EUROPAY INTERNATIONAL S.A.
CONSOLIDATED FINANCIAL STATEMENTS
F-29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Europay International S.A.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income and cash flows present fairly, in all material
respects, the financial position of Europay International S.A. (the "Company")
and its subsidiaries at December 31, 2001 and 2000, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the Belgium, expressed in euros.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
Accounting principles generally accepted in Belgium vary in certain
significant respects from accounting principles generally accepted in the United
States. The application of the latter would have affected the determination of
consolidated net income for the years ended December 31, 2001 and 2000, and the
determination of consolidated shareholders' equity and consolidated financial
position at December 31, 2001 and 2000, to the extent summarized in Note 19 to
the consolidated financial statements.
PricewaterhouseCoopers Reviseurs d'Entreprises
represented by
Yves Vandenplas
Brussels, Belgium
April 17, 2002
F-30
EUROPAY INTERNATIONAL S.A.
CONSOLIDATED BALANCE SHEETS
(IN E THOUSANDS)
<Table>
<Caption>
AS OF DECEMBER 31,
------------------
NOTES 2001 2000
-------- ------- -------
ASSETS
NON CURRENT ASSETS
Intangible assets........................................... 4 22,069 8,825
Fixed assets................................................ 5 34,046 34,133
Financial assets............................................ 6 1,943 2,029
------- -------
Total Non Current Assets.................................. 58,058 44,987
------- -------
CURRENT ASSETS
Amounts receivable within one year
Trade debtors............................................. 37,490 45,915
Other amounts receivable.................................. 8, 16 129,177 46,619
------- -------
Total amounts receivable within one year............... 166,667 92,534
Investments and deposits.................................... 9 9,000 1,852
Cash at bank and in hand.................................... 10 85,960 112,117
Deferred charges and accrued income......................... 4,060 2,679
------- -------
Total Current Assets...................................... 265,687 209,182
------- -------
TOTAL ASSETS...................................... 323,745 254,169
======= =======
CAPITAL AND RESERVES AND LIABILITIES
CAPITAL AND RESERVES
Issued Capital.............................................. 17,611 17,611
Consolidated reserves....................................... 7 35,800 23,628
Consolidation difference.................................... 6 383 383
Cumulative translation adjustment........................... 268 235
------- -------
Total Capital and Reserves................................ 54,062 41,857
------- -------
MINORITY INTEREST........................................... 11 3,060 2,619
------- -------
PROVISION FOR LIABILITIES AND CHARGES....................... 5, 9, 15 3,579 2,301
------- -------
DEFERRED TAX................................................ 16 4,817 2,792
------- -------
CREDITORS
Amounts payable within one year
Bank overdrafts........................................... 10 63,618 37,789
Suppliers................................................. 14 78,209 63,587
Taxes..................................................... 16 19,288 2,150
Remuneration and social security.......................... 15 13,518 9,932
Other amounts payable..................................... 12 82,918 89,749
------- -------
Total amounts payable within one year.................. 257,551 203,207
Accrued charges and deferred income......................... 170 1,149
Amounts payable after one year.............................. 13 506 244
------- -------
Total Creditors........................................... 258,227 204,600
------- -------
TOTAL CAPITAL AND RESERVES AND LIABILITIES.................. 323,745 254,169
======= =======
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
EUROPAY INTERNATIONAL S.A.
CONSOLIDATED STATEMENTS OF INCOME
(IN E THOUSANDS)
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
NOTES 2001 2000 1999
----- -------- -------- ------------
(UNAUDITED)
OPERATING INCOME
Revenue................................................... 17 401,900 364,806 298,206
Capitalization of intangible assets....................... 4 7,737 7,822 --
Other operating income.................................... 4,275 3,041 1,041
------- ------- -------
Total operating income.................................. 413,912 375,669 299,247
------- ------- -------
OPERATING EXPENSES
Services and other goods.................................. 17 328,464 282,387 226,776
Remuneration, social security and pension costs........... 15 63,991 58,902 50,741
Depreciation and amortization expense..................... 4, 5 13,320 11,143 9,275
Bad debt expense.......................................... -- 29 270
Increase/(decrease) in provisions for liabilities and
charges................................................. 15 (227) 127 --
Other operating expenses.................................. 14 3,438 4,858 4,864
------- ------- -------
Total operating expenses................................ 408,986 357,446 291,926
------- ------- -------
OPERATING PROFIT.......................................... 4,926 18,223 7,321
FINANCIAL INCOME/(EXPENSE)
Interest income........................................... 1,338 1,072 1,131
Net other financial income/(expense)...................... 9 22,487 (543) 6,855
Interest expense.......................................... (2,266) (172) (280)
------- ------- -------
Net financial income.................................... 21,559 357 7,706
------- ------- -------
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION............. 26,485 18,580 15,027
EXTRAORDINARY INCOME/(CHARGES)
Adjustments to amounts written off financial assets....... 6 -- 184 --
Net gain/(loss) on disposal of fixed assets............... 5 (170) (300) (411)
Net use/(establishment) of provisions for liabilities and
charges................................................. 5, 15 (2,087) (1,353) --
Other extraordinary charges............................... (642) -- --
------- ------- -------
Net extraordinary income/(charges)...................... (2,899) (1,469) (411)
------- ------- -------
PROFIT FOR THE FINANCIAL PERIOD BEFORE TAXATION........... 23,586 17,111 14,616
INCOME TAXES.............................................. 16 (10,734) (7,447) (6,721)
------- ------- -------
NET INCOME................................................ 12,852 9,664 7,895
NET INCOME/(LOSS) FROM EQUITY INVESTEES, NET OF TAX....... 6 (239) (158) --
MINORITY INTEREST, NET OF TAX............................. 11 (441) (253) (254)
------- ------- -------
NET INCOME ATTRIBUTABLE TO THE GROUP...................... 12,172 9,253 7,641
======= ======= =======
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
EUROPAY INTERNATIONAL S.A.
SUPPLEMENTAL DISCLOSURE
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN E THOUSANDS)
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
------- ------- -----------
(UNAUDITED)
OPERATING ACTIVITIES
Profit for the financial period before taxation............. 23,586 17,111 14,616
Adjustments to reconcile profit for the financial period
before taxation to cash provided by/(used in) operating
activities:
Adjustments for non-cash (income)/expense:
Adjustments to amounts written off financial assets.... -- (184) --
Depreciation and amortization expense.................. 13,320 11,143 9,275
Net (gain)/loss on disposals of fixed assets........... 170 300 411
Changes in operating assets and liabilities:
Trade debtors.......................................... 8,425 (5,396) 7,986
Other amounts receivable............................... (82,558) (33,161) (6,932)
Deferred charges and accrued income.................... (1,381) 8,272 761
Security deposits...................................... (120) 1,028 (169)
Suppliers.............................................. 14,622 1,122 8,706
Taxes paid............................................. 8,429 (4,868) (5,911)
Remuneration and social security....................... 3,586 2,550 1,389
Other amounts payable.................................. (6,831) 64,440 10,910
Accrued charges and deferred income.................... (979) (2,366) 2,651
Provision for liabilities and charges.................. 1,278 2,061 --
------- ------- -------
Net cash provided by/(used in) operating activities......... (18,453) 62,052 43,693
------- ------- -------
INVESTING ACTIVITIES
Acquisitions of intangible assets......................... (8,251) (2,001) (3,698)
Capitalization of intangible assets....................... (10,426) (7,822) --
Acquisitions of fixed assets.............................. (8,202) (13,761) (9,839)
Proceeds from sales of fixed assets....................... 232 548 3,805
Investment in affiliates.................................. -- (5) (92)
Investment in short term cash deposits.................... (9,000) -- (6,951)
Proceeds from maturity of short term cash deposit......... -- 6,951 --
Investment in foreign currency option..................... -- (1,852) --
Proceeds from maturity of investment in foreign currency
option................................................. 1,852 -- --
------- ------- -------
Net cash used in investing activities....................... (33,795) (17,942) (16,775)
------- ------- -------
FINANCING ACTIVITIES
Net change in bank overdrafts............................. 25,829 37,052 469
Payment of short-term bank loan........................... -- -- (19,831)
Net change in amounts payable after one year.............. 262 (2,289) --
------- ------- -------
Net cash provided by/(used in) financing activities......... 26,091 34,763 (19,362)
------- ------- -------
Net increase/(decrease) in cash at bank and in hand......... (26,157) 78,873 7,556
Cash at bank and in hand at beginning of year............... 112,117 33,244 25,688
------- ------- -------
Cash at bank and in hand at end of year..................... 85,960 112,117 33,244
======= ======= =======
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN E THOUSANDS)
1. ORGANIZATION
Europay International S.A., incorporated in Belgium, manages and licenses
banks and banking organizations in Europe for payment systems trademarks such as
eurocheque, Eurocard-MasterCard, Maestro, Cirrus and Clip. Services provided
also include processing services such as authorization, clearing and settlement
of transactions carried out under the above mentioned trademarks. Europay also
engages in a variety of marketing activities designed to maintain and enhance
the value of the brands, and plays a leading role in the development of new
technologies aimed at facilitating and expanding electronic and mobile commerce.
2. LIST OF CONSOLIDATED ENTERPRISES AND ENTERPRISES INCLUDED USING THE EQUITY
METHOD
The financial statements include the accounts of Europay and also the
accounts of the subsidiaries listed below.
<Table>
<Caption>
CHANGE OF
PERCENTAGE OF
PROPORTION CAPITAL HELD
METHOD OF CAPITAL (AS COMPARED
NAME, FULL ADDRESS OF REGISTERED OFFICE AND FOR ENTERPRISES USED HELD IN TO THE PREVIOUS
GOVERNED BY BELGIAN LAW, THE VAT NUMBER OR THE NATIONAL NUMBER (SEE BELOW) PERCENT PERIOD)
- -------------------------------------------------------------- ----------- ---------- ---------------
MAESTRO INTERNATIONAL, INC.................................. E1 50.00 0.00
Corporate Trust Center
1209 Orange Street
19801 Wilmington, Delaware
UNITED STATES OF AMERICA
EUROPEAN PAYMENT SYSTEM SERVICES S.A........................ F 85.00 0.00
Chaussee de Tervuren 198a
1410 Waterloo
BELGIUM
BE 427.503.348
EUROTRAVELLERS CHEQUE INTERNATIONAL S.A..................... F 100.00 0.00
Chaussee de Tervuren 198a
1410 Waterloo
BELGIUM
BE 421.611.290
EUROPAY LIMITED (Dormant)................................... F 100.00 0.00
UNITED KINGDOM
EUROCARD U.S.A., INC........................................ F 100.00 0.00
Fifth Avenue 500
10110 New York, New York
UNITED STATES OF AMERICA
E1 -- Associated enterprise accounted for using the equity method
F -- Full consolidation
</Table>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies used in the preparation of these
financial statements are set out below.
CONSOLIDATION
Europay follows accounting principles and reporting requirements generally
accepted in Belgium ("Belgian GAAP"). Assets and liabilities are recorded under
the accrual method of accounting and valued at historical cost less any amounts
provided for possible reduction in value.
F-34
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
The consolidated financial statements include the accounts of Europay and
its majority-owned subsidiaries. All significant intercompany transactions are
eliminated in consolidation. Investments in entities for which the equity method
of accounting is appropriate are reported as financial assets on the balance
sheet. Europay's share of net earnings of these entities is included in the
consolidated statements of income. Investments in entities for which the equity
method is not appropriate are accounted for using historical cost. All
investments are evaluated for impairment on an ongoing basis.
REVENUES
Revenues are recognized when services are performed. The main operating
revenues arise from the following fees.
Operations fees -- consists of authorization, clearing and settlement fees
charged to issuers/acquirers based on transaction volumes either through
settlement or through invoices. This also includes fees for other member
services that are collected based on monthly invoices.
Assessment fees -- consists of assessment fees charged to issuers and
acquirers for costs associated with the overall management of the payments
system, and currency conversion fees charged to issuers, which are charged
daily, monthly and quarterly based on transaction volumes. These fees are
recognized as revenue when collected through direct debit or upon invoicing of
customers. Assessment fees also include card fees charged to issuers that are
recognized as revenue upon invoicing of customers.
Europay has strategic arrangements with certain members, which provide for
fee rebates when the member meets certain transaction hurdles. Such rebates are
calculated as incurred based upon member transaction levels and the contracted
discount rates for the services provided, and are recorded as a reduction in
revenue in the same period as the revenue is recorded.
FOREIGN CURRENCY TRANSLATION
The euro (E) is the functional currency for the majority of Europay's
businesses except its Eurocard U.S.A. operations, where the local currency is
the functional currency. Transactions arising from EMU countries in foreign
currencies are translated at their EMU fixed rate. Bank movements generated by
Europay's centralized processing system, known as European Common Clearing &
Settlement System (ECCSS), are translated at the transaction date. All other
transactions arising in foreign currencies are translated to and recorded in
euros at the rate prevailing at the end of the month that precedes the month the
transaction takes place, which is not significantly different from the rate at
the respective transaction date. Current assets and liabilities expressed in
foreign currencies are translated at the spot rate on the balance sheet date.
Profits and losses arising from the translation of foreign currencies are
reflected in the statements of income. For businesses where the local currency
is the functional currency, translation to euros is performed for balance sheet
accounts using current exchange rates in effect at the balance sheet date and
for revenue and expense accounts using an average exchange rate for the period.
Resulting translation adjustments are reported as cumulative translation
adjustments in the consolidated balance sheets.
DEFERRED TAXES
Deferred tax liabilities on consolidation entries are recorded when it is
probable that a tax charge will effectively be incurred in the foreseeable
future.
INTANGIBLE ASSETS
Europay has strategic agreements with certain members, which include costs
to obtain the member's commitment to perform under the terms and over the period
of time defined in the agreement. These costs are
F-35
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
capitalized when incurred and amortized over the remaining term of the agreement
using the straight-line method. Eligible direct internal and external costs
related to the application development and testing stages of internally
developed software are capitalized, and, upon completion are amortized using the
straight-line method over a three year estimated useful life. All other
intangible assets, which consist primarily of purchased software, are recorded
at historical cost and amortized over their estimated useful lives using the
straight-line method between three and five years.
PROPERTY, PLANT AND EQUIPMENT
Land and buildings, plant and equipment, and office furniture and equipment
are recorded at historical cost, including ancillary expenses. Depreciation is
provided on buildings, plant and equipment and office furniture and equipment,
at the following rates calculated to amortize the cost of the assets over their
estimated useful lives, using the straight-line method.
<Table>
Buildings................................................... 10 to 33 years
Installations and equipment................................. 5 to 10 years
Office furniture and equipment.............................. 5 to 10 years
Other fixed assets.......................................... 5 years
Computer hardware........................................... 3 to 4 years
EPSNet computer network..................................... 2 years
Personal computer equipment................................. 3 years
Automobiles................................................. 3 to 4 years
</Table>
Property, plant and equipment are depreciated for a full year in the year
of acquisition.
PENSIONS
Europay has a defined benefit pension plan providing retirement and death
benefits to employees, which is funded by a group insurance contract. Premiums
charged by the insurance company are expensed as retirement benefits as
incurred, on the assumption that the amount of the premium constitutes an
appropriate measure of the economic cost of pension obligations for the period.
RESEARCH & DEVELOPMENT
It is Europay's policy to expense the costs of research and development,
such as chip card research and development, in the year in which they are
incurred.
4. INTANGIBLE ASSETS
<Table>
<Caption>
CONCESSIONS,
SOFTWARE AND PATENTS, ADVANCE
KNOW-HOW LICENSES, ETC. PAYMENTS TOTAL
------------ -------------- -------- ------
ACQUISITION COST
As at December 31, 2000........................ 27,114 1,823 -- 28,937
Movements during the period:
Acquisitions, including fixed assets, own
production................................ 10,426 5,030 3,221 18,677
</Table>
F-36
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
<Table>
<Caption>
CONCESSIONS,
SOFTWARE AND PATENTS, ADVANCE
KNOW-HOW LICENSES, ETC. PAYMENTS TOTAL
------------ -------------- -------- ------
Sales and disposals.......................... (20) -- -- (20)
Transfers from one heading to another........ (1,823) -- -- (1,823)
------ ----- ----- ------
As at December 31, 2001........................ 35,697 6,853 3,221 45,771
------ ----- ----- ------
ACCUMULATED AMORTIZATION AND AMOUNTS WRITTEN
DOWN
As at December 31, 2000........................ 18,289 1,823 -- 20,112
Movements during the period:
Amortization expense......................... 4,776 642 -- 5,418
Written down after sales and disposals....... (5) -- -- (5)
Transfers from one heading to another........ (1,823) -- -- (1,823)
------ ----- ----- ------
As at December 31, 2001........................ 21,237 2,465 -- 23,702
------ ----- ----- ------
NET CARRYING VALUE AT DECEMBER 31, 2001........ 14,460 4,388 3,221 22,069
====== ===== ===== ======
</Table>
Europay capitalized work completed on the EMV (Europay, MasterCard, Visa)
integrated circuit card, terminal and card application specifications for
payment systems and related documents as intellectual property for estimated
costs of E269 in 2000 and in doing so recognized income for the same amount,
which is included in the 2000 Consolidated Statement of Income under
capitalization of intangible assets. The EMV intangible assets have been
contributed in their entirety as part of a capital contribution to a joint
venture as described in Note 6 below.
Starting in 1999 and continuing in 2000 Europay put in place systems and
procedures in order to assess the criteria in respect of capitalization of
internally developed software, which resulted in the effective capitalization of
costs incurred as from January 1, 2000. Capitalized software amounting to E1,192
and related amortization expense of E9 should have been recognized in the
consolidated financial statements for the year ended December 31, 1999. Under
Belgian GAAP it is not permitted to restate opening retained earnings or to
account for this non-capitalization in the following year.
Europay capitalized internally developed software amounting to E7,737 and
E7,553 in the years ended December 31, 2001 and 2000, respectively. Amortization
expense related to this capitalized software amounted to E2,691 and E602 in 2001
and 2000, respectively.
Europay capitalized costs amounting to E5,030 and advance payments
amounting to E3,221, which were incurred to obtain members' commitment to
perform under the terms and over the period of time defined in strategic
agreements entered into with the members, in the year ended December 31, 2001.
Amortization related to these capitalized costs amounted to E642 for the year
ended December 31, 2001.
Computer related assets with an acquisition cost and accumulated
amortization of E1,823 were reclassified to fixed assets (see Note 5).
F-37
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
5. FIXED ASSETS
<Table>
<Caption>
LAND COMPUTER FURNITURE OTHER ASSETS
AND EQUIPMENT & AND TANGIBLE UNDER
BUILDINGS INSTALLATIONS VEHICLES ASSETS CONSTRUCTION TOTAL
--------- ------------- --------- -------- ------------ ------
ACQUISITION COST
As at December 31, 2000.............. 39,754 28,017 4,224 8,192 482 80,669
Movements during the period:
Acquisitions, including fixed
assets, own construction........ 3,624 4,047 266 29 236 8,202
Sales and disposals................ -- (1,814) (36) (5,618) -- (7,468)
Transfers from one heading to
another......................... 482 1,823 -- -- (482) 1,823
------ ------ ----- ------ ------ ------
As at December 31, 2001.............. 43,860 32,073 4,454 2,603 236 83,226
------ ------ ----- ------ ------ ------
ACCUMULATED DEPRECIATION AND AMOUNTS
WRITTEN DOWN
As at December 31, 2000.............. 15,989 21,628 2,774 6,145 -- 46,536
Movements during the period:
Expense............................ 2,880 4,100 620 302 -- 7,902
Written down after sales and
disposals....................... -- (1,445) (18) (5,618) -- (7,081)
Transfers from one heading to
another......................... -- 1,823 -- -- -- 1,823
------ ------ ----- ------ ------ ------
As at December 31, 2001.............. 18,869 26,106 3,376 829 -- 49,180
------ ------ ----- ------ ------ ------
NET CARRYING VALUE AT DECEMBER 31,
2001............................... 24,991 5,967 1,078 1,774 236 34,046
====== ====== ===== ====== ====== ======
</Table>
Computer related assets with an acquisition cost and accumulated
amortization of E1,823 were reclassified from intangible assets (see Note 4).
Assets under construction in relation to the expansion and renovation of
Europay's Waterloo premises in order to accommodate current and future
organizational and operational requirements amounting to E236 and E482 are
included in the Consolidated Balance Sheets at December 31, 2001 and 2000,
respectively. Assets under construction amounting to E482 and E2,655 were put
into use and as such transferred to buildings during the years ended December
31, 2001 and 2000, respectively.
In July 1999 Europay sold a building, which it formerly occupied, for a
sales price of E3,718. Europay realized a loss of E124 on the sale.
Europay rents network computer equipment required for network operations
under an operating lease agreement. The value of the computer equipment rented
under this lease agreement totaled E30,444 and E24,313 at December 31, 2001 and
2000, respectively. Rent expense related to this lease amounted to E4,217,
E4,717 and E5,231 in 2001, 2000 and 1999, respectively.
During 1999 Europay rented personal computer equipment required for its
activities under operating lease agreements. Rent expense related to these lease
agreements amounted to E1,717 in 1999. In December 1999 Europay bought out the
operating lease agreements. Under the terms of the transaction Europay acquired
personal computer equipment at a cost of E632 and incurred a cancellation fee of
E2,169, which was expensed.
Europay provides cars to certain levels of management under operating lease
agreements. In 2001 the terms of these operating lease agreements were changed
from 4 to 3 1/2 years. Total expense related to these
F-38
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
lease agreements, including insurance, fuel and maintenance amounted to E2,811,
E2,634 and E2,185 in 2001, 2000 and 1999, respectively.
Europay also rents office buildings and equipment under operating lease
agreements. Total rents related to these lease agreements amounted to E5,553,
E4,774 and E5,614 in 2001, 2000 and 1999, respectively. Europay provided E422
for the cost of terminating of an operating lease agreement for an office
building, the liability for which is included as part of the provisions for
liabilities and charges in the Consolidated Balance Sheet at December 31, 2001
and the cost is included as part of the net establishment of provisions for
liabilities and charges in the Consolidated Statement of Income for the year
then ended.
Future scheduled operating lease payments are summarized below. Computer
equipment includes lease payments plus related computer hardware and software
maintenance and service contract costs.
<Table>
<Caption>
OFFICE
COMPUTER BUILDINGS &
YEAR EQUIPMENT AUTOMOBILES EQUIPMENT TOTAL
- ---- --------- ----------- ----------- ------
2002.................................... 11,873 1,821 1,630 15,324
2003.................................... 7,932 1,238 1,626 10,796
2004.................................... 432 672 1,431 2,535
2005.................................... -- 68 1,427 1,495
2006 & after............................ -- -- 3,356 3,356
------ ----- ------ ------
Total......................... 20,237 3,799 9,470 33,506
====== ===== ====== ======
</Table>
F-39
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
6. FINANCIAL ASSETS
<Table>
<Caption>
ENTERPRISES
ACCOUNTED
FOR USING
THE EQUITY
METHOD OTHER TOTAL
----------- ------ ------
1. INVESTMENTS IN AFFILIATES
ACQUISITION COST
As at December 31, 2000..................................... 1,871 -- 1,871
Movements during the period:
Acquisitions.............................................. -- -- --
Translation differences................................... 81 -- 81
----- ------ ------
As at December 31, 2001..................................... 1,952 -- 1,952
----- ------ ------
CAPITAL AND RESERVES OF THE ENTERPRISES
Movements during the period:
Share in the result for the financial period.............. (239) -- (239)
Other movements in the capital and reserves............... (47) -- (47)
----- ------ ------
Net movements during the period............................. (286) -- (286)
----- ------ ------
NET CARRYING VALUE AS AT DECEMBER 31, 2001.................. 1,666 -- 1,666
----- ------ ------
2. SECURITY DEPOSITS
NET CARRYING VALUE AT THE END OF THE YEAR
As at December 31, 2000..................................... -- 158 158
Movements during the period:
Additions................................................. -- 158 158
Reimbursements............................................ -- (39) (39)
----- ------ ------
As at December 31, 2001..................................... -- 277 277
----- ------ ------
TOTAL....................................................... 1,666 277 1,943
===== ====== ======
</Table>
Europay has a 33% interest in EMVCo, LLC ("EMVCo"), which it accounts for
on an equity basis. EMVCo was established as a Delaware (U.S.) limited liability
company established as a joint venture under equal ownership by Europay,
MasterCard and Visa to manage, maintain and enhance the EMV Integrated Circuit
Card Specifications for Payment Systems as technology advances and the
implementation of chip card programs become more prevalent. In 2000 Europay's
interest in EMVCo was increased by the contribution of additional intellectual
property valued at E269 (see Note 4).
Europay also has a 50% interest in a joint venture company, Maestro
International Incorporated. ("Maestro"), of which the remaining 50% interest is
held by MasterCard. At December 31, 1999 the net value of the investment in the
joint venture was nil as the original investment of E184 was fully offset by
loss provisions from previous years.
In 2000 Europay reversed the loss provision of E184 and recognized a
consolidation adjustment of E383 for the equity share of Maestro's undistributed
1999 net earnings. The reversal of the provision resulted from a change in the
joint venture's profitability. Furthermore, the E383 income from the joint
venture was
F-40
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
recognized subsequent to 1999 or the period earned, and is reflected in the
following required disclosure of consolidation differences:
<Table>
Net carrying value at December 31, 2000..................... 383
Movements during the period:
Adjustment as described above............................. --
---
Net carrying value at December 31, 2001..................... 383
===
</Table>
The Consolidated Balance Sheets include receivables from Maestro of E947
and E345 and payables to Maestro of E2,189 and E1,874 at December 31, 2001 and
2000, respectively. The Consolidated Income Statements include amounts of
E5,773, E4,878 and E4,128 representing Europay's share of the net costs incurred
by Maestro in 2001, 2000 and 1999, respectively.
7. CONSOLIDATED RESERVES
<Table>
<Caption>
AT DECEMBER 31,
----------------
2001 2000
------ ------
Consolidated reserves at beginning of year.................. 23,628 14,375
Movements during the period:
Net income attributable to the Group................... 12,172 9,253
------ ------
Consolidated reserves at end of year...................... 35,800 23,628
====== ======
</Table>
8. OTHER AMOUNTS RECEIVABLE
Other amounts receivable consists of the following.
<Table>
<Caption>
AT DECEMBER 31,
-----------------
2001 2000
------- ------
Recoverable VAT............................................. 6,925 5,282
Settlement accounts receivable.............................. 99,582 39,303
Income taxes receivable..................................... 22,304 1,314
Other....................................................... 366 720
------- ------
Total other amounts receivable.................... 129,177 46,619
======= ======
</Table>
In 2000 a same day settlement service called "Euro D0" for euro-currency
transactions was implemented. This new service results in settlement receivables
and payables arising from the two-day delay in the settlement of issued and
acquired transactions between euro-currency members that settle on a same-day
basis and non-euro currency members that settle two days later. See Note 12 for
Euro D0 settlement payables.
The income taxes receivable at December 31, 2001 includes a receivable
amounting to E16,878 related to a disputed tax assessment from the Belgian tax
authorities which is further described in Note 16.
9. INVESTMENTS AND DEPOSITS
Europay had short-term deposits at December 31, 2001 of E6,500 and E2,500
at 3% and 3.4%, respectively, that matured on January 2, 2002.
F-41
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
At December 31, 2001 Europay had signed forward exchange contracts to hedge
projected U.S. dollar denominated expenses in 2002. Premiums and discounts on
the forward exchange contracts are amortized pro rata from the contract date to
the maturity date.
The E1,852 investment at December 31, 2000 consists of foreign currency
option premiums paid to cover future cash flows denominated in U.S. dollars.
Option premium payments are recorded as short-term investments whereas option
premiums received are recorded as deferred income.
At December 31, 2000 Europay made a loss provision for E583 on a written
option for the difference between the strike price of the option and the closing
U.S. dollar exchange rate. This loss provision is included in provisions for
liabilities and charges in the Consolidated Balance Sheet at December 31, 2000
and in net other financial income/(expense) in the Consolidated Statement of
Income for the year then ended. The reversal of this provision upon maturity of
the option in January 2001 is included in net other financial income/(expense)
in the Consolidated Statement of Income for the year December 31, 2001.
In January 1999 Europay bought a 12-month forward exchange contract for the
purchase of U.S. dollars, which matured in December 1999. A gain of E5,509
realized on this contract is included in net other financial income/(expense) in
the Consolidated Statement of Income for the year ended December 31, 1999.
The notional and estimated fair values of the outstanding derivative
contracts at December 31, 2001 and 2000 are as follows:
<Table>
<Caption>
AT DECEMBER 31, 2001 AT DECEMBER 31, 2000
---------------------- ----------------------
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE
-------- ---------- -------- ----------
Options:
Written put U.S. dollar................. -- -- 53,333 2,271
Written call U.S. dollar................ -- -- 18,824 33
Purchased call U.S. dollar.............. -- -- 44,735 359
Forwards:
Buy U.S. dollar......................... 118,122 4,935 -- --
</Table>
10. CASH AT BANK AND IN HAND AND BANK OVERDRAFTS
Cash at bank and in hand consists of the following:
<Table>
<Caption>
AT DECEMBER 31,
-----------------
2001 2000
------ -------
Cash........................................................ 28,341 73,234
Member security deposits.................................... 57,619 38,883
------ -------
Total cash at bank and on hand.................... 85,960 112,117
====== =======
</Table>
Cash includes E23,226 of cash on Europay's settlement bank accounts from
Euro D0 (described in Note 8 above) and other settlement service operations.
Europay requires and holds security deposits from certain members in order
to ensure proper settlement of their transactions. The deposits are in euros or
U.S. dollars and are placed on-call at market interest rates. At December 31,
2001 the applicable interest rates were 3.67% on euro deposits and 1.87% on U.S.
dollar deposits. These amounts are fully offset by corresponding liabilities
included in other amounts payable in the Consolidated Balance Sheets (see Note
12). The increase from 2000 to 2001 is primarily due to the addition of new
members in Eastern Europe.
F-42
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
The bank overdrafts and loans consist of the following:
<Table>
<Caption>
AT DECEMBER 31,
----------------
2001 2000
------ ------
Overdraft on corporate bank accounts........................ 36 2
Overdraft on settlement bank accounts....................... 63,582 37,787
------ ------
Total bank overdrafts............................. 63,618 37,789
====== ======
</Table>
The overdraft on settlement bank accounts is due to Euro D0 and other
settlement service operations. Overdrafts on corporate bank accounts are subject
to an interest rate of the Euro OverNight Index Average (Eonia) + 0.5% p.a.
Europay had two credit lines for a total of E65,000 available at December
31, 2001.
a) A credit line for operational funding requirements amounting to E35,000
with the following interest rate conditions, which are based on the Euro
Interbank Offered Rate (Euribor):
<Table>
Straight loans for periods up to 6 months: Euribor + 0.0625% p.a.
Straight loans for periods from 6 to 12 months: Euribor + 0.125%
</Table>
b) A credit line amounting to E30,000 to provide fixed term financing to
fund Euro D0 settlement service operations. Interest rate conditions are agreed
with the bank based on the most favorable market conditions at the time the
credit line is utilized.
Europay had no borrowings on these credit lines at December 31, 2001 or
December 31, 2000.
11. MINORITY INTEREST
MasterCard has a 15% shareholding in European Payment Systems Services
("EPSS"), Europay's transaction processing subsidiary, for which a minority
interest in Europay is determined as follows:
<Table>
<Caption>
AT DECEMBER 31,
----------------
2001 2000
------ ------
15% interest in the capital of EPSS......................... 1,562 1,562
Minority share in the profits of EPSS
Accumulated results....................................... 1,057 804
Result for the year....................................... 441 253
----- -----
Total minority interest..................................... 3,060 2,619
===== =====
</Table>
12. OTHER AMOUNTS PAYABLE
Other amounts payable consists of the following.
<Table>
<Caption>
AT DECEMBER 31,
----------------
2001 2000
------ ------
Settlement accounts payable, see note 8..................... 24,434 47,577
Liability for member security deposits, see note 10......... 57,619 38,883
Loans from Members.......................................... -- 2,533
Other....................................................... 865 756
------ ------
Total other amounts payable....................... 82,918 89,749
====== ======
</Table>
F-43
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
13. LONG TERM LIABILITIES
The balance of E506 at December 31, 2001 represents an invoice for a
sponsorship campaign that is payable in 2003, and the balance of E244 at
December 31, 2000 represents an invoice for a sponsorship campaign that is
payable in 2002.
14. COMMITMENTS AND CONTINGENCIES
In addition to the future lease payments summarized in Note 5, Europay has
entered into sponsorship and marketing contractual obligations, which are
estimated to be payable in the following years:
<Table>
<Caption>
YEAR
- ----
2002........................................................ 25,342
2003........................................................ 12,056
2004........................................................ 1,273
2005........................................................ 123
2006 & after................................................ 123
------
Total............................................. 38,917
======
</Table>
Europay received a claim from a member alleging that an error in the
technical set up of this member caused the member to incur a loss in revenues
amounting to approximately E1,500. Based on the facts and circumstances of this
matter Europay has established a provision for the potential settlement of the
claim of E739, which is included in suppliers in the Consolidated Balance Sheet
at December 31, 2001 and in other operating expenses in the Consolidated
Statement of Income for the year then ended.
15. AVERAGE NUMBER OF PERSONS EMPLOYED AND PERSONNEL CHARGES
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
------ ----------- -----------
(UNAUDITED)
PERSONNEL BY CATEGORY
Employees:
Based in Belgium................................. 542 560 526
Based outside of Belgium......................... 88 87 102
------ ------ ------
Total employees.................................... 630 647 628
Management personnel............................... 8 8 8
------ ------ ------
Average number of persons employed............... 638 655 636
====== ====== ======
REMUNERATION, SOCIAL SECURITY AND PENSIONS......... 63,991 58,902 50,741
====== ====== ======
</Table>
Management personnel consist of the directors of Europay and all other
staff are included in the employees category.
In 2000 Europay provided E1,479 for obligations arising from severance
agreements with employees, of which E127 is included in operating expenses and
E1,353 is included in extraordinary income/(charges) in the Consolidated
Statement of Income for the year ended December 31, 2000. The liability for
these obligations is included as part of the provisions for liabilities and
charges in the Consolidated Balance Sheet at December 31, 2000. These
obligations were settled in 2001 resulting in a use of provisions for
liabilities and charges amounting to E1,353 and a charge to operating expenses
for the same amount in the Consolidated Statement of Income for the year ended
December 31, 2001.
F-44
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
In 2001, Europay introduced a performance-based variable pay program for
all management and staff. Under this program a bonus is paid to an employee on
an annual basis based on the level of achievement of targeted corporate and
personal performance for the year. Europay monitors performance to corporate
targets on a regular basis and accrues for the cost of the variable pay program
when it is probable that the targets will be reached. Based on the 2001
corporate performance evaluation variable pay costs of E5,461 were accrued at
December 31, 2001.
In 2001, Europay established and began executing a comprehensive
restructuring plan in order to prepare the organization and operations for the
planned integration with MasterCard Incorporated described in Note 18 below. The
plan provides for the involuntary termination of staff functions on specified
dates over the term of the plan. Europay agreed an involuntary employee
severance package for the plan with its Works Council, and communicated the
package to all staff. In 2001, Europay notified all staff whose function will be
terminated prior to the end of 2002 in writing that their position will be
terminated as a result of the plan, including the expected termination date.
Based on the terms of the involuntary employee severance package and a
probability analysis of staff terminations defined in the plan to the end of
2002, Europay provided E2,742 for estimated involuntary employee severance
costs. In addition, Europay provided E275 for obligations arising from separate
severance agreements with employees. The liabilities for both severance
provisions are included as part of the provisions for liabilities and charges in
the Consolidated Balance Sheet at December 31, 2001 and the costs are included
in extraordinary income/(charges) in the Consolidated Statement of Income for
the year then ended.
16. TAXATION
The reconciliation of the 2001, 2000 and 1999 income tax charges compared
to the statutory rate of 40.17% is as follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
------ ----------- -----------
(UNAUDITED)
Consolidated profit for year before taxation....... 23,586 17,111 14,616
====== ====== ======
Taxes at statutory rate of 40.17%.................. 9,474 6,873 5,871
Adjusted for the tax effect of:
Disallowed expenses.............................. 925 656 735
Penalties for insufficient tax prepayments....... -- 1 115
Non-taxable reversal of investment loss
provision..................................... -- (74) --
Non-taxable (profit)/loss in consolidated
subsidiary.................................... (5) 5 --
Tax adjustments.................................. 340 (13) --
Tax surplus for prior years...................... -- (1) --
------ ------ ------
Tax charge for the year............................ 10,734 7,447 6,721
====== ====== ======
Effective tax rate................................. 45.5% 43.5% 46.0%
====== ====== ======
</Table>
Included in the consolidated tax charge for the years ended December 31,
2001 and 2000 is deferred tax amounting to E2,025 and E2,792, respectively,
related to the capitalization of internally developed software, net of related
amortization expense for the year.
In April 1999, the Belgian tax authorities initiated an investigation of
Europay's tax returns for 1997 and 1998. In June 2001, Europay received a notice
from the Belgian tax authorities challenging Europay's deduction of certain
card-based incentive program costs. Although Europay challenged these findings
in its August 2001 response to the notice, the Belgian tax authorities
reaffirmed their position in a November 2001 letter to Europay and, on December
12, 2001, Europay received a formal notice of assessment imposing an
F-45
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
additional tax liability of E16,878, including penalties and interest, in
connection with Europay's tax returns for 1997 and 1998. In accordance with
Belgian GAAP Europay recorded a tax liability for E16,878 upon receipt of the
assessment notice, which is included in taxes in the Consolidated Balance Sheet
at December 31, 2001.
Europay intends to continue to vigorously contest this matter and on
February 27, 2002 filed a protest with the regional tax director in accordance
with applicable administrative tax procedures. Therefore, in accordance with
Belgian GAAP a receivable of E16,878 has been recorded to reflect the amount in
dispute. This receivable is included in other amounts receivable in the
Consolidated Balance Sheet at December 31, 2001.
If Europay's deductions of such costs in 1999, 2000 and 2001 are similarly
challenged, this could result in a further additional tax liability of up to
approximately E16,900, including possible penalties. Interest will accrue on any
additional amounts to be paid at a per annum rate of 7% until settlement.
Interest on additional amounts will begin to accrue on July 1 of the second
fiscal year following the fiscal year in which the deductions to which the
additional amount relates was made.
In the event that Europay is unsuccessful in appealing the findings to the
Belgian tax authorities in their investigation, under certain circumstances
MasterCard International could, under its bylaws, levy an assessment on its
European members for the additional tax liability to the extent that it,
together with other losses and liabilities arising out of the representations
and warranties of Europay in the draft integration agreement, exceeds $7 million
in the aggregate.
17. ALLIANCE AGREEMENT WITH MASTERCARD INTERNATIONAL INCORPORATED
On November 14, 1996, Europay entered into an Alliance Agreement with
MasterCard pursuant to which Europay has been granted exclusive licensing rights
for the MasterCard brand in Europe and is responsible for the overall management
of the MasterCard brand within the European region. In accordance with this
agreement:
(a) Europay took over from MasterCard the billing of European members for
inter-regional credit program and service transactions as from January 1, 1998
and for inter-regional debit program and service transactions as from January 1,
1999. The Consolidated Statements of Income include revenues generated from
these transactions amounting to E126,878, E126,606 and E111,925 in 2001, 2000
and 1999, respectively.
(b) Europay is responsible for funding MasterCard's Europe region costs
plus an agreed profit margin. Total MasterCard Europe region charges of
E123,460, E103,868 and E83,172 in 2001, 2000 and 1999, respectively, are
included in services and other goods.
(c) European members were required to migrate to a new Eurocard/MasterCard
acceptance brand over the three-year period from 1997 to 1999, and MasterCard
compensated the European members for their brand migration efforts through a
Country Migration Fund over the same time period. Europay incurred E4,558 in
advertising and marketing costs related to European members' brand migration
activities in 1999. These costs are included in services and other goods in the
1999 Consolidated Statement of Income. Europay re-billed MasterCard and recorded
related revenues for the full amount of these costs.
The Consolidated Balance Sheets include receivables from MasterCard of E573
and E2,401 and payables to MasterCard of E4,131 and E11,955 at December 31, 2001
and 2000, respectively.
18. PROPOSED INTEGRATION WITH MASTERCARD INCORPORATED
Europay's shareholders are considering entering into an integration
agreement with MasterCard Incorporated and MasterCard International that
provides for MasterCard Incorporated to acquire all of Europay's capital stock
in exchange for class A and class B common stock of MasterCard Incorporated (the
"integration").
F-46
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
The integration is conditioned upon the merger of MasterCard International
with a subsidiary of MasterCard Incorporated and the exchange of existing
principal and association memberships in MasterCard International for new class
A membership interests in MasterCard International and shares of class A and
class B common stock of MasterCard Incorporated (the "conversion"), the approval
of Europay's shareholders, and other customary closing conditions. Upon
completion of the conversion and integration, the European principal members of
MasterCard International will own 33 1/3% of the outstanding capital stock of
MasterCard Incorporated and the non-European members will own 66 2/3%.
Following the completion of the conversion and integration, the Alliance
Agreement between Europay and MasterCard described in Note 17 above will be
terminated.
As of April 17, 2002 the conversion and integration have not occurred.
19. SUMMARY OF DIFFERENCES BETWEEN BELGIUM AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The accompanying consolidated financial statements have been prepared in
accordance with Belgian GAAP, which differ in certain material respects from
accounting principles generally accepted in the United States of America ("U.S.
GAAP"). These differences involve methods for measuring the amounts shown in the
financial statements, as well as additional disclosures required by U.S. GAAP.
U.S. GAAP RECONCILING ITEMS TO CONSOLIDATED NET INCOME AND TOTAL SHAREHOLDERS'
EQUITY.
The following is a summary of the material adjustments to profit on
ordinary activities after taxation and shareholders' equity that would have been
required in applying the significant differences between Belgian and U.S. GAAP.
F-47
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
RECONCILIATION OF CONSOLIDATED PROFIT AND LOSS ACCOUNTS
(IN E THOUSANDS EXCEPT EARNINGS PER SHARE)
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------
NOTES 2001 2000
----- ------ ------
Net Income Attributable to the Group as reported under
Belgian GAAP.............................................. 12,172 9,253
U.S. GAAP adjustments:
Pensions.................................................. (a) 395 (558)
Capitalization of borrowing costs, net.................... (c) (52) (35)
Depreciation of fixed assets.............................. (d) (672) 508
Internally developed software costs, net.................. (e) (391) (227)
Financial instruments..................................... (f) 2,445 (1,600)
Leases, net............................................... (g) 526 691
Capitalization of intangible assets....................... (h) 465 513
Financial assets.......................................... (i) -- 255
Licensing fee revenue recognition......................... (j) (818) (845)
------ ------
Net U.S. GAAP adjustments before deferred taxes............. 1,898 (1,298)
Deferred taxes: effects of differences in methodology and
adjustments............................................ (b) (596) 802
------ ------
Net income under U.S. GAAP before cumulative effect of
change in accounting principle............................ 13,474 8,757
Cumulative effect of changes in accounting principle, net of
tax
Financial instruments..................................... (f) (547) --
Licensing fee revenue recognition......................... (j) -- (3,100)
------ ------
Total cumulative effect of changes in accounting principle,
net of tax................................................ (547) (3,100)
------ ------
Net Income Attributable to the Group under U.S. GAAP........ 12,927 5,657
====== ======
Earnings per share in accordance with U.S. GAAP:............ (k)
Basic and diluted......................................... 129 57
Weighted average number of shares outstanding (in thousands
of shares):
Basic and diluted......................................... 100 100
Net income per U.S. GAAP.................................... 12,927 5,657
Other Comprehensive income, net of tax:
Financial instruments..................................... (f) 5,058 --
Translation adjustment.................................... 9 15
------ ------
Total other comprehensive income.......................... 5,067 15
------ ------
Comprehensive income under U.S. GAAP........................ (l) 17,994 5,672
====== ======
</Table>
F-48
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
RECONCILIATION OF CONSOLIDATED SHAREHOLDER'S EQUITY
<Table>
<Caption>
AT DECEMBER 31,
-------------------------
NOTES 2001 2000
----- ------ ------
Total shareholders' equity reported under Belgian GAAP...... 54,062 41,857
U.S. GAAP adjustments:
Pensions.................................................. (a) 692 297
Deferred taxes............................................ (b) (5,292) (4,696)
Capitalization of borrowing costs, net.................... (c) 2,362 2,414
Depreciation of fixed assets.............................. (d) 5,896 6,568
Internally developed software costs, net.................. (e) 565 956
Financial instruments..................................... (f) 5,903 (1,600)
Leases, net............................................... (g) 4,356 3,830
Capitalization of intangible assets....................... (h) (126) (567)
Financial assets.......................................... (i) (184) (184)
Licensing fee revenue recognition......................... (j) (1,663) (845)
------ ------
Net U.S. GAAP adjustments before cumulative effect of
changes in accounting principle........................... 12,509 6,173
------ ------
Shareholders' equity under U.S. GAAP before cumulative
effect of changes in accounting principle................. 66,571 48,030
Cumulative effect of changes in accounting principle, net of
tax
Financial instruments..................................... (f) (547) --
Licensing fee revenue recognition......................... (j) (3,100) (3,100)
Total cumulative effect of changes in accounting principle,
net of tax................................................
------ ------
Shareholders' equity under U.S. GAAP........................ 62,924 44,930
====== ======
</Table>
MOVEMENTS IN SHAREHOLDERS' EQUITY IN ACCORDANCE WITH U.S. GAAP
<Table>
<Caption>
AT DECEMBER 31,
----------------
2001 2000
------ ------
Balance, beginning of year.................................. 44,930 39,258
Net income.................................................. 12,927 5,657
Other comprehensive income:
Financial instruments..................................... (f) 5,058 --
Translation adjustment.................................... 9 15
------ ------
Total other comprehensive income.......................... 5,067 15
------ ------
Balance, end of year........................................ 62,924 44,930
====== ======
</Table>
A summary of the principal differences and additional disclosures
applicable to Europay are set out below:
(a) Pensions
Under Belgian GAAP, enterprises are required to make provision for their
obligations relating to retirement or survivors' pensions, early-retirement and
other similar pensions or allowances. However, enterprises are also bound by law
to fund their pension obligations with an independent pension fund or insurance
company. Consequently, the practice in Belgium is to expense as incurred the
premium charged by the insurance company or pension fund, on the assumption that
the amount of the premium constitutes an appropriate measure of the economic
cost of their pension obligations for the period concerned.
F-49
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
Under U.S. GAAP, the annual pension cost comprises the estimated cost of
benefits accruing in the period as determined in accordance with Statement of
Financial Accounting Standards (SFAS) No. 87, which requires readjustment of the
significant actuarial assumptions annually to reflect current market and
economic conditions. Under SFAS No. 87, a pension asset representing the excess
plan assets over benefit obligations is recognized in the balance sheet. The
pension benefit obligation is calculated by using a projected unit credit
method. Actuarial gains or losses within a 10% "corridor" are recognized. In
addition, in cases where the accumulated benefit obligation exceeds the
unamortized prior service cost, Europay has recorded the excess as a separate
component of shareholders' equity.
The net periodic pension cost under U.S. GAAP for Europay's defined benefit
pension plan is as follows:
COMPONENTS OF NET PERIOD BENEFIT COST
<Table>
<Caption>
YEARS ENDED
DECEMBER 31,
--------------
2001 2000
----- -----
Service cost................................................ 1,971 1,963
Interest cost............................................... 569 482
Expected return on plan assets.............................. (605) (551)
Amortization of transition obligation....................... 117 117
Amortization of net (gain)/loss............................. (143) (179)
Amortization of prior service cost.......................... 92 92
----- -----
Net periodic benefit cost................................... 2,001 1,924
===== =====
</Table>
Changes in the projected benefit obligation and plan assets during the year
were as follows:
CHANGES IN PROJECTED BENEFIT OBLIGATION
<Table>
<Caption>
YEARS ENDED
DECEMBER 31,
----------------
2001 2000
------ ------
Benefit obligation at beginning of year..................... 10,914 9,228
Service cost................................................ 1,971 1,963
Interest cost............................................... 569 482
Actuarial (gains)/losses.................................... 415 205
Benefits paid............................................... (943) (964)
------ ------
Benefit obligation at end of year........................... 12,926 10,914
====== ======
</Table>
CHANGES IN PLAN ASSETS
<Table>
<Caption>
YEARS ENDED
DECEMBER 31,
----------------
2001 2000
------ ------
Fair value of plan assets at beginning year................. 11,597 10,437
Actual return on plan assets................................ 527 758
Employer contributions...................................... 2,395 1,366
Benefits paid............................................... (943) (964)
------ ------
Fair value of plan assets, end of year...................... 13,576 11,597
====== ======
</Table>
F-50
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
The funded status under U.S. GAAP for Europay's defined benefit pension
plan is as follows:
FUNDED STATUS
<Table>
<Caption>
YEARS ENDED
DECEMBER 31,
------------------
2001 2000
------- -------
Fair value of plan assets................................... 13,576 11,597
Projected benefit obligation................................ (12,926) (10,914)
------- -------
Funded status............................................... 650 683
Unrecognized net actuarial (gain) loss...................... (1,704) (2,342)
Unrecognized prior service cost............................. 418 510
Unrecognized transition amount.............................. 1,328 1,446
------- -------
Prepaid (accrued) benefit cost.............................. 692 297
======= =======
</Table>
The weighted-average assumptions used to determine pension cost for
Europay's defined benefit pension plan were as follows:
<Table>
<Caption>
YEARS ENDED
DECEMBER 31,
-------------
2001 2000
---- ----
Discount rate............................................... 5.25% 5.50%
Expected rate of return on plan assets: on financing
funds..................................................... 5.25% 5.50%
Expected rate of return on plan assets: on mathematical
reserves.................................................. 4.75% 4.75%
Expected rate of compensation increase...................... 4.25% 4.50%
==== ====
</Table>
(b) Deferred Tax
Under Belgian GAAP, deferred tax liabilities on consolidation entries
should be recorded when it is probable that a tax charge will effectively be
incurred in the foreseeable future.
Under U.S. GAAP, deferred tax is provided for on a full liability basis.
Under the full liability method, deferred tax assets or liabilities are
recognized for differences between the financial and tax basis of assets and
liabilities and for tax loss carry forwards at the statutory rate at each
reporting date. A valuation allowance is established when it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
(c) Capitalization of Borrowing Costs
Under Belgian GAAP, an entity may choose between capitalizing or not
capitalizing interest on specific borrowings to finance the construction of
individual qualifying assets. Europay does not capitalize interest cost as part
of the historical cost of its qualifying construction projects.
Under U.S. GAAP, interest recognized on borrowings and other obligations
must be capitalized for assets that are produced under a discrete project and
require a substantial period of time to get ready for their intended use or
sale. The amount of interest eligible for capitalization is determined as either
the actual cost incurred on a specific borrowing or the weighted average of the
rates applicable for all the general borrowings outstanding during the period.
The total amount of interest cost capitalized in each period is limited to the
total amount of interest cost incurred in that period.
The adjustment to net income under U.S. GAAP reflects the decrease in
interest expense for the period as well as the increase in depreciation expense
on the constructed assets. The adjustment to shareholders' equity under U.S.
GAAP reflects the amount of interest capitalized on constructed assets, net of
depreciation.
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EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
(d) Depreciation of Fixed Assets
Under Belgian GAAP, Europay depreciates its fixed assets for a full year in
the year of acquisition under the straight-line basis. Further, Europay may
depreciate an asset during the period of its construction or development
regardless of whether the asset is substantially ready for its intended use.
Prior to 1999 Europay depreciated assets during the period of construction
regardless of when the asset was substantially ready for its intended use.
Under U.S. GAAP, fixed assets are depreciated from the date of acquisition
on a straight-line basis. Constructed assets are depreciated on a straight-line
basis when substantially complete. For purposes of the U.S. GAAP reconciliation,
Europay has applied the half-year convention method whereby a half-year of
depreciation is taken in the year of acquisition and in the year of disposal.
Additionally, a constructed asset is depreciated when it is substantially ready
for its intended use.
(e) Internally Developed Software Costs
Under Belgian GAAP, costs relating to internally developed software are
capitalized when it can be demonstrated that:
- The product or process is useful;
- The product or process is clearly defined;
- Costs related to the project are clearly identified,
- The project is technically feasible; and
- Financial resources are available to complete the project.
Under U.S. GAAP, certain costs to develop or obtain internal-use software
should be capitalized when the preliminary project stage is completed,
management implicitly or explicitly authorizes and commits to funding a computer
software project and it is probable that the project will be completed. Costs of
computer software developed or obtained for internal use that can be capitalized
include external direct material and service costs, payroll and payroll-related
costs for employees who devote time to the internal-use computer software
project and interest costs incurred while developing internal-use computer
software. Capitalized costs are amortized under a straight-line basis over the
expected useful life of the software.
(f) Financial Instruments
Under Belgian GAAP, premiums paid and received on option contracts intended
to reduce (hedge) foreign exchange risk on future U.S. dollar payments are
deferred. Option contracts that do not qualify as risk reducing (non-hedge) are
accounted for using the lower of cost or market approach.
Under U.S. GAAP, gains and losses related to derivative instruments that
satisfy the criteria for hedge accounting are recognized in the same period as
gains and losses on the hedged item. Upon termination of the derivative, any
gains and losses are deferred and amortized to profit and loss over the
remaining life of the hedged item. Derivatives that do not qualify for hedge
accounting are recorded on the balance sheet at fair value with gains and losses
immediately included in earnings.
The adjustment to net income under U.S. GAAP reflects the fact that certain
contracts accounted for by Europay as hedges do not meet the criteria for hedge
accounting under U.S. GAAP. In addition, premiums paid for hedge contracts are
carried at cost by Europay, whereas they are amortized over the life of the
derivative contract under U.S. GAAP.
On January 1, 2001 Europay adopted hedge accounting under Statement of
Financial Accounting Standards (SFAS) No. 133. Under SFAS No. 133 Europay is
required to recognize all derivatives in the consolidated balance sheet by
measuring these derivatives at fair value. The recognition of the change in the
F-52
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
fair value of a derivative depends on a number of factors, including the
intended use of the derivative and the extent to which it is effective as part
of a hedge transaction.
Europay recorded a cumulative effect adjustment of E547 (loss) to net
income and shareholders' equity under U.S. GAAP for the year ended December 31,
2001 to recognize at fair value all derivative instruments that were designated
as cash flow hedging instruments upon adoption of SFAS 133.
As discussed in Note 9, Europay had entered into forward currency hedge
contracts at December 31, 2001. Under Belgian GAAP, premiums or discounts are
amortized over the life of the contract. Under U.S. GAAP, the effective portion
of the gain or loss of the derivative instrument is recorded as a component of
other comprehensive income whereas the non-effective portion of the gain or loss
is recognized currently in earnings. For the year ended December 31, 2001,
E5,058 has been recorded as other comprehensive income for the effective portion
of the contracts.
(g) Leases
Under Belgian GAAP, a capital lease is deemed to exist when the sum of the
minimum lease payments is equal to or greater than the lessor's investment in
the leased asset, including related interest and other transaction costs.
Under U.S. GAAP, a capital lease is deemed to exist when any of the
following criteria are met:
- The present value of the minimum lease payments is greater than or equal
to 90% of the fair value of the asset at the inception of the lease, or
- The length of the lease period is greater than or equal to 75% of the
asset's estimated useful economic life, or
- The transfer of ownership of the asset to the lessee by the end of the
lease term, or
- The existence of a bargain purchase option.
The adjustment to net income under U.S. GAAP reflects a decrease in rental
expense and an increase in depreciation expense related to the capitalized
leased assets. The adjustment to shareholders' equity under U.S. GAAP reflects
the capitalization of the net present value of the minimum lease payments using
the interest rate implicit in the lease.
During the third quarter of 2001, the Company revised its lease term for
all existing automobile contracts from 4 years to 3 1/2 years with its leasing
company. Under U.S. GAAP, this modification of the lease terms effectively
terminated the existing capital lease agreements. As such, any assets and
liabilities will need to be removed from the balance sheet and an appropriate
gain or loss will be charged to profit and loss. As a result of this change in
accounting estimate, capital lease assets under U.S. GAAP with a net book value
of E1,129 and a total capital lease obligation of E1,156 were removed from the
balance sheet and a gain of E27 was recorded in the third quarter of 2001. Going
forward, under the new lease term, the existing leases have been recorded as
operating leases.
(h) Capitalization of Intangible Assets
Europay recognized the initial contributions to a joint venture at fair
value of the assets contributed. As such, any contribution of "know-how" is
recognized at fair value by both Europay and the joint venture. Further, Europay
recognizes its proportionate share of expenses associated with the amortization
of "know-how" recorded by the joint venture. See Note 4 for additional
information.
Under U.S. GAAP, initial contributions to a joint venture should generally
be recorded at cost, i.e., the amount of cash contributed or net book value of
non-cash assets contributed.
F-53
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
(i) Financial Assets
Under Belgian GAAP, Europay recorded a loss in value of an investment
accounted for under the equity method. Losses must be subsequently reversed.
Dividends to be received from an equity investee are accrued as income when
declared. See Note 4 for additional information.
Under U.S. GAAP, a loss in value of an investment, accounted for under the
equity method, which is other than temporary should be recognized. Recognized
losses are not subsequently reversed based on subsequent events or economic
developments. Dividends from an investee accounted for under the equity method
are recognized when declared as a reduction in the carrying amount of the
investment. Europay's share of earnings or losses from equity investees is
recognized as an adjustment to the carrying amount of the investment.
(j) Licensing Fee Revenue Recognition
Under Belgian GAAP, revenue from licensing fees is recognized immediately
upon invoicing of customers.
Under U.S. GAAP, licensing fees are earned as services are delivered and
performed over the term of the arrangement or the expected period of performance
and generally should be deferred and recognized systematically over the periods
that the fees are earned.
The adjustment to net income and shareholders' equity under U.S. GAAP
reflects the deferral and recognition of licensing revenue over the life of the
licensing arrangement for the current year.
The cumulative effect adjustment to net income and shareholders' equity
under U.S. GAAP reflects the cumulative adjustment, net of tax effects, related
to the deferral and proportionate recognition of licensing revenue upon adoption
of SAB 101.
(k) Earnings Per Share
Belgian GAAP does not require the presentation of earnings per share (EPS).
Under U.S. GAAP, basic and diluted earnings per share must be disclosed for
companies that file public reports under U.S. federal securities laws. Basic EPS
is calculated as profit available to common shareholders, divided by the
weighted average number of shares in issue during the period. Shares issued as a
result of a bonus issue are treated as if in issue for the whole year. To
calculate diluted EPS, earnings are adjusted for the after-tax amount of
dividends and interest recognized in the period in respect of the dilutive
potential ordinary shares and for any other changes in income or expense that
would result from the conversion of the dilutive potential on ordinary shares
and for any other changes in income or expense that would result from the
conversion of the dilutive potential ordinary shares. The conversion is deemed
to have occurred at the beginning of the period or, if later, the date of the
issue of potential ordinary shares.
(l) Comprehensive Income
Belgian GAAP does not require the presentation of comprehensive income.
U.S. GAAP requires disclosure of the components of total comprehensive
income in the period in which they are recognized in the financial statements.
Comprehensive income is defined as the change in equity (net assets) of a
business enterprise arising from transactions and other events and circumstances
from non-owner sources. It includes all changes in shareholders' equity during
the reporting period except those resulting from investments by owners and
distributions to owners.
Revenue Recognition
Under Belgian GAAP, revenue earned and related cost of sales incurred while
acting as an agent may be presented on a gross basis in the statement of income.
F-54
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
Under U.S. GAAP, revenue and related cost of sales should be presented
gross if Europay acts as a principal in the transactions and has the risk and
rewards of ownership. Europay acts as an agent on behalf of MasterCard
International for the billing and collection of inter-regional transactions with
members. Europay does not bear the risk and rewards of ownership related to
these transactions and therefore revenue and related costs should be reported
net under U.S. GAAP. The impact would be a reduction in revenue of E126,878 and
E126,606, net of a reduction in MasterCard costs included in services and other
goods of E123,460 and E103,868 for the years ended December 31, 2001 and 2000,
respectively.
Extraordinary Items
Items classified as extraordinary under Belgian GAAP do not meet the
definition of "extraordinary" under U.S. GAAP and, accordingly, are classified
as operating expenses under U.S. GAAP.
Cash Flow Information
Under Belgian GAAP, a presentation of cash flows is considered voluntary.
The statement of cash flows presented in the financial statements has been
prepared in accordance with IAS 7. This presentation is acceptable under Belgian
GAAP.
Under U.S. GAAP a statement of cash flows is required to be present in
accordance with SFAS No. 95. Interest paid and received and dividends received
are shown as operating activity cash flows, while dividends paid are shown as
financing cash flows.
A summary of Europay's operating, investing and financing activities,
classified in accordance with U.S. GAAP is as follows:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
------------------
2001 2000
------- -------
Net cash provided by/(used in) operating activities......... (11,414) 65,234
Net cash used in investing activities....................... (40,195) (22,321)
Net cash provided by financing activities................... 25,452 35,960
------- -------
Net increase/(decrease) in cash and cash equivalents........ (26,157) 78,873
Cash and cash equivalents under U.S. GAAP, beginning of
year...................................................... 112,117 33,244
------- -------
Cash and cash equivalents under U.S. GAAP, end of year...... 85,960 112,117
======= =======
</Table>
Recently Issued Accounting Standards
of the United States
SFAS No. 141, "Business Combinations" ("SFAS 141"), and SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142") were issued in July 2001.
SFAS 141 and SFAS 142 will be required to be implemented for accounting periods
commencing as from July 1, 2001 and January 1, 2002, respectively. SFAS 141
requires that all business combinations be accounted for by the purchase method.
SFAS 142 addresses the accounting for acquired goodwill and other intangible
assets and contains certain transitional provisions, which may affect
classification of intangible assets, as well as the balance of goodwill. The
ongoing impact will be that goodwill will no longer be amortized, but instead
will be tested at least annually for impairment. The requirements of both
statements will be applied prospectively from the effective date. Europay has
assessed the impact of this new standard at January 1, 2002 and there is no
impact on its financial position and results of operations. SFAS 143, "Asset
Retirement Obligations", was issued in June 2001. This standard will be
effective for Europay's fiscal year beginning after June 15, 2002; however,
early adoption is permitted. The standard provides the accounting requirements
for retirement obligations associated with tangible long-lived assets and the
associated asset retirement cost. The standard requires that the obligation
F-55
EUROPAY INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN E THOUSANDS)
associated with the retirement of the tangible long-lived assets be capitalized
into the asset cost at the time of initial recognition. The liability is then
discounted to its fair value at the time of recognition using the guidance
provided by the standard. Europay is assessing the impact that this new standard
will have on its financial position and results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions of APB No. 30, "Reporting the Results of
Operations." This statement also amends Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. SFAS 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years. Europay is in
the process of determining the effects of this statement on its business.
F-56