Mail Stop 3561
September 30, 2005
Mr. Miles S. Nadal
Chairman, President and Chief Executive Officer
MDC Partners Inc.
45 Hazelton Avenue
Toronto, Ontario M5R 2E3
Re: MDC Partners Inc.
Form 10-K for Fiscal Year Ended December 31, 2004
Filed April 18, 2005
Form 10-Q for Fiscal Quarter Ended June 30, 2005
File No. 1-13178
Dear Mr. Nadal:
We have reviewed your supplemental response letter dated
September 13, 2005 as well as your filing and have the following
comments. As noted in our comment letter dated May 31, 2005, we
have
limited our review to your financial statements and related
disclosures and do not intend to expand our review to other
portions
of your documents.
Form 10-K for Fiscal Year Ended December 31, 2004
Note 16. Gain on Sale of Assets and Settlement of Long-term Debt,
page 94
1. In your response to prior comment 2, you state that in
analyzing
the embedded derivatives you have identified the following: a call
option that you, as the issuer, wrote and a put option that you
purchased. You note that both options are contingent upon the
same
conditions occurring/not occurring, and both have the same strike
price. You also indicate that prior to either the put or call
being
exercised, you have agreed to pay the holder of the Exchangeable
Securities the equivalent of the distribution paid on the CDI
Units,
subject to a floor of 3% per annum. You have analyzed these in
the
aggregate, and determined that you have a "synthetic total return
swap". You have then determined that this "synthetic total return
swap" qualifies as a non-option based derivative.
It is unclear to us how you determined that this is a "synthetic
total return swap" in light of the minimum payment (the floor of
3%
per annum). A typical total return swap would have the
Exchangeable
Securities bear interest at an adjustable rate equal to the
equivalent percentage of the actual monthly distribution paid on
the
CDI unit. Tell us the consideration you gave to the 3% floor in
determining that this was a "synthetic total return swap."
2. While we concur that DIG Issue B20 applies when the embedded
derivative is a non-option derivative, it is unclear to us how you
have met the criteria to consider this a non-option derivative.
In
light of the above comment, please provide us with additional
information to support your conclusion.
3. You believe that fluctuations in the trading value of the
Exchangeable Securities subsequent to their issuance are purely a
result of the fair value of the embedded derivative instruments.
This assertion appears to be based upon the fact that the debt
host
is a LIBOR based instrument, and that there have been no changes
to
your creditworthiness. Tell us the consideration you have given
to
the 3% floor in making this determination, as it would appear that
the existence of a floor may result in a fixed rate debt host. If
the Exchange Security was considered a fixed rate debt host, it
would
appear that a portion of the change in its value would be the
result
of changes in the embedded derivative, while a portion of the
change
would be due to changes in interest rates.
Note 17. Segmented Information
4. We have considered the information provided to us in your
letter
dated September 13, 2005, in response to comment 1, along with
prior
correspondences and information included in your filed documents.
As
explained more fully below, we are of the view that your
aggregation
of the operating segments within the MarCom group reportable
segment
does not comply with the guidance in SFAS No. 131.
You concluded on page 7 of your letter that the entities within
the
MarCom group meet the criteria set out in SFAS No. 131 paragraph
17
a. to e. However, in addition to these criteria, Statement 131
only
permits aggregation of operating segments if (a) aggregation is
consistent with the objective and basic principles of Statement
131
and (b) the segments have similar economic characteristics. The
objective of Statement 131 is to provide information about the
different types of business activities in which an enterprise
engages
and the different economic environments in which it operates in
order
to help users of financial statements better understand the
enterprise`s performance, better assess its prospects for future
net
cash flows, and make more informed judgments about the enterprise
as
a whole.
We note that, in your letter dated September 13, 2005, management
identified the following circumstances concerning the economic
characteristics of the operating segments aggregated within the
MarCom Group:
* The operating segments in the MarCom Group have a volatile
revenue
stream that "results in significant swings in profitability and
staff
costs to revenue from period to period for most of the operating
segments."
* The reputations of KBP LLC ("KBP") and Crispin Porter & Bogusky
("CPB") "for quality and innovative work have provided KBP and CPB
with the opportunity to perform services at a more profitable
level,
resulting in a general overall higher gross margin."
* TargetCom "provides a specific highly focused type of direct
marketing which provides its customers with a measurable result.
Such specialized services enable TargetCom to obtain higher
margins
than other entities."
* Northstar "provides a significant amount of marketing
communications related research, which requires the use of a
significant amount of focus group services." "[T]he gross margins
for
Northstar have consistently been below the 30-40% range."
* Accent Marketing Services LLC provides marketing strategy
services
that "include the design, development and implementation of direct
marketing campaigns" and "include the use of Accent`s call center
facilities." In addition, we note in your letter dated July 15,
2005
that "[b]ecause Accent is providing data, its cost structure is
different than that of the other business units..."
We note your gross margin analysis shows that there have been
significant differences in gross margins among the operating
segments
and you forecast that these material differences will continue.
In
addition, you state in your July 15, 2005 letter that "it is
expected
that the larger agencies will produce higher operating income as a
percentage of revenue due to the advantage of scale."
We note you provide in your Management Presentations, as furnished
in
Forms 8-K, an analysis of MarCom revenues by region and by
discipline, separately identifying Advertising/Integrated
Communications, CRM and Direct Marketing, and Specialty
Communications and Consulting.
Given the disparity of the operating segments gross margins and
the
differences in their operations and prospects, we believe separate
reporting of segment information would materially improve an
investor`s understanding of the company`s performance, prospects
for
future net cash flows, and assist them in making informed
judgments
about the company as a whole. We request that management reassess
the
aggregation of the operating segments within the MarCom group.
You
should explain to us how your revised segment disclosures fully
comply with SFAS No. 131 and file revised financial statements
reflecting this corrected disclosure.
5. We note in your response to prior comment 1 that Metaca`s
operating loss in 2004 was in excess of 10% of the absolute amount
of
the reported profit. In light of Metaca meeting the quantitative
threshold discussed in paragraph 18 of SFAS 131, you should revise
your disclosure to present Metaca as a separate reportable segment
for each year presented.
6. We note that you have furnished Forms 8-K disclosing revenues
for
each category of services that you provide. Please disclose this
information in your segment footnote in accordance with paragraph
37
of SFAS 131.
Item 9. Changes in and Disagreements with Accountants on
Accounting
and Financial Disclosures, page 116
7. We note your response to prior comment 3. The guidance set
forth
in Exchange Act Release No. 29,354 (Multijurisdictional Disclosure
and Modifications to the Current Registration and Reporting System
for Canadian Issuers, Securities Act Release No. 6902, Exchange
Act
Release No. 29,354) that you have cited in your response is more
appropriately viewed as an accommodation, to enable a registrant
to
make filings with the Commission during a year, such that the
registrant is not required to continually reassess whether they
meet
the definition of a foreign private issuer. However, to the
extent
the registrant is aware that they no longer qualify as a foreign
private issuer, we do not believe it is appropriate to rely upon
the
guidance in that Release as a justification for not filing
domestic
reports. However, in light of the fact that the change of
accountants occurred in May 2004 and an audit report signed by the
new accountants was included in the Form 10-K for 12/31/04, we
will
not continue to object to the lack of an Item 4.01 Form 8-K being
filed reporting this event.
* * * *
Please amend your Form 10-K and respond to these comments
within 10 business days or tell us when you will provide us with a
response. You may contact Melissa Hauber, Senior Staff
Accountant,
at (202) 551-3368 or Robert S. Littlepage, Jr., Accountant Branch
Chief, at (202) 551-3361 if you have questions regarding comments
on
the financial statements and related matters. Please contact me
at
(202) 551-3810 with any other questions.
Sincerely,
Larry Spirgel
Assistant Director
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Mr. Miles S. Nadal
MDC Partners Inc.
September 30, 2005
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