MasterCard 2010 Annual Report Download

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Advantage
The MasterCard
MasterCard Annual Report 2010
Energized employees. Powerful insights. Leading innovations.
Delivering valuable payment solutions to people everywhere.

Table of contents

  • Page 1
    MasterCard Annual Report 2010 Energized employees. Powerful insights. Leading innovations. Delivering valuable payment solutions to people everywhere. The MasterCard Advantage

  • Page 2
    ...1, 2009, a new accounting standard was adopted related to EPS which required retrospective adjustment of EPS for the year ended December 31, 2008. (2) GDV generated by Maestro and Cirrus cards is not included. The data for GDV is provided by MasterCard customers and includes information with respect...

  • Page 3
    ..., highly skilled workforce. We offer stateof-the-art fraud monitoring. We combat payments fraud on many fronts, using industry leading technology such as MasterCard Expert Monitoring Solutions ® to deliver the most advanced fraud protection. We have a unified, global structure. We're able to...

  • Page 4
    ...DataCash Group and the prepaid program management business of Travelex. These strategic moves are positioning us to compete more aggressively in markets the world over - markets in which consumers, businesses and governments are coming to appreciate, more and more, the MasterCard advantage over cash...

  • Page 5
    ...Group. This strategic move extends our e-commerce merchant gateway capabilities from Asia and Australia to European countries and other markets worldwide. Another example is our agreement to purchase the prepaid program management business of Travelex. This transaction will enable MasterCard to play...

  • Page 6
    ...U.S., for example, we are working with policymakers, the financial services industry and community groups, seeking to address the harm the proposed regulations on debit card interchange fees will have on consumers, small businesses, community banks and credit unions. We'll continue to work with all...

  • Page 7
    ... In Singapore, the Post Office Savings Bank (POSB) Everyday MasterCard card features MasterCard PayPass and local contactless e-Purse Application functionality. This allows cardholders to use the card for everyday purchases as well as throughout the public transport network, which includes trains...

  • Page 8
    ... 16th Annual Global Mobile Awards held during Mobile World Congress 2011. Our jointly developed virtual card product received top honors as the Best Mobile Money Product or Solution. In addition, we also announced plans to launch our Open Application Programming Interface (API) from MasterCard Labs...

  • Page 9
    www.mastercard.com 7 help us develop innovative, market-specific payment solutions that deliver value to people everywhere. And, I know our employees are passionate about this. Of course, innovation also requires a tolerance for failure. That's why our leaders are focused on supporting a culture ...

  • Page 10
    Form 10-K

  • Page 11
    ...by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ' No Í The aggregate market value of the registrant's Class A common stock, par value $.0001 per share, held by non-affiliates (using the New York Stock Exchange closing price as of June 30, 2010, the...

  • Page 12
    .... Item 14. Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services 140...

  • Page 13
    ... products; competitive issues caused by government actions; regulation of the payments industry, consumer privacy, data use and/or security; appeals of currency conversion case settlements; future reserves, incurred liability, limitations on business and other penalties resulting from litigation...

  • Page 14
    ... credit, debit, prepaid and related payment programs for their customers (which include cardholders, businesses and government entities), manage a family of well-known, widely accepted payment card brands, including MasterCard®, Maestro® and Cirrus®, which we license to our customers for use in...

  • Page 15
    ... grow our offerings by extending our strength in our core businesses globally, including credit, debit, prepaid and processing payment transactions over the MasterCard Worldwide Network, diversify our business by seeking new areas of growth in markets around the world, expanding points of acceptance...

  • Page 16
    ... enter a PIN at a point-of-sale terminal for validation. Cash access cards are cards which permit cardholders to obtain cash principally at ATMs by entering a PIN. • • Regional and domestic/local PIN-based debit brands are the primary brands in many countries. In these markets, issuers have...

  • Page 17
    ...issuer pays the acquirer (the settlement amount). Interchange fees represent a sharing of a portion of payment system costs among the customers participating in our four-party payment card system. As such, interchange fees are a key factor in balancing the costs consumers pay and the costs merchants...

  • Page 18
    ... that require value-added processing, such as real-time access to transaction data for fraud scoring or rewards at the point-of-sale, or customization of transaction data for unique consumer-spending controls, use the network's centralized processing structure, ensuring advanced processing services...

  • Page 19
    .... The actual exchange of funds takes place between a clearing bank, designated by the customer and approved by MasterCard, and a settlement bank chosen by MasterCard. Customer settlement occurs in U.S. dollars or in a limited number of other currencies in accordance with our established rules...

  • Page 20
    ..., debit and prepaid programs, commercial payment solutions and emerging payments solutions. Our issuer customers determine the competitive features for the cards issued under our programs, including interest rates and fees. We determine other aspects of our card programs-such as required services...

  • Page 21
    ...debit business and adds value to the services that we provide to our customers. MasterCard Global ATM Solutions. Cirrus is our primary global cash access brand. Any debit, credit or ATM-accessible prepaid card bearing the MasterCard, Maestro or Cirrus logos had access to cash and account information...

  • Page 22
    ... Payment Solutions. MasterCard offers commercial payment solutions that help large corporations, mid-sized companies, small businesses and public sector organizations to streamline their payment processes, manage information and reduce administrative costs. In the year ended December 31, 2010...

  • Page 23
    ... payment cards that offer additional point-of-sale functionality and the ability to provide value-added services to the cardholder. We are also involved in a number of organizations that facilitate the development and use of smart cards globally. This includes a smart cards standards organization...

  • Page 24
    ... their payment card or other payment device, such as a phone, key fob, wristband or Mobile PayPass tag that adheres to the back of a mobile device on a PayPass-enabled terminal to complete a transaction. Our PayPass program primarily targets low value purchases and is designed to help our customers...

  • Page 25
    ... globally. Our corporate brand, MasterCard Worldwide®, is consistent with our role as franchisor, processor and advisor. Our marketing activities combine advertising, sponsorships, promotions, customer marketing, interactive media and public relations as part of an integrated program designed...

  • Page 26
    ... the use of cards carrying our brands. Our net revenues are classified into the following five categories: • Domestic assessments: Domestic assessments are fees charged to issuers and acquirers based primarily on the volume of activity on cards that carry our brands where the merchant country and...

  • Page 27
    ... information regarding the GDV for all MasterCard-branded cards (excluding Cirrus and Maestro) and for both MasterCard credit and charge card programs and MasterCard debit programs in the United States and in all of our other regions for the years ended December 31, 2010 and 2009. Growth rates...

  • Page 28
    ... access to the network and usage of our brands. Anti-money laundering due diligence reviews and customer risk management reviews are conducted on all new members prior to admission, as well as on existing members. All applicants and members must meet the requirements of MasterCard's anti-money...

  • Page 29
    ... our MasterCard Site Data Protection Service®, which assists customers and merchants in protecting commercial sites from hacker intrusions and subsequent account data compromises) by requiring proper adherence to the Payment Card Industry Data Security Standards (PCI DDS). Our customers are...

  • Page 30
    ... (principally cash and checks); card-based payment systems, including credit, charge, debit, prepaid, private-label and other types of general purpose and limited use cards; and electronic transactions such as wire transfers and Automated Clearing House payments. As a result of a global trend...

  • Page 31
    ... or programs. Some of our customers also do business with American Express or Discover in the United States, and a number of our large customers now issue American Express and/or Discoverbranded cards. We also compete for new business partners with whom we seek to work, such as merchants, government...

  • Page 32
    ...be used to buy and sell goods online, and services that support payments to and from deposit accounts or proprietary accounts for Internet, mobile commerce and other applications. A number of these new entrants rely principally on the Internet and potential wireless communication networks to support...

  • Page 33
    ... of payment cards; the success and scope of marketing and promotional campaigns; the quality, security and integrity of transaction processing; the relative value of services and products offered; new market entrants; and the ability to develop and implement competitive new card programs, systems...

  • Page 34
    ...and Regulatory Risks-Regulation in the areas of consumer privacy, data use and/ or security could decrease the number of payment cards issued and could increase our costs" in Part I, Item 1A. Anti-Money Laundering and Anti-Terrorism. MasterCard and other participants in the payment industry are also...

  • Page 35
    ... areas such as data integrity and data security. In recent years, the U.S. federal banking regulators have adopted a series of regulatory measures affecting credit card payment terms and requiring more conservative accounting, greater risk management and in some cases higher capital requirements...

  • Page 36
    ..., account management guidelines, privacy, disclosure rules, security and marketing that would impact our customers directly. These new requirements and developments may affect our customers' ability to extend credit through the use of payment cards, which could decrease our transaction volumes. In...

  • Page 37
    ...that debit interchange be set at zero for three years, merchant surcharging be permitted in Canada and "honor all cards" rules be modified. In response, the Canadian Department of Finance implemented a voluntary "Code of Conduct" on related issues for payment card industry participants in Canada, to...

  • Page 38
    ...new regulations in other jurisdictions or of other products" in this Part I, Item 1A. Additionally, merchants are seeking to reduce interchange fees through litigation. In the United States, merchants have filed approximately 50 class action or individual suits alleging that MasterCard's interchange...

  • Page 39
    ... to a government-administered program; and (3) general use prepaid cards not marketed or labeled as gift cards. Also, while the proposed regulations do not directly regulate network fees, they make clear that network fees cannot be used to circumvent the debit interchange fee restrictions. See "Risk...

  • Page 40
    ...interchange. Similarly, new laws and regulations in a country, state or region involving one product may cause lawmakers there to extend the regulations to another product. For example, regulations like those affecting debit payments could lead to regulations affecting credit and general use prepaid...

  • Page 41
    ...in the areas of consumer privacy, data use and/or security could decrease the number of payment cards issued and could increase our costs. We and our customers are also subject to regulations related to privacy and data protection and information security in the jurisdictions in which we do business...

  • Page 42
    ..., the settlement agreements will terminate. If that occurs, and we are unsuccessful in defending against these lawsuits or the state currency conversion cases, we may have to pay restitution to cardholders who make claims that they used their cards in another country, or may be required to modify...

  • Page 43
    ... global payments industry is highly competitive. Our payment programs compete against all forms of payment, including paper-based transactions (principally cash and checks), card-based systems, including credit, charge, debit, prepaid, private-label and other types of general purpose and limited use...

  • Page 44
    ...other payment-related services and from assessments on the dollar volume of activity on cards carrying our brands. In order to increase transaction volumes, enter new markets and expand our card base, we seek to enter into business agreements with customers through which we offer incentives, pricing...

  • Page 45
    ... impact on all participants in the global payments industry, including MasterCard. Some large merchants are supporting many of the legal, regulatory and legislative challenges to interchange fees that MasterCard is now defending, since interchange fees represent a significant component of the costs...

  • Page 46
    ... conducted using MasterCard, Maestro and Cirrus cards are authorized, cleared and settled by our customers or other processors without involving our central processing systems. Because we do not provide domestic processing services in these countries and do not, as described above, have direct...

  • Page 47
    ... all cross-border transactions using MasterCard, Maestro and Cirrus-branded cards and generate a significant amount of revenue from cross-border volume fees and transaction processing fees. Revenue from processing cross-border and currency conversion transactions for our customers fluctuates with 37

  • Page 48
    ...75 billion which could be used for general corporate purposes, including to provide liquidity in the event of one or more settlement failures by our customers. In the event that MasterCard International effects a payment on behalf of a failed member, MasterCard International may seek an assignment...

  • Page 49
    ... to claims against us. In recent years, there have been several high-profile account data compromise events involving merchants and third party payment processors that process, store or transmit payment card data, which affected millions of MasterCard, Visa, Discover and American Express cardholders...

  • Page 50
    ... of currencies) where the values of other currencies change relative to the U.S. dollar. Resulting exchange gains and losses are included in our net income. Our risk management activities provide protection with respect to adverse changes in the value of only a limited number of currencies and...

  • Page 51
    ... except in limited circumstances, no member or former member of MasterCard International, or any operator, member or licensee of any competing general purpose payment card system, or any affiliate of any such person, may beneficially own any share of Class A common stock or any other class or series...

  • Page 52
    ...our board of directors and will be limited by our ability to generate sufficient earnings and cash flows. MasterCard intends to pay cash dividends on a quarterly basis on our shares of Class A common stock and Class B common stock. Our board of directors may, in its discretion, decrease the level of...

  • Page 53
    ...of December 31, 2010, MasterCard and its subsidiaries owned or leased 104 commercial properties. We own our corporate headquarters, a 472,600 square foot building located in Purchase, New York. There is no outstanding debt on this building. Our principal technology and operations center is a 528,000...

  • Page 54
    ...day high and low sale prices for our Class A common stock for the four quarterly periods in each of 2010 and 2009, as reported by the New York Stock Exchange. At February 16, 2011, the Company had 46 stockholders of record for its Class A common stock. We believe that the number of beneficial owners...

  • Page 55
    ..., settlement guarantees, operating results, available cash and current and anticipated cash needs. Issuer Purchases of Equity Securities In September 2010, the Company's Board of Directors authorized a plan for the Company to repurchase up to $1 billion of its Class A common stock in open market...

  • Page 56
    ...thereto included in Part II, Item 8. 2010 Years Ended December 31, 2009 2008 2007 2006 (in millions, except per share data) Statement of Operations Data: Revenues, net ...Total operating expenses ...Operating income (loss) ...Net income (loss) attributable to MasterCard ...Basic earnings (loss) per...

  • Page 57
    ... and presented in accordance with accounting principles generally accepted in the United States ("GAAP"). Pursuant to the requirements of Regulation S-K, portions of this "Management's Discussion and Analysis of Financial Condition and Results of Operations" include a comparison of certain non...

  • Page 58
    ..., we generated cash flows from operations of $1.7 billion for the year ended December 31, 2010. Our net revenues increased 8.6% in 2010, primarily due to the increased dollar volume of activity on cards carrying our brands, pricing changes and increased transactions. The net foreign currency impact...

  • Page 59
    ... fees. The net foreign currency impact of changes in the U.S. dollar average exchange rates against the euro and the Brazilian real reduced expenses by approximately 1 percentage point in 2010. Operating expenses decreased 48.6% in 2009 compared to 2008, primarily due to lower litigation settlements...

  • Page 60
    ...offer end-to-end prepaid solutions encompassing branded switching, issuing, processing and program management services, initially focused on the travel sector. We expect to consummate the acquisition in the first half of 2011. Business Environment We process transactions from more than 210 countries...

  • Page 61
    ... continued growth of our business and to evaluate the evolution of the global payments industry. For example, in our Asia/Pacific and Latin American regions, we have now experienced several quarters of significant increases in dollar volume of activity on cards carrying our brands in those regions...

  • Page 62
    ... new accounting standard was adopted related to EPS which required retrospective adjustment of EPS for the year ended December 31, 2008. GDV generated by Maestro and Cirrus cards is not included. The data for GDV is provided by MasterCard customers and includes information with respect to MasterCard...

  • Page 63
    ... markets, process the majority of MasterCard-branded domestic transactions in the United States, United Kingdom, Canada and Brazil. Our pricing is complex and is dependent on the nature of the volumes, types of transactions and other products and services we offer to our customers. A combination...

  • Page 64
    ... of volume, and support our focus on developing merchant relationships and promoting acceptance at the point of sale. Cross-border volume fees: Cross-border volume fees are charged to issuers and acquirers based on the volume of activity on cards that carry our brands where the merchant country and...

  • Page 65
    ... lost cards and locating automated teller machines. Consulting and research fees are primarily generated by MasterCard Advisors, the Company's professional advisory services group. The Company's business agreements with certain customers and merchants may include consulting services as an incentive...

  • Page 66
    ...rebate if MasterCard was allowed to perform the currency conversion. Beginning in October 2010, if MasterCard performs the currency conversion, the cross border volume fee charged is lower and no rebate is provided. This prospective change has no impact to net revenues. Pricing changes increased net...

  • Page 67
    ... Proceedings) to the consolidated financial statements included in Part II, Item 8 for more information. • The net impact of foreign currency relating to the translation of cross-border volume fees from the euro and Brazilian real to U.S. dollars unfavorably impacted cross-border revenue growth...

  • Page 68
    ... pricing structure change in October 2010. The pricing actions in October 2009 contributed approximately 3 percentage points to the increase in rebates and incentives in 2009. There was a minimal net impact of foreign currency relating to the translation of rebates and incentives from the euro and...

  • Page 69
    ...For the Years Ended Dollar Increase December 31, (Decrease) 2010 2009 2008 2010 2009 (in millions, except percentages) Percent Increase (Decrease) 2010 2009 General and administrative ...Advertising and marketing ...Litigation settlements ...Depreciation and amortization ...Total operating expenses...

  • Page 70
    ... associated with the Litigation Settlements during 2008 and decreased usage of third-party consulting services. Telecommunications expense consists of expenses to support our global payments system infrastructure as well as our other telecommunication needs. These expenses vary with business volume...

  • Page 71
    ... introduce new service offerings and access new markets globally. Our advertising and marketing strategy is to increase global MasterCard brand awareness, preference and usage through integrated advertising, sponsorship, promotional, interactive media and public relations programs on a global scale...

  • Page 72
    ...2010 and prior years. Total liabilities for litigation settlements changed from December 31, 2008, as follows: (in millions) Balance as of December 31, 2008 ...Interest accretion on U.S. Merchant Lawsuit Settlement ...Interest accretion on American Express Settlement ...Payments on American Express...

  • Page 73
    ... termination of a customer business agreement that was recognized in 2008. See Note 26 (Other Income) to the consolidated financial statements included in Part II, Item 8 for additional discussion. • Income Taxes The effective income tax rates for the years ended December 31, 2010, 2009 and 2008...

  • Page 74
    ... continued investments in our business and to service our obligations related to litigation settlements. At December 31, 2010 and 2009, we had $3.9 billion and $2.9 billion, respectively, of cash and cash equivalents and current available-for-sale securities to use for our operations. Our equity was...

  • Page 75
    ... half of 2011. In September 2010, the Company's Board of Directors authorized a plan for the Company to repurchase up to $1 billion of its Class A common stock in open market transactions. The Company did not repurchase any shares under this plan during 2010. As of February 16, 2011, the Company...

  • Page 76
    ... net purchases of investment securities and expenditures for our global network. Net cash provided by investing activities in 2008 primarily related to net sales of investment securities, partially offset by expenditures for our payment card network and an acquisition of a business. The auction rate...

  • Page 77
    ... for future marketing, computer hardware maintenance, software licenses and other service agreements. Future cash payments that will become due to our customers under agreements which provide pricing rebates on our standard fees and other incentives in exchange for transaction volumes are not...

  • Page 78
    ... in the fourth quarter by increases in purchase volume related to the holiday shopping period, with corresponding higher rebates and incentives to our customers. Also, operating expenses have historically been higher in the fourth quarter due to additional advertising and promotions related to the...

  • Page 79
    ... consolidated financial statements in Part II, Item 8 of this Report, MasterCard does not believe that any legal or regulatory proceedings to which it is a party would have a material adverse impact on its business or prospects. Assumptions/Approach Used Our estimates of each customer's performance...

  • Page 80
    ... effective tax rate expansion and support of our could increase or decrease in that international operations. period. Asset Impairment Analyses Prepaid Customer and Merchant Incentives We prepay certain customer and merchant business incentives. In the event of customer or merchant business failure...

  • Page 81
    ..., as applicable, forecasting cash flows, selection of discount rates and selection of comparable companies. We used both internal and external data to make these judgments. If market conditions or business conditions change in the future, we may be exposed to impairment charges associated with...

  • Page 82
    ... disclosures to financial statements including, but not limited to, significant purchases and sales of financing receivables, aging information and credit quality indicators. The Company adopted this accounting standard upon its effective date, periods ending on or after December 15, 2010, and the...

  • Page 83
    ...to foreign exchange risk resulting from foreign exchange rate fluctuations. This risk is limited to the typical one business day timeframe between setting the foreign exchange rates and clearing the financial transactions and by confining the supported settlement currencies to the U.S. dollar or one...

  • Page 84
    ... - 180 $273 At December 31, 2010, we have a credit facility which provides liquidity for general corporate purposes, including providing liquidity in the event of one or more settlement failures by the Company's customers. This credit facility has variable rates, which are applied to the borrowing...

  • Page 85
    ... FINANCIAL STATEMENTS Page MasterCard Incorporated As of December 31, 2010 and 2009 and for the years ended December 31, 2010, 2009 and 2008 Management's Report on Internal Control Over Financial Reporting ...Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheet...

  • Page 86
    ... of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. As required by Section...

  • Page 87
    ...is to express opinions on these financial statements, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that...

  • Page 88
    MASTERCARD INCORPORATED CONSOLIDATED BALANCE SHEET December 31, December 31, 2010 2009 (in millions, except share data) ASSETS Cash and cash equivalents Investment securities available-for-sale, at fair value Investment securities held-to-maturity Accounts receivable Settlement due from customers ...

  • Page 89
    MASTERCARD INCORPORATED CONSOLIDATED STATEMENT OF OPERATIONS For the Years Ended December 31, 2010 2009 2008 (in millions, except per share data) Revenues, net Operating Expenses General and administrative Advertising and marketing Litigation settlements Depreciation and amortization Total ...

  • Page 90
    ... Settlement due to customers Accrued expenses Net change in other assets and liabilities Net cash provided by operating activities Investing Activities Acquisition of business, net of cash acquired Purchases of property, plant and equipment Capitalized software Purchases of investment securities...

  • Page 91
    ... (169) Cash dividends declared on Class A and Class B common stock, $0.60 per share (79) Share based payments 61 Stock units withheld for taxes (67) Tax benefit for share based compensation 48 Purchases of treasury stock (649) Conversion of Class B to Class A common stock - Exercise of stock options...

  • Page 92
    ... INCOME (LOSS) For the Years Ended December 31, 2010 2009 2008 (in millions) Net Income (Loss) Other comprehensive income (loss): Foreign currency translation adjustments Defined benefit pension and postretirement plans Income tax effect Investment securities available-for-sale Income tax effect...

  • Page 93
    ... Europe") (together, "MasterCard" or the "Company"), provide payment solutions, including transaction processing and related services to customers principally in support of their credit, deposit access (debit), prepaid, electronic cash and Automated Teller Machine ("ATM") payment card programs...

  • Page 94
    ... become standard product offerings in certain card categories. Approximately $83 million of these expenses were reclassified for the year ended December 31, 2008 to conform to the 2009 presentation. Use of estimates-The preparation of financial statements in conformity with GAAP requires management...

  • Page 95
    ...statements of operations. Settlement due from/due to customers-The Company operates systems for clearing and settling payment transactions among MasterCard International members. Net settlements are generally cleared daily among members through settlement cash accounts by wire transfer or other bank...

  • Page 96
    ... estimated useful lives, which range from 1 to 10 years, under the straight-line method. For capitalized software, MasterCard capitalizes average internal costs incurred for payroll and payroll related expenses by department for the employees who directly devote time to the design, development and...

  • Page 97
    ... settlement. MasterCard International's rules generally guarantee the payment of certain MasterCard, Cirrus and Maestro-branded transactions between its principal members. The term and amount of the guarantee are unlimited. Settlement exposure under the guarantee is short term and typically limited...

  • Page 98
    ... generally based upon transactional information accumulated by our systems or reported by our customers. The Company's revenues are based on the volume of activity on cards that carry the Company's brands, the number of transactions processed or the nature of other payment-related services. Volume...

  • Page 99
    ... exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate for the period. Resulting translation adjustments are reported as a component of other comprehensive income (loss). Earnings (loss) per share-A new accounting standard...

  • Page 100
    ... disclosures to financial statements including, but not limited to, significant purchases and sales of financing receivables, aging information and credit quality indicators. The Company adopted this accounting standard upon its effective date, periods ending on or after December 15, 2010, and the...

  • Page 101
    ... its global presence in the internet gateway business. MasterCard had exposure to foreign exchange rate fluctuations related to the DataCash acquisition price. As a result, the Company purchased foreign currency option contracts to limit the risk. See Note 24 (Foreign Exchange Risk Management) for...

  • Page 102
    ... to this accounting standard. The components of basic and diluted EPS for common shares under the two-class method for each of the years ended December 31 were as follows: 2010 2009 2008 (in millions, except per share data) Numerator: Net income (loss) attributable to MasterCard Less: Net income...

  • Page 103
    ...the years ended December 31: 2010 2009 2008 (in millions) Cash paid for income taxes Cash paid for interest Cash paid for legal settlements (Notes 20 and 22) Non-cash investing and financing activities: Dividend declared but not yet paid Municipal bonds cancelled Revenue bonds received Building and...

  • Page 104
    ... follows: December 31, 2010 Significant Other Significant Observable Unobservable Inputs Inputs (Level 2) (Level 3) (in millions) Quoted Prices in Active Markets (Level 1) Fair Value Municipal bonds1 Taxable short-term bond funds Auction rate securities Foreign currency derivative contracts Total...

  • Page 105
    ..., restricted security deposits held for customers, prepaid expenses, accounts payable, settlement due to customers and accrued expenses. Investment Securities Held-to-Maturity The Company utilizes quoted prices for identical or similar securities from active markets to estimate the fair value of its...

  • Page 106
    ... of future business conditions. The Company uses a weighted income and market approach for estimating the fair values of its reporting units. As the assumptions employed to measure these assets on a nonrecurring basis are based on management's judgment using internal and external data, these fair...

  • Page 107
    ... reset date until the auction succeeds, the issuer redeems the securities or they mature. During 2008, ARS were reclassified as Level 3 from Level 2. As of December 31, 2010, the ARS market remained illiquid, but issuer call and redemption activity in the ARS student loan sector has occurred...

  • Page 108
    ...100 basis points in the discount rate used in the discounted cash flow analysis would have increased the impairment by $2 million and $23 million as of December 31, 2010 and 2009, respectively. Carrying and Fair Values-Held-to-Maturity Investment Securities: As of December 31, 2010, the Company also...

  • Page 109
    ... 58 $109 1 88 (4) (11) $183 Interest income is generated from cash and cash equivalents, available-for-sale investment securities and held-to-maturity investment securities. Dividend income primarily consists of dividends received on the Company's cost method investments. At December 31, 2008, the...

  • Page 110
    MASTERCARD INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-continued Note 7. Prepaid Expenses Prepaid expenses consisted of the following at December 31: 2010 2009 (in millions) Customer and merchant incentives Advertising Income taxes Data processing Other Total prepaid expenses Prepaid ...

  • Page 111
    ..., net $ 402 265 50 54 771 (332) $ 439 $ 392 255 52 54 753 (304) $ 449 Effective March 1, 2009, MasterCard executed a new ten-year lease between MasterCard, as tenant, and the Missouri Development Finance Board ("MDFB"), as landlord, for MasterCard's global technology and operations center located...

  • Page 112
    MASTERCARD INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-continued The Company had no accumulated impairment losses for goodwill at December 31, 2010 or 2009. Based on annual impairment testing, no reporting units are at significant risk of future material goodwill impairment. Note 11. ...

  • Page 113
    ... at December 31: 2010 2009 (in millions) Customer and merchant incentives Personnel costs Advertising Income taxes Other Total accrued expenses $ 666 307 162 79 101 $1,315 $ 598 367 131 32 97 $1,225 Note 13. Pension, Savings Plan and Other Benefits The Company maintains a non-contributory...

  • Page 114
    ... at end of year Change in plan assets Fair value of plan assets at beginning of year Actual return on plan assets Employer contribution Voluntary plan participants' contributions Benefits paid Fair value of plan assets at end of year Funded status Fair value of plan assets at end of year Projected...

  • Page 115
    ... value of plan assets $235 216 214 Components of net periodic pension costs recorded in general and administrative expenses were as follows for each of the years ended December 31: 2010 2009 2008 (in millions) Service cost Interest cost Expected return on plan assets Curtailment gain Settlement...

  • Page 116
    ...fixed income securities) are valued at unit values provided by investment managers, which are based on the fair value of the underlying investments utilizing public information, independent external valuation from third-party services or third-party advisors, and are therefore included in Level 2 of...

  • Page 117
    ... as of December 31, 2010 and 2009: Quoted Prices in Active Markets (Level 1) Significant Other Significant Observable Unobservable Inputs Inputs (Level 2) (Level 3) (in millions) Fair Value at December 31, 2010 Mutual funds: Money market Domestic small cap equity International equity Common and...

  • Page 118
    ... obligation at end of year Change in plan assets Employer contributions Plan participants' contributions Net benefits paid Fair value of plan assets at end of year Funded status Projected benefit obligation Funded status at end of year Amounts recognized on the consolidated balance sheet consist...

  • Page 119
    ...which were used to determine net periodic postretirement benefit cost for the years ended December 31 were: 2010 2009 2008 Discount rate Rate of compensation increase 5.75% 6.00% 6.25% 5.37% 5.37% 5.37% The assumed health care cost trend rates have a significant effect on the amounts reported for...

  • Page 120
    ... or more settlement failures by the Company's customers. The facility fee and borrowing cost under the Credit Facility are contingent upon the Company's credit rating. At December 31, 2010, the applicable facility fee was 20 basis points on the average daily commitment (whether or not utilized). In...

  • Page 121
    ..., its operations had no impact on net income. However, interest income and interest expense were increased by $7 million and $11 million in 2009 and 2008, respectively. The Company did not provide any financial or other support that it was not contractually required to provide during the years ended...

  • Page 122
    ... to the IPO, the Company's capital stock was privately held by certain of its customers that were principal members of MasterCard International. All stockholders held shares of Class A redeemable common stock. Immediately prior to the closing of the IPO, MasterCard Incorporated filed an amended and...

  • Page 123
    ... and subsequently sold or transferred to public investors. In February 2008, the Company's Board of Directors authorized the conversion and sale or transfer of up to 13.1 million shares of Class B common stock into Class A common stock in one or more conversion programs during 2008. In May 2008, the...

  • Page 124
    .... In February 2010, the Company's Board of Directors authorized programs to facilitate conversions of shares of Class B common stock (without limits as to the number of shares) on a one-for-one basis into shares of Class A common stock for subsequent sale or transfer to public investors, beginning...

  • Page 125
    ... In September 2010, the Company's Board of Directors authorized a plan for the Company to repurchase up to $1 billion of its Class A common stock in open market transactions. The Company did not repurchase any shares under this plan during 2010. As of February 16, 2011, the Company had completed...

  • Page 126
    ... group of companies that management believes is generally comparable to MasterCard. The expected dividend yields were based on the Company's expected annual dividend rate on the date of grant. The following table summarizes the Company's option activity for the year ended December 31, 2010: Weighted...

  • Page 127
    ... is the closing price on the New York Stock Exchange of the Company's Class A common stock on the date of grant. Given that the performance terms are subjective and not fixed on the date of grant, the performance units will be remeasured at the end of each reporting period, at fair value, until the...

  • Page 128
    ... NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-continued expense is calculated using the number of performance stock units expected to vest; multiplied by the period ending price of a share of MasterCard's Class A common stock on the New York Stock Exchange; less previously recorded compensation...

  • Page 129
    ...million for the years ended December 31, 2010, 2009 and 2008, respectively. In January 2003, MasterCard purchased a building in Kansas City, Missouri for approximately $24 million. The building is a co-processing data center which replaced a back-up data center in Lake Success, New York. During 2003...

  • Page 130
    ...value of $1.8 billion, at a 5.75% discount rate, or $1.6 billion for the year ended December 31, 2008. As of December 31, 2010, the Company has two quarterly payments for a total of $300 million remaining. In 2003, MasterCard entered into a settlement agreement (the "U.S. Merchant Lawsuit Settlement...

  • Page 131
    ... years. Total liabilities for litigation settlements changed from December 31, 2008, as follows: (in millions) Balance as of December 31, 2008 Interest accretion on U.S. Merchant Lawsuit Settlement Interest accretion on American Express Settlement Payments on American Express Settlement Payment...

  • Page 132
    ...10) - % - 34.1% $(129) 35.0% (2.9) (0.5) (0.7) 2.8 - 33.7% The effective income tax rates for the years ended December 31, 2010, 2009 and 2008 were 33.0%, 34.1% and 33.7%, respectively. The tax rate for 2010 was lower than the tax rate for 2009 due primarily to the impact of actual and anticipated...

  • Page 133
    ... authorities for years before 2002. It is the Company's policy to account for interest expense related to income tax matters as interest expense in its statement of operations, and to include penalties related to income tax matters in the income tax provision. For the years ended December 31, 2010...

  • Page 134
    ... on the Board of Directors of MasterCard or Visa while a portion of its card portfolio is issued under the brand of the other association-was anti-competitive and acted to limit innovation within the payment card industry. Second, the DOJ challenged MasterCard's Competitive Programs Policy ("CPP...

  • Page 135
    ... wrongfully imposed an asserted one percent currency conversion "fee" on every credit card transaction by U.S. MasterCard and Visa cardholders involving the purchase of goods or services in a foreign country, and that such alleged "fee" is unlawful. This action, titled Schwartz v. Visa Int'l Corp...

  • Page 136
    ... class actions are not covered by the terms of the settlement agreement in the U.S. merchant lawsuit. Interchange Litigation and Regulatory Proceedings Interchange fees represent a sharing of payment system costs among the financial institutions participating in a four-party payment card system...

  • Page 137
    ... with them. United States. In June 2005, a purported class action lawsuit was filed by a group of merchants in the U.S. District Court of Connecticut against MasterCard International Incorporated, Visa U.S.A., Inc., Visa International Service Association and a number of member banks alleging, among...

  • Page 138
    ...Visa International Service Association and a number of member banks; and (2) a MasterCard settlement and judgment sharing agreement with a number of member banks. The agreements provide for the apportionment of certain costs and liabilities which MasterCard, the Visa parties and the member banks may...

  • Page 139
    ... default cross-border interchange fees for MasterCard and Maestro branded consumer payment card transactions in the European Economic Area ("EEA") (the European Commission refers to these as "MasterCard's MIF"), but not to commercial card transactions (the European Commission stated publicly that it...

  • Page 140
    ... service fee ("MSF"), the fee paid by issuers to acquirers when a customer uses a MasterCardbranded card in the United Kingdom either at an ATM or over the counter to obtain a cash advance. Until November 2004, the interchange fees and MSF were established by MasterCard U.K. Members Forum Limited...

  • Page 141
    ... fees and announced in February 2007 that the investigation would also cover so-called "immediate debit" cards. To date, the OFT has issued a number of requests for information to MasterCard Europe and financial institutions that participate in MasterCard's payment system in the United Kingdom...

  • Page 142
    ... Bureau (the "CCB") filed an application with the Canadian Competition Tribunal to strike down MasterCard rules related to interchange fees, including the "honor all cards" and "no surcharge" rules. Also in December 2010, MasterCard learned that a purported class action lawsuit had been commenced...

  • Page 143
    ...' applications on the electronic "chip" in MasterCard cards. MasterCard's response to the Statement of Objection is due by March 11, 2011. Note 23. Settlement and Other Risk Management MasterCard International's rules generally guarantee the payment of certain MasterCard, Cirrus and Maestro branded...

  • Page 144
    MASTERCARD INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-continued Company has global risk management policies and procedures, which include risk standards, to provide a framework for managing the Company's settlement risk. Member-reported transaction data and the transaction clearing data...

  • Page 145
    ... may have to perform under its settlement and travelers cheque guarantees. General economic conditions and political conditions in countries in which MasterCard operates may also affect the Company's settlement risk. The Company's global risk management policies and procedures, which are revised and...

  • Page 146
    ... U.S. Dollar Functional Currency December 31, 2010 December 31, 2009 Estimated Estimated Notional Fair Value 1 Notional Fair Value 1 (in millions) Commitments to purchase foreign currency Commitments to sell foreign currency Balance Sheet Location: Accounts Receivable Other Current Liabilities Euro...

  • Page 147
    ... does not maintain or measure long-lived assets by geographic location. MasterCard did not have any one customer that generated greater than 10% of net revenues in 2010, 2009 or 2008. Note 26. Other Income During the year ended December 31, 2009, the Company recognized a gain of $14 million on...

  • Page 148
    ... card purchasing volume throughout the year, particularly in the fourth quarter during the holiday shopping period. Similarly, customer and merchant incentives, which are recorded as contra-revenue, and advertising and marketing expenses have historically increased in the fourth quarter, generally...

  • Page 149
    ... Officer, carried out an evaluation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Report. Any controls and procedures, no matter how well designed and operated...

  • Page 150
    ... transactions and director independence will appear in the Proxy Statement and is incorporated by reference into this Report. Item 14. Principal Accounting Fees and Services The information required by this Item with respect to auditors' services and fees will appear in the Proxy Statement and is...

  • Page 151
    ..., thereunto duly authorized. MASTERCARD INCORPORATED (Registrant) Date: February 24, 2011 By: /S/ AJAY BANGA Ajay Banga President and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by...

  • Page 152
    ... OLIVIÉ Marc Olivié Director Date: February 24, 2011 /S/ JOSÉ OCTAVIO REYES LAGUNES José Octavio Reyes Lagunes Director Date: February 24, 2011 /S/ MARK SCHWARTZ Mark Schwartz Director Date: February 24, 2011 /S/ JACKSON TAI Jackson Tai Director Date: February 24, 2011 /S/ EDWARD SUNING TIAN...

  • Page 153
    ... Company's Annual Report on Form 10-K filed February 18, 2010 (File No. 001-32877)). Employment Agreement between Robert W. Selander and MasterCard International dated December 31, 2008 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed January 2, 2009 (File...

  • Page 154
    ... Executive Annual Incentive Compensation Plan, as amended and restated effective September 21, 2010 (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed November 2, 2010 (File No. 001-32877)). MasterCard International Incorporated Restoration Program, as...

  • Page 155
    .... and Visa International Service Association (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed August 1, 2008. (File No. 001-32877)). Release and Settlement Agreement dated as of October 27, 2008 by and among MasterCard, Discover and Visa (incorporated...

  • Page 156
    ... Agreement Regarding Interchange Litigation Judgment Sharing and Settlement Sharing, dated as of February 7, 2011, by and among MasterCard Incorporated, MasterCard International Incorporated, Visa Inc., Visa U.S.A. Inc., Visa International Service Association and MasterCard's customer banks that are...

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  • Page 159
    ... Board of Directors MasterCard Executive Committee Ajay Banga President and Chief Executive Officer MasterCard Incorporated Ajay Banga President and Chief Executive Officer Silvio Barzi 1, 2, 3 Former Chairman UniCredit Family Financing Gary J. Flood President, Global Products and Solutions...

  • Page 160
    ... Regional Headquarters Purchase, New York, U.S.A. Shareholder Information Investor Relations 1.914.249.4565 [email protected] Shareholder Information Copies of the company's Annual Report on Form 10-K and Form 10-Q reports as filed with the U.S. Securities and Exchange Commission...

  • Page 161
    ... changes in general economic or industry conditions, or other circumstances such as those set forth in MasterCard Incorporated's filings with the Securities and Exchange Commission (SEC), including its Annual Report on Form 10-K for the year ended December 31, 2010 (which is included in this annual...

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