UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2011

Commission File Number 001-13178

 

MDC PARTNERS INC.

(Exact Name of Registrant as Specified in Its Charter)

Canada		98-0364441
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

745 Fifth Avenue,
New York, NY, 10151
(646) 429-1800

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Name of Each Exchange on Which Registered
Class A Subordinate Voting Shares, no par value		NASDAQ; Toronto Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. (Check one):

Large Accelerated Filer o		Accelerated Filer x		Non-Accelerated o		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

The aggregate market value of the shares of all classes of voting and non-voting common stock of the registrant held by non-affiliates as of June 30, 2011 was approximately $446.5 million, computed upon the basis of the closing sales price ($17.56/share) of the Class A subordinate voting shares on that date.

As of March 1, 2012, there were 30,914,811 outstanding shares of Class A subordinate voting shares without par value, and 2,503 outstanding shares of Class B multiple voting shares without par value, of the registrant.

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MDC PARTNERS INC.
  
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		Page
PART I
Item 1. Business			1
Item 1A. Risk Factors			8
Item 1B. Unresolved Staff Comments			13
Item 2. Properties			13
Item 3. Legal Proceedings			13
Item 4. Mine Safety Disclosures			13
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters			14
Item 6. Selected Financial Data			16
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			40
Item 8. Financial Statements and Supplementary Data			41
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			92
Item 9A. Controls and Procedures			92
Item 9B. Other Information			94
PART III
Item 10. Directors, Executive Officers and Corporate Governance			95
Item 11. Executive Compensation			96
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			96
Item 13. Certain Relationships and Related Transactions, and Director Independence			96
Item 14. Principal Accountant Fees and Services			96
Item 15. Exhibits and Financial Statements Schedules			97
Signatures			99

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References in this Annual Report on Form 10-K to “MDC Partners”, “MDC”, the “Company,” “we,” “us” and “our” refer to MDC Partners Inc. and, unless the context otherwise requires or otherwise is expressly stated, its subsidiaries.

All dollar amounts are stated in US dollars unless otherwise stated.

DOCUMENTS INCORPORATED BY REFERENCE

The following sections of the Proxy Statement for the Annual Meeting of Stockholders to be held on June 5, 2012, are incorporated by reference in Parts I and III: “Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Executive Compensation,” “Report of the Human Resources & Compensation Committee on Executive Compensation,” “Outstanding Shares,” “Appointment of Auditors,” and “Certain Relationships and Related Transactions”.

AVAILABLE INFORMATION

Information regarding the Company’s Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports, will be made available, free of charge, at the Company’s website at http://www.mdc-partners.com, as soon as reasonably practicable after the Company electronically files such reports with or furnishes them to the Securities and Exchange Commission (“SEC”). The information found on, or otherwise accessible through, the Company’s website is not incorporated into, and does not form a part of, this Annual Report or Form 10-K. Any document that the Company files with the SEC may also be read and copied at the SEC’s public reference room located at 100 F. Street, N.E., Washington, DC 20549. Please call the SEC at 1 (800) SEC-0330 for further information on the public reference room. The Company’s filings are also available to the public from the SEC’s website at http://www.sec.gov.

The Company’s Code of Conduct, Whistleblower Policy, and each of the charters for the Audit Committee, Human Resources & Compensation Committee and the Nominating and Corporate Governance Committee, are available free of charge on the Company’s website at http://www.mdc-partners.com or by writing to MDC Partners Inc., 745 Fifth Avenue, New York, NY 10151, Attention: Investor Relations.

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FORWARD-LOOKING STATEMENTS

This document contains forward-looking statements. The Company’s representatives may also make forward-looking statements orally from time to time. Statements in this document 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, the following:

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, from borrowings under its WF Credit Agreement and through incurrence of bridge or other debt financing, any 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 this Annual Report on Form 10-K under the caption “Risk Factors” and in the Company’s other SEC filings.

SUPPLEMENTARY FINANCIAL INFORMATION

The Company reports its financial results in accordance with generally accepted accounting principles (“GAAP”) of the United States of America (“US GAAP”). However, the Company has included certain non-US GAAP financial measures and ratios, which it believes, provide useful information to both management and readers of this report in measuring the financial performance and financial condition of the Company. These measures do not have a standardized meaning prescribed by US GAAP and, therefore, may not be comparable to similarly titled measures presented by other publicly traded companies, nor should they be construed as an alternative to other titled measures determined in accordance with US GAAP.

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PART I

Item 1. Business

BUSINESS

MDC PARTNERS INC.

MDC was formed by Certificate of Amalgamation effective December 19, 1986, pursuant to the Business Corporations Act (Ontario). Effective December 19, 1986, MDC amalgamated with Branbury Explorations Limited, and thereby became a public company operating under the name of MDC Corporation. On May 28, 1996, MDC changed its name to MDC Communications Corporation and, on May 29, 1999, it changed its name to MDC Corporation Inc. On July 31, 2003, MDC acquired the remaining 26% of Maxxcom Inc. (“Maxxcom”) that it did not already own, privatizing the now wholly-owned subsidiary and merging Maxxcom’s corporate functions with MDC’s existing corporate functions. On January 1, 2004, MDC changed its name to its current name, MDC Partners Inc., and on June 28, 2004, MDC was continued under Section 187 of the Canada Business Corporations Act. MDC’s registered address is located at 45 Hazelton Avenue, Toronto, Ontario, M5R 2E3, and head office address is located at 745 Fifth Avenue, New York, NY 10151.

MDC is a leading provider of marketing communications services to customers globally. MDC has operating units in the United States, Canada, Europe, and the Caribbean.

MDC’s subsidiaries provide a comprehensive range of marketing communications and consulting services, including advertising, interactive and mobile marketing, direct marketing, database and customer relationship management, sales promotion, corporate communications, market research, corporate identity, design and branding, social media and marketing, ecommerce and other related services.

Part I — Business

MDC’s strategy is to build, grow and acquire market-leading businesses that deliver innovative, value-added marketing communications and strategic consulting services to their clients. MDC Partners strives to be a partnership of marketing communications and consulting companies (or Partners) whose strategic, creative and innovative solutions are media-agnostic, challenge the status quo and achieve measurable superior returns on investment for clients and stakeholders.

MDC’s Corporate Group ensures that MDC is the most Partner-responsive marketing services network through its strategic mandate to help Partner firms find clients, talent and tuck under acquisitions, as well as cross-sell services and enhance their culture for innovation and growth. MDC’s Corporate Group also works directly with Partner firms to expand their offerings through new strategic services, as well as leverage the collective expertise and scale of the group as a whole. The Corporate Group uses this leverage to provide various shared services to help reduce costs across the group.

The MDC model is driven by three key elements:

Perpetual Partnership.  The perpetual partnership creates ongoing alignment of interests to drive performance. The perpetual partnership model functions by (1) identifying the ‘right’ Partners with a sustainable differentiated position in the marketplace; (2) creating the ‘right’ Partnership structure generally by taking a majority ownership position and leaving a substantial noncontrolling equity or economic ownership position in the hands of operating management to incentivize long-term growth; (3) providing access to more resources and leveraging the network’s scale; and (4) focusing on delivering financial results.

Entrepreneurialism.  Entrepreneurial spirit is optimized by creating customized solutions to support and grow our businesses.

Human and Financial Capital.  The model balances accountability with financial flexibility to support growth.

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MDC operates through “Partner” companies within the following reportable segments:

Strategic Marketing Services

The Strategic Marketing Services segment generally consists of firms that offer a full suite of integrated marketing communication and consulting services, including advertising and media, interactive marketing, direct marketing, public relations, corporate communications, market research, corporate identity and branding, and sales promotion to national and global clients. The Strategic Marketing Services segment is comprised of the following agencies: 72andSunny; Allison & Partners; Anomaly; Attention; Bruce Mau Design; Capital C Partners; Colle + McVoy; Concentric Partners; Crispin Porter + Bogusky; Crispin Porter + Bogusky Canada; Hello Design; henderson bas kohn; HL Group Partners; kirshenbaum bond senecal + partners; Kbs+p Canada; Kwittken; Laird + Partners; The Media Kitchen; Mono Advertising; Redscout; Sloane & Company; Varick Media Management; Veritas Communications; Vitro and Yamamoto.

Performance Marketing Services

The Performance Marketing Services segment includes firms that provide consumer insights to satisfy the growing need for targetable, measurable solutions or cost effective means of driving return on marketing investment and growth for regional, national and global clients. The Performance Marketing Services segment is comprised of the following agencies: 6degrees Communications; Accent; AIC Publishing; Boom Marketing; Bryan Mills Iradesso; Communifx Partners; Computer Composition; Hudsun Media; Integrated Media Solutions; Kenna Communications; Northstar Research Partners; Onbrand; Relevent; RJ Palmer; Source Marketing; TargetCom; Team and Trade X.

Ownership Information

The following table includes certain information about MDC’s operating subsidiaries as of December 31, 2011. The “Put and Call Options” information represents existing contractual rights. Owners of interests in certain subsidiaries have the right in certain circumstances to require MDC to acquire additional ownership interests held by them. The owners’ ability to exercise any such “put” option right is subject to the satisfaction of certain conditions, including conditions requiring notice in advance of exercise. 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 MDC to fund the related amounts during the periods described in the accompanying notes. 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 MDC in the event such rights are exercised is dependent on defined 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. See also “Management’s Discussion and Analysis — Other-Balance Sheet Commitments — Put Rights of Subsidiaries’ Noncontrolling Shareholders” for further discussion.

Put options represent puts of ownership interests by other interest holders to MDC with reciprocal call rights held by MDC for the same ownership interests with similar terms. The percentages shown represent the potential ownership interest MDC could achieve in each company assuming that the remaining equity holder(s) were to fully exercise their put option rights at the earliest opportunity.

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		% Owned at 12/31/11				Year of Initial Investment				Put/Call Options
Company										2012				Thereafter
										(See Notes)
Consolidated:
Strategic Marketing Services
72andSunny			51.0	%			2010				—				Note 1
Allison & Partners			51.0	%			2010				—				Note 2
Anomaly			60.0	%			2011				—				Note 3
Attention			51.0	%			2009				—				Note 4
Bruce Mau Design			75.0	%			2004				—
Capital C Partners			80.0	%			2010				—				Note 5
Colle + McVoy			95.0	%			1999				100.0	%			Note 6
Concentric Partners			70.0	%			2011				—				Note 7
Crispin Porter + Bogusky			100.0	%			2001				—				Note 8
Hello Design			49.0	%			2004				—
henderson bas kohn			65.0	%			2004				100.0	%
HL Group Partners			65.9	%			2007				72.4	%			Note 9
kirshenbaum bond senecal + partners			100.0	%			2004				—				Note 10
The Media Kitchen			100.0	%			2010				—
Varick Media Management			100.0	%			2010				—
Kwittken			60.0	%			2010				—				Note 11
Laird + Partners			65.0	%			2011				—				Note 12
Mono Advertising			49.9	%			2004				65.0	%			Note 13
Redscout			100.0	%			2007				—				Note 14
Skinny NYC			50.1	%			2008				—				Note 15
Sloane & Company			70.0	%			2010				—				Note 16
Veritas Communications			85.3	%			1993				95.1	%			Note 17
Vitro			82.0	%			2004				97.5	%			Note 18
Yamamoto			100.0	%			2000				—
Performance Marketing Services
6degrees Communications			66.0	%			1993				77.3	%			Note 19
Accent			100.0	%			1999				—
AIC Publishing			51.0	%			2011				—
Boom Marketing			85.0	%			2005				—
Bryan Mills Iradesso			62.8	%			1989				100.0	%			Note 20
Communifx Partners			84.6	%			2010				—				Note 21
Computer Composition			100.0	%			1988				—
Hudson Media			51.0	%			2010				—
Integrated Media Solutions			75.0	%			2010				—				Note 22
Kenna Communications			80.0	%			2010				—				Note 23
Northstar Research Partners			91.8.%				1998				—				Note 24
Onbrand			94.0	%			1992				—
Relevent			60.0	%			2010				—
RJ Palmer			100.0	%			2011				—
Source Marketing			83.0	%			1998				91.3	%			Note 25
TargetCom			100.0	%			2000				—
TEAM			60.0	%			2010				—				Note 26
Trade X			75.0	%			2011				—				Note 27

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Notes

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Financial Information Relating to Business Segments and Geographic Regions

For financial information relating to the Company’s Marketing Communications Businesses and the geographic regions the businesses operate within, refer to Note 16 (Segmented Information) of the notes to the consolidated financial statements included in this Annual Report and to “Item 7. Management’s Discussion and Analysis” for further discussion.

Competition

In the competitive, highly fragmented marketing and communications industry, the Company’s operating companies compete for business with the operating subsidiaries of large global holding companies such as Omnicom Group Inc., Interpublic Group of Companies, Inc., WPP Group plc, Publicis Group SA and Havas Advertising. These global holding companies generally have greater resources than those available to MDC and its subsidiaries, and such resources may enable them to aggressively compete with the Company’s marketing communications businesses. Each of MDC’s operating companies also faces competition from numerous independent agencies that operate in multiple markets. MDC’s operating companies must compete with these other companies to maintain existing client relationships and to obtain new clients and assignments. MDC’s operating companies compete at this level by providing clients with marketing ideas and strategies that are focused on increasing clients’ revenues and profits. These existing and potential clients include multinational corporations and national companies with mid-to-large sized marketing budgets. MDC also benefits from cooperation among the operating companies through referrals and the sharing of both services and expertise, which enables MDC to service clients’ varied marketing needs by crafting custom integrated solutions.

A partner agency’s ability to compete for new clients is affected in some instances by the policy, which many advertisers and marketers impose, of not permitting their agencies to represent competitive accounts in the same market. In the vast majority of cases, however, MDC’s consistent maintenance of separate, independent operating companies has enabled MDC to represent competing clients across its network.

Industry Trends

Historically, advertising has been the primary service provided by the marketing communications industry. However, as clients aim to establish one-to-one relationships with customers, and more accurately measure the effectiveness of their marketing expenditures, specialized and digital communications services and database marketing and analytics are consuming a growing portion of marketing dollars. The Company believes this is increasing the demand for a broader range of non-advertising marketing communications services (i.e., direct marketing, sales promotion, interactive, public relations, etc). The notion of a mass market audience is giving way to life-style segments, social events/networks, and online/mobile communities, each segment requiring a different message and/or different, often non-traditional, channels of communication. Global marketers now seek innovative ideas wherever they can find them, providing new opportunities for small to mid-sized communications companies.

Clients

The Company serves clients in virtually every industry, and in many cases, the same clients in various locations. Representation of a client rarely means that MDC handles marketing communications for all brands or product lines of the client in every geographical location. MDC’s agencies have written contracts with many of their clients. As is customary in the industry, these contracts provide for termination by either party on relatively short notice. See “Management’s Discussion and Analysis — Executive Overview” for a further discussion of MDC’s arrangements with its clients.

During 2011, 2010 and 2009, the Company’s largest client, Sprint, accounted for approximately 6%, 8% and 16% of revenues, respectively. In addition, MDC’s ten largest clients (measured by revenue generated) accounted for 29%, 37% and 49% of 2011, 2010 and 2009 revenues, respectively.

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Employees

As of December 31, 2011, MDC and its subsidiaries had the following number of employees within its reportable segments:

Segment		Total
Strategic Marketing Services			2,779
Performance Marketing Services			3,986
Corporate			45
Total			6,810

See Management’s Discussion and Analysis for a discussion of the effect of cost of services sold on MDC’s historical results of operations. Because of the personal service character of the marketing communications businesses, the quality of personnel is of crucial importance to MDC’s continuing success. MDC considers its relations with employees to be satisfactory.

Effect of Environmental Laws

MDC believes it is substantially in compliance with all regulations concerning the discharge of materials into the environment, and such regulations have not had a material effect on the capital expenditures or operations of MDC.

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Item 1A. Risk Factors

The following factors could adversely affect the Company’s revenues, results of operations or financial condition. See also “Statement Regarding Forward-Looking Disclosure.”

Future economic and financial conditions could adversely impact our financial condition and results.

Economic and financial conditions deteriorated sharply in the latter part of 2008, and these deteriorating conditions continued in 2009 and 2010. In 2011, the United States experienced modest economic growth, but the pace of the global economic recovery is uneven and a future economic downturn could renew reductions in client spending levels and adversely affect our results of operations and financial position in 2012.

a. As a marketing services company, our revenues are highly susceptible to declines as a result of unfavorable economic conditions.

Global economic conditions affect the advertising and marketing services industry more severely than other industries. In the past, some clients have responded to weakening economic conditions with reductions to their marketing budgets, which include discretionary components that are easier to reduce in the short term than other operating expenses. This pattern may recur in the future. Decreases in our revenue would negatively affect our financial results, including a reduction of our estimates of free cash flow from operations.

b. If our clients experience financial distress, their weakened financial position could negatively affect our own financial position and results.

We have a diverse client base, and at any given time, one or more of our clients may experience financial difficulty, file for bankruptcy protection or go out of business. The unfavorable economic and financial conditions that have impacted many sectors of the global economy could result in an increase in client financial difficulties that affect us. The direct impact on us could include reduced revenues and write-offs of accounts receivable. If these effects were severe, the indirect impact could include impairments of goodwill, covenant violations relating to the WF Credit Agreement or the 11% Notes, or reduced liquidity. Our 10 largest clients (measured by revenue generated) accounted for 29% of revenue in 2011.

c. Conditions in the credit markets could adversely impact our results of operations and financial position.

Turmoil in the credit markets or a contraction in the availability of credit would make it more difficult for businesses to meet their capital requirements and could lead clients to change their financial relationship with their vendors, including us. If that were to occur, it could materially adversely impact our results of operations and financial position.

MDC competes for clients in highly competitive industries.

The Company operates in a highly competitive environment in an industry characterized by numerous firms of varying sizes, with no single firm or group of firms having a dominant position in the marketplace. MDC is, however, smaller than several of its larger industry competitors. Competitive factors include creative reputation, management, personal relationships, quality and reliability of service and expertise in particular niche areas of the marketplace. In addition, because a firm’s principal asset is its people, barriers to entry are minimal, and relatively small firms are, on occasion, able to take all or some portion of a client’s business from a larger competitor.

While many of MDC’s client relationships are long-standing, companies put their advertising and marketing services businesses up for competitive review from time to time, including at times when clients enter into strategic transactions. From year to year, the identities of MDC’s 10 largest customers may change, as a result of client losses and additions and other factors. To the extent that the Company fails to maintain existing clients or attract new clients, MDC’s business, financial condition and operating results may be affected in a materially adverse manner.

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The loss of lines of credit under our WF Credit Agreement could adversely affect MDC’s liquidity and our ability to implement MDC’s acquisition strategy and fund any put options if exercised.

MDC uses amounts available under the WF Credit Agreement, together with cash flow from operations, to fund its working capital needs, to fund the exercise of put option obligations and to fund our strategy of making selective acquisitions of ownership interests in entities in the marketing communications services industry.

The Company is currently in compliance with all of the terms and conditions of the WF Credit Agreement. If, however, events were to occur, which result in MDC losing all or a substantial portion of its available credit under the WF Credit Agreement, or if MDC was prevented from accessing such lines of credit due to other restrictions such as those in the 11% Notes, MDC could be required to seek other sources of liquidity. In addition, if MDC were unable to replace this source of liquidity, then MDC’s ability to fund its working capital needs and any contingent obligations with respect to put options would be materially adversely affected.

MDC may not realize the benefits it expects from past acquisitions or acquisitions MDC may make in the future.

MDC’s business strategy includes ongoing efforts to engage in material acquisitions of ownership interests in entities in the marketing communications services industry. MDC intends to finance these acquisitions by using available cash from operations and through incurrence of debt or bridge financing, either of which may increase its leverage ratios, or by issuing equity, which may have a dilutive impact on its existing shareholders. At any given time MDC 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 MDC. 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 its securities.

The success of acquisitions or strategic investments depends on the effective integration of newly acquired businesses into MDC’s current operations. Such integration is subject to risks and uncertainties, including realization of anticipated synergies and cost savings, the ability to retain and attract personnel and clients, the diversion of management’s attention from other business concerns, and undisclosed or potential legal liabilities of the acquired company. MDC may not realize the strategic and financial benefits that it expects from any of its past acquisitions, or any future acquisitions.

MDC’s business could be adversely affected if it loses key clients.

MDC’s strategy has been to acquire ownership stakes in diverse marketing communications businesses to minimize the effects that might arise from the loss of any one client or executive. The loss of one or more clients could materially affect the results of the individual operating companies and the Company as a whole. Management succession at our operating units is very important to the ongoing results of the Company because, as in any service business, the success of a particular agency is dependent upon the leadership of key executives and management personnel. If key executives were to leave our operating units, the relationships that MDC has with its clients could be adversely affected.

MDC’s ability to generate new business from new and existing clients may be limited.

To increase its revenues, MDC needs to obtain additional clients or generate demand for additional services from existing clients. MDC’s ability to generate initial demand for its services from new clients and additional demand from existing clients is subject to such clients’ and potential clients’ requirements, pre-existing vendor relationships, financial condition, strategic plans and internal resources, as well as the quality of MDC’s employees, services and reputation and the breadth of its services. To the extent MDC cannot generate new business from new and existing clients due to these limitations. MDC’s ability to grow its business and to increase its revenues will be limited.

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MDC’s business could be adversely affected if it loses or fails to attract key employees.

Employees, including creative, research, media, account and practice group specialists, and their skills and relationships with clients, are among MDC’s most important assets. An important aspect of MDC’s competitiveness is its ability to retain key employee and management personnel. Compensation for these key employees is an essential factor in attracting and retaining them, and MDC may not offer a level of compensation sufficient to attract and retain these key employees. If MDC fails to hire and retain a sufficient number of these key employees, it may not be able to compete effectively. If key executives were to leave our operating units, the relationships that MDC has with its clients could be adversely affected.

MDC is exposed to the risk of client defaults.

MDC’s agencies often incur expenses on behalf of their clients for productions in order to secure a variety of media time and space, in exchange for which they receive a fee. The difference between the gross cost of the production and media and the net revenue earned by us can be significant. While MDC takes precautions against default on payment for these services (such as credit analysis and advance billing of clients) and has historically had a very low incidence of default, MDC is still exposed to the risk of significant uncollectible receivables from our clients. The risk of a material loss could significantly increase in periods of severe economic downturn. Such a loss could have a material adverse effect on our results of operations and financial position.

MDC’s results of operations are subject to currency fluctuation risks.

Although MDC’s financial results are reported in U.S. dollars, a portion of its revenues and operating costs are denominated in currencies other than the US dollar. As a result, fluctuations in the exchange rate between the U.S. dollar and other currencies, particularly the Canadian dollar, may affect MDC’s financial results and competitive position.

Goodwill and intangible assets may become impaired.

We have recorded a significant amount of goodwill and intangible assets in our consolidated financial statements in accordance with U.S. GAAP resulting from our acquisition activities, which principally represents the specialized know-how of the workforce at the agencies we have acquired. We test, at least annually, the carrying value of goodwill for impairment, as discussed in Note 2 to our consolidated financial statements. The estimates and assumptions about future results of operations and cash flows made in connection with the impairment testing could differ from future actual results of operations and cash flows. While we have concluded, for each year presented in our financial statements, that our goodwill relating to continuing operations is not impaired, future events could cause us to conclude that the asset values associated with a given operation may become impaired. Any resulting impairment loss could materially adversely affect our results of operations and financial condition.

MDC is subject to regulations and litigation risk that could restrict our activities or negatively impact our revenues.

Advertising and marketing communications businesses are subject to government regulation, both domestic and foreign. There has been an increasing tendency in the United States on the part of advertisers to resort to litigation and self-regulatory bodies to challenge comparative advertising on the grounds that the advertising is false and deceptive. Moreover, there has recently been an expansion of specific rules, prohibitions, media restrictions, labeling disclosures, and warning requirements with respect to advertising for certain products and usage of personally identifiable information. Representatives within government bodies, both domestic and foreign, continue to initiate proposals to ban the advertising of specific products and to impose taxes on or deny deductions for advertising which, if successful, may have an adverse effect on advertising expenditures and consequently MDC’s revenues.

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Certain of MDC’s agencies produce software and e-commerce tools for their clients, and these product offerings have become increasingly subject to litigation based on allegations of patent infringement or other violations of intellectual property rights. As we expand these product offerings, the possibility of an intellectual property claim against us grows. Any such claim, with or without merit, could result in costly litigation and distract management from day-to-day operations and may result in us deciding to enter into license agreements to avoid ongoing patent litigation costs. If we are not successful in defending such claims, we could be required to stop offering these services, pay monetary amounts as damages, enter into royalty or licensing arrangements, or satisfy indemnification obligations that we have with some of our clients. Such arrangements may cause our operating margins to decline.

In addition, laws and regulations related to user privacy, use of personal information and internet tracking technologies have been proposed or enacted in the United States and certain international markets. These laws and regulations could affect the acceptance of the internet as an advertising medium. These actions could affect our business and reduce demand for certain of our services, which could have a material adverse effect on our results of operations and financial position.

The indenture governing the 11% Notes and the WF Credit Agreement governing our secured line of credit contain various covenants that limit our discretion in the operation of our business.

The indenture governing the 11% Notes and the WF Credit Agreement governing our lines of credit contain various provisions that limit our discretion in the operation of our business by restricting our ability to:

These restrictions on our ability to operate our business in our discretion could seriously harm our business by, among other things, limiting our ability to take advantage of financing, merger and acquisition and other corporate opportunities. The WF Credit Agreement is subject to various additional covenants, including a senior leverage ratio, a total leverage ratio, a fixed charge coverage ratio, a minimum EBITDA level (as defined), and a minimum accounts receivable level. Events beyond our control could affect our ability to meet these financial tests, and we cannot assure you that we will meet them.

Our substantial indebtedness could adversely affect our cash flow and prevent us from fulfilling our obligations, including the 11% Notes.

As of December 31, 2011, MDC had $385.2 million net of original issue discount of indebtedness. In addition, we expect to make additional drawings under the WF Credit Agreement from time to time. Our ability to pay principal and interest on our indebtedness is dependent on the generation of cash flow by our subsidiaries. Our subsidiaries’ business may not generate sufficient cash flow from operations to meet MDC’s

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debt service and other obligations. If we are unable to meet our expenses and debt service obligations, we may need to obtain additional debt, refinance all or a portion of our indebtedness on or before maturity, sell assets or raise equity. We may not be able to obtain additional debt, refinance any of our indebtedness, sell assets or raise equity on commercially reasonable terms or at all, which could cause us to default on our obligations and impair our liquidity. Our inability to generate sufficient cash flow to satisfy our debt obligations, to obtain additional debt or to refinance our obligations on commercially reasonable terms would have a material adverse effect on our business, financial condition and results of operations.

If we cannot make scheduled payments on our debt, we will be in default and, as a result, our debt holders could declare all outstanding principal and interest to be due and payable; the lenders under the WF Credit Agreement could terminate their commitments to loan us money and foreclose against the assets securing our borrowings; and we could be forced into bankruptcy or liquidation. Our level of indebtedness could have important consequences. For example it could:

Despite our current debt levels, we may be able to incur substantially more indebtedness, which could further increase the risks associated with our leverage.

We may incur substantial additional indebtedness in the future. The terms of our Credit Agreement and the indenture governing the11% Notes permit us and our subsidiaries to incur additional indebtedness subject to certain limitations. If we or our subsidiaries incur additional indebtedness, the related risks that we face could increase.

We are a holding company dependent on our subsidiaries for our ability to service our debt and pay dividends.

MDC is a holding company with no operations of our own. Consequently, our ability to service our debt and to pay cash dividends on our common stock is dependent upon the earnings from the businesses conducted by our subsidiaries. Our subsidiaries are separate and distinct legal entities and have no obligation to provide us with funds for our payment obligations, whether by dividends, distributions, loans or other payments. Although our operating subsidiaries have generally agreed to allow us to consolidate and “sweep” cash, subject to the timing of payments due to minority holders, any distribution of earnings to us from our subsidiaries is contingent upon the subsidiaries’ earnings and various other business considerations. Also, our right to receive any assets of any of our subsidiaries upon their liquidation or reorganization, and therefore the right of the holders of common stock to participate in those assets, will be structurally subordinated to the claims of that subsidiary’s creditors. In addition, even if we were a creditor of any of our subsidiaries, our rights as a creditor would be subordinate to any security interest in the assets of our subsidiaries and any indebtedness of our subsidiaries senior to that held by us.

We could change or suspend our existing dividend practice in the future.

The declaration and payment of dividends on our common stock is at the discretion of MDC’s board of directors and will depend upon limitations contained in our Credit Agreement and the indenture governing the 11% Notes, future earnings, capital requirements, our general financial condition and general business conditions. MDC’s practice is to pay dividends only out of excess free cash flow from operations, and in the

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event that worsening economic conditions, disruptions in the credit markets or other factors have a significant effect on our liquidity, MDC’s board of directors could decide to reduce or suspend dividend payments in the future.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

See the notes to the Company’s consolidated financial statements included in this Annual Report for a discussion of the Company’s lease commitments and the “Management’s Discussion and Analysis” for the impact of occupancy costs on the Company’s operating expenses.

The Company maintains office space in many cities in the United States, Canada, Europe, and the Caribbean. This space is primarily used for office and administrative purposes by the Company’s employees in performing professional services. This office space is in suitable and well-maintained condition for MDC’s current operations. All of the Company’s materially important office space is leased from third parties with varying expiration dates. Certain of these leases are subject to rent reviews or contain various escalation clauses and certain of our leases require our payment of various operating expenses, which may also be subject to escalation. In addition, leases related to the Company’s non-US businesses are denominated in other than US dollars and are therefore subject to changes in foreign exchange rates.

Item 3. Legal Proceedings

MDC’s operating entities are involved in legal proceedings of various types. While any litigation contains an element of uncertainty, MDC 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 MDC.

Item 4. Mine Safety Disclosures

Not applicable.

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PART II

Item 5. Market for Registrant’s Common Equity Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information and Holders of Class A Subordinate Voting Shares

The principal United States market on which the Company’s Class A subordinate voting shares are traded is the NASDAQ National Market (“NASDAQ”) (symbol: “MDCA”), and the principal market in Canada is the Toronto Stock Exchange (symbol: “MDZ.A”). As of March 1, 2012, the approximate number of holders of our Class A subordinate voting shares, including those whose shares are held in nominee name, was 2,800. Quarterly high and low sales prices per share of the Company’s Class A subordinate voting shares, as reported on NASDAQ and The Toronto Stock Exchange, respectively, for each quarter in the years ended December 31, 2011 and 2010, are as follows:

Nasdaq

Quarter Ended		High				Low
		($ per Share)
March 31, 2010			11.20				8.29
June 30, 2010			13.19				10.30
September 30, 2010			13.59				10.07
December 31, 2010			17.47				13.19
March 31, 2011			19.08				15.84
June 30, 2011			20.11				15.16
September 30, 2011			20.99				12.62
December 31, 2011			17.87				12.68

The Toronto Stock Exchange

Quarter Ended		High				Low
		(C$ per Share)
March 31, 2010			11.30				8.54
June 30, 2010			13.51				10.46
September 30, 2010			13.78				10.11
December 31, 2010			17.37				13.39
March 31, 2011			18.55				15.79
June 30, 2011			18.45				14.57
September 30, 2011			19.00				12.50
December 31, 2011			17.42				13.50

As of March 1, 2012, the last reported sale price of the Class A subordinate voting shares was $13.01 on NASDAQ and C$12.90 on the Toronto Stock Exchange.

Dividend Practice

In 2011, MDC’s board of directors declared the following dividends: a $0.14 per share quarterly dividend to all shareholders of record as of the close of business on March 17, 2011; a $0.14 per share dividend quarterly to all shareholders of record as of the close of business on May 16, 2011; a $0.14 per share quarterly dividend to all shareholders of record as of the close of business on August 17, 2011; a $0.14 per share quarterly dividend to all shareholders of record as of the close of business on October 28, 2011; and a $0.14 per share quarterly dividend to all shareholders of record as of the close of business on February 15, 2012. MDC’s practice is to pay dividends only out of excess free cash flow from operations. MDC is further limited in the extent to which we are able to pay dividends under our Credit Agreement and the indenture governing the 11% Notes. The payment of any future dividends will be at the discretion of MDC’s board of directors and will depend upon limitations contained in our Credit Agreement and the indenture governing the 11% Notes, future earnings, capital requirements, our general financial condition and general business conditions.

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Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information regarding securities issued under our equity compensation plans as of December 31, 2011.

		Number of Securities to Be Issued Upon Exercise of Outstanding Options and Rights				Weighted Average Exercise Price of Outstanding Options and Rights				Number of Securities Remaining Available for Future Issuance (Excluding Column (a))
		(a)				(b)				(c)
Equity Compensation Plans:
Approved by stockholders:
Share options			88,081			$	9.12				2,511,742
Stock appreciation rights			2,272,588	(1)		$	3.75				844,536
Not approved by stockholders:
None			—				—				—

On May 26, 2005, the Company’s shareholders’ approved the 2005 Stock Incentive Plan, which provides for the issuance of two million Class A shares. On June 2, 2009 and June 1, 2007, the Company’s shareholders approved amendments to the 2005 Stock Incentive Plan, which increased the number of shares available for issuance to 4.5 million 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. On May 30, 2008, the Company’s shareholders approved the 2008 Key Partner Incentive Plan, which provides for the issuance of 600,000 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 2 million Class A shares.

See also Note 13 of the notes to the consolidated financial statements included herein.

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

None.

Purchase of Equity Securities by the Issuer and Affiliated Purchasers

Issuer Purchases of Equity Securities:

Shares — Class A subordinate voting shares

For the twelve months ended December 31, 2011, the Company made no open market purchases of its Class A shares or its Class B shares. Pursuant to its Credit Agreement, the Company is currently restricted from repurchasing its shares in the open market.

During 2011, the Company’s employees surrendered 230,262 Class A shares valued at approximately $4.1 million in connection with the required tax withholding resulting from the vesting of restricted stock. The Company paid these withholding taxes on behalf of the related employees. These Class A shares were subsequently retired and no longer remain outstanding as of December 31, 2011.

Transfer Agent and Registrar for Common Stock

The transfer agent and registrar for the Company’s common stock is Canadian Stock Transfer Company (f/k/a CIBC Mellon Trust Company). Canadian Stock Transfer Company operates a telephone information inquiry line that can be reached by dialing toll-free 1-800-387-0825 or 416-643-5500.

Correspondence may be addressed to:
MDC Partners Inc.
C/o Canadian Stock Transfer Company
P.O. Box 4202, Postal Station A
Toronto, Ontario M5W 0E4

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Item 6. Selected Financial Data

The following selected financial data should be read in connection with Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes that are included in this annual report on Form 10-K.

		Years Ended December 31,
		2011				2010				2009				2008				2007
		(Dollars in Thousands, Except per Share Data)
Operating Data
Revenues		$	943,274			$	689,146			$	536,491			$	575,404			$	524,896
Operating profit		$	9,307			$	30,315			$	22,659			$	21,404			$	23,785
Income (loss) from continuing operations		$	(75,559	)		$	(1,417	)		$	(9,578	)		$	19,344			$	2,691
Stock-based compensation included in income (loss) from continuing operations		$	23,657			$	16,507			$	15,444			$	14,437			$	10,217
Earnings (Loss) per Share
Basic
Continuing operations attributable to MDC Partners Inc.		$	(2.86	)		$	(0.41	)		$	(0.55	)		$	0.41			$	(0.74	)
Diluted
Continuing operations attributable to MDC Partners Inc. common shareholders		$	(2.86	)		$	(0.41	)		$	(0.55	)		$	0.41			$	(0.74	)
Cash dividends declared per share		$	0.70			$	0.34			$	—			$	—			$	—
Financial Position Data
Total assets		$	1,055,745			$	914,348			$	604,519			$	529,239			$	520,698
Total debt		$	385,174			$	286,216			$	217,946			$	181,498			$	164,754
Redeemable noncontrolling interests		$	107,432			$	77,560			$	33,728			$	21,751			$	24,187
Deferred acquisition consideration		$	137,223			$	107,991			$	30,645			$	5,538			$	2,511
Fixed charge coverage ratio			N/A				N/A				N/A				2.07				1.45
Fixed charge deficiency		$	29,453			$	1,810			$	836				N/A				N/A

Several significant factors that should be considered when comparing the annual results shown above are as follows:

Year Ended December 31, 2011

During 2011, the Company completed a number of acquisitions. Please see Note 4 of the notes to the consolidated financial statements included herein for a summary of these acquisitions

On April 19, 2011, the Company and its wholly-owned subsidiaries, as guarantors, issued and sold an additional $55 million aggregate principal amount of 11% Notes due 2016. The additional notes were issued under the Indenture governing the 11% Notes and treated as a single series with the original 11% 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 Company received net proceeds before expenses of $59.6 million, which included an original issue premium of $6.1 million, and underwriter fees of $1.5 million. The Company used the net proceeds of the offering to repay the outstanding balance under the Company’s revolving credit agreement described elsewhere herein, and for general corporate purposes.

Effective December, 31, 2011, the Performance Marketing Group, a division of Accent Marketing Services, LLC, has been deemed a discontinued operation. All periods have been restated to reflect this discontinued operation. See Note 10 of the Notes to the Consolidated Financial Statements included herein.

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Year Ended December 31, 2010

During 2010, the Company completed a significant number of acquisitions. Please see Note 4 of the notes to the consolidated financial statements included herein for a summary of these acquisitions.

On May 14, 2010, the Company and its wholly-owned subsidiaries, as guarantors issued and sold $65 million aggregate principal amount of 11% Notes due 2016. The additional notes were issued under the Indenture governing the 11% notes and treated as a single series with the original 11% 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 Company received net proceeds before expenses of $67.2 million, which included an original issue premium of $2.6 million, and underwriter fees of $0.4 million. The Company used the net proceeds of the offering to repay the outstanding balance under the Company’s revolving Credit Agreement described elsewhere herein, and for general corporate purposes, including acquisitions.

Effective September 30, 2010, the Company ceased Zig (USA) LLC operations. All periods have been restated to reflect these discontinued operations. See Note 10 of the notes to the consolidated financial statements included herein.

Year Ended December 31, 2009

On October 23, 2009, the Company and its wholly-owned subsidiaries, as guarantors, issued and sold $225 million aggregate principal amount of 11% Notes due 2016 (the “11% Notes”). The 11% Notes bear interest at a rate of 11% per annum, accruing from October 23, 2009. Interest is payable semiannually in arrears in cash on May 1 and November 1 of each year, beginning on May 1, 2010. The 11% Notes will mature on November 1, 2016, unless earlier redeemed or repurchased. In addition, the Company entered into a Credit Agreement described elsewhere herein. The Company used the net proceeds of this offering to repay the outstanding balance and terminate its prior Fortress Financing Agreement, and redeemed its outstanding 8% C$45 million convertible debentures. As a result, the Company incurred $4.5 million of early termination fees and wrote off of the remaining deferred financing costs relating to its prior Financing Agreement and convertible debentures.

Year Ended December 31, 2008

During the year ended December 31, 2008, MDC recognized $13.3 million of primarily non-cash, unrealized, foreign exchange gains due primarily to the strengthening of the US dollar as compared to the Canadian dollar on its intercompany balances that are denominated in the US dollar.

Effective December 31, 2008, three of the Company’s operating subsidiaries, Clifford/Bratskeir Public Relations LLC, Ito Partners, LLC and Mobium Creative Group (a division of Colle + McVoy) have been deemed discontinued operations. All periods have been restated to reflect these discontinued operations. See Note 10 of the notes to the consolidated financial statements included herein.

Year Ended December 31, 2007

In March 2007, due to continued operating and client losses, the Company ceased Margeotes Fertitta Powell, LLC (“MFP”) current operations and spun off a new operating business and as a result incurred a goodwill impairment charge of $4.5 million in 2007. The Company also recorded an impairment charge relating to MFP of $6.3 million in 2006. After reviewing the 2008 projections of the new operating business the Company decided to cease the operations of the new operating business as well. As a result, the Company has classified these operations as discontinued. In addition, an additional intangible relating to an employment contract of $0.6 million was deemed impaired and written off.

In December 2007, due to continued operating losses and the lack of new business wins the Company ceased Banjo Strategic Entertainment, LLC operations. All periods have been restated to reflect these discontinued operations. See Note 10 of the notes to the consolidated financial statements included herein.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless otherwise indicated, references to the “Company” mean MDC Partners Inc. and its subsidiaries, and references to a fiscal year means the Company’s year commencing on January 1 of that year and ending December 31 of that year (e.g., fiscal 2011 means the period beginning January 1, 2011, and ending December 31, 2011).

The Company reports its financial results in accordance with generally accepted accounting principles (“GAAP”) of the United States of America (“US GAAP”). However, the Company has included certain non-US GAAP financial measures and ratios, which it believes provide useful information to both management and readers of this report in measuring the financial performance and financial condition of the Company. One such term is “organic revenue”, which means growth in revenues from sources other than acquisitions or foreign exchange impacts. These measures do not have a standardized meaning prescribed by US GAAP and, therefore, may not be comparable to similarly titled measures presented by other publicly traded companies, nor should they be construed as an alternative to other titled measures determined in accordance with US GAAP.

Executive Summary

The Company’s objective is to create shareholder value by building market-leading subsidiaries and affiliates that deliver innovative, value-added marketing communications and strategic consulting to their clients. Management believes that shareholder value is maximized with an operating philosophy of “Perpetual Partnership” with proven committed industry leaders in marketing communications.

MDC manages the business by monitoring several financial and non-financial performance indicators. The key indicators that we review focus on the areas of revenues and operating expenses and capital expenditures. Revenue growth is analyzed by reviewing the components and mix of the growth, including: growth by major geographic location; existing growth by major reportable segment (organic); growth from currency changes; and growth from acquisitions.

MDC conducts its businesses through the Marketing Communications Group. Within the Marketing Communications Group, there are two reportable operating segments: Strategic Marketing Services and Performance Marketing Services. In addition, MDC has a “Corporate Group” which provides certain accounting, administrative, financial, human resource and legal functions.

Marketing Communications Businesses

Through its operating “partners”, MDC provides advertising, consulting, customer relationship management, and specialized communication services to clients throughout the United States, Canada, Europe, and the Caribbean.

The operating companies earn 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. Additional information about revenue recognition appears in Note 2 of the notes to the consolidated financial statements.

MDC measures operating expenses in two distinct cost categories: cost of services sold, and office and general expenses. Cost of services sold is primarily comprised of employee compensation related costs and direct costs related primarily to providing services. Office and general expenses are primarily comprised of rent and occupancy costs and administrative service costs including related employee compensation costs. Also included in operating expenses is depreciation and amortization.

Because we are a service business, we monitor these costs on a percentage of revenue basis. Cost of services sold tend to fluctuate in conjunction with changes in revenues, whereas office and general expenses and depreciation and amortization, which are not directly related to servicing clients, tend to decrease as a percentage of revenue as revenues increase because a significant portion of these expenses are relatively fixed in nature.

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We measure capital expenditures as either maintenance or investment related. Maintenance capital expenditures are primarily composed of general upkeep of our office facilities and equipment that are required to continue to operate our businesses. Investment capital expenditures include expansion costs, the build out of new capabilities, technology or call centers, or other growth initiatives not related to the day to day upkeep of the existing operations. Growth capital expenditures are measured and approved based on the expected return of the invested capital.

Certain Factors Affecting Our Business

Overall Factors Affecting our Business and Results of Operations.  The most significant factors include national, regional and local economic conditions, our clients’ profitability, mergers and acquisitions of our clients, changes in top management of our clients and our ability to retain and attract key employees. New business wins and client loses occur for a variety of factors. The two most significant factors are; clients’ desire to change marketing communication firms, and the creative product our firms are offering. A client may choose to change marketing communication firms for any number of reasons, such as a change in top management and the new management wants to go retain an agency that it may have previously worked with. In addition, if the client is merged or acquired by another company, the marketing communication firm is often changed. Further, global clients are trending to consolidate the use of numerous marketing communication firms to just one or two. Another factor in a client changing firms is the agency’s campaign or work product is not providing results and they feel a change is in order to generate additional revenues.

Clients will generally reduce or increase their spending or outsourcing needs based on their current business trends and profitability. These types of changes impact the Performance Marketing Services Group more than the Strategic Marketing Services Group due to the Performance Marketing Services Group having clients who require project-based work as opposed to the Strategic Marketing Services Group who primarily have retainer-based relationships.

Acquisitions and Dispositions.  Our strategy includes acquiring ownership stakes in well-managed businesses with strong reputations in the industry. We engaged in a number of acquisition and disposal transactions during the 2009 to 2011 period, which affected revenues, expenses, operating income and net income. Additional information regarding material acquisitions is provided in Note 4 “Acquisitions” and information on dispositions is provided in Note 10 “Discontinued Operations” in the notes to the consolidated financial statements.

Foreign Exchange Fluctuations.  Our financial results and competitive position are affected by fluctuations in the exchange rate between the US dollar and non-US dollars, primarily the Canadian dollar. See also “Quantitative and Qualitative Disclosures About Market Risk — Foreign Exchange.”

Seasonality.  Historically, with some exceptions, we generate the highest quarterly revenues during the fourth quarter in each 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.

Fourth Quarter Results.  Revenues for the fourth quarter of 2011 increased to $254.3 million, compared to the 2010 fourth quarter revenues of $211.0 million. The increase consisted of organic growth of $14.1 million, acquisition revenue of $29.5 million and a $0.3 million decrease due to foreign currency fluctuations. The Strategic Marketing Services segment had revenue growth of $35.3 million, of which $10.3 million was organic and $25.1 million was acquisition related. The Performance Marketing Services segment had increased revenue of $8.1 million in 2011 of which $3.8 million was organic and $4.4 million was acquisition related. Operating results for the fourth quarter of 2011 resulted in a loss of $4.6 million compared to income of $22.2 million in 2010. The decrease in operating profits was primarily related to an increase in acquisition related costs and estimated deferred acquisition consideration adjustments of $15.3 million, and the Company’s strategic investments in talent, new office locations, and other growth investments. Income (loss) from continuing operations for the fourth quarter of 2011 was a loss of $55.5 million compared to income of $17.9 million in 2010. Interest expense was higher in 2011 by $1.7 million, income tax expense was also higher by $42.2 million and equity in earnings of affiliates was income in 2010 of $2.5 million compared to nil in 2011. Interest expense increased due to the additional outstanding debt in 2011, relating to the 11% Notes issued in April 2011. Income tax expense was higher primarily due to additional valuation allowance reserves and non-deductible stock-based compensation in

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2011. The 2010 income in equity affiliates relates to distributions in excess of the Company’s carrying value of one of its equity method investments.

Summary of Key Transactions

Year Ended December 31, 2011

The Company completed several key acquisitions in 2011. These acquisitions included the acquisition of a 70% interest in Concentric Partners, LLC (“Concentric”), a 65% interest in Laird + Partners, New York LLC (“Laird”), a 100% interest in RJ Palmer Partners LLC (“RJ Palmer”), a 75% interest in Trade X Partners LLC (“Trade X”) and a 60% interest in Anomaly Partners, LLC (“Anomaly”).

The total aggregate purchase price for these 2011 transactions was $76.8 million, which included closing cash payments equal to $40 million plus additional estimated contingent purchase payments in future years of approximately $36.8 million. See Note 4 of the notes to the consolidated financial statements included herein for additional information on these and other acquisitions.

On April 19, 2011, the Company and its wholly-owned subsidiaries, as guarantors, issued and sold an additional $55 million aggregate principal amount of 11% Notes due 2016. The additional notes were issued under the Indenture governing the 11% Notes and treated as a single series with the original 11% 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 Company received net proceeds before expenses of $59.6 million, which included an original issue premium of $6.1 million, and underwriter fees of $1.5 million. The Company used the net proceeds of the offering to repay the outstanding balance under the Company’s WF Credit Agreement described elsewhere herein, and for general corporate purposes.

Year Ended December 31, 2010

The Company completed several key acquisitions in 2010. These acquisitions included the acquisition of 60% of the equity interests in The Arsenal LLC (“Team”); 75% of the equity interests in Integrated Media Solutions, LLC; 51% of the equity interests in Allison & Partners LLC; 70% of the equity interests in Sloane & Company LLC; 60% of the equity interests of Relevent Partners LLC; 80% of the total outstanding equity interests in each of Kenna Communications LP and Capital C Partners LP; and 51% of the equity interests in 72andSunny Partners LLC.

The total aggregate purchase price for these 2010 transactions was $182.1 million, which included closing cash payments equal to $92.4 million and additional estimated contingent purchase payments in future years of approximately $89.7 million. See Note 4 of the notes to the consolidated financial statements included herein for additional information on these and other acquisitions.

On May 14, 2010, the Company and its wholly-owned subsidiaries (as guarantors) issued and sold an additional $65 million aggregate principal amount of 11% Notes due 2016. The additional notes were issued under the Indenture governing the 11% notes and treated as a single series with the original 11% notes. The additional notes were sold in a private placement in reliance on exemptions from registration under the Securities Act of 1933, as amended. The Company used the net proceeds of the offering to repay the outstanding balance under the Company’s revolving WF Credit Agreement, and for acquisitions and other general corporate purposes.

Year Ended December 31, 2009

New Financing

On October 23, 2009, the Company completed a $300 million refinancing of its existing debt arrangements. The Company issued $225 million of 11% notes and obtained a new $75 million revolving WF Credit Agreement. The proceeds were used to pay off the existing Fortress Facility, consisting of the $130 million term loan, and the C$45 million convertible debentures. The proceeds were also used for the early payment of $46.0 million of deferred acquisition consideration relating to kirshenbaum bond senecal & partners LLC (“KBSP”) and Crispin Porter & Bogusky LLC (“CPB”). In connection with the repayment of its prior indebtedness, the Company incurred termination fees and expenses of $2.0 million and wrote off deferred financing costs of $2.5 million.

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Effective October 5, 2009, MDC acquired the remaining 6% equity interest in CPB from the minority holder. In accordance with the terms of the underlying limited liability company agreement, the estimated contingent purchase price of $8.5 million will be paid in future periods beginning in April 2011. Following the closing of this transaction, MDC’s ownership in CPB is 100%.

Results of Operations for the Years Ended December 31, 2011, 2010 and 2009:

		For the Year Ended December 31, 2011
		Strategic Marketing Services				Performance Marketing Services				Corporate				Total
Revenue		$	608,079			$	335,195			$	—			$	943,274
Cost of services sold			426,053				248,407				—				674,460
Office and general expenses			138,303				45,536				35,432				219,271
Depreciation and amortization			22,379				17,031				826				40,236
Operating Profit (Loss)			21,344				24,221				(36,258	)			9,307
Other Income (Expense):
Other income, net															116
Foreign exchange loss															(1,677	)
Interest expense, net															(41,783	)
Loss from continuing operations before income taxes, equity in affiliates and noncontrolling interest															(34,037	)
Income tax expense															41,735
Loss from continuing operations before equity in affiliates and noncontrolling interests															(75,772	)
Equity in earnings of affiliates															213
Loss from continuing operations															(75,559	)
Loss from discontinued operations attributable to MDC Partners Inc., net of taxes															(1,361	)
Net loss															(76,920	)
Net income attributable to noncontrolling interests			(6,203	)			(1,551	)			—				(7,754	)
Net loss attributable to MDC Partners Inc.														$	(84,674	)
Stock-based compensation		$	5,149			$	3,695			$	14,813			$	23,657

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		For the Year Ended December 31, 2010
		Strategic Marketing Services				Performance Marketing Services				Corporate				Total
Revenue		$	438,941			$	250,205			$	—			$	689,146
Cost of services sold			289,409				183,962				—				473,371
Office and general expenses			90,622				38,383				22,291				151,296
Depreciation and amortization			17,917				15,879				368				34,164
Operating Profit (Loss)			40,993				11,981				(22,659	)			30,315
Other Income (Expense):
Other income, net															381
Foreign exchange gain															69
Interest expense, net															(33,213	)
Loss from continuing operations before income taxes, equity in affiliates and noncontrolling interest															(2,448	)
Income tax recovery															(165	)
Loss from continuing operations before equity in affiliates and noncontrolling interests															(2,283	)
Equity in earnings of affiliates															866
Loss from continuing operations															(1,417	)
Loss from discontinued operations attributable to MDC Partners Inc., net of taxes															(3,949	)
Net loss															(5,366	)
Net income attributable to noncontrolling interests			(7,211	)			(2,863	)			—				(10,074	)
Net loss attributable to MDC Partners Inc.														$	(15,440	)
Stock-based compensation		$	7,282			$	1,992			$	7,233			$	16,507

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		For the Year Ended December 31, 2009
		Strategic Marketing Services				Performance Marketing Services				Corporate				Total
Revenue		$	370,615			$	165,876			$	—			$	536,491
Cost of services sold			220,714				127,586				—				348,300
Office and general expenses			87,633				25,584				18,091				131,308
Depreciation and amortization			25,518				8,278				428				34,224
Operating Profit (Loss)			36,750				4,428				(18,519	)			22,659
Other Income (Expense):
Other expense, net															(91	)
Foreign exchange loss															(1,956	)
Interest expense, net															(21,646	)
Loss from continuing operations before income taxes, equity in affiliates and noncontrolling interest															(1,034	)
Income tax expense															8,536
Loss from continuing operations before equity in affiliates and noncontrolling interests															(9,570	)
Equity in loss of affiliates															(8	)
Loss from continuing operations															(9,578	)
Loss from discontinued operations attributable to MDC Partners Inc., net of taxes															(3,180	)
Net loss															(12,758	)
Net income attributable to noncontrolling interests			(4,851	)			(715	)			—				(5,566	)
Net loss attributable to MDC Partners Inc.														$	(18,324	)
Stock-based compensation		$	8,742			$	868			$	5,834			$	15,444

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Revenue was $943.3 million for the year ended 2011, representing an increase of $254.2 million, or 36.9%, compared to revenue of $689.1 million for the year ended 2010. This increase relates primarily to acquisition growth of $132.1 million and an increase in organic revenue of $117.3 million. In addition, a weakening of the US Dollar, primarily versus the Canadian dollar during the year ended December 31, 2011, resulted in an increase of $4.8 million.

Operating profit for the year ended 2011 was $9.3 million, compared to $30.3 million in 2010. Operating profit decreased by $19.6 million in the Strategic Marketing Services, and was offset by an increase of $12.2 million within the Performance Marketing Services segment. Corporate operating expenses increased by $13.6 million in 2011.

Loss from continuing operations was a loss of $75.6 million in 2011, compared to a loss of $1.4 million in 2010. This increase in loss of $74.2 million was primarily attributable to the decrease in operating profit of $21.0 million, an increase in tax expense of $41.9 million and an increase in net interest expense equal to $8.6 million. This increase in net interest expense was primarily due to the Company’s outstanding 11% notes. These amounts were impacted by an increase in foreign exchange losses from a gain of $0.1 million in 2010 to a loss of $1.7 million in 2011, and a decrease in other income, net of $0.3 million and a decrease in equity in earnings of non-consolidated affiliates of $0.7 million.

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Marketing Communications Group

Revenues attributable to the Marketing Communications Group, which consists of two reportable segments — Strategic Marketing Services and Performance Marketing Services, were $943.3 million in the aggregate in 2011, compared to $689.1 million in 2010, representing a year-over-year increase of 36.9%.

The components of the revenue for 2011 are shown in the following table:

		Revenue
		$000’s				%
Year ended December 31, 2010		$	689,146
Acquisition			132,102				19.2	%
Organic			117,264				17.0	%
Foreign exchange impact			4,762				0.7	%
Year ended December 31, 2011		$	943,274				36.9	%

The geographic mix in revenues was relatively consistent between 2011 and 2010 and is demonstrated in the following table:

		2011				2010
US			80	%			83	%
Canada			16	%			14	%
Europe and other			4	%			3	%

The operating profit of the Marketing Communications Group decreased by approximately 14.0% to $45.6 million in 2011, from $53.0 million in 2010. The decrease in operating profit of $7.4 million was primarily due to an increase in acquisition related costs and estimated deferred acquisition consideration adjustments of $12.4 million, and increased depreciation and amortization of $5.6 million, due to acquisitions. These amounts were offset by $10.2 million of increased operating profits related to the increase in revenue and a $0.4 million decrease in non-cash stock based compensation, despite the Company’s strategic investments in talent, new office locations, and other growth investments. Operating margins decreased to 4.8% for 2011 compared to 7.7% for 2010. This decrease in operating margin was primarily related to an increase in reimbursed client related direct costs (excluding staff costs) as a percentage of revenues from 20.3% of revenue in 2010 to 24.3% of revenue in 2011. This increase in reimbursed client related direct costs is due to the requirement that certain costs be included in both revenue and direct costs due to the Company acting as principle versus agent for certain client contracts. In addition, margins were negatively impacted by an increase in office and general expenses as a percentage of revenue from 18.7% in 2010 to 19.5% in 2011 primarily due to acquisition related costs and estimated deferred acquisition consideration adjustments as a percentage of revenue of 1.5% in 2011 compared to 0.3% in 2010. Offsetting these increases was a reduction in total staff costs as a percentage of revenues from 55.5% in 2010, to 53.9% in 2011. In addition, depreciation and amortization expenses decreased as a percentage of revenue from 4.9% in 2010, to 4.2% in 2011, due to the increase in revenue in 2011.

Marketing Communications Businesses

Strategic Marketing Services

Revenues attributable to Strategic Marketing Services in 2011 were $608.1 million, compared to $438.9 million in 2010. The year-over-year increase of $169.2 million, or 38.5%, was attributable primarily to organic growth of $81.5 million or 18.6%; acquisition growth of $84.7 million or 19.3%; and a foreign exchange translation of $2.9 million due to the weakening of the US dollar compared to the Canadian dollar. This organic revenue growth was driven by net new business wins.

The operating profit of Strategic Marketing Services decreased by $19.7 million to $21.3 million in 2011 from $41.0 million in 2010. Operating margins decreased to 3.5% in 2011 from 9.3% in 2010. The decrease in operating profit was primarily due to an increase in acquisition related costs and estimated deferred acquisition consideration adjustments of $21.7 million, increased depreciation and amortization of $4.5 million, due to acquisitions, offset by $4.4 million of increased operating profits related to increased

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revenue, and a decrease in non-cash stock based compensation of $2.1 million. The decrease in operating margin was primarily related to an increase in direct costs (excluding staff costs) as a percentage of revenues from 16.8% of revenue in 2010, to 22.1% of revenue in 2011. In addition, margins were negatively impacted by an increase in office and general expenses as a percentage of revenue from 20.6% in 2010 to 22.7% in 2011 due to the increased acquisition related costs and estimated deferred acquisition consideration adjustments of 4.0% in 2011 compared to 0.6% in 2010 offset in part from the increase in revenue. Offsetting these increases, total staff costs as a percentage of revenue decreased from 55.8% in 2010 to 54.2% in 2011, despite the Company’s investment in talent. Depreciation and amortization decreased as a percentage of revenue from 4.1% during 2010 to 3.7% during 2011, due to the increase in revenues.

Performance Marketing Services

Performance Marketing Services generated revenues of $335.2 million for 2011, an increase of $85.0 million, or 34%, compared to revenues of $250.2 million in 2010. The year-over-year increase was attributable primarily to acquisition growth of $47.4 million, organic revenue growth of $35.8 million, and a foreign translation increase of $1.8 million. This organic revenue growth was driven by net new business wins.

The operating profit of Performance Marketing Services increased by $12.2 million to $24.2 million in 2011, from an operating profit of $12.0 million in 2010. Operating margins improved from 4.8% in 2010 compared to 7.2% in 2011. The increase in operating profit was primarily due to a decrease in acquisition related costs and estimated deferred acquisition consideration adjustments of $9.3 million and $5.8 million relating to increased revenue. These increases were offset in part from increased depreciation and amortization of $1.2 million, due to acquisitions and increased non-cash stock based compensation of $1.7 million. The increase in operating margin in 2011 was due primarily to a decrease in total staff costs as a percentage of revenue from 55.0% in 2010 to 53.2% in 2011. Office and general expenses as a percentage of revenue decreased from 15.3% in 2010 to 13.6% in 2011 due to a decrease in acquisition related costs and estimated deferred acquisition consideration adjustments as a percentage of revenue of a positive net adjustment of 0.3% in 2010 to a larger positive net adjustment of 3.0% in 2011. This decrease was offset by an increase in non-cash stock based compensation expense of $1.7 million. In addition, depreciation and amortization expense decreased as a percentage of revenue from 6.3% in 2010 to 5.1% in 2011, due to the increased revenue. Offsetting these decreases was an increase in direct costs (excluding staff costs) as a percentage of revenue from 26.4% in 2010 to 28.2% in 2011.

Corporate

Operating costs related to the Company’s Corporate operations increased by $13.6 million to $36.3 million in 2011, compared to $22.7 million in 2010. This increase was primarily related to increased compensation and related costs of $9.0 million ($7.6 million of which consisted of non-cash stock based compensation). In addition, the Company incurred increased travel, promotional and related costs of $2.5 million, occupancy costs of $1.0 million, professional and other costs of $0.6 million, and depreciation expense of $0.5 million.

Other Expense, Net

Other expense, net, decreased $0.3 million in 2011 to income of $0.1 million from income of $0.4 million in 2010.

Foreign Exchange

The foreign exchange loss was $1.7 million for 2011, compared to a gain of $0.1 million recorded in 2010. This unrealized gain and loss was due primarily to the fluctuation in the US dollar during 2011 and 2010 compared to the Canadian dollar relating to the Company’s US dollar denominated intercompany balances with its Canadian subsidiaries.

Net Interest Expense

Net interest expense for 2011 was $41.8 million, an increase of $8.6 million over the $33.2 million net interest expense incurred during 2010. Interest expense increased $8.4 million in 2011 due to the additional $55 million 11% notes issued in April 2011. Interest income was $0.1 million for 2011, as compared to $0.3 million in 2010.

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Income Tax Expense

Income tax expense in 2011 was $41.7 million compared to a benefit of $0.2 million for 2010. In 2010, the Company’s effective tax rate was substantially lower than the statutory tax rate due to a decrease in the Company’s valuation allowance, and noncontrolling interest charges. These amounts were offset in part by non-deductible stock based compensation and a reserve established for potential tax positions. The Company’s effective tax rate was substantially higher than the statutory rate in 2011 due to non-deductible stock-based compensation and an increase in the Company’s valuation allowance, offset in part by noncontrolling interest charges.

The Company’s US operating units are generally structured as limited liability companies, which are treated as partnerships for tax purposes. The Company is only taxed on its share of profits, while noncontrolling holders are responsible for taxes on their share of the profits.

Equity in Affiliates

Equity in affiliates represents the income (loss) attributable to equity-accounted affiliate operations. In 2011, the Company recorded income of $0.2 million compared to income of $0.9 million in 2010.

Noncontrolling Interests

Noncontrolling interest expense was $7.8 million for 2011, a decrease of $2.3 million from the $10.1 million of noncontrolling interest expense incurred during 2010. The decrease relates to a decrease in profits earned at entities the Company does not own 100% in, both the Strategic Marketing Services and Performance Marketing Service segments.

Discontinued Operations

The loss net of taxes from discontinued operations for 2011 was $1.4 million and is primarily comprised of the operating results of the Performance Marketing Group, a division of Accent Marketing Services, LLC.

The loss net of taxes from discontinued operations for 2010 was $3.9 million and is comprised of the operating results of Performance Marketing Group, Zig (US) LLC (“Zig US”), Redscout’s 007 venture; discontinued operations of Fearless Progression LLC in 2010; and Margeotes Fertitta Powell, LLC (“MFP”) discontinued in 2007.

Net Loss

As a result of the foregoing, the net loss recorded for 2011 was $84.7 million or loss of $2.91 per diluted share, compared to a net loss of $15.4 million or $0.55 per diluted share reported for 2010.

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Revenue was $689.1 million for the year ended 2010, representing an increase of $152.7 million, or 28.5%, compared to revenue of $536.5 million for the year ended 2009. This increase relates primarily to acquisition growth of $105.8 million and an increase in organic revenue of $38.5 million. In addition, a weakening of the US Dollar, primarily versus the Canadian dollar during the year ended December 31, 2010, resulted in an increase of $8.4 million.

Operating profit for the year ended 2010 was $30.3 million compared to $22.7 million in 2009. Operating profit increased by $4.2 million in the Strategic Marketing Services, and by $7.6 million within the Performance Marketing Services segment. Corporate operating expenses increased by $4.1 million in 2010.

Loss from continuing operations was a loss of $1.4 million in 2010, compared to a loss of $9.6 million in 2009. This increase in income of $8.2 million was primarily attributable to the increase in operating profit, offset by an increase in net interest expense equal to $11.6 million. This increase in net interest expense was primarily due to the Company’s outstanding 11% notes. These amounts were impacted by a decrease in foreign exchange losses from a loss of $2.0 million in 2009 to income of $0.1 million in 2010, and an increase in other income, net of $0.5 million from a loss of $0.1 million in 2009 to income of $0.4 million in 2010. In addition, income tax expense decreased $8.7 million, from $8.5 million in 2009 to a benefit of $0.2 million in 2010. Equity in earnings of non-consolidated affiliates increased by $0.9 million due to distributions in excess of the Company’s carrying value of one equity method investment of $2.6 million, offset by the write-off of another equity method investment due to continued losses.

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Marketing Communications Group

Revenues attributable to the Marketing Communications Group, which consists of two reportable segments — Strategic Marketing Services and Performance Marketing Services, were $689.1 million in the aggregate in 2010, compared to $536.5 million in 2009, representing a year-over-year increase of 28.5%.

The components of the revenue for 2010 are shown in the following table:

		Revenue
		$000’s				%
Year ended December 31, 2009		$	536,491				—
Acquisition			105,851				19.7	%
Organic			38,448				7.2	%
Foreign exchange impact			8,356				1.6	%
Year ended December 31, 2010		$	689,146				28.5	%

The geographic mix in revenues was relatively consistent between 2010 and 2009 and is demonstrated in the following table:

		2010				2009
US			83	%			83	%
Canada			14	%			15	%
Europe and other			3	%			2	%

The operating profit of the Marketing Communications Group increased by approximately 28.6% to $53.0 million in 2010, from $41.2 million in 2009. Operating margins were consistent at 7.7% for both 2010 and 2009. The increase in operating profit is primarily attributable to a reduction in total staff costs as a percentage of revenues from 60.5% in 2009, to 55.5% in 2010. Direct costs (excluding staff costs) offset this increase as these costs increased as a percentage of revenues from 13.4% of revenue in 2009 to 20.3% of revenue in 2010 due to an increase in reimbursed client related direct costs. This increase in direct costs is due to the requirement that certain costs be included in both revenue and direct costs due to the Company acting as principle versus agent for certain client contracts. Office and general expenses as a percentage of revenue decreased from 21.1% in 2009, to 18.7% in 2010. This decrease was primarily a result of increased revenues on relatively fixed costs, offset by acquisition related costs and estimated deferred acquisition consideration adjustments of 0.6% in 2010 compared to minimal impact in 2009. Depreciation and amortization expenses decreased as a percentage of revenue from 6.3% in 2009, to 4.9% in 2010, due to these expenses being relatively flat at $33.8 million.

Marketing Communications Businesses

Strategic Marketing Services

Revenues attributable to Strategic Marketing Services in 2010 were $438.9 million, compared to $370.6 million in 2009. The year-over-year increase of $68.3 million, or 18.4%, was attributable primarily to organic growth of $43.2 million or 11.7%; acquisition growth of $20.2 million or 5.4%; and a foreign exchange conversion of $4.9 million due to the weakening of the US dollar compared to the Canadian dollar. This organic revenue growth was driven by net new business wins.

The operating profit of Strategic Marketing Services increased by approximately 11.5% to $41.0 million in 2010, from $36.8 million in 2009, while operating margins decreased to 9.3% in 2010 from 9.9% in 2009. The increase in operating profit was primarily due to the increased revenue. The decrease in operating margin was primarily related to an increase in direct costs (excluding staff costs) as a percentage of revenues from 11.0% of revenue in 2009, to 16.8% of revenue in 2010. In addition, margins were negatively impacted by acquisition related costs and estimated deferred acquisition consideration adjustments of 0.6% in 2010 compared to minimal impact in 2009. Total staff costs as a percentage of revenue decreased from 58.3% in 2009 to 55.8% in 2010, helping to offset increase in direct costs as a percentage of revenue despite the Company’s investment in talent. Depreciation and amortization decreased as a percentage of revenue from 6.9% during 2009 to 4.1% during 2010.

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Performance Marketing Services

Performance Marketing Services generated revenues of $250.2 million for 2010, an increase of $84.3 million, or 50.8%, compared to revenues of $165.9 million in 2009. The year-over-year increase was attributable primarily to acquisition growth of $85.7 million and a foreign translation of $3.4 million; offset by an organic revenue decline of $4.8 million. Revenues declined due to customers reducing their outsourcing needs and reduced client project spending in 2010.

The operating profit of Performance Marketing Services increased by $7.6 million to $12.0 million in 2010, from an operating profit of $4.4 million in 2009. Operating margins improved from 2.7% in 2009 compared to 4.8% in 2010. The increase in operating profit dollars is primarily due to increased revenue. The increase in operating margin in 2010 was due primarily to a decrease in total staff costs as a percentage of revenue from 65.3% in 2009; to 55.0% in 2010. Offsetting this decrease was an increase in direct costs (excluding staff costs) as a percentage of revenue from 18.9% in 2009 to 26.4%. Office and general expenses as a percentage of revenue decreased from 15.4% in 2009 to 15.3% in 2010 due to relatively fixed costs compared to the increase in revenue. Depreciation and amortization increased due to amortization of acquired intangibles from 2010 acquisitions.

Corporate

Operating costs related to the Company’s Corporate operations increased by $4.1 million to $22.7 million in 2010, compared to $18.5 million in 2009. This increase of $4.1 million was primarily related to increased compensation and related costs of $1.9 million ($1.4 million of which consisted of non-cash stock based compensation), travel, promotional and related costs of $2.0 million and professional and other costs of $0.2 million.

Other Expense, Net

Other expense, net, increased $0.5 million in 2010 to income of $0.4 million from an expense of $0.1 million in 2009.

Foreign Exchange

The foreign exchange gain was $0.1 million for 2010, compared to a loss of $0.1 million recorded in 2009.

During 2010, the Company settled certain intercompany accounts to reduce its exposure to the continued foreign exchange fluctuations between the US dollar and Canadian dollar. As a result, the Company recorded a net minimal foreign exchange gain in 2010 compared to the loss incurred in 2009. In 2009, the Company recorded an unrealized loss that was offset by a $1.3 million realized gain on foreign exchange transactions.

Net Interest Expense

Net interest expense for 2010 was $33.2 million, an increase of $11.6 million over the $21.6 million net interest expense incurred during 2009. Interest expense increased $11.4 million in 2010 due to the refinancing completed in October 2009 and the additional $65 million 11% notes issued in May 2010. Interest expense also increased due to the higher debt outstanding and higher interest rates on the refinanced debt. Interest income was $0.3 million for 2010, as compared to $0.5 million in 2009.

Income Taxes

Income tax benefit in 2010 was $0.2 million compared to expense of $8.5 million for 2009. In 2010, the Company’s effective tax rate was substantially lower than the statutory tax rate due to a decrease in the Company’s valuation allowance, and noncontrolling interest charges. These amounts were offset in part by non-deductible stock based compensation and a reserve established for potential tax positions. The Company’s effective tax rate was substantially higher than the statutory rate in 2010 due to non-deductible stock-based compensation and an increase in the Company’s valuation allowance, offset in part by noncontrolling interest charges.

The Company’s US operating units are generally structured as limited liability companies, which are treated as partnerships for tax purposes. The Company is only taxed on its share of profits, while noncontrolling holders are responsible for taxes on their share of the profits.

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Equity in Affiliates

Equity in affiliates represents the income loss attributable to equity-accounted affiliate operations. In 2010, the Company incurred income of $0.9 million due to distributions in excess of the Company’s carrying value of one equity method investment of $2.6 million offset by the write-off of another equity method investment due to continued losses.

Noncontrolling Interests

Noncontrolling interest expense was $10.1 million for 2010, an increase of $4.5 million from the $5.6 million of noncontrolling interest expense incurred during 2009. The increase was primarily due to increased profitability of subsidiaries within both operating segments, which are not 100% owned.

Discontinued Operations

The loss net of taxes from discontinued operations for 2010 was $3.9 million and is comprised of the operating results of the Performance Marketing Group, division of Accent Marketing Service, LLC, Zig (US) LLC (“Zig US”), Redscout’s 007 venture; discontinued operations of Fearless Progression LLC in 2010; and Margeotes Fertitta Powell, LLC (“MFP”) discontinued in 2007.

The loss net of taxes from discontinued operations for 2009 was $3.2 million and is comprised of the operating results of the Performance Marketing Group, division of Accent, Zig US, Clifford/Bratskeir Public Relations LLC discontinued in 2009 and MFP.

Net Income

As a result of the foregoing, the net loss recorded for 2010 was $15.4 million or loss of $0.55 per diluted share, compared to a net loss of $18.3 million or $0.67 per diluted share reported for 2009.

Liquidity and Capital Resources

The following table provides information about the Company’s liquidity position:

Liquidity		2011				2010				2009
		(In Thousands, Except for Long-Term Debt to Shareholders’ Equity Ratio)
Cash and cash equivalents		$	8,096			$	10,949			$	51,926
Working capital (deficit)		$	(127,888	)		$	(102,547	)		$	(40,152	)
Cash from operations		$	4,548			$	37,297			$	67,687
Cash from investing		$	(30,436	)		$	(110,580	)		$	(63,663	)
Cash from financing		$	23,299			$	32,728			$	9,717
Ratio of long-term debt to shareholders’ equity			(29.76	)			3.11				2.31

As of December 31, 2011, 2010 and 2009, $0.9 million, $5.2 million and $14.1 million, respectively, of the Company’s consolidated cash position was held by subsidiaries. Although this amount is available for the subsidiaries’ use, it does not represent cash that is distributable as earnings to MDC for use to reduce its indebtedness. It is the Company’s intent through its cash management system to reduce outstanding borrowings under the WF Credit Agreement by using available cash.

Working Capital

At December 31, 2011, the Company had a working capital deficit of $127.9 million, compared to a deficit of $102.5 million at December 31, 2010. Working capital deficit increased by $25.4 million primarily related to a $20.9 million increase in short term deferred acquisition consideration. The remainder was primarily due to accelerated timing in the amounts collected from clients, and paid to suppliers, primarily media outlets. The Company includes amounts due to noncontrolling interest holders, for their share of profits, in accrued and other liabilities. During 2011, 2010 and 2009, the Company made distributions to these noncontrolling interest holders of $12.3 million, $7.7 million and $7.8 million, respectively. At December 31, 2011, $4.0 million remains outstanding to be distributed to noncontrolling interest holders over the next twelve months.

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The Company expects that available borrowings under its Credit Agreement, together with cash flows from operations and other initiatives, will be sufficient over the next twelve months to adequately fund working capital deficits should there be a need to do so from time to time, as well as all of the Company’s obligations including put options and capital expenditures.

Operating Activities

Cash flow provided by continuing operations for 2011 was $5.5 million. This was attributable primarily to a loss from continuing operations of $50.0 million, plus non-cash stock based compensation of $23.7 million, depreciation and amortization of $42.4 million, a decrease in expenditures billable to clients of $15.3 million, deferred income taxes of $14.6 million, and adjustments to deferred acquisition consideration of $13.3 million. This was partially offset by a decrease in advance billings of $31.4 million, increases in accounts receivable of $12.1 million, other non-current assets and liabilities of $2.0 million, and a decrease in accounts payable, accruals and other liabilities of $8.2 million. Discontinued operations used cash of $0.9 million.

Cash flow provided by continuing operations for 2010 was $39.5 million. This was attributable primarily to a loss from continuing operations of $1.4 million, plus non-cash stock based compensation of $16.5 million, depreciation and amortization of $36.3 million, a decrease in expenditures billable to clients of $23.7 million, and an increase in advance billings of $2.4 million. This was partially offset by increases in accounts receivable of $31.3 million, deferred income taxes of $5.4 million, other non-current assets and liabilities of $0.5 million, and a decrease in accounts payable, accruals and other liabilities of $1.6 million. Discontinued operations used cash of $2.2 million.

Cash flow provided by continuing operations for 2009 was $69.1 million. This was attributable primarily to a loss from continuing operations of $9.6 million, plus non-cash stock based compensation of $15.4 million, depreciation and amortization of $38.3 million, deferred income taxes of $7.0 million, an increase in accounts payable, accruals and other liabilities of $9.4 million, noncurrent assets and liabilities of $3.1 million, an increase in advance billings of $15.8 million and foreign exchange translation of $6.6 million. This was partially offset by increases in accounts receivable of $11.4 million and expenditures billable to clients of $7.1 million. Discontinued operations used cash of $1.4 million.

Investing Activities

Cash flows used in investing activities were $30.4 million for 2011, compared with $110.6 million for 2010, and $63.7 million in 2009.

Cash used in acquisitions during 2011 was $6.8 million, $22.6 million related to acquisition payments, reduced by $15.9 million of media cash acquired, and $0.1 million related to deferred payments for acquisitions that closed prior to January 1, 2009.

Expenditures for capital assets in 2011 were equal to $23.4 million. Of this amount, $11.7 million was incurred by the Strategic Marketing Services segment, $4.8 million was incurred by the Performance Marketing Services segment. These expenditures consisted primarily of computer equipment, leasehold improvements, furniture and fixtures, and $6.9 million related to the purchase of Corporate assets.

Cash used in acquisitions during 2010 was $97.4 million, of which $18.2 million related to earnout and deferred acquisition payments for acquisitions that closed prior to January 1, 2009, and $79.2 million related to acquisition payments.

Expenditures for capital assets in 2010 were equal to $11.1 million. Of this amount, $6.5 million was incurred by the Strategic Marketing Services segment, $4.0 million was incurred by the Performance Marketing Services segment. These expenditures consisted primarily of computer equipment, leasehold improvements, furniture and fixtures, and $0.6 million related to the purchase of Corporate assets.

Cash used in acquisitions during 2009 was $57.5 million, of which $54.1 million related to earnout and deferred acquisition payments for acquisitions that closed prior to January 1, 2009, and $3.4 million related to acquisition payments.

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Expenditures for capital assets in 2009 were equal to $4.5 million. Of this amount, $3.6 million was incurred by the Strategic Marketing Services segment, $0.7 million was incurred by the Performance Marketing Services segment, and $0.2 million related to the purchase of Corporate assets. These expenditures consisted primarily of computer equipment, leasehold improvements and furniture and fixtures.

Profit distributions received from affiliates amounted to $4.6 million in 2011, $0.6 million in 2010, and $0.2 million for 2009.

Discontinued operations used cash of $0.6 million, $2.1 million, and $1.7 million in 2011, 2010 and 2009, respectively, relating to expenditures for capital assets.

Financing Activities

During the year ended December 31, 2011, cash flows provided by financing activities amounted to $23.3 million and primarily consisted of $61.1 million of proceeds from the additional 11% notes issuance, and proceeds from the WF Credit Agreement of $38.0 million and proceeds for the exercise of stock options of $1.0 million. These proceeds were offset by repayments from bank overdrafts of $5.7 million, by $3.1 million of deferred financing costs relating to the senior notes and revolving WF Credit Agreement. The proceeds of the 11% notes issuance were partially offset by dividends paid and proceeds for the exercise of stock options of $1.0 million, of $16.4 million, distributions to noncontrolling shareholders of $12.3 million, purchase of treasury shares of $4.1 million and repayment of long-term debt of $1.1 million. In addition, the Company made acquisition related payments of $34.3 million of which $31.2 million related to earnout and deferred acquisition payments and $3.1 million related to acquisition of additional equity interests pursuant to put/call option exercises.

During the year ended December 31, 2010, cash flows provided by financing activities amounted to $32.7 million and primarily consisted of $67.6 million of proceeds from the additional 11% notes issuance, proceeds from bank overdrafts of $9.0 million, offset by $2.1 million of deferred financing costs relating to the senior notes and new revolving WF Credit Agreement. The proceeds of the 11% notes issuance were partially offset by dividends paid and payable of $9.7 million, distributions to noncontrolling shareholders of $7.7 million, purchase of treasury shares of $3.5 million and repayment of long-term debt of $1.5 million. The Company made acquisition related payments of $19.7 million, of which $8.2 million related to earnout and deferred acquisition payments, and $11.5 million related to acquisitions of additional equity interests pursuant to put/call option exercises.

During the year ended December 31, 2009, cash flows provided by financing activities amounted to $9.7 million and primarily consisted of $225 million of proceeds from the 11% notes issuance, offset by the original issue discount of $10.5 million and $10.1 million of deferred financing costs relating to the senior notes and new revolving WF Credit Agreement. The proceeds were offset by repayments of $130.0 million term loans, $42.5 million convertible notes, $9.7 million relating to the old credit facility, and $7.8 million for distributions to noncontrolling interests. The Company made acquisition related payments of $2.5 million.

Total Debt

11% Notes Due 2016

On October 23, 2009, the Company and its wholly-owned subsidiaries, as guarantors, issued and sold $225 million aggregate principal amount of 11% Notes due 2016 (the “11% Notes”). The 11% Notes bear interest at a rate of 11% per annum, accruing from October 23, 2009. Interest is payable semiannually in arrears in cash on May 1 and November 1 of each year, beginning on May 1, 2010. The 11% Notes will mature on November 1, 2016, unless earlier redeemed or repurchased. The Company received net proceeds before expenses of $209 million which included an original issue discount of approximately 4.7% or $10.5 million and underwriter fees of $5.5 million. The 11% Notes were sold in a private placement in reliance on exemptions from registration under the Securities Act of 1933, as amended. The Company used the net proceeds of this offering to repay the outstanding balance and terminate its prior Fortress Financing Agreement consisting of repayments of $130 million term loans, a $70 million delayed draw term loan, and $9.7 outstanding on the $55 million revolving credit agreement. The Company also used the net proceeds to redeem its outstanding 8% C$45 million convertible debentures.

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On May 14, 2010, the Company and its wholly-owned subsidiaries, as guarantors, issued and sold $65 million aggregate principal amount of 11% Notes due 2016. The additional notes were issued under the Indenture governing the 11% Notes and treated as a single series with the original 11% 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 Company received net proceeds before expenses of $67.2 million, which included an original issue premium of $2.6 million, and underwriter fees of $0.4 million. The Company used the net proceeds of the offering to repay the outstanding balance under the Company’s revolving credit agreement described elsewhere herein, and for general corporate purposes, including acquisitions.

On April 19, 2011, the Company and its wholly-owned subsidiaries, as guarantors, issued and sold an additional $55 million aggregate principal amount of 11% Notes due 2016. The additional notes were issued under the Indenture governing the 11% Notes and treated as a single series with the original 11% 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 Company received net proceeds before expenses of $59.6 million, which included an original issue premium of $6.1 million, and underwriter fees of $1.5 million. The Company used the net proceeds of the offering to repay the outstanding balance under the Company’s WF Credit Agreement and for general corporate purposes.

The Company may, at its option, redeem the 11% Notes in whole at any time or in part from time to time, on and after November 1, 2013 at a redemption price of 105.5% of the principal amount thereof. If redeemed during the twelve-month period beginning on November 1, 2014, the Company must pay a redemption price of 102.75% of the principal amount thereof. If redeemed during the twelve-month period beginning on November 1, 2015, the Company must pay a redemption price of 100% of the principal amount thereof. Prior to November 1, 2013, the Company may, at its option, redeem some or all of the 11% Notes at a price equal to 100% of the principal amount of the Notes plus a “make whole” premium and accrued and unpaid interest. The Company may also redeem, at its option, prior to November 1, 2012, up to 35% of the 11% Notes with the proceeds from one or more equity offerings at a redemption price of 111% of the principal amount thereof. If the Company experiences certain kinds of changes of control (as defined in the Indenture), holders of the 11% Notes may require the Company to repurchase any 11% Notes held by them at a price equal to 101% of the principal amount of the 11% Notes plus accrued and unpaid interest. The indenture governing the 11% Notes contains various covenants restricting our operations in certain respects. See “Risk Factors.”

Credit Agreement

On October 23, 2009, the Company and its subsidiaries entered into a $75 million five year senior secured revolving WF Credit Agreement (the “WF Credit Agreement”) with Wells Fargo Foothill, LLC, as agent, and the lenders from time to time party thereto. On November 22, 2010, the Company amended its facility to increase availability to $100 million. On April 29, 2011, the Company entered into an additional amendment to increase the availability under the WF Credit Agreement to $150 million and extended the maturity date to October 23, 2015. The WF Credit Agreement replaced the Company’s existing $185 million senior secured financing agreement with Fortress Credit Corp., as collateral agent, Wells Fargo Foothill, Inc., as administrative agent. Advances under the WF Credit Agreement will 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 2.25% in the case of Base Rate Loans and 2.50% in the case of LIBOR Rate Loans. The applicable margin may be reduced subject to the Company achieving certain trailing twelve month earning levels, as defined. In addition to paying interest on outstanding principal under the WF Credit Agreement, the Company is required to pay an unused revolver fee to lender under the WF Credit Agreement in respect of unused commitments thereunder.

The WF Credit Agreement is guaranteed by all of the Company’s present and future subsidiaries, other than immaterial subsidiaries as defined and is secured by all the assets of the Company. The WF Credit Agreement includes covenants that, among other things, restrict the Company’s ability and the ability of its subsidiaries to incur or guarantee additional indebtedness; pay dividends on or redeem or repurchase the capital stock of MDC; make certain types of investments; pay dividends or other amounts from the Company’s subsidiaries; incur certain liens, sell or otherwise dispose of certain assets; enter into transactions with affiliates; enter into sale and leaseback transactions; and consolidate or merge with or into, or sell

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substantially all of the Company’s assets to, another person. These covenants are subject to a number of important limitations and exceptions. The WF Credit Agreement also contains financial covenants, including a senior leverage ratio, total leverage ratio, a fixed charge coverage ratio and a minimum earnings level, as defined.

Debt as of December 31, 2011 was $385.2 million, an increase of $99.0 million compared with the $286.2 million outstanding at December 31, 2010, primarily as a result of proceeds from the April 2011 bond issuance of $55 million and $38 million WF Credit Agreement to fund seasonal working capital requirements, earnout obligations, and acquisitions. At December 31, 2011, $106.1 million is available under the WF Credit Agreement to fund working capital requirements. After giving effect to the limitations under the indenture for the 11% Notes, at December 31, 2011, approximately $41.2 million was available under the WF Credit Agreement.

The Company is currently in compliance with all of the terms and conditions of its WF Credit Agreement, and management believes, based on its current financial projections and strategic initiatives, that the Company will be in compliance with covenants over the next twelve months.

If the Company loses all or a substantial portion of its lines of credit under the WF Credit Agreement, it may be required to seek other sources of liquidity. If the Company were unable to find these sources of liquidity, for example through an equity offering or access to the capital markets, the Company’s ability to fund its working capital needs and any contingent obligations with respect to put options would be adversely affected.

Pursuant to the Credit Agreement, the Company must comply with certain financial covenants including, among other things, covenants for (i) senior leverage ratio (ii) total leverage ratio, (iii) fixed charges ratio, (iv) minimum earnings before interest, taxes and depreciation and amortization and (v) minimum accounts receivable level, in each case as such term is specifically defined in the WF Credit Agreement. For the period ended December 31, 2011, the Company’s calculation of certain of these covenants, and the specific requirements under the Credit Agreement, respectively, were as follows:

		December 31, 2011
Senior leverage ratio			0.44
Maximum per covenant			2.0
Fixed charges ratio			1.54
Minimum per covenant			1.25
Total leverage ratio			3.85
Maximum per covenant			4.15
Earnings before interest, taxes, depreciation and amortization			$99.5 million
Minimum per covenant			$90.0 million

These ratios are not based on generally accepted accounting principles and are not presented as alternative measures of operating performance or liquidity. They are presented here to demonstrate compliance with the covenants in the Company’s WF Credit Agreement, as non-compliance with such covenants could have a material adverse effect on the Company.

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Disclosure of Contractual Obligations and Other Commercial Commitments

The following table provides a payment schedule of present and future obligations. Management anticipates that the obligations outstanding at December 31, 2011 will be repaid with new financing, equity offerings and/or cash flow from operations (in thousands):

		Payments Due by Period
Contractual Obligations		Total				Less than 1 Year				1 – 3 Years				3 – 5 Years				After 5 Years
Indebtedness		$	346,266			$	600			$	666			$	345,000			$	—
Capital lease obligations			1,437				638				654				145				—
Operating leases			164,201				26,878				48,109				37,100				52,114
Interest on debt			189,937				38,065				75,966				75,906				—
Deferred acquisition consideration			137,223				51,829				65,321				19,038				1,035
Management services agreement			1,500				1,500				—				—				—
Other			3,900				1,733				2,167				—				—
Total contractual obligations		$	844,464			$	121,243			$	192,883			$	477,189			$	53,149

The following table provides a summary of other commercial commitments (in thousands) at December 31, 2011:

		Payments Due by Period
Other Commercial Commitments		Total				Less than 1 Year				1 – 3 Years				3 – 5 Years				After 5 Years
Lines of credit		$	38,032			$	—			$	38,032			$	—			$	—
Letters of credit		$	5,830				5,830				—				—				—
Total Other Commercial Commitments		$	43,862			$	5,830			$	38,032			$	—			$	—

For further detail on MDC’s long-term debt principal and interest payments, see Note 11 and Note 17 Commitments, Contingents and Guarantees of the Company’s consolidated financial statements included in this Form 10-K. See also “Deferred Acquisition and Contingent Consideration (Earnouts)” and “Other-Balance Sheet Commitments” below.

Capital Resources

At December 31, 2011, the Company had only utilized the Credit Agreement in the form of undrawn letters of credit of $5.8 million. Cash and undrawn available bank credit facilities to support the Company’s future cash requirements at December 31, 2011 was approximately $106.1 million.

The Company expects to incur approximately $20 million of capital expenditures in 2012. Such capital expenditures are expected to include leasehold improvements, furniture and fixtures, and computer equipment at certain of the Company’s operating subsidiaries. The Company intends to maintain and expand its business using cash from operating activities, together with funds available under the Credit Agreement. Management believes that the Company’s cash flow from operations, funds available under the Credit Agreement and other initiatives will be sufficient to meet its ongoing working capital, capital expenditures and other cash needs over the next twelve months. If the Company continues to spend capital on future acquisitions, management expects that the Company may need to obtain additional financing in the form of debt and/or equity financing.

Deferred Acquisition and Contingent Consideration (Earnouts)

Acquisitions of businesses by the Company may include commitments to contingent deferred purchase consideration payable to the seller. These contingent purchase obligations are generally payable within a one to five-year period following the acquisition date, and are based on achievement of certain thresholds of future earnings and, in certain cases, also based on the rate of growth of those earnings.

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Contingent purchase price obligations for acquisitions completed prior to January 1, 2009 are accrued when the contingency is resolved and payment is certain. Contingent purchase price obligations related to acquisitions completed subsequent to December 31, 2008 are recorded as liabilities at estimated value and are remeasured at each reporting period and changes in estimated value are recorded in results of operations. At December 31, 2011, there was $137.2 million of deferred consideration included in the Company’s balance sheet.

Other-Balance Sheet Commitments

Put Rights of Subsidiaries’ Noncontrolling Shareholders

Owners of interests in certain of the Company’s subsidiaries have the right in certain circumstances to require the Company to acquire either a portion of or all of the remaining ownership interests held by them. The owners’ ability to exercise any such “put option” right is subject to the satisfaction of certain conditions, including conditions requiring notice in advance of exercise. In addition, these rights cannot be exercised prior to specified staggered exercise dates. The exercise of these rights at their earliest contractual date would result in obligations of the Company to fund the related amounts during the period 2012 to 2018. 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 put option rights are exercised is dependent on various valuation formulas and on future events, such as the average earnings of the relevant subsidiary through that date of exercise, the growth rate of the earnings of the relevant subsidiary during that period, and, in some cases, the currency exchange rate at the date of payment.

Management estimates, assuming that the subsidiaries owned by the Company at December 31, 2011, perform over the relevant future periods at their 2011 earnings levels, that these rights, if all exercised, could require the Company, in future periods, to pay an aggregate amount of approximately $29.0 million to the owners of such rights to acquire such ownership interests in the relevant subsidiaries. Of this amount, the Company is entitled, at its option, to fund approximately $3.6 million by the issuance of the Company’s Class A subordinate voting shares. In addition, the Company is obligated under similar put option rights to pay an aggregate amount of approximately $88.1 million only upon termination of such owner’s employment with the applicable subsidiary or death (including $9.7 million within the Company’s control). The Company intends to finance the cash portion of these contingent payment obligations using available cash from operations, borrowings under the WF Credit Agreement (and refinancings thereof) and, if necessary, through incurrence of additional debt. The ultimate amount payable and the incremental operating income in the future relating to these transactions will vary because it is dependent on the future results of operations of the subject businesses and the timing of when these rights are exercised. Approximately $3.6 million of the estimated $29.0 million that the Company would be required to pay subsidiaries noncontrolling shareholders’ upon the exercise of outstanding “put” rights, relates to rights exercisable within the next twelve months. Upon the settlement of the total amount of such put options, the Company estimates that it would receive incremental operating income before depreciation and amortization of $7.2 million that would be attributable to MDC Partners Inc.

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The following table summarizes the potential timing of the consideration and incremental operating income before depreciation and amortization based on assumptions as described above.

Consideration(4)		2012				2013				2014				2015				2015 & Thereafter				Total
		($ Millions)
Cash		$	3.5			$	10.1			$	4.2			$	3.4			$	4.2			$	25.4
Shares			0.7				0.9				1.2				0.5				0.3				3.6
		$	4.2			$	11.0			$	5.4			$	3.9			$	4.5	(1)		$	29.0
Operating income before depreciation and amortization to be received(2)		$	3.3			$	1.2			$	1.3			$	1.3			$	0.1			$	7.2
Cumulative operating income before depreciation and amortization(3)		$	3.3			$	4.5			$	5.8			$	7.1				7.2	(5)

Guarantees

In connection with certain dispositions of assets and/or businesses in 2001 and 2003, as well as the 2006 sale of SPI, the Company has provided customary representations and warranties whose terms range in duration and may not be explicitly defined. The Company has also retained certain liabilities for events occurring prior to sale, relating to tax, environmental, litigation and other matters. Generally, the Company has indemnified the purchasers 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 several years.

Historically, the Company has not made any significant indemnification payments under such agreements and no provision 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.

For guarantees and indemnities entered into after January 1, 2003, in connection with the sale of the Company’s investment in CDI and the sale of SPI, the Company has estimated the fair value of its liability to be insignificant.

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Transactions With Related Parties

CEO Services Agreement

On April 27, 2007, the Company entered into a Management Services Agreement (the “Services Agreement”) with Miles Nadal and with Nadal Management, Inc. to set forth the terms and conditions on which Mr. Nadal would continue to provide services to the Company as its Chief Executive Officer. The Services Agreement renewed on April 27, 2010, in accordance with its terms and conditions. In addition, effective April 27, 2010, the annual retainer amount under the Services Agreement was increased to $1,500,000. During 2009, 2010 and 2011 and in accordance with this new Services Agreement, Mr. Nadal repaid an amount equal to $0.1 million of loans due to the Company. At December 31, 2011, outstanding loans due from Nadal Management to the Company, with no stated maturity date, amounted to C$6.0 million ($5.9 million), which have been reserved for in the Company’s accounts.

Trapeze Media

In 2000, the Company purchased 1,600,000 shares in Trapeze Media Limited (“Trapeze”) for $0.2 million. At the same time, the Company’s CEO purchased 4,280,000 shares of Trapeze for $0.6 million, the Company’s former Chief Financial Officer and a Managing Director of the Company each purchased 50,000 Trapeze shares for $7,000 and a Board Member of the Company purchased 75,000 shares of Trapeze for $10,000. In 2001, the Company purchased an additional 1,250,000 shares for $0.2 million, and the Company’s CEO purchased 500,000 shares for $0.1 million. In 2002, the Company’s CEO purchased 3,691,930 shares of Trapeze for $0.5 million. All of these purchases were made at identical prices (C$0.20/unit).

During 2010 and 2009, Trapeze provided services to certain partner firms of MDC, and the total amount of such services provided was $0.1 million and $0.1 million, respectively. In addition, in 2011, 2010 and 2009, an MDC Partner firm provided services to Trapeze in exchange for fees equal to $0.4 million, $0.3 million and $0.3 million, respectively. Trapeze did not provide any services to MDC nor its partner firms in 2011.

The Company’s Board of Directors, through its Audit Committee, has reviewed and approved these transactions.

Critical Accounting Policies

The following summary of accounting policies has been prepared to assist in better understanding the Company’s consolidated financial statements and the related management discussion and analysis. Readers are encouraged to consider this information together with the Company’s consolidated financial statements and the related notes to the consolidated financial statements as included herein for a more complete understanding of accounting policies discussed below.

Estimates.  The preparation of the Company’s financial statements in conformity with generally accepted accounting principles in the United States of America, or “GAAP”, requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities including goodwill, intangible assets, redeemable noncontrolling interests, and deferred acquisition consideration, valuation allowances for receivables and deferred income tax assets and stock based compensation as well as the reported amounts of revenue and expenses during the reporting period. The statements are evaluated on an ongoing basis and estimates are based on historical experience, current conditions and various other assumptions believed to be reasonable under the circumstances. Actual results can differ from those estimates, and it is possible that the differences could be material.

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Revenue Recognition.  The Company’s revenue recognition policies are as required by the Revenue Recognition topics of the FASB Accounting Standards Codification. 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. A small portion of the Company’s contractual arrangements with clients includes performance incentive provisions, which allow the Company to earn additional revenues as a result of its performance relative to both quantitative and qualitative goals. The Company records revenue net of state taxes, when persuasive evidence of an arrangement exists, services are provided or upon delivery of the products when ownership and risk of loss has transferred to the customer, the selling price is fixed or determinable and collection of the resulting receivable is reasonably assured.

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. In the majority of the Company’s businesses, the Company acts as an agent and records revenue equal to the net amount retained, when the fee or commission is earned. In certain arrangements, the Company acts as principal and contracts directly with suppliers for third party media and production costs. In these arrangements, revenue is recorded at the gross amount billed. Additional information about our revenue recognition policy appears in Note 2 to our consolidated financial statements.

Acquisitions, Goodwill and Other Intangibles.  A fair value approach is used in testing goodwill for impairment to determine if an other than temporary impairment has occurred. One approach utilized to determine fair values is a discounted cash flow methodology. When available and as appropriate, comparative market multiples are used. Numerous estimates and assumptions necessarily have to be made when completing a discounted cash flow valuation, including estimates and assumptions regarding interest rates, appropriate discount rates and capital structure. Additionally, estimates must be made regarding revenue growth, operating margins, tax rates, working capital requirements and capital expenditures. Estimates and assumptions also need to be made when determining the appropriate comparative market multiples to be used. Actual results of operations, cash flows and other factors used in a discounted cash flow valuation will likely differ from the estimates used and it is possible that differences and changes could be material. As of December 31, 2011, there were no reporting units at risk of failing step one of the Company’s annual goodwill impairment test.

The Company has historically made and expects to continue to make selective acquisitions of marketing communications businesses. In making acquisitions, the price paid is determined by various factors, including service offerings, competitive position, reputation and geographic coverage, as well as prior experience and judgment. Due to the nature of advertising, marketing and corporate communications services companies; the companies acquired frequently have significant identifiable intangible assets, which primarily consist of customer relationships. The Company has determined that certain intangibles (trademarks) have an indefinite life, as there are no legal, regulatory, contractual, or economic factors that limit the useful life.

Business Combinations.  Valuation of acquired companies are based on a number of factors, including specialized know-how, reputation, competitive position and service offerings. Our acquisition strategy has been to focus on acquiring the expertise of an assembled workforce in order to continue building upon the core capabilities of our various strategic business platforms to better serve our clients. Consistent with our acquisition strategy and past practice of acquiring a majority ownership position, most acquisitions completed in 2011 and 2010 include an initial payment at the time of closing and provide for future additional contingent purchase price payments. Contingent payments for these transactions, as well as certain acquisitions completed in prior years, are derived using the performance of the acquired entity and are based on pre-determined formulas. Contingent purchase price obligations for acquisitions completed prior to January 1, 2009 are accrued when the contingency is resolved and payment is certain. Contingent purchase price obligations related to acquisitions completed subsequent to December 31, 2008 are recorded as liabilities at estimated value and are remeasured at each reporting period. Changes in estimated value are recorded in results of operations. In addition, certain acquisitions also include put/call obligations for additional equity ownership interests. The estimated value of these interests are recorded as redeemable noncontrolling interests. As of

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January 1, 2009, the Company expenses acquisition related costs in accordance with the Accounting Standard’s Codification’s new guidance on acquisition accounting.

For each of our acquisitions, we undertake a detailed review to identify other intangible assets and a valuation is performed for all such identified assets. We use 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 we acquire 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 that we acquire is derived from customer relationships, including the related customer contracts, as well as trade names. In executing our acquisition strategy, one of the primary drivers in identifying and executing a specific transaction is the existence of, or the ability to, expand our existing client relationships. The expected benefits of our acquisitions are typically shared across multiple agencies and regions.

Redeemable Noncontrolling Interest.  The minority interest shareholders of certain subsidiaries have the right to require the Company to acquire their ownership interest under certain circumstances pursuant to a contractual arrangement and the Company has similar call options under the same contractual terms. The amount of consideration under the put and call rights is not a fixed amount, but rather is dependent upon 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 through the date of exercise, etc. as described in Note 18.

Allowance for Doubtful Accounts.  Trade receivables are stated less allowance for doubtful accounts. The allowance represents estimated uncollectible receivables usually due to customers’ potential insolvency. The allowance includes amounts for certain customers where risk of default has been specifically identified.

Income Tax Valuation Allowance.   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 any of these factors could impact the estimated valuation allowance and income tax expense.

Interest Expense.  Interest expense primarily consists of the cost of borrowing on the revolving WF Credit Agreement and the 11% Notes. The Company uses the effective interest method to amortize the original issue discount and original issue premium on the 11% Notes. The Company amortizes deferred financing costs using the effective interest method over the life of the 11% Notes and straight line over the life of the revolving WF Credit Agreement.

Stock-based Compensation.  The fair value method is applied to all awards granted, modified or settled. Under the fair value method, compensation cost is measured at fair value at the date of grant and is expensed over the service period that is 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. 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 into operating income over the service period, that is the vesting period of the award. Changes in the Company’s payment obligation are revalued each period and recorded as compensation cost over the service period in operating income.

The Company treats benefits paid by shareholders to employees as a stock based compensation charge with a corresponding credit to additional paid-in capital.

New Accounting Pronouncements

Information regarding new accounting guidance can be found in Note 18 to our consolidated financial statements.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risk related to interest rates and foreign currencies.

Debt Instruments:  At December 31, 2011, the Company’s debt obligations consisted of amounts outstanding under its WF Credit Agreement and the 11% notes. This facility bears interest at variable rates based upon the Eurodollar rate, US bank prime rate and, US base rate, at the Company’s option. The 11% notes bear interest at a fixed rate. The Company’s ability to obtain the required bank syndication commitments depends in part on conditions in the bank market at the time of syndication. As of December 31, 2011, the Company had a $38.0 million balance on the revolving WF Credit Agreement. Given the level of debt of $38.0 million as of December 31, 2011, a 1% increase in the weighted average interest rate, which was 5.5% at December 31, 2011, would have a $0.4 million interest impact.

Foreign Exchange:  The Company conducts business in six currencies, the US dollar, the Canadian dollar, the Euro, Jamaican dollar, the British Pound and the Swedish Krona. Our results of operations are subject to risk from the translation to the US dollar of the revenue and expenses of our non-US operations. The effects of currency exchange rate fluctuations on the translation of our results of operations are discussed in the “Management’s Discussion and Analysis of Financial Condition and Result of Operations” and in Note 2 of our consolidated financial statements. For the most part, our revenues and expenses incurred related to our non-US operations are denominated in their functional currency. This minimizes the impact that fluctuations in exchange rates will have on profit margins. Intercompany debt which is not intended to be repaid is included in cumulative translation adjustments. Translation of intercompany debt, which is not intended to be repaid, is included in cumulative translation adjustments. Translation of current intercompany balances are included in net earnings. The Company generally does not enter into foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates.

The Company is exposed to foreign currency fluctuations relating to its intercompany balances between the US and Canada. For every one cent change in the foreign exchange rate between the US and Canada, the Company will not incur a material impact to its financial statements.

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Item 8. Financial Statements and Supplementary Data

MDC PARTNERS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page
Financial Statements:
Report of Independent Registered Public Accounting Firm			42
Consolidated Statements of Operations for the Three Years Ended December 31, 2011			43
Consolidated Statements of Comprehensive Loss			44
Consolidated Balance Sheets as of December 31, 2011 and 2010			45
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2011			46
Consolidated Statements of Shareholders’ Equity for the Three Years Ended December 31, 2011			48
Notes to Consolidated Financial Statements			51
Financial Statement Schedules:
Schedule II — Valuation and Qualifying Accounts for the Three Years Ended December 31, 2011			98

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Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
MDC Partners Inc.
New York, New York
Toronto, Canada

We have audited the accompanying consolidated balance sheets of MDC Partners Inc. as of December 31, 2011 and 2010 and the related consolidated statements of operations, comprehensive loss, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of MDC Partners Inc. at December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), MDC Partners Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 15, 2012 expressed an unqualified opinion thereon.

/s/ BDO USA, LLP

New York, New York
March 15, 2012

TABLE OF CONTENTS

MDC PARTNERS INC. AND SUBSIDIARIES
  
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of United States Dollars, Except Share and per Share Amounts)

		Years Ended December 31,
		2011				2010				2009
Revenue:
Services		$	943,274			$	689,146			$	536,491
Operating Expenses:
Cost of services sold			674,460				473,371				348,300
Office and general expenses			219,271				151,296				131,308
Depreciation and amortization			40,236				34,164				34,224
			933,967				658,831				513,832
Operating Profit			9,307				30,315				22,659
Other Income (Expenses)
Gain (loss) on sale of assets and other			116				381				(91	)
Foreign exchange gain (loss)			(1,677	)			69				(1,956	)
Interest expense and finance charges			(41,922	)			(33,487	)			(22,098	)
Interest income			139				274				452
			(43,344	)			(32,763	)			(23,693	)
Loss from continuing operations before income taxes and equity in affiliates			(34,037	)			(2,448	)			(1,034	)
Income tax expense (recovery)			41,735				(165	)			8,536
Loss from continuing operations before equity in affiliates			(75,772	)			(2,283	)			(9,570	)
Equity in earnings (loss) of non-consolidated affiliates			213				866				(8	)
Loss from continuing operations			(75,559	)			(1,417	)			(9,578	)
Loss from discontinued operations attributable to MDC Partners Inc., net of taxes			(1,361	)			(3,949	)			(3,180	)
Net loss			(76,920	)			(5,366	)			(12,758	)
Net income attributable to the non-controlling interests			(7,754	)			(10,074	)			(5,566	)
Net loss attributable to MDC Partners Inc.		$	(84,674	)		$	(15,440	)		$	(18,324	)
Loss Per Common Share:
Basic and diluted
Loss from continuing operations attributable to MDC Partners Inc. common shareholders		$	(2.86	)		$	(0.41	)		$	(0.55	)
Discontinued operations attributable to MDC Partners Inc. common shareholders			(0.05	)			(0.14	)			(0.12	)
Net loss attributable to MDC Partners Inc. common shareholders		$	(2.91	)		$	(0.55	)		$	(0.67	)
Weighted Average Number of Common Shares Outstanding:
Basic and diluted			29,120,373				28,161,144				27,396,463

Non cash stock based compensation expense is included in the following line items above:

Cost of services sold		$	1,333			$	4,427			$	4,919
Office and general expenses			22,324				12,080				10,525
Total		$	23,657			$	16,507			$	15,444

 
 
The accompanying notes to the consolidated financial statements are an integral part of these statements.

TABLE OF CONTENTS

MDC PARTNERS INC. AND SUBSIDIARIES
  
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Thousands of United States Dollars)

		Years Ended December 31,
		2011				2010				2009
Comprehensive Loss
Net loss		$	(76,920	)		$	(5,366	)		$	(12,758	)
Other comprehensive income (loss), net of tax:
Foreign currency cumulative translation adjustment			(504	)			1,736				769
Comprehensive loss for the year			(77,424	)			(3,630	)			(11,989	)
Comprehensive loss attributable to the noncontrolling interest			(7,760	)			(10,078	)			(5,582	)
Comprehensive loss attributable to MDC Partners Inc.		$	(85,184	)		$	(13,708	)		$	(17,571	)

 
 
The accompanying notes to the consolidated financial statements are an integral part of these statements.

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MDC PARTNERS INC. AND SUBSIDIARIES
  
CONSOLIDATED BALANCE SHEETS
(Thousands of United States Dollars)

		December 31,
		2011				2010
ASSETS
Current Assets:
Cash and cash equivalents		$	8,096			$	10,949
Accounts receivable, less allowance for doubtful accounts of $851 and $1,990			238,592				195,306
Expenditures billable to clients			39,067				30,414
Other current assets			12,657				13,455
Total Current Assets			298,412				250,124
Fixed assets, net			47,737				41,053
Investment in affiliates			99				—
Goodwill			605,244				514,488
Other intangible assets, net			57,980				67,133
Deferred tax assets			15,380				21,603
Other assets			30,893				19,947
Total Assets		$	1,055,745			$	914,348
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	178,282			$	131,074
Accrued and other liabilities			72,930				64,050
Advance billings, net			122,021				124,993
Current portion of long-term debt			1,238				1,667
Deferred acquisition consideration			51,829				30,887
Total Current Liabilities			426,300				352,671
Long-term debt			383,936				284,549
Long-term portion of deferred acquisition consideration			85,394				77,104
Other liabilities			14,900				10,956
Deferred tax liabilities			50,724				19,642
Total Liabilities			961,254				744,922
Redeemable Noncontrolling Interests			107,432				77,560
Commitments, Contingencies and Guarantees (Note 17)
Shareholders’ Equity:
Preferred shares, unlimited authorized, none issued			—				—
Class A Shares, no par value, unlimited authorized, 29,277,408 and 28,758,734 shares issued and outstanding in 2011 and 2010, respectively			228,208				226,752
Class B Shares, no par value, unlimited authorized, 2,503 issued and outstanding in 2011 and 2010, respectively, convertible into one Class A share			1				1
Shares to be issued, 28,000 shares			424				—
Additional paid-in capital			—				—
Charges in excess of capital			(45,102	)			(16,809	)
Accumulated deficit			(231,274	)			(146,600	)
Stock subscription receivable			(55	)			(135	)
Accumulated other comprehensive loss			(4,658	)			(4,148	)
MDC Partners Inc. Shareholders’ Equity			(52,456	)			59,061
Noncontrolling Interests			39,515				32,805
Total Equity			(12,941	)			91,866
Total Liabilities, Redeemable Noncontrolling Interests and Equity		$	1,055,745			$	914,348

 
 
The accompanying notes to the consolidated financial statements are an integral part of these statements.

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MDC PARTNERS INC. AND SUBSIDIARIES
  
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of United States Dollars)

		Years Ended December 31,
		2011				2010				2009
Cash flows from operating activities:
Net Loss		$	(76,920	)		$	(5,366	)		$	(12,758	)
Loss from discontinued operations			(1,361	)			(3,949	)			(3,180	)
Income (loss) from continuing operations			(75,559	)			(1,417	)			(9,578	)
Adjustments to reconcile loss from continuing operations to cash provided by operating activities:
Non-cash stock-based compensation			23,657				16,507				15,444
Depreciation			17,665				16,447				16,087
Amortization primarily from intangibles			22,571				17,717				18,137
Amortization of deferred finance charges and debt discount			2,175				2,136				4,041
Adjustment to deferred acquisition consideration			13,324				142				—
Deferred income taxes			40,284				(5,373	)			6,972
(Gain) loss on disposition of assets			75				(17	)			53
Loss (earnings) of non consolidated affiliates			(213	)			(866	)			8
Other non-current assets and liabilities			(1,954	)			(509	)			3,101
Foreign exchange			687				538				6,557
Increase/decrease in operating assets and liabilities
Accounts receivable			(12,130	)			(31,289	)			(11,420	)
Expenditures billable to clients			15,335				23,681				(7,054	)
Prepaid expenses and other current assets			(832	)			952				1,546
Accounts payable, accruals and other current liabilities			(8,259	)			(1,574	)			9,362
Advance billings			(31,373	)			2,430				15,843
Cash flows provided by continuing operating activities			5,453				39,505				69,099
Discontinued operations			(905	)			(2,208	)			(1,412	)
Net cash provided by operating activities			4,548				37,297				67,687
Cash flows from investing activities:
Capital expenditures			(23,383	)			(11,134	)			(4,513	)
Proceeds from sale of assets			22				96				20
Acquisitions, net of cash acquired			(6,790	)			(97,387	)			(57,506	)
Profit distributions from affiliates			4,584				638				198
Other investments			(4,232	)			(717	)			(163	)
Cash flows used in continuing investing activities			(29,799	)			(108,504	)			(61,964	)
Discontinued operations			(637	)			(2,076	)			(1,699	)
Net cash used in investing activities			(30,436	)			(110,580	)			(63,663	)
Cash flows from financing activities:
Proceeds from issuance of 11% Notes			61,050				67,600				214,506
Proceeds/ (repayments) of revolving credit facility			38,032				—				(9,701	)
Repayment of term loans			—				—				(130,000	)
Repayment of convertible debt			—				—				(42,470	)
Acquisition related payments			(34,287	)			(19,673	)			(2,536	)
Proceeds/ (repayments) from bank overdraft			(5,676	)			9,026				—
Distributions to noncontrolling interests			(12,264	)			(7,685	)			(7,784	)
Proceeds from exercise of options			1,086				60				370
Payments of dividends			(16,436	)			(9,727	)			—

 
 
The accompanying notes to the consolidated financial statements are an integral part of these statements.

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MDC PARTNERS INC. AND SUBSIDIARIES
  
CONSOLIDATED STATEMENTS OF CASH FLOWS — (continued)
(Thousands of United States Dollars)

		Years Ended December 31,
		2011				2010				2009
Repayment of long-term debt			(1,112	)			(1,496	)			(2,000	)
Deferred financing costs			(3,053	)			(2,103	)			(10,085	)
Proceeds from stock subscription receivable			80				206				13
Purchase of treasury shares			(4,121	)			(3,480	)			(596	)
Cash flows provided by continuing financing activities			23,299				32,728				9,717
Discontinued operations			—				—				—
Net cash provided by financing activities			23,299				32,728				9,717
Effect of exchange rate changes on cash and cash equivalents			(264	)			(422	)			(3,146	)
(Decrease) increase in cash and cash equivalents			(2,853	)			(40,977	)			10,595
Cash and cash equivalents at beginning of year			10,949				51,926				41,331
Cash and cash equivalents at end of year		$	8,096			$	10,949			$	51,926
Supplemental disclosures:
Cash income taxes paid		$	240			$	1,128			$	384
Cash interest paid		$	37,497			$	29,581			$	14,243
Non-cash transactions:
Share capital issued on acquisitions		$	—			$	—			$	—
Capital leases		$	682			$	656			$	340
Note receivable exchanged for shares of subsidiary		$	1,098			$	840			$	—
Dividends payable		$	5,456			$	387			$	—

 
 
The accompanying notes to the consolidated financial statements are an integral part of these statements.

TABLE OF CONTENTS

MDC PARTNERS INC. AND SUBSIDIARIES
  
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Thousands of United States Dollars Except Share and per Share Amounts)

		2011								2010								2009
		Number of Shares				Amount				Number of Shares				Amount				Number of Shares				Amount
Class A Shares
Balance at beginning of year			28,758,734			$	226,752				27,566,815			$	218,532				26,987,017			$	213,533
Stock appreciation rights exercised			130,932				211				101,107				239				68,261				202
Share options exercised			113,085				1,109				6,495				60				47,625				370
Shares acquired and cancelled			(230,262	)			(4,121	)			(282,954	)			(3,480	)			(156,481	)			(596	)
Issuance of restricted stock			504,919				4,257				1,367,271				11,401				620,393				5,023
Balance at end of year			29,277,408				228,208				28,758,734			$	226,752				27,566,815			$	218,532
Class B Shares
Balance at beginning of year			2,503			$	1				2,503			$	1				2,503			$	1
Shares converted to Class B shares			—				—				—				—				—				—
Balance at end of year			2,503			$	1				2,503			$	1				2,503			$	1
Share Capital to Be Issued
Balance at beginning of year			—			$	—				—			$	—				—			$	—
Shares to be issued as deferred acquisition consideration			28,000				424				—				—				—				—
Shares issued as deferred acquisition consideration			—				—				—				—				—				—
Balance at end of year			28,000			$	424				—				—				—				—
Additional Paid-In Capital
Balance at beginning of year						$	—							$	9,174							$	33,470
Stock-based compensation							22,709								14,954								13,720
Reclassification related to redeemable noncontrolling interests (Note 2)							—								—								(31,653	)
Changes in redemption value of redeemable noncontrolling interests							(24,532	)							(11,500	)							(58	)

 
 
The accompanying notes to the consolidated financial statements are an integral part of these statements.