-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I6xJL7fihTfJy5gc1UeEnp0qky2guu3F9bAXx+oQyFgvWJ7OzrknNGcDqexPmtfy pVHjP3jPJXscb6nVhWgojQ== 0000950123-02-006939.txt : 20020712 0000950123-02-006939.hdr.sgml : 20020712 20020712112825 ACCESSION NUMBER: 0000950123-02-006939 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20020628 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20020712 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MASTERCARD INC CENTRAL INDEX KEY: 0001141391 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 134172551 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-67544 FILM NUMBER: 02701605 BUSINESS ADDRESS: STREET 1: 2000 PURCHASE STREET CITY: PURCHASE STATE: NY ZIP: 10577 BUSINESS PHONE: 9142492000 MAIL ADDRESS: STREET 1: 2000 PURCHASE STREET CITY: PURCHASE STATE: NY ZIP: 10577 8-K 1 y62026e8vk.txt FORM 8-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): June 28, 2002 MASTERCARD INCORPORATED (Exact name of registrant as specified in its charter)
DELAWARE * 13-4172551 (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) 2000 PURCHASE STREET PURCHASE, NEW YORK 10577 (Address of principal executive offices) (Zip Code)
(914) 249-2000 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name or former address, if changed since last report) Item 2. Acquisition or Disposition of Assets Effective June 28, 2002, MasterCard Incorporated acquired control of 100% of the shares of Europay International S.A. ("Europay") not previously owned by MasterCard International Incorporated ("MasterCard International") pursuant to the Share Exchange and Integration Agreement, dated as of February 13, 2002, entered into by MasterCard Incorporated, MasterCard International and Europay (the "Integration Agreement"). In connection with the Integration Agreement, each shareholder of Europay (other than MasterCard International and MasterCard/Europay U.K. Limited, a company formed by certain financial institutions in the United Kingdom for the purpose of holding their shares in Europay ("MEPUK")) was required to enter into a separate share exchange agreement with MasterCard Incorporated and MasterCard International, pursuant to which it exchanged its Europay shares for a specified number of shares of class A redeemable common stock and class B convertible common stock of MasterCard Incorporated. In addition, the shareholders of MEPUK were required to enter into an agreement with MasterCard Incorporated and MasterCard International pursuant to which they exchanged their MEPUK shares for a specified number of shares of class A redeemable common stock and class B convertible common stock of MasterCard Incorporated. As a result of this transaction, each of Europay and MEPUK became a wholly-owned subsidiary of MasterCard Incorporated. MasterCard International and MEPUK continue to hold shares of Europay. Also effective June 28, 2002, pursuant to the Agreement and Plan of Merger, dated as of February 13, 2002, entered into among MasterCard Incorporated, MasterCard International and MasterCard Merger Sub, Inc., a wholly-owned subsidiary of MasterCard Incorporated (the "Merger Agreement"), MasterCard International and MasterCard Merger Sub, Inc. were merged under Delaware law with MasterCard International being the surviving entity. Under the Merger Agreement, each issued and outstanding principal membership interest in MasterCard International was 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 redeemable common stock and class B convertible common stock of MasterCard Incorporated. The issuance of class A redeemable and class B convertible common stock of MasterCard Incorporated was registered under the Securities Act of 1933 pursuant to MasterCard Incorporated's Post-Effective Amendment No. 2 to its Registration Statement on Form S-4, Registration No. 333-67544, which was declared effective on May 8, 2002 (the "Registration Statement"). The proxy statement-prospectus of MasterCard International contained in the Registration Statement contains additional information about the transactions described above. The information in such proxy statement-prospectus contained under the following captions is included herein as Exhibit 99.1 and is incorporated by reference into this Item 2: (i) "The Conversion;" (ii) "The Integration;" (iii) "Share Allocation and the Global Proxy;" (iv) "Management;" (v) "Security Ownership of Certain Beneficial Owners and Management;" (vi) "Certain Relationships and Related Transactions;" (vii) "Description of Capital Stock of MasterCard Incorporated;" and (viii) "Material Contracts Between MasterCard International and Europay." On July 1, 2002, MasterCard International issued a news release announcing the completion of the above-referenced transactions. A copy of the news release is included herein as Exhibit 99.2 and is incorporated by reference into this Item 2. Item 7. Financial Statements and Exhibits. (A) Financial Statements of Business Acquired. The consolidated financial statements of Europay as of December 31, 2001 and 2000 and for each of the three years ended December 31, 2001, 2000 and 1999 are included herein as Exhibit 99.3 and are incorporated by reference into this Item 7. (B) Pro Forma Financial Information. The unaudited pro forma condensed combined financial statements combining the historical consolidated balance sheets and statements of income of MasterCard International and Europay as of and for the year ended December 31, 2001 and giving pro forma effect to the conversion and integration are included herein as Exhibit 99.4 and are incorporated by reference into this Item 7. (C) Exhibits. (i) Exhibit 2.1. Share Exchange and Integration Agreement, dated as of February 13, 2002, by and among MasterCard Incorporated, MasterCard International Incorporated and Europay International S.A. (incorporated by reference to Annex B to the proxy statement-prospectus in Part I of the Registration Statement defined herein). (ii) Exhibit 2.2. Form of Share Exchange Agreement to be entered among MasterCard Incorporated, MasterCard International Incorporated and each shareholder of Europay International S.A. other than MEPUK and MasterCard International Incorporated (incorporated by reference to Annex C to the proxy statement-prospectus in Part I of the Registration Statement defined herein). (iii) Exhibit 2.3. Agreement and Plan of Merger, dated as of February 13, 2002, by and among MasterCard International Incorporated, MasterCard Incorporated and MasterCard Merger Sub, Inc. (incorporated by reference to Annex A to the proxy statement-prospectus in Part I of the Registration Statement defined herein). (iv) Exhibit 2.4. Form of Share Exchange Agreement to be entered among MasterCard Incorporated and each shareholder of MasterCard/Europay U.K. Limited (incorporated by reference to Exhibit 2.4 of the Registration Statement defined herein). (v) Exhibit 4.1. Amended and Restated Certificate of Incorporation of MasterCard Incorporated. (vi) Exhibit 4.2. Amended and Restated Bylaws of MasterCard Incorporated. (vii) Exhibit 4.3. Form of Specimen Certificate for Class A Redeemable Common Stock of MasterCard Incorporated (incorporated by reference to Exhibit 4.1 of the Registration Statement defined herein). (viii) Exhibit 4.4. Form of Specimen Certificate for Class B Convertible Common Stock of MasterCard Incorporated (incorporated by reference to Exhibit 4.2 of the Registration Statement defined herein). (ix) Exhibit 99.1. Portions of the proxy statement-prospectus contained in the Registration Statement defined herein. (x) Exhibit 99.2. News Release, dated July 1, 2002, of MasterCard International. (xi) Exhibit 99.3. Consolidated financial statements of Europay as of December 31, 2001 and 2000 and for each of the three years in the periods ended December 31, 2001, 2000 and 1999. (xii) Exhibit 99.4. Unaudited pro forma condensed combined financial statements of MasterCard International and Europay as of and for the year ended December 31, 2001 and giving pro forma effect to the conversion and integration. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. MASTERCARD INCORPORATED Date: July 12, 2002 By: /s/ ROBERT W. SELANDER -------------------------- President and Chief Executive Officer EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT DESCRIPTION 2.1 Share Exchange and Integration Agreement, dated as of February 13, 2002, by and among MasterCard Incorporated, MasterCard International Incorporated and Europay International S.A. (incorporated by reference to Annex B to the proxy statement-prospectus in Part I of the Registration Statement defined herein). 2.2 Form of Share Exchange Agreement to be entered among MasterCard Incorporated, MasterCard International Incorporated and each shareholder of Europay International S.A. other than MEPUK and MasterCard International Incorporated (incorporated by reference to Annex C to the proxy statement-prospectus in Part I of the Registration Statement defined herein). 2.3 Agreement and Plan of Merger, dated as of February 13, 2002, by and among MasterCard International Incorporated, MasterCard Incorporated and MasterCard Merger Sub, Inc. (incorporated by reference to Annex A to the proxy statement-prospectus in Part I of the Registration Statement defined herein). 2.4 Form of Share Exchange Agreement to be entered among MasterCard Incorporated and each shareholder of MasterCard/Europay U.K. Limited (incorporated by reference to Exhibit 2.4 of the Registration Statement defined herein). 4.1 Amended and Restated Certificate of Incorporation of MasterCard Incorporated. 4.2 Amended and Restated Bylaws of MasterCard Incorporated. 4.3 Form of Specimen Certificate for Class A Redeemable Common Stock of MasterCard Incorporated (incorporated by reference to Exhibit 4.1 of the Registration Statement defined herein). 4.4 Form of Specimen Certificate for Class B Convertible Common Stock of MasterCard Incorporated (incorporated by reference to Exhibit 4.2 of the Registration Statement defined herein).
99.1 Portions of the proxy statement-prospectus contained in the Registration Statement defined herein. 99.2 News Release, dated July 1, 2002, of MasterCard International. 99.3 Consolidated financial statements of Europay as of December 31, 2001 and 2000 and for each of the three years in the periods ended December 31, 2001, 2000 and 1999. 99.4 Unaudited pro forma condensed combined financial statements of MasterCard International and Europay as of and for the year ended December 31, 2001 and giving pro forma effect to the conversion and integration.
EX-4.1 3 y62026exv4w1.txt AMENDED AND RESTATED CERTIFICATE OF INCORPORATION Exhibit 4.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF MASTERCARD INCORPORATED THE UNDERSIGNED, for the purpose of forming a corporation pursuant to Section 102 of the Delaware General Corporation Law (the "DGCL"), does hereby certify the following: FIRST: The name of the corporation is MasterCard Incorporated (the "Corporation"). SECOND: The address of the registered office of the Corporation in the State of Delaware is 100 West Tenth Street, City of Wilmington, County of New Castle, and the name of the registered agent of the Corporation in the State of Delaware at that address is The Corporation Trust Company. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the DGCL. FOURTH: The name and mailing address of the Sole Incorporator is Noah J. Hanft, 2000 Purchase Street, Purchase, New York 10577. FIFTH: The Corporation shall have the authority to issue shares of common stock, $.01 par value per share, in three classes, all of which shall be nonassessable: Class A Common Stock ("Class A Stock"), Class B Common Stock ("Class B Stock") and Class C Common Stock ("Class C Stock" and, together with the Class A Stock and the Class B Stock, the "Common Stock"). The number of shares of Class A Stock that the Corporation may issue is limited to 275 million. The number of shares of Class B Stock that the Corporation may issue is limited to 25 million. The number of shares of Class C Stock that the Corporation may issue is limited to 75 million. 1. Class A Stock and Class B Stock. The Class A Stock and the Class B Stock and the holders thereof shall have the rights, preferences and privileges and be subject to the restrictions set forth below. a. The shares of Class A Stock and the shares of Class B Stock shall participate equally in any dividends declared by the Corporation's board of directors (the "Board"). b. (i) Each share of Class B Stock (other than a share of Class B Stock that constitutes a share of "ec Picto Stock," as that term is defined in the Share Exchange and Integration Agreement, dated as of February 13, 2002, by and among the Corporation, MasterCard International Incorporated ("MCI") and Europay International S.A. (as amended, modified, supplemented or restated from time to time, the "Integration Agreement")) shall automatically be converted into one share of Class A Stock, without further action by the Corporation or the holder of the share, at the close of business New York City time, on the Transition Date (as defined in the Integration Agreement); provided, however, that if such date is not a day on which banks in New York City are open for business, then the conversion shall take place at the close of business, New York City time, on the next date on which banks in New York City are open for business (the "First Conversion Date"). Each share of ec Picto Stock shall automatically be converted into one share of Class A Stock at the close of business, New York City time, on the second anniversary of the First Conversion Date; provided, however, that if such date is not a day on which banks in New York City are open for business, then the conversion shall take place at the close of business, New York City time, on the next date on which banks in New York City are open for business. (ii) The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Class A Stock solely for the purpose of effecting the conversion of Class B Stock such number of shares of Class A Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Class B Stock. (iii) Upon the conversion of any shares of Class B Stock, the shares of Class B Stock so converted shall be cancelled and shall no longer be issuable by the Corporation. c. (i) Except as otherwise provided in this paragraph, the holders of Class A Stock shall have the right to one vote for each share of Class A Stock held by them and, prior to and including the Transition Date, the holders of Class B Stock shall have the right to one vote for each share of Class B Stock held by them. The Class B Stock shall have no voting rights following the Transition Date. (ii) In any vote for the election of directors of the Corporation, no holder of capital stock eligible to be voted in that election, together with its Affiliates (as defined below), shall be entitled to exercise voting power in excess of 7% (the "Percentage Voting Limitation") of the outstanding shares of capital stock entitled to be voted in that election. At any time following the Transition Date, either the Board, by the affirmative vote of not less than a majority of the entire Board, or the stockholders, by a resolution approved by the affirmative vote of the holders of not less than a majority of the outstanding shares of Class A Stock, may amend, modify or delete the Percentage Voting Limitation; provided, however, that the affirmative vote of at least 75% of the members of the Board present at a meeting at which a quorum is present shall be required to increase the Percentage Voting Limitation to an amount greater than 15%. This paragraph (1)(c)(ii) of Article FIFTH shall not be amended, modified or deleted without the approval of at least 75% of the members of the Board present at a meeting at which a quorum is present and the approval of at least a majority of the outstanding shares of Class A Stock (or, prior to and including the Transition Date, the holders of not less than a majority of the outstanding shares of Class A Stock and of Class B Stock, voting together as a single class). The term "Affiliate", as used in this Certificate of Incorporation, shall mean any direct or indirect parent entity of the holders of Class A Stock (or, prior to and including the Transition Date, the holders of Class A Stock and/or Class B Stock), and any direct or indirect majority-owned subsidiary of any such holder or any of its parents. d. The Corporation shall not issue any Class B Stock except in accordance with the provisions of Sections 1.1, 1.2, 1.3 and 1.4 of the Integration Agreement. e. Shares of Class A Stock and Class B Stock may be redeemed by the Corporation in order to effectuate any reallocation of shares among the stockholders in accordance with Sections 1.3 and 1.4 of the Integration Agreement. 2. Class C Stock. The Class C Stock may be issued from time to time in one or more series, each of which will have such voting powers (or no voting powers), designations, preferences and relative, participating, optional or other special rights, and qualifications or restrictions of those powers, preferences or rights, as are stated in the resolution or resolutions of the Board providing for the issuance of the series; provided, however, that in no event shall any shares of Class C Stock be entitled to voting rights, rights to dividends or rights to participate in a liquidation that are greater than the corresponding rights of the Class A Stock. The rights which the Board may (but will not be required to) give to the holders of one or more series of Class C Stock will include, but not be limited to, (a) the right to receive dividends at such rates, on such conditions and at such times, as may be stated in the resolution or resolutions providing for the issuance of the series, (b) such rights upon the dissolution of the Corporation as may be stated in the resolution or resolutions providing for the issuance of the series and 2 (c) such rights to convert shares of the series into, or exchange shares of the series for, shares of any other class or classes or any other series of the same or any other class of stock of the Corporation, as may be stated in the resolution or resolutions providing for the issuance of the series. SIXTH: The Corporation shall not, without first obtaining (i) the approval of at least 75% of the members of the Board present at a meeting at which a quorum is present and (ii) the approval of the holders of not less than a majority of the outstanding shares of Class A Stock (or, prior to and including the Transition Date, the holders of not less than a majority of the outstanding shares of Class A Stock and Class B Stock, voting together as a single class): a. (i) alter the Corporation's status as a stock corporation; (ii) amend this Certificate of Incorporation to authorize the Corporation to issue any stock other than Class A Stock, Class B Stock or Class C Stock; (iii) sell, lease or exchange all or substantially all of the assets of the Corporation or approve the sale, lease or exchange of all or substantially all of the assets of MCI; (iii) consummate any merger or consolidation of the Corporation or MCI with another corporation; or (iv) undertake an initial public offering of any class of the Corporation's equity securities; b. in its capacity as the Class B member of MCI, consent to any proposed amendment to (i) Article FIFTH of the certificate of incorporation of MCI as in effect from and after June 28, 2002, (ii) Article SEVENTH of the certificate of incorporation of MCI as in effect from and after June 28, 2002, (iii) Article NINTH, Section (b) of the certificate of incorporation of MCI as in effect from and after June 28, 2002 or (iv) Article VI, Section 4(b) of the bylaws of MCI as in effect from and after June 28, 2002; or c. amend, modify or delete this Article SIXTH. SEVENTH: The Corporation shall not: a. issue shares of Class C Stock without first obtaining the approval of at least two-thirds of the members of the Board present at a meeting at which a quorum is present; provided, however, that if an issuance of shares of Class C Stock, when taken together with all other issuances of shares of Class C Stock made during the immediately preceding two years, represent greater than 5% of the number of shares of Class A Stock and Class B Stock outstanding before giving effect to that issuance, then the issuance of Class C Stock shall not be made without the prior approval of at least 75% of the members of the Board present at a meeting at which a quorum is present; provided, further, that the affirmative vote of at least 75% of the members of the Board present at a meeting at which a quorum is present shall be required to issue any shares of Class C Stock with voting rights; b. permit any stockholder of the Corporation (together with its Affiliates) to own shares of capital stock representing more than 15% of the outstanding shares of voting stock of the Corporation without the approval of at least two-thirds of the members of the Board present at a meeting at which a quorum is present; c. amend, modify or delete clause (a) of this Article SEVENTH and this clause (c) without the approval of at least 75% of the members of the Board present at a meeting at which a quorum is present and the approval of the holders of not less than a majority of the outstanding shares of Class A Stock (or, prior to and including the Transition Date, the holders of not less than a majority of the outstanding shares of Class A Stock and Class B Stock, voting together as a single class); or d. amend, modify or delete clause (b) of this Article SEVENTH and this clause (d) without the approval of at least two-thirds of the members of the Board present at a meeting at which a quorum is present and the approval of the holders of not less than a majority of the outstanding shares of Class A Stock (or, prior to and including the Transition Date, the holders of not less than a majority of the outstanding 3 shares of Class A Stock (or, prior to and including the Transaction Date, the holders of not less than a majority of the outstanding shares of Class A Stock and Class B Stock, voting together as a single class). EIGHTH: Unless the Board by the affirmative vote of at least 75% of its members present at a meeting at which a quorum is present decides otherwise, (i) in addition to the eligibility criteria for directors of the Corporation set forth in the Bylaws of the Corporation as in effect from and after June 28, 2002, no more than one-third of the number of members of the Board shall consist of persons who are directors, officers or employees of, or consultants to, stockholders designated as being part of a particular region of the Corporation; and (ii) the Corporation shall not amend Section 2 of Article III of the Bylaws of the Corporation as in effect from and after June 28, 2002. This Article EIGHTH shall not be amended, modified or deleted without the approval of at least 75% of the members of the Board present at a meeting at which a quorum is present and the approval of the holders of not less than a majority of the outstanding shares of Class A Stock (or, prior to and including the Transition Date, the holders of not less than a majority of the outstanding shares of Class A Stock and Class B Stock, voting together as a single class). NINTH: In furtherance and not in limitation of the powers conferred by statute, the Board is expressly authorized to make, alter or repeal the bylaws of the Corporation. TENTH: No director will have any personal liability to the Corporation or its members for monetary damages for any breach of fiduciary duty as a director, except (i) for any breach of the director's duty of loyalty to the Corporation, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL or (iv) for any transaction from which the director obtained an improper personal benefit. ELEVENTH: Pursuant to Section 211(e) of the DGCL, directors shall not be required to be elected by written ballot. IN WITNESS WHEREOF, MasterCard Incorporated has caused this Amended and Restated Certificate of Incorporation to be signed by its President and Chief Executive Officer, and its corporate seal to be hereunto affixed and attested by its Secretary, this 28th day of June, 2002. MASTERCARD INCORPORATED By: /s/ Robert W. Selander ----------------------------- Name: Robert W. Selander Title: President and Chief Executive Officer 4 EX-4.2 4 y62026exv4w2.txt AMENDED AND RESTATED BYLAWS Exhibit 4.2 AMENDED AND RESTATED BYLAWS OF MASTERCARD INCORPORATED A DELAWARE CORPORATION ADOPTED JUNE 28, 2002 ARTICLE I Offices Section 1. The registered office of the Corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. The Corporation may also have offices at such other places, within or outside of the State of Delaware, as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II Meetings of Stockholders Section 1. All meetings of stockholders shall be held at the registered office of the Corporation, or at such other place within or outside of the State of Delaware as may be fixed from time to time by the Board of Directors. Section 2. Annual meetings of stockholders shall be held at such date and time as may be fixed by the Board of Directors, at the offices of the Corporation, or at such other date and time as may be fixed by the Board of Directors. At each annual meeting of stockholders, the stockholders shall elect Directors and transact such other business as may properly be brought before the meeting. Section 3. Written notice of each annual meeting of stockholders, stating the place, date and hour of the meeting, as well as the means of acceptable remote participation, shall be given in the manner set forth in ARTICLE XV of these Bylaws. Such notice shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at the meeting. Section 4. Special meetings of stockholders may be called at any time for any purpose or purposes by written request of the Chairman of the Board of Directors or the President and Chief Executive Officer of the Corporation, or by the Secretary of the Corporation upon the written request of at least 33 1/3% of the Board of Directors, or upon the written request of the holders of at least 25% of all outstanding shares entitled to vote on the action proposed to be taken. Such written requests shall state the time, place and purpose or purposes of the special meeting, the person or persons calling the special meeting and that the special meeting so called shall be limited to the purpose or purposes set forth in the demand. Section 5. Written notice of each special meeting of stockholders shall be given in the manner set forth in ARTICLE XV of these Bylaws. Such notice shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at the meeting. Each such notice of a special meeting of stockholders shall state the place, date and hour of a meeting, the person or persons calling the meeting and the purpose or purposes for which the meeting is called, as well as the means, if any, of acceptable remote participation as may be determined by the Board of Directors. Section 6. Except as otherwise required by law or the Certificate of Incorporation, the presence in person or by proxy of holders of at least a majority of the shares entitled to vote at a meeting of stockholders shall be necessary, and shall constitute a quorum, for the transaction of business at such meeting. If a quorum is not present or represented by proxy at any meeting of stockholders, then the holders of a majority of the shares entitled to vote at the meeting who are present in person or represented by proxy may adjourn the meeting from time to time until a quorum is present. An adjourned meeting may be held later without notice other than announcement at the meeting, except that if the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given in the manner set forth in ARTICLE XV to each stockholder of record entitled to vote at the adjourned meeting. The stockholders present at a duly organized meeting may continue to transact business until adjournment, and the subsequent withdrawal of any stockholder or the refusal of any stockholder to vote shall not affect the presence of a quorum at the meeting. Section 7. At any meeting of stockholders, each stockholder having the right to vote shall be entitled to vote in person, by proxy or by such means, if any, of remote communication as may be determined by the Board of Directors. Except as otherwise provided by law or in the Certificate of Incorporation or these Bylaws, each stockholder shall be entitled to one vote for each share of stock entitled to vote standing in his name on the books of the Corporation. Except as otherwise provided by law or in the Certificate of Incorporation, any matter shall be determined by the vote of a majority of the shares that are voted with regard to it at a meeting where a valid quorum is present, subject to any limitations of the voting power of stockholders imposed by the terms of the Certificate of Incorporation. Section 8. Any action required or permitted to be taken by the stockholders at any annual or special meeting of the stockholders may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted, and shall be delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by registered or certified mail, return receipt requested. Section 9. The Board of Directors may fix a date as the record date for determination of the stockholders entitled (i) to notice of, or to vote at, any meeting of stockholders, (ii) to express consent to, or dissent from, corporate action in writing without a meeting or (iii) to receive payment of any dividend or other distribution or allotment of any rights or to take or be the subject of any other action. The record date must be on or after the date on which the Board of Directors adopts the resolution fixing the record date and in the case of (i), above, must be not less than 10 nor more than 60 days before the date of the meeting, in the case of (ii), above, must be not more than 10 days after the date on which the Board of Directors fixes the record date, and in the case of (iii), above, must be not more than 60 days prior to the proposed action. If no record date is fixed, then the record date will be as provided by law. A determination of stockholders entitled to notice of, or to vote at, any meeting of 2 stockholders that has been made as provided in this Section will apply to any adjournment of the meeting, unless the Board of Directors fixes a new record date for the adjourned meeting. ARTICLE III Share Ownership Section 1. As of the close of business, New York time, on the last day of the three-year period (the "Transition Period") beginning on the first business day of the fiscal quarter following the Closing Date (as defined in the Share Exchange and Integration Agreement by and among the Corporation, MasterCard International Incorporated and Europay International S.A., dated as of February 13, 2002, (as amended, modified, supplemented or restated from time to time, the "Integration Agreement")), each outstanding share of Class B Common Stock of the Corporation, $.01 par value per share (a "Class B share"), other than any Class B shares that constitute ec Picto Stock (as defined in the Integration Agreement), shall automatically be converted into one share of Class A Common Stock of the Corporation, $.01 par value per share (a "Class A share"). All Class A shares shall then be reallocated among the holders of Class A shares in accordance with the terms and subject to the conditions set forth in Sections 1.4(b) and 1.4(d) of the Integration Agreement. In connection with any reallocation of Class A shares, any stockholder whose ownership of Class A shares is reduced as a result of the reallocation will transfer the excess number of Class A shares to the Corporation, which shall then deliver Class A shares to any stockholder that is entitled to an additional number of Class A shares as a result of the reallocation. Section 2. For purposes of these Bylaws, the Global Proxy Calculation shall be calculated for each successive 12-month period beginning on the first day of the Transition Period; provided, however, that for Global Proxy Calculations for periods ending after the second anniversary of the end of the Transition Period, the Board of Directors may elect to use the Corporation's fiscal year as the basis for the Global Proxy Calculation. The Global Proxy Calculation for each stockholder of MasterCard International Incorporated shall be equal to the sum obtained by adding (A) .25 multiplied by a fraction, the numerator of which is such stockholder's Gross Dollar Volume (GDV) and the denominator of which is the Corporation's Gross Dollar Volume (GDV) attributable to all stockholders of the Corporation, plus (B) .25 multiplied by a fraction, the numerator of which is such stockholder's Gross Acquiring Volume (GAV) and the denominator of which is the Corporation's Gross Acquiring Volume (GAV) attributable to all stockholders of the Corporation, plus (C) .50 multiplied by a fraction, the numerator of which is the sum of (1) the Revenues Paid by such stockholder to the Corporation and its consolidated subsidiaries relating to all matters other than travelers cheque programs, plus (2) two times the Revenues Paid by the stockholder to the Corporation and its consolidated subsidiaries relating to travelers cheque programs, and the denominator of which is the sum of (1) the Revenues Paid by all stockholders to the Corporation and its consolidated subsidiaries relating to all matters other than travelers cheque programs, plus (2) two times the Revenues Paid by all stockholders to the Corporation and its consolidated subsidiaries relating to travelers cheque programs, in each case for the applicable period. No Gross Dollar Volume (GDV) or Gross Acquiring Volume (GAV) shall be attributable to travelers cheque programs for purposes of the Global Proxy Calculation. The Board of Directors may fix a record date for the purposes of determining those stockholders of record whose Gross Dollar Volume (GDV), Gross Acquiring Volume (GAV) and Revenues Paid shall be included in determining a Global Proxy Calculation for a particular period, which record date shall not be more than 30 days prior to the end of any such period. Only actual, as opposed to estimated, Gross Dollar Volume (GDV) and Gross Acquiring Volume (GAV) and Revenues Paid information will be used in determining the Global Proxy Calculation for each stockholder. 3 The Corporation, acting through relevant employees selected by the Chief Executive Officer from time to time, shall compute the Global Proxy Calculation for each stockholder for each applicable 12 month period and provide written notice to each stockholder of the results of such computation within 120 days after the end of the 12-month period to which the computation relates. The Corporation's computation of the Global Proxy Calculation shall be considered final and binding on all stockholders unless the Board of Directors determines that an error was made in the computation, in which case the Corporation's computation shall be corrected in accordance with the directions of the Board of Directors. "Gross Dollar Volume" 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 the Corporation's brands (e.g., MasterCard(R), Eurocard(R), Maestro(R), Cirrus(R) and ec Picto(R)) or (B) a non-MasterCard branded transaction involving a card which includes any one of the Corporation's brand logos as well as other payment brand logos, provided that such other payment brands are not in direct competition with any of the Corporation's brands, as determined by the Corporation. "Gross Acquiring Volume" 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 the Corporation's brands (e.g., MasterCard(R), Eurocard(R), Maestro(R), Cirrus(R) and ec Picto(R)) or (B) a non-MasterCard branded transaction involving a card which includes any one of the Corporation's brand logos as well as other payment brand logos, provided that such other payment brands are not in direct competition with any of the Corporation's brands, as determined by the Corporation. "Revenues Paid" for any period means, with respect to a particular stockholder, all revenues of the Corporation on a consolidated basis, calculated in accordance with U.S. GAAP, that are generated by the activities of that stockholder, other than (1) any fees or other charges associated with the termination of that stockholder's membership in MasterCard International Incorporated, (2) Integration Assessments (as defined in Section 4(d) of Article VI of the Bylaws of MasterCard International Incorporated) paid by that stockholder, (3) other assessments, fees and charges paid by that stockholder in its capacity as a member of MasterCard International Incorporated if those assessments, fees or charges were imposed on less than all of the members of MasterCard International Incorporated (except for assessments, fees and charges pertaining to business development, ordinary course of business and other matters deemed to be includable by the management of MasterCard International Incorporated in its sole discretion) and (4) fines and penalties paid by that stockholder (except as determined in the sole discretion of the management of MasterCard International Incorporated). "card fee assessment" means a bona fide, non de minimis fee expressed as a fixed amount in connection with a card. "volume-based assessment" means a bona fide, non de minimis assessment typically expressed as a percentage of the Gross Dollar Volume (GDV) or Gross Acquiring Volume (GAV) associated with a particular type of transaction. "Volumes" means the following four types of volumes in the specified percentages: a. Type 1 shall include 100% of all (1) volumes on cards that include a MasterCard(R) brand logo and that are subject to volume-based assessments or card fee assessments, (2) Maestro(R) and Cirrus(R) processed debit volumes and (3) Maestro(R) and Cirrus(R) debit volumes that are 4 subject to volume-based assessments, so long as Maestro(R), a Permitted Purse Brand and/or Cirrus(R) is the sole acceptance brand on the card. b. Type 1A shall include 75% of all ec Picto(R) volumes and other similar debit volumes that in each case have been converted to Maestro(R) volumes so long as Maestro(R), a Permitted Purse Brand and/or Cirrus(R) is the sole acceptance brand on the card and the card is subject to card fee assessments. c. Type 2 shall include the following percentages of all volumes for regional debit brands owned (or in the case of the initial allocation of shares to be owned) solely by the Corporation on cards that include a Maestro(R) and/or Cirrus(R) logo; provided that such cards are subject to volume-based assessments or card fee assessments; and provided, further, that for calculations for the last year of the Transition Period through the year ending on the second anniversary of the end of the Transition Period, there is a binding written commitment to remove all acceptance brand logos, other than the Maestro(R) brand logo, the Cirrus(R) brand logo or a Permitted Purse Brand logo, on the cards not later than the fifth anniversary of the first fiscal quarter beginning after the fiscal quarter in which the Closing Date occurs: (i) 40% of such volumes for the last year of the Transition Period; (ii) 30% of such volumes for the year ending on the one-year anniversary of the end of the Transition Period; (iii) 20% of such volumes for the year ending on the two-year anniversary of the end of the Transition Period; and (iv) 10% of such volumes for subsequent years. d. Type 3 shall include 1% of (i) volumes for regional debit brands not owned by the Corporation on cards that include a Maestro(R) and/or Cirrus(R) brand logo and are subject to volume-based assessments or card fee assessments and (ii) volumes for balance and commercial funds transfers relating to cards that are subject to volume-based assessments or card fee assessments. In determining the proportionate share of each stockholder of Europe of (i) the European Regional Proxy Amount (as defined in the Integration Agreement) for purposes of the reallocation contemplated by Section 1.3 of the Integration Agreement and (ii) the European Regional Proxy Amount for each year of the Transition Period other than the last year of the Transition Period, ec Picto(R) Volumes shall be accorded a weighting of 10% (unless those volumes satisfy the criteria of Type 1A or Type 2 Volumes, in which case those volumes shall be accorded the weighting contemplated by those Types, as appropriate). Thereafter, ec Picto(R) Volumes shall be accorded the weighting determined in accordance with the definitions of the Types of Volumes described above. For each Global Proxy Calculation, all Volumes described above will be included in calculating Gross Dollar Volume and Gross Acquiring Volume whether those Volumes are assessed directly or the cards to which they relate are subject to card fee assessments of the type contemplated by the applicable type of Volume. In addition, for each Global Proxy Calculation performed prior to the expiration of the Transition Period, Volumes of the types described above will be included even if they are not subject to volume-based or card fee assessments. 5 "Permitted Purse Brand" means a brand representing a stored value application that is permitted to be used by members of MasterCard International Incorporated under the Bylaws and Rules of MasterCard International Incorporated. For purposes of determining the Global Proxy Calculation, the conversion of Euros into U.S. dollars will be based on the average exchange rate during the twenty-day period ending on the day prior to the applicable measurement date (the "Prevailing Exchange Rate"), provided that during the Transition Period and for two years thereafter, the Prevailing Exchange 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. (the "Currency Conversion Band"). In the event that the Prevailing Exchange Rate does not fall within the Currency Conversion Band, the currency conversion rate to convert Euros to U.S. Dollars will be $.9565 adjusted by the difference between such Prevailing Exchange Rate and the upper/lower limit of the Currency Conversion Band, as applicable. For purposes of determining the Global Proxy Calculation during the Transition Period and for the two years thereafter, amounts denominated in the currency of a country within the Europe Region (as defined in the Integration Agreement) other than the Euro shall be converted into Euros and subsequently converted into U.S. dollars in accordance with the previous paragraph. Class A shares and Class B shares may be held only by Class A members of MasterCard International Incorporated and, with the prior approval of the Board of Directors, their Designated Affiliates. A Designated Affiliate of a Class A member is an Affiliate (as defined in the Certificate of Incorporation) of the Class A member to whom the Class A member transfers its stock in the Corporation in order to satisfy applicable regulatory requirements that prohibit the Class A member from holding stock in the Corporation. No fractional shares of Class A Stock or Class B Stock shall be issued or delivered by the Corporation, and any fractional share interests shall be rounded in such manner as the management of the Corporation shall determine in its sole discretion. Section 3. During the Transition Period, no shares may be sold, transferred, pledged, hypothecated or assigned (including any assignment of the right to receive shares) except that (i) a stockholder may sell, transfer, pledge, hypothecate or assign (including any assignment of the right to receive shares), as applicable, all, but not less than all, of its shares to the acquirer of its card portfolio in connection with a transfer by a stockholder of all or substantially all of such stockholder's card portfolio, (ii) if a stockholder that was a principal member becomes an affiliate member of another principal member, such stockholder may sell, transfer, pledge, hypothecate or assign (including any assignment of the right to receive shares), as applicable, all, but not less than all, of its shares to the principal member with whom it becomes affiliated, (iii) if a stockholder that was a principal member and had one or more affiliate members ceases to be a principal member and one or more of its affiliate members thereupon become principal members, such stockholder may sell, transfer, hypothecate or assign (including any assignment of the right to receive shares), as applicable, all, but not less than all, of its shares to such former affiliate members, (iv) if a stockholder is prohibited by applicable regulatory requirements from holding stock in the Corporation, such stockholder may sell transfer, pledge, hypothecate or assign (including any assignment of the right to receive shares), as applicable, all, but not less than all, of its shares to a Designated Affiliate so long as the Board of Directors has given its prior approval to the transaction; and (v) a stockholder may sell, transfer, pledge, hypothecate or assign (including any assignment of the right to receive shares), as applicable, all, but not less than all, of its shares to a Class A member that is an affiliate of such stockholder so long as the Board of Directors has given its prior approval to the transaction; provided, however that for the purposes of this clause (v), the term "affiliate" shall be deemed to mean any parent company that directly or indirectly owns 80% or 6 more of the voting power and economic interests in such stockholder, and any entity of which such stockholder or any of such parents owns 80% or more of the voting power and economic interests. If, during the Transition Period, a stockholder ceases to be a member of MasterCard International Incorporated (voluntarily or otherwise), such stockholder's shares in the Corporation shall be transferred to the Corporation from such stockholder at a cost to the Corporation equal to the aggregate par value of the shares transferred to the Corporation, effective as of the first business day after the date such stockholder's membership in MasterCard International Incorporated was terminated. If, following the expiration of the Transition Period, a stockholder ceases to be a member of MasterCard International Incorporated (voluntarily or otherwise), the Corporation shall have the right, in its sole discretion, to elect to direct such stockholder to transfer to the Corporation for cash all of such stockholder's shares for an amount equal to the book value of such stockholder's shares based on the Corporation's financial statements most recently filed with the U.S. Securities and Exchange Commission. The Corporation shall make such election by delivering a written notice to such stockholder within 20 days after such stockholder's membership in MasterCard International Incorporated was terminated. If the Corporation makes such election, then the Corporation shall deliver the payment price in cash to such stockholder within 20 days after delivering its written election notice. Upon delivery of the payment price, all of such stockholder's rights as a stockholder of the Corporation shall immediately cease. In the event that the Corporation does not make such election, such stockholder will be required to comply with the procedures set forth in Section 4. Section 4. An entity that became or becomes a Class A member of MasterCard International Incorporated from and after January 1, 2001 until the end of the Transition Period shall be eligible to be allocated Class A shares as of the end of the Transition Period based upon its Global Proxy Calculation in accordance with such procedures as may be determined by the Board. From and after the end of the Transition Period, each stockholder shall be free to sell, transfer, pledge, hypothecate or assign (including any assignment of the right to receive shares), as applicable, its shares to any person permitted to hold such shares. Following the expiration of the Transition Period, each stockholder must maintain an ownership percentage of the Corporation's outstanding common stock that is no less than 75% and no more than 125% of the percentage represented by such stockholder's most recent Global Proxy Calculation by purchasing or selling shares, if necessary, in accordance with procedures to be established by the Board of Directors within 12 months after receiving notice from the Corporation that such stockholder is not in compliance with this section. If a stockholder holds shares as the result of a transfer made pursuant to clauses (iv) or (v) of the first sentence of Article III, Section 3 of these Bylaws, then the percentage ownership test described in the preceding sentence shall be calculated based upon the aggregate Global Proxy Calculation of the stockholder and the Class A member(s) that transferred shares to the stockholder. If a stockholder is unable to satisfy the requirement that it own no more than 125% of the percentage represented by such stockholder's most recent Global Proxy Calculation, the selling stockholder shall be obligated to accept the highest price offered to such stockholder for such number of shares of Common Stock as is necessary to enable such stockholder to satisfy such requirement. Section 5. The Board of Directors shall establish procedures for the purchase or sale of shares following the expiration of the Transition Period. ARTICLE IV Board of Directors Section 1. The business of the Corporation will be managed by the Board of Directors, which may exercise all of the powers of the Corporation and do all lawful acts and things as are not 7 (i) by statute, the Certificate of Incorporation or these Bylaws directed or required to be exercised or done by the stockholders or (ii) specifically delegated as provided in these Bylaws. Section 2. a. The Board of Directors shall consist of such number of persons, as shall be determined by the Board of Directors from time to time. The Board of Directors initially shall consist of 18 persons. b. Each Director shall be an officer of a member institution of MasterCard International Incorporated or an individual otherwise uniquely qualified to provide guidance as to the Corporation's affairs. During the Transition Period, one-third of the total number of Directors shall be officers of stockholders of the Corporation or member institutions from the Corporation's Europe region, as defined in the Integration Agreement ("Europe"), one-third of the total number of Directors shall be officers of stockholders of the Corporation or member institutions from the Corporation's U.S. region, the President and Chief Executive Officer shall be a Director and the remaining Directors shall be apportioned among officers of stockholders of the Corporation or member institutions from the Corporation's other regions in accordance with the percentage of the Corporation's outstanding stock owned by the stockholders of each such region; provided, however, that in calculating the percentage of outstanding stock owned by the stockholders of each region, transfers of shares made pursuant to clauses (iv) or (v) of the first sentence of ARTICLE III, Section 3 of these Bylaws shall be disregarded. After the Transition Period, the President and Chief Executive Officer shall be a Director and the remaining Directors shall be apportioned among officers of stockholders from the Corporation's regions in accordance with the percentage of the Corporation's outstanding stock owned by the stockholders of each such region, subject to Article EIGHTH of the Certificate of Incorporation; provided, however, that in calculating the percentage of outstanding stock owned by the stockholders of each region, transfers of shares made pursuant to clauses (iv) or (v) of the first sentence of ARTICLE III, Section 3 of these Bylaws shall be disregarded. As used in these Bylaws, the phrase "entire Board of Directors" shall mean the total number of directors, other than honorary members of the Board of Directors (if any), that the Corporation would have if there were no vacancies. Section 3. There shall not be more than two representatives from any one Class A member of MasterCard International Incorporated, including its Affiliates and its affiliate members of MasterCard International Incorporated that are sponsored by such Class A member, on the Board of Directors. Section 4. No individual may serve as a Director of the Corporation or of any regional board if that individual also is a director (including a regional board director), officer or other employee of or consultant to a competitor of the Corporation, or if that individual is a director, officer or other employee of or consultant to an institution that is represented on the global board of directors or U.S. regional board of directors of a competitor. For this purpose, a competitor of the Corporation is an entity that owns and/or operates a payment card program competitive with the Corporation's comparable card programs, as determined by the Corporation, and that is not itself a stockholder of the Corporation. Section 5. During the Transition Period, the regional president of Europe and, if approved by the Board of Directors, one officer of the Corporation other than the President and Chief Executive Officer, shall serve as honorary members of the Board of Directors and shall be entitled to receive notice of all meetings of the Board of Directors and shall be permitted to attend and participate in all meetings of the Board of Directors, but shall not be entitled to vote. Section 6. The Corporation's Nominating Committee will consider and nominate individuals to serve as Directors of the Corporation for approval by the Corporation's stockholders at the annual meeting of stockholders based upon proposals made by each regional board of the Corporation. 8 In the event of a disagreement between a regional board and the Corporation's Nominating Committee with respect to a nominee(s) from that region, the chairman of the regional board and the Corporation's Nominating Committee shall attempt to resolve the dispute through direct consultation. If no resolution is reached promptly, the Corporation's Nominating Committee shall present its recommended slate of Directors to the Board of Directors and shall advise the Board of Directors of any disagreement with respect to the nominees from any specific region. The Board of Directors shall make the final determination with respect to any dispute regarding a nominee for Director from a region. Section 7. The Board of Directors, by the affirmative vote of a majority of the Directors then in office, and irrespective of any personal interest of any of its members, may establish reasonable compensation of any or all Directors for services to the Corporation as Directors. Section 8. The term of any Director who, after election to the Board of Directors of the Corporation, subsequently fails to meet the requirements of Sections 2, 3 or 4 of this ARTICLE IV or Article EIGHTH of the Corporation's Certificate of Incorporation, shall terminate automatically at the time that the Director so failed to qualify; provided, however, that the Board of Directors may appoint that terminated Director to fill the vacancy caused by the termination until the next annual meeting of stockholders unless such termination resulted from the failure to satisfy the requirements of Section 4 of this ARTICLE IV or Article EIGHTH of the Corporation's Certificate of Incorporation. Section 9. A vacancy in the Board of Directors, by reason of an increase in the number of Directors or by reason of the death, resignation, removal or termination of the term of a director, may be filled by the Board of Directors in a manner consistent with the requirements of Sections 2, 3, and 4 of this ARTICLE IV and Article EIGHTH of the Corporation's Certificate of Incorporation. Each Director shall hold office until a successor is elected and qualified, or until the Director's earlier death, resignation, removal or automatic termination of his term. A Director may resign at any time by written notice to the Corporation addressed to the President and Chief Executive Officer or the Secretary. ARTICLE V Meetings of the Board of Directors Section 1. The first meeting of each newly-elected Board of Directors shall be held immediately following the annual meeting of stockholders at the place of such annual meeting of stockholders. If the first meeting is not held at that time and place, then it shall be held at a time and place specified in a notice given in the manner provided for notice of special meetings of the Board of Directors as set forth in Section 3 of this ARTICLE V. Section 2. Regular meetings of the Board of Directors may be held upon such notice, or without notice, at such times and at such places within or outside of the State of Delaware as shall from time to time be determined by the Board of Directors. Section 3. Special meetings of the Board of Directors, whether to be held in person or by telephone or similar communications equipment, may be called by the Chairman of the Board of Directors or the President and Chief Executive Officer on at least five days' notice to each Director and shall be called by the Chairman or the President and Chief Executive Officer upon the written request of not less than 33 1/3% of the entire Board of Directors; provided, however, that any special meeting of the Board of Directors called to consider a matter that requires immediate action of the Board of Directors may be called on at least 24 hours' notice if the matter does not require the approval of greater than a simple majority of the Directors. 9 Section 4. Whenever notice of a meeting of the Board of Directors is required, the notice shall be given in the manner set forth in ARTICLE XV of these Bylaws and shall state the purpose or purposes, place, date and hour of the meeting. Section 5. Except as otherwise required by law or the Certificate of Incorporation or other provisions of these Bylaws, a majority of the entire Board of Directors shall constitute a quorum for the transaction of business and, except as provided in Sections 1 and 2 of ARTICLE VI below, the vote of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. If a quorum is not present at any meeting of Directors, then a majority of the Directors present at the meeting may adjourn the meeting from time to time, without notice of the adjourned meeting other than announcement at the meeting. One or more Directors may participate in a meeting of the Board of Directors by means of conference telephone or similar communication device. To the extent permitted by law, a Director participating in a meeting by conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other will be deemed present in person at the meeting and all acts taken by him or her during his or her participation shall be deemed taken at the meeting. The place of any meeting held by means of conference telephone or similar communications equipment pursuant to this Section 5 will be deemed to be the place stated in the notice thereof so long as at least one Director or, as the case may be, one committee person, is present at that place at the time of that meeting. Section 6. Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board of Directors or the committee, as the case may be, who are entitled to vote, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or of that committee. ARTICLE VI Special Voting Matters Section 1. The following actions shall require approval of at least 75% of the Directors present at a meeting at which a quorum is present: a. any modification to Section 2b of ARTICLE IV of these Bylaws; and b. any modification to this Section 1. Section 2. The following actions shall require approval of at least 66 2/3% of the Directors present at a meeting at which a quorum is present: a. Establishing or eliminating regional boards; b. any modification to the RGO (Regional, Global and Operations) planning, budgeting and reporting methodology; c. any modification to the overall size of the Board of Directors referred to in Section 2a of ARTICLE IV of these Bylaws; d. any issuance of Class A Shares or Class B Shares in excess of the number of shares to which a stockholder would be entitled under the Global Proxy Calculation; 10 e. any decision to overrule a decision taken by a regional board that was permitted to be taken in accordance with Section 6 of ARTICLE VII of these Bylaws; f. any decision to overrule a recommendation made by the Debit Advisory Board that was permitted to be taken in accordance with Section 4 of ARTICLE IX of these Bylaws; and g. any modification to this Section 2. ARTICLE VII Regional Boards and Management Section 1. The Board of Directors may establish or designate in accordance with Section 2a of ARTICLE VI, one or more bodies to act as regional boards of directors and exercise those powers and authorities delegated to them by the Board of Directors of the Corporation or MasterCard International Incorporated. The general purpose of each regional board is to manage the Corporation's brand and product strategies on a regional level. The regional boards shall not be boards of any incorporated entity. The initial powers and authorities of the Corporation's regional boards are set forth below in Section 4. Section 2. Initially, there will be six regional boards: Asia/Pacific; Canada; Europe; Latin America; Middle East/Africa; and the United States. Each region shall have corporate staff responsible for all activities within the region, including, without limitation, coordination and support of member programs within the region. The members of each regional board shall be elected by the stockholders of that region. Section 3. Each regional board shall establish an annual regional budget for the following year, which budget shall provide sufficient funds to (i) vigorously promote the Corporation's brands and fund the other regional programs, initiatives and activities and (ii) fund the region's assignment of centrally managed expenses. The method of funding the regional budgets will be by assessments and other fees (including, without limitation, transaction and operations fees) paid to the Corporation or its consolidated subsidiaries. If budgeting authority has not been delegated to a regional board in a particular region, the annual budget for that region shall be reviewed and approved by the Board of Directors of the Corporation. The Corporation's entire annual budget incorporating all regional budgets shall be submitted to the Board of Directors for its approval no later than 30 days prior to the fiscal year to which it applies. In its review of the Corporation's entire annual budget, the Board of Directors shall, among other things, ensure that each final regional budget provides for the appropriate level of expenses assigned to the region and the level of expenditures necessary to appropriately support the Corporation's brands and programs in that region and an appropriate method of funding such expenses. Section 4. Each regional board shall have the authority to manage the following activities, and any other activities that the Board of Directors may delegate from time to time, within its region, provided that (i) such activities shall affect and apply only to the affairs of the regional members licensed, and applicants for a license, within such region and to transactions taking place entirely within such region and then only with respect to MasterCard(R), Cirrus(R) and Maestro(R) payment products (other than travelers cheques), services, programs and activities and (ii) such activities have not otherwise been delegated to the management of the Corporation: a. MEMBERSHIP. Review all completed applications for membership in MasterCard International Incorporated submitted by entities headquartered in the specific region. The regional board also shall have the power and authority to act upon any requests from regional members 11 of MasterCard International Incorporated regarding change of membership status (other than termination) and class of membership. Only the Board of Directors of the Corporation or MasterCard International Incorporated shall have the right to terminate a member's membership in MasterCard International Incorporated and license or license to participate in MasterCard(R), Cirrus(R) and Maestro(R); however, the regional boards shall have the right to recommend such terminations to the Board of Directors of the Corporation. b. FINES AND DISCIPLINARY ACTIONS. Power and authority to (1) establish and approve fines and disciplinary actions for intraregional violations of the Corporation's or MasterCard International Incorporated's bylaws, rules, policies or procedures by regional members of MasterCard International Incorporated within the specific region and (2) recommend terminations of such regional members of MasterCard International Incorporated to the Board of Directors of the Corporation. c. ANNUAL EXPENSE BUDGET. Power and authority and obligation to approve an annual budget for the specific region within the time frames needed to approve the entire annual budget of the Corporation. Such regional budget shall comply with the practices, policies and procedures of the Corporation and MasterCard International Incorporated. d. ASSESSMENTS AND FEES. Power, authority and obligation to fix, impose and collect assessments and fees from regional members of MasterCard International Incorporated within the specific region in order to fund the region's budget. This power shall extend to interregional transactions in which a regional member of MasterCard International Incorporated is involved. e. SURPLUS FUNDS. Power and authority to determine the distribution of a portion of any revenues in excess of budgeted amounts in any year, provided that such distribution is consistent with the Corporation's reinvestment policy for excess funds then in effect or such other amount as agreed with the President and Chief Executive Officer of the Corporation. f. ADDITIONAL FUNDING. Power and authority to levy additional assessments, fees or both upon regional members of MasterCard International Incorporated within the region for the purpose of generating additional funds above budgeted revenue in order to fund regional initiatives not provided for in the region's annual budget. This power shall extend to interregional transactions in which a regional member of MasterCard International Incorporated is involved. g. INTRAREGIONAL INTERCHANGE FEES. Power and authority to approve intraregional interchange fees, subject to applicable regulatory requirements. h. INTRAREGIONAL OPERATING RULES. Power and authority to adopt intraregional variances to the Corporation's operating rules, policies and procedures that apply to MasterCard(R), Cirrus(R) and Maestro(R), to the extent they apply only to members of MasterCard International Incorporated of a specific region and their transactions effected wholly within a specific region, which rules, policies and procedures cover the standards and procedures governing how a specific transaction is initiated and processed, and how any related disputes are resolved. Such rules may not have any effect, intended or unintended, outside the region. i. INTRAREGIONAL PRODUCT AND ENHANCEMENT DEVELOPMENT. Power and authority to approve intraregional products and enhancement services involving the creation and ongoing management of new regional payment vehicles and enhancement services that add value to new and existing products. 12 j. AFFINITY AND CO-BRANDING RULES. With respect to MasterCard(R), Cirrus(R) and Maestro(R) branded products only, the power and authority to approve specific affinity and co-branding rules for the card programs of members of MasterCard International Incorporated within the specific region. k. REGIONAL BOARD PROCESSES. Obligation to establish the procedures and requirements for managing the regional board and its activities, which shall be set forth in the regional board rules and shall include quorum requirements, minimum vote requirements and the creation and seating of committees. Section 5. The delegation of the powers and authorities upon the regional boards as described in this ARTICLE VII, and the delegation of any other powers or authorities that may be delegated upon one or more regional boards by the Corporation's Board of Directors from time to time, is conditioned upon compliance by the regional board with all applicable laws and all of the requirements set forth in the Corporation's Certificate of Incorporation, rules and regulations, these Bylaws and MasterCard International Incorporated's certificate of incorporation, bylaws and membership and licensing rules and regulations, and any other policies of the Corporation or MasterCard International Incorporated, including the rules and regulations applicable to Cirrus(R) and Maestro(R). Such delegated power and authority may not be delegated by the regional boards. Management of the Corporation shall establish the processes supporting the regional boards in their exercise of such delegated power and authority. Section 6. Any decision of a regional board, to the extent such decision is within the scope of power and authority delegated to such regional board by the Board of Directors of the Corporation, shall be effective unless and until the Board of Directors of the Corporation, in accordance with Section 2 of ARTICLE VI, determines otherwise, provided that the approval or adoption of any action, rule or policy that could be expected, in the reasonable judgment of the Board of Directors of the Corporation, to have an effect in more than one region or that in the reasonable judgment of the Board of Directors of the Corporation is inconsistent with a published policy, practice or strategy of the Corporation, shall not become effective (or shall be declared ineffective if already in effect) unless and until such action, rule or policy has been ratified by the Board of Directors of the Corporation. Only the Corporation's management shall be authorized to enter into a business arrangement with a stockholder or a member of MasterCard International Incorporated that it can be reasonably be determined will relate to activities that will be conducted in, or have an effect in, more than one region, subject to any parameters as may be determined by the Board of Directors. Nothing contained in this Section 6 shall be construed to limit the authority of the Board of Directors of the Corporation to revoke or amend the power and authority delegated upon the regional boards. Section 7. Each region shall have a regional president selected by the President and Chief Executive Officer of the Corporation, subject to the concurrence of the regional board. In the event of a disagreement between a regional board and the President and Chief Executive Officer of the Corporation with respect to a nominee for regional president, the chairman of the regional board and the President and Chief Executive Officer of the Corporation shall attempt to resolve the dispute through direct consultation. If no resolution is reached promptly, the President and Chief Executive Officer of the Corporation shall present his recommendation for regional president to the Board of Directors and shall advise the Board of Directors of any disagreement with respect to such selection. The Board of Directors shall only approve the selection of the President and Chief Executive Officer upon the affirmative vote of two-thirds of the entire Board of Directors with respect to any dispute regarding the President and Chief Executive Officer's disputed selection for a regional president. Each regional president shall report to the President and Chief Executive Officer of the Corporation or such other member or members of the Corporation's management as the President and Chief Executive Officer of 13 the Corporation may determine. Each regional president shall assist the Corporation's Board of Directors and management and the regional board in implementing the decisions and policies of the Corporation's Board of Directors and management and the regional board (within the scope of power and authority delegated by the Corporation's Board of Directors) that affect the region. Notwithstanding anything herein to the contrary, during the Transition Period, the regional president for Europe shall report only to the President and Chief Executive Officer of the Corporation and shall be a member of the Corporation's Global Executive Management Group. Any termination of a regional president by the President and Chief Executive Officer of the Corporation shall require the concurrence of the regional board, which shall not be unreasonably withheld. ARTICLE VIII Committees Section 1. The Board of Directors may designate from among its members an Executive Committee, Audit Committee, Nominating Committee, Compensation Committee and other committees to serve at the pleasure of the Board of Directors. a. EXECUTIVE COMMITTEE. The Executive Committee, if formed, shall comprise the Chairman of the Board of Directors, the Vice Chairmen of the Board of Directors, the President and Chief Executive Officer (for so long as he or she is a Director of the Corporation) and such other number of Directors as the Board of Directors shall establish from time to time so that the composition of the Executive Committee generally reflects the regional composition of the Corporation's stockholders. To the extent permitted by law, the Executive Committee shall have all the authority of the Board of Directors, except that it will not have the power or authority to approve or recommend an amendment to the Corporation's Certificate of Incorporation or an agreement or plan of merger or consolidation, to recommend the sale, lease or exchange of all or substantially all of the Corporation's property and assets, to recommend the dissolution of the Corporation or a revocation of dissolution, to amend these Bylaws or to take any action that would require the affirmative vote of greater than a simple majority of the members of the Board of Directors present at a meeting at which a quorum is present. b. AUDIT COMMITTEE. The Audit Committee, if formed, shall comprise such number of Directors as the Board of Directors may appoint to it. The Audit Committee will be responsible for reviewing the reports of the Corporation's auditors and for performing such other duties as are assigned to it by the Board of Directors. c. NOMINATING COMMITTEE. The Nominating Committee shall comprise such number of Directors as the Board of Directors may appoint to it. In selecting Directors to serve on the Nominating Committee, the Board of Directors shall seek to include individuals representing stockholders that conduct business in multiple regions of the world, as well as individuals representing stockholders that reflect the regional composition of the Corporation's stockholders, and shall include representation from each region representing greater than 20% of the most recent Global Proxy Calculation. The Nominating Committee will be responsible for nominating persons to serve as Directors and members of the Debit Advisory Board as described in ARTICLE IX. In addition, the Nominating Committee may recommend individuals to serve on the standing committees. In making nominations, the Nominating Committee will seek, consistent with the qualifications required of Directors and committee members, to give the stockholders in each geographic region reasonable representation, taking into account, among other things, the number of shares of the Corporation's stock owned by the stockholders in each region. 14 d. COMPENSATION COMMITTEE. The Compensation Committee, if formed, shall comprise such number of Directors as the Board of Directors may elect to it. The Compensation Committee may be responsible for fixing the compensation of the elected officers of the Corporation and approving any employee incentive programs. The compensation of all other employees will be fixed by the Corporation's President and Chief Executive Officer (subject to the oversight of the Board of Directors). e. Any other committees, to the extent formed, shall have such authority as the Board of Directors grants them. The Board of Directors shall have power at any time to change the membership of any committees, to fill vacancies in their membership and to discharge any committees. Section 2. Each committee shall keep regular minutes of its proceedings and report to the Board of Directors as and when the Board of Directors shall require. Unless the Board of Directors otherwise provides, notice requirements for meetings of committees shall be the same as notice requirements for meetings of the Board of Directors. Unless the Board of Directors otherwise provides, a majority of the members of any committee may determine its actions and the procedures to be followed at its meetings (which may include a procedure for participating in meetings by conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other). Section 3. Any action of a committee may be taken without a meeting if written consent to the action signed by all the members of the committee is filed with the minutes of the committee. ARTICLE IX Debit Advisory Board Section 1. For an intended term of three years, the Corporation shall have a Debit Advisory Board which will be responsible for providing advice to the Board of Directors in the following areas: a. the development and expansion of the Corporation's debit programs globally; b. global program and brand strategies, policies, rules and technology standards for the Corporation's debit programs consistent with the standards for the Corporation's other products set by the Board of Directors; and c. the performance and evaluation of the Corporation's Debit Brand Management Group (or other group within the Corporation performing similar functions). For purposes of these Bylaws, the term "debit programs" shall mean the issuance and acceptance of ATM and point-of-sale electronic payment devices that access deposit accounts owned by an issuing member of MasterCard International Incorporated under a trademark and/or service mark owned or managed, directly or indirectly, by the Corporation or one of its subsidiaries. Section 2. Beginning on or after the two-year anniversary of the creation of the Debit Advisory Board, the Board of Directors shall review the performance of the Debit Advisory Board and consider, in its sole discretion, whether, and on what terms, to continue the Debit Advisory Board, with the understanding that it is the intent of the Corporation that the Debit Advisory Board will continue for a third year. 15 Section 3. During the first year of the existence of the Debit Advisory Board, the Debit Advisory Board shall be comprised of the members of the Board of Directors of Maestro International Incorporated in effect upon the date of adoption of these Bylaws. The Nominating Committee will nominate individuals to serve as members of the Debit Advisory Board beginning with the second year of the Debit Advisory Board for approval by the Board of Directors. In selecting nominees for service on the Debit Advisory Board, the Nominating Committee will give due consideration to representatives from key stockholders of the Corporation that support the Corporation's debit products, as measured by the Global Proxy Calculation. Prior to presenting such nominations, the Nominating Committee shall seek recommendations for candidates for the Debit Advisory Board from the regional boards and shall duly consider all such recommendations. In the event of a disagreement between a regional board and the Nominating Committee with respect to a nominee(s) from that region, the chairman of the regional board and the Nominating Committee shall attempt to resolve the dispute through direct consultation. If no resolution is reached promptly, the Nominating Committee shall present its recommended slate of Nominating Committee members and shall advise the Board of Directors of any disagreement with respect to the nominees from any specific region. The Board of Directors shall make the final determination with respect to any dispute regarding a regional nominee. Section 4. Any recommendation of the Debit Advisory Board, to the extent such recommendation is within the scope of power and authority delegated to the Debit Advisory Board by the Board of Directors of the Corporation and is not inconsistent with a published policy, practice or procedure, shall be effective unless and until the Board of Directors of the Corporation, in accordance with Section 2(f) of ARTICLE VI, overrules such recommendation. ARTICLE X Officers Section 1. Subject to the provisions of Section 1(a) below regarding the election and term of the Chairman of the Board of Directors, the Board of Directors shall, annually at its first meeting following the annual meeting of stockholders, elect a Chairman of the Board of Directors from among its members, a President and Chief Executive Officer and a Secretary; and the Board of Directors may at that meeting, and thereafter, elect a Chairman Emeritus, up to two Vice-Chairmen of the Board of Directors, a Chief Operating Officer, a Treasurer and such other officers as it may from time to time deem advisable. Except as prohibited by law, any two or more offices may be held by the same person. No officer except the Chairman of the Board of Directors, the Vice-Chairmen, if any, and the President and Chief Executive Officer need be a Director of the Corporation. a. THE CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board of Directors shall be elected to an initial term of two years and shall be eligible to be reelected annually thereafter. The Chairman of the Board of Directors shall preside at all meetings of the members of the Board of Directors and shall perform such other duties as are properly assigned to him by the Board of Directors. b. THE VICE-CHAIRMEN OF THE BOARD OF DIRECTORS. The Board of Directors may elect up to two Vice-Chairmen of the Board of Directors. The Vice-Chairmen shall have such powers assigned to them by the Chairman or by the Board of Directors. In the absence of the Chairman, the Chairman shall designate one of the Vice-Chairmen to preside at meetings of the Board of Directors. c. THE CHAIRMAN EMERITUS. The Corporation may have a Chairman Emeritus who shall be elected by the Board of Directors and shall be entitled to receive notice of all meetings of the Board of Directors and shall be permitted to attend and participate in all meetings of the Board of 16 Directors, but shall not be entitled to vote. The Chairman Emeritus must have retired as an officer of a member of MasterCard International Incorporated while serving as a member of the Board of Directors of the Corporation and must have served as Chairman of the Board of Directors of the Corporation for at least two years. d. THE PRESIDENT AND CHIEF EXECUTIVE OFFICER. The Corporation shall have a President who also shall be the Chief Executive Officer of the Corporation. The President shall have general overall supervision of all business of the Corporation and shall have such powers and duties as usually pertain to such office or as may be assigned to him by the Board of Directors. In the absence of the Chairman and the Vice-Chairmen, the President shall perform the duties and exercise the powers of the Chairman of the Board of Directors. e. THE CHIEF OPERATING OFFICER. The Corporation may have a Chief Operating Officer who shall be elected by the Board of Directors. The Chief Operating Officer shall report directly to the President and Chief Executive Officer and shall have such responsibilities as shall be assigned from time to time by the President and Chief Executive Officer. f. THE TREASURER. The Corporation may have a Treasurer who shall be elected by the Board of Directors. The Treasurer shall have the care and custody of all moneys and securities of the Corporation. He or she shall cause to be entered in records to be kept for that purpose full and accurate accounts of all moneys received by him or her and paid by him or her on account of the Corporation. He or she shall make and sign such reports, statements and documents as may be required by him of the Board of Directors or by the laws of the United States, the State of Delaware or any other state or country, and shall perform such other duties as usually pertain to such office or as may be assigned to him by the Board of Directors. The Treasurer shall be bonded in the manner and amount prescribed by the Board of Directors. The reports and records of the Treasurer shall be audited as of the end of each fiscal year and at such other times as the Board of Directors may direct by independent certified public accountants selected by the Board of Directors or by a committee of members designated by the Chairman of the Board of Directors with the approval of the Board of Directors. g. THE SECRETARY. The Corporation shall have a Secretary who shall be elected by the Board of Directors. The Secretary shall issue notices of meetings of stockholders and of the Board of Directors when such notices are required by law or these Bylaws. The Secretary shall attend all meetings of the stockholders and of the Board of Directors and keep the minutes thereof. He or she shall affix the Corporation's seal to such instruments as require the seal and shall perform such other duties as usually pertain to such office or as may be assigned to her/him by the Board of Directors or as may otherwise be provided for in these Bylaws. Section 2. Subject to the provisions of Section 1(a) above regarding the election and term of the Chairman of the Board of Directors, each officer shall be elected by the Board of Directors and shall hold office until the earliest of such individual's death, resignation, removal or the first meeting of the Board of Directors following the next annual meeting of stockholders. Any officer may be removed at any time, either with or without cause, by the Board of Directors. If any office becomes vacant for any reason, the vacancy may be filled by the Board of Directors. Section 3. Any officer may resign at any time by giving written notice to the Board of Directors or to the President and Chief Executive Officer. Such resignation shall take effect at the time specified in the notice or, if no time is specified, at the time of receipt of the notice, and the acceptance of such resignation shall not be necessary to make it effective. 17 Section 4. The Corporation may secure the fidelity of any or all of its officers or agents by bond or otherwise. In addition, the Board of Directors may require any officer, agent or employee to give security for the faithful performance of his duties. Section 5. In the event of an absence or illness of any officer, or for any other reason that the Board of Directors or the President and Chief Executive Officer may deem sufficient, the Board of Directors or the President and Chief Executive Officer may temporarily assign the powers and duties of that officer to any other officer or to any Director. Section 6. The compensation of the elected officers shall be fixed by the Board of Directors or a committee thereof. The compensation of other employees of the Corporation shall be fixed by the President and Chief Executive Officer (subject to the oversight of the Board of Directors). All employee incentive programs shall be approved by the Board of Directors or a committee thereof. ARTICLE XI Certificates for Shares Section 1. In the discretion of the Board of Directors, the shares of stock of the Corporation may be represented by certificates, in such form as the Board of Directors may from time to time prescribe, signed by the Chairman of the Board of Directors, or the President and Chief Executive Officer or a Vice President and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary and bearing any legends as may be prescribed by the Certificate of Incorporation or otherwise. Section 2. In the event that the shares of stock of the Corporation are not represented by certificates, the name, address and number and class of shares owned by each stockholder shall be set forth in the books and records of the Corporation, as such may be amended from time to time by the Corporation to reflect any change in the name, address and/or number or class of shares owned by each stockholder. Section 3. Any or all signatures upon a certificate may be a facsimile. Even if an officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall cease to be that officer, transfer agent or registrar before the certificate is issued, that certificate may be issued by the Corporation with the same effect as if he or she or it were that officer, transfer agent or registrar at the date of issue. Section 4. The Board of Directors may direct that a new certificate be issued in place of any certificate issued by the Corporation that is alleged to have been lost, stolen or destroyed. When doing so, the Board of Directors may prescribe such terms and conditions precedent to the issuance of the new certificate as it deems expedient, and may require a bond sufficient to indemnify the Corporation against any claim that may be made against it with regard to the allegedly lost, stolen or destroyed certificate or the issuance of the new certificate. Section 5. The Corporation or a transfer agent of the Corporation, upon surrender to it of a certificate representing shares, duly endorsed and accompanied by proper evidence of lawful succession, assignment or authority of transfer, shall issue a new certificate to the person entitled thereto, and shall cancel the old certificate and record the transaction upon the books of the Corporation. Section 6. The Corporation shall for all purposes be entitled to treat a person registered on its books, as the owner of shares, with the exclusive right, among other things, to receive dividends and to vote with regard to those shares, and the Corporation shall be entitled to hold a person registered on 18 its books as the owner of shares and shall not be bound to recognize any equitable or other claim to, or interest in, shares of its stock on the part of any other person, whether or not the Corporation shall have express or other notice of the claim or interest of the other person, except as otherwise provided by the laws of Delaware. ARTICLE XII Indemnification Section 1. The Corporation shall indemnify any person who was or is made 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) by reason of the fact that 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 enterprise to the fullest extent permitted by Delaware law. Section 2. The Corporation shall 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 by reason of the fact that 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 enterprise to the fullest extent permitted by Delaware law. Section 3. To the extent that a present or former director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 1 and 2 of this ARTICLE, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by the person in connection therewith. Section 4. Any indemnification under Sections 1 and 2 of this ARTICLE (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because he or she has met the applicable standard of conduct set forth in Sections 1 and 2. Such determination will be made, with respect to a person who is a director or officer at the time of such determination, (1) by a majority vote of the Board of Directors who were not parties to such action, suit or proceeding even though less than a quorum, or (2) by a committee or such Directors designated by majority vote of such Directors, even though less than a quorum, or (3) if there are no such Directors, or if such Directors so direct, by independent legal counsel (compensated by the Corporation) in a written opinion or (4) by the stockholders. Section 5. Expenses (including attorneys' fees) incurred by any director, officer, employee or agent in defending a civil, criminal, administrative or investigative action, suit or proceeding, or threat thereof, may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding in the specific case upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this ARTICLE. Such expenses (including attorney's fees) incurred by a former director, officer, employee or agent may be paid upon such terms and conditions, if any, as the Corporation deems appropriate. 19 Section 6. The indemnification and advancement of expenses provided by, or granted pursuant to, the other Sections of this ARTICLE shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office. Section 7. The Corporation may 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 enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of this ARTICLE. Section 8. References in this ARTICLE to "the Corporation" will include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger that, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, will stand in the same position under the provisions of this ARTICLE with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued. Section 9. For purposes of this ARTICLE, references to "other enterprises" will include employee benefit plans; references to "fines" will include any excise taxes assessed on a person with respect to an employee benefit plan; references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of a subsidiary of the Corporation and any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan will be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this ARTICLE. Section 10. The indemnification and advancement of expenses provided by, or granted pursuant to, this ARTICLE shall, unless otherwise provided, when authorized or ratified continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such person. Section 11. Except as specifically permitted by applicable law, no person who is or was a director, officer, employee, agent or member of any committee of the Corporation shall be indemnified in any way if such person has brought the action or proceeding against the Corporation, its directors, officers, employees, agents or any committee of the Corporation. Section 12. The provisions of this ARTICLE will be deemed retroactive and will include all acts of the directors, officers, employees or agents of the Corporation since the date of incorporation. 20 ARTICLE XIII General Provisions Section 1. The corporate seal shall be circular in form with the words "MasterCard Incorporated" around the outer margin and the words and figures "CORPORATE SEAL 2001 DELAWARE" in the center and such other appropriate legend as the Board of Directors may from time to time determine. Unless prohibited by the Board of Directors, a facsimile of the corporate seal may be affixed or reproduced in lieu of the corporate seal itself. Section 2. The fiscal year of the Corporation shall be the calendar year. Section 3. The symbol of the Corporation will be the word "MasterCard" superimposed across a red circle overlapping a yellow circle in the form adopted by the Board of Directors as the corporate symbol of the Corporation. Section 4. As used in these Bylaws, the term "card" means a device, complying with the specifications set forth in the rules and regulations of MasterCard International Incorporated, which may be used to pay for goods and/or services and to obtain cash through access of the cardholder's credit, charge or depositary account with the issuer of the cards. Section 5. As used in these Bylaws, the phrase "published policy" is one that has been disseminated by bulletin, letter or other form of written or electronic communication to, at least, the stockholders and/or the Class A members of MasterCard International Incorporated that, along with their affiliate members, if any, are affected by such policy. Section 6. The books of the Corporation, except such as are required by law to be kept within the State of Delaware, may be kept at such place or places within or outside of the State of Delaware as the Board of Directors may from time to time determine. ARTICLE XIV Amendments Section 1. The Board of Directors, by the affirmative vote of a majority of the entire Board of Directors at any meeting of the Board of Directors at which a quorum is present, or by action without a meeting if all of the Directors consent in writing to that action, may adopt, amend or repeal any provision of these Bylaws, except that (i) any amendment or repeal of Section 1 of ARTICLE VI shall require the affirmative vote of at least 75% of the Directors present at a meeting at which a quorum is present, (ii) any amendment or repeal of Section 2 of ARTICLE VI shall require the affirmative vote of at least 66 2/3% of the Directors present at a meeting at which a quorum is present and (iii) any amendment or repeal of Section 2 of ARTICLE III shall be subject to the terms and conditions of Article EIGHTH of the Corporation's Certificate of Incorporation. Section 2. The stockholders, by the affirmative vote of a majority of the votes cast at any meeting of the stockholders at which a quorum is present or by action without a meeting in accordance with these Bylaws, may adopt, amend or repeal any provision of these Bylaws; provided, however, that any amendment or repeal of Section 2 of ARTICLE III shall be subject to the terms and conditions of Article EIGHTH of the Corporation's Certificate of Incorporation. 21 ARTICLE XV Notices Section 1. To the extent permitted by applicable law, any notice to a stockholder may be given personally, by mail, facsimile transmission, telex, telegraph, cable or similar instrumentality or by electronic transmission. A notice will be deemed given when actually given in person; when transmitted by a legible transmission, if given by facsimile transmission; when transmitted, answerback received, if given by telex; on the day when delivered to a cable or similar communications company; three business days after delivery to a courier service; or on the fifth business day after the day when deposited with the United States mail, postage prepaid, directed to the stockholder at such stockholder's address, facsimile number, electronic mail address or telex number as it appears on the records of stockholders or at such other address, facsimile number, electronic mail address or telex number as the stockholder may have designated to the Secretary in writing as the address or number to which notices should be sent. Notice given by a posting on electronic network together with separate notice to the stockholder of such specific posting, shall be deemed given upon the later of (A) such posting and (B) the giving of such separate notice. Notice given by any other form of electronic transmission shall be deemed given when directed to the stockholder. Section 2. Any notice to a Director may be given personally, by telephone, by mail, facsimile transmission, telex, telegraph, cable or similar instrumentality or electronic transmission to such Director's residence or usual place of business. A notice will be deemed given when actually given in person or by telephone; when transmitted by a legible transmission, if given by facsimile transmission; when transmitted, answerback received, if given by telex; on the day when delivered to a cable or similar communications company; three business days after delivery to a courier service; or on the fifth business day after the day when deposited with the United States mail, postage prepaid, directed to the director at his business address, facsimile number, electronic mail address or telex number or at such other address, facsimile number, electronic mail address or telex number as the director may have designated to the Secretary in writing as the address or number to which notices should be sent. Notice given by any form of electronic transmission shall be deemed given when directed to the Director. Section 3. Any person may waive notice of any meeting by signing a written waiver or by electronic transmission, whether before or after the meeting. In addition, attendance at a meeting will be deemed a waiver of notice unless the person attends for the purpose, expressed to the meeting at its commencement, of objecting to the transaction of any business because the meeting is not lawfully called or convened. 22 EX-99.1 5 y62026exv99w1.txt PORTIONS OF PROXY STATEMENT 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 redeemable common stock and class B convertible 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 and the expiration or termination of any waiting period under the HSR Act. We anticipate that these conditions will be satisfied and that the conversion will be completed in the first half 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 (an officer of MasterCard Incorporated) and a non-voting director. In particular, if the conversion is approved, the current directors of MasterCard International will serve as the directors of MasterCard Incorporated and MasterCard International until the annual meeting of MasterCard Incorporated shareholders in 2003. In addition, the boards of directors of each company, acting pursuant to authority granted to them in their respective certificates of incorporation and/or bylaws, will appoint two additional voting directors affiliated with European members and Dr. Peter Hoch as a non-voting director, in each case to serve until the annual meeting of MasterCard Incorporated shareholders in 2003. The board of directors of MasterCard Incorporated will be subject to reelection in 2003. If the conversion does not occur, the current directors of MasterCard International will continue in that capacity until an annual meeting of MasterCard International principal members is held in 2003. 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 35 - 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. 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 of MasterCard Incorporated. 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 convertible 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." CONSIDERATIONS RELATING TO THE CONVERSION In approving the conversion and recommending that you approve the conversion, our board of directors considered a number of advantages of the new structure. 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: - permit member-stockholders to realize the value of their investment in MasterCard as an asset and, subject to certain restrictions, trade MasterCard Incorporated shares among themselves; - 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; 36 - 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 - 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. In approving the conversion and recommending that you approve the conversion, our board of directors also considered potential disadvantages of the new structure. Specifically, it is possible that: - a market for MasterCard Incorporated common stock may not develop sufficiently to provide member-stockholders with enough liquidity in trading their shares; - stockholders may be required to purchase or sell shares of MasterCard Incorporated in order to satisfy certain requirements, which may be disadvantageous to them; - the conversion will facilitate future strategic transactions that could reduce the influence of current MasterCard International members; - MasterCard Incorporated and certain member-stockholders will be subject to additional regulatory burdens, including Securities and Exchange Commission regulations, as a result of the conversion; and - the conversion could subject some members to tax liabilities. No director or officer or any of their affiliates has a substantial interest, direct or indirect, in the conversion. 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 voting power of MasterCard International's principal members 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 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 redeemable common stock and class B convertible common stock of MasterCard Incorporated. The number of shares of class A redeemable and 37 class B convertible 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 redeemable common stock and class B convertible 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. Accordingly, the new global proxy formula, applied on a regional basis, will determine the number of shares that members actually receive in the conversion and integration. Class A redeemable and class B convertible 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 redeemable and class B convertible common stock of MasterCard Incorporated. The merger will not close, and your existing membership interest will not be modified as described above, unless a majority of the voting power of MasterCard International's principal members at a 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. APPLICATION OF U.S. BANKING REGULATIONS TO SHARES RECEIVED Banking regulations in the United States govern, among other things, the types of equity investments that regulated institutions are permitted to make. For a description of the potential application of federal and state banking regulations to the shares received in the conversion, see "Risk Factors -- Risks Related to the Conversion -- U.S. banking regulations may impact our principal members' ownership of the common stock of 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. 38 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 redeemable common stock and class B convertible common stock of MasterCard Incorporated. 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 History. 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 established Maestro International, a joint venture, in 1991 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. Together, these interests represent an approximate 15% interest in Europay on a consolidated basis. In addition, European members currently own approximately 7% of the total voting power, and related economic rights, of MasterCard International. Early Negotiations. 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 Management 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. The negotiating committees first met on April 14, 2000. A second meeting was held on April 26, 2000. At these initial meetings, the committee members discussed the framework for a possible integration, including structural alternatives. No formal proposals regarding valuation or the type and amount of consideration to be issued to the stockholders of Europay were discussed at these initial meetings, although it was generally understood that the consideration would include some form of equity, rather than cash. Further meetings were held in May 2000 and in June 2000 (by teleconference). These meetings focused primarily on issues of 39 consideration. At the June 2000 meeting, the negotiating committees discussed the first draft of a term sheet that had been prepared by Mercer. In particular, the parties discussed the relative contribution that Europay's members would make to the revenues and transaction volume of a combined organization. Europay's view was that, based on a contribution analysis, the European members should be entitled to 33 1/3% of the equity in the combined company. MasterCard wanted to study further the level of contribution that Europay was likely to make and, in particular, the likelihood that transaction volume associated with Europay's regional ec Pictogram brand would be converted to Maestro transaction volume in the future. Later Negotiations. 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. Following these board meetings, 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. MasterCard was amenable to the concept of a stock conversion, subject to review of the potential tax, securities laws and other consequences. Each of MasterCard International and Europay retained financial advisers to assist the negotiating teams in analyzing the companies and to advise them with respect to valuation matters. MasterCard retained Donaldson, Lufkin & Jenrette (subsequently Credit Suisse First Boston or CSFB). Europay retained Merrill Lynch & Co. Mercer was instructed to prepare and circulate a confidential term sheet. In September 2000, Mr. Boudreau and Dr. Richolt met by teleconference. They primarily discussed the formula for the global proxy calculation, which would become the benchmark for measuring the level of contribution made by the European members to the combined company. The full negotiating teams met three times in October 2000. Beginning with the second of these meetings, Robert Selander, MasterCard's President and Chief Executive Officer, and Peter Hoch, Europay's Chief Executive Officer, joined the negotiating teams. During these meetings, the negotiating committees discussed a wide range of strategic and operational issues, including 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. As the parties sought to reach a mutually acceptable understanding with respect to the consideration to be received by the European members, they concluded that it would be appropriate to implement a limited transition period during which the projected level of contribution made to MasterCard's revenues and transaction volume by the European members, as measured under the new global proxy calculation, would be applied. The parties decided that the European members would receive at the closing shares in a percentage amount that represented what their contribution, as measured by the new global proxy calculation, would have been if all of their volume were converted to MasterCard and Maestro brand volumes. In its consideration of the aggregate allocation of shares of MasterCard Incorporated between European and non-European members that would result from the integration, MasterCard management developed a model to project the final relative 40 regional distribution of shares at year-end 2003, which was the date then expected for the completion of the share allocations resulting from the integration. The model projected issuing volumes (GDV) and acquiring volumes (GAV) by region, which were categorized by type for proxy purposes. European member volumes and revenues were projected by Europay for the same periods. The revenue figures that were shared with CSFB for use in connection with its fairness opinion were not materially different from the revenue figures used in the proxy analysis. Together, these projections formed the basis for the case allocating an approximate 33.1% share of MasterCard Incorporated common stock to European member-stockholders at the conclusion of the transition period. MasterCard further reviewed these projections and made adjustments to reflect lower projected revenue and lower conversion rates of ec Pictogram cards to Maestro only cards during the transition period. MasterCard management used these assumptions to generate a more conservative case. These adjusted projections formed the basis for the case allocating an approximate 25.7% share of MasterCard Incorporated common stock to European member-stockholders at the conclusion of the transition period. MasterCard management also prepared an upside case to measure the revenue and the converted ec Pictogram volumes that would be required for European member-stockholders to own a 44% share of MasterCard Incorporated common stock at the conclusion of the transition period. To support that case, European member-stockholders would have to convert all ec Pictogram cards to Maestro and would have to pay fees on the resulting volumes generated by the end of the three-year transition period. Based on the projections of GDV, GAV, and revenues described above and deemed to be reasonable by MasterCard International and Europay, the parties concluded that it would be appropriate to allocate 33 1/3% of the total outstanding shares to European members at the closing. Similarly, based on projections of the likely best and worst case for European GDV, GAV and revenue performance during the transition period, the parties concluded that it would be appropriate to establish a minimum aggregate European shareholding percentage of 26% and a maximum aggregate European shareholding percentage of 44%, in each case at the conclusion of the transition period. The European members could lose some of the shares initially allocated at closing if, at the end of the transition period, their contribution did not fulfill expectations, which would most likely be attributable to lower volume conversion than anticipated. Alternatively, if the contribution as of the end of the transition period exceeded current expectations, they could receive additional shares, subject to the maximum ownership percentage of 44%. The Europay negotiating team was also concerned about the position of the European members as minority stockholders in a combined organization. MasterCard understood these concerns, but felt it was important to strike a balance with the general proposition that the will of the majority should prevail in corporate governance matters. The parties agreed that any supermajority voting requirements should be limited to matters relating to the fundamental organizational and ownership structure of the combined company. 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, operations, 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. The MasterCard International and Europay negotiating teams met on December 6, 2000 and December 20, 2000, where they again discussed those matters in MasterCard Incorporated's organizational documents that should be subject to supermajority stockholder approval. These discussions continued at teleconference meetings on January 5 and January 11, 2001. On January 16, 2001, January 18, 2001 and January 22, 2001, the negotiating committees held additional teleconference meetings in order to finalize the term sheet that would be presented to the companies' respective boards of directors. 41 The February 8, 2001 Board Meeting. 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, 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. The board considered the following matters at the February 8, 2001 meeting: - Representatives of Mercer made a presentation about the changes made to the term sheet since the November board meeting. - John De Lavis, the MasterCard executive in charge of the MasterCard International due diligence team, presented the findings of the diligence investigation. - Jerry McElhatton, MasterCard International's senior executive in charge of technology, made a presentation regarding plans for integrating the technology systems of the two companies. - Representatives of CSFB presented their relative allocation analysis to the MasterCard board and delivered their signed fairness opinion to MasterCard. CSFB's presentation and analyses, together with the CSFB fairness opinion, are described under the heading "Opinion of Financial Advisor to MasterCard International." In addition, Denise K. Fletcher, MasterCard International's Chief Financial Officer, made a presentation at the February 8, 2001 board meeting regarding the valuation, tax and accounting aspects of the integration and conversion. This presentation also reviewed the text of certain prepared materials distributed to the board relating to valuation in advance of the meeting. Mrs. Fletcher reported on the valuation analysis by stating that management had developed three scenarios representing the possible ownership of the combined entity by European member-stockholders. She stated that the three scenarios were: (i) a 26% ownership case that represents the minimum guaranteed amount to the European member-stockholders; (ii) a 33 1/3% ownership case based on projections provided by Europay management; and (iii) a 44% ownership case that represents the maximum amount that European member-stockholders could own of MasterCard Incorporated regardless of performance. Mrs. Fletcher reported that, with respect to the 26% case, MasterCard had been valued at approximately $1.6 billion and Europay at approximately $390 million using a 10.5% discount rate and after applying a 50% reduction for both companies due to their private ownership structure. Mrs. Fletcher also reported that MasterCard's and Europay's management estimated that approximately $120 million in business synergies would result from integration on an after-tax, net present value basis, using a 10.5% discount rate and after applying the 50% private company discount. She reported that, in the 26% case, the total value of the combined company after the integration and including the synergies was estimated to be approximately $2.1 billion, using a 10.5% after-tax discount rate and after giving effect to the 50% private company discount. She stated that MasterCard management, in valuing Europay, assigned 85% of the synergy savings to Europay because approximately this portion (81%) of the synergies were expected to be derived from European operations. She stated that under the 26% case the sum of the synergies and the discounted cash flow value of the portion of Europay not presently owned by MasterCard was estimated at approximately $430 million. She then said that MasterCard management estimated that MasterCard would generate an after-tax return on investment of 14.8%, 14.4% and 14% for the 26%, 33 1/3% and the 44% cases, respectively, and that these returns were higher than the 10.5% cost of capital estimated for MasterCard. Mrs. Fletcher then noted that the valuation analysis supported European members owning 26% of MasterCard Incorporated after the conversion and integration. She further noted that the initial allocation of 33 1/3% was supported by the model reported by MasterCard management (with projections regarding the Europe region coming from Europay management) referred to above. According to the deal ultimately negotiated between the parties, European member-stockholders would initially be allocated 33 1/3% of the common stock of MasterCard Incorporated with a reallocation at the end of the three-year transition period that adjusts European member-stockholder ownership to a level between 26% and 44%, depending on actual performance of the Europe region. 42 The information presented to the MasterCard International board on February 8, 2001 by CSFB and Mrs. Fletcher was supported by projections provided to CSFB by MasterCard management that reflected management's best estimates for 2000 earnings and the 2001 budget. The projections also related to revenue and operating income for the periods 2000 through 2004. The revenue projections reflected the assumption that the economy could not continue to grow as it had in the late 1990s and that revenue growth would slow as the global economy decelerated. However, margins were expected to expand gradually reflecting productivity gains, especially in transaction processing. Europay management also provided revenue, operating expense and operating income projections regarding the Europe region to CSFB. These projections, along with MasterCard management's projections for MasterCard International, formed the basis for the case for allocating 33 1/3% of the common stock of MasterCard Incorporated to European member-stockholders at the conclusion of the three-year transition period. MasterCard management reviewed Europay's projections and provided CSFB with adjusted projections, which reflected reduced revenue and operating income estimates. This more conservative case formed the basis for the case for allocating 26% of the common stock of MasterCard Incorporated to European member-stockholders at the conclusion of the transition period. MasterCard management also developed projections that would form the basis for an upside case, which would allocate 44% of the common stock of MasterCard Incorporated to European member-stockholders at the conclusion of the transition period. MasterCard and Europay management also worked together to develop a synergy plan which projected 81% of the savings being derived from European operations, predominantly from staff savings and system integration synergies. In the fourth quarter of 2001, in connection with its delivery of the fairness opinion dated January 16, 2002, MasterCard management provided CSFB with updated projections for the periods from 2001 through 2004, and added 2005. The updated projections reflected the following adjustments: - the most recent 2001 forecast was employed; - the most recent 2002 budget projections for Europay and MasterCard, reflecting the impact of the slowdown in the economy in general and the particular consequences of the events of September 11, 2001 were employed; - an assumption was made that, by the beginning of 2003, MasterCard and Europay would function at the same level that they would have functioned had the events of September 11, 2001 not occurred; - MasterCard management's projected 2005 Europay revenues, operating expenses, pre-tax income and EBITDA (earnings before interest, taxes, depreciation and amortization) were provided; and - MasterCard management's projected 2005 revenues, operating expenses, pre-tax income and EBITDA for MasterCard International were provided. MasterCard management also updated the synergy analysis based on the integration planning and implementation that had taken place since CSFB's fairness opinion of January 30, 2001. The Europay Board Meeting; Implementation Efforts. 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. 43 Statement Regarding Projections. The preceding discussion under the heading "The Integration -- Background of the Integration" contains certain projections and forward-looking statements. MasterCard and Europay do not, as a matter of course, make public projections as to future sales, earnings or other results. The projections set forth above were not prepared with a view to public disclosure or compliance with published guidelines of the Securities and Exchange Commission or the guidelines established by the American Institute of Certified Public Accountants regarding projections. Neither MasterCard's nor Europay's independent auditors, nor any other independent accountants, have compiled, examined or performed any procedures with respect to these projections, nor have they expressed any opinion or other form of assurance with respect to these projections or their achieveability, and assume no responsibility for them. The inclusion of these projections in this document should not be regarded as a representation by MasterCard or Europay or any of their advisors, agents or representatives that these projections are or will prove to be correct. Projections of this type are based on a number of significant uncertainties and contingencies, all of which are difficult to predict and most of which are beyond MasterCard's and Europay's control. As a result, there can be no assurance that any of these projections will be realized. The projections are or involve forward-looking statements, assume that the conversion and integration have occurred and are based upon a variety of assumptions, including MasterCard's and Europay's ability to achieve strategic goals, objectives, and targets over the applicable period. These assumptions involve judgments with respect to future economic, competitive and regulatory conditions, financial market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond MasterCard's and Europay's control. Many important factors, in addition to those discussed elsewhere in this proxy statement-prospectus, could cause MasterCard's and Europay's results to differ materially from those expressed or implied by the forward-looking statements. Accordingly, there can be no assurance that the projections are indicative of MasterCard's or Europay's future performance or that actual results will not differ materially from those in the projections set forth above. See "Cautionary Statement Regarding Forward Looking Statements." CONSIDERATIONS RELATING TO THE INTEGRATION In approving the integration, our board of directors considered a number of advantages associated with the acquisition of Europay by MasterCard Incorporated. The integration represents the opportunity for MasterCard to enhance its global scope and payment programs by acquiring an important company that operates in a desirable region of the world and has demonstrated success in several key business functions. Specifically: - In 2001, the Europe region represented approximately 20% 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 44 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 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. 45 In approving the integration, our board of directors and the Europay board of directors also considered the disadvantages of integration. The integration may: - Create expected synergies that never materialize. We may be unable to reduce costs, merge effectively our management structures or improve programs and professional services to our members in a timely or efficient manner. It may also prove difficult to streamline our technology or other operations, increase the customization and management of our member relationships and standardize our combined programs and services. Finally, we may not successfully combine personnel or systems resources or achieve economies of scale. - Cause significant dilution in the ownership of non-European members of MasterCard International. The integration will cause the ownership of the non-European members of MasterCard International in MasterCard Incorporated to be significantly diluted as compared to those members' current percentage of the total equity rights in MasterCard International. - Adversely impact some members through the introduction of the new global proxy formula. Because the new global proxy formula considers additional factors (including GDV, GAV and revenues and volumes associated with Maestro and Cirrus cards) in allocating equity rights, it will dilute the ownership percentage of member-stockholders who are comparatively underweighted in such factors. No director or officer or any of their affiliates has a substantial interest, direct or indirect, in the integration. 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 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 acquisition of Europay will be made pursuant to the Share Exchange and Integration Agreement 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) has been required to enter into a 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 redeemable common stock and class B convertible common stock of MasterCard Incorporated. In addition, the shareholders of MEPUK have been required to 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 redeemable common stock and class B convertible 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 redeemable and class B convertible 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." 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 46 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; - 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. 47 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 a 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 redeemable common stock and class B convertible common stock of MasterCard Incorporated, as summarized above, and the MEPUK agreement described under the caption "-- MEPUK" below must have been entered into; - all Europay and MEPUK shareholders receiving shares in the integration must be principal members of MasterCard International prior to the closing of the integration; 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 - 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. Any of the closing conditions to the integration, as described above, may be waived by the parties to the integration agreement. Since the completion of the integration is a condition to the conversion, if a material condition to the integration is waived, MasterCard International will resolicit approval for the conversion from its principal members. 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. 48 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 June 30, 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 redeemable common stock and class B convertible common stock voting together as a single class (so long as the class B convertible 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 redeemable, B convertible 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; 49 - 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 redeemable and class B convertible 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 redeemable or class B convertible 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; - 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. MEPUK also manages rules applicable to the domestic settlement of MasterCard-branded transactions by financial institutions in the United Kingdom. In lieu of the share exchange procedures described elsewhere in this proxy statement-prospectus, the shareholders of MEPUK have been required to enter into a related share exchange agreement with MasterCard Incorporated 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. Currently, each shareholder of MEPUK is a shareholder in Europay through its ownership in MEPUK. In addition, at the time of the closing of the conversion and integration, all of the shareholders of MEPUK will be principal members of MasterCard International. 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 addition, the 50 existing MEPUK shareholders will transfer MEPUK's responsibilities for the U.K. domestic rules and other operations to a new entity that is not affiliated with MasterCard Incorporated. Accordingly, at the time of the closing of the conversion and integration, MEPUK will have no operations and its sole purpose will be to hold Europay shares. In the MEPUK agreement, the MEPUK shareholders have agreed to indemnify MasterCard Incorporated and MasterCard International for any liability of MEPUK that relates to the period up to and including the closing of the integration. MasterCard Incorporated has also agreed 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. 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. 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. In the Europay share exchange, stockholders of Europay and MEPUK, other than MasterCard International, will exchange their shares of Europay and MEPUK for 23.76 million shares of MasterCard Incorporated. The transaction provides that the number of shares allocated to former shareholders of Europay and MEPUK will increase or decrease at the end of the transition period as a result of the application of the global proxy formula for the third year of the transition period. See "Share Allocation and the Global Proxy." In accounting for the initial purchase price of Europay, MasterCard will not consider shares above the minimum number of shares allocable to Europay and MEPUK shareholders at the end of the transition period because only the minimum number of shares is issued unconditionally at the closing to such shareholders. Of the 23.76 million shares attributable to the exchange of Europay and MEPUK shares, 6.15 million shares are conditional shares subject to reallocation at the end of the transition period and allocable to Europay and MEPUK shareholders. Europay and MEPUK shareholders are therefore receiving 17.61 million unconditional shares at closing. The value of each MasterCard Incorporated share, immediately before the exchange, is estimated to be $15.21 based on an independent appraisal. Accordingly, MasterCard's purchase price for the shares of Europay is estimated to be $267.9 million. Since former Europay and MEPUK shareholders would retain or receive shares of MasterCard Incorporated at the end of the transition period without remitting any additional consideration, any shares retained or received by them that are above their minimum allocation at that time would constitute part of the purchase price. Any such additional shares would be valued at that time based upon the fair value of the stock of MasterCard Incorporated. Any such reallocation of shares to former Europay and MEPUK shareholders will increase the purchase price for Europay and, accordingly, the amount of goodwill and additional paid-in-capital recorded. The unaudited pro forma combined financial information does not give effect to any potential contingent consideration. 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. 51 REGULATORY MATTERS RELATING TO 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 was necessary in Germany and Finland on the basis of revenue and in Spain and Greece on the basis of national market share. As of the date of this proxy statement-prospectus, the transaction has been cleared by the national competition authorities in each of these countries. 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. The completion of both the conversion and the integration would 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. 52 SHARE ALLOCATION AND THE GLOBAL PROXY INTRODUCTION Since the mid 1990s, the global proxy formula used by MasterCard International to allocate equity rights 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 principally 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 initial allocation of shares to member-stockholders upon the closing of the conversion and integration. Second, the new global proxy calculation 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. MasterCard Incorporated's calculation of the global proxy for each member-stockholder will be considered final and binding unless the board of directors determines that an error was made in the computation, in which case the computation will be corrected in accordance with directions of the board. 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, 2001.) 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. 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. 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, CONSISTENT WITH THE HISTORICAL GLOBAL PROXY CALCULATION. 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 AND ARE ALLOCATED SHARES OF MASTERCARD 58 INCORPORATED DURING THE TRANSITION PERIOD IN ACCORDANCE WITH THE PROCEDURE DESCRIBED AT THE END OF THE NEXT PARAGRAPH. ON THE CLOSING DATE OF THE CONVERSION AND INTEGRATION, EACH PRINCIPAL MEMBERSHIP INTEREST IN MASTERCARD INTERNATIONAL WILL BE AUTOMATICALLY CONVERTED INTO A CLASS A MEMBERSHIP INTEREST IN MASTERCARD INTERNATIONAL AND SHARES OF COMMON STOCK OF MASTERCARD INCORPORATED. HOWEVER, TO RECEIVE SHARES AT CLOSING, A MEMBER MUST, IN ADDITION TO QUALIFYING AS A PRINCIPAL MEMBER ON THE CLOSING DATE, HAVE CONTRIBUTED REVENUES AND/OR VOLUMES TO MASTERCARD INTERNATIONAL AS A PRINCIPAL MEMBER DURING THE 12 MONTH PERIOD ENDED DECEMBER 31, 2000 THAT ARE ELIGIBLE TO BE CONSIDERED UNDER THE NEW GLOBAL PROXY FORMULA DESCRIBED HEREIN. IF NO SUCH REVENUES OR VOLUMES WERE CONTRIBUTED, A PRINCIPAL MEMBER WILL PARTICIPATE IN THE CONVERSION BUT WILL NOT RECEIVE SHARES OF COMMON STOCK OF MASTERCARD INCORPORATED AT THE CLOSING. THE MASTERCARD INCORPORATED BOARD OF DIRECTORS EXPECTS TO ADOPT PROCEDURES TO ISSUE SHARES OF MASTERCARD INCORPORATED COMMON STOCK TO PRINCIPAL MEMBERS DURING THE TRANSITION PERIOD THAT DID NOT QUALIFY TO RECEIVE SHARES AT CLOSING, IN ORDER TO PERMIT SUCH MEMBERS TO PARTICIPATE IN THE REALLOCATION OF MASTERCARD INCORPORATED SHARES THAT WILL OCCUR AT THE CONCLUSION OF THE TRANSITION PERIOD. THE GLOBAL PROXY The Formula. For each member-stockholder, 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 sum of (1) all non-travelers cheque revenues paid by the member-stockholder to MasterCard Incorporated and its subsidiaries and (2) two times the travelers cheque revenues paid by the member-stockholder to MasterCard Incorporated and its subsidiaries, and the denominator of which is the sum of (1) all non-travelers cheque revenues paid by all member-stockholders to MasterCard Incorporated and its subsidiaries and (2) two times the travelers cheque revenues paid by all member-stockholders to MasterCard Incorporated and its subsidiaries, in each case for the applicable period. Travelers cheque programs shall be deemed to have no GDV or GAV for purposes of the global proxy calculation. 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 59 associated with the termination of that member-stockholder's membership in MasterCard International, (2) integration-related assessments paid by that member-stockholder, (3) other assessments, fees and charges paid by that member-stockholder in its capacity as a member of MasterCard International if those assessments, fees and charges were imposed on less than all of the members of MasterCard International (except for assessments, 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. - Card Fee Assessment. A card fee assessment means a bona fide, non de minimis fee expressed as a fixed amount in connection with a card. - Volume-based Assessment. A volume-based assessment means a bona fide, non de minimis assessment typically expressed as a percentage of the GDV or GAV associated with a particular type of transaction. 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 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. Finally, the volume weightings give significant credit to ec Pictogram-branded volumes (a regional debit brand owned by Europay) and other similar debit volumes, provided they have been converted to the Maestro brand or are the subject of binding written commitments to convert to Maestro. Ordinarily, the global proxy formula accounts only for volumes associated with MasterCard's principal brands -- MasterCard, Maestro and Cirrus. As a result of negotiations with Europay, proxy weightings have been extended to ec Pictogram and similar regional debit volumes to give credit for the significant business currently done under those brands in Europe. The conversion commitment has also been implemented to encourage members to consistently migrate those volumes to MasterCard's principal brands in the future. The ec Pictogram brand will be owned by MasterCard Incorporated following the conversion and integration. - Volumes Weighted at 100%. All of the following volumes are weighted at 100% of actual volume: (1) volumes on cards that include a MasterCard brand logo and that are subject to volume-based assessments or card fee assessments, (2) Maestro and Cirrus processed debit volumes and (3) Maestro and Cirrus debit volumes that are subject to volume-based assessments, 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. - Volumes Weighted at 75%. The following volumes are weighted at 75% of actual volume: ec Pictogram volumes and other similar debit volumes that in each case have been converted to Maestro 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 card is subject to card fee assessments. - Sliding Scale of Weightings for Certain Regional Debit Volumes. Volumes for regional debit brands owned (or in the case of the initial allocation of shares to be 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 volume-based assessments 60 or card fee assessments; and provided, further, that for calculations for the last year of the transition period through the year ending on the second anniversary of the end of the transition period, there is a binding written commitment to remove all acceptance brand logos other than the Maestro brand logo, the Cirrus 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 not later than the fifth anniversary 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 (i) regional debit brands not owned by MasterCard Incorporated on cards that include a Maestro and/or Cirrus brand logo and are subject to volume-based assessments or card fee assessments and (ii) balance and commercial funds transfers relating to cards that are subject to volume-based or card fee assessments are weighted at 1%. Currency Conversion. In performing the global proxy calculation, the conversion of euros to U.S. dollars, 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 $.9565 U.S. = 1 euro adjusted by the difference between such average currency conversion rate and the upper or lower limit of the range, as applicable. For purposes of determining the global proxy calculation during the transition period and for the two years thereafter, amounts denominated in the currency of a country within the Europe region other than the euro will first be converted into euros and subsequently converted into U.S. dollars in accordance with the previous paragraph. Travelers Cheques. The revenue component of the global proxy formula provides that MasterCard International's travelers cheque members will calculate their respective global proxies using 100% of revenues paid by them to MasterCard Incorporated and its subsidiaries in connection with their travelers cheque programs (in other words, revenues for travelers cheque members are doubled before being discounted by the 50% factor set forth in the global proxy formula). However, travelers cheque members will not receive credit for GDV or GAV in connection with their global proxy calculations, as the integration agreement provides that GDV and GAV will be deemed to be zero for travelers cheque programs. 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. The new global proxy formula based on the 12 month period ended December 31, 2000, applied on a regional basis to Europe and non-Europe, will determine the number of shares that members receive initially in the conversion and integration. However, this outcome is the result of an integrated series of transaction steps in the conversion and integration, as described more fully below. 61 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 redeemable and class B convertible common stock of MasterCard Incorporated that is proportional to the percentage of the total equity rights in MasterCard International that such member held in accordance with the historic proxy formula in effect for the period ended September 30, 2000. The historic global proxy calculation will be used to determine the shares allocated in the conversion step only and will have no further bearing on the outcome of the transaction. Shares Issued in the Integration. In the integration, each shareholder of Europay and MEPUK will receive a number of shares of class A redeemable and class B convertible 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. To the extent practicable, the shares issued in the integration step will be proportional to each shareholder's direct (in the case of Europay shareholders) or indirect (in the case of MEPUK shareholders) prior interest in Europay. Because all Europay and MEPUK shareholders will be principal members of MasterCard International at the closing of the conversion and integration, the issuance of additional shares in the integration will have the effect, when taken together with the shares issued in the conversion, of allocating 33 1/3% of the total shares of class A redeemable and class B convertible common stock then outstanding to European members. Accordingly, the shares issued 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. The integration agreement provides that the shares of class A redeemable and class B convertible 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. This reallocation will occur as an integral component of, and contemporaneously with, the closing of the conversion and integration. Accordingly, the new global proxy formula will determine the number of shares that members ultimately receive in the conversion and integration; the number of shares received by European members may vary across members compared to the number of Europay and/or MEPUK shares exchanged. Based on the new global proxy calculation, each member-stockholder in Europe 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. The accompanying proxy card sets forth the number of class A redeemable and class B convertible shares of MasterCard Incorporated common stock that you, as a current principal member of MasterCard International, will receive upon the closing of the conversion and integration (including in connection with the initial reallocation of shares described above). For principal members that are also shareholders of Europay or MEPUK, the number of shares reported on the proxy card includes all shares issued in connection with the acquisition of their Europay or MEPUK stock in the integration. Principal members should note that the number of shares set forth on the proxy card may be adjusted to reflect changes in the attribution of ICA numbers to principal members or the termination of principal members prior to the closing date of the conversion and integration. ICA numbers are the primary method used by MasterCard International to attribute revenues and volumes associated with card activity to members for proxy and other purposes. For example, if a principal member acquires ownership of an ICA number from another principal member prior to the closing date but after the date used to calculate share ownership information for the proxy card, the shares to be issued in respect of the revenues and volumes related to that principal ICA number will be distributed to 62 the purchasing member on the closing date, and the selling member will receive a corresponding fewer number of shares as compared to the information printed on its proxy card. Member-stockholders other than travelers cheque members can also estimate the aggregate number of class A redeemable and class B convertible shares of MasterCard Incorporated to be allocated to them at the closing of the conversion and integration using their own revenue and weighted GDV and GAV data and the following figures: For the 12 months ended December 31, 2000: Aggregate Weighted European GDV (gross euro issuing volume): E304.0 billion Aggregate Weighted European GAV (gross euro acquiring volume): E303.6 billion Aggregate European Revenue: E355.2 million Aggregate Weighted non-European GDV: $548.9 billion Aggregate Weighted non-European GAV: $535.9 billion Aggregate non-European Revenue: $1,349.5 million
The formula to be applied with these figures is as follows: (0.5)(Revenue paid by Member) (0.25)(Member Weighted GDV) (0.25)(Member Weighted GAV) + + ----------------------------- --------------------------- --------------------------- Aggregate Revenue Aggregate Weighted GDV Aggregate Weighted GAV
For purposes of this calculation, European members should use the aggregate European figures and non-European members should use the aggregate non-European figures. For ease of calculation, this formula does not account for travelers cheque revenues and, as such, produces an estimated result only. However, travelers cheque revenues do not have a material impact on the proxy calculation for principal and association members that are not also travelers cheque members. Travelers cheque members should consult the formula described under the caption "The Global Proxy -- The Formula" and set forth in the integration agreement to prepare an estimate of the aggregate number of shares of class A redeemable and class B convertible common stock of MasterCard Incorporated to be allocated to them. The foregoing 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. For all members, 84% of the shares received will be in the form of class A redeemable common stock and 16% of the shares received will be in the form of class B convertible common stock. In addition, as discussed above, the shares issued upon the closing of the conversion and integration will result in European member-stockholders receiving shares of class A redeemable and class B convertible common stock that together represent 33 1/3% of all of the shares of class A redeemable common stock and class B convertible common stock together outstanding. The shares of class A redeemable common stock issued to the European member-stockholders will represent 28%, and the shares of class B convertible common stock issued to the European member-stockholders will represent 5 1/3%, of the respective total number of shares of class A redeemable common stock and class B convertible common stock together outstanding immediately after the closing of the conversion and integration. The remaining class A redeemable and class B convertible common stock, representing in the aggregate 66 2/3% of the class A redeemable and class B convertible common stock together outstanding, will be held by the non-European member-stockholders of MasterCard. The shares of class A redeemable common stock issued to the non-European member-stockholders will represent 56%, and the shares of class B convertible common stock issued to the non-European member-stockholders will represent 10 2/3%, of the total number of shares of class A redeemable common stock and class B convertible common stock together outstanding immediately after the closing of the conversion and integration. 63 Accordingly, immediately after the closing of the conversion and integration, shares of MasterCard Incorporated class A redeemable and class B convertible common stock will be allocated as follows:
EUROPEAN NON-EUROPEAN MEMBER MEMBER TOTAL SHARE STOCKHOLDERS STOCKHOLDERS DISTRIBUTION ------------ ------------ ------------ class A redeemable........................... 28,000,000 56,000,000 84,000,000 class B convertible.......................... 5,333,333 10,666,667 16,000,000 ---------- ---------- ----------- Total.............................. 33,333,333 66,666,667 100,000,000 ========== ========== ===========
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). 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 redeemable and class B convertible 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 principal 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 convertible shares that constitute ec Pictogram shares will be determined in accordance with the process described below. Second, the class B convertible shares (other than ec Pictogram shares) will be converted into class A redeemable shares on a one-for-one basis. Third, all class A redeemable shares will be reapportioned between Europe and non-Europe using the procedures described below. Fourth, each member-stockholder will be allocated class A redeemable shares according to the new global proxy, again calculated on both a European and non-European basis, as described in more detail below. As a result of this reallocation (and the subsequent reallocation involving ec Pictogram shares), member-stockholders may ultimately receive more or fewer shares than initially allocated to them, depending on the relative performance of the Europe region and their individual global proxy calculations at the time. If a member's revenue contribution, GDV and/or GAV during the period prior to reallocation grows more slowly than the membership as a whole, if any of these amounts decline for a member relative to other members, or if a member with ec Pictogram volumes fails to convert these to Maestro as required, the member may be entitled to fewer shares upon reallocation than at the closing of the conversion and integration. Members receiving additional shares upon reallocation will do so pursuant to rights initially granted with all shares of class A redeemable and class B convertible common stock of MasterCard Incorporated. ec Pictogram Shares. ec Pictogram shares are class B convertible shares that do not convert to class A redeemable shares at the conclusion of the transition period. Instead, ec Pictogram shares will convert to class A redeemable shares on the second anniversary of the end of the transition period. This additional two- 64 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 convertible shares representing ec Pictogram shares become non-voting at the end of the transition period when the other class B convertible shares convert to class A redeemable 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 redeemable common stock and class B convertible common stock of MasterCard Incorporated, will determine the number of shares of class B convertible 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 class A redeemable Shares Between Europe and Non-Europe." Reapportionment of Class A Redeemable 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 redeemable shares depending upon their aggregate global proxy calculation, and the non-European member-stockholders will be entitled to the remaining class A redeemable 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 redeemable common stock that represents 26% of the number of shares of outstanding class A redeemable common stock and class B convertible 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 redeemable common stock that represents 28% of the number of shares of outstanding class A redeemable common stock and class B convertible 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 redeemable common stock that is equal in percentage terms to their 65 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 redeemable common stock and class B convertible common stock. Because of the conversion of the class B convertible common stock at the end of the transition period, the only class B convertible 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 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 the closing, the apportionment of class A redeemable shares between Europe and non-Europe described above will produce two pools of class A redeemable shares, one for European member-stockholders and the other for non-European member-stockholders. The allocation of class A redeemable shares within each pool will be determined according to the new 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 converted to class A redeemable shares, and the class A redeemable 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 redeemable 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 class A redeemable 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. Members receiving additional shares upon reallocation will do so pursuant to rights initially granted with all shares of class A redeemable and class B convertible common stock of 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 redeemable 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. 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. Stockholders who need to sell shares in order to satisfy the 125% requirement are obligated under the bylaws of MasterCard Incorporated to accept the highest price offered to them for the shares that are required to be sold. To the extent that member-stockholders are required to purchase shares in order to satisfy the 75% minimum ownership requirement, shares will be available either directly from MasterCard Incorporated or from other member-stockholders that either are required to sell shares in order to satisfy the 125% maximum ownership requirement or otherwise desire to sell shares. The board of directors of MasterCard Incorporated is authorized to establish procedures by which shares of MasterCard Incorporated common stock will be traded among member-stockholders or purchased or sold by MasterCard. Methods for the purchase and disposition of shares may include some or all of the following: an on-line bulletin board that matches buyers and sellers of shares; a periodic auction conducted on behalf of MasterCard Incorporated for buyers and sellers of shares; and directly negotiated purchases and sales of shares. The price at which shares may be purchased or sold will 66 be determined through these methods. MasterCard Incorporated will not charge member-stockholders any commissions for facilitating trading in its shares. MasterCard Incorporated will purchase or sell its common stock subject to its having sufficient capital available to effect each purchase transaction, and only if each purchase or sale transaction is permitted under the laws, rules and regulations applicable to MasterCard Incorporated at the time (including securities laws). In particular, to the extent any offer by MasterCard Incorporated to purchase its shares constitutes a tender offer under the Exchange Act, MasterCard Incorporated will comply with the applicable tender offer rules and regulations. In addition, MasterCard Incorporated will undertake activities to facilitate trading of its common stock among member-stockholders only to the extent such activities are permitted under the federal and state securities laws of the United States and related rules and regulations. Any shares subsequently sold by MasterCard Incorporated may not be registered under the Securities Act of 1933, as amended, and accordingly may be subject to resale restrictions under the Securities Act. 67 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. One member-stockholder of MasterCard Incorporated holding more than 5% of MasterCard Incorporated common stock is entitled to cancel its customized member agreement with MasterCard International if one of its employees does not have a board seat. If the conversion is approved, the current directors of MasterCard International will serve as the directors of MasterCard Incorporated and MasterCard International until the annual meeting of MasterCard Incorporated shareholders in 2003. In addition, the boards of directors of each company, acting pursuant to authority granted to them in their respective certificates of incorporation and/or bylaws, will appoint two additional voting directors affiliated with European members and Dr. Peter Hoch as a non-voting director, in each case to serve until the annual meeting of MasterCard Incorporated shareholders in 2003. The board of directors of MasterCard Incorporated will be subject to reelection in 2003. If the conversion does not occur, the current directors of MasterCard International will continue in that capacity until an annual meeting of MasterCard International principal members is held in 2003. A number of the largest members of MasterCard International that generate significant business for MasterCard have representatives on the MasterCard Incorporated board of directors. If any of these members were to lose its representation on the board, this could have a detrimental effect on our business relationship with that member. The bylaws of MasterCard Incorporated require that directors be officers of a member institution of MasterCard International or an individual otherwise uniquely qualified to provide guidance on MasterCard's affairs. For a description of the requirements for the regional allocation of board seats arising from the conversion and integration, see "The Conversion -- Effects of the Conversion." In accordance with the restrictions described in that section, the nominating committee of the MasterCard Incorporated board is charged with nominating individuals to serve as directors, subject to election by the stockholders. Presently, MasterCard Incorporated does not grant automatic board seats to members that generate specified levels of revenues or transaction volumes for MasterCard. Under the nominating committee's current procedures, the committee accepts nominations from regional boards as well as individual member-stockholders, and also considers nominees of its own volition. In selecting nominees, the committee typically considers the following factors, among others: - the experience and qualifications of the individual nominee; - the region with which the nominee is associated; - whether the nominee represents an issuing or acquiring institution; - the size of the financial institution of which the nominee is an officer, the extent of such institution's business with MasterCard (in terms of revenues, issuing volumes and/or acquiring volumes), and the degree of such institution's relative dedication to the MasterCard brand; and - whether the financial institution of which the nominee is an officer is of particular strategic importance to MasterCard. Because the size of member-stockholders and their dedication to MasterCard are important factors considered by the nominating committee, it is possible that a director associated with a member-stockholder whose business with MasterCard declines relative to others may not be proposed for reelection by the 125 nominating committee. Similarly, officers of member-stockholders that make large and growing contributions to MasterCard's revenues and volumes are more likely to be considered by the nominating committee for nomination to the board of directors. The following table sets forth certain information regarding the executive officers and directors of MasterCard Incorporated and MasterCard International after the conversion and integration.
NAME AGE POSITION - ---- --- -------- Lance L. Weaver...................... 47 Chairman of the Board and Director Baldomero Falcones Jaquotot.......... 55 Vice Chairman and Director Donald L. Boudreau................... 60 Chairman Emeritus and non-voting Director Robert W. Selander................... 51 President, Chief Executive Officer and Director William F. Aldinger.................. 54 Director Hiroshi Arai......................... 72 Director David A. Coulter..................... 54 Director William R.P. Dalton.................. 58 Director Augusto M. Escalante Juanes.......... 52 Director Jan A.M. Hendrikx.................... 56 Director Jean-Pierre Ledru.................... 63 Director Norman C. McLuskie................... 57 Director John Francis Mulcahy................. 51 Director Robert W. Pearce..................... 47 Director Robert B. Willumstad................. 56 Director Mark H. Wright....................... 56 Director Ronald N. Zebeck..................... 47 Director Denise K. Fletcher................... 53 Executive Vice President and Chief Financial Officer Noah J. Hanft........................ 49 General Counsel and Secretary Alan J. Heuer........................ 60 Senior Executive Vice President, Customer Group Peter Hoch........................... 61 President, MasterCard Europe region and non-voting Director Jerry McElhatton..................... 63 Senior Executive Vice President, Global Technology & Operations Michael W. Michl..................... 56 Executive Vice President, Central Resources Christopher D. Thom.................. 53 Senior Executive Vice President, Global Development Group Spencer Schwartz..................... 35 Senior Vice President and Controller
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 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 an Executive 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 Directors and the Tower Hill School Board of Trustees. 126 Baldomero Falcones Jaquotot is Vice Chairman of the board of MasterCard International. He has been a member of the MasterCard International board of directors since 1997. Mr. Falcones joined Banco Hispano Industrial, a predecessor of Banco Santander Central Hispano, in 1984 and has served as Senior Executive Vice President and a member of the Executive Committee of Banco Santander Central Hispano for fifteen years. Mr. Falcones also serves as 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., S.C.H. Seguros y Reaseguros, S.A., Sistema 4B, 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 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 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 investment management and private banking activities. Mr. Coulter has been a member of MasterCard International's 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 in 1998, Mr. Dalton served as President and Chief Executive Officer of 127 HSBC Bank Canada. Mr. Dalton joined HSBC Bank Canada in 1980. Mr. Dalton is Deputy Chairman of Merrill Lynch HSBC Limited and is also a director of HSBC Investment Bank Holdings plc, CCF SA and HSBC Private Banking Holdings (Suisse) SA. He is Chairman of Young Enterprise in the United Kingdom and Vice President of the Chartered Institute of Bankers. 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. Mr. Escalante Juanes joined Banco Nacional de Mexico in 1991. 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 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 Credit Agricole SA. 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. Mr. McLuskie joined Royal Bank of Scotland in 1982. 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 Cards Ltd, Chairman of Virgin Direct Personal Finance Ltd and Deputy Chairman of Tesco Personal Finance. Mr. McLuskie is also Vice Chairman of Europay International and a fellow of the Chartered Institute of Bankers in Scotland. 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. Robert W. Pearce is President of Distribution in the Personal & Commercial Client Group for Bank of Montreal, where he has worked for over twenty years. 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 President of Citigroup and Chairman and Chief Executive Officer of Citigroup's Consumer Group, overseeing its North American cards businesses, Citibanking North America, Europe and Japan, CitiFinancial, Citigroup's Mortgage Banking business and Primerica, and has product responsibility for Global Cards and Consumer Finance. Mr. Willumstad is also responsible for, among other things, Citigroup's e-consumer unit, which provides Internet payment solutions and financial services offerings across all of 128 Citigroup's consumer businesses. Mr. Willumstad has served on the MasterCard International board of directors since 1999. Mr. Willumstad was Chairman and CEO of Travelers Group Consumer Finance Services prior to the merger between Citicorp and Travelers Group in 1998. Mr. Willumstad joined Commercial Credit, now CitiFinancial, in 1987. Prior to joining Citigroup's predecessor companies, 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 joined USAA in 1993. 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 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 General Counsel and Secretary of MasterCard Incorporated and a member of MasterCard's Executive Management Group. 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 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, and a part of the branch network. He was responsible for managing the merger between Hypo-Bank and Bayerische 129 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 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. 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. 130 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 2001, which we collectively refer to as the named executive officers.
LONG-TERM ANNUAL COMPENSATION COMPENSATION ----------------------------------------------- ------------ OTHER ANNUAL LTIP ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION(2) PAYOUTS COMPENSATION(3) - --------------------------- ---- -------- ---------- --------------- ------------ --------------- Robert W. Selander....... 2001 $783,333 $2,500,000 $205,499 $3,479,000 $451,447 President & CEO 2000 $700,000 $2,000,000 $198,760 -- $419,360 Alan J. Heuer............ 2001 $575,000 $ 900,000 $153,971 $2,380,000 $201,341 Senior Executive VP 2000 $575,000 $ 800,000 $137,796 -- $174,317 Jerry McElhatton......... 2001 $575,000 $ 825,000 $149,047 $2,047,500 $395,586 Senior Executive VP 2000 $575,000 $ 725,000 $133,849 -- $375,758 Christopher D. Thom...... 2001 $500,000 $ 700,000 $113,747 $2,072,000 $196,316 Senior Executive VP 2000 $500,000 $ 700,000 $116,470 -- $129,283 Denise K. Fletcher(4).... 2001 $375,000 $ 450,000 $ 42,182 -- $ 44,485 Executive VP 2000 $120,913 $ 200,000 -- -- $210,000(5)
- --------------- (1) Additional bonuses for services performed in 2001 will be paid to Mr. Selander ($250,000 at the closing of the conversion and integration and $250,000 per year for each of the following three years), Mr. Thom ($200,000 at the closing and $66,667 per year for each of the following three years) and Ms. Fletcher ($200,000 at the closing and $66,667 per year for each of the following three years), if, and only if, the conversion and integration is consummated. (2) Amounts principally represent reimbursement for tax obligations in connection with non-qualified retirement benefits. (3) For 2001, includes matching contributions under the MasterCard International's 401(k) plan (Mr. Selander -- $22,134; Mr. Heuer -- $22,134; Mr. McElhatton -- $22,190; Mr. Thom -- $22,190; Ms. Fletcher -- $7,378); MasterCard International's contributions to both a non-qualified defined benefit and defined contribution plan -- Annuity Bonus Plan (Mr. Selander -- $186,513; Mr. Heuer -- $131,087; Mr. McElhatton -- $124,871; Mr. Thom -- $80,314; Ms. Fletcher -- $2,107); the dollar value of the benefit of premiums paid for a split-dollar life insurance policy projected on an actuarial basis (Mr. Thom -- $47,579); the full amount of all premiums paid by MasterCard International for executive life insurance coverage (Mr. Selander -- $36,800; Mr. Heuer -- $3,120; Mr. McElhatton -- $3,524; Mr. Thom -- $1,232); MasterCard International's contributions to a deferred compensation plan -- Rabbi Trust (Mr. Selander -- $150,000; Mr. McElhatton -- $200,000); cash payments in lieu of executive perquisites (Mr. Selander -- $56,000; Mr. Heuer -- $45,000; Mr. McElhatton -- $45,000; Mr. Thom -- $45,000; Ms. Fletcher -- $35,000). (4) Ms. Fletcher joined MasterCard International in September 2000. Her salary and bonus amounts for fiscal 2000 reflect a partial year. (5) Represents a one-time bonus paid upon hiring. 131 LONG-TERM INCENTIVE PLAN-AWARDS IN FISCAL YEAR 2001 The following table lists grants of performance units in 2001 to the named executive officers:
NUMBER OF UNITS PERFORMANCE OR OTHER NAME AWARDED(1) PERIOD UNTIL MATURATION THRESHOLD ($) TARGET ($) MAXIMUM ($) - ---- ---------- ----------------------- ------------- ---------- ----------- Robert W. Selander... 35,225 1/1/2001 -- 12/31/2003 1,761,250 3,522,500 7,045,000 President and CEO 19,050(2) 1/1/2001 -- 12/31/2003 952,500 1,905,000 3,810,000 Alan J. Heuer........ 20,250 1/1/2001 -- 12/31/2003 1,012,500 2,025,000 4,050,000 Senior Executive VP 11,500(2) 1/1/2001 -- 12/31/2003 575,000 1,150,000 2,300,000 Jerry McElhatton..... 15,525 1/1/2001 -- 12/31/2003 776,250 1,552,500 3,105,000 Senior Executive VP 8,625(2) 1/1/2001 -- 12/31/2003 431,250 862,500 1,725,000 Christopher D. 17,625 Thom............... 1/1/2001 -- 12/31/2003 881,250 1,762,500 3,525,000 Senior Executive VP Denise K. Fletcher... 8,800 1/1/2001 -- 12/31/2003 440,000 880,000 1,760,000 Executive VP 1,450(2) 1/1/2001 -- 12/31/2003 72,500 145,000 290,000
- --------------- (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; improving customer focused strategy; achieving corporate financial targets 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 be increased on a straight line basis. The units will have no value if performance is below threshold. (2) Represents one-time special grants awarded pursuant to the Executive Incentive Plan that vests 100% after five years for Mr. Selander; three years for Mr. Heuer, Mr. McElhatton and Ms. Fletcher. The performance units described in the preceding table are subject to vesting as described below. Performance units that relate to a three-year performance period will vest in annual increments according to the following schedule if the participant completes 1,000 hours of service and is employed by MasterCard International on the last day of the respective twelve-month cycle:
TWELVE-MONTH CYCLE ENDING ON THE FOLLOWING ANNIVERSARY OF THE % OF PERFORMANCE DATE OF GRANT UNITS VESTED ----------------------- ---------------- 1st Anniversary............................................. 26.67% 2nd Anniversary............................................. 26.67% 3rd Anniversary............................................. 26.67% 4th Anniversary............................................. 0% 5th Anniversary............................................. 20%
Unvested performance units relating to the twelve-month cycle in which a participant terminates employment with MasterCard International, and subsequent twelve-month cycles during the vesting period for the award, will be forfeited upon termination of employment. If a participant is rehired during a subsequent twelve-month cycle in the vesting period for the same award of performance units, the participant will be eligible to vest in the performance units for the award that relate to the twelve-month cycle of rehiring and subsequent twelve-month cycles if the participant otherwise meets the terms and conditions specified in the award and completes 1,000 hours of service in, and is employed by MasterCard International on the last day of, the twelve-month cycle. 132 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 three-year performance period and/or prior to the end of the five-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 target unit value of $100. 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 target. RETIREMENT BENEFITS MASTERCARD ACCUMULATION PLAN (MAP) Any employee who participates in the MAP earns benefits under the MAP as soon as he or she becomes 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:
PAY CREDIT FOR CURRENT COMPLETED YEARS OF SERVICE AT DECEMBER 31 OF PRIOR PLAN YEAR PLAN YEAR - ------------------------------------------------------------ ----------- 0 - 4..................................................... 4.50% 5 - 9..................................................... 5.75% 10 - 14..................................................... 8.00% 15 - 19..................................................... 10.00% 20 - 29..................................................... 12.00%
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:
S&P 500 THIRTY-YEAR TREASURY ACCOUNT ACCOUNT - ---------------------------- ------- 100%........................................................ 0% 80%......................................................... 20% 50%......................................................... 50% 20%......................................................... 80% 0%.......................................................... 100%
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 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. 133 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 assuming retirement at age 65 at his or her 2001 base salary with payments made for the life of each participant.
YEAR OF 65TH ESTIMATED ANNUAL NAME BIRTHDAY BENEFIT(1) - ---- ------------ ----------------- Robert W. Selander...................................... 2015 $783,000 Alan J. Heuer........................................... 2006 $460,000 Jerry McElhatton........................................ 2004 $460,000 Christopher D. Thom..................................... 2013 $400,000 Denise K. Fletcher...................................... 2013 $ 57,000
- --------------- (1) Assumes MAP and Annuity Bonus Plan account balance increases with annual salary credits and interest credits projected at 6% per year. 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. McElhatton -- $130,514, Mr. Thom -- $114,057). 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 3%. Internal Revenue Service limits apply to all tax-deferred contributions. A 217% match is provided on employee contributions up to 6% of base pay. 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 2001, directors who were not employees of MasterCard International were paid an annual retainer of $25,000. 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 U.S. 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. 134 EMPLOYMENT AGREEMENTS AND CHANGE-IN-CONTROL ARRANGEMENTS EMPLOYMENT AGREEMENT 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. In addition, both he and MasterCard can terminate the agreement for any reason upon ninety (90) days' prior written notice. During the employment term, Mr. Selander is eligible to participate in MasterCard's rewards 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 and severance pay in the form of base salary continuation and his average annual incentive bonus, received over the prior three years, for a period of thirty-six (36) months. He is also subject to non-competition and non-solicitation covenants for a minimum period of twelve (12) months, up to the full length of the severance period. 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 International has approved a change in control agreement for certain of its executive officers, including all of the named executive officers. To date, Mr. Selander is the only executive officer who has executed the change in control agreement. Under the agreement, if an executive officer's employment is terminated without "cause" or for "good reason" (as defined in the agreement) 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 two times the average base salary and bonus (three times 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 including special grants awarded 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 grants awarded pursuant to the Executive Incentive Plan, 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). 135 For purposes of the agreement, 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;" (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. 136 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The table below sets forth certain information with respect to the principal members of MasterCard International who, together with their affiliates, are entitled to vote 5% or more of the total number of votes eligible to be cast at the special meeting of principal members of MasterCard International in connection with which we are distributing this proxy statement-prospectus. None of the directors or executive officers of MasterCard International beneficially owns any of the voting power with respect to the votes to be cast at the meeting. To the best of our knowledge, each beneficial owner has sole voting power and investment power with respect to the votes that it is eligible to cast. A total number of 1,536,772,585 votes are eligible to be cast at the meeting. Information in the following table is based on the historic global proxy calculation for the period ended September 30, 2001.
PRIOR TO CONVERSION AND INTEGRATION ----------------------------------------- NAME AND ADDRESS NUMBER OF VOTES PERCENT OF VOTES OF BENEFICIAL OWNER ELIGIBLE TO BE CAST ELIGIBLE TO BE CAST ------------------- ------------------- ------------------- Citicorp Credit Services, Inc. ............................. 124,081,529 8.1% 14700 Citicorp Drive Hagerstown, MD 21742 Chase Manhattan Bank USA, N.A. ............................. 122,591,588 8.0% 100 Duffy Avenue Hicksville, NY 11801 First USA Bank, N.A. ....................................... 104,596,601 6.8% A Bank One Company 201 North Walnut Street 15th Floor Wilmington, DE 19801
Additionally, 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 redeemable common stock and class B convertible common stock by each person who we know will 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 redeemable or class B convertible common stock following the conversion and integration. To the best of our knowledge, each beneficial owner of class A redeemable common stock and class B convertible common stock will have sole voting power and sole investment power with respect to all of the class A redeemable and class B convertible 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.
AFTER CONVERSION AND INTEGRATION ------------------------------------------------------------------------ SHARES OF PERCENT OF SHARES OF PERCENT OF PERCENT OF CLASS A CLASS A CLASS B CLASS B TOTAL REDEEMABLE REDEEMABLE CONVERTIBLE CONVERTIBLE OUTSTANDING COMMON STOCK COMMON STOCK COMMON STOCK COMMON STOCK COMMON STOCK NAME AND ADDRESS BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY OF BENEFICIAL OWNER OWNED OWNED OWNED OWNED OWNED - ------------------- ------------ ------------ ------------ ------------ ------------ Citicorp Credit Services, Inc........................... 5.08 million 6.0% .97 million 6.0% 6.0% 14700 Citicorp Drive Hagerstown, MD 21742 Chase Manhattan Bank USA, N.A... 4.50 million 5.4% .86 million 5.4% 5.4% 100 Duffy Avenue Hicksville, NY 11801 EURO Kartensysteme EUROCARD und eurocheque GmbH............... 4.39 million 5.2% .84 million 5.2% 5.2% Solmsstrasse 2-26 60648 Frankfurt/Main Germany
137
AFTER CONVERSION AND INTEGRATION ------------------------------------------------------------------------ SHARES OF PERCENT OF SHARES OF PERCENT OF PERCENT OF CLASS A CLASS A CLASS B CLASS B TOTAL REDEEMABLE REDEEMABLE CONVERTIBLE CONVERTIBLE OUTSTANDING COMMON STOCK COMMON STOCK COMMON STOCK COMMON STOCK COMMON STOCK NAME AND ADDRESS BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY OF BENEFICIAL OWNER OWNED OWNED OWNED OWNED OWNED - ------------------- ------------ ------------ ------------ ------------ ------------ First USA Bank, N.A. ........... 4.20 million 5.0% .80 million 5.0% 5.0% A Bank One Company 201 North Walnut Street 15th Floor Wilmington, DE 19801 Europay France S.A. ............ 4.22 million 5.0% .80 million 5.0% 5.0% 44, rue Cambronne 75740 Paris Cedex 15 France
138 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 and its affiliates, as of the date of this proxy statement-prospectus, net of contractual obligations under the agreement described above, were approximately $140 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 6.0% of our class A redeemable and class B convertible 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 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 and its affiliates, as of the date of this proxy statement-prospectus, net of contractual obligations under the agreement described above, were approximately $110 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 5.4% of our class A redeemable and class B convertible common stock on a combined basis. Under the terms of a licensing agreement with Europay, EURO Kartensysteme EUROCARD und eurocheque GmbH, or EKS, is the principal licensee for certain Europay brands and payment products in Germany. EKS owns a 15.3% equity interest in Europay and is a principal member of MasterCard International. In connection with the conversion and integration, EKS may enter into one or more agreements with MasterCard Incorporated, MasterCard International and/or Europay pursuant to which, among other things, EKS will assign to Europay certain trademarks, trade names and other intellectual property rights, and MasterCard and Europay will provide support for marketing initiatives designed to migrate all uses by German members of the Eurocard-MasterCard brand on cards, acceptance decals, advertising and other materials to the MasterCard brand mark. For 2000, fees earned by Europay from EKS were approximately E65 million. Jan A. M. Hendrikx, a member of our board of directors, is Chief Executive Officer of EKS and a member of the board of directors of Europay. As a result of the conversion and integration, EKS is expected to own approximately 5.2% of our class A redeemable and class B convertible common stock. 139 MasterCard and Europay provide authorization, clearing and settlement services in connection with transactions for which Bank One or its affiliates, including First USA Bank, N.A., act as issuer or acquirer. For 2000, fees earned from Bank One and its affiliates, as of the date of this proxy statement-prospectus were approximately $110 million. As a result of the conversion and integration, Bank One and its affiliates are expected to own approximately 5.0% of our class A redeemable and class B convertible common stock on a combined basis. Europay France S.A., a company formed by certain French financial institutions to promote Europay brands and payment products in France, owns a 15.3% equity interest in Europay and is a principal member of MasterCard International. For 2000, fees earned by Europay from Europay France were approximately E21 million. Jean-Pierre Ledru, a member of our board of directors, is Chairman and Chief Executive Officer of Europay France and Chairman of Europay. As a result of the conversion and integration, Europay France is expected to own approximately 5.0% of our class A redeemable and class B convertible common stock. 140 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 D and E to this proxy statement-prospectus. GENERAL Capitalization. The authorized capital stock of MasterCard Incorporated consists of: - 275 million shares of class A redeemable common stock, par value $.01 per share; - 25 million shares of class B convertible common stock, par value $.01 per share; and - 75 million shares of class C common stock, par value $.01 per share. Immediately following the closing of the conversion and integration, 84 million shares of class A redeemable common stock will be issued and outstanding, 16 million shares of class B convertible 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 convertible common stock in connection with the transactions contemplated by the integration agreement. Conversion of Class B convertible common stock. Each share of class B convertible common stock, except shares that constitute ec Pictogram shares, will automatically be converted into one share of class A redeemable 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 convertible common stock that are ec Pictogram shares will automatically be converted into one share of class A redeemable common stock on the second anniversary of the day on which all of the other shares of class B convertible common stock were converted and some or all of these shares will be allocated among the members of MasterCard responsible for ec Pictogram volumes to the extent such volumes have been previously converted to Maestro, in accordance with the terms of the integration agreement. Any remaining shares will be allocated to non-European member-stockholders. Reallocation. At the conclusion of the three year transition period, all shares of class A redeemable common stock, including class A redeemable common stock resulting from the conversion of class B convertible common stock, will be subject to reallocation as described more fully under "Share Allocation and the Global Proxy -- Reallocation of Shares at the Conclusion of the Transition Period." In connection with this reallocation, shareholders may be required to return some or all of their common stock to MasterCard Incorporated for reallocation. In addition, ec Pictogram shares will be subject to reallocation at the conclusion of an additional two year period following the transition period as described more fully under "-- Conversion of Class B Convertible Common Stock" above. Fractional Shares. No fractional shares of class A redeemable or class B convertible 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 redeemable and class B convertible common stock has the right to cast one vote for each share of class A redeemable and class B convertible common stock held of record on all matters submitted to a vote of stockholders of MasterCard Incorporated. At the end of the transition period, all shares of class B convertible common stock, except for class B convertible shares relating to ec Pictogram, will be converted into class A redeemable common stock. Following this conversion, the remaining class B convertible common stock will have no voting rights. At all times, each holder of class A redeemable and class B convertible common stock, together with its affiliates, will be subject to a 7% voting limitation in the election of directors regardless of the number of shares owned. 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 redeemable common stock and class B convertible common stock voting together as a single class (so long as 141 the class B convertible 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 redeemable and class B convertible common stock voting together as a single class (so long as the class B convertible stock has voting rights). Dividend Rights. The holders of shares of class A redeemable and class B convertible 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 redeemable and class B convertible 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. Redemption Rights. If, within three years after the closing of the conversion, a stockholder of MasterCard Incorporated ceases to be a principal member of MasterCard International (other than in connection with a permitted transfer of shares as described under "-- Transfer Restrictions" below), MasterCard Incorporated will redeem that stockholder at par value. If more than three years have elapsed since the conversion and a stockholder of MasterCard Incorporated ceases to be a principal member of MasterCard International, MasterCard Incorporated may, at its option, redeem the shares of that stockholder 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 the stockholder's shares, the stockholder will be required to offer the unpurchased shares to the other stockholders in accordance with procedures to be established by the board of directors. Certain Purchase and Sale Obligations. Beginning three years after the conversion and integration, 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. Stockholders who need to sell shares in order to satisfy the 125% requirement are obligated under the bylaws of MasterCard Incorporated to accept the highest price offered to them for the shares that are required to be sold. To the extent that member-stockholders are required to purchase shares in order to satisfy the 75% minimum ownership requirement, shares will be available either directly from MasterCard Incorporated or from other member-stockholders that either are required to sell shares in order to satisfy the 125% maximum ownership requirement or otherwise desire to sell shares. The board of directors of MasterCard Incorporated is authorized to establish procedures by which shares of MasterCard Incorporated common stock will be traded among member-stockholders or purchased or sold by MasterCard. Methods for the purchase and disposition of shares may include some or all of the following: an on-line bulletin board that matches buyers and sellers of shares; a periodic auction conducted on behalf of MasterCard Incorporated for buyers and sellers of shares; and directly negotiated purchases and sales of shares. The price at which shares may be purchased or sold will be determined through these methods. MasterCard Incorporated will not charge member-stockholders any commissions for facilitating trading in its shares. MasterCard Incorporated will purchase or sell its common stock subject to its having sufficient capital available to effect each purchase transaction, and only if each purchase or sale transaction is permitted under the laws, rules and regulations applicable to MasterCard Incorporated at the time (including securities laws). In particular, to the extent any offer by MasterCard Incorporated to purchase its shares constitutes a tender offer under the Exchange Act, MasterCard Incorporated will comply with the applicable tender offer rules and regulations. In addition, MasterCard Incorporated will undertake activities to facilitate trading of its common stock among member-stockholders only to the extent such activities are permitted under the federal and state 142 securities laws of the United States and related rules and regulations. Any shares subsequently sold by MasterCard Incorporated may not be registered under the Securities Act of 1933, as amended, and accordingly may be subject to resale restrictions under the Securities Act. Rights. Holders of class A redeemable and class B convertible common stock have the right under the terms of the integration agreement and as provided for in the bylaws of MasterCard Incorporated to receive additional shares at the end of the three-year transition period to the extent that their new global proxy calculation for the third year of the transition period (calculated on a European or non-European basis, as the case may be) exceeds their initial allocation of shares. See "Share Allocation and the Global Proxy -- Reallocation of Shares at the Conclusion of the Transition Period." Similarly, holders of class A redeemable and class B convertible common stock have the right to receive additional shares in certain circumstances in connection with the reallocation of ec Pictogram shares. See "Share Allocation and the Global Proxy -- Conversion and Reallocation of ec Pictogram Shares." Members receiving additional shares at the end of the three-year transition period and/or in connection with the reallocation of ec Pictogram shares will do so pursuant to rights initially granted with all shares of class A redeemable and class B convertible common stock of MasterCard Incorporated. Each right is transferable only with the applicable shares of class A redeemable and class B convertible common stock, expires or terminates upon completion of the final reallocation and is not redeemable except together with the redemption of a share of class A redeemable or class B convertible common stock. Other than the right and as otherwise described herein, holders of class A redeemable and class B convertible 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 convertible shares into class A redeemable 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 redeemable 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 redeemable shares and class B convertible 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 redeemable and class B convertible common stock voting together as a single class (so long as the class B convertible stock has voting rights). TRANSFER RESTRICTIONS For three years following the closing of 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 a stockholder's card portfolio; - in the event that a stockholder that was a principal member becomes an affiliate member of another principal member, in which case the stockholder may transfer its common stock to the principal member with which it becomes affiliated; - in the event that a stockholder that was a principal member with one or more affiliate members ceases to be a principal member and one or more of its affiliate members thereupon become principal members, in which case the stockholder may transfer its common stock to the former affiliate members; 143 - if a stockholder is prohibited from holding the common stock of MasterCard Incorporated by applicable regulatory requirements, in which case the stockholder may transfer its common stock to an affiliate that is permitted to hold the stock, with the prior approval of the board of directors of MasterCard Incorporated; and - a stockholder may transfer shares to a class A member of MasterCard International that is an affiliate of such stockholder with the approval of the board of directors of MasterCard Incorporated. For these purposes, an affiliate is any parent company that directly or indirectly owns 80% or more of the voting power and economic interests in the stockholder, and any entity of which the stockholder or any of such parents owns 80% or more of the voting power and economic interests. The permissible transfers described above apply only to transfers of all, but not less than all, of a stockholder's shares in MasterCard Incorporated. 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. Stockholders who need to sell shares in order to satisfy the 125% requirement are obligated under the bylaws of MasterCard Incorporated to accept the highest price offered to them for the shares that are required to be sold. In addition: - only class A members of MasterCard International may own shares of class A redeemable and class B convertible common stock of MasterCard Incorporated; and - 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. 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. See "-- Certain Purchase or Sale Obligations." The shares of MasterCard Incorporated common stock that MasterCard International members will own following the conversion and integration have been registered under the Securities Act of 1933. They may be traded in accordance with the transfer restrictions contained in this section by you if you are not an affiliate of MasterCard International under the Securities Act. An "affiliate" as defined by the rules under the Securities Act is a person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, MasterCard International. Persons who are affiliates of MasterCard International may not sell their shares of MasterCard Incorporated common stock acquired in the merger except pursuant to an effective registration statement under the Securities Act or an applicable exemption from the requirements of the Securities Act, including Rules 144 and 145 issued by the SEC under the Securities Act. Affiliates generally include directors, executive officers and beneficial owners of 10% or more of any class of capital stock. 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. 144 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 redeemable and class B convertible common stock voting together as a single class (so long as the class B convertible 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 redeemable, B convertible 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. 15% Share Ownership Limitation. Unless otherwise approved by a two-thirds vote of the MasterCard board of directors, no stockholder together with its affiliates may own more than 15% of the outstanding shares of voting stock of MasterCard Incorporated. 7% Voting Power Limitation. Each holder of class A redeemable and class B convertible common stock, together with its affiliates, will be subject to a 7% voting limitation in the election of directors regardless of the number of shares owned. Only Class A Members of MasterCard International may be Stockholders of MasterCard Incorporated. Only class A members of MasterCard International may own shares of class A redeemable and class B convertible common stock of MasterCard Incorporated. Authorized but Unissued Shares of Class C Common Stock. Since the board of directors of MasterCard Incorporated may issue shares of class C common stock and set the voting powers, designations, preferences and other rights related to that stock, any issuance of class C shares may delay or prevent a change of control. 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; 145 - 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. 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. 146 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. 160 EX-99.2 6 y62026exv99w2.txt NEWS RELEASE NEWS RELEASE MASTERCARD INTERNATIONAL --------------- Contacts: Sharon Gamsin, 914-249-5622 MASTERCARD MERGES WITH EUROPAY TO FORM A UNIFIED, SHAREHOLDER-OWNED, GLOBAL PAYMENTS COMPANY CENTERS OF EXCELLENCE ESTABLISHED TO LEVERAGE EXPERTISE AROUND THE GLOBE PURCHASE, NY AND WATERLOO, BELGIUM, JULY 1, 2002 - The conversion of MasterCard International into a private share corporation and its merger with Europay International have been completed, creating a unified, shareholder-owned global payments company, which will deliver significant benefits to customers around the globe. "The integration of MasterCard and Europay unites two of the strongest players in the payments business so that we can now deploy a truly globally integrated, regionally sensitive strategic model," said Robert W. Selander, MasterCard's president and CEO. "By integrating with Europay, we're enhancing our ability to deliver high-quality, reliable payment solutions to our members globally, while maintaining regional flexibility that is responsive to local market requirements and conditions." Selander said that by joining Europay's strength in m-commerce, smart cards, and debit cards with MasterCard's leadership in customer relationship management, award-winning brand marketing, and leading-edge processing technology, "the financial institutions we serve will receive superior support and delivery whether they operate in one country, on one continent, or in diverse markets around the world." Europay, MasterCard's long-standing strategic ally in Europe, is being integrated into the global organization as MasterCard's Europe Region. The Europe Region will continue to be based in Waterloo, Belgium. Dr. Peter Hoch, Europay's chief executive, will continue his leadership as president of MasterCard's Europe Region, reporting to Selander. "Europay has just marked another critical milestone, with over 300 million cards now issued in our region. It's a proud moment at which to enter into this merger," said Hoch. "Our members have always benefited from our strategic alliance with MasterCard but the benefits of working as a truly integrated global company will now be all the greater." With a unified governance and management structure, MasterCard will increase strategic flexibility, strengthen customer responsiveness and shorten time-to-market for innovative products and services, Selander said. At the same time, MasterCard's regions - Europe, Asia/Pacific, Latin America/Caribbean, South Asia/Middle East/Africa and North America - will maintain their regional boards and the ability to decide how best to implement MasterCard's global strategy on a regional level, and establish rules and policies that reflect local practices. -more- MASTERCARD INTERNATIONAL - PAGE 2 MASTERCARD MERGES WITH EUROPAY TO FORM A UNIFIED SHAREHOLDER-OWNED GLOBAL PAYMENTS COMPANY JULY 1, 2002 THE CONVERSION - -------------- To facilitate the merger transaction with Europay, MasterCard created a private share corporation by issuing stock in a newly developed holding company, MasterCard Incorporated, to its principal members. MasterCard International, the membership corporation, will continue as MasterCard Incorporated's principal operating subsidiary. "As a private share corporation, we provide a tangible benefit to our principal members, who are now our shareholders," Selander added. "They own stock in our company and have a vested interest in enhancing the value of that stock by moving more volume, revenue, and share to MasterCard." Selander pointed out that as part of the process of becoming a private share company, MasterCard publicly disclosed detailed information about its business, and will file quarterly and annual financial reports with the U.S. Securities and Exchange Commission. "This increased level of financial transparency and precision is an important advantage in today's business environment, and a key differentiator from our competition," he said. THE INTEGRATION - --------------- The integration of MasterCard and Europay provides an opportunity to create substantial benefits for customers in terms of improved economies of scale, elimination of duplication, and faster decision making. This means MasterCard can be faster to market, delivering timely technology and marketing solutions to customers. Many of these benefits are already being realized. Full globalization of MasterCard's processing functions, for example, will provide a single set of applications and infrastructure for core processing, with significant economies of scale. The integration provides the opportunity for the Europe Region to further benefit from MasterCard's global expertise in brand building, customer-centered service, marketing consulting, and corporate payments expertise. For example, MasterCard's award-winning PRICELESS(R) advertising campaign, now seen in 45 languages and in 90 countries, including key European markets, will be expanded throughout the region, further enhancing the global reach and scope of MasterCard's brand. European customers will also benefit from the delivery of enhanced customized relationship management and consulting services. CENTERS OF EXCELLENCE - --------------------- As part of the newly integrated company, MasterCard is launching global Centers of Excellence in Belgium and the United States. The centers will provide the best solutions to meet the dynamic needs of MasterCard's members and their customers by offering information, resources, and tools to help build global leadership. The Center of Excellence for Debit and the Center of Excellence for Chip and Mobile Commerce will be located in Waterloo, Belgium, to leverage Europay's proven expertise in these areas. A third, the Center of Excellence for e-Commerce and eB2B, will be located in Purchase, New York. -more- MASTERCARD INTERNATIONAL - PAGE 3 MASTERCARD MERGES WITH EUROPAY TO FORM A UNIFIED SHAREHOLDER-OWNED GLOBAL PAYMENTS COMPANY JULY 1, 2002 The Debit Center of Excellence will combine Europay's recognized "pay now" leadership with MasterCard's significant success in debit in Asia/Pacific and Latin America, and leverage this expertise globally. Maestro International is joining with other MasterCard debit groups around the world in order to maximize Maestro's global leadership position in online debit. The Center of Excellence for Chip and Mobile Commerce will build on Europe's expertise and experience to provide extensive and unique expertise in chip and mobile commerce businesses and technologies to customers around the world. The e-Commerce and eB2B Center of Excellence will support all aspects of e-commerce product development for businesses and consumers. This includes Internet channel security and cardholder authentication protocols, electronic procurement systems, and other emerging technologies. ABOUT MASTERCARD - ---------------- MasterCard International has a comprehensive portfolio of well-known, widely accepted payment brands including MasterCard(R), Cirrus(R) and Maestro(R). More than 1.7 billion MasterCard, Cirrus and Maestro logos are present on credit, charge and debit cards in circulation today. An association comprised of more than 15,000 member financial institutions, MasterCard serves consumers and businesses, both large and small, in 210 countries and territories. MasterCard is a leader in quality and innovation, offering a wide range of payment solutions in the virtual and traditional worlds. MasterCard's award-winning PRICELESS(R) advertising campaign is now seen in 90 countries and in 45 languages, giving the MasterCard brand a truly global reach and scope. With more than 24 million acceptance locations, no card is accepted in more places and by more merchants than the MasterCard Card. For the year ended December 31, 2001 gross dollar volume exceeded US$986 billion. MasterCard can be reached through its World Wide Web site at http://www.mastercard.com. THIS PRESS RELEASE CONTAINS FORWARD-LOOKING INFORMATION. ALTHOUGH MASTERCARD BELIEVES THAT ITS EXPECTATIONS ARE BASED ON REASONABLE ASSUMPTIONS, IT CAN GIVE NO ASSURANCE THAT ITS GOALS WILL BE ACHIEVED. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING INFORMATION CONTAINED IN THIS RELEASE INCLUDE: MASTERCARD'S ABILITY TO ACHIEVE ITS STRATEGIC OBJECTIVES; MASTERCARD'S ABILITY TO REALIZE THE CONTEMPLATED BENEFITS OF THE TRANSACTIONS; CHANGING MARKET CONDITIONS; AND OTHER MATTERS. MASTERCARD DISCLAIMS ANY OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING INFORMATION. EX-99.3 7 y62026exv99w3.txt CONSOLIDATED FINANCIAL STATEMENTS EUROPAY INTERNATIONAL S.A. CONSOLIDATED FINANCIAL STATEMENTS F-29 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 statements of income and cash flows present fairly, in all material respects, the financial position of Europay International S.A. (the "Company") and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for the years 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. Those standards 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 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 years ended December 31, 2001 and 2000, and the determination of consolidated shareholders' equity and consolidated financial position at December 31, 2001 and 2000, to the extent summarized in Note 19 to the consolidated financial statements. PricewaterhouseCoopers Reviseurs d'Entreprises represented by Yves Vandenplas Brussels, Belgium April 17, 2002 F-30 EUROPAY INTERNATIONAL S.A. CONSOLIDATED BALANCE SHEETS (IN E THOUSANDS)
AS OF DECEMBER 31, ------------------ NOTES 2001 2000 -------- ------- ------- ASSETS NON CURRENT ASSETS Intangible assets........................................... 4 22,069 8,825 Fixed assets................................................ 5 34,046 34,133 Financial assets............................................ 6 1,943 2,029 ------- ------- Total Non Current Assets.................................. 58,058 44,987 ------- ------- CURRENT ASSETS Amounts receivable within one year Trade debtors............................................. 37,490 45,915 Other amounts receivable.................................. 8, 16 129,177 46,619 ------- ------- Total amounts receivable within one year............... 166,667 92,534 Investments and deposits.................................... 9 9,000 1,852 Cash at bank and in hand.................................... 10 85,960 112,117 Deferred charges and accrued income......................... 4,060 2,679 ------- ------- Total Current Assets...................................... 265,687 209,182 ------- ------- TOTAL ASSETS...................................... 323,745 254,169 ======= ======= CAPITAL AND RESERVES AND LIABILITIES CAPITAL AND RESERVES Issued Capital.............................................. 17,611 17,611 Consolidated reserves....................................... 7 35,800 23,628 Consolidation difference.................................... 6 383 383 Cumulative translation adjustment........................... 268 235 ------- ------- Total Capital and Reserves................................ 54,062 41,857 ------- ------- MINORITY INTEREST........................................... 11 3,060 2,619 ------- ------- PROVISION FOR LIABILITIES AND CHARGES....................... 5, 9, 15 3,579 2,301 ------- ------- DEFERRED TAX................................................ 16 4,817 2,792 ------- ------- CREDITORS Amounts payable within one year Bank overdrafts........................................... 10 63,618 37,789 Suppliers................................................. 14 78,209 63,587 Taxes..................................................... 16 19,288 2,150 Remuneration and social security.......................... 15 13,518 9,932 Other amounts payable..................................... 12 82,918 89,749 ------- ------- Total amounts payable within one year.................. 257,551 203,207 Accrued charges and deferred income......................... 170 1,149 Amounts payable after one year.............................. 13 506 244 ------- ------- Total Creditors........................................... 258,227 204,600 ------- ------- TOTAL CAPITAL AND RESERVES AND LIABILITIES.................. 323,745 254,169 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-31 EUROPAY INTERNATIONAL S.A. CONSOLIDATED STATEMENTS OF INCOME (IN E THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- NOTES 2001 2000 1999 ----- -------- -------- ------------ (UNAUDITED) OPERATING INCOME Revenue................................................... 17 401,900 364,806 298,206 Capitalization of intangible assets....................... 4 7,737 7,822 -- Other operating income.................................... 4,275 3,041 1,041 ------- ------- ------- Total operating income.................................. 413,912 375,669 299,247 ------- ------- ------- OPERATING EXPENSES Services and other goods.................................. 17 328,464 282,387 226,776 Remuneration, social security and pension costs........... 15 63,991 58,902 50,741 Depreciation and amortization expense..................... 4, 5 13,320 11,143 9,275 Bad debt expense.......................................... -- 29 270 Increase/(decrease) in provisions for liabilities and charges................................................. 15 (227) 127 -- Other operating expenses.................................. 14 3,438 4,858 4,864 ------- ------- ------- Total operating expenses................................ 408,986 357,446 291,926 ------- ------- ------- OPERATING PROFIT.......................................... 4,926 18,223 7,321 FINANCIAL INCOME/(EXPENSE) Interest income........................................... 1,338 1,072 1,131 Net other financial income/(expense)...................... 9 22,487 (543) 6,855 Interest expense.......................................... (2,266) (172) (280) ------- ------- ------- Net financial income.................................... 21,559 357 7,706 ------- ------- ------- PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION............. 26,485 18,580 15,027 EXTRAORDINARY INCOME/(CHARGES) Adjustments to amounts written off financial assets....... 6 -- 184 -- Net gain/(loss) on disposal of fixed assets............... 5 (170) (300) (411) Net use/(establishment) of provisions for liabilities and charges................................................. 5, 15 (2,087) (1,353) -- Other extraordinary charges............................... (642) -- -- ------- ------- ------- Net extraordinary income/(charges)...................... (2,899) (1,469) (411) ------- ------- ------- PROFIT FOR THE FINANCIAL PERIOD BEFORE TAXATION........... 23,586 17,111 14,616 INCOME TAXES.............................................. 16 (10,734) (7,447) (6,721) ------- ------- ------- NET INCOME................................................ 12,852 9,664 7,895 NET INCOME/(LOSS) FROM EQUITY INVESTEES, NET OF TAX....... 6 (239) (158) -- MINORITY INTEREST, NET OF TAX............................. 11 (441) (253) (254) ------- ------- ------- NET INCOME ATTRIBUTABLE TO THE GROUP...................... 12,172 9,253 7,641 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-32 EUROPAY INTERNATIONAL S.A. SUPPLEMENTAL DISCLOSURE CONSOLIDATED STATEMENTS OF CASH FLOWS (IN E THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2001 2000 1999 ------- ------- ----------- (UNAUDITED) OPERATING ACTIVITIES Profit for the financial period before taxation............. 23,586 17,111 14,616 Adjustments to reconcile profit for the financial period before taxation to cash provided by/(used in) operating activities: Adjustments for non-cash (income)/expense: Adjustments to amounts written off financial assets.... -- (184) -- Depreciation and amortization expense.................. 13,320 11,143 9,275 Net (gain)/loss on disposals of fixed assets........... 170 300 411 Changes in operating assets and liabilities: Trade debtors.......................................... 8,425 (5,396) 7,986 Other amounts receivable............................... (82,558) (33,161) (6,932) Deferred charges and accrued income.................... (1,381) 8,272 761 Security deposits...................................... (120) 1,028 (169) Suppliers.............................................. 14,622 1,122 8,706 Taxes paid............................................. 8,429 (4,868) (5,911) Remuneration and social security....................... 3,586 2,550 1,389 Other amounts payable.................................. (6,831) 64,440 10,910 Accrued charges and deferred income.................... (979) (2,366) 2,651 Provision for liabilities and charges.................. 1,278 2,061 -- ------- ------- ------- Net cash provided by/(used in) operating activities......... (18,453) 62,052 43,693 ------- ------- ------- INVESTING ACTIVITIES Acquisitions of intangible assets......................... (8,251) (2,001) (3,698) Capitalization of intangible assets....................... (10,426) (7,822) -- Acquisitions of fixed assets.............................. (8,202) (13,761) (9,839) Proceeds from sales of fixed assets....................... 232 548 3,805 Investment in affiliates.................................. -- (5) (92) Investment in short term cash deposits.................... (9,000) -- (6,951) Proceeds from maturity of short term cash deposit......... -- 6,951 -- Investment in foreign currency option..................... -- (1,852) -- Proceeds from maturity of investment in foreign currency option................................................. 1,852 -- -- ------- ------- ------- Net cash used in investing activities....................... (33,795) (17,942) (16,775) ------- ------- ------- FINANCING ACTIVITIES Net change in bank overdrafts............................. 25,829 37,052 469 Payment of short-term bank loan........................... -- -- (19,831) Net change in amounts payable after one year.............. 262 (2,289) -- ------- ------- ------- Net cash provided by/(used in) financing activities......... 26,091 34,763 (19,362) ------- ------- ------- Net increase/(decrease) in cash at bank and in hand......... (26,157) 78,873 7,556 Cash at bank and in hand at beginning of year............... 112,117 33,244 25,688 ------- ------- ------- Cash at bank and in hand at end of year..................... 85,960 112,117 33,244 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-33 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.
CHANGE OF PERCENTAGE OF PROPORTION CAPITAL HELD METHOD OF CAPITAL (AS COMPARED NAME, FULL ADDRESS OF REGISTERED OFFICE AND FOR ENTERPRISES USED HELD IN TO THE PREVIOUS GOVERNED BY BELGIAN LAW, THE VAT NUMBER OR THE NATIONAL NUMBER (SEE BELOW) PERCENT PERIOD) - -------------------------------------------------------------- ----------- ---------- --------------- MAESTRO INTERNATIONAL, INC.................................. E1 50.00 0.00 Corporate Trust Center 1209 Orange Street 19801 Wilmington, Delaware UNITED STATES OF AMERICA EUROPEAN PAYMENT SYSTEM SERVICES S.A........................ F 85.00 0.00 Chaussee de Tervuren 198a 1410 Waterloo BELGIUM BE 427.503.348 EUROTRAVELLERS CHEQUE INTERNATIONAL S.A..................... F 100.00 0.00 Chaussee de Tervuren 198a 1410 Waterloo BELGIUM BE 421.611.290 EUROPAY LIMITED (Dormant)................................... F 100.00 0.00 UNITED KINGDOM EUROCARD U.S.A., INC........................................ F 100.00 0.00 Fifth Avenue 500 10110 New York, New York UNITED STATES OF AMERICA E1 -- Associated enterprise accounted for using the equity method F -- Full consolidation
3. 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. F-34 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) 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, monthly and quarterly based on transaction volumes. These fees are recognized as revenue when 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. Europay has strategic arrangements with certain members, which provide for fee rebates when the member meets certain transaction hurdles. Such rebates are calculated as incurred based upon member transaction levels and the contracted discount rates for the services provided, and are recorded as a reduction in revenue in the same period as the revenue is recorded. FOREIGN CURRENCY TRANSLATION The euro (E) 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 Europay has strategic agreements with certain members, which include costs to obtain the member's commitment to perform under the terms and over the period of time defined in the agreement. These costs are F-35 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) capitalized when incurred and amortized over the remaining term of the agreement using the straight-line method. Eligible direct internal and external costs related to the application development and testing stages of internally developed software are capitalized, and, upon completion are amortized using the straight-line method over a three year estimated useful life. All other intangible assets, which consist primarily of purchased software, 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. Buildings................................................... 10 to 33 years Installations and equipment................................. 5 to 10 years Office furniture and equipment.............................. 5 to 10 years Other fixed assets.......................................... 5 years Computer hardware........................................... 3 to 4 years EPSNet computer network..................................... 2 years Personal computer equipment................................. 3 years Automobiles................................................. 3 to 4 years
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 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. 4. INTANGIBLE ASSETS
CONCESSIONS, SOFTWARE AND PATENTS, ADVANCE KNOW-HOW LICENSES, ETC. PAYMENTS TOTAL ------------ -------------- -------- ------ ACQUISITION COST As at December 31, 2000........................ 27,114 1,823 -- 28,937 Movements during the period: Acquisitions, including fixed assets, own production................................ 10,426 5,030 3,221 18,677
F-36 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS)
CONCESSIONS, SOFTWARE AND PATENTS, ADVANCE KNOW-HOW LICENSES, ETC. PAYMENTS TOTAL ------------ -------------- -------- ------ Sales and disposals.......................... (20) -- -- (20) Transfers from one heading to another........ (1,823) -- -- (1,823) ------ ----- ----- ------ As at December 31, 2001........................ 35,697 6,853 3,221 45,771 ------ ----- ----- ------ ACCUMULATED AMORTIZATION AND AMOUNTS WRITTEN DOWN As at December 31, 2000........................ 18,289 1,823 -- 20,112 Movements during the period: Amortization expense......................... 4,776 642 -- 5,418 Written down after sales and disposals....... (5) -- -- (5) Transfers from one heading to another........ (1,823) -- -- (1,823) ------ ----- ----- ------ As at December 31, 2001........................ 21,237 2,465 -- 23,702 ------ ----- ----- ------ NET CARRYING VALUE AT DECEMBER 31, 2001........ 14,460 4,388 3,221 22,069 ====== ===== ===== ======
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 in 2000 and in doing so recognized income for the same amount, which is included in the 2000 Consolidated Statement of Income under capitalization of intangible assets. The EMV intangible assets have been contributed in their entirety as part of a capital contribution to a joint venture as described in Note 6 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 from January 1, 2000. Capitalized software amounting to E1,192 and related amortization expense of E9 should have been recognized in the consolidated financial statements 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 E7,737 and E7,553 in the years ended December 31, 2001 and 2000, respectively. Amortization expense related to this capitalized software amounted to E2,691 and E602 in 2001 and 2000, respectively. Europay capitalized costs amounting to E5,030 and advance payments amounting to E3,221, which were incurred to obtain members' commitment to perform under the terms and over the period of time defined in strategic agreements entered into with the members, in the year ended December 31, 2001. Amortization related to these capitalized costs amounted to E642 for the year ended December 31, 2001. Computer related assets with an acquisition cost and accumulated amortization of E1,823 were reclassified to fixed assets (see Note 5). F-37 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) 5. FIXED ASSETS
LAND COMPUTER FURNITURE OTHER ASSETS AND EQUIPMENT & AND TANGIBLE UNDER BUILDINGS INSTALLATIONS VEHICLES ASSETS CONSTRUCTION TOTAL --------- ------------- --------- -------- ------------ ------ ACQUISITION COST As at December 31, 2000.............. 39,754 28,017 4,224 8,192 482 80,669 Movements during the period: Acquisitions, including fixed assets, own construction........ 3,624 4,047 266 29 236 8,202 Sales and disposals................ -- (1,814) (36) (5,618) -- (7,468) Transfers from one heading to another......................... 482 1,823 -- -- (482) 1,823 ------ ------ ----- ------ ------ ------ As at December 31, 2001.............. 43,860 32,073 4,454 2,603 236 83,226 ------ ------ ----- ------ ------ ------ ACCUMULATED DEPRECIATION AND AMOUNTS WRITTEN DOWN As at December 31, 2000.............. 15,989 21,628 2,774 6,145 -- 46,536 Movements during the period: Expense............................ 2,880 4,100 620 302 -- 7,902 Written down after sales and disposals....................... -- (1,445) (18) (5,618) -- (7,081) Transfers from one heading to another......................... -- 1,823 -- -- -- 1,823 ------ ------ ----- ------ ------ ------ As at December 31, 2001.............. 18,869 26,106 3,376 829 -- 49,180 ------ ------ ----- ------ ------ ------ NET CARRYING VALUE AT DECEMBER 31, 2001............................... 24,991 5,967 1,078 1,774 236 34,046 ====== ====== ===== ====== ====== ======
Computer related assets with an acquisition cost and accumulated amortization of E1,823 were reclassified from intangible assets (see Note 4). Assets under construction in relation to the expansion and renovation of Europay's Waterloo premises in order to accommodate current and future organizational and operational requirements amounting to E236 and E482 are included in the Consolidated Balance Sheets at December 31, 2001 and 2000, respectively. Assets under construction amounting to E482 and E2,655 were put into use and as such transferred to buildings during the years ended December 31, 2001 and 2000, respectively. 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. 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 E30,444 and E24,313 at December 31, 2001 and 2000, respectively. Rent expense related to this lease amounted to E4,217, E4,717 and E5,231 in 2001, 2000 and 1999, respectively. During 1999 Europay rented personal computer equipment required for its activities under operating lease agreements. Rent expense related to these lease agreements amounted to E1,717 in 1999. 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 operating lease agreements. In 2001 the terms of these operating lease agreements were changed from 4 to 3 1/2 years. Total expense related to these F-38 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) lease agreements, including insurance, fuel and maintenance amounted to E2,811, E2,634 and E2,185 in 2001, 2000 and 1999, respectively. Europay also rents office buildings and equipment under operating lease agreements. Total rents related to these lease agreements amounted to E5,553, E4,774 and E5,614 in 2001, 2000 and 1999, respectively. Europay provided E422 for the cost of terminating of an operating lease agreement for an office building, the liability for which is included as part of the provisions for liabilities and charges in the Consolidated Balance Sheet at December 31, 2001 and the cost is included as part of the net establishment of provisions for liabilities and charges in the Consolidated Statement of Income for the year then ended. Future scheduled operating lease payments are summarized below. Computer equipment includes lease payments plus related computer hardware and software maintenance and service contract costs.
OFFICE COMPUTER BUILDINGS & YEAR EQUIPMENT AUTOMOBILES EQUIPMENT TOTAL - ---- --------- ----------- ----------- ------ 2002.................................... 11,873 1,821 1,630 15,324 2003.................................... 7,932 1,238 1,626 10,796 2004.................................... 432 672 1,431 2,535 2005.................................... -- 68 1,427 1,495 2006 & after............................ -- -- 3,356 3,356 ------ ----- ------ ------ Total......................... 20,237 3,799 9,470 33,506 ====== ===== ====== ======
F-39 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) 6. FINANCIAL ASSETS
ENTERPRISES ACCOUNTED FOR USING THE EQUITY METHOD OTHER TOTAL ----------- ------ ------ 1. INVESTMENTS IN AFFILIATES ACQUISITION COST As at December 31, 2000..................................... 1,871 -- 1,871 Movements during the period: Acquisitions.............................................. -- -- -- Translation differences................................... 81 -- 81 ----- ------ ------ As at December 31, 2001..................................... 1,952 -- 1,952 ----- ------ ------ CAPITAL AND RESERVES OF THE ENTERPRISES Movements during the period: Share in the result for the financial period.............. (239) -- (239) Other movements in the capital and reserves............... (47) -- (47) ----- ------ ------ Net movements during the period............................. (286) -- (286) ----- ------ ------ NET CARRYING VALUE AS AT DECEMBER 31, 2001.................. 1,666 -- 1,666 ----- ------ ------ 2. SECURITY DEPOSITS NET CARRYING VALUE AT THE END OF THE YEAR As at December 31, 2000..................................... -- 158 158 Movements during the period: Additions................................................. -- 158 158 Reimbursements............................................ -- (39) (39) ----- ------ ------ As at December 31, 2001..................................... -- 277 277 ----- ------ ------ TOTAL....................................................... 1,666 277 1,943 ===== ====== ======
Europay has a 33% interest in EMVCo, LLC ("EMVCo"), which it accounts for on an equity basis. EMVCo was established as a Delaware (U.S.) limited liability company 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. In 2000 Europay's interest in EMVCo was increased by the contribution of additional intellectual property valued at E269 (see Note 4). 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 F-40 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) recognized subsequent to 1999 or the period earned, and is reflected in the following required disclosure of consolidation differences: Net carrying value at December 31, 2000..................... 383 Movements during the period: Adjustment as described above............................. -- --- Net carrying value at December 31, 2001..................... 383 ===
The Consolidated Balance Sheets include receivables from Maestro of E947 and E345 and payables to Maestro of E2,189 and E1,874 at December 31, 2001 and 2000, respectively. The Consolidated Income Statements include amounts of E5,773, E4,878 and E4,128 representing Europay's share of the net costs incurred by Maestro in 2001, 2000 and 1999, respectively. 7. CONSOLIDATED RESERVES
AT DECEMBER 31, ---------------- 2001 2000 ------ ------ Consolidated reserves at beginning of year.................. 23,628 14,375 Movements during the period: Net income attributable to the Group................... 12,172 9,253 ------ ------ Consolidated reserves at end of year...................... 35,800 23,628 ====== ======
8. OTHER AMOUNTS RECEIVABLE Other amounts receivable consists of the following.
AT DECEMBER 31, ----------------- 2001 2000 ------- ------ Recoverable VAT............................................. 6,925 5,282 Settlement accounts receivable.............................. 99,582 39,303 Income taxes receivable..................................... 22,304 1,314 Other....................................................... 366 720 ------- ------ Total other amounts receivable.................... 129,177 46,619 ======= ======
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 12 for Euro D0 settlement payables. The income taxes receivable at December 31, 2001 includes a receivable amounting to E16,878 related to a disputed tax assessment from the Belgian tax authorities which is further described in Note 16. 9. INVESTMENTS AND DEPOSITS Europay had short-term deposits at December 31, 2001 of E6,500 and E2,500 at 3% and 3.4%, respectively, that matured on January 2, 2002. F-41 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) At December 31, 2001 Europay had signed forward exchange contracts to hedge projected U.S. dollar denominated expenses in 2002. Premiums and discounts on the forward exchange contracts are amortized pro rata from the contract date to the maturity date. 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. The reversal of this provision upon maturity of the option in January 2001 is included in net other financial income/(expense) in the Consolidated Statement of Income for the year December 31, 2001. 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. The notional and estimated fair values of the outstanding derivative contracts at December 31, 2001 and 2000 are as follows:
AT DECEMBER 31, 2001 AT DECEMBER 31, 2000 ---------------------- ---------------------- NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE -------- ---------- -------- ---------- Options: Written put U.S. dollar................. -- -- 53,333 2,271 Written call U.S. dollar................ -- -- 18,824 33 Purchased call U.S. dollar.............. -- -- 44,735 359 Forwards: Buy U.S. dollar......................... 118,122 4,935 -- --
10. CASH AT BANK AND IN HAND AND BANK OVERDRAFTS Cash at bank and in hand consists of the following:
AT DECEMBER 31, ----------------- 2001 2000 ------ ------- Cash........................................................ 28,341 73,234 Member security deposits.................................... 57,619 38,883 ------ ------- Total cash at bank and on hand.................... 85,960 112,117 ====== =======
Cash includes E23,226 of cash on Europay's settlement bank accounts from Euro D0 (described in Note 8 above) and other settlement service operations. 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, 2001 the applicable interest rates were 3.67% on euro deposits and 1.87% 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 12). The increase from 2000 to 2001 is primarily due to the addition of new members in Eastern Europe. F-42 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) The bank overdrafts and loans consist of the following:
AT DECEMBER 31, ---------------- 2001 2000 ------ ------ Overdraft on corporate bank accounts........................ 36 2 Overdraft on settlement bank accounts....................... 63,582 37,787 ------ ------ Total bank overdrafts............................. 63,618 37,789 ====== ======
The overdraft on settlement bank accounts is due to Euro D0 and other settlement service operations. Overdrafts on corporate bank accounts are subject to an interest rate of the Euro OverNight Index Average (Eonia) + 0.5% p.a. Europay had two credit lines for a total of E65,000 available at December 31, 2001. a) A credit line for operational funding requirements amounting to E35,000 with the following interest rate conditions, which are based on the Euro Interbank Offered Rate (Euribor): Straight loans for periods up to 6 months: Euribor + 0.0625% p.a. Straight loans for periods from 6 to 12 months: Euribor + 0.125%
b) A credit line amounting to E30,000 to provide fixed term financing to fund Euro D0 settlement service operations. Interest rate conditions are agreed with the bank based on the most favorable market conditions at the time the credit line is utilized. Europay had no borrowings on these credit lines at December 31, 2001 or December 31, 2000. 11. 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:
AT DECEMBER 31, ---------------- 2001 2000 ------ ------ 15% interest in the capital of EPSS......................... 1,562 1,562 Minority share in the profits of EPSS Accumulated results....................................... 1,057 804 Result for the year....................................... 441 253 ----- ----- Total minority interest..................................... 3,060 2,619 ===== =====
12. OTHER AMOUNTS PAYABLE Other amounts payable consists of the following.
AT DECEMBER 31, ---------------- 2001 2000 ------ ------ Settlement accounts payable, see note 8..................... 24,434 47,577 Liability for member security deposits, see note 10......... 57,619 38,883 Loans from Members.......................................... -- 2,533 Other....................................................... 865 756 ------ ------ Total other amounts payable....................... 82,918 89,749 ====== ======
F-43 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) 13. LONG TERM LIABILITIES The balance of E506 at December 31, 2001 represents an invoice for a sponsorship campaign that is payable in 2003, and the balance of E244 at December 31, 2000 represents an invoice for a sponsorship campaign that is payable in 2002. 14. COMMITMENTS AND CONTINGENCIES In addition to the future lease payments summarized in Note 5, Europay has entered into sponsorship and marketing contractual obligations, which are estimated to be payable in the following years:
YEAR - ---- 2002........................................................ 25,342 2003........................................................ 12,056 2004........................................................ 1,273 2005........................................................ 123 2006 & after................................................ 123 ------ Total............................................. 38,917 ======
Europay received a claim from a member alleging that an error in the technical set up of this member caused the member to incur a loss in revenues amounting to approximately E1,500. Based on the facts and circumstances of this matter Europay has established a provision for the potential settlement of the claim of E739, which is included in suppliers in the Consolidated Balance Sheet at December 31, 2001 and in other operating expenses in the Consolidated Statement of Income for the year then ended. 15. AVERAGE NUMBER OF PERSONS EMPLOYED AND PERSONNEL CHARGES
YEARS ENDED DECEMBER 31, ------------------------------------ 2001 2000 1999 ------ ----------- ----------- (UNAUDITED) PERSONNEL BY CATEGORY Employees: Based in Belgium................................. 542 560 526 Based outside of Belgium......................... 88 87 102 ------ ------ ------ Total employees.................................... 630 647 628 Management personnel............................... 8 8 8 ------ ------ ------ Average number of persons employed............... 638 655 636 ====== ====== ====== REMUNERATION, SOCIAL SECURITY AND PENSIONS......... 63,991 58,902 50,741 ====== ====== ======
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. These obligations were settled in 2001 resulting in a use of provisions for liabilities and charges amounting to E1,353 and a charge to operating expenses for the same amount in the Consolidated Statement of Income for the year ended December 31, 2001. F-44 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) In 2001, Europay introduced a performance-based variable pay program for all management and staff. Under this program a bonus is paid to an employee on an annual basis based on the level of achievement of targeted corporate and personal performance for the year. Europay monitors performance to corporate targets on a regular basis and accrues for the cost of the variable pay program when it is probable that the targets will be reached. Based on the 2001 corporate performance evaluation variable pay costs of E5,461 were accrued at December 31, 2001. In 2001, Europay established and began executing a comprehensive restructuring plan in order to prepare the organization and operations for the planned integration with MasterCard Incorporated described in Note 18 below. The plan provides for the involuntary termination of staff functions on specified dates over the term of the plan. Europay agreed an involuntary employee severance package for the plan with its Works Council, and communicated the package to all staff. In 2001, Europay notified all staff whose function will be terminated prior to the end of 2002 in writing that their position will be terminated as a result of the plan, including the expected termination date. Based on the terms of the involuntary employee severance package and a probability analysis of staff terminations defined in the plan to the end of 2002, Europay provided E2,742 for estimated involuntary employee severance costs. In addition, Europay provided E275 for obligations arising from separate severance agreements with employees. The liabilities for both severance provisions are included as part of the provisions for liabilities and charges in the Consolidated Balance Sheet at December 31, 2001 and the costs are included in extraordinary income/(charges) in the Consolidated Statement of Income for the year then ended. 16. TAXATION The reconciliation of the 2001, 2000 and 1999 income tax charges compared to the statutory rate of 40.17% is as follows:
YEARS ENDED DECEMBER 31, ------------------------------------ 2001 2000 1999 ------ ----------- ----------- (UNAUDITED) Consolidated profit for year before taxation....... 23,586 17,111 14,616 ====== ====== ====== Taxes at statutory rate of 40.17%.................. 9,474 6,873 5,871 Adjusted for the tax effect of: Disallowed expenses.............................. 925 656 735 Penalties for insufficient tax prepayments....... -- 1 115 Non-taxable reversal of investment loss provision..................................... -- (74) -- Non-taxable (profit)/loss in consolidated subsidiary.................................... (5) 5 -- Tax adjustments.................................. 340 (13) -- Tax surplus for prior years...................... -- (1) -- ------ ------ ------ Tax charge for the year............................ 10,734 7,447 6,721 ====== ====== ====== Effective tax rate................................. 45.5% 43.5% 46.0% ====== ====== ======
Included in the consolidated tax charge for the years ended December 31, 2001 and 2000 is deferred tax amounting to E2,025 and E2,792, respectively, related to the capitalization of internally developed software, net of related amortization expense for the year. 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. Although Europay challenged these findings in its August 2001 response to the notice, the Belgian tax authorities reaffirmed their position in a November 2001 letter to Europay and, on December 12, 2001, Europay received a formal notice of assessment imposing an F-45 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) additional tax liability of E16,878, including penalties and interest, in connection with Europay's tax returns for 1997 and 1998. In accordance with Belgian GAAP Europay recorded a tax liability for E16,878 upon receipt of the assessment notice, which is included in taxes in the Consolidated Balance Sheet at December 31, 2001. Europay intends to continue to vigorously contest this matter and on February 27, 2002 filed a protest with the regional tax director in accordance with applicable administrative tax procedures. Therefore, in accordance with Belgian GAAP a receivable of E16,878 has been recorded to reflect the amount in dispute. This receivable is included in other amounts receivable in the Consolidated Balance Sheet at December 31, 2001. If Europay's deductions of such costs in 1999, 2000 and 2001 are similarly challenged, this could result in a further additional tax liability of up to approximately E16,900, 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 deductions to which the additional amount relates was made. In the event that Europay is unsuccessful in appealing the findings to the Belgian tax authorities in their investigation, under certain circumstances MasterCard International could, under its bylaws, levy an assessment on 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. 17. 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 E126,878, E126,606 and E111,925 in 2001, 2000 and 1999, respectively. (b) Europay is responsible for funding MasterCard's Europe region costs plus an agreed profit margin. Total MasterCard Europe region charges of E123,460, E103,868 and E83,172 in 2001, 2000 and 1999, 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 in advertising and marketing costs related to European members' brand migration activities in 1999. These costs are included in services and other goods in the 1999 Consolidated Statement of Income. Europay re-billed MasterCard and recorded related revenues for the full amount of these costs. The Consolidated Balance Sheets include receivables from MasterCard of E573 and E2,401 and payables to MasterCard of E4,131 and E11,955 at December 31, 2001 and 2000, respectively. 18. PROPOSED INTEGRATION WITH MASTERCARD INCORPORATED Europay's shareholders are 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"). F-46 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) 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 17 above will be terminated. As of April 17, 2002 the conversion and integration have not occurred. 19. 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. 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. F-47 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) RECONCILIATION OF CONSOLIDATED PROFIT AND LOSS ACCOUNTS (IN E THOUSANDS EXCEPT EARNINGS PER SHARE)
YEARS ENDED DECEMBER 31, ------------------------- NOTES 2001 2000 ----- ------ ------ Net Income Attributable to the Group as reported under Belgian GAAP.............................................. 12,172 9,253 U.S. GAAP adjustments: Pensions.................................................. (a) 395 (558) Capitalization of borrowing costs, net.................... (c) (52) (35) Depreciation of fixed assets.............................. (d) (672) 508 Internally developed software costs, net.................. (e) (391) (227) Financial instruments..................................... (f) 2,445 (1,600) Leases, net............................................... (g) 526 691 Capitalization of intangible assets....................... (h) 465 513 Financial assets.......................................... (i) -- 255 Licensing fee revenue recognition......................... (j) (818) (845) ------ ------ Net U.S. GAAP adjustments before deferred taxes............. 1,898 (1,298) Deferred taxes: effects of differences in methodology and adjustments............................................ (b) (596) 802 ------ ------ Net income under U.S. GAAP before cumulative effect of change in accounting principle............................ 13,474 8,757 Cumulative effect of changes in accounting principle, net of tax Financial instruments..................................... (f) (547) -- Licensing fee revenue recognition......................... (j) -- (3,100) ------ ------ Total cumulative effect of changes in accounting principle, net of tax................................................ (547) (3,100) ------ ------ Net Income Attributable to the Group under U.S. GAAP........ 12,927 5,657 ====== ====== Earnings per share in accordance with U.S. GAAP:............ (k) Basic and diluted......................................... 129 57 Weighted average number of shares outstanding (in thousands of shares): Basic and diluted......................................... 100 100 Net income per U.S. GAAP.................................... 12,927 5,657 Other Comprehensive income, net of tax: Financial instruments..................................... (f) 5,058 -- Translation adjustment.................................... 9 15 ------ ------ Total other comprehensive income.......................... 5,067 15 ------ ------ Comprehensive income under U.S. GAAP........................ (l) 17,994 5,672 ====== ======
F-48 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) RECONCILIATION OF CONSOLIDATED SHAREHOLDER'S EQUITY
AT DECEMBER 31, ------------------------- NOTES 2001 2000 ----- ------ ------ Total shareholders' equity reported under Belgian GAAP...... 54,062 41,857 U.S. GAAP adjustments: Pensions.................................................. (a) 692 297 Deferred taxes............................................ (b) (5,292) (4,696) Capitalization of borrowing costs, net.................... (c) 2,362 2,414 Depreciation of fixed assets.............................. (d) 5,896 6,568 Internally developed software costs, net.................. (e) 565 956 Financial instruments..................................... (f) 5,903 (1,600) Leases, net............................................... (g) 4,356 3,830 Capitalization of intangible assets....................... (h) (126) (567) Financial assets.......................................... (i) (184) (184) Licensing fee revenue recognition......................... (j) (1,663) (845) ------ ------ Net U.S. GAAP adjustments before cumulative effect of changes in accounting principle........................... 12,509 6,173 ------ ------ Shareholders' equity under U.S. GAAP before cumulative effect of changes in accounting principle................. 66,571 48,030 Cumulative effect of changes in accounting principle, net of tax Financial instruments..................................... (f) (547) -- Licensing fee revenue recognition......................... (j) (3,100) (3,100) Total cumulative effect of changes in accounting principle, net of tax................................................ ------ ------ Shareholders' equity under U.S. GAAP........................ 62,924 44,930 ====== ======
MOVEMENTS IN SHAREHOLDERS' EQUITY IN ACCORDANCE WITH U.S. GAAP
AT DECEMBER 31, ---------------- 2001 2000 ------ ------ Balance, beginning of year.................................. 44,930 39,258 Net income.................................................. 12,927 5,657 Other comprehensive income: Financial instruments..................................... (f) 5,058 -- Translation adjustment.................................... 9 15 ------ ------ Total other comprehensive income.......................... 5,067 15 ------ ------ Balance, end of year........................................ 62,924 44,930 ====== ======
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-49 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
YEARS ENDED DECEMBER 31, -------------- 2001 2000 ----- ----- Service cost................................................ 1,971 1,963 Interest cost............................................... 569 482 Expected return on plan assets.............................. (605) (551) Amortization of transition obligation....................... 117 117 Amortization of net (gain)/loss............................. (143) (179) Amortization of prior service cost.......................... 92 92 ----- ----- Net periodic benefit cost................................... 2,001 1,924 ===== =====
Changes in the projected benefit obligation and plan assets during the year were as follows: CHANGES IN PROJECTED BENEFIT OBLIGATION
YEARS ENDED DECEMBER 31, ---------------- 2001 2000 ------ ------ Benefit obligation at beginning of year..................... 10,914 9,228 Service cost................................................ 1,971 1,963 Interest cost............................................... 569 482 Actuarial (gains)/losses.................................... 415 205 Benefits paid............................................... (943) (964) ------ ------ Benefit obligation at end of year........................... 12,926 10,914 ====== ======
CHANGES IN PLAN ASSETS
YEARS ENDED DECEMBER 31, ---------------- 2001 2000 ------ ------ Fair value of plan assets at beginning year................. 11,597 10,437 Actual return on plan assets................................ 527 758 Employer contributions...................................... 2,395 1,366 Benefits paid............................................... (943) (964) ------ ------ Fair value of plan assets, end of year...................... 13,576 11,597 ====== ======
F-50 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) The funded status under U.S. GAAP for Europay's defined benefit pension plan is as follows: FUNDED STATUS
YEARS ENDED DECEMBER 31, ------------------ 2001 2000 ------- ------- Fair value of plan assets................................... 13,576 11,597 Projected benefit obligation................................ (12,926) (10,914) ------- ------- Funded status............................................... 650 683 Unrecognized net actuarial (gain) loss...................... (1,704) (2,342) Unrecognized prior service cost............................. 418 510 Unrecognized transition amount.............................. 1,328 1,446 ------- ------- Prepaid (accrued) benefit cost.............................. 692 297 ======= =======
The weighted-average assumptions used to determine pension cost for Europay's defined benefit pension plan were as follows:
YEARS ENDED DECEMBER 31, ------------- 2001 2000 ---- ---- Discount rate............................................... 5.25% 5.50% Expected rate of return on plan assets: on financing funds..................................................... 5.25% 5.50% Expected rate of return on plan assets: on mathematical reserves.................................................. 4.75% 4.75% Expected rate of compensation increase...................... 4.25% 4.50% ==== ====
(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. (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. F-51 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) (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, a constructed 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) 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. On January 1, 2001 Europay adopted hedge accounting under Statement of Financial Accounting Standards (SFAS) No. 133. Under SFAS No. 133 Europay is required to recognize all derivatives in the consolidated balance sheet by measuring these derivatives at fair value. The recognition of the change in the F-52 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) 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. Europay recorded a cumulative effect adjustment of E547 (loss) to net income and shareholders' equity under U.S. GAAP for the year ended December 31, 2001 to recognize at fair value all derivative instruments that were designated as cash flow hedging instruments upon adoption of SFAS 133. As discussed in Note 9, Europay had entered into forward currency hedge contracts at December 31, 2001. Under Belgian GAAP, premiums or discounts are amortized over the life of the contract. Under U.S. GAAP, the effective portion of the gain or loss of the derivative instrument is recorded as a component of other comprehensive income whereas the non-effective portion of the gain or loss is recognized currently in earnings. For the year ended December 31, 2001, E5,058 has been recorded as other comprehensive income for the effective portion of the contracts. (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 greater than or 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 than 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. During the third quarter of 2001, the Company revised its lease term for all existing automobile contracts from 4 years to 3 1/2 years with its leasing company. Under U.S. GAAP, this modification of the lease terms effectively terminated the existing capital lease agreements. As such, any assets and liabilities will need to be removed from the balance sheet and an appropriate gain or loss will be charged to profit and loss. As a result of this change in accounting estimate, capital lease assets under U.S. GAAP with a net book value of E1,129 and a total capital lease obligation of E1,156 were removed from the balance sheet and a gain of E27 was recorded in the third quarter of 2001. Going forward, under the new lease term, the existing leases have been recorded as operating leases. (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 4 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. F-53 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) (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 4 for additional information. 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 recognized 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 recognized systematically over the periods that the fees are earned. The adjustment to net income and shareholders' 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 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. Shares issued as a result of a bonus issue are treated as if in issue for the whole year. 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 on 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. F-54 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) 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 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 E126,878 and E126,606, net of a reduction in MasterCard costs included in services and other goods of E123,460 and E103,868 for the years ended December 31, 2001 and 2000, 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 is as follows:
YEAR ENDED DECEMBER 31, ------------------ 2001 2000 ------- ------- Net cash provided by/(used in) operating activities......... (11,414) 65,234 Net cash used in investing activities....................... (40,195) (22,321) Net cash provided by financing activities................... 25,452 35,960 ------- ------- Net increase/(decrease) in cash and cash equivalents........ (26,157) 78,873 Cash and cash equivalents under U.S. GAAP, beginning of year...................................................... 112,117 33,244 ------- ------- Cash and cash equivalents under U.S. GAAP, end of year...... 85,960 112,117 ======= =======
Recently Issued Accounting Standards of the United States SFAS No. 141, "Business Combinations" ("SFAS 141"), and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") were issued in July 2001. SFAS 141 and SFAS 142 will be required to be implemented for accounting periods commencing as from July 1, 2001 and January 1, 2002, respectively. SFAS 141 requires that all business combinations be accounted for by the purchase method. SFAS 142 addresses the accounting for acquired goodwill and other intangible assets and contains certain transitional provisions, which may affect classification of intangible assets, as well as the balance of goodwill. The ongoing impact will be that goodwill will no longer be amortized, but instead will be tested at least annually for impairment. The requirements of both statements will be applied prospectively from the effective date. Europay has assessed the impact of this new standard at January 1, 2002 and there is no impact on its financial position and results of operations. SFAS 143, "Asset Retirement Obligations", was issued in June 2001. This standard will be effective for Europay's fiscal year beginning after June 15, 2002; however, early adoption is permitted. The standard provides the accounting requirements for retirement obligations associated with tangible long-lived assets and the associated asset retirement cost. The standard requires that the obligation F-55 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) associated with the retirement of the tangible long-lived assets be capitalized into the asset cost at the time of initial recognition. The liability is then discounted to its fair value at the time of recognition using the guidance provided by the standard. Europay is assessing the impact that this new standard will have on its financial position and results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB No. 30, "Reporting the Results of Operations." This statement also amends Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. Europay is in the process of determining the effects of this statement on its business. F-56 EX-99.4 8 y62026exv99w4.txt UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS 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 as of and for the year ended December 31, 2001 and the audited financial statements of Europay as of and for the year ended December 31, 2001. The historical financial information provided for Europay was prepared in accordance with U.S. GAAP. Refer to Note 19 to the Consolidated Financial Statements of Europay as of December 31, 2001 and December 31, 2000 and for the years ended December 31, 2001, 2000 and 1999, for reconciliations in euros of the historical Europay financial information prepared in accordance with Belgian GAAP to the information prepared in accordance with U.S. GAAP. 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 acquisition of Europay will be accounted for using the purchase method of accounting based upon the estimated value of the unconditional shares of MasterCard Incorporated being given in exchange for the shares of Europay on the closing date. The pro forma allocation of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed is based upon management's estimates, after consultation with its advisors, of the respective fair values of Europay assets and liabilities as of September 30, 2001. However, such allocation is preliminary and is subject to the completion of the conversion and integration. Accordingly, as discussed below, the final allocation of the purchase price could differ materially from the pro forma amounts. 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. At the end of the three-year transition period and on the second anniversary thereof shares of MasterCard Incorporated will be reallocated among member-stockholders. Certain member-stockholders of MasterCard Incorporated whose initial share allocations decrease will return shares to MasterCard Incorporated, which will deliver shares to member-stockholders whose initial share allocations increase. MasterCard Incorporated will not receive any net consideration for these reallocated shares, nor will there be any increase or decrease in the total amount of shares outstanding. The transaction provides that the number of shares allocated to former shareholders of Europay and MEPUK will increase or decrease at the end of the transition period as a result of the application of the global proxy formula for the third year of the transition period. See "Share Allocation and the Global Proxy." In accounting for the initial purchase price of Europay, MasterCard will not consider shares above the minimum number of shares allocable to Europay and MEPUK shareholders at the end of the transition period because only the minimum number of shares is issued unconditionally at the closing to such shareholders. Of the 23.76 million shares attributable to the exchange of Europay and MEPUK shares, 6.15 million shares are conditional shares subject to reallocation at the end of the transition period and allocable to Europay and MEPUK shareholders. Europay and MEPUK shareholders are therefore receiving 17.61 million unconditional shares at closing. The value of each MasterCard Incorporated share, immediately before the exchange, is estimated to be $15.21 based on an independent appraisal. Accordingly MasterCard's purchase price for the shares of Europay is estimated to be $267.9 million. Since former Europay and MEPUK shareholders would retain or receive shares of MasterCard Incorporated at the end of the transition period without remitting any additional consideration, any shares retained or received by them that are above their minimum allocation at that time would constitute part of the 68 purchase price. Any such additional shares would be valued at that time based upon the fair value of the stock of MasterCard Incorporated. Any such reallocation of shares to former Europay and MEPUK shareholders will increase the purchase price for Europay and, accordingly, the amount of goodwill and additional paid-in-capital recorded. The unaudited pro forma combined financial information does not give effect to any potential contingent consideration. The unaudited pro forma condensed combined statement of income assumes that the conversion and integration were effected on January 1, 2001. The unaudited pro forma condensed combined balance sheet assumes that the conversion and integration were effected on December 31, 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. 69 MASTERCARD INCORPORATED UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS (IN THOUSANDS EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED DECEMBER 31, 2001 ------------------------------------------------------------------ PRO FORMA MASTERCARD PRO FORMA MASTERCARD INTERNATIONAL EUROPAY(1)(2) ADJUSTMENTS(3) INCORPORATED ------------- ------------- -------------- ------------ REVENUE............................. $1,773,848 $252,324 $(2,514)(A) $2,018,477 (5,181)(F) OPERATING EXPENSES General & administrative............ 813,927 131,310 (2,514)(A) 935,731 (6,992)(F) Advertising & market development.... 665,846 80,483 1,299(F) 747,628 Depreciation........................ 39,680 11,853 (2,234)(B) 49,299 Amortization........................ 32,693 5,021 8,906(C) 46,620 ---------- -------- ------- ---------- Total Operating Expenses................ 1,552,146 228,667 (1,535) 1,779,278 Other Income and Expense............ 11,237 (1,455) 400(E) 10,182 ---------- -------- ------- ---------- INCOME BEFORE INCOME TAXES.......... 232,939 22,202 (5,760) 249,381 Income Tax.......................... 90,878 10,141 (2,669)(D) 98,867 Cumulative effect of change in 517(F) accounting principle, net of tax............................ -- (490) (490) ---------- -------- ------- ---------- NET INCOME.......................... $ 142,061 $ 11,571 $(3,608) $ 150,024 ========== ======== ======= ========== NUMBER OF SHARES.................... 100,000(G) BASIC AND DILUTED EARNINGS PER SHARE............................. N/A $ 1.50(H)
See notes to unaudited pro forma combined income statements. 70 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 1.1172 euros per U.S. dollar, the average exchange rate between U.S. dollars and euros for the year ended December 31, 2001. (2)A reconciliation of the Europay pro forma income statement for the year ended December 31, 2001 prepared in accordance with Belgian GAAP to the Europay pro forma income statement for the year ended December 31, 2001 prepared in accordance with U.S. GAAP as presented is provided below.
BELGIAN RECONCILING U.S. GAAP ITEMS GAAP -------- ----------- -------- REVENUE.......................................... $363,563 $(111,239)(a) $252,324 OPERATING EXPENSES General & administrative......................... 249,430 (118,120)(b) 131,310 Advertising & market development................. 80,483 -- 80,483 Depreciation..................................... 7,252 4,601(c) 11,853 Amortization..................................... 4,671 350(d) 5,021 -------- --------- -------- Total Operating Expenses.................... 341,836 (113,169) 228,667 -------- --------- -------- Other Income and Expense......................... (1,224) (231)(e) (1,455) -------- --------- -------- INCOME BEFORE INCOME TAXES....................... 20,503 1,699 22,202 Income Tax....................................... 9,608 533(f) 10,141 Cumulative effect of changes in accounting principle, net of tax.......................... -- (490)(g) (490) -------- --------- -------- NET INCOME....................................... $ 10,895 $ 676 $ 11,571 ======== ========= ========
Adjustments between Belgian GAAP and U.S. GAAP relate to the following: (a) REVENUE Reconciling items totaling $111,239 that decrease revenue recorded under Belgian GAAP to conform with U.S. GAAP include: the elimination of revenue relating to transactions under the alliance agreement between MasterCard International and Europay, as Europay acts as MasterCard's agent rather than a principle in these transactions, of $110,507; and the deferral and amortization of licensing fee revenue required under U.S. GAAP over the term of the agreement or expected period of performance of $732. (b) GENERAL & ADMINISTRATIVE EXPENSES Reconciling items totaling $118,120 that decrease general & administrative expense recorded under Belgian GAAP to conform with U.S. GAAP include: the elimination of expense relating to transactions under the alliance agreement between MasterCard International and Europay of $110,507; adjustments required to record derivative financial instruments at fair value, relating to qualifying hedges under Belgian GAAP which are recorded under the accrual method, that do not meet the hedge documentation or effectiveness criteria under U.S. GAAP of $2,188; the reversal of rental expense due to the capitalization of leases under U.S. GAAP of $4,619; a change in accounting estimate under U.S. GAAP relating to the modification of the lease terms for all existing automobile lease contracts which effectively terminated the capital lease agreements resulting in a gain of $27; decreased expense relating to the difference between cost treatment required under U.S. GAAP and the fair value method used under Belgian GAAP for "know-how" contributed as part of initial investment equity of $416; decreased expense of $353 relating to the change during 2001 in pension benefit cost recorded in accordance with SFAS No. 87; differences in net book value of fixed assets arising from differences in depreciation methods described below resulting in an increased gain on the disposal of fixed assets of $10. 71 (c) DEPRECIATION Reconciling items totaling $4,601 that increase depreciation expense recorded under Belgian GAAP to conform with U.S. GAAP include: depreciation of capitalized interest on borrowings and other obligations for assets under U.S. GAAP of $87; differences in depreciation methods including application of the half-year convention method under U.S. GAAP resulting in increased depreciation expense of $611; and increased depreciation expense of $3,903 related to lease agreements that are recorded as capital leases under U.S. GAAP and as operating leases under Belgian GAAP. (d) AMORTIZATION Reconciling items of $350 that increase amortization expense recorded under Belgian GAAP to conform with U.S. GAAP consist of increased amortization expense as a result of internally developed software costs that are capitalized under U.S. GAAP. (e) OTHER INCOME AND EXPENSE Reconciling items totaling $231 that reduce other income and expense under Belgian GAAP to conform with U.S. GAAP include: decreased interest expense of $40 due to the capitalization of interest on borrowings and other obligations for assets under U.S. GAAP; and increased interest expense on leases required to be recorded as capital leases under U.S. GAAP, net of gains recorded on the termination of capital leases under U.S. GAAP due to the revision of lease terms, of $271. (f) INCOME TAX Reconciling item of $533 that increases income tax under Belgian GAAP to conform with U.S. GAAP relates to the tax impact of reconciling items. (g) CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLE, NET OF TAX Reconciling item of $490 represents a cumulative effect adjustment to net income to recognize at fair value all derivative instruments that were designated as cash flow hedging instruments upon adoption of Statement of Financial Accounting Standard ("SFAS") No. 133/138, "Accounting for Derivative Instruments and Hedging Activities". For a more detailed explanation of the nature of the Belgian GAAP to U.S. GAAP reconciling items see Note 19 to the Consolidated Financial Statements of Europay as of December 31, 2001 and December 31, 2000 and for the years ended December 31, 2001, 2000 and 1999 included elsewhere in this proxy statement-prospectus. (3) 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). (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. 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. 72 (F) the consolidation of Maestro and EMV Co., entities to be under the control of the combined company. Previously, Maestro and EMV Co. were accounted for under the equity method. Europay and MasterCard each owned 50% and 33 1/3% of Maestro and EMV Co., respectively. As neither MasterCard nor Europay exercised control over Maestro or EMV Co., these investments were not consolidated prior to the integration. (G) the issuance of stock by MasterCard to its members. (H) net income attributable to European and non-European member-stockholders before and after integration with Europay (dollars in millions):
POST- INTEGRATION(D) PRE-INTEGRATION AT 26% CHANGE --------------- --------------- ------------- NET INCOME FOR THE YEAR ENDED DECEMBER 31, 2001 ATTRIBUTABLE TO: Non-European members-stockholders of MasterCard(a)........................ $134 87% $111 74% $(23) (17)% European members-stockholders(b)........ 20 13% 39 26% 19 95% ---- --- ---- --- ---- $154 100% $150 100% $ (4)(c) ==== === ==== === ====
-------------------- (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. (d) Net income attributable to European and non-European member-stockholders after the integration with Europay, giving effect to possible increased share allocations to European member-stockholders at the end of the transition period:
POST- POST- INTEGRATION CHANGE FROM INTEGRATION CHANGE FROM AT 33 1/3% PRE-INTEGRATION AT 44% PRE-INTEGRATION ------------ ---------------- ------------ ---------------- NET INCOME FOR THE YEAR ENDED DECEMBER 31, 2001 ATTRIBUTABLE TO: Non-European member-stockholders of MasterCard(a)....................... $100 67% $(34) (25)% $ 84 56% $(50) (37)% European member-stockholders(b)....... 50 33% 30 150% 66 44% 46 230% ---- --- ---- ---- --- ---- $150 100% $ (4)(c) $150 100% $ (4)(c) ==== === ==== ==== === ====
73 MASTERCARD INCORPORATED UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF DECEMBER 31, 2001 (IN THOUSANDS)
PRO FORMA MASTERCARD PRO FORMA MASTERCARD INTERNATIONAL EUROPAY(1)(2) ADJUSTMENTS(3) INCORPORATED ------------- ------------- -------------- ------------ ASSETS Cash and cash equivalents.............. $ 176,143 $ 83,550 $ 2,176(D) $ 261,869 Investment securities.................. 494,243 -- -- 494,243 Property, plant & equipment............ 159,742 45,469 8,377(A) 213,929 341(D) Other assets........................... 547,923 144,034 (16,063)(A) 646,745 (14,699)(B) (4,407)(C) (10,043)(D) Intangible assets...................... 96,754 19,914 305,093(A) 421,761 ---------- -------- --------- ---------- TOTAL ASSETS................. $1,474,805 $292,967 $ 270,775 $2,038,547 ========== ======== ========= ========== LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities.................... $ 638,471 $217,466 $ (14,699)(B) $ 871,220 (7,755)(D) 37,737(E) Long-term liabilities.................. 229,673 17,445 41,161(E) 288,279 ---------- -------- --------- ---------- TOTAL LIABILITIES............ 868,144 234,911 56,444 1,159,499 Minority interest...................... -- 2,691 230(D) 230 (2,691)(F) STOCKHOLDERS' EQUITY Common stock........................... -- -- 1,000(G) 1,000 Paid-in-capital........................ -- 17,832 250,024(A) 873,881 601,724(G) 4,301(I) Retained earnings...................... 602,724 39,049 (602,724)(G) -- (39,049)(H) Accumulated other comprehensive income (loss)............................... 3,937 (1,516) 1,516(H) 3,937 ---------- -------- --------- ---------- TOTAL STOCKHOLDERS' EQUITY... 606,661 55,365 216,792 878,818 ---------- -------- --------- ---------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY....... $1,474,805 $292,967 $ 270,775 $2,038,547 ========== ======== ========= ==========
See notes to unaudited pro forma combined balance sheet. 74 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 1.1366 euros per U.S. dollar, the period end exchange rate between U.S. dollars and euros as of December 31, 2001. (2)A reconciliation of the Europay pro forma balance sheet as of December 31, 2001 prepared in accordance with Belgian GAAP to the Europay pro forma balance sheet as of December 31, 2001 prepared in accordance with U.S. GAAP as presented is provided below.
BELGIAN RECONCILING U.S. GAAP ITEMS GAAP -------- ----------- -------- ASSETS Cash and cash equivalents................. $ 83,550 -- $ 83,550 Investment securities..................... -- -- -- Property, plant & equipment............... 29,956 15,513(a) 45,469 Other assets.............................. 151,923 (7,889)(b) 144,034 Intangible assets......................... 19,417 497(c) 19,914 -------- -------- -------- TOTAL ASSETS......................... $284,846 $ 8,121 $292,967 ======== ======== ======== LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities....................... $229,782 $(12,316)(d) $217,466 Long-term liabilities..................... 4,807 12,638(e) 17,445 -------- -------- -------- TOTAL LIABILITIES.................... 234,589 322 234,911 -------- -------- -------- Minority interest......................... 2,691 -- 2,691 STOCKHOLDERS' EQUITY Common stock.............................. -- -- -- Paid-in-capital........................... 17,832 -- 17,832 Retained earnings......................... 29,734 9,315 39,049 Accumulated other comprehensive income (loss).................................. -- (1,516)(f) (1,516) -------- -------- -------- TOTAL STOCKHOLDERS' EQUITY........... 47,566 7,799 55,365 -------- -------- -------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY............................. $284,846 $ 8,121 $292,967 ======== ======== ========
Adjustments between Belgian GAAP and U.S. GAAP relate to the following: (a) PROPERTY, PLANT AND EQUIPMENT Reconciling items totaling $15,513 that increase property, plant and equipment recorded under Belgian GAAP to conform with U.S. GAAP include: the capitalization of borrowing costs of $2,078; differences in depreciation methods including application of the half-year convention method under U.S. GAAP totaling $5,187; and the capitalization of capital leases of $8,248. (b) OTHER ASSETS Reconciling items totaling $7,889 that decrease other assets recorded under Belgian GAAP to conform with U.S. GAAP include: an adjustment to net the receivable recorded under Belgian GAAP for a disputed tax assessment against the related liability of ($14,850); prepaid pension assets of $609; deferred tax assets of $2,420; adjustments to record derivative financial instruments at fair value $4,205; the difference between cost treatment required under U.S. GAAP and fair value used under Belgian GAAP of "know-how" contributed as initial investment equity of ($499); and $226 related to a loss in value on an investment accounted for under the equity method that was deemed other than temporary. 75 (c) INTANGIBLE ASSETS Reconciling items totaling $497 that increase intangible assets recorded under Belgian GAAP to conform with U.S. GAAP are comprised of capitalization of internally developed software costs of $497. (d) CURRENT LIABILITIES Reconciling items totaling $12,316 that decrease current liabilities recorded under Belgian GAAP to conform with U.S. GAAP include: an adjustment to net the liability recorded under Belgian GAAP for a disputed tax assessment against the related receivable of ($14,850); adjustments to record derivative financial instruments at fair value of ($184); net present value of minimum lease obligations under capital leases of $1,754; and deferred licensing fee revenue of $964. (e) LONG-TERM LIABILITIES Reconciling items totaling $12,638 that increase long-term liabilities recorded under Belgian GAAP to U.S. GAAP include: deferred tax liabilities of $4,920; net present value of minimum lease obligations under capital leases of $2,660; and deferred licensing fee revenue of $5,058. (f) OTHER COMPREHENSIVE INCOME (LOSS) Reconciling items totaling ($1,516) include the effective portion of fair value changes on derivative financial instruments designated as a cash flow hedge of $4,450; and the impact of foreign currency translation of ($5,966). For a more detailed explanation of the nature of the Belgian GAAP to U.S. GAAP reconciling items see Note 19 to the Consolidated Financial Statements of Europay as of December 31, 2001 and December 31, 2000 and for the years ended December 31, 2001, 2000 and 1999 included elsewhere in this proxy statement-prospectus. (3) 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: Purchase price (see Note 3(J))....................................... $267,856 Allocated as follows: Historical book value of 85% of Europay's assets and liabilities............................................ $49,347 Step-up of the fair value of assets: Software and other technology-related intangibles...... 29,878 Trademarks, tradenames and brand names................. 11,900 Property, plant and equipment.......................... 8,377 Deferred income taxes..................................... (16,063) Liabilities and acquisition related costs (see Note 3(E)).................................................. (78,898) Excess of purchase price over identifiable assets and liabilities (goodwill and customer relationships).............................. $263,315 ========
Total intangible assets amount to $305,093 and consist of customer relationships of $176,928; goodwill of $86,387; software and other technology-related intangibles of $29,878; and trademarks, tradenames and brand names of $11,900. See Note 3(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. 76 (C) the elimination of MasterCard's historical investment of $4,407 for 12.25% of Europay and 15% of EPSS (representing 15% of Europay on a consolidated basis). (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 3(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 redeemable and class B convertible common stock of MasterCard Incorporated at a par value of $.01 per share to the MasterCard International principal members and the Europay and MEPUK shareholders. (H) the elimination of Europay's pre-acquisition retained earnings and paid-in-capital. (I) the equity pick-up resulting from the change of MasterCard International's method of accounting for the Europay investment from historical cost to consolidation. Amount was reclassified from MasterCard International's retained earnings upon conversion. (J) an independent appraisal valued the shares of MasterCard Incorporated at $1.091 billion before the transaction. In the transaction, 66.67 million shares will be issued to non-European members and 33.33 million shares will be issued to European members. As a result of negotiations between the parties, approximately 27.96 million shares will be issued to Europay and MEPUK stockholders and 5.37 million shares will be issued to European members who are not Europay or MEPUK stockholders. Europay and MEPUK stockholders will receive 4.2 million shares for the conversion of their membership interests and the remaining 23.76 million shares are attributable to the exchange of their Europay and MEPUK shares. The transaction provides that the number of shares allocated to former shareholders of Europay and MEPUK will increase or decrease at the end of the transition period as a result of the application of the global proxy formula for the third year of the transition period. See "Share Allocation and the Global Proxy." In accounting for the initial purchase price of Europay, MasterCard will not consider shares above the minimum number of shares allocable to Europay and MEPUK shareholders at the end of the transition period because only the minimum number of shares is issued unconditionally at the closing to such shareholders. Of the 23.76 million shares attributable to the exchange of Europay and MEPUK shares, 6.15 million shares are conditional shares subject to reallocation at the end of the transition period and allocable to Europay and MEPUK shareholders. Europay and MEPUK shareholders are therefore receiving 17.61 million unconditional shares at closing. Immediately before the integration, the value of each MasterCard share will be approximately $15.21 based upon an independent appraisal ($1.091 billion divided by 71.71 million shares). Accordingly, MasterCard's purchase price for the shares of Europay is estimated to be $267.9 million ($15.21 per share multiplied by 17.61 million shares). Since former Europay and MEPUK shareholders would retain or receive shares of MasterCard Incorporated at the end of the transition period without remitting any additional consideration, any shares retained or received by them that are above their minimum allocation at that time would constitute part of the purchase price. Any such additional shares would be valued at that time based upon the fair value of the stock of MasterCard Incorporated. Any such reallocation of shares to former Europay and MEPUK shareholders will increase the purchase price for Europay and, accordingly, the amount of goodwill and additional paid-in-capital recorded. 77 -----END PRIVACY-ENHANCED MESSAGE-----