Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

		
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
For the fiscal year ended December 31, 2004
or

		
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
For the transition period from                               to                               
Commission file number: 000-50250
MasterCard Incorporated
(Exact name of registrant as specified in its charter)
 	 	 	
Delaware	 	13-4172551	
(State or other jurisdiction of
incorporation or organization)	 	(I.R.S. Employer
Identification No.)	
 	
2000 Purchase Street, Purchase, New York	 	10577	
(Address of Registrant’s principal executive offices)	 	(zip code)	
Registrant’s telephone number, including area code (914) 249-2000
Securities registered pursuant to Section 12(b):
None
Securities registered pursuant to Section 12(g):
Class A Redeemable Common Stock, par value $.01 per share
Class B Convertible Common Stock, par value $.01 per share
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ          No  o
     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o
     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  o          No  þ
     As of February 9, 2005, there were 84,000,000 shares of Class A redeemable and 16,000,000 shares of Class B convertible common stock of MasterCard Incorporated issued and outstanding. The common stock of MasterCard Incorporated is not listed on any securities exchange or quoted on any automated quotation system. Accordingly, no aggregate market value of the voting and non-voting common equity securities held by non-affiliates of MasterCard Incorporated has been established.
     Portions of the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held May 9, 2005 are incorporated by reference into Part III of this Form 10-K.

MASTERCARD INCORPORATED
FISCAL YEAR 2004 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
 	 	 	 	 	 	 	
 	 	 	 	Page		
 	 	 	 	 		
PART I	
  Item 1.	 	  Business	 	 	1	 	
  Item 2.	 	  Properties	 	 	20	 	
  Item 3.	 	  Legal Proceedings	 	 	20	 	
  Item 4.	 	  Submission of Matters to a Vote of Security Holders	 	 	20	 	
 	
  PART II	
  Item 5.	 	  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	 	 	20	 	
  Item 6.	 	  Selected Financial Data	 	 	21	 	
  Item 7.	 	  Management’s Discussion and Analysis of Financial Condition and Results of Operations	 	 	23	 	
  Item 7A.	 	  Quantitative and Qualitative Disclosures About Market Risk	 	 	38	 	
  Item 8.	 	  Financial Statements and Supplementary Data	 	 	40	 	
  Item 9.	 	  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	 	 	88	 	
  Item 9A.	 	  Controls and Procedures	 	 	88	 	
  Item 9B.	 	  Other Information	 	 	88	 	
 	
  PART III	
  Item 10.	 	  Directors and Executive Officers of the Registrant	 	 	92	 	
  Item 11.	 	  Executive Compensation	 	 	92	 	
  Item 12.	 	  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	 	 	92	 	
  Item 13.	 	  Certain Relationships and Related Transactions	 	 	92	 	
  Item 14.	 	  Principal Accountant Fees and Services	 	 	92	 	
 	
  PART IV	
  Item 15.	 	  Exhibits and Financial Statement Schedules	 	 	93	 	
  EX-3.1.B: AMENDED AND RESTATED BYLAWS	
  EX-10.4.1: FIRST AMENDMENT TO GUARANTEE	
  EX-10.7.1: MASTERCARD INTERNATIONAL-CITIBANK, N.A. AGREEMENT	
  EX-10.9.1: ADDENDUM TO EMPLOYMENT AGREEMENT	
  EX-10.14: ANNUAL INCENTIVE COMPENSATION PLAN	
  EX-10.15: ANNUITY BONUS PROGRAM	
  EX-10.16: DEFERRAL PLAN	
  EX-10.17: SCHEDULE OF NON-EMPLOYEE DIRECTORS' ANNUAL COMPENSATION	
  EX-21: LIST OF SUBSIDIARIES	
  EX-31.1: CERTIFICATION	
  EX-31.2: CERTIFICATION	
  EX-32.1: CERTIFICATION	
  EX-32.2: CERTIFICATION	
i 

Table of Contents

		
Item 1.	Business	
Overview
      MasterCard Incorporated is a leading global payment solutions company that provides a variety of services principally in support of our customers’ credit, deposit access (debit), electronic cash and related payment programs. We manage a family of well-known, widely accepted payment card brands including MasterCard®, MasterCard Electronic tm , Maestro® and Cirrus®, which we license to our customers. As part of managing these brands, we also provide our customers with a sophisticated set of information and transaction processing services and establish and enforce rules and standards surrounding the use of our payment card network by customers and merchants. We generate revenues from the fees that we charge our customers for providing such transaction processing and other payment services (operation fees), and by assessing our members for the gross dollar volume (“GDV”) of activity on cards carrying our brands (assessments).
      Using our transaction processing services, our customers facilitate payment transactions between cardholders and merchants throughout the world, providing merchants with an efficient and secure payment option, and consumers and businesses with a convenient payment vehicle accepted worldwide. We guarantee the settlement of many of these transactions to ensure the integrity of our payment network. In addition, we undertake a variety of marketing activities designed to maintain and enhance the value of our brands. We work with our customers and other industry partners to develop innovative new technologies and applications for our payment programs, including in the areas of electronic and mobile commerce and chip-based cards.
      MasterCard Incorporated was incorporated as a Delaware stock corporation in May 2001. We conduct our business principally through MasterCard Incorporated’s principal operating subsidiary, MasterCard International Incorporated (“MasterCard International”), a Delaware membership corporation that was formed in November 1966. Through MasterCard International, our business is structured as an open bankcard association, in which cardholder and merchant relationships are managed principally by our customers. Accordingly, we do not issue cards, set cardholder fees or determine the interest rates (if applicable) or fees charged to cardholders using cards that carry our brands. Our customers are the principal and affiliate members of MasterCard International, which we refer to collectively as our “customers” or “members.” We refer to the customers that issue our cards as “issuers” and those that enroll merchants into programs to accept our cards as “acquirers.” We use the term “card” to refer to the plastic cards carrying our brands or those of our competitors, together with the underlying credit, charge, deposit or asset account. We use the term “MasterCard” to refer to the MasterCard brand generally, and to the business conducted by MasterCard Incorporated and its consolidated subsidiaries, including MasterCard International and MasterCard Europe sprl (“MasterCard Europe”). The common stock of MasterCard Incorporated is owned by principal members of MasterCard International.
      In 2004, our GDV as reported by our customers was $1.455 trillion, a 10.6% increase (on a local currency basis) over the GDV generated in 2003. On a regional basis, 2004 GDV growth was 9.3% in the United States, 12.8% in Canada, 14.2% in Europe, 33.3% in Latin America, 25.5% in South Asia/ Middle East/ Africa (“SAMEA”) and 1.8% in Asia/ Pacific. GDV has increased 93.2% (on a local currency basis) since 1999. GDV represents gross usage (purchase and cash transactions) on MasterCard-branded cards for goods and services, including balance transfers and convenience checks. These figures exclude Maestro and Cirrus transactions. At December 31, 2004, the total number of MasterCard cards in circulation worldwide as reported by our customers was 679.5 million, an 8.6% increase from December 31, 2003.
      In recent years, our corporate strategy has been to focus on our key customers to drive our business growth; to strengthen our brands, technology and acceptance network; and to differentiate MasterCard from our competition by developing innovative payment solutions and customized consulting services. We remain committed to this strategic direction and have begun to implement initiatives to expand our customer-focused approach to a broader group of customers, as well as to further develop relationships with merchants that accept our cards. We will also seek to leverage our expertise in payment programs, consulting services, brand marketing, technology and processing to expand the value-added services we provide our customers. We believe that debit and prepaid programs as well as corporate payment solutions offer particularly attractive opportunities for further growth.
1 

Table of Contents

      We believe there are significant opportunities for continued strong growth in our core business, particularly in international markets. These opportunities take two forms. First, we continue to benefit from a worldwide trend in which payments are migrating from paper-based forms (such as cash and checks) to electronic forms (such as payment cards). This trend has helped to drive our volume and revenue growth for a number of years, and we expect it to continue in 2005. Second, we believe there is an opportunity to increase MasterCard’s share of our customers’ overall spending on their payments businesses, by such means as pursuing additional transaction processing opportunities and by continuing to enter into business agreements with key customers. These business agreements allow us to support the individual needs of our customers with tailored pricing and other business arrangements in exchange for significant volume and other commitments to MasterCard. In particular, we believe that there are significant opportunities to pursue transaction processing arrangements and additional business agreements outside the United States.
      We operate in a dynamic and rapidly evolving regulatory environment, particularly with respect to interchange fees. Interchange fees represent a sharing of payment system costs among the financial institutions participating in a four-party payment card system such as ours. Generally, interchange fees are paid by acquirers to issuers in connection with transactions initiated with our cards. These fees are collected from acquirers and passed to issuers to reimburse the issuers for a portion of the costs incurred by them in providing services which are of benefit to all participants in the system, including acquirers and merchants. We establish multilateral interchange fees (“MIFs”) in certain circumstances as default fees that apply when there are no other interchange fee arrangements in place between an issuer and an acquirer. We administer the collection of MIFs through the settlement process; however, we generally do not earn revenues from them. MIFs are a significant component of the costs that merchants pay to accept payment cards and are subject to regulatory or legal challenges in a number of jurisdictions. We are devoting substantial management and financial resources to the defense of MIFs and to the other legal and regulatory challenges we face, as described more fully below in “Risk Factors”.
      As a global business, 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, to regional boards of directors covering each of Asia/ Pacific, Canada, Europe, Latin America and the Caribbean, SAMEA, and the United States.
2 

Table of Contents

Payment Services

		
	Transaction Processing	
      We operate a network that links issuers and acquirers around the globe for transaction processing services and, through them, permits MasterCard cardholders to use their cards at millions of merchants worldwide. A typical transaction processed over our network involves four participants in addition to ourselves: issuers, acquirers, merchants and cardholders. Consequently, the payment system we operate is often referred to as a “four-party” payment system. In a typical transaction, a cardholder purchases goods or services from a merchant using a card. After the transaction is authorized by the issuer using our network, the acquirer pays the amount of the purchase, net of a discount, to the merchant. This discount, which we refer to as the merchant discount, takes into consideration the amount of the interchange fee. The issuer pays the acquirer an amount equal to the value of the transaction minus any interchange fee and posts the transaction to the cardholder’s account. We provide transaction processing services to facilitate the authorization, clearing and settlement of these transactions and similar transactions through our proprietary, worldwide computer and telecommunications network. A significant portion of our revenues — approximately 35% in 2004 — are earned in connection with our provision of these authorization, clearing and settlement services. Our transaction processing services are provided principally through our Global Technology and Operations headquarters in O’Fallon, Missouri.
      Authorization, Clearing and Settlement. Authorization refers to 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. MasterCard’s network provides for the transmission of authorization requests and results among issuers, acquirers and other transaction processors or networks. Our rules, which may vary across regions, establish the circumstances under which merchants and acquirers must seek authorization of transactions. We processed over 9.2 billion MasterCard-branded authorizations on our global processing systems in 2004.
      Clearing refers to 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 the Global Clearing Management System (GCMS), and the related information is typically routed among customers via our data transport network, which we refer to as Banknet.
      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 (SAM) system. Once clearing is completed, a daily
3 

Table of Contents

reconciliation is provided to each customer involved in settlement, 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 customer and approved by MasterCard, and a settlement bank chosen by MasterCard. Customer settlement occurs in U.S. dollars or in other selected currencies, in accordance with established rules.
      We also operate the MasterCard Debit Switch (“MDS”), which principally supports the processing of Cirrus and Maestro debit transactions. The MDS switches financial messages, provides transaction and statistical reporting, and performs clearing and settlement between customers 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 (one 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.
      Our transaction processing services are available 24 hours per day, every day of the year. In the event that our main processing facility in O’Fallon, Missouri, becomes disabled, we have a co-processing facility in Kansas City, Missouri. Our transaction processing systems have redundant power supplies and back-up processes to ensure continued operation in the event of a fault. We consistently maintain core systems availability for our global processing systems at a rate in excess of 99.9%.
      We also generate a significant amount of revenue from processing foreign currency transactions for our customers. On a global scale, we have the ability to process transactions denominated in more than 160 currencies. These revenues are the result of cross-border transactions by cardholders that require currency conversion to settle the transactions between issuers and acquirers. MasterCard generally uses a wholesale rate increased by a certain percentage or a government-mandated rate to convert transactions in foreign currencies into U.S. dollars. Revenues from processing currency conversion transactions fluctuate with cross-border travel, which is impacted by changes in foreign currency exchange rates.
      In addition to revenues associated with transaction processing, we earn a significant portion of our revenues — approximately 37% in 2004 — from assessments on our customers calculated on the GDV on cards carrying our brands.
      Regional Transaction Processing. We provide transaction processing (authorization, clearing and settlement) services for customers in the Europe region through our subsidiary MasterCard Europe. These services, which allow European customers to facilitate payment transactions between cardholders and merchants throughout Europe, are provided via our European Payment Systems Network (“EPS-Net”) for authorization services and European Common Clearing and Settlement System (“ECCSS”) for clearing and settlement services. We are presently in the midst of a multi-year technical convergence project to fully integrate ECCSS with our global clearing and settlement systems. We also operate a separate regional processing facility for the Asia/ Pacific region in Australia.
      Outside of the United States and a select number of other jurisdictions, most intra-country (as opposed to cross-border) transaction activity conducted with MasterCard, Maestro and Cirrus cards is authorized, cleared and/or settled by our customers or other processors without the involvement of MasterCard’s central processing systems. We do not earn transaction processing fees for such activity. Accordingly, a significant portion of our non-U.S. revenues are derived from processing cross-border transactions, and therefore our business is dependent on trends in cross-border travel. For example, the recovery of cross-border travel in 2004 from the depressed levels in 2003 due to SARS and the war in Iraq was a significant source of our 2004 revenue growth. As part of our strategy, we are developing and promoting domestic processing solutions for our customers that are designed to leverage our significant investments in our global and regional processing systems. During 2003, MasterCard Europe began authorizing and clearing transactions for the members of S2 Limited, formerly known as Switch Card Services Limited, which operate an electronic domestic debit card network in the United Kingdom under the Switch® brand, as part of an agreement to migrate Switch branding to Maestro by 2007.
4 

Table of Contents

		
	Customer Relationship Management	
      To facilitate our customer-focused strategy we have teams of employees dedicated to managing our relationships with our key customers. We believe the coordinated, high quality services provided by these teams is a significant advantage for MasterCard that distinguishes us from our competitors. We also seek to enter into business agreements with key customers through which we offer financial incentives and other financial support to issue and promote our cards. These incentives often consist of a reduction in our volume-based fees and assessments for certain customers based on the achievement of GDV hurdles or other performance metrics.
      We believe that our business agreements with key customers have contributed to our strong volume and revenue growth in recent years and that these agreements will continue to drive our business performance in 2005. However, as consolidation in the banking industry produces a smaller number of larger customers, which generally have a greater ability to negotiate pricing discounts with MasterCard, we may have to increase the amount of these incentives and other financial support in order to stay competitive, which could adversely affect our revenues and profitability.
      In 2004, JP Morgan Chase Bank and its affiliates contributed to over 10% of our consolidated revenues. Net fees earned from JP Morgan Chase Bank and its affiliates were approximately $315 million. Loss of a substantial amount of revenues from JP Morgan Chase Bank and its affiliates could have a material adverse effect on our business. See “Risk Factors”.
MasterCard Payment Programs
      MasterCard offers a wide range of payment solutions to enable our customers to design, package and implement programs targeted to the specific needs of their own customers. Our principal payment programs, which are facilitated through our brands, include consumer credit and debit programs, corporate payment solutions and stored value programs. Our issuers determine the competitive features for the cards issued under our programs, including interest rates and fees.

		
	Consumer Programs — Credit and Charge	
      MasterCard offers a number of consumer credit and charge programs that are designed to meet the needs of our customers. We are able to customize programs to address specific consumer segments. Our consumer credit programs include Standard, Gold, Platinum and World MasterCard cards. 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 offered with still higher credit lines or spending limits and also provides a full range of card enhancement services. World MasterCard cards, which are aimed at affluent households in the United States, have no preset spending limit and the option to revolve a designated portion of the charges made. In February 2005, MasterCard enhanced the World MasterCard card program to offer consumers rewards points in categories of their choosing, and to provide issuers with a uniquely customizable array of incentives designed to complement their consumers’ life-cycle changes and evolving preferences. These cards are targeted principally for travel and entertainment use and are accompanied with best-in-class enhancement services and loyalty rewards programs.
      MasterCard also offers a variety of innovative card programs in selected markets throughout the world. For example, MasterCard Electronic cards offer additional control and risk management features by requiring 100% issuer authorization. The MasterCard Electronic program is designed to curb fraud and control exposure in high risk markets. The MasterCard Unembossed program encourages merchants to submit transactions electronically. MasterCard has also created innovative, alternate card forms to help our customers differentiate their programs. For example, MasterCard mc(2) tm cards are generally chip-enabled and feature a distinctive cutaway corner card design. MasterCard has launched MasterCard mc(2) programs in the Europe, Latin America/Caribbean and Asia/Pacific regions.
5 

Table of Contents

      The services provided in connection with all MasterCard credit cards and for which we charge issuers include lost/stolen card reporting, emergency card replacement and emergency cash advance. Optional services, such as emergency travel assistance, are also available on many MasterCard cards. Required services are generally provided through third-party service providers arranged by MasterCard, including a licensed insurance company retained by MasterCard to provide insurance services.

		
	Consumer Programs — Deposit Access	
      MasterCard supports a range of payment solutions that allow our customers to provide consumers with convenient access to funds on deposit in checking, demand deposit and other accounts. Our deposit access programs may be branded with the MasterCard, Maestro and/or Cirrus marks, and can be used to obtain cash in bank branches or at Automated Teller Machines (“ATMs”). In addition, MasterCard- and Maestro-branded debit cards may be used to make purchases at the point of sale. Like our consumer credit programs, we support debit Gold MasterCard programs and debit Platinum MasterCard programs that issuers can offer as premium services to cardholders. Issuers may also provide enhancement services and loyalty rewards programs in connection with debit cards carrying our brands.
      We refer to debit programs where the primary means of cardholder validation at the point of sale is for cardholders to sign a sales receipt and where transaction data is exchanged in two discrete messages (one for authorization and again for clearing) as “offline”. We refer to debit programs where cardholders enter a personal identification number (“PIN”) at a point of sale terminal for validation and where transaction data is exchanged through a single message with the initial authorization as “online”.
      We offer MasterCard-branded offline debit card programs in the United States and other countries. In 2004, Associated Bank, Bank of the West and Washington Mutual, which collectively issue an estimated 10 million offline debit cards, selected MasterCard for their offline debit card programs. In addition, MasterCard has entered into a debit processing alliance with eFunds Corporation, a leading provider of electronic payments software and processing solutions. Under the alliance, we market eFunds’ processing services as an integrated component of our debit programs. The alliance is intended to add a flexible, end-to-end debit transaction processing solution to the package of services and products already available to our customers.
      As a result of the Settlement Agreement in the U.S. merchant lawsuit described in Note 14 to the Consolidated Financial Statements herein, MasterCard has taken a number of actions to modify its MasterCard-branded offline debit card programs in the United States. Among other things, MasterCard has adopted rules that allow merchants to reject MasterCard-branded debit cards issued in the United States, while still accepting other MasterCard-branded cards, and vice versa. However, U.S. merchants who choose to accept MasterCard-branded debit cards must accept all MasterCard-branded debit cards.
      Maestro is MasterCard’s global online debit program. 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 offline debit transactions. Based on information from our customers and other sources, we estimate that, at December 31, 2004, the Maestro brand mark appeared on approximately 562.6 million cards worldwide and that Maestro was accepted for purchases at more than 8.4 million merchant locations.
      The MasterCard ATM Network is among the world’s largest global ATM networks, with more than 1 million participating ATMs and other cash dispensing locations around the globe. Generally, cardholders with cards bearing the MasterCard, Maestro or Cirrus logo may use a network ATM to access funds on deposit in their accounts (if a debit card is used) or to obtain a cash advance (if a credit card is used).
      We make the Cirrus brand available to customers to provide global cash access through the MasterCard ATM Network for our customers’ proprietary ATM cards. Cirrus transactions are validated by entering a PIN. Cirrus cards are issued and processed pursuant to a set of rules and procedures applicable specifically to ATM transactions.
6 

Table of Contents

		
	Corporate Payment Solutions	
      MasterCard offers corporate payment solutions that allow large corporations, mid-sized companies, small businesses and public sector organizations to streamline their payment processes, manage information and reduce administrative costs.
      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 corporate purchasing process and provide companies with access to enhanced line item transaction detail. MasterCard Corporate Fleet Cards provide companies with a way to monitor and control the expenses of a commercial fleet at the vehicle or driver level, as well as to capture and manage detailed spending data. Finally, the MasterCard Corporate Multi Card® is an integrated card program that combines the functionality of one or more of our MasterCard corporate programs — travel, purchasing and fleet — into a single card or account, thereby reducing the costs of managing multiple card programs. We also offer a variety of payment programs for public sector entities that are similar to the travel, purchasing, fleet and Multi Card programs offered to corporations. The MasterCard BusinessCard® and Executive BusinessCard are targeted at the small-business segment, offering business owners the ability to gain access to working capital, extend payments and separate business expenses from personal expenses.
      MasterCard has also developed programs that offer unique benefits to organizations ranging from small businesses to large corporations by integrating payment transaction data into financial systems. Such programs, which aim to facilitate paperless end-to-end corporate purchasing for our customers, include the MasterCard Multinational Corporate Program (global consolidation of payment transactions), MasterCard e-P3 tm (accounts payable re-engineering), MasterCard ExpenSys tm (expense reporting), MasterCard Smart Data (management reporting) and MasterCard SmartLink (enterprise reporting systems).

		
	Stored Value Programs	
      Stored value programs involve a balance account that is funded with monetary value prior to use. Funds in the account may be accessed via a traditional magnetic stripe or chip-enabled payment card (prepaid cards) or paper-based travelers cheques.
      Prepaid. MasterCard’s customers may implement prepaid payment programs using any of the MasterCard family of brands (MasterCard, MasterCard Electronic, Maestro or Cirrus). MasterCard provides processing services, including authorization, clearing and settlement, in support of either magnetic stripe or chip-enabled prepaid card programs and can maintain card account balance information.
      Travelers Cheques. Travelers cheques are a form of payment for use at the point of sale or at bank branches. MasterCard-branded travelers cheques are issued by a number of customers around the world. For a description of our guarantee obligations relating to travelers cheques, see Note 17 to the Consolidated Financial Statements herein.

		
	Consulting, Information and Related Services	
      Our MasterCard Advisors group provides our customers with a wide range of tailored consulting services and information and other products associated with their payments activities and programs. In 2004, MasterCard Advisors expanded existing services in the areas of research, customer relationship management, database marketing and mining, information and risk management consulting, and outsourcing. Such expansion included the acquisitions of The Tower Group, Inc., a research and advisory firm, in February 2004 and Watch Hill Partners, Inc., a customer relationship management consultancy, in May 2004. In addition, MasterCard Advisors introduced new services in the area of database mining, including the launch of the SpendingPulse™ national retail data service, which aggregates and analyzes transaction processing data in the United States to produce estimates of U.S. retail sales. MasterCard Advisors charges our customers and
7 

Table of Contents

others fees for its professional services. At this time, MasterCard Advisors does not make a significant contribution to our revenues.

		
	Global e-Business and Emerging Technologies	
      MasterCard is supporting innovation in the payments industry with a number of initiatives, including developments in the areas of electronic commerce, smart cards and mobile commerce. MasterCard’s Electronic Commerce Center of Excellence manages MasterCard’s electronic commerce offerings by researching and developing a range of emerging technologies that offer new business opportunities to MasterCard and our customers. MasterCard’s Chip Centre of Excellence manages smart card development for MasterCard by working with our customers to help them replace traditional payment cards relying solely on magnetic stripe technology with chip-enabled payment cards. As of December 31, 2004, more than 200 million smart cards bearing MasterCard’s brands were issued worldwide. We are also involved in a number of organizations that facilitate the development and use of smart cards globally, including EMVCo LLC, a smart cards standards organization, which maintains specifications that are designed to ensure interoperability and acceptance of chip-based payment applications on a worldwide basis. MasterCard’s Mobile and Wireless Centre of Excellence manages mobile commerce and wireless payment development by working with customers and leading technology companies. Finally, MasterCard is working to develop standards and programs that will allow consumers to conduct their financial transactions securely using a variety of new point of interaction devices.

		
	Anti-Fraud Programs	
      Our customers are responsible for fraud losses associated with the cards they issue or the merchants from whom they acquire transactions. However, we have implemented a series of programs and systems to aid our customers in detecting and preventing the fraudulent use of cards carrying our brands. Generally, we charge our customers fees for these anti-fraud programs and services. We have a number of prevention initiatives targeted at fraudulent cardholder activity, as well as programs targeted at merchant fraud. Security and cardholder authentication for remote channels are particularly critical issues facing MasterCard’s customers and merchants who engage in electronic commerce transactions, where a signed cardholder sales receipt is generally unavailable. MasterCard is seeking to address these issues through, among other things, the implementation of MasterCard SecureCode tm , a global Internet authentication solution that permits cardholders to authenticate themselves to their issuer through the use of a unique, personal code, and Site Data Protection, a program that assists customers and on-line merchants in protecting electronic commerce sites from hacker intrusions and subsequent account data compromises.
Marketing
      We manage and promote the MasterCard brand for the benefit of all customers through umbrella advertising, promotional and sponsorship initiatives. We strive to have our cardholders associate the MasterCard brand with “The Best Way to Pay for Everything that Matters®”. Our approach to marketing activities combines advertising, sponsorships, promotions, interactive media and public relations as part of an integrated package designed to increase consumer awareness of MasterCard and to drive usage of MasterCard cards. We also seek to tailor our global marketing messages by optimizing their use in individual countries, while maintaining a common global theme. Our brand building initiatives, which are conducted for our benefit as well as for the benefit of our customers, represent a substantial portion of our overall expenses — approximately 41% in 2004.
      Our advertising plays an important role in building brand visibility, usage and loyalty among cardholders globally. Our award-winning “Priceless®” advertising campaign, launched in the United States in 1997, has run in 48 languages across 96 countries. The “Priceless” campaign promotes MasterCard’s acceptance and usage benefits that permit cardholders to pay for what they need, when they need it. It also provides MasterCard with a consistent, recognizable message that supports our brand positioning. In order to promote usage of our cards, we also sponsor frequent promotions on a regional and national basis, often in conjunction with merchants or our customers.
8 

Table of Contents

      We seek to increase MasterCard brand awareness and preference, and to encourage card usage and loyalty, by sponsoring a variety of sporting and entertainment properties that support the “Priceless” campaign and MasterCard brand positioning. 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, including the Union of European Football Associations (“UEFA”) European Championship and the UEFA Champions League in Europe. In golf, we are a sponsor and the preferred card of the PGA Tour, the Champions Tour, the PGA of America, the LPGA, the European PGA Tour, the PGA Tour of Australasia, and other events. In baseball, we are the exclusive payments brand sponsor of Major League Baseball (“MLB”). We have also established separate marketing and sponsorship arrangements with over half of the MLB teams. In football, we have established sponsorship arrangements with the majority of the National Football League teams. Finally, as part of our marketing strategy in family entertainment, we have a long-term sponsorship arrangement with certain business units of NBC Universal that entitles MasterCard to marketing and promotional programs with certain of Universal’s motion picture, theme park, music and video properties.
Merchant Acceptance Initiatives
      Based on information from our customers and other sources, we estimate that, at December 31, 2004, cards carrying MasterCard brands were accepted at over 24 million locations around the world. Acceptance locations include merchant locations, ATMs and other locations where cash may be obtained.
      Merchants are an important constituency in the MasterCard payment system and we are working to further develop our relationships with them. We believe that consolidation in the retail industry is producing a set of larger merchants with increasingly global scope. These merchants are having a significant impact on all participants in the global payments industry, including MasterCard. We believe that the growing role of merchants in the payments system represents both an opportunity and a challenge for MasterCard. On the one hand, large merchants are supporting many of the legal and regulatory threats to interchange that MasterCard is now defending, since interchange represents a significant component of the costs that merchants pay to accept payment cards. See “Risk Factors.” In addition, we may be required to increase the amount and scope of incentives that we provide to merchants to encourage the acceptance and usage of our cards, which may adversely affect our business. On the other hand, we believe there are many opportunities to enhance our relationships with merchants and to continue to expand acceptance of our cards, which provide numerous benefits to merchants. For example, in 2004 we made available directly to merchants those portions of our rules that apply to card acceptance and related activities, and we continue to pursue multiple initiatives to encourage merchant acceptance of our cards.
      In the area of acceptance, we aim to maintain the unsurpassed acceptance of MasterCard-branded programs by focusing on three core initiatives. First, we seek to increase the number of payment channels where MasterCard programs are accepted, such as by introducing MasterCard acceptance in connection with remote payment applications. Second, we seek to increase the number of categories of merchants that accept our programs. We are focused presently on expanding acceptance in electronic commerce environments, in fast through-put businesses such as fast food restaurants, and in connection with public sector payments (including those involving taxes, fees, fines and tolls), among other categories. Third, we seek to increase usage of our programs at selected merchants by sponsoring a range of promotional programs. We also enter into arrangements with selected merchants under which these merchants provide incentives or discounts for the use of MasterCard-branded programs or otherwise indicate a preference for MasterCard-branded programs when accepting payments from consumers.
      We also support technical initiatives designed to make MasterCard card acceptance more attractive for specific merchants, such as our Quick Payment Service for fast food restaurants and other merchants where rapid transactions are required. MasterCard PayPass tm , a “contactless” payment solution that enables consumers simply to tap or wave their payment card on a specially equipped terminal, is designed to help our customers grow their business by capturing transactions that were previously cash-based and increasing card activity on underutilized card accounts. In 2004, McDonald’s agreed to accept PayPass at thousands of its
9 

Table of Contents

locations in the United States. PayPass pilot programs have been expanded to include customers and merchants in the Asia/Pacific region and Canada.
      We view recurring payments as a significant opportunity to expand MasterCard card acceptance and usage, and we are working with customers to encourage consumers to make recurring bill payments in a variety of categories — including telephone, cable, utilities and insurance — on their MasterCard-branded cards.
      Finally, we provide research, marketing support and financial assistance to our customers 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, such as an airline or retail merchant. Affinity cards are similar to co-branded cards except that the issuer’s marketing partner is typically a charity, educational or similar organization.
Membership Standards
      We establish and enforce rules and standards surrounding membership in MasterCard International and the use and acceptance of cards carrying our brands.

		
	Rule Making and Enforcement	
      Membership in MasterCard International and its affiliates is generally open only to banks and other regulated and supervised financial institutions. Applicants for membership must meet membership eligibility requirements and must be approved by the appropriate regional MasterCard board of directors. In general, MasterCard grants licenses by territory to applicants able to perform all obligations required of members. Licenses convey intellectual property rights to members, including access to the network and usage of MasterCard’s brands. Risk management reviews and anti-money laundering (“AML”) due diligence reviews are conducted on all new members prior to admission, as well as on existing members. All applicants and members must meet the requirements of MasterCard’s AML program.
      As a condition of our licenses, members agree to comply with our bylaws, policies, rules and operating regulations (“Standards”). MasterCard International and certain of its affiliates are the governing bodies that establish and enforce the Standards. The Standards relate to such matters as membership eligibility and financial soundness criteria; the standards, design and features of cards and card programs; the use of MasterCard trademarks; merchant acquiring activities (including acceptance standards applicable to merchants); and guaranteed settlement, member failures and allocation of losses.
      To help ensure that members conform to the Standards, we run a number of compliance programs including reviewing card programs proposed by members and requiring members to undergo an annual audit by an independent certified public accountant (or similar examination by a regulatory authority). To tailor MasterCard’s programs and services to the needs of local markets, our global and/or regional boards have approved a number of variations to the Standards applicable to specific regions.

		
	Member Risk Management	
      As a secondary obligor of certain card obligations of principal members, we are exposed to member credit risk arising from the potential financial failure of any of our approximately 2,200 principal members of MasterCard, Maestro and Cirrus, and approximately 3,000 affiliate debit licensees. Principal members participate directly in MasterCard programs and are responsible for the settlement and other activities of their sponsored affiliate members (approximately 21,500).
      To minimize the contingent risk to MasterCard of a failure, we monitor principal members’ and affiliate debit licensees’ financial health, economic and political operating environments and 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 MasterCard settlement obligations to other members or its payment obligations to MasterCard merchants, we may require the member to post collateral, typically in the form of letters of credit and bank guarantees. In the event that a member becomes unable or
10 

Table of Contents

unwilling to meet its MasterCard settlement and/or program obligations, we are able to draw upon such member’s collateral account in order to minimize any potential loss to our members or ourselves. In addition to obtaining collateral from members, in situations where a member is potentially unable to meet its obligations to us or other members, we can block authorization and settlement of transactions and ultimately terminate membership.
      For liquidity protection in the event of member settlement failure, we have established a $1.95 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 or any other operating losses, subject to certain limitations set forth in the bylaws and other Standards of MasterCard. For a description of our exposure to settlement and travelers cheque risk, see Note 17 to the Consolidated Financial Statements herein.
Enterprise Risk Management
      MasterCard faces a number of risks in operating its business. For a description of material risks, see “Risk Factors.” The extent to which we effectively manage risk is critical to our financial condition and profitability. Managing risk is the responsibility of our business units and is an integral component of our business activities. In 2004, a dedicated Enterprise Risk Management group was created to provide risk management analysis, support, coordination and oversight across the organization. Through enterprise risk management, we seek to identify, assess, mitigate and monitor key business risks in a consistent and disciplined manner.
Intellectual Property
      We own a number of valuable trademarks that are essential to our business, including MasterCard®, Maestro® and Cirrus®, through one or more affiliates. We also own numerous other trademarks covering various brands, programs and services offered by MasterCard to support our payment programs. Through license agreements with our customers, we authorize the use of our trademarks in connection with our customers’ card issuing and merchant acquiring businesses. In addition, we own a number of patents and patent applications relating to payments solutions, transaction processing, smart cards, security systems and other matters, some of which may be important to our future 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 Automated Clearing House (“ACH”) payments. As a result of a global trend in which electronic forms of payment such as payment cards are increasingly displacing paper forms of payment, we have gained market share versus cash and checks in recent years. However, cash and checks still capture the largest overall percentage of worldwide transaction volume.
      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. General purpose cards may be credit, charge or deposit access cards. Within the general purpose payment card industry, we face substantial and increasingly intense competition worldwide from systems such as Visa (including Plus, Electron and Interlink), American Express and JCB, among others. In specific countries, we face significant competition from other competitors such as Discover/Novus in the United States. Within the global general purpose card industry, Visa has significantly greater volume than we do. In certain countries, other competitors also have leading positions, such as JCB in Japan. Our deposit access programs also encounter substantial and increasingly intense competition from ATM and point-of-sale debit networks in various countries, such as Star, NYCE and Pulse in the United States and Interac in Canada. We also encounter competition from businesses such as retail stores and petroleum (gasoline) companies that issue their own payment cards.
      Our competitors include operators of proprietary end-to-end payment networks that have direct acquiring relationships with merchants and direct issuing relationships with cardholders, such as American Express.
11 

Table of Contents

These competitors have certain advantages that we do not enjoy. Among other things, these competitors do not require formal interchange fees to balance payment system costs among issuers and acquirers, because they have direct relationships with both merchants and cardholders. Interchange fees, which are characteristics of four-party payments systems such as ours, are subject to increased regulatory scrutiny worldwide. See “Risk Factors”. Because they do not utilize formal interchange fees, operators of end-to-end payment networks to date have avoided the same regulatory scrutiny we face and, accordingly, may enjoy a competitive advantage over four-party payment systems.
      In addition, ongoing litigation has and may continue to affect our ability to compete in the global payments industry. See Note 16 to the Consolidated Financial Statements herein. Under the Settlement Agreement in the U.S. merchant lawsuit, U.S. merchants now have the right to reject MasterCard-branded debit cards issued in the United States while still accepting other MasterCard-branded cards, which may adversely affect our ability to maintain and grow our debit business in the United States. In addition, as a result of the court’s decision in our litigation with the U.S. Department of Justice concerning our Competitive Programs Policy, some of our customers may now do business with American Express or Discover in the United States, which could adversely affect our business. MBNA Corporation has already begun to issue American Express Cards to its customers and, in December 2004, American Express announced that it had reached an agreement for Citibank to offer American Express credit cards to Citibank’s customers. Finally, we are being sued in several state and federal courts because of our currency conversion practices. The outcome of these lawsuits potentially could require us to change our currency conversion practices, which may have a negative impact on our business. We do not know what the final outcome will be of our various litigations and other regulatory proceedings.
      In addition to proprietary end-to-end networks, we compete intensely with other bankcard associations, principally Visa, for the loyalty of our customers. In most countries throughout the world, including the United States, financial institutions typically issue both MasterCard- and Visa-branded payment cards. As a result of this structure, known as “duality”, we compete with Visa for business on the basis of individual card portfolios or programs. In some countries, 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, due to Visa’s historical debit exclusivity rule. As a result of the litigation with the U.S. Department of Justice, Visa’s debit exclusivity rule is no longer enforceable. However, Visa enacted a bylaw that imposes a fee on its 100 largest issuers of debit cards in the United States if they reduce their Visa debit volume by more than 10%. In non-dual countries, we compete with Visa for the entire book of a customer’s business.
      Over the last several years, the banking industry has undergone rapid consolidation, and we expect this trend to continue in the future. Consolidation represents a competitive threat for MasterCard because our business strategy contemplates entering into business agreements with our largest customers in exchange for significant business commitments to MasterCard. Significant ongoing consolidation in the banking industry may result in a financial institution with a substantial MasterCard portfolio being acquired by an institution that has a strong relationship with Visa or another competitor, resulting in the loss of business for MasterCard. In addition, one or more of our customers could 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 the United States, we believe that MasterCard-branded transactions account for a smaller share of all offline, signature-based debit transactions than they do credit or charge transactions. In addition, many of our competitors process a greater number of online, PIN-based debit transactions at the point of sale than we do, since our Maestro brand has relatively low market penetration in the United States. In recent years, we believe that offline and online debit has grown more rapidly than credit or charge transactions. If we are unable to maintain and grow our debit business in the United States, the reputation of our brands and overall business may suffer. In addition, our business and revenues could be impacted adversely by any tendency among U.S. consumers or financial institutions to migrate from offline, signature-based debit transactions to online, PIN-based transactions, because the latter types of transactions are more likely to be processed by ATM/debit point-of-sale networks as opposed to us.
12 

Table of Contents

      We also face competition from transaction processors such as First Data Corporation, some of which are seeking to build networks that link issuers directly with point-of-sale devices for payment card transaction authorization and processing services. Certain of these transaction processors (including First Data) have significantly greater scale than we do, which may provide them with a cost advantage over us in bidding for transaction processing business. If these processors grow their transaction volumes more quickly than we do, there is a risk that their scale advantages over us may accelerate and they could capture some of our core processing business. Similarly, some of our competitors provide currency conversion services at the point-of-sale through Dynamic Currency Conversion, or DCC, which is an alternative to the MasterCard currency conversion system. These networks could reduce our transaction processing volumes, which could adversely affect our revenues.
      We also compete against new entrants that have developed alternative payment systems. 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.
      In mobile commerce, we face competition from established network operators, who today manage millions of consumer relationships and possess key advantages for facilitating payments across mobile devices. Whereas the MasterCard approach to mobile commerce centers on the use of the consumer’s payment account as established by their card issuer, network operators may apply mobile consumer payments directly to the customer’s monthly bill.
      We believe that the principal factors affecting our competitive position in the global payments industry are:

			
 	• 	our relationships with our customers;	
 		
 	• 	the impact of existing litigations, legislation and government regulation;	
 		
 	• 	the impact of globalization and consolidation of our customers and merchants;	
 		
 	• 	the acceptance base, reputation and brand recognition of our payment cards;	
 		
 	• 	the quality and integrity of transaction processing;	
 		
 	• 	the relative value of services and products offered;	
 		
 	• 	the success and scope of marketing and promotional campaigns; and	
 		
 	• 	the ability to develop and implement new card programs, systems and technologies in both physical and virtual environments.	
Government Regulation
      Government regulation impacts key aspects of our business. We are subject to regulations that affect the payment industry in the many countries in which our cards are used. In particular, interchange fees associated with four-party payment systems such as MasterCard’s are being reviewed or challenged in various jurisdictions. See Note 16 to the Consolidated Financial Statements herein.
      MasterCard customers 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 periodically reviewed 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, the European Union and elsewhere, as well as regulations imposed by the U.S. Treasury’s Office of Foreign Assets Control. MasterCard Europe operates a retail payment system in Europe and is subject to oversight by the National Bank of Belgium (“NBB”) pursuant to standards
13 

Table of Contents

published by the European Central Bank. The NBB’s oversight of MasterCard Europe is principally addressed at managing financial, legal and operations risk.
      MasterCard and other participants in the payment industry are subject to the regulatory requirements of Section 352(a) of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”). The USA PATRIOT Act has required MasterCard to create and implement a comprehensive anti-money laundering program, and has imposed similar requirements on some of our customers.
Employees
      As of December 31, 2004, we employed approximately 4,000 persons, of which approximately 1,200 were employed outside the United States. We consider our relationship with our employees to be good.
SEC Reports
      Our periodic reports filed with the U.S. Securities and Exchange Commission are available for review on our website at www.mastercardintl.com. The information contained on our website is not incorporated by reference into this Report.
Risk Factors

		
	Regulatory Risks	
Interchange fees are the subject of increasingly intense regulatory scrutiny worldwide, which may adversely affect our business.
      Interchange fees are a significant component of the costs that merchants pay to accept payment cards, and merchants and regulators are seeking to reduce these costs through litigation or regulatory action. Accordingly, interchange fees, including MasterCard’s MIFs, are the subject of increasingly intense regulatory scrutiny worldwide. For example, in the European Union, the European Commission has issued a Statement of Objections challenging MasterCard’s cross-border MIF under European Union competition rules. If MasterCard is unsuccessful in obtaining a favorable ruling, the European Commission could order MasterCard to change the manner in which it calculates its cross-border MIF. In the United Kingdom, the Office of Fair Trading (“OFT”) has issued a Statement of Objections under the U.K. Competition Act 1998 challenging the MasterCard MIF and multilateral service fee (“MSF”), claiming that the MIF and MSF infringed U.K. competition law and do not qualify for an exemption in their present forms. In Australia, the Reserve Bank of Australia (“RBA”) has enacted regulations which impose a number of changes on the operation of four-party credit card systems. In the United States, a class-action suit has been filed by merchants alleging, among other things, that our interchange fees violate federal antitrust laws. Additional litigations with respect to interchange fees have also been threatened by merchants and plaintiffs’ lawyers in the United States. Interchange fees are also being reviewed in a number of other jurisdictions, including Poland, Spain, New Zealand, Portugal, Mexico, Colombia, South Africa and Switzerland. We believe that regulators are increasingly adopting a coordinated approach to interchange matters, as a result of which developments in any one jurisdiction may influence regulators’ approach to interchange in other jurisdictions. See Note 16 to the Consolidated Financial Statements contained herein for a complete description of these proceedings. We are devoting substantial management and financial resources to the defense of MIFs and to the other legal and regulatory challenges we face.
      If issuers are unable to collect interchange fees or are forced to reduce interchange fees, they may be unable to recoup the costs incurred for their services. This could reduce the number of financial institutions willing to participate in a four-party payment card system, lower overall transaction volumes, and/or make proprietary end-to-end networks (such as those offered by American Express) or other forms of payment more attractive. Issuers could also attempt to balance the expense of their card programs by seeking a reduction in the fees that we charge. If MasterCard is less successful than Visa in defending interchange fees, we could also be competitively disadvantaged against Visa. In Australia, we believe that the RBA’s regulations
14 

Table of Contents

have already benefited our competitors operating proprietary end-to-end networks. If we are ultimately unsuccessful in our defense of our and our members’ interchange fees, regulation of interchange fees could have an adverse impact on our revenues, our prospects for future growth, and our overall business.
In addition to interchange fees, the payments industry is the subject of increased regulatory focus in the United States and elsewhere, which may impose costly new compliance burdens on MasterCard and its customers and lead to decreased transaction volumes through MasterCard’s systems.
      Regulation of the payments industry, including regulation applicable to MasterCard and our customers, has increased significantly in recent years. For example, in 2002 MasterCard became subject to the regulatory requirements of Section 352(a) of the USA PATRIOT Act. The USA PATRIOT Act has required MasterCard to create and implement a comprehensive anti-money laundering program, and has imposed similar requirements on our customers. The U.S. Congress is presently considering regulatory initiatives in the areas of Internet gambling, Internet prescription drug purchases, copyright and trademark infringement and privacy, among others, that could impose additional compliance burdens on MasterCard or our customers. Most states in the U.S. are considering a variety of legislation as well. Various regulatory agencies are also considering regulations covering identity theft, account maintenance guidelines, privacy, disclosure rules, security and marketing that would impact our customers directly. In 2004, a number of regulations were issued implementing the Fair and Accurate Credit Transactions Act, or FACT Act, which, among other things, makes permanent the preemptive effect of several key provisions of the Fair Credit Reporting Act that could have a material impact on our customers’ businesses. Additional implementing regulations are anticipated in 2005. In addition, privacy and data use and security are issues of sensitivity to regulators and legislators and we and our members could be impacted by attempts to regulate such issues.
      Outside of the United States, a number of jurisdictions have begun implementing legal frameworks to regulate their domestic payment systems. For examples, regulators in Mexico and Malaysia have recently been given statutory authority to regulate certain respects of the payments systems in those countries, and similar initiatives have been proposed in Singapore and elsewhere. At present, it is not possible to predict the impact of these developments on MasterCard’s business or prospects.
      Increased regulatory focus on MasterCard may increase our costs, which would negatively impact our financial performance. Similarly, increased regulatory focus on our customers may cause them to reduce the volume of transactions processed through our systems, which would reduce our revenues and also negatively impact our financial performance.

		
	Litigation Risks	
As a result of the Court’s decision in our litigation with the U.S. Department of Justice, we have repealed our Competitive Programs Policy and our business may suffer as a result.
      In 1998, the United States Department of Justice (“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 certain aspects of the governance of MasterCard and Visa were unlawful, and that MasterCard’s Competitive Programs Policy (“CPP”) and a Visa bylaw provision that prohibited financial institutions participating in the respective associations from issuing competing proprietary payment cards (such as American Express or Discover) acted to restrain competition. Although we were successful in defending our governance structure at trial, the Second Circuit Court of Appeals affirmed the trial court judge’s ruling that our CPP and Visa’s bylaw constituted unlawful restraints of trade under the U.S. federal antitrust laws. After the U.S. Supreme Court denied our petition for certiorari on October 4, 2004, thereby exhausting all avenues for further appeal in this case, we repealed the CPP. As a result, our issuers are now permitted to issue general purpose credit or debit cards in the United States on any other general purpose card network (such as American Express or Discover). The repeal of the CPP could cause our members to issue fewer cards with our brand and enter into arrangements with our competitors to issue cards, thereby reducing the volume of transactions that we process. MBNA Corporation has already begun to issue American Express Cards to its customers and in December 2004 American Express announced that it had reached an agreement for Citibank to offer American Express credit cards to Citibank’s customers. Similarly, Discover announced
15 

Table of Contents

that GE Finance will issue Wal-mart branded cards that will run on the Discover network. Accordingly, the repeal of the CPP could have an adverse affect on our business and revenues. See Note 16 to the Consolidated Financial Statements herein.
If we are found liable in any of the cases brought by American Express or Discover, we may be forced to pay damages, which may have an adverse effect on our revenues.
      After the Supreme Court denied our petition for a writ of certiorari of the decision in our litigation with the DOJ, Discover and American Express, respectively, filed suit against MasterCard Incorporated, MasterCard International Incorporated, Visa U.S.A., Inc. and Visa International Services Association alleging that the CPP and Visa’s bylaw provision caused each injury by unlawfully restraining trade under the U.S. federal antitrust laws. Discover also alleges that it suffered injury by reason of MasterCard’s rules which required merchants in the U.S. to accept MasterCard-branded debit cards if they accepted other MasterCard products, before these rules were modified as part of the U.S. merchant lawsuit. American Express also names a number of member banks as co-defendants.
      If we are unsuccessful in defending against these lawsuits, we may have to pay treble damages, which could have an adverse effect on our business. See Note 16 to the Consolidated Financial Statements herein for a description of these and our other material legal proceedings.
Visa’s settlement service fee and the ability of U.S. merchants to not accept MasterCard-branded debit cards as a result of the settlement of the U.S. merchant lawsuit could adversely affect our ability to maintain and grow our debit card business in the United States.
      In June 2003, Visa enacted a bylaw requiring its 100 largest issuers of debit cards in the United States to pay a so-called “settlement service fee” if the issuers reduce their debit Visa volume by more than 10%. This bylaw was later modified to clarify that the settlement service fee would only be imposed if an issuer shifted its portfolio of debit cards to MasterCard. Visa implemented this bylaw provision following the settlement of the U.S. merchant lawsuit. See Note 14 to the Consolidated Financial Statements herein. For a description of MasterCard’s response to this bylaw provision, see Note 16 to the Consolidated Financial Statements herein. If Visa is permitted to impose this settlement service fee on issuers of debit cards according to this bylaw, it would penalize Visa members seeking to do debit business with MasterCard and would effectively prohibit them from converting their debit card programs to the MasterCard brand. In addition, under the Settlement Agreement in the U.S. merchant lawsuit, merchants have the right to reject MasterCard-branded debit cards in the United States, while still accepting other MasterCard-branded cards and vice versa. Either of these scenarios would be detrimental to MasterCard’s ability to maintain and grow its debit card business in the United States.
If we are ultimately unsuccessful in any of our various lawsuits relating to our currency conversion practices, or if Dynamic Currency Conversion services reduce the volume of foreign currency transactions we process, our business may be adversely affected.
      We generate a significant amount of revenue from processing foreign currency transactions for members. However, we are defendants in several state and federal lawsuits alleging that our currency conversion practices are deceptive, anti-competitive or otherwise unlawful. A trial judge in California has found that our currency conversion practice is deceptive under California state law, and ordered that we mandate that members disclose the currency conversion process to cardholders in cardholder agreements, applications, solicitations and monthly billing statements. The judge also ordered unspecified restitution to California cardholders. The final judgment and restitution process have been stayed pending MasterCard’s appeal. In addition, we have been served with similar complaints in several state courts seeking to, in effect, extend the judge’s decision to MasterCard cardholders outside of California. We have succeeded in having several of these cases transferred to the U.S. District Court for the Southern District of New York and combined with putative federal class actions alleging that our currency conversion practices violate federal antitrust laws. See Note 16 to the Consolidated Financial Statements herein.
      If we are unsuccessful in defending against these lawsuits, we may have to pay restitution to cardholders who make claims that they used their cards in another country, or may otherwise be required to modify our
16 

Table of Contents

currency conversion practices. In addition, some of our competitors provide currency conversion services at the point of sale (known as Dynamic Currency Conversion or DCC) which, if chosen by the cardholder, could replace our own currency conversion processing services. If we are forced to change our pricing or practices for our currency conversion processing, or if we process fewer transactions because of competing DCC services or otherwise, our business would be adversely affected.
If we are found liable in any of the other material litigations that have been brought against us, we may be forced to pay damages and/or change our business practices or pricing structure, any of which could have an adverse effect on our revenues.
      There are currently actions against MasterCard International in 19 different state courts and the District of Columbia. In a number of these state courts there are multiple complaints against MasterCard International brought under state unfair competition statutes on behalf of putative classes of consumers. The claims in these actions mirror the allegations made in the U.S. merchant lawsuit and assert that merchants, faced with excessive merchant discount fees, have passed these overcharges to consumers in the form of higher prices on goods and services sold. The consumer class actions are not covered by the terms of the Settlement Agreement described in Notes 14 and 16 to the Consolidated Financial Statements herein. In addition to these litigations, we are also being sued in U.S. District Court for the Eastern District of New York, the Superior Court of California and in the District Court of Rhode Island in connection with our assessment of chargeback transactions. We may also be sued in the future in the United States or in other jurisdictions by our customers, merchants or consumers for substantial damages or injunctive relief in connection with our business practices.
      If we are unsuccessful in our defense against the consumer class actions, the merchant chargeback litigations, or any other material litigation, we may be forced to pay damages and/or change our business practices and pricing structure, any of which could have an adverse affect on our business. See Note 16 to the Consolidated Financial Statements herein for a description of these and our other material legal proceedings.

		
	Other Risks	
We face increasingly intense competitive pressure on the prices we charge our customers, which may adversely affect our revenues and profitability.
      We generate revenues from the fees that we charge our customers for providing transaction processing and other payment services, and from assessments on the dollar volume of activity on cards carrying our brands. Some of our competitors are larger or have greater financial resources than we do. In addition, continued consolidation in the banking industry is producing a smaller number of larger customers, which generally have a greater ability to negotiate pricing discounts with MasterCard. In addition, we seek to enter into business agreements with customers through which we offer incentives and other support to issue and promote our cards. In order to stay competitive, we may have to increase the amount of these incentives. Also, as merchants consolidate and become increasingly larger we may be required to increase the amount of incentives that we provide to merchants. To date, our rapid overall volume growth has allowed us to mitigate the impact of pricing reductions or incentive increases. However, we may not be able to process additional transaction volume or provide additional services to our customers to compensate for such lower fees or increased costs in the future, which would adversely affect our revenues and profitability. In addition, increased pressure on prices enhances the importance of cost containment and productivity initiatives in areas other than those relating to customer incentives. We may not be successful in these efforts.
Global economic, political and other conditions may adversely affect trends in cross-border travel, which may significantly impact our revenues and profitability.
      The global payments industry is heavily dependent upon the overall level of consumer spending. A sustained deterioration in general economic conditions, particularly in the United States or Europe, or increases in interest rates in key countries in which we operate, may adversely affect our financial performance by reducing the number or average purchase amount of transactions involving payment cards carrying our brands. In addition, a significant portion of the volume generated on cards carrying our brands (and a
17 

Table of Contents

significant portion of the revenues we earn outside the United States) are associated with cross-border business and leisure travel, which may be adversely affected by world geopolitical and other conditions. In particular, revenues from processing foreign currency transactions for our customers fluctuate with cross border travel and are impacted by changes in foreign currency exchange rates.
We are significantly dependent on our relationships with our customers to manage the MasterCard payment system. If we are unable to maintain our relationships with our customers, or if our customers are unable to maintain their relationships with cardholders or with the merchants that accept our cards for payment, our business may be adversely affected.
      We are, and will continue to be, significantly dependent on our relationships with our issuers and acquirers and their further relationships with cardholders and merchants to support our programs and services. Most of our relationships with our customers are not exclusive and may be terminated at the convenience of our customers. Our customers can reassess their commitments to us at any time in the future and/or develop their own competitive services. In particular, the payments industry is currently undergoing significant consolidations and the merger of one or more of our customers with financial institutions aligned with our competitors could have a material adverse impact on our business and prospects. In 2004, JP Morgan Chase Bank and its affiliates contributed over 10% of our consolidated revenues. Loss of business from JP Morgan Chase Bank or another large customer could adversely affect our business.
      Our business strategy calls for us to grow our business by, among other things, entering into customized agreements with customers around the globe. Like our other customer relationships, these agreements are terminable by our customers in a variety of circumstances.
      A number of our key customers are represented on our board of directors. If any one of these customers were to lose its representation on the board, this could have a detrimental effect on our business relationship with that customer. Conversely, a number of customers from which we earn substantial revenues are principally aligned with one of our competitors. A significant loss of revenues or transaction volumes from these customers could have an adverse impact on our business.
      In addition, until October 15, 2006, we are required to permit issuers with which we have entered into business agreements in the United States before October 15, 2004 to terminate those agreements without penalty in order to enter into agreements with American Express or Discover as a result of the antitrust litigation that was brought against us by the DOJ, which is described in a separate risk factor above. Accordingly, our business agreements with customers may not reduce the risk inherent in our business that customers may terminate their relationships with us in favor of our competitors, or for other reasons, or might not meet their contractual obligations to us.
      We do not issue cards, set cardholder fees or determine the interest rates (if applicable) charged to cardholders using cards that carry our brands. Each MasterCard issuer is responsible for determining these and most other competitive card features. In addition, we do not solicit merchants to process transactions or establish the discount rate that merchants are charged for card acceptance, which are responsibilities of our acquirers. As a result, much of our business depends on the continued success and competitiveness of our customers. In turn, our customers’ success is dependent upon a variety of factors over which we have little or no influence. If our customers become financially unstable, we may lose revenue or we may be exposed to settlement risk as described below.
      Outside of the United States and a select number of other jurisdictions, most in-country (as opposed to cross-border) transaction activity conducted with MasterCard, Maestro and Cirrus cards is authorized, cleared and settled by our customers or other processors without the involvement of MasterCard’s central processing systems. Because we do not provide domestic processing services in these countries and do not, as described above, have direct relationships with cardholders or merchants, we are dependent on our close working relationships with our customers to effectively manage the MasterCard brand, together with the perception of the MasterCard payment system, among regulators, merchants and consumers in these countries. From time to time, our customers may take actions that we do not believe to be in the best interests of the MasterCard payment system overall, which may adversely impact our business.
18 

Table of Contents

      We rely on the continuing expansion of merchant acceptance of our brands and programs. Although it is our business strategy to invest in strengthening our brands and expanding our acceptance network, there can be no guarantee that our efforts in these areas will continue to be successful. If the rate of merchant acceptance growth slows or reverses itself, our business could suffer.
Our operating results may suffer because of substantial and increasingly intense competition worldwide in the global payments industry.
      The global payments industry is highly competitive. Some of our competitors have developed, 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. We may not continue to be able to compete effectively against these threats. In addition, as discussed under the heading “Competition”, our business faces a number of specific and increasingly intense competitive pressures worldwide. We may not be able to continue to effectively address these competitive pressures in the future. As a result, our revenues or income may decline.
As a secondary obligor of certain obligations of principal members and affiliate debit licensees, we are exposed to risk of loss in the event that any of our members default on their MasterCard, Cirrus or Maestro settlement obligations.
      MasterCard settlement exposure materializes when an issuer or acquirer fails to fund its daily settlement obligations due to technical reasons, liquidity shortfall, insolvency or other reasons. We quantify each member’s settlement credit risk exposure by estimating the dollar value of issuing and chargeback transactions that we would have to fund in order to satisfy such member’s MasterCard, Maestro or Cirrus-related obligations to other members. If a principal member or affiliate debit licensee is unable to fulfill its settlement obligations to other members, we may bear the loss, even if we do not process the transaction. In addition, although we are not contractually obligated to do so, we may elect to keep merchants whole in the event that an acquirer defaults on its merchant payment obligations, in order to maintain the integrity and acceptance of our brands. Accordingly, one or more member defaults could expose us to significant losses and reduce our net income. For more information on our settlement exposure, see Note 17 to the Consolidated Financial Statements herein.
If we are not able to keep pace with the rapid technological developments in our industry to provide customers, 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 technologies in the areas of smart cards, radio frequency and proximity payment devices, 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 develop or adapt to technological changes and evolving industry standards and to provide end-to-end payment solutions for our customers.
If our transaction processing systems are disrupted or we are unable to process transactions securely, 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, terrorism or accident. Most of our transaction processing systems are operated out of a single facility, supported by a separate co-processing 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
19 

Table of Contents

require, as a result of natural disaster, operational disruption, terrorism or any other reason, the failure could interrupt our services and adversely affect the perception of our brands’ reliability and our revenues or income.
      In addition, our security protection measures, including with respect to the security of transaction information processed on our systems or the systems or processing technology of third parties participating in our network, may not be sufficient to prevent the fraudulent or other improper use of cards carrying our brands. Unauthorized use of our network potentially could jeopardize the security of confidential information stored in our computer systems or transmitted by our customers or others. These factors may result in liabilities for us or our customers, and could reduce our revenues and income.
Adverse currency fluctuations and foreign exchange controls could decrease revenues we receive from our international operations.
      During 2004, approximately 42% of our revenues were generated from activities outside the United States. Some of the revenues we generate outside the United States are 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 adverse impact on our business.
Item 2.      Properties
      As of December 31, 2004, MasterCard and its subsidiaries owned or leased 57 properties. We own our corporate headquarters, a three-story, 472,600 square foot building located in Purchase, New York. There is no outstanding debt on this building. Our principal technology and operations center is a 528,000 square foot leased facility located in O’Fallon, Missouri, known as “Winghaven”. The term of the lease on this facility is 10 years, which commenced on August 31, 1999. See Note 12 to the Consolidated Financial Statements herein. Our leased properties in the United States are located in 11 states and in the District of Columbia. We also lease properties in 36 other countries. These facilities primarily consist of corporate and regional offices, as well as our operations centers.
      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.
Item 3.      Legal Proceedings
      Refer to Notes 14 and 16 to the Consolidated Financial Statements herein.
 
Item 4.      Submission of Matters to a Vote of Security Holders
      No matters were submitted to a vote of security holders during the fiscal quarter ended December 31, 2004.
PART II

		
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	
      There is currently no established public trading market for the common stock of MasterCard Incorporated. There were approximately 1,136 holders of record of the Class A redeemable and Class B convertible common stock of MasterCard Incorporated as of February 9, 2005. We normally do not pay any cash dividends on our common stock and intend to retain future earnings to fund the development and growth of our business. Accordingly, we do not anticipate paying cash dividends in the future. Payment of future
20 

Table of Contents

dividends, if any, would be at the discretion of our board of directors after taking into account various factors, including our financial condition, settlement guarantees, assessment rights, operating results and current and anticipated cash needs. The common stock of MasterCard Incorporated is not currently authorized to be issued in connection with any compensation plan.
      During the period covered by this Report, MasterCard Incorporated did not make any sales of its equity securities that were not registered under the Securities Act of 1933, as amended. In addition, MasterCard did not purchase or arrange for the purchase of any of its equity securities registered under the Securities Exchange Act of 1934, as amended, during the period covered by this Report.

		
Item 6.	Selected Financial Data	
      On June 28, 2002, we converted from a membership to a stock company through the creation of MasterCard Incorporated, a new holding company. Also on June 28, 2002, MasterCard Incorporated directly and indirectly acquired all of the outstanding stock of Europay International S.A. (“EPI”) in a transaction that we refer to as the “Integration”. On July 16, 2002, EPI was renamed MasterCard Europe S.A. On September 30, 2002, MasterCard Europe was reorganized in Belgium as MasterCard Europe sprl. Note 18 to the Consolidated Financial Statements herein more fully describes these transactions.
      The selected consolidated financial data presented below as of and for the years ended December 31, 2004, 2003 and 2002 were derived from the audited consolidated financial statements of MasterCard Incorporated. The results of MasterCard Europe’s operations have been included in our consolidated statements of operations from June 28, 2002 to present. The data set forth below should be read in conjunction with, and are qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and Notes thereto included elsewhere in this Report.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Year Ended December 31,		
 	 	 		
 	 	2004		 	2003		 	2002		 	2001		 	2000		
 	 	 		 	 		 	 		 	 		 	 		
 	 	(In thousands, except per share data)		
Statement of Operations Data:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Revenue	 	$	2,593,330	 	 	$	2,230,851	 	 	$	1,891,811	 	 	$	1,611,334	 	 	$	1,445,409	 	
 	Operating Income (Loss)	 	 	346,672	 	 	 	(601,862	)	 	 	141,997	 	 	 	221,702	 	 	 	178,020	 	
 	Income (Loss) before cumulative effect of accounting change	 	 	238,060	 	 	 	(390,742	)	 	 	116,429	 	 	 	142,061	 	 	 	118,149	 	
 	Net Income (Loss)	 	 	238,060	 	 	 	(385,793	)	 	 	116,429	 	 	 	142,061	 	 	 	118,149	 	
 	Net Income (Loss) Per Share before cumulative effect of accounting change (Basic and Diluted)	 	 	2.38	 	 	 	(3.91	)	 	 	1.35	 	 	 	1.98	 	 	 	1.65	 	
 	Net Income (Loss) Per Share (Basic and Diluted)	 	 	2.38	 	 	 	(3.86	)	 	 	1.35	 	 	 	1.98	 	 	 	1.65	 	
Balance Sheet Data:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Total Assets	 	$	3,264,670	 	 	$	2,900,905	 	 	$	2,260,875	 	 	$	1,486,305	 	 	$	1,187,060	 	
 	Long-Term Debt	 	 	229,569	 	 	 	229,574	 	 	 	80,107	 	 	 	80,065	 	 	 	82,992	 	
 	Obligations under U.S. Merchant Lawsuit, Long-term	 	 	468,547	 	 	 	516,686	 	 	 	—	 	 	 	—	 	 	 	—	 	
 	Stockholders’/ Members’ Equity	 	 	974,952	 	 	 	698,721	 	 	 	1,023,406	 	 	 	606,661	 	 	 	462,408	 	
      Set forth below are tables that provide information regarding the performance results for the years ended December 31, 2004 and 2003 for the payment programs of MasterCard International and MasterCard Europe, the principal operating subsidiaries of MasterCard Incorporated. The information regarding MasterCard’s payment programs for the year ended December 31, 2003 has been restated to present the information on the same basis as the information in the table for the year ended December 31, 2004.
21 

Table of Contents

      The information set forth in the GDV, purchase volume, purchase transactions, cash volume and cash transactions columns of the tables is derived from information provided by MasterCard members that is subject to logical and statistical verification by MasterCard and partial cross-checking against information provided by MasterCard’s transaction processing systems. The data set forth in the accounts and card columns is derived from information provided by MasterCard members and is subject to certain limited logical and statistical verification by MasterCard. All data is subject to revision and amendment by MasterCard’s members subsequent to the date of its release. Accordingly, 2003 data has been updated to reflect new information from the time of its previous release. Growth rates over prior periods are provided for volume-based data. European activity is included for the periods presented.
      A portion of the data set forth in the accounts and cards columns reflects the impact of routine portfolio changes among members and other practices that may lead to over counting of the underlying data in certain circumstances.
      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. The number of cards includes virtual cards, which are MasterCard-branded payment accounts for which functional cards are not generally issued.
      The MasterCard payment product is comprised of both credit programs and offline debit programs; certain data relating to each type of program is included in the tables. Credit programs include MasterCard-branded credit and charge programs. Offline debit programs include MasterCard-branded debit programs where the primary means of cardholder validation at the point of sale is for cardholders to sign a sales receipt.
      Information denominated in U.S. dollars is calculated by applying an established U.S. dollar/local currency exchange rate for each local currency in which MasterCard volumes are reported. These exchange rates are calculated on a quarterly basis using the average exchange rate for each quarter. However, MasterCard reports period-over-period rates of change in GDV, purchase volume and cash volume solely on the basis of local currency information, in order to eliminate the impact of changes in the value of foreign currencies against the U.S. dollar in calculating such rates of change. Accordingly, the period-over-period rates of change set forth in the tables cannot be extrapolated directly by reference to dollar volume information presented by MasterCard for the current and historical periods.
      The tables include information with respect to MasterCard-branded transactions that are not processed by MasterCard and transactions for which MasterCard does not earn revenues. Maestro and Cirrus online debit transactions, Mondex transactions and other branded transactions are not included in the tables.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	For the Year Ended December 31, 2004		
 	 	 		
 	 	 	 	Purchase		 	 	 	Purchase		 	Cash		 	 	 	Cash		 	 	
 	 	GDV		 	Growth		 	Volume		 	Growth		 	Transactions		 	Volume		 	Growth		 	Transactions		 	Accounts		 	Cards		
 	 	(Billions)		 	(Local)		 	(Billions)		 	(Local)		 	(Millions)		 	(Billions)		 	(Local)		 	(Millions)		 	(Millions)		 	(Millions)		
 	 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		
All Programs Except Online Debit Programs	 	 	1,455.2	 	 	 	10.6	%	 	 	1,064.4	 	 	 	12.4	%	 	 	14,715.4	 	 	 	390.8	 	 	 	5.9	%	 	 	1,960.3	 	 	 	576.0	 	 	 	679.5	 	
Credit Programs	 	 	1,178.0	 	 	 	8.8	%	 	 	912.7	 	 	 	12.3	%	 	 	11,450.1	 	 	 	265.3	 	 	 	(1.8	)%	 	 	823.1	 	 	 	487.8	 	 	 	579.7	 	
Offline Debit Programs	 	 	277.2	 	 	 	18.7	%	 	 	151.6	 	 	 	12.7	%	 	 	3,265.3	 	 	 	125.5	 	 	 	26.9	%	 	 	1,137.2	 	 	 	88.2	 	 	 	99.7	 	
22 

Table of Contents

 	 	For the Year Ended December 31, 2003		
 	 	 		
 	 	 	 	Purchase		 	 	 	Purchase		 	Cash		 	 	 	Cash		 	 	
 	 	GDV		 	Growth		 	Volume		 	Growth		 	Transactions		 	Volume		 	Growth		 	Transactions		 	Accounts		 	Cards		
 	 	(Billions)		 	(Local)		 	(Billions)		 	(Local)		 	(Millions)		 	(Billions)		 	(Local)		 	(Millions)		 	(Millions)		 	(Millions)		
 	 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		
All Programs Except Online Debit Programs	 	 	1,273.4	 	 	 	5.8	%	 	 	915.3	 	 	 	9.5	%	 	 	13,182.3	 	 	 	358.1	 	 	 	(2.5	)%	 	 	1,780.7	 	 	 	529.3	 	 	 	625.5	 	
Credit Programs	 	 	1,046.3	 	 	 	5.4	%	 	 	785.2	 	 	 	9.0	%	 	 	10,293.9	 	 	 	261.1	 	 	 	(3.9	)%	 	 	740.8	 	 	 	460.3	 	 	 	545.7	 	
Offline Debit Programs	 	 	227.1	 	 	 	7.8	%	 	 	130.2	 	 	 	12.8	%	 	 	2,888.4	 	 	 	97.0	 	 	 	1.8	%	 	 	1,039.9	 	 	 	68.9	 	 	 	79.8	 	

		
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	
      The following discussion should be read in conjunction with the consolidated financial statements and notes of MasterCard Incorporated and its consolidated subsidiaries, including MasterCard International Incorporated (“MasterCard International”) and MasterCard Europe sprl (“MasterCard Europe”)(together, “MasterCard” or the “Company”) included elsewhere in this Report.
Forward-Looking Statements
      This Report on Form 10-K contains forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. When used in this Report, the words “believe,” “expect,” “could,” “may,” “will” and similar words are intended to identify forward-looking statements. 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 MasterCard or on its behalf. We believe there are certain risk factors that are important to our business, and that could cause actual results to differ from our expectations. Please see a complete discussion of these risk factors under the caption “Risk Factors” in Item 1 — Business of this Report.
Overview
      Our corporate strategy has been to focus on our key customers to drive our business growth; to strengthen our brands, technology and acceptance network; and to differentiate MasterCard from our competition by developing innovative payment solutions and customized consulting services. We remain committed to this strategic direction and have begun to implement initiatives to expand our customer-focused approach to a broader group of customers, as well as to further develop relationships with merchants that accept our cards. We will also seek to leverage our expertise in payment programs, consulting services, brand marketing, technology and processing to expand the value-added services we provide our customers. We also intend to proactively address the legal, regulatory and other industry risks that impact our business.
      In a challenging operating environment with legal, economic and industry pressures, we were able to exceed our planned revenue growth and attain our expense objectives in 2004. We achieved double-digit revenue growth of 14% in 2004 from the comparable period in 2003, adjusted for a 2% impact of favorable foreign currency fluctuation against the euro. The increase in revenue was due to higher gross dollar volume (“GDV”) and more transactions processed by MasterCard, primarily from the expansion of our customer relationships, economic recovery in many countries and higher cross-border travel. In 2003, our revenues were negatively impacted by the war in Iraq, the SARS outbreak, reduced travel and a general economic slowdown worldwide. During 2004, we continued to realign our operations and limit the growth of our operating expenses through successful vendor negotiations. Our operating expenses increased 7% in 2004, excluding the impact of the U.S. merchant lawsuit and other legal settlements, of which 1% was due to the impact of acquisitions during 2004. In 2004, the translation of MasterCard Europe’s operating results from euro into U.S. dollar combined with the devaluation of the U.S. dollar compared to the euro resulted in a 2% increase in both revenues and operating expenses compared to 2003. We reduced our operating expenses as a percentage of
23 

Table of Contents

total revenues to 86% from 93% in 2003, excluding the impact of the U.S. merchant lawsuit and other legal settlements.
      Our financial position reflects strong liquidity. We have $1.1 billion in cash, cash equivalents and available for sale securities and $975 million in stockholders’ equity as of December 31, 2004. We intend to continue to focus on building our financial position. We believe our cash from operations will be sufficient to fund our initiatives to accelerate our profitable growth and to enhance the global position of MasterCard in 2005.
      We successfully completed our Sarbanes-Oxley 404 testing one year ahead of the required deadline for non-accelerated filers with the U.S. Securities and Exchange Commission. The consolidated financial statements herein include a report from management which concludes that, based on our assessment, our internal controls over financial reporting were effective as of December 31, 2004.
Results of Operations
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	Percent Increase		
 	 	 	 	(Decrease)		
 	 	For the Years Ended December 31,		 	 		
 	 	 		 	2004 vs.		 	2003 vs.		
 	 	2004		 	2003		 	2002		 	2003		 	2002		
 	 	 		 	 		 	 		 	 		 	 		
 	 	(In millions, except per share, percent		 	 	 	 	
 	 	and GDV amounts)		 	 	 	 	
Operations fees	 	$	1,637	 	 	$	1,431	 	 	$	1,232	 	 	 	14.4	%	 	 	16.2	%	
Assessments	 	 	956	 	 	 	800	 	 	 	660	 	 	 	19.5	%	 	 	21.2	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue	 	 	2,593	 	 	 	2,231	 	 	 	1,892	 	 	 	16.2	%	 	 	17.9	%	
General and administrative	 	 	1,186	 	 	 	1,099	 	 	 	965	 	 	 	7.9	%	 	 	13.9	%	
Advertising and market development	 	 	916	 	 	 	851	 	 	 	694	 	 	 	7.6	%	 	 	22.6	%	
U.S. merchant lawsuit and other legal settlements	 	 	22	 	 	 	763	 	 	 	—	 	 	 	(97.1	)%	 	 	**	 	
Depreciation and amortization	 	 	122	 	 	 	120	 	 	 	91	 	 	 	1.7	%	 	 	31.9	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total operating expenses	 	 	2,246	 	 	 	2,833	 	 	 	1,750	 	 	 	(20.7	)%	 	 	61.9	%	
Operating income (loss)	 	 	347	 	 	 	(602	)	 	 	142	 	 	 	157.6	%	 	 	(523.9	)%	
Total other income (expense)	 	 	(23	)	 	 	(10	)	 	 	16	 	 	 	(130.0	)%	 	 	(162.5	)%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before income tax expense (benefit) and cumulative effect of accounting change	 	 	324	 	 	 	(612	)	 	 	158	 	 	 	152.9	%	 	 	(487.3	)%	
Income tax expense (benefit)	 	 	86	 	 	 	(221	)	 	 	42	 	 	 	138.9	%	 	 	(626.2	)%	
Cumulative effect of accounting change, net of tax	 	 	—	 	 	 	5	 	 	 	—	 	 	 	(100.0	)%	 	 	**	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	238	 	 	$	(386	)	 	$	116	 	 	 	161.7	%	 	 	(432.8	)%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss) per share (basic and diluted)	 	$	2.38	 	 	$	(3.86	)	 	$	1.35	 	 	 	161.7	%	 	 	(385.9	)%	
Weighted average shares outstanding (basic and diluted)	 	 	100	 	 	 	100	 	 	 	86	 	 	 	—	 	 	 	16.3	%	
Effective income tax (benefit) rate	 	 	26.5	%	 	 	(36.1	)%	 	 	26.5	%	 	 	**	 	 	 	**	 	
Gross dollar volume (“GDV”) on a US dollar converted basis (in billions)	 	 	1,455.2	 	 	 	1,273.4	 	 	 	1,153.7	 	 	 	14.3	%	 	 	10.4	%	
Processed transactions	 	 	12,400.6	 	 	 	10,126.7	 	 	 	8,944.7	 	 	 	22.5	%	 	 	13.2	%	
 
** — Not meaningful
      The acquisition of MasterCard Europe (formerly Europay International S.A. (“EPI”)), on June 28, 2002, affected the comparability of our financial data. The results of MasterCard Europe’s operations have
24 

Table of Contents

been included in our consolidated statements of operations from June 28, 2002. However, MasterCard Europe’s GDV and transactions are included in all periods.

		
	Impact of Foreign Currency Rates	
      Our operations are impacted by changes in foreign currency exchange rates. Quarterly assessment fees are calculated based on local dollar volume which is converted to U.S. dollar volume using average exchange rates for the quarter. In 2004, the increase in GDV of 14% on a U.S. dollar converted basis exceeded local GDV growth of 11%, resulting in increased assessment revenues due to the devaluation of the U.S. dollar. In addition, consumer behavior, particularly international travel and purchases, varies with changes in foreign currency exchange rates.
      We are especially impacted by the movements of the euro to the U.S. dollar since MasterCard Europe’s functional currency is the euro. The devaluation of the U.S. dollar against the euro and the impact of the translation of MasterCard Europe’s operating results into U.S. dollar amounts are summarized below:
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2004		 	2003		 	2002		
 	 	 		 	 		 	 		
Euro to U.S. dollar average exchange rate	 	$	1.2383	 	 	$	1.1277	 	 	$	.9902	(1)	
Devaluation of U.S. dollar to euro	 	 	10	%	 	 	14	%	 	 	 	 	
Revenue growth attributable to translation of MasterCard Europe revenues to U.S. dollars	 	 	2	%	 	 	2	%	 	 	 	 	
Operating expense growth attributable to translation of MasterCard Europe expenses to U.S. dollars	 	 	2	%	 	 	1	%	 	 	 	 	

		
(1) 	Average in 2002 is from June 28, 2002, the date of our acquisition of Europay International.	
Revenues
      Our revenues are generated from the fees that we charge our customers for providing transaction processing and other payment services, and from assessments calculated on the dollar volume of activity on cards carrying our brands. We establish standards and procedures for the acceptance and settlement of our customer transactions on a global basis. We do not issue cards, set fees, or determine the interest rates consumers will be charged on cards carrying our brands. Our issuing customers have the responsibility for determining these and most other competitive card features. Our revenues are based upon transactional information accumulated by our systems or reported by our customers. Certain revenues are estimated based upon aggregate transaction information and projected customer performance.
      MasterCard enters into business agreements with certain customers that provide for fee rebates when those customers meet certain performance based criteria. Such rebates are calculated on a monthly basis based upon estimated performance and the discounted rates for the services provided. In addition, MasterCard enters into agreements with certain customers and merchants to provide GDV-based and other performance support incentives. Rebates and incentives are recorded as a reduction of revenue in the same period as the revenue is earned or the performance has occurred.
      The U.S. remains our largest geographic market based on revenues. However, international revenues grew at a faster rate than U.S. revenues in 2004, particularly in the European region. Accordingly, revenue generated in the U.S. was approximately 58%, 63% and 61% of total revenues in 2004, 2003 and 2002, respectively. The growth in the European region is primarily due to new assessment revenue streams and increased transactions. No individual country, other than the U.S., generated more than 10% of total revenues in either period.
      In addition to the expansion of our business relationships and the global recovery in cross-border travel, we believe that our 2004 revenue growth was positively impacted by the worldwide trend in which payments are migrating from paper-based forms to electronic forms such as payment cards. This trend has helped drive our volume and revenue growth for a number of years, and we expect it to continue in 2005. However, we expect our net revenue growth in 2005 to be moderated by pricing arrangements with certain large customers.
25 

Table of Contents

These pricing arrangements reflect enhanced competition in the global payments industry and the continued consolidation and globalization of our key customers and merchants.

		
	Operations Fees	
      Operations fees primarily represent user fees for authorization, clearing, settlement and other payment services that facilitate transaction and information management among our customers on a global basis. Operations fees increased $206 million or 14% in 2004 and $199 million or 16% in 2003, in each case compared to the prior year. The acquisition of MasterCard Europe accounted for $111 million or 56% of the increase in operations fees in 2003. The significant changes in operations fees were as follows:
 	 	 	 	 	 	 	 	 	
 	 	Change in Revenue		
 	 	Increase		
 	 	(Decrease)		
 	 	 		
 	 	2004		 	2003		
 	 	 		 	 		
 	 	(In millions)		
Authorization, settlement and switch	 	$	128	 	 	$	172	 	
Currency conversion	 	 	47	 	 	 	30	 	
Consulting	 	 	19	 	 	 	—	 	
Customer/ Cardholder services	 	 	17	 	 	 	6	 	
Research subscriptions	 	 	8	 	 	 	—	 	
Excessive chargeback penalties	 	 	(12	)	 	 	15	 	
Other operations fees	 	 	25	 	 	 	(8	)	
 	 	 	 	 	 	 	
Gross operations fees change	 	$	232	 	 	$	215	 	
Increase in rebates	 	 	(26	)	 	 	(16	)	
 	 	 	 	 	 	 	
Net operations fees change	 	$	206	 	 	$	199	 	

			
 	• 	Authorization, settlement and switch revenues increased $128 million, or 16%, in 2004 and $172 million, or 28% in 2003. These revenues are driven by the number of transactions processed through our systems, which increased 23% and 13% in 2004 and 2003, respectively. In the third quarter 2003, MasterCard began processing the Switch brand in the U.K. which has significantly impacted processed transactions growth. Excluding Switch transactions, processed transaction growth would have been 13% and 10% in 2004 and 2003, respectively. In 2003, a significant portion of the increase in these revenues was due to the acquisition of MasterCard Europe. In 2004 and 2003, the volatility of exchange rates contributed to increased trading settlement revenue of $16 million and $33 million, respectively.	
 		
 	• 	Currency conversion revenues increased $47 million in 2004 and $30 million in 2003. These revenues are the result of cross-border transactions by cardholders that require currency conversion to settle the transactions between issuers and acquirers. Accordingly, these revenues fluctuate with cross-border travel. While the conflict in Iraq, threat of terrorism and outbreak of SARS negatively impacted cross-border travel in the beginning of 2003, travel increased significantly in the latter part of 2003 and in 2004. In 2003, the increase was principally due to the acquisition of MasterCard Europe.	
 		
 	• 	Consulting fees are primarily generated by MasterCard Advisors, our advisory services group. During 2004, the incremental consulting revenue is primarily the result of the acquisition of two consulting firms. See Note 6 to the Consolidated Financial Statements herein.	
 		
 	• 	Customer/ Cardholder services include revenue earned for providing enhanced services to our customers or their cardholders. Examples of these services are telecommunication assistance, ATM locator and concierge programs. These revenues increased due to an overall increase in the demand for our programs and services.	
26 

Table of Contents

			
 	• 	Research subscriptions are generated by MasterCard Advisors, our advisory services group. In 2004, this represents a new revenue stream that resulted from the acquisition of a consulting firm in 2004. See Note 6 to the Consolidated Financial Statements herein.	
 		
 	• 	Excessive chargeback fees are charged to acquiring banks with merchants that experience a high level of disputed claims from their customers. During 2004 and 2003, customers were assessed fees of $13 million and $25 million, respectively, for excessive chargebacks in accordance with MasterCard rules. The decrease in excessive chargeback fees in 2004 was the result of the imposition of such fees on one large acquiring customer in 2003 in connection with its merchant activity, in accordance with the MasterCard rules.	
 		
 	• 	Other operations fees represent various revenue streams including system services, compliance, sales of holograms, manuals and publications. The change in any individual revenue line is not considered material.	
 		
 	• 	Rebates are primarily based on transactions and volumes and, accordingly, increase as these variables increase. Rebates to certain customers continued to increase in 2004, particularly in the United States, due to ongoing consolidation of our customers and increasingly intense competition. Accordingly, rebates as a percentage of gross operations fees increased to 7% in 2004 compared to 6% in 2003.	
     Assessments
      Assessments are charges that are calculated based on our customers’ GDV. GDV represents gross usage (purchase and cash disbursements) on cards carrying our brands for goods and services including balance transfers and convenience checks. In 2004 and 2003, assessments revenue grew $156 million, or 20% and $140 million, or 21%, respectively. GDV growth was 11% and 6% in 2004 and 2003, respectively, when measured in local currency and 14% and 10%, respectively, when measured on a U.S. dollar converted basis. The acquisition of MasterCard Europe accounted for $94 million or 68% of the increase in assessments in 2003; excluding MasterCard Europe, assessments revenue growth was 8% in 2003.
      In addition to the increase in GDV, assessments grew due to the following factors:

			
 	• 	In certain countries in Europe and Latin America, our customers are charged a marketing assessment fee based on volume. These fees are used by MasterCard to expand new and existing market development programs to promote the MasterCard brand in these countries. These fees, which were extended to additional countries in 2003 and 2004, increased $28 million or 37% in 2004 and $49 million or 185% in 2003.	
 		
 	• 	Assessment rates vary based on the nature of the transactions that generate the GDV. In 2004, there was stronger growth in international volumes and purchase volumes, which are assessed at higher rates than domestic volumes and cash volumes, respectively.	
      As described above, rebates and incentives provided to our customers and merchants increased in 2004 and 2003. These rebates and incentives reduce revenue, moderate assessments growth and are generally based on GDV, as well as a fixed component for the issuance of new cards or the launch of new programs. Rebates and incentives increased $29 million and $72 million in 2004 and 2003, respectively. Rebates and incentives as a percentage of gross assessments were 29% and 31% in 2004 and 2003, respectively. During 2004 and 2003, we increased the incentives offered to certain customers and merchants to promote usage and acceptance of our brands. Additionally, the increase in rebates in 2003 can be attributed to the addition of new member contracts by MasterCard Europe subsequent to its acquisition by MasterCard.
27 

Table of Contents

Operating Expenses
      Our operating expenses are comprised of general and administrative, advertising and market development, U.S. merchant lawsuit and other legal settlements and depreciation and amortization expenses. In 2004, there was a decrease in operating expenses of $587 million or 21% compared to the prior year. Excluding the charges to earnings related to the U.S. merchant lawsuit and other legal settlements, there would have been an increase in operating expenses of $154 million or 7% in 2004 compared to the prior year. Approximately $31 million of the increase in 2004 related to the acquisition of the two consulting firms described in Note 6 to the Consolidated Financial Statements herein. In 2003, there was an increase in operating expenses of $1.1 billion or 62% compared to the prior year, of which $763 million or 70% was a result of the U.S. merchant lawsuit and other legal settlements and $197 million or 18% was due to the acquisition of MasterCard Europe.

		
	General and Administrative	
      General and administrative expenses consist primarily of personnel, professional fees, data processing, telecommunications and travel. In 2004 and 2003, these activities accounted for approximately 46% and 49% of total revenues, respectively. General and administrative expenses increased $87 million in 2004 and $134 million in 2003, primarily due to increases in personnel expenses. The acquisition of MasterCard Europe accounted for $110 million or 82% of the increase in general and administrative expenses in 2003. The major components of changes in general and administrative expenses are as follows:
 	 	 	 	 	 	 	 	 	
 	 	Change		
 	 	Increase		
 	 	(Decrease)		
 	 	 		
 	 	2004		 	2003		
 	 	 		 	 		
 	 	(In millions)		
Personnel	 	$	52	 	 	$	98	 	
Professional fees	 	 	30	 	 	 	10	 	
Telecommunications	 	 	(13	)	 	 	1	 	
Data processing	 	 	5	 	 	 	10	 	
Travel	 	 	5	 	 	 	2	 	
Other	 	 	8	 	 	 	13	 	
 	 	 	 	 	 	 	
Net general and administrative change	 	$	87	 	 	$	134	 	

			
 	• 	Personnel expense increased in 2004 primarily due to performance and merit increases resulting from better than anticipated performance against company objectives and the acquisition of the two consulting firms described in Note 6 to the Consolidated Financial Statements herein. In 2003, the increase was primarily due to a full year of salaries and benefits as compared to six months in 2002 resulting from the acquisition of MasterCard Europe.	
 		
 	• 	Professional fees increased in 2004 primarily due to consulting services utilized in developing our strategic initiatives and services related to compliance with Section 404 of the Sarbanes-Oxley Act.	
 		
 	• 	Telecommunications expense decreased in 2004 as a result of our ongoing evaluation of telecommunication needs, including renegotiation of certain contracts with service providers.	
 		
 	• 	Data processing consists of expenses to operate and maintain MasterCard’s computer systems. These expenses vary with business volume growth, system upgrades and usage.	
 		
 	• 	Travel expenses are incurred primarily for travel to customer and regional meetings and accordingly vary with business activity.	
 		
 	• 	Other includes rental expense for our facilities, foreign exchange gains and losses, impairment expense and other miscellaneous administrative expenses.	
28 

Table of Contents

		
	Advertising and Market Development	
      Advertising and market development consists of expenses associated with advertising, marketing, promotions and sponsorships, which promote our brand and assist our customers in achieving their goals by raising consumer awareness and usage of cards carrying our brands. In 2004 and 2003, these activities accounted for approximately 35% and 38% of total revenues, respectively. Advertising and market development expenses increased $65 million or 8% in 2004 and $157 million or 23% in 2003. The acquisition of MasterCard Europe accounted for $70 million or 45% of the increase in advertising and market development expenses in 2003.
      Our brands, principally MasterCard, are valuable strategic assets which convey symbols that can be readily identified by our customers, as well as our cardholders, creating value for our business. Our advertising and marketing efforts are focused on ensuring that our services are identified, communicated and marketed in a clear, efficient and consistent manner, not only on a local level, but also on a global scale. We are committed to maintaining and enhancing our MasterCard brand reputation, image and ultimate value. Our “Priceless” campaign has run in 96 countries and 48 languages and we continue to invest significantly in this campaign. In 2004, increased media advertising occurred in our European region. In addition, MasterCard has corporate sponsorships and conducts promotions to generate usage of cards carrying our brands. During 2004 and 2003, we sponsored the UEFA Champions League, certain National Football League teams, Major League Baseball, the Professional Golf Association and Universal Studios.
      MasterCard implemented a four-year plan in 2002 to accelerate our growth and to enhance the global position of MasterCard and its customers by significantly expanding its spending in advertising and market development. For the year ended December 31, 2004 and 2003, we spent $192 million and $152 million on advertising and marketing relating to this plan. The primary focus of these initiatives is to build brand recognition, promote brand acceptance and enhance the development of our programs and services in certain markets. We will continue to evaluate the extent of these initiatives in light of changing market conditions.

		
	Merchant Lawsuit and Other Legal Settlements	
      In the first quarter of 2003, we recorded a pre-tax charge of $721 million ($469 million after-tax) consisting of (i) the monetary amount of the U.S. merchant lawsuit settlement (discounted at 8 percent over the payment term), (ii) certain additional costs in connection with, and in order to comply with, other requirements of the U.S. merchant lawsuit settlement, and (iii) costs to address the merchants who opted not to participate in the plaintiff class in the U.S. merchant lawsuit. The $721 million pre-tax charge amount was an estimate, which was subsequently revised based on the approval of the U.S. merchant lawsuit settlement agreement by the court, and other factors. In addition, other legal settlements were made in 2004 and 2003. Total liabilities for the U.S. merchant lawsuit and other legal settlements changed as follows:
 	 	 	 	 	
Balance as of December 31, 2002	 	$	—	 	
U.S. merchant lawsuit and other legal settlements	 	 	763	 	
Interest accretion	 	 	43	 	
Payments	 	 	(134	)	
 	 	 	 	
Balance as of December 31, 2003	 	 	672	 	
Currency conversion court award of plaintiff attorney’s fees	 	 	14	 	
Other legal settlements and revisions of U.S. merchant lawsuit opt-out estimate	 	 	8	 	
Interest accretion	 	 	51	 	
Payments	 	 	(149	)	
Other	 	 	2	 	
 	 	 	 	
Balance as of December 31, 2004	 	$	598	 	
 	 	 	 	
29 

Table of Contents

		
	Depreciation and Amortization	
      Depreciation and amortization expenses increased $2 million in 2004 and $29 million in 2003. In 2003, depreciation and amortization expense increased significantly due to the acquisition of MasterCard Europe as well as additional capitalized computer software. The acquisition of MasterCard Europe accounted for $17 million or 59% of the increase in depreciation and amortization in 2003.
      Our business is dependent on the technology that we use to process transactions. This technology is continuously updated and improved. Therefore, our investment in capitalized software and related amortization also continues to increase. In recent years we have made the following significant changes to our technology and technology centers, which have caused an increase in our depreciation and amortization:

			
 	• 	During 2003, our co-processing technology center was moved from Lake Success, NY to Kansas City, MO. The cost of the new facility and equipment was $36 million.	
 		
 	• 	During 2004 and 2003, we continued to invest in our System Enhancement Strategy, an upgrade of all of MasterCard’s core systems to improve productivity and lower overall processing costs.	

		
	Other Income and Expense	
      Other income (expense) is comprised primarily of investment income and interest expense. Investment income decreased $8 million in 2004 and increased $31 million in 2003. The decrease in 2004 resulted from a decline in the market value of our trading securities portfolio. The increase in 2003 was primarily due to the consolidation of the variable interest entity (see the discussion in Note 12 to the Consolidated Financial Statements herein) and appreciation of the market value of our trading securities portfolio. Interest expense increased $7 million and $53 million in 2004 and 2003, respectively, primarily due to interest expense of $51 million and $43 million, respectively, related to imputed interest on the U.S. merchant lawsuit settlement. In addition, in 2003 the consolidation of the variable interest entity increased interest expense.
30 

Table of Contents

		
	Income Taxes	
      The effective income tax expense (benefit) rate for years ended December 31, 2004, 2003 and 2002 was 26.5%, (36.1)% and 26.5%, respectively. The decrease in the rate in 2004 was primarily attributable to the settlement and reassessment of various tax audit matters, the filing and recognition of refund claims and a one-time increase in our deferred state tax assets as a result of additional income subject to higher state and local tax rates. The 2003 tax benefit was primarily driven by the U.S. merchant lawsuit settlement. The amount of the litigation settlement and its impact on pretax income was so large that the permanent differences did not significantly affect the tax rate, resulting in a tax benefit at the highest marginal rate. The increase in the rate from 2002 to 2003 was primarily attributable to a one-time revaluation in 2002 of MasterCard Europe’s deferred tax liabilities due to the reduction in the Belgium statutory tax rate from 40.2% to 34.0% in December 2002. The components impacting the effective tax rate are:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	For the Years Ended December 31,		
 	 	 		
 	 	2004		 	2003		 	2002		
 	 	 		 	 		 	 		
 	 	Dollar		 	 	 	Dollar		 	 	 	Dollar		 	 	
 	 	Amount		 	Percent		 	Amount		 	Percent		 	Amount		 	Percent		
 	 	 		 	 		 	 		 	 		 	 		 	 		
 	 	(In millions)		 	 	 	(In millions)		 	 	 	(In millions)		 	 	
Income (loss) before income tax expense (benefit) and cumulative effect of accounting change	 	$	324	 	 	 	 	 	 	$	(612	)	 	 	 	 	 	$	158	 	 	 	 	 	
 	
Federal statutory tax (benefit)	 	$	113	 	 	 	35.0	%	 	$	(214	)	 	 	(35.0	)%	 	$	55	 	 	 	35.0	%	
State tax effect, net of Federal benefit	 	 	4	 	 	 	1.3	%	 	 	2	 	 	 	0.3	%	 	 	6	 	 	 	3.9	%	
Foreign tax effect, net of Federal benefit	 	 	4	 	 	 	1.2	%	 	 	(4	)	 	 	(0.6	)%	 	 	(3	)	 	 	(1.7	)%	
Non-deductible expenses and other differences	 	 	4	 	 	 	1.0	%	 	 	2	 	 	 	0.3	%	 	 	5	 	 	 	2.7	%	
Tax exempt income	 	 	(7	)	 	 	(2.1	)%	 	 	(7	)	 	 	(1.1	)%	 	 	(7	)	 	 	(4.4	)%	
Adjustment to deferred tax for change in tax rate:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	United States — state	 	 	(8	)	 	 	(2.6	)%	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
 	Foreign	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(11	)	 	 	(6.9	)%	
Refund claims and settlement of audit matters:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	United States	 	 	(11	)	 	 	(3.4	)%	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
 	Foreign	 	 	(13	)	 	 	(3.9	)%	 	 	—	 	 	 	—	 	 	 	(3	)	 	 	(2.1	)%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income tax expense (benefit)	 	$	86	 	 	 	26.5	%	 	$	(221	)	 	 	(36.1	)%	 	$	42	 	 	 	26.5	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
31 

Table of Contents

Liquidity
      We believe our ability to generate cash to reinvest in our business is one of our fundamental financial strengths. We need capital resources and liquidity to fund our global development, to provide for credit and settlement risk, to finance capital expenditures and any future acquisitions and to service the payments of principal and interest on our outstanding debt and the settlement of the U.S. merchant lawsuit. At December 31, 2004, we had $1.1 billion of cash, cash equivalents and available for sale securities with which to manage operations, compared to $880 million at December 31, 2003. We expect that the cash generated from operations and our borrowing capacity will be sufficient to meet our operating, working capital and capital needs in 2005. In addition, we believe that our resources are sufficient to fund our initiatives to accelerate our profitable growth and to enhance the global position of MasterCard in 2005. However, our liquidity could be negatively impacted by the outcome of any of the legal or regulatory proceedings to which we are a party. See “Legal, Regulatory and Other Industry Risks.”
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	Percent Change		
 	 	 	 	 	 	 	 	 		
 	 	 	 	 	 	 	 	2004 vs.		 	2003 vs.		
 	 	2004		 	2003		 	2002		 	2003		 	2002		
 	 	 		 	 		 	 		 	 		 	 		
 	 	(In millions, except ratio)		 	 	 	 	
Cash Flow Data:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cash provided by operating activities	 	$	344	 	 	$	190	 	 	$	310	 	 	 	81.1	%	 	 	(38.7	)%	
Net cash used in investing activities	 	 	(275	)	 	 	(170	)	 	 	(213	)	 	 	(61.8	)%	 	 	20.2	%	
Net cash used in financing activities	 	 	—	 	 	 	—	 	 	 	(35	)	 	 	**	 	 	 	**	 	
Balance Sheet Data:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Current assets	 	$	1,903	 	 	$	1,610	 	 	$	1,456	 	 	 	18.2	%	 	 	10.6	%	
Current liabilities	 	 	1,301	 	 	 	1,189	 	 	 	930	 	 	 	9.4	%	 	 	27.8	%	
Long-term liabilities	 	 	984	 	 	 	1,009	 	 	 	307	 	 	 	(2.5	)%	 	 	228.7	%	
Equity	 	 	975	 	 	 	699	 	 	 	1,023	 	 	 	39.5	%	 	 	(31.7	)%	
Working capital ratio	 	 	1.46	 	 	 	1.35	 	 	 	1.57	 	 	 	 	 	 	 	 	 	
 
** — Not meaningful
      Net cash provided by operating activities in 2004 and 2003 was generated principally by current period earnings (losses) exclusive of non-cash charges for depreciation and amortization and legal settlements. The liabilities related to the U.S. merchant lawsuit settlement and other legal settlements discussed in Note 14 to the Consolidated Financial Statements herein will be funded through existing cash and cash equivalents, investments, cash generated from operations and our borrowing capacity. We recorded expense of $22 million and $763 million for legal settlement costs in 2004 and 2003, respectively, and had related cash payments totaling $149 million and $134 million, respectively.
      The utilization of cash for investing activities in 2004 was primarily due to purchases of available-for-sale securities and the acquisition of certain businesses as described in Note 6 to the Consolidated Financial Statements herein. In 2004 and 2003, we also invested in the internal development of capitalized software and purchase of fixed assets to support our business. Our capitalized software is essential to providing payment card transaction processing to our customers through our proprietary global computer and telecommunications system. Our investing activities in 2003 included funding for a co-processing facility in Kansas City, Missouri, and associated equipment.
      In addition to our liquid investments, we provide for liquidity through a committed $1.95 billion revolving credit facility (the “Credit Facility”) with certain financial institutions which expires on June 17, 2005. The Credit Facility replaced MasterCard Incorporated’s prior $1.2 billion credit facility which expired on June 18, 2004. Borrowings under the Credit Facility are available to provide liquidity in the event of one or more settlement failures by MasterCard International members and, subject to a limit of $300 million, for general corporate purposes. Interest on borrowings under the Credit Facility is charged at the London Interbank Offered Rate (“LIBOR”) plus 28 basis points. An additional 10 basis points would be applied if the aggregate
32 

Table of Contents

borrowings under the Credit Facility exceed 33% of the commitments. MasterCard agreed to pay a facility fee which varies based on MasterCard’s credit rating and is currently equal to 7 basis points on the total commitment. MasterCard was in compliance with the Credit Facility covenants as of December 31, 2004. There were no borrowings under the Credit Facility at December 31, 2004. The majority of Credit Facility lenders are members or affiliates of members of MasterCard International.
      Due to Standard & Poor’s assessment of MasterCard’s vulnerability to legal risk, on May 16, 2003, Standard & Poor’s lowered MasterCard’s counterparty credit rating to A-/A-2, subordinated debt rating to BBB+ and placed MasterCard on negative outlook. These ratings were reaffirmed in 2004. This rating has not materially impacted our liquidity.
Legal, Regulatory and Other Industry Risks
      Our business has many industry risks, most significantly the legal and regulatory environment in which we operate. These risks have increased in recent years, although we are proactively seeking to address them. For a complete description of the risks facing our business; see “Risk Factors” in Item 1 — Business of this Report. The following risks, among others, may have a material impact on our results of operations or financial condition:

			
 	• 	Legal and Regulatory Proceedings — MasterCard is a party to several legal and regulatory proceedings, as discussed in Note 16 to the Consolidated Financial Statements herein, which could have a material adverse impact on our business. Many of the legal and regulatory proceedings to which we are subject are supported by merchants, who have a growing role in the global payments industry. See “Merchant Acceptance Initiatives” in Item 1 — Business of this Report.	
 		
 	• 	Competition and Consolidation of Our Customers — We are, and will continue to be, significantly dependent on our relationships with our issuers, acquirers and merchants. Most of our relationships with our customers are not exclusive and may be terminated at the convenience of our customers. In addition, the consolidation and globalization of our customers has provided more intense competition and greater demand for rebates, incentives and reduced pricing for our services. The consolidation or merger of one or more of our customers with financial institutions aligned with our competitors could have a material adverse impact on our revenues.	
 		
 	• 	Economic — Our business is dependent on certain world economies and consumer behaviors. In the past, our revenues have been impacted by specific events such as the war in Iraq, the SARS outbreak and the September 11, 2001 terrorist attack. The tsunami in Asia did not impact our 2004 revenue; however we intend to closely monitor the impact as the recovery from the tsunami evolves in 2005.	
33 

Table of Contents
Future Obligations
      The following table summarizes as of December 31, 2004 our obligations that are expected to impact liquidity and cash flow in future periods. We believe we will be able to fund these obligations through cash generated from operations and our existing cash balances.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Payments Due by Period		
 	 	 		
 	 	 	 	Less Than		 	 	 	More Than		
 	 	Total		 	1 Year		 	2-3 Years		 	4-5 Years		 	5 Years		
 	 	 		 	 		 	 		 	 		 	 		
 	 	(In millions)		
Capital leases(a)	 	$	63	 	 	$	9	 	 	$	8	 	 	$	4	 	 	$	42	 	
Operating leases(b)	 	 	123	 	 	 	37	 	 	 	55	 	 	 	29	 	 	 	2	 	
Sponsorship, licensing & other(c)	 	 	570	 	 	 	254	 	 	 	251	 	 	 	52	 	 	 	13	 	
U.S. merchant lawsuit and other legal settlements(d)	 	 	829	 	 	 	129	 	 	 	200	 	 	 	200	 	 	 	300	 	
Debt(e)	 	 	250	 	 	 	5	 	 	 	11	 	 	 	234	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	1,835	 	 	$	434	 	 	$	525	 	 	$	519	 	 	$	357	 	

			
(a)		Most capital leases relate to certain property, plant and equipment used in our business. Our largest capital lease relates to our Kansas City, Missouri co-processing facility.	
 		
(b)		We enter into operating leases in the normal course of business, including the lease on our facility in St. Louis, Missouri. Substantially all lease agreements have fixed payment terms based on the passage of time. Some lease agreements provide us with the option to renew the lease or purchase the leased property. Our future operating lease obligations would change if we exercised these renewal options and if we entered into additional lease agreements.	
 		
(c)		Amounts primarily relate to sponsorships with certain organizations to promote the MasterCard brand. The amounts included are fixed and non-cancelable. In addition, these amounts include purchase obligations. Obligations which result from performance based agreements with our members and merchants have been excluded from the table due to their contingent nature.	
 		
(d)		Represents amounts due in accordance with legal settlements entered into during 2003 and refined in 2004, including the settlement agreement in the U.S. merchant lawsuit.	
 		
(e)		Debt primarily represents principal and interest owed on our subordinated notes due June 2008 and the principal owed on our Series A Senior Secured Notes due September 2009. See Note 11 to the Consolidated Financial Statements herein. We also have various credit facilities for which there were no outstanding balances at December 31, 2004 that, among other things, would provide liquidity in the event of settlement failures by our members. Our debt obligations would change if one or more of our members failed and we borrowed under these credit facilities to settle on our members’ behalf or for other reasons.	
Member Relationships and Related Parties
      We have a diversified member base of approximately 2,200 principal members and approximately 21,500 affiliate members. Our stockholders are principal members of MasterCard International. In the normal course of business, we enter into transactions with our members and operate a system for authorizing, clearing and settling payment transactions among the members of MasterCard International.
      One customer, JP Morgan Chase Bank generated 12% of our revenue in 2004. In addition, certain other customers generate in excess of five percent of our revenue. The loss of any of these members could adversely impact MasterCard’s net income. In addition, as part of our business initiative to grow our business, MasterCard, among other efforts, enters into business agreements with members. These agreements can be terminated in a variety of circumstances. Under certain circumstances, we may be required to permit members in the United States that have entered into agreements with us to terminate those agreements without penalty as a result of the antitrust litigation brought against us by the U.S. Department of Justice. Any termination of these agreements could have an adverse impact on our financial condition. However, we believe
34 

Table of Contents

that it is not currently possible to estimate the impact, if any, that the termination of any member business agreements would have on our results of operations, financial position or cash flows.
Critical Accounting Estimates
      Our accounting policies are integral to understanding our results of operations and financial condition. We are required 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. We have established detailed policies and control procedures to ensure that the methods used to make estimates and assumptions are well controlled and are applied consistently from period to period. The following is a brief description of our current accounting policies involving significant management judgments.
 	 	 	 	 	
Financial Statement	 	 	 	 	
Caption/Critical Accounting	 	 	 	Effect if Actual Results Differ	
Estimate	 	Assumptions/Approach Used	 	from Assumptions	
 	 	 	 	 	
Revenue Recognition	 	 	 	 	
Certain revenues are estimated. Note 1 to the Consolidated Financial Statements herein contains a complete discussion of our revenue recognition policies.	 	Certain revenues are recorded based on an estimate of our customers’ performance. Such estimates are subsequently validated against performance reported by our customers. Differences are adjusted in the period the customer reports. Customers’ performance is estimated by using historical performance, member reported information, transactional information accumulated from our systems and discussions with our customers.	 	If our customers’ actual performance is not consistent with our estimates of their performance, revenues may be materially different than initially recorded.	
Rebates and incentives are estimated.	 	Rebates and incentives are generally recorded as contra- revenue based on our estimate of each customer’s performance in a given period and according to the terms of the related customer agreements.	 	If our customers’ actual performance is not consistent with our estimates of their performance, contra-revenues may be materially different than initially recorded.	
Legal and Regulatory Matters	 	 	 	 	
We are party to legal and regulatory proceedings with respect to a variety of matters. Except as described in Notes 14 and 16 to the Consolidated Financial Statements herein, MasterCard does not believe that any legal or regulatory proceedings to which it is a party would have a material adverse impact on its business or prospects.	 	We evaluate the likelihood of an unfavorable outcome of the legal or regulatory proceedings to which we are party in accordance with SFAS No. 5, “Accounting for Contingencies” (“SFAS No. 5”). Our judgments are subjective based on the status of the legal or regulatory proceedings, the merits of our defenses and consultation with in-house and outside legal counsel.	 	Due to the inherent uncertainties of the legal and regulatory process in the multiple jurisdictions in which we operate, our judgments may be materially different than the actual outcomes.	
35 

Table of Contents

Financial Statement	 	 	 	 	
Caption/Critical Accounting	 	 	 	Effect if Actual Results Differ	
Estimate	 	Assumptions/Approach Used	 	from Assumptions	
 	 	 	 	 	
Discount Rate for Merchant Lawsuit Settlement	 	 	 	 	
Note 14 to the Consolidated Financial Statements herein contains a complete discussion of the Merchant Lawsuit.	 	We estimated the discount rate we used to calculate the present value of our obligations under the Settlement Agreement to be 8% for the year ended December 31, 2003. The discount rate used was a matter of management judgment at the time of the settlement, which considered our expected post-settlement credit rating and rates for sources of credit that could be used to finance the payment of such obligations with similar terms.	 	A 1% increase in the discount rate would increase annual interest expense by approximately $4 million in 2005, and declining amounts thereafter. A 1% decrease in the discount rate would decrease annual interest expense by approximately $4 million in 2005, and declining amounts thereafter.

In addition, a 1% change in the discount rate would have impacted the amount we recorded as an after-tax charge for the year ended December 31, 2003 by approximately $20 million.	
Goodwill and Intangible Assets (except Capitalized Software)	 	 	 	 	
We perform analyses of goodwill and intangible assets on an annual basis or if indicators of impairment exist. This evaluation utilizes a two-step approach. The first step is to identify a potential impairment and the second step measures the amount of the impairment loss, if any. Impairment is measured as the excess of the carrying amount over fair value.	 	In performing the analyses, we primarily utilize independent valuation experts. The test methods employed involve assumptions concerning interest and discount rates, growth projections and other assumptions of future business conditions. The assumptions employed are based on management’s judgment using internal and external data.	 	During 2004, the Company identified and recorded impairment losses of approximately $7 million for one of the acquisitions completed in 2004. We completed our annual impairment testing for all other goodwill and intangibles using the methodology described herein, and determined there was no impairment.	
 	 	 	 	If actual results are not consistent with our assumptions and estimates, we may be exposed to an additional impairment charge associated with goodwill and/or intangible assets. The carrying value of goodwill and intangible assets, excluding capitalized software, was $426 million as of December 31, 2004.	
36 

Table of Contents

Financial Statement	 	 	 	 	
Caption/Critical Accounting	 	 	 	Effect if Actual Results Differ	
Estimate	 	Assumptions/Approach Used	 	from Assumptions	
 	 	 	 	 	
Income Taxes	 	 	 	 	
In calculating our effective tax rate we need to make decisions regarding certain tax positions, including the timing and amount of deductions and allocation of income among various tax jurisdictions.	 	We have various tax filing positions, including the timing and amount of deductions and credits, the establishment of reserves for audit matters and the allocation of income among various tax jurisdictions.	 	Although we believe that our estimates and judgments discussed herein are reasonable, actual results may differ, which could be material.	
We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized.	 	We considered projected future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance.	 	If we realize a deferred tax asset in excess of the net deferred tax asset or we were unable to realize a net deferred tax asset; an adjustment to the deferred tax asset would increase or decrease earnings, respectively, in the period.	
Capitalized Software	 	 	 	 	
Our capitalized software, which includes internal and external costs incurred in developing or obtaining computer software for internal use, is included in other intangible assets in the Consolidated Balance Sheets herein.	 	We are required to make judgments to determine if each project will satisfy its intended use. In addition, we estimate the average internal costs incurred for payroll and payroll related expenses by department for the employees who directly devote time relating to the design, development and testing phases of the project.	 	During the year, no significant impairment charges were recorded. However, if actual results are not consistent with our judgments, we may be exposed to an impairment charge. The net carrying value of capitalized software as of December 31, 2004 was $120 million.	
Note 1 to the Consolidated Financial Statements herein contains a complete discussion of our accounting policies for intangible assets.	 	On an ongoing basis, we perform impairment analyses on various technologies. If the carrying value of the various technologies exceeds the fair value, impairment charges are recorded.	 	 	
Pensions	 	 	 	 	
Certain assumptions are used in the determination of our annual pension costs and the disclosure of the funded position of our pension plans. Key assumptions include the discount rate used to measure the plans’ projected benefit obligation and the expected rate of return on plan assets.	 	We utilized a discount rate of 5.75 percent in measuring the projected pension benefit obligation at December 31, 2004, 6.25 percent in calculating the net periodic pension cost and an expected return on plan assets of 8.5 percent.	 	A quarter of a percentage point decrease in our discount rate would increase our projected benefit obligation by $1.5 million, and would have a negligible effect on our annual pension expense. An equal but opposite effect would be experienced for a quarter of a percentage point increase in the discount rate. A quarter of a percentage point increase or decrease in the expected rate of return on plan assets would decrease or increase the annual pension costs by $0.3 million.	
37 

Table of Contents

Recent Accounting Pronouncements
      In December 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88, and 106” (“SFAS 132”). This Statement revises employers’ disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by SFAS No. 87, “Employers’ Accounting for Pensions”, SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”. SFAS 132 requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. We have fully implemented SFAS 132 for the year ended December 31, 2004.
      In March 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF 03-01”). EITF 03-01 provides guidance to determine whether an other-than-temporary impairment exists for available-for-sale or held-to-maturity investments under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Investments” and investments accounted for under the cost method or the equity method. EITF 03-01 also requires certain disclosures related to investments that are in an unrealized loss position at the balance sheet date. The FASB has indefinitely deferred the recognition and measurement guidance in EITF 03-01, through FASB Staff Position (“FSP”) No. EITF Issue 03-1-1. We have fully implemented all of the required disclosures for the year ended December 31, 2004.
      In December 2004, the FASB issued FSP No. FAS 109-2 (“FSP 109-2”), “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (the “Act”). FSP 109-2 provides enterprises more time (beyond the financial-reporting period during which the Act took effect) to evaluate the Act’s impact on the enterprise’s plan for reinvestment or repatriation of certain foreign earnings for purposes of applying SFAS 109, “Accounting for Income Taxes”. We are not intending to repatriate under the Act, therefore FSP 109-2 is not expected to have an impact on our financial position or results of operations.

		
Item 7A.	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 factors such as interest rates, foreign currency exchange rates, and equity price risk. We have limited exposure to market risk from changes in interest rates, foreign exchange rates and equity price risk. Management establishes and oversees the implementation of policies, which have been approved by the board of directors, governing our funding, investments, and use of derivative financial instruments. We monitor risk exposures on an ongoing basis. There have been no material changes in our market risk exposures at December 31, 2004 as compared to December 31, 2003.
Foreign Exchange Risk
      We enter into forward exchange contracts to minimize risk associated with anticipated receipts and disbursements denominated in foreign currencies. We also enter into contracts to offset possible changes in value due to foreign exchange fluctuations of assets and liabilities denominated in foreign currencies. The objective of this activity is to reduce our exposure to transaction gains and losses resulting from fluctuations of foreign currencies against the U.S. dollar and euro. The terms of the forward currency contracts are generally less than 18 months.
      At December 31, 2004 and 2003, forward currency contracts against the U.S. dollar were both purchased (with notional amounts of $41 million and $64 million, respectively) and sold (with notional amounts of $20 million and $60 million, respectively). Based on the year-end 2004 and 2003 foreign exchange positions, the effect of a hypothetical 10 percent strengthening of the U.S. dollar is estimated to create a loss valued at $2.0 million and $0.4 million at December 31, 2004 and 2003, respectively.
38 

Table of Contents

      At December 31, 2004 and 2003, forward currency contracts against the euro were purchased (with notional amounts of $128 million and $178 million, respectively). Based on the year-end 2004 and 2003 foreign exchange positions, the effect of a hypothetical 10 percent strengthening of the euro is estimated to create a loss valued at $11 million and $16 million at December 31, 2004 and 2003, respectively.
      Our settlement activities are subject to foreign exchange risk resulting from foreign exchange rate fluctuations. This risk is limited to the extent that the timeframe between setting the foreign exchange rates and clearing the financial transactions is typically one business day and by limiting the supported settlement currencies to the U.S. dollar or one of seventeen other stable transaction currencies. The remaining 143 transaction currencies are settled in one of the supported settlement currencies or require local settlement netting arrangements that minimize our foreign exchange exposure.
Interest Rate Risk
      Our interest rate sensitive assets are our debt instruments, which we hold as available-for-sale investments. They are rated AA or above and primarily consist of fixed rate short and medium-term instruments. 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 an unrealized loss recorded in other comprehensive income of $17 million for each of 2004 and 2003, respectively. Our held-to-maturity investments are not be subject to interest rate movements.
      Our interest rate sensitive liabilities consist of subordinated debt securities. A 100 basis point decrease in rates would result in a fair value loss of $9 million and $12 million for December 31, 2004 and 2003, respectively. See Note 11 to the Consolidated Financial Statements herein.
      At December 31, 2004 and 2003, we had various credit facilities to provide liquidity in the event of material member settlement failures, settlement service operations and other operational needs. These credit facilities have variable rates, which are applied to the borrowing based on terms and conditions set forth in each agreement. There were no amounts outstanding at December 31, 2004 and 2003, respectively, under these credit facilities. See Note 11 to the Consolidated Financial Statements herein.
Equity Price Risk
      We own trading securities, which are comprised of equity securities selected to offset obligations in connection with an executive compensation plan. The effect of a hypothetical 10 percent decline in market value would result in a loss of $3 million in each of the years ended December 31, 2004 and 2003, respectively. To the extent the executive compensation plan remains in a net appreciation position, an offsetting gain would be recorded in general and administrative expense.
39 

Table of Contents

		
Item 8.	Financial Statements and Supplementary Data	
MASTERCARD INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 	 	 	 	 	 	 	
 	 	Page		
 	 	 		
MasterCard Incorporated	 	 	 	 	
 	As of December 31, 2004 and 2003 and for the years ended December 31, 2004, 2003 and 2002	 	 	 	 	
 	 	Management’s Report on Internal Control Over Financial Reporting	 	 	41	 	
 	 	Report of Independent Registered Public Accounting Firm	 	 	42	 	
 	 	Consolidated Balance Sheets	 	 	44	 	
 	 	Consolidated Statements of Operations	 	 	45	 	
 	 	Consolidated Statements of Cash Flows	 	 	46	 	
 	 	Consolidated Statements of Changes in Stockholders’/Members’ Equity	 	 	47	 	
 	 	Consolidated Statements of Comprehensive Income (Loss)	 	 	48	 	
 	 	Notes to Consolidated Financial Statements	 	 	49	 	
40 

Table of Contents

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
      The management of MasterCard Incorporated is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. As required by Section 404 of the Sarbanes-Oxley Act of 2002, management has assessed the effectiveness of MasterCard’s internal control over financial reporting as of December 31, 2004. In making its assessment management has utilized the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its report entitled Internal Control — Integrated Framework. Management has concluded that, based on its assessment, MasterCard’s internal control over financial reporting was effective as of December 31, 2004. Our management’s assessment of the effectiveness of MasterCard’s internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears on the next page.
41 

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of MasterCard Incorporated:
      We have completed an integrated audit of MasterCard Incorporated’s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its December 31, 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements
      In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of MasterCard Incorporated and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements 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.
      As discussed in Note 9 to the consolidated financial statements, the Company changed its method for calculating the market-related value of pension plan assets used in determining the expected return on the assets component of annual pension cost in 2003. Additionally, as discussed in Note 13 to the Consolidated Financial Statements, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 46R, “Consolidation of Variable Interest Entities”, which resulted in the consolidation of a special purpose entity in 2003.
Internal control over financial reporting
      Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing in this Item, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal
42 

Table of Contents

control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
      A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

		
 		
New York, NY
March 1, 2005
43 

Table of Contents
MASTERCARD INCORPORATED
CONSOLIDATED BALANCE SHEETS
 	 	 	 	 	 	 	 	 	 	
 	 	December 31,		 	December 31,		
 	 	2004		 	2003		
 	 	 		 	 		
 	 	(In thousands, except share		
 	 	data)		
ASSETS	
Cash and cash equivalents	 	$	328,996	 	 	$	248,119	 	
Investment securities, at fair value:	 	 	 	 	 	 	 	 	
 	Trading	 	 	27,407	 	 	 	30,761	 	
 	Available-for-sale	 	 	781,486	 	 	 	631,630	 	
Accounts receivable	 	 	293,292	 	 	 	259,429	 	
Settlement due from members	 	 	223,738	 	 	 	210,014	 	
Restricted security deposits held for members	 	 	87,300	 	 	 	60,524	 	
Prepaid expenses	 	 	124,595	 	 	 	92,189	 	
Other current assets	 	 	35,982	 	 	 	77,184	 	
 	 	 	 	 	 	 	
 	Total Current Assets	 	 	1,902,796	 	 	 	1,609,850	 	
Property, plant and equipment, at cost (less accumulated depreciation of $329,877 and $288,259)	 	 	242,358	 	 	 	258,520	 	
Deferred income taxes	 	 	235,023	 	 	 	223,908	 	
Goodwill	 	 	217,654	 	 	 	187,881	 	
Other intangible assets (less accumulated amortization of $228,466 and $158,938)	 	 	328,984	 	 	 	327,630	 	
Municipal bonds held-to-maturity	 	 	195,295	 	 	 	196,141	 	
Other assets	 	 	142,560	 	 	 	96,975	 	
 	 	 	 	 	 	 	
 	Total Assets	 	$	3,264,670	 	 	$	2,900,905	 	

 LIABILITIES AND STOCKHOLDERS’ EQUITY	
Accounts payable	 	$	187,035	 	 	$	202,604	 	
Settlement due to members	 	 	186,858	 	 	 	176,144	 	
Restricted security deposits held for members	 	 	87,300	 	 	 	60,524	 	
Obligations under U.S. merchant lawsuit and other legal settlements — current (Notes 14 and 16)	 	 	129,047	 	 	 	155,780	 	
Accrued expenses (Note 8)	 	 	648,019	 	 	 	555,165	 	
Other current liabilities	 	 	63,103	 	 	 	38,641	 	
 	 	 	 	 	 	 	
 	Total Current Liabilities	 	 	1,301,362	 	 	 	1,188,858	 	
Deferred income taxes	 	 	73,227	 	 	 	64,125	 	
Obligations under U.S. merchant lawsuit and other legal settlements (Notes 14 and 16)	 	 	468,547	 	 	 	516,686	 	
Long-term debt	 	 	229,569	 	 	 	229,574	 	
Other liabilities	 	 	212,393	 	 	 	198,321	 	
 	 	 	 	 	 	 	
 	Total Liabilities	 	 	2,285,098	 	 	 	2,197,564	 	
Commitments and contingent liabilities (Notes 13 and 16)	 	 	 	 	 	 	 	 	
Minority interest	 	 	4,620	 	 	 	4,620	 	
Stockholders’ Equity	 	 	 	 	 	 	 	 	
Class A redeemable common stock, $.01 par value; authorized 275,000,000 shares, issued 84,000,000 shares	 	 	840	 	 	 	840	 	
Class B convertible common stock, $.01 par value; authorized 25,000,000 shares, issued 16,000,000 shares	 	 	160	 	 	 	160	 	
Additional paid-in capital	 	 	967,368	 	 	 	967,368	 	
Retained earnings (accumulated deficit)	 	 	(121,204	)	 	 	(359,264	)	
Accumulated other comprehensive income (loss), net of tax:	 	 	 	 	 	 	 	 	
 	Cumulative foreign currency translation adjustments	 	 	127,481	 	 	 	83,210	 	
 	Net unrealized gain on investment securities available-for-sale	 	 	3,804	 	 	 	9,476	 	
 	Net unrealized loss on derivatives accounted for as hedges	 	 	(3,497	)	 	 	(3,069	)	
 	 	 	 	 	 	 	
Total accumulated other comprehensive income, net of tax	 	 	127,788	 	 	 	89,617	 	
 	 	 	 	 	 	 	
 	Total Stockholders’ Equity	 	 	974,952	 	 	 	698,721	 	
 	 	 	 	 	 	 	
Total Liabilities and Stockholders’ Equity	 	$	3,264,670	 	 	$	2,900,905	 	
 	 	 	 	 	 	 	
The accompanying notes are an integral part of these consolidated financial statements.
44 

Table of Contents
MASTERCARD INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	For the Years Ended December 31,		
 	 	 		
 	 	2004		 	2003		 	2002		
 	 	 		 	 		 	 		
 	 	(In thousands, except per share data)		
Revenue	 	$	2,593,330	 	 	$	2,230,851	 	 	$	1,891,811	 	
Operating Expenses	 	 	 	 	 	 	 	 	 	 	 	 	
General and administrative	 	 	1,185,837	 	 	 	1,098,552	 	 	 	965,299	 	
Advertising and market development	 	 	915,851	 	 	 	851,150	 	 	 	694,010	 	
U.S. merchant lawsuit and other legal settlements (Notes 14 and 16)	 	 	21,653	 	 	 	763,460	 	 	 	—	 	
Depreciation	 	 	51,277	 	 	 	52,953	 	 	 	42,068	 	
Amortization	 	 	72,040	 	 	 	66,598	 	 	 	48,437	 	
 	 	 	 	 	 	 	 	 	 	
 	Total operating expenses	 	 	2,246,658	 	 	 	2,832,713	 	 	 	1,749,814	 	
 	 	 	 	 	 	 	 	 	 	
Operating income (loss)	 	 	346,672	 	 	 	(601,862	)	 	 	141,997	 	
Other Income (Expense)	 	 	 	 	 	 	 	 	 	 	 	 	
Investment income, net	 	 	48,701	 	 	 	56,591	 	 	 	25,607	 	
Interest expense	 	 	(69,722	)	 	 	(62,936	)	 	 	(9,891	)	
Minority interest in losses (earnings) of subsidiaries	 	 	175	 	 	 	160	 	 	 	(79	)	
Other income (expense), net	 	 	(2,126	)	 	 	(3,473	)	 	 	754	 	
 	 	 	 	 	 	 	 	 	 	
 	Total other income (expense)	 	 	(22,972	)	 	 	(9,658	)	 	 	16,391	 	
 	 	 	 	 	 	 	 	 	 	
Income (loss) before income taxes	 	 	323,700	 	 	 	(611,520	)	 	 	158,388	 	
Income tax expense (benefit)	 	 	85,640	 	 	 	(220,778	)	 	 	41,959	 	
 	 	 	 	 	 	 	 	 	 	
Income (loss) before cumulative effect of accounting change	 	 	238,060	 	 	 	(390,742	)	 	 	116,429	 	
Cumulative effect of accounting change, net of tax	 	 	—	 	 	 	4,949	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	
Net Income (Loss)	 	$	238,060	 	 	$	(385,793	)	 	$	116,429	 	
 	 	 	 	 	 	 	 	 	 	
Net Income (Loss) per Share (Basic and Diluted):	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before cumulative effect of accounting change	 	$	2.38	 	 	$	(3.91	)	 	$	1.35	 	
Cumulative effect of accounting change, net of tax	 	 	—	 	 	 	.05	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	
Net Income (Loss) per Share (Basic and Diluted)	 	$	2.38	 	 	$	(3.86	)	 	$	1.35	 	
 	 	 	 	 	 	 	 	 	 	
The accompanying notes are an integral part of these consolidated financial statements.
45 

Table of Contents
MASTERCARD INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	For the Years Ended December 31,		
 	 	 		
 	 	2004		 	2003		 	2002		
 	 	 		 	 		 	 		
 	 	(In thousands)		
Operating Activities	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	238,060	 	 	$	(385,793	)	 	$	116,429	 	
Adjustments to reconcile net income (loss) to net cash provided by operating activities:	 	 	 	 	 	 	 	 	 	 	 	 	
 	Depreciation	 	 	51,277	 	 	 	52,953	 	 	 	42,068	 	
 	Amortization	 	 	72,040	 	 	 	66,598	 	 	 	48,437	 	
 	Impairment of assets	 	 	7,427	 	 	 	4,359	 	 	 	6,370	 	
 	Deferred income taxes	 	 	40,845	 	 	 	(240,666	)	 	 	4,429	 	
 	Other	 	 	4,540	 	 	 	1,391	 	 	 	2,281	 	
 	Changes in operating assets and liabilities, net of effects from acquisitions:	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Trading securities	 	 	3,354	 	 	 	(250	)	 	 	12,642	 	
 	 	Accounts receivable	 	 	(22,446	)	 	 	(48,799	)	 	 	16,414	 	
 	 	Settlement due from members	 	 	2,768	 	 	 	55,006	 	 	 	63,491	 	
 	 	Prepaid expenses and other current assets	 	 	(30,737	)	 	 	(21,604	)	 	 	(4,086	)	
 	 	Accounts payable	 	 	(20,275	)	 	 	21,566	 	 	 	34,420	 	
 	 	Settlement due to members	 	 	(3,356	)	 	 	(27,777	)	 	 	(38,133	)	
 	 	Legal settlement accruals, including accretion of imputed interest	 	 	(74,872	)	 	 	672,466	 	 	 	—	 	
 	 	Accrued expenses	 	 	82,403	 	 	 	39,738	 	 	 	64,529	 	
 	 	Net change in other assets and liabilities	 	 	(7,233	)	 	 	1,257	 	 	 	(59,419	)	
 	 	 	 	 	 	 	 	 	 	
Net cash provided by operating activities	 	 	343,795	 	 	 	190,445	 	 	 	309,872	 	
Investing Activities	 	 	 	 	 	 	 	 	 	 	 	 	
 	Purchases of property, plant and equipment	 	 	(30,525	)	 	 	(76,253	)	 	 	(54,237	)	
 	Capitalized software	 	 	(47,630	)	 	 	(73,310	)	 	 	(47,128	)	
 	Purchases of investment securities available-for-sale	 	 	(2,194,931	)	 	 	(1,282,107	)	 	 	(1,610,861	)	
 	Proceeds from sales of investment securities available-for-sale	 	 	2,032,275	 	 	 	1,265,192	 	 	 	1,474,201	 	
 	Cash received from the acquisition of Europay International S.A., net of acquisition related expenses	 	 	—	 	 	 	—	 	 	 	31,243	 	
 	Acquisition of businesses, net of cash acquired	 	 	(29,861	)	 	 	—	 	 	 	—	 	
 	Other investing activities	 	 	(3,842	)	 	 	(3,356	)	 	 	(5,972	)	
 	 	 	 	 	 	 	 	 	 	
Net cash used in investing activities	 	 	(274,514	)	 	 	(169,834	)	 	 	(212,754	)	
Financing Activities	 	 	 	 	 	 	 	 	 	 	 	 	
Short-term borrowings, net of repayments	 	 	—	 	 	 	—	 	 	 	(34,893	)	
 	 	 	 	 	 	 	 	 	 	
Net cash used in financing activities	 	 	—	 	 	 	—	 	 	 	(34,893	)	
 	 	 	 	 	 	 	 	 	 	
Effect of exchange rate changes on cash and cash equivalents	 	 	11,596	 	 	 	8,933	 	 	 	1,307	 	
 	 	 	 	 	 	 	 	 	 	
Net increase in cash and cash equivalents	 	 	80,877	 	 	 	29,544	 	 	 	63,532	 	
Cash and cash equivalents — beginning of year	 	 	248,119	 	 	 	218,575	 	 	 	155,043	 	
 	 	 	 	 	 	 	 	 	 	
Cash and cash equivalents — end of year	 	$	328,996	 	 	$	248,119	 	 	$	218,575	 	
 	 	 	 	 	 	 	 	 	 	
The accompanying notes are an integral part of these consolidated financial statements.
46 

Table of Contents
MASTERCARD INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’/ MEMBERS’ EQUITY
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	Retained		 	 	 	 	 	Additional		
 	 	 	 	Earnings		 	Accumulated Other		 	Common Stock		 	Paid-In Capital		
 	 	 	 	(Accumulated		 	Comprehensive		 	 		 	 		
 	 	Total		 	Deficit)		 	Income, net of tax		 	Class A		 	Class B		 	Class A		 	Class B		
 	 	 		 	 		 	 		 	 		 	 		 	 		 	 		
 	 	(In thousands)		
Balance at December 31, 2001	 	$	606,661	 	 	$	602,724	 	 	$	3,937	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	
 	Net income	 	 	116,429	 	 	 	116,429	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
 	Issuance of common stock	 	 	275,744	 	 	 	(692,624	)	 	 	—	 	 	 	840	 	 	 	160	 	 	 	812,589	 	 	 	154,779	 	
 	Other comprehensive income, net of tax	 	 	24,572	 	 	 	—	 	 	 	24,572	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at December 31, 2002	 	 	1,023,406	 	 	 	26,529	 	 	 	28,509	 	 	 	840	 	 	 	160	 	 	 	812,589	 	 	 	154,779	 	
 	Net loss	 	 	(385,793	)	 	 	(385,793	)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
 	Other comprehensive income, net of tax	 	 	61,108	 	 	 	—	 	 	 	61,108	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at December 31, 2003	 	 	698,721	 	 	 	(359,264	)	 	 	89,617	 	 	 	840	 	 	 	160	 	 	 	812,589	 	 	 	154,779	 	
 	Net income	 	 	238,060	 	 	 	238,060	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
 	Other comprehensive income, net of tax	 	 	38,171	 	 	 	—	 	 	 	38,171	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at December 31, 2004	 	$	974,952	 	 	$	(121,204	)	 	$	127,788	 	 	$	840	 	 	$	160	 	 	$	812,589	 	 	$	154,779	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
The accompanying notes are an integral part of these consolidated financial statements.
47 

Table of Contents
MASTERCARD INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	For the Years Ended December 31,		
 	 	 		
 	 	2004		 	2003		 	2002		
 	 	 		 	 		 	 		
 	 	(In thousands)		
Net Income (Loss)	 	$	238,060	 	 	$	(385,793	)	 	$	116,429	 	
Other comprehensive income, net of tax:	 	 	 	 	 	 	 	 	 	 	 	 	
 	Foreign currency translation adjustments	 	 	44,271	 	 	 	66,668	 	 	 	17,220	 	
 	
 	Unrealized (loss) gain on investment securities available-for-sale	 	 	(5,977	)	 	 	(2,492	)	 	 	18,717	 	
 	Income tax effect	 	 	2,068	 	 	 	925	 	 	 	(6,337	)	
 	 	 	 	 	 	 	 	 	 	
 	 	 	(3,909	)	 	 	(1,567	)	 	 	12,380	 	
 	Reclassification adjustment for net gain realized on investment securities available-for-sale	 	 	(2,695	)	 	 	(5,442	)	 	 	(3,825	)	
 	Income tax effect	 	 	932	 	 	 	2,020	 	 	 	1,295	 	
 	 	 	 	 	 	 	 	 	 	
 	 	 	(1,763	)	 	 	(3,422	)	 	 	(2,530	)	
 	
 	Unrealized loss on derivatives accounted for as hedges	 	 	(4,262	)	 	 	(13,844	)	 	 	(2,498	)	
 	Income tax effect	 	 	957	 	 	 	4,672	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	
 	 	 	(3,305	)	 	 	(9,172	)	 	 	(2,498	)	
 	Reclassification adjustment for net loss realized on derivatives accounted for as hedges	 	 	3,710	 	 	 	11,710	 	 	 	—	 	
 	Income tax effect	 	 	(833	)	 	 	(3,109	)	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	
 	 	 	2,877	 	 	 	8,601	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	
 	Other comprehensive income, net of tax	 	 	38,171	 	 	 	61,108	 	 	 	24,572	 	
 	 	 	 	 	 	 	 	 	 	
Comprehensive Income (Loss)	 	$	276,231	 	 	$	(324,685	)	 	$	141,001	 	
 	 	 	 	 	 	 	 	 	 	
The accompanying notes are an integral part of these consolidated financial statements.
48 

Table of Contents

MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)

		
Note 1.	Summary of Significant Accounting Policies	
      Organization  — MasterCard Incorporated and its consolidated subsidiaries, including MasterCard International Incorporated (“MasterCard International”), MasterCard Europe sprl (“MasterCard Europe”) (together, “MasterCard” or the “Company”), provide transaction processing and related services to customers principally in support of their credit, deposit access (debit), electronic cash and Automated Teller Machine (“ATM”) payment card programs, and travelers cheque programs. MasterCard enters into transactions with its customers in the normal course of business and operates a system for payment processing among its customers.
      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 the 2004 presentation. The consolidated financial statements include the accounts of MasterCard and its majority-owned subsidiaries. Intercompany transactions are eliminated in consolidation.
      The Company consolidates majority-owned and controlled entities, including specific consideration of variable interest entities which are required to be consolidated in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). Minority interest is recorded for consolidated entities in which the Company owns less than 100% of the interest. Minority interest represents the equity interest not owned by the Company.
      The Company accounts for investments in entities under the equity method of accounting when it holds between 20% and 50% ownership in the entity and when it exercises significant influence. 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 investees. MasterCard’s share of net earnings or losses of entities accounted for under the equity method of accounting is included in other income (expense), net on the consolidated statements of operations.
      The Company accounts for investments in affiliates under the historical cost method of accounting when it holds less than 20% ownership in the entity and when it does not exercise significant influence.
      Investments in entities for which the equity method and historical cost method of accounting are appropriate are recorded in other assets on the consolidated balance sheets.
      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 effect the reported amounts of assets and liabilities, 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. Management has established detailed policies and control procedures to ensure the methods used to make estimates are well controlled and applied consistently from period to period. Actual results may differ from these estimates.
      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. Cash equivalents are recorded at cost, which approximates fair value.
      Investment securities  — The Company classifies debt securities as held-to-maturity or available-for-sale and classifies equity securities as trading.
      Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the debt securities to maturity. Held-to-maturity debt securities are stated at amortized cost. Debt securities that are not held-to-maturity are classified as available-for-sale. Available-for-sale debt securities
49 

Table of Contents

MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
are carried at fair value, with the unrealized gains and losses, net of applicable taxes, recorded as a separate component of other comprehensive income on the consolidated statements of comprehensive income (loss). Quoted market values, when available, are used to determine the fair value of debt securities. The specific identification method is used to determine gains and losses. Net realized gains and losses on debt securities are recognized in investment income on the consolidated statements of operations.
      Equity securities bought and held primarily for sale in the near term are classified as trading and are reported at fair value. Quoted market values are used to determine the fair value of trading securities. The Company’s trading securities are publicly traded and are related to an executive compensation plan. Net realized and unrealized gains and losses on trading securities are recognized in investment income on the consolidated statements of operations. The specific identification method is used to determine realized gains and losses. To the extent these securities appreciate over their original cost, a corresponding offset would be recorded in general and administrative expense in connection with the executive compensation plan.
      Held-to-maturity and available-for-sale investments are evaluated for other than temporary impairment on an ongoing basis in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. Available-for-sale securities are available to meet the Company’s current operational needs and accordingly are classified as short-term.
      Settlement due from/due to members  — The Company operates systems for clearing and settling payment transactions among MasterCard International members. Net settlements are generally cleared daily among members through settlement cash accounts by wire transfer or other bank clearing means. However, some transactions may not settle until subsequent business days, resulting in amounts due from and due to MasterCard International members.
      Restricted security deposits held for MasterCard International members  — MasterCard requires and holds cash deposits from certain members of MasterCard International in order to maintain collateral for settlement of their transactions. These assets are fully offset by corresponding liabilities included on the consolidated balance sheets.
      Property, plant and equipment  — Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of equipment and furniture and fixtures is computed using 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 using the straight-line method over the lesser of the estimated useful lives of the improvements or the terms of the related leases. Capital leases are amortized using the straight-line method over the lives of the leases. Depreciation on buildings is calculated using the straight-line method over an estimated useful life of 30 years. Amortization of leasehold improvements and capital leases is included in depreciation expense.
      The Company evaluates the recoverability of all long-lived assets whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. If the carrying value of the asset cannot be recovered from estimated future cash flows, undiscounted and without interest, the fair value of the asset is calculated using the present value of estimated net future cash flows. If the carrying amount of the asset exceeds its fair value, a loss is recorded.
      Goodwill  — Goodwill represents the excess of cost over net assets acquired in connection with the acquisition of certain businesses. The Company tests its goodwill for impairment at least annually. Goodwill was tested for impairment during each of 2004, 2003 and 2002. In 2004, the company recorded an impairment charge; see Note 6 herein.
      Intangible assets  — Intangible assets consist of capitalized software costs, franchise rights, trademarks, tradenames and other intangible assets, which have finite lives, and customer relationships, which have
50 

Table of Contents

MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
indefinite lives. Intangible assets with finite useful lives are amortized over their estimated useful lives under the straight-line method. MasterCard capitalizes average internal costs incurred for payroll and payroll related expenses by department for the employees who directly devote time to the design, development and testing phases of each capitalized software project.
      The Company reviews intangible assets with finite lives for impairment when events or changes in circumstances indicate that their carrying amount may not be recoverable. During 2004, 2003 and 2002, the Company recorded impairment charges for finite lived intangible assets; see Note 7 herein. Intangible assets with indefinite lives, customer relationships, are tested for impairment at least annually. No impairment charges were recorded in 2004, 2003 or 2002.
      Litigation accrual  — The Company is party to certain legal and regulatory proceedings with respect to a variety of matters. Except as described in Notes 14 and 16, MasterCard does not believe that any legal or regulatory proceedings to which it is a party would have a material adverse impact on its business or prospects. The Company evaluates the likelihood of an unfavorable outcome of the legal or regulatory proceedings to which it is a party in accordance with SFAS No. 5, “Accounting for Contingencies” (“SFAS No. 5”). These judgments are subjective based on the status of the legal or regulatory proceedings, the merits of its defenses and consultation with in-house and external legal counsel. The actual outcomes of these proceedings may differ from the Company’s judgments.
      Settlement and travelers cheque risk  — MasterCard has global risk management policies and procedures, which include risk standards to provide a framework for managing the Company’s settlement exposure. Settlement risk is the legal exposure due to the difference in timing between the payment transaction date and subsequent settlement. MasterCard International’s rules generally guarantee the payment of MasterCard transactions and certain Cirrus and Maestro transactions between principal members. In the event that MasterCard International effects a payment on behalf of a failed member, MasterCard International may seek an assignment of the underlying receivables. Subject to approval by the Board of Directors, members may be assessed for the amount of any settlement loss. MasterCard has also guaranteed the payment of MasterCard-branded travelers cheques in the event of issuer default. The term and amount of these guarantees are unlimited.
      Derivative financial instruments  — The Company accounts for derivative financial instruments in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). SFAS 133, as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS 133 requires that all derivatives, whether designated in hedging relationships or not, be recorded on the balance sheet at fair value in other assets and other liabilities, regardless of the purpose or intent for holding them.
      Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a foreign-currency cash flow hedge are recorded in other comprehensive income (loss) until earnings are affected by the variability of cash flows of the hedged transaction (e.g., until periodic settlements of a variable-rate asset or liability are recorded in earnings). Any hedge ineffectiveness (which represents the amount by which the changes in the fair value of the derivative exceeds the variability in the cash flows of the forecasted transaction) is recorded in current-period earnings. Changes in the fair value of derivative instruments which are foreign currency fair value hedges or which do not qualify or are not designated for hedge accounting under SFAS 133 are reported in current-period earnings.
      The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions for all derivatives that qualify for hedge accounting under SFAS 133. This process includes linking all derivatives
51 

Table of Contents

MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
that are designated as foreign-currency cash flow hedges to forecasted transactions. The Company also formally assesses (both at the hedge’s inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. If and when it is determined that a derivative is no longer expected to be highly effective, hedge accounting is discontinued.
      Income taxes  — The Company provides for income taxes under the provisions of SFAS No. 109 “Accounting for Income Taxes” (“SFAS 109”). SFAS 109 requires an asset and liability based approach in accounting for income taxes.
      Deferred income tax assets and liabilities are recorded to reflect the tax consequences on future years of temporary differences between the financial statement carrying amounts and income tax bases of assets and liabilities. Valuation allowances are provided against assets which are not likely to be realized.
      Revenue recognition  — The Company’s revenue is comprised principally of operations fees and assessments. Revenues are generated from the fees charged to customers for providing transaction processing and other payment services, and from assessments calculated on the dollar volume of activity on cards carrying our brands. Revenues are generally based upon transactional information accumulated by our systems or reported by our customers. Certain revenues are estimated based upon aggregate transaction information and historical and projected customer performance. Revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectibility is reasonably assured.
      Operations fees represent fees for authorization, clearing, settlement and other products and services that facilitate transaction and information management among the Company’s customers on a global basis. These fees are recognized as revenue in the same period as the related transactions occur or services are rendered. Other revenues included within operations fees include currency conversion fees, net foreign exchange gains or losses on settlement activities, excessive chargeback violation fees, consulting, sales of holograms, warning bulletins, manuals and publications.
      Assessments predominantly represent payments made by members of MasterCard International with respect to their card programs carrying the marks of one or more of the brands within the MasterCard family of brands, principally the MasterCard, Maestro and Cirrus brands. Assessments are based principally upon daily, monthly or quarterly gross dollar volumes (“GDV”), which represent gross usage (purchase and cash disbursements) on MasterCard-branded cards for goods and services, including balance transfers and convenience checks. Assessments are recorded as revenue in the period they are earned, which is when the related GDV is generated on the cards. Assessments are based on management’s estimate of the customers’ performance in a given period and actual results may differ from these estimates.
      MasterCard has business agreements with certain customers that provide for fee rebates when the customers meet certain hurdles. Such rebates are calculated on a monthly basis based upon estimated performance and the contracted discount rates for the services provided. MasterCard also enters into agreements with certain customers to provide volume-based and performance support incentives. MasterCard may incur costs directly related to the acquisition of the contract, which are deferred and amortized over the life of the contract. Rebates and incentives are recorded as a reduction of revenue in the same period as the revenue is earned or performance has occurred, in accordance with Emerging Issues Task Force (“EITF”) Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)” (“EITF 01-9”). Rebates and incentives are based on management’s estimate of the customers’ performance in a given period, and actual results may differ from these estimates.
52 

Table of Contents

MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
      In addition, certain rebate and incentive agreements provide for free or discounted services, which are recorded in accordance with EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables”. The discount from the fair value of the services is recorded as a reduction of revenue related to other elements of the contract using the residual method.
      Pension and other postretirement plans  — Compensation cost of an employee’s pension benefit is recognized on the projected unit credit method over the employee’s approximate service period. The unit credit cost method is utilized for funding purposes. Prior to 2003, the expected return on plan assets was based on a calculated asset value. Beginning in 2003, the expected return on plan assets is based on the current fair value of the plan assets; this change in accounting principle is discussed in Note 9.
      In December 2003, the FASB issued SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88, and 106, and a revision of FASB Statement No. 132” (“SFAS 132”). This Statement revises employers’ disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by FASB Statements No. 87, “Employers’ Accounting for Pensions”, No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”, and No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”. SFAS 132 requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. The Company has fully implemented SFAS 132 for the year ended December 31, 2004.
      In May 2004, the FASB issued FASB Staff Position No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”)” (“FSP 106-2”). FSP 106-2 requires companies to account for the effect of the subsidy on benefits attributable to past service as an actuarial experience gain and as a reduction of the service cost component of net postretirement health care costs for amounts attributable to current service, if the benefit provided is at least actuarially equivalent to Medicare Part D. MasterCard International determined the effects of the Act were not a significant event requiring an interim remeasurement. Consequently, as permitted by FSP 106-2, net periodic postretirement benefit cost for 2004 does not reflect the effects of the Act. The accumulated postretirement benefit obligation (“APBO”) for the postretirement benefit plan was remeasured at December 31, 2004 to reflect the effects of the Act, which resulted in a reduction in the APBO of $2,680.
      Advertising expense  — Cost of media advertising is expensed when the advertising takes place. Production costs are expensed as costs are incurred. Promotional items are expensed at the time the promotional event occurs.
      Foreign currency translation  — The U.S. dollar is the functional currency for the majority of the Company’s businesses except for MasterCard Europe’s operations, for which the functional currency is the euro and MasterCard’s operations in Brazil for which the functional currency is the real. Where the U.S. dollar is considered the functional currency, monetary assets and liabilities are remeasured to U.S. dollars using current exchange rates in effect at the balance sheet date; non-monetary assets and liabilities are remeasured at historical exchange rates; and revenue and expense accounts are remeasured at a weighted average exchange rate for the period. Resulting exchange gains and losses are included in net income (loss). Where local currency is the functional currency, translation from the local currency 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 (loss).
53 

Table of Contents
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
      Net income (loss) per share  — MasterCard computes basic and diluted net income (loss) per share by dividing net income (loss) applicable to common stock by the weighted average number of common shares outstanding for the period.
Note 2.      Supplemental Cash Flows
      The following table includes supplemental cash flow disclosures for the years ended December 31:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2004		 	2003		 	2002		
 	 	 		 	 		 	 		
Cash paid for income taxes	 	$	43,594	 	 	$	14,739	 	 	$	68,238	 	
Cash paid for interest	 	 	16,732	 	 	 	16,793	 	 	 	5,711	 	
Cash paid for settlement of U.S. merchant lawsuit and other legal settlements (Note 14 and 16)	 	 	149,948	 	 	 	133,680	 	 	 	—	 	
Non-cash investing and financing activities:	 	 	 	 	 	 	 	 	 	 	 	 	
 	Common stock issued for acquisition of Europay International S.A (Note 18)	 	 	—	 	 	 	—	 	 	 	275,744	 	
 	Consolidation of variable interest entity (Note 12):	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Municipal bonds held-to-maturity	 	 	—	 	 	 	154,000	 	 	 	—	 	
 	 	Long-term debt	 	 	—	 	 	 	149,380	 	 	 	—	 	
 	 	Minority interest	 	 	—	 	 	 	4,620	 	 	 	—	 	
 	Sale-leaseback transaction:	 	 	 	 	 	 	 	 	 	 	—	 	
 	 	Capital lease obligation	 	 	—	 	 	 	36,382	 	 	 	—	 	
 	 	Bonds held-to-maturity	 	 	—	 	 	 	36,382	 	 	 	—	 	
      In January 2003, MasterCard purchased a building in Kansas City, Missouri for approximately $23,572. The building is a co-processing data center which replaced the back-up data center in Lake Success, New York. During 2003, MasterCard entered into agreements with the City of Kansas City for (i) the sale-leaseback of the building and related equipment which totaled $36,382 and (ii) the purchase of municipal bonds for the same amount which have been classified as municipal bonds held-to-maturity. The agreements enabled MasterCard to secure state and local financial benefits. No gain or loss was recorded in connection with the agreements. The leaseback has been accounted for as a capital lease as the agreement contains a bargain purchase option at the end of the ten-year lease term on April 1, 2013. The building and related equipment are being depreciated over their estimated economic life in accordance with the Company’s policy. Rent of $1,819 is due annually and is equal to the interest due on the municipal bonds. The future minimum lease payments are $52,905 and are included in the future commitment schedule in Note 13. A portion of the building was subleased to the original building owner for a five-year term with a renewal option. As of December 31, 2004, the future minimum sublease rental income is $2,868.
54 

Table of Contents
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
Note 3.      Net Income (Loss) Per Share
      The following table sets forth the computation of basic and diluted net income (loss) per share:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Years Ended December 31,		
 	 	 		
 	 	2004		 	2003		 	2002		
 	 	 		 	 		 	 		
Numerator for net income (loss) per share (basic and diluted):	 	 	 	 	 	 	 	 	 	 	 	 	
 	Income (loss) before cumulative effect of accounting change	 	$	238,060	 	 	$	(390,742	)	 	$	116,429	 	
 	Cumulative effect of accounting change, net of tax	 	 	—	 	 	 	4,949	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	
 	Net income (loss)	 	$	238,060	 	 	$	(385,793	)	 	$	116,429	 	
 	 	 	 	 	 	 	 	 	 	
Denominator for net income (loss) per share (basic and diluted):	 	 	 	 	 	 	 	 	 	 	 	 	
 	Weighted average shares outstanding	 	 	100,000	 	 	 	100,000	 	 	 	86,204	 	
 	 	 	 	 	 	 	 	 	 	
 	Income (loss) per share before cumulative effect of accounting change	 	$	2.38	 	 	$	(3.91	)	 	$	1.35	 	
 	Cumulative effect of accounting change per share, net of tax	 	 	—	 	 	 	.05	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	
 	Net income (loss) per share (basic and diluted)	 	$	2.38	 	 	$	(3.86	)	 	$	1.35	 	
 	 	 	 	 	 	 	 	 	 	
Note 4.      Investment Securities
      Available-for-sale investment securities consist of municipal bonds. The amortized cost, gross unrealized gains and losses and fair value of available-for-sale securities are as follows:
 	 	 	 	 	 	 	 	 	
 	 	Available-for-Sale		
 	 	 		
 	 	December 31,		 	December 31,		
 	 	2004		 	2003		
 	 	 		 	 		
Amortized cost	 	$	775,509	 	 	$	616,981	 	
Gross unrealized gains	 	 	6,947	 	 	 	14,907	 	
Gross unrealized losses	 	 	(970	)	 	 	(258	)	
 	 	 	 	 	 	 	
Fair value	 	$	781,486	 	 	$	631,630	 	
 	 	 	 	 	 	 	
      Held-to-maturity investment securities also consist of municipal bonds. The carrying value, gross unrecorded gains and losses and fair value of held-to-maturity securities are as follows:
 	 	 	 	 	 	 	 	 	
 	 	Held-to-maturity		
 	 	 		
 	 	December 31,		 	December 31,		
 	 	2004		 	2003		
 	 	 		 	 		
Carrying value	 	$	195,295	 	 	$	196,141	 	
Gross unrecorded gains	 	 	21,353	 	 	 	25,157	 	
Gross unrecorded losses	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	
Fair value	 	$	216,648	 	 	$	221,298	 	
 	 	 	 	 	 	 	
      At December 31, 2004, there were no significant investment securities in continuous gross unrealized loss positions for greater than twelve months. Due to the high credit quality of the Company’s investment
55 

Table of Contents
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
securities and the intent and ability to hold until maturity no investment securities are considered to be other-than-temporarily impaired as of December 31, 2004.
      The maturity distribution based on contractual terms of investment securities at December 31, 2004, is as follows:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Available-for-Sale		 	Held-to-Maturity		
 	 	 		 	 		
 	 	Amortized		 	 	 	Carrying		 	 	
 	 	Cost		 	Fair Value		 	Value		 	Fair Value		
 	 	 		 	 		 	 		 	 		
Due within 1 year	 	$	27,873	 	 	$	28,249	 	 	$	—	 	 	$	—	 	
Due after 1 year through 5 years	 	 	373,544	 	 	 	377,319	 	 	 	158,913	 	 	 	178,957	 	
Due after 5 years through 10 years	 	 	119,242	 	 	 	121,068	 	 	 	36,382	 	 	 	37,691	 	
Due after 10 years	 	 	254,850	 	 	 	254,850	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	775,509	 	 	$	781,486	 	 	$	195,295	 	 	$	216,648	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
      Included in the available-for-sale amounts above are auction rate securities of $273,299 and $126,050 as of December 31, 2004 and 2003, respectively. These securities are reset to current interest rates typically every 35 days and no later than every 90 days, but are included in this table based on their stated maturities. All securities with maturities beyond ten years are auction rate securities.
      Auction rate securities, which were previously recorded in cash and cash equivalents due to their liquidity and pricing reset feature, have been included as available-for-sale securities in the accompanying financial statements. Prior period information was reclassified to conform to the current year presentation. There was no impact on net income, cash flow from operations or debt covenants as a result of the reclassification.
      Components of net investment income are as follows for each of the years ended December 31:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2004		 	2003		 	2002		
 	 	 		 	 		 	 		
Interest income	 	$	37,051	 	 	$	35,402	 	 	$	23,090	 	
Dividend income	 	 	6,240	 	 	 	5,326	 	 	 	4,816	 	
Investment securities available-for-sale:	 	 	 	 	 	 	 	 	 	 	 	 	
 	Gross realized gains	 	 	3,169	 	 	 	5,777	 	 	 	4,035	 	
 	Gross realized losses	 	 	(474	)	 	 	(335	)	 	 	(210	)	
Trading securities:	 	 	 	 	 	 	 	 	 	 	 	 	
 	Unrealized gains (losses), net	 	 	(712	)	 	 	8,877	 	 	 	(6,983	)	
 	Realized gains, net	 	 	3,427	 	 	 	1,544	 	 	 	859	 	
 	 	 	 	 	 	 	 	 	 	
Total investment income, net	 	$	48,701	 	 	$	56,591	 	 	$	25,607	 	
 	 	 	 	 	 	 	 	 	 	
Note 5.      Property, Plant and Equipment
      Property, plant and equipment consist of the following at December 31:
 	 	 	 	 	 	 	 	 	
 	 	2004		 	2003		
 	 	 		 	 		
Equipment	 	$	333,276	 	 	$	316,567	 	
Building and land	 	 	179,415	 	 	 	169,803	 	
Furniture and fixtures	 	 	36,415	 	 	 	35,413	 	
Leasehold improvements	 	 	23,129	 	 	 	24,996	 	
 	 	 	 	 	 	 	
 	 	 	572,235	 	 	 	546,779	 	
Less accumulated depreciation	 	 	(329,877	)	 	 	(288,259	)	
 	 	 	 	 	 	 	
 	 	$	242,358	 	 	$	258,520	 	
 	 	 	 	 	 	 	
56 

Table of Contents
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
      Depreciation expense for the above property, plant and equipment was $51,277, $52,953 and $42,068 for the years ended December 31, 2004, 2003 and 2002, respectively.
Note 6.      Goodwill
      The changes in the carrying amount of goodwill for the years ended December 31, 2004 and 2003 are as follows:
 	 	 	 	 	
Balance as of December 31, 2002	 	$	152,941	 	
Change in estimate of exit costs relating to the Integration (Note 18)	 	 	3,792	 	
Foreign currency translation	 	 	31,148	 	
 	 	 	 	
Balance as of December 31, 2003	 	 	187,881	 	
Acquisition of businesses	 	 	20,225	 	
Impairment loss	 	 	(5,454	)	
Change in estimate of exit costs relating to the Integration (Note 18)	 	 	(663	)	
Foreign currency translation	 	 	15,665	 	
 	 	 	 	
Balance as of December 31, 2004	 	$	217,654	 	
 	 	 	 	
      In February 2004, the Company acquired a research and advisory firm focused exclusively on the global financial services industry. In May 2004, the Company acquired a consulting firm specializing in the optimization of customer relationships. The Company identified for one of the acquisitions above, certain indicators of potential impairment, including lower than anticipated revenues during 2004 and loss of key customers which would negatively impact future revenue growth. Accordingly, the Company recorded impairment losses of $6,560 (goodwill of $5,454 and other intangible assets of $1,106), which are reflected within general and administrative expenses on the consolidated statements of operations herein.
Note 7.      Other Intangible Assets
      The following table sets forth net intangible assets, other than goodwill:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	December 31, 2004		 	December 31, 2003		
 	 	 		 	 		
 	 	Gross		 	 	 	Net		 	Gross		 	 	 	Net		
 	 	Carrying		 	Accumulated		 	Carrying		 	Carrying		 	Accumulated		 	Carrying		
 	 	Amount		 	Amortization		 	Amount		 	Amount		 	Amortization		 	Amount		
 	 	 		 	 		 	 		 	 		 	 		 	 		
Amortized intangible assets:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Capitalized software	 	$	327,733	 	 	$	(207,371	)	 	$	120,362	 	 	$	283,217	 	 	$	(148,408	)	 	$	134,809	 	
 	Trademarks and tradenames	 	 	24,061	 	 	 	(17,728	)	 	 	6,333	 	 	 	20,204	 	 	 	(9,802	)	 	 	10,402	 	
 	Other	 	 	7,170	 	 	 	(3,367	)	 	 	3,803	 	 	 	728	 	 	 	(728	)	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Total	 	 	358,964	 	 	 	(228,466	)	 	 	130,498	 	 	 	304,149	 	 	 	(158,938	)	 	 	145,211	 	
Unamortized intangible assets:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Customer relationships	 	 	198,486	 	 	 	—	 	 	 	198,486	 	 	 	182,419	 	 	 	—	 	 	 	182,419	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Total	 	$	557,450	 	 	$	(228,466	)	 	$	328,984	 	 	$	486,568	 	 	$	(158,938	)	 	$	327,630	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
      Additions to capitalized software primarily relate to internal projects associated with system enhancements or infrastructure improvements adjusted for the translation of capitalized software denominated in foreign currency. MasterCard’s acquisitions during 2004 are discussed in Note 6 herein and resulted in an increase in trademarks and tradenames in the amount of $2,650 and an increase in other amortizable
57 

Table of Contents

MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
intangible assets, including covenants not to compete, customer lists and a research library, in the amount of $7,548.
      Amortizable trademarks and tradenames and unamortizable customer relationships include assets which are denominated in foreign currency. As such, a component of the net change in these intangible assets is attributable to foreign currency translation. In particular, customer relationships increased $16,067 and trademarks increased $1,207 in 2004 for the portion of these assets assumed in the acquisition of Europay International S.A. on June 28, 2002, as discussed in Note 18 herein.
      Amortization and impairment expense on the assets above amounted to the following:
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	For the Years Ended December 31,		
 	 	 		
 	 	2004		 	2003		 	2002		
 	 	 		 	 		 	 		
Amortization	 	$	72,040	 	 	$	66,598	 	 	$	48,437	 	
Impairment	 	$	1,973	 	 	$	3,371	 	 	$	6,370	 	
      During the years 2004, 2003 and 2002, impairment charges of $867, $3,371 and $6,370, respectively, were recorded primarily in connection with decisions to discontinue the use of various technologies. The Company performed an impairment analysis on the related technology and concluded that fair value was estimated as zero due to discontinued future use of the underlying technology. In addition, during 2004, the Company identified and recorded impairment losses of $1,106 for one of the acquisitions discussed in Note 6 herein. Impairment charges are recorded in general and administrative expense on the consolidated statements of operations for each of the years ended December 31, 2004, 2003 and 2002.
      The following table sets forth the estimated future amortization expense on amortizable intangible assets for the year ending:
 	 	 	 	 	
December 31, 2005	 	$	59,330	 	
December 31, 2006	 	$	41,740	 	
December 31, 2007	 	$	23,257	 	
December 31, 2008	 	$	3,460	 	
December 31, 2009 and thereafter	 	$	2,711	 	

		
Note 8.	Accrued Expenses	
      Accrued expenses consist of the following at December 31:
 	 	 	 	 	 	 	 	 	
 	 	2004		 	2003		
 	 	 		 	 		
Accrued personnel	 	$	190,114	 	 	$	171,811	 	
Accrued rebates and incentives	 	 	163,278	 	 	 	128,082	 	
Accrued advertising	 	 	136,107	 	 	 	122,309	 	
Accrued taxes	 	 	63,940	 	 	 	60,017	 	
Other	 	 	94,580	 	 	 	72,946	 	
 	 	 	 	 	 	 	
 	 	$	648,019	 	 	$	555,165	 	

		
Note 9.	Pension, Savings Plan and Other Benefits	
      The Company maintains a noncontributory defined benefit pension plan with a cash balance feature covering substantially all of its U.S. employees. This pension plan credits participants annually with an amount equal to a percentage of eligible pay based on age and service, as well as providing earnings credits based on
58 

Table of Contents

MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
each participant’s account balance. Additionally, the Company has an unfunded nonqualified supplemental executive retirement plan that provides certain key employees with supplemental retirement benefits in excess of limits imposed on qualified plans by U.S. tax laws.
      Effective January 1, 2003, the Company changed its method of calculating the market-related value of plan assets used in determining the expected return on asset component of its annual pension cost. Under the previous method, 80 percent of the gains and losses on plan assets were deferred and recognized in the calculated market-related value over the following four years. Under the new method, the market-related value equals the current fair value of the plan assets. The new method is considered preferable because annual pension expense will reflect changes in the market performance of plan assets on a more timely basis.
      The cumulative effect of this change in accounting principle related to periods prior to 2003 is a benefit to earnings for the year ended December 31, 2003, in the amount of $7,768, less income taxes of $2,819, for a net benefit of $4,949. The Company’s net periodic pension cost would have been reduced by $1,928 for 2003 if it had not changed its valuation method. Applying the new methodology retroactively to January 1, 2002 would have had a negligible impact on net income and net income per share for the year ended December 31, 2002.
      On June 28, 2002, in connection with its acquisition of MasterCard Europe, the Company assumed a defined benefit plan (“European Plan”) covering substantially all employees affiliated with MasterCard Europe. On December 31, 2002, the Company settled the benefit obligations and terminated the European Plan. All excess assets are being transferred to a new defined contribution plan.
      The following table sets forth the pension plans’ funded status, key assumptions and amounts recognized in the Company’s Consolidated Balance Sheets at December 31, 2004 and 2003. The U.S. plans include both the qualified and the nonqualified pension plans. The Company uses a December 31 measurement date for its pension plans.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	U.S. Plans		 	European Plan		
 	 	 		 	 		
 	 	2004		 	2003		 	2004		 	2003		
 	 	 		 	 		 	 		 	 		
Change in benefit obligation	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Benefit obligation at beginning of year	 	$	148,718	 	 	$	125,490	 	 	$	—	 	 	$	—	 	
Service cost	 	 	16,151	 	 	 	16,857	 	 	 	—	 	 	 	—	 	
Interest cost	 	 	9,795	 	 	 	8,477	 	 	 	—	 	 	 	—	 	
Actuarial loss	 	 	5,698	 	 	 	3,121	 	 	 	—	 	 	 	—	 	
Benefits paid	 	 	(8,891	)	 	 	(5,227	)	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Benefit obligation at end of year	 	$	171,471	 	 	$	148,718	 	 	$	—	 	 	$	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Change in plan assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fair value of plan assets at beginning of year	 	$	126,975	 	 	$	104,257	 	 	$	3,316	 	 	$	4,926	 	
Actual return on plan assets	 	 	11,983	 	 	 	25,445	 	 	 	215	 	 	 	1,332	 	
Employer contributions	 	 	15,000	 	 	 	2,500	 	 	 	—	 	 	 	—	 	
Benefits paid	 	 	(8,891	)	 	 	(5,227	)	 	 	(2,051	)	 	 	(2,942	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Fair value of plan assets at end of year	 	$	145,067	 	 	$	126,975	 	 	$	1,480	 	 	$	3,316	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
59 

Table of Contents
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	U.S. Plans		 	European Plan		
 	 	 		 	 		
 	 	2004		 	2003		 	2004		 	2003		
 	 	 		 	 		 	 		 	 		
Reconciliation of funded status	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Funded status	 	$	(26,404	)	 	$	(21,743	)	 	$	1,480	 	 	$	3,316	 	
Unrecognized actuarial loss	 	 	28,934	 	 	 	26,172	 	 	 	—	 	 	 	—	 	
Unrecognized prior service cost	 	 	(1,162	)	 	 	(1,477	)	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net amount recognized	 	$	1,368	 	 	$	2,952	 	 	$	1,480	 	 	$	3,316	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Amounts recognized on the Consolidated Balance Sheets consist of:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Prepaid benefit cost	 	$	10,500	 	 	$	10,598	 	 	$	1,480	 	 	$	3,316	 	
Accrued benefit cost	 	 	(9,132	)	 	 	(7,646	)	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net amount recognized	 	$	1,368	 	 	$	2,952	 	 	$	1,480	 	 	$	3,316	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted-average assumptions used to determine end of year benefit obligations	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Discount rate	 	 	5.75	%	 	 	6.25	%	 	 	—	 	 	 	—	 	
Rate of compensation increase	 	 	5.37	%	 	 	5.37	%	 	 	—	 	 	 	—	 	
      The accumulated benefit obligation for the U.S. plans was $142,047 and $123,642 at December 31, 2004 and 2003, respectively.
      Information for the Company’s nonqualified pension plan, which has an accumulated benefit obligation in excess of plan assets, is as follows:
 	 	 	 	 	 	 	 	 	
 	 	December 31,		
 	 	 		
 	 	2004		 	2003		
 	 	 		 	 		
Projected benefit obligation	 	$	9,624	 	 	$	8,081	 	
Accumulated benefit obligation	 	 	8,803	 	 	 	7,587	 	
Fair value of plan assets	 	 	—	 	 	 	—	 	
      Net periodic pension cost (benefit) includes the following components for the years ended December 31, 2004, 2003, and 2002.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	U.S. Plans		 	European Plan		
 	 	 		 	 		
 	 	2004		 	2003		 	2002		 	2004		 	2003		 	2002		
 	 	 		 	 		 	 		 	 		 	 		 	 		
Service cost	 	$	16,150	 	 	$	16,857	 	 	$	14,592	 	 	$	—	 	 	$	—	 	 	$	1,140	 	
Interest cost	 	 	9,795	 	 	 	8,477	 	 	 	7,508	 	 	 	—	 	 	 	—	 	 	 	335	 	
Expected return on plan assets	 	 	(10,319	)	 	 	(8,661	)	 	 	(6,712	)	 	 	215	 	 	 	1,332	 	 	 	(360	)	
Amortization of prior service cost	 	 	(314	)	 	 	(314	)	 	 	(314	)	 	 	—	 	 	 	—	 	 	 	—	 	
Amortization of transition asset	 	 	—	 	 	 	—	 	 	 	(32	)	 	 	—	 	 	 	—	 	 	 	—	 	
Recognized actuarial loss	 	 	1,272	 	 	 	3,562	 	 	 	1,409	 	 	 	—	 	 	 	—	 	 	 	—	 	
Curtailment gain	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(3,731	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net periodic pension cost (benefit)	 	$	16,584	 	 	$	19,921	 	 	$	16,451	 	 	$	215	 	 	$	1,332	 	 	$	(2,616	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
60 

Table of Contents
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
      Weighted-average assumptions used to determine net periodic pension cost (benefit) for the years ended December 31:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	U.S. Plans		 	European Plan		
 	 	 		 	 		
 	 	2004		 	2003		 	2002		 	2004		 	2003		 	2002		
 	 	 		 	 		 	 		 	 		 	 		 	 		
Discount rate	 	 	6.25	%	 	 	6.75	%	 	 	7.25	%	 	 	—	 	 	 	—	 	 	 	5.25	%	
Expected return on plan assets	 	 	8.50	%	 	 	8.50	%	 	 	8.50	%	 	 	—	 	 	 	—	 	 	 	5.25	%	
Rate of compensation increase	 	 	5.37	%	 	 	5.37	%	 	 	7.00	%	 	 	—	 	 	 	—	 	 	 	4.25	%	
      The expected return on plan assets is primarily based on long-term historical returns in equity and fixed income markets. Based on estimated returns of 10 percent on equity investments and 6 percent on fixed income investments and the portfolio targeted asset allocation range, the weighted average expected return of the qualified pension plan assets is 8.5 percent.
      The Company’s qualified pension plan’s weighted-average asset allocations at December 31, 2004 and 2003 by asset category are as follows:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	Plan Assets		
 	 	 	 	at		
 	 	Target		 	December 31,		
 	 	Asset		 	 		
Asset Class	 	Allocation		 	2004		 	2003		
 	 	 		 	 		 	 		
U.S. Equity Securities	 	 	 	 	 	 	 	 	 	 	 	 	
 	Large/medium cap	 	 	35-45	%	 	 	39	%	 	 	39	%	
 	Small cap	 	 	10-20	 	 	 	15	 	 	 	17	 	
Non-U.S. Equity	 	 	10-20	 	 	 	15	 	 	 	17	 	
Fixed income	 	 	25-40	 	 	 	30	 	 	 	27	 	
Other	 	 	—	 	 	 	1	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	
 	 	Total	 	 	 	 	 	 	100	%	 	 	100	%	
 	 	 	 	 	 	 	 	 	 	
      Plan assets are managed with a long-term perspective to ensure that there is an adequate level of assets to support benefit payments to participants over the life of the qualified plan. The Company periodically conducts asset-liability studies to establish the preferred target asset allocation. Plan assets are managed within the asset allocation ranges above, toward targets of 40% large cap U.S. equity, 15% small cap U.S. equity, 15% non-U.S. equity and 30% fixed income, with periodic rebalancing to maintain plan assets within the target asset allocation ranges. Plan assets are managed by external investment managers. Investment manager performance is measured against benchmarks for each asset class and peer group on quarterly, one-, three- and five-year periods. An independent consultant assists management with investment manager selections and performance evaluations. Approximately 8% of plan assets at December 31, 2003 which are classified as fixed income are invested in cash equivalents supporting obligations to purchase fixed income securities at future dates. The other category includes cash that is available to pay expected benefit payments and expenses.
      At December 31, 2004 and 2003, the funded status of the qualified plan exceeded minimum funding requirements and the Company was not required to make contributions. In December 2004, the Company elected to make a voluntary $15,000 contribution to its qualified pension plan. The Company expects to make additional voluntary contributions totaling $25,000 before September 15, 2005.
61 

Table of Contents
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
      The following table summarizes expected benefit payments through 2014 including those payments expected to be paid from the company’s general assets. Since the majority of the benefit payments are made in the form of lump-sum distributions, actual benefit payments may differ from expected benefits payments.
 	 	 	 	 	
2005	 	$	19,506	 	
2006	 	 	18,091	 	
2007	 	 	17,336	 	
2008	 	 	22,958	 	
2009	 	 	20,336	 	
2010-2014	 	 	123,428	 	
      The majority of the Company’s U.S. employees are eligible to participate in a savings and profit sharing plan sponsored by the Company. Effective January 1, 2003, the Company amended its former savings plan to incorporate a new profit sharing component. The new plan retains most of the characteristics of the former plan. Similar to the former plan, the new plan allows employees to contribute a portion of their base compensation on a pre-tax and after-tax basis in accordance with specified guidelines. The Company matches a percentage of the employee contributions up to certain limits. Under the new plan, the Company may also contribute a discretionary profit sharing component linked to its performance each year. In addition, the Company has several defined contribution plans outside of the United States. The Company’s contribution expense related to all of its savings plans was $35,517, $30,626 and $24,285 for 2004, 2003 and 2002, respectively.
      The Company has a Value Appreciation Program (“VAP”), which is a frozen incentive compensation plan 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 MasterCard members. In 1999, the VAP was replaced by an Executive Incentive Plan (“EIP”). Although contributions to the VAP have been discontinued, assets remain and participants are entitled to the net appreciation on the portfolio of securities in accordance with plan provisions. The Company’s liability related to the VAP at December 31, 2004 and 2003 was $10,274 and $9,589 respectively, and the expense/(income) was $3,145, $8,497 and ($3,854) for the years ending December 31, 2004, 2003 and 2002, respectively.
      MasterCard EIP is a performance unit plan, in which participants receive grants of units with a target value contingent on the achievement of the Company’s long-term performance goals. Employees who are designated Senior Vice President or higher are eligible for participation in any performance period, provided they have met certain performance criteria. The Compensation Committee and/or the President and Chief Executive Officer may also designate other employees as eligible to participate in the plan.
      The final value of the units under the EIP is calculated based on the Company’s performance over a three-year period. The performance units vest over three- and five-year periods. Awards are paid in the form of cash over a five-year vesting period. Upon completion of the three-year performance period, participants receive a payment equal to 80 percent of the award earned. The remaining 20 percent of the award is paid upon completion of two additional years of service. The Company’s liability related to EIP at December 31, 2004 and December 31, 2003 was $76,787 and $79,179 respectively, and the expense was $42,627, $27,764 and $36,545 for the years ending December 31, 2004, 2003 and 2002, respectively.
      Both the VAP and the EIP are accounted for in accordance with FASB Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans” (“FIN 28”). In accordance with FIN 28, compensation is accrued as a charge to expense over the periods the employee performs the related services.
62 

Table of Contents

MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)

		
Note 10.	Postretirement Health and Life Insurance Benefits	
      The Company maintains a postretirement plan providing health coverage and life insurance benefits for substantially all of its U.S. employees and retirees.
      In December 2003, the United States enacted into law the Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). The Act establishes a prescription drug benefit under Medicare, known as “Medicare Part D”, and a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The Company believes that benefits provided to certain participants will be at least actuarially equivalent to Medicare Part D, and, accordingly, the Company will be entitled to a subsidy.
      In May 2004, the FASB issued FASB Staff Position No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSP 106-2”). FSP 106-2 requires companies to account for the effects of the federal subsidy on benefits attributable to past service as an actuarial experience gain and as a reduction of the service cost component of net postretirement health care costs for amounts attributable to current service, if the benefit provided is at least actuarially equivalent to Medicare Part D.
      The Company determined the effects of the Act were not a significant event requiring an interim remeasurement. Consequently, as permitted by FSP 106-2, net periodic postretirement benefit cost for 2004 does not reflect the effects of the Act. The accumulated postretirement benefit obligation (“APBO”) was remeasured at December 31, 2004 to reflect the effects of the Act, which resulted in a reduction in the APBO of $2,680.
63 

Table of Contents
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
      The following table presents the status of the Company’s postretirement benefit plan recognized in the Company’s Consolidated Balance Sheets at December 31, 2004 and 2003. The Company uses a December 31 measurement date for its postretirement plan.
 	 	 	 	 	 	 	 	 	
 	 	2004		 	2003		
 	 	 		 	 		
Change in benefit obligation	 	 	 	 	 	 	 	 	
Benefit obligation at beginning of year	 	$	44,909	 	 	$	33,386	 	
Service cost	 	 	3,095	 	 	 	2,533	 	
Interest cost	 	 	2,967	 	 	 	2,226	 	
Actuarial loss	 	 	7,052	 	 	 	7,239	 	
Plan participants’ contribution	 	 	17	 	 	 	—	 	
Benefits paid	 	 	(745	)	 	 	(475	)	
 	 	 	 	 	 	 	
Benefit obligation at end of year	 	$	57,295	 	 	$	44,909	 	
 	 	 	 	 	 	 	
Change in plan assets	 	 	 	 	 	 	 	 	
Employer contributions	 	 	728	 	 	$	475	 	
Plan participants’ contribution	 	 	17	 	 	 	—	 	
Benefits paid	 	 	(745	)	 	 	(475	)	
 	 	 	 	 	 	 	
Fair value of plan assets at end of year	 	$	—	 	 	$	—	 	
 	 	 	 	 	 	 	
Reconciliation of funded status	 	 	 	 	 	 	 	 	
Funded status	 	$	(57,295	)	 	$	(44,909	)	
Unrecognized transition obligation	 	 	4,637	 	 	 	5,217	 	
Unrecognized prior service cost	 	 	636	 	 	 	704	 	
Unrecognized actuarial loss	 	 	8,753	 	 	 	1,702	 	
 	 	 	 	 	 	 	
Accrued benefit cost	 	$	(43,269	)	 	$	(37,286	)	
 	 	 	 	 	 	 	
Weighted-average assumptions used to determine end of year benefit obligations	 	 	 	 	 	 	 	 	
Discount rate	 	 	5.75	%	 	 	6.25	%	
Rate of compensation increase	 	 	5.37	%	 	 	5.37	%	
      Net periodic postretirement benefit cost for the years ended December 31 was:
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2004		 	2003		 	2002		
 	 	 		 	 		 	 		
Service cost	 	$	3,095	 	 	$	2,533	 	 	$	2,208	 	
Interest cost	 	 	2,967	 	 	 	2,226	 	 	 	1,919	 	
Amortization of prior service cost	 	 	68	 	 	 	68	 	 	 	68	 	
Amortization of transition obligation	 	 	580	 	 	 	580	 	 	 	580	 	
Recognized actuarial gain	 	 	—	 	 	 	(152	)	 	 	(405	)	
 	 	 	 	 	 	 	 	 	 	
Net periodic postretirement benefit cost	 	$	6,710	 	 	$	5,255	 	 	$	4,370	 	
 	 	 	 	 	 	 	 	 	 	
64 

Table of Contents
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
      The weighted-average assumptions used to determine net periodic postretirement cost for years ended December 31 were:
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2004		 	2003		 	2002		
 	 	 		 	 		 	 		
Discount rate	 	 	6.25	%	 	 	6.75	%	 	 	7.25	%	
Rate of compensation increase	 	 	5.37	%	 	 	5.37	%	 	 	7.00	%	
      Assumed health care cost trend rates at December 31 were as follows:
 	 	 	 	 	 	 	 	 	
 	 	2004		 	2003		
 	 	 		 	 		
Health care cost trend rate assumed for next year	 	 	10.00	%	 	 	9.00	%	
Rate to which the cost trend rate is expected to decline (the ultimate trend rate)	 	 	5.50	%	 	 	5.50	%	
Year that the rate reaches the ultimate trend rate	 	 	2010	 	 	 	2008	 	
      Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage point change in assumed health care cost trend rates would have the following effects:
 	 	 	 	 	 	 	 	 	
 	 	1% increase		 	1% decrease		
 	 	 		 	 		
Effect on postretirement obligation	 	$	7,105	 	 	$	(5,878	)	
Effect on total service and interest cost components	 	 	822	 	 	 	(679	)	
      The Company does not expect to make any contributions, other than benefit payments, to its postretirement plan in 2005. The Company funds its postretirement benefits as payments are required. The following table summarizes expected net benefit payments from the Company’s general assets through 2014.
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	Expected		 	Net		
 	 	Benefit		 	Subsidy		 	Benefit		
Year	 	Payments		 	Receipts		 	Payments		
 	 	 		 	 		 	 		
2005	 	$	1,654	 	 	$	—	 	 	$	1,654	 	
2006	 	 	2,202	 	 	 	(48	)	 	 	2,154	 	
2007	 	 	2,824	 	 	 	(58	)	 	 	2,766	 	
2008	 	 	3,420	 	 	 	(75	)	 	 	3,345	 	
2009	 	 	4,131	 	 	 	(94	)	 	 	4,037	 	
2010-2014	 	 	32,379	 	 	 	(957	)	 	 	31,422	 	
Note 11.      Debt
      On June 18, 2004, the Company entered into a committed unsecured $1,950,000 revolving credit facility (the “Credit Facility”) with certain financial institutions, which expires on June 17, 2005. Borrowings under the Credit Facility are available to provide liquidity in the event of one or more settlement failures by MasterCard International members and, subject to a limit of $300,000, for general corporate purposes. The Credit Facility replaced MasterCard Incorporated’s prior $1,200,000 credit facility, which expired on June 18, 2004. Interest on borrowings under the Credit Facility is charged at the London Interbank Offered Rate plus 28 basis points. An additional 10 basis points would be applied if the aggregate borrowings under the Credit Facility were to exceed 33% of the commitments. MasterCard has agreed to pay a facility fee in connection with the Credit Facility, which varies based on MasterCard’s credit rating and is currently equal to 7 basis points on the total commitment. The Company also agreed to pay upfront fees of $906 and administrative fees of $255 for the Credit Facility, which are being amortized straight-line over one year. Facility and other fees associated with the Credit Facility or prior facilities totaled $2,234, $1,742 and $1,636 for each of the years ended December 31, 2004, 2003 and 2002, respectively. MasterCard was in compliance with the Credit Facility covenants as of December 31, 2004 and was in compliance with the covenants for the previous facility
65 

Table of Contents

MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
at December 31, 2003. There were no borrowings under the Credit Facility at December 31, 2004 or the previous facility at December 31, 2003. The majority of the Credit Facility lenders are members or affiliates of members of MasterCard International.
      On January 1, 2003, the Company adopted the provisions of FIN 46, as discussed in Note 12. As a result of the consolidation of the variable interest entity, $149,380 in long-term debt was recorded on the Company’s consolidated balance sheet.
      In June 1998, MasterCard International issued ten-year unsecured, subordinated notes (the “Notes”) paying a fixed interest rate of 6.67% 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 principal amount of the Notes at anytime prior to the repayment date, however an additional “make-whole” amount must also be calculated and paid to investors at that time. The “make whole” amount represents the discounted value of the remaining principal and interest. The interest on the Notes was $5,336 for each of the years ended December 31, 2004, 2003 and 2002. During 2004, MasterCard Incorporated amended certain covenant compliance obligations. The amendment aligns MasterCard’s financial reporting and net worth covenant obligations with similar obligations under its other debt instruments. MasterCard entered into the amendment to better reflect MasterCard’s corporate structure and to reduce the costs and administrative burden of complying with different debt covenants. The Company was in compliance with the covenants of the Notes as of December 31, 2004 and 2003. The principal amount of the Notes outstanding at December 31, 2004 and 2003 was $80,000. The fair value of the Notes was estimated at $86,006 and $88,440 at December 31, 2004 and 2003, respectively.
      During 2004, MasterCard Europe and European Payment System Services sprl, a subsidiary of MasterCard, reduced their multi-purpose uncommitted credit facility with a bank from 35,000 euros to a 1,000 euro overdraft facility for MasterCard Europe and European Payment System Services sprl and a 1,000 euro guarantee facility for MasterCard Europe. There were no material borrowings under these facilities at December 31, 2004; however at December 31, 2004 and 2003, the facility supported bank-issued guarantees for a total of 692 euros and 742 euros, respectively, which reduced the amount of funds available under the facility. For these bank guarantees, a guarantee fee is paid at a rate of 1.5% per annum.
      MasterCard Europe has one additional uncommitted credit agreement totaling 100,000 euros. There were no borrowings under this agreement at December 31, 2004 and 2003. MasterCard Europe canceled an uncommitted credit agreement totaling 30,000 euros during 2004.
Note 12.      Consolidation of Variable Interest Entity
      On August 31, 1999, MasterCard International entered into a ten-year synthetic lease agreement for a global technology and operations center located in O’Fallon, Missouri, called Winghaven. The lessor under the lease agreement is MasterCard International O’Fallon 1999 Trust (the “Trust”). The Trust, which is a variable interest entity was established for a single discrete purpose, is not an operating entity, has a limited life and has no employees. The Trust financed the operations center through a combination of a third party equity investment and the issuance of 7.36 percent Series A Senior Secured Notes (the “Secured Notes”) in the amount of $149,380 due September 1, 2009.
      Annual rent of $11,390 is payable by MasterCard International and is equal to interest payments on the Secured Notes and a return to equity-holders. The future minimum lease payments are $53,155 and are included in the future commitment schedule in Note 13. In conjunction with the lease agreement, MasterCard International executed a guarantee of 85.15 percent of the Secured Notes outstanding totaling $127,197. Additionally, upon the occurrence of specific events of default, MasterCard International guarantees repayment of the total outstanding principal and interest on the Secured Notes and would take ownership of
66 

Table of Contents

MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
the facility. During 2004, MasterCard Incorporated became party to the guarantee and assumed certain covenant compliance obligations, including financial reporting and maintenance of consolidated net worth. The amendment to the guarantee aligns the Company’s financial reporting and net worth covenant obligations under the guarantee with similar obligations under its other debt instruments. The Company entered into the amendment to the guarantee to better reflect the Company’s corporate structure and to reduce the costs and administrative burden of complying with different debt covenants.
      The lease agreement permits MasterCard International to purchase the facility upon 180 days notice at a purchase price equal to the aggregate outstanding principal amount of the 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 after August 31, 2006.
      On January 1, 2003, the Company adopted the provisions of FIN 46 and consolidated the Trust on the Company’s consolidated balance sheets, which resulted in recording $154,000 in municipal bonds held by the Trust, $149,380 in long-term debt and $4,620 of minority interest relating to the equity in the Trust held by a third party. The redemption value of the minority interest approximates its carrying value and will be redeemed by the minority interest holders upon the maturity of the Secured Notes. For the years ended December 31, 2004 and 2003, the consolidation had no impact on net income (loss). However, interest income and interest expense were each increased by $11,390 in each of the years ended December 31, 2004 and 2003.
Note 13.      Commitments and Contingent Liabilities
      The future minimum payments under non-cancelable leases for office buildings and equipment, sponsorships, licensing and other agreements at December 31, 2004 are as follows:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	Sponsorship,		
 	 	 	 	Capital		 	Operating		 	Licensing &		
 	 	Total		 	Leases		 	Leases		 	Other		
 	 	 		 	 		 	 		 	 		
2005	 	$	300,244	 	 	$	9,212	 	 	$	37,185	 	 	$	253,847	 	
2006	 	 	207,811	 	 	 	4,168	 	 	 	30,097	 	 	 	173,546	 	
2007	 	 	105,114	 	 	 	3,223	 	 	 	25,253	 	 	 	76,638	 	
2008	 	 	62,280	 	 	 	2,213	 	 	 	17,663	 	 	 	42,404	 	
2009	 	 	23,486	 	 	 	1,901	 	 	 	11,360	 	 	 	10,225	 	
Thereafter	 	 	57,063	 	 	 	42,143	 	 	 	1,777	 	 	 	13,143	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	755,998	 	 	$	62,860	 	 	$	123,335	 	 	$	569,803	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
      Included in the table above are capital leases with imputed interest expense of $16,906 and a net present value of minimum lease payments of $45,954. In addition, at December 31, 2004, $26,313 of the future minimum payments in the table above for leases, sponsorship, licensing and other agreements was accrued. Consolidated rental expense for the Company’s office space was approximately $32,269, $28,298 and $25,651 for the years ended December 31, 2004, 2003 and 2002, respectively. Consolidated lease expense for automobiles, computer equipment and office equipment was $10,955, $9,019 and $5,061 for the years ended December 31, 2004, 2003 and 2002, respectively.
      MasterCard licenses certain software to its customers. The license agreements contain guarantees under which the Company indemnifies licensees from any adverse judgments arising from claims of intellectual property infringement by third parties. The terms of the guarantees are equal to the terms of the license to which they relate. The amount of the guarantees are limited to damages, losses, costs, expenses or other
67 

Table of Contents

MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
liabilities incurred by the licensee as a result of any intellectual property rights claims. The Company does not generate significant revenues from software licensing. The fair value of the guarantees is estimated to be negligible.
Note 14.      U.S. Merchant Lawsuit and Other Legal Settlements
      During 2003, MasterCard settled the U.S. merchant lawsuit described in Note 16 herein and contract disputes with certain customers. MasterCard International signed a Memorandum of Understanding (“MOU”) with plaintiffs in the U.S. merchant lawsuit on April 30, 2003. On June 4, 2003, MasterCard International and plaintiffs signed a settlement agreement (the “Settlement Agreement”) embodying the terms originally set forth in the MOU. The Settlement Agreement required the Company to pay $125,000 in 2003 and pay $100,000 annually in December from 2004 through 2012. In addition, the Company adopted rules which permit U.S. merchants to elect not to accept MasterCard branded debit (or credit) cards, implemented programs to allow merchants to identify debit cards, provided signage to merchants and established a separate debit interchange rate for a required period. For a description of interchange, see the text under the heading “Global Interchange Proceedings” in Note 16 herein.
      In connection with the signing of the MOU, MasterCard recorded a pre-tax charge of $721,000 ($469,000 after-tax) in the three months ended March 31, 2003, consisting of (i) the monetary amount of the U.S. merchant lawsuit settlement (discounted at 8 percent over the payment term), (ii) certain additional costs in connection with, and in order to comply with, other requirements of the U.S. merchant lawsuit settlement, and (iii) costs to address the merchants who opted not to participate in the plaintiff class in the U.S. merchant lawsuit. As noted above and described further in Note 16 herein, several lawsuits were initiated by merchants who opted not to participate in the plaintiff class in the U.S. merchant lawsuit. The “opt-out” merchant lawsuits are not covered by the terms of the Settlement Agreement. The $721,000 pre-tax charge amount was an estimate, which was subsequently revised based on the approval of the Settlement Agreement by the court, and other factors. If necessary, future refinements will also be made.
      In addition, during 2003 and 2004 certain other legal matters were settled or resolved with MasterCard’s customers and employees. Accruals for these matters are included in other legal settlements.
      Total liabilities for the U.S. merchant lawsuit and other legal settlements changed as follows:
 	 	 	 	 	
Balance as of December 31, 2002	 	$	—	 	
U.S. merchant lawsuit and other legal settlements	 	 	763,460	 	
Interest accretion	 	 	42,686	 	
Payments	 	 	(133,680	)	
 	 	 	 	
Balance as of December 31, 2003	 	 	672,466	 	
Currency conversion court award of plaintiff attorneys’ fees	 	 	14,112	 	
Other legal settlements	 	 	7,541	 	
Interest accretion	 	 	51,223	 	
Payments	 	 	(149,948	)	
Other	 	 	2,200	 	
 	 	 	 	
Balance as of December 31, 2004	 	$	597,594	 	
 	 	 	 	
68 

Table of Contents
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
Note 15.      Income Tax
      The total income tax provision (benefit) for the years ended December 31 is comprised of the following components:
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2004		 	2003		 	2002		
 	 	 		 	 		 	 		
Current	 	 	 	 	 	 	 	 	 	 	 	 	
Federal	 	$	28,037	 	 	$	7,526	 	 	$	35,640	 	
State and local	 	 	5,954	 	 	 	893	 	 	 	3,371	 	
Foreign	 	 	14,203	 	 	 	6,601	 	 	 	(2,666	)	
 	 	 	 	 	 	 	 	 	 	
 	 	 	48,194	 	 	 	15,020	 	 	 	36,345	 	
Deferred	 	 	 	 	 	 	 	 	 	 	 	 	
Federal	 	 	42,386	 	 	 	(225,236	)	 	 	11,442	 	
State and local	 	 	(12,474	)	 	 	1,414	 	 	 	5,096	 	
Foreign	 	 	7,534	 	 	 	(11,976	)	 	 	(10,924	)	
 	 	 	 	 	 	 	 	 	 	
 	 	 	37,446	 	 	 	(235,798	)	 	 	5,614	 	
 	 	 	 	 	 	 	 	 	 	
Total income tax expense (benefit)	 	$	85,640	 	 	$	(220,778	)	 	$	41,959	 	
 	 	 	 	 	 	 	 	 	 	
      The domestic and foreign components of earnings (losses) before income taxes for the years ended December 31 are as follows:
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2004		 	2003		 	2002		
 	 	 		 	 		 	 		
United States	 	$	277,323	 	 	$	(576,420	)	 	$	151,840	 	
Foreign	 	 	46,377	 	 	 	(35,100	)	 	 	6,548	 	
 	 	 	 	 	 	 	 	 	 	
 	 	$	323,700	 	 	$	(611,520	)	 	$	158,388	 	
 	 	 	 	 	 	 	 	 	 	
      MasterCard has not provided for U.S. federal income and foreign withholding taxes on approximately $23,800 of undistributed earnings from non-U.S. subsidiaries as of December 31, 2004 because such earnings are intended to be reinvested indefinitely outside of the United States. If these earnings were distributed, foreign tax credits may become available under current law to reduce the resulting U.S. income tax liability.
69 

Table of Contents
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
      The provision (benefit) for income taxes differs from the amount of income tax (benefit) determined by applying the appropriate statutory U.S. federal income tax rate to pretax income (loss) for the years ended December 31, as a result of the following:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	For the years ended December 31,		
 	 	 		
 	 	2004		 	2003		 	2002		
 	 	 		 	 		 	 		
 	 	Dollar		 	 	 	Dollar		 	 	 	Dollar		 	 	
 	 	Amount		 	Percent		 	Amount		 	Percent		 	Amount		 	Percent		
 	 	 		 	 		 	 		 	 		 	 		 	 		
Income (loss) before income tax expense (benefit) and cumulative effect of accounting change	 	$	323,700	 	 	 	 	 	 	$	(611,520	)	 	 	 	 	 	$	158,388	 	 	 	 	 	
 	
Federal statutory tax (benefit)	 	$	113,295	 	 	 	35.0	%	 	$	(214,032	)	 	 	(35.0	)%	 	$	55,436	 	 	 	35.0	%	
State tax effect, net of Federal benefit	 	 	4,302	 	 	 	1.3	%	 	 	1,835	 	 	 	0.3	%	 	 	6,177	 	 	 	3.9	%	
Foreign tax effect, net of Federal benefit	 	 	3,703	 	 	 	1.2	%	 	 	(3,669	)	 	 	(0.6	)%	 	 	(2,718	)	 	 	(1.7	)%	
Non-deductible expenses and other differences	 	 	3,280	 	 	 	1.0	%	 	 	1,815	 	 	 	0.3	%	 	 	4,263	 	 	 	2.7	%	
Tax exempt income	 	 	(6,729	)	 	 	(2.1	)%	 	 	(6,727	)	 	 	(1.1	)%	 	 	(6,969	)	 	 	(4.4	)%	
Adjustment to deferred tax for change in tax rate:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	United States — state	 	 	(8,540	)	 	 	(2.6	)%	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
 	Foreign	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(10,967	)	 	 	(6.9	)%	
Credits, refund claims and settlement of audit matters:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	United States	 	 	(10,912	)	 	 	(3.4	)%	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
 	Foreign	 	 	(12,759	)	 	 	(3.9	)%	 	 	—	 	 	 	—	 	 	 	(3,263	)	 	 	(2.1	)%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income tax expense (benefit)	 	$	85,640	 	 	 	26.5	%	 	$	(220,778	)	 	 	(36.1	)%	 	$	41,959	 	 	 	26.5	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
      The effective income tax (benefit) rate for the year ended December 31, 2004 was 26.5% versus an effective income tax (benefit) rate of (36.1)% for the year ended December 31, 2003. The lower 2004 rate was primarily attributable to the settlement and reassessment of various tax audit matters, the filing and recognition of refund claims and a one-time increase in our deferred state tax assets as a result of additional income subject to higher state and local tax rates.
70 

Table of Contents
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
      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 comprised of the following:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Assets (Liabilities)		
 	 	 		
 	 	2004		 	2003		
 	 	 		 	 		
 	 	Current		 	Non-current		 	Current		 	Non-current		
 	 	 		 	 		 	 		 	 		
Accrued liabilities (including U.S. merchant lawsuit)	 	$	30,879	 	 	$	212,625	 	 	$	72,065	 	 	$	186,241	 	
Changes in tax accounting methods	 	 	(8,259	)	 	 	—	 	 	 	(139	)	 	 	—	 	
Deferred compensation and benefits	 	 	1,803	 	 	 	47,466	 	 	 	2,172	 	 	 	60,628	 	
Foreign operating losses	 	 	—	 	 	 	—	 	 	 	—	 	 	 	8,753	 	
Capital losses	 	 	—	 	 	 	3,396	 	 	 	—	 	 	 	6,994	 	
Gains/losses included in comprehensive income	 	 	(313	)	 	 	178	 	 	 	(3,610	)	 	 	593	 	
Intangible assets	 	 	—	 	 	 	(58,292	)	 	 	—	 	 	 	(55,718	)	
Prepaid state tax credits	 	 	107	 	 	 	4,913	 	 	 	126	 	 	 	5,759	 	
Property, plant and equipment	 	 	—	 	 	 	(50,592	)	 	 	—	 	 	 	(53,398	)	
Other items	 	 	1,992	 	 	 	6,443	 	 	 	(908	)	 	 	3,356	 	
Valuation allowance	 	 	—	 	 	 	(4,341	)	 	 	—	 	 	 	(3,425	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	26,209	 	 	$	161,796	 	 	$	69,706	 	 	$	159,783	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
      The valuation allowance relates to the Company’s ability to recognize tax benefits associated with carry-forward capital losses and state net operating losses. If not utilized, approximately $8,600 of the Company’s carry-forward capital losses will expire in 2006 and $700 will expire in 2007.
Note 16.      Legal Proceedings
      MasterCard is a party to legal proceedings with respect to a variety of matters in the ordinary course of business. Except as described below, MasterCard does not believe that any legal proceedings to which it is a party would have a material impact on its results of operations, financial position, or cash flows.
Department of Justice Antitrust Litigation and Related Private Litigation
      In October 1998, the United States Department of Justice (“DOJ”) filed suit against MasterCard International, Visa U.S.A., Inc. and Visa International Corp. in the U.S. District Court for the Southern District of New York alleging that both MasterCard’s and Visa’s governance structure and policies violated U.S. federal antitrust laws. First, the DOJ claimed that “dual governance” — the situation where a financial institution has a representative on the board of directors of MasterCard or Visa while a portion of its card portfolio is issued under the brand of the other association — was anti-competitive and acted to limit innovation within the payment card industry. At the same time, the DOJ conceded that “dual issuance” — a term describing the structure of the bank card industry in the United States in which a single financial institution can issue both MasterCard and Visa-branded cards — was pro-competitive. Second, the DOJ challenged MasterCard’s Competitive Programs Policy (“CPP”) and a Visa bylaw provision that prohibit financial institutions participating in the respective associations from issuing competing proprietary payment cards (such as American Express or Discover). The DOJ alleged that MasterCard’s CPP and Visa’s bylaw provision acted to restrain competition.
71 

Table of Contents

MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
      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.
      On November 26, 2001, the judge issued a final judgment that ordered MasterCard to repeal the CPP insofar as it applies to issuers and enjoined MasterCard from enacting or enforcing any bylaw, rule, policy or practice that prohibits its issuers from issuing general purpose credit 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 final judgment provided that there will be a period (commencing on the effective date of the judgment and ending on the later of two years from that date or two years from the resolution of any final appeal) during which MasterCard will be required to permit any issuer with which it entered into such an agreement prior to the effective date of the final judgment to terminate that agreement without penalty, provided that the reason for the termination is to permit the issuer to enter into an agreement with American Express or Discover. MasterCard would be free to apply to the District Court to recover funds paid but not yet earned under any terminated agreement. The final judgment imposed 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.
      MasterCard appealed the judge’s ruling with respect to the CPP. On September 17, 2003 a three-judge panel of the Second Circuit issued its decision upholding the District Court’s decision. On October 4, 2004, the Supreme Court denied MasterCard’s petition for certiorari, thereby exhausting all avenues for further appeal in this case. Thereafter, the parties agreed that October 15, 2004 would serve as the effective date of the final judgment.
      In addition, on September 18, 2003, MasterCard filed a motion before the District Court judge in this case seeking to enjoin Visa, pending completion of the appellate process, from enforcing a newly-enacted bylaw requiring Visa’s 100 largest issuers of debit cards in the United States to pay a so-called “settlement service” fee if they reduce their Visa debit volume by more than 10%. This bylaw was later modified to clarify that the settlement service fee would only be imposed if an issuer shifted its portfolio of debit cards to MasterCard. Visa implemented this bylaw provision following the settlement of the U.S. merchant lawsuit described under the heading “U.S. Merchant Opt Out and Consumer Litigations” below. MasterCard believes that this bylaw is punitive and inconsistent with the final judgment in the DOJ litigation. On December 8, 2003, the District Court judge ruled that the District Court lacked jurisdiction to issue an injunction, but held that the court would have the authority to rescind contracts entered into by issuers with Visa during the time that the settlement service fee was in effect if the court’s final judgment was upheld on appeal and the court finds that the settlement service fee violates the final judgment. As a result of the Supreme Court’s denial of
72 

Table of Contents

MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
certiorari, the District Court now has jurisdiction over issues related to the final judgment in the DOJ litigation. On January 10, 2005, MasterCard moved before the District Court to enforce the terms of the final judgment and sought an order enjoining Visa from enforcing or maintaining its settlement service fee bylaw. In addition, MasterCard requested that the Court permit Visa’s largest 100 debit issuers to rescind any debit issuance agreements they entered into with Visa while the settlement service fee was in effect. The motion is scheduled to be fully briefed on May 6, 2005. At this time it is not possible to determine the ultimate resolution of this matter.
      On October 4, 2004, Discover Financial Services, Inc. filed a complaint against MasterCard, Visa U.S.A., Inc. and Visa International Incorporated. The complaint was filed in the U.S. District Court for the Southern District of New York and was designated as a related case to the DOJ litigation, and preliminarily assigned to the same judge. The complaint alleges that the implementation and enforcement of MasterCard’s CPP and Visa’s bylaw provision as well as MasterCard’s “Honor All Cards” rule (and a similar Visa rule), which require merchants who accept MasterCard cards to accept for payment every validly presented MasterCard card, violated Sections 1 and 2 of the Sherman Act as well as California’s Unfair Competition Act. The complaint also challenged MasterCard’s “no surcharge rule” (and a similar Visa rule) under the same statutes. On December 10, 2004, MasterCard moved to dismiss the complaint in its entirety for failure to state a claim. In lieu of filing its opposition papers to MasterCard’s motion, Discover filed an amended complaint on January 7, 2005. In the amended complaint, Discover dropped some of its claims, including its challenge against the no surcharge rule and it claims under California’s Unfair Competition Act, but continues to allege that the implementation and enforcement of the Company’s CPP, Visa’s bylaw provision and the Honor All Cards rules are in violation of Sections 1 and 2 of the Sherman Act. Discover requests that the District Court apply collateral estoppel with respect to its final judgment in the DOJ litigation and enter an order that CPP and Visa’s bylaw provision have injured competition and caused injury to Discover. Discover seeks treble damages in an amount to be proved at trial along with attorneys’ fees and costs. On February 7, 2005, MasterCard moved to dismiss Discover’s amended complaint in its entirety for failure to state a claim. Oral argument is scheduled for April 1, 2005. At this time it is not possible to determine the ultimate resolution of this matter. No provision for losses has been provided in connection with the Discover litigation.
      On November 15, 2004, American Express filed a complaint against MasterCard, Visa and eight member banks, including J.P. Morgan Chase & Co., Bank of America Corp., Capital One Financial Corp., U.S. Bancorp, Household International Inc., Wells Fargo & Co., Providian Financial Corp. and USAA Federal Savings Bank. The complaint, which was filed in the U.S. District Court for the Southern District of New York, was designated as a related case to the DOJ litigation and was assigned to the same judge. The complaint alleges that the implementation and enforcement of MasterCard’s CPP and Visa’s bylaw provision violated Sections 1 and 2 of the Sherman Act. American Express seeks treble damages in an amount to be proved at trial, along with attorneys’ fees and costs. On January 14, 2005, MasterCard filed a motion to dismiss the complaint for failure to state a claim. American Express’ time in which to oppose MasterCard’s motion is currently running. Oral argument on the motion is scheduled for April 1, 2005. At this time it is not possible to determine the ultimate resolution of this matter. No provision for losses has been provided in connection with the American Express litigation.
Currency Conversion Litigations
      MasterCard International, together with Visa U.S.A., Inc. and Visa International Corp., are defendants in a state court lawsuit in California. The lawsuit alleges that MasterCard and Visa wrongfully imposed an asserted one percent currency conversion “fee” on every credit card transaction by U.S. MasterCard and Visa cardholders involving the purchase of goods or services in a foreign country, and that such alleged “fee” is unlawful. This action, titled 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. Trial of the Schwartz matter
73 

Table of Contents

MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
commenced on May 20, 2002 and concluded on November 27, 2002. The Schwartz action claims 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 foreign countries and is not properly disclosed to cardholders. MasterCard denies these allegations .
      On April 8, 2003, the trial court judge issued a final decision in the Schwartz matter. In his decision, the trial judge found that MasterCard’s currency conversion process does not violate the Truth in Lending Act or regulations, nor is it unconscionably priced under California law. However, the judge found that the practice is deceptive under California law, and ordered that MasterCard mandate that members disclose the currency conversion process to cardholders in cardholder agreements, applications, solicitations and monthly billing statements. As to MasterCard, the judge also ordered restitution to California cardholders. The judge issued a decision on restitution on September 19, 2003, which requires a traditional notice and claims process in which consumers have approximately six months to submit their claims. The court issued its final judgment on October 31, 2003. On December 29, 2003, MasterCard appealed the judgment. The final judgment and restitution process have been stayed pending MasterCard’s appeal. On August 6, 2004 the court awarded plaintiff’s attorneys’ fees in the amount of $28,224 to be paid equally by MasterCard and Visa. Accordingly, during the three months ended September 30, 2004, MasterCard accrued amounts totaling $14,112 which are included in U.S. Merchant Lawsuit and Other Legal Settlements in the Consolidated Statements of Operations (see Note 14). MasterCard subsequently filed a notice of appeal on the attorneys’ fee award on October 1, 2004. With respect to restitution, MasterCard believes that it is likely to prevail on appeal. At this time it is not possible to determine the ultimate resolution of this matter. Other than as set forth above, no provision for losses has been provided in connection with this matter.
      In addition, MasterCard has been served with complaints in state courts in New York, Arizona, Texas, Florida, Arkansas, Illinois, Tennessee, Michigan, Pennsylvania, Ohio, Minnesota and Missouri seeking to, in effect, extend the judge’s decision in the Schwartz matter to MasterCard cardholders outside of California. Some of these cases have been transferred to the U.S. District Court for the Southern District of New York and combined with the federal complaints in MDL No. 1409 discussed below. In other state court cases, MasterCard has moved to dismiss the claims. On July 28, 2004, a New York state action was dismissed without prejudice. On February 1, 2005 a Michigan action was dismissed with prejudice. MasterCard has also been served with complaints in state courts in California and Texas alleging it wrongfully imposed an asserted one percent currency conversion “fee” in every debit card transaction by U.S. MasterCard cardholders involving the purchase of goods or services in a foreign country and that such alleged “fee” is unlawful. Visa USA, Inc. and Visa International Corp. have been named as co-defendants in the California cases. One such Texas case was dismissed voluntarily by plaintiffs, however a new complaint is expected to be filed. At this time, it is not possible to determine the ultimate resolution of these matters and no provision for losses has been provided in connection with them.
      MasterCard International, 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., Bank of America, N.A. (USA), MBNA, and Diners Club are also 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”. Pursuant to an order of the Judicial Panel on Multidistrict Litigation, the federal complaints have been consolidated in MDL No. 1409 before Judge William H. Pauley III in the U.S. District Court for the Southern District of New York. In January 2002, the federal plaintiffs filed a Consolidated Amended Complaint (“MDL Complaint”) adding MBNA Corporation and MBNA America Bank, N.A. as defendants. This pleading asserts two theories of antitrust conspiracy under Section 1 of the Sherman Act: (i) an alleged “inter-association” conspiracy among MasterCard (together with its members), Visa (together with its members) and Diners Club to fix currency conversion “fees” allegedly charged to cardholders of “no less than 1% of the transaction amount and frequently more;” and (ii) two alleged “intra-association”
74 

Table of Contents

MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
conspiracies, whereby each of Visa and MasterCard is claimed separately to have conspired with its members to fix currency conversion “fees” allegedly charged to cardholders of “no less than 1% of the transaction amount” and “to facilitate and encourage institution — and collection — of second tier currency conversion surcharges.” The MDL Complaint also asserts that the alleged currency conversion “fees” have not been disclosed as required by the Truth in Lending Act and Regulation Z.
      Defendants have moved to dismiss the MDL Complaint. On July 3, 2003, Judge Pauley issued a decision granting MasterCard’s motion to dismiss in part. Judge Pauley dismissed the Truth in Lending claims in their entirety as against MasterCard, Visa and several of the member bank defendants. Judge Pauley did not dismiss the antitrust claims. Fact discovery in this matter has closed but expert discovery is ongoing. On November 12, 2003 plaintiffs filed a motion for class certification, which was granted on October 15, 2004. A trial date has been set for October 10, 2005. At this time, it is not possible to determine the ultimate resolution of this matter and no provision for losses has been provided in connection with it.
Merchant Chargeback-Related Litigations
      On May 12, 2003, a complaint alleging violations of federal and state antitrust laws, breach of contract, fraud and other theories was filed in the U.S. District Court for the Central District of California (Los Angeles) against MasterCard by a merchant aggregator whose customers include businesses selling adult entertainment content over the Internet. The complaint’s allegations focus on MasterCard’s past and potential future assessments on the plaintiff’s merchant bank (acquirer) for exceeding excessive chargeback standards in connection with the plaintiff’s transaction activity as well as the effect of MasterCard’s chargeback rules and other practices on “card-not-present” merchants. Chargebacks refer to a situation where a transaction is returned, or charged back, to an acquirer by an issuer at the request of cardholders or for other reasons. Prior to MasterCard filing any motion or responsive pleading, the plaintiff filed a voluntary notice of dismissal without prejudice on December 5, 2003. On the same date, the plaintiff filed a complaint in the U.S. District Court for the Eastern District of New York making similar allegations to those made in its initial California complaint. MasterCard moved to dismiss all of the claims in the complaint for failure to state a cause of action. The Court has yet to schedule oral argument on the motion.
      In addition, on June 6, 2003, an action titled California Law Institute v. Visa U.S.A., et al. was initiated against MasterCard and Visa U.S.A., Inc. in the Superior Court of California, purportedly on behalf of the general public. Plaintiffs seek disgorgement, restitution and injunctive relief for unlawful and unfair business practices in violation of California Unfair Trade Practices Act Section 17200, et. seq. Plaintiffs purportedly allege that MasterCard’s (and Visa’s) chargeback fees are unfair and punitive in nature. Plaintiffs seek injunctive relief preventing MasterCard from continuing to engage in its chargeback practices and requiring MasterCard to provide restitution and/or disgorgement for monies improperly obtained by virtue of them. On November 19, 2004, MasterCard moved for judgment on the grounds that recent amendments to sections 17203 and 17204 of the California Business and Professions Code by the California State Ballot Initiative Proposition 64 mandate that the California Law Institute, as an unaffected plaintiff, does not have standing to pursue this action. By order dated December 29, 2004, the Court denied the motion but certified the question presented as appropriate for appellate resolution. On February 3, 2005, the Appellate Division denied MasterCard’s petition for appellate review. On February 11, 2005, MasterCard petitioned the California Supreme Court for a review of the Appellate Division’s denial of MasterCard’s petition for appellate review. The California Supreme Court has not yet ruled on MasterCard’s petition. Initial, but limited, discovery is now proceeding in this matter.
      On September 20, 2004, MasterCard was served with a complaint titled PSW Inc. v. Visa U.S.A, Inc, MasterCard International Incorporated, et. al., No. 04-347, in the District Court of Rhode Island. The plaintiff, as alleged in the complaint, provided credit card billing services primarily for adult content web sites.
75 

Table of Contents

MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
The plaintiff alleges defendants’ excessive chargeback standards, exclusionary rules, merchant registration programs, cross-border acquiring rules and interchange pricing to internet merchants violate federal and state antitrust laws as well as state contract and tort law. The plaintiff seeks $60,000 in compensatory damages as well as $180,000 in punitive damages. On November 24, 2004, MasterCard moved to dismiss the complaint. Plaintiff’s opposition brief was filed on January 28, 2005 and MasterCard’s reply was filed on February 9, 2005.
      At this time it is not possible to determine the outcome of the merchant chargeback-related litigations. No provision for losses has been provided in connection with these litigations.
U.S. Merchant Opt Out and Consumer Litigations
      Commencing in October 1996, several class action suits were brought by a number of U.S. merchants 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 challenged MasterCard’s “Honor All Cards” rule and a similar Visa rule. Plaintiffs claimed that MasterCard and Visa unlawfully tied acceptance of debit cards to acceptance of credit cards. The plaintiffs also claimed that MasterCard and Visa conspired to monopolize what they characterized as the point-of-sale debit card market, thereby suppressing the growth of regional networks such as ATM payment systems. On June 4, 2003, MasterCard International signed the Settlement Agreement to settle the claims brought by the plaintiffs in this matter, which the Court approved on December 19, 2003. A number of class members have appealed the District Court’s approval of the settlement. These appeals are largely focused on the court’s attorneys’ fees award as well on the court’s ruling on the scope of the release set forth in the Settlement Agreement. On January 4, 2005, the Second Circuit Court of Appeals issued an order affirming the District Court’s approval of the U.S. merchant settlement agreement. Plaintiffs’ time in which to seek certiorari of the Second Circuit’s decision with the U.S. Supreme Court is currently running. For a further description of the U.S. merchant lawsuit settlement and its impact on MasterCard’s financial results, see Note 14.
      Several lawsuits were commenced by merchants who have opted not to participate in the plaintiff class in the U.S. merchant lawsuit, including Best Buy Stores, CVS, Giant Eagle, Home Depot, Toys “R” Us and Darden Restaurants (collectively, the “Opt Out Plaintiffs”). The majority of these cases were filed in the U.S. District Court for the Eastern District of New York. MasterCard has entered into separate settlement agreements with each of the Opt Out Plaintiffs resolving their claims against MasterCard. The District Court has entered orders dismissing with prejudice each of the Opt Out Plaintiff’s complaints against MasterCard. For a description of the impact of the settlements with the Opt Out Plaintiffs on MasterCard’s financial results, see Note 14.
      In addition, individual or multiple complaints have been brought in 19 different states and the District of Columbia under state unfair competition statutes against MasterCard International (and Visa) on behalf of putative classes of consumers. The claims in these actions mirror the allegations made in the U.S. merchant lawsuit and assert that merchants, faced with excessive merchant discount fees, have passed these overcharges to consumers in the form of higher prices on goods and services sold. While these actions are in their early stages, MasterCard has filed motions to dismiss the complaints in a number of state courts for failure to state a cause of action. Courts in Arizona, Iowa, New York, Michigan, Minnesota, Nebraska, Maine, North Dakota, Kansas, North Carolina, South Dakota, Vermont and Wisconsin have granted MasterCard’s motions and dismissed the complaints with prejudice. The plaintiffs in the New York, Maine, Michigan, Kansas, Iowa, North Carolina, North Dakota and South Dakota cases have filed a notice of appeal, and the time in which the plaintiffs in the other states may appeal is currently running. The plaintiffs in Kansas, Maine, Vermont, North Carolina, Michigan, North Dakota and South Dakota have filed stipulations of dismissal withdrawing their appeals. The plaintiffs in Maine have moved to withdraw their appeal. Oral argument on the New York
76 

Table of Contents

MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
appeal is currently scheduled for March 1, 2005. The plaintiffs in Minnesota have filed a revised complaint on behalf of a purported class of Minnesota consumers who made purchases with debit cards rather than on behalf of all consumers. On January 6, 2005, MasterCard moved to dismiss the Minnesota complaint for failure to state a claim. Plaintiffs’ time in which to oppose the motion in the Minnesota complaint is currently running. In addition, the courts in Tennessee and California have granted MasterCard’s motion to dismiss the respective state unfair competition claims but have denied MasterCard’s motions with respect to unjust enrichment claims in Tennessee and Section 17200 claims for unlawful, unfair, and/or fraudulent business practices in California. On February 2, 2005 the court granted MasterCard permission to appeal the trial court’s decision in Tennessee on the unjust enrichment claims. On that same date, the court granted plaintiff’s motion to appeal the court’s dismissal of the state unfair competition claims. The time in which to file an application to the appellate court for permission to appeal is currently running. MasterCard is awaiting decisions on its motions to dismiss in the other state courts. At this time, it is not possible to determine the outcome of these consumer cases and no provision for losses has been provided in connection with them. The consumer class actions are not covered by the terms of the Settlement Agreement in the U.S. merchant lawsuit.
Global Interchange Proceedings
      Interchange fees represent a sharing of payment system costs among the financial institutions participating in a four-party payment card system such as MasterCard’s. Typically, interchange fees are paid by the merchant bank (the “acquirer”) to the cardholder bank (the “issuer”) in connection with transactions initiated with the payment system’s cards. These fees reimburse the issuer for a portion of the costs incurred by it in providing services which are of benefit to all participants in the system, including acquirers and merchants. MasterCard establishes a multilateral interchange fee (“MIF”) in certain circumstances as a default fee that applies when there is no other interchange fee arrangement between the issuer and the acquirer. MasterCard establishes a variety of MIF rates depending on such considerations as the location and the type of transaction, and collects the MIF on behalf of the institutions entitled to receive it. As described more fully below, MIFs are subject to regulatory or legal review and/or challenges in a number of jurisdictions. At this time, it is not possible to determine the ultimate resolution of any of the interchange proceedings described below. Accordingly, no provision for losses has been provided in connection with them.
      European Union. In September 2000, the European Commission issued a “Statement of Objections” challenging Visa International’s cross-border MIF under European Community competition rules. On July 24, 2002, the European Commission announced its decision to exempt the Visa MIF from these rules based on certain changes proposed by Visa to its MIF. Among other things, in connection with the exemption order, Visa agreed to adopt a cost-based methodology for calculating its MIF similar to the methodology employed by MasterCard, which considers the costs of certain specified services provided by issuers, and to reduce its MIF rates for debit and credit transactions to amounts at or below certain specified levels.
      On September 25, 2003, the European Commission issued a Statement of Objections challenging MasterCard Europe’s cross-border MIF. MasterCard Europe filed its response to this Statement of Objections on January 5, 2004. MasterCard Europe is engaged in discussions with the European Commission in order to determine under what conditions, if any, the European Commission would issue a favorable ruling regarding MasterCard Europe’s MIF. If MasterCard is unsuccessful in obtaining a favorable ruling, the European Commission could issue a prohibition decision ordering MasterCard to change the manner in which it calculates its cross-border MIF. MasterCard could appeal such a decision to the European Court of Justice. Because the cross-border MIF constitutes an essential element of MasterCard Europe’s operations, changes to it could significantly impact MasterCard International’s European members and the MasterCard business in Europe. In addition, a negative decision by the European Commission could lead to the filing of private actions against MasterCard by merchants seeking substantial damages.
77 

Table of Contents

MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
      United Kingdom Office of Fair Trading. On September 25, 2001, the Office of Fair Trading of the United Kingdom (“OFT”) issued a Rule 14 Notice under the U.K. Competition Act 1998 challenging the MasterCard MIF, the fee paid by acquirers to issuers in connection with point of sale transactions, and multilateral service fee (“MSF”), the fee paid by issuers to acquirers when a customer uses a MasterCard-branded card in the United Kingdom either at an ATM or over the counter to obtain a cash advance. Until recently, the MIF and MSF were established by MasterCard U.K. Members Forum Limited (formerly MEPUK) (“MMF”) for domestic credit card transactions in the United Kingdom. The notice contained preliminary conclusions to the effect that the MasterCard U.K. MIF and MSF may infringe U.K. competition law and do not qualify for an exemption in their present forms. In January 2002, MasterCard, MEPUK and several MasterCard U.K. members responded to the notice. On February 11, 2003, the OFT issued a supplemental Rule 14 Notice, which also contained preliminary conclusions challenging MasterCard’s U.K. MIF under the Competition Act. On May 2, 2003, MasterCard and MMF responded to the supplemental notice. On November 10, 2004, the OFT issued a third notice (now called a Statement of Objections) claiming that the MIF infringes U.K. competition law. In February 2005, MasterCard and MMF responded to the Statement of Objections. An oral hearing has been scheduled for March 2, 2005.
      On November 18, 2004, MasterCard’s board of directors adopted a resolution withdrawing the authority of the U.K. members to set domestic MIFs and MSFs and conferring such authority exclusively on MasterCard’s President and Chief Executive Officer. As a result, if MasterCard and MMF are unsuccessful in obtaining a favorable ruling in the current proceeding, the OFT would have to commence a new proceeding for the purpose of ordering MasterCard to change the manner in which it calculates its U.K. MIF. The OFT has informed MasterCard that, if it issues a prohibition decision in the current proceedings, it is likely to commence a new proceeding challenging MasterCard’s setting of MIFs. Because the MIF constitutes an essential element of MasterCard’s U.K. operations, negative decisions by the OFT in the current or any future proceedings could have a significant adverse impact on MasterCard’s U.K. members and on MasterCard’s competitive position and overall business in the U.K. In addition, a negative decision by the OFT could lead to the filing of private actions against MasterCard by merchants seeking substantial damages. In the event of a negative decision by the OFT in the current proceeding, MasterCard and MMF intend to appeal to the Competition Appeals Tribunal and to seek interim relief. Similarly, it is likely that MasterCard would appeal a negative decision by the OFT in any future proceeding to the Competition Appeals Tribunal and to seek interim relief.
      United States. In July 2002, a purported class action lawsuit was filed by a group of merchants in the U.S. District Court for the Northern District of California against MasterCard International, Visa U.S.A., Inc., Visa International Corp. and several member banks in California alleging, among other things, that MasterCard’s and Visa’s interchange fees contravene the Sherman Act. The suit seeks treble damages in an unspecified amount, attorney’s fees and injunctive relief, including the divestiture of bank ownership of MasterCard and Visa, and the elimination of MasterCard and Visa marketing activities. On March 4, 2004, the court dismissed the lawsuit with prejudice in reliance upon the approval of the Settlement Agreement in the U.S. merchant lawsuit by the U.S. District Court for the Eastern District of New York, which held that the settlement and release in that case extinguished the claims brought by the merchant group in the present case. The plaintiffs have appealed the U.S. District Court for the Eastern District of New York’s approval of the U.S. merchant lawsuit settlement and release to the Second Circuit Court of Appeals and have also appealed the U.S. District Court for the Northern District of California’s dismissal of the present lawsuit to the Ninth Circuit Court of Appeals. On January 4, 2005, the Second Circuit Court of Appeals issued an order affirming the District Court’s approval of the U.S. merchant lawsuit settlement agreement, including the District Court’s finding that the settlement and release extinguished such claims. Plaintiffs’ time in which to seek certiorari of the Second Circuit’s decision with the U.S. Supreme Court is currently running. The appeal to the Ninth Circuit is currently pending.
78 

Table of Contents

MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
      On October 8, 2004, a new purported class action lawsuit was filed by a group of merchants in the U.S. District Court for the Northern District of California against MasterCard International, Visa U.S.A., Inc., Visa International Corp. and several member banks in California alleging, among other things, that MasterCard’s and Visa’s interchange fees contravene the Sherman Act and the Clayton Act. The complaint contains similar allegations to those brought in the interchange case described in the preceding paragraph, and plaintiffs have designated it as a related case. The plaintiffs seek damages and an injunction against MasterCard (and Visa) setting interchange and engaging in “joint marketing activities,” which plaintiffs allege include the purported negotiation of merchant discount rates with certain merchants. On November 19, 2004, MasterCard filed an answer to the complaint.
      Other Jurisdictions. MasterCard is aware that regulatory authorities in certain other jurisdictions, including Poland, Spain, New Zealand, Portugal, Mexico, Colombia, South Africa and Switzerland are reviewing MasterCard’s and/or its members’ interchange fees and/or related practices and may seek to regulate the establishment of such fees and/or such practices.

		
Note 17.	Settlement and Travelers Cheque Risk Management	
      Settlement risk is the legal exposure due to the difference in timing between the payment transaction date and subsequent settlement. Settlement risk is estimated using the average daily card charges during the quarter multiplied by the estimated number of days to settle. The Company has global risk management policies and procedures, which include risk standards to provide a framework for managing the Company’s settlement exposure. MasterCard International’s rules generally guarantee the payment of MasterCard transactions and certain Cirrus and Maestro transactions between principal members. The term and amount of the guarantee are unlimited. Member-reported transaction data and the transaction clearing data underlying the settlement risk exposure calculation may be revised in subsequent reporting periods.
      In the event that MasterCard International effects a payment on behalf of a failed member, MasterCard International may seek an assignment of the underlying receivables. Subject to approval by the Board of Directors, members may be assessed for the amount of any settlement loss.
      MasterCard requires certain members that are not in compliance with the Company’s risk standards in effect at the time of review to post collateral, typically in the form of letters of credit and bank guarantees. This requirement is based on management review of the individual risk circumstances for each member that is out of compliance. In addition to these amounts, MasterCard holds collateral to cover variability and future growth in member programs; the possibility that it may choose to pay merchants to protect brand integrity in the event of merchant bank (acquirer) failure, although it is not contractually obligated to do so; and Cirrus and Maestro related risk. MasterCard monitors its credit risk portfolio on a regular basis to estimate potential concentration risks and the adequacy of collateral on hand. Additionally, from time to time, the Company reviews its risk management methodology and standards. As such, the amounts of uncollateralized estimated settlement exposure relating to non-compliant members are revised as necessary.
      Estimated settlement exposure, and the portion of the Company’s uncollateralized settlement exposure for MasterCard-branded transactions that relates to members that are deemed not to be in compliance with, or
79 

Table of Contents
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
that are under review in connection with, the Company’s risk management standards, at December 31, 2004 and 2003 were as follows:
 	 	 	 	 	 	 	 	 	
 	 	2004		 	2003		
 	 	 		 	 		
MasterCard-branded transactions:	 	 	 	 	 	 	 	 	
Gross legal settlement exposure	 	$	14,055,973	 	 	$	11,880,152	 	
Collateral held for legal settlement exposure	 	 	(1,482,319	)	 	 	(1,344,621	)	
 	 	 	 	 	 	 	
Net uncollateralized settlement exposure	 	$	12,573,654	 	 	$	10,535,531	 	
 	 	 	 	 	 	 	
Uncollateralized settlement exposure attributable to non-compliant members	 	$	299,995	 	 	$	250,984	 	
 	 	 	 	 	 	 	
Cirrus and Maestro transactions:	 	 	 	 	 	 	 	 	
Gross legal settlement exposure	 	$	1,294,145	 	 	$	591,317	 	
 	 	 	 	 	 	 	
      Although MasterCard holds collateral at the member level, the Cirrus and Maestro estimated settlement exposures are calculated at the regional level. Therefore, these settlement exposures are reported on a gross basis, rather than net of collateral. For the quarter ended December 31, 2004, a significant portion of the increase in Cirrus and Maestro estimated settlement exposures ($492,745) was attributable to the conversion of non-branded transactions to Maestro transactions in the United Kingdom.
      MasterCard’s estimated settlement exposure under the MasterCard brand, net of collateral, had concentrations of 56% and 58% in North America and 23% and 22% in Europe at December 31, 2004 and 2003, respectively.
      A significant portion of uncollateralized settlement exposure attributable to non-compliant members is concentrated in three members ($163,786 and $157,955 for December 31, 2004 and 2003, respectively).
      MasterCard guarantees the payment of MasterCard-branded travelers cheques in the event of issuer default. The guarantee estimate is based on all outstanding MasterCard-branded travelers cheques, reduced by an actuarial determination of cheques that are not anticipated to be presented for payment. The term and amount of the guarantee are unlimited. MasterCard calculated its MasterCard-branded travelers cheques exposure under this guarantee as $1,172,533 and $1,205,921 at December 31, 2004 and 2003, respectively.
      A significant portion of the Company’s credit risk is concentrated in one MasterCard traveler’s cheque issuer. MasterCard has obtained an unlimited guarantee estimated at $969,593 and $996,927 at December 31, 2004 and 2003, respectively, from a financial institution that is a member, to cover all of the exposure of outstanding travelers cheques with respect to that issuer. In addition, MasterCard has obtained guarantees estimated at $28,592 and $32,101 at December 31, 2004 and 2003, respectively, from financial institutions that are members in order to cover the exposure of outstanding travelers cheques with respect to another issuer. These guarantee amounts have also been reduced by an actuarial determination of cheques that are not anticipated to be presented for payment.
      Based on the Company’s ability to assess its members for settlement and travelers cheque losses, the effectiveness of the Company’s global risk management policies and procedures, and the historically low level of losses that the Company has experienced, management believes the probability of future payments for settlement and travelers cheque losses in excess of existing reserves is negligible. However, if circumstances in the future change, the Company may need to reassess whether it would be necessary to record an obligation for the fair value of some or all of its settlement and travelers cheque guarantees.
80 

Table of Contents

MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)

		
Note 18.	Acquisition of Europay International S.A. (“EPI”) (the “Integration”)	
      MasterCard acquired, directly and indirectly, 100% of the shares of EPI not previously owned by MasterCard International pursuant to a Share Exchange and Integration Agreement, dated as of February 13, 2002, entered into by MasterCard, MasterCard International and EPI (the “Integration Agreement”). EPI, now MasterCard Europe, is the Company’s principal operating subsidiary in Europe. MasterCard Europe’s primary business is to license a full range of payment programs and services to financial institutions in the European region and to provide a set of information processing and transaction delivery services to these institutions. The Integration has allowed MasterCard International and MasterCard Europe to form an integrated, global payments company with a single management team and governance structure. The results of EPI’s operations have been included in the consolidated financial statements of the Company from June 28, 2002.
Purchase Price for EPI
      MasterCard Incorporated issued 23,760 shares to the shareholders of EPI and MasterCard Europay U.K. Limited (“MEPUK”) in the Integration, in return for directly and indirectly acquiring 100% of the shares of EPI not previously owned by MasterCard International. However, of the 23,760 shares issued, only 17,610 were considered to be issued unconditionally. The share exchange agreements, under which the shares were issued, are described in Note 19, “Stockholders’ Equity”, herein. As discussed more fully below, the purchase price for EPI was based on the estimated value of the unconditional shares only, and this estimated value was determined on the basis of an independent valuation. Considering this valuation and the 17,610 unconditional shares issued, the purchase price of EPI was $267,856, excluding estimated acquisition costs of $10,486 that were incurred by the Company.
      In calculating the purchase price of EPI, the Company considered only the unconditional shares issued to the former shareholders of EPI and MEPUK because the Integration Agreement provides that the number of shares allocated to these shareholders will potentially increase or decrease at the end of a three-year transition period as a result of the application of a global proxy formula for the third year of the transition period. Of the 23,760 shares attributable to the exchange of EPI and MEPUK shares, 6,150 shares are conditional shares subject to reallocation at the end of the transition period. EPI and MEPUK shareholders therefore received 17,610 unconditional shares at closing.
      Since former EPI and MEPUK shareholders would retain or receive additional shares of MasterCard Incorporated at the end of the transition period without remitting any additional consideration, any shares retained or received by them that are above their minimum allocation at that time would constitute a part of the purchase price. Any such additional shares would be valued at that time based upon the fair value of the stock of MasterCard Incorporated. Any such reallocation of shares to former EPI and MEPUK shareholders will increase the purchase price for EPI and, accordingly, the amount of goodwill and additional paid-in capital recorded.
Fair Value of EPI Assets Acquired and Liabilities Assumed
      The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at June 28, 2002, the date of the acquisition of EPI in the Integration, as determined based on an independent appraisal, and also reflects subsequent refinements to the estimated fair values as discussed below. Certain
81 

Table of Contents
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
balances for assets acquired and liabilities assumed have been reclassified to conform to MasterCard presentation for consistency:
 	 	 	 	 	 	
Current assets	 	$	193,865	 	
Property, plant, and equipment	 	 	46,376	 	
Goodwill	 	 	141,901	 	
Other intangible assets	 	 	182,241	 	
Other assets	 	 	6,652	 	
 	 	 	 	
 	Total assets acquired	 	 	571,035	 	
 	 	 	 	
Current liabilities	 	 	196,724	 	
Deferred income taxes	 	 	69,361	 	
Other liabilities	 	 	26,608	 	
 	 	 	 	
 	Total liabilities assumed	 	 	292,693	 	
 	 	 	 	
Net assets acquired	 	$	278,342	 	
 	 	 	 	
      Subsequent to the acquisition date of EPI, the purchase price allocation was refined and amounts were reallocated among the assets acquired and liabilities assumed. The table above has been adjusted to reflect these refinements, which include a $7,166 increase to the exit cost liability estimate, a $4,836 decrease to the deferred tax estimate, a $4,911 decrease to the value assigned to certain capitalized software technologies and a $7,240 increase to goodwill. Changes to the exit cost liability are discussed below and the changes to goodwill are provided in Note 6.
      Pursuant to the Integration Agreement, the bylaws of MasterCard International adopted on June 28, 2002 provide that the Company will assume the first $7,000 of losses or liabilities that relate to any breach of EPI’s representations or warranties in the Integration Agreement. Any such losses or liabilities in excess of $7,000 could, under MasterCard International’s bylaws, be levied against MasterCard International’s European members as an assessment. MasterCard anticipates that certain former EPI liabilities could trigger this bylaw provision. The $7,000 is included in total liabilities assumed above.
82 

Table of Contents
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
Exit Costs Relating to the Integration
      Included in the total liabilities assumed above are estimates of exit costs relating to the Integration. The exit cost activities are expected to be completed in 2005. The changes in the liability for exit costs are summarized as follows:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	Redundant		 	 	 	 	
 	 	 	 	Computer		 	 	 	 	
 	 	Europay		 	Systems/		 	 	 	 	
 	 	Brand/Logo		 	Technology		 	Workforce		 	 	
 	 	Elimination		 	Elimination		 	Reduction		 	Total		
 	 	 		 	 		 	 		 	 		
Balance as of December 31, 2001	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	
Initial exit costs upon Integration	 	 	11,225	 	 	 	7,794	 	 	 	2,515	 	 	 	21,534	 	
Utilization	 	 	—	 	 	 	(2,341	)	 	 	—	 	 	 	(2,341	)	
Change in estimate	 	 	—	 	 	 	2,583	 	 	 	(542	)	 	 	2,041	 	
Change due to currency translation	 	 	656	 	 	 	75	 	 	 	147	 	 	 	878	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance as of December 31, 2002	 	 	11,881	 	 	 	8,111	 	 	 	2,120	 	 	 	22,112	 	
Utilization	 	 	(3,433	)	 	 	(5,888	)	 	 	(1,278	)	 	 	(10,599	)	
Change in estimate	 	 	—	 	 	 	6,199	 	 	 	(69	)	 	 	6,130	 	
Change due to currency translation	 	 	2,004	 	 	 	1,388	 	 	 	269	 	 	 	3,661	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance as of December 31, 2003	 	 	10,452	 	 	 	9,810	 	 	 	1,042	 	 	 	21,304	 	
Utilization	 	 	(9,564	)	 	 	(7,093	)	 	 	(21	)	 	 	(16,678	)	
Change in estimate	 	 	(642	)	 	 	—	 	 	 	(363	)	 	 	(1,005	)	
Change due to currency translation	 	 	(246	)	 	 	(80	)	 	 	(60	)	 	 	(386	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance as of December 31, 2004	 	$	—	 	 	$	2,637	 	 	$	598	 	 	$	3,235	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
      The following table provides explanations for the Company’s changes in its preliminary estimate of exit costs related to the Integration:
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Years Ended December 31,		
 	 	 		
Description	 	2004		 	2003		 	2002		
 	 	 		 	 		 	 		
Identification of an additional redundant computer system and incremental costs of systems elimination	 	$	—	 	 	$	6,199	 	 	$	2,583	 	
Redeployment of certain employees	 	 	(363	)	 	 	(69	)	 	 	(542	)	
Actual costs less than initially accrued for brand/logo elimination	 	 	(642	)	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	
Total change in estimate	 	$	(1,005	)	 	$	6,130	 	 	$	2,041	 	
 	 	 	 	 	 	 	 	 	 	
      These changes in estimate resulted in a corresponding net increase (decrease) in goodwill, net of taxes. No further changes to the exit cost liability are anticipated.
Pro Forma Results of Operations
      The unaudited pro forma results of operations for the year ended December 31, 2002 as if EPI had been combined as of January 1, 2002, are as follows:
 	 	 	 	 	
Revenue	 	$	2,000,158	 	
Net income	 	$	126,630	 	
Net income per share (basic and diluted)	 	$	1.27	 	
83 

Table of Contents

MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
      These results have been prepared for comparative purposes only, and are not necessarily indicative of the results that would have occurred had the acquisition of EPI occurred on the date indicated.

		
Note 19.	Stockholders’ Equity	
      The authorized capital stock of MasterCard Incorporated consists of 275,000 shares of class A redeemable common stock, par value $.01 per share (of which 84,000 shares are issued and outstanding); 25,000 shares of class B convertible common stock, par value $.01 per share (of which 16,000 shares are issued and outstanding); and 75,000 shares of class C common stock, par value $.01 per share (of which no shares are issued or outstanding). 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 board of directors, in compliance with certain limitations, as set forth in the certificate of incorporation of MasterCard.
      MasterCard capital stock is privately held by certain of the Company’s customers. Transfer of shares of common stock and assignment of the right to receive shares is not permitted, except under specific circumstances, until July 1, 2005. After July 1, 2005, each stockholder must maintain an ownership percentage of common stock that is no less than 75% and no more than 125% of the most recent global proxy calculation, which is the formula set forth in the MasterCard Incorporated’s bylaws to determine the allocation of shares to stockholders based on their business contributions to the MasterCard Incorporated. Stockholders may be required to purchase or sell shares of MasterCard in order to satisfy these requirements. Only principal members of MasterCard International may hold shares of MasterCard.
      If a stockholder of MasterCard ceases to be a principal member of MasterCard International before July 1, 2005, the common stock may be redeemed at par value. After July 1, 2005, MasterCard Incorporated may, at its option, redeem the common stock of a stockholder that ceases to be a principal member of MasterCard International for the book value of the shares, based on MasterCard’s financial statements most recently filed with the Securities and Exchange Commission. If MasterCard Incorporated does not redeem the stockholder’s shares, a stockholder ceasing to be a member of MasterCard International after July 1, 2005 will be required to offer the unredeemed shares to the other stockholders of MasterCard in accordance with procedures to be established by the board of directors.
      The class A and B shares were issued on June 28, 2002, pursuant to an Agreement and Plan of Merger dated as of February 13, 2002, in which MasterCard International merged with a subsidiary of MasterCard Incorporated (the “Conversion”). In the Conversion, each principal member of MasterCard International received shares of class A redeemable common stock and class B convertible common stock of MasterCard, representing each member’s existing equity interest in the Company. Additionally, each principal member of MasterCard International received a class A membership interest in MasterCard International, representing that member’s continued rights as a licensee to use MasterCard’s brands, programs, products and services. MasterCard Incorporated owns the sole class B membership interest in MasterCard International, entitling MasterCard Incorporated to exercise all economic rights and substantially all voting rights in MasterCard International. MasterCard International is the Company’s principal operating subsidiary.
      In connection with the Conversion, MasterCard acquired EPI, which is described Note 18 herein. In connection with the Integration Agreement, each shareholder of EPI (other than MasterCard International and MEPUK) entered into a separate share exchange agreement pursuant to which it exchanged its EPI shares for shares of class A redeemable and class B convertible common stock of MasterCard. The shareholders of MEPUK entered into an agreement pursuant to which they exchanged their MEPUK shares for class A and class B stock of MasterCard. As a result of the Integration, EPI and MEPUK became wholly-owned subsidiaries of MasterCard. MEPUK’s sole asset is shares of EPI (now MasterCard Europe). In addition, under the terms of the Integration Agreement, class B convertible common stock will automatically be converted into class A redeemable common stock on or about July 1, 2005, except for certain shares of
84 

Table of Contents

MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
class B stock attributable to the ec Pictogram brand in Europe (“ec Picto shares”). In accordance with the Integration Agreement, the shares of class A stock will then be reallocated among the stockholders of MasterCard as of that date. The ec Picto shares will automatically be converted into class A stock and reallocated on or about July 1, 2007, in accordance with the terms of the Integration Agreement.

		
Note 20.	Foreign Exchange Risk Management	
      The Company enters into foreign exchange contracts to minimize risk associated with anticipated receipts and disbursements denominated in foreign currencies and the possible changes in value due to foreign exchange fluctuations of assets and liabilities denominated in foreign currencies. MasterCard’s forward contracts are classified by functional currency as summarized below:
U.S. Dollar Functional Currency
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	December 31, 2004		 	December 31, 2003		
 	 	 		 	 		
 	 	 	 	Estimated		 	 	 	Estimated		
Forward Contracts	 	Notional		 	Fair Value		 	Notional		 	Fair Value		
 	 	 		 	 		 	 		 	 		
Commitments to purchase foreign currency	 	$	40,981	 	 	$	1,854	 	 	$	64,147	 	 	$	595	 	
Commitments to sell foreign currency	 	 	20,226	 	 	 	(655	)	 	 	60,162	 	 	 	(46	)	
Euro Functional Currency
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	December 31, 2004		 	December 31, 2003		
 	 	 		 	 		
 	 	 	 	Estimated		 	 	 	Estimated		
Forward Contracts	 	Notional		 	Fair Value		 	Notional		 	Fair Value		
 	 	 		 	 		 	 		 	 		
Commitments to purchase foreign currency	 	$	128,253	 	 	$	(6,494	)	 	$	178,030	 	 	$	(5,112	)	
      The currencies underlying the foreign currency forward contracts consist primarily of euro, Swiss francs, Japanese yen and U.K. pounds sterling. The fair value of the foreign currency forward contracts generally reflects the estimated amounts that the Company would receive or (pay), on a pre-tax basis, to terminate the contracts at the reporting date based on broker quotes for the same or similar instruments. The terms of the foreign currency forward contracts are generally less than 18 months. The Company has deferred $3,497 and $3,069 of net losses, after tax, in accumulated other comprehensive income as of December 31, 2004 and 2003, respectively, all of which is expected to be reclassified to earnings within the next twelve months to provide an economic offset to the earnings impact of the anticipated cash flows hedged.
      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, credit spreads or other variables. Credit and market risk related to derivative instruments were not material at December 31, 2004 and 2003.
      Generally, the Company does not obtain collateral related to forward contracts because of the high credit ratings of the counterparties that are members. The amount of accounting loss the Company would incur if the counterparties failed to perform according to the terms of the contracts is not considered material.
85 

Table of Contents

MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)

		
Note 21.	Segment Reporting	
      In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” MasterCard has one reportable segment, “Payment Services.” All of the Company’s activities are interrelated, and each activity is dependent upon and supportive of the other. Accordingly, all significant operating decisions are based upon analyses of MasterCard as one operating segment. The President and Chief Executive Officer has been identified as the chief operating decision-maker. During 2004, MasterCard had one customer which generated approximately $315,000 revenues, which are greater than 10 percent of the Company’s revenues.
      Revenue by geographic market is based on the location of our customer that issued the cards which are generating the revenue. Revenue generated in the U.S. was approximately 58%, 63% and 61% of total revenues in 2004, 2003 and 2002, respectively. No individual country, other than the U.S., generated more than 10% of total revenues in either period. MasterCard does not maintain or measure long-lived assets by geographic location.
86 

Table of Contents
MASTERCARD INCORPORATED
SUMMARY OF QUARTERLY DATA
(In thousands, except per share data)
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2004 Quarter Ended		 	 	
 	 	 		 	 	
 	 	March 31		 	June 30		 	September 30		 	December 31		 	2004 Total		
 	 	 		 	 		 	 		 	 		 	 		
 	 	(Unaudited)		
Revenue	 	$	594,310	 	 	$	647,275	 	 	$	667,841	 	 	$	683,904	 	 	$	2,593,330	 	
Operating income	 	 	118,472	 	 	 	98,461	 	 	 	149,551	 	 	 	(19,812	)	 	 	346,672	 	
Net income	 	 	73,568	 	 	 	65,707	 	 	 	97,515	 	 	 	1,270	 	 	 	238,060	 	
Net income per share (basic and diluted)	 	$	.74	 	 	$	.66	 	 	$	.98	 	 	$	.01	 	 	$	2.38	 	
Weighted average shares outstanding (basic and diluted)	 	 	100,000	 	 	 	100,000	 	 	 	100,000	 	 	 	100,000	 	 	 	100,000	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2004 Quarter Ended		 	 	
 	 	 		 	 	
 	 	March 31		 	June 30		 	September 30		 	December 31		 	2004 Total		
 	 	 		 	 		 	 		 	 		 	 		
 	 	(Unaudited)		
Revenue	 	$	512,215	 	 	$	556,893	 	 	$	594,169	 	 	$	567,574	 	 	$	2,230,851	 	
Operating income (loss)	 	 	(667,760	)	 	 	49,945	 	 	 	118,900	 	 	 	(102,947	)	 	 	(601,862	)	
Net income (loss)	 	 	(425,391	)	 	 	32,327	 	 	 	74,399	 	 	 	(67,128	)	 	 	(385,793	)	
Net income (loss) per share (basic and diluted)	 	$	(4.25	)	 	$	.32	 	 	$	.74	 	 	$	(.67	)	 	$	(3.86	)	
Weighted average shares outstanding (basic and diluted)	 	 	100,000	 	 	 	100,000	 	 	 	100,000	 	 	 	100,000	 	 	 	100,000	 	
87 

Table of Contents

Item 9.      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
      None.
Item 9A.      Controls and Procedures
      MasterCard Incorporated’s management, including the President and Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the Company’s disclosure controls and procedures (as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Report. Based on that evaluation, the Company’s President and Chief Executive Officer and Chief Financial Officer concluded that MasterCard Incorporated had effective disclosure controls and procedures for (i) recording, processing, summarizing and reporting information that is required to be disclosed in its reports under the Securities Exchange Act of 1934, as amended, within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) ensuring that information required to be disclosed in such reports is accumulated and communicated to MasterCard Incorporated’s management, including its President and Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.
      In addition, MasterCard Incorporated’s management assessed the effectiveness of MasterCard’s internal control over financial reporting as of December 31, 2004. In a report included in Item 8 herein, management concluded that based on its assessment, MasterCard’s internal control over financial reporting was effective as of December 31, 2004.
Item 9B.      Other Information
      On February 28, 2005, MasterCard Incorporated amended its bylaws to add Article III, Section 2.1 which provides for an adjustment to the Global Proxy Calculation (as defined in the bylaws) for the last year of the Transition Period (as defined in the bylaws) and for each of the following seven years to account for the impact of the U.S. merchant lawsuit settlement. In addition, the provision in Article IV, Section 5 has been removed, which provided that the regional president of Europe was an honorary member of the board of directors of MasterCard Incorporated. MasterCard Incorporated’s amended and restated bylaws are included in Exhibit 3.1(b) to this Report.
      On February 28, 2005, MasterCard entered into an addendum agreement with Robert W. Selander, the Company’s President and Chief Executive Officer, which modified his employment agreement, dated August 10, 2001. The addendum agreement provides for a retention payment of $10,000,000 (ten million U.S. dollars) to Mr. Selander provided that he remains employed by MasterCard in good standing until a date to be established by MasterCard’s board of directors no earlier than April 9, 2010, but no later than April 9, 2011 (the “Retention Date”), meets certain performance standards and provides requested assistance in identifying his successor and transitioning his responsibilities to such person. Under certain circumstances Mr. Selander may be entitled to a pro rata portion of the retention payment if his employment is terminated prior to the Retention Date. Mr. Selander’s receipt of the retention payment is further conditioned upon his agreement to generally applicable 36-month non-compete and non-solicitation covenants, subject to shorter periods if he is terminated for cause or if he resigns as a result of a change in the strategic direction of MasterCard to which he objects, and his execution of a release of liability in favor of MasterCard. The addendum agreement is included as Exhibit 10.9.1 to this Report.
      The Company maintains several compensation plans in which its executives participate. Among these plans are MasterCard International Incorporated’s Annual Incentive Compensation Plan (“AICP”), Annuity Bonus Program and Deferral Plan, which are described below and included as exhibits to this Report.
      The AICP rewards employees for successfully achieving performance goals that are in direct support of the Company’s corporate and business unit/region goals. The plan is funded based on overall corporate performance with funding allocated to each division based on corporate and business unit/region performance. Actual awards are based on corporate, business unit/region and individual performance against goals. Target
88 

Table of Contents

AICP opportunities are determined based on competitive market practices and internal equity considerations. The AICP is included as Exhibit 10.14 to this Report.
      The Annuity Bonus Program is a non-qualified, after-tax savings plan designed to provide employees with benefits and contributions to the extent amounts under the Company’s qualified plans are capped by IRS limitations. Each year, the Company pays participants a bonus distributed in the form of a premium payment to a tax-deferred annuity contract. The Annuity Bonus Program is included as Exhibit 10.15 to this Report.
      The Deferral Plan allows employees, whose total cash compensation (base salary and annual incentive) is at a predetermined amount, to defer base salary in excess of the IRS qualified plan compensation limits and up to 90% of annual and long-term incentive payments. Amounts deferred may be invested in market funds or a fixed rate option with a minimum guaranteed return of 4%. The Deferral Plan is included as Exhibit 10.16 to this Report.
      A description of the Company’s non-employee director annual compensation arrangement is included as Exhibit 10.17 to this Report.
      On November 17, 2004, the Compensation Committee of the Board of Directors of the Company (the “Compensation Committee”) approved the annual base salaries, effective as of February 1, 2005, of the Company’s executive officers. The following table sets forth the annual base salaries of the Company’s Named Executive Officers, as defined in Item 402(a)(3) of Regulation S-K, (determined as of December 31, 2004) for 2005:
 	 	 	 	 	 	 	 	 	 	
Name and Position	 	Year		 	Base Salary		
 	 	 		 	 		
Robert W. Selander	 	 	2005	 	 	$	900,000	 	
 	President & CEO	 	 	 	 	 	 	 	 	
Alan J. Heuer	 	 	2005	 	 	$	750,000	 	
 	Chief Operating Officer	 	 	 	 	 	 	 	 	
Jerry McElhatton	 	 	2005	 	 	$	625,000	 	
 	President, Global Technology & Operations	 	 	 	 	 	 	 	 	
Christopher D. Thom	 	 	2005	 	 	$	600,000	 	
 	Chief Risk Officer	 	 	 	 	 	 	 	 	
Noah J. Hanft	 	 	2005	 	 	$	400,000	 	
 	General Counsel & Corporate Secretary	 	 	 	 	 	 	 	 	
      In addition, the Compensation Committee set the 2005 annual incentive target awards under the AICP for the Named Executive Officers, as follows:
 	 	 	 	 	
Name	 	Target Annual Incentive		
 	 	 		
Mr. Selander	 	 	200% of salary	 	
Mr. Heuer	 	 	100% of salary	 	
Mr. McElhatton	 	 	0% of salary	(1)	
Mr. Thom	 	 	100% of salary	 	
Mr. Hanft	 	 	100% of salary	 	

		
(1) 	The Compensation Committee did not approve a 2005 annual incentive target award for Mr. McElhatton who will be retiring March 31, 2005.	
      If shareholders of the Company approve the Senior Executive Annual Incentive Compensation Plan at the 2005 Annual Meeting of Shareholders, annual incentive awards under the AICP will be rescinded and awards that are intended to comply with Section 162(m) of the Internal Revenue Code of 1986, as amended will be made under the new plan.
89 

Table of Contents

      The Compensation Committee also approved grants of performance units under the Executive Incentive Plan (“EIP”) on November 17, 2004, to each of the Named Executive Officers for the 2005-2007 performance period as follows:
 	 	 	 	 	 	 	 	 	
 	 	Number of		 	Performance or Other Period		
Name	 	Units		 	Until Maturation Awarded		
 	 	 		 	 		
Mr. Selander	 	 	41,000	 	 	 	1/1/2005 – 12/31/2007	 	
Mr. Heuer	 	 	27,000	 	 	 	1/1/2005 – 12/31/2007	 	
Mr. McElhatton	 	 	0	(1)	 	 	1/1/2005 – 12/31/2007	 	
Mr. Thom	 	 	17,250	 	 	 	1/1/2005 – 12/31/2007	 	
Mr. Hanft	 	 	8,500	 	 	 	1/1/2005 – 12/31/2007	 	

		
(1) 	The Compensation Committee did not approve an award for Mr. McElhatton who will be retiring March 31, 2005.	
      If shareholders of the Company approve the Senior Executive Incentive Plan at the 2005 Annual Meeting of Shareholders, long-term incentive awards under the EIP will be rescinded and awards that are intended to comply with Section 162(m) of the Internal Revenue Code of 1986, as amended will be made under the new plan.
      Also, the Compensation Committee authorized the payment of annual incentive awards under the AICP for the year ended December 31, 2004, payable in cash, to the Named Executive Officers, as follows:
 	 	 	 	 	
Name	 	Annual Incentive Award		
 	 	 		
Mr. Selander	 	$	2,500,000	 	
Mr. Heuer	 	$	1,200,000	 	
Mr. McElhatton	 	$	525,000	 	
Mr. Thom	 	$	725,000	 	
Mr. Hanft	 	$	500,000	 	
      In addition to setting base salaries and annual incentive targets for 2005 and the determination of performance unit grants and annual incentive awards for 2004, on November 17, 2004, the Compensation Committee authorized payments to the Company’s executive officers of long-term incentive awards that were granted in 2002. The value of these awards were based on the Company’s performance on a combination of qualitative and quantitative measures that include: improving profitable share with key customers in key markets; improving customer focused strategy; achieving corporate financial targets (including attaining a predetermined level of EBITDA), enhancing organizational capabilities and the integration of Europay International S.A. The following table sets forth the value of 80% of the long-term incentive awards earned for the 2002-2004 performance period and paid to the Company’s Named Executive Officers in January 2005:
 	 	 	 	 	 	 	 	 	
Name	 	Performance Period		 	Long-term Incentive Payout		
 	 	 		 	 		
Mr. Selander	 	 	2002 – 2004	 	 	$	3,830,400	 	
Mr. Heuer	 	 	2002 – 2004	 	 	$	2,340,800	 	
Mr. McElhatton	 	 	2002 – 2004	 	 	$	1,968,400	 	
Mr. Thom	 	 	2002 – 2004	 	 	$	2,074,800	 	
Mr. Hanft	 	 	2002 – 2004	 	 	$	638,400	 	
      January 2005 payments to the Company’s Named Executive Officers also included the value of 20% of the long-term incentive awards for the 2000-2002 performance period.
      On January 18, 2005, the Compensation Committee approved the performance objectives for the Company that will be used to determine the amounts of the cash bonus awards that may be paid to the following executive officers of the Company for the year ended December 31, 2005 under its AICP: Robert W. Selander, Alan J. Heuer, W. Roy Dunbar, Christopher D. Thom, Michael W. Michl, Chris A. McWilton and Noah J. Hanft. The performance objectives for 2005 are based on the following measures: implementing
90 

Table of Contents

corporate strategy, achieving financial targets (including attaining predetermined levels of net revenue growth, EBITDA, operating expense as a percent of revenue and return on equity) and enhancing organizational capabilities. Bonus award amounts will be based on the level of performance achieved against the indicated objectives, as well as business unit, region and individual objectives.
      Also, on January 18, 2005, the Compensation Committee approved the performance objectives for the Company that will be used to determine the amounts of the long-term incentive payouts that may be paid to the executive officers noted above for the 2005-2007 performance period under the EIP. The performance objectives for the 2005-2007 performance period are based on the following measures: improving performance with key customers/key markets, improving customer focused strategy, achieving financial targets (including attaining predetermined levels of EBITDA, operating expense as a percent of revenue and return on equity) and enhancing organizational capabilities. Long-term incentive payouts will be calculated for each participant based on determination of a performance score corresponding to the level of performance achieved against the indicated objectives.
      The Company intends to provide additional information regarding the compensation of its Named Executive Officers in its Proxy Statement for the 2005 Annual Meeting of Shareholders to be held on May 9, 2005 (the “Proxy Statement”).
91 

Table of Contents

PART III
Item 10.      Directors and Executive Officers of the Registrant
      The information required by this Item with respect to our directors appears under “Proposal 1 — Election of Directors” in our Proxy Statement. Information regarding our executive officers appears under “Executive Officers of the Company” in the Proxy Statement.
      The information regarding compliance with Section 16(a) of the Exchange Act appears under “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.
      The aforementioned sections of the Proxy Statement are incorporated by reference into this Report.
      We have adopted a Supplemental Code of Ethics that applies to our President and Chief Executive Officer, Chief Financial Officer, Controller and other senior officers. Our Supplemental Code of Ethics is posted on our website at http://www.mastercardintl.com.
Item 11.      Executive Compensation
      The information required by this Item appears under “Executive Compensation” in the Proxy Statement and is incorporated by reference into this Report.

		
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	
      The information required by this Item appears under “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement and is incorporated by reference into this Report.
Item 13.      Certain Relationships and Related Transactions
      The information required by this Item appears under “Certain Relationships and Related Transactions” in the Proxy Statement and is incorporated by reference into this Report.
Item 14.      Principal Accountant Fees and Services
      MasterCard’s independent registered public accounting firm, PriceWaterhouseCoopers LLP (“PwC”), has notified the Audit Committee of the board of directors that PwC performed certain limited services for the Company and other PwC clients that were inconsistent with standards for auditor independence under applicable rules. Specifically, PwC has disclosed to the Audit Committee that, during 2001, an affiliate of PwC performed tax preparation services for expatriate employees of MasterCard located in China. PwC held funds from MasterCard of less than $15,000 to pay taxes to local authorities in connection with these services. PwC’s associated fees for these services were less than $900. The services were terminated in 2001. Custody of the funds of an audit client is not permitted under applicable auditor independence rules. Among other things, PwC has reported its findings to the Securities and Exchange Commission and is undertaking a systematic investigation of these issues.
      PwC has advised the Audit Committee that PwC’s objectivity and audit independence were not impaired by these activities. PwC has confirmed to the Audit Committee that it is an independent accounting firm with respect to the Company, as defined under applicable auditor independence rules. The Audit Committee has discussed PwC’s independence in light of these disclosures. The Company is not aware of any other non-audit services performed by PwC that were inconsistent with standards for auditor independence under applicable rules.
      The other information required by this Item appears under “Auditors Services and Fees” in the Proxy Statement and is incorporated by reference into this Report.
92 

Table of Contents

PART IV
Item 15.      Exhibits and Financial Statement Schedules
      (a) The following documents are filed as part of this Report:

		
 	      1.     Consolidated Financial Statements	
 		
 	      See Index to Consolidated Financial Statements in Item 8 of this Report.	
 		
 	      2.     Consolidated Financial Statement Schedules	
 		
 	      None.	
 		
 	      3.     The following exhibits are filed as part of this Report or, where indicated, were previously filed and are hereby incorporated by reference:	
 		
 	      Refer to the Exhibit Index herein.	
93 

Table of Contents
SIGNATURES
      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

		
 	Mastercard Incorporated	
 	 	
 	(Registrant)	

			
 	By: 	/s/ Robert W. Selander	

 	Robert W. Selander	
 	President and Chief Executive Officer	
 	(Principal Executive Officer)	
      Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

Date: March 2, 2005	 	/s/ Robert W. Selander	
 	 	 
Robert W. Selander
President and Chief Executive Officer; Director
(Principal Executive Officer)	
 	
Date: March 2, 2005	 	/s/ Chris A. McWilton	
 	 	 
Chris A. McWilton
Chief Financial Officer
(Principal Financial Officer)	
 	
Date: March 2, 2005	 	/s/ Lisa Wagner	
 	 	 
Lisa Wagner
Senior Vice President and Controller
(Principal Accounting Officer)	
 	
Date: March 2, 2005	 	 	
 	 	 
William F. Aldinger
Director	
 	
Date: March 2, 2005	 	/s/ Silvio Barzi	
 	 	 
Silvio Barzi
Director	
 	
Date: March 2, 2005	 	 	
 	 	 
Donald L. Boudreau
Director	
 	
Date: March 2, 2005	 	 	
 	 	 
Augusto M. Escalante
Director	
94 

Table of Contents

 	 	 	
 	
Date: March 2, 2005	 	/s/ Bernd M. Fieseler	
 	 	 
Bernd M. Fieseler
Director	
 	
Date: March 2, 2005	 	 	
 	 	 
Richard Fairbank
Director	
 	
Date: March 2, 2005	 	/s/ Baldomero Falcones Jaquotot	
 	 	 
Baldomero Falcones Jaquotot
Chairman of the Board; Director	
 	
Date: March 2, 2005	 	 	
 	 	 
Iwao Iijima
Director	
 	
Date: March 2, 2005	 	/s/ Michel Lucas	
 	 	 
Michel Lucas
Director	
 	
Date: March 2, 2005	 	/s/ Norman C. McLuskie	
 	 	 
Norman C. McLuskie
Director	
 	
Date: March 2, 2005	 	/s/ Robert W. Pearce	
 	 	 
Robert W. Pearce
Director	
 	
Date: March 2, 2005	 	 	
 	 	 
Michael Pratt
Director	
 	
Date: March 2, 2005	 	/s/ Tan Teong Hean	
 	 	 
Tan Teong Hean
Director	
 	
Date: March 2, 2005	 	 	
 	 	 
Jac Verhaegen
Director	
 	
Date: March 2, 2005	 	/s/ Lance L. Weaver	
 	 	 
Lance L. Weaver
Director	
 	
Date: March 2, 2005	 	/s/ Robert B. Willumstad	
 	 	 
Robert B. Willumstad
Vice Chairman; Director	
95 

Table of Contents
EXHIBIT INDEX
 	 	 	 	 	
Exhibit		 	 	
Number		 	Exhibit Description	
 		 	 	
 	3	.1(a)	 	Amended and Restated Certificate of Incorporation of MasterCard Incorporated (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated June 28, 2002 and filed July 12, 2002 (No. 333-67544)).	
 	3	.1(b)	 	Amended and Restated Bylaws of MasterCard Incorporated	
 	3	.2(a)	 	Amended and Restated Certificate of Incorporation of MasterCard International Incorporated (incorporated by reference to Exhibit 3.2(a) to the Company’s Quarterly Report on Form 10-Q filed August 14, 2002 (No. 333-67544)).	
 	3	.2(b)	 	Amended and Restated Bylaws of MasterCard International Incorporated (incorporated by reference to Exhibit 3.2(b) to the Company’s Quarterly Report on Form 10-Q filed August 14, 2002 (No. 333-67544)).	
 	4	.1	 	Form of Specimen Certificate for Class A Redeemable Common Stock of MasterCard Incorporated (incorporated by reference to Exhibit 4.1 to Pre-Effective Amendment No. 4 to the Company’s Registration Statement on Form S-4 filed February 11, 2002 (No. 333-67544)).	
 	4	.2	 	Form of Specimen Certificate for Class B Convertible Common Stock of MasterCard Incorporated (incorporated by reference to Exhibit 4.2 to Pre-Effective Amendment No. 4 to the Company’s Registration Statement on Form S-4 filed February 11, 2002 (No. 333-67544)).	
 	4	.3	 	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 (incorporated by reference to Exhibit 4 to Pre-Effective Amendment No. 2 to the Company’s Registration Statement on Form S-4 filed November 9, 2001 (No. 333-67544)).	
 	4	.4	 	Amendment to MasterCard International Incorporated Note Purchase Agreement, dated August 4, 2004, regarding $80,000,000 of 6.67% Subordinated Notes due June 30, 2008 (incorporated by reference to Exhibit 4.1 to the Company’s Report on Form 10-Q filed November 9, 2004 (No. 000-50250)).	
 	10	.1	 	Settlement Agreement, dated as of June 4, 2003, between MasterCard International Incorporated and Plaintiffs in the class action litigation entitled In Re Visa Check/MasterMoney Antitrust Litigation (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed August 8, 2003 (No. 000-50250)).	
 	10	.2	 	$1,950,000,000 Credit Agreement, dated as of June 18, 2004, among MasterCard Incorporated, MasterCard International Incorporated, the several lenders, Citigroup Global Markets Inc., as sole lead arranger, Citibank, N.A., as co-administrative agent, JPMorgan Chase Bank, as co-administrative agent, and J.P. Morgan Securities, Inc., as co-arranger (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed August 5, 2004 (No. 000-50250)).	
 	10	.3	 	Lease, dated as of August 31, 1999, between MasterCard International 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 MasterCard International O’Fallon 1999 Trust and up to $5,000,000 Series B Senior Secured Notes due September 1, 2009 of MasterCard International O’Fallon 1999 Trust (incorporated by reference to Exhibit 10.3 to Pre-Effective Amendment No. 2 to the Company’s Registration Statement on Form S-4 filed November 9, 2001 (No. 333-67544)).	
 	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 MasterCard International O’Fallon 1999 Trust and the Indenture Trustee (incorporated by reference to Exhibit 10.4 to Pre-Effective Amendment No. 2 to the Company’s Registration Statement on Form S-4 filed November 9, 2001 (No. 333-67544)).	
 	10	.4.1	 	First Amendment To Guarantee, dated as of November 23, 2004, between MasterCard International Incorporated, MasterCard Incorporated and UMB Bank & Trust, N.A.	
96 

Table of Contents

Exhibit		 	 	
Number		 	Exhibit Description	
 		 	 	
 	10	.5	 	Indenture, dated as of August 31, 1999, from MCI O’Fallon 1999 Trust to State Street Bank and Trust Company of Missouri, N.A., relating to the MasterCard Winghaven facility (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed August 8, 2003 (No. 000-50250)).	
 	10	.6	 	Lease, dated as of April 1, 2003, between MasterCard International, LLC and City of Kansas City, Missouri relating to the Kansas City facility (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed August 8, 2003 (No. 000-50250)).	
 	10	.7	 	Agreement, dated as of January 1, 2004, by and among MasterCard International Incorporated, Citibank, N.A., et al. (incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 10-Q filed August 5, 2004 (No. 000-50250)).	
 	*10	.7.1	 	MasterCard International–Citibank, N.A Agreement, dated December 31, 2004, between MasterCard International Incorporated and Citibank, N.A.	
 	10	.8	 	Agreement, dated as of July 1, 1999, by and between MasterCard International Incorporated and The Chase Manhattan Bank (incorporated by reference to Exhibit 10.6 to Pre-Effective Amendment No. 1 to the Company’s Registration Statement on Form S-4 filed September 10, 2001 (No. 333-67544)).	
 	10	.9	 	Employment Agreement between MasterCard International Incorporated and Robert W. Selander (incorporated by reference to Exhibit 10.7 to Pre-Effective Amendment No. 2 to the Company’s Registration Statement on Form S-4 filed November 9, 2001 (No. 333-67544)).	
 	10	.9.1	 	Addendum to the Employment Agreement between MasterCard International Incorporated and Robert W. Selander, dated February 28, 2005.	
 	10	.10	 	Form of Employment Agreement between MasterCard International Incorporated and Executive Officers other than the President and Chief Executive Officer (incorporated by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K filed March 7, 2003 (No. 333-67544)).	
 	10	.11	 	MasterCard International Incorporated Executive Incentive Plan as Amended and Restated Effective January 1, 2004 (incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K filed March 4, 2004 (No. 000-50250)).	
 	10	.12	 	MasterCard International Incorporated Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.10 to Pre-Effective Amendment No. 2 to the Company’s Registration Statement on Form S-4 filed November 9, 2001 (No. 333-67544)).	
 	10	.13	 	MasterCard International Incorporated Value Appreciation Program (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed November 19, 2004 (No. 000-50250)).	
 	10	.14	 	MasterCard International Incorporated Annual Incentive Compensation Plan (AICP), as amended and restated, effective January 1, 2005.	
 	10	.15	 	MasterCard International Incorporated Annuity Bonus Program: Statement of Company Payroll and Procedures, as amended and restated January 1, 2000.	
 	10	.16	 	MasterCard International Incorporated Deferral Plan, as amended and restated January 1, 2003.	
 	10	.17	 	Schedule of Non-employee Directors’ Annual Compensation.	
 	10	.18	 	Change-in-Control Agreement between MasterCard International Incorporated and Robert W. Selander (incorporated by reference to Exhibit 10.11 to Pre-Effective Amendment No. 2 to the Company’s Registration Statement on Form S-4 filed November 9, 2001 (No. 333-67544)).	
 	10	.19	 	Form of Change-in-Control Agreement between MasterCard International Incorporated and Executive Officers other than the President and Chief Executive Officer (incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K filed March 7, 2003 (No. 333-67544)).	
 	10	.20	 	Euro 100,000,000 Multi-Currency Overdraft Facility Agreement, dated as of September 30, 2002, between MasterCard Europe sprl and HSBC Bank plc (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed November 14, 2002 (No. 333-67544)).	
97 

Table of Contents

Exhibit		 	 	
Number		 	Exhibit Description	
 		 	 	
 	18	.1	 	Letter re change in accounting principles by PricewaterhouseCoopers LLP dated May 8, 2003 (incorporated by reference to Exhibit 18.1 to the Company’s Quarterly Report on Form 10-Q filed May 14, 2003 (No. 000-50250)).	
 	21	 	 	List of Subsidiaries of MasterCard Incorporated.	
 	31	.1	 	Certification of Robert W. Selander, President and Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	
 	31	.2	 	Certification of Chris A. McWilton, Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	
 	32	.1	 	Certification of Robert W. Selander, President and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	
 	32	.2	 	Certification of Chris A. McWilton, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	

		
* 	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.	
98

EXHIBIT 3.1(b)
AMENDED AND RESTATED 
BYLAWS
OF
MASTERCARD INCORPORATED
A Delaware corporation
Adopted June 28, 2002 (as Amended February 28, 2005)
ARTICLE I
Offices
     Section 1. The registered office of the Corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. The Corporation may also have offices at such other places, within or outside of the State of Delaware, as the Board of Directors may from time to time determine or the business of the Corporation may require.
ARTICLE II
Meetings of Stockholders
     Section 1. All meetings of stockholders shall be held at the registered office of the Corporation, or at such other place within or outside of the State of Delaware as may be fixed from time to time by the Board of Directors.
     Section 2. Annual meetings of stockholders shall be held at such date and time as may be fixed by the Board of Directors, at the offices of the Corporation, or at such other date and time as may be fixed by the Board of Directors. At each annual meeting of stockholders, the stockholders shall elect Directors and transact such other business as may properly be brought before the meeting.
     Section 3. Written notice of each annual meeting of stockholders, stating the place, date and hour of the meeting, as well as the means of acceptable remote participation, shall be given in the manner set forth in ARTICLE XV of these Bylaws. Such notice shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at the meeting.
     Section 4. Special meetings of stockholders may be called at any time for any purpose or purposes by written request of the Chairman of the Board of Directors or the President and Chief Executive Officer of the Corporation, or by the Secretary of the Corporation upon the written request of at least 33 1/3% of the Board of Directors, or upon the written request of the holders of at least 25% of all outstanding shares entitled to vote on the action proposed to be taken. Such written requests shall state the time, place and purpose or purposes of the special meeting, the person or persons calling the special meeting and that the special meeting so called shall be limited to the purpose or purposes set forth in the demand.

 

     Section 5. Written notice of each special meeting of stockholders shall be given in the manner set forth in ARTICLE XV of these Bylaws. Such notice shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at the meeting. Each such notice of a special meeting of stockholders shall state the place, date and hour of a meeting, the person or persons calling the meeting and the purpose or purposes for which the meeting is called, as well as the means, if any, of acceptable remote participation as may be determined by the Board of Directors.
     Section 6. Except as otherwise required by law or the Certificate of Incorporation, the presence in person or by proxy of holders of at least a majority of the shares entitled to vote at a meeting of stockholders shall be necessary, and shall constitute a quorum, for the transaction of business at such meeting. If a quorum is not present or represented by proxy at any meeting of stockholders, then the holders of a majority of the shares entitled to vote at the meeting who are present in person or represented by proxy may adjourn the meeting from time to time until a quorum is present. An adjourned meeting may be held later without notice other than announcement at the meeting, except that if the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given in the manner set forth in ARTICLE XV to each stockholder of record entitled to vote at the adjourned meeting. The stockholders present at a duly organized meeting may continue to transact business until adjournment, and the subsequent withdrawal of any stockholder or the refusal of any stockholder to vote shall not affect the presence of a quorum at the meeting.
     Section 7. At any meeting of stockholders, each stockholder having the right to vote shall be entitled to vote in person, by proxy or by such means, if any, of remote communication as may be determined by the Board of Directors. Except as otherwise provided by law or in the Certificate of Incorporation or these Bylaws, each stockholder shall be entitled to one vote for each share of stock entitled to vote standing in his name on the books of the Corporation. Except as otherwise provided by law or in the Certificate of Incorporation, any matter shall be determined by the vote of a majority of the shares that are voted with regard to it at a meeting where a valid quorum is present, subject to any limitations of the voting power of stockholders imposed by the terms of the Certificate of Incorporation.
     Section 8. Any action required or permitted to be taken by the stockholders at any annual or special meeting of the stockholders may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted, and shall be delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation’s registered office shall be by hand or by registered or certified mail, return receipt requested.
     Section 9. The Board of Directors may fix a date as the record date for determination of the stockholders entitled (i) to notice of, or to vote at, any meeting of stockholders, (ii) to express consent to, or dissent from, corporate action in writing without a meeting or (iii) to receive payment of any dividend or other distribution or allotment of any rights or to take or be the subject of any other action. The record date must be on or after the date on which the Board of Directors adopts the resolution fixing the record date and in the case of (i), above, must be not less than 10 nor more than 60 days before the date of the meeting, in the case of (ii), above, must be not more than 10 days after the date on which the Board of Directors fixes the record date, and in the case of (iii), above, must be not more than 60 days prior to the proposed action. If no record date is fixed, then the record date will be as provided by law. A determination of stockholders entitled to notice of, or to vote at, any meeting of
2

 

stockholders that has been made as provided in this Section will apply to any adjournment of the meeting, unless the Board of Directors fixes a new record date for the adjourned meeting.
ARTICLE III
Share Ownership
     Section 1. As of the close of business, New York time, on the last day of the three-year period (the “Transition Period”) beginning on the first business day of the fiscal quarter following the Closing Date (as defined in the Share Exchange and Integration Agreement by and among the Corporation, MasterCard International Incorporated and Europay International S.A., dated as of February 13, 2002, (as amended, modified, supplemented or restated from time to time, the “Integration Agreement”)), each outstanding share of Class B Common Stock of the Corporation, $.01 par value per share (a “Class B share”), other than any Class B shares that constitute ec Picto Stock (as defined in the Integration Agreement), shall automatically be converted into one share of Class A Common Stock of the Corporation, $.01 par value per share (a “Class A share”). All Class A shares shall then be reallocated among the holders of Class A shares in accordance with the terms and subject to the conditions set forth in Sections 1.4(b) and 1.4(d) of the Integration Agreement, subject to the provisions of Section 2.1 hereof . In connection with any reallocation of Class A shares, any stockholder whose ownership of Class A shares is reduced as a result of the reallocation will transfer the excess number of Class A shares to the Corporation, which shall then deliver Class A shares to any stockholder that is entitled to an additional number of Class A shares as a result of the reallocation.
     Section 2. For purposes of these Bylaws, the Global Proxy Calculation shall be calculated for each successive 12-month period beginning on the first day of the Transition Period; provided, however, that for Global Proxy Calculations for periods ending after the second anniversary of the end of the Transition Period, the Board of Directors may elect to use the Corporation’s fiscal year as the basis for the Global Proxy Calculation. The Global Proxy Calculation for each stockholder of MasterCard Incorporated shall be equal to the sum obtained by adding (A) .25 multiplied by a fraction, the numerator of which is such stockholder’s Gross Dollar Volume (GDV) and the denominator of which is the Corporation’s Gross Dollar Volume (GDV) attributable to all stockholders of the Corporation, plus (B) .25 multiplied by a fraction, the numerator of which is such stockholder’s Gross Acquiring Volume (GAV) and the denominator of which is the Corporation’s Gross Acquiring Volume (GAV) attributable to all stockholders of the Corporation, plus (C) .50 multiplied by a fraction, the numerator of which is the sum of (1) the Revenues Paid by such stockholder to the Corporation and its consolidated subsidiaries relating to all matters other than travelers cheque programs, plus (2) two times the Revenues Paid by the stockholder to the Corporation and its consolidated subsidiaries relating to travelers cheque programs, and the denominator of which is the sum of (1) the Revenues Paid by all stockholders to the Corporation and its consolidated subsidiaries relating to all matters other than travelers cheque programs, plus (2) two times the Revenues Paid by all stockholders to the Corporation and its consolidated subsidiaries relating to travelers cheque programs, in each case for the applicable period. No Gross Dollar Volume (GDV) or Gross Acquiring Volume (GAV) shall be attributable to travelers cheque programs for purposes of the Global Proxy Calculation. The Board of Directors may fix a record date for the purposes of determining those stockholders of record whose Gross Dollar Volume (GDV), Gross Acquiring Volume (GAV) and Revenues Paid shall be included in determining a Global Proxy Calculation for a particular period, which record date shall not be more than 30 days prior to the end of any such period. Only actual, as opposed to estimated, Gross Dollar Volume (GDV) and Gross Acquiring Volume (GAV) and Revenues Paid information will be used in determining the Global Proxy Calculation for each stockholder.
3

 

The Corporation, acting through relevant employees selected by the Chief Executive Officer from time to time, shall compute the Global Proxy Calculation for each stockholder for each applicable 12 month period and provide written notice to each stockholder of the results of such computation within 120 days after the end of the 12-month period to which the computation relates. The Corporation’s computation of the Global Proxy Calculation shall be considered final and binding on all stockholders unless the Board of Directors determines that an error was made in the computation, in which case the Corporation’s computation shall be corrected in accordance with the directions of the Board of Directors.
“Gross Dollar Volume” means processed and non-processed issued Volumes (including domestic and international retail purchases, cash transactions, convenience checks, on-us transactions, intra-processor transactions, local use only transactions and balance and commercial funds transfers) that occur as a result of one or more of (A) a transaction involving any one of the Corporation’s brands ( e.g. , MasterCard®, Eurocard®, Maestro®, Cirrus® and ec Picto®) or (B) a non-MasterCard branded transaction involving a card which includes any one of the Corporation’s brand logos as well as other payment brand logos, provided that such other payment brands are not in direct competition with any of the Corporation’s brands, as determined by the Corporation.
“Gross Acquiring Volume” means processed and non-processed acquired Volumes (including domestic and international retail purchases, cash transactions, on-us transactions, intra-processor transactions and local use only transactions) that occur as a result of one or more of (A) a transaction involving any one of the Corporation’s brands ( e.g. , MasterCard®, Eurocard®, Maestro®, Cirrus® and ec Picto®) or (B) a non-MasterCard branded transaction involving a card which includes any one of the Corporation’s brand logos as well as other payment brand logos, provided that such other payment brands are not in direct competition with any of the Corporation’s brands, as determined by the Corporation.
“Revenues Paid” for any period means, with respect to a particular stockholder, all revenues of the Corporation on a consolidated basis, calculated in accordance with U.S. GAAP, that are generated by the activities of that stockholder, other than (1) any fees or other charges associated with the termination of that stockholder’s membership in MasterCard International Incorporated, (2) Integration Assessments (as defined in Section 4(d) of Article VI of the Bylaws of MasterCard International Incorporated) paid by that stockholder, (3) other assessments, fees and charges paid by that stockholder in its capacity as a member of MasterCard International Incorporated if those assessments, fees or charges were imposed on less than all of the members of MasterCard International Incorporated (except for assessments, fees and charges pertaining to business development, ordinary course of business and other matters deemed to be includable by the management of MasterCard International Incorporated in its sole discretion) and (4) fines and penalties paid by that stockholder (except as determined in the sole discretion of the management of MasterCard International Incorporated).
“card fee assessment” means a bona fide , non de minimis fee expressed as a fixed amount in connection with a card.
“volume-based assessment” means a bona fide , non de minimis assessment typically expressed as a percentage of the Gross Dollar Volume (GDV) or Gross Acquiring Volume (GAV) associated with a particular type of transaction.
“Volumes” means the following four types of volumes in the specified percentages:
          a.  Type 1 shall include 100% of all (1) volumes on cards that include a MasterCard® brand logo and that are subject to volume-based assessments or card fee assessments, (2) Maestro® and Cirrus® processed debit volumes and (3) Maestro® and Cirrus® debit volumes that are
4

 

subject to volume-based assessments, so long as Maestro®, a Permitted Purse Brand and/or Cirrus® is the sole acceptance brand on the card.
          b.  Type 1A shall include 75% of all ec Picto® volumes and other similar debit volumes that in each case have been converted to Maestro® volumes so long as Maestro®, a Permitted Purse Brand and/or Cirrus® is the sole acceptance brand on the card and the card is subject to card fee assessments.
          c.  Type 2 shall include the following percentages of all volumes for regional debit brands owned (or in the case of the initial allocation of shares to be owned) solely by the Corporation on cards that include a Maestro® and/or Cirrus® logo; provided that such cards are subject to volume-based assessments or card fee assessments; and provided, further, that for calculations for the last year of the Transition Period through the year ending on the second anniversary of the end of the Transition Period, there is a binding written commitment to remove all acceptance brand logos, other than the Maestro® brand logo, the Cirrus® brand logo or a Permitted Purse Brand logo, on the cards not later than the fifth anniversary of the first fiscal quarter beginning after the fiscal quarter in which the Closing Date occurs:
               (i) 40% of such volumes for the last year of the Transition Period;
               (ii) 30% of such volumes for the year ending on the one-year anniversary of the end of the Transition Period;
               (iii) 20% of such volumes for the year ending on the two-year anniversary of the end of the Transition Period; and
               (iv) 10% of such volumes for subsequent years.
          d.  Type 3 shall include 1% of (i) volumes for regional debit brands not owned by the Corporation on cards that include a Maestro® and/or Cirrus® brand logo and are subject to volume-based assessments or card fee assessments and (ii) volumes for balance and commercial funds transfers relating to cards that are subject to volume-based assessments or card fee assessments.
In determining the proportionate share of each stockholder of Europe of (i) the European Regional Proxy Amount (as defined in the Integration Agreement) for purposes of the reallocation contemplated by Section 1.3 of the Integration Agreement and (ii) the European Regional Proxy Amount for each year of the Transition Period other than the last year of the Transition Period, ec Picto® Volumes shall be accorded a weighting of 10% (unless those volumes satisfy the criteria of Type 1A or Type 2 Volumes, in which case those volumes shall be accorded the weighting contemplated by those Types, as appropriate). Thereafter, ec Picto® Volumes shall be accorded the weighting determined in accordance with the definitions of the Types of Volumes described above.
For each Global Proxy Calculation, all Volumes described above will be included in calculating Gross Dollar Volume and Gross Acquiring Volume whether those Volumes are assessed directly or the cards to which they relate are subject to card fee assessments of the type contemplated by the applicable type of Volume. In addition, for each Global Proxy Calculation performed prior to the expiration of the Transition Period, Volumes of the types described above will be included even if they are not subject to volume-based or card fee assessments.
5

 

“Permitted Purse Brand” means a brand representing a stored value application that is permitted to be used by members of MasterCard International Incorporated under the Bylaws and Rules of MasterCard International Incorporated.
For purposes of determining the Global Proxy Calculation, the conversion of Euros into U.S. dollars will be based on the average exchange rate during the twenty-day period ending on the day prior to the applicable measurement date (the “Prevailing Exchange Rate”), provided that during the Transition Period and for two years thereafter, the Prevailing Exchange Rate shall be $.9565 U.S. = 1 Euro for so long as 1 Euro is not less than $.9065 U.S. and not greater than $1.0065 U.S. (the “Currency Conversion Band”). In the event that the Prevailing Exchange Rate does not fall within the Currency Conversion Band, the currency conversion rate to convert Euros to U.S. Dollars will be $.9565 adjusted by the difference between such Prevailing Exchange Rate and the upper/lower limit of the Currency Conversion Band, as applicable.
For purposes of determining the Global Proxy Calculation during the Transition Period and for the two years thereafter, amounts denominated in the currency of a country within the Europe Region (as defined in the Integration Agreement) other than the Euro shall be converted into Euros and subsequently converted into U.S. dollars in accordance with the previous paragraph.
Class A shares and Class B shares may be held only by Class A members of MasterCard International Incorporated and, with the prior approval of the Board of Directors, their Designated Affiliates. A Designated Affiliate of a Class A member is an Affiliate (as defined in the Certificate of Incorporation) of the Class A member to whom the Class A member transfers its stock in the Corporation in order to satisfy applicable regulatory requirements that prohibit the Class A member from holding stock in the Corporation.
No fractional shares of Class A Stock or Class B Stock shall be issued or delivered by the Corporation, and any fractional share interests shall be rounded in such manner as the management of the Corporation shall determine in its sole discretion.
     Section 2.1 Notwithstanding any other provision hereof, for purposes of determining the Global Proxy Calculation for each stockholder for the last year of the Transition Period and for each of the seven years thereafter, (i) $100 million will be subtracted from the denominator of the Revenues Paid component of the Global Proxy Calculation relating to all matters other than travelers cheque programs, irrespective of whether the Corporation earned such amount as revenues under U.S. GAAP, and (ii) an “Adjustment Amount” will be subtracted from the numerator of the Revenues Paid component of the Global Proxy Calculation relating to all matters other than travelers cheque programs, irrespective of whether the stockholder paid such amount in revenues to the Corporation. “Adjustment Amount” means: (a) for each stockholder that is designated as part of the U.S. Region of the Corporation (a “U.S. Stockholder”), an amount calculated by multiplying $100 million by a fraction, the numerator of which is the Revenues Paid by such U.S. Stockholder to the Corporation and its consolidated subsidiaries prior to adjustment pursuant to this Section and the denominator of which is the Revenues Paid by all U.S. Stockholders to the Corporation and its consolidated subsidiaries prior to adjustment pursuant to this Section; and (b) for each other stockholder of the Corporation, zero.
     The Global Proxy Calculation as adjusted pursuant to this Section will be used to calculate the European Regional Proxy Amount and the Outside Europe Proxy Amount pursuant to Section 1.4 of the Integration Agreement.
6

 

     Section 3. During the Transition Period, no shares may be sold, transferred, pledged, hypothecated or assigned (including any assignment of the right to receive shares) except that (i) a stockholder may sell, transfer, pledge, hypothecate or assign (including any assignment of the right to receive shares), as applicable, all, but not less than all, of its shares to the acquirer of its card portfolio in connection with a transfer by a stockholder of all or substantially all of such stockholder’s card portfolio, (ii) if a stockholder that was a principal member becomes an affiliate member of another principal member, such stockholder may sell, transfer, pledge, hypothecate or assign (including any assignment of the right to receive shares), as applicable, all, but not less than all, of its shares to the principal member with whom it becomes affiliated, (iii) if a stockholder that was a principal member and had one or more affiliate members ceases to be a principal member and one or more of its affiliate members thereupon become principal members, such stockholder may sell, transfer, hypothecate or assign (including any assignment of the right to receive shares), as applicable, all, but not less than all, of its shares to such former affiliate members, (iv) if a stockholder is prohibited by applicable regulatory requirements from holding stock in the Corporation, such stockholder may sell transfer, pledge, hypothecate or assign (including any assignment of the right to receive shares), as applicable, all, but not less than all, of its shares to a Designated Affiliate so long as the Board of Directors has given its prior approval to the transaction; and (v) a stockholder may sell, transfer, pledge, hypothecate or assign (including any assignment of the right to receive shares), as applicable, all, but not less than all, of its shares to a Class A member that is an affiliate of such stockholder so long as the Board of Directors has given its prior approval to the transaction; provided, however that for the purposes of this clause (v), the term “affiliate” shall be deemed to mean any parent company that directly or indirectly owns 80% or more of the voting power and economic interests in such stockholder, and any entity of which such stockholder or any of such parents owns 80% or more of the voting power and economic interests. If, during the Transition Period, a stockholder ceases to be a member of MasterCard International Incorporated (voluntarily or otherwise), such stockholder’s shares in the Corporation shall be transferred to the Corporation from such stockholder at a cost to the Corporation equal to the aggregate par value of the shares transferred to the Corporation, effective as of the first business day after the date such stockholder’s membership in MasterCard International Incorporated was terminated. If, following the expiration of the Transition Period, a stockholder ceases to be a member of MasterCard International Incorporated (voluntarily or otherwise), the Corporation shall have the right, in its sole discretion, to elect to direct such stockholder to transfer to the Corporation for cash all of such stockholder’s shares for an amount equal to the book value of such stockholder’s shares based on the Corporation’s financial statements most recently filed with the U.S. Securities and Exchange Commission. The Corporation shall make such election by delivering a written notice to such stockholder within 20 days after such stockholder’s membership in MasterCard International Incorporated was terminated. If the Corporation makes such election, then the Corporation shall deliver the payment price in cash to such stockholder within 20 days after delivering its written election notice. Upon delivery of the payment price, all of such stockholder’s rights as a stockholder of the Corporation shall immediately cease. In the event that the Corporation does not make such election, such stockholder will be required to comply with the procedures set forth in Section 4.
     Section 4. An entity that became or becomes a Class A member of MasterCard International Incorporated from and after January 1, 2001 until the end of the Transition Period shall be eligible to be allocated Class A shares as of the end of the Transition Period based upon its Global Proxy Calculation in accordance with such procedures as may be determined by the Board. From and after the end of the Transition Period, each stockholder shall be free to sell, transfer, pledge, hypothecate or assign (including any assignment of the right to receive shares), as applicable, its shares to any person permitted to hold such shares. Following the expiration of the Transition Period, each stockholder must maintain an ownership percentage of the Corporation’s outstanding common stock that is no less than 75% and no more than 125% of the percentage represented by such stockholder’s most recent Global Proxy Calculation by purchasing or selling shares, if necessary, in accordance with procedures to be
7

 

established by the Board of Directors within 12 months after receiving notice from the Corporation that such stockholder is not in compliance with this section. If a stockholder holds shares as the result of a transfer made pursuant to clauses (iv) or (v) of the first sentence of Article III, Section 3 of these Bylaws, then the percentage ownership test described in the preceding sentence shall be calculated based upon the aggregate Global Proxy Calculation of the stockholder and the Class A member(s) that transferred shares to the stockholder. If a stockholder is unable to satisfy the requirement that it own no more than 125% of the percentage represented by such stockholder’s most recent Global Proxy Calculation, the selling stockholder shall be obligated to accept the highest price offered to such stockholder for such number of shares of Common Stock as is necessary to enable such stockholder to satisfy such requirement.
     Section 5. The Board of Directors shall establish procedures for the purchase or sale of shares following the expiration of the Transition Period.
ARTICLE IV
Board of Directors
     Section 1. The business of the Corporation will be managed by the Board of Directors, which may exercise all of the powers of the Corporation and do all lawful acts and things as are not (i) by statute, the Certificate of Incorporation or these Bylaws directed or required to be exercised or done by the stockholders or (ii) specifically delegated as provided in these Bylaws.
     Section 2. a. The Board of Directors shall consist of such number of persons, as shall be determined by the Board of Directors from time to time. The Board of Directors initially shall consist of 18 persons.
          b. Each Director shall be an officer of a member institution of MasterCard International Incorporated or an individual otherwise uniquely qualified to provide guidance as to the Corporation’s affairs. During the Transition Period, one-third of the total number of Directors shall be officers of stockholders of the Corporation or member institutions from the Corporation’s Europe region, as defined in the Integration Agreement (“Europe”), one-third of the total number of Directors shall be officers of stockholders of the Corporation or member institutions from the Corporation’s U.S. region, the President and Chief Executive Officer shall be a Director and the remaining Directors shall be apportioned among officers of stockholders of the Corporation or member institutions from the Corporation’s other regions in accordance with the percentage of the Corporation’s outstanding stock owned by the stockholders of each such region; provided, however, that in calculating the percentage of outstanding stock owned by the stockholders of each region, transfers of shares made pursuant to clauses (iv) or (v) of the first sentence of ARTICLE III, Section 3 of these Bylaws shall be disregarded. After the Transition Period, the President and Chief Executive Officer shall be a Director and the remaining Directors shall be apportioned among officers of stockholders from the Corporation’s regions in accordance with the percentage of the Corporation’s outstanding stock owned by the stockholders of each such region, subject to Article EIGHTH of the Certificate of Incorporation; provided, however, that in calculating the percentage of outstanding stock owned by the stockholders of each region, transfers of shares made pursuant to clauses (iv) or (v) of the first sentence of ARTICLE III, Section 3 of these Bylaws shall be disregarded. As used in these Bylaws, the phrase “entire Board of Directors” shall mean the total number of directors, other than honorary members of the Board of Directors (if any), that the Corporation would have if there were no vacancies.
     Section 3. There shall not be more than two representatives from any one Class A member of MasterCard International Incorporated, including its Affiliates and its affiliate members of
8

 

MasterCard International Incorporated that are sponsored by such Class A member, on the Board of Directors.
     Section 4. No individual may serve as a Director of the Corporation or of any regional board if that individual also is a director (including a regional board director), officer or other employee of or consultant to a competitor of the Corporation, or if that individual is a director, officer or other employee of or consultant to an institution that is represented on the global board of directors or U.S. regional board of directors of a competitor. For this purpose, a competitor of the Corporation is an entity that owns and/or operates a payment card program competitive with the Corporation’s comparable card programs, as determined by the Corporation, and that is not itself a stockholder of the Corporation.
     Section 5. During the Transition Period, if approved by the Board of Directors, one officer of the Corporation other than the President and Chief Executive Officer, shall serve as honorary members of the Board of Directors and shall be entitled to receive notice of all meetings of the Board of Directors and shall be permitted to attend and participate in all meetings of the Board of Directors, but shall not be entitled to vote.
     Section 6. The Board of Directors, by the affirmative vote of a majority of the Directors then in office, and irrespective of any personal interest of any of its members, may establish reasonable compensation of any or all Directors for services to the Corporation as Directors.
     Section 7. The term of any Director who, after election to the Board of Directors of the Corporation, subsequently fails to meet the requirements of Sections 2, 3 or 4 of this ARTICLE IV or Article EIGHTH of the Corporation’s Certificate of Incorporation, shall terminate automatically at the time that the Director so failed to qualify; provided, however, that the Board of Directors may appoint that terminated Director to fill the vacancy caused by the termination until the next annual meeting of stockholders unless such termination resulted from the failure to satisfy the requirements of Section 4 of this ARTICLE IV or Article EIGHTH of the Corporation’s Certificate of Incorporation.
     Section 8. A vacancy in the Board of Directors, by reason of an increase in the number of Directors or by reason of the death, resignation, removal or termination of the term of a director, may be filled by the Board of Directors in a manner consistent with the requirements of Sections 2, 3, and 4 of this ARTICLE IV and Article EIGHTH of the Corporation’s Certificate of Incorporation. Each Director shall hold office until a successor is elected and qualified, or until the Director’s earlier death, resignation, removal or automatic termination of his term. A Director may resign at any time by written notice to the Corporation addressed to the President and Chief Executive Officer or the Secretary.
ARTICLE V
Meetings of the Board of Directors
     Section 1. The first meeting of each newly-elected Board of Directors shall be held immediately following the annual meeting of stockholders at the place of such annual meeting of stockholders. If the first meeting is not held at that time and place, then it shall be held at a time and place specified in a notice given in the manner provided for notice of special meetings of the Board of Directors as set forth in Section 3 of this ARTICLE V.
     Section 2. Regular meetings of the Board of Directors may be held upon such notice, or without notice, at such times and at such places within or outside of the State of Delaware as shall from time to time be determined by the Board of Directors.
9

 

     Section 3. Special meetings of the Board of Directors, whether to be held in person or by telephone or similar communications equipment, may be called by the Chairman of the Board of Directors or the President and Chief Executive Officer on at least five days’ notice to each Director and shall be called by the Chairman or the President and Chief Executive Officer upon the written request of not less than 33 1/3% of the entire Board of Directors; provided, however, that any special meeting of the Board of Directors called to consider a matter that requires immediate action of the Board of Directors may be called on at least 24 hours’ notice if the matter does not require the approval of greater than a simple majority of the Directors.
     Section 4. Whenever notice of a meeting of the Board of Directors is required, the notice shall be given in the manner set forth in ARTICLE XV of these Bylaws and shall state the purpose or purposes, place, date and hour of the meeting.
     Section 5. Except as otherwise required by law or the Certificate of Incorporation or other provisions of these Bylaws, a majority of the entire Board of Directors shall constitute a quorum for the transaction of business and, except as provided in Sections 1 and 2 of ARTICLE VI below, the vote of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. If a quorum is not present at any meeting of Directors, then a majority of the Directors present at the meeting may adjourn the meeting from time to time, without notice of the adjourned meeting other than announcement at the meeting. One or more Directors may participate in a meeting of the Board of Directors by means of conference telephone or similar communication device. To the extent permitted by law, a Director participating in a meeting by conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other will be deemed present in person at the meeting and all acts taken by him or her during his or her participation shall be deemed taken at the meeting. The place of any meeting held by means of conference telephone or similar communications equipment pursuant to this Section 5 will be deemed to be the place stated in the notice thereof so long as at least one Director or, as the case may be, one committee person, is present at that place at the time of that meeting.
     Section 6. Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board of Directors or the committee, as the case may be, who are entitled to vote, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or of that committee.
ARTICLE VI
Special Voting Matters
     Section 1. The following actions shall require approval of at least 75% of the Directors present at a meeting at which a quorum is present:
          a. any modification to Section 2b of ARTICLE IV of these Bylaws; and
          b. any modification to this Section 1.
     Section 2. The following actions shall require approval of at least 66 2/3% of the Directors present at a meeting at which a quorum is present:
          a. Establishing or eliminating regional boards;
10

 

          b. any modification to the RGO (Regional, Global and Operations) planning, budgeting and reporting methodology;
          c. any modification to the overall size of the Board of Directors referred to in Section 2a of ARTICLE IV of these Bylaws;
          d. any issuance of Class A Shares or Class B Shares in excess of the number of shares to which a stockholder would be entitled under the Global Proxy Calculation;
          e. any decision to overrule a decision taken by a regional board that was permitted to be taken in accordance with Section 6 of ARTICLE VII of these Bylaws;
          f. any decision to overrule a recommendation made by the Debit Advisory Board that was permitted to be taken in accordance with Section 4 of ARTICLE IX of these Bylaws; and
          g. any modification to this Section 2.
ARTICLE VII
Regional Boards and Management
     Section 1. The Board of Directors may establish or designate in accordance with Section 2a of ARTICLE VI, one or more bodies to act as regional boards of directors and exercise those powers and authorities delegated to them by the Board of Directors of the Corporation or MasterCard International Incorporated. The general purpose of each regional board is to manage the Corporation’s brand and product strategies on a regional level. The regional boards shall not be boards of any incorporated entity. The initial powers and authorities of the Corporation’s regional boards are set forth below in Section 4.
     Section 2. Initially, there will be six regional boards: Asia/Pacific; Canada; Europe; Latin America; Middle East/Africa; and the United States. Each region shall have corporate staff responsible for all activities within the region, including, without limitation, coordination and support of member programs within the region. The members of each regional board shall be elected by the stockholders of that region.
     Section 3. Each regional board shall establish an annual regional budget for the following year, which budget shall provide sufficient funds to (i) vigorously promote the Corporation’s brands and fund the other regional programs, initiatives and activities and (ii) fund the region’s assignment of centrally managed expenses. The method of funding the regional budgets will be by assessments and other fees (including, without limitation, transaction and operations fees) paid to the Corporation or its consolidated subsidiaries. If budgeting authority has not been delegated to a regional board in a particular region, the annual budget for that region shall be reviewed and approved by the Board of Directors of the Corporation. The Corporation’s entire annual budget incorporating all regional budgets shall be submitted to the Board of Directors for its approval no later than 30 days prior to the fiscal year to which it applies. In its review of the Corporation’s entire annual budget, the Board of Directors shall, among other things, ensure that each final regional budget provides for the appropriate level of expenses assigned to the region and the level of expenditures necessary to appropriately support the Corporation’s brands and programs in that region and an appropriate method of funding such expenses.
     Section 4. Each regional board shall have the authority to manage the following activities, and any other activities that the Board of Directors may delegate from time to time, within its region,
11

 

provided that (i) such activities shall affect and apply only to the affairs of the regional members licensed, and applicants for a license, within such region and to transactions taking place entirely within such region and then only with respect to MasterCard®, Cirrus® and Maestro® payment products (other than travelers cheques), services, programs and activities and (ii) such activities have not otherwise been delegated to the management of the Corporation:
          a.  Membership. Review all completed applications for membership in MasterCard International Incorporated submitted by entities headquartered in the specific region. The regional board also shall have the power and authority to act upon any requests from regional members of MasterCard International Incorporated regarding change of membership status (other than termination) and class of membership. Only the Board of Directors of the Corporation or MasterCard International Incorporated shall have the right to terminate a member’s membership in MasterCard International Incorporated and license or license to participate in MasterCard®, Cirrus® and Maestro®; however, the regional boards shall have the right to recommend such terminations to the Board of Directors of the Corporation.
          b.  Fines and Disciplinary Actions. Power and authority to (1) establish and approve fines and disciplinary actions for intraregional violations of the Corporation’s or MasterCard International Incorporated’s bylaws, rules, policies or procedures by regional members of MasterCard International Incorporated within the specific region and (2) recommend terminations of such regional members of MasterCard International Incorporated to the Board of Directors of the Corporation.
          c.  Annual Expense Budget. Power and authority and obligation to approve an annual budget for the specific region within the time frames needed to approve the entire annual budget of the Corporation. Such regional budget shall comply with the practices, policies and procedures of the Corporation and MasterCard International Incorporated.
          d.  Assessments and Fees. Power, authority and obligation to fix, impose and collect assessments and fees from regional members of MasterCard International Incorporated within the specific region in order to fund the region’s budget. This power shall extend to interregional transactions in which a regional member of MasterCard International Incorporated is involved.
          e.  Surplus Funds. Power and authority to determine the distribution of a portion of any revenues in excess of budgeted amounts in any year, provided that such distribution is consistent with the Corporation’s reinvestment policy for excess funds then in effect or such other amount as agreed with the President and Chief Executive Officer of the Corporation.
          f.  Additional Funding. Power and authority to levy additional assessments, fees or both upon regional members of MasterCard International Incorporated within the region for the purpose of generating additional funds above budgeted revenue in order to fund regional initiatives not provided for in the region’s annual budget. This power shall extend to interregional transactions in which a regional member of MasterCard International Incorporated is involved.
          g.  Intraregional Interchange Fees. Power and authority to approve intraregional interchange fees, subject to applicable regulatory requirements.
          h.  Intraregional Operating Rules. Power and authority to adopt intraregional variances to the Corporation’s operating rules, policies and procedures that apply to MasterCard®, Cirrus® and Maestro®, to the extent they apply only to members of MasterCard International Incorporated of a specific region and their transactions effected wholly within a specific region, which rules, policies and procedures cover the standards and procedures governing how a specific transaction
12

 

is initiated and processed, and how any related disputes are resolved. Such rules may not have any effect, intended or unintended, outside the region.
          i.  Intraregional Product and Enhancement Development. Power and authority to approve intraregional products and enhancement services involving the creation and ongoing management of new regional payment vehicles and enhancement services that add value to new and existing products.
          j.  Affinity and Co-Branding Rules. With respect to MasterCard®, Cirrus® and Maestro® branded products only, the power and authority to approve specific affinity and co-branding rules for the card programs of members of MasterCard International Incorporated within the specific region.
          k.  Regional Board Processes. Obligation to establish the procedures and requirements for managing the regional board and its activities, which shall be set forth in the regional board rules and shall include quorum requirements, minimum vote requirements and the creation and seating of committees.
     Section 5. The delegation of the powers and authorities upon the regional boards as described in this ARTICLE VII, and the delegation of any other powers or authorities that may be delegated upon one or more regional boards by the Corporation’s Board of Directors from time to time, is conditioned upon compliance by the regional board with all applicable laws and all of the requirements set forth in the Corporation’s Certificate of Incorporation, rules and regulations, these Bylaws and MasterCard International Incorporated’s certificate of incorporation, bylaws and membership and licensing rules and regulations, and any other policies of the Corporation or MasterCard International Incorporated, including the rules and regulations applicable to Cirrus® and Maestro®. Such delegated power and authority may not be delegated by the regional boards. Management of the Corporation shall establish the processes supporting the regional boards in their exercise of such delegated power and authority.
     Section 6. Any decision of a regional board, to the extent such decision is within the scope of power and authority delegated to such regional board by the Board of Directors of the Corporation, shall be effective unless and until the Board of Directors of the Corporation, in accordance with Section 2 of ARTICLE VI, determines otherwise, provided that the approval or adoption of any action, rule or policy that could be expected, in the reasonable judgment of the Board of Directors of the Corporation, to have an effect in more than one region or that in the reasonable judgment of the Board of Directors of the Corporation is inconsistent with a published policy, practice or strategy of the Corporation, shall not become effective (or shall be declared ineffective if already in effect) unless and until such action, rule or policy has been ratified by the Board of Directors of the Corporation. Only the Corporation’s management shall be authorized to enter into a business arrangement with a stockholder or a member of MasterCard International Incorporated that it can be reasonably be determined will relate to activities that will be conducted in, or have an effect in, more than one region, subject to any parameters as may be determined by the Board of Directors. Nothing contained in this Section 6 shall be construed to limit the authority of the Board of Directors of the Corporation to revoke or amend the power and authority delegated upon the regional boards.
     Section 7. Each region shall have a regional president selected by the President and Chief Executive Officer of the Corporation, subject to the concurrence of the regional board. In the event of a disagreement between a regional board and the President and Chief Executive Officer of the Corporation with respect to a nominee for regional president, the chairman of the regional board and the President and Chief Executive Officer of the Corporation shall attempt to resolve the dispute through
13

 

direct consultation. If no resolution is reached promptly, the President and Chief Executive Officer of the Corporation shall present his recommendation for regional president to the Board of Directors and shall advise the Board of Directors of any disagreement with respect to such selection. The Board of Directors shall only approve the selection of the President and Chief Executive Officer upon the affirmative vote of two-thirds of the entire Board of Directors with respect to any dispute regarding the President and Chief Executive Officer’s disputed selection for a regional president. Each regional president shall report to the President and Chief Executive Officer of the Corporation or such other member or members of the Corporation’s management as the President and Chief Executive Officer of the Corporation may determine. Each regional president shall assist the Corporation’s Board of Directors and management and the regional board in implementing the decisions and policies of the Corporation’s Board of Directors and management and the regional board (within the scope of power and authority delegated by the Corporation’s Board of Directors) that affect the region. Notwithstanding anything herein to the contrary, during the Transition Period, the regional president for Europe shall report only to the President and Chief Executive Officer of the Corporation and shall be a member of the Corporation’s Global Executive Management Group. Any termination of a regional president by the President and Chief Executive Officer of the Corporation shall require the concurrence of the regional board, which shall not be unreasonably withheld.
ARTICLE VIII
Committees
     Section 1. The Board of Directors may designate from among its members an Executive Committee, Audit Committee, Nominating and Corporate Governance Committee, Compensation Committee and other committees to serve at the pleasure of the Board of Directors.
          a.  Executive Committee . The Executive Committee, if formed, shall comprise the Chairman of the Board of Directors, the Vice Chairmen of the Board of Directors, the President and Chief Executive Officer (for so long as he or she is a Director of the Corporation) and such other number of Directors as the Board of Directors shall establish from time to time so that the composition of the Executive Committee generally reflects the regional composition of the Corporation’s stockholders. To the extent permitted by law, the Executive Committee shall have all the authority of the Board of Directors, except that it will not have the power or authority to approve or recommend an amendment to the Corporation’s Certificate of Incorporation or an agreement or plan of merger or consolidation, to recommend the sale, lease or exchange of all or substantially all of the Corporation’s property and assets, to recommend the dissolution of the Corporation or a revocation of dissolution, to amend these Bylaws or to take any action that would require the affirmative vote of greater than a simple majority of the members of the Board of Directors present at a meeting at which a quorum is present.
          b.  Audit Committee . The Audit Committee, if formed, shall comprise such number of Directors as the Board of Directors may appoint to it. The Audit Committee will be responsible for reviewing the reports of the Corporation’s auditors and for performing such other duties as are assigned to it by the Board of Directors.
          c.  Nominating and Corporate Governance Committee . The Nominating and Corporate Governance Committee shall comprise such number of Directors as the Board of Directors may appoint to it. In selecting Directors to serve on the Nominating and Corporate Governance Committee, the Board of Directors shall seek to include individuals representing stockholders that conduct business in multiple regions of the world, as well as individuals representing stockholders that reflect the regional composition of the Corporation’s stockholders, and shall include representation from each region representing greater than 20% of the most recent Global Proxy
14

 

Calculation. Beginning with the second year of the Debit Advisory Board the Nominating and Corporate Governance Committee will be responsible for annually nominating a slate of persons to serve as Directors and members of the Debit Advisory Board for approval by the Board of Directors as described in Article IX. In addition, the Nominating and Corporate Governance Committee may fill vacancies in the Debit Advisory Board that occur between annual elections of the Debit Advisory Board as described in Article IX. In addition, the Nominating and Corporate Governance Committee may recommend individuals to serve on the standing committees. In making nominations, the Nominating and Corporate Governance Committee will seek, consistent with the qualifications required of Directors and committee members, to give the stockholders in each geographic region reasonable representation, taking into account, among other things, the number of shares of the Corporation’s stock owned by the stockholders in each region.
          d.  Compensation Committee . The Compensation Committee, if formed, shall comprise such number of Directors as the Board of Directors may elect to it. The Compensation Committee may be responsible for fixing the compensation of the elected officers of the Corporation and approving any employee incentive programs. The compensation of all other employees will be fixed by the Corporation’s President and Chief Executive Officer (subject to the oversight of the Board of Directors).
          e. Any other committees, to the extent formed, shall have such authority as the Board of Directors grants them. The Board of Directors shall have power at any time to change the membership of any committees, to fill vacancies in their membership and to discharge any committees.
     Section 2. Each committee shall keep regular minutes of its proceedings and report to the Board of Directors as and when the Board of Directors shall require. Unless the Board of Directors otherwise provides, notice requirements for meetings of committees shall be the same as notice requirements for meetings of the Board of Directors. Unless the Board of Directors otherwise provides, a majority of the members of any committee may determine its actions and the procedures to be followed at its meetings (which may include a procedure for participating in meetings by conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other).
     Section 3. Any action of a committee may be taken without a meeting if written consent to the action signed by all the members of the committee is filed with the minutes of the committee.
ARTICLE IX
Debit Advisory Board
     Section 1. For an intended term of three years, the Corporation shall have a Debit Advisory Board which will be responsible for providing advice to the Board of Directors in the following areas:
          a. the development and expansion of the Corporation’s debit programs globally;
          b. global program and brand strategies, policies, rules and technology standards for the Corporation’s debit programs consistent with the standards for the Corporation’s other products set by the Board of Directors; and
          c. the performance and evaluation of the Corporation’s Debit Brand Management Group (or other group within the Corporation performing similar functions).
15

 

For purposes of these Bylaws, the term “debit programs” shall mean the issuance and acceptance of ATM and point-of-sale electronic payment devices that access deposit accounts owned by an issuing member of MasterCard International Incorporated under a trademark and/or service mark owned or managed, directly or indirectly, by the Corporation or one of its subsidiaries.
     Section 2. Beginning on or after the two-year anniversary of the creation of the Debit Advisory Board, the Board of Directors shall review the performance of the Debit Advisory Board and consider, in its sole discretion, whether, and on what terms, to continue the Debit Advisory Board, with the understanding that it is the intent of the Corporation that the Debit Advisory Board will continue for a third year.
     Section 3. During the first year of the existence of the Debit Advisory Board, the Debit Advisory Board shall be comprised of the members of the Board of Directors of Maestro International Incorporated in effect upon the date of adoption of these Bylaws. The Nominating and Corporate Governance Committee will nominate individuals to serve as members of the Debit Advisory Board beginning with the second year of the Debit Advisory Board for approval by the Board of Directors. In selecting nominees for service on the Debit Advisory Board, the Nominating and Corporate Governance Committee will give due consideration to representatives from key stockholders of the Corporation that support the Corporation’s debit products, as measured by the Global Proxy Calculation. Prior to presenting such nominations, the Nominating and Corporate Governance Committee shall seek recommendations for candidates for the Debit Advisory Board from the regional boards and shall duly consider all such recommendations. In the event of a disagreement between a regional board and the Nominating and Corporate Governance Committee with respect to a nominee(s) from that region, the chairman of the regional board and the Nominating and Corporate Governance Committee shall attempt to resolve the dispute through direct consultation. If no resolution is reached promptly, the Nominating and Corporate Governance Committee shall present its recommended slate of Debit Advisory Board members and shall advise the Board of Directors of any disagreement with respect to the nominees from any specific region. The Board of Directors shall make the final determination with respect to any dispute regarding a regional nominee. A vacancy in the Debit Advisory Board that occurs in between annual elections of the Debit Advisory Board, by reason of death, resignation or subsequent non-eligibility of a member of the Debit Advisory Board, may be filled by the Nominating and Corporate Governance Committee. A Debit Advisory Board member may resign at any time by written notice to the Chief Debit Officer of the Corporation or the Secretary of the Debit Advisory Board.
     Section 4. Any recommendation of the Debit Advisory Board, to the extent such recommendation is within the scope of power and authority delegated to the Debit Advisory Board by the Board of Directors of the Corporation and is not inconsistent with a published policy, practice or procedure, shall be effective unless and until the Board of Directors of the Corporation, in accordance with Section 2(f) of ARTICLE VI, overrules such recommendation.
ARTICLE X
Officers
     Section 1. Subject to the provisions of Section 1(a) below regarding the election and term of the Chairman of the Board of Directors, the Board of Directors shall, annually at its first meeting following the annual meeting of stockholders, elect a Chairman of the Board of Directors from among its members, a President and Chief Executive Officer and a Secretary; and the Board of Directors may at that meeting, and thereafter, elect a Chairman Emeritus, up to two Vice-Chairmen of the Board of Directors, a Chief Operating Officer, a Treasurer and such other officers as it may from time to time deem advisable. Except as prohibited by law, any two or more offices may be held by the same person. No officer except the Chairman of the Board of Directors, the Vice-Chairmen, if any, and the President and Chief Executive Officer need be a Director of the Corporation.
16

 

          a.  The Chairman of the Board of Directors . The Chairman of the Board of Directors shall be elected to an initial term of two years and shall be eligible to be reelected annually thereafter. The Chairman of the Board of Directors shall preside at all meetings of the members of the Board of Directors and shall perform such other duties as are properly assigned to him by the Board of Directors.
          b.  The Vice-Chairmen of the Board of Directors . The Board of Directors may elect up to two Vice-Chairmen of the Board of Directors. The Vice-Chairmen shall have such powers assigned to them by the Chairman or by the Board of Directors. In the absence of the Chairman, the Chairman shall designate one of the Vice-Chairmen to preside at meetings of the Board of Directors.
          c.  The Chairman Emeritus . The Corporation may have a Chairman Emeritus who shall be elected by the Board of Directors and shall be entitled to receive notice of all meetings of the Board of Directors and shall be permitted to attend and participate in all meetings of the Board of Directors, but shall not be entitled to vote. The Chairman Emeritus must have retired as an officer of a member of MasterCard International Incorporated while serving as a member of the Board of Directors of the Corporation and must have served as Chairman of the Board of Directors of the Corporation for at least two years.
          d.  The President and Chief Executive Officer . The Corporation shall have a President who also shall be the Chief Executive Officer of the Corporation. The President shall have general overall supervision of all business of the Corporation and shall have such powers and duties as usually pertain to such office or as may be assigned to him by the Board of Directors. In the absence of the Chairman and the Vice-Chairmen, the President shall perform the duties and exercise the powers of the Chairman of the Board of Directors.
          e.  The Chief Operating Officer . The Corporation may have a Chief Operating Officer who shall be elected by the Board of Directors. The Chief Operating Officer shall report directly to the President and Chief Executive Officer and shall have such responsibilities as shall be assigned from time to time by the President and Chief Executive Officer.
          f.  The Treasurer . The Corporation may have a Treasurer who shall be elected by the Board of Directors. The Treasurer shall have the care and custody of all moneys and securities of the Corporation. He or she shall cause to be entered in records to be kept for that purpose full and accurate accounts of all moneys received by him or her and paid by him or her on account of the Corporation. He or she shall make and sign such reports, statements and documents as may be required by him of the Board of Directors or by the laws of the United States, the State of Delaware or any other state or country, and shall perform such other duties as usually pertain to such office or as may be assigned to him by the Board of Directors. The Treasurer shall be bonded in the manner and amount prescribed by the Board of Directors. The reports and records of the Treasurer shall be audited as of the end of each fiscal year and at such other times as the Board of Directors may direct by independent certified public accountants selected by the Board of Directors or by a committee of members designated by the Chairman of the Board of Directors with the approval of the Board of Directors.
          g.  The Secretary . The Corporation shall have a Secretary who shall be elected by the Board of Directors. The Secretary shall issue notices of meetings of stockholders and of the Board of Directors when such notices are required by law or these Bylaws. The Secretary shall attend all meetings of the stockholders and of the Board of Directors and keep the minutes thereof. He or she shall affix the Corporation’s seal to such instruments as require the seal and shall perform such other duties as usually pertain to such office or as may be assigned to her/him by the Board of Directors or as may otherwise be provided for in these Bylaws.
17

 

     Section 2. Subject to the provisions of Section 1(a) above regarding the election and term of the Chairman of the Board of Directors, each officer shall be elected by the Board of Directors and shall hold office until the earliest of such individual’s death, resignation, removal or the first meeting of the Board of Directors following the next annual meeting of stockholders. Any officer may be removed at any time, either with or without cause, by the Board of Directors. If any office becomes vacant for any reason, the vacancy may be filled by the Board of Directors.
     Section 3. Any officer may resign at any time by giving written notice to the Board of Directors or to the President and Chief Executive Officer. Such resignation shall take effect at the time specified in the notice or, if no time is specified, at the time of receipt of the notice, and the acceptance of such resignation shall not be necessary to make it effective.
     Section 4. The Corporation may secure the fidelity of any or all of its officers or agents by bond or otherwise. In addition, the Board of Directors may require any officer, agent or employee to give security for the faithful performance of his duties.
     Section 5. In the event of an absence or illness of any officer, or for any other reason that the Board of Directors or the President and Chief Executive Officer may deem sufficient, the Board of Directors or the President and Chief Executive Officer may temporarily assign the powers and duties of that officer to any other officer or to any Director.
     Section 6. The compensation of the elected officers shall be fixed by the Board of Directors or a committee thereof. The compensation of other employees of the Corporation shall be fixed by the President and Chief Executive Officer (subject to the oversight of the Board of Directors). All employee incentive programs shall be approved by the Board of Directors or a committee thereof.
ARTICLE XI
Certificates for Shares
     Section 1. In the discretion of the Board of Directors, the shares of stock of the Corporation may be represented by certificates, in such form as the Board of Directors may from time to time prescribe, signed by the Chairman of the Board of Directors, or the President and Chief Executive Officer or a Vice President and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary and bearing any legends as may be prescribed by the Certificate of Incorporation or otherwise.
     Section 2. In the event that the shares of stock of the Corporation are not represented by certificates, the name, address and number and class of shares owned by each stockholder shall be set forth in the books and records of the Corporation, as such may be amended from time to time by the Corporation to reflect any change in the name, address and/or number or class of shares owned by each stockholder.
     Section 3. Any or all signatures upon a certificate may be a facsimile. Even if an officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall cease to be that officer, transfer agent or registrar before the certificate is issued, that certificate may be issued by the Corporation with the same effect as if he or she or it were that officer, transfer agent or registrar at the date of issue.
     Section 4. The Board of Directors may direct that a new certificate be issued in place of any certificate issued by the Corporation that is alleged to have been lost, stolen or destroyed. When doing so, the Board of Directors may prescribe such terms and conditions precedent to the issuance of
18

 

the new certificate as it deems expedient, and may require a bond sufficient to indemnify the Corporation against any claim that may be made against it with regard to the allegedly lost, stolen or destroyed certificate or the issuance of the new certificate.
     Section 5. The Corporation or a transfer agent of the Corporation, upon surrender to it of a certificate representing shares, duly endorsed and accompanied by proper evidence of lawful succession, assignment or authority of transfer, shall issue a new certificate to the person entitled thereto, and shall cancel the old certificate and record the transaction upon the books of the Corporation.
     Section 6. The Corporation shall for all purposes be entitled to treat a person registered on its books, as the owner of shares, with the exclusive right, among other things, to receive dividends and to vote with regard to those shares, and the Corporation shall be entitled to hold a person registered on its books as the owner of shares and shall not be bound to recognize any equitable or other claim to, or interest in, shares of its stock on the part of any other person, whether or not the Corporation shall have express or other notice of the claim or interest of the other person, except as otherwise provided by the laws of Delaware.
ARTICLE XII
Indemnification
     Section 1. The Corporation shall indemnify any person who was or is made a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise to the fullest extent permitted by Delaware law.
     Section 2. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise to the fullest extent permitted by Delaware law.
     Section 3. To the extent that a present or former director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 1 and 2 of this ARTICLE, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection therewith.
     Section 4. Any indemnification under Sections 1 and 2 of this ARTICLE (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because he or she has met the applicable standard of conduct set forth in Sections 1 and 2. Such determination will be made, with respect to a person who is a director or officer at the time of such determination, (1) by a majority vote of the Board of Directors who were not parties to such action, suit or proceeding even though less than a quorum, or (2) by a committee or such Directors designated by majority vote of such Directors, even though less than a quorum, or (3) if there are no
19

 

such Directors, or if such Directors so direct, by independent legal counsel (compensated by the Corporation) in a written opinion or (4) by the stockholders.
     Section 5. Expenses (including attorneys’ fees) incurred by any director, officer, employee or agent in defending a civil, criminal, administrative or investigative action, suit or proceeding, or threat thereof, may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding in the specific case upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this ARTICLE. Such expenses (including attorney’s fees) incurred by a former director, officer, employee or agent may be paid upon such terms and conditions, if any, as the Corporation deems appropriate.
     Section 6. The indemnification and advancement of expenses provided by, or granted pursuant to, the other Sections of this ARTICLE shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person’s official capacity and as to action in another capacity while holding such office.
     Section 7. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of this ARTICLE.
     Section 8. References in this ARTICLE to “the Corporation” will include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger that, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, will stand in the same position under the provisions of this ARTICLE with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued.
     Section 9. For purposes of this ARTICLE, references to “other enterprises” will include employee benefit plans; references to “fines” will include any excise taxes assessed on a person with respect to an employee benefit plan; references to “serving at the request of the Corporation” shall include any service as a director, officer, employee or agent of a subsidiary of the Corporation and any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan will be deemed to have acted in a manner “not opposed to the best interests of the Corporation” as referred to in this ARTICLE.
     Section 10. The indemnification and advancement of expenses provided by, or granted pursuant to, this ARTICLE shall, unless otherwise provided, when authorized or ratified continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such person.
20

 

     Section 11. Except as specifically permitted by applicable law, no person who is or was a director, officer, employee, agent or member of any committee of the Corporation shall be indemnified in any way if such person has brought the action or proceeding against the Corporation, its directors, officers, employees, agents or any committee of the Corporation.
     Section 12. The provisions of this ARTICLE will be deemed retroactive and will include all acts of the directors, officers, employees or agents of the Corporation since the date of incorporation.
ARTICLE XIII
General Provisions
     Section 1. The corporate seal shall be circular in form with the words “MasterCard Incorporated” around the outer margin and the words and figures “CORPORATE SEAL 2001 DELAWARE” in the center and such other appropriate legend as the Board of Directors may from time to time determine. Unless prohibited by the Board of Directors, a facsimile of the corporate seal may be affixed or reproduced in lieu of the corporate seal itself.
     Section 2. The fiscal year of the Corporation shall be the calendar year.
     Section 3. The symbol of the Corporation will be the word “MasterCard” superimposed across a red circle overlapping a yellow circle in the form adopted by the Board of Directors as the corporate symbol of the Corporation.
     Section 4. As used in these Bylaws, the term “card” means a device, complying with the specifications set forth in the rules and regulations of MasterCard International Incorporated, which may be used to pay for goods and/or services and to obtain cash through access of the cardholder’s credit, charge or depositary account with the issuer of the cards.
     Section 5. As used in these Bylaws, the phrase “published policy” is one that has been disseminated by bulletin, letter or other form of written or electronic communication to, at least, the stockholders and/or the Class A members of MasterCard International Incorporated that, along with their affiliate members, if any, are affected by such policy.
     Section 6. The books of the Corporation, except such as are required by law to be kept within the State of Delaware, may be kept at such place or places within or outside of the State of Delaware as the Board of Directors may from time to time determine.
ARTICLE XIV
Amendments
     Section 1. The Board of Directors, by the affirmative vote of a majority of the entire Board of Directors at any meeting of the Board of Directors at which a quorum is present, or by action without a meeting if all of the Directors consent in writing to that action, may adopt, amend or repeal any provision of these Bylaws, except that (i) any amendment or repeal of Section 1 of ARTICLE VI shall require the affirmative vote of at least 75% of the Directors present at a meeting at which a quorum is present, (ii) any amendment or repeal of Section 2 of ARTICLE VI shall require the affirmative vote of at least 66 2/3% of the Directors present at a meeting at which a quorum is present and (iii) any amendment or repeal of Section 2 of ARTICLE III shall be subject to the terms and conditions of Article EIGHTH of the Corporation’s Certificate of Incorporation.
21

 

     Section 2. The stockholders, by the affirmative vote of a majority of the votes cast at any meeting of the stockholders at which a quorum is present or by action without a meeting in accordance with these Bylaws, may adopt, amend or repeal any provision of these Bylaws; provided, however, that any amendment or repeal of Section 2 of ARTICLE III shall be subject to the terms and conditions of Article EIGHTH of the Corporation’s Certificate of Incorporation.
ARTICLE XV
Notices
     Section 1. To the extent permitted by applicable law, any notice to a stockholder may be given personally, by mail, facsimile transmission, telex, telegraph, cable or similar instrumentality or by electronic transmission. A notice will be deemed given when actually given in person; when transmitted by a legible transmission, if given by facsimile transmission; when transmitted, answerback received, if given by telex; on the day when delivered to a cable or similar communications company; three business days after delivery to a courier service; or on the fifth business day after the day when deposited with the United States mail, postage prepaid, directed to the stockholder at such stockholder’s address, facsimile number, electronic mail address or telex number as it appears on the records of stockholders or at such other address, facsimile number, electronic mail address or telex number as the stockholder may have designated to the Secretary in writing as the address or number to which notices should be sent. Notice given by a posting on electronic network together with separate notice to the stockholder of such specific posting, shall be deemed given upon the later of (A) such posting and (B) the giving of such separate notice. Notice given by any other form of electronic transmission shall be deemed given when directed to the stockholder.
     Section 2. Any notice to a Director may be given personally, by telephone, by mail, facsimile transmission, telex, telegraph, cable or similar instrumentality or electronic transmission to such Director’s residence or usual place of business. A notice will be deemed given when actually given in person or by telephone; when transmitted by a legible transmission, if given by facsimile transmission; when transmitted, answerback received, if given by telex; on the day when delivered to a cable or similar communications company; three business days after delivery to a courier service; or on the fifth business day after the day when deposited with the United States mail, postage prepaid, directed to the director at his business address, facsimile number, electronic mail address or telex number or at such other address, facsimile number, electronic mail address or telex number as the director may have designated to the Secretary in writing as the address or number to which notices should be sent. Notice given by any form of electronic transmission shall be deemed given when directed to the Director.
     Section 3. Any person may waive notice of any meeting by signing a written waiver or by electronic transmission, whether before or after the meeting. In addition, attendance at a meeting will be deemed a waiver of notice unless the person attends for the purpose, expressed to the meeting at its commencement, of objecting to the transaction of any business because the meeting is not lawfully called or convened.
22

EXHIBIT 10.4.1
FIRST AMENDMENT TO GUARANTEE
     THIS FIRST AMENDMENT TO GUARANTEE (the “Amendment”), dated as of November 23, 2004, is made by and among MASTERCARD INTERNATIONAL INCORPORATED, a Delaware non-stock membership corporation (“MasterCard International”), MASTERCARD INCORPORATED, a Delaware stock corporation (“MasterCard Incorporated”; MasterCard International and MasterCard Incorporated are hereinafter referred to individually and collectively as “Guarantor”), and UMB BANK, & TRUST, N.A., a national banking association (formerly known as State Street Bank and Trust of Missouri, N.A.), as Indenture Trustee (the “Indenture Trustee”).
Recitals
     WHEREAS, MasterCard International delivered to the Indenture Trustee for the benefit of the Noteholders under that certain Indenture, dated as of August 31, 1999 (as amended, supplemented, extended or otherwise modified from time to time, the “Indenture”), that certain Guarantee, dated as of August 31, 1999 (the “Guarantee”). Capitalized terms used in this Amendment and not defined in this Amendment shall have the meanings ascribed to them in the Guarantee;
     WHEREAS, pursuant to the Guarantee, MasterCard International absolutely and unconditionally guaranteed the full and prompt payment of certain debts, liabilities and obligations owed by MCI O’Fallon 1999 Trust, a Delaware business trust (“MCI O’Fallon”), to the Noteholders;
     WHEREAS, MasterCard International and related entities have undergone a corporate restructuring wherein the ownership and control of MasterCard International was transferred to MasterCard Incorporated;
     WHEREAS, in order to more accurately reflect the corporate structure of the Guarantor and facilitate efficient and accurate compliance with the reporting and financial covenants set forth in the Guarantee, MasterCard International and MasterCard Incorporated have requested that the Indenture Trustee amend the Guarantee to add MasterCard Incorporated as an additional guarantor and to make other changes consistent with Guarantor’s corporate structure;
     WHEREAS, Section 15(a) of the Guarantee provides that none of the provisions of the Guarantee may be amended or modified, except as provided for in Section 11.1 of the Indenture;
     WHEREAS, Section 11.1 of the Indenture provides that the Indenture Trustee shall not enter into any amendment or modification without the prior written consent of the Required Noteholders, which constitutes the holders of more than 50% in principal amount of the Senior Secured Notes; and

 

     WHEREAS, the Required Noteholders have provided their written consent to this Amendment and have authorized the Indenture Trustee to enter into this Amendment, copies of which written consents are attached hereto as Exhibit A and are incorporated herein by this reference.
     NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows:
     1. The Guarantee is hereby amended so as to add MasterCard Incorporated as an additional party thereto and guarantor thereunder, jointly and severally, and to provide that all references to “Guarantor” contained therein shall hereinafter refer to both MasterCard International and MasterCard Incorporated, jointly and severally. All references to “Amendment” in the Guarantee shall mean this Amendment.
     2. The introductory paragraph of Section 8 and subsections 8.1 through and including subsection 8.16 of the Guarantee are hereby amended by deleting each reference to “Guarantor” contained therein and inserting the term “MasterCard International” in lieu thereof, in order that the representations and warranties contained therein shall be solely the representations and warranties of MasterCard International and not both MasterCard International and MasterCard Incorporated, collectively as Guarantor. Section 8 of the Guarantee is further amended by adding the following provisions at the end thereof:
          “8.17. Representations and Warranties of MasterCard Incorporated . In order to induce the Required Noteholders to consent to the Amendment and authorize the Indenture Trustee to enter into the Amendment, MasterCard Incorporated hereby represents and warrants to the Indenture Trustee and each Noteholder as of the date of the Amendment, as follows:
          (a)  Financial Condition (i) The audited consolidated balance sheet of MasterCard Incorporated 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 MasterCard Incorporated for the fiscal period ended on such date, reported on by its independent public accountants, and (ii) the unaudited consolidated balance sheet of MasterCard Incorporated at the end of its most recent fiscal quarter and the related consolidated statements of income and cash flows of MasterCard Incorporated for the portion of the fiscal period ended on such date, which have been filed in MasterCard Incorporated’s reports to the Securities and Exchange Commission (the “SEC”), are complete and correct and present fairly (except, with respect to interim statements, for normal year-end adjustments) the consolidated financial position of MasterCard Incorporated 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
-2-

 

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 as disclosed therein). MasterCard Incorporated 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.
          (b)  No Material Change. Since the date of the most recent financial statements identified in subsection 8.17(a), (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 report filed publicly with the SEC, MasterCard Incorporated 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.
          (c)  Corporate Existence; Compliance with Law . MasterCard Incorporated (a) is a stock corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, (b) has the corporate 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.
          (d)  Corporate Power; Authorization . MasterCard Incorporated has the corporate power and authority and the legal right to make, deliver and perform the Amendment. MasterCard Incorporated has taken all necessary corporate action to authorize the execution, delivery and performance of the Amendment. 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 MasterCard Incorporated or the validity or enforceability against MasterCard Incorporated of the Amendment.
          (e)  Enforceable Obligations . The Amendment has been duly executed and delivered on behalf of MasterCard Incorporated and the Amendment constitutes the
-3-

 

legal, valid and binding obligation of MasterCard Incorporated, enforceable against MasterCard Incorporated 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).
          (f)  No Legal Bar . The performance of the Amendment will not violate any Legal Requirement or any Contractual Obligation applicable to or binding upon MasterCard Incorporated 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 of (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.
          (g)  No Material Litigation. Except as disclosed in Schedule 8.7 or as previously disclosed in any report filed with the SEC, no litigation, investigation known to MasterCard Incorporated or proceeding of or by any Governmental Authority or any other Person is pending or, to its knowledge, threatened against MasterCard Incorporated (a) with respect to the validity, binding effect or enforceability of the Amendment, or (b) which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.
          (h)  Investment Company Act . MasterCard Incorporated 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).
          (i)  No Default . MasterCard Incorporated 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. MasterCard Incorporated 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.
          (j)  Taxes . MasterCard Incorporated 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 MasterCard Incorporated, 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
-4-

 

reserves in conformity with GAAP have been provided in the books of MasterCard Incorporated), 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 MasterCard Incorporated, 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 MasterCard Incorporated), 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 MasterCard Incorporated have been determined by the United States Internal Revenue Service and paid for all fiscal years up to and including the fiscal year ended December 31, 2003.
          (k) Ownership of Property; Liens. MasterCard Incorporated has good and marketable title to, or valid and subsisting leasehold interests in, all of 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).
          (l)  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 Amendment, 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 MasterCard Incorporated 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 MasterCard Incorporated or any Commonly Controlled Entity would become subject under ERISA if MasterCard Incorporated 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.
-5-

 

          (m)  Solvency . MasterCard Incorporated 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 MasterCard Incorporated, upon giving effect to the Amendment, shall be not less than the amount that shall be required to pay the probable liabilities of MasterCard Incorporated (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. MasterCard Incorporated is not and, upon giving effect to the Amendment 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 MasterCard Incorporated has an unreasonably small capital, and MasterCard Incorporated has no intent (a) to hinder, delay or defraud any Person to which MasterCard Incorporated is, or anticipates it shall become, indebted or (b) to incur indebtedness that would be beyond its ability to pay as such indebtedness matures.”
               3. Subsections 9.1 and 9.2 are hereby amended by deleting each reference to “Guarantor” contained therein and inserting the term “MasterCard Incorporated” in lieu thereof, in order that the covenants and obligations of the “Guarantor” contained therein shall be covenants and obligations of MasterCard Incorporated, only, and not MasterCard International.
          The financial statements required to be delivered pursuant to Subsection 9.1 shall be deemed to have been delivered to the Noteholders on the date on which MasterCard Incorporated provides written notice to the Noteholders that such information has been posted on its website on the Internet at http://www.mastercardintl.com or is available on the website of the SEC or any successor at http://www.sec.gov (to the extent such information has been posted or is available as described in such notice). Any of the foregoing to the contrary notwithstanding, MasterCard Incorporated herby agrees, upon the written request of a Noteholder, to provide to the Trustee for such Noteholder hard (paper) copies of, or written notice of the posting with the SEC website of, all quarterly reports prepared and filed with the SEC on form 10-Q and all annual reports prepared and filed with the SEC on form 10-K or written.
     Subsection 9.2(d) is further amended to add at the end thereof:
“, provided that the filing of any such statement, report, notice or prospectus with the SEC shall be deemed to have satisfied MasterCard Incorporated’s obligations under this subsection 9.2(d), provided however, that MasterCard Incorporated herby agrees, upon the written request of a Noteholder, to provide to the Trustee for such Noteholder hard (paper) copies of, or written notice of the posting with the SEC website of, all quarterly reports prepared and filed with the SEC on form 10-Q and all annual reports prepared and filed with the SEC on form 10-K.”
-6-

 

     4. Subsection 9.2 (b) is hereby deleted and the following is added in lieu thereof:
“(b) within one hundred twenty (120) days after the end of each fiscal year and within sixty (60) days after the end of each of the first three quarterly periods of each fiscal year of MasterCard Incorporated, a certificate of a Responsible Officer of each of MasterCard International and MasterCard Incorporated (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 applicable 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, and, in the case of MasterCard Incorporated, (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;”
     For purposes of Section 9, each reference to “Responsible Officer” shall mean the chief executive officer, controller or treasurer of MasterCard Incorporated or MasterCard International, as applicable.
     5. Subsection 9.7 (c) is hereby deleted and the following is added in lieu thereof:
“(c) any litigation or proceeding affecting the Guarantor, not covered by insurance, or in which injunctive or similar relief is sought which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect;”
     6. Subsection 10.1 of the Guarantee is hereby deleted and the following is added in lieu thereof:
“10.1 Consolidated Net Worth . Permit Consolidated Net Worth of MasterCard Incorporated at any time to be less than the sum of (i) $525,000,000 plus (ii) an amount equal to 50% of the sum of consolidated net income (if positive) of MasterCard Incorporated for each fiscal quarter commencing with and including the first fiscal quarter of 2004.”
     7. Subsections 10.2 and 10.3 are hereby amended to provide that such covenants shall apply only with respect to MasterCard International and by deleting each reference to “Guarantor” contained therein and inserting the term “MasterCard International” in lieu thereof, in order that the covenants and obligations contained therein shall be covenants and obligations of MasterCard International, only, and not MasterCard Incorporated.
-7-

 

     8. The following unnumbered paragraph is hereby added to the end of Section 10, immediately preceding Section 11:
     “In addition to the foregoing, MasterCard Incorporated 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, MasterCard Incorporated shall not, at any time, directly or indirectly 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 restriction shall not apply to the consolidation or merger of MasterCard Incorporated with, or conveyance, transfer or lease of all or substantially all of the assets of MasterCard Incorporated in a single transaction or a series of transactions to, any Person so long as (i) 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 (ii) 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.”
     9. With respect to Subsection 12(b) of the Guarantee, notices to both MasterCard International and MasterCard Incorporated, shall be addressed to the address or transmission number for notices set forth opposite the signature of MasterCard International, as contained in the Guarantee.
     10. MasterCard International hereby reaffirms and remakes, and MasterCard Incorporated hereby affirms and makes, its obligations to the Noteholders pursuant to the terms of the Guarantee, as hereby amended.
     11. This Amendment shall be effective as of the date first written above, and any financial statements or certificates provided after the date hereof pursuant to subsections 9.1 and 9.2 of the Guarantee, including any statements in respect of Section 10.1 contained therein, shall comply with the provisions of this Amendment, regardless of whether such financial statements or certificates relate to a period prior to the date of this Amendment.
     12. Except for the amendments contained herein, all of the provisions of the Guarantee shall remain unmodified. This Amendment shall be binding upon and inure to the benefit of the respective successors and permitted assigns and, as applicable, the heirs and legal representatives of the parties hereto. This Amendment, together with the Guarantee, as modified by this Amendment, constitutes the entire understanding and agreement between the parties and may not be amended, supplemented, or modified except by a writing executed by both of the parties.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
-8-

 

     IN WITNESS WHEREOF, this Amendment has been duly executed by the parties hereto as of the day and year first above written.

 	MASTERCARD INTERNATIONAL INCORPORATED,
a Delaware non-stock membership corporation
 	 	
 	By  	Andrea Robertson 	 	
 	 	Name:  	Andrea Robertson 	 	
 	 	Title:  	Senior Vice President and Treasurer 	 	
 	
 	MASTERCARD INCORPORATED, a Delaware stock
corporation
 	 	
 	By  	Andrea Robertson 	 	
 	 	Name:  	Andrea Robertson 	 	
 	 	Title:  	Treasurer 	 	
 	
 	UMB BANK & TRUST, N.A., a national banking
association, as Indenture Trustee
 	 	
 	By  	Brian P. Krippner 	 	
 	 	Name:  	Brian P. Krippner 	 	
 	 	Title:  	Vice President 	 	
 	
-9-

 

EXHIBIT A
-10-

 

Schedule 8.7
None
-11-

EXHIBIT 10.7.1
CERTAIN PORTIONS OF THIS EXHIBIT
HAVE BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT
TO A REQUEST FOR CONFIDENTIAL
TREATMENT. THE SYMBOL “****”
HAS BEEN INSERTED IN PLACE
OF THE PORTIONS SO OMITTED.
MasterCard International – Citibank, N.A Agreement
This agreement (“Agreement”), dated as of January 3, 2005, and effective as of the Effective Date (as defined below), is made by and between MasterCard International Incorporated, a Delaware corporation having its principal place of business at 2000 Purchase Street, Purchase, New York 10577-2509 (“MasterCard”), and Citibank, N.A., a national banking association having its principal place of business at 399 Park Avenue, New York, New York 10022 (“Citibank”).
Whereas, certain Citibank Affiliates (as defined below) are licensed to issue MasterCard Cards (as defined below) to individual consumers with billing addresses located in the Territory (as defined below); and
Whereas, MasterCard and Citibank (each a “Party”, and together the “Parties”) desire to enter into an arrangement by which MasterCard will provide certain pricing incentives in connection with MasterCard Volume (as defined below) in the Territory;
Now, therefore, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

1.   	Definitions.	
 	
1.1   	“Account” means the line of credit accessed by a Card.	
 	
1.2   	“Actual Payments” has the meaning ascribed to it in Section 2.1(b).	
 	
1.3   	“Affiliate” means, with respect to any Person, any other Person that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such Person.	
 	
1.4   	“Annual Estimated Volume” has the meaning ascribed to it in Section 2.1(b).	
 	
1.5   	“Card” means any **** card or **** card that may be used to access a line of credit either to make purchases at point of sale, whether actual or virtual, or to effect cash	

 

   	advances at bank branches or through automated teller machines. “Card” shall include the Account associated with such card and the Account number or alternative modes of access to the underlying Account (e.g., a virtual card or convenience check). **** .	

1.6   	“Citibank Issuers” means, as applicable, any or all Citibank Affiliates that are licensed to issue MasterCard Cards to individual consumers with billing addresses located in the Territory.	
 	
1.7   	“Commitments” means the obligations of each Party to the other Party contained in Articles 2 through 4 of this Agreement.	
 	
1.8   	“control” (including the terms “controlling”, “controlled by” and “under common control with”) 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 stock, by contract, or otherwise.	
 	
1.9   	“Core Issuer Services” means, **** .	
 	
 1.10   	“Core Issuer Services Fees” shall mean all fees and assessments imposed by MasterCard on its Members in accordance with the Rules from time to time in respect of Core Issuer Services for such Members that are located in the Territory. **** .	
 	
1.11   	“Effective Date” means October 1, 2004.	
 	
1.12   	“Existing Agreement” means an agreement that is in effect between a Citibank Issuer and MasterCard as of the Effective Date and that applies to a country or region within the Territory. All Existing Agreements are identified on Schedule 1.12.	
 	
1.13   	“Governmental Authority” means any of the following with due jurisdiction over this Agreement, either Party, or Citibank: (1) nation, state, county, city, town, borough, village, district or other jurisdiction; (2) federal, state, local, municipal, foreign or other government; (3) governmental authority of any nature (including any agency, branch, department, board, commission, court, tribunal or other entity exercising due governmental powers); (4) multinational organization or body; (5) body exercising, or entitled to exercise, any administrative, executive, judicial, legislative, police, regulatory or taxing authority or power; or (6) official of any of the foregoing.	
 	
1.14   	“ Interim Period” means the period commencing on the Effective Date and ending on December 31, 2004.	
 	
1.15   	“Law” means, with respect to any Person, any law (including common law), ordinance, judgment, order, decree, injunction, permit, statute, treaty, rule or regulation, regulatory bulletin or guidance, regulatory examination, order or recommendation, or determination of (or agreement with) an arbitrator or a Governmental Authority, applicable to such Person.	
 	
1.16   	“MasterCard Card” means any Card issued by Citibank Issuers containing the name, logo, hologram or service marks of MasterCard or any of its Affiliates, and includes any	
2

 

   	such Card that has MasterCard functionality or acceptance utility issued in accordance with the Rules from time to time.	

 1.17   	“ MasterCard Standard Pricing ” means the Core Issuer Services Fees that would apply to Citibank Issuers in respect of MasterCard Volume for the applicable Interim Period or Year in the absence of this Agreement. For the avoidance of doubt, MasterCard Standard Pricing includes, without limitation, any pricing for Core Issuer Services Fees applicable to ****.	
 	
1.18   	“ MasterCard Volume ” means, for any period of calculation, **** .	
 	
1.19   	“Member” has the meaning ascribed to it in the Rules.	
 	
1.20   	“Person” means any individual, partnership, corporation (including business trust), limited liability company, joint stock company, trust, unincorporated association, joint venture, or other entity, or a government or any political subdivision or agency thereof.	
 	
1.21   	“QMR” means Quarterly Member Reporting pursuant to the Rules.	
 	
1.22   	“Rules” means the MasterCard Bylaws and Rules, and any other directive, memorandum, policy, or other requirement imposed by MasterCard relating to MasterCard Cards, as such Bylaws and Rules, directives, memoranda, policies, or other requirements may be amended from time to time, to the extent the foregoing apply in the Territory.	
 	
1.23   	“Term” has the meaning ascribed to it in Section 6.1.	
 	
1.24   	“Territory” means **** .	
 	
1.25   	“User-Pay Services” means all optional Member-specific, customized, user-based or similarly optional services offered or provided by MasterCard to a Member in the Territory in respect of MasterCard Cards, the costs of which services are charged to specific participating Members. “User-Pay Services” also includes any services that MasterCard offers or provides in replacement for any of the foregoing referenced services.	
 	
1.26   	“Year” shall mean each 12 month period during the Term commencing on January 1, 2005.	
 	
1.27   	“Yearly True Up” has the meaning ascribed to it in Section 2.1(c).	
 	
2.   	MasterCard Support.	
 	
2.1   	MasterCard Core Issuer Services Fees.	

 	(a)   	During the Interim Period and each Year, in lieu of MasterCard Standard Pricing for an applicable country or region in the Territory, the Core Issuer Services Fees for MasterCard Volume in the Territory (other than any MasterCard Volume	
3

 

 	   	described in Section 2.2 of this Agreement) shall be as set forth in the following table:	
 	 	 	 	 	
 	 	 	 	Then the Core Issuer	
 	 	 	 	Services Fees for all	
 	 	If the aggregate MasterCard	 	MasterCard Volume in the	
 	 	Volume **** in the Territory	 	Territory for **** , as	
MasterCard Volume Tier	 	in a **** . . .	 	applicable, shall be . . .	
Tier 1	 	<$****	 	****	
Tier 2	 	$**** < $****	 	****bps	
Tier 3	 	$**** < $****	 	****bps	
Tier 4	 	$**** < $****	 	****bps	
Tier 5	 	$**** < $****	 	****bps	
Tier 6	 	$**** < $****	 	****bps	
Tier 7	 	$**** < $****	 	****bps	
Tier 8	 	$**** < $****	 	****bps	
Tier 9	 	$**** < $****	 	****bps	
Tier 10	 	$**** < $****	 	****bps	
Tier 11	 	$**** < $****	 	****bps	
Tier 12	 	$**** +	 	****bps	

 	   	The MasterCard Volume Tier actually achieved in the aggregate in the applicable period shall determine the Core Issuer Services Fees applicable to all MasterCard Volume during such period, in accordance with the preceding table. For example, if Citibank Issuers generate $**** in MasterCard Volume during ****, then all such MasterCard Volume shall receive Core Issuer Services Fees of **** bps, not merely the MasterCard Volume that is at or in excess of $ **** (i.e., Core Issuer Services Fees for ****shall be $**** x ****).	
 	
 	(b)   	(i)  In addition to any reporting required under the Rules, the Citibank International Cards Group shall provide MasterCard, within thirty (30) days after the end of each calendar quarter during the Term (except the last three such calendar quarters), a forecast of MasterCard Volume in the Territory for the ensuing four quarters, and, if reasonably requested by MasterCard, such other reports and information as the Parties may mutually agree to review compliance under this Agreement.	
4

 

 	   	(ii)  For the purposes of this Agreement, (A) with respect to the Interim Period and (B) as of the commencement of each Year, based in part on the quarterly forecasting report described in paragraph (i) of this Section 2.1(b), the Parties will mutually agree upon **** (the “**** Volume”).	
 	
 	   	(iii)  Based solely on MasterCard Volume as reflected in QMR data in successive calendar quarters after the original **** Volume is agreed upon, MasterCard may reasonably revise the **** Volume used for the calculation of the Core Issuer Services Fees in connection with any calendar quarter as it may deem necessary in its reasonable discretion, provided that it shall consult with the Citibank International Cards Group prior to making any such revision.	
 	
 	   	(iv)  Citibank Issuers shall continue to pay to MasterCard all fees in respect of MasterCard Volume in the Territory at MasterCard Standard Pricing with the same frequency as detailed in the MasterCard Consolidated Billing System (MCBS) manual (the “Actual Payments”).	
 	
 	   	(v)  Within 45 days immediately following the last day of (A) the Interim Period and (B) each calendar quarter of each Year, MasterCard shall make an appropriate reconciliation of Citibank Issuers’ Actual Payments against the Core Issuer Services Fees due for such Interim Period or calendar quarter pursuant to Section 2.1(a). Such reconciliation shall assume ****. To the extent Actual Payments exceed the applicable Core Issuer Service Fees for any quarter, the excess shall be due and owing from MasterCard to Citibank Issuers.	
 	
 	   	(vi)  MasterCard shall promptly refund any amounts due and owing to Citibank Issuers hereunder following each reconciliation described in paragraph (v) above in accordance with Section 2.1(d).	
 	
 	(c)   	Within 45 days after the conclusion of the Interim Period and each Year, MasterCard shall make an appropriate reconciliation of Citibank Issuers’ Actual Payments (net of any refunds made on a calendar quarter basis pursuant to Section 2.1(b)) against the Core Issuer Services Fees due for such Year or Interim Period calculated pursuant to Section 2.1(a), based upon the actual MasterCard Volume generated in the Territory during, for such Interim Period, calendar year 2004, and for each Year, such Year (in each case as reflected in the relevant QMR reports submitted by Citibank Issuers) (the “Yearly True Up”). To the extent the Actual Payments exceed the applicable Core Issuer Services Fees for such Year or Interim Period, the excess shall be due and owing from MasterCard to Citibank Issuers. Following the Yearly True Up, MasterCard shall promptly refund any amounts that may be due and owing to Citibank Issuers as a result of the Yearly True Up in accordance with Section 2.1(d), or shall withhold from the Core Issuer Services Fees refund for the first calendar quarter of the immediately succeeding Year (or any successive quarters until such amount is repaid in full) or any other refund due to Citibank Issuers under this Agreement, any amounts that may be due and owing to MasterCard as a result of the Yearly True Up, as the case may be.	
5

 

 	(d)   	(i)  MasterCard shall provide an integrated statement to the Citibank International Cards Group (or such other entity designated by Citibank Issuers) within 45 days of the end of each and every quarterly and annual period during the Term, in substantially the form set forth in Schedule 2.1(d) hereto, setting forth with respect to the Core Issuer Services provided by MasterCard to Citibank Issuers in the Territory during such period: (A) Actual Payments; (B) the total amount payable by Citibank Issuers for the Core Issuer Services calculated in accordance with Section 2.1(a); and (C) amounts owed by MasterCard to the relevant Citibank Issuer entities pursuant to this Section 2.1.	
 	
 	   	(ii)  MasterCard shall make any or all refunds due hereunder by crediting, within 15 days after the date of delivery of the report described in paragraph (i) above, the appropriate Citibank Issuer country-level designated account, as instructed by the Citibank International Cards Group with respect to each quarterly and annual period during the Term.	
 	
 	   	(iii)  Each report and payment made by MasterCard hereunder shall be accompanied by adequate supporting documentation, including, without limitation, a quarterly summary of invoices with respect to each and every MasterCard Card business in the Territory together with supporting documentation, all in electronic format (Microsoft Excel) via e-mail and CD-ROM.	
 	
 	(e)   	For tax purposes, the Parties agree to treat each of the refunds made, or deemed to be made, pursuant to this Section 2.1 as if it was an adjustment to the fees payable to MasterCard under or pursuant to the Rules.	

 2.2   	Acquired Financial Institutions/Portfolios . **** .	
 	
2.3   	User Pay Services. **** .	
 	
3.   	Brand Commitments.	
 	
3.1   	Brand Commitments . Citibank Issuers shall use commercially reasonable efforts to maintain on a cumulative basis MasterCard Volume, **** .	
 	
3.2   	Reporting on Conversion . The Citibank International Cards Group will provide notice to MasterCard as soon as practicable after it becomes aware of a conversion of MasterCard Cards that triggers, or would reasonably be determined to trigger, MasterCard’s termination right contained in Section 6.2(b) hereof.	
 	
4.   	Existing and Future Agreements.	
 	
4.1   	Pricing Provisions of Existing Agreements. **** .	
 	
4.2   	Other Provisions of Existing Agreements. Other than as set forth in Section 4.1 above, nothing contained in this Agreement shall affect any Person’s rights or obligations under	
6

 

   	any Existing Agreement, which rights and obligations shall continue in full force and effect in accordance with their terms.	

4.3   	Future Agreements . The Parties acknowledge that they and their respective Affiliates expect to continue to enter into country-specific agreements with respect to MasterCard Cards or MasterCard Volume in the Territory from time to time. **** .	
 	
5.   	Confidentiality.	
 	
5.1   	In General . The terms of this Agreement and all information provided pursuant to or in connection with either Party’s performance (and in the case of Citibank, including Citibank Issuers’ performance) under this Agreement (“Confidential Information”) is confidential and proprietary to the Party providing the Confidential Information (“Disclosing Party”) to the other Party (“Receiving Party”). Notwithstanding the foregoing, Confidential Information shall not include information which: (i) is or hereafter becomes part of the public domain through no fault of the Receiving Party; (ii) is received from or furnished to a third party without similar restriction on the third party’s rights; or (iii) is independently developed by the Receiving Party. If the Receiving Party asserts that any exception set out in the preceding sentence allows the disclosure of any Confidential Information, it shall promptly submit to the Disclosing Party written documentation demonstrating the applicability of the claimed exception.	
 	
5.2   	Use . The Receiving Party shall not use any Confidential Information provided by the Disclosing Party for any purposes other than as permitted or required under this Agreement or the Rules.	
 	
5.3   	Disclosure. Without the express written consent of the Disclosing Party, the Receiving Party shall not disclose or provide access to any Confidential Information to any Person, with the exception of (i) disclosure to any Affiliate, agent, representative, servant, contractor and employee that has a need to know, for the purposes of complying with its obligations hereunder, the specific Confidential Information, and that has agreed to keep confidential such Confidential Information, or (ii) disclosure required by Law.	
 	
5.4   	Data Protection. In accordance with applicable Law, the Receiving Party shall take reasonable measures, using the same care taken by such Party to safeguard its own confidential and proprietary information, to prevent disclosure by its Affiliates, agents, representatives, servants, contractors and employees of any Confidential Information.	
 	
5.5   	Post-Termination Obligations. Upon the conclusion of the Term, the Receiving Party shall, upon request from the Disclosing Party, return or destroy all Confidential Information provided by the Disclosing Party, including any summaries thereof, and all copies and duplicates thereof (in whatever form maintained), except as may be otherwise required by Law.	
 	
5.6   	Remedies. The Parties acknowledge that the Confidential Information provided by the Disclosing Party constitutes confidential and proprietary information of the Disclosing Party and that use or disclosure thereof by the Receiving Party or any Affiliates, agents, representatives, servants, contractors or employees of such Receiving Party, other than in	
7

 

   	accordance with the express terms of this Agreement or as otherwise authorized in writing by a senior officer of the Disclosing Party, constitutes a material breach of the Agreement or, after the Term, of such Disclosing Party’s continuing rights. In such event, the Parties acknowledge that such Disclosing Party may immediately seek to obtain an order for appropriate injunctive relief.	

 5.7   	Notice. Each Party shall notify the other immediately of any loss or unauthorized disclosure or use of Confidential Information that comes to such Party’s attention.	
 	
5.8   	Subpoenas, Etc. In the event that either Party receives a subpoena, court order or other similar process purporting to require it to disclose Confidential Information, it shall provide the other Party with written notice and documentation thereof as soon as practicable, and shall cooperate with the other Party in the event that such other Party determines to seek a protective order or other remedy with regard to such disclosure.	
 	
5.9   	No Public Announcement . Neither Party shall issue any public announcements or make any published statements regarding this Agreement or the subject matter hereof, without the prior written consent of the other Party; provided, however, that the Parties shall work together in good faith to develop mutually-agreed upon responses to media inquiries concerning this Agreement.	
 	
5.10   	Confidential Treatment . If MasterCard or Citibank (or any of its Affiliates) is required to file this Agreement as an exhibit to any report or other filing with the Securities and Exchange Commission (the “SEC”), such Party shall file with the Secretary of the SEC an application requesting confidential treatment of the Agreement pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, at or about the time of such filing, provided that no such filing shall be deemed to violate this Section 5.	
 	
6.   	Term and Termination	
 	
6.1   	Term . This Agreement shall commence as of the Effective Date and unless terminated earlier in accordance herewith shall continue until **** (the “Term”).	
 	
6.2   	**** and **** Termination.	

 	(a)   	MasterCard may terminate this Agreement upon 30 days written notice to Citibank (after which MasterCard Standard Pricing will apply) in the event **** .	
 	
 	(b)   	From and after commencement of the second Year hereunder, MasterCard may terminate this Agreement upon 30 days written notice to Citibank (after which MasterCard Standard Pricing will apply) in the event **** .	

6.3   	Termination — General . In addition to the termination rights specified in Sections 6.2 and 7.5(b) hereof:	

 	(a)   	Prior to the scheduled conclusion of the Term, either Party may terminate this Agreement (after which MasterCard Standard Pricing will apply) by giving notice to the other Party in the event that the other Party materially breaches any of its	
8

 

 	   	obligations under this Agreement, which breach is not cured within 30 days after notice thereof, or if cure cannot be effected in such time, such additional time as is necessary to cure using commercially reasonable efforts.	

 	(b)   	This Agreement will terminate immediately at the election of the non-breaching Party (after which MasterCard Standard Pricing will apply) in the event that: (i) a court of competent jurisdiction assumes custody, attaches or sequesters all or a material portion of a Party’s property or assets, which custody, attachment or sequestration is not suspended or terminated; (ii) a Party admits, in writing, its inability to pay its debts generally as they become due; (iii) a Party becomes insolvent (whether by balance sheet insolvency or a failure to meet obligations in the ordinary course) or makes an assignment for the benefit of creditors; (iv) a Party files any voluntary, or if there is filed against such Party an involuntary, petition in bankruptcy under the United States Bankruptcy Code, or any similar bankruptcy or insolvency laws of another jurisdiction (as now or in the future enacted or amended), provided that in the event of any involuntary petition the breaching Party will have a period of 30 days from the date of filing thereof to discharge the same; or (v) a Party consents to the appointment of a receiver for all or a substantial portion of its property or assets.	

6.4   	Survival. Except as otherwise provided herein, (i) the rights and obligations with respect to any payment or refund in Article 2 shall survive through the making of any such payment or refund; (ii) the obligations in Sections 2.1(e) and 7.3 shall survive for the applicable statute of limitations periods, plus thirty (30) days; (iii) the obligations in Section 7.5 shall survive for the four calendar quarters, commencing with the calendar quarter immediately following the quarter during which Citibank terminates this Agreement in accordance with its terms; and (iv) the obligations in Article 5 and Sections 7.2, 7.7, 7.8, 7.9, 7.10, 7.11, 7.12, 7.13 and 7.14 shall survive any termination of this Agreement for a period of five (5) years.	
 	
7.   	General Terms and Conditions.	
 	
7.1   	Reciprocal Obligations. Each Party acknowledges and agrees that its performance of its Commitments is in consideration of the other Party’s performance of such other Party’s Commitments.	
 	
7.2   	Remedies . Other than as specified in Section 5.6 hereof and Section 7.11 hereof (solely with respect to the recovery of costs and attorneys’ fees in an arbitration proceeding conducted pursuant to such Section 7.11) **** .	
 	
7.3   	Taxes . Each Party will be responsible for all tax reporting and tax payment obligations incurred by it pursuant to, or in connection with, this Agreement.	
 	
7.4   	Yearly Performance Review . Upon the conclusion of the Interim Period and each of the first two Years during the Term, the Citibank International Cards Group (or its designee) and MasterCard, upon being given reasonable notice, shall meet to jointly review each	
9

 

   	Party’s compliance with its Commitments and the attainment of the objectives of this Agreement.	

7.5   	MasterCard Assessments and Fees.	

 	(a)   	**** .	
 	
 	(b)   	**** .	

7.6   	Rules. Nothing in this Agreement shall affect Citibank Issuers’ obligations under the Rules.	
 	
7.7   	Notices. Except as otherwise specifically provided herein, all notices relating to this Agreement, must be in writing and will be deemed given upon hand delivery or upon receipt if sent by an overnight courier delivery service of general commercial use and acceptance ( i.e. , Airborne, FedEx or UPS) to the following addresses or such other address as may be later designated by notice given by the applicable Party:	
 	
   	If to Citibank or Citibank Issuers:	
 	 	 	
 	 	Managing Director of Marketing, International Cards	
	 	Citibank, N.A.	
	 	One Court Square	
	 	Long Island City, New York 11120	
	 	 	
	 	with a copy to General Counsel, Global Consumer Business, Citigroup Inc., 399 Park Avenue, New York, NY 10022.	
	 	 	
	 	If to MasterCard:	
	 	MasterCard International Incorporated	
	 	2000 Purchase Street	
	 	Purchase, New York 10577	
	 	Attention: Gary Flood	
	 	 	
	 	with a copy to the office of the General Counsel at the same address.	

7.8   	Assignment . Neither Party may assign or otherwise convey this Agreement, or any of its rights and obligations hereunder, to any third party without the prior written consent of the other Party, which may be withheld in such Party’s sole discretion, and any such attempted assignment without consent shall be void; provided, however, that, upon 30 days’ prior written notice to the other Party, either Party may assign or transfer this Agreement in whole or in part to an Affiliate with reasonably sufficient or comparable resources to perform the assigned provisions hereof. If any Person acquires any interest in this Agreement or the subject matter hereof in any manner, whether by voluntary or involuntary transfer, operation of Law or otherwise, such interest shall be held subject to all of the terms of the Agreement and by taking or holding such interest, such Person shall be conclusively deemed to have agreed to be bound by, and to comply with, all of	
10

 

   	the terms and obligations of the Agreement, and the Parties shall use commercially reasonable efforts to cause such Person to execute any applicable documents to reflect the rights and obligations obtained by such Person. All rights, remedies and obligations of the Parties shall accrue or apply solely thereto or to their permitted successors or assigns, and there is no intent to benefit or obligate any other Person hereby.	

 7.9   	No Violation . Notwithstanding anything else contained in this Agreement, neither MasterCard nor Citibank (nor any of their respective Affiliates) shall, and none of them shall be obligated to, take any action that such entity believes in good faith would violate, or would cause any of them to violate, any Law.	
 	
7.10   	Representations, Warranties and Covenants .	

 	(a)   	Each Party covenants, represents and warrants to the other that on a continuing basis during the Term, and for such additional period after the Term during which such Party has not completed full performance of its obligations hereunder, that: (i) it is duly organized, validly existing and in good standing under applicable Law and (ii) it has full corporate power and authority to execute, deliver, and perform this Agreement according to its terms, it possesses all licenses, consents, and approvals required to do so, and the execution, delivery, and performance of this Agreement have been duly authorized by it.	
 	
 	(b)   	Each Party represents and warrants to the other that as of the Effective Date there are no actions, suits, or proceedings existing or pending against or affecting it before any Governmental Authority which would have a material adverse effect on its ability to perform its obligations hereunder except for proceedings which it is contesting and challenging in good faith and which it does not reasonably believe will result in a final order or decree materially affecting its ability to perform this Agreement.	

7.11   	Dispute Resolution . The Parties will endeavor in good faith to promptly settle any disputes relating to this Agreement (each a “Dispute”). If the appropriate members of each Party’s management team cannot promptly settle a Dispute, senior executives from each Party will try to resolve the dispute. If no resolution is reached then either Party may submit the Dispute to the American Arbitration Association for binding arbitration. The Party prevailing in such arbitration shall be entitled to a recovery of its costs and attorneys fees from the non-prevailing Party. Subject to Section 5.6, the procedures included in this Section 7.11 will be the exclusive procedures for resolution of any and all Disputes.	
 	
7.12   	Choice of Law . This Agreement and the respective rights and obligations of the Parties shall be governed by the laws of the State of New York, excluding any “conflict of laws” or similar provisions that would mandate or permit application of the substantive law of any other jurisdiction. Any action or proceeding to enforce this Agreement or any obligation stated herein shall be commenced and prosecuted, if at all, only in a federal or state court located within the City and State of New York and each Party hereby	
11

 

   	irrevocably agrees to consent to jurisdiction in any such court and to accept process in such action in the manner set forth for notices herein.	

 7.13   	Enforceability.	

 	(a)   	If one or more of the provisions contained herein shall, for any reason, be held by a court of competent jurisdiction to be unenforceable or invalid in any respect under applicable Law, such unenforceability or invalidity shall not affect any other provision of this Agreement, and this Agreement shall then be construed as if such unenforceable or invalid provisions had never been contained herein and the Parties shall immediately commence negotiations in good faith to reform this Agreement to make alternative provisions herein that reflect the intentions and purposes of the severed provisions in a manner that does not run afoul of the basis for such unenforceability or invalidity.	
 	
 	(b)   	Each Party’s waiver of any breach of any provision of this Agreement, or either Party’s failure at any time to enforce any right or remedy available to it, shall not be construed to be a waiver of such right or remedy with respect to any other prior, concurrent or subsequent breach or failure by the other Party. Except as otherwise provided herein, no waiver shall be effective unless made in writing and signed by the waiving Party.	

7.14   	Miscellaneous.	

 	(a)   	Subject to Section 4 hereof, this Agreement constitutes the entire agreement between the Parties with respect to subject matter hereof, and supersedes any other prior oral or written agreement regarding the subject matter hereof. This Agreement can only be amended or modified in a written agreement signed by both Parties.	
 	
 	(b)   	This Agreement is the product of negotiations between the Parties and their respective counsel. No provision or section of this Agreement shall be read, construed or interpreted for or against either Party by reason of ambiguity of language, rule of construction against the draftsman, or any similar doctrine.	
 	
 	(c)   	This Agreement may be executed in one or more counterparts, each of which, taken together, shall constitute but one original document.	
 	
 	(d)   	The captions in this Agreement are included for convenience only and shall not affect the meaning or interpretation of this Agreement.	
 	
 	(e)   	Nothing contained herein shall be deemed to constitute a partnership or joint venture between the Parties, and the common enterprise of the Parties shall be limited to the express provisions of this Agreement.	

12

 

     This Agreement is executed as of January 3, 2005 and is effective as of the Effective Date.
MASTERCARD INTERNATIONAL INCORPORATED
By:      /s/ Gary J. Flood                                        
          Name: Gary J. Flood
          Title: EVP
CITIBANK, N.A.
By:      /s/ Faith Masingale                                        
          Name: Faith Masingale
          Title: EVP – Head of International Cards
13

 

Schedule 1.12
Existing Agreements ****

 

Schedule 2.1(d)
Integrated Statement ****

 

Exhibit 10.9.1
ADDENDUM TO EMPLOYMENT AGREEMENT
     Agreement made and entered into this 28th day of February, 2005 (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 modify the terms of that certain Employment Agreement entered into between the Executive and the Company, dated August 10, 2001, (the “Employment Agreement”);and
     WHEREAS, the Executive and the Company wish to ensure that this Addendum complies with the American Job Creation Act of 2004;
     NOW THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties agree to modify the Employment Agreement as follows:
     1. In addition to any compensation due and owing the Executive pursuant to Paragraph 3 of the Employment Agreement, subject to the Executive’s execution of a Separation Agreement and Release in material terms substantially in the form annexed to the Employment Agreement, other than any modifications which may be required to effectuate such release based upon changes in law or to preserve claims which have not yet accrued based exclusively upon the Executive’s continuing employment, if any,

 

following the effective date of such release, the Company shall pay the Executive a lump sum payment of 10 million dollars ($10,000,000), less any payroll deductions required by law (hereinafter referred to as the “Retention Payment”) as soon as reasonably practicable following the date of the termination of the Executive’s employment, but no less than ten (10) days following the Executive’s execution and delivery to the Company of such Separation Agreement and Release, and in no event later than two and one half months following the end of the year in which the “Retention Date” occurs (as such term is defined in Paragraph 1(a) below, provided that the Executive:

 	(a)  	remains employed by the Company (provided the Executive is then not under suspension pursuant to the terms of the Employment Agreement) in the position of CEO (or such other position to be designated by the Board of Directors of the Company (the “Global Board”)), until a date to be designated by the Global Board, in its sole discretion, occurring between and including April 9, 2010, and April 9, 2011 (the “Retention Date”);	

 	(b)  	provides to the reasonable satisfaction of the Global Board: (i) any requested assistance to the Global Board in identifying a successor CEO; and (ii) assistance, as requested in writing by the Global Board, in the process of transitioning the Executive’s duties and responsibilities to his successor through and including the Retention Date; and	

 	(c)  	the Company achieves , on average, no less than target level performance, as determined by the Compensation Committee of	
2

 

 	   	the Global Board and measured under the Annual Incentive Compensation Plan (“AICP”) (or its equivalent under any replacement plan), from and including 2004 through the date of termination of the Executive’s employment, but in no event later than the Retention Date. (Should the Executive’s employment terminate prior to December 31 of a given year, such partial year’s performance shall be measured based upon the AICP forecasted score utilized by the corporate finance department for purposes of accruing AICP bonus expense for the most recently completed calendar quarter prior to the Executive’s date of termination.)	
     2. In addition to any payments and benefits to which the Executive is entitled pursuant to Paragraph 5(b)(i) of the Employment Agreement in the event of the Executive’s employment is terminated prior to the Retention Date due to the Executive’s death in accordance with the terms set forth in Paragraph 5(a)(i) of the Employment Agreement, the Executive’s estate, subject to execution of a release by the legal representative of the Executive’s estate substantially in the form required by Paragraph 1 above, shall be entitled to payment of a pro rata portion (based upon completed calendar quarters worked between July 1, 2004 and December 31, 2010) of the Retention Payment described in Paragraph 1 above.
     3. In addition to any payments and benefits to which the Executive is entitled pursuant to Paragraph 5(b)(ii) of the Employment Agreement in the event the Executive’s employment is terminated prior to the Retention Date due to Disability in accordance with the terms set forth in Paragraph 5(a)(ii) of the Employment Agreement, the
3

 

Executive, subject to execution of a Separation Agreement and Release by the Executive (or by the Executive’s legal representative in the event the Executive is incapacitated and incapable of executing a Separation Agreement and Release) as required by Paragraph 1 above, shall be entitled to payment of a pro rata portion (based upon completed calendar quarters worked between July 1, 2004 and December 31, 2010) of the Retention Payment described in Paragraph 1 above.
     4. In addition to any payments and benefits to which the Executive is entitled pursuant to Paragraph 5(b)(v) of the Employment Agreement in the event Executive’s employment is terminated prior to the Retention Date by the Company (for a reason other than death, Disability or Cause), in accordance with the terms set forth in Paragraph 5(a)(iv) of the Employment Agreement, or if the Executive terminates his employment with Good Reason in accordance with the terms set forth in Paragraph 5(a)(v) of the Employment Agreement, the Executive, subject to the Executive’s execution of a Separation Agreement and Release, as required by Paragraph 1 above, shall be entitled to payment of a pro rata portion (based upon completed calendar quarters worked between July 1, 2004 and December 31, 2010) of the Retention Payment described in Paragraph 1 above.
     5. Notwithstanding any contrary provision set forth in Paragraphs 6(c), (d) and (e) of the Employment Agreement and regardless of the Executive’s satisfaction of the conditions necessary for receipt of the Retention Payment or actual receipt of the Retention Payment or any pro rata portion thereof, each of the Executive’s obligations under Paragraphs 6(c) (Non-Compete) and 6(d) (Non-Solicitation) shall, in all events,
4

 

continue for a period of thirty-six (36) months following the Executive’s date of termination for any reason; provided however:
     (a) in the event the Company terminates Executive’s employment for Cause, pursuant to Paragraph 5(a)(iii) of the Employment Agreement, Executive’s obligations under Paragraphs 6(c) (Non-Compete) and 6(d) (Non-Solicitation) shall continue for periods of six (6) months and twelve (12) months following Executive’s date of termination, respectively, as presently provided by the Employment Agreement following Executive’s termination for Cause; or
     (b) if Executive submits his Voluntary Resignation pursuant to Paragraph 5(a)(vi) of the Employment Agreement, but only if such Voluntary Resignation is on account of a change in strategic direction of the Company, initiated and implemented by the Global Board, following Executive’s delivery to the Global Board of advance written objection to such change, Executive’s obligations under Paragraphs 6(c) (Non-Compete) and 6(d) (Non-Solicitation) shall, be limited to a period of twelve (12) months following Executive’s date of termination.
     6. In the event the stock of the Company or of MasterCard Incorporated shall have become publicly traded on an established securities market on or before the date of the termination of the Executive’s employment, to the extent required by section 409A(2)(B)(i) of the Internal Revenue Code, any distribution required by this Addendum shall not be made before the date which is six (6) months after the date of termination of the Executive’s employment.
     7. Except as expressly modified herein, the terms of the Employment Agreement shall remain in full force and effect. Nothing herein shall be deemed to create
5

 

an obligation by the Company to: (i) employ the Executive for any definite term or (ii) provide any pay or benefits to the Executive upon the termination his employment to which he was not previously entitled under the Employment Agreement, other than the Retention Payment (or pro rata portion thereof) expressly described herein.
     IN WITNESS WHEREOF, each of the Company and the Executive has executed this Addendum 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	
6

Exhibit 10.14
MASTERCARD INTERNATIONAL
ANNUAL INCENTIVE COMPENSATION PLAN (AICP)
As Amended and Restated Effective January 1, 2005
Overview
The Annual Incentive Compensation Plan (AICP) rewards employees for successfully achieving performance goals that are in direct support of corporate and business unit/region goals. Incentive opportunity amounts vary depending upon position and market practices and are awarded annually, based on performance.
Criteria
The AICP is based on three basic measurement categories:

 	 	 	 	 	 	 	
 	 	 	n	 	Overall MasterCard corporate performance	 	 	 	
 	 	 	 	 	 	 	 	 	
	 	 	n	 	Business unit/region performance	 	 	 	
 	 	 	 	 	 	 	 	 	
	 	 	n	 	Participant’s individual contribution	 	 	 	
 	 	 	 	 	 	 	
MasterCard performance is based on the delivery of three annual corporate objectives:

 	 	 	 	 	 	 	
 	 	 	n	 	Implementing Corporate Strategy	 	 	 	
 	 	 	 	 	 	 	 	 	
	 	 	n	 	Achieve Financial Targets	 	 	 	
 	 	 	 	 	 	 	 	 	
	 	 	n	 	Enhancing Organizational Capabilities	 	 	 	
 	 	 	 	 	 	 	
Business unit/region performance is based on the achievement of pre-established goals defined in the annual business plan for each group that are directly linked to the corporate objectives.
To be considered for an award, participants must establish a set of aggressive individual performance objectives/goals (that are directly linked to their business unit/region goals) and deliver successful results. Pay out opportunities for all participants are funded based upon the achievement of corporate goals (50%) and business unit goals (50%)*. Individual awards vary significantly to recognize individual contributions. Along with demonstration of the MasterCard operating principles and related competencies (e.g., interpersonal, communication, leadership, knowledge, self-management, thinking, administrative and motivation), results will be the driver for earning an award. Awards are not guaranteed.
*EVP, or its equivalent level is 75% corporate, 25% business unit; CEO is 100% corporate.
Eligibility
MasterCard employees are eligible to participate in one annual incentive plan simultaneously (i.e., AICP, Sales Incentive Plan (SIP), MasterCard Advisors Incentive Plan (MAIP)).

Confidential	 	Page 1	

 

Incentive Pool Allotments
Corporate performance is determined by evaluating actual results versus established, measurable objectives. Annual corporate performance is determined by identifying how well MasterCard performed against each annual corporate objective. These results determine the size of the total incentive dollar pool.
Business unit/region performance results are also evaluated. The average of all business unit/region performance results will not exceed the total corporate performance results. These results determine how much of the total incentive dollar pool is allocated to each business unit/region.
Target AICP Opportunities
Target incentive opportunity percentages vary depending upon job and market practices. Each band can accommodate multiple target amounts. Once corporate and business unit performance is determined, target incentive opportunity percentages are used to determine funding levels and should not be interpreted as guaranteed payments to individuals. If MasterCard performance is higher or lower than target and business unit/region performance is higher or lower than target, the funded levels will be adjusted accordingly. 

Jobs in Band	 	Target	
A	 	20%+	
B	 	20%+	
C	 	10%, 15%, 20+%	
D	 	3%, 5%, 10+%	
E	 	2%, 3%, 5+%	
F	 	2%, 3%, 5%	
G	 	2%	
Incentive Payouts
Once it has been determined that performance warrants an award, managers will use target percentages as a guideline when determining individual payouts; however, each target percentage has an associated range of opportunity that an individual can earn – from 0% of target up to a maximum of 200% of target.
Incentive payouts will vary significantly around the target. Senior management has the discretion to decline awarding an annual incentive, as appropriate. For example, if the employee performance has not met the minimum level of performance, management has the discretion to decline making an award. Depending on the level of performance achieved, an award may be made of up to 200% of target. 

If the target is	 	The payout range is	
20%	 	0% - 40%	
15%	 	0% - 30%	
10%	 	0% - 20%	
5%	 	0% - 10%	
3%	 	0% - 6%	
2%	 	0% - 4%	
 	 	 	
Confidential	 	Page 2	

 

General Information

n	Eligible employees are not entitled to automatic payouts under the plan. To realize a payout, an employee must make a significant contribution; and, in terms of that contribution, successfully demonstrate MasterCard’s competencies. Generally, participants must earn at least a “Successful”, or its equivalent performance rating in order to be eligible to receive an incentive payout. An employee who receives a “Needs Improvement”, or its equivalent rating generally does not qualify for an award. However, MasterCard reserves the discretion to make an award in appropriate circumstances to an employee rated below “Successful”, or its equivalent. For example, if an employee who received a “Need Improvement” performance rating improves based on a specific time-bound action plan, an incentive can be awarded pending approval by the Business Unit Head and the Chief Administrative Officer.	
 	
n	Awards will be prorated on a quarterly basis for employees not in the AICP plan for the full calendar year. The proration schedule appears below:	

 	Hire Hire Date (previous year)	 	 	Incentive Payout	 	
 	January – March	 	 	100%	 	
 	April – June	 	 	75%	 	
 	July – September	 	 	50%	 	
 	October – December	 	 	25%	 	

 	An employee who has a career move into a new position that results in a higher incentive target will have his or her new incentive target prorated on a quarterly basis based on the date of the career move.	

n	Any employee who resigns or whose employment is terminated for any reason prior to the date incentives are paid, is ineligible to receive an AICP award. If an employee has received notice of termination prior to the date an award is paid and has been offered a severance package in writing, and if such an employee would otherwise be eligible to receive an award under this plan, he or she will be required to sign an agreement and release in a form acceptable to MasterCard, in order to receive the award.	
 	
n	The Compensation Committee of the Board evaluates and determines MasterCard’s corporate performance. If corporate performance is below a threshold level of 50% of corporate goal attainment, incentives will not be paid. The Committee also approves the commensurate compensation recommendations for MasterCard executives.	
 	
n	The CEO will appraise business unit/region contributions toward achieving overall MasterCard goals.	
 	 	 	
Confidential	 	Page 3	

 

n	Senior management will appraise individual performance contributions toward the achievement of corporate and business unit/region goals and will have the discretion to adjust incentive awards.	
 	
n	Any employee who moves into a new position with a lesser target incentive opportunity will be grandfathered at their current incentive opportunity for the remainder of the calendar year.	
 	
n	MasterCard reserves the right to interpret the plans provisions at its sole discretion and to change or amend this policy at any time, for any reason.	
 	 	 	
Confidential	 	Page 4	

 

Exhibit 10.15
MASTERCARD INTERNATIONAL INCORPORATED
ANNUITY BONUS PROGRAM:
STATEMENT OF COMPANY PAYROLL PRACTICES AND PROCEDURES
(As amended and restated as of January 1, 2000)
                     1. Purpose.
                    This document describes the Company’s payroll practices and procedures applicable to the payment of Annuity Bonuses and Tax Equalization Payments to Participants whose benefits are curtailed under the MAP and the Savings Plan by operation of the Limits. The Practices and Procedures are not intended to be, and shall be not construed as, an “employee benefit plan” within the meaning of the Employee Retirement Security Act of 1974, as amended.
                     2. Eligibility.
                    The Human Resources Department of the Company will advise Eligible Employees of their continuing eligibility to receive an Annuity Bonus. A Participant’s receipt of an Annuity Bonus for one Bonus Year will not obligate the Company to award an Annuity Bonus for any succeeding Bonus Year.
                     3. Definitions and Rules of Construction.
                     (a)  Definitions . The following capitalized words shall have the meanings set forth below:
     “ Accumulation Interest Rate ” means an interest rate, which may differ between classes of employees, determined each Bonus Year by the Committee.
     “ Additional Pay Credit Bonus ” means the portion of the Annuity Bonus determined in accordance with Section 4(b).
     “ Annuity Bonus ” means the amount determined in accordance with Section 4(a).
     “ Annuity Contract ” means an annuity contract, or an addition to an existing annuity contract, issued by an insurance company or other third-party annuity provider selected by the Committee from time to time.
     “ Applicable Date ” has the meaning set forth in Section 5(b).
     “ Applicable Tax Rate ” means a uniform rate applicable to all Participants for a Bonus Year, reflecting the designated federal, state and local income tax rates specified by the Committee for this purpose. The Committee’s determination of the Applicable Tax Rate shall be final and binding on all Participants and shall not be subject to appeal or review.

 

2
     “ Benefit Limit ” means the limit on benefits under the MAP or the Savings Plan imposed by Section 415 of the Code.
     “ Board ” means the Global Board of Directors of the Company.
     “ Bonus Year ” means the calendar year.
     “ Code ” means the Internal Revenue Code of 1986, as amended, and the applicable rulings and regulations thereunder.
     “ Committee ” means the Pension and Savings Plan 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.
     “ Companies ” means the Company and each other corporation that has elected, with the consent of the Board or the Committee, to award Annuity Bonuses in accordance with the Practices and Procedures.
     “ Compensation Limit ” means the limit on compensation under the MAP or the Savings Plan imposed by Section 401(a)(17) of the Code.
     “ Conversion Eligible Participant ” mean a Participant who is eligible for a MAP Conversion Bonus in accordance with the provisions of Sections 5(a) and (b).
     “ Effective Date ” means January 1, 2000.
     “ Eligible Employee ” means a highly-compensated employee of any of the Companies.
     “ Initial Account Balance ” has the meaning set forth in the MAP.
     “ Limits ” means the Compensation Limit and the Benefit Limit.
     “ MAP ” means the MasterCard International Incorporated Accumulation Plan, as the same may be amended from time to time.
     “ MAP Adjustment Bonus ” means the amount determined in accordance with Section 4(c).
     “ MAP Conversion Bonus ” means the one-time bonus payable to certain Participants under Section 5 in connection with the establishment of MAP.

 

3
     “ Net Savings Plan Bonus ” means the portion of the Annuity Bonus determined in accordance with Section 4(d).
     “ Participant ” means an Eligible Employee selected by the Company to receive an Annuity Bonus for a given Bonus Year.
     “ Pay Credit ” has the meaning set forth in the MAP.
     “ Practices and Procedures ” means these MasterCard International Incorporated practices and procedures, as the same may be amended from time to time.
     “ Prior Plan Terms ” has the meaning set forth in the MAP.
     “ Savings Plan ” means the MasterCard International Incorporated Savings Plan, as the same may be amended from time to time.
     “ Savings Plan Adjustment Bonus ” means the amount determined in accordance with Section 4(e).
     “ Tax Equalization Payment ” means an amount determined in accordance with Section 4(g) or 5(e), and subject to the provisions of Section 6(e).

 	(b)   	Rules of Construction . Unless the context requires otherwise, the use of the masculine form of a word shall include the feminine form and the use of the singular form shall include the plural form.	

 	4.	Annuity Bonus.	
                    (a)    Calculation . The amount of a Participant’s Annuity Bonus for a Bonus Year beginning on and after the Effective Date will equal the sum of (i) the Additional Pay Credit Bonus and (ii) the Net Savings Plan Bonus.
                    (b)    Additional Pay Credit Bonus . A Participant’s Additional Pay Credit Bonus for each Bonus Year beginning on or after the Effective Date shall be an amount determined in accordance with the formula [(1 - T) x (A - B)], where “ A ” is the sum of (i) the vested Pay Credits the Participant would have received for the Bonus Year under the MAP if the Limits did not apply to the Participant for such Year and (ii) the MAP Adjustment Bonus, if any, for such Bonus Year; “ B ” is the Pay Credit actually credited to the Participant for the Bonus Year; and “ T ” is the Applicable Tax Rate, as illustrated by the following example:

 

4 

Example	 	 	 	 	
 	 	 	 	 	
Service	 	6 years	
Pay Credit Multiplier from MAP	 	 	5.75	%	
Base Pay Plus AICP Incentive	 	$	200,000	 	
Applicable Compensation Limit	 	$	170,000	 	
Pay Credit without Code Limit	 	$	11,500	 	
($200,000 x .0575)	 	 	 	 	
Pay Credit from MAP	 	$	9,775	 	
($170,000 x .0575)	 	 	 	 	
Applicable Tax Rate	 	 	40	%	
Additional Pay Credit Bonus	 	$	1,035	 	
(1 - .400) x ($11,500 - $9,775)	 	 	 	 	
All tax rates in the examples in the Practices and Procedures are for illustration purposes only.
           (c)  MAP Adjustment Bonus . If a Participant who was not fully vested in the MAP would have received an Additional Pay Credit Bonus in a prior Bonus Year but for the vesting requirement in Section 4(b) and subsequently becomes entitled in a later Bonus Year to an Additional Pay Credit Bonus as part of such Participant’s Annuity Bonus, then the calculation of “A” for such Participant in such later Bonus Year shall include a MAP Adjustment Bonus. The “ MAP Adjustment Bonus ” shall equal the portion of the Pay Credits that were not taken into account for each such prior Bonus Year as a result of the vesting requirements and that become vested during the current Bonus Year, together with interest at the Accumulation Interest Rate, applied from the end of such prior Bonus Year to the end of the current Bonus Year, as illustrated by the following example: 

Example	 	 	 	 	
 	 	 	 	 	
Year of Vesting	 	 	2003	 	
Additional Pay Credit Bonus for 2001	 	$	5,000	 	
Additional Pay Credit Bonus for 2002	 	$	7,000	 	
Accumulation Interest Rate	 	 	8	%	
MAP Adjustment Bonus for 2003	 	$	13,392	 	
[($5,000 x 1.08 2 ) + ($7,000 x 1.08)].	 	 	 	 	
           (d)  Net Savings Plan Bonus . A Participant’s Net Savings Plan Bonus for each Bonus Year shall be an amount determined in accordance with the formula (1 - T) x (X - Y)], where “ X ” is the sum of (i) the vested employer matching contribution that the Participant would have received for the Bonus Year under the Savings Plan if the Limits did not apply and assuming that, for such Bonus Year, the Participant’s tax deferral contributions under the Savings Plan were not limited by the dollar limits under Section 402(g) of the Code and (ii) the Savings Plan Adjustment Bonus, if any, for such Bonus Year; “ Y ” is the actual employer

 

5
matching contribution received by the Participant for the Bonus Year under the Savings Plan; and “ T ” is the Applicable Tax Rate, as illustrated by the following example: 

Example	 	 	 	 	
 	 	 	 	 	
Vested Savings Plan Match without Limits	 	$	26,000	 	
Actual Vested Savings Plan Match	 	$	19,500	 	
Applicable Tax Rate	 	 	40	%	
Net Savings Plan Bonus	 	$	3,900	 	
(1 - .400) x ($26,000 - $19,500)	 	 	 	 	
           (e)  Savings Plan Adjustment Bonus . If a Participant who was not fully vested in the Savings Plan would have received a Net Savings Plan Bonus in a prior Bonus Year but for the vesting requirements in Section 4(d) and subsequently becomes entitled in a later Bonus Year to a Net Savings Plan Bonus as part of such Participant’s Annuity Bonus, then the calculation of “X” for such Participant in such later Bonus Year shall include a Savings Plan Adjustment Bonus. The “ Savings Plan Adjustment Bonus ” shall equal the portion of the employer matching contribution that was not taken into account for each prior Bonus Year as a result of the vesting requirements and that become vested during the current Bonus Year, together with interest at the Accumulation Interest Rate for the then current Bonus Year, applied from the end of such prior Bonus Year to the end of the current Bonus Year, as illustrated by the following example: 

Example	 	 	 	 	
 	 	 	 	 	
Year of Vesting	 	 	2003	 	
Net Savings Plan Bonus for 2001	 	$	1,000	 	
Net Savings Plan Bonus for 2002	 	$	2,000	 	
Accumulation Interest Rate	 	 	8	%	
MAP Adjustment Bonus for 2003	 	$	3,326	 	
[($1,000 x 1.08 2 ) + ($2,000 x 1.08)].	 	 	 	 	
           (f)  Form of Payment of Annuity Bonuses . As soon as reasonably practicable after the determination of a Annuity Bonus for a Bonus Year, the Company will apply the amount of the Annuity Bonus for a Bonus Year to the purchase of an Annuity Contract on the life of the Participant with a purchase price equal to the Annuity Bonus. The Annuity Contract will be distributed to the Participant as soon as reasonably practicable after such Annuity Contract is issued.
           (g)  Tax Equalization Payment . In addition to the receipt of the Annuity Contract for a Bonus Year, each Participant shall receive, for each Bonus Year that the Participant earns an Annuity Bonus, a Tax Equalization Payment determined in accordance with the formula [(P/(1 - T i )) - P], where “ P ” is the amount of the Annuity Bonus for the Bonus Year and “ T i ” is the federal, state and local tax rate for the Participant specified by the Committee for

 

6
the Bonus Year plus the rate of the Participant’s portion of the Medicare payroll tax, as illustrated by the following example: 

Example	 	 	 	 	
 	 	 	 	 	
a. Annuity Bonus	 	$	10,000	 	
b. Federal, State and Local Tax Rate	 	 	35	%	
c. Medicare Tax	 	 	1.45	%	
d. Tax Equalization Payment	 	$	5,736	 	
[$10,000/(1 - .35 - .0145) - $10,000]	 	 	 	 	
e. Total Taxable Income (a + d)	 	$	15,736	 	
f. Assumed Tax Due	 	$	5,736	 	
g. Net After-Tax Cash Flow (d - f)	 	$	0.00	 	
The Tax Equalization Payment shall be paid (or remitted in the manner contemplated by Section 6(e)) to the Participant at the time that the Annuity Contract is delivered to the Participant, subject to applicable income tax and wage withholding requirements, including, without limitation, withholding required in respect of the delivery of the Annuity Contract.
           5. MAP Conversion Bonus.
           (a)  Limited Eligibility . The provisions of this Section 5 shall apply only to individuals selected to be Conversion Eligible Participants by the Committee from among the group of Eligible Employees who meet the criteria set forth in Section 5(b).
           (b)  Minimum Eligibility Criteria . In order to be eligible for selection in accordance with Section 5(a) for a MAP Conversion Bonus, an Eligible Employee must be (i) an employee of one of the Companies on the Applicable Date (as defined below); (ii) have an Initial Account Balance under MAP on the Effective Date; and (iii) be a Participant in MAP on the Applicable Date. For purposes of this Section 5, “ Applicable Date ” shall be the later of (i) the Effective Date and (ii) the date a Conversion Eligible Participant vests in his Initial Account Balance under the MAP.
           (c)  Payment and Form of Payment of the MAP Conversion Bonus . If a Participant is vested in his MAP benefit on the Effective Date, the MAP Conversion Bonus will be paid in accordance with this section as soon as reasonably practicable after the amount of such bonus has been determined. If a Participant is not vested in his MAP benefit on the Effective Date, the MAP Conversion Bonus will be paid to such Participant at the same time as the first Additional Pay Credit Bonus is paid to such Participant (or, in the event of the Participant’s death prior to payment, at the time and in the form of the final Pay Credit Bonus payable under Section 5(g) below). Vesting is determined in accordance with the vesting provisions of Article VI of the MAP. The Company will apply the amount of the MAP Conversion Bonus to the purchase of an Annuity Contract on the life of the Participant with a purchase price equal to the MAP Conversion Bonus. The Conversion Eligible Participant will be the owner of the Annuity

 

7
Contract and will have the ability to direct the investment of funds held under the Annuity Contract and to surrender the Annuity Contract at any time. The Annuity Contract will be distributed to the Conversion Eligible Participant as soon as reasonably practicable after such Annuity Contract is issued.
           (d)  Amount of the MAP Conversion Bonus . The amount of a Conversion Eligible Participant’s MAP Conversion Bonus shall be determined as follows:
1. The Company shall calculate the difference which results by subtracting (B) the value of such Participant’s accrued benefit under the Prior Plan Terms immediately prior to the Effective Date from (A) the value of the accrued benefit that such Participant would have earned under the Prior Plan Terms immediately prior to the Effective Date if the Limits did not apply (the “ Accrued Benefit Difference ”), as illustrated by the following example: 

Example	 	 	 	 	
 	 	 	 	 	
12/31/99 Accrued Benefit under Prior Plan Terms	 	$	8,000	 	
12/31/99 Accrued Benefit under Practices and Procedures Based Upon Prior Plan Terms	 	$	10,000	 	
Accrued Benefit Difference	 	$	2,000	 	
2. The Company shall calculate the difference which results from subtracting (D) the Accrued Benefit Difference multiplied by the applicable factor set forth in Appendix A hereto from (C) the Accrued Benefit Difference multiplied by the applicable factor set forth in Part A of Appendix C of the MAP (the “ Account Balance Difference ”). The applicable factor from each table shall be based on the Conversion Eligible Participant’s age as of the last day of the calendar year in which the Effective Date occurs, as illustrated by the following example: 

Example	 	 	 	 	
 	 	 	 	 	
Accrued Benefit Difference (from above)	 	$	2,000	 	
Factor from Part A, Appendix C of MAP (for age 60 )	 	 	10.2880	 	
Factor from Appendix A of the Practices and Procedures (for age 60)	 	 	6.1638	 	
Account Balance Difference [($2,000 x 10.2880) - ($2,000 x 6.1638)]	 	$	8,248	 	

 

8
3. If the Applicable Date is later than the Effective Date, the Account Balance Difference shall be credited with the Accumulation Interest Rate from the Effective Date to the last day of the Bonus Year in which the Participant vests in his benefit under MAP (the “ Adjusted Account Balance Difference ”).
4. The Account Balance Difference or Adjusted Account Balance Difference, as the case may be, is then multiplied by one minus the Applicable Tax Rate to calculate the MAP Conversion Bonus, as illustrated by the following example: 

Example	 	 	 	 	
 	 	 	 	 	
Applicable Tax rate	 	 	40	%	
MAP Conversion Bonus [$8,248 x (1 - .40)]	 	$	4,949	 	
           (e)  Tax Equalization Payment . In addition to the receipt of the Annuity Contract in respect of the MAP Conversion Bonus, each Conversion Eligible Participant shall receive, at the time of delivery of such Annuity Contract, a Tax Equalization Payment determined in accordance with the formula [(R/(1 - T i )) - R], where “R” is the amount of the MAP Conversion Bonus and “ T i ” is the federal state and local tax rate for the Conversion Eligible Participant specified by the Committee plus the rate of the Conversion Eligible Participant’s portion of the Medicare payroll tax. The Tax Equalization Payment shall be paid to the Participant at the time that the Annuity Contract is delivered to the Participant, subject to applicable income tax and wage withholding requirements, including, without limitation, withholding required in respect of the delivery of the Annuity Contract. An example of tax equalization is set forth at the end of Section 4(g).
           6. General Provisions.
           (a)  Administration . The Committee shall have the right (i) to construe and interpret the Practices and Procedures and all rules, regulations, agreements and other documents related thereto, (ii) to promulgate rules, regulations and agreements related to the Practices and Procedures, (iii) to approve all calculations necessary for the administration and implementation of the Practices and Procedures, (iv) to make factual and other determinations, (v) to delegate administrative authority to one or more officers or employees of the Companies or to one or more third-party administrators, (vi) to determine the amount of any Annuity Bonus, MAP Conversion Bonus or Tax Equalization Payment, (vii) to correct errors in any previous calculation, and (viii) to rely upon the reports of third parties, including the actuaries, attorneys and accountants of the Company.
           (b)  Discretion as to Form of Payment . The Company shall have the right pay some or all of each Annuity Bonus or MAP Conversion Bonus in cash rather than through the delivery of an Annuity Contract.

 

9
           (c)  Participant Rights and Obligations Regarding Annuity Contracts . The Participant will be the owner of each Annuity Contract distributed to the Participant. A Participant, as the owner of a distributed Annuity Contract, will have the ability to direct the investment of funds held under the Annuity Contract. The actual accumulations under the Annuity Contract will be dependent upon investment decisions made by the Participant and consequently will not have any direct relationship to any assumptions that may be used in calculating the Annuity Bonus each year. A Participant is solely responsible for (i) reviewing the information (including the prospectus) provided by the issuer of the Annuity Contract for information on investment choices available under such contract and (ii) consulting with a personal investment adviser before making a decision to invest in the various accounts under the Annuity Contract.
           (d)  Withdrawals and Annuity Contract Charges . The Participant will have the ability to surrender the Annuity Contract at any time. If the Participant withdraws any amount from an Annuity Contract, for reasons other than retirement or disability, within five years of the end of the initial Bonus Year applicable to the Participant, the Participant will no longer be entitled to an Annuity Bonus or MAP Conversion Bonus, if any, for any subsequent Bonus Year. Whether a withdrawal is by reason of retirement or disability shall be determined by the Committee. Participants are responsible for reviewing the documents (including the prospectus) related to the Annuity Contract to determine the amount of the administrative charges against the value of the Annuity Contract if the Annuity Contract is surrendered during any period specified in the Annuity Contract. The Participant, and not the Company, shall be responsible for all charges against the value of the Annuity Contract (including load, redemption, withdrawal and surrender charges) assessed under or against the Annuity Contract after the Contract is issued.
           (e)  Considerations Regarding Tax Equalization Payments . The Company shall have the right, in lieu of paying a Tax Equalization Payment to a Participant, to credit the amount of any such Tax Equalization Payment (in such proportions as determined by the Committee) as federal, state and local income and other applicable withholding amounts on behalf of the affected Participant. Tax Equalization Payments are designed to place a Participant in approximately the same after-tax position based upon the actual tax rate as if the Participant had not received the Annuity Bonus. As there are many variables in calculating a Participant’s tax liability, the Tax Equalization Payments will not, in most cases, necessarily make a Participant whole with respect to the income and other tax liability incurred as a result of receipt of the Annuity Bonus. The Company shall have no obligation to adjust the amount of any Tax Equalization Payment based upon a Participant’s individual circumstances.
           (f)  Termination Before End of Bonus Year . If a Participant’s employment with the Companies terminates before the end of a Bonus Year for any reason other than Cause (as defined below), any amounts payable to the Participant for that Bonus Year will be based only on compensation from the Companies earned by the Participant for such year through the date of such termination of employment. No Annuity Bonus will be payable for a Bonus Year if a Participant’s employment is terminated for cause. For purposes hereof, “ Cause ” means (i) a

 

10
materially dishonest act or omission or misrepresentation by Employee in connection with the Company’s business, the Participant’s gross incompetence, (ii) willful misconduct, breach of fiduciary duty involving personal profit, (iii) intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar minor violations of law), final cease-and-desist order, or (iv) notorious act(s) contrary to customarily recognized acceptable standards of behavior which results in publicly that adversely impacts the Company or its business reputation by reason of the nature of the act and the Participant’s association with the Company.
           (g)  Death . If a Participant’s employment with the Companies ends during a Bonus Year as a result of the Participant’s death, any amounts otherwise payable to the Participant for that year shall be paid to the Participant’s Beneficiary in cash (and not in the form of an Annuity Contract). “ Beneficiary ” shall mean the individual designated in writing by the Participant in accordance with these Practices and Procedures to receive any amounts after the date of death of the Participant or, if no such designation has been made or if no such individual survives the Participant, the Participant’s estate. A Beneficiary designation shall be effective only if it is in writing and received by the Company prior to the date of death of the Participant.
           (h)  Indemnification . The Company shall indemnify and hold harmless to the fullest extent permitted by law each member of the Committee and each director, officer and employee of any of the Companies who are delegated or exercise duties or responsibilities under the Practices and Procedures in respect of any act or omission by any such person in connection with the administration or implementation of the Practices and Procedures.
           (i)  Amendment and Termination . The Company shall have no obligation to make any payments or to provide any benefits under the Practices and Procedures after the date the Committee and the Board indicate that no further Annuity Bonuses are to be awarded by the Company. The Company may amend or terminate the Practices and Procedures in whole or in part at any time and without prior notice to any person by action of the Committee and the Board.

 

Appendix A
Schedule of Conversion Factors

 	Age	 	 	Factor	 	
 	20	 	 	0.2837	 	
 	21	 	 	0.3064	 	
 	22	 	 	0.3309	 	
 	23	 	 	0.3574	 	
 	24	 	 	0.3860	 	
 	25	 	 	0.4169	 	
 	26	 	 	0.4502	 	
 	27	 	 	0.4862	 	
 	28	 	 	0.5251	 	
 	29	 	 	0.5671	 	
 	30	 	 	0.6125	 	
 	31	 	 	0.6615	 	
 	32	 	 	0.7141	 	
 	33	 	 	0.7715	 	
 	34	 	 	0.8332	 	
 	35	 	 	0.8999	 	
 	36	 	 	0.9719	 	
 	37	 	 	1.0497	 	
 	38	 	 	1.1337	 	
 	39	 	 	1.2241	 	
 	40	 	 	1.3224	 	
 	41	 	 	1.4282	 	
 	42	 	 	1.5425	 	
 	43	 	 	1.6659	 	
 	44	 	 	1.7992	 	
 	45	 	 	1.9431	 	
 	46	 	 	2.0986	 	
 	47	 	 	2.2665	 	
 	48	 	 	2.4478	 	
 	49	 	 	2.6436	 	
 	50	 	 	2.8551	 	
 	51	 	 	3.0835	 	
 	52	 	 	3.3302	 	
 	53	 	 	3.5966	 	
 	54	 	 	3.8843	 	
 	55	 	 	4.1950	 	
 	56	 	 	4.5306	 	
 	57	 	 	4.8930	 	
 	58	 	 	5.2844	 	
 	59	 	 	5.7072	 	
 	60	 	 	6.1638	 	
 	61	 	 	6.6569	 	
 	62	 	 	7.1894	 	
 	63	 	 	7.7646	 	
 	64	 	 	8.3858	 	
 	65	 	 	9.0567	 	
 	66	 	 	8.8069	 	
 	67	 	 	8.5539	 	
 	68	 	 	8.3004	 	
 	69	 	 	8.0477	 	
 	70	 	 	7.7965	 	

  

Exhibit 10.16
MASTERCARD INTERNATIONAL INCORPORATED
DEFERRAL  P L A N
As Amended and Restated Effective as of January 1, 2003

 

FOREWORD
Effective as of September 30, 1998, MasterCard International Incorporated (the “Company”) adopted the MasterCard International Incorporated Deferral Plan (the “Plan”) for the benefit of non-employee members of its Global Board of Directors and its U.S. Board of Directors, and a select group of management or highly compensated employees. The Plan was amended and restated effective as of January 1, 2000, as of August 1, 2000, as of July 25, 2001, and as of January 1, 2003. The Plan is intended to be an unfunded plan of deferred compensation. The purpose of the Plan is to permit the Directors and a select group of management or highly compensated employees within the meaning of Title I of the Employee Retirement Income Security Act of 1974, as amended, to defer, pursuant to the provisions of the Plan, a portion of certain items of income otherwise payable to them.

 

ARTICLE 1
DEFINITIONS
          1.1 “Additional Deferral Election” means the election by a Participant under Section 3.4(b) to further defer distribution from his or her Deferred Account.
          1.2 “Affiliated Employer” means (i) any corporation which is a member of a controlled group of corporations (as defined in Section 414(b) of the Code), which includes the Company, (ii) any trade or business (whether or not incorporated), which is under common control (as defined in Section 414(c) of the Code) with the Company, (iii) any organization (whether or not incorporated) which is a member of an affiliated services group (as defined in Section 414(m) of the Code) which includes the Company, and (iv) any other entity required to be aggregated with the Company pursuant to regulations under Section 414(o) of the Code.
          1.3 “Board” means the Global Board of Directors of the Company.
          1.4 “Bonus” means the amount of an Executive’s annual bonus under the Company’s Annual Incentive Compensation Plan.
          1.5 “Change in Control” means:
               (a) if (i) at any time three stockholders have become entitled to cast at least 45 percent of the votes eligible to be cast by all the stockholders of MasterCard Incorporated on any issue, (ii) at any time, a plan or agreement is approved by the stockholders of MasterCard Incorporated to sell, transfer, assign, lease or exchange (in one transaction or in a series of transactions) all or substantially all of the Company’s or MasterCard Incorporated’s assets, (iii) at any time, a plan is approved by the stockholders of MasterCard Incorporated for the sale, liquidation or dissolution of the Company or MasterCard Incorporated or (iv) at any time MasterCard Incorporated shall cease to be the sole class B member of the Company or otherwise cease to control substantially all voting rights in the Company. The foregoing notwithstanding, a reorganization in which the stockholders of MasterCard Incorporated 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 (ii), (iii) and/or (iv);
               (b) the approval by the stockholders of MasterCard Incorporated of (i) any consolidation or merger of MasterCard Incorporated in which MasterCard Incorporated is not the continuing or surviving corporation or pursuant to which shares of stock of MasterCard Incorporated would be converted into cash, securities or other property, other than a merger in which the holders of the 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;

 

               (c) any “person” (as defined in Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), other than MasterCard Incorporated or a subsidiary or employee benefit plan or trust maintained by MasterCard Incorporated 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 of MasterCard Incorporated outstanding at the time, without the prior approval of the board of directors of MasterCard Incorporated; or
               (d) a majority of the voting directors of MasterCard Incorporated proposed on a slate for election by stockholders of MasterCard Incorporated are rejected by a vote of such stockholders.
          1.6 “Change-of-Form Election” means the election by a Participant under Section 3.4(a) to change the Form of Distribution with respect to the portion of his or her Deferred Account with the same Deferral Period.
          1.7 “Change-of-Investment Return Election” means the election by a Participant under Section 3.5(b) to change the Investment Return to be earned on the balance in his or her Deferred Account.
          1.8 “Code” means the Internal Revenue Code of 1986, as amended, or any successor statute.
          1.9 “Compensation Committee” means the Compensation Committee of the Board.
          1.10 “Committee” means the committee that is responsible for administering the Plan. Unless the composition of the Committee is otherwise changed by the Compensation Committee, the Committee shall consist of the following three officers of the Company: the Executive Vice President of Central Resources, the General Counsel, and the Senior Vice President, Benefits and Compensation.
          1.11 “Company” means MasterCard International Incorporated.
          1.12 “Deferrable Savings Plan Salary” means the portion of an Executive’s Salary from which such Executive could elect to defer an amount to the MasterCard International Savings Plan that would entitle the Executive to receive the maximum matching contribution under that plan. An Executive’s Deferrable Savings Plan Salary shall be determined without regard to such Executive’s actual deferral elections made or to be made under the MasterCard International Savings Plan.
          1.13 “Deferral Election” means that separate notice, provided in a form prescribed by the Committee, that indicates a Participant’s Deferred Bonus Election, Deferred Long Term Incentives Election, Deferred Salary Election, Deferred Fee Election, and/or Deferred Retainer Election.
2

 

          1.14 “Deferral Period” means the period of time over which a Participant elects, or is mandated by the Plan or an amendment thereto, to defer receipt of Salary, Bonus, Long Term Incentives, Fees, or Retainers pursuant to Section 3.1(e) and 3.2(e).
          1.15 “Deferral Period Election” means the election by a Participant under Section 3.1(e) or 3.2(e) of the Deferral Period to apply to the Participant’s Deferral Election.
          1.16 “Deferred Account” means the bookkeeping entry established on behalf of a Participant with respect to Deferral Elections under this Plan, which shall reflect a Participant’s Salary deferrals, Bonus deferrals, Long Term Incentive deferrals, Fee deferrals, Retainer deferrals, and Non-Elective Deferrals, together with any adjustments for earnings and losses and any payments. For purposes herein, Deferred Accounts shall also include any separate subaccounts that may be established under a Participant’s Deferred Account to the extent necessary for the administration of the Plan.
          1.17 “Deferred Bonus Election” means the election by an Executive under Section 3.2 to defer until a later year receipt of some of his or her Bonus.
          1.18 “Deferred Fee Election” means the election by a Director under Section 3.1 to defer until a later year receipt of some or all of his or her Fees.
          1.19 “Deferred Long Term Incentives Election” means the election by an Executive under Section 3.2 to defer until a later year receipt of some of his or her Long Term Incentives.
          1.20 “Deferred Retainer Election” means the election by a Director under Section 3.1 to defer until a later year receipt of some or all of his or her Retainer.
          1.21 “Deferred Salary Election” means the election by an Executive under Section 3.2 to defer until a later year receipt of some of his or her Salary.
          1.22 “Director” means a non-employee member of either the Board or the U.S. Board.
          1.23 “Effective Date” means the effective date of the Plan set forth in Section 6.4.
          1.24 “Employer” means the Company or any Affiliated Employer that adopts the Plan with the approval of the Compensation Committee. Appendix A contains a list of each Employer.
          1.25 “ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
          1.26 “Executive” means an employee of an Employer who serves at the level of Executive Vice President or higher. In the event the Committee, pursuant to
3

 

Section 2.1(b), or the Compensation Committee, pursuant to Section 2.1(c)(ii), expands the group of employees eligible to participate in the Plan, the term Executive will be defined to include that group of employees.
          1.27 “Fees” means the amount of a Director’s fees which are paid for attending meetings of the Board, the U.S. Board, or committees of the Board or the U.S. Board and/or for chairing any such committee meeting.
          1.28 “Form of Distribution” means the term and frequency over which distributions from a Participant’s Deferred Account will be paid pursuant to Section 3.6(b).
          1.29 “Form of Distribution Election” means the election by a Participant under Section 3.1(f) or 3.2(f) of the Form of Distribution to apply to a Participant’s Deferral Election.
          1.30 “Investment Return” means the amounts that are credited to (or charged against, as the case may be) a Participant’s Deferred Account from time to time pursuant to Section 3.5.
          1.31 “Investment Return Options” means the investment funds, indices or crediting rates selected by the Committee that serve as a means to measure increases or decreases in value with respect to a Participant’s Deferred Account pursuant to Section 3.5.
          1.32 “Investment Return Option Election” means the election by a Participant under Section 3.1(g) or 3.2(g) of the Investment Return Option(s) to apply to the Participant’s Deferral Election.
          1.33 “Long Term Incentives” means the amount earned and payable under the Company’s Executive Incentive Plan.
          1.34 “Non-Elective Deferral” means an amount awarded by the Company under Section 3.3.
          1.35 “Participant”means a Director or an Executive who is both eligible to participate and who has elected to participate in the Plan as evidenced by submission and acceptance of a Deferral Election under Section 3.1 or 3.2, respectively.
          1.36 “Plan” means the MasterCard International Incorporated Deferral Plan, as from time to time amended.
          1.37 “Qualified Retirement” means termination from service by an Executive occurring on or after the earliest of: (i) attaining age 65 while in service, (ii) attaining age 60 while in service and completing five years of service, and (iii) attaining age 55 while in service and completing ten years of service.
4

 

          1.38 “Retainer” means the amount of a Director’s fixed annual fees which are paid for being a member of either the Board or the U.S. Board.
          1.39 “Salary” means the amount of an Executive’s regular annual base salary.
          1.40 “U.S. Board” means the U.S. Board of Directors of the Company.
5

 

ARTICLE 2
PARTICIPATION
          2.1 Participation
               (a) Participation in the Plan shall be limited to an individual who, as of the Effective Date of the Plan and/or any subsequent first day of any month, is:
                    (i) a Director, as defined in Section 1.22, or
                    (ii) an Executive, as defined in Section 1.26.
               (b) The Committee may, consistent with Company policy, expand the group of employees eligible to participate in the Plan so as to include selected employees of an Employer, who serve at the level of Senior Vice President and/or Vice President, and may designate that those employees are eligible to participate only with respect to a limited category or categories of income.
               (c) The Compensation Committee may, consistent with Company policy:
                    (i) designate as ineligible, or as ineligible with respect to a specified category or categories of compensation, particular individuals or groups of individuals who otherwise would be eligible under Section 2.1(a) or (b); or
                    (ii) designate as eligible, or as eligible with respect to a specified category or categories of compensation, particular individuals or groups of individuals who otherwise would be ineligible under Section 2.1(a) or (b).
               (d) Neither the Committee, pursuant to Section 2.1(b), nor the Compensation Committee, pursuant to Section 2.1(c), shall expand the eligible employees beyond a select group of management or highly-compensated employees within the meaning of Title I of ERISA.
6

 

ARTICLE 3
DEFERRAL ELECTIONS, ACCOUNTS, AND DISTRIBUTIONS
          3.1 Directors’ Deferral Elections.
               (a) An individual who is eligible to participate in this Plan in accordance with Section 2.1(a)(i) or Section 2.1(c)(ii) is entitled to make an election, pursuant to this Section 3.1, to defer all or part of his or her Retainer and/or his or her Fees; provided , however , that if the individual has been designated as eligible to participate in the Plan only with respect to a limited category or categories of compensation, that individual is entitled to make an election only with respect to that limited category or categories of compensation.
               (b) A Director’s Deferral Election shall be made in a written or electronic form prescribed by the Committee and furnished by the Committee or its delegate. Any such Deferral Election shall apply only to the Director’s Retainer or Fees, as the case may be, otherwise payable in the particular calendar year specified in the election. A Participant may elect to defer portions of his or her Annual Retainer and/or Fees (in 5% increments), the minimum and maximum limits of which will be prescribed by the Committee.
               (c) A Director’s Deferral Election with respect to payments for a particular calendar year must be made on or before the December 31 preceding such calendar year or, in the case of a newly-elected or newly-eligible Director, no later than thirty (30) days following the date on which he or she becomes eligible to participate in the Plan pursuant to Section 2.1(a) or (c). In the year the Plan is first put into effect, the Deferral Elections must be made within thirty (30) days of the Effective Date. In the case of the first Plan year or a newly-elected or newly-eligible Director, a Deferral Election shall apply only to amounts that are both paid after the date the election is made and earned for services performed after the date the election is made. Once made, a Deferral Election under this Section 3.1 cannot be changed or revoked.
               (d) Retainers and Fees deferred pursuant to this Section 3.1 shall be credited to the Participant’s Deferred Account (or, if none, to a new such account established in the Participant’s name) as of the date on which the Retainer or Fees, as the case may be, would otherwise have been paid.
               (e) Deferral Period. A Director who makes a Deferral Election with respect to Retainer and/or Fees shall, at the time of such election, submit a Deferral Period Election that indicates when payment of such deferred Retainer and/or Fees and any Investment Return credited thereon pursuant to Section 3.5 shall commence. Such Deferral Period Election shall be (i) January 15, 2011, January 15, 2016, or such other dates falling in five year increments from January 15, 2011, or January 15, 2016, as allowed by the Committee, or (ii) the date the Participant ceases to serve as a Director. If no Deferral Period Election is made, the Deferral Period Election shall be deemed to be
7

 

the date the Participant ceases to serve as a Director. Except as otherwise provided in Section 3.4(b), such Deferral Period Election shall not be changed or revoked.
               (f) Form of Distribution. A Director who makes a Deferral Election with respect to Retainer and/or Fees shall, at the time of such election, submit a Form of Distribution Election that indicates the manner in which balances will be distributed. Such Form of Distribution Election shall be (i) a lump sum payment, (ii) in five approximately equal annual installments, or (iii) in ten approximately equal annual installments. A separate Form of Distribution Election may be made with respect to each Deferral Period Election as provided under Section 3.1(e), provided, however, that if no Form of Distribution Election is made, such election shall be deemed to be lump sum. Except as otherwise provided in Section 3.4(a), such Form of Distribution Election shall not be changed or revoked.
               (g) Investment Return. A Director who makes a Deferral Election with respect to Retainer and/or Fees shall, at the time of such election, submit Investment Return Option Elections indicating the Investment Return Options to be used to determine the Investment Return to be credited to his or her Deferred Account as provided under Section 3.5. Separate Investment Return Option Elections may be made with respect to each Deferral Period Election as provided under Section 3.1(e), provided that each Investment Return Option allocated in such election must be in increments of 5%. If no Investment Return Election is made, the Investment Return credited will be based on the return earned by the money market or equivalent fund within the Investment Return Options selected by the Committee. Except as provided in Section 3.5(b), such Investment Return Option Elections shall not be changed or revoked.
          3.2 Executives’ Deferral Elections
               (a) An individual who is eligible to participate in this Plan in accordance with Section 2.1(a)(ii), Section 2.1(b), or Section 2.1(c)(ii), is entitled to make an election to defer his or her Salary, Bonus, and Long Term Incentives, as provided in this Section 3.2; provided , however , that if the individual has been designated as eligible to participate only with respect to a limited category or categories of compensation, that individual is entitled to make an election only with respect to that limited category or categories of compensation.
               (b) Deferral Elections with respect to Salary, Bonus, and Long Term Incentives shall be made in a written or electronic form prescribed by the Committee and furnished by the Committee or its delegate. A Deferred Salary Election, Deferred Bonus Election, and/or Deferred Long Term Incentives Election shall apply only to the Executive’s Salary, Bonus, or Long Term Incentives, as the case may be, otherwise payable in the particular calendar year specified in the election. A Participant may elect to defer a minimum of 10% or more each of his or her Deferrable Savings Plan Salary, Bonus, and/or Long Term Incentives (in 5% increments), subject to limits on the maximum deferrable percentage established by the Committee from time to time.
8

 

               (c) A Deferred Salary Election with respect to payments for a particular calendar year must be made on or before the December 31 preceding the commencement of such calendar year (or, in the case of a new or newly-eligible Executive, no later than thirty (30) days after the Executive becomes eligible to participate in the Plan pursuant to Section 2.1 or, in the case of the first Plan Year, within thirty (30) days of the Plan’s Effective Date) and, once made, cannot be changed or revoked. In the case of the first Plan year or a new or newly eligible Executive, the Deferred Salary Election will apply only to amounts that are both paid after the election is made and earned for services performed after the election is made. Salary deferred pursuant to this Section 3.2 shall be credited to the Executive’s Deferred Account (or, if none, to a new such account established in the Executive’s name) as of each payroll period of the calendar year to which it pertains. The amount of Salary that is deferred pursuant to this Deferred Salary Election will reduce the Executive’s Salary proportionately throughout the year or, in the case of the first Plan year or a new or newly eligible Executive, throughout the portion of the year to which the Deferred Salary Election is applicable.
               (d) A Deferral Election with respect to Bonus or Long Term Incentives to be paid in a particular calendar year must be made on or before the August 31 preceding the commencement of such calendar year and, once made, cannot be changed or revoked. Bonus and Long Term Incentives deferred pursuant to this Section 3.2 shall be credited to the Executive’s Deferred Account (or, if none, to a new such account established in the Executive’s name) as of the date on which it otherwise would have been paid.
               (e) Deferral Period. An Executive who makes a Deferral Election with respect to Salary, Bonus and/or Long Term Incentives shall, at the time of such election, submit a Deferral Period Election that indicates when payments of such deferred Salary, Bonus and/or Long Term Incentives and any Investment Return credited thereon pursuant to Section 3.5 shall commence. Such Deferral Period Election shall be: (i) January 15, 2011, January 15, 2016, or such other dates falling in five year increments from January 15, 2011, or January 15, 2016, as allowed by the Committee, or (ii) the Executive’s Qualified Retirement. If no Deferral Period Election is made, the Deferral Period Election shall be deemed to be Qualified Retirement. Except as otherwise provided in Section 3.4(b), such election shall not be changed or revoked.
               (f) Form of Distribution. An Executive who makes a Deferral Election with respect to Salary, Bonus, and/or Long Term Incentives shall, at the time of such election, submit a Form of Distribution Election that indicates the period and frequency of payments. Such Form of Distribution Election shall be (i) a lump sum payment, (ii) in five approximately equal annual installments, or (iii) in ten approximately equal annual installments. A separate Form of Distribution Election may be made with respect to each Deferral Period Election as provided under Section 3.2(e), provided, however, that if no Form of Distribution Election is made, such election shall be deemed to be lump sum. Except as otherwise provided in Section 3.4(a), such Form of Distribution Election shall not be changed or revoked.
9

 

               (g) Investment Return Options. An Executive who makes a Deferral Election with respect to Salary, Bonus and/or Long Term Incentives shall, at the time of such election, submit Investment Return Option Elections indicating the Investment Return Options to be used to determine the Investment Return to be credited to his or her Deferred Account as provided under Section 3.5. Separate Investment Return Option Elections may be made with respect to each Deferral Period Election as provided under Section 3.2(e), provided that each Investment Return Option allocated in such election must be in increments of 5%. If no Investment Return Election is made, the Investment Return credited will be based on the return earned by the money market or equivalent fund within the Investment Return Options selected by the Committee. Except as provided in Section 3.5(b), such Investment Return Option Elections shall not be changed or revoked.
          3.3 Non-Elective Deferral
               The Company may, in its sole discretion award to a Participant Non-Elective Deferral Amounts. Except as otherwise provided in this Plan or a written agreement between the Company and the Participant any such award shall be subject to the terms and conditions as amounts credited to a Participant’s Deferred Account pursuant to a Deferral Election.
          3.4 Change-of-Form Elections and Additional Deferral Elections
               (a) Any Participant who has made a Deferral Election may make an additional election to change the Form of Distribution. Any such Change-of-Form Election(s) is permitted with respect to the portion of the balance in a Deferred Account that shares the same Deferral Period Election under Section 3.1(e) or 3.2(e). The Form of Distribution may be changed to one of the three acceptable forms of distributions under Section 3.1(f) or 3.2(f). No such Change-of-Form Election will be effective with respect to any such balance in any Participant’s Deferred Account unless made six months or more before the date, as elected under Section 3.1(e) or 3.2(e), to which the portion of the Deferred Account is to be deferred (determined without regard to the date the balance in the Deferred Account is actually distributed pursuant to Section 3.6) and subject to the requirement of Section 3.7(f).
               (b) Any Participant who has made a Deferral Period Election may make an additional election to change the initial starting date for distributions of the balance in his or her Deferred Account. Separate Additional Deferral Elections may be made with respect to each portion of the balance in a Deferred Account that is attributable to Deferral Elections with the same elected Deferral Period and Form of Distribution. The Additional Deferral Election(s) may change the initial starting date for distributions to any of the Deferral Period options as provided under Section 3.1(e) or 3.2(e); provided , however , that only one such Additional Deferral Election may be made with respect to any such balance in any Deferred Account and further provided , however , that no such Additional Deferral Election shall be effective with respect to any such balance in any Participant’s Deferred Account unless made six months or more before the date, as elected under Section 3.1(e) or 3.2(e), to which the portion of the Deferred
10

 

Account is to be deferred (determined without regard to the date the balance in the Deferred Account is actually distributed pursuant to Section 3.6) and subject to the requirements of Section 3.7(f), and further provided, however , that an Additional Deferral Election to change the initial starting date to a date specified in Section 3.1(e)(i) or 3.2(e)(i) may only be made if such specified date is at least three years after the date that such Additional Deferral Election is made.
          3.5 Investment Return on Deferred Accounts and Change-of-Investment Return Election
               (a) The Committee or its delegate shall credit the entire balance in each Participant’s Deferred Account during the year with an Investment Return, in accordance with the Participant’s Investment Return Option Elections pursuant to Section 3.1(g) or 3.2(g) hereunder. Such balance shall include all Investment Returns credited to the Deferred Account in previous years.
               (b) Participants will be entitled to change the Investment Return to be applied to his or her Deferral Account. Separate reallocations may be made with respect to balances attributable to Deferral Elections with the same Deferral Period and same Form of Distribution Election, provided, however, that no more than six (6) changes may be made in any calendar year. Such Change-of-Investment Return Elections shall be made on a written or electronic form to be prescribed and furnished by, or in a manner established by, the Committee or its delegate. Change-of-Investment Return Elections will be effective on a prospective basis only as soon as practicable after the Change-of-Investment Return Election is made.
               (c) Within 60 days following the end of each calendar quarter, the Committee or its delegate shall furnish each Participant with a statement of account which shall set forth the balance in the individual’s Deferred Account as of the end of such calendar year, inclusive of cumulative Investment Return.
          3.6 Distributions and Cessation of Deferrals
               (a) Upon occurrence of an event specified in the Participant’s Deferral Period Election, as modified by any applicable subsequent Additional Deferral Election, or, in the event no Deferral Period Election is made, upon the date prescribed in Section 3.1(e) or 3.2(e), the amount of a Participant’s Deferred Account shall be paid or begin to be paid in cash to the Participant or beneficiary, as applicable. Such payment(s) shall be from the general assets of the Company or, in the case of an employee of an Affiliated Employer, from the general assets of the Company or the Affiliated Employer.
               (b) Unless other arrangements are specified by the Committee on a uniform and nondiscriminatory basis, deferred amounts shall be paid at the time and in the form elected by the Participant under Section 3.1 and 3.2 and modified by any applicable subsequent Change-of-Form Elections under Section 3.4, or in the event no Form of Distribution Election is made, in the form prescribed in Section 3.1(f) or Section 3.2(f), provided , however , that (i) in the event of an Executive Participant’s
11

 

termination of employment for any reason other than Qualified Retirement on or after January 1, 2003, including his or her death, or in the event of a Director Participant’s death, the Participant’s entire Deferred Account balance shall be valued and distributed in a lump sum as soon as practicable, notwithstanding the Participant’s Form of Distribution Elections then in effect; (ii) annual installment payments (five or ten, as the case may be) shall be valued and distributed on or about January 15, the first annual installment of which shall postdate the effective date of the event that triggers the commencement of distribution; and (iii) in the event that the present value of a Participant’s remaining annual installments is less than $10,000, the entire remaining balance shall be paid in the form of a lump sum.
               (c) In case of an unforeseeable emergency, a Participant may request the Committee, on a form to be provided by the Committee or its delegate, that payment be made earlier than the date to which it was deferred or that there be a cessation of deferrals under the Plan.
               For purposes of this Section 3.6(c), an “unforeseeable emergency” shall be limited to a severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or of a dependent (as defined in section 152(a) of the Code) of the Participant, loss of the Participant’s property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. The circumstances that will constitute an unforeseeable emergency will depend upon the facts of each case, but, in any case, payment may not be made and a cessation of deferral may not occur to the extent that such hardship is or may be relieved: (i) through reimbursement or compensation by available insurance or otherwise or (ii) by liquidation of the Participant’s assets, to the extent the liquidation of such assets would not itself cause severe financial hardship. Moreover, payment of a deferred amount may not be made ahead of the date to which the amount was deferred to the extent that such hardship is or may be relieved by cessation of deferrals under the Plan.
               The Committee shall consider any requests for payment on the basis of an unforeseeable emergency under this Section 3.6(c) on a uniform and nondiscriminatory basis and in accordance with the standards of interpretation described in section 457 of the Code and the regulations thereunder. In the event there is a payment or a cessation of deferrals under this Section 3.6(c) on the basis of an unforeseeable emergency, the Participant shall be ineligible to make further Deferral Elections for one year from the date of the Committee action approving the payment or cessation of deferral.
               In the event a Participant requests payment from his account earlier than the date to which it was deferred, and it is determined by the Committee that there is no unforeseeable emergency as defined in this section 3.6(c), the Participant may nonetheless receive from his account the payment, reduced by a penalty equal to ten percent of the amount that is requested in advance of the date to which it was deferred, which penalty shall be irrevocably forfeited by the Participant.
12

 

               (d) In the event a Participant becomes disabled and receives benefits under an Employer-provided long-term disability plan, previously elected deferrals will cease. The cessation of deferrals will continue during the entire period the Participant receives benefits under the long-term disability plan. Distributions will be made as scheduled and as provided under Section 3.6(b) unless an election is made under Section 3.4(a) to change the Form of Distribution or under Section 3.4(b) to change the Deferral Period, or a request is made under Section 3.6(c) to receive payment as a consequence of an unforeseeable emergency.
               (e) The Company or Employer shall deduct from all payments under the Plan federal, state and local income and employment taxes, as required by applicable law. Amounts deferred will be taken into account for purposes of any tax or withholding obligation under the Federal Insurance Contributions Act and Federal Unemployment Tax Act, not in the year distributed, but at the later of the year the services are performed or the year in which the rights to the amounts are no longer subject to a substantial risk of forfeiture, as required by sections 3121(v) and 3306(r) of the Code and the regulations thereunder. Amounts required to be withheld pursuant to sections 3121(v) and 3306(r) shall be withheld out of other current wages paid by the Employer.
          3.7 General Provisions
               (a) The Company shall make no provision for the funding of any Deferred Accounts payable hereunder that (i) would cause the Plan to be a funded plan for purposes of section 404(a)(5) of the Code or for purposes of Title I of ERISA, or (ii) would cause the Plan to be other than an “unfunded and unsecured promise to pay money or other property in the future” under Treasury Regulations § 1.83-3(e); and, except in the case of a Change in Control, as defined in Section 1.4 above, the Company shall have no obligation to make any arrangement for the accumulation of funds to pay any amounts under this Plan. Subject to the restrictions of this paragraph and in Section 3.7(c), the Company, in its sole discretion, may establish one or more grantor trusts described in Treasury Regulations § 1.677(a)-1(d) to accumulate funds to pay amounts under this Plan, provided that the assets of such trust(s) accumulated to pay amounts to Company employees shall be required to be used to satisfy the claims of the Company’s general creditors in the event of the Company’s bankruptcy or insolvency and the assets of such trusts(s) accumulated to pay amounts to employees of an Affiliated Employer shall be required to be used to satisfy the claims of the Company’s and the Affiliated Employer’s general creditors in the event of the Affiliated Employer’s bankruptcy or insolvency. In the case of a Change in Control, the Company shall, subject to the restrictions in this paragraph and in Section 3.7(c), irrevocably set aside funds in one or more such grantor trusts in an amount that is sufficient to pay each Participant (or beneficiary) the net present value as of the date on which the Change in Control occurred, of the benefits to which Participants (or their beneficiaries) who have Deferred Accounts under the Plan would be entitled pursuant to the terms of the Plan.
               (b) In the event that the Company shall decide to establish an advance accrual reserve on its books against the future expense of payments from any
13

 

Deferred Account, such reserve shall not under any circumstances be deemed to be an asset of this Plan but, at all times, shall remain a part of the general assets of the Company and/or the Affiliated Employer, subject to claims of the Company’s and/or the Affiliated Employer’s creditors.
               (c) A person entitled to any amount under this Plan as an Employee of the Company shall be a general unsecured creditor of the Company with respect to such amount. A person entitled to any amount under this Plan as an Employee of an Affiliated Employer shall be a general unsecured creditor of the Company and the Affiliated Employer with respect to such amount. Furthermore, a person entitled to a payment or distribution with respect to a Deferred Account shall have a claim upon the Company and/or Affiliated Employer only to the extent of the balance in his or her Deferred Account.
               (d) The Participant’s beneficiary under this Plan with respect to the balance in his or her Deferred Account shall be the person designated to receive benefits on account of the Participant’s death on a form provided by the Committee.
               (e) All commissions, fees and expenses that may be incurred in operating the Plan and any related trust(s) established in accordance with Section 3.7(a) will be paid by the Company.
               (f) Notwithstanding any other provision of this Plan, elections under this Plan may only be made by Participants while they serve as Directors of the Company or as Executives of an Employer.
          3.8 Non-Assignability
          Participants, their legal representatives and their beneficiaries shall have no right to anticipate, alienate, sell, assign, transfer, pledge or encumber their interests in the Plan, nor shall such interests be subject to attachment, garnishment, levy or execution by or on behalf of creditors of the Participants or of their beneficiaries.
14

 

ARTICLE 4
CLAIMS
          4.1 Claims Procedure
          If any Participant or his or her beneficiary has a claim for benefits which is not being paid, such claimant may file with the Committee a written claim setting forth the amount and nature of the claim, supporting facts, and the claimant’s address. The Committee shall notify each claimant of its decision in writing by registered or certified mail within sixty (60) days after its receipt of a claim or, under special circumstances, within ninety (90) days after its receipt of a claim. If a claim is denied, the written notice of denial shall set forth the reasons for such denial, refer to pertinent Plan provisions on which the denial is based, describe any additional material or information necessary for the claimant to realize the claim, and explain the claims review procedure under the Plan.
          4.2 Claims Review Procedure
          A claimant whose claim has been denied, or such claimant’s duly authorized representative, may file, within sixty (60) days after notice of such denial is received by the claimant, a written request for review of such claim by the Committee. If a request is so filed, the Committee shall review the claim and notify the claimant in writing of its decision within sixty (60) days after receipt of such request. In special circumstances, the Committee may extend for up to sixty (60) additional days the deadline for its decision. The notice of the final decision of the Committee shall include the reasons for its decision and specific references to the Plan provisions on which the decision is based. The decision of the Committee shall be final and binding on all parties.
15

 

ARTICLE 5
ADMINISTRATION
          5.1 Plan Administrator
               (a) Subject to the express provisions of the Plan, the Committee shall have the exclusive right to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it and to make all other determinations necessary or advisable for the administration of the Plan, including the determination under Section 2.1(b) herein. The decisions, actions and records of the Committee shall be conclusive and binding upon the Company, an Employer, and all persons having or claiming to have any right or interest in or under the Plan.
               (b) The Committee may delegate to such officers, employees or departments of the Company such authority, duties, and responsibilities of the Committee as it, in its sole discretion, considers necessary or appropriate for the proper and efficient operation of the Plan, including, without limitation, (i) interpretation of the Plan, (ii) approval and payment of claims, and (iii) establishment of procedures for administration of the Plan.
               (c) No member of the Committee shall be directly or indirectly responsible or otherwise liable for any action taken or any failure to take action as a member of the Committee, except for such action, default, exercise or failure to exercise resulting from such member’s gross negligence or willful misconduct. No member of the Committee shall be liable in any way for the acts or defaults of any other member of the Committee, or any of its advisors, agents or representatives.
               (d) The Company shall indemnify and hold harmless each member of the Committee against any and all expenses and liabilities arising out of his or her own activities relating to the Committee, except for expenses and liabilities arising out of a member’s gross negligence or willful misconduct.
               (e) The Company shall furnish to the Committee all information the Committee may deem appropriate for the exercise of its powers and duties in the administration of the Plan. The Committee shall be entitled to rely on any information provided by the Company without any investigation thereof.
               (f) No member of the Committee may act, vote or otherwise influence a decision of such Committee relating to his or her benefits, if any, under the Plan.
16

 

ARTICLE 6
AMENDMENT, TERMINATION AND EFFECTIVE DATE
          6.1 Amendment of the Plan
          Subject to the provisions of Section 6.3, the Plan may be wholly or partially amended or otherwise modified at any time by written action of the Compensation Committee.
          6.2 Termination of the Plan
          Subject to the provisions of Section 6.3, the Plan may be terminated by written action of the Compensation Committee at any time and in its sole discretion. On termination of the Plan, the Committee may (but shall not be required to) immediately pay out all benefits under the Plan.
          6.3 No Impairment of Benefits
          Notwithstanding the provisions of Sections 6.1 and 6.2, no amendment to or termination of the Plan shall impair any rights to benefits which theretofore accrued hereunder. An immediate payout of all Plan benefits on termination of the Plan, pursuant to Section 6.2, shall not, however, constitute an impairment of any rights or benefits.
          6.4 Effective Date
          The Plan is effective as of September 30, 1998. Unless otherwise stated, amendments to the Plan are effective on approval by the Compensation Committee. The first amendments to the Plan are effective January 1, 2000. The second amended and restated plan is effective August 1, 2000. The Plan’s application to grants under the Company’s Executive Incentive Plan is effective beginning with the grant of Long Term Incentives for the 1999-2001 Performance Period. The amendments approved by the Compensation Committee in June 2003, shall be effective as of January 1, 2003.
17

 

APPENDIX A
EMPLOYERS
MasterCard International, Inc.
MasterCard International, LLC
18

EXHIBIT 10.17
MASTERCARD INCORPORATED
SCHEDULE OF NON-EMPLOYEE DIRECTORS’ ANNUAL COMPENSATION
Effective January 1, 2004

RETAINER (1)	 	AMOUNT	 	
Service as a Director	 	$	45,000	 	
Service as a Committee Chair	 	$	5,000	 	
 	 	 	 	 	
MEETING FEES	 	AMOUNT	 	
Fee for Board Meetings	 	$	1,500	 	
Fee for Committee Meetings	 	$	1,000	 	
Fee for Telephonic Meetings	 	$	500	 	

(1)  	Retainer shall be paid on a quarterly schedule.	

 
EXHIBIT 21
LIST OF SUBSIDIARIES

Name	 	Jurisdiction	
Cirrus System, LLC	 	Delaware	
 	 	 	
MasterCard Europe sprl	 	Belgium	
 	 	 	
European Payment Systems Services sprl	 	Belgium	
 	 	 	
euro travellers cheque International S.A.	 	Belgium	
 	 	 	
EUROCARD U.S.A., Inc.	 	New Jersey	
 	 	 	
Eurocard Limited	 	England	
 	 	 	
MasterCard International Incorporated	 	Delaware	
 	 	 	
MasterCard Advisors, LLC	 	Delaware	
 	 	 	
MasterCard A/P Payment Services, Inc.	 	Delaware	
 	 	 	
MasterCard Asia/Pacific Pte Ltd.	 	Singapore	
 	 	 	
MasterCard Asia/Pacific (Australia) Pty. Ltd.	 	Australia	
 	 	 	
MasterCard Asia/Pacific (Hong Kong) Limited	 	Hong Kong	
 	 	 	
MasterCard Australia Ltd.	 	Delaware	
 	 	 	
MasterCard Brasil S/C Ltda.	 	Brazil	
 	 	 	
MasterCard Brasil Soluções de Pagamento 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/Europay U.K. Limited	 	England	
 	 	 	
MasterCard Financing Solutions, LLC	 	Delaware	
 	 	 	
MasterCard Foreign Sales Corporation	 	Barbados	

 

Name	 	Jurisdiction	
MasterCard Global Holding LLC	 	Delaware	
 	 	 	
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 Global Maatschap	 	Belgium	
 	 	 	
MasterCard International Holding LLC	 	Delaware	
 	 	 	
MasterCard International Japan Inc.	 	Delaware	
 	 	 	
MasterCard International Korea Ltd.	 	Korea	
 	 	 	
MasterCard International Philippines, Inc.	 	Delaware	
 	 	 	
MasterCard International, LLC	 	Delaware	
 	 	 	
MasterCard International Services, Inc.	 	Delaware	
 	 	 	
MasterCard Korea Ltd.	 	Delaware	
 	 	 	
MasterCard Mercosur, Inc.	 	Delaware	
 	 	 	
MasterCard Middle East, Inc.	 	Delaware	
 	 	 	
MasterCard Netherlands B.V.	 	The Netherlands	
 	 	 	
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	

 

Name	 	Jurisdiction	
MasterCard Uruguay Limitada	 	Uruguay	
 	 	 	
MasterCard Venezuela, Inc.	 	Delaware	
 	 	 	
MC Indonesia, Inc.	 	Delaware	
 	 	 	
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	
 	 	 	
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. Ltd.	 	Australia	
 	 	 	
MasterCard Global Key Centre Limited	 	England	
 	 	 	
MXI Management Limited	 	England	
 	 	 	
MasterCard UK Inc Pension Trustees Limited	 	England	
 	 	 	
MasterCard UK Management Services Limited	 	England	
 	 	 	
Bright Skies LLC	 	Delaware	
 	 	 	
Clear Skies LLC	 	Delaware	
 	 	 	
CSI Holdings Inc.	 	Missouri	
 	 	 	
EMVCo, LLC	 	Delaware	
 	 	 	
GVP Holding Incorporated	 	New York	

 

Name	 	Jurisdiction	
GVP Risk Management Insurance Incorporated	 	New York	
 	 	 	
JNS Corporation Yugen Kaisha	 	Japan	
 	 	 	
MasterCard GTS Holdings Private Ltd.	 	Mauritius	
 	 	 	
MasterCard GTS Software Private Limited	 	India	
 	 	 	
Mastermanager LLC	 	Delaware	
 	 	 	
MasterCard Beneficiary Trust	 	Delaware	
 	 	 	
MTS Holdings, Inc.	 	Delaware	
 	 	 	
Purchase Street Research, LLC	 	Delaware	
 	 	 	
MCA Customer Experience Group, Inc.	 	Delaware	
 	 	 	
The Tower Group, Inc.	 	Massachusetts	
 	 	 	
Towergroup Europe Limited	 	England	
 	 	 	
SET Secure Electronic Transaction LLC	 	Delaware	

 

EXHIBIT 31.1
CERTIFICATION PURSUANT TO
RULE 13a-14(a)/15d-14(a),
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Robert W. Selander, certify that:
      1. I have reviewed this annual report on Form 10-K of MasterCard Incorporated;
      2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
      3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
      4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

		
 	      a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
 		
 	      b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
 		
 	      c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
 		
 	      d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	
      5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

		
 	      a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
 		
 	      b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	

		
 	Date: March 2, 2005	

			
 	By: 	/s/ ROBERT W. SELANDER	

		
 	Robert W. Selander	
 	President and Chief Executive Officer	
99

EXHIBIT 31.2
CERTIFICATION PURSUANT TO
RULE 13a-14(a)/15d-14(a),
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Chris A. McWilton, certify that:
      1. I have reviewed this annual report on Form 10-K of MasterCard Incorporated;
      2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
      3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
      4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

		
 	      a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
 		
 	      b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
 		
 	      c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
 		
 	      d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	
      5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

		
 	      a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
 		
 	      b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	

		
 	Date: March 2, 2005	

			
 	By: 	/s/ CHRIS A. MCWILTON	

 	Chris A. McWilton	
 	Chief Financial Officer	
100

EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
      In connection with the Annual Report of MasterCard Incorporated (the “Company”) on Form 10-K for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert W. Selander, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
      1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
      2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

		
 	March 2, 2005	
 		
 	/s/ ROBERT W. SELANDER	
 	 	
 	Robert W. Selander	
 	President and Chief Executive Officer	

EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
      In connection with the Annual Report of MasterCard Incorporated (the “Company”) on Form 10-K for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Chris A. McWilton, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
      1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
      2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

		
 	March 2, 2005	
 		
 	/s/ CHRIS A. MCWILTON	
 	 	
 	Chris A. McWilton	
 	Chief Financial Officer