UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark One)
|
|
|
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
|
|
For
the quarterly period ended June 30, 2008
|
|
|
or
|
|
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the transition period from ______________ to
______________
Commission
file number: 001-13178
MDC
Partners Inc.
(Exact
name of registrant as specified in its charter)
Canada
|
|
98-0364441
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(IRS
Employer Identification No.)
|
|
|
|
45
Hazelton Avenue
Toronto,
Ontario, Canada
|
|
M5R
2E3
|
(Address
of principal executive offices)
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|
(Zip
Code)
|
(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
|
Accelerated
Filer x
|
Non-Accelerated
Filer o
(Do not check if a smaller reporting company.)
|
Smaller
reporting company 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 July 30, 2008 were: 27,302,462 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.
|
Financial
Statements
|
2
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|
Condensed
Consolidated Statements of Operations (unaudited) for the Three and
Six
Months Ended June 30, 2008 and 2007
|
2
|
|
Condensed
Consolidated Balance Sheets as of June 30, 2008 (unaudited) and December
31, 2007
|
3
|
|
Condensed
Consolidated Statements of Cash Flows (unaudited) for the Six Months
Ended
June 30, 2008 and 2007
|
4
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|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
5
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
20
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
39
|
Item
4.
|
Controls
and Procedures
|
39
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|
|
|
|
PART
II. OTHER INFORMATION
|
|
Item
1.
|
Legal
Proceedings
|
40
|
Item
1A.
|
Risk
Factors
|
40
|
Item
2.
|
Unregistered
Sales of Equity and Use of Proceeds
|
40
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
40
|
Item
6.
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Exhibits
|
|
Signatures
|
41
|
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)
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
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|
Reclassified
(Note 1)
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|
|
|
Reclassified
(Note 1)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
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|
$
|
158,275
|
|
$
|
134,497
|
|
$
|
300,965
|
|
$
|
252,577
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services sold
|
|
|
104,012
|
|
|
85,885
|
|
|
201,186
|
|
|
162,848
|
|
Office
and general expenses
|
|
|
37,480
|
|
|
35,179
|
|
|
73,072
|
|
|
68,423
|
|
Depreciation
and amortization
|
|
|
8,708
|
|
|
5,916
|
|
|
18,782
|
|
|
11,727
|
|
|
|
|
150,200
|
|
|
126,980
|
|
|
293,040
|
|
|
242,998
|
|
Operating
profit
|
|
|
8,075
|
|
|
7,517
|
|
|
7,925
|
|
|
9,579
|
|
Other
Income (Expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
(527
|
)
|
|
(1,012
|
)
|
|
3,077
|
|
|
(1,719
|
)
|
Interest
expense
|
|
|
(3,645
|
)
|
|
(3,589
|
)
|
|
(7,532
|
)
|
|
(6,239
|
)
|
Interest
income
|
|
|
173
|
|
|
1,079
|
|
|
379
|
|
|
1,235
|
|
|
|
|
(3,999
|
)
|
|
(3,522
|
)
|
|
(4,076
|
)
|
|
(6,723
|
)
|
Income
from continuing operations before income taxes, equity in affiliates
and
minority interests
|
|
|
4,076
|
|
|
3,995
|
|
|
3,849
|
|
|
2,856
|
|
Income
tax (expense) recovery
|
|
|
(3,943
|
)
|
|
433
|
|
|
(3,118
|
)
|
|
948
|
|
Income
from continuing operations before equity in affiliates and minority
interests
|
|
|
133
|
|
|
4,428
|
|
|
731
|
|
|
3,804
|
|
Equity
in earnings of non-consolidated affiliates
|
|
|
81
|
|
|
61
|
|
|
221
|
|
|
11
|
|
Minority
interests in income of consolidated subsidiaries
|
|
|
(2,869
|
)
|
|
(5,419
|
)
|
|
(4,976
|
)
|
|
(9,710
|
)
|
Loss
from continuing operations
|
|
|
(2,655
|
)
|
|
(930
|
)
|
|
(4,024
|
)
|
|
(5,895
|
)
|
Loss
from discontinued operations
|
|
|
(1,817
|
)
|
|
(1,671
|
)
|
|
(3,840
|
)
|
|
(5,502
|
)
|
Net
Loss
|
|
$
|
(4,472
|
)
|
$
|
(2,601
|
)
|
$
|
(7,864
|
)
|
$
|
(11,397
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
(0.10
|
)
|
$
|
(0.04
|
)
|
$
|
(0.15
|
)
|
$
|
(0.24
|
)
|
Discontinued
operations
|
|
|
(0.07
|
)
|
|
(0.07
|
)
|
|
(0.14
|
)
|
|
(0.22
|
)
|
Net
Loss
|
|
$
|
(0.17
|
)
|
$
|
(0.11
|
)
|
$
|
(0.29
|
)
|
$
|
(0.46
|
)
|
Weighted
Average Number of Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
26,831,952
|
|
|
24,752,472
|
|
|
26,664,557
|
|
|
24,514,954
|
|
Diluted
|
|
|
26,831,952
|
|
|
24,752,472
|
|
|
26,664,557
|
|
|
24,514,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash stock-based compensation expense is included in the following
line
items above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services sold
|
|
$
|
303
|
|
$
|
245
|
|
$
|
542
|
|
$
|
503
|
|
Office
and general expenses
|
|
|
1,560
|
|
|
1,308
|
|
|
3,319
|
|
|
2,966
|
|
Total
|
|
$
|
1,863
|
|
$
|
1,553
|
|
$
|
3,861
|
|
$
|
3,469
|
|
See
notes
to the unaudited condensed consolidated financial statements.
MDC
PARTNERS INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(thousands
of United States dollars)
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
18,510
|
|
$
|
10,410
|
|
Accounts
receivable, less allowance for doubtful accounts of $1,968 and
$1,357
|
|
|
148,468
|
|
|
135,260
|
|
Expenditures
billable to clients
|
|
|
28,781
|
|
|
19,409
|
|
Prepaid
expenses
|
|
|
6,159
|
|
|
5,937
|
|
Other
current assets
|
|
|
2,441
|
|
|
2,422
|
|
Total
Current Assets
|
|
|
204,359
|
|
|
173,438
|
|
Fixed
assets, at cost, less accumulated depreciation of $66,191 and
$58,822
|
|
|
48,018
|
|
|
47,440
|
|
Investment
in affiliates
|
|
|
1,748
|
|
|
1,434
|
|
Goodwill
|
|
|
227,772
|
|
|
217,726
|
|
Other
intangibles assets, net
|
|
|
47,566
|
|
|
55,399
|
|
Deferred
tax asset
|
|
|
8,331
|
|
|
9,175
|
|
Other
assets
|
|
|
14,877
|
|
|
16,086
|
|
Total
Assets
|
|
$
|
552,671
|
|
$
|
520,698
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
76,895
|
|
$
|
65,839
|
|
Accruals
and other liabilities
|
|
|
77,176
|
|
|
74,668
|
|
Advance
billings
|
|
|
70,227
|
|
|
50,988
|
|
Current
portion of long-term debt
|
|
|
1,896
|
|
|
1,796
|
|
Deferred
acquisition consideration
|
|
|
2,442
|
|
|
2,511
|
|
Total
Current Liabilities
|
|
|
228,636
|
|
|
195,802
|
|
Revolving
credit facility
|
|
|
6,801
|
|
|
1,901
|
|
Long-term
debt
|
|
|
115,856
|
|
|
115,662
|
|
Convertible
debentures
|
|
|
44,131
|
|
|
45,395
|
|
Other
liabilities
|
|
|
8,779
|
|
|
8,267
|
|
Deferred
tax liabilities
|
|
|
552
|
|
|
819
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
404,755
|
|
|
367,846
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
25,893
|
|
|
24,919
|
|
Commitments,
contingencies and guarantees (Note 12)
|
|
|
|
|
|
|
|
Shareholders’
Equity:
|
|
|
|
|
|
|
|
Preferred
shares, unlimited authorized, none issued
|
|
|
—
|
|
|
—
|
|
Class
A Shares, no par value, unlimited authorized, 26,830,026 and 26,235,932
shares issued in 2008 and 2007
|
|
|
213,017
|
|
|
207,958
|
|
Class
B Shares, no par value, unlimited authorized, 2,503 shares issued
in 2008
and 2007, each convertible into one Class A share
|
|
|
1
|
|
|
1
|
|
Share
capital to be issued, 27,545 Class A shares in 2007
|
|
|
—
|
|
|
214
|
|
Additional
paid-in capital
|
|
|
26,822
|
|
|
26,743
|
|
Accumulated
deficit
|
|
|
(120,835
|
)
|
|
(112,969
|
) |
Stock
subscription receivable
|
|
|
(354
|
)
|
|
(357
|
) |
Accumulated
other comprehensive income
|
|
|
3,372
|
|
|
6,343
|
|
Total
Shareholders’ Equity
|
|
|
122,023
|
|
|
127,933
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
552,671
|
|
$
|
520,698
|
|
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)
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
Reclassified
(Note 1 )
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(7,864
|
)
|
$
|
(11,397
|
)
|
Loss
from discontinued operations
|
|
|
(3,840
|
)
|
|
(5,502
|
)
|
Loss
from continuing operations
|
|
|
(4,024
|
)
|
|
(5,895
|
)
|
Adjustments
to reconcile net loss from continuing operations to cash provided
by (used
in) operating activities
|
|
|
|
|
|
|
|
Depreciation
|
|
|
8,334
|
|
|
7,139
|
|
Amortization
of intangibles
|
|
|
10,448
|
|
|
4,588
|
|
Non
cash stock-based compensation
|
|
|
3,458
|
|
|
3,030
|
|
Amortization
of deferred finance charges
|
|
|
688
|
|
|
1,659
|
|
Deferred
income taxes
|
|
|
577
|
|
|
2,610
|
|
Loss
(gain) on sale of assets
|
|
|
3
|
|
|
(1,835
|
)
|
Earnings
of non-consolidated affiliates
|
|
|
(221
|
)
|
|
(11
|
)
|
Minority
interest and other
|
|
|
930
|
|
|
310
|
|
Foreign
exchange
|
|
|
(3,062
|
)
|
|
4,180
|
|
Changes
in non-cash working capital:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(13,375
|
)
|
|
(20,072
|
)
|
Expenditures
billable to clients
|
|
|
(9,372
|
)
|
|
8,005
|
|
Prepaid
expenses and other current assets
|
|
|
(255
|
)
|
|
(6,428
|
)
|
Accounts
payable, accruals and other liabilities
|
|
|
9,795
|
|
|
(6,153
|
)
|
Advance
billings
|
|
|
19,025
|
|
|
(355
|
)
|
Cash
flows provided by (used in) continuing operating
activities
|
|
|
22,949
|
|
|
(9,228
|
)
|
Discontinued
operations
|
|
|
206
|
|
|
379
|
|
Net
cash provided by (used in) operating activities
|
|
|
23,155
|
|
|
(8,849
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(8,639
|
)
|
|
(7,346
|
)
|
Acquisitions,
net of cash acquired
|
|
|
(10,032
|
)
|
|
(10,730
|
)
|
Proceeds
from sale of assets
|
|
|
229
|
|
|
7,544
|
|
Other
investments
|
|
|
(114
|
)
|
|
(203
|
)
|
Profit
distributions from non-consolidated affiliates
|
|
|
68
|
|
|
—
|
|
Discontinued
operations
|
|
|
—
|
|
|
(118
|
)
|
Net
cash used in investing activities
|
|
|
(18,488
|
)
|
|
(10,853
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from new revolving credit facility
|
|
|
4,900
|
|
|
22,215
|
|
Repayment
of long-term debt
|
|
|
(443
|
)
|
|
(5,480
|
)
|
Purchase
of treasury shares
|
|
|
(876
|
)
|
|
(660
|
)
|
Proceeds
from stock subscription receivable
|
|
|
3
|
|
|
270
|
|
Decrease
in bank indebtedness
|
|
|
—
|
|
|
(4,910
|
)
|
Payments
under old revolving credit facility
|
|
|
—
|
|
|
(45,000
|
)
|
Proceeds
from term loan
|
|
|
—
|
|
|
60,000
|
|
Deferred
financing costs
|
|
|
—
|
|
|
(3,813
|
)
|
Issuance
of share capital
|
|
|
—
|
|
|
514
|
|
Discontinued
operations
|
|
|
—
|
|
|
(70
|
)
|
Net
cash provided by financing activities
|
|
|
3,584
|
|
|
23,066
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(151
|
)
|
|
(596
|
)
|
Net
increase in cash and cash equivalents
|
|
|
8,100
|
|
|
2,768
|
|
Cash
and cash equivalents at beginning of period
|
|
|
10,410
|
|
|
6,591
|
|
Cash
and cash equivalents at end of period
|
|
$
|
18,510
|
|
$
|
9,359
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures:
|
|
|
|
|
|
|
|
Cash
paid to minority partners
|
|
$
|
7,247
|
|
$
|
12,268
|
|
Cash
income taxes paid
|
|
$
|
873
|
|
$
|
1,046
|
|
Cash
interest paid
|
|
$
|
6,981
|
|
$
|
5,301
|
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
Share
capital issued on acquisitions
|
|
$
|
1,573
|
|
$
|
2,150
|
|
Capital
leases
|
|
$
|
284
|
|
$
|
1,510
|
|
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)
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, 2007.
In
December 2007, the Company discontinued the operations of Margeotes Fertitta
Powell, LLC (“MFP”) and Banjo Strategic Entertainment, LLC (“Banjo”) and
accordingly has reclassified its 2007 financial results to reflect 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.
Fair
Value of Financial Instruments. Effective
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements”
(SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring
fair value in accordance with accounting principles generally accepted in the
United States, and expands disclosure requirements about fair value
measurements. In accordance with FASB Staff Position FAS 157-2, “Effective Date
of FASB Statement No. 157” (FSP 157-2), we will defer the adoption of SFAS 157
for our nonfinancial assets and nonfinancial liabilities except those items
recognized or disclosed at fair value on an annual or more frequent recurring
basis, until January 1, 2009. The adoption of SFAS 157 did not have a material
impact on our fair value measurements.
Concentration
of Credit Risk.
The
Company provides marketing communications services to clients who operate in
most industry sectors. Credit is granted to qualified clients in the ordinary
course of business. Due to the diversified nature of the Company’s client base,
the Company does not believe that it is exposed to a concentration of credit
risk; however, one client accounted for approximately 14% and 13% of the
Company’s consolidated accounts receivable at June 30, 2008 and December 31,
2007, respectively. This client also accounted for 19.1% and 19.4% of revenue
for the three and six months ended June 30, 2008, respectively,
and
14.5% and 14.9% of revenue for the three and six months ended June 30, 2007,
respectively.
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. The Company has a concentration risk in that
there
are cash deposits in excess of federally insured amounts. Included in cash
and
cash equivalents at June 30, 2008 and December 31, 2007, is approximately $64
and $63, 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 as services are provided 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.
In
November 2002, EITF Issue No. 00-21, “Revenue Arrangements with Multiple
Deliverables” (“EITF 00-21”) was issued. EITF 00-22 addresses certain aspects of
the accounting by a vendor for arrangements under which it will perform multiple
revenue-generating activities and how to determine whether an arrangement
involving multiple deliverables contains more than one unit of accounting.
EITF
00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. Also, in July 2000, the EITF of the Financial
Accounting Standards Board released Issue 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 it has earned revenue from the sale of goods or services, or the net
amount retained because it has earned a fee or commission. The Company also
follows EITF No. 01-14, “Income Statement Characterization of Reimbursements
Received for Out-of-Pocket Expenses Incurred”. 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.
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
Advanced Billings.
A
small
portion of the Company’s contractual arrangements with customers includes
performance incentive provisions, which allows 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 records revenue net of sales and other taxes
due
to be collected and remitted to governmental authorities.
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 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
derived using the Black-Scholes option pricing model and is recorded in
operating income over the service period, which is the vesting period of the
award.
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.
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.
For
the
three and six months ended June 30, 2008, the Company has recorded charges
of
$565 and $772, respectively, 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. Class A shares of restricted stock
granted to employees amounting to 472,436 are included in the Company’s
calculation of Class A shares outstanding as of June 30, 2008.
The
following table sets forth the computation of basic and diluted loss per common
share from continuing operations.
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
for basic loss per common share - loss from continuing
operations
|
|
$
|
(2,655
|
)
|
$
|
(930
|
)
|
$
|
(4,024
|
)
|
$
|
(5,895
|
)
|
Effect
of dilutive securities:
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Numerator
for diluted loss per common share - loss from continuing operations
plus
assumed conversion
|
|
$
|
(2,655
|
)
|
$
|
(930
|
)
|
$
|
(4,024
|
)
|
$
|
(5,895
|
)
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic loss per common share - weighted average common
shares
|
|
|
26,831,952
|
|
|
24,752,472
|
|
|
26,664,557
|
|
|
24,514,954
|
|
Effect
of dilutive securities:
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Denominator
for diluted loss per common share - adjusted weighted shares and
assumed
conversions
|
|
|
26,831,952
|
|
|
24,752,472
|
|
|
26,664,557
|
|
|
24,514,954
|
|
Basic
loss per common share from continuing operations
|
|
$
|
(0.10
|
)
|
$
|
(0.04
|
)
|
$
|
(0.15
|
)
|
$
|
(0.24
|
)
|
Diluted
loss per common share from continuing operations
|
|
$
|
(0.10
|
)
|
$
|
(0.04
|
)
|
$
|
(0.15
|
)
|
$
|
(0.24
|
)
|
The
8%
convertible debentures, options and other rights to purchase 6,602,450 shares
of
common stock, which includes 472,436 shares of non-vested restricted stock,
were
outstanding during the six months ended June 30, 2008, but were not included
in
the computation of diluted loss per common share because their effect would
be
antidilutive. Similarly, during the six months ended June 30, 2007, the 8%
convertible debentures, options and other rights to purchase 7,820,816 shares
of
common stock, which includes 253,614 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
2008
Acquisitions
On
June
16, 2008, the Company’s 77% owned subsidiary, Crispin Porter & Bogusky
(“CPB”), acquired certain assets and assumed certain liabilities of Texture
Media, Inc. Texture Media is a digital agency specializing in website
development, and is based in Boulder, Colorado with approximately 50 employees.
The purchase price consisted of $2,500 in cash and a non-contingent cash payment
of $1,040 in one year. The allocation of the excess purchase consideration
of
this acquisition to the fair value of the net assets acquired resulted in
identifiable intangibles of $150 (consisting of customer lists and covenants
not
to compete) and goodwill of $3,111. The identified intangibles will be amortized
up to a two year period in a manner represented by the pattern in which the
economic benefits of the customer contracts/relationship are realized. The
intangibles and goodwill are tax deductible.
On
February 12, 2008, the Company’s Bratskeir subsidiary purchased the net assets
of Clifford PR for $2,050 in cash and the issuance of 30,444 newly issued shares
of the Company’s Class A stock valued at $249, plus a 10% membership interest in
Clifford/Bratskeir. For accounting purposes, the value of the Company’s Class A
shares issued as consideration was calculated based on the price of the
Company’s Class A shares on the date of the acquisition. The accounting value of
the 10% membership interest in Clifford/Bratskeir was valued at $1,064. The
allocation of the excess purchase consideration of this acquisition to the
fair
value of the net assets acquired resulted in identifiable intangibles of $1,031
(consisting of customer lists, backlog and covenants not to compete) and
goodwill of $2,201. The identified intangibles will be amortized over a period
of up to five years in a manner represented by the pattern in which the economic
benefits of the customer contracts/relationship are realized. The intangibles
and goodwill are tax deductible.
In
January 2008, the Company’s 62% owned subsidiary, Zyman Group, purchased certain
assets of Core Strategy Group and DMG Inc. The aggregate purchase price paid
at
closing consisted of $1,000 paid in cash and the issuance of 126,478 newly
issued shares of the Company’s Class A stock valued at $1,110. In addition, the
principals of Core Strategy Group and DMG received 1,000,000 newly-issued
Restricted Class C units of Zyman Group, which will entitle them to a profit
interest of 15% of Zyman Group’s pre-tax income in excess of a specified
threshold amount. For accounting purposes, the value of the Company’s Class A
shares issued as consideration was calculated based on the price of the
Company’s Class A share on the date of the acquisitions. The accounting value of
the Restricted Class C units of Zyman Group was determined based on a
Black-Scholes value of $1,001. The allocation of the excess purchase
consideration of these acquisitions to the fair value of the net assets acquired
resulted in identifiable intangibles of $497 (consisting of customer lists
and
covenants not to compete) and goodwill of $2,626. The identified intangibles
will be amortized up to a five year period in a manner represented by the
pattern in which the economic benefits of the customer contracts/relationship
are realized. The intangibles and goodwill are tax deductible.
On
January 1, 2008 and on April 1, 2008, the Company completed nine equity
acquisitions with various shareholders of Allard Johnson Communications Inc.
(“Allard”), all pursuant to contractual puts options. The aggregate purchase
price for the nine transactions was cash equal to $2,615. These transactions
increased the Company’s equity ownership in Allard to 70.9%, an increase of
10.7%. The allocation of the excess purchase consideration of this step
acquisition to the fair value of the net assets acquired resulted in
identifiable intangibles of $186 (consisting of customer lists and existing
backlog) and goodwill of $2,429. The identified intangibles will be amortized
over a five year period in a manner represented by the pattern in which the
economic benefits of the customer contracts/relationship are realized. The
intangible and goodwill are not tax deductible.
2007
Acquisitions
On
November 1, 2007, the Company acquired an additional 28% of CPB from certain
minority holders resulting in the Company’s current ownership of 77%. 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 $5,546. For accounting purposes, the value
of the Company’s Class A shares issued as consideration was calculated based on
the price of the Company’s Class A shares over a period two days before and
after the November 1, 2007 announcement date. This acquisition represented
an
accelerated exercise of the Company’s existing call option that was otherwise
exercisable in December 2007 and in April 2008. Prior to the transaction, the
Company consolidated CPB as a Variable Interest Entity (“VIE”). As a result of
this step acquisition, the Company now consolidates CPB as a majority owned
subsidiary. The allocation of the excess purchase consideration of this
acquisition to the fair value of net assets acquired resulted in 100% or $4,637
of the excess consideration being allocated to identifiable intangible assets.
Approximately $2,000 represents customer backlog and is being amortized over
a
five month period and the balance of $2,637 represents customer relationships
and is being amortized over a five year period in a manner represented by the
pattern in which the economic benefits of the customer contracts/ relationship
are realized. These intangibles are tax deductible as well as $23,470 of
intangibles which have been previously recorded in connection with the VIE
accounting.
On
October 18, 2007, the Company acquired the remaining 40% equity interest in
KBP
Holdings LLC, (“KBP”) from KBP Management Partners LLC (“Minority Holder”). The
purchase price consisted of an initial payment of approximately $12,255 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. For accounting
purposes, the value of the Company’s Class A shares issued as consideration was
calculated based on the price of the Company’s Class A shares on the date of the
acquisition. 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 $234 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 excess purchase consideration of this acquisition to the
fair
value of net assets acquired resulted in 100% or $14,494 of the excess
consideration being allocated to identifiable intangible assets. Approximately
$2,711 represents customer backlog and is being amortized over a six and
one-half month period and the balance of $11,783 represents customer
relationships and the amortization rate is expected to be 30%, 25%, 20%, 15%
and
10% in years one through five, respectively. The value of the restricted stock
grants will be amortized over a three year period. In addition, the Company
incurred a non-cash stock based compensation charge of approximately $2,603
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. The
intangibles are tax deductible. In May 2008, it was determined that an
additional payment of $814 would be due in December 2008. This additional
payment has been allocated to backlog and written off during the second quarter
of 2008. In addition, the Company incurred a non-cash stock based compensation
charge of $142 resulting from this payment to the phantom equity
holders.
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. As of December 31, 2007, the Company will be required
to
make additional payments of $1,500 of which approximately $214 may be paid
in
the form of Class A shares. At December 31, 2007, this amount has been accrued
in deferred acquisition consideration. 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 identified intangible will be amortized
over a five year period in a manner represented by the pattern in which the
economic benefits of the customer contracts/ relationship are realized. The
intangibles and goodwill are tax deductible.
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 of which 7% has been issued. 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 was paid in
April
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.
Pro
forma Information
The
following unaudited pro forma results of operations of the Company for the
three
months and six months ended June 30, 2007 assume that the acquisition of the
operating assets of the significant businesses acquired during 2007 had occurred
on January 1, 2007. For the three months and six months ended June 30, 2008,
there were no significant businesses acquired. These unaudited pro forma results
are not necessarily indicative of either the actual results of operations that
would have been achieved had the companies been combined during these periods,
or are they necessarily indicative of future results of operations. These
unaudited pro forma results for the three months and six months ended June
30,
2007, include an adjustment for the non-cash stock based compensation charge
of
$2,603 resulting from the KBP acquisition.
|
|
Three Months
Ended June 30,
2007
|
|
Six Months
Ended June 30,
2007
|
|
Revenues
|
|
$
|
134,497
|
|
$
|
252,577
|
|
Net
loss
|
|
$
|
(3,605
|
)
|
$
|
(16,316
|
)
|
Loss
per common share:
|
|
|
|
|
|
|
|
Basic
– net loss
|
|
$
|
(0.14
|
)
|
$
|
(0.64
|
)
|
Diluted
– net loss
|
|
$
|
(0.14
|
)
|
$
|
(0.64
|
)
|
5.
Accrued
and Other Liabilities
At
June
30, 2008 and December 31, 2007, 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 $6,236 and $7,916,
respectively.
6.
Discontinued
Operations
Effective
June 30, 2008, the Company sold its 60% equity interest in The Ito Partnership,
a start-up operation formed in 2006. The sale resulted in a loss of
approximately $800, and has been included in discontinued operations. This
entity had been previously included in the Company’s Specialized Communication
Services segment. The operating results for the three and six months ended
June
30, 2007 were not material and accordingly have not been restated.
In
March
2007, due to continued operating and client losses, the Company ceased
operations of MFP and spun off a new operating business. As a result, the
Company incurred a goodwill impairment charge of $4,475 in the first quarter
of
2007. In the fourth quarter of 2007, the Company received the 2008 projections
of the new MFP operating business, and decided to cease its operations. As
a
result, the Company has classified these operations as discontinued. The results
of operations of MFP and the new operating business during the three and six
months ended June 30, 2007, net of income tax benefits, was a loss, of $1,631
and $5,415, respectively. The 2008 second quarter loss includes income tax
expense of $1,031 relating to the reversal of the first quarter anticipated
tax
recovery. The operating loss consists primarily of the accrual of lease
abandonment costs and severance costs.
In
December 2007, the Company ceased Banjo’s operations due to Banjo’s continued
operating losses and the lack of new business wins. The results of operations
of
Banjo during the three and six months ended June 30, 2007, net of income tax
benefits, was a loss of $40 and $87, respectively.
MFP
and
Banjo had been previously included in the Company’s Specialized Communication
Services segment.
Included
in discontinued operations in the Company’s consolidated statements of
operations for the three months and six months ended June 30, were the
following:
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Revenue
|
|
$
|
—
|
|
$
|
760
|
|
$
|
158
|
|
$
|
2,211
|
|
Impairment
charge
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,475
|
|
Operating
loss
|
|
|
—
|
|
|
(2,324
|
)
|
|
(2,903
|
)
|
|
(8,025
|
)
|
Other
income (expense)
|
|
|
(786
|
)
|
|
(207
|
)
|
|
(937
|
)
|
|
(308
|
)
|
Income
tax (expense) recovery
|
|
|
(1,031
|
)
|
|
860
|
|
|
—
|
|
|
2,831
|
|
Net
loss from discontinued operations
|
|
$
|
(1,817
|
)
|
$
|
(1,671
|
)
|
$
|
(3,840
|
)
|
$
|
(5,502
|
)
|
7.
Comprehensive
Loss
Total
comprehensive loss and its components were:
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net loss for
the period
|
|
$
|
(4,472
|
)
|
$
|
(2,601
|
)
|
$
|
(7,864
|
)
|
$
|
(11,397
|
)
|
Foreign
currency cumulative translation adjustment
|
|
|
410
|
|
|
2,371
|
|
|
(2,971
|
)
|
|
2,907
|
|
Comprehensive
loss for the period
|
|
$
|
(4,062
|
)
|
$
|
(230
|
)
|
$
|
(10,835
|
)
|
$
|
(8,490
|
)
|
Debt
consists of:
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
|
|
|
|
|
Revolving
credit facility
|
|
$
|
6,801
|
|
$
|
1,901
|
|
8%
convertible debentures
|
|
|
44,131
|
|
|
45,395
|
|
Term
loans
|
|
|
111,500
|
|
|
111,500
|
|
Notes
payable and other bank loans
|
|
|
3,672
|
|
|
3,285
|
|
|
|
|
166,104
|
|
|
162,081
|
|
Obligations
under capital leases
|
|
|
2,580
|
|
|
2,673
|
|
|
|
|
168,684
|
|
|
164,754
|
|
Less:
|
|
|
|
|
|
|
|
Current
portions
|
|
|
1,896
|
|
|
1,796
|
|
Long
term portion
|
|
$
|
166,788
|
|
$
|
162,958
|
|
MDC
Financing Agreement and Debentures
Financing
Agreement
On
June
18, 2007, the Company and its material subsidiaries entered into a $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. Proceeds from
the Financing Agreement were used to repay in full the outstanding balances
on
the Company's prior credit facility, which was terminated.
The
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. At June 30, 2008, the
weighted average interest rate was 7.18%.
At
June
30, 2008, $62,107 remains available under the Financing Agreement to support
the
Company’s future cash requirements. The Company’s obligations under the
Financing Agreement are guaranteed by the material subsidiaries of the Company.
The Financing Agreement matures on June 17, 2012, and 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.
The
Company is currently in compliance with all of the terms and conditions of
its
Financing Agreement, and management believes, based on its current financial
projections, that the Company will be in compliance with all covenants under
the
Financing Agreement over the next twelve months.
8%
Convertible Unsecured Subordinated Debentures
On
June
28, 2005, the Company completed an offering in Canada of convertible unsecured
subordinated debentures amounting to $36,723 (C$45,000) (the “Debentures”). The
Debentures will mature on June 30, 2010. The Debentures bear interest at an
annual rate of 8.00% payable semi-annually, in arrears, on June 30 and December
31 of each year, commencing December 31, 2005. 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 $13.73 (C$14.00) per Class
A
subordinate voting share being a ratio of approximately 71.4286 Class A
subordinate voting shares per $981 (C$1,000.00) 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 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 six months ended June 30, 2008, Class A share capital increased by $5,059,
as the Company issued 529,856 Class A shares related to vested shares of
restricted stock. Additionally, during the six months ended June 30, 2008,
the
Company issued 184,467 Class A shares, valued at $1,573 in connection with
acquisitions and deferred acquisition consideration. During the six months
ended
June 30, 2008 “Additional paid-in capital” increased by $79 primarily related to
an increase of $3,458 from stock-based compensation that was expensed during
the
same period and $1,001 related to the profit interest granted in the Core
Strategy Group and DMG acquisitions by the Zyman Group. These amounts were
offset by vested shares of restricted stock of $4,368 which was reclassed to
share capital.
In
March
and June 2008, the Company purchased and retired 107,883 Class A shares for
$876
from employees in connection with the required tax withholding resulting from
the vesting of shares of the restricted stock. In addition, the Company received
and retired 12,346 Class A shares from the Company’s CEO as partial payment of
outstanding loans.
|
(a)
|
During
the three months ended June 30, 2008, the Company increased income
tax
expense for continuing operations and the valuation allowance relating
to
net operating loss carry forwards by
$2,800.
|
(b)
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Other
income (expense)
|
|
$
|
(18
|
)
|
$
|
27
|
|
$
|
(4
|
)
|
$
|
(113
|
)
|
Foreign
currency transaction gain (losses)
|
|
|
(555
|
)
|
|
(2,882
|
)
|
|
3,084
|
|
|
(3,441
|
)
|
Gain
(loss) on sale of assets
|
|
|
46
|
|
|
1,843
|
|
|
(3
|
)
|
|
1,835
|
|
|
|
$
|
(527
|
)
|
$
|
(1,012
|
)
|
$
|
3,077
|
|
$
|
(1,719
|
)
|
11.
Segmented
Information
The
Company reports in three segments plus corporate. The segments are as
follows:
|
·
|
The
Strategic
Marketing Services (“SMS”)
segment consists of integrated marketing consulting services firms
that
offer a compliment 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.
|
During
the fourth quarter of 2007, the Company reclassified certain costs from the
corporate segment to each of the SMS, CRM and SCS segments. As a result, the
2007 segments have been restated for this reclassification.
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 June 30, 2008
(thousands
of United States dollars)
|
|
Strategic
Marketing
Services
|
|
Customer
Relationship
Management
|
|
Specialized
Communication
Services
|
|
Corporate
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
88,785
|
|
$
|
36,843
|
|
$
|
32,647
|
|
$
|
—
|
|
$
|
158,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services sold
|
|
|
54,784
|
|
|
26,358
|
|
|
22,870
|
|
|
—
|
|
|
104,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
and general expenses
|
|
|
20,046
|
|
|
6,310
|
|
|
6,279
|
|
|
4,845
|
|
|
37,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
5,943
|
|
|
1,879
|
|
|
817
|
|
|
69
|
|
|
8,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit/(Loss)
|
|
|
8,012
|
|
|
2,296
|
|
|
2,681
|
|
|
(4,914
|
)
|
|
8,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(527
|
)
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes, equity in affiliates
and
minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,076
|
|
Income
tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,943
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before equity in affiliates and minority
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133
|
|
Equity
in earnings of non-consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
|
|
Minority
interests in income of consolidated subsidiaries
|
|
|
(1,815
|
)
|
|
(130
|
)
|
|
(924
|
)
|
|
—
|
|
|
(2,869
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,655
|
)
|
Loss
from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,817
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash stock based compensation
|
|
$
|
571
|
|
$
|
35
|
|
$
|
221
|
|
$
|
1,036
|
|
$
|
1,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Segment Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
$
|
2,830
|
|
$
|
1,234
|
|
$
|
344
|
|
$
|
8
|
|
$
|
4,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
and intangibles
|
|
$
|
200,738
|
|
$
|
29,000
|
|
$
|
45,600
|
|
$
|
—
|
|
$
|
275,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
361,440
|
|
$
|
76,038
|
|
$
|
96,983
|
|
$
|
18,210
|
|
$
|
552,671
|
|
Three
Months Ended June 30, 2007
(thousands
of United States dollars)
Restated
for Discontinued Operations
|
|
Strategic
Marketing
Services
|
|
Customer
Relationship
Management
|
|
Specialized
Communication
Services
|
|
Corporate
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
78,445
|
|
$
|
25,681
|
|
$
|
30,371
|
|
$ |
|
|
$
|
134,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services sold
|
|
|
46,268
|
|
|
18,873
|
|
|
20,744
|
|
|
—
|
|
|
85,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
and general expenses
|
|
|
19,457
|
|
|
4,824
|
|
|
5,466
|
|
|
5,432
|
|
|
35,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
3,876
|
|
|
1,530
|
|
|
439
|
|
|
71
|
|
|
5,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit/(Loss)
|
|
|
8,844
|
|
|
454
|
|
|
3,722
|
|
|
(5,503
|
)
|
|
7,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,012
|
)
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,510
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes, equity in affiliates
and
minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,995
|
|
Income
tax recovery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before equity in affiliates and minority
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,428
|
|
Equity
in earnings of non-consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
|
|
Minority
interests in income of consolidated subsidiaries
|
|
|
(4,250
|
)
|
|
(13
|
)
|
|
(1,156
|
)
|
|
—
|
|
|
(5,419
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(930
|
)
|
Loss
from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,671
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash stock based compensation
|
|
$
|
482
|
|
$
|
22
|
|
$
|
124
|
|
$
|
925
|
|
$
|
1,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Segment Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
$
|
1,828
|
|
$
|
1,080
|
|
$
|
815
|
|
$
|
121
|
|
$
|
3,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
and intangibles
|
|
$
|
186,925
|
|
$
|
29,517
|
|
$
|
41,437
|
|
$
|
—
|
|
$
|
257,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
330,559
|
|
$
|
67,233
|
|
$
|
101,841
|
|
$
|
18,263
|
|
$
|
517,896
|
|
Six
Months Ended June 30, 2008
(thousands
of United States dollars)
|
|
Strategic
Marketing
Services
|
|
Customer
Relationship
Management
|
|
Specialized
Communication
Services
|
|
Corporate
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
166,766
|
|
$
|
71,506
|
|
$
|
62,693
|
|
$
|
—
|
|
$
|
300,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services sold
|
|
|
105,402
|
|
|
52,048
|
|
|
43,736
|
|
|
—
|
|
|
201,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
and general expenses
|
|
|
39,387
|
|
|
12,231
|
|
|
12,226
|
|
|
9,228
|
|
|
73,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
13,235
|
|
|
3,705
|
|
|
1,707
|
|
|
135
|
|
|
18,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit/(Loss)
|
|
|
8,742
|
|
|
3,522
|
|
|
5,024
|
|
|
(9,363
|
)
|
|
7,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,077
|
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,153
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes, equity in affiliates
and
minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,849
|
|
Income
tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before equity in affiliates and minority
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
731
|
|
Equity
in earnings of non-consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
221
|
|
Minority
interests in income of consolidated subsidiaries
|
|
|
(2,484
|
)
|
|
(187
|
)
|
|
(2,305
|
)
|
|
—
|
|
|
(4,976
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,024
|
)
|
Loss
from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,840
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(7,864
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash stock based compensation
|
|
$
|
1,017
|
|
$
|
67
|
|
$
|
474
|
|
$
|
2,303
|
|
$
|
3,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Segment Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
$
|
5,537
|
|
$
|
2,112
|
|
$
|
953
|
|
$
|
37
|
|
$
|
8,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
and intangibles
|
|
$
|
200,738
|
|
$
|
29,000
|
|
$
|
45,600
|
|
$
|
—
|
|
$
|
275,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
361,440
|
|
$
|
76,038
|
|
$
|
96,983
|
|
$
|
18,210
|
|
$
|
552,671
|
|
Six
Months Ended June 30, 2007
(thousands
of United States dollars)
Restated
for Discontinued Operations
|
|
Strategic
Marketing
Services
|
|
Customer
Relationship
Management
|
|
Specialized
Communication
Services
|
|
Corporate
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
149,008
|
|
$
|
49,249
|
|
$
|
54,320
|
|
$
|
—
|
|
$
|
252,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services sold
|
|
|
89,022
|
|
|
35,871
|
|
|
37,955
|
|
|
—
|
|
|
162,848
|
|
Office
and general expense
|
|
|
37,652
|
|
|
9,361
|
|
|
10,589
|
|
|
10,821
|
|
|
68,423
|
|
Depreciation
and amortization
|
|
|
7,643
|
|
|
3,080
|
|
|
866
|
|
|
138
|
|
|
11,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit/(Loss)
|
|
|
14,691
|
|
|
937
|
|
|
4,910
|
|
|
(10,959
|
)
|
|
9,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,719
|
)
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,004
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes, equity in affiliates
and
minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,856
|
|
Income
tax recovery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before equity in affiliates and minority
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,804
|
|
Equity
in loss of non-consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
Minority
interests in income of consolidated subsidiaries
|
|
|
(7,966
|
)
|
|
(27
|
)
|
|
(1,717
|
)
|
|
—
|
|
|
(9,710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,895
|
)
|
Loss
from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,502
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(11,397
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash stock based compensation
|
|
$
|
971
|
|
$
|
48
|
|
$
|
248
|
|
$
|
2,202
|
|
$
|
3,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Segment Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
$
|
3,486
|
|
$
|
2,515
|
|
$
|
1,177
|
|
$
|
168
|
|
$
|
7,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
and intangibles
|
|
$
|
186,925
|
|
$
|
29,517
|
|
$
|
41,437
|
|
$
|
—
|
|
$
|
257,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
330,559
|
|
$
|
67,233
|
|
$
|
101,841
|
|
$
|
18,263
|
|
$
|
517,896
|
|
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 June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
129,028
|
|
$
|
25,750
|
|
$
|
3,497
|
|
$
|
158,275
|
|
2007
|
|
$
|
108,417
|
|
$
|
23,124
|
|
$
|
2,956
|
|
$
|
134,497
|
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
246,083
|
|
$
|
47,900
|
|
$
|
6,982
|
|
$
|
300,965
|
|
2007
|
|
$
|
205,320
|
|
$
|
41,807
|
|
$
|
5,450
|
|
$
|
252,577
|
|
12.
Commitments, Contingencies and Guarantees
Deferred
Acquisition Consideration.
In
addition to the consideration paid at closing by the Company in respect of
certain of its acquisitions, 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 consideration
reflected on the Company’s balance sheet at June 30, 2008, would be expected to
be owed in 2008.
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 2008 to 2015. 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 June 30,
2008,
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
approximately $65,211 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 $11,091 by the issuance of share capital.
In addition, the Company is obligated under similar put option rights to pay
an
aggregate amount of approximately $8,208 only upon termination of such owner’s
employment with the applicable subsidiary. 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.
Natural
Disasters.
Certain
of the Company’s operations are located in regions of the United States and
Caribbean which typically are subject to hurricanes. During the three and six
months ended June 30, 2008 and 2007, 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 and
2003, 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 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 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 $242 in one investment fund over a period
of
up to two years. At June 30, 2008, the Company has issued $4,592 of undrawn
outstanding letters of credit.
13. New
Accounting Pronouncements
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
adoption of this statement did not have a material effect 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 adoption of this statement did not have a material effect on its
financial statements.
In
December 2007, FASB issued SFAS No. 141R “Business Combination” (“SFAS 141R”).
This revised statement retains some fundamental concepts of the current
standard, including the acquisition method of accounting (known as the “purchase
method” in Statement 141) for all business combinations but SFAS 141R broadens
the definitions of both businesses and business combinations, resulting in
the
acquisition method applying to more events and transactions. This statement
also
requires the acquirer to recognize the identifiable assets and liabilities,
as
well as the noncontrolling interest in the acquiree, at the full amounts of
their fair values. SFAS 141R will require both acquisition-related costs and
restructuring costs to be recognized separately from the acquisition and be
expensed as incurred. In addition, acquirers will record contingent
consideration at fair value on the acquisition date as either a liability or
equity. Subsequent changes in fair value will be recognized in the income
statement for any contingent consideration recorded as a liability. SFAS 141R
is
to be applied prospectively for financial statements issued for fiscal years
beginning on or after December 15, 2008. Early application is prohibited. The
Company is currently evaluating the impact of this new statement on its
financial statements.
In
December 2007, FASB issued SFAS No. 160 “Non-controlling Interests in
Consolidated Financial Statements” (SFAS 160”). This statement amends ARB No. 51
Consolidated Financial Statements, to now require the classification of
noncontrolling (minority) interests and dispositions of noncontrolling interests
as equity within the consolidated financial statements. The income statement
will now be required to show net income/loss with and without adjustments for
noncontrolling interests. SFAS 160 is to be applied prospectively for financial
statements issued for fiscal years beginning on or after December 15, 2008
and
interim periods within those years. However, this statement requires companies
to apply the presentation and disclosure requirements retrospectively to
comparative financial statements. Early application is prohibited. The Company
is currently evaluating the impact of this new statement on its financial
statements.
In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities, an amendment of FASB Statement
No. 133” (“SFAS 161”), which requires enhanced disclosures for derivative
and hedging activities. SFAS 161 will become effective beginning with our first
quarter of 2009. Early adoption is permitted. We are currently evaluating the
impact of this standard on our Consolidated Financial Statements.
Item
2.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Unless
otherwise indicated, references to the “Company” 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 2008 means the period beginning January 1, 2008, and
ending December 31, 2008).
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” 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 six months ended June 30, 2008 and 2007, and the financial condition
of the Company as of June 30, 2008. 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, 2007 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 services 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 and capital expenditures. 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. Through its operating “partners”, MDC provides advertising,
consulting, customer relationship management, and specialized communication
services to clients throughout the United States, Canada, Mexico, Europe,
Jamaica and the Philippines.
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 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.
Because
we are a service business, we monitor these costs 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.
Capital
expenses are measured as either maintenance or investment related.
Maintenance capital expenses are primarily composed of general upkeep of our
office facilities and equipment that are required to continue to operate our
businesses. Investment capital expenses include expansion costs, the
build out of new capabilities, technology or call centers, or other growth
initiatives not related to the day to day upkeep of the existing
operations. Growth capital expenses are measured and approved based on the
expected return of the invested capital.
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 engaged in a number of acquisition
and
disposal transactions during the 2007 to 2008 period, which affected revenues,
expenses, operating income and net income. Additional information regarding
material 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 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 Company generates the highest quarterly revenues
during the fourth quarter in each 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.
Reclassifications.
During
the fourth quarter of 2007, the Company reclassified certain costs from the
corporate segment to each of the SMS, CRM and SCS segments. As a result, the
2007 segments have been restated for this reclassification.
For
the Three Months Ended June 30, 2008
(thousands
of United States dollars)
|
|
Strategic
Marketing
Services
|
|
Customer
Relationship
Management
|
|
Specialized
Communication
Services
|
|
Corporate
|
|
Total
|
|
Revenue
|
|
$
|
88,785
|
|
$
|
36,843
|
|
$
|
32,647
|
|
$
|
—
|
|
$
|
158,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services sold
|
|
|
54,784
|
|
|
26,358
|
|
|
22,870
|
|
|
—
|
|
|
104,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
and general expenses
|
|
|
20,046
|
|
|
6,310
|
|
|
6,279
|
|
|
4,845
|
|
|
37,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
5,943
|
|
|
1,879
|
|
|
817
|
|
|
69
|
|
|
8,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit/(Loss)
|
|
|
8,012
|
|
|
2,296
|
|
|
2,681
|
|
|
(4,914
|
)
|
|
8,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(527
|
)
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes, equity in affiliates
and
minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,076
|
|
Income
tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,943
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before equity in affiliates and minority
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133
|
|
Equity
in earnings of non-consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
|
|
Minority
interests in income of consolidated subsidiaries
|
|
|
(1,815
|
)
|
|
(130
|
)
|
|
(924
|
)
|
|
—
|
|
|
(2,869
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,655
|
)
|
Loss
from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,817
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash stock based compensation.
|
|
$
|
571
|
|
$
|
35
|
|
$
|
221
|
|
$
|
1,036
|
|
$
|
1,863
|
|
Results
of Operations:
For
the Three Months Ended June 30, 2007
(thousands
of United States dollars)
Restated
for Discontinued Operations
|
|
Strategic
Marketing
Services
|
|
Customer
Relationship
Management
|
|
Specialized
Communication
Services
|
|
Corporate
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
78,445
|
|
$
|
25,681
|
|
$
|
30,371
|
|
|
|
|
$
|
$
134,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services sold
|
|
|
46,268
|
|
|
18,873
|
|
|
20,744
|
|
|
—
|
|
|
85,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
and general expenses
|
|
|
19,457
|
|
|
4,824
|
|
|
5,466
|
|
|
5,432
|
|
|
35,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
3,876
|
|
|
1,530
|
|
|
439
|
|
|
71
|
|
|
5,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit/(Loss)
|
|
|
8,844
|
|
|
454
|
|
|
3,722
|
|
|
(5,503
|
)
|
|
7,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,012
|
)
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,510
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes, equity in affiliates
and minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,995
|
|
Income
tax recovery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before equity in affiliates and minority
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,428
|
|
Equity
in earnings of non-consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
|
|
Minority
interests in income of consolidated subsidiaries
|
|
|
(4,250
|
)
|
|
(13
|
)
|
|
(1,156
|
)
|
|
—
|
|
|
(5,419
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(930
|
)
|
Loss
from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,671
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash stock based compensation
|
|
$
|
482
|
|
$
|
22
|
|
$
|
124
|
|
$
|
925
|
|
$
|
1,553
|
|
For
the Six Months Ended June 30, 2008
(thousands
of United States dollars)
|
|
Strategic
Marketing
Services
|
|
Customer
Relationship
Management
|
|
Specialized
Communication
Services
|
|
Corporate
|
|
Total
|
|
Revenue
|
|
$
|
166,766
|
|
$
|
71,506
|
|
$
|
62,693
|
|
$
|
—
|
|
$
|
300,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services sold
|
|
|
105,402
|
|
|
52,048
|
|
|
43,736
|
|
|
—
|
|
|
201,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
and general expenses
|
|
|
39,387
|
|
|
12,231
|
|
|
12,226
|
|
|
9,228
|
|
|
73,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
13,235
|
|
|
3,705
|
|
|
1,707
|
|
|
135
|
|
|
18,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit/(Loss)
|
|
|
8,742
|
|
|
3,522
|
|
|
5,024
|
|
|
(9,363
|
)
|
|
7,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,077
|
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,153
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes, equity in affiliates
and
minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,849
|
|
Income
tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before equity in affiliates and minority
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
731
|
|
Equity
in earnings of non-consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
221
|
|
Minority
interests in income of consolidated subsidiaries
|
|
|
(2,484
|
)
|
|
(187
|
)
|
|
(2,305
|
)
|
|
—
|
|
|
(4,976
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,024
|
)
|
Loss
from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,840
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(7,864
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash stock based compensation.
|
|
$
|
1,017
|
|
$
|
67
|
|
$
|
474
|
|
$
|
2,303
|
|
$
|
3,861
|
|
Results
of Operations:
For
the Six Months Ended June 30, 2007
(thousands
of United States dollars)
Restated
for Discontinued Operations
|
|
Strategic
Marketing
Services
|
|
Customer
Relationship
Management
|
|
Specialized
Communication
Services
|
|
Corporate
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
149,008
|
|
$
|
49,249
|
|
$
|
54,320
|
|
$
|
—
|
|
$
|
252,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services sold
|
|
|
89,022
|
|
|
35,871
|
|
|
37,955
|
|
|
—
|
|
|
162,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
and general expenses
|
|
|
37,652
|
|
|
9,361
|
|
|
10,589
|
|
|
10,821
|
|
|
68,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
7,643
|
|
|
3,080
|
|
|
866
|
|
|
138
|
|
|
11,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit/(Loss)
|
|
|
14,691
|
|
|
937
|
|
|
4,910
|
|
|
(10,959
|
)
|
|
9,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,719
|
)
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,004
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes, equity in affiliates
and minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,856
|
|
Income
tax recovery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before equity in affiliates and minority
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,804
|
|
Equity
loss of non-consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
Minority
interests in income of consolidated subsidiaries
|
|
|
(7,966
|
)
|
|
(27
|
)
|
|
(1,717
|
)
|
|
—
|
|
|
(9,710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,895
|
)
|
Loss
from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,502
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(11,397
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash stock based compensation
|
|
$
|
971
|
|
$
|
48
|
|
$
|
248
|
|
$
|
2,202
|
|
$
|
3,469
|
|
Three
Months Ended June 30, 2008, Compared to Three Months Ended June 30,
2007
Revenue
was $158.3 million for the quarter ended June 30, 2008, representing an increase
of $23.8 million, or 17.7%, compared to revenue of $134.5 million for the
quarter ended June 30, 2007. This revenue increase relates primarily to organic
growth of $19.9 million and $1.8 million relating to acquisitions. In addition,
a weakening of the US Dollar, primarily versus the Canadian dollar during the
quarter ended June 30, 2008, compared to the 2007 quarter, resulted in increased
revenues of $2.0 million.
Operating
profit for the second quarter of 2008 was $8.1 million, compared to $7.5 million
for 2007. The increase in operating profit was primarily the result of an
increase in operating profit of $1.8 million in the Customer Relationship
Management (“CRM”) segment, partially offset by decreases in operating profits
of $0.8 million and $1.0 million within the Strategic Marketing Services (“SMS”)
and Specialized Communication Services (“SCS”) segments, respectively. In
addition, Corporate operating expenses decreased by $0.6 million.
The
loss
from continuing operations for the second quarter of 2008 was $2.7 million,
compared to $0.9 million in 2007. This increase in net loss of $1.7 million
was
due in part to an increase in income tax expense of $4.4 million of which an
increase in the deferred tax valuation allowance accounted for $2.8 million
of that increase. Minority interest charges decreased by $2.6 million, operating
profits increased by $0.6 million and other income expenses decreased by $0.5
million. Other income/expenses include a $2.3 million decrease in the unrealized
losses on foreign currency transactions during 2008 and a gain on sale of assets
of $1.8 million in 2007.
Marketing
Communications Group
Revenues
for the second quarter of 2008 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 $158.3 million compared to
$134.5 million in 2007, representing a year-over-year increase of
17.7%.
The
components of revenue growth for the second quarter of 2008 are shown in the
following table:
|
|
Revenue
|
|
|
|
$000’s
|
|
%
|
|
Three
months ended June 30, 2007
|
|
$
|
134,497
|
|
|
—
|
|
Organic
|
|
|
19,949
|
|
|
14.8
|
%
|
Acquisitions
|
|
|
1,849
|
|
|
1.4
|
%
|
Foreign
exchange impact
|
|
|
1,980
|
|
|
1.5
|
%
|
Three
months ended June 30, 2008
|
|
$
|
158,275
|
|
|
17.7
|
%
|
The
geographic mix in revenues was consistent between 2008 and 2007 and is
demonstrated in the following table:
|
|
Revenue
|
|
|
|
Three Months Ended
June 30, 2008
|
|
Three Months Ended
June 30, 2007
|
|
US
|
|
|
82
|
%
|
|
81
|
%
|
Canada
|
|
|
16
|
%
|
|
17
|
%
|
UK
and other
|
|
|
2
|
%
|
|
2
|
%
|
The
operating profit of the Marketing Communications Group for the second quarter
of
2008 was equal to $13.0 million. Operating margins decreased by 1.5% and were
8.2% for 2008 compared to 9.7% for the second quarter of 2007. The decrease
in
operating margin is primarily attributable to an increase in depreciation and
amortization of $2.8 million related primarily to the step acquisition of
kirshenbaum bond & partners, LLC (“KBP”) in the fourth quarter of 2007. In
addition, direct costs (excluding staff costs) increased as a percentage of
revenues from 26.6% in 2007 to 27.8% in 2008 due to an increase in reimbursed
client related direct costs. However, total staff costs remained consistent
as a
percentage of revenue at approximately 44.8%, and general and administrative
costs decreased as a percentage of revenue from 22.1% in 2007 to 20.6% in
2008.
Strategic
Marketing Services (“SMS”)
Revenues
attributable to SMS in the second quarter of 2008 were $88.8 million, compared
to $78.5 million in 2007. The year-over-year increase of $10.3 million or 13.2%
was attributable primarily to organic growth of $8.1 million as a result of
net
new business wins, and $1.5 million of the revenue increase related to new
acquisitions during 2007. A weakening of the US dollar versus the Canadian
dollar in the second quarter of 2008 compared to 2007 resulted in a $0.7 million
increase in revenues from the division’s Canadian-based operations.
The
operating profit of SMS for the second quarter of 2008 decreased by
approximately 9.4% to $8.0 million in 2008 from $8.8 million in 2007. Operating
margins decreased to 9.0% for the second quarter of 2008 from 11.3% for the
second quarter of 2007. Operating profit decreased due primarily to increased
depreciation and amortization of $2.1 million, which relates to the amortization
of certain intangibles resulting from the KBP step-up acquisitions during the
fourth quarter of 2007. The decrease in operating margin is primarily related
to
an increase in total staff costs as a percentage of revenues from 53.0% of
revenue in 2007 to 55.1% of revenue in 2008. Reimbursed client related direct
costs as a percentage of revenue decreased from 13.9% in 2007 to 13.4% in 2008.
General and administrative costs also decreased as a percentage of revenue
from
24.8% in the second quarter of 2007 to 22.6% in 2008 as a result of increased
revenues and relatively fixed costs.
Customer
Relationship Management (“CRM”)
Revenues
in the CRM segment for the second quarter of 2008 were $36.8 million, an
increase of $11.1 million or 43.5% compared to revenues of $25.7 million in
the
second quarter of 2007. This growth was entirely organic and was a result of
higher revenues from existing clients following the opening of a new customer
care center in September 2007.
Operating
profit earned by CRM increased by approximately $1.8 million to $2.3 million
for
the second quarter of 2008, from $0.5 million for the second quarter of the
previous year. Operating margins were 6.2% for the second quarter of 2008 as
compared to 1.8% in the second quarter of 2007. The increase in margins is
primarily due to a decrease in total cost of services sold as a percentage
of
revenue from 73.5% in 2007, to 71.5% in 2008. This decrease resulted from a
change in the mix of services being provided to customers, as well as reduced
turnover resulting in less unbillable training hours. General and administrative
costs as a percentage of revenue also decreased from 18.8% in 2007, to 17.1%
in
2008.
Specialized
Communication Services (“SCS”)
SCS
generated revenues of $32.6 million for the second quarter of 2008, an increase
of $2.2 million, or 7.5% higher than revenues of $30.4 million in 2007. This
year-over-year increase was attributable primarily to organic growth of $0.6
million as a result of net new business wins, and $0.3 million from
acquisitions. A weakening of the US dollar versus the Canadian dollar and
British pound in 2008 compared to 2007 resulted in a $1.3 million increase
in
revenues from the division’s Canadian and UK-based operations.
The
operating profit of SCS decreased by $1.0 million to $2.7 million in the second
quarter of 2008, from an operating profit of $3.7 million in the second quarter
of 2007. SCS’s operating margins were 8.2% in the second quarter of 2008
compared to 12.3% in the prior year period. The decrease in operating margin
in
2008 was due primarily to the timing of client projects’ commencement and
completion. As a result of this delay in revenue, total staff costs increased
as
a percentage of revenue from 44.1% in 2007 to 44.9% in 2008, an increase in
direct costs as a percentage of revenue from 30.6% in 2007 to 32.3% in 2008,
an
increase in depreciation and amortization as a percentage of revenue from 1.4%
in 2007 to 2.5% in 2008, and an increase in general and administrative costs
as
a percentage of revenue from 18.0% in 2007 to 19.2% in 2008.
Corporate
Operating
costs related to the Company’s Corporate operations totaled $4.9 million in the
second quarter of 2008 compared to $5.5 million in the second quarter of 2007.
This decrease of $0.6 million is primarily due to the net $0.8 million
management services agreement non-renewal payment made in 2007. This net amount
was impacted by reductions in 2008 of legal and other professional fees,
business insurance costs, and travel and entertainment costs and increases
in
the corporate bonus accrual and non-cash based compensation expense.
Other
Income/Expenses, Net
Other
expenses decreased to $0.5 million in the second quarter of 2008 compared to
$1.0 million in the second quarter of 2007. The second quarter of 2008 is
primarily comprised of a foreign exchange loss of $0.6 million for 2008 compared
to a loss of $2.9 million recorded in 2007. This was due primarily to an
unrealized loss due to the weakening in the US dollar during 2008 compared
to
the Canadian dollar primarily on its US dollar denominated intercompany balances
with its Canadian subsidiaries compared to March 31, 2008. At June 30, 2008,
the
exchange rate was 1.02 Canadian dollars to one US dollar, compared to 1.03
at
the end of March 31, 2008. During 2007, the Company recorded a $1.8 million
gain
on sale of assets.
Net
Interest Expense
Net
interest expense for the second quarter of 2008 was $3.5 million, an increase
of
$1.0 million over the $2.5 million net interest expense incurred during the
second quarter of 2007. Interest expense increased due to higher average
outstanding debt in 2008, offset by lower interest rates. Interest income was
$0.2 million for 2008 compared to $1.1 million in 2007 due to income recognized
in 2007 from the acceleration of payments received related to the sale of SPI,
originally due to be received in 2010 and 2011.
Income
Taxes
Income
tax expense in the second quarter of 2008 was $3.9 million compared to a
recovery of $0.4 million for the second quarter of 2007. The Company’s effective
tax rate was substantially higher than the statutory rate in 2008 due to an
increase in the valuation allowance relating to net operating losses,
minority interest charges and offset by non-deductible stock based compensation.
The Company’s effective tax rate was substantially lower than the statutory rate
in 2007 due to minority interest charges offset by non-deductible stock based
compensation.
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 holders are responsible
for
taxes on their share of the profits.
Equity
in Affiliates
Equity
in
affiliates represents the income attributable to equity-accounted affiliate
operations. For the second quarter of 2008, income remained at $0.1
million.
Minority
Interests
Minority
interest expense was $2.9 million for the second quarter of 2008, down $2.5
million from the $5.4 million of minority interest expense incurred during
the
prior period. Such decrease was primarily due to the Company’s step-up in
ownership of CPB and KBP, offset in part by the increase in profitability in
the
subsidiaries within the SCS operating segments that are not 100%
owned.
Discontinued
Operations
The
loss
of $1.8 million from discontinued operations in the second quarter of 2008
resulted from the loss on the sale of a 60% owned subsidiary in 2008 of $0.8
million and $1.0 million relating to income tax expense.
The
loss,
net of an income tax benefit of $1.7 million from discontinued operations for
2007 is comprised of the operating results of MFP and Banjo Strategic
Entertainment, LLC (“Banjo”).
Net
Income
As
a
result of the foregoing, the net loss recorded for 2008 was $4.5 million or
a
loss of $0.17 per diluted share, compared to the net loss of $2.6 million or
$0.11 per diluted share reported for 2007.
Revenue
was $301.0 million for the six months ended June 30, 2008, representing an
increase of $48.4 million, or 19.2%, compared to revenue of $252.6 million
for
the six months ended June 30, 2007. This revenue increase relates primarily
to
organic growth of $37.1 million and $6.1 million relating to acquisitions.
In
addition, a weakening of the US Dollar, primarily versus the Canadian dollar
during the six months ended June 30, 2008, resulted in increased revenues of
$5.1 million.
Operating
profit for the first six months of 2008 was $7.9 million, compared to $9.6
million for 2007. The decrease in operating profit was primarily the result
of a
decrease in operating profit of $5.9 million in the Strategic Marketing Services
(“SMS”) segment, partially offset by increases in operating profits of $2.6
million and $0.1 million within the Customer Relationship Management (“CRM”) and
Specialized Communication Services (“SCS”) segments, respectively. In addition,
Corporate operating expenses decreased by $1.6 million.
The
loss
from continuing operations for the first six months ended 2008 was $4.0 million,
compared to $5.9 million in 2007. This decrease in net loss of $1.9 million
was
primarily the result of an increase in other income of $4.8 million, which
includes a $6.5 million increase in unrealized gains on foreign currency
transactions from 2007 offset by a gain on sale of assets of $1.8 million in
2007, and decreased minority interest of $4.7 million, partially offset by
an
increase in income tax expense of $4.1 million of which the establishment of
a
deferred tax valuation allowance accounted for $2.8 million of the decrease
and
by decreased operating profits of $1.7 million.
Marketing
Communications Group
Revenues
for the first six months of 2008 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 $301.0 million compared to
$252.6 million in the first six months of 2007, representing a year-over-year
increase of 19.2%.
The
components of revenue growth for 2008 are shown in the following
table:
|
|
Revenue
|
|
|
|
$000’s
|
|
%
|
|
Six
months ended June 30, 2007
|
|
$
|
252,577
|
|
|
—
|
|
Organic
|
|
|
37,112
|
|
|
14.7
|
%
|
Acquisitions
|
|
|
6,138
|
|
|
2.4
|
%
|
Foreign
exchange impact
|
|
|
5,138
|
|
|
2.1
|
%
|
Six
months ended June 30, 2008
|
|
$
|
300,965
|
|
|
19.2
|
%
|
The
geographic mix in revenues was consistent between 2008 and 2007 and is
demonstrated in the following table:
|
|
Revenue
|
|
|
|
Six Months Ended
June 30, 2008
|
|
Six Months Ended
June 30, 2007
|
|
US
|
|
|
82
|
%
|
|
81
|
%
|
Canada
|
|
|
16
|
%
|
|
17
|
%
|
UK
and other
|
|
|
2
|
%
|
|
2
|
%
|
The
operating profit of the Marketing Communications Group for the first six months
of 2008 decreased by approximately 15.8% to $17.3 million from $20.5 million.
Operating margins for the first six months of 2008 decreased by 2.4% and were
5.7% for 2008 compared to 8.1% in the first six months of 2007. The decrease
in
operating profit and operating margin is primarily attributable to an increase
in depreciation and amortization of $7.1 million primarily related to the step
acquisition of KBP in the fourth quarter of 2007. In addition, direct costs
(excluding staff costs) increased as a percentage of revenues from 25.0% of
revenue in 2007 to 27.6% of revenue in 2008 due to an increase in reimbursed
client related direct costs. However, total staff costs as a percentage of
revenues decreased from 47.6% in 2007 to 46.8% in 2008. General and
administrative costs also decreased as a percentage of revenue from 22.8% in
2007 to 21.2% in 2008.
Strategic
Marketing Services (“SMS”)
Revenues
attributable to SMS in the first six months of 2008 were $166.8 million,
compared to $149.0 million for the first six months of 2007. The year-over-year
increase of $17.8 million or 11.9% was attributable primarily to organic growth
of $10.1 million as a result of net new business wins, and $5.8 million of
the
revenue increase related to new acquisitions during 2007. A weakening of the
US
dollar versus the Canadian dollar in 2008 compared to 2007 resulted in a $1.9
million increase in revenues from the division’s Canadian-based
operations.
The
operating profit of SMS decreased by approximately 40.5% to $8.7 million in
the
first six months of 2008 from $14.7 million in the first six months of 2007,
while operating margins decreased to 5.2% in the first six months of 2008 from
9.9% in the first six months of 2007. Operating profit decreased due primarily
to increased depreciation and amortization of $5.6 million, which relates to
the
amortization of certain intangibles resulting from the KBP step-up acquisition
during the fourth quarter of 2007. The decrease in operating margin is primarily
related to an increase in direct costs (excluding staff costs) as a percentage
of revenues from 11.9% of revenue in 2007 to 12.8% of revenue in 2008. Total
staff costs as a percentage of revenue increased from 56.3% in 2007 to 58.2%
in
2008. However, general and administrative costs decreased as a percentage of
revenue from 25.3% in 2007 to 23.6% in 2008 as a result of relatively fixed
costs while revenue increased.
Customer
Relationship Management (“CRM”)
Revenues
reported by the CRM segment in the first six months of 2008 were $71.5 million,
an increase of $22.3 million or 45.2% compared to the $49.2 million reported
for
2007. This growth was entirely organic and was a result of higher revenues
from
existing clients in part as a result of the opening of a new customer care
center in September 2007.
Operating
profit earned by CRM increased by approximately $2.6 million to $3.5 million
for
the first six months of 2008, from $0.9 million for the previous year. Operating
margins were 4.9% for the first six months of 2008 as compared to 1.9% in the
first six months of 2007. The increase in margins is primarily due to a decrease
in general and administrative costs as a percentage of revenue from 19.0% in
2007 to 17.1% in 2008 and a decrease in depreciation and amortization expense
as
a percentage of revenue from 6.3% in 2007 to 5.2% in 2008.
Specialized
Communication Services (“SCS”)
SCS
generated revenues of $62.7 million for the first six months of 2008, an
increase of $8.4 million, or 15.4% higher than revenues of $54.3 million in
the
first six months of 2007. The year-over-year increase was attributable primarily
to organic growth of $4.6 million as a result of net new business wins, and
$0.4
million from acquisitions. A weakening of the US dollar versus the Canadian
dollar and British pound in 2008 compared to 2007 resulted in a $3.4 million
increase in revenues from the division’s Canadian and UK-based
operations.
The
operating profit of SCS increased by $0.1 million to $5.0 million in the first
six months of 2008, from an operating profit of $4.9 million in 2007, with
operating margins of 8.0% in the first six months of 2008 compared to 9.0%
in
2007. The decrease in operating margin in 2008 was due primarily to the timing
of when expected client projects will begin and be completed. As a result,
depreciation and amortization expense as a percentage of revenue increased
from
1.6% in 2007 to 2.7% in 2008. However, this was offset in part by a decrease
in
total staff costs as a percentage of revenue from 47.5% in 2007, to 46.9% in
2008.
Corporate
Operating
costs related to the Company’s Corporate operations totaled $9.4 million in the
first six months of 2008 compared to $11.0 million in the prior year period.
This decrease of $1.6 million is primarily due to the net $0.8 million
management services agreement non-renewal payment made in 2007. This net amount
was impacted by reductions in 2008 of legal and other professional fees,
business insurance costs, travel and entertainment costs, receipt of a partial
repayment of the CEO’s outstanding loan equal to $0.1 million and increases in
the corporate bonus’ accrued and non-cash stock based compensation
expense.
Other
Income/Expenses, Net
Other
income increased to $3.1 million in the first six months of 2008 compared to
expenses of $1.7 million in the first six months of 2007. The 2008 income is
primarily comprised of a foreign exchange gain of $3.1 million for 2008 compared
to a loss of $3.4 million recorded in 2007, and was due primarily to an
unrealized gain due to the strengthening in the US dollar during 2008 compared
to the Canadian dollar primarily on its US dollar denominated intercompany
balances with its Canadian subsidiaries compared to December 31, 2007. At June
30, 2008, the exchange rate was 1.02 Canadian dollars to one US dollar, compared
to 0.99 at the end of 2007. This was offset in part due to the gain on sale
of
assets of $1.8 million in 2007.
Net
Interest Expense
Net
interest expense for 2008 was $7.2 million for the first six months, an increase
of $2.2 million over the $5.0 million net interest expense incurred during
2007.
Interest expense increased $1.3 million in 2008 due to higher average
outstanding debt in 2008, offset by lower interest rates. Interest income was
$0.4 million for the first six months of 2008 compared to $1.2 million in 2007,
due to income recognized in 2007 from the acceleration of payments received
related to the sale of SPI, originally due to be received in 2010 and
2011.
Income
Taxes
Income
tax expense recorded in the first six months of 2008 was $3.1 million compared
to a recovery of $0.9 million for 2007. The Company’s effective tax rate was
consistent with the statutory rate in 2008 due to minority interest charges
offset by an increase in the valuation allowance relating to net operating
losses and by non-deductible stock based compensation. The Company’s effective
tax rate was substantially lower than the statutory rate in 2007 due to minority
interest charges, offset by non-deductible stock based
compensation.
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 holders are responsible
for
taxes on their share of the profits.
Equity
in Affiliates
Equity
in
affiliates represents the income attributable to equity-accounted affiliate
operations. For the first six months of 2008, income of $0.2 million compared
to
a nominal amount in 2007.
Minority
Interests
Minority
interest expense was $5.0 million for the first six months of 2008, down $4.7
million from the $9.7 million minority interest expense incurred during the
first six months of 2007. Such decrease was primarily due to the Company’s
step-up in ownership of CPB and KBP offset in part by the increase in
profitability of the subsidiaries within the SCS operating segments that are
not
100% owned by the Company.
Discontinued
Operations
The
loss
of $3.8 million from discontinued operations in the first six months of 2008
results primarily from the loss on sale of 60% owned subsidiary in 2008 of
$0.8
million and $3.0 million relating to the first quarter 2008 accrual of the
lease
abandonment costs and severance costs relating to MFP.
The
loss,
net of an income tax benefit of $5.9 million from discontinued operations for
2007 is comprised of the operating results of MFP and Banjo.
In
March
2007, due to continued operating and client losses, the Company ceased MFP’s
current operations and spun off a new operating division, and as a result
incurred a goodwill impairment charge of $4.5 million. After reviewing the
2008
projections and operating losses of the new MFP operating division, the Company
decided to cease the operations of the new MFP operating business as
well.
Net
Income
As
a
result of the foregoing, the net loss recorded for the first six months of
2008
was $7.9 million or a loss of $0.29 per diluted share, compared to the net
loss
of $11.4 million or $0.46 per diluted share reported for the first six months
of
2007.
Liquidity
and Capital Resources:
Liquidity
The
following table provides summary information about the Company’s liquidity
position:
|
|
As of and for the
six months ended
June 30, 2008
|
|
As of and for the
six months ended
June 30, 2007
|
|
As of and for the
year ended
December 31, 2007
|
|
|
|
(000’s)
|
|
(000’s)
|
|
(000’s)
|
|
Cash
and cash equivalents
|
|
$
|
18,510
|
|
$
|
9,359
|
|
$
|
10,410
|
|
Working
capital (deficit)
|
|
$
|
(24,277
|
)
|
$
|
(28,884
|
)
|
$
|
(22,364
|
)
|
Cash
from operations
|
|
$
|
23,155
|
|
$
|
(8,849
|
)
|
$
|
4,132
|
|
Cash
from investing
|
|
$
|
(18,488
|
)
|
$
|
(10,853
|
)
|
$
|
(60,914
|
)
|
Cash
from financing
|
|
$
|
3,584
|
|
$
|
23,066
|
|
$
|
60,929
|
|
Long-term
debt to shareholders’ equity ratio
|
|
|
1.38
|
|
|
1.05
|
|
|
1.27
|
|
Fixed
charge coverage ratio
|
|
|
1.38
|
|
|
1.32
|
|
|
1.36
|
|
As
of
June 30, 2008, and December 31, 2007, $9.7 million and $3.5 million,
respectively, 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.
It
is the Company’s intent through its cash management system to reduce outstanding
borrowings under the Financing Agreement using available cash.
Working
Capital
At
June
30, 2008, the Company had a working capital deficit of $24.3 million compared
to
a deficit of $22.4 million at December 31, 2007. The decrease in working
capital is primarily due to seasonal shifts in the amounts collected from
clients, and paid to suppliers, primarily media outlets. The Company includes
amounts due to minority interest holders, for their share of profits, in accrued
and other liabilities. At June 30, 2008, $6.2 million remains outstanding to
be
distributed to minority interest holders over the next twelve
months.
The
Company intends to maintain sufficient availability of funds under its 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
provided by continuing operations, including changes in non-cash working
capital, for the six months ended June 30, 2008 was $22.9 million. This was
attributable primarily to depreciation and amortization and non-cash stock
compensation of $22.9 million and an increase in accounts payable accruals
and
other liabilities and advance billings to clients of $28.8 million. Partially
offset by a net operating loss from continuing operations of $4.0 million,
an
increase in accounts receivable of $13.4 million, an increase in expenditures
billable to clients of $9.4 million, and $3.1 million in foreign exchange gains.
Discontinued operations provided cash of $0.2 million in the six months ended
June 30, 2008.
Cash
flow
used in operations, including changes in non-cash working capital, for the
six
months ended June 30, 2007 was $9.2 million. This was attributable primarily
to
a net operating loss of $5.9 million, payments of accounts payable and accrued
liabilities, which resulted in a cash use from operations of $6.2 million,
an
increase in prepaid and other current assets of $6.4 million, an increase in
accounts receivable of $20.1 million and a decrease in advanced billings of
$0.4
million. This use of cash was partially offset by depreciation and amortization,
and non-cash stock compensation of $16.4 million, a decrease in expenditures
billable to clients of $8.0 million, $2.6 million in deferred income taxes,
and
$4.2 million in foreign exchange losses. Discontinued operations provided cash
of $0.4 million in the six months ended June 30, 2007.
Investing
Activities
Cash
flows used in investing activities were $18.5 million for the six months ended
June 30, 2008, compared with $10.9 million in the six months ended June 30,
2007.
In
the
six months ended June 30, 2008, capital expenditures totaled $8.6 million,
of
which $5.5 million was incurred by the SMS segment, $2.1 million was incurred
by
the CRM segment and $1.0 million was incurred by the SCS segment, which
expenditures consisted primarily of costs associated with expanding our
operations with additional leasehold improvements, computer equipment and
furniture and fixtures. Expenditures for capital assets in the six months ended
June 30, 2007 were $7.3 million. Of this amount, $3.5 million was incurred
by
the SMS segment, $2.5 million was incurred by the CRM segment and $1.2 million
was incurred by the SCS segment. These expenditures consisted primarily of
computer equipment and leasehold improvements.
In
the
six months ended June 30, 2008, cash flow used for acquisitions was $10.0
million and related to the settlement of put options, earn-out payments and
acquisitions net of cash acquired. Cash flow used in acquisitions was $10.7
million in the six months ended June 30, 2007 and primarily related to
acquisitions net of cash acquired and a payment for a deferred acquisition
consideration. The Company also received proceeds from the sale of assets of
$7.5 million in 2007.
Discontinued
operations used cash of $0.1 million in 2007 relating to capital asset
purchases.
Financing
Activities
During
the six months ended June 30, 2008, cash flows used in financing activities
amounted to $3.6 million, and consisted primarily of borrowings under the
Financing Agreement of $4.9 million, repayments of long-term debt of $0.4
million and the purchase of treasury shares relating to income tax withholding
requirements of $0.9 million. During the six months ended June 30, 2007, cash
flows provided by financing activities amounted to $23.1 million, and primarily
consisted of $82.2 million of proceeds from the Financing Agreement, which
was
partially offset by a $45 million repayment of the old Credit Facility, $10.4
million of net repayments of long-term debt and bank borrowings, and the payment
of $3.8 million of deferred financing costs relating to the Financing
Agreement.
Total
Debt
On
June
18, 2007, the Company and its material subsidiaries entered into a $185 million
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 and terminate the Company's existing credit facility.
The
obligations repaid totaled approximately $73.7 million.
This
current 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 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
weighted average interest rate at June 30, 2008 was 7.18%.
The
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.
Debt
as
of June 30, 2008 was $168.7 million, an increase of $3.9 million compared with
the $164.8 million outstanding at December 31, 2007, primarily as a result
of
borrowings under the revolving credit facility to fund seasonal working capital
requirements. At June 30, 2008, $62.1 million is available under the Financing
Agreement.
The
Company is currently in compliance with all of the terms and conditions of
its
Financing Agreement, and management believes, based on its current financial
projections, that the Company will be in compliance with covenants over the
next
twelve months.
If
the
Company loses all or a substantial portion of its lines of credit under the
Financing Agreement, it will be required to seek other sources of liquidity.
If
the Company were unable to find these sources of liquidity, for example through
an equity offering or access to the capital markets, the Company’s ability to
fund its working capital needs and any contingent obligations with respect
to
put options would be adversely affected.
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 June 30, 2008, the Company’s calculation of each of these
covenants, and the specific requirements under the Financing Agreement,
respectively, were as follows:
|
|
June 30, 2008
|
|
Total
Senior Leverage Ratio
|
|
|
2.03
|
|
Maximum
per covenant
|
|
|
3.25
|
|
Fixed
Charges Ratio
|
|
|
2.37
|
|
Minimum
per covenant
|
|
|
1.20
|
|
Minimum
earnings before interest, taxes, depreciation and amortization
|
|
$
|
60.3 million
|
|
Minimum
per covenant
|
|
$
|
37.9 million
|
|
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 non-compliance with such covenants could have a material
adverse effect on the Company
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 June 30, 2008, there was $2.4 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 $31.2 million of additional deferred purchase obligations could
be
triggered during 2008 or thereafter, including approximately $7.6 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.
Off-Balance
Sheet Commitments
Put
Rights of Subsidiaries’ Minority Shareholders
Owners
of
interests in certain of the Marketing Communications Group 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 2008 to 2015.
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 June 30,
2008,
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 $65.2 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
$11.1 million by the issuance of the Company’s Class A subordinate voting
shares. In addition, the Company is obligated under similar put option rights
to
pay an aggregate amount of approximately $8.2 million only upon termination
of
such owner’s employment with such applicable subsidiary. The Company intends to
finance the cash portion of these contingent payment obligations using available
cash from operations, borrowings under its Financing Agreement (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 $8.4 million of the estimated $65.2 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
the next twelve months. 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 $12.4 million.
The
following table summarizes the potential timing of the consideration and
incremental operating income before depreciation and amortization based on
assumptions as described above.
Consideration
(4)
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012 &
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
|
|
|
($ Millions)
|
|
Cash
|
|
$
|
8.1
|
|
$
|
2.0
|
|
$
|
26.6
|
|
$
|
2.1
|
|
$
|
15.3
|
|
$
|
54.1
|
|
Shares
|
|
|
0.3
|
|
|
0.9
|
|
|
5.9
|
|
|
1.2
|
|
|
2.8
|
|
|
11.1
|
|
|
|
$
|
8.4
|
|
$
|
2.9
|
|
$
|
32.5
|
|
$
|
3.3
|
|
$
|
18.1
|
|
$
|
65.2
|
(1)
|
Operating
income before depreciation and amortization to be received(2)
|
|
$
|
2.6
|
|
$
|
0.7
|
|
$
|
3.3
|
|
$
|
1.5
|
|
$
|
4.3
|
|
$
|
12.4
|
|
Cumulative
operating income before depreciation and amortization(3)
|
|
$
|
2.6
|
|
$
|
3.3
|
|
$
|
6.6
|
|
$
|
8.1
|
|
$
|
12.4
|
|
|
|
|
(1)
|
Of
this, approximately $19.6 million has been recognized in Minority
Interest
on the Company’s balance sheet in conjunction with the consolidation of
CPB as a variable interest entity in 2004. As a result, the net off
balance sheet commitment is $45.6
million.
|
(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 actual 2007 and second quarter 2008 operating results. This amount
represents amounts to be received commencing 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 business at times acts 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, “Income Statement
Characterization of Reimbursements Received for Out-of-Pocket Expenses
Incurred”. 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 an 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 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.
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, which
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. 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 are revalued each period and
recorded as compensation cost over the service period in operating
income.
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
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 adoption
of this statement did not have a material effect on our financial
statements.
Effective
in Future Periods
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
adoption of this statement did not have a material effect on our financial
statements.
In
December 2007, FASB issued SFAS No. 141R “Business Combination” (“SFAS 141R”).
This revised statement retains some fundamental concepts of the current
standard, including the acquisition method of accounting (known as the “purchase
method” in Statement 141) for all business combinations but SFAS 141R broadens
the definitions of both businesses and business combinations, resulting in
the
acquisition method applying to more events and transactions. This statement
also
requires the acquirer to recognize the identifiable assets and liabilities,
as
well as the noncontrolling interest in the acquiree, at the full amounts of
their fair values. SFAS 141R will require both acquisition-related costs and
restructuring costs to be recognized separately from the acquisition and be
expensed as incurred. In addition, acquirers will record contingent
consideration at fair value on the acquisition date as either a liability or
equity. Subsequent changes in fair value will be recognized in the income
statement for any contingent consideration recorded as a liability. SFAS 141R
is
to be applied prospectively for financial statements issued for fiscal years
beginning on or after December 15, 2008. Early application is prohibited. The
Company is currently evaluating the impact of this new statement on its
financial statements.
In
December 2007, FASB issued SFAS No. 160 “Non-controlling Interests in
Consolidated Financial Statements” (SFAS 160”). This statement amends ARB No. 51
Consolidated Financial Statements, to now require the classification of
noncontrolling (minority) interests and dispositions of noncontrolling interests
as equity within the consolidated financial statements. The income statement
will now be required to show net income/loss with and without adjustments for
noncontrolling interests. SFAS 160 is to be applied prospectively for financial
statements issued for fiscal years beginning on or after December 15, 2008
and
interim periods within those years. However, this statement requires companies
to apply the presentation and disclosure requirements retrospectively to
comparative financial statements. Early application is prohibited. The Company
is currently evaluating the impact of this new statement on its financial
statements.
In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities, an amendment of FASB Statement
No. 133” (“SFAS 161”), which requires enhanced disclosures for derivative
and hedging activities. SFAS 161 will become effective beginning with our first
quarter of 2009. Early adoption is permitted. We are currently evaluating the
impact of this standard on our Consolidated 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 retain and attract key
employees;
|
|
•
|
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 and deferred acquisition
consideration;
|
|
•
|
the
successful completion and integration of acquisitions which compliment
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, from borrowings under its current Financing
Agreement 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 2007 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 June 30, 2008, the Company’s debt obligations
consisted of amounts outstanding under its Financing Agreement. 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
$118.3 million, as of June 30, 2008, a 1.0% increase or decrease in the weighted
average interest rate, which was 7.2% at June 30, 2008, would have an interest
impact of approximately $1.2 million annually.
Foreign
Exchange: The Company conducts business in five currencies, the US
dollar, the Canadian dollar, the 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 the “Management’s
Discussion and Analysis of Financial Condition and Result of Operations” and in
Note 2 of our consolidated financial statements. 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.
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 Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), who is our principal financial officer, 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 June 30, 2008.
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
second quarter of 2008 that have materially affected, or are reasonably likely
to materially affect the Company’s internal control over financial
reporting.
PART II.
OTHER INFORMATION
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 2007 Annual Report on Form 10-K.
(
a) The information
provided below describes a transaction that occurred during the second quarter
of 2008 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)
|
On
June 15, 2007, the Company, through a wholly-owned subsidiary, purchased
60% of the total outstanding membership units of Redscout LLC
(“Redscout”). As part of this acquisition, the Company agreed to pay an
additional amount if certain financial performance targets were achieved
by Redscout. On April 1, 2008 the Company paid approximately $1.3
million
in cash and issued 27,545 of the Company’s Class A Shares (valued at
approximately $213,750 on the date of issuance). The Class A Shares
were
issued by the Company to the sellers of Redscout 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
“accredited investors” within the meaning of Rule 501(a) of Regulation D.
Sellers of Redscout had access to all the documents filed by the
Company
with the SEC.
|
|
(a)
|
This
item is answered in respect of the Annual and Special Meeting of
Shareholders held on May 30, 2008 (the “Annual
Meeting”).
|
|
(b)
|
No
response is required to Paragraph (b) because (i) proxies for
the meeting were solicited pursuant to Regulation 14 under the Securities
Exchange Act of 1934, as amended; (ii) there was no solicitation in
opposition to management’s nominees as listed in the proxy statement; and
(iii) all such nominees were
elected.
|
|
(c)
|
At
the Annual Meeting, the following number of shares were cast with
respect
to each matter voted upon:
(1)
Election of Directors: 20,927,657
(2)
Election of BDO Seidman LLP as Auditors: 20,927,658
(3)
Approval of the 2008 Key Partner Incentive Plan:
16,529,334
|
At
the
Annual Meeting, shareholder votes were cast for the election of the Company’s
nominees for Director as follows:
NOMINEE
|
|
FOR
|
|
WITHHELD
|
|
|
|
|
|
|
|
Clare
Copeland
|
|
|
20,624,100
|
|
|
303,557
|
|
|
|
|
|
|
|
|
|
Thomas
N. Davidson
|
|
|
20,634,100
|
|
|
293,557
|
|
|
|
|
|
|
|
|
|
Jeffrey
E. Epstein
|
|
|
20,651,413
|
|
|
276,244
|
|
|
|
|
|
|
|
|
|
Robert
J. Kamerschen
|
|
|
20,609,062
|
|
|
318,595
|
|
|
|
|
|
|
|
|
|
Scott
L. Kauffman
|
|
|
20,666,931
|
|
|
260,726
|
|
|
|
|
|
|
|
|
|
Michael
J.L. Kirby
|
|
|
20,629,934
|
|
|
297,723
|
|
|
|
|
|
|
|
|
|
Miles
S. Nadal
|
|
|
20,598,878
|
|
|
328,779
|
|
|
|
|
|
|
|
|
|
Stephen
M. Pustil
|
|
|
20,301,795
|
|
|
625,862
|
|
Proposal
to approve the appointment of BDO Seidman, LLP as the Company’s independent
auditors for 2008:
FOR
|
|
WITHHELD
|
|
20,823,809
|
|
|
103,849
|
|
Proposal
to approve the Company’s 2008 Key Partner Incentive Plan:
FOR
|
|
AGAINST
|
|
11,023,631
|
|
|
5,505,703
|
|
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
|
|
July 31,
2008
|
Exhibit No.
|
|
Description
|
|
|
|
10.1
|
|
2008
Key Partner Incentive Plan, as approved and adopted by the shareholders
of
the Company at the 2008 Annual and Special Meeting of Shareholders
on May
30, 2008.*
|
|
|
|
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.