10-K 1 mdca-20161231x10k.htm 10-K Document
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, 2016
Commission File Number 001-13718
 
 
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, 19th Floor
New York, New York, 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
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 ý
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 ý
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 ý 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 ý 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 x
 
Accelerated filer o
 
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 ý
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, 2016 was approximately $932.2 million, computed upon the basis of the closing sales price ($18.29/share) of the Class A subordinate voting shares on that date.
As of February 27, 2017, there were 55,304,347 outstanding shares of Class A subordinate voting shares without par value, and 3,755 outstanding shares of Class B multiple voting shares without par value, of the registrant.



MDC PARTNERS INC. 

TABLE OF CONTENTS

 
 
Page
PART I
PART II
PART III
PART IV
 

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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. References in the Annual Report on Form 10-K to “Partner Firms” generally refer to the Company’s subsidiary agencies.
All dollar amounts are stated in U.S. 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 7, 2017, 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 and 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 (the “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 operation of 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 and Compensation Committee and 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, 19th Floor, New York, New York 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, and estimates of amounts for redeemable noncontrolling interests and deferred acquisition consideration, 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:
successful completion of the convertible preference financing with Goldman Sachs on the anticipated terms and conditions;
risks associated with the one Canadian securities class action litigation claim;
risks associated with severe effects of international, national and regional economic conditions;
the Company’s ability to attract new clients and retain existing clients;
the spending patterns and financial success of the Company’s clients;
the Company’s ability to retain and attract key employees;
the Company’s ability to remain in compliance with its debt agreements and the Company’s ability to finance its contingent payment obligations when due and payable, including but not limited to those relating to redeemable noncontrolling interests and deferred acquisition consideration;
the successful completion and integration of acquisitions which complement and expand the Company’s business capabilities; and
foreign currency fluctuations.
The Company’s business strategy includes ongoing efforts to engage in 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 the Credit Agreement (as defined below) 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 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 Item 1A, 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 of the United States of America (“U.S. GAAP”). However, the Company has included certain non-U.S. 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 U.S. 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 U.S. GAAP.

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PART I
Item 1. 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 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 33 Draper Street, Toronto, Ontario, M5V 2M3, and its head office address is located at 745 Fifth Avenue, 19th Floor, New York, New York 10151.
About Us
MDC is a leading provider of global marketing, advertising, activation, communications and strategic consulting solutions. MDC and its Partner Firms (as defined below) deliver a wide range of customized services, including (1) global advertising and marketing services, (2) media buying, planning and optimization, (3) interactive and mobile marketing, (4) direct marketing, (5) database and customer relationship management, (6) sales promotion, (7) corporate communications, (8) market research, (9) data analytics and insights, (10) corporate identity, design and branding services, (11) social media communications, (12) product and service innovation and (13) e-commerce management.
Market Strategy
MDC’s strategy is to build, grow and acquire market-leading businesses that deliver innovative, value-added marketing, activation, communications and strategic consulting services to their clients. By doing so, MDC strives to be a partnership of marketing communications and consulting companies (or “Partner Firms”) whose strategic, creative and innovative solutions are media-agnostic, challenge the status quo, achieve measurable superior returns on investment, and drive transformative growth and business performance for its clients and stakeholders.
The MDC model is driven by three key elements:
Perpetual Partnership.  The perpetual partnership model creates ongoing alignment of interests between MDC and its Partner Firms to drive the Company’s overall performance by (1) identifying the “right” Partner Firms with a sustainable differentiated position in the marketplace, (2) creating the “right” partnership structure 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 succession planning support and compensation models to incentivize future leaders and second-generation executives, (4) leveraging the network's scale to provide access to strategic resources and best practices and (5) focusing on delivering financial results.
Entrepreneurialism.  The entrepreneurial spirit of both MDC and its Partner Firms is optimized through (1) its unique perpetual partnership model that incentivizes senior-level involvement and ambition, (2) access to shared resources within the Corporate Group that allow individual firms to focus on client business and company growth and (3) MDC’s collaborative creation of customized solutions to support and grow Partner Firm businesses.
Human and Financial Capital.  The perpetual partnership model balances accountability with financial flexibility and meaningful incentives to support growth.
Financial Reporting Segments
MDC conducts its business through its network of Partner Firms, the “Advertising and Communications Group”, who provide a comprehensive array of marketing and communications services for clients both domestically and globally. The Partner Firms provide a wide range of service offerings, which in some cases are the same or similar service offerings. The core or principal service offerings are the key factors that distinguish the Partner Firms from one another. Each Partner Firm represents an operating segment and the Company aggregates its Partner Firms to report in one Reportable segment along with an “all other” segment.
The Reportable segment is comprised of the Company’s integrated advertising, media, and public relation service firms. Firms within this segment include Allison & Partners, Anomaly, Crispin Porter + Bogusky, Doner, Forsman & Bodenfors, Hunter PR, kbs, MDC Media Partners, and 72andSunny, among others. These core or principal service offerings are similar and/or complementary in many respects and the Partner Firms that provide these service offerings both compete and/or collaborate with each other for new business. Although each Partner Firm in the Reportable segment may be recognized for their core/primary service offering, the Partner Firms also offer an array of services in order to drive results for their clients.


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The “all other” segment is comprised of the firms that provide the Company’s specialist marketing offerings such as direct marketing, sales promotion, market research, strategic communications, database and customer relationship management, data analytics and insights, corporate identity, design and branding, and product and service innovation. Firms within this segment include Gale Partners, Kingsdale Advisors, Relevent, Team, Redscout and Y Media Labs. The service offerings that these firms provide may include some that relate to advertising, PR, and media services; however, these Partner Firms provide more specialized offerings that generally are complementary and are provided to round out the service offerings. Many of these service offerings are project-based with a high level of billable expenses and thus pass-thru revenue, which has a direct impact on margins. In addition, there are some areas of specialization and pricing that lead to a more targeted client base.
MDC also reports results for the “Corporate Group.” The Corporate Group provides shared services to the Company and the Partner Firms, including accounting, administrative, strategic, financial, human resource and legal functions. The Corporate Group ensures that MDC is the most partner-responsive marketing services network through its strategic mandate to help Partner Firms accelerate their growth. The Corporate Group leverages the collective expertise and scale of MDC’s network to (1) provide business development support, talent, business planning, IT, procurement, real estate, communications, and legal to the Partner Firms, (2) help the Partner Firms source and execute tuck-under acquisitions, (3) facilitate cross-selling among the Partner Firms and (4) expand the Partner Firms’ service offerings and geographic footprints.
For further information relating to the Company’s advertising and communications businesses, refer to Note 14 (Segment Information) of the Notes to the Consolidated Financial Statements included in this Annual Report and to “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Ownership Information
The following table includes certain information about MDC’s operating subsidiaries as of December 31, 2016.

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MDC PARTNERS INC.
SCHEDULE OF ADVERTISING AND COMMUNICATIONS COMPANIES
 
 
Year of Initial
 
 
Company
 
Investment
 
Locations
Consolidated:
 
 
 
 
Reportable Segment:
 
 
 
 
72andSunny
 
2010
 
Los Angeles, New York, Netherlands, UK
Allison & Partners
 
2010
 
San Francisco, Los Angeles, New York, China, France, Singapore, UK, Japan, Germany, and other global locations
Anomaly
 
2011
 
New York, Los Angeles, Netherlands, Canada, UK, China
Colle + McVoy
 
1999
 
Minneapolis
Concentric Partners
 
2011
 
New York, UK
Crispin Porter + Bogusky
 
2001
 
Miami, Boulder, Los Angeles, UK, Sweden,
Denmark, Brazil, China
Doner
 
2012
 
Detroit, Cleveland, Los Angeles, UK
Forsman & Bodenfors
 
2016
 
Sweden
HL Group Partners
 
2007
 
New York, Los Angeles, China
Hunter PR
 
2014
 
New York, UK
kbs
 
2004
 
New York, Canada, China, UK, Los Angeles
Albion
 
2014
 
UK
Attention
 
2009
 
New York, Los Angeles
Kenna
 
2010
 
Canada
The Media Kitchen
 
2004
 
New York, Canada, UK
Kwittken
 
2010
 
New York, UK, Canada
Laird + Partners
 
2011
 
New York
MDC Media Partners
 
2010
 
 
Assembly
 
2010
 
New York, Detroit, Atlanta, Los Angeles
EnPlay
 
2015
 
New York
LBN Partners
 
2013
 
Detroit, Los Angeles
Trade X
 
2011
 
New York
Unique Influence
 
2015
 
Austin
Varick Media Management
 
2008
 
New York
Mono Advertising
 
2004
 
Minneapolis, San Francisco
Sloane & Company
 
2010
 
New York
Union
 
2013
 
Canada
Veritas
 
1993
 
Canada
Vitro
 
2004
 
San Diego, Austin
Yamamoto
 
2000
 
Minneapolis
All Other:
 
 
 
 
6degrees Communications
 
1993
 
Canada
Boom Marketing
 
2005
 
Canada
Bruce Mau Design
 
2004
 
Canada
Civilian
 
2000
 
Chicago
Gale Partners
 
2014
 
Canada, New York, India
Hello Design
 
2004
 
Los Angeles
Rumble Fox
 
2014
 
New York
Kingsdale
 
2014
 
Canada, New York
Luntz Global
 
2014
 
Washington, D.C.
Northstar Research Partners
 
1998
 
Canada, New York, UK, Indonesia
Redscout
 
2007
 
New York, San Francisco, UK
Relevent
 
2010
 
New York
Source Marketing
 
1998
 
Connecticut, Pennsylvania
TEAM
 
2010
 
Ft. Lauderdale
Y Media Labs
 
2015
 
Redwood City, New York, India

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Competition
In the competitive, highly fragmented marketing and communications industry, MDC’s Partner Firms compete for business and talent with the operating subsidiaries of large global holding companies such as Omnicom Group Inc., Interpublic Group of Companies, Inc., WPP plc, Publicis Groupe SA, Dentsu Inc. and Havas SA. 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 Partner Firms also faces competition from numerous independent agencies that operate in multiple markets, as well as newer competitors such as IT consulting, tech platforms, and other services firms that have begun to offer marketing-related services. MDC’s Partner Firms must compete with all of these other companies to maintain existing client relationships and to obtain new clients and assignments. MDC’s Partner Firms compete at this level by providing clients with disruptive 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 its entrepreneurial Partner Firms through referrals and the sharing of both services and expertise, which enables MDC to service clients’ varied marketing needs around the world by crafting custom integrated solutions.
A Partner Firm’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
There are several recent economic and industry trends that affect or may be expected to affect the Company’s results of operations. 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 these changes in the way consumers interact with media is increasing the demand for a broader range of non-advertising marketing communications services (i.e., direct marketing, sales promotion, interactive, mobile, strategic communications and public relations), which we expect could have a positive impact on our results of operations. In addition, the rise of technology and data solutions have rendered scale less crucial as it once was in areas such as media buying, creating significant opportunities for agile and modern players. Global marketers now demand breakthrough and integrated creative ideas, and no longer require traditional brick-and-mortar communications partners in every market to optimize the effectiveness of their marketing efforts. Combined with the fragmentation of the media landscape, these factors provide new opportunities for small to mid-sized communications companies like those in the MDC network. In addition, marketers now require ever greater speed-to-market to drive financial returns on their marketing and media investment, causing them to turn to more nimble, entrepreneurial and collaborative communications firms like MDC Partner Firms.
As client procurement departments have focused increasingly on marketing services company fees in recent years, the Company has invested in resources to work with client procurement departments to ensure that we are able to deliver against client goals in a mutually beneficial way. For example, the Company has explored new compensation models, such as performance-based incentive payments and equity, in order to greater align our success with our clients. These incentive payments may offset negative pricing pressure from client procurement departments.
Clients
The Company serves clients in virtually every industry, and in many cases, the same clients in various locations, and through several Partner Firms and across many disciplines. Representation of a client rarely means that MDC handles marketing communications for all brands or product lines of the client in every geographical location. For further information regarding revenues and long-lived assets on a geographical basis for each of the last three years, see Note 14 of the Notes to the Consolidated Financial Statements.
MDC’s agencies have written contracts with many of their clients. As is customary in the industry, these contracts generally provide for termination by either party on relatively short notice, usually 90 days. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Executive Overview” for a further discussion of MDC’s arrangements with its clients.
During 2016, 2015 and 2014, the Company did not have a client that accounted for 5% or more of revenues. In addition, MDC’s ten largest clients (measured by revenue generated) accounted for 23%, 24% and 24% of 2016, 2015 and 2014 revenues, respectively.

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Employees
As of December 31, 2016, MDC and its subsidiaries had the following number of employees:
Segment
 
Total
Reportable Segment
 
5,086

All Other
 
974

Corporate Group
 
78

Total
 
6,138

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” 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 its 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.
Item 1A. Risk Factors
The following factors could adversely affect the Company’s revenues, results of operations or financial condition. See also “Forward-Looking Statements.”
The pending preferred equity financing may not be completed, which could adversely affect our business, results of operations and/or financial condition or the price of our Class A shares.
On February 14, 2017, we entered into a securities purchase agreement (the “Purchase Agreement”) with Broad Street Principal Investments, L.L.C., an affiliate of The Goldman Sachs Group Inc. (the “Purchaser”), pursuant to which we have agreed to issue and sell to the Purchaser and the Purchaser has agreed to purchase 95,000 newly authorized Series 4 convertible preference shares for an aggregate purchase price of $95.0 million (the “Preference Shares”). The transaction is expected to close in the first quarter of 2017, subject to the conditions set forth in the Purchase Agreement. Although the Purchase Agreement requires the parties to use reasonable efforts to consummate the transaction, we cannot assure you that all closing conditions will be satisfied or waived. The Purchase Agreement will expire if the closing has not occurred by the sixtieth day following the date of the Purchase Agreement. If the transaction is not completed, we will be subject to a number of risks, including: we must pay costs related to the transaction, including legal and financial advisory fees, whether the transaction is completed or not; the trading price of our Class A shares may decline if the transaction is not completed, to the extent that the market price reflects a market assumption that the transaction will be completed; we may be required to seek alternative sources of liquidity, as to the availability or terms of which we cannot provide assurance, and we could be subject to litigation related to the failure to complete the transaction or other factors, all of which may adversely affect our business, results of operations and/or financial results and the price of our Class A shares.
Future economic and financial conditions could adversely impact our financial condition and results.
Advertising, marketing and communications expenditures are sensitive to global, national and regional macroeconomic conditions, as well as specific budgeting levels and buying patterns. Adverse developments including heightened uncertainty could reduce the demand for our services, which could adversely affect our revenue, results of operations, and financial position in 2017.
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

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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 MDC’s senior secured revolving credit agreement (the “Credit Agreement”) or the $900 million aggregate principal amount of 6.50% notes due 2024 (the “6.50% Notes”), or reduced liquidity. Our ten largest clients (measured by revenue generated) accounted for 23% of our revenue in 2016.
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 or experienced senior management changes. From year to year, the identities of MDC’s ten 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.
The loss of lines of credit under the 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 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, including through contingent deferred acquisition payments.
The Company is currently in compliance with all of the terms and conditions of the Credit Agreement. If, however, events were to occur, which result in MDC losing all or a substantial portion of its available credit under the Credit Agreement, or if MDC was prevented from accessing such lines of credit due to other restrictions such as those in the indenture governing the 6.50% 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 or contingent deferred acquisition payments would be materially adversely affected.
We have significant contingent obligations related to deferred acquisition consideration and noncontrolling interests in our subsidiaries, which will require us to utilize our cash flow and/or to incur additional debt to satisfy.
The Company has made a number of acquisitions for which it has deferred payment of a portion of the purchase price, usually for a period between one to five years after the acquisition. The deferred acquisition consideration is generally payable based on achievement of certain thresholds of future earnings of the acquired company and, in certain cases, also based on the rate of growth of those earnings. Once any contingency is resolved, the Company may pay the contingent consideration over time.
The Company records liabilities on its balance sheet for deferred acquisition payments at their estimated value based on the current performance of the business, which are re-measured each quarter. At December 31, 2016, these aggregate liabilities were $229.6 million, of which $108.3 million, $40.0 million, $40.4 million and $40.8 million would be payable in 2017, 2018, 2019 and thereafter, respectively.
In addition to the Company’s obligations for deferred acquisition consideration, managers of certain of the Company’s acquired subsidiaries hold noncontrolling interests in such subsidiaries. In the case of certain noncontrolling interests related to acquisitions, such managers are entitled to a proportionate distribution of earnings from the relevant subsidiary, which is recognized on the Company’s consolidated income statement under “Net income attributable to the noncontrolling interests.”
Noncontrolling shareholders often have the right to require the Company to purchase all or part of its interest, either at specified dates or upon the termination of such shareholder’s employment with the subsidiary or death (put rights). In addition, the Company usually has rights to call noncontrolling shareholders’ interests at a specified date. The purchase price for both puts and calls is typically calculated based on specified formulas tied to the financial performance of the subsidiary.
The Company recorded $60.2 million on its December 31, 2016 balance sheet as redeemable noncontrolling interests for its estimated obligations in respect of noncontrolling shareholder put and call rights based on the current performance of the subsidiaries, $12.5 million of which related to put rights for which, if exercised, the payments are due at specified dates, with the

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remainder of redeemable noncontrolling interests attributable to put or call rights exercisable only upon termination of employment or death. No estimated obligation is recorded on the balance sheet for noncontrolling interests for which the Company has a call right but the noncontrolling holder has no put right.
Payments to be made by the Company in respect of deferred acquisition consideration and noncontrolling shareholder put rights may be significantly higher than the estimated amounts described above because the actual obligation adjusts based on the performance of the acquired businesses over time, including future growth in earnings from the calculations made at December 31, 2016. Similarly, the payments made by the Company under call rights would increase with growth in earnings of the acquired businesses. The Company expects that deferred contingent consideration and noncontrolling interests for managers may be features of future acquisitions that it may undertake and that it may also grant similar noncontrolling interests to managers of its subsidiaries unrelated to acquisitions.
The Company expects that its obligations in respect of deferred acquisition consideration and payments to noncontrolling shareholders under put and call rights will be a significant use of the Company’s liquidity in the foreseeable future, whether in the form of free cash flow or borrowings under the Company’s revolving credit agreement or from other funding sources, including the anticipated proceeds from the issuance and sale of $95.0 million of Preference Shares. For further information, see the disclosure under the heading “Business — Ownership Information” and the heading “Liquidity and Capital Resources.”
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.
Our expenses have, in recent periods, increased at a greater rate than revenues, which in part reflects both the increase in expenses for deferred acquisition consideration and from our investment in headcount for certain growth initiatives. Should our acquisitions continue to outperform current expectations, expenses for deferred acquisition consideration could increase as well in future periods. If our growth initiatives do not provide sufficient revenue to offset the incremental costs in future periods, profits could be reduced and severance expense could be incurred in order to return to targeted profit margins over time.
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 or executives.
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 Partner Firms 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 conditions, 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.
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

7


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 U.S. 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 of the Notes to the Consolidated Financial Statements included herein. 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. As discussed in Note 2 and Note 8 of the Notes to the Consolidated Financial Statements included herein, for the year ended December 31, 2016, we have recorded goodwill impairment of $48.5 million. We have concluded for the years ended December 31, 2015 and 2014 that our goodwill and intangible assets relating to continuing operations are 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. For the year ended December 31, 2016, a goodwill write off of $0.8 million was included in other income (expense) related to the sale of its ownership interests in Bryan Mills Iradesso Corporation (“Bryan Mills”) to the noncontrolling shareholders. For the year ended December 31, 2014, a goodwill write off of $15.6 million was included in the loss from discontinued operations as a result of MDC’s decision to strategically sell the net assets of Accent Marketing Services, L.L.C. (“Accent”).
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 the 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.
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.
We rely extensively on information technology systems.
We rely on information technologies and infrastructure to manage our business, including digital storage of client marketing and advertising information, developing new business opportunities and processing business transactions. Our information technology systems are potentially vulnerable to system failures and network disruptions, malicious intrusion and random attack.

8


While we have taken what we believe are prudent measures to protect our data and information technology systems, we cannot assure you that our efforts will prevent system failures or network disruptions or breaches in our systems.  Any such breakdowns or breaches in our systems or data-protection policies could adversely affect our reputation or business.   
The Company is subject to an ongoing securities class action litigation claim and a government investigation.
The Company remains subject to an ongoing securities class action litigation claim in Canada, although the U.S. securities class action was dismissed, with prejudice.  We maintain insurance for a lawsuit of this nature; however, our insurance coverage does not apply in all circumstances and may be insufficient to cover the fees and potential damages and/or settlement costs relating to this class action lawsuit. Moreover, adverse publicity associated with this litigation claim could decrease client demand for our partner agencies’ services. As a result, the securities class action lawsuit described in more detail under “Item 3 - Legal Proceedings,” could have a material adverse effect on our business, reputation, financial condition, results of operations, liquidity and the trading price of our Class A shares.
In addition, one of the Company’s subsidiary agencies received a subpoena from the U.S. Department of Justice Antitrust Division concerning its ongoing investigation of production practices in the advertising industry. The Company and its subsidiary are fully cooperating with this confidential investigation. Although the ultimate effect of this investigation is inherently uncertain, we do not at this time believe that the investigation will have a material adverse effect on our results of operations or financial position. However, the ultimate resolution of this investigation could be materially different from our current assessment.
Future issuances of equity securities, which may include securities that would rank senior to our Class A shares, may cause dilution to our existing shareholders and adversely affect the market price of our Class A shares.
The market price of our Class A shares could decline as a result of sales of a large number of our Class A shares in the market, or the sale of securities convertible into a large number of our Class A shares. The perception that these sales could occur may also depress the market price of our Class A shares. On February 14, 2017, we entered into the Purchase Agreement pursuant to which, subject to the terms and conditions thereof, we expect to issue 95,000 Series 4 convertible preference shares with an initial aggregate liquidation preference of $95.0 million, which will be convertible into Class A shares or our Series 5 convertible preference shares at an initial conversion price of $10.00 per share. The terms of the Preference Shares will provide that the conversion price may be reduced, which would result in the Preference Shares being convertible into additional Class A shares, upon certain events including distributions on our Class A shares or issuances of additional Class A shares or equity-linked securities at a price less than the then-applicable conversion price. The conversion of the Preference Shares may adversely affect the market price of our Class A shares, and the market price of our Class A shares may be affected by factors, such as whether the market price is near or above the conversion price, that could make conversion of the Preference Shares more likely. In addition, the Preference Shares will rank senior to the Class A shares, which could affect the value of the Class A shares on liquidation or, as a result of contractual provisions, on a change in control transaction. For example, pursuant to the Purchase Agreement, the Company has agreed with the Purchaser, with certain exceptions, not to become party to certain change in control transactions that are approved by the Board other than a qualifying transaction in which holders of Preference Shares are entitled to receive cash or qualifying listed securities with a value equal to the then-applicable liquidation preference plus accrued and unpaid dividends. See Note 22 of the Notes to the Consolidated Financial Statements for more information regarding the terms of the Preference Shares.
Additionally, any convertible or exchangeable securities that we issue may have rights, preferences and privileges more favorable than those of our Class A shares, and may result in dilution to owners of our Class A shares. Because our decision to issue additional debt or equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future issuances. Also, we cannot predict the effect, if any, of future issuances of our Class A shares on the market price of our Class A shares.
The indenture governing the 6.50% Notes and the 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 6.50% Notes and the 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:
sell assets;
pay dividends and make other distributions;
redeem or repurchase our capital stock;
incur additional debt and issue capital stock;
create liens;
consolidate, merge or sell substantially all of our assets;

9


enter into certain transactions with our affiliates;
make loans, investments or advances;
repay subordinated indebtedness;
undergo a change in control;
enter into certain transactions with our affiliates;
engage in new lines of business; and
enter into sale and leaseback transactions.
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, mergers and acquisitions and other corporate opportunities. The Credit Agreement is subject to various additional covenants, including a senior leverage ratio, a total leverage ratio, a fixed charge coverage ratio, and a minimum EBITDA level (as defined). Events beyond our control could affect our ability to meet these financial tests, and we cannot assure you that they will be met.
Our substantial indebtedness could adversely affect our cash flow and prevent us from fulfilling our obligations, including the 6.50% Notes.
As of December 31, 2016, MDC had $936.4 million, net of debt issuance costs, of indebtedness. In addition, we expect to make additional drawings under the 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 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 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:
make it more difficult for us to satisfy our obligations with respect to the 6.50% Notes;
make it difficult for us to meet our obligations with respect to our contingent deferred acquisition payments;
limit our ability to increase our ownership stake in our Partner Firms;
increase our vulnerability to general adverse economic and industry conditions;
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital and other activities;
limit our flexibility in planning for, or reacting to, changes in our business and the advertising industry, which may place us at a competitive disadvantage compared to our competitors that have less debt; and
limit, particularly in concert with the financial and other restrictive covenants in our indebtedness, our ability to borrow additional funds or take other actions.
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 the 6.50% 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 noncontrolling interest holders, any distribution of earnings

10


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.
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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” 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, Asia and South America. 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-U.S. businesses are denominated in currencies other than U.S. dollars and are therefore subject to changes in foreign exchange rates.
Item 3. Legal Proceedings
Final Settlement of SEC Investigation
MDC Partners remains committed to the highest standards of corporate governance and transparency in its reporting practices. In April 2015, the Company announced it was actively cooperating in connection with an SEC investigation of the Company. On January 18, 2017, the Company announced that it reached a final settlement agreement with the Philadelphia Regional Office of the SEC, and that the SEC entered an administrative Order concluding its investigation of the Company.
Under the Order, without admitting or denying liability, the Company agreed that it will not in the future violate Section 17(a)(2) of the Securities Act of 1933 and Sections 13(a), 13(b) and 14(a) of the Securities Exchange Act of 1934 and related rules requiring that periodic filings be accurate; that accurate books and records and a system of internal accounting controls be maintained; and that solicitations of proxies comply with the securities laws. In addition, the Company agreed to comply with all requirements under Regulation G relating to the disclosure and reconciliation of non-GAAP financial measures. Pursuant to the Order, and based upon the Company’s full cooperation with the investigation, the SEC imposed a civil penalty of $1.5 million on the Company to resolve all potential claims against the Company relating to these matters. There will be no restatement of any of the Company’s previously-filed financial statements.
Class Action Litigation
On July 31, 2015, North Collier Fire Control and Rescue District Firefighter Pension Plan (“North Collier”) filed a putative class action suit in the Southern District of New York, naming as defendants MDC, CFO David Doft, former CEO Miles Nadal, and former CAO Mike Sabatino. On December 11, 2015, North Collier and co-lead plaintiff Plymouth County Retirement Association filed an amended complaint, adding two additional defendants, Mitchell Gendel and Michael Kirby, a former member of MDC’s Board of Directors. The plaintiff alleges in the amended complaint violations of § 10(b), Rule 10b-5, and § 20 of the Securities Exchange Act of 1934, based on allegedly materially false and misleading statements in the Company’s SEC filings and other public statements regarding executive compensation, goodwill accounting, and the Company’s internal controls. By order granted on September 30, 2016, the U.S. District Court presiding over the case granted the Company’s motion to dismiss the plaintiffs’ amended complaint in its entirety with prejudice. On November 2, 2016, the lead plaintiffs filed a notice to appeal the U.S. District Court's ruling to the U.S. Court of Appeals for the Second Circuit. On February 21, 2017, the plantiffs voluntarily dismissed their appeal.
On August 7, 2015, Roberto Paniccia issued a Statement of Claim in the Ontario Superior Court of Justice in the City of Brantford, Ontario seeking to certify a class action suit naming the following as defendants: MDC, former CEO Miles S. Nadal, former CAO Michael C. Sabatino, CFO David Doft and BDO U.S.A. LLP. The Plaintiff alleges violations of section 138.1 of the Ontario Securities Act (and equivalent legislation in other Canadian provinces and territories) as well as common law misrepresentation based on allegedly materially false and misleading statements in the Company’s public statements, as well as omitting to disclose material facts with respect to the SEC investigation. The Company intends to continue to vigorously defend this suit. A case management judge has now been appointed but a date for an initial case conference has not yet been set.

11


Antitrust Subpoena
One of the Company’s subsidiaries received a subpoena from the U.S. Department of Justice Antitrust Division concerning the Division’s ongoing investigation of production practices in the advertising industry. The Company and its subsidiary are fully cooperating with this confidential investigation.
Item 4. Mine Safety Disclosures
Not applicable.

12


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 market on which the Company’s Class A subordinate voting shares are traded is the NASDAQ National Market (“NASDAQ”) (symbol: “MDCA”). As of February 21, 2017, the approximate number of registered holders of our Class A subordinate voting shares, including those whose shares are held in nominee name, was 800. Quarterly high and low sales prices per share of the Company’s Class A subordinate voting shares, as reported on NASDAQ, for each quarter in the years ended December 31, 2016 and 2015, were as follows:
NASDAQ
Quarter Ended
 
High
 
Low
 
 
 
 
 
  
 
($ per Share)
March 31, 2015
 
28.65

 
21.20

June 30, 2015
 
28.64

 
18.00

September 30, 2015
 
20.99

 
16.15

December 31, 2015
 
22.55

 
18.25

March 31, 2016
 
23.85

 
16.32

June 30, 2016
 
23.90

 
15.94

September 30, 2016
 
18.64

 
10.42

December 31, 2016
 
11.10

 
2.75

As of February 17, 2017, the last reported sale price of the Class A subordinate voting shares was $9.00 on NASDAQ. Effective November 11, 2015, the Company voluntarily delisted its shares from the Toronto Stock Exchange (“TSX”). The Company determined that the relatively low trading volume of its shares on the TSX did not justify the financial and administrative costs associated with a dual listing.
Dividend Practice
On November 3, 2016, the Company announced that it was suspending its quarterly dividend indefinitely.
In 2016, MDC’s board of directors declared the following dividends: a $0.21 per share quarterly dividend to all shareholders of record as of the close of business on March 4, 2016; a $0.21 per share quarterly dividend to all shareholders of record as of the close of business on May 24, 2016; a $0.21 per share quarterly dividend to all shareholders of record as of the close of business on August 10, 2016.
In 2015, MDC’s board of directors declared the following dividends: a $0.21 per share quarterly dividend to all shareholders of record as of the close of business on March 5, 2015; a $0.21 per share quarterly dividend to all shareholders of record as of the close of business on May 8, 2015; a $0.21 per share quarterly dividend to all shareholders of record as of the close of business on August 18, 2015; and a $0.21 per share quarterly dividend to all shareholders of record as of the close of business on November 11, 2015.
In 2014, MDC’s board of directors declared the following dividends: a $0.18 per share quarterly dividend to all shareholders of record as of the close of business on March 4, 2014; a $0.18 per share quarterly dividend to all shareholders of record as of the close of business on May 5, 2014; a $0.19 per share quarterly dividend to all shareholders of record as of the close of business on August 5, 2014; and a $0.19 per share quarterly dividend to all shareholders of record as of the close of business on November 10, 2014.
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 6.50% Notes, future earnings, capital requirements, our general financial condition and general business conditions.

13


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, 2016:
 
Number of Securities to
Be Issued Upon
Exercise of Outstanding
Options, Warrants and Rights
 
Weighted Average
Exercise Price of
Outstanding Options, Warrants
and Rights
 
Number of Securities
Remaining Available for
Future Issuance
[Excluding Column (a)]
  
(a)
 
(b)
 
(c)
Equity compensation plans approved by stockholders
37,500

 
$
5.83

 
1,934,861

Equity compensation plans not approved by stockholders

 

 

Total
37,500

 
5.83

 
1,934,861

On May 26, 2005, the Company’s shareholders approved the 2005 Stock Incentive Plan, which provides for the issuance of 3.0 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 6.75 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 (the “SARS Plan”). On May 30, 2008, the Company’s shareholders approved the 2008 Key Partner Incentive Plan, which provides for the issuance of 900,000 Class A shares. On June 1, 2011, the Company’s shareholders approved the 2011 Stock Incentive Plan, which provides for the issuance of up to 3.0 million Class A shares. In June 2013, the Company’s shareholders approved an amendment to the SARS Plan to permit the Company to issue shares authorized under the SARS Plan to satisfy the grant and vesting of awards under the 2011 Stock Incentive Plan. In June 2016, the Company's shareholders approved the 2016 Stock Incentive Plan, which provides for the issuance of up to 1,500,000 Class A shares.
See also Note 12 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
For the twelve months ended December 31, 2016, the Company made no open market purchases of its Class A shares or its Class B shares. Pursuant to its Credit Agreement and the indenture governing the 6.50% Notes, the Company is currently limited from repurchasing its shares in the open market.
During 2016, the Company’s employees surrendered 205,876 Class A shares valued at approximately $3.4 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, 2016.
Transfer Agent and Registrar for Common Stock
The transfer agent and registrar for the Company’s common stock is Canadian Stock Transfer Trust Company (f/k/a CIBC Mellon Trust Company). Canadian Stock Transfer Trust 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 Trust Company
P.O. Box 4202, Postal Station A
Toronto, Ontario M5W 0E4

14


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 related notes that are included in this Annual Report on Form 10-K.
 
Years Ended December 31,
  
2016
 
2015
 
2014
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
  
(Dollars in Thousands, Except per Share Data)
Operating Data
  

 
  

 
  

 
  

 
  

Revenues
$
1,385,785

 
$
1,326,256

 
$
1,223,512

 
$
1,062,478

 
$
972,973

Operating income (loss)
$
48,431

 
$
72,110

 
$
87,749

 
$
(34,594
)
 
$
(17,969
)
Income (loss) from continuing operations
$
(42,724
)
 
$
(22,022
)
 
$
4,093

 
$
(133,202
)
 
$
(73,448
)
Stock-based compensation included in income (loss) from continuing operations
$
21,003

 
$
17,796

 
$
17,696

 
$
100,405

 
$
32,197

Loss per Share
  

 
  

 
  

 
  

 
  

Basic
  

 
  

 
  

 
  

 
  

Continuing operations attributable to MDC Partners Inc. common shareholders
$
(0.93
)
 
$
(0.62
)
 
$
(0.06
)
 
$
(2.96
)
 
$
(1.74
)
Diluted
  

 
  

 
  

 
  

 
  

Continuing operations attributable to MDC Partners Inc. common shareholders
$
(0.93
)
 
$
(0.62
)
 
$
(0.06
)
 
$
(2.96
)
 
$
(1.74
)
Cash dividends declared per share
$
0.63

 
$
0.84

 
$
0.74

 
$
0.46

 
$
0.38

Financial Position Data
  

 
  

 
  

 
  

 
  

Total assets
$
1,577,378

 
$
1,577,625

 
$
1,633,751

 
$
1,408,711

 
$
1,335,422

Total debt
$
936,436

 
$
728,883

 
$
727,988

 
$
648,612

 
$
422,180

Redeemable noncontrolling interests
$
60,180

 
$
69,471

 
$
194,951

 
$
148,534

 
$
117,953

Deferred acquisition consideration
$
229,564

 
$
347,104

 
$
205,368

 
$
153,913

 
$
196,446

Fixed charge coverage ratio
N/A

 
N/A

 
1.23

 
N/A

 
N/A

Fixed charge deficiency
$
49,593

 
$
16,764

 
N/A

 
$
134,754

 
$
63,240

A number of factors that should be considered when comparing the annual results shown above are as follows:
Year Ended December 31, 2016
During 2016, the Company completed one acquisition and a number of transactions with majority owned subsidiaries. Please see Note 4 of the Notes to the Consolidated Financial Statements included herein for a summary of these acquisitions.
On March 23, 2016, the Company issued and sold $900 million aggregate principal amount of the 6.50% Notes. The 6.50% Notes are guaranteed on a senior unsecured basis by all of MDC’s existing and future restricted subsidiaries that guarantee, or are co-borrowers under or grant liens to secure the Credit Agreement. The 6.50% Notes bear interest at a rate of 6.50% per annum, accruing from March 23, 2016. Interest is payable semiannually in arrears on May 1 and November 1 of each year, beginning November 1, 2016. The 6.50% Notes mature on May 1, 2024, unless earlier redeemed or repurchased. The 6.50% Notes were sold in a private placement in reliance on exceptions from registration under the the Securities Act of 1933. The Company received net proceeds from the offering of the 6.50% Notes equal to approximately $880 million. The Company used the net proceeds to redeem all of its existing 6.75% Notes, together with accrued interest, related premiums, fees and expenses and recorded a charge for the loss on redemption of such notes of $33.3 million, including write offs of unamortized original issue premium and debt issuance costs. Remaining proceeds were used for general corporate purposes, including funding of deferred acquisition consideration.

15


Year Ended December 31, 2015
During 2015, the Company completed two acquisitions and a number of transactions with majority owned subsidiaries. Please see Note 4 of the Notes to the Consolidated Financial Statements included herein for a summary of these acquisitions.
In May 2015, the Company completed its previously announced sale of the net assets of Accent. For further information, please see Note 10 of the Notes to the Consolidated Financial Statements included herein.
Year Ended December 31, 2014
During 2014, the Company completed a number of acquisitions and a number of transactions with majority owned subsidiaries. Please see Note 4 of the Notes to the Consolidated Financial Statements included herein for a summary of these acquisitions.
On April 2, 2014, the Company issued an additional $75 million aggregate principal amount of its 6.75% Notes. The additional notes were issued under the indenture governing the 6.75% Notes and treated as a single series with the original 6.75% Notes. We received net proceeds from the offering of approximately $77.5 million, and we used the proceeds for general corporate purposes, including the funding of deferred acquisition consideration, working capital, acquisitions, and the repayment of the amount outstanding under our senior secured revolving credit agreement.
During the quarter ended December 31, 2014, the Company made the decision to strategically sell the net assets of Accent. All periods reflect these discontinued operations. For further information, please see Note 10 of the Notes to the Consolidated Financial Statements included herein.
Year Ended December 31, 2013
During 2013, the Company completed an acquisition and a number of transactions with majority owned subsidiaries. Please see Note 4 of the Notes to the Consolidated Financial Statements included herein for a summary of these acquisitions.
On March 20, 2013, the Company issued and sold $550 million aggregate principal amount of the 6.75% Notes. The 6.75% Notes are guaranteed on a senior unsecured basis by all of MDC’s existing and future restricted subsidiaries that guarantee, or are co-borrowers under or grant liens to secure the Credit Agreement. The 6.75% Notes bear interest at a rate of 6.75% per annum, accruing from March 20, 2013. Interest is payable semiannually in arrears in cash on May 1 and November 1 of each year, beginning on October 1, 2013. The 6.75% Notes will mature on April 1, 2020, unless earlier redeemed or repurchased. The 6.75% Notes were sold in a private placement in reliance on exceptions from registration under the Securities Act of 1933, as amended (the “Securities Act”). The Company received net proceeds from the offering of the 6.75% Notes equal to approximately $537.6 million. The Company used the net proceeds to redeem all of its existing 11% Notes, together with accrued interest, related premiums, fees and expenses and recorded a charge for loss on redemption of notes of $55.6 million, including write offs of unamortized original issue premium and debt issuance costs. Remaining proceeds were used for general corporate purposes. In addition, the Company entered into an amended and restated $225 million senior secured revolving credit agreement due 2018.
In November 2013, stock-based compensation included a charge of $78.0 million relating to the cash settlement of the outstanding Stock Appreciation Rights (“SAR’s”).
On November 15, 2013, the Company issued an additional $110 million aggregate principal amount of the 6.75% Notes. The additional notes were issued under the indenture governing the 6.75% Notes and treated as a single series with the original 6.75% Notes.
During 2013, the Company discontinued two subsidiaries and an operating division. All periods reflect these discontinued operations. For further information, please see Note 10 of the Notes to the Consolidated Financial Statements included herein.
Year Ended December 31, 2012
During 2012, the Company completed a number of acquisitions.
On December 10, 2012, the Company and its wholly-owned subsidiaries, as guarantors, issued and sold an additional $80 million aggregate principal amount of 11% Notes due 2016 (the “11% Notes”). 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. The Company received net proceeds before expenses of $83.2 million, which included an original issue premium of $4.8 million, and underwriter fees of $1.6 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.
During 2012, the Company discontinued a subsidiary and certain operating divisions. All periods reflect these discontinued operations. For further information, please see Note 10 of the Notes to the Consolidated Financial Statements included herein.

16


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless otherwise indicated, 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 year 2016 means the period beginning January 1, 2016, and ending December 31, 2016).
The Company reports its financial results in accordance with generally accepted accounting principles (“GAAP”) of the United States of America (“U.S. GAAP”). In addition, the Company has included certain non-U.S. GAAP financial measures and ratios, which it believes provide useful supplemental 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 U.S. GAAP and should not be construed as an alternative to other titled measures determined in accordance with U.S. GAAP.
Two such non-U.S. GAAP measures are “organic revenue growth” or “organic revenue decline” that refer to the positive or negative results, respectively, of subtracting both the foreign exchange and acquisition (disposition) components from total revenue growth. The acquisition (disposition) component is calculated by aggregating the prior period revenue for any acquired businesses, less the prior period revenue of any businesses that were disposed of in the current period. The organic revenue growth (decline) component reflects the constant currency impact of (a) the change in revenue of the Partner Firms which the Company has held throughout each of the comparable periods presented and (b) for acquisitions during the current year, the revenue effect from such acquisition as if the acquisition had been owned during the equivalent period in the prior year and (c) for acquisitions during the previous year, the revenue effect from such acquisitions as if they had been owned during that entire year or same period as the current reportable period, taking into account their respective pre-acquisition revenues for the applicable periods and (d) for dispositions, the revenue effect from such disposition as if they had been disposed of during the equivalent period in the prior year. The Company believes that isolating the impact of acquisition activity and foreign currency impacts is an important and informative component to understand the overall change in the Company’s consolidated revenue. The change in the consolidated revenue that remains after these adjustments illustrates the underlying financial performance of the Company’s businesses. Specifically, it represents the impact of the Company’s management oversight, investments and resources dedicated to supporting the businesses’ growth strategy and operations. In addition, it reflects the network benefit of inclusion in the broader portfolio of firms that includes, but is not limited to, cross-selling and sharing of best practices. This approach isolates changes in performance of the business that take place under the Company’s stewardship, whether favorable or unfavorable, and thereby reflects the potential benefits and risks associated with owning and managing a talent-driven services business.
Accordingly, during the first twelve months of ownership by the Company, the organic growth measure may credit the Company with growth from an acquired business that is dependent on work performed prior to the acquisition date, and may include the impact of prior work in progress, existing contracts and backlog of the acquired businesses. It is the presumption of the Company that positive developments that may have taken place at an acquired business during the period preceding the acquisition will continue to result in value creation in the post-acquisition period.
While the Company believes that the methodology used in the calculation of organic revenue change is entirely consistent with our closest U.S. competitors, the calculations may not be comparable to similarly titled measures presented by other publicly traded companies in other industries. Additional information regarding the Company’s acquisition activity as it relates to potential revenue growth is provided in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under “Certain Factors Affecting our Business.”
Amounts reported in millions herein are computed based on the amounts in thousands. As a result, the sum of the components, and related calculations, reported in millions may not equal the total amounts due to rounding.
Executive Summary
The Company’s objective is to create shareholder value by building, growing and acquiring market-leading Partner Firms that deliver innovative, value-added marketing, activation, 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 its business by monitoring several financial and non-financial performance indicators. The key indicators that we focus on are the areas of revenues and operating expenses and capital expenditures. Revenue growth is analyzed by reviewing a mix of measurements, including (i) growth by major geographic location, (ii) existing growth by major discipline (organic revenue growth), (iii) growth from currency changes and (iv) growth from acquisitions. In addition to monitoring the foregoing financial indicators, the Company assesses and monitors several non-financial performance indicators relating to the business performance of our Partner Firms. These indicators may include a Partner Firm's recent new client win/loss record; the depth and scope of a pipeline of potential new client account activity; the overall quality of the services provided to clients; and the relative strength of the Company's next generation team that is in place as part of a potential succession plan to succeed the current senior executive team.

17


MDC conducts its businesses through its Partner Firm network, the Advertising and Communications Group, providing value-added marketing, activation, and communications and strategic consulting services to clients throughout the world. As discussed in Note 1 and Note 14 of the Notes to the Consolidated Financial Statements included herein, during the third quarter of 2016, the Company reassessed its determination of operating segments and concluded that each Partner Firm represents an operating segment and aggregated Partner Firms that met the aggregation criteria into one Reportable segment and combined and disclosed those Partner Firms that did not meet the aggregation criteria as an “all other” segment. In addition, MDC has a “Corporate Group” which provides client and business development support to the Partner Firms as well as certain strategic resources, including accounting, administrative, financial, real estate, human resource and legal functions.
The Partner Firms 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 included herein.
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 office and general expenses are the changes of the estimated value of our contingent purchase price obligations, including the accretion of present value and acquisition related costs. Depreciation and amortization are also included in operating expenses.
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 as a significant portion of these expenses are relatively fixed in nature.
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, and 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 losses occur due to a variety of factors. The two most significant factors are (i) our clients’ desire to change marketing communication firms, and (ii) the creative product that our Partner Firms offer. A client may choose to change marketing communication firms for a number of reasons, such as a change in top management and the new management wants to 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.
Acquisitions and Dispositions. The Company’s strategy includes acquiring ownership stakes in well-managed businesses with world class expertise and strong reputations in the industry. Through the Strategic Resources Group, the Company provides post-acquisition support to Partner Firms in order to help accelerate growth, including in areas such as business and client development (including cross-selling), corporate communications, corporate development, talent recruitment and training, procurement, legal services, human resources, financial management and reporting, and real estate utilization, among other areas. As most of the Company’s acquisitions remain as stand-alone entities post acquisition, integration is typically implemented promptly, and new Partner Firms can begin to tap into the full range of MDC’s resources immediately. Often the acquired businesses may begin to tap into certain MDC resources in the pre-acquisition period, such as talent recruitment or real estate. The Company engaged in a number of acquisition and disposition transactions during the 2009 to 2016 period, which affected revenues, expenses, operating income and net income. Additional information regarding acquisitions is provided in Note 4 “Acquisitions” and information on dispositions is provided in Note 10 “Discontinued Operations” of the Notes to the Consolidated Financial Statements.
Foreign Exchange Fluctuation.  Our financial results and competitive position are affected by fluctuations in the exchange rate between the U.S. dollar and non-U.S. dollar, primarily the Canadian dollar. See also “Item 7A - Quantitative and Qualitative Disclosures About Market Risk - Foreign Exchange.”

18


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 were $390.4 million for the fourth quarter of 2016, representing an increase of $31.4 million or 8.8%, compared to revenue of $359.0 million in fourth quarter of 2015. Revenue from acquisitions for the fourth quarter of 2016 was $24.7 million or 6.9%, inclusive of a $3.3 million contribution to organic revenue growth. A negative impact $0.5 million is also included to reflect the effect of a disposition. Excluding the effect of the acquisitions and disposition, revenue growth was $10.3 million or 2.9%, partially offset by a foreign exchange impact of $3.0 million or 0.8%. The increase in operating profits was attributable to a decrease in deferred acquisition consideration expense of $51.1 million due to certain Partner Firms under-performance in comparison to the Company’s prior expectations, partially offset by a goodwill impairment expense increase of $18.9 million pertaining to a strategic communication unit. Income from continuing operations for the fourth quarter of 2016 was $9.8 million, compared to a loss from continuing operations of $24.5 million in 2015. Other income, net decreased by $6.0 million or 88.9% from $6.8 million in 2015, to $0.8 million in 2016. Of this amount, $6.5 million was due to income from the sale of certain investments in 2015. Unrealized losses increased $0.6 million or 5.8% due to foreign currency fluctuations. Interest expense increased $1.6 million or 10.9% from $14.8 million in 2015, to $16.4 million in 2016. Income tax benefit increased $15.4 million from an expense of $6.2 million in 2015, compared to a benefit of $9.2 million in 2016.
Results of Operations for the Years Ended December 31, 2016, 2015 and 2014:
 
For the Year Ended December 31, 2016
  
Reportable Segment
 
All Other
 
Corporate
 
Total
Revenue
$
1,147,173

 
$
238,612

 
$

 
$
1,385,785

Cost of services sold
775,129

 
161,004

 

 
936,133

Office and general expenses
223,823

 
39,895

 
42,533

 
306,251

Depreciation and amortization
33,848

 
11,013

 
1,585

 
46,446

Goodwill impairment

 
48,524

 

 
48,524

Operating profit (loss)
114,373

 
(21,824
)
 
(44,118
)
 
48,431

Other income (expense):
  

 
 
 
  

 
  

Other income, net
  

 
 
 
  

 
414

Foreign exchange loss
  

 
 
 
  

 
(213
)
Interest expense, finance charges, and loss on redemption of notes, net
 
 
 
 
 
 
(98,348
)
Loss from continuing operations before income taxes and equity in earnings of non-consolidated affiliates
  

 
 
 
  

 
(49,716
)
Income tax benefit
 
 
 
 
 
 
(7,301
)
Loss from continuing operations before equity in earnings of non-consolidated affiliates
  

 
 
 
  

 
(42,415
)
Equity in losses of non-consolidated affiliates
 
 
 
 
 
 
(309
)
Net loss
  

 
 
 
  

 
(42,724
)
Net income attributable to noncontrolling
interests
(3,676
)
 
(1,542
)
 

 
(5,218
)
Net loss attributable to MDC Partners Inc.
 
 
 
 
 
 
$
(47,942
)
Stock-based compensation
$
14,143

 
$
4,335

 
$
2,525

 
$
21,003


19


 
For the Year Ended December 31, 2015
  
Reportable Segment
 
All Other
 
Corporate
 
Total
Revenue
$
1,101,675

 
$
224,581

 
$

 
$
1,326,256

Cost of services sold
724,749

 
154,967

 

 
879,716

Office and general expenses
208,837

 
49,972

 
63,398

 
322,207

Depreciation and amortization
32,501

 
17,948

 
1,774

 
52,223

Operating profit (loss)
135,588

 
1,694

 
(65,172
)
 
72,110

Other income (expense):
  

 
  

 
  

 
  

Other income, net
  

 
  

 
  

 
7,238

Foreign exchange loss
  

 
  

 
  

 
(39,328
)
Interest expense and finance charges, net
 
 
 
 
 
 
(57,436
)
Loss from continuing operations before income taxes and equity in earnings of non-consolidated affiliates
  

 
  

 
  

 
(17,416
)
Income tax expense
 
 
 
 
 
 
5,664

Loss from continuing operations before equity in earnings of non-consolidated affiliates
  

 
  

 
  

 
(23,080
)
Equity in earnings of non-consolidated affiliates
 
 
 
 
 
 
1,058

Loss from continuing operations
  

 
  

 
  

 
(22,022
)
Loss from discontinued operations attributable to MDC Partners Inc., net of taxes
 
 
 
 
 
 
(6,281
)
Net loss
  

 
  

 
  

 
(28,303
)
Net income attributable to noncontrolling interests
(7,202
)
 
(1,822
)
 
(30
)
 
(9,054
)
Net loss attributable to MDC Partners Inc.
 
 
 
 
 
 
$
(37,357
)
Stock-based compensation
$
10,231

 
$
4,825

 
$
2,740

 
$
17,796


20


 
For the Year Ended December 31, 2014
  
Reportable Segment
 
All Other
 
Corporate
 
Total
Revenue
$
991,245

 
$
232,267

 
$

 
$
1,223,512

Cost of services sold
631,635

 
166,883

 

 
798,518

Office and general expenses
188,757

 
35,024

 
66,292

 
290,073

Depreciation and amortization
30,631

 
14,756

 
1,785

 
47,172

Operating profit (loss)
140,222

 
15,604

 
(68,077
)
 
87,749

Other income (expense):
  

 
  

 
  

 
  

Other income, net
  

 
  

 
  

 
689

Foreign exchange loss
  

 
  

 
  

 
(18,482
)
Interest expense and finance charges, net
 
 
 
 
 
 
(54,847
)
Income from continuing operations before income taxes and equity in earnings of non-consolidated affiliates
  

 
  

 
  

 
15,109

Income tax expense
 
 
 
 
 
 
12,422

Income from continuing operations before equity in earnings of non-consolidated affiliates
  

 
  

 
  

 
2,687

Equity in earnings of non-consolidated affiliates
 
 
 
 
 
 
1,406

Income from continuing operations
  

 
  

 
  

 
4,093

Loss from discontinued operations attributable to MDC Partners Inc., net of taxes
 
 
 
 
 
 
(21,260
)
Net loss
  

 
  

 
  

 
(17,167
)
Net income attributable to noncontrolling interests
(5,398
)
 
(1,492
)
 

 
(6,890
)
Net loss attributable to MDC Partners Inc.
 
 
 
 
 
 
$
(24,057
)
Stock-based compensation
$
8,559

 
$
3,474

 
$
5,663

 
$
17,696

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Revenue was $1.39 billion for the year ended December 31, 2016, representing an increase of $59.5 million, or 4.5%, compared to revenue of $1.33 billion for the year ended December 31, 2015. Revenue from acquisitions for 2016 was $51.1 million or 3.8%, inclusive of a $10.1 million contribution to organic revenue growth. Additionally, a negative impact of $0.5 million is included to reflect a disposition. Excluding the effect of the acquisitions and disposition, revenue growth was $20.0 million or 1.5%, partially offset by a foreign exchange impact of $11.0 million or 0.8%.
Operating profit for the year ended 2016 was $48.4 million, compared to $72.1 million in 2015. Operating profit decreased by $44.7 million in the Advertising and Communications Group, while Corporate operating expenses decreased by $21.1 million in 2016.
Loss from continuing operations was $42.7 million in 2016, compared to a loss of $22.0 million in 2015. This increase of $20.7 million was primarily attributable to (1) a decrease in operating profits of $23.7 million, primarily due to goodwill impairment expense of $48.5 million, (2) an increase in net interest expense of $40.9 million, partially offset by (3) a decrease in foreign exchange loss of $39.1 million, (4) an decrease in other income, net, of $6.8 million, and (5) an increase in the income tax benefit of $13.0 million.
Advertising and Communications Group
Revenue was $1.39 billion for the year ended December 31, 2016, representing an increase of $59.5 million, or 4.5%, compared to revenue of $1.33 billion for the year ended December 31, 2015. Revenue from acquisitions for 2016 was $51.1 million or 3.8%, inclusive of a $10.1 million contribution to organic revenue growth. Additionally, a negative impact of $0.5 million is included to reflect a disposition. Excluding the effect of the acquisitions and disposition, revenue growth was $20.0 million or 1.5%, partially offset by a foreign exchange impact of $11.0 million or 0.8% which was attributable to new client wins partially offset by client losses and reductions in spending by some clients. There was mixed performance by client sector, with strength in communications, food & beverage and auto, offset by declines led by retail, technology, and financial services. The performance by disciplines was mixed with strength led by technology & data science, and public relations partially offset by declines primarily in design firms. For the year ended December 31, 2016, revenue was negatively impacted by decreased billable pass-through costs incurred on client’s behalf from the Company acting as principal in experiential and other businesses.

21


Revenue growth was driven by the Company’s business outside of North America primarily consisting of revenue from acquisitions of $40.4 million or 3.1%, inclusive of a $6.2 million contribution to organic revenue growth. Revenue growth excluding acquisitions was $12.3 million or 0.9%, partially offset by foreign exchange impact of $6.9 million or 0.5%. The majority of the revenue growth was attributable to the Company’s European and Asian operations. The revenue growth derived from the North America region was comprised of revenue from acquisitions of $10.7 million or 0.8%, in addition to revenue growth of $8.0 million or 0.6% excluding acquisitions from the United States, offset by a minimal revenue decrease from Canada. United States saw modest growth due to client wins partially offset by client losses and reduction in client spending, as well as decrease in billable pass-through cost.
The Company also utilizes a non-GAAP metric called organic revenue growth (decline), defined in Item 7. For the year ended December 31, 2016 organic revenue growth was $30.1 million or 2.3%, of which $20.0 million pertained to Partner Firms which the Company has held throughout each of the comparable periods presented, while the remaining $10.1 million were contributions from acquisitions. The increase in revenue was also a result of non-GAAP acquisition (disposition) net adjustments of $42.0 million or 3.2%, which was partially offset by a foreign exchange impact of $12.5 million or 0.9%.
The components of the change in revenues for the year ended December 31, 2016 are as follows:
 
 
 
 
2016 Non-GAAP Activity
 
 
 
Change
Advertising and Communications
Group
 
2015 Revenue
 
Foreign
Exchange
 
Non-GAAP Acquisitions
(Dispositions), net
 
Organic
Revenue
Growth
(Decline)
 
2016 Revenue
 
Foreign
Exchange
 
Non-GAAP Acquisitions
(Dispositions), net
 
Organic
Revenue
Growth
(Decline)
 
Total
Revenue
 
 
(Dollars in Millions)
 
 
 
 
 
 
 
 
United States
 
$
1,085.1

 
$

 
$
6.8

 
$
11.9

 
$
1,103.7

 
 %
 
0.6
 %
 
1.1
 %
 
1.7
 %
Canada
 
129.0

 
(4.1
)
 
(0.5
)
 
(0.3
)
 
124.1

 
(3.2
)%
 
(0.4
)%
 
(0.2
)%
 
(3.8
)%
Other
 
112.2

 
(8.4
)
 
35.7

 
18.5

 
158.0

 
(7.5
)%
 
31.9
 %
 
16.5
 %
 
40.8
 %
Total
 
$
1,326.3

 
$
(12.5
)
 
$
42.0

 
$
30.1

 
$
1,385.8

 
(0.9
)%
 
3.2
 %
 
2.3
 %
 
4.5
 %
The below is a reconciliation between the non-GAAP acquisitions (dispositions), net to revenue from acquired businesses in the statement of operations for the year ended December 31, 2016:
 
Reportable Segment
 
All Other
 
Total
 
(Dollars in Millions)
Revenue from acquisitions (dispositions), net (1)
$
44.4

 
$
6.7

 
$
51.1

Foreign exchange impact
1.5

 

 
1.5

Contribution to organic revenue (growth) decline (2)
(7.3
)
 
(2.8
)
 
(10.1
)
Prior year revenue from dispositions

 
(0.5
)
 
(0.5
)
Non-GAAP acquisitions (dispositions), net
$
38.5

 
$
3.4

 
$
42.0

(1)
For the year ended December 31, 2016, revenue from acquisitions was comprised of $11.5 million from 2015 acquisitions and $39.6 million from 2016 acquisitions.
(2)
Contributions to organic revenue growth (decline) represents the change in revenue, measured on a constant currency basis, relative to the comparable pre-acquisition period for acquired businesses that is included in the Company’s organic revenue growth (decline) calculation.
The geographic mix in revenues for the years ended December 31, 2016 and 2015 is as follows:
 
2016
 
2015
United States
79.6
%
 
81.8
%
Canada
9.0
%
 
9.7
%
Other
11.4
%
 
8.5
%
The Company's business outside of North America continued to be a driver of growth for the overall Company, with organic revenue growth of 16.5%. This growth was driven by new client wins and increased spend from existing clients as we extended the Company's capabilities into new markets throughout Europe, Asia, and South America. For the year ended December 31,

22


2016, 11.4% of the Company's total revenue came from outside North America, up from 8.5% for the year ended December 31, 2015. Additional revenue growth came from acquisitions of firms that helped expand the Company's capabilities in mobile development and digital media buying, as well as expand the Company's global footprint.
The adverse currency impact was primarily due to the weakening of the British Pound and the Canadian dollar against the U.S. dollar during the twelve months ended December 31, 2016, as compared to the twelve months ended December 31, 2015.
The change in expenses as a percentage of revenue in the Advertising and Communications Group for the years ended December 31, 2016 and 2015 was as follows:
 
 
2016
 
2015
 
Change
Advertising and Communications
Group
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Millions)
Revenue
 
$
1,385.8

 
 
 
$
1,326.3

 
 
 
$
59.5

 
4.5
 %
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
Cost of services sold
 
936.1

 
67.6
%
 
879.7

 
66.3
%
 
56.4

 
6.4
 %
Office and general expenses
 
263.7

 
19.0
%
 
258.8

 
19.5
%
 
4.9

 
1.9
 %
Depreciation and amortization
 
44.9

 
3.2
%
 
50.4

 
3.8
%
 
(5.6
)
 
(11.1
)%
Goodwill impairment
 
48.5

 
3.5
%
 

 
%
 
48.5

 
NA

 
 
$
1,293.2

 
93.3
%
 
$
1,189.0

 
89.6
%
 
$
104.3

 
8.8
 %
Operating profit
 
$
92.5

 
6.7
%
 
$
137.3

 
10.4
%
 
$
(44.7
)
 
(32.6
)%
The change in the categories of expenses as a percentage of revenue in the Advertising and Communications Group for the years ended December 31, 2016 and 2015 was as follows:
 
 
2016
 
2015
 
Change
Advertising and Communications
Group
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Millions)
Direct costs (1)
 
$
212.3

 
15.3
%
 
$
195.3

 
14.7
%
 
$
17.0

 
8.7
 %
Staff costs (2)
 
781.9

 
56.4
%
 
732.4

 
55.2
%
 
49.5

 
6.8
 %
Administrative
 
179.2

 
12.9
%
 
159.4

 
12.0
%
 
19.8

 
12.4
 %
Deferred acquisition consideration
 
8.0

 
0.6
%
 
36.3

 
2.7
%
 
(28.4
)
 
(78.1
)%
Stock-based compensation
 
18.5

 
1.3
%
 
15.1

 
1.1
%
 
3.4

 
22.7
 %
Depreciation and amortization
 
44.9

 
3.2
%
 
50.4

 
3.8
%
 
(5.6
)
 
(11.1
)%
Goodwill impairment
 
48.5

 
3.5
%
 

 
%
 
48.5

 
NA

Total operating expenses
 
$
1,293.2

 
93.3
%
 
$
1,189.0

 
89.6
%
 
$
104.3

 
8.8
 %
(1)
Excludes staff costs.
(2)
Excludes stock-based compensation and is comprised of amounts reported in both cost of services and office and general expenses.
Operating profit for the Advertising and Communications Group for the year ended December 31, 2016 was $92.5 million, compared to $137.3 million for the year ended December 31, 2015. Operating margins decreased from 10.4% in 2015 to 6.7% in 2016. The decrease in operating profit and margin was largely due to the goodwill impairment charge of $48.5 million, and increases in staff costs as a percentage of revenue, partially offset by decreased deferred acquisition consideration expense.
Direct costs increased by $17.0 million, or 8.7%, and as a percentage of revenue increased from 14.7% for the year ended December 31, 2015 to 15.3% for the year ended December 31, 2016. This increase was largely due to an acquisition during the year.
Staff costs increased by $49.5 million, or 6.8%, and as a percentage of revenue increased from 55.2% for the year ended December 31, 2015 to 56.4% for the year ended December 31, 2016. The increase in staff costs was due to increased headcount driven by certain Partner Firms to support the growth of their businesses, as well as additional increases from acquisitions. The increase in staff costs as a percentage of revenue, was due to an increase in staffing levels in advance of revenue at certain Partner Firms, as well as slower reductions in staffing at other Partner Firms.

23


Administrative costs increased year over year and as a percentage of revenue primarily due to higher occupancy expenses and other general and administrative expenses. These increases were incurred to support the growth and expansion of certain Partner Firms, as well as some real estate consolidation initiatives.
Deferred acquisition consideration was an expense of $8.0 million for the year ended December 31, 2016, compared to expense of $36.3 million for the year ended December 31, 2015. The decrease in deferred acquisition consideration expense was due to the aggregate under-performance of certain Partner Firms in 2016, as compared to forecasted expectations in comparison to 2015. This decrease was partially offset by expenses pertaining to amendments to purchase agreements of previously acquired incremental ownership interests entered into during 2016, as well as increased estimated liability driven by the decrease in the Company's estimated future stock price, pertaining to an acquisition in which the Company used its equity as purchase consideration.
Stock-based compensation remained consistent at approximately 1% of revenue.
Depreciation and amortization expense decreased by $5.6 million primarily due to lower amortization from intangibles related to prior year acquisitions.
Goodwill impairment of $48.5 million was comprised of $27.9 million relating to an experiential reporting unit, a partial impairment of goodwill of $1.7 million relating to a non-material reporting unit, and a partial impairment of goodwill of $18.9 million relating to a strategic communications reporting unit. (For more information see Note 8 of our consolidated financial statements.)
Reportable Segment
Revenue was $1.15 billion for the year ended December 31, 2016, representing an increase of $45.5 million or 4.1%, compared to revenue of $1.10 billion for the year ended December 31, 2015. This increase related to revenue from acquisitions of $44.4 million or 4.0%, as well as revenue growth of $9.1 million or 0.8% excluding the effect of the acquisitions. These increases were partially offset by a decrease in foreign exchange of $8.0 million or 0.7%.
The change in expenses as a percentage of revenue in the Reportable segment for the years ended December 31, 2016 and 2015 was as follows:
 
 
2016
 
2015
 
Change
Reportable Segment
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Millions)
Revenue
 
$
1,147.2

 
 
 
$
1,101.7

 
 
 
$
45.5

 
4.1
 %
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
Cost of services sold
 
775.1

 
67.6
%
 
724.7

 
65.8
%
 
50.4

 
7.0
 %
Office and general expenses
 
223.8

 
19.5
%
 
208.8

 
19.0
%
 
15.0

 
7.2
 %
Depreciation and amortization
 
33.8

 
3.0
%
 
32.5

 
3.0
%
 
1.3

 
4.1
 %
 
 
$
1,032.8

 
90.0
%
 
$
966.1

 
87.7
%
 
$
66.7

 
6.9
 %
Operating profit
 
$
114.4

 
10.0
%
 
$
135.6

 
12.3
%
 
$
(21.2
)
 
(15.6
)%

24


The change in the categories of expenses as a percentage of revenue in the Reportable segment for the years ended December 31, 2016 and 2015 was as follows:
 
 
2016
 
2015
 
Change
Reportable Segment
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Millions)
Direct costs (1)
 
$
148.2

 
12.9
%
 
$
132.4

 
12.0
%
 
$
15.8

 
11.9
 %
Staff costs (2)
 
673.2

 
58.7
%
 
634.2

 
57.6
%
 
39.0

 
6.1
 %
Administrative
 
156.3

 
13.6
%
 
138.8

 
12.6
%
 
17.4

 
12.6
 %
Deferred acquisition consideration
 
7.2

 
0.6
%
 
18.0

 
1.6
%
 
(10.8
)
 
(59.9
)%
Stock-based compensation
 
14.1

 
1.2
%
 
10.2

 
0.9
%
 
3.9

 
38.2
 %
Depreciation and amortization
 
33.8

 
3.0
%
 
32.5

 
3.0
%
 
1.3

 
4.1
 %
Total operating expenses
 
$
1,032.8

 
90.0
%
 
$
966.1

 
87.7
%
 
$
66.7

 
6.9
 %
(1)
Excludes staff costs.
(2)
Excludes stock-based compensation and is comprised of amounts reported in both cost of services and office and general expenses.
Operating profit for the Reportable segment for the year ended December 31, 2016 was $114.4 million, compared to $135.6 million for the year ended December 31, 2015. Operating margins decreased from 12.3% in 2015 to 10.0% in 2016. The decrease in operating profit and margin was largely due to increases in staff costs as a percentage of revenue as well as administrative costs, partially offset by decreased deferred acquisition consideration expense.
Direct costs remained consistent as a percentage of revenue at approximately 13%, slight year-over-year increase due to an acquisition completed during the year of a firm with a high component of direct costs, as well as increases in pass-through costs incurred on clients’ behalf, from some of the Company's Partner Firms acting as Principal verses Agent.
Staff costs increased by $39.0 million, or 6.1%, and as a percentage of revenue increased from 57.6% for the year ended December 31, 2015 to 58.7% for the year ended December 31, 2016. The increase in staff costs was due to increased headcount driven by certain Partner Firms to support the growth of their businesses, as well as additional contributions from acquisitions. The increase in staff costs as a percentage of revenue was due to an increase in staffing levels in advance of revenue at certain Partner Firms, as well as slower reductions in staffing at other Partner Firms.
Administrative costs increased year over year and as a percentage of revenue primarily due to higher occupancy expenses and other general and administrative expenses. These increases were incurred in 2016 to support the growth and expansion of certain Partner Firms, as well as some real estate consolidation initiatives.
Deferred acquisition consideration was an expense of $7.2 million for the year ended December 31, 2016, compared to expense of $18.0 million for the year ended December 31, 2015. The decrease in deferred acquisition consideration expense was due to the aggregate under-performance of certain Partner Firms in 2016 as compared to forecasted expectations in comparison to 2015 aggregate out-performance as compared to forecasted expectations. This decrease was partially offset by expenses pertaining to an amendment to a purchase agreement of previously acquired incremental ownership interest entered into during 2016, as well as increased estimated liability driven by the decrease in the company's estimated future stock price, pertaining to an equity funded acquisition.
Stock-based compensation remained consistent as a percentage of revenue at approximately 1%.
Depreciation and amortization expense also remained consistent as a percentage of revenue at approximately 3%.
All Other
Revenue was $238.6 million for the year ended December 31, 2016, representing an increase of $14.0 million or 6.2%, compared to revenue of $224.6 million for the year ended December 31, 2015. This increase related to revenue from acquisitions of $6.7 million or 3.0%, as well as revenue growth of $10.8 million or 4.8% excluding the effect of the acquisitions. These increases were partially offset by a decrease in foreign exchange of $3.0 million or 1.3%, as well as disposition adjustment of $0.5 million or 0.2%.

25


The change in expenses as a percentage of revenue in the All Other segment for the years ended December 31, 2016 and 2015 was as follows:
 
 
2016
 
2015
 
Change
All Other
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Millions)
Revenue
 
$
238.6

 
 
 
$
224.6

 
 
 
$
14.0

 
6.2
 %
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
Cost of services sold
 
161.0

 
67.5
 %
 
155.0

 
69.0
%
 
6.0

 
3.9
 %
Office and general expenses
 
39.9

 
16.7
 %
 
50.0

 
22.3
%
 
(10.1
)
 
(20.2
)%
Depreciation and amortization
 
11.0

 
4.6
 %
 
17.9

 
8.0
%
 
(6.9
)
 
(38.6
)%
Goodwill impairment
 
48.5

 
20.3
 %
 
$

 
%
 
48.5

 
NA

 
 
$
260.4

 
109.1
 %
 
$
222.9

 
99.2
%
 
$
37.5

 
16.8
 %
Operating profit (loss)
 
$
(21.8
)
 
(9.1
)%
 
$
1.7

 
0.8
%
 
$
(23.5
)
 
(1388.3
)%
The change in the categories of expenses as a percentage of revenue in the All Other segment for the years ended December 31, 2016 and 2015 was as follows:
 
 
2016
 
2015
 
Change
All Other
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Millions)
Direct costs (1)
 
$
64.1

 
26.9
%
 
$
62.9

 
28.0
%
 
$
1.2

 
1.9
 %
Staff costs (2)
 
108.8

 
45.6
%
 
98.2

 
43.7
%
 
10.6

 
10.8
 %
Administrative
 
22.9

 
9.6
%
 
20.6

 
9.2
%
 
2.3

 
11.2
 %
Deferred acquisition consideration
 
0.8

 
0.3
%
 
18.4

 
8.2
%
 
(17.6
)
 
(95.8
)%
Stock-based compensation
 
4.3

 
1.8
%
 
4.8

 
2.1
%
 
(0.5
)
 
(10.4
)%
Depreciation and amortization
 
11.0

 
4.6
%
 
17.9

 
8.0
%
 
(6.9
)
 
(38.4
)%
Goodwill impairment
 
48.5

 
20.3
%
 
$

 
%
 
48.5

 
NA

Total operating expenses
 
$
260.4

 
109.1
%
 
$
222.9

 
99.2
%
 
$
37.6

 
16.9
 %
(1)
Excludes staff costs.
(2)
Excludes stock-based compensation and is comprised of amounts reported in both cost of services and office and general expenses.
Operating profit for the All Other segment for the year ended December 31, 2016 was a loss of $21.8 million, compared to profit of $1.7 million for the year ended December 31, 2015. Operating margins declined from 0.8% in 2015 to a negative 9.1% in 2016. The decrease in operating profit and margin was largely due to the goodwill impairment charge of $48.5 million, partially offset by decreased deferred acquisition consideration expense.
Direct costs increased by $1.2 million, or 1.9%, and as a percentage of revenue decreased from 28.0% for the year ended December 31, 2015 to 26.9% for the year ended December 31, 2016. This decrease as a percentage of revenue was due to a decline in pass-through costs incurred on clients’ behalf from some of the Company's Partner Firms acting as principal verses agent.
Staff costs increased by $10.6 million, or 10.8%, and as a percentage of revenue increased from 43.7% for the year ended December 31, 2015 to 45.6% for the year ended December 31, 2016. The increase in staff costs was due to increased headcount driven by certain Partner Firms to support the growth of their businesses, as well as contributions from a 2015 acquisition. The increase in staff costs as a percentage of revenue, was due to increased levels of staffing at certain Partner Firms to support their growing businesses.
Administrative costs increased year over year and as a percentage of revenue primarily due to higher occupancy expenses and other general and administrative expenses. These increases were incurred to support the growth and expansion of certain Partner Firms.

26


Deferred acquisition consideration was an expense of $0.8 million for the year ended December 31, 2016, compared to expense of $18.4 million for the year ended December 31, 2015. The decrease in deferred acquisition consideration expense was due to the 2015 aggregate out performance as compared to forecast expectations of certain Partner Firms that did not reoccur in 2016.
Stock-based compensation decreased slightly as a percentage of revenue.
Depreciation and amortization expense decreased by $6.9 million primarily due to lower amortization from intangibles related to prior year acquisitions.
Goodwill impairment of $48.5 million in the aggregate was comprised of a partial impairment of goodwill of $27.9 million relating to an experiential reporting unit, a partial impairment of goodwill of $18.9 million relating to a strategic communications reporting unit, and a partial impairment of goodwill of $1.7 million relating to a non-material reporting unit. Refer to Note 8 of the Notes to the Consolidated Financial Statements included herein for additional information.
Corporate Group
The change in operating expenses for the years ended December 31, 2016 and 2015 was as follows:
 
 
 
 
 
 
Variance
Corporate
 
2016
 
2015
 
$
 
%
 
 
(Dollars in Millions)
Staff costs (1)
 
$
27.8

 
$
42.4

 
$
(14.6
)
 
(34.4
)%
Administrative
 
12.2

 
18.2

 
(6.1
)
 
(33.3
)%
Stock-based compensation
 
2.5

 
2.7

 
(0.2
)
 
(7.8
)%
Depreciation and amortization
 
1.6

 
1.8

 
(0.2
)
 
(10.7
)%
Total operating expenses
 
$
44.1

 
$
65.2

 
$
(21.1
)
 
(32.3
)%
(1)
Excludes stock-based compensation.
Total operating expenses related to the Corporate Group’s operations decreased by $21.1 million to $44.1 million for the year ended December 31, 2016, compared to $65.2 million for the year ended December 31, 2015.
Staff costs decreased on a year-over-year basis by $14.6 million, or 34.4%. The decrease was primarily related to a 2015 one-time charge of $5.8 million for the balance of prior cash bonus award amounts that were paid to the former Chief Executive Officer (“CEO”) and Chief Accounting Officer (“CAO”) but will not be recovered pursuant to the repayment terms of the applicable Separation Agreements. In addition, there was lower executive compensation expense in 2016.
Administrative costs decreased by $6.1 million primarily due to 2016 reductions in the following categories: (1) legal fees related to the class-action litigation and SEC investigation of $9.6 million, (2) advertising and promotional expenses of $1.4 million, (3) professional fees of $1.0 million, (4) travel and entertainment expenses of $0.3 million (5) occupancy costs of $0.6 million and (6) various other administrative costs of $1.1 million. In addition, the Company received $5.9 million of insurance proceeds for the year ended December 31, 2016 compared to $1.0 million for the year ended December 31, 2015 relating to the class-action litigation and SEC investigation. These reductions in administrative costs and receipt of insurance proceeds were partially offset by the $11.3 million of perquisite reimbursements from the former CEO received for the year ended December 31, 2015 and the one-time SEC civil penalty payment of $1.5 million for the year ended December 31, 2016.
Other Income, Net
Other income, net, decreased by $6.8 million from income of $7.2 million for the year ended December 31, 2015 to income of $0.4 million for the year ended December 31, 2016. The decrease pertains to the gain on sale of certain investments completed in 2015 of $6.5 million compared to the gain on sale of investments of $1.9 million completed in 2016, as well as a loss of $0.8 million related to the sale of Bryan Mills to the noncontrolling shareholders. In addition, the Company had other income of $0.4 million in 2016 compared to other income of $0.1 million in 2015.
Foreign Exchange
Foreign exchange loss was $0.2 million in 2016 compared to a foreign exchange loss of $39.3 million in 2015. The foreign exchange losses in both 2016 and 2015 primarily relate to U.S. dollar denominated indebtedness that is an obligation of the Company's Canadian parent company and were driven by the appreciation of the U.S. dollar against the Canadian dollar in the period.

27


Interest Expense, finance charges, and loss on redemption of notes, net
Interest expense and finance charges, net, for the year ended December 31, 2016 was $65.9 million, an increase of $8.0 million over the $57.9 million of interest expense and finance charges, net, incurred for the year ended December 31, 2015. This increase was due to higher average outstanding debt in 2016. In addition, the Company incurred a $33.3 million loss on redemption of the 6.75% Notes in March 2016.
Income Tax Expense (Benefit)
Income tax benefit for the year ended December 31, 2016 was $7.3 million compared to an expense of $5.7 million for the year ended December 31, 2015. The Company’s effective rate in 2016 and 2015 was lower than the statutory rate due to losses in certain tax jurisdictions where a valuation allowance was deemed necessary.
The Company’s U.S. 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 profits.
Equity in Earnings (Losses) of Non-Consolidated Affiliates
Equity in earnings (losses) of non-consolidated affiliates represents the income attributable to equity-accounted affiliate operations. For the year ended December 31, 2016, the Company recorded a loss of $0.3 million compared to earnings of $1.1 million for the year ended December 31, 2015.
Noncontrolling Interests
The effects of noncontrolling interests was $5.2 million for the year ended December 31, 2016, a decrease of $3.9 million from the $9.1 million for the year ended December 31, 2015. This decrease related to an increase in ownership in Partner Firms where there are noncontrolling shareholders.
Discontinued Operations
The loss, net of taxes, from discontinued operations was $6.3 million, for the year ended December 31, 2015. There was no impact for the year ended December 31, 2016.
Net Loss Attributable to MDC Partners Inc.
As a result of the foregoing, the net loss attributable to MDC Partners Inc. for the year ended December 31, 2016 was $47.9 million or a loss of $0.93 per diluted share, compared to a net loss of $37.4 million, or $0.75 per diluted share reported for the year ended December 31, 2015.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Revenue was $1.33 billion for the year ended December 31, 2015, representing an increase of $102.7 million, or 8.4%, compared to revenue of $1.22 billion for the year ended December 31, 2014. Revenue from acquisitions for 2015 was $45.8 million or 3.7%, inclusive of a $0.8 million contribution to organic revenue growth. Revenue from acquisitions was composed of $32.0 million pertaining to acquisitions completed in 2014 and $13.8 million relating to acquisitions completed in 2015. Excluding the effect of the acquisitions and disposition, revenue growth was $85.9 million or 7.0%, partially offset by a foreign exchange impact of $28.9 million or 2.4%.
Operating profit for the year ended 2015 was $72.1 million, compared to $87.7 million in 2014. Operating profit decreased by $18.5 million in the Advertising and Communications Group. Corporate operating expenses decreased by $2.9 million in 2015.
Loss from continuing operations was $22.0 million in 2015, compared to income of $4.1 million in 2014. This decrease of $26.1 million was primarily attributable to (1) a decrease in operating profits of $15.6 million, primarily due to increased deferred acquisition expense of $19.9 million, (2) an increase in foreign exchange loss of $20.8 million, (3) an increase in net interest expense of $2.6 million, (4) offset by a decrease in income tax expense of $6.7 million and (5) an increase in other income, net, of $6.5 million.
Advertising and Communications Group
Revenue was $1.33 billion for the year ended December 31, 2015, representing an increase of $102.7 million, or 8.4%, compared to revenue of $1.22 billion for the year ended December 31, 2014. Revenue from acquisitions for 2015 was $45.8 million or 3.7%, inclusive of a $0.8 million contribution to organic revenue growth. Excluding the effect of the acquisitions and disposition, revenue growth was $85.9 million or 7.0%, partially offset by a foreign exchange impact of $28.9 million or 2.4%.

28


The Company's revenue growth was attributable to new client wins and increased spend by existing clients. There was broad strength across most disciplines, with growth led by the Company's integrated advertising agencies, and media buying and planning platform, offset by a decline in the Company's promotions and experiential businesses. The promotions and experiential businesses were impacted by decreased billable pass-through costs incurred on the client’s behalf from the Company acting as principal which was due to a different mix of programs that had a smaller component of billable pass-through costs as compared to 2014. The Comapny's strongest client sectors were automobile, technology, consumer products, and healthcare, while revenue in the the financial and retail sectors declined.
Revenue growth was driven by the Company’s business in the North American region primarily consisting of revenue from acquisitions of $33.5 million or 2.7%, as well as revenue growth excluding acquisitions of $58.1 million or 4.7% from the United States, partially offset by foreign exchange impact of $20.6 million or 1.7% in Canada. The revenue growth derived outside of the North American region was comprised of revenue from acquisitions of $10.9 million or 0.9%. Revenue growth excluding acquisitions was $29.9 million or 2.4%, partially offset by foreign exchange impact of $8.3 million or 0.7%. In 2015, approximately 8.5% of the Company's total revenue came from outside of North America, up from approximately 6.5% in 2014.
The Company also utilizes a non-GAAP metric called organic revenue growth (decline), defined in Item 7. For the year ended December 31, 2015 organic revenue growth was $86.7 million or 7.1%, of which $85.9 million pertained to Partner Firms which the Company has held throughout each of the comparable periods presented, while the remaining $0.8 million were contributions from acquisitions. The increase in revenue was also a result of non-GAAP acquisition (disposition) net adjustments of $46.3 million or 3.8%, which was partially offset by a foreign exchange impact of $30.2 million or 2.5%.
The components of the change in revenues for the year ended December 31, 2015 are as follows:
 
 
 
 
2015 Non-GAAP Activity
 
 
 
Change
Advertising and Communications Group
 
2014 Revenue
 
Foreign
Exchange
 
Non-GAAP Acquisitions
(Dispositions), net
 
Organic
Revenue
Growth
(Decline)
 
2015 Revenue
 
Foreign
Exchange
 
Non-GAAP Acquisitions
(Dispositions), net
 
Organic
Revenue
Growth
(Decline)
 
Total
Revenue
 
 
(Dollars in Millions)
 
 
 
 
 
 
 
 
United States
 
$
993.5

 
$

 
$
28.2

 
$
63.4

 
$
1,085.1

 
 %
 
2.8
%
 
6.4
 %
 
9.2
 %
Canada
 
150.4

 
(20.6
)
 
1.4

 
(2.1
)
 
129.0

 
(13.7
)%
 
0.9
%
 
(1.4
)%
 
(14.2
)%
Other
 
79.6

 
(9.6
)
 
16.7

 
25.4

 
112.2

 
(12.1
)%
 
21.0
%
 
31.9
 %
 
40.8
 %
Total
 
$
1,223.5

 
$
(30.2
)
 
$
46.3

 
$
86.7

 
$
1,326.3

 
(2.5
)%
 
3.8
%
 
7.1
 %
 
8.4
 %
The below is a reconciliation by segment between the non-GAAP acquisitions (dispositions), net to revenue from acquired businesses included in the Statement of Operations for the year ended December 31, 2015:
 
Reportable Segment
 
All Other
 
Total
 
(Dollars in Millions)
Revenue from acquisitions (dispositions), net (1)
$
31.4

 
$
14.4

 
$
45.8

Foreign exchange impact
1.3

 

 
1.3

Deductions from (contributions to) organic revenue growth (decline) (2)
4.9

 
(5.7
)
 
(0.8
)
Non-GAAP acquisitions (dispositions), net
$
37.6

 
$
8.7

 
$
46.3

(1)
For the year ended December 31, 2015, revenue from acquisitions was comprised of $32.0 million from 2014 acquisitions and $13.8 million from 2015 acquisitions.
(2)
Deductions from (contributions to) organic revenue growth (decline) represents the change in revenue, measured on a constant currency basis, relative to the comparable pre-acquisition period for acquired businesses that is included in the Company’s organic revenue growth (decline) calculation.

29


The geographic mix in revenues for the years ended December 31, 2015 and 2014 are as follows:
Advertising and Communications Group
 
2015
 
2014
United States
 
81.8
%
 
81.2
%
Canada
 
9.7
%
 
12.3
%
Other
 
8.5
%
 
6.5
%
The Company's business outside of North America continued to be a driver of growth for the overall company, with organic revenue growth of 31.9%, primarily driven by new client wins and increased spend from existing clients as we extended the Company's capabilities into new markets throughout Europe, Asia, and to a lesser degree, South America. Additional revenue growth came from multiple acquisitions of firms that helped us expand the Company's capabilities in the advertising, public relations, and mobile development areas.
The adverse currency impact was primarily due to the weakening of the Canadian dollar, the British Pound, and the Euro against the U.S. dollar.
The change in expenses as a percentage of revenue in the Advertising and Communications Group for the years ended December 31, 2015 and 2014 was as follows:
 
 
2015
 
2014
 
Change
Advertising and Communications Group
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Millions)
Revenue
 
$
1,326.3

 
 
 
$
1,223.5

 
 
 
$
102.7

 
8.4
 %
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
Cost of services sold
 
879.7

 
66.3
%
 
798.5

 
65.3
%
 
81.2

 
10.2
 %
Office and general expenses
 
258.8

 
19.5
%
 
223.8

 
18.3
%
 
35.0

 
15.7
 %
Depreciation and amortization
 
50.4

 
3.8
%
 
45.4

 
3.7
%
 
5.1

 
11.2
 %
 
 
1,189.0

 
89.6
%