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 (“US GAAP”).
During the fourth quarter of 2015, the Company changed its reportable segment to coincide with the new reporting structure. The reporting structure was modified to reflect the approach the Chief Operating Decision Maker (“CODM”) utilizes to make decisions about the Company. Prior year segment reporting has been recast to reflect the new reportable segment.
Nature of Operations
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’s operations are in primarily
one
reportable segment — the Advertising and Communications Segment. The segment operates primarily in the US, Canada, Europe, Asia, and Latin America. See Note 14, “Segment Information,” for further descriptions.
2. Significant Accounting Policies
The Company’s significant accounting policies are summarized as follows:
Principles of Consolidation
. The accompanying consolidated financial statements include the accounts of MDC Partners Inc. 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.
Use of Estimates
. The preparation of financial statements in conformity with US 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 Financial Accounting Standards Board (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 for nonfinancial 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.
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•
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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.
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•
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Level 3 - Instruments where significant value drivers are unobservable to third parties.
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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,
2015
and
2014
.
No
clients accounted for
10%
of the Company's revenue in each of the years ended December 31,
2015
,
2014
, and
2013
.
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)
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, 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 interest in a real estate joint venture and various interests in investment funds. In 2013, the Company recorded a distribution of
$3,096
from this real estate joint venture, of which
$3,058
was in excess of the Company's carrying amount and has been recorded as a gain in equity in earnings of non-consolidated affiliates. 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, 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,
2015
and
2014
was
$11,763
and
$10,196
, 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, 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.
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)
In addition, the Company's partner agencies may receive minority 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 Intangible
. 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. Each Partner Firm is a component business of the Advertising and Communications Segment. Partner Firms that share similar economic characteristics are aggregated into single reporting units.
The Partner Firms within each of the reporting units provide similar services and serve similar clients across various industries, and in many cases the same clients. The main economic components of each Partner Firm are employee compensation and related costs, direct service costs, and office and general costs.
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. If the Company determines during the second step that the carrying amount of a reporting unit's goodwill exceeds its implied fair value, an impairment loss equal to the difference is recorded.
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. The DCF method 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-term growth rates and demand trends and appropriate discount rates based on a reporting units weighted average cost of capital (“WACC”) as determined by considering the observable weighted average cost of capital 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 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.
For the 2014 annual impairment assessment the Company had
ten
reporting units.
Three
were subject to the qualitative assessment and
seven
were subject to the two-step test. The Company concluded that there were no goodwill impairments.
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)
During the fourth quarter of 2015, the Company implemented organization changes that resulted in changes to the reporting units. For the 2015 annual impairment assessment, the Company had
13
reporting units. All of the reporting units were subject to the two-step test. As a result of the changes in the reporting units, the Company performed the 2015 goodwill impairment testing on both the previous and new reporting unit structure. The Company concludes that there were
no
goodwill impairments under both the old and new reporting unit structures.
For the 2015 goodwill impairment testing, the Company used several assumptions. The Company assumed a
3%
long-term growth rate and used the Gordon Growth model to calculate the terminal value. In addition, the range of assumptions for the WACC were
8.92%
to
11.95%
. The fair value of all reporting units were in excess of the carrying amount and as a result 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%
, where the fair value of nine of the reporting units were significantly in excess of the carrying amounts. The Company performed a sensitivity analysis which included an increased WACC of 100 basis points. Based on the results of that analysis, one reporting unit, which is comprised of the marketing experiential businesses, would be at risk of failing. 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.
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,
2015
,
2014
and
2013
,
$36,344
,
$16,467
and
$35,914
, respectively, related to changes in estimated value was recorded as operating expenses. For further information, see Note 14 and Note 13. For the year ended December 31,
2015
,
2014
, and
2013
,
$2,912
,
$6,133
and
$2,066
, 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 estimated redemption value is in excess of the fair value of the noncontrolling interests, the Company records a charge to income attributable to noncontrolling interests. For the three years ended December 31, 2015, 2014, and 2013, there were
no
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)
charges to income attributable to noncontrolling interests. Changes in the estimated redemption amounts of the redeemable noncontrolling interests are adjusted at each reporting period with a corresponding adjustment to equity. These adjustments will not impact the calculation of earnings (loss) per share.
The following table presents changes in Redeemable Noncontrolling Interests.
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|
Years Ended December 31,
|
|
|
2015
|
|
2014
|
|
2013
|
|
Beginning Balance as of January 1,
|
$
|
194,951
|
|
|
$
|
148,534
|
|
|
$
|
117,953
|
|
|
Redemptions
|
(155,042
|
)
|
|
(4,820
|
)
|
|
(4,270
|
)
|
|
Granted
(1)
|
7,703
|
|
|
13,327
|
|
|
—
|
|
|
Changes in redemption value
|
22,809
|
|
|
38,850
|
|
|
35,689
|
|
|
Currency translation adjustments
|
(950
|
)
|
|
(940
|
)
|
|
(838
|
)
|
|
Ending Balance as of December 31,
|
$
|
69,471
|
|
|
$
|
194,951
|
|
|
$
|
148,534
|
|
|
|
|
|
(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 noncontolling 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.
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,
2015
and
2014
, were
$122,558
and
$86,047
, and
$223,305
and
$192,340
, 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.
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 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.
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
6.75%
Senior Notes due
2020
(the “6.75% Notes”) and the Company's
$325 million
senior secured revolving credit agreement due
2019
(the “Credit Agreement”). The Company uses the effective interest method to amortize the deferred financing costs and original issue premium on the
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, 2015, 2014, and 2013, interest expense included
$2,543
,
$2,186
, and
$232
, 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.
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. 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 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, 2015, 2014, and 2013, the Company issued
no
stock options or similar awards.
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)
During the year ended December 31, 2011, the Company issued Equity Value Appreciation Awards to its employees. During 2013, these awards resulted in the issuance of up to
1,917,000
restricted stock units and restricted stock shares. The Company measured the fair value of these awards using a lattice based model (Monte Carlo) on the date of grant. The Company used the following assumptions in calculating the fair value under the lattice model; risk free rate
1.2%
, volatility
31.7%
, time to maturity
2.9
years, the weighted average fair value of the awards granted was
$9.37
.
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. However, awards based on performance conditions are recorded as compensation expense when the performance conditions are expected to be met. The fair value at the grant date for performance based awards granted in 2015, 2014, and 2013 was
$1,741
,
$3,026
, and
$2,699
, 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 US 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
$6,731
,
$7,503
and
$6,145
for the years ended December 31,
2015
,
2014
, and
2013
, 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, including the “Share capital to be issued” as reflected in the Shareholders’ Equity on the balance sheet. Diluted income (loss) per share is based on the above, plus, if dilutive, common share equivalents, which include outstanding options, stock appreciation rights, and 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 US 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-US Dollar based subsidiaries to US 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-US Dollar based subsidiaries are translated at the period end rate. The income statements of non-US 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 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.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
2014
|
|
2013
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
Numerator for diluted loss per common share – income (loss) from continuing operations
|
$
|
(22,022
|
)
|
|
$
|
4,093
|
|
|
$
|
(133,202
|
)
|
|
Net income attributable to the noncontrolling interests
|
(9,054
|
)
|
|
(6,890
|
)
|
|
(6,461
|
)
|
|
Loss attributable to MDC Partners Inc. common shareholders from continuing operations
|
(31,076
|
)
|
|
(2,797
|
)
|
|
(139,663
|
)
|
|
Effect of dilutive securities
|
—
|
|
|
—
|
|
|
—
|
|
|
Numerator for diluted loss per common share – loss attributable to MDC Partners Inc. common shareholders from continuing operations
|
$
|
(31,076
|
)
|
|
$
|
(2,797
|
)
|
|
$
|
(139,663
|
)
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
Denominator for basic loss per common share – weighted average common shares
|
49,875,282
|
|
|
49,545,350
|
|
|
47,108,406
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Dilutive potential common shares
|
—
|
|
|
—
|
|
|
—
|
|
|
Denominator for diluted loss per common share – adjusted weighted shares and assumed conversions
|
49,875,282
|
|
|
49,545,350
|
|
|
47,108,406
|
|
|
Basic and Diluted loss per common share from continuing operations
|
$
|
(0.62
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(2.96
|
)
|
At December 31,
2015
,
2014
, and
2013
, warrants, options and other rights to purchase
947,465
,
1,114,681
and
1,488,958
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.
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 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
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
4. Acquisitions – (continued)
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, 2015, 2014 and 2013, stock-based compensation included
$9,357
,
$7,802
, and
$6,240
, respectively, of expense relating to those payments.
Distributions to minority shareholders.
If minority 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 minority interest over the entire period from the initial acquisition date through the acquisition date of the remaining interests.
Pro forma financial information has not been presented for
2015
acquisitions noted below since they did not have a material effect on the Company’s operating results. Included in the Company’s consolidated statement of operations for the year ended
December 31, 2015
was revenue of
$13,703
, and net loss of
$10,922
, related to
2015
acquisitions.
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 has 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 the customer contracts/relationships are 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.
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.
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%
of the equity interests of Hunter PR LLC. Effective August 18, 2014, the Company acquired a
75%
interest in Albion Brand
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
4. Acquisitions – (continued)
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 the customer contracts/relationships are 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.
2013 Acquisitions
During the fourth quarter of 2013, the Company acquired a
70%
interest in Local Biz Now LLC, which allows the Company to participate in the online local search market. During the year, the Company also entered into various immaterial transactions with certain majority owned entities.
The aggregate purchase price had an estimated present value at acquisition date of
$35,591
and consisted of total closing cash payments of
$12,000
, and additional contingent deferred acquisition consideration that are based on the financial results of the underlying businesses from 2013 to 2017 with final payments due in 2018 that have an estimated present value at acquisition date of
$23,591
. An allocation of excess purchase price consideration of these acquisitions to the fair value of the net assets acquired resulted in identifiable intangibles of
$10,961
consisting primarily of customer lists, a technology asset, and covenants not to compete, and goodwill of
$32,786
representing 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 the customer contracts/relationships are realized. In addition, the Company has recorded
$10,657
as the present value of noncontrolling interest. The Company expects intangibles and goodwill of
$43,747
to be tax deductible.
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,
|
|
|
2015
|
|
2014
|
|
2013
|
|
Net loss attributable to MDC Partners Inc.
|
$
|
(37,357
|
)
|
|
$
|
(24,057
|
)
|
|
$
|
(148,863
|
)
|
|
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
|
(42,780
|
)
|
|
(8,992
|
)
|
|
11,074
|
|
|
Net transfers (to) from noncontrolling interests
|
$
|
(42,780
|
)
|
|
$
|
(8,992
|
)
|
|
$
|
11,074
|
|
|
Change from net loss attributable to MDC Partners Inc. and transfers (to) from noncontrolling interests
|
$
|
(80,137
|
)
|
|
$
|
(33,049
|
)
|
|
$
|
(137,789
|
)
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
2014
|
|
|
Cost
|
|
Accumulated Depreciation
|
|
Net Book Value
|
|
Cost
|
|
Accumulated Depreciation
|
|
Net Book Value
|
|
Computers, furniture and fixtures
|
$
|
87,213
|
|
|
$
|
(62,901
|
)
|
|
$
|
24,312
|
|
|
$
|
91,272
|
|
|
$
|
(65,451
|
)
|
|
$
|
25,821
|
|
|
Leasehold improvements
|
72,898
|
|
|
(33,653
|
)
|
|
39,245
|
|
|
64,051
|
|
|
(29,632
|
)
|
|
34,419
|
|
|
|
$
|
160,111
|
|
|
$
|
(96,554
|
)
|
|
$
|
63,557
|
|
|
$
|
155,323
|
|
|
$
|
(95,083
|
)
|
|
$
|
60,240
|
|
At December 31, 2015 and 2014, included in fixed assets are assets under capital lease obligations with a cost of
$1,959
and
$2,072
, respectively, and accumulated depreciation of
$1,378
and
$1,091
, respectively. Depreciation expense for the years ended December 31,
2015
,
2014
, and
2013
was
$18,871
,
$16,462
and
$16,742
, respectively.
6. Accrued and Other Liabilities
At December 31,
2015
and
2014
, accrued and other liabilities included accrued media of
$187,540
and
$168,508
, respectively; trust liabilities of
$5,122
and
$6,419
, respectively; and amounts due to noncontrolling interest holders for their share of profits, which will be distributed within the next twelve months, of
$5,473
and
$6,014
, 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, 2012
|
$
|
3,624
|
|
|
Income attributable to noncontrolling interests
|
6,461
|
|
|
Distributions made
|
(5,525
|
)
|
|
Other
(1)
|
650
|
|
|
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
|
|
|
|
|
|
(1)
|
Other consists primarily of step-up transactions, discontinued operations 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, the carrying value of which approximates 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
|
|
Advertising and Communications
|
|
Balance at December 31, 2013
|
|
$
|
744,333
|
|
|
Acquired goodwill
|
|
149,234
|
|
|
Discontinued operations
|
|
(27,706
|
)
|
|
Acquisition purchase price adjustments
|
|
(3,170
|
)
|
|
Foreign currency translation
|
|
(11,318
|
)
|
|
Balance at December 31, 2014
|
|
$
|
851,373
|
|
|
Acquired goodwill
|
|
43,654
|
|
|
Acquisition purchase price adjustments
|
|
(2,428
|
)
|
|
Foreign currency translation
|
|
(22,298
|
)
|
|
Balance at December 31, 2015
|
|
$
|
870,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
Intangible Assets
|
|
2015
|
|
2014
|
|
Trademarks (indefinite life)
|
|
$
|
17,780
|
|
|
$
|
17,780
|
|
|
Customer relationships – gross
|
|
$
|
135,919
|
|
|
$
|
133,409
|
|
|
Less accumulated amortization
|
|
(97,604
|
)
|
|
(83,475
|
)
|
|
Customer relationships – net
|
|
$
|
38,315
|
|
|
$
|
49,934
|
|
|
Other intangibles – gross
|
|
$
|
33,638
|
|
|
$
|
31,408
|
|
|
Less accumulated amortization
|
|
(17,351
|
)
|
|
(13,001
|
)
|
|
Other intangibles – net
|
|
$
|
16,287
|
|
|
$
|
18,407
|
|
|
Total intangible assets
|
|
$
|
187,337
|
|
|
$
|
182,597
|
|
|
Less accumulated amortization
|
|
(114,955
|
)
|
|
(96,476
|
)
|
|
Total intangible assets – net
|
|
$
|
72,382
|
|
|
$
|
86,121
|
|
See Note 4 for accounting for business combinations.
The total accumulated goodwill impairment charges are
$46,883
through December 31,
2015
. No impairment was recognized for the year ended December 31, 2015. For the year ended December 31, 2014, the Company wrote off goodwill of
$15,564
related to the sale of Accent Marketing Services, L.L.C. (“Accent”). (See Note 10.)
The weighted average amortization periods for customer relationships are
five
years and other intangible assets are
seven
years. In total, the weighted average amortization period is
six
years. Amortization expense related to amortizable intangible assets for the years ended December 31,
2015
,
2014
, and
2013
was
$30,024
,
$29,749
, and
$18,456
, respectively.
The estimated amortization expense for the five succeeding years is as follows:
|
|
|
|
|
|
|
|
|
Year
|
|
Amortization
|
|
2016
|
|
$
|
18,532
|
|
|
2017
|
|
$
|
12,363
|
|
|
2018
|
|
$
|
9,530
|
|
|
2019
|
|
$
|
6,796
|
|
|
2020
|
|
$
|
2,791
|
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
2014
|
|
2013
|
|
Income (Loss):
|
|
|
|
|
|
|
|
|
|
US
|
$
|
23,180
|
|
|
$
|
46,728
|
|
|
$
|
21,661
|
|
|
Non-US
|
(40,596
|
)
|
|
(31,619
|
)
|
|
(159,511
|
)
|
|
|
$
|
(17,416
|
)
|
|
$
|
15,109
|
|
|
$
|
(137,850
|
)
|
The provision (benefit) for income taxes by taxing jurisdiction for the years ended December 31, were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
2014
|
|
2013
|
|
Current tax provision
|
|
|
|
|
|
|
|
|
|
US federal
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
US state and local
|
1,375
|
|
|
907
|
|
|
213
|
|
|
Non-US
|
2,465
|
|
|
552
|
|
|
847
|
|
|
|
3,840
|
|
|
1,459
|
|
|
1,060
|
|
|
Deferred tax provision (benefit):
|
|
|
|
|
|
|
|
|
|
US federal
|
6,944
|
|
|
13,402
|
|
|
7,505
|
|
|
US state and local
|
3,195
|
|
|
1,971
|
|
|
1,027
|
|
|
Non-US
|
(8,315
|
)
|
|
(4,410
|
)
|
|
(13,959
|
)
|
|
|
1,824
|
|
|
10,963
|
|
|
(5,427
|
)
|
|
Income tax provision (benefit)
|
$
|
5,664
|
|
|
$
|
12,422
|
|
|
$
|
(4,367
|
)
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
2014
|
|
2013
|
|
Income (loss) from continuing operations before income taxes, equity in non-consolidated affiliates and noncontrolling interest
|
$
|
(17,416
|
)
|
|
$
|
15,109
|
|
|
$
|
(137,850
|
)
|
|
Statutory income tax rate
|
26.5
|
%
|
|
26.5
|
%
|
|
26.5
|
%
|
|
Tax expense (benefit) using statutory income tax rate
|
(4,615
|
)
|
|
4,004
|
|
|
(36,530
|
)
|
|
State and foreign taxes
|
3,524
|
|
|
1,459
|
|
|
1,060
|
|
|
Non-deductible stock-based compensation
|
3,354
|
|
|
1,982
|
|
|
24,357
|
|
|
Other non-deductible expense
|
(2,102
|
)
|
|
2,151
|
|
|
942
|
|
|
Change to valuation allowance on items affecting taxable income
|
5,468
|
|
|
2,003
|
|
|
6,952
|
|
|
Effect of the difference in federal and statutory rates
|
1,906
|
|
|
2,222
|
|
|
(15
|
)
|
|
Noncontrolling interests
|
(2,399
|
)
|
|
(1,826
|
)
|
|
(1,712
|
)
|
|
Other, net
|
528
|
|
|
427
|
|
|
579
|
|
|
Income tax expense (benefit)
|
$
|
5,664
|
|
|
$
|
12,422
|
|
|
$
|
(4,367
|
)
|
|
Effective income tax rate
|
(32.5
|
)%
|
|
82.2
|
%
|
|
(3.2
|
)%
|
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
2015
effective income tax rate was significantly higher than the statutory rate due primarily to non-deductible stock-based compensation of
$3,354
, and an increase in the valuation allowance of
$5,468
and the effect of the difference in the US and foreign federal rates and the Canadian statutory rate of
$1,906
.
The
2014
effective income tax rate was significantly higher than the statutory rate due primarily to non-deductible stock-based compensation of
$1,982
and an increase in the valuation allowance of
$2,003
and the effect of the difference in the US and foreign federal rates and the Canadian statutory rate of
$2,222
.
The
2013
effective income tax rate was significantly higher than the statutory rate due primarily to non-deductible stock-based compensation of
$24,357
and an increase in the valuation allowance of
$6,952
.
Income taxes receivable were
$615
and
$235
at December 31,
2015
and
2014
, respectively, and were included in other current assets on the balance sheet. Income taxes payable were
$7,019
and
$5,368
at December 31,
2015
and
2014
, 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.
The tax effects of significant temporary differences representing deferred tax assets and liabilities at December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
2014
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Capital assets and other
|
$
|
43,031
|
|
|
$
|
45,496
|
|
|
Net operating loss carry forwards
|
37,490
|
|
|
39,525
|
|
|
Interest deductions
|
17,347
|
|
|
17,456
|
|
|
Refinancing charge
|
144
|
|
|
5,176
|
|
|
Deferred acquisition consideration
|
16,197
|
|
|
5,204
|
|
|
Stock compensation
|
3,033
|
|
|
1,561
|
|
|
Pension plan
|
3,770
|
|
|
3,597
|
|
|
Unrealized foreign exchange
|
15,548
|
|
|
6,954
|
|
|
Capital loss carry forwards
|
10,630
|
|
|
14,834
|
|
|
Accounting reserves
|
6,700
|
|
|
5,135
|
|
|
Gross deferred tax asset
|
153,890
|
|
|
144,938
|
|
|
Less: valuation allowance
|
(124,143
|
)
|
|
(119,117
|
)
|
|
Net deferred tax assets
|
29,747
|
|
|
25,821
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Deferred finance charges
|
(323
|
)
|
|
(386
|
)
|
|
Capital assets and other
|
(797
|
)
|
|
(396
|
)
|
|
Goodwill amortization
|
(91,724
|
)
|
|
(77,603
|
)
|
|
Total deferred tax liabilities
|
(92,844
|
)
|
|
(78,385
|
)
|
|
Net deferred tax asset (liability)
|
$
|
(63,097
|
)
|
|
$
|
(52,564
|
)
|
|
Disclosed as:
|
|
|
|
|
|
|
Deferred tax assets
|
$
|
29,747
|
|
|
$
|
25,480
|
|
|
Deferred tax liabilities
|
(92,844
|
)
|
|
(78,044
|
)
|
|
|
$
|
(63,097
|
)
|
|
$
|
(52,564
|
)
|
Included in accrued and other liabilities at December 31,
2015
and
2014
was a deferred tax liability of
$263
and
$47
, respectively. Included in other current assets at December 31,
2015
and
2014
was a deferred tax asset of
$14,380
and
$6,722
, respectively.
The Company has US federal net operating loss carry forwards of
$41,187
and non-US net operating loss carry forwards of
$71,111
. These carry forwards expire in years
2016 through 2031
. The Company also has total indefinite loss carry forwards of
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
9. Income Taxes – (continued)
$115,946
. These indefinite loss carry forwards consist of
$35,723
relating to the US and
$80,223
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
$182,738
.
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 US, non-US 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,
2015
,
2014
and
2013
was
$5,468
,
$2,003
and
$6,952
, respectively. In addition, a benefit of
$1,112
and an expense of
$1,112
has been recorded in accumulated other comprehensive loss relating to the defined pension plan, for the years ended December 31, 2014 and 2013, respectively. There was
no
benefit or expense related to the defined pension plan recorded in 2015.
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.
As of December 31,
2015
and
2014
, the Company recorded a liability for unrecognized tax benefits as well as applicable penalties and interest in the amount of
$4,200
and
$4,166
. As of
December 31, 2015
and
2014
, accrued penalties and interest included in unrecognized tax benefits were approximately
$595
and
$1,093
. 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, 2012
|
$
|
3,073
|
|
|
Charges to income tax expense
|
—
|
|
|
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
|
|
The Company does
not
expect its unrecognized tax benefits to change significantly over the next
12 months
.
The Company has completed US federal tax audits through 2010 and has completed a non-US 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.
In 2013, the Company discontinued
two
subsidiaries and an operating division.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
10. Discontinued Operations – (continued)
Included in discontinued operations in the Company’s consolidated statements of operations for the years ended December 31, were the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2015
|
|
2014
|
|
2013
|
|
Revenue
|
$
|
27,025
|
|
|
$
|
70,041
|
|
|
$
|
89,659
|
|
|
Operating loss
|
(322
|
)
|
|
(4,704
|
)
|
|
(324
|
)
|
|
Other expense
|
(752
|
)
|
|
(458
|
)
|
|
(522
|
)
|
|
Noncontrolling interest expense recovery
|
—
|
|
|
—
|
|
|
(55
|
)
|
|
Loss on disposal
|
(5,207
|
)
|
|
(16,098
|
)
|
|
(8,299
|
)
|
|
Net loss from discontinued operations
|
$
|
(6,281
|
)
|
|
$
|
(21,260
|
)
|
|
$
|
(9,200
|
)
|
At December 31, 2015, the Company had
no
assets held for sale. At December 31, 2014, other current assets and other long-term assets included assets held for sale of
$5,591
and
$16,409
, respectively. For the year ended December 31, 2014, the loss on disposal included a goodwill write off of
$15,564
.
11. Debt
At December 31, the Company’s indebtedness was comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
2014
|
|
Revolving credit agreement
|
$
|
—
|
|
|
$
|
—
|
|
|
6.75% Notes due 2020
|
735,000
|
|
|
735,000
|
|
|
Original issue premium
|
5,838
|
|
|
7,017
|
|
|
Note payable and other bank loans
|
—
|
|
|
—
|
|
|
|
740,838
|
|
|
742,017
|
|
|
Obligations under capital leases
|
670
|
|
|
1,110
|
|
|
|
741,508
|
|
|
743,127
|
|
|
Less:
|
|
|
|
|
|
|
Current portion
|
470
|
|
|
534
|
|
|
|
$
|
741,038
|
|
|
$
|
742,593
|
|
Interest expense related to long-term debt for the years ended December 31,
2015
,
2014
, and
2013
was
$53,090
,
$50,832
and
$92,704
, respectively. For the year ended December 31, 2013, interest expense included a
$55,588
loss on redemption of the
11%
Notes. For the years ended December 31,
2015
,
2014
, and
2013
, interest expense included income of
$1,178
,
$975
,
$4,262
, related to the amortization of the original issue premium. For the years ended December 31,
2015
,
2014
, and
2013
, interest expense included
$2,543
,
$2,186
and
$232
, respectively, of present value adjustments for fixed deferred acquisition payments.
The amortization and write off of deferred finance costs included in interest expense were
$3,448
,
$3,222
and
$12,024
for the years ended December 31,
2015
,
2014
, and
2013
, respectively.
Issuance of 6.75% Senior Notes
On March 20, 2013, 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 its
$550 million
aggregate principal amount of
6.75%
Notes due
2020
(the “
6.75%
Notes”). The
6.75%
Notes bear interest at a rate of
6.75%
per annum, accruing from March 20, 2013. Interest is payable semiannually in arrears in cash on April 1 and October 1 of each year, beginning on October 1, 2013. The
6.75%
Notes mature on
April 1, 2020
, unless earlier redeemed or repurchased. The Company received net proceeds from the offering of the
6.75%
Notes equal to approximately
$537,600
. The Company used the net proceeds to redeem all of its existing
11%
Notes, together with accrued interest, related premiums, fees and expenses and recorded a charge for loss on redemption of such notes
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
11. Debt – (continued)
of
$55,588
, including write offs of unamortized original issue premium and debt issuance costs. Remaining proceeds were used for general corporate purposes.
On November 15, 2013, the Company issued an additional
$110,000
aggregate principal amount of the
6.75%
Notes. The additional notes were issued under the Indenture governing the
6.75%
Notes and treated as a single series with the original
6.75%
Notes. The additional notes were sold in a private placement in reliance on exceptions from registration under the Securities Act of 1933, as amended (the “'33 Act”). The Company received net proceeds before expenses of
$111,925
, which included an original issue premium of
$4,125
, and underwriter fees of
$2,200
. The Company used the net proceeds from the offering for general corporate purposes.
On April 2, 2014, the Company issued an additional
$75,000
aggregate principal amount of the
6.75%
Notes. The additional
6.75%
Notes were issued under the Indenture governing the
6.75%
Notes and treated as a single series with the original
6.75%
Notes. The additional
6.75%
Notes were sold in a private placement in reliance on exceptions from registration under the '33 Act. The Company received net proceeds before expenses of
$77,452
, which included an original issue premium of
$3,938
, and underwriter fees of
$1,500
. The Company used the net proceeds from the offering for general corporate purposes, including the funding of deferred acquisition consideration, working capital, acquisitions and the repayment of the amount outstanding under its senior secured revolving credit facility.
The
6.75%
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
6.75%
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
6.75%
Notes in whole at any time or in part from time to time, on and after April 1, 2016 (i) at a redemption price of
103.375%
of the principal amount thereof if redeemed during the twelve-month period beginning on
April 1, 2016
, (ii) at a redemption price of
101.688%
of the principal amount thereof if redeemed during the twelve-month period beginning on
April 1, 2017
(iii) and at a redemption price of
100%
of the principal amount thereof if redeemed on
April 1, 2018
and thereafter.
Prior to April 1, 2016, MDC may, at its option, redeem some or all of the
6.75%
Notes at a price equal to
100%
of the principal amount of the
6.75%
Notes plus a “make whole” premium and accrued and unpaid interest. MDC may also redeem, at its option, prior to April 1, 2016, up to
35%
of the
6.75%
Notes with the proceeds from one or more equity offerings at a redemption price of
106.750%
of the principal amount thereof.
If MDC experiences certain kinds of changes of control (as defined in the Indenture), holders of the
6.75%
Notes may require MDC to repurchase any
6.75%
Notes held by them at a price equal to
101%
of the principal amount of the
6.75%
Notes plus accrued and unpaid interest. In addition, if MDC sells assets under certain circumstances, it must offer to repurchase the
6.75%
Notes at a price equal to
100%
of the principal amount of the
6.75%
Notes 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 (i) incur or guarantee additional indebtedness, (ii) pay dividends on or redeem or repurchase the capital stock of MDC; make certain types of investments, (iii) create restrictions on the payment of dividends or other amounts from MDC’s restricted subsidiaries, (iv) sell assets, (v) enter into transactions with affiliates, (vi) create liens, (vii) enter into sale and leaseback transactions, and (viii) 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
6.75%
Notes are also subject to customary events of default, including cross-payment default and cross-acceleration provision.
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.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
11. Debt – (continued)
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.
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 Credit Agreement is guaranteed by substantially all of MDC’s present and future subsidiaries, other than immaterial subsidiaries and subject to customary exceptions. The Credit Agreement includes covenants that, among other things, restrict MDC’s ability and the ability of its subsidiaries to (i) incur or guarantee additional indebtedness, (ii) pay dividends on or redeem or repurchase the capital stock of MDC, (iii) make certain types of investments, (iv) dividend or distribute amounts from MDC’s subsidiaries, (v) incur certain liens, (vi) sell or otherwise dispose of certain assets, (vii) enter into transactions with affiliates, (viii) enter into sale and leaseback transactions, and (ix) 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 Credit Agreement also contains financial covenants, including a total leverage ratio, a senior leverage ratio, a fixed charge coverage ratio and a minimum earnings level. The Credit Agreement is also subject to customary events of default.
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,
2015
, there were
no
borrowings under the Credit Agreement.
At December 31,
2015
, the Company had issued
$5,033
of undrawn letters of credit.
At December 31,
2015
and
2014
, accounts payable included
$73,558
and
$72,147
, respectively, of outstanding checks.
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
|
|
$
|
470
|
|
|
2017
|
|
175
|
|
|
2018
|
|
10
|
|
|
2019
|
|
8
|
|
|
2020
|
|
735,007
|
|
|
2021 and thereafter
|
|
—
|
|
|
|
|
$
|
735,670
|
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
11. Debt – (continued)
Capital Leases
Future minimum capital lease payments for the years ended December 31 and in aggregate, are as follows:
|
|
|
|
|
|
|
|
|
Period
|
|
Amount
|
|
2016
|
|
$
|
495
|
|
|
2017
|
|
182
|
|
|
2018
|
|
10
|
|
|
2019
|
|
8
|
|
|
2020
|
|
7
|
|
|
2021 and thereafter
|
|
—
|
|
|
|
|
702
|
|
|
Less: imputed interest
|
|
(32
|
)
|
|
|
|
670
|
|
|
Less: current portion
|
|
(470
|
)
|
|
|
|
$
|
200
|
|
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.
(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 in to 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 uner the SARS Plan to satisfy the grant and vesting awards under the 2011 Stock Incentive Plan. As of December 31,
2015
, the Company granted
300,000
Director options (of which
150,000
were forfeited), which option grants were for a
ten
-year term and vest over
five
(5) years from the grant date under the 2005 Incentive Plan.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
12. Share Capital – (continued)
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 and 2011 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, 2012
|
534,779
|
|
|
$
|
10.73
|
|
|
835,438
|
|
|
$
|
8.48
|
|
|
Granted
|
300,756
|
|
|
8.97
|
|
|
2,612,520
|
|
|
16.83
|
|
|
Vested
|
(353,858
|
)
|
|
10.63
|
|
|
(2,499,083
|
)
|
|
15.79
|
|
|
Forfeited
|
(19,011
|
)
|
|
7.90
|
|
|
(35,087
|
)
|
|
10.91
|
|
|
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
|
|
The total fair value of restricted stock and restricted stock unit awards, which vested during the years ended December 31,
2015
,
2014
and
2013
was
$5,394
,
$7,659
and
$43,227
, respectively. In connection with the vesting of these awards, the Company included in the taxable loss the amounts of
$4,678
,
$11,874
and
$17,219
in
2015
,
2014
and
2013
, respectively. At December 31,
2015
, the weighted average remaining contractual life for performance based awards was
2.5
years and for time based awards was
1.3
years. At December 31,
2015
, the fair value of all restricted stock and restricted stock unit awards was
$18,950
. The term of these awards is
three years
with vesting up to
three years
. At December 31,
2015
, the unrecognized compensation expense for these awards was
$8,790
and will be recognized through 2017. At December 31,
2015
, there were
1,123,772
awards available to grant under all equity plans.
The Company’s Board of Directors adopted the 2005 Incentive Plan as a replacement for MDC Partners’ Amended and Restated Stock Option Incentive Plan (the “Prior 2003 Plan”). Following approval of the 2005 Incentive Plan, the Company ceased making awards under the Prior 2003 Plan.
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 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.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
12. Share Capital – (continued)
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, 2012
|
112,500
|
|
|
$
|
6.35
|
|
|
112,500
|
|
|
$
|
6.35
|
|
|
—
|
|
|
Vested
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
Expired and cancelled
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
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
|
|
|
—
|
|
At December 31,
2015
, the intrinsic value of vested options and the intrinsic value of all options was
$1,233
. For options exercised during
2015
,
2014
and
2013
, the Company received cash proceeds of
$224
,
nil
and
nil
, respectively. The Company did not receive any windfall tax benefits. The intrinsic value of options exercised during
2015
,
2014
and
2013
was
$471
,
nil
and
nil
, respectively. At December 31,
2015
, the weighted average remaining contractual life of all outstanding options was
0.9
years and for all vested options was
0.9
years. At December 31,
2015
, the unrecognized compensation expense of all options was
nil
.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
12. Share Capital – (continued)
Share options outstanding as of December 31,
2015
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Range of Exercise Prices
|
|
Outstanding Number
|
|
Weighted Average Contractual
Life
|
|
Weighted Average
Price per
Share
|
|
Exercisable Number
|
|
Weighted Average
Price per
Share
|
|
Weighted Average Contractual
Life
|
|
$4.72 – $5.83
|
|
75,000
|
|
|
0.92
|
|
$
|
5.28
|
|
|
75,000
|
|
|
$
|
5.28
|
|
|
0.92
|
(c) Stock Appreciation Rights
During 2003, the Compensation Committee of the Board of Directors approved a SAR’s compensation program for senior officers and directors of the Company. SAR’s granted prior to 2006 have a term of
four years
, and after 2006 have a term of up to
ten years
. Awards vest one-third on each anniversary date.
SAR’s granted and outstanding are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SAR’s Outstanding
|
|
SAR’s Exercisable
|
|
Non Vested SAR’s
|
|
|
Weighted Average
Number Outstanding
|
|
Weighted Average
Price per
Share
|
|
Number Outstanding
|
|
Price per
Share
|
|
|
|
Balance at December 31, 2012
|
4,633,146
|
|
|
$
|
2.49
|
|
|
4,633,146
|
|
|
$
|
2.49
|
|
|
—
|
|
|
Vested
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
Exercised
|
(4,633,146
|
)
|
|
2.49
|
|
|
|
|
|
|
|
|
—
|
|
|
Expired and cancelled
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
Balance at December 31, 2013
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
Vested
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
Expired and cancelled
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
Balance at December 31, 2014
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
Vested
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
Expired and cancelled
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
Balance at December 31, 2015
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
At December 31,
2015
, the aggregate amount of shares to be issued on vested SAR’s was
nil
. During
2015
,
2014
, and
2013
, the aggregate value of SAR’s exercised was
nil
,
nil
, and
$80,323
, respectively. The Company received tax deductions of
nil
,
nil
, and
$12,682
in
2015
,
2014
, and
2013
, respectively. In November 2013, the Company determined that all outstanding SAR’s would be settled in cash and marked the SAR’s to market. At December 31,
2015
, the unrecognized compensation expense of all SAR’s was
nil
.
(d) Equity Value Appreciation Awards
In January 2011, the Company awarded
2,119,500
extraordinary Equity Value Appreciation Awards (“EVARs”) to its employees. During 2013, these EVARs resulted in the issuance of
1,917,000
restricted stock units and restricted stock shares (“RSUs”). The RSUs underlying the EVAR grant vested on December 31, 2013.
The Company measured the fair value of EVARs using a lattice based model (Monte Carlo) on the grant date.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
12. Share Capital – (continued)
Information related to EVAR transactions over the past three years is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EVARs Outstanding
|
|
EVARs Exercisable
|
|
Non Vested EVARs
|
|
|
Number Outstanding
|
|
Weighted Average Issuance
Price per
Share
|
|
Number Outstanding
|
|
Weighted Average Issuance
Price per
Share
|
|
|
|
Balance at December 31, 2012
|
1,917,000
|
|
|
$
|
15.33
|
|
|
—
|
|
|
$
|
—
|
|
|
1,917,000
|
|
|
Vested
|
(1,917,000
|
)
|
|
15.33
|
|
|
|
|
|
|
|
|
(1,917,000
|
)
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
Expired and cancelled
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
Balance at December 31, 2013
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
Vested
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
Expired and cancelled
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
Balance at December 31, 2014
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
Vested
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
Expired and cancelled
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
Balance at December 31, 2015
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
The grant date fair value of these EVARs was
$13,240
. At December 31,
2015
, there are
no
outstanding EVARs.
The Company has reserved a total of
2,071,237
Class A shares in order to meet its obligations under various conversion rights, warrants and employee share related plans. At December 31,
2015
there were
1,123,772
shares available for future option and similar grants.
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
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 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 2015
|
|
Level 1 2014
|
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
$
|
740,838
|
|
|
$
|
765,319
|
|
|
$
|
742,017
|
|
|
$
|
751,538
|
|
Our long-term debt includes fixed rate debt. The fair value of this instrument is based on quoted market prices.
The following table presents changes in Deferred Acquisition Consideration for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
|
|
|
2015
|
|
2014
|
|
Beginning balance of contingent payments
|
$
|
172,227
|
|
|
$
|
151,848
|
|
|
Payments
|
(77,301
|
)
|
|
(61,441
|
)
|
|
Grants
(1)
|
174,530
|
|
|
68,642
|
|
|
Redemption value adjustments
(2)
|
41,636
|
|
|
20,816
|
|
|
Transfers (to) from fixed payments
|
—
|
|
|
(5,146
|
)
|
|
Foreign translation adjustment
|
(4,358
|
)
|
|
(2,492
|
)
|
|
Ending balance of contingent payments
|
$
|
306,734
|
|
|
$
|
172,227
|
|
|
|
|
|
(1)
|
Grants are the initial estimated deferred acquisition payments of new acquisitions and step-up transactions completed within that fiscal period.
|
|
|
|
|
(2)
|
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.
|
In addition to the above amounts, there are fixed payments of
$40,370
and
$33,141
for total deferred acquisition consideration of
$347,104
and
$205,368
, which reconciles to the consolidated balance sheets at December 31,
2015
and
2014
, 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.
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,
2015
and
2014
, 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
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)
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 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 (1) engages in business activities from which it earns revenues and incurs expenses, and (2) has discrete financial information that is (3) regularly reviewed by the Chief Operating Decision Maker (“CODM”) to make decisions about resources to be allocated to the segment and assess its performance. During 2015, the Company had a change in the CODM as well as a change in how the CODM manages the business. As a result, in the fourth quarter of 2015, the Company reassessed its determination of operating segments. Decisions regarding allocations of resources are made and will be made based on the overall performance of the overall Partner Firm network. Therefore, the Company has determined that the Partner Firm network represents its operating segment. The Company also reassessed its previous allocation methodology and has conformed the allocations to align with how the CODM manages the business. The overall Partner Firm network consists of each of the Company's operating agencies. The Company now reports in
one
reportable Advertising and Communications Segment in addition to the Corporate Group described as follows:
|
|
|
|
•
|
The Advertising and Communications Segment consists of Partner Firms that deliver innovative, value-added marketing, activation, communications and strategic consulting services to their clients. MDC and its Partner Firms deliver a wide range of customized services, including (1) multi-channel media management and optimization, (2) interactive and mobile marketing, (3) direct marketing, (4) database and customer relationship management, (5) sales promotion, (6) corporate communications, (7) market research, (8) data analytics and insights, (9) corporate identity, design and branding services, (10) social media communications, (11) product and service innovation and (12) e-commerce management.
|
|
|
|
|
•
|
The Corporate Group consists of corporate office expenses incurred in connection with the strategic resources provided to the Advertising and Communications Segment, as well as certain other centrally managed expenses that are not fully allocated to the reportable segment. Office and general expenses include (1) salaries and related expenses for corporate office employees including employees dedicated to supporting the Partner Firms, (2) occupancy expense relating to properties occupied by all corporate office employees, (3) other office and general expenses including professional fees for the financial statement audits, and (4) 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 reportable segment.
|
Prior year results have been recast to reflect the new reportable segment.
The significant accounting policies are in the summary of significant accounting policies included in the notes to the consolidated financial statements.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
14. Segment Information – (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2015
|
|
|
Advertising and Communications
|
|
Corporate
|
|
Total
|
|
Revenue
|
$
|
1,326,256
|
|
|
$
|
—
|
|
|
$
|
1,326,256
|
|
|
Cost of services sold
|
879,716
|
|
|
—
|
|
|
879,716
|
|
|
Office and general expenses
|
258,809
|
|
|
63,398
|
|
|
322,207
|
|
|
Depreciation and amortization
|
50,449
|
|
|
1,774
|
|
|
52,223
|
|
|
Operating profit (loss)
|
137,282
|
|
|
(65,172
|
)
|
|
72,110
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
|
|
|
|
|
7,238
|
|
|
Foreign exchange loss
|
|
|
|
|
|
|
(39,328
|
)
|
|
Interest expense and finance charges, net
|
|
|
|
|
(57,436
|
)
|
|
Loss from continuing operations before income taxes and equity in earnings of non-consolidated affiliates
|
|
|
|
|
|
|
(17,416
|
)
|
|
Income tax expense
|
|
|
|
|
5,664
|
|
|
Loss from continuing operations before equity in earnings of non-consolidated affiliates
|
|
|
|
|
|
|
(23,080
|
)
|
|
Equity in earnings of non-consolidated affiliates
|
|
|
|
|
1,058
|
|
|
Loss from continuing operations
|
|
|
|
|
|
|
(22,022
|
)
|
|
Loss from discontinued operations attributable to MDC Partners Inc., net of taxes
|
|
|
|
|
(6,281
|
)
|
|
Net loss
|
|
|
|
|
|
|
(28,303
|
)
|
|
Net income attributable to noncontrolling interests
|
(9,024
|
)
|
|
(30
|
)
|
|
(9,054
|
)
|
|
Net loss attributable to MDC Partners Inc.
|
|
|
|
|
$
|
(37,357
|
)
|
|
Stock-based compensation
|
$
|
15,056
|
|
|
$
|
2,740
|
|
|
$
|
17,796
|
|
|
Capital expenditures from continuing operations
|
$
|
23,204
|
|
|
$
|
371
|
|
|
$
|
23,575
|
|
|
Goodwill and intangibles
|
$
|
942,683
|
|
|
$
|
—
|
|
|
$
|
942,683
|
|
|
Total assets
|
$
|
1,375,372
|
|
|
$
|
214,878
|
|
|
$
|
1,590,250
|
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
14. Segment Information – (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2014
|
|
|
Advertising and Communications
|
|
Corporate
|
|
Total
|
|
Revenue
|
$
|
1,223,512
|
|
|
$
|
—
|
|
|
$
|
1,223,512
|
|
|
Cost of services sold
|
798,518
|
|
|
—
|
|
|
798,518
|
|
|
Office and general expenses
|
223,781
|
|
|
66,292
|
|
|
290,073
|
|
|
Depreciation and amortization
|
45,387
|
|
|
1,785
|
|
|
47,172
|
|
|
Operating profit (loss)
|
155,826
|
|
|
(68,077
|
)
|
|
87,749
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
|
|
|
|
|
689
|
|
|
Foreign exchange loss
|
|
|
|
|
|
|
(18,482
|
)
|
|
Interest expense and finance charges, net
|
|
|
|
|
(54,847
|
)
|
|
Income from continuing operations before income taxes and equity in earnings of non-consolidated affiliates
|
|
|
|
|
|
|
15,109
|
|
|
Income tax expense
|
|
|
|
|
12,422
|
|
|
Income from continuing operations before equity in earnings of non-consolidated affiliates
|
|
|
|
|
|
|
2,687
|
|
|
Equity in earnings of non-consolidated affiliates
|
|
|
|
|
1,406
|
|
|
Income from continuing operations
|
|
|
|
|
|
|
4,093
|
|
|
Loss from discontinued operations attributable to MDC Partners Inc., net of taxes
|
|
|
|
|
(21,260
|
)
|
|
Net loss
|
|
|
|
|
|
|
(17,167
|
)
|
|
Net income attributable to noncontrolling interests
|
(6,890
|
)
|
|
—
|
|
|
(6,890
|
)
|
|
Net loss attributable to MDC Partners Inc.
|
|
|
|
|
$
|
(24,057
|
)
|
|
Stock-based compensation
|
$
|
12,033
|
|
|
$
|
5,663
|
|
|
$
|
17,696
|
|
|
Capital expenditures from continuing operations
|
$
|
25,079
|
|
|
$
|
1,337
|
|
|
$
|
26,416
|
|
|
Goodwill and intangibles
|
$
|
937,494
|
|
|
$
|
—
|
|
|
$
|
937,494
|
|
|
Total assets
|
$
|
1,368,137
|
|
|
$
|
280,753
|
|
|
$
|
1,648,890
|
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
14. Segment Information – (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2013
|
|
|
Advertising and Communications
|
|
Corporate
|
|
Total
|
|
Revenue
|
$
|
1,062,478
|
|
|
$
|
—
|
|
|
$
|
1,062,478
|
|
|
Cost of services sold
|
704,969
|
|
|
—
|
|
|
704,969
|
|
|
Office and general expenses
|
212,933
|
|
|
143,031
|
|
|
355,964
|
|
|
Depreciation and amortization
|
34,745
|
|
|
1,394
|
|
|
36,139
|
|
|
Operating profit (loss)
|
109,831
|
|
|
(144,425
|
)
|
|
(34,594
|
)
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
|
|
|
|
|
2,531
|
|
|
Foreign exchange loss
|
|
|
|
|
|
|
(5,516
|
)
|
|
Interest expense, finance charges, and loss on redemption of notes, net
|
|
|
|
|
(100,271
|
)
|
|
Loss from continuing operations before income taxes and equity in earnings of non-consolidated affiliates
|
|
|
|
|
|
|
(137,850
|
)
|
|
Income tax benefit
|
|
|
|
|
(4,367
|
)
|
|
Loss from continuing operations before equity in earnings of non-consolidated affiliates
|
|
|
|
|
|
|
(133,483
|
)
|
|
Equity in earnings of non-consolidated affiliates
|
|
|
|
|
281
|
|
|
Loss from continuing operations
|
|
|
|
|
|
|
(133,202
|
)
|
|
Loss from discontinued operations attributable to MDC Partners Inc., net of taxes
|
|
|
|
|
(9,200
|
)
|
|
Net loss
|
|
|
|
|
|
|
(142,402
|
)
|
|
Net income attributable to noncontrolling interests
|
(6,459
|
)
|
|
(2
|
)
|
|
(6,461
|
)
|
|
Net loss attributable to MDC Partners Inc.
|
|
|
|
|
$
|
(148,863
|
)
|
|
Stock-based compensation
|
$
|
8,950
|
|
|
$
|
91,455
|
|
|
$
|
100,405
|
|
|
Capital expenditures from continuing operations
|
$
|
14,677
|
|
|
$
|
2,132
|
|
|
$
|
16,809
|
|
|
Goodwill and intangibles
|
$
|
800,595
|
|
|
$
|
—
|
|
|
$
|
800,595
|
|
|
Total assets
|
$
|
1,220,753
|
|
|
$
|
204,474
|
|
|
$
|
1,425,227
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
$
|
52,305
|
|
|
$
|
6,817
|
|
|
$
|
4,435
|
|
|
$
|
63,557
|
|
|
2014
|
$
|
48,884
|
|
|
$
|
7,099
|
|
|
$
|
4,257
|
|
|
$
|
60,240
|
|
|
Goodwill and Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
$
|
798,746
|
|
|
$
|
122,821
|
|
|
$
|
21,116
|
|
|
$
|
942,683
|
|
|
2014
|
$
|
759,035
|
|
|
$
|
154,349
|
|
|
$
|
24,110
|
|
|
$
|
937,494
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
$
|
1,085,051
|
|
|
$
|
129,039
|
|
|
$
|
112,166
|
|
|
$
|
1,326,256
|
|
|
2014
|
$
|
993,474
|
|
|
$
|
150,390
|
|
|
$
|
79,648
|
|
|
$
|
1,223,512
|
|
|
2013
|
$
|
870,525
|
|
|
$
|
135,630
|
|
|
$
|
56,323
|
|
|
$
|
1,062,478
|
|
15. Related Party Transactions
|
|
|
|
(a)
|
The Company incurred service fees and paid cash incentive awards totaling
$8,825
,
$13,592
and
$15,992
in
2015
,
2014
and
2013
, respectively, relating to companies controlled by Miles Nadal, the former Chairman and Chief Executive Officer (“CEO”) of the Company. Mr. Nadal previously provided such services to the Company as its Chief Executive Officer pursuant to a Management Services Agreement (as amended and restated on May 6, 2013, the “Services Agreement”) among the Company, Mr. Nadal and with Nadal Management, Inc. In connection with Mr. Nadal’s resignation on July 20, 2015, the Company and Mr. Nadal terminated the Services Agreement and entered into a separation agreement (the “Separation Agreement”), dated as of July 20, 2015. Pursuant to the Separation Agreement, Mr. Nadal agreed, among other things, to: (i) repay to the Company
$1,877
in connection with certain amounts paid to or for the benefit of Mr. Nadal and an affiliate; (ii) 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; and (iii) customary non-disparagement and confidentiality obligations, reaffirmation of restrictive covenants, and an intellectual property rights assignment. Mr. Nadal was not paid any compensation payments or severance under the Separation Agreement.
|
|
|
|
|
(b)
|
Pursuant to the amended Services Agreement (which has since been terminated, as described in footnote 15(a) above), the Company agreed to provide to its former CEO, Miles Nadal, a special bonus of
C$10,000
upon the first to occur of (i) the average market price of the Company’s Class A subordinate voting shares is
C$30
per share or more for more than
20
consecutive trading days (measured as of the close of trading on each applicable date) or (ii) a change of control of the Company. During November 2013, this bonus was earned and paid to Mr. Nadal in the amount of
C$10,000
(US
$9,649
).
|
|
|
|
|
(c)
|
Beginning in 2014 through June 30, 2015, MDC chartered for business purposes an airplane and helicopter (together, the “Aircraft”) owned by entities controlled by Mr. Nadal (the former CEO) and leased to an independent corporate aircraft management company. Entities controlled by Mr. Nadal paid for the purchases of the Aircraft and were legally responsible and have paid for all operating, personnel and maintenance costs associated with the Aircraft’s operations. Payments by third parties to charter the Aircraft from the corporate aircraft management company offset a portion of the costs. Payments by MDC for the business use of the Aircraft by Mr. Nadal were made to the corporate aircraft management company at a fixed hourly rate set forth in the aircraft service agreement between the aircraft management company and entities controlled by Mr. Nadal. In the first and second quarter of 2015, MDC paid a total of
$398
for the business use of the Aircraft. Promptly following Mr. Nadal's resignation on July 20, 2015, the Company prohibited the use of private aircraft travel by its directors and executive officers.
|
|
|
|
|
(d)
|
From May 2015 to December 31, 2015, Lori Senecal held the dual titles of President and Chief Executive Officer of the MDC Partner Network and Chief Executive Officer of Partner Firm Crispin Porter & Bogusky (“CPB”). As of January 1, 2016, Ms. Senecal assumed the exclusive role as Global Chief Executive Officer of CPB. Ms. Senecal's husband, William Grogan, has been employed by the Company since July 1, 2015 as President of Global Accounts. In 2015, Mr. Grogan's total compensation from the Company and its affiliate (kbs+), including salary, bonus, and other benefits, totaled approximately
$943
. His compensation is commensurate with that of his peers.
|
|
|
|
|
(e)
|
Scott 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 2015, her total compensation, including salary, bonus and other benefits, totaled approximately
$125
. Her compensation is commensurate with that of her peers.
|
|
|
|
|
(f)
|
In 2015, Union Advertising Canada LP (“Union”), a Partner Firm, provided certain website development and related marketing services to each of Peerage Realty Partners (“Peerage”) and Peerage’s subsidiary, Baker Real Estate Incorporated (“Baker”). Miles Nadal, the Company’s former CEO, is the majority equity owner of Peerage and Baker. The amount of fees paid by each of Peerage and Baker in respect of these services in 2015 was
$131
, which fees were customary for these types of services.
|
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
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
2016
to
2022
. 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, 2015 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
$17,964
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
$107
by the issuance of share capital.
In addition, the Company is obligated under similar put option rights to pay an aggregate amount of approximately
$48,900
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
$2,607
less than the initial redemption value recorded in Redeemable Noncontrolling Interests.
Included in Redeemable Noncontrolling Interests at December 31, 2015 was
$69,471
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,
2015
,
2014
, and
2013
, 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 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.
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 the Company, CFO David Doft, Mr. Nadal, and Mr. Sabatino. On December 11, 2015, North Collier and co-lead plaintiff Plymouth County Retirement Association filed an amended complaint, adding two additional defendants, Mr. Gendel and Senator Kirby. 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 the Company's financial disclosures, executive compensation, goodwill accounting, and internal controls. The Company intends to vigorously defend this suit.
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)
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 as Defendants the Company, former CEO Miles S. Nadal, former CAO Michael C. Sabatino, CFO David Doft and BDO USA, 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 an SEC investigation. The Company also intends to vigorously defend this suit.
Commitments
. At December 31,
2015
, the Company had
$5,033
of undrawn letters of credit. In addition, the Company has commitments to fund investments in an aggregate amount of
$3,449
.
Leases
. The Company and its subsidiaries lease certain facilities and equipment. For the years ended December 31,
2015
,
2014
, and
2013
, gross premises rental expense amounted to
$47,583
,
$42,657
, and
$38,366
, respectively, which was reduced by sublease income of
$1,739
,
$1,449
, and
$897
, 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.
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,
2016
and thereafter, are as follows:
|
|
|
|
|
|
|
|
|
Period
|
|
Amount
|
|
2016
|
|
$
|
39,448
|
|
|
2017
|
|
37,467
|
|
|
2018
|
|
37,055
|
|
|
2019
|
|
33,004
|
|
|
2020
|
|
30,492
|
|
|
2021 and thereafter
|
|
79,272
|
|
|
|
|
$
|
256,738
|
|
At December 31,
2015
, the total future cash to be received on sublease income is
$11,857
.
17. New Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, which amends the ASC and creates Topic 842, Leases. Topic 842 will require lessees to recognize lease assets and lease liabilities for those leases classified as operating leases under previous US GAAP on the balance sheet. This guidance is effective for annual periods beginning after December 15, 2018 and early adoption is permitted. The Company is currently assessing the impact on its consolidated financial position and results of operations.
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 November 2015, the FASB issued ASU 2015-17, Income Taxes, which amends Topic 740 and requires all deferred income tax assets and liabilities to be presented as noncurrent on the balance sheet. This amended guidance is effective beginning January 1, 2017, and may be applied retrospectively or prospectively, with early adoption permitted. 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 September 2015, the FASB issued ASU 2015-16, Business Combinations. This update amends Topic 805 and requires that an acquirer (i) recognize adjustments to provision amounts identified during the measurement period in the reporting period in which the adjustment amounts are determined, (ii) record the effect on earnings, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date, and (iii) disclose the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. This guidance is effective for the Company beginning January 1, 2016. The Company is currently assessing the impact on the presentation of its financial position and disclosures.
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)
In April 2015, the FASB issued ASU 2015-05, Intangibles - Goodwill and Other-Internal-Use Software. This update amends Topic 350 and provides explicit guidance about a customer’s accounting for fees paid in a cloud computing arrangement and whether it includes a software license. This guidance is effective for the Company beginning January 1, 2016. The implementation of the amended accounting guidance is not expected to have a material impact on the consolidated financial position or results of operations.
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest. This update amends Topic 835 and 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. This guidance is effective for the Company beginning January 1, 2016. The Company will adopt this amended guidance as of the quarter ended March 31, 2016.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This update supersedes Topic 605, Revenue Recognition. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity must apply a five-step approach. ASU 2014-09 provides for one of two methods of transition: retrospective application to each prior period presented; or, recognition of the cumulative effect of retrospective application of the new standard in the period of initial application. This guidance is effective for the Company beginning January 1, 2018. The Company is currently assessing the impact and choice of transition method.
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
|
|
|
2015
|
|
2014
|
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest cost on benefit obligation
|
1,864
|
|
|
1,788
|
|
|
Expected return on plan assets
|
(2,069
|
)
|
|
(2,025
|
)
|
|
Curtailment and settlements
|
—
|
|
|
—
|
|
|
Amortization of prior service cost
|
—
|
|
|
—
|
|
|
Amortization of actuarial (gains) losses
|
103
|
|
|
—
|
|
|
Net periodic benefit cost (benefit)
|
$
|
(102
|
)
|
|
$
|
(237
|
)
|
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.
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)
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
|
|
|
2015
|
|
2014
|
|
Curtailment/settlement
|
$
|
—
|
|
|
$
|
—
|
|
|
Current year actuarial (gain) loss
|
526
|
|
|
11,515
|
|
|
Amortization of actuarial gain (loss)
|
(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
|
$
|
423
|
|
|
$
|
11,515
|
|
|
Total recognized in net periodic benefit cost and other comprehensive (income) loss
|
321
|
|
|
$
|
11,278
|
|
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
|
|
|
2015
|
|
2014
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
Benefit obligation, Beginning balance
|
$
|
43,799
|
|
|
$
|
32,857
|
|
|
Service Cost
|
—
|
|
|
—
|
|
|
Interest Cost
|
1,864
|
|
|
1,788
|
|
|
Change in Mortality
|
—
|
|
|
3,287
|
|
|
Plan amendments
|
—
|
|
|
—
|
|
|
Curtailment/settlement
|
—
|
|
|
—
|
|
|
Actuarial (gains) losses
|
(2,774
|
)
|
|
7,681
|
|
|
Benefits paid
|
(2,593
|
)
|
|
(1,814
|
)
|
|
Benefit obligation, Ending balance
|
40,296
|
|
|
43,799
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
Fair value of plan assets, Beginning balance
|
28,360
|
|
|
26,868
|
|
|
Actual return on plan assets
|
(1,232
|
)
|
|
1,478
|
|
|
Employer contributions
|
655
|
|
|
1,828
|
|
|
Benefits paid
|
(2,593
|
)
|
|
(1,814
|
)
|
|
Fair value of plan assets, Ending balance
|
25,190
|
|
|
28,360
|
|
|
Unfunded status
|
$
|
15,106
|
|
|
$
|
15,439
|
|
Amounts recognized in the balance sheet at December 31 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Pension
Benefits
|
|
|
2015
|
|
2014
|
|
Noncurrent liability
|
$
|
15,106
|
|
|
$
|
15,439
|
|
|
Net amount recognized
|
$
|
15,106
|
|
|
$
|
15,439
|
|
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)
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
|
|
|
2015
|
|
2014
|
|
Accumulated net actuarial losses
|
$
|
9,219
|
|
|
$
|
8,796
|
|
|
Accumulated prior service cost
|
—
|
|
|
—
|
|
|
Accumulated transition obligation
|
—
|
|
|
—
|
|
|
Amount recognized, net of tax
|
$
|
9,219
|
|
|
$
|
8,796
|
|
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.
The following weighted average assumptions were used to determine benefit obligations as of December 31:
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Pension
Benefits
|
|
|
2015
|
|
2014
|
|
Discount rate
|
4.69
|
%
|
|
4.38
|
%
|
|
Rate of compensation increase
|
N/A
|
|
|
N/A
|
|
The discount rate assumptions at December 31,
2015
and
2014
were determined independently. A yield curve was produced for a universe containing the majority of US-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
|
|
|
2015
|
|
2014
|
|
Discount rate
|
4.38
|
%
|
|
5.26
|
%
|
|
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.
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)
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, 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
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Asset Category:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Fund – Short Term Investments
|
$
|
982
|
|
|
$
|
251
|
|
|
$
|
731
|
|
|
$
|
—
|
|
|
Common Stock
|
11,099
|
|
|
11,099
|
|
|
—
|
|
|
—
|
|
|
Corporate Bonds
|
5,460
|
|
|
—
|
|
|
5,460
|
|
|
—
|
|
|
Mutual Funds
|
10,606
|
|
|
10,606
|
|
|
—
|
|
|
—
|
|
|
Foreign Stock
|
213
|
|
|
213
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
28,360
|
|
|
$
|
22,169
|
|
|
$
|
6,191
|
|
|
$
|
—
|
|
The pension plans weighted-average asset allocation for the years ended December 31, 2015 and 2014 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target Allocation
|
|
Actual Allocation
|
|
Actual Allocation
|
|
|
2015
|
|
2015
|
|
2014
|
|
Asset Category:
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
60
|
%
|
|
68.0
|
%
|
|
65.0
|
%
|
|
Debt Securities
|
40
|
%
|
|
25.7
|
%
|
|
31.5
|
%
|
|
Cash/Cash Equivalents and Short Term Investments
|
—
|
%
|
|
6.3
|
%
|
|
3.5
|
%
|
|
|
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 US Treasury securities.
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 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,
2015
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 periodic benefit cost will occur in accordance with ASC 715-30 and ASC 715-60. The estimated amounts that will be amortized in 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Estimated Amortization:
|
|
2016
|
|
Prior service cost (credit) amortization
|
|
$
|
—
|
|
|
Net loss amortization
|
|
137
|
|
|
Total
|
|
$
|
137
|
|
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
|
|
2016
|
|
$
|
1,517
|
|
|
2017
|
|
$
|
1,666
|
|
|
2018
|
|
$
|
1,823
|
|
|
2019
|
|
$
|
1,832
|
|
|
2020
|
|
$
|
2,092
|
|
|
2021 – 2025
|
|
$
|
11,399
|
|
The pension plan contributions are deposited into a trust, and the pension plan benefit payments are made from trust assets.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
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, 2013
|
$
|
1,607
|
|
|
$
|
(2,404
|
)
|
|
$
|
(797
|
)
|
|
Other comprehensive income before reclassifications
|
—
|
|
|
3,448
|
|
|
3,448
|
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
(10,403
|
)
|
|
—
|
|
|
(10,403
|
)
|
|
Other comprehensive income (loss)
|
$
|
(10,403
|
)
|
|
$
|
3,448
|
|
|
$
|
(6,955
|
)
|
|
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
|
|
Reclassifications for the year ended December 31, 2015 were as follows:
|
|
|
|
|
|
|
|
|
2015
|
|
Amortization of defined pension plan:
|
|
|
|
Prior service cost
|
$
|
—
|
|
|
Actuarial losses
|
103
|
|
|
Net periodic benefit cost
|
103
|
|
|
Income tax expense
|
41
|
|
|
Net of tax
|
$
|
62
|
|
For the year ended December 31, 2014, there were
no
reclassifications from accumulated other comprehensive income (loss).
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
$
|
302,222
|
|
|
$
|
336,606
|
|
|
$
|
328,415
|
|
|
$
|
359,013
|
|
|
2014
|
$
|
274,854
|
|
|
$
|
299,356
|
|
|
$
|
309,391
|
|
|
$
|
339,911
|
|
|
Cost of services sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
$
|
210,419
|
|
|
$
|
225,042
|
|
|
$
|
212,925
|
|
|
$
|
231,330
|
|
|
2014
|
$
|
181,468
|
|
|
$
|
188,875
|
|
|
$
|
205,549
|
|
|
$
|
222,626
|
|
|
Income (loss) from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
$
|
(23,417
|
)
|
|
$
|
31,072
|
|
|
$
|
(5,166
|
)
|
|
$
|
(24,511
|
)
|
|
2014
|
$
|
(7,213
|
)
|
|
$
|
19,555
|
|
|
$
|
(1,868
|
)
|
|
$
|
(6,381
|
)
|
|
Net income (loss) attributable to MDC Partners Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
$
|
(32,091
|
)
|
|
$
|
29,560
|
|
|
$
|
(8,604
|
)
|
|
$
|
(26,222
|
)
|
|
2014
|
$
|
(8,846
|
)
|
|
$
|
16,470
|
|
|
$
|
(4,922
|
)
|
|
$
|
(26,759
|
)
|
|
Income (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
2015
|
$
|
(0.52
|
)
|
|
$
|
0.57
|
|
|
$
|
(0.15
|
)
|
|
$
|
(0.52
|
)
|
|
2014
|
$
|
(0.17
|
)
|
|
$
|
0.36
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.17
|
)
|
|
Net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
$
|
(0.65
|
)
|
|
$
|
0.60
|
|
|
$
|
(0.17
|
)
|
|
$
|
(0.52
|
)
|
|
2014
|
$
|
(0.18
|
)
|
|
$
|
0.33
|
|
|
$
|
(0.10
|
)
|
|
$
|
(0.54
|
)
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
$
|
(0.52
|
)
|
|
$
|
0.56
|
|
|
$
|
(0.15
|
)
|
|
$
|
(0.52
|
)
|
|
2014
|
$
|
(0.17
|
)
|
|
$
|
0.35
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.17
|
)
|
|
Net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
$
|
(0.65
|
)
|
|
$
|
0.59
|
|
|
$
|
(0.17
|
)
|
|
$
|
(0.52
|
)
|
|
2014
|
$
|
(0.18
|
)
|
|
$
|
0.32
|
|
|
$
|
(0.10
|
)
|
|
$
|
(0.54
|
)
|
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
2015
and
2014
included a foreign exchange loss of
$9,531
and
$8,066
, respectively.
|
|
|
|
|
•
|
The fourth quarter of
2015
and
2014
included stock-based compensation charges of
$4,771
and
$5,463
, respectively.
|
|
|
|
|
•
|
The fourth quarter of
2015
and
2014
included deferred acquisition adjustments of
$41,910
and
$1,751
, respectively.
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
21. Other Events
The Special Committee of the Board of Directors (the “Special Committee”) and management have continued to fully cooperate with the SEC in connection with its ongoing investigation of the Company, including with respect to payments made to or on behalf of Miles Nadal and Nadal Management Limited. Mr. 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 and the second installment of
$1,500
in December 2015. The Company recorded a charge of approximately
$5,338
in 2015 for the balance of prior cash bonus award amounts that will not be recovered.
The SEC investigation of these expenses and related matters remains ongoing. For the twelve months ended December 31, 2015, the Company has incurred
$13,705
of professional expenses relating to the ongoing SEC investigation, which were offset by
$1,000
of proceeds from insurance.
