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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 June 30, 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 Hazelton Avenue 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 August 3, 2004 were: 22,208,696
Class A shares and 2,502 Class B shares.
1
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.
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2
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 and Six Months Ended June 30, 2004 and
June 30, 2003................................................ 4
Condensed Consolidated Balance Sheets as of
June 30, 2004 (unaudited) and December 31, 2003.............. 5
Condensed Consolidated Statements of Cash Flows (unaudited)
Six Months Ended June 30, 2004 and June 30, 2003 ............ 6
Notes to Condensed Consolidated Financial Statements
(unaudited).................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations.................................... 35
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 51
Item 4. Controls and Procedures......................................... 51
PART II. OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities ................................. 52
Item 4. Submission of Matters to a Vote of Security Holders ............ 53
Item 6. Exhibits and Reports on Form 8-K................................ 54
Signatures................................................................. 55
3
MDC PARTNERS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(thousands of United States dollars, except share and per share amounts)
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
---------------- -------------- ------------- -------------
Revenue:
Services $58,828 $45,849 $115,094 $85,538
Products 17,159 33,750 36,006 77,275
---------------- -------------- ------------- -------------
75,987 79,599 151,100 162,813
---------------- -------------- ------------- -------------
Operating Expenses:
Cost of products sold 10,730 15,620 22,297 34,349
Salary and related costs * 31,424 27,666 68,192 54,805
General and other operating costs 26,726 30,165 55,841 58,527
Depreciation and amortization 2,726 3,310 5,069 6,675
Write-down of fixed assets and other assets - 8,126 - 8,126
Goodwill charges - 10,012 - 10,012
---------------- -------------- ------------- -------------
71,606 94,899 151,399 172,494
---------------- -------------- ------------- -------------
Operating Profit (Loss) 4,381 (15,300) (299) (9,681)
---------------- -------------- ------------- -------------
Other Income (Expenses)
Gain (loss) on sale of assets (Note 9) (73) 48,594 7,092 48,594
Interest expense (1,784) (4,936) (4,097) (9,262)
Interest income 51 78 471 171
---------------- -------------- ------------- -------------
(1,806) 43,736 3,466 39,503
---------------- -------------- ------------- -------------
Income Before Income Taxes, Equity in 2,575 28,436 3,167 29,822
Affiliates and Minority Interests
Income Taxes (Recovery) (386) 6,012 1,367 5,991
---------------- -------------- ------------- -------------
Income Before Equity in Affiliates and Minority Interests 2,961 22,424 1,800 23,831
Equity in affiliates 939 724 2,385 1,222
Minority interests (2,505) (361) (3,808) (1,379)
---------------- -------------- ------------- -------------
Net Income $1,395 $22,787 $377 $23,674
================ ============== ============= =============
Earnings Per Common Share:
Basic $0.06 $1.35 $0.02 $1.40
Diluted 0.06 0.99 0.02 0.99
Weighted average number of shares:
Basic 21,772,706 16,915,341 20,388,169 16,915,341
Diluted 23,870,460 23,469,828 22,593,239 24,575,935
* Includes stock-based compensation recovery of $1,129 and an expense of $769, during the three months
ended June 30, 2004 and 2003, respectively, and an expense of $4,793 and $769 during the six months ended
June 30, 2004 and 2003, respectively.
The accompanying notes to condensed consolidated financial tatements are an integral part of these statements.
4
MDC PARTNERS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(thousands of United States dollars)
June 30, December 31,
2004 2003
------------------ -----------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $48,668 $66,726
Accounts receivable, less allowance for doubtful accounts
of $982 and $552 100,352 60,115
Expenditures billable to clients 7,753 7,422
Inventories (Note 6) 7,149 6,795
Prepaid expenses and other current assets 6,138 4,924
------------------ -----------------
Total Current Assets 170,060 145,982
Fixed Assets, at cost, less accumulated depreciation
and amortization of $56,585 and $52,885 48,364 42,025
Investment in Affiliates 19,328 36,084
Goodwill 129,029 87,479
Deferred Tax Asset 10,938 12,580
Other Assets 6,693 6,030
------------------ -----------------
Total Assets $384,412 $330,180
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other liabilities $125,511 $74,050
Advance billings 18,957 13,391
Current portion of long-term debt (Note 7) 36,972 16,486
Deferred acquisition consideration 791 1,113
------------------ -----------------
Total Current Liabilities 182,231 105,040
Long-Term Debt (Note 7) 48,848 95,946
Convertible Notes (Note 11) - 37,794
Other Liabilities 502 516
------------------ -----------------
Total Liabilities 231,581 239,296
------------------ -----------------
Minority Interests 1,892 2,533
------------------ -----------------
Contingencies (Note 12)
Shareholders' Equity:
Share capital (Note 11) 165,806 115,996
Share capital to be issued 3,909 -
Contributed surplus 13,359 3,272
Retained earnings (deficit) (26,583) (25,148)
Accumulated other comprehensive income (loss) (5,552) (5,769)
------------------ -----------------
Total Shareholders' Equity 150,939 88,351
------------------ -----------------
Total Liabilities and Shareholders' Equity $384,412 $330,180
================== =================
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
5
MDC PARTNERS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands of United States dollars)
Six Months Ended June 30,
-------------------------
2004 2003
---------------- ----------------
Cash flows from operating activities:
Net income $377 $23,674
Adjustments for non-cash items:
Stock-based compensation 4,793 769
Depreciation and amortization 5,069 6,675
Non-cash interest expense - 2,064
Deferred income taxes 1,970 5,171
Gain on sale of assets (Note 9) (7,092) (48,594)
Write-down of fixed assets and other assets - 8,126
Goodwill charges - 10,012
Earnings of affiliates, net of distributions 1,566 (2,526)
Minority interest and other - (843)
Changes in non-cash working capital (7,370) 198
---------------- ----------------
Net cash provided by (used for) operating activities (687) 4,726
---------------- ----------------
Cash flows from investing activities:
Capital expenditures (8,113) (7,543)
Proceeds of dispositions - 98,722
Acquisitions, net of cash (5,493) (15,248)
Other assets, net 349 2,816
---------------- ----------------
Net cash provided by (used in) investing activities (13,257) 78,747
---------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 2,007 11,439
Repayment of long-term debt (4,237) (87,562)
Issuance of share capital 3,245 -
Purchase of share capital (5,117) -
---------------- ----------------
Net cash used in financing activities (4,102) (76,123)
---------------- ----------------
Effect of exchange rate changes on cash and cash equivalents (12) 2,082
---------------- ----------------
Net decrease in cash and cash equivalents (18,058) 9,432
Cash and cash equivalents at beginning of period 66,726 32,250
---------------- ----------------
Cash and cash equivalents at end of period $48,668 $41,682
================ ================
Supplemental disclosures:
Income taxes paid $949 $932
Interest paid $4,312 $2,878
Non-cash consideration:
Share capital issued, or to be issued, on acquisitions (Note 8) $18,860 -
Share capital issued on settlement of convertible notes $34,919 -
Stock-based awards issued, on acquisitions (Note 8) $1,315 -
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.
6
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 the rules of the United States Securities and
Exchange Commission (the "SEC"). 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 SEC 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 and six months
ended June 30, 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 controlled subsidiaries.
Intercompany balances and transactions have been eliminated.
Use of Estimates. The preparation of financial statements in
conformity with GAAP 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.
7
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, in 2004, also included Cliff Freeman &
Partners, LLC and Lifemed Marketing, 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
8
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
SEC Staff Accounting Bulletin ("SAB") 104, "Revenue Recognition". SAB
104 summarizes certain of the SEC staff's views in applying GAAP 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.
9
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 not to
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 and six months ended June 30, 2004
and 2003, respectively, had the Company adopted the fair value method
of accounting for stock options and similar instruments for awards
issued prior to 2003.
(in thousands of dollars)
----------------------------- -- ---------------------------
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
--------------- ---------- ----------- -----------
Net income as reported $1,395 $22,787 $377 $23,674
Fair value costs of stock-based employee
compensation for options issued prior to 2003 293 483 669 995
--------------- ---------- ----------- -----------
Net income (loss), pro forma $1,102 $22,304 ($292) $22,679
=============== ========== =========== ===========
Basic net income per share, as reported $0.06 $1.35 $0.02 $1.40
Basic net income (loss) per share, pro forma $0.05 $1.32 ($0.01) $1.34
Diluted net income per share, as reported $0.06 $0.99 $0.02 $0.99
Diluted net income (loss) per share, pro forma $0.05 $0.97 ($0.01) $0.95
10
The grant date fair value of the stock options and similar awards used
to compute pro forma net income and net income per share was estimated
using the Black-Scholes option-pricing model with the following
weighted average assumptions for each period ended:
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
-------------- ------------- ------------ ------------
Expected dividend 0.00% 0.00% 0.00% 0.00%
Expected volatility 40% 40% 40% 40%
Risk-free interest rate 3.30% 6.00% 3.30% 6.00%
Expected option life in years 5 5 5 5
Weighted average stock option fair
value per option granted $4.98 $2.26 $5.11 $2.26
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 June 30, 2004 and 2003, respectively, 2,097,754 and 6,554,487
shares, and for the six months ended June 30, 2004 and 2003,
respectively, 2,205,070 and 7,660,594 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
$303 for the three months ended June 30, 2004 and 2003, respectively,
and nil and $582 for the six months ended June 30, 2004 and 2003,
respectively.
The following table details the weighted average number of common
shares outstanding for each of the three months and six months ended
June 30, 2004 and 2003, respectively:
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
-------------- ------------ ------------- ------------
Basic weighted average shares outstanding 21,772,706 16,915,341 20,388,169 16,915,341
Weighted average shares dilution adjustments:
Dilutive stock options and warrants (a) 2,097,754 351,013 2,205,070 197,907
7% convertible senior notes - 6,203,474 - 7,462,687
-------------- ------------ ------------- ------------
Diluted weighted average shares outstanding (b) 23,870,460 23,469,828 22,593,239 24,575,935
============== ============ ============= ============
(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 June 30, 2004 and 2003, the average share price used was
$12.65 per share and $6.07 per share, respectively. For the six
months ended June 30, 2004 and 2003, the average share price used
was $13.42 per share and $4.85 per share, respectively.
(b) Had certain stock options, warrants and the convertible debt been
dilutive, they would have added 1,097,556 dilutive shares and nil
dilutive shares for the three months ended June 30, 2004 and
2003, respectively, and added 1,927,548 dilutive shares and nil
dilutive shares for the six months ended June 30, 2004 and 2003,
respectively.
11
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 US 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% US
senior subordinated notes ("Notes") as a hedge against foreign
exchange exposure of US 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 US
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:
(in thousands of dollars)
--------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ----------------------------
2004 2003 2004 2003
------------- ------------ ----------- -------------
Net income for the period $1,395 $22,787 $377 $23,674
Foreign currency translation adjustment 700 (8,445) 217 (15,680)
------------- ------------ ----------- -------------
Comprehensive income for the period $2,095 $14,342 $594 $7,994
============= ============ =========== =============
4. New Accounting Pronouncements
The following recent pronouncements were issued by the Financial
Accounting Standards Board ("FASB") and are effective in 2004:
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities, An Interpretation of ARB No. 51 ("FIN
46"). 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"). 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.
12
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, Cliff Freeman &
Partners, LLC, owned 19.9% by the Company and Lifemed Marketing, LLC,
owned 45% by the Company are required to be equity accounted for under
US GAAP. For purposes of the segmented information disclosure, 100% of
the results of operations of these three entities 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 US GAAP
reported results of operations has been provided by the Company in the
tables included in the segmented information disclosure.
13
Summary financial information concerning the Company's reportable segments for
the three months ended June 30 is shown in the following table:
Three Months Ended June 30, 2004
Combined As Reported under US GAAP
--------------- --------------------------------------------------------------
Combined Secure
Marketing Less Equity Marketing Products Corporate &
Communications Affiliates Communications International Other Total
--------------- ------------ -------------- -------------- ----------- -------------
Revenue $71,669 $13,159 $58,510 $17,159 $318 $75,987
--------------- ------------ -------------- -------------- ----------- -------------
Operating Expenses:
Cost of products sold - - - 10,730 - 10,730
Salary and related costs* 34,859 7,018 27,841 3,370 213 31,424
General and other
operating costs 25,699 3,196 22,503 2,100 2,123 26,726
Depreciation and
Amortization 2,198 328 1,870 807 49 2,726
--------------- ------------ -------------- -------------- ----------- -------------
62,756 10,542 52,214 17,007 2,385 71,606
--------------- ------------ -------------- -------------- ----------- -------------
Operating Profit (Loss) $8,913 $2,617 $6,296 $152 ($2,067) $4,381
=============== ============ ============== ============== =========== =============
Capital expenditures $3,272 $527 $2,745 $2,187 $40 $4,972
*Includes stock-based
compensation (recovery) $184 $74 $110 $ - ($1,239) ($1,129)
Three Months Ended June 30, 2003
Combined As Reported under US GAAP
--------------- --------------------------------------------------------------
Combined Secure
Marketing Less Equity Marketing Products Corporate &
Communications Affiliates Communications International Other Total
--------------- ------------ -------------- -------------- ----------- -------------
Revenue $51,594 $6,699 $44,895 $33,750 $954 $79,599
--------------- ------------ -------------- -------------- ----------- -------------
Operating Expenses:
Cost of products sold - - - 15,620 - 15,620
Salary and related costs* 23,523 2,943 20,580 5,683 1,403 27,666
General and other
operating costs 19,747 1,285 18,462 10,469 1,234 30,165
Depreciation and
amortization 2,048 123 1,925 1,081 304 3,310
Write-down of fixed assets
and other assets - - - 8,126 - 8,126
Goodwill charges - - - 10,012 - 10,012
--------------- ------------ -------------- -------------- ----------- -------------
45,318 4,351 40,967 50,991 2,941 94,899
--------------- ------------ -------------- -------------- ----------- -------------
Operating Profit (Loss) $6,276 $2,348 $3,928 ($17,241) ($1,987) ($15,300)
=============== ============ ============== ============== =========== =============
Capital expenditures $4,848 $3,052 $1,796 $3,480 $ - $5,276
*Includes stock-based
compensation $ - $ - $ - $ - $769 $769
14
Six Months Ended June 30, 2004
Combined As Reported under US GAAP
--------------- --------------------------------------------------------------
Combined Secure
Marketing Less Equity Marketing Products Corporate &
Communications Affiliates Communications International Other Total
--------------- ------------ -------------- -------------- ----------- -------------
Revenue $138,101 $23,672 $114,429 $36,006 $665 $151,100
--------------- ------------ -------------- -------------- ----------- -------------
Operating Expenses:
Cost of products sold - - - 22,297 - 22,297
Salary and related costs* 64,874 11,057 53,817 6,846 7,529 68,192
General and other
operating costs 52,453 4,737 47,716 4,501 3,624 55,841
Depreciation and
amortization 3,992 504 3,488 1,482 99 5,069
--------------- ------------ -------------- -------------- ----------- -------------
121,319 16,298 105,021 35,126 11,252 151,399
--------------- ------------ -------------- -------------- ----------- -------------
Operating Profit (Loss) $16,782 $7,374 $9,408 $880 ($10,587) ($299)
=============== ============ ============== ============== =========== =============
Capital expenditures $5,449 $870 $4,579 $3,460 $74 $8,113
*Includes stock-based
compensation $184 $74 $110 $ - $4,683 $4,793
Six Months Ended June 30, 2003
Combined As Reported under US GAAP
--------------- --------------------------------------------------------------
Combined Secure
Marketing Less Equity Marketing Products Corporate &
Communications Affiliates Communications International Other Total
--------------- ------------ -------------- -------------- ----------- -------------
Revenue $96,586 $12,300 $84,286 $77,275 $1,252 $162,813
--------------- ------------ -------------- -------------- ----------- -------------
Operating Expenses:
Cost of products sold - - - 34,349 - 34,349
Salary and related costs* 46,404 5,819 40,585 11,766 2,454 54,805
General and other
operating costs 36,364 2,332 34,032 22,519 1,976 58,527
Depreciation and
amortization 3,981 203 3,778 2,255 642 6,675
Write-down of fixed assets
and other assets - - - 8,126 - 8,126
Goodwill charges - - - 10,012 - 10,012
--------------- ------------ -------------- -------------- ----------- -------------
86,749 8,354 78,395 89,027 5,072 172,494
--------------- ------------ -------------- -------------- ----------- -------------
Operating Profit (Loss) $9,837 $3,946 $5,891 ($11,752) ($3,820) ($9,681)
=============== ============ ============== ============== =========== =============
Capital expenditures $6,931 $4,410 $2,521 $5,019 $3 $7,543
*Includes stock-based
compensation $ - $ - $ - $ - $769 $769
15
A summary of our revenue and long-lived assets by geographic area as
of June 30, 2004 and 2003 is set forth in the following table.
(in thousands of dollars)
-----------------------------------------------------------------
United States Canada Other Total
-----------------------------------------------------------------
Revenue
Three Months Ended June 30,
2004 $48,175 $21,763 $6,049 $75,987
2003 53,070 20,488 6,041 79,599
Revenue
Six Months Ended June 30,
2004 $95,136 $43,553 $12,411 $151,100
2003 111,274 40,753 10,786 162,813
Long-lived Assets
at June 30,
2004 $23,019 $20,745 $5,409 $49,173
2003 11,308 21,073 4,572 $36,953
6. Inventories
The components of inventory are listed below:
June 30, December 31,
2004 2003
------------------- -------------------
Raw Materials and supplies $3,693 $3,743
Work-in-process 2,673 2,135
Finished goods 783 917
------------------- -------------------
Total $7,149 $6,795
=================== ===================
7. Revolving Lines of Credit
MDC Partners Inc. is principally a holding company and the Company's
assets consist principally of its investments in Maxxcom Inc.
("Maxxcom"), which in turn owns a substantial portion of its interests
in the Marketing Communications businesses, and in the Secured
Products International (SPI) businesses.
Currently, substantially all of the long-term debt is held at Maxxcom
or its subsidiairies. Maxxcom's ability to meet the repayment of its
long-term debt and to make distributions to MDC Partners Inc., is
dependent upon the availability of cash from its parent MDC Partners
Inc. and from the cash flows from its subsidiaries and affiliated
companies through dividends, distributions, intercompany advances,
management fees and other payments. A number of Maxxcom's subsidiaries
are not wholly-owned and pursuant to operating agreements with some of
the other shareholders of these subsidiaries and affiliates and
certain subsidiary and affiliate lending agreements, there are certain
restrictions on the payment of dividends, distributions and advances
to Maxxcom. In addition, pursuant to certain lending agreements
entered into by MDC Partners Inc., there are restrictions on MDC's
ability to transfer available cash to Maxxcom.
As at June 30, 2004, $8,100 of the consolidated cash position is held
by subsidiaries which are restricted and not available for
distribution to Maxxcom.
16
During the second quarter of 2004, the Company reached agreements
with its senior credit lenders to amend the terms of the credit
facility of its subsidiary, Maxxcom Inc., to eliminate the scheduled
quarterly borrowing reductions after March 31, 2004 and to change the
facility's maturity date from March 31, 2005 to September 30, 2004.
As a result of this amendment, the Company was not required to make a
debt repayment in the second quarter of $5.2 million (Canadian $7.0
million). At June 30, 2004 the maximum amount which would be borrowed
under this facility is $33.1 million (C$44.1 million) of which $30.0
million was utilized.
The Company is actively seeking to refinance the amounts owing on
September 30, 2004 under its bank credit facility. The Company has a
commitment letter with a lender and the lender is undertaking its due
diligence. In the event that such a definitive credit agreement cannot
be secured by September 30, 2004, the Company would need to seek
alternative sources of financing, seek an extension to the current
credit facility or reach an agreement with certain other shareholders
to permit the advance of cash balances held in those subsidiaries or
affiliates to Maxxcom in order to meet or amend its obligation under
its existing credit facilities. There is no certainty that such events
will occur.
On June 10, 2004, MDC Partners Inc. entered into a revolving credit
facility with a syndicate of banks providing for borrowings of up to
$18.7 million (Canadian $25.0 million) maturing in May of 2005. The
facility is available for general corporate purposes including
acquisitions, however may not be used to repay existing debt or to
provide financial assistance to businesses securing such debt. This
facility bears interest at variable rates based upon LIBOR, Canadian
bank prime or US bank base rate, at the Company's option. Based on the
level of debt relative to certain operating results, the interest
rates on loans are calculated by adding between 175 to 275 basis
points to the LIBOR and Bankers Acceptance based interest rate loans
and between 75 to 175 basis points to all other loan interest rates.
The provisions of the facility contain various covenants pertaining to
debt to EBITDA ratios, debt to capitalization ratio, and the
maintenance of certain interest coverage and minimum shareholders'
equity levels. The facility is secured by a pledge of the Company's
assets principally comprised of ownership interests in its
subsidiaries and by the underlying assets of the businesses comprising
the Company's Secure Products International operating segment and
Kirshenbaum Bond + Partners, carried at a value represented by the
total assets reflected on the Company's consolidated balance sheet at
June 30, 2004. At June 30, 2004, the Company had not drawn any funds
under this facility.
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 $2,027 based on the share price on the
date of the closing), 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 $1,175. 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.
17
Exclusive of future contingent consideration, the recorded purchase
price of the net assets acquired in the transaction was $24,811. 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 26,540
Accounts payable and accrued expenses (30,346)
--------------
Total purchase price $24,811
==============
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 the six
months ended June 30, 2004, the operations of KBP contributed $20,960
of revenue and $1,631 of net income to the Company's consolidated
operating results.
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 $16,833
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 $72. 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, 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 13,734
Accounts payable and accrued liabilities (1,261)
Long-term debt (3,986)
Other liabilities (338)
---------------
Total purchase price $18,348
===============
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
18
quarter, the Company acquired further equity interests in the
existing subsidiaries of Allard Johnson Communications Inc. and
Targetcom LLC, as well as several other insignificant investments. In
aggregate, as part of these acquisitions, the Company paid $3,076 in
cash and incurred transaction costs of approximately $413. 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 $3,489. The purchase price was allocated to the net
assets acquired as follows:
Assets $2,462
Goodwill and intangible assets 3,019
Liabilities (1,992)
---------------
Total purchase price $3,489
===============
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.
During the quarter ended June 30, 2004, the Company acquired several
other ownership interests. On April 14, 2004, the Company acquired a
65% ownership interest in Henderson bas ("HB") in a transaction
accounted for under the purchase method of accounting. HB is a Toronto
based agency providing interactive and direct marketing advertising
services. HB has been recognized for its creative abilities, winning
several interactive advertising awards, and as such was acquired by
the Company to enhance the creative talent within the MDC Partners
Marketing Communications segment of businesses. On May 27, 2004, the
Company acquired a 50.1% ownership interest in Bruce Mau Design Inc.
("BMD") in a transaction accounted for under the purchase method of
accounting. BMD is a Toronto based design studio providing visual
identity and branding such as environmental graphics, exhibition
development and design, and cultural and business programming
services. BMD is world-renowned, working with internationally
acclaimed architects and leading cultural and commercial enterprises
and as such was acquired by the Company to add a new aspect to the
creative talent within the Marketing Communications segment of
businesses. During the quarter ended June 30, 2004, the Company also
acquired the following interests in three smaller agencies: a 49.9%
interest in Mono Advertising LLC, a 51% interest in Hello Design, LLC
and a 51% interest in Banjo, LLC. These agencies provide advertising,
interactive direct marketing, and film production related marketing
communications services, respectively. These transactions were all
accounted for under the purchase method of accounting.
In aggregate, the Company paid and will pay $4,194 in cash, issued
warrants to purchase 90,000 shares of the Company's common stock
to certain selling interestholders (valued at approximately $360
using the Black-Scholes option-pricing model assuming a 40%
expected volatility, a risk free interest rate of 3.3% and an
expected option life of 3 years) and incurred transaction costs of
approximately $275 for these acquisitions completed during the
quarter ended June 30, 2004. Under the terms of the Mono Advertising
LLC, Hello Design, LLC, and BMD agreements, the selling interest
holders could receive additional cash and/or share consideration
after two to three years based on achievement of certain
pre-determined cumulative earning targets. Based on current earning
levels, the additional consideration would be $0.1 million. Such
contingent consideration will be accounted for as goodwill when it
19
becomes determinable. The aggregate purchase price of the net assets
acquired in these transactions was approximately $4,829. The purchase
price was allocated to the net assets acquired as follows:
Assets $3,536
Goodwill and intangible assets 2,600
Liabilities (1,307)
-----------------
Total purchase price $4,829
=================
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 sheets of these acquired entities, accounted for on a
consolidated basis. 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 periods ended June 30, 2004 and 2003, respectively, assume
that the acquisition of the operating assets of the businesses
acquired during the first six months of 2004 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 June 30, Six Months Ended June 30,
------------------------------- ----------------------------
2004 2003 2004 2003
------------- -------------- ------------- -----------
Revenues $76,641 $90,671 $156,846 $185,039
Net (loss) income 1,406 23,555 491 25,464
Earnings per share:
Basic $0.06 $1.39 $0.02 $1.51
Diluted $0.06 $1.02 $0.02 $1.07
9. Gain on Sale of Assets
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- ----------------------------
2004 2003 2004 2003
------------- -------------- ------------- -----------
Gain (loss) on sale of assets ($73) $ - $7,092 $ -
Loss on settlement of long-term debt - (4,908) - (4,908)
Gain on sale Custom Direct Inc. - 53,502 - $53,502
------------- -------------- ------------- ------------
($73) $48,594 $7,092 $48,594
============= ============== ============= ============
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.
In the second quarter of 2003, the Company completed the sale of 80%
of Custom Direct Inc. to Custom Direct Income Fund for cash and units
of the fund. On June 30, 2003, the Company completed the repurchase of
its remaining 10.5% senior subordinated notes for 103.5% of the face
value of the notes.
20
10. Subsequent Event
In July 2004, the Company acquired a 68% ownership interest in Vitro
Robertson, LLC in a transaction to be accounted for under the purchase
method of accounting. The agency's expertise is in brand market share
management. As part of the acquisition, the Company paid $7.0 million
in cash and will issue common stock valued at $0.5 million to the
selling interestholders. Transaction costs of approximately $0.2
million are also expected to be incurred. Under the terms of this
acquisition 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.
11. Share Capital
Changes to the Company's issued and outstanding share capital during
the six months ended June 30, 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 (423,200) (3,305)
Share options exercised 175,821 1,836
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
Shares issued on settlement of convertible notes 2,582,027 34,919
-------------- -------------
Balance, June 30, 2004 22,258,180 165,805
-------------- -------------
Class B
Balance, January 1, 2004 450,470 135
Shares converted to Class A shares (447,968) (134)
-------------- -------------
Balance, June 30, 2004 2,502 1
-------------- -------------
Total Class A and Class B share capital 22,260,682 $165,806
============== =============
During the six months ended June 30, 2004, the Company acquired and
cancelled, pursuant to a nominal course issuer bid, 423,200 Class A
subordinate voting shares for $5,117. The premium paid on the
repurchase of the Class A subordinate voting shares, in the amount of
$1,812, was charged to retained earnings.
During the second quarter of 2004, the Company amended its share
appreciation rights ("SAR") plan to amend the method of settlement
from cash exclusively to cash or equity settlement at the option of
the Company. The amendment caused the existing SAR awards to be
modified, triggering a remeasurement date for accounting purposes. The
modification is accounted for as a settlement of the old awards
through the issuance of new awards. As a result, the Company measured
the settlement value of the SARs immediately prior to the modification
date and adjusted the previously accumulated amortized expense and
liability based on the revised calculation. The settlement value of
$6,142 was reclassed from accounts payable and accrued liabilities to
contributed surplus and the adjustment to the accumulated expense
resulted in a recovery of $2,591. The Company then measured the fair
value of the equity settleable SAR awards using the Black-Scholes
option pricing model on the date of modification. The excess of the
fair value calculated using the Black-Scholes option pricing model
over the settlement value of $5,046 will be accounted for as
additional compensation expense over the remaining vesting period of
the SAR awards.
21
On May 5, 2004, the Company settled in full the $34,919 (Canadian
$48,000) of 7% Convertible Notes with the issuance of 2,582,027 Class
A subordinate voting shares.
On March 17, 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 the ability 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 Company's Board of Directors that he had
initiated the process to effect 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.
Contributed surplus increased during the six months ended June 30,
2004 from $3,272 to $13,359 due primarily to the amendment of the SARs
during the period in the amount of $7,399 and an amount of $2,688
related to compensatory stock options and warrants granted during the
period.
Share option transactions during the six months ended June 30, 2004
are summarized as follows:
Options Outstanding Options Exercisable
------------------------------------ ---------------------------------
Weighted
Average Weighted
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 69,052 11.48
Exercised (175,821) 10.44
Expired and cancelled (18,955) 12.03
---------------
Balance, end of period 1,941,004 $6.19 986,661 $6.77
===============
Shares options outstanding as at June 30, 2004 are summarized as follows:
Options Outstanding Options Exercisable
---------------------------------------------- -------------------------------
Weighted
Average Weighted
Range of Outstanding Weighted Average Price per Exercisable Average Price
Exercise Prices Number Contractual Life Share Number per Share
---------------------------------------------------------------------------------------------------
$2.89 - $4.50 770,474 3.3 $4.01 319,907 $3.99
$4.51 - $6.00 523,010 3.9 $5.44 219,594 $5.45
$6.01 - $9.00 355,055 4.5 $7.26 287,046 $7.35
$9.01 - $15.30 278,992 4.1 $10.52 146,641 $10.44
$22.50 - $42.50 13,473 1.0 $41.61 13,473 $41.61
22
Warrants issued and outstanding as of June 30, 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) 736,186
-----------------
Balance at June 30, 2004 1,243,332
=================
(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. These warrants were issued as compensation
to a lender and to an advisor.
(b) During the six months ended June 30, 2004, the Company issued 736,186
warrants with a weighted average exercise price of Canadian $17.66 and
a term of five years. Of these warrants, 496,013 were issued as
acquisition consideration and 240,173 were issued as compensation and
treated as such for accounting purposes.
12. Commitments and 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 $1 million could be earned
in 2004 and 2007, of which approximately $0.9 million could be payable
in shares of the Company at the Company's discretion.
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.
Under the terms of a joint venture agreement to develop a certain
marketing communications product concept, the Company has committed to
fund up to $1.2 million in 2004. As of June 30, 2004, the Company has
funded $0.7 million.
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, which
have been fully provided for.
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.
23
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 of
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 and six months
ended June 30, 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 and six months ended June 30, 2004 and 2003 is set out as
follows.
The reconciling items under Canadian GAAP, are as follows:
Convertible Notes - 2003 Adjustments
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 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.
Convertible Notes - 2004 Adjustments
During the quarter ended June 30, 2004, the notes were converted to
equity. Therefore, the adjustments reflected in 2004 pertain only to
the interest adjustment up to the date of conversion and the
accumulated reclassification from earnings to share capital.
Proportionate Consolidation of Affiliate - 2004 and 2003 Adjustment
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
24
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.
25
Stock-based Compensation - 2004 Adjustment
Under US GAAP, the Company accounted for the modification of the SAR
awards as a settlement, measuring the incremental value of the awards
based on the fair value of the modified awards on the date of
modification. Under Canadian GAAP, the Company measures the
incremental value based on the fair value of the award on the date of
grant. The difference in measurement date results in a lower amount of
additional compensation recorded under Canadian GAAP in the quarter of
$945 and a corresponding lower amount credited to contributed surplus.
Goodwill Charges - 2003 Adjustments
Under US GAAP, the Company expensed certain costs related to existing
plant closures where production was shifted to acquired facilities.
Under Canadian GAAP, the expenditures were included as part of the
business acquired and allocated to goodwill.
Other Adjustments
Other adjustments represent cumulative translation differences as a
result of timing differences between recognition of certain expenses
under US and Canadian GAAP.
26
Three Months Ended June 30, 2004
Stock-based
Compensation
and Proportionate
US Convertible Consolidation of Canadian
GAAP Notes Affiliates GAAP
---------------------------------------------------------------------------
Revenue
Services $58,828 $ - $5,783 $64,611
Products 17,159 - - 17,159
--------------- --------------- ---------------- -----------------
75,987 - 5,783 81,770
--------------- --------------- ---------------- -----------------
Operating Expenses:
Cost of products sold 10,730 - - 10,730
Salary and related costs 31,424 (945) 2,755 33,234
Office and general expenses 26,726 - 1,311 28,037
Depreciation and amortization 2,726 - 153 2,879
--------------- --------------- ---------------- -----------------
71,606 (945) 4,219 74,880
--------------- --------------- ---------------- -----------------
Operating Profit 4,381 945 1,564 6,890
--------------- --------------- ---------------- -----------------
Other Income (Expenses)
Gain (loss) on sale of affiliate (73) - - (73)
Interest expense (1,784) 197 (21) (1,608)
Interest income 51 - 8 59
--------------- --------------- ---------------- -----------------
(1,806) 197 (13) (1,622)
--------------- --------------- ---------------- -----------------
Income Before Income Taxes, Equity in 2,575 1,142 1,551 5,268
Affiliates and Minority Interests
Income Taxes (Recovery) (386) - 576 190
--------------- --------------- ---------------- -----------------
Income Before Equity in Affiliates
and Minority Interests 2,961 1,142 975 5,078
Equity in Affiliates 939 - (975) (36)
Minority Interests (2,505) - - (2,505)
--------------- --------------- ---------------- -----------------
Net Income $1,395 $1,142 $ - $2,537
=============== =============== ================ =================
27
Six Months Ended June 30, 2004
Stock-based
Compensation
and Proportionate
US Convertible Consolidation of Canadian
GAAP Notes Affiliates GAAP
-----------------------------------------------------------------------
Revenue
Services $115,094 $ - $10,934 $126,028
Products 36,006 - - 36,006
----------- ------------- ------------ -------------
151,100 - 10,934 162,034
----------- ------------- ------------ -------------
Operating Expenses:
Cost of products sold 22,297 - - 22,297
Salary and related costs 68,192 (945) 4,734 71,981
Office and general expenses 55,841 - 2,066 57,907
Depreciation and amortization 5,069 - 239 5,308
----------- ------------- ------------ -------------
151,399 (945) 7,039 157,493
----------- ------------- ------------ -------------
Operating Profit (Loss) (299) 945 3,895 4,541
----------- ------------- ------------ -------------
Other Income (Expenses)
Gain on sale of assets 7,092 - - 7,092
Interest expense (4,097) 718 (33) (3,412)
Interest income 471 - 8 479
----------- ------------- ------------ -------------
3,466 718 (25) 4,159
----------- ------------- ------------ -------------
Income Before Income Taxes, Equity 3,167 1,663 3,870 8,700
in Affiliates and Minority
Interests
Income Taxes 1,367 - 1,449 2,816
----------- ------------- ------------ -------------
Income Before Equity in Affiliates
and Minority Interests 1,800 1,663 2,421 5,884
Equity in affiliates 2,385 - (2,421) (36)
Minority interests (3,808) - - (3,808)
----------- ------------- ------------ -------------
Net Income $377 $1,663 $ - $2,040
=========== ============= ============ =============
28
As at June 30, 2004 Stock-based
Compensation
and Proportionate
Us Convertible Consolidation Other Canadian
GAAP Notes of Affiliates Adjustments GAAP
---------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $48,668 $ - $5,667 $ - $54,335
Accounts receivables, net 100,352 - 11,936 - 112,288
Expenditures billable to
clients 7,753 - 8,457 - 16,210
Inventories 7,149 - - - 7,149
Prepaid expenses and other
current assets 6,138 - 382 - 6,520
------------- ------------- --------------- ----------- ------------
Total Current Assets 170,060 - 26,442 - 196,502
Fixed Assets, net 48,364 - 2,846 - 51,210
Investment in Affiliates 19,328 - (18,432) - 896
Goodwill 129,029 - 16,059 - 145,088
Deferred Tax Benefits 10,938 - 228 - 11,166
Other Assets 6,693 - - - 6,693
------------- ------------- --------------- ----------- ------------
Total Assets $384,412 $ - $27,143 $ - $411,555
============= ============= =============== =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and other
liabilities $125,511 $ - $16,981 $ - $142,492
Advance billings 18,957 - 9,363 - 28,320
Current portion of long-term
Debt 36,972 - - - 36,972
Deferred acquisition
consideration 791 - - - 791
------------- ------------- --------------- ----------- ------------
Total Current Liabilities 182,231 - 26,344 - 208,575
Long-Term Debt 48,848 - - - 48,848
Other Liabilities 502 - 799 - 1,301
------------- ------------- --------------- ----------- ------------
Total Liabilities 231,581 - 27,143 - 258,724
------------- ------------- --------------- ----------- ------------
Minority Interests 1,892 - - - 1,892
------------- ------------- --------------- ----------- ------------
Shareholders' Equity
Share capital 165,806 1,296 - - 167,102
Share capital to be issued 3,909 - - - 3,909
Contributed surplus 13,359 (945) - - 12,414
Retained earnings (deficit) (26,583) (351) - (816) (27,750)
Accumulated other
comprehensive income (loss) (5,552) - - 816 (4,736)
------------- ------------- --------------- ----------- ------------
Total Shareholders' Equity 150,939 - - - 150,939
------------- ------------- --------------- ----------- ------------
Total Liabilities and
Shareholders' Equity $384,412 $ - $27,143 $ - $411,555
============= ============= =============== =========== ============
29
Six Months Ended June 30, 2004
Stock-based Proportionate Canadian
US Compensation and Consolidation
GAAP Convertible Notes of Affiliates GAAP
----------------------------------------------------------------------------
Net income $377 $1,663 $ - $2,040
Stock-based compensation 4,793 (945) - 3,848
Depreciation and amortization 5,069 - 239 5,308
Deferred income taxes 1,970 - (228) 1,742
Gain on sale of assets (7,092) - - (7,092)
Earnings of affiliates, net of
distributions 1,566 - (1,456) 110
Minority interest and other - - - -
Changes in non-cash working capital (7,370) - 1,791 (5,579)
---------------- -------------- ----------------- ----------------
(687) 718 346 377
---------------- -------------- ----------------- ----------------
Investing activities
Acquisitions, net of cash acquired (5,493) - 680 (4,813)
Capital expenditures (8,113) - (444) (8,557)
Other assets, net 349 - (68) 281
---------------- -------------- ----------------- ----------------
(13,257) - 168 (13,089)
---------------- -------------- ----------------- ----------------
Financing activities
Proceeds from issuance of long-
term debt 2,007 - - 2,007
Repayment of long-term debt (4,237) (718) - (4,955)
Issuance of share capital 3,245 - - 3,245
Purchase of share capital (5,117) - - (5,117)
---------------- -------------- ----------------- ----------------
(4,102) (718) - (4,820)
---------------- -------------- ----------------- ----------------
Foreign exchange effect on cash (12) - - (12)
---------------- -------------- ----------------- ----------------
Net increase (decrease) in cash (18,058) - 514 (17,544)
Cash beginning of period 66,726 - 5,153 71,879
---------------- -------------- ----------------- ----------------
Cash end of period $48,668 $ - $5,667 $54,335
================ ============== ================= ================
30
Three Months Ended June 30, 2003
Convertible Proportionate
US Notes and Consolidation Canadian
GAAP Other of Affiliate GAAP
----------------------------------------------------------------
Revenue
Services $45,849 $ - $3,283 $49,132
Products 33,750 - - 33,750
----------- ---------- ------------- --------------
79,599 - 3,283 82,882
----------- ---------- ------------- --------------
Operating Expenses:
Cost of products sold 15,620 - - 15,620
Salary and related costs 27,666 - 1,442 29,108
Office and general expenses 30,165 - 631 30,796
Depreciation and amortization 3,310 186 60 3,556
Write-down of fixed assets and other assets 8,126 - - 8,126
Goodwill charges 10,012 - - 10,012
----------- ---------- ------------- --------------
94,899 186 2,133 97,218
----------- ---------- ------------- --------------
Operating Profit (Loss) (15,300) (186) 1,150 (14,336)
----------- ---------- ------------- --------------
Other Income (Expense)
Gain on sale of assets 48,594 (14,717) - 33,877
Interest expense (4,936) 425 - (4,511)
Interest income 78 - 10 88
----------- ---------- ------------- --------------
43,736 (14,292) 10 29,454
----------- ---------- ------------- --------------
Income Before Income Taxes, Equity in
Affiliates and Minority Interests 28,436 (14,478) 1,160 15,118
Income Taxes 6,012 57 436 6,505
----------- ---------- ------------- --------------
Income Before Equity in Affiliates and
Minority Interests 22,424 (14,535) 724 8,613
Equity in affiliates 724 - (724) -
Minority interests (361) - - (361)
----------- ---------- ------------- --------------
Net Income $22,787 ($14,535) $ - $8,252
=========== ========== ============= ==============
31
Six Months Ended June 30, 2003
Convertible Proportionate
US Notes and Consolidation Canadian
GAAP Other of Affiliate GAAP
----------------------------------------------------------------------
Revenue
Services $85,538 $ - $6,027 $91,565
Products 77,275 - - 77,275
-------------- --------------- ------------- ----------------
162,813 - 6,027 168,840
-------------- --------------- ------------- ----------------
Operating Expenses:
Cost of products sold 34,349 - - 34,349
Salary and related costs 54,805 - 2,851 57,656
Office and general expenses 58,527 - 1,144 59,671
Depreciation and amortization 6,675 371 99 7,145
Write-down of fixed assets and other assets 8,126 - - 8,126
Goodwill charges 10,012 - - 10,012
-------------- --------------- ------------- ----------------
172,494 371 4,094 176,959
-------------- --------------- ------------- ----------------
Operating Profit (Loss) (9,681) (371) 1,933 (8,119)
-------------- --------------- ------------- ----------------
Other Income (Expense)
Gain on sale of assets 48,594 (14,717) - 33,877
Interest expense (9,262) 850 - (8,412)
Interest income 171 - 26 197
-------------- --------------- ------------- ----------------
39,503 (13,867) 26 25,662
-------------- --------------- ------------- ----------------
Income Before Income Taxes, Equity in
Affiliates and Minority Interests 29,822 (14,238) 1,959 17,543
Income Taxes 5,991 212 737 6,940
-------------- --------------- ------------- ----------------
Income Before Equity in Affiliates and
Minority Interests 23,831 (14,450) 1,222 10,603
Equity in affiliates 1,222 - (1,222) -
Minority interests (1,379) - - (1,379)
-------------- --------------- ------------- ----------------
Net Income $23,674 ($14,450) $ - $9,224
============== =============== ============= ================
32
As at December 31, 2003 Proportionate
US Convertible Consolidation of Canadian
GAAP Notes Affiliate Other Adjustments GAAP
---------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $66,726 $ - $5,153 $ - $71,879
Accounts receivables, net 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
Fixed Assets, net 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
-------------- ------------ --------------- ------------- -----------
Total Liabilities 239,296 (30,851) 18,231 - 226,676
-------------- ------------ --------------- ------------- -----------
Minority Interests 2,533 - - - 2,533
-------------- ------------ --------------- ------------- -----------
Shareholders' Equity
Share capital 115,996 1,296 - - 117,292
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
============== ============ =============== ============= ===========
33
Six Months Ended June 30, 2003
Convertible Proportionate
US and Other Consolidation Other Canadian
GAAP Notes of Affiliate Adjustments GAAP
---------------------------------------------------------------------------------
Net income $23,674 $539 $ - ($14,989) $9,224
Stock-based compensation 769 769
Depreciation and amortization 6,675 - 99 371 7,145
Non-cash interest 2,064 - - - 2,064
Deferred income taxes 5,171 311 - (99) 5,383
Gain on sale of assets (48,594) - - 14,717 (33,877)
Write-down of fixed assets and
other assets 8,126 - - - 8,126
Goodwill charges 10,012 - - - 10,012
Earnings of affiliates, net of
distributions (2,526) - 2,526 - -
Minority interest and other (843) - - - (843)
Changes in non-cash working capital 198 - (3,864) - (3,666)
------------- ------------- ------------ ----------- ---------------
4,726 850 (1,239) - 4,337
------------- ------------- ------------ ----------- ---------------
Investing activities
Acquistions, net of cash (15,248) - - - (15,248)
Proceeds of dispositions 98,722 - - - 98,722
Capital expenditures (7,543) - (1,094) - (8,637)
Other assets, net 2,816 - - - 2,816
------------- ------------- ------------ ----------- ---------------
78,747 - (1,094) - 77,653
------------- ------------- ------------ ----------- ---------------
Financing activities
Proceeds on issuance of long-term
debt 11,439 - - - 11,439
Repayment of long-term debt (87,562) (850) - - (88,412)
------------- ------------- ------------ ----------- ---------------
(76,123) (850) - - (76,973)
------------- ------------- ------------ ----------- ---------------
Foreign exchange effect on cash 2,082 - - - 2,082
------------- ------------- ------------ ----------- ---------------
Increase in cash 9,432 - (2,333) - 7,099
Cash beginning of period 32,250 - 5,538 - 37,788
------------- ------------- ------------ ----------- ---------------
Cash end of period $41,682 $ - $3,205 $ - $44,887
============= ============= ============ =========== ===============
34
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 and six-month periods ended June 30,
2004 and 2003, and the financial condition of the Company as at June 30, 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 US 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 Company's marketing communications business
provides readers with a complete view of all operations that significantly
affect the Marketing Communications reportable segment's profitability and
allows readers to evaluate the financial presentation reviewed by management in
making business decisions. Entities owned 50% or less by the Company are
required to be equity accounted for under US GAAP. For purposes of the
Management Discussion and Analysis, the results of operations of these entities
have been combined with the other business of the Marketing Communications
reportable segment, and the alternate operating results have been described as
"Combined". These "Combined" results do not constitute a financial measure
prepared in accordance with US GAAP. 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 this Management Discussion and Analysis.
35
Results of Operations:
For the Three Months Ended June 30, 2004
Combined As Reported under US GAAP
-------------------- -------------------------------------------------------------
Combined Secure
Marketing Less Equity Marketing Products Corporate
Communications Affiliates Communications International & Other Total
--------------------------------------------------------------------------------------------------
Revenue $71,669 $13,159 $58,510 $17,159 $318 $75,987
----------------- ------------ -------------- ------------ ------------ -----------
Operating Expenses:
Cost of products sold - - - 10,730 - 10,730
Salary and related costs 34,859 7,018 27,841 3,370 213 31,424
General and other
operating costs 25,699 3,196 22,503 2,100 2,123 26,726
Depreciation and
amortization 2,198 328 1,870 807 49 2,726
----------------- ------------ -------------- ------------ ------------ -----------
62,756 10,542 52,214 17,007 2,385 71,606
----------------- ------------ -------------- ------------ ------------ -----------
Operating Profit (Loss) $8,913 $2,617 $6,296 $152 ($2,067) 4,381
================= ============ ============== ============ ============
Other Income (Expense)
(Loss) on sale of assets (73)
Interest expense, net (1,733)
-----------
Income Before Income Taxes, Equity in Affiliates and Minority Interests 2,575
Income Taxes (Recovery) (386)
-----------
Income Before Equity in Affiliates and Minority Interests 2,961
Equity in affiliates 939
Minority interests (2,505)
-----------
Net Income $1,395
===========
36
For the Three Months Ended June 30, 2003
Combined As Reported under US GAAP
-------------------- ---------------------------------------------------------------
Combined Secure
Marketing Less Equity Marketing Products Corporate
Communications Affiliates Communications International & Other Total
--------------------------------------------------------------------------------------------------
Revenue $51,594 $6,699 $44,895 $33,750 $954 $79,599
------------- ------------- -------------- ----------- ------------ -------------
Operating Expenses:
Cost of products sold - - - 15,620 - 15,620
Salary and related costs 23,523 2,943 20,580 5,683 1,403 27,666
General and other
operating costs 19,747 1,285 18,462 10,469 1,234 30,165
Depreciation and amortization 2,048 123 1,925 1,081 304 3,310
Write-down of fixed
assets and other assets - - - 8,126 - 8,126
Goodwill charges - - - 10,012 - 10,012
------------- ------------- -------------- ----------- ------------ -------------
45,318 4,351 40,967 50,991 2,941 94,899
------------- ------------- -------------- ----------- ------------ -------------
Operating Profit (Loss) $6,276 $2,348 $3,928 ($17,241) ($1,987) (15,300)
============= ============= ============== =========== ============
Gain on sale of assets 48,594
Interest expense, net (4,858)
-------------
Income Before Income Taxes, Equity in Affiliates and Minority Interest 28,436
Income Taxes 6,012
-------------
Income Before Equity in Affiliates and Minority Interests 22,424
Equity in affiliates 724
Minority interests (361)
-------------
Net Income $22,787
=============
37
For the Six Months Ended June 30, 2004
Combined As Reported under US GAAP
-------------------- --------------------------------------------------------------
Combined Secure
Marketing Less Equity Marketing Products Corporate
Communications Affiliates Communications International & Other Total
-------------------------------------------------------------------------------------------------
Revenue $138,101 $23,672 $114,429 $36,006 $665 $151,100
-------------- ------------ -------------- ------------ ------------- ------------
Operating Expenses:
Cost of products sold - - - 22,297 - 22,297
Salary and related costs 64,874 11,057 53,817 6,846 7,529 68,192
General and other
operating costs 52,453 4,737 47,716 4,501 3,624 55,841
Depreciation and amortization 3,992 504 3,488 1,482 99 5,069
-------------- ------------ -------------- ------------ ------------- ------------
121,319 16,298 105,021 35,126 11,252 151,399
-------------- ------------ -------------- ------------ ------------- ------------
Operating Profit (Loss) $16,782 $7,374 $9,408 $880 ($10,587) (299)
============== ============ ============== ============ =============
Gain on sale of assets 7,092
Interest expense, net (3,626)
------------
Income Before Income Taxes, Equity in Affiliates and Minority Interest 3,167
Income Taxes 1,367
------------
Income Before Equity in Affiliates and Minority Interests 1,800
Equity in affiliates 2,385
Minority interests (3,808)
------------
Net Income $377
============
38
For the Six Months Ended June 30, 2003
Combined Secure
Marketing Less Equity Marketing Products Corporate
Communications Affiliates Communications International & Other Total
-----------------------------------------------------------------------------------------------
Revenue $96,586 $12,300 $84,286 $77,275 $1,252 $162,813
--------------- ----------- --------------- ----------- ------------ -----------
Operating Expenses:
Cost of products sold - - - 34,349 - 34,349
Salary and related costs 46,404 5,819 40,585 11,766 2,454 54,805
General and other
operating costs 36,364 2,332 34,032 22,519 1,976 58,527
Depreciation and
amortization 3,981 203 3,778 2,255 642 6,675
Write-down of
fixed assets
and other assets - - - 8,126 - 8,126
Goodwill charges - - - 10,012 - 10,012
-------------- ----------- --------------- ----------- ------------ -----------
86,749 8,354 78,395 89,027 5,072 172,494
-------------- ----------- --------------- ----------- ------------ -----------
Operating Profit (Loss) $9,837 $3,946 $5,891 ($11,752) ($3,820) (9,681)
============== =========== =============== =========== ============
Gain on sale of assets 48,594
Interest expense, net (9,091)
-----------
Income Before Income Taxes, Equity in Affiliates and Minority Interest 29,822
Income Taxes 5,991
-----------
Income Before Equity in Affiliates and Minority Interests 23,831
Equity in affiliates 1,222
Minority interests (1,379)
-----------
Net Income $23,674
===========
Three Months Ended June 30, 2004 Compared to Three months Ended June 30, 2003
Marketing Communications
Marketing Communications revenue on a Combined basis was $71.7 million in the
quarter, 39% more than the comparable $51.6 million reported in the second
quarter of 2003. The increase in the quarter's Combined revenue as compared to
the same quarter in 2003 primarily resulted from several significant new
business developments which originated in the first quarter of 2004, as
described below. The revenue growth is also a result of the acquisitions of
several businesses. During the first quarter of 2004, the Company acquired a
controlling interest in the integrated marketing communications group of
agencies of Kirshenbaum Bond + Partners, LLC and an equity interest in the
advertising agency Cliff Freeman + Partners LLC. During the second quarter of
2004 the Company acquired controlling interests in Henderson bas, an interactive
marketing agency, Mono Advertising LLC, an advertising agency, Hello Design,
LLC and Bruce Mau Design Inc., branding and design studios, and Banjo, LLC, a
production studio. These acquired operations contributed $17.1 million of
revenue on a Combined basis during the quarter. Excluding the revenue of
these acquisitions in 2004, Combined revenues increased 6% period over
period. The currency exchange rate effect of the strengthened Canadian dollar
and Pound Sterling, as compared to the same period in 2003, also contributed
approximately $0.7 million to the increase in revenues during this period. On
a pro forma basis, comparing a full three months of operations in both the
second quarters of 2004 and 2003 for the businesses operated by the Company on
June 30, 2004, Combined pro forma revenue would have improved by approximately
10% period over period. This reflects significant pro forma Combined revenue
growth in the US businesses and significant revenue growth in the
39
Canadian businesses. However, the UK operations experienced a significant
decrease in revenues during this period, as compared to the second quarter in
2003. The growth in Combined pro forma US revenues was driven by incremental
revenues resulting from the Company's equity accounted affiliate, Crispin
Porter + Bogusky's new client, Burger King, and from several new client wins
at each of Kirshenbaum Bond + Partners, the Bryan Mills Group, and Henderson
bas. The UK operations experienced declines in revenues from their technology
industry based clients while experiencing very little in new revenue
additions.
The positive organic revenue growth, particularly in the US year over year, has
resulted in a shift in the geographic mix of Combined revenues. Of the Combined
revenue for the quarter, 78% was from the United States, 19% was derived from
Canada and 3% came from the United Kingdom. This compared to 72%, 22% and 6%,
respectively, in the second quarter of 2003.
During the second quarter of 2004, the Company's client base composition
shifted in several areas as compared to the same quarter in 2003. The Company
experienced a relative increase in spending by the consumer products,
information technology and telecommunications based clients, while financial,
and, to a lesser extent, media and healthcare based client revenues became a
relatively smaller component of Combined revenue in 2004 as compared to 2003.
In dollar terms, significant increases were noted in revenues from, consumer
product, telecommunications and service industry based clients. The composition
of revenues added due to business acquisitions in 2004, principally Kirshenbaum
Bond + Partners, was proportionately weighted more to the financial and service
industry based clients than the Combined revenues of the pre-existing
businesses, which contributed dollar revenues primarily from the consumer and
financial industries in particular.
Acquisitions in the first quarter did increase the dollar revenues and also the
proportionate share of revenues from advertising services, as compared to the
"below the line" services. For the second quarter of 2004, advertising services
Combined revenues represented approximately 46% of Combined revenues as
compared to 36% for the same period in 2003. Excluding the effects of the
Kirshenbaum Bond + Partners acquisition, advertising services would have
increased to 39% in the quarter, as the Company's existing operations obtained
several new clients during the quarter requiring advertising services.
Combined operating costs increased at a slightly higher pace than the 39%
growth in Combined revenues, increasing 40% during the quarter as compared to
the same quarter last year. While the "general and other operating" costs
component grew at only 30%, the staff costs increased at 48%. These relative
changes are a result of several factors. Firstly, if the effects of acquired
businesses were excluded from the Combined results, while revenues would have
increased at 6%, staff costs would have increased at 7% and "general and other
operating" costs would have increased 14%. The staff cost increases reflect
some pricing pressures primarily experienced by the Company's' customer service
center operation, Accent Marketing Services. The increase in the "general and
other operating" costs beyond the growth rate of revenues was the result of
several factors. During the second quarter of 2004, the Company invested
approximately $0.7 million in the development of a new initiative. This venture
relates to a proprietary content-driven marketing initiative, which is still in
the research phase and is expected to continue in this phase through the third
quarter of 2004. Secondly, the Company's operations expended an unusual amount
on new business development during the quarter, as the UK business in
particular invested significant resources into attracting new clients. Finally,
Accent Marketing Services expended significant costs expanding its customer
service center operations into near-shore and offshore facilities as it
prepares for additional business volumes and to maintain its competitive cost
structure in the long run.
Excluding the effects in the quarter of the acquisitions, and the investments
in new ventures and new business, as described above, pro forma Combined
operating profits would have increased 9% to $6.8 million, from $6.3 million,
resulting in pro forma Combined operating margins of approximately 12% in the
second quarter of 2004 and 2003. With the addition of Kirshenbaum Bond +
Partners and with the resulting impact of the factors affecting revenues and
operating costs, as discussed above, actual Combined operating income improved
by approximately 42% to $8.9 million from $6.3 million, quarter over quarter,
while operating margins were 12.4% for the quarter, as compared to 12.2 % in
the same quarter last year.
40
Secure Products International
Revenues attributable to Secure Products International were $17.2 million for
the second quarter of 2004, representing a decrease of $16.6 million or 49%
compared to the $33.8 million recorded in the second quarter of 2003. The
decrease was primarily due to the divestiture of Custom Direct ("CDI") last
year as revenues from the remaining operations of Secure Products International
increased 21% or $3.0 million from $14.2 million in the second quarter of 2003.
Ashton Potter, the stamp operations, generated a 107% improvement in revenues
that related primarily to the USPS contract awarded in 2003. This improvement,
together with an increase in revenues from Placard, the Australian card
operation, and from Mercury Graphics, the Canadian ticketing business, were
partially offset by a decrease in revenues from Metaca, the Canadian card
operation.
Secure Products International reported operating costs of $17.0 million for the
second quarter, versus $51.0 million in the same quarter last year. Excluding
the impact of CDI, goodwill charges of $10.0 million and a charge related to
the write-down of fixed and other assets of $8.1 million from 2003, operating
costs increased $1.9 million or 13% compared to last year. However, operating
costs expressed as a percentage of revenue on the same basis, decreased to
99.1% from 106.3% last year. Cost of sales, salaries and related costs and
depreciation of the remaining operations of Secure Products International
decreased as a percentage of revenue in 2004 to 86.8% compared to 88.6% in the
same period of 2003. General and other operating expenses also improved to
12.2% of revenue from 17.3% of revenue in the 2003 second quarter.
As a result, actual operating profit earned by the Secure Products
International Division amounted to $0.2 million for the quarter ended June 30,
2004, compared to a loss of $17.2 million in the same quarter of 2003. On a
more comparative basis, after adjusting the 2003 results to remove income from
divested operations, charges against goodwill and write-down of fixed assets
and other assets, the operating profit of the remaining Secure Products
International businesses improved by approximately $1.0 million as a result of
increased production at Ashton Potter and an improvement in profitability at
Mercury Graphics, partially offset by declines at Metaca. As a result of the
decreased revenues and operating profit generated by Metaca, management has
commenced a plan to reduce the cost structure and improve efficiencies.
Severance and other related charges of $0.2 million were recorded in the
quarter.
Corporate and Other
Revenues of the Corporate and Other segment for the three months ending June
30, 2004 were $0.3 million compared to $1.0 million in 2003. The additional
revenues received in 2003 related primarily to distributions received from CDI.
Operating costs decreased from $2.9 million in the 2003 second quarter to $2.4
million this quarter primarily as a result of a recovery related to the
provision for stock-based compensation partially offset by an increase in
general and other costs. Excluding stock-based compensation, operating expenses
increased as a result of combining the corporate offices of MDC and Maxxcom
Inc. upon the privatization of Maxxcom Inc. in July 2003 and increased
compliance costs associated with US GAAP reporting and Sarbanes-Oxley
legislation.
The operating loss of the Corporate and Other segment increased from $2.0
million in 2003 to $2.1 million in 2004.
Gain (Loss) on Sale of Assets and Settlement of Debt
The loss on sale of assets was $0.1 million for the second quarter of 2004
compared to a gain in 2003 of $48.6 million that related to the disposition of
80% of CDI through an income fund and the retirement of the Company's remaining
10.5% senior subordinated notes.
41
Interest, Net
Net interest expense on a consolidated basis for the quarter, at $1.7 million,
was $3.2 million lower than in 2003, due to a decrease in interest expense
reflective of the second quarter redemption of the convertible debentures
through the issuance of Class A Subordinate Voting Shares and lower average
levels of indebtedness than in the prior year. Interest income was relatively
unchanged compared to the second quarter of 2003.
Income Taxes
The income tax recovery recorded for the second quarter was $0.4 million,
compared to an expense of $6.0 million for the same period in 2003.
Income Before Equity In Affiliates and Minority Interests
For the quarter, income before income taxes, equity in affiliates and minority
interests was $3.0 million versus $22.4 million in 2003, a decrease of $19.4
million due primarily to the impact of asset dispositions in the second quarter
of last year, net of provisions taken against fixed and other assets and
goodwill.
Equity in Affiliates
The income attributable to equity-accounted affiliate operations, principally
Crispin Porter + Bogusky LLC, was $0.9 million for the second quarter of 2004,
$0.2 million higher than the $0.7 million earned in the second quarter of 2003.
Minority Interests
Minority interest expense of Marketing communications was $2.5 million for the
second quarter of 2004, an increase of $0.9 million compared to the same
prior-year quarter. In 2003, Secure Products International and Corporate and
Other had a minority interest recovery of $1.2 million related to Metaca and
Maxxcom, both of which are now wholly-owned.
Net Income
Net income for the quarter ending June 30, 2004 was $1.4 million versus $22.8
million in 2003.
Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003
Marketing Communications
Marketing Communications revenue on a Combined basis was $138.1 million in the
first six months of 2004, 43% more than the comparable $96.6 million reported
in the first six months of 2003. The increase in the period's Combined revenue
as compared to the same quarter in 2003 resulted primarily from several
significant new client additions which originated in the first quarter of
2004, as described below. The growth also resulted from the acquisition of
several businesses. As described above, during 2004, the Company acquired
interests in Kirshenbaum Bond + Partners, LLC, and Cliff Freeman + Partners
LLC, Henderson bas, Mono LLC, Hello Design, LLC, Bruce Mau Design Inc. and
Banjo, LLC. These acquired operations contributed $24.5 million of revenue on
a Combined basis during the first six months of 2004. Excluding the revenue of
these acquisitions in 2004, Combined revenues would have increased 18% period
over period. The currency exchange rate effect of the strengthened Canadian
dollar and Pound Sterling as compared to the same period in 2003 also
contributed approximately $2.5 million to the increase in revenues during this
period. On a pro forma basis, comparing a full six months of operations in
both the first six months of 2004 and 2003 for the businesses operated by the
Company on June 30, 2004, pro forma Combined revenue improved by approximately
14% period over period. This reflected very significant pro forma Combined
revenue growth in the US businesses and also included significant revenue
growth in the Canadian businesses, however, the UK operations experienced a
significant decrease in revenues during this period, as compared to the first
half of 2003. The growth in Combined pro forma US revenues was driven by
revenues derived from the Company's equity accounted affiliate, Crispin
42
Porter + Bogusky's new client, Burger King, and incremental revenues resulting
from several new client wins at Kirshenbaum Bond + Partners, increased
transaction volumes at Accent Marketing Services, the Bryan Mills Group
investor communications new initiatives, and Source Marketing's significant
direct marketing projects this year. The UK operations experienced declines in
revenues from their technology, and, to a lesser extent, financial industry
based clients, while experiencing very little in new revenue additions during
2004.
The positive organic growth particularly in the US year over year has resulted
in a shift in the geographic mix of Combined revenues. Of the Combined revenue
for the first six months, 78% was from the United States, 19% was derived from
Canada and 3% came from the United Kingdom. This compared to 72%, 22% and 6%,
respectively, in first half of 2003.
During the second quarter of 2004, the Company's client base composition
shifted in several areas as compared to the same quarter in 2003. The Company
saw a relative increase in spending by the consumer products,
telecommunications and information technology industry based clients, while
healthcare, and, to a lesser extent, media based client revenues became a
relatively smaller component of Combined revenue in 2004 as compared to 2003.
In dollar terms, significant increases were noted in revenues from consumer
product, financial, service and telecommunications industry based clients. The
composition of revenues added due to business acquisitions in the first half of
2004, principally Kirshenbaum Bond + Partners, was proportionately weighted
more to the financial and service industry based clients than the Combined
revenues of the pre-existing businesses, contributing dollar revenues primarily
from the consumer and financial industries in particular.
Acquisitions in the first half of 2004 did increase the dollar revenues and
also the proportionate share of revenues from advertising services as compared
to the "below the line" services. For the first half of 2004, advertising
services Combined revenues represented approximately 45% of Combined revenues
as compared to 36% for the same period in 2003. Excluding the effects of the
KBP acquisition, advertising services would have increased to 38% in the year
to date period, as the Company's existing operations obtained several new
clients during the period requiring advertising services.
Combined operating costs increased at a slower pace than the 43% growth in
Combined revenues, increasing 40% during the first half of 2004 as compared to
the same period in 2003. Of the operating costs components, Combined "general
and other operating" costs grew at 44% and while staff costs grew at only 40%.
These relative changes were a result of several factors. Firstly, if the
effects of acquired business were excluded from the Combined results, while
revenues would have increased at 18%, staff costs would have increased at 9%
and "general and other operating" costs would have increased 32%. The reduced
staff cost pace of growth relative to revenues reflects the rapid revenue
growth in the first quarter of 2004 that outpaced the ability of certain
businesses to increase staffing levels to the appropriate sustainable levels
for the business volumes, resulting in enhanced profitability during that
period. The increase in the "general and other operating" costs beyond the
growth rate of revenues was the result of several factors. During 2004, the
Company invested approximately $1.4 million in the development of two new
initiatives. During the second quarter of 2004, the Company invested in a new
venture to develop a proprietary content-driven marketing initiative, which is
still in the research phase and is expected to continue in this phase through
the third quarter of 2004. The second venture invested in during 2004, which
will not continue beyond the second quarter of 2004, was related to a possible
expansion into a new geographic market. A further cause of the increase in
operating costs was the unusually high amount expended on new business
development during 2004, in particular by the UK business, which invested
significant resources into attracting new clients. Finally, Accent Marketing
Services expended significant costs to expand its customer service center
operations into near-shore and offshore facilities as it prepares for
additional business volumes and to maintain its competitive cost structure in
the long run.
Excluding the effects in the period of the acquisitions, and the investments in
new ventures and new business, as described above, pro forma Combined operating
profits would have increased 41% to $13.9 million, from $9.8 million, resulting
in pro forma Combined operating margins of approximately 12% in 2004 to date
and approximately 10% in the same period in 2003. With the addition of
Kirshenbaum Bond + Partners and with the resulting impact of the factors
affecting revenues and operating costs, as discussed above, actual Combined
operating income improved by approximately 71% to $16.8 million from $9.8
million, period over period, while operating margins where 12.2% for the first
half of 2004, as compared to 10.2 % in the same period in 2003.
43
Secure Products International
Secure Products International revenues totaled $36.0 million for the first six
months of 2004. The decrease of $41.3 million, or 53% compared to revenues of
$77.3 million for the same period in 2003, was primarily due to the divestiture
of CDI. Revenues from the remaining operations of Secure Products International
increased 25% year over year. The most significant increase was generated by
the stamp operations of Ashton Potter, where production increased due to the
USPS contract awarded in 2003. Placard, the Australian card operation, and
Mercury, the Canadian ticketing business also experienced revenue growth.
However, revenues of the Canadian card operation, Metaca, decreased period over
period.
Operating costs incurred by Secure Products International were $35.1 million
for the first half of the year compared to $89.0 million in 2003 which included
$41.5 million of costs related to CDI, and expenses related to provisions
against fixed assets and goodwill of $18.1 million. Excluding these costs from
the 2003 results, the remaining operations recorded an improvement in operating
expenses as a percentage of revenue, from 102.1% for the first half of 2003 to
97.6% for the first half of 2004.
In the 2004 first half, Secure Products International achieved operating income
of $0.9 million, an improvement of $12.7 million from the loss incurred in 2003
of $11.8 million. This represents a year over year improvement of $1.6 million
from the adjusted operating loss related to the remaining operations, primarily
as a result of the increased production at Ashton Potter partially offset by
declines at Metaca.
Corporate and Other
Revenue attributable to the Corporate and Other segment for the first half of
2004 was $0.7 million compared to $1.3 million for the same period of 2003
which included distributions from CDI. Rental revenues remained relatively
unchanged.
Operating costs, at $11.3 million, increased $6.2 million compared to the six
months ended June 30, 2003, primarily related to a $4.0 million increase in
charges for stock-based compensation. Corporate and other costs also increased
as a result of the merger of head offices upon the privatization of Maxxcom Inc
and an increase in compliance costs.
The operating losses of the Corporate and Other segment increased to $10.6
million in 2004 from $3.8 million in 2003.
Gain on Sale of Assets
The gain on sale of assets of $7.1 million for the first two quarters of 2004
primarily related to the divestiture of the remaining interest in CDI upon
settlement of the adjustable rate exchangeable securities in the first quarter.
The 2003 gain related primarily to the disposition of the initial 80% interest
in the U.S. cheque operations.
Interest, Net
On a consolidated basis net interest expense for the first six months of the
year was $3.6 million, compared to the $9.1 million incurred during the same
year-earlier period. Interest expense decreased $5.2 million due primarily to
the repayment of the 10.5% senior subordinated notes and the redemption of the
convertible debentures. 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
The income tax expense recorded for the six months ended June 30, 2004, was
$1.4 million compared to $6.0 million for the same period in 2003. Income taxes
were 43.1% of income before income taxes, equity in affiliates and minority
interests versus 20.0% in 2003.
44
Income Before Equity In Affiliates and Minority Interests
The consolidated income before equity in affiliates and minority interests for
the year-to-date period ended June 30, 2004 was $1.8 million, $22.0 million
lower than the $23.8 million earned during the same prior-year period. The
decrease was primarily due to the significant gain on sale of assets related to
CDI in 2003, net of goodwill charges and the write-down of assets also recorded
in that year.
Equity in Affiliates
Equity in affiliates represents the income attributable to equity-accounted
affiliate operations. For the first two quarters of 2004, income of $2.4
million was recorded. The increase of $1.2 million over the $1.2 million earned
in the first half of 2003 is principally due to greater income generated by
Crispin Porter + Bogusky.
Minority Interests
Minority interest expense of marketing communications was $3.8 million for the
first six months of 2004, an increase of $1.2 million compared to the $2.6
million in the previous year. In 2003, a recovery of $1.2 million was recorded
related to Metaca and Maxxcom.
Net Income
Net income for the first half of 2004 was $0.4 million versus the $23.7 million
achieved in 2003.
Liquidity and Capital Resources
Working Capital
The Company had a working capital deficit of $12.2 million at June 30, 2004,
relatively unchanged from the deficit of $12.6 million at March 31, 2004 and
$53.1 million less than the working capital of $40.9 million at December 31,
2003. The reduction in working capital is due primarily to cash payments made
for acquisitions completed during 2004, 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 $18.0
million. Accounts receivable and expenditures billable to clients increased by
$40.2 million and $0.4 million, respectively. Inventory increased by $0.3
million and prepaid expenses by $1.2 million. Accounts payable and accrued
liabilities increased by $51.5 million. Advance billings increased by $5.6
million and the current portion of long-term debt increased by $20.5 million.
At June 30, 2004, Maxxcom had utilized approximately $30.0 million of its $33.1
million facility in the form of drawings and letters of credit. During the
second quarter, the Company reached agreements with its senior credit lenders
to amend the terms of the credit facility of its subsidiary, Maxxcom Inc., to
eliminate the scheduled quarterly borrowings reductions after March 31, 2004
and to change the facility's maturity date from March 31, 2005 to September 30,
2004.
Currently, substantially all of the long-term debt is held at Maxxcom or its
subsidiairies. Maxxcom's ability to meet the repayment of its long-term debt is
dependent upon the availability of cash from its parent MDC Partners Inc. and
from the cash flows from its subsidiaries and affiliated companies through
dividends, distributions, intercompany advances, management fees and other
payments. A number of Maxxcom's subsidiaries are not wholly-owned and pursuant
to operating agreements with some of the other shareholders of these
subsidiaries and affiliates and certain subsidiary and affiliate lending
agreements, there are certain restrictions on the payment of dividends,
distributions and advances to Maxxcom. In addition, pursuant to certain lending
agreements entered into by MDC Partners Inc, there are restrictions on MDC's
ability to transfer available cash to Maxxcom.
45
On June 10, 2004, the Company entered into a revolving credit facility with a
syndicate of banks providing for borrowings of up to $18.7 million (CDN$25.0
million) maturing in May of 2005. This facility is secured by a pledge of the
Company's assets, principally comprised of ownership interest in its
subsidiaries and by the underlying assets of the businesses comprising the
Company's Secure Products International segment and Kirshenbaum Bond &
Partners. At June 30, 2004, the Company had not drawn any funds under this
facility.
Cash and undrawn available bank credit facilities to support the Company's
future cash requirements, as at June 30, 2004, was approximately $70 million.
Long-Term Debt
Long-term indebtedness (including the current portion) at the end of the second
quarter was $85.8 million, a reduction of $34.9 million compared with the
$120.7 million outstanding at March 31, 2004 and $64.4 million from the $150.2
million outstanding at December 31, 2003. The $34.9 million outstanding
convertible notes were settled in full on May 5, 2004 with the issuance of
approximately 2.6 million Class A subordinate voting shares.
MDC Partners Inc., the parent company, is in the process of refinancing its
indebtedness with a $100 million credit facility. A term sheet has been signed
with a major US financial institution and the credit facility agreement is
currently being negotiated. This new facility, combined with a related cash
management program, will be used to repay existing outstanding indebtedness
under the MDC senior credit facility, the Maxxcom senior credit facility, the
Maxxcom mezzanine facility and the Accent Marketing LLC credit facility.
Management believes that the new facility will be completed prior to September
30, 2004, the date the Maxxcom senior credit facility is due. Once completed,
the new credit facility will reduce the Company's aggregate borrowing costs and
provide enhanced liquidity. In the event the new credit facility is not
completed prior to maturity of the Maxxcom senior credit facility, management
is believes that the Maxxcom facility can be renegotiated and extended.
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 June 30, 2004, approximately $0.8 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 $1 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 the date of exercise, the
growth rate of the earnings of the relevant subsidiary during that period, and,
in some cases, the currency exchange rate at the date of payment.
46
Management estimates, assuming that the subsidiaries perform at their current
profit levels over the relevant future periods, that these rights, if all
exercised, could require the Company, in future periods, to pay an aggregate of
approximately $73 million to the owners of such rights to acquire the remaining
ownership interests in the relevant subsidiaries. Of this amount, the Company
would be entitled, at its option, to fund approximately $18 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 $10 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 $4 million of the estimated $73 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 three 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 used in operations, including changes in non-cash working capital,
for the first six months of 2004 was $0.7 million, representing a $5.4 million
decrease from the cash flow generated of $4.7 million from the same period of
2003, primarily as a result of non-cash working capital usage, offset partially
by the improved operating profit achieved.
Cash flows used in investing activities amounted to $13.3 million for the six
months ended June 30, 2004, compared with the cash flows generated in the same
2003 period of $78.7 million. $4.6 million of the $8.1 million year-to-date
capital expenditures relate to the Marketing Communications segment and the
remainder to the purchase of manufacturing equipment in the Secure Products
segment. In 2003, proceeds on disposition primarily represent the net proceeds
received from the initial public offering of CDI.
At June 30, 2004, cash flows used in financing activities were $4.1 million and
comprised of the proceeds from the issuance of long-term debt of $2.0 million,
a repayment of $4.2 million of long-term indebtedness, proceeds of $3.2 million
from the issuance of share capital through a private placement and the exercise
of options, and $5.1 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.
47
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 and six months ended June 30, 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 certain 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, stock-based compensation 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.
48
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. Substantially all of the revenue of the Marketing
Communications segment is derived from fees for services. Commissions are
earned based on 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 recognition 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:
We hereby incorporate by reference the disclosure provided under the header
"Risks and Uncertainties" in the Company's Management Discussion and Analysis
of Financial Condition and Results of Operations for the year ended
49
December 31, 2003, included in the Company's Annual Report on Form 40-F for
the year ended December 31, 2003, filed with the SEC on May 10, 2004. As of
June 30, 2004, no material change had occurred that required the Company to
update such disclosure.
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, and 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 are currently evaluating this
opportunity.
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.
50
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 US 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 US 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 US/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 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 as of the end of the period covered by this report. Based on that
evaluation, our CEO and CFO concluded as of June 30, 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 June 30, 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.
51
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 | Total Number of | Maximum Number of |
| | Shares Purchased | Paid per Share | Shares Purchased as | Shares that may |
| | | | Part of Publicly | yet be Purchased |
| | | | Announced Plans or | under the Plans |
| | | | Programs | or Programs |
|------------------|------------------|----------------|---------------------|-------------------|
| April 1, 2004 | nil | $ - | - | 110,073 |
| -April 30, 2004 | | | | |
|------------------|------------------|----------------|---------------------|-------------------|
| May 1, 2004 | 46,100 | $11.78 | 46,100 | 63,973 |
| -May 31, 2004 | | | | |
|------------------|------------------|----------------|---------------------|-------------------|
| June 1, 2004 | 17,800 | $11.92 | 17,800 | nil(1) |
| -June 30, 2004 | 254,300 | $11.43 | 254,300 | 1,562,522(2) |
|------------------|------------------|----------------|---------------------|-------------------|
| Total | 318,200 | $11.33 | 318,200 | |
------------------------------------------------------------------------------------------------
1. The Class A subordinate voting shares were purchased pursuant to a
publicly announced plan which commenced May 30, 2003 and expired June 2,
2004. The number of shares purchased under this plan was 1,223,716.
2. The Class A subordinate voting shares were purchased pursuant to a
publically announced plan which commenced June 7, 2004. The maximum number
of shares that may be purchased under this plan is 1,816,822. This plan
expires June 6, 2005.
52
Item 4. Submission of Matters to a Vote of Security Holders
The Company held it's annual shareholders' meeting on June 9, 2004. At the
meeting, votes were cast for the following proposals as follows:
To appoint KPMG LLP as auditors of the Company and authorizing the Company's
Board of Directors to fix the auditors' remuneration:
In excess of 95% of proxy votes were for this resolution.
To elect the following Directors:
Thomas Davidson
Guy P. French
Richard R. Hylland
Michael J.L. Kirby
Miles S. Nadal
Stephen M. Pustil
Francois R. Roy
In excess of 95% of proxy votes were for this resolution.
To approve the special resolution to approve the continuance of the Company
from the Business Corporations Act (Ontario) to the Canadian Business
Corporations Act:
In excess of 95% of proxy votes were for this resolution.
To approve the ordinary resolution to confirm By-Law No. 1 to be adopted by the
Company upon continuance of the Company from the Business Corporations Act
(Ontario) to the Canadian Business Corporations Act:
Votes For Votes Against
6,413,027 469,606
To the approve the ordinary resolution to approve an amendment to the Company's
Stock Appreciation Rights Plan:
Votes For Votes Against
6,669,903 1,115,044
53
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
3.2 General By-law No. 1, dated June 9, 2004 *;
3.3 Articles of Continuance, dated June 28, 2004 *;
10.11 Management Services Agreement between MDC Partners Inc. and
Peter M. Lewis, dated May 20, 2004*;
10.12 Credit Agreement made June 10, 2004 between MDC Partners Inc,
as borrower, The Toronto-Dominion Bank, as Lead Arranger,
Sole Bookrunner and administration agent, and the Lenders (
as defined therein)*;
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 June 30, 2004:
On June 25, 2004, the Company furnished a Current Report on Form 8-K containing
historical financial information all prepared in accordance with, or derived
from, financial information prepared in accordance with United States generally
accepted accounting principles.
__________
* Filed electronically herewith.
54
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
- --------------------------
Walter Campbell
Chief Financial Officer
August 4, 2004
55
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3.2 General By-law No. 1, dated June 9, 2004 *;
3.3 Articles of Continuance, dated June 28, 2004 *;
10.11 Management Services Agreement between MDC Partners Inc. and
Peter M. Lewis, dated May 20, 2004*;
10.12 Credit Agreement made June 10, 2004 between MDC Partners Inc,
as borrower, The Toronto-Dominion Bank, as Lead Arranger,
Sole Bookrunner and administration agent, and the Lenders (
as defined therein)*;
21 Subsidiaries of Registrant *;
31 Rule 13a-14(a)/15d-14(a) Certifications *;
32 Section 1350 Certifications *.
__________
* Filed electronically herewith.
56