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Note 1—Summary of Significant Accounting Policies
Organization—Visa Inc. (“Visa” or the “Company”) is a global payments technology company that connects consumers, businesses, banks and governments around the world, enabling them to use digital currency instead of check and cash. The Company provides financial institutions with payment processing platforms that encompass consumer credit, debit, prepaid and commercial payments, and facilitate global commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses and government entities. The Company does not issue cards, set fees, or determine the interest rates consumers will be charged on Visa-branded cards, which are the independent responsibility of the Company’s issuing customers. In order to respond to industry dynamics and enhance Visa’s ability to compete, Visa undertook a reorganization in October 2007, and in March 2008 the Company completed its initial public offering (the “IPO”). See Note 2—The Reorganization.
Consolidation and basis of presentation—The consolidated financial statements include the accounts of Visa Inc. and its consolidated entities and are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company consolidates all entities that are controlled by ownership of a majority voting interest as well as variable interest entities for which the Company is the primary beneficiary. All significant intercompany accounts and transactions are eliminated in consolidation. Certain reclassifications, not affecting net income, have been made to prior period information to conform to the current period presentation format.
Prior to the October 2007 reorganization, Visa operated as five corporate entities related by ownership and membership: Visa U.S.A., Visa International Service Association (“Visa International” comprising the operating regions of Asia Pacific (“AP”), Latin America and Caribbean (“LAC”), and Central and Eastern Europe, Middle East and Africa (“CEMEA”)), Visa Canada Inc. (“Visa Canada”), Inovant LLC (“Inovant”), and Visa Europe Limited (“Visa Europe”). See Note 2—The Reorganization. Beginning October 1, 2007, the Company’s consolidated results include Visa U.S.A., Visa International, Visa Canada and Inovant. Visa Europe did not become a subsidiary of Visa Inc. as part of the reorganization. See Note 3—Visa Europe. Consolidated results for the year ended September 30, 2007 are those of Visa U.S.A., the accounting acquirer in the reorganization.
During the first quarter of fiscal 2009, the Company formed Visa Processing Services, Ltd. (“VPS”) and issued a 30% minority interest to and executed a joint venture agreement with Yalamanchili International Pte. Ltd., a payments processor and software company that will enable VPS to extend multi-currency and multi-language debit, credit and prepaid processing capabilities outside of the United States. The Company retained the remaining 70% interest in VPS, which is consolidated in the financial statements.
In fiscal 2010, the Company will report non-controlling interests (previously referred to as minority interests) as a component of equity. The adoption will primarily impact the presentation of the consolidated financial statements including all comparable periods.
The Company has one operating and reportable segment, “Payment Services.” The Company’s activities are interrelated and each activity is dependent upon and supportive of the other. Accordingly all significant operating decisions are based on analysis of Visa Inc. as a single global business.
Use of estimates—The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Future actual results could materially differ from these estimates. The use of estimates in specific accounting policies are described further below as appropriate.
Cash and cash equivalents—Cash and cash equivalents include cash and certain highly liquid investments with original maturities of 90 days or less from the date of purchase. Cash equivalents are recorded at cost, which approximates fair value.
Restricted cash—Litigation escrow—The Company deposited funds from the IPO and its own funds into an Escrow Account from which settlements of, or judgments in, the covered litigation will be paid. See Note 4—Retrospective Responsibility Plan for discussion of covered litigation. The escrow funds are held in money market investments together with the income earned, less applicable taxes payable, and classified as restricted cash on the consolidated balance sheet. The amount of the Escrow Account, equivalent to the actual undiscounted amount of payments expected to be made beyond one year from the balance sheet date for settled claims, is classified as a non-current asset. Interest earned on escrow funds is included in investment income, net, on the consolidated statement of operations.
Investments and fair value—Effective October 1, 2008, the Company began to measure certain required assets and liabilities at fair value as defined in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard establishes a framework for measuring fair value, sets out a three-level fair value hierarchy to be used to classify the source of information used in fair value measurements, and requires disclosures of assets and liabilities measured at fair value based on their level in the hierarchy.
The three levels of the valuation hierarchy and the classification of the Company’s financial assets and liabilities within the hierarchy are as follows:
Level 1—Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities. The fair value of the Company’s cash equivalents (money market funds), mutual fund equity securities and exchange-traded equity securities are based on quoted prices and are therefore classified as Level 1.
Level 2—Inputs to the valuation methodology can include: (1) quoted prices in active markets for similar (not identical) assets or liabilities; (2) quoted prices for identical or similar assets in non-active markets; (3) inputs other than quoted prices that are observable for the asset or liability; or (4) inputs that are derived principally from or corroborated by observable market data.
Level 2 assets include U.S. government-sponsored debt securities, and Canadian government debt securities for which fair value is based on quoted prices in active markets for similar assets, and other observable inputs. Level 2 assets and liabilities also include foreign exchange derivative instruments in an asset or liability position and are valued using inputs that are derived principally from or corroborated with observable market data.
Level 3—Inputs to the valuation methodology are unobservable and cannot be corroborated by observable market data. Inputs reflect the use of significant management judgment via the use of pricing models for which the assumptions include estimates of market participant assumptions. Level 3 assets include the Company’s auction rate securities, corporate debt securities, mortgage backed securities and other asset backed securities. Level 3 liabilities include the Visa Europe put option. See Note 3—Visa Europe.
FASB provided further guidance in April 2009 on how to determine the fair value of assets and liabilities when there is no active market or where the price inputs being used to determine fair value represent distressed sales. The adoption of this guidance did not have a material impact on the consolidated financial statements.
Available-for-sale securities include investments in debt and marketable equity securities. These securities are recorded at cost at the time of purchase and are carried at fair value. The Company classifies its debt and marketable equity securities as available-for-sale to meet its operational needs. Investments with original maturities greater than 90 days and stated maturities less than one year from the balance sheet date are current assets, while those with stated maturities greater than one year from the balance sheet date are non-current assets. Unrealized gains and losses are reported in accumulated other comprehensive income (loss) on the consolidated balance sheets. The specific identification method is used to determine realized gain or loss. Dividend and interest income are recognized when earned and are included in investment income, net on the consolidated statements of operations.
The Company evaluates its debt securities for other-than-temporary impairment (“OTTI”) on an ongoing basis. OTTI is assessed when fair value is below amortized cost. OTTI can be triggered when a company has the intent to sell a security, is more likely than not required to sell the security before recovery of the amortized cost basis, or does not expect to recover the entire amortized cost basis of the security. The Company has not presented required separate disclosures because its gross unrealized loss positions in debt securities for the periods presented are not material. In addition, the credit and non-credit loss components of debt securities on the balance sheet for which OTTI was previously recognized were not material. The Company recognized $9 million in OTTI during fiscal 2009 primarily related to corporate debt, mortgage backed and asset backed securities. In fiscal 2008, the Company recognized $9 million in OTTI primarily related to auction rate securities.
Trading assets include mutual fund equity security investments related to various employee compensation and benefit plans. The trading activity of these investments is dependent upon the actions of the Company’s employees. On October 1, 2008, the Company adopted FASB ASC 825 and elected the fair value option to account for these investments, which had previously been reported as available-for-sale investments. There was no impact to the consolidated statements of operations as a result of this adoption. Changes in fair value are recorded in investment income, net, and offset in personnel expense on the consolidated statements of operations.
The Company uses the equity method of accounting for investments in other entities when it holds between 20% and 50% ownership in the entity or when it exercises significant influence. Under the equity method, the Company’s share of each entity’s profit or loss is reflected in equity in earnings of unconsolidated affiliates on the consolidated statements of operations. The equity method of accounting is also used for flow-through entities such as limited partnerships and limited liability companies when the investment ownership percentage is equal to or greater than 5% of outstanding ownership interests, regardless of whether the Company has significant influence over the investees.
The Company accounts for investments in other entities under the historical cost method of accounting when it holds less than 20% ownership in the entity or for flow-through entities when the investment ownership is less than 5%, and the Company does not exercise significant influence. These investments consist of equity holdings in non-public companies and are recorded in other assets on the consolidated balance sheets.
The Company regularly reviews investments accounted for under the cost and equity methods for possible impairment, which generally involves an analysis of the facts and circumstances influencing the investment, expectations of the entity’s cash flows and capital needs, and the viability of its business model.
Financial instruments—The Company considers the following to be financial instruments: cash and cash equivalents, restricted cash-litigation escrow, trading and available-for sale investments, the Reserve Primary Fund (see Note 6—Prepaid Expenses and Other Assets), accounts receivable, non-marketable equity investments, customer collateral, accounts payable, debt, settlement guarantees, derivative instruments, the Visa Europe put option, and settlement receivable and payable. The estimated fair value of such instruments at September 30, 2009 approximates their carrying value as reported on the consolidated balance sheets except as otherwise disclosed, or as deemed impracticable to estimate the fair value, such as for non marketable equity investments. See Note 5—Investments and Fair Value Measurements.
Settlement receivable and payable—The Company operates systems for clearing and settling customer payment transactions. Net settlements are generally cleared within one to two business days, resulting in amounts due to and from financial institution customers. These settlement receivables and payables are stated at cost and are presented gross on the consolidated balance sheets.
Customer collateral—The Company holds cash deposits and other noncash assets from certain customers in order to ensure their performance of settlement obligations arising from credit, debit and travelers cheque product clearings. The cash collateral assets are restricted and fully offset by corresponding liabilities and both balances are presented on the consolidated balance sheets. Noncash collateral assets are held on behalf of the Company by a third party and are not recorded on the consolidated balance sheets. See Note 12—Settlement Guarantee Management.
Property, equipment and technology, net—Property, equipment, and technology, net are recorded at historical cost less accumulated depreciation and amortization, which are computed on a straight-line basis over the asset’s estimated useful life. Depreciation and amortization of technology, furniture, fixtures and equipment are computed over estimated useful lives ranging from 2 to 7 years. Capital leases are amortized over the lease term and leasehold improvements are amortized over the shorter of the useful life of the asset or lease term. Building improvements are depreciated between 3 and 40 years, and buildings are depreciated over 40 years. Improvements that increase functionality of the asset are capitalized and depreciated over the asset’s remaining useful life. Land and construction-in-progress are not depreciated. Fully depreciated assets are retained in property, equipment and technology, net, until removed from service.
Technology includes both purchased and internally developed software. Internally developed software represents software primarily used by the VisaNet electronic payment network. Internal and external costs incurred during the preliminary project stage are expensed as incurred. Qualifying costs incurred during the application development stage are capitalized. Once the project is substantially complete and ready for its intended use these costs are amortized on a straight-line basis over the technology’s estimated useful life.
Leases—The Company enters into operating and capital leases for the use of premises, software and equipment. Rent expense related to lease agreements which contain lease incentives are recorded on a straight-line basis.
Intangible assets—The Company records identifiable intangible assets at fair value on the date of acquisition and evaluates the useful life of each asset. Intangible assets with finite useful lives are amortized on a straight-line basis. Intangible assets with indefinite useful lives are not amortized but are evaluated for impairment annually or whenever events and circumstances indicate that impairment may exist. Intangible assets consist of tradename, customer relationships and Visa Europe franchise right, all of which have indefinite useful lives.
The Company tests each category of intangible assets for impairment on an aggregate basis, which may require the allocation of cash flows and/or an estimate of fair value to those assets or asset group. Impairment exists if the fair value of the indefinite-lived intangible asset is less than the carrying value. The Company relies on a number of factors when completing impairment assessment including a review of discounted future cash flows, business plans and use of present value techniques. The Company evaluated its intangible assets for impairment as of July 1, 2009 and concluded there was no impairment as of that date. No recent events or circumstances indicate that impairment may exist.
Goodwill—Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination. Goodwill is not amortized but is evaluated for impairment at the reporting unit level annually or whenever events and circumstances indicate that impairment may exist. The Company has only one reporting unit, which is the level in which discrete financial information is available and reviewed by the chief operating decision maker.
Impairment is reviewed using a two-step process. The first step compares the fair value of the reporting unit to its carrying value. If the fair value exceeds the carrying value, no impairment exists, and the second step is not performed. If the fair value is less than the carrying value, the second step is performed to compute the amount of the impairment by comparing the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The Company relies on a number of factors when completing impairment assessment including a review of discounted future cash flows, business plans and use of present value techniques. The Company evaluated its goodwill for impairment as of July 1, 2009 and concluded there was no impairment as of that date. No recent events or circumstances indicate that impairment may exist as reflected by the Company’s overall business performance and market capitalization.
Impairment of long-lived assets—The Company evaluates the recoverability of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. If the sum of expected undiscounted future cash flows is less than the carrying amount of an asset or asset group, an impairment loss is recognized. The loss is measured as the amount by which the carrying amount of the asset or asset group exceeds its fair value.
Volume and support incentives—The Company enters into incentive agreements with financial institution customers, merchants, and other business partners designed to build payments volume and to increase product acceptance. These incentives are generally accounted for as reductions of operating revenues or expenses where an identifiable benefit can be identified. The Company generally capitalizes certain incentive payments under these agreements if certain criteria are met. The capitalization criteria includes the existence of legally enforceable recoverability clauses, such as early termination clauses, management’s ability and intent to enforce the recoverability clauses and the ability to generate future earnings from the agreement in excess of the deferred amounts. Incentives are accrued systematically and rationally based on management’s estimate of the customers’ performance. These accruals are regularly reviewed and estimates of performance are adjusted as appropriate. Capitalized amounts are amortized over the period of contractual recoverability.
Accrued litigation—The Company evaluates the likelihood of an unfavorable outcome of legal or regulatory proceedings to which it is a party and records a loss contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These judgments are subjective, based on legal or regulatory proceedings, the merits of the Company’s defenses and consultation with corporate and external legal counsel, and actual outcomes of related legal proceedings may materially differ from the Company’s judgment. Accrued litigation associated with settled obligations to be paid over periods longer than one year is initially recorded using the present value of future payment obligations. The obligation is accreted to its full payment value with the corresponding accretion charge included in interest expense on the consolidated statement of operations. The Company expenses legal costs as incurred in professional and consulting fees. See also Note 21—Legal Matters.
Revenue recognition—The Company’s operating revenues are comprised principally of service revenues, data processing revenues, international transaction revenues and other revenues, reduced by costs incurred under volume and support incentives. The Company recognizes revenue when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured.
Service revenues predominantly represent payments by customers with respect to their card programs carrying marks of the Visa brand and are based principally upon spending on Visa-branded cards for goods and services. Current quarter service revenues are assessed using a calculation of pricing applied to the prior quarter’s payments volume. The Company also earns revenues from assessments designed to support ongoing acceptance and volume growth initiatives. These revenues are recognized in the same period the related volume is transacted.
Data processing revenues represent revenues earned for authorization, clearing, settlement, transaction processing services and other maintenance and support services that facilitate transaction and information processing among the Company’s customers globally and Visa Europe. These revenues are recognized in the same period the related transactions occur or services are rendered.
International transaction revenues are assessed to customers on cardholder transactions where the cardholder’s issuer country is different from the merchant’s country. Revenues from these cross-border transactions are recognized in the same period the related transactions occur or services are rendered.
Other revenues include revenues earned from Visa Europe in connection with the Framework Agreement (see Note 3—Visa Europe), optional card enhancements, such as extended cardholder protection and concierge services, cardholder services, and other services provided to customers. Other revenues are recognized in the same period the related transactions occur or services are rendered.
Advertising, marketing and promotion—The Company expenses costs for the production of advertising as incurred. The cost of media advertising is expensed when the advertising takes place. Sponsorship costs are recognized over the period in which the Company benefits from the sponsorship rights. Promotional items are expensed as incurred, when the related services are received, or when the related event occurs.
Income taxes—The Company’s income tax expense consists of two components: current and deferred. Current income tax expense represents taxes to be paid for the current period. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts and the respective tax basis of existing assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In assessing whether deferred tax assets are realizable, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. A valuation allowance is recorded for the portions that are not expected to be realized based on the level of historical taxable income, projections of future taxable income over the periods in which the temporary differences are deductible, and allowable tax planning strategies.
Where interpretation of the tax law may be uncertain, the Company recognizes, measures and discloses income tax uncertainties. The Company accounts for interest expense and penalties related to uncertain tax positions in other income (expense) in the consolidated statement of operations.
The Company files a consolidated federal income tax return and, in certain states, combined state tax returns. Foreign taxes paid are generally deducted to reduce federal income taxes payable.
Pension and other postretirement benefit plans—The Company’s defined benefit pension and other postretirement benefit plans are actuarially evaluated, incorporating various critical assumptions including the discount rate and the expected rate of return on plan assets (for qualified pension plans). The discount rate is based on matching the duration of a pool of high quality corporate bonds to the expected benefit payment stream, and is used to determine the present value of the Company’s future benefit obligations. The expected rate of return on pension plan assets considers the current and expected asset allocation, as well as historical and expected returns on each plan asset class. Any difference between actual and expected plan experience, including asset return experience, in excess of a 10% corridor is recognized in the net periodic pension calculation over the expected average employee future service period, approximately 8 years for United States plans. Other assumptions involve demographic factors such as retirement, mortality, attrition and the rate of compensation increases. The Company evaluates assumptions annually and modifies them as appropriate.
The Company recognizes the funded status of its benefit plans in its consolidated balance sheet as a separate component of accumulated other comprehensive income (loss) within stockholders’ equity. The Company immediately recognizes settlement losses when it settles pension benefit obligations, including making lump-sum cash payments to plan participants in exchange for their rights to receive specified pension benefits. See Note 11—Pension, Postretirement and Other Benefits.
Foreign currency remeasurement and translation—The Company’s functional currency is the U.S. dollar for the majority of its foreign operations. Transactions denominated in currencies other than the applicable functional currency are remeasured to the functional currency at the exchange rate on the transaction date. Monetary assets and liabilities are remeasured to the functional currency using exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are maintained at historical exchange rates. Gains and losses related to remeasurement are recorded in administrative and other in the consolidated statements of operations.
The functional currency in Canada is the Canadian dollar. Translation from the Canadian dollar to the U.S. dollar is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate for the period. Resulting translation adjustments are reported as a component of accumulated other comprehensive income on the consolidated balance sheets.
Derivative financial instruments—The Company uses forward foreign exchange contracts to reduce its exposure to foreign currency rate changes on non-functional currency denominated forecasted operating revenues and expenses. Derivatives are carried at fair value on the consolidated balance sheets. Gains and losses resulting from changes in fair value of derivative instruments are accounted for either in accumulated other comprehensive income (loss) on the consolidated balance sheets, or in the consolidated statements of operations (in the corresponding account where revenue or expense is hedged, or to administrative and other for hedge amounts determined to be ineffective) depending on whether they are designated and qualify for hedge accounting. Fair value represents the difference in the value of the contracts at the contractual rate and the value at current market rates, and generally reflects the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date based on broker quotes for the same or similar instruments.
Additional disclosures that demonstrate how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows have not been presented because the impact of derivative instruments is immaterial to the overall consolidated balance sheets, statements of operations and statements of comprehensive income. See Note 13—Derivative Financial Instruments.
Guarantees and indemnifications—The Company recognizes an obligation for guarantees and indemnifications at inception if the fair value is estimable, regardless of the probability of occurrence. The Company indemnifies issuing and acquiring customers from settlement losses suffered by the failure of any other customer to honor drafts, travelers cheques, or other instruments processed in accordance with Visa’s operating regulations. The estimated fair value of the liability for settlement indemnification is included in accrued liabilities on the consolidated balance sheets and is described in Note 12—Settlement Guarantee Management. The Company also indemnifies Visa Europe for any claims arising out of the provision of services brought against Visa Europe by Visa Inc.’s customer financial institutions, as described in Note 18—Commitments and Contingencies.
Share-based compensation—The Company recognizes share-based compensation cost using the fair value method of accounting. The Company recognizes compensation cost for awards with only service conditions on a straight-line basis over the requisite service period, which is generally the vesting period. Compensation cost for performance awards is initially estimated based on target performance and is adjusted as appropriate throughout the performance period. See Note 17—Share-based Compensation.
Net income per share—The Company calculates net income per share using the two-class method to reflect the different rights of each class and series of outstanding common stock. See Note 16—Net Income Per Share. In fiscal 2010, the Company will include unvested instruments granted in share-based payment transactions that have non-forfeitable rights to dividends or dividend equivalents in the calculation of net income per share as a separate class of security. This change will not result in any impact to fiscal 2009 and 2008 full year diluted class A net income per share.
Recently Issued Accounting Pronouncements
In December 2007, FASB ASC 805 was issued which changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the treatment of acquisition related transaction costs, the accounting for pre-acquisition gain and loss contingencies, the accounting for acquisition-related restructuring cost accruals, and the recognition of changes in the acquirer’s income tax valuation allowance. In April 2009, FASB ASC 805-20 was issued with regard to the initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. The Company will adopt these standards on October 1, 2009. The adoption is not expected to have a material impact on the consolidated financial statements.
In December 2008, FASB ASC 715-20 was issued which provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The disclosures about plan assets required by this standard are effective for fiscal years ending after December 15, 2009 and are not required for earlier periods presented for comparative purposes. Earlier application is permitted. This standard impacts disclosures only and will not have an effect on the consolidated financial position or results of operations upon adoption. The Company will adopt this standard in fiscal 2010.
In May 2009, FASB ASC 855 was issued and established standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The standard requires entities to disclose the date through which they have evaluated subsequent events and whether the date corresponds to the release of their financial statements. The Company has since adopted the standard and subsequent events have been evaluated through November 19, 2009.
In June 2009, FASB ASC 810-10 was issued. ASC 810-10 changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The Company will adopt ASC 810-10 effective October 1, 2010. Early adoption is prohibited. The Company is evaluating the impact of adopting ASC 810-10 on its consolidated financial statements.
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Note 2—The Reorganization
Description of the Reorganization and Purchase Consideration
In a series of transactions from October 1 to October 3, 2007, Visa undertook a reorganization in which Visa U.S.A., Visa International, Visa Canada and Inovant became direct or indirect subsidiaries of Visa Inc. and the Retrospective Responsibility Plan was established. See Note 4—Retrospective Responsibility Plan. For accounting purposes, the Company reflected the reorganization as a single transaction occurring on October 1 (the “reorganization date”), using the purchase method of accounting with Visa U.S.A. as the accounting acquirer. The net assets underlying the acquired interests in Visa International, Visa Canada, and Inovant (the “acquired interests”) were recorded at fair value at the reorganization date with the excess purchase price over this value attributed to goodwill. Visa Europe did not become a subsidiary of Visa Inc., but rather remained owned and governed by its European member financial institutions and entered into a set of contractual arrangements with the Company in connection with the reorganization.
The Company issued different classes and series of common stock in the reorganization reflecting the different rights and obligations of the Visa financial institution members and Visa Europe. The allocation of the Company’s common stock to each of Visa AP, Visa LAC, Visa CEMEA, Visa Canada (collectively the “acquired regions”) and Visa U.S.A. (collectively “the participating regions”) was based on each entity’s expected relative contribution to the Company’s projected fiscal 2008 net income, after giving effect to negotiated adjustments. This allocation was adjusted shortly prior to the IPO (the “true-up”) to reflect actual performance in the four quarters ended December 31, 2007. The allocation of the Company’s common stock and other consideration conveyed to Visa Europe in exchange for its ownership interest in Visa International and Inovant was determined based on the fair value of each element exchanged in the reorganization as discussed below and in Note 3—Visa Europe. Total shares authorized and issued to the financial institution member groups of the participating regions and to Visa Europe in the reorganization totaled 775,080,512 shares of class B and class C common stock.
Total purchase consideration, inclusive of the true-up, of approximately $18.4 billion comprised of the following:
| in millions | |||
|
Visa Inc. common stock |
$ | 17,935 | |
|
Visa Europe put option |
346 | ||
|
Liability under Framework Agreement |
132 | ||
|
Total purchase consideration |
$ | 18,413 | |
Visa Inc. Common Stock Issued in Exchange for the Acquired Interests
The value of the purchase consideration conveyed to each of the member groups of the acquired regions was determined by valuing the underlying businesses contributed by each, after giving effect to negotiated adjustments. The fair value of the purchase consideration, consisting of 258,022,779 shares of class C (series I) common stock, was approximately $12.6 billion, measured at June 15, 2007, or the date on which all parties entered into the global restructuring agreement. Additional purchase consideration of $1.2 billion, consisting of 26,138,056 incremental shares of class C common stock valued at $44 per share were issued to the acquired regions shortly before the IPO in connection with the true-up. The fair value of these shares was determined based on the price per share in the IPO.
To value the shares issued on June 15, 2007 (the “measurement date”), the Company primarily relied upon the analysis of comparable companies with similar industry, business model and financial profiles. This analysis considered a range of metrics including the forward multiples of revenue; earnings before interest, depreciation and amortization; and net income of these comparable companies. Ultimately, the Company determined that the forward net income multiple was the most appropriate measure to value the acquired regions and reflect anticipated changes in the Company’s financial profile prospectively. This multiple was applied to the corresponding forward net income of the acquired regions to calculate their value. The most comparable company identified was MasterCard Inc. Therefore, the most significant input into this analysis was MasterCard’s forward net income multiple of 27 times net income at the measurement date.
Visa Inc. Common Stock Issued to Visa Europe
As part of the reorganization, Visa Europe received 62,762,788 shares of class C (series III and IV) common stock valued at $3.1 billion based on the value of the class C (series I) common stock issued to the acquired regions. Visa Europe also received 27,904,464 shares of class C (series II) common stock valued at $1.104 billion determined by discounting the redemption price of these shares using a risk-free rate of 4.9% over the period to October 2008, when these shares were redeemed by the Company. Prior to the IPO, the Company issued Visa Europe an additional 51,844,393 class C (series II) common stock at a price of $44 per share in exchange for a subscription receivable. The issuance and subscription receivable were recorded as offsetting entries in temporary equity at September 30, 2008. Completion of the Company’s IPO triggered the redemption feature of this stock and in March 2008, the Company reclassified all outstanding shares of the class C (series II) common stock at its then fair value of $1.125 billion to temporary equity on the consolidated balance sheet with a corresponding reduction in additional paid-in-capital of $1.104 billion and accumulated income of $21 million. From March 2008 to October 10, 2008, the date these shares were redeemed, the Company recorded accretion of this stock to its redemption price through accumulated income.
Fair Value of Assets Acquired and Liabilities Assumed
Total purchase consideration has been allocated to the tangible and identifiable intangible assets and liabilities assumed underlying the acquired interests based on their fair value on the reorganization date. The excess of purchase consideration over net assets assumed was recorded as goodwill. The following table summarizes this allocation.
| in millions | ||||
|
Tangible assets and liabilities |
||||
|
Current assets |
$ | 1,733 | ||
|
Non-current assets |
1,122 | |||
|
Current liabilities |
(1,194 | ) | ||
|
Non-current liabilities |
(4,426 | ) | ||
|
Intangible Assets |
10,883 | |||
|
Goodwill |
10,295 | |||
|
Net assets acquired |
$ | 18,413 | ||
Condensed Pro Forma Results of Operations
The following condensed Visa Inc. pro forma results of operations for fiscal 2007 have been prepared to give effect to the reorganization described above assuming it occurred on October 1, 2006. The condensed pro forma results below are presented for illustrative purposes only and have been prepared by applying adjustments to the historical consolidated statements of operations of Visa U.S.A., Visa International and Visa Canada for fiscal 2007.
| (in millions except share and per share data) | Fiscal 2007 | |||
|
Total operating revenues |
$ | 5,193 | ||
|
Total operating expenses |
(6,309 | ) | ||
|
Operating loss |
(1,116 | ) | ||
|
Total other income |
109 | |||
|
Loss before income taxes |
(1,007 | ) | ||
|
Income tax benefit |
(146 | ) | ||
|
Net loss |
$ | (861 | ) | |
|
Basic and diluted net loss per share |
$ | (1.11 | ) | |
|
Shares used in basic and diluted net loss per share |
775,080,512 | |||
The condensed pro forma results presented above reflect the Company’s continuing eligibility to claim the special deduction afforded to companies that operate on a cooperative or mutual basis under California Revenue and Taxation Code §24405. Had ineligibility for the special deduction been reflected at October 1, 2006 in the condensed pro forma results, pro forma income tax benefit would decrease and pro forma net loss would increase by approximately $31 million.
|
|||
Note 3—Visa Europe
Under the terms of the reorganization, Visa Europe exchanged its ownership interest in Visa International and Inovant for Visa Inc. common stock as described in Note 2—The Reorganization, a put-call option agreement and a Framework Agreement, as described below.
Visa Europe Put Option Agreement
The Company granted Visa Europe a perpetual put option, which if exercised, will require Visa Inc. to purchase all of the outstanding shares of capital stock of Visa Europe from its members. The put option became exercisable during fiscal 2009. The Company is required to purchase the shares of Visa Europe no later than 285 days after exercise of the put option. The purchase price of the Visa Europe shares under the put option is based upon a formula that, subject to certain adjustments, applies Visa Inc.’s forward price-to-earnings multiple (the “P/E ratio”) at the time the option is exercised (as defined in the option agreement) to Visa Europe’s projected sustainable adjusted net operating income for the forward 12-month period (“adjusted sustainable income”). Visa Europe’s adjusted sustainable income is calculated under the terms of the put option agreement and includes potentially material adjustments for cost synergies and other negotiated items.
Fair Value of Put Option. At September 30, 2009, the Company determined the fair value of the put option to be approximately $346 million. While this amount represents the fair value of the put option at September 30, 2009, it does not represent the actual purchase price that the Company may be required to pay if the option is exercised, which could be several billion dollars or more. The fair value of the put option represents the value of Visa Europe’s option, which under certain conditions could obligate the Company to purchase its member equity interest for an amount above fair value. While the put option is in fact non-transferable, its fair value represents the Company’s estimate of the amount the Company would be required to pay a third party market participant to transfer the potential obligation in an orderly transaction.
The fair value of the put option is computed using probability-weighted models designed to estimate the Company’s liability assuming various possible exercise decisions that Visa Europe could make under different economic conditions in the future, including the possibility that Visa Europe will never exercise its option. The most significant of these estimates are the assumed probability that Visa Europe will elect to exercise its option and the estimated differential between the P/E ratio and the P/E ratio applicable to Visa Europe on a stand alone basis at the time of exercise, which the Company refers to as the “P/E differential”.
Exercise of the put option is at the sole discretion of Visa Europe (on behalf of the Visa Europe shareholders pursuant to authority granted to Visa Europe, under its articles of association). The Company estimates the assumed probability of exercise based on reasonably available information including, but not limited to: (i) Visa Europe’s stated intentions; (ii) indications that Visa Europe is preparing to exercise as reflected in its reported financial results; (iii) evaluation of market conditions, including the regulatory environment, that could impact the potential future profitability of Visa Europe; and (iv) qualitative factors applicable to Visa Europe’s largest members, which could indicate a change in their need or desire to liquidate their investment holdings. Factors impacting the assumed P/E differential used in the calculation include material changes in the P/E ratio of Visa Inc. and those of a group of comparable companies used to estimate the forward price-to-earnings multiple applicable to Visa Europe.
In determining the fair value of the put option at September 30, 2009, the Company assumed a 40% probability of exercise by Visa Europe at some point in the future and a P/E differential at the time of exercise of 5.3x. These assumptions are consistent with those used in the valuation of the put option at September 30, 2008. The put option is exercisable at any time at the sole discretion of Visa Europe. As such, the put option liability is included in accrued liabilities on our consolidated balance sheet at September 30, 2009. Classification in current liabilities is not an indication of management’s expectation of exercise and simply reflects the fact that the obligation resulting from the exercise of the instrument could become payable within 12 months. Changes in fair value are included in the Company’s consolidated statement of operations. See Note 5—Investments and Fair Value Measurements for additional discussion of the fair value of the put option.
Visa Call Option Agreement
Visa Europe granted to Visa Inc. a perpetual call option under which the Company may be entitled to purchase all of the share capital of Visa Europe. The Company may exercise the call option, in the event of certain triggering events. These triggering events involve the performance of Visa Europe measured as an unremediated decline in the number of merchants or ATM’s in the Visa Europe region that accept Visa-branded products. The Company believes the likelihood of these triggers occurring to be remote.
The Framework Agreement
The relationship between Visa Inc. and Visa Europe is governed by a Framework Agreement, which provides for trademark and technology licenses and bilateral services as described below.
Visa Inc., Visa U.S.A., Visa International and Inovant, as licensors, granted to Visa Europe exclusive, irrevocable and perpetual licenses to use the Visa trademarks and technology intellectual property owned by the licensors and certain affiliates within the Visa Europe region for use in the field of financial services, payments, related information technology and information processing services and participation in the Visa system. Visa Europe may sublicense the Visa trademarks and technology intellectual property to its members and other sublicensees under agreed upon circumstances.
The fee payable for these irrevocable and perpetual licenses is approximately $143 million per year, payable quarterly (“quarterly base fee”), except for the year ended September 30, 2008 during which the fee payable was $41 million due to an agreed upon formula. In calculating total purchase consideration in the reorganization, the Company included a liability of $132 million, which represented the estimated obligation to provide the licenses during fiscal 2008 at below fair value. The difference in this estimate and the actual results in fiscal 2008 was primarily due to changes in the three-month LIBOR rate during the period, which were used in the agreed upon formula to calculate the fee. Changes in this liability as a result of movement in the three-month LIBOR rate were reflected in the consolidated statement of operations in fiscal 2008. The liability was fully settled upon redemption of Visa Europe’s class C (series II) and class C (series III) common shares on October 10, 2008.
Beginning November 9, 2010, the quarterly base fee will be adjusted annually based on the annual growth of the gross domestic product of the European Union. The Company determined through an analysis of the fee rates implied by the economics of the agreement that the quarterly base fee, as adjusted in future periods based on the growth of the gross domestic product of the European Union, approximates fair value.
Visa Europe must comply with certain agreed upon global rules governing the use and interoperability of the Visa trademarks and interoperability of Visa Inc.’s systems with the systems of Visa Europe. The parties will also guarantee the obligations of their respective customers and members to settle transactions, manage certain relationships with sponsors, customers and merchants, and comply with rules relating to the operation of the Visa enterprise. The Company will indemnify Visa Europe for claims arising from activities in the field of financial payment and processing services brought outside Visa Europe’s region and Visa Europe will indemnify Visa Inc. for any likewise claims brought within Visa Europe’s region. The Company has not recorded liabilities associated with these obligations as the fair value of such obligations was determined to be nominal at September 30, 2009 and 2008, respectively.
Visa Inc. provides Visa Europe with transitional and ongoing authorization services for cross-border transactions involving Visa Europe’s region and the rest of the world, as well as clearing and settlement system services between Visa Europe’s region and the rest of the world. Until Visa Europe’s regional clearing and settlement system is fully deployed, Visa Inc. will provide clearing and settlement system services within Visa Europe’s region. In addition, the parties share foreign exchange revenues related to currency conversion for transactions involving European cardholders as well as other cross-border transactions that take place in Visa Europe’s region until Visa Europe’s regional clearing and settlement system is fully deployed, at which time this arrangement will cease. The parties also use each others’ switching and processing services. The Company has determined that the value of services exchanged as a result of these various agreements approximate fair value at September 30, 2009 and 2008, respectively.
|
|||
Note 4—Retrospective Responsibility Plan
The Company has established several related mechanisms designed to address potential liability under certain litigation referred to as the “covered litigation”. These mechanisms are included in and referred to as the Retrospective Responsibility Plan (the “Plan”) and consist of an escrow agreement, a loss sharing agreement, an interchange judgment sharing agreement, the conversion feature of the Company’s shares of class B common stock and the indemnification obligations of the Visa U.S.A. members pursuant to Visa U.S.A.’s certificate of incorporation and bylaws and in accordance with their membership agreements.
In accordance with the escrow agreement, following the Company’s IPO in fiscal 2008, the Company deposited $3.0 billion of the proceeds of the offering in an Escrow Account from which settlements of, or judgments in, the covered litigation are being paid. Under the terms of the Plan, when the Company funds the Escrow Account, the shares of class B common stock are subject to dilution through an adjustment to the conversion rate of the shares of class B common stock to shares of class A common stock. As a result of the initial deposit, the conversion rate applicable to the Company’s class B common stock outstanding was reduced to 0.7143 class A shares. The escrow funds are held in money market investments along with the income earned, less applicable taxes, and are classified as restricted cash on the consolidated balance sheet. The amount of the escrow funds is equivalent to the actual, undiscounted amount of covered litigation payments expected to be made beyond one year from the balance sheet date for settled claims and is classified as a non-current asset. The amount of the escrow was determined by the litigation committee. The litigation committee was established pursuant to the litigation management agreement among Visa Inc., Visa U.S.A., Visa International and the members of the litigation committee, all of whom are affiliated with, or act for, certain Visa U.S.A. members.
On December 16, 2008, upon the recommendation of the Company’s board of directors, the Company’s stockholders approved and adopted an amendment and restatement of its then existing certificate of incorporation to permit the Company greater flexibility in funding the Escrow Account and made other clarifying modifications. These amendments enabled the Company to, under certain conditions, deposit operating cash directly into the Escrow Account resulting in a further reduction in the conversion rate applicable to the Company’s class B common shares. As a result, the Company filed a Fifth Amended and Restated Certificate of Incorporation with the Secretary of State of Delaware on December 16, 2008.
During fiscal 2009, the Company deposited an additional $1.8 billion into the Escrow Account. The funding further reduced the conversion rate applicable to the Company’s class B common stock outstanding from 0.7143 class A shares to 0.5824 class A shares. See Note 15—Stockholders’ Equity.
The following table sets forth the changes in the Escrow Account:
| 2009 | 2008 | |||||||
| (in millions) | ||||||||
|
Balance at October 1 |
$ | 1,928 | $ | — | ||||
|
Funding under the Plan |
1,800 | 3,000 | ||||||
|
American Express settlement payments |
(280 | ) | (1,085 | ) | ||||
|
Discover settlement payments(1) |
(1,748 | ) | — | |||||
|
Interest earned, less applicable taxes |
15 | 13 | ||||||
|
Balance at September 30 |
$ | 1,715 | 1,928 | |||||
|
Less: Current portion of Escrow Account |
(1,365 | ) | (1,298 | ) | ||||
|
Long-term portion of Escrow Account |
$ | 350 | 630 | |||||
| (1) |
The Company made payments totaling $1.9 billion related to the Discover settlement during fiscal 2009. Of the $1.9 billion payment, $1.7 billion was funded through the Escrow Account under the Plan and $145 million, $65 million of which was reimbursed by Morgan Stanley evenly over the four fiscal 2009 quarters, was funded from the Company’s operating cash. |
An accrual for covered litigation is recorded when loss is deemed to be probable and reasonably estimable. In making this determination, the Company evaluates information including funding decisions made by the litigation committee. The accrual related to covered litigation could be either higher or lower than the Escrow Account balance.
The Company, at the request of the litigation committee, may conduct additional sales of class A common stock in order to increase the size of the Escrow Account, in which case the conversion rate of the class B into class A common stock will be subject to additional dilutive adjustments to the extent of the proceeds from those sales. To the extent that amounts available under the escrow arrangement and agreements in the Plan are insufficient to fully resolve the covered litigation, the Company will use commercially reasonable efforts to enforce the indemnification obligations of Visa U.S.A.’s members for such excess amount, including but not limited to enforcing indemnification obligations pursuant to Visa U.S.A.’s certificate of incorporation and bylaws and in accordance with their membership agreements.
Visa Inc. has entered into a loss sharing agreement with Visa U.S.A., Visa International and certain Visa U.S.A. members. The loss sharing agreement provides for the indemnification of Visa U.S.A., Visa International and, in certain circumstances, Visa Inc. with respect to: (i) the amount of a final judgment paid by Visa U.S.A. or Visa International in the covered litigation after the operation of the interchange judgment sharing agreement, plus any amounts reimbursable to the interchange judgment sharing agreement signatories; or (ii) the damages portion of a settlement of a covered litigation that is approved as required under Visa U.S.A.’s certificate of incorporation by the vote of Visa U.S.A.’s specified voting members. The several obligation of each bank that is a party to the loss sharing agreement will equal the amount of any final judgment enforceable against Visa U.S.A., Visa International or any other signatory to the interchange judgment sharing agreement, or the amount of any approved settlement of a covered litigation, multiplied by such bank’s then-current membership proportion as calculated in accordance with Visa U.S.A.’s certificate of incorporation.
Visa U.S.A. and Visa International also entered into an interchange judgment sharing agreement with certain Visa U.S.A. members that have been named as defendants in the interchange litigation. Under this judgment sharing agreement, Visa U.S.A. members that are signatories will pay their membership proportion of the amount of a final judgment not allocated to the conduct of MasterCard.
|
|||
Note 5—Investments and Fair Value Measurements
The Company measures certain assets and liabilities at fair value. See Note 1—Summary of Significant Accounting Policies.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
Assets and liabilities carried at fair value on a recurring basis are as follows:
| Fair Value Measurements at September 30, 2009 Using Inputs Considered as |
|||||||||
| Level 1 | Level 2 | Level 3 | |||||||
| (in millions) | |||||||||
|
Assets |
|||||||||
|
Cash equivalents and restricted cash |
|||||||||
|
Money market funds and time deposits |
$ | 5,977 | |||||||
|
Investment securities |
|||||||||
|
U.S. government-sponsored agency debt securities |
$ | 169 | |||||||
|
Canadian government debt securities |
7 | ||||||||
|
Equity securities |
73 | ||||||||
|
Corporate debt securities |
$ | 10 | |||||||
|
Mortgage backed securities |
6 | ||||||||
|
Other asset backed securities |
5 | ||||||||
|
Auction rate securities |
13 | ||||||||
|
Derivative financial instruments |
|||||||||
|
Foreign exchange derivative instruments |
16 | ||||||||
| $ | 6,050 | $ | 192 | $ | 34 | ||||
|
Liabilities |
|||||||||
|
Other liabilities |
|||||||||
|
Visa Europe put option |
$ | 346 | |||||||
|
Foreign exchange derivative instruments |
$ | 96 | |||||||
Level 3 Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
Corporate debt securities, mortgage backed securities and other asset backed securities. These securities have been classified as Level 3 due to a lack of trading in active markets and a lack of observable inputs in measuring fair value. Valuations for these securities are provided by the Company’s pricing vendors and are based on significant unobservable inputs. The valuations provided by these pricing vendors were insignificant to the Company’s consolidated financial statements.
Auction rate securities. These securities have been classified within Level 3 as their valuation requires substantial judgment and estimation of factors that are not currently observable in the market due to the lack of trading in these securities.
Visa Europe put option agreement. The Company granted Visa Europe a perpetual put option which is carried at fair value in accrued liabilities on the consolidated balance sheet with changes in the fair value recorded in the consolidated statement of operations. See Note 3—Visa Europe. The liability is classified within Level 3 as the assumed probability that Visa Europe will elect to exercise its option and the estimated P/E differential are unobservable inputs used to value the put option. There was no change in the fair value of the put option during fiscal 2009.
The table below provides a roll-forward of Level 3 investments which are measured at fair value on a recurring basis from October 1, 2008 to September 30, 2009:
| Financial Assets Using Significant Unobservable Inputs (Level 3) |
|||||||||||||||||||
| Corporate Debt Securities |
Mortgage Backed Securities |
Other Asset Backed Securities |
Auction Rate Securities |
Total | |||||||||||||||
| (in millions) | |||||||||||||||||||
|
Balances at October 1, 2008 |
$ | 45 | $ | 22 | $ | 23 | $ | 13 | $ | 103 | |||||||||
|
Other-than-temporary impairment included in investment income, net |
(3 | ) | (4 | ) | (1 | ) | — | (8 | ) | ||||||||||
|
Maturities and principal payments |
(32 | ) | (12 | ) | (17 | ) | (61 | ) | |||||||||||
|
Transfers in (out) of Level 3 |
— | — | — | — | — | ||||||||||||||
|
Balances at September 30, 2009 |
$ | 10 | $ | 6 | $ | 5 | $ | 13 | $ | 34 | |||||||||
Assets Measured at Fair Value on a Nonrecurring Basis
Certain financial assets are measured at fair value on a nonrecurring basis and therefore are not included in the tables above.
Non-marketable equity investments. The Company applies fair value measurement to its strategic investments which are accounted for under the cost and equity methods. Strategic investments are classified as Level 3 due to the absence of quoted market prices, inherent lack of liquidity, and the fact that inputs used to measure the fair value are unobservable and require management judgment. If events or circumstances indicate that these investments may be impaired, the Company revalues the investments using various assumptions including financial metrics and ratios of comparable public companies. During fiscal 2009, certain events and circumstances triggered impairment analyses for certain non-marketable equity securities which resulted in recognized losses of $7 million. The Company will estimate the fair value of the non-marketable equity investments in the event of a triggering event that would require an impairment assessment. At September 30, 2009, non-marketable equity security investments totaled $102 million in other assets on the consolidated balance sheet. During fiscal 2009, Visa International, a wholly-owned subsidiary, sold its investment in Companhia Brasileira de Meios de Pagamento (“VisaNet do Brasil”). See Note 6—Prepaid Expenses and Other Assets.
Reserve Primary Fund. The Company’s investment in the Reserve Primary Fund (the “Fund”) was originally recorded as a cash equivalent on the consolidated balance sheet. In September 2008, the Fund was unable to honor the Company’s request for the full redemption of its investment and the Company considered its shares in the Fund to represent an equity investment for which a market price is not readily determinable. Therefore, the investment is accounted for under the cost method of accounting and classified within prepaid expenses and other current assets on the consolidated balance sheet at September 2008 and 2009. The investment is considered a Level 3 asset as the fair value is estimated by discounting the Company’s pro-rata ownership of the Fund’s underlying investment holdings based upon an estimate of inherent risk. See Note 6—Prepaid Expenses and Other Assets for additional information regarding this asset and Note 21—Legal Matters regarding legal action on this matter.
Long-lived assets such as goodwill, finite-lived intangible assets, and property, plant and equipment are considered non-financial assets, and are measured at fair value only when impairment indicators exist. The accounting and disclosure provisions of ASC 820 as related to non-financial assets and non-financial liabilities are effective beginning in the first quarter of fiscal 2010 and are not expected to have a significant impact on our consolidated financial statements. See Note 1—Summary of Significant Accounting Policies.
Available-for-sale investments
Available-for-sale investment securities, which are recorded at fair value, consist of the types of securities presented below. The amortized cost, unrealized gains and losses, and fair value of available-for-sale securities are as follows:
| Available-For-Sale (in millions) |
|||||||||||||
| Amortized Cost |
Gross Unrealized | Fair Value |
|||||||||||
| Gains | Losses | ||||||||||||
|
September 30, 2009: |
|||||||||||||
|
Debt securities: |
|||||||||||||
|
U.S. government-sponsored agency debt securities |
$ | 160 | $ | 9 | $ | — | $ | 169 | |||||
|
Canadian government debt securities |
7 | — | — | 7 | |||||||||
|
Corporate debt securities |
10 | — | — | 10 | |||||||||
|
Mortgage backed securities |
6 | — | — | 6 | |||||||||
|
Other asset backed securities |
5 | — | — | 5 | |||||||||
|
Auction rate securities |
13 | — | — | 13 | |||||||||
|
Equity Securities |
7 | 7 | — | 14 | |||||||||
|
Total |
$ | 208 | $ | 16 | $ | — | $ | 224 | |||||
|
Less: current portion of available-for-sale securities |
(56 | ) | |||||||||||
|
Long-term available-for-sale securities |
$ | 168 | |||||||||||
| Available-For-Sale (in millions) |
||||||||||||||
| Amortized Cost |
Gross Unrealized | Fair Value |
||||||||||||
| Gains | Losses | |||||||||||||
|
September 30, 2008: |
||||||||||||||
|
Debt securities: |
||||||||||||||
|
U.S. government-sponsored agency debt securities |
$ | 387 | $ | 4 | $ | — | $ | 391 | ||||||
|
Canadian government debt securities |
7 | — | — | 7 | ||||||||||
|
Tax-exempt municipal bonds |
5 | — | — | 5 | ||||||||||
|
Corporate debt securities |
45 | — | — | 45 | ||||||||||
|
Mortgage backed securities |
23 | — | (1 | ) | 22 | |||||||||
|
Other asset backed securities |
23 | — | — | 23 | ||||||||||
|
Auction rate securities |
13 | — | — | 13 | ||||||||||
|
Equity securities |
93 | — | — | 93 | ||||||||||
|
Total |
$ | 596 | $ | 4 | $ | (1 | ) | $ | 599 | |||||
|
Less: current portion of available-for-sale securities |
(355 | ) | ||||||||||||
|
Long-term available-for-sale securities |
$ | 244 | ||||||||||||
The contractual maturity of available-for-sale debt securities regardless of their balance sheet classification is presented below. Contractual maturities may differ from expected maturities as borrowers may have the right to prepay certain obligations in advance of the contractual due date.
| Amortized Cost | Fair Value | |||||
| (in millions) | ||||||
|
September 30, 2009: |
||||||
|
Due within one year |
$ | 39 | $ | 39 | ||
|
Due after 1 year through 5 years |
133 | 141 | ||||
|
Due after 5 years through 10 years |
3 | 3 | ||||
|
Due after 10 years |
14 | 15 | ||||
|
Debt securities with no single maturity date |
12 | 12 | ||||
|
Total |
$ | 201 | $ | 210 | ||
Trading assets
Trading assets primarily consist of mutual fund investments related to various employee compensation plans. Employees bear the risk of market fluctuations over the term of their participation in these compensation plans. See Note 1—Summary of Significant Accounting Policies. As of September 30, 2009, trading assets totaled $59 million.
Investment income
Investment income, net, consisted of the following:
| For the Years Ended September 30, |
||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (in millions) | ||||||||||||
|
Interest and dividend income on cash and investments |
$ | 113 | $ | 279 | $ | 98 | ||||||
|
Gain on sale of other investments |
473 | — | 1 | |||||||||
|
Investment securities-available-for-sale: |
||||||||||||
|
Gross realized gains |
3 | 2 | 5 | |||||||||
|
Gross realized losses |
— | (3 | ) | (1 | ) | |||||||
|
Investment securities-trading assets: |
||||||||||||
|
Unrealized gains (losses) |
8 | — | — | |||||||||
|
Realized gains (losses) |
(6 | ) | — | — | ||||||||
|
Other-than-temporary impairment on investments and other assets |
(16 | ) | (67 | ) | — | |||||||
|
Investment income, net |
$ | 575 | $ | 211 | $ | 103 | ||||||
|
|||
Note 6—Prepaid Expenses and Other Assets
Prepaid expenses and other current assets consisted of the following:
| September 30, 2009 |
September 30, 2008 |
|||||
| (in millions) | ||||||
|
Money market investment—Reserve Primary Fund |
$ | 69 | $ | 953 | ||
|
Prepaid expenses and maintenance |
97 | 91 | ||||
|
Income tax receivable |
135 | 90 | ||||
|
Other |
65 | 56 | ||||
|
Total |
$ | 366 | $ | 1,190 | ||
Other non-current assets consisted of the following:
| September 30, 2009 |
September 30, 2008 |
|||||
| (in millions) | ||||||
|
Other investments |
$ | 102 | $ | 592 | ||
|
Long-term prepaid expenses and Other |
23 | 42 | ||||
|
Total |
$ | 125 | $ | 634 | ||
The money market investment represents the carrying value of the Company’s investment in the Reserve Primary Fund (the “Fund”). The Fund balance reflects a $29 million other-than-temporary impairment which was recorded in fiscal 2008 against the Company’s original investment of $982 million. The other-than-temporary impairment reflected a change in the per share value of $1.00 to approximately $0.97 per share. During fiscal 2009, the Company received distributions totaling $884 million. On August 25, 2009, the Fund issued a statement stating that each unpaid shareholder may receive total distributions which would be equivalent to a per share value of $0.987 based on certain assumptions. On September 23, 2009, the Court held a hearing where the judge considered a proposed plan by the U.S. Securities and Exchange Commission to distribute the Fund’s remaining assets. Applying this per share value to Visa’s unredeemed shares at September 30, 2009 would result in an additional distribution totaling approximately $86 million. Based on recent developments, the Company believes it is likely that the Fund will liquidate and distribute the remaining assets within a twelve month period, and has therefore included the Reserve Primary Fund balance as a current asset at September 30, 2009. See Note 5—Investments and Fair Value Measurements and Note 21—Legal Matters. On October 5, 2009, the Company received an additional $19 million distribution from the Fund.
The other investment balance represents equity investments in privately-held companies. On June 29, 2009, the Company sold its investment in VisaNet do Brasil for proceeds of approximately $1.0 billion, which was received on July 2, 2009. Prior to the sale, the Company accounted for the investment under the cost method with a book value of approximately $535 million, reflected in other non-current assets on its balance sheet. Approximately $517 million of the book value was recorded in the reorganization as part of the allocation of the purchase price to acquired assets and liabilities. The Company recognized a pre-tax gain of $473 million in investment income, net on its statement of operations as a result of the sale. The amount of the gain net of tax was $237 million. The decrease in other non-current assets was offset by $50 million of new investments in the fourth quarter of fiscal 2009.
|
|||
Note 7—Property, Equipment and Technology
Property, equipment and technology, net consisted of the following:
| September 30, 2009 |
September 30, 2008 |
|||||||
| (in millions) | ||||||||
|
Land |
$ | 71 | $ | 71 | ||||
|
Buildings and building improvements |
629 | 369 | ||||||
|
Furniture, equipment and leasehold improvements |
598 | 519 | ||||||
|
Construction-in-progress |
43 | 266 | ||||||
|
Technology |
688 | 531 | ||||||
|
Total property, equipment and technology |
2,029 | 1,756 | ||||||
|
Accumulated depreciation and amortization |
(825 | ) | (676 | ) | ||||
|
Property, equipment and technology, net |
$ | 1,204 | $ | 1,080 | ||||
Construction-in-progress balance at September 30, 2008 primarily reflects costs related to the construction of the Company’s east coast data center, which commenced operations in fiscal 2009.
Technology consists of both purchased and internally developed software. Internally developed software represents software utilized by the VisaNet electronic payment network. At September 30, 2009, and September 30, 2008, accumulated amortization for technology was $434 million and $304 million, respectively.
At September 30, 2009, estimated future amortization expense on technology placed in service was as follows:
|
Fiscal (in millions) |
2010 | 2011 | 2012 | 2013 | 2014 and thereafter |
Total | ||||||||||||
|
Estimated future amortization expense |
$ | 121 | $ | 44 | $ | 31 | $ | 29 | $ | 29 | $ | 254 | ||||||
Depreciation and amortization expenses related to property, equipment and technology was $226 million and $237 million for fiscal 2009 and 2008, respectively. Included in those amounts are amortization expense on technology of $128 million and $129 million for fiscal 2009 and 2008, respectively.
|
|||
Note 8—Intangible Assets
Intangible assets at September 30, 2009 and 2008 consisted of customer relationships of $6.8 billion, a tradename of $2.6 billion and a Visa Europe franchise right of $1.5 billion which were acquired from Visa International and Visa Canada in the reorganization. Customer relationships represent the value of the Company’s relationships with its customers in Canada and the acquired regions of Visa International. Tradename represents the value of the Visa brand utilized in Canada and the acquired regions of Visa International. Visa Europe’s franchise right represents the value of the right to franchise the use of the Visa brand, use of Visa technology and access to the overall Visa network in the Visa Europe region. There was no amortization or impairment related to these intangible assets during fiscal 2009 or 2008 as these have been determined to be indefinite-lived intangible assets.
|
|||
Note 9—Accrued and Other Liabilities
Accrued liabilities consisted of the following:
| September 30, | September 30, | |||||
| 2009 | 2008 | |||||
| (in millions) | ||||||
|
Visa Europe put option(1)—(See Note 3—Visa Europe) |
$ | 346 | $ | — | ||
|
Accrued operating expenses |
87 | 119 | ||||
|
Accrued marketing and product expenses |
103 | 103 | ||||
|
Deferred revenue |
39 | 37 | ||||
|
Accrued income taxes—(See Note 20—Income Taxes) |
23 | — | ||||
|
Other |
156 | 47 | ||||
|
Total |
$ | 754 | $ | 306 | ||
Other long-term liabilities consisted of the following:
| September 30, 2009 |
September 30, 2008 |
|||||
| (in millions) | ||||||
|
Visa Europe put option(1)—(See Note 3—Visa Europe) |
$ | — | $ | 346 | ||
|
Accrued income taxes—(See Note 20—Income Taxes) |
304 | 122 | ||||
|
Employee benefits |
119 | 99 | ||||
|
Other |
49 | 46 | ||||
|
Total |
$ | 472 | $ | 613 | ||
| (1) |
At September 30, 2009, the put option is exercisable at any time at the sole discretion of Visa Europe with payment required 285 days thereafter. As such, the put option liability is included in accrued liabilities on the consolidated balance sheet at September 30, 2009. As the put option did not become exercisable until March 2009, it was classified as long-term at September 30, 2008. Classification in current liabilities is not an indication of management’s expectation of exercise and simply reflects the fact that the obligation resulting from the exercise of the instrument could become payable within 12 months. |
|
|||
Note 10—Debt
The Company had outstanding debt as follows:
| September 30, 2009 |
September 30, 2008 |
|||||||
| (in millions) | ||||||||
|
5.60% Senior secured notes—Series B principal and interest payments payable quarterly, due December 2012 |
$ | 22 | $ | 29 | ||||
|
7.53% Medium-term notes—interest payments payable semi-annually, due August 2009 |
— | 40 | ||||||
|
8.28% Secured notes—Series B, principal and interest payments payable monthly, due September 2014 |
16 | 18 | ||||||
|
7.83% Secured notes—Series B, principal and interest payments payable monthly, due September 2015 |
19 | 21 | ||||||
|
Total principal amount of debt |
$ | 57 | $ | 108 | ||||
|
Unamortized discount, debt issuance costs and other costs |
(1 | ) | (2 | ) | ||||
|
Total debt |
$ | 56 | $ | 106 | ||||
|
Less: current portion of long-term debt |
(12 | ) | (51 | ) | ||||
|
Long-term debt |
$ | 44 | $ | 55 | ||||
The estimated fair value of the Company’s debt at September 30, 2009 and 2008 is $64 million and $115 million, respectively, based on credit ratings for similar notes.
5.60% Senior Secured Notes-Series B
In December 2002, Visa U.S.A. issued $68 million in series B senior secured notes with a maturity date of ten years. The note is collateralized by the Company’s Colorado facility, which consists of two data centers and an office building, in addition to processing assets and developed software.
7.53% Medium-Term Notes
Visa International established a medium-term note program in 1992 to offer up to $250 million of unsecured private placement notes. At September 30, 2009, the Company had no outstanding obligations under these notes and terminated this private placement program.
8.28% Secured Notes-Series B
In September 1994, a real estate partnership owned jointly by Visa U.S.A. and Visa International issued notes that are secured by certain office properties and facilities in California which are used by the Company (“1994 Lease Agreement”). Series B of these notes, totaling $26 million, were issued with an interest rate of 8.28% and a stated maturity of September 23, 2014, and are payable monthly with interest-only payments for the first ten years and payments of interest and principal for the remainder of the term. In May 2008, Visa Inc., Visa U.S.A. and Visa International executed an Amendment and Waiver to the 1994 Lease Agreement (“Amended 1994 Lease Agreement”) under which remaining obligations are guaranteed by Visa Inc. The Amended 1994 Lease Agreement stipulates that the interest rate will be adjusted upward if the long-term senior unsecured debt rating of Visa Inc. falls below certain stipulated levels.
7.83% Secured Notes—Series B
In September 1995, a real estate partnership owned jointly by Visa U.S.A. and Visa International issued notes that are secured by certain office properties and facilities in California which are used by the Company (“1995 Lease Agreement”). Series B of these notes, totaling $27 million, was issued with an interest rate of 7.83% and a stated maturity of September 15, 2015, and is payable monthly with interest-only payments for the first ten years and payments of interest and principal for the remainder of the term. In May 2008, Visa Inc., Visa U.S.A. and Visa International executed an Amendment and Waiver to the 1995 Lease Agreement (“Amended 1995 Lease Agreement”), that guarantees remaining obligations under the agreement by Visa Inc.
Future Principal Payments
Future principal payments on the Company’s outstanding debt are as follows:
|
Fiscal |
2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | |||||||||
|
(in millions) |
$ | 12 | 12 | 13 | 8 | 7 | 5 | $ | 57 | |||||||
U.S. Commercial Paper Program
Visa International maintains a U.S. commercial paper program to support its working capital requirements and for general corporate purposes. This program allows the Company to issue up to $500 million of unsecured debt securities, with maturities up to 270 days from the date of issuance and at interest rates generally extended to companies with comparable credit ratings. At September 30, 2009, the Company had no outstanding obligations under this program.
Revolving Credit Facilities
In 2008, Visa Inc. entered into a $3.0 billion five-year revolving credit facility (the “February 2008 Agreement”). The February 2008 Agreement matures on February 15, 2013 and contains covenants and events of defaults customary for facilities of this type. The participating lenders in this revolving credit facility include affiliates of certain holders of the Company’s class B and class C common stock, and certain of the Company’s customers or affiliates of its customers. This revolving credit facility is maintained to provide liquidity in the event of settlement failures by its customers, to back up the commercial paper program and for general corporate purposes.
Loans under the five-year facility may be in the form of: (1) Base Rate Advance, which will bear interest at a rate equal to the higher of the Federal Funds Rate plus 0.5% or the Bank of America prime rate; (2) Eurocurrency Advance, which will bear interest at a rate equal to LIBOR (as adjusted for applicable reserve requirements) plus an applicable cost adjustment and an applicable margin of 0.11% to 0.30% based on our credit rating; or (3) U.S. Swing Loan, Euro Swing Loan, or Foreign Currency Swing Loan, which will bear interest at the rate equal to the applicable Swing Loan rate for that currency plus the same applicable margin plus additionally for Euro and Sterling loans, an applicable reserve requirement and cost adjustment. The Company also agrees to pay a facility fee on the aggregate commitment amount, whether used or unused, at a rate ranging from 0.04% to 0.10% and a utilization fee on loans at a rate ranging from 0.05% to 0.10% based on the Company’s credit rating. Currently, the applicable margin is 0.15%, the facility fee is 0.05% and the utilization fee is 0.05%.
There are no borrowings under the revolving credit facility at September 30, 2009 and the Company is in compliance with all related covenants.
|
|||
Note 11—Pension, Postretirement and Other Benefits
The Company sponsors various qualified and non-qualified defined benefit pension and postretirement benefit plans which provide for retirement and medical benefits for substantially all employees residing in the United States. The Company uses a September 30 measurement date for its pension and postretirement benefit plans.
Defined Benefit Pension Plan
The defined benefit pension plan benefits are based on years of service, age and the employee’s highest average of any three consecutive years during the final five years of earnings; and for employees hired after September 30, 2002, the employee’s final five years of earnings. Expense for the pension benefits is accrued levelly throughout an employee’s career. The funding policy is to contribute annually no less than the minimum required contribution under ERISA.
In August 2007, the Company approved changes to the pension plan and began transitioning from a traditional final average pay formula to a cash balance formula for determining pension benefits, effective January 1, 2008. The cash balance formula will provide contributions at a rate of 6% of eligible compensation and will credit interest on account balances at the 30 year Treasury Bond rate. Effective October 1, 2008, the pension plan was amended to provide death benefits of 100% of the value of the accrued benefit to a participant’s beneficiary or estate. Prior to this amendment, the plan provided a 50% death benefit only to a participant’s spouse.
Postretirement Benefits Plan
The postretirement benefits plan provides medical benefits for retirees and dependents who meet minimum age and service requirements. Benefits are provided from retirement date until age sixty-five. Retirees must contribute on a monthly basis for the same coverage that is generally available to active employees and their dependents. The Company’s contributions are funded on a current basis.
In August 2008, the Company amended its postretirement benefits plan to discontinue the employer subsidy for all participants not yet retirement eligible at December 31, 2008 and recorded a curtailment gain of $2 million in fiscal 2008.
Summary of Plan Activities
Change in Projected Benefit Obligation/Accumulated Postretirement Benefit Obligation:
| Pension Benefits | Other Postretirement Benefits |
|||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| (in millions) | ||||||||||||||||
|
Benefit obligation-beginning of fiscal year |
$ | 667 | $ | 634 | $ | 50 | $ | 77 | ||||||||
|
Service cost |
51 | 50 | — | 5 | ||||||||||||
|
Interest cost |
46 | 40 | 2 | 5 | ||||||||||||
|
Plan amendments |
— | 4 | — | (26 | ) | |||||||||||
|
Actuarial (gain)/loss |
64 | 16 | (5 | ) | (7 | ) | ||||||||||
|
Settlements |
4 | 21 | — | — | ||||||||||||
|
Benefit payments |
(93 | ) | (98 | ) | (4 | ) | (4 | ) | ||||||||
|
Benefit obligation-end of fiscal year |
$ | 739 | $ | 667 | $ | 43 | $ | 50 | ||||||||
|
Accumulated benefit obligation |
$ | 720 | $ | 634 | NA | NA | ||||||||||
|
Change in Plan Assets: |
||||||||||||||||
|
Fair value of plan assets-beginning of fiscal year |
$ | 624 | $ | 604 | $ | — | $ | — | ||||||||
|
Actual return on plan assets |
6 | (68 | ) | — | — | |||||||||||
|
Company contribution |
166 | 186 | 4 | 4 | ||||||||||||
|
Benefit payments |
(93 | ) | (98 | ) | (4 | ) | (4 | ) | ||||||||
|
Fair value of plan assets-end of fiscal year |
$ | 703 | $ | 624 | $ | — | $ | — | ||||||||
|
Funded status at end of fiscal year |
$ | (36 | ) | $ | (43 | ) | $ | (43 | ) | $ | (50 | ) | ||||
|
Recognized in Consolidated Balance Sheets: |
||||||||||||||||
|
Current liability |
$ | (4 | ) | $ | (3 | ) | $ | (5 | ) | $ | (5 | ) | ||||
|
Noncurrent liability |
(32 | ) | (40 | ) | (38 | ) | (45 | ) | ||||||||
|
Funded status at end of fiscal year |
$ | (36 | ) | $ | (43 | ) | $ | (43 | ) | $ | (50 | ) | ||||
|
Amounts recognized in accumulated comprehensive income before tax: |
|
|||||||||||||||
| Pension Benefits | Other Postretirement Benefits |
|||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| (in millions) | ||||||||||||||||
|
Net actuarial loss/(gain) |
$ | 276 | $ | 186 | $ | (3 | ) | $ | 3 | |||||||
|
Prior service cost/(credit) |
(48 | ) | (56 | ) | (23 | ) | (26 | ) | ||||||||
|
Total |
$ | 228 | $ | 130 | $ | (26 | ) | $ | (23 | ) | ||||||
Amounts from accumulated other comprehensive income to be amortized into net periodic benefit cost in fiscal 2010:
| Pension Benefits | Other Postretirement Benefits |
|||||||
| (in millions) | ||||||||
|
Actuarial (gain)/loss |
$ | 25 | $ | — | ||||
|
Prior service (credit)/cost |
(7 | ) | (3 | ) | ||||
|
Total |
$ | 18 | $ | (3 | ) | |||
Benefit obligation and fair value of plan assets with obligations in excess of plan assets:
| Pension Benefits | Other Postretirement Benefits |
|||||||||||
| September 30, | September 30, | |||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||
| (in millions) | ||||||||||||
|
Accumulated benefit obligation in excess of plan assets |
||||||||||||
|
Accumulated benefit obligation, end of year |
$ | 21 | $ | 18 | NA | NA | ||||||
|
Fair value of plan assets, end of year |
— | — | — | — | ||||||||
|
Projected benefit obligation/accumulated postretirement benefit obligation in excess of plan assets |
||||||||||||
|
Benefit obligation, end of year |
$ | 739 | $ | 667 | $ | 43 | $ | 50 | ||||
|
Fair value of plan assets, end of year |
703 | 624 | — | — | ||||||||
Net periodic pension and other postretirement plan cost
| Pension Benefits | Other Postretirement Benefits |
|||||||||||||||||||||||
| Fiscal | ||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
|
Service cost |
$ | 51 | $ | 50 | $ | 61 | $ | — | $ | 5 | $ | 6 | ||||||||||||
|
Interest cost |
46 | 40 | 43 | 2 | 5 | 5 | ||||||||||||||||||
|
Expected return on assets |
(45 | ) | (42 | ) | (36 | ) | — | — | — | |||||||||||||||
|
Amortization of: |
||||||||||||||||||||||||
|
Prior service (credit)/cost |
(8 | ) | (13 | ) | — | (3 | ) | (5 | ) | (5 | ) | |||||||||||||
|
Actuarial loss (gain) |
14 | 7 | 8 | — | 2 | 2 | ||||||||||||||||||
|
Net benefit cost |
$ | 58 | $ | 42 | $ | 76 | $ | (1 | ) | $ | 7 | $ | 8 | |||||||||||
|
Curtailment (gain)/loss |
— | — | — | — | (2 | ) | — | |||||||||||||||||
|
Settlement loss/(gain) |
3 | 27 | — | — | — | — | ||||||||||||||||||
|
Total net periodic benefit cost |
$ | 61 | $ | 69 | $ | 76 | $ | (1 | ) | $ | 5 | $ | 8 | |||||||||||
|
Visa U.S.A. share of net periodic benefit cost |
$ | 60 | $ | 6 | ||||||||||||||||||||
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
| Pension Benefits | Other Postretirement Benefits |
|||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| (in millions) | ||||||||||||||||
|
Current year actuarial (gain)/loss |
$ | 107 | $ | 148 | $ | (5 | ) | $ | (7 | ) | ||||||
|
Amortization of actuarial gain/(loss) |
(17 | ) | (34 | ) | — | (2 | ) | |||||||||
|
Current year prior service (credit)/cost |
— | 4 | — | (26 | ) | |||||||||||
|
Amortization of prior service credit/(cost) |
8 | 13 | 3 | 7 | ||||||||||||
|
Total recognized in other comprehensive income |
$ | 98 | $ | 131 | $ | (2 | ) | $ | (28 | ) | ||||||
|
Total recognized in net periodic benefit cost and other comprehensive income |
$ | 159 | $ | 200 | $ | (3 | ) | $ | (23 | ) | ||||||
Weighted Average Actuarial Assumptions:
| Fiscal | |||||||||
| 2009 | 2008 | 2007 | |||||||
|
Discount rate for benefit obligation(1) |
|||||||||
|
Pension |
5.60 | % | 6.75 | % | 6.00 | % | |||
|
Postretirement |
4.43 | % | 6.24 | % | 5.99 | % | |||
|
Discount rate for net periodic benefit cost |
|||||||||
|
Pension |
6.75 | % | 6.00 | % | 6.23 | % | |||
|
Postretirement |
6.24 | % | 5.99 | % | 6.16 | % | |||
|
Expected long-term rate of return on plan assets(2) |
7.50 | % | 7.50 | % | 7.50 | % | |||
|
Rate of increase in compensation levels for: |
|||||||||
|
Benefit obligation(3) |
5.50 | % | 5.50 | % | 5.50 | % | |||
|
Net periodic benefit cost |
5.50 | % | 5.50 | % | 5.50 | % | |||
| (1) |
Based on a “bond duration matching” methodology, which reflects the matching of projected plan liability cash flows to an average of high-quality corporate bond yield curves whose duration matches the projected cash flows. |
| (2) |
Primarily based on the targeted allocation, and evaluated for reasonableness by considering such factors as: (i) actual return on plan assets; (ii) historical rates of return on various asset classes in the portfolio; (iii) projections of returns on various asset classes; and (iv) current and prospective capital market conditions and economic forecasts. Any difference between actual and expected plan experience, including asset return experience in excess of the greater of 10% of plan assets or the projected benefit obligations, is recognized in net periodic pension cost over the average remaining service period of employees expected to receive benefits under the plan, which is currently eight years. |
| (3) |
For the benefit obligation measured at fiscal 2009 year-end, rate of increase in compensation is 0% for fiscal 2010 and 5.5% for fiscal 2011 and thereafter. |
The assumed annual rate of future increases in health benefits for the other postretirement benefits plan is 9% for fiscal 2010. The rate is assumed to decrease to 5% by 2017 and remain at that level thereafter. These trend rates reflect management’s expectations of future rates. Increasing or decreasing the healthcare cost trend by 1% would increase (decrease) the postretirement accumulated plan benefit obligation by less than $1 million.
Pension Plan Assets
The pension plan’s weighted-average asset allocations at September 30 were as follows:
| Target Allocation |
Target Allocation Range |
Actual Allocation |
|||||||||||||
|
Asset Class |
Minimum | Maximum | 2009 | 2008 | |||||||||||
|
Equity securities |
65 | % | 50 | % | 80 | % | 64 | % | 58 | % | |||||
|
Fixed income securities |
30 | % | 25 | % | 35 | % | 31 | % | 24 | % | |||||
|
Other |
5 | % | 0 | % | 7 | % | 5 | % | 18 | % | |||||
|
Total |
100 | % | 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 pension plan. Plan assets are managed by external investment managers. Investment manager performance is measured against benchmarks for each asset class on a quarterly basis. An independent consultant assists management with investment manager selections and performance evaluations. Plan assets are broadly diversified to maintain a prudent level of risk. The other category includes cash that is available to meet expected benefit payments and expenses. Pension plan assets in the other category increased on September 30, 2008 due to an additional contribution made on the last day of the plan year, to ensure ERISA contribution requirements were met. The amount was reinvested subsequently in line with target asset allocations.
Cash Flows
| Pension Benefits |
Other Postretirement Benefits |
|||||
|
Actual employer contributions |
(in millions) | |||||
|
Fiscal 2009 |
$ | 166 | $ | 4 | ||
|
Fiscal 2008 |
$ | 186 | $ | 4 | ||
|
Expected employer contributions |
||||||
|
2010 |
$ | 65 | $ | 4 | ||
|
Expected benefit payments |
||||||
|
2010 |
$ | 96 | $ | 4 | ||
|
2011 |
103 | 5 | ||||
|
2012 |
94 | 5 | ||||
|
2013 |
88 | 5 | ||||
|
2014 |
88 | 5 | ||||
|
2015-2019 |
367 | 21 | ||||
Other Benefits
The Company participates in a defined contribution plan, which covers substantially all of its employees residing in the United States. Personnel costs included $28 million, $33 million and $26 million in fiscal 2009, 2008 and 2007, respectively, for expenses attributable to the Company’s employees under the plan. The Company’s contributions to this plan are funded on a current basis, and the related expenses are recognized in the period that the payroll expenses are incurred.
|
|||
Note 12—Settlement Guarantee Management
The Company indemnifies customers for settlement losses suffered due to failure of any other customer to honor Visa cards, travelers cheques, deposit access products, point-of-sale check service drivers and other instruments processed in accordance with the operating regulations. This indemnification creates settlement risk for the Company due to the difference in timing between the date of a payment transaction and the date of subsequent settlement. The term and amount of the indemnification are unlimited. Settlement at risk (or exposure) is estimated based on the sum of the following inputs: (1) average daily volumes during the quarter multiplied by the estimated number of days to settle plus a safety margin; (2) four months of rolling average chargebacks volume; and (3) the total balance for outstanding travelers cheques. The Company maintains global credit settlement risk policies and procedures to manage settlement risk which may require customers to post collateral if certain credit standards are not met.
During the first quarter of fiscal 2009, the Company updated its settlement risk policy and raised the safety margin from two days to three days. The Company’s estimated maximum settlement exposure was approximately $41.8 billion at September 30, 2009 compared to $34.8 billion at September 30, 2008. Of these amounts, $3.7 billion at September 30, 2009 and $3.0 billion at September 30, 2008, are covered by collateral. The total available collateral balances presented below are greater than the settlement exposure covered by customer collateral held due to instances in which the available collateral exceeds the total settlement exposure for certain financial institutions at each date presented.
The Company maintained collateral as follows:
| September 30, 2009 |
September 30, 2008 |
|||||
| (in millions) | ||||||
|
Cash equivalents |
$ | 812 | $ | 679 | ||
|
Pledged securities at market value |
243 | 150 | ||||
|
Letters of credit |
703 | 720 | ||||
|
Guarantees |
2,644 | 1,938 | ||||
|
Total |
$ | 4,402 | $ | 3,487 | ||
Cash equivalents collateral is reflected in customer collateral on the consolidated balance sheet as it is held in escrow in the Company’s name. All other collateral is excluded from the consolidated balance sheet. Pledged securities are held by third parties in trust for the Company and customers. Guarantees are provided primarily by parent financial institutions to secure the obligations of their subsidiaries, and the Company routinely evaluates the financial viability of institutions providing the guarantees.
The fair value of the settlement risk guarantee is estimated using a proprietary model which considers statistically derived loss factors based on historical experience, estimated settlement exposures at period end and a standardized grading process for customers (using, where available, third-party estimates of the probability of customer failure). The estimated probability-weighted value of the guarantee was less than $1 million at September 30, 2009 and 2008 and is reflected in accrued liabilities on the consolidated balance sheet.
|
|||
Note 13—Derivative Financial Instruments
The functional currency for the Company is the U.S. dollar (“USD”) for the majority of its foreign operations. The Company transacts business in USD and in various foreign currencies. This activity subjects the Company to exposure from movements in foreign currency exchange rates. The Company’s policy is to enter into foreign exchange forward derivative contracts to manage the variability in expected future cash flows attributable to changes in foreign exchange rates. At September 30, 2009, all derivative instruments outstanding mature within 21 months or less. The Company does not use foreign exchange forward contracts for speculative or trading purposes. All derivatives are recorded on the consolidated balance sheet at fair value in prepaid expenses and other current assets or accrued liabilities and the resulting gains or losses from changes in fair value are accounted for depending on whether they are designated and qualify for hedge accounting.
The Company enters into forward contracts to hedge certain operational (“cash flow”) exposures resulting from changes in foreign currency exchange rates. Such cash flow exposures result from portions of forecasted revenues and expenses being denominated in or based on currencies other than USD. In fiscal 2009 the Company implemented a rolling hedge strategy program. Under this strategy, the Company seeks to reduce the exchange rate risk from forecasted net exposure of revenues derived from and payments made in foreign currencies during the immediately following 12 months. The aggregate notional amount of the Company’s foreign currency forward contracts outstanding in its exchange rate risk management program was $742 million and $4 million, respectively, at September 30, 2009 and September 30, 2008. The aggregate notional amount of $742 million outstanding at September 30, 2009 is fully consistent with the Company’s strategy and treasury policy aimed at reducing foreign exchange risk below a predetermined and approved threshold. However, actual results for this period could materially differ from the Company’s forecast. As of September 30, 2009, the Company’s cash flow hedges in an asset position totaled $18 million and are classified in prepaid expenses and other current assets on the consolidated balance sheet, while cash flow hedges in a liability position totaled $94 million and are classified in accrued liabilities on the consolidated balance sheet. See Note 5—Investments and Fair Value Measurements.
To qualify for cash flow hedge accounting treatment, the Company formally documents, at inception of the hedge, all relationships between hedging transactions and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Company also formally assesses whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the cash flows of the hedged items and whether those derivatives may be expected to remain highly effective in future periods.
The Company assesses effectiveness prospectively using regression analysis and retrospectively using a dollar ratio test. The effectiveness tests are performed on the foreign exchange forward contracts based on changes in the spot rate of the derivative instrument compared to changes in the spot rate of the forecasted hedged transaction. The Company excludes time value for effectiveness testing and measurement purposes. The excluded time value is reported immediately in earnings. For fiscal 2009 and 2008, the amount by which earnings were reduced relating to excluded time value and ineffectiveness was $18 million and $2 million, respectively.
The effective portion of changes in the fair value of derivatives designated as cash flow hedges are recorded as a component of accumulated other comprehensive income on the consolidated balance sheet. When the forecasted transaction occurs and is recognized in earnings, the amount in accumulated other comprehensive income related to that hedge is reclassified to operating revenue or expense. The balance in accumulated other comprehensive income was $58 million at September 30, 2009 and the Company expects to reclassify the entire amount as a reduction to earnings in the consolidated statement of operations during fiscal 2010 and fiscal 2011 due to the recognition in earnings of the hedged forecasted transactions.
In the event there is recognized ineffectiveness or the underlying forecasted transaction does not occur within the designated hedge period, or it becomes remote that the forecasted transaction will occur, the related gains and losses on the cash flow hedges are reclassified from accumulated other comprehensive income on the consolidated balance sheet to administrative and other expense on the consolidated statement of operations at that time.
The Company’s derivative financial instruments are subject to both credit and market risk. The Company monitors the credit-worthiness of the financial institutions that are counterparties to its derivative financial instruments and does not consider the risks of counterparty nonperformance to be significant. Notwithstanding the Company’s efforts to manage foreign exchange risk, there can be no assurance that its hedging activities will adequately protect against the risks associated with foreign currency fluctuations. Credit and market risks related to derivative instruments were not considered significant at September 30, 2009.
|
|||
Note 14—Enterprise-wide Disclosures and Concentration of Business
The Company’s long-lived net property, equipment and technology assets are classified by major geographic area as follows:
| September 30, 2009 |
September 30, 2008 |
|||||
| (in millions) | ||||||
|
U.S. |
$ | 1,128 | $ | 1,014 | ||
|
Non-U.S. |
76 | 66 | ||||
|
Total |
$ | 1,204 | $ | 1,080 | ||
Revenue by geographic market is primarily based on the location of the issuing bank. Certain revenues, primarily international service revenues, are shared by geographic locations based upon the location of the merchant involved in the transaction. Visa does not maintain revenues by individual country, other than the U.S. Revenue generated in the U.S. was approximately 58%, 59% and 92% of total operating revenues in fiscal 2009, 2008 and 2007, respectively.
A significant portion of Visa’s operating revenues are concentrated among its largest customers. Loss of business from any of these customers could have an adverse effect on the Company. Revenues from the Company’s top five customers were approximately 32%, 26% and 33% of total operating revenues in fiscal 2009, 2008 and 2007, respectively. JPMorgan Chase accounted for 10% of the Company’s net operating revenues in fiscal 2009. No other customer accounted for 10% or more of total operating revenues. See Item 1A—Risk Factors.
|
|||
Note 15—Stockholders’ Equity
Reorganization, IPO and Redemptions
As part of the October 2007 reorganization, the Company issued different regional classes and series of common stock reflecting the different rights and obligations of the Visa financial institution members and Visa Europe. The allocation of these shares to the participating regions was adjusted in the true-up shortly prior to the IPO at which time the regional classes and series of common stock issued were converted into either class B or class C common stock. The shares held by Visa Europe were not subject to the true-up, but were converted to class C (series II, III, and IV) common stock on a one-for-one basis concurrent with the true-up.
In March 2008, the Company completed its IPO with the issuance of 446,600,000 shares of class A common stock at a net offering price of $42.77 (the IPO price of $44.00 per share of class A common stock, less underwriting discounts and commissions of $1.23 per share). The Company received net proceeds of $19.1 billion from the IPO, of which $13.4 billion was used to partially redeem shares of class B and class C common stock in March 2008 and $3.0 billion was used to fund the litigation Escrow Account as discussed below.
In October 2008, the remaining $2.7 billion in IPO proceeds were utilized to fund the redemptions of class C (series II) and class C (series III) common stock. The Company used IPO proceeds to redeem all class C (series II) common stock, which was purchased for a cash payment of $1.138 billion and the return to Visa Europe of the class C (series II) common stock subscription receivable outstanding. The Company also used $1.508 billion for redemptions of 35,263,585 shares of class C (series III) common stock at a redemption price of $42.77 per share as was required by the Company’s certificate of incorporation as then in effect. Following the October 2008 redemption, the remaining 27,499,203 shares of class C (series III) and class C (series IV) common stock outstanding automatically converted into shares of class C (series I) common stock on a one-to-one basis. In December 2008, upon adoption of the Fifth Amended and Restated Certificate of Incorporation, shares of class C (series I) common stock were designated as class C common stock with no series designation.
Class B Common Stock
The class B common stock is not convertible or transferable until the later of March 25, 2011 or the date on which all of the covered litigation has been finally resolved, although the Company’s board of directors may make exceptions to this transfer restriction after resolution of all covered litigation. This transfer restriction is subject to limited exceptions, including transfers to other class B stockholders. After termination of the restrictions, the class B common stock will be convertible into class A common stock if transferred to a person that was not a Visa member or similar person or affiliate of a Visa member or similar person. Upon such transfer, each share of class B common stock will automatically convert into a number of shares of class A common stock based upon the applicable conversion rate in effect at the time of such transfer.
Funding of the Litigation Escrow Account
Immediately following the IPO in March 2008, the conversion rate applicable to class B common stock was reduced to 0.7143 class A share for each class B share. The conversion rate was adjusted to reflect the initial deposit of $3.0 billion into the Escrow Account. Further adjustment of the conversion rate occurs upon: (i) the completion of any follow-on offering of class A common stock completed to increase the size of the Escrow Account resulting in a further corresponding decrease in the conversion rate; or (ii) the final resolution of the covered litigation and the release of funds remaining on deposit in the Escrow Account to the Company resulting in a corresponding increase in the conversion rate. On December 16, 2008, the Company’s stockholders approved and adopted the Company’s Fifth Amended and Restated Certificate of Incorporation which permits the Company greater flexibility in funding the Escrow Account. See Note 4—Retrospective Responsibility Plan.
On December 19, 2008, the Company funded the Escrow Account with $1.1 billion, which reduced the conversion rate applicable to Visa’s class B common stock from 0.7143 class A share per class B share to 0.6296 class A share per class B share. With respect to the number of shares of class A common stock outstanding on an as-converted basis, this funding had the effect of a repurchase by the Company of the equivalent of 20,800,824 class A shares. The repurchase amount per share of $52.88 was calculated using the volume-weighted average price of the Company’s class A shares for the 15-trading day period from December 1, 2008, to December 19, 2008 in accordance with the Fifth Amended and Restated Certificate of Incorporation of Visa Inc.
On July 16, 2009, the Company funded the Escrow Account with an additional $700 million, which reduced the conversion rate applicable to Visa’s class B common stock from 0.6296 class A share per class B share to 0.5824 class A share per class B share. With respect to the number of shares of class A common stock outstanding on an as-converted basis, this funding had the effect of a repurchase by the Company of the equivalent of 11,578,878 class A shares. The repurchase amount per share of $60.45 was calculated using the volume weighted average price of the Company’s class A shares for the 11-trading day pricing period from June 30, 2009 to July 15, 2009 in accordance with the Fifth Amended and Restated Certificate of Incorporation of Visa Inc.
After giving effect to the fiscal 2009 escrow fundings and the corresponding reduction in the conversion rate applicable to class B common stock outstanding, the number of class A shares outstanding on an as-converted basis is as follows:
|
(in millions) |
Shares Outstanding at September 30, 2009 |
Conversion Rate Into Class A Common Stock |
As Converted |
|||
|
Class A common stock |
470 | — | 470 | |||
|
Class B common stock |
245 | 0.5824 | 143 | |||
|
Class C common stock |
131 | 1.0000 | 131 | |||
| 846 | 744 |
Accelerated Class C Share Release Program
On April 27, 2009, the Company’s board of directors approved a program in which class C stockholders were permitted to liquidate up to 30% of their class C common stock anytime between July 1, 2009 and September 30, 2009, subject to certain terms and conditions. The release of the class C common stock did not increase the number of outstanding shares of the Company and there was no dilutive effect to the outstanding share count from these transactions. Class C common stock sold under this program to a person that was not, immediately after the reorganization, a Visa member, automatically converted to class A shares. Under this program, 40 million class C common stock were released from trading restrictions, of which 21 million shares were converted from class C common stock to class A common stock through September 30, 2009.
The remaining class C shares will continue to be subject to the general transfer restrictions that expire on March 25, 2011 under Visa’s certificate of incorporation and will not be transferable or convert into class A common stock until such date. This transfer restriction is subject to limited exceptions, including transfers to other class C stockholders. The Company’s board of directors may make additional exceptions to this transfer restriction. After termination of the restrictions, the class C common stock will convert into class A common stock if transferred to a person that was not, immediately after the reorganization, a Visa member. In connection with such a transfer, each share of class C common stock will automatically convert into a number of shares of class A common stock on a one-to-one basis, subject to adjustments for stock splits, recapitalizations and similar transactions.
Special IPO Cash and Stock Dividends Received from Cost Method Investees
Several of the Company’s cost method investees are also holders of class C common stock and elected to declare a special cash dividend to return to their owners on a pro rata basis, the proceeds received as a result of the redemption of a portion of their class C common stock. As a result of the Company’s ownership interest in these cost method investees, the Company recorded approximately $2 million and $29 million of special dividends from these investees during fiscal 2009 and 2008, respectively. In addition, the Company received 24,449 and 525,443 shares of its own class C common stock during fiscal 2009 and 2008, respectively, from similar cost method investees and recorded $1 million and $35 million, respectively, as treasury stock.
These special cash and stock dividends are recorded as an increase in additional paid-in capital, net of tax, and are not recorded as income in the consolidated statements of operations as they represent the same redemption proceeds and shares issued by the Company as part of the reorganization. Any value recorded upon their return would be the result of appreciation in the Company’s own stock, which is therefore not recorded as income. The value of the treasury stock was calculated based on other class C common stock transactions by other class C stockholders with unrelated third parties. In fiscal 2009, the Company retired the 525,443 shares of treasury stock received during fiscal 2008.
Preferred Stock
Preferred stock may be issued as redeemable or non-redeemable, and it has preference over any class or series of common stock with respect to the payment of dividends and distribution of the Company’s assets in the event of a liquidation or dissolution.
Voting Rights
The holders of class A common stock have the right to vote on all matters on which stockholders generally are entitled to vote. All holders of class B and class C common stock have no right to vote on any matters, except for certain defined matters, including any consolidation, merger, combination or any decision to exit the core payments business, in which the holders of class B and class C common stock are entitled to cast a number of votes equal to the number of shares of class B or class C common stock held multiplied by the applicable conversion rate in effect on the record date.
Dividends Declared
On October 20, 2009, the Company’s board of directors declared a dividend in the aggregate amount of $0.125 per share of class A common stock (determined in the case of class B and class C common stock on an as-converted basis) to be paid on December 1, 2009 to all holders of record of the Company’s class A, class B and class C common stock as of November 16, 2009. The Company declared and paid dividends in the aggregate amount of $0.42 per share in fiscal 2009.
|
|||
Note 18—Commitments and Contingencies
Commitments
The Company leases certain premises and equipment throughout the world with varying expiration dates. The Company incurred total rent expense of $77 million in fiscal 2009 and 2008, and Visa U.S.A. incurred total rent expense of $39 million in fiscal 2007. The Company’s future minimum payments on leases and marketing and sponsorship agreements per fiscal year, at September 30, 2009 were as follows:
| (in millions) | 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | ||||||||||||||
|
Operating Leases |
$ | 42 | $ | 35 | $ | 26 | $ | 18 | $ | 6 | $ | 14 | $ | 141 | |||||||
|
Capital Leases |
12 | 13 | 13 | 13 | — | — | 51 | ||||||||||||||
|
Marketing and Sponsorships |
150 | 122 | 117 | 82 | 80 | 7 | 558 | ||||||||||||||
|
Total |
$ | 204 | $ | 170 | $ | 156 | $ | 113 | $ | 86 | $ | 21 | $ | 750 | |||||||
In addition to fixed payments included in the above table, certain sponsorship agreements require the Company to undertake marketing, promotional or other activities up to stated monetary values to support events which the Company is sponsoring. The stated monetary value of these activities typically represents the value in the marketplace, which may be significantly in excess of the actual costs incurred by the Company.
Volume and Support Incentives
The Company has agreements with customers for various programs designed to build payments volume and increase the acceptance of its products. These agreements, with original terms ranging from one to thirteen years, provide card issuance, and/or conversion, volume targets and marketing and program support based on specific performance requirements. These agreements are designed to encourage customer business and to increase overall Visa-branded payment volume, thereby reducing unit transaction processing costs and increasing brand awareness for all Visa customers.
Payments made, that qualify for capitalization, and obligations incurred under these programs are included on the balance sheet. Obligations under these customer agreements are amortized as a reduction to revenue in the same period as the related revenues are earned, based on management’s estimate of the customer’s performance in accordance with the terms of the incentive agreement. The agreements may or may not limit the amount of customer incentive payments.
The table below sets forth the expected future reduction of revenue for volume and support incentive agreements in effect at September 30, 2009:
| (in millions) | 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | ||||||||||||||
|
Volume and Support Incentives |
$ | 1,283 | $ | 1,168 | $ | 1,019 | $ | 842 | $ | 472 | $ | 523 | $ | 5,307 | |||||||
The ultimate amounts that are recorded will be greater or less than the estimates above due to customer performance, execution of new contracts, or amendments to existing contracts. Based on these agreements, increases in incentive payments are generally driven by increased payment and transaction volume, and as a result, in the event incentive payments exceed this estimate such payments are not expected to have a material effect on the Company’s financial condition, results of operations or cash flows.
|
|||
Note 19—Related Parties
Since becoming a publicly held company in fiscal 2008, Visa considers an entity to be a related party for purposes of this Note 19 if an entity owns more than 10% of Visa’s total voting common stock at the end of the fiscal year or if an officer or employee of an entity also serves on the board of directors. The Company considers an investee to be a related party if the Company’s: (i) ownership interest in the investee is greater than or equal to 10%; or (ii) if the investment is accounted for under the equity method of accounting. There were no material operating expenses incurred, or amounts due to or from related parties during and at the end of fiscal 2009 and 2008.
Ownership. At September 30, 2009 and 2008, no entity owned more than 10% of the Company’s total voting common stock.
Board representation. The Company generated total operating revenues of approximately $786 million and $538 million from financial institution customers represented on its board of directors during fiscal 2009 and 2008, respectively. In addition, the Company maintains banking relationships and has credit facilities with financial institution customers that have representation on the board of directors. See Note 10—Debt.
During fiscal 2008, one of the Company’s directors, and the spouse of another of the Company’s directors, were officers of entities that participated in (or were affiliated with an entity that participated in) the IPO as underwriters, and one of those entities was also a customer. As underwriters, each was offered and purchased 113 million shares of class A common stock at a price of $42.77 per share, a discount of $1.23 per share based on the IPO price of $44.00 per share. This price per share is the same as that paid by all underwriters in the IPO. Also as underwriters, each received total underwriter fees of $139 million in March 2008.
Investees. The Company generated total operating revenues of $56 million and $39 million, and received dividend income of $41 million and $65 million from related party investees during fiscal 2009 and 2008, respectively. The Company also received special IPO dividends from certain related party investees which are included in the amounts discussed in Note 15—Stockholders’ Equity.
|
|||
Note 20—Income Taxes
The Company’s income before taxes by fiscal year consisted of the following:
| 2009 | 2008 | 2007 | ||||||||
| (in millions) | ||||||||||
|
U.S. |
$ | 3,807 | $ | 1,245 | $ | (1,387 | ) | |||
|
Non-U.S. |
193 | 91 | — | |||||||
|
Total income (loss) before taxes and minority interest |
$ | 4,000 | $ | 1,336 | $ | (1,387 | ) | |||
Fiscal 2009 U.S. income before taxes of $3.8 billion includes $1.8 billion from non-U.S. customers.
Income tax expense by fiscal year consisted of the following:
| 2009 | 2008 | 2007 | ||||||||||
| (in millions) | ||||||||||||
|
Current: |
||||||||||||
|
U.S. federal |
$ | 912 | $ | 416 | $ | 520 | ||||||
|
State and local |
226 | 82 | 38 | |||||||||
|
Non-U.S. |
208 | 31 | — | |||||||||
|
Total current taxes |
1,346 | 529 | 558 | |||||||||
|
Deferred: |
||||||||||||
|
U.S. federal |
353 | 189 | (819 | ) | ||||||||
|
State and local |
14 | (193 | ) | (55 | ) | |||||||
|
Non-U.S. |
(65 | ) | 7 | — | ||||||||
|
Total deferred taxes |
302 | 3 | (874 | ) | ||||||||
|
Total income tax (benefit) expense |
$ | 1,648 | $ | 532 | $ | (316 | ) | |||||
The tax effect of temporary differences that give rise to significant portions of deferred tax assets and liabilities at September 30, 2009 and 2008 are presented below:
| 2009 | 2008 | |||||||
| (in millions) | ||||||||
|
Deferred Tax Assets |
||||||||
|
Accrued compensation and benefits |
$ | 37 | $ | 88 | ||||
|
Comprehensive income |
105 | 41 | ||||||
|
Investments in joint ventures |
19 | — | ||||||
|
Accrued litigation obligation |
571 | 1,182 | ||||||
|
Volume and support incentives |
122 | 37 | ||||||
|
Research and development credits |
19 | 19 | ||||||
|
Federal benefit of state taxes |
268 | 211 | ||||||
|
Federal benefit of foreign taxes |
5 | 32 | ||||||
|
Other |
44 | 28 | ||||||
|
Deferred tax assets |
1,190 | 1,638 | ||||||
|
Deferred Tax Liabilities |
||||||||
|
Property, equipment and technology, net |
(135 | ) | (82 | ) | ||||
|
Investment in joint ventures |
— | (212 | ) | |||||
|
Intangible assets |
(4,131 | ) | (4,199 | ) | ||||
|
Foreign taxes |
(16 | ) | (4 | ) | ||||
|
Other |
(12 | ) | (8 | ) | ||||
|
Deferred tax liabilities |
(4,294 | ) | (4,505 | ) | ||||
|
Net deferred tax (liabilities) assets |
$ | (3,104 | ) | $ | (2,867 | ) | ||
Total net deferred tax assets and liabilities are included in the Company’s consolidated balance sheets as follows:
| September 30, 2009 |
September 30, 2008 |
|||||||
| (in millions) | ||||||||
|
Current deferred tax assets |
$ | 703 | $ | 944 | ||||
|
Non current deferred tax (liabilities) assets, net |
(3,807 | ) | (3,811 | ) | ||||
|
Net deferred tax (liabilities) assets |
$ | (3,104 | ) | $ | (2,867 | ) | ||
The decrease in the deferred tax asset for accrued litigation obligation is primarily due to payments of the Discover settlement during fiscal 2009.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management believes it is more likely than not that the Company will realize the benefits of its deferred tax assets recorded.
The Company had state research and development tax credit carry forwards of approximately $19 million at September 30, 2009 that may be carried forward indefinitely. The Company expects to realize the benefit of the credit carry forwards in future years.
The income tax expense differs from the amount of income tax determined by applying the applicable U.S. federal statutory rate of 35% to pretax income, as a result of the following:
| For the Years Ended September 30 | ||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||
| Dollars | Percent | Dollars | Percent | Dollars | Percent | |||||||||||||||
| (in millions) | ||||||||||||||||||||
|
U.S. federal income tax |
$ | 1,400 | 35 | % | $ | 467 | 35 | % | $ | (485 | ) | 35 | % | |||||||
|
State income taxes, net of federal benefit |
156 | 4 | % | 43 | 3 | % | (11 | ) | 1 | % | ||||||||||
|
Non-U.S. tax effect, net of federal benefit |
7 | — | 13 | 1 | % | — | — | |||||||||||||
|
Reserve for tax uncertainties related to litigation |
4 | — | 103 | 8 | % | 180 | (13 | )% | ||||||||||||
|
Other, net |
30 | 1 | % | 21 | 2 | % | 2 | — | ||||||||||||
|
One-time adjustments: |
||||||||||||||||||||
|
Benefit from remeasurement of deferred taxes due to state apportionment decrease |
— | — | (115 | ) | (9 | )% | — | — | ||||||||||||
|
Non-U.S. tax on sale of VisaNet do Brasil, net of federal benefit |
51 | 1 | % | — | — | — | — | |||||||||||||
|
Minority interest—not subject to tax |
— | — | — | — | (2 | ) | — | |||||||||||||
|
Income tax (benefit) expense |
$ | 1,648 | 41 | % | $ | 532 | 40 | % | $ | (316 | ) | 23 | % | |||||||
The difference between the effective income tax rates for fiscal 2008 and fiscal 2009 is primarily due to the additional non-U.S. tax in fiscal 2009 on the sale of the investment in VisaNet do Brasil, the litigation tax reserves in fiscal 2008, and a one-time rate reduction in fiscal 2008 from the combined effect of the loss of a California special deduction upon IPO and the deferred tax remeasurement benefit due to the change in state tax apportionment.
The effective income tax rate for fiscal 2008 differs from that for fiscal 2007 primarily due to the tax reserves related to litigation, and the one time rate reduction in fiscal 2008 described above.
Income taxes receivable of $135 million and $90 million are included in prepaid and other current assets at September 30, 2009 and 2008, respectively. See Note 6—Prepaid Expenses and Other Assets. Income taxes payable of $23 million are included in accrued taxes as part of accrued liabilities at September 30, 2009, and accrued income taxes of $304 million and $122 million are included in other long-term liabilities at September 30, 2009 and 2008, respectively. See Note 9—Accrued and Other Liabilities.
Cumulative undistributed earnings of the Company’s international subsidiaries amounted to $276 million at September 30, 2009, all of which are intended to be reinvested indefinitely outside the U.S. The amount of income taxes that would have resulted had such earnings been repatriated is not practically determinable.
Beginning October 1, 2008, the Company’s subsidiary in Singapore operates under a tax incentive agreement which is effective through September 30, 2014, and may be extended through September 30, 2023, if certain additional requirements are satisfied. The tax incentive agreement is conditional upon certain employment and investment thresholds being met by the Company. The tax incentive agreement decreased Singapore tax by $16 million for fiscal 2009. The benefit of the tax incentive agreement on diluted net income per share was $0.02.
In accordance with ASC 740, the Company is required to inventory, evaluate, and measure all uncertain tax positions taken or to be taken on tax returns, and to record liabilities for the amount of such positions that may not be sustained, or may only partially be sustained, upon examination by the relevant taxing authorities.
At September 30, 2009 and 2008, the Company’s total unrecognized tax benefits were approximately $439 million and $407 million, respectively, exclusive of interest and penalties described below. Included in the $439 million and $407 million are approximately $397 million and $334 million of unrecognized tax benefits, respectively, that if recognized, would reduce the effective tax rate in a future period.
A reconciliation of beginning and ending unrecognized tax benefits by fiscal year is as follows:
| 2009 | 2008 | |||||||
|
Beginning balance at October 1 (in millions) |
$ | 407 | $ | 320 | ||||
|
Increases of unrecognized tax benefits related to prior years |
14 | 8 | ||||||
|
Increases of unrecognized tax benefits related to current year |
23 | 126 | ||||||
|
Decreases of unrecognized tax benefits related to settlements |
(4 | ) | (46 | ) | ||||
|
Reductions to unrecognized tax benefits related to lapsing statute of limitations |
(1 | ) | (1 | ) | ||||
|
Ending balance at September 30 |
$ | 439 | $ | 407 | ||||
It is the Company’s policy to account for interest expense and penalties related to uncertain tax positions as interest expense and administrative and other, respectively, in its consolidated statements of operations. In fiscal 2009 and 2008, the Company recognized $17 million and $2 million of interest expense, respectively, and $4 million and a de minimus amount of penalties, respectively, related to uncertain tax positions in its statements of operations. At September 30, 2009, the Company had cumulatively $22 million and $5 million accrued interest and penalties, respectively, related to uncertain tax positions in its other long term liabilities.
The Company believes that unrecognized tax benefits will not significantly increase or decrease within the next 12 months.
The Company’s fiscal 2006, 2007 and 2008 U.S. federal income tax returns are currently under examination by the Internal Revenue Service. The Company is also subject to examinations by various state and foreign tax authorities. The Company has concluded all California income tax matters for years through fiscal 2003. All material state and foreign tax matters have been concluded for years through fiscal 2002.
|
|||
Note 21—Legal Matters
The Company is party to various legal and regulatory proceedings. Some of these proceedings involve complex claims that are subject to substantial uncertainties and unascertainable damages. Accordingly, except as disclosed, the Company has not established reserves or ranges of possible loss related to these proceedings, as at this time in the proceedings, the matters do not relate to a probable loss and/or amounts are not reasonably estimable. Although the Company believes that it has strong defenses for the litigation and regulatory proceedings described below, it could in the future incur judgments or fines or enter into settlements of claims that could have a material adverse effect on the Company’s results of operations, financial position or cash flows.
The Company recorded litigation provisions of approximately $2 million, $1,470 million and $2,653 million in fiscal year 2009, 2008 and 2007, respectively. The litigation accrual is an estimate and is based on management’s understanding of its litigation profile, the specifics of each case, advice of counsel to the extent appropriate and management’s best estimate of incurred loss at the balance sheet date. From time to time, the Company may engage in settlement discussions or mediations with respect to one or more of its outstanding litigation matters, either on its own behalf or collectively with other parties.
The following table summarizes the activity related to accrued litigation for both covered and other non-covered litigation for the years ended September 30, 2009 and 2008:
| 2009 | 2008 | |||||||
| (in millions) | ||||||||
|
Balance at October 1 |
$ | 3,758 | $ | 3,682 | ||||
|
Provision for settled legal matters |
(1 | ) | 1,180 | |||||
|
Provision for unsettled legal matters |
3 | 290 | ||||||
|
Settlement obligation refunded by Morgan Stanley(1) |
65 | — | ||||||
|
Interest accretion on settled matters |
93 | 131 | ||||||
|
Payments on settled matters |
(2,201 | ) | (1,525 | ) | ||||
|
Balance at September 30 |
$ | 1,717 | $ | 3,758 | ||||
| (1) |
This balance represents the amount of the Discover settlement refunded to the Company during fiscal 2009 by Morgan Stanley under a separate agreement. |
Covered Litigation
Visa Inc., Visa U.S.A. and Visa International are parties to certain legal proceedings discussed below that are subject to the Retrospective Responsibility Plan, which the Company refers to as the covered litigation. See Note 4—Retrospective Responsibility Plan. An accrual for covered litigation is recorded when loss is deemed to be probable and reasonably estimable. In making this determination the Company evaluates available information, including funding decisions made by the litigation committee. The accrual related to covered litigation could be either higher or lower than the Escrow Account balance.
The Discover Litigation
On October 4, 2004, Discover Financial Services, Inc. filed a complaint against Visa U.S.A., Visa International and MasterCard International Incorporated (MasterCard). 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 a lawsuit brought by the U.S. Department of Justice (DOJ) in 1998. The complaint alleged, among other things, that the implementation and enforcement of Visa’s bylaw 2.10(e) and MasterCard’s Competitive Programs Policy (CPP) (which prohibited their respective members from issuing American Express or Discover cards) violated Sections 1 and 2 of the Sherman Act and California’s Unfair Competition Law, and sought money damages (subject to trebling) and attorneys’ fees and costs.
On October 13, 2008, Visa, MasterCard and Discover reached an agreement in principle to settle the litigation. The parties executed a final settlement agreement on October 27, 2008 that became effective on November 4, 2008 upon approval by Visa’s class B shareholders. Visa’s net share of the settlement totaled $1.8 billion, of which $1.74 billion was paid over four quarters from the Escrow Account established by the Retrospective Responsibility Plan. Visa Inc. also paid $80 million toward Visa’s share in connection with releases obtained from MasterCard with respect to certain potential claims. Visa Inc. also paid an additional $65 million, which was refunded by Morgan Stanley, under a separate agreement related to the settlement. Visa’s settlement obligations were fully satisfied with the September 2009 payment to Discover. The Company’s consolidated statement of operations reflect a provision of $1.8 billion for the settlement in fiscal 2008.
The American Express Litigation
On November 15, 2004, American Express filed a complaint against Visa U.S.A., Visa International, MasterCard and several Visa U.S.A. and Visa International member financial institutions in the U.S. District Court for the Southern District of New York. The complaint alleged that the implementation and enforcement of Visa U.S.A.’s bylaw 2.10(e) and MasterCard’s CPP violated Sections 1 and 2 of the Sherman Act, and sought money damages (subject to trebling) and attorneys’ fees and costs.
Visa Inc., Visa U.S.A. and Visa International entered into a settlement agreement with American Express that became effective on November 9, 2007. Under the settlement agreement, American Express will receive maximum payments of $2.25 billion, including up to $2.07 billion from Visa Inc. and $185 million from five co-defendant banks. An initial payment of $1.13 billion was made on March 31, 2008, including $945 million funded through the litigation Escrow Account established under the Retrospective Responsibility Plan and $185 million from the five co-defendant banks. Beginning April 2008, Visa Inc. will pay American Express an additional amount of up to $70 million each quarter for 16 quarters, for a maximum total of $1.12 billion. The quarterly settlement payments are also covered by the Retrospective Responsibility Plan. The total settlement was recorded in fiscal 2007 at a discounted value of $1.9 billion using a rate of 4.72% over the payment term. The present value of the remaining obligation is reflected in current and long-term accrued litigation obligation on the consolidated balance sheets.
The quarterly payments are in an amount equal to 5% of American Express’s United States global network services billings during the quarter up to a maximum of $70 million per quarter; provided, however, that if the payment for any quarter is less than $70 million, the maximum payment for a future quarter or quarters shall be increased by the difference between $70 million and such lesser amount as was actually paid. American Express has met the performance criteria set forth in the settlement agreement for each quarter thus far, including the fourth fiscal quarter of fiscal 2009, and Visa has made each of the corresponding settlement payments.
The Attridge Litigation
On December 8, 2004, a complaint was filed in California state court on behalf of a putative class of consumers asserting claims against Visa U.S.A., Visa International and MasterCard under California’s Cartwright Act and Unfair Competition Law. The claims in this action, Attridge v. Visa U.S.A. Inc., et al., seek to piggyback on the portion of the DOJ litigation in which the U.S. District Court for the Southern District of New York found that Visa’s bylaw 2.10(e) and MasterCard’s CPP constitute unlawful restraints of trade under the federal antitrust laws. On May 19, 2006, the court entered an order dismissing plaintiff’s Cartwright Act claims with prejudice but allowing the plaintiff to proceed with his Unfair Competition Law claims, which seek restitution, injunctive relief, and attorneys’ fees and costs. On December 14, 2007, the plaintiff amended his complaint to add Visa Inc. as a defendant. No new claims were added to the complaint.
On July 1, 2009, the court denied in part the Defendants’ Motion for Summary Judgment or Summary Adjudication, but ordered the parties to submit affidavits as to whether further discovery should be conducted prior to the court rendering judgment on the Motion for Summary Adjudication. On August 3, 2009, the court ruled the Motion submitted without any such further discovery.
On September 14, 2009, Visa entered into a settlement agreement in the California “Indirect Purchaser” Credit/Debit Card Tying Cases, also pending in California state court. The settlement agreement is subject to the approval of the court in those cases, and provides that it would release the claims not only in those cases but also in the Attridge case. On September 24, 2009, the Attridge court deferred decision on the Motion for Summary Adjudication pending the ruling on preliminary approval of the settlement by the court in the Credit/Debit Card Tying Cases.
The Interchange Litigation
Kendall. On October 8, 2004, 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 Visa U.S.A., MasterCard and several Visa U.S.A. member financial institutions alleging, among other things, that Visa U.S.A.’s and MasterCard’s interchange reimbursement fees contravene the Sherman Act and the Clayton Act (Kendall v. Visa U.S.A. Inc., et al.). On July 25, 2005, the court granted Visa U.S.A.’s motion to dismiss and dismissed the complaint with prejudice.
On March 7, 2008, the U.S. Court of Appeals for the Ninth Circuit affirmed the district court’s dismissal of the complaint. The court concluded that the plaintiffs had failed to plead facts sufficient to establish a conspiracy, and that no amendment could cure the pleading defect. In doing so, the Ninth Circuit also held that the plaintiffs were “indirect purchasers” of Visa U.S.A. and could not recover antitrust damages for their claims. Plaintiffs did not seek review of the Ninth Circuit’s ruling.
Multidistrict Litigation Proceedings (MDL). Beginning in May 2005, approximately 55 complaints, all but 10 of which were styled as class actions, have been filed in U.S. federal district courts on behalf of merchants against Visa U.S.A. and/or MasterCard, and in some cases, certain Visa member financial institutions. Visa International was also named as a defendant in more than 30 of these complaints. The cases allege, among other things, that Visa’s and MasterCard’s purported setting of interchange reimbursement fees, their “no surcharge” rules, and alleged tying and bundling of transaction fees violate federal antitrust laws. On October 19, 2005, the Judicial Panel on Multidistrict Litigation issued an order transferring these cases to the U.S. District Court for the Eastern District of New York for coordination of pre-trial proceedings (Multidistrict Litigation or MDL 1720). On April 24, 2006, the group of purported class plaintiffs filed a First Amended Class Action Complaint. Taken together, the claims in the First Amended Class Action Complaint and in the 10 complaints brought on behalf of individual merchants are generally brought under Sections 1 and 2 of the Sherman Act. In addition, some of these complaints contain certain state unfair competition law claims. These interchange-related cases also seek treble damages in an unspecified amount (although several of the complaints allege that the plaintiffs expect that damages will range in the tens of billions of dollars), as well as attorneys’ fees and injunctive relief.
As part of the Retrospective Responsibility Plan, Visa Inc. entered into a judgment sharing agreement with Visa U.S.A., Visa International and certain member financial institutions of Visa U.S.A. on July 1, 2007.
On January 8, 2008, the district court adopted the recommendation of the Magistrate Judge and granted defendants’ motion to dismiss the class plaintiffs’ claims for damages incurred prior to January 1, 2004.
On January 29, 2009, putative class plaintiffs filed a Second Consolidated Amended Class Action Complaint. Among other things, this complaint: (i) added new claims for damages and injunctive relief against Visa and the bank defendants regarding interchange reimbursement fees for Visa PIN-debit cards; (ii) added new claims for damages and injunctive relief against Visa and the bank defendants since the time of Visa’s IPO regarding interchange reimbursement fees for Visa’s credit, offline debit, and PIN-debit cards; (iii) eliminated claims for damages relating to the so-called “no-surcharge” rule and “anti-steering” rules; and (iv) eliminated claims for damages based on the alleged tie of network processing services and payment guarantee services to the payment card system services; and (v) added Visa Inc. as a defendant.
In addition, putative class plaintiffs filed a Second Supplemental Class Action Complaint (the “Supplemental Complaint”) against Visa Inc. and several financial institutions challenging Visa’s reorganization and IPO under Section 1 of the Sherman Act and Section 7 of the Clayton Act. In the Supplemental Complaint, putative class plaintiffs seek unspecified monetary damages and declaratory and injunctive relief, including an order that the IPO be unwound.
On May 8, 2008, putative class plaintiffs served on defendants a motion seeking to certify a class of merchants. On March 31, 2009, Visa, jointly with other defendants, moved to dismiss the Supplemental Complaint and the Second Consolidated Amended Class Action Complaint.
Other Litigation
Retailers’ Litigation
Beginning in October 1996, several antitrust class action lawsuits were brought by U.S. merchants against Visa U.S.A. and MasterCard. The suits were later consolidated in the U.S. District Court for the Eastern District of New York, In re Visa Check/MasterMoney Antitrust Litigation. Among other claims, the plaintiffs alleged that Visa U.S.A.’s “Honor All Cards” rule, which required merchants that accepted Visa cards to accept for payment every validly presented Visa card, and a similar MasterCard rule, constituted an illegal tying arrangement in violation of Section 1 of the Sherman Act. On June 4, 2003, the parties signed a settlement agreement that was approved by the court on December 19, 2003. Pursuant to the settlement agreement, Visa agreed to modify its “Honor All Cards” rule such that a merchant may accept only Visa check cards, only Visa credit cards, or both. Visa also agreed to pay approximately $2.0 billion to the merchant class over 10 years in equal annual installments of $200 million per year, among other things.
Subject to court approval, on August 31, 2009, Visa entered into an agreement to prepay its remaining $800 million in settlement payments for $682 million. On October 2, 2009, the court entered a final order approving the prepayment agreement, and Visa made the prepayment pursuant to the agreement’s terms on October 5, 2009. Pursuant to its terms, the prepayment agreement became final after no appeals to the approval order were filed within the 30-day appeal period.
Retailers’ “Opt-Outs”
Several lawsuits were commenced by merchants that opted not to participate in the plaintiff class in In re Visa Check/MasterMoney Antitrust Litigation. The majority of these cases were filed in the U.S. District Court for the Eastern District of New York. Visa U.S.A. entered into separate settlement agreements with all of these plaintiffs. The last remaining action, brought by GMRI, Inc. against Visa U.S.A., was dismissed on November 21, 2008 pursuant to a settlement agreement.
“Indirect Purchaser” Actions
Complaints were also filed in 19 different states and the District of Columbia alleging state antitrust, consumer protection and common law claims against Visa U.S.A. and MasterCard (and, in California, Visa International) on behalf of putative classes of consumers. The claims in these actions included allegations mirroring those made in the U.S. merchant lawsuit and asserting that merchants, faced with excessive merchant discount fees, passed on some portion those fees to consumers in the form of higher prices on goods and services sold. Visa U.S.A. has been successful in the majority of these cases, as courts in 17 jurisdictions have granted Visa U.S.A.’s motions to dismiss for failure to state a claim or plaintiffs have voluntarily dismissed their complaints. The court approved the voluntary dismissal of one of the consolidated cases in New Mexico on September 16, 2009; the parties are awaiting a decision on Visa U.S.A.’s motion to dismiss the other case in New Mexico.
In California, in the consolidated Credit/Debit Card Tying Cases, the court dismissed claims brought under the Cartwright Act, but denied a similar motion with respect to Unfair Competition Law claims for unlawful, unfair and/or fraudulent business practices. On October 31, 2007, the court denied the plaintiffs’ motion to give collateral estoppel effect to certain elements of their “tying” claim based on statements in the ruling on cross-motions for summary judgment in In re Visa Check/MasterMoney Antitrust Litigation. On October 3, 2008, the parties agreed to confidential settlement terms to resolve the dispute. On September 14, 2009, the parties entered into a written settlement agreement that was then submitted to the court for approval. The amount of the settlement is not considered material to the consolidated financial statements.
New Zealand Interchange Proceedings
The Commerce Commission, New Zealand’s competition regulator, filed a civil Statement of Claim in the High Court in Wellington on November 9, 2006, alleging that, among other things, the fixing of default interchange rates by Cards NZ Limited, Visa International, MasterCard and certain Visa International member financial institutions contravenes the New Zealand Commerce Act. On November 27, 2006, a group of New Zealand retailers filed a nearly identical claim against the same parties before the same tribunal. Both the Commerce Commission and the retailers seek declaratory, injunctive and monetary relief. Both cases were transferred to the commercial list at the High Court in Auckland in April 2007.
The Commerce Commission, Visa International and Visa Worldwide Pte Ltd settled the Commerce Commission case on August 11, 2009, and the court granted leave to discontinue the claim on August 26, 2009. On October 3, 2009, Visa and the New Zealand retailers entered into an agreement to settle the retailers’ case, and the retailers filed a notice of discontinuance on October 7, 2009. The terms of the settlements are not considered material to the consolidated financial statements.
Currency Conversion Litigation
In 2000, a “representative” action was filed in California state court against Visa U.S.A. and Visa International in connection with an asserted 1% currency conversion “fee” assessed on member financial institutions by the payment card networks on transactions involving the purchase of goods or services in a foreign currency and the disclosure of that fee (Schwartz). Plaintiffs claimed Visa’s currency conversion practices violated California Business & Professions Code Section 17200. Additional California state class actions were filed against Visa U.S.A. and Visa International challenging currency conversion practices (Shrieve, Mattingly, and Baker). Visa U.S.A., Visa International, MasterCard, Citicorp Diners Club, Inc. (Diners Club) and several Visa member financial institutions are also defendants in a number of federal class actions that allege, among other things, violations of federal antitrust laws based on the 1% currency conversion fee. The federal complaints were consolidated or coordinated in MDL 1409 (In re Currency Conversion Fee Antitrust Litigation) in the U.S. District Court for the Southern District of New York.
On July 20, 2006, Visa U.S.A. and Visa International entered into a settlement agreement in MDL 1409. Under the terms of that settlement, Visa U.S.A. and Visa International paid $100.1 million into a settlement fund and agreed that for five years they would separately identify or itemize any fees added to transactions because they occurred in a foreign country or involved a foreign currency and would require U.S. issuing members to disclose certain changes, if any, to exchange rate practices. Visa U.S.A. and Visa International also paid into the settlement fund $18.6 million in attorneys’ fees to resolve Schwartz. The Shrieve, Mattingly, and Baker plaintiffs agreed that they would ask the court to dismiss their actions with prejudice as to Visa U.S.A. and Visa International once the MDL 1409 settlement receives court approval. If Baker is dismissed, Visa U.S.A. and Visa International shall pay $1.0 million plus interest as attorneys’ fees. If Baker is not dismissed within 60 days of final approval of the MDL settlement, Visa U.S.A. and Visa International shall pay $500,000 plus interest as attorneys’ fees.
The court granted final approval of the MDL 1409 settlement on October 22, 2009. One or more objectors may appeal the court’s ruling.
Morgan Stanley Dean Witter/Discover Litigation
In August 2004, the European Commission in Brussels issued a Statement of Objections against Visa International and Visa Europe alleging a breach of European competition law. The allegation arises from the Visa International and Visa Europe Rule (bylaw 2.12(b)) that makes certain designated competitors, including Morgan Stanley Dean Witter/Discover, ineligible for membership. On October 3, 2007, the European Commission fined Visa International and Visa Europe €10.2 million ($14.5 million) for infringing European Union rules on restrictive business practices (Article 81 of the EC Treaty and Article 53 of the EEA Agreement). Visa International and Visa Europe filed an appeal of the ruling with the Court of First Instance on December 19, 2007. Pursuant to existing agreements, Visa Europe has acknowledged full responsibility for the defense of this action, including any fines that may be payable.
Parke Litigation
On June 27, 2005, a purported consumer and merchant class action was filed in California state court against Visa U.S.A., Visa International, MasterCard, Merrick Bank and CardSystems Solutions, Inc. The complaint alleged that Visa U.S.A. and Visa International’s failure to inform cardholders in a timely manner of a data-security breach at CardSystems, a payment card processor that handled Visa and other payment brands, constitutes an unlawful and/or unfair business practice under California’s Unfair Competition Law and violates California’s statutory privacy-notice law. CardSystems filed for bankruptcy in U.S. District Court for the District of Arizona in May 2006, staying the litigation as to it. Proceedings involving CardSystems continue in the bankruptcy court in Arizona.
On February 13, 2009, the parties executed a settlement agreement in which plaintiffs agreed to withdraw their proof of claim against CardSystems in the bankruptcy action and dismiss their claims with prejudice against all defendants in the California state court action. On April 23, 2009, the federal bankruptcy court judge approved the withdrawal of plaintiffs’ bankruptcy claim against CardSystems, and on June 16, 2009, the state court judge approved the settlement and dismissed the state court action with prejudice. With the expiration of the appeals period, the settlement became final on August 17, 2009. The settlement amount is not considered material to the consolidated financial statements.
The ATM Exchange Litigation
On November 14, 2005, The ATM Exchange filed a complaint for money damages against Visa U.S.A. and Visa International in the U.S. District Court for the Southern District of Ohio. The plaintiff asserted claims of promissory estoppel, negligent misrepresentation and fraudulent misrepresentation, alleging that Visa’s deferment of a July 1, 2004 member deadline that required newly deployed ATMs to be certified by a Visa-recognized laboratory as meeting certain PIN-entry device testing requirements harmed the plaintiff by reducing demand for its ATM upgrade solution. On August 4-6, 2009, a non-binding “summary jury trial” was held pursuant to the court’s local rules. A jury found no liability and awarded no damages. On August 31, 2009, the parties entered into a settlement agreement. The settlement was funded exclusively by Visa’s insurer, and the case has been dismissed with prejudice.
U.S. Department of Justice Civil Investigative Demands
On September 27, 2007, the Antitrust Division of the United States Department of Justice (the “Division”) issued a Civil Investigative Demand, or “CID,” to Visa U.S.A. that sought information regarding a potential violation of Section 1 or 2 of the Sherman Act, 15 U.S.C. §§ 1, 2. The CID sought documents in response to several requests, which focused on Visa U.S.A.’s agreements with banks that issue Visa debit cards. On February 26, 2008, the Division issued another CID to Visa U.S.A., seeking information regarding a potential violation of the Final Judgment, dated November 26, 2001, in United States v. Visa U.S.A. Inc. et al., 163 F.Supp.2d 322 (S.D.N.Y. 2001). The CID sought documents, data and narrative responses to several interrogatories and document requests, which focused on alleged termination and waiver provisions in certain agreements between Visa U.S.A. and Visa issuers. On February 5, 2009, the Division informed Visa that it closed the investigations that led to the issuance of the September 27, 2007 and February 26, 2008 CIDs.
On October 10, 2008, the Division issued a CID to Visa U.S.A. that seeks information regarding a potential violation of Section 1 or 2 of the Sherman Act, 15 U.S.C. §§ 1, 2. The CID seeks documents, data and narrative responses to several interrogatories and document requests, which focus on certain Visa U.S.A. policies relating to merchant acceptance practices, including Visa U.S.A.’s policies regarding merchant surcharging and merchants’ ability to steer customers to other forms of payment. Visa U.S.A. is cooperating with the Division in connection with the CID.
State Investigative Demands
On May 15, 2009, the Office of the Attorney General for the State of Ohio issued an Investigative Demand to Visa Inc. seeking information regarding a potential violation of Chapter 1331 of the Ohio Revised Code, Ohio’s antitrust law. The Ohio Attorney General is part of a multistate attorney general working group. The Investigative Demand seeks copies of documents, data and narrative responses that Visa has produced to the Division pursuant to the CID issued on October 10, 2008. The Investigative Demand focuses on certain Visa U.S.A. policies relating to merchant acceptance practices, including Visa U.S.A.’s policies regarding merchant surcharging and merchants’ ability to steer customers to other forms of payment.
As part of the multistate working group’s investigation, the Office of the Attorney General of Texas issued a CID to Visa Inc. on October 9, 2009 seeking information regarding a potential violation of Sections 15.05 of the Texas Free Enterprise and Antitrust Act of 1983, Texas’s antitrust law. The CID seeks narrative responses to interrogatories that focus on certain Visa U.S.A. policies relating to merchant acceptance practices, including Visa U.S.A.’s policies regarding merchant surcharging and merchants’ ability to steer customers to other forms of payment. Visa Inc. is cooperating with the state Attorneys General in connection with these requests.
Hill Country Custom Cycles
Robert Smith, individually and doing business as Hill Country Custom Cycles, filed a putative class action lawsuit against Visa Inc., several banks, and a processor in U.S. District Court for the Central District of California on June 4, 2008. The plaintiff alleged that, due to fluctuations in currency conversion rates, a transaction disputed by a cardholder and ultimately charged back to a merchant by its acquiring bank (a “chargeback”) may result in a debit to a merchant’s account in excess of the original transaction amount. The lawsuit asserted claims under federal and state antitrust law and a variety of common law claims, including fraud and breach of contract. On December 22, 2008, the court issued an order dismissing without prejudice the case against Visa. On April 28, 2009, the parties reached an agreement in principle to settle the litigation, and the case was subsequently dismissed with prejudice. The settlement amount is not considered material to the consolidated financial statements.
Venezuela Interchange Proceedings
On October 2, 2008, the Superintendencia para la Promoción y Protección de la Libre Competencia (“Competition Authority”) of Venezuela filed an administrative proceeding against “Visa Inc. International” (sic), MasterCard, American Express, Diners Club, Consorcio Credicard, and more than thirty privately held financial institutions. The Competition Authority alleges that, among other things, the defendants’ setting of default interchange rates and merchant discount rates violates Venezuelan competition law. The Competition Authority seeks monetary and injunctive relief.
The evidentiary phase of the investigation has concluded, but the Competition Authority has not yet issued any findings as a result of the investigation.
European Interchange Proceedings
On April 3, 2009, the European Commission issued a Statement of Objections (“SO”) to Visa Europe, Visa International and Visa Inc. alleging a breach of European competition law. Visa Inc. and Visa International were served with the Statement of Objections on June 1, 2009. The SO alleges a breach of Article 81 of the EC Treaty and Article 53 of the EEA Agreement. The SO is directed to Visa Inc. and Visa International as to Honor All Cards, the no-surcharge rule and what the Commission alleges is the “subsidiary application of the Inter-Regional MIFs to the intra-regional POS transactions with consumer cards.” On August 10, 2009, Visa Inc. and Visa International filed a response to the SO. Pursuant to existing agreements among the parties, Visa Europe is obligated to indemnify Visa International and Visa Inc. in connection with this proceeding, including payment of any fines that may be imposed.
Canadian Competition Bureau Proceedings
On April 21, 2009, Visa received an oral notification from the Canadian Competition Bureau that it has initiated a civil inquiry regarding interchange and certain of Visa policies relating to merchant acceptance practices. Visa has not yet received documentation related to the inquiry.
Brazilian Competition Authority Proceedings
On August 7, 2009, Secretaria de Direito Econômico (SDE), the Brazilian competition agency, opened an administrative proceeding against Visa International, Visa do Brasil, and Companhia Brasileira de Meios de Pagamento (d/b/a VisaNet do Brasil) regarding an alleged exclusive relationship between the Company and VisaNet do Brasil, the sole acquirer of Visa transactions in Brazil. SDE also issued an injunction against Visa International and Visa do Brasil requiring, among other things, that Visa grant additional acquiring licenses to Brazilian financial institutions and suspend Visa’s exclusive relationship with VisaNet do Brasil. The SDE administrative proceeding follows the issuance of a report by the Central Bank of Brazil suggesting, among other things, that the single-acquirer structure in Brazil be changed.
Visa International and Visa do Brasil appealed the injunction to Conselho Administrativo de Defesa Econômica (CADE), the Brazilian competition authority, and on September 16, 2009, CADE revoked the injunction in its entirety.
Kabuki Restaurants
On January 5, 2009, Kabuki Restaurants, Inc. filed a putative class action lawsuit against Visa Inc. in California Superior Court. The plaintiff alleged that Visa’s practice of imposing fines on acquiring banks for their merchants’ failure to abide by certain Visa rules, including fines related to the Cardholder Information Security Program (CISP) and Account Data Compromise Recovery (ADCR) process, violates California state law, including Business and Professions Code §§17200 et seq. Before Visa filed a responsive pleading, Kabuki voluntarily dismissed the action without prejudice and re-filed the suit on an individual basis. On July 22, 2009, the parties executed an agreement to settle the litigation, and the case was subsequently dismissed with prejudice. The settlement amount is not considered material to the consolidated financial statements.
Loiseau
On March 17, 2009, Robert Loiseau filed a putative class action against Visa U.S.A. in California Superior Court asserting claims for breach of contract, unjust enrichment and violations of Business and Professions Code §§17200 et seq. The plaintiff alleges that certain terms and conditions associated with Visa gift cards are unlawful. On June 2, 2009, plaintiff amended the complaint to add the card issuer, Metabank, as a defendant. On September 1, 2009, plaintiff filed a Second Amended Complaint that included more specific class allegations. On the basis of those allegations, on October 2, 2009, Metabank removed the case to the U.S. District Court for the Southern District of California. Visa moved to dismiss the Second Amended Complaint as to Visa on October 9, 2009. On November 17, 2009, the court granted Visa’s motion and dismissed the complaint without prejudice, giving plaintiff leave to file an amended complaint.
The Reserve Primary Fund
On May 5, 2009, Visa U.S.A. commenced an action in the United States Court for the Southern District of New York against The Reserve Primary Fund (the “Fund”) and related entities in connection with the Fund’s failure to promptly redeem in full Visa U.S.A.’s investment in a money market mutual fund. On September 15, 2008, Visa U.S.A. sought to redeem its entire investment of over $981 million, plus accrued dividends. The Fund failed to return Visa U.S.A.’s investment within one business day as required by the Fund’s prospectus. Since that time, the Fund announced a liquidation plan and has so far made interim distributions returning approximately 90% of Visa U.S.A.’s investment. Visa U.S.A. is seeking damages in excess of $98 million, the amount of its investment currently held by the Fund. Also see Note 5—Investments and Fair Value Measurements and Note 6—Prepaid Expenses and Other Assets. On May 5, 2009, the SEC commenced an action in the U.S. District Court for the Southern District of New York against the Fund and has proposed an alternative plan of liquidation.
Intellectual Property Litigation
Vale Canjeable
On November 21, 2006, Vale Canjeable Ticketven, C.A. filed an action in the Fifth Municipal Court of Caracas (“Fifth Municipal court”), Venezuela against Todoticket 2004, C.A., and Visa International seeking a preliminary injunction preventing use of the Visa Vale mark in Venezuela. In December 2006, the plaintiff also filed a claim with the Fourth Commercial Court of First Instance of Caracas (“First Instance court”), alleging that the defendants infringed the plaintiff’s rights as the holder of the trademark registries and requesting declarative, injunctive and monetary relief.
On November 29, 2006, the Fifth Municipal court granted a preliminary injunction prohibiting use of the “Vale” in the Venezuelan market of food vouchers. On December 6, 2006, Visa International filed a constitutional objection to that ruling. The objection was dismissed, and Visa International appealed the decision through the appellate courts.
On September 25, 2007, Visa International’s request for removal of the First Instance judge from the case was granted. A new judge was assigned to finalize the discovery phase of the case.
After all appeals to the lower appellate courts had been rejected, on March 14, 2008, Visa International filed an extraordinary appeal of the preliminary injunction ruling with the Commercial Chamber of the Supreme Court. On August 6, 2008, the Supreme Court accepted Visa International’s appeal and declared the lower court’s decision null and void. Pursuant to the Supreme Court’s order, on March 25, 2009, the First Commercial Judge of Appeals of Caracas issued a new decision. The decision (i) dismissed Visa International’s appeal; (ii) ratified the preliminary injunction; and (iii) found Visa and Todoticket liable for legal fees and costs in connection with the appeal. On July 9, 2009, Visa International filed a further appeal as to the March 25 decision on preliminary relief.
Starpay and VIMachine
On May 8, 2003, Starpay and VIMachine sued Visa U.S.A. and Visa International in U.S. District Court for the Northern District of Texas, claiming that Visa used information provided by Starpay in 2000 to create Verified by Visa (“VbV”) and to file a Visa patent application on the technology underlying VbV. Two claims are asserted: infringement of VIMachine’s patent and misappropriation of Starpay’s trade secrets. On February 23, 2004, Visa U.S.A. and Visa International answered the complaint and filed a counterclaim for a declaratory judgment that Visa U.S.A. and Visa International are not infringing the asserted patent and/or that the patent is invalid. On March 16, 2004, Starpay filed an answer to the counterclaim.
The parties reached an agreement in principle to settle the dispute in January 2008. On May 16, 2008, Visa U.S.A. and Visa International filed a Motion to Enforce the Settlement Agreement against all parties to the agreement, including the inventor. VIMachine and the inventor filed a Motion to Compel Further Mediation on November 7, 2008 and sought a stay in favor of arbitration on December 17, 2008.
The parties executed a revised settlement agreement (the “Revised Settlement”) in June 2009, and on September 11, 2009, the court issued an order dismissing all claims with prejudice. The settlement amount in the Revised Settlement is not considered material to the consolidated financial statements.
Every Penny Counts, Inc.—Prepaid Cards
On July 17, 2007, Every Penny Counts, Inc. filed a complaint in the U.S. District Court for the Middle District of Florida against Visa U.S.A., MasterCard and American Express for patent infringement. Plaintiff amended its complaint on September 27, 2007 to add Green Dot Corp. as a party and to add a patent to its suit. The complaint now alleges that the defendants’ “open” prepaid card products infringe five U.S. Patents held by the plaintiff. After the court denied Visa U.S.A.’s motion to dismiss, on November 13, 2007, Visa U.S.A. filed its answer and counterclaims alleging that Visa does not infringe the plaintiff’s patents, that the plaintiff’s patents are invalid, and that the plaintiff’s patents are unenforceable due to prosecution laches and inequitable conduct.
At a claims construction hearing on May 22, 2008, the court ruled in favor of defendants on all five of plaintiff’s patents. In light of this ruling, plaintiff orally agreed to a stipulated judgment in favor of all defendants on all claims. The court entered judgment for all defendants on May 23, 2008, which was affirmed by the Federal Circuit on April 30, 2009. The Federal Circuit denied Every Penny Counts’s petition for rehearing on May 26, 2009 and issued its mandate on June 2, 2009. Judgment was entered pursuant to that mandate on June 10, 2009. The U.S. Supreme Court denied Every Penny Counts’s petition for writ of certiorari on November 9, 2009.
Calabrese Stemer—Transaction Notification Alerts
On February 19, 2009, Calabrese Stemer LLC and Charge Notification Services Corp, Inc. filed suit against Visa Inc. in the U.S. District Court for the Southern District of Florida for patent infringement. Plaintiffs allege that Visa offers to perform certain transaction notification pilot services that would infringe U.S. Patent No. 7,357,310 (“Mobile Phone Charge Card Notification and Authorization Method”). On June 11, 2009, Plaintiff filed a Notice of Voluntary Dismissal Without Prejudice. On June 16, 2009, the Court issued an Order of Closeout dismissing the Plaintiffs’ claims without prejudice.
TQP Development, LLC—Data Encryption
On March 25, 2009, TQP Development, LLC filed a lawsuit against Visa Inc., Visa U.S.A., Visa International and a number of other companies, including American Express, MasterCard and Barclays, in the U.S. District Court for the Eastern District of Texas alleging that methods practiced on the defendants’ websites infringe U.S. Patent No. 5,412,730 (“Encrypted Data Transmission System Employing Means for Randomly Altering the Encryption Keys”). On May 22, 2009, Visa answered the complaint and filed a counterclaim for a declaratory judgment that Visa is not infringing the patent and/or that the patent is invalid.
Actus, LLC—Prepaid Cards
On April 9, 2009, Actus, LLC filed a lawsuit against Visa Inc. and a number of other companies in the U.S. District Court for the Eastern District of Texas alleging that certain Visa prepaid products infringe U.S. Patent No. 7,328,189 (“Method and Apparatus for Conducting Electronic Commerce Transactions Using Electronic Tokens”) and U.S. Patent No. 7,249,099 (“Method and Apparatus for Conducting Electronic Commerce Transactions Using Electronic Tokens”). On June 11, 2009, Visa filed a motion to dismiss plaintiff’s claims. Actus filed a second amended complaint on August 17, 2009, to address the issues raised in Visa’s motion, and Visa and other defendants filed a renewed motion to dismiss on September 8, 2009.
Joao Bock Transaction Systems—Transaction Security
On May 11, 2009, Joao Bock Transaction Systems of Texas, LLC filed a lawsuit against Visa Inc. and a number of other companies in the U.S. District Court for the Eastern District of Texas alleging that certain Visa products and/or services infringe U.S. Patent No. 7,096,003 (“Transaction Security Apparatus”). On June 23, 2009, plaintiff filed a first amended complaint. On July 10, 2009, Visa filed a motion to dismiss plaintiff’s claim. On October 1, 2009, the parties executed an agreement to settle the litigation, and the case was dismissed with prejudice on October 13, 2009. The settlement amount is not considered material to the consolidated financial statements.
Restricted Spending Solutions, LLC—Prepaid and Commercial Cards
On June 23, 2009, Restricted Spending Solutions, LLC filed a lawsuit against Visa U.S.A. and a number of other companies in the U.S. District Court for the Northern District of Illinois alleging that certain Visa prepaid and commercial cards infringe U.S. Patent No. 6,044,360 (“Third Party Credit Card”). On October 30, 2009, Visa U.S.A. answered the complaint and filed a counterclaim for a declaratory judgment that Visa is not infringing the patent and/or that the patent is invalid.
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Note 22—Subsequent Events
In October 2009, the Company’s board of directors authorized a $1.0 billion share repurchase plan. The authorization will be in place through September 30, 2010, and is subject to extension or expansion at the determination of the Company’s board of directors. The Company began repurchasing its class A shares from the open market in late October 2009 and has continued to do so into November 2009.
In fiscal 2009, the Company entered into an agreement to modify its remaining payment obligations under the original retailers’ litigation settlement agreement, which was approved by the court on October 2, 2009. Pursuant to this agreement, the Company made a payment of $682 million to fully satisfy the remaining $800 million obligation on October 5, 2009, and the prepayment agreement became final after no appeals to the approval order were filed within the 30-day appeal period. See Note 21—Legal Matters.
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