UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
8-K
Current
Report Pursuant to Section 13 or 15(d)
of
the Securities Exchange Act of 1934
Date of
Report (Date Earliest Event reported) – May 10, 2010 (May 6,
2010)
MDC
PARTNERS INC.
(Exact
name of registrant as specified in its charter)
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Ontario
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001-13718
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98-0364441
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||
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(Jurisdiction of Incorporation)
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(Commission File Number)
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(IRS Employer Identification No.)
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45
Hazelton Ave., Toronto, Ontario, Canada M5R 2E3
(Address
of principal executive offices and zip code)
(416)
960-9000
(Registrant’s
Telephone Number)
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions:
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¨
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Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
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¨
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Soliciting material
pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
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¨
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Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
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¨
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Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e- 4(c))
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On May 6,
2010, MDC Partners Inc. (the “Company”) acquired a 75% equity interest in
Integrated Media Solutions Partners LLC, a Delaware limited liability company,
the successor-in-interest to the business formerly owned by Integrated Media
Solutions, LLC, a New York limited liability company (“IMS”). The
remaining 25% of the outstanding equity interests in IMS were retained by Robert
Ingram, Desiree Dumont and Ron Corvino, the existing principals of
IMS. IMS is a direct response media planning, reporting, analysis and
optimization company for offline and online media. The purchase price paid by
the Company consisted of $20 million in cash paid at closing, plus additional
equal non-contingent payments to the seller totaling $12.67 million to be paid
annually for three years, $10 million of which bears interest at 6% per annum.
The purchase price is subject to customary working capital
adjustments. In addition, the Company will make contingent payments
based on IMS’ financial performance from the date of closing through December
31, 2014. In connection with the IMS acquisition, a wholly-owned subsidiary of
the Company and each of the other equity holders of IMS entered into an
operating agreement that specifies the parties’ respective economic, governance
and liquidity rights, including the Company’s right to priority distributions
from IMS for the period through 2014. IMS also entered into new employment
agreements with the existing principals. The Company has call rights
with respect to the remaining 25% of the equity interests in IMS that could
increase the Company’s ownership to 100% in 2015.
Item
9.01 Financial Statements and Exhibits.
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(a)
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Financial
Statements of businesses acquired.
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Audited
financial statements of Integrated Media Solutions, LLC for the years ended
December 31, 2009 and 2008, and the related notes thereto.
The
required historical financial information of IMS included in this Form 8-K shall
be deemed filed for purposes of the Securities Exchange Act of 1934, as
amended. IMS’ historical financial results set forth below should not
be viewed as indicative of the contribution by IMS to the Company’s future
operating results.
2
Integrated
Media Solutions, LLC
Contents
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Independent
auditors’ report
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4
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Financial
statements:
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|
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Balance
sheets
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5
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Statements
of income and members’ equity (deficit)
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6
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Statements
of cash flows
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7
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|
Summary
of significant accounting policies
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8-12
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|
Notes
to financial statements
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13-16
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3
 |
100
Park Avenue
New
York, New York 10017
Telephone:
212-885-8000
Fax:
212-697-1299
|
Independent
Auditors’ Report
Board of
Directors
Integrated
Media Solutions, LLC
New York,
New York
We have
audited the accompanying balance sheets of Integrated Media Solutions, LLC as of
December 31, 2009 and 2008 and the related statements of income and members’
equity (deficit), and cash flows for the years then ended. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with auditing standards generally accepted in
the United States of America. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Integrated Media Solutions, LLC at
December 31, 2009 and 2008, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
/s/ BDO
Seidman, LLP
May 7,
2010
4
Balance
Sheets
(in
thousands)
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December 31,
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2009
|
2008
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||||||
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Assets
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||||||||
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Current
assets:
|
||||||||
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Cash
and cash equivalents
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$ | 18,016 | $ | 5,691 | ||||
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Accounts
receivable, less allowance for doubtful accounts of $68 in 2009 and $711
in 2008
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15,881 | 16,055 | ||||||
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Expenditures
billable to clients
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5,127 | 949 | ||||||
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Other
current assets
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191 | 276 | ||||||
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Total
current assets
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39,215 | 22,971 | ||||||
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Property
and equipment, net
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837 | 1,004 | ||||||
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Security
deposits
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319 | 317 | ||||||
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Total
assets
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$ | 40,371 | $ | 24,292 | ||||
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Liabilities
and Members’ Equity (Deficit)
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||||||||
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Current
liabilities:
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||||||||
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Accounts
payable
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$ | 17,202 | $ | 12,103 | ||||
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Accruals
and other liabilities
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6,598 | 4,859 | ||||||
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Advance
billings
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15,937 | 8,361 | ||||||
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Capital
lease
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30 | 49 | ||||||
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Total
Liabilities
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39,767 | 25,372 | ||||||
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Total
Members’ Equity (Deficit)
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604 | (1,080 | ) | |||||
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Total
Liabilities and Members’ Equity
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$ | 40,371 | $ | 24,292 | ||||
See
accompanying summary of significant accounting policies
and
notes to financial statements.
5
Statements
of Income and Members’ Equity (Deficit)
(in
thousands)
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December 31,
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2009
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2008
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||||||
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Net
revenues
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$ | 28,618 | $ | 27,812 | ||||
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Operating
expenses:
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||||||||
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Cost
of services sold
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13,522 | 14,541 | ||||||
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Office
and general expenses
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5,383 | 5,241 | ||||||
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Depreciation
and amortization
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326 | 336 | ||||||
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Total
operating expenses
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19,231 | 20,118 | ||||||
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Income
from operations
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9,387 | 7,694 | ||||||
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Other
income
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||||||||
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Interest
income
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22 | 201 | ||||||
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Income
before provisions for income taxes
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9,409 | 7,895 | ||||||
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Income
tax provision
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300 | 281 | ||||||
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Net
income
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9,109 | 7,614 | ||||||
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Members’
equity (deficit) – beginning of year
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(1,080 | ) | 477 | |||||
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Less
distributions to members
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(7,425 | ) | (9,171 | ) | ||||
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Members’
equity (deficit) – end of year
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604 | (1,080 | ) | |||||
See
accompanying summary of significant accounting policies
and
notes to financial statements.
6
Statements
of Cash Flows
(in
thousands)
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December 31,
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2009
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2008
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||||||
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Cash
flows from operating activities:
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||||||||
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Net
income
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$ | 9,109 | $ | 7,614 | ||||
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Adjustments
to reconcile net income to net cash provided by operating
activities:
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||||||||
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Depreciation
and amortization
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326 | 336 | ||||||
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Bad
debt expense
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68 | 712 | ||||||
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(Increase)
decrease in cash resulting from changes in operating assets and
liabilities:
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||||||||
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Accounts
receivable
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106 | 6,427 | ||||||
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Expenditures
billable to clients
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(4,178 | ) | 1,315 | |||||
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Other
current assets
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83 | (241 | ) | |||||
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Accounts
payable
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5,099 | (725 | ) | |||||
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Advance
billings
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7,576 | (2,979 | ) | |||||
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Other
current liabilities
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1,739 | (2,947 | ) | |||||
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Net
cash provided by operating activities
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19,928 | 9,512 | ||||||
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Cash
flows from investing activities:
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||||||||
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Purchase
of property and equipment
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(159 | ) | (425 | ) | ||||
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Net
cash used in investing activities
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(159 | ) | (425 | ) | ||||
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Cash
flows from financing activities:
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||||||||
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Payments
on capital lease obligations
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(19 | ) | (18 | ) | ||||
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Distribution
to members
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(7,425 | ) | (9,171 | ) | ||||
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Net
cash used in financing activities
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(7,444 | ) | (9,189 | ) | ||||
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Net
increase (decrease) in cash and cash equivalents
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12,325 | (102 | ) | |||||
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Cash
and cash equivalents at beginning of year
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5,691 | 5,793 | ||||||
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Cash
and cash equivalents at end of year
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$ | 18,016 | $ | 5,691 | ||||
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Supplemental
disclosure of cash flow information
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||||||||
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Cash
paid during the year for:
|
||||||||
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Income
taxes
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$ | 166 | $ | 330 | ||||
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Interest
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4 | 5 | ||||||
See
accompanying summary of significant accounting policies
and
notes to financial statements.
7
Summary
of Significant Accounting Policies
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Nature
of Business
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Founded
in 2002, Integrated Media Solutions, LLC (the “Company”) is a marketing
services company that performs media planning, buying, reporting, analysis
and optimization of offline and online media, including direct response
television, as well as all forms of interactive advertising, radio and
print media.
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|
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Use
of Estimates
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The
preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates and assumptions.
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|
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Cash and Cash Equivalents
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The
Company considers all highly liquid instruments with original maturities
of three months or less, when purchased, to be cash
equivalents.
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|
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At
times, cash balances held at financial institutions are in excess of the
federally insured limit and the Company is exposed to the credit risk
resulting from this concentration of cash.
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||
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Accounts Receivable and
Allowance for
Doubtful Account
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Accounts
receivable consists of trade receivables recorded at original invoice
amounts, less an estimated allowance for uncollectible accounts. Trade
credit is generally extended on a short-term basis; thus trade receivables
do not bear interest. Trade receivables are periodically evaluated for
collectability based on past credit histories with customers and their
current financial conditions. Changes in the estimated collectability of
trade receivables are recorded in the results of operations for the period
in which the estimates are revised. Trade receivables that are deemed
uncollectible are offset against the allowance for uncollectible accounts.
The Company generally does not require collateral for trade
receivables.
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Fees
earned and unbilled to clients are recognized and classified as a
component of accounts
receivable.
|
8
Summary
of Significant Accounting Policies
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Expenditures Billable to
Clients
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Expenditures
billable to clients consist principally of media costs incurred prior to
the campaign date, which is the date the revenues and the related expenses
will be recorded to revenues and cost of services sold, respectively, and
the related costs are recorded in advance billings.
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|||
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Property and Equipment,
Net
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Property
and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are provided over the
estimated useful lives of the assets by straight line method using the
half-year convention as follows:
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|||
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Estimated
|
||||
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Assets
|
Useful lives
|
|||
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IT
and Office Equipment
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5
years
|
|||
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Furniture
and Fixtures
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5
years
|
|||
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Computer
Software
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3
years
|
|||
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Leasehold
Improvements
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Lesser
of the
|
|||
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life
of lease or
|
||||
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life of the asset
|
||||
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Accounts
Payable
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Accounts
payable generally represents media payables and other unpaid costs
incurred in the ordinary course of business.
|
|||
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Revenue
Recognition
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The
Company offers several media related services including direct response
television, digital marketing, print, and integrated
analytics.
|
|||
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The
Company’s revenue is primarily from commissions, fees, or performance
based client agreements related to media placement and brokerage of
television, internet and print advertising. For commission based
agreements, revenue is recognized on the media run date. For fee based
client agreements, revenue is recognized as services are performed. For
performance based client agreements, revenue is recognized in the month of
media activity.
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||||
9
Summary
of Significant Accounting Policies
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Revenue
Recognition
(continued)
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The
Company follows Accounting Standards Codification (“ASC”) 605-45
“Principle Agent Considerations – Reporting Revenue Gross or Net”
(formerly, EITF No. 99-19, “Reporting Revenue Gross as a Principal versus
Net as an Agent”). This standard addresses when revenue should be recorded
at the gross amount billed because revenue has been earned from the sale
of goods or services, or the net amount retained because a fee or
commission has been earned. The Company reports revenue on a “net” basis
since in general, it acts as an agent procuring media on behalf of its
clients.
|
|
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Fees
billed to clients in excess of fees recognized as revenue are classified
as advanced billings.
|
10
Summary
of Significant Accounting Policies
|
Income
Taxes
|
The
Company, with the consent of its members, has elected to be taxed as
limited liability company (“Pass-through entity”). Members report their
pro-rata share of the Company’s federal taxable income on their respective
individual income tax returns. The company is subject to income taxes in
certain states due to its election to file Composite income tax returns
(on behalf of its owners), as well as New York City taxes. Accordingly a
provision for state and local income taxes is provided in the accompanying
financial statements.
|
|
|
The
Company accounts for income taxes in accordance with ASC 740, “Income
Taxes,” (formerly SFAS No. 109, ‘‘Accounting for Income Taxes” and FIN No.
48, “Accounting for Uncertainty in Income Taxes - an interpretation of
FASB Statement No. 109)” ASC 740 (formerly FIN No. 48) provides guidance
on financial statement recognition and measurement of tax positions taken,
or expected to be taken, in tax returns. The amount of unrecognized tax
benefits may increase or decrease in the future for various reasons,
including adding amounts for current tax year positions, expiration of
open income tax returns due to statutes of limitation, changes in
management's judgment about the level of uncertainty, status of tax
examinations, litigation and legislative activity and the addition or
elimination of uncertain tax positions. As of December 31, 2009, there
were no uncertain tax positions identified by the
Company.
|
||
|
The
Company’s policy is to recognize interest and penalties, should they be
incurred, as a component of income before provision for income taxes.
Penalties would be recorded in office and administrative expenses and
interest paid would be recorded in interest expense in the statements of
income. During the year ended December 31, 2009 the Company did not record
any interest income, interest expense or
penalties.
|
11
Summary
of Significant Accounting Policies
|
Leases
|
The Company accounts for
operating leases with scheduled rent increases during the lease
term in accordance with ASC 840, “Leases,” which requires that rental
payments that are not made on a straight-line basis be recognized on a
straight-line basis. Any rent escalations, concessions and holidays in the
Company’s operating leases
are recognized on a straight-line basis over the lease term
(including any rent holiday
period).
|
12
Notes
to Financial Statements
(in thousands)
(in thousands)
|
1.
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Property,
Plant and Equipment, Net
|
Property
and equipment, net consists of the following:
|
||||||||
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December 31
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2009
|
2008
|
||||||||
|
IT
and Office Equipment
|
$
|
1,942
|
$
|
1,804
|
||||||
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Furniture
and fixtures
|
193
|
189
|
||||||||
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Computer
Software
|
195
|
196
|
||||||||
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Leasehold
Improvements
|
387
|
369
|
||||||||
|
Other
Assets
|
4
|
4
|
||||||||
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2,721
|
2,562
|
|||||||||
|
Less
accumulated depreciation
|
(1,884
|
)
|
(1,558
|
)
|
||||||
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Total
property and equipment
|
$
|
837
|
$
|
1,004
|
||||||
|
Depreciation
and amortization expense for the years ended December 31, 2009 and 2008
were $326 and $336, respectively.
|
||||||||||
|
2.
|
Business
Concentrations
|
Revenue
& Accounts Receivable
Two
customers accounted for approximately 39% and 22% of revenues for 2009 and
2008, respectively, and four and three customers accounted for 54% and 47%
of total accounts receivable at December 31, 2009 an 2008,
respectively.
|
||||||||
|
3.
|
Retirement
Plan
|
The
Company sponsors a 401(k) defined contribution plan covering substantially
all employees fulfilling minimum age and service requirements. Company
contributions are made at the discretion of management. The Company
contributed $131 and $143 for the years ended December 31, 2009 and 2008,
respectively.
|
||||||||
13
Notes
to Financial Statements
(in
thousands)
|
4.
|
Commitments
and
|
Lease
Commitments
|
|||||
|
Contingencies
|
|||||||
|
The
Company leases operating and office facilities for its business locations
in New York, and California under long-term, non- cancelable operating
lease agreements, some of which contain provisions for future rent
increases, rent free periods, or periods in which rent payments are
reduced (abated). The total amount of rental payments due over the terms
of each lease are being charged to rent expense on the straight-line
method over the terms of each lease. The difference between rent expense
recorded and the amount paid is credited or charged to “Deferred Rent,” in
the accompanying balance sheets. The leases expire at various dates
through 2015 and provide for renewal options up to 5 years. In the normal
course of business, it is expected that these leases will be renewed or
replaced by leases on other properties.
|
|||||||
|
Rental
expense amounted to $1,726 and $1,264 in 2009 and 2008,
respectively.
|
|||||||
|
Approximate
minimum future rental commitments under non-cancellable leases are payable
as follows:
|
|||||||
|
For
the years ended December 31,
|
Amount
|
||||||
|
2010
|
$
|
1,217
|
|||||
|
2011
|
1,254
|
||||||
|
2012
|
1,286
|
||||||
|
2013
|
1,047
|
||||||
|
2014
|
522
|
||||||
|
Thereafter
|
87
|
||||||
|
$
|
5,413
|
||||||
14
Notes
to Financial Statements
(in
thousands)
|
Media
Placement
|
|
|
The
Company books media placements as an agent for its clients. While most
media properties accept sequential liability (the Company is not liable
for unpaid amounts), some media properties do not. Under these
circumstances, the Company would have a contingency for payment if the
Company’s clients could not provide payment. As of December 31, 2009, the
Company had a contingency for media placement of approximately $16,400. As
of May 7, 2010, the Company has not been required to provide any payments
with respect to this contingency.
|
|
|
Litigation
|
|
|
From
time to time the Company is involved in legal proceedings arising in the
ordinary course of business. The Company believes there is no litigation
pending against it that could have individually or in the aggregate, a
material adverse effect on its financial position, results of operations
or cash flows, other than as described below.
|
|
|
The
Company is named as a defendant in a lawsuit whereby a former employee is
seeking payment for all current and former employees of the Company. This
payment is on the basis of allegations that The Company failed to properly
pay overtime compensation or to provide duty-free meal periods and rest
periods. The Company believes these claims are without merit but has
nonetheless negotiated and reached a class action settlement in a maximum
amount of $860. Members of the class action settlement have until May 20,
2010 to opt out of this settlement. At December 31, 2009, the Company has
accrued $875 as a liability relating to this litigation for settlement and
legal costs.
|
|
|
The
Company is named as one of several defendants in a claim whereby a
bankruptcy trustee is seeking repayment of $1,448 for alleged preference
payments. The Company has received a discovery request with respect to
this claim and is preparing responsive materials. The Company intends to
vigorously defend against this claim and has not provided any liability
for this claim in the accompanying balance
sheets.
|
15
Notes
to Financial Statements
(in
thousands)
|
5.
|
Member’s
Equity
|
Members'
equity is represented by one class of membership units as stipulated in
the Organizational Agreement dated June 25, 2002 with all membership units
having the same voting rights and features.
|
|
|
6.
|
Agreements
|
The
Company has a strategic relationship with Performance One, LLC to provide
performance based television services to the Company’s clients. Effective
July, 2008, subject to certain terms and conditions, Performance One paid
the Company 35% of Performance One’s revenue as part of the agreement.
Prior to July 2008, certain members of the Company had membership interest
in Performance One.
|
|
|
For
the years 2009 and 2008, the Company recorded revenues of $810 and $1,682,
respectively, from the strategic relationship; and had receivables of $317
and $257 as of December 31, 2009 and 2008, respectively
|
|||
|
7.
|
Subsequent Events
|
The
Company evaluated its December 31, 2009 financial statements for
subsequent events through May 7, 2010, the date the
financial statements were available to be issued. Other than the events
noted below, the Company is not aware of any subsequent events which would
require recognition or disclosure in the financial
statements.
|
|
|
On
May 6, 2010, MDC Partners Inc (“MDC”) acquired a 75% ownership interest in
the Company. In connection with the acquisition, the remaining 25%
ownership interest of the Company is subject to a call option anytime
after 2015 by MDC.
|
16
|
(b)
|
Pro
forma financial information.
|
Unaudited
pro forma consolidated financial statements of the Company and subsidiaries as
of March 31, 2010 and for the three months then ended and unaudited pro forma
consolidated financial statements for the year ended December 31, 2009, and the
related notes thereto.
The pro
forma financial information of the Company giving effect to the IMS acquisition
is intended to be furnished pursuant to Item 9.01(b) of Form 8-K and such
information shall not be deemed “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, nor shall it be deemed incorporated
by reference in any filing under the Securities Act of 1933, as amended, except
as shall be expressly set forth by specific reference in such
filing. The unaudited pro forma consolidated financial information is
presented below for informational purposes only. The pro forma data
is not necessarily indicative of what the Company’s financial position or
results of operations actually would have been had the IMS acquisition been
completed at and as of the dates indicated. In addition, the
unaudited pro forma financial information does not purport to project the future
financial position or operating results of the Company.
17
MDC
PARTNERS INC. AND SUBSIDIARIES
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(in
thousands, except share and per share amounts)
|
YEAR
ENDED DECEMBER 31, 2009
|
||||||||||||||||||||
|
Historical MDC
Partners Inc.
|
Historical Integrated
Media Solutions,
LLC
|
Pro forma
Adjustments
|
Notes
|
Pro forma Statements
of Operations
|
||||||||||||||||
|
Revenue:
|
||||||||||||||||||||
|
Services
|
$ | 545,924 | $ | 28,618 | $ | — | $ | 574,542 | ||||||||||||
|
Operating
Expenses:
|
||||||||||||||||||||
|
Cost
of services sold
|
354,312 | 13,522 | — | 367,834 | ||||||||||||||||
|
Office
and general expenses
|
136,897 | 5,383 | 1,201 |
4(b)(ii)
|
143,481 | |||||||||||||||
|
Depreciation
and amortization
|
34,471 | 326 | 3,758 |
4(b)(i)
|
38,555 | |||||||||||||||
| 525,680 | 19,231 | 4,959 | 549,870 | |||||||||||||||||
|
Operating
profit
|
20,244 | 9,387 | (4,959 | ) | 24,672 | |||||||||||||||
|
Other
Income (Expense):
|
||||||||||||||||||||
|
Other
income (expense)
|
(2,038 | ) | - | — | (2,038 | ) | ||||||||||||||
|
Interest
expense
|
(22,098 | ) | - | (2,053 | ) |
4(b)(iii)
|
(24,151 | ) | ||||||||||||
|
Interest
income
|
344 | 22 | — | 366 | ||||||||||||||||
| (23,792 | ) | 22 | (2,053 | ) | (25,823 | ) | ||||||||||||||
|
Income
(loss) from continuing operations before income taxes, equity in
affiliates
|
(3,548 | ) | 9,409 | (7,012 | ) | (1,151 | ) | |||||||||||||
|
Income
tax expense
|
(8,536 | ) | (300 | ) | (659 | ) |
4(b)(iv)
|
(9,495 | ) | |||||||||||
|
Income
(loss) from continuing operations before equity in
affiliates
|
(12,084 | ) | 9,109 | (7,671 | ) | (10,646 | ) | |||||||||||||
|
Equity
in earnings (loss) of non-consolidated affiliates
|
(8 | ) | — | — | (8 | ) | ||||||||||||||
|
Income
(loss) from continuing operations
|
(12,092 | ) | 9,109 | (7,671 | ) | (10,654 | ) | |||||||||||||
|
Loss
from discontinued operations attributable to MDC Partners Inc., net of
taxes
|
(876 | ) | — | — | (876 | ) | ||||||||||||||
|
Net
income (loss)
|
(12,968 | ) | 9,109 | (7,671 | ) | (11,530 | ) | |||||||||||||
|
Net
income attributable to the noncontrolling interests
|
(5,356 | ) | — | — | (5,356 | ) | ||||||||||||||
|
Net
income (loss) attributable to MDC Partners Inc.
|
$ | (18,324 | ) | $ | 9,109 | $ | (7,671 | ) | $ | (16,886 | ) | |||||||||
|
Income
(loss) Per Common Share:
|
||||||||||||||||||||
|
Basic
and Diluted:
|
||||||||||||||||||||
|
Net
income (loss) from continuing operations attributable to MDC Partners Inc.
common shareholders
|
$ | (0.64 | ) | $ | $ | (0.59 | ) | |||||||||||||
|
Loss
from discontinued operations attributable to MDC Partners Inc. common
shareholders
|
(0.03 | ) | (0.03 | ) | ||||||||||||||||
|
Net
income (loss) attributable to MDC Partners Inc. common
shareholders
|
$ | (0.67 | ) | $ | $ | (0.62 | ) | |||||||||||||
|
Weighted
Average Number of Common Shares Outstanding:
|
||||||||||||||||||||
|
Basic
|
27,396,463 | 27,396,463 | ||||||||||||||||||
|
Diluted
|
27,396,463 | 27,396,463 | ||||||||||||||||||
The
accompanying notes are an integral part of the pro forma consolidated statement
of operations.
18
MDC
PARTNERS INC. AND SUBSIDIARIES
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(in
thousands, except share and per share amounts)
|
THREE
MONTHS ENDED MARCH 31, 2010
|
||||||||||||||||||||
|
Historical MDC
Partners Inc.
|
Historical Integrated
Media Solutions,
LLC
|
Pro forma
Adjustments
|
Notes
|
Pro forma
Statements of
Operations
|
||||||||||||||||
|
Revenue:
|
||||||||||||||||||||
|
Services
|
$ | 136,182 | $ | 7,085 | $ | — | $ | 143,267 | ||||||||||||
|
Operating
Expenses:
|
||||||||||||||||||||
|
Cost
of services sold
|
96,969 | 3,878 | — | 100,847 | ||||||||||||||||
|
Office
and general expenses
|
34,625 | 1,340 | 423 |
4(c)(ii)
|
36,388 | |||||||||||||||
|
Depreciation
and amortization
|
5,833 | 81 | 708 |
4(c)(i)
|
6,622 | |||||||||||||||
| 137,427 | 5,299 | 1,131 | 143,857 | |||||||||||||||||
|
Operating
profit (loss)
|
(1,245 | ) | 1,786 | (1,131 | ) | (590 | ) | |||||||||||||
|
Other
Income (Expense):
|
||||||||||||||||||||
|
Other
income (expense)
|
(613 | ) | - | — | (613 | ) | ||||||||||||||
|
Interest
expense
|
(7,028 | ) | - | (211 | ) |
4(c)(iii)
|
(7,239 | ) | ||||||||||||
|
Interest
income
|
21 | 6 | — | 27 | ||||||||||||||||
| (7,620 | ) | 6 | (211 | ) | (7,825 | ) | ||||||||||||||
|
Income
(loss) from continuing operations before income taxes, equity in
affiliates
|
(8,865 | ) | 1,792 | (1,342 | ) | (8,415 | ) | |||||||||||||
|
Income
tax expense
|
(249 | ) | - | (180 | ) |
4(c)(iv)
|
(429 | ) | ||||||||||||
|
Income
(loss) from continuing operations before equity in
affiliates
|
(9,114 | ) | 1,792 | (1,522 | ) | (8,844 | ) | |||||||||||||
|
Equity
in earnings (loss) of non-consolidated affiliates
|
(104 | ) | — | — | (104 | ) | ||||||||||||||
|
Income
(loss) from continuing operations
|
(9,218 | ) | 1,792 | (1,522 | ) | (8,948 | ) | |||||||||||||
|
Loss
from discontinued operations attributable to MDC Partners Inc., net of
taxes
|
— | — | — | — | ||||||||||||||||
|
Net
income (loss)
|
(9,218 | ) | 1,792 | (1,522 | ) | (8,948 | ) | |||||||||||||
|
Net
income attributable to the noncontrolling interests
|
(968 | ) | — | — | (968 | ) | ||||||||||||||
|
Net
income (loss) attributable to MDC Partners Inc.
|
$ | (10,186 | ) | $ | 1,792 | $ | (1,522 | ) | $ | (9,916 | ) | |||||||||
|
Income
(loss) Per Common Share:
|
||||||||||||||||||||
|
Basic
and Diluted:
|
||||||||||||||||||||
|
Net
income (loss) from continuing operations attributable to MDC Partners Inc.
common shareholders
|
$ | (0.37 | ) | $ | $ | (0.36 | ) | |||||||||||||
|
Loss
from discontinued operations attributable to MDC Partners Inc. common
shareholders
|
||||||||||||||||||||
|
Net
income (loss) attributable to MDC Partners Inc. common
shareholders
|
$ | (0.37 | ) | $ | $ | (0.36 | ) | |||||||||||||
|
Weighted
Average Number of Common Shares Outstanding:
|
||||||||||||||||||||
|
Basic
|
27,631,903 | 27,631,903 | ||||||||||||||||||
|
Diluted
|
27,631,903 | 27,631,903 | ||||||||||||||||||
The
accompanying notes are an integral part of the pro forma consolidated statement
of operations.
19
MDC
PARTNERS INC. AND SUBSIDIARIES
UNAUDITED
PRO FORMA CONSOLIDATED BALANCE SHEET
(in
thousands)
|
AS
AT MARCH 31, 2010
|
||||||||||||||||||||
|
Historical MDC
Partners Inc.
|
Historical Integrated
Media Solutions,
LLC
|
Pro forma
Adjustments
|
Notes
|
Pro forma Balance Sheets
|
||||||||||||||||
|
Current
Assets:
|
||||||||||||||||||||
|
Cash
|
$ | 21,247 | $ | 11,419 | $ | (20,000 | ) |
4(a)(i)
|
$ | 12,666 | ||||||||||
|
Accounts
receivable
|
131,944 | 24,920 | — | 156,864 | ||||||||||||||||
|
Expenditures
billable to clients
|
23,226 | 10,362 | — | 33,588 | ||||||||||||||||
|
Other
current assets
|
10,706 | 150 | — |
4(a)(ii)
|
10,856 | |||||||||||||||
|
Total
Current Assets
|
187,123 | 46,851 | (20,000 | ) | 213,974 | |||||||||||||||
|
Fixed
assets
|
36,327 | 1,166 | — | 37,493 | ||||||||||||||||
|
Investment
in affiliates
|
1,473 | — | — | 1,473 | ||||||||||||||||
|
Goodwill
|
338,142 | — | 40,400 |
3,4(a)(ii)
|
378,542 | |||||||||||||||
|
Other
intangibles
|
39,765 | — | 9,535 |
3,4(a)(ii)
|
49,300 | |||||||||||||||
|
Deferred
tax asset
|
12,625 | — | — | 12,625 | ||||||||||||||||
|
Other
assets
|
17,611 | 318 | — | 17,929 | ||||||||||||||||
|
Total
Assets
|
$ | 633,066 | $ | 48,335 | $ | 29,935 | $ | 711,336 | ||||||||||||
|
Current
Liabilities:
|
||||||||||||||||||||
|
Accounts
payable
|
$ | 69,967 | $ | 15,179 | $ | — | $ | 85,146 | ||||||||||||
|
Accrual
and other liabilities
|
65,694 | 6,300 | — | 71,994 | ||||||||||||||||
|
Advance
billings
|
80,907 | 28,407 | — | 109,314 | ||||||||||||||||
|
Current
portion of long-term debt
|
1,308 | 25 | — | 1,333 | ||||||||||||||||
|
Deferred
acquisition consideration
|
21,258 | — | 2,000 |
3
|
23,258 | |||||||||||||||
|
Total
Current Liabilities
|
239,134 | 49,911 | 2,000 | 291,045 | ||||||||||||||||
|
Revolving
credit facility
|
10,278 | — | — | 10,278 | ||||||||||||||||
|
Long-term
debt
|
216,928 | — | — | 216,928 | ||||||||||||||||
|
Deferred
acquisition consideration long-term
|
16,690 | — | 13,504 |
3
|
30,194 | |||||||||||||||
|
Other
liabilities
|
8,617 | — | — | 8,617 | ||||||||||||||||
|
Deferred
tax liabilities
|
9,005 | — | — | 9,005 | ||||||||||||||||
|
Total
Liabilities
|
500,652 | 49,911 | 15,504 | 566,067 | ||||||||||||||||
|
Reedemable
Noncontrolling Interests
|
29,868 | — | — | 29,868 | ||||||||||||||||
|
Shareholder’s
Equity
|
||||||||||||||||||||
|
Preferred
Shares
|
— | — | — | — | ||||||||||||||||
|
Class
A Shares
|
219,992 | — | — | 219,992 | ||||||||||||||||
|
Class
B Shares
|
1 | — | — | 1 | ||||||||||||||||
|
Additional
paid in capital
|
7,668 | — | — | 7,668 | ||||||||||||||||
|
Accumulated
deficit
|
(141,348 | ) | (1,576 | ) | 1,576 |
4(a)(iii)
|
(141,348 | ) | ||||||||||||
|
Stock
subscription receivable
|
(217 | ) | — | — | (217 | ) | ||||||||||||||
|
Accumulated
other comprehensive income
|
(4,462 | ) | — | — | (4,462 | ) | ||||||||||||||
|
MDC
Partners Inc. Shareholder’s Equity
|
81,634 | (1,576 | ) | 1,576 | 81,634 | |||||||||||||||
|
Noncontrolling
interests
|
20,912 | — | 12,855 |
3
|
33,767 | |||||||||||||||
|
Total
Shareholder’s Equity
|
102,546 | (1,576 | ) | 14,431 | 115,401 | |||||||||||||||
|
Total
Liabilities and Shareholder’s Equity
|
$ | 633,066 | $ | 48,335 | $ | 29,935 | $ | 711,336 | ||||||||||||
The
accompanying notes are an integral part of the pro forma consolidated balance
sheet.
20
NOTES
TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share amounts)
1.
Description
of transaction
Effective
April 30, 2010, the Company, through a wholly-owned subsidiary, purchased 75% of
the total outstanding membership interests in Integrated Media Solutions
Partners LLC, a Delaware limited liability company, the successor-in-interest to
the business formerly owned by Integrated Media Solutions, LLC, a New York
limited liability company (“IMS”), for cash at closing of $20,000 and additional
deferred acquisition consideration, the current estimated present value of which
is $18,564 less a working capital true-up estimated at $3,060 at
March 31, 2010.
In
connection with the IMS acquisition, the Company, IMS and the other membership
interest holders of IMS entered into a new Limited Liability Company Agreement
(the “LLC Agreement”).The LLC Agreement set forth certain economic, governance
and liquidity rights with respect to IMS. IMS will initially have five managers,
three of which were appointed by the Company. Pursuant to the LLC Agreement, the
Company will be allocated 100% of the profits of IMS thru 2014, after which the
allocation will be based on ownership percentage, subject to certain priority
returns, by the Company thru 2014, as defined. In accordance with the LLC
Agreement, the remaining 25% of the outstanding membership interests are subject
to a call by the Company at a defined purchased price beginning in 2015. There
are no membership interests subject to a mandatory put to the
Company.
2. Basis
of Presentation
The
accompanying unaudited pro forma consolidated financial statements as of March
31, 2010 and for the three months ended March 31, 2010 give effect to the
acquisition of IMS. The unaudited pro forma consolidated balance sheet presents
our financial position as if the acquisition of IMS had occurred on March 31,
2010. The unaudited pro forma consolidated statements of operations presents our
results as if the acquisition of IMS had occurred on January 1, 2009. Both our
fiscal year end and IMS’ fiscal year end is December 31. The unaudited pro forma
consolidated balance sheet as of March 31, 2010 is based upon our historical
unaudited consolidated balance sheet as of March 31, 2010 and the historical
unaudited consolidated balance sheet of IMS as of March 31, 2010. The unaudited
pro forma consolidated statement of operations for the three ended March 31,
2010 is based upon our historical unaudited consolidated statement of operations
for the three months ended March 31, 2010 and the historical
unaudited consolidated statement of operations of IMS for the three months ended
March 31, 2010. The unaudited pro forma consolidated
statement of operations for the year ended December 31, 2009 is based upon our
historical audited consolidated statement of operations for the year ended
December 31, 2009 and the historical audited consolidated statement of
operations of IMS for the year ended December 31, 2009.
The
unaudited pro forma consolidated financial statements include, in our opinion,
all material adjustments necessary to reflect this acquisition. The unaudited
pro forma consolidated financial statements do not purport to represent what the
Company’s actual results of operations including the acquisition of IMS would
have been, nor do they purport to predict or indicate our financial position or
results of operations at any future date or for any future period. The unaudited
pro forma consolidated financial statements should be read in conjunction with
our audited consolidated financial statements and the related notes thereto and
IMS’ audited consolidated financial statements and the related notes thereto
included herein. The statements have been prepared by management in accordance,
with generally accepted accounting principles (“GAAP”) of the United States of
America (“US GAAP”). The accounting policies used in the preparation of the
unaudited pro forma consolidated financial statements are consistent with those
used by the Company in the preparation of the consolidated financial statements
as of and for the year ended December 31, 2009.
21
3. Accounting
for the Acquisition
The
acquisition is accounted for using the acquisition method of accounting. The
total estimated purchase price is composed of the following:
|
Cash
|
$ | 20,000 | ||
|
Estimated
present value of
|
||||
|
deferred
acquisition consideration
|
18,564 | |||
|
Estimated
working capital deficit
|
(3,060 | ) | ||
| $ | 35,504 |
For
purposes of the pro forma presentation, the purchase price has been allocated to
the assets acquired (including identifiable intangible assets arising form the
acquisition) and liabilities assumed as of March 31, 2010 for balance sheet
purposes and January 1, 2009 for purposes of the statements of operations, based
on their estimated fair values.
Details
of the estimated fair values of assets acquired and liabilities assumed of IMS
based on information available at the date of preparation of these unaudited pro
forma financial statements are as follows:
|
Assets
acquired:
|
||||
|
Cash
|
$ | 11,419 | ||
|
Accounts
receivable
|
24,920 | |||
|
Expenditures
billable to clients
|
10,362 | |||
|
Other
current assets
|
150 | |||
|
Fixed
assets
|
1,166 | |||
|
Other
intangible assets
|
9,535 | |||
|
Goodwill
|
40,400 | |||
|
Other
assets
|
318 | |||
| 98,270 | ||||
|
Less
liabilities assumed:
|
||||
|
Accounts
payable
|
15,179 | |||
|
Accruals
and other liabilities
|
6,300 | |||
|
Advance
billings
|
28,407 | |||
|
Current
portion of long-term debt
|
25 | |||
|
Noncontrolling
interests
|
12,855 | |||
| 62,766 | ||||
|
Net
assets acquired
|
$ | 35,504 | ||
In the
preparation of these unaudited pro forma consolidated financial statements, the
purchase consideration has been allocated on a preliminary basis to the fair
value of assets acquired and liabilities assumed based on management’s best
estimates and taking into account all relevant information available at the time
these unaudited pro forma consolidated financial statements were prepared. The
Company expects that the actual amounts for each of the fair values of these
assets and liabilities acquired will vary from the pro forma amounts and that
the variation may be significant.
The
actual adjustments that the Company will ultimately make in finalizing the
allocation of the purchase price of IMS to the fair value of the net assets
acquired effective April 30, 2010 will depend on a number of factors, including
additional information available at such time, changes in market values and
changes in IMS’ operating results between the date of these unaudited pro forma
consolidated financial statements and the effective date of the
acquisition.
22
4. Pro
forma assumptions and adjustments
|
(a)
|
The
unaudited pro forma consolidated balance sheet as at March 31, 2010
incorporates the following
adjustments:
|
|
|
(i)
|
The
funding for the acquisition, which reduced the current cash balances in
the amount of $20,000, has been reflected in the unaudited pro forma
consolidated balance sheet as if it had occurred on March 31,
2010.
|
|
|
(ii)
|
Intangible
assets arising from the acquisition have been recorded at their estimated
fair values as part of the allocation of the purchase price. Intangible
assets acquired include IMS’ customer contracts and relationships
including backlog. The estimated fair values are based on preliminary
studies undertaken by management. The estimated value allocated to
goodwill was based on the residual of the preliminary fair values of the
identifiable tangible and intangible assets less the preliminary fair
values of the liabilities assumed. The actual allocation may differ
significantly from these estimates.
|
|
|
(iii)
|
IMS’
members equity has been eliminated to reflect the
acquisition.
|
|
(b)
|
The
unaudited pro forma consolidated statement of operations for the year
ended December 31, 2009 incorporates the following assumptions and
adjustments:
|
|
|
(i)
|
Pro
forma depreciation and amortization has been increased by $3,758 for the
year ended December 31, 2009 to reflect the amortization of other
intangible assets arising from the acquisition, over their estimated lives
of five years over both straight line basis and in a manner represented by
the pattern in which the economic benefits are
realized.
|
|
|
(ii)
|
Pro
forma office and general expenses have been increased by $1,201 for the
year ended December 31, 2009 to reflect two adjustments; (a) an increase
of expenses of $1,166 representing the accretion of the present value of
the deferred acquisition consideration and (b) an increase of expenses of
$35 representing compensation and related benefits and other costs not
expected to continue due to the
acquisition.
|
|
|
(iii)
|
Pro
forma interest expense has been increased by $2,053 for the year ended
December 31, 2009 to reflect an increase of $787 representing the
financing of the acquisition assuming the Company issued $8,581 of its 11%
senior notes on January 1, 2009, instead of on October 23, 2009, and
$1,266 representing the interest expense on the non-contingent deferred
acquisition consideration.
|
|
|
(iv)
|
Pro
forma income tax expense has been increased by $659 for the year ended
December 31, 2009 to reflect the tax effect of the related pro forma
adjustments and IMS’ historical pre-tax income of $9,409 based on an
estimated blended state and federal rate of 40%. After taking into effect
the taxes recorded on $300 on IMS’ historical financial
statements.
|
|
(c)
|
The
unaudited pro forma consolidated statement of operations for the three
month ended March 31, 2010 incorporates the following assumptions and
adjustments:
|
|
|
(i)
|
Pro
forma depreciation and amortization has been increased by $708 for the
three months ended March 31, 2010 to reflect the amortization of other
intangible assets arising from the acquisition, over their estimated lives
of five years over both straight line basis and in a manner represented by
the pattern in which the economic benefits are
realized.
|
|
|
(ii)
|
Pro
forma office and general expenses have been increased by $423 for the
three months ended March 31, 2010 to reflect two adjustments; (a) an
increase of expenses of $292 representing the accretion of the present
value of the deferred acquisition consideration and (b) an increase of
expenses of $131 representing compensation and related benefits and other
costs not expected to continue due to the
acquisition.
|
|
|
(iii)
|
Pro
forma interest expense has been increased by $211 representing the
interest expense on the non-contingent deferred acquisition
consideration.
|
|
|
(iv)
|
Pro
forma income tax expense has been increased by $180 for the three months
ended March 31, 2010 to reflect the tax effect of the related pro forma
adjustments and IMS’ historical pre-tax income of $1,792 based on an
estimated blended state and federal rate of
40%.
|
23
|
(c)
|
Not
applicable.
|
|
(d)
|
Exhibits.
|
|
Exhibit No.
|
Description
|
|
|
23.1
|
Consent
of Independent
Auditor.
|
24
Forward
Looking Information
This
Current Report on Form 8-K contains forward-looking statements. The Company’s
representatives may also make forward-looking statements orally from time to
time. Statements in this Current Report on Form 8-K that are not historical
facts, including statements about the Company’s beliefs and expectations, recent
business and economic trends, potential acquisitions, estimates of amounts for
deferred acquisition consideration and “put” option rights, constitute
forward-looking statements. These statements are based on current
plans, estimates and projections, and are subject to change based on a number of
factors, including those outlined in this section. Forward-looking
statements speak only as of the date they are made, and the Company undertakes
no obligation to update publicly any of them in light of new information or
future events, if any.
Forward-looking
statements involve inherent risks and uncertainties. A number of
important factors could cause actual results to differ materially from those
contained in any forward-looking statements. Such risk factors include, but are
not limited to:
|
|
·
|
risks associated with severe
effects of national and regional economic
downturn;
|
|
|
·
|
the Company’s
ability to attract new clients and retain existing
clients;
|
|
|
·
|
the financial success of the
Company’s clients;
|
|
|
·
|
the Company’s ability to
retain and attract key
employees;
|
|
|
·
|
the Company’s ability to
remain in compliance with its debt agreements and the Company’s ability to
finance its contingent payment obligations when due and payable, including
but not limited to those relating to “put” option right and deferred
acquisition consideration;
|
|
|
·
|
the successful completion and
integration of acquisitions which complement and expand the Company’s
business capabilities; and
|
|
|
·
|
foreign currency
fluctuations.
|
In
addition to improving organic growth for its existing operations, the Company’s
business strategy includes ongoing efforts to engage in material acquisitions of
ownership interests in entities in the marketing communications services
industry. The Company intends to finance these acquisitions by using
available cash from operations and through incurrence of bridge or other debt
financing, either of which may increase the Company’s leverage ratios, or by
issuing equity, which may have a dilutive impact on existing shareholders
proportionate ownership. At any given time the Company may be engaged
in a number of discussions that may result in one or more material
acquisitions. These opportunities require confidentiality and may
involve negotiations that require quick responses by the
Company. Although there is uncertainty that any of these discussions
will result in definitive agreements or the completion of any transactions, the
announcement of any such transaction may lead to increased volatility in the
trading price of the Company’s securities.
Investors
should carefully consider these risk factors and the additional risk factors
outlined in more detail in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2009 under the caption “Risk Factors” and in the Company’s
other SEC filings.
25
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
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MDC
PARTNERS INC.
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Date:
May 10, 2010
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By:
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/s/
MITCHELL GENDEL
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Name:
Mitchell Gendel
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Title:
General Counsel and Corporate
Secretary
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26