NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Except per Share Amounts)
1. Basis of Presentation
MDC Partners Inc. (the “Company” or “MDC”) has prepared the consolidated financial statements included herein pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) and in accordance with generally accepted accounting principles of the United States of America (“U.S. GAAP”).
Based in part on feedback from the SEC, the Company performed a comprehensive review of its reportable segments, reassessed the aggregation of its operating segments, and identified four new reportable segments. As each Partner Firm represents an operating segment, the Company aggregates Partner Firms that meet the aggregation criteria pursuant to the guidance of the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (the “ASC”) Topic 280, Segment Reporting, into one of four reportable segments and combines and discloses those Partner Firms that do not meet the aggregation criteria in the All Other category. For further information, see Note
14
, “Segment Information.”
Nature of Operations
MDC is a leading provider of global marketing, advertising, activation, communications and strategic consulting solutions. MDC’s Partner Firms deliver a wide range of customized services in order to drive growth and business performance for its clients.
MDC Partners Inc., formerly MDC Corporation Inc., is incorporated under the laws of Canada. 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 operates primarily in the U.S., Canada, Europe, Asia, and Latin America.
2. Significant Accounting Policies
The Company’s significant accounting policies are summarized as follows:
Accounting Changes.
On December 31, 2016, the Company retrospectively adopted the FASB Accounting Standards Update (“ASU”) 2015-17, Income Taxes (Topic 740). This update requires that deferred tax assets and liabilities be classified as non-current. As a result of the adoption of ASU 2015-17, the balance sheet at December 31, 2015 was adjusted to reflect the reclassification of
$14,381
from other current assets to long-term deferred tax assets and
$263
from accruals and other liabilities to long-term deferred tax liabilities.
On January 1, 2016, the Company retrospectively adopted the FASB ASU 2015-03, Interest - Imputation of Interest. This update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. As a result of the adoption of this update, the balance sheet at December 31, 2015 was adjusted to reflect the reclassification of
$12,625
from other assets to long-term debt.
Additionally, the Company prospectively adopted the FASB ASU 2016-09, Stock Compensation (Topic 718). As a result of the adoption, there was no material impact.
Principles of Consolidation
. The accompanying consolidated financial statements include the accounts of MDC Partners Inc. and its domestic and international controlled subsidiaries that are not considered variable interest entities, and variable interest entities for which the Company is the primary beneficiary. Intercompany balances and transactions have been eliminated in consolidation.
Reclassifications.
Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. During the three months ended March 31, 2017, the Company changed the presentation of book overdrafts on its statement of cash flows to classify the associated cash flows as operating activities. Book overdrafts were previously presented within financing activities. This resulted in cash outflows of
$6,636
and
$1,410
, and inflows of
$37,835
, being reclassified from financing activities to operating activities for the
for the years ended December 31,
2016
,
2015
and
2014
, respectively. There was no impact on the Company’s consolidated statements of operations, comprehensive income (loss), or balance sheets.
Use of Estimates
. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities including goodwill, intangible assets, contingent deferred acquisition consideration, valuation allowances for receivables, deferred tax assets and the amounts of revenue and expenses reported during the period. These estimates are evaluated on an ongoing basis and are based on historical experience, current conditions and various other assumptions believed to be reasonable under the circumstances. Actual results could differ from these estimates.
Fair Value
. The Company applies the fair value measurement guidance of the FASB Accounting Standards Codification (the “ASC”) Topic 820, Fair Value Measurements, for financial assets and liabilities that are required to be measured at fair value and
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
2. Significant Accounting Policies – (continued)
for non-financial assets and liabilities that are not required to be measured at fair value on a recurring basis, including goodwill and other identifiable intangible assets. The measurement of fair value requires the use of techniques based on observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The inputs create the following fair value hierarchy:
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•
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Level 1 - Quoted prices for identical instruments in active markets.
|
|
|
•
|
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations where inputs are observable or where significant value drivers are observable.
|
|
|
•
|
Level 3 - Instruments where significant value drivers are unobservable to third parties.
|
When available, the Company uses quoted market prices to determine the fair value of its financial instruments and classifies such items in Level 1. In some cases, quoted market prices are used for similar instruments in active markets and the Company classifies such items in Level 2.
Concentration of Credit Risk
. The Company provides marketing communications services to clients who operate in most industry sectors. Credit is granted to qualified clients in the ordinary course of business. Due to the diversified nature of the Company’s client base, the Company does not believe that it is exposed to a concentration of credit risk.
No
client accounted for more than
10%
of the Company’s consolidated accounts receivable as of December 31,
2016
and
2015
.
No
clients accounted for
10%
of the Company's revenue in each of the years ended December 31,
2016
,
2015
, and
2014
.
Cash and Cash Equivalents
. The Company’s cash equivalents are primarily comprised of investments in overnight interest-bearing deposits, commercial paper and money market instruments and other short-term investments with original maturity dates of three months or less at the time of purchase. The Company has a concentration of credit risk in that there are cash deposits in excess of federally insured amounts.
Cash in Trust.
A subsidiary of the Company holds restricted cash in trust accounts related to funds received on behalf of clients. Such amounts are held in escrow under depositary service agreements and distributed at the direction of the clients. The funds are presented as a corresponding liability on the balance sheet.
Allowance for Doubtful Accounts
. Trade receivables are stated at invoiced amounts less allowances for doubtful accounts. The allowances represent estimated uncollectible receivables associated with potential customer defaults usually due to customers’ potential insolvency. The allowances include amounts for certain customers where a risk of default has been specifically identified. The assessment of the likelihood of customer defaults is based on various factors, including the length of time the receivables are past due, historical experience and existing economic conditions.
Expenditures Billable to Clients
. Expenditures billable to clients consist principally of outside vendor costs incurred on behalf of clients when providing advertising, marketing and corporate communications services that have not yet been invoiced to clients. Such amounts are invoiced to clients at various times over the course of the production process.
Fixed Assets
. Fixed assets are stated at cost, net of accumulated depreciation. Computers, furniture and fixtures are depreciated on a straight-line basis over periods of
three
to
seven
years. Leasehold improvements are depreciated on a straight-line basis over the lesser of the term of the related lease or the estimated useful life of the asset. Repairs and maintenance costs are expensed as incurred.
Impairment of Long-lived Assets
. In accordance with the FASB ASC, a long-lived asset or asset group is tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. When such events occur, the Company compares the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group to the carrying amount of such asset or asset group. If this comparison indicates that there is an impairment, the amount of the impairment is typically calculated using discounted expected future cash flows where observable fair values are not readily determinable. The discount rate applied to these cash flows is based on the Company’s weighted average cost of capital (“WACC”), risk adjusted where appropriate.
Equity Method Investments
. 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 by contractual arrangement, (i) over the operating and financial policies of the affiliate or (ii) has an ownership interest greater than
50%
; however, the substantive participating rights of the noncontrolling interest shareholders preclude the Company from exercising unilateral control over the operating and financial policies of the affiliate. The Company’s investments accounted for using the equity method include a
30%
undivided
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
2. Significant Accounting Policies – (continued)
interest in a real estate joint venture and various interests in investment funds. The Company’s management periodically evaluates these investments to determine if there has been a decline in value that is other than temporary. These investments are included in investments in non-consolidated affiliates.
During the year ended
December 31,
2016
, the Company sold its ownership in
two
of these equity method investments for
$4,023
and recognized a gain of
$623
in Other income.
During the year ended
December 31, 2015
, the Company sold its ownership in
one
of these equity method investments for
$2,094
and recognized a gain of
$1,086
in Other income.
Cost Method Investments
. From time to time, the Company makes non-material cost based investments in start-up advertising technology companies and innovative consumer product companies where the Company does not exercise significant influence over the operating and financial policies of the investee. The total net cost basis of these investments, which is included in Other Assets on the balance sheet, as of December 31,
2016
and
2015
was
$10,132
and
$11,763
, respectively. These investments are periodically evaluated to determine whether a significant event or change in circumstances has occurred that may impact the fair value of each investment other than temporary declines below book value. A variety of factors are considered when determining if a decline is other than temporary, including, among others, the financial condition and prospects of the investee, as well as the Company’s investment intent.
During the year ended
December 31, 2016
, the Company sold its ownership in
three
of these cost method investments for an aggregate purchase price of
$4,074
and recognized a gain of
$1,309
in Other income.
During the year ended
December 31, 2015
, the Company sold its ownership in
six
of these cost method investments for an aggregate purchase price of
$11,364
and recognized a gain of
$5,440
in Other income.
In addition, the Company’s partner agencies may receive noncontrolling equity interests from start-up companies in lieu of fees. During the year ended December 31, 2014, the Company liquidated
two
such equity interest positions in exchange for an aggregate purchase price equal to
$8,248
. The purchasers of these equity investments were current investors in such entities and two executive officers of our subsidiary partner agencies.
Goodwill and Indefinite Lived Intangibles
. In accordance with the FASB ASC topic, Goodwill and Other Intangible Assets, goodwill and indefinite life intangible assets (trademarks) acquired as a result of a business combination which are not subject to amortization are tested for impairment annually as of October 1st of each year, or more frequently if indicators of potential impairment exist. For goodwill, impairment is assessed at the reporting unit level.
For the annual impairment testing the Company has the option of assessing qualitative factors to determine whether it is more likely than not that the carrying amount of a reporting unit exceeds its fair value or performing the two-step goodwill impairment test. Qualitative factors considered in the assessment include industry and market considerations, the competitive environment, overall financial performance, changing cost factors such as labor costs, and other factors specific to each reporting unit such as change in management or key personnel.
If the Company elects to perform the qualitative assessment and concludes that it is more likely than not that the fair value of the reporting unit is more than its carrying amount, then goodwill is not considered impaired and the two-step goodwill impairment test is not necessary. For reporting units for which the qualitative assessment concludes that it is more likely than not that the fair value of the reporting unit is less than its carrying amount and for reporting units for which the qualitative assessment is not performed, the Company will perform the first step of the goodwill impairment test, which compares the fair value of the reporting unit to its carrying amount. If the fair value of the reporting unit exceeds the carrying amount of the net assets assigned to that reporting unit, goodwill is not considered impaired and additional analysis is not required. However, if the carrying amount of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the second step of the goodwill impairment test must be performed to determine the implied fair value of the reporting unit’s goodwill.
Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. The Company’s goodwill impairment test uses the income approach to estimate a reporting unit’s fair value. The income approach is based on a discounted cash flow (“DCF”) method, which requires the exercise of significant judgment, including judgment about the amount and timing of expected future cash flows, assumed terminal value and appropriate discount rates.
The DCF estimates incorporate expected cash flows that represent a spectrum of the amount and timing of possible cash flows of each reporting unit from a market participant perspective. The expected cash flows are developed as part of the Company’s routine long-range planning process using projections of revenue and expenses and related cash flows based on assumed long-
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
2. Significant Accounting Policies – (continued)
term growth rates and demand trends and appropriate discount rates based on a reporting unit’s WACC as determined by considering the observable WACC of comparable companies and factors specific to the reporting unit (for example, size). The terminal value is estimated using a constant growth method which requires an assumption about the expected long-term growth rate. The estimates are based on historical data and experience, industry projections, economic conditions, and the Company’s expectations.
The assumptions used for the long-term growth rate and WACC in the annual goodwill impairment tests are as follows:
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|
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|
October 1,
|
|
2016
|
|
2015
|
Long-term growth rate
|
3%
|
|
3%
|
WACC
|
10.39% - 13.45%
|
|
8.92% - 11.95%
|
The Company’s reporting units vary in size with respect to revenue and operating profits. These differences drive variations in fair value of the reporting units. In addition, these differences as well as differences in book value, including goodwill, cause variations in the amount by which fair value exceeds the carrying amount of the reporting units. The reporting unit goodwill balances vary by reporting unit primarily because it relates specifically to the Partner Firm’s goodwill which was determined at the date of acquisition.
Under the second step of the goodwill impairment test, the Company utilizes both a market approach and income approach to estimate the implied fair value of a reporting unit’s goodwill. For the market approach, the Company utilizes both the guideline public company method and the precedent transaction method. For the income approach, the Company utilizes a DCF method. The Company weights the market and income approaches to arrive at an implied fair value of goodwill. If the Company determines that the carrying amount of a reporting unit’s goodwill exceeds its implied fair value, an impairment loss equal to the difference is recorded.
For the 2015 annual goodwill impairment testing, the Company had
13
reporting units. All of the reporting units were subject to the two-step test. As the fair value of all reporting units were in excess of their respective carrying amounts, there was no impairment of goodwill. The range of the excess of the fair value over the carrying amount was from
7%
to over
100%
. The Company performed a sensitivity analysis which included a 1% increase to the WACC. Based on the results of that analysis, one reporting unit, which was comprised of the marketing experiential businesses, was at risk of failing.
The Company noted no significant events or conditions during the first and second quarter of 2016 that would have affected the conclusions from the annual assessment. During the third quarter of 2016, the Company changed its operating segments, as a result of the management structure change as discussed in Note
14
, which resulted in a corresponding change to the Company’s reporting units. Each Partner Firm now represents an operating segment as well as a reporting unit for goodwill impairment testing. As a result of the changes in the reporting units, the Company performed further analysis to assess whether the results of the 2015 testing would have been different had it been performed at the Partner Firm level. This change in operating segments, coupled with a decline in operating performance required the Company to perform interim goodwill testing on
one
of its experiential reporting units. Additionally, a triggering event occurred during the third quarter of 2016 that required the Company to perform interim goodwill testing on
one
non-material reporting unit. These two reporting units failed the first step of the goodwill impairment testing, and the second step of the goodwill impairment testing resulted in a partial impairment of goodwill of
$27,893
and
$1,738
relating to the experiential reporting unit and non-material reporting unit, respectively. See Note 8 for further information.
For the 2016 annual goodwill impairment test, the Company had
31
reporting units, all of which were subject to the two-step test.
For the 2016 annual goodwill impairment test, the carrying amount of
one
of the Company’s strategic communications reporting unit exceeded its fair value and the second step of the goodwill impairment test was performed, resulting in a partial impairment of goodwill of
$18,893
. The fair value for all other reporting units were in excess of their respective carrying amounts and as a result there was no additional impairment of goodwill. The range of the excess of the fair value over the carrying amount was from
5%
to over
100%
. The Company performed a sensitivity analysis which included a 1% increase to the WACC. Based on the results of that analysis, the non-material reporting unit for which a partial impairment of goodwill was recorded during the third quarter of 2016 would be at risk of failing; however, there were no events or circumstances that would more likely than not reduce the fair value of such reporting unit below its respective carrying value between the interim and annual goodwill impairment testing performed.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
2. Significant Accounting Policies – (continued)
The Company believes the estimates and assumptions used in the calculations are reasonable. However, if there was an adverse change in the facts and circumstances, then an impairment charge may be necessary in the future. The Company will monitor its reporting units to determine if there is an indicator of potential impairment. Should the fair value of any of the Company’s reporting units fall below its carrying amount because of reduced operating performance, market declines, changes in the discount rate, or other conditions, charges for impairment may be necessary. Subsequent to the annual impairment test at October 1,
2016
, there were no events or circumstances that triggered the need for an interim impairment test. See Note 8 for further information.
Definite Lived Intangible Assets
. In accordance with the FASB ASC, acquired intangibles are subject to amortization over their useful lives. The method of amortization selected reflects the pattern in which the economic benefits of the specific intangible asset is consumed or otherwise used up. If that pattern cannot be reliably determined, a straight-line amortization method is used over the estimated useful life. Intangible assets that are subject to amortization are reviewed for potential impairment at least annually or whenever events or circumstances indicate that carrying amounts may not be recoverable. See also Note 8.
Business
Combinations.
Business combinations
are accounted for using the acquisition method and accordingly, the assets acquired (including identified intangible assets), the liabilities assumed and any noncontrolling interest in the acquired business are recorded at their acquisition date fair values. The Company’s acquisition model typically provides for an initial payment at closing and for future additional contingent purchase price obligations. Contingent purchase price obligations are recorded as deferred acquisition consideration on the balance sheet at the acquisition date fair value and are remeasured at each reporting period. Changes in such estimated values are recorded in the results of operations. For the years ended December 31,
2016
,
2015
and
2014
,
$7,972
,
$36,344
and
$16,467
, respectively, related to changes in estimated value was recorded as operating expenses. For further information, see Note 4 and Note 13. For the years ended December 31,
2016
,
2015
, and
2014
,
$2,640
,
$2,912
and
$6,133
, respectively, of acquisition related costs were charged to operations.
For each acquisition, the Company undertakes a detailed review to identify other intangible assets and a valuation is performed for all such identified assets. The Company uses several market participant measurements to determine estimated value. This approach includes consideration of similar and recent transactions, as well as utilizing discounted expected cash flow methodologies. Like most service businesses, a substantial portion of the intangible asset value that the Company acquires is the specialized know-how of the workforce, which is treated as part of goodwill and is not required to be valued separately. The majority of the value of the identifiable intangible assets acquired is derived from customer relationships, including the related customer contracts, as well as trade names. In executing the Company’s overall acquisition strategy, one of the primary drivers in identifying and executing a specific transaction is the existence of, or the ability to, expand the existing client relationships. The expected benefits of the Company’s acquisitions are typically shared across multiple agencies and regions.
Redeemable Noncontrolling Interests
. Many of the Company’s acquisitions include contractual arrangements where the noncontrolling shareholders have an option to purchase, or may require the Company to purchase, such noncontrolling shareholders’ incremental ownership interests under certain circumstances and the Company has similar call options under the same contractual terms. The amount of consideration under these contractual arrangements is not a fixed amount, but rather is dependent upon various valuation formulas as described in Note 16. In the event that an incremental purchase may be required of the Company, the amounts are recorded as redeemable noncontrolling interests in mezzanine equity on the balance sheet at their acquisition date fair value and adjusted for changes to their estimated redemption value through additional paid-in capital (but not less than their initial redemption value), except for foreign currency translation adjustments. These adjustments will not impact the calculation of earnings (loss) per share if the redemption values are less than the estimated fair values. For the three years ended December 31,
2016
,
2015
, and
2014
, there was
no
impact on the Company's earnings (loss) per share calculation.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
2. Significant Accounting Policies – (continued)
The following table presents changes in redeemable noncontrolling interests:
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|
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|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Beginning Balance as of January 1,
|
$
|
69,471
|
|
|
$
|
194,951
|
|
|
$
|
148,534
|
|
Redemptions
|
(1,708
|
)
|
|
(155,042
|
)
|
|
(4,820
|
)
|
Granted
(1)
|
2,274
|
|
|
7,703
|
|
|
13,327
|
|
Changes in redemption value
|
(9,604
|
)
|
|
22,809
|
|
|
38,850
|
|
Currency translation adjustments
|
(253
|
)
|
|
(950
|
)
|
|
(940
|
)
|
Ending Balance as of December 31,
|
$
|
60,180
|
|
|
$
|
69,471
|
|
|
$
|
194,951
|
|
|
|
(1)
|
Grants in 2015 consisted of transfers from noncontrolling interests related to step-up transactions and new acquisitions.
|
Subsidiary and Equity Investment Stock Transactions.
Transactions involving the purchase, sale or issuance of stock of a subsidiary where control is maintained are recorded as a reduction in the redeemable noncontrolling interests or noncontrolling interests, as applicable. Any difference between the purchase price and noncontrolling interest is recorded to additional paid-in capital. In circumstances where the purchase of shares of an equity investment results in obtaining control, the existing carrying value of the investment is remeasured to the acquisition date fair value and any gain or loss is recognized in results of operations.
Variable Interest Entity
. Effective March 28, 2012, the Company invested in Doner Partners LLC (“Doner”). The Company acquired a
30%
voting interest and convertible preferred interests that allow the Company to increase ordinary voting ownership to
70%
at the Company’s option. The Company has determined that (i) this entity is a variable interest entity and (ii) the Company is the primary beneficiary because it receives a disproportionate share of profits and losses as compared to its ownership percentage. As such, Doner is consolidated for all periods subsequent to the date of investment.
Doner is a full service integrated creative agency that is included as part of the Company’s portfolio in the Global Integrated Agencies reportable segment. The Company’s Credit Agreement (see Note 11) is guaranteed and secured by all of Doner’s assets.
Total assets and total liabilities of Doner included in the Company’s consolidated balance sheet at December 31,
2016
and
2015
, were
$102,456
and
$57,622
, and
$122,558
and
$86,047
, respectively.
Guarantees
. Guarantees issued or modified by the Company to third parties after January 1, 2003 are generally recognized, at the inception or modification of the guarantee, as a liability for the obligations it has undertaken in issuing the guarantee, including its ongoing obligation to stand ready to perform over the term of the guarantee in the event that the specified triggering events or conditions occur. The initial measurement of that liability is the fair value of the guarantee. The recognition of the liability is required even if it is not probable that payments will be required under the guarantee. The Company’s liability associated with guarantees is not significant. (See Note 16.)
Revenue Recognition
. The Company’s revenue recognition policies are established in accordance with the Revenue Recognition topics of the FASB ASC, and accordingly, revenue is recognized when all of the following criteria are satisfied: (i) persuasive evidence of an arrangement exists; (ii) the selling price is fixed or determinable; (iii) services have been performed or upon delivery of the products when ownership and risk of loss has transferred to the client; and (iv) collection of the resulting receivable is reasonably assured.
The Company follows the Multiple-Element Arrangement topic of the FASB ASC, which 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.
The Company follows the Principal Agent Consideration topic of the FASB ASC which addresses (i) whether revenue should be recorded at the gross amount billed because it has earned revenue from the sale of goods or services, or recorded at the net amount retained because it has earned a fee or commission, and (ii) that reimbursements received for out-of-pocket expenses incurred should be characterized in the income statement as revenue. Accordingly, the Company has included such reimbursed expenses in revenue.
The Company earns revenue from agency arrangements in the form of retainer fees or commissions; from short-term project arrangements in the form of fixed fees or per diem fees for services; and from incentives or bonuses.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
2. Significant Accounting Policies – (continued)
Non-refundable retainer fees are generally recognized on a straight-line basis over the term of the specific customer arrangement. Commission revenue is earned and recognized upon the placement of advertisements in various media when the Company has no further performance obligations. Fixed fees for services are recognized upon completion of the earnings process and acceptance by the client. Per diem fees are recognized upon the performance of the Company’s services. In addition, for a limited number of certain service transactions, which require delivery of a number of service acts, the Company uses the proportional performance model, which generally results in revenue being recognized based on the straight-line method.
Fees billed to clients in excess of fees recognized as revenue are classified as Advanced Billings on the Company’s balance sheet.
A small portion of the Company’s contractual arrangements with customers includes performance incentive provisions, which allow the Company to earn additional revenue 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 assured, or when the Company’s clients determine performance against qualitative goals has been achieved. In all circumstances, revenue is only recognized when collection is reasonably assured. The Company records revenue net of sales and other taxes due to be collected and remitted to governmental authorities.
Cost of Services Sold
. Cost of services sold do not include depreciation charges for fixed assets.
Interest Expense
. Interest expense primarily consists of the cost of borrowing on the Company’s previously outstanding
6.75%
Senior Notes due
2020
(the “6.75% Notes”); the Company’s
6.50%
senior unsecured notes due
2024
(the “6.50% Notes”); and the Company’s
$325 million
senior secured revolving credit agreement due
2021
(the “Credit Agreement”). The Company uses the effective interest method to amortize the deferred financing costs as well as the original issue premium on the previously outstanding
6.75%
Notes. The Company also uses the straight-line method to amortize the deferred financing costs on the Credit Agreement. For the years ended December 31, 2016, 2015, and 2014, interest expense included
$255
,
$2,543
, and
$2,186
, respectively, relating to present value adjustments for fixed deferred acquisition consideration payments.
Deferred Taxes
. The Company uses the asset and liability method of accounting for income taxes. Deferred income taxes are provided for the temporary difference between the financial reporting basis and tax basis of the Company’s assets and liabilities. Deferred tax benefits result principally from certain tax carryover benefits and from recording certain expenses in the financial statements that are not currently deductible for tax purposes and from differences between the tax and book basis of assets and liabilities recorded in connection with acquisitions. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax liabilities result principally from deductions recorded for tax purposes in excess of that recorded in the financial statements or income for financial statement purposes in excess of the amount for tax purposes. The effect of changes in tax rates is recognized in the period the rate change is enacted.
During the second quarter of 2017, the Company identified and recorded out-of-period adjustments related to the misapplication of ASC 740 and ASC 850-740 accounting policies as they applied to the calculation of deferred tax liabilities. The Company has revised prior period information presented on this Amendment No. 1 on Form 10-K/A as follows: (i) for the years ended December 31, 2016, 2015, and 2014, income tax expense has been reduced by
$2,108
,
$1,903
, and
$2,646
, respectively, (ii) basic and diluted net loss attributable to MDC Partners Inc. common shareholders for the years ended December 31, 2016, 2015, and 2014 increased by
$0.04
per share,
$0.04
per share, and
$0.06
per share, respectively, (iii) deferred tax liabilities as of December 31, 2016 and 2015 have been increased by
$6,916
and
$9,016
, respectively, and (iv) accumulated deficit as of December 31, 2013 has been increased by
$13,568
. The correction had no impact on the Company’s cash flows.
Stock-Based Compensation
. Under the fair value method, compensation cost is measured at fair value at the date of grant and is expensed over the service period, in this case the award’s vesting period. The Company recognized forfeitures as they occur. When awards are exercised, share capital is credited by the sum of the consideration paid together with the related portion previously credited to additional paid-in capital when compensation costs were charged against income or acquisition consideration.
The Company uses its historical volatility derived over the expected term of the award to determine the volatility factor used in determining the fair value of the award.
Stock-based awards that are settled in cash, or may be settled in cash at the option of employees, are recorded as liabilities. The measurement of the liability and compensation cost for these awards is based on the fair value of the award, and is recorded in operating income over the service period, in this case the awards vesting period. Changes in the Company’s payment obligation
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
2. Significant Accounting Policies – (continued)
prior to the settlement date of a stock-based award are recorded as compensation cost in operating income in the period of the change. The final payment amount for such awards is established on the date of the exercise of the award by the employee.
Stock-based awards that are settled in cash or equity at the option of the Company are recorded at fair value on the date of grant and recorded as additional paid-in capital. The fair value measurement of the compensation cost for these awards is based on using the Black-Scholes option pricing-model and is recorded in operating income over the service period, in this case the award's vesting period.
For the years ended December 31,
2016
,
2015
, and
2014
, the Company issued
no
stock options or similar awards.
It is the Company’s policy for issuing shares upon the exercise of an equity incentive award to verify the amount of shares to be issued, as well as the amount of proceeds to be collected (if any) and to deliver new shares to the exercising party.
The Company has adopted the straight-line attribution method for determining the compensation cost to be recorded during each accounting period. The Company commences recording compensation expense related to awards that are based on performance conditions under the straight-line attribution method when it is probable that such performance conditions will be met. The fair value at the grant date for performance based awards granted in
2016
,
2015
, and
2014
was
$140
,
$1,741
, and
$3,026
, respectively.
The Company treats benefits paid by shareholders or equity members to employees as a stock-based compensation charge with a corresponding credit to additional paid-in capital.
From time to time, certain acquisitions and step-up transactions include an element of compensation related payments. The Company accounts for those payments as stock-based compensation.
Pension Costs
. Several of the Company’s U.S. and Canadian subsidiaries offer employees access to certain defined contribution pension programs. Under the defined contribution plans, these subsidiaries, in some cases, make annual contributions to participants’ accounts which are subject to vesting. The Company’s contribution expense pursuant to these plans was
$10,026
,
$6,731
and
$7,503
for the years ended December 31,
2016
,
2015
, and
2014
, respectively. The Company also has a defined benefit plan. See Note 18.
Income (Loss) per Common Share
. Basic income (loss) per share is based upon the weighted average number of common shares outstanding during each period. “Share capital to be issued” as reflected in the Shareholders’ Equity on the balance sheet are also included if there is no circumstance under which those shares would not be issued. Diluted income (loss) per share is based on the above, in addition, if dilutive, common share equivalents, which include outstanding options, stock appreciation rights, and unvested restricted stock units.
Foreign Currency Translation
. The Company’s financial statements were prepared in accordance with the requirements of the Foreign Currency Translation topic of the FASB ASC. The functional currency of the Company is the Canadian dollar and it has decided to use U.S. dollars as its reporting currency for consolidated reporting purposes. Generally, the Company’s subsidiaries use their local currency as their functional currency. Accordingly, the currency impacts of the translation of the balance sheets of the Company’s non-U.S. dollar based subsidiaries to U.S. dollar statements are included as cumulative translation adjustments in accumulated other comprehensive income. Translation of intercompany debt, which is not intended to be repaid, is included in cumulative translation adjustments. Cumulative translation adjustments are not included in net earnings unless they are actually realized through a sale or upon complete, or substantially complete, liquidation of the Company’s net investment in the foreign operation. Translation of current intercompany balances are included in net earnings. The balance sheets of non-U.S. dollar based subsidiaries are translated at the period end rate. The income statements of non-U.S. dollar based subsidiaries are translated at average exchange rates for the period.
Gains and losses arising from the Company’s foreign currency transactions are reflected in net earnings. Unrealized gains or losses arising on the translation of certain intercompany foreign currency transactions that are of a long-term nature (that is settlement is not planned or anticipated in the future) are included as cumulative translation adjustments in accumulated other comprehensive income.
Derivative Financial Instruments
. The Company follows the Accounting for Derivative Instruments and Hedging Activities topic of the FASB ASC, which establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts and debt instruments) be recorded on the balance sheet as either an asset or liability measured at its fair value. The accounting for the change in fair value of the derivative depends on whether the instrument qualifies for and has been designated as a hedging relationship and on the type of hedging relationship. There are three types of hedging relationships: (i) a cash flow hedge, (ii) a fair value hedge, and (iii) a hedge of foreign currency exposure of a
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
2. Significant Accounting Policies – (continued)
net investment in a foreign operation. The designation is based upon the exposure being hedged. Derivatives that are not hedges, or become ineffective hedges, must be adjusted to fair value through earnings.
3. Loss per Common Share
The following table sets forth the computation of basic and diluted loss per common share from continuing operations for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Numerator
|
|
|
|
|
|
|
|
|
Numerator for diluted loss per common share – income (loss) from continuing operations
|
$
|
(40,621
|
)
|
|
$
|
(20,119
|
)
|
|
$
|
6,739
|
|
Net income attributable to the noncontrolling interests
|
(5,218
|
)
|
|
(9,054
|
)
|
|
(6,890
|
)
|
Loss attributable to MDC Partners Inc. common shareholders from continuing operations
|
(45,839
|
)
|
|
(29,173
|
)
|
|
(151
|
)
|
Effect of dilutive securities
|
—
|
|
|
—
|
|
|
—
|
|
Numerator for diluted loss per common share – loss attributable to MDC Partners Inc. common shareholders from continuing operations
|
$
|
(45,839
|
)
|
|
$
|
(29,173
|
)
|
|
$
|
(151
|
)
|
Denominator
|
|
|
|
|
|
|
|
|
Denominator for basic loss per common share – weighted average common shares
|
51,345,807
|
|
|
49,875,282
|
|
|
49,545,350
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Dilutive potential common shares
|
—
|
|
|
—
|
|
|
—
|
|
Denominator for diluted loss per common share – adjusted weighted shares and assumed conversions
|
51,345,807
|
|
|
49,875,282
|
|
|
49,545,350
|
|
Basic and Diluted loss per common share from continuing operations
|
$
|
(0.89
|
)
|
|
$
|
(0.58
|
)
|
|
$
|
—
|
|
At December 31,
2016
,
2015
, and
2014
, warrants, options and other rights to purchase
1,391,456
,
947,465
and
1,114,681
shares of common stock, respectively, were not included in the computation of diluted loss per common share because doing so would have had an antidilutive effect. Additionally, the
523,321
of restricted stock and restricted stock unit awards which are contingent upon the Company meeting an undefined cumulative three year earnings target and continued employment are also excluded from the computation of diluted loss per common share.
4. Acquisitions
Valuations of acquired companies are based on a number of factors, including specialized know-how, reputation, competitive position and service offerings. The Company’s acquisition strategy has been focused on acquiring the expertise of an assembled workforce in order to continue to build upon the core capabilities of its various strategic business platforms to better serve the Company’s clients. The Company’s strategy includes acquiring ownership stakes in well-managed businesses with strong reputations in the industry. The Company’s model of “Perpetual Partnership” often involves acquiring a majority interest rather than a
100%
interest and leaving management owners with a significant financial interest in the performance of the acquired entity for a minimum period of time, typically not less than five years. The Company’s acquisition model in this scenario typically provides for (i) an initial payment at the time of closing, (ii) additional contingent purchase price obligations based on the future performance of the acquired entity, and (iii) an option by the Company to purchase (and in some instances a requirement to so purchase) the remaining interest of the acquired entity under a predetermined formula.
Contingent purchase price obligations.
The Company’s contingent purchase price obligations are generally payable within a five year period following the acquisition date, and are based on (i) the achievement of specific thresholds of future earnings, and (ii) in certain cases, the growth rate of those earnings. Contingent purchase price obligations are recorded as deferred acquisition consideration on the balance sheet at the acquisition date fair value and adjusted at each reporting period through operating income or net interest expense, depending on the nature of the arrangement. See Note 13 for additional information on deferred acquisition consideration.
Options to purchase
. When acquiring less than
100%
ownership, the Company may enter into agreements that give the Company an option to purchase, or require the Company to purchase, the incremental ownership interests under certain
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
4. Acquisitions – (continued)
circumstances. Where the option to purchase the incremental ownership is within the Company’s control, the amounts are recorded as noncontrolling interests in the equity section of the Company’s balance sheet. Where the incremental purchase may be required of the Company, the amounts are recorded as redeemable noncontrolling interests in mezzanine equity at their acquisition date estimated redemption value and adjusted at each reporting period for changes to their estimated redemption value through additional paid-in capital (but not less than their initial redemption value), except for foreign currency translation adjustments. On occasion, the Company may initiate a renegotiation to acquire an incremental ownership interest and the amount of consideration paid may differ materially from the balance sheet amounts. See Note 16 for additional information on redeemable noncontrolling interests.
Employment conditions.
From time to time, specifically when the projected success of an acquisition is deemed to be dependent on retention of specific personnel, such acquisition may include deferred payments that are contingent upon employment terms as well as financial performance. The Company accounts for those payments through operating income as stock-based compensation over the required retention period. For the years ended December 31, 2016, 2015 and 2014, stock-based compensation included
$10,341
,
$9,359
, and
$7,802
, respectively, of expense relating to those payments.
Distributions to noncontrolling shareholders.
If noncontrolling shareholders have the right to receive distributions based on the profitability of an acquired entity, the amount is recorded as income attributable to noncontrolling interests. However, there are circumstances when the Company acquires a majority interest and the selling shareholders waive their right to receive distributions with respect to their retained interest for a period of time, typically not less than five years. Under this model, the right to receive such distributions typically begins concurrently with the purchase option period and, therefore, if such option is exercised at the first available date the Company may not record any noncontrolling interest over the entire period from the initial acquisition date through the acquisition date of the remaining interests.
Included in the Company’s consolidated statement of operations for the year ended
December 31, 2016
was revenue of
$39,569
, and net loss of
$3,815
, related to
2016
acquisitions. The net loss was attributable to an increase in the deferred acquisition payment liability driven by the decrease in the future market performance of the Company’s stock price and the amortization of the intangibles identified in the allocation of the purchase price consideration.
2016 Acquisitions
Effective July 1, 2016, the Company acquired
100%
of the equity interests of Forsman & Bodenfors AB (“F&B”), an advertising agency based in Sweden, for an approximate purchase price range of
$35,000
to
$55,000
. The estimated aggregate purchase price at acquisition date of
$49,837
, which is subject to adjustments, consisted of a closing payment of
1,900,000
MDC Class A subordinate voting shares with an acquisition date fair value of
$34,219
, plus additional deferred acquisition payments with an estimated present value at acquisition date of
$15,618
. The amount of additional payments will be calculated based on the financial results of the acquired business for 2015 and 2016 as well as the value of the Company’s shares from July 1, 2016 up to and including the close of business on November 2, 2016. At
December 31, 2016
, the estimated present value of the additional deferred acquisition payments was
$18,857
. The additional deferred acquisition payments are payable in 2017 at the Company’s option through the payment of cash or the issuance of additional Class A subordinate voting shares. In the event the Company elects to settle the additional deferred payments through the issuance of Class A subordinate voting shares, such settlement amount will be subject to adjustment based on the value of the Company’s shares determined at the close of business on the final trading day of the seller’s applicable 90 day trading window.
An allocation of excess purchase price consideration of this acquisition to the fair value of the net assets acquired resulted in identifiable intangibles of
$36,698
, consisting primarily of customer lists, trade names and covenants not to compete, and goodwill of
$24,778
, including the value of the assembled workforce. The identified assets have a weighted average useful life of approximately
10.8
years and will be amortized in a manner represented by the pattern in which the economic benefits of such assets are expected to be realized. In addition, the Company has recorded
$2,275
as the present value of redeemable noncontrolling interests and
$5,514
as the present value of noncontrolling interests both relating to the noncontrolling interest of F&B's subsidiaries.
None
of the intangibles and goodwill are tax deductible and the Company recorded a deferred tax liability of
$8,074
related to the intangibles. F&B's results are included in the Global Integrated Agencies reportable segment.
The actual adjustments that the Company will ultimately make in finalizing the allocation of purchase price to fair value of the net assets acquired will depend on a number of factors.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
4. Acquisitions – (continued)
The following unaudited pro forma results of operations of the Company for the years ended
December 31, 2016
and
2015
assume that the acquisition of F&B occurred on January 1, 2015. These unaudited pro forma results are not necessarily indicative of either the actual results of operations that would have been achieved had the acquisition of F&B taken place on January 1, 2015, or are they necessarily indicative of future results of operations.
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
Revenues
|
$
|
1,426,770
|
|
|
$
|
1,398,756
|
|
Net loss attributable to MDC Partners Inc.
|
$
|
(39,756
|
)
|
|
$
|
(34,398
|
)
|
Loss per common share:
|
|
|
|
Basic and Diluted
|
|
|
|
Net loss attributable to MDC Partners Inc. common shareholders
|
$
|
(0.76
|
)
|
|
$
|
(0.66
|
)
|
Effective April 1, 2016, the Company acquired the remaining
40%
ownership interests of Luntz Global Partners LLC. In 2016, the Company also entered into various non-material transactions in connection with other majority-owned entities. As a result of the foregoing, the Company made total cash closing payments of
$1,581
, eliminated the contingent deferred acquisition payments of
$4,052
and fixed deferred acquisition payments of
$467
related to certain initial acquisition of the equity interests, reduced other assets by
$428
, reduced redeemable noncontrolling interests by
$1,005
, reduced noncontrolling interests by
$19,354
, increased accruals and other liabilities by
$94
, and increased additional paid-in capital by
$22,775
. Additional deferred payments with an estimated present value at acquisition date of
$2,393
that are contingent upon service conditions have been excluded from deferred acquisition consideration and will be expensed as stock-based compensation over the required service period.
2015 Acquisitions
Effective May 1, 2015, the Company acquired a majority of the equity interests of Y Media Labs LLC, such that following the transaction, the Company’s effective ownership was
60%
. Effective October 31, 2015, the Company acquired substantially
100%
of the assets of Unique Influence, LLC (and certain other affiliated entities). The aggregate purchase price of these acquisitions had an estimated present value at acquisition date of
$55,279
and consisted of total closing cash payments of
$23,000
and additional deferred acquisition payments that will be based on the future financial results of the underlying businesses from
2015
to
2020
with final payments due in
2022
. These additional deferred payments have an estimated present value at acquisition date of
$32,279
. An allocation of excess purchase price consideration of these acquisitions to the fair value of the net assets acquired resulted in identifiable intangibles of
$16,721
, consisting primarily of customer lists, trade names and covenants not to compete, and goodwill of
$43,654
, including the value of the assembled workforce. The identified assets have a weighted average useful life of approximately
6.3
years and will be amortized in a manner represented by the pattern in which the economic benefits of such assets are expected to be realized. In addition, the Company has recorded
$1,999
as the present value of redeemable noncontrolling interests. The Company expects intangibles and goodwill of
$9,720
to be tax deductible.
In 2015, the Company acquired incremental ownership interests of Sloane & Company LLC, Anomaly Partners LLC, Allison & Partners LLC, Relevent Partners LLC, Kenna Communications LP and 72andSunny Partners LLC. In addition, the Company also entered into various non-material transactions in connection with other majority owned entities.
The aggregate purchase price for these 2015 acquisitions of incremental ownership interests had an estimated present value at transaction date of
$200,822
and consisted of total closing cash payments of
$37,467
and additional deferred acquisition payments that are both fixed and based on the future financial results of the underlying businesses from 2015 to 2021 with final payments due in 2022. These additional deferred payments had an estimated present value at acquisition date of
$163,355
. The Company reduced redeemable noncontrolling interests by
$149,335
and noncontrolling interests by
$8,708
. The difference between the purchase price and the noncontrolling interests of
$42,780
was recorded in additional paid-in capital.
2014 Acquisitions
During 2014, the Company entered into several acquisitions and various non-material transactions with certain majority owned entities. Effective January 1, 2014, the Company acquired
60%
of the equity interests of Luntz Global Partners LLC. Effective February 14, 2014, the Company acquired
65%
of the equity interests of Kingsdale Partners LP. On June 3, 2014, the Company acquired a
100%
equity interest in The House Worldwide Ltd. On July 31, 2014, Union Advertising Canada LP acquired
100%
of the issued and outstanding stock of Trapeze Media Limited (“Trapeze”). Effective August 1, 2014, the Company acquired
65%
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
4. Acquisitions – (continued)
of the equity interests of Hunter PR LLC. Effective August 18, 2014, the Company acquired a
75%
interest in Albion Brand Communication Limited. In addition, in June 2014 and August 2014, the Company (through a subsidiary) entered into other non-material acquisitions.
The aggregate purchase price of these acquisitions had an estimated present value at acquisition date of
$151,202
and consisted of total closing cash payments of
$67,236
, and additional deferred acquisition payments that are based on the financial results of the underlying businesses from 2014 to 2018 with final payments due in 2019. These additional deferred payments had an estimated present value at acquisition date of
$83,966
. An allocation of excess purchase price consideration of these acquisitions to the fair value of the net assets acquired resulted in identifiable intangibles of
$64,733
, consisting primarily of customer lists, a technology asset and covenants not to compete, and goodwill of
$146,806
, including the value of the assembled workforce. The identified assets will be amortized over a
five
to
six
year period in a manner represented by the pattern in which the economic benefits of such assets are expected to be realized. In addition, the Company has recorded
$50,552
as the present value of noncontrolling interests and
$13,327
as the present value of redeemable noncontrolling interests. The Company expects intangibles and goodwill of
$149,232
to be tax deductible. In addition the Company recorded other income of
$908
representing a gain on the previously held
18%
interest in Trapeze.
Noncontrolling Interests
Changes in the Company’s ownership interests in our less than
100%
owned subsidiaries during the three years ended December 31, were as follows:
Net Loss Attributable to MDC Partners Inc. and
Transfers (to) from the Noncontrolling Interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Net loss attributable to MDC Partners Inc.
|
$
|
(45,839
|
)
|
|
$
|
(35,454
|
)
|
|
$
|
(21,411
|
)
|
Transfers (to) from the noncontrolling interests
|
|
|
|
|
|
|
|
|
Increase (decrease) in MDC Partners Inc. paid-in capital for purchase of equity interests in excess of noncontrolling interests and redeemable noncontrolling interests
|
22,776
|
|
|
(42,780
|
)
|
|
(8,992
|
)
|
Net transfers (to) from noncontrolling interests
|
$
|
22,776
|
|
|
$
|
(42,780
|
)
|
|
$
|
(8,992
|
)
|
Change from net loss attributable to MDC Partners Inc. and transfers (to) from noncontrolling interests
|
$
|
(23,063
|
)
|
|
$
|
(78,234
|
)
|
|
$
|
(30,403
|
)
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
5. Fixed Assets
The following is a summary of the Company’s fixed assets as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Cost
|
|
Accumulated Depreciation
|
|
Net Book Value
|
|
Cost
|
|
Accumulated Depreciation
|
|
Net Book Value
|
Computers, furniture and fixtures
|
$
|
91,909
|
|
|
$
|
(64,030
|
)
|
|
$
|
27,879
|
|
|
$
|
87,213
|
|
|
$
|
(62,901
|
)
|
|
$
|
24,312
|
|
Leasehold improvements
|
91,601
|
|
|
(41,103
|
)
|
|
50,498
|
|
|
72,898
|
|
|
(33,653
|
)
|
|
39,245
|
|
|
$
|
183,510
|
|
|
$
|
(105,133
|
)
|
|
$
|
78,377
|
|
|
$
|
160,111
|
|
|
$
|
(96,554
|
)
|
|
$
|
63,557
|
|
At December 31, 2016 and 2015, included in fixed assets are assets under capital lease obligations with a cost of
$1,967
and
$1,959
, respectively, and accumulated depreciation of
$1,316
and
$1,378
, respectively. Depreciation expense for the years ended December 31,
2016
,
2015
, and
2014
was
$22,293
,
$18,871
and
$16,462
, respectively.
6. Accruals and Other Liabilities
At December 31,
2016
and
2015
, accruals and other liabilities included accrued media of
$201,872
and
$187,540
, respectively; and amounts due to noncontrolling interest holders for their share of profits, which will be distributed within the next twelve months, of
$4,154
and
$5,473
, respectively.
Changes in noncontrolling interest amounts included in accrued and other liabilities for the three years ended December 31, were as follows:
|
|
|
|
|
|
Noncontrolling Interests
|
Balance at December 31, 2013
|
$
|
5,210
|
|
Income attributable to noncontrolling interests
|
6,890
|
|
Distributions made
|
(6,523
|
)
|
Other
(1)
|
437
|
|
Balance at December 31, 2014
|
$
|
6,014
|
|
Income attributable to noncontrolling interests
|
9,054
|
|
Distributions made
|
(9,503
|
)
|
Other
(1)
|
(92
|
)
|
Balance at December 31, 2015
|
$
|
5,473
|
|
Income attributable to noncontrolling interests
|
5,218
|
|
Distributions made
|
(7,772
|
)
|
Other
(1)
|
1,235
|
|
Balance at December 31, 2016
|
$
|
4,154
|
|
|
|
(1)
|
Other consists primarily of business acquisitions, sale of a business, step-up transactions, and cumulative translation adjustments.
|
7. Financial Instruments
Financial assets, which include cash and cash equivalents and accounts receivable, have carrying values which approximate fair value due to the short-term nature of these assets. Financial liabilities with carrying values approximating fair value due to short-term maturities include accounts payable. Deferred acquisition consideration is recorded at fair value. The revolving credit agreement is a variable rate debt, the carrying value of which approximates fair value. The Company’s notes are a fixed rate debt instrument recorded at the carrying value. See Note 13 for the fair value. The fair value of financial commitments, guarantees and letters of credit, are based on the stated value of the underlying instruments. Guarantees have been issued in conjunction with the disposition of businesses in 2001 and 2003 and letters of credit have been issued in the normal course of business.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except Share and per Share Amounts)
8. Goodwill and Intangible Assets
As of December 31, the gross and net amounts of acquired intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
Global Integrated Agencies
|
|
Domestic Creative Agencies
|
|
Specialist Communications
|
|
Media Services
|
|
All Other
|
|
Total
|
Balance at December 31, 2014
|
$
|
370,094
|
|
|
$
|
37,117
|
|
|
$
|
98,497
|
|
|
$
|
136,033
|
|
|
$
|
209,632
|
|
|
$
|
851,373
|
|
Acquired goodwill
|
—
|
|
|
—
|
|
|
—
|
|
|
6,253
|
|
|
37,401
|
|
|
43,654
|
|
Acquisition purchase price adjustments
|
(998
|
)
|
|
133
|
|
|
(879
|
)
|
|
—
|
|
|
(684
|
)
|
|
(2,428
|
)
|
Foreign currency translation
|
(4,937
|
)
|
|
(579
|
)
|
|
(40
|
)
|
|
—
|
|
|
(16,742
|
)
|
|
(22,298
|
)
|
Balance at December 31, 2015
|
$
|
364,159
|
|
|
$
|
36,671
|
|
|
$
|
97,578
|
|
|
$
|
142,286
|
|
|
$
|
229,607
|
|
|
$
|
870,301
|
|
Acquired goodwill
|
24,778
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
24,778
|
|
Disposition
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(764
|
)
|
|
(764
|
)
|
Impairment loss recognized
|
—
|
|
|
—
|
|
|
(18,893
|
)
|
|
—
|
|
|
(29,631
|
)
|
|
(48,524
|
)
|
Transfer of goodwill between segments
(1)
|
(34,400
|
)
|
|
—
|
|
|
—
|
|
|
34,400
|
|
|
—
|
|
|
—
|
|
Foreign currency translation
|
(3,821
|
)
|
|
91
|
|
|
6
|
|
|
—
|
|
|
2,692
|
|
|
(1,032
|
)
|
Balance at December 31, 2016
|
$
|
350,716
|
|
|
$
|
36,762
|
|
|
$
|
78,691
|
|
|
$
|
176,686
|
|
|
$
|
201,904
|
|
|
$
|
844,759
|
|
(1)
During the year ended December 31, 2016, the Company transferred a component of one reporting unit to another reporting unit. As a result, based on the relative fair value, we transferred $34.4 million of goodwill from the Global Integrated Agencies reportable segment to Media Services, which represented the portion of the goodwill associated with the component. An interim impairment analysis was performed both before and after the transfer, noting no impairment indicators were present.
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
Intangible Assets
|
|
2016
|
|
2015
|
Trademarks (indefinite life)
|
|
$
|
17,780
|
|
|
$
|
17,780
|
|
Customer relationships – gross
|
|
$
|
121,408
|
|
|
$
|
135,919
|
|
Less accumulated amortization
|
|
(80,432
|
)
|
|
(97,604
|
)
|
Customer relationships – net
|
|
$
|
40,976
|
|
|
$
|
38,315
|
|
Other intangibles – gross
|
|
$
|
43,656
|
|
|
$
|
33,638
|
|
Less accumulated amortization
|
|
(17,341
|
)
|
|
(17,351
|
)
|
Other intangibles – net
|
|
$
|
26,315
|
|
|
$
|
16,287
|
|
Total intangible assets
|
|
$
|
182,844
|
|
|
$
|
187,337
|
|
Less accumulated amortization
|
|
(97,773
|
)
|
|
(114,955
|
)
|
Total intangible assets – net
|
|
$
|
85,071
|
|
|
$
|
72,382
|
|
The results of the annual goodwill impairment test performed as of October 1, 2015, indicated fair values in excess of carrying amounts for each of the Company’s reporting units. The Company noted no significant events or conditions during the first and second quarter of 2016 that would have affected the conclusions from the annual assessment.
During the third quarter of 2016, the Company changed its operating segments, as a result of the management structure change as discussed in Note 14, which resulted in a corresponding change to the Company’s reporting units. The Company performed interim goodwill testing on
one
of its experiential reporting units and
one
non-material reporting unit, resulting in a partial impairment of goodwill of
$27,893
and
$1,738
relating to the experiential reporting unit and non-material reporting unit, respectively. Additionally, as a result of the annual goodwill impairment test performed as of October 1, 2016, the Company recognized a partial impairment of goodwill of
$18,893
relating to
one
of the Company’s strategic communications reporting units. See Note 2 for further information.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except Share and per Share Amounts)
The total accumulated goodwill impairment charges are
$95,407
through December 31,
2016
. During the year for 2016, the Company wrote off goodwill of
$764
related to the sale of its ownership interests in Bryan Mills to the noncontrolling shareholders. This write off is included in other income (expense).
The weighted average amortization periods for customer relationships are
six years
and other intangible assets are
eight years
. In total, the weighted average amortization period is
seven years
. Amortization expense related to amortizable intangible assets for the years ended December 31,
2016
,
2015
, and
2014
was
$21,726
,
$30,024
, and
$29,749
, respectively.
The estimated amortization expense for the five succeeding years is as follows:
|
|
|
|
|
|
Year
|
|
Amortization
|
2017
|
|
$
|
16,677
|
|
2018
|
|
$
|
11,525
|
|
2019
|
|
$
|
7,346
|
|
2020
|
|
$
|
4,999
|
|
2021
|
|
$
|
3,411
|
|
9. Income Taxes
The components of the Company’s income (loss) from continuing operations before income taxes and equity in earnings of non-consolidated affiliates by taxing jurisdiction for the years ended December 31, were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Income (Loss):
|
|
|
|
|
|
|
|
|
U.S.
|
$
|
(16,661
|
)
|
|
$
|
23,180
|
|
|
$
|
46,728
|
|
Non-U.S.
|
(33,055
|
)
|
|
(40,596
|
)
|
|
(31,619
|
)
|
|
$
|
(49,716
|
)
|
|
$
|
(17,416
|
)
|
|
$
|
15,109
|
|
The provision (benefit) for income taxes by taxing jurisdiction for the years ended December 31, were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Current tax provision
|
|
|
|
|
|
|
|
|
U.S. federal
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
U.S. state and local
|
(1,520
|
)
|
|
1,375
|
|
|
907
|
|
Non-U.S.
|
2,154
|
|
|
2,465
|
|
|
552
|
|
|
634
|
|
|
3,840
|
|
|
1,459
|
|
Deferred tax provision (benefit):
|
|
|
|
|
|
|
|
|
U.S. federal
|
5,785
|
|
|
5,359
|
|
|
11,173
|
|
U.S. state and local
|
(3,550
|
)
|
|
2,877
|
|
|
1,554
|
|
Non-U.S.
|
(12,273
|
)
|
|
(8,315
|
)
|
|
(4,410
|
)
|
|
(10,038
|
)
|
|
(79
|
)
|
|
8,317
|
|
Income tax provision (benefit)
|
$
|
(9,404
|
)
|
|
$
|
3,761
|
|
|
$
|
9,776
|
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
9. Income Taxes – (continued)
A reconciliation of income tax expense (benefit) using the statutory Canadian federal and provincial income tax rate compared with actual income tax expense for the years ended December 31, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Income (loss) from continuing operations before income taxes, equity in non-consolidated affiliates and noncontrolling interest
|
$
|
(49,716
|
)
|
|
$
|
(17,416
|
)
|
|
$
|
15,109
|
|
Statutory income tax rate
|
26.5
|
%
|
|
26.5
|
%
|
|
26.5
|
%
|
Tax expense (benefit) using statutory income tax rate
|
(13,175
|
)
|
|
(4,615
|
)
|
|
4,004
|
|
State and foreign taxes
|
(94
|
)
|
|
3,524
|
|
|
1,459
|
|
Non-deductible stock-based compensation
|
1,123
|
|
|
665
|
|
|
1,982
|
|
Other non-deductible expense
|
1,848
|
|
|
163
|
|
|
3,075
|
|
Change to valuation allowance on items affecting taxable income
|
6,605
|
|
|
3,565
|
|
|
(643
|
)
|
Effect of the difference in federal and statutory rates
|
(4,579
|
)
|
|
1,906
|
|
|
2,222
|
|
Noncontrolling interests
|
(1,287
|
)
|
|
(2,399
|
)
|
|
(1,826
|
)
|
Other, net
|
155
|
|
|
952
|
|
|
(497
|
)
|
Income tax expense (benefit)
|
$
|
(9,404
|
)
|
|
$
|
3,761
|
|
|
$
|
9,776
|
|
Effective income tax rate
|
18.9
|
%
|
|
(21.6
|
)%
|
|
64.7
|
%
|
The
2016
effective income tax rate was lower than the statutory rate due primarily to non-deductible stock-based compensation of
$1,848
, an increase in the valuation allowance of
$6,605
, and the effect of the difference in the U.S. and foreign federal rates and the Canadian statutory rate of
$4,579
. All of this resulted in a lower tax benefit.
The
2015
effective income tax rate was higher than the statutory rate due primarily to non-deductible stock-based compensation of
$665
and an increase in the valuation allowance of
$3,565
, and the effect of the difference in the U.S. and foreign federal rates and the Canadian statutory rate of
$1,906
. All of this resulted in a tax expense verses a tax benefit.
The
2014
effective income tax rate was higher than the statutory rate due primarily to non-deductible stock-based compensation of
$1,982
, an decrease in the valuation allowance of
$643
, and the effect of the difference in the U.S. and foreign federal rates and the Canadian statutory rate of
$2,222
.
Income taxes receivable were
$1,506
and
$615
at December 31,
2016
and
2015
, respectively, and were included in other current assets on the balance sheet. Income taxes payable were
$4,547
and
$7,019
at December 31,
2016
and
2015
, respectively, and were included in accrued and other liabilities on the balance sheet. It is the Company’s policy to classify interest and penalties arising in connection with the under payment of income taxes as a component of income tax expense.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
9. Income Taxes – (continued)
The tax effects of significant temporary differences representing deferred tax assets and liabilities at December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
|
|
Capital assets and other
|
$
|
6,758
|
|
|
$
|
7,334
|
|
Net operating loss carry forwards
|
44,305
|
|
|
39,454
|
|
Interest deductions
|
12,146
|
|
|
12,266
|
|
Refinancing charge
|
7,413
|
|
|
144
|
|
Goodwill and intangibles
|
179,029
|
|
|
178,835
|
|
Stock compensation
|
2,581
|
|
|
3,033
|
|
Pension plan
|
5,095
|
|
|
3,770
|
|
Unrealized foreign exchange
|
15,237
|
|
|
15,548
|
|
Capital loss carry forwards
|
10,957
|
|
|
10,630
|
|
Accounting reserves
|
7,138
|
|
|
6,701
|
|
Gross deferred tax asset
|
290,659
|
|
|
277,715
|
|
Less: valuation allowance
|
(248,866
|
)
|
|
(247,967
|
)
|
Net deferred tax assets
|
41,793
|
|
|
29,748
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Deferred finance charges
|
(333
|
)
|
|
(323
|
)
|
Capital assets and other
|
(388
|
)
|
|
(797
|
)
|
Goodwill amortization
|
(109,638
|
)
|
|
(100,743
|
)
|
Total deferred tax liabilities
|
(110,359
|
)
|
|
(101,863
|
)
|
Net deferred tax asset (liability)
|
$
|
(68,566
|
)
|
|
$
|
(72,115
|
)
|
Disclosed as:
|
|
|
|
|
|
Deferred tax assets
|
$
|
41,793
|
|
|
$
|
29,748
|
|
Deferred tax liabilities
|
(110,359
|
)
|
|
(101,863
|
)
|
|
$
|
(68,566
|
)
|
|
$
|
(72,115
|
)
|
The Company has U.S. federal net operating loss carry forwards of
$21,339
and non-U.S. net operating loss carry forwards of
$70,517
. These carry forwards expire in years
2016 through 2031
. The Company also has total indefinite loss carry forwards of
$118,413
. These indefinite loss carry forwards consist of
$35,723
relating to the U.S. and
$82,691
which are related to capital losses from the Canadian operations. In addition, the Company has net operating loss carry forwards for various state taxing jurisdictions of approximately
$188,367
.
The Company records a valuation allowance against deferred income tax assets when management believes it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Management considers factors such as the reversal of deferred income tax liabilities, projected future taxable income, the character of the income tax asset, tax planning strategies, changes in tax laws and other factors. A change to these factors could impact the estimated valuation allowance and income tax expense.
The valuation allowance has been recorded to reduce our deferred tax asset to an amount that is more likely than not to be realized, and is based upon the uncertainty of the realization of certain U.S., non-U.S. and state deferred tax assets. The increase in the Company’s valuation allowance charged to the statement of operations for each of the years ended December 31,
2016
,
2015
and was
$6,605
, and
$3,565
, respectively. The Company's valuation allowance decreased
$643
in 2014. In addition, a benefit of
$1,112
has been recorded in accumulated other comprehensive loss relating to the defined pension plan for the years ended December 31, 2014. There was
no
benefit or expense related to the defined pension plan recorded in 2015 and 2016.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
9. Income Taxes – (continued)
Deferred taxes are not provided for temporary differences representing earnings of subsidiaries that are intended to be permanently reinvested. The potential deferred tax liability associated with these undistributed earnings is not material.
During the second quarter of 2017, the Company identified and recorded out-of-period adjustments related to the misapplication of ASC 740 and ASC 850-740 accounting policies as they applied to the calculation of deferred tax liabilities. See Note 2 for details.
As of December 31,
2016
and
2015
, the Company recorded a liability for unrecognized tax benefits as well as applicable penalties and interest in the amount of
$1,543
and
$4,200
. As of
December 31, 2016
and
2015
, accrued penalties and interest included in unrecognized tax benefits were approximately
$78
and
$595
. The Company identified an uncertainty relating to the future tax deductibility of certain intercompany fees. To the extent that such future benefit will be established, the resolution of this position will have no effect with respect to the financial statements. If these unrecognized tax benefits were to be recognized, it would affect the Company’s effective tax rate.
|
|
|
|
|
Changes in the Company’s reserve is as follows:
|
|
Balance at December 31, 2013
|
$
|
3,073
|
|
Charges to income tax expense
|
—
|
|
Balance at December 31, 2014
|
3,073
|
|
Charges to income tax expense
|
960
|
|
Settlement of uncertainty
|
(428
|
)
|
Balance at December 31, 2015
|
3,605
|
|
Charges to income tax expense
|
(1,261
|
)
|
Settlement of uncertainty
|
(879
|
)
|
Balance at December 31, 2016
|
$
|
1,465
|
|
The Company does not expect its unrecognized tax benefits to change significantly over the next
12 months
.
The Company has completed U.S. federal tax audits through 2013 and has completed a non-U.S. tax audit through 2009.
10. Discontinued Operations
In the fourth quarter of 2014, the Company made the decision to strategically sell the net assets of Accent. Effective May 31, 2015, the Company completed the sale of Accent for an aggregate selling price of
$17,102
, net of transaction expenses. There were no discontinued operations for the year ended December 31, 2016.
Included in discontinued operations in the Company’s consolidated statements of operations for the years ended December 31, 2015 and 2014 were the following:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2015
|
|
2014
|
Revenue
|
|
$
|
27,025
|
|
|
$
|
70,041
|
|
Operating loss
|
|
(322
|
)
|
|
(4,704
|
)
|
Other expense
|
|
(752
|
)
|
|
(458
|
)
|
Loss on disposal
|
|
(5,207
|
)
|
|
(16,098
|
)
|
Net loss from discontinued operations
|
|
$
|
(6,281
|
)
|
|
$
|
(21,260
|
)
|
For the year ended December 31, 2014, the loss on disposal included a goodwill write off of
$15,564
.
At December 31, 2016 and 2015, the Company had
no
assets held for sale.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
11. Debt
As of December 31, the Company’s indebtedness was comprised as follows:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Revolving credit facility
|
$
|
54,425
|
|
|
$
|
—
|
|
6.50% Notes due 2024
|
900,000
|
|
|
—
|
|
6.75% Notes due 2020
|
—
|
|
|
735,000
|
|
Original issue premium
|
—
|
|
|
5,838
|
|
Debt issuance costs
|
(18,420
|
)
|
|
(12,625
|
)
|
|
936,005
|
|
|
728,213
|
|
Obligations under capital leases
|
431
|
|
|
670
|
|
|
936,436
|
|
|
728,883
|
|
Less:
|
|
|
|
|
Current portion
|
228
|
|
|
470
|
|
|
$
|
936,208
|
|
|
$
|
728,413
|
|
Interest expense related to long-term debt for the years ended December 31,
2016
,
2015
, and
2014
was
$56,468
,
$53,090
and
$50,832
, respectively. For the year ended December 31,
2016
, the Company recorded a charge for the loss on redemption of the
6.75%
Notes of
$33,298
, which included accrued interest, related premiums, fees and expenses, write offs of unamortized original issue premium, and unamortized debt issuance costs. For the years ended December 31,
2016
,
2015
, and
2014
, interest expense included income of
$312
,
$1,178
,
$975
, related to the amortization of the original issue premium. For the years ended December 31,
2016
,
2015
, and
2014
, interest expense included
$255
,
$2,543
and
$2,186
, respectively, of present value adjustments for fixed deferred acquisition payments.
The amortization of deferred finance costs included in interest expense were
$3,022
,
$3,448
and
$3,222
for the years ended December 31,
2016
,
2015
, and
2014
, respectively.
6.50% Senior Notes
On March 23, 2016, MDC entered into an indenture (the “Indenture”) among MDC, its existing and future restricted subsidiaries that guarantee, or are co-borrowers under or grant liens to secure, the Credit Agreement, as guarantors (the “Guarantors”) and The Bank of New York Mellon, as trustee, relating to the issuance by MDC of
$900,000
aggregate principal amount of the
6.50%
Notes. The
6.50%
Notes were sold in a private placement in reliance on exceptions from registration under the Securities Act of 1933. The
6.50%
Notes bear interest at a rate of
6.50%
per annum, accruing from March 23, 2016. Interest is payable semiannually in arrears on May 1 and November 1 of each year, beginning November 1, 2016. The
6.50%
Notes mature on May 1, 2024, unless earlier redeemed or repurchased. The Company received net proceeds from the offering of the
6.50%
Notes equal to approximately
$880,000
. The Company used the net proceeds to redeem all of its existing
6.75%
Notes, together with accrued interest, related premiums, fees and expenses and recorded a charge for the loss on redemption of such notes of
$33,298
, including write offs of unamortized original issue premium and debt issuance costs. Remaining proceeds were used for general corporate purposes, including funding of deferred acquisition consideration.
The
6.50%
Notes are guaranteed on a senior unsecured basis by all of MDC’s existing and future restricted subsidiaries that guarantee, or are co-borrowers under or grant liens to secure, the Credit Agreement. The
6.50%
Notes are unsecured and unsubordinated obligations of MDC and rank (i) equally in right of payment with all of MDC’s or any Guarantor’s existing and future senior indebtedness, (ii) senior in right of payment to MDC’s or any Guarantor’s existing and future subordinated indebtedness, (iii) effectively subordinated to all of MDC’s or any Guarantor’s existing and future secured indebtedness to the extent of the collateral securing such indebtedness, including the Credit Agreement, and (iv) structurally subordinated to all existing and future liabilities of MDC’s subsidiaries that are not Guarantors.
MDC may, at its option, redeem the
6.50%
Notes in whole at any time or in part from time to time, on and after
May 1, 2019
(i) at a redemption price of
104.875%
of the principal amount thereof if redeemed during the twelve-month period beginning on
May 1, 2019
, (ii) at a redemption price of
103.250%
of the principal amount thereof if redeemed during the twelve-month period beginning on
May 1, 2020
, (iii) at a redemption price of
101.625%
of the principal amount thereof if redeemed during the twelve-
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
11. Debt – (continued)
month period beginning on
May 1, 2021
, and (iv) at a redemption price of
100%
of the principal amount thereof if redeemed on
May 1, 2022
and thereafter.
Prior to
May 1, 2019
, MDC may, at its option, redeem some or all of the
6.50%
Notes at a price equal to
100%
of the principal amount of the
6.50%
Notes plus a “make whole” premium and accrued and unpaid interest. MDC may also redeem, at its option, prior to
May 1, 2019
, up to
35%
of the
6.50%
Notes with the proceeds from one or more equity offerings at a redemption price of
106.50%
of the principal amount thereof.
If MDC experiences certain kinds of changes of control (as defined in the Indenture), holders of the
6.50%
Notes may require MDC to repurchase any
6.50%
Notes held by them at a price equal to
101%
of the principal amount of the
6.50%
Notes plus accrued and unpaid interest. In addition, if MDC sells assets under certain circumstances, it must apply the proceeds from such sale and offer to repurchase the
6.50%
Notes at a price equal to
100%
of the principal amount plus accrued and unpaid interest.
The Indenture includes covenants that, among other things, restrict MDC’s ability and the ability of its restricted subsidiaries (as defined in the Indenture) to incur or guarantee additional indebtedness; pay dividends on or redeem or repurchase the capital stock of MDC; make certain types of investments; create restrictions on the payment of dividends or other amounts from MDC’s restricted subsidiaries; sell assets; enter into transactions with affiliates; create liens; enter into sale and leaseback transactions; and consolidate or merge with or into, or sell substantially all of MDC’s assets to, another person. These covenants are subject to a number of important limitations and exceptions. The
6.50%
Notes are also subject to customary events of default, including a cross-payment default and cross-acceleration provision.
Redemption of 6.75% Senior Notes
On March 23, 2016, the Company redeemed the
6.75%
Notes in whole at a redemption price of
103.375%
of the principal amount thereof with the proceeds from the issuance of the
6.50%
Notes.
Credit Agreement
On March 20, 2013, MDC, Maxxcom Inc. (a subsidiary of MDC) and each of their subsidiaries party thereto entered into an amended and restated,
$225 million
senior secured revolving credit agreement due
2018
(the “Credit Agreement”) with Wells Fargo Capital Finance, LLC, as agent, and the lenders from time to time party thereto. Advances under the Credit Agreement are to be used for working capital and general corporate purposes, in each case pursuant to the terms of the Credit Agreement. Capitalized terms used in this section and not otherwise defined have the meanings set forth in the Credit Agreement.
Effective October 23, 2014, MDC and its subsidiaries entered into an amendment to its Credit Agreement. The amendment: (i) expanded the commitments under the facility by
$100 million
, from
$225 million
to
$325 million
; (ii) extended the date by an additional eighteen months to
September 30, 2019
; (iii) reduced the base borrowing interest rate by
25 basis points
(the applicable margin for borrowing is
1.00%
in the case of Base Rate Loans and
1.75%
in the case of LIBOR Rate Loans) ; and (iv) modified certain covenants to provide the Company with increased flexibility to fund its continued growth and other general corporate purposes.
Effective May 3, 2016, MDC and its subsidiaries entered into an additional amendment to its Credit Agreement. The amendment: (i) extends the date by an additional nineteen months to
May 3, 2021
; (ii) reduces the base borrowing interest rate by 25 basis points; (iii) provides the Company the ability to borrow in foreign currencies; and (iv) certain other modifications to provide additional flexibility in operating the Company’s business.
Advances under the Credit Agreement bear interest as follows: (a)(i) LIBOR Rate Loans bear interest at the LIBOR Rate and (ii) Base Rate Loans bear interest at the Base Rate, plus (b) an applicable margin. The initial applicable margin for borrowing is
1.00%
in the case of Base Rate Loans and
1.75%
in the case of LIBOR Rate Loans. In addition to paying interest on outstanding principal under the Credit Agreement, MDC is required to pay an unused revolver fee to lenders under the Credit Agreement in respect of unused commitments thereunder.
The Company is currently in compliance with all of the terms and conditions of its Credit Agreement, and management believes, based on its current financial projections, that the Company will be in compliance with the covenants over the next twelve months. At December 31,
2016
, there were
$54,425
of borrowings under the Credit Agreement.
At December 31,
2016
, the Company had issued
$4,360
of undrawn letters of credit.
At December 31,
2016
and
2015
, accounts payable included
$80,193
and
$73,558
, respectively, of outstanding checks.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
11. Debt – (continued)
Future Principal Repayments
Future principal repayments, including capital lease obligations, for the years ended December 31, and in aggregate, are as follows:
|
|
|
|
|
|
|
|
|
Period
|
|
Amount
|
2016
|
|
$
|
228
|
|
2017
|
|
91
|
|
2018
|
|
86
|
|
2019
|
|
22
|
|
2020
|
|
54,429
|
|
2021 and thereafter
|
|
900,000
|
|
|
|
$
|
954,856
|
|
Capital Leases
Future minimum capital lease payments for the years ended December 31 and in aggregate, are as follows:
|
|
|
|
|
|
Period
|
|
Amount
|
2016
|
|
$
|
248
|
|
2017
|
|
102
|
|
2018
|
|
93
|
|
2019
|
|
23
|
|
2020
|
|
5
|
|
2021 and thereafter
|
|
—
|
|
|
|
471
|
|
Less: imputed interest
|
|
(40
|
)
|
|
|
431
|
|
Less: current portion
|
|
(228
|
)
|
|
|
$
|
203
|
|
12. Share Capital
The authorized share capital of the Company is as follows:
(a) Authorized Share Capital
Class A Shares
An unlimited number of 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.
Class B Shares
An unlimited number, carrying
20
votes each, convertible at any time at the option of the holder into one Class A share for each Class B share.
Preferred A Shares
An unlimited number, non-voting, issuable in series.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
12. Share Capital – (continued)
(b) Employee Stock Incentive Plan
On May 26, 2005, the Company’s shareholders approved the Company’s 2005 Stock Incentive Plan (the “2005 Incentive Plan”). The 2005 Incentive Plan authorizes the issuance of awards to employees, officers, directors and consultants of the Company with respect to
3,000,000
shares of MDC Partners’ Class A Subordinate Voting Shares or any other security into which such shares shall be exchanged. On June 1, 2007 and on June 2, 2009, the Company’s shareholders approved a total additional authorized Class A Shares of
3,750,000
to be added to the 2005 Incentive Plan for a total of
6,750,000
authorized Class A Shares. In addition, the plan was amended to allow shares under this plan to be used to satisfy share obligations under the Stock Appreciation Rights Plan (the “SARS” Plan”). On May 30, 2008, the Company’s shareholders approved the 2008 Key Partner Incentive Plan, which provides for the issuance of
900,000
Class A Shares. On June 1, 2011, the Company’s shareholders approved the 2011 Stock Incentive Plan, which provides for the issuance of up to
3,000,000
Class A Shares. In June 2013, the Company's shareholders approved an amendment to the SARS Plan to permit the Company to issue shares authorized under the SARS Plan to satisfy the grant and vesting awards under the 2011 Stock Incentive Plan. On June 1, 2016, the Company's shareholders approved the 2016 Stock Incentive Plan, which provides for the issuance of up to
1,500,000
Class A shares.
The following table summarizes information about time based and financial performance-based restricted stock and restricted stock unit awards granted under the 2005 Incentive Plan, 2008 Key Partner Incentive Plan, 2011 Stock Incentive Plan and 2016 Stock Incentive Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Based Awards
|
|
Time Based Awards
|
|
Shares
|
|
Weighted Average Grant Date Fair
Value
|
|
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
Balance at December 31, 2013
|
462,666
|
|
|
$
|
9.79
|
|
|
913,788
|
|
|
$
|
12.54
|
|
Granted
|
120,578
|
|
|
25.09
|
|
|
293,705
|
|
|
21.99
|
|
Vested
|
(497,214
|
)
|
|
9.62
|
|
|
(264,478
|
)
|
|
10.88
|
|
Forfeited
|
—
|
|
|
—
|
|
|
(26,874
|
)
|
|
11.52
|
|
Balance at December 31, 2014
|
86,030
|
|
|
$
|
23.14
|
|
|
916,141
|
|
|
$
|
16.36
|
|
Granted
|
80,000
|
|
|
21.76
|
|
|
191,155
|
|
|
20.42
|
|
Vested
|
(68,067
|
)
|
|
25.21
|
|
|
(297,794
|
)
|
|
12.35
|
|
Forfeited
|
—
|
|
|
—
|
|
|
(35,000
|
)
|
|
21.69
|
|
Balance at December 31, 2015
|
97,963
|
|
|
$
|
19.61
|
|
|
774,502
|
|
|
$
|
18.71
|
|
Granted
|
10,000
|
|
|
14.00
|
|
|
392,500
|
|
|
12.53
|
|
Vested
|
(17,963
|
)
|
|
10.02
|
|
|
(380,367
|
)
|
|
16.02
|
|
Forfeited
|
—
|
|
|
—
|
|
|
(46,000
|
)
|
|
20.39
|
|
Balance at December 31, 2016
|
90,000
|
|
|
$
|
20.90
|
|
|
740,635
|
|
|
$
|
16.71
|
|
The total fair value of restricted stock and restricted stock unit awards, which vested during the years ended December 31,
2016
,
2015
and
2014
was
$6,272
,
$5,394
and
$7,659
, respectively. In connection with the vesting of these awards, the Company included in the taxable loss the amounts of
$5,429
,
$4,678
and
$11,874
in
2016
,
2015
and
2014
, respectively. At December 31,
2016
, the weighted average remaining contractual life for performance based awards was
1.87
years and for time based awards was
1.65
years. At December 31,
2016
, the fair value of all restricted stock and restricted stock unit awards was
$5,441
. The term of these awards is
three years
with vesting up to
three years
. At December 31,
2016
, the unrecognized compensation expense for these awards was
$7,105
and will be recognized through 2019. At December 31,
2016
, there were
1,934,861
awards available to grant under all equity plans.
In addition, the Company awarded restricted stock and restricted stock unit awards of which
523,321
awarded shares were outstanding as of December 31,
2016
. The vesting of these awards are contingent upon the Company meeting a cumulative three year earnings target and continued employment through the vesting date. Once the Company defines the earnings target, the grant date is established and the Company will record the compensation expense over the vesting period.
Prior to adoption of the 2005 Incentive Plan, the Company’s Prior 2003 Plan provided for grants of up to
2,836,179
options to employees, officers, directors and consultants of the Company. All the options granted were for a term of
five years
from the
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
12. Share Capital – (continued)
date of the grant and vest
20%
on the date of grant and a further
20%
on each anniversary date. In addition, the Company granted
802,440
options, on the privatization of Maxxcom, with a term of no more than
10 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.
Information related to share option transactions grant under all plans over the past three years is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Non Vested Options
|
|
Number Outstanding
|
|
Weighted Average
Price per
Share
|
|
Number Outstanding
|
|
Weighted Average
Price per
Share
|
|
|
Balance at December 31, 2013
|
112,500
|
|
|
$
|
6.03
|
|
|
112,500
|
|
|
$
|
6.03
|
|
|
—
|
|
Vested
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
Expired and cancelled
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
Balance at December 31, 2014
|
112,500
|
|
|
$
|
5.70
|
|
|
112,500
|
|
|
$
|
5.70
|
|
|
—
|
|
Vested
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
Exercised
|
37,500
|
|
|
4.72
|
|
|
|
|
|
|
|
|
—
|
|
Expired and cancelled
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
Balance at December 31, 2015
|
75,000
|
|
|
$
|
5.28
|
|
|
75,000
|
|
|
$
|
5.28
|
|
|
—
|
|
Vested
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
Exercised
|
37,500
|
|
|
5.97
|
|
|
|
|
|
|
|
|
—
|
|
Expired and cancelled
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
Balance at December 31, 2016
|
37,500
|
|
|
$
|
5.83
|
|
|
37,500
|
|
|
$
|
5.83
|
|
|
—
|
|
At December 31,
2016
, the intrinsic value of vested options and the intrinsic value of all options was
$27
. For options exercised during
2016
,
2015
and
2014
, the Company received cash proceeds of
nil
,
$224
and
nil
, respectively. The Company did not receive any windfall tax benefits. The intrinsic value of options exercised during
2016
,
2015
and
2014
was
$471
,
$471
and
nil
, respectively. At December 31,
2016
, the weighted average remaining contractual life of all outstanding options was
0.5
years and for all vested options was
0.5
years. At December 31,
2016
, the unrecognized compensation expense of all options was
nil
.
Share options outstanding as of December 31,
2016
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Exercise Price
|
|
Outstanding Number
|
|
Weighted Average Contractual
Life
|
|
Weighted Average
Price per
Share
|
|
Exercisable Number
|
|
Weighted Average
Price per
Share
|
|
Weighted Average Contractual
Life
|
$5.83
|
|
37,500
|
|
|
0.50
|
|
$
|
5.83
|
|
|
37,500
|
|
|
$
|
5.83
|
|
|
0.50
|
The Company has reserved a total of
2,753,496
Class A shares in order to meet its obligations under various conversion rights, warrants and employee share related plans. At December 31,
2016
there were
781,135
shares available for future option and similar grants.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
13. Fair Value Measurements
Authoritative guidance for fair value establishes a framework for measuring fair value. A fair value measurement assumes a transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.
In order to increase consistency and comparability in fair value measurements, the guidance establishes a hierarchy for observable and unobservable inputs used to measure fair value into three broad levels, which are described below:
|
|
•
|
Level 1 - Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
|
|
|
•
|
Level 2 - Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
|
|
|
•
|
Level 3 - Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
|
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.
On a nonrecurring basis, the Company uses fair value measures when analyzing asset impairment. Long-lived assets and certain identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined such indicators are present and the review indicates that the assets will not be fully recoverable, based on undiscounted estimated cash flows over the remaining amortization periods, their carrying values are reduced to estimated fair value. Measurements based on undiscounted cash flows are considered to be Level 3 inputs. During the fourth quarter of each year, the Company evaluates goodwill and indefinite-lived intangibles for impairment at the reporting unit level. For each acquisition, the Company performed a detailed review to identify intangible assets and a valuation is performed for all such identified assets. The Company used several market participant measurements to determine estimated value. This approach includes consideration of similar and recent transactions, as well as utilizing discounted expected cash flow methodologies. The amounts allocated to assets acquired and liabilities assumed in the acquisitions were determined using level three inputs. Fair value for property and equipment was based on other observable transactions for similar property and equipment. Accounts receivable represents the best estimate of balances that will ultimately be collected, which is based in part on allowance for doubtful accounts reserve criteria and an evaluation of the specific receivable balances.
Financial Liabilities Measured at Fair Value on a Recurring Basis
The following tables present certain information for our financial assets that is measured at fair value on a recurring basis at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 2016
|
|
Level 1 2015
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
6.50% Senior Notes due 2024
|
900,000
|
|
|
812,250
|
|
|
—
|
|
|
—
|
|
6.75% Senior Notes due 2020
|
—
|
|
|
—
|
|
|
740,838
|
|
|
765,319
|
|
Our long-term debt includes fixed rate debt. The fair value of this instrument is based on quoted market prices.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
13. Fair Value Measurements – (continued)
The following table presents changes in deferred acquisition consideration for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
|
|
2016
|
|
2015
|
Beginning balance of contingent payments
|
$
|
306,734
|
|
|
$
|
172,227
|
|
Payments
(1)
|
(105,169
|
)
|
|
(77,301
|
)
|
Additions
(2)
|
16,132
|
|
|
174,530
|
|
Redemption value adjustments
(3)
|
13,930
|
|
|
41,636
|
|
Other
(4)
|
(6,412
|
)
|
|
—
|
|
Foreign translation adjustment
|
(461
|
)
|
|
(4,358
|
)
|
Ending balance of contingent payments
|
$
|
224,754
|
|
|
$
|
306,734
|
|
|
|
(1)
|
For the year ended December 31, 2016, payments include
$10,458
of deferred acquisition consideration settled through the issuance of
691,559
MDC Class A subordinate voting shares in lieu of cash.
|
|
|
(2)
|
Additions are the initial estimated deferred acquisition payments of new acquisitions and step-up transactions completed within that fiscal period.
|
|
|
(3)
|
Redemption value adjustments are fair value changes from the Company’s initial estimates of deferred acquisition payments, including the accretion of present value and stock-based compensation charges relating to acquisition payments that are tied to continued employment.
|
|
|
(4)
|
Other is comprised of (i)
$2,360
transfered to shares to be issued related to
100,000
MDC Class A subordinate voting shares to be issued contingent on specific thresholds of future earnings that management expects to be attained; and, (ii)
$4,052
of contingent payments eliminated through the acquisition of incremental ownership interests. See Note 4.
|
In addition to the above amounts, there are fixed payments of
$4,810
and
$40,370
for total deferred acquisition consideration of
$229,564
and
$347,104
, which reconciles to the consolidated balance sheets at December 31,
2016
and
2015
, respectively.
The Company includes the payments of all deferred acquisition consideration in financing activities in the Company’s consolidated statement of cash flows, as the Company believes these payments to be seller-related financing activities, which is the predominant source of cash flows. The FASB recently issued new guidance regarding the classification of cash flows for contingent consideration that is effective January 1, 2018. See Note 17 for further information.
Level 3 payments relate to payments made for deferred acquisition consideration. Level 3 grants relate to contingent purchase price obligations related to acquisitions and are recorded on the balance sheet at the acquisition date fair value. The estimated liability is determined in accordance with various contractual valuation formulas that may be dependent on future events, such as the growth rate of the earnings of the relevant subsidiary during the contractual period and, in some cases, the currency exchange rate as of the date of payment. Level 3 redemption value adjustments relate to the remeasurement and change in these various contractual valuation formulas as well as adjustments of present value.
At December 31,
2016
and
2015
, the carrying amount of the Company’s financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximated fair value because of their short-term maturity. The Company does not disclose the fair value for equity method investments or investments held at cost as it is not practical to estimate fair value since there is no readily available market data.
Non-financial Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
On a nonrecurring basis, the Company uses fair value measures when analyzing asset impairment. Long-lived assets and certain identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined such indicators are present and the review indicates that the assets will not be fully recoverable, based on undiscounted estimated cash flows over the remaining amortization periods, their carrying values are reduced to estimated fair value. Measurements based on undiscounted cash flows are considered to be Level 3 inputs. During the fourth quarter of each year, the Company evaluates goodwill and indefinite-lived intangibles for impairment at the reporting unit level. For each acquisition, the Company performed a detailed review to identify intangible assets and a
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
13. Fair Value Measurements – (continued)
valuation is performed for all such identified assets. The Company used several market participant measurements to determine estimated value. This approach includes consideration of similar and recent transactions, as well as utilizing discounted expected cash flow methodologies. The amounts allocated to assets acquired and liabilities assumed in the acquisitions were determined using Level 3 inputs. Fair value for property and equipment was based on other observable transactions for similar property and equipment. Accounts receivable represents the best estimate of balances that will ultimately be collected, which is based in part on allowance for doubtful accounts reserve criteria and an evaluation of the specific receivable balances.
14
. Segment Information
The Company determines an operating segment if a component (i) engages in business activities from which it earns revenues and incurs expenses, (ii) has discrete financial information, and is (iii) regularly reviewed by the Chief Operating Decision Maker (“CODM”) to make decisions regarding resource allocation for the segment and assess its performance. During June 2016, the Company entered into a Separation and Release Agreement with its former Chief Operating Officer in connection with a limited restructuring of the Company’s corporate department. This change to the Company’s management structure was designed to provide the CODM greater visibility into the operating performance of individual Partner Firms and resulted in a corresponding change in the level at which the CODM reviews the operating results of such Partner Firms. As a result, in the third quarter of 2016, the Company concluded that each Partner Firm represents an operating segment. The Company then determined to aggregate its Partner Firms to report in one reportable segment along with an “All Other” category.
Based in part on feedback from the SEC, the Company performed a comprehensive review of its reportable segments to determine if aggregation of its operating segments is consistent with the principles detailed in ASC 280. Based on this review, it was determined that the Company misapplied ASC 280 in its identification of reportable segments following the change in the Company’s management structure. The Company incorrectly concluded that there was one reportable segment since the third quarter of 2016. This misapplication of the standard had no impact on the Company’s consolidated statements of operations, balance sheets, or cash flows. Based on the comprehensive review, the Company reassessed the aggregation of its operating segments, identified four new reportable segments and revised the composition of the “All Other” category. This determination was based upon a quantitative analysis of the expected and reported average long-term profitability for each Partner Firm, together with an assessment of the qualitative characteristics set forth in FASB ASC 280-10-50.
The
four
reportable segments that meet the appropriate aggregation criteria are as follows: “Global Integrated Agencies”; “Domestic Creative Agencies”; “Specialist Communications”; and “Media Services". In addition, the Company combines and discloses those Partner Firms that do not meet the aggregation criteria as “All Other”. The Company also reports corporate expenses, as further detailed below, as “Corporate”. All segments follow the same basis of presentation and accounting policies as those described in Note 1 and 2, respectively.
|
|
•
|
The
Global Integrated Agencies
reportable segment is comprised of the Company’s six global, integrated Partner Firms with broad marketing communication capabilities, including advertising, branding, digital, social media, design and production services, serving multinational clients around the world. Each Partner Firm within this segment represents an operating segment which includes 72andSunny, Anomaly, Crispin Porter + Bogusky, Doner, Forsman & Bodenfors, and kbs. These Partner Firms share similar characteristics related to (i) the nature of their services; (ii) the type of global clients and the methods used to provide services; and (iii) the extent to which they may be impacted by global economic and geopolitical risks. In addition, these Partner Firms compete with each other for new business and often have business move between them. The Company believes the expected average long-term profitability is similar among the Partner Firms aggregated in the Global Integrated Agencies segment.
|
|
|
•
|
The
Domestic Creative Agencies
reportable segment is comprised of four Partner Firms that are national advertising agencies leveraging creative capabilities at their core. Each Partner Firm within this segment represents an operating segment which includes Colle + McVoy, Laird+Partners, Mono Advertising and Union. These Partner Firms share similar characteristics related to (i) the nature of their creative advertising services; (ii) the type of domestic client accounts and the methods used to provide services; and (iii) the extent to which they may be impacted by domestic economic and policy factors within North America. In addition, these Partner Firms compete with each other for new business and often have business move between them. The Company believes the expected average long-term profitability is similar among the Partner Firms aggregated in the Domestic Creative Agencies segment.
|
|
|
•
|
The
Specialist Communications
reportable segment is comprised of seven Partner Firms that are each communications agencies with core service offerings in public relations and related communications services. Each Partner Firm within this segment represents an operating segment which includes Allison & Partners, Hunter PR, HL Group Partners, Kwittken,
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
14. Segment Information – (continued)
Luntz Global, Sloane & Company and Veritas. These Partner Firms share similar characteristics related to (i) the nature of their public relations and communication services, including content creation, social media and influencer marketing; (ii) the type of client accounts and the methods used to provide services; (iii) the extent to which they may be impacted by domestic economic and policy factors within North America; and (iv) the regulatory environment regarding public relations and social media. In addition, these Partner Firms compete with each other for new business and often have business move between them. The Company believes the expected average long-term profitability is similar among the Partner Firms aggregated in the Specialist Communications segment.
|
|
•
|
The
Media Services
reportable segment is comprised of a unique single operating segment known as MDC Media Partners. MDC Media Partners is comprised of the Company’s network of stand-alone agencies with media buying and planning as their core competency, including the integrated platform Assembly. The agencies within this single operating segment share a Chief Executive Officer and Chief Financial Officer, who have operational oversight of these agencies. These agencies provide other services, including influencer marketing, content, insights & analytics, out-of-home, paid search, social media, lead generation, programmatic, artificial intelligence, and corporate barter. MDC Media Partners operates primarily in North America.
|
|
|
•
|
All Other
consists of the Company’s remaining Partner Firms that provide a range of diverse marketing communication services, but generally do not have similar services offerings or financial characteristics as those aggregated in the reportable segments. Each Partner Firm within the All Other category represents an operating segment which includes 6Degrees, Bruce Mau Design, Concentric Partners, Civilian, Gale Partners, Hello Design, Kenna, Kingsdale, Northstar Research Partners, Redscout, Relevent, Source Marketing, Team, Vitro, Yamamoto and Y Media Labs. The nature of the specialist services provided by these Partner Firms varies among each other and from those Partner Firms aggregated into the reportable segments. This results in these Partner Firms having current and long-term performance expectations inconsistent with those Partner Firms aggregated in the reportable segments.
|
|
|
•
|
Corporate
consists of corporate office expenses incurred in connection with the strategic resources provided to the Partner Firms, as well as certain other centrally managed expenses that are not fully allocated to the Partner Firms. These office and general expenses include (i) salaries and related expenses for corporate office employees, including employees dedicated to supporting the Partner Firms, (ii) occupancy expenses relating to properties occupied by all corporate office employees, (iii) other office and general expenses including professional fees for the financial statement audits and other public company costs, and (iv) certain other professional fees managed by the corporate office. Additional expenses managed by the corporate office that are directly related to the Partner Firms are allocated to the appropriate reportable segment and the All Other category.
|
Prior year results have been recast to reflect the new segment reporting.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
14. Segment Information – (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Revenue:
|
|
|
|
|
|
Global Integrated Agencies
|
$
|
696,410
|
|
|
$
|
652,987
|
|
|
$
|
600,150
|
|
Domestic Creative Agencies
|
85,953
|
|
|
91,658
|
|
|
83,196
|
|
Specialist Communications
|
170,285
|
|
|
153,920
|
|
|
124,938
|
|
Media Services
|
131,498
|
|
|
132,419
|
|
|
120,852
|
|
All Other
|
301,639
|
|
|
295,272
|
|
|
294,376
|
|
Corporate
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
1,385,785
|
|
|
$
|
1,326,256
|
|
|
$
|
1,223,512
|
|
|
|
|
|
|
|
Segment operating income (loss):
|
|
|
|
|
|
Global Integrated Agencies
|
$
|
58,505
|
|
|
$
|
66,161
|
|
|
$
|
67,290
|
|
Domestic Creative Agencies
|
16,583
|
|
|
17,535
|
|
|
14,266
|
|
Specialist Communications
|
1,939
|
|
|
18,047
|
|
|
16,242
|
|
Media Services
|
6,154
|
|
|
20,116
|
|
|
29,706
|
|
All Other
|
9,368
|
|
|
15,423
|
|
|
28,322
|
|
Corporate
|
(44,118
|
)
|
|
(65,172
|
)
|
|
(68,077
|
)
|
Total
|
$
|
48,431
|
|
|
$
|
72,110
|
|
|
$
|
87,749
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
Other income, net
|
414
|
|
|
7,238
|
|
|
689
|
|
Foreign exchange gain (loss)
|
(213
|
)
|
|
(39,328
|
)
|
|
(18,482
|
)
|
Interest expense and finance charges, net
|
(98,348
|
)
|
|
(57,436
|
)
|
|
(54,847
|
)
|
Income (loss) continuing operations before income taxes and equity in earnings of non-consolidated affiliates
|
(49,716
|
)
|
|
(17,416
|
)
|
|
15,109
|
|
Income tax expense (benefit)
|
(9,404
|
)
|
|
3,761
|
|
|
9,776
|
|
Income (loss) from continuing operations before equity in earnings of non-consolidated affiliates
|
(40,312
|
)
|
|
(21,177
|
)
|
|
5,333
|
|
Equity in earnings (loss) of non-consolidated affiliates
|
(309
|
)
|
|
1,058
|
|
|
1,406
|
|
Income (loss) from continuing operations
|
(40,621
|
)
|
|
(20,119
|
)
|
|
6,739
|
|
Income (loss) from discontinued operations attributable to MDC Partners Inc., net of taxes
|
—
|
|
|
(6,281
|
)
|
|
(21,260
|
)
|
Net income (loss)
|
(40,621
|
)
|
|
(26,400
|
)
|
|
(14,521
|
)
|
Net income attributable to the noncontrolling interest
|
(5,218
|
)
|
|
(9,054
|
)
|
|
(6,890
|
)
|
Net income (loss) attributable to MDC Partners Inc.
|
$
|
(45,839
|
)
|
|
$
|
(35,454
|
)
|
|
$
|
(21,411
|
)
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
14. Segment Information – (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Depreciation and amortization:
|
|
|
|
|
|
Global Integrated Agencies
|
$
|
21,447
|
|
|
$
|
20,599
|
|
|
$
|
17,410
|
|
Domestic Creative Agencies
|
1,653
|
|
|
1,855
|
|
|
1,809
|
|
Specialist Communications
|
6,637
|
|
|
11,201
|
|
|
8,272
|
|
Media Services
|
5,718
|
|
|
4,660
|
|
|
6,113
|
|
All Other
|
9,406
|
|
|
12,134
|
|
|
11,783
|
|
Corporate
|
1,585
|
|
|
1,774
|
|
|
1,785
|
|
Total
|
$
|
46,446
|
|
|
$
|
52,223
|
|
|
$
|
47,172
|
|
|
|
|
|
|
|
Stock-based compensation:
|
|
|
|
|
|
Global Integrated Agencies
|
$
|
12,141
|
|
|
$
|
6,981
|
|
|
$
|
5,043
|
|
Domestic Creative Agencies
|
634
|
|
|
644
|
|
|
394
|
|
Specialist Communications
|
3,629
|
|
|
1,510
|
|
|
2,050
|
|
Media Services
|
301
|
|
|
471
|
|
|
918
|
|
All Other
|
1,773
|
|
|
5,450
|
|
|
3,628
|
|
Corporate
|
2,525
|
|
|
2,740
|
|
|
5,663
|
|
Total
|
$
|
21,003
|
|
|
$
|
17,796
|
|
|
$
|
17,696
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
Global Integrated Agencies
|
$
|
16,439
|
|
|
$
|
17,043
|
|
|
$
|
19,669
|
|
Domestic Creative Agencies
|
1,055
|
|
|
1,321
|
|
|
818
|
|
Specialist Communications
|
2,741
|
|
|
1,311
|
|
|
632
|
|
Media Services
|
5,110
|
|
|
825
|
|
|
475
|
|
All Other
|
4,054
|
|
|
2,704
|
|
|
3,485
|
|
Corporate
|
33
|
|
|
371
|
|
|
1,337
|
|
Total
|
$
|
29,432
|
|
|
$
|
23,575
|
|
|
$
|
26,416
|
|
A summary of the Company’s long-lived assets, comprised of fixed assets, goodwill and intangibles, net, as at December 31, is set forth in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Canada
|
|
Other
|
|
Total
|
Long-lived Assets
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
$
|
67,617
|
|
|
$
|
5,887
|
|
|
$
|
4,873
|
|
|
$
|
78,377
|
|
2015
|
$
|
52,305
|
|
|
$
|
6,817
|
|
|
$
|
4,435
|
|
|
$
|
63,557
|
|
Goodwill and Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
$
|
736,334
|
|
|
$
|
121,987
|
|
|
$
|
71,509
|
|
|
$
|
929,830
|
|
2015
|
$
|
798,746
|
|
|
$
|
122,821
|
|
|
$
|
21,116
|
|
|
$
|
942,683
|
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
14. Segment Information – (continued)
A summary of the Company’s revenue as at December 31 is set forth in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Canada
|
|
Other
|
|
Total
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
$
|
1,103,714
|
|
|
$
|
124,101
|
|
|
$
|
157,970
|
|
|
$
|
1,385,785
|
|
2015
|
$
|
1,085,051
|
|
|
$
|
129,039
|
|
|
$
|
112,166
|
|
|
$
|
1,326,256
|
|
2014
|
$
|
993,474
|
|
|
$
|
150,390
|
|
|
$
|
79,648
|
|
|
$
|
1,223,512
|
|
15. Related Party Transactions
Scott L. Kauffman is Chairman and Chief Executive Officer of the Company. His daughter, Sarah Kauffman, has been employed by Partner Firm kbs since July 2011, and currently acts as Director of Operations, Attention Partners. In
2016
and
2015
, her total compensation, including salary, bonus and other benefits, totaled approximately
$145
and
$125
, respectively. Her compensation is commensurate with that of her peers.
16. Commitments, Contingencies and Guarantees
Deferred Acquisition Consideration
. In addition to the consideration paid by the Company in respect of certain of its acquisitions at closing, additional consideration may be payable, or may be potentially payable, based on the achievement of certain threshold levels of earnings. See Note 2 and Note 4.
Options to Purchase
. Noncontrolling shareholders in certain subsidiaries have the right in certain circumstances to require the Company to acquire the remaining ownership interests held by them. The noncontrolling shareholders’ ability to exercise any such option right is subject to the satisfaction of certain conditions, including conditions requiring notice in advance of exercise and specific employment termination conditions. 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
2017
to
2023
. It is not determinable, at this time, if or when the owners of these rights will exercise all or a portion of these rights.
The amount payable by the Company in the event such rights are exercised is dependent on various valuation formulas and on future events, such as the average earnings of the relevant subsidiary through the date of exercise, the growth rate of the earnings of the relevant subsidiary during that period and, in some cases, the currency exchange rate at the date of payment.
Management estimates, assuming that the subsidiaries owned by the Company at
December 31, 2016
perform over the relevant future periods at their trailing twelve-month earnings levels, that these rights, if all exercised, could require the Company to pay an aggregate amount of approximately
$12,510
to the owners of such rights in future periods to acquire such ownership interests in the relevant subsidiaries. Of this amount, the Company is entitled, at its option, to fund approximately
$124
by the issuance of share capital.
In addition, the Company is obligated under similar put option rights to pay an aggregate amount of approximately
$43,085
only upon termination of such owner’s employment with the applicable subsidiary or death.
The amount the Company would be required to pay to the noncontrolling interest holders should the Company acquire the remaining ownership interests is
$4,585
less than the initial redemption value recorded in redeemable noncontrolling interests.
Included in redeemable noncontrolling interests at
December 31, 2016
was
$60,180
of these put options because they are not within the control of the Company. The ultimate amount payable relating to these transactions will vary because it is dependent on the future results of operations of the subject businesses and the timing of when these rights are exercised.
Natural Disasters
. Certain of the Company’s operations are located in regions of the United States which typically are subject to hurricanes. During the years ended December 31,
2016
,
2015
, and
2014
, these operations did not incur any material costs related to damages resulting from hurricanes.
Guarantees
. Generally, the Company has indemnified the purchasers of certain assets in the event that a third party asserts a claim against the purchaser that relates to a liability retained by the Company. These types of indemnification guarantees typically extend for a number of years. Historically, the Company has not made any significant indemnification payments under such agreements and no amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification guarantees. The Company continues to monitor the conditions that are subject to guarantees and indemnifications
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
16. Commitments, Contingencies and Guarantees – (continued)
to identify whether it is probable that a loss has occurred and would recognize any such losses under any guarantees or indemnifications in the period when those losses are probable and estimable.
Legal Proceedings
. The Company’s operating entities are involved in legal proceedings of various types. While any litigation contains an element of uncertainty, the Company has no reason to believe that the outcome of such proceedings or claims will have a material adverse effect on the financial condition or results of operations of the Company. In addition, the Company is involved in class action suits as described below.
MDC Partners remains committed to the highest standards of corporate governance and transparency in its reporting practices. In April 2015, the Company announced it was actively cooperating in connection with an SEC investigation of the Company. On January 18, 2017, the Company announced that it reached a final settlement agreement with the Philadelphia Regional Office of the SEC, and that the SEC entered an administrative Order concluding its investigation of the Company.
Under the Order, without admitting or denying liability, the Company agreed that it will not in the future violate Section 17(a)(2) of the Securities Act of 1933 and Sections 13(a), 13(b) and 14(a) of the Securities Exchange Act of 1934 and related rules requiring that periodic filings be accurate; that accurate books and records and a system of internal accounting controls be maintained; and that solicitations of proxies comply with the securities laws. In addition, the Company agreed to comply with all requirements under Regulation G relating to the disclosure and reconciliation of non-GAAP financial measures. Pursuant to the Order, and based upon the Company’s full cooperation with the investigation, the SEC imposed a civil penalty of
$1,500
on the Company to resolve all potential claims against the Company relating to these matters. In 2016, the Company recorded a charge of
$1,500
related to such penalty. There will be no restatement of any of the Company’s previously-filed financial statements.
On July 31, 2015, North Collier Fire Control and Rescue District Firefighter Pension Plan (“North Collier”) filed a putative class action suit in the Southern District of New York, naming as defendants MDC, CFO David Doft, former CEO Miles Nadal, and former CAO Mike Sabatino. On December 11, 2015, North Collier and co-lead plaintiff Plymouth County Retirement Association filed an amended complaint, adding two additional defendants, Mitchell Gendel and Michael Kirby, a former member of MDC’s Board of Directors. The plaintiff alleges in the amended complaint violations of § 10(b), Rule 10b-5, and § 20 of the Securities Exchange Act of 1934, based on allegedly materially false and misleading statements in the Company’s SEC filings and other public statements regarding executive compensation, goodwill accounting, and the Company’s internal controls. The Company filed a motion to dismiss the amended complaint on February 9, 2016, the lead plaintiffs filed an opposition to that motion on April 8, 2016, and the Company filed a reply brief on May 9, 2016. By order granted on September 30, 2016, the U.S. District Court presiding over the case granted the Company’s motion to dismiss the plaintiffs’ amended complaint in its entirety with prejudice. On November 2, 2016, the lead plaintiffs filed a notice to appeal the U.S. District Court's ruling to the U.S. Court of Appeals for the Second Circuit. On February 21, 2017, the lead plaintiffs voluntarily dismissed their appeal.
On August 7, 2015, Roberto Paniccia issued a Statement of Claim in the Ontario Superior Court of Justice in the City of Brantford, Ontario seeking to certify a class action suit naming the following as defendants: MDC, former CEO Miles S. Nadal, former CAO Michael C. Sabatino, CFO David Doft and BDO U.S.A. LLP. The Plaintiff alleges violations of section 138.1 of the Ontario Securities Act (and equivalent legislation in other Canadian provinces and territories) as well as common law misrepresentation based on allegedly materially false and misleading statements in the Company’s public statements, as well as omitting to disclose material facts with respect to the SEC investigation. The Company intends to continue to vigorously defend this suit. A case management judge has now been appointed but a date for an initial case conference has not yet been set.
One of the Company’s subsidiaries received a subpoena from the U.S. Department of Justice Antitrust Division concerning the Division’s ongoing investigation of production practices in the advertising industry. The Company and its subsidiary are fully cooperating with this confidential investigation.
Commitments
. At December 31,
2016
, the Company had
$4,360
of undrawn letters of credit. In addition, the Company has commitments to fund investments in an aggregate amount of
$738
.
Leases
. The Company and its subsidiaries lease certain facilities and equipment. For the years ended December 31,
2016
,
2015
, and
2014
, gross premises rental expense amounted to
$56,725
,
$47,583
, and
$42,657
, respectively, which was reduced by sublease income of
$3,027
,
$1,739
, and
$1,449
, respectively. Where leases contain escalation clauses or other concessions, the impact of such adjustments is recognized on a straight-line basis over the minimum lease period.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
16. Commitments, Contingencies and Guarantees – (continued)
Minimum rental commitments for the rental of office and production premises and equipment under non-cancellable leases net of sublease income, some of which provide for rental adjustments due to increased property taxes and operating costs, for the years ending December 31,
2017
and thereafter, are as follows:
|
|
|
|
|
|
Period
|
|
Amount
|
2017
|
|
$
|
57,294
|
|
2018
|
|
55,445
|
|
2019
|
|
51,858
|
|
2020
|
|
49,068
|
|
2021
|
|
43,697
|
|
2022 and thereafter
|
|
134,485
|
|
|
|
$
|
391,847
|
|
At December 31,
2016
, the total future cash to be received on sublease income is
$11,599
.
17. New Accounting Pronouncements
In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment, which eliminates step two from the two-step goodwill impairment test. Under the new guidance, an entity will perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value provided the loss recognized does not exceed the total amount of goodwill allocated to that reporting unit. This guidance is effective for annual or interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019. The Company does not expect the application of this guidance to have a significant impact on its consolidated financial position or results of operations.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows. This new guidance is intended to reduce diversity in practice regarding the classification of certain transactions in the statement of cash flows. This guidance is effective January 1, 2018 and requires a retrospective transition method. Early adoption is permitted. The Company currently classifies all cash outflows for contingent consideration as a financing activity. Upon adoption the Company is required to classify only the original estimated liability as a financing activity and any changes as an operating activity.
In February 2016, the FASB issued ASU 2016-02, which amends the ASC and creates Topic 842, Leases. Topic 842 will require lessees to recognize right-to-use assets and lease liabilities for those leases classified as operating leases under previous U.S. GAAP on the balance sheet. This guidance is effective for annual periods beginning after December 15, 2018 and early adoption is permitted. While not yet in a position to assess the full impact of the application of the new standard, the Company expects that the impact of recording the lease liabilities and the corresponding right-to-use assets will have a significant impact on its total assets and liabilities with a minimal impact on equity.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Liabilities
,
which will require equity investments, except equity method investments, to be measured at fair value and any changes in fair value will be recognized in results of operations. This guidance is effective for annual and interim periods beginning after December 15, 2017 and early application is not permitted. Additionally, this guidance provides for the recognition of the cumulative effect of retrospective application of the new standard in the period of initial application. The Company does not expect the application of this guidance to have a significant impact on its consolidated financial position or results of operations.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which will replace all existing revenue guidance under U.S GAAP. The core principle of ASU 2014-09 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration expected to be received in exchange for those goods or services. On July 9, 2015, the FASB approved a one year deferral of the effective date of ASU 2014-09 to all annual and interim periods beginning after December 15, 2017. ASU 2014-09 provides for one of two methods of transition: (i) retrospective application to each prior period presented; or (ii) recognition of the cumulative effect of retrospective application of the new standard as of the beginning of the period of initial application. The Company plans to apply ASU 2014-09 on the effective date of January 1, 2018. Presently, the Company is not yet in a position to conclude on the transition method it will choose. Based on the Company’s initial assessment, the impact of the application of the new standard will likely result in a change in the timing of our revenue recognition for performance incentives received from clients. Performance incentives are currently recognized in revenue when specific quantitative goals are achieved, or when the Company’s performance against qualitative goals is determined by the client. Under
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
17. New Accounting Pronouncements – (continued)
the new standard, the Company will be required to estimate the amount of the incentive that will be earned at the inception of the contract and recognize such incentive over the term of the contract. While performance incentives are not material to the Company’s revenue, this will result in an acceleration of revenue recognition for certain contract incentives compared to the current method. Additionally, in certain businesses, the Company records revenue as a principal and includes certain third-party-pass-through and out-of-pocket costs, which are billed to clients in connection with the services provided. In March 2016, the FASB issued further guidance on principal versus agent considerations. The Company is currently evaluating the impact of the principal versus agent guidance on its revenue and cost of services; however, such change is not expected to have a material effect on the Company’s results of operations.
18. Employee Benefit Plans
A subsidiary acquired in 2012 sponsors a defined benefit plan. The benefits under the defined benefit plans are based on each employee’s years of service and compensation. Effective March 1, 2006, the plan was frozen to all new employees. The Company’s policy is to contribute the minimum amounts required by the Employee Retirement Income Security Act of 1974 (ERISA), as amended. The assets of the plans are invested in an investment trust fund and consist of investments in money market funds, bonds and common stock, mutual funds, preferred stock, and partnership interests.
Net periodic pension cost consists of the following components for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Pension
Benefits
|
|
2016
|
|
2015
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost on benefit obligation
|
1,855
|
|
|
1,864
|
|
Expected return on plan assets
|
(1,863
|
)
|
|
(2,069
|
)
|
Curtailment and settlements
|
929
|
|
|
—
|
|
Amortization of prior service cost
|
—
|
|
|
—
|
|
Amortization of actuarial (gains) losses
|
137
|
|
|
103
|
|
Net periodic benefit cost (benefit)
|
$
|
1,058
|
|
|
$
|
(102
|
)
|
ASC 715-30-25 requires an employer to recognize the funded status of its defined pension benefit plan as a net asset or liability in its statement of financial position with an offsetting amount in accumulated other comprehensive income, and to recognize changes in that funded status in the year in which changes occur through comprehensive income.
Other changes in plan assets and benefit obligation recognized in Other Comprehensive Loss consist of the following components for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Pension
Benefits
|
|
2016
|
|
2015
|
Curtailment/settlement
|
$
|
—
|
|
|
$
|
—
|
|
Current year actuarial (gain) loss
|
3,238
|
|
|
526
|
|
Amortization of actuarial gain (loss)
|
(137
|
)
|
|
(103
|
)
|
Current year prior service (credit) cost
|
—
|
|
|
—
|
|
Amortization of prior service credit (cost)
|
—
|
|
|
—
|
|
Amortization of transition asset (obligation)
|
—
|
|
|
—
|
|
Total recognized in other comprehensive (income) loss
|
$
|
3,101
|
|
|
$
|
423
|
|
Total recognized in net periodic benefit cost and other comprehensive (income) loss
|
4,159
|
|
|
$
|
321
|
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
18. Employee Benefit Plans - (continued)
The following table summarizes the change in benefit obligations and fair values of plan assets for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Pension
Benefits
|
|
2016
|
|
2015
|
Change in benefit obligation:
|
|
|
|
|
|
Benefit obligation, Beginning balance
|
$
|
40,296
|
|
|
$
|
43,799
|
|
Service Cost
|
—
|
|
|
—
|
|
Interest Cost
|
1,855
|
|
|
1,864
|
|
Change in Mortality
|
—
|
|
|
—
|
|
Plan amendments
|
—
|
|
|
—
|
|
Curtailment/settlement
|
—
|
|
|
—
|
|
Actuarial (gains) losses
|
2,502
|
|
|
(2,774
|
)
|
Benefits paid
|
(3,931
|
)
|
|
(2,593
|
)
|
Benefit obligation, Ending balance
|
40,722
|
|
|
40,296
|
|
Change in plan assets:
|
|
|
|
|
|
Fair value of plan assets, Beginning balance
|
25,190
|
|
|
28,360
|
|
Actual return on plan assets
|
198
|
|
|
(1,232
|
)
|
Employer contributions
|
3,025
|
|
|
655
|
|
Benefits paid
|
(3,931
|
)
|
|
(2,593
|
)
|
Fair value of plan assets, Ending balance
|
24,482
|
|
|
25,190
|
|
Unfunded status
|
$
|
16,240
|
|
|
$
|
15,106
|
|
Amounts recognized in the balance sheet at December 31 consist of the following:
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Pension
Benefits
|
|
2016
|
|
2015
|
Non-current liability
|
$
|
16,240
|
|
|
$
|
15,106
|
|
Net amount recognized
|
$
|
16,240
|
|
|
$
|
15,106
|
|
Amounts recognized, net of tax, in Accumulated Other Comprehensive Loss consists of the following components for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Pension
Benefits
|
|
2016
|
|
2015
|
Accumulated net actuarial losses
|
$
|
12,320
|
|
|
$
|
9,219
|
|
Accumulated prior service cost
|
—
|
|
|
—
|
|
Accumulated transition obligation
|
—
|
|
|
—
|
|
Amount recognized, net of tax
|
$
|
12,320
|
|
|
$
|
9,219
|
|
The preceding table presents two measures of benefit obligations for the pension plan. Accumulated benefit obligation generally measures the value of benefits earned to date. Projected benefit obligation also includes the effect of assumed future compensation increases for plans in which benefits for prior service are affected by compensation changes. This pension plan has asset values less than these measures. Plan funding amounts are calculated pursuant to ERISA and Internal Revenue Code rules.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
18. Employee Benefit Plans - (continued)
The following weighted average assumptions were used to determine benefit obligations as of December 31:
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Pension
Benefits
|
|
2016
|
|
2015
|
Discount rate
|
4.32
|
%
|
|
4.69
|
%
|
Rate of compensation increase
|
N/A
|
|
|
N/A
|
|
The discount rate assumptions at December 31,
2016
and
2015
were determined independently. A yield curve was produced for a universe containing the majority of U.S.-issued AA-graded corporate bonds, all of which were non-callable (or callable with make-whole provisions). The discount rate was developed as the level equivalent rate that would produce the same present value as that using spot rates aligned with the projected benefit payments.
The following weighted average assumptions were used to determine net periodic costs at December 31:
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Pension
Benefits
|
|
2016
|
|
2015
|
Discount rate
|
4.69
|
%
|
|
4.38
|
%
|
Expected return on plan assets
|
7.40
|
%
|
|
7.40
|
%
|
Rate of compensation increase
|
N/A
|
|
|
N/A
|
|
The expected return on plan assets is a long-term assumption established by considering historical and anticipated returns of the asset classes invested in by the pension plan and the allocation strategy currently in place among those classes.
Fair Value of Plan Assets
The Defined Benefit plan assets fall into any of three fair value classifications as defined in the FASB ASC Topic 820, Fair Value Measurements. There are no Level 3 assets held by the plan. The fair value of the plan assets as of December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Asset Category:
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Fund – Short Term Investments
|
$
|
1,687
|
|
|
$
|
1,687
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Common Stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Corporate Bonds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Mutual Funds
|
22,795
|
|
|
22,795
|
|
|
—
|
|
|
—
|
|
Foreign Stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
24,482
|
|
|
$
|
24,482
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Asset Category:
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Fund – Short Term Investments
|
$
|
1,580
|
|
|
$
|
145
|
|
|
$
|
1,435
|
|
|
$
|
—
|
|
Common Stock
|
9,479
|
|
|
9,479
|
|
|
—
|
|
|
—
|
|
Corporate Bonds
|
3,834
|
|
|
—
|
|
|
3,834
|
|
|
—
|
|
Mutual Funds
|
10,006
|
|
|
10,006
|
|
|
—
|
|
|
—
|
|
Foreign Stock
|
291
|
|
|
291
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
25,190
|
|
|
$
|
19,921
|
|
|
$
|
5,269
|
|
|
$
|
—
|
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
18. Employee Benefit Plans - (continued)
The pension plans weighted-average asset allocation for the years ended December 31, 2016 and 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Target Allocation
|
|
Actual Allocation
|
|
Actual Allocation
|
|
2016
|
|
2016
|
|
2015
|
Asset Category:
|
|
|
|
|
|
|
|
|
Equity Securities
|
68.0
|
%
|
|
65.5
|
%
|
|
68.0
|
%
|
Debt Securities
|
31.0
|
%
|
|
27.6
|
%
|
|
25.7
|
%
|
Cash/Cash Equivalents and Short Term Investments
|
1.0
|
%
|
|
6.9
|
%
|
|
6.3
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
The investment policy for the plans is formulated by the Company’s Pension Plan Committee (the “Committee”). The Committee is responsible for adopting and maintaining the investment policy, managing the investment of plan assets and ensuring that the plans’ investment program is in compliance with all provisions of ERISA, as well as the appointment of any investment manager who is responsible for implementing the plans’ investment process.
The goals of the pension plan investment program are to fully fund the obligation to pay retirement benefits in accordance with the plan documents and to provide returns that, along with appropriate funding from the Company, maintain an asset/liability ratio that is in compliance with all applicable laws and regulations and assures timely payment of retirement benefits.
The Company’s overall investment strategy is to achieve a mix of approximately
50 percent
of investments for long-term growth and
50 percent
for near-term benefit payments with a wide diversification of asset types and fund strategies.
Equity securities primarily include investments in large-cap and mid-cap companies primarily located in the United States, as well as a smaller percentage invested in large-cap and mid-cap companies located outside of the United States. Fixed income securities are diversified across different asset types with bonds issued in the United States as well as outside the United States.
The target allocation of plan assets is
50 percent
equity securities and
50 percent
corporate bonds and U.S. Treasury securities.
The Plan invests in various investment securities. The investments are primarily invested in corporate equity and bond securities. Investment securities are exposed to various risks such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the preceding tables.
The above tables present information about the pension plan assets measured at fair value at December 31,
2016
and the valuation techniques used by the Company to determine those fair values.
In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets that the Plan has the ability to access.
Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset.
In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each plan asset.
The net of investment manager fee asset return objective is to achieve a return earned by passively managed market index funds, weighted in the proportions identified in the strategic asset allocation matrix. Each investment manager is expected to perform in the top one-third of funds having similar objectives over a full market cycle.
The investment policy is reviewed by the Committee at least annually and confirmed or amended as needed. Under ASC 715-30-25, the transition obligation, prior service costs, and actuarial (gains)/losses are recognized in Accumulated Other Comprehensive Income each December 31 or any interim measurement date, while amortization of these amounts through net
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
18. Employee Benefit Plans - (continued)
periodic benefit cost will occur in accordance with ASC 715-30 and ASC 715-60. The estimated amounts that will be amortized in 2017 are as follows:
|
|
|
|
|
|
|
|
Pension
Benefits
|
Estimated Amortization:
|
|
2017
|
Prior service cost (credit) amortization
|
|
$
|
—
|
|
Net loss amortization
|
|
222
|
|
Total
|
|
$
|
222
|
|
The following estimated benefit payments, which reflect expected future service, as appropriate, are expected to be paid in the years ending December 31:
|
|
|
|
|
|
Period
|
|
Amount
|
2017
|
|
$
|
1,613
|
|
2018
|
|
$
|
1,762
|
|
2019
|
|
$
|
1,858
|
|
2020
|
|
$
|
2,028
|
|
2021
|
|
$
|
2,020
|
|
2022 and thereafter
|
|
$
|
11,269
|
|
The pension plan contributions are deposited into a trust, and the pension plan benefit payments are made from trust assets.
19. Changes in Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) for the year ended December 31 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
Benefit
Pension
|
|
Foreign Currency Translation
|
|
Total
|
Balance December 31, 2014
|
$
|
(8,796
|
)
|
|
$
|
1,044
|
|
|
$
|
(7,752
|
)
|
Other comprehensive income before reclassifications
|
—
|
|
|
14,432
|
|
|
14,432
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
(423
|
)
|
|
—
|
|
|
(423
|
)
|
Other comprehensive income (loss)
|
$
|
(423
|
)
|
|
$
|
14,432
|
|
|
$
|
14,009
|
|
Balance December 31, 2015
|
$
|
(9,219
|
)
|
|
$
|
15,476
|
|
|
$
|
6,257
|
|
Other comprehensive income before reclassifications
|
—
|
|
|
(4,980
|
)
|
|
(4,980
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
(3,101
|
)
|
|
—
|
|
|
(3,101
|
)
|
Other comprehensive income (loss)
|
(3,101
|
)
|
|
(4,980
|
)
|
|
(8,081
|
)
|
Balance December 31, 2016
|
$
|
(12,320
|
)
|
|
$
|
10,496
|
|
|
$
|
(1,824
|
)
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
Reclassifications for the years ended December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Amortization of defined pension plan:
|
|
|
|
|
Prior service cost
|
$
|
—
|
|
|
$
|
—
|
|
Actuarial losses
|
137
|
|
|
103
|
|
Net periodic benefit cost
|
137
|
|
|
103
|
|
Income tax expense
|
55
|
|
|
41
|
|
Net of tax
|
$
|
82
|
|
|
$
|
62
|
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
20. Quarterly Results of Operations (Unaudited)
The following table sets forth a summary of the Company’s consolidated unaudited quarterly results of operations for the years ended December 31, in thousands of dollars, except per share amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Revenue:
|
|
|
|
|
|
|
|
|
2016
|
$
|
309,042
|
|
|
$
|
337,047
|
|
|
$
|
349,254
|
|
|
$
|
390,442
|
|
|
2015
|
$
|
302,222
|
|
|
$
|
336,606
|
|
|
$
|
328,415
|
|
|
$
|
359,013
|
|
|
Cost of services sold:
|
|
|
|
|
|
|
|
|
2016
|
$
|
211,446
|
|
|
$
|
228,835
|
|
|
$
|
235,659
|
|
|
$
|
260,193
|
|
|
2015
|
$
|
210,419
|
|
|
$
|
225,042
|
|
|
$
|
212,925
|
|
|
$
|
231,330
|
|
|
Income (loss) from continuing operations:
|
|
|
|
|
|
|
|
|
2016
|
$
|
(22,772
|
)
|
|
$
|
2,089
|
|
|
$
|
(31,081
|
)
|
|
$
|
11,143
|
|
|
2015
|
$
|
(22,941
|
)
|
|
$
|
31,548
|
|
|
$
|
(4,690
|
)
|
|
$
|
(24,036
|
)
|
|
Net income (loss) attributable to MDC Partners Inc.:
|
|
|
|
|
|
|
|
|
2016
|
$
|
(23,631
|
)
|
|
$
|
835
|
|
|
$
|
(32,140
|
)
|
|
$
|
9,097
|
|
|
2015
|
$
|
(31,615
|
)
|
|
$
|
30,036
|
|
|
$
|
(8,128
|
)
|
|
$
|
(25,747
|
)
|
|
Income (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
2016
|
$
|
(0.47
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.62
|
)
|
|
$
|
0.17
|
|
|
2015
|
$
|
(0.51
|
)
|
|
$
|
0.58
|
|
|
$
|
(0.14
|
)
|
|
$
|
(0.52
|
)
|
|
Net income (loss):
|
|
|
|
|
|
|
|
|
2016
|
$
|
(0.47
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.62
|
)
|
|
$
|
0.17
|
|
|
2015
|
$
|
(0.64
|
)
|
|
$
|
0.60
|
|
|
$
|
(0.16
|
)
|
|
$
|
(0.52
|
)
|
|
Diluted
|
|
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
2016
|
$
|
(0.47
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.62
|
)
|
|
$
|
0.17
|
|
(1)
|
2015
|
$
|
(0.51
|
)
|
|
$
|
0.57
|
|
|
$
|
(0.14
|
)
|
|
$
|
(0.52
|
)
|
|
Net income (loss):
|
|
|
|
|
|
|
|
|
2016
|
$
|
(0.47
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.62
|
)
|
|
$
|
0.17
|
|
(1)
|
2015
|
$
|
(0.64
|
)
|
|
$
|
0.60
|
|
|
$
|
(0.16
|
)
|
|
$
|
(0.52
|
)
|
|
|
|
(1)
|
The diluted income per share calculation for the fourth quarter of 2016 excludes the Company's option to settle the deferred acquisition consideration in shares related to F&B. If such shares were included, the diluted income per common share would be
$0.14
.
|
The above revenue, cost of services sold, and income (loss) from continuing operations have primarily been affected by acquisitions, divestitures and discontinued operations.
Historically, with some exceptions, the Company’s fourth quarter generates the highest quarterly revenues in a year. The fourth quarter has historically been the period in the year in which the highest volumes of media placements and retail related consumer marketing occur.
Income (loss) from continuing operations and net loss have been affected as follows:
|
|
•
|
The fourth quarter of
2016
and
2015
included a foreign exchange loss of
$10,081
and
$9,531
, respectively.
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
20. Quarterly Results of Operations (Unaudited) - (continued)
|
|
•
|
The fourth quarter of
2016
and
2015
included stock-based compensation charges of
$5,560
and
$4,771
, respectively.
|
|
|
•
|
The fourth quarter of
2016
and
2015
included deferred acquisition adjustments of
$(9,211)
and
$41,913
, respectively.
|
|
|
•
|
The third and fourth quarter of 2016 included goodwill impairment charges of
$29,631
and
$18,893
, respectively.
|
21. Other Events
On January 18, 2017, the Company announced that it reached a final settlement agreement with the Philadelphia Regional Office of the SEC in connection with its prior investigation of the Company, and that the SEC entered an administrative Order concluding its investigation of the Company. Pursuant to the Order, and based upon the Company’s full cooperation with the investigation, the SEC imposed a civil penalty of
$1,500
on the Company to resolve all potential claims against the Company relating to these matters. There will be no restatement of any of the Company’s previously-filed financial statements.
In connection with the investigation, Miles Nadal resigned from his position as CEO and as a Director of the Company’s Board of Directors, effective July 20, 2015, and agreed to repay to the Company specified expenses paid by the Company on his behalf and prior cash bonus awards. Specifically, as of December 31, 2015, Mr. Nadal repaid to the Company an aggregate amount equal to
$11,285
in respect of perquisites and improper payments identified by the Special Committee. The Company recorded this amount as a reduction of office and general expenses in 2015. In addition, Mr. Nadal agreed to repay to the Company
$10,582
in connection with amounts required to be repaid pursuant to cash bonus awards previously paid to Mr. Nadal, with such repayments to be made in five installments, with the last to be paid on December 31, 2017. Mr. Nadal repaid to the Company the first installment of
$1,000
in September 2015, the second installment of
$1,500
in December 2015, and an additional payment of
$2,000
in December 2016. An additional
$6,082
is due in 2017. In 2015, the Company recorded a charge of approximately
$5,338
for the balance of prior cash bonus award amounts that will not be recovered.
For the twelve months ended December 31, 2016, the Company has incurred
$4,065
of professional expenses and
$1,500
of civil penalty payments relating to the prior SEC investigation, which were offset by
$5,919
of proceeds from the Company’s D&O insurance policy.
22. Subsequent Events
On February 14, 2017, the Company entered into a securities purchase agreement with Broad Street Principal Investments, L.L.C., an affiliate of The Goldman Sachs Group Inc. (the “Purchaser”), pursuant to which the Company has agreed to issue and sell to the Purchaser, and the Purchaser has agreed to purchase,
95,000
newly authorized Series 4 convertible preference shares for an aggregate purchase price in cash of
$95.0 million
, subject to the terms and conditions set forth in the securities purchase agreement. The closing of the transaction is expected to occur in the first quarter of 2017, subject to the conditions set forth in the securities purchase agreement.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures
Not Applicable.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be included in our SEC reports is recorded, processed, summarized, and reported within the applicable time periods specified by the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and our Chief Financial Officer (CFO), who is our principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, our disclosure controls and procedures provide reasonable assurance, but not absolute assurance, of achieving their objectives.
We conducted an evaluation, under the supervision and with the participation of our management, including our CEO, our CFO and our management Disclosure Committee, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) of the Exchange Act. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective at such time.
(b) Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management (with the participation of our CEO and CFO) conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2016 based on the criteria set forth in Internal Control -
Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on this evaluation, our CEO and CFO concluded that our internal control over financial reporting was effective as of December 31, 2016.
Our management, including our CEO and CFO, believes there have been no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2016, that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
The effectiveness of our internal control over financial reporting as of December 31, 2016, has been independently audited by BDO USA LLP, an independent registered public accounting firm, as stated in their report which is included herein.
(c) Evaluation of New Reportable Segments; Changes in Internal Control Over Financial Reporting
As described in Note 14 to the unaudited condensed consolidated financial statements contained in this Amendment No. 1 on Form 10-K/A, we have recast our single reportable segment and identified four (4) new reportable segments for our Partner Firms. Where applicable, prior period information presented in this Amendment No. 1 on Form 10-K/A has been recast to conform to these new reportable segments. The recasting of prior period segment information in this Amendment No. 1 on Form 10-K/A does not affect our consolidated financial condition or results of operations for the three years in the period ended December 31, 2016, our balance sheets as of December 31, 2016 and December 31, 2015, our cash flows for the three years in the period ended December 31, 2016, or goodwill for any period presented.
Our management, including our CEO and CFO, believes there have been no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2016, that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting. The Company continues to evaluate the impact of the determination to recast its reportable segments in consultation with the SEC. The outcome of this evaluation could affect our determination as to whether changes in internal control over financial reporting that were made in connection with recasting our reportable segments constituted material changes.
(d) Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
MDC Partners Inc.
New York, New York
Toronto, Canada
We have audited MDC Partners Inc. internal control over financial reporting as of December 31,
2016
, based on criteria established in
Internal Control — Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). MDC Partners Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A - Management’s Report on Internal Control Over Financial Reporting.” Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, MDC Partners Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31,
2016
, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board, the consolidated balance sheets of MDC Partners Inc. as of December 31,
2016
and
2015
, and the related consolidated statements of operations, comprehensive loss, shareholders’ deficit, and cash flows for each of the three years in the period ended December 31,
2016
and our report dated March 1, 2017, except for Notes 2 and 14 which is August 31, 2017, expressed an unqualified opinion thereon and included an explanatory paragraph regarding the Company's restated (i) segment disclosures, (ii) presentation of book overdrafts on the statements of cash flows, and (iii) adjusted deferred tax liabilities.
/s/ BDO USA LLP
New York, New York
August 31, 2017