-----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, MUODHKhME1buzYEl+c23NlKIm90vZCr3n+zAoXW/OQJUlcbRCWHQMHanYx7KRcfh DlpvJp/6GVU/L90YyR0PPA== 0000950123-01-508154.txt : 20020410 0000950123-01-508154.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950123-01-508154 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 20011109 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: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-67544 FILM NUMBER: 1780843 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 S-4/A 1 y49195a2s-4a.txt AMENDMENT NO. 2 TO FORM S-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 9, 2001 REGISTRATION NO. 333-67544 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ MASTERCARD INCORPORATED (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 7389 13-4172551 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER
2000 PURCHASE STREET PURCHASE, NEW YORK 10577 (914) 249-2000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ ROBERT W. SELANDER PRESIDENT AND CHIEF EXECUTIVE OFFICER MASTERCARD INTERNATIONAL INCORPORATED 2000 PURCHASE STREET PURCHASE, NEW YORK 10577 (914) 249-2000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: NOAH J. HANFT, ESQ. VINCENT PAGANO, ESQ. SENIOR VICE PRESIDENT AND GENERAL COUNSEL SIMPSON THACHER & BARTLETT MASTERCARD INTERNATIONAL INCORPORATED 425 LEXINGTON AVENUE 2000 PURCHASE STREET NEW YORK, NEW YORK 10017 PURCHASE, NEW YORK 10577 (212) 455-2000 (914) 249-2000
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC: As soon as practicable after this registration statement becomes effective and after all other conditions to the conversion and integration described herein have been satisfied or waived. If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, as amended, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [MASTERCARD LOGO] PROXY STATEMENT-PROSPECTUS MASTERCARD INTERNATIONAL INCORPORATED MASTERCARD INCORPORATED , 2001 Dear MasterCard International Principal, Association or Travelers Cheque Member: You are invited to attend the special meeting of the principal, association and travelers cheque members of MasterCard International Incorporated to be held on , 2001, at 9:00 a.m., local time, at MasterCard International Incorporated's offices located at 2000 Purchase Street, Purchase, New York 10577. You are being asked to vote on a proposed plan to convert MasterCard International Incorporated to a private stock corporation. This plan was approved by your board of directors at a meeting held on February 8, 2001. At that same meeting, your board of directors also approved the integration of Europay International S.A. and MasterCard through the acquisition by MasterCard Incorporated, a Delaware holding company, of all the outstanding shares of Europay International S.A. in exchange for MasterCard Incorporated common stock. The conversion and the integration are important steps in enhancing our position as an integrated, global organization that is able to respond effectively to challenges and opportunities in today's fast-paced payments industry. In the conversion, each MasterCard International Incorporated principal member, which for purposes of this proxy statement-prospectus includes principal, association and travelers cheque members, will receive shares of class A and class B common stock of MasterCard Incorporated, and a class A membership interest in MasterCard International Incorporated, a Delaware non-stock corporation and subsidiary of MasterCard Incorporated. The class A membership interest will represent your continued rights as a licensee to use MasterCard's brands, programs and services. Immediately after the closing of the conversion and integration, 84,000,000 shares of class A common stock and 16,000,000 shares of class B common stock of MasterCard Incorporated will be held by the stockholders of MasterCard Incorporated. Each share of class A and class B common stock will be entitled to one vote. Following a three-year transition period, most of the class B common stock will be converted to class A common stock and the remaining shares of class B common stock will lose their voting rights. Except in limited circumstances, shares of common stock cannot be transferred during the transition period. After the transition period, shares of common stock may be transferred only among the holders of class A membership interests in MasterCard International, and no stockholder or its affiliates may own more than 15% of the outstanding shares. Additionally, following the transition period, each stockholder will be required to maintain its ownership of MasterCard Incorporated common stock within a range determined by a new global proxy formula that includes revenues and transaction volume generated by the stockholder principally in connection with its MasterCard(R), Maestro(R) and Cirrus(R) branded activity. Following the conversion and integration, European member-stockholders will hold 33 1/3% of MasterCard Incorporated common stock with the remaining 66 2/3% being held by non-European member-stockholders. These percentages will be reallocated at the end of the three-year transition period and could result in the European member-stockholders receiving between 26% and 44% of MasterCard Incorporated's common stock. WE ENCOURAGE YOU TO READ THE ACCOMPANYING PROXY STATEMENT-PROSPECTUS CAREFULLY. IN PARTICULAR, PLEASE READ THE SECTION OF THE PROXY STATEMENT-PROSPECTUS ENTITLED "RISK FACTORS" ON PAGE 18 FOR A DISCUSSION OF RISKS THAT YOU SHOULD CONSIDER IN EVALUATING THE TRANSACTIONS DESCRIBED IN THE PROXY STATEMENT-PROSPECTUS. The conversion plan requires the approval of at least a majority of the votes cast at the special meeting of MasterCard International principal members at which a quorum is present. It is important that as many of our principal members as possible be present or represented by proxy at the special meeting to consider and approve the plan of conversion. I look forward to seeing all of you who attend in person. Sincerely, ROBERT W. SELANDER President and Chief Executive Officer NEITHER THE U.S. SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED IN CONNECTION WITH THE CONVERSION AND INTEGRATION, OR DETERMINED IF THE ACCOMPANYING PROXY STATEMENT-PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. This proxy statement-prospectus is dated , 2001, and was first mailed to the principal members of MasterCard International Incorporated and the shareholders of Europay International S.A. and MasterCard/Europay U.K. Limited on or about , 2001. [MASTERCARD LOGO] MASTERCARD INTERNATIONAL INCORPORATED 2000 PURCHASE STREET PURCHASE, NEW YORK 10577 ------------------------ NOTICE OF SPECIAL MEETING OF PRINCIPAL, ASSOCIATION AND TRAVELERS CHEQUE MEMBERS TO BE HELD ON , 2001 To the Principal, Association and Travelers Cheque Members of MasterCard International Incorporated: The special meeting of principal members of MasterCard International Incorporated will be held at 9:00 a.m., local time, on , 2001 at MasterCard International Incorporated's offices located at 2000 Purchase Street, Purchase, New York 10577 to consider and vote on a plan to convert MasterCard International Incorporated to a private stock corporation. In particular, the board of directors is asking you to consider and approve the merger of MasterCard International Incorporated with MasterCard Merger Sub, Inc., a wholly-owned subsidiary of MasterCard Incorporated formed solely for the purpose of completing the merger. MasterCard International Incorporated will survive this merger and become a subsidiary of MasterCard Incorporated. In the conversion, each MasterCard International Incorporated principal member will receive shares of class A and class B common stock of MasterCard Incorporated, a Delaware holding company, and a class A membership interest in MasterCard International Incorporated, a Delaware non-stock corporation and subsidiary of MasterCard Incorporated. The class A membership interest will represent your continued rights as a licensee to use MasterCard's brands, programs and services. For purposes of this notice and the accompanying proxy statement-prospectus, the principal members of MasterCard International Incorporated are comprised of MasterCard International Incorporated's principal, association and travelers cheque members. We will not transact any other business at the special meeting. The close of business on , 2001 has been fixed as the record date for determining those members entitled to vote at the special meeting and any adjournments or postponements of the meeting. A list of eligible members of record as of the close of business on the record date will be available at the special meeting for examination by any member or the member's attorney or agent. Please note that by delivering a proxy to vote at the special meeting, you are also granting a proxy voting in favor of any adjournments of the special meeting. Whether or not you plan to attend the special meeting, please sign, date and return the enclosed proxy card in the accompanying postage-paid envelope or authorize the individuals named on your proxy card to vote your interests by calling the toll-free telephone number or by using the Internet as described in the instructions included with your proxy card. If you attend the meeting, you may vote in person, which will revoke any signed proxy you have already submitted. You may also revoke your proxy at any time before the meeting by notifying us in writing. MasterCard International Incorporated must receive your proxy card by 5:00 p.m., New York time, on , 2001. By Order of the Board of Directors, -------------------------------------- NOAH J. HANFT Secretary , 2001 Purchase, New York YOUR VOTE IS VERY IMPORTANT. PLEASE COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENVELOPE PROVIDED OR AUTHORIZE THE INDIVIDUALS NAMED ON YOUR PROXY CARD TO VOTE YOUR INTERESTS BY CALLING THE TOLL-FREE TELEPHONE NUMBER OR BY USING THE INTERNET AS DESCRIBED IN THE INSTRUCTIONS INCLUDED WITH YOUR PROXY CARD. THE BOARD OF DIRECTORS OF MASTERCARD INTERNATIONAL INCORPORATED RECOMMENDS THAT MEMBERS VOTE FOR APPROVAL OF THE CONVERSION PLAN. TABLE OF CONTENTS
PAGE ---- Questions and Answers About the Conversion.......................... 1 Questions and Answers About the Integration......................... 4 Summary............................... 6 Risk Factors.......................... 18 Cautionary Statement Concerning Forward-Looking Statements.......... 30 The Special Meeting................... 32 The Conversion........................ 35 The Integration....................... 39 Share Allocation and the Global Proxy............................... 50 Unaudited Pro Forma Combined Financial Statements.......................... 58 Capitalization........................ 64 Overview of the Global Payments Industry............................ 65 Business of MasterCard International....................... 67 MasterCard Selected Consolidated Financial and Other Information..... 86 MasterCard Selected Statistical Information......................... 87 MasterCard Management's Discussion and Analysis of Financial Condition and Results of Operations............... 88 Business of Europay International..... 95
PAGE ---- Europay Selected Historical Consolidated Financial Data......... 100 Europay Management's Discussion and Analysis of Financial Condition and Results of Operations............... 102 Management............................ 110 Security Ownership of Certain Beneficial Owners and Management.... 121 Certain Relationships and Related Transactions........................ 123 Description of Capital Stock of MasterCard Incorporated............. 125 Comparison of Rights of MasterCard International Members Before and After the Conversion and Integration......................... 131 Federal Income Tax Consequences of the Conversion and the Integration...... 139 Material Contracts Between MasterCard International and Europay........... 142 Legal Matters......................... 142 Experts............................... 142 Other Matters......................... 142 Stockholders Proposals................ 143 Where You Can Find More Information... 143 Index to Consolidated Financial Statements.......................... F-1
Annex A -- Agreement and Plan of Merger Annex B -- Share Exchange and Integration Agreement Annex C -- Share Exchange Agreement Annex D -- Amended and Restated Certificate of Incorporation of MasterCard Incorporated Annex E -- Amended and Restated Bylaws of MasterCard Incorporated Annex F -- Amended and Restated Certificate of Incorporation of MasterCard International Incorporated Annex G -- Amended and Restated Bylaws of MasterCard International Incorporated ------------------------ i The registered trademarks of MasterCard International Incorporated, which we refer to as MasterCard International, include MasterCard(R) and Cirrus(R). Maestro(R) is a registered trademark of Maestro International Incorporated and Mondex(R) is a registered trademark of Mondex International Limited. The registered trademarks of Europay International and its subsidiaries are Eurocard(R), ec eurocheque(R), ec Pictogram(R), Clip(R) and etc euro travellers cheque(R). Upon completion of the conversion and integration, all of these trademarks will be the property of MasterCard Incorporated or its subsidiaries. Other trademarks used in this proxy statement-prospectus are the property of their respective owners. References in this proxy statement-prospectus to MasterCard generally mean the MasterCard trademark or the business conducted by MasterCard International prior to the conversion and integration and by MasterCard Incorporated following the conversion and integration. ------------------------ As of November 8, 2001, the exchange rate between U.S. dollars and euros was 1.11 euros per U.S. dollar. As of June 30, 2001 and December 31, 2000, the period end exchange rate between U.S. dollars and euros was 1.18 and 1.07 euros per U.S. dollar, respectively, while the average exchange rate for the six month period ended June 30, 2001 and the year ended December 31, 2000 was 1.12 and 1.11 euros per U.S. dollar, respectively. The exchange rates referred to above are based on the noon buying rate in New York City for cable transfers in euros as certified for customs purposes by the Federal Reserve Bank of New York. We make no representation that the dollar or euro amounts referred to in this proxy statement-prospectus could have been or could in the future be converted into euros or dollars, as the case may be, at any particular rate or at all. ------------------------ You should rely only on the information contained in this proxy statement-prospectus or to which we have referred you. We have not authorized anyone to provide you with information that is different. Information on the Web sites of MasterCard International and Europay International is not part of this document. This proxy statement-prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. The information in this proxy statement-prospectus may be accurate only as of the date of this proxy statement-prospectus. ii QUESTIONS AND ANSWERS ABOUT THE CONVERSION Q. WHAT IS THE CONVERSION? A. The conversion refers to the process by which MasterCard International will merge with a subsidiary of MasterCard Incorporated, a newly formed stock holding company. After the conversion, MasterCard International will continue as a non-stock corporation and will be a subsidiary of MasterCard Incorporated. As a result of the conversion, MasterCard Incorporated will hold the only class B membership interest in MasterCard International, entitling MasterCard Incorporated to substantially all voting power, and all economic rights, in MasterCard International. In addition, the current principal members of MasterCard International will hold the class A membership interests in MasterCard International and the common stock of MasterCard Incorporated. A diagram showing the structure of MasterCard Incorporated and MasterCard International after the conversion and integration (described below) can be found on page 10. Q. WHAT WILL HAPPEN TO MY MASTERCARD INTERNATIONAL MEMBERSHIP IN THE CONVERSION? A. In the conversion, each principal member of MasterCard International will receive shares of class A and class B common stock of MasterCard Incorporated, representing that member's equity interest in MasterCard Incorporated, and a class A membership interest in MasterCard International, representing that member's continued rights to use MasterCard's brands, programs and services under the member's current MasterCard license. See "Comparison of Rights of MasterCard International Members Before and After the Conversion and Integration." Q. WHAT ARE THE REASONS FOR THE CONVERSION? A. We believe that the conversion will enhance the value of our business and our future opportunities by aligning more closely the interests of MasterCard and our member-stockholders and providing a more flexible structure to respond to opportunities in the marketplace. In particular, we believe the conversion will help enhance our member-stockholders' commitment to MasterCard because their relative shareholdings in MasterCard Incorporated may increase as they increase their MasterCard business. For more information, see "The Conversion -- Considerations Relating to the Conversion," and "Risk Factors -- Risks Relating to the Conversion." Q. WHY IS MASTERCARD INTERNATIONAL BEING REORGANIZED AS A TWO-TIERED HOLDING COMPANY? A. The proposed structure will give MasterCard many of the advantages of a stock corporation at the holding company level, while enabling it to maintain the flexibility of a membership association in governing the operations of its global payments programs at the subsidiary level. As is typical of a holding company structure, the holding company, MasterCard Incorporated, will control the voting power of its operating subsidiary, MasterCard International, with regard to nearly all items that currently require a vote of MasterCard International's members. Q. WILL I CONTINUE TO HAVE VOTING RIGHTS? A. Yes. As a stockholder of MasterCard Incorporated, you will be able to vote on all matters submitted to the stockholders for a vote, including the election of the board of directors, and extraordinary transactions, such as a merger, consolidation or sale of all or substantially all of the assets or dissolution of MasterCard Incorporated. Each share of class A and class B common stock will be entitled to one vote. Each stockholder, together with its affiliates, will be subject to a 7% voting cap in the election of directors regardless of the number of shares owned. For more information, see "Description of Capital Stock of MasterCard Incorporated." The board of directors of MasterCard International will be identical to the board of directors of MasterCard Incorporated. In addition, you will continue to be able to vote on proposed changes to Article I (Membership) of the bylaws of MasterCard International, which will require the approval of the holders of at least two-thirds of the voting power held by the class A members, but you will no longer be entitled to vote directly with respect to any other amendments of the charter or bylaws of MasterCard International. See "Comparison of Rights of MasterCard International Members Before and After the Conversion and Integration." 1 Q. ARE THERE ANY RESTRICTIONS ON MY ABILITY TO SELL MY SHARES OF CLASS A OR CLASS B COMMON STOCK OR MY CLASS A MEMBERSHIP INTEREST? A. Yes. Shares of MasterCard Incorporated class A or class B common stock cannot be transferred for three years after the conversion except in connection with a sale of all or substantially all of the stockholder's card portfolio. After three years, each stockholder must maintain an ownership percentage of outstanding common stock not less than 75% nor more than 125% of that stockholder's most recent global proxy calculation. The global proxy calculation is determined by a formula specified in the share exchange and integration agreement. If you do not satisfy these ownership requirements based on the annual calculation of the global proxy, you may be required to purchase or sell shares of MasterCard Incorporated. In addition, class A and class B common stock will be permitted to be traded only among institutions holding class A membership interests in MasterCard International. No stockholder, together with its affiliates, may own more than 15% of the outstanding voting stock of MasterCard Incorporated. Class A membership interests, like your existing membership interests, are not transferable. For more information, see "Description of Capital Stock of MasterCard Incorporated -- Transfer Restrictions." Q. WILL THE CONVERSION AFFECT THE RULES FOR QUALIFICATION AS A MEMBER OF MASTERCARD INTERNATIONAL? A. No. The rules for the qualification of members of MasterCard International following the conversion will be the same as the current rules for the qualification of members of MasterCard International. Q. WHAT ARE THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE CONVERSION? A. The conversion and integration should be treated as a single, integrated series of transactions for U.S. federal income tax purposes. We, our principal members and the shareholders of Europay and MasterCard/Europay U.K. Limited, which we refer to in this proxy statement-prospectus as MEPUK, should not recognize any gain or loss for U.S. federal income tax purposes to the extent that our principal members and the shareholders of Europay and MEPUK are treated for U.S. federal income tax purposes as having received shares of MasterCard Incorporated stock in exchange for property, except that our principal members and the shareholders of Europay and MEPUK may recognize imputed interest income upon the receipt of additional MasterCard Incorporated stock at the end of the three year transition period or thereafter pursuant to the integration agreement. We have requested that the Internal Revenue Service issue a ruling on key aspects of the conversion and integration, and we expect to receive a response during the first quarter of 2002. Principal members and Europay and MEPUK shareholders should consult their own tax advisors regarding the U.S. federal, as well as any state, local or non-U.S., tax consequences to them of the conversion and integration. For more information, see "Federal Income Tax Consequences of the Conversion and the Integration." Q. WHAT ARE THE ACCOUNTING IMPLICATIONS OF THE CONVERSION? A. Members should consult their financial advisors regarding the potential accounting implications of the conversion to them. Q. WHEN WILL THE CONVERSION BE COMPLETED? A. The conversion will be completed as soon as practicable after the conditions to the conversion are satisfied, including approval of the plan of conversion by the members, the expiration or termination of any waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder, which we refer to together as the HSR Act, and approval of antitrust authorities in certain European countries. We anticipate that these conditions will be satisfied and that the conversion will be completed in the first quarter of 2002. Members should consult their advisors to determine whether they are required to make any filings under the HSR Act. Q. WHAT WILL HAPPEN IF THE MEMBERS DO NOT APPROVE THE PLAN OF CONVERSION? A. If the members do not approve the plan of conversion, or if the conversion is not completed for any reason, the board of directors of MasterCard International presently intends to continue to operate MasterCard International in its cur- 2 rent form. Completion of the conversion is a condition to the integration. If the conversion does not occur for any reason, MasterCard International will not be able to proceed with the integration. Q. WILL THE CONVERSION OCCUR EVEN IF THE INTEGRATION WITH EUROPAY IS NOT COMPLETED? A. No, not in its present form. We will not proceed with the conversion in its present form if the integration will not also be completed. The board of directors of MasterCard International may, however, determine in the future that a conversion in some form is in the best interests of MasterCard International and its members. If so, MasterCard International would, at that time, seek member approval for that transaction. Q. WHAT ARE MY RIGHTS IF I VOTE AGAINST THE PLAN OF CONVERSION, BUT THE PLAN OF CONVERSION PASSES ANYWAY? A. You are not entitled to rights of appraisal or similar rights for any matter to be acted on at the meeting. Q. WHAT VOTE IS REQUIRED FOR THE PLAN OF CONVERSION PROPOSAL TO PASS? A. The proposal requires the affirmative vote of a majority of the votes cast at the MasterCard International special meeting at which a quorum is present, either in person or by proxy. Q. WHAT DO I NEED TO DO NOW? A. After carefully reading and considering the information contained in this proxy statement-prospectus, please indicate on your proxy card how you want to vote and mail your signed and dated form in the enclosed return envelope or authorize the individuals named on your proxy card to vote your interests by calling the toll-free telephone number or by using the Internet as described in the instructions included with your proxy card. Q.CAN I VOTE BY TELEPHONE OR ELECTRONICALLY? A.Yes. You may vote by telephone, or electronically through the Internet, by following the instructions included with your proxy card. Q. WHAT DO I DO IF I WANT TO CHANGE MY VOTE? A. Just send in a later-dated, signed proxy card to the Secretary of MasterCard International or authorize the individuals named on your proxy card to vote your interests by telephone or by Internet before the special meeting or attend the meeting in person and vote. Q. WHO CAN HELP ANSWER MY QUESTIONS? A. If you have more questions about this proxy statement-prospectus you should contact: MasterCard International Incorporated 2000 Purchase Street Purchase, New York 10577 Attention: Noah J. Hanft Secretary Telephone: (914) 249-2000 Facsimile: (914) 249-4262 or Georgeson Shareholder Communications Inc. 17 State Street 10th Floor New York, New York 10004 Telephone: (212) 440-9800 Facsimile: (212) 440-9009 3 QUESTIONS AND ANSWERS ABOUT THE INTEGRATION Q. WHAT IS THE INTEGRATION? A. The integration refers to the acquisition of Europay by MasterCard Incorporated and the combination of the businesses of Europay and MasterCard International. In connection with the integration, Europay's shareholders, other than MasterCard International and MEPUK, will exchange their shares of Europay capital stock for shares of class A common stock and class B common stock of MasterCard Incorporated. In a related transaction, shareholders of MEPUK will exchange their shares of MEPUK capital stock for shares of class A common stock and class B common stock of MasterCard Incorporated. Upon completion of the conversion and integration, the European principal members of MasterCard International, including the former MEPUK shareholders, will own 33 1/3% of the outstanding capital stock of MasterCard Incorporated and the non-European principal members will own 66 2/3%. The shares of class A and class B common stock of MasterCard Incorporated will be initially allocated within each of the European and non-European shareholder groups in accordance with the new global proxy formula described in this proxy statement-prospectus. Shares will be reallocated at the end of a three-year transition period following the closing of the conversion and integration, which could result in the European member-stockholders receiving between 26% and 44% of MasterCard Incorporated's common stock. For a summary of the integration, see "The Integration" and "Share Allocation and the Global Proxy." For a description of the related share exchange proposed for shareholders of MEPUK, see "The Integration -- MEPUK." Q. WHAT ARE THE REASONS FOR THE INTEGRATION? A. The integration will allow MasterCard and Europay to form an integrated, global company with a single management team and governance structure. Accordingly, we expect that MasterCard Incorporated will be able to respond more effectively to the challenges and opportunities in today's fast-paced global payments industry than either MasterCard International or Europay could separately. We expect that the integration will combine MasterCard International's strengths in global brand building, transaction processing and marketing consulting services with Europay's strengths in debit, mobile commerce and chip-based card programs. As a result, we anticipate that we will be able to manage our collective brands and combined companies more effectively, take advantage of many potential operating synergies between the two companies and reduce costs and thereby improve profitability. For more information, see "The Integration -- Considerations Relating to the Integration," and "Risk Factors -- Risks Related to the Integration." Q. ARE MASTERCARD INTERNATIONAL PRINCIPAL MEMBERS BEING ASKED TO APPROVE THE INTEGRATION OF MASTERCARD AND EUROPAY? A. Approval by the members of MasterCard International is not required for the acquisition of Europay by MasterCard Incorporated in the integration. However, approval of the members is required for the plan of conversion, which is a condition for the integration. Q. HOW MANY SHARES OF MASTERCARD INCORPORATED WILL I RECEIVE? A. Features of both the conversion and integration will determine the number of shares of MasterCard Incorporated you receive. The accompanying proxy card sets forth the number of class A and class B shares of MasterCard Incorporated that you will receive upon the closing of the conversion and integration. For more information, see "Share Allocation and the Global Proxy." Q. WHAT ARE THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE INTEGRATION? A. The conversion and integration should be treated as a single, integrated series of transactions for U.S. federal income tax purposes. We, our principal members and the Europay and MEPUK shareholders should not recognize any gain or loss for U.S. federal income tax purposes to the extent that our principal members and the shareholders of Europay and MEPUK are treated for U.S. federal income tax purposes as having received shares of MasterCard Incorporated stock in exchange for property, except that our principal members and the shareholders of Europay and MEPUK may recognize imputed interest income upon the receipt of additional MasterCard Incorporated stock at the end of the 4 three year transition period or thereafter pursuant to the integration agreement. We have requested that the Internal Revenue Service issue a ruling on key aspects of the conversion and integration, and we expect to receive a response during the first quarter of 2002. Principal members and Europay and MEPUK shareholders should consult their own tax advisors regarding the U.S. federal, as well as any state, local or non-U.S., tax consequences to them of the conversion and integration. For more information, see "Federal Income Tax Consequences of the Conversion and the Integration." Q. WHAT ARE THE ACCOUNTING IMPLICATIONS OF THE INTEGRATION? A. Members should consult their financial advisors regarding the potential accounting implications of the integration to them. Q. WHAT ARE THE CONDITIONS TO THE INTEGRATION? A. The integration will not occur if the conversion is not also completed. In addition, the integration is subject to customary closing conditions, among others. For more information, see "The Integration -- Conditions to Closing of the Integration." Q. WHEN WILL THE INTEGRATION BE COMPLETED? A. If the conditions to the integration have been satisfied or waived, we expect to close the integration immediately after the completion of the conversion. Q. WHAT APPROVALS MUST EUROPAY OBTAIN BEFORE PROCEEDING WITH THE INTEGRATION? A. Europay's board of directors has already approved the integration. However, before proceeding with the integration, Europay shareholders, other than MasterCard International and MEPUK, must agree to exchange their shares in Europay in accordance with the share exchange and integration agreement. MEPUK shareholders must agree to exchange their shares in MEPUK in accordance with a related share exchange agreement, which we refer to as the MEPUK agreement. 5 SUMMARY This summary highlights information contained elsewhere in this proxy statement-prospectus. This summary does not contain all of the information you should consider with regard to the transactions described in this proxy statement-prospectus. You should read this summary together with the entire proxy statement-prospectus, including MasterCard International's and Europay's financial statements and the notes to those statements, carefully. See "Where You Can Find More Information." We have included page references parenthetically to direct you to more complete descriptions of the topics presented in this summary. MASTERCARD INTERNATIONAL (PAGE 67) MasterCard International is a leading global payment solutions company owned by over 1,500 financial institutions worldwide that participate directly in the business of MasterCard International as its principal members. We manage a family of well-known, widely accepted payment card brands including MasterCard, Maestro and Cirrus on behalf of these members and approximately 13,500 affiliate members that participate indirectly in our business. We license our brands to members, provide a sophisticated set of information and transaction processing services to members and establish and enforce rules and standards surrounding the use of cards carrying our brands. We also undertake a variety of marketing activities designed to maintain and enhance the value of our brands. As an industry leader in technological innovation, we are developing highly secure, efficient payment programs for electronic and mobile commerce applications and helping members launch chip-based card programs in countries throughout the world. On a global scale, we process transactions denominated in more than 180 currencies. In 2000, our gross dollar volume ("GDV"), which represents gross spending (purchases and cash disbursements) on MasterCard-branded cards for goods and services, including balance transfers and convenience checks, increased 18% to $858 billion from $726 billion in 1999. For the first six months of 2001, our GDV was $459 billion, an 18% increase over the $405 billion of GDV generated during the same period in 2000. At June 30, 2001, the total number of MasterCard cards in circulation worldwide as reported by our members was 475 million, a 19% increase from the same date in 2000, reflecting strong performance in a number of countries. In addition, our members estimate that cards carrying MasterCard brands were accepted at over 22 million locations around the world as of June 30, 2001. Our revenue is comprised of operations fees and member assessments. Operations fees represent user fees for authorization, clearing, settlement and other member services that facilitate transaction and information management among our members on a global basis. Member assessments are based principally upon the GDV of transactions generated by MasterCard-branded cards. In addition to transaction processing and brand building, we also provide a growing set of marketing and technology consulting, card enhancement and loyalty rewards support, and information-based performance analysis services to our members. We do not issue cards, set fees or determine the interest rates that cardholders are charged for use of their cards. In addition, we do not solicit merchants to accept MasterCard cards or establish the discount rate that merchants are charged for card acceptance. These matters are the responsibility of our members. EUROPAY INTERNATIONAL (PAGE 95) Europay International is a leading payment solutions company in Europe. Headquartered in Waterloo, Belgium, Europay is owned and controlled by European financial institutions and serves approximately 1,200 principal members, who participate directly in its card business, and approximately 2,700 affiliate members, who participate in Europay's card business indirectly through a principal member. Europay offers its member financial institutions a full range of payment programs and services, including ec eurocheque, Maestro, Cirrus, Eurocard-MasterCard and ec Pictogram, which they in turn can provide to their customers -- cardholders and retailers. Europay's primary role is to license the above brands to its members, provide a sophisticated set of information processing and transaction delivery services to members and establish and enforce rules and standards surrounding the use of payment cards carrying the brands. Europay has a long-standing strategic alliance with MasterCard, originating with Eurocard International's alliance with Interbank Card Association, MasterCard International's predecessor, in 1968 and 6 enhanced by more recent agreements. Europay has been granted exclusive licensing rights in Europe for certain MasterCard brands and is responsible for the marketing of these brands and transaction processing throughout Europe. In addition, Europay and MasterCard are equal partners in Maestro International, a joint venture which oversees the global development of the Maestro debit service. CONVERSION OF MASTERCARD INTERNATIONAL (PAGE 35) In connection with the conversion, each issued and outstanding principal membership interest in MasterCard International will be automatically converted by virtue of the merger into a class A membership interest of MasterCard International and a specified number of shares of class A common stock and class B common stock of MasterCard Incorporated. After a three-year transition period, the principal members of MasterCard International will be able to trade the common stock of MasterCard Incorporated among themselves, subject to certain restrictions. The class A membership in MasterCard International will continue each member's right to use MasterCard International's brands, programs and services under the member's current MasterCard license. MasterCard Incorporated will be issued the sole outstanding class B membership interest in MasterCard International. The class B membership interest will entitle MasterCard Incorporated to substantially all of the voting power, and all economic rights, in MasterCard International. MasterCard Incorporated's stockholders will participate indirectly in the voting power and economic rights associated with the class B membership interest through their ownership of the common stock of MasterCard Incorporated. For a description of the material terms of the conversion, see "The Conversion." CONSIDERATIONS RELATING TO THE CONVERSION (PAGE 36) We believe that conversion will enhance the value of the MasterCard enterprise by: - permitting 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. - aligning more closely the interests of MasterCard and our member-stockholders and helping to enhance our member-stockholders' commitment to MasterCard; - providing a more flexible structure to respond to opportunities in the marketplace; - resulting in greater financial transparency for our member-stockholders; and - making it easier, if desired, for MasterCard Incorporated to raise financing in the public securities markets. We also considered the following disadvantages relating to the conversion: - 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 may 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. For more information, see "The Conversion -- Considerations Relating to the Conversion," and "Risk Factors -- Risks Related to the Conversion." 7 THE INTEGRATION (PAGE 39) MasterCard Incorporated and MasterCard International intend to enter into an integration agreement with Europay that provides for MasterCard Incorporated to acquire Europay's capital stock in exchange for shares of class A and class B common stock of MasterCard Incorporated. MasterCard Incorporated will acquire Europay capital stock directly from Europay's shareholders and indirectly by acquiring the capital stock of MEPUK from MEPUK's shareholders. Following this acquisition, Europay will become a consolidated subsidiary of MasterCard Incorporated. As a result, Europe, like MasterCard's other regions, will be managed by a regional board of directors that operates under delegated authority from MasterCard's global board of directors. At the closing of the conversion and integration, all Europay and MEPUK shareholders will also be principal members of MasterCard International. For a description of the material terms of the acquisition of Europay, see "The Integration." CONSIDERATIONS RELATING TO THE INTEGRATION (PAGE 42) The integration will allow MasterCard and Europay to form an integrated, global company with a single management team and governance structure. Accordingly, we expect that MasterCard Incorporated will be able to respond more effectively to the challenges and opportunities in today's fast-paced global payments industry than either MasterCard International or Europay could separately. MasterCard and Europay are expected to benefit from the integration through the establishment of: - one global management team and governance structure; - improved delivery of customized relationship management and professional services to customers in all key regions, including Europe; and - synergies to reduce costs and improve service, thereby improving profitability. The integration will allow MasterCard to: - establish a more consistent global marketing message, particularly in Europe, that is intended to increase MasterCard's presence in Europe and thereby make the European region more attractive to all MasterCard members; and - take advantage of Europay's expertise in debit and chip cards and mobile commerce. For Europay, the integration represents the opportunity to merge with a well-capitalized industry leader and, as a result, to leverage its own strengths based on the broader resources of the MasterCard brand and organization. Integration with MasterCard provides the opportunity for European members to: - participate in the MasterCard system on a much more significant scale than they currently do; - utilize MasterCard's expertise in brand building and customer-centered service; and - utilize MasterCard's marketing consulting, internet and corporate product management expertise. MasterCard and Europay also considered the following disadvantages relating to the integration: - expected synergies may never materialize because of our possible failure to reduce costs, merge effectively our management structures, improve our programs and services or combine our systems efficiently; - the integration will significantly dilute the equity percentage of non-European members of MasterCard International in MasterCard Incorporated as compared to the non-European members' current equity percentage (including voting power and economic rights) in MasterCard International; and - the integration will adversely impact some members through the introduction of the new global proxy formula. For more information, see "The Integration -- Considerations Relating to the Integration," and "Risk Factors -- Risks Related to the Integration." No independent appraisal of MasterCard or MasterCard International was prepared in connection with the conversion or integration. 8 SHARE ALLOCATION AND THE GLOBAL PROXY (PAGE 50) As a result of the conversion and integration, the principal members of MasterCard International, including all Europay and MEPUK shareholders, will receive shares of class A common stock and class B common stock of MasterCard Incorporated and class A membership interests in MasterCard International. The number of shares of class A and class B common stock that you will receive upon the closing of the conversion and integration is set forth on the accompanying proxy card. 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. The number of shares that each principal member will receive is the result of two factors: - Whether you are a European or non-European member. In consideration for the acquisition of Europay in the integration, European member-stockholders will hold shares of class A and class B common stock at the closing that, together with the shares they receive in the conversion, represent 33 1/3% of all shares of class A and class B common stock together then outstanding. Non-European member stockholders will hold the remaining shares of class A and class B common stock, representing 66 2/3% of all shares together then outstanding. The allocation of 33 1/3% of outstanding shares to Europe was determined as a result of extensive negotiations between MasterCard International and Europay, as described more fully under the heading "The Integration -- Background of the Integration." - Your proportionate share of the new global proxy formula. The global proxy represents an approximation of each member's proportionate share of MasterCard's total business and revenues and has traditionally been employed to determine the equity rights each principal member receives at annual meetings of members of MasterCard International, among other things. In connection with the conversion and integration, the global proxy will be adjusted from the historic formula that takes into account only revenue from MasterCard transactions to a new formula that includes transaction volume and revenue earned principally in connection with MasterCard, Cirrus and Maestro cards. Accordingly, the new global proxy formula based on the 12 month period ended December 31, 2000, applied on a regional basis to the European pool of shares (representing 33 1/3% of total shares outstanding) and the non-European pool of shares (representing 66 2/3% of total shares outstanding), will determine the number of shares that members receive initially in the conversion and integration. The application of the new global proxy formula on a European and non-European basis to determine the allocation of shares to members is the result of an integrated series of transaction steps in the conversion and integration, as described more fully under the heading "Share Allocation and the Global Proxy." Three years after the closing, and as an integral component of the conversion and integration, MasterCard Incorporated shares will be reallocated, with European members owning between 26% and 44% of the total common stock then outstanding, based in part on the aggregate global proxy calculation of European members at that time, and non-European members owning the remaining shares. Shares of common stock will be allocated to each member within each stockholder group on the basis of each member's new global proxy calculation in effect at that time. In addition, at the end of the three year transition period, most of the class B shares will be converted into class A shares. The class B shares not converted into class A shares will by their terms become non-voting, and after an additional two-year period will convert to class A shares and be subject to reallocation. As a result of these provisions, the equity percentage of non-European members of MasterCard International in MasterCard Incorporated will be significantly diluted when compared to their current equity percentage in MasterCard International. For more information, see "Share Allocation and the Global Proxy." 9 STRUCTURE OF MASTERCARD BEFORE AND AFTER THE CONVERSION AND INTEGRATION MasterCard International is currently a Delaware membership corporation owned by over 1,500 principal members that participate directly in the MasterCard business. Each principal member owns a membership interest that gives it rights to vote for the election of directors and to receive distributions upon the liquidation of MasterCard International, as well as rights to use MasterCard's brands, programs and services under license. Each principal member is entitled to a number of votes determined in accordance with the historic global proxy calculation. MasterCard International also has approximately 13,500 affiliate members that participate indirectly in our business through their affiliation with one or more principal members. Affiliate members do not have voting rights and will not receive shares in connection with the conversion and integration. The diagrams below show the approximate ownership structure of MasterCard and Europay before and after the conversion and integration. MasterCard International currently owns 12 1/4% of Europay and 15% of EPSS, Europay's transaction processing subsidiary, of which Europay owns the remainder. Based on the relative values of Europay and EPSS, this is equivalent to an approximate 15% ownership interest in Europay on a consolidated basis, as shown in the first diagram below. BEFORE CONVERSION AND INTEGRATION [Diagram showing (1) Non-European Members owning 66 2/3% of MasterCard Incorporated and class A membership interests in MasterCard International, (2) European Members owning 33 1/3% of MasterCard Incorporated and class A membership interests in MasterCard International and (3) MasterCard Incorporated owning 100% of Europay International and the class B membership interest in MasterCard International.] IMMEDIATELY AFTER CLOSING OF CONVERSION AND INTEGRATION [Diagram showing (1) Non-European Members owning 93% of MasterCard International, (2) European Members owning 7% of MasterCard International and 87 3/4% of Europay International and (3) MasterCard International owning 12 1/4% of Europay International.] 10 THREE YEARS AFTER CLOSING OF CONVERSION AND INTEGRATION [Diagram showing (1) Non-European Members owning 56%-74% of MasterCard Incorporated and class A membership interests in MasterCard International, (2) European Members owning 26%-44% of MasterCard Incorporated and class A membership interests in MasterCard International and (3) MasterCard Incorporated owning 100% of Europay International and the class B membership interest in MasterCard International.] * Assumes each Europay shareholder agrees to exchange its shares of Europay, and each shareholder of MEPUK agrees to exchange its shares of MEPUK, for common stock of MasterCard Incorporated as described in this proxy statement-prospectus. MasterCard Incorporated will own Europay shares directly and indirectly through MasterCard International and MEPUK. TRANSFER RESTRICTIONS (PAGE 127) No stockholder of MasterCard Incorporated, together with its affiliates, may own more than 15% of MasterCard Incorporated's outstanding voting stock. For three years after completion of the conversion and integration, no transfer of class A or class B common stock will be permitted except in connection with the sale of all or substantially all of a stockholder's card portfolio. After three years, transfers are permitted among stockholders who also own a class A membership interest in MasterCard International, subject to the requirement that each stockholder maintain an ownership percentage of outstanding class A and class B (if any) common stock not less than 75% nor more than 125% of that stockholder's most recent global proxy calculation. Stockholders may be required to purchase or sell shares of MasterCard Incorporated in order to satisfy these requirements. Any sale of MasterCard Incorporated shares would ordinarily constitute a taxable transaction. Class C shares, which will be authorized but unissued at the closing of the conversion and integration, may or may not be subject to transfer restrictions. For a description of restrictions on the transfer of MasterCard Incorporated common stock, see "Description of Capital Stock of MasterCard Incorporated -- Transfer Restrictions." BOARDS OF DIRECTORS FOLLOWING THE CONVERSION AND INTEGRATION (PAGE 35) The directors and executive officers of MasterCard Incorporated after the conversion and integration will be the same as the directors and executive officers of MasterCard International before the conversion and integration except for the addition of two voting directors who will be affiliated with European members and the addition of Dr. Peter Hoch, currently Chief Executive Officer of Europay, who will be President of MasterCard's Europe region (an officer of MasterCard Incorporated) and a non-voting director. The board of directors of MasterCard Incorporated will initially consist of 18 voting members -- six from the U.S., six from Europe, three from Asia/Pacific, one from Canada, one from Latin America and the Caribbean and the President and Chief Executive Officer of MasterCard Incorporated. The directors will be elected by the 11 stockholders subject to a voting cap and a limit on the number of representatives that may come from any single region. The certificate of incorporation of MasterCard International requires that MasterCard Incorporated, as the sole class B member, elect its directors to serve as the directors of MasterCard International. In addition to the board of directors, there will be a regional board for each of MasterCard's six operating regions. For a discussion of the regional boards and their governance rights, see "The Conversion -- Effects of the Conversion." BOARD OF DIRECTORS' AND PRINCIPAL MEMBERS' APPROVAL OF THE CONVERSION AND THE INTEGRATION (PAGE 37) On February 8, 2001, the board of directors of MasterCard International approved resolutions recommending the conversion and integration to MasterCard International's principal members. Approval at a special meeting of principal members at which a quorum is present of at least a majority of the votes cast is required to complete the plan of conversion. On February 12, 2001, the board of directors of Europay also approved resolutions recommending the integration to Europay's shareholders. However, approval by the principal members of MasterCard International is not required to complete the integration. If the plan of conversion is approved and the conditions to the integration are satisfied or waived, we will proceed with the conversion and integration. THE BOARD OF DIRECTORS OF MASTERCARD INTERNATIONAL RECOMMENDS THAT MEMBERS VOTE FOR APPROVAL OF THE PLAN OF CONVERSION. Principal members of MasterCard International who are represented on MasterCard International's board of directors are entitled to exercise votes representing approximately 32% of the votes entitled to be cast on the proposal regarding the plan of conversion. ABSENCE OF APPRAISAL OR DISSENTERS' RIGHTS Members who object to the conversion will have no appraisal or dissenters' rights under applicable law. OVERVIEW OF THE MERGER AGREEMENT EFFECTING THE CONVERSION (PAGE 37) The conversion will be effected pursuant to the Agreement and Plan of Merger to be entered into among MasterCard Incorporated, MasterCard International and MasterCard Merger Sub, Inc., which we refer to as the merger agreement. Under the merger agreement, each issued and outstanding principal membership interest in MasterCard International will be automatically converted by virtue of the merger into a class A membership interest of MasterCard International and a specified number of shares of class A common stock and class B common stock of MasterCard Incorporated. The number of shares of class A and class B common stock of MasterCard Incorporated that a principal member receives in the merger will be proportional to the percentage of the total voting power of MasterCard International that such member held in accordance with the historic global proxy formula in effect for the period ended September 30, 2000. Shares of class A and class B common stock are fully paid, non-assessable voting equity interests in MasterCard Incorporated and vote together as a single class on all matters. Class A membership interests in MasterCard International represent the members' continued rights to use MasterCard's brands, programs and services under the members' current MasterCard license. In addition, under the merger agreement, MasterCard Incorporated will receive one class B membership interest in MasterCard International and become the sole principal member of MasterCard International for most matters subject to a vote of members. The merger will not close, and your membership interest will not be exchanged as described above, unless a majority of the votes cast at the special meeting at which a quorum is present approve the plan of conversion and the merger agreement. For more information, see "The Conversion -- The Merger Agreement Effecting the Conversion." 12 OVERVIEW OF THE INTEGRATION AGREEMENT (PAGE 43) The acquisition of Europay, which we refer to as the integration, will be accomplished pursuant to the Share Exchange and Integration Agreement to be entered into by MasterCard Incorporated, MasterCard International and Europay International. We refer to this agreement as the integration agreement. The integration agreement provides for the following: - the exchange of shares of Europay and MEPUK for specified numbers of shares of class A common stock and class B common stock of MasterCard Incorporated. The common stock of MasterCard Incorporated will be issued to the shareholders of Europay and MEPUK, which will be principal members of MasterCard International in Europe at the time of closing. Accordingly, the shares issued in the integration will increase the aggregate shareholding of European members of MasterCard International to 33 1/3% of the outstanding shares; - as an integral component of the conversion and integration, the reallocation of the shares of class A and class B common stock of MasterCard Incorporated issued in the conversion and integration 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; - three years following the closing of the integration, the conversion of the class B common stock, other than a limited number of shares relating to ec Pictogram (if any), into class A common stock, and the reallocation of the class A common stock among the stockholders; and - restrictions on the conduct of business of each of MasterCard International and Europay prior to the closing of the integration. For more information on the allocation of shares, see "Share Allocation and the Global Proxy." See also "The Integration -- The Integration Agreement." As a result of the reallocation of shares three years following the closing of the integration, European members will own between 26% and 44% of the total common stock then outstanding, based in part on the aggregate new global proxy calculation of European members at that time, and the remaining shares will be owned by the non-European members. Certain shares of class B common stock relating to ec Pictogram will be subject to reallocation after an additional two year period. As a result of these reallocations, 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 gross acquiring volume ("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. REGULATORY MATTERS (PAGE 49) Neither MasterCard International nor Europay is required to make filings with the European Commission or United States antitrust authorities in connection with the conversion and integration. However, a number of countries within the European Union require notification and prior regulatory approval of the conversion and integration in connection with competition laws and rules at the national level, depending on whether national merger control thresholds are met. National notification will be made in Germany, Finland, Spain and Greece. As of the date of this proxy statement-prospectus, the transaction has been cleared by the national competition authorities in Germany. Some members of MasterCard International and some shareholders of Europay that receive shares of MasterCard Incorporated may be required to make filings with the United States antitrust authorities 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. The conversion and the integration would be subject to the expiration or termination of all of these filings. 13 For a description of the potential application of federal and state banking regulations to the shares received in the conversion and integration, 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." There are no other federal or state regulatory requirements or approvals that must be obtained or satisfied to complete the conversion and integration. For more information, see "The Integration -- Regulatory Matters Relating to the Integration." FORWARD-LOOKING STATEMENTS (PAGE 30) Statements in this proxy statement-prospectus include forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those expressed in forward-looking statements, depending on a variety of factors discussed more fully in this proxy statement-prospectus. You should carefully review all information, including the financial statements and the notes to the financial statements included in this proxy statement-prospectus. RISK FACTORS (PAGE 18) You should carefully consider all of the information provided in this proxy statement-prospectus and, in particular, you should evaluate the specific factors described under "Risk Factors" on page 18 for a description of the risks associated with the conversion and integration. 14 MASTERCARD SUMMARY CONSOLIDATED FINANCIAL AND OTHER INFORMATION The following table sets forth summary consolidated financial and other information for MasterCard for each of the three years in the period ended December 31, 2000 and as of the end of each such fiscal year, and as of and for the six months ended June 30, 2001 and June 30, 2000, and selected unaudited pro forma financial data for the year ended December 31, 2000 and as of and for the six months ended June 30, 2001. The summary consolidated financial data as of December 31, 2000 and December 31, 1999 and for the fiscal years ended December 31, 2000, December 31, 1999 and December 31, 1998 have been derived from the audited consolidated financial statements of MasterCard International included elsewhere in this proxy statement-prospectus. The summary consolidated financial data as of December 31, 1998 has been derived from the audited consolidated financial statements of MasterCard International that have not been included in this proxy statement-prospectus. The summary consolidated financial data for the six months ended June 30, 2001 and June 30, 2000 and as of June 30, 2001 and June 30, 2000 have been derived from the unaudited consolidated financial statements of MasterCard International, which in the opinion of management include all adjustments, consisting only of normal recurring adjustments, that are necessary for a fair statement of the results of operations and financial position of MasterCard International for the periods and at the dates presented. The results of operations for the six months ended June 30, 2001 are not necessarily indicative of the results to be expected for the full year. The pro forma adjustments are based upon available information and certain assumptions that management believes are reasonable. The information set forth below should be read in conjunction with "MasterCard Management's Discussion and Analysis of Financial Condition and Results of Operations," the Consolidated Financial Statements of MasterCard International and the notes thereto, and other financial information, including the pro forma combined financial information, included in this proxy statement-prospectus.
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, -------------------------- -------------------------------------- 2001 2000 2000 1999 1998 ----------- ----------- ---------- ---------- ---------- (IN THOUSANDS EXCEPT PER SHARE DATA) MASTERCARD INTERNATIONAL INCOME STATEMENT DATA: Revenue.................... $ 855,622 $ 744,913 $1,571,215 $1,389,155 $1,205,968 Operating Income........... 154,991 155,188 172,472 115,053 18,254 Net Income................. 99,147 95,065 118,149 86,255 24,183 BALANCE SHEET DATA: Total Assets............... $1,235,835 $1,111,484 $1,181,787 $ 972,477 $ 871,643 Long-Term Debt............. 82,517 82,904 82,992 82,682 82,419 Members' Equity............ 563,716 436,866 462,408 341,520 257,248 MASTERCARD INCORPORATED PRO FORMA DATA: Earnings per share, basic and diluted............. $ 1.00 N/A $ 1.16 N/A N/A Book value per share....... 7.84 N/A 6.83 N/A N/A
15 EUROPAY SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA The summary historical consolidated financial data set forth below for Europay for the year ended December 31, 2000 and as of December 31, 2000 has been derived from Europay's audited consolidated financial statements and related notes which were prepared in accordance with accounting principles generally accepted in Belgium ("Belgian GAAP"). The consolidated financial statements have been audited by PricewaterhouseCoopers Reviseurs d'Entreprises, independent accountants, as stated in their report included elsewhere in this proxy statement-prospectus and should be read in conjunction with their report. The summary historical consolidated financial data set forth below for Europay for the two years ended December 31, 1999 and 1998 and as of December 31, 1999 have been derived from Europay's unaudited consolidated financial statements and related notes which were prepared in accordance with Belgian GAAP and are included elsewhere in this proxy statement-prospectus. The summary consolidated financial information as of June 30, 2001 and 2000 and for the six months then ended has been derived from Europay's unaudited consolidated interim financial statements prepared in accordance with Belgian GAAP, which are included elsewhere in this proxy statement-prospectus. In the opinion of Europay management the unaudited consolidated interim financial statements of Europay have been prepared on the same basis as the audited consolidated financial statements included herein and include all adjustments necessary for the fair presentation of the financial position and results of operation of Europay for these periods, which adjustments are only of a normal recurring nature for the periods and the dates presented. The results of operations for the six months ended June 30, 2001 and 2000 are not necessarily indicative of results that may be expected for a full year. The financial data in the tables below has been derived from Europay's audited and unaudited consolidated financial statements in accordance with Belgian GAAP, which differs in certain significant respects from accounting principles generally accepted in the United States of America ("U.S. GAAP"). These differences have a material effect on the net income and composition of shareholders' equity and are summarized in Note 15 to the unaudited consolidated interim financial statements of Europay as of June 30, 2001 and for the six months ended June 30, 2001 and 2000, and Note 22 to the Consolidated Financial Statements of Europay as of December 31, 2000 and December 31, 1999 and for the years ended December 31, 2000, 1999 and 1998 included elsewhere in this proxy statement-prospectus. This table should be read in conjunction with the "Europay Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of Europay and the related notes included elsewhere in this proxy statement-prospectus. Since its inception, Europay has not declared or paid any dividends.
SIX MONTHS ENDED JUNE 30, ----------------------------------------------------- 2001 2001 2000 2000 ----------- ----------- ----------- ----------- (IN THOUSANDS OF EUROS EXCEPT PER SHARE DATA) BELGIAN BELGIAN US GAAP GAAP US GAAP GAAP ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) INCOME STATEMENT DATA(1): Revenue(2)................. 131,518 191,095 114,859 168,003 Operating Profit........... 497 1,511 1,399 3,119 Cumulative effect of changes in accounting principle, net of tax.... (547) -- (3,100) -- Net Income/(Loss).......... 4,902 4,644 (2,537) 710 Earnings/(Loss) per share.................... 49 -- (25) -- BALANCE SHEET DATA(1): Total Assets............... 300,392 276,432 N/A N/A Long-Term Debt............. 3,217 -- N/A N/A Shareholders' Equity....... 52,253 46,557 N/A N/A YEAR ENDED DECEMBER 31, --------------------------------------------------------------- 2000 2000 1999 1999 1998 --------- --------- ----------- ----------- ----------- (IN THOUSANDS OF EUROS EXCEPT PER SHARE DATA) BELGIAN BELGIAN BELGIAN US GAAP GAAP US GAAP GAAP GAAP --------- --------- ----------- ----------- ----------- (AUDITED) (AUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) INCOME STATEMENT DATA(1): Revenue(2)................. 260,093 364,806 215,034 298,206 245,506 Operating Profit........... 16,241 18,223 8,249 7,321 5,038 Cumulative effect of changes in accounting principle, net of tax.... (3,100) -- -- -- -- Net Income/(Loss).......... 5,657 9,253 8,546 7,641 278 Earnings/(Loss) per share.................... 57 -- 85 -- -- BALANCE SHEET DATA(1): Total Assets............... 275,625 254,169 156,125 138,896 125,897 Long-Term Debt............. 3,449 -- 5,572 2,533 2,533 Shareholders' Equity....... 44,930 41,857 39,258 31,986 24,345
- --------------- (1) Prior year balances have been translated from Belgian francs into euros using the fixed exchange rate on January 1, 1999 of BEF 40.3399 per euro. 16 (2) Europay acts as an agent on behalf of MasterCard for the billing and collection of inter-regional transactions with members. Europay does not bear risk and rewards of ownership related to these transactions and therefore, revenue is reported net under U.S. GAAP. See Note 15 to the unaudited consolidated interim financial statements of Europay as of June 30, 2001 and for the six months ended June 30, 2001 and 2000, and Note 22 to Consolidated Financial Statements of Europay as of December 31, 2000 and December 31, 1999 and for the years ended December 31, 2000, 1999 and 1998 included elsewhere in this proxy statement-prospectus. 17 RISK FACTORS You should carefully consider the following risk factors, as well as the other information contained in this proxy statement-prospectus, regarding our business, the conversion and the integration before deciding whether to vote on the conversion, if you are a MasterCard member, or execute the applicable share exchange agreement, if you are also a Europay or MEPUK shareholder. RISKS RELATED TO OUR BUSINESS GENERALLY IF WE ARE UNABLE TO MAINTAIN OUR RELATIONSHIPS WITH OUR MEMBERS, OR IF OUR MEMBERS ARE UNABLE TO MAINTAIN THEIR RELATIONSHIPS WITH CARDHOLDERS OR THE MERCHANTS WHO ACCEPT OUR CARDS FOR PAYMENT, OUR BUSINESS MAY BE ADVERSELY AFFECTED. We are and will continue to be significantly dependent on a number of third party relationships, principally our relationships with our issuing and acquiring members and their further relationships with cardholders and merchants, to support our programs and services. Most of our relationships with our members are not exclusive and may be terminated at the convenience of our members. We cannot assure you that our members will not reassess their commitments to us at any time in the future or that they will not develop their own competitive services. In particular, the payments industry is currently undergoing significant consolidations and the merger of one or more of our members with financial institutions aligned with our competitors could have a material adverse impact on our business and prospects. Our business strategy calls for us to increase our share by, among other things, entering into customized agreements with members around the globe. Like our other member relationships, these agreements are terminable by our members in a variety of circumstances that, based on today's dynamic business environment, could be triggered should a number of eventualities occur. In particular, we may be required to permit issuers with which we have entered into member business agreements to terminate those agreements without penalty as a result of the current antitrust litigation being brought against us by the United States Department of Justice, which is described in a separate risk factor below. Accordingly, we cannot assure you that the customized agreements contemplated by our business strategy will reduce the risk inherent in our business that members may terminate their relationships with us in favor of our competitors, or for other reasons. We may not be able to maintain or form new relationships with card issuers, card acquirers, technology providers, transaction processors, merchants or others who provide products and services that are important to our success. Accordingly, we cannot assure you that our existing or prospective relationships will result in sustained business relationships or the generation of significant revenues. We do not issue cards, set fees or determine the interest rates (if applicable) charged to cardholders carrying MasterCard-branded cards. Each MasterCard issuing member is responsible for determining these and most other competitive card features. In addition, we do not solicit merchants or establish the discount rate that merchants are charged for card acceptance, which are responsibilities of our acquiring members. As a result, much of our business depends on the continued success and competitiveness of our members. In turn, our members' success is dependent upon a variety of factors over which we have little or no influence. In addition, if our members become financially unstable, we may lose the revenue that we generate by charging them operations fees and assessments. We rely on the continuing expansion of merchant acceptance of our brands of cards. Although it is our business strategy to invest in strengthening our brands and aggressively expanding our acceptance network, there can be no guarantee that our efforts in these areas will continue to be successful. If the rate of merchant acceptance growth slows or reverses itself, our business could suffer. A DOWNTURN IN GENERAL ECONOMIC CONDITIONS, PARTICULARLY IN LIGHT OF THE EVENTS OF SEPTEMBER 11, MAY ADVERSELY AFFECT OUR REVENUES SIGNIFICANTLY. The payment card industry is heavily dependent upon the overall level of consumer spending. Any substantial deterioration in general economic conditions, particularly in the United States, or increases in 18 interest rates in key countries in which we operate, may adversely affect our financial performance. In the short term, the slowdown in the U.S. economy reported in the second half of 2001, together with the events of September 11, are likely to reduce the rates at which our transaction volumes and revenues will grow compared to recent years. OUR OPERATING RESULTS MAY SUFFER BECAUSE OF SUBSTANTIAL AND INCREASINGLY INTENSE COMPETITION WORLDWIDE IN THE GLOBAL PAYMENTS INDUSTRY. The global payments industry is highly competitive. We compete with all forms of payment including cash, checks and electronic forms of payment. Among general purpose payment cards, we encounter constant and intense competition from systems such as Visa and its related brands (including Plus, Electron and Interlink), American Express, and JCB. In specific countries, we face significant competition from other competitors such as Discover/Novus, Interac, Bancard and EFTPOS. We also encounter competition from businesses such as retail stores and petroleum (gasoline) companies that issue their own private-label cards, as well as from regional Automated Teller Machine ("ATM") networks such as NYCE, Concord/EFS and others. We also compete against new entrants that have developed alternative payment systems that can reduce the dollar value charged on our cards or the number of transactions for which our cards are used. Some of our competitors have, or may develop, substantially greater financial and other resources than we have, may offer a wider range of programs and services than we offer or may use more effective advertising and marketing strategies to achieve broader brand recognition or merchant acceptance than we have. Within the global general purpose card industry, we believe that Visa has approximately twice our purchase volume. In addition, American Express, Discover/Novus and others control proprietary end-to-end payments systems in which they extend credit and charge privileges to consumers and businesses and establish relationships directly with merchants (in our case, both of these functions are the responsibility of our members). These end-to-end systems provide our competitors with certain competitive advantages that we do not enjoy. We may not continue to be able to compete effectively against these threats, and, as a result, our revenues or income may decline. One or more of our members could also seek to merge with, or acquire, one of our competitors, and any such transaction could have a material adverse impact on our business and prospects. In addition, our business and revenues could be adversely impacted by any tendency among U.S. consumers or financial institutions to migrate from off-line, signature based debit transactions to on-line, PIN-based transactions, because the latter types of transactions are more likely to be processed by regional ATM networks as opposed to ourselves. IF WE ARE NOT ABLE TO KEEP UP WITH THE RAPID TECHNOLOGICAL DEVELOPMENTS IN OUR INDUSTRY TO PROVIDE MEMBERS, MERCHANTS AND CARDHOLDERS WITH NEW AND INNOVATIVE PAYMENT PROGRAMS AND SERVICES, THE USE OF MASTERCARD-BRANDED CARDS COULD DECLINE, WHICH WOULD REDUCE OUR REVENUES AND INCOME. The payment card industry is subject to rapid and significant technological changes, such as continuing developments of alternative technologies in the areas of smart cards, electronic commerce and mobile commerce, among others. We cannot predict the effect of technological changes on our business. We rely in part on third parties, including some of our competitors and potential competitors, for the development of and access to new technologies. We expect that new services and technologies applicable to the payments industry will continue to emerge, and these new services and technologies may be superior to or render obsolete the technologies we currently use in our card programs and services. Our future success will depend, in part, on our ability to adapt to, or develop, technological changes and evolving industry standards and to provide end to end payment solutions for our members. We may be unable to obtain access to new technologies on acceptable terms or at all, and this may cause us to be unable to offer card programs and services competitively. In many circumstances we believe that the payment card industry should create, and we are working to forge, industry standards to allow for the compatibility of various card programs and technologies. The industry, however, may not set standards on a timely basis or at all, or we may develop a program or technology that is not adapted as an industry standard. These risks could have a material adverse effect on our revenues and income. 19 IF OUR TRANSACTION PROCESSING SYSTEMS ARE DISRUPTED OR WE ARE UNABLE TO PROCESS TRANSACTIONS EFFECTIVELY OR EFFICIENTLY OR AT ALL, OUR REVENUES OR INCOME WOULD BE MATERIALLY REDUCED. Our transaction authorization, clearing and settlement systems may experience service interruptions as a result of fire, natural disasters, power loss, disruptions in long distance or local telecommunications access, or the accidental or intentional actions of others. Nearly all of our transaction processing systems are operated out of a single facility, supported by a separate back-up facility. A natural disaster or other problem at our primary and/or back-up facilities or our other owned or leased facilities could interrupt our services. Additionally, we rely on third party service providers, such as AT&T, for the timely transmission of information across our global data transportation network. If a service provider fails to provide the communications capacity or services we require, as a result of natural disaster, operational disruption or any other reason, the failure could interrupt our services and adversely affect our revenues and income. A BREACH OF OUR SYSTEMS' SECURITY COULD ADVERSELY IMPACT OUR BUSINESS. Our security protection measures, including the security of transaction information processed on our systems, may not be sufficient to prevent a disruption of our computer systems as a result of fraud or for other reasons. Unauthorized use of our network could potentially jeopardize the security of confidential information stored in our computer systems or transmitted by our members. These factors may result in liabilities for us or our members, and could reduce our revenues and income. IN EVERY MASTERCARD CARD TRANSACTION, THERE IS A RISK THAT THE ISSUING OR ACQUIRING MEMBER WILL DEFAULT IN ITS PAYMENT OBLIGATIONS. BECAUSE WE GUARANTEE THE SETTLEMENT OBLIGATIONS OF OUR PRINCIPAL MEMBERS, ONE OR MORE DEFAULTS COULD EXPOSE US TO SIGNIFICANT LOSSES. As a secondary obligor for certain card obligations among principal members, we are exposed to settlement risk from our members. Settlement exposure materializes when an issuer or acquirer fails to fund daily settlement obligations due to technical reasons, liquidity shortfall or other reasons. For any member, our settlement exposure is comprised of the estimated dollar value of issuing and chargeback transactions that we would need to fund in order to satisfy the member's MasterCard related obligations to other members. If a principal member is unable to fulfill its settlement obligations to other members, we may bear the loss, even if we do not otherwise process the transaction. In addition, although we are not contractually obligated to do so, we may elect to pay merchants for transactions in the event that an acquiring member defaults on its obligations to the merchants, in order to maintain the integrity and guaranteed acceptance of our brands. Accordingly, one or more member defaults could expose us to significant losses and reduce our revenues and income. See "Business of MasterCard International -- Payment Services -- Transaction Processing -- Member Risk Management." COMPETITION FOR HIGHLY SKILLED PERSONNEL IS INTENSE AND THE SUCCESS OF OUR BUSINESS DEPENDS ON OUR ABILITY TO ATTRACT, RETAIN AND MOTIVATE KEY PERSONNEL. Our future success depends on our continuing ability to attract, retain and motivate highly skilled employees in a competitive labor market. In the past, our inability to provide stock-based compensation has complicated our efforts to attract and retain highly qualified employees, and we may not be successful in doing so in the future. If we do not succeed in attracting sufficient new personnel or retaining and motivating our current personnel, our ability to provide our programs and services in a competitive manner could diminish, which could have a material adverse effect on our business. MASTERCARD CANNOT PREDICT THE OUTCOME OR IMPACT OF ANTITRUST CLAIMS BY THE U.S. DEPARTMENT OF JUSTICE. In October 1998, the United States Department of Justice (the "DOJ") filed suit against MasterCard International, Visa U.S.A., Inc. and Visa International Corp. in the U.S. District Court for the Southern District of New York alleging that both MasterCard's and Visa's governance structure and policies violated U.S. federal antitrust laws. First, the DOJ claimed that "dual governance" -- the situation where a financial institution has a representative on the board of directors of MasterCard or Visa while a portion of its card 20 portfolio is issued under the brand of the other association -- was anti-competitive and acted to limit innovation within the payment card industry. At the same time, the DOJ conceded that "dual issuance" -- a term describing the structure of the bank card industry in the United States in which a single financial institution can issue both MasterCard and Visa-branded cards -- was pro-competitive. Second, the DOJ challenged MasterCard's Competitive Programs Policy ("CPP") and a Visa bylaw provision that prohibit financial institutions participating in the respective associations from issuing competing proprietary payment cards (such as American Express or Discover). The DOJ alleged that MasterCard's CPP and Visa's bylaw provision acted to restrain competition. A bench trial concerning the DOJ's allegations was concluded on August 22, 2000. On October 9, 2001, the district court judge issued an opinion upholding the legality and pro-competitive nature of dual governance. In so doing, the judge specifically found that MasterCard and Visa have competed vigorously over the years, that prices to consumers have dropped dramatically, and that MasterCard has fostered rapid innovations in systems, product offerings and services. However, the judge also held that MasterCard's CPP and the Visa bylaw constitute unlawful restraints of trade under the federal antitrust laws. The judge found that the CPP and Visa bylaw weakened competition and harmed consumers by preventing competing proprietary payment card networks such as American Express and Discover from entering into agreements with banks to issue cards on their networks. In reaching this decision, the judge found that two distinct markets -- a credit and charge card issuing market and a network services market -- existed in the United States, and that both MasterCard and Visa had market power in the network market. MasterCard strongly disputes these findings and believes that the DOJ failed, among other things, to demonstrate that U.S. consumers have been harmed by the CPP. The judge issued a proposed judgment that orders MasterCard to repeal the CPP and enjoins MasterCard from enacting or enforcing any bylaw, rule, policy or practice that prohibits its issuers from issuing general purpose or debit cards in the United States on any other general purpose card network. The judge also concluded that during the period in which the CPP was in effect, MasterCard was able to "lock up" certain members by entering into long-term agreements with them pursuant to which the members committed to maintain a certain percentage of their general purpose card volume, new card issuance or total number of cards in force in the United States on MasterCard's network. Accordingly, the proposed judgment provides that upon the resolution of any appeals, there would be a two-year period during which MasterCard would be required to permit any issuer with which it has entered into such an agreement to terminate that agreement without penalty. MasterCard would be free to apply to the district court to recover funds paid but not yet earned under any terminated agreement. The judge's proposed judgment imposes parallel requirements on Visa. The judge explicitly provided that MasterCard and Visa would be free to enter into new partnership or member business agreements in the future. The parties submitted comments to the judge's proposed judgment on October 17, 2001. On October 29, 2001, the parties submitted reply comments to the proposed judgment. MasterCard is currently awaiting the entry of a final judgment. MasterCard believes that it has a strong legal basis to challenge the judge's ruling with respect to the CPP, and presently intends to appeal the decision on that count. If the judge declines to modify the proposed judgment in the manner MasterCard has requested, MasterCard also intends to seek a motion staying the final judgment pending the outcome of the appeal, as the judgment would otherwise become effective ninety days after it is entered by the district court. The DOJ is also free to appeal the judge's ruling with respect to dual governance. MasterCard cannot predict the impact that the ultimate resolution of the DOJ litigation will have on our results of operations, financial position or cash flows, although an adverse result of the appeal could have a material adverse effect on our business, prospects and financial condition. If the repeal of the CPP is upheld on appeal, American Express, Discover and potentially other networks are expected to seek to enter into issuing relationships with our members, which may have an adverse impact on our competitive position. In particular, we are concerned that the repeal of the CPP will allow American Express to "cherry pick" select MasterCard members and funnel high-value transactions through American Express' proprietary network, negatively affecting our ability to support thousands of members that are not targeted by American Express, including 21 many smaller community banks. If the judge's order to permit members to terminate their MasterCard member business agreements is upheld on appeal, our strategy of entering into customized agreements with members to increase our share may be negatively impacted. If one or more members actually terminates its member business agreement, we may lose share or not be able to grow share as aggressively as anticipated, which would adversely impact our financial and competitive position. Finally, if the district court's judgment on dual governance is appealed by the DOJ and dual governance is ultimately eliminated, it is possible that some of our largest members may withdraw from MasterCard governance. Any withdrawal of this nature could have an adverse impact on our business and prospects. See "Business of MasterCard International -- Legal Proceedings -- Department of Justice Antitrust Litigation." MASTERCARD CANNOT PREDICT THE OUTCOME OR IMPACT OF A PUTATIVE CLASS ACTION LAWSUIT BY U.S. MERCHANTS AGAINST MASTERCARD. Commencing in October 1996, several putative class action suits were brought by a number of U.S. merchants -- including Wal-Mart Stores, Inc., Sears Roebuck & Co., Inc., The Limited Inc. and Safeway, Inc. -- against MasterCard International and Visa U.S.A., Inc. challenging certain aspects of the payment card industry under U.S. federal antitrust law. Those suits where later consolidated in the U.S. District Court for the Eastern District of New York. The plaintiffs challenge MasterCard's "Honor All Cards" rule (and a similar Visa rule), which ensures universal acceptance for consumers by requiring merchants who accept MasterCard cards to accept for payment every validly presented MasterCard card. Plaintiffs claim that MasterCard and Visa unlawfully have tied acceptance of debit cards to acceptance of credit cards. In essence, the merchants desire the ability to reject off-line, signature-based debit transactions (for example, MasterCard card transactions) in favor of other payment forms, including on-line, PIN-based debit transactions (for example, Maestro or regional ATM network transactions) which generally impose lower transaction costs for merchants. The plaintiffs also claim that MasterCard and Visa have conspired to monopolize what they characterize as the point-of-sale debit card market, thereby suppressing the growth of regional networks such as ATM payment systems. Plaintiffs allege that the plaintiff class has been forced to pay unlawfully high prices for debit and credit card transactions as a result of the alleged tying arrangement and monopolization practices. There are related consumer class actions pending in two state courts that have been stayed pending developments in this matter. On February 22, 2000, the district court granted the plaintiffs' motion for class certification. MasterCard and Visa subsequently appealed the decision to the Second Circuit Court of Appeals. On October 17, 2001, a three-judge panel affirmed the lower court decision by a two-to-one majority. On October 31, 2001, MasterCard and Visa petitioned the Second Circuit for a rehearing by the panel, or, in the alternative, by the full court. Motions seeking summary judgment have been filed by both sides and fully briefed in the district court. As of the date of this proxy statement-prospectus, no argument date for summary judgment and no trial date has been set. Based upon publicly available information, the plaintiffs previously have asserted damage claims in this litigation of approximately $8 billion, before any trebling under U.S. federal antitrust law. More recent public estimates (including estimates set forth in the opinion of the Second Circuit panel) place the plaintiffs' estimated damage claims at approximately $50 billion to $100 billion, depending on the source. In addition, the plaintiffs' damage claims could be materially higher than these amounts as a result of the passage of time and substantive changes in the theory of damages presented by the plaintiffs. MasterCard believes that it is not currently possible to estimate the impact, if any, that the ultimate resolution of this matter will have on MasterCard's results of operations, financial position or cash flows. However, an adverse result could have a material adverse effect on our business, prospects and financial condition. See "Business of MasterCard International -- Legal Proceedings -- Merchant Antitrust Litigation." 22 BECAUSE WE HAVE SIGNIFICANT INTERNATIONAL OPERATIONS, WE FACE ADDITIONAL RISKS RELATED TO GLOBAL POLITICAL AND ECONOMIC CONDITIONS. We operate in and intend to expand our business further in countries throughout the world, including through our integration with Europay. We cannot be sure that we will be able to broaden our global operations in a cost-effective manner or compete effectively in all of our targeted countries. There are risks inherent in conducting business internationally, any of which could adversely affect our operations, including: - unexpected changes in regulatory requirements; - challenges in staffing and managing foreign operations; - reliance on foreign third party service providers; - differing technology standards; - employment laws and practices in foreign countries; - weaker intellectual property protections in certain countries; - political, social and economic instability; - foreign exchange restrictions and price controls; - costs of services tailored to specific markets; and - potentially adverse tax consequences. If these risks materialize, they could have a material adverse effect on our business. We cannot assure you that we will continue to develop and implement effective policies and strategies in each location where we do business. ADVERSE CURRENCY FLUCTUATIONS AND FOREIGN EXCHANGE CONTROLS COULD DECREASE REVENUES WE RECEIVE FROM OUR INTERNATIONAL OPERATIONS. During 2000, approximately 33% of our revenues were generated from activities outside the United States. The U.S. dollar is the functional currency of MasterCard's business. Some of the revenues we generate outside the United States are therefore subject to unpredictable and indeterminate fluctuations if the values of international currencies change relative to the U.S. dollar. Resulting exchange gains and losses are included in our net income. Our risk management activities provide protection with respect to adverse changes in the value of only a limited number of currencies. Furthermore, we may become subject to exchange control regulations that might restrict or prohibit the conversion of our revenue currencies into U.S. dollars. The occurrence of any of these factors could have a material adverse effect on our business. RISKS RELATED TO EUROPAY IF EUROPAY'S MEMBERS ARE UNABLE TO COMPLETE THE TIMELY MIGRATION OF THEIR ATM NETWORKS TO ACCOMMODATE THE INTRODUCTION OF EURO NOTES AND COINS, OR IF MERCHANTS ARE UNABLE TO COMPLETE THE TIMELY MIGRATION OF THEIR POINT-OF-SALE TERMINALS TO ACCOMMODATE EURO-BASED TRANSACTIONS, TRANSACTION VOLUMES MAY DECREASE AND EUROPAY'S REVENUES MAY DECLINE. As part of Europe's migration to a single currency, euro notes and coins will be introduced in twelve European countries on January 1, 2002. We cannot assure you that Europay's members will successfully migrate their ATM networks, or that merchants will successfully migrate their point-of-sale terminals, to accommodate the introduction of the euro. If Europay members are unable to accommodate demand for euro notes and coins at their ATMs, or if merchants are unable to accommodate euro-based transactions at their point-of-sale terminals, during the transition period following January 1, 2002, transaction volumes may decrease and Europay's revenues may decline. 23 EUROPAY'S BUSINESS MAY BE ADVERSELY IMPACTED IF THE MULTILATERAL INTERCHANGE FEES OR MULTILATERAL SERVICE FEES APPLIED BY ITS MEMBERS ARE REQUIRED TO BE CHANGED IN RESPONSE TO CHALLENGES BY THE COMPETITION AUTHORITIES OF THE EUROPEAN UNION AND THE UNITED KINGDOM. In September 2000, the European Commission issued a "Statement of Objections" challenging Visa International's multilateral interchange fee ("MIF") under European Community competition rules. The MIF is a fee that is paid by the merchant bank, or the "acquirer", to the cardholder bank, or the "issuer", when a payment is made to a merchant using a payment card. The amount of the MIF is set by the payment card system as a default fee that will only apply where the issuer and the acquirer cannot agree on a bilateral interchange fee. Interchange fees represent a sharing of payment system costs. Among other elements, interchange fees cover the processing costs of payment card transactions as well as the costs of the payment guarantee delivered by the issuer. Although Europay is not an addressee of the Statement of Objections, its rules also contain a MIF scheme. The European Commission announced on August 10, 2001 its intention to take a favorable view of Visa's MIF in light of certain changes proposed by Visa, most notably a reduction in the level of fees. On August 11, 2001, the European Commission published a notice containing the details of these changes and invited interested third parties to submit their views to the European Commission, after which it will issue a formal decision. Assuming the European Commission does not change its position, the decision would exempt Visa's modified MIF. The European Commission's decision in the Visa case would be addressed only to Visa and would not cover Europay's MIF. Europay has submitted comments to the European Commission challenging the proposed changes to Visa's MIF contained in its notice, and is currently involved in separate discussions with the European Commission in order to determine under what conditions it would grant a formal exemption or comfort letter for Europay's MIF. In connection with a separate inquiry, the Office of Fair Trading of the United Kingdom ("OFT") issued on September 25, 2001 a press release proposing a decision that the agreement among Europay members in the U.K. on the level of certain fees, including the MIF, infringes U.K. competition law and does not qualify for an exemption. The OFT considers that the agreements regarding the MIF and the multilateral service fee ("MSF"), the fee paid by issuing banks to acquiring banks when a customer uses a MasterCard branded card either at an ATM or over the counter to obtain a cash advance, are anti-competitive and increase retail costs and consumer prices. Both Europay and MEPUK, which manages rules governing fees for Europay and MasterCard transactions in the U.K., intend to make oral and written representations to the OFT in response to its proposed decision on behalf of MasterCard and Europay members in the U.K. and will seek to demonstrate that these fees constitute necessary and efficient mechanisms for allocating the costs of a multi-party card payment system between issuers and acquirers. Because the MIF and MSF constitute essential elements of Europay's payment scheme, changes to them could significantly impact Europay's members. At this time, it is not possible to determine what actions these competition authorities will take with respect to the MIF and MSF, and therefore the financial impact that any changes would have on Europay and its members cannot be estimated. See "Business of Europay International -- Legal Proceedings -- Multilateral Interchange Fee." EUROPAY'S TAX RETURNS FOR 1997 AND 1998 ARE CURRENTLY BEING INVESTIGATED BY THE BELGIAN TAX AUTHORITIES, WHICH MAY RESULT IN SIGNIFICANT ADDITIONAL TAX LIABILITIES AND PENALTIES. In April 1999, the Belgian tax authorities initiated an investigation of Europay's tax returns for 1997 and 1998. In June 2001, Europay received a notice from the Belgian tax authorities challenging Europay's deduction of certain card-based incentive program costs, which could result in an additional tax liability of up to approximately E16.3 million, including possible penalties and interest accrued to December 31, 2000. If Europay's deduction of such costs in 1999 and 2000 is similarly challenged, this could result in a further additional tax liability of up to approximately E9.5 million, including possible penalties. Although Europay believes that it has reasonable and meritorious arguments in favor of its characterization of these deductions 24 and has submitted a vigorous response to the notice, Europay cannot predict the outcome of this matter or any additional matters raised by the Belgian tax authorities in their investigation. RISKS RELATED TO THE CONVERSION THERE IS NO EXISTING MARKET FOR OUR COMMON STOCK AND WE DO NOT KNOW IF ONE WILL DEVELOP TO PROVIDE YOU WITH ADEQUATE LIQUIDITY. There is currently no existing market for our class A or class B common stock, and we do not anticipate that our class A or class B common stock will be listed on any securities exchange or quoted on any automated quotation systems or electronic communications network. In addition, due to the significant restrictions on transfer to which our common stock will be subject, we anticipate that only a limited trading market for our common stock will exist following the three year transition period. The lack of a liquid market for our common stock could adversely affect its price. For example, the price of our common stock as determined by our board of directors could be different from the price that might otherwise exist in a more liquid trading market. THE COMMON STOCK WILL BE SUBJECT TO SIGNIFICANT RESTRICTIONS ON TRANSFER AND OWNERSHIP, AND MAY BE SUBJECT TO REDEMPTION IN SOME CIRCUMSTANCES. The shares of class A and class B common stock that will be issued in connection with the conversion and integration are subject to significant ownership and transfer restrictions. Following the conversion and integration, only holders of class A membership interests in MasterCard International may own or purchase shares of class A and class B common stock of MasterCard Incorporated. No stockholder, together with its affiliates, may own more than 15% of MasterCard Incorporated's outstanding voting stock. In addition, you will not be permitted to transfer any of your shares for a period of three years after the conversion and integration unless you sell all or substantially all of your MasterCard card portfolio. If your status as a principal member terminates for any reason within three years of the conversion and integration, MasterCard Incorporated will redeem your shares for their par value of $0.01 per share. If your principal membership terminates more than three years after the conversion, MasterCard Incorporated will have the right to redeem your shares for their book value based on MasterCard Incorporated's financial statements most recently filed with the Securities and Exchange Commission. If MasterCard Incorporated does not redeem your shares, you will be required to offer the unpurchased shares to other stockholders in accordance with procedures to be established by the board of directors. STOCKHOLDERS MAY BE REQUIRED TO PURCHASE OR SELL SHARES OF MASTERCARD INCORPORATED IN ORDER TO SATISFY CERTAIN REQUIREMENTS. 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. THE VOTING POWER REPRESENTED BY YOUR SHARES OF MASTERCARD INCORPORATED COMMON STOCK MAY BE LIMITED BECAUSE OWNERSHIP OF A SIGNIFICANT PERCENTAGE OF OUR COMMON STOCK WILL BE CONCENTRATED IN A FEW OF OUR LARGEST STOCKHOLDERS. Upon completion of the conversion and integration with Europay, we expect that five of our member-stockholders will own over 5% of our outstanding common stock. Although our certificate of incorporation and bylaws contain ownership and voting restrictions and require a supermajority vote on a number of matters voted upon by stockholders or directors, our largest member-stockholders will continue to have a significant influence over our business. 25 EACH STOCKHOLDER, TOGETHER WITH ITS AFFILIATES, WILL BE SUBJECT TO A 7% VOTING CAP IN THE ELECTION OF DIRECTORS REGARDLESS OF THE NUMBER OF SHARES OWNED. Regardless of the number of shares owned by a stockholder, in any vote for the election of directors, no stockholder, together with its affiliates, will be entitled to vote more than 7% of the shares that are entitled to be voted in that election. As a result, stockholders owning more than 7% of MasterCard Incorporated's outstanding shares will have disproportionately less influence in electing directors. MOST OF OUR DIRECTORS ARE AFFILIATED WITH OUR MEMBERS AND, THEREFORE, MAY HAVE INTERESTS DIFFERENT FROM THOSE OF MASTERCARD OR OTHER MEMBERS. Other than Mr. Selander, our President and Chief Executive Officer, each of our voting directors is affiliated with one of our members. Those directors who are affiliated with our members will have fiduciary duties to MasterCard and its stockholders, but will also have obligations to the companies with which they are affiliated. This may result in a greater likelihood of directors having an interest in matters under consideration and may make decision-making more difficult. OUR ORGANIZATIONAL DOCUMENTS AND APPLICABLE LAW CONTAIN PROVISIONS THAT MAY MAKE A CHANGE OF CONTROL MORE DIFFICULT. There are a number of provisions, including the limitations on stock transfer, the 15% cap on ownership of MasterCard Incorporated voting stock by any single stockholder together with its affiliates, supermajority voting requirements and limitations on the ability of stockholders to call a special meeting in our certificate of incorporation and bylaws that may prevent or discourage takeovers or business combinations that our stockholders might otherwise consider to be in their best interests. THE BOARD OF DIRECTORS OF MASTERCARD INCORPORATED WILL BE REQUIRED TO ACT ON BEHALF OF THE STOCKHOLDERS OF MASTERCARD INCORPORATED. The board of directors of MasterCard Incorporated will be required under Delaware law to make decisions and take actions designed to maximize profits and stockholder value. Initially, the members of MasterCard International and the stockholders of MasterCard Incorporated will be the same. It is possible that, in the future, shares of common stock could be issued to persons who are not members of MasterCard International. If that were to happen, then the stockholder and member groups would diverge and the board of MasterCard Incorporated would be required by its fiduciary duties to act in the best interest of the stockholders. These interests may not always be consistent with the interests of members of MasterCard International. THE INTERNAL REVENUE SERVICE MAY TREAT A PORTION OF THE MASTERCARD INCORPORATED SHARES RECEIVED BY A PRINCIPAL MEMBER OF MASTERCARD INTERNATIONAL OR A SHAREHOLDER OF EUROPAY OR MEPUK AS TAXABLE INCOME. The conversion and integration should be treated as a single, integrated series of transactions for U.S. federal income tax purposes. We, our principal members and the Europay and MEPUK shareholders should not recognize any gain or loss for U.S. federal income tax purposes to the extent that our principal members and the shareholders of Europay and MEPUK are treated for U.S. federal income tax purposes as having received shares of MasterCard Incorporated stock in exchange for property, except that our principal members and the shareholders of Europay and MEPUK may recognize imputed interest income upon the receipt of additional MasterCard Incorporated stock at the end of the three year transition period or thereafter pursuant to the integration agreement. To the extent, however, that the percentage interest in MasterCard Incorporated ultimately allocated to a principal member of MasterCard International or to a shareholder of Europay or MEPUK exceeds the percentage interest of the member or shareholder immediately after the closing of the conversion and the integration (in each case, without taking into account any allocation of MasterCard Incorporated shares based on the new global proxy formula), the IRS may decline to treat the excess as having been received in exchange for property. In that event, a principal member of MasterCard International or a shareholder of Europay or MEPUK could be required to recognize income to the extent of the excess. 26 We have requested that the Internal Revenue Service issue a ruling on key aspects of the conversion and integration, and we expect to receive a response during the first quarter of 2002. Receipt of the ruling is not a condition to the closing of the conversion and the integration. An IRS ruling is generally binding on the IRS, but may, under certain circumstances, be revoked or retroactively modified. Principal members and Europay and MEPUK shareholders should consult their own tax advisors regarding the U.S. federal, as well as any state, local or non-U.S., tax consequences to them of the conversion and integration. For more information, see "Federal Income Tax Consequences of the Conversion and the Integration." MEMBERS AND SHAREHOLDERS MAY INCUR TAX LIABILITIES IN JURISDICTIONS OUTSIDE THE UNITED STATES IN CONNECTION WITH THE CONVERSION AND INTEGRATION. Principal members and Europay and MEPUK shareholders may be required to recognize gain or loss in connection with the conversion and integration in jurisdictions outside the United States. Members and shareholders should consult their local tax advisors regarding the potential non-U.S. tax consequences of the conversion and integration. THE CONVERSION MAY IN THE FUTURE FACILITATE STRATEGIC TRANSACTIONS WHICH MAY REDUCE THE INFLUENCE OF MEMBERS. As a result of the conversion, MasterCard Incorporated will be better positioned to engage in future capital raising activities and strategic transactions such as mergers and acquisitions. Transactions of this type would likely involve issuing or selling equity interests in MasterCard Incorporated to non-members. While the bylaws of MasterCard Incorporated provide that class A and class B common stock may be held only by class A members of MasterCard International, the certificate of incorporation of MasterCard Incorporated also provides that class C common stock may be issued to non-members, provided that the approval of two-thirds or 75% of the board of directors is obtained, depending on the circumstances. If these approvals are granted, MasterCard Incorporated may issue voting shares of class C common stock to persons who are not members of MasterCard International. In this case, the influence of members over the affairs of MasterCard Incorporated would be reduced. U.S. BANKING REGULATIONS MAY IMPACT OUR PRINCIPAL MEMBERS' OWNERSHIP OF THE COMMON STOCK OF MASTERCARD INCORPORATED. Banking regulations in the United States govern, among other things, the types of equity investments that regulated institutions are permitted to make. MasterCard believes that principal members which are regulated as banking organizations by the federal government, including bank holding companies, financial holding companies, savings and loan holding companies ("SLHCs"), grandfathered "unitary" SLHCs, national banks and federal savings associations, should be permitted to hold the common stock of MasterCard Incorporated following the conversion. However, principal members that are regulated as banking organizations by the federal government should consult their own advisors regarding any notice or application that is required to be made, or any consent that is required to be obtained, from any applicable federal regulatory agency regarding the shares received in the conversion. In addition, principal members that are federal savings associations should consult their own advisors regarding the application to the shares received in the conversion of certain Office of Thrift Supervision rules that limit "pass through investments" to a percentage of an institution's total capital. MasterCard believes that there are no federal laws or regulations that would prohibit principal members which are regulated as banking organizations by the states - including state-chartered banks, state savings associations and state-chartered credit unions - from holding the common stock of MasterCard Incorporated following the conversion. While most states permit state-chartered banks and state savings associations to make the same equity investments as federally regulated institutions, MasterCard has not independently investigated the effect of state banking laws or regulations on the issuance of the common stock of MasterCard Incorporated in the conversion. Principal members that are state-chartered banks, state savings associations 27 and state-chartered credit unions should consult their own advisors regarding the consequences of the conversion under applicable laws and regulations. RISKS RELATED TO THE INTEGRATION MASTERCARD MAY FAIL TO COMPLETE THE CONVERSION AND INTEGRATION WITH EUROPAY OR, IF THE CONVERSION AND INTEGRATION ARE COMPLETED, MAY FAIL TO REALIZE THE ANTICIPATED BENEFITS OF THE CONVERSION AND INTEGRATION WITH EUROPAY. Contemporaneous with the completion of the conversion, we expect to acquire all of the outstanding Europay capital stock that we do not currently own in a transaction that we refer to in this proxy statement-prospectus as the integration. The completion of the acquisition of Europay by MasterCard is conditioned upon the satisfaction of several conditions contained in the integration agreement, including that each Europay shareholder other than MasterCard International and MEPUK agrees to exchange its Europay shares for shares of MasterCard Incorporated. If any of the conditions is not satisfied or waived, we will be unable to complete the integration. Furthermore, even if we do complete the conversion and integration, our success will depend, in part, on the ability of MasterCard and Europay to coordinate and integrate our operations and business enterprises and realize the anticipated growth opportunities and synergies from combining the two companies. We cannot assure you that we will be able to integrate these businesses in an efficient and timely manner to realize the growth opportunities and synergies we currently expect. THE INTEGRATION MAY BE SUBJECT TO ADVERSE REGULATORY CONDITIONS. Before the integration may be completed, various approvals must be obtained from, or notifications submitted to, competition, antitrust and other regulatory authorities. The governmental entities from which approvals are required may impose conditions on the completion of the integration or require changes to the terms of the integration. These conditions or changes could have the effect of delaying or preventing completion of the integration or imposing additional costs on or limiting the revenues of MasterCard Incorporated, any of which may have a material adverse effect on our business and prospects following the integration. THE SUPERMAJORITY VOTING PROVISIONS RESULTING FROM THE INTEGRATION MAY MAKE THE GOVERNANCE OF MASTERCARD INCORPORATED MORE COMPLICATED. As a result of the integration, a variety of supermajority voting requirements with respect to actions to be taken by directors and shareholders will be incorporated into the certificate of incorporation and bylaws of MasterCard Incorporated and MasterCard International. See "The Integration -- The Integration Agreement -- Supermajority Voting Provisions" and "Comparison of Rights of MasterCard International Members Before and After the Conversion and Integration -- Vote on Extraordinary Transactions/Supermajority Voting Provisions." As a result of these supermajority voting requirements, it may be more difficult for the board of directors or shareholders of MasterCard Incorporated to take action in certain circumstances, which may prevent MasterCard Incorporated from pursuing strategic opportunities that would otherwise be available. EUROPEAN MEMBER-STOCKHOLDERS WILL BE ALLOCATED AN INCREASED PERCENTAGE OF MASTERCARD INCORPORATED'S COMMON STOCK IN CONNECTION WITH THE CONVERSION AND INTEGRATION. Currently, European members of MasterCard International control approximately 7% of the total equity rights in MasterCard International. Immediately following the conversion and integration, the European members of MasterCard International will be allocated one-third of MasterCard Incorporated's common stock, even if those members would be entitled to less voting stock if calculated solely in accordance with the new global proxy. See "Share Allocation and The Global Proxy -- The Global Proxy" and "-- The Initial Allocation of Shares." In addition, at the end of the three year transition period when the shares of common stock of MasterCard Incorporated are reallocated, European members are entitled to receive at least 26% of 28 the outstanding class A and class B common stock of MasterCard Incorporated, even if in accordance with the new global proxy they would have been entitled to a smaller percentage of the outstanding common stock. Under other circumstances, European members could receive up to 44% of the outstanding common stock of MasterCard Incorporated at the end of the transition period. See "Share Allocation and the Global Proxy -- Reallocation of Shares at the Conclusion of the Transition Period." As a result of these provisions, the equity percentage of non-European members of MasterCard International in MasterCard Incorporated will be significantly diluted when compared to their current equity percentage in MasterCard International. SOME MEMBER-STOCKHOLDERS MAY BE ADVERSELY IMPACTED BY THE INTRODUCTION OF THE NEW GLOBAL PROXY FORMULA. The historic global proxy formula used by MasterCard International to allocate equity rights at annual meetings of members was 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 that will measure each member-stockholder's contribution to gross dollar volume (GDV) and gross acquiring volume (GAV) in addition to revenue. Moreover, the new global proxy formula will account for revenues and volumes earned in connection with Maestro- and Cirrus-branded cards, in addition to MasterCard cards. Accordingly, the migration to the new global proxy formula may reduce the number of shares some members are entitled to receive as compared to their historic voting entitlement, particularly if such members (1) contribute a disproportionately large amount to MasterCard revenues for a given level of transaction volume, or (2) have a disproportionately large amount of their transaction volumes associated with cards carrying the MasterCard brand. In addition, the new global proxy calculation includes a collar with respect to the U.S. dollar/euro exchange rate, and to the extent that these currencies trade significantly outside the range of the collar, members with volumes denominated in either currency could be entitled to fewer shares than the global proxy formula would otherwise require, depending on the circumstances. THE CLASS A AND CLASS B COMMON STOCK IS SUBJECT TO REALLOCATION. The integration agreement provides that, as an integral component of the conversion and integration, the class A and class B common stock is subject to reallocation at the conclusion of the three year transition period, at which time most class B common stock will automatically convert to class A common stock and be reallocated. Thereafter, the only shares of class B common stock will be those relating to ec Pictogram, which will automatically convert to class A common stock at the conclusion of an additional two year period and be reallocated. As a result of these reallocations, member-stockholders may ultimately receive more or fewer shares than their initial allocation, 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. Accordingly, in either reallocation, member-stockholders may be required to return shares previously allocated to them. MASTERCARD INTERNATIONAL RECEIVED A FAIRNESS OPINION BASED ON A CONFIDENTIAL TERM SHEET, BUT DID NOT SEEK A FAIRNESS OPINION IN CONNECTION WITH APPROVING THE DEFINITIVE AGREEMENTS FOR THE EUROPAY INTEGRATION. The fairness opinion considered by the MasterCard International board of directors in its decision to recommend the transaction to MasterCard International's members and approve the term sheet upon which the fairness opinion was based is dated January 30, 2001. The opinion spoke only as of, and was specifically addressed solely to the facts and conditions that were presented on, such date. In particular, the opinion did not take into account any circumstances subsequent to that date, including any changes in the transaction terms reflected in the binding definitive agreements. The board did not subsequently request, nor did it receive, updated advice as to the fairness of the proposed transaction from a financial point of view, including without limitation in connection with the board's approval of the definitive documentation of the transaction. 29 CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS This proxy statement-prospectus contains forward-looking statements, which may be identified by the words "believe," "expect," "anticipate," "intend," "aim," "will" and similar words. These statements are contained throughout this proxy statement-prospectus including in the sections titled "Questions and Answers About the Conversion," "Questions and Answers About the Integration," "Summary," "The Conversion," "The Integration," "Business of MasterCard International," "MasterCard Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business of Europay International" and "Europay Management's Discussion and Analysis of Financial Conditions and Results of Operations." These statements relate to our future prospects, developments and business strategies. Many factors and uncertainties relating to our operations and business environment, all of which are difficult to predict and many of which are outside of our control, influence whether any forward-looking statements can or will be achieved. Any one of those factors could cause our actual results to differ materially from those expressed or implied in writing in any forward-looking statements made by us or on our behalf. We list below the principal factors we believe are important to our business, the conversion and the integration and that could cause actual results to differ from our expectations. We caution you that although these factors are important, this list should not be considered as exhaustive or as an admission regarding the adequacy of the disclosure: - our relationships with our member financial institutions; - substantial and increasingly intense competition worldwide in the current or future global payments industry and consolidation in the payments industry; - general global economic conditions, which may be adversely affected by the events of September 11 and their aftermath; - technological developments in the global payment card industry; - potential disruptions of our transaction processing computer systems by natural disaster or otherwise; - potential breach of our systems' security; - risk of settlement default by our members; - our ability to attract, retain and motivate key personnel; - general economic conditions, especially interest rates and business cycles; - the outcome or impact of antitrust claims by the U.S. Department of Justice; - the outcome or impact of a putative antitrust class action lawsuit by U.S. merchants; - risks related to global political and economic conditions; - currency fluctuations and foreign exchange controls; - the ability of European members and merchants to accommodate the introduction of the euro; - the outcome or impact of European Commission proceedings against Visa's multilateral interchange fee; - the outcome or impact of proceedings against MEPUK's multilateral interchange and service fees by the United Kingdom's Office of Fair Trading; - the consequences of the investigation of Europay's 1997 and 1998 tax returns by the Belgian tax authorities; - lack of an existing market for our common stock, particularly given the significant restrictions on transfer and ownership to which the common stock will be subject and the requirement that ownership of common stock be maintained at a certain level; - concentration of ownership of our common stock in a few of our largest stockholders; - the 7% voting cap in the election of directors; - affiliation of most of our directors with our members; 30 - restrictions on a change of control contained in our organizational documents and applicable law; - the potential for divergence of interests between the members and stockholders; - the potential for reduced influence of members in the future; - adverse tax consequences; - the impact of U.S. banking regulations on our principal members' ownership of common stock of MasterCard Incorporated; - failure to complete the integration with Europay or failure to realize the anticipated benefits of the integration with Europay; - regulatory conditions adverse to the integration; - allocation of an increased percentage of common stock to European member-stockholders; and - the introduction of a new global proxy formula. 31 THE SPECIAL MEETING PROXY STATEMENT-PROSPECTUS This proxy statement-prospectus is being furnished to principal members of MasterCard International in connection with the solicitation of proxies by MasterCard International's board of directors in connection with the proposed plan of conversion. This proxy statement-prospectus is first being furnished to principal members of MasterCard International on or about , 2001. DATE, TIME AND PLACE OF THE SPECIAL MEETING The special meeting is scheduled to be held as follows: , 2001 9:00 a.m., local time MasterCard International Incorporated 2000 Purchase Street Purchase, New York 10577 PURPOSES OF THE SPECIAL MEETING At the MasterCard International special meeting, the principal members of MasterCard International will be asked to approve a plan of conversion that will convert MasterCard International into a non-stock corporation that is a subsidiary of a stock holding company, MasterCard Incorporated. Under the plan, MasterCard Merger Sub, Inc., a wholly-owned subsidiary of MasterCard Incorporated, will merge with and into MasterCard International according to the terms of the merger agreement and each MasterCard International principal member will receive shares of class A common stock and class B common stock of MasterCard Incorporated, a Delaware stock holding company, and a class A membership interest in MasterCard International, a Delaware non-stock corporation and subsidiary of MasterCard Incorporated. The shares of class A common stock and class B common stock will represent your equity interest in MasterCard Incorporated. The class A membership interest will represent your continued rights as a licensee to use MasterCard's brands, programs and services. For a description of the impact of the approval of the plan of conversion on the election of directors of MasterCard Incorporated and MasterCard International in 2002, see "The Conversion -- Effects of the Conversion." We will not transact any other business at the special meeting. RECORD DATE; VOTES REQUIRED FOR APPROVAL The MasterCard International board of directors has fixed the close of business on , 2001, as the record date for the determination of the MasterCard International principal members entitled to notice of and to vote at the MasterCard International special meeting. On , 2001, there were principal members entitled to notice of and to vote at the special meeting. Each principal member is entitled to vote that number of votes determined by the historical global proxy calculation as of September 30, 2000, which number of votes is set forth on the accompanying proxy card. Each member's vote is limited to 15% of the total votes eligible to be cast at the meeting. If all members vote in person or by proxy at the special meeting, 1,294,660,941 votes will be cast at the meeting. Principal members affiliated with MasterCard International directors are entitled to exercise votes representing approximately 32% of the votes entitled to be cast on the conversion. The conversion requires the affirmative vote of a majority of the votes cast at the MasterCard International special meeting at which a quorum is present. Under the MasterCard International bylaws, the presence, either in person or by proxy, of principal members representing a majority of the votes eligible to be cast constitutes a quorum. VOTING PROCEDURES If a principal member attends the MasterCard International special meeting in person or sends a representative to the meeting with a signed and notarized proxy, that member may vote or its representative may vote on its behalf. However, since many principal members may be unable to attend the MasterCard 32 International special meeting, those members can ensure that their votes are cast at the meeting by signing and dating the enclosed proxy card and returning it in the envelope provided or by authorizing the individuals named on its proxy card to vote its interests by calling the toll-free telephone number or by using the Internet as described in the instructions included with its proxy card. When a proxy card is returned properly signed and dated or a member's vote is authorized by telephone or Internet, the vote of the MasterCard International principal member will be cast in accordance with the instructions on the proxy card or authorized by telephone or Internet. If a principal member does not return a signed proxy card, authorize its vote by telephone or Internet or attend the meeting in person or by representative and vote, no vote will be cast on behalf of that member. Principal members are urged to mark the box on the proxy card to indicate how their vote is to be cast. If a member returns a signed proxy card but does not indicate on the proxy card how it wishes to vote, the vote represented by the proxy card will be cast "FOR" the proposed conversion. Any MasterCard International principal member who executes and returns a proxy card or authorizes its vote by telephone or by Internet may revoke the proxy at any time before it is voted by: - notifying in writing Noah J. Hanft, Secretary of MasterCard International, at 2000 Purchase Street, Purchase, New York, 10577; - executing and returning a subsequent proxy; - subsequently authorizing the individuals named on its proxy card to vote its interests by calling the toll-free telephone number or by using the Internet as described in the instructions included with its proxy card; or - appearing in person or by representative with a signed proxy and voting at the MasterCard International special meeting. Attendance in person or by representative at the MasterCard International special meeting will not in and of itself constitute revocation of a proxy. SOLICITATION OF PROXIES MasterCard International will bear the costs of solicitation of proxies, including the cost of preparing, printing and mailing this proxy statement-prospectus. In addition to the solicitation of proxies by use of the mails, proxies may be solicited from MasterCard International members by directors, officers, employees and agents of MasterCard International in person or by telephone, facsimile or other appropriate means of communication. We have engaged Georgeson Shareholder Communications Inc. to solicit proxies on behalf of MasterCard International. The anticipated cost of Georgeson Shareholder's services is estimated to be approximately $120,000. No additional compensation, except for reimbursement of reasonable out-of-pocket expenses, will be paid to directors, officers and employees of MasterCard International in connection with the solicitation. Any questions or requests for assistance regarding this proxy statement-prospectus and related proxy materials may be directed to: MasterCard International Incorporated Attention: Office of the Corporate Secretary 2000 Purchase Street Purchase, New York 10577 Attention: Noah J. Hanft Telephone: (914) 249-2000 Facsimile: (914) 249-4262 or Georgeson Shareholder Communications Inc. 17 State Street 10th Floor New York, New York 10004 Telephone: (212) 440-9800 Facsimile: (212) 440-9009 33 OTHER MATTERS Pursuant to the current bylaws of MasterCard International, no other business or matter other than the conversion transaction indicated above may be properly presented at the special meeting. Copies of MasterCard International's bylaws are available to members free of charge upon request to the Secretary of MasterCard International at the address given above. 34 THE CONVERSION OVERVIEW OF THE CONVERSION The conversion refers to the process by which MasterCard International will merge with a subsidiary of MasterCard Incorporated, a newly formed stock holding company. After the conversion, MasterCard International will continue as a non-stock corporation and the principal operating subsidiary of MasterCard Incorporated, which will own the sole class B membership interest of MasterCard International. In the conversion, each principal member of MasterCard International will receive shares of class A common stock and class B common stock of MasterCard Incorporated representing that member's equity interest in MasterCard Incorporated, and a class A membership interest in MasterCard International representing that member's continued rights as a licensee to use MasterCard's brands, programs and services. MasterCard International's rules and standards will not be affected by the conversion and integration. We expect that the conversion will be completed as soon as practicable after the conditions to conversion are satisfied, including approval of the conversion by the members, the expiration or termination of any waiting period under the HSR Act and approval of European antitrust authorities. We anticipate that these conditions will be satisfied and that the conversion will be completed in the first quarter of 2002. EFFECTS OF THE CONVERSION As a stockholder of MasterCard Incorporated, you will have the right to vote on all matters submitted to the stockholders for a vote, including the election of the board of directors, and extraordinary transactions, such as a merger, consolidation, or sale of all or substantially all of the assets or dissolution of MasterCard Incorporated. In any vote for the election of directors, no stockholder, together with its affiliates, will be entitled to vote more than 7% of the outstanding shares that are entitled to vote in that election. The board of directors of MasterCard International is required to be the same as the board of directors of MasterCard Incorporated. You will have the right to vote on proposed changes to Article I (Membership) of the bylaws of MasterCard International, but you will no longer be entitled to vote with respect to any other amendments of the charter or bylaws of MasterCard International. The rules for the qualification of members of MasterCard International will be the same as the current rules for the qualification of members of MasterCard International. The directors and executive officers of MasterCard Incorporated after the conversion and integration will be the same as the directors and executive officers of MasterCard International before the conversion except for the addition of two voting directors who will be affiliated with European members and the addition of Dr. Peter Hoch, currently Chief Executive Officer of Europay, who will be President of MasterCard's Europe region (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 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; - 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 36 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. BOARD OF DIRECTORS' AND PRINCIPAL MEMBERS' APPROVAL On February 8, 2001, the board of directors of MasterCard International approved resolutions recommending the conversion to MasterCard International's members. Approval at the special meeting of at least a majority of votes cast is required to complete the plan of conversion; the quorum for the special meeting is the presence in person or by proxy of members representing a majority of the votes eligible to be cast. Notwithstanding member approval, however, the plan of conversion will not be completed if the integration will not also be completed. THE BOARD OF DIRECTORS OF MASTERCARD INTERNATIONAL RECOMMENDS THAT MEMBERS VOTE FOR APPROVAL OF THE PLAN OF CONVERSION. THE MERGER AGREEMENT EFFECTING THE CONVERSION We summarize below the material terms and other provisions of the merger agreement. The description is not complete, and we refer you to the merger agreement, which is contained in Annex A of this proxy statement-prospectus and which we have filed as an exhibit to the registration statement of which this proxy statement-prospectus is a part. CONVERSION OF MEMBERSHIP INTERESTS The conversion will be effected pursuant to the Agreement and Plan of Merger to be entered into among MasterCard Incorporated, MasterCard International and MasterCard Merger Sub, Inc., which we refer to as the merger agreement. The merger agreement provides for the merger of MasterCard International and MasterCard Merger Sub, Inc. under Delaware law, with MasterCard International being the surviving entity. Under the merger agreement, each issued and outstanding principal membership interest in MasterCard International will be automatically converted by virtue of the merger into a class A membership interest of MasterCard International and a specified number of shares of class A common stock and class B common stock of MasterCard Incorporated. The number of shares of class A and class B common stock of MasterCard Incorporated that a principal member receives in the merger will be proportional to the percentage of the total voting power of MasterCard International that such member held in accordance with the historic global proxy formula in effect for the period ended September 30, 2000. Upon completion of the conversion and integration and as an integral component thereof, the shares of class A common stock and class B common stock of MasterCard Incorporated will initially be reallocated within each of the European and non-European 37 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 and class B common stock are fully paid, non-assessable voting equity interests in MasterCard Incorporated. The class A membership interest in MasterCard International represents the member's continued rights as a licensee to use MasterCard's brands, programs and services and participate in the MasterCard system. For a description of the allocation of shares resulting from the conversion and integration, see "Share Allocation and the Global Proxy." Under the merger agreement, MasterCard Incorporated will receive the sole outstanding class B membership interest in MasterCard International, which will entitle MasterCard Incorporated to substantially all of the voting power, and all economic rights, in MasterCard International. MasterCard Incorporated's stockholders will participate indirectly in the voting power of, and economic rights associated with, the class B membership interest through their ownership of the class A and class B common stock of MasterCard Incorporated. The merger will not close, and your existing membership interest will not be modified as described above, unless a majority of the votes cast at the special meeting at which a quorum is present approve the conversion and the merger agreement. The board of directors of each of MasterCard Incorporated, MasterCard International and MasterCard Merger Sub, Inc. may terminate the merger agreement at any time prior to the conversion whether before or after the approval of the members of MasterCard International. APPLICATION OF THE SECURITIES LAWS TO SHARES RECEIVED As a result of the conversion, stockholders of MasterCard Incorporated will be subject to various provisions of the U.S. federal securities laws. Pursuant to Rule 10b-5 under the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act, all stockholders will be prohibited from trading MasterCard Incorporated shares while in possession of any material, non-public information about MasterCard Incorporated. In addition, certain significant stockholders of MasterCard Incorporated may be required to file public reports with respect to their stockholdings. Other reporting obligations may also apply. Responsibility for compliance with these laws will reside with the applicable stockholder, not MasterCard Incorporated. 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 common stock and class B 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 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 1992 to oversee the global development of the Maestro debit service, and entered into an agreement regarding the Maestro brand in 1997 to further strengthen their cooperation in this area. Each of MasterCard International and Europay own a 50% interest in Maestro International Incorporated, a Delaware corporation which owns the Maestro brand. MasterCard International currently owns approximately 12.25% of the capital stock of Europay and 15.0% of the capital stock of European Payment Systems Services (EPSS), Europay's transaction processing subsidiary. Together, these interests represent an approximate 15% interest in Europay on a consolidated basis. In addition, European members currently own approximately 7.0% of the total voting power, and related economic rights, of MasterCard International. As the MasterCard-Europay relationship developed, the managements of the organizations came to believe that they could significantly enhance the value of their alliance if they more fully integrated their organizations and focused their combined efforts on promoting a core set of global brands and services. In November 1999, a subcommittee of the MasterCard International board of directors authorized management to retain the services of Mercer 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 39 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 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. 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). 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. Based on projections of GDV, GAV, and revenues 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 40 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. A special meeting of the MasterCard International board was held on February 8, 2001 for the purpose of considering and approving the term sheet. At this meeting, representatives of Mercer made a presentation about the changes made to the term sheet since the November board meeting. Representatives of Credit Suisse First Boston presented their valuation analyses to the MasterCard board and delivered their signed fairness opinion to the MasterCard board. Denise Fletcher, MasterCard International's Chief Financial Officer, made a presentation regarding the financial, valuation, tax and accounting aspects of the integration and the stock conversion. 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. The board adopted resolutions recommending the conversion and integration to MasterCard International's members and approving the term sheet, and authorized the MasterCard International negotiating team to seek to finalize negotiations with Europay. The board also authorized the conversion of MasterCard International to a stock corporation. On February 12, 2001, the board of directors of Europay approved resolutions recommending the integration to Europay's shareholders. During the months of February through May 2001, counsel for MasterCard International and Europay prepared definitive documentation to effect the conversion and integration. Numerous telephone conversations and meetings were held among representatives of MasterCard International and Europay and their legal advisors for the purpose of negotiating the definitive agreements. Forms of agreements were provided to the MasterCard International and MasterCard Incorporated boards in advance of a special meeting called for May 16, 2001. At this meeting, the MasterCard International 41 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. 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 2000, the Europe region represented approximately 22.5% of MasterCard's worldwide gross dollar volume, not including Maestro and Cirrus transactions. - European countries are among the largest and most sophisticated payments markets in the world and represent a significant portion of the global payments industry. - Europay has demonstrated expertise in chip and debit programs and services, and in the ongoing development of new mobile commerce payment applications. The integration will also give MasterCard the opportunity to: - Establish a more consistent global marketing message, particularly in Europe, that is intended to increase MasterCard's presence in Europe and thereby make the Europe region more attractive to all MasterCard members. Following completion of the integration, MasterCard will be better able to coordinate European marketing programs, enabling us to build our brands in Europe in concert with our global brand-building efforts. We expect that this increased coordination, combined with improved productivity, faster time to market and greater emphasis on customized solutions for members, should strengthen the presence of the MasterCard family of brands both in Europe and around the world. - Take advantage of Europay's expertise in debit and chip cards and mobile commerce. Europay and Maestro have established in Europe a significant leadership in the debit and chip card arenas as well as in mobile commerce. Given the increasing use by cardholders globally of these applications, the skills and knowledge already present at Europay in these areas will represent a key strength for MasterCard, permitting the development of new business solutions. The integration represents the opportunity for Europay to merge with a well-capitalized industry leader and, as a result, to leverage its own strengths based on the broader resources of the MasterCard brand and organization. For European members of the combined company, integration with MasterCard provides additional opportunities to succeed in an increasingly competitive global business, in which size, an existing 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 42 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. 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 43 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 to be entered into by MasterCard Incorporated, MasterCard International and Europay International, which we refer to as the integration agreement. In connection with the integration agreement, each shareholder of Europay (other than MasterCard International and MEPUK) will enter into the separate share exchange agreement with MasterCard Incorporated and MasterCard International, pursuant to which it will exchange its Europay shares for a specified number of shares of class A common stock and class B common stock of MasterCard Incorporated. In addition, the shareholders of MEPUK will enter into the MEPUK agreement with MasterCard Incorporated and MasterCard International as described under the heading "-- MEPUK" below, pursuant to which they will exchange their MEPUK shares for a specified number of shares of class A common stock and class B common stock of MasterCard Incorporated. The integration agreement also provides, as an integral component of the conversion and integration, that the shares of class A and class B common stock of MasterCard Incorporated issued to the principal members of MasterCard International and the shareholders of Europay and MEPUK will initially be reallocated within each of the European and non-European member-stockholder groups in accordance with the new global proxy calculation described herein. The integration agreement defines how the European members of MasterCard, including those members that are not shareholders of Europay, and the non-European members of MasterCard, will be treated in the conversion and the integration. For a description of the allocation of shares resulting from the conversion and integration, see "Share Allocation and the Global Proxy." CONDUCT OF BUSINESS PRIOR TO CLOSING OF INTEGRATION From the date of the integration agreement until the closing of the integration, each of MasterCard Incorporated, MasterCard International and Europay have agreed to conduct their respective businesses in the ordinary course, consistent with past practice, and, among other things, to take all commercially reasonable steps and to act in good faith in cooperation with the other party to obtain all necessary government approvals. The parties also have agreed to the restrictions summarized below. Europay has agreed that, except as may be required by law, unless previously disclosed to MasterCard International or agreed to by MasterCard Incorporated, it and its subsidiaries will not, and will not enter into an agreement to, among other things: - increase the compensation of its officers, employees or consultants whose compensation is, or after giving effect to any change, would be, $100,000 or more; - issue or sell any shares of its capital stock or its other equity interests; - declare or pay any dividend or other distribution on its capital stock or its other equity interests or redeem or purchase any of its capital stock or its other equity interests; - incur net new debt exceeding E15 million or prepaying any existing debt; - make capital expenditures or commitments exceeding E15 million. MasterCard Incorporated and MasterCard International have agreed that they and their subsidiaries will not: - liquidate or dissolve themselves; - 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. 44 CONDITIONS TO CLOSING OF THE INTEGRATION MasterCard Incorporated's and MasterCard International's obligations, on the one hand, and Europay's obligations, on the other hand, to complete the integration are subject to satisfaction, or waiver by the other side, of the following conditions: - each party's representations and warranties must be true on the date of the closing of the integration; - each party must have performed or complied with each of its respective agreements contained in the integration agreement; - there must not be, on the date of closing of the integration, any order or law prohibiting the closing of the integration or conversion or any action or proceeding to prohibit the integration before any governmental and regulatory authority, and all required consents and approvals with any governmental or regulatory authorities, in form and substance reasonably satisfactory to the other party, must have been obtained; - all consents or waivers to the performance by the parties to the integration agreement of their respective obligations under the integration agreement and all consents or waivers relating to contracts of the parties must be obtained in form and substance reasonably satisfactory to the other party; - the registration statement of which this proxy statement-prospectus forms a part must have been declared effective by the Securities and Exchange Commission and must not be subject to any stop order or proceeding by the Securities and Exchange Commission relating to a stop order; and - each party must have had delivered to the other opinions of counsel, officer's certificates, revised charter and bylaws and tax rulings from relevant tax authorities or related opinions of tax counsel, in each case, as specified in the integration agreement. In addition, MasterCard Incorporated's and MasterCard International's obligations to complete the integration are subject to the satisfaction by Europay, or the waiver by MasterCard Incorporated and MasterCard International, of the following additional conditions: - the board of directors of Europay must have resigned, effective as of the date of the closing of the integration; - certain of the European members must have entered into an intellectual property assignment agreement, as specified in the integration agreement, confirming that Europay is the sole owner of the intellectual property rights associated with its brands; - each shareholder of Europay (other than MEPUK) must have entered into the share exchange agreement with MasterCard Incorporated and MasterCard International, as specified in the integration agreement, to transfer its shares of Europay capital stock to MasterCard Incorporated in exchange for class A common stock and class B common stock of MasterCard Incorporated, as summarized above, and the MEPUK agreement described under the caption "-- MEPUK" below must have been entered into; - 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. 45 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. TERMINATION The parties to the integration agreement may terminate it on any of the following bases: - by mutual agreement of the parties for any reason; - in the event of a material breach by Europay, on the one hand, or MasterCard Incorporated and MasterCard International, on the other hand, that is not cured within five business days following notice of the breach or on notice by one party that the satisfaction of its obligations under the integration agreement has become impossible or impracticable despite the use of commercially reasonable efforts; and - at any time after March 31, 2002 if the closing of the integration has not occurred and this failure is not a result of a breach of the integration agreement by the terminating party. ALLOCATION OF LIABILITY FOR BREACH The bylaws of MasterCard International provide that losses and liabilities resulting from a breach of the representations and warranties of MasterCard Incorporated, MasterCard International or Europay contained in the integration agreement will be distributed equitably among MasterCard's six regions as an expense. However, losses and liabilities related to a breach by either of MasterCard Incorporated or MasterCard International of its representations and warranties in the integration agreement exceeding $21 million in the aggregate will be allocated solely to regions other than Europe. Conversely, losses and liabilities related to a breach by Europay of its representations and warranties in the integration agreement exceeding $7 million in the aggregate will be allocated solely to Europe. SUPERMAJORITY VOTING PROVISIONS After completion of the conversion and integration, approval of at least 75% of the directors present at a meeting at which a quorum is present and, in certain cases, the holders of a majority of the outstanding class A 46 common stock and class B common stock voting together as a single class (so long as the class B common stock has voting rights) will be required to, among other things: - alter MasterCard Incorporated's status as a stock corporation; - amend the certificate of incorporation of MasterCard Incorporated to authorize MasterCard Incorporated to issue stock other than the class A, B or C common stock; - sell, lease or exchange all or substantially all of MasterCard Incorporated's assets; - approve the sale, lease or exchange of all or substantially all of the assets of MasterCard International; - engage in a business combination (merger or consolidation) involving MasterCard Incorporated or MasterCard International; - undertake an initial public offering; - amend the MasterCard International certificate of incorporation to allow MasterCard International to issue capital stock, to create additional classes of membership interests in MasterCard International, to subject the property of the members of MasterCard International to the obligations of MasterCard International or to subject non-U.S. programs to the satisfaction of any liabilities arising from the current DOJ and merchant antitrust litigations in the United States; - amend the provisions of the MasterCard International bylaws relating to special assessments that may be imposed upon the members of MasterCard International; - make any modification to the bylaw provision stating the proportion of directors to come from each region; - alter MasterCard International's board seating methodology; - change the definition of the global proxy calculation; - raise the limitation on voting for directors applicable to stockholders and their affiliates to greater than 15% of the outstanding voting stock entitled to be voted; - approve the issuance of voting class C common stock or class C common stock that, together with all other issuances of class C common stock made during the immediately preceding two years, represents greater than 5% of the total number of shares of class A and class B common stock outstanding prior to the issuance; and - modify any of these supermajority requirements. After completion of the conversion and integration, the following actions, among others, will require approval of at least 66 2/3% of the directors present at a meeting at which a quorum is present: - establishing or eliminating regional boards; - modifying MasterCard's internal regional cost allocation methodology; - modifying the bylaw provision setting forth the overall size of the MasterCard Incorporated board of directors; - approving the issuance of shares of class C common stock; - permitting a stockholder's ownership level to exceed 15%; - permitting the issuance of shares of class A or class B common stock of MasterCard Incorporated in excess of the number of shares to which a stockholder would be entitled under the global proxy; - deciding to overrule a decision taken by a regional board that was permitted to be taken in accordance with the bylaws; 47 - 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 will enter into a related share exchange agreement with MasterCard Incorporated and MasterCard International pursuant to which they will exchange all their MEPUK shares for shares of common stock of MasterCard Incorporated. As a result of this transaction, MEPUK will become a wholly-owned subsidiary of MasterCard Incorporated and will continue to hold shares of Europay. 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 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 will agree 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 will also agree to distribute to the MEPUK shareholders, net of any taxes or liabilities, any assets of MEPUK (other than the Europay shares) not distributed prior to the closing of the integration. The MEPUK agreement is filed as an exhibit to the registration statement of which this proxy statement-prospectus forms a part. 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. 48 With respect to the manner in which they account for their equity interest in MasterCard, members should consult their financial advisors regarding the potential accounting implications of the integration. REGULATORY MATTERS RELATING TO THE INTEGRATION We set forth below descriptions of the European jurisdictions that must be notified of the integration and that may require regulatory approval before we can complete the integration. Within the European Union, transactions falling under the European Commission's merger regulations require prior notification and regulatory approval. The proposed integration amounts to a concentration within the meaning of the European Commission merger regulations because it will entail a change of control of Europay. However, because the consolidated worldwide revenue of MasterCard and Europay is below the threshold stipulated by the regulations, prior notification and regulatory approval will not be required at the European Commission level. Notwithstanding this, Europay has informed the European Commission of the integration for informational purposes. A number of countries within the European Union require notification and prior regulatory approval depending upon whether the national merger control thresholds are met or not. National merger control thresholds can relate to the national and worldwide revenues of the parties and/or to their market share in the country in question, with thresholds for market share ranging from 20% to 35%. National notification will be necessary in Germany and Finland on the basis of revenue and in Spain and Greece on the basis of national market share. If the regulatory authorities in any of these countries determine that the conversion and integration present an issue under applicable competition law, they may delay, impose conditions on or prevent completion of the conversion and integration. As of the date of this proxy statement-prospectus, the transaction has been cleared by the national competition authorities in Germany. 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. 49 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. In connection with the initial allocation of shares, the relevant period for calculating the new global proxy will be the 12 month period ended December 31, 2000. (In contrast, the last global proxy using the historical, revenue-only formula was calculated for the 12 month period ended September 30, 2000.) All subsequent calculations of the new global proxy will be made on the basis of each successive 12 month period beginning on the first business day of the fiscal quarter following the closing of the conversion and integration. All global proxy calculations will be made on an accrual basis of accounting. (In contrast, the historical global proxy formula was calculated on a cash basis of accounting). The board of directors of MasterCard Incorporated is empowered to establish a record date in connection with each global proxy calculation for purposes of determining the stockholders of record whose GDV, GAV and revenue will be included in determining the relevant global proxy. For the initial allocation of shares, the record date will be the closing date of the conversion and integration. The new global proxy formula and the regional apportionment of shares are described in the integration agreement and in the by-laws of MasterCard Incorporated. Matters relating to the ec Pictogram shares are described principally in the integration agreement. 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. 50 THE GLOBAL PROXY The Formula. For each member-stockholder (other than a travelers cheque member), the global proxy calculation will be equal to the sum obtained by adding (A) .25 multiplied by a fraction, the numerator of which is the member-stockholder's GDV and the denominator of which is MasterCard Incorporated's total GDV attributable to all member-stockholders, plus (B) .25 multiplied by a fraction, the numerator of which is the member-stockholder's GAV and the denominator of which is MasterCard Incorporated's total GAV attributable to all member-stockholders, plus (C) .50 multiplied by a fraction, the numerator of which is the revenues paid by the member-stockholder to MasterCard Incorporated and its subsidiaries and the denominator of which is the revenues paid by all member-stockholders to MasterCard Incorporated and its subsidiaries, in each case for the applicable period. Only actual, as opposed to estimated, GDV, GAV and revenues paid will be considered for purposes of the global proxy calculation. In addition, for purposes of the global proxy calculation: - GDV. GDV means processed and non-processed issued volumes (including domestic and international retail purchases, cash transactions, convenience checks, on-us transactions, intra-processor transactions, local use only transactions and balance and commercial funds transfers) that occur as a result of one or more of (A) a transaction involving any one of MasterCard Incorporated's brands (e.g., MasterCard, Eurocard, Maestro, Cirrus and ec Pictogram) or (B) a non-MasterCard branded transaction involving a card that includes any one of MasterCard Incorporated's brand logos as well as other payment brand logos, provided that such other payment brands are not in direct competition with any MasterCard brands as determined by MasterCard Incorporated. - GAV. GAV means processed and non-processed acquired volumes (including domestic and international retail purchases, cash transactions, on-us transactions, intra-processor transactions and local use only transactions) that occur as a result of one or more of (A) a transaction involving any one of MasterCard Incorporated's brands (e.g., MasterCard, Eurocard, Maestro, Cirrus and ec Pictogram) or (B) a non-MasterCard branded transaction involving a card that includes any one of MasterCard Incorporated's brand logos as well as other payment brand logos, provided that such other payment brands are not in direct competition with any MasterCard brands as determined by MasterCard Incorporated. - Revenue. Revenues paid for a particular member-stockholder are, for any period, all revenues of MasterCard Incorporated on a consolidated basis, calculated in accordance with U.S. GAAP, that are generated by the activities of that member-stockholder, other than (1) any fees or other charges associated with the termination of that member-stockholder's membership in MasterCard International, (2) integration-related assessments paid by that member-stockholder, (3) other fees and charges paid by that member-stockholder in its capacity as a member of MasterCard International if those fees and charges were imposed on less than all of the members of MasterCard International (except for fees and charges pertaining to business development, ordinary course of business and other matters deemed to be includable by the management of MasterCard International in management's sole discretion) and (4) fines and penalties paid by that member-stockholder (except as determined includable in the sole discretion of the management of MasterCard International). For purposes of the initial allocation of shares associated with the closing of the conversion and integration, MasterCard intends generally to include fines and penalties in the calculation of revenues paid, except for termination fees. GDV and GAV Volume Weightings. In calculating GDV and GAV, each member-stockholder's volume must be broken into four categories, each of which is weighted differently for purposes of the calculation, as described below. The weighted categories are designed to reflect the relative value of different activities to MasterCard's overall business, and provide the highest recognition to transactions that are fully assessed by MasterCard based on volume. Volumes attributable to transactions involving only card-based assessments are accorded relatively lower weight. Volumes are included in the global proxy calculation whether they are assessed directly or the cards to which they relate are subject to card fee assessments of the type contemplated by the applicable category of volume. In addition, for each global proxy calculation performed prior to the 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 51 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 carrying the MasterCard brand that are subject to volume-based assessments or non de minimis, meaningful card fee assessments, (2) Maestro and Cirrus processed debit volumes and (3) Maestro and Cirrus stand-alone debit assessed volumes so long as Maestro, a brand representing a stored value application that is permitted to be used by members of MasterCard International and/or Cirrus is the sole acceptance brand on the card and the assessments are non de minimis. - Volumes Weighted at 75%. All of the following volumes are weighted at 75% of actual volume: ec Pictogram volumes converted to Maestro volumes as the sole acceptance debit brand with bona fide, non de minimis volume-based or card fee assessments and other similar debit volumes with bona fide, non de minimis volume-based or card fee assessments; provided, in each case, that there exists a binding commitment to remove the ec Pictogram brand logo and all other payment brand logos, other than the Maestro brand logo or the logo of a brand representing a stored value application that is permitted to be used by members of MasterCard International, on the cards within five years of the first fiscal quarter beginning after the fiscal quarter in which the closing of the conversion and integration occurs. - Sliding Scale of Weightings for Certain Regional Debit Volumes. Volumes for regional debit brands owned solely by MasterCard Incorporated on cards that include a Maestro and/or Cirrus logo are weighted at the following percentages for the period indicated; provided that such cards are subject to non de minimis volume-based or card fee assessments; and provided, further, that for calculations for the last year of the transition period through the year ending on the two year anniversary of the end of the transition period, there is a binding written commitment to remove all payment brand logos, including ec Pictogram, other than the Maestro brand logo or the logo of a brand representing a stored value application that is permitted to be used by members of MasterCard International, on the cards within five years of the first fiscal quarter beginning after the fiscal quarter in which the closing of the conversion and integration occurs: - 10% of such volumes for all calculations until the last year of the transition period; - 40% of such volumes for the last year of the transition period; - 30% of such volumes for the year ending on the one-year anniversary of the end of the transition period; - 20% of such volumes for the year ending on the two-year anniversary of the end of the transition period; and - 10% of such volumes for subsequent years. - Volumes Weighted at 1%. Volumes for regional debit brands not owned by MasterCard Incorporated on cards that include a Maestro and/or Cirrus brand logo (provided that such cards are subject to non de minimis volume-based or card fee assessments) and volumes for balance and commercial funds transfers are weighted at 1%. Currency Conversion. In performing the global proxy calculation, all currency conversions, to the extent necessary, will be based on the average exchange rate during the twenty-day period ending on the day prior to the applicable measurement date, which we refer to as the average currency conversion rate, provided that during the transition period and for the two years thereafter the average currency conversion rate shall be $.9565 U.S. = 1 euro for so long as 1 euro is not less than $.9065 U.S. and not greater than $1.0065 U.S. In the event that the average currency conversion rate does not fall within this range, the rate to convert euros to 52 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. Travelers Cheques. MasterCard International's travelers cheque members will calculate the numerator of their respective global proxies using 100% of revenues paid by them to MasterCard Incorporated and its subsidiaries in connection with their travelers cheque programs (in other words, revenue for travelers cheque members will not be discounted by the 50% factor set forth in the global proxy formula for other principal members). However, travelers cheque members will not receive credit for GDV or GAV in connection with their global proxy calculations (in other words, GDV and GAV will be zero for travelers cheque members). The denominator of the global proxy calculation for travelers cheque members will be the same as the denominator described above. 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. Shares Issued in the Conversion. In the conversion, each principal member of MasterCard International, including each MasterCard principal member in Europe, will receive a number of shares of class A and class B common stock of MasterCard Incorporated that is proportional to the percentage of the total 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 and class B common stock of MasterCard Incorporated in exchange for its shares of Europay or MEPUK, as the case may be, as specified in the share exchange agreement and MEPUK agreement, respectively. 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 and class B 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 and class B common stock will then initially be reallocated within each of the European and non-European pools of shares in accordance with the new global proxy formula. 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 53 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 and class B shares of MasterCard Incorporated common stock that you, as a current member of MasterCard International, will receive upon the closing of the conversion and integration. 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. Member-stockholders can also estimate the aggregate number of class A and class B shares of MasterCard Incorporated to be allocated to them at the closing of the conversion and integration using their own GDV, GAV and revenue data and the following figures: For the 12 months ended December 31, 2000: Aggregate European GDV: $ Aggregate European GAV: $ Aggregate European Revenue: $ Aggregate non-European GDV: $ Aggregate non-European GAV: $ Aggregate non-European Revenue: $ For principal members other than travelers cheque members, the formula to be applied with these figures is as follows: (0.5)(Revenue paid by Member) (0.25)(Member GDV) (0.25)(Member GAV) + + ----------------------------- ------------------ ------------------ Aggregate Revenue Aggregate GDV Aggregate 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. This formula produces a percentage that can be multiplied by the number of shares in the applicable pool of shares to derive an estimate of the number of shares to be received in the conversion and integration. A description of the total number of shares allocated to each pool is provided below. For all members, 84% of the shares received will be in the form of class A common stock and 16% of the shares received will be in the form of class B common stock. 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 and class B common stock that together represent 33 1/3% of all of the shares of class A common stock and class B common stock together outstanding. The shares of class A common stock issued to the European member-stockholders will represent 28%, and the shares of class B common stock issued to the European member-stockholders will represent 5 1/3%, of the respective total number of shares of class A common stock and class B common stock together outstanding immediately after the closing of the conversion and integration. The remaining class A and class B common stock, representing in the aggregate 66 2/3% of the class A and class B common stock together outstanding, will be held by the non-European member-stockholders of MasterCard. The shares of class A common stock issued to the non-European member-stockholders will represent 56%, and the shares of class B common stock issued to the non-European member-stockholders will represent 10 2/3%, of the total number of shares of class A common stock and class B common stock together outstanding immediately after the closing of the conversion and integration. Accordingly, immediately after the closing of the conversion and integration, shares of MasterCard Incorporated class A and class B common stock will be allocated as follows:
EUROPEAN NON-EUROPEAN MEMBER MEMBER TOTAL SHARE STOCKHOLDERS STOCKHOLDERS DISTRIBUTION ------------ ------------ ------------ Class A...................................... 28,000,000 56,000,000 84,000,000 Class B...................................... 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 54 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 and class B common stock that they held as of the closing of the transaction, regardless of changes in the respective global proxy calculations of those member-stockholders during the transition period, provided that they remain as members of MasterCard International and do not sell all or substantially all of their MasterCard card portfolios. Financial institutions that become principal members of MasterCard International after the period of the global proxy calculation used in connection with the initial allocation of shares will be eligible to be allocated shares at the end of the transition period in accordance with procedures to be determined by the board of directors. Until shares are allocated, those financial institutions will not be entitled to vote at any meetings of stockholders of MasterCard Incorporated. The reallocation of shares of MasterCard Incorporated at the conclusion of the three year transition period will be determined according to a multi-step process. First, the number of class B shares that constitute ec Pictogram shares will be determined in accordance with the process described below. Second, the class B shares of European members (other than ec Pictogram shares) will be converted into class A shares on a one-for-one basis, and the converted class A common stock will be distributed to the European members according to their respective entitlements. Third, all class A shares will be reapportioned between Europe and non-Europe using the procedures described below. Fourth, each member-stockholder will be allocated class A shares according to the 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. ec Pictogram Shares. ec Pictogram shares are class B shares that do not convert to class A shares at the conclusion of the transition period. Instead, ec Pictogram shares will convert to class A shares on the second anniversary of the end of the transition period. This additional two-year holding period is designed to recognize that additional time may be needed before the transaction volumes associated with ec Pictogram, a regional debit program owned by Europay, can be converted to Maestro volumes. All class B shares representing ec Pictogram shares become non-voting at the end of the transition period when the other class B shares convert to class A shares. The number of ec Pictogram shares will be calculated at the end of the transition period according to the following procedures: - The aggregate global proxy calculation of Europe during the third year of the transition period will be determined. - Then, a simulated global proxy will be calculated assuming that certain ec Pictogram transactions are converted to Maestro transactions as of the beginning of the third year of the transition period. Because Maestro transactions are accorded a higher GDV and GAV weighting than ec Pictogram transactions, the simulated result is likely to be higher than the actual European aggregate global proxy calculation. ec Pictogram transactions will be accorded a higher weighting in the simulated proxy if they are 55 associated with binding contracts to convert to Maestro within a two-year period following the end of the transition period. - The difference between the actual global proxy and the simulated global proxy results described above, measured in terms of a percentage of the outstanding class A common stock and class B common stock of MasterCard Incorporated, will determine the number of shares of class B common stock that constitutes the ec Pictogram shares. If the simulated global proxy is equal to or less than the actual global proxy (as measured), there will be no ec Pictogram shares. - Notwithstanding the preceding paragraph, ec Pictogram shares cannot exceed 5 1/3% of the total shares of MasterCard Incorporated then outstanding. In addition, ec Pictogram shares will be reduced by a percentage equal to the percentage of any over-apportionment of shares to Europe in connection with the thresholds described below under the heading "-- Reapportionment of Class A Shares Between Europe and Non-Europe." Reapportionment of Class A Shares Between Europe and Non-Europe. At the end of the three-year transition period, MasterCard Incorporated will determine the global proxy calculation of all member-stockholders (calculated on a single worldwide basis) for the last 12 months of the transition period. The European member-stockholders will be entitled to more or fewer class A shares depending upon their aggregate global proxy calculation, and the non-European member-stockholders will be entitled to the remaining class A shares. The purpose of the reapportionment is to permit the final allocation of shares of MasterCard Incorporated to be based on the relative aggregate global proxy calculations of the European and non-European areas during the last year of the transition period. Specifically: - Europe Less than or Equal to 26%. If the global proxy calculation indicates that European member-stockholders in the aggregate represent 26% or less of the worldwide global proxy calculation for the last year of the transition period, then the European member-stockholders will be entitled to an allocation of shares of class A common stock that represents 26% of the number of shares of outstanding class A common stock and class B common stock. - Europe Greater than 26% but Less than or Equal to 28%. If the global proxy calculation indicates that European member-stockholders in the aggregate represent greater than 26% but less than or equal to 28% of the worldwide global proxy calculation for the last year of the transition period, then the European member-stockholders will be entitled to an allocation of shares of class A common stock that represents 28% of the number of shares of outstanding class A common stock and class B common stock. - Europe Greater than 28%. If the global proxy calculation indicates that European member-stockholders in the aggregate represent greater than 28% of the worldwide global proxy calculation for the last year of the transition period, then the European member-stockholders will be entitled to an allocation of shares of class A common stock that is equal in percentage terms to their aggregate global proxy calculation for the last year of the transition period, up to a maximum amount, when taken together with any ec Pictogram shares, of 44% of the number of shares of outstanding class A common stock and class B common stock. Because of the conversion of the class B common stock at the end of the transition period, the only class B common stock outstanding at the time of this calculation will be the ec Pictogram shares, if any. In the reapportionment, stockholders of MasterCard Incorporated whose initial share allocations decrease will return shares initially allocated to them to MasterCard Incorporated, which will deliver 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 shares between Europe and non-Europe described above will produce two pools of class A shares, one for European member-stockholders and the other for non-European member- stockholders. The allocation of class A shares within each pool will be determined according to the 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." 56 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 shares, and the class A shares will then be subject to reallocation. European member-stockholders with ec Pictogram volumes that have converted to Maestro volumes will be entitled to some or all of those class A shares depending upon the percentage of ec Pictogram volumes that have actually been converted to Maestro by that time. Non-European member-stockholders will be entitled to the balance, which will be distributed to those member-stockholders in accordance with the new global proxy formula based on the 12 month period ending at the end of the additional two-year holding period. Any reallocation of class A shares resulting from the conversion of ec Pictogram shares will be effected by a return of shares to MasterCard Incorporated and delivery of shares by MasterCard Incorporated. GLOBAL PROXY CALCULATION FOLLOWING THE TRANSITION PERIOD AND CONVERSION OF THE EC PICTOGRAM SHARES Following the transition period and the conversion of the ec Pictogram shares to class A voting shares, the global proxy calculation will be performed on an individual member-stockholder basis according to the procedures described above under the heading "-- The Global Proxy." The European and non-European areas will cease to have any significance in connection with the determination of the global proxy. After the transition period, member-stockholders will be required to maintain an ownership percentage of MasterCard's outstanding common stock of not less than 75% nor more than 125% of that member-stockholder's most recent global proxy calculation. 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 commit to buy or sell shares under certain circumstances in order to ensure that member-stockholders are able to satisfy their minimum or maximum share ownership requirements. In particular, if a member-stockholder is unable to sell shares to another member-stockholder and the sale is required for the member-stockholder to maintain its share ownership within the specified range, MasterCard Incorporated will offer to buy the shares at par or for any greater value determined by the board of directors in its discretion. Similarly, if a member-stockholder is unable to buy shares from another member-stockholder and the purchase is required for the member-stockholder to maintain its share ownership within the specified range, MasterCard Incorporated will sell the required shares to the member-stockholder for their book value, or for any greater value determined by the board of directors in its discretion. 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. MasterCard Incorporated will purchase or sell its common stock in connection with the foregoing commitments 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, in each case as determined by the board of directors in its discretion. 57 UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS The following unaudited pro forma condensed combined financial statements combine the historical consolidated balance sheets and statements of income of MasterCard International and Europay and give pro forma effect to the conversion and integration. We are providing the following information to aid you in your analysis of the financial aspects of the conversion and integration. We derived this information from the separate audited financial statements of MasterCard International for the year ended December 31, 2000, the audited financial statements of Europay for the year ended December 31, 2000, and the unaudited consolidated interim financial statements of each of MasterCard International and Europay for the six months ended June 30, 2001. The historical financial information provided for Europay was prepared in accordance with U.S. GAAP. Refer to Note 15 to the unaudited consolidated interim financial statements of Europay as of June 30, 2001 and for the six months ended June 30, 2001 and 2000, and Note 22 to the Consolidated Financial Statements of Europay as of December 31, 2000 and December 31, 1999 and for the years ended December 31, 2000, 1999 and 1998, 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. 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 June 30, 2001. However, such allocation is preliminary and is subject to the completion of the conversion and integration. Accordingly, 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, in each case as an integral component of the conversion and integration, shares of MasterCard Incorporated will be reallocated among member-stockholders. See "Share Allocation and the Global Proxy." 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 the reallocated shares, nor will there be any increase or decrease in the total amount of shares outstanding. There will be no change in the stockholders' equity of MasterCard Incorporated as a result of the reallocations. The unaudited pro forma condensed combined statements of income assume that the conversion and integration were effected on January 1, 2000. The unaudited pro forma condensed combined balance sheet assumes that the conversion and integration were effected on June 30, 2001. The unaudited pro forma combined financial information is presented for illustrative purposes only. No separate pro forma adjustment is required for the integration of MEPUK as it will have no assets or liabilities other than shares in Europay at the close of the transaction. You should not rely on the pro forma combined financial information as being indicative of the historical results that would have been achieved had the companies always been consolidated or the future results that the combined company will achieve after the conversion and integration. 58 MASTERCARD INCORPORATED UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS (IN THOUSANDS EXCEPT PER SHARE DATA)
FOR THE SIX MONTHS ENDED JUNE 30, 2001 --------------------------------------------------------------- PRO FORMA MASTERCARD PRO FORMA MASTERCARD INTERNATIONAL EUROPAY(1) ADJUSTMENTS(2) INCORPORATED ------------- ---------- -------------- ------------ REVENUE................................ $855,622 $119,815 $ (681)(A) $973,151 (1,605)(F) OPERATING EXPENSES General & administrative............... 394,116 66,538 (681)(A) 458,162 (1,811)(F) Advertising & market development....... 274,345 36,856 214(F) 311,415 Depreciation........................... 17,557 6,267 (619)(B) 23,205 Amortization........................... 14,613 1,661 6,531(C) 22,805 -------- -------- -------- -------- Total Operating Expenses..... 700,631 111,322 3,634 815,587 Other Income and Expense............... 8,068 (341) 104(E) 7,831 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES............. 163,059 8,152 (5,816) 165,395 Income Tax............................. 63,912 3,269 (2,365)(D)(F) 64,816 Cumulative effect of change in accounting principle, net of tax..... -- (490) -- (490) -------- -------- -------- -------- NET INCOME............................. $ 99,147 $ 4,393 $ (3,451) 100,089 ======== ======== ======== ======== NUMBER OF SHARES....................... 100,000(G) BASIC AND DILUTED EARNINGS PER SHARE... N/A $ 1.00(H)
FOR THE YEAR ENDED DECEMBER 31, 2000 --------------------------------------------------------------- PRO FORMA MASTERCARD PRO FORMA MASTERCARD INTERNATIONAL EUROPAY(1) ADJUSTMENTS(2) INCORPORATED ------------- ---------- -------------- ------------ REVENUE................................ $1,571,215 $237,673 $ (297)(A) $1,803,041 (5,550)(F) OPERATING EXPENSES General & administrative............... 742,807 147,084 (297)(A) 882,901 (6,693)(F) Advertising & market development....... 596,539 64,731 542(F) 661,812 Depreciation........................... 34,728 10,869 (236)(B) 45,361 Amortization........................... 24,669 2,977 13,406(C) 41,052 ---------- -------- -------- ---------- Total Operating Expenses..... 1,398,743 225,661 6,722 1,631,126 Other Income and Expense............... 27,759 1,899 229(E) 29,887 ---------- -------- -------- ---------- INCOME BEFORE INCOME TAXES............. 200,231 13,911 (12,340) 201,802 Income Tax............................. 82,082 6,002 (4,935)(D)(F) 83,149 Cumulative effect of change in accounting principle, net of tax..... -- (2,800) -- (2,800) ---------- -------- -------- ---------- NET INCOME............................. $ 118,149 $ 5,109 $ (7,405) 115,853 ========== ======== ======== ========== NUMBER OF SHARES....................... 100,000(G) BASIC AND DILUTED EARNINGS PER SHARE... N/A $ 1.16(H)
See notes to unaudited pro forma combined income statements. 59 NOTES TO UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS (IN THOUSANDS) (1) Euro amounts are translated into U.S. dollars based on a conversion rate of 1.1158 and 1.1071 euros per U.S. dollar, the average exchange rates between U.S. dollars and euros for the six month period ended June 30, 2001 and the year ended December 31, 2000, respectively. (2) The pro forma financial statements have been prepared to reflect the conversion of MasterCard International from a member-based organization to a stock company and the integration of Europay, MEPUK and MasterCard. No separate pro forma adjustment is required for the integration of MEPUK as it will have no assets or liabilities other than shares in Europay at the close of the transaction. Pro forma adjustments are made to reflect: (A) the elimination of inter-company revenues and expenses between MasterCard and Europay. (B) the change in annual depreciation resulting from adjustments made to the estimated useful lives of property acquired (ranging from three to thirty years). (C) additional annual amortization of certain intangible assets resulting from the acquisition consisting primarily of software and other technology-related intangibles and trademarks, which are being amortized over their estimated useful lives ranging from three to five years. Amortization for the year ended December 31, 2000 was calculated in accordance with current accounting principles generally accepted in the United States of America. In accordance with SFAS No. 142, goodwill and other intangible assets resulting from the integration that have indefinite useful lives will not be amortized. (D) the income tax effect of the pro forma adjustments. This is calculated using a 40% tax rate. (E) the elimination of the reduction on Europay's income statement of the minority interest in EPSS held by MasterCard. (F) the consolidation of Maestro and EMV Co., entities 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. 60 (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 33 1/3% CHANGE --------------- --------------- ------------- NET INCOME FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2001 ATTRIBUTABLE TO: Non-European members-stockholders of MasterCard(a)........................ $ 93 89% $ 67 67% $(26) (28)% European members-stockholders(b)........ 11 11% 33 33% 22 200% ---- --- ---- --- ---- $104 100% $100 100% $ (4)(c) ==== === ==== === ==== NET INCOME FOR THE YEAR ENDED DECEMBER 31, 2000 ATTRIBUTABLE TO: Non-European members-stockholders of MasterCard(a)........................ $111 90% $ 78 67% $(33) (30)% European members-stockholders(b)........ 12 10% 38 33% 26 217% ---- --- ---- --- ---- $123 100% $116 100% $ (7)(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 maximum and minimum share reallocation at the end of the transition period:
POST- CHANGE POST- CHANGE INTEGRATION FROM PRE- INTEGRATION FROM PRE- AT 26% INTEGRATION AT 44% INTEGRATION ------------ ------------ ------------ ------------ NET INCOME FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2001 ATTRIBUTABLE TO: Non-European member-stockholders of MasterCard(a)............................. $ 74 74% $(19) (20)% $ 56 56% $(37) (40)% European member-stockholders(b)............. 26 26% 15 136% 44 44% 33 300% ---- --- ---- ---- --- ---- $100 100% $ (4) $100 100% $ (4) ==== === ==== ==== === ==== NET INCOME FOR THE YEAR ENDED DECEMBER 31, 2000 ATTRIBUTABLE TO: Non-European member-stockholders of MasterCard(a)............................. $ 86 74% $(25) (23)% $ 65 56% $(46) (41)% European member-stockholders(b)............. 30 26% 18 150% 51 44% 39 325% ---- --- ---- ---- --- ---- $116 100% $ (7) $116 100% $ (7) ==== === ==== ==== === ====
61 MASTERCARD INCORPORATED UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF JUNE 30, 2001 (IN THOUSANDS)
PRO FORMA MASTERCARD PRO FORMA MASTERCARD INTERNATIONAL EUROPAY(1) ADJUSTMENTS(2) INCORPORATED ------------- ---------- -------------- ------------ ASSETS Cash and cash equivalents................... $ 215,511 $ 97,504 $ 2,994(D) $ 316,009 Investment securities....................... 375,163 -- -- 375,163 Property, plant & equipment................. 237,457 51,740 7,652(A) 297,819 970(D) Other assets................................ 395,570 105,127 (15,772)(A) 464,895 (3,180)(B) (4,407)(C) (12,443)(D) Intangible assets........................... 12,134 265,445(A) 277,579 ---------- -------- --------- ---------- TOTAL ASSETS...................... $1,235,835 $254,371 $ 241,259 $1,731,465 ========== ======== ========= ========== LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities......................... $ 415,896 $192,166 $ (3,180)(B) $ 633,684 (8,935)(D) 37,737(E) Long-term liabilities....................... 255,967 15,649 41,161(E) 312,777 ---------- -------- --------- ---------- TOTAL LIABILITIES................. 671,863 207,815 66,783 946,461 Minority interest........................... 256 2,733 456(D) 712 (2,733)(F) STOCKHOLDERS' EQUITY Common stock................................ -- -- 1,000(G) 1,000 Paid-in-capital............................. -- 17,832 200,168(A) 779,386 558,810(G) 2,576(I) Retained earnings........................... 559,810 31,871 (559,810)(G) (31,871)(H) Accumulated other comprehensive income (loss).................................... 3,906 (5,880) 5,880(H) 3,906 ---------- -------- --------- ---------- TOTAL STOCKHOLDERS' EQUITY........ 563,716 43,823 176,753 784,292 ---------- -------- --------- ---------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY............ $1,235,835 $254,371 $ 241,259 $1,731,465 ========== ======== ========= ==========
See notes to unaudited pro forma combined balance sheet. 62 NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET (IN THOUSANDS EXCEPT PER SHARE DATA) (1) Euro amounts are translated into U.S. dollars based on a conversion rate of 1.1809 euros per U.S. dollar, the period end exchange rate between U.S. dollars and euros as of June 30, 2001. (2) The pro forma financial statements have been prepared to reflect the conversion of MasterCard from a member-based organization to a stock company and the integration of Europay, MEPUK and MasterCard. No separate pro forma adjustment is required for the integration of MEPUK as it will have no assets or liabilities other than shares in Europay at the close of the transaction. Pro forma adjustments are made to reflect: (A) intangible assets arising out of the preliminary allocation of purchase price as follows: Purchase price of 85% of the estimated fair value of Europay......... $218,000 Allocated as follows: Historical book value of 85% of Europay's assets and liabilities............................................ $39,573 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.......................... 7,652 Deferred income taxes..................................... (15,772) Liabilities and acquisition related costs (see Note 2(E)).................................................. (78,898) Excess of purchase price over identifiable assets and liabilities (goodwill and other intangible assets including customer relationships)..................................................... $223,667 ========
Total intangible assets amount to $265,445 and consist of goodwill and other intangible assets including customer relationships of $223,667; software and other technology-related intangibles of $29,878; and trademarks, tradenames and brand names of $11,900. See Note 2(C) to the Notes to the Unaudited Pro Forma Combined Income Statements for amortization period. (B) the elimination of inter-company balances between MasterCard and Europay. (C) the elimination of MasterCard's historical investment of $4,407 for 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 2(A)). (F) the elimination of the reduction on Europay's balance sheet of the minority interest in EPSS held by MasterCard. (G) the conversion of MasterCard International from a member-based institution to a stock corporation and the issuance of 100 million shares of class A and class B common stock of MasterCard Incorporated at a par value of $.01 per share to the MasterCard International members and the Europay and MEPUK shareholders. (H) the elimination of Europay's pre-acquisition retained earnings and paid-in-capital. (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. 63 CAPITALIZATION The following table sets forth the capitalization of MasterCard Incorporated as of June 30, 2001 on: - an actual basis for MasterCard International; and - a pro forma basis for MasterCard Incorporated giving effect to the proposed conversion and integration with Europay International. The table should be read in conjunction with "Unaudited Pro Forma Combined Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" for each of MasterCard International and Europay included elsewhere in this proxy statement-prospectus. There has been no change to our capitalization since June 30, 2001, other than the impact of current earnings subsequent to June 30, 2001, that would result in a material change to the pro forma capitalization set forth below.
AS OF JUNE 30, 2001 ------------------------------ PRO FORMA FOR THE CONVERSION AND ACTUAL INTEGRATION(1) -------- ------------------ (IN THOUSANDS EXCEPT SHARE DATA) Long term debt.............................................. $ 82,517 $ 82,517 Members'/Stockholders' Equity: Retained Earnings......................................... 559,810 -- Common Stock: Class A common stock, $.01 par value, 275,000,000 shares authorized and 84,000,000 issued....................... -- 840 Class B common stock, $.01 par value, 25,000,000 shares authorized and 16,000,000 issued....................... -- 160 Class C common stock, $.01 par value, 75,000,000 shares authorized and none issued............................. -- -- Additional paid-in capital................................ -- 779,386 Accumulated other comprehensive income.................... 3,906 3,906 -------- -------- Total members'-stockholders' equity......................... 563,716 784,292 -------- -------- Total capitalization........................................ $646,233 $866,809 ======== ========
- --------------- (1) The pro forma data reflects such adjustments as are necessary, in the opinion of management, for a fair presentation of the results of operations and stockholders' equity of MasterCard Incorporated on a pro forma basis. For further detail, see "Unaudited Pro Forma Combined Financial Statements." 64 OVERVIEW OF THE GLOBAL PAYMENTS INDUSTRY The global payments industry consists of all forms of payment including: - Paper -- personal checks, cash, money orders, official checks, travelers cheques and other paper-based means of transferring value; - Cards -- credit cards, charge cards, debit cards (including ATM cards), stored value cards and other types of cards; and - Other Electronic -- wire transfers, electronic benefits transfers and preauthorized payments such as Automated Clearing House ("ACH") payments, among others. The market for global payments is vast. Worldwide private consumption, which measures the market value of goods and services purchased by households and includes certain housing, public sector and non-profit expenditures, was approximately $18 trillion in 1998, according to the World Development Indicators Book 2000. Within the United States, Nilson Reports estimates that the U.S payments industry completed nearly 105.5 billion transactions valued at nearly $4,863 billion in 1999. According to Nilson, there were 77.8 billion paper transactions, 26.1 billion card transactions and 1.6 billion electronic transactions in the U.S. in 1999, valued at approximately $3,342 billion, $1,355 billion and $166 billion, respectively. We believe that the percentage of overall payment transactions conducted with cards has increased in recent years compared to paper forms of payment such as cash and checks. We expect this trend to continue. The relative growth of card-based forms of payment is the result of a number of factors, including: - the expansion of card acceptance networks (including MasterCard's); - the development of new channels for conducting commercial transactions, such as the Internet and mobile commerce applications, that favor card-based forms of payment; - the introduction of globally accepted debit cards usable at the point of sale, and the growth in popularity of debit cards generally; - the development of rewards programs to encourage card usage in certain countries; and - the growing use of cards by corporations and small businesses for travel, purchasing, fleet management and other functions. The most common card-based forms of payment are general purpose cards, which are payment cards carrying logos that permit widespread usage of the cards within countries, regions or around the world. The primary general purpose card brands include the MasterCard family of brands (MasterCard, Maestro and Cirrus); Eurocard; Visa and its related brands (including Plus, Electron and Interlink); American Express; JCB; Diner's Club; and Discover/Novus. In 2000, general purpose cards were used worldwide in approximately 38.5 billion transactions with a GDV of nearly $3,177 billion, an increase of 17.8% and 21.5%, respectively, over the number of transactions and GDV recorded in 1999. GDV is the dollar value of all spending on cards during a given period and is calculated by adding purchase and cash disbursement volume (including, in each case, balance transfers and convenience checks). In addition, the total number of general purpose cards in circulation in 2000 was approximately 1.36 billion, an increase of 12.0% over the number of cards in circulation in 1999. The preceding figures exclude on-line debit programs such as Maestro, which are general purpose cards that typically access a deposit account (as opposed to a line of credit) and use a Personal Identification Number ("PIN") as the primary method for verifying cardholders. In addition, regional or country-specific debit programs or ATM networks, such as NYCE, Concord/EFS and others in the United States, Interac in Canada or EFTPOS in Australia, are properly included in the general purpose card category, although the preceding figures also exclude these programs. In addition to general purpose cards, private label cards comprise a significant portion of all card-based forms of payment. Typically, private label cards are issued by a merchant (such as a department store or gasoline (petroleum) retailer) and can be used only at the issuing merchant's locations. 65 A number of MasterCard's competitors -- including American Express, JCB and Discover/Novus -- operate proprietary systems in which they generally issue the cards bearing their brands and "acquire" transactions from the merchants who accept their cards for payment. These competitors set their own credit policies and practices and the competitive terms of the cards they issue. In contrast, MasterCard is an open bankcard association, as is Visa. MasterCard is owned by financial institutions that issue cards with global acceptance and/or acquire transactions on behalf of merchants who accept those cards for payment. MasterCard is not a financial institution that issues cards or contracts with merchants to accept cards for payment. In most countries throughout the world, including the United States, financial institutions typically issue both MasterCard- and Visa-branded payment cards. This structure is known as "duality." In some countries, however, particularly Canada, card issuers are "non-dual," meaning that they issue either MasterCard or Visa payment cards, but not both. Issuance of MasterCard and Visa debit cards is generally non-dual in the United States as well because of a Visa rule mandating debit exclusivity. As the result of consolidation in the banking industry, we expect that the number of financial institutions that issue MasterCard cards will decline, resulting in fewer active member financial institutions for MasterCard. However, MasterCard's remaining members are expected to become correspondingly larger and more global in scope. 66 BUSINESS OF MASTERCARD INTERNATIONAL After the conversion, MasterCard International will be a subsidiary of MasterCard Incorporated and the principal members of MasterCard International will own the common stock of MasterCard Incorporated. The following discussion of the business of MasterCard International describes the business that will be conducted by MasterCard Incorporated through MasterCard International after the conversion. MasterCard International is a leading global payment solutions company owned by over 1,500 financial institutions worldwide, which are principal members that participate directly in the business of MasterCard International. We manage a family of well-known, widely accepted payment card brands including MasterCard, Maestro and Cirrus on behalf of these members and approximately 13,500 affiliate members that participate indirectly in our business. We license our brands to members, provide a sophisticated set of information and transaction processing services to members and establish and enforce rules and standards surrounding the use of cards carrying our brands. We also undertake a variety of marketing activities designed to maintain and enhance the value of our brands. As an industry leader in technological innovation, we are developing highly secure, efficient payment programs for electronic and mobile commerce applications and helping members launch chip-based card programs in countries throughout the world. On a global scale, we process transactions denominated in more than 180 currencies. In 2000, our GDV, which represents gross spending (purchases and cash disbursements) on MasterCard-branded cards for goods and services, including balance transfers and convenience checks, increased 18% to $857.7 billion from $725.6 billion in 1999. For the first six months of 2001, our GDV was $458.8 billion, an 18% increase over the $405.3 billion of GDV generated during the same period in 2000. At June 30, 2001, the total number of MasterCard cards in circulation worldwide as reported by our members was 475.3 million, a 19% increase from the same date in 2000, reflecting strong performance in a number of countries. In addition, our members estimate that cards carrying MasterCard brands were accepted at over 22 million locations around the world as of June 30, 2001. Our revenue is comprised of operations fees and member assessments. Operations fees represent user fees for authorization, clearing, settlement and other member services that facilitate transaction and information management among our members on a global basis. Member assessments are based principally upon the GDV of transactions generated by MasterCard-branded cards. We refer to the financial institutions that issue our cards as "issuers" and those that enroll merchants into programs to accept our cards as "acquirers." We refer to these institutions collectively as "MasterCard licensed financial institutions" or "members." The term "members" includes both principal and affiliate members of MasterCard International. We use the terms "MasterCard-branded cards," "MasterCard brands" and similar terms to refer to all cards carrying our brands, including MasterCard, Maestro, Cirrus and Mondex, unless the context requires otherwise. We provide the following services to our members: - Payment Services. We provide transaction processing (primarily authorization, clearing and settlement) services for our members via a sophisticated, proprietary, worldwide computer and telecommunications network. Using our transaction processing services, MasterCard members facilitate payment transactions between cardholders and merchants throughout the world, providing merchants with an efficient and secure payment option and consumers with a convenient payment vehicle accepted worldwide. We also provide a growing set of marketing and technology consulting, card enhancement and loyalty rewards support, and information-based performance analysis services to our members. We do not issue cards, set fees or determine the interest rates that cardholders are charged for use of their cards. Issuers have the responsibility for determining these and most other competitive card features. In addition, we do not solicit merchants or establish the discount rate that merchants are charged for card acceptance, which are responsibilities of acquirers. - Brand Building. We manage and promote our global brands for the benefit of all MasterCard members through umbrella advertising, promotional and sponsorship initiatives. We also promote our global brands by encouraging affinity and co-branded cards and merchant acceptance initiatives. 67 - Rulemaking and Enforcement. We adopt and enforce rules applicable to all MasterCard members relating to a variety of topics where common procedures and standards are needed to ensure the smooth, equitable and secure functioning of our system. We were established in 1966 when a group of banks with proprietary or regional card systems formed the Interbank Card Association ("ICA"). In 1968, ICA began to develop a global network by forming associations and alliances with banks outside the United States. In 1969, ICA acquired exclusive rights to the "MasterCharge" name and the interlocking circles device for its members. After over a decade of expansion, ICA changed its name and the name of its trademarks to MasterCard to reflect its growth into a broad payment services company. We acquired Cirrus in 1988. We acquired an interest in Europay's predecessor, EuroCard, in 1985, and together with Europay launched Maestro as the world's first global, on-line, point-of-sale debit network in 1992. Today, we continue to develop the presence of our brands around the world. Because our business is global in scope, we have structured our organization to be sensitive to the requirements of the regions and countries in which we operate. Our global board of directors has delegated authority over a variety of matters, including certain rulemaking, enforcement and fee-setting decisions and advertising and marketing activities, to regional boards of directors covering each of the United States, Canada, Latin America and the Caribbean, Middle East/Africa, and Asia/Pacific. We also provide member services on a regional basis. In Europe, our business is currently operated through alliance agreements with Europay, which manages licensing and marketing for the MasterCard family of brands. Following the conversion and integration, our business in Europe will be operated through a European regional board of directors with authority like other regional boards of directors. BUSINESS STRATEGY MasterCard's mission is to add value to our members by working to ensure that our payment programs become the world's best and preferred way to pay. To this end, we seek to build superior brands that provide high quality, technologically sophisticated, widely accessible payment solutions for consumers and businesses worldwide. We have adopted the following corporate strategy to fulfill our mission. WE INTEND TO FOCUS ON KEY FINANCIAL INSTITUTIONS AND COUNTRIES TO INCREASE OUR SHARE, WHILE OFFERING BEST-IN-CLASS SERVICES TO ALL OF OUR MEMBERS. Our strategy is to be a global payment solutions company focused strongly on our customers -- our members. We believe that we can profitably grow share by focusing increased, customized attention on the financial institutions that are the largest participants in the MasterCard business and on countries that are vital to our continued success because of their size or growth prospects. To this end, we have entered into customized agreements with members around the globe, which allow us to support the individual needs of these members in exchange for significant business commitments to MasterCard. We intend to focus on entering into further customized agreements with our key members globally. At the same time, our strategy is to continue to provide best-in-class service to all our members, irrespective of their size. To this end, we have established dedicated account management teams for key members and teams for other members on a regional basis. We are also redeploying significant cost savings achieved as a result of our corporate "process change" initiative into higher value-added, customer-focused activities. From a regional perspective, we have identified key countries in which to target our brand-building and program development efforts, and will continue to make significant marketing, promotional and program development investments in these countries. WE WILL CONTINUE TO WORK TO STRENGTHEN MASTERCARD'S BRANDS, TECHNOLOGY AND ACCEPTANCE NETWORK. In light of strong competition in the payments industry, our strategy is to continually invest in strengthening our brands, technology and acceptance network. We will continue to leverage our popular "Priceless" advertising campaign, as well as our sponsorship of major sporting events such as World Cup 2002, the Professional Golf Association Tour, Major League Baseball and the Jordan Grand Prix Formula One racing team, to increase awareness of our brands in countries throughout the world. For consumers, we have positioned the MasterCard brand as "The Best Way to Pay for Everything that Matters"(TM), and our global 68 advertising and marketing activities will continue to stress this message to drive activation, usage and retention of cards carrying our brands. We also will seek increasingly to integrate our brand building efforts with our development of payment solutions in specific countries. With respect to our technical infrastructure, we are three years into the implementation of our "Systems Enhancement Strategy," which is designed to substantially upgrade our core authorization, clearing and settlement systems to enhance their reliability, functionality and flexibility, and to reduce transaction processing costs. We also will continue aggressively to expand the number of merchant locations that accept our brands, in order to maintain the unsurpassed acceptance of MasterCard-branded cards. Finally, we will focus on acceptance initiatives within merchant categories that have not traditionally accepted cards for payment, and on expanding participation in our successful recurring payments programs. WE INTEND TO CONTINUE TO DIFFERENTIATE MASTERCARD FROM OUR COMPETITION BY DEVELOPING INNOVATIVE PAYMENT SOLUTIONS AND CUSTOMIZED PROFESSIONAL SERVICES. Our strategy is to provide a full range of innovative payment solutions in a rapidly evolving industry. To this end, we are continuing to make significant investments to support our members' initiatives in the areas of electronic and mobile commerce, and we will continue to expand our capabilities in connection with corporate and pre-paid programs. We also seek continually to use technology to enhance our members' satisfaction with our core transaction processing services. We intend to continue our significant efforts to facilitate the introduction of chip-based or "smart" cards in countries throughout the world. Smart cards can offer greater security and are more open to customization than existing magnetic stripe cards, allowing our members to keep pace with changes in technology. As of the third quarter of 2001, more than 100 million smart cards bearing MasterCard's or Europay's brands were issued worldwide. In addition, we provide a growing set of marketing, operations and technology consulting, card enhancement and loyalty rewards support, and information-based performance analysis services to our members on an optional, fee-for-services basis. We intend to focus on expanding the range and scope of these professional services in order to enhance our ability to provide customized services to members. WE INTEND TO INTEGRATE WITH EUROPAY TO FORM A SINGLE GLOBAL COMPANY THAT COMBINES THE SEPARATE STRENGTHS OF MASTERCARD AND EUROPAY AND ALLOWS OUR BRANDS TO BE MANAGED MORE EFFECTIVELY. In 2001, our plan is to conclude the integration of MasterCard and Europay to create a single, cohesive, global organization that will manage the continued growth of our brands. In a rapidly evolving marketplace, we need to position ourselves to respond better to competitive and technological trends and to increase our responsiveness to the unique requirements of our members in Europe. We expect the integration with Europay to allow us to improve efficiency, eliminate duplication and costs associated with a two company structure, and coordinate marketing and brand-building initiatives more closely. We also expect that integration will provide us with greater access to a global pool of talent, permit us to benefit fully from Europay's expertise in chip-based cards, debit programs and mobile commerce, and allow us to expand MasterCard's professional services and Internet-related businesses in Europe. PAYMENT SERVICES We provide payment card transaction processing services to our members through a sophisticated, proprietary, worldwide computer and telecommunications system. TRANSACTION PROCESSING Authorization, Clearing and Settlement. The objective of the authorization, clearing and settlement process is to facilitate the movement of transaction data and funds among members on a global basis in a timely and efficient manner. Together, the clearing and settlement processes are often referred to as "interchange." Authorization is the process by which a transaction is approved by the issuer or, in certain circumstances, by MasterCard or others on behalf of the issuer in accordance with the issuer's instructions. We processed over 69 6.1 billion authorizations in 2000. The MasterCard authorization system is a worldwide network designed to facilitate the authorization needs of MasterCard members, and is devised for the near-instantaneous transmission of card account data and authorization results among issuers, acquirers and other transaction processors or networks. In a typical transaction, the merchant or acquirer requests authorization for the transaction from the issuer and permission is given or denied by the issuer based on cardholder account status. Depending on the type of card and transaction value, the relevant authorization criterion may vary. In limited instances, MasterCard will provide stand-in authorization, or authorization on behalf of the issuer, when the issuer is not signed on to our system or cannot be contacted within an established time frame. Typically, our global data transport network, which we refer to as Banknet, routes the authorization requests and responses between issuers and acquirers in less than one quarter of one second (250 milliseconds), with a reliability rate of over 99.7% and an availability rate in excess of 99.99%. Our rules, which vary across regions, establish the circumstances under which merchants and acquirers must seek authorization of transactions. Clearing is the exchange of financial transaction information between the issuer and the acquirer after a transaction has been completed. MasterCard transactions are generally "cleared" through our centralized processing system, known as INET, and the related information is typically routed among members via our Banknet data transport network. Clearing involves the movement of transaction data from the acquirer to MasterCard, where individual transactions are sorted and forwarded to the appropriate issuer for posting to cardholder accounts. Each transaction is valued according to our established rules. Data can be submitted 24-hours per day, seven days a week, and there are multiple clearing cycles each day. Data transmission is provided on every U.S. banking business day to facilitate the member settlement process. Once transactions have been authorized and cleared, MasterCard provides services in connection with the "settlement" of the transaction -- that is, the exchange of funds along with associated fees. Settlement is provided through our Settlement Account Management system, or SAM. Once clearing is complete, a daily reconciliation is provided to each member, detailing the net amounts by clearing cycle and a final settlement position. The actual exchange of funds takes place between a clearing bank chosen by the member and approved by MasterCard and one of MasterCard's settlement banks. If the member is in a net debit position, its clearing bank transfers funds to MasterCard's settlement bank; the opposite occurs if the member is in a net credit position. In most cases, member settlement occurs in U.S. dollars in accordance with established rules, although we offer non-U.S. dollar settlement to our members electing to receive or pay in other selected currencies. We also operate the MasterCard Debit Switch ("MDS"), which supports processing for Cirrus and most Maestro transactions. The MDS switches financial messages between acquiring and issuing members, provides transaction and statistical reporting and performs clearing and settlement between members and other debit transaction processing networks. Unlike the authorization and clearing processes described above, which involve the exchange of transaction data in two discrete messages (once for authorization and again for clearing), the MDS generally operates as a "single message" system in which clearing occurs simultaneously with the initial authorization request. Operations and Systems. We provide transaction processing services through our primary operations facility located in St. Louis, Missouri. Our services are available 24 hours per day, 365 days per year. In the event our main facility becomes disabled, we have a back-up system located at a separate facility in Lake Success, New York. We successfully relocated our primary operations center to a new state-of-the-art transaction processing facility in O'Fallon, Missouri in the second quarter of 2001, and expect to complete our operations staff relocation to this facility by the fourth quarter of 2001. Our transaction processing facilities have redundant power supplies to help protect against loss of data during a power failure. In addition, our systems contain back-up processes and redundancies to ensure continued operation in the event that a process or operation stops unexpectedly. We consistently maintain systems availability at a rate in excess of 99.99%. Systems Enhancement Strategy. We are three years into our five year Systems Enhancement Strategy ("SES") program, which is designed to upgrade our core processing systems to increase flexibility, achieve operating efficiencies, improve time-to-market for new services and reduce transaction costs. 70 As part of the SES program, we have: - migrated our Banknet global data transport network to a "virtual private network" ("VPN") in conjunction with AT&T. Our VPN enhancements have significantly reduced transaction processing times and costs and enhanced data security for members; - replaced computer hardware with state-of-the art systems and improved our stand-in authorization systems to increase capacity and improve member risk management; and - consolidated settlement functions across all MasterCard brands with enhanced settlement advisement and currency management systems. We are also in the process of introducing, among other things, a new clearing system to replace INET called the Global Clearing Management System. This system is intended to be more flexible than its predecessor and to support a richer set of transaction data. Member Risk Management. As a secondary obligor for certain card obligations among principal members, we are exposed to member credit risk. Our legal exposure is limited to our approximately 1,500 principal members. These members directly participate in MasterCard activities and are responsible for the settlement and other activities of, and must provide a performance guarantee with respect to, affiliate members (numbering approximately 13,500 in total). Generally, principal members must meet minimum rating agency requirements. If principal members are not rated, they must meet minimum credit standards to avoid maintaining cash collateral accounts or providing financial guarantees. To minimize the contingent risk to MasterCard of a member failure, we monitor members' activities, perform traditional credit risk analysis of members' financial strength, evaluate members' economic operating environments and monitor compliance with our rules and standards. If the financial condition of a member or the state of a national economy in which a member operates indicates that a member may not be able to satisfy its settlement obligations to other members, we may require the member to post collateral and provide guarantees sufficient to cover our potential exposure in event of such member's failure. When collateral is required, the amount is generally equal to the member's credit risk exposure. If an issuing bank is potentially unable to meet its obligations to us, we can block authorization of transactions and ultimately terminate membership. Our principal member credit risk is settlement exposure, which materializes when an issuer or acquirer fails to fund settlement (including chargeback) obligations. For liquidity protection in the event of member settlement failure, we have established a $1.2 billion committed credit facility, which is subject to annual renewal. In addition, we have the right to assess all or a portion of our members for reimbursement for settlement losses, member credit losses or any other operating losses. For a description of our assessment rights following the conversion and integration, see "Comparison of Rights of MasterCard International Members Before and After the Conversion and Integration -- Fees, Expenses and Assessments." For a description of the settlement and other risks attributable to our travelers' cheque business, see Note 9 to the audited Consolidated Financial Statements of MasterCard International. Anti-Fraud Initiatives. We are continually developing programs and systems to aid our members and merchants in detecting and preventing the fraudulent use of cards carrying our brands. Our most basic anti-fraud initiative is a "warning bulletin" that we prepare, sell and distribute to members showing invalid and other recently terminated account numbers. This bulletin is sold and distributed electronically to members in the United States and is produced in both paper and electronic format for members outside the United States. In addition, our Member Protection Program provides, among other things, a daily report to all card issuers identifying accounts with unusual activity based on the number or size of transactions. We have a number of other sophisticated prevention initiatives targeted at fraudulent cardholder activity. As one example, our System to Avoid Fraud Effectively (SAFE) program compiles member-submitted data regarding fraudulent transactions into reports designed to help issuers and acquirers improve fraud detection and prevention. In addition, our Risk Finder system helps members to predict fraud and reduce losses by evaluating transactions using a number of variables. Through our MasterCard Alerts on-line program, we 71 facilitate communications among members and law enforcement officials with respect to fraudulent activities on a worldwide basis. We also target fraudulent activity at the merchant level. Through our Merchant Profiles program, we identify high risk merchants with significant fraud-related transaction activity and encourage these merchants to implement fraud control procedures. Our Member Alert to Control High-Risk Merchants -- MATCH(TM) program is a tool designed to assist acquirers to assess risk before signing a merchant into their MasterCard acceptance programs. MATCH contains an updated file of merchants terminated for cause by members or otherwise classified as a special risk. In addition, our Merchant Audit Program audits merchants worldwide once per month, assessing each merchant's fraud to sales ratio. When the ratio exceeds 4% for two consecutive months in a six-month period, the merchant is placed on a special watch. When the ratio exceeds 8% for the same period, acquiring members have the option to terminate the relevant merchant agreement or process all fraudulent activity chargebacks against the merchant for a minimum period of one year. We have also implemented the Common Points of Purchase Program, which helps identify merchants that knowingly or unknowingly may have facilitated the compromise of cardholder account data. One of the strongest barriers to increasing electronic commerce is consumer fear for the security of Internet-based transactions. To address this concern, we have developed the Secure Electronic Transaction ("SET") protocol for safeguarding personal information contained on consumers' payment cards. SET uses a digital certificate and encryption software to store account and transaction information as a means of securing Internet transactions. MasterCard is a founding member of SET Co., a consortium of leading companies established to encourage the widespread adoption of the SET security specifications. SET has been adopted in many countries outside of the United States. In addition to SET, MasterCard is developing the Secure Payment Application (SPA) to protect account numbers and authenticate cardholders in electronic and mobile commerce transactions. MasterCard RPPS. MasterCard's Remote Payment and Presentment Service ("RPPS"), launched in 1987, is an electronic payment processing service for remote banking services in the United States and Canada. RPPS provides routing, clearing and settlement services between service providers supporting consumer bill payment services (for example, in connection with personal computer-based home banking) and billers. RPPS transmits over 12 million payments valued at approximately $6 billion per month, and represents one of the largest networks for the processing of consumer-to-business electronic payments in the United States. OTHER PAYMENT SERVICES In addition to transaction processing, we provide a growing set of marketing and technology consulting, card enhancement and loyalty rewards support, and information-based performance analysis services to our members. These services are generally provided on an optional, fee-for-services basis, or may be provided to members in connection with customized support agreements. Marketing Consulting. Our global marketing consulting group provides customized consulting to members in the area of cardholder marketing, including acquisition, portfolio management and loyalty consulting designed to help expand our members' businesses. Among other things, we undertake strategic reviews of our members' marketing activities, help members to launch new programs and enter new regional markets, develop strategic plans, assist members to build relationships with selected business partners and undertake extensive research. We also develop innovative marketing communications programs (such as direct mail packages, telephone scripts and Internet and television advertisements) to improve our members' ability to acquire card accounts and to stimulate activation of these accounts. In addition, we undertake a range of portfolio segmentation, database marketing and loyalty consulting projects that assist members to better target their cardholders' unique characteristics and requirements, helping to improve acquisition and retention of accounts. We consult with respect to all MasterCard card programs and in all regions of the world. Operations Consulting. We have leveraged our significant technical expertise to provide technology-based consulting services to members. Through these services, our experienced operations staff assist members to analyze key operations trends and best industry practices to improve their overall service levels and business 72 performance. Our operations consultants provide advice principally in connection with testing practices, program management and change management activities. We also provide consulting services to members regarding risk management and security issues. Card Enhancement Services. Our worldwide cardholder services group develops, manages and markets a range of services to members globally to support the features that are offered in connection with certain of our card programs. These services include lost and stolen card reporting, emergency card replacement, emergency cash advance, concierge and travel assistance services. In conjunction with a licensed insurance company, we also support our members' purchase assurance, extended warranty, collision/damage waiver and other insurance-based enhancements. Loyalty Rewards Program Services. Our loyalty rewards services group provides members with comprehensive support of their card-based loyalty rewards programs. We have developed a proprietary software program, which we use to track, accumulate and redeem points for cardholders participating in member rewards programs that use our services. Through arrangements with leading travel service providers and rewards vendors, we have established a dedicated call center in St. Louis that accepts cardholder calls to redeem points, answer customer service inquiries, and book travel arrangements. Information/Performance Analysis Services. We provide a sophisticated set of software and online decision-support tools to our members and others. These tools rely on aggregated transaction information captured in our clearing and settlement systems to permit members to analyze the performance of their card portfolios and to take action to improve the revenue potential of their businesses. We also provide decision-support tools that allow members to identify, track and evaluate their performance in areas such as authorizations, fraud detection and response, quality and chargeback processing. These tools are principally available in the United States, although we intend to increasingly offer them to members on a global basis where possible. Many of our decision support tools are provided to members through MasterCard OnLiNE(TM) , our online messaging system that allows members to conduct a wide range of business with MasterCard through Internet, dial-up, VPN or other connections. In addition to accessing some of the tools described above, members can use MasterCard OnLiNE to obtain new card program approvals, submit periodic statistical performance information, assist in processing chargebacks and receive alerts about fraudulent transaction activity and related information. MasterCard's recently launched on-line information initiative, called MasterCard eService, provides members with access through MasterCard OnLiNE to most MasterCard publications, manuals and bulletins as well as operations forms, information releases and on-line research tools. BRAND BUILDING MARKETING ACTIVITIES For cardholders, the MasterCard brand stands for "The Best Way to Pay for Everything that Matters(TM)." Our approach to marketing activities combines advertising, sponsorships and promotions as part of an integrated package designed to increase consumer awareness of MasterCard and to drive activation, usage and retention of cards carrying our brands. We also seek to tailor our global marketing messages so that they are optimized for use in individual countries, while maintaining a common global theme. Advertising. Our advertising plays a critical role in building brand visibility, usage and loyalty among cardholders globally. Our award-winning "Priceless" advertising campaign launched in the United States in 1997 and has run in more than 36 languages across 80 countries. We believe the "Priceless" campaign represents one of the most successful and flexible global advertising campaigns in use today. The campaign promotes MasterCard's universal acceptance and usage benefits that permit cardholders to pay for what they need, when they need it, and provides MasterCard with a consistent, recognizable message that supports our brand positioning. Sponsorships. We seek to increase brand awareness and preference, and to encourage card usage and loyalty, by sponsoring a variety of sports properties that support the "Priceless" campaign and MasterCard brand positioning. Our sports sponsorships constitute unique assets that help build the MasterCard brand, 73 while supporting the business of our members and relationships with key customers. In soccer, MasterCard is the exclusive payment system sponsor of the FIFA World Cup, which we believe is the single largest sporting event in the world. We also sponsor other leading soccer events, such as the FIFA Women's World Cup and the FIFA World Youth Championship, as well as both the regional and club championships of Copa America and Copa Libertadores in Latin America, and, through Europay, the European Championship and UEFA Champions League in Europe. Our ten year global investment in soccer is complemented by other global and regional sports sponsorships. Globally, we sponsor the Jordan Grand Prix Formula One racing team, part of the prestigious Formula One auto racing circuit. In golf, we are an international sponsor and the preferred card of the PGA Tour, the Senior PGA Tour, the PGA of America, the British Open, the MasterCard Championship Tournament held in Hawaii, and the MasterCard Colonial Tournament held in Texas. In North America, we have made major sponsorship investments in baseball, ice hockey and figure skating. In baseball, we are the preferred card of Major League Baseball and a sponsor of both the All-Star Game and the World Series. We have also established separate marketing and sponsorship agreements with nine major league baseball teams. In hockey, we are the preferred card and a sponsor of the National Hockey League, the National Hockey League Players Association and the Canadian Hockey League. We also sponsor a number of specific hockey-related events including the NHL All-Star Weekend, the Stanley Cup Finals, the MasterCard Memorial Cup and the MasterCard Quebec Major Junior Hockey League All-Star Game. In figure skating, we sponsored the 2001 World Figure Skating Championships and other events, including the Skate Canada Organization and the MasterCard Skate Canada International Competition. Promotions. In order to increase usage of our cards, we sponsor frequent promotions on a regional and national basis. These promotions typically provide cardholders with a discount, rebate or other special offer, or an entry into a sweepstakes or contest, in connection with the use of a MasterCard-branded card. In the United States, we sponsor MasterCard Exclusives(TM), a collection of promotional programs and select merchant offers that members can insert into their cardholder statements to drive card usage; MasterCard Exclusives Online(TM), a permission-based email and Internet web site program providing cardholders with access to exclusive merchant offers; and periodic national sweepstakes promotions, which typically coincide with peak spending periods such as Christmas or the summer travel season. These promotions are prominently featured on our Internet site, mastercard.com, which contains a variety of materials targeted to consumers. MERCHANT ACCEPTANCE INITIATIVES At June 30, 2001, our members estimate that cards carrying MasterCard brands were accepted at over 22 million locations around the world. These results were part of a longer-term trend of substantially increasing MasterCard card acceptance. In the last five years, our members estimate that the number of MasterCard acceptance locations worldwide increased by over 50%. Our acceptance strategy is to maintain the unsurpassed acceptance of MasterCard-branded cards by continuing our aggressive efforts to expand the number of merchant locations worldwide where cardholders can use our cards. Our acceptance efforts are focused on three core initiatives. First, we seek to increase the number of payment channels where MasterCard cards are accepted, such as by introducing MasterCard card acceptance in connection with Internet, mobile commerce and interactive television payment applications. Second, we seek to increase the categories of merchants that accept our cards. In recent years, payment card acceptance has increased in a number of merchant categories that were previously averse to accepting payment cards, such as utilities, doctors offices and supermarkets. In the United States, we are focused presently on expanding acceptance in fast food restaurants and in connection with public sector payments (including in connection with taxes, fees, fines and tolls), among other categories. Outside the United States, where payment card acceptance is growing more rapidly than inside the U.S., we are working to support enhanced card acceptance for electronic commerce, public sector and recurring payments. Third, we seek to increase usage of our cards at selected merchants by sponsoring a range of special offers, sweepstakes, contests and other promotional programs from time to time. We also enter into brand preference agreements with 74 merchants, in connection with which merchants commit to expressing their preference for MasterCard-branded cards when accepting payments from consumers. Our acceptance initiatives are primarily designed to educate merchants about the benefits and features of accepting MasterCard-branded cards for payment. We also support technical initiatives designed to make card acceptance more attractive for specific merchants, such as our Quick Payment Service, which reduces authorization times and enhances the availability of MasterCard card acceptance for fast food restaurants and other merchants where rapid transactions are required. We are presently working on efforts to support radio frequency identification devices, which are designed to facilitate card acceptance at merchants with dispersed points of interaction with consumers, such as food delivery outlets. Finally, we view recurring payments as a significant opportunity to expand MasterCard card acceptance in the United States, and are sponsoring initiatives to encourage consumers to make recurring bill payments in a variety of categories -- including telephone, cable, utilities and insurance -- on their MasterCard-branded cards. CO-BRANDED/AFFINITY CARDS We provide research, marketing support and financial assistance to our members and their partners in connection with the launch and marketing of co-branded and affinity card programs. Co-branded cards are payment cards bearing the logos or other insignia of an issuer and a marketing partner, often a retail merchant. Affinity cards are similar to co-branded cards except that the issuer's marketing partner is typically a charity or similar organization, and a portion of consumer spending on the affinity card is generally allocated to support the charity. MasterCard has supported a number of leading co-branded and affinity card programs in the automobile, mass merchandise retailing and other segments. RULE MAKING AND ENFORCEMENT Membership in MasterCard is open to banks and other regulated and supervised financial institutions. Applicants for membership must be approved by a regional MasterCard board of directors. In general, MasterCard staff grant licenses by territory. To be approved as a member, an applicant must be able to perform all obligations required of members. Credit reviews are conducted on all new members prior to admission, and are updated periodically. In exchange for licenses to use our brands, members agree to comply with our by-laws, policies, rules and operating regulations ("Standards"). We are the governing body that establishes and enforces the Standards. The Standards relate to such matters as: - membership eligibility and financial soundness criteria; - the design and features of cards; - the use of MasterCard trademarks; - the standards and features applicable to certain card programs; - transaction and other reporting requirements; - transaction processing obligations and the use of third-party service providers; - merchant acquiring activities, including acceptance standards applicable to merchants; - cash disbursements; - fees; - guaranteed settlement, member failures and allocation of losses; and - termination of membership. To ensure that members conform to the Standards, we run an extensive range of compliance and other programs including reviewing all card programs proposed to be issued by members and requiring members to 75 undergo an annual audit by an independent certified public accountant (or similar examination by a regulatory authority). Except as specifically described in this proxy statement-prospectus, the Standards will not be effected by the conversion or integration. In connection with enforcement of the Standards, MasterCard regulates disputes between members relating to specific transactions. For example, after a transaction is presented to an issuer, the issuer may determine that the transaction may be invalid for a variety of reasons, including fraud. If the issuer believes there is a defect in a transaction, the issuer may return, or chargeback, the transaction to the acquirer. MasterCard enforces rules relating to chargebacks and acts as an arbitrator of last resort with respect to chargeback disputes. MASTERCARD PAYMENT PROGRAMS MasterCard supports a wide range of payment solutions to enable our members to design, package and implement programs targeted to the specific needs of their consumer and corporate customers. While we permit regional variations in the characteristics and features of our payment programs, all MasterCard cards benefit from MasterCard's worldwide acceptance network and can be used to make purchases or obtain cash wherever the relevant brand logos are displayed indicating acceptance of our cards. The MasterCard acceptance network, together with our Standards and the transaction processing services we provide, ensure that all MasterCard payment programs are integrated into a network that facilitates payments across the globe. Our principal payment programs, which are facilitated through our brands -- MasterCard, Maestro, Cirrus and Mondex -- are listed below:
CATEGORY PROGRAM - -------- ------- Consumer Programs - Standard MasterCard - Gold MasterCard - Platinum MasterCard - World MasterCard - MasterCard debit - Gold MasterCard debit - Platinum MasterCard debit - Maestro (online debit cards) - MasterCard/Cirrus/Maestro ATM Network Corporate Payment - MasterCard Corporate Solutions - MasterCard Corporate Executive - MasterCard Corporate Purchasing - MasterCard Corporate Fleet - MasterCard Corporate Multi Card - MasterCard BusinessCard - MasterCard Executive BusinessCard - MasterCard BusinessCard debit Stored Value Programs - Pre-paid programs - Mondex (stored value cards) - MasterCard Travelers Cheques
76 CONSUMER PROGRAMS MasterCard administers a number of consumer credit programs that are designed to meet the needs of our members for tailored, customized programs addressed to specific consumer segments. Standard MasterCard cards are general purpose credit cards targeted to consumers with basic needs for a credit card. Gold MasterCard cards are targeted to consumers typically requiring a higher line of credit or spending limit and one or more card enhancement services associated with a card. Platinum MasterCard cards are generally targeted to more upscale consumers and are offered with still higher minimum credit lines or spending limits. Platinum MasterCard cards also provide a full range of card enhancement services. World MasterCard cards are a highly flexible payment program that combines the absence of a preset spending limit with the option to revolve a designated portion of the charges made. These cards are targeted principally for travel and entertainment use and are accompanied by best-in-class enhancement services and loyalty rewards programs. All MasterCard cards, including business/corporate cards discussed below, permit cardholders to obtain cash from bank branches or through the MasterCard/Cirrus/Maestro ATM network, as well as to make purchases at the point of sale. The services provided in connection with all MasterCard credit cards include lost/stolen card reporting, emergency card replacement and emergency cash advance. MasterAssist(TM) enhancement services are provided in connection with most Gold, Platinum and World MasterCard cards, as well as certain Standard MasterCard cards, and include emergency travel assistance and referral services, as well as retail-related insurance such as purchase protection and extended warranty coverage. MasterRental(TM) vehicle rental insurance is also provided in the United States in connection with all Gold, Platinum and World MasterCard cards (MasterRental(TM) is a required benefit in Canada, but members can use independent vendors to provide the service). In addition, concierge services and airport lounge access are required benefits for World MasterCard cards in the United States, and are typical features associated with most Platinum and World MasterCard cards. Cardholders can access these and other services through MasterCard Global Service(TM), a worldwide customer service program delivered through a call center operated by MasterCard and accessible via a network of country-specific, toll-free or collect telephone numbers. MasterCard's rules also permit our members to issue "secured" MasterCard cards, in which all or a portion of the cardholder's line of credit is secured by collateral, typically a cash deposit made by the cardholder. In addition, MasterCard supports a range of payment solutions that allow our members to provide consumers with convenient access to funds on deposit in checking, demand deposit and other accounts. Transactions processed on a debit card generally withdraw available funds directly from a cardholder's account in accordance with terms established by the issuer of the card, and in some cases involve an extension of credit. MasterCard's debit programs may be branded with the MasterCard, Maestro and/or Cirrus marks, and can be used to obtain cash in bank branches or at ATMs. In addition, MasterCard- and Maestro-branded debit cards may be used to make purchases at the point of sale. All MasterCard debit programs are designed to enhance our members' programs and services by providing consumers with greater access to their funds by leveraging the strengths of MasterCard's extensive global acceptance network and the MasterCard/Cirrus/ Maestro ATM network. Debit cards carrying the MasterCard brand allow cardholders to validate transactions at the point of sale either by signing a sales receipt or, if the relevant card also bears a Maestro or regional ATM network mark and the merchant has the necessary equipment, by entering a PIN at a terminal. Like our consumer credit programs, we support Gold MasterCard debit cards and Platinum MasterCard debit cards that members can offer as premium services to cardholders. Members can also provide enhancement services and loyalty rewards programs in connection with debit cards carrying our brands; in the United States, all MasterCard debit cards benefit from the same core enhancements available on MasterCard credit cards. Maestro is MasterCard's leading online debit program, with more participating issuers, cards and acceptance locations in more countries than any other on-line debit brand. Typically, Maestro cards allow cardholders to verify themselves by entering a PIN, although in certain countries, cardholders are required to sign a sales receipt. Maestro cards are issued, and Maestro transactions are processed, pursuant to a set of rules and procedures that are separate from the rules applicable to MasterCard credit and debit transactions. 77 International travel services including emergency cash disbursement, lost and stolen card reporting as well as access to card issuers are available on an optional basis to Maestro cardholders through Maestro Global Service from MasterCard(TM). We believe that the MasterCard/Cirrus/Maestro ATM Network is the world's largest global ATM network, with more than 600,000 participating cash dispensing locations around the globe. Any cardholder with a card bearing the MasterCard, Maestro or Cirrus logo may use a network ATM to access funds on deposit in his or her account or to take a cash advance (if a MasterCard credit card is used). The network is available twenty four hours a day, seven days a week, 365 days a year. We make the Cirrus brand available to members to provide global cash access through the MasterCard/ Cirrus/Maestro ATM Network for our members' proprietary ATM cards. Cirrus transactions are validated by entering a PIN. As with Maestro cards, Cirrus cards are issued and processed pursuant to a set of rules and procedures that are separate from the rules applicable either to MasterCard or Maestro transactions. CORPORATE PAYMENT SOLUTIONS MasterCard's corporate payment solutions assist corporations, mid-sized companies, small businesses and public sector organizations to streamline their payment processes, manage information and reduce administrative costs. We have a long history of innovation in the corporate segment, having developed the first business card issued by a financial institution, the first fleet card platform and the first multi-purpose card. Inherent in each corporate payment solution is a combination of rich transaction data, purchasing controls and sophisticated reporting alternatives that are customizable to the needs of the user. The MasterCard Corporate card is designed to allow organizations to manage employee travel and entertainment expenses. MasterCard Corporate Executive cards, marketed in such countries as the United States, Canada, Chile and France, are targeted at senior executives and offer increased spending limits, concierge services and worldwide, 24-hour customer service. MasterCard Corporate Purchasing cards, marketed globally, are designed to assist in the reengineering of the corporate purchasing process, enhancing companies' financial controls while reducing administrative costs. MasterCard Corporate Fleet cards provide companies with a way to manage the expenses of a commercial fleet. Finally, the MasterCard Corporate Multi Card provides customers with an integrated card that combines the functionality of one or more of our MasterCard corporate programs -- travel, purchasing or fleet -- into a single card or account, thereby reducing the costs of managing multiple card programs. We also administer a variety of payment programs for public sector entities that are similar to the travel, purchasing, fleet and Multi cards offered to corporations. The MasterCard BusinessCard and Executive BusinessCard, marketed globally, are targeted at the small-business segment, offering cardholders the ability to extend payments and separate business expenses from personal expenses. MasterCard's Small Business Connections, currently offered in the United States, Canada, and the United Kingdom, is a web-based community for small businesses. It includes the Business Savings Club that offers discounts on products and services, Business Bonuses, a rewards program, as well as Market Access, a marketplace site where small businesses are able to buy and sell over the web. A key driver of growth in corporate payment solutions, particularly outside of the United States, is Smart Data Online, our web-based reporting tool. Implemented in all regions of the world, Smart Data Online is a state-of-the-art software product developed and supported by MasterCard. It is available in ten languages and requires only a web browser to access. It allows organizations ranging from small businesses to large corporations to display cardholder statements, prepare management reports and integrate charge data into their financial systems. Recognizing the rapid growth in business-to-business electronic commerce, MasterCard's Corporate Payment Solutions group has a team dedicated to the development and deployment of an overall electronic business-to-business strategy. Core to the strategy will be leveraging MasterCard's infrastructure and ubiquitous brand to become the payment method of choice for both buyers and sellers in electronic business-to-business transactions. As an example, we recently launched the MasterCard Global Trading Program(TM), 78 which expands the functionality of the MasterCard Purchasing card to become a payment vehicle for cross border trade. STORED VALUE PROGRAMS Unlike debit, charge or credit programs -- where the consumer or business/corporate customer is obligated to pay at the same time as, or later than, the relevant transaction -- "stored value" programs involve a balance account that is funded with monetary value prior to use. For MasterCard pre-paid cards, this balance account is maintained on the issuer's or MasterCard's host computer, and the account is accessed through a MasterCard-branded plastic payment card using magnetic stripe technology. For travelers cheques, the balance account is reflected in the value of the paper cheques "purchased" by a consumer prior to use. For Mondex cards, the balance account is maintained in an electronic "purse" application contained on a computer chip embedded into the payment card itself. Pre-paid. MasterCard's pre-paid card platform is a flexible tool that permits our members to develop, launch and manage host-based, magnetic stripe-enabled pre-paid card programs customized to the needs of unique consumer segments. Pre-paid cards can be issued in connection with our MasterCard, Maestro and/or Cirrus brands according to the issuing member's requirements, and are accepted anywhere the relevant brand is accepted. There are a variety of MasterCard-branded pre-paid card programs in operation in the United States, Asia/Pacific and other regions. In the United States, we launched a MasterCard gift card program in 2000 using our pre-paid card platform, which allows consumers to purchase and replenish MasterCard-branded gift cards over the Internet. Travelers Cheques. Travelers cheques are a paper-based, prepaid form of payment for use at the point of sale. MasterCard-branded travelers cheques, which are available in a number of international currencies including the euro, are refundable worldwide and can be replaced if lost or stolen. MasterCard-branded travelers cheques are issued by a number of members around the world. For a description of MasterCard's guarantee obligations relating to travelers cheques, see Note 13 to the Consolidated Financial Statements of MasterCard International. Mondex. The Mondex electronic cash program, a chip-based, stored value payment application, allows monetary value to be stored in an electronic "purse" directly on Mondex-branded payment cards. Up to five currencies can be loaded on a Mondex card at any one time. The value stored on a Mondex card can be used as payment for goods or services at retailers who accept Mondex cards, or transferred to other Mondex cards, using specialized card readers. Mondex cards permit the immediate transfer of value to a merchant or between cards without the transaction being authorized, cleared or settled through a central computer system. Mondex cards are primarily marketed to consumers as a convenient, technologically advanced and secure alternative to payment by cash or check, principally in connection with low-value purchases. For merchants and banks, Mondex cards can also reduce the risks and costs associated with processing cash and check payments. The Mondex purse application is commercialized through a franchise system operated by Mondex International Limited ("MXI"). All MasterCard members have the right to obtain licenses from franchisees of MXI to issue Mondex cards in the countries in which they operate. To date, the Mondex purse application has been franchised or directly licensed to financial institutions in most major national markets. Full scale Mondex electronic cash programs have been implemented in Hong Kong and in connection with a number of universities and an Internet retailer in the United Kingdom and Venezuela. In addition, Mondex cards are currently in pilot trials in Canada and New Zealand. For a description of our investment in MXI, the owner and licensor of the Mondex electronic cash program, see Note 11 to the Consolidated Financial Statements of MasterCard International. On June 29, 2001, MasterCard International acquired all of the outstanding stock of MXI that it did not previously own. As a result of assuming full ownership of MXI, MasterCard International now directly controls all of MXI's operations and management. This transaction will not have a material impact on the financial statements of MasterCard International. Through MXI, MasterCard International presently expects to continue providing support to Mondex franchisees and licensees, providing services to the MULTOS 79 consortium (described below), and managing the Mondex electronic cash, security and certificate authority applications. GLOBAL e-BUSINESS AND EMERGING TECHNOLOGIES Through our Global e-Business and Emerging Technologies group, MasterCard is supporting innovation in the payments industry with a number of initiatives, including developments in the areas of electronic commerce, mobile commerce and smart cards. We seek to ensure that MasterCard-branded payment cards play an important role in payment channels that are developing as a result of new technologies (including the Internet, wireless channels and cable). We also seek to develop payment programs that utilize these technologies (including, among others, person-to-person payments, micropayments and payments via television set-top boxes). Electronic and Mobile Commerce. Our Global e-Business group seeks to ensure that MasterCard cards can be securely and conveniently used for all kinds of payments involving new or developing technologies, such as the Internet, wireless devices, digital wallets, interactive television and personal digital assistants. We are planning or developing MasterCard payment solutions in each of these areas through alliances with electronic commerce vendors and service providers. We are also participating in the establishment of industry standards for both electronic and mobile commerce. We are also working to develop mobile commerce standards and programs that will allow consumers to securely conduct their financial transactions using a variety of wireless devices. Mobile commerce is the term applied to online financial transactions -- shopping or the electronic transfer of funds -- using a mobile device. Our global mobile commerce team works with standards organizations such as WAP, the Global Mobile Commerce Interoperability Group (GMCIG), ETSI and others to establish wireless payment standards, and has entered into alliances with Motorola, 724 Solutions, Sonera Smart Trust, MobileWay and other members of the mobile commerce chain to develop secure wireless payment solutions. Smart Cards. We are working with our members to help them replace traditional payment cards relying solely on magnetic stripe technology with smart, or chip-enabled, payment cards. Smart cards provide for more secure transactions and offer members the opportunity to provide their cardholders with value-added, customized relationship services associated with the card. Smart cards can perform many different functions, such as storing cardholders' personal and purchasing information and allowing banks to provide individualized rewards programs and merchants to offer personalized incentives. Additionally, smart cards may offer greater security protections in certain circumstances than magnetic stripe cards because electronic proof of a cardholder's identity is carried on the smart card and encrypted before transmission to the issuer, allowing secure purchases. We provide an end-to-end strategy for helping our members migrate from magnetic stripe cards to smart cards in a manner and timeframe that works best for them. Our chip migratory strategy is based on two fundamental principles: - ensuring that our chip programs work the same way around the globe; and - providing choice in terms of which applications and operating systems are available to our members. To support the movement to chip-based cards, we have developed The Complete Chip Solution(TM), a turnkey strategy for helping our members migrate their MasterCard cards to a chip platform. The Complete Chip Solution is a support program offering members a suite of payment applications for smart cards, including debit, credit, stored value and digital identification, which can operate on MULTOS(TM), Java(TM) and other smart card operating platforms. In addition, we have developed M/Chip(TM), an integrated credit/debit application that allows our members to issue chip-based MasterCard, Maestro, and Cirrus-branded cards that are fully compatible with the EMV (Europay-MasterCard-Visa) standard. We offer an M/Chip application specifically designed for the MULTOS platform, and a platform neutral version of M/Chip for JavaCard and proprietary chip operating systems. We also manage the Chip Vendor Services Program, through which we coordinate MasterCard's chip strategies with leading smart card vendors and assist members in implementing chip-based programs. 80 While our strategy is to allow members to choose their own operating system for their chip programs, we (together with our Mondex affiliate) have played a leading role in the development of MULTOS, an open, industry-controlled, high-security, multi-application operating system for smart cards. With MULTOS, members issuing smart cards are able to combine payment applications from any service provider (such as credit, debit, stored value and loyalty programs) with applications from outside the financial services industry (such as security or storage of personal information). MULTOS is actively promoted by MAOSCO, a consortium in which we play a significant role. We have also joined with Europay and Visa to establish EMVCo, a joint working group created to facilitate the introduction of chip technology in a global payments environment. As of the third quarter of 2001, more than 100 million smart cards bearing MasterCard's or Europay's brands were issued worldwide. MYCAL, the fourth largest retailer in Japan, successfully launched the first MasterCard smart card program using the MULTOS operating system and M/Chip in 1998, and over one million cards were issued in connection with this program in 1999. Significant chip migration activities are now occurring in Brazil, the United Kingdom and other countries, and M/Chip implementations are taking place in Japan, Korea and South Africa. INTELLECTUAL PROPERTY We own a number of valuable trademarks that are essential to our business, including MasterCard and Cirrus. We own the Maestro trademark through our joint venture with Europay. MXI owns the Mondex wordmark and we license the interlocking circles device that, together with the wordmark, make up the Mondex logo. Through license agreements with our member financial institutions, we authorize the use of our trademarks in connection with our members' card issuing and merchant acquiring businesses. Trademarks remain valid so long as they are used properly for identification purposes, and we emphasize the correct use of our trademarks both within our company and by our members. In addition, we own a number of patents relating to payments solutions, transaction processing, smart cards, security systems and other matters. None of our patents are material to our business operations. COMPETITION MasterCard programs compete against all forms of payment, including paper-based transactions (principally cash and checks) and electronic transactions such as wire transfers and ACH payments. While we believe we have gained share versus cash and checks in recent years, these forms of payment still capture the largest overall percentage of worldwide transaction volume. Within the general purpose payment card industry, we face substantial and increasingly intense competition worldwide from systems such as Visa, American Express and JCB, among others. In specific countries, we face significant competition from other competitors such as Discover/Novus (United States), Interac (Canada) and Bancard and EFTPOS (Australia). We also encounter competition from businesses such as retail stores and petroleum (gasoline) companies that issue their own payment cards, as well as from regional ATM networks such as NYCE, Concord/EFS and others. Some of our competitors have substantially greater capital and resources than we have. In addition, we compete against new entrants that have developed alternative payment systems, such as PayPal Inc., PayBox, Billpoint and others. Among other things, these competitors provide Internet currencies that can be used to buy and sell goods on-line, "virtual checking" programs that permit the direct debit of consumer checking accounts for on-line payments, and services that support payments to and from proprietary accounts for Internet, mobile commerce and other applications. A number of these new entrants rely principally on the Internet to support their services, and may enjoy lower costs than we do as a result of our fixed transaction processing and data transport networks. We also face competition from transaction processors such as First Data Corporation, some of whom are seeking to build networks that link issuers directly with point-of-sale devices for payment card transaction authorization and processing services. These networks may threaten to disintermediate our own transaction processing functions. 81 We believe that the principal factors affecting our competitive position in the global payments industry are: - our relationships with our members; - the relative prices of services and products offered; - the acceptance base, reputation and brand recognition of the payment cards; - the quality of transaction processing; - the number of issued cards and the extent of consumer and business spending with the cards; - the success of marketing and promotional campaigns; - the integrity of our transaction processing systems and our guarantee of our principal members' settlement obligations; and - the ability to develop and implement new card programs, systems and technologies in both physical and virtual environments. For additional information on our competitive position, see "Overview of the Global Payments Industry." EMPLOYEES As of June 30, 2001, we employed approximately 3,100 persons, of which approximately 475 were employed outside the United States. We consider our relationship with our employees to be good. PROPERTIES As of June 30, 2001, MasterCard and its subsidiaries owned or leased 44 properties. These facilities primarily consist of corporate and regional headquarters offices, as well as our operations centers. Our corporate headquarters is a three story, 472,600 square foot building located at 2000 Purchase Street in Purchase, New York. We own the building and there is no outstanding debt on the facility. Currently, MasterCard leases four operations centers in St. Louis, Missouri, totaling 361,000 square feet. These facilities are being replaced by a 528,000 square foot global technology and operations center known as "Winghaven," which is currently under construction in O'Fallon, Missouri. Certain areas of the facility have been occupied upon completion. We plan to fully occupy the facility at the anticipated completion date in the fourth quarter of 2001. The term of the lease on this new facility is 10 years commencing on August 31, 1999. In addition to our corporate headquarters and operations centers noted above, MasterCard leases a total of 36 other facilities. These facilities include the following: 32 regional or country offices, 3 operations centers, 1 public affairs office and 2 storage facilities. Included in these totals are 25 facilities outside of the United States. See Note 9 to the audited Consolidated Financial Statements of MasterCard International. We believe that our facilities are suitable and adequate for the business that we currently conduct. However, we periodically review our space requirements and may acquire new space to meet the needs of our business, or consolidate and dispose of facilities that are no longer required. LEGAL PROCEEDINGS MasterCard is a party to litigation with respect to a variety of matters in the ordinary course of business. Except as described below, MasterCard does not believe that any litigation to which it is a party may have a material adverse impact on our business or prospects. DEPARTMENT OF JUSTICE ANTITRUST LITIGATION In October 1998, the DOJ filed suit against MasterCard International, Visa U.S.A., Inc. and Visa International Corp. in the U.S. District Court for the Southern District of New York alleging that both MasterCard's and Visa's governance structure and policies violated U.S. federal antitrust laws. First, the DOJ 82 claimed that "dual governance" -- the situation where a financial institution has a representative on the board of directors of MasterCard or Visa while a portion of its card portfolio is issued under the brand of the other association -- was anti-competitive and acted to limit innovation within the payment card industry. At the same time, the DOJ conceded that "dual issuance" -- a term describing the structure of the bank card industry in the United States in which a single financial institution can issue both MasterCard and Visa-branded cards -- was pro-competitive. Second, the DOJ challenged MasterCard's CPP and a Visa bylaw provision that prohibit financial institutions participating in the respective associations from issuing competing proprietary payment cards (such as American Express or Discover). The DOJ alleged that MasterCard's CPP and Visa's bylaw provision acted to restrain competition. MasterCard denied the DOJ's allegations. MasterCard believes that both "dual governance" and the CPP are pro-competitive and fully consistent with U.S. federal antitrust law. A bench trial concerning the DOJ's allegations was concluded on August 22, 2000. On October 9, 2001, the district court judge issued an opinion upholding the legality and pro-competitive nature of dual governance. In so doing, the judge specifically found that MasterCard and Visa have competed vigorously over the years, that prices to consumers have dropped dramatically, and that MasterCard has fostered rapid innovations in systems, product offerings and services. However, the judge also held that MasterCard's CPP and the Visa bylaw constitute unlawful restraints of trade under the federal antitrust laws. The judge found that the CPP and Visa bylaw weakened competition and harmed consumers by preventing competing proprietary payment card networks such as American Express and Discover from entering into agreements with banks to issue cards on their networks. In reaching this decision, the judge found that two district markets -- a credit and charge card issuing market and a network services market -- existed in the United States, and that both MasterCard and Visa had market power in the network market. MasterCard strongly disputes these findings and believes that the DOJ failed, among other things, to demonstrate that U.S. consumers have been harmed by the CPP. The judge issued a proposed judgment that orders MasterCard to repeal the CPP and enjoins MasterCard from enacting or enforcing any bylaw, rule, policy or practice that prohibits its issuers from issuing general purpose or debit cards in the United States on any other general purpose card network. The judge also concluded that during the period in which the CPP was in effect, MasterCard was able to "lock up" certain members by entering into long-term agreements with them pursuant to which the members committed to maintain a certain percentage of their general purpose card volume, new card issuance or total number of cards in force in the United States on MasterCard's network. Accordingly, the proposed judgment provides that upon the resolution of any appeals, there would be a two-year period during which MasterCard would be required to permit any issuer with which it has entered into such an agreement to terminate that agreement without penalty. MasterCard would be free to apply to the district court to recover funds paid but not yet earned under any terminated agreement. The judge's proposed judgment imposes parallel requirements on Visa. The judge explicitly provided that MasterCard and Visa would be free to enter into new partnership or member business agreements in the future. The parties submitted comments to the judge's proposed judgment on October 17, 2001. On October 29, 2001, the parties submitted reply comments to the proposed judgment. MasterCard is currently awaiting the entry of a final judgment. MasterCard believes that is has a strong legal basis to challenge the judge's ruling with respect to the CPP, and presently intends to appeal the decision on that count. If the judge declines to modify the proposed judgment in the manner MasterCard has requested, MasterCard also intends to seek a motion staying the final judgment pending the outcome of the appeal, as the judgment would otherwise become effective ninety days after it is entered by the district court. The DOJ is also free to appeal the judge's ruling with respect to dual governance. 83 MERCHANT ANTITRUST LITIGATION Commencing in October 1996, several putative class action suits were brought by a number of U.S. merchants -- including Wal-Mart Stores, Inc., Sears Roebuck & Co., Inc., The Limited Inc. and Safeway, Inc. -- against MasterCard International and Visa U.S.A., Inc. challenging certain aspects of the payment card industry under U.S. federal antitrust law. Those suits were later consolidated in the U.S. District Court for the Eastern District of New York. The plaintiffs challenge MasterCard's "Honor All Cards" rule (and a similar Visa rule), which ensures universal acceptance for consumers by requiring merchants who accept MasterCard cards to accept for payment every validly presented MasterCard card. Plaintiffs claim that MasterCard and Visa unlawfully have tied acceptance of debit cards to acceptance of credit cards. In essence, the merchants desire the ability to reject off-line, signature-based debit transactions (for example, MasterCard card transactions) in favor of other payment forms, including on-line, PIN-based debit transactions (for example, Maestro or regional ATM network transactions) which generally impose lower transaction costs for merchants. The plaintiffs also claim that MasterCard and Visa have conspired to monopolize what they characterize as the point-of-sale debit card market, thereby suppressing the growth of regional networks such as ATM payment systems. Plaintiffs allege that the plaintiff class has been forced to pay unlawfully high prices for debit and credit card transactions as a result of the alleged tying arrangement and monopolization practices. There are related consumer class actions pending in two state courts that have been stayed pending developments in this matter. MasterCard denies the merchant allegations and believes that the "Honor All Cards" rule and MasterCard practices with respect to debit card programs in the United States are pro-competitive and fully consistent with U.S. federal antitrust law. On February 22, 2000, the district court granted the plaintiffs' motion for class certification. MasterCard and Visa subsequently appealed the decision to the Second Circuit Court of Appeals. On October 17, 2001, a three-judge panel affirmed the lower court decision by a two-to-one majority. On October 31, 2001, MasterCard and Visa petitioned the Second Circuit for a rehearing by the panel, or, in the alternative, by the full court. Motions seeking summary judgment have been filed by both sides and fully briefed in the district court. As of the date of this proxy statement-prospectus, no argument date for summary judgment and no trial date has been set. Based upon publicly available information, the plaintiffs previously have asserted damage claims in this litigation of approximately $8 billion, before any trebling under U.S. federal antitrust law. More recent public estimates (including estimates set forth in the opinion of the Second Circuit panel) place the plaintiffs' estimated damage claims at approximately $50 billion to $100 billion, depending on the source. In addition, the plaintiffs' damage claims could be materially higher than these amounts as a result of the passage of time and substantive changes in the theory of damages presented by the plaintiffs. These figures reflect claims asserted and should not be construed as an acknowledgement of the reliability of the figures presented. MasterCard believes that it is not currently possible to estimate the impact, if any, that the ultimate resolution of this matter will have on MasterCard's results of operations, financial position or cash flows. CURRENCY CONVERSION LITIGATION MasterCard, together with Visa U.S.A., Inc. and Visa International Corp., are defendants in two lawsuits that allege that MasterCard and Visa wrongfully imposed an asserted one percent currency conversion "fee" on every credit card purchase transaction by U.S. MasterCard and Visa cardholders involving the purchase of goods or services in a foreign country, and that such "fee" is unlawful. The first of these actions, Schwartz v. Visa Int'l Corp., et al., was brought in the Superior Court of California in February 2000, purportedly on behalf of the general public. The second action, Senequier v. Visa Int'l Corp., et al. was commenced in January 2001 in the Supreme Court of the State of New York and is a purported class action. A trial date of April 30, 2002 has been set for the Schwartz matter. No trial date has been set for the Senequier matter. Both these actions claim that the alleged "fee" grossly exceeds any costs the defendants might incur in connection with currency conversions relating to credit card purchase transactions made in non-U.S. countries and is not properly disclosed to cardholders. Plaintiffs seek to prevent the defendants from continuing to engage in, use or 84 employ the alleged practice of charging and collecting the asserted one percent currency conversion "fee" and from charging any type of purported currency conversion "fee" without providing a clear, obvious and comprehensive notice that a fee will be charged. Plaintiffs also request an order (1) requiring defendants to fund a corrective advertising campaign; and (2) awarding restitution of the monies allegedly wrongfully acquired by imposing the purported currency conversion "fee". The complaints assert that, during the four-year period that preceded each respective lawsuit, MasterCard collected approximately $200 million as a result of allegedly imposing the claimed one percent currency conversion "fee." MasterCard denies these allegations. MasterCard, Visa U.S.A., Inc., Visa International Corp., several member banks including Citibank (South Dakota), N.A., Citibank (Nevada), N.A., Chase Manhattan Bank USA, N.A. and Bank of America, N.A. (USA), and Diners Club are defendants in a number of federal putative class actions that allege, among other things, violations of federal antitrust laws based on the asserted one percent currency conversion "fee." The complaints also allege violations of the Truth-In-Lending Act against the member banks. Seven of the purported class actions, Ross, et al. v. Visa U.S.A., Inc., et al., Kune v. Visa U.S.A., Inc., et al., Chatham v. Visa U.S.A., Inc., et al., Steinlauf v. Visa U.S.A., Inc., et al., Finkelman v. Visa U.S.A., Inc., et al., La Marca v. Visa U.S.A., Inc., et al. and Lipner v. Visa U.S.A., Inc., et al., were brought in the United States District Court for the Eastern District of Pennsylvania in 2001. Five other purported class actions, Cooper v. Visa U.S.A., Inc., et al., Ramsey v. Visa U.S.A., Inc., et al., La Place v. Visa U.S.A., Inc., et al., Salvagio v. Visa U.S.A., Inc., et al., and Javier, et al. v. Visa U.S.A., Inc. et al., were brought in the United States District Court for the Northern District of California in 2001. Five other purported class actions, Wood v. Visa U.S.A., Inc., et al., Oshry v. Visa U.S.A., Inc., et al., Inducon Park Assocs. Inc. v. Visa U.S.A., Inc., et al., Matthews v. Visa U.S.A., Inc., et al. and Silberman et al. v. Visa U.S.A., Inc. were brought in the United States District Court for the Southern District of New York. As against MasterCard, the plaintiffs seek damages for an alleged conspiracy to fix and maintain prices in violation of the Sherman Antitrust Act. The complaints allege that MasterCard's and Visa's system of dual governance inhibits competition between the associations and provides each association with the ability and incentive to collude and fix the asserted currency conversion "fee" in violation of antitrust laws. Two of the complaints, Silberman and Ramsey, also allege violations of the Truth-in-Lending Act against MasterCard. MasterCard denies these allegations. Pursuant to motions to the judicial panel on multidistrict litigation and subsequent notices of tag-along rights, these actions were centralized in the United States District Court for the Southern District of New York (Pauley, J.) for coordinated or consolidated pretrial proceedings. Judge Pauley has directed the plaintiffs to file a consolidated amended complaint. MasterCard believes that it is not currently possible to estimate the impact, if any, that the ultimate resolution of theses matters will have on its results of operations, financial position or cash flows. GOVERNMENT REGULATION MasterCard is subject to a variety of employment, health and safety, environmental and other forms of government regulation in the ordinary course of its business. MasterCard members are subject to numerous regulations applicable to banks and other financial institutions in the United States and elsewhere, and as a consequence MasterCard is at times impacted by such regulations. Certain of MasterCard's operations are subject to periodic audits by the Federal Financial Institutions Examination Council. In addition, aspects of our operations or business may be subject to privacy regulation in the United States and abroad, as well as regulations imposed by the U.S. Office of Foreign Asset Control. Government regulation did not have a material impact on MasterCard in 2000, and MasterCard does not expect that government regulation will have a material impact on its business or financial condition in 2001 or 2002. MARKET INFORMATION There is no established public trading market for our common stock, and we do not currently anticipate that our common stock will be listed on any securities exchange or quoted on any automated quotations system or electronic communications network. 85 MASTERCARD SELECTED CONSOLIDATED FINANCIAL AND OTHER INFORMATION The following table sets forth selected consolidated financial and other information for MasterCard for each of the five years in the period ended December 31, 2000 and as of the end of each such fiscal year, and as of and for the six months ended June 30, 2001 and June 30, 2000 and selected unaudited pro forma financial data for the year ended December 31, 2000 and as of and for the six months ended June 30, 2001. The selected consolidated financial data as of December 31, 2000 and December 31, 1999 and for the fiscal years ended December 31, 2000, December 31, 1999 and December 31, 1998 have been derived from the audited consolidated financial statements of MasterCard International included elsewhere in this proxy statement-prospectus. The selected consolidated financial data as of December 31, 1998, December 31, 1997 and December 31, 1996 and for the fiscal years ended December 31, 1997 and December 31, 1996 have been derived from the audited consolidated financial statements of MasterCard International that have not been included in this proxy statement-prospectus. The selected consolidated financial data for the six months ended June 30, 2001 and June 30, 2000 and as of June 30, 2001 and June 30, 2000 have been derived from the unaudited consolidated financial statements of MasterCard International, which in the opinion of management, include all adjustments, consisting of only normal recurring adjustments, that are necessary for a fair statement of the results of operations and financial position of MasterCard International for the periods and at the dates presented. The results of operations for the six months ended June 30, 2001 are not necessarily indicative of the results to be expected for the full year. The pro forma adjustments are based upon available information and certain assumptions that management believes are reasonable. The information set forth below should be read in conjunction with "MasterCard Management's Discussion and Analysis of Financial Condition and Results of Operations," the consolidated financial statements of MasterCard International and the notes thereto, and other financial information, including the pro forma consolidated financial information, included elsewhere in this proxy statement-prospectus.
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, ------------------------- ------------------------------------------------------------- 2001 2000 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- ---------- -------- (IN THOUSANDS EXCEPT PER SHARE DATA) MASTERCARD INTERNATIONAL INCOME STATEMENT DATA: Revenue............. $ 855,622 $ 744,913 $1,571,215 $1,389,155 $1,205,968 $1,077,099 $949,684 Operating Income.... 154,991 155,188 172,472 115,053 18,254 36,253 52,564 Net Income.......... 99,147 95,065 118,149 86,255 24,183 44,283(a) 78,781(b) BALANCE SHEET DATA: Total Assets........ $1,235,835 $1,111,484 $1,181,787 $ 972,477 $ 871,643 $ 715,986 $638,228 Long-Term Debt...... 82,517 82,904 82,992 82,682 82,419 11,467 -- Members' Equity..... 563,716 436,866 462,408 341,520 257,248 232,396 189,799 MASTERCARD INCORPORATED PRO FORMA DATA: Earnings per share, basic and diluted........... $ 1.00 N/A $ 1.16 N/A N/A N/A N/A Book value per share............. 7.84 N/A 6.83 N/A N/A N/A N/A
- --------------- (a) Includes a net gain of $8,162 recognized in conjunction with the sale of MasterCard International's wholly owned subsidiary, Monetary Transfer Systems L.L.C. ("MTS"), to Honor Technologies, Inc. and Honor Services, Inc. in October 1997. MTS owned and operated the Bankmate(R) ATM and point-of-sale debit network. (b) Includes a net gain of $66,836 recognized in conjunction with MasterCard International's sale of MasterCard Automated Point-of-Sale Processing ("MAPP") to National Data Corporation ("NDC") in April 1996. This agreement included the formation of a new payment processing company called Global Payments Systems L.L.C. ("GPS") which consisted of MAPP and NDC's payment services, point-of-sale, and back-office services. Also included in net income is $27,000 in net expense associated with an agreement with Access Brand Ltd. to acquire the Access(R) brand and to collaboratively market the MasterCard brand in the United Kingdom. 86 MASTERCARD SELECTED STATISTICAL INFORMATION The tables below set forth, for the year ended December 31, 2000 and the six months ended June 30, 2001, our GDV, purchase volume and cash volume and the number of purchase transactions, cash transactions, accounts and cards on a regional basis. For purposes of the tables: GDV represents purchase volume plus cash volume and includes the impact of balance transfers and convenience checks; purchase volume means the aggregate dollar amount of purchases made with MasterCard-branded cards for the relevant period; and cash volume means the aggregate dollar amount of cash disbursements obtained with MasterCard-branded cards for the relevant period. Maestro, Cirrus and Mondex transactions are not included in the following tables. Information in the tables is adjusted to eliminate the impact of changes in the value of foreign currencies against the U.S. dollar. The data set forth in the GDV, Purchase Volume, Purchase Transactions, Cash Volume and Cash Transactions columns below are derived from information provided by the members of MasterCard International that is subject to logical and statistical verification by MasterCard's Global Statistics Unit and cross-checking against information provided by MasterCard's transaction processing systems. The data set forth in the Accounts and Cards columns below are derived from information provided by the members of MasterCard International and certain limited logical and statistical verification by MasterCard's Global Statistics Unit. A portion of the data set forth in the tables below is estimated.
FOR THE YEAR ENDED DECEMBER 31, 2000 -------------------------------------------------------------------------------------------- PURCHASE PURCHASE CASH CASH GDV VOLUME TRANSACTIONS VOLUME TRANSACTIONS ACCOUNTS CARDS (BILLIONS) (BILLIONS) (MILLIONS) (BILLIONS) (MILLIONS) (MILLIONS) (MILLIONS) ---------- ---------- ------------ ---------- ------------ ---------- ---------- ALL PROGRAMS EXCEPT ON-LINE DEBIT PROGRAMS Middle East/Africa.............. $ 6.5 $ 4.4 95.3 $ 2.1 17.3 2.2 2.5 Asia/Pacific.................... 182.1 110.3 894.8 71.8 164.4 75.4 85.1 Europe.......................... 193.8 147.3 2,517.3 46.5 563.3 60.9 68.3 Latin America and Caribbean..... 27.5 22.6 474.6 4.9 57.7 24.5 29.6 Canada.......................... 25.0 20.8 366.3 4.2 16.4 12.7 16.9 United States................... 422.8 328.1 4,516.0 94.8 314.4 187.2 235.3 Worldwide....................... $857.7 $633.5 8,864.3 $224.3 1,133.5 362.9 437.7
FOR THE SIX MONTHS ENDED JUNE 30, 2001 -------------------------------------------------------------------------------------------- PURCHASE PURCHASE CASH CASH GDV VOLUME TRANSACTIONS VOLUME TRANSACTIONS ACCOUNTS CARDS (BILLIONS) (BILLIONS) (MILLIONS) (BILLIONS) (MILLIONS) (MILLIONS) (MILLIONS) ---------- ---------- ------------ ---------- ------------ ---------- ---------- ALL PROGRAMS EXCEPT ON-LINE DEBIT PROGRAMS Middle East/Africa.............. $ 3.2 $ 2.1 48.9 $ 1.0 9.6 2.3 2.6 Asia/Pacific.................... 95.9 54.7 521.8 41.3 94.4 83.0 92.2 Europe.......................... 98.4 74.4 1,320.6 24.0 307.9 65.3 73.0 Latin America and Caribbean..... 14.4 11.4 250.9 3.0 35.2 28.5 32.5 Canada.......................... 12.9 10.6 185.3 2.3 8.2 14.2 18.8 United States................... 234.0 179.2 2,495.5 54.8 168.5 206.4 256.2 Worldwide....................... $458.8 $332.4 4,822.9 $126.4 623.7 399.6 475.3
87 MASTERCARD MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with MasterCard's Consolidated Financial Statements and the accompanying notes included elsewhere in this proxy statement-prospectus. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000 Revenue was $856 million for the six months ended June 30, 2001 compared to $745 million for the six months ended June 30, 2000, an increase of $111 million or 15%. Our revenue is comprised of operations fees and member assessments. Operations fees represent user fees for authorization, clearing, settlement and other member products and services that facilitate transaction and information management among our members on a global basis. Operations fees were $517 million for the six months ended June 30, 2001 compared to $457 million for the six months ended June 30, 2000, an increase of $60 million or 13%. The increase in operations fees was attributable partially to an 18% increase in the number of transactions processed, offset by lower average pricing based on our pricing structure, which rewards members with lower prices for incremental volume. Member assessments were $338 million for the six months ended June 30, 2001 compared to $288 million for the six months ended June 30, 2000, an increase of $50 million or 17%. The increase in member assessments was attributable primarily to a 13% increase in gross dollar volume ("GDV") between the periods, which represents gross spending on MasterCard cards for goods and services as well as cash disbursements. The growth in GDV was driven primarily by a 19% increase in the number of MasterCard cards issued by members between the periods (without adjusting for the impact of changes in the value of foreign currencies against the U.S. dollar). For the six months ended June 30, 2001, member assessments revenue growth exceeded GDV growth due to a greater percentage of international volume growth, which is assessed at higher rates. Furthermore, revenues increased as a result of a shift in the prior year's balance transfer volume to retail sales volume, for which we receive higher assessable revenues. Balance transfers represent the movement of credit card balances by a cardholder from one account to another account, held by a different institution. Increases in member assessments in the first six months of 2001 were partially offset by lower average pricing based on our pricing structure, which rewards members with reduced prices for incremental volume. Operating expenses were $701 million for the six months ended June 30, 2001 compared to $590 million for the six months ended June 30, 2000, an increase of $111 million or 19%. Our operating expenses are comprised of general and administrative, advertising and market development, depreciation and amortization expenses. General and administrative expenses consist primarily of personnel, telecommunications, data processing, travel and professional fees. General and administrative expenses were $394 million for the six months ended June 30, 2001 compared to $361 million for the six months ended June 30, 2000, an increase of $33 million or 9%. This increase was primarily attributable to increases in personnel costs of $30 million resulting from increases in headcount and compensation. As a percentage of revenue, general and administrative expenses declined from 48% to 46% for the six months ended June 30, 2000 and 2001, respectively. In the six months ended June 30, 2001, we made significant investments in advertising and market development to support and build value in the MasterCard family of brands, and to develop new and distinct programs to differentiate ourselves from our competition. Advertising and market development expenses were $274 million for the six months ended June 30, 2001 compared to $202 million for the six months ended June 30, 2000, an increase of $72 million or 36%. This increase was attributable primarily to additional costs of $23 million associated with strong performance in card-based and other long-term member incentive programs as well incremental merchant acceptance initiatives. The increase was also attributable to increases in network television costs of $13 million associated with new media buys during the SuperBowl and the Grammy Awards. Finally, our promotions and sponsorship fees increased $24 million primarily as a result of 88 incremental promotions in the six months ended June 30, 2001, such as the National Hockey League Celebrity Cup Face-off, as well as increased contractual sponsorship fees associated with the World Cup, Copa America, the National Hockey League, Major League Baseball and PGA Golf organizations. Depreciation expense was $18 million for the six months ended June 30, 2001 compared to $17 million for the six months ended June 30, 2000, an increase of $1 million or 6%, primarily due to purchases of equipment in 2001. Amortization expense was $15 million for the six months ended June 30, 2001 compared to $10 million for the six months ended June 30, 2000, an increase of $5 million or 45%. This increase was primarily the result of additional amortization of capitalized computer software, partially offset by a decrease in the amortization of franchise rights in 2001 due to the write-down of Mondex China Pte., Ltd. and Mondex India Pte., Ltd. and Mondex Asia Pte., Ltd. franchise rights to their estimated fair value in 2000. Other income and expense was $8 million for the six months ended June 30, 2001 compared to $7 million for the six months ended June 30, 2000, an increase of $1 million or 11%. Other income and expense comprises primarily interest, dividend and other investment income related to the portfolio of investments held, as well as interest expense and minority interest. The increase in other income and expense was primarily the result of additional investment income associated with our available-for-sale portfolio of securities. The effective tax rates for the six months ended June 30, 2001 and June 30, 2000 were 39.2% and 41.5%, respectively. The lower rate for the six months ended June 30, 2001 was due to a larger amount of tax-exempt interest income than in the six months ended June 30, 2000 and from the tax benefits of a realized capital loss that occurred in the six months ended June 30, 2001. As a result of the foregoing, our net income was $99 million for the six months ended June 30, 2001 compared to $95 million for the six months ended June 30, 2000, an increase of $4 million or 4%. In addition, EBITDA, which we define as operating earnings before interest, taxes, depreciation and amortization, was $187 million for the six months ended June 30, 2001 compared to $182 million for the six months ended June 30, 2000, an increase of $5 million or 3%. EBITDA, as defined, is not intended to replace generally accepted accounting principles, including such measures as net income, operating income and cash flow. We believe that EBITDA enhances management's ability to evaluate and direct its business. On June 29, 2001, MasterCard International acquired all of the outstanding stock of Mondex International Ltd. ("MXI") that it did not previously own. As a result of assuming full ownership of MXI, MasterCard International now directly controls all of MXI's operations and management. This transaction did not have a material impact on the financial statements of MasterCard International. YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 Revenue was $1.571 billion for the year ended December 31, 2000 compared to $1.389 billion for the year ended December 31, 1999, an increase of $182 million or 13%. Operations fees were $969 million for the year ended December 31, 2000 compared to $851 million for the year ended December 31, 1999, an increase of $118 million or 14%. The increase in operations fees was attributable primarily to an 18% increase in the number of transactions processed, which increased to 10 billion in 2000 compared to 8.5 billion in 1999. The increase in operations fees was also the result of the introduction of new services and acceptance programs, including the implementation of merchant investment fees that are reinvested in acceptance initiatives. These fees generated $31 million in additional revenue for the year ended December 31, 2000. Increases in operations fees in 2000 were partially offset by lower average pricing based on our pricing structure, which rewards members with lower prices for incremental volume. Operations fee rebates provided to our members also increased $23 million from 1999 to 2000. Member assessments were $602 million for the year ended December 31, 2000 compared to $538 million for the year ended December 31, 1999, an increase of $64 million or 12%. The increase in member assessments was attributable primarily to an increase in GDV between the periods. GDV was $858 billion for the year ended December 31, 2000 compared to $726 billion for the year ended December 31, 1999, an 89 increase of $131 billion or 18%. The growth in GDV was driven by many factors, one of which was an increase in the number of MasterCard cards issued by members. At December 31, 2000, there were 438 million MasterCard cards in circulation worldwide compared to 379 million at December 31, 1999, an increase of 59 million or 16%. In addition, the average spending per card increased 3% between 1999 and 2000. The increase in GDV was also a result of an increase in balance transfer volume, for which we do not receive tiered member assessment revenue. Increases in member assessments in 2000 were partially offset by lower average pricing based on our pricing structure, which rewards members with lower prices for incremental volume. Member assessment rebates provided to our members also increased $29 million from 1999 to 2000. Operating expenses were $1.399 billion for the year ended December 31, 2000 compared to $1.274 billion for the year ended December 31, 1999, an increase of $125 million or 10%. General and administrative expenses were $743 million for the year ended December 31, 2000 compared to $730 million for the year ended December 31, 1999, an increase of $13 million or 2%. This increase was primarily attributable to increases in personnel costs of $43 million resulting from increased headcount and compensation increases between 1999 and 2000, offset by reduced professional fees of $30 million resulting primarily from the delay in the merchant antitrust litigation over the same period. In addition, asset impairments of approximately $19 million and $18 million at December 31, 2000 and 1999, respectively, were recorded to write-down certain investments. These write-downs were determined by an impairment analysis prepared by management based on recoverability, primarily of Mondex Asia Pte., Ltd. in 2000, and Mondex China Pte., Ltd. and Mondex India Pte., Ltd. in 1999. As a percentage of revenue, general and administrative expenses declined from 53% to 47% for the years ended December 31, 1999 and 2000, respectively. In 2000, we made significant expenditures in advertising and market development to support and build value in the MasterCard family of brands, and to develop new and distinct programs to differentiate ourselves from our competition. Advertising and market development expenses were $597 million for the year ended December 31, 2000 compared to $491 million for the year ended December 31, 1999, an increase of $106 million or 21%. This increase was attributable primarily to additional costs of $59 million associated with card- based and other long-term member incentive programs used to support and develop customized card programs and other acceptance programs. The increase was also attributable to increases in network television and print costs of $46 million, which were associated with the expansion of our global advertising campaign in many countries and in support of new payment channels, such as e-commerce and pre-paid programs. Finally, the comparability between 2000 and 1999 was affected by a $21 million reduction in member incentive accruals in 1999. Depreciation expense was $35 million for the year ended December 31, 2000 compared to $32 million for the year ended December 31, 1999, an increase of $3 million or 10%. This increase was primarily attributable to depreciation associated with our corporate headquarters building, which was purchased in January 2000 for $70 million. Amortization expense was $25 million for the year ended December 31, 2000 compared to $22 million for the year ended December 31, 1999, an increase of $3 million or 14%. This increase was primarily the result of additional amortization of capitalized computer software, partially offset by decreases in the amortization of franchise rights in 2000 due to the write-down of Mondex China Pte., Ltd. and Mondex India Pte., Ltd. franchise rights to their estimated fair value in 1999. Other income and expense was $28 million for the year ended December 31, 2000 compared to $34 million for the year ended December 31, 1999, a decrease of $6 million or 18%. The decrease in other income and expense was primarily the result of minority interest, which reflects a decrease in the net loss associated with Mondex Asia Pte., Ltd., a consolidated MasterCard subsidiary. This decrease was partially offset by interest expense. Interest expense largely comprises interest related to our $80 million subordinated debt issuance that has been outstanding since 1998. See Note 9 of the audited Consolidated Financial Statements of MasterCard International for additional information. 90 The effective tax rates for 2000 and 1999 were 41% and 42%, respectively. The lower rate in 2000 was principally due to the effects of foreign taxes, income and losses. In 2000 compared to 1999, we had greater taxable income effectively taxed at a rate lower than the United States statutory rate. As a result of the foregoing, our net income was $118 million for the year ended December 31, 2000 compared to $86 million for the year ended December 31, 1999, an increase of $32 million or 37%. In addition, EBITDA was $232 million for the year ended December 31, 2000 compared to $168 million for the year ended December 31, 1999, an increase of $64 million or 38%. The EBITDA margin percentage was 15% in 2000 compared to 12% in 1999. YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 Revenue was $1.389 billion for the year ended December 31, 1999 compared to $1.206 billion for the year ended December 31, 1998, an increase of $183 million or 15%. Operations fees were $851 million for the year ended December 31, 1999 compared to $737 million for the year ended December 31, 1998, an increase of $114 million or 15%. The increase in operations fees was attributable primarily to a 14% increase in the number of transactions processed, which increased to 8.5 billion in 1999 compared to 7.4 billion in 1998. Increases in operations fees in 1999 were partially offset by lower average pricing based on our pricing structure, which rewards members with lower prices for incremental volume. Operations fee rebates provided to our members increased $13 million from 1998 to 1999. Member assessments were $538 million for the year ended December 31, 1999 compared to $469 million for the year ended December 31, 1998, an increase of $69 million or 15%. The increase in member assessments was attributable primarily to an increase in GDV between the periods. GDV was $726 billion for the year ended December 31, 1999 compared to $650 billion for the year ended December 31, 1998, an increase of $75 billion or 12%. The growth in GDV was driven by many factors, one of which was an increase in the number of MasterCard cards issued by members. At December 31, 1999, there were 379 million MasterCard cards in circulation worldwide compared to 357 million at December 31, 1998, an increase of $22 million or 6%. In addition, the average spending per card increased 5% between 1998 and 1999. The increase in GDV was also the result of stronger financial performance in the Asia/Pacific region, which began to recover from its economic crisis in 1998. In 1999, larger international volume growth resulted in increased pricing and member assessment revenue which exceeded the growth rate of GDV as compared to the prior year. The increases in volume growth, and accordingly in member assessment revenue, were partially offset by a lower domestic pricing structure, which rewards members with lower prices for incremental volume. Member assessment rebates provided to our members increased $12 million from 1998 to 1999. Operating expenses were $1.274 billion for the year ended December 31, 1999 compared to $1.188 billion for the year ended December 31, 1998, an increase of $86 million or 7%. This increase was primarily due to additional expenditures for global brand building and member support, as well as investments in personnel and technology. General and administrative expenses were $730 million for the year ended December 31, 1999 compared to $665 million for the year ended December 31, 1998, an increase of $65 million or 10%. This increase was primarily attributable to increases in personnel costs of $62 million resulting from increased headcount and compensation increases and professional fees of $25 million resulting from increased litigation expenses over the period primarily in connection with developments in the DOJ and merchant antitrust litigations. These increases were partially offset by other operating costs of $43 million primarily associated with decreased costs related to the purchase of the MasterCard Debit Switch, additional settlement reserves recorded in 1998 primarily due to the Asian financial crisis and reduced costs related to publications. In addition, asset impairments of $18 million at December 31, 1999, were recorded to write-down investments primarily in Mondex China Pte., Ltd. and Mondex India Pte., Ltd. As a percentage of revenue, general and administrative expenses declined from 55% to 53% for the years ended December 31, 1998 and 1999, respectively. Advertising and market development expenses were $491 million for the year ended December 31, 1999 compared to $477 million for the year ended December 31, 1998, an increase of $14 million or 3%. The 91 increase was attributable primarily to additional advertising expense of $49 million associated with the expansion of our global advertising campaign, which was launched in 1997. These increases were partially offset by decreased expenditures from the prior year largely due to a $21 million reduction in member incentive accruals in 1999. Depreciation expense was $32 million for the year ended December 31, 1999 compared to $31 million for the year ended December 31, 1998, an increase of $1 million or 3%. This increase was attributable primarily to our continued investment in new technology. Amortization expense was $22 million for the year ended December 31, 1999 compared to $15 million for the year ended December 31, 1998, an increase of $6 million or 40%. This increase was primarily the result of additional amortization expense associated with the capitalization of computer software in accordance with Statement of Position ("SOP") 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" which was adopted in 1998. This increase was partially offset by decreased amortization expense in 1999 versus 1998 due to the write-down of Mondex China Pte., Ltd. and Mondex India Pte., Ltd. franchise rights to their estimated fair value in 1999. Other income and expense was $34 million for the year ended December 31, 1999 compared to $22 million for the year ended December 31, 1998, an increase of $12 million or 54%. This increase was primarily the result of increases in investment income and unrealized gains and losses on the portfolio of investments held, as well as higher minority interest which reflects an increase in the net loss associated with Mondex China Pte., Ltd. and Mondex India Pte., Ltd., consolidated MasterCard subsidiaries. These increases were partially offset by increased interest expense in 1999 associated with our subordinated debt issuance in 1998. The 1998 interest expense reflected a partial year of expense for the subordinated debt issue versus a full year in 1999. The effective tax rates for 1999 and 1998 were 42% and 40%, respectively. The higher 1999 rate was principally due to substantially higher pretax income, resulting in less tax-exempt income as a percentage of pretax income. As a result of the foregoing, our net income was $86 million for the year ended December 31, 1999 compared to $24 million for the year ended December 31, 1998, an increase of $62 million or 257%. In addition, EBITDA was $168 million for the year ended December 31, 1999 compared to $64 million for the year ended December 31, 1998, an increase of $104 million or 162%. The EBITDA margin percentage was 12% in 1999 compared to 5% in 1998. LIQUIDITY AND CAPITAL RESOURCES We need substantial capital resources and liquidity to fund our global developments, to finance our capital expenditures and any future acquisitions and to service the payments of principal and interest on our outstanding debt. We expect that the cash generated from operations, working capital and our borrowing capacity will be sufficient to meet our operating and capital needs in 2001. These resources are also sufficient to meet the estimated costs of the integration of EPI. For the six months ended June 30, 2001, net cash provided by operating activities was $84 million compared to $148 million for the six months ended June 30, 2000. A lower amount of operating cash was generated primarily due to a decrease in accrued legal expenses and an acceleration of payments associated with member incentives. In addition, there was a decrease in accrued expenses in connection with the implementation of a new financial accounting system in 2000, which temporarily delayed payments. The smaller increase in deferred income taxes was a result of increased recognition, for income tax purposes, of tax deductible expenses that were recorded for financial reporting purposes in earlier periods. Net cash used in investing activities was $62 million and $213 million for the six months ended June 30, 2001 and 2000, respectively. The decrease between periods was primarily the result of reduced cash outlays for capital expenditures and investment securities available-for-sale. The decrease in capital expenditures was due principally to the purchase of our corporate headquarters building located in Purchase, New York during the 92 first quarter of 2000 for $70 million. Purchases of investment securities available-for-sale decreased as a result of decreased funds from operating activities between periods. At December 31, 2000, net cash provided by operating activities was $250 million compared to $77 million and $130 million for the years ended December 31, 1999 and 1998, respectively. The significant increase in 2000 primarily reflects an increase in net income and a larger increase in accounts payable and accrued expenses, which was partially offset by increases in accounts receivable. The increase in accounts payable and accrued expenses were primarily driven by an increase in accrued expenses related to long-term member incentive agreements and other expenses, primarily advertising. The increase in accounts receivable was primarily due to increases in settlement and other member receivables. The decrease from 1998 to 1999 reflects the impact of higher levels of accounts receivable at year-end 1999, resulting from increased settlement receivables and revenue, and decreased expenses related to accrued long-term member incentive agreements and reserves. Net cash (used in) provided by investing activities was $(318) million, $34 million and $(204) million for the years ended December 31, 2000, 1999 and 1998, respectively. The decrease in 2000 was primarily the result of cash outlays for capital expenditures and investments in securities available-for-sale. The increase in capital expenditures was due principally to the purchase of our corporate headquarters building located in Purchase, New York during the first quarter of 2000 for $70 million. Investment securities available-for-sale increased as a result of investments made with excess funds. The change between 1999 and 1998 reflected reduced purchases of investment securities available-for-sale due to decreased cash provided by operating activities in 1999. For the year ended December 31, 1998, net cash provided by financing activities of $34 million was due primarily to our issuance of $80 million of subordinated debt in June 1998, offset by loan principal and interest repayments of $49 million associated with the borrowing from the MXI transaction. See Note 9 of the Consolidated Financial Statements of MasterCard International for additional information. Our financial position continues to reflect strong liquidity. Working capital, consisting of current assets less current liabilities, was $442 million at June 30, 2001, $362 million at December 31, 2000, and $312 million at December 31, 1999, a working capital ratio of 2.1 to 1 compared to 1.8 to 1 and 1.7 to 1, respectively. To facilitate liquidity management, we maintain a committed credit facility from certain financial institutions, which we renew annually. Pursuant to this facility, we have the right to borrow funds to provide liquidity for material member settlement failures. On June 5, 2001, we renewed the facility for an additional one year period and increased its amount to $1.2 billion, from $1.0 billion in the prior period. Facility adequacy is regularly reviewed and increases are obtained as necessary. In addition to the committed credit facility, we can draw upon other sources of liquidity such as emergency borrowings from members, special assessments, and member letters of credit or guarantees. ECONOMIC FLUCTUATIONS Although we cannot precisely determine the impact of inflation on our operations, we do not believe our operations have been significantly affected by inflation. For the most part, we have utilized technology and operating efficiencies to offset increased operating expenses. In addition, a portion of our revenues is based upon a percentage of GDV processed, which partially insulates operating margins on these revenues from the effects of inflation. Portions of our business are seasonal. Our revenue is favorably affected by progressively increased card purchasing volume throughout the year, particularly in the fourth quarter during the holiday shopping period. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the potential for economic losses to be incurred on market risk sensitive instruments arising from adverse changes in market indices such as interest rates and foreign currency exchange rates. We have limited exposure to market risk from changes in both interest rates and foreign exchange rates. Management 93 establishes and oversees implementation of board of director approved policies governing our funding, investments, and use of derivative financial instruments and monitors aggregate risk exposures on an ongoing basis. There have been no material changes in our market risk exposures at June 30, 2001 as compared to December 31, 2000 and 1999. We enter into foreign exchange forward and swap contracts to minimize risk associated with anticipated revenues and expenses and assets and liabilities denominated in foreign currencies. This activity minimizes our exposure to transaction gains and losses resulting from fluctuations of foreign currencies against the U.S. dollar. The terms of the contracts are generally less than 18 months. At December 31, 2000 and 1999, foreign currency forward contracts were both sold (with notional amounts of $43 million and $28 million, respectively) and purchased (with notional amounts of $60 million and $67 million, respectively) to manage a majority of anticipated cash flows in major overseas markets for the subsequent year. Our settlement activities may be subject to foreign exchange risk resulting from foreign exchange rate fluctuations. This risk is limited to the extent that setting the timing of the foreign exchange rate for financial transactions and the clearing of settlement positions is typically one business day and is limited to eleven stable transaction currencies. The remaining 173 transaction currencies are settled in U.S. dollars or require local settlement netting arrangements that eliminate our foreign exchange exposure. Based on the year-end 2000 and 1999 foreign exchange positions, excluding the currency and interest rate swap since they are no longer outstanding as of 2000, the effect of a hypothetical 10 percent strengthening of the U.S. dollar is estimated to be a loss valued at $1 million and $3 million at December 31, 2000 and December 31, 1999, respectively. Our interest sensitive assets are our debt instruments rated AA or above, which primarily consist of fixed rate short and medium-term notes. With respect to fixed maturities, our general policy is to invest in high quality securities, while providing adequate liquidity and maintaining diversification to avoid significant exposure. Based on the net present value of expected future cash flows, a 100 basis point increase in interest rates, assuming a parallel shift of the yield curve, would result in fair value changes and a related pre-tax loss effect of $10 million and $3 million for 2000 and 1999, respectively. Additionally, we own trading securities, which are composed of equity securities held in connection with an executive compensation plan. The effect of a hypothetical 10 percent change in market value would result in a $6 million gain or loss for December 31, 2000 and December 31, 1999, respectively. Offsetting gains or losses would be recorded in compensation expense. At December 31, 2000, we had a $1.0 billion committed credit facility from member banks to provide liquidity for material member settlement failures. A variable rate is applied to the borrowing based on terms and conditions set forth in the agreement. 94 BUSINESS OF EUROPAY INTERNATIONAL Europay is a leading payment solutions company in Europe. Headquartered in Waterloo, Belgium, Europay is owned and controlled by European financial institutions and serves approximately 1,200 principal members, who participate directly in its card business, and approximately 2,700 affiliate members, who participate in Europay's card business indirectly through a principal member. Europay offers its member financial institutions a full range of payment programs and services, including ec eurocheque, Maestro, Cirrus and Eurocard-MasterCard, which they in turn can provide to their customers -- cardholders and retailers. Europay's mission is to be its members' preferred provider of innovative payment solutions by offering a tailored range of programs and support services to enable its members to maximize the return on their payment system investment. Europay's primary role is to license the above brands to its members, provide a sophisticated set of information processing and transaction delivery services to members and establish and enforce rules and standards surrounding the use of payment cards carrying the brands. Europay also engages in a variety of marketing activities designed to maintain and enhance the value of the brands, and plays a leading role in the development of new technologies aimed at facilitating and expanding electronic and mobile commerce. Europay has a long-standing strategic alliance with MasterCard, originating with Eurocard International's alliance with Interbank Card Association, MasterCard International's predecessor, in 1968 and enhanced by more recent agreements. Europay has been granted exclusive licensing rights in Europe for certain MasterCard brands and is responsible for the marketing of these brands and transaction processing throughout Europe. MasterCard owns a 12.25% equity interest in Europay and a 15% equity interest in European Payment Systems Services (EPSS), Europay's transaction processing subsidiary. In addition, Europay and MasterCard are equal partners in Maestro International, a joint venture which oversees the global development of the Maestro debit service. Europay's revenue is comprised principally of operations fees and assessment fees charged to members. Operations fees represent user fees for authorization, clearing, settlement, and other member services that facilitate transaction and information management for Europay members on a global basis. Member assessment fees are based principally upon the gross volume of international transactions processed on Europay branded cards. Europay provides the following services to its members: - Credit Programs. Europay's credit programs include Eurocard-MasterCard premium, standard and corporate cards, as well as affinity, co-branded, and revolving credit cards. Europay recently launched the Eurocard-MasterCard virtual card program in response to growing consumer demand for payment solutions on the Internet and in other "remote" environments where a physical card is not required to validate a transaction. Europay is also playing a leading role in the migration of credit payment programs to chip-based technologies. - Debit Programs. Europay currently manages the Maestro brand in Europe. Maestro is a leading online debit program with participating issuers, cards and acceptance locations in over 80 countries throughout the world. Maestro cards are accepted both at the point of sale and at ATMs. Europay's other debit programs include Cirrus, for use at ATMs worldwide, ec Pictogram, for use at ATMs within Europe, and ec eurocheque, the guaranteed paper cheque accepted at retailers throughout Europe and around the Mediterranean sea. Europay is also playing a leading role in the migration of debit payment programs to chip-based technologies. - Pre-paid Programs. In response both to technological advances in the area of pre-paid payment solutions, including mobile telephony, Internet and pay-per-use television, and to their increasing popularity among young customers, Europay has developed a number of pre-paid solutions for use in the physical and virtual world, including Clip, a stored-value card or electronic "purse." Europay recently introduced the Maestro Pre-paid Card, a stored-value card accepted wherever Maestro cards are accepted. In addition, Europay supports the euro travelers/Thomas Cook/MasterCard travelers 95 cheque, a pre-paid, paper check distributed by Thomas Cook and available in pre-determined denominations in major travel destination currencies that can be replaced if lost or stolen. - e-Business. e-Business presents Europay and its members with the opportunity of developing new, more convenient payment solutions and acceptance channels, such as mobile commerce. Europay seeks to increase its share of the electronic commerce and mobile commerce payments market, improve the profitability of members' electronic commerce and mobile commerce transactions and support the development and implementation of e-business solutions while controlling the risks of doing business in the virtual world. A core challenge in this area is to develop security solutions to address the perceived insecure nature of transactions carried out over the Internet or wireless networks. Europay is currently focused on four key areas to support its members: - enhancing the security of online credit transactions; - launching Maestro on the Internet and facilitating secure online debit transactions; - expanding existing acceptance channels and developing new acceptance channels for Eurocard-MasterCard and Maestro, such as wireless devices; and - developing e-trust services such as digital signatures, secure messaging and controlled access to on-line systems. - Payment Services. Europay provides transaction processing services, consisting primarily of authorization, clearing and settlement, for its members via its own European Payment Systems Network, or EPS-Net. EPS-Net is a telecommunications network for data transfer which operates 194 modules, or connection points, at 140 sites in 38 countries. EPS-Net interfaces with the MasterCard BankNet network for worldwide retail payment and ATM transaction interchange. Using Europay's transaction processing services, Europay members facilitate payment transactions between cardholders and merchants throughout Europe. - Licensing and Rules. Members of Europay must enter into a license agreement with respect to Europay programs and services to be offered by the member. In addition, Europay adopts and enforces rules applicable to all Europay members relating to a variety of topics where common procedures and standards are needed to ensure the efficient, equitable and secure functioning of its system. To ensure that members conform to its rules, Europay runs an extensive range of compliance and other programs including reviewing all card programs proposed to be issued by members. Europay also approves applications for membership in MasterCard in Europe under authority delegated to it by MasterCard International. - Security. Europay is continually developing programs and systems to aid its members and merchants in detecting and preventing the fraudulent use of Europay branded cards. These include activities such as fraud investigations and case management, information gathering, analysis and dissemination, cooperation with domestic and international law enforcement agencies, and compliance and audit programs for members and merchants. In order to more effectively assess and respond to fraud risks, Europay has risk services managers located in each of its regional offices who promote and support these programs and services. In addition to its anti-fraud initiatives, Europay provides its members with a variety of risk management products and services, including security risk management advice and training for members and law enforcement officials, the dissemination of information to members relating to potential risks to the Europay payment system, risk analysis in connection with the development of new Europay programs and services, and the enforcement of member compliance with minimum security standards through a mandated Risk Assessment Management Program (RAMP). Europay also cooperates with other payment schemes in identifying and addressing common fraud and security threats. - Brand Marketing and Sponsorship. Europay offers a fully integrated and wide ranging marketing package to its member financial institutions. Sponsorship of the Union of European Football Association (UEFA) Champions League(TM) and the UEFA EURO 2000(TM) European soccer champion- 96 ships along with the Eurocard-MasterCard and Maestro communications campaigns are designed to transcend regional boundaries and increase the attractiveness of, and loyalty to, Europay brands. These campaigns also provide platforms for members to exploit their targeted sales strategies and increase card acquisition and use. Europay's origins stem from the mid-1960s, when Europe's modern payments system began to take shape with the emergence of two principal payment solution providers: ec eurocheque, a cheque guarantee and paper clearing system, and Eurocard, a credit card-based payments system. Each of eurocheque and Eurocard were owned by a separate consortium of European financial institutions, although both groups included many of the same financial institutions. By the mid-1980s, the development of magnetic stripe technology, enabling the portable storage of bank and account information, service codes and security measures, and the growing demand for an electronic infrastructure to support magnetic stripe usage signaled the need for a more integrated payments solution. In 1984, eurocheque began to engage in cross-border ATM transactions. In 1985, Eurocard created its own electronic authorization and data clearing system. In 1989, eurocheque acquired a 15% equity interest in a new technology company created to run the Eurocard electronic network, EPSS. By the late 1980s, the maturing of the card industry and increasing demand for more sophisticated products and programs convinced European member financial institutions to combine eurocheque and Eurocard, including EPSS, into a single organization. In 1992, Europay International S.A., a Belgian corporation, was established following the merger of eurocheque International S.C., eurocheque International Holdings S.A. and Eurocard International S.A. As of September 30, 2001, Europay employed approximately 642 persons. Europay's owned and leased properties consist primarily of its corporate headquarters in Waterloo, Belgium and ten regional offices located in London, England; Frankfurt, Germany; Stockholm, Sweden; Madrid, Spain; Rome, Italy; Budapest, Hungary; Prague, Czech Republic; Istanbul, Turkey; Warsaw, Poland; and Moscow, Russia. LEGAL PROCEEDINGS Europay is a party to litigation with respect to a variety of matters in the ordinary course of business. Except as described below, Europay does not believe that any litigation to which it is a party may have a material adverse impact on its business or prospects. MULTILATERAL INTERCHANGE FEE European Commission. In September 2000, the European Commission issued a "Statement of Objections" challenging Visa International's multilateral interchange fee ("MIF") under European Community competition rules. The MIF is a fee that is paid by the merchant bank (the "acquirer") to the cardholder bank (the "issuer") when a payment is made to a merchant using a payment card. The amount of the MIF is set by the payment card system as a default fee that will only apply where the issuer and the acquirer cannot agree on a bilateral interchange fee. Interchange fees represent a sharing of payment system costs. Among other elements, interchange fees cover the processing costs of payment card transactions as well as the costs of the payment guarantee delivered by the issuer. Although Europay is not an addressee of the Statement of Objections, its rules also contain a MIF scheme. Europay has therefore requested that the European Commission issue a Statement of Objections in its own case should the Commission have objections to the Europay MIF. However, the European Commission has to date elected to treat the Visa International case as the "leading" payment card case and has not issued a separate Statement of Objections challenging Europay's MIF. In its Statement of Objections, the European Commission took the view that the MIF constitutes a "price-fixing" agreement between the banks participating in the payment card system, and is tantamount to a "tying" arrangement since the MIF covers both the processing costs of a payment card transaction and the costs of the payment guarantee delivered by the issuers to the merchants, and thus "forces" merchants to accept the payment guarantee. On this basis, the European Commission argued that the MIF could not be exempted from European Community competition rules and should be eliminated. Europay and MasterCard 97 disagreed with the European Commission's characterization of the MIF. In their written submissions and at the February 2001 hearing, Europay and MasterCard sought to demonstrate that (1) the MIF is not a restrictive price agreement but a necessary and efficient mechanism for allocating the costs of a four-party card payment system between issuers and acquirers, and (2) the payment guarantee is essential to ensuring universal card usage, benefits merchants, and cannot be unbundled. The European Commission announced on August 10, 2001 its intention to take a favorable view of Visa's MIF in light of certain changes proposed by Visa, most notably a reduction in the level of fees. On August 11, 2001, the European Commission published a notice containing the details of these changes and invited interested third parties to submit their views to the European Commission, after which it will issue a formal decision. Assuming the European Commission does not change its position, the decision would exempt Visa's modified MIF. The European Commission's decision in the Visa case would be addressed only to Visa and would not cover Europay's MIF. Europay has submitted comments to the European Commission challenging the proposed changes to Visa's MIF in its notice, and is currently involved in separate discussions with the European Commission in order to determine under what conditions the European Commission would grant a formal exemption or comfort letter for Europay's MIF. Because the MIF constitutes an essential element of Europay's payment scheme, changes to it could significantly impact Europay's members. At this time, it is not possible to determine what actions the European Commission will take with respect to Europay's MIF, and therefore the financial impact that any changes would have on Europay and its members cannot be estimated. In addition, even if the European Commission does not formally challenge Europay's MIF, private parties could use the decision in the Visa case to challenge Europay's MIF before national courts or national competition authorities. United Kingdom Office of Fair Trading. On September 25, 2001, the Office of Fair Trading of the United Kingdom ("OFT") issued a press release proposing a decision that the agreement among Europay members in the U.K. on the level of certain fees, including the MIF, infringes U.K. competition law and does not qualify for an exemption. The OFT considers that the agreements regarding the MIF and the multilateral service fee ("MSF"), the fee paid by issuing banks to acquiring banks when a customer uses a MasterCard branded card either at an ATM or over the counter to obtain a cash advance, are anti-competitive and increase retail costs and consumer prices. The OFT has invited MEPUK and members of MasterCard and Europay in the U.K. to make written and oral representations, which will be taken into account in a final decision, or to amend their MIF and MSF fees. Both Europay and MEPUK intend to make oral and written representations to the OFT in response to its proposed decision on behalf of MasterCard and Europay members in the U.K., and will seek to demonstrate that the MIF and MSF constitute necessary and efficient mechanisms for allocating the costs of a multi-party card payment system between issuers and acquirers. Because the MIF and MSF constitute essential elements of Europay's payment scheme in the U.K., changes to these fees could significantly impact its U.K. members. At this time, it is not possible to determine what action the OFT will take with respect to the MIF and MSF, and therefore the financial impact on Europay and its members in the U.K. cannot be estimated. INVESTIGATION BY BELGIAN TAX AUTHORITIES In April 1999 the Belgian tax authorities initiated an investigation of Europay's tax returns for 1997 and 1998. In June 2001, Europay received a notice from the Belgian tax authorities challenging Europay's deduction of certain card-based incentive program costs which could result in an additional tax liability of up to approximately E16.3 million, including possible penalties and interest accrued to December 31, 2000. If Europay's deduction of such costs in 1999 and 2000 is similarly challenged, this could result in a further additional tax liability of up to approximately E9.5 million, including possible penalties. 98 Europay believes that it has reasonable and meritorious arguments in favor of its characterization of these deductions and has submitted a vigorous response to the notice. However, Europay cannot predict the outcome of this matter or any additional matters raised by the Belgian tax authorities in their investigation. In the event that Europay is unsuccessful in appealing the findings of the Belgian tax authorities in their investigation, under certain circumstances MasterCard International could, under its bylaws, levy an assessment upon its European members for the additional tax liability to the extent that it, together with other losses and liabilities arising out of the representations and warranties of Europay in the draft integration agreement, exceeds $7 million in the aggregate. MARKET INFORMATION There is no established public trading market for the common stock of Europay International. As of June 30, 2001, there were 27 holders of Europay common stock, including MasterCard International. Europay has not paid dividends in the past and does not anticipate paying dividends in the future. 99 EUROPAY SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The selected historical consolidated financial data set forth below for Europay for the year ended December 31, 2000 and as of December 31, 2000 has been derived from Europay's audited consolidated financial statements and related notes which were prepared in accordance with Belgian GAAP. The consolidated financial statements have been audited by PricewaterhouseCoopers Reviseurs d'Entreprises, independent accountants, as stated in their report included elsewhere in this proxy statement-prospectus and should be read in conjunction with their report. The selected historical consolidated financial data set forth below for Europay for the two years ended December 31, 1999 and 1998 and as of December 31, 1999 have been derived from Europay's unaudited consolidated financial statements and related notes which were prepared in accordance with Belgian GAAP and are included elsewhere in this proxy statement-prospectus. The selected historical consolidated statement of income data of Europay set forth below for the two years ended December 31, 1997 and 1996 and consolidated balance sheet data as of December 31, 1998, 1997 and 1996 have been derived from Europay's unaudited consolidated financial statements not included in this proxy statement-prospectus. The summary consolidated financial information as of June 30, 2001 and 2000 and for the six months then ended has been derived from Europay's unaudited consolidated interim financial statements prepared in accordance with Belgian GAAP, which are included elsewhere in this proxy statement-prospectus. In the opinion of Europay management the unaudited consolidated interim financial statements of Europay have been prepared on the same basis as the audited consolidated financial statements included herein and include all adjustments necessary for the fair presentation of the financial position and results of operation of Europay for these periods, which adjustments are only of a normal recurring nature for the periods and the dates presented. The results of operations for the six months ended June 30, 2001 and 2000 are not necessarily indicative of results that may be expected for a full year. The financial data in the tables below has been derived from Europay's audited and unaudited consolidated financial statements in accordance with Belgian GAAP, which differs in certain significant respects from U.S. GAAP. These differences have a material effect on the net income and composition of shareholders' equity and are summarized in Note 15 to the unaudited consolidated interim financial statements of Europay as of June 30, 2001 and for the six months ended June 30, 2001 and 2000, and Note 22 to the Consolidated Financial Statements of Europay as of December 31, 2000 and December 31, 1999 and for the years ended December 31, 2000, 1999 and 1998 included elsewhere in this proxy statement-prospectus. This table should be read in conjunction with the "Europay Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of Europay and the related notes included elsewhere in this proxy statement-prospectus. Since its inception, Europay has not declared or paid any dividends.
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, ----------------------------------------------------- --------------------------------------- 2001 2001 2000 2000 2000 2000 1999 ----------- ----------- ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS OF EUROS EXCEPT PER SHARE DATA) BELGIAN BELGIAN BELGIAN US GAAP GAAP US GAAP GAAP US GAAP GAAP US GAAP (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (AUDITED) (AUDITED) (UNAUDITED) ----------- ----------- ----------- ----------- --------- --------- ----------- INCOME STATEMENT DATA(1): Revenue(2)................ 131,518 191,095 114,859 168,003 260,093 364,806 215,034 Operating Profit.......... 497 1,511 1,399 3,119 16,241 18,223 8,249 Cumulative effect of changes in accounting principle, net of tax... (547) -- (3,100) -- (3,100) -- -- Net Income/(Loss)......... 4,902 4,644 (2,537) 710 5,657 9,253 8,546 Earnings/(Loss) per share................... 49 -- (25) -- 57 -- 85 BALANCE SHEET DATA(1): Total Assets.............. 300,392 276,432 N/A N/A 275,625 254,169 156,125 Long-Term Debt............ 3,217 -- N/A N/A 3,449 -- 5,572 Shareholders' Equity...... 52,253 46,557 N/A N/A 44,930 41,857 39,258 YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1999 1998 1997 1996 ----------- ----------- ----------- ----------- (IN THOUSANDS OF EUROS EXCEPT PER SHARE DATA) BELGIAN BELGIAN BELGIAN BELGIAN GAAP GAAP GAAP GAAP (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) ----------- ----------- ----------- ----------- INCOME STATEMENT DATA(1): Revenue(2)................ 298,206 245,506 153,486 123,490 Operating Profit.......... 7,321 5,038 4,350 2,696 Cumulative effect of changes in accounting principle, net of tax... -- -- -- -- Net Income/(Loss)......... 7,641 278 1,566 159 Earnings/(Loss) per share................... -- -- -- -- BALANCE SHEET DATA(1): Total Assets.............. 138,896 125,897 79,914 87,905 Long-Term Debt............ 2,533 2,533 2,533 2,533 Shareholders' Equity...... 31,986 24,345 24,067 22,502
- --------------- (1) Prior year balances have been translated from Belgian francs into euros using the fixed exchange rate on January 1, 1999 of BEF 40.3399 per euro. 100 (2) Europay acts as an agent on behalf of MasterCard for the billing and collection of inter-regional transactions with members. Europay does not bear risk and rewards of ownership related to these transactions and therefore, revenue is reported net under U.S. GAAP. See Note 15 to the unaudited consolidated interim financial statements of Europay as of June 30, 2001 and for the six months ended June 30, 2001 and 2000, and Note 22 to Consolidated Financial Statements of Europay as of December 31, 2000 and December 31, 1999 and for the years ended December 31, 2000, 1999 and 1998 included elsewhere in this proxy statement-prospectus. 101 EUROPAY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with Europay's financial statements and the accompanying notes included elsewhere in this proxy statement-prospectus. Europay prepares its financial statements in accordance with Belgian GAAP, which differs in certain significant respects from U.S. GAAP. For an explanation of the material differences between Belgian GAAP and U.S. GAAP, see Note 15 to the unaudited consolidated interim financial statements of Europay as of June 30, 2001 and for the six months ended June 30, 2001 and 2000, and Note 22 to Consolidated Financial Statements of Europay as of December 31, 2000 and December 31, 1999 and for the years ended December 31, 2000, 1999 and 1998 included elsewhere in this proxy statement-prospectus. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000 Revenue consists of operations fees and assessment fees charged to members. Total revenue was E191.1 million for the six months ended June 30, 2001 compared to E168.0 for the six months ended June 30, 2000, an increase of E23.1 or 14%. Operations fees represent user fees for authorization, clearing and settlement and other member services. Operations fees increased E19.5 million, or 26%, from E75.4 million for the six months ended June 30, 2000 to E94.9 million for the six months ended June 30, 2001. The increase in operations fees was attributable primarily to a stoplist service price increase implemented in April 2001 and increases in authorization and clearing transactions processed of 26% and 35%, respectively, from 325 million authorization and 377 million clearing transactions for the six months ended June 30, 2000 to 409 million authorization and 509 million clearing transactions for the six months ended June 30, 2001. Assessment fees represent primarily fees charged to issuers and acquirers based on the gross euro volume of transactions (GEV), as well as card and currency conversion fees charged to issuers. Assessment fees increased E5.2 million, or 6%, from E92.6 million for the six months ended June 30, 2000 to E97.8 million for the six months ended June 30, 2001. This increase was attributable primarily to the increase in GEV associated with the increase in clearing transactions processed noted above as well as a 13% increase in the total number of cards issued by members, offset by a price decrease on intra-regional assessments implemented in April 2001. Services and other goods consist primarily of MasterCard costs, marketing and advertising expenses, professional fees, information technology costs, and general administrative, occupancy and travel costs. Services and other goods increased E21.2 million, or 16%, from E135.5 million for the six months ended June 30, 2000 to E156.7 million for the six months ended June 30, 2001. This increase was primarily due to increases in MasterCard costs and marketing, advertising and sponsorship costs. In accordance with the terms of its alliance agreement with MasterCard, Europay is required to fund MasterCard's costs assigned to the Europe region plus an agreed profit contribution. MasterCard costs increased E6.6 million, or 13%, from E52.3 million for the six months ended June 30, 2000 to E58.9 million for the six months ended June 30, 2001. A 5.5% rise in the average U.S. dollar to euro exchange rates utilized to record MasterCard U.S. dollar charges in Europay's books of account for the six month periods ended June 30, 2001 and 2000 accounts for E3.2 million, or 48%, of the total increase. The balance of the increase was due primarily to an increase in the cost of global functions. Marketing and advertising expenses increased by E10.4 million or 26%, from E40.5 million for the six months ended June 30, 2000 to E50.9 million for the six months ended June 30, 2001. This increase was primarily due to additional costs of E4.5 million for the UEFA European soccer championships and E2.6 million for brand development programs, which reflects Europay's continuing efforts to build brand value. The costs of a European members' meeting held in June 2001 accounted for a further E3.0 million of this increase. 102 Remuneration, social security and pension costs amounted to E31.3 million for the six months ended June 30, 2001 compared to E29.2 million for the six months ended June 30, 2000, an increase of E2.1 million or 7%. This increase was primarily attributable to the introduction of a performance-based variable pay program for all management and staff in 2001. Depreciation and amortization expense was E5.4 million for the six months ended June 30, 2001 compared to E4.6 million for the six months ended June 30, 2000, an increase of E0.8 million or 17%. This increase was primarily due to Europay's continuing investment in information technology equipment and expansion of buildings and facilities to accommodate increases in staff and equipment. The bad debt expense of E0.8 for the six months ended June 30, 2001 million represents doubtful account provisions for two disputed invoices. Net financial income/(expense) increased E6.6 million, from net financial expense of E0.5 million for the six months ended June 30, 2000 to net financial income of E6.1 million for the six months ended June 30, 2001. This increase in net financial income/(expense) was primarily the result of net foreign exchange income on multi-currency settlement operations, partially offset by an increase in interest expense resulting from the fixed-term loan used to finance Euro D0 settlement operations. For a description of Euro D0, see "Liquidity and Capital Resources." The effective tax rates for the six months ended June 30, 2001 and 2000 were 40% and 52%, respectively. The variance with the statutory tax rate of 40% for the six months ended June 30, 2000 was due to expenses that are partially or fully non-deductible under Belgian income tax regulations, such as leased car costs, entertainment expenses incurred in Belgium and gifts. For the six months ended June 30, 2001 the effect of such disallowed expenses was offset by prior year tax adjustments which represented a refund of 1999 tax overpayments. As a result of the foregoing, Europay's net income increased to E4.8 million for the six months ended June 30, 2001 compared to E1.3 million for the six months ended June 30, 2000. Net income attributable to the Europay Group (Europay and its consolidated subsidiaries), reflecting after-tax adjustments for net income/(loss) from equity investments and minority interest, increased to E4.6 million for the six months ended June 30, 2001 compared to E0.7 million for the six months ended June 30, 2000. YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 Total revenue was E364.8 million for the year ended December 31, 2000 compared to E298.2 million for the year ended December 31, 1999, an increase of E66.6 million or 22%. Operations fees increased E16.0 million, or 11%, from E142.9 million for the year ended December 31, 1999 to E158.9 million for the year ended December 31, 2000. The increase in operations fees was attributable primarily to increases in authorization and clearing transactions processed of 26% and 33%, respectively, from 637 million authorization and 678 million clearing transactions for the year ended December 31, 1999 to 802 million authorization and 903 million clearing transactions for the year ended December 31, 2000. Assessment fees increased E36.8 million, or 22%, from E170.0 million for the year ended December 31, 1999 to E206.8 million for the year ended December 31, 2000. This increase was attributable primarily to the increase in GEV associated with the increase in clearing transactions processed mentioned above as well as a 14% increase in the total number of cards issued by members. There was also a positive variance in the volume discount of E13.8 million that offsets revenue, as in 2000 Europay began granting specific, performance-based discounts under agreements with individual members rather than an overall price discount to all members, which was the case in 1999. The total of such member incentive discounts was E0.9 million in 2000. Capitalization of intangible assets consists primarily of the capitalization of internally developed software amounting to E7.6 million for the year ended December 31, 2000. 103 Services and other goods increased E55.6 million, or 25%, from E226.8 million for the year ended December 31, 1999 to E282.4 million for the year ended December 31, 2000. This increase was primarily due to increases in MasterCard costs and marketing, advertising and sponsorship costs. MasterCard costs increased E20.7 million, or 25%, from E83.2 million for the year ended December 31, 1999 to E103.9 million for the year ended December 31, 2000. A 13.1% rise in the average U.S. dollar to euro exchange rates utilized to record MasterCard U.S. dollar charges in Europay's books of account from 1999 to 2000 accounted for E12.5 million, or 61%, of the total increase. The balance of the increase was due primarily to increases in the costs of global functions, products and services provided to European members and the profit contribution, which were partially offset by a decrease in global technology operation costs. Marketing and advertising expenses increased E27.5 million, or 47%, from E58.5 million for the year ended December 31, 1999 to E86.0 million for the year ended December 31, 2000. This increase was primarily due to additional costs of E11.4 million for member card issuance and acceptance incentives and brand development programs, which reflects Europay's continuing efforts to build issuance, acceptance and brand value, and an increase of E8.9 million for extended sponsorship of the UEFA European soccer championships. Increased region and country-specific marketing and advertising efforts, consumer brand and advertising awareness studies conducted in Europe, pan-European coordination of regional advertising agencies for the MasterCard advertising campaign and increased card issuance and acceptance development efforts together accounted for a further E6.8 million of the increase. Remuneration, social security and pension costs amounted to E58.9 million for the year ended December 31, 2000 compared to E50.7 million for the year ended December 31, 1999, an increase of E8.2 million or 16%. This increase was primarily attributable to an increase in salary expense and social security costs related to increases in employee head count together with annual staff performance salary increases and bonus payments made to management and staff for meeting performance targets. Depreciation and amortization expense was E11.1 million for the year ended December 31, 2000 compared to E9.3 million for the year ended December 31, 1999, an increase of E1.8 million or 20%. The increase in 2000 versus 1999 was primarily due to Europay's continuing investment in information technology equipment and expansion of buildings and facilities to accommodate increases in staff and equipment as well as the capitalization of internally developed software. Financial income decreased E7.3 million, or 95%, from E7.7 million for the year ended December 31, 1999 to E0.4 million for the year ended December 31, 2000. This decrease was primarily due to scaled back hedging activity in light of the volatility of the euro to U.S. dollar exchange rate throughout 2000. The E1.4 million provision for extraordinary liabilities and charges for the year ended December 31, 2000 represented primarily employee severance provisions. The effective tax rates for 2000 and 1999 were 44% and 46%, respectively. The variance with the statutory tax rate of 40% for both years was primarily due to expenses that are partially or fully non-deductible under Belgian income tax regulations, such as leased car costs, entertainment expenses incurred in Belgium, and gifts. As a result of the foregoing, Europay's net income increased to E9.7 million for the year ended December 31, 2000 compared to E7.9 million for the year ended December 31, 1999. Net income attributable to the Europay Group (Europay and its consolidated subsidiaries), reflecting after-tax adjustments for net income/(loss) from equity investments and minority interest, increased to E9.3 million for the year ended December 31, 2000 compared to E7.6 million for the year ended December 31, 1999. YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 Total revenue was E298.2 million for the year ended December 31, 1999 compared to E245.5 million for the year ended December 31, 1998, an increase of E52.7 million or 21%. Operations fees increased E30.1 million, or 27%, from E112.8 million for the year ended December 31, 1998 to E142.9 million for the year ended December 31, 1999. The increase in operations fees was attributable 104 primarily to increases in authorization and clearing transactions processed of 25% and 19%, respectively, from 509 million authorization and 567 million clearing transactions for the year ended December 31, 1998 to 637 million authorization and 678 million clearing transactions for the year ended December 31, 1999. The growth in operations fees also includes increases of E7.5 million in user pay fees and E6.5 million in risk management fees. The increase in user pay fees resulted primarily from the introduction of new services in 1999, including chip card and terminal support services, upper market card services, a risk assessment management program, and global services. The increase in risk management fees, which represent fees charged for usage of fraud prevention services such as stop-lists and warning bulletins used for card blockage, was driven by increases in the number of credit cards in issue, fraud, and usage by issuers of our stop-list and warning bulletin services. Assessment fees increased E37.3 million, or 28%, from E132.7 million for the year ended December 31, 1998 to E170.0 million for the year ended December 31, 1999. This increase was attributable primarily to the increase in GEV associated with the increase in transactions processed mentioned above, the introduction of a new currency conversion charge in 1999 and a 12% increase in the total number of cards issued by members. The increases in revenues described above were offset by a one-time volume discount of E14.7 million granted to members in 1999 in response to competitive pressures in the European market. There were no volume discounts granted in 1998. Other operating income decreased by E10.2 million, or 91%, from E11.2 million for the year ended December 31, 1998 to E1.0 million for the year ended December 31, 1999. This decrease was primarily attributable to E9.8 million of non-recurring revenues from MasterCard for debit switch and chip development cost sharing and marketing program funding, exhibition and other fees from a European members' meeting and ticket sales for the 1998 World Cup in France. Services and other goods increased E28.0 million, or 14%, from E198.8 million for the year ended December 31, 1998 to E226.8 million for the year ended December 31, 1999. This increase was primarily due to increases in MasterCard costs, marketing advertising and sponsorship expenses and professional fees. MasterCard costs increased E18.1 million, or 28%, from E65.1 million for the year ended December 31, 1998 to E83.2 million for the year ended December 31, 1999. This increase was primarily due to increases in the costs of global functions, global technology operation costs, products and services provided to European members and the profit contribution, coupled with a 3.7% rise in the average U.S. dollar to euro exchange rates utilized to record MasterCard U.S. dollar charges in Europay's books of account from 1998 to 1999. Marketing and advertising expenses increased E4.3 million, or 8%, from E54.2 million for the year ended December 31, 1998 to E58.5 million for the year ended December 31, 1999. This increase was attributable primarily to E10.8 million of additional spending for developing Maestro card activation, acceptance, communication, PIN migration and transaction service quality, increases in region and country-specific marketing and advertising efforts and expanded sponsorship of the UEFA European soccer championships. These increases were offset by E6.7 million in cost reductions due mainly to a European members' meeting that took place in 1998 but not in 1999, and a decrease in member conversion costs to the new Europay-MasterCard brand. Professional fees increased E5.8 million, or 21%, from E28.1 million for the year ended December 31, 1998 to E33.9 million for the year ended December 31, 1999. This increase was attributable primarily to increased usage of contractors and consultants in the areas of chip technology development and migration, strategy, projects and member training programs. Remuneration, social security and pension costs increased E9.7 million, or 24%, from E41.0 million for the year ended December 31, 1998 to E50.7 million for the year ended December 31, 1999. This increase was primarily attributable to an increase in salary expense and social security costs related to increases in employee head count together with annual staff performance salary increases and retention bonuses paid to information technology staff due to market demand. 105 Depreciation and amortization expense increased E1.0 million, or 12%, from E8.3 million to E9.3 million in 1999. The increase in 1999 versus 1998 was primarily due to Europay's continuing investment in information technology equipment as well as an expansion of buildings and facilities to accommodate increases in staff and equipment. Financial income increased E7.6 million from E0.1 million in 1998 to E7.7 million in 1999. This increase was primarily due to a net gain of E5.5 million on a 12-month forward exchange contract for the purchase of U.S. dollars, which matured in December 1999. Europay bought this contract at the time of the introduction of the euro in January 1999 to cover the currency exposure on the U.S. dollar-based MasterCard costs noted above. In 1998 Europay owned but no longer occupied its former premises located in Brussels. In 1998 an independent valuation was made of the building, based on which Europay made an impairment provision of E3.1 million to reflect a permanent diminution in the value of the building. In July 1999 this building was sold at a loss of E0.1 million, which was included in the net gain/(loss) on disposal of fixed assets in 1999. The effective tax rates for 1999 and 1998 were 46% and 86%, respectively. The higher rate for 1998 and the variance with the statutory tax rate of 40% for 1999 and 1998 were primarily due to expenses that are partially or fully non-deductible under Belgian income tax regulations, such as leased car costs, entertainment expenses and gifts. As a result of the foregoing, our net income increased to E7.9 million in 1999 compared to E0.3 million in 1998. Net income attributable to the Europay Group (Europay and its consolidated subsidiaries), reflecting after-tax adjustments for net income from equity investments and minority interest, increased to E7.6 million in 1999 compared to E0.3 million in 1998. LIQUIDITY AND CAPITAL RESOURCES Europay expects that cash generated from operations, working capital and its borrowing capacity will be sufficient to meet our operational and capital needs in 2001. Net cash provided by/(used in) operating activities for the six months ended June 30, 2001 was (E32.2) million, as compared to E17.6 million for the six months ended June 30, 2000. The E49.8 million decrease between periods was attributable primarily to a significant increase in other amounts receivable, a smaller decrease in deferred soccer sponsorship charges, a larger decrease in suppliers and a decrease in other amounts payable, offset by an increase in profit for the financial period before taxation. The increase in other amounts receivable is primarily due to member settlement receivables related to a same day settlement service called "Euro D0" for euro-currency transactions which was introduced in the second half of 2000. This service results in settlement receivables and payables arising from the two-day delay in the settlement of issued and acquired transactions between euro-currency members that settle on a same-day basis and non-euro currency members that settle two days later. The decrease in other amounts payable is primarily due to member settlement payables related to the Euro D0 settlement service introduced in the second half of 2000, partially offset by a larger increase in member settlement security deposits. Net cash used in investing activities was E12.7 million and E14.8 million for the six months ended June 30, 2001 and 2000, respectively. The E2.1 million increase between periods was principally due to a lower level of fixed asset acquisitions and the proceeds from an investment in a foreign currency option, offset by a net increase in investments in short-term cash deposits. Net cash provided by/(used in) financing activities for the six months ended June 30, 2001 and 2000 was E40.7 million and (E0.7) million, respectively. The E41.4 million increase between periods was primarily the result of financing of Euro D0 activity introduced in the second half of 2000 with E30.0 million proceeds from the fixed-term bank loan and a E10.3 million settlement bank overdraft. Net cash provided by/(used in) operating activities for the year ended December 31, 2000 was E62.1 million, as compared to E43.7 million and (E0.7) million for the years ended December 31, 1999 and 1998, respectively. In addition to the increase in net income before taxation, the E18.4 million increase in 2000 106 was attributable primarily to a significant increase in other amounts payable and a larger decrease in deferred soccer sponsorship charges, offset by an increase in trade debtors attributable to the 22% increase in revenues, an increase in other amounts receivable and a smaller increase in suppliers versus 1999. The increase in other amounts payable was primarily due to continuing increases in member settlement security deposits and member settlement payables related to the introduction in 2000 of the Euro D0 settlement service. The increase in other amounts receivable was primarily due to member settlement receivables related to the Euro D0 settlement service introduced in 2000, partially offset by a decrease in value added tax (VAT) receivable. The E44.4 million increase in 1999 was attributable primarily to an increase in net income before taxation, a decrease in trade debtors and deferred soccer sponsorship charges versus increases in both in 1998 and a larger increase in other amounts payable, partially offset by an increase in other amounts receivable due mainly to two quarters of recoverable VAT receivable at the end of 1999 rather than one, as was the case in 1998, and a smaller increase in suppliers versus 1998. The decrease in trade debtors was attributable to payments received on receivables from MasterCard and Maestro partially offset by an increase in receivables from trade customers arising from the 16% increase in revenues. The increase in other amounts payable was mainly due to the increase of member settlement security deposits. Net cash used in investing activities was E17.9 million, E16.8 million and E13.2 million for the years ended December 31, 2000, 1999 and 1998, respectively. The E1.1 million increase from 1999 to 2000 was principally due to the capitalization of internally developed software for E7.6 million, offset by the redemption of a short-term cash deposit for E7.0 million. The E3.6 million increase from 1998 to 1999 was principally due to the investment in a short-term cash deposit for E7.0 million, partially offset by proceeds from the sale of Europay's former premises in Brussels of E3.8 million. Net cash provided by/(used in) financing activities for the years ended December 31, 2000, 1999 and 1998 was E34.8 million, (E19.4) million and E19.3 million, respectively. The E54.2 million increase from 1999 to 2000 was the result of a E36.6 million net increase in the bank overdraft, which is primarily attributable to Euro D0 settlement activity, and a E19.8 million payment on the short-term bank loan that was required in 1999 with none in 2000. These increases were partially offset by the reclassification of stockholder loans totaling E2.5 million to other amounts payable in current liabilities as the loans will be repaid in 2001. The (E38.7) million decrease from 1999 to 2000 was attributable primarily to the 1999 repayment of a E19.8 million short-term bank loan taken in 1998. Europay's financial position continues to reflect satisfactory liquidity. Cash flow generated from operations provides a significant source of liquidity to meet Europay's needs. Working capital, consisting of current assets less current liabilities, was E8.0 million at June 30, 2001, E4.8 million at December 31, 2000 and E3.4 million at December 31, 1999. Europay has substantially no long-term debt. In addition, Europay can draw upon other sources of liquidity, such as a E35 million credit line for short term corporate cash requirements, a E40 million credit line to cover day-to-day positions involved in member settlement activity, emergency borrowings from members and special assessments. In addition, Europay may draw on member settlement deposits, letters of credit and guarantees in connection with certain member failures. ECONOMIC FLUCTUATIONS INFLATION Due to the worldwide shortage of information technology skills, information technology personnel costs are increasing faster than inflation. However, these costs are to a great extent offset by productivity gains. Otherwise, Europay does not believe inflation has a significant impact on its operations, as both its costs and revenues will be impacted in a similar manner. ECONOMIC GROWTH Europay revenues depend heavily on cross-border transactions and volume, which are influenced by card issuance, cardholder travel and expenditure patterns. Cross-border travel, both business and leisure, is sensitive to the economic context. High interest rates tend to discourage cardholder spending. A slowdown of the economy will negatively impact cross-border traffic, and therefore the growth of Europay's revenues. 107 However, Europay has not identified a clear correlation between GDP growth and card transactions. Europay believes the reason for this is that the overriding drivers for transaction growth in the last ten years have been (i) the growth of cards issued, with double digit year-on-year growth, and (ii) a steady increase of the share of payments by card versus other payment instruments (mainly cash and checks). SEASONAL BUSINESS Two seasonal patterns are evident in Europay's business. Cross-border card transaction traffic shows a peak in the summer holiday months, with August being the peak month, and domestic traffic shows a peak in December, which is attributable to Christmas shopping. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the potential for economic losses to be incurred on market risk sensitive instruments arising from adverse changes in market indices such as interest rates and foreign currency exchange rates. Europay has exposure to market risk arising from fluctuations in interest rates and foreign exchange rates. Europay management's policy is to monitor Europay's foreign exchange risk relating to the primary transaction currencies, specifically the U.S. dollar, Swiss franc and pound sterling, and to budget annual expenditures in these currencies based on forecasted euro exchange rates. Derivative financial instruments are utilized to mitigate the risk associated with variances to the forecasted exchange rate. In accordance with management policies, the finance department has responsibility for monitoring and mitigating the exposure to foreign exchange risk, including the use of derivative financial instruments. As a result of changes in international settlement procedures implemented during 2000 to reduce the processing time for the clearing and settlement of credit card transactions, Europay has increased risk exposure relating to fluctuations in foreign currency exchange rates for the six months ended June 30, 2001 and the year ended December 31, 2000 as compared to December 31, 1999. Europay is primarily exposed to the foreign exchange risk arising from the translation of foreign currency transactions into the euro. Based on Europay's year end foreign exchange position, the effect of a ten percent weakening in the value of the euro is estimated to be a loss of E20.3 million and E13.2 million at December 31, 2000 and December 31, 1999, respectively. Included in the foreign exchange risk discussed above is Europay's exposure to changes in the U.S. dollar versus euro exchange rate related to the obligation under its alliance agreement with MasterCard. Included in the foreign exchange risk discussed above is Europay's exposure to changes in the U.S. dollar versus euro exchange rate related to the obligation under its alliance agreement with MasterCard. Europay utilizes foreign currency forward and option contracts to reduce the foreign exchange risk associated with the U.S. dollar denominated anticipated expenses under this agreement. These transactions seek to minimize the exposure of Europay to losses resulting from a strengthening of the U.S. dollar against the euro. At June 30, 2001 Europay had foreign currency forward contracts outstanding to buy U.S. dollars with a notional amount of E8.7 million and to purchase U.S. dollars with a notional amount of E33.9 to manage the anticipated U.S. dollar denominated cash flows for the remainder of 2001. At December 31, 2000 Europay had outstanding purchased foreign currency option contracts with a notional amount of E53.2 million. As of December 31, 2000, Europay's exposure with respect to these foreign currency option contracts, assuming a ten percent increase/(decrease) in the U.S. dollar versus euro exchange rate, was (E1.3 million) and E3.7 million, respectively. There were no derivative contracts outstanding as of December 31, 1999. Europay utilizes written foreign currency option contracts to offset the cost of hedging transactions. These instruments do not meet the requirements for hedge accounting under U.S. GAAP and therefore are classified as trading securities. Europay is exposed to the risk of loss on these contracts resulting from movements in the U.S. dollar versus euro exchange rate. As of December 31, 2000, a ten percent increase in this exchange rate would result in a loss of E4.8 million while a ten percent decrease in the exchange rate would generate a loss of E1.9 million. Europay's international settlement activities are subject to foreign exchange risk resulting from foreign exchange rate fluctuations. This risk is limited to the extent that the timing difference between the setting of the foreign exchange rate for financial transactions and the clearing of settlement positions is typically one 108 business day and is limited to nine foreign currencies plus the euro. The remaining 174 transaction currencies are settled in one of these ten payment currencies. As of December 31, 2000, a ten percent fluctuation of the exchange rate for these foreign settlement currencies would result in a loss of E2.2 million. The majority of this exposure relates to the settlement of Swiss francs, pound sterling and U.S. dollars. The risk of loss, assuming a ten percent movement of the exchange rate, related to these currencies as of December 31, 2000 was E0.5 million, E0.4 million and E1.1 million, respectively. As of December 31, 1999, there were no timing differences between the setting of the foreign exchange rate for transactions and the clearing of settlement positions. As a result there was no risk exposure to fluctuations in the foreign currency exchange rates relating to international settlement activities. Europay has a E35 million credit line with a bank to cover short-term cash needs. As of June 30, 2001, December 31, 2000 and December 31, 1999, no funding was obtained from this credit line. Europay has limited market risk related to changes in interest rates as borrowings and deposits are for relatively small amounts and generally have a maturity of less than one month. During 2001, Europay has obtained an additional E40 million in credit lines from its principal bankers to cover the technical overdrafts created by the introduction of same day settlement for the euro. On average, about E20 million of these credit lines is used. A variable rate is applied to the borrowing, based on terms and conditions set forth in the agreement. While Europay is subject to interest rate fluctuation on this credit line, an agreement was reached with the members that the cost of this credit line can be recovered from the members. 109 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. 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 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......................... 71 Director David A. Coulter..................... 54 Director William R.P. Dalton.................. 57 Director Augusto M. Escalante Juanes.......... 52 Director Jan A.M. Hendrikx.................... 55 Director Jean-Pierre Ledru.................... 62 Director Norman C. McLuskie................... 57 Director John Francis Mulcahy................. 51 Director Robert W. Pearce..................... 46 Director Robert B. Willumstad................. 56 Director Mark H. Wright....................... 56 Director Ronald N. Zebeck..................... 46 Director Denise K. Fletcher................... 53 Executive Vice President and Chief Financial Officer Noah J. Hanft........................ 48 Senior Vice President, 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..................... 62 Senior Executive Vice President, Global Technology & Operations Michael W. Michl..................... 55 Executive Vice President, Central Resources Christopher D. Thom.................. 53 Senior Executive Vice President, Global Development Group Spencer Schwartz..................... 34 Senior Vice President and Controller
110 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 a Senior Vice Chairman of MBNA America Bank, N.A. and Chairman of the board of MasterCard Incorporated. Mr. Weaver was first elected to the MasterCard International board of directors in 1997 and was elected chairman of the board of MasterCard International in 2001. Before joining MBNA America Bank in 1991, Mr. Weaver held various management positions with Wells Fargo and Citicorp/ Citibank. He is director of MBNA America Bank and MBNA Information Services. He also serves on the board of directors of the Christiana Care Corporation and the Wilmington Renaissance Corporation. He is a member of the Georgetown University Board of Regents and the Tower Hill School Board of Trustees. Baldomero Falcones Jaquotot is Director General of Banco Santander Central Hispano and a member of its Executive Committee, and Vice Chairman of the board of MasterCard International. He has been a member of the MasterCard International board of directors since 1997. Mr. Falcones joined Banco Hispano Industrial, a predecessor of Banco Santander Central Hispano, in 1984. Mr. Falcones also serves as Chairman of Sistemas Espanoles de Tarjetas Inteligentes (S.E.T.I.), Chairman of Europay Espana, Chairman of Aquanima Holding, S.A. and Aquanima Iberica, S.A. and as a director and a member of the Executive Committee of Europay International S.A. He is a director of Union Fenosa, S.A., La Estrella, S.A. de Seguros, Central Hispano Vida, S.A., Central Hispano Seguros Generales, S.A., Sistema 4B, S.A., Portal Universia, S.A. and B2BF, S.A. Donald L. Boudreau is Chairman Emeritus and a non-voting advisory director of MasterCard Incorporated. Mr. Boudreau has served on the MasterCard International board of directors since 1997 and was the Chairman of the MasterCard International board of directors from April 1998 to March 2001. Mr. Boudreau recently retired as a Vice Chairman of The Chase Manhattan Corporation and The Chase Manhattan Bank, where he was a member of the Executive Committee. Mr. Boudreau served in a variety of positions during his 40 year career at Chase, and most recently was responsible for all of Chase's small and consumer and middle market businesses. Mr. Boudreau is Chairman of the New York City Blood Donor campaign, a member of the board of directors of the New York City Blood Center, and a member of the board of trustees of the New York Presbyterian Hospital, Pace University, the National Urban League and the United Way of Tri-State. Robert W. Selander will be President and Chief Executive Officer of MasterCard Incorporated and presently holds the same position at MasterCard International. Mr. Selander has served on the MasterCard International board of directors since 1997. Prior to his election as President and Chief Executive Officer of MasterCard International, Mr. Selander was an Executive Vice President and President of the MasterCard International Europe, Middle East/Africa and Canada regions. He also currently serves as a director of Hartford Financial Services Group and Europay International. Before joining MasterCard in 1994, Mr. Selander spent two decades with Citicorp/Citibank, N.A. William F. Aldinger is the Chairman and Chief Executive Officer of Household International. Mr. Aldinger was first elected to the MasterCard International board of directors in 1998 and is a former member of MasterCard International's U.S. region board of directors. Mr. Aldinger joined Household International in 1994, and prior to that time served in various positions at Wells Fargo Bank, including Vice Chairman. Mr. Aldinger is a member of the boards of directors of Illinois Tool Works, Inc. and Evanston Northwestern Healthcare. He is a member of the combined boards of directors of Children's Memorial Medical Center/Children's Memorial Hospital and the Children's Memorial Foundation located in Chicago. Mr. Aldinger is also a member of the board of trustees of Northwestern University and the J.L. Kellogg Graduate School of Management. Hiroshi Arai is the Chairman of the Board of Orient Corporation, a position he has held since 1999. Mr. Arai has been a member of the MasterCard International board of directors since 1999 and is currently a 111 member of MasterCard International's Asia/Pacific region board of directors. Prior to joining Orient Corporation in 1993, Mr. Arai was employed for forty years with Dai-ichi Kangyo Bank, where he held various positions including Deputy President. David A. Coulter is Vice Chairman of J.P. Morgan Chase & Co. and head of its retail and middle market business, as well as its Internet initiatives. Mr. Coulter has been a member of MasterCard International's 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 HSBC Bank Canada. Mr. Dalton joined HSBC Bank Canada in 1980. Mr. Dalton is Chairman of HSBC Asset Finance (UK) Limited and Deputy Chairman of Merrill Lynch HSBC Limited and is also a director of HSBC Investment Bank Holdings plc and Credit Commercial de France. He is President of the Chartered Institute of Bankers and Chairman of Young Enterprise in the United Kingdom. In addition, Mr. Dalton is a Fellow of the Institute of Canadian Bankers and a Fellow of the Chartered Institute of Bankers. Augusto M. Escalante Juanes is Deputy President, Consumer Product and Marketing Areas, Banco Nacional de Mexico, S.A. Mr. Escalante Juanes was elected to the MasterCard International board of directors in 2001 after having previously served on the board from April 1998 to March 1999, and is currently chairman of MasterCard International's Latin America and Caribbean region board of directors. 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 as a consultant for Gemini Consulting in London and in senior positions in the European offices of Visa International and Citibank. He has served on the Europay International board of directors since 1998. Jean-Pierre Ledru is Senior Executive Vice President of Caisse Nationale de Credit Agricole. He has served on the MasterCard International board of directors since 1991. In addition, Mr. Ledru is Chairman of Cedicam, Chairman and C.E.O. of Europay France, Chairman of Europay International, and Vice Chairman of the Groupement des Cartes Bancaires. In addition, Mr. Ledru is Executive Vice Chairman of BMS (Billetique Monetique Services) and a member of the board of directors of AROP (Association pour le Rayonnement de l'Opera National de Paris). Norman C. McLuskie is a Director of The Royal Bank of Scotland Group plc, The Royal Bank of Scotland plc and National Westminister Bank plc. Mr. McLuskie was first elected to the MasterCard International board of directors in 2000. 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 Advanta, Chairman of RBS Cards Ltd, Chairman of the Trustees of the RBS Pension Fund, Chairman of Virgin Direct Personal Finance Ltd, Deputy Chairman of Tesco Personal Finance and Director of Worldpay Group plc. Mr. McLuskie is also Vice Chairman of Europay International. 112 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 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 Chief Executive Officer of Citigroup's Consumer Group, overseeing its North American cards businesses, Citibanking North America, CitiFinancial, Citigroup's Mortgage Banking business, Primerica Financial Services, and its international consumer finance business, and has product responsibility for global cards and its e-consumer unit that provides Internet payment solutions and financial services offerings across all the consumer businesses. Mr. Willumstad has served on the MasterCard International board of directors since 1999. Mr. Willumstad was Vice Chairman of Travelers Group prior to the merger between Citicorp and Travelers Group, where he has been for fourteen years. Prior to joining Travelers Group, Mr. Willumstad served in various positions with Chemical Bank for twenty years, last holding the position of President of Chemical Technologies Corporation. Mark H. Wright is President and Chief Executive Officer of USAA Federal Savings Bank, and serves as Vice Chairman of USAA Federal Savings Bank's board of directors. He also serves as Chairman of the Board of USAA Savings Bank. Mr. Wright 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 Vice President of the Thrift Institutions Advisory Council appointed by the Federal Reserve Bank. Ronald N. Zebeck is Chairman and Chief Executive Officer of Metris Companies Inc., as well as Chief Executive Officer of Direct Merchants Credit Card Bank. Mr. Zebeck has served on the MasterCard International board of directors since 1997 and is currently a member of MasterCard International's U.S. Region board of directors. Prior to joining Metris Companies Inc. in 1994, Mr. Zebeck held various credit card related positions at Citicorp, Advanta and General Motors. EXECUTIVE OFFICERS Biographies of the executive officers of MasterCard Incorporated and MasterCard International after the conversion and integration other than Mr. Selander are set forth below. Each of the following officers currently hold the same position with MasterCard International before the conversion and integration that they will hold in MasterCard Incorporated and MasterCard International after the conversion and integration, except for Dr. Peter Hoch, who is currently the Chief Executive Officer of Europay International. Denise K. Fletcher will be Executive Vice President and Chief Financial Officer of MasterCard Incorporated and a member of MasterCard's Executive Management Group. Ms. Fletcher will be responsible for the corporate finance, planning, audit, purchasing and new markets and investments functions at MasterCard. Prior to joining MasterCard in 2000, Ms. Fletcher spent four years as Senior Vice President and Chief Financial Officer of Bowne & Company, the world's largest financial printer, with responsibility for finance and strategy. She serves on the boards of directors of Girl Scouts USA and the YWCA of the City of New York. Noah J. Hanft will be Senior Vice President, General Counsel and Secretary of MasterCard Incorporated. Mr. Hanft has served in various increasingly senior legal positions at MasterCard since 1984, except for 113 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, among other things. He helped to oversee the merger between Hypo-Bank and Bayerische Vereinsbank to form Hypo Vereinsbank, and served on the management board of Hypo Vereinsbank in 1998 and 1999. Dr. Hoch is currently a member of the board of directors of Giesecke & Devrient. Jerry McElhatton will be Senior Executive Vice President of MasterCard Incorporated and a member of MasterCard's Executive Management Group. Mr. McElhatton will be responsible for MasterCard's Global Technology and Operations group, which includes the St. Louis transaction processing facility. Before joining MasterCard in 1994, Mr. McElhatton was President and Chief Executive Officer of Dallas-based Payment Systems Technology & Consulting, Inc. Mr. McElhatton currently serves on the board of directors of Ignite Sales, Inc. and Mascon, a development firm based in India; the board of directors of St. Louis University; the board of directors of the Regional Commerce and Growth Association in St. Louis; the National Council for the Olin School of Business of Washington University in St. Louis; and the boards of directors of Rainbow Village in St. Louis and the United Way (St. Louis). Michael W. Michl will be Executive Vice President of MasterCard Incorporated and will be a member of MasterCard's Executive Management Group. Mr. Michl will be responsible for MasterCard's Central Resources unit, encompassing the communications, global human resources and corporate services functions. Mr. Michl joined MasterCard in 1998 from Avon Products, where he was Vice President of Human Resources. Christopher D. Thom will be Senior Executive Vice President of MasterCard Incorporated and a member of MasterCard's Executive Management Group. Mr. Thom will be responsible for MasterCard's Global Development Group, which manages the brand and program development functions at MasterCard, as well as MasterCard's initiatives in the areas of electronic commerce, mobile commerce and chip-based smart cards. Prior to joining MasterCard in 1995, Mr. Thom served in a variety of positions at HSBC Group in the United Kingdom, including as general manager, Strategic Development and general manager, Retail. In the latter position, Mr. Thom was responsible for the core banking services and products delivered through HSBC's branch network, as well as HSBC's card service, private banking and other businesses. Mr. Thom is a director of 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 114 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. COMPENSATION. The compensation committee will establish the compensation policies and criteria of the Chief Executive Officer and other executive officers of MasterCard Incorporated. The members of the compensation committee are expected to be Messrs. Weaver, Aldinger, Boudreau and Falcones. NOMINATING. The nominating committee will consider and nominate individuals to serve as directors of MasterCard Incorporated for approval by the class A and class B stockholders at the annual meeting of stockholders, based upon proposals made by each regional board of MasterCard Incorporated. The members of the nominating committee are expected to be Messrs. Weaver, Aldinger, Boudreau, Dalton, Falcones, Ledru and Willumstad. EXECUTIVE COMPENSATION SUMMARY COMPENSATION The following table shows the before-tax compensation for the Chief Executive Officer and the four next highest paid executive officers of MasterCard International at the end of 2000, which we collectively refer to as the named executive officers.
LONG-TERM ANNUAL COMPENSATION COMPENSATION -------------------------------------- ------------ (1) (2) OTHER ANNUAL LTIP ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION PAYOUTS COMPENSATION - --------------------------- -------- ---------- ------------ ------------ ------------ Robert W. Selander.......... $700,000 $2,000,000 $198,760 $0 $419,360 President & CEO Alan J. Heuer............... $575,000 $ 800,000 $137,796 $0 $174,317 Senior Executive VP Jerry McElhatton............ $575,000 $ 725,000 $133,849 $0 $375,758 Senior Executive VP Christopher D. Thom......... $500,000 $ 700,000 $116,470 $0 $129,283 Senior Executive VP Michael W. Michl............ $330,000 $ 425,000 $ 36,165 $0 $ 50,107 Executive VP
- --------------- (1) Amounts principally represent reimbursement for tax obligations in connection with non-qualified retirement benefits. (2) Includes $20,535 contributed as matching contributions under MasterCard International's 401(k) plan for each named executive officer; company contributions to both a non-qualified defined benefit and defined contribution plan -- Annuity Bonus Plan (Mr. Selander -- $176,597; Mr. Heuer -- $110,662; Mr. McElhatton -- $117,530; Mr. Thom -- $77,265; Mr. Michl -- $9,150); the full amount of all 115 premiums paid by MasterCard International for executive life insurance coverage (Mr. Selander -- $32,232; Mr. Heuer -- $3,120; Mr. McElhatton -- $3,524; Mr. Thom -- $1,232; Mr. Michl -- $1,928); company contributions to a deferred compensation plan -- Rabbi Trust (Mr. Selander -- $150,000; Mr. McElhatton -- $200,000); and cash payments in lieu of executive perquisites (Mr. Selander -- $39,996; Mr. Heuer -- $40,000; Mr. McElhatton -- $34,169; Mr. Thom -- $30,251; Mr. Michl -- $18,494). LONG-TERM INCENTIVE PLAN-AWARDS IN FISCAL YEAR 2000 The following table lists grants of performance units in 2000 to the executive officers named below:
NUMBER OF UNITS PERFORMANCE OR OTHER NAME AWARDED(1) PERIOD UNTIL MATURATION THRESHOLD($) TARGET($) MAXIMUM($) - ---- ---------- ----------------------- ------------ --------- ---------- Robert W. Selander........ 28,475 1/1/2000 - 12/31/2002 1,423,750 2,847,500 5,695,000 President & CEO Alan J. Heuer............. 21,350 1/1/2000 - 12/31/2002 1,067,500 2,135,000 4,270,000 Senior Executive VP Jerry McElhatton.......... 16,375 1/1/2000 - 12/31/2002 818,750 1,637,500 3,275,000 Senior Executive VP Christopher D. Thom....... 15,475 1/1/2000 - 12/31/2002 773,750 1,547,500 3,095,000 Senior Executive VP Michael W. Michl.......... 8,175 1/1/2000 - 12/31/2002 408,750 817,500 1,635,000 Executive VP
- --------------- (1) The performance units were granted under MasterCard International's Executive Incentive Plan. Each performance unit has a target value equal to $100. The actual value of each unit will be calculated based on MasterCard International's performance over a three-year period based on a combination of qualitative and quantitative measures that include: improving profitable share with key members in key markets, achieving corporate financial targets, implementing corporate strategy, improving customer focus and value added delivery and enhancing organizational capabilities. Each unit will be valued at target ($100) if, on a weighted-average basis, target performance is achieved for all of the performance measures. Each unit will be valued at threshold ($50) if, on a weighted-average basis, threshold performance is achieved. Each unit will be valued at maximum ($200) if, on a weighted-average basis, maximum performance is achieved. For performance between threshold and target or target and maximum, the value of the units will increase on a straight line basis. The units will have no value if performance is below threshold. The performance units described in the preceding table are subject to the following vesting schedule:
% OF ANNIVERSARY OF DATE OF GRANT UNITS VESTED - ---------------------------- ------------ First....................................................... 26.33% Second...................................................... 52.67% Third....................................................... 80% Fourth...................................................... 80% Fifth....................................................... 100%
Upon completion of the three-year performance period, participants will receive a payout equal to 80% of the award earned. The remaining 20% of the award will be paid upon completion of two additional years of service, (i.e., 5 years of service in total). Participants who retire (with at least six months of service during the performance period), die or become permanently disabled prior to the end of the 3-year performance period and/or prior to the end of the 5-year performance period are eligible for 100% vesting of their units, and receive a payout equal to the number of units granted for the period multiplied by the per unit value determined by MasterCard. If a participant is terminated for cause, all units will be forfeited. Upon any other termination, only unvested units will be forfeited and vested units will be paid at the lower of target or the most recent annual performance score. 116 RETIREMENT BENEFITS MASTERCARD ACCUMULATION PLAN (MAP) Employees who participate in the MAP earn benefits under the MAP as soon as they become an employee of MasterCard. Benefits generally vest after four years of service. For each plan year after January 1, 2000, participants are credited with a percentage of their compensation for the plan year in accordance with the table below:
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 to certain other participants under various funded and unfunded nonqualified plans. Benefits are provided to certain employees whose benefits are limited by compensation or amount under applicable federal tax laws and regulations. Designated employees may also receive an annual benefit at retirement equal to a designated percentage of their final average base compensation reduced by the amount of all benefits received under the MAP and other qualified and nonqualified arrangements. ESTIMATED ANNUAL RETIREMENT BENEFITS PAYABLE TO CERTAIN EXECUTIVE OFFICERS The following table shows the estimated annual retirement benefits, including supplemental retirement benefits under the plans applicable to the individuals, which would be payable to each executive officer listed if he were to retire at age 65 at his 2000 base salary and payments were made for the life of each participant.
YEAR OF 65TH ESTIMATED ANNUAL NAME BIRTHDAY BENEFIT(1) - ---- ------------ ----------------- Robert W. Selander...................................... 2015 $700,000 Alan J. Heuer........................................... 2006 $460,000 Jerry McElhatton........................................ 2004 $460,000 Christopher D. Thom..................................... 2013 $400,000 Michael W. Michl........................................ 2010 $130,000
- --------------- (1) Assumes MAP and Annuity Bonus Plan account balance increases with annual salary credits and interest credits projected at 6% per year. 117 Included in the Estimated Annual Benefit in the table above is the MAP Conversion Annuity, part of MasterCard's nonqualified defined benefit plan, which was applicable to all executives with earnings exceeding the Internal Revenue Code section 401(a)(17) limit. This annuity was designed to cover certain early retirement subsidies applicable under the former pension plan to all plan participants. The aggregate annuity for certain named executive officers exceeded $100,000 (Mr. Selander -- $194,693, Mr. Heuer -- $136,696, Mr. Thom -- $114,057, Mr. McElhatton -- $130,514). 401(k) SAVINGS PLAN Employees who participate in the 401(k) plan may contribute from 2% to 6% of base pay on a tax-deferred basis. In addition, after-tax contributions are permitted, and employees may also contribute supplemental tax-deferred and after-tax amounts from 1% to 5%. Internal Revenue Service limits apply to all tax-deferred contributions. MasterCard matches employee contributions up to 6% of pay at 217%. Employees must contribute to the 401(k) plan to receive matching contributions. Matching contributions are 100% vested after 4 years of service under a graded vesting schedule. Loans and certain types of withdrawals are permitted. COMPENSATION OF DIRECTORS Members of the board of MasterCard Incorporated will receive the same compensation as members of the board of MasterCard International before the conversion as set forth below. The board of MasterCard Incorporated does not intend to establish any compensation for members of the board of MasterCard International. In fiscal year 2000, directors who were not employees of MasterCard International were paid an annual retainer of $25,000. In addition, the chairman of the board received an annual retainer of $30,000. Non-employee directors also received an annual retainer of $5,000 for serving as a chairperson of a standing committee; a $1,500 meeting fee for attendance at global and regional board meetings; a $1,000 meeting fee for attendance at committee meetings and a $500 meeting fee for telephonic meetings. In addition, customary expenses for attending board and committee meetings were reimbursed. Under the MasterCard Deferral Plan, up to 100% of non-employee director's meeting fees and annual retainer may be deferred and invested among several investment return options. In general, deferred amounts are not paid until after the director retires from the board. The amounts are then paid, at the director's option, either in a lump sum or in ten annual installments. EMPLOYMENT AGREEMENTS AND CHANGE-IN-CONTROL ARRANGEMENTS EMPLOYMENT 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, as defined under the agreement. In addition, both he and MasterCard can terminate the agreement for any reason upon ninety (90) days' prior written notice. Further, the employment agreement may be terminated by MasterCard for cause as defined under the agreement. During the employment term, Mr. Selander is eligible to participate in MasterCard's compensation, benefit and perquisite plans and arrangements on a level commensurate with his position. The agreement also provides that if Mr. Selander's employment is terminated either by MasterCard other than for cause or by him for certain specified reasons, he shall receive any earned, but unpaid base salary, a pro rata portion of his target bonus through the date of termination and additional pay in the form of base salary continuation, his average annual incentive bonus received over the prior three years, and certain additional benefits payable for a period of thirty-six (36) months, or recalculated to an amount equivalent to such continued pay and benefits due to be received over a thirty-six (36) month period, payable until he is eligible to retire, whichever period is longer. Mr. Selander is also subject to non-competition and non-solicitation 118 covenants for a minimum period of six (6) months, up to the full length of the additional pay period, under certain circumstances. Pursuant to the agreement, Mr. Selander is eligible for annual company contributions of up to $150,000 to a rabbi trust or other tax deferred investment vehicle. $50,000 of this amount is guaranteed and the remaining $100,000 is based upon MasterCard attaining certain threshold and target performance goals. Generally, the vested portion of the assets is payable at the later of age 55 or his termination of employment. CHANGE-IN-CONTROL ARRANGEMENTS MasterCard recently approved a change in control agreement for certain of its executive officers, including all of the named executive officers. 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 plan) during the six-month period preceding or the two-year period following a "change in control" of MasterCard International, the executive will be entitled to the following: - a severance payment equal to 2x average base salary and bonus (3x in the case of the CEO), payable over a 24-month period (36 months in the case of the CEO), subject to recalculation to be payable over the period until the executive is eligible to retire (without any increase in the amount payable); - continued coverage under the executive's individual long-term disability plan for the 24- or 36-month period; - continued coverage in the medical, dental, hospitalization and vision care plans for up to eighteen months; - accelerated vesting of performance units granted prior to the change in control under the executive incentive plan, with payout at 125% of target; - accelerated vesting of appreciation of share units granted under the value appreciation plan; - accelerated vesting of special award, nonqualified retirement and deferred compensation benefits; - lump sum payment equal to the value of unvested qualified plan benefits; - outplacement assistance; and - an excise tax gross-up for any taxes incurred as a result of Section 4999 of the Internal Revenue Code. The executive would be subject to a covenant not to compete and not to solicit employees for up to 24-months (36 in the case of the CEO). For purposes of the plan, a "change in control" is defined as follows: (a) as long as MasterCard International is a non-stock membership corporation or it or any of its affiliates is a private share corporation, if (1) at any time three members have become entitled to cast at least 45 percent of the votes eligible to be cast by all the members of MasterCard International (or all the shareholders of such private share corporation) on any issue, (2) at any time, a plan or agreement is approved by the members or shareholders, as the case may be, to sell, transfer, assign, lease or exchange substantially all of MasterCard International's (or such private share corporations') assets, or (3) at any time, a plan is approved by the members of MasterCard International (or the shareholders of such private share corporation) for the sale or liquidation of MasterCard International or such private share corporation. The foregoing notwithstanding, a reorganization in which the members continue to have all of the ownership rights in the continuing entity shall not in and of itself be deemed a "change of control" under (2) and/or (3), and a reorganization to convert MasterCard International from a membership to a 119 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. 120 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 1,294,660,941 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, 2000.
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. ............................. 104,425,321 8.1% 14700 Citicorp Drive Hagerstown, MD 21742 Chase Manhattan Bank, N.A. ................................. 93,410,113 7.2% 1 Chase Manhattan Plaza 17th Floor New York, NY 10081 First USA Bank, N.A. ....................................... 80,524,844 6.2% A Bank One Company 201 North Walnut Street 15th Floor Wilmington, DE 19801
121 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 common stock and class B 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 or class B common stock following the conversion and integration. To the best of our knowledge, each beneficial owner of class A common stock and class B common stock will have sole voting power and sole investment power with respect to all of the class A and class B shares that it owns. This table does not give effect to shares that may be acquired pursuant to options because no shares may be so acquired within 60 days from the date of this proxy statement-prospectus.
AFTER CONVERSION AND INTEGRATION ------------------------------------------------------------------------ PERCENT OF SHARES OF PERCENT OF SHARES OF PERCENT OF TOTAL CLASS A CLASS A CLASS B CLASS B 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 million 6% 1 million 6% 6% 14700 Citicorp Drive Hagerstown, MD 21742 Chase Manhattan Bank USA........ 4.2 million 5% 0.8 million 5% 5% 1 Chase Manhattan Plaza 17th Floor New York, NY 10081 First USA Bank, N.A. ........... 4.2 million 5% 0.8 million 5% 5% A Bank One Company 201 North Walnut Street 15th Floor Wilmington, DE 19801 EURO Kartensysteme EUROCARD und eurocheque GbmH............... 4.2 million 5% 0.8 million 5% 5% Solmsstrasse 2-26 60648 Frankfurt/Main Germany Europay France S.A. ............ 4.2 million 5% 0.8 million 5% 5% Rue Lecourbe 16 75740 Paris Cedex 15 France
122 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% of our class A and class B common stock on a combined basis. Pursuant to an agreement, dated as of July 1, 1999, between MasterCard and The Chase Manhattan Bank, The Chase Manhattan Bank has agreed, among other things, to continue to increase, and then maintain, the annual percentage of payment cards issued by Chase that are MasterCard branded, in exchange for certain pricing terms. MasterCard and Europay provide authorization, clearing and settlement services in connection with transactions for which The Chase Manhattan Bank or its affiliates act as issuer or acquirer. In addition, The Chase Manhattan Bank uses several of MasterCard's fee-for-service products. A portion of MasterCard International's $1.2 billion dollar credit facility is syndicated to The Chase Manhattan Bank, for which the The Chase Manhattan Bank receives a fee. In addition, The Chase Manhattan Bank and its affiliates receive amounts from MasterCard for cash management services. The Chase Manhattan Bank acts as issuer of MasterCard's corporate cards and provides a variety of banking services for MasterCard employees pursuant to arrangements entered into with MasterCard. MasterCard provides certain financial and other incentives to The Chase Manhattan Bank for co-branded and affinity card programs issued by Chase. For 2000, fees earned from The Chase Manhattan Bank 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% of our class A and class B common stock on a combined basis. 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% of our class A and class B 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 123 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% of our class A and class B common stock. 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% of our class A and class B common stock. 124 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 common stock, par value $.01 per share; - 25 million shares of class B common stock, par value $.01 per share; and - 75 million shares of class C common stock, par value $.01 per share. Immediately following the closing of the conversion and integration, 84 million shares of class A common stock will be issued and outstanding, 16 million shares of class B common stock will be issued and outstanding and no shares of class C common stock will be issued and outstanding. MasterCard Incorporated may only issue the class B common stock in connection with the transactions contemplated by the integration agreement. Conversion of Class B common stock. Each share of class B common stock, except shares that constitute ec Pictogram shares, will automatically be converted into one share of class A common stock on the third anniversary of the first day of the first fiscal quarter beginning after the fiscal quarter in which the closing of the conversion and integration occurs. Shares of class B common stock that are ec Pictogram shares will automatically be converted into one share of class A common stock on the second anniversary of the day on which all of the other shares of class B common stock were converted and some or all of these shares will be allocated among the members of MasterCard responsible for ec Pictogram volumes 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 common stock, including class A common stock resulting from the conversion of class B 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 Common Stock" above. Fractional Shares. No fractional shares of class A or class B common stock will be issued or delivered by MasterCard Incorporated. Any fractional share interests will be rounded to a whole share in such manner as the management of MasterCard Incorporated may determine in its sole discretion. VOTING RIGHTS, DIVIDEND RIGHTS AND LIQUIDATION RIGHTS Voting Rights. Each holder of class A and class B common stock has the right to cast one vote for each share of class A and class B common stock held of record on all matters submitted to a vote of stockholders of MasterCard Incorporated. At the end of the transition period, all shares of class B common stock, except for class B shares relating to ec Pictogram, will be converted into class A common stock. Following this conversion, the remaining class B common stock will have no voting rights. At all times, each holder of class A and class B 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 common stock and class B common stock voting together as a single class (so long as the class B stock has voting rights). However, approval of at least 75% of the directors present at a meeting at which a quorum is present is required to raise the limitation on voting for directors to more than 15% of the shares that are entitled to vote in the election of directors. The above provisions may be amended only with the approval of 75% of the 125 directors present at a meeting at which a quorum is present and the approval of the holders of a majority of the outstanding class A and class B common stock voting together as a single class (so long as the class B stock has voting rights). Dividend Rights. The holders of shares of class A and class B common stock are entitled to share ratably in dividends or distributions, if, as and when dividends or distributions are declared by the board of directors of MasterCard Incorporated at its discretion. MasterCard Incorporated has no current plans to pay cash dividends on the common stock. Liquidation Rights. Upon dissolution, liquidation or winding-up of MasterCard Incorporated, holders of class A and class B common stock are entitled to share ratably in the net assets available for distribution to stockholders after the payment of debts and other liabilities, subject to the prior rights of any issued preferred shares. 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, 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 that stockholder for the book value of its shares 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. 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 commit to buy or sell shares under certain circumstances in order to ensure that member-stockholders are able to satisfy their minimum or maximum share ownership requirements. In particular, if a member-stockholder is unable to sell shares to another member-stockholder and the sale is required for the member-stockholder to maintain its share ownership within the specified range, MasterCard Incorporated will offer to buy the shares at par or for any greater value determined by the board of directors in its discretion. Similarly, if a member-stockholder is unable to buy shares from another member-stockholder and the purchase is required for the member-stockholder to maintain its share ownership within the specified range, MasterCard Incorporated will sell the required shares to the member-stockholder for their book value, or for any greater value determined by the board of directors in its discretion. 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. 126 MasterCard Incorporated will purchase or sell its common stock in connection with the foregoing commitments 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, in each case as determined by the board of directors in its discretion. Other Rights. Other than as otherwise described herein, holders of class A and class B common stock do not have any rights to purchase additional shares of stock from MasterCard Incorporated, to have their common stock converted into or exchanged for other securities (except for the conversion of class B shares into class A shares as described above), to have their common stock repurchased by MasterCard Incorporated or to receive a preferred return on their shares of common stock. Class C Common Stock. Shares of class C common stock may be issued from time to time with voting powers, designations, preferences and other rights to be determined by the MasterCard Incorporated board of directors, provided that no shares of class C common stock may be entitled to voting rights, dividends or rights to participate in the proceeds of a liquidation that are greater than the corresponding rights of the class A common stock. The MasterCard Incorporated certificate of incorporation provides that any issuance of class C common stock requires the approval of two-thirds of the board of directors, and that any issuance of voting class C common stock or class C common stock that, together with all other issuances of class C common stock made during the immediately preceding two years, represents greater than 5% of the total number of class A shares and class B shares outstanding prior to the issuance requires the approval of 75% of the board of directors. These provisions may be amended only with the approval of 75% of the directors present at a meeting at which a quorum is present and the approval of the holders of a majority of the outstanding class A and class B common stock voting together as a single class (so long as the class B stock has voting rights). TRANSFER RESTRICTIONS For three years following the 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 the stockholder's card portfolio. After three years, each stockholder must maintain an ownership percentage of MasterCard Incorporated common stock that is no less than 75% and no more than 125% of the stockholder's most recent global proxy calculation. Stockholders may be required to purchase or sell shares of MasterCard Incorporated in order to satisfy these requirements within 12 months of receipt of notice from MasterCard Incorporated that such purchase or sale is required. Any sales of shares would ordinarily constitute taxable transactions. In addition: - only class A members of MasterCard International may own shares of class A and class B common stock of MasterCard Incorporated; 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." TRANSFER AGENT Initially, MasterCard Incorporated will be the transfer agent and registrar of the common stock. 127 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. Supermajority Vote of the Board of Directors. Our certificate of incorporation requires the approval of 75% of the directors present at a meeting at which a quorum is present and the approval of the holders of a majority of the outstanding class A and class B common stock voting together as a single class (so long as the class B common stock has voting rights) to: alter our status as a stock corporation; amend our certificate of incorporation to authorize MasterCard Incorporated to issue stock other than class A, B or C common stock; sell, lease or exchange all or substantially all of MasterCard Incorporated's assets; approve the sale, lease or exchange of all or substantial all of the assets of MasterCard International; engage in a business combination (merger or consolidation) involving either MasterCard Incorporated or MasterCard International; undertake an initial public offering; amend the MasterCard International certificate of incorporation to allow MasterCard International to issue capital stock, to create additional classes of membership interests in MasterCard International, to subject the property of the members of MasterCard International to the obligations of MasterCard International or to subject non-U.S. programs to the satisfaction of any liabilities arising from the current DOJ and merchant antitrust litigations in the United States; or amend the provisions of the MasterCard International bylaws relating to special assessments that may be imposed upon the members of MasterCard International. Other provisions of the certificates of incorporation and by-laws of MasterCard Incorporated and MasterCard International may be modified only if certain supermajorities are achieved, and these provisions may have the effect of deterring potential acquirors. See "Comparison of Rights of MasterCard International Members Before and After the Conversion and Integration." Ability to Call Special Meetings. Special meetings of MasterCard Incorporated stockholders may be called at any time for any purpose by written request of the chairman of the board of directors or the President and Chief Executive Officer of MasterCard Incorporated. Special meetings may also be called by the Secretary upon the written request of at least 33 1/3% of the board of directors or the holders of at least 25% of the outstanding shares entitled to vote on the action being proposed. Notice of a special meeting must state the time, place and date of the meeting, the name of the person or persons calling the meeting, the purpose for which the meeting is called and the means of acceptable remote participation. The business transacted at the special meeting is limited to the purpose described in the notice. 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 and class B 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 and class B 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 128 associates, owns 15% or more of the corporation's voting stock for a three year period following the time the stockholder became an interested stockholder, unless: - prior to the time the stockholder became an interested stockholder, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; - the interested stockholder owned at least 85% of the voting stock of the corporation, excluding specified shares, upon completion of the transaction which resulted in the stockholder becoming an interested stockholder; or - at or subsequent to the time the stockholder became an interested stockholder, the business combination is approved by the board of directors of the corporation and authorized by the affirmative vote, at an annual or special meeting and not by written consent, of at least 66 2/3% of the outstanding voting shares of the corporation, excluding shares held by that interested stockholder. A business combination generally includes: - mergers, consolidations and sales or other dispositions of 10% or more of the assets of a corporation to or with an interested stockholder; - specified transactions resulting in the issuance or transfer to an interested stockholder of any capital stock of the corporation or its subsidiaries; and - other transactions resulting in a disproportionate financial benefit to an interested stockholder. 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. 129 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. 130 COMPARISON OF RIGHTS OF MASTERCARD INTERNATIONAL MEMBERS BEFORE AND AFTER THE CONVERSION AND INTEGRATION The rights of members are currently governed by the certificate of incorporation, bylaws and rules of MasterCard International and the Delaware General Corporation Law. On completion of the conversion and integration, the rights of member-stockholders will be governed, regarding their ownership of class A common stock and class B common stock, by the certificate of incorporation and bylaws of MasterCard Incorporated and by the Delaware General Corporation Law, and regarding their class A membership interest, by the revised certificate of incorporation and bylaws of MasterCard International and by the Delaware General Corporation Law. We summarize below the principal differences between your current rights as a member of MasterCard International, which is to say before the conversion and integration, with what your rights will be as a stockholder of MasterCard Incorporated and as a class A member of MasterCard International after the conversion and integration. The following comparison is not complete and we refer you to the certificate of incorporation and bylaws of MasterCard Incorporated and MasterCard International, each of which will be adopted or revised, as the case may be, on completion of the conversion and integration, and which are contained as Annexes D, E, F and G of this proxy statement-prospectus. We have also filed them as exhibits to the registration statement of which this proxy statement-prospectus is a part. The provisions of the bylaws of MasterCard International relating to a member's (including an affiliate member's) participation in MasterCard's global payments programs, as well as the Standards described under the heading "Business of MasterCard International -- Rule Making and Enforcement," are unchanged by the conversion and integration.
MASTERCARD INTERNATIONAL CLASS A MEMBERSHIPS AND MASTERCARD INCORPORATED MASTERCARD INTERNATIONAL MEMBERSHIPS CLASS A AND CLASS B COMMON STOCK (AFTER THE (BEFORE THE CONVERSION AND INTEGRATION) CONVERSION AND INTEGRATION) ---------------------------------------------- ---------------------------------------------- DIVIDENDS The Delaware General Corporation Law permits The board of each corporation has the the payment of dividends by MasterCard discretion to determine whether and when to International. MasterCard International has declare and distribute dividends to the never paid any dividends. stockholders or, in the case of MasterCard International, the class B member. The class A members of MasterCard International will have no right to receive dividends or distributions under the certificate of incorporation of MasterCard International. AUTHORIZED The restated certificate of incorporation and The certificate of incorporation of MasterCard CAPITAL bylaws of MasterCard International permit an Incorporated authorizes the issuance of up to unlimited number of memberships. 275 million shares of class A common stock, 25 million shares of class B common stock and 75 million shares of class C common stock. The certificate of incorporation of MasterCard International authorizes an unlimited number of class A memberships and one class B membership. MEMBER MasterCard International principal members All economic and voting rights in MasterCard INTERESTS hold membership interests representing International are held by MasterCard economic and voting rights in MasterCard Incorporated in the form of one class B International. membership except for the right to vote on certain amendments to the governing documents of MasterCard International. Class A members of MasterCard International hold class A and class B common stock in MasterCard Incorporated representing economic and voting rights in MasterCard Incorporated, which represent indirect economic and voting rights in MasterCard International. MEMBER MasterCard International members are limited The eligibility criteria for class A members ELIGIBILITY to certain regulated financial institutions or of MasterCard International remain unchanged. such other institutions as the board of directors may permit, generally with a two-thirds majority.
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MASTERCARD INTERNATIONAL CLASS A MEMBERSHIPS AND MASTERCARD INCORPORATED MASTERCARD INTERNATIONAL MEMBERSHIPS CLASS A AND CLASS B COMMON STOCK (AFTER THE (BEFORE THE CONVERSION AND INTEGRATION) CONVERSION AND INTEGRATION) ---------------------------------------------- ---------------------------------------------- LIQUIDITY AND Members of MasterCard International may not Shares of MasterCard Incorporated common stock TRANSFERABILITY transfer their memberships. cannot be transferred for three years after the conversion except in connection with a sale of all or substantially all of the stockholder's card portfolio. After three years, each stockholder must maintain an ownership percentage of outstanding common stock not less than 75% nor more than 125% of the percentage represented by that stockholder's most recent global proxy calculation. In addition, after three years, class A and class B common stock may be traded only among institutions that also hold a class A membership in MasterCard International, and no stockholder, together with its affiliates, may own more than 15% of the outstanding common stock of MasterCard Incorporated. See "Description of Capital Stock of MasterCard Incorporated -- Transfer Restrictions." 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. There is no public market for MasterCard International class A memberships. Members may not transfer their memberships. GLOBAL PROXY The global proxy calculation takes into The global proxy calculation includes GDV, GAV CALCULATION account only revenue received from MasterCard and revenue from MasterCard, Cirrus and transactions and travelers cheques. Maestro branded cards, and revenue from travelers cheques. In calculating GDV and GAV, the volumes associated with different cards will be assigned different weightings. See "Share Allocation and the Global Proxy." VOTING RIGHTS Members receive a number of votes equal to the Each class A and class B stockholder of total U.S. dollar amount of assessments and MasterCard Incorporated is entitled to one fees paid to MasterCard International in the vote per share on all matters presented to the 12 months ended on the September 30 preceding stockholders, provided that no holder of the meeting at which the vote takes place, common stock, together with its affiliates, provided that no member may cast more than 15% may exercise voting power in excess of 7% of of the total votes of all the members or less the outstanding shares of MasterCard than 1,200 votes. Each member of MasterCard Incorporated in an election of directors. International also has the right to approve Following the transition period, the class B proposed amendments to MasterCard common stock will have no voting rights. International's bylaws. The class B membership held by MasterCard Incorporated has the sole voting right on all matters relating to MasterCard International, except that class A members have the right to vote on amendments to Article I -- "Membership" of the bylaws by a two-thirds vote of the class A members present at a meeting at which there is a quorum. The class B member is required to elect the persons who are directors of MasterCard Incorporated as directors of MasterCard International. Any director of MasterCard Incorporated who ceases to be a director of MasterCard Incorporated will also cease to be a director of MasterCard International. In addition, a number of provisions of the certificate of incorporation and bylaws of MasterCard Incorporated and MasterCard International impose supermajority voting requirements. See "-- Vote on Extraordinary
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MASTERCARD INTERNATIONAL CLASS A MEMBERSHIPS AND MASTERCARD INCORPORATED MASTERCARD INTERNATIONAL MEMBERSHIPS CLASS A AND CLASS B COMMON STOCK (AFTER THE (BEFORE THE CONVERSION AND INTEGRATION) CONVERSION AND INTEGRATION) ---------------------------------------------- ---------------------------------------------- Transactions/Supermajority Voting Provisions" below. VOTE ON Delaware law requires that a merger, In addition to the Delaware law provisions, EXTRAORDINARY consolidation, sale of all or substantially which apply to both MasterCard Incorporated TRANSACTIONS/ all of the assets or a dissolution must be and MasterCard International, the MasterCard SUPERMAJORITY approved by an affirmative vote of holders of Incorporated certificate of incorporation VOTING at least a majority of the memberships having requires the approval of 75% of the directors PROVISIONS the right to vote for the election of present at a meeting at which a quorum is directors. present and the approval of the holders of a majority of the outstanding class A common stock and class B common stock voting together as a single class (so long as class B common stock has voting rights) at a meeting at which a quorum is present to: alter MasterCard Incorporated's status as a stock corporation; amend the certificate of incorporation to authorize MasterCard Incorporated to issue stock other than the class A, B or C common stock; sell, lease or exchange all or substantially all of MasterCard Incorporated's assets; approve the sale, lease or exchange of all or substantially all of the assets of MasterCard International; engage in a business combination (merger or consolidation) involving MasterCard Incorporated or MasterCard International; undertake an initial public offering; amend the MasterCard International certificate of incorporation to allow MasterCard International to issue capital stock, to 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. The MasterCard Incorporated certificate of incorporation also provides that the approval of 75% of the directors present at a meeting at which a quorum is present is required to amend the global proxy formula or the requirement that no more than one-third of all MasterCard Incorporated directors come from any single region. This supermajority provision may be amended only with the approval of 75% of the directors present at a meeting at which a quorum is present and the approval of the holders of a majority of the outstanding class A and class B common stock voting together as a single class (so long as the class B stock has voting rights). The MasterCard Incorporated certificate of incorporation also provides that the 7% voting limitation for the election of directors may be altered by a majority vote of the MasterCard Incorporated board of directors or by a majority of the holders of the class A common stock and class B common stock voting together as a single class (so long as the class B stock has voting rights) at a meeting at which a quorum is present. 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
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MASTERCARD INTERNATIONAL CLASS A MEMBERSHIPS AND MASTERCARD INCORPORATED MASTERCARD INTERNATIONAL MEMBERSHIPS CLASS A AND CLASS B COMMON STOCK (AFTER THE (BEFORE THE CONVERSION AND INTEGRATION) CONVERSION AND INTEGRATION) ---------------------------------------------- ---------------------------------------------- voting for directors to more than 15% of the shares that are entitled to vote in the election of directors. The foregoing provisions may be amended only with the approval of 75% of the directors present at a meeting at which a quorum is present and the approval of the holders of a majority of the outstanding class A and class B common stock voting together as a single class (so long as the class B stock has voting rights). The MasterCard Incorporated certificate of incorporation also provides that any issuance of class C common stock requires the approval of two-thirds of the board of directors present at a meeting at which a quorum is present, 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 shares of class A and class B common stock outstanding prior to the issuance requires the approval of 75% of the board of directors present at a meeting at which a quorum is present. The foregoing provisions may be amended only with the approval of 75% of the directors present at a meeting at which a quorum is present and the approval of the holders of a majority of the outstanding class A and class B common stock voting together as a single class (so long as the class B stock has voting rights). The MasterCard Incorporated certificate of incorporation also provides that approval of at least two-thirds of the board of directors present at a meeting at which a quorum is present is required to permit any stockholder of MasterCard Incorporated, together with its affiliates, to own more than 15% of the outstanding voting stock of MasterCard Incorporated. This provision may be amended only with the approval of two-thirds of the directors present at a meeting at which a quorum is present and the approval of the holders of a majority of the outstanding class A and class B common stock voting together as a single class (so long as the class B stock has voting rights). The MasterCard Incorporated bylaws require the approval of (1) 75% of the directors present at a meeting at which a quorum is present or the holders of a majority of the votes cast at a meeting of stockholders at which a quorum is present to alter MasterCard International's board seating methodology or (2) two-thirds of the directors present at a meeting at which a quorum is present or the holders of a majority of the votes cast at a meeting of stockholders at which a quorum is present to establish or eliminate regional boards, modify MasterCard's internal regional cost allocation methodology, modify the overall size of MasterCard Incorporated's board of directors, permit the issuance of any shares of class A or class B common stock of MasterCard Incorporated in excess of the number of shares to which a stockholder would be
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MASTERCARD INTERNATIONAL CLASS A MEMBERSHIPS AND MASTERCARD INCORPORATED MASTERCARD INTERNATIONAL MEMBERSHIPS CLASS A AND CLASS B COMMON STOCK (AFTER THE (BEFORE THE CONVERSION AND INTEGRATION) CONVERSION AND INTEGRATION) ---------------------------------------------- ---------------------------------------------- entitled under the global proxy, or overrule a properly authorized decision of a regional board or overturn a recommendation of MasterCard Incorporated's Debit Advisory Board. These supermajority provisions may be amended only with the approval of a vote of the board of directors equivalent to the required supermajority percentage or the approval of the holders of a majority of the outstanding class A and class B common stock voting together as a single class (so long as the class B stock has voting rights). The MasterCard International certificate of incorporation requires the approval of two-thirds of the directors present at a meeting at which a quorum is present to create additional classes of membership interests in MasterCard International. The MasterCard International certificate of incorporation also requires the approval of MasterCard Incorporated and the holders of a majority of the outstanding voting stock of MasterCard Incorporated to amend provisions of the certificate of incorporation of MasterCard International relating to the authority of MasterCard International to issue capital stock, the creation of additional classes of membership interests in MasterCard International, the ability of MasterCard International to subject the property of its members to its debts or other obligations, the allocation of assessment liability for the current merchant antitrust actions, the modification of director eligibility requirements of MasterCard International, the liquidation provisions for MasterCard International and the certificate of incorporation amendment provisions of MasterCard International. AMENDMENT OF The members may amend the bylaws by a majority The class B member of MasterCard GOVERNING vote except that any amendment to Article I -- International, MasterCard Incorporated, has DOCUMENTS "Membership" must be approved by a two-thirds the sole vote on changes to the certificate of vote. incorporation and bylaws of MasterCard International except that the class A members Amendments to the certificate of incorporation of MasterCard International have the right to need not be approved by the members. amend Article I -- "Membership" of the bylaws by a two-thirds vote of the class A members present at a meeting at which there is a quorum. In addition, either the class B member or the board of directors may amend the bylaws of MasterCard International, provided that the consent of a 75% supermajority of the MasterCard International board and the approval of the holders of a majority of the outstanding class A and class B common stock voting together as a single class (so long as the class B stock has voting rights) is required to modify the bylaw provision limiting special assessments to two times MasterCard Incorporated's worldwide annual revenue, and the approval of two-thirds of the directors of MasterCard International present at a meeting at which a quorum is present is required to modify the bylaw provision limiting special assessments imposed on less than all members to eight times the revenues paid by a member to MasterCard Incorporated.
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MASTERCARD INTERNATIONAL CLASS A MEMBERSHIPS AND MASTERCARD INCORPORATED MASTERCARD INTERNATIONAL MEMBERSHIPS CLASS A AND CLASS B COMMON STOCK (AFTER THE (BEFORE THE CONVERSION AND INTEGRATION) CONVERSION AND INTEGRATION) ---------------------------------------------- ---------------------------------------------- See also "-- Vote on Extraordinary Transactions/ Supermajority Voting Provision" above. ANNUAL MEETINGS The bylaws of MasterCard International provide The bylaws of MasterCard Incorporated provide for annual meetings to be held in March or that annual meetings may be held at any time April of each year on such date as the board or place fixed by the board of directors. of directors determines. The bylaws of MasterCard International provide that annual meetings may be held at any time or place fixed by the board of directors. FEES, EXPENSES Each member must pay the joining fee, Shares of MasterCard Incorporated are AND ASSESSMENTS operating fees and other fees (including nonassessable. The class B membership interest termination fees) established from time to of MasterCard International is also time by the board of directors, or such other nonassessable. fees described in commercial agreements between MasterCard International and the Each class A member of MasterCard member subject to overall parameters International must pay the joining fee, determined by the board of directors. operating fees and other fees (including termination fees) established from time to The board of directors may impose assessments time by the board of directors, or such other on any or all of the members from time to fees described in commercial agreements time, in its sole discretion for any portion between MasterCard International and the of the expenses or liabilities of MasterCard member subject to overall parameters International or for a violation of the bylaws determined by the board of directors. or other rules or policies of MasterCard International. The board of directors of MasterCard International may impose assessments on any or all of the members of MasterCard International from time to time (other than the class B member, MasterCard Incorporated), in its sole discretion for any portion of the expenses or liabilities relating to the ordinary activities of MasterCard International or for a violation of the bylaws or other rules or policies of MasterCard International. In addition, the board of directors of MasterCard International may impose special assessments on any or all of the members of MasterCard International from time to time (other than the class B member, MasterCard Incorporated) for expenses and liabilities arising out of extraordinary events. However, the certificate of incorporation of MasterCard International provides that, with respect to any liabilities arising from the current DOJ and merchant litigations in the United States described elsewhere in this proxy statement- prospectus, no assessment may be made directly or indirectly against members based upon card issuing or acquiring programs operated outside the United States. In no event will the aggregate cumulative liability of all members for special assessments exceed two times MasterCard Incorporated's worldwide annual revenue. In addition, with respect to a special assessment that is imposed on less than all of the members, no member shall be required to contribute greater than eight times its latest annual revenue paid to MasterCard Incorporated and its subsidiaries. These limitations on special assessments apply on a prospective basis only, and do not apply to assessments relating to the DOJ and merchant antitrust litigations or to assessments made to compensate for losses and liabilities relating to any breach of the representations, warranties, covenants or agreements contained in the integration agreement.
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MASTERCARD INTERNATIONAL CLASS A MEMBERSHIPS AND MASTERCARD INCORPORATED MASTERCARD INTERNATIONAL MEMBERSHIPS CLASS A AND CLASS B COMMON STOCK (AFTER THE (BEFORE THE CONVERSION AND INTEGRATION) CONVERSION AND INTEGRATION) ---------------------------------------------- ---------------------------------------------- The imposition of a special assessment requires the approval of two-thirds of the board of directors of MasterCard International if the aggregate assessment is greater than one times (but less than or equal to two times) MasterCard Incorporated's worldwide annual revenue; otherwise a simple majority of the board is required to impose a special assessment. The bylaws of MasterCard International provide that losses and liabilities resulting from a breach of the representations, warranties, agreements and covenants 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 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 exceeding $7 million in the aggregate will be allocated solely to Europe. REDEMPTION The bylaws of MasterCard International do not If, within three years after the conversion, a provide for redemption rights, but do provide stockholder of MasterCard Incorporated ceases for involuntary termination of membership to be a member of MasterCard International, under certain circumstances. 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 member of MasterCard International, MasterCard Incorporated may, at its option, redeem that stockholder for the book value of its shares 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. The bylaws of MasterCard International do not provide for redemption rights, but do provide for involuntary termination of membership under certain circumstances. If a member is voluntarily, involuntarily or automatically terminated from membership in MasterCard International, the redemption provisions described above will be implicated. APPRAISAL The organizational documents of MasterCard Delaware law provides for appraisal rights for RIGHTS International do not provide for appraisal stockholders of MasterCard Incorporated in the rights. case of certain mergers or other consolidations involving MasterCard Incorporated. The organizational documents of MasterCard International do not provide for appraisal rights. LIQUIDATION MasterCard International principal members are Stockholders of MasterCard Incorporated are RIGHTS entitled to share ratably in any liquidation entitled to share ratably in any liquidation distributions. distributions. Holders of class A memberships of MasterCard International are not entitled to any liquidation distributions. The holder of the class B membership, MasterCard Incorporated, has the right to any liquidation distributions of MasterCard International.
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MASTERCARD INTERNATIONAL CLASS A MEMBERSHIPS AND MASTERCARD INCORPORATED MASTERCARD INTERNATIONAL MEMBERSHIPS CLASS A AND CLASS B COMMON STOCK (AFTER THE (BEFORE THE CONVERSION AND INTEGRATION) CONVERSION AND INTEGRATION) ---------------------------------------------- ---------------------------------------------- ELECTION OF The members of MasterCard International are Each class A and class B stockholder of DIRECTORS entitled to vote for the election of the MasterCard Incorporated is entitled to cast directors. one vote per share for the election of the directors (so long as the class B stock has voting rights), provided that no holder of class A or class B common stock, together with its affiliates, will be entitled to vote more than 7% of the outstanding shares that are entitled to vote in that election. Elections need not be by written ballot. As to MasterCard International, the class B member, MasterCard Incorporated, is required to appoint the directors of MasterCard Incorporated as directors of MasterCard International. Any director who leaves the board of MasterCard Incorporated is required to leave the board of MasterCard International. See also "The Conversion -- Effects of the Conversion." GOVERNANCE MasterCard International is governed by a MasterCard Incorporated will be governed by a PROVISIONS global board of directors that supervises global board of directors that supervises regional boards of directors in the U.S., regional boards of directors in the U.S., Canada, Latin America and the Caribbean, Canada, Europe, Latin America and the Middle East/Africa and Asia/Pacific. Europay Caribbean, Middle East/Africa and Asia/ International is a separate company governed Pacific, as well as the Debit Advisory Board. by its own board of directors. The global MasterCard International board of directors MasterCard International will be governed by a has delegated certain authority to Europay board of directors that will mirror the board International in the European region. of directors of MasterCard Incorporated. TAXATION MasterCard International is treated as a MasterCard Incorporated will be treated as a corporation for U.S. federal income tax corporation for U.S. federal income tax purposes, and is the common parent of an purposes, and will be the common parent of an affiliated group of corporations filing a U.S. affiliated group of corporations, including consolidated federal income tax return. The MasterCard International, filing a U.S. group's taxable income is taxed at regular consolidated federal income tax return. The corporate income tax rates. Members may be group's taxable income will be taxed at subject to taxation on any dividends they regular corporate income tax rates. receive depending upon the applicable tax laws Stockholders may be subject to taxation on any of their respective taxing jurisdictions. dividends they receive depending upon the applicable tax laws of their respective taxing jurisdictions. LIMITED Under the charter of MasterCard International, Stockholders of MasterCard Incorporated are LIABILITY members are not subject to personal liability not subject to personal liability for the for the payment of debts or any other debts, obligations or liabilities of obligations of MasterCard International. MasterCard Incorporated. In addition, the MasterCard International may assess its common stock of MasterCard Incorporated is members pursuant to the provisions of its nonassessable. bylaws. MasterCard International members are subject to the assessment provisions of MasterCard International's charter and bylaws. INDEMNIFICATION Delaware law permits indemnification of MasterCard Incorporated and MasterCard officers and directors against all expenses, International will indemnify all officers and including attorney's fees) incurred in any directors to the fullest extent permitted by action, suit or proceeding by reason of the Delaware law. fact that the person is or was a director, officer, employee or agent of the company. It is 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. MasterCard International will indemnify all officers and directors to the fullest extent permitted by Delaware law.
138 FEDERAL INCOME TAX CONSEQUENCES OF THE CONVERSION AND THE INTEGRATION The following is a discussion of the material U.S. federal income tax consequences of the conversion or the integration, or both, as the case may be, to the principal members of MasterCard International, the shareholders of Europay and MEPUK, MasterCard International and MasterCard Incorporated. Insofar as it relates to matters of law and legal conclusions, this discussion constitutes the opinion of Pillsbury Winthrop LLP, our special tax counsel. This discussion does not address all U.S. federal income tax considerations that may be relevant to a specific member of MasterCard International or shareholder of Europay or MEPUK in light of its particular circumstances. This discussion also does not address the special U.S. federal income tax rules that may apply to certain members or shareholders (including insurance companies, dealers or traders in securities or currencies, tax-exempt entities or persons that "mark to market" their securities). Further, this discussion does not address any state, local or non-U.S. tax consequences of the conversion or the integration. This discussion is based on the Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations promulgated under the Code, and administrative rulings and pronouncements and judicial decisions, in each case as of the date of this proxy statement-prospectus. All of these authorities are subject to change, possibly with retroactive effect. This discussion is also based on factual statements and representations made by us in this proxy statement-prospectus, in a request for an Internal Revenue Service ("IRS") private letter ruling, described below, and in a separate representation letter addressed to Pillsbury Winthrop LLP. WE URGE YOU TO CONSULT YOUR OWN TAX ADVISORS ABOUT THE PARTICULAR TAX CONSEQUENCES OF THE CONVERSION OR THE INTEGRATION, OR BOTH, TO YOU, INCLUDING THE EFFECTS OF U.S. FEDERAL, AS WELL AS ANY STATE, LOCAL OR NON-U.S. OR OTHER, TAX LAWS. Based on the foregoing, to the extent that the principal members of MasterCard International and the shareholders of Europay and MEPUK are treated for U.S. federal income tax purposes as having received shares of MasterCard Incorporated stock in exchange for property, and except to the extent that a portion of any additional shares of MasterCard Incorporated stock received by a member or shareholder at the end of the three year transition period or thereafter pursuant to the integration agreement is treated as imputed interest, the material U.S. federal income tax consequences of the conversion or the integration, or both, as the case may be, to the principal members of MasterCard International, the shareholders of Europay and MEPUK, MasterCard International and MasterCard Incorporated, should be as follows: - Each principal member of MasterCard International should be treated as having exchanged (A) the equity rights associated with its current membership interest in MasterCard International for an interest in the class B membership interest in MasterCard International and (B) its rights to use MasterCard's brands, programs and services under its current MasterCard license for a class A membership in MasterCard International (collectively, the "recapitalization"). - Pursuant to the conversion, each principal member of MasterCard International should be treated as having transferred its interest in the class B membership interest in MasterCard International to MasterCard Incorporated solely in exchange for shares of MasterCard Incorporated class A and class B common stock. - The equity rights associated with a current membership interest in MasterCard International and the class B membership interest in MasterCard International should each be treated as stock of MasterCard International. - Insofar as it relates to the deemed exchange of equity rights associated with current membership interests in MasterCard International for an interest in the class B membership interest in MasterCard International, the recapitalization should qualify as a reorganization within the meaning of Section 368(a)(1)(E) of the Code. MasterCard International should be a party to a reorganization within the meaning of Section 368(b) of the Code. 139 - No gain or loss should be recognized by a principal member of MasterCard International as a result of the deemed exchange of the equity rights associated with its current membership interest in MasterCard International for an interest in the class B membership interest in MasterCard International. - No gain or loss should be recognized by a principal member of MasterCard International as a result of the exchange of its rights to use MasterCard's brands, programs and services under its current MasterCard license for a class A membership in MasterCard International. - The basis of a principal member of MasterCard International in its interest in the class B membership interest in MasterCard International should equal the member's basis in the equity rights associated with its current membership interest in MasterCard International immediately before the recapitalization. - The holding period of a principal member of MasterCard International for its interest in the class B membership interest in MasterCard International should include the period during which the member held the equity rights associated with its current membership interest in MasterCard International, provided that those equity rights are held as a capital asset on the date of the recapitalization. - No gain or loss should be recognized by MasterCard International as a result of the recapitalization. - No gain or loss should be recognized by a principal member of MasterCard International on the deemed transfer of its interest in the class B membership interest in MasterCard International, or by a shareholder of Europay or MEPUK on the transfer of its shares of Europay or MEPUK stock, to MasterCard Incorporated in exchange for shares of MasterCard Incorporated class A and class B common stock, taking into consideration any surrender of shares, or any receipt of additional shares, of MasterCard Incorporated class A or class B common stock as a result of a reallocation of MasterCard Incorporated stock. - No gain or loss should be recognized when shares of MasterCard Incorporated class B common stock are converted to class A common stock. - No gain or loss should be recognized by MasterCard Incorporated on the receipt of the class B membership interest in MasterCard International and the shares of Europay and MEPUK stock in exchange for shares of MasterCard Incorporated class A and class B common stock. - The basis of a principal member of MasterCard International or a shareholder of Europay or MEPUK in the shares of MasterCard Incorporated class A and class B common stock received should be the same as the basis of the member in its deemed interest in the class B membership interest or the shareholder in the shares of Europay or MEPUK stock, as the case may be, immediately before the transfer. - The holding period for the shares of MasterCard Incorporated class A and class B common stock received by a principal member of MasterCard International or a shareholder of Europay or MEPUK should include the period during which the interest in the class B membership interest was deemed held, or the shares of Europay or MEPUK stock were held, provided that the interest in the class B membership interest is deemed held, or the shares of Europay or MEPUK stock are held, as capital assets on the date of the transfer. A portion of any additional shares of MasterCard Incorporated stock received by a principal member of MasterCard International or a shareholder of Europay or MEPUK at the end of the three year transition period or thereafter pursuant to the integration agreement should be treated as imputed interest as to which the member or shareholder may be required to recognize income. The amount treated as interest will be determined by discounting the fair market value of the additional shares from the date of receipt back to the closing date, using the applicable federal rate determined under Section 1274 of the Code. If a member or shareholder is not a United States person for U.S. federal income tax purposes, MasterCard Incorporated may be required to withhold U.S. federal income tax at a rate of 30% or, if applicable, a lower treaty rate. You should consult your own tax advisors regarding the possible recognition of interest income on receipt of any 140 additional shares, as well as the basis, holding period and withholding tax consequences of receiving those shares. On July 6, 2001, Pillsbury Winthrop LLP filed with the IRS on our behalf a request for a private letter ruling concluding that the conversion and integration will have the U.S. federal income tax consequences described in the bullet-point paragraphs above. Because of the novelty and complexity of the conversion and integration, it is unclear whether the IRS will issue a ruling in the form requested. If the IRS issues a ruling in the form requested, the material U.S. federal income tax consequences of the conversion and integration will be as described in the bullet-point paragraphs above. To the extent, however, that the percentage interest in MasterCard Incorporated ultimately allocated to a principal member of MasterCard International or to a shareholder of Europay or MEPUK exceeds the percentage interest of the member or shareholder immediately after the closing of the conversion and the integration (in each case, without taking into account any allocation of MasterCard Incorporated shares based on the new global proxy formula), the IRS may decline to treat the excess as having been received in exchange for property. In that event, a principal member of MasterCard International or a shareholder of Europay or MEPUK could be required to recognize income to the extent of the excess. A member or shareholder that is not a United States person for U.S. federal income tax purposes would be required to recognize such income only to the extent that the income was considered to be effectively connected with a trade or business of the member or shareholder in the United States and, if required by an applicable income tax treaty, as attributable to a permanent establishment maintained by the member or shareholder in the United States. An IRS private letter ruling is generally binding on the IRS, but may, under certain circumstances, be revoked or retroactively modified. BECAUSE OF THE COMPLEXITY OF THE TAX LAWS, AND BECAUSE THE TAX CONSEQUENCES OF THE CONVERSION OR THE INTEGRATION, OR BOTH, AS THE CASE MAY BE, TO A PRINCIPAL MEMBER OF MASTERCARD INTERNATIONAL OR A SHAREHOLDER OF EUROPAY OR MEPUK MAY DIFFER FROM THOSE DESCRIBED ABOVE OR BE AFFECTED BY MATTERS NOT DISCUSSED ABOVE, YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR ABOUT YOUR PARTICULAR CIRCUMSTANCES AND ABOUT THE TAX CONSEQUENCES TO YOU OF THE CONVERSION OR THE INTEGRATION, OR BOTH, AS THE CASE MAY BE, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND NON-U.S. TAX LAWS, AND ANY PROPOSED CHANGES IN APPLICABLE TAX LAWS. 141 MATERIAL CONTRACTS BETWEEN MASTERCARD INTERNATIONAL AND EUROPAY We summarize below the material contracts between MasterCard International and Europay before the conversion and integration. If the conversion and integration are completed, these agreements will be terminated. ALLIANCE AGREEMENT MasterCard International and Europay are parties to an Alliance Agreement, dated as of November 14, 1996, that provides for a broad alliance between the two companies and sets forth the terms and conditions under which MasterCard International and Europay agreed to improve the acceptance, visibility, brand awareness and technological support of the MasterCard brand in Europe. Under the Alliance Agreement, MasterCard International agreed to grant Europay the exclusive right to elect new European members for the non-exclusive use of the MasterCard brand marks in Europe and agreed to approve and execute new member agreements and/or licenses on a non-exclusive basis for newly elected European members and/or licensees for use of the MasterCard brand marks in Europe. MAESTRO AGREEMENT MasterCard International and Europay are also parties to a Maestro Agreement, dated as of June 19, 1997, that provides for the joint development, promotion and management by MasterCard International and Europay of Maestro International Incorporated. Maestro International Incorporated is 50% owned by MasterCard International and 50% owned by Europay. Maestro International grants licenses to use and to grant sublicenses for the Maestro brands to MasterCard and Europay for each of the regions of the world. LEGAL MATTERS The validity of the common stock offered by this proxy statement-prospectus will be passed upon for MasterCard Incorporated by Simpson Thacher & Bartlett, New York, New York. In addition, Pillsbury Winthrop LLP will pass upon certain United States federal income tax consequences of the conversion and integration for MasterCard Incorporated. EXPERTS The consolidated financial statements of MasterCard International and subsidiaries as of December 31, 2000 and 1999 and for each of the three years in the period ended December 31, 2000 included in this proxy statement-prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in accounting and auditing. The consolidated financial statements of Europay International S.A. and subsidiaries as of December 31, 2000 and for the year then ended included in this proxy statement-prospectus have been so included in reliance on the report of PricewaterhouseCoopers Reviseurs d'Entreprises, independent accountants, given on the authority of said firm as experts in accounting and auditing. OTHER MATTERS MasterCard International does not currently intend to bring any matters other than those described in this proxy statement-prospectus before its special meeting. Further, MasterCard International has no knowledge of any other matters that may be introduced by other persons. If any other matters do properly come before our special meeting or any adjournment or postponement of our special meeting, the persons named in the enclosed proxy form will vote the proxies in keeping with their judgment on such matters. 142 STOCKHOLDERS PROPOSALS Pursuant to Rule 14a-8 under the Exchange Act, as amended, stockholders may present proper proposals for inclusion in a company's proxy statement and for consideration at the next annual meeting of its stockholders by submitting their proposals to the company in a timely manner. MasterCard Incorporated does not expect to hold an annual meeting of stockholders in 2002. MasterCard Incorporated will hold an annual meeting of stockholders in the year 2003 only if the conversion is completed in 2002. If the annual meeting is held, stockholder proposals will be eligible for inclusion in MasterCard Incorporated's proxy statement relating to the 2003 annual meeting of stockholders if the stockholder proposals are received no later than November 15, 2002. To be considered for presentation at the MasterCard Incorporated annual meeting, although not included in the proxy statement, proposals must be received no later than February 1, 2003. All stockholder proposals should be marked for the attention of Secretary, MasterCard Incorporated, 2000 Purchase Street, Purchase, New York 10577. WHERE YOU CAN FIND MORE INFORMATION MasterCard International has filed with the Securities and Exchange Commission a registration statement on Form S-4 under the Securities Act of 1933 with respect to the shares of common stock of MasterCard Incorporated being offered in the conversion and integration. This proxy statement-prospectus, which constitutes a part of the registration statement, does not contain all the information set forth in the registration statement. Some items of information are contained in exhibits to the registration statement, as permitted by the rules and regulations of the Securities and Exchange Commission. Statements made in this proxy statement-prospectus as to the content of any contract, agreement or other document filed or incorporated by reference as an exhibit to the registration statement are not necessarily complete. With respect to those statements, you should refer to the corresponding exhibit for a more complete description of the matter involved and read all statements in this proxy statement-prospectus in light of that exhibit. Following completion of the conversion, MasterCard International will be required to file reports and other information with the Securities and Exchange Commission on an ongoing basis. We intend to furnish holders of the common stock of MasterCard Incorporated with annual reports containing audited financial statements with a report thereon by MasterCard Incorporated's independent certified public accountants. MasterCard Incorporated filings are available to the public at the Securities and Exchange Commission's web site at http://www.sec.gov. 143 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- MASTERCARD INTERNATIONAL INCORPORATED As of December 31, 2000 and December 31, 1999 and for the years ended December 31, 2000, 1999 and 1998 Report of Independent Auditors......................... F-2 Consolidated Statements of Income...................... F-3 Consolidated Balance Sheets............................ F-4 Consolidated Statements of Cash Flows.................. F-5 Consolidated Statements of Comprehensive Income........ F-6 Consolidated Statements of Changes in Members' Equity................................................ F-6 Notes to Consolidated Financial Statements............. F-7 As of June 30, 2001 and December 31, 2000 and for the six months ended June 30, 2001 and 2000 (Unaudited) Consolidated Interim Statements of Income.............. F-25 Consolidated Interim Balance Sheets.................... F-26 Consolidated Interim Statements of Cash Flows.......... F-27 Consolidated Interim Statements of Comprehensive Income................................................ F-28 Consolidated Interim Statements of Changes in Members' Equity................................................ F-28 Notes to Consolidated Interim Financial Statements..... F-29 EUROPAY INTERNATIONAL S.A. As of December 31, 2000 and December 31, 1999 (Unaudited) and for the years ended December 31, 2000, 1999 (Unaudited) and 1998 (Unaudited) Report of Independent Accountants...................... F-36 Consolidated Balance Sheets............................ F-37 Consolidated Statements of Income...................... F-38 Consolidated Statements of Cash Flows.................. F-39 Notes to Consolidated Financial Statements............. F-40 As of June 30, 2001 and December 31, 2000 (Unaudited) and for the six months ended June 30, 2001 and 2000 (Unaudited) Consolidated Interim Balance Sheets.................... F-63 Consolidated Interim Statements of Income.............. F-64 Consolidated Interim Statements of Cash Flows.......... F-65 Notes to Consolidated Interim Financial Statements..... F-66
F-1 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Members of MasterCard International Incorporated: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, changes in members' equity, and cash flows present fairly, in all material respects, the financial position of MasterCard International Incorporated and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP New York, New York April 11, 2001 F-2 MASTERCARD INTERNATIONAL INCORPORATED CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------- 2000 1999 1998 ---------- ---------- ---------- (IN THOUSANDS) REVENUE................................................ $1,571,215 $1,389,155 $1,205,968 OPERATING EXPENSES General and administrative............................. 742,807 729,957 664,874 Advertising and market development..................... 596,539 491,027 476,877 Depreciation........................................... 34,728 31,525 30,594 Amortization........................................... 24,669 21,593 15,369 ---------- ---------- ---------- Total operating expenses............................. 1,398,743 1,274,102 1,187,714 ---------- ---------- ---------- Operating income..................................... 172,472 115,053 18,254 OTHER INCOME AND EXPENSE Investment income...................................... 30,380 32,182 21,549 Interest expense....................................... (9,652) (11,198) (5,087) Minority interest...................................... 7,031 12,994 5,589 ---------- ---------- ---------- Total other income and expense....................... 27,759 33,978 22,051 ---------- ---------- ---------- Income before taxes.................................... 200,231 149,031 40,305 Income tax expense..................................... 82,082 62,776 16,122 ---------- ---------- ---------- NET INCOME............................................. $ 118,149 $ 86,255 $ 24,183 ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-3 MASTERCARD INTERNATIONAL INCORPORATED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31, 2000 1999 ------------ ------------ (IN THOUSANDS) ASSETS Cash and cash equivalents................................... $ 193,304 $261,244 Investment securities, at fair value: Available-for-sale........................................ 316,507 146,839 Trading................................................... 54,958 64,102 Accounts receivable......................................... 218,882 187,768 Prepaid expenses and other current assets................... 42,863 37,201 Deferred income taxes....................................... 18,142 38,716 ---------- -------- TOTAL CURRENT ASSETS...................................... 844,656 735,870 Property, plant and equipment, at cost (less accumulated depreciation of $273,479 and $222,151).................... 206,196 105,482 Deferred income taxes....................................... 59,975 44,835 Intangible assets, net...................................... 13,427 27,715 Investments in affiliates................................... 41,583 41,291 Investment securities held-to-maturity...................... 8,050 8,775 Other assets................................................ 7,900 8,509 ---------- -------- TOTAL ASSETS................................................ $1,181,787 $972,477 ========== ======== LIABILITIES AND MEMBERS' EQUITY LIABILITIES Accounts payable............................................ $ 196,221 $143,364 Accrued expenses............................................ 256,728 236,525 Other current liabilities................................... 29,222 44,219 ---------- -------- TOTAL CURRENT LIABILITIES................................. 482,171 424,108 Other liabilities........................................... 152,344 115,264 Long-term debt.............................................. 82,992 82,682 ---------- -------- TOTAL LIABILITIES......................................... 717,507 622,054 Minority interest........................................... 1,872 8,903 Commitments and contingencies (Note 9) MEMBERS' EQUITY Retained earnings........................................... 460,663 342,514 Accumulated other comprehensive income (loss), net of tax: Cumulative translation adjustment......................... (345) (17) Net unrealized gain (loss) on investment securities available-for-sale..................................... 2,090 (977) ---------- -------- Total accumulated other comprehensive income (loss)......... 1,745 (994) ---------- -------- TOTAL MEMBERS' EQUITY..................................... 462,408 341,520 ---------- -------- TOTAL LIABILITIES AND MEMBERS' EQUITY..................... $1,181,787 $972,477 ========== ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 MASTERCARD INTERNATIONAL INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------- 2000 1999 1998 --------- --------- --------- (IN THOUSANDS) OPERATING ACTIVITIES Net income............................................ $ 118,149 $ 86,255 $ 24,183 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation....................................... 34,728 31,525 30,594 Amortization....................................... 24,669 21,593 15,369 Write down of franchise rights..................... 8,609 15,334 -- Deferred income tax................................ 5,434 (32,794) (38,040) Loss (gain) on disposal of property, plant and equipment, net................................... 50 1,385 (8) Amortization of premiums and discounts, net........ 1,779 1,299 97 Minority interest.................................. (7,031) (12,994) (5,589) Changes in operating assets and liabilities: Trading securities............................... 9,144 (6,517) (19,803) Accounts receivable.............................. (31,114) (54,192) 24,816 Prepaid expenses and other current assets........ (9,476) (6,690) (3,676) Accounts payable................................. 52,857 18,633 30,896 Accrued expenses................................. 20,203 (11,722) 47,971 Other current liabilities........................ (14,997) (35,070) (17,240) Net change in other assets and liabilities....... 36,933 61,163 39,946 --------- --------- --------- Net cash provided by operating activities............... 249,937 77,208 129,516 INVESTING ACTIVITIES Purchases of property, plant and equipment, net....... (153,715) (54,264) (38,448) Purchases of investment securities available-for-sale................................. (480,849) (183,536) (309,903) Proceeds from sales of investment securities available-for-sale................................. 308,628 251,597 127,435 Proceeds from principal pay-downs and maturities of investment securities.............................. 4,725 9,507 4,633 Payments received on affiliate franchise sales........ 3,626 18,993 9,848 Purchase of investment securities held-to-maturity.... -- (8,775) -- Investment in affiliates.............................. (292) 263 2,720 --------- --------- --------- Net cash (used in) provided by investing activities..... (317,877) 33,785 (203,715) FINANCING ACTIVITIES Proceeds from borrowings.............................. -- -- 83,136 Payments on borrowings................................ -- -- (49,324) --------- --------- --------- Net cash provided by financing activities............... -- -- 33,812 --------- --------- --------- Net (decrease) increase in cash and cash equivalents........................................ (67,940) 110,993 (40,387) Cash and cash equivalents -- beginning of year........ 261,244 150,251 190,638 --------- --------- --------- Cash and cash equivalents -- end of year.............. $ 193,304 $ 261,244 $ 150,251 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-5 MASTERCARD INTERNATIONAL INCORPORATED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2000 1999 1998 --------- -------- -------- (IN THOUSANDS) NET INCOME.................................................. $118,149 $86,255 $24,183 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments.................. 20 -- 343 Income tax effect......................................... (348) (188) -- -------- ------- ------- (328) (188) 343 Net unrealized gain (loss) on investment securities available-for-sale arising during the year............. 5,383 (4,278) 496 Income tax effect......................................... (2,220) 1,731 (223) -------- ------- ------- 3,163 (2,547) 273 Reclassification adjustment for net (gain) loss realized on investment securities available-for-sale... (162) 1,299 97 Income tax effect......................................... 66 (547) (44) -------- ------- ------- (96) 752 53 -------- ------- ------- Other comprehensive income (loss)......................... 2,739 (1,983) 669 -------- ------- ------- COMPREHENSIVE INCOME........................................ $120,888 $84,272 $24,852 ======== ======= =======
MASTERCARD INTERNATIONAL INCORPORATED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
ACCUMULATED OTHER COMPREHENSIVE RETAINED INCOME (LOSS) EARNINGS TOTAL ------------- -------- -------- (IN THOUSANDS)} BALANCE AT JANUARY 1, 1998.............................. $ 320 $232,076 $232,396 Net income.............................................. -- 24,183 24,183 Other comprehensive income.............................. 669 -- 669 ------- -------- -------- BALANCE AT DECEMBER 31, 1998............................ 989 256,259 257,248 Net income.............................................. -- 86,255 86,255 Other comprehensive loss................................ (1,983) -- (1,983) ------- -------- -------- BALANCE AT DECEMBER 31, 1999............................ (994) 342,514 341,520 Net income.............................................. -- 118,149 118,149 Other comprehensive income.............................. 2,739 -- 2,739 ------- -------- -------- BALANCE AT DECEMBER 31, 2000............................ $ 1,745 $460,663 $462,408 ======= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-6 MASTERCARD INTERNATIONAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS) 1. ORGANIZATION Organization -- MasterCard International Incorporated ("MasterCard") is a nonstock company, owned by certain of its member financial institutions and incorporated under the laws of Delaware, United States of America. MasterCard and its consolidated subsidiaries (the "Company") promote the interests of their members by providing credit, debit, smart card, travelers cheque, electronic cash, and Automated Teller Machine services, and by promoting the Company's brands. The Company enters into transactions with its members in the normal course of business, and operates a system for authorizing, clearing and settling payment transactions among its members. The Company is governed by a global board of directors, comprised principally of officers of member financial institutions and of the President and Chief Executive Officer of the Company, who are elected by the membership. The global board is responsible for managing the business of the Company, including the approval of a budget that provides for funding of operations and technology support, program and service development, and strategy execution, among other things. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation and basis of presentation -- The Company follows accounting principles generally accepted in the United States of America. Certain prior period amounts have been reclassified to conform to 2000 classifications. The consolidated financial statements include the accounts of MasterCard and its majority-owned subsidiaries. All significant intercompany transactions are eliminated in consolidation. The Company consolidates those entities that it owns more than 50% of the outstanding voting interest and over which it exercises control. The Company accounts for its investments in entities that it owns between 20% and 50% and over which it exercises significant influence using the equity method of accounting. The Company accounts for its investments in entities that it owns less than 20% and over which it does not exercise significant influence using the historical cost method of accounting. The equity method of accounting is also utilized for limited partnerships and limited liability companies if the investment ownership percentage is greater than 3% of outstanding ownership interests or common stock, respectively, regardless of whether MasterCard has significant influence over the investee. Investments in entities for which the equity method of accounting is appropriate are reported as investments in affiliates on the balance sheet. MasterCard's share of net earnings of these entities is included in general and administrative expenses and investment income depending on the nature of the investment, in the consolidated statements of income. Investments in affiliates for which the equity method is not appropriate are accounted for using historical cost. Management evaluates all investments accounted for under APB 18 for impairment on an ongoing basis primarily using cash flow analyses. If the sum of expected net future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized. The loss is measured as the amount by which the carrying amount of the asset exceeds its fair value calculated using the present value of estimated net future cash flows. Use of estimates -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results may differ from these estimates. Revenue recognition -- Revenues are recognized when services are performed and when products are sold. MasterCard revenue is comprised of member assessments and operations fees. Member assessments represent payments made by principal members to support MasterCard's operating requirements. Assessments are based upon daily, monthly or quarterly issuer and acquirer gross dollar volumes F-7 MASTERCARD INTERNATIONAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS) ("GDV") which represent gross spending on MasterCard cards for goods and services as well as cash disbursements. Assessments are recorded as revenue in the month they are earned, which is when the related GDV is generated on MasterCard cards. Operations fees represent user fees for authorization, clearing, settlement and other member products and services that facilitate transaction and information management among our members on a global basis. These fees are recognized as revenue in the same period as the related transactions occur or services are rendered. Products sold include holograms, paper warning bulletins, manuals and publications. Revenue from product sales is recognized upon their sale. MasterCard has strategic arrangements with certain members, which provide for fee rebates when the member meets certain transaction hurdles. Such rebates are calculated based upon member transaction levels and are recorded as a reduction of revenue. Advertising expense -- Advertising and promotional items are expensed at the time the event occurs. Cash and cash equivalents -- Cash and cash equivalents include certain highly liquid investments with a maturity of three months or less from the date of purchase. Such investments are recorded at cost, which approximates fair value. Investment securities -- The Company classifies debt securities as either "held-to-maturity," "available-for-sale" or "trading" and equity securities as "trading." Investments for which management has the intent, and the Company has the ability, to hold them to maturity are carried at cost adjusted for amortization of premium and accretion of discount. Amortization and accretion are calculated principally using the interest method. Securities bought and held primarily for the purpose of selling them in the near term are classified as "trading" and reported at fair value. Changes in unrealized gains and losses on "trading" securities are recognized in the consolidated statements of income. Securities classified as "available-for-sale" are reported at fair value. Changes in unrealized gains and losses for "available-for-sale" securities, net of applicable taxes, are recorded as a separate component in the statement of comprehensive income. Quoted market values, when available, are used to determine the fair value of "available-for-sale" securities. The Company also has publicly traded securities, which are connected to an executive compensation plan. These securities are accounted for as trading securities and carried at fair value. The specific identification method is used to determine realized gains and losses. All net realized and unrealized gains and losses on these securities are recognized in other income and expense and a corresponding offset is recorded in compensation expense. Investment securities are evaluated for permanent impairment on a periodic basis. Property, plant and equipment -- Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation on computer equipment and furniture and fixtures is computed under the straight-line method over the related estimated useful lives of the assets, generally ranging from two to five years. Amortization of leasehold improvements is computed under the straight-line method, using the shorter of the estimated useful lives of the improvements or the terms of the related leases. Capital leases are amortized over the lives of the leases. Depreciation on buildings is calculated under the straight-line method over an estimated useful life of 30 years. On January 1, 1998, the Company adopted the provisions of Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." In accordance with the provisions of this statement, eligible direct internal and external costs related to the application development stage are capitalized and, upon completion of the project, are amortized using the straight-line method over the estimated useful life of the software, not to exceed three years. Intangible assets -- Intangible assets are comprised of goodwill and other intangibles. Intangible assets acquired in business combinations accounted for by the purchase method of accounting are capitalized and F-8 MASTERCARD INTERNATIONAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS) amortized over their expected useful life as a non-cash charge against future results of operations. The Company amortizes goodwill on a straight-line method over an estimated useful life, not to exceed twenty years. Other intangibles consist of shareholder franchise rights which are being amortized on a straight-line basis over their estimated useful lives, none of which exceed seven years. The realizability of goodwill and other intangibles is evaluated on an ongoing basis to determine the recoverability of carrying amounts. If the sum of expected net future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized. The loss is measured as the amount by which the carrying amount of the asset exceeds its fair value, calculated using the present value of estimated net future cash flows. Derivative financial instruments -- The Company enters into foreign exchange forward and swap contracts to minimize the risk of anticipated revenues and expenses, and assets and liabilities denominated in foreign currencies. This activity minimizes the Company's exposure to transaction gains and losses resulting from fluctuations of foreign currencies against the U.S. dollar. The terms of the forward contracts are generally less than 18 months. Foreign exchange forward and swap contracts are recorded at fair value and any unrealized gains and losses are recognized in income. Income taxes -- The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." In accordance with SFAS No. 109, deferred tax assets and liabilities are established for the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities using enacted tax rates. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized. Foreign currency translation -- The U.S. dollar is the functional currency for the majority of MasterCard businesses except its Mondex International operations, where the local currency is the functional currency. Where the U.S. dollar is considered the functional currency, monetary assets and liabilities are translated to U.S. dollars using current exchange rates in effect at the balance sheet date; non-monetary assets and liabilities are translated at historical exchange rates; and revenue and expense accounts are translated at a weighted average exchange rate for the period. Resulting exchange gains and losses are included in net income. For businesses where the local currency is the functional currency, translation to U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate for the period. Resulting translation adjustments are reported as a component of other comprehensive income. Pension and other postretirement plans -- The compensation cost of an employee's pension benefit is recognized on the projected unit credit method over the employee's approximate service period. The aggregate cost method is utilized for funding purposes. New accounting standards -- In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended in June 1999 by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133," and in June 2000, by SFAS No. 138, "Accounting for Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133" (collectively, "SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other contracts. The statement requires that all derivatives be recognized in the balance sheet, as either assets or as liabilities, and measured at fair value. Additionally, changes in a derivative's fair value will be recognized in current earnings unless specific hedge accounting criteria are met. For the Company, SFAS No. 133 is effective January 1, 2001. The adoption of this pronouncement did not have a material effect on the Company's consolidated financial statements. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition in Financial Statements," which provides guidance related F-9 MASTERCARD INTERNATIONAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS) to revenue recognition and disclosure in the financial statements. SAB 101, as amended by SAB 101A and SAB 101B, was required to be implemented in the Company's fourth quarter of 2000, retroactive to the beginning of the year. It requires companies to report any changes in revenue recognition as a cumulative change in accounting principle at the time of implementation in accordance with Accounting Principles Board Opinion 20, "Accounting Changes." The adoption of SAB 101 did not have a material effect on the Company's financial position or results of operations. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," ("SFAS No. 140") replacing FASB Statement No. 125. SFAS No. 140 revises the standard for accounting and reporting for transfers and servicing of financial assets and extinguishments of liabilities. The new standard is based on consistent application of a financial-components approach that recognizes the financial and servicing assets controlled and the liabilities incurred, derecognizes financial assets when control has been surrendered and derecognizes liabilities when extinguished. SFAS No. 140 provides consistent guidelines for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The Company was required to adopt SFAS No. 140 by March 31, 2001. SFAS No. 140 did not have a material impact on the Company's consolidated financial statements. 3. INVESTMENT SECURITIES The amortized cost and estimated fair value of investment securities available-for-sale are as follows:
GROSS UNREALIZED AMORTIZED ---------------- DECEMBER 31, 2000 COST GAINS LOSSES FAIR VALUE - ----------------- --------- ------ ------ ---------- Municipal bonds............................. $307,952 $3,681 $(217) $311,416 Corporate securities........................ 5,000 91 -- 5,091 -------- ------ ----- -------- $312,952 $3,772 $(217) $316,507 ======== ====== ===== ========
GROSS UNREALIZED AMORTIZED ---------------- DECEMBER 31, 1999 COST GAINS LOSSES FAIR VALUE - ----------------- --------- ----- ------- ---------- U.S. Treasury securities.................... $ 570 -- $ (5) $ 565 Municipal bonds............................. 142,935 $141 (1,802) 141,274 Corporate securities........................ 5,000 -- -- 5,000 -------- ---- ------- -------- $148,505 $141 $(1,807) $146,839 ======== ==== ======= ========
The maturity distribution based on contractual terms of investment securities available-for-sale at December 31, 2000, is as follows:
AMORTIZED COST FAIR VALUE --------- ---------- Due within 1 year........................................... $ 14,322 $ 14,406 Due after 1 year through 5 years............................ 278,107 281,313 Due after 5 years through 10 years.......................... 20,523 20,788 -------- -------- $312,952 $316,507 ======== ========
The Company holds a 5.25 percent Missouri Development Bond due August 1, 2009, as an investment security held-to-maturity. The amortized cost of this security was $8,050 and $8,775 at December 31, 2000 and 1999, respectively. Principal and interest payments are received on a semi-annual basis with a final maturity date of August 1, 2009. The fair market value of this security approximates amortized cost. F-10 MASTERCARD INTERNATIONAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS) Components of investment income are as follows for the years ended December 31:
2000 1999 1998 -------- -------- -------- Interest income.................................... $ 23,811 $ 19,083 $ 14,800 Dividend income.................................... 2,799 3,571 2,799 Investment securities available-for-sale: Gross realized gains............................... 306 63 44 Gross realized losses.............................. (144) (1,362) (141) Trading Securities: Gross unrealized gains............................. 16,633 19,605 22,234 Gross unrealized losses............................ (16,251) (15,435) (20,879) Gross realized gains............................... 3,973 5,407 3,473 Gross realized losses.............................. (1,449) (97) (1,864) All other investment income........................ 702 1,347 1,083 -------- -------- -------- Total investment income............................ $ 30,380 $ 32,182 $ 21,549 ======== ======== ========
4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following at December 31:
2000 1999 --------- --------- Equipment................................................... $ 222,693 $ 192,727 Capitalized software........................................ 79,629 38,740 Building and land........................................... 71,166 866 Furniture and fixtures...................................... 57,446 55,090 Leasehold improvements...................................... 48,741 40,210 --------- --------- 479,675 327,633 --------- --------- Less accumulated depreciation and amortization.............. (273,479) (222,151) --------- --------- $ 206,196 $ 105,482 ========= =========
For the years ended December 31, 2000, 1999 and 1998, depreciation and amortization expense aggregated $52,951, $42,439 and $35,333, respectively. Included in these amounts was $12,000, $5,774 and $523 in 2000, 1999 and 1998, respectively, of amortization of capitalized software. On January 12, 2000, MasterCard exercised its option to purchase the corporate headquarters building in Purchase, New York, for $70,000, in accordance with the provisions of its lease agreement. F-11 MASTERCARD INTERNATIONAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS) 5. INCOME TAXES The income tax provision for the years ended December 31 is composed of the following components:
2000 1999 1998 ------- -------- -------- CURRENT Federal............................................. $68,650 $ 74,702 $ 45,809 State and local..................................... 8,505 8,192 7,710 Foreign............................................. 2,350 1,959 910 ------- -------- -------- 79,505 84,853 54,429 DEFERRED Federal............................................. 2,200 (20,770) (34,201) State and local..................................... 377 (1,307) (4,106) ------- -------- -------- 2,577 (22,077) (38,307) ------- -------- -------- Total tax provision................................. $82,082 $ 62,776 $ 16,122 ======= ======== ========
For the year ended December 31, 2000, domestic operations contributed approximately $214,000 to earnings before income taxes and foreign operations resulted in a loss before income taxes of approximately $14,000. The provision for income taxes differs from the amount of income tax determined by applying the appropriate statutory U.S. federal income tax rate to pretax income for the years ended December 31, as a result of the following:
2000 1999 1998 ---- ---- ---- Federal statutory tax rate.................................. 35.0% 35.0% 35.0% State tax, net of Federal benefit........................... 3.1 3.0 4.9 Foreign tax effect, net of Federal benefit.................. 2.5 3.7 6.2 Non-deductible expenses and other differences............... 2.9 3.1 1.2 Tax-exempt income........................................... (2.5) (2.7) (7.3) ---- ---- ---- Effective tax rate.......................................... 41.0% 42.1% 40.0% ==== ==== ====
F-12 MASTERCARD INTERNATIONAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS) Deferred tax assets and liabilities represent the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. The net deferred tax asset at December 31 is composed of the following:
ASSETS (LIABILITIES) ------------------------------------------------ 2000 1999 ---------------------- ---------------------- CURRENT NON-CURRENT CURRENT NON-CURRENT ------- ----------- ------- ----------- Accrued liabilities..................... $23,322 $ 501 $42,143 $ 501 Changes in tax methods.................. (4,490) (4,490) (4,495) (8,990) Deferred compensation and benefits...... 974 42,076 844 31,326 Excess foreign losses................... -- 12,487 -- 8,574 Gains/losses included in comprehensive income................................ (1,465) 463 690 124 Intangible assets....................... -- 13,699 -- 9,656 Prepaid state tax credits............... 176 8,050 155 8,775 Property, plant and equipment........... -- (6,583) -- (1,576) Other items............................. (375) 2,111 (621) 1,780 Valuation allowance..................... -- (8,339) -- (5,335) ------- ------- ------- ------- $18,142 $59,975 $38,716 $44,835 ======= ======= ======= =======
The valuation allowance relates primarily to the ability to recognize tax benefits associated with foreign operations. The valuation allowance was $3,602 at December 31, 1998. The valuation allowance increased in each year as a result of additional foreign losses incurred during that year, the benefits of which may not be recognized. Cash paid for income taxes for the years ended December 31, 2000, 1999 and 1998 was $81,854, $83,406 and $35,029, respectively. 6. PENSION, SAVINGS PLAN AND OTHER BENEFITS The Company has a trusteed, noncontributory defined benefit pension plan covering substantially all of its employees. Prior to 2000, individual benefits were based on years of service, average pay during the last five years of employment and age at retirement. Effective January 1, 2000, the Company converted the plan to a noncontributory cash balance plan. Participants are credited with a percentage of their compensation for the plan year based on completed years of service. The Company's funding policy is to contribute annually an amount, based on actuarial present value computations, which satisfies the U.S. Internal Revenue Service's funding standards. At December 31, 2000 and 1999, a MasterCard member was the plan trustee. Plan assets are invested in U.S. government and agency securities, corporate debt instruments, common stocks, foreign investments and certain funds of the plan's investment managers. Certain investments may be in corporate debt or common stock of MasterCard members and certain funds may hold securities of MasterCard members. F-13 MASTERCARD INTERNATIONAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS) The following table sets forth the plan's funded status and amounts recognized in the Company's balance sheet at December 31:
2000 1999 -------- -------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year..................... $ 56,779 $ 56,645 Service cost................................................ 9,854 8,562 Interest cost............................................... 5,619 3,685 Actuarial (gain) or loss.................................... 17,675 (8,359) Benefits paid............................................... (5,297) (3,754) -------- -------- Benefit obligation at end of year........................... $ 84,630 $ 56,779 ======== ======== CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year.............. $ 42,850 $ 35,887 Adjustment.................................................. (44) -- Actual return on plan assets................................ 2,128 6,610 Employer contributions...................................... 8,241 4,107 Benefits paid............................................... (5,297) (3,754) -------- -------- Fair value of plan assets at end of year.................... $ 47,878 $ 42,850 ======== ======== RECONCILIATION OF FUNDED STATUS Funded status............................................... $(36,752) $(13,929) Unrecognized actuarial (gain) or loss....................... 9,951 (6,902) Unrecognized transition (asset)............................. (148) (264) Unrecognized prior service cost............................. (1,372) (1,594) -------- -------- (Accrued) benefit cost...................................... $(28,321) $(22,689) ======== ========
Net pension expense included the following components for the years ended December 31:
2000 1999 1998 ------- ------- ------- Service cost.......................................... $ 9,854 $ 8,562 $ 7,695 Interest cost......................................... 5,619 3,685 3,284 Expected return on plan assets........................ (2,775) (2,455) (2,323) Amortization of prior service cost.................... (223) (132) (132) Amortization of transition (asset).................... (116) (116) (116) Recognized actuarial loss............................. 1,513 823 820 ------- ------- ------- Net periodic benefit cost............................. $13,872 $10,367 $ 9,228 ======= ======= =======
Assumptions used to measure the accumulated and projected benefit obligation included a weighted average discount rate of 7.75 percent for both 2000 and 1999. An assumed rate of increase in future compensation levels for 2000 and 1999 was 7.0 percent, and an expected long-term rate of return on plan assets was 8.5 percent and 9.5 percent for 2000 and 1999, respectively. The Company has an employee savings plan, whereby eligible employees may contribute a portion of their base compensation and the Company contributes an amount in excess of the participant's contribution. The Company's contribution aggregated $17,180, $16,125 and $14,562 in 2000, 1999 and 1998, respectively. F-14 MASTERCARD INTERNATIONAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS) Participating employees can invest contributions among several fund alternatives. Certain of these funds may hold securities in MasterCard members. The Company has a Value Appreciation Program ("VAP"), which is an incentive program established in 1995. Annual awards were granted to VAP participants from 1995 through 1998, which entitled participants to the net appreciation on a portfolio of securities of member banks. The plan states that participants vest at a rate of 20% for each year of service. If a participant is not fully vested and redeems their shares, the appreciation that he/she forfeits is returned to MasterCard. In 1999, VAP was replaced by an Executive Incentive Plan arrangement. Although contributions to VAP have been discontinued effective 1999, plan assets remain intact and participants are entitled to the net appreciation on the plan assets in accordance with plan provisions. The Company's liability at December 31, 2000 and 1999 related to VAP was $15,871 and $18,978, respectively, and the expense was $499, $5,707 and $1,934 for the years ending December 31, 2000, 1999 and 1998, respectively. MasterCard's Executive Incentive Plan ("EIP"), effective January 1999, is a performance unit plan, where a participant receives a grant of units with a target value contingent on the achievement of MasterCard's long-term performance goals. The end value of the units will vary based upon the level of performance achieved. Earned incentive awards are paid in the form of cash. Employees who are designated Senior Vice President or higher are eligible for participation in any performance period provided they have achieved the minimum performance evaluation rating and have been designated to the appropriate level by March 1 of the calendar year. The Compensation Committee and/or the President and Chief Executive Officer may also designate any other employee as eligible to participate in the plan. Performance units were granted under the EIP with an actual value that will be calculated based on the Company's performance over a three-year period. Each unit will be valued at threshold ($50), target ($100) or maximum ($200) if, on a weighted-average basis, threshold, target or maximum performance is achieved for all of the performance measures. The units will have no value if performance is below the threshold. Upon completion of the three-year performance period, participants will receive a payout equal to 80% of the award earned. The remaining 20% of the award will be paid upon completion of two additional years of service. The performance units vest over a period of five years from the date of grant. The Company's liability related to EIP at December 31, 2000 and December 31, 1999 was $45,307 and $17,857, respectively, and the expense was $29,682, $17,910 and $5,708 for the years ending December 31, 2000, 1999 and 1998, respectively. Both the VAP and the EIP are accounted for in accordance with FIN 28, "Accounting for Stock Appreciation Rights and Other Variable Stock Option of Award Plans". In accordance with FIN 28, compensation is accrued as a charge to expense over the periods the employee performs the related services. 7. POSTRETIREMENT HEALTH AND LIFE INSURANCE BENEFITS MasterCard has a combined defined benefit/defined contribution plan for providing postretirement medical, dental and life insurance benefits. The plan provides each employee with a notional account, which grows with an annual credit (twelve hundred dollars) and an interest credit (3%). Upon retirement, the account is converted to a lifetime medical subsidy expressed as a percentage of estimated future premiums. The medical account is MasterCard's contribution toward medical coverage. MasterCard currently does not fund its retiree medical obligation. Regular full-time employees not eligible for grandfathering are eligible for MasterCard's account plan after the earlier of the completion of 5 years of vesting service or attainment of age 40. All active employees who, as of January 1, 1993, were 50 years old or age 45 with at least 10 years of vesting service were grandfathered when the account-based plan was implemented. Full coverage is provided for all grandfathered employees. F-15 MASTERCARD INTERNATIONAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS) Effective July 1, 2001 MasterCard intends to modify certain provisions of the current design based on certain business objectives. The new design better aligns with MasterCard's account-based pension plan by providing flat dollar annual contributions based upon employee service. The new program does not apply to benefits applicable to former grandfathered employees and also provides full coverage for career employees with proportionally less for early retirees. A portion of MasterCard's retiree medical obligation becomes funded when the new design is implemented as these accounts are vested and are portable subaccounts within MasterCard's pension plan. In adopting Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," MasterCard elected to defer and amortize the $11,592 transition obligation through the year 2013. The following table presents the status of the Company's postretirement benefit plan at December 31:
2000 1999 -------- -------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year..................... $ 17,895 $ 17,961 Service cost................................................ 2,309 2,162 Interest cost............................................... 1,657 1,243 Actuarial (gain) or loss.................................... 3,766 (3,252) Benefits paid............................................... (172) (219) -------- -------- Benefit obligation at end of year........................... $ 25,455 $ 17,895 ======== ======== CHANGE IN PLAN ASSETS Employer contributions...................................... $ 172 $ 219 Benefits paid............................................... (172) (219) -------- -------- Fair value of plan assets at end of year.................... $ -- $ -- ======== ======== RECONCILIATION OF FUNDED STATUS Funded status............................................... $(25,455) $(17,895) Unrecognized actuarial (gain)............................... (6,850) (10,900) Unrecognized transition obligation.......................... 6,955 7,535 -------- -------- (Accrued) benefit cost...................................... $(25,350) $(21,260) ======== ========
The Company's postretirement benefit plan is currently unfunded. Net periodic postretirement benefit cost for the years ended December 31, 2000, 1999 and 1998 included the following components:
2000 1999 1998 ------ ------ ------ Service cost............................................. $2,309 $2,162 $1,771 Interest cost............................................ 1,657 1,243 1,017 Amortization of transition obligation.................... 580 580 580 Recognized actuarial gain................................ (284) (324) (381) ------ ------ ------ Net periodic benefit cost................................ $4,262 $3,661 $2,987 ====== ====== ======
Assumptions used in determining the postretirement defined benefit obligation included a weighted average discount rate of 7.75 percent for both 2000 and 1999, and a rate of increase in future compensation levels of 7.0 percent for both 2000 and 1999. F-16 MASTERCARD INTERNATIONAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS) For net postretirement benefit cost measurement purposes, an annual rate of increase in the per capita cost of covered medical benefits of 8.0 percent was assumed for 2000. The rate was assumed to decrease gradually to 6.0 percent by 2004 and remain at that level thereafter. Increasing (decreasing) the assumed health care cost trend rates by 1.0 percent in each year would increase (decrease) the accumulated postretirement defined benefit obligation and the aggregate of the service and interest cost components of net periodic postretirement benefit as follows:
1% INCREASE 1% DECREASE ----------- ----------- Postretirement benefit obligation........................... $2,898 $(2,366) Service and interest cost components........................ 592 (475)
8. DEBT At December 31, 2000, the Company had a $1 billion ($742,500 at December 31, 1999) committed credit facility from banks, some of whom are members. Pursuant to this facility, the Company has the right to borrow funds at a variable rate calculated in accordance with the provisions of the agreement, to provide liquidity for member settlement failures. As of December 31, 2000, the Company has not borrowed under this credit facility. Commitment and other fees associated with this credit facility totaled $1,279, $1,055 and $550 for each of the years ended December 31, 2000, 1999 and 1998, respectively. On June 30, 1998, the Company issued $80,000 in subordinated debt ("the Notes") fixed at 6.67 percent per annum. The terms of the Notes require MasterCard to repay the principal amount on June 30, 2008. The Company has the option to prepay the Notes with a "make-whole" payment to the investors, if market interest rates are lower at the time of prepayment. Interest expense aggregated $5,336 for each of the years ended December 31, 2000 and 1999. Interest expense for the year ended December 31, 1998 totaled $2,668. Cash paid for interest during the years ended December 31, 2000, 1999 and 1998 was $5,750, $5,593 and $5,034, respectively. The fair value of subordinated debt is estimated at $78,117 and $73,528 at December 31, 2000 and 1999, respectively. The terms of the borrowing facilities include various covenants including, but not limited to, limitations on liens and the maintenance of minimum net worth. The Company was in compliance with such covenants at December 31, 2000. 9. COMMITMENTS AND CONTINGENT LIABILITIES On August 31, 1999, the Company entered into a ten-year operating lease agreement for a global technology and operations center that will be constructed in O'Fallon, Missouri. The lease may be extended for one ten-year term for annual payments of $100 per year subject to the repayment of the principal on the senior secured notes described below. The Company plans to occupy the facility at the anticipated completion date in the fourth quarter of 2001. In conjunction with the lease agreement, the owner of the property leased the land to the MCI O'Fallon 1999 Trust. The Trust financed the operations center through a combination of an equity investment and the issuance of 7.36 percent Series A Senior Secured Notes in the amount of $149,380. In the event that additional financing is needed to complete the facility, the Trust may issue its Series B Senior Secured Notes in an aggregate amount not to exceed $5,000. Rent is payable in amounts equal to interest payments on the Notes plus a return of 2.75 percent. The lease agreement permits the Company to purchase the facility upon 180 days notice at a purchase price equal to the aggregate outstanding principal amount of the Series A Senior Secured Notes, including any accrued and unpaid interest and investor equity, along with any accrued and unpaid amounts due to the investor under the lease agreement. In conjunction with the lease agreement, the Company executed a Guarantee of 85.73 percent of the Series A Senior Secured F-17 MASTERCARD INTERNATIONAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS) Notes outstanding. Additionally, upon the occurrence of specific events of default, the Company will guarantee repayment of the total outstanding principal and interest on the Series A Senior Secured Notes. Rental expense for office space aggregated approximately $16,254, $18,940 and $18,827 for the years ended December 31, 2000, 1999 and 1998, respectively. Rental of computer equipment, communications lines, and office equipment aggregated $31,064, $31,096 and $33,442 for the years ended December 31, 2000, 1999 and 1998, respectively. The future minimum lease payments under non-cancellable operating leases at December 31, 2000 are as follows: 2001........................................................ $ 24,939 2002........................................................ 18,554 2003........................................................ 16,322 2004........................................................ 15,715 2005........................................................ 15,140 Thereafter.................................................. 48,285 -------- Total minimum lease payments................................ $138,955 ========
On March 6, 1996, the Company entered into an agreement whereby a vendor will design and monitor a virtual private network to support the Company's data networking needs. At December 31, 2000, the remaining cost associated with this agreement was approximately $40,600 to be paid over six years, subject to certain termination provisions. Additionally, the agreement calls for certain variable costs to be paid annually. The Company also leases certain communications lines on a monthly basis. These are cancelable without penalty upon 30 days' notice. MasterCard has guaranteed the payment of settlement obligations between members should a member institution fail to settle their transactions. See Note 13 for a description of settlement credit risk. MasterCard has also guaranteed the payment of MasterCard branded travelers cheques outstanding. MasterCard had outstanding travelers cheques of $1,480,279 and $1,676,771 at December 31, 2000 and 1999, respectively. MasterCard has obtained an unlimited guarantee in the amount of $1,399,663 and $1,487,608 at December 31, 2000 and 1999, respectively, from a financial institution in order to cover most of the exposure of outstanding travelers cheques. Maestro International Incorporated ("Maestro") was formed in July 1992 as a joint venture of MasterCard and Europay International S.A. ("Europay"). The Company owns a 50% interest in Maestro but does not have control. Accordingly, MasterCard accounts for this investment using the equity method. Maestro owns the Maestro name mark and uses the blue and red interlocking circle mark as part of the Maestro logo, pursuant to a license from MasterCard. Europay is the regional licensor for the Maestro brand in Europe, while MasterCard, through its wholly owned subsidiaries, is the regional licensor for the Maestro brand elsewhere in the world. Under the terms of their agreement, the Company is required to reimburse Maestro for its share of net expenses and paid $8,909, $8,876 and $8,932 to Maestro for the years ended December 31, 2000, 1999 and 1998, respectively. 10. LEGAL PROCEEDINGS MasterCard is a party to litigation with respect to a variety of matters in the ordinary course of business. Except as described below, MasterCard does not believe that any litigation to which it is a party may have a material adverse impact on the Company's business or prospects. F-18 MASTERCARD INTERNATIONAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS) DEPARTMENT OF JUSTICE ANTITRUST LITIGATION In October 1998, the United States Department of Justice ("DOJ") filed suit against MasterCard, Visa U.S.A., Inc. and Visa International Corp. in the U.S. District Court for the Southern District of New York alleging that both MasterCard's and Visa's governance structure and policies violated U.S. federal antitrust laws. First, the DOJ claimed that "dual governance" -- the situation where a financial institution has a representative on the board of directors of MasterCard or Visa while a portion of its card portfolio is issued under the brand of the other association -- was anti-competitive and acted to limit innovation within the payment card industry. At the same time, the DOJ conceded that "dual issuance" -- a term describing the structure of the bank card industry in the United States in which a single financial institution can issue both MasterCard and Visa-branded cards -- was pro-competitive. Second, the DOJ challenged MasterCard's Competitive Programs Policy ("CPP") and a Visa bylaw provision that prohibit financial institutions participating in the respective associations from issuing competing proprietary payment cards (such as American Express or Discover). The DOJ alleged that the CPP and bylaw provision acted to restrain competition. MasterCard denies the DOJ's allegations and believes that both "dual governance" and the CPP are pro-competitive and fully consistent with U.S. federal antitrust law. A bench trial concerning the DOJ's allegations was concluded on August 22, 2000. In response to the judge's request for a proposed remedy, the DOJ submitted a proposed order that, if implemented, would require MasterCard to repeal the CPP and Visa to repeal its bylaw. The government's proposed order also would require all financial institutions with representatives on any governing MasterCard board or committee (defined as any body having decision-making authority or access to competitively sensitive information with respect to MasterCard, unless the activities of that board or committee relate solely to activities outside the United States) to (i) with regard to new issuance, issue general purpose cards bearing MasterCard brands exclusively, and (ii) ensure that by 2003 at least 80% of each such institution's total issuing volume in the United States and globally is derived from MasterCard-branded cards. The proposed order would impose parallel requirements on Visa, and would also require that financial institutions that have signed long-term member agreements with MasterCard or Visa have a two-year period to exercise termination rights related to such agreements. MasterCard has objected to the DOJ's proposed order and believes that the remedies reflected in the order are, among other things, inconsistent with the evidence of intense competition offered throughout the trial as well as the testimony of the DOJ's own expert economist. As of December 31, 2000, no decision has been rendered in the trial. MERCHANT ANTITRUST LITIGATION Commencing in October 1996, several putative class action suits were brought by a number of U.S. merchants -- including Wal-Mart Stores, Inc., Sears Roebuck & Co., Inc., The Limited Inc. and Safeway, Inc. -- against MasterCard and Visa U.S.A., Inc. challenging certain aspects of the payment card industry under U.S. federal antitrust law. Those suits were later consolidated in the U.S. District Court for the Eastern District of New York. The plaintiffs challenge MasterCard's "Honor All Cards" rule (and a similar Visa rule), which ensures universal card acceptance for consumers by requiring merchants who accept MasterCard cards to accept for payment every validly presented MasterCard card. Plaintiffs claim that MasterCard and Visa unlawfully have tied acceptance of debit cards to acceptance of credit cards. In essence, the merchants desire the ability to reject off-line, signature-based debit transactions (for example, MasterCard card transactions) in favor of other payment forms, including on-line, PIN-based debit transactions (for example, Maestro or regional ATM network transactions) which generally impose lower transaction costs for merchants. The plaintiffs also claim that MasterCard and Visa have conspired to monopolize what they characterize as the point-of-sale debit card market, thereby suppressing the growth of regional networks such F-19 MASTERCARD INTERNATIONAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS) as ATM payment systems. Plaintiffs allege that the plaintiff class has been forced to pay unlawfully high prices for debit and credit card transactions as a result of the alleged tying arrangement and monopolization practices. There are related consumer class actions pending in two state courts that have been stayed pending developments in this matter. MasterCard denies the merchant allegations and believes that the "Honor All Cards" rule and MasterCard practices with respect to debit card programs in the United States are pro-competitive and fully consistent with U.S. federal antitrust law. On February 22, 2000, the district court granted plaintiffs' motion for class certification. MasterCard and Visa promptly appealed. The Second Circuit Court of Appeals subsequently agreed to consider the appeal of the grant of class certification. As of December 31, 2000, the parties were awaiting a hearing before that court to consider the appeal. Motions seeking summary judgment have been filed by both sides and fully briefed in the district court. Currently, no argument date for summary judgment has been set pending resolution of the appeal of the class certification decision and no trial date has been set. Management believes that it is not currently possible to estimate the impact, if any, that the ultimate resolution of the DOJ and merchant antitrust litigations will have on the Company's results. MasterCard's policy is to accrue probable estimated legal fees in defending these claims. 11. MONDEX On February 21, 1997, the Company completed a transaction with Mondex International, Ltd. ("MXI") and MXI's shareholders. MXI, which is based in London, England, owns and licenses to franchisees and to others the rights to implement Mondex's "smart card" technology of which the initial use is in the Mondex electronic cash system. The Company acquired a 51 percent interest in MXI for $16,720 (L10,333) and agreed (i) to pay its proportionate share of fees assessed by MXI in exchange for global support services and (ii) until February 20, 2002, to pay fees assessed against minority shareholders for global support services up to L56,400 subject to certain adjustments primarily related to franchise sales and the net present value of amounts paid under (i) above. With respect to the amount paid pursuant to (ii), MasterCard members and others will have the right to obtain licenses in regions in which they operate to participate in the MXI electronic cash system and to participate in other applications of the MXI technology in chip-based programs. Through subsequent investments in affiliates, the Company obtained an incremental beneficial interest in MXI of 7.2 percent. In a separate transaction, MasterCard also paid $43,691(L27,000) to a shareholder of MXI in exchange for that shareholder's existing right to receive up to an equivalent amount from Mondex's sales of franchise rights to exploit MXI technology in territories that remained unsold at the time of the agreement. Such rights to proceeds from MXI franchise sales of $2,643 and $952 are included in prepaid expenses and other current assets and in other assets, respectively, in the consolidated balance sheet. The amount included in prepaid expenses and other current assets relates to contractual payments due within one year from third party purchasers. From the sale of franchises, MasterCard received $3,626, $18,993 and $9,848 in 2000, 1999 and 1998, respectively. The MXI acquisition described above was accounted for as a purchase and, accordingly, the results of MXI's operations have been included in the consolidated financial statements since the date of acquisition. The excess of purchase price over book value, which approximated fair value, was recorded as an intangible asset. The investment is accounted for on a consolidated basis. On October 22, 1997, the Company purchased a 51% ownership interest in three regional Mondex Franchises, Mondex Asia Pte., Ltd. ("Mondex Asia"), Mondex China Pte., Ltd. ("Mondex China"), and Mondex India Pte., Ltd. ("Mondex India") for $24,511. These acquisitions were accounted for under the F-20 MASTERCARD INTERNATIONAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS) purchase method and, accordingly, the results of acquired operations have been included in the consolidated financial statements since the date of acquisition. The investments are accounted for on a consolidated basis. 12. INTANGIBLE ASSETS The following table sets forth net intangible assets at December 31:
2000 1999 -------- -------- Goodwill.................................................... $ 28,469 $ 28,469 Shareholder franchise rights................................ 49,527 49,527 -------- -------- 77,996 77,996 -------- -------- Less: Accumulated amortization.................................... (40,626) (34,947) Accumulated impairment...................................... (23,943) (15,334) -------- -------- $ 13,427 $ 27,715 ======== ========
Amortization expense related to intangible assets was $5,679, $9,508 and $9,725 in 2000, 1999 and 1998, respectively. In conjunction with the October 22, 1997 acquisition of a 51 percent ownership interest in Mondex Asia, Mondex China and Mondex India, the Company recorded shareholder franchise rights to develop and exploit the MXI technology in 13 Asian countries. These rights, totaling $47,985, are being amortized on a straight-line basis over seven years. During 2000 and 1999, the Company evaluated the recoverability of these franchise rights. Government restrictions and slower than expected development in these countries limit future cash streams in the foreseeable future. Accordingly, pursuant to SFAS 121, "Accounting for the Impairment of Long-Lived Assets and Assets to be Disposed Of", the Company adjusted the carrying value of franchise rights associated with Mondex Asia, Mondex China and Mondex India to the estimated net present value of future cash flows from those entities resulting in an impairment loss of $8,609 and $15,334 for the years ended December 31, 2000 and 1999, respectively. The acquisition of MXI on February 21, 1997, resulted in approximately $6,400 of goodwill, which was fully amortized over the three-year period ending December 31, 1999. The 1988 acquisition of Cirrus System, Inc. resulted in $22,048 of goodwill, which is being amortized on a straight-line basis over 20 years. 13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT On February 17, 1999, the Company entered into an interest rate swap with a notional amount of $55,000 that matured on February 17, 2000. This swap paid a floating rate of interest based upon the BMA Municipal Swap Index and received a fixed rate of 3.24% in order to reduce interest rate risk on that portion of the Company's short term municipal investment portfolio which earned a floating rate. On June 30, 1998, the Company entered into two foreign currency swaps totaling L24,700 to hedge the Mondex franchise receivable which is denominated in U.K. pounds sterling. One currency swap expired on June 30, 2000 (L4,000) and the other currency swap was originally contracted to expire on June 30, 2001 (L20,700). The two contracts called for the sale of pounds sterling into U.S. dollars at a rate of $1.665 to L1.0. On July 19, 2000, the Company elected to terminate the remaining contract of L20,700. During 2000, the Company realized a net gain of $1,385 as a result of the maturity and termination of these currency swaps. F-21 MASTERCARD INTERNATIONAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS) The notional amounts and estimated fair values of these contracts at December 31 are as follows:
2000 1999 ---------------------- ---------------------- ESTIMATED ESTIMATED NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE -------- ---------- -------- ---------- Forwards Commitments to purchase foreign currency............................. $60,275 $(1,427) $66,950 $ (641) Commitments to sell foreign currency.... 43,416 291 27,798 (137) Interest rate swap........................ -- -- 55,000 -- Currency swap............................. -- -- 41,125 (1,454)
The Company's derivative financial instruments are subject to both credit and market risk. Credit risk is the risk of loss due to failure of a counterparty to perform its obligations in accordance with contractual terms. Market risk is the potential change in an investment's value caused by fluctuations in interest and currency exchange rates, equity and commodity prices, credit spreads or other risk. Credit and market risk related to derivative instruments were not material at December 31, 2000 and 1999. Foreign exchange forward, option and swap contracts are not used for trading purposes. The currencies underlying the forward exchange commitments consist primarily of Australian dollars, Japanese yen, Canadian dollars, Singapore dollars, Brazilian real and U.K. pounds sterling. The fair value of off-balance sheet financial instruments generally reflects the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date, thereby taking into account the current unrealized gains or losses of outstanding forward and option contracts. Credit risk is the risk of loss due to the failure of a counterparty to fulfill its contractual obligations. Credit risk is concentrated with members who are principally in the financial services industry and is primarily related to the Company's guarantee of qualifying settlement transactions between its members and of foreign currency forward, option and swap contracts with members as counterparties. Settlement credit risk is the legal exposure due to the difference in timing between payments made by and receipts due to MasterCard. A member's settlement credit risk is estimated as the average daily card charges of the member multiplied by the estimated maximum number of days that could elapse between MasterCard's payment to the acquiring bank and receipt of funds from the issuing bank. To minimize its exposure to settlement credit risk, the Company has established member risk standards. Members that are not in compliance with established risk standards are required to provide collateral or other security in the form of cash deposits, escrow accounts, letters of credit or bank guarantees. MasterCard held collateral for legal settlement risk of $528,472 and $114,933 and had unlimited guarantees estimated at $597,039 and $460,136 at December 31, 2000 and December 31, 1999, respectively. MasterCard monitors its credit risk portfolio on a regular basis to assess potential concentration risks and to evaluate the adequacy of collateral on hand. MasterCard's member credit exposure at December 31, 2000 and 1999, after consideration of collateral and guarantees, amounted to $7,921,109 and $6,601,427, respectively. MasterCard member credit exposure had concentrations of 58% and 55% in North America and 28% and 32% in Europe at December 31, 2000 and December 31, 1999, respectively. The Company also reviews the credit worthiness of banks to consider the appropriateness of establishing reserves for non-payment. A significant portion of the Company's credit risk is concentrated in one MasterCard travelers cheque issuer. MasterCard travelers cheques outstanding issued by that issuer at December 31, 2000 and 1999 was $1,399,663 and $1,487,608, respectively. MasterCard has obtained an unlimited guarantee from a financial institution in order to mitigate its exposure to outstanding travelers cheques for that issuer. F-22 MASTERCARD INTERNATIONAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS) Generally, the Company does not obtain collateral related to forward, option and swap contracts because of the high credit ratings of the counterparties involved. The amount of accounting loss the Company would incur if the counterparties failed completely to perform according to the terms of the contracts is not material. 14. SEGMENT REPORTING MasterCard has one reportable segment, "Payment Services." All of the Company's activities are interrelated, and each activity is dependent upon and supportive of the other. Accordingly, all significant operating decisions are based upon analyses of MasterCard as one operating segment. The CEO has been identified as the chief operating decision maker. General information required by SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," is disclosed in the consolidated financial statements. There is no single customer that accounted for more than 10 percent of the Company's revenue. The following geographic data represents revenues based on the geographic locations of the Company's customers for each years ended:
DECEMBER 31, -------------------------------------- 2000 1999 1998 ---------- ---------- ---------- United States.................................. $1,050,145 $ 933,367 $ 815,702 Asia/Pacific................................... 185,564 159,595 127,947 Latin America/Caribbean........................ 138,150 119,591 106,307 Europe......................................... 121,129 114,246 103,038 Canada......................................... 44,691 34,047 28,020 Middle East/Africa............................. 31,536 28,309 24,954 ---------- ---------- ---------- Total Revenue.................................. $1,571,215 $1,389,155 $1,205,968 ========== ========== ==========
MasterCard does not maintain or measure long-lived assets by geographical location. 15. SUBSEQUENT EVENT At a meeting on February 8, 2001, the Board of Directors of MasterCard International approved a management recommendation to undertake a transaction to integrate MasterCard and Europay International S.A. into a single global entity. At the same meeting, the MasterCard Board authorized management to negotiate with Europay and take all steps necessary to implement the integration transaction. F-23 MASTERCARD INTERNATIONAL INCORPORATED UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF JUNE 30, 2001 AND DECEMBER 31, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000 F-24 MASTERCARD INTERNATIONAL INCORPORATED CONSOLIDATED INTERIM STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED JUNE 30, -------------------- 2001 2000 -------- -------- (IN THOUSANDS) REVENUE..................................................... $855,622 $744,913 OPERATING EXPENSES General and administrative.................................. 394,116 360,992 Advertising and market development.......................... 274,345 202,153 Depreciation................................................ 17,557 16,527 Amortization................................................ 14,613 10,053 -------- -------- Total operating expenses.................................. 700,631 589,725 -------- -------- Operating income.......................................... 154,991 155,188 OTHER INCOME AND EXPENSE Investment income........................................... 11,533 10,246 Interest expense............................................ (4,889) (3,783) Minority interest........................................... 1,424 802 -------- -------- Total other income and expense............................ 8,068 7,265 -------- -------- Income before taxes......................................... 163,059 162,453 Income tax expense.......................................... 63,912 67,388 -------- -------- NET INCOME.................................................. $ 99,147 $ 95,065 ======== ========
The accompanying notes are an integral part of these consolidated interim financial statements. F-25 MASTERCARD INTERNATIONAL INCORPORATED CONSOLIDATED INTERIM BALANCE SHEETS (UNAUDITED)
JUNE 30, DECEMBER 31, 2001 2000 ---------- ------------ (IN THOUSANDS) ASSETS Cash and cash equivalents................................... $ 215,511 $ 193,304 Investment securities, at fair value: Available-for-sale........................................ 319,829 316,507 Trading................................................... 55,334 54,958 Accounts receivable......................................... 199,742 218,882 Prepaid expenses and other current assets................... 67,231 61,005 ---------- ---------- TOTAL CURRENT ASSETS................................... 857,647 844,656 Property, plant and equipment, at cost (less accumulated depreciation and amortization of $301,205 and $273,479)... 237,457 206,196 Deferred income taxes....................................... 65,674 59,975 Intangible assets, net...................................... 12,134 13,427 Other assets................................................ 62,923 57,533 ---------- ---------- TOTAL ASSETS................................................ $1,235,835 $1,181,787 ========== ========== LIABILITIES AND MEMBERS' EQUITY LIABILITIES Accounts payable............................................ $ 127,825 $ 196,221 Accrued expenses and other current liabilities.............. 288,071 285,950 ---------- ---------- TOTAL CURRENT LIABILITIES.............................. 415,896 482,171 Other liabilities........................................... 173,450 152,344 Long-term debt.............................................. 82,517 82,992 ---------- ---------- TOTAL LIABILITIES...................................... 671,863 717,507 Minority interest........................................... 256 1,872 Commitments and contingencies (Note 3) MEMBERS' EQUITY Retained earnings........................................... 559,810 460,663 Accumulated other comprehensive income, net of tax: Cumulative translation adjustment......................... (594) (345) Net unrealized gain on investment securities available-for-sale..................................... 4,500 2,090 ---------- ---------- Total accumulated other comprehensive income................ 3,906 1,745 ---------- ---------- TOTAL MEMBERS' EQUITY.................................. 563,716 462,408 ---------- ---------- TOTAL LIABILITIES AND MEMBERS' EQUITY....................... $1,235,835 $1,181,787 ========== ==========
The accompanying notes are an integral part of these consolidated interim financial statements. F-26 MASTERCARD INTERNATIONAL INCORPORATED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, --------------------- 2001 2000 -------- --------- (IN THOUSANDS) OPERATING ACTIVITIES Net income................................................ $ 99,147 $ 95,065 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation.............................................. 17,557 16,527 Amortization.............................................. 14,613 10,053 Other adjustments to net income........................... (317) (80) Changes in operating assets and liabilities: Accounts receivable.................................... 19,140 23,360 Prepaid expenses and other current assets.............. (10,050) (18,651) Deferred income tax.................................... (3,832) (26,002) Accounts payable....................................... (68,396) (50,607) Accrued expenses....................................... 5,049 88,482 Net change in other assets and liabilities............. 11,328 9,859 -------- --------- Net cash provided by operating activities................... 84,239 148,006 INVESTING ACTIVITIES Purchases of property, plant and equipment................ (62,055) (102,121) Purchases of investment securities available-for-sale..... (70,290) (184,194) Proceeds from sales of investment securities available-for-sale..................................... 67,934 69,906 Other investing activities................................ 2,379 3,248 -------- --------- Net cash used in investing activities....................... (62,032) (213,161) -------- --------- Net increase (decrease) in cash and cash equivalents........ 22,207 (65,155) Cash and cash equivalents -- beginning of year.............. 193,304 261,244 -------- --------- Cash and cash equivalents -- end of period.................. $215,511 $ 196,089 ======== =========
The accompanying notes are an integral part of these consolidated interim financial statements. F-27 MASTERCARD INTERNATIONAL INCORPORATED CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------- 2001 2000 -------- ------- (IN THOUSANDS) NET INCOME.................................................. $ 99,147 $95,065 Other comprehensive income, net of tax: Foreign currency translation adjustments.................. (249) (83) Unrealized gain on investment securities available-for-sale, net................................ 2,410 364 -------- ------- Other comprehensive income................................ 2,161 281 -------- ------- COMPREHENSIVE INCOME........................................ $101,308 $95,346 ======== =======
MASTERCARD INTERNATIONAL INCORPORATED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN MEMBERS' EQUITY (UNAUDITED)
ACCUMULATED OTHER COMPREHENSIVE RETAINED INCOME (LOSS) EARNINGS TOTAL -------------- -------- -------- (IN THOUSANDS) BALANCE AT JANUARY 1, 2000.............................. $ (994) $342,514 $341,520 Net income.............................................. -- 95,065 95,065 Other comprehensive income.............................. 281 -- 281 ------ -------- -------- BALANCE AT JUNE 30, 2000................................ $ (713) $437,579 $436,866 ====== ======== ======== BALANCE AT JANUARY 1, 2001.............................. $1,745 $460,663 $462,408 Net income.............................................. -- 99,147 99,147 Other comprehensive income.............................. 2,161 -- 2,161 ------ -------- -------- BALANCE AT JUNE 30, 2001................................ $3,906 $559,810 $563,716 ====== ======== ========
The accompanying notes are an integral part of these consolidated interim financial statements. F-28 MASTERCARD INTERNATIONAL INCORPORATED NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements for the six months ended June 30, 2001 should be read in conjunction with the consolidated financial statements of MasterCard International Incorporated ("MasterCard" or "the Company") for the year ended December 31, 2000. Significant accounting policies disclosed therein have not changed. The consolidated financial statements for the six months ended June 30, 2001 and 2000 and as of June 30, 2001 are unaudited but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair statement of the Company's results of operations and financial positions for the periods and dates presented. The results of operations for the six months ended June 30, 2001 are not necessarily indicative of the results to be expected for the full year. The year end balance sheet is unaudited but has been derived from the Company's audited financial statements. All intercompany accounts and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year presentation. New accounting standards -- In August 2001, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("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 No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company is in the process of determining the effects of this statement on its business. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 is effective for financial statements issued for fiscal years 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 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. The Company is assessing the impact that this new standard will have on its financial position and results of operations. On June 29, 2001, the FASB unanimously approved SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 supercedes Accounting Principles Board Opinion ("APB") No. 16, "Business Combinations." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and establishes specific criteria for the recognition of intangible assets separately from goodwill. The new standard also requires unallocated negative goodwill to be written off immediately as an extraordinary gain (instead of being deferred and amortized). SFAS No. 142 supercedes APB No. 17, "Intangible Assets." SFAS No. 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition (i.e., the post-acquisition accounting). The provisions of SFAS No. 142 will generally be effective for fiscal years beginning after December 15, 2001. SFAS No. 142 establishes that goodwill and indefinite lived intangible assets will no longer be amortized and that goodwill should be tested for impairment at least annually at the reporting unit F-29 MASTERCARD INTERNATIONAL INCORPORATED NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) (IN THOUSANDS) level. The new standard also requires that intangible assets deemed to have an indefinite life should be tested for impairment at least annually, and the amortization period of intangible assets with finite lives will no longer be limited to forty years. In accordance with this standard, goodwill, acquired in a business combination for which the acquisition date is after June 30, 2001, will not be amortized. SFAS 142 is not expected to have a material impact on the Company's consolidated financial statements in relation to goodwill and other intangible assets recorded as of June 30, 2001. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended in June 1999 by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133," and in June 2000, by SFAS No. 138, "Accounting for Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133" (collectively, "SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other contracts. The statement requires that all derivatives be recognized in the balance sheet, as either assets or as liabilities, and measured at fair value. Additionally, changes in a derivative's fair value will be recognized in current earnings unless specific hedge accounting criteria are met. For the Company, SFAS No. 133 was effective January 1, 2001. The adoption of SFAS No. 133 had no significant effect on the Company's consolidated financial statements. 2. INVESTMENT SECURITIES The amortized cost and fair value of investment securities available-for-sale are as follows:
GROSS UNREALIZED AMORTIZED ---------------- JUNE 30, 2001 COST GAINS LOSSES FAIR VALUE - ------------- --------- ------ ------ ---------- Municipal bonds.............................. $312,328 $7,544 $(43) $319,829 ======== ====== ==== ========
GROSS UNREALIZED AMORTIZED ---------------- DECEMBER 31, 2000 COST GAINS LOSSES FAIR VALUE - ----------------- --------- ------ ------ ---------- Municipal bonds............................. $307,952 $3,681 $(217) $311,416 Corporate securities........................ 5,000 91 -- 5,091 -------- ------ ----- -------- $312,952 $3,772 $(217) $316,507 ======== ====== ===== ========
The maturity distribution based on contractual terms of investment securities available-for-sale at June 30, 2001, is as follows:
AMORTIZED COST FAIR VALUE --------- ---------- Due within 1 year........................................... $ 916 $ 929 Due 1 year through 5 years.................................. 280,054 287,083 Due 5 years through 10 years................................ 31,358 31,817 -------- -------- $312,328 $319,829 ======== ========
The Company holds a 5.25 percent Missouri Development Bond, due August 1, 2009 as an investment security held-to-maturity. The amortized cost of this security was $7,693 and $8,050 at June 30, 2001 and December 31, 2000, respectively. Principal and interest payments are received on a semi-annual basis with a final maturity date of August 1, 2009. The fair value of this security approximates amortized cost. F-30 MASTERCARD INTERNATIONAL INCORPORATED NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) (IN THOUSANDS) 3. COMMITMENTS AND CONTINGENCIES On August 31, 1999, the Company entered into a ten-year operating lease agreement for a global technology and operations center that is being constructed in O'Fallon, Missouri. The lease may be extended for one ten-year term for annual payments of $100 per year subject to the repayment of the principal on the senior secured notes described below. Certain areas of the facility have been occupied upon completion. The Company plans to fully occupy the facility at the anticipated completion date in the fourth quarter of 2001. In conjunction with the lease agreement, the owner of the property leased the land to the MCI O'Fallon 1999 Trust (the "Trust"). The Trust financed the operations center through a combination of an equity investment and the issuance of 7.36 percent Series A Senior Secured Notes in the amount of $149,380. In the event that additional financing is needed to complete the facility, the Trust may issue its Series B Senior Secured Notes in an aggregate amount not to exceed $5,000. Rent is payable in amounts equal to interest payments on the Notes plus a return of 2.75 percent. The lease agreement permits the Company to purchase the facility upon 180 days notice at a purchase price equal to the aggregate outstanding principal amount of the Series A Senior Secured Notes, including any accrued and unpaid interest and investor equity, along with any accrued and unpaid amounts due to the investor under the lease agreement. In conjunction with the lease agreement, the Company executed a guarantee of 85.73 percent of the Series A Senior Secured Notes outstanding. Additionally, upon the occurrence of specific events of default, the Company will guarantee repayment of the total outstanding principal and interest on the Series A Senior Secured Notes. On March 6, 1996, the Company entered into an agreement whereby a vendor will design and monitor a virtual private network to support the Company's data networking needs. At June 30, 2001, the remaining cost associated with this agreement was approximately $32,497 to be paid over six years, subject to certain termination provisions. Additionally, the agreement calls for certain variable costs to be paid annually. The vendor provides telecommunication services on a monthly basis. These services are cancelable without penalty upon 30 days notice. MasterCard has guaranteed the payment of settlement obligations between members should a member institution fail to settle their transactions. See Note 6 for a description of settlement credit risk. MasterCard has also guaranteed the payment of MasterCard branded travelers cheques outstanding. MasterCard had outstanding travelers cheques of $1,532,830 and $1,480,279 at June 30, 2001 and December 31, 2000, respectively. MasterCard has obtained an unlimited guarantee in the amount of $1,458,514 and $1,399,663 at June 30, 2001 and December 31, 2000, respectively, from a financial institution in order to cover most of the exposure of outstanding travelers cheques. 4. LEGAL PROCEEDINGS MasterCard is a party to litigation with respect to a variety of matters in the ordinary course of business. Except as described below, MasterCard does not believe that any litigation to which it is a party will have a material impact on the Company's business or prospects. DEPARTMENT OF JUSTICE ANTITRUST LITIGATION On October 9, 2001, the district court judge issued an opinion upholding the legality and pro-competitive nature of dual governance. In so doing, the judge specifically found that MasterCard and Visa have competed vigorously over the years, that prices to consumers have dropped dramatically, and that MasterCard has fostered rapid innovations in systems, product offerings and services. However, the judge also held that MasterCard's CPP and the Visa bylaw constitute unlawful restraints of trade under the federal antitrust laws. The judge found that the CPP and Visa bylaw weakened competition F-31 MASTERCARD INTERNATIONAL INCORPORATED NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) (IN THOUSANDS) and harmed consumers by preventing competing proprietary payment card networks such as American Express and Discover from entering into agreements with banks to issue cards on their networks. In reaching this decision, the judge found that two distinct markets -- a credit and charge card issuing market and a network services market -- existed in the United States, and that both MasterCard and Visa had market power in the network market. MasterCard strongly disputes these findings and believes that the DOJ failed, among other things, to demonstrate that U.S. consumers have been harmed by the CPP. The judge issued a proposed judgment that orders MasterCard to repeal the CPP and enjoins MasterCard from enacting or enforcing any by-law, rule, policy or practice that prohibits its issuers from issuing general purpose or debit cards in the United States on any other general purpose card network. The judge also concluded that during the period in which the CPP was in effect, MasterCard was able to "lock up" certain members by entering into long-term agreements with them pursuant to which the members committed to maintain a certain percentage of their general purpose card volume, new card issuance or total number of cards in force in the United States on MasterCard's network. Accordingly, the proposed judgment provides that upon the resolution of any appeals, there would be a two-year period during which MasterCard would be required to permit any issuer with which it has entered into such an agreement to terminate that agreement without penalty. MasterCard would be free to apply to the district court to recover funds paid but not yet earned under any terminated agreement. The judge's proposed judgment imposes parallel requirements on Visa. The judge explicitly provided that MasterCard and Visa would be free to enter into new partnership or member business agreements in the future. The parties submitted comments to the judge's proposed judgment on October 17, 2001. On October 29, 2001, the parties submitted reply comments to the proposed judgment. MasterCard is currently awaiting the entry of a final judgment. MasterCard believes that it has a strong legal basis to challenge the judge's ruling with respect to the CPP, and presently intends to appeal the decision on that count. If the judge declines to modify the proposed judgment in the manner that MasterCard has requested, MasterCard also intends to seek a motion staying the final judgment pending the outcome of the appeal, as the judgment would otherwise become effective ninety (90) days after it is entered by the district court. The DOJ is also free to appeal the judge's ruling with respect to dual governance. MERCHANT ANTITRUST LITIGATION On February 22, 2000, the district court granted the plaintiffs' motion for class certification. MasterCard and Visa subsequently appealed the decision to the Second Circuit Court of Appeals. On October 17, 2001, a three-judge panel affirmed the lower court decision by a two-to-one majority. On October 31, 2001, MasterCard and Visa petitioned the Second Circuit for a rehearing by the panel, or, in the alternative, by the full court. Motions seeking summary judgment have been filed by both sides and fully briefed in the district court. As of the date of this proxy statement-prospectus, no argument date for summary judgment and no trial date has been set. CURRENCY CONVERSION LITIGATION Subsequent to December 31, 2000, there have been a number of developments in certain litigations relating to MasterCard's currency conversion practices. MasterCard, together with Visa U.S.A., Inc. and Visa International Corp., are defendants in two lawsuits that allege that MasterCard and Visa wrongfully imposed an asserted one percent currency conversion "fee" on every credit card purchase transaction by U.S. MasterCard and Visa cardholders involving the purchase of goods or services in a foreign country, and that such "fee" is unlawful. The first of these actions, Schwartz v. Visa Int'l Corp., et al., was brought in the F-32 MASTERCARD INTERNATIONAL INCORPORATED NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) (IN THOUSANDS) Superior Court of California in February 2000, purportedly on behalf of the general public. The second action, Senequier v. Visa Int'l Corp., et al. was commenced in January 2001 in the Supreme Court of the State of New York and is a purported class action. A trial date of April 30, 2002 has been set for the Schwartz matter. No trial date has been set for the Senequier matter. Both these actions claim that the alleged "fee" grossly exceeds any costs the defendants might incur in connection with currency conversions relating to credit card purchase transactions made in non-U.S. countries and is not properly disclosed to cardholders. Plaintiffs seek to prevent the defendants from continuing to engage in, use or employ the alleged practice of charging and collecting the asserted one percent currency conversion "fee" and from charging any type of purported currency conversion "fee" without providing a clear, obvious and comprehensive notice that a fee will be charged. Plaintiffs also request an order (1) requiring defendants to fund a corrective advertising campaign; and (2) awarding restitution of the monies allegedly wrongfully acquired by imposing the purported currency conversion "fee". The complaints assert that, during the four-year period that preceded each respective lawsuit, MasterCard collected approximately $200 million as a result of allegedly imposing the claimed one percent currency conversion "fee." MasterCard denies these allegations. MasterCard, Visa U.S.A., Inc., Visa International Corp., several member banks including Citibank (South Dakota), N.A., Citibank (Nevada), N.A., Chase Manhattan Bank USA, N.A. and Bank of America, N.A. (USA), and Diners Club are defendants in a number of federal putative class actions that allege, among other things, violations of federal antitrust laws based on the asserted one percent currency conversion "fee." The complaints also allege violations of the Truth-In-Lending Act against the member banks. Seven of the purported class actions, Ross, et al. v. Visa U.S.A., Inc., et al., Kune v. Visa U.S.A., Inc., et al., Chatham v. Visa U.S.A., Inc., et al., Steinlauf v. Visa U.S.A., Inc., et al., Finkelman v. Visa U.S.A. Inc., et al., La Marca v. Visa U.S.A., Inc., et al. and Lipner v. Visa U.S.A., Inc., et al., were brought in United States District Court for the Eastern District of Pennsylvania in 2001. Five other purported class actions, Cooper v. Visa U.S.A., Inc., et al., Ramsey v. Visa U.S.A., Inc., et al., La Place v. Visa U.S.A., Inc., et al., Salvagio v. Visa U.S.A., Inc., et al. and Javier, et al. v. Visa U.S.A., Inc. et al., were brought in the United States District Court for the Northern District of California in 2001. Five other purported class actions, Wood v. Visa U.S.A., Inc., et al., Oshry v. Visa U.S.A., Inc., et al., Inducon Park Assocs. Inc. v. Visa U.S.A., Inc., et al., Matthews v. Visa U.S.A., Inc., et al. and Silberman et al. v. Visa U.S.A., Inc. were brought in the United States District Court for the Southern District of New York. As against MasterCard, the plaintiffs seek damages for an alleged conspiracy to fix and maintain prices in violation of the Sherman Antitrust Act. The complaints allege that MasterCard's and Visa's system of dual governance inhibits competition between the associations and provides each association with the ability and incentive to collude and fix the asserted currency conversion "fee" in violation of antitrust laws. Two of the complaints, Silberman and Ramsey, also allege violations of the Truth-in-Lending Act against MasterCard. MasterCard denies these allegations. Pursuant to motions to the judicial panel on multidistrict litigation and subsequent notices of tag-along rights, these actions were centralized in the United States District Court for the Southern District of New York (Pauley, J.) for coordinated or consolidated pretrial proceedings. Judge Pauley has directed the plaintiffs to file a consolidated amended complaint. MasterCard believes that it is not currently possible to estimate the impact, if any, that the ultimate resolution of these matters will have on its results of operations, financial position or cash flows. 5. SEGMENT REPORTING In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," MasterCard has one reportable segment, "Payment Services." All of the Company's activities are interrelated, and each activity is dependent upon and supportive of the other. Accordingly, all significant F-33 MASTERCARD INTERNATIONAL INCORPORATED NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) (IN THOUSANDS) operating decisions are based upon analysis of MasterCard as one operating segment. The CEO has been identified as the chief operating decision-maker. There is no single customer that accounted for more than 10 percent of the Company's revenue. Revenue generated in the United States contributed approximately 66% of the Company's total revenue for the six months ended June 30, 2001 and June 30, 2000. The Company estimates that no other individual country contributed a significant portion to the Company's revenue for the six months ended June 30, 2001 or June 30, 2000. MasterCard does not maintain or measure long-lived assets by geographic location. 6. RISK MANAGEMENT MasterCard held collateral for legal settlement risk of $504,781 and $528,472 and had unlimited guarantees estimated at $705,227 and $597,039 at June 30, 2001 and December 31, 2000, respectively. MasterCard monitors its credit risk portfolio on a regular basis to assess potential concentration risks and to evaluate the adequacy of collateral on hand. MasterCard's settlement exposure at June 30, 2001 and December 31, 2000, after consideration of collateral and guarantees, amounted to $7,431,217 and $7,921,109, respectively. MasterCard settlement exposure had concentrations of 65% and 55% in North America and 19% and 32% in Europe at June 30, 2001 and December 31, 2000, respectively. The Company also reviews the credit worthiness of financial institutions to consider the appropriateness of establishing reserves for non-payment. A significant portion of the Company's credit risk is concentrated in one MasterCard travelers cheque issuer. See Note 3 for a description of exposure of outstanding travelers cheques. Generally, the Company does not obtain collateral related to forward, option and swap contracts because of the high credit ratings of the counter-parties involved. The amount of accounting loss the Company would incur if the counter-parties failed to perform according to the terms of the contracts is not considered material. 7. MONDEX On June 29, 2001 the Company purchased all the outstanding minority shares of Mondex International, Ltd. ("MXI") that it did not previously own. As a result of assuming full ownership of MXI, MasterCard now directly controls all of MXI's operations and management. Accordingly, MasterCard is no longer responsible for MXI assessments. The Company purchased the minority interest for $4,251 consisting of $115 for 80,535 common and preferred shares of MXI and $4,136 in acquisition costs. This acquisition was treated as a step-acquisition and was accounted for as a purchase. The transaction did not have a material impact on the financial statements of MasterCard International. F-34 EUROPAY INTERNATIONAL S.A. CONSOLIDATED FINANCIAL STATEMENTS F-35 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Europay International S.A.: In our opinion, the accompanying consolidated balance sheet and the related consolidated statement of income and cash flows present fairly, in all material respects, the financial position of Europay International S.A. and its subsidiaries at December 31, 2000, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the Belgium, expressed in euros. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. Accounting principles generally accepted in Belgium vary in certain significant respects from accounting principles generally accepted in the United States. The application of the latter would have affected the determination of consolidated net income for the year ended December 31, 2000 and the determination of consolidated shareholders' equity and consolidated financial position at December 31, 2000 to the extent summarized in Note 22 to the consolidated financial statements. PricewaterhouseCoopers Reviseurs d'Entreprises represented by Yves Vandenplas Brussels, Belgium May 22, 2001 Except for Note 21 as to which the date is July 31, 2001 F-36 EUROPAY INTERNATIONAL S.A. CONSOLIDATED BALANCE SHEETS (IN E THOUSANDS)
AS OF DECEMBER 31, ---------------------- NOTES 2000 1999 ------ ------- ----------- (UNAUDITED) ASSETS NON CURRENT ASSETS Intangible assets........................................... 5 8,825 2,559 Fixed assets................................................ 6 34,133 29,076 Financial assets............................................ 7 2,029 2,138 ------- ------- Total Non Current Assets.................................. 44,987 33,773 ------- ------- CURRENT ASSETS Amounts receivable within one year Trade debtors............................................. 45,915 40,519 Other amounts receivable.................................. 9 46,619 13,458 ------- ------- Total amounts receivable within one year............... 92,534 53,977 Investments and deposits.................................... 10 1,852 6,951 Cash at bank and in hand.................................... 11 112,117 33,244 Deferred charges and accrued income......................... 2,679 10,951 ------- ------- Total Current Assets...................................... 209,182 105,123 ------- ------- TOTAL ASSETS...................................... 254,169 138,896 ======= ======= CAPITAL AND RESERVES AND LIABILITIES CAPITAL AND RESERVES Issued capital.............................................. 17,611 17,611 Consolidated reserves....................................... 8 23,628 14,375 Consolidation difference.................................... 7 383 -- Cumulative translation adjustment........................... 235 -- ------- ------- Total Capital and Reserves................................ 41,857 31,986 ------- ------- MINORITY INTEREST........................................... 12 2,619 2,366 ------- ------- PROVISION FOR LIABILITIES AND CHARGES....................... 10, 17 2,301 240 ------- ------- DEFERRED TAX................................................ 18 2,792 -- ------- ------- CREDITORS Amounts payable within one year Bank overdrafts........................................... 11 37,789 737 Suppliers................................................. 63,587 62,465 Taxes..................................................... 2,150 2,363 Remuneration and social security.......................... 9,932 7,382 Other amounts payable..................................... 14 89,749 25,309 ------- ------- Total amounts payable within one year.................. 203,207 98,256 Accrued charges and deferred income......................... 1,149 3,515 Amounts payable after one year.............................. 15 244 2,533 ------- ------- Total Creditors........................................... 204,600 104,304 ------- ------- TOTAL CAPITAL AND RESERVES AND LIABILITIES.................. 254,169 138,896 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-37 EUROPAY INTERNATIONAL S.A. CONSOLIDATED STATEMENTS OF INCOME (IN E THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------- NOTES 2000 1999 1998 ----- ------- ----------- ----------- (UNAUDITED) (UNAUDITED) OPERATING INCOME Revenue................................................. 19 364,806 298,206 245,506 Capitalization of intangible assets..................... 5 7,822 -- 860 Other operating income.................................. 3,041 1,041 11,202 ------- ------- ------- Total operating income................................ 375,669 299,247 257,568 ------- ------- ------- OPERATING EXPENSES Services and other goods................................ 19 282,387 226,776 198,777 Remuneration, social security and pension costs......... 17 58,902 50,741 41,017 Depreciation and amortization expense................... 5, 6 11,143 9,275 8,261 Bad debt expense........................................ 29 270 86 Increase in provisions for liabilities and charges...... 17 127 -- -- Other operating expenses................................ 4,858 4,864 4,389 ------- ------- ------- Total operating expenses.............................. 357,446 291,926 252,530 ------- ------- ------- OPERATING PROFIT........................................ 18,223 7,321 5,038 FINANCIAL INCOME/(EXPENSE) Interest income......................................... 1,072 1,131 450 Net other financial income/(expense).................... 10 (543) 6,855 (60) Interest expense........................................ (172) (280) (336) ------- ------- ------- Net financial income.................................. 357 7,706 54 ------- ------- ------- PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION........... 18,580 15,027 5,092 EXTRAORDINARY INCOME/(CHARGES) Adjustments to amounts written off financial assets..... 7 184 -- -- Net gain/(loss) on disposal of fixed assets............. (300) (411) 6 Impairment of fixed asset............................... 6 -- -- (3,063) Provisions for liabilities and charges.................. 17 (1,353) -- -- ------- ------- ------- Net extraordinary income/(charges).................... (1,469) (411) (3,057) ------- ------- ------- PROFIT FOR THE FINANCIAL PERIOD BEFORE TAXATION......... 17,111 14,616 2,035 INCOME TAXES............................................ 18 (7,447) (6,721) (1,747) ------- ------- ------- NET INCOME.............................................. 9,664 7,895 288 NET LOSS FROM EQUITY INVESTEES, NET OF TAX.............. 7 (158) -- -- MINORITY INTEREST, NET OF TAX........................... 12 (253) (254) (10) ------- ------- ------- NET INCOME ATTRIBUTABLE TO THE GROUP.................... 9,253 7,641 278 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-38 EUROPAY INTERNATIONAL S.A. SUPPLEMENTAL DISCLOSURE CONSOLIDATED STATEMENTS OF CASH FLOWS (IN E THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------- 2000 1999 1998 ------- ----------- ----------- (UNAUDITED) (UNAUDITED) OPERATING ACTIVITIES Profit for the financial period before taxation........... 17,111 14,616 2,035 Adjustments to reconcile profit for the financial period before taxation to net 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................ 11,143 9,275 8,261 Net (gain)/loss on disposals of fixed assets......... 300 411 (6) Impairment of fixed asset............................ -- -- 3,063 Changes in operating assets and liabilities: Trade debtors........................................ (5,396) 7,986 (27,681) Other amounts receivable............................. (33,161) (6,932) (1,389) Deferred charges and accrued income.................. 8,272 761 (9,551) Security deposits.................................... 1,028 (169) (83) Suppliers............................................ 1,122 8,706 24,194 Taxes paid........................................... (4,868) (5,911) (1,611) Remuneration and social security..................... 2,550 1,389 468 Other amounts payable................................ 64,440 10,910 1,498 Accrued charges and deferred income.................. (2,366) 2,651 127 Provision for liabilities and charges................ 2,061 -- -- ------- ------- ------- Net cash provided by/(used in) operating activities....... 62,052 43,693 (675) ------- ------- ------- INVESTING ACTIVITIES Acquisitions of intangible assets....................... (2,001) (3,698) (2,248) Capitalization of intangible assets..................... (7,822) -- (860) Acquisitions of fixed assets............................ (13,761) (9,839) (10,048) Proceeds from sales of fixed assets..................... 548 3,805 6 Investment in affiliates................................ (5) (92) -- Investment in short-term cash deposit................... -- (6,951) -- Proceeds from maturity of short-term cash deposit....... 6,951 -- -- Investment in foreign currency option................... (1,852) -- -- ------- ------- ------- Net cash used in investing activities..................... (17,942) (16,775) (13,150) ------- ------- ------- FINANCING ACTIVITIES Net change in bank overdrafts........................... 37,052 469 (559) Proceeds from short-term bank loan...................... -- -- 19,831 Payment of short-term bank loan......................... -- (19,831) -- Net change in amounts payable after one year............ (2,289) -- -- ------- ------- ------- Net cash provided by/(used in) financing activities....... 34,763 (19,362) 19,272 ------- ------- ------- Net increase in cash at bank and in hand.................. 78,873 7,556 5,447 Cash at bank and in hand at beginning of year............. 33,244 25,688 20,241 ------- ------- ------- Cash at bank and in hand at end of year................... 112,117 33,244 25,688 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-39 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 EUROCARD 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
F-40 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) 3. CHANGES IN FINANCIAL STATEMENT PRESENTATION The Consolidated Financial Statements for the years ended December 31, 1999 and 1998 have been amended in order to reflect the following changes and improvements in presentation: Consolidated Balance Sheets: Certain reclassifications have been made in the December 31, 1999 Consolidated Balance Sheet to conform to the classifications used in the December 31, 2000 Consolidated Balance Sheet. Consolidated Statements of Income: Following the 1999 introduction of the new single European currency, the euro, in the Economic and Monetary Union (EMU), Europay changed its functional currency from the Belgian Franc to the euro (E). Accordingly, the 1998 Consolidated Statement of Income and accompanying supplemental disclosures and notes have been converted into euros at the fixed exchange rate of E1 = BEF 40.3399. Reporting Currency: The informative value and trends presented for 1998 are consistent with those of the financial statements had the conversion from Belgian Franc to euro not been applied. The 1998 financial statements are not comparable to financial statements of other companies that report in euros and that restate amounts from currencies other than the Belgian Franc.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies used in the preparation of these financial statements are set out below. CONSOLIDATION Europay follows accounting principles and reporting requirements generally accepted in Belgium ("Belgian GAAP"). Assets and liabilities are recorded under the accrual method of accounting and valued at historical cost less any amounts provided for possible reduction in value. The consolidated financial statements include the accounts of Europay and its majority-owned subsidiaries. All significant intercompany transactions are eliminated in consolidation. Investments in entities for which the equity method of accounting is appropriate are reported as financial assets on the balance sheet. Europay's share of net earnings of these entities is included in the consolidated statements of income. Investments in entities for which the equity method is not appropriate are accounted for using historical cost. All investments are evaluated for impairment on an ongoing basis. REVENUES Revenues are recognized when services are performed. The main operating revenues arise from the following fees. Operations fees -- consists of authorization, clearing and settlement fees charged to issuers/acquirers based on transaction volumes either through settlement or through invoices. This also includes fees for other member services that are collected based on monthly invoices. Assessment fees -- consists of assessment fees charged to issuers and acquirers for costs associated with the overall management of the payments system, and currency conversion fees charged to issuers, which are charged daily and quarterly based on transaction volumes. These fees are recognized as revenue when F-41 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) collected through direct debit or upon invoicing of customers. Assessment fees also include card fees charged to issuers that are recognized as revenue upon invoicing of customers. FOREIGN CURRENCY TRANSLATION The euro is the functional currency for the majority of Europay's businesses except its Eurocard U.S.A. operations, where the local currency is the functional currency. Transactions arising from EMU countries in foreign currencies are translated at their EMU fixed rate. Bank movements generated by Europay's centralized processing system, known as European Common Clearing & Settlement System (ECCSS), are translated at the transaction date. All other transactions arising in foreign currencies are translated to and recorded in euros at the rate prevailing at the end of the month that precedes the month the transaction takes place, which is not significantly different from the rate at the respective transaction date. Current assets and liabilities expressed in foreign currencies are translated at the spot rate on the balance sheet date. Profits and losses arising from the translation of foreign currencies are reflected in the statements of income. For businesses where the local currency is the functional currency, translation to euros is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate for the period. Resulting translation adjustments are reported as cumulative translation adjustments in the consolidated balance sheets. DEFERRED TAXES Deferred tax liabilities on consolidation entries are recorded when it is probable that a tax charge will effectively be incurred in the foreseeable future. INTANGIBLE ASSETS Intangible assets are recorded at historical cost and amortized over their estimated useful lives using the straight-line method between three and five years. PROPERTY, PLANT AND EQUIPMENT Land and buildings, plant and equipment, and office furniture and equipment are recorded at historical cost, including ancillary expenses. Depreciation is provided on buildings, plant and equipment and office furniture and equipment, at the following rates calculated to amortize the cost of the assets over their estimated useful lives, using the straight-line method. 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 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 F-42 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) retirement benefits as incurred, on the assumption that the amount of the premium constitutes an appropriate measure of the economic cost of pension obligations for the period. RESEARCH & DEVELOPMENT It is Europay's policy to expense the costs of research and development, such as chip card research and development, in the year in which they are incurred. 5. INTANGIBLE ASSETS
CONCESSIONS, SOFTWARE AND PATENTS, KNOW-HOW LICENSES, ETC. ------------ -------------- ACQUISITION COST As at December 31, 1999 (unaudited)......................... 17,560 1,823 Movements during the period: Acquisitions, including fixed assets, own production...... 9,823 -- Contribution to joint venture............................. (269) -- ------ ----- As at December 31, 2000..................................... 27,114 1,823 ------ ----- ACCUMULATED AMORTIZATION AND AMOUNTS WRITTEN DOWN As at December 31, 1999 (unaudited)......................... 15,001 1,823 Movements during the period: Amortization expense...................................... 3,288 -- ------ ----- As at December 31, 2000..................................... 18,289 1,823 ------ ----- NET CARRYING VALUE AT DECEMBER 31, 2000..................... 8,825 -- ====== =====
Europay capitalized work completed on the EMV (Europay, MasterCard, Visa) integrated circuit card, terminal and card application specifications for payment systems and related documents as intellectual property for estimated costs of E269 and E860 in 2000 and 1998, respectively, and in doing so recognized income for the same amounts, which is included in the 2000 and 1998 Consolidated Statements of Income under capitalization of intangible asset. The EMV intangible assets have been contributed in their entirety as part of a capital contribution to a joint venture as described in Note 7 below. Starting in 1999 and continuing in 2000 Europay put in place systems and procedures in order to assess the criteria in respect of capitalization of internally developed software, which resulted in the effective capitalization of costs incurred as of January 1, 2000. Accordingly, eligible direct internal and external costs related to the application development and testing stages are capitalized and, upon completion of the project, are amortized using the straight-line method over a three year estimated useful life. Capitalized software amounting to E1,192 and related amortization expense of E9 should have been recognized in the consolidated accounts for the year ended December 31, 1999. Under Belgian GAAP it is not permitted to restate opening retained earnings or to account for this non-capitalization in the following year. Europay capitalized internally developed software amounting to E7,553 in the year ended December 31, 2000. Amortization expense related to this capitalized software amounted to E602 in 2000. F-43 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) 6. FIXED ASSETS
LAND COMPUTER FURNITURE OTHER ASSETS AND EQUIPMENT & AND TANGIBLE UNDER BUILDINGS INSTALLATIONS VEHICLES ASSETS CONSTRUCTION TOTAL --------- ------------- --------- -------- ------------ ------ ACQUISITION COST As at December 31, 1999 (unaudited)........................ 30,060 23,666 4,034 7,340 3,136 68,236 Movements during the period: Acquisitions, including fixed assets, own construction........ 7,039 4,962 907 852 1 13,761 Sales and disposals................ -- (611) (717) -- -- (1,328) Transfers.......................... 2,655 -- -- -- (2,655) -- ------ ------ ----- ----- ------ ------ As at December 31, 2000.............. 39,754 28,017 4,224 8,192 482 80,669 ------ ------ ----- ----- ------ ------ ACCUMULATED DEPRECIATION AND AMOUNTS WRITTEN DOWN As at December 31, 1999 (unaudited)........................ 13,082 17,796 2,435 5,847 -- 39,160 Movements during the period: Expense............................ 2,907 4,038 612 298 -- 7,855 Written down after sales and disposals....................... -- (206) (273) -- -- (479) ------ ------ ----- ----- ------ ------ As at December 31, 2000.............. 15,989 21,628 2,774 6,145 -- 46,536 ------ ------ ----- ----- ------ ------ NET CARRYING VALUE AT DECEMBER 31, 2000............................... 23,765 6,389 1,450 2,047 482 34,133 ====== ====== ===== ===== ====== ======
In July 1999 Europay sold a building, which it formerly occupied, for a sales price of E3,718. Europay realized a loss of E124 on the sale. In 1998, based on an independent valuation made of the building in July 1998 Europay recorded an impairment of E3,063 to reflect a permanent diminution in value. In 1998 Europay began a process of expanding and renovating its Waterloo premises in order to accommodate current and future organizational and operational requirements. Assets under construction in relation to this effort amounting to E482 and E3,136 are included in the Consolidated Balance Sheets at December 31, 2000 and 1999, respectively. During 2000 assets under construction amounting to E2,655 were put into use and as such transferred to buildings. Europay rents network computer equipment required for network operations under an operating lease agreement. The value of the computer equipment rented under this lease agreement totaled E24,313 and E20,878 at December 31, 2000 and 1999, respectively. Rent expense related to this lease amounted to E4,717, E5,231 and E5,868 in 2000, 1999 and 1998, respectively. During 1999 and 1998 Europay rented personal computer equipment required for its activities under operating lease agreements. Rent expense related to these lease agreements amounted to E1,717 and E2,064 in 1999 and 1998, respectively. In December 1999 Europay bought out the operating lease agreements. Under the terms of the transaction Europay acquired personal computer equipment at a cost of E632 and incurred a cancellation fee of E2,169, which was expensed. Europay provides cars to certain levels of management under 4 year operating lease agreements. Total expense related to these lease agreements, including insurance, fuel and maintenance, amounted to E2,634, E2,185 and E2,055 in 2000, 1999 and 1998, respectively. Europay also rents office buildings and equipment under operating lease agreements. Total rents related to these lease agreements amounted to E4,774, E5,614 and E5,038 in 2000, 1999 and 1998, respectively. F-44 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) Future scheduled operating lease payments are summarized below. Computer equipment includes lease payments plus related computer hardware and software maintenance and service contract costs.
OFFICE COMPUTER BUILDINGS & YEAR EQUIPMENT AUTOMOBILES EQUIPMENT TOTAL - ---- --------- ----------- ----------- ------ 2001.................................... 11,710 1,816 1,530 15,056 2002.................................... 9,189 1,325 1,526 12,040 2003.................................... 7,350 791 1,526 9,667 2004.................................... -- 243 1,331 1,574 2005 & after............................ -- -- 4,529 4,529 ------ ----- ------ ------ Total......................... 28,249 4,175 10,442 42,866 ====== ===== ====== ======
In 2000 and 1999 Europay concluded a physical observation of fixed assets and reconciled the results to its books of account. Adjustments were made in order to equate the books of account to the physical observation. As a result of these adjustments Europay recognized net losses of E295 and E394 in 2000 and 1999, respectively, which are included in fixed asset disposals. 7. FINANCIAL ASSETS
ENTERPRISES ACCOUNTED FOR USING THE EQUITY METHOD OTHER TOTAL ----------- ------ ------ 1. INVESTMENTS IN AFFILIATES ACQUISITION COST As of December 31, 1999 (unaudited)......................... 1,136 -- 1,136 Movements during the period: Acquisitions................................................ 274 -- 274 Translation differences..................................... 230 -- 230 ----- ------ ------ As at December 31, 2000..................................... 1,640 -- 1,640 ----- ------ ------ AMOUNTS WRITTEN DOWN As at December 31, 1999 (unaudited)......................... 184 -- 184 Movements during the period: Reversal of prior loss provisions........................... (184) -- (184) ----- ------ ------ As at December 31, 2000..................................... -- -- -- ----- ------ ------ MOVEMENTS IN THE CAPITAL AND RESERVES OF THE ENTERPRISES Share in the result for the financial period................ (158) -- (158) Other movements in the capital and reserves................. 389 -- 389 ----- ------ ------ Total Movements............................................. 231 -- 231 ----- ------ ------ NET CARRYING VALUE AT DECEMBER 31, 2000..................... 1,871 -- 1,871 ----- ------ ------
F-45 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS)
ENTERPRISES ACCOUNTED FOR USING THE EQUITY METHOD OTHER TOTAL ----------- ------ ------ 2. SECURITY DEPOSIT NET CARRYING VALUE AT THE END OF THE YEAR As at December 31, 1999 (unaudited)......................... -- 1,186 1,186 Movements during the period: Reimbursements.............................................. -- (1,028) (1,028) ----- ------ ------ As at December 31, 2000..................................... -- 158 158 ----- ------ ------ TOTAL....................................................... 1,871 158 2,029 ===== ====== ======
In 1999 Europay assigned the rights to intellectual property described in Note 5 to EMVCo, LLC ("EMVCo"), a Delaware (U.S.) limited liability company. EMVCo was established as a joint venture under equal ownership by Europay, MasterCard and Visa to manage, maintain and enhance the EMV Integrated Circuit Card Specifications for Payment Systems as technology advances and the implementation of chip card programs become more prevalent. This assignment, amounting to the full E860 value of the intellectual property and a cash payment of E92, represents Europay's capital contribution for its one-third interest in EMVCo. In 2000 Europay's interest in EMVCo was increased by the contribution of additional intellectual property valued at E269 (see also Note 5). The full capital contribution is accounted for as an investment in EMVCo on an equity basis. Europay also has a 50% interest in a joint venture company, Maestro International Incorporated. ("Maestro"), of which the remaining 50% interest is held by MasterCard. At December 31, 1999 the net value of the investment in the joint venture was nil as the original investment of E184 was fully offset by loss provisions from previous years. In 2000 Europay reversed the loss provision of E184 and recognized a consolidation adjustment of E383 for the equity share of Maestro's undistributed 1999 net earnings. The reversal of the provision resulted from a change in the joint venture's profitability. Furthermore, the E383 income from the joint venture was recognized subsequent to 1999 or the period earned, and is reflected in the following required disclosure of consolidation differences: Net carrying value at December 31, 1999 (unaudited)......... -- Movements during the period: Adjustments as described above............................ 383 --- Net carrying value at December 31, 2000..................... 383 ===
The Consolidated Balance Sheets include receivables from Maestro of E345 and E890 and payables to Maestro of E1,874 and E1,513 at December 31, 2000 and 1999, respectively. The income statements include amounts of E4,878, E4,128 and E3,978 representing Europay's share of the net costs incurred by Maestro in 2000, 1999 and 1998, respectively. F-46 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) 8. CONSOLIDATED RESERVES
AT DECEMBER 31, --------------------- 2000 1999 ------ ----------- (UNAUDITED) Consolidated reserves at beginning of year.................. 14,375 6,734 Movements during the period: Net income attributable to the Group...................... 9,253 7,641 ------ ------ Consolidated reserves at end of year........................ 23,628 14,375 ====== ======
9. OTHER AMOUNTS RECEIVABLE Other amounts receivable consists of the following.
AT DECEMBER 31, ----------------------- 2000 1999 ------ ------------- (UNAUDITED) Recoverable VAT............................................. 5,282 12,647 Settlement accounts receivable.............................. 39,303 -- Income tax refund receivable................................ 1,314 245 Other....................................................... 720 566 ------ ------ Total other amounts receivable.................... 46,619 13,458 ====== ======
At December 31, 1999 Europay had recoverable value added tax, or VAT, for the third and fourth quarters of 1999, whereas at December 31, 2000 only the recoverable VAT for the fourth quarter of 2000 was receivable. In 2000 a same day settlement service called "Euro D0" for euro-currency transactions was implemented. This new service results in settlement receivables and payables arising from the two-day delay in the settlement of issued and acquired transactions between euro-currency members that settle on a same-day basis and non-euro currency members that settle two days later. See Note 14 for Euro D0 settlement payables. 10. INVESTMENTS AND DEPOSITS Europay had a short-term deposit at December 31, 1999 of E6,951 ($7,000) at 5.35% that matured on January 4, 2000. The E1,852 investment at December 31, 2000 consists of foreign currency option premiums paid to cover future cash flows denominated in U.S. dollars. Option premium payments are recorded as short-term investments whereas option premiums received are recorded as deferred income. At December 31, 2000 Europay made a loss provision for E583 on a written option for the difference between the strike price of the option and the closing U.S. dollar exchange rate. This loss provision is included in provisions for liabilities and charges in the Consolidated Balance Sheet at December 31, 2000 and in net other financial income/(expense) in the Consolidated Statement of Income for the year then ended. In January 1999 Europay bought a 12-month forward exchange contract for the purchase of U.S. dollars, which matured in December 1999. A gain of E5,509 realized on this contract is included in net other financial income/(expense) in the Consolidated Statement of Income for the year ended December 31, 1999. F-47 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) The notional and estimated fair values of the outstanding derivative contracts at December 31, 2000 and 1999 are as follows:
AT DECEMBER 31, 2000 AT DECEMBER 31, 1999 ---------------------- ---------------------- NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE -------- ---------- -------- ---------- (UNAUDITED) 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................................... -- -- -- --
11. CASH AT BANK AND IN HAND AND BANK OVERDRAFTS Cash at bank and in hand consists of the following:
AT DECEMBER 31, ---------------------- 2000 1999 ------- ----------- (UNAUDITED) Cash........................................................ 73,234 8,381 Member security deposits.................................... 38,883 24,863 ------- ------ Total cash at bank and on hand.................... 112,117 33,244 ======= ======
Cash includes E47,210 of cash on Europay's settlement bank accounts from Euro D0 (described in Note 9 above) and other new settlement service operations that commenced in 2000. Europay requires and holds security deposits from certain members in order to ensure proper settlement of their transactions. The deposits are in euros or U.S. dollars and are placed on-call at market interest rates. At December 31, 2000 the applicable interest rates were 4.33% on euro deposits and 5.99% on U.S. dollar deposits. These amounts are fully offset by corresponding liabilities included in other amounts payable in the Consolidated Balance Sheets (see Note 14). The 1999 to 2000 increase is primarily due to the addition of new members in Eastern Europe. The bank overdrafts consist of the following:
AT DECEMBER 31, --------------------- 2000 1999 ------ ----------- (UNAUDITED) Overdraft on corporate bank accounts........................ 2 737 Overdraft on settlement bank accounts....................... 37,787 -- ------ --- Total bank overdrafts............................. 37,789 737 ====== ===
The overdraft on settlement bank accounts is due to Euro D0 (described in Note 9 above) and other new settlement service operations that commenced in 2000. Overdrafts on corporate bank accounts are subject to an interest rate of the Euro OverNight Index Average (Eonia) + 0.5% p.a. F-48 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) 12. MINORITY INTEREST MasterCard has a 15% shareholding in European Payment Systems Services ("EPSS"), Europay's transaction processing subsidiary, for which a minority interest in Europay is determined as follows:
AT DECEMBER 31, -------------------- 2000 1999 ----- ----------- (UNAUDITED) 15% interest in the capital of EPSS......................... 1,562 1,562 Minority share in the profits of EPSS Accumulated results....................................... 804 550 Result for the year....................................... 253 254 ----- ----- Total minority interest........................... 2,619 2,366 ===== =====
13. CREDIT LINES Europay has credit lines available amounting to E35,000 at December 31, 2000 (E24,789 at December 31, 1999) with the following interest rate conditions, which are based on the Euro Interbank Offered Rate (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%
Europay had no borrowings on these credit lines at December 31, 2000. 14. OTHER AMOUNTS PAYABLE Other amounts payable consists of the following.
AT DECEMBER 31, --------------------- 2000 1999 ------ ----------- (UNAUDITED) Settlement accounts payable, see Note 9..................... 47,577 -- Liability for member security deposits, see Note 11......... 38,883 24,863 Loans from members, see Note 15............................. 2,533 -- Other....................................................... 756 446 ------ ------ Total other amounts payable....................... 89,749 25,309 ====== ======
15. LONG TERM LIABILITIES At December 31, 1999 Europay had long-term loans outstanding from members amounting to E2,533 which are interest free with no fixed repayment date. Europay will repay these loans in 2001; consequently, the loans have been reclassified as current and are included in other amounts payable in the Consolidated Balance Sheet at December 31, 2000 (see Note 14). The balance of E244 at December 31, 2000 represents an invoice for a sponsorship campaign that is payable in 2002. F-49 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) 16. COMMITMENTS In addition to the future lease payments summarized in Note 6, Europay has entered into other contractual obligations, which are estimated to be payable in the following years:
YEAR SPONSORSHIP OTHER TOTAL - ---- ----------- ----- ------ 2001................................................... 18,147 1,703 19,850 2002................................................... 20,426 -- 20,426 2003................................................... 10,907 -- 10,907 ------ ----- ------ Total........................................ 49,480 1,703 51,183 ====== ===== ======
17. AVERAGE NUMBER OF PERSONS EMPLOYED AND PERSONNEL CHARGES
YEARS ENDED DECEMBER 31, ------------------------------------ 2000 1999 1998 ------ ----------- ----------- (UNAUDITED) (UNAUDITED) PERSONNEL BY CATEGORY Employees.......................................... 560 526 466 Management personnel............................... 8 8 7 ------ ------ ------ Average number of persons employed............... 568 534 473 ====== ====== ====== REMUNERATION, SOCIAL SECURITY AND PENSIONS......... 58,902 50,741 41,017 ====== ====== ======
Management personnel consist of the directors of Europay and all other staff are included in the employees category. In 2000 Europay provided E1,479 for obligations arising from severance agreements with employees, of which E127 is included in operating expenses and E1,353 is included in extraordinary income/(charges) in the Consolidated Statement of Income for the year ended December 31, 2000. The liability for these obligations is included as part of the provisions for liabilities and charges in the Consolidated Balance Sheet at December 31, 2000. 18. TAXATION The reconciliation of the 2000, 1999 and 1998 income tax charges compared to the statutory rate of 40.17% is as follows:
YEARS ENDED DECEMBER 31, ------------------------------------ 2000 1999 1998 ------ ----------- ----------- (UNAUDITED) (UNAUDITED) Consolidated profit for year before taxation....... 17,111 14,616 2,035 ====== ====== ===== Taxes at statutory rate of 40.17%.................. 6,873 5,871 817 Adjusted for the tax effect of: Disallowed expenses.............................. 656 735 940 Penalties for insufficient tax prepayments....... 1 115 -- Non-taxable reversal of investment loss provision..................................... (74) -- -- Non-taxable loss in consolidated subsidiary...... 5 -- -- Tax adjustments.................................. (13) -- 53 Tax surplus for prior years...................... (1) -- (63) ------ ------ ----- Tax charge for the year............................ 7,447 6,721 1,747 ====== ====== ===== Effective tax rate................................. 43.5% 46.0% 85.8% ====== ====== =====
F-50 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) Included in the consolidated tax charge for the year ended December 31, 2000 is deferred tax amounting to E2,792 related to the capitalization of internally developed software, net of related amortization expense for the year. 19. ALLIANCE AGREEMENT WITH MASTERCARD INTERNATIONAL INCORPORATED On November 14, 1996, Europay entered into an Alliance Agreement with MasterCard pursuant to which Europay has been granted exclusive licensing rights for the MasterCard brand in Europe and is responsible for the overall management of the MasterCard brand within the European region. In accordance with this agreement: (a) Europay took over from MasterCard the billing of European members for inter-regional credit program and service transactions as from January 1, 1998 and for inter-regional debit program and service transactions as from January 1, 1999. The Consolidated Statements of Income include revenues generated from these transactions amounting to E126,606, E111,925 and E74,186 in 2000, 1999 and 1998, respectively. (b) Europay is responsible for funding MasterCard's Europe region costs plus an agreed profit margin. Total MasterCard Europe region charges of E103,868, E83,172 and E65,099 in 2000, 1999 and 1998, respectively, are included in services and other goods. (c) European members were required to migrate to a new Eurocard/MasterCard acceptance brand over the three-year period from 1997 to 1999, and MasterCard compensated the European members for their brand migration efforts through a Country Migration Fund over the same time period. Europay incurred E4,558 and E7,557 in advertising and marketing costs related to European members' brand migration activities in 1999 and 1998, respectively. These costs are included in services and other goods in the Consolidated Statements of Income. Europay re-billed MasterCard and recorded related revenues for the full amount of these costs. These revenues, as well as other revenues and income received from MasterCard are included in the Consolidated Statements of Income as follows:
YEARS ENDED DECEMBER 31, ---------------------------------- 2000 1999 1998 ---- ----------- ----------- (UNAUDITED) (UNAUDITED) Revenue Country Migration Fund.............................. -- 4,558 7,557 MasterCard Strategy Fund............................ -- 5 2,135 --- ----- ------ Total revenue from MasterCard............... -- 4,563 9,692 --- ----- ------ Other operating income Debit switch cost sharing........................... -- -- 4,544 Chip program cost sharing........................... -- -- 1,847 Marketing funds..................................... -- -- 1,480 Office rent and services............................ 245 118 118 --- ----- ------ Total other operating income from MasterCard................................ 245 118 7,989 --- ----- ------ Total............................................... 245 4,681 17,681 === ===== ======
The Consolidated Balance Sheets include receivables from MasterCard of E2,401 and E4,284 and payables to MasterCard of E11,955 and E4,194 at December 31, 2000 and 1999, respectively. F-51 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) 20. SUBSEQUENT EVENT, 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"). The integration is conditioned upon the merger of MasterCard International with a subsidiary of MasterCard Incorporated and the exchange of existing principal and association memberships in MasterCard International for new class A membership interests in MasterCard International and shares of class A and class B common stock of MasterCard Incorporated (the "conversion"), the approval of Europay's shareholders, and other customary closing conditions. Upon completion of the conversion and integration, the European principal members of MasterCard International will own 33 1/3% of the outstanding capital stock of MasterCard Incorporated and the non-European members will own 66 2/3%. Following the completion of the conversion and integration, the Alliance Agreement between Europay and MasterCard described in Note 19 above will be terminated. As of May 22, 2001 the conversion and integration have not occurred. 21. SUBSEQUENT EVENT, TAX NOTICE In April 1999 the Belgian tax authorities initiated an investigation of Europay's tax returns for 1997 and 1998. In June 2001, Europay received a notice from the Belgian tax authorities challenging Europay's deduction of certain card-based incentive program costs totaling E10.4 million in 1997 and E13.4 million in 1998. The aggregate tax liability claimed in the notice approximates E16.3 million, including possible penalties and interest accrued to December 31, 2000. Based on the methodology and assertions used by the Belgian tax authorities in determining the possible tax liability for 1997 and 1998, Europay has estimated the possible impact for 1999 and 2000 to be a further additional tax liability of up to approximately E9.5 million, including possible penalties. Interest will accrue on any additional amounts to be paid at a per annum rate of 7% until settlement. Interest on additional amounts will begin to accrue on July 1 of the second fiscal year following the fiscal year in which the deduction to which the additional amount relates was made. Europay believes that it has reasonable and meritorious arguments in favor of its characterization of these deductions and has submitted a vigorous response to the notice. In the event that Europay is unsuccessful in appealing the findings of the Belgian tax authorities in their investigation, under certain circumstances MasterCard International could, under its bylaws, levy an assessment upon its European members for the additional tax liability to the extent that it, together with other losses and liabilities arising out of the representations and warranties of Europay in the draft integration agreement, exceeds $7 million in the aggregate. Europay cannot predict the outcome of this matter or any additional matters that may be raised by the Belgian tax authorities. Europay believes that it is not currently possible to estimate the impact, if any, that the ultimate resolution of these matters will have on its financial position or results of operations. 22. SUMMARY OF DIFFERENCES BETWEEN BELGIUM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES The accompanying consolidated financial statements have been prepared in accordance with Belgian GAAP, which differ in certain material respects from accounting principles generally accepted in the United States of America ("U.S. GAAP"). These differences involve methods for measuring the amounts shown in the financial statements, as well as additional disclosures required by U.S. GAAP. F-52 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) U.S. GAAP RECONCILING ITEMS TO CONSOLIDATED NET INCOME AND TOTAL SHAREHOLDERS' EQUITY. The following is a summary of the material adjustments to profit on ordinary activities after taxation and shareholders' equity that would have been required in applying the significant differences between Belgian and U.S. GAAP. RECONCILIATION OF CONSOLIDATED PROFIT AND LOSS ACCOUNTS (IN E THOUSANDS EXCEPT EARNINGS PER SHARE)
YEARS ENDED DECEMBER 31, ------------------------------ NOTES 2000 1999 ----- ------ ----------- (UNAUDITED) Profit on ordinary activities after taxation as reported under Belgian GAAP........................................ 9,253 7,641 U.S. GAAP adjustments: Pensions.................................................. (a) (558) 328 Capitalization of borrowing costs, net.................... (c) (35) (64) Depreciation of fixed assets.............................. (d) 508 577 Internally developed software costs, net.................. (e) (227) 1,183 Financial instruments..................................... (f) (1,600) -- Leases, net............................................... (g) 691 (418) Capitalization of intangible assets....................... (h) 513 -- Financial assets.......................................... (i) 255 (56) Licensing fee revenue recognition......................... (j) (845) -- ------ ----- Net U.S. GAAP adjustments before deferred taxes............. (1,298) 1,550 Deferred taxes: effects of differences in methodology and adjustments............................................ (b) 802 (645) ------ ----- Net income under U.S. GAAP before cumulative effect of change in accounting principle......................... 8,757 8,546 Cumulative effect of change in accounting principle, net of tax................................................. (j) (3,100) -- ------ ----- Net income under U.S. GAAP.................................. 5,657 8,546 ====== ===== Earnings per share in accordance with U.S. GAAP:............ (k) Basic and diluted......................................... 57 85 Weighted average number of shares outstanding (in thousands of shares): Basic and diluted......................................... 100 100 Net income per U.S. GAAP.................................... 5,657 8,546 Other Comprehensive income, net of tax: Translation adjustment.................................... 15 -- ------ ----- Total other comprehensive income.......................... 15 -- ------ ----- Comprehensive income under U.S. GAAP........................ (l) 5,672 8,546 ====== =====
F-53 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) RECONCILIATION OF CONSOLIDATED SHAREHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, --------------------- NOTES 2000 1999 ----- ------ ----------- (UNAUDITED) Total shareholders' equity reported under Belgian GAAP...... 41,857 31,986 U.S. GAAP adjustments: Pensions.................................................. (a) 297 855 Deferred taxes............................................ (b) (4,696) (5,498) Capitalization of borrowing costs, net.................... (c) 2,414 2,449 Depreciation of fixed assets.............................. (d) 6,568 6,060 Internally developed software costs, net.................. (e) 956 1,183 Financial instruments..................................... (f) (1,600) -- Leases, net............................................... (g) 3,830 3,139 Capitalization of intangible assets....................... (h) (567) (860) Financial assets.......................................... (i) (184) (56) Licensing fee revenue recognition......................... (j) (845) -- ------ ------ Net U.S. GAAP adjustments before cumulative effect of change in accounting principle................................... 6,173 7,272 ------ ------ Shareholders' equity under U.S. GAAP before cumulative effect of change in accounting principle.................. 48,030 39,258 Cumulative effect of change in accounting principle, net of tax....................................................... (j) (3,100) -- ------ ------ Shareholders' equity under U.S. GAAP........................ 44,930 39,258 ====== ======
MOVEMENTS IN SHAREHOLDERS' EQUITY IN ACCORDANCE WITH U.S. GAAP
YEARS ENDED DECEMBER 31, --------------------- 2000 1999 ------ ----------- (UNAUDITED) Balance, beginning of year.................................. 39,258 30,712 Net income.................................................. 5,657 8,546 Other comprehensive income.................................. 15 -- ------ ------ Balance, end of year........................................ 44,930 39,258 ====== ======
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-54 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, -------------------- 2000 1999 ----- ----------- (UNAUDITED) Service cost................................................ 1,963 1,675 Interest cost............................................... 482 404 Expected return on plan assets.............................. (551) (437) Amortization of transition obligation....................... 117 117 Amortization of net (gain)/loss............................. (179) (150) Amortization of prior service cost.......................... 92 92 ----- ----- Net periodic benefit cost................................... 1,924 1,701 ===== =====
Changes in the projected benefit obligation and plan assets during the year were as follows: CHANGES IN PROJECTED BENEFIT OBLIGATION
YEARS ENDED DECEMBER 31, --------------------- 2000 1999 ------ ----------- (UNAUDITED) Benefit obligation at beginning of year..................... 9,228 8,487 Service cost................................................ 1,963 1,675 Interest cost............................................... 482 404 Actuarial (gains)/losses.................................... 205 (206) Benefits paid............................................... (964) (1,132) ------ ------ Benefits obligation at end of year.......................... 10,914 9,228 ====== ======
F-55 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) CHANGES IN PLAN ASSETS
YEARS ENDED DECEMBER 31, --------------------- 2000 1999 ------ ----------- (UNAUDITED) Fair value of plan assets at beginning year................. 10,437 8,761 Actual return on plan assets................................ 758 779 Employer contributions...................................... 1,366 2,029 Benefits paid............................................... (964) (1,132) ------ ------ Fair value of plan assets, end of year...................... 11,597 10,437 ====== ======
The funded status under U.S. GAAP for Europay's defined benefit pension plan is as follows: FUNDED STATUS
YEARS ENDED DECEMBER 31, ------------------------ 2000 1999 -------- ------------ (UNAUDITED) Fair value of plan assets................................... 11,597 10,437 Projected benefit obligation................................ (10,914) (9,228) ------- ------ Funded status............................................... 683 1,209 Unrecognized net actuarial (gain) loss...................... (2,342) (2,518) Unrecognized prior service cost............................. 510 601 Unrecognized transition amount.............................. 1,446 1,563 ------- ------ Prepaid (accrued) benefit cost.............................. 297 855 ======= ======
The weighted-average assumptions used to determine pension cost for Europay's defined benefit pension plan were as follows:
YEARS ENDED DECEMBER 31, ------------------- 2000 1999 ---- ----------- (UNAUDITED) Discount rate............................................... 5.50% 5.00% Expected rate of return of plan assets: on financing funds..................................................... 5.50% 5.00% Expected rate of return of plan assets: on mathematical reserves.................................................. 4.75% 4.75% Expected rate of compensation increase...................... 4.50% 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. F-56 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) (c) Capitalization of Borrowing Costs Under Belgian GAAP, an entity may choose between capitalizing or not capitalizing interest on specific borrowings to finance the construction of individual qualifying assets. Europay does not capitalize interest cost as part of the historical cost of its qualifying construction projects. Under U.S. GAAP, interest recognized on borrowings and other obligations must be capitalized for assets that are produced under a discrete project and require a substantial period of time to get ready for their intended use or sale. The amount of interest eligible for capitalization is determined as either the actual cost incurred on a specific borrowing or the weighted average of the rates applicable for all the general borrowings outstanding during the period. The total amount of interest cost capitalized in each period is limited to the total amount of interest cost incurred in that period. The adjustment to net income under U.S. GAAP reflects the decrease in interest expense for the period as well as the increase in depreciation expense on the constructed assets. The adjustment to shareholders' equity under U.S. GAAP reflects the amount of interest capitalized on constructed assets, net of depreciation. (d) Depreciation of Fixed Assets Under Belgian GAAP, Europay depreciates its fixed assets for a full year in the year of acquisition under the straight-line basis. Further, Europay may depreciate an asset during the period of its construction or development regardless of whether the asset is substantially ready for its intended use. Prior to 1999 Europay depreciated assets during the period of construction regardless of when the asset was substantially ready for its intended use. Under U.S. GAAP, fixed assets are depreciated from the date of acquisition on a straight-line basis. Constructed assets are depreciated on a straight-line basis when substantially complete. For purposes of the U.S. GAAP reconciliation, Europay has applied the half-year convention method whereby a half-year of depreciation is taken in the year of acquisition and in the year of disposal. Additionally, 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-57 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) The 1999 addition to net income and shareholders' equity under U.S. GAAP reflects the excess of capitalized internal software development costs over the related amortization expense (see Note 5). This excess was due to the fact that nearly all of the capitalized internally developed software was in progress at the end of 1999 and was not completed and placed in service until 2000. (f) Financial Instruments Under Belgian GAAP, premiums paid and received on option contracts intended to reduce (hedge) foreign exchange risk on future U.S. dollar payments are deferred. Option contracts that do not qualify as risk reducing (non-hedge) are accounted for using the lower of cost or market approach. Under U.S. GAAP, gains and losses related to derivative instruments that satisfy the criteria for hedge accounting are recognized in the same period as gains and losses on the hedged item. Upon termination of the derivative, any gains and losses are deferred and amortized to profit and loss over the remaining life of the hedged item. Derivatives that do not qualify for hedge accounting are recorded on the balance sheet at fair value with gains and losses immediately included in earnings. The adjustment to net income under U.S. GAAP reflects the fact that certain contracts accounted for by Europay as hedges do not meet the criteria for hedge accounting under U.S. GAAP. In addition, premiums paid for hedge contracts are carried at cost by Europay, whereas they are amortized over the life of the derivative contract under U.S. GAAP. (g) Leases Under Belgian GAAP, a capital lease is deemed to exist when the sum of the minimum lease payments is equal to or greater than the lessor's investment in the leased asset, including related interest and other transaction costs. Under U.S. GAAP, a capital lease is deemed to exist when any of the following criteria are met: - The present value of the minimum lease payments is 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. (h) Capitalization of Intangible Assets Europay recognized the initial contributions to a joint venture at fair value of the assets contributed. As such, any contribution of "know-how" is recognized at fair value by both Europay and the joint venture. Further, Europay recognizes its proportionate share of expenses associated with the amortization of "know-how" recorded by the joint venture. See Note 5 for additional information. Under U.S. GAAP, initial contributions to a joint venture should generally be recorded at cost, i.e., the amount of cash contributed or net book value of non-cash assets contributed. F-58 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 7 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 recognised immediately upon invoicing of customers. Under U.S. GAAP, licensing fees are earned as services are delivered and performed over the term of the arrangement or the expected period of performance and generally should be deferred and 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 the U.S. federal securities laws. Basic EPS is calculated as profit available to common shareholders, divided by the weighted average number of shares in issue during the period. To calculate diluted EPS, earnings are adjusted for the after-tax amount of dividends and interest recognized in the period in respect of the dilutive potential 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. F-59 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) Revenue Recognition Under Belgian GAAP, revenue earned and related cost of sales incurred while acting as an agent may be presented on a gross basis in the statement of income. Under U.S. GAAP, revenue and related cost of sales should be presented gross if Europay acts as a principal in the transactions and has the risk and rewards of ownership. Europay acts as an agent on behalf of MasterCard International for the billing and collection of inter-regional transactions with members. Europay does not bear the risk and rewards of ownership related to these transactions and therefore revenue and related costs should be reported net under U.S. GAAP. The impact would be a reduction in revenue of E126,606 and E111,925, net of a reduction in MasterCard costs included in services and other goods of E103,868 and E83,172 for the years ended December 31, 2000 and 1999, respectively. Extraordinary Items Items classified as extraordinary under Belgian GAAP do not meet the definition of "extraordinary" under U.S. GAAP and, accordingly, are classified as operating expenses under U.S. GAAP. Cash Flow Information Under Belgian GAAP, a presentation of cash flows is considered voluntary. The statement of cash flows presented in the financial statements has been prepared in accordance with IAS 7. This presentation is acceptable under Belgian GAAP. Under U.S. GAAP a statement of cash flows is required to be present in accordance with SFAS No. 95. Interest paid and received and dividends received are shown as operating activity cash flows, while dividends paid are shown as financing cash flows. A summary of Europay's operating, investing and financing activities, classified in accordance with U.S. GAAP is as follows:
YEAR ENDED DECEMBER 31, ------------------------ 2000 1999 -------- ------------ (UNAUDITED) Net cash provided by operating activities................... 65,234 49,216 Net cash provided by (used in) investing activities......... (22,321) (21,720) Net cash provided by (used in) financing activities......... 35,960 (19,940) ------- ------- Net increase in cash and cash equivalents................... 78,873 7,556 Cash and cash equivalents under U.S. GAAP, beginning of year...................................................... 33,244 25,688 ------- ------- Cash and cash equivalents under U.S. GAAP, end of year...... 112,117 33,244 ======= =======
Recently Issued Accounting Standards United States In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." Europay has reviewed the effect of the implementation of SFAS 133, as amended by SFAS 138 and related implementation guidance. This statement requires Europay to recognize all derivatives in the consolidated balance sheet measuring these derivatives at fair value. The recognition of the change in the fair value of a derivative depends on a number of factors, including the intended use of the derivative and the extent to which it is effective as part of a hedge transaction. SFAS 133 F-60 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN E THOUSANDS) is effective for Europay for the fiscal year commencing January 1, 2001. Europay intends to continue to pursue hedge accounting under SFAS 133. Europay estimates that it will record a net-of-tax cumulative-effect-type adjustment of E548 (loss) in earnings to recognize at fair value all derivative instruments that will be designated as cash flow hedging instruments upon adoption of SFAS 133. F-61 EUROPAY INTERNATIONAL S.A. UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF JUNE 30, 2001 AND DECEMBER 31, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000 F-62 EUROPAY INTERNATIONAL S.A. CONSOLIDATED INTERIM BALANCE SHEETS (IN E THOUSANDS)
AS OF --------------------------- JUNE 30, DECEMBER 31, NOTES 2001 2000 ----- ----------- ------------ (UNAUDITED) ASSETS NON CURRENT ASSETS Intangible assets........................................... 2 11,534 8,825 Fixed assets................................................ 3 33,387 34,133 Financial assets............................................ 2,027 2,029 ------- ------- Total Non Current Assets.................................. 46,948 44,987 ------- ------- CURRENT ASSETS Amounts receivable within one year Trade debtors............................................. 36,581 45,915 Other amounts receivable.................................. 5 75,636 46,619 ------- ------- Total amounts receivable within one year............... 112,217 92,534 Investments and deposits.................................... 6 7,200 1,852 Cash at bank and in hand.................................... 7 107,944 112,117 Deferred charges and accrued income......................... 2,123 2,679 ------- ------- Total Current Assets...................................... 229,484 209,182 ------- ------- TOTAL ASSETS................................................ 276,432 254,169 ======= ======= CAPITAL AND RESERVES AND LIABILITIES CAPITAL AND RESERVES Issued Capital.............................................. 17,611 17,611 Consolidated reserves....................................... 4 28,272 23,628 Consolidation difference.................................... 383 383 Cumulative translation adjustment........................... 291 235 ------- ------- Total Capital and Reserves................................ 46,557 41,857 ------- ------- MINORITY INTEREST........................................... 2,726 2,619 ------- ------- PROVISION FOR LIABILITIES AND CHARGES....................... 6 1,272 2,301 ------- ------- DEFERRED TAX................................................ 3,857 2,792 ------- ------- CREDITORS Amounts payable within one year Bank overdrafts and loans................................. 7 78,253 37,789 Suppliers................................................. 45,059 63,587 Taxes..................................................... 1,643 2,150 Remuneration and social security.......................... 10 9,249 9,932 Other amounts payable..................................... 8 87,236 89,749 ------- ------- Total amounts payable within one year.................. 221,440 203,207 Accrued charges and deferred income......................... 86 1,149 Amounts payable after one year.............................. 494 244 ------- ------- Total Creditors........................................... 222,020 204,600 ------- ------- TOTAL CAPITAL AND RESERVES AND LIABILITIES.................. 276,432 254,169 ======= =======
The accompanying notes are an integral part of these consolidated interim financial statements. F-63 EUROPAY INTERNATIONAL S.A. CONSOLIDATED INTERIM STATEMENTS OF INCOME (IN E THOUSANDS)
SIX MONTHS ENDED JUNE 30, ------------------ NOTES 2001 2000 ----- ------- ------- (UNAUDITED) OPERATING INCOME Revenue..................................................... 191,095 168,003 Capitalization of intangible assets......................... 2 3,681 4,045 Other operating income...................................... 2,170 1,790 ------- ------- Total operating income.................................... 196,946 173,838 ------- ------- OPERATING EXPENSES Services and other goods.................................... 156,653 135,503 Remuneration, social security and pension costs............. 10 31,310 29,199 Depreciation and amortization expense....................... 2, 3 5,412 4,584 Bad debt expense............................................ 868 -- Other operating expenses.................................... 1,192 1,433 ------- ------- Total operating expenses.................................. 195,435 170,719 ------- ------- OPERATING PROFIT............................................ 1,511 3,119 FINANCIAL INCOME/(EXPENSE) Interest income............................................. 478 342 Net other financial income/(expense)........................ 6 6,978 (748) Interest expense............................................ (1,377) (143) ------- ------- Net financial income/(expense)............................ 6,079 (549) ------- ------- PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION............... 7,590 2,570 EXTRAORDINARY INCOME/(CHARGES) Adjustments to amounts written off financial assets......... -- 184 Net gain/(loss) on disposal of fixed assets................. -- (1) Net use/(establishment) of provisions for liabilities and charges................................................... 447 -- Other extraordinary charges................................. -- (1) ------- ------- Net extraordinary income/(charges)........................ 447 182 ------- ------- PROFIT FOR THE FINANCIAL PERIOD BEFORE TAXATION............. 8,037 2,752 INCOME TAXES................................................ 11 (3,237) (1,417) ------- ------- NET INCOME.................................................. 4,800 1,335 NET INCOME/(LOSS) FROM EQUITY INVESTEES, NET OF TAX......... (49) (415) MINORITY INTEREST, NET OF TAX............................... (107) (210) ------- ------- NET INCOME ATTRIBUTABLE TO THE GROUP........................ 4,644 710 ======= =======
The accompanying notes are an integral part of these consolidated interim financial statements. F-64 EUROPAY INTERNATIONAL S.A. SUPPLEMENTAL DISCLOSURE CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS (IN E THOUSANDS)
SIX MONTHS ENDED JUNE 30, ------------------ 2001 2000 ------- ------- (UNAUDITED) OPERATING ACTIVITIES Profit for the financial period before taxation............. 8,037 2,752 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.................. 5,412 4,584 Net (gain)/loss on disposals of fixed assets........... -- 1 Changes in operating assets and liabilities: Trade debtors.......................................... 9,334 8,490 Other amounts receivable............................... (29,017) 5,216 Deferred charges and accrued income.................... 556 5,703 Security deposits...................................... 9 1,005 Suppliers.............................................. (18,528) (11,701) Taxes paid............................................. (2,679) (395) Remuneration and social security....................... (683) (1,417) Other amounts payable.................................. (2,513) 7,053 Accrued charges and deferred income.................... (1,063) (3,500) Provision for liabilities and charges.................. (1,029) -- ------- ------- Net cash provided by/(used in) operating activities......... (32,164) 17,607 ------- ------- INVESTING ACTIVITIES Acquisitions of intangible assets......................... (786) (372) Capitalization of intangible assets....................... (3,681) (4,045) Acquisitions of fixed assets.............................. (2,919) (4,384) Proceeds from sales of fixed assets....................... 11 6 Investment in affiliates.................................. -- (5) Investment in short-term cash deposit..................... (7,200) (13,000) Proceeds from short-term cash deposit..................... -- 6,951 Proceeds from investment in foreign currency option....... 1,852 -- ------- ------- Net cash used in investing activities....................... (12,723) (14,849) ------- ------- FINANCING ACTIVITIES Net change in bank overdrafts............................. 10,464 (737) Proceeds from short-term bank loan........................ 30,000 -- Net change in amounts payable after one year.............. 250 -- ------- ------- Net cash provided by/(used in) financing activities......... 40,714 (737) ------- ------- Net increase/(decrease) in cash at bank and in hand......... (4,173) 2,021 Cash at bank and in hand at beginning of year............... 112,117 33,244 ------- ------- Cash at bank and in hand at end of year..................... 107,944 35,265 ======= =======
The accompanying notes are an integral part of these consolidated interim financial statements. F-65 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED AND IN E THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated interim financial statements for the six months ended June 30, 2001 should be read in conjunction with the consolidated financial statements of Europay International S.A. ("Europay") for the year ended December 31, 2000. Significant accounting policies disclosed therein have not changed. The consolidated interim financial statements for the six months ended June 30, 2001 and 2000 and as of June 30, 2001 are unaudited but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair statement of Europay's results of operations and financial positions for the periods and dates presented. The results of operations for the six months ended June 30, 2001 and 2000 are not necessarily indicative of the results to be expected for the full years. The year-end balance sheet has been derived from Europay's audited financial statements. 2. INTANGIBLE ASSETS
SOFTWARE CONCESSIONS, AND PATENTS, KNOW-HOW LICENSES, ETC. -------- -------------- ACQUISITION COST As at December 31, 2000..................................... 27,114 1,823 Movements during the period: Acquisitions, including fixed assets, own production...... 4,467 -- ------ ----- As at June 30, 2001......................................... 31,581 1,823 ------ ----- ACCUMULATED AMORTIZATION AND AMOUNTS WRITTEN DOWN As at December 31, 2000..................................... 18,289 1,823 Movements during the period: Amortization expense...................................... 1,758 -- ------ ----- As at June 30, 2001......................................... 20,047 1,823 ------ ----- NET CARRYING VALUE AT JUNE 30, 2001......................... 11,534 -- ====== =====
Europay capitalized internally developed software amounting to E3,681 and recorded E1,030 of amortization expense related to capitalized software in the six months ended June 30, 2001. 3. 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... 551 1,562 133 29 644 2,919 Sales and disposals........... -- -- (32) -- -- (32) ------ ------ ------ ----- ----- ------ As at June 30, 2001............. 40,305 29,579 4,325 8,221 1,126 83,556 ------ ------ ------ ----- ----- ------
F-66 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED AND IN E THOUSANDS)
LAND COMPUTER FURNITURE OTHER ASSETS AND EQUIPMENT & AND TANGIBLE UNDER BUILDINGS INSTALLATIONS VEHICLES ASSETS CONSTRUCTION TOTAL --------- ------------- --------- -------- ------------ ------ 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....................... 1,425 1,787 291 151 -- 3,654 Written down after sales and disposals.................. -- -- (21) -- -- (21) ------ ------ ------ ----- ----- ------ As at June 30, 2001............. 17,414 23,415 3 ,044 6,296 -- 50,169 ------ ------ ------ ----- ----- ------ NET CARRYING VALUE AT JUNE 30, 2001.......................... 22,891 6,164 1,281 1,925 1,126 33,387 ====== ====== ====== ===== ===== ======
4. CONSOLIDATED RESERVES
Consolidated reserves at December 31, 2000.................. 23,628 Movements during the period: Net income attributable to the Group...................... 4,644 ------ Consolidated reserves at June 30, 2001...................... 28,272 ======
5. OTHER AMOUNTS RECEIVABLE Other amounts receivable consists of the following:
AT AT JUNE 30, DECEMBER 31, 2001 2000 -------- ------------ Recoverable VAT............................................. 4,140 5,282 Settlement accounts receivable.............................. 68,520 39,303 Income tax refund receivable................................ 1,500 1,314 Other....................................................... 1,476 720 ------ ------ Total other amounts receivable.................... 75,636 46,619 ====== ======
A same day settlement service called "euro D0" for euro-currency transactions results in settlement receivables and payables arising from the 2-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 7 for a credit line and Note 8 for payables relating to euro D0 settlement operations. 6. INVESTMENTS AND DEPOSITS The E7,200 investment at June 30, 2001 represents a cash deposit from June 29, 2001 to July 2, 2001 at an interest rate of 4.63%. The E1,852 investment at December 31, 2000 consists of foreign currency option premiums paid to hedge 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. These options expired during the six months ended June 30, 2001. F-67 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED AND IN E THOUSANDS) 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. This provision was utilized when the option expired in January 2001. The notional and estimated fair values of the outstanding foreign exchange forward and derivative contracts at June 30, 2001 and December 31, 2000 were as follows:
AT JUNE 30, 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.......................... 33,911 3,396 -- -- Sell U.S. dollar......................... 8,651 769 -- --
7. CASH AT BANK AND IN HAND AND BANK OVERDRAFTS AND LOANS Cash at bank and in hand consists of the following:
AT AT JUNE 30, DECEMBER 31, 2001 2000 -------- ------------ Cash........................................................ 48,938 73,234 Member security deposits.................................... 59,006 38,883 ------- ------- Total cash at bank and on hand.................... 107,944 112,117 ======= =======
Cash includes E46,299 of cash on Europay's settlement bank accounts from Euro D0 (described in Note 5 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 June 30, 2001 the applicable interest rates were 3.25% on euro deposits and 4.08% 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 8). The increase for the six-month period is primarily due to the addition of new members in Eastern Europe. The bank overdrafts and loans consist of the following:
AT AT JUNE 30, DECEMBER 31, 2001 2000 -------- ------------ Overdraft on corporate bank accounts........................ 179 2 Overdraft on settlement bank accounts....................... 48,074 37,787 Fixed term loan............................................. 30,000 -- ------ ------ Total bank overdrafts............................. 78,253 37,789 ====== ======
F-68 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED AND IN E THOUSANDS) 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 June 30, 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 Euribor + 0.125% months :
Europay had no borrowings on this credit line at June 30, 2001 or December 31, 2000. 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 borrowed E30,000 on this credit line on June 29, 2001 for a fixed term to July 29, 2001 at an interest rate of 4.65%. 8. OTHER AMOUNTS PAYABLE Other amounts payable consists of the following:
AT AT JUNE 30, DECEMBER 31, 2001 2000 -------- ------------ Settlement accounts payable, see note 5..................... 27,212 47,577 Liability for member security deposits, see note 7.......... 59,006 38,883 Loans from Members.......................................... -- 2,533 Other....................................................... 1,018 756 ------ ------ Total other amounts payable....................... 87,236 89,749 ====== ======
9. COMMITMENTS Europay has entered into operating lease agreements for computer equipment, automobiles and office buildings and equipment, and a sponsorship agreement for the UEFA European soccer championships. Obligations relating to these contractual obligations are estimated to be payable in the following periods:
SPONSOR- PERIOD LEASES SHIP TOTAL - --------------------------------------------------------- ------ -------- ------ July to December 2001.................................... 7,897 9,559 17,456 Year ending December 31, 2002............................ 13,428 20,264 33,692 Year ending December 31, 2003............................ 10,546 10,706 21,252 Year ending December 31, 2004............................ 2,572 -- 2,572 Year ending December 31, 2005 and after.................. 6,833 -- 6,833 ------ ------ ------ Total.......................................... 41,276 40,529 81,805 ====== ====== ======
10. VARIABLE PAY PROGRAM 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 F-69 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED AND IN E THOUSANDS) 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 year-to-date and projected full year performance E2,445 in variable pay cost was accrued to June 30, 2001. 11. TAXATION The reconciliation of the income tax charges for the six months ended June 30, 2001 and 2000 compared to the statutory rate of 40.17% is as follows:
SIX MONTHS ENDED JUNE 30, -------------- 2001 2000 ----- ----- Consolidated profit for year before taxation................ 8,037 2,752 ===== ===== Taxes at statutory rate of 40.17%........................... 3,228 1,105 Adjusted for the tax effect of: Disallowed expenses....................................... 325 312 Non-taxable loss in consolidated subsidiary............... 4 -- Tax adjustments from prior years.......................... (320) -- ----- ----- Tax charge for the year..................................... 3,237 1,417 ===== ===== Effective tax rate.......................................... 40.3% 51.5%
12. 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 E77,409 and E61,232 in the six months ended June 30, 2001 and 2000, respectively. b) Europay is responsible for funding MasterCard's Europe region costs plus an agreed profit margin. Total MasterCard Europe region charges of E58,899 and E52,299 are included in services and other goods in the six months ended June 30, 2001 and 2000, respectively. The Consolidated Balance Sheets include receivables from MasterCard of E718 and E2,401 and payables to MasterCard of E3,519 and E11,955 at June 30, 2001 and December 31, 2000, respectively. 13. THE PROPOSED TRANSACTION 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"). 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 F-70 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED AND IN E THOUSANDS) 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 33.3% of the outstanding capital stock of MasterCard Incorporated and the non-European members will own 66.7%. Following completion of the conversion and integration, the Alliance Agreement between Europay and MasterCard described in Note 11 above will be terminated. As of November 7, 2001, the conversion and integration have not occurred. 14. TAX NOTICE In April 1999 the Belgian tax authorities initiated an investigation of Europay's tax returns for 1997 and 1998. In June 2001, Europay received a notice from the Belgian tax authorities challenging Europay's deduction of certain card-based incentive program costs totaling E10.4 million in 1997 and E13.4 million in 1998. The aggregate tax liability claimed in the notice approximates E16.3 million, including possible penalties and interest accrued to December 31, 2000. Based on the methodology and assertions used by the Belgian tax authorities in determining the possible tax liability for 1997 and 1998, Europay has estimated the possible impact for 1999 and 2000 to be a further additional tax liability of up to approximately E9.5 million, including possible penalties. Interest will accrue on any additional amounts to be paid at a per annum rate of 7% until settlement. Interest on additional amounts will begin to accrue on July 1 of the second fiscal year following the fiscal year in which the deductions to which the additional amount relates was made. Europay believes that it has reasonable and meritorious arguments in favor of its characterization of these deductions and has submitted a vigorous response to the notice. In the event that Europay is unsuccessful in appealing the findings of the Belgian tax authorities in their investigation, under certain circumstances MasterCard International could, under its bylaws, levy an assessment 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. Europay cannot predict the outcome of this matter or any additional matters that may be raised by the Belgian tax authorities. Europay believes that it is not currently possible to estimate the impact, if any, that the ultimate resolution of these matters will have on its financial positions or results of operations. 15. 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 generally accepted accounting principles in the United States ("U.S. GAAP"). Such 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-71 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED AND IN E THOUSANDS) RECONCILIATION OF CONSOLIDATED PROFIT AND LOSS ACCOUNTS (IN THOUSANDS EXCEPT EARNINGS PER SHARE)
SIX MONTHS ENDED JUNE 30, --------------- NOTES 2001 2000 ----- ----- ------ (UNAUDITED) Profit on ordinary activities after taxation as reported under Belgian GAAP........................................ 4,644 710 U.S. GAAP adjustments: Pensions.................................................. (a) -- (620) Capitalization of borrowing costs, net.................... (c) (49) (9) Depreciation of fixed assets.............................. (d) (835) (550) Internally developed software costs, net.................. (e) (195) (57) Financial instruments..................................... (f) 2,636 -- Leases, net............................................... (g) 145 346 Capitalization of intangible assets....................... (h) 193 264 Financial assets.......................................... (i) -- 255 Licensing fee revenue recognition......................... (j) (678) (224) -- ----- ------ Net U.S. GAAP adjustments before deferred taxes............. 1,217 (595) Deferred taxes: effects of differences in methodology and adjustments............................................ (b) (412) 448 -- ----- ------ Net income under U.S. GAAP before cumulative effect of change in accounting principle............................ 5,449 563 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/(loss) under U.S. GAAP........................... 4,902 (2,537) ===== ====== Earnings/(loss) per share in accordance with U.S. GAAP: (k) Basic and diluted......................................... 49 (25) Weighted average number of shares outstanding (in thousands of shares): Basic and diluted......................................... 100 100 Net income/(loss) per U.S. GAAP............................. 4,902 (2,537) Other Comprehensive income, net of tax: Financial instruments..................................... (f) 2,408 -- Translation adjustment.................................... 13 12 ----- ------ Total other comprehensive income.......................... 2,421 12 ----- ------ Comprehensive income under U.S. GAAP........................ (l) 7,323 (2,525) ===== ======
F-72 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED AND IN E THOUSANDS) A summary of the principal differences and additional disclosures applicable to Europay are set out below: RECONCILIATION OF CONSOLIDATED SHAREHOLDERS' EQUITY
AT AT JUNE 30, DECEMBER 31, NOTES 2001 2000 ----- ----------- ------------ (UNAUDITED) Total shareholders' equity reported under Belgian GAAP...... 46,557 41,857 U.S. GAAP adjustments: Pensions.................................................. (a) 297 297 Deferred taxes............................................ (b) (5,108) (4,696) Capitalization of borrowing costs, net.................... (c) 2,365 2,414 Depreciation of fixed assets.............................. (d) 5,733 6,568 Internally developed software costs, net.................. (e) 761 956 Financial instruments..................................... (f) 3,444 (1,600) Leases, net............................................... (g) 3,975 3,830 Capitalization of intangible assets....................... (h) (374) (567) Financial assets.......................................... (i) (227) (184) Licensing fee revenue recognition......................... (j) (1,523) (845) ------ ------ Net U.S. GAAP adjustments before cumulative effect of change in accounting principle................................... 9,343 6,173 ------ ------ Shareholders' equity under U.S. GAAP before cumulative effect of change in accounting principle.................. 55,900 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................................................ (3,647) (3,100) ------ ------ Shareholders' equity under U.S. GAAP........................ 52,253 44,930 ====== ======
MOVEMENTS IN SHAREHOLDERS' EQUITY IN ACCORDANCE WITH U.S. GAAP
AT AT JUNE 30, DECEMBER 31, 2001 2000 ----------- ------------ (UNAUDITED) Balance, beginning of year.................................. 44,930 39,258 Net income.................................................. 4,902 5,657 Other comprehensive income: Financial instruments..................................... (f) 2,408 -- Translation adjustment.................................... 13 15 ------ ------ Total other comprehensive income.......................... 2,421 15 ------ ------ Balance, end of year........................................ 52,253 44,930 ====== ======
F-73 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED AND IN E THOUSANDS) (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. 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. During the six months ended June 30, 2000 Europay received a refund from its insurance company representing part of the pension plan over funding at December 31, 1999. Under Belgian GAAP this refund was recorded as a reduction in pension premium expense in the six months ended June 30, 2000 whereas under U.S. GAAP the refund was recorded as a reduction of the prepaid pension asset recorded at the end of 1999. (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 their 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-74 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED AND 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 related 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. F-75 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED AND IN E THOUSANDS) 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 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 six months ended June 30, 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 6, Europay had entered into forward currency hedge contracts at June 30, 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 six months ended June 30, 2001, E2,408 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 greater than or is equal to 90% of the fair value of the asset at the inception of the lease, or - The length of the lease period is greater 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 will be removed from the balance sheet and a gain of E27 will be recorded in the third quarter of 2001. Going forward, under the new lease term, the existing leases will be 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. F-76 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED AND IN E THOUSANDS) Further, Europay recognizes its proportionate share of expenses associated with the amortization of "know-how" recorded by the joint venture. Under U.S. GAAP, initial contributions to a joint venture should be recorded at cost (i.e., the amount of cash contributed or net book value of non-cash assets contributed). (i) Financial Assets Under Belgian GAAP, Europay recorded a loss in value of an investment accounted for under the equity method. Losses must be subsequently reversed. 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. (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 terms 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 stockholders' equity under U.S. GAAP reflects the deferral and recognition of licensing revenue over the life of the licensing arrangement for the current year. The cumulative effect adjustment to net income and shareholders' equity under U.S. GAAP for the six months ended June 30, 2000 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. F-77 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED AND IN E THOUSANDS) Revenue Recognition Under Belgian GAAP, revenue earned and related cost of sales incurred while acting as an agent may be presented on a gross basis in the statement of income. Under U.S. GAAP, revenue and related cost of sales should be presented gross if Europay acts as a principal in the transactions and has the risk and rewards of ownership. Europay acts as an agent on behalf of MasterCard International for the billing and collection of inter-regional transactions with members. Europay does not bear 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 E77,409 and E61,232 net of a reduction in MasterCard costs included in services and other goods of E58,899 and E52,299 for the six months ended June 30, 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:
SIX MONTHS ENDED JUNE 30, ----------------- 2001 2000 ------- ------- Net cash provided by/(used in) operating activities......... (29,885) 19,392 Net cash provided by/(used in) investing activities......... (15,887) (17,232) Net cash provided by/(used in) financing activities......... 41,599 (139) ------- ------- Net increase/(decrease) in cash and cash equivalents........ (4,173) 2,021 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...... 107,944 35,265 ======= =======
Recently Issued Accounting Standards 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 with effect 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 F-78 EUROPAY INTERNATIONAL S.A. NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED AND IN E THOUSANDS) 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 is assessing the impact that this new standard will have 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 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-79 PART II: ITEM 20: INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145(a) of the General Corporation Law of the State of Delaware ("Delaware Corporation Law") provides, in general, that a corporation shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, other than an action by or in the right of the corporation, because the person is or was a director, officer, employee or an agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprises. That indemnity may be against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding, if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and if, with respect to any criminal action or proceeding, the person did not have reasonable cause to believe the person's conduct was unlawful. Section 145(b) of the Delaware General Corporation Law provides, in general, that a corporation shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor because the person is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprises, against any expenses (including attorneys' fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, that person is fairly and reasonably entitled to be indemnified for these expenses which the Court of Chancery or such other court shall deem proper. Section 145(g) of the Delaware General Corporation Law provides, in general, that a corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprises, against any liability asserted against the person in any such capacity, or arising out of the person's status as such, whether or not the corporation would have the power to indemnify the person against that liability under the provisions of the law. Article XII of the registrant's bylaws requires indemnification to the fullest extent permitted under Delaware law of any person who is or was a director, officer, employee or agent of the registrant who is or was involved or threatened to be made so involved in any proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was serving as a director, officer, employee or agent of the registrant or was serving at the request of the registrant as a director, officer, employee or agent of any other enterprise. The registrant has also obtained officer's and directors' liability insurance which insures against liabilities that officers and directors of the registrant in these capacities, may incur. Section 102(b)(7) of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duties as a director, except for liability (i) for any breach of the director's duty of loyalty to the company or its stockholders, (ii) for acts or omissions not in good faith or which include intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law (certain illegal distributions), or (iv) for any transaction from which II-1 the director derives an improper personal benefit. Article Tenth of the registrant's certificate of incorporation includes such a provision. The foregoing statements are subject to the detailed provisions of Sections 145 and 102(b)(7) of the Delaware Corporation Law and Article XII of the bylaws and Article Tenth of the certificate of incorporation of the registrant. ITEM 21: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- *2.1 Share Exchange and Integration Agreement dated as of , 2001 by and among MasterCard Incorporated, MasterCard International Incorporated and Europay International S.A. *2.2 Form of Share Exchange Agreement to be entered among MasterCard Incorporated, MasterCard International Incorporated and each shareholder of Europay International S.A. *2.3 Agreement and Plan of Merger dated as of , 2001 by and among MasterCard International Incorporated, MasterCard Incorporated and MasterCard Merger Sub, Inc. 2.4 Share Exchange Agreement dated as of , 2001 to be entered among MasterCard Incorporated, MasterCard International Incorporated and each shareholder of MasterCard/Europay U.K. Limited *3.1(a) Amended and Restated Certificate of Incorporation of MasterCard Incorporated. *3.1(b) Amended and Restated Bylaws of MasterCard Incorporated. *3.2(a) Amended and Restated Certificate of Incorporation of MasterCard International Incorporated. *3.2(b) Amended and Restated Bylaws of MasterCard International Incorporated. **4 Form of MasterCard International Incorporated Note Purchase Agreement, dated as of June 30, 1998, regarding $80,000,000 of 6.67% Subordinated Notes due June 30, 2008. 5 Opinion of Simpson Thacher & Bartlett as to the legality of the securities being registered. **8 Opinion of Pillsbury Winthrop LLP regarding certain U.S. tax matters. **10.1 $1,000,000,000 Credit Agreement, dated as of June 6, 2000, among MasterCard International Incorporated, the several lenders, Salomon Smith Barney, as Arranger, and Citibank, N.A., as Administrative Agent. **10.2 $1,200,000,000 Amended and Restated Credit Agreement, dated as of June 5, 2001, among MasterCard International Incorporated, the several lenders, Salomon Smith Barney, as Arranger, and Citibank, N.A., as Administrative Agent. **10.3 Lease, dated as of August 31, 1999 between MCI O'Fallon 1999 Trust and MasterCard International Incorporated, relating to $149,380,000 7.36% Series A Senior Secured Notes due September 1, 2009 of MCI O'Fallon 1999 Trust and up to $5,000,000 Series B Senior Secured Notes due September 1, 2009 of MCI O'Fallon 1999 Trust. **10.4 Guarantee, dated as of August 31, 1999, made by MasterCard International Incorporated in favor of State Street Bank and Trust Company of Missouri, N.A., as Indenture Trustee for the Noteholders under the Indenture, dated as of August 31, 1999 between MCI O'Fallon 1999 Trust and the Indenture Trustee. *+10.5 Agreement, dated as of March 1, 1999, by and among MasterCard International Incorporated, Citibank, N.A., et al. *+10.6 Agreement, dated as of July 1, 1999, by and between MasterCard International Incorporated and The Chase Manhattan Bank.
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EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- **10.7 Employment Agreement between MasterCard International Incorporated and Robert W. Selander. **10.8 MasterCard International Incorporated Executive Incentive Plan. **10.9 MasterCard International Incorporated Rabbi Trust. **10.10 MasterCard International Incorporated Supplemental Executive Retirement Plan. **10.11 MasterCard International Incorporated Change-in-Control Agreement. 11 Statement regarding computation of per share earnings. 12 Statements regarding computation of ratios. 15 Letter regarding unaudited interim financial information. **21 List of Subsidiaries of MasterCard Incorporated. **23.1 Consent of PricewaterhouseCoopers LLP regarding the financial statements of MasterCard International. **23.2 Consent of PricewaterhouseCoopers Reviseurs d'Entreprises regarding the financial statements of Europay International. 23.3 Consent of Simpson Thacher & Bartlett (contained in Exhibit 5). *23.4 Consent of Pillsbury Winthrop LLP (contained in Exhibit 8). 24 Power of Attorney (included on signature page on page II-4). **99 Form of Proxy of MasterCard International Incorporated.
* Previously filed. ** Filed herewith. + The registrant has applied for confidential treatment of portions of this exhibit. Accordingly, portions have been omitted and filed separately with the Securities and Exchange Commission. ITEM 22: UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Securities Act") may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission that indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against these liabilities (other than the payment by the registrant of expenses incurred, or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether that indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of that issue. The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of the form, within one business day of receipt of the request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement on Form S-4 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Purchase, State of New York, on November 9, 2001. MASTERCARD INCORPORATED By: /s/ NOAH J. HANFT ------------------------------------ NOAH J. HANFT Senior Vice President and General Counsel PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS REGISTRATION STATEMENT HAS BEEN SIGNED ON NOVEMBER 9, 2001 BY OR ON BEHALF OF THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED WITH THE REGISTRANT.
SIGNATURES TITLE ---------- ----- * President and Chief Executive Officer (principal - --------------------------------------------------- executive officer) Robert W. Selander * Executive Vice President and Chief Financial - --------------------------------------------------- Officer (principal financial officer) Denise K. Fletcher * Senior Vice President and Controller (principal - --------------------------------------------------- accounting officer) Spencer Schwartz * Director - --------------------------------------------------- William F. Aldinger * Director - --------------------------------------------------- Hiroshi Arai * Chairman Emeritus - --------------------------------------------------- Donald L. Boudreau * Director - --------------------------------------------------- David A. Coulter * Director - --------------------------------------------------- William R.P. Dalton * Director - --------------------------------------------------- Augusto M. Escalante Juanes * Vice Chairman of the Board; Director - --------------------------------------------------- Baldomero Falcones Jaquotot
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SIGNATURES TITLE ---------- ----- * Director - --------------------------------------------------- Jan A.M. Hendrikx * Director - --------------------------------------------------- Jean-Pierre Ledru * Director - --------------------------------------------------- Norman C. McLuskie * Director - --------------------------------------------------- John Francis Mulcahy * Director - --------------------------------------------------- Robert W. Pearce * Chairman of the Board; Director - --------------------------------------------------- Lance L. Weaver * Director - --------------------------------------------------- Robert B. Willumstad * Director - --------------------------------------------------- Mark H. Wright * Director - --------------------------------------------------- Ronald N. Zebeck *By: /s/ NOAH J. HANFT -------------------------------------------- Noah J. Hanft Attorney-in-fact
II-5 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- *2.1 Share Exchange and Integration Agreement dated as of , 2001 by and among MasterCard Incorporated, MasterCard International Incorporated and Europay International S.A. *2.2 Form of Share Exchange Agreement to be entered among MasterCard Incorporated, MasterCard International Incorporated and each shareholder of Europay International S.A. *2.3 Agreement and Plan of Merger dated as of , 2001 by and among MasterCard International Incorporated, MasterCard Incorporated and MasterCard Merger Sub, Inc. 2.4 Share Exchange Agreement dated as of , 2001 to be entered among MasterCard Incorporated, MasterCard International Incorporated and each shareholder of MasterCard/Europay U.K. Limited *3.1(a) Amended and Restated Certificate of Incorporation of MasterCard Incorporated. *3.1(b) Amended and Restated Bylaws of MasterCard Incorporated. *3.2(a) Amended and Restated Certificate of Incorporation of MasterCard International Incorporated. *3.2(b) Amended and Restated Bylaws of MasterCard International Incorporated. **4 Form of MasterCard International Incorporated Note Purchase Agreement, dated as of June 30, 1998, regarding $80,000,000 of 6.67% Subordinated Notes due June 30, 2008. 5 Opinion of Simpson Thacher & Bartlett as to the legality of the securities being registered. **8 Opinion of Pillsbury Winthrop LLP regarding certain U.S. tax matters. **10.1 $1,000,000,000 Credit Agreement, dated as of June 6, 2000, among MasterCard International Incorporated, the several lenders, Salomon Smith Barney, as Arranger, and Citibank, N.A., as Administrative Agent. **10.2 $1,200,000,000 Amended and Restated Credit Agreement, dated as of June 5, 2001, among MasterCard International Incorporated, the several lenders, Salomon Smith Barney, as Arranger, and Citibank, N.A., as Administrative Agent. **10.3 Lease, dated as of August 31, 1999 between MCI O'Fallon 1999 Trust and MasterCard International Incorporated, relating to $149,380,000 7.36% Series A Senior Secured Notes due September 1, 2009 of MCI O'Fallon 1999 Trust and up to $5,000,000 Series B Senior Secured Notes due September 1, 2009 of MCI O'Fallon 1999 Trust. **10.4 Guarantee, dated as of August 31, 1999, made by MasterCard International Incorporated in favor of State Street Bank and Trust Company of Missouri, N.A., as Indenture Trustee for the Noteholders under the Indenture, dated as of August 31, 1999 between MCI O'Fallon 1999 Trust and the Indenture Trustee. *+10.5 Agreement, dated as of March 1, 1999, by and among MasterCard International Incorporated, Citibank, N.A., et al. *+10.6 Agreement, dated as of July 1, 1999, by and between MasterCard International Incorporated and The Chase Manhattan Bank. **10.7 Employment Agreement between MasterCard International Incorporated and Robert W. Selander. **10.8 MasterCard International Incorporated Executive Incentive Plan. **10.9 MasterCard International Incorporated Rabbi Trust. **10.10 MasterCard International Incorporated Supplemental Executive Retirement Plan. **10.11 MasterCard International Incorporated Change-in-Control Agreement.
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EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- 11 Statement regarding computation of per share earnings. 12 Statements regarding computation of ratios. 15 Letter regarding unaudited interim financial information. **21 List of Subsidiaries of MasterCard Incorporated. **23.1 Consent of PricewaterhouseCoopers LLP regarding the financial statements of MasterCard International. **23.2 Consent of PricewaterhouseCoopers Reviseurs d'Entreprises regarding the financial statements of Europay International. 23.3 Consent of Simpson Thacher & Bartlett (contained in Exhibit 5). **23.4 Consent of Pillsbury Winthrop LLP (contained in Exhibit 8). 24 Power of Attorney (included on signature page on page II-4). **99 Form of Proxy of MasterCard International Incorporated.
* Previously filed. ** Filed herewith. + The registrant has applied for confidential treatment of portions of this exhibit. Accordingly, portions have been omitted and filed separately with the Securities and Exchange Commission. II-7 EX-4 3 y49195a2ex4.txt FORM OF MASTERCARD INT'L INC. NOTE RELEASE EXHIBIT 4 MASTERCARD INTERNATIONAL INCORPORATED --------------------- NOTE PURCHASE AGREEMENT --------------------- DATED AS OF JUNE 30, 1998 $80,000,000 6.67% SUBORDINATED NOTES DUE JUNE 30, 2008 MASTERCARD INTERNATIONAL INCORPORATED NOTE PURCHASE AGREEMENT TABLE OF CONTENTS PAGE 1. AUTHORIZATION OF NOTES..................................................1 2. SALE AND PURCHASE OF NOTES..............................................1 3. CLOSING.................................................................1 4. CONDITIONS TO CLOSING...................................................2 4.1 Representations and Warranties.................................2 4.2 Performance; No Default........................................2 4.3 Compliance Certificates........................................2 4.4 Opinions of Counsel............................................2 4.5 Purchase Permitted By Applicable Law, etc......................2 4.6 S&P Rating.....................................................3 4.7 Sale of Other Notes............................................3 4.8 Payment of Special Counsel Fees................................3 4.9 Private Placement Number.......................................3 4.10 Changes in Corporate Structure.................................3 4.11 Proceedings and Documents......................................4 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY...........................4 5.1 Organization; Power and Authority..............................4 5.2 Authorization, etc.............................................4 5.3 Disclosure.....................................................4 5.4 Organization and Ownership of Shares of Subsidiaries...........5 5.5 Financial Statements...........................................5 5.6 Compliance with Laws, Other Instruments, etc...................5 5.7 Governmental Authorizations, etc...............................6 5.8 Litigation; Observance of Statutes and Orders..................6 5.9 Taxes..........................................................6 5.10 Title to Property; Leases......................................7 5.11 Licenses, Permits, etc.........................................7 5.12 Compliance with ERISA..........................................7 5.13 Private Offering by the Company................................8 5.14 Use of Proceeds; Margin Regulations............................8 5.15 Existing Indebtedness..........................................9 5.16 Foreign Assets Control Regulations, etc........................9 5.17 Status under Certain Statutes..................................9 6. REPRESENTATIONS OF THE PURCHASER........................................9 6.1 Purchase for Investment........................................9 MASTERCARD INTERNATIONAL INCORPORATED i NOTE PURCHASE AGREEMENT 6.2 Source of Funds...............................................10 7. INFORMATION AS TO COMPANY..............................................11 7.1 Financial and Business Information............................11 7.2 Officer's Certificate.........................................13 7.3 Inspection....................................................14 8. PAYMENTS ON THE NOTES..................................................14 8.1 Required Principal, Interest Payments.........................14 8.2 Optional Prepayments with Make-Whole Amount...................15 8.3 Allocation of Partial Prepayments.............................15 8.4 Maturity; Surrender, etc......................................15 8.5 Purchase of Notes.............................................15 8.6 Make-Whole Amount.............................................16 9. AFFIRMATIVE COVENANTS..................................................17 9.1 Compliance with Law...........................................17 9.2 Insurance.....................................................18 9.3 Maintenance of Properties.....................................18 9.4 Payment of Taxes..............................................18 9.5 Corporate Existence, etc......................................18 9.6 Compliance with ERISA.........................................19 10. NEGATIVE COVENANTS.....................................................19 10.1 Transactions with Affiliates..................................19 10.2 Merger, Consolidation, etc....................................20 10.3 Net Worth.....................................................20 11. EVENTS OF DEFAULT......................................................21 11.1 Events of Default.............................................21 11.2 Remedies for Events of Default................................22 11.3 Limitation on Distribution to Junior Creditors................23 11.4 Payment of Expenses...........................................24 11.5 Remedies Cumulative, Not Waived...............................24 12. SUBORDINATION..........................................................24 12.1 Subordination.................................................24 12.2 Right to Receive Payment......................................25 12.3 No Set-off....................................................25 13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES..........................25 13.1 Registration of Notes.........................................25 13.2 Transfer and Exchange of Notes................................25 13.3 Replacement of Notes..........................................26 MASTERCARD INTERNATIONAL INCORPORATED ii NOTE PURCHASE AGREEMENT 14. PAYMENTS ON NOTES......................................................26 14.1 Manner of Payment.............................................26 14.2 Payments Due on Non-Business Days.............................27 15. EXPENSES, ETC..........................................................27 15.1 Transaction Expenses..........................................27 15.2 Survival......................................................27 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.......................................................28 17. AMENDMENT AND WAIVER...................................................28 17.1 Requirements..................................................28 17.2 Solicitation of Holders of Notes..............................28 17.3 Binding Effect, etc...........................................29 17.4 Notes held by Company, etc....................................29 18. NOTICES................................................................29 19. REPRODUCTION OF DOCUMENTS..............................................30 20. CONFIDENTIAL INFORMATION...............................................30 21. MISCELLANEOUS..........................................................32 21.1 Successors and Assigns........................................32 21.2 Severability..................................................32 21.3 Construction..................................................32 21.4 Counterparts..................................................33 21.5 Governing Law.................................................33 SCHEDULE B -- Defined Terms MASTERCARD INTERNATIONAL INCORPORATED iii NOTE PURCHASE AGREEMENT EXHIBIT 1 -- Form of 6.67% Subordinated Note due June 30, 2008 EXHIBIT 4.4(a) -- Form of Opinion of Special Counsel for the Company MASTERCARD INTERNATIONAL INCORPORATED iv NOTE PURCHASE AGREEMENT MASTERCARD INTERNATIONAL INCORPORATED 6.67% SUBORDINATED NOTES DUE JUNE 30, 2008 Dated as of June 30, 1998 To Each of the Purchasers Listed in the Attached Schedule A: Ladies and Gentlemen: MASTERCARD INTERNATIONAL INCORPORATED, a Delaware non-stock membership corporation (together with its successors and assigns, the "COMPANY"), agrees with you as follows: 1. AUTHORIZATION OF NOTES The Company will authorize the issue and sale of $80,000,000 aggregate principal amount of its 6.67% Subordinated Notes due June 30, 2008 (the "NOTES", such term to include any such notes issued in substitution therefor pursuant to Section 13 of this Agreement and the Other Agreements). The Notes shall be substantially in the form of Exhibit 1. 2. SALE AND PURCHASE OF NOTES Subject to the terms and conditions of this Agreement, the Company will issue and sell to you and you will purchase from the Company, at the Closing provided for in Section 3, Notes in the principal amount specified below your name in SCHEDULE A at the purchase price of 100% of the principal amount thereof. Contemporaneously with entering into this Agreement, the Company is entering into separate Note Purchase Agreements (the "OTHER AGREEMENTS") identical with this Agreement with each of the other purchasers named in SCHEDULE A (the "OTHER PURCHASERS," together with you, the "PURCHASERS"), providing for the sale at such Closing to each of the Other Purchasers of Notes in the principal amount specified below its name in SCHEDULE A. Your obligation hereunder and the obligations of the Other Purchasers under the Other Agreements are several and not joint obligations and you shall have no obligation under any Other Agreement and no liability to any Person for the performance or non-performance by any Other Purchaser thereunder. 3. CLOSING The sale and purchase of the Notes to be purchased by you and the Other Purchasers shall occur at the offices of Hebb & Gitlin, One State Street, Hartford, Connecticut 06103, at 10:00 a.m., local Hartford time, at a closing (the "CLOSING") on June 30, 1998 or on such other Business Day thereafter prior to July 1, 1998 as may be agreed upon by the Company and you and the Other Purchasers. At the Closing the Company will deliver to you the Notes to be purchased by you in the form of a single Note (or such greater number of Notes in denominations of at least $250,000 as you may request) dated the date of the Closing and registered in your name (or in the name of your nominee), against delivery by you to the Company or its order of immediately available funds in the amount of the purchase price therefor by wire transfer of immediately available funds for the account of the Company as specified on MASTERCARD INTERNATIONAL INCORPORATED NOTE PURCHASE AGREEMENT SCHEDULE 3. If at the Closing the Company fails to tender such Notes to you as provided in this Section 3, or any of the conditions specified in Section 4 shall not have been fulfilled to your satisfaction, you shall, at your election, be relieved of all further obligations under this Agreement, without thereby waiving any rights you may have by reason of such failure or such nonfulfillment. 4. CONDITIONS TO CLOSING Your obligation to purchase and pay for the Notes to be sold to you at the Closing is subject to the fulfillment to your satisfaction, prior to or at the Closing, of the following conditions: 4.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company in this Agreement shall be correct as of the Closing. 4.2 PERFORMANCE; NO DEFAULT. The Company shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by it prior to or at the Closing and after giving effect to the issue and sale of the Notes (and the application of the proceeds thereof as contemplated by SCHEDULE 5.14) no Default or Event of Default shall have occurred and be continuing. 4.3 COMPLIANCE CERTIFICATES. The Company shall have delivered to you a certificate certifying as to the resolutions attached thereto and other corporate proceedings relating to the authorization, execution and delivery of the Notes and the Agreements. 4.4 OPINIONS OF COUNSEL. You shall have received opinions in form and substance satisfactory to you, dated the date of the Closing (a) from Robert E. Norton, general counsel for the Company, covering the matters set forth in Exhibit 4.4(a) and covering such other matters incident to the transactions contemplated hereby as you or your counsel may reasonably request (and the Company hereby instructs its counsel to deliver such opinion to you) and (b) from Hebb & Gitlin, your special counsel, covering such matters incident to such transactions as you may reasonably request. 4.5 PURCHASE PERMITTED BY APPLICABLE LAW, ETC. On the date of the Closing your purchase of Notes shall MASTERCARD INTERNATIONAL INCORPORATED 2 NOTE PURCHASE AGREEMENT (a) be permitted by the laws and regulations of each jurisdiction to which you are subject, without recourse to provisions (such as section 1 405(a)(8) of the New York Insurance Law) permitting limited investments by insurance companies without restriction as to the character of the particular investment, (b) not violate any applicable law or regulation (including, without limitation, regulations of the Board of Governors of the Federal Reserve System in respect of margin lending), and (c) not subject you to any tax, penalty or liability under or pursuant to any applicable law or regulation, which law or regulation was not in effect on the date hereof. If requested by you, you shall have received an Officer's Certificate certifying as to such matters of fact as you may reasonably specify to enable you to determine whether such purchase is so permitted. 4.6 S&P RATING. You shall have received evidence satisfactory to you that Standard & Poors has issued a private letter rating of at least A- for the Notes and such rating remains in full force and effect as of the date of closing. 4.7 SALE OF OTHER NOTES. Contemporaneously with the Closing the Company shall sell to the Other Purchasers and the Other Purchasers shall purchase the Notes to be purchased by them at the Closing as specified in SCHEDULE A. 4.8 PAYMENT OF SPECIAL COUNSEL FEES. Without limiting the provisions of Section 15.1, the Company shall have paid on or before the Closing the fees, charges and disbursements of your special counsel referred to in Section 4.4 to the extent reflected in a statement of such counsel rendered to the Company at least one Business Day prior to the Closing. 4.9 PRIVATE PLACEMENT NUMBER. A Private Placement Number issued by Standard & Poor's CUSIP Service Bureau (in cooperation with the Securities Valuation Office of the National Association of Insurance Commissioners) shall have been obtained for the Notes. 4.10 CHANGES IN CORPORATE STRUCTURE. Except as specified in SCHEDULE 4.10, the Company shall not have changed its jurisdiction of incorporation or been a party to any merger or consolidation and shall not have succeeded to all or any substantial part of the liabilities of any other entity, at any time following the date of the most recent financial statements referred to in SCHEDULE 5.5. MASTERCARD INTERNATIONAL INCORPORATED 3 NOTE PURCHASE AGREEMENT 4.11 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated by this Agreement and all documents and instruments incident to such transactions shall be satisfactory to you and your special counsel, and you and your special counsel shall have received all such counterpart originals or certified or other copies of such documents as you or they may reasonably request. 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to you, as of the date of the Closing, that: 5.1 ORGANIZATION; POWER AND AUTHORITY. The Company is a non-stock corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and is duly qualified as a foreign non-stock corporation and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Company has the corporate power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Agreement and the Other Agreements and the Notes and to perform the provisions hereof and thereof. 5.2 AUTHORIZATION, ETC. This Agreement and the Other Agreements and the Notes have been duly authorized by all necessary corporate action on the part of the Company, and this Agreement constitutes, and upon execution and delivery thereof each Note will constitute, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by (a) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (b) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 5.3 DISCLOSURE. The Company, through its agents, Chase Securities, Inc., Donaldson Lufkin & Jenrette Securities Corporation and Salomon Smith Barney Inc., has delivered to you and each Other Purchaser a copy of a Private Placement Memorandum, dated May, 1998 (the "MEMORANDUM"), relating to the transactions contemplated hereby. Except as disclosed in SCHEDULE 5.3, this Agreement, the Memorandum, the documents, certificates or other writings identified in SCHEDULE 5.3 and the financial statements listed in SCHEDULE 5.5, taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading in light of the circumstances under which they were MASTERCARD INTERNATIONAL INCORPORATED 4 NOTE PURCHASE AGREEMENT made. Except as expressly described in SCHEDULE 5.3, or in one of the documents, certificates or other writings identified therein, or in the financial statements listed in SCHEDULE 5.5, since December 31, 1997, there has been no change in the financial condition, operations, business or properties of the Company or any of its Subsidiaries except changes that individually or in the aggregate would not reasonably be expected to have a Material Adverse Effect. 5.4 ORGANIZATION AND OWNERSHIP OF SHARES OF SUBSIDIARIES. (a) SCHEDULE 5.4 is (except as noted therein) a complete and correct list of the Company's Subsidiaries, showing, as to each Subsidiary, the correct name thereof, the jurisdiction of its organization, and the percentage of shares of each class of its capital stock or similar equity interests outstanding owned by the Company and each other Subsidiary. (b) All of the outstanding shares of capital stock or similar equity interests of each Subsidiary shown in SCHEDULE 5.4 as being owned by the Company and its Subsidiaries have been validly issued, are fully paid and nonassessable and are owned by the Company or another Subsidiary free and clear of any Lien (except as otherwise disclosed in SCHEDULE 5.4). (c) Each Subsidiary identified in SCHEDULE 5.4 is a corporation or other legal entity duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and is duly qualified as a foreign corporation or other legal entity and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Each such Subsidiary has the corporate or other power and authority to own or hold under lease the properties it purports to own or hold under lease and to transact the business it transacts and proposes to transact. 5.5 FINANCIAL STATEMENTS. The Company has delivered to each Purchaser copies of the financial statements of the Company and its Subsidiaries listed on SCHEDULE 5.5. All of said financial statements (including in each case the related schedules and notes) fairly present in all material respects the consolidated financial position of the Company and its Subsidiaries as of the respective dates specified in such SCHEDULE 5.5 and the consolidated results of their operations and cash flows for the respective periods so specified and have been prepared in accordance with GAAP consistently applied throughout the periods involved except as set forth in the notes thereto (subject, in the case of any interim financial statements, to normal year-end adjustments). 5.6 COMPLIANCE WITH LAWS, OTHER INSTRUMENTS, ETC. The execution, delivery and performance by the Company of this Agreement and the Notes will not (a) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of the Company or any Subsidiary MASTERCARD INTERNATIONAL INCORPORATED 5 NOTE PURCHASE AGREEMENT under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or by-laws, or any other Material agreement or instrument to which the Company or any Subsidiary is bound or by which the Company or any Subsidiary or any of their respective properties may be bound or affected, (b) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to the Company or any Subsidiary, or (c) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the Company or any Subsidiary. 5.7 GOVERNMENTAL AUTHORIZATIONS, ETC. No consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution, delivery or performance by the Company of this Agreement or the Notes. 5.8 LITIGATION; OBSERVANCE OF STATUTES AND ORDERS. (a) Except as set forth on SCHEDULE 5.8, there are no actions, suits or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or any Subsidiary or any property of the Company or any Subsidiary in any court or before any arbitrator of any kind or before or by any Governmental Authority that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect. (b) Neither the Company nor any Subsidiary is in default under any order, judgment, decree or ruling of any court, arbitrator or Governmental Authority or is in violation of any applicable law, ordinance, rule or regulation (including without limitation Environmental Laws) of any Governmental Authority, which default or violation, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect. 5.9 TAXES. The Company and its Subsidiaries have filed all income tax returns that are required to have been filed in any jurisdiction, and have paid all taxes shown to be due and payable on such returns and all other taxes and assessments payable by them, to the extent such taxes and assessments have become due and payable and before they have become delinquent, except for any taxes and assessments (a) the amount of which is not individually or in the aggregate Material or (b) the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which the Company or a Subsidiary, as the case may be, has established adequate reserves in accordance with GAAP. MASTERCARD INTERNATIONAL INCORPORATED 6 NOTE PURCHASE AGREEMENT 5.10 TITLE TO PROPERTY; LEASES. The Company and its Subsidiaries have good and marketable title to their respective Material properties, including all such properties reflected in the most recent audited balance sheet referred to in Section 5.5 or purported to have been acquired by the Company or any Subsidiary after said date (except as sold or otherwise disposed of in the ordinary course of business), in each case free and clear of Liens prohibited by this Agreement, except for those defects in title and Liens that, individually or in the aggregate, would not have a Material Adverse Effect. All Material leases are valid and subsisting and are in full force and effect in all material respects. 5.11 LICENSES, PERMITS, ETC. Except as disclosed in SCHEDULE 5.11, the Company and its Subsidiaries own or possess all licenses, permits, franchises, authorizations, patents, copyrights, service marks, trademarks and trade names, or rights thereto, that are Material, without known conflict with the rights of others, except for those conflicts that, individually or in the aggregate, would not have a Material Adverse Effect. 5.12 COMPLIANCE WITH ERISA. (a) COMPLIANCE WITH LAW. The Company and each ERISA Affiliate have operated and administered each Plan in compliance with all applicable laws except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any ERISA Affiliate has incurred any liability pursuant to Title I or Title IV of ERISA or the penalty or excise tax provisions of the IRC relating to employee benefit plans (as defined in section 3 of ERISA), and no event, transaction or condition has occurred or exists that would reasonably be expected to result in the incurrence of any such liability by the Company or any ERISA Affiliate, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate, in either case pursuant to Title I or Title IV of ERISA or to such penalty or excise tax provisions or to section 401(a)(29) or section 412 of the IRC, other than such liabilities or Liens as would not be individually or in the aggregate Material. (b) AMOUNT OF LIABILITY. The present value of the aggregate benefit liabilities under each of the Plans (other than Multiemployer Plans), determined as of the end of such Plan's most recently ended plan year (i.e. 1997) on the basis of the actuarial assumptions specified for funding purposes in such Plan's most recent actuarial valuation report, did not exceed the aggregate current value of the assets of such Plan allocable to such benefit liabilities in the aggregate for all Plans. The term "BENEFIT LIABILITIES" has the meaning specified in section 4001 of ERISA and the terms "CURRENT VALUE" and "PRESENT VALUE" have the meaning specified in section 3 of ERISA. (c) MULTIEMPLOYER LIABILITIES. The Company and its ERISA Affiliates have not incurred withdrawal liabilities (and are not subject to contingent withdrawal MASTERCARD INTERNATIONAL INCORPORATED 7 NOTE PURCHASE AGREEMENT liabilities) under section 4201 or section 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are Material. (d) POSTRETIREMENT BENEFITS. The expected postretirement benefit obligation (determined as of the last day of the Company's most recently ended fiscal year in accordance with Financial Accounting Standards Board Statement No. 106, without regard to liabilities attributable to continuation coverage mandated by section 4980B of the IRC and other similar provisions of applicable law) of the Company and its Subsidiaries is not Material. (e) PROHIBITED TRANSACTIONS. The execution and delivery of this Agreement and the issuance and sale of the Notes hereunder will not involve any transaction that is subject to the prohibitions of section 406 of ERISA (other than a transaction or transactions subject to an exemption from such prohibitions whether statutory or administrative) or in connection with which a tax could reasonably be expected to be imposed pursuant to section 4975(c)(1)(A) through section 4975(c)(1)(D) of the IRC, inclusive. The representation by the Company in the first sentence of this Section 5.12(e) is made in reliance upon and subject to (i) the accuracy of your representation in Section 6.2 as to the sources of the funds to be used to pay the purchase price of the Notes to be purchased by you and (ii) the assumption, made solely for the purpose of making such representation, that Department of Labor Interpretive Bulletin 75-2 with respect to prohibited transactions remains valid in the circumstances of the transactions contemplated herein. 5.13 PRIVATE OFFERING BY THE COMPANY. Neither the Company nor anyone acting on its behalf has offered the Notes or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any Person other than you, the Other Purchasers and not more than 50 other institutional investors, each of which has been offered the Notes at a private sale for investment. Neither the Company nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Notes to the registration requirements of section 5 of the Securities Act. 5.14 USE OF PROCEEDS; MARGIN REGULATIONS. The Company will apply the proceeds of the sale of the Notes as set forth in SCHEDULE 5.14. No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for any purpose that would violate regulations of the Board of Governors of the Federal Reserve System in respect of margin lending. MASTERCARD INTERNATIONAL INCORPORATED 8 NOTE PURCHASE AGREEMENT 5.15 EXISTING INDEBTEDNESS. Except as described therein, SCHEDULE 5.15 sets forth a complete and correct list of all outstanding Indebtedness of the Company and its Subsidiaries as of June 30, 1998, after giving effect to the application of the proceeds of the Notes as set forth in SCHEDULE 5.14 (and specifying, as to each such Indebtedness, the collateral, if any, securing such Indebtedness), since which date there has been no Material change in the amounts, interest rates, sinking funds, instalment payments, collateral or maturities of the Indebtedness of the Company or its Subsidiaries. Neither the Company nor any Subsidiary is in default and no waiver of default is currently in effect, in the payment of any principal or interest on any Indebtedness of the Company or such Subsidiary and no event or condition exists with respect to any Indebtedness of the Company or any Subsidiary that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Indebtedness to become due and payable before its stated maturity or before its regularly scheduled dates of payment. 5.16 FOREIGN ASSETS CONTROL REGULATIONS, ETC. Neither the sale of the Notes by the Company hereunder nor its use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto. 5.17 STATUS UNDER CERTAIN STATUTES. Neither the Company nor any Subsidiary is subject to regulation under the Investment Company Act of 1940, as amended, the Public Utility Holding Company Act of 1935, as amended, or the Federal Power Act, as amended. 6. REPRESENTATIONS OF THE PURCHASER 6.1 PURCHASE FOR INVESTMENT. You represent that (a) you are an "accredited investor" as defined in Rule 501(a) under the Securities Act, with such knowledge and experience in financial and business matters as are necessary in order to evaluate the merits and risks of an investment in the Notes, and (b) you are purchasing the Notes for your own account or for one or more separate accounts maintained by you or for the account of one or more pension or trust funds and not with a view to the distribution thereof, provided that the disposition of your or their property shall at all times be within your or their control. You acknowledge that (i) the Notes have not been registered under the Securities Act and may be resold only if registered pursuant to the provisions of the Securities Act or if an MASTERCARD INTERNATIONAL INCORPORATED 9 NOTE PURCHASE AGREEMENT exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law, and (ii) the Company is not required to register the Notes under the Securities Act. 6.2 SOURCE OF FUNDS. You represent that at least one of the following statements is an accurate representation as to each source of funds (a "SOURCE") to be used by you to pay the purchase price of the Notes to be purchased by you hereunder: (a) GENERAL ACCOUNT -- the Source is an "insurance company general account" as defined in Department of Labor Prohibited Transaction Exemption ("PTE") 95-60 and in respect thereof you represent that there is no "employee benefit plan" (as defined in section 3(3) of ERISA and section 4975(e)(1) of the IRC, treating as a single plan all plans maintained by the same employer or employee organization or affiliate thereof) with respect to which the amount of the general account reserves and liabilities of all contracts held by or on behalf of such plan exceed 10% of the total reserves and liabilities of such general account (exclusive of separate account liabilities) plus surplus, as set forth in the NAIC Annual Statement filed with your state of domicile; (b) SEPARATE ACCOUNT -- the Source is either (i) an insurance company pooled separate account, within the meaning of PTE 90-1, or (ii) a bank collective investment fund, within the meaning of the PTE 91-38, and, except as you have disclosed to the Company in writing pursuant to this Section 7.2(b), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; (c) QPAM -- the Source constitutes assets of an "investment fund" (within the meaning of Part V of PTE 84-14) in respect of which each of the following is true: (i) such investment fund is managed by a "qualified professional asset manager" or "QPAM" (within the meaning of Part V of PTE 84-14); (ii) no employee benefit plan's assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of section V(c)(1) of PTE 84-14) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, MASTERCARD INTERNATIONAL INCORPORATED 10 NOTE PURCHASE AGREEMENT (iii) the conditions of Part I(c) and Part I(g) of PTE 84-14 are satisfied, neither the QPAM nor a Person controlling or controlled by the QPAM (applying the definition of "control" in Section V(e) of PTE 84-14) owns a 5% or more interest in the Company, and (A) the identity of such QPAM, and (B) the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this Section 7.2(c); (d) GOVERNMENT PLAN, ETC -- the Source is a governmental plan or church plan that is covered by neither ERISA nor Section 4975 of the IRC; (e) IDENTIFIED PLANS -- the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this Section 7.2(e); (f) IN-HOUSE ASSET MANAGER -- the Source is the assets of one or more employee benefit plans that are managed by an "in-house asset manager," as that term is defined in PTE 96-23, and such purchase and holding of the Notes is exempt under PTE 96-23; or (g) EXEMPT PLANS -- the Source does not include the assets of any employee benefit plan that is subject to Title I of ERISA or any "plan" that is subject to Section 4975 of the IRC. As used in this Section 7.2, the terms "employee benefit plan", "governmental plan", "party in interest" and "separate account" shall have the respective meanings assigned to such terms in section 3 of ERISA. 7. INFORMATION AS TO COMPANY 7.1 FINANCIAL AND BUSINESS INFORMATION. The Company shall deliver to each holder of Notes: (a) QUARTERLY STATEMENTS -- within 60 days after the end of each quarterly fiscal period in each fiscal year of the Company (other than the last quarterly fiscal period of each such fiscal year), duplicate copies of, (i) a consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarter, and (ii) consolidated statements of income, changes in equity and cash flows of the Company and its Subsidiaries, for such quarter and (in the case of the MASTERCARD INTERNATIONAL INCORPORATED 11 NOTE PURCHASE AGREEMENT second and third quarters) for the portion of the fiscal year ending with such quarter, setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly financial statements generally, and certified by a Senior Financial Officer as fairly presenting, in all material respects, the consolidated financial position of the companies being reported on and their consolidated results of operations and cash flows, subject to changes resulting from year-end adjustments, provided that delivery within the time period specified above of copies of the Company's Quarterly Report on Form 10-Q prepared in compliance with the requirements therefor and filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this Section 7.1(a); (b) ANNUAL STATEMENTS -- within 105 days after the end of each fiscal year of the Company, duplicate copies of, (i) a consolidated balance sheet of the Company and its Subsidiaries, as at the end of such year, and (ii) consolidated statements of income, changes in equity and cash flows of the Company and its Subsidiaries, for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP, and accompanied by an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall state that such financial statements present fairly, in all material respects, the consolidated financial position of the companies being reported upon and their consolidated results of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion in the circumstances, provided that the delivery within the time period specified above of the Company's Annual Report on Form 10-K for such fiscal year prepared in accordance with the requirements therefor and filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this Section 7.1 (b); (c) SEC AND OTHER REPORTS -- promptly upon their becoming available, one copy of (i) each financial statement, report, notice or proxy statement sent by the Company or any Subsidiary to public securities holders or the Company's members generally, and (ii) each regular or periodic report, each registration statement that shall have become effective (without exhibits except as expressly requested by such holder), and each final prospectus and all amendments thereto filed by the Company or any Subsidiary with the Securities and Exchange Commission; MASTERCARD INTERNATIONAL INCORPORATED 12 NOTE PURCHASE AGREEMENT (d) NOTICE OF DEFAULT OR EVENT OF DEFAULT -- promptly, and in any event within five days, after a Responsible Officer becoming aware of the existence of any Default or Event of Default, a written notice specifying the nature and period of existence thereof and what action the Company is taking or proposes to take with respect thereto; (e) ERISA MATTERS -- promptly, and in any event within Ten Business Days after a Responsible Officer becomes aware of any of the following, a written notice setting forth the nature thereof and the action, if any, that the Company or an ERISA Affiliate proposes to take with respect thereto: (i) with respect to any Plan, any reportable event, as defined in section 4043(c) of ERISA and the regulations thereunder, for which notice thereof has not been waived pursuant to such regulations as in effect on the date of the Closing; or (ii) the taking by the PBGC of steps to institute, or the threatening by the PBGC of the institution of, proceedings under section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan; or (iii) any event, transaction or condition that could reasonably be expected to result in the incurrence of any liability by the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the IRC relating to employee benefit plans, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or such penalty or excise tax provisions, if such event, liability or Lien, taken together with any other such events, liabilities or Liens then existing, would reasonably be expected to have a Material Adverse Effect; (f) REQUESTED INFORMATION -- with reasonable promptness, such other data and information relating to the business, operations, affairs, financial condition, assets or properties of the Company or any of its Subsidiaries or relating to the ability of the Company to perform its obligations hereunder and under the Notes as from time to time may be reasonably requested by any such holder of Notes, or such information regarding the Company required to satisfy the requirements of 17 C.F.R. Section 230.144A, as amended from time to time, in connection with any contemplated transfer of the Notes. 7.2 OFFICER'S CERTIFICATE. Each set of financial statements delivered to a holder of Notes pursuant to Section 7.1(a) or Section 7.1(b) shall be accompanied by a certificate of a Senior Financial Officer setting forth: (a) COVENANT COMPLIANCE -- the information (including detailed calculations) required in order to establish whether the Company was in compliance with the requirements of Section 10.3 during the quarterly or annual period covered by the MASTERCARD INTERNATIONAL INCORPORATED 13 NOTE PURCHASE AGREEMENT statements then being furnished (including with respect to each such Section, where applicable, the calculations of the maximum or minimum amount, ratio or percentage, as the case may be, permissible under the terms of such Sections, and the calculation of the amount, ratio or percentage then in existence); and (b) EVENT OF DEFAULT -- a statement that such officer has reviewed the relevant terms hereof and has made, or caused to be made, under his or her supervision, a review of the transactions and conditions of the Company and its Subsidiaries from the beginning of the quarterly or annual period covered by the statements then being furnished to the date of the certificate and that such review has not disclosed the existence during such period of any condition or event that constitutes a Default or an Event of Default or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action the Company shall have taken or proposes to take with respect thereto. 7.3 INSPECTION. The Company shall permit the representatives of each holder of Notes: (a) NO DEFAULT -- if no Default or Event of Default then exists, at the expense of such holder and upon reasonable prior notice to the Company, to visit the principal executive office of the Company during regular business hours and not more than once per year, to discuss the affairs, finances and accounts of the Company and its Subsidiaries with the Company's officers, and, with the consent of the Company (which consent will not be unreasonably withheld) to visit the other offices and properties of the Company and each Subsidiary, all at such reasonable times and as often as may be reasonably requested in writing; and (b) DEFAULT -- if a Default or Event of Default then exists, at the expense of the Company to visit and inspect any of the offices or properties of the Company or any Subsidiary, to examine all their respective books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers and independent public accountants (and by this provision the Company authorizes said accountants to discuss the affairs, finances and accounts of the Company and its Subsidiaries), all at such times and as often as may be requested. 8. PAYMENTS ON THE NOTES 8.1 REQUIRED PRINCIPAL, INTEREST PAYMENTS. The entire principal of the Notes remaining outstanding on June 30, 2008, together with interest accrued thereon, shall become due and payable on June 30, 2008. Interest on the Notes shall be computed and paid in the manner and on the dates provided in the Notes. MASTERCARD INTERNATIONAL INCORPORATED 14 NOTE PURCHASE AGREEMENT 8.2 OPTIONAL PREPAYMENTS WITH MAKE-WHOLE AMOUNT. The Company may, at its option, upon notice as provided below, prepay at any time all, or from time to time any part, of the Notes, in an amount not less than 5% of the aggregate principal amount of the Notes then outstanding in the case of a partial prepayment, at 100% of the principal amount so prepaid, plus the Make-Whole Amount determined for the prepayment date with respect to such principal amount. The Company will give each holder of Notes written notice of each optional prepayment under this Section 8.2 not less than 30 days and not more than 60 days prior to the date fixed for such prepayment. Each such notice shall specify such prepayment date, the aggregate principal amount of the Notes to be prepaid on such date, the principal amount of each Note held by such holder to be prepaid (determined in accordance with Section 8.3), and the interest to be paid on the prepayment date with respect to such principal amount being prepaid, and shall be accompanied by a certificate of a Senior Financial Officer as to the estimated Make-Whole Amount due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation. Two Business Days prior to such prepayment, the Company shall deliver to each holder of Notes a certificate of a Senior Financial Officer specifying the calculation of such Make-Whole Amount as of the specified prepayment date. 8.3 ALLOCATION OF PARTIAL PREPAYMENTS. In the case of each partial prepayment of the Notes, the principal amount of the Notes to be prepaid shall be allocated among all of the Notes at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not theretofore called for prepayment. 8.4 MATURITY; SURRENDER, ETC. In the case of each prepayment of Notes pursuant to this Section 8, the principal amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment, together with interest on such principal amount accrued to such date and the applicable Make-Whole Amount, if any. From and after such date, unless the Company shall fail to pay such principal amount when so due and payable, together with the interest and Make-Whole Amount, if any, as aforesaid, interest on such principal amount shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to the Company and cancelled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note. 8.5 PURCHASE OF NOTES. The Company will not and will not permit any Affiliate to purchase, redeem, prepay or otherwise acquire, directly or indirectly, any of the outstanding Notes except (a) upon the payment or prepayment of the Notes in accordance with the terms of this Agreement and the Notes or (b) pursuant to an offer to purchase made by the Company or an Affiliate pro rata to the holders of all Notes at the time outstanding upon the same terms and conditions. MASTERCARD INTERNATIONAL INCORPORATED 15 NOTE PURCHASE AGREEMENT Any such offer shall provide each holder with sufficient information to enable it to make an informed decision with respect to such offer, and shall remain open for at least 20 Business Days. If the holders of more than 25% of the principal amount of the Notes then outstanding accept such offer, the Company shall promptly notify the remaining holders of such fact and the expiration date for the acceptance by holders of Notes of such offer shall be extended by the number of days necessary to give each such remaining holder at least 10 Business Days from its receipt of such notice to accept such offer. The Company will promptly cancel all Notes acquired by it pursuant to any payment, prepayment or purchase of Notes pursuant to any provision of this Agreement and no Notes may be issued in substitution or exchange for any such Notes. 8.6 MAKE-WHOLE AMOUNT. The term "MAKE-WHOLE AMOUNT" means, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Note over the amount of such Called Principal, provided that the Make-Whole Amount may in no event be less than zero. For the purposes of determining the Make-Whole Amount, the following terms have the following meanings: "CALLED PRINCIPAL" means, with respect to any Note, the principal of such Note that is to be prepaid pursuant to Section 8.2 or has become immediately due and payable pursuant to Section 11, as the context requires. "DISCOUNTED VALUE" means, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Notes is payable) equal to the Reinvestment Yield with respect to such Called Principal. "REINVESTMENT YIELD" means, with respect to the Called Principal of any Note, 0.5% per annum plus the yield to maturity implied by (i) the yields reported, as of 10:00 A.M. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated as "USD" on the Bloomberg Financial Market Service (or such other display as may replace Page USD on the Bloomberg Financial Market Service) for actively traded U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable, the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities MASTERCARD INTERNATIONAL INCORPORATED 16 NOTE PURCHASE AGREEMENT having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield will be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice, and (b) interpolating linearly between (1) the actively traded U.S. Treasury security with the duration closest to and greater than the Remaining Average Life, and (2) the actively traded U.S. Treasury security with the duration closest to and less than the Remaining Average Life. "REMAINING AVERAGE LIFE" means, with respect to any Called Principal, the number of years that will elapse between the Settlement Date and June 30, 2008. "REMAINING SCHEDULED PAYMENTS" means, with respect to the Called Principal of any Note, all payments of interest on such Called Principal that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date and the payment of such Called Principal on June 30, 2008, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Notes, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to Section 8.2 or Section 11. "SETTLEMENT DATE" means, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 11, as the context requires. 9. AFFIRMATIVE COVENANTS The Company covenants that so long as any of the Notes are outstanding: 9.1 COMPLIANCE WITH LAW. The Company will and will cause each of its Subsidiaries to comply with all laws, ordinances or governmental rules or regulations to which each of them is subject, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of their respective properties or to the conduct of their respective businesses, in each case to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations would not reasonably be expected, individually or in the aggregate, to have a materially adverse MASTERCARD INTERNATIONAL INCORPORATED 17 NOTE PURCHASE AGREEMENT effect on the business, operations, financial condition, properties or assets of the Company and its Subsidiaries taken as a whole. 9.2 INSURANCE. The Company will and will cause each of its Subsidiaries to maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated. 9.3 MAINTENANCE OF PROPERTIES. The Company will and will cause each of its Subsidiaries to maintain and keep, or cause to be maintained and kept, their respective properties in good repair, working order and condition (other than ordinary wear and tear), so that the business carried on in connection therewith may be properly conducted at all times, provided that this Section 9.3 shall not prevent the Company or any Subsidiary from discontinuing the operation and the maintenance of any of its properties if such discontinuance is desirable in the conduct of its business and the Company has concluded that such discontinuance would not, individually or in the aggregate, have a materially adverse effect on the business, operations, financial condition, properties or assets of the Company and its Subsidiaries taken as a whole. 9.4 PAYMENT OF TAXES. The Company will and will cause each of its Subsidiaries to file all income tax or similar tax returns required to be filed in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, or levies payable by any of them, to the extent such taxes, assessments charges or levies have become due and payable and before they have become delinquent, provided that neither the Company nor any Subsidiary need pay any such tax, assessment, charge or levy, if (a) the amount, applicability or validity thereof is contested by the Company or such Subsidiary on a timely basis in good faith and in appropriate proceedings, and the Company or a Subsidiary has established adequate reserves therefor in accordance with GAAP on the books of the Company or such Subsidiary, or (b) the nonpayment of all such taxes, assessments, charges and levies in the aggregate would not reasonably be expected to have a materially adverse effect on the business, operations, financial condition, properties or assets of the Company and its Subsidiaries taken as a whole. 9.5 CORPORATE EXISTENCE, ETC. Subject to Section 10.2, the Company will at all times preserve and keep in full force and effect its corporate existence. The Company will at all times preserve and keep in full force and effect the corporate existence of each of its Subsidiaries (unless merged into the Company or a MASTERCARD INTERNATIONAL INCORPORATED 18 NOTE PURCHASE AGREEMENT Subsidiary) and all rights and franchises of the Company and its Subsidiaries unless, in the good faith judgment of the Company, the termination of or failure to preserve and keep in full force and effect such corporate existence, right or franchise would not, individually or in the aggregate, have a materially adverse effect on the business, operations, financial condition, properties or assets of the Company and its Subsidiaries taken as a whole. 9.6 COMPLIANCE WITH ERISA. The Company will not permit (a) any Plan to fail to satisfy the minimum funding standards of ERISA or the IRC for any plan year or part thereof or the seeking or obtaining of a waiver of such standards or the extension of any amortization period under section 412 of the IRC with respect thereto; (b) the filing of a notice of intent to terminate any Plan with the PBGC or the institution or continuation of proceedings under ERISA section 4042 to terminate or appoint a trustee to administer any Plan; (c) the aggregate "amount of unfunded benefit liabilities" (within the meaning of section 4001 (a)(1 8) of ERISA) under all Plans, determined in accordance with Title IV of ERISA, to exceed $10,000,000; (d) the Company or any ERISA Affiliate to incur or reasonably expect to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the IRC relating to employee benefit plans; (e) the Company or any ERISA Affiliate to withdraw from any Multiemployer Plan; or (f) the Company or any ERISA Affiliate to establish or amend any employee welfare benefit plan that provides post-employment welfare benefits in a manner that would increase the liability of the Company or any ERISA Affiliate thereunder; if any such event or events described in clause (a) through clause (f) above, either individually or together with any other such event or events, would reasonably be expected to have a Material Adverse Effect. As used in this Section 9.6, the terms "EMPLOYEE BENEFIT PLAN" and "EMPLOYEE WELFARE BENEFIT PLAN" shall have the respective meanings assigned to such terms in Section 3 of ERISA. 10. NEGATIVE COVENANTS The Company covenants that so long as any of the Notes are outstanding: 10.1 TRANSACTIONS WITH AFFILIATES. The Company will not and will not permit any Subsidiary to enter into directly or indirectly any Material transaction or Material group of related transactions (including without MASTERCARD INTERNATIONAL INCORPORATED 19 NOTE PURCHASE AGREEMENT limitation the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate (other than the Company or another Subsidiary), except pursuant to the reasonable requirements of the Company's or such Subsidiary's business and upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would be obtainable in a comparable arm's-length transaction with a Person not an Affiliate. 10.2 MERGER, CONSOLIDATION, ETC. The Company shall not consolidate with or merge with any other Person or convey, transfer or lease substantially all of its assets in a single transaction or series of transactions to any Person unless: (a) the successor formed by such consolidation or the survivor of such merger or the Person that acquires by conveyance, transfer or lease substantially all of the assets of the Company as an entirety, as the case may be, shall be a solvent corporation organized and existing under the laws of the United States or any State thereof (including the District of Columbia), and, if the Company is not such corporation, such corporation shall have executed and delivered to each holder of any Notes its assumption of the due and punctual performance and observance of each covenant and condition of this Agreement, the Other Agreements and the Notes; and (b) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing. No such conveyance, transfer or lease of substantially all of the assets of the Company shall have the effect of releasing the Company or any successor corporation that shall theretofore have become such in the manner prescribed in this Section 10.2 from its liability under this Agreement or the Notes. 10.3 NET WORTH. The Company will not permit Consolidated Net Worth at any time to be less than (a) $125,000,000, plus (b) the sum of the amounts calculated in respect of each fiscal quarter of the Company ending after December 31, 1997 equal, in the case of each such fiscal quarter, to the greater of (i) $0, or (ii) 50% of Consolidated Net Income for such fiscal quarter. MASTERCARD INTERNATIONAL INCORPORATED 20 NOTE PURCHASE AGREEMENT 11. EVENTS OF DEFAULT 11.1 EVENTS OF DEFAULT. An "EVENT OF DEFAULT" shall exist if any of the following conditions or events shall occur and be continuing: (a) PRINCIPAL AND INTEREST DEFAULTS -- (i) the Company defaults in the payment of any principal or Make-Whole Amount, if any, on any Note when the same becomes due and payable; or (ii) the Company defaults in the payment of any interest on any Note for more than five Business Days after the same becomes due and payable; or (b) OTHER DEFAULTS -- (i) the Company defaults in the performance of or compliance with any term contained in Section 10.3; or (ii) the Company defaults in the performance of or compliance with any term contained herein and such default is not remedied within 30 days after the earlier of (A) a Responsible Officer obtaining actual knowledge of such default and (B) the Company receiving written notice of such default from any holder of a Note (any such written notice to be identified as a "notice of default" and to refer specifically to this Section 11.1(b)(ii)); or (iii) any representation or warranty made in writing by or on behalf of the Company or by any officer of the Company in this Agreement or in any writing furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any material respect on the date as of which made or deemed made; or (c) BANKRUPTCY DEFAULTS -- (i) the Company (A) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, MASTERCARD INTERNATIONAL INCORPORATED 21 NOTE PURCHASE AGREEMENT (B) makes an assignment for the benefit of its creditors, (C) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (D) is adjudicated as insolvent or to be liquidated, or (E) takes corporate action for the purpose of any of the foregoing; or (ii) a court or governmental authority of competent jurisdiction enters an order appointing, without consent by the Company, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of the Company, or any such petition shall be filed against the Company and such petition shall not be dismissed within 60 days. 11.2 REMEDIES FOR EVENTS OF DEFAULT. (a) PRINCIPAL AND INTEREST DEFAULT. Upon the occurrence of any Event of Default described in Section 11.1(a), any one or more of each holder of Notes (with respect to amounts owed to such holder) and the Required Holders (with respect to amounts owed to all holders) may enforce its rights or the rights of all holders of Notes, as the case may be, either by suit in equity or by action at law, or both, in respect of each payment that is in default pursuant to Section 11.1(a). (b) OTHER DEFAULTS. Upon the occurrence of any Event of Default described in Section 11.1(b), the Required Holders may proceed to protect and enforce the rights of the holders of the Notes hereunder and under the Notes, either by suit in equity or by action at law, or both, whether for the specific performance of any covenant or agreement contained in this Agreement or in aid of the exercise of any power granted in this Agreement, provided that neither the Required Holders nor any holder of a Note shall have the right to exercise the remedies provided in Section 11.2(a) other than in accordance with Section 11.2(a). (c) BANKRUPTCY. Upon the occurrence of any Event of Default described in Section 11.1(c), (i) the Notes will forthwith mature and the entire unpaid principal amount of the Notes, plus all accrued and unpaid interest thereon and the Make-Whole Amount determined in respect of such principal amount (to the full extent permitted by applicable law) as of the date of such event, shall be immediately due and payable, in each and every case without presentment, demand, protest or further notice, all of which are hereby waived, and MASTERCARD INTERNATIONAL INCORPORATED 22 NOTE PURCHASE AGREEMENT (ii) each holder of Notes may prove for the debts owed to such holder under the Note Purchase Agreements and the Notes and make a claim therefor in any proceeding in respect of the insolvency, winding-up, liquidation or dissolution of the Company. (d) APPLICATION FOR LIQUIDATION. If, at any time, (i) an Event of Default under Section 11.1(a) is then continuing, (ii) the Company is subject to regulation and supervision by Governmental Authorities of the United States of America as an insured depository institution, (iii) the Notes would constitute a part of the Company's equity capital for purposes of such regulation and supervision if this Section 11.2(d) was applicable to such Event of Default, and (iv) such regulations require that if an Event of Default under Section 11.1(a) is continuing, then the remedies of the holders of the Notes in respect of such Event of Default shall be limited to petitioning such Governmental Authority for the liquidation, winding-up or dissolution of the Company, then the remedies at such time of the holders of the Notes in such event shall be limited to petitioning such Governmental Authority for the liquidation, winding-up or dissolution of the Company, and the entire unpaid principal amount of the Notes, plus all accrued and unpaid interest thereon and the Make-Whole Amount determined in respect of such principal amount (to the full extent permitted by applicable law) shall be due in connection with such liquidation, winding-up or dissolution of the Company, and each holder of Notes may prove for the debts owed to such holder under the Note Purchase Agreements and the Notes and make a claim therefor in any proceeding in respect of the winding-up, liquidation or dissolution of the Company. (e) LIMITATION ON REMEDIES. Notwithstanding Section 11.2(a) and Section 11.2(b), no holder of Notes may participate in the institution of the appointment of a receiver or trustee of the Company, or the institution of a proceeding in respect of the Company's insolvency, liquidation, bankruptcy, assignment for the benefit of creditors, reorganization or the institution of any other proceeding for the marshalling of the assets and liabilities of the Company, provided that this Section 11.2(e) shall not in any way limit Section 11.2(c). 11.3 LIMITATION ON DISTRIBUTION TO JUNIOR CREDITORS. The Company will not make any distribution of money or property of any nature in respect of (a) any obligation (including, without limitation, any equity claim) that ranks junior to the Notes under Section 12.1 MASTERCARD INTERNATIONAL INCORPORATED 23 NOTE PURCHASE AGREEMENT (b) obligations represented by capital, equity or other ownership interests of the Company, including, without limitation, claims of general partners, limited partners, stockholders and members, and claims derived from such interests, including, without limitation, declared distributions or dividends in respect of such interests, while any Default or Event of Default is continuing. 11.4 PAYMENT OF EXPENSES. If the Company defaults in the making of any payment due under any Note or in the performance or observance of any agreement contained in this Agreement and the Notes, the Company will pay to the holder thereof such further amounts, to the extent lawful, as shall be sufficient to pay the reasonable costs and expenses of collection or of otherwise enforcing such holder's rights, including reasonable counsel fees. The obligations of the Company under this Section 11.4 shall survive the payment of the Notes. 11.5 REMEDIES CUMULATIVE, NOT WAIVED. Subject to the provisions of Section 11 and Section 12, no remedy herein conferred upon any holder of any Note is intended to be exclusive of any other remedy and each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute. No course of dealing between the Company and any holder of any Note and no delay or failure in exercising any rights hereunder or under any Note in respect thereof shall operate as a waiver of any of the rights of any holder of such Note. 12. SUBORDINATION 12.1 SUBORDINATION. The obligations of the Company under the Notes with respect to the payment of outstanding principal of, interest on, and Make-Whole Amount, if any, due with respect thereto, is and shall be fully and irrevocably subordinate in right of payment and subject to the prior payment or provision for payment in full of all Indebtedness for Money Borrowed of the Company that was outstanding on the date of Closing or incurred by the Company during the period beginning on and including date of Closing and ending (but excluding) the date on which any of the events described in Section 11.1(c) shall have first occurred, except for (a) Indebtedness for Money Borrowed of the Company that is the subject of subordination provisions that rank on the same priority as the Notes or the class of obligations of which the Notes are a member (obligations in respect of the Notes shall rank pari passu with such claims), and (b) Indebtedness for Money Borrowed of the Company that is the subject of subordination provisions that rank junior to the Notes or the class of obligations of which the Notes are a member (obligations in respect of the Notes shall be senior to such claims). MASTERCARD INTERNATIONAL INCORPORATED 24 NOTE PURCHASE AGREEMENT Obligations made senior to the Company's obligations in respect of outstanding principal of and interest and Make-Whole Amount, if any, due with respect to, the Notes pursuant to this Section 12.1 are referred to herein as "SENIOR CLAIMS". 12.2 RIGHT TO RECEIVE PAYMENT. In the event of the appointment of a receiver or trustee of the Company or in the event of its insolvency, liquidation, bankruptcy, assignment for the benefit of creditors, reorganization (whether or not pursuant to bankruptcy laws) or any other marshalling of the assets and liabilities of the Company, the obligation of the Company to pay the principal of the Notes, together with interest accrued thereon and the Make-Whole Amount, if any, due with respect thereto, shall become immediately due and payable in full (notwithstanding any contrary provision of this Agreement or the Notes) but the holders of the Notes shall not be entitled to participate or share, ratably or otherwise, in the distribution of assets of the Company in satisfaction of such obligation to pay the principal of the Notes, together with the interest accrued thereon and any Make-Whole Amount, if any, due with respect thereto, until all Senior Claims have been fully satisfied (or provision made for payment if assets of the Company available to pay the same shall be adequate in amount to satisfy all such claims fully). Subject to the payment in full of all Senior Claims, the holders of Notes shall be, to the extent of distributions of property of the Company to the holders of Senior Claims to which the holders of Notes would be entitled but for this Section 12, subrogated to the rights of the holders of such Senior Claims. 12.3 NO SET-OFF. Each holder of Notes irrevocably waives, to the fullest extent permitted by law, any right to set off or otherwise apply any amount now or hereafter due or owing or payable by such holder on any account whatsoever against, or in or towards satisfaction of, any amount now or hereafter due or owing or payable, by the Company under this Agreement and the Notes. 13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES 13.1 REGISTRATION OF NOTES. The Company shall keep at its principal executive office a register for the registration and registration of transfers of Notes. The name and address of each holder of one or more Notes, each transfer thereof and the name and address of each transferee of one or more Notes shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name any Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. The Company shall give to any holder of a Note promptly upon request therefor, a complete and correct copy of the names and addresses of all registered holders of Notes. 13.2 TRANSFER AND EXCHANGE OF NOTES. Upon surrender of any Note at the principal executive office of the Company for registration of transfer or exchange (and in the case of a surrender for registration of transfer, duly endorsed or accompanied by a written instrument of transfer duly executed by the registered MASTERCARD INTERNATIONAL INCORPORATED 25 NOTE PURCHASE AGREEMENT holder of such Note or his attorney duly authorized in writing and accompanied by the address for notices of each transferee of such Note or part thereof), the Company shall execute and deliver, at the Company's expense (except as provided below), one or more new Notes (as requested by the holder thereof) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note shall be payable to such Person as such holder may request and shall be substantially in the form of Exhibit 1. Each such new Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Notes. Notes shall not be transferred in denominations of less than $250,000, provided that if necessary to enable the registration of transfer by a holder of its entire holding of Notes, one Note may be in a denomination of less than $250,000. Any transferee, by its acceptance of a Note registered in its name (or the name of its nominee), shall be deemed to have made the representation set forth in Section 6.2. 13.3 REPLACEMENT OF NOTES. Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note (which evidence shall be, in the case of an institutional investor, notice from such institutional investor of such ownership and such loss, theft, destruction or mutilation), and (a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided that if the holder of such Note is, or is a nominee for, a Purchaser or another holder of a Note with a minimum net worth of at least $10,000,000, such Person's own unsecured agreement of indemnity shall be deemed to be satisfactory), or (b) in the case of mutilation, upon surrender and cancellation thereof, the Company at its own expense shall execute and deliver, in lieu thereof, a new Note, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest shall have been paid thereon. 14. PAYMENTS ON NOTES 14.1 MANNER OF PAYMENT. The Company shall pay all amounts payable with respect to each Note (without any presentment of such Notes and without any notation of such payment being made thereon) by crediting, by federal funds bank wire transfer, the account of the holder thereof in any bank in the United States of America as may be designated in writing by such holder, or in such other manner as may be reasonably directed or to such other address in the United States of America as may be reasonably designated in writing by such holder. SCHEDULE A shall be deemed to constitute notice, direction or designation (as appropriate) by each Purchaser to the Company with respect to payments to be made to such Purchaser as aforesaid. In the absence of such MASTERCARD INTERNATIONAL INCORPORATED 26 NOTE PURCHASE AGREEMENT written direction, all amounts payable with respect to each Note shall be paid by check mailed and addressed to the registered holder of such Note at the address shown in the Note register maintained by the Company. 14.2 PAYMENTS DUE ON NON-BUSINESS DAYS. Any payment of principal of or Make-Whole Amount or interest on any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day without including the additional days elapsed in the computation of the interest payable on such next succeeding Business Day (interest in respect of such additional days being due on the next interest payment date). 15. EXPENSES, ETC. 15.1 TRANSACTION EXPENSES. Whether or not the transactions contemplated hereby are consummated, the Company will pay all costs and expenses (including reasonable attorneys' fees of a special counsel and, if reasonably required, local or other counsel) incurred by you and each Other Purchaser or holder of a Note in connection with such transactions and in connection with any amendments, waivers or consents under or in respect of this Agreement or the Notes (whether or not such amendment, waiver or consent becomes effective), including, without limitation: (a) the costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under this Agreement or the Notes or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement or the Notes, or by reason of being a holder of any Note; and (b) the costs and expenses, including financial advisors' fees, incurred in connection with the insolvency or bankruptcy of the Company or any Subsidiary or in connection with any work-out or restructuring of the transactions contemplated hereby and by the Notes. The Company will pay, and will save you and each other holder of a Note harmless from, all claims in respect of any fees, costs or expenses if any, of brokers and finders (other than those retained by you). 15.2 SURVIVAL. The obligations of the Company under this Section 15 will survive the payment or transfer of any Note, the enforcement, amendment or waiver of any provision of this Agreement or the Notes, and the termination of this Agreement. MASTERCARD INTERNATIONAL INCORPORATED 27 NOTE PURCHASE AGREEMENT 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT All representations and warranties contained herein shall survive the execution and delivery of this Agreement and the Notes, the purchase or transfer by you of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any subsequent holder of a Note, regardless of any investigation made at any time by or on behalf of you or any other holder of a Note. All statements contained in any certificate or other instrument delivered by or on behalf of the Company pursuant to this Agreement shall be deemed representations and warranties of the Company under this Agreement. Subject to the preceding sentence, this Agreement and the Notes embody the entire agreement and understanding between you and the Company and supersede all prior agreements and understandings relating to the subject matter hereof. 17. AMENDMENT AND WAIVER 17.1 REQUIREMENTS. This Agreement and the Notes may be amended, and the observance of any term hereof or of the Notes may be waived (either retroactively or prospectively), with (and only with) the written consent of the Company and the Required Holders, except that (a) no amendment or waiver of any of the provisions of any one or more of Section 1 through Section 6, or any defined term (as it is used therein), will be effective as to you unless consented to by you in writing, and (b) no such amendment or waiver may, without the written consent of the holder of each Note at the time outstanding affected thereby, (i) change the amount or time of any prepayment or payment of principal of, or reduce the rate or change the time of payment or method of computation of interest or of the Make-Whole Amount on, the Notes, (ii) change the percentage of the principal amount of the Notes the holders of which are required to consent to any such amendment or waiver, or (iii) amend any of Sections 8, Section 11.1(a), Section 11.2, Section 12, Section 17 or Section 20. 17.2 SOLICITATION OF HOLDERS OF NOTES. (a) SOLICITATION. The Company will provide each holder of the Notes (irrespective of the amount of Notes then owned by it) with sufficient information, sufficiently far in advance of the date a decision is required, to enable such holder to make an informed and considered decision with respect to any proposed amendment, waiver or consent in respect of any of the provisions hereof or of the Notes. The Company will deliver executed or true and correct copies of each amendment, waiver or consent effected pursuant to the provisions of this Section 17 to each holder of MASTERCARD INTERNATIONAL INCORPORATED 28 NOTE PURCHASE AGREEMENT outstanding Notes promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the requisite holders of Notes. (b) PAYMENT. The Company will not directly or indirectly pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, or grant any security, to any holder of Notes as consideration for or as an inducement to the entering into by any holder of Notes of any waiver or amendment of any of the terms and provisions hereof unless such remuneration is concurrently paid, or security is concurrently granted, on the same terms, ratably to each holder of Notes then outstanding even if such holder did not consent to such waiver or amendment. 17.3 BINDING EFFECT, ETC. Any amendment or waiver consented to as provided in this Section 17 applies equally to all holders of Notes and is binding upon them and upon each future holder of any Note and upon the Company without regard to whether such Note has been marked to indicate such amendment or waiver. No such amendment or waiver will extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon. No course of dealing between the Company and the holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of any holder of such Note. As used herein, the term "THIS AGREEMENT" and references thereto shall mean this Agreement as it may from time to time be amended or supplemented. 17.4 NOTES HELD BY COMPANY, ETC. Solely for the purpose of determining whether the holders of the requisite percentage of the aggregate principal amount of Notes then outstanding approved or consented to any amendment, waiver or consent to be given under this Agreement or the Notes, or have directed the taking of any action provided herein or in the Notes to be taken upon the direction of the holders of a specified percentage of the aggregate principal amount of Notes then outstanding, Notes directly or indirectly owned by the Company or any of its Affiliates shall be deemed not to be outstanding. 18. NOTICES All notices and communications provided for hereunder shall be in writing and sent (a) by telecopy if the sender on the same day sends a confirming copy of such notice by a recognized overnight delivery service (charges prepaid), (b) by registered or certified mail with return receipt requested (postage prepaid), or (c) by a recognized overnight delivery service (with charges prepaid). Any such notice must be sent: MASTERCARD INTERNATIONAL INCORPORATED 29 NOTE PURCHASE AGREEMENT (i) if to you or your nominee, to you or it at the address specified for such communications in SCHEDULE A, or at such other address as you or it shall have specified to the Company in writing, (ii) if to any other holder of any Note, to such holder at such address as such other holder shall have specified to the Company in writing, or (iii) if to the Company, to the Company at MASTERCARD INTERNATIONAL INCORPORATED 2000 Purchase Street Purchase, NY 10577-2509 Mr. John D. Ranieri Vice President and Treasurer T: 914-249-5741 F: 914-249-4205 or at such other address as the Company shall have specified to the holder of each Note in writing. Notices under this Section 18 will be deemed given only when actually received. 19. REPRODUCTION OF DOCUMENTS This Agreement and all documents relating thereto, including, without limitation, (a) consents, waivers and modifications that may hereafter be executed, (b) documents received by you at the Closing (except the Notes themselves), and (c) financial statements, certificates and other information previously or hereafter furnished to you, may be reproduced by you by any photographic, photostatic, microfilm, microcard, miniature photographic or other similar process and you may destroy any original document so reproduced. The Company agrees and stipulates that, to the extent permitted by applicable law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by you in the regular course of business) and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. This Section 19 shall not prohibit the Company or any other holder of Notes from contesting any such reproduction to the same extent that it could contest the original, or from introducing evidence to demonstrate the inaccuracy of any such reproduction. 20. CONFIDENTIAL INFORMATION MASTERCARD INTERNATIONAL INCORPORATED 30 NOTE PURCHASE AGREEMENT For the purposes of this Section 20, "CONFIDENTIAL INFORMATION" means information delivered to you by or on behalf of the Company or any Subsidiary in connection with the transactions contemplated by or otherwise pursuant to this Agreement that is proprietary in nature and that was clearly marked or labeled or otherwise adequately identified when received by you as being confidential information of the Company or such Subsidiary, provided that such term does not include information that (a) was publicly known or otherwise known to you prior to the time of such disclosure, (b) subsequently becomes publicly known through no act or omission by you or any Person acting on your behalf, (c) otherwise becomes known to you from a source other than through disclosure by the Company or any Subsidiary that is not, to your actual knowledge, subject to an applicable duty of confidentiality to the Company or such Subsidiary with respect thereto, or (d) constitutes financial statements delivered to you under Section 7.1 that are otherwise publicly available. You will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by you in good faith to protect confidential information of third parties delivered to you, provided that you may deliver or disclose Confidential Information to (i) your directors, officers, trustees, employees, agents, attorneys and affiliates (to the extent such disclosure reasonably relates to the administration of the investment represented by your Notes), (ii) your financial advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with the terms of this Section 20, (iii) any other holder of any Note, (iv) any Person to which you sell or offer to sell such Note or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20), (v) any Person from which you offer to purchase any security of the Company (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20), (vi) any federal or state regulatory authority having jurisdiction over you, MASTERCARD INTERNATIONAL INCORPORATED 31 NOTE PURCHASE AGREEMENT (vii) the National Association of Insurance Commissioners or any similar organization, or any nationally recognized rating agency that requires access to information about your investment portfolio, or (viii) any other Person to which such delivery or disclosure may be necessary or appropriate (A) to effect compliance with any law, rule, regulation or order applicable to you, (B) in response to any subpoena or other legal process, (C) in connection with any litigation to which you are a party or (D) if an Event of Default has occurred and is continuing, to the extent you may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under your Notes and this Agreement. Each holder of a Note, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 20 as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to any holder of a Note of information required to be delivered to such holder under this Agreement or requested by such holder (other than a holder that is a party to this Agreement or its nominee), such holder will enter into an agreement with the Company embodying the provisions of this Section 20. 21. MISCELLANEOUS 21.1 SUCCESSORS AND ASSIGNS. All covenants and other agreements contained in this Agreement by or on behalf of any of the parties hereto bind and inure to the benefit of their respective successors and assigns (including, without limitation, any subsequent holder of a Note) whether so expressed or not. 21.2 SEVERABILITY. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction. 21.3 CONSTRUCTION. Each covenant contained herein shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse MASTERCARD INTERNATIONAL INCORPORATED 32 NOTE PURCHASE AGREEMENT compliance with any other covenant. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person. Certain capitalized terms used in this Agreement are defined in SCHEDULE B; references to a "Schedule" or an "Exhibit" are, unless otherwise specified, to a Schedule or an Exhibit attached to this Agreement; and references to Sections are, unless otherwise specified, references to Sections of this Agreement. 21.4 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto. 21.5 GOVERNING LAW. THIS AGREEMENT AND THE NOTES SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAW OF THE STATE OF NEW YORK EXCLUDING CHOICE-OF-LAW PRINCIPLES OF THE LAW OF SUCH STATE THAT WOULD REQUIRE THE APPLICATION OF THE LAWS OF A JURISDICTION OTHER THAN SUCH STATE. [Remainder of page intentionally blank; next page is signature page.] MASTERCARD INTERNATIONAL INCORPORATED 33 NOTE PURCHASE AGREEMENT If you are in agreement with the foregoing, please sign the form of agreement on the accompanying counterpart of this Agreement and return it to the Company, whereupon the foregoing shall become a binding agreement between you and the Company. Very truly yours, MASTERCARD INTERNATIONAL INCORPORATED By: /s/ John D. Ranieri ---------------------------------------- Name: John D. Ranieri Title: Vice President and Treasurer The foregoing is hereby agreed to as of the date thereof. UNITY MUTUAL LIFE INSURANCE COMPANY BY: ADVANTUS CAPITAL MANAGEMENT, INC. By: /s/ Loren Haugland ----------------------------------------- Name: Loren Haugland Title: Vice President MASTERCARD INTERNATIONAL INCORPORATED 34 NOTE PURCHASE AGREEMENT SCHEDULE B DEFINED TERMS As used herein, the following terms have the respective meanings set forth below or set forth in the Section hereof following such term: "AFFILIATE" means, at any time, and with respect to any Person, any other Person that at such time directly or indirectly through one or more intermediaries Controls, or is Controlled by, or is under common Control with, such first Person. As used in this definition, "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Unless the context otherwise clearly requires, any reference to an "Affiliate" is a reference to an Affiliate of the Company. "BUSINESS DAY" means any day other than a Saturday, a Sunday or a day on which any of the commercial banks specified by any holder of Notes or the Company for the receipt of payments in respect of the Notes are required or authorized to be closed. "CAPITAL LEASE" means, at any time, a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP. "CLOSING" is defined in Section 3. "COMPANY" is defined in the introductory sentence to this Agreement. "CONSOLIDATED NET INCOME" means, in respect of any period, net income of the Company and its subsidiaries for such period determined in accordance with GAAP. "CONSOLIDATED NET WORTH" means, at any time, the total equity of the Company and its subsidiaries at such time determined in accordance with GAAP. "CONFIDENTIAL INFORMATION" is defined in Section 20. "DEFAULT" means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default. "ENVIRONMENTAL LAWS" means any and all Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including but not limited to those related to hazardous substances or wastes, air emissions and discharges to waste or public systems. MASTERCARD INTERNATIONAL INCORPORATED Schedule B-1 NOTE PURCHASE AGREEMENT "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect. "ERISA AFFILIATE" means (a) any corporation subject to ERISA whose employees are treated as employed by the same employer as the employees of the Company under IRC Section 414(b), (b) any trade or business subject to ERISA whose employees are treated as employed by the same employer as the employees of the Company under IRC Section 414(c), (c) solely for purposed Section 302 of ERISA and Section 412 of the IRC, any organization subject to ERISA that is a member of an affiliated service group of which the Company is a member under IRC Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any party subject to ERISA that is a party to an arrangement with the Company and whose employees are aggregated with the employees of the Company under IRC Section 414(o). If a trade or business (including without limitation a corporation) becomes an ERISA Affiliate, the provisions hereof applicable to such trade or business as an ERISA Affiliate shall not apply thereto until as of the date it becomes an ERISA Affiliate. If a trade or business ceases to be an ERISA Affiliate, the provision hereof applicable to such trade or business as an ERISA Affiliate shall no longer apply thereto as of the date of such cessation. "EVENT OF DEFAULT" is defined in Section 11.1. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "GAAP" means generally accepted accounting principles as in effect from time to time in the United States of America. "GOVERNMENTAL AUTHORITY" means (a) the government of (i) the United States of America or any State or other political subdivision thereof, or (ii) any jurisdiction in which the Company or any Subsidiary conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company or any Subsidiary, or MASTERCARD INTERNATIONAL INCORPORATED Schedule B-2 NOTE PURCHASE AGREEMENT (b) any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government. "HOLDER" means, with respect to any Note, the Person in whose name such Note is registered in the register maintained by the Company pursuant to Section 13.1. "INDEBTEDNESS" means, with respect to any Person, without duplication, (a) its liabilities for borrowed money and its redemption obligations in respect of mandatorily redeemable Preferred Stock; (b) its liabilities for the deferred purchase price of property acquired by such Person which in accordance with GAAP would be included as a liability on the balance sheet of such Person (including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property); (c) all liabilities appearing on its balance sheet in accordance with GAAP in respect of Capital Leases; (d) all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities); (e) all its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money); (f) Swaps of such Person; and (g) any Guaranty of such Person with respect to liabilities of a type described in any of clause (a) through clause (f) hereof. provided that Indebtedness shall not include trade payables and accrued expenses relating to employees, in each case arising in the ordinary course of business. As used in this definition, "Guaranty" means, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any indebtedness, dividend or other obligation of any other Person in any manner, whether directly or indirectly, including (without limitation) obligations incurred through an agreement, contingent or otherwise, by such Person: (a) to purchase such indebtedness or obligation or any property constituting security therefor; (b) to advance or supply funds (i) for the purchase or payment of such indebtedness or obligation, or MASTERCARD INTERNATIONAL INCORPORATED Schedule B-3 NOTE PURCHASE AGREEMENT (ii) to maintain any working capital or other balance sheet condition or any income statement condition of any other Person or otherwise to advance or make available funds for the purchase or payment of such indebtedness or obligation; (c) to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such indebtedness or obligation of the ability of any other Person to make payment of the indebtedness or obligation; or (d) otherwise to assure the owner of such indebtedness or obligation against loss in respect thereof. In any computation of the indebtedness or other liabilities of the obligor under any Guaranty, the indebtedness or other obligations that are the subject of such Guaranty shall be assumed to be direct obligations of such obligor. "Swaps" means, with respect to any Person, payment obligations with respect to interest rate swaps, currency swaps and similar obligations obligating such Person to make payments, whether periodically or upon the happening of a contingency. For the purposes of this Agreement, the amount of the obligation under any Swap shall be the amount determined in respect thereof as of the end of the then most recently ended fiscal quarter of such Person, based on the assumption that such Swap had terminated at the end of such fiscal quarter, and in making such determination, if any agreement relating to such Swap provides for the netting of amounts payable by and to such Person thereunder or if any such agreement provides for the simultaneous payment of amounts by and to such Person, then in each such case, the amount of such obligation shall be the net amount so determined. "INDEBTEDNESS FOR MONEY BORROWED OF THE COMPANY" means any obligation of, or any obligation guaranteed by, the Company for the repayment of money borrowed, whether or not evidenced by bonds, debentures, notes or other written instruments, and any deferred obligation for payment of the purchase price of property or assets. "IRC" means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time. "LIEN" means, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capital Lease, upon or with respect to any property or asset of such Person (including in the case of stock, stockholder agreements, voting trust agreements and all similar arrangements). The term "Lien" does not include negative pledge clauses in agreements relating to the borrowing of money. "MAKE-WHOLE AMOUNT" is defined in Section 8.6. "MATERIAL" means material in relation to the business, operations, financial condition, assets, or properties of the Company and its Subsidiaries taken as a whole. MASTERCARD INTERNATIONAL INCORPORATED Schedule B-4 NOTE PURCHASE AGREEMENT "MATERIAL ADVERSE EFFECT" means a material adverse effect on (a) the business, operations, financial condition, assets or properties of the Company and its Subsidiaries taken as a whole, or (b) the ability of the Company to perform its obligations under this Agreement and the Notes, or (c) the validity or enforceability of this Agreement or the Notes. "MEMORANDUM" is defined in Section 5.3. "MULTIEMPLOYER PLAN" means any Plan that is a "multiemployer plan" (as such term is defined in section 4001 (a)(3) of ERISA). "NOTES" is defined in Section 1. "OFFICER'S CERTIFICATE" means a certificate of a Senior Financial Officer or of any other officer of the Company whose responsibilities extend to the subject matter of such certificate. "OTHER AGREEMENTS" is defined in Section 2. "OTHER PURCHASERS" is defined in Section 2. "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto. "PERSON" means an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization, or a government or agency or political subdivision thereof. "PLAN" means an "employee benefit plan" (as defined in section 3(3) of ERISA) that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate is reasonably expected to have any liability. "PREFERRED STOCK" means any class of capital stock of a corporation that is preferred over any other class of capital stock of such corporation as to the payment of dividends or the payment of any amount upon liquidation or dissolution of such corporation. "PROPERTY" or "PROPERTIES" means, unless otherwise specifically limited, real or personal property of any kind, tangible or intangible, choate or inchoate. "PURCHASERS" is defined in Section 2. "PTE" is defined in Section 6.2(a). MASTERCARD INTERNATIONAL INCORPORATED Schedule B-5 NOTE PURCHASE AGREEMENT "REQUIRED HOLDERS" means, at any time, the holder or holders of more than 66-2/3% in principal amount of the Notes at the time outstanding (exclusive of Notes then owned by the Company or any of its Affiliates). "RESPONSIBLE OFFICER" means any Senior Financial Officer and any other officer of the Company with responsibility for the administration of the relevant portion of this Agreement. "SECURITIES ACT" means the Securities Act of 1933, as amended from time to time. "SENIOR CLAIMS" is defined in Section 12.1 (b). "SENIOR FINANCIAL OFFICER" means the chief financial officer, principal accounting officer, treasurer or comptroller of the Company. "SIGNIFICANT SUBSIDIARY" means at any time any Subsidiary that would at such time constitute a "significant subsidiary" (as such term is defined in Regulation S-X of the Securities and Exchange Commission as in effect on the date of the Closing) of the Company. "SOURCE" is defined in Section 6.2. "SUBSIDIARY" means, as to any Person, any corporation, association or other business entity in which such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such entity, and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries (unless such partnership or joint venture can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Unless the context otherwise clearly requires, any reference to a "Subsidiary" is a reference to a Subsidiary of the Company. MASTERCARD INTERNATIONAL INCORPORATED Schedule B-6 NOTE PURCHASE AGREEMENT EXHIBIT 1 FORM OF NOTE THE RIGHT TO PAYMENT IN RESPECT OF THIS NOTE IS SUBORDINATED TO CERTAIN SENIOR CLAIMS AGAINST THE COMPANY TO THE EXTENT AND IN THE MANNER PROVIDED IN THE NOTE PURCHASE AGREEMENTS REFERRED TO BELOW. MASTERCARD INTERNATIONAL INCORPORATED 6.67% Subordinated Note due June 30, 2008 No. R-[____________] [Date] $[________________] PPN: 57636@ AA 8 FOR VALUE RECEIVED, the undersigned, MASTERCARD INTERNATIONAL INCORPORATED (herein called the "Company"), a non-stock corporation organized and existing under the laws of the State of Delaware hereby promises to pay to [_______________], or registered assigns, the principal sum of ________________ DOLLARS on June 30, 2008, with interest (computed on the basis of a 360-day year of twelve 30-day months) (a) on the unpaid balance thereof at the rate of 6.67% per annum from the date hereof, payable semiannually, on the 30th day of June and December in each year, commencing with the June 30 or December 30 next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law on any overdue payment (including any overdue prepayment) of principal, any overdue payment of interest and any overdue payment of any Make-Whole Amount (as defined in the Note Purchase Agreements referred to below), payable semiannually as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to 6.67%. Payments of principal, Make-Whole Amount, if any, and interest shall be made in such coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debts to the registered holder hereof at the address shown in the register maintained by the Company for such purpose, in the manner provided in the Note Purchase Agreements. This Note is one of a series of Subordinated Notes (herein called the "Notes") issued pursuant to those certain Note Purchase Agreements, dated as of June 30, 1998 (as from time to time amended, the "Note Purchase Agreements"), between the Company and the respective Purchasers named therein and is entitled to the benefits thereof. Each holder of this Note will be deemed, by its acceptance hereof, (i) to have agreed to the confidentiality provisions set forth in Section 20 of the Note Purchase Agreements and (ii) to have made the representation set forth in Section 6 of the Note Purchase Agreements. This Note is a registered Note and, as provided in the Note Purchase Agreements, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written MASTERCARD INTERNATIONAL INCORPORATED Exhibit 1-1 NOTE PURCHASE AGREEMENT instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary. This Note is subject to optional prepayment, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreements, but not otherwise. This Note will be governed by, and construed and enforced in accordance with, the law as provided in the Note Purchase Agreement. MASTERCARD INTERNATIONAL INCORPORATED By: ___________________________________ Name: Title: MASTERCARD INTERNATIONAL INCORPORATED Exhibit 1-2 NOTE PURCHASE AGREEMENT EXHIBIT 4.4(a) FORM OF OPINION OF SPECIAL COUNSEL TO THE COMPANY Matters To Be Covered In Opinion of Special Counsel To the Company 1. Each of the Company and its subsidiaries is duly organized, validly existing and in good standing and the Company has the requisite legal power and authority to issue and sell the Notes and to execute and deliver the Note Purchase Agreements and the Notes. 2. Each of the Company and its Significant Subsidiaries is duly qualified and in good standing as a foreign business organization in appropriate jurisdictions. 3. The Note Purchase Agreements and the Notes have been duly authorized and executed, and delivered and are legal, valid, binding and enforceable. 4. The Note Purchase Agreements and the Notes do not conflict with charter documents, laws or other agreements. 5. All consents required to issue and sell the Notes and to execute and deliver the Note Purchase Agreements have been obtained. 6. There is no litigation questioning the validity of the Note Purchase Agreements or the Notes. 7. Neither the registration of the Notes under the Securities Act of 1933, nor the qualification of an indenture under the Trust Indenture Act of 1939 in respect of the Notes, is required. 8. The use of the proceeds of the Notes does not violate any regulation of the Federal Reserve Board in respect of margin lending. 9. Company not an "investment company", or a company "controlled" by an "investment company", under the Investment Company Act of 1940, as amended. The opinion shall cover such other matters relating to the sale of the Notes as the Purchaser or its special counsel may reasonably request and may contain qualifications and exceptions (including, without limitation, qualifications as to the enforceability of documents and instruments) that are customarily found in New York law opinions delivered in transactions similar to the transactions contemplated by the Note Purchase Agreement. With respect to matters of fact on which such opinion is based, such counsel shall be entitled to rely on appropriate certificates of public officials and officers of the Company and customary searches of public records. Such opinion shall state that (i) Hebb & Gitlin, counsel to the Purchasers, shall be entitled to rely on such opinion for purposes of rendering their opinion to the Purchaser on the date of Closing, (ii) subsequent holders of Notes shall be entitled to rely on such opinion as if it were addressed to them, and (iii) copies of such opinion may be delivered or disclosed to (a) governmental, regulatory and other authorities having jurisdiction over the affairs of each holder MASTERCARD INTERNATIONAL INCORPORATED Exhibit 4.4(a)-1 NOTE PURCHASE AGREEMENT EXHIBIT 4.4(a) of Notes (including, without limitation, the National Association of Insurance Commissioners of the United States of America) and (b) any potential transferee of any Notes. MASTERCARD INTERNATIONAL INCORPORATED Exhibit 4.4(a)-2 NOTE PURCHASE AGREEMENT EX-8 4 y49195a2ex8.txt OPINION OF PILLSBURY WINTHROP LLP Exhibit 8 [PILLSBURY WINTHROP LLP LOGO] ONE BATTERY PARK PLAZA NEW YORK, NY 10004-1490 212.858.1000 F:212.858.1500 November 9, 2001 MasterCard International Incorporated 2000 Purchase Street Purchase, New York 10577 Re: Share Exchange and Integration Agreement by and among MasterCard Incorporated, MasterCard International Incorporated, and Europay International S.A. and Related Documents Ladies and Gentlemen: We have acted as special tax counsel for MasterCard International Incorporated, a Delaware non-stock corporation ("MasterCard International"), and MasterCard Incorporated, a Delaware stock corporation ("MasterCard Incorporated"), in connection with: (i) the proposed merger of MasterCard Merger Sub, Inc., a Delaware non-stock corporation and wholly-owned subsidiary of MasterCard Incorporated ("Merger Sub"), with and into MasterCard International, with MasterCard International surviving (the "Conversion"); and (ii) the proposed transfer by (A) the shareholders of Europay International S.A., a Belgian company limited by shares ("Europay"), other than MasterCard/Europay U.K. Limited, a United Kingdom limited company ("MEPUK") and MasterCard International, of their shares of Europay stock and (B) the shareholders of MEPUK of their shares of MEPUK stock, in each case to MasterCard Incorporated in exchange for shares of MasterCard Incorporated stock (the "Integration"). In connection with the Conversion and Integration, MasterCard Incorporated has filed a registration statement on Form S-4 (as amended, the "Registration Statement") with the United States Securities and Exchange Commission (the "Commission"). As special tax counsel to MasterCard International and MasterCard Incorporated, we have examined certain documents(1) and the proxy statement-prospectus to be used in - -------------- (1) The documents that we have examined include (i) the Share Exchange and Integration Agreement by and among MasterCard Incorporated, MasterCard International, and Europay (the "Integration [PILLSBURY WINTHROP LLP LOGO] November 9, 2001 Page 2 connection with the Conversion and Integration (the "Proxy Statement"), including the discussions contained therein under the headings "Questions and Answers About the Conversion; Q: What are the U.S. federal income tax consequences of the conversion?," "Questions and Answers About the Integration; Q: What are the U.S. federal income tax consequences of the integration?," and "Federal Income Tax Consequences of the Conversion and the Integration." The Proxy Statement is part of the Registration Statement. Except as otherwise provided, capitalized terms not defined herein have the meanings ascribed to them in the Integration Agreement or in the letter that MasterCard International has delivered to us on or about the date hereof that contains certain statements and representations upon which we have relied for purposes of this opinion (the "Representation Letter"). This opinion is based upon and subject to: (i) the Conversion and Integration being effected in the manner described in the Proxy Statement and in accordance with the terms of the Operative Documents; (ii) the accuracy and completeness of the statements and representations in the Representation Letter, and their continuing accuracy and completeness at all times through each of the Closing Date, the Transition Date and the second anniversary of the Transition Date; (iii) the accuracy and completeness of the statements concerning the Conversion and Integration set forth in the Proxy Statement, including the purposes of MasterCard International for consummating the Conversion and Integration; - ----------------- Agreement"), (ii) the Agreement and Plan of Merger by and among MasterCard International, MasterCard Incorporated and Merger Sub, (iii) the Share Exchange Agreement by and among MasterCard Incorporated, MasterCard International and each Europay shareholder, other than MEPUK and MasterCard International, (iv) the Amended and Restated Certificate of Incorporation of MasterCard Incorporated, (v) the Amended and Restated Bylaws of MasterCard Incorporated, (vi) the Amended and Restated Certificate of Incorporation of MasterCard International, (vii) the Amended and Restated Bylaws of MasterCard International and (viii) the Share Exchange Agreement by and among MasterCard Incorporated and the shareholders of MEPUK, in the case of each of (i) through (vii), in the form filed as an exhibit to the Registration Statement and, in the case of (viii), in the form of a draft dated October 1, 2001 (collectively, the "Operative Documents"). [PILLSBURY WINTHROP LLP LOGO] November 9, 2001 Page 3 (iv) the accuracy and completeness of the representations set forth in any Operative Document; and (v) our assumptions that (A) any statement or representation in the Representation Letter or in any Operative Document that is directly or indirectly qualified by "knowledge," "belief," "understanding," "estimation" or other similar qualification is accurate and complete as if it had been made without any qualification, and (B) in the case of any statement or representation in the Representation Letter or in any Operative Document relating to the absence of any plan, intention, understanding or agreement, there is in fact no such plan, intention, understanding or agreement. On the basis of the foregoing and upon consideration of applicable law, subject to the limitations set forth herein and the qualifications stated therein, the discussion set forth under the caption "Federal Income Tax Consequences of the Conversion and Integration" in the Proxy Statement, insofar as it relates to matters of law and legal conclusions, constitutes our opinion as to the material United States federal income tax consequences of the Conversion or the Integration, or both, to the principal members of MasterCard International, the shareholders of Europay and MEPUK, MasterCard International and MasterCard Incorporated. This opinion is limited to the federal income tax laws of the United States and does not consider the effects of any state, local or non-United States tax laws or any United States federal laws other than those pertaining to income taxation. This opinion may not be relied upon except as to the consequences specifically discussed herein. This opinion is based on the Internal Revenue Code of 1986, as amended, Treasury regulations promulgated thereunder, Internal Revenue Service rulings interpreting the foregoing, and pertinent judicial authority, all as in effect on the date hereof, and assumes that no substantial changes in such authorities will be promulgated or occur between the date hereof and each of the Closing Date, the Transition Date and the second anniversary of the Transition Date. We hereby consent to being named in the Registration Statement as special tax counsel that has passed upon the above-referenced United States federal income tax matters with respect to the Conversion and Integration for MasterCard Incorporated. We also hereby consent to the filing of this opinion as an exhibit to the Registration Statement. In giving such consent we do not thereby admit that we are in the category of [PILLSBURY WINTHROP LLP LOGO] November 9, 2001 Page 4 persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Commission thereunder. Very truly yours, /s/ Pillsbury Winthrop LLP EX-10.1 5 y49195a2ex10-1.txt CREDIT AGREEMENT EXHIBIT 10.1 ================================================================================ $1,000,000,000 CREDIT AGREEMENT AMONG MASTERCARD INTERNATIONAL INCORPORATED, THE SEVERAL LENDERS FROM TIME TO TIME PARTIES HERETO, SALOMON SMITH BARNEY INC. AS ARRANGER AND CITIBANK, N.A. AS ADMINISTRATIVE AGENT BANK ONE, NA FLEET NATIONAL BANK HSBC BANK USA AS CO-SYNDICATION AGENTS DATED AS OF JUNE 6, 2000 ================================================================================ TABLE OF CONTENTS
PAGE SECTION 1. DEFINITIONS......................................................... 1 1.1 Defined Terms....................................................... 1 1.2 Other Definitional Provisions....................................... 13 SECTION 2. AMOUNT AND TERMS OF LOANS........................................... 13 2.1 Revolving Credit Commitments........................................ 13 2.2 Procedure for Revolving Credit Borrowing............................ 13 2.3 Term Loans.......................................................... 14 2.4 Procedure for Term Loan Borrowing................................... 14 2.5 Facility Fee........................................................ 14 2.6 Termination or Restriction of Commitments........................... 15 2.7 Repayment of Revolving Credit Loans and Term Loans; Evidence of Debt 15 2.8 Optional Prepayments................................................ 16 2.9 Conversion and Continuation Options................................. 16 2.10 CAF Advances........................................................ 17 2.11 Procedure for CAF Advance Borrowing................................. 17 2.12 CAF Advance Payments................................................ 20 2.13 Evidence of Debt.................................................... 20 2.14 Certain Restrictions................................................ 21 2.15 Minimum Amounts of Tranches......................................... 21 2.16 Interest Rates and Payment Dates.................................... 21 2.17 Computation of Interest and Fees.................................... 21 2.18 Inability to Determine Interest Rate................................ 22 2.19 Pro Rata Treatment and Payments..................................... 22 2.20 Swing Line Commitment............................................... 23 2.21 Illegality.......................................................... 25 2.22 Requirements of Law................................................. 25 2.23 Taxes............................................................... 26 2.24 Indemnity........................................................... 28 2.25 Commitment Increases................................................ 28 SECTION 3. REPRESENTATIONS AND WARRANTIES...................................... 29 3.1 Financial Condition................................................. 29 3.2 No Change........................................................... 30 3.3 Corporate Existence; Compliance with Law............................ 30 3.4 Corporate Power; Authorization; Enforceable Obligations............. 30 3.5 No Legal Bar........................................................ 31 3.6 No Material Litigation.............................................. 31 3.7 No Default.......................................................... 31 3.8 Ownership of Property; Liens........................................ 31 3.9 Intellectual Property............................................... 31 3.10 No Burdensome Restrictions.......................................... 31
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PAGE 3.11 Taxes............................................................... 31 3.12 Federal Regulations................................................. 32 3.13 ERISA............................................................... 32 3.14 Investment Company Act; Other Regulations........................... 32 3.15 Subsidiaries........................................................ 32 3.16 Purpose of Loans.................................................... 33 3.17 Environmental Matters............................................... 33 SECTION 4. CONDITIONS PRECEDENT................................................ 33 4.1 Conditions to Initial Loans......................................... 33 4.2 Conditions to Each Loan............................................. 35 SECTION 5. AFFIRMATIVE COVENANTS............................................... 35 5.1 Financial Statements................................................ 35 5.2 Certificates; Other Information..................................... 36 5.3 Payment of Obligations.............................................. 36 5.4 Conduct of Business and Maintenance of Existence.................... 37 5.5 Maintenance of Property; Insurance.................................. 37 5.6 Inspection of Property; Books and Records; Discussions.............. 37 5.7 Notices............................................................. 37 5.8 Environment Laws.................................................... 38 SECTION 6. NEGATIVE COVENANTS.................................................. 38 6.1 Maintenance of Net Worth............................................ 39 6.2 Limitation on Liens................................................. 39 6.3 Limitation on Fundamental Changes................................... 40 6.4 Limitation on Sale of Assets........................................ 40 6.5 Limitation on Dividends............................................. 41 6.6 Limitation on Investments, Loans and Advances....................... 41 6.7 Limitation on Transactions with Affiliates.......................... 41 6.8 Limitation on Changes in Fiscal Year................................ 41 6.9 Limitation on Lines of Business..................................... 41 SECTION 7. EVENTS OF DEFAULT................................................... 41 SECTION 8. THE ADMINISTRATIVE AGENT............................................ 44 8.1 Appointment......................................................... 44 8.2 Delegation of Duties................................................ 44 8.3 Exculpatory Provisions.............................................. 44 8.4 Reliance by Administrative Agent.................................... 45 8.5 Notice of Default................................................... 45 8.6 Non-Reliance on Administrative Agent and Other Lenders.............. 45 8.7 Indemnification..................................................... 46 8.8 Administrative Agent in Its Individual Capacity..................... 46 8.9 Successor Administrative Agent...................................... 46
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PAGE SECTION 9. MISCELLANEOUS....................................................... 47 9.1 Amendments and Waivers.............................................. 47 9.2 Notices............................................................. 47 9.3 No Waiver; Cumulative Remedies...................................... 48 9.4 Survival of Representations and Warranties.......................... 48 9.5 Payment of Expenses and Taxes....................................... 48 9.6 Successors and Assigns; Participations and Assignments.............. 49 9.7 Adjustments; Set-off................................................ 52 9.8 Counterparts........................................................ 53 9.9 Severability........................................................ 53 9.10 Integration......................................................... 53 9.11 Termination of Commitments and Swing Line Commitments............... 53 9.12 GOVERNING LAW....................................................... 53 9.13 Submission To Jurisdiction; Waivers................................. 53 9.14 Acknowledgements.................................................... 54 9.15 WAIVERS OF JURY TRIAL............................................... 54
iii CREDIT AGREEMENT, dated as of June 6,2000 among MASTERCARD INTERNATIONAL INCORPORATED, a Delaware corporation (the "Borrower"), the several banks and other financial institutions from time to time parties to this Agreement (the "Lenders"), and Citibank, N.A. ("Citibank"), as administrative agent for the Lenders hereunder (Citibank, in its capacity as administrative agent, the "Administrative Agent"). The parties hereto hereby agree as follows: SECTION 1. DEFINITIONS 1.1 Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "ABR": a fluctuating interest rate per annum in effect from time to time, which rate per annum shall at all times be equal to the highest of: (i) the rate of interest announced publicly by Citibank in New York City from time to time as Citibank's base rate; and (ii) 1.00% per annum above the latest three-week moving average of secondary market morning offering rates in the United States for three-month certificates of deposit of major United States money market banks, such three-week moving average being determined weekly on each Monday (or, if any such day is not a Business Day, on the next succeeding Business Day) for the three-week period ending on the previous Friday by Citibank on the basis of such rates reported by certificate of deposit dealers to and published by the Federal Reserve Bank of New York or, if such publications shall be suspended or terminated, on the basis of quotations for such rates received by Citibank from three New York certificate of deposit dealers of recognized standing selected by Citibank, in either case adjusted to the nearest 0.25%, or if there is no nearest 0.25%, to the next higher 0.25%; and (iii) for any day, 0.50% per annum above the Federal Funds Rate in effect on such day. Each change in any interest rate provided for herein based upon the ABR resulting from a change in the ABR shall take effect at the time of such change in the ABR. "ABR Loans": Revolving Credit Loans and Term Loans hereunder the rate of interest applicable to which is based upon the ABR. "Administrative Agents": as defined in the preamble hereof. "Administrative Questionnaire": an Administrative Questionnaire in a form supplied by the Administrative Agent. CREDIT AGREEMENT 2 "Affiliate": as to any Person, any other Person (other than a Subsidiary) which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" of a Person means the power, directly or indirectly, either to (a) vote 25% or more of the securities having ordinary voting power for the election of directors of such Person or (b) direct or cause the direction of the management and policies of such Person, whether by contract or otherwise. "Agreement": this Credit Agreement, as amended, supplemented or otherwise modified from time to time. "Applicable Margin": for each LIBOR Loan .23% per annum, plus, on each day on which the drawn portion of the aggregate amount of the Commitments (including Swing Line Loans, CAF Advances and Term Loans): (i) exceeds 33% of the aggregate amount of the Commitments as is in effect on the Closing Date but is less than or equal to 66% of the aggregate amount of such Commitments, 0.025% and (ii) exceeds 66% of the aggregate amount of the Commitments as is in effect on the Closing Date, 0.05%. "Assignee": as defined in subsection 9.6(c). "Available Commitment": as to any Lender on any day, an amount equal to the excess, if any, of (a) the amount of such Lender's Commitment over (b) the aggregate of (i) the aggregate principal amount of all Revolving Credit Loans and Term Loans made by such Lender then outstanding and (ii) an amount equal to such Lender's Commitment Percentage of the aggregate principal amount of all Swing Line Loans then outstanding (after giving effect to any repayment of Swing Line Loans on such day). "Board": the Board of Governors of the Federal Reserve System of the United States (or any successor). "Borrowing Date": any Business Day specified in a notice pursuant to subsections 2.2, 2.4, 2.11 or 2.20 as a date on which the Borrower requests the Lenders or the Swing Line Lender, as the case may be, to make Loans hereunder. "Business": as defined in subsection 3.17. "Business Day": a day other than a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to close; provided that when such term is used to describe a day on which a borrowing, payment or interest rate determination is to be made in respect of a LIBOR Loan or a LIBOR CAF Advance, such day shall also be a day on which dealings in foreign currencies and exchange between banks may be carried on in London, England. "CAF Advance": each CAF Advance made pursuant to subsection 2.10. "CAF Advance Availability Period": the period from and including the Closing Date to and including the date which is 7 days prior to the Revolving Credit Termination Date. CREDIT AGREEMENT 3 "CAF Advance Confirmation": each confirmation by the Borrower of its acceptance of CAF Advance Offers, which confirmation shall be substantially in the form of Exhibit D-3 and shall be delivered to the Administrative Agent by facsimile transmission. "CAF Advance Interest Payment Date": as to each CAF Advance, each interest payment date specified by the Borrower for such CAF Advance in the related CAF Advance Request. "CAF Advance Maturity Date": as to any CAF Advance, the date specified by the Borrower pursuant to subsection 2.11(a) in its acceptance of the related CAF Advance Offer. "CAF Advance Offer": each offer by a Lender to make CAF Advances pursuant to a CAF Advance Request, which offer shall contain the information specified in Exhibit D-2 and shall be delivered to the Administrative Agent by telephone, immediately confirmed by facsimile transmission. "CAF Advance Request": each request by the Borrower for Lenders to submit bids to make CAF Advances, which request shall contain the information in respect of such requested CAF Advances specified in Exhibit D- 1 and shall be delivered to the Administrative Agent in writing, by facsimile transmission, or by telephone, immediately confirmed by facsimile transmission. "Capital Lease": as applied to any Person, any lease of any property (whether real, personal or mixed) by that Person as lessee which, in conformity with GAAP, is, or is required to be, accounted for as a capital lease on the balance sheet of that Person. "Capitalized Lease Obligations": all obligations under Capital Leases of any Person, in each case taken at the amount thereof accounted for as liabilities in accordance with GAAP. "Capital Stock": any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants or options to purchase any of the foregoing. "Cash Equivalents": (i) cash equivalents in existence on March 31, 2000 as set forth on Schedule 1.1(a) (and, in the case of any such cash equivalents described on Schedule 1.1(a), any replacement of any such cash equivalents with substantially the same investment), (ii) securities issued or directly and fully guaranteed or insured by the United States or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof) having maturities of not more than one year from the date of acquisition, (iii) Dollar denominated time deposits, certificates of deposit and bankers acceptances of any Lender or any bank whose short- term commercial paper rating from Standard & Poor's Corporation ("S&P") is at least A-1 or the equivalent thereof or from Moody's Investors Service, Inc. ("Moody's") is at least P-1 or the equivalent thereof (any such bank, an "Approved Bank"), with maturities CREDIT AGREEMENT 4 of not more than one year from the date of acquisition, (iv) repurchase obligations with a term of not more than seven days for underlying securities of the type described in clause (ii) entered into with an Approved Bank, (v) commercial paper issued by, or guaranteed by, any Approved Bank or by the parent company of any Approved Bank or commercial paper issued by, or guaranteed by, any industrial or financial company with a short-term commercial paper rating of at least A-1 or the equivalent thereof by S&P or at least P-1 or the equivalent thereof by Moody's, or issued by, or guaranteed by, any industrial or financial company with a long term unsecured debt rating of at least A or A2, or the equivalent of each thereof, from S&P or Moody's, respectively, and in each case maturing within one year after the date of acquisition and (vi) any fund or funds making substantially all of their investments in investments of the type described in clauses (i) through (v) above. "C/D Assessment Rate": for any day as applied to any loan the interest rate applicable to which is based upon the ABR, the annual assessment rate in effect on such day which is payable by a member of the Bank Insurance Fund maintained by the Federal Deposit Insurance Corporation (the "FDIC") classified as well-capitalized and within supervisory subgroup "B" (or a comparable successor assessment risk classification) within the meaning of 12 C.F.R. Section 327.4 (or any successor provision) to the FDIC (or any successor) for the FDIC's (or such successor's) insuring time deposits at offices of such institution in the United States. "C/D Reserve Percentage": for any day as applied to any loan the interest rate applicable to which is based upon the ABR, that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board, for determining the maximum reserve requirement for a Depositary Institution (as defined in Regulation D of the Board) in respect of new non-personal time deposits in Dollars having a maturity of 30 days or more. "Citibank": as defined in the preamble hereof. "Closing Date": the date on which the conditions precedent set forth in subsection 4.1 shall be satisfied. "Code": the Internal Revenue Code of 1986, as amended from time to time. "Commitment": as to any Lender, the obligation of such Lender to make Revolving Credit Loans and Term Loans to the Borrower hereunder in an aggregate principal amount at any one time outstanding not to exceed the amount set forth opposite such Lenders name on Schedule 1.2, as such amount may be reduced or increased from time to time in accordance with the provisions of this Agreement. "Commitment Increase Offer": as defined in subsection 2.25(a). "Commitment Increase Supplement": as defined in subsection 2.25(c). "Commitment Percentage": as to any Lender at any time, the percentage which such Lender's Commitment then constitutes of the aggregate Commitments (or, at any CREDIT AGREEMENT 5 time after the Commitments shall have expired or terminated, the percentage which the aggregate principal amount of such Lender's Revolving Credit Loans and Term Loans then outstanding constitutes of the aggregate principal amount of the Revolving Credit Loans and Term Loans then outstanding). "Commitment Period": the period from and including the date hereof to but not including the Revolving Credit Termination Date or such earlier date on which the Commitments shall terminate as provided herein. "Commonly Controlled Entity": an entity, whether or not incorporated, which is under common control with the Borrower within the meaning of Section 4001 of ERISA or is part of a group which includes the Borrower and which is treated as a single employer under Section 414 of the Code. "Consolidated Net Income": shall mean, as at date for determination thereof, consolidated net income of the Borrower and its Subsidiaries, determined in accordance with GAAP. "Consolidated Net Worth": shall mean, as at any date of determination, the stockholders' equity of the Borrower as determined in accordance with GAAP and as would be reflected on a consolidated balance sheet of the Borrower prepared as of such date. "Contractual Obligation": as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by, which it or any of its property is legally bound. "Declined Amount": as defined in subsection 2.25(a). "Declining Lender": as defined in subsection 2.25(a). "Default": any of the events specified in Section 7, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "Dollars" and "$": dollars in lawful currency of the United States. "Environmental Laws": any and all foreign, Federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees, requirements of any Governmental Authority or other Requirements of Law (including common law) regulating, relating to or imposing liability or standards of conduct concerning protection of human health or the environment, as now or may at any time hereafter be in effect. "ERISA": the Employee Retirement Income Security Act of 1974, as amended from time to time. "Eurocurrency, Reserve Requirements": for any day as applied to a LIBOR Loan or a LIBOR CAF Advance, the aggregate (without duplication) of the rates (expressed as CREDIT AGREEMENT 6 a decimal fraction) of reserve requirements in effect on such day (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board or other Governmental Authority having jurisdiction with respect thereto) dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of the Board) maintained by a member bank of such system. "Event of Default": any of the events specified in Section 7, provided that any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "Executive Incentive Compensation Plan": as described in the annual report of the Borrower. "Federal Funds Rate" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (i) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (ii) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average of the quotations received by the Administrative Agent from three federal funds brokers of recognized standing selected by the Administrative Agent. "Fixed Rate CAF Advance Request": any CAF Advance made pursuant to a Fixed Rate CAF Advance Request. "Fixed Rate CAF Advance": any CAF Advance Request requesting the Lenders to offer to make CAF Advances at a fixed rate of interest (as opposed to a rate composed of the London Interbank Offered Rate plus (or minus) a margin). "Foreign Subsidiaries": any Subsidiary of the Borrower organized under the laws of any jurisdiction outside the United States. "GAAP": generally accepted accounting principles in the United States in effect from time to time. "Governmental Authority": any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guarantee Obligation": as to any Person (the "guaranteeing person"), any obligation of (a) the guaranteeing person or (b) another Person (including, without limitation, any bank under any letter of credit) to induce the creation of which the guaranteeing person has issued a reimbursement, counterindemnity or similar obligation, in either case guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends CREDIT AGREEMENT 7 or other obligations (the "primary obligations") of any other third Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of the guaranteeing person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (1) for the purchase or payment of any such primary obligation or (2) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof, provided, however, that the term Guarantee Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guarantee Obligation of any guaranteeing person shall be deemed to be the lower of (a) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee Obligation is made and (b) the maximum amount for which such guaranteeing person may be liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless such primary obligation and the maximum amount for which such guaranteeing person may be liable are not stated or determinable, in which case the amount of such Guarantee Obligation shall be such guaranteeing person's maximum reasonably anticipated liability in respect thereof as determined by the Borrower in good faith. "Indebtedness": as to any Person, (a) all indebtedness of such Person for borrowed money, (b) the deferred purchase price of assets or services which in accordance with GAAP would be shown on the liability side of the balance sheet of such Person, (c) the face amount of all letters of credit issued for the account of such Person and, without duplication, all drafts drawn thereunder, (d) all Indebtedness of a second Person secured by any Lien on any property owned by such first Person, whether or not such Indebtedness has been assumed, (e) all Capitalized Lease Obligations of such Person, (f) all obligations of such Person to pay a specified purchase price for goods or services whether or not delivered or accepted, eg., take-or-pay and similar obligations, (g) all obligations of such Person under Interest Rate Agreements, and (h) without duplication, all Guarantee Obligations of such Person, provided that Indebtedness shall not include trade payables and accrued expenses relating to employees, in each case arising in the ordinary course of business. "Insolvency": with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of Section 4245 of ERISA. "Insolvent": pertaining to a condition of Insolvency. "Interest Payment Date": (a) as to any Loan the rate of interest applicable to which is based upon the ABR, the last day of each March, June, September and December, on the Revolving Credit Termination Date and on the Termination Date, (b) as to any LIBOR Loan or LIBOR CAF Advance having an Interest Period of three months or less, or any Fixed Rate CAF Advance having an Interest Period of 90 days or CREDIT AGREEMENT 8 less, the last day of such Interest Period and (c) as to any LIBOR Loan or any Fixed Rate CAF Advance having an Interest Period longer than three months or 90 days, respectively, each day which is three months or 90 days, respectively, or a whole multiple thereof, after the first day of such Interest Period and the last day of such Interest Period. "Interest Period": (a) with respect to any LIBOR Loan: (i) initially, the period commencing on the borrowing or conversion date, as the case may be, with respect to such LIBOR Loan and ending one, two, three or six months thereafter, as selected by the Borrower in its notice of borrowing or notice of conversion, as the case may be, given with respect thereto; and (ii) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such LIBOR Loan and ending one, two, three or six months thereafter, as selected by the Borrower by irrevocable notice to the Administrative Agent not less than three Business Days prior to the last day of the then current Interest Period with respect thereto; (b) with respect to any CAF Advance, the period specified in the CAF Advance Confirmation with respect to such CAF Advance; provided that all of the foregoing provisions relating to Interest Periods are subject to the following: (A) if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless, in the case of LIBOR Loans or LIBOR CAF Advances, the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day; (B) any Interest Period that would otherwise extend beyond the Revolving Credit Termination Date or beyond the date final payment is due on the Term Loans shall end on the Revolving Credit Termination Date or such date of final payment, as the case may be; and (C) any Interest Period pertaining to a LIBOR Loan or a LIBOR CAF Advance that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month. "Interest Rate Agreement": any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate futures contract, interest rate option contract or other similar agreement or arrangement designed to protect any Person against fluctuations in interest rates. CREDIT AGREEMENT 9 "LIBOR CAF Advance": any CAF Advance made pursuant to a LIBOR CAF Advance Request. "LIBOR CAF Advance Request": any CAF Advance Request requesting the Lenders to offer to make CAF Advances at an interest rate equal to the London Interbank Offered Rate plus (or minus) a margin. "LIBOR Loans": Revolving Credit Loans and Term Loans hereunder the rate of interest applicable to which is based upon the London Interbank Offered Rate. "Lien": any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), charge or other security interest or any preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement and any Capital Lease having substantially the same economic effect as any of the foregoing). "Loan": any Revolving Credit Loan, Term Loan, CAF Advance or Swing Line Loan made by any Lender pursuant to this Agreement. "Loan Documents": this Agreement and any Notes issued hereunder. "London Interbank Offered Base Rate": with respect to each day during each Interest Period pertaining to a LIBOR Loan or a LIBOR CAF Advance, the rate appearing on Page 3750 of the Telerate Service (or on any successor or substitute page of such service, or any successor to or substitute for such service, providing rate quotations comparable to those currently provided on such page of such Service, as determined by the Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market) at approximately 11:00 A.M., London time, two Business Days prior to the commencement of such Interest Period, as the rate for dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not available at such time for any reason, then the `London Interbank Offered Base Rate" with respect to such LIBOR Loan or LIBOR CAF Advance for such Interest Period shall be the rate at which dollar deposits of $5,000,000 and for a maturity comparable to such Interest Period are offered by the principal London office of Citibank in immediately available funds in the London interbank market at approximately 11:00 A.M., London time, two Business Days prior to the commencement of such Interest Period. "London Interbank Offered Rate": with respect to each day during each Interest Period pertaining to a LIBOR Loan or a LIBOR CAF Advance, a rate per annum determined for such day in accordance with the following formula (rounded upward to the nearest 1/100th of 1%): London Interbank Offered Base Rate -------------------------------------------- 1.00 - Eurocurrency Reserve Requirements "Margin Stock" means margin stock within the meaning of Regulation U. CREDIT AGREEMENT 10 "Material Adverse Effect": a material adverse effect on (a) the business, assets, operations, property or condition (financial or otherwise) of the Borrower and its Subsidiaries taken as a whole (it being understood that a settlement failure by one or more members, in and of itself, shall not be deemed an event, development or circumstance that has a "Material Adverse Effect") or (b) the validity or enforceability of this or any of the other Loan Documents or the rights or remedies of the Administrative Agent or the Lenders hereunder or thereunder. "Materials of Environmental Concern": any gasoline or petroleum (including crude oil or any fraction thereof) or petroleum products or any hazardous or toxic substances, materials or wastes, defined or regulated as such in or under any Environmental Law, including, without limitation, asbestos, polychlorinated biphenyls and urea-formaldehyde insulation. "Multiemployer Plan": a Plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "New Lender": as defined in subsection 2.25(b). "New Lender Supplement": as defined in subsection 2.25(b). "Non-Excluded Taxes": as defined in subsection 2.23. "Notes": the collective reference to the Revolving Credit Notes, the Term Notes and the Swing Line Note. "Participant": as defined in subsection 9.6(b). "PRGC": the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA. "Permitted Investments": shall mean: (a) investments in Cash Equivalents; (b) investments in existence on the date of this Agreement and disclosed in the financial statements previously delivered to the Administrative Agent and the Lenders and as set forth on Schedule 1.1(b) (and, in the case of any investments described on Schedule 1.1(b), any replacement of any such investment with substantially the same investment in no greater amounts); (c) investments in any Subsidiary by the Borrower, including any investment made to acquire such Subsidiary; (d) investments in the Borrower by any existing or future Subsidiary of the Borrower; (e) sales of goods or services on trade credit terms in the ordinary course of business; (f) loans and advances to employees in the ordinary course of business; (g) loans or advances to vendors or contractors of the Borrower in the ordinary course of business; (h) lease, utility and other similar deposits in the ordinary course of business; (i) stock, obligations or securities received in the ordinary course of business in settlement of debts owing to the Borrower or a Subsidiary as a result of foreclosure, perfection or enforcement of any Lien, or in connection with good faith settlement of delinquent obligations owing to the Borrower or a Subsidiary; (j) investments in partnerships or joint ventures engaged in a business related to that engaged in by the Borrower on the date of this Agreement and investments CREDIT AGREEMENT 11 in other entities engaged in the development or production of new technologies directly related to the businesses engaged in by the Borrower and its Subsidiaries on the date of this Agreement, which investments do not exceed an aggregate amount at any time outstanding of 25% of the total assets of the Borrower and its consolidated Subsidiaries; (k) investments in securities of member banks by the Borrower pursuant to the Executive Incentive Compensation Plan in an aggregate amount not to exceed at any time outstanding not more than 15% of the total assets of the Borrower and its consolidated Subsidiaries; (1) investments or assumed Indebtedness under Interest Rate Agreements and currency exchange and protection agreements entered into in the ordinary course of business; and (m) in addition to Permitted Investments described in the foregoing clauses (a) through (1), investments in an aggregate amount not to exceed 20% of the total assets of the Borrower and its consolidated Subsidiaries at any one time outstanding. "Person": an individual, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature. "Plan": at a particular time, any employee benefit plan which is covered by ERISA and in respect of which the Borrower or a Commonly Controlled Entity is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Properties": as defined in subsection 3.17. "Register": as defined in subsection 9.6(e). "Regulation U": Regulation U of the Board as in effect from time to time. "Reorganization": with respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of Section 4241 of ERISA. "Reportable Event": any of the events set forth in Section 4043(c) of ERISA, other than those events as to which the thirty day notice period is waived under subsections .22, .23, .25, .27 or .28 of PBGC Reg. Section 4043. "Required Lenders": at any time, Lenders the Commitment Percentages of which aggregate more than 50%. "Requirement of Law": as to any Person, the certificate of incorporation and by-laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Responsible Officer": the chief executive officer and president or the executive vice president, global resources of the Borrower or, with respect to financial matters, the chief financial officer or the treasurer of the Borrower. CREDIT AGREEMENT 12 "Revolving Credit Loans": as defined in subsection 2.1. "Revolving Credit Note": as defined in subsection 2.7(e). "Revolving Credit Termination Date": June 5, 2001 or such earlier date as the Commitments shall terminate pursuant to the terms hereof; provided that if said date is not a Business Day, the Revolving Credit Termination Date shall be the immediately preceding Business Day. "Single Employer Plan": any Plan which is covered by Title IV of ERISA, but which is not a Multiemployer Plan. "Subsidiary": (i) as to any Person, a corporation, partnership or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person and (ii) Mondex International . Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower. "Swing Line Commitment": the Swing Line Lender's obligation to make Swing Line Loans pursuant to subsection 2.20. "Swing Line Lender": Citibank in its capacity as provider of the Swing Line Loans. "Swing Line Loan Participation Certificate": a certificate in substantially the form of Exhibit E. "Swing Line Loans": as defined in subsection 2.20(a). "Swing Line Note": as defined in subsection 2.20(b). "Term Loans": as defined in subsection 2.3. "Term Note": as defined in subsection 2.7(e). "Termination Date": the date that is the first anniversary of the Revolving Credit Termination Date. "Tranche": the collective reference to LIBOR Loans the then current Interest Periods with respect to all of which begin on the same date and end on the same later date (whether or not such loans shall originally have been made on the same day); Tranches may be identified as "LIBOR Tranches" "Transferee": as defined in subsection 9.6(g). CREDIT AGREEMENT 13 "Type": as to any Revolving Credit Loan or Term Loan, its nature as an ABR Loan or a LIBOR Loan. "United States": the United States of America. 1.2 Other Definitional Provisions. (a) Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in any Notes or any certificate or other document made or delivered pursuant hereto. (b) As used herein and in any Notes, and any certificate or other document made or delivered pursuant hereto, accounting terms relating to the Borrower and its Subsidiaries not defined in subsection 1-1 and accounting terms partly defined in subsection 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP. (c) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, subsection, Schedule and Exhibit references are to this Agreement unless otherwise specified. (d) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. (e) The words "asset" and "property" shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights. SECTION 2. AMOUNT AND TERMS OF LOANS 2.1 Revolving Credit Commitments. (a) Subject to the terms and conditions hereof, each Lender severally agrees to make revolving credit loans ("Revolving Credit Loans") to the Borrower from time to time during the Commitment Period in an aggregate principal amount at any one time outstanding, when added to such Lender's Commitment Percentage of all outstanding Swing Line Loans, not to exceed the amount of such Lender's Commitment, provided that the aggregate principal amount of all Loans outstanding at any time shall not exceed the aggregate amount of the Commitments at such time. During the Commitment Period the Borrower may use the Commitments by borrowing, prepaying the Revolving Credit Loans in whole or in part, and reborrowing, all in accordance with the terms and conditions hereof. (b) The Revolving Credit Loans may from time to time be LIBOR Loans, ABR Loans, or a combination thereof, as determined by the Borrower and notified to the Administrative Agent in accordance with subsections 2.2 and 2.9, provided that no Revolving Credit Loan shall be made as a LIBOR Loan after the day that is one month prior to the Revolving Credit Termination Date. 2.2 Procedure for Revolving Credit Borrowing. The Borrower may borrow under the Commitments during the Commitment Period on any Business Day, provided that the Borrower shall give the Administrative Agent irrevocable notice (which notice must be received CREDIT AGREEMENT 14 by the Administrative Agent prior to 10:00 A.M., New York City time, (a) three Business Days prior to the requested Borrowing Date, if all or any part of the requested Revolving Credit Loans are to be initially LIBOR Loans, or (b) on the same Business Day of the requested Borrowing Date, otherwise), specifying (i) the amount to be borrowed, (ii) the requested Borrowing Date, (iii) whether the borrowing is to be of LIBOR Loans, ABR Loans, or a combination thereof and (iv) if the borrowing is to be entirely or partly of LIBOR Loans, the respective amounts of each such Type of Revolving Credit Loan and the respective lengths of the initial Interest Periods therefor. Each borrowing under the Commitments shall be in an amount equal to at least $10,000,000 or a whole multiple of $1,000,000 in excess thereof (or, if the then aggregate Available Commitments are less than $10,000,000, such lesser amount). Upon receipt of any such notice from the Borrower, the Administrative Agent shall promptly notify each Lender thereof. Each Lender will make the amount of its pro rata share of each borrowing available to the Administrative Agent for the account of the Borrower at the office of the Administrative Agent specified in subsection 9.2 prior to 12:00 Noon, New York City time, on the Borrowing Date requested by the Borrower in funds immediately available to the Administrative Agent. Such borrowing will then be made available to the Borrower by the Administrative Agent crediting the account of the Borrower on the books of such office with the aggregate of the amounts made available to the Administrative Agent by the Lenders and in like funds as received by the Administrative Agent. 2.3 Term Loans. The Revolving Credit Loans outstanding at the close of business on the Revolving Credit Termination Date shall, at the option of the Borrower, convert on such date into term loans (the "Term Loans") to the Borrower. The Term Loans may from time to time be (a) LIBOR Loans, (b) ABR Loans or (c) a combination thereof, as determined by the Borrower and notified to the Administrative Agent in accordance with subsections 2.4 and 2.9. 2.4 Procedure for Term Loan Borrowing. The Borrower shall give the Administrative Agent irrevocable notice (which notice must be received by the Administrative Agent prior to 10:00 A.M., New York City time, (a) three Business Days prior to the Revolving Credit Termination Date, if all or any part of the Term Loans are to be initially LIBOR Loans or (b) one Business Day prior to the Revolving Credit Termination Date, otherwise) requesting that the Lenders make the Term Loans on the Revolving Credit Termination Date and specifying (i) the amount to be borrowed, (ii) whether the Term Loans are to be initially LIBOR Loans, ABR Loans or a combination thereof, and (iii) if the Term Loans are to be entirely or partly LIBOR Loans the respective lengths of the initial Interest Periods therefor. Upon receipt of such notice the Administrative Agent shall promptly notify each Lender thereof. The aggregate principal amount of the Term Loans shall be equal to the aggregate principal amount of the Revolving Credit Loans outstanding on the Revolving Credit Termination Date and the Term Loans shall be made without any payments being made by the Lenders. Promptly after the making of its Term Loan each Lender shall mark any Revolving Credit Note held by it "cancelled" and deliver the same to the Borrower. 2.5 Facility Fee. The Borrower agrees to pay to the Administrative Agent for the account of each Lender a facility fee for the period from and including the first day of the Commitment Period to the Termination Date, computed at the rate of .07% per annum on (i) the average daily Commitment of such Lender, whether or not utilized, from and including the first CREDIT AGREEMENT 15 day of the Commitment Period until the Revolving Credit Termination Date, and on (ii) the outstanding principal amount of the Term Loans of such Lender, if any, thereafter. Such facility fee shall be payable quarterly in arrears on the last day of each March, June, September and December, on the Revolving Credit Termination Date or such earlier date as the Commitments shall terminate as provided herein and on the Termination Date, commencing on the first of such dates to occur after the date hereof. 2.6 Termination or Restriction of Commitments. The Borrower shall have the right, upon not less than five Business Days' notice to the Administrative Agent, to terminate the Commitments or, from time to time, to reduce the amount of the Commitments, provided that after giving effect to such termination or reduction, the aggregate outstanding principal amount of the Loans shall not exceed the aggregate Commitments. Any such reduction shall be in an amount equal to $ 10,000,000 or a whole multiple of $ 1,000,000 in excess thereof and shall reduce permanently the Commitments then in effect. Termination of the Commitments shall also terminate the obligation of the Lenders to make the Term Loans. 2.7 Repayment of Revolving Credit Loans and Term Loans; Evidence of Debt. (a) The Borrower hereby unconditionally promises to pay to the Administrative Agent for the account of each Lender (i) the then unpaid principal amount of each Revolving Credit Loan of such Lender on the Revolving Credit Termination Date (or such earlier date on which the Revolving Credit Loans become due and payable pursuant to Section 7), and (ii) the principal amount of the Term Loan of such Lender on the Termination Date (or the then unpaid principal amount of such Term Loan, on the date that the Term Loans become due and payable pursuant to Section 7). The Borrower hereby further agrees to pay interest on the unpaid principal amount of the Revolving Credit Loans and Term Loans from time to time outstanding from the date hereof until payment in full thereof at the rates per annum., and on the dates, set forth in subsection 2.16. (b) Each Lender shall maintain in accordance with its usual practice appropriate records evidencing indebtedness of the Borrower to such Lender resulting from each Revolving Credit Loan and Term Loan of such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time under this Agreement. (c) The Administrative Agent shall maintain the Register pursuant to subsection 9.6(e), and a record therein for each Lender, in which shall be recorded (i) the amount of each Revolving Credit Loan and Term Loan made hereunder, the Type thereof and each Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) both the amount of any sum received by the Administrative Agent hereunder from the Borrower and each Lender's share thereof. (d) The entries made in the Register and the records of each Lender maintained pursuant to subsection 2.7(b) shall, to the extent permitted by applicable law, be prima facie evidence of the existence and amounts of the obligations of the Borrower therein recorded; provided, however, that the failure of any Lender or the Administrative Agent to maintain the Register or any such record, or any error therein, shall not in any manner affect the CREDIT AGREEMENT 16 obligation of the Borrower to repay (with applicable interest) the Revolving Credit Loans and Term Loans made to such Borrower by such Lender in accordance with the terms of this Agreement. (e) The Borrower agrees that, upon the request to the Administrative Agent by any Lender, the Borrower will execute and deliver to such Lender (i) a promissory note of the Borrower evidencing the Revolving Credit Loans of such Lender, substantially in the form of Exhibit A attached hereto with appropriate insertions as to date and principal amount (a "Revolving Credit Note"), and/or (ii) a promissory note of the Borrower evidencing the Term Loan of such Lender, substantially in the form of Exhibit B with appropriate insertions as to date and principal amount (a "Term Note"). 2.8 Optional Prepayments. The Borrower may on the last day of any Interest Period with respect thereto, in the case of LIBOR Loans, or at any time and from time to time, in the case of ABR Loans, prepay the Revolving Credit Loans or the Term Loans, in whole or in part, without premium or penalty, upon at least two Business Days' irrevocable notice to the Administrative Agent, if such prepayment is to be applied in whole or in part to LIBOR Loans, and upon same day notice otherwise (which notices shall be made on the relevant day not later than 10:00 A.M., New York City time), specifying the date and amount of prepayment and whether the prepayment is of LIBOR Loans, or a combination of LIBOR and ABR Loans, and, if of a combination thereof, the amount allocable to each; in the case of ABR Loans, notice shall be same day. Upon receipt of any such notice the Administrative Agent shall promptly notify each Lender thereof. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein, together with any accrued interest to such date on the amount prepaid and any other amounts payable pursuant to subsection 2.24. Amounts prepaid on account of the Term Loans may not be reborrowed. Partial prepayments shall be in an aggregate principal amount of $10,000,000 or a whole multiple of $ 1,000,000 in excess thereof. The Borrower shall not have the right to prepay any principal amount of any CAF Advance except as provided in subsection 2.12(a). Prepayments of any Swing Line Loan shall be as provided in subsection 2.20(a). 2.9 Conversion and Continuation Options. (a) The Borrower may elect from time to time to convert LIBOR Loans to ABR Loans, by giving the Administrative Agent at least three Business Days' prior irrevocable notice of such election, provided that any such conversion of LIBOR Loans may only be made on the last day of an Interest Period with respect thereto. The Borrower may elect from time to time to convert ABR Loans to LIBOR Loans by giving the Administrative Agent at least three Business Days' prior irrevocable notice of such election. Any such notice of conversion to LIBOR Loans shall specify the length of the initial Interest Period or Interest Periods therefor. Upon receipt of any such notice the Administrative Agent shall promptly notify each Lender thereof. All or any part of outstanding LIBOR Loans and ABR Loans may be converted as provided herein, provided that (i) no Revolving Credit Loan or Term Loan may be converted into a LIBOR Loan when any Event of Default has occurred and is continuing and the Administrative Agent has or the Required Lenders have determined that such a conversion is not appropriate, (ii) no Revolving Credit Loan or Term Loan may be converted into a LIBOR Loan after the date that is one month prior to the Revolving Credit Termination Date or the Termination Date, as the case may be, and (iii) no Swing Line Loan may be converted into a loan that bears interest at any rate other than the ABR. CREDIT AGREEMENT 17 (b) Any LIBOR Loans may be continued as such upon the expiration of the then current Interest Period with respect thereto by the Borrower giving notice to the Administrative Agent, in accordance with the applicable provisions of the term "Interest Period" set forth in subsection 1.1, of the length of the next Interest Period to be applicable to such Revolving Credit Loans, provided that no LIBOR Loan may be continued as such (i) when any Event of Default has occurred and is continuing and the Administrative Agent has or the Required Lenders have determined that such a continuation is not appropriate or (ii) after the date that is one month prior to, the Revolving Credit Termination Date (in the case of continuations of Revolving Credit Loans) or the date of the final installment of principal of the Term Loans and provided, further, that if the Borrower shall fail to give such notice or if such continuation is not permitted such Revolving Credit Loans shall be automatically converted to ABR Loans on the last day of such then expiring Interest Period. 2.10 CAF Advances. Subject to the terms and conditions of this Agreement, the Borrower may borrow CAF Advances from time to time on any Business Day during the CAF Advance Availability Period. CAF Advances may be borrowed in amounts such that the aggregate principal amount of all Loans outstanding at any time shall not exceed the aggregate amount of the Commitments at such time. Within the limits and on the conditions hereinafter set forth with respect to CAF Advances, the Borrower from time to time may borrow, repay and reborrow CAF Advances. 2.11 Procedure for CAF Advance Borrowing. (a) The Borrower shall request CAF Advances by delivering a CAF Advance Request to the Administrative Agent, not later than 12:00 Noon (New York City time) four Business Days prior to the proposed Borrowing Date (in the case of a LIBOR CAF Advance Request), and not later than 10:00 A.M., New York City time, one Business Day prior to the proposed Borrowing Date (in the case of a Fixed Rate CAF Advance Request). Each CAF Advance Request in respect of any Borrowing Date may solicit bids for CAF Advances on such Borrowing Date in an aggregate principal amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof and having not more than three alternative CAF Advance Maturity Dates. The CAF Advance Maturity Date for each CAF Advance shall be the date set forth therefor in the relevant CAF Advance Request, which date shall be (i) not less than 7 days nor more than 60 days after the Borrowing Date therefor, in the case of a Fixed Rate CAF Advance, (ii) one or two months after the Borrowing Date therefor, in the case of a LIBOR CAF Advance and (iii) not later than the Revolving Credit Termination Date, in the case of any CAF Advance. The Administrative Agent shall notify each Lender promptly by facsimile transmission of the contents of each CAF Advance Request received by the Administrative Agent. (b) In the case of a LIBOR CAF Advance Request, upon receipt of notice from the Administrative Agent of the contents of such CAF Advance Request, each Lender may elect, in its sole discretion, to offer irrevocably to make one or more CAF Advances at the applicable London Interbank Offered Rate plus (or minus) a margin determined by such Lender in its sole discretion for each such CAF Advance. Any such irrevocable offer shall be made by delivering a CAF Advance Offer to the Administrative Agent, before 10:30 A.M., New York City time, on the day that is three Business Days before the proposed Borrowing Date, setting forth: CREDIT AGREEMENT 18 (i) the maximum amount of CAF Advances for each CAF Advance Maturity Date and the aggregate maximum amount of CAF Advances for all CAF Advance Maturity Dates which such Lender would be willing to make (which amounts may, subject to subsection 2.10, exceed such Lender's Commitment); and (ii) the margin above or below the applicable London Interbank Offered Rate at which such Lender is willing to make each such CAF Advance. The Administrative Agent shall advise the Borrower before 11:00 A.M., New York City time, on the date which is three Business Days before the proposed Borrowing Date of the contents of each such CAF Advance Offer received by it. If the Administrative Agent, in its capacity as a Lender, shall elect, in its sole discretion, to make any such CAF Advance Offer, it shall advise the Borrower of the contents of its CAF Advance Offer before 10:15 A.M., New York City time, on the date which is three Business Days before the proposed Borrowing Date. (c) In the case of a Fixed Rate CAF Advance Request, upon receipt of notice from the Administrative Agent of the contents of such CAF Advance Request, each Lender may elect, in its sole discretion, to offer irrevocably to make one or more CAF Advances at a rate of interest determined by such Lender in its sole discretion for each such CAF Advance. Any such irrevocable offer shall be made by delivering a CAF Advance Offer to the Administrative Agent before 9:30 A.M., New York City time, on the proposed Borrowing Date, setting forth: (i) the maximum amount of CAF Advances for each CAF Advance Maturity Date, and the aggregate maximum amount for all CAF Advance Maturity Dates, which such Lender would be willing to make (which amounts may, subject to subsection 2.10, exceed such Lender's Commitment); and (ii) the rate of interest at which such Leader is willing to make each such CAF Advance. The Administrative Agent shall advise the Borrower before 10:00 A.M., New York City time, on the proposed Borrowing Date of the contents of each such CAF Advance Offer received by it. If the Administrative Agent, in its capacity as a Lender, shall elect, in its sole discretion, to make any such CAF Advance Offer, it shall advise the Borrower of the contents of its CAF Advance Offer before 9:15 A.M., New York City time, on the proposed Borrowing Date. (d) Before 11:30 A.M., New York City time, three Business Days before the proposed Borrowing Date (in the case of CAF Advances requested by a LIBOR CAF Advance Request) and before 10:30 A.M., New York City time, on the proposed Borrowing Date (in the case of CAF Advances requested by a Fixed Rate CAF Advance Request), the Borrower, in its absolute discretion, shall: (i) cancel such CAF Advance Request by giving the Administrative Agent telephone notice to that effect, or (ii) by giving telephone notice to the Administrative Agent (immediately confirmed by delivery to the Administrative Agent of a CAF Advance Confirmation by facsimile transmission) (A) subject to the provisions of subsection CREDIT AGREEMENT 19 2.11(e), accept one or more of the offers made by any Lender or Lenders pursuant to subsection 2.11(b) or subsection 2.11(c), as the case may be, and (B) reject any remaining offers made by Lenders pursuant to subsection 2.11(b) or subsection 2.11(c), as the case may be. (e) The Borrower's acceptance of CAF Advances in response to any CAF Advance Offers shall be subject to the following limitations: (i) the amount of CAF Advances accepted for each CAF Advance Maturity Date specified by any Lender in its CAF Advance Offer shall not exceed the maximum amount for such CAF Advance Maturity Date specified in such CAF Advance Offer; (ii) the aggregate amount of CAF Advances accepted for all CAF Advance Maturity Dates specified by any Lender in its CAF Advance Offer shall not exceed the aggregate maximum amount specified in such CAF Advance Offer for all such CAF Advance Maturity Dates; (iii) the Borrower may not accept offers for CAF Advances for any CAF Advance Maturity Date in an aggregate principal amount in excess of the maximum principal amount requested in the related CAF Advance Request; and (iv) if the Borrower accepts any of such offers, it must accept offers based solely upon pricing for each relevant CAF Advance Maturity Date and upon no other criteria whatsoever, and if two or more Lenders submit offers for any CAF Advance Maturity Date at identical pricing and the Borrower accepts any of such offers but does not wish to (or, by reason of the limitations set forth in subsection 2.10, cannot) borrow the total amount offered by such Lenders with such identical pricing, the Borrower shall accept offers from all of such Lenders in amounts allocated among them pro rata according to the amounts offered by such Lenders (with appropriate rounding, in the sole discretion of the Borrower, to assure that each accepted CAF Advance is an integral multiple of $1,000,000); provided that if the number of Lenders that submit offers for any CAF Advance Maturity Date at identical pricing is such that, after the Borrower accepts such offers pro rata in accordance with the foregoing provisions of this paragraph, the CAF Advance to be made by any such Lender would be less than $5,000,000 principal amount, the number of such Lenders shall be reduced by the Administrative Agent by lot until the CAF Advances to be made by each such remaining Lender would be in a principal amount of $5,000,000 or an integral multiple of $1,000,000 in excess thereof. (f) If the Borrower notifies the Administrative Agent that a CAF Advance Request is cancelled pursuant to subsection 2.11(d)(i), the Administrative Agent shall give prompt telephone notice thereof to the Lenders. (g) If the Borrower accepts pursuant to subsection 2.11(d)(ii) one or more of the offers made by any Lender or Lenders, the Administrative Agent promptly shall notify each Lender which has made such an offer of (i) the aggregate amount of such CAF Advances to be CREDIT AGREEMENT 20 made on such Borrowing Date for each CAF Advance Maturity Date and (ii) the acceptance or rejection of any offers to make such CAF Advances made by such Lender. Before 12:00 Noon (New York City time) on the Borrowing Date specified in the applicable CAF Advance Request, each Lender whose CAF Advance Offer has been accepted shall make available to the Administrative Agent at its office set forth in subsection 9.2 the amount of CAF Advances to be made by such Lender, in immediately available funds. The Administrative Agent will make such funds available to the Borrower as soon as practicable on such date at such office of the Administrative Agent. As soon as practicable after each Borrowing Date, the Administrative Agent shall notify each Lender of the aggregate amount of CAF Advances advanced on such Borrowing Date and the respective CAF Advance Maturity Dates thereof. 2.12 CAF Advance Payments. (a) The Borrower hereby unconditionally promises to pay to the Administrative Agent, for the account of each Lender which has made a CAF Advance, on the applicable CAF Advance Maturity Date, the then unpaid principal amount of such CAF Advance. The Borrower shall not have the right to prepay any principal amount of any CAF Advance without the consent of the Lender to which such CAF Advance is owed. (b) The Borrower hereby further agrees to pay interest on the unpaid principal amount of each CAF Advance from the Borrowing Date of such CAF Advance to the applicable CAF Advance Maturity Date at the rate of interest specified in the CAF Advance Offer accepted by the Borrower in connection with such CAF Advance (calculated on the basis of a 360-day year for actual days elapsed), payable on each applicable CAF Advance Interest Payment Date. (c) If any principal of, or interest on, any CAF Advance shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such CAF Advance shall, without limiting any rights of any Lender under this Agreement, bear interest from the date on which such payment was due at a rate per annum which is 2% per annum above the rate which would otherwise be applicable to such CAF Advance until the stated CAF Advance Maturity Date of such CAF Advance, and for each day thereafter at a rate per annum which is 2% per annum above the ABR, in each case until paid in fall (as well after as before judgment). Interest accruing pursuant to this paragraph (c) shall be payable from time to time on demand. 2.13 Evidence of Debt. Each Lender shall maintain in accordance with its usual practice appropriate records evidencing indebtedness of the Borrower to such Lender resulting from each CAF Advance of such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time in respect of such CAF Advance. The Administrative Agent shall maintain the Register pursuant to subsection 9.6(e), and a record therein for each Lender, in which shall be recorded (i) the amount of each CAF Advance made by such Lender, the CAF Advance Maturity Date thereof, the interest rate applicable thereto and each CAF Advance Interest Payment Date applicable thereto, and (ii) the amount of any sum received by the Administrative Agent hereunder from the Borrower on account of such CAF Advance. The entries made in the Register and the records of each Lender maintained pursuant to this subsection shall, to the extent permitted by applicable law, be prima facie evidence of the existence and amounts of the obligations of the Borrower therein recorded; provided, however, that the failure of any Lender or the Administrative Agent to maintain the Register or any such record, or any error therein, shall not in any manner affect the obligation of the Borrower to CREDIT AGREEMENT 21 repay (with applicable interest) the CAF Advances made by such Lender in accordance with the terms of this Agreement. 2.14 Certain Restrictions. A CAF Advance Request may request offers for CAF Advances to be made on not more than one Borrowing Date and to mature on not more than three CAF Advance Maturity Dates. No CAF Advance Request may be submitted earlier than five Business Days after submission of any other CAF Advance Request. 2.15 Minimum Amounts of Tranches. All borrowings, conversions and continuations of Revolving Credit Loans and Term Loans hereunder and all selections of Interest Periods hereunder shall be in such amounts and be made pursuant to such elections so that, after giving effect thereto, the aggregate principal amount of the Revolving Credit Loans and Term Loans comprising each LIBOR Tranche shall be equal to $10,000,000 or a whole multiple of $1,000,000 in excess thereof. In no event shall there be more than five LIBOR Tranches outstanding at any time. 2.16 Interest Rates and Payment Dates. (a) Each LIBOR Loan shall bear interest for each day during each Interest Period with respect thereto at a rate per annum equal to the London Interbank Offered Rate determined for such day plus the Applicable Margin. (b) Each ABR Loan and Swing Line Loan shall bear interest at a rate per annum equal to the ABR. Each CAF Advance shall bear interest as provided in subsection 2.10. (c) If all or a portion of (i) any principal of any Revolving Credit Loan, Term Loan or Swing Line Loan, (ii) any interest payable thereon, (iii) any facility fee or (iv) any other amount payable hereunder (other than overdue CAF payments provided for in subsection 2.12(c)) shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), the principal of the Revolving Credit Loans, Term-Loans and the Swing Line Loans and any such overdue interest, facility fee or other amount shall bear interest at a rate per annum which is (x) in the case of principal, the rate that would otherwise be applicable thereto pursuant to the foregoing provisions of this subsection plus 2% per annum or (y) in the case of any such overdue interest, facility fee or other amount, the rate applicable to ABR Loans pursuant to subsection 2.16(b) plus 2% per annum, in each case from the date of such non-payment until such overdue principal, interest, facility fee or other amount is paid in full (as well after as before judgment). (d) Interest on Revolving Credit Loans, Term Loans and Swing Line Loans shall be payable in arrears on each Interest Payment Date, provided that interest accruing pursuant to paragraph (c) of this subsection shall be payable from time to time on demand. 2.17 Computation of Interest and Fees. (a) Whenever it is calculated on the basis of the Prime Rate, interest shall be calculated on the basis of a 365- (or 366-, as the case may be) day year for the actual days elapsed; and, otherwise, interest and the facility fee shall be calculated on the basis of a 360-day year for the actual days elapsed. The Administrative Agent shall as soon as practicable notify the Borrower and the Lenders of each determination of a London Interbank Offered Rate. Any change in the interest rate on a Loan resulting from a change in the ABR, the Eurocurrency Reserve Requirements, the C/D Assessment Rate or the C/D Reserve Percentage shall become effective as of the opening of business on the day on CREDIT AGREEMENT 22 which such change becomes effective. The Administrative Agent shall as soon as practicable notify the Borrower and the Lenders of the effective date and the amount of each such change in interest rate. (b) Each determination of an interest rate by the Administrative Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Borrower and the Lenders in the absence of manifest error. The Administrative Agent shall, at the request of the Borrower, deliver to the Borrower a statement showing the quotations used by the Administrative Agent in determining any interest rate pursuant to subsection 2.16(a) or 2.9(b). 2.18 Inability to Determine Interest Rate. If prior to the first day of any Interest Period: (a) the Administrative Agent shall have determined (which determination shall be conclusive and binding upon the Borrower) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the London Interbank Offered Rate for such Interest Period, or (b) the Administrative Agent shall have received notice from the Required Lenders that the London Interbank Offered Rate determined or to be determined for such Interest Period will not adequately and fairly reflect the cost to such Lenders (as conclusively certified by such Lenders) of making or maintaining their affected Loans during such Interest Period, the Administrative Agent shall give telecopy or telephonic notice thereof to the Borrower and the Lenders as soon as practicable thereafter. If such notice is given (x) any LIBOR Loans requested to be made on the first day of such Interest Period shall be made as ABR Loans, (y) any Loans that were to have been converted on the first day of such Interest Period to LIBOR Loans, shall be converted to or continued as ABR Loans and (z) any outstanding LIBOR Loans shall be converted, on the first day of such Interest Period, to ABR Loans. Until such notice has been withdrawn by the Administrative Agent, no further LIBOR Loans shall be made or continued as such, nor shall the Borrower have the right to convert Loans to LIBOR Loans, as the case may be. 2.19 Pro Rata Treatment and Payments. (a) Each borrowing of Revolving Credit Loans and Term Loans by the Borrower from the Lenders hereunder, each payment by the Borrower on account of any facility fee hereunder and any reduction of the Commitments of the Lenders shall be made pro rata according to the respective Commitment Percentages of the Lenders. Each payment (including each prepayment) by the Borrower on account of principal of and interest on any Loans shall be made pro rata according to the respective outstanding principal amounts of such Loans then held by the Lenders. All payments (including prepayments) to be made by the Borrower hereunder, whether on account of principal, interest, fees or otherwise, shall be made without set-off or counterclaim and shall be made prior to 12:00 Noon, New York City time, on the due date thereof to the Administrative Agent, for the account of the Lenders, at the Administrative Agent's office specified in subsection 9.2, in Dollars and in immediately available funds. The Administrative Agent shall distribute such payments to the Lenders promptly upon receipt in like funds as received. If any payment hereunder becomes due and payable on a day other than a Business Day, such payment shall be extended to the next CREDIT AGREEMENT 23 succeeding Business Day, and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. (b) Unless the Administrative Agent shall have been notified in writing by any Lender prior to a borrowing that such Lender will not make the amount that would constitute its allocable share of such borrowing available to the Administrative Agent, the Administrative Agent may assume that such Lender is making such amount available to the Administrative Agent, and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower a corresponding amount. If such amount is not made available to the Administrative Agent by the required time on the Borrowing Date therefor, such Lender shall pay to the Administrative Agent, on demand, such amount with interest thereon at a rate equal to the daily average Federal Funds Effective Rate for the period until such Lender makes such amount immediately available to the Administrative Agent. A certificate of the Administrative Agent submitted to any Lender with respect to any amounts owing under this subsection shall be conclusive in the absence of manifest error. If such Lender's Commitment Percentage of such borrowing is not made available to the Administrative Agent by such Lender within three Business Days of such Borrowing Date, the Administrative Agent shall also be entitled to recover such amount with interest thereon at the rate per annum applicable to ABR Loans hereunder, on demand, from the Borrower. 2.20 Swing Line Commitment. (a) Subject to the terms and conditions hereof, the Swing Line Lender agrees to make swing line loans ("Swing Line Loans") to the Borrower from time to time during the Commitment Period in an aggregate principal amount at any one time outstanding not to exceed $10,000,000, provided that the aggregate principal amount of all Loans outstanding at any one time shall not exceed the aggregate amount of the Commitments at such time. During the Commitment Period, the Borrower may use the Swing Line Commitment by borrowing, prepaying the Swing Line Loans in whole or in part, and reborrowing, all in accordance with the terms and conditions hereof. All Swing Line Loans shall bear interest based upon the ABR and shall not be entitled to be converted into loans that bear interest at any other rate. The Borrower shall give the Swing Line Lender irrevocable notice (which notice must be received by the Swing Line Lender prior to 11:00 A.M., New York City time, on the requested Borrowing Date specifying the amount of the requested Swing Line Loan which shall be in a minimum amount of $100,000 or a whole multiple of $50,000 in excess thereof. The proceeds of the Swing Line Loan will be made available by the Swing Line Lender to the Borrower at the office of the Swing Line Lender by 3:00 P.M., New York City time, on the Borrowing Date by crediting the account of the Borrower at such office with such proceeds. The Borrower may, at any time and from time to time, prepay the Swing Line Loans, in whole or in part, without premium or penalty, by notifying the Swing Line Lender prior to 11:00 A.M., New York City time, on any Business Day of the date and amount of prepayment. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein. Partial prepayments shall be in an aggregate principal amount of $100,000 or a whole multiple of $50,000 in excess thereof. (b) The Swing Line Loans shall be evidenced by a promissory note of the Borrower substantially in the form of Exhibit C to this Agreement, with appropriate insertions (the "Swing Line Note"), payable to the order of the Swing Line Lender and representing the obligation of the Borrower to pay the amount of the Swing Line Commitment or, if less, the CREDIT AGREEMENT 24 unpaid principal amount of the Swing Line Loans, with interest thereon as prescribed in subsection 2.16. The Swing Line Lender is hereby authorized to record the Borrowing Date, the amount of each Swing Line Loan and the date and amount of each payment or prepayment of principal thereof, on the schedule annexed to and constituting a part of the Swing Line Note and any such recordation shall constitute prima facie evidence of the accuracy of the information so recorded, provided that the failure by the Swing Line Lender to make any such recordation shall not affect any of the obligations of the Borrower under such Swing Line Note or this Agreement. The Swing Line Note shall (a) be dated the Closing Date, (b) be stated to mature on the Revolving Credit Termination Date and (c) bear interest for the period from the date thereof until paid in full on the unpaid principal amount thereof from time to time outstanding at the applicable interest rate per annum determined as provided in, and payable as specified in, subsection 2.16. (c) The Swing Line Lender, at any time in its sole and absolute discretion may, on behalf of the Borrower (which hereby irrevocably directs the Swing Line Lender to act on its behalf) request each Lender including the Swing Line Lender, to make a Revolving Credit Loan in an amount equal to such Lender's Commitment Percentage of the amount of the Swing Line Loans outstanding on the date such notice is given (the "Outstanding Swing Line Loans"). Unless any of the events described in paragraph (f) of Section 7 shall have occurred with respect to the Borrower (in which event the procedures of paragraph (e) of this subsection shall apply) each Lender shall make the proceeds of its Revolving Credit Loan available to the Administrative Agent for the account of the Swing Line Lender at the office of the Administrative Agent specified in subsection 9.2 prior to 12:00 Noon (New York City time) in funds immediately available on the Business Day next succeeding the date such notice is given. The proceeds of such Revolving Credit Loans shall be immediately applied to repay the Outstanding Swing Line Loans. Effective on the day such Revolving Credit Loans are made, the portion of the Swing Line Loans so paid shall no longer be outstanding as Swing Line Loans, shall no longer be due under the Swing Line Note and shall be evidenced as provided in subsection 2.7(b). The Borrower authorizes the Swing Line Lender to charge the Borrower's accounts with the Administrative Agent (up to the amount available in each such account) in order to immediately pay the amount of such Outstanding Swing Line Loans to the extent amounts received from the Lenders are not sufficient to repay in full such Outstanding Swing Line Loans. (d) Notwithstanding anything herein to the contrary, the Swing Line Lender shall not be obligated to make any Swing Line Loans if the conditions set forth in subsection 4.2 have not been satisfied. (e) If prior to the making of a Revolving Credit Loan pursuant to paragraph (c) of subsection 2.20 one of the events described in paragraph (f) of Section 7 shall have occurred and be continuing with respect to the Borrower, each Lender will, on the date such Revolving Credit Loan was to have been made pursuant to the notice in subsection 2.20(c), purchase an undivided participating interest in the Outstanding Swing Line Loan in an amount equal to (i) its Commitment Percentage times (ii) the aggregate principal amount of Swing Line Loans then outstanding. Each Lender will immediately transfer to the Swing Line Lender, in immediately available funds, the amount of its participation, and upon receipt thereof the Swing CREDIT AGREEMENT 25 Line Lender will deliver to such Lender a Swing Line Loan Participation Certificate dated the date of receipt of such funds and in such amount. (f) Whenever, at any time after any Lender has purchased a participating interest in a Swing Line Loan, the Swing Line Lender receives any payment on account thereof, the Swing Line Lender will distribute to such Lender its participating interest in such amount (appropriately adjusted, in the case of interest payments, to reflect the period of time during which such Lender's participating interest was outstanding and funded); provided, however, that in the event that such payment received by the Swing Line Lender is required to be returned, such Lender will return to the Swing Line Lender any portion thereof previously distributed by the Swing Line Lender to it. (g) Each Lender's obligation to make the Revolving Credit Loans referred to in subsection 2.20(c) and to purchase participating interests pursuant to subsection 2.20(e) shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation, (i) any set-off, counterclaim, recoupment, defense or other right which such Lender or the Borrower may have against the Swing Line Lender, the Borrower or any other Person for any reason whatsoever, (ii) the occurrence or continuance of a Default or an Event of Default; (iii) any adverse change in the condition (financial or otherwise) of the Borrower; (iv) any breach of this Agreement or any other Loan Document by the Borrower, any Subsidiary or any other Lender; or (v) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. 2.21 Illegality. Notwithstanding any other provision herein, if the adoption of or any change in any Requirement of Law or in the interpretation or application thereof shall make it unlawful for any Lender to make or maintain LIBOR Loans as contemplated by this Agreement, (a) the commitment of such Lender hereunder to make LIBOR Loans, continue LIBOR Loans as such and convert ABR Loans to LIBOR Loans shall forthwith be cancelled and (b) such Lender's Loans then outstanding as LIBOR Loans, if any, shall be converted automatically to ABR Loans on the respective last days of the then current Interest Periods with respect to such Loans or within such earlier period as required by law. If any such conversion of a LIBOR Loan occurs on a day which is not the last day of the then current Interest Period with respect thereto, the Borrower shall pay to such Lender such amounts, if any, as may be required pursuant to subsection 2.22. 2.22 Requirements of Law. (a) If the adoption of or any change in any Requirement of Law or in the interpretation or application thereof or compliance by any Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority made subsequent to the date hereof: (i) shall subject any Lender to any tax of any kind whatsoever with respect to this Agreement, any Note or any LIBOR Loan made by it, or change the basis of taxation of payments to such Lender in respect thereof (except for Non-Excluded Taxes covered by subsection 2.23 and changes in the rate of tax on the overall net income of such Lender); CREDIT AGREEMENT 26 (ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of such Lender which is not otherwise included in the determination of the London Interbank Offered Rate hereunder; or (iii) shall impose on such Lender any other condition; and the result of any of the foregoing is to increase the cost to such Lender, by an amount which such Lender deems to be material, of making, converting into, continuing or maintaining LIBOR Loans or to reduce any amount receivable hereunder in respect thereof, then, in any such case, the Borrower shall promptly pay such Lender such additional amount or amounts as will compensate such Lender for such increased cost or reduced amount receivable. (b) If any Lender shall have determined that the adoption of or any change in any Requirement of Law regarding capital adequacy or in the interpretation or application thereof or compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any Governmental Authority made subsequent to the date hereof shall have the effect of reducing the rate of return on such Lender's or such corporation's capital as a consequence of its obligations hereunder to a level below that which such Lender or such corporation could have achieved but for such adoption, change or compliance (taking into consideration such Lender's or such corporation's policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, the Borrower shall promptly pay to such Lender such additional amount or amounts as will compensate such Lender for such reduction. (c) If any Lender becomes entitled to claim any additional amounts pursuant to this subsection, it shall promptly notify the Borrower (with a copy to the Administrative Agent) of the event by reason of which it has become so entitled and of the basis for the calculation of such additional amounts. A certificate as to any additional amounts payable pursuant to this subsection submitted by such Lender to the Borrower (with a copy to the Administrative Agent) shall be conclusive in the absence of manifest error. The agreements in this subsection shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. 2.23 Taxes. (a) All payments made by the Borrower under this Agreement and any Notes shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, excluding net income taxes and franchise taxes (imposed in lieu of net income taxes) imposed on the Administrative Agent or any Lender as a result of a present or former connection between the Administrative Agent or such Lender and the jurisdiction of the Governmental Authority imposing such tax or any political subdivision or taxing authority thereof or therein (other than any such connection arising solely from the Administrative Agent or such Lender having executed, delivered or performed its obligations or received a payment under, or enforced, this Agreement or any Note). If any such non-excluded taxes, levies, imposts, duties, charges, fees deductions or withholdings ("Non-Excluded Taxes") CREDIT AGREEMENT 27 are required to be withheld from any amounts payable to the Administrative Agent or any Lender hereunder or under any Note, the amounts so payable to the Administrative Agent or such Lender shall be increased to the extent necessary to yield to the Administrative Agent or such Lender (after payment of all Non-Excluded Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement, provided, however, that the Borrower shall not be required to increase any such amounts payable to any Lender that is not organized under the laws of the United States or a state thereof if such Lender fails to comply with the requirements of paragraph (b) of this subsection. Whenever any Non-Excluded Taxes are payable by the Borrower, as promptly as possible thereafter the Borrower shall send to the Administrative Agent for its own account or for the account of such Lender, as the case may be, a certified copy of an original official receipt received by the Borrower showing payment thereof. If the Borrower fails to pay any Non-Excluded Taxes when due to the appropriate taxing authority or fails to remit to the Administrative Agent the required receipts or other required documentary evidence, the Borrower shall indemnify the Administrative Agent and the Lenders for any incremental taxes, interest or penalties that may become payable by the Administrative Agent or any Lender as a result of any such failure. The agreements in this subsection shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. (b) Each Lender that is not incorporated under the laws of the United States or a state thereof shall: (i) deliver to the Borrower and the Administrative Agent two duly completed copies of United States Internal Revenue Service Form W-8 BEN or W-8 ECI, or successor applicable form, as the case may be; (ii) deliver to the Borrower and the Administrative Agent two further copies of any such form or certification on or before the date that any such form or certification expires or becomes obsolete and after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Borrower; and (iii) obtain such extensions of time for filing and complete such forms or certifications as may reasonably be requested by the Borrower or the Administrative Agent; unless in any such case an event (including, without limitation, any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form with respect to it and such Lender so advises the Borrower and the Administrative Agent. Such Lender shall certify that it is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes. Each Person that shall become a Lender or a Participant pursuant to subsection 9.6 shall, upon the effectiveness of the related transfer, be required to provide all of the forms and statements required pursuant to this subsection, provided that in the case of a Participant such Participant shall furnish all such required forms and statements to the Lender from which the related participation shall have been purchased. CREDIT AGREEMENT 28 2.24 Indemnity. The Borrower agrees to indemnify each Lender and to hold each Lender harmless from any loss or expense which such Lender may sustain or incur as a consequence of (a) default by the Borrower in making either (i) a borrowing of LIBOR Loans or LIBOR CAF Advances or (ii) a conversion into or continuation of LIBOR Loans, in each case after the Borrower has given a notice requesting the same in accordance with the provisions of this Agreement (in the case of a borrowing of LIBOR CAF Advances, so long as the Borrower shall have accepted a CAF Advance offered in connection with any such notice), (b) default by the Borrower in making any prepayment after the Borrower has given a notice thereof in accordance with the provisions of this Agreement or (c) the making of either (i) a prepayment of LIBOR Loans, LIBOR CAF Advances or Fixed Rate CAF Advances or (ii) a conversion of LIBOR Loans, in each case on a day which is not the last day of an Interest Period with respect thereto. Such indemnification may include an amount equal to the excess, if any, of (i) the amount of interest which would have accrued on the amount so prepaid, or not so borrowed, converted or continued, for the period from the date of such prepayment or of such failure to borrow, convert or continue to the last day of such Interest Period (or, in the case of a failure to borrow, convert or continue, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for such Loans provided for herein (excluding, however, the Applicable Margin included therein, if any) over (ii) the amount of interest (as reasonably determined by such Lender) which would have accrued to such Lender on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank eurodollar market. This covenant shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. 2.25 Commitment Increases. (a) In the event that Borrower wishes to increase the aggregate Commitments, it shall notify the Lenders (through the Administrative Agent) of the amount of such proposed increase (such notice, a "Commitment Increase Offer"). Each Commitment Increase Offer shall offer the Lenders the opportunity to participate in the increased Commitments ratably in accordance with their respective Commitment Percentages. In the event that any Lender (each, a "Declining Lender") shall fail to accept in writing a Commitment Increase Offer within 10 Business Days after receiving notice thereof, all or any portion of the proposed increase in the Commitments offered to the Declining Lenders (the aggregate of such offered amounts, the "Declined Amount") may instead be allocated to any one or more additional banks, financial institutions or other entities pursuant to paragraph (b) below and/or to any one or more existing Lenders pursuant to paragraph (c)(ii) below. (b) Any additional bank, financial institution or other entity which, with the consent of the Borrower and the Administrative Agent, elects to become a party to this Agreement and obtain a Commitment in an amount equal to all or any portion of a Declined Amount shall execute a New Lender Supplement (each, a "New Lender Supplement") with the Borrower and the Administrative Agent, substantially in the form of Exhibit K-1, whereupon such bank, financial institution or other entity (herein called a "New Lender") shall become a Lender for all purposes and to the same extent as if originally a party hereto and shall be bound by and entitled to the benefits of this Agreement, and Schedule 1.2 shall be deemed to be amended to add the name and Commitment of such New Lender. (c) Any Lender which (i) accepts a Commitment Increase Offer pursuant to subsection 2.25(a) or (ii) with the consent of the Borrower, elects to increase its Commitment by CREDIT AGREEMENT 29 an amount equal to all or any portion of a Declined Amount shall, in each case, execute a Commitment Increase Supplement (each, a "Commitment Increase Supplement") with the Borrower and the Administrative Agent, substantially in the form of Exhibit K-2, whereupon such Lender shall be bound by and entitled to the benefits of this Agreement with respect to the full amount of its Commitment as so increased, and Schedule 1.2 shall be deemed to be amended to so increase the Commitment of such Lender. (d) If on the date upon which a bank, financial institution or other entity becomes a New Lender pursuant to subsection 2.25(b) or upon which a Lender's Commitment is increased pursuant to subsection 2.25(a) or (c) there is an unpaid principal amount of Revolving Credit Loans, the Borrower shall borrow Revolving Credit Loans from the Lenders and/or (subject to compliance by the Borrower with subsection 2.24) prepay Revolving Credit Loans of the Lenders such that, after giving effect thereto, the Revolving Credit Loans (including, without limitation, the Types thereof and Interest Periods with respect thereto) shall be held by the Lenders (including for such purposes the New Lenders) pro rata according to their respective Commitment Percentages. (e) Notwithstanding anything to the contrary in this subsection, (i) in no event shall any transaction effected pursuant to this subsection cause (x) the aggregate Commitments to exceed $1,500,000,000 or (y) an increase in the aggregate Commitments of an amount less than $100,000,000, (ii) the aggregate amount of any increase in Commitments pursuant to subsection 2.25(b) or (c)(ii) shall be limited to the relevant Declined Amount and (iii) no Lender shall have any obligation to increase its Commitment unless it agrees to do so in its sole discretion. SECTION 3. REPRESENTATIONS AND WARRANTIES To induce the Administrative Agent and the Lenders to enter into this Agreement and to make the Loans, the Borrower hereby represents and warrants to the Administrative Agent and each Lender that: 3.1 Financial Condition. The consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at December 31, 1999 and the related consolidated statements of income and of cash flows for the fiscal year ended on such date, reported on by Price Waterhouse LLP, copies of which have heretofore been furnished to each Lender, are complete and correct in all material respects and present fairly the consolidated financial condition of the Borrower and its consolidated Subsidiaries as at such date, and the consolidated results of their operations and their consolidated cash flows for the fiscal year then ended. The unaudited consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at March 31, 2000 and the related unaudited consolidated statements of income and of cash flows for the three-month period ended on such date, certified by a Responsible Officer, copies of which have heretofore been furnished to each Lender, are complete and correct in all material respects and present fairly the consolidated financial condition of the Borrower and its consolidated Subsidiaries as at such date, and the consolidated results of their operations and their consolidated cash flows for the three-month period then ended (subject to normal year-end audit adjustments). All such financial statements have been prepared in accordance with GAAP CREDIT AGREEMENT 30 applied consistently throughout the periods involved (except as approved by such accountants or Responsible Officer, as the case may be, and as disclosed therein). Neither the Borrower nor any of its consolidated Subsidiaries had, at the date of the most recent balance sheet referred to above, any material Guarantee Obligation outside the ordinary course of business, contingent liability or liability for taxes, or any long-term lease or unusual forward or long-term commitment which in the aggregate may reasonably be expected to have a Material Adverse Effect, including, without limitation, any interest rate or foreign currency swap or exchange transaction (except as listed on Schedule 3.1 attached hereto), which is not reflected in the foregoing statements or in the notes thereto. Except as heretofore disclosed to the Lenders, during the period from December 31, 1999 to and including the date hereof there has been no sale, transfer or other disposition by the Borrower or any of its consolidated Subsidiaries of any material part of its business or property and no purchase or other acquisition of any business or property (including any capital stock of any other Person) material in relation to the consolidated financial condition of the Borrower and its consolidated Subsidiaries at December 31, 1999. 3.2 No Change. Since December 31, 1999 there has been no development or event which has had or could reasonably be expected to have a Material Adverse Effect. 3.3 Corporate Existence; Compliance with Law. Each of the Borrower and its Subsidiaries (a) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has the corporate power and authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (c) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction (other than that of its incorporation) where its ownership, lease or operation of property or the conduct of its business requires such qualification and (d) is in compliance with all Requirements of Law, except in the case of clause (c) or (d) above, to the extent that the failure to qualify as a foreign corporation or to be in good standing or to comply with any Requirement of Law could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 3.4 Corporate Power; Authorization; Enforceable Obligations. The Borrower has the corporate power and authority, and the legal right, to make, deliver, and perform the Loan Documents to which it is a party and to borrow hereunder and has taken all necessary corporate action to authorize the borrowings on the terms and conditions of this Agreement and any Notes and to authorize the execution, delivery and performance of the Loan Documents to which it is a party. No consent or authorization of, filing with, notice to or other act by or in respect of, any Governmental Authority or any other Person is required in connection with the borrowings hereunder or with the execution, delivery, performance, validity or enforceability of the Loan Documents to which the Borrower is a party. This Agreement has been, and each other Loan Document to which it is a party will be, duly executed and delivered on behalf of the Borrower. This Agreement constitutes, and each other Loan Document to which it is a party when executed and delivered will constitute, a legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. CREDIT AGREEMENT 31 3.5 No Legal Bar. The execution, delivery and performance of the Loan Documents to which the Borrower is a party, the borrowings hereunder and the use of the proceeds thereof will not violate any Requirement of Law or Contractual Obligation of the Borrower or of any of its Subsidiaries and will not result in, or require, the creation or imposition of any Lien on any of its or their respective properties or revenues pursuant to any such Requirement of Law or Contractual Obligation. 3.6 No Material Litigation. Except as listed on Schedule 3.6, no litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the Borrower, threatened by or against the Borrower or any of its Subsidiaries or against any of its or their respective properties or revenues (a) with respect to any of the Loan Documents or any of the transactions contemplated hereby or thereby, or (b) which could, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 3.7 No Default. Neither the Borrower nor any of its Subsidiaries is in default under or with respect to any of its Contractual Obligations in any respect which could, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. 3.8 Ownership of Property; Liens. Each of the Borrower and its Subsidiaries has good record and marketable title in fee simple to, or a valid leasehold interest in, all its real property, and good title to, or a valid leasehold interest in, all its other material property, and none of such property is subject to any Lien except as permitted by subsection 6.2. 3.9 Intellectual Property. The Borrower and each of its Subsidiaries owns, or is licensed to use, all trademarks, tradenames, copyrights, technology, know-how and processes necessary for the conduct of its business as currently conducted except for those the failure to own or license which could not reasonably be expected to have a Material Adverse Effect (the "Intellectual Property"). No claim has been asserted and is pending by any Person challenging or questioning the use of any such Intellectual Property or the validity or effectiveness of any such Intellectual Property, nor does the Borrower know of any valid basis for any such claim. The use of such Intellectual Property by the Borrower and its Subsidiaries does not infringe on the rights of any Person, except for such claims and infringements that, in the aggregate, could not reasonably be expected to have a Material Adverse Effect. 3.10 No Burdensome Restrictions. No Requirement of Law or Contractual Obligation of the Borrower or any of its Subsidiaries could reasonably be expected to have a Material Adverse Effect. 3.11 Taxes. Each of the Borrower and its Subsidiaries has filed or caused to be filed all tax returns which, to the knowledge of the Borrower, are required to be filed and has paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority (other than any the amount or validity of which are currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of the Borrower or its CREDIT AGREEMENT 32 Subsidiaries, as the case may be); no tax Lien has been filed, and, to the knowledge of the Borrower, no claim is being asserted, with respect to any such tax, fee or other charge. 3.12 Federal Regulations. Neither the Borrower nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose (whether immediate, incidental or ultimate) of buying or carrying Margin Stock. No part of the proceeds of any Loans will be used directly or indirectly for the purpose (whether immediate, incidental or ultimate) of buying or carrying Margin Stock or for any purpose that violates the provisions of the regulations of the Board. If requested by any Lender or the Administrative Agent, the Borrower will furnish to each Lender and the Administrative Agent a statement in conformity with the requirements of Federal Reserve Form FR U-1 or FR G-3, as appropriate, referred to in Regulation U, as to demonstrate the compliance of any borrowing hereunder with Regulation U. 3.13 ERISA. Neither a Reportable Event nor an "accumulated funding deficiency" (within the meaning of Section 412 of the Code or Section 302 of ERISA) has occurred during the five-year period prior to the date on which this representation is made or deemed made with respect to any Single Employer Plan, and each Plan has complied in all material respects with the applicable provisions of ERISA and the Code. No termination of a Single Employer Plan has occurred (other than via a "standard termination" as defined in Section 4041 (b) of ERISA), and no Lien in favor of the PBGC or a Single Employer Plan has arisen, during such five-year period. The present value of all accrued benefits under each Single Employer Plan (based on those assumptions used to fund such Plans) did not, as of the last annual valuation date prior to the date on which this representation is made or deemed made, exceed the value of the assets of such Plan allocable to such accrued benefits by more than $10,000,000. Neither the Borrower nor any Commonly Controlled Entity has had a complete or partial withdrawal from any Multiemployer Plan, and neither the Borrower nor any Commonly Controlled Entity would become subject to any liability under ERISA if the Borrower or any such Commonly Controlled Entity were to withdraw completely from all Multiemployer Plans as of the valuation date most closely preceding the date on which this representation is made or deemed made. To the best knowledge of the Borrower, no such Multiemployer Plan is in Reorganization or Insolvent. The present value (determined using actuarial and other assumptions which are reasonable in respect of the benefits provided and the employees participating) of the liability of the Borrower and each Commonly Controlled Entity for post retirement benefits to be provided to their current and former employees under Plans which are welfare benefit plans (as defined in Section 3(l) of ERISA) does not, in the aggregate, exceed the assets under all such Plans allocable to such benefits by an amount in excess of $20,000,000. 3.14 Investment Company Act; Other Regulations. The Borrower is not an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. The Borrower is not subject to regulation under any Federal or State statute or regulation (other than Regulation X of the Board) which limits its ability to incur Indebtedness. 3.15 Subsidiaries. Schedule 3.15 lists each Subsidiary of the Borrower (and the direct and indirect ownership interest of the Borrower therein), in each case existing on March 31, 2000. The Borrower will at all times own directly or indirectly the percentage of the CREDIT AGREEMENT 33 outstanding capital stock, if any, of said Subsidiaries indicated on Schedule 3.15 as owned by the Borrower as of the date hereof except to the extent the disposition thereof would not violate subsection 6.4. 3.16 Purpose of Loans. The proceeds of the Loans shall be used by the Borrower and its Subsidiaries solely to ensure the integrity of the settlement process in the event of settlement failure by one or more members. 3.17 Environmental Matters. (a) To the best knowledge of the Borrower, the facilities and properties owned, leased or operated by the Borrower or any of its Subsidiaries (the "Properties") do not contain, and have not previously contained, any Materials of Environmental Concern in amounts or concentrations which (i) constitute or constituted a violation of, or (ii) could reasonably be expected to give rise to liability under, any Environmental Law. (b) The Properties and all operations at the Properties are in compliance in all material respects with all applicable Environmental Laws, and there is no contamination at, under or about the Properties or violation of any Environmental Law with respect to the Properties or the business operated by the Borrower or any of its Subsidiaries (the "Business") which could materially interfere with the continued operation of the Properties or materially impair the fair saleable value thereof (c) Neither the Borrower nor any of its Subsidiaries has received any notice of violation, alleged violation, non-compliance, liability or potential liability regarding environmental matters or compliance with Environmental Laws with regard to any of the Properties or the Business, nor does the Borrower have knowledge or reason to believe that any such notice will be received or is being threatened. (d) No judicial proceeding or governmental or administrative action is pending or, to the knowledge of the Borrower, threatened, under any Environmental Law to which the Borrower or any Subsidiary is or will be named as a party with respect to the Properties or the Business, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law with respect to the Properties or the Business. SECTION 4. CONDITIONS PRECEDENT 4.1 Conditions to Initial Loans. The agreement of each Lender to make the initial Loan requested to be made by it is subject to the satisfaction, prior to or concurrently with the making of such Loan on the Closing Date, of the following conditions precedent: (a) Loan Documents. The Administrative Agent shall have received (i) this Agreement, executed and delivered by a duly authorized officer of the Borrower, with a counterpart for each Lender, and (ii) for the account of the Swing Line Lender, the Swing Line Note conforming to the requirements hereof and executed by a duly authorized officer of the Borrower. CREDIT AGREEMENT 34 (b) Related Agreements. The Administrative Agent shall have received, with a copy for each Lender, true and correct copies, certified as to authenticity by the Borrower, of such other documents or instruments as may be reasonably requested by the Administrative Agent, including, without limitation, a copy of any debt instrument, security agreement or other material contract to which the Borrower or its Subsidiaries may be a party. (c) Closing Certificate. The Administrative Agent shall have received, with a copy for each Lender, a closing certificate of the Borrower, dated the Closing Date, substantially in the form of Exhibit I, with appropriate insertions and attachments, satisfactory in form and substance to the Administrative Agent, executed by the President or any Vice President and the Secretary or any Assistant Secretary of the Borrower. (d) Corporate Proceedings. The Administrative Agent shall have received, with a copy for each Lender, a copy of the resolutions, in form and substance satisfactory to the Administrative Agent, of the Board of Directors of the Borrower authorizing (i) the execution, delivery and performance of this Agreement and the other Loan Documents to which it is a party and (ii) the borrowings contemplated hereunder, certified by the Secretary or an Assistant Secretary of the Borrower as of the Closing Date, which certificate shall be in form and substance satisfactory to the Administrative Agent and shall state that the resolutions thereby certified have not been amended, modified, revoked or rescinded. (e) Incumbency Certificate. The Administrative Agent shall have received, with a copy for each Lender, a certificate of the Borrower, dated the Closing Date, as to the incumbency and signature of the officers of the Borrower executing any Loan Document satisfactory in form and substance to the Administrative Agent, executed by the President or any Vice President and the Secretary or any Assistant Secretary of the Borrower. (f) Corporate Documents. The Administrative Agent shall have received, with a copy for each Lender, true and complete copies of the certificate of incorporation and by-laws of the Borrower, certified as of the Closing Date as complete and correct copies thereof by the Secretary or an Assistant Secretary of the Borrower. (g) Fees. The Administrative Agent shall have received the fees to be received on the Closing Date. (h) Legal Opinions. The Administrative Agent shall have received, with a counterpart for each Lender, the executed legal opinion of Robert E. Norton, Jr., Senior Vice President, General Counsel and Secretary of the Borrower (or such other person who then holds the position of General Counsel of the Borrower), substantially in the form of Exhibit F. Such legal opinion shall cover such other matters incident to the transactions contemplated by this Agreement as the Administrative Agent may reasonably require. CREDIT AGREEMENT 35 (i) Existing Agreement. The Administrative Agent shall have received evidence satisfactory to it that the commitments under the Borrower's existing $742,500,000 Credit Agreement, dated as of June 8, 1999, shall have been canceled and all amounts outstanding thereunder shall have been repaid. 4.2 Conditions to Each Loan. The agreement of each Lender to make any Loan requested to be made by it on any date (including, without limitation, its initial Loan and its Term Loan) is subject to the satisfaction of the following conditions precedent: (a) Representations and Warranties. Each of the representations and warranties made by the Borrower in or pursuant to the Loan Documents shall be true and correct in all material respects on and as of such date as if made on and as of such date. (b) No Default. No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the Loans requested to be made on such date. (c) Additional Matters. All corporate and other proceedings, and all documents, instruments and other legal matters in connection with the transactions contemplated by this Agreement and the other Loan Documents shall be satisfactory in form and substance to the Administrative Agent, and the Administrative Agent shall have received such other documents and legal opinions in respect of any aspect or consequence of the transactions contemplated hereby or thereby as it shall reasonably request. Each borrowing by the Borrower hereunder shall constitute a representation and warranty by the Borrower as of the date thereof that the conditions contained in this subsection have been satisfied. SECTION 5. AFFIRMATIVE COVENANTS The Borrower hereby agrees that, so long as the Commitments remain in effect or any amount is owing to any Lender or the Administrative Agent hereunder or under any other Loan Document, the Borrower shall and (except in the case of delivery of financial information, reports and notices) shall cause each of its Subsidiaries to: 5.1 Financial Statements. Furnish to each Lender: (a) as soon as available, but in any event within 120 days after the end of each fiscal year of the Borrower, a copy of the consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at the end of such year and the related consolidated statements of income and retained earnings and of cash flows for such year, setting forth in each case in comparative form the figures for the previous year, reported on without a "going concern" or like qualification or exception, or qualification arising out of the scope of the audit, by Price Waterhouse LLP or other independent certified public accountants of nationally recognized standing; and CREDIT AGREEMENT 36 (b) as soon as available, but in any event not later than 45 days after the end of each of the first three quarterly periods of each fiscal year of the Borrower, the unaudited consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at the end of such quarter and the related unaudited consolidated statements of income and retained earnings of such quarter and of cash flows of the Borrower and its consolidated Subsidiaries for the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures for the previous year or, in the case of such consolidated balance sheet, for the last day of the prior fiscal year, certified by a Responsible Officer as being fairly stated in all material respects (subject to normal yearend audit adjustments); all such financial statements shall be complete and correct in all material respects and shall be prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods (except as approved by such accountants or officer, as the case may be, and disclosed therein). 5.2 Certificates; Other Information. Furnish to the Administrative Agent: (a) concurrently with the delivery of the financial statements referred to in subsection 5.1(a), a certificate of the independent certified public accountants reporting on such financial statements stating that in making the examination necessary therefor no knowledge was obtained of any failure by the Borrower or any of its Subsidiaries to comply with subsections 6.1, 6.4 or 6.5, except as specified in such certificate; (b) concurrently with the delivery of the financial statements referred to in subsections 5.1(a) and (b), a certificate of a Responsible Officer, substantially in the form of Exhibit J attached hereto, stating that, to the best of such Officer's knowledge, during such period the Borrower has observed or performed all of its covenants and other agreements, and satisfied every condition, contained in this Agreement and the other Loan Documents to be observed, performed or satisfied by it, and that such Officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate; (c) within five days after the same are sent, copies of all financial statements and reports which the Borrower sends to its members generally, and within five days after the same are filed, copies of all financial statements and reports which the Borrower may make to, or file with, the Securities and Exchange Commission or any successor or analogous Governmental Authority; and . (d) promptly, such additional financial and other information (other than any non-public information or materials pertaining to (i) the Borrower's proprietary new products, systems or services, (ii) the Borrower's proprietary marketing programs, strategies or plans, or (iii) any member specific billing, contractual or other arrangements) as the Administrative Agent may from time to time reasonably request. 5.3 Payment of Obligations. Pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all its obligations of whatever CREDIT AGREEMENT 37 nature, except (i) where the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of the Borrower or its Subsidiaries, as the case may be or (ii) to the extent that failure to comply therewith could not, in the aggregate, be reasonably expected to have a Material Adverse Effect. 5.4 Conduct of Business and Maintenance of Existence. Continue to engage in business of the same general type as now conducted by it and preserve, renew and keep in full force and effect its corporate existence and take all reasonable action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business except as otherwise permitted pursuant to subsection 6.9; and comply with all Contractual Obligations and Requirements of Law except to the extent that failure to comply therewith could not, in the aggregate, be reasonably expected to have a Material Adverse Effect. 5.5 Maintenance of Property; Insurance. Keep all property useful and necessary in its business in good working order and condition; maintain with financially sound and reputable insurance companies insurance on all its property in at least such amounts and against at least such risks as are usually insured against in the same general area by companies engaged in the same or a similar business; and furnish to each Lender, upon written request, full information as to the insurance carried. 5.6 Inspection of Property; Books and Records; Discussions. Keep proper books of records and account in which full, true and correct entries in conformity with GAAP (or such other commonly accepted accounting practice which has been previously disclosed to the Administrative Agent) and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities; and permit representatives of any Lender to, upon reasonable notice, visit and inspect any of its properties (not more than one time in any fiscal year) and examine and make abstracts from any of its books and records (other than any non-public information or materials pertaining to (i) the Borrower's proprietary new products, systems or services, (ii) the Borrower's proprietary marketing programs, strategies or plans, or (iii) any member specific billing, contractual or other arrangements) at any reasonable time and as often as may reasonably be desired and to discuss the business, operations, properties and financial and other condition of the Borrower and its Subsidiaries with officers and employees of the Borrower and its Subsidiaries and with its independent certified public accountants; provided that if a Default or Event of Default shall have occurred and be continuing, such visits and inspections may be conducted at any time upon reasonable notice. 5.7 Notices. Promptly give notice to the Administrative Agent of: (a) the occurrence of any Default or Event of Default; (b) any (i) default or event of default under any Contractual Obligation of the Borrower or any of its Subsidiaries or (ii) litigation, investigation or proceeding which may exist at any time between the Borrower or any of its Subsidiaries and any Governmental Authority, which in either case, if not cured or if adversely determined, as the case may be, could reasonably be expected to have a Material Adverse Effect; CREDIT AGREEMENT 38 (c) any litigation or proceeding affecting the Borrower or any of its Subsidiaries in which the amount involved is $10,000,000 or more and not covered by insurance or in which injunctive or similar relief is sought; (d) the following events, as soon as possible and in any event within 30 days after the Borrower knows or has reason to know thereof: (i) the occurrence or expected occurrence of any Reportable Event with respect to any Plan, a failure to make any required contribution to any "pension plan" (as defined in Section 3(2) of ERISA), the creation of any Lien in favor of the PBGC or a Plan or any withdrawal from, or the termination, Reorganization or Insolvency of, any Multiemployer Plan or (ii) the institution of proceedings or the taking of any other action by the PBGC or the Borrower or any Commonly Controlled Entity or any Multiemployer Plan with respect to the withdrawal from, or the terminating, Reorganization or Insolvency of, any Multiemployer Plan, except where the termination, Reorganization or Insolvency of any Multiemployer Plan could not reasonably be expected to result in a liability in excess of $10,000,000; and (e) any material adverse change in the business, operations, property or condition (financial or otherwise) of the Borrower and its Subsidiaries taken as a whole. Each notice pursuant to this subsection shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action the Borrower proposes to take with respect thereto. 5.8 Environment Laws. (a) Comply with, and ensure compliance by all tenants and subtenants, if any, with, all applicable Environmental Laws and obtain and comply in all material respects with and maintain, and ensure that all tenants and subtenants obtain and comply in all material respects with and maintain, any and all licenses, approvals, notifications, registrations or permits required by applicable Environmental Laws except to the extent that failure to do so could not be reasonably expected to have a Material Adverse Effect. (b) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws and promptly comply in all material respects with all lawful orders and directives of all Governmental Authorities regarding Environmental Laws except to the extent that the same are being contested in good faith by appropriate proceedings and the pendency of such proceedings could not be reasonably expected to have a Material Adverse Effect. SECTION 6. NEGATIVE COVENANTS The Borrower hereby agrees that, so long as the Commitments remain in effect or any amount is owing to any Lender or the Administrative Agent hereunder or under any other Loan Document, the Borrower shall not and shall not permit any of its Subsidiaries to, directly or indirectly: CREDIT AGREEMENT 39 6.1 Maintenance of Net Worth. Permit Consolidated Net Worth at any time to be less than the sum of (i) $273,216,000 plus (ii) 50% of the sum of Consolidated Net Income (if positive) of the Borrower for each quarter ending after December 31, 1999. 6.2 Limitation on Liens. Create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, except for: (a) Liens for taxes not yet due or which are being contested in good faith by appropriate proceedings, provided that adequate reserves with respect thereto are maintained on the books of the Borrower or its Subsidiaries, as the case may be, in conformity with GAAP; (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 60 days or which are being contested in good faith by appropriate proceedings; (c) pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation and deposits securing liability to insurance carriers under insurance or self-insurance arrangements; (d) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (e) easements, rights-of-way, restrictions and other similar encumbrances which, in the aggregate, do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of the Borrower and its Subsidiaries taken as a whole; (f) Liens in existence on the date hereof listed on Schedule 6.2(f), provided that no such Lien is spread to cover any additional property after the Closing Date and that the amount of Indebtedness secured thereby is not increased; (g) Liens securing Indebtedness of the Borrower and its Subsidiaries incurred to finance the acquisition of fixed or capital assets, provided that (i) such Liens shall be created substantially simultaneously with the acquisition of such fixed or capital assets and (ii) such Liens do not at any time encumber any property other than the property financed by such Indebtedness; (h) bankers' liens arising by operation of law; (i) Liens on the property or assets of a corporation which becomes a Subsidiary on or after the date hereof securing Indebtedness of such corporation, provided that (i) such Liens existed at the time such corporation became a Subsidiary and were not created in anticipation thereof and (ii) any such Lien is not spread to cover any CREDIT AGREEMENT 40 property or assets of such corporation after the time such corporation becomes a Subsidiary; (j) Liens arising out of judgments or awards (x) which are bonded or (y) with respect to which an appeal or a proceeding for review is being prosecuted in good faith and adequate reserves have been provided for the payment of such judgment or award; (k) Liens in favor of the Borrower which secure the obligation of any Subsidiary to the Borrower; and (l) Liens (not otherwise permitted hereunder) which secure obligations not exceeding (as to the Borrower and all Subsidiaries) $20,000,000 in aggregate amount at any time outstanding. 6.3 Limitation on Fundamental Changes. Enter into any merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease, assign, transfer or otherwise dispose of, all or substantially all of its property, business or assets, or make any material change in its present method of conducting business (taking the Borrower and its Subsidiaries as a whole), except: (a) any Subsidiary of the Borrower may be merged or consolidated with or into the Borrower (provided that the Borrower shall be the continuing or surviving corporation) or with or into any one or more wholly owned Subsidiaries of the Borrower (provided that the wholly owned Subsidiary or Subsidiaries shall be the continuing or surviving corporation); (b) any wholly owned Subsidiary may sell, lease, transfer or otherwise dispose of any or all of its assets (upon voluntary liquidation or otherwise) to the Borrower or any other wholly owned Subsidiary of the Borrower; and (c) as permitted by subsection 6.4. 6.4 Limitation on Sale of Assets. Convey, sell, lease, assign, transfer or otherwise dispose of any of its property, business or assets (including, without limitation, receivables and leasehold interests), whether now owned or hereafter acquired, or, in the case of any Subsidiary, issue or sell any shares of such Subsidiary's Capital Stock to any Person other than the Borrower or any wholly owned Subsidiary, except: (a) the sale or other disposition of obsolete or worn out property in the ordinary course of business; (b) the sale or other disposition of any property in the ordinary course of business; provided that the aggregate book value of all assets so sold or disposed of in any period of twelve consecutive months shall not exceed 20% of consolidated total assets of the Borrower and its Subsidiaries as at the beginning of such twelve-month period; CREDIT AGREEMENT 41 (c) the sale or disposition of the headquarters of the Borrower located at 2000 Purchase Street, Purchase, New York 10577-2509; (d) the sale of inventory in the ordinary course of business; (e) the sale or discount without recourse of accounts receivable arising in the ordinary course of business in connection with the compromise or collection thereof; and (f) as permitted by subsection 6.3(b). 6.5 Limitation on Dividends. Declare or pay any dividend exceeding 40% of net income in any fiscal year (other than dividends payable solely in common stock of the Borrower) on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of, any shares of any class of Capital Stock of the Borrower or any warrants or options to purchase any such Stock, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of the Borrower or any Subsidiary. The provisions hereunder shall in no way limit the ability of any Subsidiary to make dividend payments to the Borrower or any other shareholder of such Subsidiary. 6.6 Limitation on Investments, Loans and Advances. Make any advance, loan, extension of credit or capital contribution to, or purchase any stock, bonds, notes, debentures or other securities of or any assets constituting a business unit of, or make any other investment in, any Person, except Permitted Investments. 6.7 Limitation on Transactions with Affiliates. Enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate unless such transaction is (a) in the ordinary course of the Borrower's or such Subsidiary's business and (b) upon fair and reasonable terms. 6.8 Limitation on Changes in Fiscal Year. Permit the fiscal year of the Borrower to end on a day other than December 31; provided that, the Borrower may change its fiscal year with the consent of the Administrative Agent, which consent shall not unreasonably be withheld. 6.9 Limitation on Lines of Business. Enter into any business, either directly or through any Subsidiary, except for businesses (a) in which the Borrower and its Subsidiaries are engaged on the date of this Agreement or (b) which, after giving effect to such new business, would not result in a change in the primary business of the Borrower and its Subsidiaries, taken as a whole, on the date hereof. CREDIT AGREEMENT 42 SECTION 7. EVENTS OF DEFAULT If any of the following events shall occur and be continuing: (a) The Borrower shall fail to pay any principal of any Loan when due in accordance with the terms thereof or hereof, or the Borrower shall fail to pay any interest on any Loan, or any other amount payable hereunder, within five days after any such interest or other amount becomes due in accordance with the terms thereof or hereof; or (b) Any representation or warranty made or deemed made by the Borrower or any of its subsidiaries herein or in any other Loan Document or which is contained in any certificate, document or financial or other statement furnished by it at any time under or in connection with this Agreement shall prove to have been incorrect in any material respect on or as of the date made or deemed made; or (c) The Borrower shall default in the observance or performance of any agreement contained in Section 6; or (d) The Borrower shall default in the observance or performance of any other term, covenant or agreement contained in this Agreement (other than as provided in paragraphs (a) through (c) of this Section), and such default shall continue unremedied for a period of 30 days after notice to the Borrower by the Administrative Agent or the Required Lenders; or (e) The Borrower or any of its Subsidiaries shall (i) default in any payment of principal of or interest of any Indebtedness (other than the Loans) or in the payment of any Guarantee Obligation, in either case in excess of $5,000,000 individually or $10,000,000 in the aggregate, beyond the period of grace (not to exceed 30 days), if any, provided in the instrument or agreement under which such Indebtedness or Guarantee Obligation was created; or (ii) default in the observance or performance of any other agreement or condition relating to any such Indebtedness or Guarantee Obligation or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness or beneficiary or beneficiaries of such Guarantee Obligation (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity or such Guarantee Obligation to become payable; or (f) (i) The Borrower or any of its Subsidiaries shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or the Borrower or any of its Subsidiaries shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against the Borrower or any of its Subsidiaries any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains CREDIT AGREEMENT 43 undismissed, undischarged or unbonded for a period of 90 days; or (iii) there shall be commenced against the Borrower or any of its Subsidiaries any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) the Borrower or any of its Subsidiaries shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) the Borrower or any of its Subsidiaries shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or (g) (i) Any Person shall engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan or any Lien in favor of the PBGC or a Plan shall arise on the assets of the Borrower or any Commonly Controlled Entity, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or commencement of proceedings or appointment of a trustee is, in the reasonable opinion of the Required Lenders, likely to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes of Title IV of ERISA, (v) the Borrower or any Commonly Controlled Entity shall, or in the reasonable opinion of the Required Lenders is likely to, incur any liability in connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan or (vi) any other event or condition shall occur or exist with respect to a Plan; and in each case in clauses (i) through (vi) above, such event or condition, together with all other such events or conditions, if any, could reasonably be expected to have a Material Adverse Effect; or (h) One or more judgments or decrees shall be entered against the Borrower or any of its Subsidiaries involving a liability (not paid or fully covered by insurance) of $5,000,000 or more in the case of any one such judgment or $10,000,000 or more in the aggregate for all such judgments and decrees, and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 90 days from the entry thereof; or (i) Any Person or "group" (within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended) (i) shall have acquired beneficial ownership of 20% or more of any outstanding class of Capital Stock having ordinary voting power in the election of directors of the Borrower or (ii) shall obtain the power (whether or not exercised) to elect a majority of the Borrower's directors; then, and in any such event, (A) if such event is an Event of Default specified in clause (i) or (ii) of paragraph (f) of this Section with respect to the Borrower, automatically the Commitments shall immediately terminate and the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement shall immediately become due and payable, and (B) if such event is any other Event of Default, either or both of the following actions may be taken: CREDIT AGREEMENT 44 (i) with the consent of the Required Lenders, the Administrative Agent may, or upon the request of the Required Lenders, the Administrative Agent shall, by notice to the Borrower declare the Commitments to be terminated forthwith, whereupon the Commitments shall immediately terminate; and (ii) with the consent of the Required Lenders, the Administrative Agent may, or upon the request of the Required Lenders, the Administrative Agent shall, by notice to the Borrower, declare the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement to be due and payable forthwith, whereupon the same shall immediately become due and payable. Except as expressly provided above in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived. SECTION 8. THE ADMINISTRATIVE AGENT 8.1 Appointment. Each Lender hereby irrevocably designates and appoints the Administrative Agent as the agent of such Lender under this Agreement and the other Loan Documents, and each such Lender irrevocably authorizes the Administrative Agent, in such capacity, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Administrative Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement, the Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any, Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Administrative Agent. 8.2 Delegation of Duties. The Administrative Agent may execute any of its duties under this Agreement and the other Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. 8.3 Exculpatory Provisions. Neither the Administrative Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any other Loan Document (except for its or such Person's own gross negligence or willful misconduct) or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by the Borrower or any officer thereof contained in this Agreement or any other Loan Document or in any certificate, report, statement or other document referred to or provided for in, or received by the Administrative Agent under or in connection with, this Agreement or any other Loan Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document or for any failure of the Borrower to perform its obligations hereunder or thereunder. The Administrative Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Borrower. CREDIT AGREEMENT 45 8.4 Reliance by Administrative Agent. The Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any Note, writing, resolution, notice, consent, certificate, affidavit, letter, telecopy, or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrower), independent accountants and other experts selected by the Administrative Agent. The Administrative Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Administrative Agent. The Administrative Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Loan Documents in accordance with a request of the Required Lenders, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Loans. 8.5 Notice of Default. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Administrative Agent has received notice from a Lender or the Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default." In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give prompt notice thereof to the Lenders. The Administrative Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders; provided that unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders. 8.6 Non-Reliance on Administrative Agent and Other Lenders. Each Lender expressly acknowledges that neither the Administrative Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to it and that no act by the Administrative Agent hereinafter taken, including any review of the affairs of the Borrower, shall be deemed to constitute any representation or warranty by the Administrative Agent to any Lender. Each Lender represents to the Administrative Agent that it has, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Borrower and made its own decision to make its Loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the CREDIT AGREEMENT 46 Borrower. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent hereunder, the Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of the Borrower which may come into the possession of the Administrative Agent or any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates. 8.7 Indemnification. The Lenders agree to indemnify the Administrative Agent in its capacity as such (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so), ratably according to their respective Commitment Percentages in effect on the date on which indemnification is sought, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment of the Loans) be imposed on, incurred by or asserted against the Administrative Agent in any way relating to or arising out of, the Commitments, this Agreement, (including, without limitation, enforcement of the Administrative Agent's rights under this subsection) any of the other Loan Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Administrative Agent under or in connection with any of the foregoing, provided that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Administrative Agent's gross negligence or willful misconduct. The agreements in this subsection shall survive the payment of the Loans and all other amounts payable hereunder. 8.8 Administrative Agent in Its Individual Capacity. The Administrative Agent and its Affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Borrower as though the Administrative Agent were not the Administrative Agent hereunder and under the other Loan Documents. With respect to the Loans made by it, the Administrative Agent shall have the same rights and powers under this Agreement and the other Loan Documents as any Lender and may exercise the same as though it were not the Administrative Agent, and the terms "Lender" and "Lenders" shall include the Administrative Agent in its individual capacity. 8.9 Successor Administrative Agent. The Administrative Agent may resign as Administrative Agent upon 10 days' notice to the Lenders. If the Administrative Agent shall resign as Administrative Agent under this Agreement and the other Loan Documents, then the Required Lenders shall appoint from among the Lenders a successor agent for the Lenders, which successor agent (provided that it shall have been approved by the Borrower (such approval not to be unreasonably withheld)), shall succeed to the rights, powers and duties of the Administrative Agent hereunder. Effective upon such appointment and approval, the term "Administrative Agent" shall mean such successor agent, and the former Administrative Agent's rights, powers and duties as Administrative Agent shall be terminated, without any other or further act or deed on the part of such former Administrative Agent or any of the parties to this Agreement or any holders of the Loans. After any retiring Administrative Agent's resignation as Administrative Agent, the provisions of this Section 8 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement and the other Loan Documents. CREDIT AGREEMENT 47 SECTION 9. MISCELLANEOUS 9.1 Amendments and Waivers. Neither this Agreement nor any other Loan Document, nor any terms hereof or thereof may be amended, supplemented or modified except in accordance with the provisions of this subsection. The Required Lenders may, or, with the written consent of the Required Lenders, the Administrative Agent may, from time to time, (a) enter into with the Borrower written amendments, supplements or modifications hereto and to the other Loan Documents for the purpose of adding any provisions to this Agreement or the other Loan Documents or changing in any manner the rights of the Lenders or of the Borrower hereunder or thereunder or (b) waive, on such terms and conditions as the Required Lenders or the Administrative Agent, as the case may be, may specify in such instrument, any of the requirements of this Agreement or the other Loan Documents or any Default or Event of Default and its consequences; provided, however, that no such waiver and no such amendment, supplement or modification shall (i) reduce the amount or extend the scheduled date of maturity of any Loan, or reduce the stated rate of any interest or fee payable hereunder or extend the scheduled date of any payment thereof or increase the amount or extend the expiration date of any Lender's Commitment, in each case without the consent of each Lender affected thereby, or (ii) amend, modify or waive any provision of this subsection or subsection 9.6(a) or reduce the percentage specified in the definition of Required Lenders, or consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement and the other Loan Documents, in each case without the written consent of all the Lenders, or (iii) amend, modify or waive an), provision of Section 8 without the written consent of the then Administrative Agent. Any such waiver and any such amendment, supplement or modification shall apply equally to each of the Lenders and shall be binding upon the Borrower, the Lenders, the Administrative Agent and all future holders of the Loans. In the case of any waiver, the Borrower, the Lenders and the Administrative Agent shall be restored to their former positions and rights hereunder and under the other Loan Documents, and any Default or Event of Default waived shall be deemed to be cured and not continuing; no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereon. 9.2 Notices. All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including by facsimile transmission) and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made (a) in the case of delivery by hand, when delivered, (b) in the case of delivery by mail, three Business Days after being deposited in the mails, certified or registered postage prepaid, or (c) in the case of delivery by facsimile transmission, when sent and receipt has been confirmed, addressed as follows in the case of the Borrower and the Administrative Agent, and as set forth in an Administrative Questionnaire delivered to the Administrative Agent in the case of the Lenders, or to such other address as may be hereafter notified by the respective parties hereto: The Borrower: MasterCard International Incorporated 2000 Purchase Street Purchase, New York 10577-2509 Attention: John Ranieri (with a copy to Stephen Piccininni) Fax: 914-249-4205 Telephone: 914-249-5741 CREDIT AGREEMENT 48 The Administrative Agent or the Swing Line Lender: Citibank, N.A. 2 Penns Way, Suite 200 New Castle, Delaware 19720 Attention: Robert Partee Fax: 302-894-6120 Telephone: 302-894-6017 provided that any notice, request or demand to or upon the Administrative Agent or the Lenders pursuant to subsection 2.2, 2.4, 2.6, 2.8, 2.9, 2.11, 2.19 or 2.20 shall not be effective until received. 9.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Administrative Agent or any Lender, any right, remedy, power or privilege hereunder or under the other Loan Documents shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 9.4 Survival of Representations and Warranties. All representations and warranties made hereunder, in the other Loan Documents and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the making of the Loans hereunder. 9.5 Payment of Expenses and Taxes. The Borrower agrees (a) to pay or reimburse the Administrative Agent for all reasonable fees, charges and disbursements of counsel incurred in connection with this Agreement and the other Loan Documents or the amendment, modification or waiver thereof and all reasonable and documented out-of-pocket expenses of the Administrative Agent incurred in connection with any amendment, modification or waiver with respect to this Agreement and the other Loan Documents, (b) to pay or reimburse each Lender and the Administrative Agent for all its costs and expenses incurred in connection with the enforcement or preservation of any rights under this Agreement (including, without limitation, this subsection), the other Loan Documents and any such other documents, including, without limitation, the reasonable fees and disbursements of counsel (including, without limitation, the non-duplicative documented allocated cost of in-house counsel) to each Lender and of counsel to the Administrative Agent, (c) to pay, indemnify, and hold harmless each Lender, the Administrative Agent, their respective affiliates and their respective officers, directors, employees, agents and advisors (each, an "Indemnitee") from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the other Loan Documents and any such other documents, and (d) to pay, indemnify, and hold harmless each Indemnitee from and against any CREDIT AGREEMENT 49 and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever (including, without limitation, reasonable legal fees) with respect to the execution, delivery, enforcement, performance and administration of this Agreement (including, without limitation, this subsection), the other Loan Documents and any such other documents, including, without limitation, any investigative, administrative or judicial proceeding relating to the foregoing or any of the foregoing relating to any actual or proposed use of proceeds of the Loans or the violation of, noncompliance with or liability under, any Environmental Law applicable to the operations of the Borrower, any of its Subsidiaries or any of the Properties or arising out of the Commitments (all the foregoing in this clause (d), collectively, the "indemnified liabilities"), provided that the Borrower shall have no obligation hereunder to any Indemnitee with respect to indemnified liabilities arising from the gross negligence or willful misconduct of such Indemnitee. The agreements in this subsection shall survive repayment of the Loans and all other amounts payable hereunder. 9.6 Successors and Assigns; Participations and Assignments. (a) This Agreement shall be binding upon and inure to the benefit of the Borrower, the Lenders, the Administrative Agent and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of each Lender. (b) Any Lender may, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time sell to one or more banks or other entities ("Participants") participating interests in any Loan owing to such Lender, any Commitment or Swing Line Commitment of such Lender or any other interest of such Lender hereunder and under the other Loan Documents. In the event of any such sale by a Lender of a participating interest to a Participant, such Lender's obligations under this Agreement to the other parties to this Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, such Lender shall remain the holder of any such Loan for all purposes under this Agreement and the other Loan Documents, and the Borrower and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and the other Loan Documents. No Lender shall be entitled to create in favor of any Participant, in the participation agreement pursuant to which such Participants participating interest shall be created or otherwise, any right to vote on, consent to or approve any matter relating to this Agreement or any other Loan Document except for those specified in clauses (i) and (ii) of the proviso to subsection 9.1. The Borrower agrees that if amounts outstanding under this Agreement are due or unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall, to the maximum extent permitted by applicable law, be deemed to have the right of setoff in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement, provided that, in purchasing such participating interest, such Participant shall be deemed to have agreed to share with the Lenders the proceeds thereof as provided in subsection 9.7(a) as fully as if it were a Lender hereunder. The Borrower also agrees that each Participant shall be entitled to the benefits of subsections 2.19, 2.20, 2.22 and 2.23 with respect to its participation in the Commitments, Swing Line Commitments and the Loans outstanding from time to time as if it was a Lender; provided that, in the case of subsection 2.23, such Participant shall have complied with the requirements of said subsection and provided, CREDIT AGREEMENT 50 further, that no Participant shall be entitled to receive any greater amount pursuant to any such subsection than the transferor Lender would have been entitled to receive in respect of the amount of the participation transferred by such transferor Lender to such Participant had no such transfer occurred. (c) Subject to the provisions of subsection 9.6(d) relating to the assignment of CAF Advances, any Lender may, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time and from time to time assign to one or more banks or other financial institutions (an "Assignee") all or any part of its rights and obligations under this Agreement and the other Loan Documents; provided, however, that (i) except in the case of an assignment (A) to a Lender or an Affiliate of a Lender which is a bank or financial institution or (B) of CAF Advances, each of the Administrative Agent and (except when a Default or Event of Default shall have occurred and be continuing) the Borrower must give its consent to such assignment (which in each case shall not be unreasonably withheld or delayed); (ii) the Swing Line Lender may not transfer any portion of the Swing Line Commitment without the consent of the Borrower (such consent not to be unreasonably withheld or delayed); (iii) in the case of any assignment to an additional bank or financial institution that is not a Lender or an Affiliate thereof, the sum of the aggregate principal amount of the Loans and the aggregate amount of the Commitments and Swing Line Commitments being assigned and, if such assignment is of less than all of the rights and obligations of the assigning Lender, the sum of the aggregate principal amount of the Loans and the aggregate amount of the Commitments and Swing Line Commitments remaining with the assigning Lender are each not less than $5,000,000 (or such lesser amount as may be agreed to by the Borrower and the Administrative Agent); and (iv) such assignment shall be evidenced by an Assignment and Acceptance, substantially in the form of Exhibit H, executed by such Assignee, such assigning Lender (and, in the case of an Assignee that is not then a Lender or an Affiliate thereof, by the Borrower and the Administrative Agent) and delivered to the Administrative Agent for its acceptance and recording in the Register. Upon such execution, delivery, acceptance and recording, from and after the effective date determined pursuant to such Assignment and Acceptance, (x) the Assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder with a Commitment or Swing Line Commitment as set forth therein, and (y) the assigning Lender thereunder shall, to the extent provided in such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement such assigning Lender shall cease to be a party hereto). Notwithstanding any provision of this paragraph (c) and paragraph (f) of this subsection, the consent of the Borrower shall not be required, and, unless requested by the Assignee and/or the assigning Lender, new Notes shall not be required to be executed and delivered by the CREDIT AGREEMENT 51 Borrower, for any assignment which occurs at any time when any of the events described in Section 7(f) shall have occurred and be continuing. (d) Any Lender may, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time and from time to time assign to one or more banks or other entities ("CAF Advance Assignees") any CAF Advance owing to such Lender, pursuant to a CAF Advance Assignment, substantially in the form of Exhibit D-4 attached hereto, executed by the assignor Lender and the CAF Advance Assignee. Upon such execution, from and after the date of such CAF Advance Assignment, the CAF Advance Assignee shall, to the extent of the assignment provided for in such CAF Advance Assignment, be deemed to have the same rights and benefits of payment and enforcement with respect to such CAF Advance and the same rights of set-off and obligation to share pursuant to subsection 9.7 as it would have had if it were a Lender hereunder; provided that unless such CAF Advance Assignment shall otherwise specify and a copy of such CAF Advance Assignment shall have been delivered to the Administrative Agent for its acceptance and recording in the Register in accordance with subsection 9.6(e), the assignor thereunder shall act as collection agent for the CAF Advance Assignee thereunder, and the Administrative Agent shall pay all amounts received from the Borrower which are allocable to the assigned CAF Advance directly to such assignor without any further liability to such CAF Advance Assignee. A CAF Advance Assignee under a CAF Advance Assignment shall not, by virtue of such CAF Advance Assignment, become a party to this Agreement or have any rights to consent to or refrain from consenting to any amendment, waiver or other modification of any provision of this Agreement or any related document; provided that (x) the assignor under such CAF Advance Assignment and such CAF Advance Assignee may, in their discretion, agree between themselves upon the manner in which such assignor will exercise its rights under this Agreement and any related document except no Lender shall sell any CAF Advance pursuant to which the CAF Advance Assignee shall have rights to approve any amendment or waiver to this Agreement except to the extent such amendment or waiver would (i) reduce the principal amount of any CAF Advance which has been assigned to such CAF Advance Assignee, (ii) reduce the rate of interest on any such CAF Advance or any fees payable in connection with such CAF Advance or (iii) extend the time of payment of principal or, or interest on, any such CAF Advance or any other amount owing under this Agreement and in connection with such CAF Advance, and (y) if a copy of such CAF Advance Assignment shall have been delivered to the Administrative Agent for its acceptance and recording in the Register in accordance with subsection 9.6(e), neither the principal amount of, the interest rate on, nor the maturity date of, any CAF Advance assigned to such CAF Advance Assignee thereunder will be modified without the written consent of such CAF Advance Assignee. If a CAF Advance Assignee has caused a CAF Advance Assignment to be recorded in the Register in accordance with subsection 9.6(e), such CAF Advance Assignee may thereafter, in the ordinary course of its business and in accordance with applicable law, assign the CAF Advance assigned to it to any Lender, to any affiliate or subsidiary of such CAF Advance Assignee or to any other financial institution with the consent of the Borrower (which shall not be unreasonably withheld), and the foregoing provisions of this paragraph (c) shall apply, mutatis mutandis, to any such assignment by a CAF Advance Assignee. Except in accordance with the preceding sentence, CAF Advances may not be further assigned by a CAF Advance Assignee, subject to any legal or regulatory requirement that the CAF Advance Assignee's assets must remain under its control. CREDIT AGREEMENT 52 (e) The Administrative Agent, on behalf of the Borrower, shall maintain at the address of the Administrative Agent referred to in subsection 9.2 a copy of each Assignment and Acceptance delivered to it and a register (the "Register") for the recordation of the names and addresses of the Lenders and the Commitment of, and principal amount of the Loans owing to, each Lender from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, the Administrative Agent and the Lenders may (and, in the case of any Loan or other obligation hereunder not evidenced by a Note, shall) treat each Person whose name is recorded in the Register as the owner of a Loan or other obligation hereunder as the owner thereof for all purposes of this Agreement and the other Loan Documents, notwithstanding any notice to the contrary. Any assignment of any Loan or other obligation hereunder not evidenced by a Note shall be effective only upon appropriate entries with respect thereto being made in the Register. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (f) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an Assignee (and, in the case of an Assignee that is not then a Lender or an affiliate thereof, by the Borrower and the Administrative Agent) together with payment to the Administrative Agent of a registration and processing fee of $2,000 and (if the Assignee is not a Lender) delivery to the Administrative Agent of such Assignee's Administrative Questionnaire, the Administrative Agent shall (i) promptly accept such Assignment and Acceptance and (ii) on the effective date determined pursuant thereto record the information contained therein in the Register and give notice of such acceptance and recordation to the Lenders and the Borrower. (g) The Borrower authorizes each Lender to disclose to any Participant or Assignee (each, a "Transferee") and any prospective Transferee any and all financial information in such Lender's possession concerning the Borrower and its Affiliates which has been delivered to such Lender by or on behalf of the Borrower pursuant to this Agreement or which has been delivered to such Lender by or on behalf of the Borrower in connection with such Lender's credit evaluation of the Borrower and its Affiliates prior to becoming a party to this Agreement. (h) For avoidance of doubt, the parties to this Agreement acknowledge that the provisions of this subsection concerning assignments of Loans and Notes relate only to absolute assignments and that such provisions do not prohibit assignments creating security interests, including, without limitation, any pledge or assignment by a Lender of any Loan or Note to any Federal Reserve Bank in accordance with applicable law. 9.7 Adjustments; Set-off. (a) If any Lender (a "benefited Lender") shall at any time receive any payment of all or part of its Loans, or interest thereon, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred to in Section 7(f), or otherwise), in a greater proportion than any such payment to, or collateral received by any other Lender, if any, in respect of such other Lender's Loans, or interest thereon, such benefited Lender shall purchase for cash from the other Lenders a participating interest in such portion of each such other Lender's Loan, or shall provide such other Lenders with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such benefited Lender to share the excess payment or benefits of such collateral or proceeds ratably with each of the Lenders; provided, however, that if all or any CREDIT AGREEMENT 53 portion of such excess payment or benefits is thereafter recovered from such benefited Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. (b) In addition to any rights and remedies of the Lenders provided by law, each Lender shall have the right, without prior notice to the Borrower, any such notice being expressly waived by the Borrower to the extent permitted by applicable law, upon any amount becoming due and payable by the Borrower hereunder (whether at the stated maturity, by acceleration or otherwise) to set off and appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Lender or any branch or agency thereof to or for the credit or the account of the Borrower, provided that no such set-off and application may be made against deposits in the accounts listed on Schedule 9.7(b) attached hereto. Each Lender agrees promptly to notify the Borrower and the Administrative Agent after any such set-off and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such set-off and application. 9.8 Counterparts. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate Counterparts (including by facsimile transmission), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the copies of this Agreement signed by all the parties shall be lodged with the Borrower and the Administrative Agent. 9.9 Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or enforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 9.10 Integration. This Agreement and the other Loan Documents represent the agreement of the Borrower, the Administrative Agent and the Lenders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Administrative Agent or any Lender relative to subject matter hereof not expressly set forth or referred to herein or in the other Loan Documents. 9.11 Termination of Commitments and Swing Line Commitments. The Commitments and Swing Line Commitments shall terminate if the conditions to closing set forth in subsection 4.1 shall not be satisfied on or before June 30, 2000. 9.12 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 9.13 Submission To Jurisdiction; Waivers. The Borrower hereby irrevocably and unconditionally: CREDIT AGREEMENT 54 (a) submits for itself and its property in any legal action or proceeding relating to this, Agreement and the other Loan Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the Courts of the State of New York, the courts of the United States for the Southern District of New York, and appellate courts from any thereof; (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to the Borrower at its address set forth in subsection 9.2 or at such other address of which the Administrative Agent shall have been notified pursuant thereto; (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this subsection any special, exemplary, punitive or consequential damages. 9.14 Acknowledgements. The Borrower hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents; (b) neither the Administrative Agent nor any Lender has any fiduciary relationship with or duty to the Borrower arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between Administrative Agent and Lenders, on one hand, and the Borrower, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and (c) no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Lenders or among the Borrower and the Lenders. 9.15 WAIVERS OF JURY TRIAL. THE BORROWER, THE ADMINISTRATIVE AGENT AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN. CREDIT AGREEMENT 55 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. MASTERCARD INTERNATIONAL INCORPORATED By: /s/ John D. Ranieri ----------------------------------- Name: John D. Ranieri Title: SVP & Treasurer CITIBANK, N.A. as Administrative Agent and as a Lender By: /s/ Robert A. Danziger ----------------------------------- Name: Robert A. Danziger Title: Vice President CREDIT AGREEMENT 56 LENDERS BANK ONE, NA By: /s/ Stacy A. Kamen ----------------------------------- Name: Stacy A. Kamen Title: Commercial Banking Officer FLEET NATIONAL BANK By: /s/ Todd C. Mesick ----------------------------------- Name: Todd C. Mesick Title: Vice President HSBC BANK USA By: /s/ Diane M. Zieske ----------------------------------- Name: Diane M. Zieske Title: Vice President ABN AMRO BANK N.V. By: /s/ Giovanni P. Fallone ----------------------------------- Name: Giovanni P. Fallone Title: Group Vice President By: /s/ Parker H. Douglas ----------------------------------- Name: Parker H. Douglas Title: Group Vice President COMMONWEALTH BANK OF AUSTRALIA -- GRAND CAYMAN BRANCH By: /s/ Chris Williams ------------------------------------ Name: Chris Williams Title: Head of Risk Management Americas Region CREDIT AGREEMENT 57 BANK OF MONTREAL By: /s/ Kanu Modi ------------------------------------ Name: Kanu Modi Title: Director CREDIT AGRICOLE INDOSUEZ By: /s/ Craig Welch ------------------------------------ Name: Craig Welch Title: Managing Director By: /s/ John McCloskey --------------------------------- Name: John McCloskey Title: First Vice President NATIONAL WESTMINSTER BANK PLC, New York and Nassau Branches By: /s/ David Rowley ------------------------------------ Name: David Rowley Title: Vice President BAYERISCHE HYPO-UND VEREINSBANK AG, NEW YORK BRANCH By: /s/ David Lefkovits ------------------------------------ Name: David Lefkovits Title: Managing Director By: /s/ Sessa von Richthofen --------------------------------- Name: Sessa von Richthofen Title: Associate CREDIT AGREEMENT 58 THE CHASE MANHATTAN BANK By: /s/ Roger A. Parker ------------------------------------ Name: Roger A. Parker Title: Vice President DAI-ICHI KANGYO BANK, LIMITED By: /s/ Nicholas A. Fiore ------------------------------------ Name: Nicholas A. Fiore Title: Vice President PNC BANK, NATIONAL ASSOCIATION By: /s/ Donald V. Davis ------------------------------------ Name: Donald V. Davis Title: Vice President SUNTRUST BANK By: /s/ W. David Wilson ------------------------------------ Name: W. David Wilson Title: Vice President WELLS FARGO BANK By: /s/ Bradley A. Hardy ------------------------------------ Name: Bradley A. Hardy Title: Vice President CREDIT AGREEMENT EX-10.2 6 y49195a2ex10-2.txt AMENDED AND RESTATED CREDIT AGREEMENT EXHIBIT 10.2 U.S. $1,200,000,000 MASTERCARD INTERNATIONAL INCORPORATED AMENDED AND RESTATED CREDIT AGREEMENT dated as of June 5, 2001 (Originally dated as of June 6, 2000) among THE SEVERAL LENDERS FROM TIME TO TIME PARTIES HERETO, CITIBANK, N.A., as Administrative Agent JPMORGAN CHASE, A DIVISION OF CHASE SECURITIES, INC., FLEET NATIONAL BANK HSBC BANK USA as Co-Syndication Agents SALOMON SMITH BARNEY INC., as Arranger AMENDED AND RESTATED CREDIT AGREEMENT dated as of June 5, 2001, among MASTERCARD INTERNATIONAL INCORPORATED, a Delaware corporation (the "Borrower"), the several banks and other financial institutions from time to time parties hereto (the "Lenders"), and CITIBANK, N.A. ("Citibank"), as administrative agent for the Lenders hereunder. The Borrower, certain of the Lenders, the Retiring Lenders referred to below and the Administrative Agent are parties to a Credit Agreement dated as of June 6, 2000 (as heretofore modified and supplemented and in effect on the date of this Agreement, the "Existing Credit Agreement"), providing, subject to the terms and conditions thereof, for loans to be made by said Lenders to the Borrower in an aggregate principal amount not exceeding $1,000,000,000 at any one time outstanding. Effective on the Restatement Date (as defined in Section 3 of this Agreement), each Lender identified under the caption "New Lender" on Schedule I hereto (collectively, the "New Lenders") wishes to become a party to the Existing Credit Agreement as a "Lender" thereunder; each Lender identified under the caption "Retiring Lender" on Schedule I hereto (collectively, the "Retiring Lenders") wishes to cease being a "Lender" party to the Existing Credit Agreement; and the Borrower, the Lenders other than the Retiring Lenders and the Administrative Agent wish to extend the maturity of the Existing Credit Agreement to June 4, 2002 and amend the Existing Credit Agreement in certain other respects. Accordingly, the parties hereto hereby agree to amend the Existing Credit Agreement as set forth herein and to restate the Existing Credit Agreement to read in its entirety as set forth in the Existing Credit Agreement, which is incorporated herein by reference, with the amendments set forth in Section 1 of this Agreement (as so amended and restated, the "Credit Agreement"). The parties hereto agree as follows: SECTION 1. Amendments; Restatement. The Existing Credit Agreement is hereby amended, effective as of the Restatement Date (as defined in Section 3 of this Agreement), as follows and, as so amended, is hereby restated in its entirety: (i) Commitments. Effective as of the Effective Date, Schedule 1.2 to the Existing Credit Agreement is hereby deleted and Schedule 1.2 hereto is inserted in its place, and the Commitments of the Lenders shall be as set forth in said new Schedule 1.2. (ii) Definitions. (a) Except as otherwise defined in this Agreement, terms defined in the Credit Agreement are used herein as defined therein. (b) The definition of "Applicable Margin" in Section 1.01 of the Existing Credit Agreement is amended to read in its entirety as follows: "Applicable Margin": for each LIBOR Loan .28% per annum, plus, on each day on which the drawn portion of the aggregate amount of the AMENDED AND RESTATED CREDIT AGREEMENT 2 Commitments (including Swing Line Loans, CAF Advances and Term Loans) exceeds 33% of the aggregate amount of the Commitments as in effect on the Closing Date, 0.10% per annum. (c) The definition of "Consolidated Net Worth" in Section 1.01 of the Existing Credit Agreement is amended by changing the word "stockholders" in the second line thereof to read "members". (d) A new definition of "Conversion" is included in its alphabetical location in Section 1.01 of the Existing Credit Agreement to read in its entirety as follows: "Conversion": collectively, the transactions pursuant to which the Borrower will merge with MasterCard Merger Sub, Inc., a wholly-owned subsidiary of MasterCard Incorporated, with the Borrower being the surviving entity in such merger, and the transactions directly relating thereto, all as described in the Form S-4. (e) A new definition of "Form S-4" is included in its alphabetical location in Section 1.01 of the Existing Credit Agreement to read in its entirety as follows: "Form S-4": the Form S-4 to be filed by MasterCard Incorporated with the Securities and Exchange Commission in connection with the transactions described in the definitions of "Conversion" and "Integration". (f) A new definition of "Integration" is included in its alphabetical location in Section 1.01 of the Existing Credit Agreement to read in its entirety as follows: "Integration": collectively, the transactions pursuant to which MasterCard Incorporated shall acquire Europay International S.A., a Belgian corporation, and the transactions directly relating thereto, all as described in the Form S-4. (g) A new definition of "MasterCard Incorporated" is included in its alphabetical location in Section 1.01 of the Existing Credit Agreement to read in its entirety as follows: "MasterCard Incorporated": MasterCard Incorporated, a Delaware corporation. (h) The definition of "Revolving Credit Termination Date" in Section 1.01 of the Existing Credit Agreement is amended to read in its entirety as follows: "Revolving Credit Termination Date": June 4, 2002 or such earlier date as the Commitments shall terminate pursuant to the terms hereof; provided that if said date is not a Business Day, the Revolving Credit Termination Date shall be the immediately preceding Business Day. AMENDED AND RESTATED CREDIT AGREEMENT 3 (iii) Notice of Borrowing. Section 2.2 of the Existing Credit Agreement is amended by changing the time "10:00 A.M." in the fourth line thereof to read "12:00 Noon", and changing the time "12:00 Noon" in the seventeenth line thereof to read "2:00 P.M.". (iv) Swing Line Commitment. Section 2.20 of the Existing Credit Agreement is amended by changing the figure "$10,000,000" in the fourth line thereof to read "$50,000,000". (v) Commitment Increases. Section 2.25(e) of the Existing Credit Agreement is amended by changing the figure "$1,500,000,000" in the third line thereof to read "$1,700,000,000". (vi) Representations and Warranties. Section 3 of the Existing Credit Agreement is hereby amended as follows: (a) Section 3.1 is amended by changing the date "March 31, 2000" in the eighth line thereof to read "March 31, 2001" and the date "December 31, 1999" in the second, twenty-fifth and twenty-ninth lines thereof to read "December 31, 2000". (b) Section 3.2 is amended by changing the date "December 31, 1999" to read "December 31, 2000". (c) Section 3.16 is amended to read in its entirety as follows: "3.16 Purpose of Loans. The proceeds of the Loans shall be used by the Borrower and its Subsidiaries solely to ensure the integrity of the MasterCard payment system in the event of settlement failure by one or more members, including failure by one or more members to meet merchant payment obligations." (d) Section 3.15 is amended by changing the date "March 31, 2000" to read "March 31, 2001". (vii) Conditions to Each Loan. Section 4.2(a) of the Existing Credit Agreement is hereby amended by deleting the words "in all material respects" in the third line thereof. (viii) Financial Statements. Section 5.1(b) of the Existing Credit Agreement is amended by changing the figure "45" in the first line thereof to read "60". (ix) Certificates; Other Information. Section 5.2(d) of the Existing Credit Agreement is hereby amended by inserting the phrase "or any Lender through the Administrative Agent" after the phrase "as the Administrative Agent" in the last line thereof. (x) Maintenance of Net Worth. Section 6.1 of the Existing Credit Agreement is hereby amended by changing the figure "$273,216,000" in the second line thereof to read "$333,000,000" and the date "December 31, 1999" in the third line thereof to read "December 31, 2000". AMENDED AND RESTATED CREDIT AGREEMENT 4 (xi) Limitation on Fundamental Changes. Section 6.3 of the Existing Credit Agreement is hereby amended by adding the following new subsection (b) and re-lettering the remaining subsections appropriately: "(b) nothing in this Section 6.3 shall be deemed to prohibit the Conversion or the Integration;" (xii) Limitation on Sale of Assets. Section 6.4(f) of the Existing Credit Agreement is hereby amended by changing the words "subsection 6.3(b)" to read "subsection 6.3(c)". (xiii) Limitation on Transactions with Affiliates. Section 6.7 of the Existing Credit Agreement is hereby amended by adding at the end thereof the phrase "; provided, however, that nothing in this Section 6.7 shall be deemed to prohibit the Conversion or the Integration". (xiv) Successor Administrative Agent. Section 8.9 of the Existing Credit Agreement is hereby amended to read in its entirety as follows: "Section 8.9 Successor Administrative Agent. The Administrative Agent may resign as Administrative Agent upon 10 days' notice to the Lenders, and the Administrative Agent may be removed at any time with or without cause by the Required Lenders. Upon any such resignation or removal, the Required Lenders shall appoint from among the Lenders a successor agent for the Lenders, which successor agent (provided that it shall have been approved by the Borrower (such approval not to be unreasonably withheld)), shall succeed to the rights, powers and duties of the Administrative Agent hereunder. Effective upon such appointment and approval, the term "Administrative Agent" shall mean such successor agent, and the former Administrative Agent's rights, powers and duties as Administrative Agent shall be terminated, without any other or further act or deed on the part of such former Administrative Agent or any of the parties to this Agreement or any holders of the Loans. After any retiring Administrative Agent's resignation or removal as Administrative Agent, the provisions of this Section 8 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement and the other Loan Documents. (xv) Notices. Section 9.2 of the Existing Credit Agreement is hereby amended by changing the address of the Borrower for receipt of notices to read as follows: "The Borrower: MasterCard International Incorporated 2000 Purchase Street Purchase, New York 10577-2509 Attention: Denise K. Fletcher, EVP and CFO Fax: 914-249-6230 Telephone: 914-249-6220" (xvi) Assignments. Section 9.6(c)(i) of the Existing Credit Agreement is hereby amended by adding after the words "to a Lender or" in the first line thereof the words "subject to giving prior written notice thereof to the Borrower and the Administrative Agent". AMENDED AND RESTATED CREDIT AGREEMENT 5 (xvii) Registration and Processing Fee. Section 9.6(f) of the Existing Credit Agreement is hereby amended by changing the figure "$2,000" in the fourth line thereof to read "$3,000". (xviii) Termination of Commitments and Swing Line Commitments. Section 9.11 of the Existing Credit Agreement is hereby amended by changing the date "June 30, 2000" in the third line thereof to read "June 30, 2001". (xix) Schedules. (a) Schedule 1.1(a) to the Existing Credit Agreement is hereby deleted and Schedule 1.1(a) hereto is inserted in its place. (b) Schedule 1.1(b) to the Existing Credit Agreement is hereby deleted and Schedule 1.1(b) hereto is inserted in its place. (c) Schedule 3.1 to the Existing Credit Agreement is hereby deleted and Schedule 3.1 hereto is inserted in its place. (d) Schedule 3.6 to the Existing Credit Agreement is hereby deleted and Schedule 3.6 hereto is inserted in its place. (e) Schedule 3.15 to the Existing Credit Agreement is hereby deleted and Schedule 3.15 hereto is inserted in its place. (f) Schedule 9.7(b) to the Existing Credit Agreement is hereby deleted and Schedule 9.7(b) hereto is inserted in its place. SECTION 2. Representations and Warranties. The Borrower represents and warrants to the Lenders and the Administrative Agent as of the Restatement Date (as defined in Section 3 of this Agreement) that (i) the representations and warranties of such Borrower set forth in Section 3 of the Existing Credit Agreement as amended hereby are true and correct on and as of the Restatement Date as if made on and as of such date and as if each reference in said Section 3 to "this Agreement" included reference to this Agreement and to the Credit Agreement as amended and restated hereby, (ii) no Default or Event of Default has occurred and is continuing or will have occurred and be continuing immediately after giving effect to the Conversion or the Integration, and (iii) no Advances are, as of the Restatement Date, outstanding. It shall be deemed to be an Event of Default under Section 7(b) of the Credit Agreement if any of the foregoing representations and warranties proves to have been incorrect in any material respect on or as of the date made or deemed made. SECTION 3. Conditions to Effectiveness. The amendments to the Existing Credit Agreement set forth in said Section 1 and the restatement of the Existing Credit Agreement shall become effective on the date (the "Restatement Date") on which the Administrative Agent notifies the Borrower and the Lenders that it has received the following documents or items, each of which shall be in form and substance reasonably satisfactory to the Administrative Agent: AMENDED AND RESTATED CREDIT AGREEMENT 6 (a) Loan Documents. The Administrative Agent shall have received (i) this Agreement, duly executed and delivered by each party hereto, with a counterpart for each Lender, and (ii) for the account of the Swing Line Lender, a new Swing Line Note conforming to the requirements of the Existing Credit Agreement and dated the Restatement Date and executed by a duly authorized officer of the Borrower. (b) Related Agreements. The Administrative Agent shall have received, with a copy for each Lender, true and correct copies, certified as to authenticity by the Borrower, of such other documents or instruments as may be reasonably requested by the Administrative Agent, including, without limitation, a copy of any debt instrument, security agreement or other material contract to which the Borrower or its Subsidiaries may be a party. (c) Closing Certificate. The Administrative Agent shall have received, with a copy for each Lender, a closing certificate of the Borrower, dated the Restatement Date, substantially in the form of Exhibit A hereto, with appropriate insertions and attachments, satisfactory in form and substance to the Administrative Agent, executed by the President or any Vice President and the Secretary or any Assistant Secretary of the Borrower. (d) Corporate Proceedings. The Administrative Agent shall have received, with a copy for each Lender, a copy of the resolutions, in form and substance satisfactory to the Administrative Agent, of the Board of Directors of the Borrower authorizing (i) the execution, delivery and performance of this Agreement and the other Loan Documents to which it is a party and (ii) the borrowings contemplated hereunder, certified by the Secretary or an Assistant Secretary of the Borrower as of the Restatement Date, which certificate shall be in form and substance satisfactory to the Administrative Agent and shall state that the resolutions thereby certified have not been amended, modified, revoked or rescinded. (e) Incumbency Certificate. The Administrative Agent shall have received, with a copy for each Lender, a certificate of the Borrower, dated the Restatement Date, as to the incumbency and signature of the officers of the Borrower executing any Loan Document satisfactory in form and substance to the Administrative Agent, executed by the President or any Vice President and the Secretary or any Assistant Secretary of the Borrower. (f) Corporate Documents. The Administrative Agent shall have received, with a copy for each Lender, true and complete copies of the certificate of incorporation and by-laws of the Borrower, certified as of the Restatement Date as complete and correct copies thereof by the Secretary or an Assistant Secretary of the Borrower. (g) Fees. The Administrative Agent shall have received the fees to be received on the Restatement Date. (h) Legal Opinions. The Administrative Agent shall have received, with a counterpart for each Lender, the executed legal opinion of Noah J. Hanft, Senior Vice President, General Counsel and Secretary of the Borrower (or such other person who then AMENDED AND RESTATED CREDIT AGREEMENT 7 holds the position of General Counsel of the Borrower), substantially in the form of Exhibit B. Such legal opinion shall cover such other matters incident to the transactions contemplated by this Agreement as the Administrative Agent may reasonably require. (i) Retiring Lender Consents. Each Retiring Lender shall have executed and delivered to the Administrative Agent an instrument in form and substance satisfactory to the Administrative Agent agreeing to the terms of Section 4(b) hereof. SECTION 4. New Lenders; Retiring Lenders. (a) On the Restatement Date, each New Lender shall be a "Lender" under and as defined in the Credit Agreement for all purposes thereof and shall have all of the obligations, rights and benefits of a Lender thereunder with the Commitment set forth in Schedule 1.2. The initial Lending Office and initial address for notices under the Credit Agreement for each New Lender is specified in the administrative questionnaire heretofore returned by such Lender to the Administrative Agent. (b) On the Restatement Date, each Retiring Lender shall, after giving effect to the payment of all amounts payable to such Retiring Lender under the Existing Credit Agreement (including, without limitation, all accrued interest and fees and any other amounts payable to such Retiring Lender), cease to be a Lender or to have the rights and remedies of a Lender under or to be party to, the Credit Agreement, provided however that the obligations of each Retiring Lender under Section 8 of the Credit Agreement shall be deemed to continue solely with respect to events or circumstances occurring before the Restatement Date. SECTION 5. Miscellaneous. Except as expressly herein provided, the Existing Credit Agreement shall remain unchanged and in full force and effect. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same agreement and any of the parties hereto may execute this Agreement by signing any such counterpart. This Agreement shall be governed by, and construed in accordance with, the law of the State of New York. AMENDED AND RESTATED CREDIT AGREEMENT 8 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. BORROWER MASTERCARD INTERNATIONAL INCORPORATED By:/s/ Kennet W. Bruce -------------------------- Name: Kennet W. Bruce Title: VP, Asst. Treasurer CITIBANK, N.A. as Administrative Agent By:/s/ William G. Martens -------------------------- Name: William G. Martens Title: Managing Director AMENDED AND RESTATED CREDIT AGREEMENT 9 LENDERS CITIBANK, N.A. By:/s/ William G. Martens -------------------------- Name: William G. Martens Title: Managing Director THE CHASE MANHATTAN BANK By:/s/ Roger Parker -------------------------- Name: Roger Parker Title: Vice President FLEET NATIONAL BANK By:/s/ Todd Mesick -------------------------- Name: Todd Mesick Title: Vice President HSBC BANK USA By:/s/ Diane M. Zieske -------------------------- Name: Diane M. Zieske Title: First Vice President AMENDED AND RESTATED CREDIT AGREEMENT 10 COMMONWEALTH BANK OF AUSTRALIA -- GRAND CAYMAN BRANCH By:/s/ C.J.L. Williams -------------------------- Name: C.J.L. Williams Title: Head of Risk Management BANK OF MONTREAL By:/s/ Kanu Modi -------------------------- Name: Kanu Modi Title: Director CREDIT AGRICOLE INDOSUEZ By:/s/ Rene LeBlanc -------------------------- Name: Rene LeBlanc Title: Vice President By:/s/ Michael Fought -------------------------- Name: Michael Fought Title: Vice President ROYAL BANK OF SCOTLAND PLC, New York Branch By:/s/ Garry Popofsky -------------------------- Name: Garry Popofsky Title: Managing Director AMENDED AND RESTATED CREDIT AGREEMENT 11 BANK ONE, NA By:/s/ Peter P. Stach -------------------------- Name: Peter P. Stach Title: Commercial Banking Officer BAYERISCHE HYPO - UND VEREINSBANK AG, NEW YORK BRANCH By:/s/ David A. Lefkovits -------------------------- Name: David A. Lefkovits Title: Managing Director By:/s/ Sessa von Richthofen -------------------------- Name: Sessa von Richthofen Title: Associate THE DAI-ICHI KANGYO BANK, LIMITED By:/s/ Martin T. McNeill, Jr. -------------------------- Name: Martin T. McNeill, Jr. Title: Account Officer PNC BANK, NATIONAL ASSOCIATION By:/s/ Donald V. Davis -------------------------- Name: Donald V. Davis Title: Vice President WELLS FARGO BANK By:/s/ Roy H. Roberts -------------------------- Name: Roy H. Roberts Title: Vice President AMENDED AND RESTATED CREDIT AGREEMENT 12 NEW LENDERS DEUTSCHE BANK LUXEMBOURG S.A. By:/s/ M. Groth C. Koch -------------------------------- Name: M. Groth C. Koch Title: AMENDED AND RESTATED CREDIT AGREEMENT EX-10.3 7 y49195a2ex10-3.txt LEASE Exhibit 10.3 LEASE THIS LEASE, dated as of August 31, 1999 (as amended or supplemented from time to time, this "LEASE"), between the MCI O'Fallon 1999 Trust, a Delaware business trust (the "LESSOR"), as lessor, and MasterCard International Incorporated, a non-stock membership corporation organized under the laws of the State of Delaware (the "LESSEE"), as lessee; W I T N E S S E T H: WHEREAS, the Missouri Development Finance Board, a body corporate and politic organized and existing under the laws of the State of Missouri (the "BOARD") is the fee owner of a parcel of land in the City of O'Fallon, Missouri on which it has been proposed to develop, construct and equip an approximately 414,000 square foot office space, an approximately 114,000 square foot data and energy center providing and utilizing reliable, redundant energy and communication sources and parking for approximately 1,751 cars, constituting, together with the Land and the other Improvements, the Facility (as hereinafter defined), whereupon the ownership thereof will vest in the Board; WHEREAS, the Board has issued its Industrial Development Revenue Bonds (Winghaven/MasterCard Project) Series 1999A, in the aggregate principal amount of $154,000,000, due September 1, 2009 (the "SERIES A BONDS"), and will, upon issuance of the Series B Notes (referred to below) and subject to certain conditions, issue its Industrial Development Revenue Bonds (Winghaven/MasterCard Project) Series 1999B, in aggregate principal amount equal to the aggregate principal amount of the Series B Notes (as defined below) and the additional Investor Contribution (as provided in the Participation Agreement) due September 1, 2009 (the "SERIES B BONDS") (collectively, the "BONDS"), for such purposes and will deposit the proceeds thereof in the Escrow Account for disbursement and application pursuant thereto; WHEREAS, the Board has entered into the Bond Lease dated of even date herewith (as amended or supplemented from time to time, the "BOND LEASE"), with the O'Fallon Public Facilities Authority, a non-profit corporation organized under the laws of the State of Missouri (the "BOND SUBLESSOR"), under which a leasehold estate in the Facility will vest in the Bond Sublessor; WHEREAS, the Bond Sublessor has made available for the development and construction of the Facility approximately $3.7 million and will deposit it in the Escrow Account for disbursement and application pursuant thereto; WHEREAS, concurrently with the execution and delivery of the Bond Lease, the Bond Sublessor and the Lessor have entered into the Bond Sublease dated as of even date herewith (as amended or supplemented from time to time, the "BOND SUBLEASE"), under which the Lessor, using funds on deposit in the Escrow Account, will cause the Facility to be developed and constructed, whereupon a leasehold estate therein will, pursuant to the Bond Sublease, vest in the Lessor; WHEREAS, the Lessor desires to sublease the Facility to the Lessee and the Lessee desires to sublease the Facility from the Lessor, for the rentals and upon the terms and conditions hereinafter set forth; WHEREAS, concurrently with the execution and delivery of this Lease, the Lessor shall issue and sell to several financial institutions (the "PURCHASERS"), and the Purchasers shall purchase, pursuant to the Series A Note Purchase Agreement, dated as of even date herewith, $149,380,000 aggregate principal amount of the Lessor's 7.36% Series A Senior Secured Notes due September 1, 2009 (the "SERIES A NOTES", such term to include any such Notes issued in substitution or replacement therefor); WHEREAS, the proceeds of the Series A Notes and the Investor Contribution will be used by the Lessor to acquire the Series A Bonds issued by the Board, and the purchase price for the Series A Bonds, together with approximately $3,700,000 deposited by the Bond Sublessor to fund capitalized interest on the Series A Bonds during the Construction Period, will be deposited in the Escrow Account, as described above; WHEREAS, in the event that additional financing is needed to complete the Facility, the Lessor may, upon request of the Lessee, issue its Series B Senior Secured Notes due September 1, 2009 (the "SERIES B NOTES", such term to include any such Notes issued in substitution or replacement therefor pursuant to the Indenture, and together with the Series A Notes, the "NOTES") in an aggregate principal amount not to exceed $5,000,000; WHEREAS, the proceeds of the Series B Notes, if and when issued (together with additional Investor Contribution, as described in Section 2.1 of the Participation Agreement), will be used by the Lessor to acquire the Series B Bonds then issued by the Board, and the purchase price for the Series B Bonds will be deposited in the Escrow Account, as described above; WHEREAS, the Basic Rent hereunder shall be sufficient to pay interest on the Bonds, which will be used to pay interest on the Notes and the Investor Yield, and the Supplemental Rent hereunder shall be sufficient to pay all other amounts with respect to the Notes, the Investor Contribution and the Bonds; NOW, THEREFORE, in consideration of the premises and the mutual representations, covenants and agreements herein contained, the Lessor and the Lessee do hereby represent, covenant and agree as follows: ARTICLE I DEFINITIONS SECTION 1.1 DEFINITIONS OF WORDS AND TERMS. For purposes of this Lease, capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in Annex A attached hereto and incorporated herein by reference. The rules of usage set forth in such Annex A shall apply hereto. "FULL INSURABLE VALUE" means the actual replacement cost of the Facility exclusive of the cost of land, excavations, footings and foundation, as determined in accordance with SECTION 6.1(a) hereof. - 2 - "OBLIGATIONS" means, without limitation, all Basic Rent and Supplemental Rent and all fees, claims, demands, payments, damages, liabilities, penalties, assessments and the like of or imposed upon the Lessee or its directors, trustees, officers, agents, employees, representatives, advisors or assigns, whether under this Lease or any of the other Operative Agreements or elsewhere and whether arising out of or based upon a claim of tort, contract, misrepresentation, or any other or additional legal theory whatsoever. "TAX FORBEARANCE AGREEMENT" means a Tax Forbearance Agreement, Deed of Trust and Security Agreement, dated as of August 31, 1999, among the Board, the Lessee, the City of O'Fallon, Missouri, the Wentzville R-IV School District of St. Charles County, Missouri and the mortgagee trustee named therein, as amended or supplemented from time to time. SECTION 1.2 CONFLICT IN INTERPRETATION BETWEEN LEASE AND OPERATIVE AGREEMENTS. To the extent that the provisions of this Lease shall conflict with the provisions of (i) the Participation Agreement, the terms and provisions of the Participation Agreement shall control or (ii) any other Operative Agreement, the provisions of this Lease shall control. ARTICLE II REPRESENTATIONS SECTION 2.1 REPRESENTATIONS BY THE LESSOR. The Lessor makes the following representations: (a) The Lessor is a business trust duly formed and validly existing under the laws of the State of Delaware, is not required by the law of the State of Missouri to qualify or register as a foreign business trust and has taken all actions necessary for the transaction of business in the State of Missouri. The Lessor has lawful power and authority to enter into the transactions contemplated by this Lease and to carry out its obligations hereunder. By proper action of its governing body, the Lessor has been duly authorized to execute and deliver this Lease, acting by and through its duly authorized officers. (b) The Lessor shall have no authority to operate the Facility as a business or in any other manner except as the sublessee thereof in accordance with the Bond Sublease and as lessor thereof in accordance with this Lease. (c) The Lessor hereby assigns to the Lessee (subject, however, to the Indenture) any and all representations and warranties made to or assigned to the Lessor under the Bond Sublease, including the representations and warranties made by McEagle Development, L.L.C., Novus Property Holdings, L.L.C. and Novus Campus, L.L.C. SECTION 2.2 REPRESENTATIONS BY THE LESSEE. The Lessee makes the following representations: (a) The Lessee is a non-stock membership corporation organized and existing and in good standing under the laws of the State of Delaware and is in good standing and duly authorized and qualified to do business in the State of Missouri. (b) The Lessee has lawful power and authority to enter into the Operative Agreements to which the Lessee is a party and to carry out its obligations thereunder. By proper - 3 - action of its board of directors, the Lessee has been duly authorized to execute and deliver each of the Operative Agreements, acting by and through its duly authorized officers. (c) The execution and delivery of the Operative Agreements to which the Lessee is a party, the consummation of the transactions contemplated thereby, and the performance of or compliance with the terms and conditions of the Operative Agreements to which the Lessee is a party will not conflict with or result in a breach of any of the terms, conditions or provisions of, or constitute a default under, any mortgage, deed of trust, lease or any other agreement or instrument to which the Lessee is a party or by which it or any of its property is bound, or the Lessee's organizational documents, or any order, rule or regulation applicable to the Lessee or any of its property of any court or governmental body, or constitute a default under any of the foregoing, or result in the creation or imposition of any lien, charge or encumbrance (other than Permitted Liens) of any nature whatsoever upon any of the property or assets of the Lessee under the terms of any instrument or agreement to which the Lessee is a party. (d) The estimated costs of the development and construction of the Facility have been determined in accordance with sound engineering and generally accepted accounting principles, and the Facility Costs are reasonably expected to equal the Projected Completion Value. (e) The Facility will comply in all material respects with all Facility Requirements, including applicable building and zoning, health, environmental and safety ordinances and laws and all other applicable laws, rules and regulations, as currently existing and in effect on the Completion Date. ARTICLE III GRANTING PROVISIONS SECTION 3.1 GRANTING OF LEASEHOLD ESTATE; THE FACILITY; CERTAIN MACHINERY AND EQUIPMENT. (a) The Lessor hereby rents, leases and lets the Facility to the Lessee, and the Lessee hereby rents, leases and hires the Facility from the Lessor, subject to Permitted Liens, for the rentals and upon and subject to the terms and conditions herein contained. (b) The Land and all Improvements located thereon at the execution hereof, all work and materials on the Improvements as such work progresses, and all additions or enlargements thereto or thereof, the Facility as fully completed, anything under this Lease which becomes, is deemed to be, or constitutes a part of the Facility, and the Facility as repaired, rebuilt, rearranged, restored or replaced by the Lessee under the provisions of this Lease, except as otherwise specifically provided herein, shall immediately when erected or installed be vested in the Board and become part of the leasehold estate under the Lease, subject only to Permitted Liens. (c) Any item of machinery or equipment the entire purchase price of which is paid for by the Lessee with the Lessee's own funds, and no part of the purchase price of which is paid for from funds deposited in the Escrow Account, shall be the sole property of the Lessee and shall not be subject to this Lease, unless such item shall become a part of the Improvements as a matter of law or shall be necessary for the normal use and operation of the Facility. - 4 - (d) This Lease shall be and is hereby made subject and subordinate to the Lien of the Indenture and of the Security Documents. SECTION 3.2 LEASE TERM. (a) This Lease shall become effective upon the Closing Date, and subject to sooner termination pursuant to the provisions of this Lease, shall be leased for the Term. (b) Thereafter, if this Lease has not been earlier terminated, the Lessee shall have the option to extend the Term of this Lease for one ten-year term, upon the same terms and conditions herein contained, except that (i) the rentals shall be $100 for each year or part thereof that the Lessee leases the Facility pursuant to its exercise of this extension option and (ii) the provisions of the second paragraph of SECTION 9.5 shall be of no further force and effect during such extended term; provided that no such extension shall be made unless all Indebtedness under the Notes and all amounts owing in respect of the Certificates have been indefeasibly paid in full on or prior to the Maturity Date. SECTION 3.3 POSSESSION AND USE OF THE FACILITY. (a) The Lessor covenants and agrees that as long as no Lease Event of Default shall have occurred and be continuing, the Lessee shall have sole and exclusive possession of the Facility (subject to Permitted Liens and the rights of access pursuant to SECTION 9.3 hereof) and shall and may peaceably and quietly have, hold and enjoy the Facility during the Term. The Lessor covenants and agrees that it will not take any action, other than those expressly permitted pursuant to ARTICLE XI of this Lease, to prevent the Lessee from having quiet and peaceable possession and enjoyment of the Facility during the Term and will, at the reasonable request and expense of the Lessee, cooperate with the Lessee in order that the Lessee may have quiet and peaceable possession and enjoyment of the Facility. (b) Subject to the provisions of this Section, the Lessee shall have the right to use the Facility for any lawful purpose allowed by Legal Requirements. The Lessee shall comply with all statutes, laws, ordinances, orders, judgments, decrees, regulations, directions and requirements of all federal, state, local and other governments or governmental authorities, now or hereafter applicable to the Facility or to any adjoining public ways, as to the manner of use or the condition of the Facility or of adjoining public ways. The Lessee shall also comply with the requirements, rules and regulations of all insurers under the policies carried under the provisions of ARTICLE VI hereof. The Lessee shall pay all costs, expenses, claims, fines, penalties and damages that may in any manner arise out of, or be imposed as a result of, the failure of the Lessee to comply with the provisions of this Section. Notwithstanding any provision contained in this Section, however, the Lessee shall have the right, at its own cost and expense, and subject to compliance with the provisions of the Operative Agreements, to contest or review by legal or other appropriate procedures the validity, legality or applicability of any such governmental statute, law, ordinance, order, judgment, decree, regulation, direction or requirement, or any such requirement, rule or regulation of an insurer, and during such contest or review the Lessee may refrain from complying therewith. (c) Notwithstanding anything herein to the contrary, the Facility shall be developed and constructed in a manner consistent with the Facility Agency Agreement and, after the Completion Date, shall be used as a global technology and operations center and for general office space and for no other use that could impair the value, utility or remaining useful life of - 5 - the Facility, as compared to such use. The Lessee shall pay, or cause to be paid, all charges and costs required in connection with the use of the Facility. The Lessee shall not commit or permit any waste of, or nuisance on, the Facility or any part thereof. SECTION 3.4 TITLE. The Facility is leased to the Lessee without any representation or warranty, express or implied, by the Lessor (without limiting the representations and warranties assigned to the Lessee pursuant to SECTION 2.1(C) hereof) and subject to the rights of parties in possession, the existing state of title (including the Permitted Exceptions) and all applicable Legal Requirements. The Lessee shall in no event have any recourse against the Lessor for any defect in title to the Facility, including any failure of the Facility to be developed or constructed, in whole or in part, as contemplated hereby. SECTION 3.5 OWNERSHIP OF THE FACILITY. (a) The Lessor and the Lessee intend that (i) for financial accounting purposes with respect to the Lessee (A) this Lease will be treated as an "operating lease" pursuant to Statement of Financial Accounting Standards (SFAS) No. 13, as amended, (B) the Lessor will be treated as the sublessor of the Facility and (C) the Lessee will be treated as the sublessee of the Facility, but (ii) for federal, state and local income tax and all other tax purposes the Lessee will be entitled to depreciate the Improvements. Nevertheless, the Lessee agrees that none of the Board, the Bond Sublessor, the Lessor, the Investor, the Trust Company, the Bond Trustee, the Indenture Trustee, or any Noteholder has provided or will provide tax, accounting or legal advice to the Lessee regarding this Lease, the other Operative Agreements or the transactions contemplated hereby and thereby or has made any representations or warranties concerning the tax, accounting or legal characteristics of the Operative Agreements, and that the Lessee has obtained and relied upon such tax, accounting and legal advice concerning the Operative Agreements as it deems appropriate. (b) The Lessor and the Lessee further intend and agree that in the event of any insolvency or receivership proceedings or a petition under the United States bankruptcy laws or any other applicable insolvency laws or statute of the United States of America or any State or Commonwealth thereof affecting the Lessee or the Lessor, the transactions evidenced by this Lease shall be regarded as secured loans made by an unrelated third party lender to the Lessee. SECTION 3.6 TERMINATION. (a) If the Lessor or the Lessee shall have received notice of a Total Condemnation or a Total Loss, then the Lessee shall be obligated, within thirty (30) days after the Lessee receives notice thereof, to deliver a written notice in the form described in SECTION 3.6(c) (a "TERMINATION NOTICE") of the termination of this Lease. (b) If either: (i) a Condemnation occurs, and the Lessee shall have delivered to the Lessor an Officer's Certificate that such Condemnation is a Total Condemnation; or (ii) a Casualty occurs, and the Lessee shall have delivered to the Lessor an Officer's Certificate that such Casualty is a Total Loss then, the Lessee shall, simultaneously with the delivery of the Officer's Certificate pursuant to the preceding clause (i) or (ii) deliver a Termination Notice. (c) A Termination Notice shall contain: (i) notice of termination of this Lease on a date no later than the next Payment Date occurring after such Termination Notice (the "TERMINATION DATE"); (ii) a binding and irrevocable agreement of the Lessee to pay the - 6 - Termination Value and purchase the interests of the Board, the Bond Sublessor and the Lessor in the Facility and the Lessor's interest in the Bonds on such Termination Date and (iii) the Officer's Certificate described in SECTION 3.6(b). (d) On the Termination Date, the Lessee shall pay to the Lessor, without duplication, the Termination Value (which amount shall be sufficient to satisfy all indebtedness under the Bonds owing by the Board to the Lessor, as the owner of the Bonds, and shall be applied by the Lessor to (i) the aggregate Outstanding principal amount of the Senior Secured Notes, accrued and unpaid interest on the Senior Secured Notes, any applicable Make Whole Premium and all other amounts owing to the Indenture Trustee and/or to the Noteholders plus (ii) the aggregate outstanding amount of the Investor Contribution, all accrued and unpaid amounts on the account of the Investor Yield, any applicable Investor Premium and all other amounts owing to the Investor under the Operative Agreements), plus all amounts owing in respect of Rent (including Supplemental Rent) theretofore accruing (which shall be applied to all amounts due and owing by the Lessor under the Operative Agreements), and the Lessor shall convey, upon indefeasible payment in full of all Indebtedness under the Senior Secured Notes and all indebtedness under the Bonds, all of the Lessor's interest in the Facility, and shall cause the Board and the Bond Sublessor to convey all of their interests in the Facility, to the Lessee (or the Lessee's designee) all in accordance with SECTION 3.6(e). (e) In connection with any termination of this Lease pursuant to this SECTION 3.6 or the Lessee's exercise of its Purchase Option or Maturity Date Purchase Option, upon the date on which this Lease is to terminate or upon the Expiration Date, and upon tender by the Lessee of the amounts set forth in SECTION 3.6(d), 10.1 OR 10.2, as applicable. (i) The Lessor shall execute and deliver, and shall cause the Board and the Bond Sublessor to execute and deliver, to the Lessee (or to the Lessee's designee) at the Lessee's cost and expense an assignment of the Lessor's, the Board's and the Bond Sublessor's entire interest in the Facility (which shall include an assignment of all of the Lessor's right, title and interest in any Net Proceeds not previously received by the Lessor), in each case in recordable form and otherwise in conformity with local custom and free and clear of the Lien of the applicable Leasehold Deed of Trust; and (ii) The Facility shall be conveyed to the Lessee "AS IS" in all respects. SECTION 3.7 RETURN. Subject to ARTICLE X, the Lessee shall, upon the expiration or earlier termination of the Term, vacate, surrender and transfer the Facility to the Lessor, at the Lessee's expense, free and clear of all Liens other than Permitted Liens and Lessor Liens, in good condition, ordinary wear and tear excepted, and in compliance with all Legal Requirements and the other requirements of this Lease (and in any event without (x) any asbestos installed or maintained in any part of the Facility, (y) any polychlorinated biphenyls in, on or used, stored or located at the Facility, and (z) any other Hazardous Substances, in each case in violation of any Environmental Laws) the Lessee shall cooperate with any purchaser of the Facility from the Lessor or the Indenture Trustee in order to facilitate the ownership and operation by such purchaser of the Facility after such expiration or earlier termination of the Term including providing all book reports and records regarding the maintenance repair and ownership of the Facility and all data and technical information relating thereto granting or assigning all licenses necessary for the operation and maintenance of the Facility (to the extent assignable) and cooperating in seeking and obtaining all necessary licenses permits and approvals of Governmental Authorities The Lessee shall have also paid the total cost for the completion of all - 7 - Modifications commenced prior to such expiration or earlier termination of the Term. The obligation of the Lessee under this SECTION 3.7 shall survive the expiration or termination of this Lease. SECTION 3.8 ENVIRONMENTAL INSPECTION UPON SURRENDER OF THE FACILITY. Upon surrender of possession of the Facility, or not more than one hundred twenty (120) days nor less than thirty (30) days prior to the Expiration Date (unless the Lessee has previously irrevocably exercised the Purchase Option), the Lessee shall, at its sole cost and expense, provide to the Lessor, the Board and the Bond Sublessor a report by an environmental consultant selected by the Lessee and reasonably satisfactory to the Lessor, the Board and the Bond Sublessor certifying that Hazardous Substances have not at any time during the Term been generated, used, treated or stored on, transported to or from, released at, on or from or deposited at or on the Facility, and no portion of the Facility has been used for such purposes, in each case other than (i) as necessary to use, operate, maintain, repair and restore the Facility and (ii) in full compliance with all Environmental Laws. If such is not the case, the report shall set forth a remedial response plan relating to the Facility (which remedial response plan, if required by any Environmental Law or Governmental Authority, shall be approved by the appropriate Governmental Authority). Such remedial response plan shall include, but shall not be limited to, plans for full response, remediation, removal, or other corrective action, and the protection, or mitigative action associated with the protection, of natural resources including wildlife, aquatic species, and vegetation associated with the Facility, as required by all applicable Environmental Laws. ARTICLE IV RENT PROVISIONS SECTION 4.1 BASIC RENT. The Lessee covenants and agrees to pay the Basic Rent to the Lessor in immediately available funds during the Term, on or before 11:00 A.M., New York City time, commencing on the earlier to occur of (i) the first Payment Date after the Outside Completion Date and (ii) the first Payment Date after the Completion Date, and on each Payment Date occurring thereafter and on any date when this Lease shall terminate. Basic Rent shall be due and payable in lawful money of the United States and shall be paid by wire transfer of immediately available funds on the due date therefor to such account or accounts at such bank or banks or to such other Person or in such other manner as the Lessor shall from time to time direct. Neither the Lessee's inability or failure to take possession of all, or any portion, of the Facility when delivered by the Lessor, nor the Lessor's inability or failure to deliver all or any portion of the Facility to the Lessee, whether or not attributable to any act or omission of the Lessee or any act or omission of the Lessor, or for any other reason whatsoever, shall delay or otherwise affect the Lessee's obligation to commence paying Basic Rent on the first Payment Date specified above, in accordance with the terms of this Lease. Basic Rent and Supplemental Rent shall be paid absolutely net to the Lessor, so that this Lease shall yield to the Lessor the full amount thereof, without setoff, deduction or reduction. SECTION 4.2 SUPPLEMENTAL RENT. The Lessee shall pay as Supplemental Rent the following amounts, as and when the same become due: (a) all reasonable fees, charges and expenses, including agent and counsel fees, of (i) the Bond Trustee incurred under the Bond Indenture, (ii) the Indenture Trustee - 8 - incurred under the Indenture, (iii) the Escrow Agent incurred under the Escrow Agreement and (iv) the Lessor under the Trust Agreement; (b) all costs incident to (i) the payment of the principal of and interest on the Bonds as the same become due and payable, including all costs and expenses in connection with the call, redemption and payment of all outstanding Bonds, (ii) the payment of the principal of, premium and interest on the Notes as the same become due and payable, including all costs and expenses in connection with the call, redemption and payment of all Outstanding Notes and (iii) the payment of the Investor Contribution, Investor Premium and Investor Yield as the same become due and payable, including all costs and expenses in connection with the call, redemption and payment of all Certificates; (c) all expenses incurred in connection with the enforcement of any rights under (i) the Bond Documents by the Lessor, the Investor, the Bond Sublessor, the Board, the Bond Trustee, or the owners of the Bonds or (ii) the Indenture or the Security Documents, by or on behalf of the Indenture Trustee or the Noteholders; (d) an amount sufficient to reimburse (i) the Board and the Bond Sublessor for all expenses reasonably incurred thereby in connection with the performance of their respective obligations under the Bond Documents and (ii) the Indenture Trustee for all expenses reasonably incurred by the Indenture Trustee in connection with the performance of its obligations under the Indenture or the Security Documents; (e) all other payments of whatever nature which the Lessee has agreed to pay or assume under the provisions of this Lease, including any payment of Supplemental Rent equal to the Termination Value or the Maximum Residual Guarantee Amount; and (f) the cost of obtaining an owner's policy of title insurance regarding the Land and the recording and filing fees in connection with the conveyances contemplated by the Donation Agreement between Contributing Associates, L.L.C. and The Small Business Synergy Corporation and the Donation Agreement between The Small Business Synergy Corporation and the Board. The Lessee shall pay to the Lessor or the Person entitled thereto any and all Supplemental Rent promptly as the same shall become due and payable, and if the Lessee fails to pay any Supplemental Rent, the Lessor shall have all rights, powers and remedies provided for herein or by law or equity or otherwise in the case of nonpayment of Basic Rent. The Lessee shall pay to the Lessor as Supplemental Rent, among other things, on demand, to the extent permitted by applicable Legal Requirements interest, and the Investor Yield at the applicable Overdue Rate on any installment of Basic Rent not paid when due for the period for which the same shall be overdue and on any payment of Supplemental Rent not paid when due or demanded by the Lessor for the period from the due date or the date of any such demand, as the case may be, until the same shall be paid. The expiration or other termination of the Lessee's obligations to pay Basic Rent hereunder shall not limit or modify the obligations of the Lessee with respect to Supplemental Rent Unless expressly provided otherwise in this Lease in the event of any failure on the part of the Lessee to pay and discharge any Supplemental Rent as and when due, the Lessee shall also promptly pay and discharge any fine, penalty, interest or cost which may be assessed or added for nonpayment or late payment of such Supplemental Rent all of which shall also constitute Supplemental Rent. - 9 - SECTION 4.3 OBLIGATIONS OF THE LESSEE ABSOLUTE AND UNCONDITIONAL. (a) The obligations of the Lessee under this Lease to make payments of Basic Rent and Supplemental Rent on or before the date the same become due, and to perform all of its other Obligations, covenants and agreements hereunder shall be absolute and unconditional, without notice or demand, and without abatement, deduction set-off counterclaim recoupment or defense or any right of termination or cancellation arising from any circumstance whatsoever whether now existing or hereafter arising and irrespective of whether the Facility shall have been started or completed The Obligations and liabilities of the Lessee hereunder shall in no way be released, discharged (except upon complete payment and/or performance thereof) or otherwise affected for any reason including to the maximum extent permitted by law (i) any defect in the condition, merchantability, design, construction, quality or fitness for use of any portion of the Facility, or any failure of the Facility to comply with all Legal Requirements, including any inability to occupy or use the Facility by reason of such noncompliance (ii) any damage to abandonment loss contamination of or Release from or destruction of or any requisition or taking of the Facility or any part thereof, including eviction; (iii) any restriction, prevention or curtailment of or interference with any use of the Facility or any part thereof including eviction (iv) any defect in title to or rights to the Facility or any Lien on such tide or rights or on the Facility; (v) any change, waiver, extension indulgence or other action or omission or breach in respect of any Obligation or liability of or by the Board, Bond Sublessor, Lessor, Investor, Bond Trustee, Indenture Trustee or any Noteholder; (vi) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceedings relating to the Lessee, Lessor, Investor, Indenture Trustee, any Noteholder, the Board, the Bond Sublessor, the Bond Trustee or any other Person, or any action taken with respect to this Lease by any trustee or receiver of the Lessee, Lessor, Investor, Indenture Trustee, any Noteholder, the Board, the Bond Sublessor, the Bond Trustee or any other Person, or by any court, in any such proceeding; (vii) any claim that the Lessee has or might have against any Person, including the Lessor, Investor, Indenture Trustee, any Noteholder, the Board, the Bond Sublessor or the Bond Trustee; (viii) any failure on the part of the Lessor to perform or comply with any of the terms of this Lease, any other Operative Agreement or any other agreement; (ix) any invalidity or unenforceability or disaffirmance against or by the Lessee of this Lease or any provision hereof or any of the other Operative Agreements or any provision of any thereof; (x) the impossibility of performance by the Lessee, the Lessor or both; (xi) any action by any court, administrative agency or other Governmental Authority; (xii) any restriction, prevention or curtailment of or any interference with the construction on or any use of the Facility or any part thereof; or (xiii) any other occurrence whatsoever, whether similar or dissimilar to the foregoing, whether or not the Lessee shall have notice or knowledge of any of the foregoing and whether or not foreseeable. This Lease shall be noncancellable by the Lessee for any reason whatsoever except as expressly provided herein, and the Lessee, to the fullest extent permitted by Legal Requirements, waives all rights now or hereafter conferred by statute or otherwise to quit, terminate or surrender this Lease, or to any diminution, abatement or reduction of Rent payable by the Lessee hereunder. If for any reason whatsoever this Lease shall be terminated in whole or in part by operation of law or otherwise, except as otherwise expressly provided herein, the Lessee shall, unless prohibited by Legal Requirements, nonetheless pay to the Lessor (or, in the case of Supplemental Rent, to whomever shall be entitled thereto) an amount equal to each Rent payment at the time and in the manner that such payment would have become due and payable under the terms of this Lease if it had not been terminated in whole or in part, and in such case, so long as such payments are made and no Lease Event of Default shall have occurred and be continuing, the Lessor will deem this Lease to have remained in effect until the Expiration Date. Each payment of Rent made by - 10 - the Lessee hereunder shall be final absent manifest error in the computation of the amount thereof. The Lessee assumes the sole responsibility for the condition, use, operation, maintenance, and management of the Facility, and the Lessor shall have no responsibility in respect thereof and shall have no liability for damage to the property of the Lessee or any subtenant of the Lessee for any reason whatsoever except due to the Lessor's gross negligence or willful misconduct. (b) Nothing in this Lease shall be construed to release the Lessor from the performance of any agreement on its part herein contained or as a waiver by the Lessee of any rights or claims the Lessee may have against the Lessor under this Lease or otherwise, but any recovery upon such rights and claims shall be had from the Lessor separately (and not the Indenture Trustee), it being the intent of this Lease that the Lessee shall be unconditionally and absolutely obligated to perform filly all of its Obligations, agreements and covenants under this Lease (including the obligation to pay Basic Rent and Supplemental Rent) for the benefit of the Indenture Trustee, as pledgee of the Bonds, the Noteholders and the Investor. The Lessee may, however, subject to any provision of the Operative Agreements, at its own cost and expense and in its own name or in the name of the Lessor, prosecute or defend any action or proceeding or take any other action involving third persons which the Lessee deems reasonably necessary in order to secure or protect its right of possession, occupancy and use hereunder, and in such event the Lessor hereby agrees to cooperate fully with the Lessee and to take all action necessary to effect the substitution of the Lessee for the Lessor in any such action or proceeding if the Lessee shall so request. SECTION 4.4 PREPAYMENT. The Lessee may not at any time prepay all or any part of the Basic Rent or of the Maximum Residual Guarantee Amount or the Termination Value provided for hereunder except as expressly provided herein. SECTION 4.5 PERFORMANCE ON A NON-BUSINESS DAY. If any payment of Rent is required to be made hereunder on a day that the interest to which such payment relates is not payable in accordance with the Indenture, such payment of Rent shall be payable on the day in which such interest becomes payable pursuant thereto. ARTICLE V MAINTENANCE, TAXES AND UTILITIES SECTION 5.1 MAINTENANCE AND REPAIRS. (a) Throughout the Term the Lessee shall, at its own expense, keep the Facility in such safe condition as may be necessary or appropriate in light of the use and operation thereof permitted hereby, and keep the Facility in good repair and in good operating condition, making from time to time all necessary repairs thereto and renewals and replacements thereof. Furthermore, the Lessee shall make all required repairs, renewals and replacements thereof as may be required by all Legal Requirements and Insurance Requirements. (b) The Lessee hereby agrees to accept the entire risk of, and the responsibility (including all Costs and expenses) for compliance with any change of law, regulation or interpretation relating to the Legal Requirements or the Insurance Requirements and agrees that no change of law will relieve or otherwise limit any of its obligations hereunder. - 11 - SECTION 5.2 TAXES, ASSESSMENTS AND OTHER GOVERNMENTAL CHARGES. (a) Subject to the provisions of SECTION 5.4 hereof, the Lessee shall promptly pay and discharge, as the same become due, all taxes and assessments, general and special, and other governmental charges of any kind whatsoever that may be lawfully taxed, charged, levied, assessed or imposed upon or against or be payable for or in respect of the Facility, or any part thereof or interest therein (including the leasehold estate of the Lessee therein) or any buildings, improvements, machinery and equipment at any time installed thereon by the Lessee, or the income therefrom or Basic Rent, Supplemental Rent and other amounts payable under this Lease, including any new taxes and assessments not of the kind enumerated above to the extent that the same are lawfully made, levied or assessed in lieu of or in addition to taxes or assessments now customarily levied against real or personal property, and further including all utility charges, assessments and other general governmental charges and impositions whatsoever, foreseen or unforeseen, which if not paid when due would impair the security of the Notes or encumber the Lessor's title to the Facility; provided that with respect to any special assessments or other governmental charges that are lawfully levied and assessed which may be paid in installments, the Lessee shall be obligated to pay only such installments thereof as become due and payable during the Term. The Lessee shall have the right, subject to the provisions of the Operative Agreements, in its own name or in the Lessor's name, to contest the validity or amount of any tax, assessment or other governmental charge which the Lessee is required to bear, pay and discharge pursuant to the terms of this Article by appropriate legal proceedings instituted at least ten (10) days before the tax, assessment or other governmental charge complained of becomes delinquent if and provided (1) the Lessee, before instituting any such contest, gives the Lessor written notice of its intention so to do, (2) the Lessee diligently prosecutes any such contest and at all times effectively stays or prevents any official or judicial sale therefor, under execution or otherwise, (3) any Lien resulting from such tax, assessment or other governmental charge is bonded or provided for, and (4) the Lessee promptly pays any final judgment enforcing the tax, assessment or other governmental charge so contested and thereafter promptly procures and records a recordable release or satisfaction thereof. The Lessor agrees to cooperate fully with the Lessee in connection with any and all administrative or judicial proceedings related to any tax, assessment or other governmental charge. The Lessee shall indemnify and hold the Lessor whole and harmless from any costs and expenses related to any of the above. SECTION 5.3 UTILITIES. All utilities and utility services used in, on or about the Facility shall be paid for by the Lessee and shall be contracted for by the Lessee in the Lessee's own name, and the Lessee shall, at its sole cost and expense, procure any and all permits, licenses or authorizations necessary in connection therewith. The Lessee shall be entitled to receive any credit or refund with respect to any utility charge paid by the Lessee and the amount of any credit or refund received by the Lessor on account of any utility charges paid by the Lessee, net of the costs and expenses incurred by the Lessor in obtaining such credit or refund, shall be promptly paid over to the Lessee. All charges for utilities imposed with respect to the Facility for a billing period during which this Lease expires or terminates shall be adjusted and prorated on a daily basis between the Lessor and the Lessee, and each party shall pay or reimburse the other for each party's pro rata share thereof. SECTION 5.4 PAYMENTS IN LIEU OF TAXES. The Lessee agrees to make all payments required to be made under the provisions of the Tax Forbearance Agreement. - 12 - ARTICLE VI INSURANCE SECTION 6.1 PROPERTY (HAZARD) INSURANCE. (a) Subject to the provisions of the Operative Agreements, the Lessee shall at all times during the Construction Period maintain at its sole cost and expense, or cause the counterparties under the Facility Contracts to maintain, in full force and effect, with Permitted Insurers a policy or policies of Builder's Risk-All Risk-Completed Value Form Insurance for the Facility, with such limits and deductibles (not exceeding $5,000) as are reasonably acceptable to the Lessor. Prior to or simultaneously with the expiration of said Builder's Risk Insurance, the Lessee shall at its sole cost and expense obtain and shall maintain throughout the Term with Permitted Insurers a policy or policies of insurance to keep the Facility continuously insured against loss or damage by fire, lightning and all other perils covered by the extended coverage insurance endorsement then in use in the State of Missouri, in an amount equal to the Full Insurable Value thereof, with such limits and deductibles as are reasonably acceptable to the Lessor. The initial determination of Full Insurable Value shall be made at the Completion Date by the Lessee based on an Appraisal made in connection with such determination or, if so requested by the Indenture Trustee, pursuant to the Appraisal Procedure, and thereafter the Full Insurable Value of the Facility shall be determined by the Lessee or, if so requested by the Indenture Trustee, pursuant to the Appraisal Procedure from time to time at the written request of the Lessor or the Indenture Trustee (but not more frequently than once in every three years) and certified by a Responsible Officer of the Lessee. The insurance required pursuant to this Section shall be maintained at the Lessee's sole cost and expense, shall be maintained with generally recognized responsible insurance company or companies authorized to do business in the State of Missouri as may be selected by the Lessee. Copies of the insurance policies required under this Section, or originals or certificates thereof, each bearing notations evidencing payment of the premiums or other evidence of such payment, shall be delivered by the Lessee to the Lessor and the Indenture Trustee. All such policies of insurance pursuant to this Section, and all renewals thereof, shall name the Board, the Bond Sublessor, the Lessor, the Lessee, the Bond Trustee, and the Indenture Trustee as loss payees, as their respective interests may appear, and shall contain a provision that such insurance may not be canceled by the issuer thereof without at least thirty (30) days' prior written notice (subject to the limitations inherent in the insurance industry standard practice) to the Board, the Bond Sublessor, the Lessor, the Bond Trustee, and the Indenture Trustee. (b) Subject to the provisions of the Operative Agreements, in the event of loss or damage to the Facility, the Net Proceeds of casualty insurance carried pursuant to this Section shall be paid over to the Indenture Trustee pursuant to ARTICLE VIII hereof. SECTION 6.2 COMMERCIAL GENERAL LIABILITY (CASUALTY) INSURANCE. (a) The Lessee shall at its sole cost and expense maintain or cause to be maintained at all times during the Term with Permitted Insurers commercial general liability insurance (including coverage for all losses whatsoever arising from the ownership, maintenance, operation or use of any automobile, truck or other motor vehicle), which shall be endorsed to name the Board, the Bond Sublessor, the Lessor, the Lessee, the Bond Trustee, and - 13 - the Indenture Trustee as additional insureds, properly protecting and indemnifying them, in an amount not less than $2,000,000 for bodily injury (including death) in any one occurrence (with excess coverage in an amount not less than $50,000,000 and a deductible of not more than $500,000 in the aggregate), and not less than $1,000,000 for property damage in any one occurrence (subject to reasonable loss deductible clauses not to exceed $500,000 in the aggregate). The policies of said insurance shall contain a provision that such insurance may not be canceled by the issuer thereof without at least thirty (30) days' advance written notice to the Board, the Bond Sublessor, the Lessor, the Bond Trustee, and the Indenture Trustee. Such policies or copies or certificates thereof shall be furnished to the Lessor and the Indenture Trustee. (b) In the event of a Casualty, the Net Proceeds of liability insurance carried pursuant to this Section shall be applied toward the satisfaction of the liability with respect to which such proceeds have been paid. SECTION 6.3 BLANKET INSURANCE POLICIES. The Lessee may satisfy any of the insurance requirements set forth in this Article by using blanket policies of insurance provided each and all of the requirements and specifications of this Article respecting insurance are complied with and such policies are otherwise reasonably acceptable to the Lessor. ARTICLE VII ALTERATION OF THE FACILITY SECTION 7.1 ADDITIONS, MODIFICATIONS AND IMPROVEMENTS OF THE FACILITY. So long as no Lease Event of Default has occurred and is continuing and subject to the other provisions of this Article VII, the Lessee, at its sole cost and expense, may at any time and from time to time make alterations, renovations, improvements and additions to the Facility or any part thereof (collectively, "MODIFICATIONS"); provided that: (i) except for any Modification required to be made pursuant to a Legal Requirement or an Insurance Requirement, no Modification shall impair the value, utility or remaining useful life of the Facility from that which existed immediately prior to such Modification; (ii) the Modification shall be performed expeditiously and in a good and work unalike manner; (iii) the Lessee shall comply in all material respects with all Legal Requirements (including all Environmental Laws) and Insurance Requirements applicable to the Modification, including the obtaining of all permits and certificates of occupancy, and the structural integrity of the Facility shall not be adversely affected; (iv) the Lessee shall maintain or cause to be maintained builders' risk-all risk insurance at all times when a Modification is in progress; (v) subject to the terms of SECTION 3.3(b) relating to permitted contests, the Lessee shall pay all costs and expenses and discharge any Liens arising with respect to the Modification; (vi) such Modifications shall comply with SECTIONS 3.5 and 5.1 and shall not change the primary character of the Facility; and (vii) no improvements shall be demolished, except to the extent such demolition, together with such replacement thereof or other Modification, does not materially impair the value, utility or useful life of the Facility. All Modifications (other than those that may be readily removed without impairing the value, utility or remaining useful life of the Facility) shall remain part of the realty and shall be subject to this Lease, and title thereto shall immediately vest in the Lessor; provided, however, that additions to machinery and equipment installed in the Facility by the Lessee not purchased or acquired from funds deposited in the Escrow Account and not constituting repairs, renewals or replacements of Equipment under SECTION 7.2 hereof shall remain the property of the Lessee and may be removed - 14 - by the Lessee prior to the Expiration Date, subject to any provisions in the Operative Agreements. SECTION 7.2 REMOVAL OF EQUIPMENT. The Lessee shall have the right, subject to any provisions in the Operative Agreements, provided no Lease Event of Default has occurred and is continuing, to remove from the Facility and (on behalf of the Lessor) sell, exchange or otherwise dispose of, without responsibility or accountability to the Board, the Bond Sublessor, the Lessor, the Bond Trustee, or the Indenture Trustee with respect thereto, any items of machinery and equipment which constitute a part of the Equipment and which have become inadequate, obsolete, worn out, unsuitable, undesirable or unnecessary or which, in the sound discretion of the Lessee, are otherwise no longer useful to the Lessee in its operations conducted on or in the Facility; provided that the Lessee shall promptly replace all such Equipment so removed, except for any such Equipment so removed having a fair market value of not more than $100,000 in any one case and not more than $500,000 in the aggregate in any calendar year, with machinery and equipment of the same or a different kind but with a value equal to or greater than the fair market value of the Equipment (original cost of such machinery or equipment less depreciation at rates calculated in accordance with generally accepted accounting principles) so removed, and such machinery and equipment shall be deemed a part of the Equipment, and (b) within thirty (30) days after any such replacement, deliver to the Lessor and the Indenture Trustee a certificate signed by the Lessee (1) setting forth a complete description, including make, model and serial numbers, if any, of the machinery and equipment which the Lessee has acquired to replace the Equipment so removed by the Lessee, (2) stating the cost thereof, and (3) stating that the machinery and equipment described in said certificate are fully paid for and have been installed on the Facility. The Lessor shall amend, and provide to the Indenture Trustee a copy of, the list of Equipment maintained by it pursuant to SECTION 9.8 hereof upon receipt of such certificate. All machinery and equipment which replaces Equipment removed from the Facility by the Lessee pursuant to this Section shall become and be deemed a part of the Facility. In all cases, the Lessee shall pay all the costs and expenses of any such removal and shall immediately repair at its expense all damage to the Facility caused thereby. The Lessee's rights under this Section to remove from the Facility machinery and equipment constituting a part of the Equipment is intended only to permit the Lessee to maintain an efficient operation by the removal of machinery and equipment which is no longer suitable to the Lessee's use of the Facility for any of the reasons set forth in this Section, and such right is not to be construed to permit a removal under any other circumstances and specifically is not to be construed to permit the Lessee to make a wholesale removal of the Equipment. SECTION 7.3 ADDITIONAL IMPROVEMENTS. So long as no Lease Event of Default has occurred and is continuing and subject to the other provisions of this ARTICLE VII, the Lessee shall have and is hereby given the right, at its sole cost and expense, subject to any provisions in the Operative Agreements, to construct on portions of the Land not theretofore occupied by buildings or improvements such additional buildings and improvements as the Lessee from time to time may deem necessary or desirable for its business purposes. All additional buildings and improvements constructed on the Land by the Lessee pursuant to the authority of this Section shall become a part of the Facility. The Lessee covenants and agrees to make any repairs and restorations required to be made to the Facility because of the construction of, addition to, alteration or removal of such additional buildings or improvements. - 15 - SECTION 7.4 PERMITS AND AUTHORIZATIONS. The Lessee shall not do or permit others under its control to do any work on the Facility related to any repair, rebuilding, restoration, replacement, modification or addition to the Facility, or any part thereof, unless all requisite municipal and other governmental permits and authorizations shall have been first procured. All such work shall be done in a good and workmanlike mariner and in compliance with all applicable building, zoning and other laws, ordinances, governmental regulations and requirements and in accordance with the requirements, rules and regulations of all insurers under the policies required to be carried under the provisions of ARTICLE VI hereof. SECTION 7.5 MECHANICS' LIENS. (a) Neither the Lessor nor the Lessee shall do or suffer anything to be done whereby the Facility, or any part thereof, may be encumbered by any mechanics' or other similar Lien. Whenever and as often as any mechanics' or other similar Lien is filed against the Facility, or any part thereof, purporting to be for or on account of any labor done or materials or services furnished in connection with any work in or about the Facility, the Lessee shall comply with the provisions of the Operative Agreements and shall discharge the same of record within sixty (60) days after the Lessee receives notice of the filing thereof. Notice is hereby given that the Lessor shall not be liable for any labor or materials furnished the Lessee or anyone claiming by, through or under the Lessee, and that no mechanics' or other similar Lien for any such labor, services or materials shall attach to or affect the reversionary or other estate of the Board, the Bond Sublessor, or the Lessor in and to the Facility or any part thereof. (b) Notwithstanding paragraph (a) above, the Lessee shall have the right, subject to the provisions of the Operative Agreements to contest any such mechanics' or other similar Lien if within said 60-day period stated above it notifies the Board, the Bond Sublessor, the Lessor, the Bond Trustee, and the Indenture Trustee in writing of its intention so to do, and provided the Lessee diligently prosecutes such contest, at all times effectively stays or prevents any official or judicial sale of the Facility, or any part thereof or interest therein, under execution or otherwise, and pays or otherwise satisfies any final judgment enforcing such contested Lien claim and thereafter promptly procures record release or satisfaction thereof. The Lessee shall indemnify and hold the Board, the Bond Sublessor, the Lessor, the Bond Trustee, and the Indenture Trustee whole and harmless from any loss, costs or expenses they may incur related to any such contest. The Lessor shall cooperate fully with the Lessee in any such contest. SECTION 7.6 EXPANSION. (a) Should the Lessee, during the Term of this Lease, desire to construct additional buildings or improvements on the Land pursuant to SECTION 7.3 or make any alterations or additions to the Facility pursuant to this ARTICLE VII (in each case, an "EXPANSION"), the Lessee may, prior to the commencement of construction of such Expansion, offer by written notice to the Lessor, the Board, the Bond Sublessor, the Bond Trustee and the Indenture Trustee (a "PAYMENT OFFER") the opportunity for the Lessor to pay the costs (the "EXPANSION COST") thereof, setting forth in such offer in reasonable detail a professional, good faith estimate (based on an Appraisal made in connection therewith) of the costs of equipment, materials, labor and services, including architecture and engineering fees, financing fees, legal fees, survey, title insurance and other normal and customary development, construction and financing costs. - 16 - (b) Should the Lessor elect to accept the Payment Offer, which acceptance shall be at the Lessor's sole option and shall, subject to paragraph (c) below, if made, be made in writing within sixty (60) days after receipt by the Lessor of such offer, the Lessor and the Lessee shall enter into good faith negotiations regarding the execution and delivery of a written amendment to this Lease providing for the following: (i) payment by the Lessor to the Lessee of the Expansion Cost within one hundred twenty (120) days after the date of the Lessor's acceptance of such Payment Offer, or in installment payments as agreed, or on the date of completion of the Expansion, whichever shall be the later; (ii) an increase in the annual Basic Rent at such imputed rate of interest and upon such other terms as shall be agreed upon between the Lessor and the Lessee, but which shall be no less favorable than the prevailing interest rate and terms for first unsecured loans in a principal amount equal to the Expansion Cost for borrowers with credit ratings equivalent to that of the Lessee's at that time; (iii) an increase in the Basic Rent to provide a rate of return on the Investor Contribution not less than the then prevailing market rate and an increase in the Termination Value and the Residual Guaranteed Maximum Amount; and (iv) such other changes and amendments to the Bond Lease, the Bond Sublease, this Lease, the Guarantee, the Residual Value Policy and the other Operative Agreements as may be necessary or appropriate in view of such payment of the Expansion Cost by the Lessor. The Lessee shall pay all costs and expenses incurred by the Lessor, the Board, the Bond Sublessor, the Bond Trustee, the Indenture Trustee and the Noteholders in connection with any such modification to this Lease and the other Operative Agreements and such financing, including closing costs, brokerage fees, taxes, recording charges and attorneys' fees and expenses. (c) To the extent that the terms of the Security Documents or any other Lien encumbering the Facility shall require the consent of the holder or holders of any Lien on any of the Facility (the Secured Parties") to the addition or construction of any Expansion or to the financing thereof by the Lessor, the rights and obligations of the Lessor and the Lessee hereunder are expressly conditioned upon the Lessee's obtaining, prior to the commencement of any construction the Secured Parties written consent to such construction and to such financing which consent may be withheld at the Secured Parties' sole discretion. (d) If the Lessor accepts the Payment Offer it may finance the Expansion only by (i) issuance (in accordance with SECTION 2.1(d) of the Indenture) and sale (subject to the right of first offer set forth in ARTICLE 11 of the Series A Note Purchase Agreement or any comparable provision in the Series B Note Purchase Agreement) of Expansion Notes in the aggregate principal amount not to exceed 97% of the Expansion Cost and (ii) receipt of additional Investor Contribution in the amount not less than 3% of the Expansion Cost. (e) Should any Payment Offer not be accepted by the Lessor within said sixty (60) day period or should the Lessor and the Lessee be unable in good faith to agree upon the terms of the modification of this Lease and the other Operative Agreements, the Lessee shall, - 17 - subject to the provisions of this Lease, have the right to construct the Expansion at the Lessee's sole cost and expense; provided that the Lessor shall not reject the Payment Offer solely by reason of the Investor's inability or unwillingness to provide the additional Investor Contribution referred to in the foregoing clause (d) but shall (provided that all other conditions of this Section have been satisfied) in such case allow the Lessee to secure the additional Investor Contribution from other investors (complying with the requirements of SECTION 10.1 of the Participation Agreement) that will upon making of such additional Investor Contribution, become beneficiaries of the Lessor, on parity with the Investor under the Operative Agreements. In any event, the Expansion shall be the property of the Lessor and part of the Facility subject to this Lease and the Lien of the Security Documents. (f) Notwithstanding anything else in this SECTION 7.6 the Lessor may prohibit in its sole discretion, any Expansion that could reasonably be expected to cause a Material Adverse Effect. SECTION 7.7 IMPROVEMENTS. If the Lessor determines that additional financing is needed to complete the Facility by the Outside Completion Date, the Lessor may, upon request of the Lessee, issue Lessor's Series B Notes pursuant to the Indenture and in compliance with the other Operative Agreements, in an aggregate principal amount not to exceed $5,000.000. ARTICLE VIII DAMAGE, DESTRUCTION AND CONDEMNATION SECTION 8.1 DAMAGE OR DESTRUCTION. (a) If the Facility shall be damaged or destroyed by fire or any other Casualty (other than any such Casualty constituting a Total Loss with respect to which the Lessee has delivered a Termination Notice pursuant to SECTION 3.6), whether or not covered by insurance, subject to the provisions of the Operative Agreements, the Lessee as promptly as practicable shall either repair restore replace or rebuild the same as nearly as may be practicable to its condition and character immediately prior to such damage or destruction, and so that upon completion of such repairs, restoration, replacement or rebuilding such Facility shall be of a value not less than the value thereof immediately prior to the occurrence of such damage or destruction or, at the Lessee's option, shall construct upon the Land new buildings and improvements thereafter together with all new machinery, equipment and fixtures which are either to be attached to or are to be used in connection with the operation or maintenance thereof, provided that (i) the value thereof shall not be less than the value of such destroyed or damaged Improvements and/or Equipment immediately prior to the occurrence of such damage or destruction and (ii) the nature of such new buildings, improvements, machinery, equipment and fixtures will not impair the character and use of the Facility as an enterprise permitted hereby and by Legal Requirements. If the Lessee shall elect to construct any such new buildings and improvements, for all purposes of this Lease, any reference to the word "Improvements" shall be deemed to also include any such new buildings and improvements and all additions thereto and all replacements and alterations thereof and any reference to the word "Equipment" shall be deemed to include any such new machinery, equipment and fixtures which are either attached to or are used in connection with the operation or maintenance of such new buildings and improvements and all additions or replacements thereof. - 18 - The Net Proceeds of hazard or casualty insurance required by ARTICLE VI hereof and received with respect to such damage or loss to the Facility shall be paid to the Indenture Trustee and, if no Lease Default or Lease Event of Default has occurred and is continuing, shall be applied in the following manner. (i) there shall be paid to the Lessee from the Net Proceeds such part thereof as shall equal the cost to the Lessee of making such temporary repairs or doing such other work, as, in the Lessee's reasonable opinion, may be necessary in order to protect the Facility pending adjustment of the insurance loss or the making of permanent repairs, restoration, replacement or rebuilding; (ii) there shall be paid to the Lessee from the Net Proceeds such part thereof as shall equal the cost to the Lessee of repairing, restoring, replacing or rebuilding the Facility or any part thereof; (iii) payment to the Lessee pursuant to subdivisions (i) or (ii) of this subsection (a) from such Net Proceeds shall be made to the Lessee from time to time as the work progresses, in amounts equal to the cost of labor and material incorporated into and used in such work, the contractors', architects' and engineers' fees, and other charges in connection with such work, upon delivery to the Board, the Bond Sublessor, the Lessor, the Bond Trustee and the Indenture Trustee of a certificate of the Lessee's architect or general contractor, as the case may be, in charge of such work, certifying: (1) that the amounts so to be paid to the Lessee are payable to the Lessee in accordance with the provisions of this Article and that such amounts are then due and payable by the Lessee or have theretofore been paid by the Lessee (2) the progress of the work (3) that the work has been done in accordance with the plans and specifications therefor and all insurance requirements of ARTICLE VI hereof (4) that the sum requested when added to all sums previously paid out under this Article for the work does not exceed the value of the work done to the date of such certificate (5) the estimated cost of completing the work in reasonable detail and (6) that the remaining Net Proceeds are sufficient to pay the estimated cost of completing the work; and (iv) the Lessee shall furnish to the Indenture Trustee the Lessor and upon request, to the Board the Bond Sublessor or the Bond Trustee as the case may be at the time of any such payment an official search or other evidence reasonably satisfactory to such Person that there has not been filed with respect to the Land or the Improvements any mocha s or other Lien which has not been discharged of record in respect of any work labor services or materials performed furnished or supplied in connection with the work and that all of said materials have been purchased free and clear of all Liens Upon the termination of this Lease and the payment in full of the Bonds the Notes and the Certificates any monies then held by the Bond Trustee or the Indenture Trustee shall be paid over to the Lessee subject to the rights of the Bond Trustee and the Indenture Trustee under the Operative Agreements (b) The insurance monies if any paid to the Lessee as provided under this Article on account of any or destruction to the Facility shall be held by it in trust and applied only for the purposes of repairing reconstructing or restoring the Facility or constructing new buildings and improvements and installing new building equipment and fixtures thereto. - 19 - (c) If any of the insurance monies paid by the insurance company to the Indenture Trustee or the is hereinabove provided shall remain after the completion of such repairs restoration replacement or rebuilding, and this Lease shall not have terminated, the excess shall be paid to the Lessee. If the Net Proceeds shall be insufficient to pay the entire cost of such repairs, restoration, replacement or rebuilding, the Lessee shall pay the deficiency. (d) Except in connection with a Casualty constituting a Total Loss with respect to which the Lessee has delivered a Termination Notice pursuant to SECTION 3.6, in the event of any such damage by fire or any other Casualty, the provisions of this Lease shall be unaffected and the Lessee shall remain and continue liable for the payment of all Basic Rent and Supplemental Rent and all other charges required hereunder to be paid by the Lessee, as though no damage by fire or any other Casualty has occurred. (e) The Lessor and the Lessee agree that they will cooperate with each other, to such extent as such other party may reasonably require, in connection with the prosecution or defense of any action or proceeding arising out of, or for the collection of any insurance monies that may be due in the event of, any loss or damage, and that they will execute and deliver to such other parties such instruments as may be required to facilitate the recovery of any insurance monies. In no event shall the Lessor or the Lessee settle or consent to the settlement of any such proceeding without the prior written consent of the other party and the Indenture Trustee. (f) The Lessee agrees to give prompt notice to the Board, the Bond Sublessor, the Lessor, the Indenture Trustee and the Bond Trustee with respect to all fires and any other casualties occurring in, on, at or about the Facility. (g) The Lessee shall not, by reason of its inability to use all or any part of the Facility during any period in which the Facility is damaged or destroyed or is being repaired, rebuilt, restored or replaced, nor by reason of the payment of the costs of such rebuilding repairing, restoring or replacing, be entitled to any reimbursement from the Board, the Bond Sublessor, the Lessor, the Bond Trustee, the Indenture Trustee, or the Noteholders or to any abatement or diminution of the rentals payable by the Lessee under this Lease (including the Lessee's obligation to pay Rent under SECTIONS 4.1 and 4.2) or of any other Obligations of the Lessee under this Lease except as expressly provided in this Section. SECTION 8.2 CONDEMNATION. (a) Subject to the provisions of the Operative Agreements, if during the Term, title to, or the temporary use of, all or any part of the Facility shall be condemned by or sold under threat of condemnation to any authority possessing the power of eminent domain, to such extent that the claim or loss resulting from such condemnation is greater than 10% of the Termination Value, the Lessee shall, within eighty (80) days after the date of entry of a final order in any eminent domain proceedings granting condemnation or the date of sale under threat of condemnation, notify the Board, the Bond Sublessor, the Lessor, the Bond Trustee and the Indenture Trustee in writing (which notice may be, in the case of Total Condemnation, a Termination Notice, in which case the provisions of SECTION 3.6 shall govern) as to the nature and extent of such condemnation or loss of title and whether it is practicable and desirable to acquire or construct substitute improvements. (b) If the Lessee shall determine that such substitution is practicable and desirable, subject to the provisions of the Operative Agreements, the Lessee shall proceed - 20 - promptly with and complete with reasonable dispatch the acquisition or construction of such substitute improvements, so as to place the Facility in substantially the same condition as existed prior to the exercise of the said power of eminent domain, including the acquisition or construction of other improvements suitable for the Lessee's operations at the Facility (which improvements will be deemed a part of the Facility and available for use and occupancy by the Lessee without the payment of any rent other than herein provided, to the same extent as if such other improvements were specifically described herein and demised hereby); provided that such improvements will be acquired by the Lessor subject to no Liens, security interests or encumbrances other than Permitted Liens. In such case, any Net Proceeds received from any award or awards with respect to the Facility or any part thereof made in such condemnation or eminent domain proceedings, or of the sale proceeds, shall be applied in the same manner as provided in Section 8.1 hereof (with respect to the receipt of hazard of casualty insurance proceeds). (c) The Lessee shall not, by reason of its inability to use all or any part of the Facility during any such period of restoration or acquisition nor by reason of the payment of the costs of such restoration or acquisition, be entitled to any reimbursement from the Board, the Bond Sublessor, the Lessor, the Bond Trustee, the Indenture Trustee, or the Noteholders or to any abatement or diminution of the rentals payable by the Lessee under this Lease (including, without limitation, the Lessee's obligation to pay Rent under SECTIONS 4.1 and 4.2) nor of any other Obligations hereunder except as expressly provided in this Section. (d) The Lessor shall cooperate fully with the Lessee in the handling and conduct of any prospective or pending condemnation proceedings with respect to the Facility or any part thereof, and shall, to the extent it may lawfully do so, permit the Lessee to litigate in any such proceeding in the name and on behalf of the Board, the Bond Sublessor, and the Lessor. In no event will the Board, the Bond Sublessor, the Lessor or the Lessee settle or consent to the settlement of any prospective or pending condemnation proceedings with respect to the Facility or any part thereof without the prior written consent of the Lessor, the Lessee, the Board, the Bond Sublessor, the Bond Trustee and the Indenture Trustee. (e) Lessor hereby grants, and shall cause the Board and the Bond Sublessor to grant, to the Lessee its legal rights, as the owner of the title to, or a leasehold estate in, the Facility, to settle any condemnation proceeding or prospective condemnation proceeding involving all or any portion of the Facility. SECTION 8.3 ENVIRONMENTAL MATTERS. Promptly upon the Lessee's actual knowledge of the presence of Hazardous Substances in any portion of the Facility in concentrations and conditions that could constitute an Environmental Violation, the Lessee shall notify the Lessor, the Board, the Bond Sublessor, the Bond Trustee and the Indenture Trustee in writing of such condition. The Lessee shall, not later than thirty (30) days after the Lessee has actual knowledge of such Environmental Violation, deliver to the Lessor, the Board, the Bond Sublessor, the Bond Trustee and the Indenture Trustee an Officer's Certificate with respect thereto estimating in good faith the cost of remediating the same and, at the Lessee's sole cost and expense, promptly and diligently undertake any response, clean up, remedial or other action necessary to remove, cleanup or remediate the Environmental Violation in accordance with all Legal Requirements and Insurance Requirements. The Lessee shall, upon completion of remedial action, cause to be prepared by an environmental consultant reasonably acceptable to the Lessor a report describing the Environmental Violation and the actions taken by the Lessee (or its agents) in response to such Environmental Violation, and a statement by the consultant that the - 21 - Environmental Violation has been remedied in full compliance in all material respects with applicable Environmental Laws. ARTICLE IX SPECIAL COVENANTS SECTION 9.1 NO WARRANTY OF CONDITION OR SUITABILITY BY THE LESSOR; EXCULPATION AND INDEMNIFICATION. LESSEE AGREES THAT IT IS RENTING THE PROPERTY "AS IS" WITHOUT REPRESENTATION, WARRANTY OR COVENANT (EXPRESS OR IMPLIED) BY THE LESSOR (OTHER THAN, IN THE CASE OF THE LESSOR, THE ABSENCE OF LESSOR LIENS AND THE COVENANT OF QUIET ENJOYMENT) AND SUBJECT TO (A) THE EXISTING STATE OF TITLE, (B) THE RIGHTS OF ANY PARTIES IN POSSESSION THEREOF, (C) ANY STATE OF FACTS WHICH AN ACCURATE SURVEY OR PHYSICAL INSPECTION MIGHT SHOW AND (D) VIOLATIONS OF LEGAL REQUIREMENTS WHICH MAY EXIST ON THE DATE HEREOF. NONE OF THE LESSOR, THE INVESTOR, THE BOARD, THE BOND SUBLESSOR, THE BOND TRUSTEE, THE INDENTURE TRUSTEE, AND ANY NOTEHOLDER HAS MADE OR SHALL BE DEEMED TO HAVE MADE ANY REPRESENTATION, WARRANTY OR COVENANT (EXPRESS OR IMPLIED, INCLUDING THE CONDITION OF ANY IMPROVEMENTS THEREON, THE SOIL CONDITION, OR ANY ENVIRONMENTAL OR HAZARDOUS MATERIAL CONDITION) OR SHALL BE DEEMED TO HAVE ANY LIABILITY WHATSOEVER AS TO THE TITLE, VALUE, HABITABILITY, USE, CONDITION, DESIGN, OPERATION, OR FITNESS FOR USE OF THE PROPERTY (OR ANY PART THEREOF), OR ANY OTHER REPRESENTATION, WARRANTY OR COVENANT WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO THE PROPERTY (OR ANY PART THEREOF) (OTHER THAN THE ABSENCE OF LESSOR LIENS AND THE COVENANT OF QUIET ENJOYMENT) AND NONE OF THE LESSOR, THE INVESTOR, THE BOARD, THE BOND SUBLESSOR, THE BOND TRUSTEE, THE INDENTURE TRUSTEE, AND ANY NOTEHOLDER SHALL BE LIABLE FOR ANY LATENT, OR PATENT DEFECT THEREIN OR THE FAILURE OF THE PROPERTY, OR ANY PART THEREOF, TO COMPLY WITH ANY LEGAL REQUIREMENT, INSURANCE REQUIREMENT OR FACILITY REQUIREMENT. SECTION 9.2 SURRENDER OF POSSESSION. Upon accrual of the Lessor's right of re-entry because of the occurrence of a Lease Event of Default hereunder or upon the cancellation or termination of this Lease for any reason other than the purchase of the Facility pursuant to Article XI hereof, the Lessee shall peacefully surrender possession of the Facility to the Lessor in good condition and repair, ordinary wear and tear excepted; provided, however, the Lessee shall have, subject to the provisions of the Operative Agreements, the right within thirty (30) days (or such later date as the Lessor may agree to) after the termination of this Lease to remove from the Land any buildings, improvements, furniture, trade fixtures, machinery and equipment owned by the Lessee and not constituting part of the Facility. All repairs to and restorations of the Facility required to be made because of such removal shall be made by and at the sole cost and expense of the Lessee, and during said 30-day (or extended) period the Lessee shall bear the sole responsibility for and bear the sole risk of loss for said buildings, improvements, furniture, trade fixtures, machinery and equipment. All buildings, improvements, furniture, trade fixtures, machinery and equipment owned by the, Lessee and which are not so removed from the Facility - 22 - prior to the expiration of said period shall be the separate and absolute property of the Board, subject to Permitted Liens. SECTION 9.3 RIGHT OF ACCESS TO THE FACILITY. The Lessee agrees that the Lessor, the Board, the Bond -Sublessor, the Bond Trustee, and the Indenture Trustee and their duly authorized representatives shall upon reasonable notice have the right at reasonable times during business hours, subject to the Lessee's usual safety and security requirements, to enter upon the Land (a) to examine and inspect the Facility without interference or prejudice to the Lessee's operations, (b) performing such work in and about the Facility as may be made necessary by reason of a Lease Event of Default, and (c) exhibiting the Facility to prospective purchasers, sublessees, lenders or trustees. SECTION 9.4 GRANTING OF EASEMENTS. If no Lease Event of Default shall have occurred and be continuing, the Lessee may at any time or times, subject to the provisions of the Operative Agreements, cause the Lessor, and the Lessor shall cause the Board and the Bond Sublessor, to (1) grant easements, licenses, rights-of-way and other rights or privileges in the nature of easements that are for the direct use of the Facility, or part thereof, by the grantee, (2) release existing easements, licenses, rights-of-way and other rights or privileges, all with or without consideration and upon such terms and conditions as the Lessee shall determine, (3) incur Permitted Liens, or (4) execute non-disturbance agreements in form and substance acceptable to the Lessor and the Indenture Trustee. The Lessor agrees that it will execute and deliver, and will cause and the Board and the Bond Sublessor to execute and deliver, any instrument necessary or appropriate to confirm and grant or release any such easement, license, right-of-way or other right or privilege or any such agreement or other arrangement, upon receipt by the Lessor, the Board, the Bond Sublessor, the Bond Trustee and the Indenture Trustee of: (i) a copy of the instrument of grant or release or of the agreement or other arrangement, (ii) a notice signed by the Lessee requesting such instrument, and (iii) a certificate executed by the Lessee stating that such grant or release is not detrimental to the proper conduct of the business of the Lessee, will not impair the effective use or interfere with the efficient and economical operation of the Facility, and will not materially adversely affect the security intended to be given by or under the Security Documents. If the instrument of grant shall provide that any such easement or right and the rights of such other parties thereunder shall be superior to the rights of the Lessor under this Lease or the Indenture Trustee under the Indenture and shall not be affected by any termination of this Lease or default on the part of the Lessee hereunder, then such easement shall not have any effect whatsoever without the written consent of the Indenture Trustee, which shall not be unreasonably withheld. If no Lease Event of Default shall have occurred and be continuing, subject to the provisions of the Operative Agreements, any payments or other consideration received by the Lessee for any such grant or with respect to or under any such agreement or other arrangement shall be and remain the property of the Lessee, but, in the event of the termination of this Lease or default by the Lessee, all rights then existing of the Lessee with respect to or under such giant shall inure to the benefit of and be exercisable by the Lessor and the Indenture Trustee. SECTION 9.5 INDEMNIFICATION. The Lessee shall indemnify and save the Board, the Bond Sublessor, the Lessor, the Bond Trustee, the Indenture Trustee and the Noteholders (each, an "Indemnitee") harmless from and against all claims by or on behalf of any Person arising from the conduct or management of, or from any work or thing done in on or about the Facility during the Term and against and from all claims arising during the Term from (a) any condition of the Facility (b) any breach or default in the performance of any of the Lessee's - 23 - obligations under this Lease (c) any contract entered into in connection with the acquisition purchase construction, installation and equipping of the Facility, (d) any Environmental Violation or any violation of Legal Requirements or Insurance Requirements, (e) any negligence of the Lessee or of any of its agents, contractors, servants employees or licensees and (f) any negligence of any assignee or sublessee of the Lessee or of any agents, contractors, servants, employees or licensees of any assignee or sublessee of the Lessee, except in each case to the extent arising from the willful misconduct or gross negligence of an Indemnitee and then only with respect to such Indemnitee. The Lessee shall indemnify and save each Indemnitee harmless from and against all costs and expenses (except those which have arisen from the willful misconduct or gross negligence of such Indemnitee) incurred in or in connection with any action or proceeding brought thereon, and upon notice from the Indemnitee the Lessee shall defend them or either of them in any such action or proceeding. Notwithstanding anything contained in this Section to the contrary, the Lessee shall not be required to defend, indemnify and hold harmless any Indemnitee for any Claim in respect of the Non Guaranteed Residual Amount, except for Claims relating to or arising or alleged to arise out of: (A) a violation of any Environmental Law or as to any Environmental Claim (B) during the Construction Period (i) third party Claims (including by the Noteholders) against the Lessor, the Board or the Bond Sublessor caused by or resulting from the Lessee's own actions or failure to act (including any default in payment under the Guarantee) other than Claims arising directly or indirectly out of the Lessee's (in its capacity as the Construction Agent) failure to achieve the Completion of the Facility by the Outside Completion Date (ii) Claims brought by the Lessor the Board or the Bond Sublessor relating to fraud misappropriation of funds illegal acts or willful misconduct on the part of the Lessee or (iii) bankruptcy or insolvency of the Lessee or (C) at any time after the Construction Period the occurrence and continuance of (i) a default under the Guarantee (including any breach of the Guarantor's obligations to pay the entirety of all amounts under the Notes and the Indenture due upon any acceleration thereof but excluding defaults relating to breaches of Article VIII or Sections 9.3 (other than any breach of the Lessee's payment obligations with respect to the Notes and the Indenture as aforesaid) through 9.7 inclusive of the Guarantee) or (ii) a Specified Lease Event of Default. SECTION 9.6 DEPRECIATION AND INVESTMENT TAX CREDIT. The Lessor agrees that any depreciation or investment tax credit with respect to the Facility or any part thereof shall be made available to the Lessee or any of its sublessees and the Lessor will fully cooperate with the Lessee or any of its sublessees in any effort to avail itself of any such depreciation or investment tax credit. SECTION 9.7 LESSEE TO MAINTAIN ITS EXISTENCE. The Lessee agrees that until all amounts owing in respect of the Bonds the Senior Secured Notes, the Investor Contribution and the Operative Agreements are indefeasibly paid for in accordance with the terms of the Indenture and the other Operative Agreements it will maintain its existence and will not file a certificate of dissolution or otherwise dispose of all or substantially all of its assets provided however that subject to the provisions of the Operative Agreements the Lessee may, without violating the agreement contained in tins Section consolidate with or merge into a corporation limited liability company or other business entity organized and existing under the laws of one of the states of the United States or permit one or more other such entities to consolidate with or merge into it or may sell or otherwise transfer to another such entity all or substantially all of its assets as an entirety and thereafter file a certificate of dissolution, provided (i) the surviving resulting or - 24 - transferee entity expressly assumes in writing all the obligations of the Lessee contained in this Lease and the other Operative Agreements and such writing is furnished to the Board the Bond Sublessor the Lessor the Bond Trustee and the Indenture Trustee prior to the effective date of such assumption and (ii) the Indenture Trustee and the Bond Trustee have received an opinion of counsel in form and substance reasonably satisfactory to the Indenture Trustee and the Bond Trustee as to the compliance by the Lessee with the provisions of this Section. SECTION 9.8 SECURITY INTERESTS. The Lessor and the Lessee agree, at the written request of the other party or the Board, the Bond Sublessor, the Board Trustee, the Indenture Trustee or the Noteholders, to enter into all instruments (including financing statements and statements of continuation) necessary for perfection of and continuance of the perfection of the Liens and security interests of the Board, the Bond Sublessor, the Lessor, the Bond Trustee, and the Indenture Trustee in the Facility. The Lessor and the Lessee shall cooperate with the Board, the Bond Sublessor, the Bond Trustee, and the Indenture Trustee in mailing all filings in furtherance thereof, by executing such continuation statements and providing such information as the Indenture Trustee may require to renew or continue such Liens and security interests. The Lessor shall maintain, and upon any change thereto provide the Indenture Trustee and the Bond Trustee with a copy of, a file showing a description of all Equipment, said file to be compiled from the certificates furnished to the Lessor pursuant to SECTION 7.2 hereof. SECTION 9.9 NO TERMINATION OR ABATEMENT. The Lessee shall remain obligated under this Lease in accordance with its terms and shall not take any action to terminate, rescind or avoid this Lease, notwithstanding any action for bankruptcy, insolvency, reorganization, liquidation, dissolution, or other proceeding affecting the Lessor, or any action with respect to the Facility or this Lease which may be taken by any trustee, receiver or liquidator of the Lessor or by any court with respect to the Lessor, and the Lessee hereby waives all right (i) to terminate or surrender this Lease, except as otherwise expressly provided herein, or (ii) to avail itself of any abatement, suspension, deferment, reduction, setoff, counterclaim or defense with respect to any Rent. The Lessee shall remain obligated under this Lease in accordance with its terms and the Lessee hereby waives any and all rights now or hereafter conferred by statute or otherwise to modify or to avoid strict compliance with its obligations under this Lease. Notwithstanding any such statute or otherwise, the Lessee shall be bound by all of the terms and conditions contained in this Lease. SECTION 9.10 PERFORMANCE OF OBLIGATIONS OF THE BOARD, THE BOND SUBLESSOR AND THE LESSOR. The Lessee agrees that it shall perform all of the obligations of the Bond Sublessor under the Bond Lease of the Lessor under the Bond Sublease and the Board, the Bond Sublessor and the Lessor under the Security Documents, except the obligations of the Board, the Bond Sublessor and the Lessor to execute and deliver documents and instruments required to be executed and delivered by them under the provisions thereof. ARTICLE X OPTION TO PURCHASE THE FACILITY SECTION 10.1 PURCHASE OPTION. The Lessee shall have the option on any Payment Date (exercisable by giving the Lessor irrevocable written notice (the "PURCHASE NOTICE") of the Lessee's election to exercise such option not less than one hundred and eighty (180) days prior to such Payment Date) to purchase (i) the Lessor's interest in the Facility at any time, or (ii) the Facility at any time after the seventh anniversary of the Closing Date; provided - 25 - that the conditions to the exercise of the Bond Sublessor's Purchase Option set forth in SECTION 11.1 of the Bond Lease have been satisfied, in each case at a price equal to the Termination Value. If the Lessee has exercised its option pursuant to this Section (the "PURCHASE OPTION"), the Lessor shall transfer, and, in the case of clause (ii) above, cause the Board and the Bond Sublessor to transfer to the Lessee or the Lessee's designee all of the Lessor's, and their, right, title and interest in and to the Facility in accordance with SECTION 3.6 as of the date specified in the Purchase Notice upon receipt of all Rent (including the Termination Value) and other amounts then due and payable under this Lease and other Operative Agreements. Upon receipt of such Purchase Notice, the Lessor will give, and cause the Bond Sublessor to give, similar notices exercising the comparable purchase options under the Bond Lease and the Bond Sublease. SECTION 10.2 MATURITY DATE PURCHASE OPTION. Not less than twelve (12) months prior to the Maturity Date, the Lessee may give the Lessor and Indenture Trustee irrevocable written notice (the "MATURITY DATE ELECTION NOTICE") of the exercise of the Maturity Date Purchase Option or its election to remarket the Facility pursuant to SECTION 10.3. The Lessee does not give a Maturity Date Election Notice on or before the date twelve months prior to the Maturity Date, then the Lessee shall be obligated to purchase the Facility pursuant to this SECTION 10.2 (unless the Lessee has exercised the Purchase Option in accordance with Section 10.1). If the Lessee has exercised the Maturity Date Purchase Option, then on the Maturity Date the Lessee shall pay to the Lessor the Termination Value and, upon receipt of such amount plus all other amounts then due and payable under this Lease and any other Operative Agreement, the Lessor shall transfer, and cause the Board and the Bond Sublessor to transfer, to the Lessee or the Lessee's designee all of their right, title and interest in and to the Facility in accordance with SECTION 3.6. Upon receipt of such Maturity Date Election Notice, the Lessor will give, and cause the Bond Sublessor to give, similar notices exercising the comparable purchase options under the Bond Lease and the Bond Sublease. Notwithstanding anything herein to the contrary, the Lessee shall be deemed to have elected the Maturity Date Purchase Option if a Lease Event of Default has occurred and is continuing during the Marketing Period, unless the Indenture Trustee and the Lessor have consented to the Lessee's remarketing of the Facility under such circumstances, which consent may be withheld by either of them in their sole and absolute discretion. SECTION 10.3 SALE PROCEDURE. (a) During the Marketing Period, the Lessee, as nonexclusive broker for the Lessor, shall use best efforts to obtain bids for the cash purchase of the Facility for the highest price available in a commercially reasonable sale in the relevant market, shall notify the Lessor promptly of the name and address of each prospective purchaser and the cash price which each prospective purchaser shall have offered to pay for the Facility and shall provide the Lessor with such additional information about the bids and the bid solicitation procedure as the Lessor may request from time to time. The Lessor may reject any and all bids and may also obtain bids for the purchase of the Facility; provided, however, that notwithstanding the foregoing, the Lessor shall accept the highest bid providing for the sale of the Facility if such bid is greater than or equal to the sum of the Non-Guaranteed Residual Amount and all costs and expenses referred to in SECTION 10.4(i) and is a bona fide offer by a third party purchaser who is not an Affiliate of the Lessee. If, ten Business Days prior to the Maturity Date, no prospective purchaser shall have offered to pay for the Facility in an amount equal to or greater than the sum of the Non-Guaranteed Residual Amount and all costs and expenses referred to in SECTION 10.4(i), the Lessor may elect to retain the Facility by giving the Lessee at least two (2) Business Days' prior written notice of the Lessor's election to retain the Facility, and upon receipt of such notice, the - 26 - Lessee shall surrender the Facility to the Lessor on the Maturity Date and pay the Lessor the amounts provided for in SECTION 10.3(b). Unless the Lessor shall have elected to retain the Facility pursuant to the preceding sentence, the Lessor, or the Lessee on its behalf, shall sell the Facility free of any Lessor Liens, without recourse or warranty, for cash to the purchaser or purchasers identified by the Lessee or the Lessor, as the case may be, and the Lessee shall surrender the Facility so sold to the purchaser in the condition specified in SECTION 3.7. Failure to sell the Facility shall not constitute a Lease Event of Default so long as the Lessee has complied with its obligations set forth in this SECTION 10.3. (b) If the Facility has not been sold on or prior to the Maturity Date for any reason whatsoever, then on the Maturity Date, (i) the Lessee shall pay to the Lessor the Maximum Residual Guarantee Amount and all Supplemental Rent and other amounts then owing hereunder or under the other Operative Agreements and (ii) this Lease and all of the Lessee's right, title and interest in the Facility shall terminate, and the Lessee shall surrender the Facility in the condition specified in SECTION 3.7. Thereafter, the Lessee will use commercially reasonable efforts to assist the Lessor in remarketing the Facility and transfer its interest therein to the Lessor. SECTION 10.4 APPLICATION OF PROCEEDS FROM SALE. The Lessor shall apply the proceeds of sale of the Facility in the following order of priority: (i) FIRST, to pay or to reimburse the Lessor and the Lessee for the payment of all reasonable costs and expenses incurred by the Lessor in connection with the sale; and (ii) SECOND, the balance shall be paid to the Indenture Trustee to be applied pursuant to the provisions of the Indenture. SECTION 10.5 INDEMNITY FOR EXCESSIVE WEAR. If the proceeds of the sale described in SECTION 10.3(a), less all expenses incurred by the Lessor and the Lessee in connection with such sale, shall be less than the Non-Guaranteed Residual Amount (such difference, the "Net Sale Proceeds Shortfall") and if it shall have been determined (pursuant to the Appraisal Procedure) that the Fair Market Sales Value of the Facility shall have been impaired by greater than expected wear and tear during the Term, the Lessee shall pay to the Lessor within ten (10) days after receipt of the Lessor's written statement (i) the amount of such excess wear and tear determined by the Appraisal Procedure set forth in SECTION 10.6 or (ii) the amount of the Net Sale Proceeds Shortfall, whichever amount is less. SECTION 10.6 APPRAISAL PROCEDURE. For determining the Fair Market Sales Value of the Facility or any other amount which may, pursuant to any provision of any Operative Agreement, be determined by an appraisal procedure, the Lessor and the Lessee shall use the following procedure (the "Appraisal Procedure"). The Lessor and the Lessee shall endeavor to reach an agreement as to such amount for a period often (10) days from commencement of the Appraisal Procedure, and if they cannot agree within ten (10) days, then two qualified appraisers, one chosen by the Lessee and one chosen by the Lessor, shall agree thereupon, but if either party shall fail to choose an appraiser within twenty (20) days after notice from the other party of the selection of its appraiser, then the appraisal by such appointed appraiser shall be binding on the Lessee and the Lessor. If the two appraisers cannot agree within twenty (20) days after both shall have been appointed, then a third appraiser shall be selected by the two appraisers or, failing agreement as to such third appraiser within thirty (30) days after both shall have been appointed, by the American Arbitration Association. The decisions of the three appraisers shall be given within twenty (20) days of the appointment of the third appraiser and the decision of the - 27 - appraiser most different from the average of the other two shall be discarded and such average shall be binding on the Lessor and the Lessee; provided that if the highest appraisal and the lowest appraisal are equidistant from the third appraisal, the third appraisal shall be binding on the Lessor and the Lessee. The reasonable fees and expenses of all of the appraisers shall be paid by the Lessee. SECTION 10.7 CERTAIN OBLIGATIONS CONTINUE. During the Marketing Period, the obligation of the Lessee to pay Rent with respect to the Facility (including the installment of Basic Rent and all Supplemental Rent due on the Maturity Date) shall continue undiminished until payment in full, without duplication, to the Lessor of the sale proceeds, the Maximum Residual Guarantee Amount, if any, the amount due under SECTION 10.5, (ii) any, and all other amounts due to the Lessor with respect to the Facility. The Lessor shall have the right, but shall be under no duty, to solicit bids, to inquire into the efforts of the Lessee to obtain bids or otherwise to take action in connection with any such sale, other than as expressly provided in this Article. ARTICLE XI DEFAULTS AND REMEDIES SECTION 11.1 EVENTS OF DEFAULT. If any one or more of the following events shall occur (each a "Lease Event of Default"): (a) Default in the due and punctual payment of (i) Basic Rent or Supplemental Rent (except to the extent such Supplemental Rent represents the payment of the Maximum Residual Guarantee Amount or the Termination Value) when the same has become due and payable and such default shall have continued for three days or (ii) the Maximum Residual Guarantee Amount or the Termination Value when the same has become due and payable; or (b) Default in the due observance or performance of (x) Article VI or (y) any covenant, agreement, obligation or provision of this Lease or any other Operative Agreements on the Lessee's part to be observed or performed (except as specified elsewhere in this SECTION 11.1), and such default shall continue for thirty (30) days after the Lessee has been given a notice specifying such default; provided that such 30-day period shall be extended (up to a maximum period of 180 days) as to defaults which cannot be cured with the payment of money but are curable, though not reasonably capable of cure within such 30-day period, so long as the Lessee has commenced to cure such default prior to the end of such 30-day period and prosecutes such cure to completion and such extension, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect; or (c) Any Agency Agreement Event of Default, any default under the Guarantee, any event of default under the Escrow Agreement or any Indenture Event of Default; or (d) The Lessee shall: (1) admit in writing its inability to pay its debts as they become due; or (2) file a petition in bankruptcy or for reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the federal bankruptcy laws of the United States of America or any other similar present or future - 28 - federal or state statute or regulation, or file a pleading asking for such relief; or (3) make an assignment for the benefit of creditors; or (4) consent to the appointment of a trustee, receiver or liquidator for all or a major portion of its property or fail to have the appointment of any trustee, receiver or liquidator vacated or set aside; or (5) be finally adjudicated as bankrupt or insolvent under any federal or state law; or (6) be subject to any proceeding, or suffer the entry of a final and non-appealable court order, under any federal or state law appointing a trustee, receiver or liquidator for all or a major part of its property or ordering the winding-up or liquidation of its affairs, or approving a petition filed against it under the federal bankruptcy laws of the United States of America, which order or proceeding shall not be dismissed, vacated, denied, set aside or stayed within sixty (60) days after the day of entry or commencement; or (e) The Lessee shall vacate or abandon the Facility, or shall have been ejected from the Facility or any material portion thereof by reason of a defect in title to the Facility or violation of any Legal Requirement; or (f) Default under any Indebtedness of the Lessee (after the expiration of any applicable grace period) in making any payment in respect thereof or any default or other event shall occur or condition shall exist in respect of any Indebtedness, the effect of which is to cause, or permit any holder of such Indebtedness to cause, such Indebtedness to become due before its stated maturity or before its regularly scheduled dates of payment; or (g) A judgment, decree, writ, warrant of attachment or similar process in an amount equal to or exceeding, individually or in the aggregate, $500,000 shall be entered against the Lessee or the Facility that is not satisfied, vacated, discharged, appealed from (with execution or similar process continuously stayed) within thirty (30) days of such entry; or (h) Any representation or warranty of the Lessee set forth in any Operative Agreement or in any certificate delivered pursuant thereto shall be incorrect in any material respect when made; then, in any such event, the Lessor may, in addition to the other rights and remedies provided for in this Lease, terminate this Lease by giving the Lessee five (5) days notice of such termination, whereupon this Lease shall terminate. The Lessee shall pay as Supplemental Rent all costs and expenses incurred by or on behalf of the Lessor and the Indenture Trustee, including fees and expenses of counsel, as a result of any Lease Event of Default hereunder. SECTION 11.2 FINAL LIQUIDATED DAMAGES. If a Lease Event of Default shall have occurred and be continuing, the Lessor shall have the right to recover, by demand upon the Lessee, and the Lessee shall pay to the Lessor, without duplication, as final liquidated damages (but without limiting its obligations hereunder or under the other Operative Agreements to indemnify the Lessor, the Indenture Trustee and each other Indemnified Person), and in lieu of all damages beyond the date of such demand, the sum of (a) the Termination Value, plus (b) all Supplemental Rent and other amounts accruing under this Lease. Upon payment of such sum, the Lessee shall be entitled to receive, at the Lessee's request and cost, the conveyance and assignment of the Board's, the Bond Sublessor's, and the Lessor's right, title and interest in the Facility, in each case in recordable form and otherwise in conformity with local custom and free and clear of the Lien of the Security Documents and any Lessor Liens. The Facility shall be - 29 - conveyed to the Lessee (or the Lessee's designee) "AS IS" in all respects. If any statute or rule of law shall limit the amount of such final liquidated damages to less than the amount agreed upon, the Lessor shall be entitled to the maximum amount allowable under such statute or rule of law, but the Lessee shall not be entitled to receive the conveyance and assignment of the Facility unless the Lessee shall have paid in full the sum specified in the first sentence of this Section. SECTION 11.3 LEASE REMEDIES. If the Lessor is unable to enforce the remedies set forth in Section 11.2 against the Lessee and the Facility, the following remedies shall be available to the Lessor with respect to the Lessee and the Facility: (a) Surrender of Possession. If a Lease Event of Default shall have occurred and be continuing, and whether or not this Lease shall have been terminated pursuant to SECTION 11.1, the Lessee shall, upon thirty (30) days written notice, surrender to the Lessor possession of the Facility and the Lessee shall quit the same. The Lessor may enter upon and repossess the Facility by the means as are available at law or in equity, and may remove the Lessee and all other Persons and remove or retain any and all personal property and the Lessee's equipment and personality and severable Modifications from the Facility. The Lessor shall have no liability by reason of any such entry, repossession, removal or retention performed in accordance with applicable law. (b) Reletting. If a Lease Event of Default shall have occurred and be continuing, and whether or not this Lease shall have been terminated pursuant to SECTION 11.1, the Lessor may, but shall be under no obligation to, relet all, or any portion, of the Facility; for the account of the Lessee or otherwise, for such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the Term) and on such conditions (which may include concessions or free rent) and for such purposes as the Lessor may determine, and the Lessor may collect, receive and retain the rents resulting from such reletting. The Lessor shall not be liable to the Lessee for any failure to relet the Facility or for any failure to collect any rent due upon such reletting. (c) Damages. None of (a) the termination of this Lease pursuant to SECTION 11.1; (b) the repossession of the Facility; or (c) except to the extent required by applicable law, the failure of the Lessor to relet all, or any portion, of the Facility, the reletting of all or any portion thereof, or the failure of the Lessor to collect or receive any rentals due upon any such reletting shall relieve the Lessee of its liability and obligations hereunder, all of which shall survive any such termination, repossession or reletting. If any Lease Event of Default shall have occurred and be continuing and notwithstanding any termination of this Lease pursuant to SECTION 11.1, the Lessee shall forthwith pay to the Lessor all Basic Rent, Supplemental Rent (including the Termination Value) and other sums due and payable hereunder to and including the date of such termination. Thereafter, on the days on which the Basic Rent or Supplemental Rent, as applicable, are payable under this Lease or would have been payable under this Lease if the same had not been terminated pursuant to SECTION 11.1 and until the end of the Term or what would have been the Term in the absence of such termination the Lessee shall pay the Lessor as current liquidated damages (it being agreed that it would be impossible accurately to determine actual damages) an amount equal to the Basic Rent and Supplemental Rent that are payable under this Lease or would have been payable by the Lessee hereunder if this Lease had not been terminated pursuant to SECTION 11.1, less the net proceeds, if any, which are actually received by the Lessor with respect to the period in question of any reletting of the Facility or any portion thereof; provided that the Lessee's obligation to make payments of Basic Rent and Supplemental Rent under this SECTION 11.3 shall continue only so long as the Lessor shall not have received the - 30 - amounts specified in SECTION 11.2 or SECTION 11.3(d). In calculating the amount of such net proceeds from reletting, there shall be deducted all of the Lessor's, the Indenture Trustee's and any Noteholder's expenses in connection therewith, including repossession costs, brokerage commissions, fees and expenses for counsel and any necessary repair or alteration costs and expenses incurred in preparation for such reletting. To the extent the Lessor receives any damages pursuant to this SECTION 11.3, such amounts shall be regarded as amounts paid on account of Rent. (d) Acceleration of Rent. If a Lease Event of Default shall have occurred and be continuing, and this Lease shall not have been terminated pursuant to SECTION 11.1, and whether or not the Lessor shall have collected any current liquidated damages pursuant to SECTION 11.3(c), the Lessor may upon written notice to the Lessee (to the extent permitted by applicable law) accelerate all payments of Basic Rent due hereunder and, upon such acceleration, the Lessee shall immediately pay the Lessor, as final liquidated damages and in lieu of all current liquidated damages on account of such Lease Event of Default beyond the date of such acceleration (it being agreed that it would be impossible accurately to determine actual damages) an amount equal to the sum of(a) all Basic Rent (assuming interest at a rate per annum equal to the Overdue Rate), as applicable, due from the date of such acceleration until the end of the Term, (b) the Maximum Residual Guarantee Amount that would be payable under SECTION 10.3(b) assuming the proceeds of the sale pursuant to such SECTION 10.3(a) are equal to zero, which sum is then discounted to present value at a rate equal to the rate then being paid on United States treasury securities with maturities corresponding to the then remaining Term plus 0.50%. Following payment of such amount by the Lessee, so long as this Lease shall not have been terminated pursuant to SECTION 11.1, the Lessee will be permitted to stay in possession of the Facility for the remainder of the Term, subject to the terms and conditions of this Lease, including the obligation to pay Supplemental Rent. if any statute or rule of law shall limit the amount of such final liquidated damages to less than the total amount of Rent for which this Lease expressly provides, the Lessor shall be entitled to the maximum amount allowable under such statute or rule of law, but the Lessee shall not be relieved of its obligations hereunder unless the Lessee shall have paid in full the Termination Value plus all Supplemental Rent and other amounts of Rent for which this Lease expressly provides. SECTION 11.4 WAIVER OF CERTAIN RIGHTS. If this Lease shall be terminated pursuant to Section 11.1, the Lessee waives, to the fullest extent permitted by law, (a) any notice of re-entry or the institution of legal proceedings to obtain re-entry or possession; (b) any right of redemption, re-entry or repossession; (c) the benefit of any laws now or hereafter in force exempting property from liability for rent or for debt; and (d) any other rights which might otherwise limit or modify any of the Lessor's nights or remedies under this Article XI. SECTION 11.5 ASSIGNMENT OF RIGHTS. Under Contracts if a Lease Event of Default shall have occurred and be continuing and whether or not this Lease shall have been terminated pursuant to SECTION 11.1 the Lessee shall upon the Lessor's demand immediately assign, transfer and set over to the Lessor all of the Lessee's right, title and interest in and to each agreement executed by the Lessee in connection with the construction, renovation, development, use or operation of the Facility (including all right, title and interest of the Lessee with respect to all warranty, performance, service and indemnity provisions). SECTION 11.6 SURVIVAL OF OBLIGATIONS. The Lessee covenants and agrees with the Lessor, the Bond Trustee, the Indenture Trustee and Noteholders that its obligations under this Lease shall survive the cancellation and termination of this Lease, for any cause, and that the - 31 - Lessee shall continue to pay the Basic Rent and Supplemental Rent and perform all other obligations provided for in this Lease, all at the time or times provided in this Lease; provided, however, that upon the payment of all Basic Rent and Supplemental Rent required under Article IV hereof, and upon the satisfaction and discharge of the Bond Indenture and the Indenture, the Lessee's obligation under this Lease shall thereupon cease and terminate in full. SECTION 11.7 PERFORMANCE OF THE LESSEE'S OBLIGATIONS BY THE LESSOR, THE BOND TRUSTEE OR THE INDENTURE TRUSTEE. If the Lessee shall fail to keep or perform any of its obligations as provided in this Lease, then the Lessor, the Bond Trustee or the Indenture Trustee may (but shall not be obligated to), and without waiving or releasing the Lessee from any obligation hereunder, as an additional but not exclusive remedy, perform such obligation, and all amounts paid by the Lessor, the Bond Trustee or the Indenture Trustee and all necessary incidental reasonable costs and expenses incurred by the Lessor, the Bond Trustee or the Indenture Trustee in performing such obligations shall be deemed Supplemental Rent and shall be paid to the Lessor, the Bond Trustee or the Indenture Trustee on demand, and if not so paid by the Lessee, the Lessor, the Bond Trustee or the Indenture Trustee shall have the same rights and remedies provided for in this Article XI for a default in the payment of Basic Rent. SECTION 11.8 RIGHTS AND REMEDIES CUMULATIVE. The rights and remedies provided herein and those available at law, equity or otherwise, including any mortgage foreclosure remedies provided under the laws of the State of Missouri, shall be construed as cumulative and continuing rights and remedies, in addition to (and not in limitation of) one another. None of them shall be exhausted by the exercise of any of them on one or more occasions. The Lessor, the Bond Trustee and the Indenture Trustee shall each be entitled to specific performance and injunctive or other equitable relief for any breach or threatened breach of any of the provisions of this Lease, notwithstanding availability of an adequate remedy at law, and the Lessee hereby waives the right to raise such defense in any proceeding in equity. SECTION 11.9 WAIVER OF BREACH. No waiver of any breach of any covenant or agreement herein contained shall operate as a waiver of any subsequent breach of the same covenant or agreement or as a waiver of any breach of any other covenant or agreement, and in case of a breach by the Lessee of any covenant, agreement or undertaking, the Lessor, the Bond Trustee or the Indenture Trustee may nevertheless accept from the Lessee any payment or payments hereunder without in any way waiving the Lessor's, the Bond Trustee's or the Indenture Trustee's right to exercise any of its rights and remedies provided for herein with respect to any such default or defaults of the Lessee which were inexistence at the time such payment or payments were accepted by the Lessor, the Bond Trustee or the Indenture Trustee. Notwithstanding anything else contained herein, so long as any Bond or any Note is outstanding, any action by the Bond Trustee or the Indenture Trustee automatically binds the Lessor with respect to such action. SECTION 11.10 INDENTURE TRUSTEE'S EXERCISE OF THE LESSOR'S REMEDIES. Whenever any Lease Event of Default shall have occurred and be continuing, the Indenture Trustee may, but shall not be obliged to, exercise any or all of the rights of the Lessor under this Article. In addition, the Indenture Trustee shall have available to it all of the remedies prescribed by the Indenture. - 32 - ARTICLE XII ASSIGNMENT AND SUBLEASE SECTION 12.1 ASSIGNMENT; SUBLEASE. (a) Subject to the provisions of the Operative Agreements and so long as no Lease Event of Default has occurred and is continuing, the Lessee shall have the right to assign, transfer, encumber or dispose of this Lease, but only with the written consent of all of the Board, the Bond Sublessor, the Lessor, the Investor, the Bond Trustee and the Indenture Trustee (it being understood that such consent may be given or withheld by any of such parties in its absolute discretion); and any assignment of this Lease by the Lessee without such consents shall be void. With respect to any assignment, the Lessee shall comply with the following conditions: (1) Such assignment shall be in writing, duly executed and acknowledged by the assignor and in proper form for recording; (2) Such assignment shall include the entire then unexpired term of this Lease; (3) A duplicate original of such assignment shall be delivered to the Board, the Bond Sublessor, the Lessor, the Investor, the Bond Trustee and the Indenture Trustee within ten (10) days after the execution thereof, together with an assumption agreement, duly executed and acknowledged by the assignee in proper form for recording, by which the assignee shall assume all of the terms, covenants and conditions of this Lease on the part of the Lessee to be thereafter performed and observed; (4) At the time of any such assignment there shall be no damage or destruction to the Facility which has not been repaired, restored and replaced in accordance with the provisions of this Lease, unless sufficient funds then held by the Lessee for the purposes of such repair, restoration and replacement are simultaneously transferred to the assignee; and (5) all Rent and all other amounts accruing under this Lease and the other Operative Agreements up to and including the effective date of the assignment shall have been paid in full. Upon the satisfaction of the conditions set forth herein, the assignor shall be relieved of all further liability occurring on and after the effective date of such assignment. (b) Subject to the provisions of the Operative Agreements, the Lessee shall have the right to sublet all or any portion of the Facility. No sublease of the Facility, or any portion thereof, shall release or discharge the Lessee from its primary liability for the payment of the Basic Rent and Supplemental Rent hereunder and the performance of all of the covenants and agreements herein contained, and its duties and obligations under this Lease shall continue as if no such sublease had been made. The Lessee shall, within ten (10) days after the delivery thereof, furnish or cause to be furnished to the Board, the Bond Sublessor, the Lessor, the Bond Trustee and the Indenture Trustee a true and correct copy of each such sublease. Any sublease -33- may provide, at the Lessor's option, that the Lessor's consent shall not be required in respect of any further subletting thereunder if such further subletting is for a similar purpose as the original sublease and is for a purpose permissible under this Lease. SECTION 12.2 ASSIGNMENT BY THE LESSOR. The Lessor shall assign and pledge its interest in this Lease to the Bond Trustee pursuant to the Assignment of Lease, as security for payment of the principal of, premium, if any, and interest on, the Bonds and the Notes and the Lessee shall consent to such pledge and assignment pursuant to the Consent to Assignment. SECTION 12.3 ASSIGNMENT OF LEASE. In order to secure the payment and performance of the obligations of the Lessee under this Lease, the Lessee hereby pledges and assigns to the Lessor all right, title and interest of the Lessee in, to and under this Lease pursuant to the Lessee Leasehold Deed of Trust. ARTICLE XIII AMENDMENTS, CHANGES AND MODIFICATIONS SECTION 13.1 AMENDMENTS, CHANGES AND MODIFICATIONS. This Lease may not be amended, changed, modified, altered or terminated without the prior written consent of the Indenture Trustee and the Bond Trustee, given in accordance with the provisions of the Indenture and the Bond Indenture (which consent may be withheld in the Indenture Trustee's and the Bond Trustee's absolute discretion), and any agreement or writing purporting to do so will be void ab initio. ARTICLE XIV MISCELLANEOUS PROVISIONS SECTION 14.1 NOTICES. All notices, certificates or other communications required or desired to be given hereunder shall be in writing and shall be deemed duly given when mailed by registered or certified mail, postage prepaid, or sent by reputable overnight delivery, addressed as follows: (a) To the Board Missouri Development Finance Board Harry S. Truman Building, Room 680 301 West High Street Jefferson City, Missouri 65108 ATTN: Executive Director (b) To the Bond Trustee: State Street Bank and Trust Company of Missouri, N.A. One Metropolitan Square, Suite 3900 211 North Broadway St. Louis, Missouri 63102 ATTN: Corporate Trust Department (c) To the Bond O'Fallon Public Facilities Authority Sublessor: 100 N. Main Street O'Fallon, Missouri 63366 ATTN: President -34- (d) To the Lessor: MCI O'Fallon 1999 Trust c/o Wilmington Trust Company 1100 North Market Street Rodney Square North, Wilmington, Delaware 19890-0001 (e) To the Lessee: MasterCard International Incorporated 2000 Purchase Street Purchase, NY 10577-2509 ATTN: General Counsel With a copy to: MasterCard International Incorporated 2000 Purchase Street Purchase, NY 10577-2509 ATTN: General Counsel (f) To the Indenture State Street Bank and Trust Company of Trustee: Missouri, N.A. One Metropolitan Square, 39th Floor 211 North Broadway St. Louis, Missouri 63102 ATTN: Corporate Trust Division All notices shall be deemed given as of the date of receipt. A duplicate copy of each notice, certificate or other communication given hereunder by a party to another party shall also be given to the Indenture Trustee. The Board, the Bond Sublessor, the Bond Trustee, the Indenture Trustee, the Lessor, and the Lessee may from time to time designate, by notice given hereunder to the others of such parties, such other address to which subsequent notices, certificates or other communications shall be sent. SECTION 14.2 NET LEASE. The parties hereto agree (a) that this Lease shall be deemed and construed to be a net lease, (b) that the payments of Basic Rent and Supplemental Rent are designed to provide the Lessor funds adequate in amount to pay all principal of, premium, if any, and interest accruing on the Bonds and the Notes and the Investor Yield and the return of the Investor Contribution (and any Investor Premium), as the same become due and payable, (c) that to the extent that the specified payments of Rent are not sufficient to provide the Lessor with funds sufficient for the purposes aforesaid, the Lessee shall be obligated to pay, and it does hereby covenant and agree to pay, upon demand therefor, as Supplemental Rent, such further sums of money, in cash, as may from time to time be required for such purposes, and (d) that if after the principal of, premium, if any, and interest on the Notes and the Investor Yield and the return of the Investor Contribution, and all costs incident to the payment thereof, have been paid in full the Lessor holds unexpended funds received in accordance with the terms hereof, such unexpended funds shall, after payment therefrom of all sums then due and owing by the Lessee under the terms of this Lease, and except as otherwise provided in this Lease, the Bond Documents and the Indenture, become the absolute property of and be paid over forthwith to the Lessee. -35- SECTION 14.3 RISK OF LOSS. The risk of loss of or decrease in the enjoyment and beneficial use of the Facility as a result of the damage or destruction thereof by fire, the elements, casualties, thefts, riots, wars or otherwise is assumed by the Lessee, and the Lessor shall in no event be answerable or accountable therefor. SECTION 14.4 GOVERNING LAW. TO THE EXTENT THIS LEASE IS REQUIRED UNDER APPLICABLE LAW TO BE TREATED AS A LEASE RATHER THAN AS A FINANCING ARRANGEMENT, THIS LEASE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF MISSOURI AND, TO THE EXTENT THIS LEASE MAY BE TREATED AS A FINANCING ARRANGEMENT, IT SHALL BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK EXCLUDING ALL CHOICE OF LAW AND CONFLICT OF LAWS RULES THAT WOULD APPLY THE LAW OF ANY OTHER STATE. SECTION 14.5 BINDING EFFECT. This Lease shall be binding upon and shall inure to the benefit of the Lessor and the Lessee and their respective successors and permitted assigns. SECTION 14.6 SEVERABILITY. If for any reason any provision of this Lease shall be determined to be invalid or unenforceable, the validity and enforceability of the other provisions hereof shall not be affected thereby. SECTION 14.7 EXECUTION IN COUNTERPARTS. This Lease may be executed simultaneously in several counterparts, each of which shall be deemed to be an original and all of which shall constitute but one and the same instrument. SECTION 14.8 ESTOPPEL CERTIFICATES. At any time and from time to time upon not less than twenty (20) days' prior request by the Lessor or the Lessee (the "REQUESTING PARTY"), the other party (whichever party shall have received such request, the "CERTIFYING PARTY") shall furnish to the Requesting Party a certificate signed by an individual having the office of vice president or higher in the Certifying Party certifying that this Lease is in full force and effect (or that this Lease is in full force and effect as modified and setting forth the modifications); the dates to which the Basic Rent and Supplemental Rent have been paid; and, to the knowledge of the signer of such certificate, whether or not the Requesting Party is in default under any of its obligations hereunder (and, if so, the nature of such alleged default). Any such certificate furnished pursuant to this SECTION 14.8 may be relied upon by the Requesting Party (provided that such reliance shall not relieve such Requesting Party from its obligations hereunder or under any other Operative Agreements), and any existing or prospective mortgagee, purchaser or lender, and any accountant or auditor, of, from or to the Requesting Party (or any Affiliate thereof). SECTION 14.9 MEMORANDUM OF LEASE. This Lease shall not be recorded, but the Lessor and the Lessee shall, upon the Closing Date, execute and deliver a short-form memorandum of this Lease (a "MEMORANDUM OF LEASE") in form suitable for recording under the laws of Missouri, which memorandum shall be recorded at the Lessee's sole cost and expense. SECTION 14.10 NO MERGER. There shall be no merger of this Lease, or the leasehold estate created by this Lease, with any other estate or interest in the Facility, or any part thereof, by reason of the fact that the same person may acquire, own or hold, directly or indirectly, (i) this Lease or the leasehold estate created by this Lease, or any interest in this Lease -36- or in any such leasehold estate, and (ii) any such other estate or interest in the Facility or any part thereof; and no such merger shall occur unless and until all persons having an interest (including a security interest) in (a) this Lease or the leasehold estate created by this Lease and (b) any such other estate or interest in the Facility or any part thereof, shall join in a written instrument effecting such merger and shall duly record the same. [The remainder of this page intentionally left blank.] -37- EXHIBIT A 52 acres A tract of land being part of Fractional Section 13 and part of Lot 23 of the "Walnut Grove Tract" in U.S. Survey 1669, Township 46 North, Range 2 East, St. Charles County, Missouri and being more particularly described as follows: Beginning at the intersection of the Southwestern line of said U.S. Survey 1669 with the Northern line of U.S. Survey 1641, said point being the Southwestern corner of said Lot 23 of the "Walnut Grove Tract," said point also being the Southeast corner of property conveyed to McEagle-O'Fallon, L.C. by deed recorded in Book 1989, page 316 of the St. Charles County Records; thence along the common line between said U.S. Survey 1641 and said Fractional 13, South 82 degrees 34 minutes 07 seconds West, 1,014.38 feet to a point, said point being the Southwest corner of said McEagel-O-Fallon; thence along the Southwestern line of McEagle-O'Fallon, North 18 degrees 40 minutes 53 seconds West, 762.00 feet to a Iron Pipe; thence South 89 degrees 20 minutes 07 seconds West, 236.96 feet to an Iron Pipe; thence South 49 degrees 01 minutes 37 seconds West, 278.60 feet to an Iron Pipe on the existing Northeastern right-of-way line of Highway 40-61, said point being 88.50 feet perpendicular Northeasterly from existing centerline station 322+47.5; thence leaving said Northeastern right-of-way line, North 34 degrees 48 minutes 36 seconds West, 156.56 feet to a point, said point being 92.21 feet perpendicular Northeasterly from existing centerline station 320-91.0; thence North 20 degrees 14 minutes 05 seconds West, 216.00 feet to a point, said point being 151.51 feet perpendicular Northeasterly from existing centerline station 318+83.3; thence North 14 degrees 45 minutes 35 seconds West, 149.18 feet to a point, said point being 205.97 feet perpendicular Northeasterly from existing centerline station 317+44.4; thence North 5 degrees 11 minutes 43 seconds West, 148.14 feet to a point, said point, said point, said point being 205.97 feet perpendicular Northeasterly from existing centerline station 317+44.4; thence North 5 degrees 11 minutes 43 seconds West, 148.14 feet to a point, said point being 282.20 feet perpendicular Northeasterly from existing centerline station 316+17.4; thence North 4 degrees 26 minutes 08 seconds East, 148.75 feet to a point, said point being 379.02 feet perpendicular Northeasterly from existing centerline station 315+04.5; thence North 14 degrees 05 minutes 19 seconds East, 148.55 feet to a point, said point being 493.24 feet perpendicular Northeasterly from existing centerline station 314+09.5; thence North 18 degrees 56 minutes 07 seconds East, 103.32 feet to a point, said point being 578.00 feet perpendicular Northeasterly from existing centerline station 313+50.4; thence South 69 degrees 32 minutes 53 seconds East, 60.30 feet; thence South 18 degrees 32 minutes 53 seconds East, 30.75 feet; thence North 71 degrees 27 minutes 07 seconds East, 264.44 feet; thence North 89 degrees 56 minutes 28 seconds East, 112.33 feet; thence South 62 degrees 54 minutes 33 seconds East, 197.46 feet; thence South 49 degrees 19 minutes 53 seconds East, 165.21 feet; thence South 79 degrees 27 minutes 53 seconds East, 1,110.50 feet; thence South 44 degrees 35 minutes 23 seconds East, 669.00 feet; thence South 14 degrees 40 minutes 37 seconds West, 332.23 feet to a point on the Northern line of a tract of land conveyed to Ira C. and Lillian Jones by Alfred Selfen, Et al, by deed recorded in Book 372, page 7 of the St. Charles County Records; thence along said Northern line of Jones, South 82 degrees 08 minutes 07 seconds West, 475.86 feet to a point on the Southwestern of said U.S. Survey 1669; thence along said Southwestern line, South 26 degree 46 minutes 13 seconds East, 211.46 feet to the point of beginning and containing 52.08 acres according to survey by The Clayton Engineering Company March, 1999. EXHIBIT B IMPROVEMENTS All buildings, structures, improvements and fixtures located on or to be purchased, constructed and otherwise improved on the Land, including the Facility or pursuant to ARTICLE VII of the Lease, and in any case which paid for in whole or in part from the proceeds of Bonds and all additions, alterations, modifications and improvements thereof made pursuant to the Bond Sublease, the Bond Lease or this Lease. EXHIBIT C EQUIPMENT All items of machinery, equipment and parts or other personal property installed or acquired or to be acquired for installation in the Improvements or elsewhere on the Land, including the Facility or pursuant to ARTICLE VII of the Lease, and in any case when paid for in whole or in part from the proceeds of Bonds and all replacements thereof and substitutions therefor made pursuant to the Bond Sublease, the Bond Lease or this Lease. MEMORANDUM OF LEASE THIS MEMORANDUM OF LEASE is made as of the 31st day of August, 1999, between MCI O'Fallon 1999 Trust, a Delaware business trust (the "LANDLORD") and MasterCard International Incorporated, a non-stock membership corporation organized under the laws of the State of Delaware ("TENANT"). W I T N E S S E T H WHEREAS, Landlord is the owner of a subleasehold estate in and to the real estate described in EXHIBIT A hereto and by this reference incorporated herein (the "PREMISES"); and WHEREAS, pursuant to a Lease, dated as of August 31, 1999, between Landlord and Tenant (the "LEASE"), Landlord leased the Premises to Tenant; and WHEREAS, Landlord and Tenant desire to give notice of the existence of the Lease; NOW, THEREFORE, in consideration of the covenants and agreements on the part of Tenant set forth in the Lease, Landlord does hereby demise and lease to Tenant and Tenant does hereby take and lease from Landlord the Premises, subject to the terms and conditions set forth in the Lease. The term of the Lease commences on August 31, 1999, and ends on September 1, 2009. The Lease grants to Tenant an option to extend the term of the Lease for one (1) extension term of ten (10) years. The Lease contains an option in favor of Tenant to purchase the Premises on the terms and conditions set forth therein. The Lease is subject and subordinate to the instruments set forth in EXHIBIT B hereto and by reference incorporated herein. Notice is hereby given that the Lease contains numerous terms, covenants, provisions and conditions not required to be set forth in memoranda of leases and/or in memoranda of executory contracts and options. This Memorandum is subject in all events to all of the terms, covenants, provisions and conditions in the Lease contained, to which reference is hereby made, which Lease shall govern in the event of any conflict between any of the terms, provisions and conditions thereof, and the terms of this Memorandum. IN WITNESS WHEREOF, the parties have executed this Memorandum of Lease as of the day and year first above written. MCI O'FALLON 1999 TRUST By First Bank of Missouri, not in its individual Capacity but solely as co-trustee [SEAL] By:/s/Matt J. McLaughlin ------------------------------ Name: Matt J. McLaughlin ------------------------------ Title: Vice President ------------------------------ MASTERCARD INTERNATIONAL INCORPORATED By: ------------------------------ Its: ------------------------------ [SEAL] STATE OF KANSAS ) ) SS. COUNTY OF WYANDOTTE ) On this 30th day of August, 1999, before me appeared Matt McLaughlin to, me personally known, who, being by me duly sworn, did say that he or she is the Vice President of First Bank of Missouri, the co-trustee of MCI O'Fallon 1999 Trust, a Delaware business trust, and that the seal affixed to the foregoing instrument is the seal of said Trust; and that said instrument was signed and sealed in behalf of said Trustee by authority of its Vice President; and said individual acknowledged said instrument to be the free act and deed of said Trust. IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my official seal in the City and State aforesaid, the day and year first above written. (SEAL) /s/Susan K. Baldwin --------------------------------------- Notary Public My term expires 07-21-02 2 STATE OF MISSOURI ) ) SS. CITY OF ST. LOUIS ) On this 30th day of August, 1999, before me appeared John D. Ranieri, to me personally known, who, being by me duly sworn, did say that he or she is the Vice President of the MasterCard International Incorporated, a non-stock membership corporation organized under the laws of the State of Delaware; and that the seal affixed to the foregoing instrument is the seal of said Corporation; and that said instrument was signed and sealed in behalf of said Corporation by authority of its Board of Directors; and said individual acknowledged said instrument to be the free act and deed of said Corporation. IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my official seal in the City and State aforesaid, the day and year first above written. (SEAL) /s/Linda L. Rands -------------------------------------- Notary Public My terms expires: August 20, 2002 3 EXHIBIT A 52 acres A tract of land being part of Fractional Section 13 and part of Lot 23 of the "Walnut Grove Tract" in U.S. Survey 1669, Township 46 North, Range 2 East, St. Charles County, Missouri and being more particularly described as follows: Beginning at the intersection of the Southwestern line of said U.S. Survey 1669 with the Northern line of U.S. Survey 1641, said point being the Southwestern corner of said Lot 23 of the "Walnut Grove Tract", said point also being the Southeast corner of property conveyed to McEagle-O'Fallon, L.C. by deed recorded in Book 1989, page 316 of the St. Charles County Records; thence along the common line between said U.S. Survey 1641 and said Fractional 13, South 82 degrees 34 minutes 07 seconds West, 1,014.38 feet to a point, said point being the Southwest corner of said McEagle-O'Fallon; thence along the Southwestern line of McEagle-O'Fallon, North 18 degrees 40 minutes 53 seconds West, 762.00 feet to a Iron Pipe; thence South 89 degrees 20 minutes 07 seconds West, 236.96 feet to an Iron Pipe; thence South 49 degrees 01 minutes 37 seconds West, 278.60 feet to an Iron Pipe on the existing Northeastern right-of-way line of Highway 40-61, said point being 88.50 feet perpendicular Northeasterly from existing centerline station 322+47.5; thence leaving said Northeastern right-of-way line, North 34 degrees 48 minutes 36 seconds West, 156.56 feet to a point, said point being 92.21 feet perpendicular Northeasterly from existing centerline station 320+91.0; thence North 20 degrees 14 minutes 05 seconds West, 216.00 feet to a point, said point being 151.51 feet perpendicular Northeasterly from existing centerline station 3 18+83.3; thence North 14 degrees 45 minutes 35 seconds West, 149.18 feet to a point, said point being 205.97 feet perpendicular Northeasterly horn existing centerline station 317+44.4; thence North 5 degrees 11 minutes 43 seconds West, 148.14 feet to a point, said point being 282.20 feet perpendicular Northeasterly from existing centerline station 316+17.4; thence North 4 degrees 26 minutes 08 seconds East, 148.75 feet to a point, said point being 379.02 feet perpendicular Northeasterly from existing centerline station 315+04.5; thence North 14 degrees 05 minutes 19 seconds East, 148.55 feet to a point, said point being 493.24 feet perpendicular Northeasterly from existing centerline station 314+09.5; thence North 18 degrees 56 minutes 07 seconds East, 103.32 feet to a point, said point being 578.00 feet perpendicular Northeasterly from existing centerline station 313+50.4; thence South 69 degrees 32 minutes 53 seconds East, 60.30 feet; thence South 18 degrees 32 minutes 53 seconds East, 30.75 feet; thence North 71 degrees 27 minutes 07 seconds East, 264.44 feet; thence North 89 degrees 56 minutes 28 seconds East, 112.33 feet; thence South 62 degrees 54 minutes 33 seconds East, 197.46 feet; thence South 49 degrees 19 minutes 53 seconds East, 165.21 feet; thence South 79 degrees 27 minutes 53 seconds East, 1,110.50 feet; thence South 44 degrees 35 minutes 23 seconds East, 669.00 feet; thence South 14 degrees 40 minutes 37 seconds West, 332.23 feet to a point on the Northern line of a tract of land conveyed to Ira C. and Lillian Jones by Alfred Selfen, Etal, by deed recorded in Book 372, page 7 of the St. Charles County Records; thence along said Northern line of Jones, South 82 degrees 08 minutes 07 seconds West, 475.86 feet to a point on the Southwestern of said U.S. Survey 1669; thence along said Southwestern line, South 26 degrees 46 minutes 13 seconds East, 211.46 feet to the point of beginning and containing 52.08 acres according to survey by The Clayton Engineering Company March, 1999. 4 EXHIBIT B SENIOR INSTRUMENTS 1. Bond Deed of Trust and Security Agreement dated as of August 31, 1999, from Missouri Development Finance Board (the "BOARD") to Steven E. Kushner, as trustee (the "MORTGAGE TRUSTEE") for the benefit of State Street Bank and Trust Company of Missouri, N.A., as bond trustee (the "BOND TRUSTEE"); 2. Bond Lease, dated as of August 31, 1999, between the Board, as lessor, and O'Fallon Public Facilities Authority (the "SUBLESSOR"), as lessee; 3. Bond Lease Leasehold Deed of Trust, dated as of August 31, 1999, from Sublessor to Mortgage Trustee for the benefit of Bond Trustee; 4. Bond Sublease, dated as of August 31, 1999, between Sublessor, as lessor, and Landlord, as lessee; and 5. Bond Sublease Leasehold Deed of Trust, dated as of August 31, 1999, from Landlord to Mortgage Trustee for the benefit of Bond Trustee. EX-10.4 8 y49195a2ex10-4.txt GUARANTEE Exhibit 10.4 GUARANTEE GUARANTEE dated as of August 31, 1999 made by MASTERCARD INTERNATIONAL INCORPORATED, a non-stock membership corporation organized under the laws of the State of Delaware (the "Guarantor"), in favor of STATE STREET BANK AND TRUST COMPANY OF MISSOURI, N.A., a national banking association, as Indenture Trustee (in such capacity, the "Indenture Trustee") for the Noteholders (the "Noteholders") under the Indenture, dated as of the date hereof (as amended, supplemented, extended or otherwise modified from time to time, the "Indenture"), from MCI O'Fallon 1999 Trust, a Delaware business trust (the "Borrower"), to the Indenture Trustee. Preliminary Statement Pursuant to the Note Purchase Agreement, dated as of the date hereof (as amended, supplemented, extended or otherwise modified from time to time, the "Series A Note Purchase Agreement"), the Noteholders have severally agreed to purchase from the Borrower a $149,380,000 aggregate principal amount of its 7.36% Series A Senior Secured Notes due September 1, 2009 (the "Series A Notes," such term to include any such Notes issued in substitution or replacement therefor under the Indenture), upon the terms and subject to the conditions set forth therein, issued by the Borrower under the Indenture. The Borrower has entered into the Series A Note Purchase Agreement for the purpose of facilitating the financing, with the proceeds of the Series A Notes, for the acquisition and construction of the Facility. The Borrower will sublease the Facility to the Lessee pursuant to the Lease, which will be assigned to the Bond Trustee for the benefit of Bondholders, as a security for the Bonds. The Borrower will use the proceeds of the Series A Notes, together with other funds, to purchase the Series A Bonds. The Series A Bonds will be endorsed to and registered in the name of the Indenture Trustee, and the rights, privileges and benefits of the Bondholders under the Bond Indenture will be assigned to the Indenture Trustee, in each case, for the benefit of the Noteholders. In the event that additional financing is needed to complete the Facility, the Borrower may, upon request of the Lessee and the Satisfaction of certain conditions in the Indenture and the Participation Agreement, issue its Series B Senior Secured Notes due September 1, 2009 (the "Series B Notes," such term to include any such Notes issued in substitution or replacement therefore under the Indenture, and together with the Series A Notes, the "Notes"), to be sold pursuant to a note purchase agreement substantially in the form of the Series A Note Purchase Agreement (as amended, supplemented, extended or otherwise modified from time to time, the "Series B Note Purchase Agreement," and together with the Series A Note Purchase Agreement, the "Note Purchase Agreements"). The Borrower will use the proceeds of the Series B Notes, together with other funds, to purchase the Series B Bonds. The Series B Bonds will be endorsed to and registered in the name of the Indenture Trustee, and the rights, privileges and benefits of the Bondholders under the Bond Indenture will be assigned to the Indenture Trustee, in each case, for the benefit of the Noteholders. It is a condition precedent to the obligation of the Purchasers to purchase Series A Notes from the Borrower under the Series A Note Purchase Agreement (and, if any Series B Notes are issued and sold, it will be a condition to the purchase thereof) that the Guarantor shall have executed and delivered this Guarantee to the Indenture Trustee for the ratable benefit of the Noteholders of Series A Notes and Series B Notes (if any), from time to time Outstanding. NOW, THEREFORE, in consideration of the premises and to induce the Indenture Trustee to enter into the Indenture and to induce the Purchasers to purchase the Series A Notes from the Borrower under the Series A Note Purchase Agreement (and, if any Series B Notes are issued and sold, to induce the purchasers thereof to purchase any such Series B Notes under the Series B Note Purchase Agreement), the Guarantor hereby agrees with the Indenture Trustee, for the ratable benefit of the Noteholders, as follows: 1. Defined Terms; Calculations and Computations. Capitalized terms not otherwise defined herein shall have the meanings set forth on Annex A to the Participation Agreement dated as of the date hereof among the Lessee, the Lessor, the Trust Company, the Investor, the Indenture Trustee and the Purchasers. 2. Guarantee. (a) Subject, only in the case of the Non-Guaranteed Residual Amount, to the limitations contained in Section 2(b), the Guarantor hereby unconditionally and irrevocably guarantees and agrees to act as a primary obligor and as a surety to the Indenture Trustee, for the ratable benefit of the Noteholders and their respective successors, indorsees, transferees and assigns, with respect to the prompt and complete payment and performance by the Borrower and the Lessee, as applicable, when due (whether at the stated maturity, by acceleration or otherwise) of each of the following (collectively, the "Guaranteed Obligations"): (i) the unpaid principal of and interest on the Notes and all other obligations and liabilities of the Borrower to the Indenture Trustee or the Noteholders (including any applicable Make Whole Premium, any interest accruing at the then applicable rate provided in respect of the Notes after the occurrence of an Indenture Event of Default and any such interest accruing at the then applicable rate provided in respect of the Notes after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower or the Lessee, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding), whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter incurred, which may arise under, out of, or in connection with, the Note Purchase Agreements, the Notes, the Indenture, the other Operative Agreements or any other document made, delivered or given in connection therewith, whether on account of principal, interest, any applicable Make Whole Premium, reimbursement obligations, fees, indemnities, costs, expenses or otherwise (including all reasonable fees and expenses of counsel to the Indenture Trustee or to the Noteholders that are required to be paid by the Borrower pursuant to the terms of the Note Purchase Agreements or any other Operative Agreement), (ii) all amounts payable by the Lessee under the Lease, including, without limitation, the Basic Rent, the Supplemental Rent, the Maximum Residual Guarantee Amount, the Construction Termination Amount and the Termination Value, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter incurred, which may arise under, out of or in connection with, the Lease, and (iii) all other amounts payable by the Lessee under any of the Operative -2- Agreements (including indemnities) to the Indenture Trustee and/or the Noteholders or to the Lessor for the direct or indirect benefit of the Indenture Trustee and/or the Noteholders. (b) Anything herein or in any other Operative Agreement to the contrary notwithstanding, the Guarantor shall not at any time be required to make any payment hereunder in respect of the Non-Guaranteed Residual Amount: (A) during the Construction Period, except with respect to the Guaranteed Obligations following (i) any breach of the environmental indemnities set forth in Section 11.1(a) of the Participation Agreement, (ii) third party Claims (including by the Noteholders) against the Borrower caused by or resulting from the Guarantor's own actions or failure to act (including any default in payment under this Guarantee) other than Claims arising directly or indirectly out of the Guarantor's (in its capacity as the Construction Agent) failure to achieve the Completion of the Facility by the Outside Completion Date, (iii) Claims brought by the Borrower relating to fraud, misappropriation of funds, illegal acts, or willful misconduct on the part of the Guarantor (whether in its capacity as the Lessee, the Guarantor or the Construction Agent) or (iv) bankruptcy or insolvency of the Guarantor; or (B) at any time after the Construction Period, unless at such time (i) a default under this Guarantee (including any breach of the Guarantor's obligations to pay the entirety of all amounts under the Notes and the Indenture due upon any acceleration thereof, but excluding defaults relating to breaches of Article VIII and Sections 9.3 (other than any breach of the Guarantor's payment obligations with respect to the Notes and the Indenture, as aforesaid) through 9.7, inclusive, hereof) or (ii) a Specified Lease Event of Default, in any case, has occurred and is continuing. (c) The Guarantor further agrees to pay any and all expenses (including all reasonable fees and expenses of counsel) which may be paid or incurred by the Indenture Trustee or any Noteholder, after the occurrence and during the continuance of an Indenture Event of Default, in enforcing, or obtaining advice of counsel in respect of, any rights with respect to, or collecting, any or all of the Guaranteed Obligations and/or enforcing any rights with respect to, or collecting against, the Guarantor under this Guarantee. This Guarantee shall remain in full force and effect until the Guaranteed Obligations and all amounts owing hereunder are indefeasibly paid in full, notwithstanding that from time to time prior thereto the Borrower may be free from any Guaranteed Obligations. (d) No payment or payments made by the Borrower, the Guarantor or any other Person or received or collected by the Indenture Trustee or any Noteholder from the Borrower, the Guarantor or any other Person by virtue of any action or proceeding or any set-off or appropriation or application at any time or from time to time in reduction of or in payment of the Guaranteed Obligations shall be deemed to modify, reduce, release or otherwise affect the liability of the Guarantor hereunder. The Guarantor shall, notwithstanding any such payment or payments, remain liable for the Guaranteed Obligations until the Guaranteed Obligations and all amounts owing hereunder are indefeasibly paid in full. (e) The Guarantor agrees that whenever, at any time, or from time to time, it shall make any payment to the Indenture Trustee or any Noteholder on account of its liability hereunder, it will notify the Indenture Trustee in writing that such payment is made under this Guarantee for such purpose. 3. No Subrogation. Notwithstanding any payment or payments made by the Guarantor hereunder or any set-off or application of funds of the Guarantor by any Noteholder, -3- the Guarantor shall not be entitled to exercise or enforce by way of subrogation any rights of the Indenture Trustee or any Noteholder against the Borrower or any other Person or any collateral security or guarantee or right of offset held by the Indenture Trustee or any Noteholder for the payment of the Guaranteed Obligations, nor shall the Guarantor, in its capacity as Guarantor, seek or be entitled to seek any contribution or reimbursement from the Borrower or any other Person in respect of payments made by the Guarantor hereunder, until all amounts owing to the Indenture Trustee and the Noteholders by the Borrower on account of the Guaranteed Obligations and all amounts owing hereunder are indefeasibly paid in full. If any amount shall be paid to the Guarantor on account of such subrogation rights at any time when all of the Guaranteed Obligations and all amounts owing hereunder shall not have been paid in full, such amount shall be held by the Guarantor in trust for the Indenture Trustee and the Noteholders, segregated from other funds of the Guarantor, and shall, forthwith upon receipt by the Guarantor, be turned over to the Indenture Trustee in the exact form received by the Guarantor (duly indorsed by the Guarantor to the Indenture Trustee, if required), to be applied against the Guaranteed Obligations, whether matured or unmatured, in such order as the Indenture Trustee may determine in accordance with the Indenture. 4. Amendments, etc. with respect to the Guaranteed Obligations; Waiver of Rights. The Guarantor shall remain obligated hereunder notwithstanding that, without any reservation of rights against the Guarantor and without notice to or further assent by the Guarantor, any demand for payment of any of the Guaranteed Obligations made by the Indenture Trustee or any Noteholder may be rescinded by such party and any of the Guaranteed Obligations continued, and the Guaranteed Obligations, or the liability of any other party upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by the Indenture Trustee or any Noteholder, and the Indenture, the Note Purchase Agreements and the other Operative Agreements may be amended, modified, supplemented or terminated, in whole or in part, as the Indenture Trustee (or the Required Holders, as the case may be) may deem advisable from time to time, and any collateral security, guarantee or right of offset at any time held by the Indenture Trustee or any Noteholder for the payment of the Guaranteed Obligations may be sold, exchanged, waived, surrendered or released. Neither the Indenture Trustee nor any Noteholder shall have any obligation to protect, secure, perfect or insure any Lien at any time held by it as security for the Guaranteed Obligations or for this Guarantee or any property subject thereto. When making any demand hereunder against the Guarantor, the Indenture Trustee or any Noteholder may, but shall be under no obligation to, make a similar demand on the Borrower or any other guarantor, and any failure by the Indenture Trustee or any Noteholder to make any such demand or to collect any payments from the Borrower or any other guarantor or any release of the Borrower or such other guarantor shall not relieve the Guarantor, and shall not impair or affect the rights and remedies, express or implied, or as a matter of law, of the Indenture Trustee or any Noteholder against the Guarantor. For the purposes hereof "demand" shall include the commencement and continuance of any legal proceedings. 5. Guarantee Absolute and Unconditional. The Guarantor waives any and all notice of the creation, renewal, extension or accrual of any of the Guaranteed Obligations and notice of or proof of reliance by the Indenture Trustee or any Noteholder upon this Guarantee or acceptance of this Guarantee; the Guaranteed Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended, amended or waived, -4- in reliance upon this Guarantee; and all dealings between the Borrower and the Guarantor, on the one hand, and the Indenture Trustee and the Noteholders, on the other hand, likewise shall be conclusively presumed to have been had or consummated in reliance upon this Guarantee. The Guarantor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon the Borrower or the Guarantor with respect to the Guaranteed Obligations. The Guarantor understands and agrees that this Guarantee shall be construed as a continuing, absolute and unconditional guarantee and primary obligation and surety of payment and performance without regard to (a) the validity, regularity or enforceability of the Notes, the Indenture, the Note Purchase Agreements or any other Operative Agreement, any of the Guaranteed Obligations or any other collateral security therefor or guarantee or right of offset with respect thereto at any time or from time to time held by the Indenture Trustee or any Noteholder, (b) any defense, set-off or counterclaim (other than a defense of payment or performance) which may at any time be available to or be asserted by the Borrower or the Guarantor against the Indenture Trustee or any Noteholder, or (c) any other circumstance whatsoever (with or without notice to or knowledge of the Borrower or the Guarantor) that constitutes, or might be construed to constitute, an equitable or legal discharge of the Borrower from the Guaranteed Obligations, or of the Guarantor under this Guarantee, in bankruptcy or in any other instance. When pursuing its rights and remedies hereunder against the Guarantor, the Indenture Trustee and any Noteholder may, but shall be under no obligation to, pursue such rights and remedies as it may have against the Borrower or any other Person or against any collateral security or guarantee for the Guaranteed Obligations or any right of offset with respect thereto, and any failure by the Indenture Trustee or any Noteholder to pursue such other rights or remedies or to collect any payments from the Borrower or any such other Person or to realize upon any such collateral security or guarantee or to exercise any such right of offset, or any release of the Borrower or any such other Person or any such collateral security, guarantee or right of offset, shall not relieve the Guarantor of any liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of the Indenture Trustee and the Noteholders against the Guarantor. This Guarantee shall remain in full force and effect and be binding in accordance with and to the extent of its terms upon the Guarantor and the successors and assigns thereof, and shall inure to the benefit of the Indenture Trustee, the Noteholders and their respective successors, indorsees, transferees and assigns, until all the Guaranteed Obligations and the obligations of the Guarantor under this Guarantee shall have been satisfied by indefeasible payment in full, notwithstanding that from time to time during the term of the Indenture and the Note Purchase Agreements the Borrower may be free from any Guaranteed Obligations. 6. Reinstatement. This Guarantee shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Guaranteed Obligations is rescinded or must otherwise be restored or returned by the Indenture Trustee or any Noteholder upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Borrower or the Guarantor, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, the Borrower or the Guarantor or any substantial part of its property, or otherwise, all as though such payments had not been made. 7. Payments. The Guarantor hereby guarantees that payments hereunder will be paid by the paid to the Indenture Trustee without set-off or counterclaim in Dollars at the office of the Indenture Trustee located at One Metropolitan Square, Suite 3900, 211 North -5- Broadway, St. Louis, MO 63102 which shall be distributed in accordance with Articles 6 and 8 of the Indenture, as applicable. 8. Representations; Warranties. In order to induce the Purchasers to enter into the Series A Note Purchase Agreement and to purchase the Series A Notes (and, if any Series B Notes are issued and sold, to induce the purchasers thereof to purchase any such Series B Notes under the Series B Note Purchase Agreement), the Guarantor hereby represents and warrants to the Indenture Trustee and each Noteholder as of the Closing Date, as follows, all of which shall survive the execution and delivery of this Guarantee, the Indenture and the Note Purchase Agreements and the purchase of the Notes: 8.1 Financial Condition. (i) The audited consolidated balance sheet of the Guarantor at the end of its most recent fiscal year and the related consolidated statements of income and comprehensive income, of changes in equity and of cash flows of the Guarantor for the fiscal period ended on such date, reported on by its independent public accountants, and (ii) the unaudited consolidated balance sheet of the Guarantor at the end of its most recent fiscal quarter and the related consolidated statements of income and cash flows of the Guarantor for the portion of the fiscal period ended on such date, certified as complete and correct and prepared in accordance with GAAP (subject to normal year-end adjustments) by the chief financial officer or treasurer of the Guarantor, copies of each of which have heretofore been furnished to each Noteholder, are complete and correct and present fairly (except, with respect to interim statements, for normal year end adjustments) the consolidated financial position of the Guarantor as of such dates, and the consolidated results of operations and cash flows for the fiscal periods then ended and, in the case of the statements referred to in the foregoing clause (ii), the portion of the fiscal year through such date. All such financial statements, including the related schedules and notes thereto in the case of statements referred to in the foregoing clause (ii), have been prepared in accordance with GAAP applied consistently throughout the periods involved (except, with respect to interim statements, for normal year-end adjustments and that such interim statements may be condensed and exclude detailed footnote disclosure and except as concurred with such accountants or such chief financial officer, as the case may be, and as disclosed therein). The Guarantor did not, as of the date of any such financial statements, have any material obligation, contingent or otherwise, which was not reflected in the foregoing statements or in the notes thereto and which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. 8.2 No Material Change. Since the date of the most recent financial statements identified in Section 8.1(i) (i) there has been no occurrence which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect, and (ii) other than as disclosed in any financial statements delivered hereunder pursuant to Section 8.1, the Guarantor has not, since such date, incurred any material obligation, contingent or otherwise, which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. 8.3 Corporate Existence; Compliance with Law. The Guarantor (a) is a non-stock membership corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, (b) has the corporate -6- power and authority and the legal right to own and operate its property, to lease the property it operates and to conduct the business in which it is currently engaged (except to the extent that the failure to possess such corporate power and authority and such legal right, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect), (c) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification, except where the failure to be so qualified, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect and (d) is in compliance with all Legal Requirements (including, without limitation, CERCLA, any so-called "Superfund" or "Superlien" law, or any applicable federal, state, local or other statute, law, ordinance, code, rule, regulation, order or decree regulating, relating to, or imposing liability or standards of conduct concerning, any Hazardous Substances), except to the extent that the failure to comply therewith, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. 8.4 Corporate Power: Authorization. The Guarantor has the corporate power and authority and the legal right to make, deliver and perform the Operative Agreements to which it is a party. The Guarantor has taken all necessary corporate action to authorize the execution, delivery and performance of the Operative Agreements to which it is a party. No consent or authorization of, or filing with, any Person (including, without limitation, any Governmental Authority) is required in connection with the execution, delivery or performance by the Guarantor or the validity or enforceability against the Guarantor of any Operative Agreement to which it is a party. 8.5 Enforceable Obligations. Each of the Operative Agreements to which it is a party has been duly executed and delivered on behalf of the Guarantor and each of such Operative Agreements constitutes the legal, valid and binding obligation of the Guarantor, enforceable against the Guarantor in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law). 8.6 No Legal Bar. The performance of each Operative Agreement to which it is a party will not violate any Legal Requirement or any Contractual Obligation applicable to or binding upon the Guarantor or any of its properties or assets, which violations, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect, and will not result in the creation or imposition (or the obligation to create or impose) any Lien (other than Liens created under the Security Documents) on any of its properties or assets pursuant to any Legal Requirement applicable to it or any of its Contractual Obligations. 8.7 No Material Litigation. Except as disclosed in Schedule 8.7, no litigation, investigation known to the Guarantor or proceeding of or by any Governmental Authority or any other Person is pending or, to its knowledge, threatened against the Guarantor (a) with respect to the validity, binding effect or enforceability of any Operative Agreement and the transactions contemplated thereby, or (b) which, -7- individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. 8.8 Investment Company Act. The Guarantor is not an "investment company" or a company "controlled" by an "investment company" (as each of the quoted terms is defined or used in the Investment Company Act of 1940, as amended). 8.9 Federal Regulation. No part of the proceeds of the sale of the Notes will be used for any purpose which violates, or which would be inconsistent with, the provisions of Regulation T, U or X of the Federal Reserve Board. The Guarantor is not engaged and will not engage, principally or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" within the respective meanings of the quoted terms under said Regulation U. 8.10 No Default. The Guarantor is not in default in the payment or performance of any of its Contractual Obligations in any respect which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. The Guarantor is not in default under any order, award or decree of any Governmental Authority or arbitrator binding upon or affecting it or by which any of its properties or assets may be bound or affected in any respect which default, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect, and no such order, award or decree, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. 8.11 No Burdensome Restrictions. The Guarantor is neither a party to nor is bound by any Contractual Obligation or subject to any Legal Requirement or other corporate restriction which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. 8.12 Taxes. The Guarantor has filed or caused to be filed or has timely requested an extension to file or has received an approved extension to file all tax returns which, to the knowledge of the Guarantor, are required to have been filed, and has paid all taxes shown to be due and payable on said returns or extension requests or on any assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority (other than those the amount or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided in the books of the Guarantor), except where the failure to make or pay any such filings or taxes, fees or charges, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect; and, to the knowledge of the Guarantor, no claims are being asserted with respect to any such taxes, fees or other charges (other than those the amount or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided in the books of the Guarantor), except where the failure to pay any such taxes, fees or other charges, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. The federal income tax liabilities of the Guarantor have been determined by the United States Internal Revenue -8- Service and paid for all fiscal years up to and including the fiscal year ended December 31, 1998. 8.13 Ownership of Property: Liens. The Guarantor has good and marketable title to, or valid and subsisting leasehold interests in, all its real property, and good title to all its material other property, except to the extent the failure to have such good title or valid leasehold interest, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect; and none of such property is subject, except as permitted hereunder or under the other Operative Agreements and except as, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect, to any Lien (including, without limitation, federal, state and other tax Liens). 8.14 ERISA. No "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) or "accumulated funding deficiency" (as defined in Section 302 of ERISA) or Reportable Event (other than a Reportable Event with respect to which the 30-day notice requirement under Section 4043 of ERISA has been waived) has occurred during the five years preceding each date on which this representation is made or deemed made, or will occur, after giving effect to the transactions contemplated by the Operative Agreements, with respect to any Plan in any case the consequences of which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. The present value of all accrued benefits under each Single Employer Plan maintained by the Guarantor or a Commonly Controlled Entity (based on those assumptions used to fund such Plan) did not, as of the most recent annual valuation date in respect of each such Plan, exceed the fair market value of the assets of the Plan (including for these purposes accrued but unpaid contributions) allocable to such benefits by an amount which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. The liability to which the Guarantor or any Commonly Controlled Entity would become subject under ERISA if the Guarantor or any such Commonly Controlled Entity were to withdraw completely from all Multiemployer Plans as of the valuation date most closely preceding the date hereof would not have a Material Adverse Effect. No Multiemployer Plan is either in Reorganization or Insolvent in any case the consequences of which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. 8.15 Solvency. The Guarantor has received reasonably equivalent value in exchange for guaranteeing the Guaranteed Obligations. The net cash flow and the fair saleable value of the business and assets of the Guarantor, upon giving effect to the transactions contemplated by the Operative Agreements, shall be not less than the amount that shall be required to pay the probable liabilities of the Guarantor (including the Guaranteed Obligations and all contingent, fixed, subordinated, unsubordinated, matured, unmatured, liquidated and unliquidated liabilities) on existing debts as they may become absolute and matured. The Guarantor is not and, upon giving effect to the transactions contemplated by the Operative Agreements, shall not be "insolvent" (as defined in Title 11 of the United States Code or under any applicable state fraudulent conveyance or transfer statute, in each case as in effect from time to time), and shall not be engaged in any business or transaction, or about to engage in any business or transaction, for which the Guarantor has an unreasonably small capital, and the Guarantor has no intent (a) to -9- hinder, delay or defraud any Person to which the Guarantor is, or anticipates it shall become, indebted or (b) to incur indebtedness that would be beyond its ability to pay as such indebtedness matures. 8.16 Disclosure. The Guarantor, through the Arranger, has delivered to each Purchaser a copy of a Confidential Offering Memorandum (the "Memorandum") related to the transactions contemplated by the Operative Agreements. The Memorandum fairly describes, in all material respects, the general nature of the business and principal properties of the Guarantor. The Memorandum, this Guarantee and the other Operative Agreements and any other materials delivered by or on behalf of the Guarantor, taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading in light of the circumstances under which they were made. There is no fact known to the Guarantor that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect and that has not been set forth in the Memorandum or in the Operative Agreements delivered by or on behalf of the Guarantor. 9. Affirmative Covenants of the Guarantor. The Guarantor hereby agrees that so long as this Guarantee is in effect and until the Guaranteed Obligations and all amounts owing hereunder are indefeasibly paid in full it will: 9.1 Financial Statements. Furnish to the Indenture Trustee (with sufficient copies for each Noteholder): (a) as soon as available, but in any event within 120 days after the end of each fiscal year of the Guarantor, a copy of the consolidated balance sheet of the Guarantor as at the end of such year and the related consolidated statements of income, of changes in equity and of cash flows for such year, setting forth in each case in comparative form the figures for the previous year, reported on (without a "going concern" or like qualification or exception or any qualification arising out of the scope of the audit) by independent certified public accountants of nationally recognized standing; and (b) as soon as available, but in any event not later than 60 days after the end of each of the first three quarterly periods of each fiscal year of the Guarantor, the unaudited consolidated balance sheet of the Guarantor as at the end of such quarter and the related unaudited consolidated statements of income, of changes in equity and of cash flows of the Guarantor for the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures for the previous year, certified by a Responsible Officer as being fairly stated in all material respects (subject to normal year-end audit adjustments); all of which financial statements shall be complete and correct in all material respects (subject, in the case of interim statements, to normal year-end audit adjustments) and shall be prepared in reasonable detail (except that interim statements may be condensed and may exclude detailed footnote disclosure) and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods (except as concurred with such accountants or a Responsible Officer, as the case may be, and disclosed therein and except that interim financial -10- statements need not be restated for changes in accounting principles which require retroactive application, and operations which have been discontinued (as defined in Accounting Principles Board Opinion No. 30) during the current year need not be shown in interim financial statements as such either for the current period or comparable prior period). In the event the Guarantor changes its accounting methods because of changes in GAAP, or any change in GAAP occurs which increases or diminishes the protection and coverage afforded to the Noteholders under current GAAP accounting methods, the Guarantor or the Indenture Trustee, as the case may be, may request of the other parties to this Guarantee an amendment of the financial covenants contained in this Guarantee to reflect such changes in GAAP and to provide the Noteholders with protection and coverage equivalent to that existing prior to such changes in accounting methods or GAAP, and each of the Guarantor, the Indenture Trustee and the Noteholders agree to consider such request in good faith. 9.2 Certificates; Other Information. Furnish to the Indenture Trustee (with sufficient copies for each Noteholder which shall be made available by the Indenture Trustee to any Noteholder upon request): (a) concurrently with the delivery of the financial statements referred to in Section 9.1(a), a letter from the Guarantor's independent certified public accountants reporting on such financial statements stating that in making the examination necessary to express their opinion on such financial statements no knowledge was obtained of any failure by the Guarantor to comply with Section 10.1 hereof, except as specified in such letter; (b) concurrently with each delivery of the financial statements referred to in Sections 9.1(a) and (b), a certificate of a Responsible Officer of the Guarantor (i) stating that such officer has reviewed and is familiar with this Guarantee and the other Operative Agreements and that, to the best of such officer's knowledge, the Guarantor has observed or performed all of its covenants and other agreements, and satisfied every condition, contained in this Guarantee, or in the other Operative Agreements to be observed, performed or satisfied by it, and that such officer has obtained no knowledge of any default under this Guarantee or any Lease Default or Lease Event of Default except as specified in such certificate, (ii) showing in detail as of the end of the related fiscal period the figures and calculations supporting such statement in respect of Section 10.1; (c) promptly upon receipt thereof, copies of all final reports submitted to the Guarantor by independent certified public accountants in connection with each annual, interim or special audit of the books of the Guarantor made by such accountants; (d) promptly upon their becoming available, copies of all financial statements, reports, notices and proxy statements sent or made available generally by the Guarantor and all regular and periodic reports and all final registration statements and final prospectuses, if any, filed by the Guarantor with any securities exchange or with the Securities and Exchange Commission or any Governmental Authority succeeding to any of its functions; and -11- (e) promptly, such additional financial and other information as any Noteholder may from time to time reasonably request. 9.3 Payment of Obligations. Pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all of its obligations and liabilities of whatever nature, except (a) when the amount or validity thereof is currently being contested in good faith by appropriate proceedings and adequate reserves in conformity with GAAP with respect thereto have been established on the books of the Guarantor, (b) for delinquent obligations which, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect and (c) for trade and other accounts payable in the ordinary course of business in accordance with customary trade terms and which are not overdue for a period of more than 120 days (or any longer period if longer payment terms are accepted in the ordinary course of business) or, if overdue for more than 120 days (or such longer period), as to which a good faith dispute exists and is diligently being contested and adequate reserves in conformity with GAAP have been established on the books of the Guarantor. 9.4 Conduct of Business and Maintenance of Existence. Continue to engage in business of the same general type as now conducted by it, and preserve, renew and keep in full force and effect its corporate existence and take all reasonable action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business except for rights, privileges and franchises the loss of which, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect; and comply with all applicable Legal Requirements except to the extent that the failure to comply therewith, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. 9.5 Maintenance of Property: Insurance. (a) Keep all property useful and necessary in its business (other than the Facility, for which the provisions of the Lease shall apply) in good working order and condition (ordinary wear and tear excepted); and (b) Maintain with financially sound and reputable insurance companies insurance on all its property (other than the Facility, for which the provisions of the Lease shall apply) in at least such amounts and with only such deductibles as are usually maintained by, and against at least such risks as are usually insured against in the same general area by, companies engaged in the same or a similar business; provided that the Guarantor may implement programs of self insurance in the ordinary course of business and in accordance with industry standards for a company of similar size so long as reserves are maintained in accordance with GAAP for the liabilities associated therewith. 9.6 Inspection of Property; Books and Records; Discussions. Keep proper books of record and account in which full, true and correct entries are made of all dealings and transactions in relation to its business and activities which permit financial statements to be prepared in conformity with GAAP and all Legal Requirements; and permit representatives of the Indenture Trustee or any Noteholder that is an Institutional Investor upon reasonable notice to visit and inspect (at the expense of the Noteholders -12- unless there is an occurrence and continuance of an Event of Default, in which case, at the expense of the Guarantor) any of its properties and examine and make summaries (but not copies) from any of its books and records at any reasonable time and as often as may reasonably be desired upon reasonable notice, and to discuss the business, operations, properties and financial and other condition of the Guarantor with officers and employees thereof and with their independent certified public accountants (and by this provision, the Guarantor authorizes such accountants to discuss the affairs, finances and accounts of the Guarantor). 9.7 Notices. Promptly give notice to the Indenture Trustee and each Noteholder: (a) of the occurrence of any Indenture Default or Indenture Event of Default other than an Independent Default, and occurrence of any Independent Default of which it has notice; (b) of any (i) default or event of default under any instrument or other agreement, guarantee or collateral document of the Guarantor which default or event of default, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect, or (ii) litigation, investigation or proceeding which may exist at any time between the Guarantor and any Governmental Authority, or receipt of any notice of any environmental claim or assessment against the Guarantor by any Governmental Authority, which in any such case, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect; (c) of any litigation or proceeding affecting the Guarantor (i) in which more than $1,000,000 of the amounts claimed, aggregating such amounts with respect to all claims in such litigations and proceedings, is not covered by insurance or (ii) in which injunctive or similar relief is sought which if obtained, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect; (d) of the following events, as soon as practicable after, and in any event within 30 days after, the Guarantor knows thereof: (i) the occurrence of any Reportable Event with respect to any Single Employer Plan which Reportable Event, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect, or (ii) the institution of proceedings or the taking of any other action by PBGC, the Guarantor or any Commonly Controlled Entity to terminate, withdraw from or partially withdraw from any Plan and, with respect to a Multiemployer Plan, the Reorganization or Insolvency of such Plan, in each of the foregoing cases which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect, and in addition to such notice, deliver to the Indenture Trustee and each Noteholder whichever of the following may be applicable: (A) a certificate of the controller or treasurer of the Guarantor setting forth details as to such Reportable Event and the action that the Guarantor or such Commonly Controlled Entity proposes to take with respect thereto, together with a copy of any notice of such Reportable Event that may be required to be filed -13- with PBGC, or (B) any notice delivered by PBGC evidencing its intent to institute such proceedings or any notice to PBGC that such Plan is to be terminated, as the case may be; and (e) of any event that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. Each notice pursuant to this Section 9.7 shall be accompanied by a statement of the controller or treasurer of the Guarantor setting forth details of the occurrence referred to therein and stating what action the Guarantor proposes to take with respect thereto. 10. Negative Covenants. The Guarantor hereby agrees that so long as this Guarantee is in effect and until the Guaranteed Obligations and all amounts owing hereunder are indefeasibly paid in full, the Guarantor shall not, at any time, directly or indirectly: 10.1 Consolidated Net Worth. Permit Consolidated Net Worth at any time to be less than (a) $182,108,000 plus (b) 50% of its Consolidated Net Income (but only if positive) for each fiscal quarter, for the period beginning on the first day of the first full fiscal quarter following the Closing Date and ending on the last day of the fiscal quarter for which financial statements have been most recently delivered to the Indenture Trustee pursuant to Section 9.1. 10.2 Fundamental Changes. Consolidate with or merge with, or convey, transfer or lease all or substantially all of its assets in a single transaction or series of transactions to, any Person; provided that the foregoing restrictions shall not apply to the consolidation or merger of the Guarantor with, or conveyance, transfer or lease of all or substantially all of the assets of the Guarantor in a single transaction or series of transactions to, any Person so long as: (a) the successor formed by such consolidation or the survivor of such merger or the Person that acquires by conveyance, transfer or lease all or substantially all of the assets of the Guarantor as an entirety, as the case may be (the "Successor Guarantor"), shall be a solvent corporation organized under the laws of the United States of America, any state thereof or the District of Columbia; (b) each such corporation shall have executed and delivered to the Indenture Trustee and the Noteholders its assumption of the due and punctual performance and observance of each covenant and condition of this Guarantee and each other Operative Agreement to which the Guarantor is a party; (c) after giving effect to such transaction, the respective senior unsecured debt credit ratings of the Successor Guarantor by S&P and Moody's shall be no less than such ratings immediately before giving effect to such transaction; and (d) immediately before and after giving effect to such transaction, no Indenture Default or Indenture Event of Default or any default under this Guarantee would exist. -14- 10.3 ERISA. Use moneys from any Plan established by the Guarantor or for the benefit of the Guarantor's employees to perform any of the Guarantor's obligations under this Guarantee or any other Operative Agreements, nor will the Guarantor transfer its interests in the Collateral to any such Plan. The Guarantor will not, and will not permit any ERISA Affiliate to, withdraw from any Multiemployer Plan or permit any Plan maintained by it or for the benefit of its employees to be terminated if such withdrawal or termination would result in withdrawal liability (as described in Part I of Subtitle E of Title IV of ERISA) or the imposition of a Lien on the Collateral pursuant to Section 4068 of ERISA. 11. Authority of Indenture Trustee. The Guarantor acknowledges that the rights and responsibilities of the Indenture Trustee under this Guarantee with respect to any action taken by the Indenture Trustee or the exercise or non-exercise by the Indenture Trustee of any option, right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Guarantee shall, as between the Indenture Trustee and the Noteholders, be governed by the Indenture and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Indenture Trustee and the Guarantor, the Indenture Trustee shall be conclusively presumed to be acting as agent for the Noteholders with full and valid authority so to act or refrain from acting, and the Guarantor shall not be under any obligation, or entitlement, to make any inquiry respecting such authority. 12. Notices. All notices, requests and demands to or upon the Indenture Trustee, any Noteholder or the Guarantor to be effective shall be in writing (including by telecopy or telex), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered in person or by mail, postage prepaid, by Federal Express or other reliable 24-hour delivery service, or, in the case of facsimile, when received, addressed as follows: (a) if to the Indenture Trustee or any Noteholder, at its address or transmission number for notices provided in Section 11.5 of the Indenture and Schedule A of the Note Purchase Agreements, respectively; and (b) if to the Guarantor, at its address or transmission number for notices set forth opposite its signature below. The Indenture Trustee, each Noteholder and the Guarantor may change its address and transmission numbers for notices by notice in the manner provided in this Section 12. -15- 13. Severability. Any provision of this Guarantee which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 14. Integration. This Guarantee represents the agreement of the Guarantor with respect to the subject matter hereof and there are no promises or representations by the Indenture Trustee or any Noteholder relative to the subject matter hereof not reflected herein. 15. Amendments in Writing; No Waiver; Cumulative Remedies. (a) None of the terms or provisions of this Guarantee may be waived, amended, supplemented or otherwise modified except as provided in Section 11.1 of the Indenture. (b) Neither the Indenture Trustee nor any Noteholder shall by any act (except by a written instrument pursuant to Section 15(a) hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Indenture Default or Indenture Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Indenture Trustee or any Noteholder, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Indenture Trustee or any Noteholder of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Indenture Trustee or such Noteholder would otherwise have on any future occasion. (c) The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law. 16. Section Headings. The section headings used in this Guarantee are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 17. Successors and Assigns. This Guarantee shall be binding upon the successors and assigns of the Guarantors and shall inure to the benefit of the Indenture Trustee, the Noteholders and their successors and assigns. 18. SUBMISSION TO JURISDICTION: WAIVERS. (a) THE GUARANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY: (i) SUBMITS IN ALL LEGAL ACTIONS OR PROCEEDINGS RELATING TO THIS GUARANTEE OR ANY OTHER OPERATIVE AGREEMENT TO WHICH IT IS A PARTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE SUPREME COURT OF THE STATE OF NEW YORK AND THE APPELLATE COURTS THEREOF AND THE FEDERAL COURT FOR THE SOUTHERN DISTRICT OF NEW YORK; -16- (ii) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURT, WAIVES ANY OBJECTION THAT IT MAY HAVE NOW OR HEREAFTER TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT AND WAIVES ANY OBJECTION THAT SUCH ACTION OR PROCEEDING IN ANY SUCH COURT WAS BROUGHT IN AN INCONVENIENT FORUM AND AGREES NOT TO PLEAD, CLAIM OR ASSERT THE SAME; (iii) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID TO, OR BY PERSONAL SERVICE AT, ITS ADDRESS SET FORTH HEREIN OR SUCH OTHER ADDRESS OF WHICH THE INDENTURE TRUSTEE SHALL HAVE BEEN NOTIFIED PURSUANT HERETO, WHETHER OR NOT SUCH ADDRESS BE WITHIN THE JURISDICTION OF ANY SUCH COURT; (iv) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF THE INDENTURE TRUSTEE (AND NOT OF THE GUARANTOR) TO SUE IN ANY OTHER JURISDICTION; AND (v) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LEGAL ACTION OR PROCEEDING RELATING TO ANY OPERATIVE AGREEMENT OR RELATED DOCUMENT OR TRANSACTION ANY SPECIAL, EXEMPLARY, OR PUNITIVE DAMAGES. (b) THE GUARANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS GUARANTEE OR ANY OTHER OPERATIVE AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN. (c) THE GUARANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES THE RIGHT TO ASSERT, ARGUE OR RAISE, IN ANY ACTION BROUGHT BY THE INDENTURE TRUSTEE AGAINST THE GUARANTOR UNDER THIS GUARANTEE, THAT THE INDENTURE TRUSTEE OR THE NOTEHOLDERS STRUCTURED THE TRANSACTION CONTEMPLATED BY THE OPERATIVE AGREEMENTS IN SUCH A MANNER PRIMARILY TO CIRCUMVENT ANY ONE-FORM-OF-ACTION OR ANTI-DEFICIENCY LAWS. (d) The Guarantor hereby waives all of the Guarantor's rights of subrogation, reimbursement, contribution or in respect of suretyship and any other rights and defenses available to the Guarantor, including (a) any defenses the Guarantor may have to the obligations undertaken by the Guarantor in this Guarantee by reason of an election of remedies by any Noteholder and (b) any rights or defenses the Guarantor may have by reason of protection afforded by the Borrower with respect to the obligations guaranteed hereby pursuant to the -17- antideficiency, bankruptcy, insolvency or other similar laws limiting or discharging the Borrower's Indebtedness. The Guarantor's waiver of defenses under clause (c) above is made even though an election of remedies by any Noteholder, such as a nonjudicial foreclosure with respect to security for a guaranteed obligation, may extinguish the Guarantor's rights of subrogation and reimbursement against the Borrower. The foregoing waivers shall not be deemed a waiver of the defense that the Guaranteed Obligations have been indefeasibly paid in full. To the extent of any inconsistency between the provisions of this Section 18(d) and Section 3, the provisions of Section 3 shall control. 19. GOVERNING LAW. THIS GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF YORK, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES WHICH MAY REQUIRE THE APPLICATION OF LAWS OF ANOTHER STATE. 20. Right of Set-Off. In addition to any rights now or hereafter granted under applicable law or otherwise, and not by way of limitation of any such rights, upon the occurrence and during the continuance of an Indenture Event of Default, the Indenture Trustee and each Noteholder are hereby authorized at any time or from time to time, without presentment, demand, protest or other notice of any kind to the Borrower, the Guarantor or any other Person, any such notice being hereby expressly waived, to set off and to appropriate and apply any and all deposits (general or special) and any other Indebtedness at any time held or owing by the Indenture Trustee or such Noteholder (including, without limitation, by branches and agencies of the Indenture Trustee or such Noteholder wherever located) to or for the credit or the account of the Guarantor against and on account of the obligations and liabilities of the Guarantor hereunder or under any of the other Operative Agreements, and all other claims if any nature or description arising out of or connected with this Guarantee or any other Operative Agreement, irrespective of whether the Indenture Trustee or such Noteholder shall have made any demand hereunder and although said obligations, liabilities or claims, or any of them, shall be contingent or unmatured. -18- IN WITNESS WHEREOF, the undersigned has caused this Guarantee to be duly executed and delivered by its duly authorized officer as of the day and year first above written. MASTERCARD INTERNATIONAL INCORPORATED By: /s/Michael J. Timk -------------------------------------- Name: Michael J. Timk Title: VP and Assist. Secretary Address for Notices MasterCard International Incorporated 2000 Purchase Street Purchase, NY 10577-2509 Attention: General Counsel with a copy to: MasterCard International Incorporated 2000 Purchase Street Purchase, NY 10577-2509 Attention: Treasurer -19- EX-10.7 9 y49195a2ex10-7.txt EMPLOYMENT AGREEMENT Exhibit 10.7 EMPLOYMENT AGREEMENT Agreement made and entered into this 10th day of August, 2001 (the "Effective Date"), by and between MasterCard International Incorporated, a Delaware corporation (the "Company") and Robert W. Selander (the "Executive"). W I T N E S S E T H: WHEREAS, the Executive and the Company wish to continue the employment of the Executive on the terms and conditions specified herein; NOW THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties agree as follows: 1. Term of Employment. (a) Commencing on the Effective Date, the Company agrees to continue to employ the Executive, and the Executive agrees to accept such continued employment and serve the Company, in such capacities, with such duties and authority, for such period, at such level of compensation and with such benefits, and upon such other terms and subject to such other conditions, as are hereinafter set forth. The term of the Executive's employment hereunder shall commence on the Effective Date and, shall continue until terminated in accordance with the terms of Paragraph 5 herein (the "Term of Employment"). 2. Capacities, Duties and Authority. (a) Effective on the Effective Date, the Executive shall continue to serve the Company in the position of Chief Executive Officer ("CEO"). (b) In his capacity as CEO, the Executive shall have such authority, perform such duties, discharge such responsibilities and render such services as are customary to and consistent with such position, subject to the authority and direction of the Company's Board of Directors or its designee. (c) The Executive shall render his services diligently, faithfully and to the best of his ability, devoting thereto substantially all of his business time, energy and skills to the Company; provided, however, that nothing herein shall preclude the Executive from serving as an outside corporate director, making and managing personal investments or serving in any capacity with any civic, educational or charitable organization, so long as such activities are disclosed to the Compensation Committee of the Company's Board of Directors (the "Compensation Committee") and do not conflict with the interests of the Company or interfere with the performance of the Executive's duties and obligations hereunder, including, but not limited to the obligations set forth in Paragraph 6 hereof. 3. Compensation. (a) The Executive shall be paid a base salary, payable in accordance with the regular payroll practices of the Company. During the Term of Employment, the Compensation Committee shall annually review the Executive's performance and determine, in its sole discretion, whether or not to increase the Executive's base salary and, if so, the amount of such increase. Once increased, the Executive's base salary hereunder may not thereafter be decreased. The Executive's base salary as in effect from time to time is hereinafter referred to as the "Base Salary." (b) The Executive shall be entitled to participate in the Annual Incentive Compensation Plan ("AICP") or such other annual bonus plan as such is provided to the Company's senior-level executives in accordance with the terms and conditions of such plans as may be in effect from time to time. The Executive shall also be eligible, during the Term of Employment, to earn an annual bonus based upon performance goals or other criteria as may be 2 established by the Compensation Committee, in its sole discretion. Such bonus will be payable on terms as may be established by the Compensation Committee. (c) The Executive shall be entitled to participate in the Executive Incentive Plan ("EIP"), any successor plan thereto or any other long-term bonus or incentive compensation plans as such is provided to the Company's senior-level executives in accordance with the terms and conditions of such plans as may be in effect from time to time. (d) The Executive shall be entitled, annually during the Term of Employment, to vacation, without loss or diminution of compensation, in accordance with Company policy then in effect. 4. Employee Benefit Programs. (a) During the Employment Period, the Executive shall be entitled to participate in and shall have the benefit of all the Company's group and executive life and disability plans, group medical, dental and vision plans and programs, AICP, EIP, Value Appreciation Plan ("VAP"), Deferral Compensation Program, MAP, 401(k) Plan, Annuity Bonus Program, Supplemental Executive Retirement Plan ("SERP"), Special Awards Plan and such other employee benefit plans and programs as generally are or will be made available to executive personnel of the Company, as such benefit plans or programs may be amended or terminated in the sole discretion of the Company from time to time. (b) For each full calendar year of employment the Executive will be eligible for a deposit in the MasterCard Rabbi Trust (the "Rabbi Trust") in an amount of up to $150,000 per year. $50,000 of this amount shall be payable to the Rabbi Trust for each year in which the Executive is employed on December 31st of such year. Eligibility for the remaining $100,000 will be based upon performance, payable to the Rabbi Trust, if at all, together with the aforementioned guaranteed minimum $50,000 payment, by end of the first quarter of the 3 following year. The Executive shall only be entitled to the full amount of the $100,000 payment for each year that the Executive has qualified, based upon the performance of the Executive, for a full target level AICP Bonus. For each year that the Executive does not qualify for such a full target level bonus but does qualify for at least 90% of his target level bonus for that year, the Executive shall be entitled to $50,000 of the $100,000 payment. For each year that the Executive does not qualify for at least 90% of such a target level bonus but does qualify for at least 80% of his target level bonus for that year, the Executive shall be entitled to $25,000 of the $100,000 payment. In any year that the Executive has not qualified for such an AICP Bonus of at least 80% of such target level for that year, the Executive shall not be entitled to any of the $100,000 payment. The Executive is and shall be irrevocably vested in 100% of all of his benefits provided by the Trust. The assets of the Trust shall be distributed, in accordance with the terms of the Trust instrument, to the Executive at the later of age 55 or the time of cessation of the Executive's employment, including without limitation, cessation of employment in the event of the Employee's inability to perform duties as provided in paragraph 5(a)(ii) below. Notwithstanding the foregoing, in the event of the Executive's death, any benefits remaining unpaid from the Trust at the time of the Executive's death shall then be distributed to the Executive's estate or other designated beneficiary, as provided under the Trust instrument. The assets in the Trust shall be invested in a market basket of stocks, securities, government bonds and paper and/or funds as determined by the provisions of the Trust instrument. (c) During the Term of Employment, the Executive shall be entitled to participate in the Company's executive perquisite program as such is provided to the Company's senior-level executives in accordance with the terms and conditions of such program as may be in effect from time to time. 4 (d) Nothing in this Paragraph 4 shall be construed to require the Company to establish, maintain or continue any benefit plan, program or arrangement. Except as otherwise expressly provided by their terms, such benefit plans, programs or arrangements are subject to modification or termination by the Company at any time. 5. Termination of Employment. (a) The Executive's employment hereunder shall terminate: (i) upon the death of the Executive; (ii) upon the Disability of the Executive, which for the purposes of this Agreement shall be defined as set forth under the MasterCard Long-Term Disability Benefits Plan, as it may be amended from time to time, which continues for a period of at least six (6) months or for an aggregate of one hundred eighty (180) days within any twelve (12) month period), as determined by the Company's disability insurance carrier, after review of such medical evidence as the disability insurance carrier may deem necessary. Any dispute concerning whether the Executive is deemed to have suffered a Disability for purposes of this Agreement shall be resolved in accordance with the dispute resolution procedures set forth in the MasterCard Long-Term Disability Benefits Plan. The Executive shall be required to apply for Long-Term Disability benefits promptly upon becoming disabled or upon request by the Company. The Company may not terminate the Executive's employment on account of Disability under the provisions of this paragraph unless the Executive has been approved to receive benefits under the terms of the MasterCard Long-Term Disability Benefits Plan. 5 (iii) at the option of the Company, exercisable by or upon the authority of the Company's Board of Directors and effective not less than fourteen (14) days after the giving by the Company to the Executive of written notice of such exercise, for "Cause" ("Notice of Termination for Cause"), which, for purposes of this Agreement, shall mean: (A) the willful failure by the Executive to perform his duties or responsibilities (other than due to Disability); (B) the Executive's having been convicted of, or entered a plea of guilty or nolo contendere to any crime that constitutes a felony, or a crime that constitutes a misdemeanor involving moral turpitude; (C) the material breach by the Executive of any written covenant or agreement with the Company not to disclose any information pertaining to the Company; or (D) the breach by the Executive of the Code of Conduct, any material provision of this Agreement, or any material provision of the following Company policies: nondiscrimination, substance abuse, workplace violence, nepotism, travel and entertainment, corporate information security, antitrust/competition law, foreign corrupt practices act and other Company policies approved by the Executive adopted after the date of this Agreement that the Company notifies Executive are to be included in this section. The Company's Notice of Termination For Cause shall state the date of termination and the basis for the Company's determination that the Executive's actions establish Cause hereunder. Upon 6 the Executive's receipt of a Notice of Termination For Cause, the Executive may, prior to the date of termination set forth therein, seek to cure any conduct identified in the Notice of Termination For Cause as establishing Cause (to the extent susceptible to cure) and shall, upon his written request, be accorded the right to address the Board of Directors, with or without counsel to the Executive present at the Executive's option, for the purpose of responding to the Notice of Termination For Cause. Following such meeting between the Executive and the Board of Directors, if the Board of Directors does not withdraw or modify the Notice of Termination For Cause, the Executive's employment shall terminate on the date of termination stated in the Notice of Termination For Cause. (iv) at the option of the Company, for a reason other than death, Disability or Cause, effective ninety (90) days after the giving of written notice of such exercise or immediately upon the Company's tender to the Executive of written notice and ninety (90) days' Base Salary in lieu of such notice period; (v) at the option of the Executive, effective ninety (90) days after the giving of written notice to the Company of the grounds for termination for Good Reason by the Executive, which grounds, as specified by the Executive, have not been cured by the Company during such ninety (90) day period. The Company may waive the ninety (90) day notice required to be given by the Executive hereunder by giving written notice to the Executive. For purposes of this Agreement "Good Reason" shall mean the occurrence at any time of any of the following without the Executive's prior written consent: (A) removal from the principal position held by the Executive with the Company on the Effective Date; 7 (B) a reduction in the Executive's annual Base Salary from that in effect on the Effective Date (or any greater salary that the Executive is subsequently entitled to); (C) the relocation of the Executive's principal place of employment to a location more than fifty (50) miles from the Executive's principal place of employment (unless such relocation does not increase the Executive's commute by more than twenty (20) miles) on the Effective Date, except for required travel on the Company's business to an extent substantially consistent with the Executive's business travel obligations as of such day; or (D) the failure by the Company to obtain an agreement from any successor to the Company to assume and agree to perform this Agreement. (vi) at the option of the Executive, for a reason other than Good Reason ("Voluntary Resignation"), which shall be effective only after the giving of ninety (90) days prior written notice of such exercise. (b) Obligations of the Company upon Termination of Employment. (i) Death. In the event of the Executive's death during the Employment Period, the Employment Period shall end as of the date of the Executive's death and his estate and/or beneficiaries, as the case may be, shall be entitled to the following, as soon as practicable following the date of Executive's death: (A) Base Salary earned but not paid prior to the date of his death; 8 (B) payment for all accrued but unused vacation time up to the date of his death; (C) the target annual incentive bonus payable for the year in which the Executive's death occurs; and (D) such additional benefits to which the Executive is expressly entitled following the termination of the Executive's employment on account of death, as may be provided by the then existing plans, programs and/or arrangements of the Company. (ii) Disability. If the Executive's employment is terminated due to Disability during the Term of Employment, either by the Company or by the Executive, the Term of Employment shall end as of the date of the termination of the Executive's employment (as provided in Paragraph 5(a)(ii) of this Agreement) and the Executive shall be entitled to the following, as soon as practicable following the date of termination: (A) Base Salary earned but not paid prior to the date of the termination of the Executive's employment; (B) payment for all accrued but unused vacation time up to the date of the termination of the Executive's employment; (C) a pro rata portion (based upon completed calendar quarters worked) of the target annual incentive bonus payable for the year in which the Executive's termination of employment occurs; and (D) such additional benefits to which the Executive is expressly entitled following the termination of the Executive's employment 9 on account of Disability, as may be provided by the then existing plans, programs and/or arrangements of the Company. (iii) Cause. If the Company terminates the Executive's employment for Cause in accordance with the terms set forth in Paragraph 5(a)(iii) above, the Term of Employment shall end as of the effective date of termination and the Executive shall be entitled to the following, as soon as practicable following the Executive's date of termination: (A) Base Salary earned but not paid prior to the date of the termination of his employment; (B) payment for all accrued but unused vacation time up to the date of the termination of the Executive's employment; and (C) such additional benefits to which the Executive is expressly entitled following the termination of the Executive's employment by the Company for Cause, as may be provided by the then existing plans, programs and/or arrangements of the Company. (iv) Voluntary Resignation. If the Executive terminates his employment by Voluntary Resignation, in accordance with the terms set forth in Paragraph 5(a)(vi) above, the Term of Employment shall end as of the effective date of termination; and the Executive shall be entitled to the following, as soon as practicable following the Executive's date of termination. (A) Base Salary earned but not paid prior to the date of the termination of his employment; 10 (B) payment for all accrued but unused vacation time up to the date of the termination of the Executive's employment; and (C) such additional benefits to which the Executive is expressly entitled following the termination of the Executive's employment by Voluntary Resignation, as may be provided by the then existing plans, programs and/or arrangements of the Company. (v) Without Cause or With Good Reason. If the Executive's employment is terminated by the Company (other than for Cause or Disability) in accordance with the terms set forth in Paragraph 5(a)(iv) above, or if the Executive terminates his employment with Good Reason in accordance with the terms set forth in Paragraph 5(a)(v) above, the Term of Employment shall end as of the effective date of termination and the Executive shall be entitled to the following as soon as practicable (unless otherwise provided herein) following the Executive's date of termination: (A) Base Salary earned but not paid prior to the date of the termination of his employment; (B) payment for all accrued but unused vacation time up to the date of the termination of the Executive's employment; (C) a pro rata portion (based upon completed calendar months worked) of the target annual incentive bonus payable for the year in which the Executive's termination of employment occurs; (D) subject to the Executive's execution of Separation Agreement(s) and Release(s) of all claims related to the Executive's employment 11 or the termination thereof, in the form annexed hereto, other than any modifications which may be required to effectuate such release(s) based upon any changes in law, additional pay, in the form of Base Salary continuation and payment of an amount equivalent to the average annual incentive bonus received by the Executive with respect to the prior three years of Executive's employment by the Company (the "Average Bonus Payment"), payable on a schedule in accordance with the regular payroll and annual incentive bonus pay practices of the Company (such Base Salary continuation and Average Bonus Payment being collectively referred to herein as "Additional Pay") for, and with respect to, a period of thirty-six (36) months following the Executive's date of termination (the "Additional Pay Period"). Notwithstanding the foregoing, in the event the Additional Pay Period would otherwise terminate prior to the date on which the Executive attains the age of fifty-five (55), the Company shall recalculate the Additional Pay payable during the Additional Pay Period and pay to the Executive as an employee on the Company's payroll, on an approved leave of absence (which shall not be deemed to be full-time employment), an amount equal to the Additional Pay payable to the Executive during the Additional Pay Period, divided into equal installments, payable in accordance with the Company's regular payroll practices, beginning with the first 12 payroll period of such Additional Pay Period and ending with the first payroll period after the date the Executive attains the age of fifty-five (55) (the "Recalculated Additional Pay Period"). In all events, Additional Pay shall be paid to the Executive for that portion of the Additional Pay Period prior to the date the Executive attains the age of fifty-five (55) as an employee on the Company's payroll on an approved leave of absence. At the conclusion of the Executive's approved leave of absence the Executive's employment shall terminate and the Executive or, if applicable, an authorized representative of the Executive's estate, shall execute a Separation Agreement and Release in substantially the same form as the Separation Agreement and Release executed by the Executive at the commencement of the Additional Pay Period or Recalculated Additional Pay Period, as applicable, covering the period of the Executive's approved leave of absence. In the event the Executive is placed on an approved leave of absence, all references to termination of employment in Paragraph 5(b)(v)(A-H) shall mean termination of full-time employment. The Executive agrees to make himself available to consult with the Company during the approved leave of absence period, at reasonable times and with reasonable notice as may be requested by the Company from time to time. In the event that the Executive dies prior to receipt of all Additional Pay due hereunder, any 13 remaining Additional Pay due to the Executive under this Paragraph 5(b)(v)(D) shall be paid to the Executive's estate; (E) subject to the Executive's execution of Separation Agreement(s) and Release(s), as set forth in Paragraph D, above, payment on the Executive's behalf, for the monthly cost of the premiums for coverage under the Consolidated Omnibus Reconciliation Act of 1985, as amended ("COBRA"), for a period equivalent to the Additional Pay Period (as may be reduced by the Executive in accordance with the terms of Paragraph 6(e), below) or eighteen (18) months (twenty-nine (29) months if the Executive is now disabled or determined to be disabled under the Social Security Act within the first sixty (60) days of the continuation period) following the date of the termination of the Executive's employment, whichever is shorter; provided, however, such coverage shall not be provided if during such period the Executive is or becomes ineligible under the provisions of COBRA for continuing coverage or the Executive becomes eligible for medical coverage under Paragraph 5(b)(v)(H) below or any Company retirement plan. The Executive agrees that in consideration of the payment of cost of COBRA coverage to execute all necessary documentation acknowledging proper COBRA Notice and coverage; 14 (F) subject to the Executive's execution of Separation Agreement(s) and Release(s) as set forth in Paragraph D, above, outplacement services, to be provided by a firm selected by the Company, at a level generally made available to senior executives of the Company for the shorter of the Additional Pay Period or the period he remains unemployed; (G) subject to the Executive's execution of Separation Agreement(s) and Release(s), as set forth in Paragraph D, above and subject to amendment of the SERP, which the Company hereby agrees to amend in accordance with the terms of this Paragraph G, Executive shall (i) become fully vested in his SERP benefit upon the termination of Executive's employment without Cause or with Good Reason as defined herein, and (ii) if Executive has not yet attained the age of fifty-five (55), receive additional benefits under the SERP or, at the Company's option, the Annuity Bonus Plan, to increase Executive's SERP or Annuity Bonus Plan benefit, as applicable, by the amount of benefits which Executive would have accrued under the Company tax-qualified pension and savings plan until the Executive attained the age of fifty-five (55) had he been eligible to participate in such plans; provided, however, no such SERP benefit shall be payable until the Executive attains the age of sixty (60) or as otherwise provided by the SERP, prior to its amendment in accordance with this Paragraph G; 15 (H) participation in the Company's health plan, life insurance plan, individual disability benefit plan, EIP (for vesting purposes only, without further award or contribution), VAP (for vesting purposes only, without further award or contribution) and Special Awards Plan (for vesting purposes only, without further award or contribution) for the duration of any approved leave of absence then granted to the Executive and following such leave of absence, Executive shall, upon retirement, be fully vested in all EIP, VAP and Special Awards Plan grants previously made; provided, that the Executive waives in writing any and all rights to future participation and accrual of benefits under any qualified employee pension benefit plan of the Company as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended, and any Group Disability Plans; and (I) such other benefits to which the Executive is expressly entitled following the termination of the Executive's employment by the Company without Cause or by the Executive with Good Reason, upon the termination of the Executive's approved leave of absence, as may be provided by the then existing plans, programs and/or arrangements of the Company (other than any severance payments payable under the terms of any benefit plan, including, but not limited to, the MasterCard International Incorporated Severance Plan); 16 (c) Except as expressly provided by Paragraph 5(b), any payment or benefit provided under Paragraph 5(b) hereof shall be in lieu of any other severance, bonus or other payments, perquisites or benefits, including any further accruals or vesting thereof, to which the Executive might then or, in the future, be entitled pursuant to this Agreement or any statutory or common law claim. In order to preserve the parties' respective legal rights in the event of a dispute, the Executive acknowledges and agrees that in the event the parties dispute whether the Executive shall be entitled to the payment hereunder, such payment shall not be deemed to be earned or otherwise vest hereunder until such time as the dispute is determined by a final judgment of a court of competent jurisdiction or otherwise resolved. The foregoing shall not be deemed to prohibit a court of competent jurisdiction from awarding prejudgment interest under circumstances in which it may deem it appropriate to do so. (d) Notwithstanding anything to the contrary herein, if the Company's Board of Directors has reason to believe that there are circumstances which, if substantiated, would constitute Cause as defined herein, the Company may suspend the Executive from employment immediately upon notice for such period of time as shall be reasonably necessary for the Company's Board of Directors to ascertain whether such circumstances are substantiated. During such suspension, the Executive shall continue to be paid all compensation and provided all benefits hereunder; provided, however, that if the Executive has been indicted or otherwise formally charged by governmental authorities with any felony, the Company's Board of Directors may, in its sole discretion, and without limiting the Company's Board of Directors' discretion to terminate the Executive's employment for Cause (provided it has grounds to do so under the terms of Paragraph 5(a)(iii) hereof), suspend the Executive without continuation of any compensation or benefits hereunder (except health benefits which shall be continued during the 17 period of suspension), pending final disposition of such criminal charge(s). Upon receiving notice of any such suspension, the Executive shall promptly leave the premises of the Company and remain off such premises until further notice from the Company's Board of Directors. In the event the Executive is acquitted or otherwise exonerated of such charges, the Company shall pay to the Executive such compensation, with interest, calculated from the date such compensation was suspended at the prime lending rate in effect on the date the Company receives notice from the Executive of such acquittal or exoneration, and provide benefits withheld from the Executive during the period of the Executive's suspension, if any. 6. Acknowledgements; Confidential Information; Competitive Activities; Non Solicitation. (a) The Executive acknowledges as follows: (i) The Company is in the payments industry and provides such services both nationally and internationally without limitation to any geographic area. (ii) Since the Company would suffer irreparable harm if the Executive left the Company's employ and solicited employees of the Company or otherwise interfered with business relationships of the Company, it is reasonable to protect the Company against such activities by the Executive for a limited period of time after the Executive leaves the Company. (iii) The covenants contained in Paragraphs 6(b), (c) and (d) below are reasonably necessary for the protection of the Company and are reasonably limited with respect to the activities they prohibit, their duration, their geographical scope and their effect on the Executive and the public. The purpose 18 and effect of the covenants simply are to protect the Company for a limited period of time from unfair competition by the Executive. (b) For the purposes of this Agreement, all confidential or proprietary information concerning the business and affairs of the Company, including, without limitation, all trade secrets, know how and other information generally retained on a confidential basis by the Company concerning its designs, software codes and specifications, formulae, processes, inventions and discoveries, business plans, pricing, product plans and the identities of, and the nature of the Company's dealings with, its members, suppliers and customers, whether or not such information shall, in whole or in part, be subject to or capable of being protected by patent, copyright or trademark laws, shall constitute "Confidential Information." The Executive acknowledges that he will from time to time have access to and obtain knowledge of certain Confidential Information, and that improper use or revelation thereof by the Executive, during or after the termination of his employment by the Company, could cause serious injury to the business of the Company. Accordingly, the Executive agrees that he will forever keep secret and inviolate all Confidential Information which shall have come or shall hereafter come into his possession, and that he will not use the same for his own private benefit, or directly or indirectly for the benefit of others, and that he will not disclose such Confidential Information to any other person. If the Executive is legally compelled (by deposition, interrogatory, request for documents, subpoena, civil investigative demand or similar process) to disclose any of the Confidential Information, he shall provide the Company with prompt prior written notice of such legal requirement so that the Company may seek a protective order or other appropriate remedy and/or waive compliance with the terms of this section. In any event, the Executive may furnish only that portion of the Confidential Information which the Executive is advised by legal counsel 19 is required, and he shall exercise his best efforts to obtain an order or assurance that confidential treatment will be accorded such Confidential Information as is disclosed. Notwithstanding anything contained herein which may be to the contrary, the term "Confidential Information" does not include any information which at the time of disclosure or thereafter is generally available to and known by the public, other than as a result of a disclosure directly or indirectly by the Executive. (c) In addition to the acknowledgments by the Executive set forth in Paragraph 6(a) above, the Executive acknowledges that the services provided for the Company are a significant factor in the creation of valuable, special and unique assets which are expected to provide the Company with a competitive advantage. Accordingly, the Executive agrees that during the Term of Employment, and thereafter for the duration of the Additional Pay Period or the Recalculated Additional Pay Period, as applicable, or in the event that the Executive is ineligible for Additional Pay pursuant to Paragraph 5(b)(v)(D) hereunder, for a period of six (6) months following the Executive's date of termination in the event the Executive's employment is terminated for Cause pursuant to Paragraph 5(a)(iii), or twelve (12) months following Executive's date of termination in the event the Executive's employment is terminated for any other reason and the Executive is ineligible for Additional Pay pursuant to Paragraph 5(b)(v)(D), the Executive (whether as an employee, officer, director, partner, proprietor, investor, associate, executive, consultant, adviser or otherwise) will not, either directly or indirectly, for the Executive or any third party, engage or invest in any business or activity which is directly or indirectly in competition with any business or activity engaged in by the Company, including, but not limited to, any credit, charge, chip or debit card business or processor. For purposes of the preceding sentence, the Executive shall be deemed to be engaged in any business which any 20 person for whom he shall perform services is engaged. Notwithstanding the foregoing, nothing herein shall prohibit the Executive from having a beneficial ownership interest of less than 3% of the outstanding amount of any class of securities of any enterprise (but without otherwise participating in the activities of such enterprise) if such securities are listed on a national securities exchange or quoted on an inter-dealer quotation system. For the avoidance of doubt, the Company and Executive agree that Executive may perform services or engage in business or activities for a MasterCard Member, without violating the provisions of this Paragraph, provided that Executive may not perform services or engage in business or activities for a MasterCard Member that is party to a brand dedication agreement with VISA USA, VISA International, American Express, JCB, Discover, Diners Club, Carte Blanche or any other competitor of the Company, the term of which is two years or more. (d) During the Term of Employment, and thereafter for the duration of the Additional Pay Period or the Recalculated Additional Pay Period, as applicable, or in the event that the Executive is ineligible for Additional Pay pursuant to Paragraph 5(b)(v)(D) for a period of twelve (12) months following Executive's date of termination, the Executive shall not himself, or by assisting any other person to, directly or indirectly, (a) solicit, induce, recruit or encourage any other employee, agent, consultant or representative to leave the service of the Company for any reason, or (b) induce any member, customer, supplier or other person with whom the Company engaged in business, or to the knowledge of the Executive planned or proposed to engage in business, to terminate any commercial relationship with the Company or cease to accept or issue its products. Nothing herein contained shall be deemed to prohibit the Executive from hiring any employee, agent, consultant or representative of the Company who responds to a general, written solicitation in any form of media directed at the public in general. 21 (e) Notwithstanding the provisions of paragraphs 6(c) and 6(d) above, the Executive may at his election, reduce the Additional Pay Period to a period of not less than twelve (12) months by providing written notice to the Company of such election. In such case, the restrictions contained in Paragraphs 6(c) and 6(d) shall be in effect only for the duration of such reduced Additional Pay Period and the Company's obligation to continue to provide any further Additional Pay with respect to any period subsequent to such reduced Additional Pay Period under the terms of Paragraphs 5(b)(v)(D) or provide any further benefits under the terms of Paragraph 5(b)(v)(E) shall cease. In the event that the Company determines, in good faith, that the Executive has breached his obligations under Paragraphs 6(b), 6(c) or 6(d), the Company shall be under no obligation to provide any further Additional Pay or provide any further benefits otherwise due under Paragraphs 5(b)(v)(D) or (E) above, during the remainder of the Additional Pay Period. In the event of a judicial determination that the Executive has breached his obligations under Paragraphs 6(b), 6(c) or 6(d), in addition to any damages or other relief otherwise available to the Company, the Executive shall be obligated to reimburse the Company for any Additional Pay previously received from the Company. In addition, following a judicial determination, the prevailing party shall be entitled to be reimbursed by the nonprevailing party for reasonable legal fees and expenses incurred by the prevailing party in connection with the judicial proceeding seeking to enforce the provisions of Paragraph 6 hereof. (f) For the purposes of this Agreement, the period of restriction of confidentiality or proprietary information and competition is intended to limit disclosure and competition by the Executive to the maximum extent permitted by law. If it shall be finally determined by any court of competent jurisdiction ruling on this Agreement that the scope or duration of any limitation contained in this Agreement is too extensive to be legally enforceable, then the parties hereby 22 agree that the provisions hereof shall be construed to be confined to such scope or duration (not greater than that provided for herein) as shall be legally enforceable, and the Executive hereby consents to the enforcement of such limitations as so modified. (g) The Executive acknowledges that any violation by him of the provisions of this Paragraph 6 would cause serious and irreparable damage to the Company. He further acknowledges that it might not be possible to measure such damage in money. Accordingly, the Executive agrees that, in the event of a breach or threatened breach by the Executive of the provisions of this Section, the Company may seek, in addition to any other rights or remedies, including money damages, an injunction or restraining order, without the need to post any bond or other security, prohibiting the Executive from doing or continuing to do any acts constituting such breach or threatened breach. 7. Reimbursement of Business Expense. During the Term of Employment, subject to and in accordance with the Company's policies with regard to such matters, the Executive is authorized to incur reasonable business expenses in carrying out his duties and responsibilities under the Agreement, and the Company shall promptly reimburse him for all such properly documented business expenses incurred in accordance with the Company's travel and business expense reimbursement policy in connection with carrying out the business of the Company. 8. Indemnity. The Company shall indemnify the Executive, to the fullest extent permitted by the General Corporation Law of the State of Delaware, for any acts or omissions taken or made by the Executive during the Term of Employment, within the scope of his authority under this Agreement. 23 9. Miscellaneous. (a) This Agreement shall be construed and enforced in accordance with the laws of the State of New York without reference to principles of conflict of laws. Any legal suit, action or proceeding against any party hereto arising out of or relating to this Agreement shall be instituted in a federal or state court in the State of New York, and each party hereto waives any objection which it may now or hereafter have to the laying of venue of any such suit, action or proceeding and each party hereto irrevocably submits to the jurisdiction of any such court in any suit, action or proceeding. (b) Upon the Effective Date, this Agreement and the Change-in-Control Agreement between the Executive and the Company, entered into simultaneously herewith, shall incorporate the complete understanding and agreement between the parties with respect to the subject matter hereof and thereof and supersede any and all other prior or contemporaneous agreements, written or oral, between the Executive and the Company or any predecessor thereof, with respect to such subject matter. No provision hereof may be modified or waived except by a written instrument duly executed by the Executive and the Company with the express approval of the Compensation Committee. (c) The Executive acknowledges that before entering into this Agreement he has received a reasonable period of time to consider this Agreement and has had sufficient time and an opportunity to consult with any attorney or other advisor of his choice in connection with this Agreement and all matters contained herein, and that he has been advised to do so if he so chooses. The Executive further acknowledges that this Agreement and all terms hereof are fair, reasonable and are not the result of any fraud, duress, coercion, pressure or undue influence exercised by the Company, that he has approved and entered into this Agreement and all of the terms hereof on his own free will, and that no promises or representations have been made to him 24 by any person to induce him to enter into this Agreement other than the express terms set forth herein. (d) The Company shall be entitled to deduct and withhold from all compensation payable to the Executive pursuant to this Agreement all amounts required to be deducted and withheld therefrom pursuant to any present or future law, regulation or ordinance of the United States of America or any state or local jurisdiction therein or any foreign taxing jurisdiction. (e) Paragraph headings are included in this Agreement for convenience of reference only and shall not affect the interpretation of the text hereof. (f) Any and all notices, demands or other communications to be given or made hereunder shall be in writing and shall be deemed to have been fully given or made when personally delivered, or on the third business day after mailing from within the continental United States by registered mail, postage prepaid, addressed as follows: If to the Company: MasterCard International Incorporated 2000 Purchase Street Purchase, New York 10577 Attention: General Counsel If to the Executive: Robert W. Selander Either party may change the address to which any notices to it shall be sent by giving to the other party written notice of such change in conformity with the foregoing. (g) This Agreement may be executed in two or more counterparts, each of which shall constitute an original but all of which together shall constitute one and the same instrument. 25 (h) This Agreement may be assigned by the Company to, and shall inure to the benefit of, any successor to substantially all the assets and business of the Company as a going concern, whether by merger, consolidation or purchase of substantially all of the assets of the Company or otherwise, provided that such successor shall assume the Company's obligations under this Agreement. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. (i) Notwithstanding anything contained herein to the contrary, the Executive shall not be entitled to receive any duplicative payment or benefit hereunder, with respect to any payment or benefit received during the Change-in-Control Payment Period or the Recalculated Change-in-Control Payment Period provided under the Executive's Change-in-Control Agreement with the Company. Any payment or benefit to which the Executive may become entitled hereunder with respect to the Additional Pay Period or the Recalculated Additional Pay Period, as applicable, shall take into account any payment or benefits already received by or provided to the Executive during the Change-in-Control Payment Period or the Recalculated Change-in-Control Payment Period under the Executive's Change-in-Control Agreement with the Company, such that the Executive does not receive the same payment or benefit (or any portion thereof) twice, but instead shall receive under both this Agreement and the Change-in-Control Agreement combined, only the equivalent of the full payment or benefit to which he is then entitled under the operative agreement. This Paragraph 9(i) shall not affect any accelerated vesting to which the Executive has or may become entitled under this Agreement or the Executive's Change-in-Control Agreement. 26 IN WITNESS WHEREOF, each of the Company and the Executive has executed this Agreement to become effective on the Effective Date. MASTERCARD INTERNATIONAL INCORPORATED /s/ Robert W. Selander By: /s/ Michael Michl - -------------------------- ------------------------------ Robert W. Selander Michael Michl Executive Vice President, Central Resources 27 AGREEMENT AND RELEASE TO: MasterCard International Incorporated 1. I acknowledge that my [full-time] employment terminated effective [date]. The terms and conditions governing the termination of my [full-time] employment are provided by my Employment Agreement with MasterCard International Incorporated ("MasterCard"), dated as of_____ , 2001 ("Employment Agreement"), my Change in Control Agreement with MasterCard, dated as of_____ , 2001 ("CIC Agreement") and this Agreement and Release, which together constitute our Agreement (collectively, the "Agreements"). I further acknowledge that the payments and benefits provided under the Agreements relating to the period following the termination of my [full-time] employment are conditioned upon my execution of this Agreement and Release. I further acknowledge that the Agreements provide for payments and benefits which exceed and are in lieu of any other payments and benefits to which I might otherwise be entitled in the absence of my execution of this Agreement and Release. 2. Waiver and Release: Except as otherwise provided in the Employment Agreement and the CIC Agreement, I agree to and do waive any claims I may have for employment by MasterCard. I further agree to and do release and forever discharge MasterCard, its members, subsidiaries, affiliates and their respective current and former officers, directors, shareholders, employees and agents from any and all claims and causes of action, known or unknown, arising out of or relating to my employment by MasterCard or the termination thereof, including, but not limited to wrongful discharge, breach of contract, tort, fraud, Civil Rights Laws, the Age Discrimination in Employment Act, the Americans with Disabilities Act or any other federal, state or local law relating to employment, discrimination in employment, termination of employment or otherwise, up to and including the date I execute this Agreement and Release. 3. Agreement Not to Sue: Except as otherwise prohibited by law, I agree not to sue or commence any proceeding or participate voluntarily in any action, suit, proceeding, arbitration or mediation against MasterCard and/or its current or former employees, directors and agents, with respect to any act, occurrence, event, or any alleged failure to act, relating to my employment and occurring up to and including the date of this Agreement and Release. 4. Exclusions from this Agreement and Release: This Agreement and Release excludes my right to enforce the terms of the Employment Agreement or the CIC Agreement insofar as they relate to MasterCard's obligations to me, which survive the termination of my [full-time] employment, nor does it include any rights I may have under MasterCard's employee benefit plans as determined by the terms of the relevant plan documents, other than the Severance Plan and except as may otherwise be expressly provided in the Employment Agreement or the CIC Agreement. Further, this Agreement and Release excludes any claims I may have for: (i) indemnity as provided in the Employment Agreement; and (ii) coverage under any MasterCard Directors and Officers liability insurance policy. 5. Return of Property: No later than [insert termination day], I agree to relinquish all MasterCard property in my possession or under my control, including, but not limited to, MasterCard equipment, files, keys, personal computers, cellular phones and business, credit and access cards. I further agree to submit all expense reports and settle my outstanding accounts with MasterCard before I may receive any payments or other benefits pursuant to the Agreements. I acknowledge that MasterCard will not accept expense reports submitted more than twenty (20) days after the effective date of the termination of my [full-time] employment. I further acknowledge that MasterCard will review timely submitted expense reports and pay only those ordinary and necessary business expenses in accordance with its then current business expense reimbursement policy. 6. No Disparagement: I agree that I will not now or at any time in the future, make any communications, whether oral or written, which negatively reflect upon, or disparage in any way, or induce or encourage others to disparage in any way, MasterCard, its services, its products, or any of its members or current or former directors, officers, employees or agents. 7. Transition of My Responsibilities: I agree to cooperate fully, completely and to the extent reasonably required by MasterCard in order to assure transition of files and pending matters that are or will be assigned to other staff. To the extent not inconsistent with my employment or other business activities, this includes, but is not limited to, assisting and advising MasterCard from time to time with respect to matters in which I was involved and had knowledge as MasterCard's Chief Executive Officer. Further, I agree to provide testimony and/or information related to any claims, lawsuits or investigations by or against MasterCard and to make myself available for that purpose. 8. Right to Terminate and Recover Payments and Other Benefits: Except as otherwise prohibited by law, with respect to the release of claims under the Age Discrimination in Employment Act, I acknowledge and agree that MasterCard's obligation to make or provide, or continue making or providing payments and benefits under the Agreements relating to the period following the termination of my [full-time] employment is expressly conditioned upon my compliance with all of my obligations provided under this Agreement and Release. Should I violate any of the terms of this Agreement and Release, MasterCard will be entitled to discontinue all payments and benefits provided under the Agreements. In the event of a judicial determination that I have breached my obligations under this Agreement and Release, MasterCard shall have the further right to recover all sums it may have paid pursuant to the Agreements relating to the period following the termination of my [full-time] employment. In addition, following a judicial determination, the prevailing party shall be entitled to be reimbursed by the non-prevailing party for reasonable legal fees and expenses incurred by the prevailing party in connection with the judicial proceeding seeking to enforce the provisions of this paragraph 8. The foregoing shall not limit MasterCard's rights under the Agreements in the event of a breach of any of the Agreements by the Executive. 9. Terms Governing The Agreements: I acknowledge that the Agreements set forth the entire understanding of the parties and supersedes any and all prior agreements, oral or written, relating to my employment by MasterCard or the termination thereof. The Agreements may not be modified except by a writing, signed by me and by MasterCard. The Agreements shall be binding upon my heirs and personal representatives, and the successors and assigns of MasterCard. This Agreement and Release shall be governed and construed in accordance with the laws of the State of New York, without regard to its choice of law rules. 2 10. Severability: The invalidity or unenforceability of any particular provisions of this Agreement and Release shall not affect the other provisions hereof, and this Agreement and Release shall be construed in all respects as if such invalid or unenforceable provisions were omitted. 11. Waiver: I understand that the waiver by MasterCard of my breach of any provision of this Agreement and Release shall not operate or be construed as a waiver of any subsequent breach by me. The waiver by me of a breach of any provision of this Agreement and Release by MasterCard shall not operate or be construed as a waiver of any subsequent breach by MasterCard. 12. No Admission of Wrongdoing: I acknowledge that by making this offer, MasterCard does not admit any failure of performance, wrongdoing or violation of law. 13. Acknowledgment of Voluntary Execution: I have been informed that I may take up to 21 days from today to consider this Agreement and Release. I have also been informed that I may revoke this Agreement and Release after signing it, but only by delivering a signed revocation notice to ______________ within seven (7) days of my signing and returning this Agreement and Release. I acknowledge that before executing this Agreement and Release, I have had the opportunity to consult with any attorney or other advisor of my choice, and I have been advised to do so if I choose. I further acknowledge that I have signed this Agreement and Release of my own free will, and that no promises or representations have been made to me by any person to induce me to sign this Agreement and Release other than the express terms set forth in the Agreements. I further acknowledge that I have read the Agreements and understand all of the terms outlined therein, including the waiver and release of claims set forth in paragraph 2 above. Accepted and Agreed: _______________________________________ Robert W. Selander Dated:_________________________________ 3 EX-10.8 10 y49195a2ex10-8.txt MASTERCARD INT'L INC. EXECUTIVE INCENTIVE PLAN Exhibit 10.8 MASTERCARD INTERNATIONAL INCORPORATED EXECUTIVE INCENTIVE PLAN PLAN DOCUMENT AS AMENDED AND RESTATED EFFECTIVE JULY 25, 2001 1. PURPOSE The Executive Incentive Plan (the "Plan") is designed to support the strategic commitment to attract, retain and motivate senior executives of MasterCard International Incorporated (the "Company") by providing a long-term incentive opportunity that is based on the Company's achievement of its quantitative and qualitative long-term performance goals. 2. DEFINITIONS For purposes of this Plan, the following terms shall have the meanings set forth below: "Board" shall mean the Global Board of Directors. "Cause" shall mean (i) the willful failure by the Participant to substantially perform his duties as an employee of the Company (other than due to physical or mental illness) after reasonable notice to the Participant of such failure, (ii) the Participant's engaging in serious misconduct that is injurious to the Company including, but not limited to, damage to its reputation or standing in its industry, (iii) the Participant's having been convicted of, or entered a plea of nolo contendere to a crime that constitutes a felony or (iv) the material breach by the Participant of any written covenant or agreement with the Company not to disclose any information pertaining to the Company. "Change in Control" means: (i) as long as the Company is a non-stock membership corporation, or any of its affiliates is a private share corporation, if (a) 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 the Company (or all shareholders of such private share corporation) on any issue, (b) 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 the Company's or such private share corporations' assets, or (c) at any time, a plan is approved by the members of the Company or the shareholders of Plan Document 1 such private share corporation for the sale or liquidation of the Company 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 in Control" under (b) and/or (c), and a reorganization to convert the Company from a membership to a stock company or a transaction resulting in the integration of Europay and MasterCard shall not in and of itself constitute a "Change in Control"; (ii) if the Company becomes a stock corporation, the approval by its stockholders of (a) any consolidation or merger of the Company in which the Company 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, (b) any sale, lease, exchange or other transfer (in one transaction or series of related transactions) of all or substantially all of the assets of the Company, or (c) adoption of any plan or proposal for the liquidation or dissolution of the Company; (iii) any "person" (as defined in Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than the Company or a subsidiary or employee benefit plan or trust maintained by the Company 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 twenty-five percent (25%) of the stock outstanding at the time, without the prior approval of the Board; or (iv) a majority of the voting directors proposed on a slate for election by members are rejected by a vote of such members. "Committee" shall mean a committee of the Board designated by the Board to administer the Plan. Unless the Board shall determine otherwise, the Committee shall be the Compensation Committee. "Determination Date" shall have the meaning set forth in Section 5. "Disability" shall mean total and permanent disability in accordance with the Company's long-term disability plan. "Participant" shall mean an eligible employee to whom a Performance Unit has been granted. Plan Document 2 "Performance Levels" shall mean, with respect to the Performance Measures (on an aggregate basis), the following degrees of achievement: Below Threshold, Minimum Threshold, Target and Superior. "Performance Measures" shall mean one or more performance goals established by the Committee with respect to each award of Performance Units. "Performance Period" shall mean, with respect to each award of Performance Units, the three-year period beginning on the date such award is made or such other period as may be established by the Committee at the time of award. "Performance Unit" shall mean a performance unit awarded under the Plan, including a Limited Award described in Section 3. "Post-Performance Period" shall have the meaning set forth in Section 7(b). "Retirement" shall mean retirement pursuant to the terms of the MasterCard Accumulation Plan. "Unit Value" shall be the value of a Performance Unit as determined in accordance with Section 5. 3. ELIGIBILITY Employees who are designated Senior Vice President or higher are eligible for participation in any Performance Period provided they have achieved the minimum performance evaluation rating required for participation as determined by the Committee and have been designated to the appropriate level by March 31 of the calendar year. In addition, the Committee and/or the Chief Executive Officer may designate any other employee as eligible to participate in the Plan. Further, the Committee and/or the Chief Executive Officer may designate any other employee not otherwise eligible to participant in the Plan as eligible to receive a limited award of a Performance Unit (a "Limited Award") under the Plan. Employees not otherwise eligible to participate in the Plan may receive up to a total of two such Limited Awards. Limited Awards shall be granted only while the employee is not otherwise entitled to participate in the Plan. 4. PERFORMANCE UNIT AWARDS (a) Subject to the provisions of this Plan, each performance unit award shall be determined by the CEO with approval by the Committee and evidenced by a certificate or written agreement provided to each Participant. Subject to Sections 6 and 7 of the Plan, each Performance Unit grant shall entitle a Plan Document 3 Participant to receive a cash payment equal to the Unit Value of such Performance Unit. Unit Value shall be determined in accordance with Section 5. (b) The Committee shall specify the terms and conditions of each award of Performance Units, including the applicable vesting schedule, Performance Period, Performance Measures and Performance Levels. The Committee may condition the grant of a new award on the surrender of an outstanding award. Any such new award shall be subject to the terms and conditions specified by the Committee at the time the new award is granted, in accordance with the provisions of the Plan and without regard to the terms of the surrendered award. 5. UNIT VALUE (a) Unless otherwise provided by the Committee at the time of award, the Unit Value of a Performance Unit shall be determined based upon the achievement of Performance Levels as of the Determination Date as follows.
PERFORMANCE LEVEL UNIT VALUE ------------------------------------------------------ Below Threshold $ 0 Threshold $ 50 Target $ 100 Superior $ 200
Determinations as to the achievement of Performance Levels shall be made by the Committee in its sole discretion. The Committee will determine the Unit Value based on interpolation in the event that performance between threshold and target or target and superior is achieved. (b) The Committee shall determine the Performance Level achieved for a Performance Period during the [60] day period following the Determination Date. Except as otherwise provided by the Committee, the Determination Date shall be the last day of the Performance Period to which a Performance Unit relates; provided that, if a Participant terminates employment prior to the end of the Performance Period, the Determination Date with respect to any Performance Units relating to such Performance Period (provided such Performance Units have not been forfeited pursuant to Section 6 by reason of such termination) shall be deemed to be the last day of employment. In the event termination prior to the end of the Performance Period is by reason of death, Disability, or Retirement, the Performance Level achieved with respect to any such Performance Units Plan Document 4 shall be deemed to be Target. In the event termination prior to the end of the Performance Period is other than by reason of death, Disability, or Retirement, the Performance Level achieved with respect to any such Performance Units shall be deemed to be the lesser of (i) Target or (ii) the Performance Level indicated by the most recent annual corporate score used for purposes of the Company's Annual Incentive Compensation Plan. 6. VESTING (a) Each Performance Unit shall vest subject to such terms and conditions as the Committee may, in its sole discretion, determine; provided that, unless otherwise provided by the Committee at the time of award, Performance Units which relate to a three-year Performance Period shall vest according to the following schedule if the Participant remains in the continuous employment of the Company:
ANNIVERSARY OF % OF PERFORMANCE THE DATE OF GRANT UNITS VESTED ----------------- ---------------- 1st 26 1/3% 2nd 52 2/3% 3rd 80% 4th 80% 5th 100%
(b) Except as otherwise determined by the Committee or as provided below, unvested Performance Units shall be forfeited upon termination of employment. (c) Notwithstanding the foregoing, upon a Participant's termination of employment due to death or Disability, all of the Participant's Performance Units shall immediately vest and none shall be forfeited. (d) Notwithstanding the foregoing, upon a Participant's termination of employment due to Retirement, all of the Participant's Performance Units (with the exception of any Performance Units granted with no vesting until the end of the Performance Period) shall immediately vest and none shall be forfeited, as long as Participant has at least six months of service in the Performance Period. (e) Notwithstanding the foregoing, upon a Participant's termination of employment for Cause, all vested but unpaid Performance Units held by the Participant shall be forfeited in full, without any right to payment from Plan Document 5 the Company. The Committee in its sole discretion shall determine whether a termination was for "Cause". (f) Notwithstanding the foregoing, upon a Participant's voluntary termination other than by reason of Disability, all vested but unpaid Performance Units held by a Participant who violates the noncompetition provisions set forth in Section 7(c) below, shall be forfeited in full. (g) In the event of a change in control, key executives defined in the MasterCard Change of Control policy or who are parties to a "Change-in-Control" agreement with the Company would be eligible for 100% vesting in all unvested awards. 7. PAYMENT (a) Except as otherwise determined by the Committee at the time of award, or as otherwise elected by the Participant pursuant to Section 7(d) below, within 60 days of the determination of the Unit Value in accordance with Section 5, Participant shall receive a cash payment in respect of each vested Performance Unit equal to such Unit Value for the completed Performance Period. (b) Except as otherwise determined by the Committee at the time of award, or as otherwise elected by the Participant pursuant to Section 7(d) below, (i) if Participant remains in the continuous employment of the Company through the second anniversary of the last day of the Performance Period (the "Post-Performance Period") or (ii) if a Participant terminates employment due to death, Disability or Retirement during the Post-Performance Period, the Participant shall receive, within 60 days of such anniversary or termination, an additional cash payment in respect of each Performance Unit which has not yet been paid pursuant to paragraph (a) above equal to the Unit Value. (c) In the event a Participant voluntarily terminates employment other than by reason of Disability, no payment otherwise due under Section 7(a) or (b) above shall be made before 120 days after such voluntary termination. In the event that, during the 120 days following such voluntary termination, the Participant directly or indirectly engages or invests in any business or activity that is directly or indirectly in competition with any business or activity engaged in by the Company, including, but not limited to, any credit, charge, chip, or debit card business or processor, the Participant's Performance Units shall not be paid and, pursuant to Section 6(f) above, shall be forfeited in full. For purposes of the preceding sentence, the Participant shall be deemed to be engaged in any business which any Plan Document 6 person for whom he shall perform services is engaged. Notwithstanding the foregoing, nothing herein shall prohibit the Participant from having a beneficial ownership interest of less than 3% of the outstanding amount of any class of securities of any enterprise (but without otherwise participating in the activities of such enterprise) if such securities are listed on a national securities exchange or quoted on an inter-dealer quotation system. The Participant shall not be treated as engaged or invested in any business in competition with that of the Company if the Participant performs services or engages in business or activities for a MasterCard member, provided that the MasterCard member is not a party to a brand dedication agreement with VISA USA, VISA International, American Express, JCB, Discover, Diners Club, Carte Blanche or any other competitor of the Company, the term of which is two years or more. (d) Payments of Performance Units under Sections 7(a) and 7(b) above are eligible for deferral under the terms and conditions of the MasterCard International Incorporated Deferral Plan, as amended from time to time. In the event a Participant who has made a Deferred Performance Units Election under the MasterCard International Incorporated Deferral Plan voluntarily terminates employment, Sections 6(f) and 7(c) will apply to those payments that, in the absence of the Deferred Performance Units Election, would have been paid in the 120 days following termination. 8. TERM The Plan shall be effective as of January 1999. Amendments to the Plan generally shall be effective on their adoption. Section 6(f) and Section 7(c), as added to the Plan effective July 25, 2001, shall apply to Performance Units awarded beginning January 1, 2002. 9. ADMINISTRATION (a) The Committee shall determine, in its sole discretion, any question arising in connection with the interpretation or application of the provisions of the Plan and its decisions or actions in respect thereof shall be conclusive and binding upon any and all Participants and their beneficiaries, successors and assigns, and all other persons. All resolutions or actions taken by the Committee shall be by affirmative vote or action of a majority of the members of the Committee. (b) The Committee may delegate to one or more officers or managers of the Company, or to a committee of such officers or managers, the authority, subject to such terms and limitations as the Committee shall determine, to take any actions the Committee has the authority to take under the Plan. Plan Document 7 (c) Members of the Committee or its delegates shall be fully protected in relying in good faith upon the advice of counsel and shall incur no liability with respect to the Plan except for their own gross negligence or willful misconduct in the performance of their duties. The Company shall defend, indemnify and hold harmless each member of the Committee or its delegates against any and all claims, liabilities and costs (including attorney fees) arising in connection with their administration of the Plan except for such member's own gross negligence or willful misconduct. 10. GENERAL PROVISIONS (a) Nothing in this Plan or in any instrument executed pursuant hereto shall confer upon any person any right to continue in the employment or other service of the Company, or shall affect the right of the Company to terminate the employment or other service of any person at any time with or without cause. (b) The grant of Performance Units shall not confer upon a Participant any of the rights of a stockholder of the Company, and no shares of stock shall be issued pursuant to Performance Units. The rights of a Participant under the Plan shall be no greater than the rights of a general unsecured creditor of the Company. (c) In the event a Participant is employed or resides in a country with laws that prescribe certain requirements for long-term incentives to qualify for advantageous tax treatment, the Committee may at its discretion modify the terms of an award to be made under the Plan and procure assumption of any of the Company's obligations hereunder by an affiliate company, in a manner consistent or inconsistent with the terms of the Plan, for the purpose of qualifying the award under such laws of such country; provided, however, that to the extent possible, the overall terms and conditions of such an award should not be made more favorable to the recipient than would be permitted if the award had been granted under this Plan as herein set forth. (d) Participants shall be solely responsible for the payment of any taxes due in connection with the Plan; provided, however, that the Company shall make such provisions as it may deem appropriate for the withholding of any taxes which the Company determines it is required to withhold in connection with any award under the Plan. (e) By accepting any benefits under the Plan, each Participant, and Plan Document 8 each person claiming under or through him, shall be conclusively deemed to have indicated his acceptance and ratification of, and consent to, all provisions of the Plan and any action or decision under the Plan by the Company, its agents and employees and the Committee. (f) The validity, construction, interpretation and administration of the Plan and any awards under the Plan and of any determinations or decisions made thereunder, and the rights of all persons having or claiming to have any interest herein or thereunder, shall be governed by, and determined exclusively in accordance with, the laws of New York (determined without regard to its conflict of laws provisions). (g) This Plan shall be binding upon and inure to the benefit of the Company, its affiliated companies and their successors or assigns, and all Participants and their beneficiaries, successors, and assigns and all other persons claiming under or through any of them. (h) The value of Performance Unit awards shall not be treated as compensation and/or salary for purposes of calculating a Participant's benefits under any of the Company's other benefit plans, policies or programs. (i) The use of the masculine gender shall also include within its meaning the feminine. The use of the singular shall include within its meaning the plural and vice versa. 11. AMENDMENT AND TERMINATION This Plan may be amended or terminated by the Board at any time, for any reason and in any respect; provided, however, that no such amendment or termination of this Plan shall affect adversely any award of Performance Units theretofore granted without the written consent of the holder thereof. Notwithstanding the foregoing: (a) The methodology for determining Unit Value may be changed, on a prospective basis, at any time. (b) Upon termination of the Plan, the Board may provide for the immediate termination of all outstanding Performance Units in exchange for a cash payment equal to the then value of the Performance Units that are outstanding and vested (pursuant to Section 6) at the time of termination. Plan Document 9 EX-10.9 11 y49195a2ex10-9.txt MASTERCARD INT'L INC RABBI TRUST Exhibit 10.9 MASTERCARD INTERNATIONAL RABBI TRUST This Agreement is made and entered into as of December 21, 1993 by and between MasterCard International ("Company") and Wells Fargo Bank ("Trustee"). WHEREAS, Company has adopted certain deferred compensation agreements (the "Plan"); WHEREAS, Company wishes to establish a trust (hereinafter called "Trust") and to contribute to the Trust assets that shall be held therein, subject to the claims of Company's creditors in the event of Company's Insolvency, as herein defined, until paid to Plan participants and their beneficiaries in such manner and at such times as specified in the Plan; WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the Plan as an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974; WHEREAS, it is the intention of Company to make contributions to the Trust to provide itself with a source of funds to assist it in the meeting of its liabilities under the Plan; NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows: Section 1. Establishment of Trust. (a) Company hereby deposits with Trustee in trust $100, which shall become the principal of the Trust to be held, administered and disposed of by Trustee as provided in this Trust Agreement. (b) The Trust hereby established shall be irrevocable. (c) The Trust is intended to be a grantor trust, of which Company is the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly. (d) The principal of the Trust, and any earnings thereon shall be held separate and apart from other funds of Company and shall be used exclusively for the uses and purposes of Plan participants and general creditors as herein set forth. Plan participants and their beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Plan and this Trust Agreement shall be mere unsecured contractual rights of Plan participants and their beneficiaries against Company. Any assets held by the Trust will be subject to the claims of Company's general creditors under federal and state law in the event of Insolvency, as defined in Section 3(a) herein. 1 Section 2. Payments to Plan Participants and Their Beneficiaries. (a) Company shall deliver to Trustee a schedule (the "Payment Schedule") that indicates the amounts payable in respect of each Plan participant (and his or her beneficiaries), that provides a formula or other instructions acceptable to Trustee for determining the amounts so payable, the form in which such amount is to be paid (as provided for or available under the Plan), and the time of commencement for payment of such amounts. Except as otherwise provided herein, Trustee shall make payments to the Plan participants and their beneficiaries into the terms of the Plan and shall pay amounts withheld to the appropriate taxing authorities or determine that such amounts have been reported, withheld and paid by Company. (b) The entitlement of a Plan participant or his or her beneficiaries to benefits under the Plan shall be determined by Company or such party as it shall designate under the Plan, and any claim for such benefits shall be considered and reviewed under the procedures set out in the Plan. (c) Company may make payments of benefits directly to Plan participants or their beneficiaries as they become due under the terms of the Plan. Company shall notify Trustee of its decision to make payment of benefits directly prior to the time amounts are payable to participants or their beneficiaries. In addition, if the principal of the Trust, and any earnings thereon, are not sufficient to make payments of benefits in accordance with the terms of the Plan, Company shall make the balance of each such payment as it falls due. Trustee shall notify Company where principal and earnings are not sufficient. Section 3. Trustee Responsibility Regarding Payments to Trust Beneficiary When Company Is Insolvent. (a) Trustee shall cease payment of benefits to Plan participants and their beneficiaries if the Company is Insolvent. Company shall be considered "Insolvent" for purposes of this Trust Agreement if (i) Company is unable to pay its debts as they become due, or (ii) Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. (b) At all times during the continuance of this Trust, as provided in Section 1(d) hereof, the principal and income of the Trust shall be subject to claims of general creditors of Company under federal and state laws as set forth below. (1) The Board of Directors and the Chief Executive Officer [or substitute the title of the highest ranking officer of the Company] of Company shall have the duty to inform Trustee in writing of Company's Insolvency. If a person claiming to be a creditor of Company alleges in writing to Trustee that Company has become Insolvent, Trustee shall determine whether Company is Insolvent and, pending such determination, Trustee shall discontinue payment of benefits of Plan participants or their beneficiaries. (2) Unless Trustee has actual knowledge of Company's Insolvency, or has received notice from Company or a person claiming to be a creditor alleging that Company is Insolvent, Trustee shall have no duty to inquire whether Company is Insolvent. Trustee may in all events rely on such evidence concerning Company's solvency as may be furnished to Trustee and that provides Trustee with a reasonable basis for making a determination concerning Company's solvency. 2 (3) If at any time Trustee has determined that Company is Insolvent, Trustee shall discontinue payments to Plan participants or their beneficiaries and shall hold the assets of the Trust for the benefit of Company's general creditors. Notwithstanding in this Trust Agreement shall in any way diminish any rights of Plan participants or their beneficiaries to pursue their rights as general creditors of Company with respect to benefits due under the Plan or otherwise. (4) Trustee shall resume the payment of benefits to Plan participants or their beneficiaries in accordance with Section 2 of this Trust Agreement only after Trustee has determined that Company is not Insolvent (or is no longer Insolvent). (c) Provided that there are sufficient assets, if Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Plan participants or their beneficiaries under the terms of the Plan for the period of such discontinuance, less the aggregate amount of any payments made to Plan participants or their beneficiaries by Company in lieu of the payments provided for hereunder during any such period of discontinuance. Section 4. Payments to Company. Except as provided in Section 3 hereof, after the Trust has become irrevocable, Company shall have no right or power to direct Trustee to return to Company or to divert to others any of the Trust assets before all payment[s] of benefits have been made to Plan participant and their beneficiaries pursuant to the terms of the Plan. Section 5. Investment Authority. (a) Except as provided below, the Company shall have all power over and responsibility for the management, disposition, and investment of the Trust assets, and the Trustee shall comply with proper written directions of the Company concerning the Trust assets. The Company shall not issue directions in violation of the terms of this Agreement. Except as provided in this Agreement, the Trustee shall have no duty or responsibility to review, initiate action, or make recommendations regarding the Trust assets and shall retain such assets until directed in writing by the Company to dispose of them. (b) The Company may appoint an Investment Manager or Managers to direct, control or manage the investment of all or a portion of the Trust assets. The Company shall notify the Trustee in writing of the appointment of each Investment Manager and the portion of the Trust assets subject to the Investment Manager's direction. If the foregoing conditions are met, the Investment Manager shall have the power to manage, acquire, retain, or dispose of such portion of the Trust assets and the Trustee shall not be liable for the acts or omissions of the Investment Manager or be under an obligation to invest or otherwise manage the portion of the Trust assets which is subject to the direction of such Investment Manager. (c) The Company may also delegate all of its investment authority to the Trustee for all or part of the Trust. Upon written acceptance of that delegation, the Trustee shall have full 3 power and authority to invest and reinvest the portion of the Trust so designated by the Company in investments of any kind. Section 6. Disposition of Income (a) During the term of this Trust, all income received by the Trust, net of expenses and taxes, shall be accumulated and reinvested. Section 7. Accounting by Trustee. Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such specific records as shall be agreed upon in writing between Company and Trustee. Within 60 days following the close of each calendar year and within 60 days after the removal or resignation of Trustee, Trustee shall deliver to Company a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be. Section 8. Responsibility of Trustee. (a) Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by Company which is contemplated by, and in conformity with, the terms of the Plan or this Trust and is given in writing by Company. In the event a dispute between Company and a party, Trustee may apply to a court of competent jurisdiction to resolve the dispute. (b) If Trustee undertakes or defends any litigation arising in connection with this Trust, Company agrees to indemnify Trustee against Trustee's costs, expenses and liabilities (including without limitation, attorneys' fees and expenses) relating thereto and to be primarily liable for such payments. If Company does not pay such costs, expenses, and liabilities in a reasonably timely manner, Trustee may obtain payment from the Trust. (c) Trustee may consult with legal counsel (who may also be counsel for Company generally) with respect to any of its duties or obligations hereunder. (d) Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any of its duties or obligations hereunder. (e) Trustee shall have, without exclusion, all powers conferred on trustees by applicable law, unless expressly provided otherwise herein, provided, however, that if an insurance policy is 4 held as an asset of the Trust, Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee, or to loan to any person the proceeds of any borrowing against such policy. (f) Notwithstanding any powers granted to Trustee pursuant to this Trust Agreement or to applicable law, Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code. Section 9. Compensation and Expenses of Trustee. Company shall pay all administrative and Trustee's fees and expenses as per the agreed upon schedule. If not so paid, the fees and expenses shall be paid from the Trust. Section 10. Resignation and Removal of Trustee. (a) Trustee may resign at any time by written notice to Company, which shall be effective 60 days after receipt of such notice unless Company and Trustee agree otherwise. (b) Trustee may be removed by Company on 60 days notice or upon shorter notice accepted by Trustee. (c) Upon resignation or removal of Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee. The transfer shall be completed within 60 days after receipt of notice of resignation, removal or transfer, unless Company extends the time limit. (d) If Trustee resigns or is removed, a successor shall be appointed, in accordance with Section 11 hereof, by the effective date of resignation or removal under paragraphs (a) or (b) of this section. If no such appointment has been made, Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust. Section 11. Appointment of Successor. (a) If Trustee resigns or is removed in accordance with Section 10(a) or (b) hereof, Company may appoint any third party, such as a bank trust department or other party that may be granted corporate trustee powers under state law, as a successor to replace Trustee upon resignation or removal. The appointment shall be effective when accepted in writing by the new Trustee, who shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by Company or the successor Trustee to evidence the transfer. (b) The successor Trustee need not examine the records and acts of any prior Trustee and may retain or dispose of existing Trust assets, subject to Sections 7 and 8 hereof. The successor Trustee shall not be responsible for and Company shall indemnify and defend the successor 5 Trustee from any claim or liability resulting from any action or inaction of any prior Trustee or from any other past event, or any condition existing at the time it becomes successor Trustee. Section 12. Amendment or Termination. (a) This Trust Agreement may be amended by a written instrument executed by Trustee and Company. Notwithstanding the foregoing, no such amendment shall conflict with the terms of the Plan or shall make the Trust revocable after it has become irrevocable in accordance with Section 1(b) hereof. (b) The Trust shall not terminate until the date on which Plan participants and their beneficiaries are no longer entitled to benefits pursuant to the terms of the Plan. Upon termination of the Trust any assets remaining in the Trust shall be returned to Company. Section 13. Miscellaneous (a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. (b) Benefits payable to Plan participants and their beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process. (c) This Trust Agreement shall be governed by and construed in accordance with the laws of California. Section 14. Effective Date The effective date of this Trust Agreement shall be December 21, 1993. Wells Fargo Bank, N.A. MasterCard International By By ---------------------------------- ----------------------------------- 6 EX-10.10 12 y49195a2ex10-10.txt MASTERCARD INT'L SUPPLEMENTAL EXEC RETIREMENT PLAN Exhibit 10.10 MASTERCARD INTERNATIONAL INCORPORATED SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Effective November 18, 1999 MASTERCARD INTERNATIONAL INCORPORATED SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
TABLE OF CONTENTS Page ---- ARTICLE I DEFINITIONS 1.1 Definitions......................................................................... 1 1.2 Rules of Construction............................................................... 5 ARTICLE II ELIGIBILITY AND PARTICIPATION 2.1 Eligibility......................................................................... 6 2.2 Notice.............................................................................. 6 2.3 Participation....................................................................... 6 ARTICLE III RETIREMENT BENEFIT AND DEATH BENEFIT 3.1 Retirement Benefit Payable on or After Vesting Date................................. 7 3.2 Retirement Benefit Following Termination Due to a Change of Control................. 7 3.3 Death Benefit....................................................................... 8 ARTICLE IV FORM AND TIMING OF RETIREMENT BENEFIT 4.1 Form................................................................................ 9 4.2 Timing.............................................................................. 9 ARTICLE V VESTING 5.1 Vesting............................................................................. 11 ARTICLE VI ADMINISTRATION 6.1 Committee........................................................................... 12 6.2 Claims Procedures................................................................... 12 ARTICLE VII FUNDING 7.1 General Rule........................................................................ 13
i
ARTICLE VIII AMENDMENT AND TERMINATION 8.1 General Rule........................................................................ 14 ARTICLE IX GENERAL PROVISIONS 9.1 Payments to Minors and Incompetents................................................. 15 9.2 No Contract......................................................................... 15 9.3 Non-Alienation of Benefits.......................................................... 15 9.4 Income Tax Withholding.............................................................. 15 9.5 Governing Law....................................................................... 15 9.6 Captions............................................................................ 15 9.7 Severability........................................................................ 15 9.8 Notices............................................................................. 15
Appendix A - Calculation of the Offset Appendix B - Actuarial Assumptions and Factors Appendix C - Hypothetical Prior Employer Benefit for Sample Participant ii PREAMBLE Effective November 18, 1999, MasterCard International Incorporated (the "Company") established a nonqualified defined benefit pension plan referred to as the Supplemental Executive Retirement Plan (the "Plan" or "SERP") for the benefit of key executives of the Company. The Plan is an unfunded nonqualified pension plan that is maintained primarily for the purpose of providing retirement income for a select group of highly compensated employees and is intended to qualify as a "top hat plan" for purposes of ERISA. ARTICLE I DEFINITIONS 1.1 Definitions. The following words and phrases when used in the Plan shall have the meanings indicated in this Article I. Capitalized terms that are defined in MAP and not otherwise defined in this Article I have the meanings assigned thereto in MAP. Similarly, capitalized terms that are defined in the Annuity Bonus Program and not otherwise defined in this Article I have the meanings assigned thereto in the Annuity Bonus Program, if so indicated in the Plan. "Actuarial Equivalent" means a benefit of equal value, in accordance with the actuarial assumptions and factors set forth in Appendix B. "Annuity Bonus Program" means the MasterCard International Incorporated Annuity Bonus Program, effective February 1, 1995, as amended and restated effective January 1, 2000, and as the same may be amended from time to time. "Annuity Bonus-Related Benefit" means an aggregate amount equal to the sum of the following amounts: (a) the amount that is the difference between the (i) lump-sum value of a Participant's accrued benefit, as of December 31, 1999, under the Prior Plan Terms, without regard to the limits of Sections 401(a)(17) and 415 of the Code, as determined by the Company and (ii) such Participant's Initial Account Balance in MAP; and (b) the amount that is the sum of each amount that shall be determined annually, beginning as of January 1, 2000, in accordance with the formula A-B, where "A" is the sum of (i) the vested Pay Credit that a Participant would have received for the calendar year, if the Limits (as defined under the Annuity Bonus Program) did not apply to the Participant for such year and (ii) the MAP Adjustment Bonus, if any (as defined under the Annuity Bonus Program), for such calendar year; and "B" is the Pay Credit actually credited to the Participant's MAP Account for such calendar year. The amounts determined in paragraphs (a) and (b) are each accumulated with 8% interest to the Participant's Vesting Date. "Beneficiary" means the Participant's Spouse, other Beneficiary or Contingent Annuitant who is eligible to receive payments upon the death of the Participant. "Benefit Starting Date" means the date on which a Participant's Retirement Benefit is payable or, in the case of a Ten-Year Certain Annuity, the date on which payment of a Participant's Retirement Benefit first commences. "Board" means the Global Board of Directors of the Company. "Cause" means (a) the willful failure by the Participant to substantially perform his duties as an Employee of the Company (other than due to physical or mental illness) after reasonable notice to the Participant of such failure, (b) the Participant's engaging in serious misconduct that is injurious to the Company including, but not limited to, damage to its reputation or standing in its industry, (c) the Participant's having been convicted of, or having entered a plea of nolo contendere to a crime that constitutes a felony or (d) the material breach by the Participant of any written covenant or agreement with the Company not to disclose any information pertaining to the Company. The conduct described in the immediately preceding sentence shall be considered Cause, notwithstanding that the Company may not learn of such conduct until after the Participant incurs a Termination from Service Date. "Change of Control" means: (a) as long as the Company is a non-stock membership corporation, if (i) at any time three members have become entitled to cast at least 35 percent of the votes eligible to be cast by all the members of the Company on any issue, (ii) at any time, a plan or agreement is approved by the members to sell, transfer, assign, lease or exchange substantially all of the Company's assets, or (iii) at any time, a plan is approved by the members of the sale or liquidation of the Company. 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 (ii) and/or (iii), and a reorganization to convert the Company from a membership to a stock company or a transaction resulting in the integration of Europay and MasterCard shall not in and of itself constitute a "Change of Control". (b) if the Company becomes a stock corporation, the approval by the shareholders of the Company of (i) any consolidation or merger of the Company in which the Company 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 or 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, (ii) any sale, lease, exchange or other transfer (in one transaction or series of related transactions) of all or substantially all of the assets of the Company, or (iii) adoption of any plan or proposal for the liquidation or dissolution of the Company. (c) any "person" (as defined in Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than the Company or a subsidiary or employee benefit plan or trust maintained by the Company 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; or (d) a majority of the voting directors proposed on a slate for 2 election by the members are rejected by a vote of such members. "Chief Executive Officer" means the Chief Executive Officer of the Company. "Committee" means the committee of the Board designated by the Board to administer the Plan. Unless the Board shall determine otherwise, the Committee shall be Compensation Committee. "Company" means MasterCard International Incorporated, a Delaware not-for-profit corporation, and any entity that succeeds to all or substantially all of its business or assets. "Constructive Termination" means the termination by the Participant of his employment with the Company due to one of the following conditions: (a) a material reduction in the Participant's title or responsibilities, (b) the relocation of the Participant's principal place of work as of the date of a Change of Control to a location that is more than fifty (50) miles from such place of work, (c) a reduction in the Participant's Base Pay or (d) a reduction of ten percent (10%) or more in the target annual incentive bonus for which the Participant is eligible; provided, however, that the Participant provides written notice to the Company within sixty (60) days of the occurrence of such event and the Company fails to cure such condition within sixty (60) days after receipt of such written notice. "Deferral Request" has the meaning set forth in Section 4.2(c). "Election" has the meaning set forth in Section 4.1(b). "Eligible Employee" means an Employee of the Company who satisfies the requirements of Section 2.1. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the regulations thereunder. "Final 48-Month Average Base Pay" means an annual amount, determined in accordance with the formula P/Y, where "P" is the sum of a Participant's Base Pay earned during the forty-eight consecutive months immediately preceding the month in which the Participant's Vesting Date occurs and "Y" is four. In determining "P" for a Participant who has incurred a Disability, salary continuation payments under the Company's long-term disability plan shall be considered Base Pay. Notwithstanding anything in this definition to the contrary, if a Retirement Benefit is payable prior to completion of forty eight months as a Participant on account of (a) a Participant's Termination from Service Date occurring prior to such Participant's Vesting Date pursuant to Section 3.2(a), (b) the termination of the Plan pursuant to Section 8.1, or (c) a Pre-Vesting Date Death Benefit pursuant to Section 3.3(c), "P" shall be an amount equal to the sum of "X" and "Y" where: - "X" is the Participant's actual aggregate Base Pay earned through the applicable date set forth in (a), (b) or (c) above; and 3 - "Y" is the assumed aggregate Base Pay earned for the N future months. For purposes of determining Y, > "N" is equal to the difference between forty-eight and the number of months of earned Base Pay included in X; and > the assumed aggregate Base Pay is the sum of the monthly Base Pay that would be earned for N months, using the rate of Base Pay in effect on the applicable date set forth in (a), (b) or (c) above, which rate of Base Pay is increased by 5% on each March 1 occurring between such applicable date and the date on which the Participant would have earned forty eight months of Base Pay as a Participant. "MAP" means the MasterCard Accumulation Plan, effective as of January 1, 2000, and as the same may be amended from time to time. "Notice" means the Notice of Participation that is sent to an Eligible Employee pursuant to Section 2.2. "Offset" means an amount equal to the sum of the (a) Participant's Account Balance under MAP, (b) Participant's Annuity Bonus-Related Benefit, (c) lump-sum Actuarial Equivalent of the Participant's Social Security Primary Insurance Amount and (d) Participant's Prior Employer Benefit. The Offset shall be determined in accordance with Appendix A. "Participant" means an Eligible Employee who has received a Notice pursuant to Article II. "Plan" or "SERP" means the MasterCard International Supplemental Executive Retirement Plan. "Pre-Vesting Date Death Benefit" has the meaning set forth in Section 3.3(c). "Prior Employer Benefit" means a hypothetical retirement benefit designed to represent the lump-sum retirement benefit that a Participant would have received from a prior employer, as set forth in Appendix A and Appendix C. "Retirement Benefit" has the meaning set forth in Section 3.1. "SERP Service" means an Employee's Service while a Participant, commencing on such Employee's first day of participation in the Plan as set forth in the Notice. "Social Security Primary Insurance Amount" means the annual primary insurance amount that would be paid to a Participant under the Social Security Act, based on such Participant's available compensation, at age sixty-two (62), without regard to whether such amount is actually paid. If a Participant incurs a Termination from Service Date either before or after attaining age sixty-two (62), the Social Security Primary Insurance Amount shall be the Actuarial Equivalent of such Participant's age sixty-two (62) Social Security Primary Insurance 4 Amount. In determining the Social Security Primary Insurance Amount for a Participant, the Committee shall assume that the Participant's earnings for purposes of Social Security were greater than the Social Security wage base for all years through the earliest of the Participant's: (a) Vesting Date; (b) date of death; (c) Termination from Service Date; provided, however, that such date is (x) prior to such Participant's Vesting Date, (y) due to a Termination Without Cause or a Constructive Termination and (z) within two (2) years following a Change of Control; and (d) attainment of age sixty-two (62). "Ten-Year Certain Annuity" means a form of payment whereby the benefit is paid in ten (10) equal annual installments commencing on the Benefit Starting Date and continuing at each subsequent anniversary of the Benefit Starting Date until ten payments have been paid. "Termination from Service Date" means the earlier of: (a) the date on which an Employee quits, retires, is discharged or dies; and (b) the first anniversary of the first date of absence for any other reason, such as leave of absence granted in accordance with Company policy. "Termination Without Cause" means the termination by the Company of a Participant's employment with the Company for any reason other than death, retirement, disability or Cause. "Vesting Date" means the date on which a Participant's Retirement Benefit is vested pursuant to Article V. 1.2 Rules of Construction. The masculine gender shall be construed to include the feminine gender, and the singular form of a word shall be deemed to include the plural form, unless the context requires otherwise. Unless indicated otherwise, references herein to articles and sections are to articles and sections of the Plan. 5 ARTICLE II ELIGIBILITY AND PARTICIPATION 2.1 Eligibility. An Employee of the Company, other than the Chief Executive Officer, shall become an Eligible Employee if (a) such Employee is a participant in MAP and (b) the Chief Executive Officer, with the approval of the Committee, selects and approves the Employee for participation in the Plan. The Chief Executive Officer shall become an Eligible Employee upon the approval of the Committee. 2.2 Notice. An Eligible Employee's participation in the Plan shall be evidenced by a Notice addressed to such Eligible Employee that shall comply with, and be subject to, the provisions of the Plan. 2.3 Participation. (a) Commencement. An Eligible Employee shall become a Participant as of the date specified in the Notice. (b) Duration. Except as may otherwise be provided in the Notice, an individual shall continue to be a Participant as long as such individual is entitled to a Retirement Benefit under the Plan, notwithstanding that such Participant may have incurred a Termination from Service Date. (c) Cessation. Notwithstanding any provision in the Plan to the contrary, an Employee, other than the Chief Executive Officer, shall cease to be a Participant and shall forfeit all rights to any Retirement Benefit if the Chief Executive Officer makes the decision to terminate the Participant's employment, for any reason, with or without Cause. The Chief Executive Officer shall cease to be a Participant and forfeit all rights to a Retirement Benefit if the Board makes the decision to terminate such Participant's employment for any reason, with or without Cause. (d) Effect of Reemployment. (i) A Participant who (x) incurs a Termination from Service Date for any reason, except for the reason set forth in Section 2.3(c) and (y) is subsequently reemployed prior to his Benefit Starting Date may become a Participant, subject to the requirements of Sections 2.1 and 2.2. Such Participant shall receive credit for his SERP Service prior to the Termination from Service Date in accordance with MAP. (ii) Notwithstanding anything in the Plan to the contrary, a Participant who incurs a Termination from Service Date for any reason and is subsequently reemployed by the Company after incurring a Benefit Starting Date shall not become an Eligible Employee and shall not be permitted to recommence participation in the Plan. 6 ARTICLE III RETIREMENT BENEFIT AND DEATH BENEFIT 3.1 Retirement Benefit Payable on or After Vesting Date. (a) Benefit Starting Date as of Vesting Date. (i) The Retirement Benefit payable to a Participant (x) who is the Chief Executive Officer and (y) whose Benefit Starting Date occurs on the Vesting Date, is an amount equal to the lump sum Actuarial Equivalent of a life annuity equal to 100% of the Chief Executive Officer's Final 48-Month Average Base Pay, reduced by the amount of such Chief Executive Officer's Offset, determined in accordance with Section A.1 of Appendix A. (ii) The Retirement Benefit payable to a Participant, except the Chief Executive Officer, whose Benefit Starting Date occurs on the Vesting Date, is an amount equal to the lump sum Actuarial Equivalent of a life annuity equal to 80% of the Participant's Final 48-Month Average Base Pay, reduced by the amount of such Participant's Offset, determined in accordance with Section A.1 of Appendix A. (b) Benefit Starting Date Following Vesting Date. The Retirement Benefit payable to any Participant whose Benefit Starting Date follows such Participant's Vesting Date is the Actuarial Equivalent of the Retirement Benefit determined in accordance with Section 3.1(a). (c) Disability. A Participant who incurs a Disability Retirement Date in accordance with MAP shall be eligible to receive a Retirement Benefit in accordance with Plan provisions; provided, however, that such date does not precede the Vesting Date. A Participant who incurs a Disability Retirement Date prior his Vesting Date shall not be eligible for a Retirement Benefit. 3.2 Retirement Benefit Following Termination Due to a Change of Control. (a) General Rule. If, due to a Change of Control, a Participant incurs a Termination Without Cause or Constructive Termination, such Participant's Retirement Benefit shall be payable in accordance with Article IV, without regard to the requirements of Article V. For purposes of the Plan, a Termination Without Cause or Constructive Termination shall be deemed to be due to a Change of Control if such termination occurs within two years after the date on which a Change of Control occurs. (b) Amount Generally. Except as provided in Section 3.2(c), the Retirement Benefit payable to a Participant who incurs a Termination from Service Date pursuant to Section 3.2(a) shall be determined in accordance with Section 3.1; provided, however, that the Offset shall be determined in accordance with Section A.3 of Appendix A. (c) Amount Upon Deferral. Notwithstanding anything in Section 3.2(b) to the contrary, the Retirement Benefit of a Participant (x) who incurs a Termination from Service Date pursuant to Section 3.2(a) and (y) whose Benefit Starting Date is deferred pursuant to Section 4.2(c)(ii), shall be an amount equal to the Actuarial Equivalent of the Retirement Benefit 7 determined in accordance with Section 3.2(b). 3.3 Death Benefit. (a) Following Vesting Date and Prior to Benefit Starting Date. In the event of the death of a Participant who, as of the date of death, (i) meets the vesting requirements of Article V and (ii) has not incurred a Benefit Starting Date, the Retirement Benefit that would have been payable to such Participant as of the date of death in accordance with Section 3.1 shall be payable to such Participant's Beneficiary in the form of a lump sum. In the event that a Participant's Beneficiary has predeceased him or the Participant did not designate a Beneficiary, such Retirement Benefit shall be paid to the Participant's estate in the form of a lump sum. (b) Following Benefit Starting Date. (i) In the event of the death of a Participant who (x) has incurred a Benefit Starting Date, (y) elected a Retirement Benefit in the form of a Ten-Year Certain Annuity, and (z) has not received ten (10) installment payments of the Retirement Benefit as of the date of death, the remaining installment payments that would have been payable to the Participant had the Participant survived shall be payable to such Participant's Beneficiary. If a Beneficiary who is receiving installment payments from a Ten-Year Certain Annuity dies before all remaining installments are paid, the remaining Retirement Benefit shall be paid to the Beneficiary's estate in the form of an Actuarial Equivalent lump sum. In the event the Participant's Beneficiary predeceases the Participant or the Participant did not designate a Beneficiary, the remaining Retirement Benefit shall be paid to the Participant's estate in the form of an Actuarial Equivalent lump sum. (ii) In the event of the death of a Participant who has incurred a Benefit Starting Date and has received payment of his entire Retirement Benefit, no death benefit shall be payable from the Plan to such Participant's Beneficiary or estate. (c) Pre-Vesting Date Death Benefit. (i) In the event of the death of a Participant prior to his Vesting Date, a death benefit (the "Pre-Vesting Date Death Benefit") shall be payable to the Beneficiary as a lump sum. (ii) The Pre-Vesting Date Death Benefit shall be in an amount that: (x) if the Participant is the Chief Executive Officer, is equal to 75% of the Actuarial Equivalent of the Retirement Benefit calculated in accordance with Section 3.1(a)(i); provided, however, that the Offset shall be determined in accordance with Section A.2 of Appendix A; and (y) if the Participant is not the Chief Executive Officer, is equal to 75% of the Actuarial Equivalent of the Retirement Benefit calculated in accordance with Section 3.1(a)(ii); provided, however, that the Offset shall be determined in accordance with Section A.2 of Appendix A. 8 ARTICLE IV FORM AND TIMING OF RETIREMENT BENEFIT 4.1 Form. (a) General Rule. The Retirement Benefit shall be paid as a single lump-sum payment unless the Participant makes an Election pursuant to Section 4.1(b). Notwithstanding such Election or deferral pursuant to Section 4.2(c)(ii), the form of payment of (i) a Retirement Benefit payable due to a Termination from Service Date due to a Change of Control, pursuant to Section 3.2 or (ii) a death benefit, pursuant to Section 3.3, shall be in the form of a single lump-sum payment, except as provided in Section 3.3(b). (b) Election. At any time following receipt of a Notice, a Participant may make a written election (the "Election"), in accordance with procedures established by the Committee, to receive his Retirement Benefit in the form of an Actuarial Equivalent Ten-Year Certain Annuity. A Participant may, at any time after making an Election, notify the Committee in writing, in accordance with procedures established by the Committee, of (i) his revocation of a prior Election and (ii) a subsequent Election. Notwithstanding anything in this Section 4.1(b) or any other section of the Plan to the contrary, any Election or any revocation of a prior Election that is received by the Committee less than six months prior to the Participant's Termination from Service Date shall not be given effect. The date on which a Participant makes such Election or revocation thereof shall not affect the date on which his Retirement Benefit becomes payable, pursuant to Section 4.2. 4.2 Timing. (a) General Rule. Subject to Article V, the Benefit Starting Date with respect to the Retirement Benefit shall be the first day of the first period with respect to which a Participant's benefit under MAP is paid, regardless of the form of such MAP benefit. If, for administrative or other reasons, payment of a Retirement Benefit is delayed beyond the Benefit Starting Date, retroactive payments shall be made without interest. (b) Death Benefit. A benefit paid under the Plan on account of the death of a Participant shall be paid as soon as practicable following the Participant's date of death, except as provided in Section 3.3(b). (c) Change of Control. (i) A Retirement Benefit paid to a Participant who incurs a Termination from Service Date pursuant to Section 3.2 shall be paid as soon as practical following such Termination from Service Date, subject to Section 4.2(c)(ii). (ii) Notwithstanding anything in Section 4.2(c)(i) to the contrary, on or prior to his Termination from Service Date pursuant to Section 3.2(a), a Participant may irrevocably request that his Benefit Starting Date be deferred to a specified future date (the "Deferral Request"); provided, however, that such Deferral Request is approved by the Committee, in its sole discretion, and provided, further, that the Participant provides written notification to the 9 Committee of his Deferral Request, including the desired future Benefit Starting Date, in accordance with procedures established by the Committee. Notwithstanding the foregoing, a Participant may, after receiving approval of his Deferral Request, submit one or more subsequent Deferral Requests to the Committee, in accordance with procedures established by the Committee; provided, however, that (A) each such subsequent Deferral Request is received by the Committee at least thirty days prior to the previously approved Benefit Starting Date and (B) the Benefit Starting Date requested in each subsequent Deferral Request is a least six months following the date on which such subsequent request is received by the Committee. The Retirement Benefit shall be paid as soon as practical following the Benefit Starting Date specified in the most recent Deferral Request approved by the Committee. 10 ARTICLE V VESTING 5.1 Vesting. Subject to Sections 3.2 and 3.3, and except as otherwise may be established by the Committee and set forth in the Notice, a Participant shall be vested in his Retirement Benefit on the first of the month coinciding with or next following his completion of four (4) years of SERP Service while actively employed by the Company and attainment of age sixty (60). 11 ARTICLE VI ADMINISTRATION 6.1 Committee. (a) Responsibilities. The Plan shall be administered by the Committee, which shall be responsible for the interpretation of the Plan and establishment of the rules and regulations governing the administration thereof. The Committee shall have full discretion to interpret and administer the Plan. The Committee's decision in any matter involving the interpretation and application of this Plan shall be final and binding on all parties. Neither the Committee nor any member thereof nor the Company shall be liable for any action or determination made in good faith with respect to the Plan or the rights of any person under the Plan. (b) Authority of Members. The members of the Committee may authorize one or more of their number to execute or deliver any instrument, make any payment or perform any other act that the Plan authorizes or requires the Committee to do, including, without limitation, the retention of counsel and other agents as it may require in carrying out the provisions of the Plan. (c) Authority to Delegate. Any responsibility or authority assigned to the Committee under the Plan may be delegated to any other person or persons, by name or in the case of a delegation to an employee of the Company by title or position with the Company, consistent with the by-laws or other procedures of the Committee; provided that such delegation is revocable by the Committee at any time, in its discretion. (d) Records and Expenses. The Committee or its designees shall keep such records as may be necessary for the administration of the Plan and shall furnish such periodic information to Participants as may be necessary or desirable, in the sole discretion of the Committee. All expenses of administering the Plan shall be paid by the Company and shall not affect a Participant's right to, or the amount of, benefits. 6.2 Claims Procedures. All claims for benefits under the Plan shall be made in writing to the Committee or its designee. The Committee shall provide adequate written notice to any individual whose claim for benefits under the Plan has been denied, setting forth specific reasons for such denial, written in a manner calculated to be understood by such individual, consistent with the claims procedures established under MAP. 12 ARTICLE VII FUNDING 7.1 General Rule. The Plan is an unfunded arrangement and is subject to the claims of the general creditors of the Company. No portion of any funds set apart for a Participant or Beneficiary pursuant to this Article shall be the property of such Participant or Beneficiary until distribution thereof has been made to such individual. Further, the rights of a Participant or Beneficiary shall be limited to those of a general, unsecured creditor of the Company who has a claim equal to the value of the Participant's Retirement Benefit. Retirement Benefits shall be payable from the general assets of the Company, or from such other funding vehicle established for such purpose as described above, or both. Except as may be otherwise determined by the Board in its sole discretion pursuant to this Article VII, neither the Company, the Committee nor any other person shall have any duty to set apart or invest any funds for the purpose of providing benefits pursuant to the terms of the Plan. 13 ARTICLE VIII AMENDMENT AND TERMINATION 8.1 General Rule. The Committee shall have the right to amend the Plan for any reason, at any time and from time to time; provided, however, that an amendment shall not cause a reduction in the Retirement Benefit that would have been payable to a Participant prior to such amendment. The Committee may terminate the Plan at any time and for any reason. Any such action by the Committee shall be undertaken by a resolution duly adopted at a meeting of the Committee, or by written consent of the Committee, in lieu of a meeting, as the case may be. In the event of a termination of the Plan, each Participant shall receive a Retirement Benefit, notwithstanding that the Participant may not satisfy the requirements of Article V as of such date; provided, however, that the determination date for purposes of the Offset shall be the date on which the Plan is terminated. 14 ARTICLE IX GENERAL PROVISIONS 9.1 Payments to Minors and Incompetents. If any Participant or Beneficiary entitled to receive any benefits hereunder is a minor or is deemed by the Committee or is adjudged to be legally incapable of giving valid receipt and discharge for such benefits, they will be paid to such person or institution as the Committee may designate or to a duly appointed guardian. Such payment shall, to the extent made, be deemed a complete discharge of any such payment under the Plan. 9.2 No Contract. This Plan shall not be deemed a contract of employment with any Participant, and no provision hereof shall affect the right of the Company to terminate a Participant's employment. 9.3 Non-Alienation of Benefits. No amount payable to, or held under the Plan for the account of, any Participant or Beneficiary shall be subject, in any manner, to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to so anticipate, alienate, sell, transfer, assign, pledge, encumber or charge the same shall be void. No amount payable to, or held under the Plan for the account of, any Participant shall be subject to any legal process of levy or attachment. 9.4 Income Tax Withholding. The Company may withhold from any payments hereunder such amount as it may be required to withhold under applicable federal, state or other law, and transmit such withheld amounts to the appropriate taxing authority. In lieu thereof, the Company shall have the right, to the extent permitted by law, to withhold the amount of such taxes from any other sums due from the Company to the Participant upon such terms and conditions as the Committee may prescribe. 9.5 Governing Law. The provisions of the Plan shall be interpreted, construed and administered under the laws of the State of New York applicable to contracts entered into and performed in such state, without regard to the choice of law provisions thereof and to the extent that ERISA and other federal laws do not apply. 9.6 Captions. The captions contained in the Plan are inserted only as a matter of convenience and for reference and in no way define, limit, enlarge or describe the scope or intent of the Plan or in any way affect the construction of any provision of the Plan. 9.7 Severability. If any provision of the Plan is held invalid or unenforceable, its invalidity or unenforceability will not affect any other provision of the Plan, and the Plan will be construed and enforced as if such provision had not been included. 9.8 Notices. Each Participant shall be responsible for furnishing the Committee with the current and proper address for the mailing of notices and delivery of agreements and payments. Any notice required or permitted to be given shall be deemed given if directed to the person to whom addressed at such address and mailed by regular United States first class mail, postage prepaid. If any item mailed to such address is returned as undeliverable to the addressee, mailing shall be suspended until the Participant furnishes the proper address. 15 IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its duly authorized officer as of the day of , 2000. MasterCard International Incorporated By: --------------------------------- Attest: - ---------------------------- (Corporate Seal) APPENDIX A CALCULATION OF THE OFFSET A.1 As of the Vesting Date. The following provisions apply with respect to calculation of the Offset as of a Participant's Vesting Date. A.1(a) Account Balance. The Account Balance under MAP is determined as of the Participant's Vesting Date. A.1(b) Annuity Bonus-Related Benefit. The Annuity Bonus-Related Benefit is an amount equal to the bonuses, accumulated with interest, as recorded for each Participant, as of such Participant's Vesting Date. A.1(c) Social Security Primary Insurance Amount. The Actuarial Equivalent of the Social Security Primary Insurance Amount is the lump-sum Actuarial Equivalent of the Social Security Primary Insurance Amount, as defined in Section 1.1 of the Plan, as of the Participant's Vesting Date. A.1(d) Prior Employer Benefit. (i) The Prior Employer Benefit shall be equal to an amount determined by the following allocation formula:
% OF PRIOR YEARS OF SERVICE BASE PAY ---------------- ---------- 1 - 2 3.25 3 - 4 4.00 5 - 9 5.00 10 - 14 6.00 15 - 19 8.00 20 - 34 11.00
All amounts are assumed to be allocated to the Participant on December 31 of each year and are credited with the Interest Crediting Rate, as defined in Section A.1(d)(ii). A calculation of the hypothetical Prior Employer Benefit for a sample Participant is set forth in Appendix C. (ii) Definitions. For purposes of determining the Prior Employer Benefit, the following definitions shall apply: "Interest Crediting Rate" means the rate at which a Participant's Prior Employer Benefit accumulates. For purposes of the Plan, an interest rate of 8.0% per year, up to the Participant's Vesting Date, shall be used. "Prior Base Pay" means the assumed prior earnings of a Participant during his Years of Service. The Prior Base Pay for a calendar year is determined by taking an Eligible Employee's annual rate of Base Pay from the Company as of the date he became an employee of the Company and multiplying such annual rate by the factor [(1.10)(to the power of)(A-B)], where "A" is the prior calendar year for which Base Pay is being determined and "B is the date of participation in the Plan. "Years of Service" means each calendar year beginning with the calendar year in which the Participant attains age 25 through the calendar year preceding the Participant's Employment Commencement Date. A.2 Pre-Vesting Date Death Benefit. The Offset for purposes of determining a Pre-Vesting Date Death Benefit shall be calculated in accordance with Section A.1; provided, however, that the determination date shall be the date of death of the Participant and not the Vesting Date. A.3 Termination Due to Change of Control. The Offset for purposes of determining the Retirement Benefit a Participant who incurs a Termination Without Cause or Constructive Termination due to a Change of Control pursuant to Section 3.2 shall be calculated as follows: A.3(a) if such termination occurs on or after the Vesting Date, the Offset shall be calculated in accordance with Section A.1; and A.3(b) if such termination occurs prior to the Vesting Date, the Offset shall be calculated in accordance with Section A.1; provided, however, that the determination date shall be the Participant's Termination from Service Date and not the Vesting Date. A-2 APPENDIX B ACTUARIAL ASSUMPTIONS AND FACTORS B.1. The Actuarial Equivalent shall be determined by the following assumptions: (a) Mortality: the mortality table prescribed by the Commissioner of the Internal Revenue Service for purposes of Revenue Ruling 95-6. (b) Interest: the average annual interest rate on thirty-year Treasury securities, rounded to the nearest one-hundredth of one percent, for the month of August preceding the first day of the calendar year in which the determination is made. APPENDIX C HYPOTHETICAL PRIOR EMPLOYER BENEFIT FOR A SAMPLE PARTICIPANT
SAMPLE Name PARTICIPANT Date of Birth 1/1/45 Date of Hire 7/1/98 Date of SERP Entry 1/1/00 Base Pay at Hire $300,000 Date Vested in SERP 1/1/05 Salary Regression 10.00% Interest on Account 8.00%
Hypothetical Prior Employer Benefit ------------------------------------------------------------------- Assumed Prior ER Beginning Interest Age Prior Base Service Allocation of Year End of Year on End of Year Year Attained Pay at EOY Percentage Balance Allocation Account Balance 1970 25 $ 20,805 1 3.25% $ 0 $ 676 $ 0 $ 676 1971 26 $ 22,885 2 3.25% $ 676 $ 744 $ 54 $ 1,474 1972 27 $ 25,173 3 4.00% $ 1,474 $ 1,007 $ 118 $ 2,599 1973 28 $ 27,690 4 4.00% $ 2,599 $ 1,108 $ 208 $ 3,915 1974 29 $ 30,459 5 5.00% $ 3,915 $ 1,523 $ 313 $ 5,751 1975 30 $ 33,505 6 5.00% $ 5,751 $ 1,675 $ 460 $ 7,886 1976 31 $ 36,855 7 5.00% $ 7,886 $ 1,843 $ 631 $ 10,360 1977 32 $ 40,540 8 5.00% $ 10,360 $ 2,027 $ 829 $ 13,216 1978 33 $ 44,594 9 5.00% $ 13,216 $ 2,230 $ 1,057 $ 16,503 1979 34 $ 49,053 10 6.00% $ 16,503 $ 2,943 $ 1,320 $ 20,766 1980 35 $ 53,958 11 6.00% $ 20,766 $ 3,237 $ 1,661 $ 25,664 1981 36 $ 59,354 12 6.00% $ 25,664 $ 3,561 $ 2,053 $ 31,278 1982 37 $ 65,289 13 6.00% $ 31,278 $ 3,917 $ 2,502 $ 37,697 1983 38 $ 71,818 14 6.00% $ 37,697 $ 4,309 $ 3,016 $ 45,022 1984 39 $ 79,000 15 8.00% $ 45,022 $ 6,320 $ 3,602 $ 54,944 1985 40 $ 86,900 16 8.00% $ 54,944 $ 6,952 $ 4,396 $ 66,292 1986 41 $ 95,590 17 8.00% $ 66,292 $ 7,647 $ 5,303 $ 79,242 1987 42 $105,149 18 8.00% $ 79,242 $ 8,412 $ 6,339 $ 93,993 1988 43 $115,664 19 8.00% $ 93,993 $ 9,253 $ 7,519 $110,765 1989 44 $127,230 20 11.00% $110,765 $ 13,995 $ 8,861 $133,621 1990 45 $139,953 21 11.00% $133,621 $ 15,395 $ 10,690 $159,706 1991 46 $153,948 22 11.00% $159,706 $ 16,934 $ 12,776 $189,416 1992 47 $169,343 23 11.00% $189,416 $ 18,628 $ 15,153 $223,197 1993 48 $186,277 24 11.00% $223,197 $ 20,490 $ 17,856 $261,543 1994 49 $204,905 25 11.00% $261,543 $ 22,540 $ 20,923 $305,006 1995 50 $225,395 26 11.00% $305,006 $ 24,793 $ 24,400 $354,199 1996 51 $247,934 27 11.00% $354,199 $ 27,273 $ 28,336 $409,808 1997 52 $272,727 28 11.00% $409,808 $ 30,000 $ 32,785 $472,593 1998 53 $300,000 0.00% $472,593 $ 0 $ 37,807 $510,400 1999 54 N/A 0.00% $510,400 $ 0 $ 40,832 $551,232 2000 55 N/A 0.00% $551,232 $ 0 $ 44,099 $595,331 2001 56 N/A 0.00% $595,331 $ 0 $ 47,626 $642,957 2002 57 N/A 0.00% $642,957 $ 0 $ 51,437 $694,394 2003 58 N/A 0.00% $694,394 $ 0 $ 55,552 $749,946 2004 59 N/A 0.00% $749,946 $ 0 $ 59,996 $809,942 2005 60 N/A 0.00% $809,942 $ 0 $ 0 $809,942
BALANCE AT 01/01/2005 = $809,942 EX-10.11 13 y49195a2ex10-11.txt MASTERCARD INT'L CHANGE IN CONTROL AGREEMENT Exhibit 10.11 CHANGE-IN-CONTROL AGREEMENT AGREEMENT, made and entered into as of the 10th day of August 2001 by and between MasterCard International Incorporated, a Delaware corporation, (the "Company") and Robert W. Selander (the "Executive"). W I T N E S S E T H : WHEREAS, the Executive is a key employee of the Company; and WHEREAS, the Company and the Executive have entered into an Employment Agreement simultaneously herewith (such agreement, as amended from time to time, being hereinafter referred to as the "Employment Agreement"); and WHEREAS, the Company desires to enter into this agreement ("Agreement") with the Executive providing for, among other things, (i) upon a Change-in-Control (as hereinafter defined) the acceleration of vesting of certain benefits which would not have otherwise been vested and (ii) certain payments to the Executive and the continuation of certain of the Executive's benefits if the Executive's employment terminates in connection with a Change-in-Control, subject to the terms and conditions specified herein; NOW, THEREFORE, in consideration of the premises and mutual covenants hereinafter set forth, the parties agree as follows: 1. TERM This Agreement shall become effective immediately (the "Effective Date"). 2. TERMINATION OF EXECUTIVE'S EMPLOYMENT PRIOR TO OR FOLLOWING A CHANGE-IN-CONTROL (a) If the Executive's employment or full-time employment, as applicable, is terminated by the Company or any of its subsidiaries or by the Company's successor without Cause (as hereinafter defined), or the Executive terminates his employment or full-time employment, as applicable, with the Company or any of its subsidiaries or with the Company's successor for Good Reason (as hereinafter defined), and such termination occurs within six months preceding, or within two years following, a Change-in-Control, the Executive shall be entitled to receive a Change-in-Control Payment (as hereinafter defined). (b) Notwithstanding the foregoing, the Executive shall not be entitled to receive the Change-in-Control Payment if any of the Circumstances of Ineligibility (as hereinafter defined) apply to the Executive. (c) "CHANGE-IN-CONTROL PAYMENT" means the product of (i) three times (ii) the sum of (x) the Executive's annual base salary at the time of the termination of the Executive's employment (or, in the case of a termination of employment by the Executive for Good Reason based on a reduction of the Executive's annual base salary, the annual base salary in effect immediately prior to such reduction) plus (y) an amount equivalent to the average annual incentive bonus received by the Executive with respect to the prior three years of Executive's employment by the Company (the "Average Bonus Payment"). (d) "CHANGE-IN-CONTROL" means: (i) as long as the Company is a non-stock membership corporation, or any of its affiliates is a private share corporation, if (a) 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 the Company (or all shareholders of such private share corporation) on any issue, (b) 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 the Company's or such private share corporation's assets, or (c) at any time, a plan is approved by the members of the Company or the shareholders of such private share corporation for the sale or liquidation of the Company 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 in Control" under (b) and/or (c), and a reorganization to convert the Company from a membership to a stock company or a transaction resulting in the integration of Europay and MasterCard shall not in and of itself constitute a "Change in Control"; (ii) if the Company becomes a stock corporation, the approval by its stockholders of (a) any consolidation or merger of the Company in which the Company 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, (b) any sale, lease, exchange or other transfer (in one transaction or series of related transactions) of all or substantially all of the assets of the Company, or (c) adoption of any plan or proposal for the liquidation or dissolution of the Company; (iii) any "person" (as defined in Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than the Company or a subsidiary or employee benefit plan or trust maintained by the Company 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 twenty-five percent (25%) of the stock outstanding at the time, without the prior approval of the Board; or 2 (iv) a majority of the voting directors proposed on a slate for election by members are rejected by a vote of such members.] (e) "CAUSE" shall mean: (i) the willful failure by the Executive to perform his duties or responsibilities (other than due to Disability); (ii) the Executive's having been convicted of, or entered a plea of guilty or nolo contendere to any crime that constitutes a felony, or a crime that constitutes a misdemeanor involving moral turpitude; (iii) the material breach by the Executive of any written covenant or agreement with the Company not to disclose any information pertaining to the Company; or (iv) the breach by the Executive of the Code of Conduct, any material provision of this Agreement or the Employment Agreement, or any material provision of the following Company policies: non-discrimination, substance abuse, workplace violence, nepotism, travel and entertainment, corporate information security, antitrust/competition law, foreign corrupt practices act and other Company policies approved by the Executive adopted after the date of this Agreement that the Company notifies Executive are to be included in this Paragraph. (f) "GOOD REASON" means the occurrence of any of the following without the prior written consent of the Executive: (i) removal from the principal position held by the Executive with the Company on the Effective Date; (ii) a reduction in the Executive's annual base salary from that in effect on the Effective Date (or any greater salary that the Executive is subsequently entitled to); (iii) the relocation of the Executive's principal place of employment to a location more than fifty (50) miles from the Executive's principal place of employment (unless such relocation does not increase the Executive's commute by more than twenty (20) miles) except for required travel on the Company's business to an extent substantially consistent with the Executive's business travel obligations as of such day; or (iv) the failure by the Company to obtain an agreement from any successor to assume and agree to perform this Agreement or the Employment Agreement. (g) "CIRCUMSTANCES OF INELIGIBILITY" means any one or more of the following circumstances: 3 (i) Death, Disability or Voluntary Termination. If the Executive is terminated due to death or Disability (as defined in the long term group disability plan in effect at the Company at the time of disability) or if the Executive elects to voluntarily terminate his employment, including, but not limited to, a termination due to retirement, with the Company or a successor, the Executive shall not be eligible to receive the Change-in-Control Payment; provided, however, that termination of employment by the Executive for Good Reason shall not constitute a Circumstance of Ineligibility. (ii) Termination for Cause. If the Executive's employment with the Company or a successor is terminated for Cause, at any time preceding or following a Change-in-Control, the Executive shall not be eligible to receive the Change-in-Control Payment. The Executive's employment may be terminated for "Cause" as defined in paragraph 2(e) above, by the Company, upon the authority of the Company's Board of Directors, effective not less than fourteen (14) days after the giving by the Company to the Executive written notice of such termination for "Cause" ("Notice of Termination for Cause"). The Company's Notice of Termination For Cause shall state the date of termination and the basis for the Company's determination that the Executive's actions establish Cause hereunder. Upon the Executive's receipt of a Notice of Termination For Cause, the Executive may, prior to the date of termination set forth therein, seek to cure any conduct identified in the Notice of Termination For Cause as establishing Cause (to the extent susceptible to cure) and shall, upon his written request, be accorded the right to address the Board of Directors, with or without counsel to the Executive present at the Executive's option, for the purpose of responding to the Notice of Termination For Cause. Following such meeting between the Executive and the Board of Directors, if the Board of Directors does not withdraw or modify the Notice of Termination For Cause, the Executive's employment shall terminate on the date of termination stated in the Notice of Termination For Cause. (iii) Failure to Give Notice of Termination for Good Reason. The Executive's employment or full-time employment, as applicable, may be terminated for "Good Reason" as defined in paragraph 2(f) above, by the Executive, effective ninety (90) days after the giving of written notice to the Company of the grounds for termination for Good Reason by the Executive, which grounds, as specified by the Executive, have not been cured by the Company during such ninety (90) day period. The Company may, in its sole discretion, waive the ninety (90) day notice required to be given by the Executive. Unless waived by the Company, failure by the Executive to give notice of termination for Good Reason in compliance with this paragraph, shall render the Executive ineligible to receive the Change-in-Control Payment. 3. TIME OF PAYMENT OF CHANGE-IN-CONTROL PAYMENT Subject to the Executive's execution of a Separation Agreement and Release of all claims related to the Executive's employment or the termination thereof, in the form attached hereto, other than any modifications which may be required to effectuate such release based 4 upon any changes in law, and subject to Paragraph 7(e) below, the Change-in-Control Payment (if any) shall be paid to the Executive in cash in seventy-two (72) equal bi-monthly installments payable in accordance with the Company's regular payroll practices, beginning following the later of (i) the date of the termination of the Executive's employment with the Company or the successor to the Company or (ii) the date of the Change-in-Control (the "Change-in-Control Payment Period"). Notwithstanding the foregoing, in the event the Change-in-Control Payment Period would otherwise terminate prior to the date on which the Executive attains the age of fifty-five (55), the Company shall recalculate the Change-in-Control Payment payable during the Change-in-Control Payment Period and pay to the Executive as an employee on the Company's payroll, on an approved leave of absence (which shall not be deemed to be full-time employment), an amount equal to the Change-in-Control Payment payable to the Executive during the Change-in-Control Payment Period, divided into equal installments, payable in accordance with the Company's regular payroll practices, beginning with the first payroll period of such Change-in-Control Payment Period and ending with the first payroll period after the date the Executive attains the age of fifty-five (55) (the "Recalculated Change-in-Control Payment Period"). In all events, the Change-in-Control Payment shall be paid to the Executive for that portion of the Change-in-Control Payment Period prior to the date the Executive attains the age of fifty-five (55) as an employee on the Company's payroll on an approved leave of absence. At the conclusion of the Executive's approved leave of absence, the Executive's employment shall terminate and the Executive or, if applicable, an authorized representative of the Executive's estate, shall execute a Separation Agreement and Release in the form attached hereto, other than modifications which may be required to effectuate such release based upon any changes in the law, covering the period of the Executive's approved leave of absence. The Executive agrees to make himself available to consult with the Company during the approved leave of absence period, at reasonable times and with reasonable notice as may be requested by the Company from time to time. In the event that the Executive dies prior to receipt of the entire Change-in-Control Payment due hereunder, any remaining portion of the Change-in-Control Payment due to the Executive under this Paragraph 3 shall be paid to the Executive's estate. 4. ACCELERATION OF VESTING OF CERTAIN EMPLOYEE BENEFITS AND INCENTIVE COMPENSATION Upon the occurrence of a Change-in-Control, there shall occur: (i) full and immediate acceleration of vesting of all unvested performance units under the Executive Incentive Plan with the amount based upon the assumption that the Company has achieved a performance score of one hundred (100%) percent for all grants awarded under such plan; provided, however, if the Executive's employment is terminated in accordance with paragraph 2(a) above, the amount of such units shall be increased based upon the assumption that the Company has achieved a performance score of one hundred twenty-five (125%) percent for all grants awarded under the such Plan; (ii) full and immediate vesting of all unvested share units under the Value Appreciation Plan; 5 (iii) full and immediate vesting of all outstanding annuity contracts under the Annuity Bonus Program and the Executive shall receive an additional adjusted annuity bonus if his termination of employment or full-time employment, as applicable, occurs before the end of a calendar year to reflect the portion of the year completed unless the annuity bonuses have already been approved for such calendar year, in which case, the Executive shall receive the approved annuity bonus for such calendar year; (iv) full and immediate vesting of the annual benefit under the MasterCard International Supplemental Executive Retirement Plan (the "SERP"). The Executive's benefit under the SERP shall be calculated based upon the assumption that the Executive has attained age 60; and (v) full and immediate vesting under the Special Awards Plan. 5. CONTINUATION OF EXECUTIVE WELFARE BENEFITS Notwithstanding anything contained herein to the contrary, if the Executive is entitled to receive the Change-in-Control Payment: (a) subject to the Executive's execution of Separation Agreement(s) and Release(s), as set forth in Paragraph 3, above, payment on the Executive's behalf, for the monthly cost of the premiums for coverage under the Consolidated Omnibus Reconciliation Act of 1985, as amended ("COBRA"), for a period equivalent to the Change-in-Control Payment Period (as may be reduced by the Executive in accordance with the terms of Paragraph 7(e), below) or eighteen (18) months (twenty-nine (29) months if the Executive is now disabled or determined to be disabled under the Social Security Act within the first sixty (60) days of the continuation period) following the date of the termination of the Executive's employment, whichever is shorter; provided, however, such coverage shall not be provided if during such period the Executive is or becomes ineligible under the provisions of COBRA for continuing coverage or the Executive becomes eligible for medical coverage under Paragraph 5(c) below or any Company retirement plan. The Executive agrees that in consideration of the payment of cost of COBRA coverage to execute all necessary documentation acknowledging proper COBRA Notice and coverage; (b) subject to the Executive's execution of Separation Agreement(s) and Release(s) as set forth in Paragraph 3, above, outplacement services, to be provided by a firm selected by the Company, at a level generally made available to senior executives of the Company for the shorter of the Change-in-Control Payment Period or the period he remains unemployed; (c) participation in the Company's health plan, individual life insurance plan and individual disability benefit plan for the duration of any approved leave of absence then granted to the Executive, provided that the Executive waives in writing any and all rights to future participation and accrual of benefits under any qualified employee pension benefit plan of the Company as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended, and any Group Disability Plans; 6 (d) such other benefits to which the Executive is expressly entitled following the termination of the Executive's employment by the Company without Cause or by the Executive with Good Reason, upon the termination of the Executive's approved leave of absence, as may be provided by the then existing plans, programs and/or arrangements of the Company (other than any severance payments payable under the terms of any benefit plan, including, but not limited to, the MasterCard International Incorporated Severance Plan); and 6. LIMITATION ON PAYMENTS; GROSS-UP PAYMENT (a) If any of the payments or benefits received or to be received by the Executive in connection with a Change in Control or the Executive's termination of employment (whether such payments or benefits are provided pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control or any person affiliated with the Company or such person) (such payments or benefits, excluding the Gross-Up Payment, being hereinafter referred to as the "Total Payments") will be subject to the excise tax (the "Excise Tax") imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), the Company shall pay to the Executive, as soon as practicable following the Change in Control (but in any event not later than the later of (1) thirty (30) days following the Executive's termination of employment or (2) thirty (30) days following the Change in Control), such additional amounts (the "Gross-Up Payment") such that the net amount retained by the Executive, taking into account the Gross-Up Payment, and after deduction of any federal, state and local income and employment taxes and Excise Taxes, shall be equal to the Excise Tax on such Gross-Up Payment and the Total Payments (calculated on a hypothetical basis by taking into account the provisions of paragraphs (b) and (c) hereof). Notwithstanding the above, if it is determined that the Excise Tax (without regard to paragraph (c) hereof) would cause the net after-tax Total Payments to be paid to or on behalf of the Executive to be less than what he would have netted, after federal, state and local income taxes without taking into account any Gross-Up Payment, had the present value of his Total Payments equaled $1 less than three times his base amount, as defined under Section 280G(b)(3)(A) of the Code, then such Executive's Total Payments shall be reduced (but not below the minimum possible amount), so that no portion of the Total Payments is subject to the Excise Tax (without regard to paragraph (c) hereof). (b) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code) unless, in the opinion of tax counsel ("Tax Counsel") selected by the Company and reasonably acceptable to the Executive, such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount" (as defined in Section 280G(b)(3) of the Code) allocable to such payment, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by Tax Counsel in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive 7 shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence or place of employment under which such amounts are subject to taxation, whichever is greater, in the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. (c) For the purpose of determining the hypothetical calculation of Excise Tax on the Total Payments under paragraph (a) and (d) hereunder, the Executive's base amount shall be determined by including in his gross income (for the taxable year in which such amounts would have been so included in the absence of the deferral hereinafter described), all compensation amounts the payment of which has been deferred by the Executive, but only to the extent such amounts have not been included in Executive's gross income prior to the calendar year in which the Change in Control occurs. (d) In the event that the Excise Tax (calculated on a hypothetical basis by taking into account the provisions of paragraph (c) hereof) is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) within five (5) business days following the time that the amount of such excess is finally determined. In the event that the Excise Tax (calculated on a hypothetical basis by taking into account the provisions of paragraph (c) hereof) is determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, the Executive shall repay to the Company within five (5) business days following the time that such difference is finally determined the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to such Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by the Executive if such repayment results in a reduction in such Excise Tax or a federal, state and local income tax deduction) plus any interest received by the Executive on the amount of such repayment less any federal, state and local income and employment taxes actually paid by the Executive on such interest. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for any Excise Tax with respect to the Total Payments. 7. ACKNOWLEDGEMENTS; CONFIDENTIAL INFORMATION; COMPETITIVE ACTIVITIES; NON SOLICITATION. (a) The Executive acknowledges as follows: (i) The Company is in the payments industry and provides such services both nationally and internationally without limitation to any geographic area. (ii) Since the Company would suffer irreparable harm if the Executive left the Company's employ and solicited employees of the Company or otherwise interfered with 8 business relationships of the Company, it is reasonable to protect the Company against such activities by the Executive for a limited period of time after the Executive leaves the Company. (iii) The covenants contained in Paragraphs 7(b), (c) and (d) below are reasonably necessary for the protection of the Company and are reasonably limited with respect to the activities they prohibit, their duration, their geographical scope and their effect on the Executive and the public. The purpose and effect of the covenants simply are to protect the Company for a limited period of time from unfair competition by the Executive. (b) For the purposes of this Agreement, all confidential or proprietary information concerning the business and affairs of the Company, including, without limitation, all trade secrets, know how and other information generally retained on a confidential basis by the Company concerning its designs, software codes and specifications, formulae, processes, inventions and discoveries, business plans, pricing, product plans and the identities of, and the nature of the Company's dealings with, its members, suppliers and customers, whether or not such information shall, in whole or in part, be subject to or capable of being protected by patent, copyright or trademark laws, shall constitute "Company Confidential Information." The Executive acknowledges that he will from time to time have access to and obtain knowledge of certain Company Confidential Information, and that improper use or revelation thereof by the Executive, during or after the termination of his employment by the Company, could cause serious injury to the business of the Company. Accordingly, the Executive agrees that he will forever keep secret and inviolate all Company Confidential Information which shall have come or shall hereafter come into his possession, and that he will not use the same for his own private benefit, or directly or indirectly for the benefit of others, and that he will not disclose such Company Confidential Information to any other person. If the Executive is legally compelled (by deposition, interrogatory, request for documents, subpoena, civil investigative demand or similar process) to disclose any of the Company Confidential Information, he shall provide the Company with prompt prior written notice of such legal requirement so that the Company may seek a protective order or other appropriate remedy and/or waive compliance with the terms of this Paragraph. In any event, the Executive may furnish only that portion of the Company Confidential Information which the Executive is advised by legal counsel is required, and he shall exercise his best efforts to obtain an order or assurance that confidential treatment will be accorded such Company Confidential Information as is disclosed. Notwithstanding anything contained herein which may be to the contrary, the term "Company Confidential Information" does not include any information which at the time of disclosure or thereafter is generally available to and known by the public, other then as a result of a disclosure directly or indirectly by the Executive. (c) In addition to the acknowledgments by the Executive set forth in Paragraph 7(a) above, the Executive acknowledges that the services provided for the Company are a significant factor in the creation of valuable, special and unique assets which are expected to provide the Company with a competitive advantage. Accordingly, the Executive agrees that during the Term, and thereafter for the duration of the Change-in-Control Payment Period or the Recalculated Change-in-Control Payment Period, as applicable, the Executive (whether as an employee, officer, director, partner, proprietor, investor, associate, executive, consultant, adviser or otherwise) will not, either directly or indirectly, for the Executive or any third party, engage or invest in any business or activity which is directly or indirectly in competition with any business 9 or activity engaged in by the Company, including, but not limited to, any credit, charge, chip or debit card business or processor. For purposes of the preceding sentence, the Executive shall be deemed to be engaged in any business which any person for whom he shall perform services is engaged. Notwithstanding the foregoing, nothing herein shall prohibit the Executive from having a beneficial ownership interest of less than 3% of the outstanding amount of any class of securities of any enterprise (but without otherwise participating in the activities of such enterprise) if such securities are listed on a national securities exchange or quoted on an inter-dealer quotation system. For the avoidance of doubt, the Company and Executive agree that Executive may perform services or engage in business activities for a MasterCard Member, without violating the provisions of this Paragraph, provided that Executive may not perform services or engage in business activities for a MasterCard Member that is party to a brand dedication agreement with VISA USA, VISA International, American Express, JCB, Discover, Diners Club, Carte Blanche or any other competitor of the Company, the term of which is two years or more. (d) During the Term, and thereafter for the duration of the Change-in-Control Payment Period or the Recalculated Change-in-Control Payment Period, as applicable, the Executive shall not himself, or by assisting any other person to, directly or indirectly, (a) solicit, induce, recruit or encourage any other employee, agent, consultant or representative to leave the service of the Company for any reason, or (b) induce any member, customer, supplier or other person with whom the Company engaged in business, or to the knowledge of the Executive planned or proposed to engage in business, to terminate any commercial relationship with the Company or cease to accept or issue its products. Nothing herein contained shall be deemed to prohibit the Executive from hiring any employee, agent, consultant or representative of the Company who responds to a general, written solicitation in any form of media directed at the public in general. (e) Notwithstanding the provisions of paragraphs 7(c) and 7(d) above, the Executive may at his election, reduce the payment period (thereby reducing the total payments required) under Paragraph 3 above to a period of not less than twelve (12) months by providing written notice to the Company of such election. In such case, the restrictions contained in Paragraphs 7(c) and 7(d) shall be in effect only for the duration of such reduced payment period and the Company's obligation to continue to provide any further payments with respect to any period subsequent to such reduced payment period under the terms of Paragraph 3 or provide any further benefits under the terms of Paragraph 5 shall cease. In the event that the Company determines, in good faith, that the Executive has breached his obligations under Paragraphs 7(b), 7(c) or 7(d), the Company shall be under no obligation to provide any further payments under the terms of Paragraph 3 or provide any further benefits otherwise due under Paragraphs 5 above, during the remainder of the payment period. In the event of a judicial determination that the Executive has breached his obligations under Paragraphs 7(b), 7(c) or 7(d), in addition to any damages or other relief otherwise available to the Company, the Executive shall be obligated to reimburse the Company for any payments previously received from the Company. In addition, following a judicial determination, the prevailing party shall be entitled to be reimbursed by the non-prevailing party for reasonable legal fees and expenses incurred by the prevailing party in connection with the judicial proceeding seeking to enforce the provisions of Paragraph 7 hereof. 10 (f) For the purposes of this Agreement, the period of restriction of confidentiality or proprietary information and competition is intended to limit disclosure and competition by the Executive to the maximum extent permitted by law. If it shall be finally determined by any court of competent jurisdiction ruling on this Agreement that the scope or duration of any limitation contained in this Agreement is too extensive to be legally enforceable, then the parties hereby agree that the provisions hereof shall be construed to be confined to such scope or duration (not greater than that provided for herein) as shall be legally enforceable, and the Executive hereby consents to the enforcement of such limitations as so modified. (g) The Executive acknowledges that any violation by him of the provisions of this Paragraph 7 would cause serious and irreparable damage to the Company. He further acknowledges that it might not be possible to measure such damage in money. Accordingly, the Executive agrees that, in the event of a breach or threatened breach by the Executive of the provisions of this Paragraph, the Company may seek, in addition to any other rights or remedies, including money damages, an injunction or restraining order, without the need to post any bond or other security, prohibiting the Executive from doing or continuing to do any acts constituting such breach or threatened breach. 8. MISCELLANEOUS (a) Governing Law. This Agreement shall be construed and enforced in accordance with the laws of the State of New York without reference to principles of conflict of laws. Any legal suit, action or proceeding against any party hereto arising out of or relating to this Agreement shall be instituted in a federal or state court in the State of New York, and each party hereto waives any objection which it may now or hereafter have to the laying of venue of any such suit, action or proceeding and each party hereto irrevocably submits to the jurisdiction of any such court in any suit, action or proceeding. (b) Entire Agreement. Upon the Effective Date, this Agreement and the Employment Agreement between the Executive and the Company, entered into simultaneously herewith, shall incorporate the complete understanding and agreement between the parties with respect to the subject matter hereof and thereof and supersede any and all other prior or contemporaneous agreements, written or oral, between the Executive and the Company or any predecessor thereof, with respect to such subject matter. No provision hereof may be modified or waived except by a written instrument duly executed by the Executive and the Company with the express approval of the Compensation Committee. (c) Knowing and Voluntary Agreement. The Executive acknowledges that before entering into this Agreement he has received a reasonable period of time to consider this Agreement and has had sufficient time and an opportunity to consult with any attorney or other advisor of his choice in connection with this Agreement and all matters contained herein, and that he has been advised to do so if he so chooses. The Executive further acknowledges that this Agreement and all terms hereof are fair, reasonable and are not the result of any fraud, duress, coercion, pressure or undue influence exercised by the Company, that he has approved and entered into this Agreement and all of the terms hereof on his own free will, and that no promises or representations have been made to him by any person to induce him to enter into this Agreement other than the express terms set forth herein. 11 (d) Deductions and Withholding. The Company shall be entitled to deduct and withhold from all compensation payable to the Executive pursuant to this Agreement all amounts required to be deducted and withheld therefrom pursuant to any present or future law, regulation or ordinance of the United States of America or any state or local jurisdiction therein or any foreign taxing jurisdiction. (e) Headings. Paragraph headings are included in this Agreement for convenience of reference only and shall not affect the interpretation of the text hereof. (f) Notice. Any and all notices, demands or other communications to be given or made hereunder shall be in writing and shall be deemed to have been fully given or made when personally delivered, or on the third business day after mailing from within the continental United States by registered mail, postage prepaid, addressed as follows: If to the Company: MasterCard International Incorporated 2000 Purchase Street Purchase, New York 10577 Attention: General Counsel If to the Executive: Robert W. Selander Either party may change the address to which any notices to it shall be sent by giving to the other party written notice of such change in conformity with the foregoing. (g) Counterparts. This Agreement may be executed in two or more counterparts; each of which shall constitute an original but all of which together shall constitute one and the same instrument. (h) Binding Agreement. This Agreement may be assigned by the Company to, and shall inure to the benefit of, any successor to substantially all the assets and business of the Company as a going concern, whether by merger, consolidation or purchase of substantially all of the assets of the Company or otherwise, provided that such successor shall assume the Company's obligations under this Agreement. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. (i) No Duplication of Payments or Benefits. Notwithstanding anything contained herein to the contrary, the Executive shall not be entitled to receive any duplicative payment or benefit hereunder, with respect to any payment or benefit received during the Additional Pay 12 Period or Recalculated Additional Pay Period provided under the Executive's Employment Agreement with the Company. Any payment or benefit to which the Executive may become entitled hereunder with respect to the Change-in-Control Payment Period or the Recalculated Change-in-Control Payment Period, as applicable, shall take into account any payments or benefits already received by or provided to the Executive during the Additional Pay Period or Recalculated Additional Pay Period under the Executive's Employment Agreement with the Company, such that the Executive does not receive the same payment or benefit (or any portion thereof) twice, but instead shall receive under both this Agreement and the Employment Agreement combined, only the equivalent of the full payment or benefit to which he is then entitled under the operative agreement. This Paragraph 8(i) shall not affect any accelerated vesting to which the Executive has or may become entitled under this Agreement or the Executive's Employment Agreement. (j) Authority to Enter Into this Agreement. The Company represents and warrants that Michael Michl has been authorized to enter this Agreement on its behalf by the Compensation Committee of the Board of Directors, acting for, and on behalf of the Board of Directors. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first written above. MASTERCARD INTERNATIONAL INCORPORATED By /s/ Michael Michl ------------------------------- Michael Michl Executive Vice President, Central Resources ACCEPTED AND AGREED TO As of the date first written above By: /s/ Robert W. Selander ----------------------------- Robert W. Selander 13 AGREEMENT AND RELEASE TO: MasterCard International Incorporated 1. I acknowledge that my [full-time] employment terminated effective [date]. The terms and conditions governing the termination of my [full-time] employment are provided by my Employment Agreement with MasterCard International Incorporated ("MasterCard"), dated as of_____ ,2001 ("Employment Agreement"), my Change in Control Agreement with MasterCard, dated as of _____ ,200l ("CIC Agreement") and this Agreement and Release, which together constitute our Agreement (collectively, the "Agreements"). I further acknowledge that the payments and benefits provided under the Agreements relating to the period following the termination of my [full-time] employment are conditioned upon my execution of this Agreement and Release. I further acknowledge that the Agreements provide for payments and benefits which exceed and are in lieu of any other payments and benefits to which I might otherwise be entitled in the absence of my execution of this Agreement and Release. 2. Waiver and Release: Except as otherwise provided in the Employment Agreement and the CIC Agreement, I agree to and do waive any claims I may have for employment by MasterCard. I further agree to and do release and forever discharge MasterCard, its members, subsidiaries, affiliates and their respective current and former officers, directors, shareholders, employees and agents from any and all claims and causes of action, known or unknown, arising out of or relating to my employment by MasterCard or the termination thereof, including, but not limited to wrongful discharge, breach of contract, tort, fraud, Civil Rights Laws, the Age Discrimination in Employment Act, the Americans with Disabilities Act or any other federal, state or local law relating to employment, discrimination in employment, termination of employment or otherwise, up to and including the date I execute this Agreement and Release. 3. Agreement Not to Sue: Except as otherwise prohibited by law, I agree not to sue or commence any proceeding or participate voluntarily in any action, suit, proceeding, arbitration or mediation against MasterCard and/or its current or former employees, directors and agents, with respect to any act, occurrence, event, or any alleged failure to act, relating to my employment and occurring up to and including the date of this Agreement and Release. 4. Exclusions from this Agreement and Release: This Agreement and Release excludes my right to enforce the terms of the Employment Agreement or the CIC Agreement insofar as they relate to MasterCard's obligations to me, which survive the termination of my [full-time] employment, nor does it include any rights I may have under MasterCard's employee benefit plans as determined by the terms of the relevant plan documents, other than the Severance Plan and except as may otherwise be expressly provided in the Employment Agreement or the CIC Agreement. Further, this Agreement and Release excludes any claims I may have for: (i) indemnity as provided in the Employment Agreement; and (ii) coverage under any MasterCard Directors and Officers liability insurance policy. 5. Return of Property: No later than [insert termination day], I agree to relinquish all MasterCard property in my possession or under my control, including, but not limited to, - 1 - MasterCard equipment, files, keys, personal computers, cellular phones and business, credit and access cards. I further agree to submit all expense reports and settle my outstanding accounts with MasterCard before I may receive any payments or other benefits pursuant to the Agreements. I acknowledge that MasterCard will not accept expense reports submitted more than twenty (20) days after the effective date of the termination of my [full-time] employment. I further acknowledge that MasterCard will review timely submitted expense reports and pay only those ordinary and necessary business expenses in accordance with its then current business expense reimbursement policy. 6. No Disparagement: I agree that I will not now or at any time in the future, make any communications, whether oral or written, which negatively reflect upon, or disparage in any way, or induce or encourage others to disparage in any way, MasterCard, its services, its products, or any of its members or current or former directors, officers, employees or agents. 7. Transition of My Responsibilities: I agree to cooperate fully, completely and to the extent reasonably required by MasterCard in order to assure transition of files and pending matters that are or will be assigned to other staff. To the extent not inconsistent with my employment or other business activities, this includes, but is not limited to, assisting and advising MasterCard from time to time with respect to matters in which I was involved and had knowledge as MasterCard's Chief Executive Officer. Further, I agree to provide testimony and/or information related to any claims, lawsuits or investigations by or against MasterCard and to make myself available for that purpose. 8. Right to Terminate and Recover Payments and Other Benefits: Except as otherwise prohibited by law, with respect to the release of claims under the Age Discrimination in Employment Act, I acknowledge and agree that MasterCard's obligation to make or provide, or continue making or providing payments and benefits under the Agreements relating to the period following the termination of my [full-time] employment is expressly conditioned upon my compliance with all of my obligations provided under this Agreement and Release. Should I violate any of the terms of this Agreement and Release, MasterCard will be entitled to discontinue all payments and benefits provided under the Agreements. In the event of a judicial determination that I have breached my obligations under this Agreement and Release, MasterCard shall have the further right to recover all sums it may have paid pursuant to the Agreements relating to the period following the termination of my [full-time] employment. In addition, following a judicial determination, the prevailing party shall be entitled to be reimbursed by the non-prevailing party for reasonable legal fees and expenses incurred by the prevailing party in connection with the judicial proceeding seeking to enforce the provisions of this paragraph 8. The foregoing shall not limit MasterCard's rights under the Agreements in the event of a breach of any of the Agreements by the Executive. 9. Terms Governing The Agreements: I acknowledge that the Agreements set forth the entire understanding of the parties and supersedes any and all prior agreements, oral or written, relating to my employment by MasterCard or the termination thereof. The Agreements may not be modified except by a writing, signed by me and by MasterCard. The Agreements shall be binding upon my heirs and personal representatives, and the successors and assigns of MasterCard. This Agreement and Release shall be governed and construed in accordance with the laws of the State of New York, without regard to its choice of law rules. - 2 - 10. Severability: The invalidity or unenforceability of any particular provisions of this Agreement and Release shall not affect the other provisions hereof, and this Agreement and Release shall be construed in all respects as if such invalid or unenforceable provisions were omitted. 11. Waiver: I understand that the waiver by MasterCard of my breach of any provision of this Agreement and Release shall not operate or be construed as a waiver of any subsequent breach by me. The waiver by me of a breach of any provision of this Agreement and Release by MasterCard shall not operate or be construed as a waiver of any subsequent breach by MasterCard. 12. No Admission of Wrongdoing: I acknowledge that by making this offer, MasterCard does not admit any failure of performance, wrongdoing or violation of law. 13. Acknowledgment of Voluntary Execution: I have been informed that I may take up to 21 days from today to consider this Agreement and Release. I have also been informed that I may revoke this Agreement and Release after signing it, but only by delivering a signed revocation notice to ______________ within seven (7) days of my signing and returning this Agreement and Release. I acknowledge that before executing this Agreement and Release, I have had the opportunity to consult with any attorney or other advisor of my choice, and I have been advised to do so if I choose. I further acknowledge that I have signed this Agreement and Release of my own free will, and that no promises or representations have been made to me by any person to induce me to sign this Agreement and Release other than the express terms set forth in the Agreements. I further acknowledge that I have read the Agreements and understand all of the terms outlined therein, including the waiver and release of claims set forth in paragraph 2 above. Accepted and Agreed: - -------------------------------- Robert W. Selander Dated: -------------------------- -3- EX-21 14 y49195a2ex21.txt LIST OF SUBSIDIARIES Exhibit 21 LIST OF SUBSIDIARIES
PLACE NAME INCORPORATED Cirrus Systems Inc. Texas Europay International S.A. Belgium European Payment Systems Services S.A. Belgium Eurotravellers Cheque International S.A. Belgium EUROCARD U.S.A., Inc. New Jersey EUROCARD Ltd. England Maestro International Incorporated Delaware Maestro Asia/Pacific Ltd. Delaware Maestro Canada, Inc. Delaware Maestro Latin America, Inc. Delaware Maestro Middle East/Africa, Inc. Delaware Maestro U.S.A., Inc. Delaware MasterCard International Incorporated Delaware MasterCard A/P Payment Services Inc. Delaware MasterCard Asia/Pacific Pte Ltd. Singapore MasterCard Australia Ltd. Delaware MasterCard Brasil S/C Ltda. Brazil MasterCard Canada, Inc. Delaware MasterCard Cardholder Solutions, Inc. Delaware MasterCard Chip Standards Holdings, Inc. Delaware MasterCard Colombia, Inc. Delaware MasterCard EMEA, Inc. Delaware MasterCard Foreign Sales Corporation Barbados MasterCard Global Promotions & Sponsorships Annex, Inc. Delaware MasterCard Holding Incorporated Delaware MasterCard Hong Kong Ltd. Delaware MasterCard (India) Private Limited India
MasterCard International Far East Ltd. Delaware MasterCard International Japan Inc. Delaware MasterCard International Korea Ltd. Korea MasterCard International Philippines, Inc. Delaware MasterCard Korea Ltd. Delaware MasterCard Mercosur, Inc. Delaware MasterCard Originator SPC, Inc. Delaware MasterCard Peru, Inc. Delaware MasterCard Services SPC, Inc. Delaware MasterCard Singapore Ltd. Delaware MasterCard Southern Africa, Inc. Delaware MasterCard Taiwan Ltd. Delaware MasterCard Travelers Cheque, Inc. Delaware MasterCard UK, Inc. Delaware MasterCard Venezuela, Inc. Delaware MC Indonesia, Inc. Delaware Mondex International Limited England MAOSCO, Limited England Mondex International Americas, Inc. New Jersey Mondex Asia Pte. Ltd. Singapore Mondex China Pte. Ltd. Singapore Mondex India Pte. Ltd. Singapore Mondex International (Australia) Pty. Limited Australia NXI Limited England NXI Management Limited England CSI Holdings Inc. Missouri EMVCO, LLC Delaware Japan Network Services Co., Ltd. Japan Mastermanager LLC Delaware MTS Holdings, Inc. Delaware Primary Capital Management, Inc. Delaware SET Secure Electronic Transaction LLC Delaware Transactional Data Solutions LLC New York
EX-23.1 15 y49195a2ex23-1.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP Exhibit 23.1 [LETTERHEAD OF PRICEWATERHOUSECOOPERS LLP] CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-4 of MasterCard Incorporated of our report dated April 11, 2001 relating to the financial statements of MasterCard International Incorporated, which appears in such Registration Statement. We also consent to the references to us under the headings "Experts" and "Selected Financial Data" in such Registration Statement. PricewaterhouseCoopers LLP New York, New York November 9, 2001 EX-23.2 16 y49195a2ex23-2.txt CONSENT OF PRICEWATERHOUSECOOPERS Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-4 of MasterCard Incorporated of our report dated May 22, 2001, except as to the subsequent event described in Note 21 which is as of July 31, 2001, relating to the financial statements of Europay International, which appears in such Registration Statement. We also consent to the references to us under the headings "Experts" and "Selected Financial Data" in such Registration Statement. PricewaterhouseCoopers Reviseurs d'Entreprises, represented by Yves Vandenplas Brussels, Belgium November 9, 2001 EX-99 17 y49195a2ex99.txt FORM OF PROXY OF MASTERCARD INTERNATIONAL INC. Exhibit 99 - -------------------------------------------------------------------------------- PROXY [MASTERCARD LOGO] MASTERCARD INTERNATIONAL INCORPORATED THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE SPECIAL MEETING OF PRINCIPAL, ASSOCIATION AND TRAVELERS CHEQUE MEMBERS ON XXXXXX, 2001 The undersigned hereby constitute(s) and appoint(s) Lance L. Weaver, Robert W. Selander and Noah J. Hanft, and each or any of them, attorneys and proxies of the undersigned, with full power of substitution of each, and with all the powers the undersigned would possess if personally present, to appear and vote all voting interests in MasterCard International Incorporated the undersigned is entitled to vote at the Special Meeting of Principal Members of MasterCard International Incorporated to be held on XXXXXX, 2001, and at any adjournment thereof, upon the matters referred to in the Notice of Meeting and Proxy Statement for said meeting and in their discretion upon such other business as may properly come before the meeting or any adjournment. The undersigned hereby revokes any proxies heretofore given and ratifies and confirms all that each of said attorneys and proxies, or any substitute or substitutes, shall lawfully do or cause to be done by reason thereof, upon the matters referred to in the Notice of Meeting and Proxy Statement for said meeting. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED, OR IF NO CHOICE IS SPECIFIED, "FOR" THE PROPOSAL LISTED ON THE REVERSE SIDE. DISCRETIONARY AUTHORITY IS HEREBY CONFERRED AS TO ALL OTHER MATTERS THAT MAY COME BEFORE THE MEETING. ----------- SEE REVERSE SIDE ----------- THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSAL. [MASTERCARD LOGO] SPECIAL MEETING OF PRINCIPAL, ASSOCIATION AND TRAVELERS CHEQUE MEMBERS XXXXXX, 2001 AT 9:00 A.M. At Our Offices 2000 Purchase Street Purchase, New York 10577 - -------------------------------------------------------------------------------- INSTRUCTIONS FOR VOTING YOUR PROXY THERE ARE THREE WAYS TO VOTE YOUR PROXY TELEPHONE VOTING This method of voting is available for principal, association and travelers cheque members located in the U.S. and Canada. On a touch tone telephone, call TOLL FREE 1-800-849-5629, 24 hours a day, 7 days a week. You will be asked to enter ONLY the CONTROL NUMBER shown below. Have your proxy card ready, then follow the prerecorded instructions. Your vote will be confirmed and cast as you directed. Available 24 hours a day, 7 days a week until 5:00 p.m. Eastern time on XXXXXX, 2001. INTERNET VOTING Visit the Internet voting website at HTTP://PROXY.GEORGESON.COM. Enter the COMPANY NUMBER AND CONTROL NUMBER shown below and follow the instructions on your screen.You will incur only your usual Internet charges. Available 24 hours a day, 7 days a week until 5:00 p.m. Eastern time on XXXXXX, 2001. VOTING BY MAIL Simply mark, sign and date your proxy card and return it in the reply envelope enclosed. - -------------- -------------- COMPANY NUMBER CONTROL NUMBER - -------------- -------------- IF YOU ARE VOTING BY TELEPHONE OR THE INTERNET, PLEASE DO NOT MAIL YOUR PROXY CARD TO VOTE BY MAIL, PLEASE DETACH PROXY CARD HERE - -------------------------------------------------------------------------------- [X] PLEASE MARK VOTES AS IN THIS EXAMPLE. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED BELOW. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED "FOR" THE PROPOSAL. - -------------------------------------------------------------------------------- MASTERCARD INTERNATIONAL'S BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSAL LISTED BELOW. - -------------------------------------------------------------------------------- 1. To approve a plan of conversion that FOR AGAINST ABSTAIN will convert MasterCard International [ ] [ ] [ ] into a non-stock corporation that is a subsidiary of a stock holding company, MasterCard Incorporated. _______________________________________________________ Member Name Set forth below is the aggregate number of shares of class A and class B common stock of MasterCard Incorporated to be owned by the member named herein after the conversion and integration. The figures include the number of shares issued to the member identified on this proxy card in connection with the Europay integration. The member's vote is not sought for the Europay integration. _______________________________________________________ Number of Current MasterCard International Member Votes _______________________________________________________ Shares of class A common stock _______________________________________________________ Shares of class B common stock _______________________________________________________ Authorized Signature _______________________________________________________ Date _______________________________________________________ Type or Print Name of Person Signing _______________________________________________________ Type or Print Title of Person Signing _______________________________________________________ ICA Number(s) -----END PRIVACY-ENHANCED MESSAGE-----