UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
(Mark
One)
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x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the quarterly period ended September 30, 2007
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or
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from ______________ to
______________
Commission
file number: 001-13178
MDC
Partners Inc.
(Exact
name of registrant as specified in its charter)
Canada
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98-0364441
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(State
or other jurisdiction of
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(IRS
Employer Identification No.)
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incorporation
or organization)
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45
Hazelton Avenue
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Toronto,
Ontario, Canada
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M5R
2E3
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(Address
of principal executive offices)
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(Zip
Code)
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(416)
960-9000
Registrant’s
telephone number, including area code:
950
Third Avenue, New York, New York 10022
(646)
429-1809
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of “accelerated
filer” and “large accelerated filer” in Rule 12(b)-2 of the Exchange Act
(check one)
Large
Accelerated Filer o
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Accelerated
Filer x
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Non-Accelerated
Filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes
o
No
x
APPLICABLE
ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING
FIVE
YEARS:
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Act subsequent
to the distributions of securities under a plan confirmed by a
court. Yes o
No
o
The
numbers of shares outstanding as of October 31, 2007
were: 26,202,811 Class A subordinate voting shares and 2,503
Class B multiple voting shares.
Website
Access to Company Reports
MDC
Partners Inc.’s internet website address is www.mdc-partners.com. The Company’s
annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K, and any amendments to those reports filed or
furnished pursuant to section 13(a) or 15(d) of the Exchange Act, will
be made available free of charge through the Company’s website as soon as
reasonably practical after those reports are electronically filed with, or
furnished to, the Securities and Exchange Commission.
MDC
PARTNERS INC.
QUARTERLY
REPORT ON FORM 10-Q
TABLE
OF CONTENTS
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Page
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PART I.
FINANCIAL INFORMATION
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Item
1.
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Financial
Statements
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2
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Condensed
Consolidated Statements of Operations (unaudited) for the Three and
Nine
Months Ended September 30, 2007 and 2006
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2
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Condensed
Consolidated Balance Sheets as of September 30, 2007 (unaudited)
and
December 31, 2006
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3
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Condensed
Consolidated Statements of Cash Flows (unaudited) for the Nine Months
Ended September 30, 2007 and 2006
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4
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Notes
to Unaudited Condensed Consolidated Financial Statements
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5
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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19
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Item
3.
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Quantitative
and Qualitative Disclosures about Market Risk
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39
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Item
4.
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Controls
and Procedures
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39
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PART II.
OTHER INFORMATION
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Item
1.
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Legal
Proceedings
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40
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Item
1A.
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Risk
Factors
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40
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Item
2.
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Unregistered
Sales of Equity and Use of Proceeds
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40
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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40
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Item
6.
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Exhibits
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41
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Signatures
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42
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Item
1. Financial Statements
MDC
PARTNERS INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(thousands
of United States dollars, except share and per share amounts)
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Three
Months Ended September 30,
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Nine
Months Ended September 30,
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2007
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2006
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2007
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2006
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Revenue:
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Services
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$
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140,050
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$
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101,122
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$
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394,838
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$
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299,333
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Operating
Expenses:
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Cost
of services sold (1)
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90,853
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57,150
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257,225
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177,790
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Office
and general expenses (2)
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36,633
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36,666
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106,777
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97,672
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Depreciation
and amortization
|
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10,496
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6,696
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22,741
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18,595
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Goodwill
impairment
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|
—
|
|
|
—
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|
4,475
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|
—
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137,982
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100,512
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391,218
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294,057
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Operating
profit
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2,068
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610
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3,620
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5,276
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Other
Income (Expense):
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Other
income (expense)
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(3,146
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)
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625
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(4,913
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)
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1,697
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Interest
expense
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|
(3,691
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)
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|
(3,351
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)
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(10,182
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)
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(8,244
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)
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Interest
income
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219
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|
171
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1,448
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|
429
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(6,618
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)
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(2,555
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)
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(13,647
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)
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(6,118
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)
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Loss
from continuing operations before income taxes, equity in affiliates
and
minority interests
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(4,550
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)
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(1,945
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)
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(10,027
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)
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(842
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)
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Income
tax recovery
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2,816
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685
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6,596
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1,751
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Income/(loss)
from continuing operations before equity in affiliates and minority
interests
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(1,734
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)
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(1,260
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)
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(3,431
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)
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909
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Equity
in earnings of non-consolidated affiliates
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124
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129
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134
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630
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Minority
interests in income of consolidated subsidiaries
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(5,163
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)
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(1,780
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)
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(14,873
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)
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(9,965
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)
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|
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|
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Loss
from continuing operations
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(6,773
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)
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(2,911
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)
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(18,170
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)
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(8,426
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)
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Loss
from discontinued operations
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—
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|
(9,998
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)
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—
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(20,120
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)
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Net
Loss
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$
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(6,773
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)
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$
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(12,909
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)
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$
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(18,170
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)
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$
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(28,546
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)
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Loss
Per Common Share:
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Basic:
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|
|
|
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Continuing
operations
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$
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(0.27
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)
|
$
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(0.12
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)
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$
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(0.74
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)
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$
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(0.35
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)
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Discontinued
operations
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—
|
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|
(0.42
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)
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—
|
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|
(0.84
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)
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Net
Loss
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|
$
|
(0.27
|
)
|
$
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(0.54
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)
|
$
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(0.74
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)
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$
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(1.19
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)
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Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
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Continuing
operations
|
|
$
|
(0.27
|
)
|
$
|
(0.12
|
)
|
$
|
(0.74
|
)
|
$
|
(0.35
|
)
|
Discontinued
operations
|
|
|
—
|
|
|
(0.42
|
)
|
|
—
|
|
|
(0.84
|
)
|
Net
loss
|
|
$
|
(0.27
|
)
|
$
|
(0.54
|
)
|
$
|
(0.74
|
)
|
$
|
(1.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Weighted
Average Number of Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
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Basic
|
|
|
24,957,704
|
|
|
23,911,327
|
|
|
24,664,159
|
|
|
23,849,571
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|
Diluted
|
|
|
24,957,704
|
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|
23,911,327
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|
24,664,159
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23,849,571
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|
(1)
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|
Includes
non cash stock-based compensation of $299 and $134 and $802 and $2,975,
respectively, in each of the three month periods ended September
30, 2007
and 2006, and in each of the nine month periods ended September 30,
2007
and 2006.
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|
(2)
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|
Includes
non cash stock-based compensation of $1,574 and $1,515 and $4,540
and
$4,006, respectively, in each of the three month periods ended September
30, 2007 and 2006, and in each of the nine month periods ended September
30, 2007 and 2006.
|
See
notes
to the unaudited condensed consolidated financial statements.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(thousands
of United States dollars)
|
|
September
30,
2007
|
|
December 31,
2006
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
7,089
|
|
$
|
6,591
|
|
Accounts
receivable, less allowance for doubtful accounts of $886 and
$1,633
|
|
|
148,124
|
|
|
125,744
|
|
Expenditures
billable to clients
|
|
|
14,167
|
|
|
28,077
|
|
Prepaid
expenses
|
|
|
7,609
|
|
|
4,816
|
|
Other
current assets
|
|
|
2,005
|
|
|
1,248
|
|
Total
Current Assets
|
|
|
178,994
|
|
|
166,476
|
|
Fixed
assets, at cost, less accumulated depreciation of $62,203 and
$52,359
|
|
|
46,428
|
|
|
44,425
|
|
Investment
in equity accounted for affiliates
|
|
|
394
|
|
|
2,058
|
|
Goodwill
|
|
|
219,709
|
|
|
203,693
|
|
Other
intangibles assets, net
|
|
|
40,132
|
|
|
48,933
|
|
Deferred
tax asset
|
|
|
14,493
|
|
|
13,332
|
|
Other
assets
|
|
|
16,938
|
|
|
14,584
|
|
Total
Assets
|
|
$
|
517,088
|
|
$
|
493,501
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Short-term
debt
|
|
$
|
—
|
|
$
|
4,910
|
|
Revolving
credit facility
|
|
|
—
|
|
|
45,000
|
|
Accounts
payable
|
|
|
68,172
|
|
|
90,588
|
|
Accruals
and other liabilities
|
|
|
68,229
|
|
|
75,315
|
|
Advance
billings
|
|
|
47,339
|
|
|
51,804
|
|
Current
portion of long-term debt
|
|
|
1,777
|
|
|
1,177
|
|
Deferred
acquisition consideration
|
|
|
320
|
|
|
2,721
|
|
Total
Current Liabilities
|
|
|
185,837
|
|
|
271,515
|
|
Revolving
credit facility
|
|
|
25,631
|
|
|
—
|
|
Long-term
debt
|
|
|
79,258
|
|
|
5,754
|
|
Convertible
notes
|
|
|
45,235
|
|
|
38,613
|
|
Other
liabilities
|
|
|
7,068
|
|
|
5,512
|
|
Deferred
tax liabilities
|
|
|
5,282
|
|
|
1,140
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
348,311
|
|
|
322,534
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
48,093
|
|
|
46,553
|
|
Commitments,
contingencies and guarantees (Note 12)
|
|
|
|
|
|
|
|
Shareholders’
Equity:
|
|
|
|
|
|
|
|
Preferred
shares, unlimited authorized, none issued
|
|
|
—
|
|
|
—
|
|
Class A
Shares, no par value, unlimited authorized, 25,236,366 and 23,923,522
shares issued in 2007 and 2006
|
|
|
194,454
|
|
|
184,698
|
|
Class B
Shares, no par value, unlimited authorized, 2,503 and 2,502 shares
issued
in 2007 and 2006, each convertible into one Class A
share
|
|
|
1
|
|
|
1
|
|
Additional
paid-in capital
|
|
|
25,792
|
|
|
26,216
|
|
Accumulated
deficit
|
|
|
(104,784
|
)
|
|
(86,614
|
)
|
Treasury
stock, at cost; 93,848 Class A shares at September 30,
2007
|
|
|
(765
|
)
|
|
—
|
|
Stock
subscription receivable
|
|
|
(251
|
)
|
|
(643
|
)
|
Accumulated
other comprehensive income
|
|
|
6,237
|
|
|
756
|
|
Total
Shareholders’ Equity
|
|
|
120,684
|
|
|
124,414
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
517,088
|
|
$
|
493,501
|
|
See
notes
to the unaudited condensed consolidated financial statements.
MDC
PARTNERS INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands
of United States dollars)
|
|
Nine Months Ended September
30,
|
|
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
loss
|
|
$
|
(18,170
|
)
|
$
|
(28,546
|
)
|
Loss
from discontinued operations
|
|
|
—
|
|
|
(20,120
|
)
|
Loss
from continuing operations
|
|
|
(18,170
|
)
|
|
(8,426
|
)
|
Adjustments
to reconcile net loss from continuing operations to cash provided
by (used
in) operating activities
|
|
|
|
|
|
|
|
Depreciation
|
|
|
11,793
|
|
|
9,712
|
|
Amortization
of intangibles
|
|
|
10,948
|
|
|
8,883
|
|
Non-cash
stock-based compensation
|
|
|
4,749
|
|
|
6,363
|
|
Goodwill
impairment
|
|
|
4,475
|
|
|
—
|
|
Foreign
exchange
|
|
|
8,214
|
|
|
592
|
|
Amortization
of deferred finance charges
|
|
|
1,980
|
|
|
1,598
|
|
Deferred
income taxes
|
|
|
(1,819
|
)
|
|
(3,342
|
)
|
Gain
on sale of assets
|
|
|
(2,173
|
)
|
|
—
|
|
Earnings
of non-consolidated affiliates
|
|
|
(134
|
)
|
|
(630
|
)
|
Minority
interest and other
|
|
|
1,433
|
|
|
(786
|
)
|
Changes
in non-cash working capital:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(20,241
|
)
|
|
(17,355
|
)
|
Expenditures
billable to clients
|
|
|
14,223
|
|
|
(23,334
|
)
|
Prepaid
expenses and other current assets
|
|
|
(2,604
|
)
|
|
(1,166
|
)
|
Accounts
payable, accruals and other liabilities
|
|
|
(30,547
|
)
|
|
14,423
|
|
Advance
billings
|
|
|
(5,930
|
)
|
|
17,059
|
|
Cash
flows provided by (used in) continuing operating
activities
|
|
|
(23,803
|
)
|
|
3,591
|
|
Discontinued
operations
|
|
|
—
|
|
|
2,073
|
|
Net
cash provided by (used in) operating activities
|
|
|
(23,803
|
)
|
|
5,664
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(14,970
|
)
|
|
(18,791
|
)
|
Acquisitions,
net of cash acquired
|
|
|
(12,534
|
)
|
|
(5,176
|
)
|
Proceeds
from sale of assets
|
|
|
8,348
|
|
|
604
|
|
Other
investments
|
|
|
(389
|
)
|
|
—
|
|
Distributions
received from non-consolidated affiliates
|
|
|
—
|
|
|
499
|
|
Discontinued
operations
|
|
|
—
|
|
|
(1,641
|
)
|
Net
cash used in investing activities
|
|
|
(19,545
|
)
|
|
(24,505
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
(Decrease)
Increase in bank indebtedness
|
|
|
(4,910
|
)
|
|
479
|
|
(Payments)
Proceeds under old revolving credit facility
|
|
|
(45,000
|
)
|
|
11,800
|
|
Proceeds
from new revolving credit facility
|
|
|
25,631
|
|
|
—
|
|
Proceeds
from term loans
|
|
|
75,000
|
|
|
—
|
|
Repayment
of long-term debt
|
|
|
(5,718
|
)
|
|
(1,228
|
)
|
Proceeds
from note payable
|
|
|
2,471
|
|
|
—
|
|
Deferred
financing costs
|
|
|
(3,946
|
)
|
|
—
|
|
Issuance
of share capital
|
|
|
2,125
|
|
|
535
|
|
Proceeds
from stock subscription receivable
|
|
|
392
|
|
|
—
|
|
Purchase
of treasury shares
|
|
|
(765
|
)
|
|
—
|
|
Discontinued
operations
|
|
|
—
|
|
|
(702
|
)
|
Net
cash provided by financing activities
|
|
|
45,280
|
|
|
10,884
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(1,434
|
)
|
|
(374
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
498
|
|
|
(8,331
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
6,591
|
|
|
12,923
|
|
Cash
and cash equivalents at end of period
|
|
$
|
7,089
|
|
|
4,592
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures:
|
|
|
|
|
|
|
|
Cash
paid to minority partners
|
|
$
|
16,310
|
|
$
|
14,475
|
|
Cash
income taxes paid
|
|
$
|
1,205
|
|
$
|
940
|
|
Cash
interest paid
|
|
$
|
9,133
|
|
$
|
6,345
|
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
Share
capital issued on acquisitions
|
|
$
|
2,497
|
|
$
|
4,459
|
|
Capital
leases
|
|
$
|
1,531
|
|
$
|
915
|
|
Note
receivable exchanged for shares in subsidiary
|
|
$
|
—
|
|
$
|
1,155
|
|
See
notes
to the unaudited condensed consolidated financial statements.
MDC
PARTNERS INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(thousands
of United States dollars, unless otherwise stated)
1.
Basis of
Presentation
MDC
Partners Inc. (the “Company”) has prepared the unaudited condensed consolidated
interim financial statements included herein pursuant to the rules and
regulations of the United States Securities and Exchange Commission (the “SEC”).
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles (“GAAP”) of the United States of America (“US GAAP”) have been
condensed or omitted pursuant to these rules.
The
accompanying financial statements reflect all adjustments, consisting of
normally recurring accruals, which in the opinion of management are necessary
for a fair presentation, in all material respects, of the information contained
therein. Results of operations for interim periods are not necessarily
indicative of annual results.
These
statements should be read in conjunction with the consolidated financial
statements and related notes included in the Annual Report on Form 10-K for
the year ended December 31, 2006.
On
November 14, 2006, the Company completed the sale of its Secure Products
International Group ("SPI") and accordingly has reclassified its 2006
financial results to reflect SPI as discontinued operations.
2.
Significant
Accounting Policies
The
Company’s significant accounting policies are summarized as
follows:
Principles
of Consolidation
. The
accompanying condensed consolidated financial statements include the accounts
of
MDC Partners Inc. and its domestic and international controlled subsidiaries
that are not considered variable interest entities, and variable interest
entities for which the Company is the primary beneficiary. Intercompany balances
and transactions have been eliminated in consolidation.
Use
of Estimates.
The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets and liabilities including goodwill,
intangible assets, valuation allowances for receivables and deferred tax assets,
and the reporting of variable interest entities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. The estimates are evaluated on an ongoing basis and estimates are based
on historical experience, current conditions and various other assumptions
believed to be reasonable under the circumstances. Actual results could differ
from those estimates.
Cash
and Cash Equivalents.
The
Company’s cash equivalents are primarily comprised of investments in overnight
interest-bearing deposits, commercial paper and money market instruments and
other short-term investments with original maturity dates of three months or
less at the time of purchase. Included in cash and cash equivalents at September
30, 2007 and December 31, 2006, is approximately $189 and $172,
respectively, of cash restricted as to its use by the Company.
Revenue
Recognition.
The
Company’s revenue recognition policies are in compliance with the SEC Staff
Accounting Bulletin 104, “Revenue Recognition” (“SAB 104”), and accordingly,
revenue is generally recognized when services are earned or upon delivery of
the
products when ownership and risk of loss has transferred to the customer, the
selling price is fixed or determinable and collection of the resulting
receivable is reasonably assured.
The
Company earns revenue from agency arrangements in the form of retainer fees
or
commissions; from short-term project arrangements in the form of fixed fees
or
per diem fees for services; and from incentives or bonuses.
Non-refundable
retainer fees are generally recognized on a straight-line basis over the term
of
the specific customer contract. Commission revenue is earned and recognized
upon
the placement of advertisements in various media when the Company has no further
performance obligations. Fixed fees for services are recognized upon completion
of the earnings process and acceptance by the client. Per diem fees are
recognized upon the performance of the Company’s services. In addition, for
certain service transactions, which require delivery of a number of service
acts, the Company uses the Proportional Performance model, which generally
results in revenue being recognized based on the straight-line method due to
the
acts being non-similar and there being insufficient evidence of fair value
for
each service act provided.
Fees
billed to clients in excess of fees recognized as revenue are classified as
advance billings.
A
small
portion of the Company’s contractual arrangements with clients includes
performance incentive provisions, which allow the Company to earn additional
revenues as a result of its performance relative to both quantitative and
qualitative goals. The Company recognizes the incentive portion of revenue
under
these arrangements when specific quantitative goals are achieved, or when the
Company’s clients determine performance against qualitative goals has been
achieved. In all circumstances, revenue is only recognized when collection
is
reasonably assured.
The
Company follows EITF No. 99-19, “Reporting Revenue Gross as a Principal versus
Net as an Agent” (“EITF 99-19). This Issue summarized the EITF’s views on when
revenue should be recorded at the gross amount billed because revenue has been
earned from the sale of goods or services, or the net amount retained because
a
fee or commission has been earned. The Company’s businesses at times act as an
agent and records revenue equal to the net amount retained, when the fee or
commission is earned. The Company also follows EITF No. 01-14 for reimbursement
received for out-of-pocket expenses. This Issue summarized the EITF’s views
that reimbursements received for out-of-pocket expenses incurred should be
characterized in the income statement as revenue. Accordingly, the Company
has
included in revenue such reimbursed expenses.
Stock-Based
Compensation
. The
fair value method is applied to all awards granted, modified or settled on
or
after January 1, 2003. Under the fair value method, compensation cost is
measured at fair value at the date of grant and is expensed over the service
period; that is the award’s vesting period. When awards are exercised, share
capital is credited by the sum of the consideration paid together with the
related portion previously credited to additional paid-in capital when
compensation costs were charged against income or acquisition consideration.
The
Company uses its historical volatility derived over the expected term of the
award, to determine the volatility factor used in determining the fair value
of
the award. The Company uses the “simplified” method to determine the term of the
award.
Stock-based
awards that are settled in cash or may be settled in cash at the option of
employees are recorded as liabilities. The measurement of the liability and
compensation cost for these awards is based on the fair value of the award,
and
is recorded into operating income over the service period; that is the vesting
period of the award. Changes in the Company’s payment obligation subsequent to
vesting of the award and prior to the settlement date are recorded as
compensation cost in operating profit in the period of the change. The final
payment amount for such awards is established on the date of the exercise of
the
award by the employee.
Stock-based
awards that are settled in cash or equity at the option of the Company are
recorded at fair value on the date of grant and recorded as additional paid-in
capital. The fair value measurement of the compensation cost for these awards
is
based on using the Black-Scholes option pricing-model and is recorded in
operating income over the service period; that is the vesting period of the
award. Effective January 1, 2006, the Company adopted SFAS 123(R) and has
opted to use the modified prospective application transition method. Under
this
method the Company has not restated its prior year’s financial statements.
Instead, the Company applies SFAS 123(R) for new awards granted or modified
after January 1, 2006, any portion of awards that were granted after
December 15, 1994 and have not vested as of January 1, 2006, and any
outstanding liability awards. It is the Company’s policy for issuing shares upon
the exercise of an equity incentive award to verify the amount of shares to
be
issued, as well as the amount of proceeds to be collected (if any) and delivery
of new shares to the exercising party.
Measurement
of compensation cost for awards that are outstanding and classified as equity
at
January 1, 2006, will be based on the original grant-date fair value
calculations of those awards. The Company has adopted the straight-line
attribution method for determining the compensation cost to be recorded during
each accounting period. However, awards based on performance conditions are
recorded as compensation expense when the performance conditions are expected
to
be met.
On
June
1, 2007, the Company’s shareholders approved an additional 1,000,000 authorized
Class A shares to be added to the Company’s 2005 Stock Incentive Plan for a
total of 3,000,000 authorized Class A shares.
In
March
2007, the Company issued 165,114 Class A shares of financial
performance-based restricted stock, and 388,615 financial performance-based
restricted stock units, to its employees under the 2005 Stock Incentive Plan.
The Class A shares underlying each grant of restricted stock or restricted
stock units will vest at 66% based upon achievement by the Company of specified
financial performance criteria in 2007, 2008 and 2009. The remaining 34% will
vest on the third anniversary date of grant, subject to acceleration if certain
financial performance targets are achieved in 2007 and 2008. Based on the
Company’s expected financial performance in 2007, the Company currently believes
that 34% of the 2007 financial performance-based awards to employees will vest
on March 15, 2008. Accordingly, the Company will be recording a non-cash
stock based compensation charge of $1,803 from the date of grant through
March 15, 2008.
For
the
nine months ended September 30, 2007, the Company has recorded stock based
compensation of $1,048 relating to these equity incentive grants. The value
of
the awards was determined based on the fair market value of the underlying
stock
on the date of grant. The 165,114 Class A shares of restricted stock
granted to employees are included in the Company’s calculation of Class A
shares outstanding as of September 30, 2007.
3.
Loss
Per Common Share
The
following table sets forth the computation of basic and diluted loss per common
share from continuing operations.
|
|
Three Months Ended September
30,
|
|
Nine Months Ended September
30
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
Numerator
for basic loss per common share - loss from continuing
operations
|
|
$
|
(6,733
|
)
|
$
|
(2,911
|
)
|
$
|
(18,170
|
)
|
$
|
(8,426
|
)
|
Effect
of dilutive securities:
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Numerator
for diluted loss per common share - loss from continuing operations
plus
assumed conversion
|
|
$
|
(6,733
|
)
|
$
|
(2,911
|
)
|
$
|
(18,170
|
)
|
$
|
(8,426
|
)
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic loss per common share - weighted average common
shares
|
|
|
24,957,704
|
|
|
23,911,327
|
|
|
24,664,159
|
|
|
23,849,571
|
|
Effect
of dilutive securities:
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Denominator
for diluted loss per common share - adjusted weighted shares and
assumed
conversions
|
|
|
24,957,704
|
|
|
23,911,327
|
|
|
24,664,159
|
|
|
23,849,571
|
|
Basic
loss per common share from continuing operations
|
|
$
|
(0.27
|
)
|
$
|
(0.12
|
)
|
$
|
(0.74
|
)
|
$
|
(0.35
|
)
|
Diluted
loss per common share from continuing operations
|
|
$
|
(0.27
|
)
|
$
|
(0.12
|
)
|
$
|
(0.74
|
)
|
$
|
(0.35
|
)
|
The
8%
convertible debentures, options and other rights to purchase 6,893,847
shares of common stock, which includes 371,614 shares of non-vested
restricted stock, were outstanding during the three and nine months ended
September 30, 2007, but were not included in the computation of diluted loss
per
common share because their effect would be antidilutive. Similarly, during
the
three and nine months ended September 30, 2006, the 8% convertible debentures,
options and other rights to purchase 8,492,018 shares of common stock, which
includes 263,500 shares of non-vested restricted stock, were outstanding but
were not included in the computation of diluted loss per common share because
their effect would be antidilutive.
4.
Acquisitions
2007
Acquisitions
On
August
17, 2007, the Company purchased an additional 16% of the equity interests of
VitroRobertson LLC (“Vitro”). This 16% represents one of the founders’ remaining
equity interest in Vitro. This founder initially had a put option right to
the
Company for this 16%, which was to become exercisable in 2011. However, the
Company agreed to purchase this 16% for an initial payment of $650, together
with the potential of two additional payments of $75 each based upon client
retention targets. The allocation of the cost of the acquisition to the fair
value of net assets acquired resulted in identifiable intangible assets of
$190
and goodwill of $385. The identifiable intangibles will be amortized on a
straight line basis over five years. The intangibles and goodwill are tax
deductible in future years.
On
June
15, 2007, the Company acquired a 60% membership interest in Redscout, LLC
(“Redscout”). Redscout is a brand development and innovation consulting firm.
Redscout is expected to expand the Company’s strategic consultancy services
within the Strategic Marketing Services segment. The purchase price consisted
of
$4,021 in cash and $641 was paid in the form of 76,340 newly issued Class A
shares of the Company. In addition, the Company may be required to make
additional payments which are contingent on the results of Redscout’s operations
through December 2008. In addition, the Company incurred approximately $35
of
transaction related costs for a total purchase price of $4,697. The allocation
of the cost of the acquisition to the fair value of net assets acquired resulted
in amortizable intangible assets of $1,275 and goodwill of $2,706 and is based
on estimates of fair values and certain assumptions that the Company believes
are reasonable. The intangibles and goodwill are tax deductible in future
years.
On
May 1,
2007, the Company’s 70.1% owned subsidiary, Northstar Research Holdings USA LP,
acquired a 51% membership interest in Trend Core LLC (“TC”). TC is a
qualitative research firm with a specialty in the understanding of the merger
of
cultural trends and consumer needs with product innovation. TC is expected
to
expand the Company’s research capabilities within the Specialized Communication
Services segment. The purchase price consisted of $103 in cash and related
closing costs. In addition, the Company may be required to pay up to an
additional $900 in cash to the sellers if TC achieves specified financial
targets at certain specified times over the period ending April 30, 2011. The
allocation of the cost of the acquisition to the fair value of net assets
acquired resulted in an amortizable intangible asset of approximately $96 based
on estimates of fair values and certain assumptions that the Company believes
are reasonable. The intangible is tax deductible in future years.
On
April
4, 2007, the Company acquired a 59% membership interest in HL Group Partners
LLC
(“HL”). The Company intends to use up to 8% of the membership
interests acquired for purposes of entering into a profits interest
arrangement with other key executives of HL, or “Gen II” management. Gen II
management will also have liquidity rights based on any appreciation of value
over the original purchase price attributable to the profits interest. HL
is a marketing strategy and corporate communications firm with a specialty
in
high end fashion and luxury goods. HL is expected to expand the Company’s
creative talent within the Strategic Marketing Services segment. The purchase
price consisted of $4,813 in cash, of which $4,493 was paid and $320 will be
paid on April 4, 2008, and $1,000 was paid in the form of 128,550 newly-issued
Class A shares of the Company. In addition, the Company incurred transaction
costs of approximately $30 for a total purchase price of $5,843. The allocation
of the cost of the acquisition to the fair value of net assets acquired resulted
in amortizable intangible assets of $2,154 and goodwill of $3,442 and is based
on estimates of fair values and certain assumptions that the Company believes
are reasonable. The intangibles and goodwill are tax deductible in future
years.
On
February 2, 2007, the Company, through its subsidiary Bryan Mills Group
Ltd. (“Bryan Mills”), acquired 100% of the issued and outstanding shares of
Iradesso Communications Corp., a Canadian financial communications firm. This
acquisition provides the Company an opportunity to expand its business, in
terms
of productive talent, service offerings and geographic presence. The purchase
price for this transaction included a cash payment equal to $342 and the
issuance of shares in Bryan Mills representing 11.85% of the equity ownership
in
Bryan Mills, valued at $815. The Company incurred transaction costs of $40
for a
total purchase price of $1,197. This cost has been assigned to an intangible
asset relating to the value of the new employment agreement with the former
owner of Iradesso Communications Corp. and will be amortized over a five year
term. The intangible asset is tax deductible in future years.
2006
Acquisitions
During
2006, the Company did not complete any material acquisitions. However, the
Company did complete the following transactions:
On
February 7, 2006, the Company purchased the remaining outstanding
membership interests of 12.33% of Source Marketing LLC (“Source”) pursuant to an
exercise of a put option notice delivered in October 2005. The purchase
price of $2,287 consisted of cash of $1,830 and the delivery of 1,063,516 shares
of LifeMed Media Inc. (“LifeMed”) valued at $457. The Company’s carrying value
of these LifeMed shares was $27, thus the Company recorded a gain on the
disposition of these shares of $430, which has been included in other
income.
On
February 15, 2006, Source issued 15% of its membership interests to certain
members of management. The purchase price for these membership interests was
$1,540, which consisted of $385 cash and recourse notes in an aggregate
principal amount equal to $1,155. In addition, the purchaser also received
a
fully vested option to purchase an additional 5% of Source at an exercise price
based upon the price paid above. This call option was exercised by the
management members in October 2006. An amended and restated LLC agreement was
entered into with these new members. The agreement also provides these members
with an option to put to the Company these membership interests from
December 2008-2012. During the quarter ended March 31, 2006, the
Company recorded a non-cash stock based compensation charge of $2,338 relating
to the price paid for the membership interests, which was less than the fair
value of such membership interests and the fair value of the option granted.
The
5% call option exercise resulted in a dilution loss of $626 and reduced the
Company’s equity ownership in Source down to 80%.
On
July 27, 2006, the Company settled a put option obligation for a fixed
amount equal to $1,492, relating to the purchase of 4.3% of additional equity
interests of Accent Marketing, LLC. The settlement of this put was satisfied
by
a cash payment of $424, plus the cancellation of an outstanding promissory
note
to the Company in a principal amount equal to $1,068. The purchase price was
allocated as follows: $403 to identified intangibles, amortized over eight
years
and the balance of $1,089 as additional goodwill. The goodwill and intangibles
are deductible for tax purposes. Following this transaction, the Company owns
93.7% of Accent Marketing, LLC.
On
November 14, 2006, the Company purchased an additional 20% interest in
Northstar Research Partners Inc. (“Northstar”) for $3,405 in cash, increasing
the Company’s ownership interest in Northstar to 70%. This transaction resulted
in an allocation of the purchase price to goodwill of $2,989 and identifiable
intangible assets of $415. In February 2007, Northstar acquired an additional
18% of Northstar Research (UK) Limited for approximately $27. This cost has
been
assigned to goodwill. Northstar now owns 82% of Northstar Research (UK)
Limited.
On
November 14, 2006, the Company through its subsidiary Zig Inc. purchased a
65% interest in Hadrian’s Wall Advertising, LLC for $550. Hadrian’s Wall
Advertising, LLC is a creative advertising firm that was acquired to facilitate
the expansion of the Zig Canada business into the US market. In addition the
Company purchased an additional 0.2% of Zig Inc. for cash of $18 and 30,000
of
the Company’s Stock Appreciation Rights (“SARs”), valued at $104, increasing the
Company’s ownership interest in Zig, Inc. to 50.1%. The purchase price was
allocated to goodwill of $18 and the value of the SARs was considered to be
compensation expense and will be amortized over the vesting period of the SARs.
Effective November 17, 2006, as a result of the additional share purchase,
the Company has consolidated Zig Inc., which had previously been accounted
for
under the equity method.
On
December 15, 2006, the Company and Accumark Communications Inc. amended its
operating agreement to eliminate certain minority rights. As a result of this
amendment, effective December 15, 2006, the Company has consolidated
Accumark Communications Inc., which had previously been accounted for under
the
equity method.
5
.
Accrued
and Other Liabilities
At
September 30, 2007 and December 31, 2006, accrued and other liabilities included
amounts due to minority interest holders, for their share of profits, which
will
be distributed within the next twelve months of $10,538 and $11,129,
respectively.
In
August
2006, one of the entities in the Strategic Marketing Services segment closed
an
office on the West Coast. The Company incurred a charge to operations of $2,624
resulting primarily from lease termination costs and the write off of the
related leasehold improvements. The liability is expected to be paid out over
the next five years.
6.
Discontinued
Operations
In
June 2006, the Company’s Board of Directors made the decision to sell or
otherwise divest the Company’s Secure Paper Businesses and Secure Card
Businesses (collectively, “Secure Products International” or
“SPI”).
On
November 14, 2006, the Company completed its sale of SPI, resulting in net
proceeds of approximately $27,000. Consideration was received in the form of
cash of $20,000 and five additional annual payments of $1,000. In addition,
the
Company received a 7.5% equity interest in the newly formed entity acquiring
SPI. The Company had initially recorded the present value of the five additional
payments of $3,724 as other assets. In July 2007, the Company received an
accelerated payment of $2,000 representing amounts originally due in 2010 and
2011. As a result of the receipt of this payment, the Company recorded interest
income of $733 for the nine months ended September 30, 2007. Also included
in
Other Assets is the estimated value of the 7.5% equity interest received of
$1,924. The results of operations of SPI during the three and nine months ended
September 30, 2006 was a loss of $9,998 and $20,120, respectively. Included
in
such losses is an impairment charge of $11,607 and $19,498, respectively, which
was based on the estimated net proceeds from the sale of SPI.
Based
on
the net proceeds and average borrowing rate, the Company has allocated interest
expense to discontinued operations of $364 and $1,029 for the three and nine
months ended September 30, 2006, respectively.
Included
in discontinued operations in the Company’s consolidated statements of
operations for the three and nine months ended September 30, 2006 was the
following:
|
|
Three
Months Ended
September
30,
2006
|
|
Nine
Months
Ended
September 30,
2006
|
|
Revenue
|
|
$
|
20,860
|
|
$
|
56,799
|
|
Depreciation
expense and impairment charge
|
|
$
|
11,607
|
|
$
|
21,799
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
$
|
(9,268
|
)
|
$
|
(18,008
|
)
|
Other
expense
|
|
$
|
(491
|
)
|
|
(1,958
|
)
|
Income
tax expense
|
|
$
|
(239
|
)
|
|
(154
|
)
|
Net
loss from discontinued
operations
|
|
$
|
(9,998
|
)
|
$
|
(20,120
|
)
|
7.
Comprehensive
Loss
Total
comprehensive loss and its components were:
|
|
Three Months Ended September
30,
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
loss for the period
|
|
$
|
(6,773
|
)
|
$
|
(12,909
|
)
|
$
|
(18,170
|
)
|
$
|
(28,546
|
)
|
Foreign
currency cumulative translation adjustment
|
|
$
|
2,574
|
|
$
|
(2,241
|
)
|
$
|
5,481
|
|
$
|
(159
|
)
|
Comprehensive
loss for the period
|
|
$
|
(4,199
|
)
|
$
|
(15,150
|
)
|
$
|
(12,689
|
)
|
$
|
(28,705
|
)
|
8.
Short-Term
Debt, Long-Term Debt and Convertible Debentures
Debt
consists of:
|
|
September
30,
2007
|
|
December 31,
2006
|
|
Short-term
debt
|
|
$
|
—
|
|
$
|
4,910
|
|
Revolving
credit facility
|
|
|
25,631
|
|
|
45,000
|
|
8%
convertible debentures (1)
|
|
|
45,235
|
|
|
38,613
|
|
Term
loans
|
|
|
75,000
|
|
|
—
|
|
Notes
payable and other bank loans
|
|
|
3,285
|
|
|
5,206
|
|
|
|
|
149,151
|
|
|
93,729
|
|
Obligations
under capital leases
|
|
|
2,750
|
|
|
1,725
|
|
|
|
|
151,901
|
|
|
95,454
|
|
Less:
|
|
|
|
|
|
|
|
Revolving
credit facility
|
|
|
—
|
|
|
45,000
|
|
Short-term
debt
|
|
|
—
|
|
|
4,910
|
|
Current
portions
|
|
|
1,777
|
|
|
1,177
|
|
Long
term portion
|
|
$
|
150,124
|
|
$
|
44,367
|
|
Short-term
debt represents outstanding checks at the end of the reporting
periods.
(1)
The
8% convertible debentures are due and payable in Canadian dollars and as such
the balance due will fluctuate with foreign currency movements.
New
Financing Agreement
On
June
18, 2007, MDC Partners Inc. (the “Company”) and its material subsidiaries
entered into a new $185,000 senior secured financing agreement (the “Financing
Agreement”) with Fortress Credit, an affiliate of Fortress Investment
Group, as collateral agent and Wells Fargo Bank, as administrative agent, and
a
syndicate of lenders. This facility replaced the Company’s existing $96,500
credit facility that was originally expected to mature on September 21, 2007.
Proceeds from the Financing Agreement were used to repay in full the outstanding
balances on the Company's existing credit facility. All of these repaid credit
facilities have been terminated.
The
new
Financing Agreement consists of a $55,000 revolving credit facility, a $60,000
term loan and a $70,000 delayed draw term loan. Borrowings under the Financing
Agreement will bear interest as follows: (a) LIBOR Rate Loans bear interest
at
applicable interbank rates and Reference Rate Loans bear interest at the rate
of
interest publicly announced by the Reference Bank in New York, New York, plus
(b) a percentage spread ranging from 0% to a maximum of 4.75% depending on
the
type of loan and the Company’s Senior Leverage Ratio. In addition, the Company
is required to pay a facility fee of 50 basis points.
The
new
Financing Agreement is guaranteed by the material subsidiaries of the Company
and matures on June 17, 2012. The Financing Agreement is subject to various
covenants, including a senior leverage ratio, fixed charges ratio, limitations
on debt incurrence, limitation on liens and limitation on dividends and other
payments. At September 30, 2007, the unused portion of the total facility was
$77,891.
At
September 30, 2007 and December 31, 2006, the aggregate amount of outstanding
checks (disclosed as “Short-term debt” in Current Liabilities on the balance
sheet) was zero and $4,910, respectively.
The
Company has classified the revolving credit facility of the Financing Agreement
as a long term liability in accordance with EITF 95-22, “Balance Sheet
Classification of Borrowings Outstanding under Revolving Credit Agreements
that
include both a Subjective Acceleration Clause and a Lock-Box Agreement”.
Management believes that no conditions have occurred that would result in
subjective acceleration by the lenders under the Financing Agreement, and
management believes that no such conditions will exist over the next twelve
months. The weighted average interest rate on the outstanding debt under the
Financing Agreement was 9.59% at September 30, 2007. The weighted average
interest rate on the prior credit facility was 8.13% at December 31,
2006.
As
of
September 30, 2007, and December 31, 2006, $1,847 and $2,414 of the consolidated
cash position is held by subsidiaries, which, although available for the
subsidiaries’ use, does not represent cash that is available for use to reduce
the Company’s indebtedness.
8%
Convertible Unsecured Subordinated Debentures
On
June 28, 2005, the Company completed an offering in Canada of convertible
unsecured subordinated debentures amounting to C$45,000 ($36,723) (the
“Debentures”). The Debentures mature on June 30, 2010 and bear
interest at an annual rate of 8.00% payable semi-annually, in arrears, on June
30 and December 31 of each year. The Company did not have an effective
resale registration statement filed with the SEC on December 31, 2005, and
as a result the rate of interest increased by an additional 0.50% for the first
six month period following December 31, 2005. As of April 19, 2006,
the Company had an effective resale registration statement and as a result
the
interest rate returned to 8.0% effective July 1, 2006. Unless an event of
default has occurred and is continuing, the Company may elect, from time to
time, subject to applicable regulatory approval, to issue and deliver
Class A subordinate voting shares to the Debenture trustee in order to
raise funds to satisfy all or any part of the Company’s obligations to pay
interest on the Debentures in accordance with the indenture in which holders
of
the Debentures will be entitled to receive a cash payment equal to the interest
payable from the proceeds of the sale of such Class A subordinate voting
shares by the Debenture trustee.
The
Debentures are convertible at the holder’s option into fully-paid,
non-assessable and freely tradable Class A subordinate voting shares of the
Company, at any time prior to maturity or redemption, subject to the
restrictions on transfer, at a conversion price of C$14.00 ($14.07 as of
September 30, 2007) per Class A subordinate voting share being a ratio of
approximately 71.4286 Class A subordinate voting shares per C$1,000.00
($1,005 as of September 30, 2007) principal amount of Debentures.
The
Debentures may not be redeemed by the Company on or before June 30,
2008. Thereafter, but prior to June 30, 2009, the Debentures may be
redeemed, in whole or in part from time to time, at a price equal to the
principal amount of the Debenture plus accrued and unpaid interest, provided
that the volume weighted average trading price of the Class A subordinate
voting shares on the Toronto Stock Exchange during a specified period is not
less than 125% of the conversion price. From July 1, 2009 until the
maturity of the Debentures, the Debentures may be redeemed by the Company at
a
price equal to the principal amount of the Debenture plus accrued and unpaid
interest, if any. The Company may elect to satisfy the redemption consideration,
in whole or in part, by issuing Class A subordinate voting shares of the
Company to the holders, the number of which will be determined by dividing
the
principal amount of the Debenture by 95% of the current market price of the
Class A subordinate voting shares on the redemption date. Upon the
occurrence of a change of control of the Company involving the acquisition
of
voting control or direction over 50% or more of the outstanding Class A
subordinate voting shares prior to June 30, 2008, the Company shall be
required to make an offer to purchase all of the then outstanding Debentures
at
a price equal to 100% of the principal amount thereof plus an amount equal
to
the interest payments not yet received on the Debentures calculated from the
date of the change of control to June 30, 2008, discounted at a
specified rate. Upon the occurrence of a change of control on or
after June 30, 2008, the Company shall be required to make an offer to
purchase all of the then outstanding Debentures at a price equal to 100% of
the
principal amount of the Debentures plus accrued and unpaid interest to the
purchase date.
9.
Shareholders’
Equity
During
the nine months ended September 30, 2007, Class A share capital increased
by $9,756, as the Company issued 999,767 Class A shares related to the
exercise of stock options, vested restricted stock, and stock appreciation
right
awards. Additionally, during the nine months ended September 30, 2007, the
Company issued 313,077 Class A shares, valued at $2,496 in connection with
acquisitions and the settlement of a deferred acquisition consideration payment.
During the nine months ended September 30, 2007 “Additional paid-in capital”
decreased by $424, of which $5,135 related to the exercise of stock appreciation
right awards and stock options and $38 related to the resolution of a
contingency based on the Company’s share price relating to a previous
acquisition, offset by $4,749 related to an increase from stock-based
compensation that was expensed during the same period.
In
March
2007, the Company purchased 83,253 Class A shares for $660 from employees in
connection with the required tax withholding resulting from the vesting of
restricted stock. In addition, during the third quarter of 2007, the Company
received 10,595 Class A shares valued at $105 in connection with a partial
repayment of a note receivable from the Company’s Chief Executive
Officer.
10.
Other
Income (Expense)
|
|
Three Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Other
income
|
|
$
|
495
|
|
$
|
98
|
|
|
|
$
|
334
|
|
$
|
417
|
|
Foreign
currency transaction losses (b)
|
|
|
(3,629
|
)
|
|
(400
|
)
|
|
|
|
(7,070
|
)
|
|
(99
|
)
|
Gain
(loss) on sale/recovery of assets (a)
|
|
|
(12
|
)
|
|
927
|
|
|
|
|
1,823
|
|
|
1,379
|
|
|
|
$
|
(3,146
|
)
|
$
|
625
|
|
|
|
$
|
(4,913
|
)
|
$
|
1,697
|
|
(a)
On
April 17, 2007, the Company sold the plane that was acquired in connection
with
the Zyman acquisition for consideration equal to $6,368. In connection with
the
sale, the Company repaid the loan relating to the plane in an amount equal
to
$5,001 and recorded a gain on the sale of $1,846.
(b)
During the three and nine months ended September 30, 2007, the Company has
recorded unrealized foreign currency transaction losses of $3,629 and $7,070,
respectively, representing the weakening in the US dollar compared to the
Canadian dollar primarily on its intercompany balances. For the three and nine
months ended September 30, 2006, the Company had recorded unrealized foreign
currency transaction losses of $400 and $99, respectively, representing the
weakening in the US dollar compared to the Canadian dollar primarily on its
intercompany balances.
11.
Segmented
Information
During
the fourth quarter of 2006, the Company assessed its reportable operating
segments and reclassified Margeotes Fertitta Powell, LLC (“MFP”) from the
Strategic Marketing Services (“SMS”) segment to the Specialized Communication
Services segment, as MFP’s performance currently and for the foreseeable future
is not consistent with the performance of the operating units in the SMS
segment. The Company has recast its prior year disclosures to conform to the
current year presentation. The Company reports in three segments plus corporate.
The segments are as follows:
|
·
|
The
Strategic
Marketing Services (“SMS”)
segment includes Crispin Porter & Bogusky, kirshenbaum bond +
partners, and Zyman Group LLC, among others. This segment consists
of
integrated marketing consulting services firms that offer a complement
of
marketing consulting services including advertising and media, marketing
communications including direct marketing, public relations, corporate
communications, market research, corporate identity and branding,
interactive marketing and sales promotion. Each of the entities within
SMS
share similar economic characteristics, specifically related to the
nature
of their respective services, the manner in which the services are
provided and the similarity of their respective customers. Due to
the
similarities in these businesses, they exhibit similar long term
financial
performance and have been aggregated
together.
|
|
·
|
The
Customer
Relationship Management (“CRM”)
segment provides marketing services that interface directly with
the
consumer of a client’s product or service. These services include the
design, development and implementation of a complete customer service
and
direct marketing initiative intended to acquire, retain and develop
a
client’s customer base. This is accomplished using several domestic and
two foreign-based customer contact
facilities.
|
|
·
|
The
Specialized
Communication Services (“SCS”)
segment includes all of the Company’s other marketing services firms that
are normally engaged to provide a single or a few specific marketing
services to regional, national and global clients. These firms provide
niche solutions by providing world class expertise in select marketing
services.
|
In
March
2007, due to continued operating and client losses, the Company ceased MFP’s
current operations and spun off a new operating business and as a result
incurred a goodwill impairment charge of $4,475. During the three and nine
months ended September 30, 2007, the Company incurred operating losses,
excluding the goodwill impairment charge, of $808 and $4,256, respectively,
relating to MFP.
The
significant accounting policies of these segments are the same as those
described in the summary of significant accounting policies included in the
notes to the consolidated financial statements.
The
SCS
segment is an “Other” segment pursuant SFAS 131 “Disclosures about Segments of
an Enterprise and Related Information”.
Summary
financial information concerning the Company’s operating segments is shown in
the following tables:
Three
Months Ended September 30, 2007
(thousands
of United States dollars)
|
|
Strategic
Marketing
Services
|
|
Customer
Relationship
Management
|
|
Specialized
Communication
Services
|
|
Corporate
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
79,110
|
|
$
|
29,885
|
|
$
|
31,055
|
|
$
|
—
|
|
$
|
140,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services sold
|
|
|
47,252
|
|
|
21,841
|
|
|
21,760
|
|
|
—
|
|
|
90,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
and general expense
|
|
|
18,358
|
|
|
5,224
|
|
|
6,079
|
|
|
6,972
|
|
|
36,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
7,143
|
|
|
1,680
|
|
|
1,429
|
|
|
244
|
|
|
10,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit/(Loss)
|
|
|
6,357
|
|
|
1,140
|
|
|
1,787
|
|
|
(7,216
|
)
|
|
2,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,146
|
)
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes, equity in affiliates
and
minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,550
|
)
|
Income
tax recovery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before equity in affiliates and minority
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,734
|
)
|
Equity
in earnings of non-consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124
|
|
Minority
interests in income of consolidated subsidiaries
|
|
|
(4,172
|
)
|
|
(42
|
)
|
|
(949
|
)
|
|
—
|
|
|
(5,163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(6,773
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Segment Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash stock based compensation
|
|
$
|
306
|
|
$
|
—
|
|
$
|
(7
|
)
|
$
|
1,574
|
|
$
|
1,873
|
|
Capital
expenditures
|
|
$
|
3,355
|
|
$
|
3,835
|
|
$
|
297
|
|
$
|
19
|
|
$
|
7,506
|
|
Goodwill
and intangibles
|
|
$
|
187,823
|
|
$
|
29,385
|
|
$
|
42,633
|
|
$
|
—
|
|
$
|
259,841
|
|
Total
assets
|
|
$
|
326,502
|
|
$
|
72,126
|
|
$
|
102,807
|
|
$
|
15,653
|
|
$
|
517,088
|
|
Three
Months Ended September 30, 2006
(thousands
of United States dollars)
|
|
Strategic
Marketing
Services
|
|
Customer
Relationship
Management
|
|
Specialized
Communication
Services
|
|
Corporate
|
|
Total
|
|
|
|
(recasted)
|
|
|
|
(recasted)
|
|
|
|
|
|
Revenue
|
|
$
|
58,890
|
|
$
|
20,934
|
|
$
|
21,298
|
|
$
|
—
|
|
$
|
101,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services sold
|
|
|
26,948
|
|
|
15,147
|
|
|
15,055
|
|
|
—
|
|
|
57,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
and general expenses
|
|
|
22,053
|
|
|
4,549
|
|
|
5,103
|
|
|
4,961
|
|
|
36,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
4,945
|
|
|
1,240
|
|
|
449
|
|
|
62
|
|
|
6,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit/(Loss)
|
|
|
4,944
|
|
|
(2
|
)
|
|
691
|
|
|
(5,023
|
)
|
|
610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
625
|
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,180
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes, equity in affiliates
and
minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,945
|
)
|
Income
tax recovery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before equity in affiliates and minority
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,260
|
)
|
Equity
in earnings of non-consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129
|
|
Minority
interests in income of consolidated subsidiaries
|
|
|
(1,370
|
)
|
|
11
|
|
|
(421
|
)
|
|
—
|
|
|
(1,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,911
|
)
|
Loss
from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(12,909
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Segment Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash stock based compensation
|
|
$
|
128
|
|
$
|
6
|
|
$
|
—
|
|
$
|
1,515
|
|
$
|
1,649
|
|
Capital
expenditures
|
|
$
|
1,860
|
|
$
|
5,307
|
|
$
|
249
|
|
$
|
78
|
|
$
|
7,494
|
|
Nine
Months Ended September 30, 2007
(thousands
of United States dollars)
|
|
Strategic
Marketing
Services
|
|
Customer
Relationship
Management
|
|
Specialized
Communication
Services
|
|
Corporate
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
228,117
|
|
$
|
79,134
|
|
$
|
87,587
|
|
$
|
—
|
|
$
|
394,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services sold
|
|
|
136,328
|
|
|
57,712
|
|
|
63,185
|
|
|
—
|
|
|
257,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
and general expenses
|
|
|
54,685
|
|
|
14,429
|
|
|
17,600
|
|
|
20,063
|
|
|
106,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
14,740
|
|
|
4,759
|
|
|
2,813
|
|
|
429
|
|
|
22,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
impairment
|
|
|
—
|
|
|
—
|
|
|
4,475
|
|
|
—
|
|
|
4,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit/(Loss)
|
|
|
22,364
|
|
|
2,234
|
|
|
(486
|
)
|
|
(20,492
|
)
|
|
3,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,913
|
)
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,734
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes, equity in affiliates
and
minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,027
|
)
|
Income
tax recovery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before equity in affiliates and minority
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,431
|
)
|
Equity
in earnings of non-consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134
|
|
Minority
interests in income of consolidated subsidiaries
|
|
|
(12,138
|
)
|
|
(68
|
)
|
|
(2,667
|
)
|
|
—
|
|
|
(14,873
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(18,170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Segment Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash stock based compensation
|
|
$
|
797
|
|
$
|
5
|
|
$
|
—
|
|
$
|
4,540
|
|
$
|
5,342
|
|
Capital
expenditures
|
|
$
|
6,841
|
|
$
|
6,350
|
|
$
|
1,592
|
|
$
|
187
|
|
$
|
14,970
|
|
(thousands
of United States dollars)
|
|
Strategic
Marketing
Services
|
|
Customer
Relationship
Management
|
|
Specialized
Communication
Services
|
|
Corporate
|
|
Total
|
|
|
|
(recasted)
|
|
|
|
(recasted)
|
|
|
|
|
|
Revenue
|
|
$
|
171,415
|
|
$
|
60,747
|
|
$
|
67,171
|
|
$
|
—
|
|
$
|
299,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services sold
|
|
|
85,336
|
|
|
44,554
|
|
|
47,900
|
|
|
—
|
|
|
177,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
and general expenses
|
|
|
54,186
|
|
|
11,882
|
|
|
14,257
|
|
|
17,347
|
|
|
97,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
13,697
|
|
|
3,429
|
|
|
1,310
|
|
|
159
|
|
|
18,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit/(Loss)
|
|
|
18,196
|
|
|
882
|
|
|
3,704
|
|
|
(17,506
|
)
|
|
5,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,697
|
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,815
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes, equity in affiliates
and
minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(842
|
)
|
Income
tax recovery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before equity in affiliates and minority
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
909
|
|
Equity
in earnings of non-consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
630
|
|
Minority
interests in income of consolidated subsidiaries
|
|
|
(8,047
|
)
|
|
(27
|
)
|
|
(1,891
|
)
|
|
—
|
|
|
(9,965
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,426
|
)
|
Loss
from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(28,546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Segment Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash stock based compensation
|
|
$
|
619
|
|
$
|
18
|
|
$
|
2,338
|
|
$
|
4,006
|
|
$
|
6,981
|
|
Capital
expenditures
|
|
$
|
7,774
|
|
$
|
9,926
|
|
$
|
820
|
|
$
|
271
|
|
$
|
18,791
|
|
A
summary
of the Company’s revenue by geographic area, based on the location in which the
services originated, is set forth in the following table:
|
|
United
States
|
|
Canada
|
|
Other
|
|
Total
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
112,225
|
|
$
|
24,524
|
|
$
|
3,301
|
|
$
|
140,050
|
|
2006
|
|
$
|
85,215
|
|
$
|
13,655
|
|
$
|
2,252
|
|
$
|
101,122
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
319,556
|
|
$
|
66,531
|
|
$
|
8,751
|
|
$
|
394,838
|
|
2006
|
|
$
|
253,879
|
|
$
|
41,275
|
|
$
|
4,179
|
|
$
|
299,333
|
|
12.
Commitments, Contingencies and Guarantees
Put
Options. Owners
of interests in certain subsidiaries have the right in certain circumstances
to
require the Company to acquire the remaining ownership interests held by them.
The owners’ ability to exercise any such “put option” right is subject to the
satisfaction of certain conditions, including conditions requiring notice in
advance of exercise. In addition, these rights cannot be exercised prior to
specified staggered exercise dates. The exercise of these rights at their
earliest contractual date would result in obligations of the Company to fund
the
related amounts during the period 2007 to 2013. It is not determinable, at
this
time, if or when the owners of these rights will exercise all or a portion
of
these rights.
The
amount payable by the Company in the event such rights are exercised is
dependent on various valuation formulas and on future events, such as the
average earnings of the relevant subsidiary through the date of exercise, the
growth rate of the earnings of the relevant subsidiary during that period,
and,
in some cases, the currency exchange rate at the date of payment.
Management
estimates, assuming that the subsidiaries owned by the Company at September
30,
2007, perform over the relevant future periods at their trailing
twelve-months earnings levels, that these rights, if all exercised, could
require the Company, in future periods, to pay an aggregate amount of $143,044
to the owners of such rights to acquire such ownership interests in the relevant
subsidiaries. Of this amount, the Company is entitled, at its option, to fund
approximately $28,132 by the issuance of share capital. The ultimate amount
payable relating to these transactions will vary because it is dependent on
the
future results of operations of the subject businesses and the timing of when
these rights are exercised. In October and November 2007, the Company and
the other equity holders of kirshenbaum bond + partners LLC and
Crispin Porter & Bogusky LLC agreed to an accelerated exercise of the
Company’s existing call options that were otherwise exercisable in December 2007
and 2008. These call options represent approximately $70,113 of the
aggregate estimate above. See Note 14.
Deferred
Acquisition Consideration.
In
addition to the consideration paid by the Company in respect of certain of
its
acquisitions at closing, additional consideration may be payable, or may be
potentially payable based on the achievement of certain threshold levels of
earnings. Should the current level of earnings be maintained by these acquired
companies, no additional consideration, in excess of the deferred acquisition
consideration reflected on the Company’s balance sheet at September 30, 2007,
would be owed by the Company in 2007.
Natural
Disasters.
Certain
of the Company’s operations are located in regions of the United States which
typically are subject to hurricanes. During the nine months ended September
30,
2007 and 2006, these operations did not incur any costs related to damages
resulting from hurricanes.
Guarantees. In
connection with certain dispositions of assets and/or businesses in 2001, 2003
and 2006, the Company has provided customary representations and warranties
whose terms range in duration and may not be explicitly defined. The Company
has
also retained certain liabilities for events occurring prior to sale, relating
to tax, environmental, litigation and other matters. Generally, the Company
has
indemnified the purchasers in the event that a third party asserts a claim
against the purchaser that relates to a liability retained by the Company.
These
types of indemnification guarantees typically extend for a number of
years.
In
connection with the sale of the Company’s investment in Custom Direct Inc.
(“CDI”), the amounts of indemnification guarantees were limited to the total
sale price of approximately $84,000. For the remainder, the Company’s potential
liability for these indemnifications are not subject to a limit as the
underlying agreements do not always specify a maximum amount and the amounts
are
dependent upon the outcome of future contingent events.
Historically,
the Company has not made any significant indemnification payments under such
agreements and no amount has been accrued in the accompanying consolidated
financial statements with respect to these indemnification guarantees. The
Company continues to monitor the conditions that are subject to guarantees
and
indemnifications to identify whether it is probable that a loss has occurred,
and would recognize any such losses under any guarantees or indemnifications
in
the period when those losses are probable and estimable.
For
guarantees and indemnifications entered into after January 1, 2003, in
connection with the sale of SPI and the Company’s investment in CDI, the Company
has estimated the fair value of its liability, which was
insignificant.
Legal
Proceedings.
The
Company’s operating entities are involved in legal proceedings of various types.
While any litigation contains an element of uncertainty, the Company has no
reason to believe that the outcome of such proceedings or claims will have
a
material adverse effect on the financial condition or results of operations
of
the Company.
Commitments.
The
Company has commitments to fund $322 in two investment funds over a period
of up
to two years. At September 30, 2007, the Company has issued $6,478 of undrawn
outstanding letters of credit.
On
April
27, 2007, the Company entered into a new Management Services Agreement (the
“Services Agreement”) with Miles Nadal and with Nadal Management, Inc. to set
forth the terms and conditions on which Mr. Nadal will continue to provide
services to the Company as its Chief Executive Officer. Mr. Nadal’s prior
services agreement with the Company was scheduled to expire on October 31,
2007,
subject to two-year annual renewals. If the Company were not going to enter
into
a new agreement with Mr. Nadal and did not intend to allow the prior agreement
to renew, it would have been required to give Mr. Nadal notice of such
non-renewal by April 30, 2007.
The
Services Agreement has a three-year term with automatic one-year extensions.
Pursuant to the Services Agreement, the base compensation for Mr. Nadal’s
services will continue through 2007 at the current rate of $950, with annual
increases of $25 in each of 2008 and 2009. The Services Agreement also provides
for an annual bonus with a targeted payout of up to 250% of the base
compensation. The Company will also make an annual cash payment of $500 in
respect of retirement benefits, employee health benefits and perquisites. In
addition, in the discretion of the Compensation Committee, the Company may
grant
equity incentives with a targeted grant-date value of up to 300% of the then
current base retainer.
As
an
incentive to enter into the Services Agreement, the Company paid a one-time
non-renewal fee of $3,500 upon execution of the Services Agreement, which was
expensed during the second quarter of 2007. Mr. Nadal used a portion
of the proceeds of this fee to repay to the Company the $2,678 (C$3,000) note
receivable due on November 1, 2007 from Nadal Management, Inc. The Company
had
previously reserved the principal amount of this note receivable; the collection
of this receivable resulted in a one-time recovery of $2,678, which was included
in operating income in the second quarter of 2007. In addition, during July
and
September 2007, Mr. Nadal repaid an additional $236 of other previously reserved
notes receivable. As a result of these transactions above, operating income
for
the nine months ended September 30, 2007 was adversely impacted by
$586.
13.
New
Accounting Pronouncements
In
June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”. This
Interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. This Interpretation is effective
for fiscal years beginning after December 15, 2006, with earlier
application permitted. The Company has adopted this interpretation, the adoption
of which did not have a material effect on its financial
statements.
In
September 2006, FASB issued SFAS No. 157, “Fair Value Measurements”. This
statement defines fair value, establishes a framework for measuring fair value
and expands disclosures about fair value measurements. This statement is
effective for all fiscal year beginning after November 15, 2007 and interim
periods within those fiscal years. Earlier application is encouraged. The
Company is currently evaluating the impact of this statement on its financial
statements.
In
February 2007, FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”). This statement permits
entities to choose to measure many financial instruments and certain other
items
at fair value. This statement expands the use of fair value measurement and
applies to entities that elect the fair value option. The fair value option
established by this Statement permits all entities to choose to measure eligible
items at fair value at specified election dates. SFAS 159 is effective as of
the
beginning of an entity’s first fiscal year that begins after November 15,
2007. The Company is currently evaluating the impact of this statement on its
financial statements.
14.
Subsequent Events
On
October 18, 2007, the Company acquired the remaining 40% equity interest in
kirshenbaum bond + partners LLC, (“KBP”) from KBP Management Partners LLC
(“Minority Holder”). The purchase price consisted of an initial payment of
approximately $12,254 in cash and the issuance of 269,389 newly-issued shares
of
the Company’s Class A subordinated voting stock valued at approximately $2,901.
In addition, the Company expects to pay a contingent amount to the
Minority Holder in 2009 and 2010, based on KBP’s financial performance in 2008
and 2009. These additional contingent payments will be calculated in accordance
with KBP’s existing limited liability company agreement. In connection with this
acquisition, certain key executives of KBP agreed to extend the terms of their
existing employment agreements and received grants of restricted stock of the
Company valued at $250 in the aggregate. These equity grants vest over a three
year period. This acquisition represented an accelerated exercise of the
Company’s existing call option that was otherwise exercisable in 2008. The
allocation of the cost of this acquisition to the fair value of net assets
acquired is estimated to result in 100% of the cost being allocated to
identifiable intangible assets. Approximately $2,711 of the cost is expected
to
be amortized over a six and one-half month period, and the balance of
approximately $11,783 is expected to be amortized over a five year period.
The
value of the restricted stock grants will be amortized over a three year period.
In addition, in October 2007, the Company will incur a non-cash stock based
compensation charge of approximately $2,627 resulting from a portion of the
purchase price being paid by the Minority Holder to certain employees of KBP
pursuant to an existing phantom equity plan between those employees and the
Minority Holder. A similar type of charge will be incurred if and when any
contingent payments are made in 2009 and 2010.
On
November 1, 2007, the Company acquired an additional 28% of Crispin Porter
&
Bogusky LLC, (“CPB”) from certain minority holders. The purchase price consisted
of a payment of approximately $22,561 in cash and the issuance of 514,025
newly-issued shares of the Company’s Class A subordinated voting stock valued at
approximately $5,600. This acquisition represented an accelerated exercise
of
the Company’s existing call option that was otherwise exercisable in December
2007 and in April 2008. The Company currently consolidates CPB as a Variable
Interest Entity (“VIE”). As a result of this step acquisition, the Company will
now consolidate CPB as a majority owned subsidiary. The allocation of the cost
of this acquisition to the fair value of net assets acquired is estimated to
result in 100% of the cost being allocated to identifiable intangible assets.
Approximately $2,000 of the cost is expected to be amortized over a five month
period and the balance of approximately $2,796 is expected to be amortized
over
a five year period.
Item
2.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Unless
otherwise indicated, references to the “Company” and “MDC” mean MDC Partners
Inc. and its subsidiaries, and references to a fiscal year means the Company’s
year commencing on January 1 of that year and ending December 31 of
that year (e.g., fiscal 2007 means the period beginning January 1, 2007,
and ending December 31, 2007).
The
Company reports its financial results in accordance with generally accepted
accounting principles (“GAAP”) of the United States of America (“US GAAP”).
However, the Company has included certain non-US GAAP financial measures and
ratios, which it believes, provide useful information to both management and
readers of this report in measuring the financial performance and financial
condition of the Company. One such term is “organic revenue growth” which means
growth in revenues from sources other than acquisitions or foreign exchange
impacts. These measures do not have a standardized meaning prescribed by US
GAAP
and, therefore, may not be comparable to similarly titled measures presented
by
other publicly traded companies, nor should they be construed as an alternative
to other titled measures determined in accordance with US GAAP.
The
following discussion focuses on the operating performance of the Company for
the
three and nine months ended September 30, 2007 and 2006, and the financial
condition of the Company as of September 30, 2007. This analysis should be
read
in conjunction with the interim condensed consolidated financial statements
presented in this interim report and the annual audited consolidated financial
statements and Management’s Discussion and Analysis presented in the Annual
Report to Shareholders for the year ended December 31, 2006 as reported on
Form 10-K. All amounts are in U.S. dollars unless otherwise
stated.
Executive
Summary
The
Company’s objective is to create shareholder value by building market-leading
subsidiaries and affiliates that deliver innovative, value-added marketing
communications and strategic consulting to their clients. Management believes
that shareholder value is maximized with an operating philosophy of “Perpetual
Partnership” with proven committed industry leaders in marketing
communications.
MDC
manages the business by monitoring several financial and non-financial
performance indicators. The key indicators that we review focus on the areas
of
revenues and operating expenses. Revenue growth is analyzed by reviewing the
components and mix of the growth, including: growth by major geographic
location; existing growth by major reportable segment (organic); growth from
currency changes; and growth from acquisitions.
MDC
conducts its businesses through the Marketing Communications Group. Within
the
Marketing Communications Group, there are three reportable operating segments:
Strategic Marketing Services (“SMS”), Customer Relationship Management (“CRM”)
and Specialized Communication Services (“SCS”). In addition, MDC has a
“Corporate Group” which provides certain administrative, accounting, financial
and legal functions. During the fourth quarter of 2006, the Company reclassified
Margeotes Fertitta Powell, LLC (“MFP”) from the SMS segment to the SCS
segment because MFP’s performance was not consistent with the other
operating units of the SMS group. All prior periods have been recast to conform
to the current year presentation.
Marketing
Communications Group
Through
its operating “partners”, MDC provides advertising, consulting and specialized
communication services to clients throughout the United States, Canada, Mexico,
Jamaica and Europe.
The
operating companies earn revenue from agency arrangements in the form of
retainer fees or commissions; from short-term project arrangements in the form
of fixed fees or per diem fees for services; and from incentives or bonuses.
Additional information about revenue recognition appears in Note 2 “Significant
Accounting Policies” of the notes to the consolidated financial
statements.
MDC
measures operating expenses in two distinct cost categories: cost of services
sold, and office and general expenses. Cost of services sold is primarily
comprised of employee compensation related costs and direct costs related
primarily to providing services. Office and general expenses are primarily
comprised of rent and occupancy costs and administrative service costs including
related employee compensation costs. Also included in operating expenses is
depreciation and amortization.
MDC
management monitors these costs referred to above on a percentage of revenue
basis. Cost of services sold tend to fluctuate in conjunction with changes
in
revenues, whereas office and general expenses and depreciation and amortization,
which are not directly related to servicing clients, tend to decrease as a
percentage of revenue as revenues increase because a significant portion of
these expenses are relatively fixed in nature.
Certain
Factors Affecting Our Business
Acquisitions
and Dispositions.
MDC’s strategy includes acquiring ownership stakes in well-managed businesses
with strong reputations in the industry. MDC has entered into acquisition and
disposal transactions during the 2006 to 2007 period, which affected revenues,
expenses, operating income and net income. Additional information regarding
acquisitions is provided in Note 4 “Acquisitions” and information on
dispositions is provided in Note 6 “Discontinued Operations” in the notes to the
consolidated financial statements.
Foreign
Exchange Fluctuations.
MDC’s financial results and competitive position are primarily affected by
fluctuations in the exchange rate between the US dollar and non-US dollars,
primarily the Canadian dollar. See also “Quantitative and Qualitative
Disclosures About Market Risk—Foreign Exchange.”
Seasonality.
Historically, with some exceptions, the fourth quarter generates the highest
quarterly revenues in a year. The fourth quarter has historically been the
period in the year in which the highest volumes of media placements and retail
related consumer marketing occur.
Other
important factors that could affect our results of operations are set forth
in
“Item 1A Risk Factors” of the Company’s Form 10-K for the year ended
December 31, 2006.
Summary
of Key Transactions
Sale
of Secure Products International
On
November 14, 2006, MDC completed the sale of its Secure Products International
Group for consideration equal to approximately $27 million. Consideration was
received in the form of cash of $20 million and additional $1 million
annual payments over the next five years. In addition, MDC received a 7.5%
equity interest in the newly formed entity acquiring the Secure Products
International Group (“SPI”). During 2006, the Company recorded an impairment
loss of $19.5 million and a gain on a sale of $1.8 million. The results of
operations of the SPI have been included in discontinued operations for the
three and nine months ended September 30, 2006.
Management
Services Agreement
On
April
27, 2007, the Company entered into a new Management Services Agreement (the
“Services Agreement”) with Miles Nadal and with Nadal Management, Inc. to set
forth the terms and conditions on which Mr. Nadal will continue to provide
services to the Company as its Chief Executive Officer. Mr. Nadal’s prior
services agreement with the Company was scheduled to expire on October 31,
2007,
subject to two-year annual renewals. If the Company were not going to enter
into
a new agreement with Mr. Nadal and did not intend to allow the prior agreement
to renew, it would have been required to give Mr. Nadal notice of such
non-renewal by April 30, 2007.
The
Services Agreement has a three-year term with automatic one-year extensions.
Pursuant to the Agreement, the base compensation for Mr. Nadal’s services will
continue through 2007 at the current rate of $950,000, with annual increases
of
$25,000 in each of 2008 and 2009. The Services Agreement also provides for
an
annual bonus with a targeted payout of up to 250% of the base compensation.
The
Company will also make an annual cash payment of $500,000 in respect of
retirement benefits, employee health benefits and perquisites. In addition,
in
the discretion of the Compensation Committee, the Company may grant equity
incentives with a targeted grant-date value of up to 300% of the then current
base retainer.
As
an
incentive to enter into the Services Agreement, the Company paid a one-time
non-renewal fee of $3.5 million upon execution of the Services Agreement, which
was expensed during the second quarter of 2007. Mr. Nadal used a
portion of the proceeds to repay to the Company the $2.7 million (C$3.0 million)
note receivable due on November 1, 2007 from Nadal Management, Inc. The Company
had previously reserved the principal amount of this note receivable; the
collection of this receivable resulted in a one-time recovery of $2.7 million,
which was included in operating income in the nine months ended September 30,
2007. In addition, during July and September 2007, Mr. Nadal repaid an
additional $0.2 million of other previously reserved notes receivable. As a
result of these transactions above, operating income was adversely impacted
by
$0.6 million in the nine months ended September 30, 2007.
New
Financing Agreement
On
June
18, 2007, MDC and its material subsidiaries entered into a new $185 million
senior secured financing agreement (the “Financing Agreement”) with Fortress
Credit, an affiliate of Fortress Investment Group, as collateral agent and
Wells Fargo Bank, as administrative agent, and a syndicate of lenders. This
facility replaced the Company’s existing $96.5 million credit facility that was
originally expected to mature on September 21, 2007. Proceeds from the Financing
Agreement were used to repay in full the outstanding balances on the Company's
existing credit facility. The obligations repaid totaled approximately $73.7
million. All of these repaid credit facilities have been
terminated.
The
new
Financing Agreement consists of a $55 million revolving credit facility, a
$60
million term loan and a $70 million delayed draw term loan. Borrowings under
the
Financing Agreement will bear interest as follows: (a) LIBOR Rate Loans bear
interest at applicable interbank rates and Reference Rate Loans bear interest
at
the rate of interest publicly announced by the Reference Bank in New York,
New
York, plus (b) a percentage spread ranging from 0% to a maximum of 4.75%
depending on the type of loan and the Company’s Senior Leverage Ratio. In
addition, the Company is required to pay a facility fee of 50 basis
points.
Separation
Agreement
On
July
23, 2007, the Company entered into a separation agreement and release with
its
former President and Chief Financial Officer. In connection with this agreement
and related matters, the Company incurred charges of approximately $1.9 million
in the third quarter of 2007. This charge represents all costs and expenses
incurred as a consequence of this separation and for the hiring of a new
CFO.
Results
of Operations:
For
the Three Months Ended September 30, 2007
(thousands
of United States dollars)
|
|
Strategic
Marketing
Services
|
|
Customer
Relationship
Management
|
|
Specialized
Communication
Services
|
|
Corporate
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
79,110
|
|
$
|
29,885
|
|
$
|
31,055
|
|
$
|
—
|
|
$
|
140,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services sold
|
|
|
47,252
|
|
|
21,841
|
|
|
21,760
|
|
|
—
|
|
|
90,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
and general expenses
|
|
|
18,358
|
|
|
5,224
|
|
|
6,079
|
|
|
6,972
|
|
|
36,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
7,143
|
|
|
1,680
|
|
|
1,429
|
|
|
244
|
|
|
10,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit/(Loss)
|
|
|
6,357
|
|
|
1,140
|
|
|
1,787
|
|
|
(7,216
|
)
|
|
2,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,146
|
)
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations before income taxes, equity in affiliates and minority
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,550
|
)
|
Income
tax recovery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations before equity in affiliates and minority
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,734
|
)
|
Equity
in earnings of non-consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124
|
|
Minority
interests in income of consolidated subsidiaries
|
|
|
(4,172
|
)
|
|
(42
|
)
|
|
(949
|
)
|
|
—
|
|
|
(5,163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(6,773
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Segment Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash stock based compensation
|
|
$
|
306
|
|
$
|
—
|
|
$
|
(7
|
)
|
$
|
1,574
|
|
$
|
1,873
|
|
Capital
expenditures:
|
|
|
3,355
|
|
|
3,835
|
|
|
297
|
|
|
19
|
|
|
7,506
|
|
Results
of Operations:
For
the Three Months Ended September 30, 2006
(thousands
of United States dollars)
|
|
Strategic
Marketing
Services
|
|
Customer
Relationship
Management
|
|
Specialized
Communication
Services
|
|
Corporate
|
|
Total
|
|
|
|
(recasted)
|
|
|
|
(recasted)
|
|
|
|
|
|
Revenue
|
|
$
|
58,890
|
|
$
|
20,934
|
|
|
21,298
|
|
|
—
|
|
$
|
101,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services sold
|
|
|
26,948
|
|
|
15,147
|
|
|
15,055
|
|
|
—
|
|
|
57,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
and general expenses
|
|
|
22,053
|
|
|
4,549
|
|
|
5,103
|
|
|
4,961
|
|
|
36,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
4,945
|
|
|
1,240
|
|
|
449
|
|
|
62
|
|
|
6,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit/(Loss)
|
|
|
4,944
|
|
|
(2
|
)
|
|
691
|
|
|
(5,023
|
)
|
|
610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
625
|
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,180
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes, equity in affiliates
and
minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,945
|
)
|
Income
tax recovery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before equity in affiliates and minority
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,260
|
)
|
Equity
in earnings of non-consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129
|
|
Minority
interests in income of consolidated subsidiaries
|
|
|
(1,370
|
)
|
|
11
|
|
|
(421
|
)
|
|
—
|
|
|
(1,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,911
|
)
|
Loss
from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(12,909
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Segment Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash stock based compensation
|
|
$
|
128
|
|
$
|
6
|
|
$
|
—
|
|
$
|
1,515
|
|
$
|
1,649
|
|
Capital
expenditures
|
|
$
|
1,860
|
|
$
|
5,307
|
|
$
|
249
|
|
$
|
78
|
|
|
7,494
|
|
Results
of Operations:
For
the Nine Months Ended September 30, 2007
(thousands
of United States dollars)
|
|
Strategic
Marketing
Services
|
|
Customer
Relationship
Management
|
|
Specialized
Communication
Services
|
|
Corporate
|
|
Total
|
|
Revenue
|
|
$
|
228,117
|
|
$
|
79,134
|
|
$
|
87,587
|
|
$
|
—
|
|
$
|
394,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services sold
|
|
|
136,328
|
|
|
57,712
|
|
|
63,185
|
|
|
—
|
|
|
257,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
and general expenses
|
|
|
54,685
|
|
|
14,429
|
|
|
17,600
|
|
|
20,063
|
|
|
106,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
14,740
|
|
|
4,759
|
|
|
2,813
|
|
|
429
|
|
|
22,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
impairment
|
|
|
—
|
|
|
—
|
|
|
4,475
|
|
|
—
|
|
|
4,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit/(Loss)
|
|
|
22,364
|
|
|
2,234
|
|
|
(486
|
)
|
|
(20,492
|
)
|
|
3,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,913
|
)
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,734
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations before income taxes, equity in affiliates and minority
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,027
|
)
|
Income
tax recovery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations before equity in affiliates and minority
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,431
|
)
|
Equity
in earnings of non-consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134
|
|
Minority
interests in income of consolidated subsidiaries
|
|
|
(12,138
|
)
|
|
(68
|
)
|
|
(2,667
|
)
|
|
—
|
|
|
(14,873
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(18,170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Segment Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash stock based compensation
|
|
$
|
797
|
|
$
|
5
|
|
$
|
—
|
|
$
|
4,540
|
|
$
|
5,342
|
|
Capital
expenditures
|
|
|
6,841
|
|
|
6,350
|
|
|
1,592
|
|
|
187
|
|
|
14,970
|
|
Results
of Operations:
For
the Nine Months Ended September 30, 2006
(thousands
of United States dollars)
|
|
Strategic
Marketing
Services
|
|
Customer
Relationship
Management
|
|
Specialized
Communication
Services
|
|
Corporate
|
|
Total
|
|
|
|
(recasted)
|
|
|
|
(recasted)
|
|
|
|
|
|
Revenue
|
|
$
|
171,415
|
|
$
|
60,747
|
|
$
|
67,171
|
|
$
|
—
|
|
$
|
299,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services sold
|
|
|
85,336
|
|
|
44,554
|
|
|
47,900
|
|
|
—
|
|
|
177,790
|
|
|
|
|
|
|
|
|
|
|
14,257
|
|
|
|
|
|
|
|
Office
and general expenses
|
|
|
54,186
|
|
|
11,882
|
|
|
|
|
|
17,347
|
|
|
97,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
13,697
|
|
|
3,429
|
|
|
1,310
|
|
|
159
|
|
|
18,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit/(Loss)
|
|
|
18,196
|
|
|
882
|
|
|
3,704
|
|
|
(17,506
|
)
|
|
5,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,697
|
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,815
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes, equity in affiliates
and
minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(842
|
)
|
Income
tax recovery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before equity in affiliates and minority
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
909
|
|
Equity
in earnings of non-consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
630
|
|
Minority
interests in income of consolidated subsidiaries
|
|
|
(8,047
|
)
|
|
(27
|
)
|
|
(1,891
|
)
|
|
—
|
|
|
(9,965
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,426
|
)
|
Loss
from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(28,546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Segment Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash stock based compensation
|
|
$
|
619
|
|
$
|
18
|
|
$
|
2,338
|
|
$
|
4,006
|
|
$
|
6,981
|
|
Capital
expenditures
|
|
$
|
7,774
|
|
$
|
9,926
|
|
$
|
820
|
|
$
|
271
|
|
$
|
18,791
|
|
Revenue
was $140.1 million for the third quarter of 2007, representing an increase
of
$38.9 million or 38.5%, compared to revenue of $101.1 million in the third
quarter of 2006. This revenue increase relates primarily to organic growth
of
$26.7 million, primarily resulting from net new business wins and additional
revenues from existing clients in the United States. In addition, there was
an
increase of $5.2 million related to the consolidation of two entities in the
third quarter of 2007, that were previously accounted for on the equity method
of accounting in the third quarter of 2006. Acquisition related revenue growth
was $5.3 million. In addition, a weakening of the U.S. dollar versus the
Canadian dollar and British pound during the third quarter of 2007, as compared
to the third quarter of 2006, resulted in increased revenues of approximately
$1.7 million.
Operating
profit for the third quarter of 2007 was $2.1 million, compared to an operating
profit of $0.6 million for the same quarter of 2006. The increase in operating
profit was primarily the result of a $1.4 million increase in operating profit
in the Strategic Marketing Services segment, as compared to the prior year
quarter. In addition, operating profit in the Customer Relationship
Management segment increased by $1.1 million and operating profit in the
Specialized Communication Services segment increased by $1.1 million. This
was
partially offset by an increase in corporate operating expenses of $2.2 million
during the quarter ended September 30, 2007, as compared to the quarter ended
September 30, 2006. This increase was primarily due to approximately $1.9
million of costs associated with the separation agreement with the Company’s
former President and CFO and the hiring of a new CFO, as well as an increase
in
corporate depreciation and amortization of $0.2 million.
The
net
loss from continuing operations for the third quarter of 2007 increased from
$2.9 million in 2006 to $6.8 million in 2007. This increase in net loss of
$3.9
million was primarily the result of an increase in other expenses of $3.8
million which includes a $2.8 million increase in unrealized losses on foreign
currency transactions, increased minority interest of $3.4 million, additional
net interest expense of $0.3 million. This was offset in part by increased
operating profits of $1.5 million and an additional income tax recovery of
$2.1
million.
Marketing
Communications Group
Revenues
for the third quarter of 2007 attributable to the Marketing Communications
Group, which consists of three reportable segments - Strategic Marketing
Services (“SMS”), Customer Relationship Management (“CRM”), and Specialized
Communication Services (“SCS”), were $140.1 million compared to $101.1 million
in the third quarter of 2006, representing an increase of $38.9 million or
38.5%.
The
components of revenue growth for the Marketing Communications Group for
the third quarter of 2007 are shown in the following table:
|
|
Revenue
|
|
|
|
(in
thousands)
|
|
%
|
|
Three
months ended September 30, 2006
|
|
$
|
101,122
|
|
|
|
|
Organic
|
|
|
26,740
|
|
|
26.4
|
%
|
Acquisitions
|
|
|
5,343
|
|
|
5.3
|
%
|
Effect
of accounting change
|
|
|
5,163
|
|
|
5.1
|
%
|
Foreign
exchange impact
|
|
|
1,682
|
|
|
1.7
|
%
|
Three
months ended September 30, 2007
|
|
$
|
140,050
|
|
|
38.5
|
%
|
The
percentage of revenue by geographic region remained relatively consistent with
the prior year quarter and is demonstrated in the following table:
|
|
Revenue
|
|
|
|
Three Months Ended
September
30, 2007
|
|
Three Months Ended
September
30, 2006
|
|
US
|
|
|
80
|
%
|
|
84
|
%
|
Canada
|
|
|
18
|
%
|
|
14
|
%
|
UK
and other
|
|
|
2
|
%
|
|
2
|
%
|
The
operating profit of the Marketing Communications Group for the third quarter
of
2007 increased by approximately $3.7 million, or 64.8%, to $9.3 million from
$5.6 million. Operating margins were 6.6% for 2007 as compared to 5.6% for
the
third quarter of 2006. The increase in operating margin was primarily related
to
a decrease in office and general expenses (excluding staff costs) as a
percentage of revenue from 16.6% in 2006 to 11.7% in 2007. This margin
improvement was partially offset by an increase in direct costs as a percentage
of revenue to 26.7% in 2007 from 23.1% in 2006, primarily attributable to
increased reimbursed client related direct costs and an increase in depreciation
and amortization as a percentage of revenue from 6.6% in 2006 to 7.3% in 2007.
Included in 2006 office and general expenses was a charge of $1.9 million
relating to the closure of one of our West Coast facilities and a $1.0 million
write-off of related leasehold improvements which is included in depreciation
and amortization. Excluding these charges, office and general expenses and
depreciation and amortization as a percentage of revenue for the third quarter
of 2006 would have been 14.7% and 5.5%, respectively.
Marketing
Communications Businesses
Strategic
Marketing Services (“SMS”)
Revenues
attributable to SMS for the third quarter of 2007 were $79.1 million compared
to
$58.9 million in the third quarter of 2006. This increase of $20.2 million,
or
34.3%, included organic revenue growth of approximately $13.0 million resulting
from new client business wins, which was partially offset by client
losses. In addition, revenue increased by $1.9 million relating to the
consolidation of Zig Inc. in the third quarter of 2007 as compared to the third
quarter of 2006, when it was accounted for on the equity method of accounting.
Acquisition related revenue contributed $4.8 million during the third quarter
of
2007. In addition, a weakening of the U.S. dollar versus the Canadian dollar
and
British pound during the third quarter of 2007, as compared to the third quarter
of 2006, resulted in increased revenues of approximately $0.4
million.
The
operating profit of SMS for the third quarter of 2007 was $6.4 million, compared
to 2006 operating profit of $4.9 million. Operating margins were 8.0% for the
third quarter of 2007, as compared to 8.4% for the third quarter of 2006. Office
and general expenses (excluding staff costs) decreased as a percentage of
revenue to 12.5% in the third quarter of 2007, from 18.9% in the prior year
quarter. Depreciation and amortization increased as a percentage of revenue
from
8.4% in 2006 to 9.0% in 2007. The increase in depreciation and amortization
resulted from a change in the estimated amortization rate of customer lists.
Included in 2006 office and general expenses was a charge of $1.9 million
relating to the closure of one of our West Coast facilities and a $1.0 million
write-off of related leasehold improvements, which is included in depreciation
and amortization. Excluding these charges, office and general expenses and
depreciation and amortization as a percentage of revenue for the third quarter
of 2006 would have been 15.7% and 6.7%, respectively. Total staff costs as
a
percentage of revenue increased from 53.0% in 2006 to 56.1% in 2007, primarily
from increased headcount. In addition, other direct costs increased as a
percentage of revenue to 12.2% in 2007 as compared to 8.9% in 2006, primarily
from an increase in reimbursed client related direct costs as a percentage
of
revenue.
Customer
Relationship Management (“CRM”)
Revenues
reported by the CRM segment for the third quarter of 2007 were $29.9
million, an increase of $9.0 million or 43%, compared to $20.9 million reported
for the third quarter of 2006. This growth was entirely organic and was due
primarily to additional business from existing clients, in part as a result
of
the opening of a new customer care center in September 2007 and the opening
of
three additional customer care centers during 2006, offset by the closure of
one
customer care center, in August 2006.
The
operating profit of CRM was approximately $1.1 million for the third quarter
of
2007, as compared to nil in the third quarter of 2006. Operating margins were
3.8% for the third quarter of 2007 as compared to 0% in the third quarter of
2006. The increase in operating margin was primarily due to a decrease in total
staff costs as a percentage of revenue from 21.3% in 2006, to 19.8% in 2007,
and
a decrease in office and general expenses as a percentage of revenue from 12.6%
to 9.4%. This was partially offset by an increase in other direct costs as
a
percentage of revenue from 58.7% in 2006 to 59.7% in 2007.
Specialized
Communication Services (“SCS”)
SCS
generated revenues of $31.1 million for the third quarter of 2007, $9.8 million
or 46% higher than revenue of $21.3 million in the third quarter of 2006. This
was primarily due to organic revenue growth of $4.8 million as a result of
new
business wins, offset by the closure of MFP. In addition, revenue increased
by
$3.2 million relating to the consolidation of an entity, Accumark
Communications, Inc., previously accounted for on the equity basis. In addition,
a weakening of the U.S. dollar versus the Canadian dollar and British pound
during the third quarter of 2007, as compared to the third quarter of 2006,
resulted in increased revenues of approximately $1.3 million. Acquisition
related revenue accounted for $0.5 million of the revenue growth.
The
operating profit of SCS increased by $1.1 million to $1.8 million in the third
quarter of 2007 from an operating profit of $0.7 million in the third quarter
of
2006. Operating margins were 5.8% for the third quarter of 2007, as compared
to
3.2% in the prior year period. The increase in operating margins results
primarily from a decrease in total staff costs as a percentage of revenue from
51.8% in 2006 to 44.7% in 2007, coupled with a decrease in office and general
expenses (excluding staff costs) as a percentage of revenue from 14.1% in 2006
to 11.8% in 2007. These positive impacts on operating margin were offset in
part
by an increase in other direct costs as a percentage of revenue to 32.0% in
2007
from 27.6% in 2006, as well as an increase in depreciation and amortization
as a
percentage of revenue to 4.6% in 2007 as compared to 2.1% in 2006. Excluding
the
results of MFP in 2007 and 2006, operating income would have been $2.6 million
and $1.6 million, respectively, and operating margins would have been 8.4%
and
7.4%, respectively.
Corporate
Corporate
operating expenses for the third quarter of 2007 increased by $2.2 million
to
$7.2 million from $5.0 million in the prior year quarter. The increase in
corporate expenses is primarily due to $1.9 million of costs associated with
the
Company’s separation agreement with its former President and CFO and the hiring
of a new CFO. In addition, depreciation and amortization increased by $0.2
million and the prior year quarter included a capital tax refund of $0.2
million. These increases in corporate costs were partially offset by a $0.2
million partial repayment of a note receivable from the Company’s Chief
Executive Officer that the Company had previously provided a reserve against.
Net
Interest Expense
Net
interest expense for the three months ended September 30, 2007 was $3.5 million,
$0.3 million higher than the $3.2 million incurred during the same period of
2006. This increase was due to higher interest rates and higher average
outstanding debt in 2007 relating to continuing operations. Interest income
was
$0.2 million for both the three months ended September 30, 2007 and
2006.
Other
Income (Expense)
Other
expense was $3.1 million in the third quarter of 2007, as compared to other
income of $0.6 million in the third quarter of 2006. This $3.8 million decrease
in income was due primarily to foreign currency transaction losses of $3.6
million in 2007 as compared to $0.4 million in 2006. In addition, in 2006 other
income included a $1 million gain on the recovery of an asset as compared to
a
recovery of assets of $0.5 million in 2007.
Income
Tax Recovery
The
income tax recovery recorded in the third quarter of 2007 was $2.8 million
as
compared to a $0.7 million income tax recovery recorded in the third quarter
of
2006. The Company’s 2007 and 2006 effective tax rate was different than the
statutory tax rate due to minority interest income which is not subject to
tax
and non-deductible non-cash stock based compensation charges.
The
Company’s US operating units are generally structured as limited liability
companies, which are treated as partnerships for tax purposes. The Company
is
only taxed on its share of profits, while minority interest holders are
responsible for taxes on their share of the operating units’
profits.
Minority
Interests
Minority
interest in income of consolidated subsidiaries was $5.2 million for the third
quarter of 2007, an increase of $3.4 million from the $1.8 million of minority
interest in income of consolidated subsidiaries incurred during the third
quarter of 2006. This increase was due primarily to an increase in profitability
in subsidiaries within the SMS and SCS operating segments that are not owned
100%.
Discontinued
Operations
Loss
from
discontinued operations was $10.0 million for the third quarter of 2006 and
relates to the operations of SPI, which was sold in 2006. Included in the loss
was a $11.6 million impairment charge, which was based on the net proceeds
from
the sale of SPI compared to the Company’s carrying value of SPI.
Net
Loss
As
a
result of the foregoing, the net loss recorded for the third quarter of 2007
was
$6.8 million, or a loss of $ (0.27) per diluted share, compared to the net
loss
of $12.9 million, or $ (0.54) per diluted share, reported for the third quarter
of 2006.
Nine
Months Ended September 30, 2007 Compared to Nine Months Ended September 30,
2006
Revenue
was $394.8 million for the nine months ended September 30, 2007, representing
an
increase of $95.5 million or 31.9%, compared to revenue of $299.3 million in
the
nine months ended September, 2006. This revenue increase relates primarily
to
organic growth of $70.3 million, primarily resulting from net new business
wins
and additional revenues from existing clients in the United States. There was
also an increase of $15.8 million related to the consolidation of three entities
in the nine months ended September 30, 2007 that were previously accounted
for
on the equity method of accounting in the nine months ended September 30, 2006.
In addition, acquisitions accounted for $7.3 million of the revenue increase,
and a weakening of the U.S. dollar versus the Canadian dollar and British pound
during the nine months ended September 30, 2007, as compared to the nine months
ended September 30, 2006, resulted in increased revenues of approximately $2.1
million.
Operating
profit for the nine months ended September 30, 2007 was $3.6 million, compared
to an operating profit of $5.3 million for the same period of 2006. The decrease
in operating profit was primarily the result of an operating loss of $0.5
million in the Specialized Communication Services segment for the nine months
ended September 30, 2007 as compared to an operating profit of $3.7 million
in
the prior year period. This operating loss of $0.5 million in the SCS segment
for the nine months ended September 30, 2007 was due primarily to a goodwill
impairment charge of $4.5 million. Corporate operating expenses increased by
$3.0 million to $20.5 million during the nine months ended September 30, 2007
from $17.5 million during the same prior year period, primarily due to
approximately $1.9 million of costs associated with the separation agreement
with the Company’s former President and Chief Financial Officer and the hiring
of a new Chief Financial Officer, as well as a net $0.6 million charge relating
to the new management services agreement with the Company’s CEO and increased
non-cash stock based compensation of $0.5 million. This was partially
offset by a $4.2 million increase in operating profit in the Strategic Marketing
Services Segment, as compared to the prior year. In addition, operating profit
in the Customer Relationship Management Segment increased by $1.4
million.
The
net
loss from continuing operations for the nine months ended September 30, 2007
increased from $8.4 million in 2006 to $18.2 million in 2007, primarily the
result of an increase in other expenses of $6.6 million, which includes an
increase in unrealized foreign currency transaction losses of $6.2 million,
increased interest expense of $1.9 million, decreased operating profit of $1.7
million, and increased minority interest expense of $4.9 million offset in
part by an increase in the income tax recovery of $4.8 million.
Marketing
Communications Group
Revenues
for the nine months ended September 30, 2007 attributable to the Marketing
Communications Group, which consists of three reportable segments - Strategic
Marketing Services (“SMS”), Customer Relationship Management (“CRM”), and
Specialized Communication Services (“SCS”), were $394.8 million compared to
$299.3 million in the nine months ended September 30, 2006, representing an
increase of $95.5 million or 31.9%.
The
components of revenue growth for the Marketing Communications Group, for
the first nine months of 2007 are shown in the following table:
|
|
Revenue
|
|
|
|
(in
thousands)
|
|
%
|
|
Nine
months ended September 30, 2006
|
|
$
|
299,333
|
|
|
|
|
Organic
|
|
|
70,284
|
|
|
23.5
|
%
|
Acquisitions
|
|
|
7,287
|
|
|
2.4
|
%
|
Effect
of accounting change
|
|
|
15,830
|
|
|
5.3
|
%
|
Foreign
exchange impact
|
|
|
2,104
|
|
|
0.7
|
%
|
Nine
months ended September 30, 2007
|
|
$
|
394,838
|
|
|
31.9
|
%
|
The
Marketing Communications Group had organic revenue growth of $70.3 million,
or
23.5%, for the nine months ended September 30, 2007, primarily attributable
to
net new business wins and additional revenues from existing clients,
particularly in the United States. The consolidation of three entities in the
nine months ended September 30, 2007, which were previously accounted for under
the equity method of accounting in the nine months ended September 30, 2006,
accounted for $15.8 million of the increase. Acquisitions accounted for $7.3
million of revenue growth in the nine months ended September 30, 2007. In
addition, a weakening of the U.S. dollar versus the Canadian dollar and British
pound during the nine months ended September 30, 2007, as compared to the nine
months ended September 30, 2006, resulted in increased revenues of approximately
$2.1 million.
The
percentage of revenue by geographic region remained relatively consistent with
the prior year period and is demonstrated in the following table:
|
|
Revenue
|
|
|
|
Nine Months Ended
September
30, 2007
|
|
Nine Months Ended
September
30, 2006
|
|
US
|
|
|
81
|
%
|
|
85
|
%
|
Canada
|
|
|
17
|
%
|
|
14
|
%
|
UK
and other
|
|
|
2
|
%
|
|
1
|
%
|
The
operating profit of the Marketing Communications Group for the nine months
ended
September 30, 2007 increased by approximately $1.3 million, or 5.8%, to $24.1
million from $22.8 million. Operating margins decreased by 1.5% and were 6.1%
for the nine months ended September 30, 2007 as compared to 7.6% for the nine
months ended September 30, 2006. A goodwill impairment charge of $4.5 million
accounted for 1.1% of the decrease in operating margin. Included in operating
profits in 2006 was a termination payment of $5.3 million received in connection
with the termination by a client of their engagement with a subsidiary of the
Company. In addition, 2006 included a non-cash stock based compensation charge
of $2.3 million relating to the price paid for membership interests, which
was
less than fair value of such membership interests and the fair value of an
option granted to certain members of management of Source Marketing LLC. These
two items had a net positive impact on operating margins of 0.9% in 2006. Staff
costs as a percentage of revenues decreased from 47.9% in 2006 to 46.9% in
2007.
In addition, occupancy and administrative costs decreased from 11.6% of revenue
in 2006 to 8.7% of revenue in 2007,
Marketing
Communications Businesses
Strategic
Marketing Services (“SMS”)
Revenues
attributable to SMS for the nine months ended September 30, 2007 were $228.1
million compared to $171.4 million in the nine months ended September 30, 2006.
This increase of $56.7 million or 33.1% included organic revenue growth of
approximately $42.0 million resulting from new client business wins which was
partially offset by client losses. In December 2005, one of the SMS’
businesses client’s terminated their engagement, and as a result, that business
received $5.3 million in termination payments during the nine months ended
September 30, 2006. In addition, revenue also increased by $7.5 million
relating to the consolidation of two entities, Zig Inc. and Mono Advertising,
LLC, previously accounted for on the equity basis. Acquisitions accounted for
$6.8 million of revenue growth in the nine months ended September 30,
2007.
The
operating profit of SMS for the nine months ended September 30, 2007 and 2006
was $22.4 million and $18.2 million, respectively, while operating margins
were
9.8% for the nine months ended September 30, 2007 as compared to 10.6% in the
nine months ended September 30, 2006. Excluding the receipt of the termination
payment noted above, 2006 operating profit would have been $12.9 million with
operating margins of 7.9%. Total staff costs as a percentage of revenue
increased from 55.0% in 2006 to 55.6% in 2007. Excluding the termination
payment, staff costs as a percentage of revenue in 2006 would have been 56.8%.
Office and general expenses increased due to additional occupancy and
administrative costs relating to the expansion of operations in Boulder,
Colorado and expansions and office moves of other business units but as a
percentage of revenue occupancy and administrative costs decreased from 17.6%
in
2006 to 13.8% in 2007. Depreciation and amortization represented 8.0% and 6.5%
of revenue during the nine months ended September 30, 2006 and 2007,
respectively, as certain intangibles resulting from the Zyman acquisition were
fully amortized during 2006. During 2007, amortization expense increased from
a
change in the estimated amortization rate of customer lists. These positive
impacts to operating margin were offset in part by an increase in reimbursed
client related direct costs as a percentage of revenue.
Customer
Relationship Management (“CRM”)
Revenues
reported by the CRM segment for the nine months ended September 30, 2007 were
$79.1 million, an increase of $18.4 million or 30.3% compared to the $60.7
million reported for the nine months ended September 30, 2006. This growth
was
entirely organic and was due primarily to additional business from existing
clients, in part as a result of opening a new customer care center in September
2007 and the opening of three additional customer care centers during 2006,
offset by the closure of one customer care center, in August 2006.
The
operating profit of CRM was approximately $2.2 million for the nine months
ended
September 30, 2007 as compared to $0.9 million in 2006. Operating margins were
2.8% for the nine months ended September 30, 2007 and 1.5% for the nine months
ended September 30, 2006. The increase in operating margins is due primarily
to
a decrease in cost of services sold due to reduced employee
turnover.
Specialized
Communication Services (“SCS”)
SCS
generated revenues of $87.6 million for the nine months ended September 30,
2007, $20.4 million or 30.4% higher than revenue of $67.2 million in the nine
months ended September 30, 2006. This increase was primarily due to revenue
of
$9.9 million relating to organic growth as a result of new business wins offset
by the loss of several significant clients, primarily at MFP, and revenue
of $8.3 million relating to the consolidation of an entity, Accumark
Communications, Inc., previously accounted for on the equity basis. In addition,
a weakening of the US dollar versus the Canadian dollar and British pound during
the nine months ended September 30, 2007, as compared to the nine months ended
September 30, 2006, resulted in increased revenues of approximately $1.6
million. Acquisition related revenue growth was $0.5 million.
The
operating profit of SCS decreased by $4.2 million to an operating loss of $0.5
million in the nine months ended September 30, 2007, from an operating profit
of
$3.7 million in the nine months ended September 30, 2006. This decrease was
due
primarily to a goodwill impairment charge of $4.5 million in 2007 offset by
a
non-cash stock based compensation charge of $2.3 million in 2006 relating to
the
price paid for membership interests, which was less than fair value of such
membership interests and the fair value of an option granted to certain members
of management of Source Marketing LLC (“Source”). Excluding the operating
results of MFP and the related goodwill impairment, 2007 operating income would
have been $8.2 million with operating margins of 9.7%. Excluding the operating
results of MFP and the Source non-cash stock based compensation charge, 2006
operating income would have been $8.5 million with operating margins of 14.7%.
Staff costs excluding MFP and the Source non-cash stock based compensation
charge as a percentage of revenue decreased to 45.6% in 2007 from 46.3% in
2006.
The decrease in operating margins is primarily a result of the timing of when
expected client projects will begin and when they will be completed.
Additionally, the decrease in operating margins were negatively impacted by
increases in other direct costs as a percentage of revenue, primarily increased
reimbursed client related direct costs as a percentage of revenue.
Corporate
Operating
expenses for the nine months ended September 30, 2007 increased by $3.0 million
to $20.5 million from $17.5 million in the prior year period. The increase
in
corporate expenses is primarily due to the $1.9 million of costs associated
with the Company’s separation agreement with its former President and Chief
Financial Officer (“CFO”) and the hiring of a new CFO, and the net $0.6 million
impact of the renewal of the CEO management services agreement. In addition,
non-cash stock based compensation increased by $0.5 million and depreciation
and
amortization increased by $0.3 million. These increases were partially offset
by
a decrease in cash compensation and benefits of $0.3 million.
Net
Interest Expense
Net
interest expense for the nine months ended September 30, 2007 was $8.7 million,
$0.9 million higher than the $7.8 million incurred during the same period of
2006. Interest expense increased $1.9 million in the nine months ended September
30, 2007 compared to the same period of 2006 due to the write-off of deferred
financing costs of $0.6 million relating to the Company’s prior credit facility,
as well as higher interest rates and higher average outstanding debt in 2007.
Interest income was $1.4 million for the nine months ended September 30, 2007
as
compared to $0.4 million in the same period of 2006. This increase was primarily
due to the interest income recognized from the acceleration of payments received
in July 2007 related to the sale of SPI, originally due to be received in 2010
and 2011.
Other
Income (Expense)
Other
(expense) increased by $6.6 million and was an expense of $4.9 million in the
nine months ended September 30, 2007 as compared to other income of $1.7 million
in the nine months ended September 30, 2006, due primarily to an increase in
foreign currency transaction losses of $7.1 million in 2007 as compared to
$0.1
million in 2006. In addition, during the nine months ended September 30, 2007,
the Company recognized a gain on the sale/recovery of assets of $1.8 million,
primarily related to the sale of a plane acquired in the Zyman acquisition,
as
compared to a gain on the sale/recovery of assets of $1.4 million in
2006.
Income
Tax Recovery
The
income tax recovery recorded in the nine months ended September 30, 2007 was
$6.6 million as compared to $1.8 million in the nine months ended September
30,
2006. The Company’s effective tax rate was different than the statutory tax rate
due to minority interest income which is not subject to tax and non-deductible
non-cash stock based compensation charges in both the 2007 and 2006 first
quarter.
The
Company’s US operating units are generally structured as limited liability
companies, which are treated as partnerships for tax purposes. The Company
is
only taxed on its share of profits, while minority interest holders are
responsible for taxes on their share of the profits.
Minority
Interests
Minority
interest in income of consolidated subsidiaries was $14.9 million for the nine
months ended September 30, 2007, up $4.9 million from the $10.0 million of
minority interest in income of consolidated subsidiaries incurred during the
nine months ended September 30, 2006, due primarily to an increase in
profitability in the subsidiaries within the SMS and SCS operating segments
who
are not 100% owned.
Discontinued
Operations
Loss
from
discontinued operations was $20.1 million for the nine months ended September
30, 2006 and relates to the operations of SPI, which was sold in 2006. Included
in the $20.1 million loss was a $19.5 million impairment charge which was based
on the expected net proceeds from the sale of SPI compared to the Company’s
carrying value of SPI.
Net
Loss
As
a
result of the foregoing, the net loss recorded for the nine months ended
September 30, 2007 was $18.2 million, or a loss of $ (0.74) per diluted share,
compared to the net loss of $28.5 million, or $ (1.19) per diluted share,
reported for the nine months ended September 30, 2006.
Liquidity
and Capital Resources:
Liquidity
The
following table provides summary information about the Company’s liquidity
position:
|
|
As
of and for the nine
months
ended
September
30, 2007
|
|
As
of and for the nine months ended
September
30, 2006
|
|
As
of and for the year ended
December 31,
2006
|
|
|
|
(000’s)
|
|
(000’s)
|
|
(000’s)
|
|
Cash
and cash equivalents
|
|
$
|
7,089
|
|
$
|
4,592
|
|
$
|
6,591
|
|
Working
capital (deficit)
|
|
$
|
(6,843
|
)
|
$
|
(107,183
|
)
|
$
|
(105,039
|
)
|
Cash
(used in) provided by operating activities
|
|
$
|
(23,803
|
)
|
$
|
5,664
|
|
$
|
39,705
|
|
Cash
used in investing activities
|
|
$
|
(19,545
|
)
|
$
|
(24,505
|
)
|
$
|
(14,315
|
)
|
Cash
(provided by) used in financing activities
|
|
$
|
45,280
|
|
$
|
(10,884
|
)
|
$
|
(31,597
|
)
|
Long-term
debt to shareholders’ equity ratio
|
|
|
1.26
|
|
|
1.04
|
|
|
0.37
|
|
Fixed
charge coverage ratio
|
|
|
N/A
|
|
|
1.07
|
|
|
1.31
|
|
Fixed
charge coverage deficiency
|
|
$
|
9,759
|
|
|
N/A
|
|
|
N/A
|
|
As
of
September 30, 2007, and December 31, 2006, $1.8 million and $2.4 million of
the consolidated cash position was held by subsidiaries, which, although
available for the subsidiaries’ use, does not represent cash that is
distributable as earnings to MDC Partners for use to reduce its
indebtedness.
Working
Capital
At
September 30, 2007, the Company had a working capital deficit of $6.8 million,
compared to a deficit of $105.0 million at December 31, 2006. The increase
in working capital is primarily due to seasonal shifts in the amounts billed
to
clients, and paid to suppliers, primarily media outlets, as well as
classification of the revolving credit facility under the new Financing
Agreement as a long-term liability as of September 30, 2007 as compared to
a
short-term liability at December 31, 2006.
At
December 31, 2006, included in current liabilities is the outstanding borrowings
under the Company’s former credit facility of $45.0 million. See Long-term Debt
below.
The
Company intends to maintain sufficient availability of funds under the new
Financing Agreement at any particular time to adequately fund such working
capital deficits should there be a need to do so from time to time.
Cash
Flows
Operating
Activities
Cash
flow
used in operations, including changes in non-cash working capital, for the
nine
months ended September 30, 2007 was $23.8 million. This was attributable
primarily to a net operating loss of $18.2 million, payments of accounts payable
and accrued liabilities, which resulted in a cash use from operations of $30.5
million, an increase in accounts receivable of $20.2 million, a decrease in
advance billings of $5.9 million and an increase in prepaid and other current
assets of $2.6 million. This use of cash was partially offset by depreciation
and amortization, a goodwill impairment charge and non-cash stock compensation
of $33.9 million, a decrease in expenditures billable to clients of $14.2
million and a foreign exchange impact of $8.2 million. Cash provided by
continuing operations was $3.6 million in the nine months ended September 30,
2006 and was primarily reflective of a net loss from continuing operations
of
$8.4 million plus non-cash depreciation and amortization and stock based
compensation of $26.6 million, an increase in accounts payable, accruals and
other liabilities of $14.4 million and an increase in advance billings of $17.1
million, partially offset by an increase in accounts receivable of $17.4
million, expenditures billable to clients of $23.3 million and $3.3 million
in
deferred income taxes. Discontinued operations provided cash of $2.1 million
in
the nine months ended September 30, 2006.
Investing
Activities
Cash
flows used in investing activities were $19.5 million for the nine months ended
September 30, 2007, compared with $24.5 million in the nine months ended
September 30, 2006.
Expenditures
for capital assets in the nine months ended September 30, 2007 were $15.0
million. Of this amount, $6.8 million was incurred by the SMS segment, $6.4
million was incurred by the CRM segment and $1.6 million was incurred by the
SCS
segment. These expenditures consisted primarily of computer equipment, leasehold
improvements, furniture and fixtures, and $0.2 million related to the purchase
of corporate assets, primarily software. In the nine months ended September
30,
2006, capital expenditures totaled $18.8 million, of which $7.8 million was
incurred by the SMS segment, $9.9 million was incurred by the CRM segment and
$0.8 million was incurred by the SCS segment, which expenditures consisted
primarily of leasehold improvements, computer and switching equipment, and
$0.3
million related to the purchase of corporate assets.
Cash
flow
used in acquisitions was $12.5 million in the nine months ended September 30,
2007, and primarily related to the Company’s investments in the HL Group,
Redscout, Iradesso Communications Corp. and payments for deferred acquisition
consideration. The Company also received proceeds from the sale of assets of
$8.4 million in 2007, primarily related to the sale of a plane acquired in
the
acquisition of Zyman. In the nine months ended September 30, 2006, cash flow
used in acquisitions was $5.2 million and primarily related to the settlement
of
put obligations and deferred acquisition consideration.
Distributions
received from non-consolidated affiliates amounted to $0.5 million for the
nine
months ended September 30, 2006.
Discontinued
operations used cash of $1.6 million in 2006 relating to capital asset
purchases.
Financing
Activities
During
the nine months ended September 30, 2007, cash flows provided by financing
activities amounted to $45.3 million, and primarily consisted of $100.6 million
of proceeds from the new Financing Agreement, which was partially offset by
the
$45.0 million repayment of the old credit facility, $10.6 million of net
repayments of long-term debt and bank borrowings, and the payment of $3.9
million of deferred financing costs relating to the new Financing Agreement.
The
Company also received proceeds from a forgivable note payable amounting to
$2.5
million relating to the opening of a new customer care center. In addition,
the
Company received $2.1 million of proceeds from the issuance of share capital
resulting from the exercise of stock options. During the nine months ended
September 30, 2006, cash flows provided from financing activities amounted
to
$10.9 million, and consisted primarily of borrowings under the prior credit
facility of $11.8 million and proceeds from the issuance of share capital of
$0.5 million, which was partially offset by repayments of long-term debt and
bank borrowings of $0.7 million.
Discontinued
operations used cash of $0.7 million in 2006, relating to payments under capital
leases.
Long-Term
Debt
On
June
18, 2007, the Company and its material subsidiaries entered into a new $185
million senior secured financing agreement (the “Financing Agreement”) with
Fortress Credit, an affiliate of Fortress Investment Group, as collateral
agent, and Wells Fargo Bank, as administrative agent, and a syndicate of
lenders. This facility replaced the Company’s existing $96.5 million credit
facility that was originally expected to mature on September 21, 2007. Proceeds
from the Financing Agreement were used to repay in full the outstanding balances
on the Company's existing credit facility. The obligations repaid totaled
approximately $73.65 million. All of these repaid credit facilities have been
terminated.
This
new
Financing Agreement consists of a $55 million revolving credit facility, a
$60
million term loan and a $70 million delayed draw term loan. Borrowings under the
Financing Agreement will bear interest as follows: (a) LIBOR Rate Loans bear
interest at applicable interbank rates and Reference Rate Loans bear interest
at
the rate of interest publicly announced by the Reference Bank in New York,
New
York, plus (b) a percentage spread ranging from 0% to a maximum of 4.75%
depending on the type of loan and the Company’s Senior Leverage Ratio. In
addition, the Company is required to pay a facility fee of 50 basis
points.
The
new
Financing Agreement is guaranteed by the material subsidiaries of the Company
and matures on June 17, 2012. The Financing Agreement is subject to various
covenants, including a senior leverage ratio, fixed charges ratio, limitations
on debt incurrence, limitation on liens and limitation on dividends and other
payments.
Long-term
debt (including the current portion of long-term debt and the Financing
Agreement) as of September 30, 2007 was $151.9 million, an increase of $56.4
million compared with the $95.5 million outstanding at December 31, 2006.
The increase was primarily the result of borrowings under the Financing
Agreement due primarily to seasonal shifts in the amounts billed to clients,
and
paid to suppliers, primarily media outlets and payments made for acquisitions
and deferred acquisition payments and an increase in the Company’s 8%
convertible debentures (payable in Canadian dollars) of $6.6 million due to
the
weakening of the US dollar compared to the Canadian dollar.
Pursuant
to the Financing Agreement, the Company must comply with certain financial
covenants including, among other things, covenants for (i) total debt
ratio, (ii) fixed charges ratio, (iii) minimum earnings before
interest, taxes and depreciation and amortization, and (iv) limitations on
capital expenditures, in each case as such term is specifically defined in
the
Financing Agreement. For the period ended September 30, 2007, the Company’s
calculation of each of these covenants, and the specific requirements under
the
Financing Agreement, respectively, were as follows:
|
|
September
30,
2007
|
|
|
|
(000’s,
except ratios)
|
|
Total
Senior Leverage Ratio
|
|
|
2.34
|
|
Maximum
per covenant
|
|
|
3.25
|
|
|
|
|
|
|
Fixed
Charges Coverage Ratio
|
|
|
2.08
|
|
Minimum
per covenant
|
|
|
1.20
|
|
|
|
|
|
|
Minimum
earnings before interest, taxes and depreciation and
amortization
|
|
$
|
44,787
|
|
Minimum
per covenant
|
|
$
|
30,000
|
|
These
ratios are not based on generally accepted accounting principles and are not
presented as alternative measures of operating performance or liquidity. They
are presented here to demonstrate compliance with the covenants in the Company’s
Financing Agreement, as noncompliance with such covenants could have a material
adverse effect on the Company.
Capital
Resources
At
September 30, 2007 the Company had utilized approximately $107.1 million of
its
Financing Agreement in the form of drawings and letters of credit. Cash and
drawn available bank credit facilities to support the Company’s future cash
requirements, as at September 30, 2007 was approximately $83.1
million.
The
Company expects to use approximately $15.0 million net of landlord and other
reimbursements for capital expenditures during 2007. Such capital expenditures
are expected to include leasehold improvements and computer hardware and
software at certain of the Company’s operating subsidiaries. The Company intends
to maintain and expand its business using cash from operating activities,
together with funds available under the Financing Agreement and, if required,
by
raising additional funds through the incurrence of bridge or other debt or
the
issuance of equity. Management believes that the Company’s cash flow from
operations and funds available under the Financing Agreement will be sufficient
to meet its ongoing working capital, capital expenditures and other cash needs
over the next eighteen months. If the Company has significant organic growth,
the Company may need to obtain additional financing in the form of debt and/or
equity financing upon fluctuations in working capital.
Deferred
Acquisition Consideration (Earnouts)
Acquisitions
of businesses by the Company may include commitments to contingent deferred
purchase consideration payable to the seller. These contingent purchase
obligations are generally payable within a one to three-year period following
the acquisition date, and are based on achievement of certain thresholds of
future earnings and, in certain cases, also based on the rate of growth of
those
earnings. The contingent consideration is recorded as an obligation of the
Company when the contingency is resolved and the amount is reasonably
determinable. At September 30, 2007, there was $0.3 million of deferred
consideration included in the Company’s balance sheet. Based on the various
assumptions as to future operating results of the relevant entities, management
estimates that approximately $1.8 million of additional deferred purchase
obligations could be triggered during 2007 or thereafter, which includes
approximately $0.2 million which may be paid in the form of issuance by the
Company of its Class A shares. The actual amount that the Company pays in
connection with the obligations may differ materially from this
estimate.
In
October 2007, the Company and the owners of kirshenbaum bond + partners LLC
agreed to an accelerated exercise of the Company’s call option that was
otherwise exercisable in 2008. As a result, based on the various assumptions
as
to future operating results, management estimates that approximately $26.5
million of additional deferred purchase obligations could be triggered in 2009
and 2010, including approximately $6.6 million, which may be paid in the form
of
issuance by the Company of its Class A shares. See Note 14 in the condensed
consolidated financial statements.
Off-Balance
Sheet Commitments
Put
Rights of Subsidiaries’ Minority Shareholders
Owners
of
interests in certain subsidiaries have the right in certain circumstances to
require the Company to acquire the remaining ownership interests held by them.
The owners’ ability to exercise any such “put option” right is subject to the
satisfaction of certain conditions, including conditions requiring notice in
advance of exercise. In addition, these rights cannot be exercised prior to
specified staggered exercise dates. The exercise of these rights at their
earliest contractual date would result in obligations of the Company to fund
the
related amounts during the period of 2007 to 2013. It is not determinable,
at
this time, if or when the owners of these put option rights will exercise all
or
a portion of these rights.
The
amount payable by the Company in the event such put option rights are exercised
is dependent on various valuation formulas and on future events, such as the
average earnings of the relevant subsidiary through that date of exercise,
the
growth rate of the earnings of the relevant subsidiary during that period,
and,
in some cases, the currency exchange rate at the date of payment.
Management
estimates, assuming that the subsidiaries owned by the Company at September
30,
2007, perform over the relevant future periods at their trailing twelve-month
earnings level, that these rights, if all exercised, could require the Company,
in future periods, to pay an aggregate amount of approximately $143.0 million
to
the owners of such rights to acquire such ownership interests in the relevant
subsidiaries. Of this amount, the Company is entitled, at its option, to fund
approximately $28.1 million by the issuance of the Company’s Class A
subordinate voting shares. The Company intends to finance the cash portion
of
these contingent payment obligations using available cash from operations,
borrowings under its credit facility (and refinancings thereof) and, if
necessary, through incurrence of additional debt. The ultimate amount payable
and the incremental operating income in the future relating to these
transactions will vary because it is dependent on the future results of
operations of the subject businesses and the timing of when these rights are
exercised. Approximately $10.4 million of the estimated $143.0 million that
the
Company would be required to pay subsidiaries minority shareholders’ upon the
exercise of outstanding put option rights, relates to rights exercisable within
2007. Upon the settlement of the total amount of such put options, the Company
estimates that it would receive incremental operating income before depreciation
and amortization of $23.3 million.
In
October and November 2007, the Company and the owners of interest of kirshenbaum
bond + partners LLC and Crispin Porter & Bogusky LLC agreed to an
accelerated exercise of the Company’s existing call options that were otherwise
exercisable in December 2007 and 2008. As a result of this call approximately
$70.1 million of the aggregate amount noted above has been exercised. See Note
14 to the condensed consolidated financial statements.
The
following table summarizes the potential timing of the consideration and
incremental operating income before depreciation and amortization based on
assumptions as described above.
Consideration
(4)
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
& Thereafter
|
|
Total
|
|
|
|
|
($
Millions)
|
|
|
Cash
|
|
$
|
9.4
|
|
$
|
34.0
|
|
$
|
14.4
|
|
$
|
38.2
|
|
$
|
18.9
|
|
$
|
114.9
|
|
|
Shares
|
|
|
1.0
|
|
|
8.3
|
|
|
4.4
|
|
|
10.4
|
|
|
4.0
|
|
|
28.1
|
|
|
|
|
$
|
10.4
|
|
$
|
42.3
|
|
$
|
18.8
|
|
$
|
48.6
|
|
$
|
22.9
|
|
$
|
143.0
|
(1
|
)
|
Operating
income before depreciation and amortization to be
received(2)
|
|
$
|
3.0
|
|
$
|
9.7
|
|
$
|
1.8
|
|
$
|
3.6
|
|
$
|
5.2
|
|
$
|
23.3
|
|
|
Cumulative
operating income before depreciation and amortization(3)
|
|
$
|
3.0
|
|
$
|
12.7
|
|
$
|
14.5
|
|
$
|
18.1
|
|
$
|
23.3
|
|
|
|
(5
|
)
|
(1)
|
Of
this, approximately $43.3 million has been recognized in Minority
Interest
on the Company’s balance sheet as of September 22, 2004 in
conjunction with the consolidation of CPB as a variable interest
entity.
|
(2)
|
This
financial measure is presented because it is the basis of the calculation
used in the underlying agreements relating to the put rights and
is based
on estimated 2007 operating results. This amount represents amounts
to be
received in the year the put is
exercised.
|
(3)
|
Cumulative
operating income before depreciation and amortization represents
the
cumulative amounts to be received by the
company.
|
(4)
|
The
timing of consideration to be paid varies by contract and does not
necessarily correspond to the date of the exercise of the
put.
|
|
Amounts
are not presented as they would not be meaningful due to multiple
periods
included.
|
Critical
Accounting Policies
The
following summary of accounting policies has been prepared to assist in better
understanding the Company’s consolidated financial statements and the related
management discussion and analysis. Readers are encouraged to consider this
information together with the Company’s consolidated financial statements and
the related notes to the consolidated financial statements as included in the
Company’s annual report on Form 10-K for a more complete understanding of
accounting policies discussed below.
Estimates.
The preparation of the Company’s financial statements in conformity with
generally accepted accounting principles in the United States of America, or
“US
GAAP”, requires management to make estimates and assumptions. These estimates
and assumptions affect the reported amounts of assets and liabilities including
goodwill, intangible assets, valuation allowances for receivables and deferred
income tax assets, stock-based compensation, and the reporting of variable
interest entities at the date of the financial statements. The statements are
evaluated on an ongoing basis and estimates are based on historical experience,
current conditions and various other assumptions believed to be reasonable
under
the circumstances. Actual results can differ from those estimates, and it is
possible that the differences could be material.
Revenue
Recognition.
The
Company’s revenue recognition policies are in compliance with the SEC Staff
Accounting Bulletin 104, “Revenue Recognition” (“SAB 104”), and accordingly,
revenue is generally recognized when services are earned or upon delivery of
the
products when ownership and risk of loss has transferred to the customer, the
selling price is fixed or determinable and collection of the resulting
receivable is reasonably assured.
The
Company earns revenue from agency arrangements in the form of retainer fees
or
commissions; from short-term project arrangements in the form of fixed fees
or
per diem fees for services; and from incentives or bonuses.
Non-refundable
retainer fees are generally recognized on a straight-line basis over the term
of
the specific customer contract. Commission revenue is earned and recognized
upon
the placement of advertisements in various media when the Company has no further
performance obligations. Fixed fees for services are recognized upon completion
of the earnings process and acceptance by the client. Per diem fees are
recognized upon the performance of the Company’s services. In addition, for
certain service transactions, which require delivery of a number of service
acts, the Company uses the Proportional Performance model, which generally
results in revenue being recognized based on the straight-line method due to
the
acts being non-similar and there being insufficient evidence of fair value
for
each service provided.
Fees
billed to clients in excess of fees recognized as revenue are classified as
advance billings.
A
small
portion of the Company’s contractual arrangements with clients includes
performance incentive provisions, which allow the Company to earn additional
revenues as a result of its performance relative to both quantitative and
qualitative goals. The Company recognizes the incentive portion of revenue
under
these arrangements when specific quantitative goals are achieved, or when the
Company’s clients determine performance against qualitative goals has been
achieved. In all circumstances, revenue is only recognized when collection
is
reasonably assured.
The
Company follows EITF No. 99-19, “Reporting Revenue Gross as a Principal versus
Net as an Agent” (“EITF 99-19). This Issue summarized the EITF’s views on when
revenue should be recorded at the gross amount billed because revenue has been
earned from the sale of goods or services, or the net amount retained because
a
fee or commission has been earned. The Company’s businesses at times act as an
agent and records revenue equal to the net amount retained, when the fee or
commission is earned. The Company also follows EITF No. 01-14 for reimbursement
received of out-of-pocket expenses. This Issue summarized the EITF’s views that
reimbursements received for out-of-pocket expenses incurred should be
characterized in the income statement as revenue. Accordingly, the Company
has
included in revenue such reimbursed expenses.
Acquisitions,
Goodwill and Other Intangibles.
A fair
value approach is used in testing goodwill for impairment under SFAS 142 to
determine if other than temporary impairment has occurred. One approach utilized
to determine fair values is a discounted cash flow methodology. When available
and as appropriate, comparative market multiples are used. Numerous estimates
and assumptions necessarily have to be made when completing a discounted cash
flow valuation, including estimates and assumptions regarding interest rates,
appropriate discount rates and capital structure. Additionally, estimates must
be made regarding revenue growth, operating margins, tax rates, working capital
requirements and capital expenditures. Estimates and assumptions also need
to be
made when determining the appropriate comparative market multiples to be used.
Actual results of operations, cash flows and other factors used in a discounted
cash flow valuation will likely differ from the estimates used and it is
possible that differences and changes could be material. The Company incurred
a
goodwill impairment charge of $4.5 million in 2007.
The
Company has historically made and expects to continue to make selective
acquisitions of marketing communications businesses. In making acquisitions,
the
price paid is determined by various factors, including service offerings,
competitive position, reputation and geographic coverage, as well as prior
experience and judgment. Due to the nature of advertising, marketing and
corporate communications services companies; the companies acquired frequently
have significant identifiable intangible assets, which primarily consist of
customer relationships. The Company has determined that certain intangibles
(trademarks) have an indefinite life, as there are no legal, regulatory,
contractual, or economic factors that limit the useful life.
A
summary
of the Company’s deferred acquisition consideration obligations, sometimes
referred to as earnouts, and obligations under put rights of subsidiaries’
minority shareholders to purchase additional interests in certain subsidiary
and
affiliate companies is set forth in the “Liquidity and Capital Resources”
section of this report. The deferred acquisition consideration obligations
and
obligations to purchase additional interests in certain subsidiary and affiliate
companies are primarily based on future performance. Contingent purchase price
obligations are accrued, in accordance with GAAP, when the contingency is
resolved and payment is determinable.
Allowance
for doubtful accounts.
Trade
receivables are stated less allowance for doubtful accounts. The allowance
represents estimated uncollectible receivables usually due to customers’
potential insolvency. The allowance includes amounts for certain customers
where
risk of default has been specifically identified.
Income
tax valuation allowance.
The
Company records a valuation allowance against deferred income tax assets when
management believes it is more likely than not that some portion or all of
the
deferred income tax assets will not be realized. Management considers factors
such as the reversal of deferred income tax liabilities, projected future
taxable income, the character of the income tax asset, tax planning strategies,
changes in tax laws and other factors. A change to these factors could impact
the estimated valuation allowance and income tax expense.
Effective
January 1, 2006, the Company adopted SFAS 123(R) and has opted to use the
modified prospective application transition method. Under this method the
Company will not restate its prior financial statements. Instead, the Company
will apply SFAS 123(R) for new awards granted or modified after the adoption
of
SFAS 123(R), any portion of awards that were granted after December 15, 1994
and
have not vested as of January 1, 2006, and any outstanding liability
awards.
Variable
Interest Entities.
The
Company evaluates its various investments in entities to determine whether
the
investee is a variable interest entity and if so whether MDC is the primary
beneficiary. Such evaluation requires management to make estimates and judgments
regarding the sufficiency of the equity at risk in the investee and the expected
losses of the investee and may impact whether the investee is accounted for
on a
consolidated basis.
New
Accounting Pronouncements
In
June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”. This
Interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. This Interpretation is effective
for fiscal years beginning after December 15, 2006, with earlier
application permitted. The Company has adopted this interpretation, the adoption
of which did not have a material effect on its financial
statements.
In
September 2006, FASB issued SFAS No. 157, “Fair Value Measurements”. This
statement defines fair value, establishes a framework for measuring fair value
and expands disclosures about fair value measurements. This statement is
effective for all fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years. Earlier application is encouraged.
The Company is currently evaluating the impact of this statement on its
financial statements.
In
February 2007, FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”). This statement permits
entities to choose to measure many financial instruments and certain other
items
at fair value. This statement expands the use of fair value measurement and
applies to entities that elect the fair value option. The fair value option
established by this Statement permits all entities to choose to measure eligible
items at fair value at specified election dates. SFAS 159 is effective as of
the
beginning of an entity’s first fiscal year that begins after November 15,
2007. The Company is currently evaluating the impact of this statement on its
financial statements.
Risks
and Uncertainties
This
document contains forward-looking statements. The Company’s representatives may
also make forward-looking statements orally from time to time. Statements in
this document that are not historical facts, including statements about the
Company’s beliefs and expectations, recent business and economic trends,
potential acquisitions, estimates of amounts for deferred acquisition
consideration and “put” option rights, constitute forward-looking statements.
These statements are based on current plans, estimates and projections, and
are
subject to change based on a number of factors, including those outlined in
this
section. Forward-looking statements speak only as of the date they are made,
and
the Company undertakes no obligation to update publicly any of them in light
of
new information or future events, if any.
Forward-looking
statements involve inherent risks and uncertainties. A number of important
factors could cause actual results to differ materially from those contained
in
any forward-looking statements. Such risk factors include, but are not limited
to, the following:
|
·
|
risks
associated with effects of national and regional economic
conditions;
|
|
·
|
the
Company’s ability to attract new clients and retain existing
clients;
|
|
·
|
the
financial success of the Company’s
clients;
|
|
·
|
the
Company’s ability to remain in compliance with its debt agreements and the
Company’s ability to finance its contingent payment obligations when due
and payable, including but not limited to those relating to “put” options
rights;
|
|
·
|
the
Company’s ability to retain and attract key
employees;
|
|
·
|
the
successful completion and integration of acquisitions which complement
and
expand the Company’s business
capabilities;
|
|
·
|
foreign
currency fluctuations; and
|
|
·
|
risks
arising from the Company’s historical stock option grant
practices.
|
The
Company’s business strategy includes ongoing efforts to engage in material
acquisitions of ownership interests in entities in the marketing communications
services industry. The Company intends to finance these acquisitions by using
available cash from operations and through incurrence of bridge or other debt
financing, either of which may increase the Company’s leverage ratios, or by
issuing equity, which may have a dilutive impact on existing shareholders
proportionate ownership. At any given time, the Company may be engaged in a
number of discussions that may result in one or more material acquisitions.
These opportunities require confidentiality and may involve negotiations that
require quick responses by the Company. Although there is uncertainty that
any
of these discussions will result in definitive agreements or the completion
of
any transactions, the announcement of any such transaction may lead to increased
volatility in the trading price of the Company’s securities.
Investors
should carefully consider these risk factors, the risk factors specified in
Item
1A of this Form 10-Q, and in the additional risk factors outlined in more detail
in the Company’s Annual Report on Form 10-K under the caption “Risk
Factors” and in the Company’s other SEC filings.
Item
3.
Quantitative
and Qualitative Disclosures about Market Risk
The
Company is exposed to market risk related to interest rates and foreign
currencies.
Debt
Instruments. At September 30, 2007, the Company’s debt obligations consisted of
amounts outstanding under a revolving credit facility and term loan. This
facility bears interest at variable rates based upon the Eurodollar rate, US
bank prime rate, and US base rate, at the Company’s option. The Company’s
ability to obtain the required bank syndication commitments depends in part
on
conditions in the bank market at the time of syndication. Given the existing
level of debt of $100.6 million under the financing agreement, as of September
30, 2007, a 1.0% increase or decrease in the weighted average interest rate,
which was 9.59% during the three months ended September 30, 2007, would have
an
interest impact of approximately $1.0 million annually.
Foreign
Exchange. The Company conducts business in five currencies, the US dollar,
the
Canadian dollar, Jamaican dollar, the Mexican Peso and the British Pound. Our
results of operations are subject to risk from the translation to the US dollar
of the revenue and expenses of our non-US operations. The effects of currency
exchange rate fluctuations on the translation of our results of operations
are
discussed in “Management’s Discussion and Analysis of Financial Condition and
Result of Operations”. For the most part, our revenues and expenses incurred
related to our non-US operations are denominated in their functional currency.
This minimizes the impact that fluctuations in exchange rates will have on
profit margins. The Company does not enter into foreign currency forward
exchange contracts or other derivative financial instruments to hedge the
effects of adverse fluctuations in foreign currency exchange rates.
Effective June 28,
2005, the Company entered into a cross currency swap contract (“Swap”), a form
of derivative, in order to mitigate the risk of currency fluctuations relating
to interest payment obligations. The Swap contract provided for a notional
amount of debt fixed at C$45.0 million and at $36.5 million, with the interest
rates fixed at 8% per annum for the Canadian dollar amount and fixed at 8.25%
per annum for the US dollar amount. On June 22, 2006, the Company settled
this Swap.
Item
4.
Controls
and Procedures
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures designed to ensure that information
required to be included in our SEC reports is recorded, processed, summarized
and reported within the applicable time periods specified by the SEC’s rules and
forms, and that such information is accumulated and communicated to our
management, including our President and Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), as appropriate, to allow timely decisions regarding
required disclosures. There are inherent limitations to the effectiveness of
any
system of disclosure controls and procedures, including the possibility of
human
error and the circumvention or overriding of the controls and procedures.
Accordingly, even effective disclosure controls and procedures can only provide
reasonable assurance of achieving their control objectives. However, the
Company’s disclosure controls and procedures are designed to provide reasonable
assurances of achieving the Company’s control objectives.
We
conducted an evaluation, under the supervision and with the participation of
our
management, including our CEO, our CFO and our management Disclosure Committee,
of the effectiveness of our disclosure controls and procedures as of the end
of
the period covered by this report pursuant to Rule 13a-15(b) of the Exchange
Act. Based on that evaluation, the Company has concluded that its disclosure
controls and procedures were effective as of September 30, 2007.
Changes
in Internal Control over Financial Reporting
There
were no changes in the Company’s internal control over financial reporting
identified in connection with the foregoing evaluation that occurred during
the
first nine months of 2007 that have materially affected, or are reasonably
likely to materially affect the Company’s internal control over financial
reporting.
.
Item
1.
Legal
Proceedings
The
Company’s operating entities are involved in legal proceedings of various types.
While any litigation contains an element of uncertainty, the Company has no
reason to believe that the outcome of such proceedings or claims will have
a
material adverse effect on the financial condition or results of operations
of
the Company.
Item
1A.
Risk
Factors
There
are
no material changes in the risk factors set forth in Part I, Item 1A of the
Company’s Annual Report on Form 10-K for the year-ended December 31,
2006.
(a)
The information provided below describe a transaction that occurred during
the
third quarter of 2007 in which the Company issued shares of its Class A
subordinate voting shares (“Class A Shares”) that were not registered under
the Securities Act of 1933, as amended (the “Securities Act”).
|
(1)
|
During
the third
quarter of 2007, the Company issued 41,747 Class A Shares to the
minority equity holder of Bruce Mau Holdings Ltd., an Ontario
corporation, as part of a deferred payment in respect of the acquisition
by the Company of a 50.1% ownership interest in Bruce Mau
Holdings Ltd. in May 2004. The
Class A Shares were issued by the Company without registration in
reliance on Section 4(2) under the Securities Act and Regulation
D thereunder, based on the sophistication of the sellers and their
status
as an “accredited investors” within the meaning of
Rule 501(a) of Regulation D. Sellers of Bruce Mau
Holdings Ltd. had access to all the documents filed by the Company
with
the SEC.
|
Item
4. Submission
of Matters to a Vote of Security Holders
None.
Item
6.
Exhibits
EXHIBIT INDEX
Exhibit No.
|
|
Description
|
|
|
|
10.1
|
|
Employment
Agreement, dated as of August 20, 2007, between the Company and Stephen
Pustil, as Vice Chairman.*
|
|
|
|
10.2
|
|
Employment
Agreement, dated as of September 5, 2007, between the Company and
Gavin
Swartzman, as Managing Director.*
|
|
|
|
10.3
|
|
Form
of Restricted Stock Grant Agreement (November 2007).*
|
|
|
|
10.4
|
|
Form
of Service-Based and Financial Performance-Based Restricted Stock
Unit
Agreement (November 2007).*
|
|
|
|
12
|
|
Statement
of computation of ratio of earnings to fixed charges*
|
|
|
|
31.1
|
|
Certification
by Chief Executive Officer pursuant to Rules 13a-14(a) and
15d-14(a) under the Securities Exchange Act of 1934 and
Section 302 of the Sarbanes-Oxley Act of 2002.*
|
|
|
|
31.2
|
|
Certification
by the Chief Financial Officer pursuant to Rules 13a-14(a) and
15d-14(a) under the Securities Exchange Act of 1934 and
Section 302 of the Sarbanes-Oxley Act of 2002.*
|
|
|
|
32.1
|
|
Certification
by Chief Executive Officer pursuant to 18 USC. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
|
|
|
|
32.2
|
|
Certification
by the Chief Financial Officer pursuant to 18 USC. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
|
|
|
|
99.1
|
|
Schedule
of ownership by operating
subsidiary.*
|
*
Filed
electronically herewith.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
MDC
PARTNERS INC.
|
|
|
|
|
|
|
|
/s/ Michael
Sabatino
|
|
|
|
Michael
Sabatino
Chief
Accounting Officer
|
|
|
|
|
|
|
|
November
8, 2007
|
|
|
|
EXHIBIT INDEX
Exhibit No.
|
|
Description
|
|
|
|
10.1
|
|
Employment
Agreement, dated as of August 20, 2007, between the Company and Stephen
Pustil, as Vice Chairman.*
|
|
|
|
10.2
|
|
Employment
Agreement, dated as of September 5, 2007, between the Company and
Gavin
Swartzman, as Managing Director.*
|
|
|
|
10.3
|
|
Form
of Restricted Stock Grant Agreement (November 2007).*
|
|
|
|
10.4
|
|
Form
of Service-Based and Financial Performance-Based Restricted Stock
Unit
Agreement (November 2007).*
|
|
|
|
12
|
|
Statement
of computation of ratio of earnings to fixed charges*
|
|
|
|
31.1
|
|
Certification
by Chief Executive Officer pursuant to Rules 13a-14(a) and
15d-14(a) under the Securities Exchange Act of 1934 and
Section 302 of the Sarbanes-Oxley Act of 2002.*
|
|
|
|
31.2
|
|
Certification
by the Chief Financial Officer pursuant to Rules 13a-14(a) and
15d-14(a) under the Securities Exchange Act of 1934 and
Section 302 of the Sarbanes-Oxley Act of 2002.*
|
|
|
|
32.1
|
|
Certification
by Chief Executive Officer pursuant to 18 USC. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
|
|
|
|
32.2
|
|
Certification
by the Chief Financial Officer pursuant to 18 USC. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
|
|
|
|
99.1
|
|
Schedule
of ownership by operating
subsidiary.*
|
*
Filed
electronically herewith.