SEC Company Response from Stagwell Inc (STGW) (CIK 0000876883) (STGW) — Jul 15, 2005
Stagwell Inc (STGW) (CIK 0000876883)
Date: July 15, 2005 · CIK: 0000876883 · Accession: 0000903423-05-000520
AI Filing Summary & Sentiment
Reasoning
Referenced dates: June 30, 2005
Letter
Division of Corporation Finance Securities and Exchange Commission Form 10-K for Fiscal Year Ended December 31, 2004 (the “2004 Form 10-K”) Filed April 18, 2005 Form 10-Q for Fiscal Quarter Ended March 31, 2005 (the “March 31 Form 10-Q”) File No. 1-13178
Dear Mr. Spirgel:
Set forth below are the responses of MDC Partners Inc. (the “Company”) to the comments of the Staff of the Division of Corporation Finance, which were set forth in your letter dated June 30, 2005 (the “June 30 Letter”) regarding the Company’s above-referenced filings. The responses to the Staff’s comments are provided in the order in which the comments were set out in the June 30 Letter and are numbered correspondingly.
The Staff’s comments, indicated by bold, are followed by responses on behalf of the Company. Page references below are to the applicable Exchange Act filing, as the case may be.
Mr. Larry Spirgel
Securities and Exchange Commission
July 15, 2005
Page 2 of 14
Form 10-K for Fiscal Year Ended December 31, 2004
Management’s Discussion and Analysis
1.
We note in your response to comment 1 your reasons for presenting combined results of operations within the marketing communications segment. In order to provide investors clear information explaining the material changes in the Company’s historical results of operations, please discuss in your future MD&A disclosures the historical results of operations of your marketing communications segment on a GAAP basis first, consistent with the information disclosed in Note 17. We would not object if management follows this with a discussion of certain key performance indicators that include amounts that are combined with your equity method investee amounts. However, this should be limited to revenues and cost of revenues. It would then be necessary for you to accompany this disclosure with a comprehensive explanation of its purpose, quantified disclosure of how it was calculated, a discussion of its limitations, and an explanation of why management believes it is meaningful to investors. We do not consider the amount reported as the combined marketing communications operating profit to be a non-GAAP measure of the Company’s performance because it includes the operating profit of other entities. We believe it is inappropriate, and potentially confusing, to report and discuss a pro forma profit amount as if you own a controlling interest in those entities. Please confirm to us that you will fully comply with this comment in your future filings.
The Company confirms that it will fully comply with the Staff's comment in its future filings.
Note 2 – Significant Accounting Policies, page 66
Goodwill and Indefinite Lived Intangibles, page 68
2.
We note your response to comments 2 and 7. Based on the fact that the results of each business are regularly presented to your chief operating decision maker, it appears to us that each of your 33 business units may represent an operating segment and a reporting unit. Please address the following items:
•
Clarify your statement, in response to comment 2, that you have prepared an analysis of goodwill impairment on a “legal entity level basis.” Tell us whether your legal entities are the same as your “business units,” as described in your response to comment 7.
To clarify the Company’s response to comment 2, in preparing the analysis of goodwill impairment on a “legal entity level basis”, that is the same basis as the Company’s “business units” described in the Company’s response to comment 7.
Mr. Larry Spirgel
Securities and Exchange Commission
July 15, 2005
Page 3 of 14
•
Tell us whether you would have recorded a different goodwill impairment charge for the fiscal year ended December 31, 2003 if you had tested goodwill on a legal entity level basis.
The goodwill impairment charge for the fiscal year ended December 31, 2003 related entirely to the Secured Products Group resulting in nominal remaining goodwill for that segment. The Company has determined through an analysis that the impairment charge for the Secured Products Group (“SPG”) on a legal entity basis would have resulted in the same impairment charge as presented in 2003.
For the Marketing Communications Group (“MCG”) the Company has determined through an analysis that the recoverability of the carrying value of goodwill attributable to MCG prepared on an entity level basis would have yielded a similar result; i.e., no impairment charge. The Company reached this conclusion as follow;
•
In most business units (except for the five discussed below) the cashflow data used for the 2004 analysis was lower than what would have been used for the 2003 analysis, thus an analysis performed at that time would have provided greater support for the recoverability of goodwill.
•
In five business units the financial data that would have been used for a 2003 analysis would have been more conservative than the data used in the 2004 analysis. For these cases the Company has performed an entity level impairment analysis and concludes that, using 2003 data, no impairment related to these five entities would have been triggered.
•
Describe for us in more detail how you determined that the business units have similar economic characteristics. Provide us with the quantitative analysis you performed in reaching this conclusion.
The Company is structured in the following two operating divisions:
Marketing Communications Group
Through a network of 29 business units, MCG provides a comprehensive range of communication services to its clients in the United States, Canada, and the United Kingdom. Marketing Communications services include advertising, direct marketing, database management, sales promotion, corporate communications, marketing research, corporate identity and branding, and interactive marketing, all operating through a network of entrepreneurial companies.
In the Marketing Communications Group, successful firms must meet the increasing demands of clients for innovative programs and creative content, combined with high
Mr. Larry Spirgel
Securities and Exchange Commission
July 15, 2005
Page 4 of 14
quality and reliable service delivery. This requires the talents, relationships, and leadership of key executives and management personnel.
Secure Products Group
This group consists of four operating business units which specialize in the production of secure products solutions in three primary areas: electronic transaction products such as credit, debit, telephone and smart cards; secure ticketing products such as airline, transit and event tickets; and stamps, both postal and excise.
SPG is comprised of four individual facilities, which represent the Company’s non-core businesses. In the secure products division, success depends upon proper technology investments, leading edge e-commerce capabilities, innovative and specialized products, highly reliable service, competitive pricing, functioning within a highly secure environment and the ability to maintain strong operating margins. Revenues are typically derived from contracts, which are generally awarded in competitive bidding processes. The Company has strong relationships with its customers, has employed experienced management, and has invested in leading edge technology, providing it with the expertise and cost structures to meet customer needs.
Competitive and Operating Characteristics
These two divisions do not exhibit similar competitive and operating risks. MCG‘s competitive factors include creative reputation, management, personal relationships, quality and reliability of service and expertise. Pricing is important in obtaining new clients; however, it is generally of lesser importance once a client relationship has been established. Timing and budgets are top priorities of clients. This results in unstable forecasting and a very competitive market with competitive pricing.
SPG’s competitive factors, on the other hand, include design capability, quality, reliability and service. Price is also an important criterion, but is secondary to the initial requirement for a supplier to satisfy a potential customer that it has the proven ability to meet the primary criteria of secured reliable service. Government and public corporation security projects are generally awarded on the basis of competitive bidding procedures through Requests for Proposals (RFP’s). These RFP’s require a bidder to provide detailed information regarding price, security, manufacturing capabilities and quality control processes. These RFP submissions form the basis for the awarding of contracts. Contracts are generally awarded on a multi-year basis. To be successful, innovative, highly specialized secure products require leading edge technology delivered at an appropriate cost structure.
Mr. Larry Spirgel
Securities and Exchange Commission
July 15, 2005
Page 5 of 14
Economic Characteristics
The Company’s two divisions do not have similar economic characteristics. MCG’s business is cyclical and subject to the effects of general economic downturns. MCG’s most productive and most valuable asset is its staff. Talent is viewed as the competitive advantage by senior management. The success of MCG is dependent upon the leadership of key executives (most importantly, the agency founders) and management personnel. Further, each of the operating business units are staffed in a similar way, with the account services, creative and production functions being the core, typically representing approximately 70% to 80% of the total operating costs. Occupancy costs, which is generally the second largest cost element after staff costs, typically at approximately 5% to 10% of total operating costs, is generally unmodified common commercial space located within the commercial districts of large regional centers and subject to the same general economic influences. Other operating costs are typical general and administrative type costs associated with running a commercial office.
SPG’s business, on the other hand, is based on quality, customer service, design capability, production capability and price. Operating costs for SPG are impacted by production outsourcing, plant expansions and the impact of new manufacturing equipment. Leading edge technology and competitive cost structures are viewed as key competitive advantages by senior management (as opposed to talent in the marketing communications segment).
Conclusions
Based on the above analysis, the Company has determined that MCG and SPG are separate reportable segments.
Aggregation within SPG
Qualitative Factors
The business units within SPG have been aggregated based on similar competitive, operating and economic characteristics.
•
SPG’s competitive factors include design capability, quality, reliability and service and production capability. Price is also an important criterion, but is secondary to the initial requirement for a supplier to satisfy a potential customer that it has the proven ability to meet the primary criteria of secured reliable service. Government and public corporation security products are generally awarded on the basis of competitive bidding procedures through Requests for Proposals (RFP’s). These RFP’s require a bidder to provide detailed information regarding price, security, manufacturing capabilities and quality control processes. These RFP submissions form the basis for the awarding of contracts. Contracts are generally awarded on a
Mr. Larry Spirgel
Securities and Exchange Commission
July 15, 2005
Page 6 of 14
multi-year basis. To be successful, innovative, highly specialized secure products require leading edge technology delivered at an appropriate cost structure.
•
SPG’s industry is based on quality, customer service, design and production capability and price. Operating costs for SPG are impacted by production outsourcing, plant expansions and the impact of new manufacturing equipment. Leading edge technology and competitive cost structures are viewed as key competitive advantages by senior management.
•
The secure products industry has significant qualitative barriers to entry. Companies competing in this industry have developed trusting relationships with their customers, must process expertise in specific technologies, such as micro-printing and generally are 100% accountable for every item produced. Security risks relate to both the manufacturing process and the impact if a product is not 100% accounted for, such that a breach in either could impact all customers. Additionally, the nature of the products produced are similar in that they all have a high degree of security measures built within them to prevent counterfeiting or inappropriate usage.
•
Products for each of these business units are only manufactured for specific customers. None of the business units in SPG produce products to be sold outside of contracted amounts.
•
The delivery of products for all SPG business requires specialty services. Security around delivery is imperative due to the nature of the products. Types of security used in the delivery process includes, secured couriers, separate mailing of PIN numbers, or direct customer pick-up as in the case of the US Postal Service.
•
In addition all four companies operate under the umbrella of SPG with a SPG website and intranet and two of the SPG entities cross sell each others’ products and all four refer business to each other.
Quantitative Factors
•
As indicated in Appendix A to this letter, only Meteca would exceed the 10% threshold test set out in paragraph 18 of FAS 131 due to its higher then expected operating loss in 2004.
•
A key performance measure used to evaluate these business units is contribution margin, as indicated in Appendix C hereto. Segment management looks for a minimum of 30% annually for each of these business units.
•
The contribution margins of the business units within SPG are all affected by the cost of similar raw materials, such as paper, ink and various petroleum based products.
Conclusion
The Company has determined based on the specific facts and circumstances, that in its judgment aggregation of these business units is appropriate. Although the entities may
Mr. Larry Spirgel
Securities and Exchange Commission
July 15, 2005
Page 7 of 14
have varying operating results in any given year, the businesses are all specialty printing businesses that have similar economic characteristics. To report only one business unit as a separate segment and the remaining three included in “all other” in accordance with paragraph 21 of FAS 131 would not be meaningful to investors and users of the financial statements.
Aggregation within MCG
Qualitative Factors
The business units within MCG have been aggregated based on similar competitive and operating and economic characteristics.
•
MCG‘s competitive factors include creative reputation, management, personal relationships, quality and reliability of service and expertise. Pricing is important in obtaining new clients; however it is generally of lesser importance once a client relationship has been established. Timing and budgets are at the top of clients’
Show Raw Text
CORRESP
1
filename1.htm
July 15, 2005
Larry Spirgel
Assistant Director
Mail Stop 0407
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re:
MDC Partners Inc.
Form 10-K for Fiscal Year Ended December 31, 2004 (the “2004 Form 10-K”)
Filed April 18, 2005
Form 10-Q for Fiscal Quarter Ended March 31, 2005 (the “March 31 Form 10-Q”)
File No. 1-13178
Dear Mr. Spirgel:
Set forth below are the responses of MDC Partners Inc. (the “Company”) to the comments of the Staff of the Division of Corporation Finance, which were set forth in your letter dated June 30, 2005 (the “June 30 Letter”) regarding the Company’s above-referenced filings. The responses to the Staff’s comments are provided in the order in which the comments were set out in the June 30 Letter and are numbered correspondingly.
The Staff’s comments, indicated by bold, are followed by responses on behalf of the Company. Page references below are to the applicable Exchange Act filing, as the case may be.
1
Mr. Larry Spirgel
Securities and Exchange Commission
July 15, 2005
Page 2 of 14
Form 10-K for Fiscal Year Ended December 31, 2004
Management’s Discussion and Analysis
1.
We note in your response to comment 1 your reasons for presenting combined results of operations within the marketing communications segment. In order to provide investors clear information explaining the material changes in the Company’s historical results of operations, please discuss in your future MD&A disclosures the historical results of operations of your marketing communications segment on a GAAP basis first, consistent with the information disclosed in Note 17. We would not object if management follows this with a discussion of certain key performance indicators that include amounts that are combined with your equity method investee amounts. However, this should be limited to revenues and cost of
revenues. It would then be necessary for you to accompany this disclosure with a comprehensive explanation of its purpose, quantified disclosure of how it was calculated, a discussion of its limitations, and an explanation of why management believes it is meaningful to investors. We do not consider the amount reported as the combined marketing communications operating profit to be a non-GAAP measure of the Company’s performance because it includes the operating profit of other entities. We believe it is inappropriate, and potentially confusing, to report and discuss a pro forma profit amount as if you own a controlling interest in those entities. Please confirm to us that you will fully comply with this comment in your future filings.
The Company confirms that it will fully comply with the Staff's comment in its future filings.
Note 2 – Significant Accounting Policies, page 66
Goodwill and Indefinite Lived Intangibles, page 68
2.
We note your response to comments 2 and 7. Based on the fact that the results of each business are regularly presented to your chief operating decision maker, it appears to us that each of your 33 business units may represent an operating segment and a reporting unit. Please address the following items:
•
Clarify your statement, in response to comment 2, that you have prepared an analysis of goodwill impairment on a “legal entity level basis.” Tell us whether your legal entities are the same as your “business units,” as described in your response to comment 7.
To clarify the Company’s response to comment 2, in preparing the analysis of goodwill impairment on a “legal entity level basis”, that is the same basis as the Company’s “business units” described in the Company’s response to comment 7.
2
Mr. Larry Spirgel
Securities and Exchange Commission
July 15, 2005
Page 3 of 14
•
Tell us whether you would have recorded a different goodwill impairment charge for the fiscal year ended December 31, 2003 if you had tested goodwill on a legal entity level basis.
The goodwill impairment charge for the fiscal year ended December 31, 2003 related entirely to the Secured Products Group resulting in nominal remaining goodwill for that segment. The Company has determined through an analysis that the impairment charge for the Secured Products Group (“SPG”) on a legal entity basis would have resulted in the same impairment charge as presented in 2003.
For the Marketing Communications Group (“MCG”) the Company has determined through an analysis that the recoverability of the carrying value of goodwill attributable to MCG prepared on an entity level basis would have yielded a similar result; i.e., no impairment charge. The Company reached this conclusion as follow;
•
In most business units (except for the five discussed below) the cashflow data used for the 2004 analysis was lower than what would have been used for the 2003 analysis, thus an analysis performed at that time would have provided greater support for the recoverability of goodwill.
•
In five business units the financial data that would have been used for a 2003 analysis would have been more conservative than the data used in the 2004 analysis. For these cases the Company has performed an entity level impairment analysis and concludes that, using 2003 data, no impairment related to these five entities would have been triggered.
•
Describe for us in more detail how you determined that the business units have similar economic characteristics. Provide us with the quantitative analysis you performed in reaching this conclusion.
The Company is structured in the following two operating divisions:
Marketing Communications Group
Through a network of 29 business units, MCG provides a comprehensive range of communication services to its clients in the United States, Canada, and the United Kingdom. Marketing Communications services include advertising, direct marketing, database management, sales promotion, corporate communications, marketing research, corporate identity and branding, and interactive marketing, all operating through a network of entrepreneurial companies.
In the Marketing Communications Group, successful firms must meet the increasing demands of clients for innovative programs and creative content, combined with high
3
Mr. Larry Spirgel
Securities and Exchange Commission
July 15, 2005
Page 4 of 14
quality and reliable service delivery. This requires the talents, relationships, and leadership of key executives and management personnel.
Secure Products Group
This group consists of four operating business units which specialize in the production of secure products solutions in three primary areas: electronic transaction products such as credit, debit, telephone and smart cards; secure ticketing products such as airline, transit and event tickets; and stamps, both postal and excise.
SPG is comprised of four individual facilities, which represent the Company’s non-core businesses. In the secure products division, success depends upon proper technology investments, leading edge e-commerce capabilities, innovative and specialized products, highly reliable service, competitive pricing, functioning within a highly secure environment and the ability to maintain strong operating margins. Revenues are typically derived from contracts, which are generally awarded in competitive bidding processes. The Company has strong relationships with its customers, has employed experienced management, and has invested in leading edge technology, providing it with the expertise and cost structures to meet customer needs.
Competitive and Operating Characteristics
These two divisions do not exhibit similar competitive and operating risks. MCG‘s competitive factors include creative reputation, management, personal relationships, quality and reliability of service and expertise. Pricing is important in obtaining new clients; however, it is generally of lesser importance once a client relationship has been established. Timing and budgets are top priorities of clients. This results in unstable forecasting and a very competitive market with competitive pricing.
SPG’s competitive factors, on the other hand, include design capability, quality, reliability and service. Price is also an important criterion, but is secondary to the initial requirement for a supplier to satisfy a potential customer that it has the proven ability to meet the primary criteria of secured reliable service. Government and public corporation security projects are generally awarded on the basis of competitive bidding procedures through Requests for Proposals (RFP’s). These RFP’s require a bidder to provide detailed information regarding price, security, manufacturing capabilities and quality control processes. These RFP submissions form the basis for the awarding of contracts. Contracts are generally awarded on a multi-year basis. To be successful, innovative, highly specialized secure products require leading edge technology delivered at an appropriate
cost structure.
4
Mr. Larry Spirgel
Securities and Exchange Commission
July 15, 2005
Page 5 of 14
Economic Characteristics
The Company’s two divisions do not have similar economic characteristics. MCG’s business is cyclical and subject to the effects of general economic downturns. MCG’s most productive and most valuable asset is its staff. Talent is viewed as the competitive advantage by senior management. The success of MCG is dependent upon the leadership of key executives (most importantly, the agency founders) and management personnel. Further, each of the operating business units are staffed in a similar way, with the account services, creative and production functions being the core, typically representing approximately 70% to 80% of the total operating costs. Occupancy costs, which is generally the second largest cost element after staff costs, typically at approximately 5% to 10% of total operating costs, is generally unmodified common commercial space located within the
commercial districts of large regional centers and subject to the same general economic influences. Other operating costs are typical general and administrative type costs associated with running a commercial office.
SPG’s business, on the other hand, is based on quality, customer service, design capability, production capability and price. Operating costs for SPG are impacted by production outsourcing, plant expansions and the impact of new manufacturing equipment. Leading edge technology and competitive cost structures are viewed as key competitive advantages by senior management (as opposed to talent in the marketing communications segment).
Conclusions
Based on the above analysis, the Company has determined that MCG and SPG are separate reportable segments.
Aggregation within SPG
Qualitative Factors
The business units within SPG have been aggregated based on similar competitive, operating and economic characteristics.
•
SPG’s competitive factors include design capability, quality, reliability and service and production capability. Price is also an important criterion, but is secondary to the initial requirement for a supplier to satisfy a potential customer that it has the proven ability to meet the primary criteria of secured reliable service. Government and public corporation security products are generally awarded on the basis of competitive bidding procedures through Requests for Proposals (RFP’s). These RFP’s require a bidder to provide detailed information regarding price, security, manufacturing capabilities and quality control processes. These RFP submissions form the basis for the awarding of contracts. Contracts are generally awarded on a
5
Mr. Larry Spirgel
Securities and Exchange Commission
July 15, 2005
Page 6 of 14
multi-year basis. To be successful, innovative, highly specialized secure products require leading edge technology delivered at an appropriate cost structure.
•
SPG’s industry is based on quality, customer service, design and production capability and price. Operating costs for SPG are impacted by production outsourcing, plant expansions and the impact of new manufacturing equipment. Leading edge technology and competitive cost structures are viewed as key competitive advantages by senior management.
•
The secure products industry has significant qualitative barriers to entry. Companies competing in this industry have developed trusting relationships with their customers, must process expertise in specific technologies, such as micro-printing and generally are 100% accountable for every item produced. Security risks relate to both the manufacturing process and the impact if a product is not 100% accounted for, such that a breach in either could impact all customers. Additionally, the nature of the products produced are similar in that they all have a high degree of security measures built within them to prevent counterfeiting or inappropriate usage.
•
Products for each of these business units are only manufactured for specific customers. None of the business units in SPG produce products to be sold outside of contracted amounts.
•
The delivery of products for all SPG business requires specialty services. Security around delivery is imperative due to the nature of the products. Types of security used in the delivery process includes, secured couriers, separate mailing of PIN numbers, or direct customer pick-up as in the case of the US Postal Service.
•
In addition all four companies operate under the umbrella of SPG with a SPG website and intranet and two of the SPG entities cross sell each others’ products and all four refer business to each other.
Quantitative Factors
•
As indicated in Appendix A to this letter, only Meteca would exceed the 10% threshold test set out in paragraph 18 of FAS 131 due to its higher then expected operating loss in 2004.
•
A key performance measure used to evaluate these business units is contribution margin, as indicated in Appendix C hereto. Segment management looks for a minimum of 30% annually for each of these business units.
•
The contribution margins of the business units within SPG are all affected by the cost of similar raw materials, such as paper, ink and various petroleum based products.
Conclusion
The Company has determined based on the specific facts and circumstances, that in its judgment aggregation of these business units is appropriate. Although the entities may
6
Mr. Larry Spirgel
Securities and Exchange Commission
July 15, 2005
Page 7 of 14
have varying operating results in any given year, the businesses are all specialty printing businesses that have similar economic characteristics. To report only one business unit as a separate segment and the remaining three included in “all other” in accordance with paragraph 21 of FAS 131 would not be meaningful to investors and users of the financial statements.
Aggregation within MCG
Qualitative Factors
The business units within MCG have been aggregated based on similar competitive and operating and economic characteristics.
•
MCG‘s competitive factors include creative reputation, management, personal relationships, quality and reliability of service and expertise. Pricing is important in obtaining new clients; however it is generally of lesser importance once a client relationship has been established. Timing and budgets are at the top of clients’