Edgar Filing: MDC PARTNERS INC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(thousands of United States dollars, except share and per share amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005

Revenue:
Services	$	101,122		$	96,977		$	299,333		$	261,042

Operating Expenses:
Cost of services sold (1)		57,150			55,509			177,790			155,180
Office and general expenses (2)		36,666			28,853			97,672			77,826
Depreciation and amortization		6,696			6,905			18,595			16,675
		100,512			91,267			294,057			249,681

Operating profit		610			5,710			5,276			11,361

Other Income (Expenses):
Other income (expense)		625			(395	)		1,697			616
Interest expense		(3,704	)		(2,302	)		(8,134	)		(4,926	)
Interest income		171			—			429			230
		(2,908	)		(2,697	)		(6,008	)		(4,080	)

Income (loss) from continuing operations before income taxes, equity
in affiliates and minority interests		(2,298	)		3,013			(732	)		7,281
Income tax recovery		812			397			1,711			1,676

Income/(loss) from continuing operations before equity in affiliates
and minority interests		(1,486	)		3,410			979			8,957
Equity in earnings of non-consolidated affiliates		129			348			630			624
Minority interests in income of consolidated subsidiaries		(1,780	)		(6,073	)		(9,965	)		(14,374	)

Loss from continuing operations		(3,137	)		(2,315	)		(8,356	)		(4,793	)
Income/(loss) from discontinued operations		(9,772	)		660			(20,190	)		(1,609	)

Net Loss	$	(12,909	)	$	(1,655	)	$	(28,546	)	$	(6,402	)

Income/(Loss) Per Common Share:
Basic:
Continuing operations	$	(0.13	)	$	(0.10	)	$	(0.35	)	$	(0.21	)
Discontinued operations		(0.41	)		0.03			(0.84	)		(0.07	)
Net Loss	$	(0.54	)	$	(0.07	)	$	(1.19	)	$	(0.28	)
Diluted:
Continuing operations	$	(0.13	)	$	(0.10	)	$	(0.35	)	$	(0.21	)
Discontinued operations		(0.41	)		0.03			(0.84	)		(0.07	)
Net loss	$	(0.54	)	$	(0.07	)	$	(1.19	)	$	(0.28	)

Weighted Average Number of Common Shares Outstanding:
Basic		23,911,327			23,710,572			23,849,571			23,151,825
Diluted		23,911,327			23,710,572			23,849,571			23,151,825

(1)		Includes non cash stock-based compensation of $134 and $18 in each of the three month periods ended September 30, 2006 and 2005, respectively, and $2,975 and $89 in each of the nine month periods ended September 30, 2006 and 2005, respectively.

(2)		Includes non cash stock-based compensation of $1,515 and $548, respectively, in each of the three month periods ended September 30, 2006 and 2005, respectively, and $4,006 and $2,273 in each of the nine month periods ended September 20, 2006 and 2005 respectively.

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

CONDENSED CONSOLIDATED BALANCE SHEETS

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

	September 30, 2006			December 31, 2005
	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	4,592		$	12,923
Accounts receivable, less allowance for doubtful accounts of $1,780 and $1,250		120,414			117,319
Expenditures billable to clients		31,152			7,838
Inventories		—			10,359
Prepaid expenses		4,682			4,401
Other current assets		630			356
Assets held for sale		28,849			—
Total Current Assets		190,319			153,196
Fixed assets, at cost, less accumulated depreciation of $52,196 and $71,220		43,403			63,528
Investment in affiliates		10,068			10,929
Goodwill		199,340			195,026
Other intangibles assets, net		50,130			57,139
Deferred tax asset		17,825			16,057
Other assets		10,173			11,440
Assets held for sale		12,249			—
Total Assets	$	533,507		$	507,315
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Short-term debt	$	4,218		$	3,739
Revolving credit facility		85,300			73,500
Accounts payable		69,686			63,452
Accruals and other liabilities		69,549			69,891
Advance billings		50,996			38,237
Current portion of long-term debt		1,532			2,571
Deferred acquisition consideration		—			1,741
Liabilities related to assets held for sale		16,221			—
Total Current Liabilities		297,502			253,131
Long-term debt		4,991			8,475
Convertible notes		40,261			38,694
Other liabilities		8,871			7,937
Deferred tax liabilities		2,346			2,446
Liabilities related to assets held for sale		3,352			—

Total Liabilities		357,323			310,683

Minority interests		46,335			44,484
Commitments, contingencies and guarantees (Note 12)
Shareholders’ Equity:
Preferred shares, unlimited authorized, none issued		—			—
Class A Shares, no par value, unlimited authorized, 24,191,113 and 23,437,615 shares issued in 2006 and 2005		183,851			178,589
Class B Shares, no par value, unlimited authorized, 2,502 shares issued in 2006 and 2005, each convertible into one Class A share		1			1
Share capital to be issued, 266,856 Class A shares in 2005		—			4,209
Additional paid-in capital		25,600			20,028
Accumulated deficit		(81,621	)		(53,075	)
Accumulated other comprehensive income		2,018			2,396
Total Shareholders’ Equity		129,849			152,148
Total Liabilities and Shareholders’ Equity	$	533,507		$	507,315

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

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

	Nine Months Ended September 30,
	2006			2005 Revised Note 1
Cash flows from operating activities:
Net loss	$	(28,546	)	$	(6,402	)
Loss from discontinued operations		(20,190	)		(1,609	)
Loss from continuing operations		(8,356	)		(4,793	)
Adjustments to reconcile net loss to cash provided by (used in) operating activities
Depreciation and amortization		18,595			16,675
Non-cash stock-based compensation		6,363			2,362
Amortization of deferred finance charges		1,598			911
Deferred income taxes		(3,342	)		(3,270	)
Earnings of non-consolidated affiliates		(630	)		(624	)
Minority interest and other		(194	)		(228	)
Changes in non-cash working capital:
Accounts receivable		(17,355	)		141
Expenditures billable to clients.		(23,334	)		703
Prepaid expenses and other current assets		(1,166	)		(1,483	)
Accounts payable, accruals and other liabilities		14,353			(14,674	)
Advance billings		17,059			(3,389	)
Cash flows from continuing operating activities		3,591			(7,669	)
Discontinued operations		2,073			2,335
Net cash provided by (used in) operating activities		5,664			(5,334	)
Cash flows from investing activities:
Capital expenditures		(18,791	)		(6,572	)
Acquisitions, net of cash acquired		(5,176	)		(56,446	)
Proceeds of dispositions		604			250
Distributions from non-consolidated affiliates		499			1,381
Discontinued operations		(1,641	)		(2,052	)
Net cash used in investing activities		(24,505	)		(63,439	)
Cash flows from financing activities:
Increase (decrease) in bank indebtedness		479			(4,526	)
Proceeds from issuance of long term debt		—			36,723
Proceeds from revolving credit facility		11,800			34,000
Repayment of long-term debt		(1,228	)		(3,900	)
Issuance of share capital		150			16
Subsidiary issuance of share capital		385			—
Deferred financing costs		—			(3,316	)
Discontinued operations		(702	)		(1,664	)
Net cash provided by financing activities		10,884			57,333
Effect of exchange rate changes on cash and cash equivalents		(374	)		186
Net decrease in cash and cash equivalents		(8,331	)		(11,254	)
Cash and cash equivalents at beginning of period		12,923			22,673
Cash and cash equivalents at end of period	$	4,592		$	11,419

Supplemental disclosures:
Cash income taxes paid	$	940		$	1,154
Cash interest paid	$	6,345		$	4,236
Non-cash transactions:
Share capital issued on acquisitions	$	4,459		$	14,493
Capital leases	$	915		$	998
Note receivable exchanged for shares in subsidiary	$	1,155		$	122

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(thousands of United States dollars, unless otherwise stated)

1. Basis of Presentation

MDC Partners Inc. (the “Company”) has prepared the unaudited condensed consolidated interim financial statements included herein pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) of the United States of America (“US GAAP”) have been condensed or omitted pursuant to these rules.

The accompanying financial statements reflect all adjustments, consisting of normally recurring accruals, which in the opinion of management are necessary for a fair presentation, in all material respects, of the information contained therein. Results of operations for interim periods are not necessarily indicative of annual results.

These statements should be read in conjunction with the consolidated financial statements and related notes included in the annual report on Form 10-K for the year ended December 31, 2005.

As of the quarter ended December 31, 2005, the Company revised the 2005 statement of cash flows to separately disclose the operating, investing and financing portions of the cash flows attributable to its discontinued operations. Accordingly, the nine months ended September 30, 2005 statement of cash flows has been revised to conform to such presentation.

Effective June 30, 2006, the Company has classified the assets and liabilities of the Company’s Secure Paper Business and Secure Cards Business as held for sale and accordingly has classified the results of their operations as discontinued operations.

2. Significant Accounting Policies

The Company’s significant accounting policies are summarized as follows:

Principles of Consolidation. The accompanying condensed consolidated financial statements include the accounts of MDC Partners Inc. and its domestic and international controlled subsidiaries that are not considered variable interest entities, and variable interest entities for which the Company is the primary beneficiary. Intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities including goodwill, intangible assets, valuation allowances for receivables and deferred tax assets, and the reporting of variable interest entities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The estimates are evaluated on an ongoing basis and estimates are based on historical experience, current conditions and various other assumptions believed to be reasonable under the circumstances. Actual results could differ from those estimates.

Concentration of Credit Risk. The Company provides marketing communications services to clients who operate in most industry sectors. Credit is granted to qualified clients in the ordinary course of business. Due to the diversified nature of the Company’s client base, the Company does not believe that it is exposed to a concentration of credit risk as no client accounted for more than 10% of the Company’s consolidated accounts receivable at September 30, 2006; however, one client accounted for 14% of revenue for the nine months ended September 30, 2006. For the nine months ended September 30, 2005, no client accounted for more than 10% of revenue. As of December 31, 2005, no client accounted for more than 10% of accounts receivable.

Cash and Cash Equivalents. The Company’s cash equivalents are primarily comprised of investments in overnight interest-bearing deposits, commercial paper and money market instruments and other short-term investments with original maturity dates of six months or less at the time of purchase. Included in cash and cash equivalents at September 30, 2006 and December 31, 2005, is approximately $100 and $1,300, respectively, of cash restricted to withdrawal.

Stock-Based Compensation. Effective January 1, 2003, the Company prospectively adopted fair value accounting for stock-based awards as prescribed by SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS No. 123”). Prior to January 1, 2003, the Company elected not to apply fair value accounting to stock-based awards to employees, other than for direct awards of stock and awards settleable in cash, which required fair value accounting. Prior to January 1, 2003, for awards not elected to be accounted for under the fair value method, the Company accounted for stock-based awards in accordance with Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees” (“APB 25”). APB 25 is based upon an intrinsic value method of accounting for stock-based awards. Under this method, compensation cost is measured as the excess, if any, of the quoted market price of the stock issuance at the measurement date over the amount to be paid by the employee.

The Company adopted fair value accounting for stock-based awards using the prospective application transitional alternative available in SFAS 148 “Accounting for Stock-Based Compensation—Transition and Disclosure”. Accordingly, the fair value method is applied to all awards granted, modified or settled on or after January 1, 2003. Under the fair value method, compensation cost is measured at fair value at the date of grant and is expensed over the service period, that is the award’s vesting period. When awards are exercised, share capital is credited by the sum of the consideration paid together with the related portion previously credited to additional paid-in capital when compensation costs were charged against income or acquisition consideration.

Stock-based awards that are settled in cash or may be settled in cash at the option of employees are recorded as liabilities. The measurement of the liability and compensation cost for these awards is based on the intrinsic value of the award, and is recorded as a charge to operating income over the service period, that is the vesting period of the award in accordance with FASB Interpretation Number 28- “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans—an interpretation of APB Opinions No. 15 and 25” (“FIN 28”). Changes in the Company’s payment obligation subsequent to vesting of the award and prior to the settlement date are recorded as compensation cost in operating income in the period of the change. The final payment amount for such awards is established on the date of the exercise of the award by the employee.

Stock-based awards that are settled in cash or equity at the option of the Company are recorded at fair value on the date of grant and recorded as additional paid-in capital. The fair value measurement of the compensation cost for these awards is based on the Black-Scholes option pricing model and is recorded as a charge to operating income over the service period, that is the vesting period of the award.

Effective January 1, 2006, the Company adopted FAS 123(R) and has opted to use the modified prospective application transition method. Under this method the Company will not restate its prior financial statements. Instead, the Company will apply FAS 123(R) for new awards granted after the adoption of FAS 123(R), any portion of awards that were granted after December 15, 1994 and have not vested as of January 1, 2006, and any outstanding liability awards.

Measurement of compensation cost for awards that are outstanding and classified as equity, at January 1, 2006, will be based on the original grant-date fair value calculations of those awards. The Company had previously adopted FAS 123 and as such has been expensing the fair value of all awards issued after January 1, 2003. For all previously issued awards, the Company has been providing pro-forma disclosure for such awards. Upon the adoption of FAS 123(R), the Company expenses the fair value of the awards granted prior to January 1, 2003. The Company has adopted the straight-line attribution method for determining the compensation cost to be recorded during each accounting period. The adoption of FAS 123(R) did not have a material effect on the Company’s financial position or results of operations.

The table below summarizes what the quarterly pro forma effect for the three and nine months ended September 30, 2005, would have been had the Company adopted the fair value method of accounting for stock options and similar instruments for awards issued prior to 2003 and prior to the adoption of FAS 123(R):

	Three Months Ended September 30, 2005		Nine Months Ended September 30, 2005
Net loss as reported	$	(1,655)	$	(6,402)

Fair value costs, net of income tax, of stock-based employee compensation for options issued prior to 2003		161		522
Net loss pro forma	$	(1,816)	$	(6,924)

Basic net loss per share, as reported	$	(0.07)	$	(0.28)
Basic net loss per share, pro forma	$	(0.08)	$	(0.30)
Diluted net loss per share, as reported	$	(0.07)	$	(0.28)
Diluted net loss per share, pro forma	$	(0.08)	$	(0.30)

The fair value of the stock options and similar awards at the grant date were estimated using the Black-Scholes option-pricing model with the following weighted average assumptions for the following period:

	Nine Months Ended September 30, 2006			Three Months Ended September 30, 2005			Nine Months Ended September 30, 2005

Expected dividend		0.00	%		0.00	%		0.00	%
Expected volatility		40	%		40	%		40	%
Risk-free interest rate		4.95	%		2.9	%		2.9	%
Expected option life in years		5-7			3			3
Weighted average stock option fair value per option granted		$ 4.74			$3.09			$3.67

On February 28, 2006, the Company issued 247,500 Class A shares of financial performance-based restricted stock, and 475,000 financial performance-based restricted stock units to its employees under the 2005 Stock Incentive Plan. The Class A shares underlying each grant of restricted stock or restricted stock units will vest upon achievement by the Company of specified financial performance criteria in 2006, 2007 and 2008. Based on the Company’s expected financial performance in 2006, the Company currently believes that 50% of the financial performance-based awards to employees will vest on March 15, 2007. Accordingly, the Company is recording a non-cash stock based compensation charge of $3,089 from the date of grant through March 15, 2007.

On March 6, 2006, the Company issued 16,000 Class A shares of restricted stock and 8,000 restricted stock units to its non-employee Directors under the 2005 Stock Incentive Plan. These awards to non-employee Directors vest on the third anniversary of the grant date. Accordingly, the Company is recording a $205 non-cash compensation charge over the three year vesting period.

On April 28, 2006, the Company issued 50,000 restricted stock units to an employee; 15,000 of these units will vest based upon the achievement by the Company of specified financial criteria in 2006, 2007 and 2008. The remaining 35,000 of these units will vest on the third anniversary of the grant date. Accordingly, the Company is recording a $380 non-cash compensation charge over the three-year vesting period. In addition, the Company issued 10,000 Stock Appreciation Rights to the same employee. The Company also issued 125,000 options to certain non-employee Directors.

For the three and nine months ended September 30, 2006, the Company has recorded a charge of $804 and $1,845, respectively relating to the first quarter of 2006 restricted stock and restricted stock unit grants. The value of the awards was determined based on the fair market value of the underlying stock on the date of grant. The first quarter of 2006 restricted stock granted to employees and non-employee Directors totaling 263,500 Class A shares are included in the Company’s calculation of Class A shares outstanding as of September 30, 2006.

Derivative Financial Instruments. The Company follows SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS No.133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts and debt instruments) be recorded in the balance sheet as either an asset or liability measured at its fair value. The accounting for the change in fair value of the derivative depends on whether the instrument qualifies for and has been designated as a hedging relationship and on the type of hedging relationship. There are three types of hedging relationships: a cash flow hedge, a fair value hedge and a hedge of foreign currency exposure of a net investment in a foreign operation. The designation is based upon the exposure being hedged. Derivatives that are not hedges, or become ineffective hedges, must be adjusted to fair value through earnings.

Effective June 28, 2005, the Company entered into a cross currency swap contract (“Swap”), a form of derivative. The Swap contract provides for a notional amount of debt fixed at $45,000 Canadian dollars (“C$”) and at $36,452, with the interest rates fixed at 8% per annum for the Canadian dollar amount and fixed at 8.25% per annum for the US dollar amount. Consequently, under the terms of this Swap, semi-annually, the Company will receive interest of C$1,800 and will pay interest of $1,503 per annum. At December 31, 2005, the Swap fair value was estimated to be a receivable of $165 and is reflected in other assets on the Company’s balance sheet with the change in the value of the swap reflected in interest expense. On June 22, 2006, the Company settled this swap for its fair value of $357, which resulted in a gain of $192 for the nine months ended September 30, 2006 and is included in other income.

3. Loss Per Common Share

The following table sets forth the computation of basic and diluted loss per common share from continuing operations.

	Three Months Ended September 30,				Nine Months Ended September 30
	2006		2005		2006		2005
Numerator
Numerator for basic loss per common share - loss from continuing operations	$	(3,137)	$	(2,315)	$	(8,356)	$	($4,793)
Effect of dilutive securities:
Interest expense on convertible debentures, net of taxes of nil		—		—		—		—
Numerator for diluted loss per common share - loss from continuing operations plus assumed conversion	$	(3,137)	$	(2,315)	$	(8,356)	$	(4,793)
Denominator
Denominator for basic loss per common share - weighted average common shares		23,911,327		23,710,572		23,849,571		23,151,825
Effect of dilutive securities:
8% convertible debentures		—		—		—		—
Employee stock options, warrants, and stock appreciation rights		—				—		—
Dilutive potential common shares
Denominator for diluted loss per common share - adjusted weighted shares and assumed conversions		23,911,327		23,710,572		23,849,571		23,151,825
Basic loss per common share from continuing operations	$	(0.13)	$	(0.10)	$	(0.35)	$	(0.21)
Diluted loss per common share from continuing operations	$	(0.13)	$	(0.10)	$	(0.35)	$	(0.21)

The 8% convertible debentures, options and other rights to purchase 8,492,018 shares of common stock, which includes 263,500 shares of non-vested restricted stock, were outstanding during the three and nine months ended September 30, 2006, but were not included in the computation of diluted loss per common share because their effect would be antidilutive. Similarly, during the three and nine months ended September 30, 2005, the 8% convertible debentures, options and other rights to purchase 8,102,679 and 5,983,369 shares, respectively of common stock were outstanding but were not included in the computation of diluted loss per common share because either the exercise prices were greater than the average market price of the common shares and/or their effect would be antidilutive.

4. Acquisitions

2006 Acquisitions

The Company is negotiating with the minority holders of Northstar Research Partners Inc. (“Northstar”), to purchase an additional 20% interest in Northstar for C$4 million ($3.6 million at September 30, 2006). This transaction is expected to close during the fourth quarter of 2006.

On July 27, 2006, the Company settled a put option obligation for a fixed amount equal to $1,492, relating to the purchase of 4.3% of additional equity interests of Accent Marketing, LLC. The settlement of this put was satisfied by a cash payment of $424, plus the cancellation of an outstanding promissory note to the Company in a principal amount equal to $1,068. The purchase price was allocated as follows: $403 to identified intangibles, amortized over eight years and the balance of $1,089 as additional goodwill. The goodwill and intangibles are not deductible for tax purposes. Including this transaction, the Company now owns 93.7% of Accent Marketing, LLC.

On February 7, 2006, the Company purchased the remaining outstanding membership interests of 12.33% of Source Marketing LLC (“Source”) pursuant to an exercise of a put option notice delivered in October 2005. The purchase price of $2,287 consisted of cash of $1,830 and the delivery of 1,063,516 shares of LifeMed Media Inc. (“LifeMed”) valued at $457. The Company’s carrying value of these LifeMed shares was $27, thus the Company recorded a gain on the disposition of these shares of $430, which has been included in other income.

On February 15, 2006, Source issued 15% of its membership interests to certain members of management. The purchase price for these membership interests was $1,540, which consisted of $385 cash and recourse notes in an aggregate principal amount equal to $1,155. In addition, the purchaser also received a fully vested option to purchase an additional 5% of Source at an exercise price equal to the price paid above. The option is exercisable any time prior to December 31, 2010. An amended and restated LLC agreement was entered into with these new members. The agreement also provides these members with an option to put to the Company these membership interests from December 2008-2012. As a result of the above transactions, the Company now owns 85% of Source. During the quarter ended March 31, 2006, the Company recorded a non-cash stock based compensation charge of $2,338 relating to the price paid for the membership interests which was less than the fair value of such membership interests and the fair value of the option granted.

2005 Acquisitions

Zyman Group

On April 1, 2005, the Company, through a wholly owned subsidiary, purchased approximately 61.6% of the total outstanding membership units of Zyman Group, LLC (“Zyman Group”) for purchase price consideration of $52,389 in cash and 1,139,975 Class A shares of the Company, valued at $11,257 based on the share price on or about the announcement date. Related transaction costs of approximately $976 were also incurred. In addition, the Company may be required to pay up to an additional $12,000 to the sellers if Zyman Group achieves specified financial targets for the twelve month periods ending June 30, 2006 and/or June 30, 2007. For the period ending September 30, 2006, such financial targets were not achieved.

In connection with the Zyman Group acquisition, the Company, Zyman Group and the other unitholders of Zyman Group entered into a new Limited Liability Company Agreement (the “LLC Agreement”). The LLC Agreement sets forth certain economic, governance and liquidity rights with respect to Zyman Group. Zyman Group has seven managers, four of whom were appointed by the Company. Pursuant to the LLC Agreement, the Company will have the right to purchase, and may have an obligation to purchase, for a combination of cash and shares, additional membership units of Zyman Group from the other members of Zyman Group, in each case, upon the occurrence of certain events or during certain specified time periods.

The Zyman Group name is well recognized for strategic marketing consulting and as such was acquired by the Company for its assembled workforce to enhance the creative talent within the Company’s Strategic Marketing Service segment of businesses.

The Zyman Group acquisition was accounted for as a purchase business combination. The purchase price of the net assets acquired in this transaction is $64,622. The final allocation of the cost of the acquisition to the fair value of net assets acquired and minority interests is as follows:

Cash and cash equivalents	$	5,653
Accounts receivable and other current assets		6,734
Fixed assets and other assets		7,785
Goodwill (tax deductible)		45,349
Intangible assets		20,143
Accounts payable, accrued expenses and other liabilities		(7,475	)
Total debt		(8,524	)
Minority interest at carrying value		(5,043	)
Total cost of the acquisition	$	64,622

Identifiable intangible assets of $20,143 are comprised primarily of customer relationships and related backlog and trademarks. The allocation of the purchase price to assets acquired and liabilities assumed is based upon estimates of fair values and certain assumptions that the Company believes are reasonable under the circumstances. The Company’s consolidated financial statements include Zyman Group’s results of operations subsequent to its acquisition on April 1, 2005.

During the first five years following MDC’s acquisition of the Zyman Group, MDC’s allocation of profits of the Zyman Group may differ from its proportionate share of ownership. On an annual basis, the Company receives a 20% priority return calculated based on its total investment in Zyman Group. Thereafter, based on calculations set forth in the operating agreement of Zyman Group (the “LLC Agreement”), the Company’s share of remaining Zyman Group profits in excess of the annual “threshold” amount of $20,600 may be disproportionately less than its equity ownership in Zyman Group. Specifically, on an annual basis, if Zyman operating results exceed a defined operating margin, the Company would be entitled to 25% of the excess margins in the first two years of the LLC Agreement and 30% of the excess margins in the following three years of the LLC Agreement, rather than the Company’s equity portion of 61.6%. After the first five years, the earnings of the Zyman Group will be allocated in a proportion equal to the respective equity interests of the members.

Based on the Company’s investment in the Zyman Group, at September 30, 2006, the annual priority return is expected to be equal to approximately $12,700, with the minority owners receiving the next $7,900 up to the threshold amount. If profits are insufficient to meet the Company’s priority return during any of the first five years, the Company will receive a catch-up payment through year five equal to any shortfall from the prior year(s). Furthermore, if profits do not reach the threshold amount during the first five years, the minority owners will be entitled to receive a catch-up payment through year five equal to any shortfall from the prior year(s). Based on Zyman Group’s expected results for 2006, the Company expects to receive less than the full amount of its priority return from Zyman Group in 2006.

Neuwirth

On December 1, 2005, the Company, through its subsidiary Northstar Research Partners (USA) LLC (“NS LLC”), purchased the business of Neuwirth Research, Inc. (“Neuwirth”) for purchase price consideration of $450 in cash, a 20% equity interest in NS LLC valued at $225 based on the estimated market value of NS LLC on or about the announcement date, and 48,391 MDC Class A shares valued at $300. Related transaction costs of approximately $100 were also incurred. In addition, the Company was required to pay up to an additional $625 in cash to the seller if the acquired Neuwirth business achieves specified financial targets for the year ended December 31, 2005 and/or December 31, 2006. As of March 31, 2006, the Company determined that these targets were achieved and, accordingly, the $625 payment obligation was settled by the Company’s issuance of 30,058 Class A shares MDC stock valued at $250 and cash of $375.

In connection with the Neuwirth acquisition, the Company and seller entered into agreements related to governance and certain put option rights with respect to the seller’s 20% equity interest in NS LLC which becomes 50% exercisable in 2010 and 100% exercisable in 2015.

Neuwirth is a recognized market research firm and was acquired by the Company for its list of blue chip clients and synergies with NS LLC existing business. This acquisition is part of the Specialized Communications Services segment of businesses.

The Neuwirth acquisition was accounted for as a purchase business combination. The allocation of the cost of the acquisition to the fair value of net assets acquired is as follows:

Accounts receivable and other current assets	$	492
Fixed assets and other assets		50
Intangible assets		1,680
Accounts payable, accrued expenses and other liabilities		(522	)
Total cost of the acquisition	$	1,700

Identifiable intangible assets, consisting of an employment agreement, estimated to be $1,680, is being amortized on a straight-line basis over ten years. The allocation of the purchase price to assets acquired and liabilities assumed is based upon estimates of fair values and certain assumptions that the Company believes are reasonable under the circumstances. The Company’s consolidated financial statements include Neuwirth’s results of operations subsequent to its acquisition on December 1, 2005.

Powell

On July 25, 2005, the Company, through its subsidiary Margeotes Fertitta Powell, LLC, (“MFP”) purchased the business of Powell, LLC (“Powell”) for purchase price consideration of $332 in cash and a 5% equity interest in MFP valued at $400 based on the estimated market value of MFP on or about the announcement date. The issuance of equity interests by MFP resulted in a loss of $103 on the dilution of the Company’s equity interest in its subsidiary. Related transaction costs of approximately $20 were also incurred. In addition, in August 2006, the Company paid an additional $300 in cash to the seller.

In connection with the Powell acquisition, the Company and seller entered into agreements related to governance and certain put option rights with respect to seller’s 5% equity interest in MFP, which become exercisable in 2010.

Powell is a well recognized, highly creative advertising agency and as such was acquired by the Company for its creative talent to supplement existing creative agencies within the Company’s Strategic Marketing Services segment of businesses.

The Powell acquisition was accounted for as a purchase business combination. The allocation of the cost of the acquisition to the fair value of net assets acquired is as follows:

Accounts receivable and other current assets	$	32
Fixed assets and other assets		31
Intangible assets		1,130
Accounts payable, accrued expenses and other liabilities		(141	)
Total cost of the acquisition	$	1,052

Identifiable intangible assets, consisting of an employment agreement, estimated to be $1,130, is being amortized on a straight-line basis over five years. The allocation of the purchase price to assets acquired and liabilities assumed is based upon estimates of fair values and certain assumptions that the Company believes are reasonable under the circumstances. The Company’s consolidated financial statements include Powell’s results of operations subsequent to its acquisition on July 25, 2005.

Other Acquisitions and Transactions

On July 31, 2005, the Company acquired a further 20% equity interest in its existing subsidiary MFP pursuant to the exercise of a put obligation under the existing purchase agreement with a minority interest holder. The purchase price of $1,740 which includes $15 of acquisition costs was paid in cash. Of the purchase price, $500 was allocated to customer relationship intangible assets and $1,240 was allocated to goodwill. The allocation of the purchase price to assets acquired and liabilities assumed is based upon certain assumptions that the Company believes are reasonable under the circumstances. As a result of this acquisition, and the Powell transaction discussed above, the Company retains a 95% equity interest in MFP.

On September 1, 2005, the Company, through a consolidated variable interest entity, Crispin Porter + Bogusky, LLC (“CPB”), purchased 20% of the total outstanding membership units of Fuseproject, LLC (“Fuseproject”) for purchase price consideration of $750 in cash and an additional $400, which was paid during the quarter ended March 31, 2006. Fuseproject is a design firm acquired by CPB to complement its creative offerings. The Fuseproject acquisition was accounted for using the equity method as CPB has significant influence over the operations of Fuseproject. The purchase price of the net assets acquired in this transaction is $1,150. The allocation of the cost of the acquisition to the fair value of the net assets acquired resulted in a portion being attributed to intangible assets valued at $40 and $1,090 consisting of goodwill. The allocation of the purchase price to assets acquired and liabilities assumed is based upon estimates of fair values and certain assumptions that the Company believes are reasonable under the circumstances. The Company’s consolidated financial statements include Fuseproject’s results of operations in equity in earnings of non-consolidated affiliates subsequent to its acquisition on September 1, 2005.

During August 2005, Bryan Mills Group Ltd., (“BMG”) a subsidiary whose operations are consolidated by the Company, completed the acquisition of 450 shares from a minority shareholder at a price of $515.00 per share, for a total purchase price of $232. This resulted in the Company’s ownership interest in BMG increasing to 71.2% from 68.0%. Also as a result of the equity transaction by BMG, the Company recorded goodwill of $146.

During the quarter ended March 31, 2005, the Company contributed $125 of cash as additional paid in capital to its existing consolidated subsidiary, Banjo Strategies Entertainment LLC. There was no change in the Company’s ownership interest. This resulted in a loss on dilution of $61 and is reflected in the Company’s consolidated statement of operations. During the quarter ended June 30, 2005, the Company acquired further equity interests in the existing consolidated subsidiaries of Allard Johnson Communications Inc. (0.3%) and Banjo Strategies Entertainment LLC (7.2%). In aggregate, the Company paid $143 in cash for these incremental ownership interests. During the quarter ended September 30, 2005, the Company acquired a further 0.7% equity interest in the existing consolidated subsidiary, Allard Johnson Communications Inc., for $148.

Pro forma Information

The following unaudited pro forma results of operations of the Company for the nine months ended September 30, 2005 assume that the acquisition of the operating assets of the significant businesses acquired during 2005 had occurred on January 1 of the respective year in which the business was acquired. These unaudited pro forma results are not necessarily indicative of either the actual results of operations that would have been achieved had the companies been combined during this period, or are they necessarily indicative of future results of operations.

	Nine Months Ended September 30, 2005
Revenues	$	275,428
Net loss	$	(3,253)
Loss per common share:
Basic - net loss	$	(0.14)
Diluted - net loss	$	(0.14)

5. Inventory

The components of inventory are listed below:

	December 31, 2005
Raw materials and supplies	$	4,860
Work-in-process		5,499
Total	$	10,359

6. Discontinued Operations

Based on these events, management has concluded that the criteria for the assets/liabilities of SPI to be accounted for as assets/liabilities held for sale and the results of operations to be accounted for as discontinued operations have been met. Discontinued operations relating to SPI for the three months ended September 30, 2006 and 2005 amounted to net losses of $9,772 and $210, respectively. For the nine months ended September 30, 2006 and 2005, discontinued operations relating to SPI amounted to net losses of $20,190 and $2,177, respectively. Based on the current estimated proceeds from a sale, the Company recorded an impairment charge totaling approximately $19,498 during the nine months ended September 30, 2006. Based on the estimated net proceeds and average borrowing rate for each period, the Company has allocated interest expense to discontinued operations of $1,139 and $886 for the nine months ended September 30, 2006 and 2005.

During July 2005, LifeMed, a variable interest entity whose operations had been consolidated by the Company, completed a private placement issuing approximately 12.5 million shares at a price of $0.4973 per share. LifeMed received net proceeds of approximately $6,200. Consequently, the Company’s ownership interest in LifeMed was reduced to 18.3%, and of LifeMed, the Company recorded a gain of $1,300. This gain represents the Company’s reversal of a liability related to funding obligations that the Company is no longer obligated to fund. The Company no longer has any significant continuing involvement in the management or operations of LifeMed, and has not participated in the purchase of significant new equity offerings of LifeMed. Consequently, as of July 2005, the Company no longer consolidated the operations of LifeMed, commenced accounting for its remaining investment in LifeMed on a cost basis, and has reported the results of operations of LifeMed as discontinued operations for all periods presented. In February 2006, the Company sold 27% of its remaining ownership in LifeMed as partial settlement of a put option (see Note 4). As of September 30, 2006, the Company holds a 13.4% interest in LifeMed. As of September 30, 2006 and December 31, 2005, other assets include $73 and $100, respectively of the Company’s net investment in LifeMed.

In November 2004, the Company’s management reached a decision to discontinue the operations of a component of its business. This component is comprised of the Company’s UK based marketing communications business, a wholly owned subsidiary named Mr. Smith Agency, Ltd. (“Mr. Smith”, formerly known as Interfocus Networks Limited). The Company decided to dispose of the operations of this business due to its unfavorable economics. Substantially all of the net assets of the discontinued business were sold during the fourth quarter of 2004 with the disposition of all activities of Mr. Smith and remaining sale of assets was substantially complete by the end of the first quarter of 2005. No significant one-time termination benefits were incurred or are expected to be incurred. No further significant other charges are expected to be incurred.

For the three and nine months ended September 30, 2005, discontinued operations relating to LifeMed and Mr. Smith amounted to net income of $870 and $568, respectively.

Included in discontinued operations in the Company’s consolidated statement of operations for the three and nine months ended September 30, 2006 and 2005 were the following:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Revenue	$	20,860		$	21,920		$	56,799		$	58,178
Depreciation, amortization and impairment charge	$	11,607		$	1,063		$	21,799		$	3,199
Operating income (loss)	$	(9,268	)	$	1,163		$	(18,008	)	$	(1,906	)
Other expense	$	(138	)	$	459		$	(2,068	)	$	(320	)
Income tax (expense) recovery	$	(366	)	$	(962	)	$	(114	)	$	357
Minority interest recovery	$	—		$	—		$	—		$	260
Net income (loss) from discontinued operations	$	(9,772	)	$	660		$	(20,190	)	$	(1,609	)

As of September 30, 2006, the carrying value on the Company’s balance sheet of the assets and liabilities to be disposed were as follows:

	September 30,
	2006
Assets held for sale:
Accounts receivable	$	15,791
Inventories		11,502
Other current assets		1,556
Fixed assets		10,281
Other long-term assets		1,968
Total assets	$	41,098

Liabilities related to assets held for sale:
Accounts payable and other current liabilities	$	9,861
Advance billings		5,444
Other		4,268
Total liabilities	$	19,573

7. Comprehensive Loss

Total comprehensive loss and its components were:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Net loss for the period	$	(12,909	)	$	(1,655	)	$	(28,546	)	$	(6,402	)
Foreign currency cumulative translation adjustment	$	(2,241	)	$	1,399		$	(159	)	$	(607	)
Comprehensive loss for the period	$	(15,150	)	$	(256	)	$	(28,705	)	$	(7,009	)

8. Short-Term Debt, Long-Term Debt and Convertible Debentures

Debt consists of:

	September 30, 2006		December 31, 2005
Short-term debt	$	4,218	$	3,739
Revolving credit facility		85,300		73,500
8% convertible debentures		40,261		38,694
Notes payable and other bank loans		5,250		5,650
Obligations under capital leases		1,273		5,396
		136,302		126,979
Less:
Revolving credit facility		85,300		73,500
Short-term debt		4,218		3,739
Current portions		1,532		2,571
	$	45,252	$	47,169

Short-term debt represents the swing line under the revolving credit facility and outstanding checks at the end of the reporting periods.

MDC Revolving Credit Facility

MDC Partners Inc. and certain of its wholly-owned subsidiaries entered into a revolving credit facility with a syndicate of banks, which as of September 30, 2006, provides for borrowings of up to $100 million (including swing-line advances of up to $10 million) maturing in September 2007 (the “Credit Facility”). This facility bears interest at variable rates based upon the Eurodollar rate, US bank prime rate, US base rate, and Canadian bank prime rate, at the Company’s option. Based on the level of debt relative to certain operating results, the interest rates on loans are calculated by adding between 200 and 325 basis points on Eurodollar and Bankers Acceptance based interest rate loans, and between 50 and 175 basis points on all other loan interest rates. The provisions of the facility contain various covenants pertaining to a minimum ratio of debt to net income before interest, income taxes, depreciation and amortization (“EBITDA”), a maximum debt to capitalization ratio, the maintenance of certain liquidity levels and minimum shareholders’ equity levels. The facility restricts, among other things, the levels of capital expenditures, investments, distributions, dispositions and incurrence of other debt. Effective April 15, 2006, a 1.0% per annum facility fee is charged on the amount of the revolving commitments under the Credit Facility in excess of $65,000, which fee became payable beginning on April 15, 2006 and for so long as the revolving commitments under the Credit Facility are in excess of $65,000. The facility is secured by a senior pledge of the Company’s assets principally comprised of ownership interests in its subsidiaries and by the underlying assets of the businesses comprising the Company’s Secure Products International Group (“SPI”) and by a substantial portion of the underlying assets of the businesses comprising the Company’s Marketing Communications Group, the underlying assets being carried at a value represented by the total assets reflected on the Company’s consolidated balance sheet at September 30, 2006.

On November 3, 2006, the Company further amended its Credit Facility. Pursuant to such amendment, among other things, the lenders (i) amended the “net worth” financial covenant to include an addition for any losses on sale or non-cash impairment charges recorded in connection with the disposition of the Secure Products International (“SPI”) business; (ii) reduced the commitment reduction requirement based upon net cash proceeds received from the sale of SPI in excess of $12.5 million; and (iii) modified the Company's “total debt ratio” covenant.

Upon the closing of the sale of SPI, the Company will repay advances under the Credit Facility by an amount equal to the net cash proceeds received by the Company. At September 30, 2006, the unused portion of the total facility was $6,594.

The Company has classified the swing-line component of this revolving credit facility as a current liability in accordance with EITF 95-22, “Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that include both a Subjective Acceleration Clause and a Lock-Box Agreement”. This component, reflected as short term debt on the balance sheet, is classified as a current liability in accordance with EITF 95-22 since the swing-line contains a lock box arrangement that requires the cash receipts of the Company to be used to repay amounts outstanding under the swing-line and the entire credit facility is subject to subjective acceleration clauses. Management believes that no conditions have occurred that would result in subjective acceleration by the lenders, nor do they believe that any such conditions will exist over the next twelve months. The weighted average interest rate on these current portions of debt was 8.4% and 6.7% as of September 30, 2006 and December 31, 2005, respectively.

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

As of September 30, 2006 and December 31, 2005, $2,809 and $4,035 of the consolidated cash position is held by subsidiaries, which, although available for the subsidiaries’ use, does not represent cash that is available for use to reduce MDC Partners Inc. indebtedness.

8% Convertible Unsecured Subordinated Debentures

On June 28, 2005, the Company completed an offering in Canada of convertible unsecured subordinated debentures amounting to C$45,000 ($36,723) (the “Debentures”). The Debentures mature on June 30, 2010 and bear interest at an annual rate of 8.00% payable semi-annually, in arrears, on June 30 and December 31 of each year. The Company did not have an effective resale registration statement filed with the SEC on December 31, 2005, and as a result the rate of interest increased by an additional 0.50% for the first six month period following December 31, 2005. As of April 19, 2006, the Company had an effective resale registration statement and as a result the interest rate returned to 8.0% effective July 1, 2006. Unless an event of default has occurred and is continuing, the Company may elect, from time to time, subject to applicable regulatory approval, to issue and deliver Class A subordinate voting shares to the Debenture trustee in order to raise funds to satisfy all or any part of the Company’s obligations to pay interest on the Debentures in accordance with the indenture in which holders of the Debentures will be entitled to receive a cash payment equal to the interest payable from the proceeds of the sale of such Class A subordinate voting shares by the Debenture trustee.

The Debentures are convertible at the holder’s option into fully-paid, non-assessable and freely tradable Class A subordinate voting shares of the Company, at any time prior to maturity or redemption, subject to the restrictions on transfer, at a conversion price of C$14.00 ($12.53 as of September 30, 2006) per Class A subordinate voting share being a ratio of approximately 71.4286 Class A subordinate voting shares per C$1,000.00 ($895 as of September 30, 2006) principal amount of Debentures.

The Debentures may not be redeemed by the Company on or before June 30, 2008. Thereafter, but prior to June 30, 2009, the Debentures may be redeemed, in whole or in part from time to time, at a price equal to the principal amount of the Debenture plus accrued and unpaid interest, provided that the volume weighted average trading price of the Class A subordinate voting shares on the Toronto Stock Exchange during a specified period is not less than 125% of the conversion price. From July 1, 2009 until the maturity of the Debentures, the Debentures may be redeemed by the Company at a price equal to the principal amount of the Debenture plus accrued and unpaid interest, if any. The Company may elect to satisfy the redemption consideration, in whole or in part, by issuing Class A subordinate voting shares of the Company to the holders, the number of which will be determined by dividing the principal amount of the Debenture by 95% of the current market price of the Class A subordinate voting shares on the redemption date. Upon the occurrence of a change of control of the Company involving the acquisition of voting control or direction over 50% or more of the outstanding Class A subordinate voting shares prior to June 30, 2008, the Company shall be required to make an offer to purchase all of the then outstanding Debentures at a price equal to 100% of the principal amount thereof plus an amount equal to the interest payments not yet received on the Debentures calculated from the date of the change of control to June 30, 2008, discounted at a specified rate. Upon the occurrence of a change of control on or after June 30, 2008, the Company shall be required to make an offer to purchase all of the then outstanding Debentures at a price equal to 100% of the principal amount of the Debentures plus accrued and unpaid interest to the purchase date.

Notes Payable

In connection with the Zyman acquisition, the Company assumed a note payable in the original amount of $6,275. The note bears interest of 5.73% and is due on June 8, 2009. The balance of the note payable was $5,227 and $5,589 at June 30, 2006 and December 31, 2005, respectively. The note agreement is secured by an aircraft and related equipment with a net book value of $4,455 at September 30, 2006.

9. Shareholders’ Equity

During the nine months ended September 30, 2006 Class A share capital increased by $5,262, as the Company (i) issued 30,058 Class A shares in connection with deferred acquisition consideration, (ii) issued 266,856 Class A shares previously identified to be issued and (iii) 144,693 Class A shares related to the exercise of stock options, vested restricted stock, and stock appreciation right awards. During the nine months ended September 30, 2006 “Additional paid-in capital” increased by $5,572, of which $6,411 related to stock-based compensation that was expensed during the same period, of which $48 is included in equity in earnings of non consolidated affiliates, offset by $653 related to the exercise of stock appreciation right awards and $186 related to the resolution of a contingency based on the Company’s share price relating to a previous acquisition.

10. Other Income (Expense)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
Other Income	$	98	$	—	$	417	$	37
Foreign currency transaction losses		(400)		(200)		(99)		(10)
Gain (loss) on sale/recovery of assets		927		(195)		1,379		589
	$	625	$	(395)	$	1,697	$	616

11. Segmented Information

The Company currently reports in five segments. They are as follows:

The Strategic Marketing Services (“SMS”) segment includes Crispin Porter & Bogusky, kirshenbaum bond + partners, Zyman Group LLC among others. This segment consists of integrated marketing consulting services firms that offer a full complement of marketing consulting services including advertising and media, marketing communications including direct marketing, public relations, corporate communications, market research, corporate identity and branding, interactive marketing and sales promotion. Each of the entities within SMS share similar economic characteristics, specifically related to the nature of their respective services, the manner in which the services are provided and the similarity of their respective customers. Due to the similarities in these businesses, they exhibit similar long term financial performance and have been aggregated together.

The Customer Relationship Management (“CRM”) segment provides marketing services that interface directly with the consumer of a client’s product or service. These services include the design, development and implementation of a complete customer service and direct marketing initiative intended to acquire, retain and develop a client’s customer base. This is accomplished using several domestic and foreign-based customer contact facilities.

The Specialized Communications Services (“SCS”) segment includes all of the Company’s other marketing services firms that are normally engaged to provide a single or a few specific marketing services to regional, national and global clients. These firms provide niche solutions by providing world class expertise in select marketing services.

The Company’s two other segments were the Secure Cards Business and Secure Paper Business segments. In connection with a proposed sale of SPI, the Company has included results of those segments in discontinued operations. See Note 6.

The significant accounting polices of these segments are the same as those described in the summary of significant accounting policies included in the notes to the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2005, except as where indicated.

The SCS segment is an “Other” segment pursuant SFAS 131 “Disclosures about Segments of an Enterprise and Related Information”.

Summary financial information concerning the Company’s operating segments is shown in the following tables:

Three Months Ended September 30, 2006

	Strategic Marketing Services		Customer Relationship Management		Specialized Communications Services		Corporate		Total

Revenue	$	61,682	$	20,934	$	18,506	$		$	101,122

Cost of services sold		28,963		15,147		13,040				57,150

Office and general expenses		23,554		4,549		3,602		4,961		36,666

Depreciation and amortization		5,102		1,240		292		62		6,696


Operating Profit/(Loss)		4,063		(2)		1,572		(5,023)		610

Other Income (Expense):
Other income										625
Interest expense, net										(3,533)

Loss from continuing operations before income taxes, equity in affiliates and minority interests										(2,298)
Income tax recovery										812

Loss from continuing operations before equity in affiliates and minority interests										(1,486)
Equity in earnings of non-consolidated affiliates										129
Minority interests in income of consolidated subsidiaries		(1,322)		11		(469)				(1,780)

Loss from continuing operations										(3,137)
Loss from discontinued operations										(9,772)

Net Loss									$	(12,909)

Non cash stock based compensation	$	128	$	6	$	—	$	1,515	$	1,649
Supplemental Segment Information:

Capital expenditures	$	1,897	$	5,307	$	212	$	78	$	7,494

Goodwill and intangibles	$	193,731	$	25,840	$	29,899	$	—	$	249,470

Total assets	$	340,455	$	56,916	$	80,355	$	55,781	$	533,507

Three Months Ended September 30, 2005

	Strategic Marketing Services		Customer Relationship Management		Specialized Communications Services		Corporate		Total

Revenue	$	59,699	$	16,645	$	20,633	$	—	$	96,977

Cost of services sold		28,818		12,710		13,981		—		55,509

Office and general expense		15,833		2,529		2,629		7,862		28,853

Depreciation and amortization		5,505		910		225		265		6,905

Operating Profit/(Loss)		9,543		496		3,798		(8,127)		5,710

Other Income (Expense):
Other income (expense)										(395)
Interest expense, net										(2,302)

Income from continuing operations before income taxes, equity in affiliates and minority interests										3,013
Income tax recovery										397

Income from continuing operations before equity in affiliates and minority interests										3,410
Equity in earnings of non-consolidated affiliates										348
Minority interests in income of consolidated subsidiaries		(5,239)		(50)		(784)		—		(6,073)

Loss from continuing operations										(2,315)
Income from discontinued operations										660

Net Loss									$	(1,655)

Non cash stock based compensation	$	6	$	12	$		$	548	$	566

Supplemental Segment Information:

Capital expenditures	$	763	$	503	$	163	$	46	$	1,475

Nine Months Ended September 30, 2006

	Strategic Marketing Services		Customer Relationship Management		Specialized Communications Services		Corporate		Total

Revenue	$	180,272	$	60,747	$	58,314	$	—	$	299,333

Cost of services sold		92,617		44,554		40,619		—		177,790

Office and general expenses		57,854		11,882		10,589		17,347		97,672

Depreciation and amortization		14,147		3,429		860		159		18,595

Operating Profit/Loss)		15,654		882		6,246		(17,506)		5,276

Other Income (Expense):
Other income										1,697
Interest expense, net										(7,705)

Loss from continuing operations before income taxes, equity in affiliates and minority interests										(732)
Income tax recovery										1,711

Income from continuing operations before equity in affiliates and minority interests										979
Equity in earnings of non-consolidated affiliates										630
Minority interests in income of consolidated subsidiaries		(7,931)		(27)		(2007)				(9,965)

Loss from continuing operations										(8,356)
Loss from discontinued operations										(20,190)

Net Loss									$	(28,546)

Non cash stock based compensation	$	619	$	18	$	2,338	$	4,006	$	6,981
Supplemental Segment Information:

Capital expenditures	$	7,961	$	9,926	$	633	$	271	$	18,791

Goodwill and intangibles	$	193,731	$	25,840	$	29,899	$	—	$	249,470

Total assets	$	340,455	$	56,916	$	80,355	$	55,781	$	533,507

Nine Months Ended September 30, 2005

	Strategic Marketing Services		Customer Relationship Management		Specialized Communications Services		Corporate		Total

Revenue	$	153,810	$	49,145	$	58,087	$	—	$	261,042

Cost of services sold		77,404		38,228		39,548		—		155,180

Office and general expense		42,746		7,649		8,929		18,502		77,826

Depreciation and amortization		13,044		2,634		659		338		16,675

Operating Profit/(Loss)		20,616		634		8,951		(18,840)		11,361

Other Income (Expense):
Other income										616
Interest expense, net										(4,696)

Income from continuing operations before income taxes, equity in affiliates and minority interests										7,281
Income tax recovery										1,676

Income from continuing operations before equity in affiliates and minority interests										8,957
Equity in earnings of non-consolidated affiliates										624
Minority interests in income of consolidated subsidiaries		(11,887)		(63)		(2,424)		—		(14,374)

Loss from continuing operations										(4,793)
Loss from discontinued operations										(1,609)

Net Loss									$	(6,402)

Non cash stock based compensation	$	21	$	68	$	—	$	2,273	$	2,362

Supplemental Segment Information:

Capital expenditures	$	4,583	$	1,436	$	461	$	92	$	6,572

A summary of the Company’s revenue by geographic area, based on the location in which the services originated, is set forth in the following table:

	United States		Canada		United Kingdom		Total
Revenue
Three Months Ended September 30,
2006	$	86,433	$	13,655	$	1,034	$	101,122
2005	$	83,400	$	11,965	$	1,612	$	96,977
Nine Months Ended September 30,
2006	$	255,098	$	41,275	$	2,960	$	299,333
2005	$	216,892	$	38,627	$	5,523	$	261,042

12. Commitments, Contingencies and Guarantees

Deferred Acquisition Consideration. In addition to the consideration paid by the Company in respect of certain of its acquisitions at closing, additional consideration may be payable, or may be potentially payable based on the achievement of certain threshold levels of earnings. Should the current level of earnings be maintained by these acquired companies, no additional consideration, in excess of the deferred acquisition consideration reflected on the Company’s balance sheet at September 30, 2006 would be expected to be owing in 2006.

Put Options. Owners of interests in certain Marketing Communications subsidiaries have the right in certain circumstances to require the Company to acquire the remaining ownership interests held by them. The owners’ ability to exercise any such “put option” right is subject to the satisfaction of certain conditions, including conditions requiring notice in advance of exercise. In addition, these rights cannot be exercised prior to specified staggered exercise dates. The exercise of these rights at their earliest contractual date would result in obligations of the Company to fund the related amounts during the period 2006 to 2013. It is not determinable, at this time, if or when the owners of these rights will exercise all or a portion of these rights.

The amount payable by the Company in the event such rights are exercised is dependent on various valuation formulas and on future events, such as the average earnings of the relevant subsidiary through the date of exercise, the growth rate of the earnings of the relevant subsidiary during that period, and, in some cases, the currency exchange rate at the date of payment.

Natural Disasters. Certain of the Company’s operations are located in regions of the United States which typically are subject to hurricanes. During the three and nine months ended September 30, 2006, these operations did not incur any costs related to damages resulting from hurricanes. For the three and nine months ended September 30, 2005, these operations incurred costs of $100 related to damages resulting from hurricanes.

Guarantees. In connection with certain dispositions of assets and/or businesses in 2001 and 2003, the Company has provided customary representations and warranties whose terms range in duration and may not be explicitly defined. The Company has also retained certain liabilities for events occurring prior to sale, relating to tax, environmental, litigation and other matters. Generally, the Company has indemnified the purchasers in the event that a third party asserts a claim against the purchaser that relates to a liability retained by the Company. These types of indemnification guarantees typically extend for a number of years.

In connection with the sale of the Company’s investment in Custom Direct Inc. (“CDI”), the amounts of indemnification guarantees were limited to the total sale price of approximately $84,000. For the remainder, the Company’s potential liability for these indemnifications are not subject to a limit as the underlying agreements do not always specify a maximum amount and the amounts are dependent upon the outcome of future contingent events.

Historically, the Company has not made any significant indemnification payments under such agreements and no amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification guarantees. The Company continues to monitor the conditions that are subject to guarantees and indemnifications to identify whether it is probable that a loss has occurred, and would recognize any such losses under any guarantees or indemnifications in the period when those losses are probable and estimable.

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

Legal Proceedings. The Company’s operating entities are involved in legal proceedings of various types. While any litigation contains an element of uncertainty, the Company has no reason to believe that the outcome of such proceedings or claims will have a material adverse effect on the financial condition or results of operations of the Company.

Commitments. The Company has commitments to fund $612 in two investment funds over a period of up to three years. At September 30, 2006, the Company has $4,520 of undrawn outstanding letters of credit.

13. New Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This Interpretation is effective for fiscal years beginning after December 15, 2006, with earlier application permitted. The Company is currently evaluating the impact if any this Interpretation will have on its financial statements.

In September 2006, FASB issued SFAS No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This statement is effective for all fiscal year beginning after November 15, 2007 and interim periods within those fiscal years. Earlier application is encouraged. The Company is currently evaluating the impact of this statement on its financial statements.

In September 2006, FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. This statement requires employers with defined benefit plans to recognize the over funded or under funded status of a defined benefit plan. This statement also expands the required disclosures around these plans. This statement is effective for all fiscal years ending after December 15, 2006.The Company does not expect its financial statements to be significantly impacted by this statement.

14. Subsequent Events

On November 3, 2006, the Company entered into a definitive agreement to sell the stock of its SPI in exchange for consideration equal to approximately $27 million. Consideration will be paid in the form of a $20 million cash payment at closing and additional $1 million annual payments over the next five years. In addition, the Company will receive a 7.5% equity interest in the newly formed entity acquiring SPI. The estimated net cash proceeds at closing will be used to repay borrowings under the Company’s credit facility. The transaction is expected to close on or about November 15, 2006.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless otherwise indicated, references to the “Company” mean MDC Partners Inc. and its subsidiaries, and references to a fiscal year means the Company’s year commencing on January 1 of that year and ending December 31 of that year (e.g., fiscal 2006 means the period beginning January 1, 2006, and ending December 31, 2006).

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

The following discussion focuses on the operating performance of the Company for the three and nine month periods ended September 30, 2006 and 2005, and the financial condition of the Company as of September 30, 2006. This analysis should be read in conjunction with the interim condensed consolidated financial statements presented in this interim report and the annual audited consolidated financial statements and Management’s Discussion and Analysis presented in the Annual Report to Shareholders for the year ended December 31, 2005 as reported on Form 10-K. All amounts are in U.S. dollars unless otherwise stated.

Executive Summary

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

Effective with the accounting classification of the Secure Products International Group as discontinued operations, MDC conducts its businesses through the Marketing Communications Group. Within the Marketing Communications Group, there are three reportable operating segments: Strategic Marketing Services (“SMS”), Customer Relationship Management (“CRM”) and Specialized Communications Services (“SCS”). In addition, MDC has a “Corporate Group” which provides certain administrative, accounting, financial and legal functions.

Marketing Communications Group

Through its operating “partners” in the Marketing Communications Group, MDC provides advertising, consulting and specialized communication services to clients throughout the United States, Canada, Mexico and Europe.

The operating companies within the Marketing Communications Group 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.

MDC’s Marketing Communications Group 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.

Because the Company is a service business, the Company monitors 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, which are not directly related to servicing clients, tend to decrease as a percentage of revenue as revenues increase because a significant portion of these expenses are relatively fixed in nature.

Certain Factors Affecting Our Business

Acquisitions and Dispositions. MDC’s strategy includes acquiring ownership stakes in well-managed businesses with strong reputations in the industry. MDC has entered into a number of acquisition and disposal transactions in 2006 and 2005, which affected revenues, expenses, operating income, net income, assets and liabilities. Additional information regarding material acquisitions is provided in Note 4 “Acquisitions” and Note 6 “Discontinued Operations” in the notes to the consolidated financial statements included in this Quarterly Report on Form 10-Q.

Foreign Exchange Fluctuations. MDC’s financial results and competitive position are affected by fluctuations in the exchange rate between the US dollar and the Canadian dollar. See also “Quantitative and Qualitative Disclosures About Market Risk—Foreign Exchange.”

Seasonality. Historically, with some exceptions, the Marketing Communications Groups’ fourth quarter generates the highest quarterly revenues in a 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.

Other important factors that could affect our results of operations are set forth in “Item 1A Risk Factors” of the Company’s Form 10-K for the period ended December 31, 2005 and the Company’s Form 10-Q for the period ended June 30, 2006.

Summary of Key Transactions

Secure Products Group

In June 2006, the Company’s Board of Directors made the decision to sell or otherwise divest the Company’s Secure Paper Business and Secure Card Business (collectively, “SPI”). These are non-core operations, and their divestiture will allow MDC Partners to better focus on its Marketing Communications businesses. On November 3, 2006, the Company entered into a definitive agreement to sell the stock of its Secure Products International Group in exchange for consideration equal to approximately $27 million. Consideration will be paid in the form of a $20 million cash payment at closing and additional $1 million annual payment over the next five years in consulting fees. The Company will also receive a 7.5% equity interest in the newly formed entity acquiring SPI. The net cash proceeds at closing will be used to repay borrowings under the Company’s credit facility. The transaction is expected to close on or about November 15, 2006.

Based on these events, management has concluded that the criteria for the assets/liabilities of SPI to be accounted for as assets/liabilities held for sale and the results of operations to be accounted for as discontinued operations have been met. Discontinued operations relating to SPI for the three months ended September 30, 2006 and 2005 amounted to net losses of $9.8 million and $0.2 million, respectively. For the nine months ended September 30, 2006 and 2005 discontinued operations relating to SPI amounted to net losses of $20.2 million and $2.2 million, respectively. Based on the current estimated net proceeds from a sale, the Company recorded an impairment charge of $19.5 million during the nine months ended September 30, 2006. Based on the estimated net proceeds and average borrowing rate for each period, the Company has allocated interest expense to discontinued operations of $1.1 million and $0.9 million for the nine months ended September 30, 2006 and 2005 respectively.

Zyman Group Acquisition

On April 1, 2005, MDC, through a wholly-owned subsidiary, purchased approximately 61.6% of the total outstanding membership units of Zyman Group, LLC (“Zyman Group”) for a purchase price equal to $52.4 million in cash and 1,139,975 Class A shares of MDC. In addition, MDC may be required to pay up to an additional $12 million in cash and Class A shares to the sellers if Zyman Group achieves specified financial targets for the twelve-month periods ending June 30, 2006 and/or June 30, 2007. For the period ending September 30, 2006, such financial targets were not achieved. Based on Zyman Group’s expected performance for the twelve months ended September 30, 2007, such financial targets are not expected to be met.

MDC’s acquisition of the Zyman Group enabled MDC to expand its capabilities in the areas of strategic marketing knowledge and solutions.

During the first five years following MDC’s acquisition of the Zyman Group, MDC’s allocation of profits of the Zyman Group may differ from its proportionate share of ownership. On an annual basis, the Company receives a 20% priority return calculated based on its total investment in Zyman Group. Thereafter, based on calculations set forth in the operating agreement of Zyman Group (the “LLC Agreement”), the Company’s share of remaining Zyman Group profits in excess of the annual threshold amount may be disproportionately less than its equity ownership in Zyman Group. Specifically, on an annual basis, if Zyman operating results exceed a defined operating margin, the Company would be entitled to 25% of the excess margins in the first two years of the LLC Agreement and 30% of the excess margins in the following three years of the LLC Agreement, rather than the Company’s equity portion of 61.6%. After the first five years, the earnings of the Zyman Group will be allocated in a proportion equal to the respective equity interests of the members.

Based on the Company’s investment in the Zyman Group, at September 30, 2006, the annual priority return is expected to be equal to approximately $12.7 million, with the minority owners receiving the next $7.9 million up to the “threshold” amount of $20.6 million. If profits are insufficient to meet the Company’s priority return during any of the first five years, the Company will receive a catch-up payment through year five equal to any shortfall from the prior year(s). Furthermore, if profits do not reach the threshold amount during the first five years, the minority owners will be entitled to receive a catch-up payment through year five equal to any shortfall from the prior year(s). Based on Zyman Group’s expected results for 2006, the Company expects to receive less than its priority return from Zyman Group in 2006. In addition, based on Zyman Group’s expected results for 2007, the Company does not expect to receive more than the sum of its priority return for 2007 and catch-up payments for 2006, if any.

8% Convertible Debentures

MDC completed an issuance in Canada of convertible unsecured subordinated debentures amounting to C$45.0 million as of June 28, 2005 ($36.7 million) (the “Debentures”). The Debentures mature on June 30, 2010. The Debentures bear interest at an annual rate of 8.00% payable semi-annually, in arrears, on June 30 and December 31 of each year, commencing December 31, 2005. From January 1, 2006 until June 30, 2006, the Debentures had an annual interest rate of 8.50%. Effective July 1, 2006, the interest rate for Debentures reverted back to an annual rate of 8.00%.

For the Three Months Ended September 30, 2006

	Strategic Marketing Services		Customer Relationship Management		Specialized Communications Services		Corporate		Total

Revenue	$	61,682	$	20,934	$	18,506	$	—	$	101,122

Cost of services sold		28,963		15,147		13,040		—		57,150

Office and general expenses		23,554		4,549		3,602		4,961		36,666

Depreciation and amortization		5,102		1,240		292		62		6,696

Operating Profit/(Loss)		4,063		(2)		1,572		(5,023)		610

Other Income (Expense):
Other income										625
Interest expense, net										(3,533)

Loss before income taxes, equity in affiliates and minority interests										(2,298)
Income tax recovery										812

Loss before equity in affiliates and minority interests										(1,486)
Equity in earnings of non-consolidated affiliates										129
Minority interests in income of consolidated subsidiaries		(1,322)		11		(469)				(1,780)

Loss from Continuing Operations										(3,137)
Loss from Discontinued Operations										(9,772)

Net Loss									$	(12,909)



Non cash stock based compensation	$	128	$	6	$	—	$	1,515	$	1,649

For the Three Months Ended September 30, 2005

(thousands of United States dollars)

	Strategic Marketing Services		Customer Relationship Management		Specialized Communications Services		Corporate		Total
Revenue	$	59,699	$	16,645	$	20,633	$	—	$	96,977

Cost of services sold		28,818		12,710		13,981		—		55,509

Office and general expenses		15,833		2,529		2,629		7,862		28,853

Depreciation and amortization		5,505		910		225		265		6,905

Operating Profit/(Loss)		9,543		496		3,798		(8,127)		5,710

Other Income (Expense):
Other income (expense)										(395)
Interest expense, net										(2,302)

Income from continuing operations before income taxes, equity in affiliates and minority interests										3,013
Income tax recovery										397

Income from continuing operations before equity in affiliates and minority interests										3,410
Equity in Earnings of Non-Consolidated Affiliates										348
Minority interests in income of consolidated subsidiaries		(5,239)		(50)		(784)		—		(6,073)
										(2,315)
Loss from Continuing Operations
Income from Discontinued Operations										660

Net Loss									$	(1,655)

Non cash stock based compensation.	$	6	$	12	$	—	$	548	$	566

For the Nine Months Ended September 30, 2006

	Strategic Marketing Services		Customer Relationship Management		Specialized Communications Services		Corporate		Total

Revenue	$	180,272	$	60,747	$	58,314	$	—	$	299,333

Cost of services sold		92,617		44,554		40,619		—		177,790

Office and general expenses		57,854		11,882		10,589		17,347		97,672

Depreciation and amortization		14,147		3,429		860		159		18,595

Operating Profit/(Loss)		15,654		882		6,246		(17,506)		5,276

Other Income (Expense):
Other income										1,697
Interest expense, net										(7,705)

Loss before income taxes, equity in affiliates and minority interests										(732)
Income tax recovery										1,711

Income from continuing operations before equity in affiliates and minority interests										979
Equity in earnings of non-consolidated affiliates										630
Minority interests in income of consolidated subsidiaries		(7,931)		(27)		(2,007)		—		(9,965)

Loss from Continuing Operations										(8,356)
Loss from Discontinued Operations										(20,190)

Net Loss									$	(28,546)



Non cash stock based compensation	$	619	$	18	$	2,338	$	4,006	$	6,981

For the Nine Months Ended September 30, 2005