SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 40-F/A
(Amendment No. 1)
[ ] 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 (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Classification Identification No.)
Incorporation or Code Number)
Organization)
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.
Title of each class Name of each Exchange on which Registered:
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: Restated 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: Restated Management's Discussion and Analysis of
Financial Condition and Results of Operations for the
year ended December 31, 2003.
EXPLANATORY NOTE
This Form 40-F/A for the year ended December 31, 2003 is being filed to restate
our financial statements for the years ended December 31, 2003, 2002 and 2001.
The Company has restated its consolidated financial statements to reflect the
following:
(1) the correction of the acquisition of the 26% minority interest in Maxxcom
Inc.; (2) corrections in the timing of the write-off of deferred financing
fees, (3) corrections to the calculation of the gain on disposal of an asset
and related income taxes, (4) correction of revenue recognition related to
certain contract terms, (5) corrections to the accounting for certain
investments, (6) the correction of the accounting for foreign exchange gains
and losses on intercompany balances, and (7) the correction of the accounting
for stock-based compensation, and (8) the correction to the computation of the
dilutive effect of convertible debentures, in calculating diluted earnings per
share.
Refer to Note 1 of the notes to the consolidated financial statements included
herein which discloses the adjustments to the Company's consolidated financial
statements resulting from these restatements.
The reconciliation of results reported in accordance with generally accepted
accounting principles (GAAP) in Canada with the United States GAAP has also been
restated to reflect the items above as well as the following additional items:
(1) To recognize the fair value adjustment related to an embedded
derivative in the Company's exchangeable securities as determined
pursuant to SFAS 133, as amended by SFAS 138, "Accounting for
Derivative Instruments and Hedging Activities;
(2) Correction of the accounting for an investment in a joint venture,
previously accounted for on a proportionately consolidated basis for
US GAAP purposes. Pursuant to APB Opinion No. 18. "The Equity Method
of Accounting for Investments in Common Stock", this investment is
accounted for using the equity method;
(3) The correction of the timing and amounts recognized on gain on
disposal of an asset
In addition, the Company has restated and reflected corresponding corrections to
the Management Discussion and Analysis in Document No. 3. The Company has also
revised Item's A and B to include information about the impact of the
restatements on its internal controls. This Form 40-F/A does not reflect events
occurring after the original filing date of the Form 40-F.
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:
Jurisdiction of
Percentage of Voting Incorporation/
Name of Subsidiary or Affiliate Securities/Interests 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
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$2,029,000.
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
---- ---- ----
( Restated )
Marketing Communications Division 62% 43% 35%
Secure Products International Division 37% 55% 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.
As described in Note 1 to these consolidated financial statements, these
consolidated financial statements have been restated.
Chartered Accountants
Toronto, Ontario
May 3, 2004 (December 14, 2004 as to the effects of the restatements described
in Note 1)
MDC Partners Inc.
Consolidated Balance Sheets
(in thousands of U.S. dollars)
-----------------------------------------
December 31 2003 2002 2001
---------------------------------- ---------- ---------- ----------
Restated Restated Restated
See Note 1 See Note 1 See Note 1
---------- ---------- ----------
Assets
Current
Cash and cash equivalents $ 71,600 $ 37,437 $ 36,987
Accounts receivable (Note 5) 80,295 66,789 88,518
Inventory 7,735 7,929 17,957
Prepaid expenses and sundry 5,043 6,261 7,485
Future income taxes - - 17,579
---------- ---------- ----------
164,673 118,416 168,526
Capital and other assets (Note 6) 80,438 80,048 104,474
Goodwill (Note 7) 101,779 185,529 290,416
---------- ---------- ----------
$ 346,890 $ 383,993 $ 563,416
========== ========== ==========
Liabilities and Shareholders' Equity
Current
Accounts payable and accrued liabilities $ 89,606 $ 82,251 $ 111,845
Deferred acquisition consideration 1,113 23,966 15,943
Deferred revenue 16,304 13,044 20,047
Current portion of long-term indebtedness (Note 8) 18,646 4,088 7,565
---------- ---------- ----------
125,669 123,349 155,400
Long-term indebtedness (Note 8) 102,112 155,514 331,158
---------- ---------- ----------
227,781 278,863 486,558
---------- ---------- ----------
Minority interest 2,432 9,705 9,439
---------- ---------- ----------
Shareholders' equity
Share capital (Note 9) 117,292 96,407 95,111
Contributed surplus (Note 10) 4,610 - -
Other paid-in capital (Note 11) 30,851 24,179 32,687
Cumulative translation adjustment (Note 12) (2,365) 7,858 3,447
Retained earnings (deficit) (33,711) (33,019) (63,826)
---------- ---------- ----------
116,677 95,425 67,419
---------- ---------- ----------
$ 346,890 $ 383,993 $ 563,416
========== ========== ==========
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
---------------------------------------------------------- ---------- ---------- ----------
Restated Restated Restated
See Note 1 See Note 1 See Note 1
---------- ---------- ----------
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 2) - (15,470) (6,732)
Impact of transitional goodwill impairment charge (Note 2) - (62,477) -
Impact of change in revenue recognition policy (Note 1(4)) (1,325) (2,251) (1,734)
---------- ---------- ----------
Opening retained earnings (deficit), as restated (33,019) (126,303) 36,834
Net income (loss) for the year 5,916 94,260 (99,227)
---------- ---------- ----------
(27,103) (32,043) (62,393)
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 $ (33,711) $ (33,019) $ (63,826)
========== ========== ==========
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
---------------------------------------------------------------------- ---------- ---------- ----------
Restated Restated Restated
See Note 1 See Note 1 See Note 1
---------- ---------- ----------
Gross billings $ 548,530 $ 599,699 $ 712,968
========== ========== ==========
Revenues $ 304,936 $ 387,191 $ 504,526
Operating costs 274,039 332,455 425,770
---------- ---------- ----------
Operating income before other income (charges) 30,897 54,736 78,756
---------- ---------- ----------
Other income (charges)
Net gain (loss) on asset dispositions and other charges (Note 13) 11,464 97,288 (59,212)
Unrealized foreign exchange gain (loss) (2,023) 4,380 (12,034)
Amortization (10,362) (14,119) (20,898)
Amortization of deferred finance charges (2,225) (2,030) (2,798)
Interest, net (11,498) (17,814) (34,065)
Income participation of minority partners (Note 14) (5,489) (3,228) (2,987)
---------- ---------- ----------
(20,133) 64,477 (131,994)
---------- ---------- ----------
Income (loss) before income taxes, goodwill
charges equity in affiliates and minority interest 10,764 119,213 (53,238)
Income taxes (recovery) (Note 15) 7,742 21,921 (18,260)
---------- ---------- ----------
Income (loss) before goodwill charges, equity in affiliates
and minority interest 3,022 97,292 (34,978)
Equity in affiliates 1,850
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 5,916 94,260 (73,799)
Loss from discontinued operations (Note 16) - - (25,428)
---------- ---------- ----------
Net income (loss) for the year $ 5,916 $ 94,260 $ (99,227)
========== ========== ==========
Earnings per share (Note 17)
Income (loss) from continuing operations
Basic $ 0.27 $ 5.51 $ (4.46)
========== ========== ==========
Diluted $ 0.26 $ 3.73 $ (4.46)
========== ========== ==========
Net income (loss)
Basic $ 0.27 $ 5.51 $ (5.96)
========== ========== ==========
Diluted $ 0.26 $ 3.69 $ (5.96)
========== ========== ==========
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
-------------------------------------------------------- ---------- ---------- ----------
Restated Restated Restated
See Note 1 See Note 1 See Note 1
---------- ---------- ----------
Cash provided by (used in)
Operating activities
Income (loss) from continuing operations $ 5,916 $ 94,260 $ (73,799)
Items not involving cash
Asset dispositions and other charges (26,950) (102,385) 107,002
Stock-based compensation 6,182 - -
Other charges - accrued (paid) - (3,545) 7,653
Unrealized foreign exchange loss (gain) 2,023 (4,380) 12,034
Goodwill writedown 10,012 - 32,579
Amortization 12,587 16,149 36,606
Future income taxes 6,612 20,870 (21,045)
Interest capitalized 4,557 3,368 -
Earnings of affiliates, net of distributions
of $2,283 433 - -
Minority interest and other (1,227) (129) (3,869)
---------- ---------- ----------
20,145 24,208 97,161
Changes in non-cash working capital (2,184) 1,123 (3,246)
---------- ---------- ----------
Cash flows from operating activities 17,961 25,331 93,915
---------- ---------- ----------
Investing activities
Proceeds on dispositions (acquisitions), net 88,440 161,302 (16,884)
Capital assets, net (18,383) (8,070) (16,209)
Other assets, net 4,541 (1,639) (20,407)
---------- ---------- ----------
Cash flows from (used in) investing activities 74,598 151,593 (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 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 34,163 450 (3,714)
Cash and cash equivalents, beginning of year 37,437 36,987 40,701
---------- ---------- ----------
Cash and cash equivalents, end of year $ 71,600 $ 37,437 $ 36,987
========== ========== ==========
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.
The equity method is used to account for
investments in entities in which the
Company has an ownership interest of less
than 50% and has significant influence,
or joint control over the operating and
financial policies of the affiliate; or
has an ownership interest of greater than
50% but does not have unilateral control
over, the operating and financial
policies of the affiliate. The Company's
management periodically evaluates these
investments to determine if there have
been any, other than temporary, declines
in value.
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. These exchange gains and losses
are not included in earnings unless they
are actually realized through a reduction
in the Company's net investment in the
foreign subsidiary.
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 2).
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 Company's net investment in its US
operation, Custom Direct Inc.
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.
Gains and losses arising from the
Company's foreign currency transactions
are reflected in net earnings immediately,
other than those arising from intercompany
foreign currency transactions that are of
a long-term nature (that is settlement is
planned or anticipated in the future)
which are included as cumulative
translation adjustments.
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 2). 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 The Company generates
services revenue from its Marketing
Communications reportable segment and
product revenue from its Secure Products
reportable segment.
Marketing Communications
Substantially all of the Marketing
Communications reportable segment revenue
is derived from fees for services.
Additionally, the Company often earns
commissions based upon the placement of
advertisements in various media.
Generally, the Company acts as agent for
its customers and records revenue equal to
the net amount retained. Revenue is
realized when the service is performed in
accordance with the terms of each client
arrangement and upon completion of the
earnings process. This includes when
services are rendered, upon presentation
date to the public for media, when costs
are incurred for radio and television
production and when print production is
completed and collection is reasonably
assured and all other revenue recognition
criteria have been met.
A small portion of the Company's
contractual arrangements with clients
includes performance incentive provisions,
which allow the Company to earn additional
revenues as a result of its performance
relative to both quantitative and
qualitative goals. The Company recognizes
the incentive portion of revenue under
these arrangements when specific
quantitative goals are achieved, or when
performance against qualitative goals is
determined by the Company's clients.
Secured Products
Substantially all of the Secured Products
International reportable segment revenue
is derived from the sale of products. The
Company has the following revenue
recognition policies.
Revenue derived from the stamp operations
is recognized upon shipment or upon
delivery of the product to the customer
when the Company's obligations under the
contractual arrangements are completed,
the customer takes ownership and assumes
the risk of loss of the product, the
selling price is determined and the
collection of the related receivable is
probable. The Company performs extensive
quality control testing procedures prior
to shipment to ensure that its contractual
obligations are met. Under these
contractual arrangements, the Company has
the ability to recover any costs incurred
to date under possible termination of the
contract, accordingly the Company accounts
for the manufacturing costs incurred as
inventory work-in-progress, until
completion of production.
Revenue derived from secured printing
arrangements whereby the Company
manufactures and stores the printed
product for a period of time at the
direction of its customer is recognized
when the customized printed products moves
to the secure storage facility and the
printing process is complete and when
title transfers to the customer. The
Company has no further obligations under
the printing segment of the arrangement.
The Company recognizes the storage fee
revenue when the customized printed
products are delivered to the customer's
premises. Although amounts are generally
not billed by the Company until the
customized print product is delivered to
the customer's premises, collection of the
entire consideration is due under certain
contracts within 90 days of completion of
the printing segment of the arrangement.
Under certain other printing contracts,
title of the printed product does not pass
when the customized printed product is
moved to the secure storage facility and
that the sales price is not payable until
final delivery is made to the customer's
premises, accordingly revenue is not
recognized until final delivery occurs
consistent with SAB 101 and SAB 104. Costs
under these secured printing arrangements
continue to be expensed as incurred.
Revenue derived from the design,
manufacturing, inventory management and
personalization arrangements of secured
cards is recognized as a single unit of
accounting when the secured card is
shipped to the cardholder and the
Company's service obligations to the card
issuer are complete under the terms of the
contractual arrangement and the total
selling price related to the card is known
and collection of the related receivable
is probable. Any amounts billed and/or
collected in advance of this date is
deferred and recognized at the shipping
date. Under these contractual
arrangements, the Company has the ability
to recover any costs incurred to date
under possible termination of the
contract, accordingly the Company accounts
for the effect of costs incurred related
to design, manufacturing, and service
relative to the secured card arrangement
as inventory work-in-progress related to
the arrangements.
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 cash equivalents,
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 8) 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 9). 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. RESTATEMENT OF FINANCIAL STATEMENTS
In preparing the financial statements for the three and nine-month periods ended
September 30, 2004, the Company determined that its previously filed audited
consolidated financial statements for the years ended December 31, 2003, 2002
and 2001 and its previously issued interim unaudited condensed consolidated
financial statements for the three months ended March 31, 2004 and 2003 and the
interim unaudited condensed consolidated financial statements for the three and
six months ended June 30, 2003 and 2004 required restatements.
Restatement adjustments included the following: (1) the correction of the
acquisition of the 26% minority interest in Maxxcom Inc.; (2) corrections in the
timing of the write-off of deferred financing fees, (3) to correct the
calculation of the gain on disposal of an asset and related income taxes, (4)
correction of revenue recognition guidance related to certain contract terms,
(5) corrections to the accounting for certain investments, (6) the correction of
the accounting for foreign exchange gains and losses on intercompany balances,
(7) the correction of the accounting for stock-based compensation, and (8)
corrections to the computation of the dilutive effect of convertible debentures
on diluted earnings per share.
The following presents the impact on revenues and net income (loss) of the
restatement adjustments for the years ended December 31, 2003, 2002 and 2001:
2003 2002 2001
---------- ---------- ----------
Revenues:
As previously reported $ 312,716 $ 387,765 $ 509,747
Adjustments (7,780) (574) (5,221)
---------- ---------- ----------
As restated $ 304,936 $ 387,191 $ 504,526
========== ========== ==========
Income (Loss) from Continuing
Operations:
As previously reported $ 11,042 $ 93,334 ($ 73,282)
Adjustments (5,126) 926 (517)
---------- ---------- ----------
As restated $ 5,916 $ 94,260 ($ 73,799)
========== ========== ==========
Loss from Discontinued Operations:
As previously reported - - ($ 25,428)
Adjustments - - -
---------- ---------- ----------
As restated - - ($ 25,428)
========== ========== ==========
Net Income (Loss):
As previously reported $ 11,042 $ 93,334 ($ 98,710)
Adjustments (5,126) 926 (517)
---------- ---------- ----------
As restated $ 5,916 $ 94,260 ($ 99,227)
========== ========== ==========
The following presents details by category, aggregating to the net change in net
income (loss) resulting from restatement adjustments for the years ended
December 31:
2003 2002 2001
---------- ---------- ----------
Acquisition accounting ($ 1,611) $ - $ -
Deferred financing fees 3,085 - -
Gain on disposition (3,301) - -
Gain (1,940) - -
Income taxes (1,361) - -
Revenue recognition (545) 926 (517)
Accounting for foreign exchange (2,023) -
Accounting for investments (433) -
Accounting for stock-based compensation (298) -
---------- ---------- ----------
Net increase (decrease) in net income (loss) ($ 5,126) $ 926 ($ 517)
========== ========== ==========
Descriptions of the categories of restatement adjustments to the Company's net
income (loss) for the years ended December 31, 2003, 2002 and 2001 are set forth
below:
1. Acquisition Accounting. The correction of the accounting for the
acquisition of the 26% minority interest holding of Maxxcom Inc. by
the Company in the third quarter of 2003, specifically correctin the
recognition of stock based compensation pursuant to CICA, Section 3870
"Stock-based Compensation and Other Stock-based Payments" and SFAS 123
"Accounting for Stock Based Compensation" related to stock option
remeasurement required on the issuance of vested and unvested options
of the Company in exchange for vested and unvested stock options of
Maxxcom Inc, and severance costs previously capitalized in goodwill.
These corrections increased salary and related costs, reducing
operating profit (loss) and reduced net income (loss) for the year
ended December 31, 2003, 2002 and 2001 by $1,611 with the net effect
being an decrease in goodwill of $2,168 and an increase in contributed
surplus of $1,040 as at December 31, 2003;
2. Deferred Financing Fees. The correction of the timing of the write-off
of deferred financing fees, which were written off in 2003 in
anticipation of the refinancing of debt rather than at the date the
debt was repaid in 2004. This correction reduced the loss on the write
off of deferred financing fees included in net gain (loss) in asset
dispositions by $3,085, resulting in an increase in net income of
$3,085 for the year ended December 31, 2003 and an increase in other
assets of $3,085 as at December 31, 2003..
3. Gain on Disposition. To correct an error made in the calculation of
the reported net gain on asset disposition and other charges related
to the 2003 disposition of 80% of the Company's interest in Custom
Direct, Inc., including a reduction in a future income tax benefit
previously recognized. This correction reduced the gain on sale of
assets and net income by $1,940, for the year ended December 31, 2003
and increased other assets by $1,940 as at December 31, 2003,
increased. Associated with this transaction, income tax expense was
corrected due income tax expense by $1,361 for the year ended December
31, 2003 and decreased future income taxes included in capital assets
by $1,361 as at December 31, 2003.
4. Revenue Recognition. The correction of revenue related to certain
multiple deliverable contracts where the Company recognized revenue on
each deliverable as billed and on certain other long-term contracts
where the Company recognized revenue on a percentage completion basis.
Revenue is now recognized when the products are delivered to the
customer. The impact of the revenue recognition correction as at
December 31, 2003, was to increase inventory by $940 (2002 - $924,
2001 - $3,340) and increase deferred revenue by $2,708 (2002 - $1,940,
2001 - $5,123). The impact on the statement of operations was an
increase (decrease) for the years ended December 31 as follows:
2003 2002 2001
---------- ---------- ----------
Revenue ($ 1,679) $ 3,898 ($ 1,126)
Cost of sales (924) 3,071 (771)
---------- ---------- ----------
Operating income (loss) (755) 827 (355)
Income taxes (210) (99) 162
---------- ---------- ----------
Net income (loss) ($ 545) $ 926 ($ 517)
========== ========== ==========
This correction resulted in a charge to opening retained earnings
(deficit) on January 1, 2001 of $1,734.
5. Accounting for Foreign Exchange. The correction of the accounting for
foreign exchange gains and losses related to certain intercompany
balances previously reflected in cumulative translation adjustment
rather than recognized in earnings. This change resulted in foreign
exchange losses of $2,023 for the year ended December 31, 2003,
correspondingly affecting net income and a reduction in the cumulative
translation adjustment in the same amount.
6. Accounting for Investments. The correction of the accounting for two
investments: (i) A majority owned investee, Accumark Promotions Group,
Inc. ("Account"), was previously accounted for on a consolidated
basis. Upon evaluation pursuant to CICA Handbook Section 1590
"Subsidiaries", it was determined that the Company did not have
unilateral control over significant financial operating polices of
Accumark, but rather had joint control and accordingly it is now
accounted for by the Company using the proportionate consolidation
method; and (ii) the remaining investment in Custom Direct Inc. was
previously accounted for on the cost basis with distributions recorded
in revenues. The Company has determined that the investment should be
equity accounted for as it had significant influence. Due to the
nature of the adjustment in (i), the correction impacted most line
items on the balance sheets. The impact of the change of accounting
for these investments on the statement of operations is an increase
(decrease) for the years ended December 31 are as follows:
2003 2002 2001
---------- ---------- ----------
Revenue ($ 6,101) ($ 4,472) ($ 4,095)
Operating costs (3,235) (3,755) (3,404)
---------- ---------- ----------
Operating income (loss) before other charges (2,866) (717) (691)
---------- ---------- ----------
Other charges:
Gain (loss) on sale of assets 73 - -
Amortization (30) (22) (21)
Interest, net (4) 4 (5)
Income participation of minority partners (624) (699) (657)
---------- ---------- ----------
(585) (717) (683)
---------- ---------- ----------
Income before income taxes and earnings from
affiliates (2,281) - (8)
Income taxes 2 - (8)
Earnings from affiliates 1,850 - -
---------- ---------- ----------
Net income (loss) ($ 433) $ - $ -
========== ========== ==========
7. Accounting for Stock-based Compensation. The correction of the
accounting for stock-based compensation to recognize, on a cumulative
basis, compensation cost to the end of each reporting period at least
equal to the value of the vested portion of the stock-based award at
that same date. This change increased salary and related costs by $298
with a corresponding decrease in operating income and net income for
the year ended December 31, 2003 and an increase of $298 in
contributed surplus as at December 31, 2003.
The following tables present a summary of the impact of the
restatements for the periods presented in the accompanying financial
statements:
8. Diluted Earnings per Share. The correction to the computation of the
dilutive effect of convertible debentures, in calculating diluted
earnings per share.
For the Year Ended December 31, 2003
-----------------------------------------
As Reported Adjustments As Restated
----------- ----------- -----------
Gross Billings $ 556,310 ($ 7,780) $ 548,530
=========== =========== ===========
Revenue $ 312,716 ($ 7,780) $ 304,936
Operating costs 276,157 (2,118) 274,039
----------- ----------- -----------
Operating income before other income (charges) 36,559 (5,662) 30,897
----------- ----------- -----------
Other income (charges):
Net gain on asset dispositions and other charges 10,260 1,204 11,464
Unrealized foreign exchange gain (loss) - (2,023) (2,023)
Amortization (12,617) 2,255 (10,362)
Amortization of deferred finance charges - (2,225) (2,225)
Interest, net (11,502) 4 (11,498)
Income participation of minority partners (6,113) 624 (5,489)
----------- ----------- -----------
(19,972) (161) (20,133)
----------- ----------- -----------
Income (loss) before income taxes, goodwill charges, equity in
affiliates and minority interest 16,587 (5,823) 10,764
Income taxes (recovery) 6,589 1,153 7,742
----------- ----------- -----------
Income (loss) before goodwill charges, equity in affiliates and
minority interest 9,998 (6,976) 3,022
Equity in affiliates - 1,850 1,850
Minority interest (recovery) (1,044) - (1,044)
----------- ----------- -----------
Net income (loss) for the year $ 11,042 ($ 5,126) $ 5,916
=========== =========== ===========
Earnings Per Common Share:
Basic $ 0.55 $ 0.27
Diluted 0.49 0.26
For the Year Ended December 31, 2002
-----------------------------------------
As Reported Adjustments As Restated
----------- ----------- -----------
Gross Billings $ 600,273 ($ 574) $ 599,699
=========== =========== ===========
Revenue $ 387,765 ($ 574) $ 387,191
Operating costs 333,139 ($ 684) 332,455
----------- ----------- -----------
Operating income before other income (charges) 54,626 110 54,736
----------- ----------- -----------
Other income (charges):
Net gain on asset dispositions and other charges 97,288 - 97,288
Unrealized foreign exchange gain (loss) 4,380 - 4,380
Amortization (16,171) 2,052 (14,119)
Amortization of deferred finance charges - (2,030) (2,030)
Interest, net (17,810) (4) (17,814)
Income participation of minority partners (3,927) 699 (3,228)
----------- ----------- -----------
63,760 717 64,477
----------- ----------- -----------
Income (loss) before income taxes, goodwill charges, equity in
affiliates and minority interest 118,386 827 119,213
Income taxes (recovery) 22,020 (99) 21,921
----------- ----------- -----------
Income (loss) before goodwill charges, equity in affiliates and
minority interest 96,366 926 97,292
Minority interest (recovery) 3,032 - 3,032
----------- ----------- -----------
Net income (loss) for the year $ 93,334 $ 926 $ 94,260
=========== =========== ===========
Earnings Per Common Share:
Basic $ 5.46 $ 5.51
Diluted 3.70 3.69
For the Year Ended December 31, 2001
-----------------------------------------
As Reported Adjustments As Restated
----------- ----------- -----------
Gross Billings $ 718,189 ($ 5,221) $ 712,668
=========== =========== ===========
Revenue $ 509,747 ($ 5,221) $ 504,526
Operating costs 429,945 (4,175) 425,770
----------- ----------- -----------
Operating income before other income (charges) 79,802 (1,046) 78,756
----------- ----------- -----------
Other income (charges):
Net gain on asset dispositions and other charges (59,212) - (59,212)
Unrealized foreign exchange gain (loss) (12,034) - (12,034)
Amortization (23,717) 2,819 (20,898)
Amortization of deferred finance charges - (2,798) (2,798)
Interest, net (34,070) 5 (34,065)
Income participation of minority partners (3,644) 657 (2,987)
----------- ----------- -----------
(132,677) 683 (131,994)
----------- ----------- -----------
Income (loss) before income taxes, goodwill charges, equity in
affiliates and minority interest (52,875) (363) (53,238)
Income taxes (recovery) (18,414) 154 (18,260)
----------- ----------- -----------
Income (loss) before goodwill charges, equity in affiliates and
minority interest (34,461) (517) (34,978)
Goodwill charges, net of income tax 42,999 - 42,999
Minority interest (recovery) (4,178) - (4,178)
----------- ----------- -----------
Income (loss) from continuing operations (73,282) (517) (73,799)
Loss from discontinued operations (25,428) - (25,428)
----------- ----------- -----------
Net income (loss) for the year (98,710) ($ 517) (99,227)
=========== =========== ===========
Earnings Per Common Share:
Income (loss) from continuing operations
Basic ($ 4.43) ($ 4.46)
Diluted (4.43) (4.46)
Net income (loss)
Basic ($ 5.93) ($ 5.96)
Diluted (5.93) (5.96)
At December 31, 2003
-----------------------------------------
As Reported Adjustments As Restated
----------- ----------- -----------
ASSETS
Current:
Cash and cash equivalents $ 71,879 (279) $ 71,600
Accounts receivable, net 80,979 (684) 80,295
Inventory 6,795 940 7,735
Prepaid expenses and sundry 5,068 (25) 5,043
----------- ----------- -----------
164,721 (48) 164,673
Capital and other assets, net 80,152 286 80,438
Goodwill 103,538 (1,759) 101,779
----------- ----------- -----------
$ 348,411 (1,521) $ 346,890
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities $ 91,289 (1,683) $ 89,606
Deferred acquisition consideration 1,113 - 1,113
Deferred revenue 13,516 2,788 16,304
Current portion of long-term indebtedness 18,646 - 18,646
----------- ----------- -----------
124,564 1,105 125,669
Long-term indebtedness 102,112 - 102,112
----------- ----------- -----------
226,676 1,105 227,781
----------- ----------- -----------
Minority interests 2,533 (101) 2,432
----------- ----------- -----------
Shareholders' Equity:
Share capital 117,292 - 117,292
Contributed surplus 3,272 1,338 4,610
Other paid-in capital 30,851 - 30,851
Cumulative translation adjustment (4,953) 2,588 (2,365)
Retained earnings (deficit) (27,260) (6,451) (33,711)
----------- ----------- -----------
119,202 (2,525) 116,677
----------- ----------- -----------
$ 348,411 (1,521) $ 346,890
=========== =========== ===========
At December 31, 2002
-----------------------------------------
As Reported Adjustments As Restated
----------- ----------- -----------
ASSETS
Current:
Cash and cash equivalents $ 37,788 (351) $ 37,437
Accounts receivable, net 67,457 (668) 66,789
Inventory 7,005 924 7,929
Prepaid expenses and sundry 6,266 (5) 6,261
----------- ----------- -----------
118,516 (100) 118,416
Capital and other assets, net 79,967 81 80,048
Goodwill 185,637 (108) 185,529
----------- ----------- -----------
$ 384,120 (127) $ 383,993
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities $ 82,874 (623) $ 82,251
Deferred acquisition consideration 23,966 - 23,966
Deferred revenue 11,104 1,940 13,044
Current portion of long-term indebtedness 4,088 - 4,088
----------- ----------- -----------
122,032 1317 123,349
Long-term indebtedness 155,514 - 155,514
----------- ----------- -----------
277,546 1317 278,863
----------- ----------- -----------
Minority interests 9,824 (119) 9,705
----------- ----------- -----------
Shareholders' Equity:
Share capital 96,407 - 96,407
Other paid-in capital 24,179 - 24,179
Cumulative translation adjustment 7,858 - 7,858
Retained earnings (deficit) (31,694) (1,325) (33,019)
----------- ----------- -----------
96,750 (1,325) 95,425
----------- ----------- -----------
$ 384,120 (127) $ 383,993
=========== =========== ===========
At December 31, 2001
-----------------------------------------
As Reported Adjustments As Restated
----------- ----------- -----------
ASSETS
Current:
Cash and cash equivalents $ 37,231 (244) $ 36,987
Accounts receivable, net 89,634 (1,116) 88,518
Inventory 14,617 3,340 17,957
Prepaid expenses and sundry 7,514 (29) 7,485
Future income taxes 17,579 - 17,579
----------- ----------- -----------
166,575 1,951 168,526
Capital and other assets, net 104,494 (20) 104,474
Goodwill 290,524 (108) 290,416
----------- ----------- -----------
$ 561,593 1,823 $ 563,416
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities $ 112,757 (912) $ 111,845
Deferred acquisition consideration 15,943 - 15,943
Deferred revenue 14,924 5,123 20,047
Current portion of long-term indebtedness 7,565 - 7,565
----------- ----------- -----------
151,189 4,211 155,400
Long-term indebtedness 331,158 - 331,158
----------- ----------- -----------
482,347 4,211 486,558
----------- ----------- -----------
Minority interests 9,576 (137) 9,439
----------- ----------- -----------
Shareholders' Equity:
Share capital 95,111 - 95,111
Other paid-in capital 32,687 - 32,687
Cumulative translation adjustment 3,447 - 3,447
Retained earnings (deficit) (61,575) (2,251) (63,826)
----------- ----------- -----------
69,670 (2,251) 67,419
----------- ----------- -----------
$ 561,593 1,823 $ 563,416
=========== =========== ===========
Reconciliation of Canadian GAAP with US GAAP
The reconciliation of results reported in accordance with generally accepted
accounting principles (GAAP) in Canada with the United States GAAP has also been
restated to reflect the items above and the following additional items;
(i) To recognize the fair value adjustment related to an embedded
derivative in the Company's exchangeable securities as determined
pursuant to SFAS 133, as amended by SFAS 138, "Accounting for
Derivative Instruments and Hedging Activities". The correction reduced
Other income and net income in 2003 by $3,974.
(ii) Correction of the accounting for an investment in a joint ventures,
previously accounted for on a proportionately consolidated basis for
US GAAP purposes. Pursuant to APB Opinion No. 18. "The Equity Method
of Accounting for Investments in Common Stock", these investments are
accounted for using the equity method.
(iii) Correction of the timing and amounts recognized or gain a disposal of
an asset.
The following tables present a summary of the impact of the restatements on the
reconciliation of results reported in accordance with GAAP in Canada with the
United States GAAP for the periods presented in the accompanying financial
statements:
For the Year Ended December 31, 2003
-----------------------------------------
As Reported Adjustments As Restated
----------- ----------- -----------
Operations
Income (loss) from continuing operations before income taxes a
reported under Canadian GAAP $ 17,631 ($ 3,973) $ 13,658
Adjustments
Gain on dispositions 14,785 (3,664) 11,121
Loss on embedded derivative in long-term debt - (3,974) (3,974)
Reduction in amortization 741 - 741
Interest on convertible debt (1,907) 215 (1,692)
----------- ----------- -----------
Income (loss) from continuing operations before income taxes, US
GAAP 31,250 (11,396) 19,854
----------- ----------- -----------
Income taxes (recovery)
Current 1,128 2 1,130
Deferred 4,995 1,298 6,293
----------- ----------- -----------
6,123 1,300 7,423
----------- ----------- -----------
Net income (loss), US GAAP 25,127 (12,696) 12,431
Other comprehensive income, net of tax
Cumulative translation adjustment (13,627) 2,412 (11,215)
----------- ----------- -----------
Comprehensive income (loss), US GAAP $ 11,500 ($ 10,284) $ 1,216
=========== =========== ===========
Net income (loss) per Class A and Class B share, US GAAP
Basic $ 1.41 $ 0.70
Diluted $ 1.15 $ 0.65
Weighted average number of shares
Basic 17,791,064 17,791,064
Diluted 23,257,596 21,665,530
At December 31, 2003
-----------------------------------------
As Reported Adjustments As Restated
----------- ----------- -----------
In Accordance with Canadian GAAP:
Current assets $ 164,721 ($ 48) $ 164,673
Capital and other 80,152 286 80,438
Goodwill 103,538 (1,759) 101,779
Current liabilities 124,564 1,105 125,669
Long term indebtedness 102,112 - 102,112
Share capital 117,292 - 117,292
Contributed surplus 3,272 1,338 4,610
Other paid in capital 30,851 - 30,851
Cumulative translation adjustment (4,953) 2,588 (2,365)
Retained earnings (accumulated deficit) (27,260) (6,451) (33,711)
At December 31, 2003
-----------------------------------------
As Reported Adjustments As Restated
----------- ----------- -----------
In Accordance with US GAAP:
Current assets $ 145,982 ($ 1,438) $ 144,544
Capital and other 96,719 (2,923) 93,796
Goodwill 87,479 (4,280) 83,199
Current liabilities 105,040 878 105,918
Long term indebtedness 134,256 24 134,280
Share capital 115,996 - 115,996
Contributed surplus 3,272 1,338 4,610
Accumulated other comprehensive income (5,769) 3,241 (2,528)
Retained earnings (accumulated deficit) (25,148) (14,021) (39,169)
For the Year Ended December 31, 2002
-----------------------------------------
As Reported Adjustments As Restated
----------- ----------- -----------
Operations
Income (loss) from continuing operations before income taxes a
reported under Canadian GAAP $ 115,354 $ 827 $ 116,181
Adjustments
Gain on dispositions 3,209 - 3,209
Deferred charges (134) - (134)
Unrealized financial derivative gain 4,437 - 4,437
Reduction in amortization 1,322 - 1,322
Interest on convertible debt (1,582) - (1,582)
----------- ----------- -----------
Income (loss) from continuing operations before income taxes, US
GAAP 122,606 827 123,433
----------- ----------- -----------
Income taxes (recovery)
Current 1,051 - 1,051
Deferred 25,495 (99) 25,396
----------- ----------- -----------
26,546 (99) 26,447
----------- ----------- -----------
Net income (loss) from continuing operations 96,060 926 96,986
Cumulative effect of change in accounting principle (62,477) - (62,477)
----------- ----------- -----------
Net income (loss), US GAAP 33,583 926 34,509
Other comprehensive income, net of tax
Cumulative translation adjustment 5,240 - 5,240
----------- ----------- -----------
Comprehensive income (loss), US GAAP $ 38,823 $ 926 $ 39,749
=========== =========== ===========
Net income (loss) per Class A and Class B share, under US GAAP,
from continuing operations:
Basic $ 5.68 $ 5.73
Diluted $ 3.84 $ 3.84
Earnings (loss) per Class A and Class B share, as reported:
Basic $ 1.99 $ 2.04
Diluted $ 1.38 $ 1.40
Weighted average number of shares
Basic 16,915,341 16,915,341
Diluted 25,357,018 25,619,168
At December 31, 2002
-----------------------------------------
As Reported Adjustments As Restated
----------- ----------- -----------
In Accordance with Canadian GAAP:
Current assets $ 118,516 ($ 100) $ 118,416
Capital and other 79,967 81 80,048
Goodwill 185,637 (108) 185,529
Current liabilities 122,032 1,317 123,349
Long term indebtedness 155,514 - 155,514
Share capital 96,407 - 96,407
Other paid in capital 24,179 - 24,179
Cumulative translation adjustment 7,858 - 7,858
Retained earnings (accumulated deficit) (31,694) (1,325) (33,019)
At December 31, 2002
-----------------------------------------
As Reported Adjustments As Restated
----------- ----------- -----------
In Accordance with US GAAP:
Current assets $ 105,613 ($ 1,601) $ 104,012
Capital and other 103,940 (10,658) 93,282
Goodwill 143,976 8,407 152,383
Current liabilities 108,911 (767) 108,144
Long term indebtedness 179,290 (1,641) 177,649
Share capital 95,111 - 95,111
Share purchase loans (3,550) - (3,550)
Accumulated other comprehensive income 8,687 - 8,687
Retained earnings (accumulated deficit) (44,744) (1,325) (46,069)
For the Year Ended December 31, 2001
-----------------------------------------
As Reported Adjustments As Restated
----------- ------------ -----------
Operations ($ 94,002) ($ 363) ($ 94,365)
Income (loss) from continuing operations before income taxes a
reported under Canadian GAAP
Adjustments
Deferred charges (1,635) - (1,635)
Unrealized financial derivative gain 5,023 - 5,023
Reduction in amortization 3,640 - 3,640
Interest on convertible debt (1,682) - (1,682)
----------- ------------ -----------
Income (loss) from continuing operations before income taxes, US
GAAP (88,656) (363) (89,019)
----------- ------------ -----------
Income taxes (recovery)
Current 487 (8) 479
Deferred (19,068) 162 (18,906)
----------- ------------ -----------
(18,581) 154 (18,427)
----------- ------------ -----------
Net income (loss) from continuing operations, US GAAP (70,075) (517) (70,592)
Cumulative effect of change in accounting principle (5,650) - (5,650)
Loss from discontinued operations (24,078) - (24,078)
----------- ------------ -----------
Net income (loss), US GAAP (99,803) (517) (100,320)
Other comprehensive income, net of tax
Cumulative translation adjustment 7,526 - 7,526
----------- ------------ -----------
Comprehensive income (loss), US GAAP ($ 92,277) ($ 517) ($ 92,794)
=========== ============ ===========
Net income (loss) per Class A and Class B share, under US GAAP,
from continuing operations:
Basic ($ 4.15) ($ 4.18)
Diluted ($ 4.15) ($ 4.18)
Net income (loss) per Class A and Class B share, as reported:
Basic ($ 5.91) ($ 5.94)
Diluted ($ 5.91) ($ 5.94)
Weighted average number of shares
Basic 16,885,877 16,885,877
Diluted 16,885,877 16,885,877
At December 31, 2001
-----------------------------------------
As Reported Adjustments As Restated
----------- ----------- -----------
In Accordance with Canadian GAAP:
Current assets $ 166,575 $ 1,951 $ 168,526
Capital and other 104,494 (20) 104,474
Goodwill 290,524 (108) 290,416
Current liabilities 151,189 4,211 155,400
Long term indebtedness 331,158 - 331,158
Share capital 95,111 - 95,111
Other paid in capital 32,687 - 32,687
Cumulative translation adjustment 3,447 - 3,447
Retained earnings (accumulated deficit) (61,575) (2,251) (63,826)
At December 31, 2001
-----------------------------------------
As Reported Adjustments As Restated
----------- ----------- -----------
In Accordance with US GAAP:
Current assets $ 166,575 $ 255 $ 166,830
Capital and other 100,126 3,188 103,314
Goodwill 277,527 (2,159) 275,368
Current liabilities 151,189 3,672 154,861
Long term indebtedness 366,944 - 366,944
Share capital 95,111 - 95,111
Share purchase loans (4,711) - (4,711)
Accumulated other comprehensive income 4,446 - 4,446
Retained earnings (accumulated deficit) (78,327) (2,251) (80,578)
2. 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.
3. 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
3. 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,
---------------------------------------------
Restated 2003 2002 2001
---------------------------------------------
Net assets acquired, at fair value
Assets, net of liabilities $ 219 $ 36 $ 4,425
Reduction in minority interest 6,844 - -
Goodwill 23,523 20,774 50,927
---------------------------------------------
$ 30,586 $ 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 2,530 - -
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 1,120 392 8,571
---------------------------------------------
$ 30,586 $ 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 13). 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
--------------------------------------------------------------------------------
4. 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)
--------------------------------------------------------------------------------
5. Accounts Receivable
December 31,
------------------------------------
2003 2002 2001
---------- ---------- ----------
Restated Restated Restated
See Note 1 See Note 1 See Note 1
Receivables - Trade $ 66,304 $ 56,670 $ 74,126
- Other 3,655 2,158 5,980
Unbilled work in progress 10,336 7,961 8,412
---------- ---------- ----------
$ 80,295 $ 66,789 $ 88,518
---------- ---------- ----------
================================================================================
MDC Partners Inc.
Notes to Consolidated Financial Statements
(in thousands of U.S. dollars,
except per share amounts)
December 31, 2003, 2002, 2001
--------------------------------------------------------------------------------
6. Capital and Other Assets
----------------------- ------------------------ ------------------------
2003 2002 2001
----------------------- ------------------------ ------------------------
Accumulated Accumulated Accumulated
Cost Amortization Cost Amortization Cost Amortization
-------- ------------ --------- ------------ --------- ------------
Restated Restated Restated
See Note 1 See Note 1 See Note 1
(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 46,062 32,288 45,800 28,542 64,816 35,825
Machinery and equipment 32,233 12,426 33,012 11,590 48,109 20,092
Leasehold improvements 12,845 6,895 10,907 5,536 13,872 6,621
-------- ------------ --------- ------------ --------- ------------
97,736 53,122 95,118 46,768 132,564 63,603
-------- ------------ --------- ------------ --------- ------------
(b) Other Assets
Investments,
net of provisions 16,114 - 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 9,811 4,423 10,467 4,318 13,417 4,614
Future income taxes 11,563 - 19,649 - 11,435 -
-------- ------------ --------- ------------ --------- ------------
41,945 6,121 37,458 5,760 47,315 11,802
-------- ------------ --------- ------------ --------- ------------
139,681 59,243 132,576 52,528 179,879 75,405
-------- ------------ --------- ------------ --------- ------------
Cost less accumulated
amortization $ 80,438 $ 80,048 $ 104,474
-------- ------------ --------- ------------ --------- ------------
Investments include $15,946 related to a 20% equity investment in of Custom
Direct, Inc. which were exchanged into units of Custom Direct Income Fund
("Fund"). On February 13, 2004.the investment was exchanged into units of the
Fund and were then applied in full settlement of the Company's adjustable rate
exchangeable securities (see Note 8).
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). As at December 31, 2003, long-term notes
receivable ("Notes") include $10,075 (2002 - $13,972, 2001 - $14,099), subject
to provisions of $8,326 (2002 - $9,207, 2001 - $9,292), 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
--------------------------------------------------------------------------------
7. 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 (Restated - See Note 1):
Cost $ 323,054
Accumulated amortization 32,638
-------------
$ 290,416
=============
The changes in the carrying amount of goodwill for the year ended December
31 are as follows:
---------- ----------
2003 2002
---------- ----------
Restated Restated
See Note 1 See Note 1
Balance, January 1 $ 185,529 $ 290,416
Transitional impairment loss - (72,522)
Acquired during the year 23,523 20,774
Reduction for dispositions (88,741) (55,647)
Goodwill charges (see note 13) (10,012) -
Foreign currency translation (8,520) 2,508
---------- ----------
Balance, December 31 $ 101,779 $ 185,529
========== ==========
Net income (loss), adjusted to exclude goodwill amortization expense
including the related income tax effects, is as follows:
---------- ---------- ----------
2003 2002 2001
---------- ---------- ----------
Restated Restated Restated
See Note 1 See Note 1 See Note 1
Reported net income (loss) $ 5,916 $ 94,260 $ (99,227)
Add back: goodwill amortization, net of tax of $Nil
(2002 - $Nil, 2001 - $1,811) - - 11,232
---------- ---------- ----------
Adjusted net income (loss) $ 5,916 $ 94,260 $ (87,995)
========== ========== ==========
Earnings (loss) per share:
Reported net income (loss)
Basic $ 0.27 $ 5.51 $ (5.96)
Goodwill amortization - - 0.66
---------- ---------- ----------
Adjusted net income (loss) $ 0.27 $ 5.51 $ (5.30)
========== ========== ==========
Diluted $ 0.26 $ 3.73 $ (5.96)
Goodwill amortization - - 0.66
---------- ---------- ----------
Adjusted net income (loss) $ 0.26 $ 3.73 $ (5.30)
========== ========== ==========
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF U.S. DOLLARS,
EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 2003, 2002, 2001
8. 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 for cash proceeds of $24,450
(C$31,700). 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
8. 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 debt and equity components of 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
8. 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 32,500 4,000 4,000
--------- --------- ---------
$ 126,000 $ 152,000 $ 302,000
========= ========= =========
--------------------------------------------------------------------------------
9. 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:
9. Share Capital (Continued)
================================================================================
MDC Partners Inc.
Notes to Consolidated Financial Statements
(in thousands of U.S. dollars,
except per share amounts)
December 31, 2003, 2002, 2001
--------------------------------------------------------------------------------
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
9. 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
9. 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 $888 compensation expense related to options
issued to employees including options assumed on the privatization of Maxxcom.
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
------------------------------------
Restated - See Note 1
Pro forma net income $ 94,189
============
Pro forma earnings per share
Basic $ 5.51
===========
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.
The Company's compensation expense related to options assumed on the
privatization of Maxxcom, stock appreciation rights and from the issuance of
stock warrants and options for the year ended December 31, 2003 was $6,182.
================================================================================
MDC Partners Inc.
Notes to Consolidated Financial Statements
(in thousands of U.S. dollars,
except per share amounts)
December 31, 2003, 2002, 2001
--------------------------------------------------------------------------------
10. Contributed Surplus
December 31,
-----------------------------------------------------
2003 2002 2001
-----------------------------------------------------
Restated
See Note 1
Fair value of stock options granted to employees $ 888 $ - $ -
Fair value of stock options issued on
privatization of Maxxcom 1,703 - -
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 - -
-----------------------------------------------------
$ 4,610 $ - $ -
=====================================================
--------------------------------------------------------------------------------
11. 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 8) - (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.
12. 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
13. Net Gain on Asset Dispositions and Other Charges
For the years ended December 31,
--------------------------------------------
2003 2002 2001
--------------------------------------------
Restated
See Note 1)
Cash charges $ - $ (5,097) $ (13,675)
Stock based compensation expense (5,474) - -
Non-cash charges - capital assets (8,126) (3,391) (107,839)
Goodwill charges (10,012) - -
Net gain on asset dispositions 35,076 105,776 62,302
--------------------------------------------
$ 11,464 $ 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 in July 2003. 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 vacated lease premises costs, of which $949 was
paid in 2003 (2002 - $3,545, 2001 - $6,225) with a balance of $1,154 (2002 -
$2,103, 2001 - $7,450) remaining in accounts payable.
14. 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.
15. Income Taxes
The Company's provision (recovery) for income taxes is comprised as follows:
For the years ended December 31,
-----------------------------------------------
2003 2002 2001
-----------------------------------------------
Restated Restated Restated
See Note 1 See Note 1 See Note 1
Current $ 1,130 $ 1,051 $ 479
Future 6,612 20,870 (21,045)
-----------------------------------------------
$ 7,742 $ 21,921 $ (20,566)
================================================
================================================================================
MDC Partners Inc.
Notes to Consolidated Financial Statements
(in thousands of U.S. dollars,
except per share amounts)
December 31, 2003, 2002, 2001
--------------------------------------------------------------------------------
15. Income Taxes (Continued)
Reconciliation to statutory rates is as follows:
For the years ended December 31,
---------------------------------------------------
2003 2002 2001
---------------------------------------------------
Restated Restated Restated
See Note 1 See Note 1 See Note 1
Provision for income taxes based on
combined basic Canadian federal and
provincial tax rate of 36.6% (2002 - 38.6%, 2001 - 42.1%) $ 3,940 $ 46,016 $ (41,486)
Increase (decrease) in taxes resulting from
permanent differences
- Capital gains (3,409) (20,607) (4,734)
- Other, including non-deductible goodwill charges 2,098 (2,820) 15,760
Losses not recognized for income tax purposes 5,113 (668) 9,894
---------------------------------------------------
Total provision (recovery) $ 7,742 $ 21,921 $ (20,566)
===================================================
Disclosed on the Consolidated Statements of Operations as follows:
For the years ended December 31,
---------------------------------------------------
2003 2002 2001
---------------------------------------------------
Restated Restated Restated
See Note 1 See Note 1 See Note 1
Income taxes $ 7,742 $ 21,921 $ (18,260)
Recovery of income taxes related to goodwill charges - - (2,306)
---------------------------------------------------
$ 7,742 $ 21,921 $ (20,566)
===================================================
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
---------------------------------------------------
Restated
See Note 1
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 10,428 17,317 21,399
---------------------------------------------------
$ 11,563 $ 19,649 $ 29,014
===================================================
At December 31, 2003, the Company has income tax loss carryforwards of
approximately $32,000 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 $52,000, 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
16. 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)
=====================================
-------------------------------------------------------------------------------
17. 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
-------------------------------------------
Restated Restated
See Note 1 See Note 1
Basic 17,791,064 16,915,341 16,885,877
Impact of dilutive items 492,823 8,703,827 -
-------------------------------------------
Diluted 18,283,887 25,619,168 16,885,877
===========================================
-------------------------------------------------------------------------------
18. 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
19. 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.
c) The Company has agreed to provide to its Chairman, President and Chief
Executive Officer a bonus of C$10 million in the event that the market price of
the Company's Class A subordinate voting shares is C$30 per share or more for
more than 20 consecutive trading days. The after-tax proceeds of such bonus are
to be applied first as repayment of any outstanding loans due to the Company
from this officer and his related companies. The loans due from the officer are
non-interest bearing and are repayable only on the termination of the officer's
employment. The loans due from the officer's related companies are non-interest
bearing and substantially all of the amounts are repayable on November 1, 2007,
have been personally guaranteed by the officer and in the event that the
management services agreement with such company is terminated, 50% of the
termination penalty payable by the Company must be applied against the
outstanding loans. As at December 31, 2002, outstanding loans due from the
officer and his related companies were C$10,665 and C$3,000, respectively,
which, net of an aggregate C$10,000 provision, results in C$3,665 being recorded
in the Company's accounts. During 2003, the officer repaid loans in the amount
of C$3,845 and as at December 31, 2003 the remaining outstanding loans from the
officer and his related companies are C$6,820 and C$3,000, respectively, both of
which have been fully provided for in the Company's accounts, as the Company
anticipates such amounts will be recovered by payment of the bonus described
above.
20. 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 non-interest bearing notes receivable from an officer
of the Company and from companies controlled by the same officer as described in
note 19(c) above.
================================================================================
MDC Partners Inc.
Notes to Consolidated Financial Statements
(in thousands of U.S. dollars, except per share amounts)
--------------------------------------------------------------------------------
21. 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.
22. 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
--------------------------------------------------------------------------------------------------------
Restated Restated Restated Restated
See Note 1 See Note 1 See Note 1 See Note 1
EARNINGS:
Gross billings $ 433,336 $ 113,927 $ 1,267 $ 548,530
=======================================================
Revenues $ 189,742 $ 113,927 $ 1,267 $ 304,936
-------------------------------------------------------
Operating costs
Cost of sales - 56,654 - 56,654
Salaries and related costs 88,765 17,637 2,826 109,228
General and other operating costs 74,270 27,369 5,185 106,824
Other charges (recoveries) - - 1,333 1,333
-------------------------------------------------------
163,035 101,660 9,344 274,039
-------------------------------------------------------
Operating income (loss) before
other income (charges) 26,707 12,267 (8,077) 30,897
-------------------------------------------------------
Net gain on asset dispositions
and other charges (111) 8,207 3,368 11,464
Unrealized foreign exchange loss (2,023) - - (2,023)
Amortization (5,672) (3,803) (887) (10,362)
Amortization of deferred finance charges (2,225) - - (2,225)
Interest, net (6,282) (4,850) (366) (11,498)
Income participation of minority partners (5,489) - - (5,489)
-------------------------------------------------------
(21,802) (446) 2,115 (20,133)
-------------------------------------------------------
Income (loss) before income taxes and
minority interest 4,905 11,821 (5,962) 10,764
Income taxes (recovery) 1,852 6,087 (197) 7,742
-------------------------------------------------------
Income (loss) before minority interest 3,053 5,734 (5,765) 3,022
Equity in affiliates - - 1,850 1,850
Minority interest (recovery) - (1,536) 492 (1,044)
-------------------------------------------------------
Net income (loss) for the year 3,053 7,270 (4,407) 5,916
=======================================================
================================================================================
ASSETS
Total assets $ 225,788 47,939 73,163 346,890
=======================================================
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)
--------------------------------------------------------------------------------
22. Segmented Information (Continued)
FOR THE YEAR ENDED DECEMBER 31, 2002
Marketing Secure Corporate
Communications Transactions & Other Total
--------------------------------------------------------------------------------------------------------------------
Restated Restated
See Note 1 See Note 1
EARNINGS:
Gross billings $ 379,776 $ 212,998 $ 6,925 $ 599,699
=============================================================
Revenues $ 167,268 $ 212,998 $ 6,925 $ 387,191
-------------------------------------------------------------
Operating costs
Cost of sales - 98,304 3,255 101,559
Salaries and related costs 79,703 28,781 2,492 110,976
General and other operating costs 66,570 48,224 5,126 119,920
-------------------------------------------------------------
146,273 175,309 10,873 332,455
-------------------------------------------------------------
Operating income (loss)
before other income (charges) 20,995 37,689 (3,948) 54,736
-------------------------------------------------------------
Net gain on asset dispositions and other charges (576) 100,219 (2,355) 97,288
Unrealized foreign exchange gain - - 4,380 4,380
Amortization (6,173) (7,214) (732) (14,119)
Amortization of deferred finance charges (1,400) - (630) (2,030)
Interest, net (5,301) (10,767) (1,746) (17,814)
Income participation of minority partners (3,228) - - (3,228)
-------------------------------------------------------------
(16,678) 82,238 (1,083) 64,477
-------------------------------------------------------------
Income (loss) before income taxes and
minority interest 4,317 119,927 (5,031) 119,213
Income taxes (recovery) 1,413 22,248 (1,740) 21,921
-------------------------------------------------------------
Income (loss) before minority interest 2,904 97,679 (3,291) 97,292
Minority interest - 2,379 653 3,032
-------------------------------------------------------------
Net income (loss) for the year $ 2,904 $ 95,300 $ (3,944) $ 94,260
=============================================================
================================================================================
ASSETS
Total assets $ 204,862 $ 162,168 $ 16,963 $ 383,993
=============================================================
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)
--------------------------------------------------------------------------------
22. Segmented Information (Continued)
FOR THE YEAR ENDED DECEMBER 31, 2001
Marketing Secure Corporate
Communications Transactions & Other Total
Restated Restated
Note 1 Note 1
-------------------------------------------------------------------------------------------------------------------
EARNINGS:
Gross billings $ 384,697 $ 304,030 $ 26,241 $ 712,968
===========================================================
Revenues $ 174,255 $ 304,030 $ 26,241 $ 504,526
-----------------------------------------------------------
Operating costs
Cost of sales - 138,797 11,289 150,086
Salaries and related costs 86,676 40,646 10,141 137,463
General and other operating costs 66,593 62,355 9,273 138,221
-----------------------------------------------------------
153,269 241,798 30,703 425,770
-----------------------------------------------------------
Operating income (loss) before
other income (charges) 20,986 62,232 (4,462) 78,756
-----------------------------------------------------------
Net gain (loss) on asset dispositions and other charges (9,140) (7,838) (42,234) (59,212)
Unrealized foreign exchange loss - - (12,034) (12,034)
Amortization (5,872) (13,798) (1,228) (20,898)
Amortization of deferred finance charges (782) - (2,016) (2,798)
Interest, net (4,155) (10,344) (19,566) (34,065)
Income participation of minority partners (2,987) - - (2,987)
-----------------------------------------------------------
(22,936) (31,980) (77,078) (131,994)
-----------------------------------------------------------
Income (loss) before income taxes, goodwill
and minority interest (1,950) 30,252 (81,540) (53,238)
Income taxes (recovery) (1,405) 12,173 (29,028) (18,260)
-----------------------------------------------------------
Income (loss) before goodwill and minority interest (545) 18,079 (52,512) (34,978)
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) $ 4,016 $ (67,558) (73,799)
===========================================================
================================================================================
ASSETS
Restated Restated
See Note 1 See Note 1
Total assets $ 239,180 $ 266,444 $ 57,792 $ 563,416
===========================================================
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)
22. Segmented Information (Continued)
GEOGRAPHIC INFORMATION
Revenues
2003 2002 2001
-------------------------------------------------
Restated Restated Restated
See Note 1 See Note 1 See Note 1
Canada $ 92,987 $ 139,017 $ 221,356
United States 184,985 220,104 245,476
Other countries 26,964 28,070 37,694
-------------------------------------------------
Total $ 304,936 $ 387,191 $ 504,526
=================================================
Capital Assets and Goodwill
2003 2002 2001
-------------------------------------------------
Restated Restated Restated
See Note 1 See Note 1 See Note 1
Canada $ 48,001 $ 51,329 $ 130,392
United States 93,023 169,000 206,640
Other countries 5,369 13,550 22,345
-------------------------------------------------
Total $ 146,393 $ 233,879 $ 359,377
=================================================
===============================================================================
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US DOLLARS,
EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 2003, 2002 AND 2001
23. RECONCILIATION OF RESULTS REPORTED IN ACCORDANCE WITH GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
(GAAP) IN CANADA WITH UNITED STATES ("U.S.") GAAP
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. Refer to
Note 1 Restatement of Financial Statements for a description of the causes of
the restatement of certain of the financial information presented in this note:
(a) Prior to January 1, 2003 certain deferred charges in respect of the
Company's Custom Direct Inc. operations, 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 reflected 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
23. 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.
At December 31, 2003, the Company's adjustable rate exchangeable securities
include an embedded derivative related to the underlying Custom Direct Income
Fund Units for which the securities were exchangeable. Under US GAAP the Company
must recognize in earnings in each period the change in the fair value of the
embedded derivative. This resulted in a loss on the derivative of $3,974. Under
Canadian GAAP, EIC 117 prohibits the bifurcation of the embedded derivative. In
addition, under EIC 56, until such time as the exchange right is no longer
contingent upon future events, no adjustments to the carrying value of the
debenture are permitted.
(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
23. 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 Company's adoption EITF 00-21 did not have a
material effect on our results of operations or financial condition.
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 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
23. 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
Restated Restated Restated
See Note 1 See Note 1 See Note 1
Income (loss) from continuing operations before
income taxes as reported under Canadian GAAP $ 13,658 $ 116,181 $ (94,365)
Adjustments
Gain on dispositions 11,121 3,209 -
Loss on embedded derivative in long-term debt (3,974) - -
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 (1,692) (1,582) (1,682)
--------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
income taxes, U.S. GAAP 19,854 123,433 (89,019)
--------------------------------------------------------------------------------------------------------------
Income taxes (recovery)
Current 1,130 1,051 479
Deferred 6,293 25,396 (18,906)
--------------------------------------------------------------------------------------------------------------
7,423 26,447 (18,427)
--------------------------------------------------------------------------------------------------------------
Net income (loss) from continuing operations 12,431 96,986 (70,592)
Cumulative effect of change in accounting principle - (62,477) (5,650)
Loss from discontinued operations - - (24,078)
--------------------------------------------------------------------------------------------------------------
Net income (loss), U.S. GAAP 12,431 34,509 (100,320)
Other comprehensive income, net of tax
Cumulative translation adjustment (11,215) 5,240 7,526
--------------------------------------------------------------------------------------------------------------
Comprehensive income (loss), U.S. GAAP $ 1,216 $ 39,749 $ (92,794)
--------------------------------------------------------------------------------------------------------------
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US DOLLARS,
EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 2003, 2002 AND 2001
23. RECONCILIATION OF RESULTS REPORTED IN ACCORDANCE WITH GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP) IN CANADA WITH UNITED STATES ("U.S.") GAAP
(CONTINUED)
------------------------------------------------------------------------------------------------------------
2003 2002 2001
------------------------------------------------------------------------------------------------------------
Restated Restated
See Note 1 See Note 1
Earnings (loss) per Class A and Class B share, under U.S. GAAP, from
continuing operations:
Basic $ 0.70 $ 5.73 $ (4.18)
------------------------------------------------------------------------------------------------------------
Diluted $ 0.65 $ 3.84 $ (4.18)
------------------------------------------------------------------------------------------------------------
Net Income (loss) per Class A and Class B share, as reported:
Basic $ 0.70 $ 2.04 $ (5.94)
------------------------------------------------------------------------------------------------------------
Diluted $ 0.65 $ 1.40 $ (5.94)
------------------------------------------------------------------------------------------------------------
Weighted average number of shares
Basic 17,791,064 16,915,341 16,885,877
------------------------------------------------------------------------------------------------------------
Diluted 21,665,530 25,619,168 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
23. 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
------------------------------------------------------------------------------------------------------------
Restated
See Note 1
Cash provided by (used in)
Operating activities
Operations
Loss from continuing operations $ 12,431 $ 96,986 $ (70,592)
Adjustments to reconcile income (loss)
from continuing operations to net cash
used in operating activities
Amortization 11,450 14,433 32,968
Stock-based compensation 6,182 - -
Restructuring, dispositions and other
charges, non-cash (33,059) (105,594) 107,002
Restructuring, dispositions and other
charges accrued to accounts payable (949) (3,545) 7,653
Goodwill charges 10,012 - 32,579
Interest capitalized to debt 4,557 3,368 -
Unrealized financial derivative gain - (4,437) (5,023)
Deferred income taxes 6,293 25,396 (18,906)
Unrealized foreign exchange loss (gain) 2,023 (4,380) 12,034
Increase (decrease) in accounts receivable (5,194) 5,872 6,818
Increase (decrease) in accounts payable 2,892 (6,103) (12,021)
Other (1,659) (3,136) (4,065)
------------------------------------------------------------------------------------------------------------
14,979 18,860 88,447
------------------------------------------------------------------------------------------------------------
Investing activities
Business investments, acquisitions and divestitures,
net of cash acquired 88,440 161,302 (16,884)
Purchase of capital and other assets (12,111) (9,322) (34,981)
------------------------------------------------------------------------------------------------------------
76,329 151,980 (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
23. 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 (88,993) (186,869) (123,475)
Issuance of share capital 3,031 - 732
Redemption of share capital (13,662) - (6,727)
------------------------------------------------------------------------------------------------------------
(62,152) (180,914) (42,241)
------------------------------------------------------------------------------------------------------------
Foreign exchange gain on cash held in foreign
currencies 5,547 6,092 166
------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents 34,703 (3,982) (5,493)
Cash and equivalents, beginning of year 31,226 35,208 40,701
------------------------------------------------------------------------------------------------------------
Cash and equivalents, end of year $ 65,929 $ 31,226 $ 35,208
------------------------------------------------------------------------------------------------------------
Non-cash investing and financing activity:
Common stock issued for acquisitions $ 25,985 $ - $ 7,353
Stock options and warrants issued for
Acquisitions 2,530 - -
Increase (decrease) in minority interest (7,366) - (3,156)
------------------------------------------------------------------------------------------------------------
Net non-cash activities related to acquisitions $ 21,149 $ $ - $ 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
23. 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:
In accordance with Canadian GAAP In accordance with U.S. GAAP
As restated As restated
------------------------------------- -------------------------------------
2003 2002 2001 2003 2002 2001
------------------------------------- -------------------------------------
Restated Restated Restated Restated Restated Restated
See Note 1 See Note 1 See Note 1 See Note 1 See Note 1 See Note 1
Current assets $ 164,673 $ 118,416 $ 168,526 $ 144,544 $ 104,012 $ 166,830
Capital and other 80,438 80,048 104,474 93,796 93,282 103,314
Goodwill 101,779 185,529 290,416 83,199 152,383 275,368
Current liabilities 125,669 123,349 155,400 105,918 108,144 154,861
Long term indebtedness 102,112 155,514 331,158 134,280 177,649 366,944
Share capital 117,292 96,407 95,111 115,996 95,111 95,111
Contributed surplus 4,610 - - 4,610 - -
Other paid in capital 30,851 24,179 32,687 - - -
Share purchase loans - - - - (3,550) (4,711)
Cumulative translation adjustment (2,365) 7,858 3,447 - - -
Accumulated other comprehensive income - - - (2,528) 8,687 4,446
Retained earnings (accumulated deficit) (33,711) (33,019) (63,826) (39,169) (46,069) (80,578)
Reconciliation of shareholders' equity between Canadian GAAP and U.S. GAAP:
2003 2002 2001
Restated Restated
See Note 1 See Note 1
---------------------------------------------------------------------------------------------
Shareholders' equity as reported in the
Canadian GAAP consolidated financial
statements $ 116,677 $ 95,425 $ 67,419
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 (2,943) (13,122) (12,997)
Share purchase loans - (3,550) (4,711)
Deferred finance costs regarding convertible
debt, net of amortization - - 333
Unrealized derivative losses (3,974) - (4,394)
Interest regarding convertible debt - - 1,295
Tax effect on above adjustments - 263 5,350
------------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity according to
U.S. GAAP $ 78,909 $ 54,179 $ 14,268
------------------------------------------------------------------------------------------------------------------------------------
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
Restated Restated
See Note 1 See Note 1
Income used to compute Basic EPS
Income (loss) from continuing operations, U.S. GAAP $ 12,431 $ 96,986 $ (70,592)
Add: Effect of interest on convertible notes 1,552 1,369 -
Income used to compute Diluted EPS $ 13,983 $ 98,355 $ (70,592)
Shares used to compute Basic EPS 17,791,064 16,915,341 16,885,877
Add: Effect of convertible notes 3,381,643 8,665,511 -
Add: Stock options 492,823 38,316 -
Shares used to compute Diluted EPS 21,665,530 25,619,168 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
23. 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
==================================
Restated
See Note 1
Pro forma net income (loss) $ 34,438 $ (100,652)
==================================
Pro forma net income (loss) per share:
Basic $ 2.04 $ (5.96)
==================================
Diluted $ 1.40 $ (5.96)
==================================
Under US GAAP, in thousands of United States Dollars, the Company's Balance
Sheet as of December 31, 2003 was as follows:
ASSETS
Current Assets:
Cash and cash equivalents $ 65,929
Accounts receivable, net 58,864
Expenditures billable to clients 7,153
Inventories 7,735
Prepaid expenses and other current assets 4,863
---------
Total Current Assets 144,544
Fixed Assets, net 38,775
Investment in Affiliates 34,362
Goodwill 83,199
Deferred Tax Benefits 11,563
Other Assets 9,096
---------
Total Assets $ 321,539
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 38,451
Accruals and other liabilities 34,245
Advance billings 15,731
Current portion of long-term debt 16,378
Deferred acquisition consideration 1,113
---------
Total Current Liabilities 105,918
Long-Term Debt 95,970
Convertible Notes 37,794
Other Liabilities 516
---------
Total Liabilities 240,198
---------
Minority Interest 2,432
---------
Contingencies
Shareholders' Equity:
Share capital 115,996
Additional paid-in capital 4,610
Retained earnings (deficit) (39,169)
Accumulated other comprehensive income (loss) (2,528)
---------
Total Shareholders' Equity 78,909
---------
Total Liabilities and Shareholders' Equity $ 321,539
=========
Under US GAAP, in thousands of United States Dollars, the Company's Statement of
Operations for the year ended December 31, 2003 was as follows:
Revenue:
Services $ 171,583
Products 113,927
---------
285,510
---------
Operating Expenses:
Cost of products sold 56,654
Salary and related costs 107,228
General and other operating costs 100,435
Other charges 1,333
Depreciation and amortization 9,225
Write-down of fixed assets and other assets 8,126
Goodwill charges 10,012
---------
293,013
---------
Operating Profit (Loss)
(7,503)
---------
Other Income (Expenses):
Gain on sale of assets and settlement
of long-term debt 42,134
Foreign exchange gain (loss) (2,023)
Interest expense (16,060)
Interest income 937
---------
24,988
---------
Income Before Income Taxes, Equity in
Affiliates and Minority Interests 17,485
Income Taxes 5,538
---------
Income Before Equity in Affiliates
and Minority Interests 11,947
Equity in Affiliates 4,929
Minority Interests in Income of
Consolidated Subsidiaries (4,445)
---------
Net Income $ 12,431
=========
Document No. 3
Management's Discussion & Analysis
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.
Restatement of Financial Statements
The Company restated its financial statements for the years ended December 31,
2003 and 2002 Refer to Note 1 of the notes to consolidated financial statements
of the Company's Consolidated Financial Statements included herein.
The Company has restated and reflected corresponding corrections to the
Management Discussion and Analysis. This Form 40-F/A does not reflect events
occurring after the original filing date of the Form 40-F.
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
---------------------------------------------------------- ---------------- ----------------- ---------------
Restated Restated Restated
See Note 1 See Note 1 See Note 1
Revenues $304,936 $ 387,191 $ 504,526
Income (loss) from continuing operations $ 5,916 $ 94,260 $ (73,799)
Net income (loss) for the year $ 5,916 $ 94,260 $ (99,227)
Earnings per share
Income (loss) from continuing operations
Basic $ 0.27 $ 5.51 $ (4.46)
Diluted $ 0.26 $ 3.73 $ (4.46)
Net income (loss)
Basic $ 0.27 $ 5.51 $ (5.96)
Diluted $ 0.26 $ 3.73 $ (5.96)
Assets $ 346,890 $ 383,993 $563,416
Long-term indebtedness $ 120,758 $ 159,602 $338,723
---------------------------------------------------------- ---------------- ----------------- ---------------
RESULTS OF OPERATIONS
Revenues
On a consolidated basis, revenues for the year were $304.9 million, a decrease
of 21% or $82.2 million compared to $387.1 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 $433.3 million
in 2003, 14% or $53.5 million greater than the previous year. Revenues were
$189.7 million, an improvement of $22.4 million or 13% from the $167.3 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
------------------------------ ----------- ---------- -------------- ---------
Restated See Note 1
Agriculture $ 5,857 3% $ 6,047 4%
Automotive 12,868 7% 8,571 5%
Consumer products 71,666 38% 60,190 36%
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 3% 9,573 6%
------------------------------ ----------- ---------- -------------- ---------
$ 189,742 100% $ 167,268 100%
------------------------------ ----------- ---------- -------------- ---------
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 $113.9 million for the year ended
December 31, 2003, decreased $99.1 million or 47% compared to 2002. The decrease
was primarily attributable to the revenues of divested operations included in
the prior-year results. The revenues of the remaining operations decreased $1.0
million year-over-year. Each of the stamp, card and ticketing operations
contributed to the improvement with increases in revenues of $0.2 million and
$1.1 million, respectively, partially offset by a $2.3 million decrease in
revenues of the card operation.
Revenues of the Company's Corporate and Other operations decreased $5.6 million
to $1.3 million from the $6.9 million reported in 2002, primarily due to the
divestiture of A.E. McKenzie Co. Inc. in 2002.
Operating Costs
Consolidated operating costs were $274.0 million, representing a decrease of 18%
or $58.5 million from the operating costs of $332.5 million incurred in the
previous year.
The operating costs of Marketing Communications amounted to $163.0 million for
the year compared to $146.3 million in 2002. The 11% or $16.7 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 85.9% in 2003 versus
87.4% in 2002. Salaries and related costs increased $9.1 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 $101.7 million in
2003, $73.6 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 82.3% in 2002 to 89.2% in 2003. Cost of sales increased to 49.7%
of sales in 2003 compared to 46.2% of sales in 2002, and salaries and related
costs increased from 13.5% to 15.5% of sales, while other operating costs
increased as a percentage of sales to 24.0% from 22.6%.
The operating costs of Corporate and Other operations were $9.3 million, $1.6
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, including a $1.3 million charge to related to severances.
Operating Income before Other Income (Charges) Operating income before other
charges was $30.9 million for 2003, reflecting a decrease of $23.8 million or
44% from the $54.7 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 $26.7 million in operating income before
other charges for the year compared with $21.0 million in 2002. Operating
margins improved to 14.1% 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 $12.3 million of operating income before
other charges, a decrease of $25.4 million or 67% from the prior-year income of
$37.7 million. Operating income as a percentage of sales was 10.8% this year
compared to 17.7% last year. The ongoing operations of Secure Products
International reported a decrease in operating income of $3.1 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 $8.1
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 $11.5 million for 2003.
Of this, $35.0 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 and the write-off of the related unamortized deferred finance
fees of $1.7 million. 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. The 2003 foreign exchange loss
relates to short-term intercompany denominated receivables held by Canadian
operations in United States dollars.
Amortization
Amortization expense for the year was $12.6 million, $3.5 million lower than the
amortization of $16.1 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 reduced from $1.4 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 $5.5 million, $2.3 million higher than 2002 as
a result of improved performance in the Marketing Communications Division.
Income before Income Taxes, Equity in Affiliates and Minority Interest
Income before income taxes, equity if affiliates and minority interest was $10.8
million for 2003 compared to $119.2 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 $7.7 million compared with $21.9
million last year. The effective tax rate for 2003 was 71.9% of income before
taxes and minority interest. In 2002, the tax rate was 18.4% due primarily to
the significant divestitures completed during that year.
Equity in Affiliates
Equity in affiliates represents the income attributable to equity-accounted
affiliate operations. Income of $1.9 million dollars was reported for the year
ended December 31, 2003 related to equity earnings from CDI.
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 $5.9 million versus $94.3 million in 2002. The
marginal improvement in 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 $39.0 million compared with negative
$4.9 million at December 31, 2002. The $43.9 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 $7.4 million and $3.3 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 $116.2 million. The ratio of long-term
indebtedness to shareholders' equity decreased from 1.65 at the end of 2002 to
1.04 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 $18.7 million. This represents a decrease of
$4.7 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 $74.6 million compared
with $151.6 million in 2002. The net proceeds received from the sale of Custom
Direct, net of investing activities, amounted to $88.4 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 (Restated - See Note 1)
(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 85,023 120,479 80,617 91,212 66,659 87,323 72,637 88,227
Net income (loss)
for the period 297 7,006 6,698 80,685 2,463 4,684 (3,542) 1,885
Earnings (loss) per share
Basic $ (0.00) $ 0.40 $ 0.38 $ 4.76 $ 0.12 $ 0.26 $ (0.20) $ 0.10
Diluted $ (0.00) $ 0.26 $ 0.29 $ 3.41 $ 0.11 $ 0.18 $ (0.20) $ 0.08
------------------------- ---------- ---------- ---------- ---------- ---------- --------- ---------- -------
A. Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that
information required to be included in our SEC reports is recorded, processed,
summarized and reported within applicable time periods specified by the SEC's
rules and forms, and that such information is accumulated and communicated to
our management, including our Chief Executive Officer (CEO) and Chief Financial
Officer (CFO) as appropriate, to allow timely decisions regarding required
disclosures.
On May 10, 2004, the Company disclosed in its annual report on Form 40-F for the
fiscal year ended December 31, 2003 that an evaluation had been performed by the
Company's management, including its CEO and CFO, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures, and
that based on that evaluation, the Company's management concluded that the
Company's disclosure controls and procedures were effective as of December 31,
2003. Subsequently, management determined that the Company's disclosure controls
and procedures were not effective as of December 31, 2003, because the Company
had a "material weakness" that resulted in the improper reporting of certain
items, as described in Note 1 to the consolidated financial statements included
herein.
Prior to the filing date of this Form 40-F/A, the Company implemented revised
control activities to support improved processes under the direction of our Vice
Chairman & Executive Vice President. The revised control activities and improved
processes include expanded supervisory activities and monitoring procedures,
including the corrective actions described below. Based on these changes and
improvements, management believes that as of the date of this filing, our
disclosure controls and procedures are effective to ensure that material
information relating to our Company, including our consolidated subsidiaries, is
made known to our CEO and CFO by others within those entities. Furthermore, our
management, including our CEO and CFO, believe such controls have improved in
providing reasonable assurance that information required to be disclosed by us
in the reports that we file or submit to the SEC is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms. We currently are designing and implementing an improved control
environment to address the deficiencies described below.
B. Internal Control over Financial Reporting
In the light of restatements of the Company's previously issued financial
statements, as described in Note 1 of the Company's consolidated financial
statements contained herein, the Company's management has concluded that there
are significant deficiencies in the design or operation of internal controls
which could adversely affect the Company's ability to record, process, summarize
and report financial data consistent with the assertions of management in the
financial statements. Management believes that such deficiencies represent
material weaknesses in internal control over financial reporting that, by
themselves or in combination, result in a more than remote likelihood that a
material misstatement in our financial statements will not be prevented or
detected by our employees in the normal course of performing their assigned
functions. Such material weaknesses in internal control over financial reporting
existed as at December 31, 2003.
Under applicable rules, management may not conclude that the Company's internal
control over financial reporting is effective if a material weakness exists.
Given the nature of the restatements, the Company's management believes that its
material weaknesses relate primarily to significant transactions at the
Company's head office accounting and reporting functions, including the
following:
. insufficient personnel resources and technical accounting expertise within
its accounting functions;
. failure in the design and operating effectiveness of identified controls
in preventing or detecting misstatements of accounting information;
. absence of appropriate review of significant transactions and related
accounting entries, and the appropriate documentation and application of
U.S. GAAP for those significant transactions;
. failure to document approvals required for certain transactions; and
. inadequate procedures and oversight for appropriately assessing and
applying accounting principles and changes thereon.
Our management and Audit Committee have dedicated resources to assist in
assessing the underlying issues giving rise to the restatement and in ensuring
proper steps have been and are being taken to improve our control environment.
That assessment found and concluded that our finance and accounting personnel
made a number of accounting errors, but that there was no evidence of any fraud,
intentional misconduct or concealment on the part of the Company, its officers
or its employees. We currently are designing and implementing improved controls
to address the material weaknesses described above in our control environment.
Specifically, the Company has taken the following corrective actions:
. Hired additional personnel resources, and is actively pursing appropriate
additional resources in its accounting and finance functions, particularly
those with US GAAP expertise;
. Developed, distributed and begun to communicate and implement
comprehensive accounting policies in a number of areas, including revenue
recognition;
. Developed and continues to refine procedures for ensuring appropriate
documentation of complex transactions and application of accounting
standards to ensure compliance with U.S. GAAP;
. Improving procedures for reviewing underlying business agreements and
analyzing, reviewing and documenting the support for management's
accounting entries and significant transactions; and
. Improving monitoring controls to ensure internal controls are operating
effectively.
The Company believes that these steps should remediate the identified material
weaknesses in control over financial reporting.
Section 404 Assessment
Section 404 of the Sarbanes-Oxley Act requires management's annual review and
evaluation of our internal controls, and an attestation of the effectiveness
of these controls by our independent registered public accountants beginning
with our Form 10-K for the fiscal year ending on December 31, 2004. We have
dedicated significant resources, including management time and effort, and
incurred substantial costs in connection with our ongoing Section 404
assessment. We are currently documenting and testing our internal controls and
evaluating necessary improvements for maintaining an effective control
environment. The evaluation of our internal controls is being conducted under
the direction of our senior management in consultation with independent third
party consulting firm. In addition, the Company's management is regularly
discussing the results of our testing and any proposed improvements to our
control environment with the Audit Committee. Despite the dedication of
significant resources for our Section 404 assessment, and the incurrence of
significant costs, the Company has determined that a significant amount of
work will be required to remediate the above-mentioned material weaknesses in
its internal control over financial reporting. Accordingly, the Company
expects that it is likely that it will have material weaknesses in internal
control over financial reporting at year-end. However, based on significant
work performed during the past several months, including the measures
discussed above, management believes that there are no material inaccuracies
or omissions of material fact in this Form 40-F/A. Management, to the best of
its knowledge, also believes that the financial statements contained in this
Form 40-F/A are fairly presented in all material respects. Despite the
potential for a material weakness in the Company's internal controls at
year-end, management further expects that its corrective measures and improved
internal controls will enable the Company to file financial statements for the
year ending December 31, 2004, in compliance with U.S. GAAP on a timely basis.
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: December 20, 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
* Filed previously.