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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period
ended MARCH 31, 2004 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period
from to Commission file number: 000-50303
______________
MDC PARTNERS INC.
(Exact name of registrant as specified in its charter)
ONTARIO, CANADA N/A
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
45 HAZELTONAVENUE M5R 2E3
Toronto, Ontario, Canada (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(416) 960-9000
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 an accelerated filer (as
defined in Rule 12(b)-2 of the Act). Yes [X] No [ ]
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 May 10, 2004 were: 22,574,366
Class A shares and 2,502 Class B 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
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................ 4
Condensed Consolidated Statements of Operations (unaudited)
Three Months Ended March 31, 2004 and March 31, 2003......... 4
Condensed Consolidated Balance Sheets as of
March 31, 2004 (unaudited) and December 31, 2003............. 5
Condensed Consolidated Statements of Cash Flows (unaudited)
Three Months Ended March 31, 2004 and March 31, 2003 ........ 6
Notes to Condensed Consolidated Financial Statements
(unaudited).................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations.................................... 29
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 40
Item 4. Controls and Procedures......................................... 40
PART II. OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities ................................. 41
Item 6. Exhibits and Reports on Form 8-K................................ 42
Signatures................................................................... 44
MDC PARTNERS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(thousands of United States dollars, except per share amounts)
THREE MONTHS ENDED MARCH 31,
2004 2003
Revenue:
Services $56,266 $39,689
Products 18,847 43,525
------------------ -----------------
75,113 83,214
------------------ -----------------
Operating Expenses:
Cost of products sold 11,567 18,729
Salary and related costs * 36,768 27,139
General and other operating costs 29,115 28,362
Depreciation and amortization 2,343 3,365
------------------ -----------------
79,793 77,595
------------------ -----------------
Operating Profit (Loss) (4,680) 5,619
------------------ -----------------
Other Income (Expenses)
Gain on sale of affiliate (Note 9) 7,165 -
Interest expense (2,313) (4,326)
Interest income 420 93
------------------ -----------------
5,272 (4,233)
------------------ -----------------
Income Before Income Taxes, Equity in Affiliates and Minority Interests 592 1,386
Income Taxes (Recovery) 1,753 (21)
------------------ -----------------
Income (Loss) Before Equity in Affiliates and Minority Interests (1,161) 1,407
Equity in affiliates 1,446 498
Minority interests (1,303) (1,018)
------------------ -----------------
Net Income (Loss) ($1,018) $887
================== =================
Earnings (Loss) Per Common Share:
Basic - net income (loss) ($0.05) $0.05
Diluted - net income (loss) (0.05) 0.05
Weighted average number of shares:
Basic 18,918,608 16,915,341
Diluted 18,918,608 26,403,555
* Includes stock-based compensation of $5,922 and nil, respectively in 2004 and 2003.
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
MDC PARTNERS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(thousands of United States dollars)
MARCH 31, DECEMBER 31,
2004 2003
-------------------- -----------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $59,158 $66,726
Accounts receivable, less allowance for doubtful accounts
of $797 and $552 96,958 60,115
Expenditures billable to clients 8,294 7,422
Inventories 7,851 6,795
Prepaid expenses and other current assets 6,844 4,924
-------------------- -----------------
Total Current Assets 179,105 145,982
Fixed Assets, at cost, less accumulated depreciation
and amortization of $55,512 and $52,885 46,543 42,025
Investment in Affiliates 19,579 36,084
Goodwill 129,917 87,479
Deferred Tax Benefits 10,097 12,580
Other Assets 5,615 6,030
-------------------- -----------------
Total Assets $390,856 $330,180
==================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other liabilities $132,162 $74,050
Advance billings 26,869 13,391
Current portion of long-term debt 31,554 16,486
Deferred acquisition consideration 1,113 1,113
-------------------- -----------------
Total Current Liabilities 191,698 105,040
Long-Term Debt 52,543 95,946
Convertible Notes (Note 10) 36,605 37,794
Other Liabilities 483 516
Minority Interests 1,195 2,533
-------------------- -----------------
Total Liabilities 282,524 241,829
-------------------- -----------------
Contingencies (Note 12)
Shareholders' Equity:
Share capital (Note 11) 131,520 115,996
Share capital to be issued 3,909 -
Contributed surplus 5,321 3,272
Retained earnings (deficit) (26,166) (25,148)
Accumulated other comprehensive income (loss) (6,252) (5,769)
-------------------- -----------------
Total Shareholders' Equity 108,332 88,351
-------------------- -----------------
Total Liabilities and Shareholders' Equity $390,856 $330,180
==================== =================
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
MDC PARTNERS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(thousands of United States dollars)
Three Months Ended March 31,
2004 2003
Cash flows from operating activities:
Net income (loss) ($1,018) $887
Adjustments for non-cash items:
Stock-based compensation 5,922 -
Depreciation and amortization 2,343 3,365
Non-cash interest expense - 954
Deferred income taxes 2,407 134
Gain on sale of affiliate (Note 9) (7,165) -
Earnings of affiliates, net of distributions 581 (1,094)
Minority interest and other (75) (151)
Changes in non-cash working capital (4,732) (4,128)
------------------ ------------------
Net cash used for operating activities (1,737) (33)
------------------ ------------------
Cash flows from investing activities:
Capital expenditures (3,141) (2,267)
Acquisitions, net of cash acquired 3 (1,115)
Other assets, net 115 (179)
------------------ ------------------
Net cash used in investing activities (3,023) (3,561)
------------------ ------------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 159
Repayment of long-term debt (2,188) (1,884)
Issuance of share capital 2,041 -
Purchase of share capital (1,468) -
------------------ ------------------
Net cash used in financing activities (1,615) (1,725)
------------------ ------------------
Effect of exchange rate changes on cash and cash equivalents (1,193) 717
------------------ ------------------
Net decrease in cash and cash equivalents (7,568) (4,602)
Cash and cash equivalents at beginning of period 66,726 32,250
------------------ ------------------
Cash and cash equivalents at end of period $59,158 $27,648
================== ==================
Supplemental disclosures:
Income taxes paid $160 $449
Interest paid $1,766 $612
Non-cash consideration:
Share capital issued, or to be issued, on acquisitions (Note 8) $18,860 -
Stock-based awards issued, on acquisitions (Note 8) $1,827 -
Settlement of debt with investment in affiliate
Reduction in debt (Note 9) ($26,344) -
Reduction in investment in affiliate (Note 9) $16,876 -
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, unless otherwise stated)
1. BASIS OF PRESENTATION
MDC Partners Inc. (the "Company") has prepared the condensed
consolidated interim financial statements included herein without
audit pursuant to Securities and Exchange Commission rules. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles ("GAAP") of the United States of America 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. These statements
should be read in conjunction with the consolidated financial
statements and related notes included in the Company's annual report
on Form 40-F for the year ended December 31, 2003.
Results of operations for interim periods are not necessarily
indicative of annual results.
As of the first quarter of 2004, the Company changed its method of
accounting from Canadian GAAP to GAAP of the United States of America
("US"). The comparative financial statements included in these interim
financial statements have been restated following US GAAP. This change
in accounting method resulted from the conversion of Class B multiple
voting shares into Class A Subordinate Voting Shares during the first
quarter of 2004 (see Note 11). Due to the conversion of these shares,
the majority of shareholder votes now belong to shareholders of the
Company who reside in the US and, as a result, the Company is now
deemed to be a US domestic issuer as defined under the United States
Securities and Exchange Commission regulations to which the Company is
subject.
Under Canadian securities requirements, the Company is required to
provide a reconciliation setting out the differences between US and
Canadian GAAP as applied to the Company's financial statements for the
interim periods and years ended in the fiscal periods for 2004 and
2005. This required disclosure for the three months ended March 31,
2004 and 2003 is set out in Note 13.
2. SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are summarized as
follows:
Principles of Consolidation. The accompanying consolidated
financial statements include the accounts of MDC Partners Inc.
(formerly MDC Corporation Inc.) and its domestic and international
controlled subsidiaries. Intercompany balances and transactions have
been eliminated.
Use of Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents. The Company's cash equivalents are
primarily comprised of investments in overnight interest-bearing
deposits, commercial paper and money market instruments and other
short-term investments with original maturity dates of three months or
less at the time of purchase.
Allowance for Doubtful Accounts. Trade receivables are stated
at invoiced amounts less allowances for doubtful accounts. The
allowances represent estimated uncollectible receivables associated
with potential customer defaults usually due to customers' potential
insolvency. The allowances include amounts for certain customers where
a risk of default has been specifically identified. The assessment of
the likelihood of customer defaults is based on various factors,
including the length of time the receivables are past due, historical
experience and existing economic conditions.
Expenditures Billable to Clients. Expenditures billable to
clients consist principally of costs incurred on behalf of clients
when providing advertising, marketing and corporate communications
services to clients that have not been invoiced. Such amounts are
invoiced to clients at various times over the course of the production
process.
Inventories. Finished goods and work-in-process inventories
are valued at the lower of cost and net realizable value. Raw
materials are valued at the lower of cost and replacement cost. Cost
is determined on a first-in, first-out method.
Depreciation of Fixed Assets. Buildings are depreciated on a
straight-line basis over the estimated useful lives of 20 to 25 years.
Computers, furniture and fixtures are depreciated on a declining
balance basis at rates of between 20% to 50% per year. Machinery and
equipment are depreciated on a declining balance basis at rates of
between 10% to 20% per year. Leasehold improvements are amortized on a
straight-line basis over the lesser of the terms of the related lease
or the estimated useful life of these assets.
Long-lived Assets. In accordance with SFAS 144 "Accounting
for the Impairment or Disposal of Long-lived Assets," a long-lived
asset or asset group is tested for recoverability whenever events or
changes in circumstances indicate that its carrying amount may not be
recoverable. When such events occur, the Company compares the sum of
the undiscounted cash flows expected to result from the use and
eventual disposition of the asset or asset group to the carrying
amount of the long-lived asset or asset group. If this comparison
indicates that there is an impairment, the amount of the impairment is
typically calculated using discounted expected future cash flows where
observable fair values are not readily determinable. The discount rate
applied to these cash flows is based on the Company's weighted average
cost of capital, risk adjusted where appropriate, which represents the
blended after-tax costs of debt and equity.
Equity Method Investments. The equity method is used to
account for investments in entities in which the Company has an
ownership of less than 50% and has significant influence, or joint
control, over the operating and financial policies of the affiliate.
The Company's investments accounted for using this method are Crispin
Porter + Bogusky, LLC and Cliff Freeman & Partners, LLC. The Company's
management periodically evaluates these investments to determine if
there have been any, other than temporary, declines in value.
Goodwill and Other Intangibles. In accordance with SFAS 142,
"Goodwill and Other Intangible Assets", goodwill acquired as a result
of a business combination for which the acquisition date was after
June 30, 2001 is no longer amortized, but is periodically tested for
impairment. Additionally, in accordance with SFAS 141, "Business
Combinations", the cost of an acquired entity is allocated to the
assets acquired and liabilities assumed based on their estimated fair
values including other identifiable intangible assets, as applicable,
such as trade names, customer relationships and client lists.
Prior to the adoption of SFAS 142 on January 1, 2002, intangibles were
amortized on a straight-line basis over a period not to exceed 40
years. The intangibles were written down if and to the extent they
were determined to be impaired. Under SFAS 142, the Company no longer
amortizes goodwill and intangibles with indefinite lives and is
required to perform an annual impairment test on goodwill balances and
intangibles with indefinite lives. The initial test for impairment
required the Company to assess whether there was an indication that
goodwill was impaired as of the date of adoption of SFAS 142. To
accomplish this, the Company identified its reporting units and
determined the carrying value of each unit, including goodwill and
other intangible assets. The company then determined the fair value of
each reporting unit and compared it to its carrying value. In
performing this test in accordance with SFAS 142, the components of
the reporting units were aggregated to the level where operating
decisions are made. The initial SFAS 142 impairment test was completed
during the second quarter of 2002 and, as a result, a transitional
impairment loss was charged to the statement of operations as a
cumulative effect of a change in accounting policy. The Company
performs the annual impairment test during the fourth quarter of each
year, unless certain events, as defined in SFAS 142, trigger the need
for an earlier evaluation for impairment. Subsequent impairment losses
will be charged to operating income, where applicable.
Deferred Taxes. Deferred income taxes are provided for the
temporary difference between the financial reporting basis and tax
basis of the Company's assets and liabilities. Deferred tax benefits
result principally from recording certain expenses in the financial
statements that are not currently deductible for tax purposes and from
differences between the tax and book basis of assets and liabilities
recorded in connection with acquisitions. Deferred tax liabilities
result principally from deductions recorded for tax purposes in excess
of that recorded in the financial statements.
Revenue Recognition. Substantially all of the Marketing
Communications reportable segment revenue is derived from fees for
services. Additionally, the Company earns commissions based upon the
placement of advertisements in various media. Revenue is realized when
the service is performed in accordance with the terms of each client
arrangement and upon completion of the earnings process. This includes
when services are rendered, upon presentation date for media, when
costs are incurred for radio and television production and when print
production is completed and collection is reasonably assured.
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 performance against
qualitative goals is determined by the Company's clients.
Substantially all of the Secure Products International reportable
segment revenue is derived from the sale of products. Revenue derived
from the stamp operations is realized using the percentage of
completion method determined based on costs of production incurred to
date relative to the expected total costs to be incurred upon
completion. Revenue derived from the sale of tickets and cards is
realized when the product is completed and either shipped, or held in
the Company's secure facilities at the written request of the
customer, title to the product has transferred to the customer, and
all revenue recognition criteria have been met.
The Company's revenue recognition policies are in compliance with the
Securities and Exchange Commissions ("SEC") Staff Accounting Bulletin
("SAB") 104, "Revenue Recognition". SAB 104 summarizes certain of the
SEC staff's views in applying generally accepted accounting principles
to revenue recognition in financial statements. Also, in July 2000,
the Emerging Issues Task Force ("EITF") of the Financial Accounting
Standards Board released Issue 99-19, "Reporting Revenue Gross as a
Principal versus Net as an Agent". This Issue summarized the EITF's
views on when revenue should be recorded at the gross amount billed
because it has earned revenue from the sale of goods or services, or
the net amount retained because it has earned a fee or commission.
Additionally, in January 2002, the EITF released Issue 01-14, Income
Statement Characterization of Reimbursements Received for
"Out-of-Pocket" Expenses Incurred. This Issue summarized the EITF's
views on when out-of-pocket expenses should be characterized as
revenue. The Company's revenue recognition policies are in compliance
with, SAB 104, EITF 99-19 and EITF 01-14. In the majority of the
Company's businesses, it acts as an agent and records revenue equal to
the net amount retained, when the fee or commission is earned.
Stock-Based Compensation. Effective January 1, 2003, the
Company prospectively adopted full fair value accounting for stock
based awards as prescribed by SFAS 123 "Accounting for Stock Based
Compensation". Prior to January 1, 2003, the Company elected to not
apply fair value accounting to stock based awards to employees, other
than for direct awards of stock and awards settleable in cash, which
required fair value accounting. Prior to January 1, 2003, for awards
not elected to be accounted for under the fair value method, the
Company accounted for stock based compensation in accordance with
Accounting Principles Board Opinion 25, "Accounting for Stock Issued
to Employees" ("APB 25"). APB 25 is based upon an intrinsic value
method of accounting for stock-based compensation. Under this method,
compensation cost is measured as the excess, if any, of the quoted
market price of the stock issuance at the measurement date over the
amount to be paid by the employee.
The Company adopted full fair value accounting for stock based awards
using the prospective application transitional alternative available
in SFAS 148 "Accounting for Stock Based Compensation - Transition and
Disclosure". Accordingly, the fair value based method is applied to
all awards granted, modified or settled on or after January 1, 2003.
Under the fair value based method, compensation cost is measured at
fair value at the date of grant and is expensed over 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 contributed surplus when 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
intrinsic value of the award, and is recorded into operating income
over the vesting period of the award. Changes in the Company's payment
obligation subsequent to vesting of the award and prior to the
settlement date are recorded in operating income in the period
incurred. The payment amount is established for Share Appreciation
Rights on the date of the exercise of the award by the employee.
As noted, prior to January 1, 2003, the Company did not use the fair
value method to account for certain employee stock-based compensation
plans but disclosed this pro forma information for options granted
commencing fiscal 1995. The table below summarizes the quarterly pro
forma effect for the three months ended March 31, 2004 and 2003 had
the Company adopted the fair value method of accounting for stock
options and similar instruments for awards issued prior to 2003.
Three Months Ended March 31,
2004 2003
------------------ -------------------
Net income (loss), as reported ($1,018) $887
Fair value costs of stock-based employee compensation
for options issued prior to 2003 376 512
------------------ -------------------
Net income (loss), pro forma
($1,394) $375
================== ===================
Basic net income (loss) per share, as reported ($0.05) $0.05
Basic net income (loss) per share, pro forma ($0.07) $0.02
Diluted net income (loss) per share, as reported ($0.05) $0.05
Diluted net income (loss) per share, pro forma ($0.07) $0.02
The fair value of the stock options and similar awards used to compute
pro forma net income (loss) and net income (loss) per share was
estimated fair value at grant date using Black-Scholes option-pricing
model with the following weighted average assumptions for each of the
three months ended:
Three Months Ended March 31,
--------------------------------------
2004 2003
------------------ ----------------
Expected dividend 0.00% 0.00%
Expected volatility 40% 80%
Risk-free interest rate 5.00% 6.00%
Expected option life in years 5 -
Weighted average stock option fair value per option granted $5.16 -
There were no stock options granted during the three months ended
March 31, 2003.
Earnings Per Common Share. Basic earnings per share is based
upon the weighted average number of common shares outstanding during
each period, including the "Share capital to be issued" as reflected
in the Shareholders' Equity on the balance sheet. Diluted earnings per
share is based on the above, plus, if dilutive, common share
equivalents which include outstanding options and warrants. For
purposes of computing diluted earnings per share for the three months
ended March 31, 2004 and 2003, respectively, nil and 9,488,214 shares
were assumed to have been outstanding related to common share
equivalents. Additionally, the assumed increase in net income related
to the after tax interest costs of convertible debentures used in the
computations was nil and $368 for the three months ended March 31,
2004 and 2003, respectively.
The following table details the weighted average number of common
shares outstanding for each of the three months ended March 31, 2004
and 2003:
Three Months Ended March 31,
--------------------------------------
2004 2003
------------------ ----------------
Basic weighted average shares outstanding 18,918,608 16,915,341
Weighted average shares dilution adjustments:
Dilutive stock options and warrants (a) - 36,418
7% convertible senior notes due January 8, 2007 - 9,451,796
------------------ ----------------
Diluted weighted average shares outstanding (b) 18,918,608 26,403,555
================== ================
(a) Dilutive and anti-dilutive stock options and warrants were determined by using the average closing price of the
Class A Subordinate Voting shares for the period. For the three months ended March 31, 2004 and 2003, the
average share price used was $14.20 per share and $3.69 per share, respectively.
(b) Had certain stock options, warrants and the convertible debt been dilutive, they would have added 3,979,821
dilutive shares and nil dilutive shares for the three months ended March 31, 2004 and 2003, respectively.
Foreign Currency Translation. The Company's financial
statements were prepared in accordance with the requirements of SFAS
No. 52, "Foreign Currency Translation". All of the Company's
subsidiaries use their local currency as their functional currency in
accordance with SFAS 52. Accordingly, the currency impacts of the
translation of the balance sheets of the Company's non-US dollar based
subsidiaries to U.S. dollar statements are included as translation
adjustments in other accumulated comprehensive income. The income
statements of non-US dollar based subsidiaries are translated at
average exchange rates for the period.
Derivative Financial Instruments. The Company adopted SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities", on January 1, 2001. SFAS No. 133 establishes accounting
and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts)
be recorded in the balance sheet as either an asset or liability
measured at its fair value. During 2003 and 2004 the Company did not
participate in any derivative financial instruments.
Effective July 1, 2002, management designated the Company's 10.5% U.S.
senior subordinated notes ("Notes") as a hedge against foreign
exchange exposure of U.S. operations of Secure Products International.
The hedge was applied prospectively from the effective date whereby
any foreign exchange translation adjustment of the Notes reduced any
offsetting foreign exchange translation adjustment of the U.S.
operations, the net of which was reflected in the cumulative
translation account within shareholder equity. The application of
hedge accounting ceased on the repayment of the Company's 10.5% US
senior subordinated notes on June 30, 2003 which corresponded with the
sale of 80% of CDI.
3. COMPREHENSIVE INCOME
Total comprehensive income and its components were:
Three Months Ended March 31
---------------------------------------------
2004 2003
-------------------- -----------------
Net income (loss) for the period ($1,018) $887
Foreign currency translation adjustment (483) (6,224)
-------------------- -----------------
Comprehensive income (loss) for the period ($1,501) ($5,337)
==================== =================
4. NEW ACCOUNTING PRONOUNCEMENTS
The following pronouncements were issued by the Financial Accounting
Standards Board ("FASB") in 2004:
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities, An Interpretation of ARB No. 51. This
Interpretation addresses the consolidation by business enterprises of
variable interest entities, as defined in the Interpretation. The
Interpretation was to be applied immediately to variable interests in
variable interest entities created after January 31, 2003, and to
variable interests in variable interest entities obtained after
January 31, 2003. In December 2003, the FASB issued FASB
Interpretation No. 46R, Consolidation of Variable Interest Entities
Revised. FIN 46R modifies certain scope exceptions provided in FIN 46.
Entities would be required to replace FIN 46 provisions with FIN 46R
provisions for all newly created post-January 31, 2003 entities as of
the end of the first interim or annual reporting period ending after
March 15, 2004. The application of these Interpretations did not have
a material effect on the consolidated financial statements.
In November 2003 the EITF reached a consensus on Issue 03-01, The
Meaning of Other-Than-Temporary Impairment and its Application to
Certain Investments. EITF 03-01 established additional disclosure
requirements for each category of SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities ("SFAS 115"), investments in
a loss position. Effective for years ending after December 15, 2003,
the adoption of this EITF requires the Company to include certain
quantitative and qualitative disclosures for debt and marketable
equity securities classified as available-for-sale or held-to-maturity
under SFAS 115 that are impaired at the balance sheet date for which
an other-than-temporary impairment has not been recognized.
Additionally, certain qualitative disclosures should be made to
clarify a circumstance whereby an investment's fair value that is
below cost is not considered other-than-temporary. The provisions of
this consensus do not have a material impact on the Company's
consolidated financial statements.
5. SEGMENTED INFORMATION
Based on the Company's internal management structure, the Company's
operations form two reportable segments - Marketing Communications and
Secure Products International.
Marketing Communications services, through the Company's network of
entrepreneurial firms, include advertising and media, customer
relationship management, and marketing services. These businesses
provide communications services to similar type clients on a global,
national and regional basis. The businesses have similar cost
structures and are subject to the same general economic and
competitive risks. Given these similarities, the results are
aggregated into one reportable segment.
Secure Products International operations provide security products and
services in three primary areas: electronic transaction products such
as credit, debit, telephone and smart cards; secure ticketing products
such as airline, transit and event tickets; and stamps, both postal
and excise. Again, given the similarities in types of clients, cost
structure and risks, the results are aggregated into one reportable
segment. The significant accounting polices of these segments are the
same as those described in the summary of significant accounting
policies included in these notes to condensed consolidated financial
statements, except as where indicated.
Many of the Company's marketing communications businesses have
significant other interestholders and in some cases, the Company
operates the business as a joint venture with these other
interestholders. The Company's management oversees these businesses as
active managers rather than a passive investor, reviewing all aspects
of their operations with the management of these businesses,
regardless of the Company's ownership interest. Within the marketing
communications industry, the monitoring of operating costs, such as
salary and related costs, relative to revenues, among other things,
are key performance indicators. Consequently, the Company's management
reviews, analyses and manages these elements of the businesses as a
whole, rather than just being concerned with it as an investment.
Management believes the presentation of the whole of the businesses
comprising this segment also provides readers with a complete view of
the elements of all operations that significantly affect the Marketing
Communications reportable segment's profitability. Crispin Porter +
Bogusky, LLC, ("CPB"), owned 49% by the Company and operated in joint
venture with the other interest holders, is required to be equity
accounted for under US GAAP. For purposes of the segmented information
disclosure, the results of operations of CPB have been combined with
the other business of the Marketing Communications reportable segment
and the alternate operating results have been described as "Combined".
A reconciliation of "Combined" results of operations of the Marketing
Communications reportable segment to the GAAP reported results of
operations has been provided by the Company in the tables included in
the segmented information disclosure.
Summary financial information concerning the Company's reportable
segments for the three months ended March 31 is shown in the following
table:
Three Months Ended March 31, 2004
Combined As Reported under US GAAP
-------------------------------- ------------------------------------------------------------
Less
Combined Marketing Equity Marketing Secure Products Corporate & Total
Communications Affiliates Communications International Other
---------------- --------------- -------------- ----------------- ------------- ----------
Revenue $66,432 $10,513 $55,919 $18,847 $347 $75,113
--------------- ------------ ----------- ------------ ------------ ----------
Operating Expenses:
Cost of products sold - - - 11,567 - 11,567
Salary and related costs 30,015 4,039 25,976 3,476 7,316* 36,768
General and other
operating costs 26,754 1,541 25,213 2,401 1,501 29,115
Depreciation and
Amortization 1,794 176 1,618 675 50 2,343
--------------- ------------ ----------- ------------ ------------ ----------
58,563 5,756 52,807 18,119 8,867 79,793
--------------- ------------ ----------- ------------ ------------ ----------
Operating Profit (Loss) $7,869 $4,757 $3,112 $728 ($8,520) ($4,680)
=============== ============ =========== ============ ============ ==========
Capital expenditures $2,012 $178 $1,834 $1,273 $34 $3,141
* Includes $5,922 related to stock-based compensation reflected in the three months ended March 31, 2004. There was no
similar charge during the same period in 2003.
Three Months Ended March 31, 2003
Combined As Reported under US GAAP
------------------ --------------------------------------------------------------
Combined Secure
Marketing Less Equity Marketing Products Corporate &
Communications Affiliates Communications International Other Total
----------------- --------------- ----------------- --------------- ------------- ------------------
Revenue $44,992 $5,601 $39,391 $43,525 $298 $83,214
----------------- ----------- -------------- ----------- ---------- ---------------
Operating Expenses:
Cost of products sold - - - 18,729 - 18,729
Salary and related
Costs 22,881 2,876 20,005 6,083 1,051 27,139
General and other
operating costs 16,617 1,047 15,570 12,050 742 28,362
Depreciation and
amortization 1,933 80 1,853 1,174 338 3,365
----------------- ----------- -------------- ----------- ---------- ---------------
41,431 4,003 37,428 38,036 2,131 77,595
----------------- ----------- -------------- ----------- ---------- ---------------
Operating Profit (Loss) $3,561 $1,598 $1,963 $5,489 ($1,833) $5,619
================= =========== ============== =========== ========== ===============
Capital expenditures $1,243 $518 $725 $1,539 $3 $2,267
A summary of our revenue and long-lived assets by geographic area as
of March 31, 2004 and 2003 is set forth in the following table.
United States Canada Other Total
-------------------- ------------------ -------------- --------------
Revenue
Three Months Ended March 31,
2004 $46,961 $21,790 $6,362 $75,113
2003 58,204 20,265 4,745 83,214
Long-lived Assets
at March 31,
2004 $21,471 $20,673 $5,243 $47,387
2003 19,227 25,657 5,040 49,924
6. INVENTORY
The components of inventory are listed below:
March 31, December 31,
2004 2003
------------------- -------------------
Raw Materials and supplies $3,809 $3,743
Work-in-process 2,867 2,135
Finished goods 1,175 917
------------------- -------------------
Total $7,851 $6,795
=================== ===================
7. REVOLVING LINES OF CREDIT
At March 31, 2004, the Company had secured committed revolving credit
lines of $39,031, which were partially drawn to $32,505 and are
reflected as short-term bank loans and long-term bank loans. These
secured loans were comprised of local borrowings of the Company's US
and Canadian subsidiaries.
8. ACQUISITIONS
On January 29, 2004, the Company acquired a 60% ownership interest in
kirshenbaum bond + partners, LLC ("KBP") in a transaction accounted
for under the purchase method of accounting. KBP is comprised of four
units: kirshenbaum bond (New York and San Francisco) which are
primarily advertising agencies, LIME Public Relations + Promotion, The
Media Kitchen, which handles media buying and planning and Dotglu, an
interactive and direct marketing unit. KBP is recognized for creating
very successful non-traditional marketing campaigns and as such was
acquired by the Company to enhance the creative talent within the MDC
Partners Marketing Communications segment of businesses. As part of
the acquisition, the Company paid $20,654 in cash, issued 148,719
shares of the Company's common stock to the selling interestholders of
KBP (valued at approximately $2,029 based on the share price on the
date of the closing and press release), issued warrants to purchase
150,173 shares of the Company's common stock to the selling
interestholders of KBP (valued at approximately $955 based on the
share price during the period on or about the date of the closing and
press release) and incurred transaction costs of approximately $1,019.
Under the terms of the agreement, the selling interestholders of KBP
could receive additional cash and/or share consideration, totaling up
to an additional $735 within one year, based upon achievement of
certain predetermined earnings targets. Such contingent consideration
will be accounted for as goodwill when it becomes determinable.
Exclusive of future contingent consideration, the recorded purchase
price of the net assets acquired in the transaction was $24,657. The
purchase price was allocated to the net assets acquired as follows:
Cash and cash equivalents $15,170
Accounts receivable and other current assets 11,124
Furniture, equipment and leasehold improvements 2,323
Goodwill and intangible assets 26,834
Accounts payable and accrued expenses (30,794)
-------------
Total purchase price $24,657
=============
The allocation of the purchase price to assets acquired and
liabilities assumed is based on preliminary estimates and certain
assumptions that the Company believes are reasonable under the
circumstances and will be adjusted in a subsequent period upon
finalization of such assumptions and estimates. The Company's
consolidated financial statements include KBP's results of operations
subsequent to its acquisition on January 29, 2004. During this period,
the operations of KBP contributed $7,397 of revenue and $623 of net
income.
On March 29, 2004, the Company acquired an additional 39.3% ownership
interest in the Accent Marketing Services LLC ("Accent"), increasing
its total ownership interest in this subsidiary from 50.1% to
approximately 89.4%. Accent has established itself as an integrated
direct marketing services company providing customer contact centers
and direct mail services to its clients, offering a unique customer
relationship and product life cycle management program to its clients.
As part of the acquisition, the Company paid $1,444 in cash, issued,
and to be issued, 1,103,331 shares of the Company's common stock to
the selling interestholders of Accent (valued at approximately $16,454
based on the share price during the period on or about the date of the
closing and press release), and incurred transaction costs of
approximately $63. Under the terms of the agreement, the selling
interestholders of Accent could receive up to a maximum additional
consideration of 742,642 common shares of the Company, or the cash
equivalent, based upon achievement of certain predetermined earnings
targets, by June 2005. Such contingent consideration will be accounted
for when it becomes determinable. This acquisition was accounted for
as a purchase and accordingly, the Company's consolidated financial
statements, which have consolidated Accent's financial results since
1999, will reflect a further 39% ownership participation subsequent to
the additional acquisition on March 29, 2004.
The purchase price was allocated to the net assets as follows:
Cash and cash equivalents $100
Accounts receivable 4,439
Fixed assets 2,861
Other assets 2,799
Goodwill and intangible assets 13,347
Accounts payable and accrued liabilities (1,261)
Long-term debt (3,986)
Other liabilities (338)
------------------
Total purchase price $17,961
==================
The allocation of the purchase price to assets acquired and
liabilities assumed is based on preliminary estimates and certain
assumptions that the Company believes are reasonable under the
circumstances and will be adjusted in a subsequent period upon
finalization of such estimates and assumptions.
During the quarter ended March 31, 2004, the Company acquired several
other ownership interests. In March 2004, the Company acquired a 19.9%
ownership interest in Cliff Freeman + Partners LLC ("CF") in a
transaction accounted for under the equity method of accounting. CF is
a New York based advertising agency. CF has long been recognized for
its creative abilities, winning numerous national and international
advertising awards, and as such was acquired by the Company to enhance
the creative talent within the MDC Partners Marketing Communications
segment of businesses. Also during the quarter, the Company acquired
further equity interests in the existing subsidiaries of Allard
Johnson Communications Inc. and Targetcom LLC, as well as several
other immaterial investments. In aggregate, as part of these
acquisitions, the Company paid $3,076 in cash and incurred transaction
costs of approximately $397. Under the terms of the CF agreement, the
selling interestholders could receive additional cash and/or share
consideration after two years based upon achievement of certain
predetermined cumulative earnings targets. Based on current earnings
levels, the additional consideration would be nil. Such contingent
consideration will be accounted for as goodwill when it becomes
determinable.
Exclusive of future contingent consideration, the aggregate purchase
price of the net assets acquired in these transactions was
approximately $3,473. The purchase price was allocated to the net
assets acquired as follows:
Assets $2,462
Goodwill and intangible assets 3,003
Liabilities (1,992)
--------------------
Total purchase price $3,473
====================
The allocation of the purchase price to assets acquired and
liabilities assumed is based on preliminary estimates and certain
assumptions that the Company believes are reasonable under the
circumstances and will be adjusted in a subsequent period upon
finalization of such estimates and assumptions. The Company's
consolidated financial statements include the results of operations
and balance sheet, accounted for on a consolidated basis except for
CF, which is accounted for on an equity basis due to the significant
influence of the management of the operation obtained through
contractual rights. During this period, the aggregated operations of
these acquisitions did not have a material effect on the Company's
results of operations.
The following unaudited pro forma results of operations of the Company
for the three months ended March 31, 2004 and 2003 assume that the
acquisition of the operating assets of KBP, CF and the further
interest in Accent had occurred on January 1, 2004 and 2003,
respectively. These unaudited pro forma results are not necessarily
indicative of the actual results of operations that would have been
achieved nor are they necessarily indicative of future results of
operations. The unaudited pro forma results may also require
adjustment pending finalization of the purchase price allocation to
the assets and liabilities acquired.
Three Months Ended March 31,
2004 2003
------------- --------------
Revenues $78,708 $93,138
Net (loss) income (780) 2,017
Earnings per share:
Basic - net income (loss) ($0.04) $0.11
Diluted - net income (loss) (0.04) 0.09
9. GAIN ON SALE OF AFFILIATE
In February 2004, the Company sold its remaining 20% interest in
Custom Direct Income Fund (the "Fund") through the exchange of its
interest in the Fund for the settlement of the $26,344 (C$34,155) of
adjustable rate exchangeable securities issued on December 1, 2003.
Based on the performance of the Fund for the period ended December 31,
2003, the Company was entitled to exchange its shares of Custom
Direct, Inc. for units of the Fund. Upon the occurrence of certain
events, the adjustable rate exchangeable securities could be exchanged
for units of the Fund. The Company delivered the Units of the Fund on
February 13, 2004 in full settlement of the adjustable rate
exchangeable securities.
10. SUBSEQUENT EVENT
Pursuant to the trust indenture, as amended, governing the Company's
7% subordinated unsecured convertible debentures due January 8, 2007
(the "Debentures"), the Company announced on April 5, 2004 that it
would redeem the Debentures on May 5, 2004 (the "Redemption Date"), at
a redemption price equal to the aggregate principal amount, and
accrued and unpaid interest. MDC has elected to satisfy its obligation
to pay the aggregate principal amount of the Debentures payable on
redemption by the issuance of Class A Subordinate Voting Shares of the
Company. Approximately $36.6 million (Canadian $48 million) aggregate
principal amount of Debentures is outstanding.
The number of Class A Subordinate Voting Shares issuable to holders of
Debentures on redemption will be approximately 2.58 million Class A
Subordinate Voting Shares. The Company is not required to issue any
fractional Class A Subordinate Voting Shares. Accrued interest on the
Debentures up to the Redemption Date will be paid in cash. No interest
will continue to be payable on the Debentures from and after the
Redemption Date.
11. SHARE CAPITAL
Changes to the Company's issued and outstanding share capital during
the three months ended March 31, 2004 are as follows:
Class A Shares Amount
-------------- -------------
Balance, January 1, 2004 18,369,451 $115,861
Shares acquired and cancelled pursuant to a normal course issuer bid (105,000) (1,468)
Share options exercised 69,807 632
Shares issued - private placement 120,919 1,409
Shares issued - acquisitions (Note 8) 985,194 14,951
Shares issued upon conversion of Class B shares 447,968 134
-------------- -------------
Balance, March 31, 2004 19,888,339 131,519
-------------- -------------
Class B
Balance, January 1, 2004 450,470 135
Shares converted to Class A shares (447,968) (134)
-------------- -------------
Balance, March 31, 2004 2,502 1
-------------- -------------
Total Class A and Class B share capital 19,890,841 $131,520
============== =============
During the first quarter of 2004, the Company completed a private
placement issuing 120,919 shares at an average price of $11.65 per
share and issuing 120,919 warrants with exercise prices ranging from
Canadian $15.72 to Canadian $19.13 and expiring in March 2009. The
Company undertook the private placement as a means to provide the
Company's Board of Directors and potential Board members to increase
their share holdings in the Company in order to further align their
interests with those of the Company. As a result of the offering, a
stock-based compensation charge in the amount of $1.0 million was
taken in the first quarter to account for the fair value of the
benefits conveyed to the recipients of the awards on the granting of
warrants and the issuing of shares at a price less than the trading
value on the day of issuance.
On February 26, 2004 the Company's then controlling shareholder, Miles
S. Nadal (the Company's Chairman and Chief Executive Officer) gave
formal notice to the corporation's Board of Directors that he had
initiated the process to affect conversion of 100% of his Class B
multiple voting shares into Class A Subordinate Voting Shares on a
one-for-one basis, without any cash or non-cash consideration. The
conversion was completed. Mr. Nadal's equity interest in the Company
prior to the conversion was approximately 20.2%, and he controlled
44.9% of the voting rights attached to the corporation. Prior to the
conversion Mr. Nadal owned 447,968 Class B multiple voting shares,
which represented 99% of the class and carry 20 votes per share, in
addition to 3,400,351 Class A Subordinate Voting Shares, which carry
one vote per share. After the conversion, both Mr. Nadal's equity
interest and voting interest in the Company are approximately 20.2%,
or 3,848,319 Class A Subordinated Voting Shares.
Share option transactions during the three months ended March 31, 2004
are summarized as follows:
Options Outstanding Options Exercisable
------------------------------------ ---------------------------------
Weighted Weighted
Average Number Average Price Number Price per
Outstanding per Share Outstanding Share
---------------- ---------------- --------------- -------------
Balance, beginning of period 2,066,728 $6.60 870,979 $7.82
Granted 44,052 11.70
Exercised (69,807) 9.09
Expired and cancelled (622) 10.05
----------------
Balance, end of period 2,040,351 $6.54 1,000,507 $7.60
================
Shares options outstanding as at March 31, 2004 are summarized as
follows:
Options Outstanding Options Exercisable
--------------------------------------------------- --------------------------------
Range of Outstanding Weighted Weighted Exercisable Weighted
Number Average Average Price Number Average Price
Exercise Prices Contractual Life per Share per Share
- ---------------------------- ----------------- ----------------- --------------- ---------------- ---------------
$2.94 - $4.50 770,535 3.6 $4.08 322,813 $4.06
$4.51 - $6.00 518,865 4.1 $5.53 117,349 $5.52
$6.01 - $9.00 347,153 5.0 $7.27 273,852 $7.36
$9.01 - $15.30 390,325 2.9 $11.02 273,020 $11.21
$23.00 - $42.50 13,473 1.2 $42.33 13,473 $42.33
Warrants issued and outstanding as of March 31, 2004 are as follows:
Class A Stock
Warrants
-----------------
Balance at December 31, 2002 -
Warrants issued (a) 507,146
-----------------
Balance at December 31, 2003 507,146
Warrants issued (b) 626,092
-----------------
Balance at March 31, 2004 1,133,238
=================
(a) During the year ended December 31, 2003, the Company issued
507,146 warrants with a weighted average exercise price of
Canadian $14.28 and terms of two to five years.
(b) During the three months ended March 31, 2004, the Company
issued 626,092 warrants with a weighted average exercise price
of Canadian $17.71 and a term of five years.
12. CONTINGENCIES
In addition to the consideration paid by the Company in respect of its
acquisitions, additional consideration may be payable based on the
achievement of certain threshold levels of earnings. Should the
current level of earnings be maintained by these acquired companies,
additional consideration of approximately $6 million could be earned
in 2004 and 2005, of which approximately $5 million would be payable
in shares of the Company.
Owners of interests in certain of the Company's subsidiaries and
investments have the right in certain circumstances to require the
Company to purchase additional ownership stakes. The exercise of these
rights at their earliest contractual date would result in obligations
of the Company to fund related amounts during the period 2004 to 2010.
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, and the growth rate of the earnings of the
relevant subsidiary during the period. The Company has not received
any notices to exercise such rights that are not currently reflected
on the Company's balance sheet.
The Company has agreed to provide to its Chairman, President and Chief
Executive Officer a bonus of Canadian $10 million in the event that
the market price of the Company's Class A subordinate voting shares is
Canadian $30 per share or more for a specified period of time. The
after tax proceeds of such bonus are to be applied first as repayment
of any outstanding loans due to the Company from this officer.
In connection with certain dispositions of assets and/or businesses,
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
relate to a liability retained by the Company. These types of
indemnification guarantees typically extend for a number of years.
The Company is unable to estimate the maximum potential liability for
these indemnifications as the underlying agreements do not always
specify a maximum amount and the amounts are dependent upon the
outcome of future contingent events, the nature and likelihood if
which cannot be determined at this time.
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
when those losses are probable and estimable.
13. CANADIAN GAAP RECONCILIATION
During the third quarter of fiscal 2003, the Company changed its
reporting currency from Canadian dollars to US dollars. The
comparative financial information for the three months ended March 31,
2003 prepared under Canadian GAAP included in this reconciliation
differ from amounts previously reported as a result of the change in
reporting currency to US dollars. The change in reporting currency had
no impact on the measurement of earnings under Canadian GAAP. Under
Canadian securities requirements, the Company is required to provide a
reconciliation setting out the differences between US and Canadian
GAAP as applied to the Company's financial statements for the interim
periods and years ended in the fiscal periods for 2004 and 2005. This
required disclosure for the three months ended March 31, 2004 and 2003
is set out as follows.
The reconciling items under Canadian GAAP, are as follows:
Convertible Notes
Under US GAAP, the convertible notes are classified entirely as debt.
Accordingly, interest expense is recorded based upon the stated
interest rate associated with the underlying debt.
Under Canadian GAAP, the Company has classified the convertible notes
as equity as the Company has the ability and intent to satisfy the
obligation on redemption or maturity in freely tradeable Class A
shares. Under Canadian GAAP, the Company has recorded an amount in
long-term and current debt representing the present value of the
future interest payments owing on the convertible debt. The interest
in respect of the convertible debt is recorded as a credit on an
account of the equity portion of the compound financial instrument
such that the equity component is accreted to the face of the
convertible debt upon maturity.
This difference results in a reclassification on the balance sheet
between long-term debt and equity, and a reduction in the interest
expense for the amount of the accretion that is not expensed for
Canadian GAAP purposes.
Proportionate Consolidation of Affiliate
Under US GAAP, joint ventures in which the Company owns less than a
50% interest are accounted for under the equity method. Under Canadian
GAAP, joint ventures are accounted for on the proportionate
consolidation method whereby the Company consolidates on a
line-by-line basis their interest in the financial position and
results of operations and cash flows of the joint venture.
Other Adjustments
Other adjustments represent cumulative translation differences as a
result of timing differences between recognition of certain expenses
under US and Canadian GAAP.
Three Months Ended March 31, 2004
Proportionate
US Convertible Consolidation of Canadian
GAAP Notes Affiliate GAAP
---------------- ------------------ ------------------- ---------------------
Revenue
Services $56,266 $ - $5,151 $61,417
Products 18,847 - - 18,847
---------------- --------------- ----------------- -----------------
75,113 - 5,151 80,264
---------------- --------------- ----------------- -----------------
Operating Expenses:
Cost of products sold 11,567 - - 11,567
Salary and related costs 36,768 - 1,979 38,747
Office and general expenses 29,115 - 755 29,870
Depreciation and amortization 2,343 - 86 2,429
---------------- --------------- ----------------- -----------------
79,793 - 2,820 82,613
---------------- --------------- ----------------- -----------------
Operating Profit (Loss) (4,680) - 2,331 (2,349)
---------------- --------------- ----------------- -----------------
Other Income (Expenses)
Gain on sale of affiliate 7,165 - - 7,165
Interest expense (2,313) 521 (12) (1,804)
Interest income 420 - - 420
---------------- --------------- ----------------- -----------------
5,272 521 (12) 5,781
---------------- --------------- ----------------- -----------------
Income Before Income Taxes, Equity in 592 521 2,319 3,432
Affiliates and Minority Interests
Income Taxes 1,753 - 873 2,626
---------------- --------------- ----------------- -----------------
Income (Loss) Before Equity in
Affiliates and Minority Interests (1,161) 521 1,446 806
Equity in Affiliates 1,446 - (1,446) -
Minority Interests (1,303) - - (1,303)
---------------- --------------- ----------------- -----------------
Net Income (Loss) ($1,018) $521 $ - ($497)
================ =============== ================= =================
As at March 31, 2004 Proportionate
US Convertible Consolidation of Other Canadian
GAAP Notes Affiliate Adjustments GAAP
-------------- --------------- ------------------- -------------- ---------------
ASSETS
Current Assets
Cash and cash equivalents $59,158 $ - $4,522 $ - $63,680
Account receivables 96,958 - 11,903 - 108,861
Expenditures billable to
clients 8,294 - 5,127 - 13,421
Inventories 7,851 - - - 7,851
Prepaid expenses and other
current assets 6,844 - 371 - 7,215
------------- ------------ --------------- ----------- ------------
Total Current Assets 179,105 - 21,923 - 201,028
Capital assets 46,543 - 2,734 - 49,277
Investment in Affiliates 19,579 - (18,502) - 1,077
Goodwill 129,917 - 16,059 - 145,976
Deferred Tax Benefits 10,097 - - - 10,097
Other Assets 5,615 - - - 5,615
------------- ------------ --------------- ----------- ------------
Total Assets $390,856 $ - $22,214 $ - $413,070
============= ============ =============== =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and other
liabilities $132,162 $ - $21,355 $ - $153,517
Advance billings 26,869 - 34 - 26,903
Current portion of long-term
debt 31,554 2,128 - - 33,682
Deferred acquisition
consideration 1,113 - - - 1,113
------------- ------------ --------------- ----------- ------------
Total Current Liabilities 191,698 2,128 21,389 215,215
Long-Term Debt 52,543 - - - 52,543
Convertible Notes 36,605 (32,532) - - 4,073
Other Liabilities 483 - 825 - 1,308
Minority Interests 1,195 - - - 1,195
------------- ------------ --------------- ----------- ------------
Total Liabilities 282,524 (30,404) 22,214 - 274,334
------------- ------------ --------------- ----------- ------------
Shareholders' Equity
Share capital 131,520 1,296 - - 132,816
Share capital to be issued 3,909 - - - 3,909
Contributed surplus 5,321 - - - 5,321
Retained earnings (deficit) (26,166) (1,296) - (816) (28,278)
Other paid-in capital - 30,404 30,404
Accumulated other
comprehensive income (loss) (6,252) - - 816 (5,436)
------------- ------------ --------------- ----------- ------------
Total Shareholders' Equity 108,332 30,404 - - 138,736
------------- ------------ --------------- ----------- ------------
Total Liabilities and
Shareholders' Equity $390,856 $ - $22,214 $ - $413,070
============= ============ =============== =========== ============
Three Months Ended March 31, 2004
Proportionate
US Consolidation of Canadian
GAAP Convertible Notes Affiliate GAAP
------------------ -------------------- ------------------ -----------------
Net income (loss) ($1,018) $521 $ - ($497)
Earnings of affiliates, net of
distributions 581 - (581) -
Gain on sale of affiliate (7,165) - - (7,165)
Depreciation and amortization 2,343 - 86 2,429
Deferred income taxes 2,407 - - 2,407
Stock-based compensation 5,922 - - 5,922
Minority interest and other (75) - - (75)
--------------- --------------- ------------------- -------------
2,995 521 (495) 3,021
Changes in non-cash working capital (4,732) - 84 (4,648)
--------------- --------------- ------------------- -------------
(1,737) 521 (411) (1,627)
--------------- --------------- ------------------- -------------
Investing activities
Acquisitions, net of cash
acquired 3 - - 3
Capital expenditures (3,141) - (178) (3,319)
Other assets, net 115 - (42) 73
--------------- --------------- ------------------- -------------
(3,023) - (220) (3,243)
--------------- --------------- ------------------- -------------
Financing activities
Proceeds from issuance of long-
term debt - - - -
Repayment of long-term debt (2,188) (521) - (2,709)
Issuance of share capital 2,043 - - 2,043
Purchase of share capital (1,470) - - (1,470)
--------------- --------------- ------------------- -------------
(1,615) (521) - (2,136)
--------------- --------------- ------------------- -------------
Foreign exchange effect on cash (1,193) - - (1,193)
--------------- --------------- ------------------- -------------
Net increase (decrease) in cash (7,568) - (631) (8,199)
Cash beginning of period 66,726 - 5,153 71,879
--------------- --------------- ------------------- -------------
Cash end of period $59,158 $ - $4,522 $63,680
=============== =============== =================== =============
Three Months Ended March 31, 2003
Proportionate
US Convertible Consolidation of Canadian
GAAP Notes and Other Affiliate GAAP
------------------- ----------------- ---------------------- -----------------
Revenue
Services $39,689 $ - $2,744 $42,433
Products 43,525 - - 43,525
---------------- -------------- ------------------ ----------------
83,214 - 2,744 85,958
---------------- -------------- ------------------ ----------------
Operating Expenses:
Cost of products sold 18,729 - - 18,729
Salary and related costs 27,139 - 1,409 28,548
Office and general expenses 28,362 - 513 28,875
Depreciation and amortization 3,365 185 39 3,589
---------------- -------------- ------------------ ----------------
77,595 185 1,961 79,741
---------------- -------------- ------------------ ----------------
Operating Profit (Loss) 5,619 (185) 783 6,217
---------------- -------------- ------------------ ----------------
Other Income (Expense)
Interest expense (4,326) 425 - (3,901)
Interest income 93 - 16 109
---------------- -------------- ------------------ ----------------
(4,233) 425 16 (3,792)
---------------- -------------- ------------------ ----------------
Income Before Income Taxes, Equity
in Affiliates and Minority Interests 1,386 240 799 2,425
Income Taxes (Recovery) (21) 155 301 435
---------------- -------------- ------------------ ----------------
Income Before Equity in Affiliates
and Minority Interests 1,407 85 498 1,990
Equity in Affiliates 498 - (498) -
Minority Interests (1,018) - - (1,018)
---------------- -------------- ------------------ ----------------
Net Income $887 $85 $ - $972
================ ============== ================== ================
As at December 31, 2003 US Convertible Proportionate Other Adjustments Canadian
Consolidation of
GAAP Notes Affiliate GAAP
-------------- ---------------- -------------------- ------------------- ----------
ASSETS
Current Assets
Cash and cash equivalents $66,726 $ - $5,153 $ - $71,879
Account receivables 60,115 - 10,407 - 70,522
Expenditures billable to clients 7,422 - 3,035 - 10,457
Inventories 6,795 - - - 6,795
Prepaid expenses and other current
assets 4,924 - 144 - 5,068
--------------- ------------- --------------- -------------- -----------
Total Current Assets 145,982 - 18,739 - 164,721
Capital Assets 42,025 - 2,641 - 44,666
Investment in Affiliates 36,084 - (19,208) - 16,876
Goodwill 87,479 - 16,059 - 103,538
Deferred Tax Benefits 12,580 - - - 12,580
Other Assets 6,030 - - - 6,030
--------------- ------------- --------------- -------------- -----------
Total Assets $330,180 $ - $18,231 $ - $348,411
=============== ============= =============== ============== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and other liabilities $74,050 $ - $17,239 - $91,289
Advance billings 13,391 - 125 - 13,516
Current portion of long-term debt 16,486 2,160 - - 18,646
Deferred acquisition consideration 1,113 - - - 1,113
--------------- ------------- --------------- -------------- -----------
Total Current Liabilities 105,040 2,160 17,364 - 124,564
Long-Term Debt 95,946 - - - 95,946
Convertible Notes 37,794 (33,011) - - 4,783
Other Liabilities 516 - 867 - 1,383
Minority Interests 2,533 - - - 2,533
--------------- ------------- --------------- -------------- -----------
Total Liabilities 241,829 (30,851) 18,231 - 229,209
--------------- ------------- --------------- -------------- -----------
Shareholders' Equity
Share capital 115,996 1,296 - - 117,292
Share capital to be issued - - - - -
Contributed surplus 3,272 - - - 3,272
Retained earnings (deficit) (25,148) (1,296) - (816) (27,260)
Other paid-in capital - 30,851 - - 30,851
Accumulated other comprehensive
income (loss) (5,769) - - 816 (4,953)
--------------- ------------- --------------- -------------- -----------
Total Shareholders' Equity 88,351 30,851 - - 119,202
--------------- ------------- --------------- -------------- -----------
Total Liabilities and Shareholders' Equity $330,180 $ - $18,231 $ - $348,411
=============== ============= =============== ============== ===========
Three Months Ended March 31, 2003
US Convertible Proportionate Other Adjustments Canadian
Consolidation of
GAAP and Other Notes Affiliate GAAP
------------------ ---------------- -------------------- ------------------- -----------------
Net income (loss) $887 $270 $ - ($185) $972
Earnings of affiliates, net of
distributions (1,094) - 1,094 - -
Depreciation and amortization 3,365 - 39 185 3,589
Deferred income taxes 134 155 - - 289
Non-cash interest 954 - - - 954
Minority interest and other (151) - - - (151)
-------------- ------------- ---------------- ---------------- ----------------
4,095 425 1,133 - 5,653
Changes in non-cash working
capital (4,128) - (1,025) - (5,153)
-------------- ------------- ---------------- ---------------- ----------------
(33) 425 108 - 500
-------------- ------------- ---------------- ---------------- ----------------
Investing activities
Acquistions, net of cash (1,115) - - - (1,115)
acquired
Capital expenditures (2,267) - (518) - (2,785)
Other assets, net (179) - - - (179)
-------------- ------------- ---------------- ---------------- ----------------
(3,561) - (518) - (4,079)
-------------- ------------- ---------------- ---------------- ----------------
Financing activities
Proceeds on issuance of long-
term debt 159 - - - 159
Repayment of long-term debt (1,884) (425) - - (2,309)
-------------- ------------- ---------------- ---------------- ----------------
(1,725) (425) - - (2,150)
-------------- ------------- ---------------- ---------------- ----------------
Foreign exchange effect on cash 717 - - - 717
-------------- ------------- ---------------- ---------------- ----------------
Decrease in cash (4,602) - (410) - (5,012)
Cash beginning of period 32,250 - 5,538 - 37,788
-------------- ------------- ---------------- ---------------- ----------------
Cash end of period $27,648 $ - $5,128 $ - $32,776
============== ============= ================ ================ ================
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 2004 MEANS THE PERIOD BEGINNING JANUARY 1, 2004, AND
ENDING DECEMBER 31, 2004). THIS REPORT CONTAINS FORWARD LOOKING STATEMENTS
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 WITH
RESPECT TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS, AND BUSINESS OF THE
COMPANY. THESE FORWARD LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND
UNCERTAINTIES. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH MATTERS WILL BE
REALIZED. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THE
FOLLOWING POSSIBILITIES: (1) COMPETITIVE PRESSURE IN THE COMPANY'S INDUSTRY
INCREASES SIGNIFICANTLY; (2) GENERAL ECONOMIC CONDITIONS ARE LESS FAVORABLE
THAN EXPECTED; (3) CHANGES IN THE FINANCIAL MARKETS AFFECTING THE COMPANY'S
FINANCIAL STRUCTURE AND THE COMPANY'S COST OF CAPITAL AND BORROWED MONEY; AND
(6) THE UNCERTAINTIES INHERENT IN INTERNATIONAL OPERATIONS AND FOREIGN CURRENCY
FLUCTUATIONS. THE COMPANY HAS NO DUTY UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995 TO UPDATE THE FORWARD LOOKING STATEMENTS IN THIS QUARTERLY
REPORT ON FORM 10-Q AND THE COMPANY DOES NOT INTEND TO PROVIDE SUCH UPDATES.
The following discussion focuses on the operating performance of MDC Partners
Inc. (the "Company") for the three-month periods ended March 31, 2004 and 2003,
and the financial condition of the Company as at March 31, 2004. This analysis
should be read in conjunction with the consolidated interim 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, 2003. All amounts
are in U.S. dollars unless otherwise stated.
COMBINED REVENUE, OPERATING COSTS AND OPERATING PROFITS
Many of the Company's marketing communications businesses have significant
other interestholders and in some cases, the Company operates the business as a
joint venture with these other interestholders. The Company's management
oversees the businesses as active managers rather than a passive investor,
reviewing all aspects of their operations with the management of these
businesses, regardless of the Company's ownership interest. Within the
marketing communications industry, the monitoring of operating costs, such as
salary and related costs, relative to revenues, among other things, are key
performance indicators. Consequently, the Company's management reviews,
analyses and manages these elements of the businesses as a whole, rather than
just being concerned with it as an investment. Management believes the
presentation of the whole of the business comprising this request also provides
readers with a complete view of the elements of all operations that
significantly affect the Marketing Communications reportable segment's
profitability. Crispin Porter + Bogusky, LLC, ("CPB"), owned 49% by the Company
and operated in joint venture with the other interest holders, is required to
be equity accounted for under US GAAP. For purposes of the Management
Discussion and Analysis, the results of operations of CPB have been combined
with the other business of the Marketing Communications reportable segment and
the alternate operating results have been described as "Combined". A
reconciliation of "Combined" results of operations of the Marketing
Communications reportable segment to the GAAP reported results of operations
has been provided by the Company in the tables included in the Management
Discussion and Analysis.
RESULTS OF OPERATIONS:
FOR THE THREE MONTHS ENDED MARCH 31, 2004
Combined As Reported under US GAAP
-------------------- -------------------------------------------------------------
Less
Combined Marketing Equity Marketing Secure Products Corporate &
Communications Affiliates Communications International Other Total
--------------- ----------- --------------- ------------ ---------------- ----------
Revenue $66,432 $10,513 $55,919 $18,847 $347 $75,113
--------------- ----------- --------------- ------------ ---------------- ----------
Operating Expenses:
Cost of products sold - - - 11,567 - 11,567
Salary and related costs 30,015 4,039 25,976 3,476 7,316 36,768
General and other
operating costs 26,754 1,541 25,213 2,401 1,501 29,115
Depreciation and
amortization 1,794 176 1,618 675 50 2,343
--------------- ----------- --------------- ------------ ---------------- ----------
58,563 5,756 52,807 18,119 8,867 79,793
--------------- ----------- --------------- ------------ ---------------- ----------
Operating Profit (Loss) $7,869 $4,757 $3,112 $728 ($8,520) (4,680)
=============== =========== =============== ============ ================
Other Income (Expense)
Gain on sale of affiliate 7,165
Interest expense, net (1,893)
----------
Income Before Income Taxes, Equity in Affiliates and Minority Interests 592
Income Taxes 1,753
----------
Loss Before Equity in Affiliates and Minority Interests (1,161)
Equity in Affiliates 1,446
Minority Interests (1,303)
----------
Net Income (Loss) ($1,018)
==========
FOR THE THREE MONTHS ENDED MARCH 31, 2003
Combined As Reported under US GAAP
----------------- ------------------------------------------------------------------
Combined Secure
Marketing Less Equity Marketing Products Corporate &
Communications Affiliates Communications International Other Total
----------------- --------------- ----------------- --------------- ------------- ------------------
Revenue $44,992 $5,601 $39,391 $43,525 $298 $83,214
----------------- ----------- -------------- ----------- ---------- ---------------
Operating Expenses:
Cost of products sold - - - 18,729 - 18,729
Salary and related
costs 22,881 2,876 20,005 6,083 1,051 27,139
General and other
operating costs 16,617 1,047 15,570 12,050 742 28,362
Depreciation and
amortization 1,933 80 1,853 1,174 338 3,365
----------------- ----------- -------------- ----------- ---------- ---------------
41,431 4,003 37,428 38,036 2,131 77,595
----------------- ----------- -------------- ----------- ---------- ---------------
Operating Profit (Loss) $3,561 $1,598 $1,963 $5,489 ($1,833) 5,619
================= =========== ============== =========== ==========
Interest expense, net (4,233)
---------------
Income Before Income Taxes, Equity in Affiliates and Minority Interest 1,386
Income Taxes(Recovery) (21)
---------------
Income Before Equity in Affiliates and Minority Interests 1,407
Equity in Affiliates 498
Minority Interests (1,018)
---------------
Net Income $887
===============
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
Marketing Communications
Marketing Communications revenue on a Combined basis was $66.4 million in the
quarter, 48% more than the $45.0 million in revenue reported in the first
quarter of 2003. The increase in Combined revenue as compared to the same
quarter in 2003 resulted primarily from several significant new business
developments in the quarter as described below. The growth also resulted from
the acquisition of kirshenbaum bond + partners, LLC ("KBP") at the end of
January 2004, which contributed $7.4 million of revenue in the quarter.
Excluding revenue generated by KBP in 2004, Combined revenue increased 31%.
Increases in the value of the Canadian dollar and Pound Sterling, measured in
U.S. dollars, as compared to the same period in 2003 had the effect of
increasing Combined revenue by approximately $1.8 million during the period. On
a pro forma basis, comparing a full three months of operations in both 2004 and
2003 for businesses operated by the segment on March 31, 2004, Combined revenue
improved by approximately 26% year over year. This reflected very significant
pro forma Combined revenue growth in the US businesses as well as the Canadian
operations during the quarter. The growth in Combined proforma revenue related
to US operations is attributable most notably to incremental revenue that the
Company's equity accounted affiliate, CPB, , earned from its new client, Burger
King, and from incremental revenue earned by subsidiaries Source Marketing, LLC
and Accent Marketing Services, LLC, in connection with services performed for
clients in the financial and telecommunications industries.
The positive organic growth, particularly in the US, has resulted in a shift in
the geographic mix of Combined revenue. Of the Combined revenue for the
quarter, 77% was derived from operations in the United States, 18% was derived
from operations in Canada and 5% was derived from operations in the United
Kingdom. This compares to 71%, 24% and 5%, respectively, in first quarter of
2003.
During the first quarter of 2004 the Marketing Communications Division saw a
relative increase, as compared to the same quarter in 2003, in revenue from
financial and telecommunications-based clients, and a relative decrease in
revenue from healthcare, media and, to a lesser extent, consumer products-based
clients In dollar terms, significant increases were noted in revenues from
financial-, consumer product- and telecommunications industry-based clients.
The composition of revenues added due to business acquisitions in the first
quarter of 2004, principally KBP, did not have a material effect on Combined
revenue composition, as revenue continues to be derived primarily from clients
in the consumer and financial industries.
Acquisitions completed during the first quarter did increase both total revenue
and the proportionate share of revenue from advertising services, as compared
to the "below-the-line" services. For the first quarter of 2004, Combined
revenue from advertising services represented approximately 43% of Combined
revenue as compared to 35% for the same period in 2003. Excluding the effects
of the KBP acquisition, advertising services would have increased to 39% in the
quarter, as the division's existing operations obtained several new advertising
clients during the quarter.
Combined operating costs increased 44%, as compared to the same quarter in
2003. This rate of growth is lower than the 48% rate of growth exhibited by
Combined revenues, during the same period. Increases in staffing levels did not
occur at the same rate as increases in revenues from new business development.
In addition, the consolidation of Maxxcom's head office into the "Corporate and
Other" division upon the privatization of Maxxcom helped minimize the increase
in salary costs. Combined salary and related costs increased approximately 31%,
as compared to the same quarter in 2003. Combined general and other operating
costs, which include production costs, increased approximately 61% reflecting a
shift in the mix of business to sales promotional, direct marketing and
database management services. Excluding the effects of the KBP acquisition,
Combined revenues increased approximately 31%, while Combined operating costs
increased 27%, resulting in a Combined operating margin of 10.8% and a 79%
increase in Combined operating income. Following the acquisition of KBP,
Combined operating income improved by approximately 121%, as compared to the
same quarter in 2003, increasing operating margins to 11.8% for the quarter, as
compared to 7.9 % in the same quarter last year.
Had Combined operating income been adjusted on a pro forma basis, in the same
manner as described above relative to revenue, Combined operating income would
have increased by approximately 49%, as compared to the same quarter in 2003,
from approximately $5.7 million to approximately $8.5 million.
Secure Products International
Secure Products International revenue totaled $18.8 million for the quarter
ended March 31, 2004, $24.7 million or 57% lower than the $43.5 million
reported for the same period of 2003. This decrease related to the disposition
of Custom Direct ("CDI") in 2003. Revenue of the remaining operations of the
Secure Products International Division increased from $14.6 million in the
first quarter of 2003 to $18.8 million for the same period this year. The
significant increase in revenue of the stamp operations of Ashton Potter,
primarily due to increased production related to the USPS contract awarded in
2003, combined with the increase in revenues of Placard, the Australian card
operation, and of Mercury, the Canadian ticketing business, and were partially
offset by a decrease in revenues of the Canadian card operation, Metaca.
Operating costs incurred by the Secure Products International Division amounted
to $18.1 million for the first quarter of 2004, compared to $38.0 million in
the first quarter of 2003, however, the 2003 results include $23.4 million of
costs related to CDI. After adjusting for those costs, operating expenses
increased $3.5 million compared to Q1 2003, but decreased to 96.1%, when
expressed as a percentage of revenue, compared to 100.5% last year on the same
basis, cost of sales, salaries and related costs and depreciation increased
marginally as a percentage of revenue in 2004, as compared to the same quarter
in 2003, and general and other operating expenses declined to 12.7% of revenue
as compared to 18.4% of revenue for the same quarter in 2003.
In the first quarter of 2004, the Secure Products International Division
contributed operating profit of $0.7 million, a decrease of $4.8 million from
the $5.5 million operating profits achieved in the prior-year first quarter,
primarily as a result of the sale of CDI. Operating profit of the remaining
operations of Secure Products International improved $0.8 million from the $0.1
million operating loss incurred in Q1 2003 reflective of increased production
at Ashton Potter and partially offset by declines at Metaca.
Corporate and Other
Revenue from rental property attributable to the Corporate and Other Division
for the first quarter of 2004 was $0.3 million relatively unchanged from the
same quarter in 2003.
Operating costs, at $8.9 million, increased $6.7 million compared to the
quarter ended March 31, 2003, primarily as a result of a $5.9 million
stock-based compensation charge recorded in 2004 related to stock appreciation
rights and options. Corporate and other costs also increased as a result of the
merger of head offices upon the privatization of Maxxcom Inc. and increased
compliance costs.
As a result, the operating loss of the Corporate and Other Division was $8.5
million for the first quarter of 2004 versus $1.8 million for the first quarter
of 2003.
Gain on Sale of Affiliate
The Company recorded a gain of $7.2 million on the divestiture of its remaining
interest in CDI on the adjustable rate exchangeable securities settlement in
February 2004.
Net Interest, Expense
Net interest expense for the first quarter of 2004 on a consolidated basis was
$1.9 million, $2.3 million lower than the $4.2 million incurred during the
first quarter of 2003. Interest costs of $2.2 million in 2003 was related to
the 10.5% senior notes repaid with proceeds from the sale of CDI Interest
expense of the remaining operations increased $0.2 million in 2004 due to
higher average borrowings under Marketing Communications facilities. Interest
income increased by $0.3 million due to higher cash balances at certain
agencies and head office in the first quarter of 2004.
Income Taxes
Income tax expense recorded in the quarter ended March 31, 2004, was $1.8
million, compared to an insignificant recovery for the same period in 2003. The
Company did not recognize a tax benefit related to stock-based compensation and
losses incurred in certain jurisdictions, creating an income tax expense in
excess of normal rates.
Income (Loss) After Income Taxes
The consolidated loss after income taxes was $1.2 million for the first quarter
of 2004, representing a $2.6 million decrease from the $1.4 million of income
earned during the first quarter of 2003. The change was primarily due to a
charge incurred for stock-based compensation and income earned in 2003 related
to CDI, partially offset by the gain recorded on the settlement of the
exchangeable securities and the divestiture of the remaining interest in CDI.
Equity in Affiliates
Equity in affiliates represents the income attributable to equity-accounted
affiliate operations, principally CPB. For the first quarter of 2004, income of
$1.4 million was recorded, $0.9 million higher than the $0.5 million earned in
the first quarter of 2003, primarily due to significant new business wins in
2004.
Minority Interests
Minority interest expense was $1.3 million for the first quarter of 2004, up
$0.3 million from the $1.0 million minority interest expense incurred during in
the first quarter of 2004.
Net Income (Loss)
As a result of the foregoing, net loss recorded for the first quarter of 2004
was $1.0 million, compared to net income of $0.9 million reported for the first
quarter of 2003.
LIQUIDITY AND CAPITAL RESOURCES:
Working Capital
At March 31, 2004, the Company had a working capital deficit of $12.6 million
compared to working capital of $40.9 million at December 31, 2003. The $53.5
million decrease is due primarily to cash used in connection with acquisitions
completed in the quarter, the movement of the senior credit facility at Maxxcom
from long-term debt to current portion of long-term debt and a decrease in
working capital in the Marketing Communications subsidiaries. Compared to
December 31, 2003, on a consolidated basis, cash decreased by $7.6 million.
Accounts receivable and expenditures billable to clients increased by $36.8
million and $0.9 million, respectively. Inventory increased by $1.1 million and
prepaid expenses increased by $1.9 million. Accounts payable and accrued
liabilities increased by $58.1 million. Advance billings increased by $13.5
million and the current portion of long-term debt increased by $15.1 million.
At March 31, 2004, Maxxcom had utilized approximately $29 million of its $34
million facility in the form of drawings and letters of credit. Cash and
undrawn available bank credit facilities to support the Company's future cash
requirements, as at March 31, 2004, was approximately $64 million.
Long-term Debt
Long-term debt (including the current portion of long-term debt) at the end of
the first quarter of 2004 was $120.7 million, a reduction of $29.5 million
compared with the $150.2 million outstanding at December 31, 2003, primarily
the result of the settlement of the adjustable rate exchangeable securities in
February 2004. The convertible notes declined $1.2 million in the quarter as a
result of the repurchase of CDN$1.0 million of notes pursuant to a normal
course issuer bid with the remaining reduction related to weakness in the
Canadian dollar. The Company has provided a notice of redemption to Noteholders
whereby the Company will redeem the notes for Class A Subordinate Voting
Shares. The Company will issue approximately 2.58 million shares to redeem the
notes on May 5, 2004.
Deferred Acquisition Consideration (Earnouts)
Acquisitions of businesses by the Company typically include commitments to
contingent deferred purchase obligations. Deferred purchase price obligations
are generally payable annually over a three-year period following the
acquisition date, and are payable based on achievement of certain thresholds of
future earnings and, in certain cases, also based on the rate of growth of
those earnings. At March 31, 2004, approximately $1.1 million of deferred
purchase price obligations relating to prior year acquisitions are reflected in
deferred acquisition consideration on the Company's balance sheet. Based on
various assumptions as to future operating results of the relevant entities,
management estimates that approximately $6 million of further additional
deferred purchase obligations will be earned during 2004 or thereafter. The
actual amount that the Company pays in connection with the obligations may be
materially different from this estimate.
Put Rights of Subsidiaries' Minority Shareholders
Owners of interests in certain of the Marketing Communications 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 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 2004 to 2010.
Except as described below, 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 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.
The Company's management estimates, assuming that the subsidiaries perform over
the relevant future periods at their 2003 earnings levels, that these rights,
if all exercised, could require the Company, in future periods, to pay an
aggregate of approximately $57 million to the owners of such rights to acquire
the remaining ownership interests in the relevant subsidiaries. Of this amount,
the Company is entitled, at its option, to fund approximately $13 million by
the issuance of the Company's share capital.
The actual future amount payable in connection with the exercise of any of the
above described rights cannot be determined because it is dependent on the
future results of operations of the subject businesses and the timing of the
exercise of the rights. The actual amounts the Company pays may be materially
different from these estimates.
If all of the outstanding rights were exercised, the Company would acquire
incremental ownership interests in the relevant subsidiaries entitling the
Company to additional annual operating income before other charges estimated by
management, using the same earnings basis used to determine the aggregate
purchase price noted above, to be approximately $8 million. The actual
additional annual operating income earned by the relevant subsidiaries may be
materially different from this estimate.
The Company expects to fund obligations relating to the rights described above,
if and when they become due, through the issuance of its common shares to the
rights holders, and through the use of cash derived from operations, bank
borrowings, and equity and/or debt offerings. There can be no certainty that
the Company will have adequate means to satisfy its obligations in respect of
the rights described above, if and when such obligations become due.
Approximately $6 million of the estimated $57 million that the Company could be
required to pay subsidiaries' minority shareholders upon the exercise of
outstanding put rights relates to rights exercisable in 2004 in respect of the
securities of four subsidiaries. The Company expects to fund the acquisition of
these interests, if and when they become due, through the use of cash derived
from operations and bank borrowings. Accordingly, the acquisition of any equity
interest in connection with the exercise of these rights in 2004 will not be
recorded in the Company's financial statements until ownership is transferred.
Cash Flow from Operations
Cash flow from operations, including changes in non-cash working capital, for
the first quarter of 2004 was a use of $1.7 million compared to the cash flow
used of less than $0.1 million in the same quarter of 2003, primarily
reflective of the impact of the divestiture of CDI offset partially by the
improved operating profit achieved by both the Marketing Communications
Division and Secure Products International.
Cash flows used in investing activities were $3.0 million for the first quarter
of 2004, compared with $3.6 million in the first quarter of 2003. $1.9 million
of the capital expenditures in the first quarter relate to the Marketing
Communications Division's acquisition of computer and switching equipment with
the balance used to purchase manufacturing equipment in the Secure Products
Division, primarily Ashton Potter.
During the quarter, cash flows used in financing activities amounted to $1.6
million and consisted of a repayment of $2.2 million of long-term indebtedness,
proceeds of $2.0 million from the issuance of share capital through a private
placement and the exercise of options, and $1.5 million used to repurchase
shares of the Company under a normal course issuer bid.
DIFFERENCES IN MD&A PRESENTATION UNDER CANADIAN GAAP
Under Canadian Securities requirements, the Company is required to provide
supplemental information to highlight the significant differences that would
have resulted in the information provided in the MD&A had the Company prepared
the MD&A using Canadian GAAP financial information.
The Company has identified and disclosed the significant differences between
Canadian and US GAAP as applied to its interim consolidated financial
statements for the three months ended March 31, 2004 and 2003 in note 13 to the
condensed consolidated interim financial statements. The primary GAAP
difference is the application under Canadian GAAP of proportionate
consolidation for investments in joint ventures in the marketing communications
businesses, while US GAAP requires equity accounting for such investments. This
GAAP difference does not have a significant impact on the content of the MD&A
as the discussion of the results of the Company's marketing communications
businesses has been presented on a combined basis, consistent with the
Company's segment disclosures in its condensed consolidated interim financial
statements. The Combined financial information has been reconciled to US GAAP
financial information by adjusting for the equity accounting for the joint
ventures in this MD&A as well as in the segment information in note 5 to the
condensed consolidated interim financial statements. If the reconciliation of
the Combined financial information were prepared to reconcile to Canadian GAAP
results, it would have adjusted for the proportionate consolidation of the
joint venture.
CRITICAL ACCOUNTING POLICIES
The following supplemental summary of accounting policies has been prepared to
assist in better understanding the Company's financial statements and the
related management discussion and analysis. Readers are encouraged to consider
this supplement together with the Company's consolidated interim financial
statements and the related notes to the condensed consolidated interim
financial statements 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 "GAAP", requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities including valuation allowance for receivables and deferred tax
assets, accruals for bonus compensation and the disclosure of contingent
liabilities at the date of the financial statements, as well as the reported
amounts of revenue and expenses during a 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.
Acquisitions and Goodwill. A fair value approach is used in testing
goodwill for impairment under SFAS 142 to determine if an other than temporary
impairment has occurred. One approach utilized to determine fair values is a
discounted cash flow methodology. When available and as appropriate,
comparative market multiples are used. Numerous estimates and assumptions
necessarily have to be made when completing a discounted cash flow valuation,
including estimates and assumptions regarding interest rates, appropriate
discount rates and capital structure. Additionally, estimates must be made
regarding revenue growth, operating margins, tax rates, working capital
requirements and capital expenditures. Estimates and assumptions also need to
be made when determining the appropriate comparative market multiples to be
used. Actual results of operations, cash flows and other factors used in a
discounted cash flow valuation will likely differ from the estimates used and
it is possible that differences and changes could be material. Additional
information about impairment testing under SFAS 142 appears in the notes of the
condensed consolidated interim financial statements.
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
minimal tangible net assets and identifiable intangible assets which primarily
consist of customer relationships. Accordingly, a substantial portion of the
purchase price is allocated to goodwill. An annual impairment test is performed
in order to assess that the fair value of the reporting units exceeds their
carrying value, inclusive of goodwill.
A summary of the Company's contingent purchase price obligations,
sometimes referred to as earn-outs, and obligations to purchase additional
interests in certain subsidiary and affiliate companies is set forth in the
"Liquidity and Capital Resources" section of this report. The contingent
purchase price 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 certain.
Additional information about acquisitions and goodwill appears in the
notes to the condensed consolidated interim financial statements of this
report.
Revenue. Marketing Communications substantially all revenue is derived
from fees for services.
Commissions are earned based upon the placement of advertisements in various
media. Revenue is realized when the service is performed, in accordance with
terms of the arrangement with the clients and upon completion of the earnings
process. This includes when services are rendered, generally upon presentation
date for media, when costs are incurred for radio and television production and
when print production is completed and collection is reasonably assured.
Revenue is recorded at the net amount retained when the fee or
commission is earned. In the delivery of certain services to clients, costs are
incurred on their behalf for which the Company is reimbursed. Substantially all
of the reimbursed costs relate to purchases on behalf of clients of media and
production services. There is normally little latitude in establishing the
reimbursement price for these expenses and clients are invoiced for these
expenses in an amount equal to the amount of costs incurred. These reimbursed
costs, which are a multiple of the Company's revenue, are significant. However,
the majority of these costs are incurred on behalf of the largest clients and
the Company's has not historically experienced significant losses in connection
with the reimbursement of these costs by clients.
A small portion of the contractual arrangements with clients includes
performance incentive provisions designed to link a portion of the Company's
revenue to its performance relative to both quantitative and qualitative goals.
This portion of revenue is recognized when the specific quantitative goals are
achieved, or when the performance against qualitative goals is determined by
the client. Additional information about revenue appears in the notes to the
condensed consolidated interim financial statements.
Substantially all of the Secure Products International reportable
segment revenue is derived from the sale of products. Revenue derived from the
stamp operations is realized using the percentage of completion method
determined based on costs of production incurred to date relative to the
expected total costs to be incurred upon completion. Revenue derived from the
sale of tickets and cards is realized when the product is completed and either
shipped, or held in the Company's secure facilities at the written request of
the customer, title to the product has transferred to the customer, and all
bill and hold revenue recognition criteria have been met. Additional
information about revenue appears in the notes to the condensed consolidated
interim financial statements.
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.
RISKS AND UNCERTAINTIES:
Our Annual Report on Form 40-F for the year ended December 31, 2003, provides a
detailed discussion of the risks affecting our operations. As of March 31,
2004, no material change had occurred in our risks from the disclosure
contained in that 40-F.
OUTLOOK:
2004 will be a year of transformation for MDC. Our vision has been to enhance
the conglomerate, simplify the story and focus on the market place that best
positions the Company to deliver premium returns to its shareholders.
Our genesis was in the marketing communications business, our experience and
knowledge is greatest in that area. Our growth strategy is based on empowering
our partners with equity and autonomy. We believe that combination will deliver
accretive investments and attract the best talent. We have identified an
opportunity to structure and complete the final act of our structural
transformation through the monetization of our secure print properties in the
form of an income fund. We anticipate filing a preliminary prospectus of the
fund in the second quarter.
SUPPLEMENTARY FINANCIAL INFORMATION:
The Company reports its financial results in accordance with US GAAP. However,
the Company has included certain non-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. These measures do not have a standardized meaning prescribed by 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative Information About Market Risk
We are currently not invested in market risk sensitive instruments
such as derivative financial instruments or derivative commodity instruments.
Qualitative Information About Market Risk
Our Secure Products International businesses operate in North America
and Australia. Certain North American costs are payable in Canadian dollars
while North American revenues are principally collectible in U.S. dollars. Our
Marketing Communications businesses operate in North America and the United
Kingdom, however each business's revenues are collectable and its costs are
generally payable in the same local currency. Consequently, our financial
results can be affected by changes in foreign currency exchange rates.
Fluctuations in the exchange rates between the U.S. dollar, the Sterling Pound,
the Australian dollar and the Canadian dollar may have a material effect on our
results of operations. In particular, we may be adversely affected by a
significant strengthening of the Canadian dollar against any of these
currencies. We are not currently a party to any forward foreign currency
exchange contract, or other contract that could serve to hedge our exposure to
fluctuations in the U.S./Canada dollar exchange rate
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures designed to ensure that
information required to be included in our Securities and Exchange Commission
("SEC") reports is recorded, processed, summarized and reported within
applicable time periods. We conducted an evaluation, under the supervision and
with the participation of our management, including our CEO and CFO, of the
effectiveness of our disclosure controls and procedures. Based on that
evaluation, our CEO and CFO concluded as of March 31, 2004 that they believe
that our disclosure controls and procedures are effective to ensure recording,
processing, summarizing and reporting of information required to be included in
our SEC reports on a timely basis. During the three months ended March 31,
2004, there was no change in our internal control over financial reporting that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES
OF EQUITY SECURITIES
Issuer Purchases of Equity Securities:
Shares- Class A Subordinate Voting Shares
- ---------------------- -------------------- --------------------- --------------------- --------------------
Period Total Number of Average Price Paid Total Number of Maximum Number of
Shares Purchased per Share Shares Purchased as Shares that may
Part of Publicly yet be Purchased
Announced Plans or under the Plans or
Programs Programs
- ---------------------- -------------------- --------------------- --------------------- --------------------
January 1, 2004 5,000 $11.34 5,000 210,073
- -January 31, 2004
- ---------------------- -------------------- --------------------- --------------------- --------------------
February 1, 2004 95,000 14.03 95,000 115,073
- -February 29, 2004
- ---------------------- -------------------- --------------------- --------------------- --------------------
March 1, 2004 5,000 15.71 5,000 110,073
- -March 31, 2004
- ---------------------- -------------------- --------------------- --------------------- --------------------
Total 105,000 $13.98 105,000
- ---------------------- -------------------- --------------------- --------------------- --------------------
1. The Class A subordinate voting shares were purchased pursuant to a
publicly announced plan commencing May 30, 2003. The maximum number of
shares that may be purchased under this plan is 1,269,889. This plan
expires June 2, 2004.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
3.1 Articles of Amalgamation, dated January1, 2004*;
4.1 MDC Communications Corporation and R-M Trust Company (as
Trustee) Trust Indenture dated January 7, 1997, providing for
the issue of $50,000,000 7% subordinated unsecured
convertible debentures due January 8, 2007*;
4.2 MDC Corporation Inc., Custom Direct Income Fund and CIBC
Mellon Company (as Trustee) Trust Indenture dated December 8,
2003, providing for the issuance of adjustable rate
exchangeable securities due December 31, 2028*;
10.1.1 Underwriting Agreement made as of November 20, 2003 between
MDC Corporation Inc., among others, and the Underwriters to
issue adjustable rate exchangeable securities*;
10.1.2 Underwriting agreement made as of July 18, 2003 between MDC
Corporation Inc., among others, and the Underwriters to sell
Custom Direct Income Fund Trust units ;
10.1.3 Acquisition Agreement made as of May 15, 2003 between MDC
Corporation and Custom Direct Income Fund, among others*;
10.1.4 Amending Agreement to the Acquisition Agreement dated May 15,
2003, made as of May 29, 2003 between MDC Corporation Inc.
and Custom Direct Income Fund, among others*;
10.1.5 Amending Agreement made July 25, 2003 to the Underwriting
Agreement made July 18, 2003 between MDC Corporation Inc,
among others, and the Underwriters*;
10.2.1 Second Amended and Restated Credit Agreement made as of 11
July 2001 between Maxxcom Inc., an Ontario corporation,
Maxxcom Inc., a Delaware corporation, as borrowers, certain
Restricted Parties, as guarantors, the Lenders (as defined
therein) and The Bank of Nova Scotia, as administrative
agent, and schedules thereto*;
10.2.2 First Amendment Agreement made 31 March 2002 to the Second
Amended and Restated Credit Agreement*;
10.2.3 Second Amendment Agreement made 30 June 2002 to the Second
Amended and Restated Credit Agreement*;
10.2.4 Third Amendment Agreement made 28 October 2002 to the Second
Amended and Restated Credit Agreement*;
10.2.5 Fourth Amendment Agreement made 15 August 2003 to the Second
Amended and Restated Credit Agreement*;
10.2.6 Forbearance Agreement made 15 August 2003*;
10.2.7 Fifth Amendment Request made 16 December 2003 to the Second
Amended and Restated Credit Agreement*;
10.3.1 Subordinated Debenture dated 11 July 2001 issued by Maxxcom
Inc., an Ontario corporation, in favor of TD Capital, a
division of The Toronto-Dominion Bank and Schedules to the
subordinated Debenture*;
10.3.2 First Amendment dated as of 31 March 2002 to Subordinated
Debenture*;
10.3.3 Second Amendment dated as of 28 October 2002 to Subordinated
Debenture*;
10.3.4 Third Amendment dated as of 15 August 2003 to Subordinated
Debenture*;
10.4 Employment Agreement - Peter Lewis dated July 19, 1999*.
10.5 Employment Agreement - Robert Dickson dated July 26, 2002*.
10.6 Employment Agreement - Graham Rosenberg dated October 1,
2002*.
10.7 Employment Agreement - Walter Campbell dated May 24, 2000*.
10.8 Management Services Agreement*; -
10.9 Amended and Restated Stock Option Incentive Plan*;
10.10 Stock Appreciation Rights Plan dated as of April 22, 2004*;
21 Subsidiaries of Registrant*;
31 Rule 13a-14(a)/15d-14(a) certifications*;
32 Section 1350 Certifications *.
(b) The Company filed the following Current Reports on Form 8-K for the quarter
ended March 31, 2004:
None.
__________
* Filed electronically herewith.
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.
/s/ Walter Campbell
__________________________________
Name: Walter Campbell
Title: Chief Financial Officer
May 10, 2004
EXHIBIT INDEX
Exhibit No. Description
3.1 Articles of Amalgamation, dated January 1, 2004*;
4.1 MDC Communications Corporation and R-M Trust Company (as
Trustee) Trust Indenture dated January 7, 1997, providing for
the issue of $50,000,000 7% subordinated unsecured
convertible debentures due January 8, 2007*;
4.2 MDC Corporation Inc., Custom Direct Income Fund and CIBC
Mellon Company (as Trustee) Trust Indenture dated December 8,
2003, providing for the issuance of adjustable rate
exchangeable securities due December 31, 2028*;
10.1.1 Underwriting Agreement made as of November 20, 2003 between
MDC Corporation Inc., among others, and the Underwriters to
issue adjustable rate exchangeable securities*;
10.1.2 Underwriting agreement made as of July 18, 2003 between MDC
Corporation Inc., among others, and the Underwriters to sell
Custom Direct Income Fund Trust units*;
10.1.3 Acquisition Agreement made as of May 15, 2003 between MDC
Corporation and Custom Direct Income Fund, among others*;
10.1.4 Amending Agreement to the Acquisition Agreement dated May 15,
2003, made as of May 29, 2003 between MDC Corporation Inc.
and Custom Direct Income Fund, among others*;
10.1.5 Amending Agreement made July 25, 2003 to the Underwriting
Agreement made July 18, 2003 between MDC Corporation Inc,
among others, and the Underwriters*;
10.2.1 Second Amended and Restated Credit Agreement made as of 11
July 2001 between Maxxcom Inc., an Ontario corporation,
Maxxcom Inc., a Delaware corporation, as borrowers, certain
Restricted Parties, as guarantors, the Lenders (as defined
therein) and The Bank of Nova Scotia, as administrative
agent, and schedules thereto*;
10.2.2 First Amendment Agreement made 31 March 2002 to the Second
Amended and Restated Credit Agreement*;
10.2.3 Second Amendment Agreement made 30 June 2002 to the Second
Amended and Restated Credit Agreement*;
10.2.4 Third Amendment Agreement made 28 October 2002 to the Second
Amended and Restated Credit Agreement*;
10.2.5 Fourth Amendment Agreement made 15 August 2003 to the Second
Amended and Restated Credit Agreement*;
10.2.6 Forbearance Agreement made 15 August 2003*;
10.2.7 Fifth Amendment Request made 16 December 2003 to the Second
Amended and Restated Credit Agreement*;
10.3.1 Subordinated Debenture dated 11 July 2001 issued by Maxxcom
Inc., an Ontario corporation, in favor of TD Capital, a
division of The Toronto-Dominion Bank and Schedules to the
subordinated Debenture*;
10.3.2 First Amendment dated as of 31 March 2002 to Subordinated
Debenture*;
10.3.3 Second Amendment dated as of 28 October 2002 to Subordinated
Debenture*;
10.3.4 Third Amendment dated as of 15 August 2003 to Subordinated
Debenture*;
10.4 Employment Agreement - Peter Lewis dated July 19, 1999*.
10.5 Employment Agreement - Robert Dickson dated July 26, 2002*.
10.6 Employment Agreement - Graham Rosenberg dated October 1,
2002*.
10.7 Employment Agreement - Walter Campbell dated May 24, 2000*.
10.8 Management Services Agreement*;
10.9 Amended and Restated Stock Option Incentive Plan*;
10.10 Stock Appreciation Rights Plan dated as of April 22, 2004*;
21 Subsidiaries of Registrant*;
31 Rule 13a-14(a)/15d-14(a) certifications*;
32 Section 1350 Certifications *.
_______
* Filed electronically herewith.