UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
(Mark One)
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|
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x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the quarterly period ended September 30, 2009
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or
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from ______________ to ______________
Commission
file number: 001-13178
MDC
Partners Inc.
(Exact
name of registrant as specified in its charter)
Canada
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|
98-0364441
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(State
or other jurisdiction of
incorporation
or organization)
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(IRS
Employer Identification No.)
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45 Hazelton Avenue
Toronto,
Ontario, Canada
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M5R
2E3
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(Address
of principal executive offices)
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(Zip
Code)
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(416)
960-9000
Registrant’s
telephone number, including area code:
950
Third Avenue, New York, New York 10022
(646)
429-1809
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
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 ¨
|
Accelerated
Filer x
|
Non-Accelerated
Filer ¨
(Do not check if a smaller reporting company.)
|
Smaller
reporting company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes
¨ 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 ¨ No ¨
The
numbers of shares outstanding as of October 28, 2009 were: 28,224,021
Class A subordinate voting shares and 2,503 Class B multiple voting
shares.
Website
Access to Company Reports
MDC
Partners Inc.’s internet website address is www.mdc-partners.com. The Company’s
annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K, and any amendments to those reports filed or
furnished pursuant to section 13(a) or 15(d) of the Exchange Act, will
be made available free of charge through the Company’s website as soon as
reasonably practical after those reports are electronically filed with, or
furnished to, the Securities and Exchange Commission.
MDC
PARTNERS INC.
QUARTERLY
REPORT ON FORM 10-Q
TABLE
OF CONTENTS
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Page
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PART I.
FINANCIAL INFORMATION
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Item
1.
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Financial
Statements
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3
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Condensed
Consolidated Statements of Operations (unaudited) for the Three and Nine
Months Ended September 30, 2009 and 2008
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3
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Condensed
Consolidated Balance Sheets as of September 30, 2009 (unaudited) and
December 31, 2008
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4
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Condensed
Consolidated Statements of Cash Flows (unaudited) for the Nine Months
Ended September 30, 2009 and 2008
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5
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Notes
to Unaudited Condensed Consolidated Financial Statements
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6
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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23
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Item
3.
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Quantitative
and Qualitative Disclosures about Market Risk
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41
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Item
4.
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Controls
and Procedures
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41
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PART II.
OTHER INFORMATION
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Item
1.
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Legal
Proceedings
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42
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Item
1A.
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Risk
Factors
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42
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Item
2.
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Unregistered
Sales of Equity and Use of Proceeds
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42
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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42
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Item
6.
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Exhibits
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Signatures
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43
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Item
1. Financial Statements
MDC
PARTNERS INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(thousands
of United States dollars, except share and per share amounts)
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|
Three Months Ended September
30,
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Nine Months Ended September
30,
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2009
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2008
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2009
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2008
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Reclassified
(Note 1)
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Reclassified
(Note 1)
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Revenue:
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Services
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$
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134,625
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$
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142,089
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$
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396,246
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$
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439,940
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Operating
Expenses:
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Cost
of services sold
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85,526
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94,558
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259,644
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292,410
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Office
and general expenses
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31,401
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31,864
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92,726
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102,754
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Depreciation
and amortization
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|
7,514
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7,428
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22,711
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25,789
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124,441
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133,850
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375,081
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420,953
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Operating
profit
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10,184
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8,239
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21,165
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18,987
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Other
Income (Expenses):
|
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Other
income (expense)
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(3,080)
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2,418
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(2,991)
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5,545
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Interest
expense
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(3,792)
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(3,573
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)
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|
(11,276)
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(11,140
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)
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Interest
income
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17
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456
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|
289
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1,350
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(6,855)
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(699
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)
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(13,978)
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(4,245
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)
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Income
from continuing operations before income taxes, equity in
affiliates
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3,329
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7,540
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7,187
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14,742
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Income
tax expense
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1,149
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2,222
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3,373
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6,415
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Income
from continuing operations before equity in affiliates
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2,180
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5,318
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3,814
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8,327
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Equity
in earnings of non-consolidated affiliates
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60
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69
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258
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290
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Income
from continuing operations
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2,240
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5,387
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4,072
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8,617
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Loss
from discontinued operations attributable to MDC Partners Inc., net of
taxes
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|
—
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(771
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)
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(361)
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(6,698
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)
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Net
income
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2,240
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|
4,616
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3,711
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1,919
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|
Net
income attributable to the noncontrolling interests
|
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|
(2,204)
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|
(1,366
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)
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(3,569)
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(6,533
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)
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Net
income (loss) attributable to MDC Partners Inc.
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$
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36
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$
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3,250
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$
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142
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$
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(4,614
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)
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Income
(loss) Per Common Share:
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Basic
and Diluted:
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Income
from continuing operations attributable to MDC Partners Inc. common
shareholders
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$
|
0.00
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$
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0.15
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$
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0.02
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|
$
|
0.08
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Discontinued
operations attributable to MDC Partners Inc. common
shareholders
|
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0.00
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(0.03
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)
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|
(0.01)
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|
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(0.25
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)
|
Net
income (loss) attributable to MDC Partners Inc. common
shareholders
|
|
$
|
0.00
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|
$
|
0.12
|
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|
$
|
0.01
|
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|
$
|
(0.17
|
)
|
Weighted
Average Number of Common Shares Outstanding:
|
|
|
|
|
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|
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|
|
|
|
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Basic
|
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27,471,041
|
|
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26,835,101
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|
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27,343,575
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26,721,820
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Diluted
|
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|
29,009,655
|
|
|
|
27,290,259
|
|
|
|
27,838,740
|
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|
27,235,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Non
cash stock-based compensation expense is included in the following line
items above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services sold
|
|
$
|
286
|
|
|
$
|
236
|
|
|
$
|
783
|
|
|
$
|
778
|
|
Office
and general expenses
|
|
|
1,945
|
|
|
|
1,593
|
|
|
|
5,390
|
|
|
|
4,912
|
|
Total
|
|
$
|
2,231
|
|
|
$
|
1,829
|
|
|
$
|
6,173
|
|
|
$
|
5,690
|
|
See notes
to the unaudited condensed consolidated financial statements.
MDC
PARTNERS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE
SHEETS
(thousands
of United States dollars)
|
|
September 30,
2009
|
|
|
December 31,
2008
|
|
|
|
(Unaudited)
|
|
|
(Reclassified)
(Note 1)
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
70,937
|
|
|
$
|
41,331
|
|
Accounts
receivable, less allowance for doubtful accounts of $2,570 and
$2,179
|
|
|
126,281
|
|
|
|
106,954
|
|
Expenditures
billable to clients
|
|
|
24,466
|
|
|
|
16,949
|
|
Prepaid
expenses
|
|
|
5,955
|
|
|
|
5,240
|
|
Other
current assets
|
|
|
3,643
|
|
|
|
5,270
|
|
Total
Current Assets
|
|
|
231,282
|
|
|
|
175,744
|
|
Fixed
assets, at cost, less accumulated depreciation of $80,171 and
$69,018
|
|
|
36,547
|
|
|
|
44,021
|
|
Investment
in affiliates
|
|
|
1,792
|
|
|
|
1,593
|
|
Goodwill
|
|
|
253,284
|
|
|
|
238,214
|
|
Other
intangibles assets, net
|
|
|
37,662
|
|
|
|
46,852
|
|
Deferred
tax asset
|
|
|
9,871
|
|
|
|
11,926
|
|
Other
assets
|
|
|
9,800
|
|
|
|
10,889
|
|
Total
Assets
|
|
$
|
580,238
|
|
|
$
|
529,239
|
|
LIABILITIES,
REDEEMABLE NONCONTROLLING INTERESTS, AND EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
79,364
|
|
|
$
|
75,360
|
|
Accruals
and other liabilities
|
|
|
58,984
|
|
|
|
55,338
|
|
Advance
billings
|
|
|
74,536
|
|
|
|
50,053
|
|
Current
portion of long-term debt and convertible notes
|
|
|
43,059
|
|
|
|
1,546
|
|
Deferred
acquisition consideration
|
|
|
2,932
|
|
|
|
5,538
|
|
Total
Current Liabilities
|
|
|
258,875
|
|
|
|
187,835
|
|
Revolving
credit facility
|
|
|
9,347
|
|
|
|
9,701
|
|
Long-term
debt
|
|
|
131,960
|
|
|
|
133,305
|
|
Convertible
notes
|
|
|
—
|
|
|
|
36,946
|
|
Other
liabilities
|
|
|
9,728
|
|
|
|
6,949
|
|
Deferred
tax liabilities
|
|
|
4,808
|
|
|
|
4,700
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
414,718
|
|
|
|
379,436
|
|
|
|
|
|
|
|
|
|
|
Redeemable
Noncontrolling Interests (Note 14)
|
|
|
65,328
|
|
|
|
21,751
|
|
Commitments,
contingencies and guarantees (Note 13)
|
|
|
|
|
|
|
|
|
Shareholders’
Equity:
|
|
|
|
|
|
|
|
|
Preferred
shares, unlimited authorized, none issued
|
|
|
—
|
|
|
|
—
|
|
Class A
Shares, no par value, unlimited authorized, 27,517,528 and 26,987,017
shares issued in 2009 and 2008
|
|
|
218,146
|
|
|
|
213,533
|
|
Class B
Shares, no par value, unlimited authorized, 2,503 shares issued in 2009
and 2008, each convertible into one Class A share
|
|
|
1
|
|
|
|
1
|
|
Additional
paid-in capital
|
|
|
—
|
|
|
|
33,470
|
|
Charges
in excess of capital
|
|
|
(2,593)
|
|
|
|
—
|
|
Accumulated
deficit
|
|
|
(112,694)
|
|
|
|
(112,836
|
)
|
Stock
subscription receivable
|
|
|
(341)
|
|
|
|
(354
|
)
|
Accumulated
other comprehensive loss
|
|
|
(5,560)
|
|
|
|
(6,633
|
)
|
MDC
Partners Inc. Shareholders’ Equity
|
|
|
96,959
|
|
|
|
127,181
|
|
Noncontrolling
Interests
|
|
|
3,233
|
|
|
|
871
|
|
Total
Equity
|
|
|
100,192
|
|
|
|
128,052
|
|
Total
Liabilities, Redeemable Noncontrolling Interests and
Equity
|
|
$
|
580,238
|
|
|
$
|
529,239
|
|
See notes
to the unaudited condensed consolidated financial statements.
MDC
PARTNERS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS (unaudited)
(thousands
of United States dollars)
|
|
Nine Months Ended September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$
|
3,711
|
|
|
$
|
1,919
|
|
Net
income attributable to the noncontrolling interests
|
|
|
(3,569)
|
|
|
|
(6,533
|
)
|
Net
income (loss) attributable to MDC Partners Inc.
|
|
|
142
|
|
|
|
(4,614
|
)
|
Loss
from discontinued operations attributable to MDC Partners Inc., net of
taxes
|
|
|
(361)
|
|
|
|
(6,698
|
)
|
Income
attributable to MDC Partners Inc. from continuing
operations
|
|
|
503
|
|
|
|
2,084
|
|
Adjustments
to reconcile net income attributable to MDC Partners Inc. from continuing
operations to cash provided by operating activities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
12,073
|
|
|
|
12,511
|
|
Amortization
of intangibles
|
|
|
10,638
|
|
|
|
13,278
|
|
Non-cash
stock-based compensation
|
|
|
5,443
|
|
|
|
5,053
|
|
Amortization
of deferred finance charges
|
|
|
979
|
|
|
|
1,036
|
|
Deferred
income taxes
|
|
|
1,942
|
|
|
|
2,000
|
|
Earnings
of non-consolidated affiliates
|
|
|
(258)
|
|
|
|
(290
|
)
|
Loss
on sale of assets
|
|
|
10
|
|
|
|
113
|
|
Other
non-current assets and liabilities
|
|
|
3,483
|
|
|
|
949
|
|
Foreign
exchange
|
|
|
4,432
|
|
|
|
(5,627
|
)
|
Changes
in non-cash working capital:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(18,057)
|
|
|
|
(2,765
|
)
|
Expenditures
billable to clients
|
|
|
(7,517)
|
|
|
|
(6,016
|
)
|
Prepaid
expenses and other current assets
|
|
|
643
|
|
|
|
(509
|
)
|
Accounts
payable, accruals and other liabilities
|
|
|
5,442
|
|
|
|
(16,829
|
)
|
Advance
billings
|
|
|
24,476
|
|
|
|
17,842
|
|
Cash
flows provided by continuing operating activities
|
|
|
44,232
|
|
|
|
22,830
|
|
Discontinued
operations
|
|
|
(290)
|
|
|
|
(295
|
)
|
Net
cash provided by operating activities
|
|
|
43,942
|
|
|
|
22,535
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(3,288)
|
|
|
|
(10,434
|
)
|
Acquisitions,
net of cash acquired
|
|
|
(8,059)
|
|
|
|
(10,405
|
)
|
Proceeds
from sale of assets
|
|
|
23
|
|
|
|
439
|
|
Other
|
|
|
26
|
|
|
|
(130
|
)
|
Profit
distributions from non-consolidated affiliates
|
|
|
139
|
|
|
|
68
|
|
Cash
Flows used in continuing investing activities
|
|
|
(11,159)
|
|
|
|
(20,462
|
)
|
Discontinued
operations
|
|
|
—
|
|
|
|
(538
|
)
|
Net
cash used in investing activities
|
|
|
(11,159)
|
|
|
|
(21,000
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
(repayments) from revolving credit facility
|
|
|
(354)
|
|
|
|
8,401
|
|
Repayment
of long-term debt
|
|
|
(1,753)
|
|
|
|
(1,612
|
)
|
Proceeds
from stock subscription receivable
|
|
|
13
|
|
|
|
1
|
|
Purchase
of treasury shares
|
|
|
(597)
|
|
|
|
(896
|
)
|
Net
cash (used in) provided by continuing financing activities
|
|
|
(2,691)
|
|
|
|
5,894
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(486)
|
|
|
|
(356
|
)
|
Net
increase in cash and cash equivalents
|
|
|
29,606
|
|
|
|
7,073
|
|
Cash
and cash equivalents at beginning of period
|
|
|
41,331
|
|
|
|
10,410
|
|
Cash
and cash equivalents at end of period
|
|
$
|
70,937
|
|
|
$
|
17,483
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures:
|
|
|
|
|
|
|
|
|
Cash
paid to noncontrolling partners
|
|
$
|
6,232
|
|
|
$
|
9,678
|
|
Cash
income taxes paid
|
|
$
|
487
|
|
|
$
|
936
|
|
Cash
interest paid
|
|
$
|
9,599
|
|
|
$
|
9,225
|
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
|
Share
capital issued on acquisitions
|
|
$
|
—
|
|
|
$
|
1,573
|
|
Capital
leases
|
|
$
|
288
|
|
|
$
|
308
|
|
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, 2008.
Effective
December 2008, three of the Company’s operating subsidiaries, Clifford/Bratskeir
Public Relations, LLC, Ito Partners, LLC and Mobium Creative Group (a division
of Colle + McVoy) have been deemed discontinued operations. All
periods have been restated to reflect these discontinued
operations.
Noncontrolling
Interests (formerly minority interests) have been reclassified in the prior
periods to conform with the current period presentation (See Note
14).
On July
1, 2009, the Company adopted the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification. This does not alter current U.S.
GAAP, but rather integrated existing accounting standards with other
authoritative guidance. It provides a single source of authoritative
U.S. GAAP for non governmental entities and supersedes all other previously
issued non SEC accounting and reporting guidance. The adoption did not have any
effect on our financial statements. All prior references to U.S. GAAP
have been revised to conform with the Accounting Standards
Codification.
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,
redeemable noncontrolling interests, stock-based compensation 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 Measurements.
The Company adopted Financial Accounting Standards related to the fair
value measurements of nonfinancial assets and nonfinancial liabilities effective
January 1, 2009. These standards define fair value, establish a
framework for measuring fair value in GAAP, and expand disclosures about fair
value measurements. These standards will apply whenever another standard
requires (or permits) assets or liabilities to be measured at fair
value. The standard does not expand the use of fair value to any new
circumstances. The effect of adopting these standards did not have a
material impact on the Company’s financial position or results of
operations.
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, at September 30, 2009, no clients accounted
for more than 10% of the Company’s consolidated accounts
receivable. At December 31, 2008, one client accounted for
approximately 17% of the Company’s consolidated accounts receivable. This client
also accounted for 15% and 17% of revenue for the three and nine months ended
September 30, 2009, respectively, and 19% of revenue for the three and nine
months ended September 30, 2008.
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 September 30, 2009 and
December 31, 2008, is approximately $91 and $51, respectively, of cash
restricted as to its use by the Company.
Redeemable Noncontrolling
Interests. The Company has recorded its put options as
mezzanine equity at their current estimated redemption
amounts. Changes in the estimated redemption amounts of the put
options are adjusted at each reporting period with a corresponding adjustment to
equity. These adjustments will not impact the calculation of earnings
per share. At December 31, 2008, the Company has reclassified $21,751
of the originally reflected minority interest of $22,622 to redeemable
noncontrolling interests and $871 to noncontrolling interests. The
amount reclassified to redeemable noncontrolling interests of $21,751 represents
minority interest equity which is subject to put obligations. In
addition, as of September 30, 2009, the Company has recorded $43,353 to
redeemable noncontrolling interests and changes in excess of capital which
represents the estimated put option redemption amounts.
Revenue Recognition. The
Company’s revenue recognition policies are as required by the Revenue
Recognition topics of the FASB Accounting Standards Codification 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 follows the Revenue Arrangements with Multiple Deliverables topic of the
FASB Accounting Standards Codification. This topic 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. Also, the Reporting Revenue Gross as a Principal
versus Net as an Agent topic of the FASB Accounting Standards Codification
provides a summary on when revenue should be recorded at the gross amount billed
because revenue has been earned from the sale of goods or services, or the net
amount retained because a fee or commission has been earned. The Company’s
businesses at times acts as an agent and records revenue equal to the net amount
retained, when the fee or commission is earned. The Company
also follows the reimbursements received for out-of-pocket expenses topic of the
FASB Accounting Standards Codification. This topic requires 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.
In
February and March 2009, the Company issued 3,694,686 Stock Appreciation Rights
(“SARs”) to its employees and directors. The SARs have an exercise
price of $3.72 and one-third will vest on each of the anniversary dates of grant
in 2010, 2011 and 2012. The Company will be recording a non-cash stock based
compensation charge of $4,311 from the date of grant through 2012 for these SARs
awards. In September 2009, the Company issued 50,000 SARs to an
employee with an exercise price of $6.60 and one-third will vest on each
anniversary dates of grant in 2010, 2011, and 2012.
For the
three and nine months ended September 30, 2009, the Company has recorded charges
of $762 and $1,770, respectively, relating to these equity incentive grants. The
value of the awards was determined based on the fair market value of the
underlying award using the Black-Scholes Option Pricing Model. The
weighted average fair value of the awards was $1.18, based on a volatility range
of 39.84% to 44.50%, risk free interest range of 1.76% to 2.49%, no dividends
and an expected life range of 3 to 4 years.
A total
of 681,493 Class A shares of restricted stock, granted to employees as
equity incentive awards, are included in the Company’s calculation of
Class A shares outstanding as of September 30, 2009.
3 .
|
Income Per Common
Share
|
The
following table sets forth the computation of basic and diluted income per
common share from continuing operations.
|
|
Three Months Ended September
30,
|
|
|
Nine Months Ended September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
for basic income per common share - income from continuing
operations
|
|
$
|
2,240
|
|
|
$
|
5,387
|
|
|
$
|
4,072
|
|
|
$
|
8,617
|
|
Net
income attributable to the noncontrolling interests
|
|
|
(2,204)
|
|
|
|
(1,366)
|
|
|
|
(3,569)
|
|
|
|
(6,533
|
)
|
Income
attributable to MDC Partners Inc. common shareholders from continuing
operations
|
|
$
|
36
|
|
|
$
|
4,021
|
|
|
$
|
503
|
|
|
$
|
2,084
|
|
Effect
of dilutive securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Numerator
for diluted income per common share – income attributable to MDC Partners
Inc. common shareholders from continuing operations
|
|
$
|
36
|
|
|
$
|
4,021
|
|
|
$
|
503
|
|
|
$
|
2,084
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic income per common share - weighted average common
shares
|
|
|
27,471,041
|
|
|
|
26,835,101
|
|
|
|
27,343,575
|
|
|
|
26,721,820
|
|
Effect
of dilutive securities:
|
|
|
1,538,614
|
|
|
|
455,158
|
|
|
|
495,165
|
|
|
|
513,551
|
|
Denominator
for diluted income per common share - adjusted weighted
shares
|
|
|
29,009,655
|
|
|
|
27,290,259
|
|
|
|
27,838,740
|
|
|
|
27,235,371
|
|
Basic
income per common share from continuing operations
|
|
$
|
0.00
|
|
|
$
|
0.15
|
|
|
$
|
0.02
|
|
|
$
|
0.08
|
|
Diluted
income per common share from continuing operations
|
|
$
|
0.00
|
|
|
$
|
0.15
|
|
|
$
|
0.02
|
|
|
$
|
0.08
|
|
The 8%
convertible debentures, options and other rights to purchase 3,736,929
shares of common stock, were outstanding during the nine months ended September
30, 2009, but were not included in the computation of diluted income per common
share because their effect would be antidilutive because of the market price of
the stock at September 30, 2009. During the nine months ended
September 30, 2008, the 8% convertible debentures, options and other rights to
purchase 4,723,520 shares of common stock, were outstanding but were not
included in the computation of diluted loss per common share because their
effect would be antidilutive.
2009
Acquisitions
On
August 31, 2009, the Company, through HL Group Partners LLC (“HL Group”),
acquired a 51% interest in Attention Partners LLC (“Attention”), a social media
agency that further expands HL Group’s business capabilities. At
closing, the HL Group paid $1,000 and made a capital contribution of $400 to
Attention. In addition, HL Group recorded estimated contingent payments totaling
$671 due in 2010 and 2011 as deferred acquisition consideration. The allocation
of the excess purchase consideration of this acquisition to the fair value of
the net assets acquired resulted in identifiable intangibles of $544 (consisting
of primarily of customer lists and a covenant not to compete) and goodwill of
$3,057 representing the value of the assembled workforce. The fair value of the
noncontrolling interests not acquired at the acquisition date was $2,431 based
on the purchase paid by the Company. The identified intangibles will
be amortized up to a three-year period in a manner represented by the pattern in
which the economic benefits of the customer contracts/relationships are
realized. The intangibles and goodwill are tax deductible.
On
July 1, 2009, the Company, through Crispin Porter & Bogusky LLC (“CPB”),
acquired 100% of the preferred shares and 52% of the common shares of Crispin
Porter & Bogusky Europe AB (formerly known as “daddy”), a digital agency
based in Sweden that has created a foothold in Europe for CPB. At closing,
CPB paid $3,052 plus an additional $50, currently recorded as deferred
acquisition consideration. The Company has additional calls and the
noncontrolling owners have reciprocal puts on the remaining 48% of the common
shares, which are exercisable beginning in October 2009 and January 2012.
The current estimated cost of these puts and calls is approximately $6,441 and
has been recorded as Redeemable Noncontrolling Interests. The allocation of the
excess purchase consideration of this acquisition to the fair value of the net
assets acquired resulted in identifiable intangibles of $650 (consisting
primarily of customer lists and a covenant not to compete) and goodwill of
$8,533 representing the value of the assembled workforce. The identified
intangibles will be amortized up to a three-year period in a manner represented
by the pattern in which the economic benefits of the customer
contracts/relationships are realized. The intangibles and goodwill are not tax
deductible. Accordingly, CPB recorded a deferred tax liability of
$221 representing the future tax benefits relating to the amortization of the
identified intangibles.
Effective
January 22, 2009, the Company acquired an additional 8.9% of equity interests in
HL Group, thereby increasing MDC’s ownership to 64.9%. The purchase price
totaled $1,100 and was paid in cash at closing. The Company recorded
an entry to reduce Redeemable Noncontrolling Interests, as this purchase was
pursuant to the early exercise of an existing put/call option. Accordingly, no
additional intangibles have been recorded. However, the amount of the purchase
price will be tax deductible.
2008
Acquisitions
Effective
December 31, 2008, the Company acquired an additional 6.3% of equity interests
in Accent Marketing LLC, increasing the Company’s ownership to 100%.
The aggregate purchase price totaled $4,830 and was paid in cash of $995 at
closing and repayment of outstanding loans of $1,830. The balance
aggregate of $2,005 will be paid in 2009 and has been recorded in deferred
acquisition consideration, as of September 30, 2009, $561 has been paid. In
addition, an additional contingent performance payment may be paid based on
Accent’s financial results in 2009. The allocation of the excess purchase
consideration of these step acquisitions to the fair value of the net assets
acquired resulted in identifiable intangibles of $1,900 (consisting of customer
lists), goodwill of $365 and a stock based compensation charge of $2,285,
relating to the amount paid in excess of the fair value of the equity
purchase. The identified intangibles will be amortized over a seven year period
in a manner represented by the pattern in which the economic benefits of the
customer contracts/relationships are realized. The intangibles, goodwill and
stock based compensation charge are tax deductible.
Effective
December 1, 2008, the Company acquired an additional 3% of equity interests in
Source Marketing LLC, increasing the Company’s ownership to 83%. The purchase
price totaled $1,286 and was paid in cash less $42 of outstanding loans. 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
$300 (consisting of customer lists), goodwill of $504 and a stock based
compensation charge of $524, relating to the amount paid in excess of
the fair value of the equity purchase. 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/relationships are
realized. The intangibles, goodwill and stock based compensation charge are tax
deductible.
On
November 24, 2008, the Company agreed to make an early payment to KBP Management
Partners LLC of the contingent payment originally due in 2009 pursuant to the
purchase agreement entered into in November 2007. The additional payment totaled
$16,005, of which $14,124 was paid in cash in November 2008 and $1,881 was paid
in 2009. This additional payment was accounted for as additional
goodwill. In addition, pursuant to an existing phantom stock arrangement a stock
based compensation charge of $3,548 has been recorded for amounts paid to the
phantom equity holders. The goodwill is tax deductible.
Effective
November 10, 2008, the Company acquired an additional 17% of equity
interests in CPB, increasing the Company’s ownership to 94%. The purchase
price totaled $6,823 plus a contingent payment in April of 2010 based on the
financial performance of 2009. This contingent payment will be calculated in
accordance with CPB’s existing limited liability company agreement. The
consideration was paid in cash of $6,430 and the issuance of 105,000
newly-issued shares of the Company’s Class A subordinated voting stock valued at
$393. 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 of two days before and after the November 10, 2008
announcement date. This acquisition represented an accelerated exercise of the
Company’s existing call option that was otherwise exercisable in April 2010. The
allocation of the excess purchase consideration of this acquisition to the fair
value of the net assets acquired resulted in $5,008 being allocated to
identifiable intangibles, existing backlog. This intangible will be amortized
over 14.5 month period. This intangible is tax deductible.
Effective
October 10, 2008, MDC acquired an additional 8.56% of Zig Inc. and an additional
13.17% of an affiliate of Zig Inc. for cash of $1,320. These transactions
increased the Company’s equity ownership in Zig Inc to 74.07%. The allocation of
the excess purchase consideration of these step acquisitions to the fair value
of the net assets acquired resulted in identifiable intangibles of $176
(consisting of customer lists and existing backlog) and goodwill of $1,196. The
identified intangibles will be amortized over 30 months in a manner represented
by the pattern in which the economic benefits of the customer
contracts/relationships are realized. The tax deductible portion of these
transactions amounts to $253.
On June
16, 2008, 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, which is included in deferred acquisition consideration,
as of September 30, 2009, $540 has been paid. 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 $400. 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 $1,432. 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. Effective December
31, 2008, the Company transferred the ownership of the Clifford PR assets to HL
Group Partners, LLC. As part of this transfer, the Company issued
45,000 Class A Shares valued at $137 which have been recorded as stock based
compensation expense. In connection with that transaction, the
Company purchased the 10% membership interest in Clifford/Bratskeir for $400
less an adjustment for working capital of $88. This net amount will
be paid over a three-year period and is included in deferred acquisition
consideration, as of September 30, 2009, $45 has been paid. 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.
Throughout
2008, the Company completed 16 equity acquisitions with various shareholders of
Allard Johnson Communications Inc. (“Allard”). The aggregate purchase price for
the 16 transactions was cash equal to $3,442. These transactions increased the
Company’s equity ownership in Allard to 75.06%, an increase of 14.8%. The
allocation of the excess purchase consideration of these step acquisitions to
the fair value of the net assets acquired resulted in identifiable intangibles
of $247 (consisting of customer lists and existing backlog), goodwill of $2,752
and a stock based compensation charge of $467, relating to amounts paid in
excess of the fair value of the equity purchased. 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.
Pro
forma Information
The
following unaudited pro forma results of operations of the Company for the three
and nine months ended September 30, 2008 assume that the acquisition of the
operating assets of the significant businesses acquired during 2008 had occurred
on January 1, 2008. For the three and nine months ended September
30, 2009, 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.
|
|
Three Months
Ended September
30,
2008
|
|
|
Nine Months
Ended September
30,
2008
|
|
Revenues
|
|
$
|
142,089
|
|
|
$
|
439,940
|
|
Net
income (loss) attributable to MDC Partners Inc.
|
|
$
|
3,731
|
|
|
$
|
(3,582
|
) |
Income
(Loss) per common share:
|
|
|
|
|
|
|
|
|
Basic
– net income (loss) attributable to MDC Partners Inc.
|
|
$
|
0.14
|
|
|
$
|
(0.13
|
) |
Diluted
– net income (loss) attributable to MDC Partners Inc.
|
|
$
|
0.14
|
|
|
$
|
(0.13
|
) |
5.
|
Accrued
and Other Liabilities
|
At
September 30, 2009 and December 31, 2008, accrued and other liabilities included
amounts due to noncontrolling interest holders, for their share of profits,
which will be distributed within the next twelve months of $3,383 and $4,856,
respectively.
6.
|
Discontinued
Operations
|
In
December 2008, the Company entered into negotiations to sell certain remaining
assets in Bratskeir to management. This transaction was completed in
April 2009. As a result of this transaction, the Company has
classified this entity’s results as discontinued
operations. Bratskeir’s results of operations, net of income tax
benefits, for the three and nine months ended September 30, 2009, were losses of
nil and $361, respectively. The results of operations, net of income
tax benefits, for the three and nine months ended September 30, 2008, were
losses of $505 and $1,822, respectively. This entity had been
previously included in the Company’s Specialized Communication Service
segment.
Effective
December 3, 2008, Colle & McVoy, LLC (“Colle’), completed the sale of
certain assets of its Mobium division. Mobium’s results of
operations, net of income tax benefits for the three and nine months ended
September 30, 2008, were a loss of $266 and $1,036,
respectively. This entity had been previously included in the
Company’s Strategic Marketing Service segment.
Effective
June 30, 2008, the Company sold its 60% interest in The Ito Partnership (“Ito”),
a start-up operation formed in 2006. Ito’s results of operations, net
of income tax benefits for the three and nine months ended September 30, 2008,
were a loss of nil and $806, respectively. This entity had been
previously included in the Company’s Specialized Communication service
segment.
In 2007,
the Company ceased all operations relating to Margeotes Fertitta Powell, LLC
(“MFP”) and accordingly have classified these operations as
discontinued. The results of operations of MFP for the three and nine
months ended September 30, 2008 was a loss, net of income tax benefits of nil
and $3,034 and consists primarily of the accrual of lease abandonment costs and
severance costs.
Included
in discontinued operations in the Company’s consolidated statements of
operations for the three months and nine months ended September 30, were the
following:
|
|
Three Months Ended September
30,
|
|
|
Nine Months Ended September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
1,339
|
|
|
$
|
481
|
|
|
$
|
5,845
|
|
Operating
loss
|
|
$
|
—
|
|
|
$
|
(902
|
)
|
|
$
|
(549
|
)
|
|
$
|
(6,572
|
)
|
Other
expense
|
|
$
|
—
|
|
|
$
|
(346
|
)
|
|
$
|
—
|
|
|
$
|
(1,878
|
)
|
Net
loss from discontinued operations attributable to MDC Partners Inc., net
of taxes
|
|
$
|
—
|
|
|
$
|
(771
|
)
|
|
$
|
(361
|
)
|
|
$
|
(6,698
|
)
|
7.
|
Comprehensive
Income (Loss)
|
Total
comprehensive income (loss) and its components were:
|
|
Three Months Ended September
30,
|
|
|
Nine Months Ended September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
income for the period
|
|
$
|
2,240
|
|
|
$
|
4,616
|
|
|
$
|
3,711
|
|
|
$
|
1,919
|
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency cumulative translation adjustment
|
|
|
1,016
|
|
|
|
(2,446
|
)
|
|
|
1,086
|
|
|
|
(5,423
|
)
|
Comprehensive
income (loss)
|
|
|
3,256
|
|
|
|
2,170
|
|
|
|
4,797
|
|
|
|
(3,504
|
)
|
Comprehensive
income attributable to the noncontrolling interest
|
|
|
(2,210)
|
|
|
|
(1,357
|
)
|
|
|
(3,582)
|
|
|
|
(6,518
|
)
|
Comprehensive
income (loss) attributable to MDC Partners Inc.
|
|
$
|
1,046
|
|
|
$
|
813
|
|
|
$
|
1,215
|
|
|
$
|
(10,022
|
)
|
8.
|
Short-Term
Debt, Long-Term Debt and Convertible
Debentures
|
Debt
consists of:
|
|
September 30,
2009
|
|
|
December 31,
2008
|
|
|
|
|
|
|
|
|
Revolving
credit facility
|
|
$
|
9,347
|
|
|
$
|
9,701
|
|
8%
convertible debentures
|
|
|
41,597
|
|
|
|
36,946
|
|
Term
loans
|
|
|
130,000
|
|
|
|
130,000
|
|
Notes
payable and other bank loans
|
|
|
1,801
|
|
|
|
2,789
|
|
|
|
|
182,745
|
|
|
|
179,436
|
|
Obligations
under capital leases
|
|
|
1,621
|
|
|
|
2,062
|
|
|
|
|
184,366
|
|
|
|
181,498
|
|
Less:
|
|
|
|
|
|
|
|
|
Current
portions
|
|
|
43,059
|
|
|
|
1,546
|
|
Long
term portion
|
|
$
|
141,307
|
|
|
$
|
179,952
|
|
MDC
Financing Agreement and Debentures
Financing
Agreement
On June
18, 2007, MDC Partners Inc. (the “Company”) and its material subsidiaries
entered into a $185,000 senior secured financing agreement (the “Fortress
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.
The
Fortress Financing Agreement consisted 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 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 September 30, 2009, the
weighted average interest rate was 7.1%.
At
September 30, 2009, $40,940 remained available under the Fortress Financing
Agreement to support the Company’s future cash requirements. The Company’s
obligations under the Fortress Financing Agreement were guaranteed by the
material subsidiaries as defined and secured by all assets of the Company. The
Fortress Financing Agreement was subject to various covenants, including a
senior leverage ratio, fixed charges ratio, limitations on debt incurrence,
limitation on liens and limitation on dividends and other payments.
At
September 30, 2009, the Company was in compliance with all of the terms and
conditions of the Fortress Financing Agreement.
Effective
October 23, 2009, the Company repaid all outstanding amounts under the Fortress
Financing Agreement. See Note 15.
Management
believes, based on its current financial projections, that the Company will be
in compliance with all covenants under the new Credit Agreement over the next
twelve months, see Note 15.
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 $12.94 (C$14.00) per Class A
subordinate voting share being a ratio of approximately 71.4286 Class A
subordinate voting shares per $924.39 (C$1,000.00) principal amount of
Debentures.
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.
Effective
October 26, 2009, the Company gave notice of redemption of all outstanding
Debentures at a redemption price equal to principal plus accrued interest to the
redemption date on November 26, 2009. See Note
15.
During
the nine months ended September 30, 2009, Class A share capital increased
by $4,613, as the Company issued 686,992 Class A shares related to vested
restricted stock and stock appreciation rights. During the nine
months ended September 30, 2009, “Additional paid-in capital” decreased by
$5,209 related to the vested restricted stock, and stock appreciation rights, by
$36,149 relating to the recording of existing put options (Note 14), and $213
related to acquisitions offset by $5,442 related to an increase from stock-based
compensation that was expensed during the same period and a reclassification of
the $2,593 to charges in excess of capital.
Throughout
2009, the Company purchased and retired 156,481 Class A shares for $596 from
employees in connection with the required tax withholding resulting from the
vesting of shares of restricted stock.
Total
equity decreased $27,860, which is comprised of the put options of $36,149,
treasury stock purchases of $596, and acquisition related adjustments of $213,
offset in part by an increase in stock-based compensation of $5,442, the
addition of noncontrolling interests relating to acquisitions of $2,431, net
income attributable to MDC Partners of $142, and an increase in total
accumulated other comprehensive income of $1,073, and other transactions of
$10.
10.
|
Fair
Value Measurements
|
Effective
January 1, 2008, the Company adopted guidance regarding accounting for Fair
Value Measurements, for financial assets and liabilities. This
guidance defines fair value, establishes a framework for measuring fair value
and expands the related disclosure requirements. The statement
indicates, among other things, that a fair value measurement assumes a
transaction to sell an asset or transfer a liability occurs in the principal
market for the asset or liability or, in the absence of a principal market, the
most advantageous market for the asset or liability.
In order
to increase consistency and comparability in fair value measurements, the
guidance establishes a hierarchy for observable and unobservable inputs used to
measure fair value into three broad levels, which are described
below:
|
·
|
Level
1: Quoted prices (unadjusted) in active markets that are accessible at the
measurement date for assets or liabilities. The fair value
hierarchy gives the highest priority to Level 1
inputs.
|
|
·
|
Level
2: Observable prices that are based on inputs not quoted on active
markets, but corroborated by market
data.
|
|
·
|
Level
3: Unobservable inputs are used when little or no market data is
available. The fair value hierarchy gives the lowest priority
to Level 3 inputs.
|
In
determining fair value, the Company utilizes valuation techniques that maximize
the use of observable inputs and minimize the use of unobservable inputs to the
extent possible as well as considers counterparty credit risk in its assessment
of fair value.
Assets
measured at fair value on a recurring basis include the following as of
September 30, 2009:
|
|
Fair Value Measurement at September 30, 2009 Using
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
|
|
|
Significant
|
|
|
|
|
|
Total
|
|
|
|
Prices in
|
|
|
Other
|
|
|
Significant
|
|
|
Carrying
|
|
|
|
Active
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Value at
|
|
|
|
Markets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
September 30,
|
|
(In Thousands)
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Put
options
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
43,353
|
|
|
$
|
43,353
|
|
On a
nonrecurring basis, the Company uses fair value measures when analyzing asset
impairment. Long-lived assets and certain identifiable intangible
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. If it is determined such indicators are present and the
review indicates that the assets will not be fully recoverable, based on
undiscounted estimated cash flows over the remaining amortization periods, their
carrying values are reduced to estimated fair value. Measurements
based on undiscounted cash flows are considered to be level 3
inputs. During the fourth quarter of each year, the Company evaluates
goodwill and indefinite-lived intangibles for impairment at the reporting unit
level.
As of
September 30, 2009, the Company has estimated the redemption amounts of the
Company’s outstanding put options, as described in Note 13. The
following table presents a reconciliation of the Company’s Redeemable
Noncontrolling Interests measured at fair value on a recurring basis using
unobservable inputs (Level 3):
|
|
Level 3
(Unobservable
Inputs)
|
|
|
|
Put Options
|
|
Balance,
January 1, 2009
|
|
$
|
37,849
|
|
Transfers
to Level 3
|
|
|
—
|
|
Put
options exercised
|
|
|
(1,275
|
)
|
Put
options granted
|
|
|
6,441
|
|
Currency
translation
|
|
|
2,038
|
|
Gains
and losses:
|
|
|
|
|
Reported
in earnings
|
|
|
—
|
|
Reported
in additional paid in capital
|
|
|
(1,700
|
)
|
Balance,
September 30, 2009
|
|
$
|
43,353
|
|
11.
|
Other
Income (Expense)
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Other
income (expense)
|
|
$
|
3
|
|
|
$
|
30
|
|
|
$
|
(19)
|
|
|
$
|
76
|
|
Foreign
currency transaction gain (loss)
|
|
|
(3,078)
|
|
|
|
2,498
|
|
|
|
(2,962)
|
|
|
|
5,582
|
|
Loss
on sale of assets
|
|
|
(5)
|
|
|
|
(110
|
)
|
|
|
(10)
|
|
|
|
(113
|
)
|
|
|
$
|
(3,080)
|
|
|
$
|
2,418
|
|
|
$
|
(2,991)
|
|
|
$
|
5,545
|
|
12.
|
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 complement of marketing consulting
services including advertising and media, marketing communications
including direct marketing, public relations, corporate communications,
market research, corporate identity and branding, interactive marketing
and sales promotion. Each of the entities within SMS share similar
economic characteristics, specifically related to the nature of their
respective services, the manner in which the services are provided and the
similarity of their respective customers. Due to the similarities in these
businesses, they exhibit similar long term financial performance and have
been aggregated together.
|
|
·
|
The
Customer Relationship
Management (“CRM”) segment provides marketing services that
interface directly with the consumer of a client’s product or service.
These services include the design, development and implementation of a
complete customer service and direct marketing initiative intended to
acquire, retain and develop a client’s customer
base.
|
|
·
|
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.
|
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 the Segment Reporting topic of the FASB
Accounting Standards Codification.
Summary
financial information concerning the Company’s operating segments is shown in
the following tables:
Three Months Ended September
30, 2009
(thousands
of United States dollars)
|
|
Strategic
Marketing
Services
|
|
|
Customer
Relationship
Management
|
|
|
Specialized
Communication
Services
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
86,302
|
|
|
$
|
26,276
|
|
|
$
|
22,047
|
|
|
$
|
—
|
|
|
$
|
134,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services sold
|
|
|
50,284
|
|
|
|
18,682
|
|
|
|
16,560
|
|
|
|
—
|
|
|
|
85,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
and general expenses
|
|
|
17,700
|
|
|
|
5,006
|
|
|
|
3,977
|
|
|
|
4,718
|
|
|
|
31,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
5,245
|
|
|
|
1,732
|
|
|
|
422
|
|
|
|
115
|
|
|
|
7,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit/(Loss)
|
|
|
13,073
|
|
|
|
856
|
|
|
|
1,088
|
|
|
|
(4,833)
|
|
|
|
10,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,080)
|
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,775)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes, equity in
affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,329
|
|
Income
tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before equity in affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,180
|
|
Equity
in earnings of non-consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,240
|
|
Loss
from discontinued operations attributable to MDC Partners Inc., net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,240
|
|
Net
income attributable to the noncontrolling interests
|
|
|
(1,817)
|
|
|
|
—
|
|
|
|
(387)
|
|
|
|
—
|
|
|
|
(2,204)
|
|
Net
income attributable to MDC Partners Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash stock based compensation
|
|
$
|
705
|
|
|
$
|
44
|
|
|
$
|
248
|
|
|
$
|
1,234
|
|
|
$
|
2,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Segment Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
$
|
684
|
|
|
$
|
289
|
|
|
$
|
195
|
|
|
$
|
33
|
|
|
$
|
1,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
and intangibles
|
|
$
|
225,731
|
|
|
$
|
30,462
|
|
|
$
|
34,753
|
|
|
$
|
—
|
|
|
$
|
290,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
375,155
|
|
|
$
|
57,405
|
|
|
$
|
78,861
|
|
|
$
|
68,817
|
|
|
$
|
580,238
|
|
Three
Months Ended September 30, 2008
(thousands
of United States dollars)
Restated
for Discontinued Operations
|
|
Strategic
Marketing
Services
|
|
|
Customer
Relationship
Management
|
|
|
Specialized
Communication
Services
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
81,279
|
|
|
$
|
32,673
|
|
|
$
|
28,137
|
|
|
$
|
—
|
|
|
$
|
142,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services sold
|
|
|
49,611
|
|
|
|
23,888
|
|
|
|
21,059
|
|
|
|
—
|
|
|
|
94,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
and general expense
|
|
|
18,108
|
|
|
|
5,780
|
|
|
|
5,077
|
|
|
|
2,899
|
|
|
|
31,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
4,872
|
|
|
|
1,845
|
|
|
|
642
|
|
|
|
69
|
|
|
|
7,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit/(Loss)
|
|
|
8,688
|
|
|
|
1,160
|
|
|
|
1,359
|
|
|
|
(2,968
|
)
|
|
|
8,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,418
|
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes, equity in
affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,540
|
|
Income
tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before equity in affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,318
|
|
Equity
in earnings of non-consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations attributable to MDC Partners Inc., net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(771
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,616
|
|
Net
income attributable to the noncontrolling interests
|
|
|
(1,180
|
)
|
|
|
(60
|
)
|
|
|
(126
|
)
|
|
|
—
|
|
|
|
(1,366
|
)
|
Net
income attributable to MDC Partners Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash stock based compensation
|
|
$
|
475
|
|
|
$
|
31
|
|
|
$
|
174
|
|
|
$
|
1,149
|
|
|
$
|
1,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Segment Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
$
|
1,319
|
|
|
$
|
302
|
|
|
$
|
198
|
|
|
$
|
23
|
|
|
$
|
1,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
and intangibles
|
|
$
|
198,462
|
|
|
$
|
28,872
|
|
|
$
|
44,307
|
|
|
$
|
—
|
|
|
$
|
271,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
347,907
|
|
|
$
|
69,197
|
|
|
$
|
101,812
|
|
|
$
|
9,799
|
|
|
$
|
528,715
|
|
Nine Months Ended September
30, 2009
(thousands
of United States dollars)
|
|
Strategic
Marketing
Services
|
|
|
Customer
Relationship
Management
|
|
|
Specialized
Communication
Services
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
247,675
|
|
|
$
|
85,702
|
|
|
$
|
62,869
|
|
|
$
|
—
|
|
|
$
|
396,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services sold
|
|
|
148,349
|
|
|
|
62,771
|
|
|
|
48,524
|
|
|
|
—
|
|
|
|
259,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
and general expenses
|
|
|
53,298
|
|
|
|
15,802
|
|
|
|
10,857
|
|
|
|
12,769
|
|
|
|
92,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
15,826
|
|
|
|
5,340
|
|
|
|
1,257
|
|
|
|
288
|
|
|
|
22,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit/(Loss)
|
|
|
30,202
|
|
|
|
1,789
|
|
|
|
2,231
|
|
|
|
(13,057)
|
|
|
|
21,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,991)
|
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,987)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes, equity in
affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,187
|
|
Income
tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before equity in affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,814
|
|
Equity
in earnings of non-consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,072
|
|
Loss
from discontinued operations attributable to MDC Partners Inc., net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(361)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,711
|
|
Net
income attributable to the noncontrolling interests
|
|
|
(2,965)
|
|
|
|
—
|
|
|
|
(604)
|
|
|
|
—
|
|
|
|
(3,569)
|
|
Net
income attributable to MDC Partners Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash stock based compensation
|
|
$
|
1,509
|
|
|
$
|
92
|
|
|
$
|
574
|
|
|
$
|
3,998
|
|
|
$
|
6,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Segment Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
$
|
2,051
|
|
|
$
|
782
|
|
|
$
|
363
|
|
|
$
|
92
|
|
|
$
|
3,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
and intangibles
|
|
$
|
225,731
|
|
|
$
|
30,462
|
|
|
$
|
34,753
|
|
|
$
|
—
|
|
|
$
|
290,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
375,155
|
|
|
$
|
57,405
|
|
|
$
|
78,861
|
|
|
$
|
68,817
|
|
|
$
|
580,238
|
|
Nine
Months Ended September 30, 2008
(thousands
of United States dollars)
Restated
for Discontinued Operations
|
|
Strategic
Marketing
Services
|
|
|
Customer
Relationship
Management
|
|
|
Specialized
Communication
Services
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
246,383
|
|
|
$
|
104,179
|
|
|
$
|
89,378
|
|
|
$
|
—
|
|
|
$
|
439,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services sold
|
|
|
152,943
|
|
|
|
75,936
|
|
|
|
63,531
|
|
|
|
—
|
|
|
|
292,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
and general expense
|
|
|
56,681
|
|
|
|
18,011
|
|
|
|
15,935
|
|
|
|
12,127
|
|
|
|
102,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
18,085
|
|
|
|
5,550
|
|
|
|
1,950
|
|
|
|
204
|
|
|
|
25,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit/(Loss)
|
|
|
18,674
|
|
|
|
4,682
|
|
|
|
7,962
|
|
|
|
(12,331
|
)
|
|
|
18,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,545
|
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,790
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes, equity in
affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,742
|
|
Income
tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before equity in affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,327
|
|
Equity
in earnings of non-consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations attributable to MDC Partners Inc., net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,919
|
|
Net
income attributable to the noncontrolling interests
|
|
|
(3,708
|
)
|
|
|
(247
|
)
|
|
|
(2,578
|
)
|
|
|
—
|
|
|
|
(6,533
|
)
|
Net
loss attributable to MDC Partners Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash stock based compensation
|
|
$
|
1,492
|
|
|
$
|
98
|
|
|
$
|
648
|
|
|
$
|
3,452
|
|
|
$
|
5,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Segment Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
$
|
6,818
|
|
|
$
|
2,415
|
|
|
$
|
1,141
|
|
|
$
|
60
|
|
|
$
|
10,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
and intangibles
|
|
$
|
198,462
|
|
|
$
|
28,872
|
|
|
$
|
44,307
|
|
|
$
|
—
|
|
|
$
|
271,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
347,907
|
|
|
$
|
69,197
|
|
|
$
|
101,812
|
|
|
$
|
9,799
|
|
|
$
|
528,715
|
|
A summary
of the Company’s revenue by geographic area, based on the location in which the
services originated, is set forth in the following table:
|
|
United
States
|
|
|
Canada
|
|
|
Other
|
|
|
Total
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
112,107
|
|
|
$
|
19,630
|
|
|
$
|
2,888
|
|
|
$
|
134,625
|
|
2008
|
|
$
|
117,898
|
|
|
$
|
20,865
|
|
|
$
|
3,326
|
|
|
$
|
142,089
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
335,046
|
|
|
$
|
56,169
|
|
|
$
|
5,031
|
|
|
$
|
396,246
|
|
2008
|
|
$
|
360,867
|
|
|
$
|
68,765
|
|
|
$
|
10,308
|
|
|
$
|
439,940
|
|
13.
Commitments, Contingencies and Guarantees
Deferred Acquisition
Consideration. In addition to the consideration paid by the Company with
respect of certain of its acquisitions made prior to January 1, 2009, additional
consideration may be payable, or may be potentially payable based on the
achievement of certain threshold levels of earnings. Should the current level of
earnings be maintained by these acquired companies, no additional consideration,
in excess of the deferred acquisition consideration reflected on the Company’s
balance sheet at September 30, 2009, would be expected to be owed in
2009.
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 2009 to 2018. It is not determinable, at this
time, if or when the owners of these rights will exercise all or a portion of
these rights.
The
amount payable by the Company in the event such rights are exercised is
dependent on various valuation formulas and on future events, such as the
average earnings of the relevant subsidiary through the date of exercise, the
growth rate of the earnings of the relevant subsidiary during that period, and,
in some cases, the currency exchange rate at the date of payment.
Management
estimates, assuming that the subsidiaries owned by the Company at September 30,
2009, 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 $39,668 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 $3,636 by the issuance of share capital. In
addition, the Company is obligated under similar put option rights to pay an
aggregate amount of approximately $3,684 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. The aggregate amount of these options $43,353 has been
recorded on the balance at September 30, 2009 and is included in Redeemable
Noncontrolling Interests.
On
October 5, 2009, the Company exercised its call and acquired the remaining 6%
equity interest in CPB. The estimated contingent cost of this
acquisition was $8,596, which amount was included in Redeemable Noncontrolling
Interests. (See Note 15.)
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 nine
months ended September 30, 2009 and 2008, 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 $69 in one investment fund over a period of up
to two years. At September 30, 2009, the Company has issued $4,713 of undrawn
outstanding letters of credit.
14. New Accounting
Pronouncements
In June
2009, the FASB introduced the FASB Accounting
Standards Codification and issued the revised guidance on Hierarchy of Generally
Accepted Accounting Principles, which is effective for the Company July 1,
2009. This standard does not alter current U.S. GAAP, but rather integrates
existing accounting standards with other authoritative guidance. Under this
standard there will be a single source of authoritative U.S. GAAP for
nongovernmental entities and will supersede all other previously issued non-SEC
accounting and reporting guidance.
In May
2009, the FASB issued revised guidance on Subsequent Events, which is effective
for the Company June 30, 2009. These standards provide guidance
for disclosing events that occur after the balance sheet date, but before
financial statements are issued or available to be issued. The adoption of this
standard did not have a significant impact on our Consolidated Financial
Statements.
In
December 2007, FASB issued revised guidance on Business Combinations. These
revised standards retain some fundamental concepts of the current standard,
including the acquisition method of accounting (known as the “purchase method”)
for all business combinations but revised guidance broadens the definitions of
both businesses and business combinations, resulting in the acquisition method
applying to more events and transactions. This guidance 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. Both acquisition-related costs and restructuring costs are required 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. This revised guidance is to be applied
prospectively for financial statements issued for fiscal years beginning on or
after December 15, 2008. Early application is prohibited. The
adoption of these revised standards did not have a material effect on our
financial statements.
In
December 2007, FASB issued guidance that now requires 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. The reclassifications must
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 was
prohibited. The guidance was expanded in 2008 to require the
recording of put options as a liability and a reduction of
equity. The adoption of these new standards has resulted in the
Company recording the estimated redemption amount of its outstanding put options
as a reduction of Additional Paid in Capital and an increase in Redeemable
Noncontrolling Interests of $37,849 as of January 1, 2009. As of December 31,
2008, the Company has reclassified $21,751 of minority interest to Redeemable
Noncontrolling Interest, representing Noncontrolling Interests which could be
purchased by the Company pursuant to the exercise of an existing Put
option. In addition, as of December 31, 2008, a portion of minority
interest, which is not subject to put options, has been reclassified as part of
Equity-Noncontrolling Interest. Changes in the estimated redemption
amounts of the put options are adjusted at each reporting period with a
corresponding adjustment to Equity. For the three and nine months
ended September 30, 2008, the Company reclassified net income attributable to
the noncontrolling interests below net income (loss), as a result net income for
the three month period was increased by $1,366 and the net loss was reduced by
$6,533, respectively. These adjustments will not impact the
calculation of earnings per share. At September 30, 2009, the Company
reduced its estimated redemption amounts by $1,700.
In March
2008, the FASB issued guidance relating to "Disclosures about Derivative
Instruments and Hedging Activities (previously in SFAS No. 161 and currently
included in ACS 815-10-65)," which requires enhanced disclosures for derivative
and hedging activities. The additional disclosures became effective beginning
with our first quarter of 2009. Early adoption is permitted. The
adoption of this statement did not have a material effect on our financial
statements.
In
November 2008, the EITF issued guidance on Equity Method Investment Accounting
Considerations, which is effective for the Company January 1, 2009. This
standard addresses the impact that revised Guidance on Business Combinations and
Noncontrolling Interests might have on the accounting for equity method
investments, including how the initial carrying value of an equity method
investment should be determined, how an impairment assessment of an underlying
indefinite lived intangible asset of an equity method investment should be
performed and how to account for a change in an investment from the equity
method to the cost method. The adoption of this guidance did not have an impact
on our financial statements.
In April
2008, the FASB issued revised guidance on the topic of Determination
of the Useful Life of Intangible Assets. The revised guidance amends
the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible. The
intent of this revision is to improve the consistency between the useful life of
a recognized intangible asset under previous guidance, and the period of
expected cash flows used to measure the fair value of the asset. These changes
were effective for fiscal years beginning after December 15, 2008 and are to be
applied prospectively to intangible assets acquired subsequent to its effective
date. Accordingly, we adopted these provisions on January 1, 2009. The impact
that this adoption may have on our financial position and results of operations
will depend on the nature and extent of any intangible assets acquired
subsequent to its effective date. Accordingly, we adopted the
provisions of this statement on January 1, 2009. The impact that the adoption
may have on our financial position and results of operations will depend on the
nature and extent of any intangible assets acquired subsequent to its effective
date.
In May
2008, the FASB issued standards relating to the Accounting for Convertible Debt
Instruments That May Be Settled In Cash Upon Conversion (Including Partial Cash
Settlement), which is now included in the Accounting Standards Codification
Topic Debt with Convertible and Other Options. The guidance addresses
the accounting for convertible debt instruments that, by their stated terms, may
be settled in cash upon conversion including partial cash
settlement. This guidance is effective for fiscal years beginning
after December 15, 2008 and interim periods within those years. The
adoption of this guidance did not have a material effect on our financial
statements.
In June
2009, the FASB issued revised guidance on the topic of Accounting for Variable
Interest Entities, which we will adopt effective January 1, 2010. This guidance
revises factors that should be considered by a reporting entity when determining
whether an entity that is insufficiently capitalized or is not controlled
through voting (or similar rights) should be consolidated and also includes
revised financial statement disclosures regarding the reporting entity’s
involvement and risk exposure. We believe that this will not have a material
impact on our financial statements.
15. Subsequent Event
The
Company has evaluated subsequent events through the filing of this Form 10-Q on
November 2, 2009, and determined there have not been any events that have
occurred that would require adjustments to our unaudited Consolidated Financial
Statements. However, the following items require
disclosure:
Purchase
of Equity in Subsidiary
On
October 5, 2009, the Company purchased the remaining 6% equity interest in CPB.
In accordance with the terms of the underlying limited liability company
agreement, the estimated fixed and contingent purchase price of $9,115 will be
paid in future periods beginning in April 2011. Following the closing of this
transaction, the Company’s ownership in CPB is 100%.
Issuance
of 11% Senior Notes
On
October 23, 2009, the Company and its wholly-owned subsidiaries, as guarantors,
issued and sold $225,000 aggregate principal amount of 11% Senior Notes due 2016
(the “11% Notes”). The 11% Notes bear interest at a rate of 11% per
annum, accruing from October 23, 2009. Interest is payable
semiannually in arrears in cash on May 1 and November 1 of each year, beginning
on May 1, 2010. The 11% Notes will mature on November 1, 2016, unless
earlier redeemed or repurchased. The Company received net proceeds
before expenses of $208,881, which included an original issue discount of
approximately 4.7% and underwriter fees. The 11% Notes were sold in a private
placement in reliance on exemptions from registration under the Securities Act
of 1933, as amended. The Company used the net proceeds of this offering to repay
the outstanding balance and terminate its prior Fortress Financing Agreement,
and will redeem its outstanding 8% C$45,000 convertible debentures on or about
November 26, 2009.
The
Company may, at its option, redeem the 11% Notes in whole at any time or in part
from time to time, on and after November 1, 2013 at a redemption price of
105.500% of the principal amount thereof if redeemed during the twelve-month
period beginning on November 1, 2013, at a redemption price of 102.750% of the
principal amount thereof if redeemed during the twelve-month period beginning on
November 1, 2014 and at a redemption price of 100% of the principal amount
thereof if redeemed during the twelve-month period beginning on November 1,
2015. Prior to November 1, 2013, the Company may, at its option,
redeem some or all of the 11% Notes at a price equal to 100% of the principal
amount of the Notes plus a “make whole” premium and accrued and unpaid
interest. The Company may also redeem, at its option, prior to
November 1, 2012, up to 35% of the 11% Notes with the proceeds from one or more
equity offerings at a redemption price of 11% of the principal amount
thereof. If the Company experiences certain kinds of changes of
control (as defined in the Indenture), holders of the 11% Notes may require the
Company to repurchase any 11% Notes held by them at a price equal to 101% of the
principal amount of the 11% Notes plus accrued and unpaid interest.
New
Credit Agreement
On
October 23, 2009, the Company and its subsidiaries entered into a new $75,000
five year senior secured revolving credit facility (the “WF Credit
Agreement”) with Wells Fargo Foothill, LLC, as agent, and the lenders from time
to time party thereto. The WF Credit Agreement replaced the Company’s
existing $185,000 senior secured financing agreement with Fortress Credit Corp.,
as collateral agent, Wells Fargo Foothill, Inc., as administrative
agent. Advances under the WF Credit Agreement will bear
interest as follows: (a)(i) LIBOR Rate Loans bear interest at the LIBOR Rate and
(ii) Base Rate Loans bear interest at the Base Rate, plus (b) an applicable
margin. The initial applicable margin for borrowing is 3.00% in the
case of Base Rate Loans and 3.25% in the case of LIBOR Rate
Loans. The applicable margin may be reduced subject to the Company
achieving certain trailing twelve month earning levels, as
defined. In addition to paying interest on outstanding principal
under the WF Credit Agreement, the Company is required to pay an unused revolver
fee to lender under the WF Credit Agreement in respect of unused commitments
thereunder.
The
WF Credit Agreement is guaranteed by all of the Company’s present and future
subsidiaries, other than immaterial subsidiaries as defined. The WF
Credit Agreement includes covenants that, among other things, restrict the
Company’s ability and the ability of its subsidiaries to incur or guarantee
additional indebtedness; pay dividends on or redeem or repurchase the capital
stock of MDC; make certain types of investments; impose limitations on dividends
or other amounts from the Company’s subsidiaries; incur certain liens, sell or
otherwise dispose of certain assets; enter into transactions with affiliates;
enter into sale and leaseback transactions; and consolidate or merge with or
into, or sell substantially all of the Company’s assets to, another
person. These covenants are subject to a number of important
limitations and exceptions. The WF Credit Agreement also contains
financial covenants, including a senior leverage ratio, a fixed charge coverage
ratio and a minimum earnings level, as defined.
In
connection with these transactions, the Company incurred a termination fee of
$1,850 and will write-off approximately $2,240 of deferred financing costs
relating to its prior Fortress Financing Agreement.
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 2009 means the period beginning January 1, 2009, and
ending December 31, 2009).
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 nine months ended September 30, 2009 and 2008, and the financial
condition of the Company as of September 30, 2009. 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, 2008 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.
We manage
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.
We
conduct our 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 our operating “partners”, MDC provides advertising,
consulting, customer relationship management, and specialized communication
services to clients throughout the United States, Canada, Europe and
Jamaica.
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 Unaudited Condensed Consolidated Financial Statements.
We
measure 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. The cost of services sold tends 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.
We
measure capital expenses 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. Our strategy includes acquiring ownership stakes
in well-managed businesses with strong reputations in the industry. We engaged
in a number of acquisition and disposal transactions during the 2008 to 2009
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 Unaudited Condensed Consolidated
Financial Statements.
Foreign Exchange
Fluctuations. Our 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, we generate 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.
Results
of Operations:
For the Three Months Ended
September 30,
2009
(thousands
of United States dollars)
|
|
Strategic
Marketing
Services
|
|
|
Customer
Relationship
Management
|
|
|
Specialized
Communication
Services
|
|
|
Corporate
|
|
|
Total
|
|
Revenue
|
|
$
|
86,302
|
|
|
$
|
26,276
|
|
|
$
|
22,047
|
|
|
$
|
—
|
|
|
$
|
134,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services sold
|
|
|
50,284
|
|
|
|
18,682
|
|
|
|
16,560
|
|
|
|
—
|
|
|
|
85,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
and general expenses
|
|
|
17,700
|
|
|
|
5,006
|
|
|
|
3,977
|
|
|
|
4,718
|
|
|
|
31,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
5,245
|
|
|
|
1,732
|
|
|
|
422
|
|
|
|
115
|
|
|
|
7,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit/(Loss)
|
|
|
13,073
|
|
|
|
856
|
|
|
|
1,088
|
|
|
|
(4,833)
|
|
|
|
10,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,080)
|
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,775)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes, equity in
affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,329
|
|
Income
tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before equity in affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,180
|
|
Equity
in earnings of non-consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,240
|
|
Loss
from discontinued operations attributable to MDC Partners Inc., net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,240
|
|
Net
income attributable to the noncontrolling interests
|
|
|
(1,817)
|
|
|
|
—
|
|
|
|
(387)
|
|
|
|
—
|
|
|
|
(2,204)
|
|
Net
income attributable to MDC Partners Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash stock based compensation.
|
|
$
|
705
|
|
|
$
|
44
|
|
|
$
|
248
|
|
|
$
|
1,234
|
|
|
$
|
2,231
|
|
Results
of Operations:
For
the Three Months Ended September 30, 2008
(thousands
of United States dollars)
Restated
for Discontinued Operations
|
|
Strategic
Marketing
Services
|
|
|
Customer
Relationship
Management
|
|
|
Specialized
Communication
Services
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
81,279
|
|
|
$
|
32,673
|
|
|
$
|
28,137
|
|
|
$
|
—
|
|
|
$
|
142,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services sold
|
|
|
49,611
|
|
|
|
23,888
|
|
|
|
21,059
|
|
|
|
—
|
|
|
|
94,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
and general expenses
|
|
|
18,108
|
|
|
|
5,780
|
|
|
|
5,077
|
|
|
|
2,899
|
|
|
|
31,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
4,872
|
|
|
|
1,845
|
|
|
|
642
|
|
|
|
69
|
|
|
|
7,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit/(Loss)
|
|
|
8,688
|
|
|
|
1,160
|
|
|
|
1,359
|
|
|
|
(2,968
|
)
|
|
|
8,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,418
|
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes, equity in
affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,540
|
|
Income
tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before equity in affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,318
|
|
Equity
in earnings non-consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations attributable to MDC Partners Inc., net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(771
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,616
|
|
Net
income attributable to the noncontrolling interests
|
|
|
(1,180
|
)
|
|
|
(60
|
)
|
|
|
(126
|
)
|
|
|
—
|
|
|
|
(1,366
|
)
|
Net
Income attributable to MDC Partners, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash stock based compensation
|
|
$
|
475
|
|
|
$
|
31
|
|
|
$
|
174
|
|
|
$
|
1,149
|
|
|
$
|
1,829
|
|
Results
of Operations:
For the Nine Months Ended
September 30,
2009
(thousands
of United States dollars)
|
|
Strategic
Marketing
Services
|
|
|
Customer
Relationship
Management
|
|
|
Specialized
Communication
Services
|
|
|
Corporate
|
|
|
Total
|
|
Revenue
|
|
$
|
247,675
|
|
|
$
|
85,702
|
|
|
$
|
62,869
|
|
|
$
|
—
|
|
|
$
|
396,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services sold
|
|
|
148,349
|
|
|
|
62,771
|
|
|
|
48,524
|
|
|
|
—
|
|
|
|
259,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
and general expenses
|
|
|
53,298
|
|
|
|
15,802
|
|
|
|
10,857
|
|
|
|
12,769
|
|
|
|
92,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
15,826
|
|
|
|
5,340
|
|
|
|
1,257
|
|
|
|
288
|
|
|
|
22,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit/(Loss)
|
|
|
30,202
|
|
|
|
1,789
|
|
|
|
2,231
|
|
|
|
(13,057)
|
|
|
|
21,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,991)
|
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,987)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes, equity in
affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,187
|
|
Income
tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before equity in affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,814
|
|
Equity
in earnings of non-consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,072
|
|
Loss
from discontinued operations attributable to MDC Partners Inc., net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(361)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,711
|
|
Net
income attributable to the noncontrolling interests
|
|
|
(2,965)
|
|
|
|
—
|
|
|
|
(604)
|
|
|
|
—
|
|
|
|
(3,569)
|
|
Net
income attributable to MDC Partners Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash stock based compensation.
|
|
$
|
1,509
|
|
|
$
|
92
|
|
|
$
|
574
|
|
|
$
|
3,998
|
|
|
$
|
6,173
|
|
Results
of Operations:
For
the Nine Months Ended September 30, 2008
(thousands
of United States dollars)
Restated
for Discontinued Operations
|
|
Strategic
Marketing
Services
|
|
|
Customer
Relationship
Management
|
|
|
Specialized
Communication
Services
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
246,383
|
|
|
$
|
104,179
|
|
|
$
|
89,378
|
|
|
$
|
—
|
|
|
$
|
439,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services sold
|
|
|
152,943
|
|
|
|
75,936
|
|
|
|
63,531
|
|
|
|
—
|
|
|
|
292,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
and general expenses
|
|
|
56,681
|
|
|
|
18,011
|
|
|
|
15,935
|
|
|
|
12,127
|
|
|
|
102,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
18,085
|
|
|
|
5,550
|
|
|
|
1,950
|
|
|
|
204
|
|
|
|
25,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit/(Loss)
|
|
|
18,674
|
|
|
|
4,682
|
|
|
|
7,962
|
|
|
|
(12,331
|
)
|
|
|
18,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,545
|
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,790
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes, equity in
affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,742
|
|
Income
tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before equity in affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,327
|
|
Equity
in earnings of non-consolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations attributable to MDC Partners Inc., net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,919
|
|
Net
income attributable to the noncontrolling Interests
|
|
|
(3,708
|
)
|
|
|
(247
|
)
|
|
|
(2,578
|
)
|
|
|
—
|
|
|
|
(6,533
|
)
|
Net
loss attributable to MDC Partners, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash stock based compensation
|
|
$
|
1,492
|
|
|
$
|
98
|
|
|
$
|
648
|
|
|
$
|
3,452
|
|
|
$
|
5,690
|
|
Three Months Ended September
30, 2009, Compared to Three
Months Ended September 30, 2008
Revenue
was $134.6 million for the quarter ended September 30, 2009, representing a
decrease of $7.5 million, or 5.3%, compared to revenue of $142.1 million for the
quarter ended September 30, 2008. This revenue decrease relates primarily to a
decrease in organic revenues of $6.3 million. In addition, a strengthening of
the US dollar, primarily versus the Canadian dollar during the quarter ended
September 30, 2009, resulted in decreased revenues of $1.2 million.
Operating
profit for third quarter of 2009 was $10.2 million, compared to $8.2 million for
2008. The increase in operating profit was primarily the result of an increase
in operating profit of $4.4 million in the Strategic Marketing Services (“SMS”)
segment. This was partially offset by decreases in operating profits
of $0.3 million in both the Specialized Communication Services (“SCS”) and
Customer Relationship Management (“CRM”) segments. In addition,
Corporate operating expenses increased by $1.9 million.
The
income from continuing operations attributable to MDC Partners Inc. for the
third quarter of 2009 was $0.1 million, compared to $4.0 million in
2008. This decrease in income of $3.9 million was primarily the result of an
increase in unrealized losses on foreign currency transactions of $5.5 million,
an increase in net interest expense of $0.7 million, and an increase in net
income attributable to noncontrolling interests of $0.8
million. These amounts were offset by an increase in operating profit
of $2.0 million and a decrease in income tax expense of $1.1
million.
Marketing
Communications Group
The
components of revenues for the third quarter of 2009 attributable to the
Marketing Communications Group, which consists of three reportable
segments — SMS, CRM, and SCS are shown in the following
table:
|
|
Revenue
|
|
|
|
$000’s
|
|
|
%
|
|
Quarter
ended September 30, 2008
|
|
$
|
142,089
|
|
|
|
—
|
|
Organic
|
|
|
(6,251)
|
|
|
|
(4.4)
|
% |
Foreign
exchange impact
|
|
|
(1,213)
|
|
|
|
(0.9)
|
% |
Quarter
ended September 30, 2009
|
|
$
|
134,625
|
|
|
|
(5.3)
|
% |
The
geographic mix in revenues was consistent between 2009 and 2008 and is
demonstrated in the following table:
|
|
2009
|
|
|
2008
|
|
US
|
|
|
83
|
%
|
|
|
83
|
%
|
Canada
|
|
|
15
|
%
|
|
|
15
|
%
|
UK
and other
|
|
|
2
|
%
|
|
|
2
|
%
|
The
operating profit of the Marketing Communications Group increased by
approximately 34.0% to $15.0 million from $11.2 million. Operating margins
increased by 3.3% and were 11.2% for the third quarter of 2009, compared to 7.9%
for the third quarter of 2008. Operating margins increased due primarily to a
decrease in direct costs (excluding staff costs) as a percentage of revenues
from 14.2% in 2008 to 13.5% in 2009 due to a decrease in reimbursed client
related direct costs. Total staff costs as a percentage of revenues
decreased from 60.1% in 2008, to 58.1% in 2009. General and administrative costs
decreased as a percentage of revenue from 20.4% in 2008 to 19.8% in
2009.
Strategic
Marketing Services (“SMS”)
Revenues
attributable to SMS in the third quarter of 2009 were $86.3 million, compared to
$81.3 million in 2008. The year-over-year increase of $5.0 million or 6.2% was
attributable primarily to organic growth as a result of net new business
wins.
The
operating profit of SMS for the third quarter of 2009 increased by approximately
50.5% to $13.1 million in 2009, from $8.7 million in 2008. Operating
margins increased to 15.1% in 2009, from 10.7% in 2008. Operating profit
increased due primarily to a decrease in total staff costs as a percentage of
revenue from 57.9% in 2008 to 55.3% in 2009 as a result of managing costs. In
addition, direct costs (excluding staff costs) as a percentage of revenues
decreased from 10.9% of revenue in 2008, to 10.7% of revenue in 2009. General
and administrative costs decreased as a percentage of revenue from 22.3% in the
third quarter of 2008, to 20.5% in 2009, as a result of managing these
costs.
Customer
Relationship Management (“CRM”)
Revenues
reported by the CRM segment for the third quarter of 2009 were $26.3 million, a
decrease of $6.4 million or 19.6% compared to the $32.7 million reported for
2008. This decrease was a result of existing clients reducing their outsourcing
needs.
Operating
profit earned by CRM decreased to $0.9 million in 2009, from $1.2 million for
the third quarter of 2008. Operating margins were 3.3% for the third quarter of
2009 as compared to 3.6% for the third quarter of 2008. The decrease in margins
is primarily attributable to a decrease in revenue. Cost of services
sold decreased from 73.1% in 2008, to 71.1% in 2009. In addition,
general and administrative costs as a percentage of revenue increased from 17.7%
in 2008, to 19.1% in 2009 as a result of relatively fixed costs against a
decrease in revenues.
Specialized
Communication Services (“SCS”)
SCS
generated revenues of $22.0 million for the third quarter of 2009, a decrease of
$6.1 million, or 21.6% lower than revenues of $28.1 million in 2008. The period
over period decrease was attributable primarily to reduced revenue of $5.3
million as a result of the reduction and delays of client project spending. A
strengthening of the US dollar versus the Canadian dollar and British pound in
2009 compared to 2008 resulted in a $0.8 million decrease in revenues from the
division’s Canadian and UK-based operations.
The
operating profit of SCS decreased to $1.1 million in the third quarter of 2009,
from $1.4 million in the third quarter of 2008, with operating margins of 4.9%
in 2009 compared to 4.8% in 2008. The decrease in operating profit and increase
in operating margin is primarily attributable to the decrease in revenue and
decrease in direct costs (excluding staff costs) as a percentage of revenue from
36.7% in 2008 to 35.7% in 2009. In addition, total staff costs as a
percentage of revenue increased from 45.6% in 2008, to 45.8% in 2009.
However, actual staff costs decreased by $2.7 million as the decrease in revenue
outpaced these reductions. General and administrative costs as a
percentage of revenue was 18.0% in both 2008 and 2009.
Corporate
Operating
costs related to the Company’s Corporate operations totaled $4.8 million in the
third quarter of 2009 compared to $3.0 million in the third quarter of
2008. This increase is primarily due to a 2008 reduction in the third
quarter of the corporate bonus accrual and increased travel and entertainment
costs in 2009.
Other
Income, Net
Other
income, net decreased to a net expense of $3.1 million in the third quarter of
2009, compared to a net income of $2.4 million in the third quarter of 2008. The
2009 expense is primarily comprised of a net, foreign exchange loss of $3.1
million for 2009, compared to a gain of $2.5 million recorded in 2008.
This unrealized loss was due primarily to the weakening in the US dollar during
2009 and 2008 compared to the Canadian dollar primarily on its US dollar
denominated intercompany balances with its Canadian subsidiaries compared to
June 30, 2009. At September 30, 2009, the exchange rate was 1.08 Canadian
dollars to one US dollar, compared to 1.16 at June 30, 2009.
Net
Interest Expense
Net
interest expense for the third quarter of 2009 was $3.8 million, an increase of
$0.7 million over the $3.1 million net interest expense incurred during the
third quarter of 2008. Interest expense remained relatively flat year over year
as a result of higher average outstanding debt in 2009, offset by lower interest
rates. Interest income was $0.5 million for 2008 and minimal in
2009.
Income
Taxes
Income
tax expense was $1.1 million in the third quarter of 2009, compared to $2.2
million for the third quarter of 2008. The Company’s effective tax rate was
consistent with the statutory rate in 2009 and lower than the statutory rate in
2008 due to noncontrolling interest charges, offset by non-deductible stock
based compensation and the establishment of a valuation allowance on certain
deferred tax assets.
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 noncontrolling 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 third quarter of 2009 and 2008, income of $0.1 million was
recorded.
Noncontrolling
Interests
Net
income attributable to the noncontrolling interests was $2.2 million for the
third quarter of 2009, an increase of $0.8 million from the $1.4 million of
noncontrolling interest expense incurred during the third quarter of 2008. Such
increase was primarily due to the increased profitability in the subsidiaries
within the SMS and SCS operating segments who are not 100% owned.
Discontinued
Operations Attributable to MDC Partners Inc.
For the
third quarter of 2009, the Company incurred no discontinued operations charges,
however, in 2008; the Company incurred $0.8 million of such
charges.
2008
Discontinued Operations
The
operating loss of Bratskeir was $0.5 million net of income tax
benefits.
The loss
net of taxes from discontinued operations was $0.3 million from Mobium, a
division of Colle & McVoy, LLC (“Colle”).
Net income (loss) attributable to MDC
Partners Inc .
As a
result of the foregoing, net income attributable to MDC Partners Inc. recorded
for 2009 was minimal compared to a net income attributable to MDC Partners Inc.
of $3.3 million or $0.12 per diluted share reported for 2008.
Nine Months Ended September
30, 2009, Compared to Nine
Months Ended September 30, 2008
Revenue
was $396.2 million for the nine months ended September 30, 2009, representing a
decrease of $43.7 million, or 9.9%, compared to revenue of $439.9 million for
the nine months ended September 30, 2008. This revenue decrease relates
primarily to a decrease in organic revenues of $34.7 million. In addition, a
strengthening of the US Dollar, primarily versus the Canadian dollar during the
nine months ended September 30, 2009, resulted in decreased revenues of $9.0
million.
Operating
profit for the nine months ended September 30, 2009 was $21.2 million, compared
to $19.0 million for the nine months ended September 30, 2008. The increase in
operating profit was primarily the result of an increase in operating profit of
the SMS segment of $11.5 million offset by decreases in operating profit of $2.9
million and $5.7 million from the CRM and SCS segments, respectively. In
addition, corporate expenses increased by $0.7 million.
The
income from continuing operations attributable to MDC Partners Inc. for the
first nine months of 2009 was $0.5 million, compared to $2.1 million in 2008.
This decrease in income of $1.6 million was primarily the result of a decrease
in unrealized gains on foreign currency transactions of $8.5 million and an
increase in net interest expense of $1.2 million. These amounts were
offset by an increase in operating profits of $2.2 million, a decrease in income
tax expense of $3.0 million and a decrease in net income attributable to
noncontrolling interests of $3.0 million.
Marketing
Communications Group
The
components of revenues for the first nine months of 2009 attributable to the
Marketing Communications Group, which consists of three reportable
segments — SMS, CRM, and SCS are shown in the following
table:
|
|
Revenue
|
|
|
|
$000’s
|
|
|
%
|
|
Nine
months ended September 30, 2008
|
|
$ |
439,940 |
|
|
|
— |
|
Organic
|
|
|
(34,719 |
) |
|
|
(7.9 |
)% |
Foreign
exchange impact
|
|
|
(8,975 |
) |
|
|
(2.0 |
)% |
Nine
months ended September 30, 2009
|
|
$ |
396,246 |
|
|
|
(9.9 |
)% |
The
geographic mix in revenues was consistent between 2009 and 2008 and is
demonstrated in the following table:
|
|
2009
|
|
|
2008
|
|
US
|
|
|
85 |
% |
|
|
82 |
% |
Canada
|
|
|
14 |
% |
|
|
16 |
% |
UK
and other
|
|
|
1 |
% |
|
|
2 |
% |
The
operating profit of the Marketing Communications Group increased by
approximately 9.3% to $34.2 million from $31.3 million. Operating margins
increased by 1.5% and were 8.6% for the first nine months of 2009 compared to
7.1% for the first nine months of 2008. The increase in operating profit and
operating margin is primarily attributable to a decrease in depreciation and
amortization of $3.2 million primarily related to the SMS segment and the
decrease in revenue. In addition, direct costs (excluding staff costs) decreased
as a percentage of revenues from 14.3% of revenue in 2008 to 13.6% of revenue in
2009 due to a decrease in reimbursed client related direct costs. However, total
staff costs as a percentage of revenues increased from 59.7% in 2008 to 60.3% in
2009. Total staff costs decreased by $23.6 million, as a result of managing
these costs as the decrease in revenue outpaced these reductions. General
and administrative costs decreased as a percentage of revenue from 20.6% in 2008
to 20.2% in 2009 as a result of managing these costs as revenue has
decreased.
Strategic
Marketing Services (“SMS”)
Revenues
attributable to SMS for the first nine months of 2009 were $247.7 million,
compared to $246.4 million in 2008. The year-over-year increase of $1.3 million
or 0.5% was attributable primarily to organic growth of $4.3 million. A
strengthening of the US dollar versus the Canadian dollar in 2009 compared to
2008 resulted in a decrease of $3.0 million in revenues from the division’s
Canadian-based operations.
The
operating profit of SMS for the first nine months of 2009 increased by
approximately 61.7% to $30.2 million in 2009 from $18.7 million in 2008, while
operating margins increased to 12.2% in 2009 from 7.6% in 2008. Operating profit
increased due primarily to decreased depreciation and amortization of $2.3
million, which relates to the amortization of certain intangibles resulting from
the CPB and KBP step-up acquisitions during the fourth quarter of 2007. In
addition, direct costs (excluding staff costs) as a percentage of revenues
decreased from 12.2% of revenue in 2008, to 11.0% of revenue in 2009. Total
staff costs as a percentage of revenue decreased from 57.7% in 2008 to 57.3% in
2009. General and administrative costs decreased as a percentage of
revenue from 23.0% in the first nine months of 2008 to 21.5% in 2009, as a
result of managing these costs as revenues decreased.
Customer
Relationship Management (“CRM”)
Revenues
reported by the CRM segment for the first nine months of 2009 were $85.7
million, a decrease of $18.5 million or 17.7% compared to the $104.2 million
reported for 2008. This decrease was a result of reduced revenues from existing
clients as a result of clients reducing their outsourcing needs and the
conversion of a customer care center to a new program which began in the fourth
quarter of 2008.
Operating
profit earned by CRM decreased to $1.8 million for the first nine months of 2009
from $4.7 million for the first nine months of 2008. Operating margins were 2.1%
for 2009 as compared to 4.5% for 2008. The decrease in margins is primarily due
to an increase in cost of services sold from 72.9% in 2008 to 73.2% in 2009, and
an increase in general and administrative costs as a percentage of revenue from
17.3% in 2008 to 18.4% in 2009. These increases relate primarily to
relatively fixed costs against a decrease in revenue.
Specialized
Communication Services (“SCS”)
SCS
generated revenues of $62.9 million for the first nine months of 2009, a
decrease of $26.5 million, or 29.7% lower than revenues of $89.4 million for the
first nine months of 2008. The period over period decrease was attributable
primarily to reduced revenue of $20.6 million as a result of the reduction and
delays of client project spending. A strengthening of the US dollar versus the
Canadian dollar and British pound in 2009 compared to 2008 resulted in a $5.9
million decrease in revenues from the division’s Canadian and UK-based
operations.
The
operating profit of SCS decreased to $2.2 million in the first nine months of
2009, from $8.0 million in the first nine months of 2008, with operating
margins of 3.5% in 2009 compared to 8.9% in 2008. The decrease in operating
margin in 2009 was due primarily to an increase in direct costs as a percentage
of revenue from 32.7% in 2008 to 36.1% in 2009, and an increase in total staff
costs as a percentage of revenue from 45.3% in 2008, to 47.2% in 2009.
Direct costs decreased by $6.6 million and total staff costs decreased by $10.8
million. However, revenue decreases outpaced the reduction of staff costs
and direct costs.
Corporate
Operating
costs related to the Company’s Corporate operations totaled $13.1 million in the
first nine months of 2009 compared to $12.3 million in 2008. Non-cash
stock based compensation charges increased by $0.5 million from $3.5
million in 2008 to $4.0 million in 2009. Increases in travel and
entertainment and promotional expenses accounted for the remaining
increase.
Other
Income, Net
Other
income decreased to net expense of $3.0 million during the first nine months of
2009 compared to net income of $5.5 million in the first nine months of 2008.
The 2009 expense is primarily comprised of a net foreign exchange loss of $3.0
million, compared to a gain of $5.6 million recorded in 2008. The 2009
loss included a $1.3 million realized cash gain on foreign currency transactions
and an unrealized loss of approximately $4.3 million, which was due
primarily to the weakening in the US dollar during 2009 and 2008 compared to the
Canadian dollar primarily on its US dollar denominated intercompany balances
with its Canadian subsidiaries compared to December 31, 2008. At September
30, 2009, the exchange rate was 1.08 Canadian dollars to one US dollar, compared
to 1.22 at the end of 2008.
Net
Interest Expense
Net
interest expense for the first nine months of 2009 was $11.0 million, an
increase of $1.2 million over the $9.8 million net interest expense incurred
during the first nine months of 2008. Interest expense increased $0.1 million in
2009 due to higher average outstanding debt in 2009, offset by lower interest
rates. Interest income was $1.4 million for 2008 and $0.3 million in 2009, due
to income recorded on the notes receivable from the sale of SPI, which were
fully collected in May 2009.
Income
Taxes
Income
tax expense was $3.4 million in the first nine months of 2009 compared to $6.4
million for the first nine months of 2008. The Company’s effective tax rate was
substantially higher than the statutory rate in 2009 and 2008 due to
noncontrolling interest charges, offset by non-deductible stock based
compensation and the establishment of a valuation allowance on certain deferred
tax assets.
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 noncontrolling 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 nine months of 2009 and 2008, income of $0.3 million
was recorded.
Noncontrolling
Interests
Net
income attributable to the noncontrolling interests was $3.6 million for the
first nine months of 2009, down $2.9 million from the $6.5 million of
noncontrolling interest expense incurred during the first nine months of 2008.
Such decrease was primarily due to the Company’s 2008 step-up in ownership of
CPB and Accent and increased profitability in the subsidiaries within the SMS
segment offset by decreases in profitability in subsidiaries within the SCS
operating segment who are not 100% owned.
Discontinued
Operations Attributable to MDC Partners Inc.
2009
Discontinued Operations
The loss,
net of an income tax benefit of $0.4 million from discontinued operations in the
first nine months of 2009, resulted from the operating results of
Clifford/Bratskeir Public Relations LLC (“Bratskeir”), which was discontinued in
2008 with the completion of the sale of Bratskeir’s remaining assets in April
2009.
2008
Discontinued Operations
The 2008
loss from discontinued operations of $6.7 million consisted of the
following:
The
operating loss of Bratskeir for 2008 was $1.8 million net of income tax
benefits.
Effective
December 3, 2008, Colle completed the sale of certain assets of its Mobium
division. The operating loss was $1.0 million, net of income tax
benefits.
Effective
June 30, 2008, the Company completed the sale of its equity interests in
Ito. The operating loss of Ito for 2008 was $0.8 million.
In 2007,
the Company ceased operation of MFP. In 2008, the Company recorded a loss of
$3.0 million, net of income tax benefits resulting primarily from the accrual of
lease abandonment costs and severance at MFP.
Net Income (loss) attributable to MDC
Partners Inc .
As a
result of the foregoing, net income attributable to MDC Partners Inc. recorded
for 2009 was $0.1 million or $0.1 per diluted share, compared to a net loss
attributable to MDC Partners Inc. of $4.6 million or $0.17 per diluted share
reported for 2008.
Liquidity
and Capital Resources:
Liquidity
The
following table provides summary information about the Company’s liquidity
position:
|
|
As of and for the
nine months ended
September 30, 2009
|
|
|
As of and for the
nine months ended
September 30, 2008
|
|
|
As of and for the
year ended
December 31, 2008
|
|
|
|
(000’s except ratios)
|
|
|
(000’s except ratios )
|
|
|
(000’s except ratios )
|
|
Cash
and cash equivalents
|
|
$ |
70,937 |
|
|
$ |
17,483 |
|
|
$ |
41,331 |
|
Working
capital deficit
|
|
$ |
(27,593 |
) |
|
$ |
(12,811 |
) |
|
$ |
(12,091 |
) |
Cash
from operations
|
|
$ |
43,942 |
|
|
$ |
22,535 |
|
|
$ |
57,446 |
|
Cash
from investing
|
|
$ |
(11,159 |
) |
|
$ |
(21,000 |
) |
|
$ |
(50,186 |
) |
Cash
from financing
|
|
$ |
(2,691 |
) |
|
$ |
5,894 |
|
|
$ |
(23,510 |
) |
Long-term
debt to total equity ratio
|
|
|
1.84 |
|
|
|
1.36 |
|
|
|
1.42 |
|
Fixed
charge coverage ratio
|
|
|
1.48 |
|
|
|
1.97 |
|
|
|
2.01 |
|
As of
September 30, 2009, and December 31, 2008, $15.9 million and $8.4 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 and to fund acquisitions and related payments.
Due to
the adoption of a new accounting pronouncement, in January 2009, the Company was
required to record its outstanding Put Options on the Company’s balance
sheet. As of September 30, 2009, the result of recording these Put Options
reduced total equity by $36.2 million.
Working
Capital
At
September 30, 2009, the Company had a working capital deficit of $27.6 million
compared to a deficit of $12.1 million at December 31, 2008. The decrease
in working capital is primarily due to the reclassification of the convertible
notes to current liabilities offset by seasonal shifts in the amounts collected
from clients, and paid to suppliers, primarily media outlets. In addition,
the Company has implemented improvements in its billing and collecting
practices. The Company includes amounts due to noncontrolling interest holders,
for their share of profits, in accrued and other liabilities. At September 30,
2009, $3.4 million remains outstanding to be distributed to noncontrolling
interest holders over the next twelve months.
The
Company intends to maintain sufficient cash and availability of funds under its
WF Credit 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 nine months ended September 30, 2009 was $44.2 million. This
was attributable primarily to income from continuing operations attributable to
MDC Partners of $0.5 million, depreciation and amortization and non-cash
stock-based compensation of $29.1 million, an increase in accounts payable,
accruals, advanced billings to clients, prepaids and other non-current assets
and liabilities of $34.0 million and foreign exchange of $4.4 million. This cash
provided by continuing operations was partially offset by an increase in
accounts receivable of $18.1 million and an increase in expenditures billable to
clients of $7.5 million. Discontinued operations attributable to MDC Partners
used cash of $0.3 million in the nine months ended September 30,
2009.
Cash flow
provided by continuing operations, including changes in non-cash working
capital, for the nine months ended September 30, 2008 was $22.8 million. This
was attributable primarily to depreciation and amortization and non-cash
stock-based compensation of $31.9 million and an increase in advanced billing to
clients of $17.8 million, partially offset by a decrease in accounts payable and
accrued liabilities of $16.8, an increase in accounts receivable of $2.8 million
and an increase in expenditures billable to clients of $6.0 million.
Discontinued operations attributable to MDC Partners used cash of $0.3 million
in the nine months ended September 30, 2008.
Investing
Activities
Cash
flows used in investing activities were $11.2 million for the nine months ended
September 30, 2009, compared with $21.0 million in the nine months ended
September 30, 2008.
In the
nine months ended September 30, 2009, capital expenditures totaled $3.3 million,
of which $2.1 million was incurred by the SMS segment, $0.8 million was incurred
by the CRM segment and $0.4 million was incurred by the SCS segment. These
expenditures consisted primarily of computer equipment and furniture and
fixtures. Expenditures for capital assets in the nine months ended September 30,
2008 were $10.4 million. Of this amount, $6.8 million was incurred by the SMS
segment, $2.4 million was incurred by the CRM segment and $1.1 million was
incurred by the SCS segment. These expenditures consisted primarily of computer
equipment and leasehold improvements.
In the
nine months ended September 30, 2009, cash flow used for acquisitions was $8.1
million and related to the settlement of put options, earn-out payments, and
acquisitions net of cash acquired. Cash flow used in acquisitions was $10.4
million in the nine months ended September 30, 2008 and related to the
settlement of put options, earn-out payments and acquisitions net of cash
acquired.
Discontinued
operations used cash of $0.5 million in 2008 primarily related to capital asset
purchases.
Financing
Activities
During
the nine months ended September 30, 2009, cash flows used in financing
activities amounted to $2.7 million, and consisted primarily of repayments of
long-term debt and advances under the Fortress Financing Agreement of $2.1
million and the purchase of treasury shares for income tax withholding
requirements of $0.6 million. During the nine months ended September 30, 2008,
cash flows provided by financing activities amounted to $5.9 million, and
primarily consisted of borrowings under the Fortress Financing Agreement of $8.4
million, repayments of long-term debt of $1.6 million and the purchase of
treasury shares for income tax withholding requirements of $0.9
million.
As of
September 30, 2009, the Fortress Financing Agreement consisted of a $55 million
revolving credit facility, a $60 million term loan and a $70 million delayed
draw term loan. Borrowings under the Fortress 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 was required to pay a facility
fee of 50 basis points. The weighted average interest rate at September 30, 2009
was 7.1%.
The
Fortress Financing Agreement was guaranteed by the material subsidiaries as
defined of the Company and matures on June 17, 2012. The Fortress Financing
Agreement was 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. On October 23, 2009, the
Company repaid all amounts due under the Fortress Financing
Agreement.
Debt as
of September 30, 2009 was $184.4 million, an increase of $2.9 million compared
with the $181.5 million outstanding at December 31, 2008, primarily as a result
of the weakening of the US dollar, as the Company’s 8% convertible debentures
are payable in Canadian dollars. At September 30, 2009, $40.9 million was
available under the Fortress Financing Agreement.
The
Company is currently in compliance with all of the terms and conditions of its
WF Credit 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 WF
Credit 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 Fortress Financing Agreement, the Company was required to 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 was specifically defined in the
Fortress Financing Agreement. For the period ended September 30, 2009, the
Company’s calculation of each of these covenants, and the specific requirements
under the Fortress Financing Agreement, respectively, were as
follows:
|
|
September
30, 2009
|
|
Total
Senior Leverage Ratio
|
|
|
1.42 |
|
Maximum
per covenant
|
|
|
3.25 |
|
|
|
|
|
|
Fixed
Charges Ratio
|
|
|
3.65 |
|
Minimum
per covenant
|
|
|
1.30 |
|
|
|
|
|
|
Minimum
earnings before interest, taxes, depreciation and
amortization
|
|
$ |
67.0
million |
|
Minimum
per covenant
|
|
$ |
45.4
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
Fortress Financing Agreement, as non-compliance with such covenants would have
had a material adverse effect on the Company.
On
October 23, 2009, the Company and its wholly-owned subsidiaries, as guarantors,
issued and sold $225 million aggregate principal amount of 11% Senior Notes due
2016 (the “11% Notes”). The 11% Notes bear interest at a rate of 11% per
annum, accruing from October 23, 2009. Interest is payable semiannually in
arrears in cash on May 1 and November 1 of each year, beginning on May 1,
2010. The 11% Notes will mature on November 1, 2016, unless earlier
redeemed or repurchased. The Company received net proceeds before expenses
of $209 million which included an original issue discount of approximately 4.7%
and underwriter fees. The 11% Notes were sold in a private placement in reliance
on exemptions from registration under the Securities Act of 1933, as amended.
The Company used the net proceeds of this offering to repay the outstanding
balance and terminate its prior Fortress Financing Agreement, and will redeem
its outstanding 8% C$45 million convertible debentures on or about November 26,
2009.
The
Company may, at its option, redeem the 11% Notes in whole at any time or in part
from time to time, on and after November 1, 2013 at a redemption price of
105.500% of the principal amount thereof if redeemed during the twelve-month
period beginning on November 1, 2013, at a redemption price of 102.750% of the
principal amount thereof if redeemed during the twelve-month period beginning on
November 1, 2014 and at a redemption price of 100% of the principal amount
thereof if redeemed during the twelve-month period beginning on November 1,
2015. Prior to November 1, 2013, the Company may, at its option, redeem
some or all of the 11% Notes at a price equal to 100% of the principal amount of
the Notes plus a “make whole” premium and accrued and unpaid interest. The
Company may also redeem, at its option, prior to November 1, 2012, up to 35% of
the 11% Notes with the proceeds from one or more equity offerings at a
redemption price of 11% of the principal amount thereof. If the Company
experiences certain kinds of changes of control (as defined in the Indenture),
holders of the 11% Notes may require the Company to repurchase any 11% Notes
held by them at a price equal to 101% of the principal amount of the 11% Notes
plus accrued and unpaid interest.
On
October 23, 2009, the Company and its subsidiaries entered into a new $75
million five year senior secured revolving credit facility (the “WF Credit
Agreement”) with Wells Fargo Foothill, LLC, as agent, and the lenders from time
to time party thereto. The WF Credit Agreement replaced the Company’s
existing $185 million senior secured financing agreement with Fortress Credit
Corp., as collateral agent, Wells Fargo Foothill, Inc., as administrative
agent. Advances under the WF Credit Agreement will bear interest as
follows: (a)(i) LIBOR Rate Loans bear interest at the LIBOR Rate and (ii) Base
Rate Loans bear interest at the Base Rate, plus (b) an applicable margin.
The initial applicable margin for borrowing is 3.00% in the case of Base Rate
Loans and 3.25% in the case of LIBOR Rate Loans. The applicable margin may
be reduced subject to the Company achieving certain trailing twelve month
earning levels, as defined. In addition to paying interest on outstanding
principal under the WF Credit Agreement, the Company is required to pay an
unused revolver fee to lender under the WF Credit Agreement in respect of unused
commitments thereunder.
The WF
Credit Agreement is guaranteed by all of the Company’s present and future
subsidiaries, other than immaterial subsidiaries as defined. The WF Credit
Agreement includes covenants that, among other things, restrict the Company’s
ability and the ability of its subsidiaries to incur or guarantee additional
indebtedness; pay dividends on or redeem or repurchase the capital stock of MDC;
make certain types of investments; impose limitations on dividends or other
amounts from the Company’s subsidiaries; incur certain liens, sell or otherwise
dispose of certain assets; enter into transactions with affiliates; enter into
sale and leaseback transactions; and consolidate or merge with or into, or sell
substantially all of the Company’s assets to, another person. These
covenants are subject to a number of important limitations and exceptions.
The WF Credit Agreement also contains financial covenants, including a senior
leverage ratio, a fixed charge coverage ratio and a minimum earnings level, as
defined.
Deferred
Acquisition Consideration (Earnouts)
Acquisitions
of businesses by the Company may include commitments to pay contingent deferred
purchase consideration to the seller. These contingent purchase obligations are
generally payable within a one to three-year period following the acquisition
date, and are based on achievement of certain thresholds of future earnings and,
in certain cases, also based on the rate of growth of those earnings. The
contingent consideration is recorded as an obligation of the Company when the
contingency is resolved and the amount is reasonably determinable. At September
30, 2009, there was $2.9 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 $55.9
million of additional deferred purchase obligations could be triggered during
2009 or thereafter, including approximately $3.5 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.
Other-Balance
Sheet Commitments
Put
Rights of Subsidiaries’ Noncontrolling 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 2009 to 2018. It is
not determinable, at this time, if or when the owners of these put option rights
will exercise all or a portion of these rights.
The
amount payable by the Company in the event such put option rights are exercised
is dependent on various valuation formulas and on future events, such as the
average earnings of the relevant subsidiary through that date of exercise, the
growth rate of the earnings of the relevant subsidiary during that period, and,
in some cases, the currency exchange rate at the date of
payment.
Management
estimates, assuming that the subsidiaries owned by the Company at September 30,
2009, 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 $39.7 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 $3.6 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 $3.7 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 $9.8 million of the
estimated $39.7 million that the Company would be required to pay subsidiaries
noncontrolling 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
$5.0 million.
On
October 5, 2009, the Company exercised its call and acquired the remaining 6%
equity interest in CPB. The estimated cost of this equity included in the
above is $8.6 million.
The
following table summarizes the potential timing of the consideration and
incremental operating income before depreciation and amortization based on
assumptions as described above.
Consideration (4)
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013 &
Thereafter
|
|
|
Total
|
|
|
|
($ Millions)
|
|
Cash
|
|
$ |
9.2 |
|
|
$ |
1.6 |
|
|
$ |
1.4 |
|
|
$ |
8.7 |
|
|
$ |
15.2 |
|
|
$ |
36.1 |
|
Shares
|
|
|
0.6 |
|
|
|
0.1 |
|
|
|
0.6 |
|
|
|
0.9 |
|
|
|
1.4 |
|
|
|
3.6 |
|
|
|
$ |
9.8 |
|
|
$ |
1.7 |
|
|
$ |
2.0 |
|
|
$ |
9.6 |
|
|
$ |
16.6 |
|
|
$ |
39.7 |
(1) |
Operating
income before depreciation and amortization to be
received(2)
|
|
$ |
1.3 |
|
|
$ |
0.3 |
|
|
$ |
0.7 |
|
|
$ |
1.6 |
|
|
$ |
1.1 |
|
|
$ |
5.0 |
|
Cumulative
operating income before depreciation and amortization(3)
|
|
$ |
1.3 |
|
|
$ |
1.6 |
|
|
$ |
2.3 |
|
|
$ |
3.9 |
|
|
$ |
5.0 |
|
|
|
(5 |
) |
(1)
|
This amount, in addition to put
options only exercisable upon termination of $3.7 million have been
recognized in Redeemable Noncontrolling Interests on the Company’s balance
sheet in conjunction with the adoption of a new accounting
pronouncement.
|
(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
2008 and first nine months of 2009 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.
|
(5)
|
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, redeemable noncontrolling interests, stock-based compensation
and the reported amounts of revenue and expenses during the reporting period.
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 FASB
Accounting Standards Codification topic on Revenue Recognition, 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 the Reporting Revenue Gross as a Principal versus Net as an
Agent topic of the FASB Accounting Standards Codification. This topic summarized
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 Income Statement
Characterization of Reimbursements Received for Out-Of-Pocket Expenses topic of
the FASB Accounting Standards Codification. This topic requires 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 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’
noncontrolling 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 the revised guidance on Accounting for
Stock Options 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 this guidance for new
awards granted or modified after the adoption, 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.
New
Accounting Pronouncements
In June
2009, the FASB introduced the FASB Accounting
Standards Codification and issued the revised guidance on Hierarchy of Generally
Accepted Accounting Principles, which is effective for the Company July 1,
2009. This standard does not alter current U.S. GAAP, but rather
integrates existing accounting standards with other authoritative guidance.
Under this standard there will be a single source of authoritative U.S. GAAP for
nongovernmental entities and will supersede all other previously issued non-SEC
accounting and reporting guidance.
In May
2009, the FASB issued revised guidance on Subsequent Events, which is effective
for the Company June 30, 2009. This statement provides guidance for
disclosing events that occur after the balance sheet date, but before financial
statements are issued or available to be issued. The adoption of this standard
did not have a significant impact on our Consolidated Financial
Statements.
In
December 2007, FASB issued revised guidance on Business Combinations. These
revised standards retain some fundamental concepts of the current standard,
including the acquisition method of accounting (known as the “purchase method”)
for all business combinations but revised guidance broadens the definitions of
both businesses and business combinations, resulting in the acquisition method
applying to more events and transactions. This guidance 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. Both acquisition-related costs and restructuring costs are required 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. This revised guidance is to be applied
prospectively for financial statements issued for fiscal years beginning on or
after December 15, 2008. Early application is prohibited. The adoption of
these revised standards did not have a material effect on our financial
statements.
In
December 2007, FASB issued guidance that now requires 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. The reclassifications must 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 was prohibited. The guidance was
expanded in 2008 to require the recording of put options as a liability and a
reduction of equity. The adoption of these new standards has resulted in
the Company recording the estimated redemption amount of its outstanding put
options as a reduction of Additional Paid in Capital and an increase in
Redeemable Noncontrolling Interests of $37.8 million as of January 1, 2009. As
of December 31, 2008, the Company has reclassified $21.8 million of minority
interest to Redeemable Noncontrolling Interest, representing Noncontrolling
Interests which could be purchased by the Company pursuant to the exercise of an
existing Put option. In addition, as of December 31, 2008, a portion of
minority interest, which is not subject to put options, has been reclassified as
part of Equity-Noncontrolling Interest. Changes in the estimated
redemption amounts of the put options are adjusted at each reporting period with
a corresponding adjustment to Equity. For the three and nine months ended
September 30, 2008, the Company reclassified net income attributable to the
noncontrolling interests below net income (loss), as a result net income for the
three month period was increased by $1.4 million and the net loss was reduced by
$6.5 million, respectively. These adjustments will not impact the
calculation of earnings per share. At September 30, 2009, the Company
reduced its estimated redemption amounts by $1,700.
In March
2008, the FASB issued guidance relating to "Disclosures about Derivative
Instruments and Hedging Activities (previously in SFAS No. 161 and currently
included in ACS 815-10-65)," which requires enhanced disclosures for derivative
and hedging activities. The additional disclosures became effective beginning
with our first quarter of 2009. Early adoption is permitted. The adoption
of this statement did not have a material effect on our financial
statements.
In
November 2008, the EITF issued guidance on Equity Method Investment Accounting
Considerations , which is effective for the Company January 1, 2009. This
standard addresses the impact that revised Guidance on Business Combinations and
Noncontrolling Interests might have on the accounting for equity method
investments, including how the initial carrying value of an equity method
investment should be determined, how an impairment assessment of an underlying
indefinite lived intangible asset of an equity method investment should be
performed and how to account for a change in an investment from the equity
method to the cost method. The adoption of this guidance did not have an impact
on our financial statements.
In April
2008, the FASB issued revised guidance on the topic of Determination of
the Useful Life of Intangible Assets. The revised guidance amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible. The intent of this
revision is to improve the consistency between the useful life of a recognized
intangible asset under previous guidance, and the period of expected cash flows
used to measure the fair value of the asset. These changes were effective for
fiscal years beginning after December 15, 2008 and are to be applied
prospectively to intangible assets acquired subsequent to its effective date.
Accordingly, we adopted these provisions on January 1, 2009. The impact that
this adoption may have on our financial position and results of operations will
depend on the nature and extent of any intangible assets acquired subsequent to
its effective date.
In May
2008, the FASB issued standards relating to the Accounting for Convertible Debt
Instruments That May Be Settled In Cash Upon Conversion (Including Partial Cash
Settlement)”, which is now included in the Accounting Standards Codification
Topic Debt with Convertible and Other Options. The guidance addresses the
accounting for convertible debt instruments that, by their stated terms, may be
settled in cash upon conversion including partial cash settlement. This
guidance is effective for fiscal years beginning after December 15, 2008 and
interim periods within those years. The adoption of this guidance did not
have a material effect on our financial statements.
In June
2009, the FASB issued revised guidance on the topic of Accounting for Variable
Interest Entities, which we will adopt effective January 1, 2010. This guidance
revises factors that should be considered by a reporting entity when determining
whether an entity that is insufficiently capitalized or is not controlled
through voting (or similar rights) should be consolidated and also includes
revised financial statement disclosures regarding the reporting entity’s
involvement and risk exposure. We believe that this will not have a material
impact on our 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:
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•
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risks
associated with severe effects of national and regional economic
downturn;
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•
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the
Company’s ability to attract new clients and retain existing
clients;
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•
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the
financial success of the Company’s
clients;
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•
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the
Company’s ability to retain and attract key
employees;
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•
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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;
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•
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the
successful completion and integration of acquisitions which complement and
expand the Company’s business capabilities;
and
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•
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foreign
currency fluctuations.
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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, and the risk factors outlined in
more detail in the Company’s 2008 Annual Report on Form 10-K under the
caption “Risk Factors”, and in the Company’s other SEC filings, including the
Form 8-K filed on October 19, 2009.
Item 3. Quantitative and
Qualitative Disclosures about Market Risk
The
Company is exposed to market risk related to interest rates and foreign
currencies.
Debt
Instruments: At September 30, 2009, 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
$139.3 million, as of September 30, 2009, a 1.0% increase or decrease in the
weighted average interest rate, which was 7.1% at September 30, 2009, would have
an interest impact of approximately $1.4 million annually.
Foreign
Exchange: The Company conducts business in four currencies, the US
dollar, the Canadian dollar, Jamaican dollar 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”. 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.
The
Company is exposed to foreign currency fluctuations relating to its intercompany
balances between US and Canada. For every one cent change in the
foreign exchange rate between the US and Canada, the Company will incur an
approximate $0.4 million impact to its financial statements.
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 September 30, 2009.
Changes
in Internal Control Over Financial Reporting
There
were no changes in the Company’s internal control over financial reporting
identified in connection with the foregoing evaluation that occurred during the
first nine months of 2009 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 2008 Annual Report on Form 10-K and the Company Form 8-K filed on
October 19, 2009.
Item 2.
Unregistered
Sales of Equity Securities and Use of Proceeds.
(a)
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There
were no transactions during the third quarter of 2009 in which the Company
issued shares of its Class A subordinate voting shares that were not
registered under the Securities Act of 1933, as
amended.
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Item 4.
Submission
of Matters to a Vote of Security Holders
None
SIGNATURES
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.
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/s/ Michael
Sabatino
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Michael
Sabatino
Chief
Accounting Officer
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November
2, 2009
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EXHIBIT INDEX
Exhibit No.
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Description
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10.1
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Agreement
of Separation and Release, dated August 31, 2009, between the Company and
Graham Rosenberg*
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12
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Statement
of computation of ratio of earnings to fixed charges*
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31.1
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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.*
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31.2
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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.*
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32.1
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Certification
by Chief Executive Officer pursuant to 18 USC. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
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32.2
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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.*
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99.1
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Schedule
of ownership by operating
subsidiary.*
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* Filed
electronically herewith.