SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 40-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003 Commission File Number 001-13718
MDC PARTNERS INC.
(Exact name of Registrant as specified in its charter)
Ontario 2751 Not Applicable
(Province or other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
45 Hazelton Avenue
Toronto, Ontario, Canada
M5R 2E3
(416) 960-9000
(Address and telephone number of Registrants' principal executive offices)
Ashton-Potter USA Ltd.
10 Curtwright Drive
Williamsville, NY 14221
(716) 633-2000
(Name, address (including zip code) and telephone number
(including area code) of agent for service in the United States)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Name of each Exchange on which
Title of each class Registered:
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None
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Class A Subordinate Voting Shares, without par value
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None
For annual reports, indicate by check mark the information filed with this Form:
[X] Annual information form [X] Audited annual financial statements
Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period covered by
this annual report.
The Registrant had 18,369,451 Class A Subordinate Voting Shares
outstanding as at December 31, 2003
Indicate by check mark whether the Registrant by filing the
information contained in this Form is also thereby furnishing the information
to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act
of 1934 (the "Exchange Act"). If "Yes" is marked, indicate the filing number
assigned to the registrant in connection with such Rule.
Yes ______ 82- ______ No X
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 _______
DOCUMENTS FILED UNDER COVER OF THIS FORM
Document No. 1: Annual Information Form for the year ended December 31,
2003, dated April 30, 2004.
Document No. 2: Audited Financial Statements for the financial year ended
December 31, 2003, prepared in accordance with Canadian
generally accepted accounting principles, and reconciled
to United States generally accepted accounting principles
in accordance with Item 17 of Form 20-F.
Document No. 3: Management's Discussion and Analysis of Financial
Condition and Results of Operations for the year ended
December 31, 2003.
Document No. 1
MDC PARTNERS INC.
ANNUAL INFORMATION FORM
2004
April 30, 2004
MDC PARTNERS INC.
2004 ANNUAL INFORMATION FORM
TABLE OF CONTENTS
Page
The Company 2
Principal Operating Subsidiaries 4
Business of the Company 5
Business Operations of the Company
Marketing Communications Division 8
Secure Products International Division 13
Financial Information Relating to Principal Business Categories 14
Competition 14
Industry Trends 15
Employees 16
Risks 16
Dividends 16
Capital Structure 17
Management's Discussion and Analysis 17
Market for Securities of the Company 17
Directors and Officers 17
Conflicts of Interest 18
Additional Information 19
MDC PARTNERS INC.
2004 ANNUAL INFORMATION FORM
THE COMPANY
MDC Partners Inc. ("MDC" or the "Company") was formed by Certificate of
Amalgamation effective December 19, 1986 pursuant to the Business Corporations
Act (Ontario). Effective December 19, 1986, the Company amalgamated with
Branbury Explorations Limited, and thereby became a public company. The
registered and principal office of the Company is located at 45 Hazelton Avenue,
Toronto, Ontario, M5R 2E3, and its telephone number is (416) 960-9000. The
Company has amended its articles in the following instances:
(a) by Certificate of Amendment dated March 4, 1987, changing its
name to MDC Corporation and further reorganizing its share
capital changing its issued and outstanding common shares into
Class A Subordinate Voting Shares and Class B Shares (each in
an unlimited amount) and creating an unlimited number of
non-voting preference shares, issuable in series, in an
unlimited number, having those designations, preferences,
rights, restrictions, conditions, limitations and other
attributes as determined by the board of directors of the
Company;
(b) by Certificate of Amendment dated May 31, 1988, creating
"coattail" provisions to the Class A Subordinate Voting Shares
of the Company;
(c) by Certificate of Amendment dated February 23, 1989, creating
the first series of preference shares of the Company,
designated as "Series 1 Preference Shares", and fixing the
rights, privileges, restrictions and conditions attaching
thereto;
(d) By Certificate of Amendment dated May 12, 1989, creating the
second series of preference shares of the Company, designated
as "Series 2 Preference Shares" and fixing the rights,
privileges, restrictions and conditions attaching thereto;
(e) by Certificate of Amendment dated May 31, 1990, amending the
preferences, rights, conditions, limitations and prohibitions
attaching to the preference shares of the Corporation as a
class;
(f) by Certificate of Amendment dated May 31, 1990, amending
the provisions attaching to the Company's Series 1
Preference Shares;
(g) by Certificate of Amalgamation dated November 30, 1990,
amalgamating the Company with its wholly-owned subsidiaries,
MDC Production Services Limited and MDC Industries Inc.;
(h) by Certificate of Amendment dated September 3, 1991,
empowering the directors of the Company to determine the
number of directors to be elected at each annual meeting of
shareholders, subject to the articles of the Company;
(i) by Certificate of Amendment dated February 27, 1992, amending
the provisions attaching to the Company's Series 1
Preference Shares;
(j) by Certificate of Amendment dated January 7, 1992, clarifying
the provisions attaching to the Class A Shares and the Class B
Shares and redesignating the Class A Shares as "Class A
Subordinate Voting Shares";
(k) by Certificate of Amalgamation dated January 1, 1996,
amalgamating the Company with its wholly-owned subsidiary,
Mercury Graphics Corporation;
(l) by Certificate of Amendment dated May 28, 1996, changing its
name to MDC Communications Corporation and consolidating its
share capital, Class A Subordinate Voting Shares and Class B
Shares, on a one-for-six basis;
(m) by Certificate of Amalgamation dated January 1, 1999,
amalgamating the Company with its wholly-owned subsidiary, MDC
D&H Regal Inc.;
(n) by Certificate of Amendment dated May 28, 1999, changing its
name to MDC Corporation Inc.;
(o) by Certificate of Amendment dated March 16, 2000, creating the
third series of preference shares of the Company, designated
as "CyberSight-MDC Exchangeable Preference Shares" and fixing
the rights, privileges, restrictions and conditions attaching
thereto; and
(p) by Certificate of Amalgamation dated January 1, 2004,
amalgamating MDC Corporation Inc. with its wholly-owned
subsidiary, MDC Partners Inc.
PRINCIPAL OPERATING SUBSIDIARIES
The following are the principal operating subsidiaries and affiliates
of the Company together with the percentage of voting securities/interests
thereof which are owned, directly or indirectly, by the Company as of December
31, 2003 and the jurisdiction of incorporation/formation of each:
Name of Subsidiary or Affiliate Percentage of Voting Jurisdiction of
Securities/Interests Incorporation/
Formation
---------------------------------------------------------------------------------------------------------------
Ashton-Potter Canada Ltd. 100.0 Ontario
Ashton-Potter (USA) Ltd. 100.0 Delaware
Computer Composition of Canada Inc. 100.0 Ontario
Metaca Corporation 100.0 Ontario
Placard Pty Ltd. 100.0 Australia
Pro-Image Corporation 100.0 Delaware
Maxxcom Inc. 100.0 Ontario
Accent Marketing Services, L.L.C. 50.1 Delaware
Accumark Promotions Group Inc. 55.0 Ontario
Allard Johnson Communications Inc. 54.3 Ontario
Ambrose Carr Linton Carroll Inc. 100.0 Ontario
Bratskier & Company, Inc. 100.0 New York
Bryan Mills Group Ltd. 68.0 Ontario
Colle & McVoy, Inc. 100.0 Minnesota
Crispin, Porter Bogusky, LLC 49.0 Delaware
Fletcher Martin Ewing LLC 70.0 Delaware
Integrated Healthcare Communications, Inc. 70.0 Ontario
Interfocus Network Limited 100.0 England
Mackenzie Marketing, Inc. 100.0 Delaware
Margeotes/Fertitta + Partners LLC 80.0 Delaware
Northstar Research Partners Inc. 50.1 Ontario
Chinnici Direct, Inc. 100.0 Delaware
Source Marketing LLC 87.7 New York
TargetCom LLC 80.0 Delaware
Veritas Communications Inc. 58.8 Ontario
656712 Ontario Limited, o/a "Strategies International" 85.0 Ontario
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BUSINESS OF THE COMPANY
The Company carries on business through two operating divisions: Marketing
Communications Division and Secure Products International Division.
Over the last three years, the business of the Company has developed
chronologically as follows:
Date Development
January 15, 2001 The Company, through Maxxcom Inc., acquired
49% of Crispin Porter + Bogusky LLC ("CF+P"),
a Miami-based advertising agency.
February 12, 2001 The Company acquired 100% of NBS Canada Inc.,
the Canadian card services unit of Mist Inc.,
a supplier of plastic cards and
personalization services to financial
institutions and retailers in Canada and the
United States.
February 16, 2001 All outstanding CyberSight-MDC Exchangeable
Preference Shares of the Company were
exchanged into common shares of CyberSight.
The Company then acquired additional shares
of Cybersight. The Company issued 933,337
Class A Subordinate Voting Shares as part of
the total consideration.
March, 1, 2001 The Company, through Maxxcom Inc., acquired
100% of The Marketing Department LLC, a sales
promotion company located in Greenwich,
Connecticut.
April 5, 2001 Maxxcom Inc. issued 1,333,333 common shares
from treasury to 1451946 Ontario Inc., a
wholly-owned subsidiary of the Company, for
gross proceeds of CDN$10,000,000.
June 15, 2001 Maxxcom Inc. acquired certain assets of
McCool Communications, Inc., an advertising
business located in Atlanta, Georgia.
July 25, 2001 The Company, through Maxxcom Inc., acquired
79.17% of Grange Advertising Limited, an
advertising and direct marketing company
located in London, England.
December 17, 2001 MDC completed the disposition of its
discontinued operations, Regal, for gross
proceeds of approximately CDN$36,000,000.
December 19, 2001 The Company completed the sale of a 45.45%
interest in the Canadian cheque operations of
Davis + Henderson (D+H) through an income
trust offering for gross proceeds of
approximately CDN$250,000,000.
January 10, 2002 The Company sold an additional 4.54% interest
in Davis + Henderson, Limited Partnership,
through the exercise of the underwriters'
over-allotment option, for gross proceeds of
approximately CDN$17,200,000.
April 2, 2002 The Company sold its remaining 50.01%
interest in Davis + Henderson, Limited
Partnership for gross proceeds of
approximately CDN$200,000,000.
April 9, 2002 The Company completed the repurchase of
US$112,500,000 of its 10.5% Senior
Subordinated Notes due December 1, 2006 at
89% of the original principal amount.
April 30, 2002 The Company, through Maxxcom Inc., disposed
of its 100% interest in Wernimont & Paullus
Inc., located in Cedar Rapids, Iowa.
May 30, 2002 The Company, through Maxxcom Inc., disposed
of its 100% interest in News Canada Inc.,
located in Toronto, Ontario.
June 28, 2002 The Company completed the sale of
Ashton-Potter Packaging.
July 16, 2002 Maxxcom Inc. completed a rights offering to
holders of its common shares. Under the
rights offering, 16,777,550 common shares
were subscribed for at a price of CDN$1.60
per share resulting in total gross proceeds
of CDN$26,844,000. MDC subscribed for its pro
rata entitlement, an additional investment of
CDN$25,000,000.
July 19, 2002 The Company completed the sale of A.E.
McKenzie Co. Inc. for gross proceeds of
approximately CDN$8,000,000
September 20, 2002 The Company completed the sale of its U.K.
stamp operations.
September 30, 2002 The Company completed the divestiture of its
Australian ticketing operation.
May 29, 2003 The Company completed an initial public
offering of Custom Direct, its U.S.-based
direct-to-consumer cheque operation, through
Custom Direct Income Fund (the "Fund") for
gross proceeds, including the exercise of the
underwriters' over-allotment option, of
approximately US$128,000,000. After this
transaction, MDC owned a 29.6% interest in
the Fund, and a 20% subordinated interest in
Custom Direct.
June 30, 2003 The Company redeemed the remaining
US$86,400,000 of its 10.5% Senior Subordinate
Notes due December 1, 2006 for approximately
US$89,500,000.
July 31, 2003 The Company completed the sale of its 29.6%
interest in the Fund for gross proceeds of
approximately US$21,300,000.
July 31, 2003 The Company acquired the remaining 26% of
Maxxcom Inc. that it did not already own by
way of a plan of arrangement. Pursuant to the
arrangement, Maxxcom shareholders, other than
MDC, received 1 MDC Class A Subordinate
Voting Share for every 5.25 Maxxcom common
shares they owned, resulting in the issuance
by MDC of approximately 2,470,000 Class A
Subordinate Voting Shares.
September 30, 2003 The Company acquired the remaining 15% of
Metaca Corporation that it did not already
own.
December 8, 2003 The Company completed the offering of
3,903,451 Adjustable Rate Exchangeable
Securities due December 31, 2028 for total
net proceeds of approximately CDN$31,700,000.
The securities paid interest monthly at a
rate equal to the actual distribution by the
Fund in that month and a holder of an
Exchangeable Security had the right to
exchange the security for a unit of the Fund
once MDC was entitled to effectively exchange
its 20% ownership of Custom Direct into units
of the Fund.
January 29, 2004 The Company purchased a 60% interest in
kirshenbaum bond + partners for cash
consideration of approximately US$21,000,000
and share consideration of approximately
US$1,800,000.
February 13, 2004 The Company redeemed all of the Adjustable
Rate Exchangeable Securities due December 31,
2028 for units of the Fund, divesting of its
remaining 20% ownership in Custom Direct.
February 25, 2004 The Company's controlling shareholder, Miles
Nadal, completed the conversion of 100% of
the Class B multiple voting shares of the
Company owned indirectly by him into Class A
Subordinate Voting Shares on a one-for-one
basis, without any cash or non-cash
consideration.
March 29, 2004 The Company acquired an additioanl 39.3%
ownership interest in Accent Marketing
Services LLC, increasing its total ownership
interest in this subsidiary from 50.1% to
approximately 89.4%.
March 31, 2004 The Company acquired a 19.9% interest in
Cliff Freeman & Partners LLC.
BUSINESS OPERATIONS OF THE COMPANY
MDC is a publicly traded international organization with operating units in
Canada, the United States, the United Kingdom and Australia. MDC is a leading
provider of marketing communications services, and secure transaction products
and services, to customers in more than 60 countries. MDC carries on business
through two operating divisions:
i. Marketing Communications Division; and
ii. Secure Products International Division
Marketing Communications Division
MDC Partners Inc. is the largest full-service marketing communications
organization based in Canada. Its subsidiaries provide a comprehensive range of
communications services in Canada, the United States and the United Kingdom.
Marketing communication services include advertising, direct marketing, database
management, sales promotion, corporate communications, marketing research,
corporate identity and branding, and interactive marketing.
The Marketing Communications Division operates through its integrated
communications and its specialized communications companies. The Company's
integrated communications operating companies are listed below.
Integrated Communications Companies
Companies comprising MDC's integrated communications businesses deliver
solutions to clients using a variety of marketing communications services. By
carefully analyzing the requirements of each client, they select and combine the
relevant services to ensure consistency in the delivery of the client's image
and brand. Because the integrated companies offer a full range of services, the
solutions they deliver are client-based, not service-based. As a result,
profitability is measured on a client basis, and not on a service basis.
The integrated communications companies of the Marketing Communications Division
are listed below.
Allard Johnson Communications Inc.
In 1999, LBJ.FRB Communications Inc., a Marketing Communications Division
operating company since 1992, merged with Allard et Associes Inc. to form Allard
Johnson Communications Inc. ("Allard Johnson"). Allard Johnson is a Canadian
integrated communications services agency, providing advertising, sales
promotion, direct marketing and interactive services in the fields of consumer
products, financial services, wellness and social marketing. Clients include
Dairy Farmers of Canada, RBC Royal Bank and Wal-Mart.
Ambrose Carr Linton Carroll Inc.
Ambrose Carr Linton Carroll Inc. ("ACLC") is a Canadian integrated
communications services agency, providing advertising, sales promotion,
collateral, point-of-sale and direct marketing for a broad range of clients.
Agency clients include Honda, Acura, Swiss Chalet, Hershey, Paramount Canada's
Wonderland and Toshiba. MDC acquired ACLC in 1992.
Colle & McVoy, Inc.
Colle & McVoy, Inc. ("CMI") founded in 1935, is a U.S. full-service, integrated
marketing communications services agency, providing business planning,
advertising, corporate communications, direct response, public relations,
interactive and sales productivity development services. Clients include 3M,
Case New Holland, Cenex, the Minnesota Office of Tourism, Pfizer, Nestle,
Purina, the Red Wing Shoe Company and Winnebago. CMI was purchased by MDC in
1999.
Cormark Communications Inc.
Cormark Communications Inc. ("Cormark") was launched in 1978 and was acquired by
MDC in 1994. Cormark is a Canadian integrated communications services agency,
providing advertising and direct marketing services to a wide variety of
clients. Clients include Ayerst Animal Health, Bridgestone/Firestone Canada,
Canadian Wheat Board, Ontario Lottery and Gaming Corporation and Northland Mall.
Fletcher Martin Ewing LLC.
Fletcher Martin Ewing LLC ("Fletcher Martin") was founded in 1979 and acquired
by MDC in 1999. Fletcher Martin is a U.S. integrated communications services
agency, providing strategic consulting, advertising, sales promotion and
corporate communications services. Clients include Arby's, Mrs. Winner's/Lee's
Chicken, Piccadilly Cafeterias, Precept Golf and the Suntory Water Group.
Interfocus Group Limited.
Interfocus Group Limited ("Interfocus") is an U.K. integrated communications
services agency, providing brand and marketing consulting, advertising, design,
sales promotion, direct marketing, new media and sponsorship services. Clients
include Lloyds TSB, Panasonic, Scottish Life and Xerox. The Company acquired its
interest in Interfocus in 2000.
Mackenzie Marketing, Inc.
Mackenzie Marketing, Inc. ("Mackenzie Marketing") was founded in 1997 and
acquired by the Company in 2000. Mackenzie Marketing is a U.S. integrated
communications services agency, providing strategic consulting, advertising,
sales promotion and corporate communications services to clients primarily in
the financial services industry. Clients include American Express, Best buy,
Blue Cross/Green Shield, Paisley Consulting, Bank One Corporation, J.P. Morgan
Chase, Transamerica Financial Institutions, U.S. Bancorp and Wells Fargo.
Margeotes/Fertitta + Partners LLC.
Margeotes/Fertitta + Partners LLC ("Margeotes/Fertitta") was founded in 1973 and
acquired by MDC in 1998. Margeotes/Fertitta is a U.S. integrated communications
services agency, providing advertising, sales promotion and corporate
communications services to clients in the packaged goods, financial services,
online services and entertainment industries. Clients include Bacardi, Godiva
Chocolatier, The McGraw Hill Companies, Putnam Investments and Triton PCS.
Specialized Communications Services Companies
The companies comprising the Company's specialized communications services
businesses are focused on an individual marketing communications discipline.
These companies are selected by clients for their depth of expertise in their
respective disciplines. Specialized communications have been traditionally
labeled the "below the line" component of the marketing communications services
industry. The Company's specialized communications companies are listed below.
Advertising
-----------
Cliff Freeman & Partners.
Cliff Freeman & Partners, which operates with the credo "Entertainment sells,"
has long been recognized for its creative brilliance and has won numerous
national and international advertising awards. Cliff Freeman & Partners'
inspired creative and inspired ideas have consistently helped clients at
critical crossroads, launching or re-launching brands in extremely competitive
environments. Current and former clients include Little Caesar's, Turner
Broadcasting Systems, Mohegan Sun, Designer Shoe Warehouse, Fox Sports and The
Sports Authority.
Crispin Porter + Bogusky LLC.
Crispin Porter + Bogusky LLC ("Crispin Porter"), founded in 1965, is a U.S.
specialized corporate communications firm, providing advertising services to a
wide variety of clients. Its clients include IKEA, Sirius Satellite Radio, MINI
(a division of BMW North America), Molson U.S.A., Virgin Atlantic Airways,
Burger King and the American Legacy Foundation. The Company acquired its
interest in Crispin Porter in 2001.
kirshenbaum bond + partners
kirshenbaum bond + partners creates creates non-traditional marketing programs
for clients through four complementary units - kirshenbaum bond (advertising,
with offices in New York and San Francisco), The Media Kitchen (media
management), LIME Public Relations + Promotions and Dotglu (interactive and
direct marketing). Current and former clients include Verizon SuperPages, The
Andrew Jergens Company, Citibank, Aadvantage, Liberty Mutual, Song Airways,
Timex, Vegas.com, Cisco Systems, Wyndham Hotels & Resorts, Snapple, Kenneth
Cole, Coach, Hennessy, The Meow Mix Company and Target.
Direct Marketing/Database Management
------------------------------------
Accent Marketing Services, L.L.C.
Headquartered in Jeffersonville, Indiana, and founded in 1993, Accent Marketing
Services, L.L.C. ("Accent") was acquired by MDC in 1999. Accent is an
international customer relationship management company that designs, develops
and implements complete customer service and direct marketing campaigns to
acquire, retain and develop its clients' customers. With six domestic customer
contact centres and one near-shore location, Accent is experienced in providing
world class inbound and outbound calling programs for Fortune 1000 companies
worldwide. Accent focuses on delivering a value-added approach to customer
lifecycle management, utilizing both the contact centre capabilities and the
direct marketing/direct mail assets of the business. Clients include Sprint,
Maytag, Murray Lawn Care, US Cellular and Whirlpool.
Chinnici Direct, Inc.
Founded in 1980, Chinnici Direct, Inc. ("Chinnici") is an U.S. specialized
corporate communications firm, providing direct marketing servicing to a variety
of industries. Clients include Barnes & Noble, Chase Manhattan Bank, CNA
Insurance, Pantone and Reed Exhibitions. The Company acquired its interest in
Chinnici in 2000.
TargetCom LLC.
TargetCom LLC ("TargetCom") was established in 1988. TargetCom is a U.S.
specialized corporate communications firm, providing direct marketing services
specializing in very targeted delivery of meaningful and relevant messages to
customers. Clients include Citibank, Chicago Tribune, Cancer Treatment Centers
of America, Transunion, U.S. Cellular and Spiegel. The Company acquired
TargetCom in 2000.
Sales Promotion
---------------
Accumark Promotions Group Inc.
Accumark Promotions Group Inc. ("Accumark") is a Canadian specialized corporate
communications firm providing promotional marketing services including strategic
consulting, trade, sales force and consumer promotional programs, in-store
merchandising and point-of-sale material, food service marketing and event
marketing. Accumark was acquired by MDC in 1993. Clients include Campbell Soup
Company, Kraft and Pfizer.
eSource Drive to Web Marketing LLC.
Launched in 2000, this start-up is focused on attracting new customers to
e-commerce sites and encourages loyalty among existing customers of e-commerce
brands. Its clients include TD Waterhouse.
Source Marketing LLC.
Source Marketing LLC ("Source") is a U.S. full-service marketing services firm,
specializing in promotional, retail, event, direct and other business building
marketing services. Clients include AOL, Chase Bank, Beiersdorf, Discovery, Time
Warner Cable, Mattel, Reckitt Benckiser and Schering Plough. MDC acquired its
interest in Source in 1998.
Corporate Communications
------------------------
Bratskeir & Company, Inc.
Bratskeir & Company, Inc. ("Bratskeir"), established in 1989, is a U.S.
specialized corporate communications firm servicing a wide variety of
industries. Clients include 1-800-Flowers.com, Bristol-Myers Squibb, ConAgra,
Conoco-Phillips, Fox Sports, Hasbro Toys, Maybelline, and Unilever. The Company
acquired Bratskeir in 2000.
Bryan Mills Group Ltd.
Bryan Mills Group Ltd. ("Bryan Mills") is a financial communications firm which
provides consulting, speaker support and logistics for investment road shows and
shareholder meetings and specializes in investor relations, consulting and
writing for conference call scripts, quarterly reporting, print and on-line
annual reports and corporate websites. Bryan Mills is the 2003 winner of "Best
Canadian Annual Report" and Best Canadian Annual Report for Sustainable
Development Reporting." Clients include CIBC, Four Seasons Hotels, MDS, Shoppers
Drug Mart, Alliance Atlantis, ATI and Dofasco. MDC acquired its interest in
Bryan Mills in 1989.
Veritas Communications Inc.
Launched in 1993, Veritas Communications Inc. is a Canadian public relations and
public affairs agency, providing media relations, corporate communications and
government relations to organizations in the consumer, financial and health care
categories. Clients include Certified Management Accountants of Canada (CMA),
Lakeport Breweries Central Park Lodges and Shire BioChem.
Research and Consulting
-----------------------
Integrated Healthcare Communications, Inc.
Integrated Healthcare Communications, Inc. ("IHC") is a Canadian specialized
corporate communications firm, providing continuing medical education services
to physicians, other health care providers and consumers of health care services
for health care clients. Clients include GlaxoSmithKline, Merck, Pfizer and
Wyeth-Ayerst. IHC joined the Company in 1997.
Northstar Research Partners Inc.
Northstar Research Partners Inc. ("Northstar") was founded in 1998 and was
acquired by MDC in 1998. Northstar is a firm that provides market research and
consulting services to a select group of international clients.
Branding and Corporate Identity
-------------------------------
Strategies International
Founded in 1986 and acquired by MDC in 1992, Strategies International
("Strategies") is a Canadian brand and corporate identity company, specializing
in brand and corporate identity services, including packaging, branding, naming,
signage and collateral materials. Clients include Tim Hortons, Parmalat North
America, McNeil Consumer Healthcare, Heinz, Moosehead Breweries, Scott Paper
Limited, Revlon Canada, Ganong Bros., Limited, Shur Gain Pet Food and Atlas Wine
Merchants.
Other Companies
---------------
Computer Composition of Canada Inc.
Computer Composition of Canada Inc. ("Computer Composition") is an information
processing company which performs data-based management, information processing,
desktop publishing, text storage and typesetting activities. Computer
Composition's text storage and typesetting technology allows it to produce
journals, books and other documents for the legal and specialty publishing
industry. Computer Composition has been in business since 1982.
Pro-Image Corporation
This company serves the U.S. market and specializes in pre-press services for
publishers of educational, engineering and reference textbooks as well as
technical and medical journals.
Secure Products International Division
--------------------------------------
The Secure Products International Division provides 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.
Electronic Transaction Products
-------------------------------
Metaca Corporation provides security card manufacturing and personalization for
plastic and smart card programs. With operations in both Canada and Australia,
MDC is a market leader in card solutions for a broad range of business segments
including banks, credit card companies, long distance and mobile
telecommunication providers, insurance companies and governments. The Australian
operations consist of Placard Pty Ltd.
Secure Ticketing Products
-------------------------
MDC participates in the global secure ticketing business through its Canadian
operation Mercury Graphics. Mercury Graphics manufactures secure ticketing
products in three major industry segments: airline, transit and event ticketing.
Mercury's clients include Air Canada, British Airways, Northwest Airlines,
Virgin Atlantic Airways, Toronto Transit Commission, BC Transit, Tampa Bay
Buccaneers, Detroit Red Wings, Chicago Bulls, Boston Celtics, Los Angeles
Dodgers and San Francisco 49ers.
Stamps
------
The MDC stamp companies, consisting of Ashton-Potter (USA) Ltd. and
Ashton-Potter Canada Limited, comprise one of the world's largest private sector
manufacturers of postage stamps. The group has a long-term contract with the
United States Postal Service (USPS) and produces definitive and commemorative
products for Canada Post Corporation. A contract award from the USPS in 2003
establishes Ashton-Potter (USA) Ltd. as one of three private sector providers,
resulting in dramatic volume increases. A large investment in equipment and
technology has been made to meet these demands, positioning MDC as an industry
leader in stamp production.
Financial Information Relating to Principal Business Categories
---------------------------------------------------------------
The following table is illustrative of the approximate percentage of
consolidated revenues received by the Company in each of its continuing
principal business categories:
Percentage of Company's Consolidated
Principal Business Category Sales for the Fiscal Year Ended
------------------------------------------------------------------------------
2003 2002 2001
---- ---- ----
Marketing Communications Division 62% 44% 35%
Secure Products International Division 37% 54% 60%
Corporate and Other 1% 2% 5%
------------ ------------ -----------
100% 100% 100%
============ ============ ===========
Competition
Marketing Communications Division
The marketing communications industry is highly competitive. Management believes
that the Perpetual Partnership(TM) model, including the value-creating
capabilities of its corporate resources and the service composition of its
various operating companies, provide the Company with a competitive advantage in
the industry.
The operating companies of the Marketing Communications Division compete for
acquisitions in the highly fragmented marketing and communications industry with
large global consolidators such as Omnicom Group Inc., Interpublic Group of
Companies, Inc., WPP Group plc, Publicis Group SA and Havas Advertising. MDC
relies on the attributes of its Perpetual Partnership(TM) business model,
including the opportunity for owners to maintain equity in the operating
business and operational independence, to compete for and attract new
acquisitions and to attract and retain experienced and talented professional
staff.
Each of the operating companies within the Marketing Communications Division
face competition from large multinational marketing communications companies
operating in Canada and/or the United States, as well as numerous smaller
agencies that only operate in one or more countries or local markets. The
Company's operating companies must compete with these other companies to
maintain existing client relationships and to obtain new clients and
assignments.
The Company's operating companies compete at this level by identifying and
developing sectors or niches which have historically been underserved by other
marketing communications companies. These niches include the regional operations
of multinational corporations and national companies with mid-sized marketing
budgets.
The Company's integrated communications services companies compete principally
by offering clients integrated solutions and managing a client's brand
consistency across a broad range of communications services including both
advertising and non-traditional services. The specialized communications
companies compete principally by offering clients depth of expertise in a
specialized marketing communications discipline. MDC also benefits from two-way
referrals and cross-selling of services based on expertise, and the complexity
and service scope of client requirements.
A company's ability to compete for new clients is affected in some instances by
the policy, which many advertisers and marketers follow, of not permitting their
agencies to represent competitive accounts in the same market. As a result,
increasing size may limit a company's ability to compete for certain new
clients. In the vast majority of cases, however, MDC's consistent maintenance of
separate, independent operating companies has enabled the Company to represent
competing clients.
Secure Products International Division
Competition in the Company's markets is primarily dependent upon quality,
reliability and service. Price is also an important criteria, but is secondary
to the initial requirement for a supplier to satisfy a potential customer that
it has the proven ability to meet the primary criteria.
In both Canada and the United States, government and public corporation security
products are generally awarded on the basis of competitive bidding procedures
through Requests for Proposals (RFP's). These RFP's require a bidder to provide
detailed information regarding price, security, manufacturing capabilities and
quality control processes. These RFP submissions form the basis for the awarding
of contracts. Contracts are generally awarded on a multi-year basis.
MDC is one of the largest suppliers in the Canadian card market and the number
two supplier in the Australian card market. MDC's secure ticketing business has
the number two market share position in secure ticketing products in North
America. MDC is also one of the largest private sector stamp suppliers
world-wide.
Industry Trends
Marketing Communications Division
Significant trends exist in the marketing communications industry. Historically,
advertising has been the primary service provided by the industry. However, as
clients aim to establish one-to-one relationships with customers, and more
accurately measure the effectiveness of their marketing expenditures,
specialized communications services are consuming a growing portion of marketing
dollars. This is increasing the demand for a broader range of services
particularly "below the line" or "non-traditional" services. As well, there is
an increasing need for consistent brand communication in response to increased
competition from globalization and deregulation.
Large multinational organizations have shown a tendency towards consolidation of
their marketing communications providers into one firm that provides services to
all international locations. As a result, communications and marketing services
providers with a broader geographical scope that better positions them to
provide services that meet these needs may be more successful at maintaining
exiting or winning new business.
The Company's success in this environment has been in the past and is expected
to continue to be dependent on the ability to retain and attract key executive
and management personnel and employees, to maintain relationships with existing
clients and successfully bid on new business, and to staff projects with the
expertise required.
Secure Products International Division
The continuing growth expected in the areas of e-commerce and the Internet and
the imminence of the "smart card" revolution are anticipated to positively
impact MDC.
In April 2003, it was announced Ashton-Potter (USA) Ltd. had been awarded a
long-term contract by the United States Postal Service ("USPS") to provide
definitive and commemorative postage stamp products. The USPS awarded production
of all U.S. postage stamp products to three successful suppliers. The three
master contracts awarded are for the printing, finishing and packaging of U.S.
postage stamps with an initial base term of four years and have an aggregate
estimated value (for all three contractors) of US$229 million. In addition,
there are also three two-year options to the base contracts for a potential
contractual term of 10 years. If all the option years are exercised, the
potential value of the three contracts over the 10 years would be US$572.5
million. This contract award positions Ashton-Potter as one of the largest
producers of postage stamps in the world.
Employees
As at December 31, 2003, the Company and its subsidiaries had approximately
3,200 employees.
Risks
Pages 21 to 23 of the Company's 2003 Annual Report entitled "Risks and
Uncertainties" of the "Management's Discussion and Analysis" are hereby
incorporated herein by reference. The "Management Discussion and Analysis" is
available on SEDAR at www.sedar.com.
DIVIDENDS
The Company has not declared nor paid any dividends on its Class A Subordinate
Voting Shares since its incorporation. It is the present policy of the Company
to retain all earnings to support the growth of its various businesses.
Accordingly, it is expected that no dividends will be paid by the Company on the
Class A Subordinate Voting Shares in the foreseeable future. Any future payment
of dividends will be determined by the board of directors of MDC on the basis of
the Company's earnings, financial requirements and other relevant factors.
CAPITAL STRUCTURE
The authorized share capital of the Company is as follows:
An unlimited number of Class A shares (subordinate voting shares) carrying one
vote each, entitled to dividends equal to or greater than Class B shares,
convertible at the option of the holder into one Class B share for each Class A
share after the occurrence of certain events related to an offer to purchase all
Class B shares.
An unlimited number of Class B shares carrying 20 votes each, convertible at any
time at the option of the holder into one Class A share for each Class B share.
An unlimited number of non-voting preference shares issuable in series.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Pages 13 to 24 of the Company's 2003 Annual Report entitled "Management's
Discussion and Analysis" are hereby incorporated herein by reference. The
"Management Discussion and Analysis" is available on SEDAR at www.sedar.com.
MARKET FOR SECURITIES OF THE COMPANY
The Company's outstanding Class A Subordinate Voting Shares are listed and
posted for trading on the Toronto Stock Exchange in Canada and on the Nasdaq
National Market in the United States. The Company's outstanding Convertible
Debentures are listed and posted for trading on the Toronto Stock Exchange.
DIRECTORS AND OFFICERS
The section entitled "Election of Directors" contained on pages 4 to 6 of the
Company's Management Information Circular dated April 30, 2004 for use in
connection with the Company's annual and special meeting of shareholders to be
held on June 9, 2004, is hereby incorporated herein by reference. The Company's
Management Information Circular is available on SEDAR at www.sedar.com.
The following table sets forth certain information with respect to each of the
officers of the Company:
Name and
Municipality of Residence Office
Miles S. Nadal Chairman, President and Chief
Nassau, Bahamas Executive Officer
Peter M. Lewis Vice Chairman
Toronto, Ontario
Graham L. Rosenberg Managing Director
Toronto, Ontario
Robert E. Dickson Managing Director
Toronto, Ontario
Walter Campbell Chief Financial Officer and
Ajax, Ontario Corporate Secretary
Charles K. Porter Chief Strategist
Miami, Florida
Glenn Gibson Senior Vice President, Finance
Richmond Hill, Ontario
Stephanie Ivy Vice President, Finance
Oshawa, Ontario
Maria Pappas Assistant Secretary
Toronto, Ontario
As of April 30, 2004, the directors and officers of the Company, as a group,
beneficially own, directly or indirectly, or exercise control or direction over
approximately 22% of the outstanding Class A Subordinate Voting Shares and none
of the outstanding Class B Shares.
Conflicts of Interest
Certain directors of the Company provide services from time to time to the
Company and its subsidiaries. If a director of the Company has an actual
conflict of interest with respect to a particular matter resulting from his
relationship with the Company or a subsidiary of the Company, such director
would be required to declare such interest and, in most instances, abstain from
voting in connection with such matter.
ADDITIONAL INFORMATION
Additional information, including directors' and officers' remuneration and
indebtedness, 10% securityholders, options to purchase securities and interests
of insiders in material transactions, where applicable, is contained in the
Company's Management Information Circular dated April 30, 2004, which involves
the election of directors. The Company's Management Information Circular is
available on SEDAR at www.sedar.com. Additional financial information is
provided in the Company's comparative financial statements for 2003. A copy of
such documents may be obtained upon written request from the Secretary of the
Company.
The Company will provide to any person or company upon request to the Corporate
Secretary of the Company:
(a) when the securities of the Company are in the course of distribution
under a preliminary short form prospectus or a short form prospectus:
(i) one copy of the Company's annual information form, together
with one copy of any document, or the pertinent pages of any
document, incorporated therein by reference;
(ii) the comparative consolidated financial statements of the
Company for the Company's most recently completed financial
year together with the accompanying report of the Company's
auditors thereon;
(iii) one copy of any interim financial statements of the Company
subsequent to the financial statements of the Company's most
recently completed financial year;
(iv) one copy of the information circular of the Company in respect
of the Company's most recent annual meeting of shareholders
that involved the election of directors; and
(v) one copy of any other documents that are incorporated by
reference into the preliminary short form prospectus or the
short form prospectus and are not required to be provided
under (i) to (iv) above; or
(b) at any other time, one copy of any other documents referred to in (a)
(i), (ii), (iii) and (iv) above, provided the Company may require the
payment of a reasonable charge if the request is made by a person or
company who is not a security holder of the Company.
Document No. 2
MDC PARTNERS INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
CONTENTS
--------------------------------------------------------------------------------
AUDITORS' REPORT 2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets 3
Consolidated Statements of Retained Earnings (Deficit) 4
Consolidated Statements of Operations 5
Consolidated Statements of Cash Flows 6
Summary of Significant Accounting Policies 7-11
Notes to Consolidated Financial Statements 12-41
================================================================================
AUDITORS' REPORT
--------------------------------------------------------------------------------
TO THE DIRECTORS OF
MDC PARTNERS INC.
We have audited the consolidated balance sheets of MDC Partners Inc. as at
December 31, 2003, 2002 and 2001 and the consolidated statements of retained
earnings, operations and cash flows for each of the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing standards
in Canada. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31,
2003, 2002 and 2001 and the results of its operations and its cash flows for
each of the years then ended in accordance with Canadian generally accepted
accounting principles.
On February 24, 2004, we reported separately to the shareholders of MDC Partners
Inc. on financial statements for the same period, prepared in accordance with
Canadian generally accepted accounting principles without the additional note of
Reconciliation of Results Reported in Accordance with Generally Accepted
Accounting Principles in Canada with United States Generally Accepted Accounting
Principles.
Chartered Accountants
Toronto, Ontario
May 3, 2004
============================================================================================================
MDC Partners Inc.
Consolidated Balance Sheets
(in thousands of U.S. dollars)
December 31 2003 2002 2001
------------------------------------------------------------------------------------------------------------
Assets
Current
Cash and cash equivalents $ 71,879 $ 37,788 $ 37,231
Accounts receivable (Note 4) 80,979 67,457 89,634
Inventory 6,795 7,005 14,617
Prepaid expenses and sundry 5,068 6,266 7,514
Future income taxes - - 17,579
-------------------------------------------------
164,721 118,516 166,575
Capital and other assets (Note 5) 80,152 79,967 104,494
Goodwill (Note 6) 103,538 185,637 290,524
-------------------------------------------------
$ 348,411 $ 384,120 $ 561,593
============================================================================================================
Liabilities and Shareholders' Equity
Current
Accounts payable and accrued liabilities $ 91,289 $ 82,874 $ 112,757
Deferred acquisition consideration 1,113 23,966 15,943
Deferred revenue 13,516 11,104 14,924
Current portion of long-term indebtedness (Note 7) 18,646 4,088 7,565
-------------------------------------------------
124,564 122,032 151,189
Long-term indebtedness (Note 7) 102,112 155,514 331,158
-------------------------------------------------
226,676 277,546 482,347
-------------------------------------------------
Minority interest 2,533 9,824 9,576
-------------------------------------------------
Shareholders' equity
Share capital (Note 8) 117,292 96,407 95,111
Contributed surplus (Note 9) 3,272 - -
Other paid-in capital (Note 10) 30,851 24,179 32,687
Cumulative translation adjustment (Note 11) (4,953) 7,858 3,447
Retained earnings (Deficit) (27,260) (31,694) (61,575)
-------------------------------------------------
119,202 96,750 69,670
-------------------------------------------------
$ 348,411 $ 384,120 $ 561,593
============================================================================================================
The accompanying summary of significant accounting policies and notes are an integral part of these financial statements.
On behalf of the Board:
Director
-----------------------------------------------------------------
Thomas N. Davidson
Director
-----------------------------------------------------------------
Guy P. French
======================================================================================================================
MDC Partners Inc.
Consolidated Statements of
Retained Earnings (Deficit)
(in thousands of U.S.
dollars)
For the years ended December 31 2003 2002 2001
----------------------------------------------------------------------------------------------------------------------
Retained earnings (deficit), beginning of year
as previously reported $ (31,694) $ (46,105) $ 45,300
Impact of change in accounting for foreign currency
translation (Note 1) - (15,470) (6,732)
Impact of transitional goodwill impairment charge (Note 1) - (62,477) -
----------------------------------------------------
Opening retained earnings (deficit), as restated (31,694) (124,052) 38,568
Net income (loss) for the year 11,042 93,334 (98,710)
----------------------------------------------------
(20,652) (30,718) (60,142)
Premium paid on repurchase of Class A shares (5,531) - -
Allocation to other paid-in capital,
net of income tax recovery of
$615 (2002 - $616, 2001 - $1,139) (1,077) (976) (1,433)
----------------------------------------------------
Retained earnings (deficit), end of year $ (27,260) $ (31,694) $ (61,575)
======================================================================================================================
The accompanying summary of significant accounting policies and notes are an integral part of these financial statements.
=======================================================================================================================
MDC Partners Inc.
Consolidated Statements of Operations
(in thousands of U.S.dollars,
except per share amounts)
For the years ended December 31 2003 2002 2001
-----------------------------------------------------------------------------------------------------------------------
Gross billings $ 556,310 $ 600,273 $ 718,189
====================================================
Revenues $ 312,716 $ 387,765 $ 509,747
Operating costs 276,157 333,139 429,945
----------------------------------------------------
Operating income before other income (charges) 36,559 54,626 79,802
----------------------------------------------------
Other income (charges)
Net gain on asset dispositions and other charges (Note 12) 10,260 97,288 (59,212)
Unrealized foreign exchange gain (loss) - 4,380 (12,034)
Amortization (12,617) (16,171) (23,717)
Interest, net (11,502) (17,810) (34,070)
Income participation of minority partners (Note 13) (6,113) (3,927) (3,644)
----------------------------------------------------
(19,972) 63,760 (132,677)
----------------------------------------------------
Income (loss) before income taxes, goodwill
charges and minority interest 16,587 118,386 (52,875)
Income taxes (recovery) (Note 14) 6,589 22,020 (18,414)
----------------------------------------------------
Income (loss) before goodwill charges
and minority interest 9,998 96,366 (34,461)
Goodwill charges, net of income tax recovery
of $Nil (2002 - $Nil, 2001 - $2,306) - - 42,999
Minority interest (recovery) (1,044) 3,032 (4,178)
----------------------------------------------------
Income (loss) from continuing operations 11,042 93,334 (73,282)
Loss from discontinued operations (Note 15) - - (25,428)
----------------------------------------------------
Net income (loss) for the year $ 11,042 $ 93,334 $ (98,710)
====================================================
Earnings per share (Note 16)
Income (loss) from continuing operations
Basic $ 0.55 $ 5.46 $ (4.43)
====================================================
Diluted $ 0.49 $ 3.70 $ (4.43)
====================================================
Net income (loss)
Basic $ 0.55 $ 5.46 $ (5.93)
====================================================
Diluted $ 0.49 $ 3.70 $ (5.93)
====================================================
=======================================================================================================================
The accompanying summary of significant accounting policies and notes are an integral part of these financial statements.
==========================================================================================================================
MDC Partners Inc.
Consolidated Statements
of Cash Flows
(in thousands of U.S. dollars)
For the years ended December 31 2003 2002 2001
--------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in)
Operating activities
Income (loss) from continuing operations $ 11,042 $ 93,334 $ (73,282)
Items not involving cash
Asset dispositions and other charges (20,272) (102,667) 107,002
Other charges - accrued (paid) (949) (3,545) 7,653
Unrealized foreign exchange loss (gain) - (4,380) 12,034
Goodwill writedown 10,012 - 32,579
Amortization 12,617 16,171 36,606
Future income taxes 5,461 20,969 (21,207)
Interest capitalized 4,557 3,368 -
Minority interest and other (1,227) 153 (3,869)
----------------------------------------------
21,241 23,403 97,516
Changes in non-cash working capital (1,981) 2,023 (3,357)
----------------------------------------------
Cash flows from operating activities 19,260 25,426 94,159
----------------------------------------------
Investing activities
Proceeds on dispositions (acquisitions), net 87,107 161,302 (16,884)
Capital assets, net (18,421) (8,058) (16,209)
Other assets, net 4,541 (1,639) (20,407)
----------------------------------------------
Cash flows from (used in) investing activities 73,227 151,605 (53,500)
----------------------------------------------
Financing activities
Proceeds on issuance of long-term indebtedness 37,472 5,955 87,229
Repayment of long-term indebtedness (90,784) (188,521) (125,529)
Issuance of share capital 3,031 - 732
Repurchase of share capital (13,662) - (6,727)
----------------------------------------------
Cash flows from (used in) financing activities (63,943) (182,566) (44,295)
----------------------------------------------
Foreign exchange gain on cash held in foreign currencies 5,547 6,092 166
----------------------------------------------
Increase (decrease) in cash and
cash equivalents during the year 34,091 557 (3,470)
Cash and cash equivalents, beginning of year 37,788 37,231 40,701
----------------------------------------------
Cash and cash equivalents, end of year $ 71,879 $ 37,788 $ 37,231
==========================================================================================================================
Supplemental cash flow information
Cash paid for interest $ 7,136 $ 16,310 $ 33,232
==============================================
Cash paid (recovered) for income taxes $ (2,087) $ (380) $ 6,385
==========================================================================================================================
The accompanying summary of significant accounting policies and notes are an integral part of these financial statements.
================================================================================
MDC PARTNERS INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DECEMBER 31, 2003, 2002 AND 2001
--------------------------------------------------------------------------------
NATURE OF BUSINESS MDC Partners Inc., formerly MDC
Corporation Inc., is incorporated under
the laws of Ontario. The Company commenced
using the name MDC Partners Inc. on
November 1, 2003 and legally changed its
name through amalgamation with a
wholly-owned subsidiary on January 1,
2004. The Company's operations are in
primarily two business segments -
Marketing Communications and Secure
Products International.
PRINCIPLES OF CONSOLIDATION The financial statements include
the accounts of the Company and
any effectively controlled subsidiary
companies and are prepared in conformity
with generally accepted accounting
principles in Canada. Interests in joint
ventures are recorded using the
proportionate consolidation method.
Acquisitions are consolidated from the
effective date of acquisition with
intercompany transactions and accounts
eliminated upon consolidation.
INVESTMENTS Investments in which the Company does not
have control or have significant influence
are valued at the lower of cost or market.
INVENTORY Inventory is valued at the lower of cost
and net realizable value. Cost is
determined on a first-in, first-out basis.
CAPITAL ASSETS Capital assets are recorded at cost.
Amortization is provided as follows:
Buildings - 4-5% straight-line
Computer, furniture and fixtures - 20-50% declining balance
Machinery and equipment - 10-20% declining balance
Leasehold improvements - straight-line over term of
the lease
DEFERRED CHARGES The Company capitalizes direct
costs related to development of new
products and services until the
commencement of commercial operations, at
which time all related costs are amortized
on a straight-line basis over their
estimated useful life.
DEFERRED FINANCE COSTS Deferred finance costs are amortized over
the term of the related indebtedness.
FUTURE INCOME TAXES The Company uses the liability
method of tax allocation for
accounting for income taxes. Under the
liability method of tax allocation, future
tax assets and liabilities are determined
based on differences between the financial
reporting and tax bases of assets and
liabilities and are measured using the
substantially enacted tax rates and laws
that will be in effect when the
differences are expected to reverse.
================================================================================
MDC PARTNERS INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DECEMBER 31, 2003, 2002 AND 2001
--------------------------------------------------------------------------------
FOREIGN CURRENCY
TRANSLATION Historically, the Company's consolidated
financial statements have been presented
in Canadian dollars. In order to more
fully reflect the U.S. nature of the
Company's business and shareholder base,
and to improve investors' ability to
compare the Company's results with those
of most other publicly traded businesses
in the marketing communications industry,
which also report in U.S. dollars, the
U.S. dollar was adopted as the Company's
reporting currency effective September 30,
2003. The functional currencies of each of
the Company's operations are unchanged.
The consolidated financial statements and
notes thereto have been restated in U.S.
dollars for all periods presented.
With the exception of the Company's
foreign subsidiaries, foreign currency
assets and liabilities carried at current
prices are translated into Canadian
dollars using the rate of exchange in
effect at the year end; other foreign
currency assets and liabilities are
translated using the rates of exchange in
effect at the dates of the transaction;
long-term monetary assets and liabilities
with a fixed term which have been hedged
are translated using the rate per the
hedge agreements; revenue and expense
items are translated at the average
monthly rate of exchange for the year,
except for amortization of capital and
other assets which is translated at the
historical rates of the related assets.
The asset and liability accounts of
foreign subsidiaries self-sustaining
operations are translated using the rate
of exchange in effect at the year end and
revenues and expenses are translated at
the average monthly rates during the year.
The unrealized foreign exchange gains and
losses on translation of the accounts of
foreign subsidiaries are reflected as a
separate component of shareholders'
equity.
Effective January 1, 2002, the Company
adopted the recommendations of the
Canadian Institute of Chartered
Accountants ("CICA") with respect to the
accounting for foreign exchange gains or
losses relating to translation of
non-hedged long-term monetary assets and
liabilities. Previously such gains or
losses were deferred and amortized over
the remaining term of the related assets
or liabilities. The Institute now requires
that exchange gains or losses arising on
translation of all non-hedged monetary
items be included in the determination of
net income for the current period. The
accounting policy change has been applied
retroactively with restatement of prior
periods as recommended by the CICA (see
note 1).
================================================================================
MDC PARTNERS INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DECEMBER 31, 2003, 2002 AND 2001
-------------------------------------------------------------------------------
FOREIGN CURRENCY
TRANSLATION (CONTINUED) Effective July 1, 2002, management
designated the Company's 10.5% U.S. Senior
Subordinated Notes ("Notes") as a hedge
against the foreign exchange exposure of
the Secure Transactions U.S. operations.
The hedge is applied prospectively from
the effective date whereby any foreign
exchange translation adjustment of the
Notes will reduce any offsetting foreign
exchange translation adjustment of the
U.S. operations, the net of which is
reflected in the cumulative translation
account within shareholders' equity.
All other foreign exchange gains and
losses are included in net income or loss
in the current period.
GOODWILL Goodwill represents the price paid for
acquisitions in excess of the fair market
value of net assets acquired. Effective
January 1, 2002, the Company adopted the
recommendations of the CICA with respect
to goodwill and other intangibles. These
standards require that goodwill and other
intangible assets determined to have
indefinite lives are no longer amortized
but tested for impairment on adoption of
the standard and at least annually
thereafter. Transitional impairment tests
for goodwill were completed as at June 30,
2002 and, as a result, a transitional
impairment loss was charged to opening
retained earnings (see note 1). Prior to
2002, the Company amortized goodwill on a
straight-line basis over periods ranging
from 10 to 40 years. Goodwill arising on
acquisitions completed after June 30, 2001
was not amortized.
REVENUE RECOGNITION Revenue is recognized using the percentage
of completion method with respect to
contracts having a specified time period
for the performance of the service.
Percentage of completion is determined
based either on (a) the fair value of the
project at each particular stage relative
to its total fair value on completion, or,
(b) based on costs incurred to date
relative to the expected total costs to be
incurred upon completion. Work in progress
is estimated as the portion of revenue
which has been earned but not billed.
Customer billings in advance are recorded
as deferred revenue. Potential losses, if
any, on work in progress are provided for
as soon as the possibility of a loss
becomes apparent.
All other revenue is recorded when the
service is completed and/or the product is
delivered.
================================================================================
MDC PARTNERS INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DECEMBER 31, 2003, 2002 AND 2001
--------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS The Company's financial instruments
consist of cash and short-term
investments, accounts receivable, accounts
payable and accrued liabilities, long-term
indebtedness and derivative financial
instruments. The Company has used
derivative financial instruments to manage
its exposure to market risks relating to
interest rates and foreign currency
exchange rates. At December 31, 2003, the
Company was not party to any derivative
financial instrument.
CREDIT RISK The Company's financial assets that are
exposed to credit risk consist primarily
of cash, accounts receivable and
derivative financial instruments. The
Company, in its normal course of business,
is exposed to credit risk from its
customers.
FAIR VALUE The fair value of long-term indebtedness
(see note 7) that bears interest at fixed
rates is based on its quoted market price
or on discounted future cash flows using
rates currently available for debt of
similar terms and maturities if the quoted
market price was not available. The fair
value of other financial instruments, cash
and short-term investments, accounts
receivable, bank indebtedness and accounts
payable and accrued liabilities,
approximates carrying value due to their
short-term maturities.
INTEREST RATE RISK The Company's principal exposure to
interest rate fluctuations is with respect
to certain of its long-term indebtedness,
which bear interest at floating rates.
CASH AND CASH EQUIVALENTS The Company considers all cash and highly
liquid investments purchased with an
initial maturity of three months or less
to be cash or cash equivalents.
The Company maintains its cash in bank
deposit accounts that, at times, may
exceed federally insured limits. The
Company has not experienced any losses in
such accounts and believes it is not
exposed to any significant credit risks on
cash and cash equivalents.
================================================================================
MDC PARTNERS INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DECEMBER 31, 2003, 2002 AND 2001
--------------------------------------------------------------------------------
STOCK-BASED COMPENSATION Effective January 1, 2002, the Company
adopted the recommendations of the CICA
with respect to stock-based compensation
and other stock-based payments. These
standards require that direct awards of
stock and liabilities based on the price
of common stock be measured at fair value
at each reporting date, with the change in
fair value reported in the statement of
operations, and encourages, but does not
require, the use of the fair value method
for all other types of employee
stock-based compensation plans.
During the fourth quarter of 2003, the
Company decided to adopt the fair value
based method of accounting for all its
stock-based compensation. The Company
adopted these changes using the
prospective application transitional
alternative. Accordingly, the fair value
based method is applied to awards granted,
modified or settled on or after January 1,
2003. When the 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.
Prior to January 1, 2003, the Company did
not use the fair value method to account
for employee stock-based compensation
plans but disclosed pro forma information
for options granted after January 1, 2002
(see note 8). Furthermore the Company
recorded no compensation expense when
options were issued to employees, and any
consideration paid by employees on the
exercise of options was credited to share
capital.
ACCOUNTING ESTIMATES The preparation of financial statements in
accordance with generally accepted
accounting principles requires management
to make estimates and assumptions that
affect the reported amounts of assets and
liabilities at the date of the financial
statements, and the reported amounts of
revenues and expenses during the reporting
period. Actual results could differ from
management's best estimates as additional
information becomes available in the
future.
================================================================================
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF U.S. DOLLARS,
EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 2003, 2002, 2001
--------------------------------------------------------------------------------
1. CHANGES IN SIGNIFICANT ACCOUNTING POLICIES
FOREIGN CURRENCY TRANSLATION
Effective January 1, 2002, the Company adopted the recommendation of
the CICA with respect to the accounting for foreign exchange gains or
losses relating to translation of non-hedged long-term monetary assets
and liabilities.
The effects of the change, which has been applied retroactively, are a
decrease to capital assets and retained earnings as at January 1, 2002
of $15,470 (2001 - $6,732). Net income for the year ended December 31,
2001 was decreased from the amount previously reported by $8,732
primarily related to the unrealized foreign exchange loss of $12,034.
GOODWILL
Effective January 1, 2002, the Company adopted the recommendations of
the CICA with respect to goodwill and other intangibles. These
standards require that goodwill and other intangible assets determined
to have indefinite lives are no longer amortized but tested for
impairment on adoption of the standard and at least annually
thereafter.
Transitional impairment tests for goodwill were completed by June 30,
2002 and, as a result, a transitional impairment loss of $62,477 (net
of income tax recovery of $10,045) was charged to the 2002 opening
retained earnings.
2. ACQUISITIONS
The following are the acquisitions during the period. These
acquisitions were accounted for by the purchase method and consolidated
from the respective effective date of acquisition.
2001 Acquisitions:
------------------
Effective January 8, 2001, the Company acquired 49% of Crispin Porter +
Bogusky LLC.
Effective January 31, 2001, the Company acquired 100% of the Canadian
card services business of MIST Inc.
Effective February 15, 2001, the Company acquired an additional 16% of
CyberSight Acquisition Co., Inc.
Effective March 1, 2001, the Company acquired 100% of The Marketing
Department LLC.
Effective June 15, 2001, the Company acquired 100% of McCool
Communications.
Effective July 25, 2001, the Company acquired 79.17% of Grange
Advertising Limited.
2002 Acquisitions:
------------------
None.
================================================================================
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF U.S. DOLLARS,
EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 2003, 2002, 2001
--------------------------------------------------------------------------------
2. ACQUISITIONS (CONTINUED)
2003 Acquisitions:
------------------
Effective January 1, 2003, the Company acquired the remaining 5.96% of
Colle & McVoy, Inc. that it did not already own.
Effective March 31, 2003, the Company acquired an additional 1.52% of
Allard Johnson Communications Inc. to own 54.3%.
Effective July 31, 2003, the Company acquired the remaining 26% of
Maxxcom Inc. ("Maxxcom") that it did not already own through a plan of
arrangement (the "privatization of Maxxcom").
Effective August 15, 2003, the Company acquired the remaining 38.7% of
Interfocus Network Ltd. that it did not already own.
Effective September 30, 2003, the Company acquired the remaining 15% of
Metaca Corporation that it did not already own.
Effective October 1, 2003, the Company acquired an additional 6.17% of
Source Marketing, LLC to own 87.67%.
The assets acquired and the consideration given are as follows:
DECEMBER 31,
---------------------------------------------
2003 2002 2001
---------------------------------------------
Net assets acquired, at fair value
Assets, net of liabilities $ 219 $ 36 $ 4,425
Reduction in minority interest 6,844 - -
Goodwill 25,691 20,774 50,927
---------------------------------------------
$ 32,754 $ 20,810 $55,352
=============================================
Consideration
Cash and promissory notes $ 6,215 $ - $24,552
Class A shares issued 24,199 - 7,353
Fair value of stock options and
Warrants issued 1,900 - -
Additional consideration -
current year acquisitions - - 626
Additional consideration -
prior year acquisitions 698 20,418 14,250
Recovery of consideration -
prior year acquisitions (4,176) - -
Other acquisition costs 3,918 392 8,571
---------------------------------------------
$ 32,754 $ 20,810 $ 55,352
=============================================
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. Based on the
current year's earnings, $698 (2002 - $12,553, 2001 - $28,240) of
additional consideration was accrued related to current and prior year
acquisitions and is reflected in deferred acquisition consideration
(see note 12). No additional consideration will be incurred on current
and prior year acquisitions.
======================================================================================================================
MDC Partners Inc.
Notes to Consolidated Financial Statements
(in thousands of U.S. dollars,
except per share amounts)
December 31, 2003, 2002, 2001
-----------------------------------------------------------------------------------------------------------------------
3. Interest in Jointly Controlled Entity
The Company accounts for its 49% interest in Crispin Porter + Bogusky LLC, a jointly controlled entity, using the
proportionate consolidation method. The following is the Company's proportionate share of the major components of
the financial statements of the jointly controlled entity as at and for the years ended December 31, 2003, 2002
and 2001:
Balance Sheet 2003 2002 2001
-------------------------------------------------------
Current assets $ 18,739 $ 12,903 $ 5,106
Long-term assets 2,641 325 371
Current liabilities (16,965) (12,935) (5,001)
Long-term liabilities (867) - -
Statement of Operations 2003 2002 2001
-------------------------------------------------------
Gross billings $ 58,143 $ 32,051 $ 13,893
-------------------------------------------------------
Revenues $ 13,491 $ 9,506 $ 5,517
Expenses 9,066 6,680 4,595
-------------------------------------------------------
Income before income taxes 4,425 2,826 922
Income taxes 1,666 1,064 347
-------------------------------------------------------
Net income $ 2,759 $ 1,762 $ 575
-------------------------------------------------------
Statement of Cash Flows 2003 2002 2001
-------------------------------------------------------
Cash provided from (used in):
Operating activities $ 2,385 $ 7,486 $ (208)
Investing activities (1,600) (224) (97)
Financing activities (1,170) (3,008) (359)
-----------------------------------------------------------------------------------------------------------------------
4. Accounts Receivable
December 31,
-------------------------------------------------------
2003 2002 2001
-------------------------------------------------------
Receivables - Trade $ 66,867 $ 57,081 $ 74,936
- Other 3,655 2,158 5,980
Unbilled work in progress 10,457 8,218 8,718
-------------------------------------------------------
$ 80,979 $ 67,457 $ 89,634
-------------------------------------------------------
===============================================================================================================================
MDC Partners Inc.
Notes to Consolidated Financial Statements
(in thousands of U.S. dollars,
except per share amounts)
December 31, 2003, 2002, 2001
-------------------------------------------------------------------------------------------------------------------------------
5. Capital and Other Assets
-------------------------------------------------------------------------------------------
2003 2002 2001
-------------------------------------------------------------------------------------------
Accumulated Accumulated Accumulated
Cost Amortization Cost Amortization Cost Amortization
-------------------------------------------------------------------------------------------
(a) Capital Assets
Land $ 1,026 $ - $ 843 $ - $ 898 $ -
Buildings 5,570 1,513 4,556 1,100 4,869 1,065
Computer, furniture
and fixtures 46,276 32,454 45,974 28,673 64,871 35,825
Machinery and equipment 32,233 12,426 33,012 11,590 48,109 20,092
Leasehold improvements 12,897 6,943 10,948 5,567 13,872 6,621
-------------------------------------------------------------------------------------------
98,002 53,336 95,333 46,930 132,619 63,603
-------------------------------------------------------------------------------------------
(b) Other Assets
Investments, at cost
net of provisions 17,844 - 103 - 380 -
Long-term notes receivable,
net of provisions of
$8,326 (2002 - $17,435,
2001 - $12,712) 1,749 - 5,139 - 9,555 -
Deferred charges 2,708 1,698 2,100 1,442 12,528 7,188
Deferred finance costs 6,726 4,423 10,467 4,318 13,417 4,614
Future income taxes 12,580 - 19,515 - 11,400 -
-------------------------------------------------------------------------------------------
41,607 6,121 37,324 5,760 47,280 11,802
-------------------------------------------------------------------------------------------
139,609 59,457 132,657 52,690 179,899 75,405
-------------------------------------------------------------------------------------------
Cost less accumulated
amortization $ 80,152 $ 79,967 $ 104,494
-------------------------------------------------------------------------------------------
Investments include $16,876 related to shares of Custom Direct, Inc. which were exchanged into units of Custom Direct
Income Fund ("Fund") on February 13, 2004. The units of the Fund were then applied in full settlement of the Company's
adjustable rate exchangeable securities (see Note 7).
Included in capital assets are assets under capital leases with a cost of $11,682 (2002 - $10,835, 2001 - $10,241) and
accumulated amortization of $5,089 (2002 - $4,120, 2001 - $3,320). Long-term notes receivable ("Notes") include $10,075,
subject to provisions of $8,326, owing from current and former employees, officers and directors of the Company and its
subsidiaries. The Notes are non-interest bearing with no specific terms of repayment. During the year, a recovery of
$1,710 (2002 - $Nil, 2001 - a provision of $2,395) relating to employee notes receivable has been recorded.
==========================================================================================================================
MDC Partners Inc.
Notes to Consolidated Financial Statements
(in thousands of U.S. dollars,
except per share amounts)
December 31, 2003, 2002, 2001
-------------------------------------------------------------------------------------------------------------------------
6. Goodwill
Effective January 1, 2002, the Company adopted the new standards of the CICA Handbook Section
3062 for accounting for goodwill and other intangible assets. These standards require that
goodwill no longer be amortized, but tested for impairment, at least annually by comparison to
its fair value. Pursuant to these standards, management of the Company completed the
transitional impairment test as at June 30, 2002. By applying the prescribed method of
comparing the fair value of its reporting units to the carrying amounts of its reporting
units, the Company assessed its goodwill and recorded a transitional impairment loss of
$62,477 net of income taxes ($72,522 before income taxes) directly as a reduction to opening
retained earnings (deficit) at January 1, 2002.
The original cost and accumulated amortization of goodwill as at December 31, 2001 was as follows:
Cost $ 323,168
Accumulated amortization 32,644
-------------------
$ 290,524
===================
The changes in the carrying amount of goodwill for the year ended December 31 are as follows:
--------------------------------------
2003 2002
--------------------------------------
Balance, January 1 $ 185,637 $ 290,524
Transitional impairment loss - (72,522)
Acquired during the year 25,691 20,774
Reduction for dispositions (88,741) (55,647)
Goodwill charges (see note 12) (10,012) -
Foreign currency translation (9,037) 2,508
--------------------------------------
Balance, December 31 $ 103,538 $ 185,637
======================================
Net income (loss), adjusted to exclude goodwill amortization expense including the related income tax
effects, is as follows:
-----------------------------------------------------
2003 2002 2001
-----------------------------------------------------
Reported net income (loss) $ 11,042 $ 93,334 $ (98,710)
Add back: goodwill amortization, net of tax of $Nil
(2002 - $Nil, 2001 - $1,811) - - 11,232
-----------------------------------------------------
Adjusted net income (loss) $ 11,042 $ 93,334 $ (87,478)
=====================================================
Earnings (loss) per share:
Reported net income (loss)
Basic $ 0.55 $ 5.45 $ (5.93)
Goodwill amortization - - 0.66
-----------------------------------------------------
Adjusted net income (loss) $ 0.55 $ 5.45 $ (5.27)
=====================================================
Diluted $ 0.49 $ 3.70 $ (5.93)
Goodwill amortization - - 0.66
-----------------------------------------------------
Adjusted net income (loss) $ 0.49 $ 3.70 $ (5.27)
=====================================================
================================================================================
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF U.S. DOLLARS,
EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 2003, 2002, 2001
--------------------------------------------------------------------------------
7. LONG-TERM INDEBTEDNESS
DECEMBER 31,
-----------------------------------------
2003 2002 2001
-----------------------------------------
Adjustable rate exchangeable securities C$34,155 (2002 and 2001 - Nil), due December 2008
Adjustable rate exchangeable securities,
C$34,155 (2002 - Nil), due December 2028 $ 26,344 $ - $ -
10.5% unsecured senior subordinated notes - 86,433 200,000
Davis & Henderson, Limited Partnership
term facility - - 50,226
7% convertible debentures, face value C$49,000
(2002 and 2001 - C$50,000),
due January 8, 2007 6,943 7,515 -
6% convertible subordinated notes - - 3,139
7.84% mortgage payable, C$5,261
(2002 - C$5,390, 2001 - C$5,500),
due January 2012 4,058 3,417 3,454
Notes payable and other bank loans 5,632 4,208 7,444
MDC credit facility - - 7,000
Maxxcom credit facility 30,718 24,000 35,242
Maxxcom subordinated debenture, C$51,664
(2002 - C$45,465, 2001 - C$40,000),
due September 2005 39,849 28,819 25,113
-----------------------------------------
113,544 154,392 331,618
Obligations under capital leases, interest at
6.2% to 8.4% 7,214 5,210 7,105
-----------------------------------------
120,758 159,602 338,723
Less: Current portion 18,646 4,088 7,565
-----------------------------------------
$ 102,112 $ 155,514 $ 331,158
==========================================
On December 8, 2003, the Company issued $26,344 (C$34,155) of
adjustable rate exchangeable securities due December 31, 2028. Based on
the performance of Custom Direct Income Fund (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. The units of
the Fund were then applied by the Company in full settlement of the
adjustable rate exchangeable securities. The transaction was completed
on February 13, 2004.
The Maxxcom stand-alone credit facility provides for an aggregate
maximum borrowing of up to $39,414 (C$51,100) bearing interest at rates
which depend on certain of Maxxcom's financial ratios and which vary in
accordance with borrowing rates in Canada and the United States. The
maximum aggregate borrowing reduces by $5,399 (C$7,000) per quarter
until maturity on March 31, 2005. The facility is secured by a general
security agreement, a pledge of shares of Maxxcom's subsidiaries and an
assignment of intercompany debt.
--------------------------------------------------------------------------------
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF U.S. DOLLARS,
EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 2003, 2002, 2001
--------------------------------------------------------------------------------
7. LONG-TERM INDEBTEDNESS (CONTINUED)
On July 11, 2001, Maxxcom issued a C$40,000 subordinated debenture,
which bears interest at bankers' acceptance plus 8%. It is secured by a
general security agreement, a pledge of shares of Maxxcom's
subsidiaries and intercompany debt and is ranked second to the Maxxcom
stand-alone credit facility. In connection with the debenture, Maxxcom
issued five-year warrants to the debenture holder which provided for
the purchase of up to 1,349,850 Maxxcom shares at a price of C$9.00 per
share. No value was assigned to the warrants.
In April 2002, Maxxcom reached agreements with its senior credit and
subordinated debenture lenders to amend certain of its credit
facilities covenants. In connection with these amendments, Maxxcom
agreed to amend the exercise price of the warrants to acquire 1,349,850
Maxxcom common shares which were granted to the holders of the C$40,000
subordinated debenture. The exercise price was reduced from C$9.00 per
share to C$2.50 per share. As a result of this amendment, the Company
recorded a deferred finance charge of $493, representing the estimated
value of the warrants at that time.
Upon the privatization of Maxxcom, the Maxxcom warrants were exchanged
into 257,146 MDC warrants with an exercise price of C$13.12. The fair
value of the MDC warrants was included as consideration in the
privatization of Maxxcom.
The notes payable and other bank loans bear interest at rates ranging
from prime less 0.5% to a fixed rate of 8.95% and are due between 2004
and 2010. The other bank loans are secured by a general security
agreement with a specific subsidiary.
The mortgage and capital leases are secured by specific equipment, land
and building.
In accordance with the Company's accounting policy on financial
instruments, the net proceeds of C$47,350 of the 7% convertible
debentures with the face value of C$50,000 were originally allocated
C$14,350 to long-term indebtedness and C$33,000 to other paid-in
capital within shareholders' equity. Additional amounts were
capitalized annually to the equity portion of the notes in order that
the equity portion of the notes equaled the face value at the estimated
settlement date of January 2002. As the notes were not settled within
the estimated period, the 7% convertible debentures were re-assessed in
January 2002 with an allocation to long-term indebtedness from other
paid-in capital, in the amount of $9,010, representing the present
value of future interest payments. Additional amounts are capitalized
annually to the equity portion of the notes in order that the equity
portion of the notes will equal the face value at maturity. The 7%
convertible debentures are convertible at the option of the holder into
Class A shares at a rate of 49.261 Class A shares per one thousand
Canadian dollars of debenture. The 7% convertible debentures are
redeemable by the Company at par. The Company may, at its option,
satisfy the obligation to repay the principal amount of the debentures
on redemption or at maturity in freely tradable Class A shares. The
debentures are unsecured and rank subordinate to all other indebtedness.
================================================================================
MDC Partners Inc.
Notes to Consolidated Financial Statements
(in thousands of U.S. dollars,
except per share amounts)
December 31, 2003, 2002, 2001
--------------------------------------------------------------------------------
7. Long-term Indebtedness (Continued)
The approximate principal portion of long-term indebtedness repayable in each of
the five years subsequent to December 31, 2003 is as follows:
2004 $ 18,646
2005 65,311
2006 4,162
2007 1,093
2008 4,056
Thereafter 27,490
--------------
Total $120,758
==============
Total interest on long-term indebtedness was $12,412 (2002 - $18,260, 2001 -
$33,886). The Company's estimate of the fair value of its long-term indebtedness
is as follows:
December 31,
---------------------------------------------
2003 2002 2001
---------------------------------------------
Maturing within five years $ 93,500 $ 148,000 $ 298,000
Maturing after five years 27,500 4,000 4,000
---------------------------------------------
$ 121,000 $ 152,000 $ 302,000
=============================================
--------------------------------------------------------------------------------
8. Share Capital
The authorized share capital of the Company is as follows:
An unlimited number of Class A shares (subordinate voting shares) carrying one
vote each, entitled to dividends equal to or greater than Class B shares,
convertible at the option of the holder into one Class B share for each Class A
share after the occurrence of certain events related to an offer to purchase all
Class B shares.
An unlimited number of Class B shares carrying 20 votes each, convertible at any
time at the option of the holder into one Class A share for each Class B share.
An unlimited number of non-voting preference shares issuable in series.
Changes to the Company's issued and outstanding share capital are as follows:
================================================================================
MDC Partners Inc.
Notes to Consolidated Financial Statements
(in thousands of U.S. dollars,
except per share amounts)
December 31, 2003, 2002, 2001
--------------------------------------------------------------------------------
8. Share Capital (Continued)
Class A Shares Amount
------- ------ ------
Balance December 31, 2000 16,261,309 $ 93,618
Share options exercised 112,025 732
Shares acquired and cancelled (841,800) (6,727)
Shares issued in exchange for Cybersight
Acquisition Co., Inc. shares 933,337 7,353
---------------------------
Balance December 31, 2001 16,464,871 94,976
Allocation from other paid-in capital upon
settlement of 6% convertible subordinated notes - 1,296
---------------------------
Balance December 31, 2002 16,464,871 96,272
Share options exercised 458,987 3,031
Shares acquired and cancelled (1,274,816) (8,131)
Shares issued on privatization of Maxxcom 2,473,183 23,327
Shares issued as acquisition consideration 74,183 872
Shares issued as deferred acquisition 173,043 1,786
consideration
---------------------------
Balance December 31, 2003 18,369,451 117,157
===========================
Class B
-------
Balance December 31, 2001, 2002 and 2003 450,470 $ 135
===========================
Total Class A and Class B Share Capital
---------------------------------------
2003 18,819,921 117,292
===========================
2002 16,915,341 96,407
===========================
2001 16,915,341 95,111
===========================
================================================================================
MDC Partners Inc.
Notes to Consolidated Financial Statements
(in thousands of U.S. dollars,
except per share amounts)
December 31, 2003, 2002, 2001
--------------------------------------------------------------------------------
8. Share Capital (Continued)
The Company has an employee share option incentive plan, which currently may
grant up to 2,331,112 options to employees, officers, directors and consultants
of the Company. All options granted are for a term of five years from the date
of grant and vest 20% on the date of grant and a further 20% on each anniversary
date. In addition, the Company granted 534,960, on the privatization of Maxxcom,
with a term of no more than ten years from initial date of grant by Maxxcom and
vest 20% in each of the first two years with the balance vesting on the third
anniversary of the initial grant.
The Company has reserved a total of 5,263,365 Class A shares in order to meet
its obligations under various conversion rights, warrants and employee share
options. At December 31, 2003 there were 275,698 shares available for future
option grants.
Information related to share option transactions over the past three years is
summarized as follows:
Options Outstanding Options Exercisable
-------------------------------------------------------------------
Weighted Weighted
Average Average
Number Price per Number Price per
Outstanding Share Outstanding Share
-------------------------------------------------------------------
Balance, December 31, 2000 2,256,279 8.01 1,347,556 7.64
Granted 130,000 5.93
Exercised (112,025) 6.44
Expired and cancelled (416,409) 7.62
-------------------------------------------------------------------
Balance, December 31, 2001 1,857,845 7.46 1,314,736 7.33
Granted 812,000 3.47
Expired and cancelled (420,217) 5.76
-------------------------------------------------------------------
Balance, December 31, 2002 2,249,628 6.45 1,353,344 7.63
Granted 614,000 5.94
Granted on privatization of Maxxcom 534,960 6.24
Exercised (458,987) 6.35
Expired and cancelled (872,873) 9.46
-------------------------------------------------------------------
Balance, December 31, 2003 2,066,728 $ 6.60 870,979 $ 7.82
===================================================================
================================================================================
MDC Partners Inc.
Notes to Consolidated Financial Statements
(in thousands of U.S. dollars,
except per share amounts)
December 31, 2003, 2002, 2001
--------------------------------------------------------------------------------
8. Share Capital (Continued)
Share options outstanding at December 31, 2003 are summarized as follows:
Options Outstanding Options Exercisable
--------------------------------------- ---------------------------------
Weighted Weighted Weighted
Average Average Average
Range of Exercise Number Contractual Price per Number Price per
Prices Outstanding Life Share Exercisable Share
------ ----------- ---- ----- ----------- -----
$2.97 - $4.50 784,535 3.9 $ 4.13 315,907 $ 4.11
$4.51 - $6.00 525,265 4.4 5.60 111,034 5.61
$6.01 - $9.00 348,253 5.3 7.33 159,484 7.95
$9.01 - $14.00 395,118 2.4 10.93 271,283 11.23
$23.00 - $44.00 13,557 3.2 42.81 13,271 43.24
In 2003, The Company recorded $180 compensation expense related to options
issued to employees. Prior to 2003, the Company recorded no compensation expense
when options were issued to employees but provided pro forma information for
options granted after January 1, 2002. The Company estimates the fair value of
each share option on the date of grant using the Black-Scholes option pricing
model with the following assumptions: risk-free interest rate of 6%; expected
volatility of 40%; expected option life of five years; and no dividend payments.
Had compensation expense been recorded for employee stock option grants in 2002,
the resulting pro forma net earnings and earnings per share would be as follows:
For the year ended December 31, 2002
------------------------------------
Pro forma net income $ 93,263
==================
Pro forma earnings per share
Basic $ 5.46
==================
Diluted $ 3.69
==================
During 2003, the Compensation Committee of the Board of Directors approved a
stock appreciation rights compensation program for senior officers and directors
of the Company. Stock appreciation rights have a term of four years and vest
one-third on each anniversary date. During the year ended December 31, 2003,
1,650,479 stock appreciation rights were granted with rights prices ranging from
$3.85 to $7.71 with an average price of $5.76. The Company has recorded
compensation expense of $4,102 with respect to stock appreciation rights.
==========================================================================================================================
MDC Partners Inc.
Notes to Consolidated Financial Statements
(in thousands of U.S. dollars,
except per share amounts)
December 31, 2003, 2002, 2001
-----------------------------------------------------------------------------------------------------------------------
9. Contributed Surplus
December 31,
-----------------------------------------------------
2003 2002 2001
-----------------------------------------------------
Fair value of stock options granted to employees $ 180 $ - $ -
Fair value of stock options issued on
privatization of Maxxcom 1,073 - -
Fair value of 257,146 stock warrants granted on
privatization of Maxxcom, fully
vested with an
exercise price of C$13.12, expiring
July 11, 2006 827 - -
Fair value of 250,000 stock warrants
granted to service
providers, fully vested with an
exercise price
of C$15.47, expiring November 19, 2008 1,192 - -
-----------------------------------------------------
$ 3,272 $ - $ -
=====================================================
------------------------------------------------------------------------------------------------------------------
10. Other Paid-in Capital
December 31,
-----------------------------------------------------
2003 2002 2001
-----------------------------------------------------
Balance beginning of year $ 24,179 $ 32,687 $ 31,981
Allocation upon re-assessment of 7%
convertible debentures (See Note 7) - (9,010) -
Allocation to share capital upon
settlement of 6%
convertible subordinated notes - (1,296) -
Allocation from retained earnings 1,692 1,592 2,572
Reduction for repurchase of C$1,000 of 7%
convertible debentures (597) - -
Foreign exchange 5,577 206 (1,866)
-----------------------------------------------------
$ 30,851 $ 24,179 $ 32,687
=====================================================
During 2002, share capital increased $1,296 representing the transfer from other
paid-in capital of the expired option value associated with the 6% convertible
subordinated notes which were repaid.
--------------------------------------------------------------------------------
11. Cumulative Translation Adjustment
This adjustment represents the net unrealized foreign currency translation gain
(loss) on the Company's net investment in self-sustaining foreign operations in
the United States, United Kingdom and Australia.
===============================================================================
MDC Partners Inc.
Notes to Consolidated Financial Statements
(in thousands of U.S. dollars,
except per share amounts)
December 31, 2003, 2002, 2001
-------------------------------------------------------------------------------
12. Net Gain on Asset Dispositions and Other Charges
For the years ended December 31,
--------------------------------------------
2003 2002 2001
--------------------------------------------
Cash charges $ - $ (5,097) $ (13,675)
Stock based compensation expense (5,474) - -
Non-cash charges - capital assets (8,126) (3,391) (107,839)
- deferred finance
costs (3,085) - -
Goodwill charges (10,012) - -
Net gain on asset dispositions 36,957 105,776 62,302
--------------------------------------------
$ 10,260 $ 97,288 $ (59,212)
============================================
In May 2003, the Company sold an 80% interest in Custom Direct Inc. ("Custom")
to the Custom Direct Income Fund ("the Fund") for cash and units of the Fund.
The Fund units were subsequently sold. Total gross proceeds for the disposal of
80% of Custom were approximately $150,000. The net gain on asset dispositions
includes charges for incentive payments to management including management of
divested subsidiaries in the amount of $10,737 (2002 - $1,239, 2001 - $7,561).
In accordance with its accounting policy of testing goodwill and other
intangibles for impairment on an annual basis, the Company undertook an
extensive review of all businesses comparing the book carrying value to the
estimated fair market value of each operation. As a result, the Company recorded
non-cash charges against specific assets of $11,211 and goodwill charges of
$10,012.
During 2002, the Company disposed of its remaining interest in Davis +
Henderson, A.E. McKenzie Co. Inc., The House of Questa Limited, Spectron
Security Print Pty Ltd., Ashton-Potter Packaging and Cybersight Acquisition Co.,
Inc. for aggregate gross proceeds of approximately $189,000. Cash charges
incurred relate to expenditures associated with the postponed income trust of
Custom Direct including costs incurred to settle a supply contract dispute.
During 2001, the Company developed a plan to maximize the returns in its core
businesses and construct an orderly exit from non-core activities. The plan
included a reduction in the estimated useful life of deferred customer
acquisition costs in the direct-to-consumer cheque market as a result of the
absence of predictability in the direct response market, extensive cost
reduction initiatives across the organization, including an approximate 15%
reduction in the Company's workforce, the exit from certain leased facilities
and the provisions against specific assets connected with various non-core
businesses which will be exited in the foreseeable future. The resulting
restructuring charge was comprised of non-cash charges of $107,839 related to
writedowns in customer acquisition costs and other specific assets. The Company
disposed of 45.45% of Davis + Henderson for aggregate gross proceeds of
approximately $111,000. Cash charges amounted to $13,675 related primarily to
employee termination costs and vaca
--------------------------------------------------------------------------------
13. Income Participation of Minority Partners
These amounts represent payments to minority shareholders of subsidiary
companies pursuant to their respective shareholder agreements and
adjustments to the minority interest position.
--------------------------------------------------------------------------------
14. Income Taxes
The Company's provision (recovery) for income taxes is comprised as follows:
For the years ended December 31,
-----------------------------------------------
2003 2002 2001
-----------------------------------------------
Current $ 1,128 $ 1,051 $ 487
Future 5,461 20,969 (21,207)
-----------------------------------------------
$ 6,589 $ 22,020 $ (20,720)
================================================
==========================================================================================================================
MDC Partners Inc.
Notes to Consolidated Financial Statements
(in thousands of U.S. dollars,
except per share amounts)
December 31, 2003, 2002, 2001
-----------------------------------------------------------------------------------------------------------------------
14. Income Taxes (Continued)
Reconciliation to statutory rates is as follows:
For the years ended December 31,
---------------------------------------------------
2003 2002 2001
---------------------------------------------------
Provision for income taxes based on
combined basic Canadian federal and
provincial tax rate of 36.6% (2002 - 38.6%, 2001 - 42.1%) $ 6,071 $ 45,697 $ (41,334)
Increase (decrease) in taxes resulting from
permanent differences
- Capital gains (3,409) (20,607) (4,734)
- Other, including non-deductible goodwill charges 1,358 (2,820) 15,760
Losses not recognized for income tax purposes 2,569 (250) 9,588
---------------------------------------------------
Total provision (recovery) $ 6,589 $ 22,020 $ (20,720)
===================================================
Disclosed on the Consolidated Statements of Operations as follows:
For the years ended December 31,
---------------------------------------------------
2003 2002 2001
---------------------------------------------------
Income taxes $ 6,589 $ 22,020 $ (18,414)
Recovery of income taxes related to goodwill charges - - (2,306)
---------------------------------------------------
$ 6,589 $ 22,020 $ (20,720)
===================================================
The tax effects of significant items comprising the Company's future tax assets
and liabilities as at December 31 are as follows:
2003 2002 2001
---------------------------------------------------
Future tax assets
Differences between book and tax basis of equity
transaction costs $ 853 $ 1,083 $ 2,081
Loss carryforwards related to equity transaction costs 282 1,249 5,534
Operating loss carryforwards and differences between
book and tax basis 11,445 17,183 21,364
---------------------------------------------------
$ 12,580 $ 19,515 $ 28,979
===================================================
At December 31, 2003, the Company has income tax loss carryforwards of
approximately $34,000 which relate to the Company and certain subsidiaries, the
tax benefits of which are likely to be realized, and therefore have been
recognized in these financial statements. The tax loss carryforwards expire
between 2004 and 2021. In addition, certain other subsidiaries have income tax
loss carryforwards of approximately $50,000, the tax benefit of which have not
been recognized in these financial statements.
================================================================================
MDC Partners Inc.
Notes to Consolidated Financial Statements
(in thousands of U.S. dollars,
except per share amounts)
December 31, 2003, 2002, 2001
--------------------------------------------------------------------------------
15. Discontinued Operations
In December 1997, the Company adopted a plan to divest its Regal
Greetings & Gift and Primes de Luxe ("Regal") operations. Accordingly,
the results of Regal were reported as discontinued operations. Interest
was allocated to such discontinued operations. During the second
quarter of 2001, the Company recorded a provision of $25,428 to cover
the anticipated loss on disposal. The Company completed the disposal of
Regal in the fourth quarter of 2001 for proceeds of approximately
$23,000 with no adjustment required to the provision.
For the years ended December 31,
-------------------------------------
2003 2002 2001
-------------------------------------
Sales $ - $ - $ 49,492
-------------------------------------
Income from operations - - -
Provision for loss on disposal
- - (25,428)
-------------------------------------
Loss from discontinued operations $ - $ - $ (25,428)
=====================================
-------------------------------------------------------------------------------
16. Earnings per Share
Basic earnings per share has been calculated on a weighted average
basis of Class A shares and Class B shares outstanding during the year
and after giving effect to the net allocation to other paid-in capital
related to the convertible debentures.
The calculation of diluted earnings per share is based upon the
treasury method. The weighted average shares outstanding during the
year are as follows:
For the years ended December 31,
-------------------------------------------
2003 2002 2001
-------------------------------------------
Basic 17,791,064 16,915,341 16,885,877
Impact of dilutive items 5,466,532 8,441,677 -
-------------------------------------------
Diluted 23,257,596 25,357,018 16,885,877
===========================================
-------------------------------------------------------------------------------
17. Commitments
The Company has leased real estate and equipment at the following
approximate annual base rental:
2004 $ 12,097
2005 10,274
2006 8,329
2007 6,243
2008 5,947
Thereafter 16,624
================================================================================
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF U.S. DOLLARS,
EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 2003, 2002, 2001
--------------------------------------------------------------------------------
18. CONTINGENT LIABILITIES
a) As at December 31, 2003, there are claims against the Company in
varying amounts. It is not possible to determine the amounts that may
ultimately be assessed against the Company with respect to these
claims, however, management believes that any such amounts would not
have a material impact on the business or financial position of the
Company.
b) Owners of interests in certain of the Company's subsidiaries have the
right in certain circumstances to require the Company to purchase
additional ownership stakes. A minority shareholder of one of the
subsidiaries has given notice of intent to require the Company to
purchase their remaining interest in the related subsidiary. The
Company will be required to complete the purchase in the first quarter
of 2004. It is estimated that this obligation will be approximately
$800.
--------------------------------------------------------------------------------
19. RELATED PARTY TRANSACTIONS
The Company incurred fees totaling $8,006 (2002 - $2,421, 2001 -
$3,466) to companies controlled by an officer of the Company in respect
of services provided including merger and acquisition, financial and
administrative. In addition, the Company has a non-interest bearing
note receivable of $2,314, C$3,000, (2002 - $1,902, 2001 - $1,883) from
another company controlled by the same officer.
--------------------------------------------------------------------------------
=======================================================================================================================
MDC Partners Inc.
Notes to Consolidated Financial Statements
(in thousands of U.S. dollars, except per share amounts)
-----------------------------------------------------------------------------------------------------------------------
20. Subsequent Events
On January 29, 2004, the Company purchased a 60% interest in kirshenbaum bond + partners
for cash consideration of approximately $20,000 and share consideration of approximately
$1,800.
On February 13, 2004, the Company applied its units of the Fund in full settlement of the
adjustable rate exchangeable securities.
21. Segmented Information
Based on the Company's internal management structure, the Company's continuing operations
are in primarily two business segments - Marketing Communications and Secure
Transactions. Marketing Communications services, through MDC's network of entrepreneurial
firms, include advertising and media, customer relationship management, and marketing
services. Secure Transactions 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. The significant accounting policies of these segments are the
same as those described in the summary of significant accounting policies.
FOR THE YEAR ENDED DECEMBER 31, 2003
Marketing Secure Corporate
Communications Transactions & Other Total
--------------------------------------------------------------------------------------------------------
EARNINGS:
Gross billings $ 437,154 $ 115,606 $ 3,550 $ 556,310
=======================================================
Revenues $ 193,560 $ 115,606 $ 3,550 $ 312,716
-------------------------------------------------------
Operating costs
Cost of sales - 57,578 - 57,578
Salaries and related costs 88,297 17,637 3,448 109,382
General and other operating costs 76,643 27,369 5,185 109,197
-------------------------------------------------------
164,940 102,584 8,633 276,157
-------------------------------------------------------
Operating income (loss) before
other income (charges) 28,620 13,022 (5,083) 36,559
-------------------------------------------------------
Net gain on asset dispositions
and other charges (38) 10,147 151 10,260
Amortization (7,927) (3,803) (887) (12,617)
Interest, net (6,286) (4,850) (366) (11,502)
Income participation of minority partners (6,113) - - (6,113)
-------------------------------------------------------
(20,364) 1,494 (1,102) (19,972)
-------------------------------------------------------
Income (loss) before income taxes and
minority interest 8,256 14,516 (6,185) 16,587
Income taxes (recovery) 1,850 6,297 (1,558) 6,589
-------------------------------------------------------
Income (loss) before minority interest 6,406 8,219 (4,627) 9,998
Minority interest (recovery) - (1,536) 492 (1,044)
-------------------------------------------------------
Net income (loss) for the year 6,406 9,755 (5,119) 11,042
=======================================================
===============================================================================================================
ASSETS
Total assets $ 225,987 48,016 74,408 348,411
=======================================================
Expenditures on capital assets $ 6,975 11,731 - 18,706
=======================================================
=========================================================================================================================
MDC Partners Inc.
Notes to Consolidated Financial Statements
(in thousands of U.S. dollars, except per share amounts)
-------------------------------------------------------------------------------------------------------------------------
21. Segmented Information (Continued)
FOR THE YEAR ENDED DECEMBER 31, 2002
Marketing Secure Corporate
Communications Transactions & Other Total
--------------------------------------------------------------------------------------------------------------------
EARNINGS:
Gross billings $ 384,248 $ 209,100 $ 6,925 $ 600,273
=============================================================
Revenues $ 171,740 $ 209,100 $ 6,925 $ 387,765
-------------------------------------------------------------
Operating costs
Cost of sales - 95,233 3,255 98,488
Salaries and related costs 80,588 28,781 2,492 111,861
General and other operating costs 69,440 48,224 5,126 122,790
-------------------------------------------------------------
150,028 172,238 10,873 333,139
-------------------------------------------------------------
Operating income (loss)
before other income (charges) 21,712 36,862 (3,948) 54,626
-------------------------------------------------------------
Net gain on asset dispositions and other charges (576) 100,219 (2,355) 97,288
Unrealized foreign exchange gain - - 4,380 4,380
Amortization (7,595) (7,214) (1,362) (16,171)
Interest, net (5,297) (10,767) (1,746) (17,810)
Income participation of minority partners (3,927) - - (3,927)
-------------------------------------------------------------
(17,395) 82,238 (1,083) 63,760
-------------------------------------------------------------
Income (loss) before income taxes and
minority interest 4,317 119,100 (5,031) 118,386
Income taxes (recovery) 1,413 22,347 (1,740) 22,020
-------------------------------------------------------------
Income (loss) before minority interest 2,904 96,753 (3,291) 96,366
Minority interest - 2,379 653 3,032
-------------------------------------------------------------
Net income (loss) for the year $ 2,904 $ 94,374 $ (3,944) $ 93,334
=============================================================
====================================================================================================================
ASSETS
Total assets $ 206,047 $ 161,110 $ 16,963 $ 384,120
=============================================================
Expenditures on capital assets $ 3,813 $ 4,654 $ 142 $ 8,609
=============================================================
=========================================================================================================================
MDC Partners Inc.
Notes to Consolidated Financial Statements
(in thousands of U.S. dollars, except per share amounts)
-------------------------------------------------------------------------------------------------------------------------
21. Segmented Information (Continued)
FOR THE YEAR ENDED DECEMBER 31, 2001
Marketing Secure Corporate
Communications Transactions & Other Total
-------------------------------------------------------------------------------------------------------------------
EARNINGS:
Gross billings $ 386,792 $ 305,156 $ 26,241 $ 718,189
===========================================================
Revenues $ 178,350 $ 305,156 $ 26,241 $ 509,747
-----------------------------------------------------------
Operating costs
Cost of sales - 139,568 11,289 150,857
Salaries and related costs 87,504 40,646 10,141 138,291
General and other operating costs 69,169 62,355 9,273 140,797
-----------------------------------------------------------
156,673 242,569 30,703 429,945
-----------------------------------------------------------
Operating income (loss) before
other income (charges) 21,677 62,587 (4,462) 79,802
-----------------------------------------------------------
Net gain on asset dispositions and other charges (9,140) (7,838) (42,234) (59,212)
Unrealized foreign exchange loss - - (12,034) (12,034)
Amortization (6,675) (13,798) (3,244) (23,717)
Interest, net (4,160) (10,344) (19,566) (34,070)
Income participation of minority partners (3,644) - - (3,644)
-----------------------------------------------------------
(23,619) (31,980) (77,078) (132,677)
-----------------------------------------------------------
Income (loss) before income taxes, goodwill
and minority interest (1,942) 30,607 (81,540) (52,875)
Income taxes (recovery) (1,397) 12,011 (29,028) (18,414)
-----------------------------------------------------------
Income (loss) before goodwill and minority interest (545) 18,596 (52,512) (34,461)
Goodwill charges 9,712 14,705 18,582 42,999
Minority interest (recovery) - (642) (3,536) (4,178)
-----------------------------------------------------------
Income (loss) from continuing operations $ (10,257) $ 4,533 $ (67,558) (73,282)
===========================================================
===================================================================================================================
ASSETS
Total assets $ 240,732 $ 263,069 $ 57,792 $ 561,593
===========================================================
Expenditures on capital assets $ 4,146 $ 10,709 $ 1,354 $ 16,209
===========================================================
==============================================================================
MDC Partners Inc.
Notes to Consolidated Financial Statements
(in thousands of U.S. dollars, except per share amounts)
------------------------------------------------------------------------------
21. Segmented Information (Continued)
GEOGRAPHIC INFORMATION
Revenues
2003 2002 2001
-------------------------------------------------
Canada $ 95,924 $ 135,607 $ 226,480
United States 189,712 223,921 245,573
Other countries 27,080 28,237 37,694
-------------------------------------------------
Total $ 312,716 $ 387,765 $ 509,747
=================================================
Capital Assets and Goodwill
2003 2002 2001
-------------------------------------------------
Canada $ 49,628 $ 51,329 $ 130,392
United States 93,207 169,161 206,803
Other countries 5,369 13,550 22,345
-------------------------------------------------
Total $ 148,204 $ 234,040 $ 359,540
=================================================
===============================================================================
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US DOLLARS,
EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 2003, 2002 AND 2001
-------------------------------------------------------------------------------
22. RECONCILIATION OF RESULTS REPORTED IN ACCORDANCE
WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(GAAP) IN CANADA WITH UNITED STATES ("U.S.") GAAP (CONTINUED)
The following are the significant adjustments required to give effect to
the differences between U.S. GAAP and Canadian GAAP which is the basis of
presentation for the consolidated financial statements of the Company:
(a) Prior to January 1, 2003 certain deferred charges, which were
capitalized under Canadian GAAP, were expensed in the period
incurred under U.S. GAAP.
(b) Prior to January 1, 2001, under Canadian GAAP, the Company had a
policy of including certain internal acquisition costs as part of
the purchase price of businesses acquired. U.S. GAAP does not permit
capitalization of these costs.
(c) Under Canadian GAAP, convertible debt is allocated between debt and
a separate component of shareholders' equity with additional amounts
capitalized annually to the equity portion of the debt in order that
the equity portion of the debt equal the face value at maturity.
Under U.S. GAAP, convertible debt remains debt until converted or
extinguished and interest is charged to income in the period
incurred.
(d) Future Income Taxes
Prior to January 1, 2000, under Canadian GAAP, future tax debits
were recorded only when there was reasonable assurance they would be
realized. Under U.S. GAAP, such debits are recorded and then reduced
through a valuation adjustment if it is more likely than not that
some, or all, of the deferred tax asset will not be realized. The
Company did not record a future tax asset relating to net operating
loss carryforwards and other income tax benefits acquired in
connection with certain business acquisitions. The acquired entities
had losses and other benefits available for tax purposes amounting
to $Nil (2002 and 2001 - $40,000). The total value of the future tax
asset amounts to $Nil (2002 and 2001 - $15,200). For U.S. purposes,
the future tax asset was reduced by a valuation adjustment in the
same amount.
(e) Under Canadian GAAP, the Company reflects share purchase loans as
assets based on the economic substance of the arrangement. U.S. GAAP
requires that these advances be shown as contra-equity. As at
December 31, 2003 share purchase loans outstanding amounted to $Nil
(2002 - $3,550 and 2001 - $4,711).
(f) The Company has disclosed income before goodwill charges and
minority interest which is not permitted disclosure under U.S. GAAP.
(g) Comprehensive Income
Statement of Financial Accounting Standards ("SFAS") No. 130,
Reporting Comprehensive Income, requires the disclosure of
comprehensive income (loss), which consists of net income (loss) and
other comprehensive income (loss). Other comprehensive income (loss)
consists of cumulative translation adjustments that are presented as
a separate section of shareholders' equity on the balance sheet.
===============================================================================
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US DOLLARS,
EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 2003, 2002 AND 2001
-------------------------------------------------------------------------------
22. RECONCILIATION OF RESULTS REPORTED IN ACCORDANCE
WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(GAAP) IN CANADA WITH UNITED STATES ("U.S.") GAAP (CONTINUED)
(h) Under U.S. GAAP, the Company would have been required to adopt SFAS
No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133), which requires that all derivative
instruments be recorded on the balance sheet at fair value. Changes
in the fair value of derivatives are recorded each period either in
current results of operations or other comprehensive income (loss).
For a derivative designated as part of a hedge transaction, where it
is recorded is dependent on whether it is a fair value hedge or a
cash flow hedge. For a derivative designated as a fair value hedge,
the gain or loss of the derivative in the period of change and the
offsetting loss or gain of the hedged item attributed to the hedged
risk are recognized in results of operations. For a derivative
designated as a cash flow hedge, the effective portion of the
derivative's gain or loss is initially reported as a component of
other comprehensive income (loss) and subsequently reclassified into
results of operations when the hedged exposure affects results of
operations. The ineffective portion of the gain or loss of a cash
flow hedge is recognized currently in results of operations. For a
derivative not designated as a hedging instrument, the gain or loss
is recognized currently in results of operations.
The Company used interest rate and cross currency swaps to hedge a
portion of its debt obligations and future interest payments. The
Company had not designated these derivative instruments as hedging
transactions for US GAAP purposes. The Company does not enter into
derivative contracts for trading purposes. The adoption of SFAS 133
for U.S. GAAP purposes resulted in the cumulative effect of an
accounting change of $5,650 as at December 31, 2001. As at December
31, 2002 all such derivative instruments had been terminated.
(i) Investments where the Company exercises joint control have been
accounted for on the proportionate consolidation basis under
Canadian GAAP. For 2003 and 2002, amounts reported for U.S. GAAP
purposes have been revised to reflect the investment on an equity
basis. This policy did not give rise to material differences in
2001.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses accounting
for restructuring and similar costs. SFAS No. 146 supersedes previous
accounting guidance, principally Emerging Issues Task Force ("EITF") Issue
No. 94-3, "Liability Recognition for Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires
companies to recognize costs associated with exit or disposal of
activities when they are incurred rather than at the date of a commitment
to an exit or disposal plan. This statement is effective for exit or
disposal activities that are initiated after December 31, 2002. The
adoption of SFAS No. 146 did not have any immediate impact on our results
of operations or financial position.
===============================================================================
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US DOLLARS,
EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 2003, 2002 AND 2001
-------------------------------------------------------------------------------
22. RECONCILIATION OF RESULTS REPORTED IN ACCORDANCE
WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(GAAP) IN CANADA WITH UNITED STATES ("U.S.") GAAP (CONTINUED)
In November 2002, EITF Issue No. 00-21, "Revenue Arrangements with
Multiple Deliverables" (EITF 00-21) was issued. EITF 00-21 addresses
certain aspects of the accounting by a vendor for arrangements under which
it will perform multiple revenue-generating activities and how to
determine whether an arrangement involving multiple deliverables contains
more than one unit of accounting. EITF 00-21 is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003.
The adoption of EITF 00-21 does not have a material effect on our results
of operations or financial position.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". FIN 45 requires
a guarantor to recognize, at the inception of a guarantee, a liability for
the fair value of the obligation it has undertaken in issuing the
guarantee. FIN 45 also requires guarantors to disclose certain information
for guarantees, beginning December 31, 2002. The adoption of FIN 45 did
not have a material effect on our results of operations or financial
condition and these financial statements contain the required disclosures.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation, Transition and Disclosure, an amendment of FASB
Statement No. 123". SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. Additionally, the
statement amends the disclosure provisions of SFAS No. 123 to require
prominent disclosure in financial statements about the method for
accounting for stock-based compensation and the effect of the method used
on reported results. Finally, this statement amends Accounting Principles
Board (APB) Opinion No. 28, "Interim Financial Reporting", to require
disclosure about those effects in interim financial information. The
amendments to SFAS No. 123 that provide alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation are effective for financial statements
for fiscal years ending after December 15, 2002. The amendment to SFAS No.
123 relating to disclosures and the amendment to APB Opinion No. 28 is
effective for financial reports containing condensed financial statements
for interim periods beginning after December 15, 2002. In compliance with
SFAS No. 148, we elected to continue to follow the intrinsic value method
in accounting for our stock-based employee compensation plans as defined
by APB Opinion No. 25 and we made the applicable disclosures in the Notes
to the Consolidated Financial Statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires an investor with a
majority of the variable interests in a variable interest entity to
consolidate the entity and also requires majority and significant variable
interest investors to provide certain disclosures. A variable interest
entity is an entity in which the equity investors do not have a
controlling financial interest or the equity investment at risk is
insufficient to finance the entity's activities without receiving
additional subordinated financial support from other parties. We do not
have any variable interest entities that must be consolidated.
===============================================================================
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US DOLLARS,
EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 2003, 2002 AND 2001
-------------------------------------------------------------------------------
22. RECONCILIATION OF RESULTS REPORTED IN ACCORDANCE
WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(GAAP) IN CANADA WITH UNITED STATES ("U.S.") GAAP (CONTINUED)
In May 2003, the FASB issued SFAS No. 150, "Accounting For Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity", which establishes standards for how an issuer of financial
instruments classifies and measures certain financial instruments with
characteristics of both liabilities and equity. SFAS No. 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. Implementation of this standard did not
have a material effect on our results of operations or financial position.
Operations
2003 2002 2001
Income (loss) from continuing operations before
income taxes as reported under Canadian GAAP $ 17,631 $ 115,354 $ (94,002)
Adjustments
Gain on dispositions 14,785 3,209 -
Deferred charges - (134) (1,635)
Unrealized financial derivative gain - 4,437 5,023
Reduction of amortization 741 1,322 3,640
Interest on convertible debt (1,907) (1,582) (1,682)
------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
income taxes, U.S. GAAP 31,250 122,606 (88,656)
------------------------------------------------------------------------------------------------------------
Income taxes (recovery)
Current 1,128 1,051 487
Deferred 4,995 25,495 (19,068)
------------------------------------------------------------------------------------------------------------
6,123 26,546 (18,581)
------------------------------------------------------------------------------------------------------------
Net income (loss) before cumulative effect of change in
accounting principle 25,127 96,060 (70,075)
Cumulative effect of change in accounting principle - (62,477) (5,650)
------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations, U.S. GAAP 25,127 33,583 (75,725)
Loss from discontinued operations - - (24,078)
------------------------------------------------------------------------------------------------------------
Net income (loss), U.S. GAAP 25,127 33,583 (99,803)
Other comprehensive income, net of tax
Cumulative translation adjustment (13,627) 5,240 7,526
------------------------------------------------------------------------------------------------------------
Comprehensive income (loss), U.S. GAAP $ 11,500 $ 38,823 $ (92,277)
------------------------------------------------------------------------------------------------------------
===============================================================================
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US DOLLARS,
EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 2003, 2002 AND 2001
-------------------------------------------------------------------------------
22. RECONCILIATION OF RESULTS REPORTED IN ACCORDANCE
WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(GAAP) IN CANADA WITH UNITED STATES ("U.S.") GAAP (CONTINUED)
------------------------------------------------------------------------------------------------------------
2003 2002 2001
------------------------------------------------------------------------------------------------------------
Earnings (loss) per Class A and Class B
share, under U.S. GAAP, before cumulative effect of change in
accounting principle:
Primary $ 1.41 $ 5.68 $ (4.15)
------------------------------------------------------------------------------------------------------------
Diluted $ 1.15 $ 3.84 $ (4.15)
------------------------------------------------------------------------------------------------------------
Earnings (loss) per Class A and Class B share, under U.S. GAAP, from
continuing operations:
Primary $ 1.41 $ 1.99 $ (4.48)
------------------------------------------------------------------------------------------------------------
Diluted $ 1.15 $ 1.38 $ (4.48)
------------------------------------------------------------------------------------------------------------
Earnings (loss) per Class A and Class B share, as reported:
Primary $ 1.41 $ 1.99 $ (5.91)
------------------------------------------------------------------------------------------------------------
Diluted $ 1.15 $ 1.38 $ (5.91)
------------------------------------------------------------------------------------------------------------
Weighted average number of shares
Primary 17,791,064 16,915,341 16,885,877
------------------------------------------------------------------------------------------------------------
Diluted 23,257,596 25,357,018 16,885,877
------------------------------------------------------------------------------------------------------------
===============================================================================
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US DOLLARS,
EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 2003, 2002 AND 2001
-------------------------------------------------------------------------------
22. RECONCILIATION OF RESULTS REPORTED IN ACCORDANCE
WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(GAAP) IN CANADA WITH UNITED STATES ("U.S.") GAAP (CONTINUED)
Cash Flows
----------
Consolidated statement of cash flows under U.S. GAAP:
2003 2002 2001
------------------------------------------------------------------------------------------------------------
Cash provided by (used in)
Operating activities
Operations
Loss from continuing operations $ 25,127 $ 33,583 $ (99,803)
Adjustments to reconcile income (loss)
from continuing operations to net cash
used in operating activities
Amortization 11,876 14,849 32,968
Restructuring, dispositions and other
charges, non-cash (35,057) (105,876) 107,002
Restructuring, dispositions and other
charges accrued to accounts payable (949) (3,545) 7,653
Goodwill charges 10,012 - 32,579
Cumulative effect of change in accounting
principle - 62,477 5,650
Interest capitalized to debt 4,557 3,368 -
Unrealized financial derivative gain - (4,437) (5,023)
Deferred income taxes 4,995 25,495 (19,068)
Unrealized foreign exchange loss (gain) - (4,380) 12,034
Increase (decrease) in accounts receivable (5,160) 7,545 6,818
Increase (decrease) in accounts payable 3,154 (1,370) (12,021)
Other (1,202) (3,999) (2,397)
------------------------------------------------------------------------------------------------------------
17,353 23,710 90,470
------------------------------------------------------------------------------------------------------------
Investing activities
Business investments, acquisitions and divestitures,
net of cash acquired 87,107 161,302 (16,884)
Purchase of capital and other assets (13,880) (9,563) (34.981)
------------------------------------------------------------------------------------------------------------
73,227 151,739 (51,865)
------------------------------------------------------------------------------------------------------------
===============================================================================
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US DOLLARS,
EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 2003, 2002 AND 2001
-------------------------------------------------------------------------------
22. RECONCILIATION OF RESULTS REPORTED IN ACCORDANCE
WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(GAAP) IN CANADA WITH UNITED STATES ("U.S.") GAAP (CONTINUED)
2003 2002 2001
------------------------------------------------------------------------------------------------------------
Financing activities
Issuance of long term indebtedness 37,472 5,955 87,229
Repayment of long term indebtedness (88,877) (186,939) (123,475)
Issuance of share capital 3,031 - 732
Redemption of share capital (13,662) - (6,727)
------------------------------------------------------------------------------------------------------------
(62,036) (180,984) (42,241)
------------------------------------------------------------------------------------------------------------
Foreign exchange gain on cash held in foreign
currencies 5,547 6,092 166
------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents 34,091 557 (3,470)
Cash and equivalents, beginning of year 37,788 37,231 40,701
------------------------------------------------------------------------------------------------------------
Cash and equivalents, end of year $ 71,879 $ 37,788 $ 37,231
------------------------------------------------------------------------------------------------------------
Non-cash investing and financing activity:
Common stock issued for acquisitions $ 25,985 $ - $ 7,353
Stock options and warrants issued for
Acquisitions 1,900 - -
Increase (decrease) in minority interest (7,366) - (3,156)
------------------------------------------------------------------------------------------------------------
Net non-cash activities related to acquisitions $ 20,519 $ - $ 4,197
------------------------------------------------------------------------------------------------------------
The Company's cash equivalents are comprised of commercial paper and
treasury bills with maturity dates three months or less from the date of
purchase.
===============================================================================
MDC Partners Inc.
Notes to Consolidated Financial Statements
(in thousands of US dollars,
except per share amounts)
December 31, 2003, 2002 and 2001
-------------------------------------------------------------------------------
22. Reconciliation of Results Reported in Accordance
with Generally Accepted Accounting Principles
(GAAP) in Canada with United States ("U.S.") GAAP - (Continued)
The following are balance sheet items which are affected by GAAP
differences:
As reported In accordance with U.S. GAAP
------------------------------------- -------------------------------------
2003 2002 2001 2003 2002 2001
------------------------------------- -------------------------------------
Current assets $ 164,721 $ 118,516 $ 166,575 $ 145,982 $ 105,613 $ 166,575
Capital and other 80,152 79,967 104,494 96,719 103,940 100,126
Goodwill 103,538 185,637 290,524 87,479 143,976 277,527
Current liabilities 124,564 122,032 151,189 105,040 108,911 151,189
Long term indebtedness 102,112 155,514 331,158 134,256 179,290 366,944
Share capital 117,292 96,407 95,111 115,996 95,111 95,111
Contributed surplus 3,272 - - 3,272 - -
Other paid in capital 30,851 24,179 32,687 - - -
Share purchase loans - - - - (3,550) (4,711)
Cumulative translation adjustment (4,953) 7,858 3,447 - - -
Accumulated other comprehensive income - - - (5,769) 8,687 4,446
Retained earnings (accumulated deficit) (27,260) (31,694) (61,575) (25,148) (44,744) (78,327)
===============================================================================
MDC Partners Inc.
Notes to Consolidated Financial Statements
(in thousands of US dollars,
except per share amounts)
December 31, 2003, 2002 and 2001
-------------------------------------------------------------------------------
22. Reconciliation of Results Reported in Accordance
with Generally Accepted Accounting Principles
(GAAP) in Canada with United States ("U.S.") GAAP (Continued)
Reconciliation of shareholders' equity between Canadian GAAP and U.S. GAAP:
2003 2002 2001
Shareholders' equity as reported in the
Canadian GAAP consolidated financial
statements $ 119,202 $ 96,750 $ 69,670
Less: Other paid in capital (30,851) (24,179) (32,687)
Capitalization of deferred charges, net of amortization - (658) (5,340)
Costs of acquisitions, net of goodwill amortization - (13,122) (12,997)
Share purchase loans - (3,550) (4,711)
Deferred finance costs regarding convertible
debt, net of amortization - - 333
Unrealized derivative losses - - (4,394)
Interest regarding convertible debt - - 1,295
Tax effect on above adjustments - 263 5,350
------------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity according to
U.S. GAAP $ 88,351 $ 55,504 $ 16,519
------------------------------------------------------------------------------------------------------------------------------------
The following is a summary of the calculation of the income and number of shares used in calculating basic and diluted EPS:
2003 2002 2001
Income used to compute Basic EPS
Income (loss) from continuing operations, U.S. GAAP $ 25,127 $ 33,583 $ 69,670
Add: Effect of interest on convertible notes 1,552 1,369 -
Income used to compute Diluted EPS $ 26,679 $ 34,952 $ 69,670
Shares used to compute Basic EPS 17,791,064 16,915,341 16,885,877
Add: Effect of convertible notes 4,929,577 8,403,361 -
Add: Stock options 536,955 38,316 -
Shares used to compute Diluted EPS 23,257,596 25,357,018 16,885,877
===============================================================================
MDC Partners Inc.
Notes to Consolidated Financial Statements
(in thousands of US dollars,
except per share amounts)
December 31, 2003, 2002 and 2001
-------------------------------------------------------------------------------
22. Reconciliation of Results Reported in Accordance
with Generally Accepted Accounting Principles
(GAAP) in Canada with United States ("U.S.") GAAP - (Continued)
For the year ended December 31, 2003, 593,219 options and 507,146
warrants were not included in the computation of diluted earnings per
share because their effect would have been anti-dilutive.
Employee Share Option Incentive Plan
------------------------------------
Prior to 2003, SFAS No. 123, Accounting for Stock-Based Compensation
prior to 2003, the Company provided pro forma information regarding net
income and earnings per share as if compensation cost for the Company's
share option plan had been determined in accordance with the fair value
based method prescribed in SFAS 123. The Company estimates the fair value
of each share option on the date of the grant using the Black-Scholes
option-pricing model with the following assumptions used for grants in
the years ended December 31, 2002 and 2001: risk-free interest rate of
6%; expected volatility of 40%; expected option life of 5 years; and no
dividend payments.
The following pro forma net income and earnings per share are presented
for informational purposes and have been computed using the fair value
method of accounting for share-based compensation as set forth in SFAS
No. 123:
2002 2001
==================================
Pro forma net income (loss) $ 33,512 $ (100,135)
==================================
Pro forma net income (loss) per share:
Primary $ 1.98 $ (5.93)
==================================
Diluted $ 1.38 $ (5.93)
==================================
Document No. 3
Management's Discussion & Analysis (continued)
---------------------------------------------
The following discussion focuses on the operating performance of MDC Partners
Inc. (the "Company") for the years ended December 31, 2003 and 2002, and its
financial condition as at December 31, 2003. This analysis should be read in
conjunction with the annual audited consolidated financial statements.
Additional information relating to the Company, including the Company's AIF, is
available on SEDAR at www.sedar.com.
The annual audited consolidated statements, the management's discussion and
analysis and all other information contained in this Annual Report are the
responsibility of management. The Board of Directors is responsible for
reviewing and approving the financial information contained in this Annual
Report and for overseeing management's responsibilities for the presentation
and preparation of financial information.
The financial data contained in this Annual Report has been prepared in
accordance with generally accepted accounting principles in Canada. All amounts
are in U.S. dollars unless otherwise stated.
OVERVIEW AND OPERATING STRATEGIES
The Company's objective is to create long-term shareholder value by building
market-leading companies that deliver innovative, value-added products and
services to their customers. Management believes that long-term shareholder
value is maximized with an operating philosophy of partnership with proven,
committed industry leaders.
The Company operates in two business segments:
Marketing Communications
MDC Partners is one of the world's leading marketing communications firms.
Through its partnership of entrepreneurial firms, MDC provides advertising and
specialized communications services to leading brands throughout the United
States, Canada and the United Kingdom.
The Company's objective is to drive growth in its Marketing Communications
Division by building a network of marketing communications firms. This network
is designed to foster an environment where the industry's leading talent will
want to live through ownership and entrepreneurial drive.
Secure Products International
Secure Products International operations provide security products and services
in three primary areas:
Metaca Corporation ("Metaca") - the second largest provider of credit, debit
and smart cards in Canada, and in Australia through its subsidiary Placard Pty
Ltd.
Mercury Graphics ("Mercury") - a major supplier of secure ticketing products to
leading airline, sports, entertainment and transit companies.
Ashton-Potter (USA) Ltd. and Ashton-Potter Canada Ltd. ("Ashton-Potter") -
providers of highly specialized postage stamp printing services to the United
States Postage Service ("USPS"), government and tax authorities.
Management believes that long-term success is achieved through the investment
in entrepreneurs, within the marketing communications industry, that have
significant potential for organic growth beyond industry averages. This will be
supplemented with strategic acquisitions. The Company will provide its partners
with strategic input and access to capital, to allow them to build on their
diverse strengths.
In the marketing communications sector, successful firms must meet the
increasing demands of clients for innovative programs and creative content,
combined with a high-quality, reliable service delivery. This requires the
talents, relationships, and leadership of key executives and management
personnel. Accordingly, management's ongoing strategy is to acquire ownership
stakes in well-managed businesses with strong reputations in the industry,
using its Perpetual Partnership(TM) model to create incentive and retain key
personnel.
Success in Secure Products International requires companies to offer their
customers innovative products, highly reliable service, and the consistent
delivery of highly specialized, secure products on a price-competitive basis.
Revenues are derived from both long-term contracts and competitive bids. The
Company Management's Discussion & Analysis (continued) has strong relationships
with its customers, has partnered with experienced management, and has invested
in leading edge technology, providing it with the expertise and cost structures
to meet customer needs.
The Company has undertaken several initiatives to ensure that it has sufficient
liquidity and capital resources. Proceeds from the sale of Custom Direct Inc.
throughout 2003 allowed the Company to redeem the balance of its outstanding
10.5% unsecured senior subordinated notes ("Notes"), investment spend in plant
and equipment in all facets of the business, and complete a significant
acquisition, 60% of kirshenbaum bond + partners, in January 2004.
During 2003, the Company successfully completed the privatization of Maxxcom
Inc., through the issuance of 2.47 million Class A subordinate voting shares
and solidified its core focus to grow in the marketing communications sector.
With a stronger, de-leveraged balance sheet, the Company intends to complete a
financing that will repay existing indebtedness at Maxxcom, reduce borrowing
costs and provide liquidity for future acquisitions.
Selected Consolidated Annual Financial Information
(in thousands of U.S. dollars, except per share amounts) 2003 2002 2001
---------------------------------------------------------- ---------------- ----------------- ---------------
Revenues $312,716 $ 387,765 $509,747
Income (loss) from continuing operations $ 11,042 $ 93,334 $ (73,282)
Net income (loss) for the year $ 11,042 $ 93,334 $ (98,710)
Earnings per share
Income (loss) from continuing operations
Basic $ 0.55 $ 5.46 $ (4.43)
Diluted $ 0.49 $ 3.70 $ (4.43)
Net income (loss)
Basic $ 0.55 $ 5.46 $ (5.93)
Diluted $ 0.49 $ 3.70 $ (5.93)
Assets $ 348,411 $ 384,120 $561,593
Long-term indebtedness $ 120,758 $ 159,602 $338,723
---------------------------------------------------------- ---------------- ----------------- ---------------
RESULTS OF OPERATIONS
Revenues
On a consolidated basis, revenues for the year were $312.7 million, a decrease
of 19% or $75.1 million compared to $387.8 million in 2002. The significant
improvement in revenues reported by the Marketing Communications Division was
more than offset by the impact of divestitures on the revenues of Secure
Products International and Corporate and Other operations.
Gross billings of the Marketing Communications Division totaled $437.2 million
in 2003, 14% or $52.9 million greater than the previous year. Revenues were
$193.6 million, an improvement of $21.9 million or 13% from the $171.7 million
achieved in 2002. This increase was primarily due to an increase in demand for
direct marketing and database management services, particularly in the United
States, and market research and advertising services in all geographic
segments. Additionally, a weakening of the U.S. dollar throughout 2003 as
compared to 2002 resulted in increased contribution from the division's
Canadian- and U.K.-based operations.
Revenues represent gross billings less the recovery of certain costs that are
normally characterized as pass-through billings. Gross billings reflect all
amounts billed by the Company. Revenues include items such as commissions
earned from advertising placed with media and fees derived from all other
services provided, but exclude amounts billed to clients solely to recover
costs incurred (for example, media time and production materials and services).
Revenues are generally viewed as the most appropriate measure of sales for
marketing communications companies because gross billings may vary
significantly due to the volume of pass-through costs, which ultimately result
in very little impact on revenues.
The table below describes the revenues of the Marketing Communications Division
by client industry sector and demonstrates both a diversified base and a
significant shift to telecommunications-based client spending, with a
significant decrease in healthcare and financial services sectors' client
spending as compared to 2002.
(in thousands of U.S. dollars) 2003 2002
------------------------------ ----------- ---------- -------------- ---------
Agriculture $ 5,857 3% $ 6,047 4%
Automotive 12,868 7% 8,571 5%
Consumer products 75,484 39% 64,662 38%
Financial services 21,313 11% 23,438 14%
Healthcare 11,198 6% 17,434 10%
Media 5,389 3% 2,040 1%
Telecommunications 41,688 22% 28,445 17%
Government 4,765 2% 6,948 4%
Information technology 5,231 3% 3,137 2%
Energy 3,408 2% 1,445 1%
Other 6,359 2% 9,573 4%
------------------------------ ----------- ---------- -------------- ---------
$ 193,560 100% $ 171,740 100%
------------------------------ ----------- ---------- -------------- ---------
Historically, with the exception of 2001, the Marketing Communications
Division's fourth quarter generates the highest quarterly revenues in a year.
During the fourth quarter of 2003, revenues increased 18% as compared to the
same quarter in 2002, largely as a result of an increase in excess of 47%
quarter-over-quarter in revenues from U.S. direct marketing and database
management services. Similar to the yearly results, clients in the
telecommunications industry were the largest contributors to this growth.
Revenues of Secure Products International, at $115.6 million for the year ended
December 31, 2003, decreased $93.5 million or 45% compared to 2002. The
decrease was attributable to the revenues of divested operations included in
the prior-year results as the revenues of the remaining operations improved
$4.7 million year-over-year. Each of the stamp, ticketing and card operations
contributed to the improvement, with increases in revenues of $1.9 million,
$1.1 million and $1.7 million, respectively.
Revenues of the Company's Corporate and Other operations decreased $3.3 million
to $3.6 million from the $6.9 million reported in 2002, primarily due to the
divestiture of A.E. McKenzie Co. Inc. in 2002, partially offset by the
distributions received in 2003 from Custom Direct Income Fund.
Operating Costs
Consolidated operating costs were $276.2 million, representing a decrease of
17% or $56.9 million from the operating costs of $333.1 million incurred in the
previous year.
The operating costs of Marketing Communications amounted to $164.9 million for
the year compared to $150.0 million in 2002. The 10% or $14.9 million increase
was primarily due to the increased revenues, partially offset by the
elimination of head office costs due to the privatization of Maxxcom on July
31, 2003. Operating costs expressed as a percentage of revenues were 85.2% in
2003 versus 87.4% in 2002. Salaries and related costs increased $7.7 million
compared to the previous year, but were slightly lower as a percentage of
revenues year-over-year. This was in large part due to the shift in mix of the
operation's revenues to increased direct marketing and database management
services.
Secure Products International experienced operating costs of $102.6 million in
2003, $69.7 million lower than 2002 due primarily to divested operations
partially offset by an increase in costs related to preparation for increased
production under the long-term USPS contract, combined with the impact of a
stronger Canadian dollar on the operating costs at Canadian facilities. As a
percentage of sales, total operating costs for Secure Products International
increased from 82.4% in 2002 to 88.7% in 2003. Cost of sales increased to 49.8%
of sales in 2003 compared to 45.5% of sales in 2002, and salaries and related
costs increased from 13.8% to 15.3% of sales, while other operating costs
increased marginally as a percentage of sales to 23.7% from 23.1%.
The operating costs of Corporate and Other operations were $8.6 million, $2.3
million less than the $10.9 million of 2002. The decrease was primarily related
to operations that were disposed, partially offset by additional costs
allocated to Corporate and Other with the merger of head offices upon the
privatization of Maxxcom in 2003.
Operating Income before Other Income (Charges)
Operating income before other charges was $36.6 million for 2003, reflecting a
decrease of $18.0 million or 33% from the $54.6 million achieved in 2002,
largely due to the dispositions completed by the Secure Products International
partially offset by the increased operating income of Marketing Communications.
Marketing Communications contributed $28.6 million in operating income before
other charges for the year compared with $21.7 million in 2002. Operating
margins improved to 14.8% of sales versus 12.6% of sales in 2002. These
improvements were primarily the result of higher revenues combined with cost
reductions that were achieved through the merger of head offices related to the
privatization of Maxxcom. Several external factors continued to influence
operating margin levels. Client spending remained tentative for much of 2003 as
throughout 2002; however, the volume of client activity and the level of new
business opportunities increased somewhat in 2003, particularly through the
third and fourth quarters. The types of services provided in 2003 and 2002
reflected the shift to more directly measurable services. Significant pricing
and profitability pressures have resulted from the combination of an increased
sensitivity to the fees charged for these services and aggressive competition
from marketing communications companies of all sizes.
Secure Products International earned $13.0 million of operating income before
other charges, a decrease of $23.9 million or 65% from the prior-year income of
$36.9 million. Operating income as a percentage of sales was 11.3% this year
compared to 17.6% last year. The ongoing operations of Secure Products
International reported a decrease in operating income of $1.6 million compared
to 2002. The higher operating costs in U.S. dollars from Canadian facilities as
a result of a stronger Canadian dollar and the increased costs of the stamp
operations were only partially offset by an improvement in operating income
from Placard, the Australian card business. The increased costs incurred in the
stamp operations resulted from significant outsourcing of production while a
plant expansion and the installation of new manufacturing equipment was
completed.
The operating loss attributable to Corporate and Other operations was $5.1
million in 2003 compared to $4.0 million in 2002, the result of increased head
office costs, partially offset by the effect of dispositions.
Net Gain on Asset Dispositions and Other Charges
The net gain on asset dispositions and other charges was $10.3 million for
2003. Of this, $37.0 million related to net gains on asset dispositions,
primarily due to the disposal of 80% of Custom Direct Inc. for aggregate gross
proceeds of approximately $150.0 million and to the repurchase of the remaining
$86.4 million of Notes. The Company also undertook an extensive review of all
businesses, comparing the book carrying value to the estimated fair market
value of each operation. As a result, the Company recorded non-cash charges
against specific assets of $11.2 million and goodwill charges of $10.0 million.
In addition, the Company incurred stock-based compensation expense of $5.5
million related to the expensing of employee stock options, the implementation
of a stock appreciation rights plan for senior management and directors, and
warrants issued to outside service providers.
In 2002, the gain of $105.8 million related to the divestiture of the remaining
interest in Davis + Henderson, A.E. McKenzie Co. Inc., The House of Questa
Limited, Spectron Security Print Pty Ltd., Ashton-Potter Packaging and
CyberSight Acquisition Co., Inc. for aggregate gross proceeds of approximately
$189.0 million and the repurchase of $112.5 million of Notes at 89% of the
original principal amount. Cash charges of $5.1 million were incurred related
to expenditures associated with the postponed income trust of Custom Direct,
including costs incurred to settle a supply contract dispute.
Unrealized Foreign Exchange Gain
In the first half of 2002, an unrealized foreign exchange gain of $4.4 million
was recorded with respect to the U.S. dollar denominated Notes. On July 1,
2002, the Notes were designated as a hedge against the foreign exchange
exposure of the U.S. Secure Products International operations, and any foreign
exchange translation adjustment of the Notes reduced the offsetting foreign
exchange translation adjustment of the U.S. operations, which was reflected in
the cumulative translation account within shareholders' equity until the sale
of Custom Direct and repayment of the Notes in 2003.
Amortization
Amortization expense for the year was $12.6 million, $3.6 million lower than
the amortization of $16.2 million in 2002 primarily as a result of the
reduction in the capital assets of Secure Products International. Amortization
of the Marketing Communications Division was $7.9 million compared to 2002, at
$7.6 million. This increase was primarily attributable to the capital assets
associated with the expansion of customer service centres. Amortization
attributable to Corporate and Other decreased by $0.5 million to $0.9 million.
Interest, Net
For 2003, interest expense was $11.5 million, down $6.3 million compared with
2002. The decrease was due primarily to the reduction of interest in Secure
Products International and Corporate and Other, due to the retirement of the
Notes and the senior credit facility at head office. Interest expense related
to the Marketing Communications Division increased $1.0 million, primarily due
to a higher weighted cost of borrowing and a higher average level of
borrowings.
Income Participation of Minority Partners
Income participation of minority partners represents payments to minority
shareholders of subsidiary companies pursuant to their respective shareholder
agreements, and for the year was $6.1 million, $2.2 million higher than 2002 as
a result of improved performance in the Marketing Communications Division.
Income before Income Taxes and Minority Interest
Income before income taxes and minority interest was $16.6 million for 2003
compared to $118.4 million in 2002. The improvement in Marketing Communications
was more than offset by reductions in Secure Products International, primarily
due to divestitures, and increased costs at Corporate and Other.
Income Tax Expense
Income tax expense recorded for the year was $6.6 million compared with $22.0
million last year. The effective tax rate for 2003 was 39.7% of income before
taxes and minority interest. In 2002, the tax rate was 18.6% due primarily to
the significant divestitures completed during that year.
Minority Interest
Minority interest expense for 2003 was a recovery of $1.0 million, compared
with an expense of $3.0 million in 2002, and represented the minority interest
share of the net income (losses) of Maxxcom and Metaca for the period in which
those operations were not wholly owned subsidiaries.
Net Income for the Year
Net income for the year was $11.0 million versus $93.3 million in 2002. The
$3.5 million improvement in the net income of the Marketing Communications
Division was offset by the impact of asset dispositions and a decrease in
income attributable to the remaining business segments.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital
At December 31, 2003, working capital was $40.2 million compared with negative
$3.5 million at December 31, 2002 and $26.2 million at the end of the third
quarter of 2003. The $43.6 million increase in working capital since last year
was primarily the result of the sale of Custom Direct, Inc. and a $22.9 million
decrease in deferred acquisition consideration payable, net of a $14.6 million
increase in the current portion of long-term indebtedness. Accounts receivable
increased by $13.5 million, and accounts payable and deferred revenue increased
by $8.4 million and $2.4 million, respectively.
It was determined that the Company possessed sufficient liquid funds to finance
foreseeable requirements and hence management decided to cancel its $25.0
million senior credit facility during the third quarter of 2003. At December
31, 2003, Maxxcom had utilized approximately $30.7 million (C$39.8 million) of
its C$51.1 million facility in the form of drawings and letters of credit. This
facility will reduce by C$7.0 million each quarter until maturity in March
2005.
Cash and undrawn available bank credit facilities to support the Company's
future cash requirements, at the end of 2003, were approximately $80.0 million.
Contractual Obligations
The following table summarizes the Company's contractual obligations at
December 31, 2003:
Payments Due by Period
Contractual Obligations (in thousands of Less than More than
U.S. dollars) Total 1 year 1-3 years 4- 5 years 5 years
------------------------------------------ ------------ ------------ ------------ ------------ -----------
Long-term indebtedness $ 113,544 $15,996 $ 66,112 $ 4,600 $ 26,836
Capital lease obligations 7,214 2,650 3,361 549 654
Operating leases 59,514 12,097 18,603 12,190 16,624
Deferred acquisition consideration 1,113 1,113 - - -
------------------------------------------ ------------ ------------ ------------ ------------ -----------
Total contractual obligations $ 181,385 $ 31,856 $ 88,076 $ 17,339 $ 44,114
------------------------------------------ ------------ ------------ ------------ ------------ -----------
Long-term Indebtedness
Long-term indebtedness (including the current portion of long-term
indebtedness) at December 31, 2003 was $120.8 million, a reduction of $38.8
million compared with the $159.6 million outstanding at the end of last year,
due primarily to the redemption of the Notes in the second quarter of 2003,
partially offset by the adjustable rate exchangeable securities and new
indebtedness incurred by Maxxcom to fund the payment of deferred acquisition
consideration and certain capital expenditures. During the third quarter of
2003, $0.9 million of long-term indebtedness was repaid including the
repurchase of C$1.0 million of the C$50.0 million 7% convertible notes under a
normal course issuer bid.
On December 1, 2003, the Company issued $26.3 million of adjustable rate
exchangeable securities due December 31, 2028. Based on the performance of
Custom Direct Income Fund (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. The units of the Fund were delivered by the Company, on
February 13, 2004, in full settlement of the adjustable rate exchangeable
securities.
The following table summarizes the Company's exposure to interest and exchange
rate risks by providing the amount of long-term indebtedness outstanding at
December 31, 2003 in the currency in which it is denominated and the amounts
that are subject to floating versus fixed rates of interest:
Long-term Indebtedness
Interest C $ US $ AUS $
----------------------------- ---------------- ----------------- ---------------
Fixed 18,429,220 3,911,000 2,475,582
Floating 86,750,312 33,863,000 -
----------------------------- ---------------- ----------------- ---------------
Deferred Acquisition Consideration
Acquisitions of businesses by the Company typically include commitments to
contingent deferred purchase obligations ("Earnouts") and, in certain
circumstances, commitments to purchase minority shareholdings ("Puts").
Earnouts were generally payable annually over a three-year period following the
acquisition date and were 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 December 31, 2003, approximately $1.1 million of Earnouts
related to prior-year acquisitions are reflected on the Company's balance
sheet. This obligation is expected to be funded during 2004 through the use of
operating funds.
The Company plans to reduce the use of Earnouts in future acquisitions.
Based on various assumptions as to future operating results of the existing
relevant entities, including kirshenbaum bond + partners, acquired in January
2004, it is estimated that approximately $0.8 million additional deferred
purchase obligations would be earned during 2004 or thereafter.
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
these rights is subject to the satisfaction of certain conditions, such as the
provision of a period of notice in advance of exercising such right or the
installation of successor management in the subsidiary, and in some cases is
related to the employment status of the holder of the right. 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 2012. 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 in the event such rights are exercised is dependent on
various valuation formulas and on future events, such as the average earnings
of the relevant subsidiary through that date of exercise, the growth rate of
the earnings of the relevant subsidiary during that period, and, in some cases,
the currency exchange rate at the date of payment.
Management estimates, assuming that the subsidiaries, including kirshenbaum
bond + partners, perform over the relevant future periods at their 2003
earnings levels, that these rights, if all exercised, could require the
Company, in future periods, to pay an aggregate of approximately $70 million to
the owners of such rights to acquire the remaining ownership interests in the
relevant subsidiaries. Of this amount, the Company is entitled, at its option,
to fund approximately $12 million by the issuance of share capital.
The ultimate amount payable in the future relating to these transactions will
vary because it is dependent on the future results of operations of the subject
businesses and the timing of when these rights are exercised. The actual
amounts paid will be different from these estimates, and these differences
could be material.
If these rights were exercised in aggregate, the Company would acquire
incremental ownership interests in the relevant Marketing Communications
subsidiaries, entitling the Company to additional annual operating income
before other charges, which is estimated, using the same earnings basis used to
determine the aggregate purchase price noted above, to be approximately $11
million. The actual amounts acquired will be different from this estimate and
these differences could be material.
Of the estimated aggregate amount, approximately $0.8 million relates to rights
exercisable in 2004 associated with a subsidiary. A shareholder of this
subsidiary has given one-year advance notice of their intent to exercise their
right to require the Company to purchase a portion of their total respective
interest in the related subsidiary. The Company has funded this obligation in
the first quarter of 2004.
Long-term Indebtedness to Shareholders' Equity
At December 31, 2003, the Company's long-term indebtedness was $120.8 million,
and total shareholders' equity totaled $119.2 million. The ratio of long-term
indebtedness to shareholders' equity decreased from 1.65 at the end of 2002 to
1.01 at the end of 2003.
Repayment of Long-term Indebtedness
Approximately $92.0 million of the long-term indebtedness outstanding at
December 31, 2003 is due within the next five years; $70.6 million or 77% of
that amount relates to Maxxcom's credit facility, which matures in March 2005,
and Maxxcom's subordinated debenture, due September 2005. Management
anticipates that this indebtedness will be repaid with a new financing at the
parent company and cash flow from operations.
Share Capital
At January 31, 2004, there were 18,519,218 Class A subordinate voting shares
and 450,470 Class B shares outstanding. Each Class B share is convertible at
the option of the holder into one Class A share.
Also outstanding at January 31, 2004 were 7% convertible debentures with a face
value of C$48.0 million. These debentures are convertible at the option of the
holder into Class A shares at a rate of 49.261 Class A shares per one thousand
Canadian dollars of debenture. The 7% convertible debentures are redeemable by
the Company at par. The Company may, at its option, satisfy the obligation to
repay the principal amount of the debentures on redemption or at maturity in
freely tradable Class A shares.
Cash Flows
Cash flows from operations, before changes in non-cash working capital, for the
year ended December 31, 2003 were $21.2 million. This represents a decrease of
$2.2 million from the cash flow generated in 2002, reflective of the impact of
lower revenues and operating income before other charges related to Secure
Products International and Corporate and Other operations.
Cash flows from investing activities during the year were $73.2 million
compared with $151.6 million in 2002. The net proceeds received from the sale
of Custom Direct, net of investing activities, amounted to $87.1 million. The
$18.4 million of capital asset expenditures was primarily related to the
development of customer service centres, additional investment in new premises
and applications software by Marketing Communications, and the purchase of
manufacturing equipment across Secure Products International. Cash flow from
other assets of $4.5 million primarily related to the repayment of employee
loans.
Cash flows used in financing activities amounted to $63.9 million and comprised
new indebtedness of $37.5 million, the repayment of $90.8 million of long-term
indebtedness, proceeds of $3.0 million from the issuance of share capital
through the exercise of options, and $13.7 million used to repurchase and
cancel shares of the Company.
Transactions with Related Parties
The Company incurred fees totaling $8.0 million in 2003 and $2.4 million in
2002 to companies controlled by an officer of the Company in respect of
services provided including merger and acquisition, financial and
administrative. In addition, the Company had a non-interest bearing note
receivable at December 31, 2003 of $2.3 million (C$3.0 million), $1.9 million
at December 31, 2002, from another company controlled by the same officer.
RISKS AND UNCERTAINTIES
Economic Uncertainty
The marketing communications industry is cyclical and is subject to the effects
of economic downturns. The Company is also exposed to the risk of clients
changing their business plans and/or reducing their marketing budgets. As a
result, the Company's business, financial condition and operating results may
be affected in a materially adverse manner.
Competition
Each of the Company's divisions operates in a highly competitive environment.
The Marketing Communications Division competes in an industry characterized by
numerous firms of varying sizes, with no single firm or group of firms having a
dominant position in the marketplace. Competitive factors include creative
reputation, management, personal relationships, quality and reliability of
service, and expertise in particular niche areas of the marketplace. Although
the price of services may be a competitive factor in obtaining new clients, it
is generally of lesser importance once a client relationship has been
established.
Additionally, there has been a trend of large multinational organizations
consolidating their marketing communications providers so that one firm
provides these services to all international locations. As a result, marketing
communications providers may experience the loss of clients or projects. To the
extent that the Company's Marketing Communications Division may lose business
and is unsuccessful in replacing it, the Company's business, financial
condition and operating results may be affected in a materially adverse manner.
Secure Products International competes primarily on the basis of quality,
customer service, design capability and price. A number of the Company's
competitors have greater resources than those available to the Company which
may enable them to aggressively pursue the business of Secure Products
International.
Customer Concentration
The strategy has been to acquire ownership stakes in diverse marketing
communications businesses to minimize the effects that might arise from the
loss of any one client or executive. However, management succession is very
important to the ongoing results of the Marketing Communications Division
because, as in any service business, the success of the Company is dependent
upon the leadership of key executives and management personnel. Accordingly,
the top 10 clients of the Marketing Communications Division represent less than
one-third of revenues; however, if key executives were to leave, the
relationships they have with the clients could be lost. Management has
attempted to mitigate the risks with respect to these successions through
various employment contracts, shareholder agreements, and non-competition and
non-solicitation agreements.
Within Secure Products International, the postage stamp business derives a
significant portion of its revenues from government contracts. Contracts are
generally awarded in a competitive bidding process. The loss of these contracts
could have a material adverse effect on the sales and earnings of the division.
Risk of Media Account Default
The Marketing Communications Division of the Company incurs expenses on behalf
of clients in order to secure a variety of media time and space for which it
receives a fee. The difference between the gross cost of the media and the net
revenue earned by the Company can be significant. While the Company takes many
precautions against default on payment for these services (such as advance
billing clients) and has historically had a very low incidence of default, it
is still exposed to the risk of significant uncollectible receivables.
Currency Fluctuations
Although the Company's financial results are reported in U.S. dollars, a
significant portion of its sales and operating costs are denominated in
Canadian dollars. As a result, fluctuations in the exchange rate between the
U.S. dollar and other currencies, particularly the Canadian dollar, may affect
the Company's financial results and the Company's competitive position. The
Company generally manages its exposure to foreign currency risks through
foreign exchange contracts and currency swap agreements. There can be no
assurance that such measures will be successful; however, management will
attempt to mitigate these risks to the fullest extent available.
Access to Capital and Future Liquidity
In addition to internally generated funds, the Company relies upon access to
credit facilities and other forms of financing for its business. The Company
will therefore need to raise capital through the incurrence of additional
long-term or shortterm indebtedness or the issuance of additional equity
securities. Although the Company has been able to obtain such financing in the
past, there is no assurance that the Company will be able to refinance current
or future indebtedness on terms that are acceptable to the Company.
The incurrence of additional indebtedness may result in increased interest
expense or decreased net income, and the issuance of additional equity
securities could result in dilution of existing equity positions.
CHANGES IN ACCOUNTING POLICIES
Reporting Currency
Historically, the Company's consolidated financial statements have been
presented in Canadian dollars. In order to more fully reflect the U.S. nature
of the Company's business and shareholder base, and to improve investors'
ability to compare the Company's results with those of most other publicly
traded businesses in the marketing communications industry, which also report
in U.S. dollars, the U.S. dollar was adopted as the Company's reporting
currency effective September 30, 2003. The functional currencies of each of the
Company's operations are unchanged. The consolidated financial statements and
notes thereto have been restated in U.S. dollars for all periods presented.
Stock-based Compensation
During the fourth quarter of 2003, the Company decided to adopt the fair value
based method of accounting for all its stockbased compensation. The Company
adopted these changes using the prospective application transitional
alternative. Accordingly, the fair value based method is applied to awards
granted, modified or settled on or after January 1, 2003. When the 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.
NEW ACCOUNTING PRONOUNCEMENTS
Asset Retirement Obligations
The CICA has issued new recommendations for accounting for asset retirement
obligations (CICA Handbook Section 3110), effective for the fiscal years
beginning on or after January 1, 2004, with earlier adoption encouraged. The
new section focuses on the recognition and measurement of liabilities for
statutory, contractual or legal obligations, normally when incurred, associated
with the retirement of property, plant and equipment when those obligations
result from the acquisition, construction, development or normal operation of
the assets. The Company expects that the impact of this new accounting
pronouncement will not be material to its financial position, results of
operations, or cash flows.
Consolidation of Variable Interest Entities
In June 2003, the AcSB issued new CICA AcG-15, Consolidation of Variable
Interest Entities. This Guideline addresses the consolidation of variable
interest entities, which are entities that have insufficient equity or their
equity investors lack one or more of the specified essential characteristics of
a controlling financial interest. AcG-15 also provides guidance for determining
who should consolidate the variable interest entity. This Guideline is
effective for the first interim and annual period beginning on or after
November 1, 2004, with earlier application encouraged. The Company expects that
the impact of this new accounting pronouncement will not be material to its
financial position, results of operations, or cash flows.
Financial Instruments - Disclosure and Presentation
In November 2003, the CICA issued an amendment to Section 3860, Financial
Instruments - Disclosure and Presentation, that clarifies the difference
between an equity and a liability instrument. Any security that may be settled
in cash or in the equivalent value of shares must be classified as debt. The
effective date of this amendment is January 1, 2005. To the extent the 7%
convertible debentures remain outstanding on adoption, the balance in other
paid-in capital, included in shareholders' equity, will be classified as debt.
In addition, the charge to retained earnings will be eliminated with an
increase to interest expense.
Outlook
Following the Company's 2001 strategic plan, in 2002, management focused its
resources on the Company's core businesses and also capitalized on market
opportunities to dispose of assets and reduce indebtedness. In 2003, management
was able to further reduce indebtedness with proceeds from the sale of Custom
Direct and solidify its Marketing Communications Division through the
privatization of Maxxcom.
Revenues and operating profits of the Marketing Communications Division are
expected to continue to grow in 2004 from organic growth and strategic
acquisitions. 2004 has started strong with new client engagements earned by our
exciting brands and the acquisition of 60% of kirshenbaum bond + partners.
Secure Products International will continue to provide secure products to its
clients. The Company's investment in the high-growth areas of the secure
printing industry and the completion of the operational restructuring are
expected to restore profitability and produce greater returns. Revenues and
profits from existing operations are expected to increase in 2004 as the result
of investment spending and ramp up of the USPS contract, while we explore other
opportunities to diversify the client base and develop new applications for
target markets.
Management is encouraged by the progress made over the past year and believes
that the Company's core operations form a strong platform from which to grow
its business in 2004 and beyond.
Forward-looking Statements
The Company and its representatives periodically make written and spoken
forward-looking statements, including those contained in this Annual Report. By
their nature, forward-looking statements are subject to risks and uncertainties
that could result in actual performance being materially different from
anticipated results. The Company cautions readers, when making decisions, to
consider the risks and uncertainties of forward-looking statements.
Selected Consolidated Quarterly Financial Information
(in thousands of U.S. First Quarter Second Quarter Third Quarter Fourth Quarter
dollars, except Ended March 31 Ended June 30 Ended September 30 Ended December 31
per share amounts)
------------------------- ---------- ---------- ---------- ---------- ---------- --------- ---------- -------
2003 2002 2003 2002 2003 2002 2003 2002
------------------------- ---------- ---------- ---------- ---------- ---------- --------- ---------- -------
Revenues 85,958 121,655 82,882 89,749 68,088 88,548 75,788 87,813
Net income (loss)
for the period 972 7,526 8,252 80,016 3,341 4,179 (1,523) 1,613
Earnings (loss) per share
Basic $ 0.04 $ 0.43 $ 0.47 $ 4.72 $ 0.17 $ 0.23 $ (0.10) $ 0.08
Diluted $ 0.04 $ 0.28 $ 0.36 $ 3.39 $ 0.15 $ 0.16 $ (0.10) $ 0.07
------------------------- ---------- ---------- ---------- ---------- ---------- --------- ---------- -------
A. Disclosure Controls and Procedures
Disclosure controls and procedures are defined by the Securities and Exchange
Commission as those controls and other procedures that are designed to ensure
that information required to be disclosed by MDC Partners Inc. (the
"Registrant") in reports filed or submitted by it under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the Commission's rules and
forms. The Registrant's Chief Executive Officer and Chief Financial Officer
have evaluated the Registrant's disclosure controls and procedures as of the
end of the period covered by this Annual Report on Form 40-F, and have
determined that such disclosure controls and procedures are effective.
B. Changes in Internal Control Over Financial Reporting
Since the most recent evaluation of the Registrant's internal controls, there
has not been any significant change in the Registrant's internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, the Registrant's internal control over financial reporting.
C. Notice of Pension Fund Blackout Period
The Registrant was not required by Rule 104 of Regulation BTR to send any
notice to any of its directors or executive officers during the fiscal year
ended December 31, 2003.
D. Audit Committee Financial Expert
The Registrant's board of directors has determined that Francois R. Roy, an
individual serving on the audit committee of the Registrant's board of
directors, is an audit committee financial expert, as that term is defined in
General Instruction B(8)(a) of Form 40-F. The Registrant's board of directors
has also determined that Francois R. Roy is independent, as that term is
defined under the rules and regulations of the Nasdaq Stock Market, Inc.
E. Code of Ethics
The Registrant has adopted a code of ethics that applies to its chief
executive officer, chief financial officer and controller and its principal
accounting officer. The code of ethics is filed herewith as Exhibit 14 hereto.
F. Principal Accountant Fees and Services
Audit Fees
The aggregate fees billed by BDO Dunwoody LLP, the Registrant's principal
accountant (the "Outside Auditors"), for the fiscal years ended December 31,
2002 and 2003 for professional services rendered by the Outside Auditors for
the audit of the Registrant's annual financial statements or services that are
normally provided by the Outside Auditors in connection with statutory and
regulatory filings or engagements for such years were $716,000 and $671,000,
respectively.
Audit-Related Fees
The aggregate fees billed by the Outside Auditors for the fiscal years ended
December 31, 2002 and 2003 for assurance and related services rendered by it
that are reasonably related to the performance of the audit or review of the
Registrant's financial statements and are not reported above as audit fees
were $257,000 and $62,000, respectively. Professional services provided
included prospectus services on account of certain subsidiaries.
Tax Fees
The aggregate fees billed by the Outside Auditors for the fiscal years ended
December 31, 2002 and 2003 for professional services rendered by it for tax
compliance, tax advice, tax planning and other services were $2,500 for
general tax advice.
All Other Fees
There were no fees billed by the Outside Auditors for the fiscal years ended
December 31, 2002 and 2003 for products and services provided by the Outsider
Auditors, other than the services reported in the preceding three paragraphs.
Audit Committee Pre-Approval Policies
All audit and non-audit services performed by the Registrant's auditor are
pre-approved by the audit committee of the Registrant.
G. Off-Balance Sheet Arrangements
The Registrant is not a party to any off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on its financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors.
H. Tabular Disclosure of Contractual Obligations
The following table sets out the Registrant's known contractual obligations
for its long-term liabilities and lease commitments as of the fiscal year
ended December 31, 2003.
Payments due by period
--------------------------------------------------------------
Contractual Obligations Less than 1 to 3 4 to 5 More than
(in thousands of U.S. dollars) Total 1 year years years 5 years
-----------------------------------------------------------------------------------------------------
Long-term indebtedness $ 113,544 $ 15,996 $ 66,112 $ 4,600 $ 26,836
Capital lease obligations 7,214 2,650 3,361 549 654
Operating leases 59,514 12,097 18,603 12,190 16,624
Deferred acquisition consideration 1,113 1,113 - - -
------------------------------------------------------------------------------------------------------
Total contractual obligations $ 181,385 $ 31,856 $ 88,076 $ 17,339 $ 44,114
------------------------------------------------------------------------------------------------------
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
A. Undertaking
The Registrant undertakes to make available, in person or by telephone,
representatives to respond to inquiries made by the Commission staff, and to
furnish promptly, when requested to do so by the Commission staff, information
relating to: the securities in relation to which the obligation to file an
annual report on Form 40-F arises; or transactions in said securities.
B. Consent to Service of Process
The Registrant has previously filed with the Commission a Form F-X.
SIGNATURE
Pursuant to the requirements of the Exchange Act, the Registrant
certifies that it meets all of the requirements for filing on Form 40-F and
has duly caused this annual report to be signed on its behalf by the
undersigned, thereto duly authorized.
MDC PARTNERS INC.
Dated: May 10, 2004 By: /s/ Walter Campbell
-------------------------
By: Walter Campbell
Title: Chief Financial Officer
EXHIBIT INDEX
Number Document
------ --------
1. Consent of BDO Dunwoody LLP
14. Code of Ethics of MDC Partners Inc.
31. Certification of CEO and CFO pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32. Certification of CEO and CFO pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
Exhibit 1
[BDO Dunwoody LLP letterhead]
Private & Confidential
The Board of Directors
MDC Partners Inc.
45 Hazelton Avenue
Toronto, Ontario
M5R 2E3 Canada
Auditors' Consent
We consent to the inclusion in this Annual Report (Form 40-F) of MDC Partners
Inc. of our report dated May 3, 2004 with respect to the consolidated
financial statements of MDC Partners Inc. included therein.
Yours truly
/s/ BDO Dunwoody LLP
Chartered Accountants
May 10, 2004
Exhibit 14
MDC PARTNERS INC.
Code of Ethics
MDC Partners Inc. (the "Company") is committed to conducting its
business in accordance with applicable laws, rules and regulations, and the
highest standards of business ethics, and to full and accurate disclosure in
compliance with applicable laws, rules and regulations. This Code of Ethics
applies to all directors, officers and employees of the Company and sets forth
specific policies to guide you in the performance of your duties.
As a director, officer or employee of the Company, you must not only
comply with applicable laws, rules and regulations; you also must engage in and
promote honest and ethical conduct and abide by the policies and procedures
that govern the conduct of the Company's business. Your responsibilities
include helping to create and maintain a culture of high ethical standards and
commitment to compliance, and, in the case of directors and officers,
maintaining a work environment that encourages employees to raise concerns to
the attention of management and promptly addressing employee compliance
concerns.
Compliance With Laws, Rules And Regulations
You are required to comply with the laws, rules and regulations that
govern the conduct of the Company's business including, without limitation, all
laws prohibiting insider trading, money laundering, bribery and improper
payments, and to report any suspected violations in accordance with the section
below titled "Compliance With Code Of Ethics."
Conflicts Of Interest
You may not make any investment, accept any position or benefits,
participate in any transaction or business arrangement or otherwise act in a
manner that creates or appears to create a conflict of interest unless you make
full disclosure of all facts and circumstances to, and obtain the prior written
approval of either Peter M. Lewis, the Chief Financial Officer, or Walter
Campbell, the Senior Vice-President, Finance and Corporate Secretary, in the
case of employees, or one of Guy P. French, Chairman of the Nominating and
Corporate Governance Committee, Thomas N. Davidson, Chairman of the Audit
Committee, or Richard R. Hylland, Chairman of the Compensation Committee, in
the case of directors and officers.
A "conflict of interest" arises when you take actions or have
interests that conflict in any way with the interests of the Company. These
conflicts may make it difficult for you to perform your work objectively and
efficiently. The following are some common examples that illustrate actual or
apparent conflicts of interest that should be avoided:
o You or a member of your family has an ownership interest in, is
employed by or serves as a director of a company that competes with
the Company, does business with the Company (such as a customer,
supplier or business partner) or is a recipient of charitable
contributions made by the Company. (However, it is not typically
considered a conflict of interest to make investments in competitors,
customers or suppliers that are listed on a stock exchange so long as
the total value of the investment is less than one percent (1%) of the
outstanding stock of the corporation and the amount of the investment
is not so significant that it would affect your business judgment on
behalf of Company.)
o You or a member of your family participates in a joint venture,
partnership or other business arrangement or investment with the
Company or that you learned of through the use of corporate property
or information or your position at the Company; and
o You or a member of your family receives improper personal benefits as
a result of your position in the Company.
Confidential Information
You are required to maintain the confidentiality of all confidential
information that you receive or become privy to in connection with the
Company's business, except when disclosure is authorized or legally mandated.
Confidential information includes all non-public information that might
prejudice the ability of the Company to pursue certain objectives, be of use to
competitors or harmful to the Company, its suppliers or its customers, if
disclosed. Confidential information also includes any information relating to
the Company's business and affairs that results in or would reasonably be
expected to result in a significant change in the market price or value of any
of the Company's securities or any information a reasonable investor would
consider important in making an investment decision. You must not use
confidential information for your own advantage or profit.
Disclosures
It is the Company's policy to make full, fair, accurate, timely and
understandable disclosure in compliance with all applicable laws and
regulations in all reports and documents that the Company files with, or
submits to, the Securities and Exchange Commission and Canadian securities
regulators and in all other public communications made by the Company. The
Company's management have the general responsibility for preparing such filings
and such other communications and shall ensure that such filings and
communications comply with all applicable laws and regulations. Employees must
provide all necessary information to management when requested and must inform
management if they become aware that information in any such filing or
communication was untrue or misleading at the time such filing or communication
was made or if they have information that would affect any filings or
communications to be made in the future.
Protection and Proper Use of Company Assets
You should protect the Company's assets and ensure their efficient
use. Theft, carelessness and waste have a direct impact on the Company's
profitability. The Company's assets should only be used for legitimate business
purposes.
Compliance With Code Of Ethics
If you know of or suspect a violation of applicable laws, rules or
regulations or this Code of Ethics, you must immediately report that
information to Peter M. Lewis, in the case of employees, or to one of Guy P.
French, Chairman of the Nominating and Corporate Governance Committee, Thomas
N. Davidson, Chairman of the Audit Committee, or Richard R. Hylland, Chairman
of the Compensation Committee, in the case of directors and officers. Reports
of suspected violations should identify as many relevant facts as possible,
including, if applicable: (1) the date(s) relevant to the identified issue; (2)
the name of any persons involved in the identified activity; (3) the specific
facts that give rise to the concerns expressed; and (4) any suggestions for
resolving or dealing with the problems or issues identified. The Company
recognizes that resolving reported problems or concerns will advance the
overall interests of the Company, and will help to safeguard the Company's
assets, financial integrity and reputation. No one will be subject to
retaliation because of a good faith report of a suspected violation.
Violations of this Code of Ethics may result in disciplinary action,
up to and including discharge. The Company's Audit Committee shall determine,
or shall designate appropriate persons to determine appropriate action in
response to violations of this Code of Ethics. Violations of this Code of
Ethics may also violate certain laws.
Waivers Of Code Of Ethics
If you would like to seek a waiver of this Code of Ethics, you must
make full disclosure of your particular circumstances to Peter M. Lewis, in the
case of employees, or one of Guy P. French, Chairman of the Nominating and
Corporate Governance Committee, Thomas N. Davidson, Chairman of the Audit
Committee, or Richard R. Hylland, Chairman of the Compensation Committee, in
the case of directors and officers. Amendments to and waivers of this Code of
Ethics will be publicly disclosed as required by applicable laws, rules and
regulations.
Documenting Compliance with the Disclosure Policy
Appropriate records evidencing compliance with this Code of Ethics
shall be maintained by the Company, including copies of correspondence relating
to requests for, and determinations relating to, waivers of this Code of
Ethics, and copies of documents relating to violations of this Code of Ethics.
No Rights Created
This Code of Ethics is a statement of certain fundamental principles,
policies and procedures that govern the directors, officers and employees of
the Company in the conduct of the Company's business. It is not intended to and
does not create any rights in any employee, customer, client, supplier,
competitor, shareholder or any other person or entity.
MDC PARTNERS INC.
Acknowledgement Form
For Senior Executive Officers
The undersigned hereby acknowledges the above Code of Ethics and
further agrees to comply with the policies contained therein.
___________________________
Printed Name
___________________________
Signature
___________________________
Date
Exhibit 31
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Miles S. Nadal, certify that:
1. I have reviewed this report on Form 40-F of MDC Partners Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the issuer as of, and for, the periods presented in this
report;
4. The issuer's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the issuer
and have:
a. Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information
relating to the issuer, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this
report is being prepared;
b. Evaluated the effectiveness of the issuer's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c. Disclosed in this report any change in the issuer's internal
control over financial reporting that occurred during the
period covered by the report that has materially affected,
or is reasonably likely to materially affect, the issuer's
internal control over financial reporting; and
5. The issuer's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial
reporting, to the issuer's auditors and the audit committee of the
issuer's board of directors (or persons performing the equivalent
function):
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the issuer's ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
issuer's internal control over financial reporting.
Date: May 10, 2004 /s/ Miles S. Nadal
---------------------------
By: Miles S. Nadal
Title: President and Chief
Executive Officer
I, Walter Campbell, certify that:
1. I have reviewed this report on Form 40-F of MDC Partners Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the issuer as of, and for, the periods presented in this
report;
4. The issuer's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the issuer
and have:
a. Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information
relating to the issuer, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this
report is being prepared;
b. Evaluated the effectiveness of the issuer's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c. Disclosed in this report any change in the issuer's internal
control over financial reporting that occurred during the
period covered by the report that has materially affected,
or is reasonably likely to materially affect, the issuer's
internal control over financial reporting; and
5. The issuer's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial
reporting, to the issuer's auditors and the audit committee of the
issuer's board of directors (or persons performing the equivalent
function):
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the issuer's ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
issuer's internal control over financial reporting.
Date: May 10, 2004 /s/ Walter Campbell
--------------------------
By: Walter Campbell
Title: Chief Financial Officer
Exhibit 32
Certification of CEO and CFO
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of MDC Partners Inc. (the "Registrant")
on Form 40-F for the year ended December 31, 2003, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), Miles S.
Nadal, as President and Chief Executive Officer of the Registrant, and Walter
Campbell, as Chief Financial Officer of the Registrant, each hereby certifies,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, to the best of his knowledge, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Registrant.
/s/ Miles S. Nadal
--------------------------
By: Miles S. Nadal
Title: President and Chief Executive Officer
May 10, 2004
/s/ Walter Campbell
----------------------------
By: Walter Campbell
Title: Chief Financial Officer
May 10, 2004
This certification accompanies the Report pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Registrant for purposes of
ss.18 of the Securities Exchange Act of 1934, as amended.