UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
combine the historical consolidated balance sheets and statements of income of
MasterCard International and Europay and give pro forma effect to the conversion
and integration.
We are providing the following information to aid you in your analysis of
the financial aspects of the conversion and integration. We derived this
information from the separate audited financial statements of MasterCard
International as of and for the year ended December 31, 2001 and the audited
financial statements of Europay as of and for the year ended December 31, 2001.
The historical financial information provided for Europay was prepared in
accordance with U.S. GAAP. Refer to Note 19 to the Consolidated Financial
Statements of Europay as of December 31, 2001 and December 31, 2000 and for the
years ended December 31, 2001, 2000 and 1999, for reconciliations in euros of
the historical Europay financial information prepared in accordance with Belgian
GAAP to the information prepared in accordance with U.S. GAAP. The information
is only a summary and you should read it in conjunction with our historical
financial statements and related notes contained elsewhere in this proxy
statement-prospectus.
MasterCard International's acquisition of Europay will be accounted for
using the purchase method of accounting based upon the estimated value of the
unconditional shares of MasterCard Incorporated being given in exchange for the
shares of Europay on the closing date. The pro forma allocation of the purchase
price to the tangible and identifiable intangible assets acquired and
liabilities assumed is based upon management's estimates, after consultation
with its advisors, of the respective fair values of Europay assets and
liabilities as of September 30, 2001. However, such allocation is preliminary
and is subject to the completion of the conversion and integration. Accordingly,
as discussed below, the final allocation of the purchase price could differ
materially from the pro forma amounts. Identifiable intangible assets other than
goodwill were estimated in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations." The purchase price in
excess of tangible and identifiable intangible assets acquired and liabilities
assumed has been allocated to goodwill. In accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets," goodwill and other intangible assets
resulting from the integration that have indefinite useful lives will not be
amortized.
At the end of the three-year transition period and on the second
anniversary thereof shares of MasterCard Incorporated will be reallocated among
member-stockholders. Certain member-stockholders of MasterCard Incorporated
whose initial share allocations decrease will return shares to MasterCard
Incorporated, which will deliver shares to member-stockholders whose initial
share allocations increase. MasterCard Incorporated will not receive any net
consideration for these reallocated shares, nor will there be any increase or
decrease in the total amount of shares outstanding.
The transaction provides that the number of shares allocated to former
shareholders of Europay and MEPUK will increase or decrease at the end of the
transition period as a result of the application of the global proxy formula for
the third year of the transition period. See "Share Allocation and the Global
Proxy." In accounting for the initial purchase price of Europay, MasterCard will
not consider shares above the minimum number of shares allocable to Europay and
MEPUK shareholders at the end of the transition period because only the minimum
number of shares is issued unconditionally at the closing to such shareholders.
Of the 23.76 million shares attributable to the exchange of Europay and MEPUK
shares, 6.15 million shares are conditional shares subject to reallocation at
the end of the transition period and allocable to Europay and MEPUK
shareholders. Europay and MEPUK shareholders are therefore receiving 17.61
million unconditional shares at closing. The value of each MasterCard
Incorporated share, immediately before the exchange, is estimated to be $15.21
based on an independent appraisal. Accordingly MasterCard's purchase price for
the shares of Europay is estimated to be $267.9 million.
Since former Europay and MEPUK shareholders would retain or receive shares
of MasterCard Incorporated at the end of the transition period without remitting
any additional consideration, any shares retained or received by them that are
above their minimum allocation at that time would constitute part of the
68
purchase price. Any such additional shares would be valued at that time based
upon the fair value of the stock of MasterCard Incorporated. Any such
reallocation of shares to former Europay and MEPUK shareholders will increase
the purchase price for Europay and, accordingly, the amount of goodwill and
additional paid-in-capital recorded. The unaudited pro forma combined financial
information does not give effect to any potential contingent consideration.
The unaudited pro forma condensed combined statement of income assumes that
the conversion and integration were effected on January 1, 2001. The unaudited
pro forma condensed combined balance sheet assumes that the conversion and
integration were effected on December 31, 2001.
The unaudited pro forma combined financial information is presented for
illustrative purposes only. No separate pro forma adjustment is required for the
integration of MEPUK as it will have no assets or liabilities other than shares
in Europay at the close of the transaction. You should not rely on the pro forma
combined financial information as being indicative of the historical results
that would have been achieved had the companies always been consolidated or the
future results that the combined company will achieve after the conversion and
integration.
69
MASTERCARD INCORPORATED
UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31, 2001
------------------------------------------------------------------
PRO FORMA
MASTERCARD PRO FORMA MASTERCARD
INTERNATIONAL EUROPAY(1)(2) ADJUSTMENTS(3) INCORPORATED
------------- ------------- -------------- ------------
REVENUE............................. $1,773,848 $252,324 $(2,514)(A) $2,018,477
(5,181)(F)
OPERATING EXPENSES
General & administrative............ 813,927 131,310 (2,514)(A) 935,731
(6,992)(F)
Advertising & market development.... 665,846 80,483 1,299(F) 747,628
Depreciation........................ 39,680 11,853 (2,234)(B) 49,299
Amortization........................ 32,693 5,021 8,906(C) 46,620
---------- -------- ------- ----------
Total Operating
Expenses................ 1,552,146 228,667 (1,535) 1,779,278
Other Income and Expense............ 11,237 (1,455) 400(E) 10,182
---------- -------- ------- ----------
INCOME BEFORE INCOME TAXES.......... 232,939 22,202 (5,760) 249,381
Income Tax.......................... 90,878 10,141 (2,669)(D) 98,867
Cumulative effect of change in 517(F)
accounting principle, net of
tax............................ -- (490) (490)
---------- -------- ------- ----------
NET INCOME.......................... $ 142,061 $ 11,571 $(3,608) $ 150,024
========== ======== ======= ==========
NUMBER OF SHARES.................... 100,000(G)
BASIC AND DILUTED EARNINGS PER
SHARE............................. N/A $ 1.50(H)
</Table>
See notes to unaudited pro forma combined income statements.
70
NOTES TO UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS (IN THOUSANDS)
(1)Euro amounts are translated into U.S. dollars based on a conversion rate of
1.1172 euros per U.S. dollar, the average exchange rate between U.S. dollars
and euros for the year ended December 31, 2001.
(2)A reconciliation of the Europay pro forma income statement for the year ended
December 31, 2001 prepared in accordance with Belgian GAAP to the Europay pro
forma income statement for the year ended December 31, 2001 prepared in
accordance with U.S. GAAP as presented is provided below.
<Table>
<Caption>
BELGIAN RECONCILING U.S.
GAAP ITEMS GAAP
-------- ----------- --------
REVENUE.......................................... $363,563 $(111,239)(a) $252,324
OPERATING EXPENSES
General & administrative......................... 249,430 (118,120)(b) 131,310
Advertising & market development................. 80,483 -- 80,483
Depreciation..................................... 7,252 4,601(c) 11,853
Amortization..................................... 4,671 350(d) 5,021
-------- --------- --------
Total Operating Expenses.................... 341,836 (113,169) 228,667
-------- --------- --------
Other Income and Expense......................... (1,224) (231)(e) (1,455)
-------- --------- --------
INCOME BEFORE INCOME TAXES....................... 20,503 1,699 22,202
Income Tax....................................... 9,608 533(f) 10,141
Cumulative effect of changes in accounting
principle, net of tax.......................... -- (490)(g) (490)
-------- --------- --------
NET INCOME....................................... $ 10,895 $ 676 $ 11,571
======== ========= ========
</Table>
Adjustments between Belgian GAAP and U.S. GAAP relate to the following:
(a) REVENUE
Reconciling items totaling $111,239 that decrease revenue recorded
under Belgian GAAP to conform with U.S. GAAP include: the elimination
of revenue relating to transactions under the alliance agreement
between MasterCard International and Europay, as Europay acts as
MasterCard's agent rather than a principle in these transactions, of
$110,507; and the deferral and amortization of licensing fee revenue
required under U.S. GAAP over the term of the agreement or expected
period of performance of $732.
(b) GENERAL & ADMINISTRATIVE EXPENSES
Reconciling items totaling $118,120 that decrease general &
administrative expense recorded under Belgian GAAP to conform with
U.S. GAAP include: the elimination of expense relating to transactions
under the alliance agreement between MasterCard International and
Europay of $110,507; adjustments required to record derivative
financial instruments at fair value, relating to qualifying hedges
under Belgian GAAP which are recorded under the accrual method, that
do not meet the hedge documentation or effectiveness criteria under
U.S. GAAP of $2,188; the reversal of rental expense due to the
capitalization of leases under U.S. GAAP of $4,619; a change in
accounting estimate under U.S. GAAP relating to the modification of
the lease terms for all existing automobile lease contracts which
effectively terminated the capital lease agreements resulting in a
gain of $27; decreased expense relating to the difference between cost
treatment required under U.S. GAAP and the fair value method used
under Belgian GAAP for "know-how" contributed as part of initial
investment equity of $416; decreased expense of $353 relating to the
change during 2001 in pension benefit cost recorded in accordance with
SFAS No. 87; differences in net book value of fixed assets arising
from differences in depreciation methods described below resulting in
an increased gain on the disposal of fixed assets of $10.
71
(c) DEPRECIATION
Reconciling items totaling $4,601 that increase depreciation expense
recorded under Belgian GAAP to conform with U.S. GAAP include:
depreciation of capitalized interest on borrowings and other
obligations for assets under U.S. GAAP of $87; differences in
depreciation methods including application of the half-year convention
method under U.S. GAAP resulting in increased depreciation expense of
$611; and increased depreciation expense of $3,903 related to lease
agreements that are recorded as capital leases under U.S. GAAP and as
operating leases under Belgian GAAP.
(d) AMORTIZATION
Reconciling items of $350 that increase amortization expense recorded
under Belgian GAAP to conform with U.S. GAAP consist of increased
amortization expense as a result of internally developed software costs
that are capitalized under U.S. GAAP.
(e) OTHER INCOME AND EXPENSE
Reconciling items totaling $231 that reduce other income and expense
under Belgian GAAP to conform with U.S. GAAP include: decreased
interest expense of $40 due to the capitalization of interest on
borrowings and other obligations for assets under U.S. GAAP; and
increased interest expense on leases required to be recorded as capital
leases under U.S. GAAP, net of gains recorded on the termination of
capital leases under U.S. GAAP due to the revision of lease terms, of
$271.
(f) INCOME TAX
Reconciling item of $533 that increases income tax under Belgian GAAP
to conform with U.S. GAAP relates to the tax impact of reconciling
items.
(g) CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLE, NET OF TAX
Reconciling item of $490 represents a cumulative effect adjustment to
net income to recognize at fair value all derivative instruments that
were designated as cash flow hedging instruments upon adoption of
Statement of Financial Accounting Standard ("SFAS") No. 133/138,
"Accounting for Derivative Instruments and Hedging Activities".
For a more detailed explanation of the nature of the Belgian GAAP to
U.S. GAAP reconciling items see Note 19 to the Consolidated Financial
Statements of Europay as of December 31, 2001 and December 31, 2000 and
for the years ended December 31, 2001, 2000 and 1999 included elsewhere
in this proxy statement-prospectus.
(3) The pro forma financial statements have been prepared to reflect the
conversion of MasterCard International from a member-based organization to a
stock company and the integration of Europay, MEPUK and MasterCard. No
separate pro forma adjustment is required for the integration of MEPUK as it
will have no assets or liabilities other than shares in Europay at the close
of the transaction. Pro forma adjustments are made to reflect:
(A) the elimination of inter-company revenues and expenses between
MasterCard and Europay.
(B) the change in annual depreciation resulting from adjustments made to
the estimated useful lives of property acquired (ranging from three to
thirty years).
(C) additional annual amortization of certain intangible assets resulting
from the acquisition consisting primarily of software and other
technology-related intangibles and trademarks, which are being
amortized over their estimated useful lives ranging from three to five
years. In accordance with SFAS No. 142, goodwill and other intangible
assets resulting from the integration that have indefinite useful lives
will not be amortized.
(D) the income tax effect of the pro forma adjustments. This is calculated
using a 40% tax rate.
(E) the elimination of the reduction on Europay's income statement of the
minority interest in EPSS held by MasterCard.
72
(F) the consolidation of Maestro and EMV Co., entities to be under the
control of the combined company. Previously, Maestro and EMV Co. were
accounted for under the equity method. Europay and MasterCard each
owned 50% and 33 1/3% of Maestro and EMV Co., respectively. As neither
MasterCard nor Europay exercised control over Maestro or EMV Co.,
these investments were not consolidated prior to the integration.
(G) the issuance of stock by MasterCard to its members.
(H) net income attributable to European and non-European
member-stockholders before and after integration with Europay (dollars
in millions):
<Table>
<Caption>
POST-
INTEGRATION(D)
PRE-INTEGRATION AT 26% CHANGE
--------------- --------------- -------------
NET INCOME FOR THE YEAR ENDED DECEMBER 31,
2001 ATTRIBUTABLE TO:
Non-European members-stockholders of
MasterCard(a)........................ $134 87% $111 74% $(23) (17)%
European members-stockholders(b)........ 20 13% 39 26% 19 95%
---- --- ---- --- ----
$154 100% $150 100% $ (4)(c)
==== === ==== === ====
</Table>
--------------------
(a) The net income (pre-integration) attributable to non-European members
of MasterCard is approximately 93% of MasterCard's net income and
approximately 15% of Europay's net income.
(b) The net income (pre-integration) attributable to European members of
MasterCard is approximately 7% of MasterCard's net income and
approximately 85% of Europay's net income.
(c) Decreased consolidated net income is primarily due to additional
amortization of intangible assets.
(d) Net income attributable to European and non-European
member-stockholders after the integration with Europay, giving effect
to possible increased share allocations to European member-stockholders
at the end of the transition period:
<Table>
<Caption>
POST- POST-
INTEGRATION CHANGE FROM INTEGRATION CHANGE FROM
AT 33 1/3% PRE-INTEGRATION AT 44% PRE-INTEGRATION
------------ ---------------- ------------ ----------------
NET INCOME FOR THE YEAR ENDED DECEMBER
31, 2001 ATTRIBUTABLE TO:
Non-European member-stockholders of
MasterCard(a)....................... $100 67% $(34) (25)% $ 84 56% $(50) (37)%
European member-stockholders(b)....... 50 33% 30 150% 66 44% 46 230%
---- --- ---- ---- --- ----
$150 100% $ (4)(c) $150 100% $ (4)(c)
==== === ==== ==== === ====
</Table>
73
MASTERCARD INCORPORATED
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF DECEMBER 31, 2001
(IN THOUSANDS)
<Table>
<Caption>
PRO FORMA
MASTERCARD PRO FORMA MASTERCARD
INTERNATIONAL EUROPAY(1)(2) ADJUSTMENTS(3) INCORPORATED
------------- ------------- -------------- ------------
ASSETS
Cash and cash equivalents.............. $ 176,143 $ 83,550 $ 2,176(D) $ 261,869
Investment securities.................. 494,243 -- -- 494,243
Property, plant & equipment............ 159,742 45,469 8,377(A) 213,929
341(D)
Other assets........................... 547,923 144,034 (16,063)(A) 646,745
(14,699)(B)
(4,407)(C)
(10,043)(D)
Intangible assets...................... 96,754 19,914 305,093(A) 421,761
---------- -------- --------- ----------
TOTAL ASSETS................. $1,474,805 $292,967 $ 270,775 $2,038,547
========== ======== ========= ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities.................... $ 638,471 $217,466 $ (14,699)(B) $ 871,220
(7,755)(D)
37,737(E)
Long-term liabilities.................. 229,673 17,445 41,161(E) 288,279
---------- -------- --------- ----------
TOTAL LIABILITIES............ 868,144 234,911 56,444 1,159,499
Minority interest...................... -- 2,691 230(D) 230
(2,691)(F)
STOCKHOLDERS' EQUITY
Common stock........................... -- -- 1,000(G) 1,000
Paid-in-capital........................ -- 17,832 250,024(A) 873,881
601,724(G)
4,301(I)
Retained earnings...................... 602,724 39,049 (602,724)(G) --
(39,049)(H)
Accumulated other comprehensive income
(loss)............................... 3,937 (1,516) 1,516(H) 3,937
---------- -------- --------- ----------
TOTAL STOCKHOLDERS' EQUITY... 606,661 55,365 216,792 878,818
---------- -------- --------- ----------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY....... $1,474,805 $292,967 $ 270,775 $2,038,547
========== ======== ========= ==========
</Table>
See notes to unaudited pro forma combined balance sheet.
74
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET (IN THOUSANDS EXCEPT PER
SHARE DATA)
(1)Euro amounts are translated into U.S. dollars based on a conversion rate of
1.1366 euros per U.S. dollar, the period end exchange rate between U.S.
dollars and euros as of December 31, 2001.
(2)A reconciliation of the Europay pro forma balance sheet as of December 31,
2001 prepared in accordance with Belgian GAAP to the Europay pro forma
balance sheet as of December 31, 2001 prepared in accordance with U.S. GAAP
as presented is provided below.
<Table>
<Caption>
BELGIAN RECONCILING U.S.
GAAP ITEMS GAAP
-------- ----------- --------
ASSETS
Cash and cash equivalents................. $ 83,550 -- $ 83,550
Investment securities..................... -- -- --
Property, plant & equipment............... 29,956 15,513(a) 45,469
Other assets.............................. 151,923 (7,889)(b) 144,034
Intangible assets......................... 19,417 497(c) 19,914
-------- -------- --------
TOTAL ASSETS......................... $284,846 $ 8,121 $292,967
======== ======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities....................... $229,782 $(12,316)(d) $217,466
Long-term liabilities..................... 4,807 12,638(e) 17,445
-------- -------- --------
TOTAL LIABILITIES.................... 234,589 322 234,911
-------- -------- --------
Minority interest......................... 2,691 -- 2,691
STOCKHOLDERS' EQUITY
Common stock.............................. -- -- --
Paid-in-capital........................... 17,832 -- 17,832
Retained earnings......................... 29,734 9,315 39,049
Accumulated other comprehensive income
(loss).................................. -- (1,516)(f) (1,516)
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY........... 47,566 7,799 55,365
-------- -------- --------
TOTAL LIABILITIES & STOCKHOLDERS'
EQUITY............................. $284,846 $ 8,121 $292,967
======== ======== ========
</Table>
Adjustments between Belgian GAAP and U.S. GAAP relate to the following:
(a) PROPERTY, PLANT AND EQUIPMENT
Reconciling items totaling $15,513 that increase property, plant and
equipment recorded under Belgian GAAP to conform with U.S. GAAP include:
the capitalization of borrowing costs of $2,078; differences in
depreciation methods including application of the half-year convention
method under U.S. GAAP totaling $5,187; and the capitalization of capital
leases of $8,248.
(b) OTHER ASSETS
Reconciling items totaling $7,889 that decrease other assets recorded under
Belgian GAAP to conform with U.S. GAAP include: an adjustment to net the
receivable recorded under Belgian GAAP for a disputed tax assessment
against the related liability of ($14,850); prepaid pension assets of $609;
deferred tax assets of $2,420; adjustments to record derivative financial
instruments at fair value $4,205; the difference between cost treatment
required under U.S. GAAP and fair value used under Belgian GAAP of
"know-how" contributed as initial investment equity of ($499); and $226
related to a loss in value on an investment accounted for under the equity
method that was deemed other than temporary.
75
(c) INTANGIBLE ASSETS
Reconciling items totaling $497 that increase intangible assets recorded
under Belgian GAAP to conform with U.S. GAAP are comprised of
capitalization of internally developed software costs of $497.
(d) CURRENT LIABILITIES
Reconciling items totaling $12,316 that decrease current liabilities
recorded under Belgian GAAP to conform with U.S. GAAP include: an
adjustment to net the liability recorded under Belgian GAAP for a disputed
tax assessment against the related receivable of ($14,850); adjustments to
record derivative financial instruments at fair value of ($184); net
present value of minimum lease obligations under capital leases of $1,754;
and deferred licensing fee revenue of $964.
(e) LONG-TERM LIABILITIES
Reconciling items totaling $12,638 that increase long-term liabilities
recorded under Belgian GAAP to U.S. GAAP include: deferred tax liabilities
of $4,920; net present value of minimum lease obligations under capital
leases of $2,660; and deferred licensing fee revenue of $5,058.
(f) OTHER COMPREHENSIVE INCOME (LOSS)
Reconciling items totaling ($1,516) include the effective portion of fair
value changes on derivative financial instruments designated as a cash flow
hedge of $4,450; and the impact of foreign currency translation of
($5,966).
For a more detailed explanation of the nature of the Belgian GAAP to U.S.
GAAP reconciling items see Note 19 to the Consolidated Financial Statements
of Europay as of December 31, 2001 and December 31, 2000 and for the years
ended December 31, 2001, 2000 and 1999 included elsewhere in this proxy
statement-prospectus.
(3) The pro forma financial statements have been prepared to reflect the
conversion of MasterCard from a member-based organization to a stock company
and the integration of Europay, MEPUK and MasterCard. No separate pro forma
adjustment is required for the integration of MEPUK as it will have no
assets or liabilities other than shares in Europay at the close of the
transaction. Pro forma adjustments are made to reflect:
(A) intangible assets arising out of the preliminary allocation of purchase
price as follows:
<Table>
Purchase price (see Note 3(J))....................................... $267,856
Allocated as follows:
Historical book value of 85% of Europay's assets and
liabilities............................................ $49,347
Step-up of the fair value of assets:
Software and other technology-related intangibles...... 29,878
Trademarks, tradenames and brand names................. 11,900
Property, plant and equipment.......................... 8,377
Deferred income taxes..................................... (16,063)
Liabilities and acquisition related costs (see Note
3(E)).................................................. (78,898)
Excess of purchase price over identifiable assets and liabilities
(goodwill and customer relationships).............................. $263,315
========
</Table>
Total intangible assets amount to $305,093 and consist of customer
relationships of $176,928; goodwill of $86,387; software and other
technology-related intangibles of $29,878; and trademarks, tradenames
and brand names of $11,900. See Note 3(C) to the Notes to the
Unaudited Pro Forma Combined Income Statements for amortization
period.
(B) the elimination of inter-company balances between MasterCard and
Europay.
76
(C) the elimination of MasterCard's historical investment of $4,407 for
12.25% of Europay and 15% of EPSS (representing 15% of Europay on a
consolidated basis).
(D) the consolidation of Maestro International and EMV Co., entities under
the control of the combined company.
(E) acquisition related costs including the costs of acquiring and
eliminating certain Europay brands and logos totaling $39,700;
professional fees relating to the transaction totaling $12,200;
severance costs for Europay employees totaling $10,000; costs of
eliminating redundant European computer systems totaling $6,400; $8,000
relating to certain other acquisition liabilities; and other
miscellaneous costs totaling approximately $2,600. See Note 3(A).
(F) the elimination of the reduction on Europay's balance sheet of the
minority interest in EPSS held by MasterCard.
(G) the conversion of MasterCard International from a member-based
institution to a stock corporation and the issuance of 100 million
shares of class A redeemable and class B convertible common stock of
MasterCard Incorporated at a par value of $.01 per share to the
MasterCard International principal members and the Europay and MEPUK
shareholders.
(H) the elimination of Europay's pre-acquisition retained earnings and
paid-in-capital.
(I) the equity pick-up resulting from the change of MasterCard
International's method of accounting for the Europay investment from
historical cost to consolidation. Amount was reclassified from
MasterCard International's retained earnings upon conversion.
(J) an independent appraisal valued the shares of MasterCard Incorporated
at $1.091 billion before the transaction. In the transaction, 66.67
million shares will be issued to non-European members and 33.33 million
shares will be issued to European members. As a result of negotiations
between the parties, approximately 27.96 million shares will be issued
to Europay and MEPUK stockholders and 5.37 million shares will be
issued to European members who are not Europay or MEPUK stockholders.
Europay and MEPUK stockholders will receive 4.2 million shares for the
conversion of their membership interests and the remaining 23.76
million shares are attributable to the exchange of their Europay and
MEPUK shares. The transaction provides that the number of shares
allocated to former shareholders of Europay and MEPUK will increase or
decrease at the end of the transition period as a result of the
application of the global proxy formula for the third year of the
transition period. See "Share Allocation and the Global Proxy." In
accounting for the initial purchase price of Europay, MasterCard will
not consider shares above the minimum number of shares allocable to
Europay and MEPUK shareholders at the end of the transition period
because only the minimum number of shares is issued unconditionally at
the closing to such shareholders. Of the 23.76 million shares
attributable to the exchange of Europay and MEPUK shares, 6.15 million
shares are conditional shares subject to reallocation at the end of the
transition period and allocable to Europay and MEPUK shareholders.
Europay and MEPUK shareholders are therefore receiving 17.61 million
unconditional shares at closing. Immediately before the integration,
the value of each MasterCard share will be approximately $15.21 based
upon an independent appraisal ($1.091 billion divided by 71.71 million
shares). Accordingly, MasterCard's purchase price for the shares of
Europay is estimated to be $267.9 million ($15.21 per share multiplied
by 17.61 million shares). Since former Europay and MEPUK shareholders
would retain or receive shares of MasterCard Incorporated at the end of
the transition period without remitting any additional consideration,
any shares retained or received by them that are above their minimum
allocation at that time would constitute part of the purchase price.
Any such additional shares would be valued at that time based upon the
fair value of the stock of MasterCard Incorporated. Any such
reallocation of shares to former Europay and MEPUK shareholders will
increase the purchase price for Europay and, accordingly, the amount of
goodwill and additional paid-in-capital recorded.
77