THE INTERPUBLIC GROUP OF COMPANIES, INC.
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
     
(Mark One)    
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the fiscal year ended December 31, 2004
OR
 
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file no. 1-6686
THE INTERPUBLIC GROUP OF COMPANIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
     
Delaware   13-1024020
(State of Incorporation)   (I.R.S. Employer Identification No.)
1114 Avenue of the Americas, New York, New York 10036
(Address of Principal Executive Offices) (Zip Code)
(212) 704-1200
(Registrant’s Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
     
Title of Each Class   Name of Each Exchange on Which Registered
     
Common Stock, $0.10 par value   New York Stock Exchange
Series A Mandatory Convertible Preferred Stock, no par value
  New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes  o     No  þ
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes  þ     No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o     No  þ
      As of June 30, 2005, the aggregate market value of the shares of the registrant’s common stock held by non-affiliates was $5,201,493,786. The number of shares of the registrant’s common stock outstanding as of August 31, 2005 was 427,268,023.
 
 


TABLE OF CONTENTS
             
        Page
         
 PART I.
   Business     1  
   Properties     10  
   Legal Proceedings     10  
   Submission of Matters to a Vote of Security Holders     11  
 
 PART II.
   Market for Registrant’s Common Equity and Related Stockholder Matters     12  
   Selected Financial Data     14  
   Management’s Discussion and Analysis of Financial Condition and Results of Operations     17  
   Quantitative and Qualitative Disclosures About Market Risk     90  
   Consolidated Financial Statements and Supplementary Data     91  
   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     207  
   Controls and Procedures     207  
 
 PART III.
   Directors and Executive Officers of Interpublic     208  
   Executive Compensation     217  
   Security Ownership of Certain Beneficial Owners and Management     232  
   Certain Relationships and Related Transactions     235  
   Principal Accountant Fees and Services     235  
 
 PART IV.
   Exhibits and Financial Statement Schedules     237  
 EX-31.1: CERTIFICATION
 EX-31.2: CERTIFICATION
 EX-32: CERTIFICATION


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EXPLANATORY NOTE RELATING TO THIS FORM 10-K/A
      We are filing this Form 10-K/A to correct the following matters in our 2004 Annual Report on Form 10-K, which we filed on September 30, 2005. The changes described below do not affect the cumulative impact of the restatement or our Consolidated Financial Statements for any period subsequent to December 31, 2001:
  •  We have corrected our presentation of the restatement to recognize a tax benefit in periods prior to 2000 and a tax provision in 2001 attributable to restatement adjustments related to revenue recognition for customer contracts. These changes appear on pages 15 and 16 in Item 6 and pages 61-63, 65, 75, 78 and 83 in Item 7. These changes do not affect the cumulative impact of the restatement or our Consolidated Financial Statements for any period subsequent to December 31, 2001. We do not believe that the change is material to the 2001 financial statements.
 
  •  In our presentation of the effects of restatement adjustments on income statement and balance sheet accounts for full year and quarterly periods, we have corrected the allocation of tax effects between the “Other Adjustments” category and the other restatement categories in the tables. These changes appear on pages 62-65, 70, and 73-75 in Item 7 and on pages 121-123, 127, 128, 132, 134, and 201-204 in Item 8. These changes do not affect the cumulative impact of the restatement of our Consolidated Financial Statements and had no impact on any year in the 2000 to 2004 periods.
 
  •  We have also corrected for miscellaneous typographical errors.
      We do not believe that any of these changes were material to any period as previously presented. However, we believe it was appropriate to amend our filing. We have not otherwise amended our 2004 Annual Report on Form 10-K in any respect, and it is presented as of September 30, 2005, when it was originally filed.

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STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
      This report contains forward-looking statements. We may also make forward-looking statements orally from time to time. Statements in this report that are not historical facts, including statements about management’s beliefs and expectations, particularly regarding recent business and economic trends, our internal control over financial reporting, impairment charges, the Securities and Exchange Commission (“SEC”) investigation, credit ratings, regulatory and legal developments, acquisitions and dispositions, constitute forward-looking statements. These statements are based on current plans, estimates and projections, and are subject to change based on a number of factors, including those outlined in this report under Item 1, Business — Risk Factors. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events.
      Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Such risk factors include, but are not limited to, the following:
  •  risks arising from material weaknesses in our internal control over financial reporting, including material weaknesses in our control environment;
 
  •  potential adverse effects to our financial condition, results of operations or prospects as a result of our restatement of prior period financial statements;
 
  •  risks associated with our inability to satisfy covenants under our syndicated credit facilities;
 
  •  our ability to satisfy certain reporting covenants under our indentures;
 
  •  our ability to attract new clients and retain existing clients;
 
  •  our ability to retain and attract key employees;
 
  •  potential adverse effects if we are required to recognize additional impairment charges or other adverse accounting-related developments;
 
  •  potential adverse developments in connection with the ongoing SEC investigation;
 
  •  potential downgrades in the credit ratings of our securities;
 
  •  risks associated with the effects of global, national and regional economic and political conditions, including with respect to fluctuations in interest rates and currency exchange rates; and
 
  •  developments from changes in the regulatory and legal environment for advertising and marketing services companies around the world.
      Investors should carefully consider these risk factors and the additional risk factors outlined in more detail in Item 1, Business — Risk Factors, in this report.
AVAILABLE INFORMATION
      Information regarding our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports, will be made available, free of charge, at our website at http://www.interpublic.com, as soon as reasonably practicable after we electronically file such reports with, or furnish them to, the SEC. Any document that we file with the SEC may also be read and copied at the SEC’s Public Reference Room located at Room 1580, 100 F Street, N.E., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our filings are also available to the public from the SEC’s website at http://www.sec.gov, and at the offices of the New York Stock Exchange. For further information on obtaining copies of our public filings at the New York Stock Exchange, please call (212) 656-5060.

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      Our Corporate Governance Guidelines, Code of Conduct and each of the charters for the Audit Committee, Compensation Committee and the Corporate Governance Committee are available free of charge on our website at http://www.interpublic.com, or by writing to The Interpublic Group of Companies, Inc., 1114 Avenue of the Americas, New York, New York 10036, Attention: Secretary.
EXPLANATORY NOTE
      The filing of this report for 2004 was delayed because of the extensive additional work necessary to compensate for material weaknesses in our internal control over financial reporting and to complete a restatement of our previously issued Consolidated Financial Statements. The material weaknesses in our internal control over financial reporting are described in Item 8, Management’s Assessment on Internal Control Over Financial Reporting, and Item 9A, Controls and Procedures. All our Consolidated Financial Statements and other financial information included in this report for dates and periods through the third quarter of 2004 have been restated. These Consolidated Financial Statements and financial information have been restated to reflect adjustments to our previously reported financial information for the years ended December 31, 2003, 2002, 2001, and 2000. Our 2004 and 2003 quarterly financial information also has been restated to reflect adjustments to our previously reported financial information for the quarters ended March 31, June 30, and September 30 of those years. The restatement also affects periods prior to 2000, which is reflected as an adjustment to opening retained earnings as of January 1, 2000.
      We have not amended any of our previously filed reports. The Consolidated Financial Statements and other financial information in our previously filed reports for the dates and periods referred to above should no longer be relied upon.
      The broad areas of restatement adjustments primarily relate to errors in the accounting for acquisitions, revenue, leases, and the results of internal investigations into employee misconduct, as well as the impact of other miscellaneous adjustments.
      The following sections of this report contain restatement-related disclosures:
  •  Item 6, Selected Financial Data, contains restated financial results;
 
  •  Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains restated financial results, the reconciliation of restated amounts to previously released financial information, and an in depth discussion of each category of adjustment recorded;
 
  •  Item 8, Financial Statements and Supplementary Data, Note 2, Restatement of Previously Issued Financial Statements, presents restated financial results, the reconciliation of restated amounts to previously released financial information, and an in-depth discussion of each category of adjustment recorded;
 
  •  Item 8, Financial Statements and Supplementary Data, Note 20, Results by Quarter, presents restated financial results and the reconciliation of restated amounts to previously released financial information;
 
  •  Item 8, Management’s Assessment on Internal Control Over Financial Reporting; and
 
  •  Item 9A, Controls and Procedures.

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PART I
Item 1. Business
      The Interpublic Group of Companies, Inc. was incorporated in Delaware in September 1930 under the name of McCann-Erickson Incorporated as the successor to the advertising agency businesses founded in 1902 by A.W. Erickson and in 1911 by Harrison K. McCann. The Company has operated under the Interpublic name since January 1961.
Our Client Offerings
      The Interpublic Group of Companies, Inc. and subsidiaries (the “Company”, “we”, “us” or “our”) is one of the world’s largest advertising and marketing services companies, comprised of hundreds of communication agencies around the world that deliver custom marketing solutions on behalf of our clients. Our agencies cover the spectrum of marketing disciplines and specialties, from traditional services such as consumer advertising and direct marketing, to services such as experiential marketing and branded entertainment. With offices in approximately 130 countries and approximately 43,700 employees, our agencies work with our clients to create global and local marketing campaigns that cross borders and media. These marketing programs seek to build brands, influence consumer behavior and sell products.
      To meet the challenge of an increasingly complex consumer culture, we create customized marketing solutions for each of our clients. Engagements between clients and agencies fall into five basic categories:
      Single discipline model — This model allows clients to have an ongoing relationship with one best-in-class marketing specialist. In this traditional client-agency model, one agency provides service in a single discipline.
      Project collaboration model — Many of our clients have ongoing relationships with only one of our agencies, which specializes in one marketing discipline. However, when the client has a need that requires additional expertise, the agency can turn to an affiliated company for an expansion of capabilities.
      Integrated agency-of-record model — Within our agency groups, there are approximately twenty full-service marketing agencies. These agencies offer multidisciplinary solutions for their clients, including advertising, direct marketing, interactive services, public relations, promotions and other specialties, under one roof.
      Lead company model — For clients needing world-class expertise across global markets in many marketing disciplines, we offer this solution in which one lead agency manages the work of multiple partner agencies on an on-going basis.
      Virtual network model — To capitalize on the fullest range of the marketing spectrum that we have to offer, clients can formalize a relationship at the holding company level. A channel-neutral team becomes the client’s brand steward and coordinates the work of multiple agencies from within our agency groups.
      While our agencies work on behalf of our clients using one of these models, we provide resources and support to ensure that our agencies can best meet our clients’ needs. Based in New York City, the holding company sets company-wide financial objectives, directs collaborative inter-agency programs, establishes fiscal management and operational controls, guides personnel policy, conducts investor relations and initiates, manages and approves mergers and acquisitions. In addition, it provides limited centralized functional services that offer our companies some operational efficiencies, including accounting and finance, marketing information retrieval and analysis, legal services, real estate expertise, recruitment aid, employee benefits and executive compensation management.

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Our Disciplines and Agencies
      We have hundreds of specialized agencies. The following is a sample of some of our brands.
      Our global networks offer our largest clients a full range of marketing and communications services. Combined, their footprint spans approximately 130 countries:
  •  McCann Erickson Worldwide
 
  •  Foote Cone & Belding Worldwide
 
  •  Lowe Worldwide
      We have many full-service marketing agencies whose distinctive resources provide clients with multi-disciplinary communication services:
  •  Campbell-Ewald
 
  •  Carmichael Lynch
 
  •  Deutsch
 
  •  Hill Holliday
 
  •  The Martin Agency
 
  •  Springer & Jacoby
      We also have many domestic advertising agencies that provide North American clients with traditional services in print and broadcast media:
  •  Austin Kelley
 
  •  Avrett Free & Ginsberg
 
  •  Campbell Mithun
 
  •  Dailey & Associates
 
  •  Gillespie
 
  •  Gotham
 
  •  Jay Advertising
 
  •  Mullen
 
  •  Tierney Communications
 
  •  TM Advertising
      Our direct marketing agencies deliver one-to-one marketing that communicates directly with consumers in relevant and innovative ways:
  •  Draft Worldwide
 
  •  MRM Partners Worldwide
 
  •  The Hacker Group
      Our interactive agencies seek to provide best-in-class digital marketing solutions for many of our largest clients:
  •  R/ GA
 
  •  FCBi
 
  •  Zentropy

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      We have a worldwide leader in experiential marketing, Jack Morton Worldwide, as part of our agency group. Jack Morton creates interactive experiences whose goal is to improve performance, increase sales and build brand recognition. The agency produces meetings and events, environmental design, exhibits, digital media and learning programs.
      Our media offering takes advantage of changes in today’s fragmented media landscape, with capabilities in planning, research, negotiating, product placement and programming:
  •  Initiative
 
  •  MAGNA Global
 
  •  Universal McCann
      To help activate consumer demand, our promotion agencies offer clients a range of options, including sweepstakes, incentive programs, sampling opportunities and trade programming:
  •  Marketing Drive
 
  •  Momentum
 
  •  The Properties Group
 
  •  Zipatoni
      Our public relations agencies offer such worldwide services as consumer PR, corporate communications, crisis management, web relations and investor relations:
  •  DeVries Public Relations
 
  •  Golin Harris
 
  •  MWW Group
 
  •  Weber Shandwick
      We also have special marketing services agencies that we believe are best-in-class for their niche markets:
  •  Marketing Accountability Practice (marketing accountability/ ROI)
 
  •  frank about women
 
  •  KidCom (youth marketing)
 
  •  NAS (recruitment)
 
  •  Newspaper Services of America (newspaper services)
 
  •  OSI (outdoor advertising)
 
  •  Wahlstrom Group (yellowpages)
 
  •  Women2Women Communications
      Our sports and entertainment marketing firms manage top athletes and sporting events and represent some of the world’s most-recognized celebrities:
  •  Bragman Nyman Cafarelli
 
  •  Octagon
 
  •  PMK/ HBH
 
  •  Rogers & Cowan

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      Our affiliated multicultural agency partners, in which we own a minority interest, target specific demographic segments:
  •  Accent Marketing (Hispanic)
 
  •  Casanova Pendrill (Hispanic)
 
  •  GlobalHue (diverse segments)
 
  •  IW Group (Asian-Pacific-American)
 
  •  SiboneyUSA (Hispanic)
 
  •  Ten Communications (Asian-American)
      We have organized our agencies into five global operating divisions and a group of leading stand-alone agencies. Four of these divisions, McCann WorldGroup(“McCann”), The FCB Group (“FCB”), The Lowe Group (“Lowe”) and Draft Worldwide (“Draft”), provide a distinct comprehensive array of global communications and marketing services. The fifth global operating division, The Constituent Management Group (“CMG”), including Weber Shandwick, FutureBrand, DeVries Public Relations, Golin Harris, Jack Morton and Octagon Worldwide (“Octagon”), provides clients with diversified services, including public relations, meeting and event production, sports and entertainment marketing, corporate and brand identity and strategic marketing consulting.
      Our leading stand-alone agencies provide clients with a full range of advertising and marketing services. These agencies partner with our global operating groups as needed, and include Deutsch, Campbell-Ewald, Hill Holliday and The Martin Agency. We believe this organizational structure allows us to provide comprehensive solutions for clients, enables stronger financial and operational growth opportunities and allows us to improve operating efficiencies within our organization. We practice a decentralized management style, providing agency management with a great deal of operational autonomy, while holding them broadly responsible for their agencies’ financial and operational performance.
Our Financial Reporting Segments
      For financial reporting purposes, we have three reporting segments. The largest segment, Integrated Agency Networks (“IAN”), is comprised of McCann, FCB, Lowe, Draft and our leading stand-alone agencies. CMG comprises our second reporting segment. Our third reporting segment was comprised of our Motorsports operations, which were sold during 2004. IAN also includes our media agencies, Initiative Media and Magna Global which are part of our leading stand-alone agencies, and Universal McCann which is part of McCann. Our media offering creates integrated communications solutions, with services that cover the full spectrum of communication needs, including channel strategy, planning and buying, consulting, production, and post-campaign analysis. See Note 18 to the Consolidated Financial Statements for further discussion.
Principal Markets
      Our agencies are located in approximately 130 countries and in every significant market. We provide services for clients whose businesses are broadly international in scope, as well as for clients whose businesses are limited to a single country or a small number of countries. Based on revenue for the year ended December 31, 2004, our five principal markets are the US, Europe (excluding the United Kingdom (“UK”), the UK, Asia Pacific and Latin America, which represented 54.9%, 19.2%, 10.3%, 7.5% and 3.8% of our total revenue, respectively. For information concerning revenues and long-lived assets on a geographical basis for each of the last three years, see Note 18 to the Consolidated Financial Statements.
Sources of Revenue
      We generate revenue from fees and commissions. Our primary sources of revenue are the planning and execution of advertising programs in various media and the planning and execution of other marketing

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and communications programs. The fee and commission amounts vary depending on the level of client spending or the time we incur performing the specific services required by a client plus the reimbursement of other costs.
      Historically, revenues for creation, planning and placement of advertising were derived predominantly from commissions. These services are now being provided on a negotiated fee basis and to a lesser extent on a commission basis. Fees are usually calculated to reflect hourly rates plus proportional overhead and a mark-up. Many clients are now including an incentive compensation component in their total compensation package. This provides added revenue based on achieving mutually agreed upon metrics within specified time periods. Commissions are earned based on services provided, and are usually based as a percentage or fee over the total cost and expense to complete the assignment. They can also be derived when clients pay us the gross rate billed by media and we pay for media at a lower net rate. The difference is the commission that is earned by us, which is either retained in total or shared with the client depending on the nature of the services agreement.
      We pay the media charges with respect to contracts for advertising time or space that we place on behalf of our clients. To reduce our risk from a client’s non-payment, we generally pay media charges only after we have received funds from our clients. Generally, we act as the client’s agent rather than the primary obligor. In some instances we agree with the media provider that we will only be liable to pay the media after the client has paid us for the media charges.
      We also generate revenue in negotiated fees from our public relations, sales promotion, event marketing, sports and entertainment marketing and corporate and brand identity services.
      Our revenue is dependent upon the advertising, marketing and corporate communications requirements of our clients and tends to be higher in the second half of the calendar year as a result of the holiday season and lower in the first half as a result of the post-holiday slow-down of client activity. Our agencies generally have written contracts with their clients which dictate proportional performance, monthly basis or completed contract revenue recognition. Fee revenue recognized on a completed contract basis also contributes to the higher seasonal revenues experienced in the fourth quarter due to the majority of our contracts ending at December 31. As is customary in the industry, these contracts provide for termination by either party on relatively short notice, usually 90 days. See Note 1 to the Consolidated Financial Statements for further discussion of our revenue recognition accounting policies.
Clients
      In the aggregate, our top ten clients that made the largest revenue contribution accounted for approximately 23.5% and 22.7% of revenue in 2004 and 2003, respectively. Based on revenue for the year ended December 31, 2004, our largest clients were General Motors Corporation, Johnson & Johnson, L’Oreal, Microsoft and Unilever. While the loss of the entire business of any one of our largest clients might have a material adverse effect upon our business, we believe that it is very unlikely that the entire business of any of these clients would be lost at the same time. This is because we represent several different brands or divisions of each of these clients in a number of geographic markets, in each case through more than one of our agency systems. Representation of a client rarely means that we handle advertising for all brands or product lines of the client in all geographical locations. Any client may transfer its business from one of our agencies to a competing agency, and a client may reduce its marketing budget at any time.
Personnel
      As of December 31, 2004, we employed approximately 43,700 persons, of whom 18,400 were employed in the US. Because of the personal service character of the advertising and marketing communications business, the quality of personnel is of crucial importance to our continuing success. There is keen competition for qualified employees.

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Risk Factors
      We are subject to a variety of possible risks that could adversely impact our revenues, results of operations or financial condition. Some of these risks relate to the industry in which we operate, while others are more specific to us. The following factors set out potential risks we have identified that could adversely affect us. See also Statement Regarding Forward-Looking Disclosure.
  •  We have restated our previously issued financial statements.
      As a result of the restatement presented in this annual report, we have recorded liabilities for vendor discounts and other obligations that will necessitate cash settlement which may negatively impact our cash flow in future years. We may also become subject to additional scrutiny in our ongoing SEC investigation or new regulatory actions or civil litigation that could require us to pay fines or other penalties or damages. In addition, we may become subject to further ratings downgrades and negative publicity and may lose or fail to attract and retain key clients, employees and management personnel as a result of these matters.
  •  We have numerous material weaknesses in our internal control over financial reporting.
      As required by Section 404 of the Sarbanes-Oxley Act of 2002, management has conducted an assessment of our internal control over financial reporting. In performing our assessment we identified numerous material weaknesses in our internal control over financial reporting and management has assessed that our internal control over financial reporting was not effective as of December 31, 2004. For a detailed description of these material weaknesses, see Item 8, Management’s Assessment on Internal Control Over Financial Reporting. It is possible had we been able to complete our assessment that additional material weaknesses may have been identified. Each of our material weaknesses results in more than a remote likelihood that a material misstatement will not be prevented or detected. As a result, we must perform extensive additional work to obtain assurance regarding the reliability of our financial statements. Even with this additional work, given the extensive material weakness identified, there is a risk of additional errors not being prevented or detected which could result in additional restatements.
  •  We have extensive work remaining to remedy the material weaknesses in our internal control over financial reporting.
      Because of our decentralized structure and our many disparate accounting systems of varying quality and sophistication, we have extensive work remaining to remedy our material weaknesses in internal control over financial reporting. We are in the process of developing and implementing a full work plan for remedying all of the identified material weaknesses and we expect that this work will extend into the 2006 fiscal year and possibly beyond. There can be no assurance as to when the remediation plan will be fully completed and when it will be implemented. Until our remedial efforts are completed, we will continue to incur the expenses and management burdens associated with the manual procedures and additional resources required to prepare our consolidated financial statements. There will also continue to be an increased risk that we will be unable to timely file future periodic reports with the SEC, that a default under the indentures governing our default securities could occur and that our future financial statements could contain errors that will be undetected.
  •  Until our auditor can provide us with an opinion on management’s assessment and on the effectiveness of our internal control over financial reporting, we will continue to suffer certain adverse consequences under the federal securities laws.
      The report of PricewaterhouseCoopers LLP (“PwC”), our independent registered public accounting firm, on our internal control over financial reporting disclaims an opinion on management’s assessment of our internal control over financial reporting. See Item 8, Report of Independent Registered Public Accounting Firm.
      As a result of this disclaimer received from PwC, the SEC staff considers our SEC filings not to be current for purposes of certain of the SEC’s rules. We are unable to use “short-form” registration (registration that allows us to incorporate by reference our Form 10-K, Form 10-Q and other SEC reports into our registration statements) or, for most purposes, shelf registration, until twelve complete months

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have passed after we file an annual report or amended annual report containing an audit report on internal control over financial reporting that does not disclaim an opinion.
      In addition, any holder of restricted securities within the meaning of Rule 144 of the Securities Act of 1933, as amended (the “Securities Act”), who is our “affiliate” for purposes of the US securities laws will be unable to sell such securities in reliance on Rule 144, unless such holder obtains no-action relief from the SEC.
      Likewise, until we file an annual report or amended annual report containing an audit report on internal control over financial reporting that does not disclaim an opinion on our assessment or on the effectiveness of our internal control over financial reporting, we are ineligible to use Form S-8. We use Form S-8 to register grants of equity compensation to our employees, including grants in the form of options and restricted stock. Although Form S-1 is still available for such purposes, the unavailability of Form S-8 reduces our flexibility in granting options and restricted stock to some employees.
  •  We face substantial ongoing costs associated with complying with the requirements of Section 404 of the Sarbanes-Oxley Act.
      We have extensive work remaining to remedy the material weaknesses in our internal control over financial reporting. We expect that this work will extend into the 2006 fiscal year and possibly beyond. The cost of this work will be significant in 2005 and 2006. These matters will continue to require a large amount of time of our financial management and external resources so long as the remediation work continues.
  •  Ongoing SEC investigations regarding our accounting restatements could adversely affect us.
      In January 2003, the SEC issued a formal order of investigation related to our restatements of earnings for periods dating back to 1997. On April 20, 2005, we received a subpoena from the SEC under authority of the order of investigation requiring production of additional documents relating to the potential restatement we announced in March 2005. The SEC is investigating the restatement detailed in Note 2 to the Consolidated Financial Statements. While we are cooperating fully with the investigation, adverse developments in connection with the investigation, including any expansion of the scope of the investigation, could negatively impact us and could divert the efforts and attention of our management team from our ordinary business operations. In connection with any SEC investigation, it is possible that we will be required to pay fines, consent to injunctions on future conduct or suffer other penalties, any of which could have a material adverse effect on us.
  •  We operate in a highly competitive industry.
      The marketing communications business is highly competitive. Our agencies and media services must compete with other agencies, and with other providers of creative or media services, in order to maintain existing client relationships and to win new clients. The client’s perception of the quality of an agency’s creative work, our reputation and the agency’s reputation are important factors in determining our competitive position. An agency’s ability to serve clients, particularly large international clients, on a broad geographic basis is also an important competitive consideration. On the other hand, because an agency’s principal asset is its people, freedom of entry into the business is almost unlimited and a small agency is, on occasion, able to take all or some portion of a client’s account from a much larger competitor.
      Some clients require agencies to compete for business periodically. We have lost client accounts in the past as a result of such periodic competitions. To the extent that our clients require us to participate in open competitions to maintain accounts, it increases the risk of losing those accounts.
      Our large size may limit our potential for securing new business, because many clients prefer not to be represented by an agency that represents a competitor. Also, clients frequently wish to have different products represented by different agencies. Our ability to attract new clients and to retain existing clients may, in some cases, be limited by clients’ policies or perceptions about conflicts of interest. These policies can, in some cases, prevent one agency, or even different agencies under our ownership, from performing similar services for competing products or companies.

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      In addition, if our recent financial reporting difficulties were to persist, it could divert the efforts and attention of our management from our ordinary business operations or have an adverse impact on clients’ perception of us and adversely affect our overall ability to compete for new and existing business.
  •  We may lose or fail to attract and retain key employees and management personnel.
      Employees, including creative, research, media, account and practice group specialists, and their skills and relationships with clients, are among our most important assets. An important aspect of our competitiveness is our ability to attract and retain key employees and management personnel.
      Compensation for these key employees and management personnel is an essential factor in attracting and retaining them, and there can be no assurance that we will offer a level of compensation sufficient to do so. Equity-based compensation, including in the forms of options and restricted stock, plays an important role in our compensation of new and existing talent. Until we have received an unqualified opinion on management’s assessment on the effectiveness of our internal controls over financial reporting from our independent registered public accounting firm, our ability to use equity-based compensation to compensate or attract employees and management personnel could be limited. In particular, the ability to exercise outstanding options will be limited, as will negotiated grants of options or restricted stock. Our current financial reporting difficulties could adversely affect our ability to recruit and retain key personnel.
  •  As a marketing services company, our revenues are highly susceptible to declines as a result of unfavorable economic conditions.
      Economic downturns often more severely affect the marketing services industry than many other industries. In the past, clients have responded, and may respond in the future, to weak economic performance in any region where we operate by reducing their marketing budgets, which are generally discretionary in nature and easier to reduce in the short-term than other expenses related to operations.
  •  Our liquidity profile has recently been adversely affected.
      In recent periods we have experienced operating losses which have adversely affected our cash flows from operations. In addition, our 364-day credit facility will expire on September 30, 2005. We have recorded liabilities and incurred substantial professional fees in connection with the restatement. It is also possible that we will be required to pay fines or other penalties or damages in connection with the ongoing SEC investigation or future regulatory actions or civil litigation. These items have impacted and will impact our liquidity in future years negatively and could require us to seek new or additional sources of liquidity to fund our working capital needs, for example, through capital markets transactions. There can be no guarantee that we would be able to access any such new sources of new liquidity on commercially reasonable terms or at all. If we are unable to do so, our working capital position would be adversely affected.
  •  Downgrades of our credit ratings could adversely affect us.
      Our current long-term debt credit ratings as of September 26, 2005 are Baa3 with negative outlook, BB- with negative outlook and B+ with negative outlook, as reported by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, respectively. Although a ratings downgrade by any of the ratings agencies will not trigger an acceleration of any of our indebtedness, a downgrade may adversely affect our ability to access capital and would likely result in more stringent covenants and higher interest rates under the terms of any new indebtedness.
  •  International business risks could adversely affect our operations.
      International revenues represent a significant portion of our revenues, approximately 45% in 2004. Our international operations are exposed to risks which affect foreign operations of all kinds, including, for example, local legislation, monetary devaluation, exchange control restrictions and unstable political conditions. These risks may limit our ability to grow our business and effectively manage our operations in those countries. In addition, because a high level of our revenues and expenses is denominated in

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currencies other than the US dollar, primarily the Euro and Pound Sterling, fluctuations in exchange rates between the US dollar and such currencies may materially affect our financial results.
  •  In 2004 and prior years, we recognized substantial impairment charges and increased our deferred tax valuation allowances, and we may be required to record additional charges in the future related to these matters.
      We evaluate all of our long-lived assets (including goodwill, other intangible assets and fixed assets), investments and deferred tax assets for possible impairment or realizability at least annually and whenever there is an indication of impairment or lack of realizability. If certain criteria are met, we are required to record an impairment charge or valuation allowance. In the past, we have recorded substantial amounts of goodwill, investment and other impairment charges, and have been required to establish substantial valuation allowances with respect to deferred tax assets and loss carry-forwards.
      As of December 31, 2004, we have substantial amounts of intangibles, investments and deferred tax assets on our consolidated Balance Sheet. Future events, including our financial performance and the strategic decisions we make, could cause us to conclude that further impairment indicators exist and that the asset values associated with intangibles, investments and deferred tax assets may have become impaired. Any resulting impairment loss would have an adverse impact on our reported earnings in the period in which the charge is recognized.
      Any future impairment charge (excluding valuation allowance charges) could also adversely affect our financial condition and result in a violation of the financial covenants of our Three-Year Revolving Credit Facility, which requires us to maintain minimum levels of consolidated EBITDA (as defined in that facility) and established ratios of debt for borrowed money to consolidated EBITDA and interest coverage ratios. A violation of any of these financial covenants could trigger a default under this facility and adversely affect our liquidity.
     •  We are subject to certain restrictions and must meet certain minimum financial covenants under our Revolving Credit Facility.
      Our Three-Year Revolving Credit Facility contains covenants that limit our flexibility in a variety of ways and that require us to meet specified financial ratios. These covenants have recently been amended. As amended, the Three-Year Revolving Credit Facility does not permit us (i) to make cash acquisitions in excess of $50.0 million until October 2006, or thereafter in excess of $50.0 million until expiration of the agreement in May 2007, subject to increases equal to the net cash proceeds received in the applicable period from any disposition of assets; (ii) to make capital expenditures in excess of $210.0 million annually; (iii) to repurchase or to declare or pay dividends on our capital stock (except for any convertible preferred stock, convertible trust preferred instrument or similar security, which includes our outstanding 5.40% Series A Mandatory Convertible Preferred), except that we may repurchase our capital stock in connection with the exercise of options by our employees or with proceeds contemporaneously received from an issue of new shares of our capital stock; and (iv) to incur new debt at our subsidiaries, other than unsecured debt incurred in the ordinary course of business, which may not exceed $10.0 million in the aggregate with respect to our US subsidiaries.
      Under the Three-Year Revolving Credit Facility, we are also subject to financial covenants with respect to our interest coverage ratio, debt to EBITDA ratio and minimum EBITDA. We have amended the financial covenants as they apply to periods beginning with the third quarter of 2005. There can be no assurance that we will be able to comply with these covenants for the third quarter 2005.
     •  We may not be able to meet our performance targets and milestones.
      From time to time, we communicate to the market certain targets and milestones for our financial and operating performance including, but not limited to, the areas of revenue growth, operating expense reduction and operating margin growth. These targets and milestones are intended to provide metrics against which to evaluate our performance, but they should not be understood as predictions or guidance

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about our expected performance. Our ability to meet any target or milestone is subject to inherent risks and uncertainties, and we caution investors against placing undue reliance on them. See Statement Regarding Forward-Looking Disclosure.
     •  We are subject to regulations that could restrict our activities or negatively impact our revenues.
      Our industry is subject to government regulation, both domestic and foreign. There has been an increasing tendency in the US on the part of advertisers to resort to the courts and industry and self-regulatory bodies to challenge comparative advertising on the grounds that the advertising is false and deceptive. Through the years, there has been a continuing expansion of specific rules, prohibitions, media restrictions, labeling disclosures and warning requirements with respect to the advertising for certain products. Representatives within government bodies, both domestic and foreign, continue to initiate proposals to ban the advertising of specific products and to impose taxes on or deny deductions for advertising which, if successful, may have an adverse effect on advertising expenditures and consequently our revenues.
Item 2. Properties
      Substantially all of our office space is leased from third parties with expiration dates ranging from one to twenty-five years. Certain leases are subject to rent reviews or contain escalation clauses, and certain of our leases require the payment of various operating expenses, which may also be subject to escalation. Physical properties include leasehold improvements, furniture, fixtures and equipment located in our offices. We believe that facilities leased or owned by us are adequate for the purposes for which they are currently used and are well maintained. See Note 19 to the Consolidated Financial Statements for a discussion of our lease commitments.
Item 3. Legal Proceedings
      We are or have been involved in legal and administrative proceedings of various types. While any litigation contains an element of uncertainty, we have no reason to believe that the outcome of such proceedings or claims will have a material adverse effect on our financial condition except as described below.
Federal Securities Class Actions
      During the fourth quarter 2004, the settlement of thirteen class actions under the federal securities laws became final. The class actions were filed against the Company and certain of our present and former directors and officers on behalf of a purported class of purchasers of our stock shortly after our August 13, 2002 announcement regarding the restatement of our previously reported earnings for the periods January 1, 1997 through March 31, 2002. These actions, which were all filed in the United States District Court for the Southern District of New York, were consolidated by the court and lead counsel was appointed for all plaintiffs on November 15, 2002. On December 2, 2003, we reached an agreement in principle to settle the consolidated class action shareholder suits in federal district court in New York. Under the terms of the settlement, we agreed to pay $115.0 million, comprised of $20.0 million in cash and $95.0 million in shares of our common stock at a value of $14.50 per share. On November 4, 2004, the court entered an order granting final approval of the settlement. The term of appeal for the settlement expired on December 6, 2004. During the fourth quarter of 2004, the $20.0 million cash portion of the settlement was paid into escrow and $0.8 million of the settlement shares were issued to the plaintiffs’ counsel as payment of their fee. We recognized the cost of the settlement in 2003. For a discussion of the litigation charge recorded principally in connection with the settlement, see Note 19 to the Consolidated Financial Statements.

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Derivative Actions
      In the fourth quarter of 2004, the settlement of a shareholder derivative suit became final. The suit was filed in New York Supreme Court, New York County, by a single shareholder acting on behalf of Interpublic against the Board of Directors and against our auditors. This suit alleged a breach of fiduciary duties to our shareholders. On November 26, 2002, another shareholder derivative suit, alleging the same breaches of fiduciary duties, was filed in New York Supreme Court, New York County. On January 26, 2004, we reached an agreement in principle to settle these derivative actions, agreeing to institute certain corporate governance procedures prescribed by the court. On June 11, 2004, the court entered an order granting preliminary approval to the proposed settlement. These governance procedures have been adopted as part of our Corporate Governance Guidelines (which can be found on our website). The court held a final approval and fairness hearing on October 22, 2004, and on November 4, 2004, the court entered an order granting final approval of the settlement.
SEC Investigation
      In January 2003, the SEC issued a formal order of investigation related to our restatements of earnings for periods dating back to 1997. On April 20, 2005, we received a subpoena from the SEC under authority of the order of investigation requiring production of additional documents relating to the potential restatement we announced in March 2005. The SEC is investigating the restatement detailed in Note 2 to the Consolidated Financial Statements. We are cooperating fully with the investigation.
Item 4. Submission of Matters to a Vote of Security Holders
      Not applicable.

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PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
Price Range of Common Stock
      Our common stock is listed and traded on the New York Stock Exchange (“NYSE”) under the symbol “IPG.” The following table provides the high and low closing sales prices per share for the periods shown below as reported on the NYSE. At August 31, 2005, there were 16,275 registered holders of our common stock.
                   
    NYSE Sale Price
     
Period   High   Low
         
2005:
               
 
Second Quarter
  $ 13.28     $ 12.11  
 
First Quarter
  $ 13.68     $ 11.50  
2004:
               
 
Fourth Quarter
  $ 13.50     $ 10.95  
 
Third Quarter
  $ 13.62     $ 10.51  
 
Second Quarter
  $ 16.43     $ 13.73  
 
First Quarter
  $ 17.19     $ 14.86  
2003:
               
 
Fourth Quarter
  $ 16.41     $ 13.55  
 
Third Quarter
  $ 15.44     $ 12.94  
 
Second Quarter
  $ 14.55     $ 9.30  
 
First Quarter
  $ 15.38     $ 8.01  
Dividend Policy
      No dividend was paid on our common stock during 2003, 2004, or the first three quarters of 2005. Our future dividend policy will be determined on a quarter-by-quarter basis and will depend on earnings, financial condition, capital requirements and other factors. For a discussion of the restrictions under our amended revolving credit facility, which limits our ability to declare or pay dividends, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.
Transfer Agent and Registrar for Common Stock
      The transfer agent and registrar for our common stock is:
Mellon Investor Services, Inc.
44 Wall Street, 6th Floor
New York, NY 10005
Tel: (877) 363-6398
Sales of Unregistered Securities
      In the fourth quarter of 2004, we issued common stock without registration under the Securities Act in payment of deferred compensation for acquisitions we made in earlier periods. The specific transactions were as follows:
  •  On November 22, 2004, we issued 29,015 shares of our common stock to a shareholder of a company in connection with the purchase of 49% of the common stock of such company in the fourth quarter of 1999. The shares of our common stock had a market value of $351,114 as of the

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  date of issuance and were issued without registration in reliance on Section 4(2) under the Securities Act, based on the status of the shareholder as an accredited investor.
 
  •  On October 26, 2004, we issued 296,928 shares of our common stock to four former shareholders of a company as a final deferred payment for 100% of the shares of the company, which we acquired in the third quarter of 2000. The shares of our common stock were valued at $3,327,389 as of the date of issuance and were issued without registration in reliance on Regulation S under the Securities Act.
 
  •  On October 19, 2004, we issued 115,838 shares of our common stock, and on November 18, 2004 we issued 242,713 shares of our common stock, to four former shareholders of a company for shares we acquired in the first quarter of 1997 and in the second quarter of 2004. The shares of our common stock were valued at $1,742,671 and $2,698,491, as of their respective dates of issuance, and were issued without registration in reliance on Regulation S under the Securities Act.
Repurchase of Equity Securities
      The following table provides information regarding our purchases of equity securities during the fourth quarter of 2004:
                                 
                Maximum
                Number
                of Shares
        Average   Total Number of Shares   that May Yet Be
    Total Number   Price   Purchased as Part of   Purchased
    of Shares   Paid per   Publicly Announced   Under the Plans
    Purchased   Share(2)   Plans or Programs   or Programs
                 
October 1-31
    10,285     $ 11.34              
November 1-30
    2,461     $ 12.22              
December 1-31
    9,657     $ 12.97              
Total(1)
    22,403     $ 12.14              
 
(1)  Consists of restricted shares of our common stock withheld under the terms of grants under employee stock compensation plans to offset tax withholding obligations that occurred upon vesting and release of restricted shares (the “Withheld Shares”).
 
(2)  The average price per month of the Withheld Shares was calculated by dividing the aggregate value of the tax withholding obligations for each month by the aggregate number of shares of our common stock withheld each month.

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Item 6. Selected Financial Data
      The following financial data at December 31, 2004 and 2003 and for the years ended December 31, 2004, 2003 and 2002 has been derived from the audited financial statements of the Company which appear elsewhere in this document. The audited financial statements at December 31, 2003 and for the years ended December 31, 2003 and 2002 have been restated and the financial data presented below reflects the restatement. The following financial data at December 31, 2002, 2001 and 2000 and for the years ended December 31, 2001 and 2000 has been derived from unaudited financial statements and includes the effects of the restatement items discussed in Item 8, Financial Statements and Supplementary Data, and Note 2, Restatement of Previously Issued Financial Statements. The Selected Financial Data should be read in conjunction with:
  •  Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
  •  Item 8, Financial Statements and Supplementary Data, Note 2, Restatement of Previously Issued Financial Statements
 
  •  Item 8, Financial Statements and Supplementary Data, Note 20, Results by Quarter

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND SELECTED FINANCIAL DATA
                                           
    For the Years Ended December 31,
     
    2004   2003   2002   2001   2000
                     
        (Restated)   (Restated)   (Restated)   (Restated)
    (Amounts in Millions, Except Per Share Amounts)
REVENUE
  $ 6,387.0     $ 6,161.7     $ 6,059.1     $ 6,598.5     $ 6,872.2  
                               
OPERATING EXPENSES:
                                       
 
Salaries and related expenses
    3,733.5       3,500.6       3,396.7       3,634.5       3,830.8  
 
Office and general expenses
    2,249.8       2,225.7       2,248.7       2,398.5 (1)     2,173.0 (1)
 
Restructuring charges
    62.2       172.9       7.9       629.5       158.3  
 
Long-lived asset impairment and other charges
    322.2       294.0       130.0       300.7        
 
Motorsports contract termination costs
    113.6                          
                               
Total operating expenses
    6,481.3       6,193.2       5,783.3       6,963.2       6,162.1  
                               
OPERATING INCOME (LOSS)
    (94.3 )     (31.5 )     275.8       (364.7 )     710.1  
                               
EXPENSE AND OTHER INCOME:
                                       
 
Interest expense
    (172.0 )     (207.0 )     (158.7 )     (169.0 )     (127.3 )
 
Debt prepayment penalty
    (9.8 )     (24.8 )                  
 
Interest income
    50.7       39.3       30.6       41.7       57.4  
 
Investment impairments
    (63.4 )     (71.5 )     (40.3 )     (212.4 )     (3.9 )
 
Litigation charges
    32.5       (127.6 )                  
 
Other income (expense)
    (10.7 )     50.3       8.3       14.5       45.3  
                               
Total expense and other income
    (172.7 )     (341.3 )     (160.1 )     (325.2 )     (28.5 )
                               
Income (loss) from continuing operations before provision for income taxes
    (267.0 )     (372.8 )     115.7       (689.9 )     681.6  
 
Provision for (benefit of) income taxes
    262.2       242.7       106.4       (88.1 )     305.9  
                               
Income (loss) from continuing operations of consolidated companies
    (529.2 )     (615.5 )     9.3       (601.8 )     375.7  
 
Income applicable to minority interests (net of tax)
    (21.5 )     (27.0 )     (30.0 )     (27.3 )     (38.5 )
 
Equity in net income (loss) of unconsolidated affiliates (net of tax)
    5.8       2.4       5.9       3.2       (13.3 )
                               
Income (loss) from continuing operations
    (544.9 )     (640.1 )     (14.8 )     (625.9 )     323.9  
Dividends on preferred stock
    19.8                          
                               
Net income (loss) from continuing operations
    (564.7 )     (640.1 )     (14.8 )     (625.9 )     323.9  
Income from discontinued operations (net of tax)
    6.5       101.0       31.5       15.5       6.4  
                               
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS
  $ (558.2 )   $ (539.1 )   $ 16.7     $ (610.4 )   $ 330.3  
                               
Earnings (loss) per share of common stock:
                                       
Basic:
                                       
 
Continuing operations
  $ (1.36 )   $ (1.66 )   $ (0.04 )   $ (1.70 )   $ 0.90  
 
Discontinued operations
    0.02       0.26       0.08       0.04       0.02  
                               
Total*
  $ (1.34 )   $ (1.40 )   $ 0.04     $ (1.65 )   $ 0.92  
                               
Diluted:
                                       
 
Continuing operations
  $ (1.36 )   $ (1.66 )   $ (0.04 )   $ (1.70 )   $ 0.87  
 
Discontinued operations
    0.02       0.26       0.08       0.04       0.02  
                               
Total*
  $ (1.34 )   $ (1.40 )   $ 0.04     $ (1.65 )   $ 0.89  
                               
Weighted-average shares:
                                       
 
Basic
    415.3       385.5       376.1       369.0       359.6  
 
Diluted
    415.3       385.5       376.1       369.0       370.5  
OTHER DATA
                                       
 
Cash dividends per share of common stock
  $     $     $ 0.38     $ 0.38     $ 0.37  
 
Cash dividends per share of preferred stock
  $ 2.69     $     $     $     $  
 
Capital expenditures
  $ (194.0 )   $ (159.6 )   $ (171.4 )   $ (257.5 )   $ (246.9 )
 
Actual number of employees
    43,700       43,400       45,800       50,500       58,400  
 
(1)  Includes amortization expense of $161.0 and $132.3 in 2001 and 2000, respectively.
Earnings (loss) per share does not add due to rounding.

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Millions, Except Per Share Amounts)
                                           
    As of December 31,
     
    2004   2003   2002   2001   2000
                     
        (Restated)   (Restated)   (Restated)   (Restated)
ASSETS:
                                       
Cash and cash equivalents
  $ 1,550.4     $ 1,871.9     $ 953.2     $ 938.1     $ 848.8  
Short-term marketable securities
    420.0       195.1       30.7       21.2       26.6  
Accounts receivable, net of allowances
    4,907.5       4,650.3       4,610.1       4,653.1       5,599.6  
Expenditures billable to clients
    345.2       303.3       387.7       358.4       473.2  
Deferred income taxes
    261.0       279.7       103.0       136.0       27.3  
Prepaid expenses and other current assets
    152.6       232.4       389.6       300.1       235.0  
                               
 
Total current assets
    7,636.7       7,532.7       6,474.3       6,406.9       7,210.5  
                               
Land, buildings and equipment, net
    722.9       697.9       851.1       871.0       845.6  
Deferred income taxes
    274.2       378.3       534.3       514.0       410.1  
Investments
    168.7       246.8       326.5       334.6       463.0  
Goodwill
    3,141.6       3,267.9       3,320.9       2,933.9       2,996.0  
Other intangible assets, net of amortization
    37.6       43.0       82.4       102.2       87.8  
Other assets
    290.6       279.3       315.5       277.7       264.6  
                               
 
Total non-current assets
    4,635.6       4,913.2       5,430.7       5,033.4       5,067.1  
                               
TOTAL ASSETS
  $ 12,272.3     $ 12,445.9     $ 11,905.0     $ 11,440.3     $ 12,277.6  
                               
 
LIABILITIES:
                                       
Accounts payable
  $ 6,128.7     $ 5,614.7     $ 5,370.8     $ 4,711.2     $ 5,901.5  
Accrued liabilities
    1,108.6       1,256.7       1,273.9       1,536.5       1,342.1  
Short-term debt
    325.9       316.9       841.9       428.5       538.0  
                               
 
Total current liabilities
    7,563.2       7,188.3       7,486.6       6,676.2       7,781.6  
Long-term debt
    1,936.0       2,198.7       1,822.2       2,484.6       1,533.8  
Deferred compensation and employee benefits
    590.7       548.6       534.9       438.6       525.5  
Other non-current liabilities
    408.9       326.7       270.7       177.3       163.6  
Minority interests in consolidated subsidiaries
    55.2       64.8       68.0       84.0       93.1  
                               
 
Total non-current liabilities
    2,990.8       3,138.8       2,695.8       3,184.5       2,316.0  
                               
TOTAL LIABILITIES
    10,554.0       10,327.1       10,182.4       9,860.7       10,097.6  
                               
TOTAL STOCKHOLDERS’ EQUITY
    1,718.3       2,118.8       1,722.6       1,579.6       2,180.0  
                               
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 12,272.3     $ 12,445.9     $ 11,905.0     $ 11,440.3     $ 12,277.6  
                               

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Amounts in Millions, Except Per Share Amounts)
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
      The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand The Interpublic Group of Companies, Inc. and its subsidiaries (the “Company”, “we”, “us” or “our”). MD&A is provided as a supplement to and should be read in conjunction with our financial statements and the accompanying notes. The results included in this MD&A have been restated. Our MD&A includes the following sections:
      OVERVIEW provides a description of our business, the drivers of our business, and how we analyze our business. It then provides an analysis of our 2004 performance and a description of the significant events impacting 2004 and thereafter.
      RESULTS OF OPERATIONS provides an analysis of the consolidated and segment results of operations for 2004 compared to 2003 and 2003 compared to 2002.
      LIQUIDITY AND CAPITAL RESOURCES provides an overview of our cash flows, financing, contractual obligations and derivatives and hedging activities.
      INTERNAL CONTROL OVER FINANCIAL REPORTING provides a description of the status of our compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and related rules. For more detail, see Item 8, Financial Statements and Supplementary Data, Note 2, Restatement of Previously Issued Financial Statements and Item 9A, Controls and Procedures.
      RESTATEMENT provides a description and reconciliation of the restatement. For additional information, see Item 8, Financial Statements and Supplementary Data, Note 2, Restatement of Previously Issued Financial Statements.
      CRITICAL ACCOUNTING POLICIES provides a discussion of our accounting policies that require critical judgment, assumptions and estimates.
      OTHER MATTERS provides a discussion of our significant non-operational items which impact our financial statements, such as the SEC investigation and material contingencies.
      RECENT ACCOUNTING STANDARDS by reference to Note 1 to the Consolidated Financial Statements, provides a description of accounting standards which we have not yet been required to implement and may be applicable to our operations, as well as those significant accounting standards which were adopted during 2004.
OVERVIEW
Our Business
      We are one of the world’s largest advertising and marketing services companies, comprised of hundreds of communication agencies around the world that deliver custom marketing solutions on behalf of our clients. Our agencies cover the spectrum of marketing disciplines and specialties, from traditional services such as consumer advertising and direct marketing, to services such as experiential marketing and branded entertainment. With offices in approximately 130 countries and approximately 43,700 employees, our agencies work with our clients to create global and local marketing campaigns that cross borders and media. These marketing programs seek to build brands, influence consumer behavior and sell products.
      We have organized our agencies into five global operating divisions and a group of leading stand-alone agencies. Four of these divisions, McCann WorldGroup (“McCann”), The FCB Group (“FCB”), The Lowe Group (“Lowe”) and Draft Worldwide (“Draft”), provide a distinct, comprehensive array of global communications and marketing services. The fifth global operating division, The Constituent Management

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
Group (“CMG”), including Weber Shandwick, FutureBrand, DeVries, Golin Harris, Jack Morton and Octagon Worldwide (“Octagon”), provides clients with diversified services, including public relations, meeting and event production, sports and entertainment marketing, corporate and brand identity and strategic marketing consulting.
      Our leading stand-alone agencies provide clients with a full range of advertising and marketing services. These agencies partner with our global operating groups as needed, and include Deutsch, Campbell-Ewald, Hill Holliday and The Martin Agency. We believe this organizational structure allows us to provide comprehensive solutions for clients, enables stronger financial and operational growth opportunities and allows us to improve operating efficiencies within our organization. We practice a decentralized management style, providing agency management with a great deal of operational autonomy, while holding them broadly responsible for their agencies’ financial and operational performance.
      For financial reporting purposes, we have three reportable segments. The largest segment, Integrated Agency Networks (“IAN”), is comprised of McCann, FCB, Lowe, Draft and our leading stand-alone agencies. CMG comprises our second reportable segment. Our third reportable segment was comprised of our Motorsports operations, which were sold during 2004. IAN also includes our media agencies, Initiative Media and Magna Global which are part of our leading stand-alone agencies, and Universal McCann which is part of McCann. Our media offering creates integrated communications solutions, with services that cover the full spectrum of communication needs, including channel strategy, planning and buying, consulting, production, and post-campaign analysis. See Note 18 to the Consolidated Financial Statements for further discussion.
Business Drivers
      We generate revenue from fees and commissions. Our primary sources of revenue are the planning and execution of advertising programs in various media and the planning and execution of other marketing and communications programs. The fee and commission amounts vary depending on the level of client spending or the time we incur performing the specific services required by a client plus the gross-up of other costs.
      Historically, revenues for creation, planning and placement of advertising were derived predominantly from commissions. These services are now being provided on a negotiated fee basis and to a lesser extent on a commission basis. Fees are usually calculated to reflect hourly rates plus proportional overhead and a mark-up. Many clients are now including an incentive compensation component in their total compensation package. This provides added revenue based on achieving mutually agreed upon metrics within specified time periods. Commissions are earned based on services provided, and are usually based as a percentage or fee over the total cost and expense to complete the assignment. They can also be derived when clients pay us the gross rate billed by media and we pay for media at a lower net rate. The difference is the commission that is earned by us, which is either retained in total or shared with the client depending on the nature of the services agreement.
      We pay the media charges with respect to contracts for advertising time or space that we place on behalf of our clients. To reduce our risk from a client’s non-payment, we generally pay media charges only after we have received funds from our clients. Generally, we act as the client’s agent rather than the primary obligor. In some instances we agree with the media provider that we will only be liable to pay the media after the client has paid us for the media charges.
      We also generate revenue in negotiated fees from our public relations, sales promotion, event marketing, and sports and entertainment marketing and corporate and brand identity services.

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
      Our revenue is dependent upon the advertising, marketing and corporate communications requirements of our clients and tends to be higher in the second half of the calendar year as a result of the holiday season and lower in the first half as a result of the post-holiday slow-down of client activity. Our agencies generally have written contracts with their clients which dictate proportional performance, monthly basis or completed contract revenue recognition. Fee revenue recognized on a completed contract basis also contributes to the higher seasonal revenues experienced in the fourth quarter due to the majority of our contracts ending at December 31. As is customary in the industry, these contracts provide for termination by either party on relatively short notice, usually 90 days. See Note 1 to the Consolidated Financial Statements for further discussion on the revenue recognition accounting policies.
      Our revenue is driven by our ability to maintain and grow existing business as well as generate new business. Our business is directly affected by economic conditions in the industries and regions we serve and by the marketing and advertising requirements and practices of our clients and potential clients. When economic conditions decline, companies generally decrease advertising and marketing budgets, and it becomes more difficult to achieve profitability. Our business is highly competitive, which tends to mitigate our pricing power and that of our competition.
      We believe that expanding the range of services we provide to our key clients is critical to our continued growth. We are focused on strengthening our collaboration across agencies, which we believe will increase our ability to better service existing clients and win new clients.
2004 Performance
      The primary focus of our business analysis is on operating performance — specifically, changes in revenues and operating expenses.
      We analyze the increase or decrease in revenue by reviewing the components of the change, including: the impact of foreign currency rate changes, the impact of acquisitions and divestitures, and the balance, which we refer to as organic revenue change. As economic conditions and demand for our services can vary between geographic regions, we also analyze revenues by domestic and international sources.
      Our operating expenses are in two primary categories: salaries and related expenses, and office and general expenses. As with revenue, we review the following components: impact of foreign currency rate changes, impact of acquisitions and divestitures, and the organic component of the change. Salaries and related expenses tend to fluctuate with changes in revenues and are measured as a percentage of revenues. Office and general expenses, which have both a fixed and variable component, tend not to vary as much with revenue.
      As a part of our restatement process we issued accounting guidance to our agencies to strengthen adherence to Staff Accounting Bulletin 104, Revenue Recognition. Our policies are further explained in our revenue recognition policy discussion in both management’s discussion and analysis and the footnotes. This accounting guidance governs the timing of when revenue is recognized. Accordingly, if work is being performed in a given quarter but there is insufficient evidence on an arrangement, the related revenue would be deferred to a future quarter when the evidence is obtained. However, our costs of services, on the other hand, are primarily expensed as incurred, except that incremental direct costs may be deferred under a significant long term contract until complete. With revenue being deferred until completion of the contract and costs primarily expensed as incurred, this will have a negative impact on our operating margin until the revenue can be recognized and in the period of revenue recognition. While this will not affect cash flow, it will affect organic revenue growth and margins and this effect is likely to be greater in comparing quarters than in comparing full years.

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
      In addition, the Company also issued guidelines to our agencies units to strengthen adherence to EITF 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent. This accounting guidance governs when revenues should be recorded net of external media or production cost and when it should be recorded gross. The guidance is very contract specific and can vary period to period and agency by agency. While this accounting will not affect cash flow and profitability, it could affect changes in revenue growth.
      Our financial performance over the past several years has lagged behind that of our industry peers, due to lower revenue growth, as well as impairment and restructuring charges. We are working to improve our margins by restoring consistent revenue growth and controlling expenses. Our success in doing so in 2004 was significantly limited by the cost of business priorities that we consider urgent, such as improving our internal control over financial reporting, consolidating financial back office activities by creating a shared service center, upgrading our information technology systems infrastructure, professional fees, and exiting the Motorsports business. With the exception of salary-related expenses which have increased due to our additional headcount, we believe that most other costs associated with these priorities are transitional in nature, but do not expect a decrease in total office and general expense over the short term due to the significant professional fees required as a result of our internal control weaknesses. The cost of remedying our internal control weaknesses will be significant in 2005 and 2006.
      We have indicated that accelerating organic revenue growth and improving operating margin are key corporate metrics. The following are the performance priorities and basis of analysis of our financial and operating performance:
  •  We seek to accelerate organic revenue growth by strengthening collaboration among our agencies and increasing the number of marketing services used by each client. We have established a supplemental incentive plan, expanded internal tools and resources, and heightened internal communications aimed at encouraging collaboration. We analyze our performance by calculating the percentage increase in revenue related to organic growth between comparable periods.
 
  •  We seek to improve operating margin by increasing revenue and by controlling salaries and related expenses, as well as office and general expenses. We analyze our performance by comparing revenue to prior periods and measuring salaries and related expenses, as well as office and general expenses, as a percentage of revenue. We define operating margin as operating income divided by reported revenue.
                 
    For the Years
    Ended
    December 31,
     
    2004   2003
         
Organic revenue growth percentage (vs. prior year)
    1.2 %     (3.0 )%
Operating margin percentage
    (1.5 )%     (0.5 )%
Salaries and related expenses as a percentage of revenue
    58.5 %     56.8 %
Office and general expenses as a percentage revenue
    35.2 %     36.1 %
      Organic revenue growth improved in 2004, but we have not yet reached our goal of matching peer group organic growth. Domestic organic revenue growth was 2.5%, while international revenue decreased by 0.4% on an organic basis.
      Operating margin during 2004 was impacted by cost increases and a number of charges. During 2004, we recorded asset impairments of $322.2, restructuring charges of $62.2 and contract termination charges related to the Motorsports business of $113.6, which together comprised a $31.1 increase in such charges as compared to 2003. Operating margin in 2003 was impacted by approximately $294.0 of asset

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
impairment charges and $172.9 of restructuring charges. Additionally, in 2004, we recorded cost increases for salaries and related expenses of $232.9 and professional fees of $87.6.
     Significant 2004 Activity and Subsequent Events
     Income Statement
  •  Long-lived asset impairment charges of $322.2 were recorded, including $311.9 of goodwill impairments primarily at CMG, Lowe and Draft as a result of our annual impairment review. These were due to a decline in revenue, coupled with a drop in industry valuation metrics. Refer to Note 8 of the Consolidated Financial Statements for additional information.
 
  •  Motorsports contract termination charges of $113.6 were recorded related to agreements with the British Racing Drivers Club and the Formula One Administration Limited, which released us from certain guarantees and lease obligations. We have exited this business and do not anticipate any additional material charges. Refer to Note 4 of the Consolidated Financial Statements for additional information.
 
  •  Restructuring charges of $62.2 were recorded related to severance and termination costs and lease termination and other exit costs under the 2003 and 2001 restructuring programs, net of $32.0 of reserve reversals due to changes in our original estimates. These charges were primarily the result of vacating properties and employment terminations executed during 2004. Reserve reversals recorded during 2004 were the result of changes in management’s estimates impacted by events and circumstances which arose during the period. Refer to Note 5 of the Consolidated Financial Statements for additional information.
 
  •  Investment impairment charges of $63.4 were recorded primarily related to an investment in an unconsolidated German advertising agency as a result of a decrease in projected operating results. Refer to Note 9 of the Consolidated Financial Statements for additional information.
 
  •  Shareholder litigation settlement resulted in a reduction of expenses of $32.5, related to proceeds received of $20.0 from insurance policies (which a receivable had not previously accounted for) and the reversal of $12.5 in settlement reserves due to the decrease in share price between the tentative settlement date and the final settlement date as the share settlement was a fixed number. Refer to Note 19 of the Consolidated Financial Statements for additional information.
 
  •  Prepayment penalty charges of $9.8 were recorded on the early retirement of $250.0 of the 7.875% Senior Unsecured Notes due in 2005. Refer to Note 11 of the Consolidated Financial Statements for additional information.
 
  •  A total charge of $236.0 was recorded to increase our valuation allowance for deferred income tax assets primarily relating to foreign net operating loss carry forwards. Refer to Note 10 of the Consolidated Financial Statements for additional information.
 
  •  Total salaries and related expenses and professional fees increased by approximately $232.9 and $87.6. These related primarily to increased headcount, the audit of our restated financial statements and the requirements of the Sarbanes-Oxley Act and are discussed in Consolidated Results of Operations — 2004 Compared to 2003.
     Financing Activities
  •  We replaced our previous 364-day and five-year revolving credit facilities totaling $875.0, with 364-Day and Three-Year Revolving Credit Facilities, maturing May 2007, totaling $700.0.

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
  •  We completed the issuance and sale of $250.0 aggregate principal amount of 5.40% Senior Unsecured Notes maturing 2009 and $350.0 aggregate principal amount of 6.25% Senior Unsecured Notes maturing 2014.
 
  •  Proceeds from the two debt issuances were used to pay down $250.0 of the 7.875% Senior Unsecured Notes due 2005 and redeem the $361.0 aggregate principal amount of 1.87% Convertible Subordinated Notes in December 2004.
 
  •  All of the 1.80% Convertible Subordinate Notes were redeemed for approximately $246.0 in January 2004 using net proceeds from offerings of $246.0 of convertible preferred stock and common stock in late 2003.
     Subsequent to 2004
  •  We entered into waivers and amendments to our 364-Day and Three-year Revolving Credit Facilities, to waive any breach or default related to not complying in a timely manner with our reporting requirements. In addition, financial covenants with respect to our interest coverage ratio, debt to EBITDA ratio and minimum EBITDA for certain fiscal quarters were amended.
 
  •  In March 2005, we completed a consent solicitation to amend the indentures governing five series of our outstanding public debt to provide that our failure to timely file our SEC reports would not constitute a default under the indentures until September 30, 2005.
 
  •  In July 2005, we completed the issuance and sale of $250.0 Floating Rate Notes maturing 2008. We used the proceeds to redeem the 7.875% Senior Unsecured Notes maturing October 2005 with an aggregate principal amount of $250.0.
 
  •  Our Three-Year Revolving Credit Facility was amended and restated as of September 27, 2005. The effectiveness of the amended Three-Year Revolving Credit Facility is subject to certain conditions. The amendment revises certain of the negative and financial covenants under our existing Three-Year Revolving Credit Facility. The 364-day Revolving Credit Facility will expire on September 30, 2005.
Management Changes
  •  In February 2004, Stephen Gatfield was hired as our Executive Vice President, Global Operations and Innovation.
 
  •  In May 2004, Nick Cyprus was hired as our Senior Vice President, Controller and Chief Accounting Officer.
 
  •  In June 2004, Robert Thompson was named our Executive Vice President and Chief Financial Officer. He resigned in July 2005.
 
  •  In July 2004, Michael Roth was hired as our Executive Chairman.
 
  •  In November 2004, Tony Wright was hired as Chief Executive Officer of Lowe Worldwide and Ed Powers was named Chief Operating Officer of Lowe Worldwide.
Subsequent to 2004
  •  In January 2005, Michael Roth was named our Chairman and Chief Executive Officer. Concurrently, David Bell, our Chairman and Chief Executive Officer since 2003 was named Co-Chairman.

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
  •  In May 2005, Steve Centrillo was hired as our Executive Vice President and Chief Growth Officer.
 
  •  In May 2005, Mark Rosenthal was hired as our Chairman and Chief Executive Officer of Media Operations.
 
  •  In June 2005, Steve Blamer, who had been hired as Chief Executive Officer of Foote, Cone and Belding Worldwide in December 2004, assumed his responsibility following the expiration of a prior non-compete agreement.
 
  •  In July 2005, Frank Mergenthaler was hired as our Executive Vice President and Chief Financial Officer.
RESULTS OF OPERATIONS
Consolidated Results of Operations — 2004 Compared to 2003
REVENUE
      The components of the 2004 change were as follows:
                                                                   
    Total   Domestic   International
             
    $   % Change   $   % Change   % of Total   $   % Change   % of Total
                                 
2003 (Restated)
  $ 6,161.7             $ 3,459.3               56.1 %   $ 2,702.4               43.9 %
                                                 
Foreign currency changes
    237.7       3.9 %                         237.7       8.8 %        
Net acquisitions/divestitures
    (88.0 )     (1.4 )%     (35.4 )     (1.0 )%             (52.6 )     (1.9 )%        
Organic
    75.6       1.2 %     85.3       2.5 %             (9.7 )     (0.4 )%        
                                                 
 
Total change
    225.3       3.7 %     49.9       1.4 %             175.4       6.5 %        
2004
  $ 6,387.0             $ 3,509.2               54.9 %   $ 2,877.8               45.1 %
                                                 
      For the year ended December 31, 2004, consolidated revenues increased $225.3, or 3.7%, as compared to 2003, which was attributable to foreign currency exchange rate changes of $237.7 and organic revenue growth of $75.6, partially offset by the effect of net acquisitions and divestitures of $88.0.
      The increase due to foreign currency changes was attributable to the strengthening of the Euro and Pound Sterling in relation to the US Dollar. The net effect of acquisitions and divestitures resulted largely from the sale of the Motorsports business during 2004.
      During 2004, organic revenue change of 75.6, or 1.2%, was driven by an increase at IAN, partially offset by decrease at CMG. The increase at IAN was a result of client wins, additional business from existing clients, and overall growth in domestic markets. The decrease at CMG was as a result of weakness in demand for branding and sports marketing services, partially offset by growth in the public relations business.

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
OPERATING EXPENSES
                                                   
    For the Years Ended December 31,        
             
    2004   2003        
                 
        % of       % of        
    $   Revenue   $   Revenue   $ Change   % Change
                         
            (Restated)        
Salaries and related expenses
  $ 3,733.5       58.5 %   $ 3,500.6       56.8 %   $ 232.9       6.7 %
Office and general expenses
    2,249.8       35.2 %     2,225.7       36.1 %     24.1       1.1 %
Restructuring charges
    62.2               172.9               (110.7 )     (64.0 )%
Long-lived asset impairment and other charges
    322.2               294.0               28.2       9.6 %
Motorsports contract termination costs
    113.6                             113.6        
                                     
 
Total operating expenses
  $ 6,481.3             $ 6,193.2             $ 288.1       4.7 %
                                     
Salaries and Related Expenses
      The components of the 2004 change were as follows:
                         
    Total    
        % of
    $   % Change   Revenue
             
2003 (Restated)
  $ 3,500.6               56.8 %
                   
Foreign currency changes
    129.4       3.7 %        
Net acquisitions/divestitures
    (40.5 )     (1.2 )%        
Organic
    144.0       4.1 %        
                   
Total change
    232.9       6.7 %        
2004
  $ 3,733.5               58.5 %
                   
      Salaries and related expenses are the largest component of operating expenses and consist primarily of salaries and related benefits, and performance incentives. During 2004, salaries and related expenses increased to 58.5% of revenues, compared to 56.8% in 2003. In 2004, salaries and related expenses increased $144.0, excluding the increase related to foreign currency exchange rate changes of $129.4 and a decrease related to net acquisitions and divestitures of $40.5.
      Salaries and related expenses were impacted by changes in foreign currency rates, attributable to the strengthening of the Euro and Pound Sterling in relation to the US Dollar. The increase due to foreign currency rate changes was partially offset by the impact of net acquisitions and divestitures activity, which resulted largely from the sale of the Motorsports business during 2004.
      The increase in salaries and related expenses, excluding the impact of foreign currency and net acquisitions and divestitures, was primarily the result of increases in employee headcount at certain locations and increased utilization of temporary and freelance staffing and higher performance incentive expense at a number of agencies that experienced an increase in operating results. Furthermore, during the year, we hired additional personnel within our operating units and in the corporate group to support our back office processes, including accounting and shared services initiatives, as well as our ongoing efforts in achieving Sarbanes-Oxley compliance. We reduced staff at certain operations after client accounts were

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
lost. Cost savings associated with headcount reductions were partially offset by increased severance costs associate with the headcount reductions.
     Office and General Expenses
      The components of the 2004 change were as follows:
                         
    Total    
        % of
    $   % Change   Revenue
             
2003 (Restated)
  $ 2,225.7               36.1 %
                   
Foreign currency changes
    102.9       4.6 %        
Net acquisitions/divestitures
    (63.9 )     (2.9 )%        
Organic
    (14.9 )     (0.7 )%        
                   
Total change
    24.1       1.1 %        
2004
  $ 2,249.8               35.2 %
                   
      Office and general expenses primarily consists of rent, office and equipment, depreciation, professional fees, other overhead expenses and certain out-of-pocket expenses related to our revenue. During 2004, office and general expenses decreased to 35.2% of revenues, compared to 36.1% in 2003. In 2004, office and general expenses decreased $14.9, excluding the increase related to foreign currency exchange rate changes of $102.9 and a decrease related to net acquisitions and divestitures of $63.9.
      Office and general expenses were impacted by changes in foreign currency rates, attributable to the strengthening of the Euro and Pound Sterling in relation to the US Dollar. The increase due to foreign currency rate changes was offset by the impact of net acquisitions and divestitures activity, which resulted largely from the sale of the Motorsports business in 2004.
      The decrease in office and general expenses, excluding the impact of foreign currency and net acquisition and divestitures activity, was primarily the result of lower occupancy and overhead costs, and a decrease related to charges recorded by CMG in 2003 to secure certain sports television rights. These decreases, however, were partially offset by increases driven by a rise in professional fees as part of our ongoing efforts in achieving Sarbanes-Oxley compliance, and the development of information technology systems and processes related to our shared services initiatives.

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
Restructuring Charges
      During 2004 and 2003, we recorded net expense related to lease termination and other exit costs and severance and termination costs for the 2003 and 2001 restructuring programs of $62.2 and $172.9, respectively, which included the impact of adjustments resulting from changes in management’s estimates as described below. A summary of the net (income) and expense by segment is as follows:
                                                           
    Lease Termination and        
    Other Exit Costs   Severance and Termination Costs    
             
    2003   2001       2003   2001        
    Program   Program   Total   Program   Program   Total   Total
                             
2004 Net (Income) Expense
                                                       
IAN
  $ 40.3     $ (7.3 )   $ 33.0     $ 14.1     $ (4.3 )   $ 9.8     $ 42.8  
CMG
    8.1       4.0       12.1       5.1       (0.7 )     4.4       16.5  
Corporate
    3.7       (1.0 )     2.7       0.3       (0.1 )     0.2       2.9  
                                           
 
Total
  $ 52.1     $ (4.3 )   $ 47.8     $ 19.5     $ (5.1 )   $ 14.4     $ 62.2  
                                           
2003 Net (Income) Expense (Restated)
                                                       
IAN
  $ 23.1     $ 8.8     $ 31.9     $ 106.6     $ (0.1 )   $ 106.5     $ 138.4  
CMG
    12.7       6.1       18.8       15.7             15.7       34.5  
Motorsports
                      0.4             0.4       0.4  
Corporate
    (2.2 )     (1.3 )     (3.5 )     3.1             3.1       (0.4 )
                                           
 
Total
  $ 33.6     $ 13.6     $ 47.2     $ 125.8     $ (0.1 )   $ 125.7     $ 172.9  
                                           
Lease termination and other exit costs
2003 Program
      Net expense related to lease termination and other exit costs recorded for 2004 were $52.1, comprised of charges of $67.8, partially offset by adjustments to management estimates of $15.7. For 2003, net expense was $33.6, comprised of charges of $41.6 offset by similar adjustments of $8.0. These charges related to vacating 43 and 55 offices in 2004 and 2003, respectively, located primarily in the US and Europe. Charges were recorded at net present value and were net of estimated sublease rental income. The discount related to lease terminations is being amortized over the expected remaining term of the related lease.
      In addition to amounts recorded as restructuring charges, we recorded charges of $11.1 and $16.5 during 2004 and 2003, respectively, related to the accelerated amortization of leasehold improvements on properties included in the 2003 program. These charges were included in office and general expenses on the Consolidated Statements of Operations.
2001 Program
      Net (income) and expense related to lease termination and other exit costs of ($4.3) and $13.6, recorded for 2004 and 2003, respectively, resulted exclusively from the impact of adjustments to management estimates. The 2001 program resulted in approximately 180 offices being vacated worldwide.

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
Adjustments to Estimates
      Lease termination and other exit costs for the 2003 and 2001 restructuring programs included the net impact of adjustments for changes in management estimates to decrease the restructuring reserves by $20.0 in 2004 and increase the reserve by $5.6 in 2003. Adjustments to management estimates of net lease obligations included both increases and decreases to the restructuring reserve balance as a result of several factors. The significant factors were our negotiation of terms upon the exit of leased properties, changes in sublease rental income and utilization of previously vacated properties by certain of our agencies due to improved economic conditions in certain markets, all of which occurred during the period recorded.
Severance and termination costs
2003 Program
      Net expense related to severance and termination costs of $19.5 recorded for 2004 were comprised of charges of $26.4, partially offset by adjustments to management estimates of $6.9. For 2003, net expenses of $125.8 was comprised of charges of $133.7 offset by adjustments of $7.9. These charges related to a worldwide workforce reduction of approximately 400 employees in 2004 and 2,900 in 2003. The restructuring program affected employee groups across all levels and functions, including executive, regional and account management and administrative, creative and media production personnel. The majority of the severance charges related to the US and Europe, with the remainder in Asia and Latin America.
2001 Program
      Net income related to severance and termination costs of $5.1 and $0.1 recorded for 2004 and 2003, respectively, resulted exclusively from the impact of adjustments to management estimates. The 2001 program related to a worldwide reduction of approximately 7,000 employees.
Adjustments to Estimates
      Severance and termination costs associated with the 2003 and 2001 restructuring programs included the net impact of adjustments for changes in management estimates to decrease the restructuring reserves by $12.0 in 2004 and $8.0 in 2003. Adjustments to management estimates of severance and termination obligations included both increases and decreases to the restructuring reserve balance as a result of several factors. The significant factors were the decrease in the number of terminated employees, change in amounts paid to terminated employees and change in estimates of taxes and restricted stock payments related to terminated employees, all of which occurred in the period recorded.
      For additional information, see Note 5 to the Consolidated Financial Statements.
Long-Lived Asset Impairment and Other Charges
      Long-lived assets include land, buildings, equipment, goodwill and other intangible assets. Buildings, equipment and other intangible assets with finite lives are depreciated or amortized on a straight-line basis over their respective estimated useful lives. At least annually, we review all long-lived assets for impairment. When necessary, we record an impairment charge for the amount that the carrying value exceeds the fair value. See Note 1 to the Consolidated Financial Statements for fair value determination and impairment testing methodologies.

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
      The following table summarizes long-lived asset impairment and other charges:
                                                                   
    For the Years Ended December 31,
     
    2004   2003 (Restated)
         
        Motor-           Motor-    
    IAN   CMG   sports   Total   IAN   CMG   sports   Total
                                 
Goodwill impairment
  $ 220.2     $ 91.7     $     $ 311.9     $ 0.4     $ 218.0     $     $ 218.4  
Fixed asset impairment
    2.0       0.4       3.0       5.4       2.3             63.8       66.1  
Other
    4.9                   4.9       9.1       0.4             9.5  
                                                 
 
Total
  $ 227.1     $ 92.1     $ 3.0     $ 322.2     $ 11.8     $ 218.4     $ 63.8     $ 294.0  
                                                 
      The long-lived asset impairment charges recorded in 2004 and 2003 are due to the following:
2004 Impairments
      IAN — During the third quarter of 2004, we recorded goodwill impairment charges of approximately $220.2 at The Partnership reporting unit, which was comprised of, Lowe Worldwide, Draft Worldwide, Mullen, Dailey & Associates and BGW. Our long-term projections showed previously unanticipated declines in discounted future operating cash flows due to recent client losses, reduced client spending, and declining industry valuation metrics. These discounted future operating cash flow projections caused the estimated fair value of The Partnership to be less than the book value. The Partnership was subsequently disbanded in the fourth quarter of 2004 and the remaining goodwill was allocated based on the relative fair value of the agencies at the time of disbandment. We considered the possibility of impairment at Lowe and Draft, the two largest agencies previously within The Partnership. However, at this point we have determined that there is no discernible trigger event for an additional impairment. We will continue to monitor the results and, should operating performance worsen, particularly at Lowe we may conclude that a trigger event has occurred and impairment may then be required.
      CMG — As a result of the annual impairment review, a goodwill impairment charge of $91.7 was recorded at our CMG reporting unit, which is comprised of Weber Shandwick, Golin Harris, DeVries Public Relations and FutureBrand. The fair value of CMG was adversely affected by declining industry market valuation metrics, specifically, a decrease in the EBITDA multiples used in the underlying valuation calculations. The impact of the lower EBITDA multiples caused the calculated fair value of CMG goodwill to be less than the related book value.
2003 Impairments
      CMG — We recorded an impairment charge of $218.0 to reduce the carrying value of goodwill at Octagon. The Octagon impairment charge reflects the reduction of the unit’s fair value due principally to poor financial performance in 2003 and lower than expected future financial performance. Specifically, there was significant pricing pressure in both overseas and domestic TV rights distribution, declining fees from athlete representation, and lower than anticipated proceeds from committed future events, including ticket revenue and sponsorship.
      Motorsports — We recorded fixed asset impairment charges of $63.8, consisting of $38.0 in connection with the sale of a business comprised of the four owned auto racing circuits and $9.6 related to the sales of other Motorsports entities and a fixed asset impairment of $16.2 for outlays that Motorsports was contractually required to spend to improve the racing facilities.

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
      For additional information, see Note 8 to the Consolidated Financial Statements.
Motorsports Contract Termination Costs
      As discussed in Note 4 to the Consolidated Financial Statements, during the year ended December 31, 2004, we recorded a pretax charge of $113.6 related to a series of agreements with the British Racing Drivers Club and Formula One Administration Limited which release us from certain guarantees and lease obligations in the United Kingdom. We have exited this business and do not anticipate any additional material charges.
EXPENSE AND OTHER INCOME
                                   
    For the Years Ended        
    December 31,        
             
    2004   2003   $ Change   % Change
                 
        (Restated)        
Interest expense
  $ (172.0 )   $ (207.0 )   $ 35.0       (16.9 )%
Debt prepayment penalty
    (9.8 )     (24.8 )     15.0       (60.5 )%
Interest income
    50.7       39.3       11.4       29.0 %
Investment impairments
    (63.4 )     (71.5 )     8.1       (11.3 )%
Litigation charges
    32.5       (127.6 )     160.1       (125.5 )%
Other income (expense)
    (10.7 )     50.3       (61.0 )     (121.3 )%
                         
 
Total
  $ (172.7 )   $ (341.3 )   $ 168.6       (49.4 )%
                         
Interest Expense
      The decrease in interest expense was primarily due to the redemption of our $250.0 1.80% Convertible Subordinate Notes in January 2004 and the early redemption of our borrowings under the Prudential Agreements during the third quarter of 2003.
Debt Prepayment Penalty
      During the fourth quarter of 2004, a prepayment penalty of $9.8 was recorded related to the early retirement of $250.0 of the 7.875% Senior Unsecured Notes due in 2005. During the third quarter of 2003, we repaid our borrowings under the Prudential Agreements, repaying $142.5 principal amount and incurring a prepayment penalty of $24.8.
Interest Income
      The increase in interest income in 2004 was primarily due to an increase in our average balance of short-term investments held during the year, as well as an increase in interest rates when compared to 2003.
Investment Impairments
      During 2004, we recorded investment impairment charges of $63.4. The principal component of the charge was $50.9 related to the impairment of an unconsolidated investment in a German advertising agency, Springer & Jacoby, as a result of a decrease in projected operating results. Additionally, we recorded impairment charges of $4.7 related to unconsolidated affiliates primarily in Israel, Brazil, Japan and India, and $7.8 related to several other available-for-sale investments.

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
      During 2003, we recorded $71.5 of investment impairment charges related to 20 investments. The charge related principally to investments in Fortune Promo 7 of $9.5 in the Middle East, Koch Tavares of $7.7 in Latin America, Daiko of $10.0 in Japan, Roche Macaulay Partners of $7.9 in Canada, Springer & Jacoby of $6.5 in Germany and Global Hue of $6.9 in the US. The majority of the impairment charges resulted from deteriorating economic conditions in the countries in which the agencies operate, due to the loss of one or several key clients.
Litigation Charges
      During 2004, with the settlement approved we received $20.0 from insurance proceeds which we recorded as a reduction in litigation charges because we had not previously established a receivable. We also recorded a reduction of 12.5 relating to a decrease in the share price between the tentative settlement date and the final settlement date.
      During 2003, we recorded litigation charges of $127.6 for various legal matters, of which $115.0 related to a then-tentative settlement of the class action shareholder suits discussed in Note 19 to the Consolidated Financial Statements. Under the terms of the settlement, we were required to pay $20.0 in cash and issue 6.6 shares of our common stock. The ultimate amount of the litigation charge related to the settlement was to be dependent upon our stock price at the time of the final settlement (as the number of shares was fixed in the agreement), which took place in December 2004.
Other Income (Expense)
      In 2004, the $10.7 other expense included $18.2 of net losses on the sale of 19 agencies. The losses related primarily to the sale of Transworld Marketing, a US-based promotions agency, which resulted in a loss of $8.6, and a $6.2 loss for the final liquidation of the Motorsports investment. See Note 4 to the Consolidated Financial Statements for further discussion of the Motorsports disposition. These net losses were offset by gains of sale of Modem Media shares and other available-for-sale securities and miscellaneous investment income of $0.8 and $6.7, respectively.
      In 2003, other income of $50.3 included approximately 11.0 shares of Modem Media sold for net proceeds of approximately $57.0, resulting in a pre-tax gain of $30.3. We also sold all of the approximately 11.7 shares of Taylor Nelson Sofres plc (“TNS”) we had acquired through the sale of NFO WorldGroup Inc. (“NFO”), for approximately $42.0 of net proceeds. A pre-tax gain of $13.3 was recorded.
OTHER ITEMS
Income Taxes
                 
    For the Years Ended
    December 31,
     
    2004   2003
         
        (Restated)
Provision for income taxes
  $ 262.2     $ 242.7  
             
Effective tax rate
    98.2 %     65.1 %
             
      Our effective tax rate was negatively impacted in both 2004 and 2003 by the establishment of valuation allowances, as described below, restructuring charges, and non-deductible long-lived asset impairment charges. In 2004, our effective tax rate was also impacted by pretax charges and related tax benefits resulting from the Motorsports contract termination costs. The difference between the effective tax

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
rate and the statutory federal rate of 35% is also due to state and local taxes and the effect of non-US operations.
Valuation Allowance
      Under Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes, we are required, on a quarterly basis, to evaluate the realizability of our deferred tax assets. SFAS No. 109 requires that a valuation allowance be established when it is more likely than not that all or a portion of deferred tax assets will not be realized. In circumstances where there is sufficient negative evidence, establishment of valuation allowance must be considered. We believe that cumulative losses in the most recent three-year period represent sufficient negative evidence under the provisions of SFAS No. 109 and, as a result, we determined that certain of our deferred tax assets required the establishment of a valuation allowance. The deferred tax assets for which an allowance was established relate primarily to foreign net operating and US capital loss carryforwards.
      During 2004, the valuation allowance of $236.0 was established in continuing operations on existing deferred tax assets and current year losses with no benefit. The total valuation allowance as of December 31, 2004 was $488.6. Our income tax expense recorded in the future will be reduced to the extent of offsetting decreases in our valuation allowance. The establishment or reversal of valuation allowances could have a significant negative or positive impact on future earnings.
      During 2003, the valuation allowance of $111.4 was established in continuing operations on existing deferred tax assets and losses in 2003 with no benefit. In addition, $3.7 of valuation allowances were established for certain US capital and other loss carryforwards. The total valuation allowance as of December 31, 2003 was $252.6.
      For additional information, see Note 10 to the Consolidated Financial Statements.
Minority Interest and Unconsolidated Affiliates
                 
    For the Years Ended
    December 31,
     
    2004   2003
         
        (Restated)
Income applicable to minority interests, net of tax
  $ (21.5 )   $ (27.0 )
             
Equity in net income of unconsolidated affiliates, net of tax
  $ 5.8     $ 2.4  
             
      The decrease in income applicable to minority interests was primarily due to lower earnings of majority-owned international businesses, primarily in Europe, and the sale of majority-owned businesses in Latin America.
      The increase in equity in net income of unconsolidated affiliates was primarily due to the impact of prior year losses at Modem Media, which was sold in 2003, and the impact of higher 2003 losses at an unconsolidated investment in Brazil and a US-based sports and entertainment event business.

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
NET INCOME (LOSS)
                                 
    For the Years Ended        
    December 31,        
             
    2004   2003   $ Change   % Change
                 
        (Restated)        
Loss from continuing operations
  $ (544.9 )   $ (640.1 )   $ 95.2       14.9 %
Less: preferred stock dividends
    19.8             19.8        
Net loss from continuing operations
    (564.7 )     (640.1 )     75.4       11.8 %
Income from discontinued operations, net of taxes of $3.5 and $8.3, respectively
    6.5       101.0       (94.5 )     (93.6 )%
                         
Net loss applicable to common stockholders
  $ (558.2 )   $ (539.1 )   $ (19.1 )     3.5 %
                         
Loss from Continuing Operations
      In 2004, our loss from continuing operations decreased by $95.2 or 14.9% as a result of an increase in revenue of $225.3 and a decrease in expense and other income primarily driven by higher litigation costs in 2003, as a result of the shareholder suit settlement. These changes were partially offset by an increase in operating expenses of $288.1, which includes Motorsports contract termination costs of $113.6.
Income from Discontinued Operations
      Recorded within income from discontinued operations is the impact of our sale of NFO, our research unit, to TNS in 2003. NFO is classified in discontinued operations and the results of operations and cash flows of NFO have been removed from our results of continuing operations and cash flows for all periods. During 2003, we completed the sale of NFO for $415.6 in cash ($376.7, net of cash sold and expenses) and approximately 11.7 shares of TNS stock. We sold the TNS stock in December 2003 for net proceeds of approximately $42.0. As a result of the sale of NFO, we recognized a pre-tax gain of $99.1 ($89.1, net of tax) in the third quarter of 2003 after certain post closing adjustments. The TNS shares sold resulted in a pre-tax gain of $13.3. In July 2004, we received an additional $10.0 ($6.5, net of tax) from TNS as a final payment. For additional information, see Note 4 to the Consolidated Financial Statements.
Segment Results of Operations — 2004 Compared to 2003
      As discussed in Note 18 to the Consolidated Financial Statements, we have three reporting segments: our operating divisions, IAN, CMG and Motorsports. We also report results for the corporate group. The profitability measure employed by our chief operating decision makers for allocating resources to operating divisions and assessing operating division performance is operating profit. For this purpose, amounts reported as segment operating profit exclude the impact of restructuring and impairment charges, as we do not consider these charges when assessing operating division performance or when allocating resources. Segment profit excludes interest income and expense, debt repayment penalties, investment impairments, litigation charges and other non-operating income. The Motorsports business was sold during 2004. Other than long-lived asset impairment and contract termination costs, the operating results of Motorsports are

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
not material to consolidated results, and therefore are not discussed in detail below. The following table summarizes revenue and operating income by segment:
                                   
    For the Years Ended        
    December 31,        
             
    2004   2003   $ Change   % Change
                 
        (Restated)        
Revenue:
                               
IAN
  $ 5,399.2     $ 5,140.5     $ 258.7       5 %
CMG
    935.8       942.4       (6.6 )     (0.7 )%
Motorsports
    52.0       78.8       (26.8 )     (34.0 )%
                         
 
Consolidated revenue
  $ 6,387.0     $ 6,161.7     $ 225.3       3.7 %
                         
Segment operating income (loss):
                               
IAN
  $ 577.2     $ 551.9     $ 25.3       4.6 %
CMG
    83.7       55.7       28.0       50.3 %
Motorsports
    (14.0 )     (43.6 )     29.6       67.9 %
Corporate and other
    (243.2 )     (128.6 )     (114.6 )     89.1 %
                                                                                 
    For the Years Ended December 31,
     
    2004   2003 (Restated)
         
Reconciliation to segment   IAN   CMG   Motorsports   Corporate   Total   IAN   CMG   Motorsports   Corporate   Total
operating income:                                        
Consolidated operating income (loss)
  $ 307.3     $ (24.9 )   $ (130.6 )   $ (246.1 )   $ (94.3 )   $ 401.7     $ (197.2 )   $ (107.8 )   $ (128.2 )   $ (31.5 )
Adjustments:
                                                                               
Restructuring charges
    (42.8 )     (16.5 )           (2.9 )     (62.2 )     (138.4 )     (34.5 )     (0.4 )     0.4       (172.9 )
Long lived asset impairment and other charges:
    (227.1 )     (92.1 )     (116.6 )           (435.8 )     (11.8 )     (218.4 )     (63.8 )           (294.0 )
                                                             
Segment operating income
  $ 577.2     $ 83.7     $ (14.0 )   $ (243.2 )           $ 551.9     $ 55.7     $ (43.6 )   $ (128.6 )        
                                                             
INTEGRATED AGENCY NETWORKS (“IAN”)
     REVENUE
      The components of the 2004 change were as follows:
                                                                   
    Total   Domestic   International
             
    $   % Change   $   % Change   % of Total   $   % Change   % of Total
                                 
2003 (Restated)
  $ 5,140.5             $ 2,864.4               55.7 %   $ 2,276.1               44.3 %
                                                 
Foreign currency changes
    194.1       3.8 %                         194.1       8.5 %        
Net acquisitions/divestitures
    (40.0 )     (0.8 )%     (27.5 )     (1.0 )%             (12.5 )     (0.5 )%        
Organic
    104.6       2.0 %     96.4       3.4 %             8.2       0.4 %        
                                                 
 
Total change
    258.7       5.0 %     68.9       2.4 %             189.8       8.3 %        
2004
  $ 5,399.2             $ 2,933.3               54.3 %   $ 2,465.9               45.7 %
                                                 

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
      For the year ended December 31, 2004, IAN experienced net increases in revenue as compared to 2003 by $258.7, or 5.0%, which was comprised of organic revenue growth of $104.6 and an increase in foreign currency exchange rate changes of $194.1, partially offset by a decrease attributable to net acquisitions and divestitures of $40.0. The increase due to foreign currency was primarily attributable to the strengthening of the Euro and Pound Sterling in relation to the US Dollar. This increase was partially offset by the net effect of divestitures and acquisitions, primarily related to the sale of some small businesses at McCann, Lowe, and Draft, and increased equity ownership in two small businesses at Lowe.
      The organic revenue increase was primarily driven by increases at McCann, Draft, FCB, and Deutsch, partially offset by decreases at Lowe. McCann experienced an organic revenue increase as a result of new client wins and increased business from existing clients, primarily in our US and European agencies. Draft experienced an organic revenue increase mainly in the US due to client wins and increased business by existing clients, partially offset by poor economic conditions in Europe and the closing of its field marketing business in 2003. FCB experienced an organic revenue increase due to increased spending by existing clients and client wins, partially offset by a decrease in revenues as a result of clients lost during the year, mainly in the US and Germany. Deutsch experienced organic revenue growth stemming from new client wins and increased business from existing clients. Lowe experienced an organic revenue decline, primarily the result of client losses and reduced business from major multinational clients.
SEGMENT OPERATING INCOME
                                 
    For the Years Ended        
    December 31,        
             
        2003        
    2004   (Restated)   $ Change   % Change
                 
Segment operating income
  $ 577.2     $ 551.9     $ 25.3       4.6 %
                         
Operating margin
    10.7 %     10.7 %                
                         
      For the year ended December 31, 2004, IAN operating income increased by $25.3, or 4.6%, which was a result of an increase in revenue of $258.7, offset by an increase in salaries and related expenses of $202.8 and increased office and general expenses of $30.6.
      Segment operating income growth, excluding the impact of foreign currency and net effects of acquisitions and divestitures, was primarily driven by increases at McCann, and to a lesser extent, Deutsch and FCB, partially offset by a decrease at Lowe. McCann experienced an organic revenue increase with essentially flat operating expenses. Operating expenses at McCann reflect higher compensation costs to support new client business and an increase in contractual compensation payments made to individuals for the achievement of specific operational targets as part of certain prior year acquisition agreements. These increases were offset by lower depreciation expense incurred as a result of limited capital purchases, as well as a decrease in bad debt expense due to improved collection of accounts receivable. Deutsch and FCB experienced increases as a result of organic revenue increases, partially offset by an increase in operating expense related to increased employee incentives and additional salaries and freelance costs to support the increase in business activity. The decrease in operating income at Lowe was the result of a significant organic revenue decrease partially offset by moderate decreases in operating expenses. The decrease in operating expenses at Lowe was the result of lower headcount and reduced office space requirements.

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
CONSTITUENT MANAGEMENT GROUP (“CMG”)
REVENUE
      The components of the 2004 change were as follows:
                                                                   
    Total       Domestic       International
                     
    $   % Change   $   % Change   % of Total   $   % Change   % of Total
                                 
2003 (Restated)
  $ 942.4             $ 593.2               62.9 %   $ 349.2               37.1 %
                                                 
Foreign currency changes
    34.4       3.7 %                         34.4       9.9 %        
Net acquisitions/divestitures
    (11.0 )     (1.2 )%     (7.9 )     (1.3 )%             (3.1 )     (0.9 )%        
Organic
    (30.0 )     (3.2 )%     (9.3 )     (1.6 )%             (20.7 )     (5.9 )%        
                                                 
 
Total change
    (6.6 )     (0.7 )%     (17.2 )     (2.9 )%             10.6       3.0 %        
2004
  $ 935.8             $ 576.0               61.6 %   $ 359.8               38.4 %
                                                 
      For the year ended December 31, 2004, CMG experienced decreased revenues as compared to 2003 by $6.6, or 0.7%, which was comprised of an organic revenue decrease of $30.0 and the impact of acquisitions and divestitures of $11.0, partially offset by an increase in foreign currency exchange rate changes of $34.4. The increase due to foreign currency exchange rate was primarily attributable to the strengthening of the Euro and Pound Sterling in relation to the US Dollar. Net effects of acquisitions and divestitures primarily related to the disposition of three small businesses in 2004 and two small businesses in 2003.
      The organic revenue decline was primarily driven by a decrease in the branding and sports marketing businesses, offset slightly by growth in our public relations business.
     SEGMENT OPERATING INCOME
                                 
    For the Years Ended        
    December 31,        
             
    2004   2003   $ Change   % Change
                 
        (Restated)        
Segment operating income
  $ 83.7     $ 55.7     $ 28.0       50.3 %
                         
Operating margin
    8.9 %     5.9 %                
                         
      For the year ended December 31, 2004, CMG operating income increased by $28.0, or 50.3%, which was the result of a $46.6 decrease in office and general expenses, offset by a $6.6 decrease in revenue and $12.0 increase in salary and related expenses.
      Segment operating income growth, excluding the impact of foreign currency and net effects of acquisition and divestitures, was primarily driven by an increase at sports marketing business, partially offset by an increase in CMG corporate office expense. While there was organic revenue decrease sports marketing business operating expenses decreased at a higher rate than organic revenue decrease due to a decrease related to charges recorded by CMG in 2003 to secure certain sports television rights. Increased corporate office expenses was driven by higher expenses recorded for performance incentive awards as a result of improved revenue performance and additional accruals for post employment and other benefits for management personnel.

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
CORPORATE AND OTHER
      Amounts in corporate and other include corporate office expenses and shared service center expenses, as well as certain other centrally managed expenses which are not allocated to operating divisions. The following significant expenses are included in corporate and other:
                                   
    For the Years Ended        
    December 31,        
             
    2004   2003   $ Change   % Change
                 
        (Restated)        
Salaries and related expenses
  $ 151.2     $ 129.0     $ 22.2       17.2 %
Professional fees
    143.4       49.8       93.6       188.0 %
Rent and depreciation
    38.0       30.5       7.5       24.6 %
Corporate Insurance
    29.7       26.5       3.2       12.1 %
Bank fees
    2.8       1.6       1.2       75.0 %
Other
    11.4       9.3       2.1       22.6 %
Expenses allocated to operating divisions
    (133.3 )     (118.1 )     (15.2 )     (12.9 )%
                         
 
Total corporate and other
  $ 243.2     $ 128.6     $ 114.6       89.1 %
                         
      Salaries, benefits and related expenses include salaries, pension, the cost of medical, dental and other insurance coverage and other compensation-related expenses for corporate office employees. Professional fees include costs related to the preparation for Sarbanes-Oxley Act compliance, the financial statement audit, legal counsel, information technology and other consulting fees. Rent and depreciation includes rental expense and depreciation of leasehold improvements for properties occupied by corporate office employees. Bank fees relates to our debt and credit facilities. The amounts of expenses allocated to operating segments are calculated monthly based on a formula that uses the weighted average net revenues of the operating unit. The majority of the corporate costs including most of the costs associated with internal control remediation and compliance are not allocated back to operating segments.
      The increase in corporate and other expense of $114.6 or 89.1% is primarily related to the increase in professional fees and salaries and related expenses. The increase in professional fees primarily resulted from costs associated with complying with the requirements of the Sarbanes-Oxley Act. We also incurred increased expenses for the development of systems and processes related to our shared services initiatives. The increase in payroll related expenses is due mainly to an increase in the use of temporary employees in order to enhance monitoring controls at the corporate office as well as to support our significant ongoing efforts to achieve Sarbanes-Oxley compliance. Increased headcount and expanded office space at the corporate office also contributed to this increase. Also, certain contractual bonuses for management increased as compared to prior year.

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
Consolidated Results of Operations — 2003 Compared to 2002
     REVENUE
      The components of the 2003 change were as follows:
                                                                   
    Total   Domestic   International
             
    $   % Change   $   % Change   % of Total   $   % Change   % of Total
                                 
2002 (Restated)
  $ 6,059.1             $ 3,478.1               57.4 %   $ 2,581.0               42.6 %
                                                 
Foreign currency changes
    293.7       4.8 %                         293.7       11.4 %        
Net acquisitions/divestitures
    (11.8 )     (0.2 )%     8.8       0.3 %             (20.6 )     (0.8 %)        
Organic
    (179.3 )     (3.0 )%     (27.6 )     (0.8 )%             (151.7 )     (5.9 %)        
                                                 
 
Total change
    102.6       1.7 %     (18.8 )     (0.5 )%             121.4       4.7 %        
2003 (Restated)
  $ 6,161.7             $ 3,459.3               56.1 %   $ 2,702.4               43.9 %
                                                 
      For the year ended December 31, 2003, consolidated revenues increased $102.6, or 1.7%, as compared to 2002, which was attributable to foreign currency exchange rate changes of $293.7, partially offset by the effect of net acquisitions and dispositions of $11.8 and organic revenue decrease of $179.3.
      The increase due to foreign currency changes was primarily attributable to the strengthening of the Euro and Pound Sterling in relation to the US Dollar. The net effect of acquisitions and divestitures resulted largely from the sale of a part of the Motorsports business during 2003.
      During 2003, organic revenue decline of $179.3, or 3.0%, was driven by decreases at IAN and CMG. The decrease at IAN was a result of client losses as well as decreased business from existing multi-national clients. The decrease at CMG was a result of revenue declines in our public relations business, driven by general economic factors in the US, partially offset by increases in our events and sports marketing businesses.
     OPERATING EXPENSES
                                                   
        For the Years Ended        
        December 31,        
                 
    2003 (Restated)   2002 (Restated)        
                 
        % of       % of        
    $   Revenue   $   Revenue   $ Change   % Change
                         
Salaries and related expenses
  $ 3,500.6       56.8 %   $ 3,396.7       56.1 %   $ 103.9       3.1 %
Office and general expenses
    2,225.7       36.1 %     2,248.7       37.1 %     (23.0 )     (1.0 )%
Restructuring charges
    172.9       2.8 %     7.9       0.1 %     165.0       2088.6 %
Long-lived asset impairment and other charges
    294.0       4.8 %     130.0       2.1 %     164.0       126.2 %
                                     
 
Total operating expenses
  $ 6,193.2             $ 5,783.3             $ 409.9       7.1 %
                                     

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
     Salaries and Related Expenses
      The components of the 2003 change were as follows:
                           
    Total    
        % of
    $   % Change   Revenue
             
2002 (Restated)
  $ 3,396.7               56.1 %
                   
Foreign currency changes
    156.7       4.6 %        
Net acquisitions/divestitures
    (2.3 )     (0.1 )%        
Organic
    (50.5 )     (1.5 )%        
                   
 
Total change
    103.9       3.1 %        
2003 (Restated)
  $ 3,500.6               56.8 %
                   
      Salaries and related expenses are the largest components of operating expenses and consist primarily of salaries and related benefits and performance incentives. During 2003, salaries and related expenses increased to 56.8% of revenues, compared to 56.1% in 2002. In 2003, salaries and related expenses decreased $50.5, excluding the increase related to foreign currency exchange rate changes of $156.7 and a decrease related to net acquisitions and divestitures of $2.3.
      Salaries and related expenses were impacted by changes in foreign currency rates, attributable to the strengthening of the Euro and Pound Sterling in relation to the US Dollar.
      The decrease in salaries and related expenses, excluding the impact of foreign currency and net acquisitions and divestitures, was primarily the result of reduced payroll costs across our company due to a decrease in headcount and restructuring actions. This was partially offset by increased performance incentive awards, employee benefits and related tax expenses relating to some agencies.
     Office and General Expenses
      The components of the 2003 change were as follows:
                           
    Total    
        % of
    $   % Change   Revenue
             
2002 (Restated)
  $ 2,248.7               37.1 %
                   
Foreign currency changes
    121.1       5.4 %        
Net acquisitions/divestitures
    (13.4 )     (0.6 )%        
Organic
    (130.7 )     (5.8 )%        
                   
 
Total change
    (23.0 )     (1.0 )%        
2003 (Restated)
  $ 2,225.7               36.1 %
                   
      Office and general expenses primarily consists of rent, office and equipment, depreciation, professional fees, other overhead expenses and certain out-of-pocket expenses related to our revenue. During 2003, office and general expenses decreased to 36.1% of revenues compared to 37.1% in 2002. In 2003, office and general expenses decreased $130.7, excluding the increase related to foreign currency exchange rate changes of $121.1 and a decrease related to net acquisitions and divestitures of $13.4.
      Office and general expenses was impacted by changes in foreign currency rates, attributable to the strengthening of the Euro and Pound Sterling in relation to the US Dollar.

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
      The decrease in office and general expenses, excluding the impact of foreign currency and net acquisition and divestitures activity, was due mainly to the result of our efforts to control office and general expenses. Additionally, lower occupancy and overhead costs were recorded in 2003 due to our restructuring program. These decreases were partially offset by charges recorded by CMG in 2003 to secure certain sports television rights. We also experienced a significant increase in professional fees for work performed relating to securities litigation, the SEC investigation, higher audit costs and costs associated with preparing for compliance with the Sarbanes-Oxley Act, as well as the development of systems for our shared services initiatives.
     Restructuring Charges
      During 2003 and 2002, we recorded net expense related to lease termination and other exit costs and severance and termination costs for the 2003 and 2001 restructuring programs of $172.9 and $7.9, respectively, which included the impact of adjustments resulting from changes in management’s estimates as described below. A summary of the net (income) and expense by segment is as follows:
                                                           
    Lease Termination and Other        
    Exit Costs   Severance and Termination Costs    
             
    2003   2001       2003   2001        
    Program   Program   Total   Program   Program   Total   Total
                             
2003 Net (Income) Expense (Restated)
                                                       
IAN
  $ 23.1     $ 8.8     $ 31.9     $ 106.6     $ (0.1 )   $ 106.5     $ 138.4  
CMG
    12.7       6.1       18.8       15.7             15.7       34.5  
Motorsports
                      0.4             0.4       0.4  
Corporate
    (2.2 )     (1.3 )     (3.5 )     3.1             3.1       (0.4 )
                                           
 
Total
  $ 33.6     $ 13.6     $ 47.2     $ 125.8     $ (0.1 )   $ 125.7     $ 172.9  
                                           
2002 Net Expense (Restated)
                                                       
IAN
  $     $ 5.2     $ 5.2     $     $ 7.9     $ 7.9     $ 13.1  
CMG
          5.7       5.7             (1.2 )     (1.2 )     4.5  
Corporate
          (4.3 )     (4.3 )           (5.4 )     (5.4 )     (9.7 )
                                           
 
Total
  $     $ 6.6     $ 6.6     $     $ 1.3     $ 1.3     $ 7.9  
                                           
Lease termination and other exit costs
2003 Program
      Net expense related to lease termination and other exit costs recorded for 2003 was $33.6, comprised of charges of $41.6, partially offset by adjustments to management estimates of $8.0. These charges related to vacating 55 offices in 2003, located primarily in the US and Europe. Charges were recorded at net present value and were net of estimated sublease rental income. The discount related to lease terminations is being amortized over the expected remaining term of the related lease.
      In addition to amounts recorded as restructuring charges, we recorded charges of $16.5 during 2003 related to the accelerated amortization of leasehold improvements on properties included in the 2003 program. These charges were included in office and general expenses within the Consolidated Statements of Operations.

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
2001 Program
      Net expense related to lease termination and other exit costs of $13.6 and $6.6, recorded for 2003 and 2002 respectively, resulted exclusively from the impact of adjustments to management estimates. The 2001 program resulted in approximately 180 offices being vacated worldwide.
Adjustments to Estimates
      Lease termination and other exit costs for the 2003 and 2001 restructuring programs included the net impact of adjustments for changes in management estimates to increase the restructuring reserves by $5.6 and $6.6 in 2003 and 2002, respectively. Adjustments to management estimates of net lease obligations included both increases and decreases to the restructuring reserve balance as a result of several factors. The significant factors were our negotiation of terms upon the exit of leased properties, changes in sublease rental income and utilization of previously vacated properties by certain of our agencies due to improved economic conditions in certain markets, all of which occurred during the period recorded.
Severance and termination costs
2003 Program
      Net expense related to severance and termination costs of $125.8 recorded for 2003 was comprised of charges of $133.7, partially offset by adjustments to management estimates of $7.9. These charges related to a worldwide workforce reduction of approximately 2,900 employees in 2003. The restructuring program affected employee groups across all levels and functions, including executive, regional and account management, and administrative, creative and media production personnel. The majority of the severance charges related to the U.S. and Europe, with the remainder in Asia and Latin America.
2001 Program
      Net (income) and expense related to severance and termination costs of ($0.1) and $1.3, recorded for 2003 and 2002, respectively, resulted exclusively from the impact of adjustments to management estimates. The 2001 program related to a worldwide reduction of approximately 7,000 employees.
Adjustments to Estimates
      Severance and termination costs associated with the 2003 and 2001 restructuring programs included the net impact of adjustments for changes in management estimates to decrease the restructuring reserve by $8.0 in 2003 and increase the restructuring reserve by $1.3 in 2002. Adjustments to management estimates of severance and termination obligations included both increases and decreases to the restructuring reserve balance as a result of several factors. The significant factors were the decrease in the number of terminated employees, change in amounts paid to terminated employees and change in estimates of taxes and restricted stock payments related to terminated employees, all of which occurred during the period recorded.
      For additional information, see Note 5 to the Consolidated Financial Statements.

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
Long-Lived Asset Impairment and Other Charges
      The following table summarizes the long-lived asset impairment and other charges for 2003 and 2002:
                                                           
    For the Years Ended December 31,
     
    2003   2002
         
    IAN   CMG   Motorsports   Total   IAN   Motorsports   Total
                             
    (Restated)   (Restated)
Goodwill impairment
  $ 0.4     $ 218.0     $     $ 218.4     $ 2.9     $ 82.1     $ 85.0  
Fixed asset impairment
    2.3             63.8       66.1             33.0       33.0  
Other
    9.1       0.4             9.5             12.0       12.0  
                                           
 
Total
  $ 11.8     $ 218.4     $ 63.8     $ 294.0     $ 2.9     $ 127.1     $ 130.0  
                                           
          2003 Impairments
      CMG — We recorded an impairment charge of $218.0 to reduce the carrying value of goodwill at Octagon. The Octagon impairment charge reflects the reduction of the unit’s fair value due principally to poor financial performance in 2003 and lower than expected future financial performance. Specifically, there was significant pricing pressure in both overseas and domestic TV rights distribution, declining fees from athlete representation, and lower than anticipated proceeds from committed future events, including ticket revenue and sponsorship.
      Motorsports — We recorded fixed asset impairment charges of $63.8, consisting of $38.0 in connection with the sale of a business comprised of the four owned auto racing circuits, $9.6 related to the sale of other Motorsports entities, and a fixed asset impairment of $16.2 for outlays that Motorsports was contractually required to spend to improve the racing facilities.
          2002 Impairments
      Motorsports — Beginning in the second quarter of 2002 and continuing in subsequent quarters, certain Motorsports businesses experienced significant operational difficulties. Some of the impairment indicators included significantly lower than anticipated attendance at the marquee British Grand Prix race in July 2002 and a change in management at Motorsports in the third quarter of 2002. We performed an impairment test and concluded that certain asset groupings of Motorsports had a book value that exceeded their fair market value. As a result, we recognized an impairment loss of $127.1, which is composed of $82.1 of goodwill impairment, $33.0 of fixed asset impairment and $12.0 of other impairment.
      For additional information, see Note 8 to the Consolidated Financial Statements.

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
     EXPENSE AND OTHER INCOME
                                   
    For the Years Ended        
    December 31,        
             
    2003   2002   $ Change   % Change
                 
    (Restated)   (Restated)        
Interest expense
  $ (207.0 )   $ (158.7 )   $ (48.3 )     30.4 %
Debt prepayment penalty
    (24.8 )           (24.8 )      
Interest income
    39.3       30.6       8.7       28.4 %
Investment impairments
    (71.5 )     (40.3 )     (31.2 )     77.4 %
Litigation charges
    (127.6 )           (127.6 )      
Other income
    50.3       8.3       42.0       506.0 %
                         
 
Total
  $ (341.3 )   $ (160.1 )   $ (181.2 )     113.2 %
                         
     Interest Expense
      In 2003, interest expense increased by $48.3 to $207, primarily due to the issuance in March 2003 of $800.0 of 4.50% Convertible Senior Notes maturing 2023. These proceeds were invested in April 2003, at which time the proceeds were used for the settlement of the tender offer for the Zero-Coupon Convertible Senior Notes.
     Debt Prepayment Penalty
      During the third quarter of 2003, we repaid our borrowings under the Prudential Agreements, repaying $142.5 principal amount and incurring a prepayment penalty of $24.8.
     Interest Income
      In 2003, interest income increased by $8.7 to $39.3 primarily due to higher cash balances resulting from the issuance of the 4.50% Convertible Senior Notes in March 2003, the proceeds from the sale of NFO in July 2003, and the proceeds from the equity offerings in December 2003.
     Investment Impairments
      During 2003, we recorded $71.5 of investment impairment charges related to 20 investments. The charge related principally to investments in Fortune Promo 7 of $9.5 in the Middle East, Koch Tavares of $7.7 in Latin America, Daiko of $10.0 in Japan, Roche Macaulay Partners of $7.9 in Canada, Springer & Jacoby of $6.5 in Germany and GlobalHue of $6.9 in the US. The majority of the impairment charges resulted from deteriorating economic conditions in the countries in which the agencies operate, due to the loss of one or several key clients.
      During 2002, we recorded $40.3 of investment impairment charges primarily related to Octagon investments. The largest component of the write-off was a $28.4 charge, related to an investment in a German soccer team/franchise, based on current and projected operating results.
     Litigation Charges
      During 2003, we recorded litigation charges of $127.6 for various legal matters, of which $115.0 related to a tentative settlement of the class action shareholder suits discussed in Note 19 to the Consolidated Financial Statements. Under the terms of the settlement, we were required to pay $20.0 in

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
cash and issue 6.6 shares of our common stock. The ultimate amount of the litigation charge related to the settlement was to be dependent upon our stock price at the time of the final settlement, which took place in December 2004.
     Other Income
      In 2003, other income of $50.3 included approximately 11.0 shares of Modem Media sold for net proceeds of approximately $57.0 in December, resulting in a pre-tax gain of $30.3. Also in December, we sold all of the approximately 11.7 shares of TNS we had acquired through the sale of NFO, for approximately $42.0 of net proceeds. A pre-tax gain of $13.3 was recorded.
     OTHER ITEMS
     Income Taxes
                 
    For the Years Ended
    December 31,
     
    2003   2002
         
    (Restated)   (Restated)
Provision for income taxes
  $ 242.7     $ 106.4  
             
Effective tax rate
    65.1%       91.9%  
             
      Our effective income tax rate was negatively impacted for 2003 and 2002 by the establishment of valuation allowances, as described below, restructuring charges, and non-deductible long-lived asset impairment charges. The difference between the effective tax rate and the statutory federal rate of 35% is also due to state and local taxes and the effect of non-US operations.
     Valuation Allowance
      During 2003, a valuation allowance of $111.4 was established in continuing operations on existing deferred tax assets and losses with no benefits. The total valuation allowance as of December 31, 2003 was $252.6.
     Minority Interest and Unconsolidated Affiliates
                 
    For the Years Ended
    December 31,
     
    2003   2002
         
    (Restated)   (Restated)
Income applicable to minority interests
  $ (27.0 )   $ (30.0 )
             
Equity in net income of unconsolidated affiliates, net of tax
  $ 2.4     $ 5.9  
             
      The income applicable to minority interests was virtually unchanged. The decrease in equity in net income of unconsolidated affiliates, was primarily due to a decrease in earnings in unconsolidated affiliates in Europe and Brazil.

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
     NET INCOME (LOSS)
                                 
    For the Years Ended        
    December 31,        
             
    2003   2002   $ Change   % Change
                 
    (Restated)   (Restated)        
Loss from continuing operations
  $ (640.1 )   $ (14.8 )   $ (625.3 )     4225.0 %
Income from discontinued operations net of taxes of $8.3 and $22.4, respectively
    101.0       31.5       69.5       220.6 %
                         
Net income (loss) applicable to common stockholders
  $ (539.1 )   $ 16.7     $ (555.8 )     (3328.1 )%
                         
Loss from Continuing Operations
      We recorded a loss from continuing operations in 2003 of $640.1 as compared to a loss from continuing operations in 2002 of $14.8, a change of $625.3. This significant increase in our net loss was due to higher operating expenses of $409.9, and higher expense and other income of $181.2. Significant increases in our operating expenses were due to restructuring charges and long-lived asset impairment and other charges, which increased $165.0 and $164.0, respectively, from the prior year. Litigation charges of $127.6 contributed to the increase in expense and other income.
Income from Discontinued Operations
      As discussed in Consolidated Results of Operations — 2004 Compared to 2003 and in Note 4 to the Consolidated Financial Statements, we have recorded the impact of our sale of NFO in income from discontinued operations. We completed the sale of NFO in 2003. NFO is classified as discontinued operations and the results of operations and cash flows of NFO have been removed from our results of continuing operations and cash flows for all periods.
Segment Results of Operations — 2003 Compared to 2002
      As discussed in Note 18 to the Consolidated Financial Statements, we have three reporting segments: our operating divisions, IAN, CMG and Motorsports. We also report results for the corporate group. Other than long-lived asset impairment and contract termination costs, the operating results of Motorsports are not material to consolidated results, and therefore are not discussed in detail below. The following table summarizes revenue and operating income by segment:
                                   
    For the Years Ended        
    December 31,        
             
    2003   2002   $ Change   % Change
                 
    (Restated)   (Restated)        
Revenue:
                               
IAN
  $ 5,140.5     $ 4,994.7     $ 145.8       2.9 %
CMG
    942.4       970.8       (28.4 )     (2.9 )%
Motorsports
    78.8       93.6       (14.8 )     (15.8 )%
                         
 
Consolidated revenue
  $ 6,161.7     $ 6,059.1     $ 102.6       1.7 %
                         

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
                                 
    For the Years Ended        
    December 31,        
             
    2003   2002   $ Change   % Change
                 
    (Restated)   (Restated)        
Segment operating income (loss):
                               
IAN
  $ 551.9     $ 550.7     $ 1.2       (0.2 )%
CMG
    55.7       47.5       8.2       17.3 %
Motorsports
    (43.5 )     (82.2 )     38.7       (47.1 )%
Corporate and other
    (128.7 )     (102.3 )     (26.4 )     25.8 %
                                                                                 
    For the Years Ended December 31,
     
    2003 (Restated)   2002 (Restated)
         
    IAN   CMG   Motorsports   Corporate   Total   IAN   CMG   Motorsports   Corporate   Total
                                         
Reconciliation to segment operating income:
                                                                               
Consolidated operating income (loss)
  $ 401.7     $ (197.2 )   $ (107.7 )   $ (128.3 )   $ (31.5 )   $ 534.7     $ 43.0     $ (209.3 )   $ (92.6 )   $ 275.8  
Adjustments:
                                                                               
Restructuring charges
    (138.4 )     (34.5 )     (0.4 )     0.4       (172.9 )     (13.1 )     (4.5 )           9.7       (7.9 )
Long lived asset impairment and other charges:
    (11.8 )     (218.4 )     (63.8 )           (294.0 )     (2.9 )           (127.1 )           (130.0 )
                                                             
Segment operating income (loss)
  $ 551.9     $ 55.7     $ (43.5 )   $ (128.7 )           $ 550.7     $ 47.5     $ (82.2 )   $ (102.3 )        
                                                             
INTEGRATED AGENCY NETWORKS (“IAN”)
     REVENUE
      The components of the 2003 change were as follows:
                                                                   
        Domestic   International
    Total        
            % of       % of
    $   % Change   $   % Change   Total   $   % Change   Total
                                 
2002 (Restated)
  $ 4,994.7             $ 2,857.1               57.2 %   $ 2,137.6               42.8 %
                                                 
Foreign currency changes
    244.6       4.9 %           0.0 %             244.6       11.4 %        
Net acquisitions/divestitures
    9.9       0.2 %     9.6       0.3 %             0.3       0.0 %        
Organic
    (108.7 )     (2.2 )%     (2.3 )     (0.1 )%             (106.4 )     (5.0 )%        
                                                 
 
Total change
    145.8       2.9 %     7.3       0.3 %             138.5       6.5 %        
2003 (Restated)
  $ 5,140.5             $ 2,864.4               55.7 %   $ 2,276.1               44.3 %
                                                 
      For the year ended December 31, 2003, IAN experienced a net increase in revenue as compared to 2002 by $145.8, or 2.9%, which was due to the effect of an increase in foreign currency exchange rate changes of $244.6 and net acquisitions and divestitures of $9.9, offset by an organic revenue decrease of $108.7. The increase due to foreign currency rate changes was primarily attributable to the strengthening of the Euro and Pound Sterling in relation to the US Dollar. The slight increase resulting from net acquisitions and divestitures primarily related to a small acquisition at McCann.

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
      The organic revenue decrease was primarily driven by the results of Lowe. Lowe reported an organic revenue decrease as compared to 2002, due to the loss of local clients in certain international markets, as well as a decline in business from existing multinational clients in certain European markets.
     SEGMENT OPERATING INCOME
                                 
    For the Years Ended        
    December 31,        
             
    2003   2002   $ Change   % Change
                 
    (Restated)   (Restated)        
Segment operating income
  $ 551.9     $ 550.7     $ 1.2       0.2 %
                         
Operating margin
    10.7 %     11.1 %                
                         
      For the year ended December 31, 2003, IAN operating income increased by $1.2, or 0.2%, which was due to an increase in revenue of $145.8, offset by increased salaries and related expenses of $142.7 and an increase of $1.8 in office and general expense.
      Segment operating income increase, excluding the impact of foreign currency and net effects of acquisitions and divestitures, was primarily driven by increases at McCann and Initiative Media and decreases at FCB and Campbell-Ewald. At FCB, the organic revenue increase was offset by significantly higher operating expenses. Increased operating expenses at FCB primarily resulted from a rise in performance incentive awards, and higher rent expense associated with excess space. At Campbell-Ewald, operating expenses rose more than the organic revenue increase. Campbell-Ewald experienced higher expenses in salaries and related benefits for increased headcount to support organic revenue growth. McCann experienced relatively flat revenues with a decline in operating expenses. Operating expenses declined primarily due to lower compensation from a reduced headcount and lower bad debts. Initiative Media experienced an organic revenue increase, while operating expenses remained relatively flat.
     CONSTITUENT MANAGEMENT GROUP (“CMG”)
     REVENUE
      The components of the 2003 change were as follows:
                                                                 
    Total   Domestic   International
             
    $%   Change   $   % Change   % of Total   $   % Change   % of Total
                                 
2002 (Restated)
  $ 970.8             $ 620.1               63.9 %   $ 350.7               36.1 %
                                                 
Foreign currency changes
    38.6       4.0 %                         38.6       11.0 %        
Net acquisitions/ divestitures
    (1.8 )     (0.2 )%     (0.2 )     0.0 %             (1.6 )     (0.5 )%        
Organic
    (65.2 )     (6.7 )%     (26.7 )     (4.3 )%             (38.5 )     (11.0 )%        
                                                 
Total change
    (28.4 )     (2.9 )%     (26.9 )     (4.3 )%             (1.5 )     (0.4 )%        
2003 (Restated)
  $ 942.4             $ 593.2               62.9 %   $ 349.2               37.1 %
                                                 
      For the year ended December 31, 2003, CMG experienced a net decrease in revenues as compared to 2002 of $28.4, or 2.9%, which was comprised of an organic revenue decrease of $65.2 and the impact of acquisitions and divestitures of $1.8, offset by an increase due to foreign currency exchange rate changes of $38.6. The effect of currency exchange rate was primarily attributable to the strengthening of the Euro and Pound Sterling in relation to the US Dollar.

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
      Organic revenue decline resulted from reduced demand for our services within our public relations business in the US and international markets as well as decreased demand for other project related business, offset partially by modest gains in our events and sports marketing business.
     Segment Operating Income
                                 
    For the Years Ended        
    December 31,        
             
    2003   2002   $ Change   % Change
                 
    (Restated)   (Restated)        
Segment operating income
  $ 55.7     $ 47.5     $ 8.2       17.2%  
                         
Operating margin
    5.9 %     4.9 %                
                         
      For the year ended December 31, 2003, CMG operating income increased by $8.2, or 17.2%, which was the result of a $31.0 decrease in salary and related expenses and a $5.6 decrease in office and general expenses, offset by a $28.4 decrease in revenue.
      Segment operating income growth, excluding the impact of foreign currency and net effects of the acquisitions and divestitures, was primarily driven by increases in the branding and public relations businesses, offset by decreased operating income in sports marketing. Both brand and public relations businesses experienced organic revenue declines as well as significantly decreased operating expenses. The decreased operating expenses in branding were primarily driven by a decrease in bad debt expense as a result of improved collection activity, decreased payroll related expenses due to lower headcount as a result of restructuring actions taken in the public relations and branding business, as well as a decrease in expenses recorded for performance incentive awards. Operating income declined at Octagon despite organic revenue growth as a result of significant increases in operating expenses. Operating expenses in sports marketing rose as a result of certain sports television rights.
CORPORATE AND OTHER
      Amounts in corporate and other include corporate office expenses and shared service center expenses, as well as certain other centrally managed expenses which are not allocated to each operating division. The following significant expenses are included in corporate and other:
                                 
    For the Years Ended        
    December 31,        
        $    
    2003   2002   Change   % Change
                 
    (Restated)   (Restated)        
Salaries, benefits and related expenses
  $ 129.0     $ 131.1     $ (2.1 )     1.6 %
Professional fees
    49.8       28.5       21.3       74.7 %
Rent and depreciation
    30.5       26.5       4.0       15.1 %
Corporate insurance
    26.5       12.5       14.0       112.0 %
Bank fees
    1.6       3.7       (2.1 )     (56.8 )%
Other
    9.3       17.7       (8.4 )     (47.5 )%
Expenses allocated to segments
    (118.1 )     (117.7 )     (0.4 )     0.3 %
                         
Total corporate and other
  $ 128.6     $ 102.3     $ 26.3       25.7 %
                         

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
      Salaries and related expenses include salaries, insurance, pension and bonus expense for Corporate Office employees. Professional fees include costs related to the preparation for Sarbanes-Oxley Act compliance, financial statement audit, legal, information technology and other consulting fees. Rent and depreciation includes rental expense and depreciation of leasehold improvements for properties occupied by corporate office employees. Bank fees relate to debt and credit facilities managed by the Corporate Office. The amount of expense allocated to operating segments is calculated monthly based on a formula that uses the weighted average revenues of the operating unit. The majority of the corporate costs including most of the costs associated with internal control remediation and compliance are not allocated back to operating segment.
      The increase in corporate and other expense of $26.4 or 25.8% is primarily related to an increase in professional fees increased as a result of higher legal fees incurred from securities litigation and SEC investigation, higher audit costs and costs associated with preparing for compliance with the Sarbanes-Oxley Act. In addition, salaries, benefits, and related expenses increased as a result of accruals for performance incentive awards.
LIQUIDITY AND CAPITAL RESOURCES
     CASH FLOW OVERVIEW
     Operating cash flow
      Our cash provided by operating activities was $455.5, compared to $499.7 in 2003 and $878.9 in 2002. The decrease in cash provided by operating activities in 2004 was primarily attributable to the decrease in year-over-year changes in receivables and liabilities. The decrease in cash provided by operating activities in 2003 was primarily attributable to the lower earnings levels in 2003 resulting from continued softness in client demand for advertising and marketing services and our restructuring program.
      We conduct media buying on behalf of clients, which affects our working capital and operating cash flow. In most of our businesses, we collect funds from our clients which we use, on their behalf, to pay production costs and media costs. The amounts involved substantially exceed our revenues, and the current assets and current liabilities on our balance sheet reflect these pass-through arrangements. Our assets include both cash received and accounts receivable from customers for these pass-through arrangements, while our liabilities include amounts owed on behalf of customers to media and production suppliers. Generally, we pay production and media charges only after we have received funds from our clients, and our risk from client nonpayment has historically not been significant.
     Funding requirements
      Our most significant funding requirements include: non-cancelable operating lease obligations, capital expenditures, payments in respect of past acquisitions, interest payments, preferred stock dividends and taxes. We have not paid dividends on our common stock since 2002.
      We have no scheduled maturities of long-term debt until 2008, as a result of transactions undertaken in 2005. Our outstanding debt and preferred stock are described below under Long-Term Debt and Convertible Preferred Stock. In January 2004, we redeemed $250.0 of debt. In November 2004, we refinanced $250.0 of debt through November 2009 and $350.0 of debt through November 2014, and in July 2005 we refinanced $250.0 of debt due to mature in 2005 through July 2008. These transactions are described below under Redemption and Repurchase of Long-Term Debt.
      Our capital expenditures are primarily to upgrade computer and telecommunications systems and to modernize offices. Our principal bank credit facility as amended limits the amounts we can spend on

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
capital expenditures in any calendar year to $210.0. Our capital expenditures were $194.0 in 2004, $159.6 in 2003 and $171.4 in 2002.
      We acquired a large number of agencies through 2001, but in recent years the number and value of acquisitions have been significantly less. Cash paid for new acquisitions was approximately $14.6 in 2004, $4.0 in 2003 and $48.2 in 2002. However, under the terms of certain of our past acquisitions, we have long-term obligations to pay additional consideration or to purchase additional equity interests in certain consolidated or unconsolidated subsidiaries if specified conditions are met. Some of the consideration under these arrangements is in shares of our common stock, but most is in cash. We made cash payments for past acquisitions of $161.7 in 2004, $221.2 in 2003 and $240.0 in 2002. Our projected obligations for 2005 and beyond are set forth below under Contractual Obligations.
      Certain media companies in various international locations require advertising agencies to post a letter of credit to support commitments to purchase media placements. Primarily, we obtain these letters of credit from our principal bank syndicate under the credit facilities described under Credit Arrangements below. The outstanding amount of letters of credit was $165.4 and $160.1 as of December 31, 2004 and 2003, respectively. These letters of credit have not been drawn upon in recent years.
     Sources of funds
      At December 31, 2004 our total of cash and cash equivalents plus short-term marketable securities was $1,970.4. The total was $2,067.0 at December 31, 2003, which included proceeds from securities sold in December 2003 that we used in January 2004 to retire $250.0 of outstanding debt.
      We have financed ourselves through access to the capital markets by issuing debt securities, convertible preferred stock and common stock. Our outstanding debt securities and convertible preferred stock are described under Long-Term Debt, Convertible Senior Notes and Convertible Preferred Stock below. As a result of the disclaimer of opinion by PwC on Management’s Assessment on Internal Control over Financial Reporting, the SEC considers our SEC filings not to be current for purposes of certain of the SEC’s rules. As a result, we are unable to use “short-form” registration (registration that allows us to incorporate by reference our Form 10-K, Form 10-Q and other SEC reports into our registration statements) or, for most purposes, shelf registration, until twelve complete months have passed after we file an annual report containing an audit report on internal control over financial reporting that does not disclaim an opinion.
      In July 2005, we issued $250.0 of Floating Rate Notes due 2008 in a private placement to refinance maturing debt, as described below.
      We have committed and uncommitted credit lines and the terms of our revolving credit facilities are described below. We have not drawn on our committed facilities during 2004 or 2003, although we use them to issue letters of credit, as described above. Our outstanding borrowings under uncommitted credit facilities were $67.8 and $69.8 as of December 31, 2004 and 2003, respectively. We use uncommitted credit lines for working capital needs at some of our operations outside the United States. If we lose access to these credit lines, we may be required to provide funding directly to some overseas operations. We maintain our committed credit facilities primarily as stand-by short-term liquidity.

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
     Liquidity outlook
      We expect our operating cash flow and cash on hand to be sufficient to meet our anticipated operating requirements for the next twelve months. We have no significant scheduled amounts of long-term debt due until 2008. We continue to have a level of cash and cash equivalents that we consider to be conservative. We consider this approach to be important as we address the consequences of the restatement, including increased cash requirements resulting, among other things, from higher professional fees and from the liabilities we have recognized in the restatement. Accordingly we may seek to raise additional financing, if market conditions applicable to our Company permit us to do so on favorable terms, in order to enhance our financial flexibility. There can be no assurance that such financing will be completed on terms that are favorable to us, if at all.
      Substantially all of our operating cash flow is generated by subsidiaries. Our liquid assets are held primarily at the holding company level, but also at our larger subsidiaries. The legal or contractual restrictions on our ability to transfer funds within the group, whether in the form of dividends, loans or advances, do not significantly reduce our financial flexibility.
     FINANCING
     Long-Term Debt
      A summary of our long-term debt is as follows:
                   
    December 31,
     
    2004   2003
         
1.80% Convertible Subordinated Notes due 2004 (less unamortized discount of $5.9)
  $     $ 244.1  
1.87% Convertible Subordinated Notes due 2006 (less unamortized discount of $23.5)
          337.5  
7.875% Senior Unsecured Notes due 2005
    255.0       522.1  
7.25% Senior Unsecured Notes due 2011
    500.0       500.0  
5.40% Senior Unsecured Notes due 2009 (less unamortized discount of $0.3)
    249.7        
6.25% Senior Unsecured Notes due 2014 (less unamortized discount of $1.0)
    347.3        
4.50% Convertible Senior Notes due 2023
    800.0       800.0  
Other notes payable and capitalized leases — at interest rates from 4.5% to 22.23%
    42.1       42.1  
             
 
Total long-term debt
    2,194.1       2,445.8  
Less: current portion
    258.1       247.1  
             
Long-term debt, excluding current portion
  $ 1,936.0     $ 2,198.7  
             
      Exposure to interest rate movements is reduced by interest rate swap agreements. As a result of these agreements, the effective interest rate for the 6.25% Senior Unsecured Notes differs from its stated rate.

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
      Annual repayments of long-term debt as of December 31, 2004 are scheduled as follows:
           
2005
  $ 258.1  
2006
    3.9  
2007
    2.1  
2008
    1.6  
2009
    250.5  
Thereafter
    1,677.9  
       
 
Total long-term debt
  $ 2,194.1  
       
     Redemption and Repurchase of Long-Term Debt
      In January 2004, we redeemed the 1.80% Convertible Subordinated Notes with an aggregate principal amount of $250.0 at maturity at an aggregate price of approximately $246.0, which included the principal amount of the Notes plus original issue discount and accrued interest to the redemption date. To redeem these Convertible Subordinated Notes, we used approximately $246.0 of the net proceeds from the 2003 Common and Mandatory Convertible Preferred Stock offerings as discussed below.
      In November 2004, we tendered for $250.0 of the $500.0 outstanding face value 7.875% Senior Unsecured Notes at an aggregate price of approximately $263.1, which included the principal amount of the Notes plus accrued interest to the tender date. A prepayment premium of $9.8 was recorded on the early retirement of $250.0 of these Notes. In December 2004, we redeemed our outstanding 1.87% Convertible Subordinated Notes with an aggregate principal amount of approximately $361.0 at maturity at an aggregate price of approximately $346.8, which included the principal amount of the Notes plus accrued interest to the redemption date. To tender for the 7.875% Senior Unsecured Notes and redeem the 1.87% Convertible Subordinated Notes, we used approximately $250.0 and $350.0, respectively, of the net proceeds from the sale and issuance in November 2004 of the 5.40% Senior Unsecured Notes due November 2009 and 6.25% Senior Unsecured Notes due November 2014.
      In August 2005, we redeemed the remainder of the outstanding 7.875% Senior Unsecured Notes with an aggregate principal amount of approximately $250.0 at maturity at an aggregate price of approximately $258.6, which included the principal amount of the Notes plus accrued interest to the redemption date. To redeem these Notes we used the proceeds from the sale and issuance in July 2005 of $250.0 Floating Rate Notes due in July 2008.
     Consent Solicitation
      In March 2005, we completed a consent solicitation to amend the indentures governing five series of our outstanding public debt to provide, among other things, that our failure to file with the trustee our SEC reports, including our 2004 Annual Report on Form 10-K and Quarterly Reports for the first and second quarter of 2005 on Form 10-Q, would not constitute a default under the indentures until September 30, 2005.
      The indenture governing our 4.50% Convertible Senior Notes was also amended to provide for: (1) an extension from March 15, 2005 to September 15, 2009 of the date on or after which we may redeem the 4.50% Notes and (2) an additional “make-whole” adjustment to the conversion rate in the event of a change of control meeting specified conditions.
     Convertible Senior Notes
      The 4.50% Convertible Senior Notes (“4.50% Notes”) are convertible to common stock at a conversion price of $12.42 per share, subject to adjustment in specified circumstances. They are convertible at any time if the average price of our common stock for 20 trading days immediately

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
preceding the conversion date is greater than or equal to a specified percentage, beginning at 120% in 2003 and declining 0.5% each year until it reaches 110% at maturity, of the conversion price. They are also convertible, regardless of the price of our common stock, if: (i) we call the 4.50% Notes for redemption; (ii) we make specified distributions to shareholders; (iii) we become a party to a consolidation, merger or binding share exchange pursuant to which our common stock would be converted into cash or property (other than securities) or (iv) the credit ratings assigned to the 4.50% Notes by any two of Moody’s Investors Service, Standard & Poor’s and Fitch Ratings are lower than Ba2, BB and BB, respectively, or the 4.50% Notes are no longer rated by at least two of these ratings services. Because of our current credit ratings, the 4.50% Notes are currently convertible into approximately 64.4 shares of our common stock.
      We, at the investors’ option, may be required to redeem the 4.50% Notes for cash on March 15, 2008 and may also be required to redeem the 4.50% Notes at the investors’ option on March 15, 2013 and March 15, 2018, for cash or common stock or a combination of both, at our election. Additionally, investors may require us to redeem the 4.50% Notes in the event of certain change of control events that occur prior to March 15, 2008, for cash or common stock or a combination of both, at our election. If at any time on or after March 13, 2003 we pay cash dividends on our common stock, we will pay contingent interest in an amount equal to 100% of the per share cash dividend paid on the common stock multiplied by the number of shares of common stock issuable upon conversion of the 4.50% Notes. At our option, we may redeem the 4.50% Notes on or after September 15, 2009 for cash. The redemption price in each of these instances will be 100% of the principal amount of the notes being redeemed, plus accrued and unpaid interest, if any. The 4.50% Notes also provide for an additional “make-whole” adjustment to the conversion rate in the event of a change of control meeting specified conditions.
     Credit Arrangements
      We have committed and uncommitted lines of credit with various banks that permit borrowings at variable interest rates. At December 31, 2004 and 2003, there were no borrowings under our committed facilities, however, there were borrowings under the uncommitted facilities made by several of our international subsidiaries totaling $67.8 and $69.8, respectively. We have guaranteed the repayment of some of these borrowings by our subsidiaries. The weighted-average interest rate on outstanding balances under the uncommitted short-term facilities at December 31, 2004 and 2003 was approximately 5% in each year. A summary of our credit facilities is as follows:
                                                   
    December 31,
     
    2004   2003
         
    Total   Amount   Total   Total   Amount   Total
    Facility   Outstanding   Available   Facility   Outstanding   Available
                         
Committed
                                               
 
364-Day Revolving Credit Facility
  $ 250.0     $     $ 250.0     $ 500.0     $     $ 339.9 **
 
Three-Year Revolving Credit Facility
    450.0             284.6 *                  
 
Five-Year Revolving Credit Facility
                      375.0             375.0  
 
Other Facilities
    0.8             0.8       0.8             0.8  
                                     
    $ 700.8     $     $ 535.4     $ 875.8     $     $ 715.7  
Uncommitted
                                               
 
International
  $ 738.1     $ 67.8     $ 670.3     $ 744.8     $ 69.8     $ 675.0  
 
  Amount available is reduced by $165.4 of letters of credit issued under the Three-Year Revolving Credit Facility at December 31, 2004.

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
**  Amount available is reduced by $160.1 of letters of credit issued under the 364-Day Revolving Credit Facility at December 31, 2003.
      Our primary bank credit agreements are two credit facilities, a 364-day revolving credit facility (“364-Day Revolving Credit Facility”) and a three-year revolving credit facility (“Three-Year Revolving Credit Facility” and, together with the 364-Day Revolving Credit Facility, the “Revolving Credit Facilities”). The 364-Day Revolving Credit Facility provides for borrowings of up to $250.0 and expires on September 30, 2005. The Three-Year Revolving Credit Facility expires on May 9, 2007 and provides for borrowings of up to $450.0, of which $200.0 is available for the issuance of letters of credit.
      Our Three-Year Revolving Credit Facility was amended and restated as of September 27, 2005. The effectiveness of the amended Three-Year Revolving Credit Facility is subject to certain conditions as described below.
      The terms of the amended Three-Year Revolving Credit Facility do not permit us: (i) to make cash acquisitions in excess of $50.0 until October 2006, or thereafter in excess of $50.0 until expiration of the agreement in May 2007, subject to increases equal to the net cash proceeds received in the applicable period from any disposition of assets; (ii) to make capital expenditures in excess of $210.0 annually; (iii) to repurchase or to declare or to pay dividends on our capital stock (except for any convertible preferred stock, convertible trust preferred instrument or similar security, which includes our outstanding 5.40% Series A Mandatory Convertible Preferred), except that we may repurchase our capital stock in connection with the exercise of options by our employees or with proceeds contemporaneously received from an issue of new shares of our capital stock; and (iv) to incur new debt at our subsidiaries, other than unsecured debt incurred in the ordinary course of business, which may not exceed $10.0 in the aggregate with respect to our US subsidiaries.
      The amended Three-Year Revolving Credit Facility also sets forth revised financial covenants. These require that, as of the fiscal quarter ended September 30, 2005 and each fiscal quarter thereafter, we maintain (i) an interest coverage ratio of not less than that set forth opposite the corresponding quarter in the table below:
         
Fiscal Quarter Ending   Ratio
     
September 30, 2005
    2.15 to 1  
December 31, 2005
    1.75 to 1  
March 31, 2006
    1.85 to 1  
June 30, 2006
    1.45 to 1  
September 30, 2006
    1.75 to 1  
December 31, 2006
    2.15 to 1  
March 31, 2007
    2.50 to 1  

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
(ii) a debt to EBITDA ratio of not greater than that set forth opposite the corresponding quarter in the table below:
         
Fiscal Quarter Ending   Ratio
     
September 30, 2005
    5.20 to 1  
December 31, 2005
    6.30 to 1  
March 31, 2006
    5.65 to 1  
June 30, 2006
    6.65 to 1  
September 30, 2006
    5.15 to 1  
December 31, 2006
    4.15 to 1  
March 31, 2007
    3.90 to 1  
and (iii) minimum levels of EBITDA for the four fiscal quarters then ended of not less than that set forth opposite the corresponding quarter in the table below:
         
Four Fiscal Quarters Ending   Amount
     
September 30, 2005
  $ 435.0  
December 31, 2005
  $ 360.0  
March 31, 2006
  $ 400.0  
June 30, 2006
  $ 340.0  
September 30, 2006
  $ 440.0  
December 31, 2006
  $ 545.0  
March 31, 2007
  $ 585.0  
      The terms used in these ratios, including EBITDA, interest coverage and debt, are subject to specific definitions set forth in the agreement. Under the definition set forth in the Three-Year Revolving Credit Facility, EBITDA is determined by adding to net income or loss the following items: interest expense, income tax expense, depreciation expense, amortization expense, and certain specified cash payments and non-cash charges subject to limitations on time and amount set forth in the agreement. We expect to be in compliance with all covenants under our Three-Year Revolving Credit Facility, as amended and restated, for the next twelve months.
      Before agreeing to the amendments, the lenders reviewed preliminary drafts of the Consolidated Financial Statements included in this Annual Report and in our quarterly reports on Form 10-Q for the first two quarters of 2005. One condition to effectiveness of the amendments is that we have not received, on or before October 4, 2005 notice from the lenders that have a majority in amount of the revolving credit commitments that the Consolidated Financial Statements in this Annual Report and our quarterly reports, and the financial data contained in the notes thereto, are not substantially similar to the preliminary consolidated financial statements we provided to them. If we receive such a notice, the amended agreement will not become effective. In that event, we will continue to be subject to the financial covenants that were previously applicable under the Three-Year Revolving Credit Facility, as amended in June 2005 with respect to periods through the second quarter of 2005. We were in compliance with those covenants through June 30, 2005, but there can be no assurance that we will be in compliance when we report financial information through the third quarter of 2005.

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
Credit Agency Ratings
      Our current long-term debt credit ratings as of September 29, 2005 are Baa3 with negative outlook, BB- with negative outlook and B+ with negative outlook, as reported by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, respectively. Although a ratings downgrade by any of the ratings agencies will not trigger an acceleration of any of our indebtedness, a downgrade may adversely affect our ability to access capital and would likely result in more stringent covenants and higher interest rates under the terms of any new indebtedness.
      Our credit ratings at year-end 2004 and 2003 were as follows:
                                                 
    December 31,
     
    2004   2003
         
    Senior       Senior    
    Unsecured   Subordinated*   Outlook   Unsecured   Subordinated   Outlook
                         
Moody’s
    Baa3             Stable       Baa3       Ba1       Credit watch Negative  
Standard & Poor’s
    BB+             Credit watch Negative       BB+       BB-       Stable  
Fitch
    BB+             Stable       BB+       BB-       Stable  
 
As of December 31, 2004, we had no Subordinated debt outstanding.
Convertible Preferred Stock
      In December 2003 we issued 7.5 shares of Series A Mandatory Convertible Preferred Stock (“Preferred Stock”). The Preferred Stock carries a dividend yield of 5.375%. On the automatic conversion date in December 2006, each share of the Preferred Stock will convert, subject to adjustment, to between 3.0358 and 3.7037 shares of common stock, depending on the then-current market price of our common stock. Under certain circumstances, the Preferred Stock may be converted prior to maturity at our option or at the option of the holders.
Payment of Dividends
      We have not paid any dividends on our common stock since December of 2002. As previously discussed, our ability to declare or pay dividends on common stock is currently restricted by the terms of our Revolving Credit Facilities. We pay annual dividends on each share of Preferred Stock in the amount of $2.6875. Dividends are cumulative from the date of issuance and are payable on each payment date to the extent that dividends are not restricted under the Revolving Credit Facilities and assets are legally available to pay dividends. In addition to the stated annual dividend, if at any time on or before December 16, 2006, we pay a cash dividend on our common stock, the holders of Preferred Stock participate in such distributions via adjustments to the conversion ratio, thereby increasing the number of common shares into which the Preferred Stock will ultimately convert.
CONTRACTUAL OBLIGATIONS
      The following summarizes our estimated contractual obligations at December 31, 2004, and the effect on our liquidity and cash flow in future periods:
                                                         
    2005   2006   2007   2008   2009   Thereafter   Total
                             
Long-term debt
  $ 258.1     $ 3.9     $ 2.1     $ 1.6     $ 250.5     $ 1,677.9     $ 2,194.1  
Interest payments
  $ 133.0     $ 125.5     $ 125.5     $ 121.0     $ 107.7     $ 667.9     $ 1,280.6  
Non-cancelable operating lease obligations
  $ 269.9     $ 243.5     $ 212.9     $ 186.5     $ 155.5     $ 828.4     $ 1,896.7  

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
      As a result of the restatement review (discussed more fully in Note 2), the Company has recorded additional liabilities with regard to Vendor Discounts or Credits, Internal Investigations and International Compensation Agreements which amount to $242.3, $114.8 (including $37.5 of additional vendor discounts or credits) and $40.3, respectively, as of December 31, 2004. The Company believes that these amounts represent our best estimates of our ultimate liabilities in each of these cases based on facts and documents reviewed and are sufficient to cover any obligations that we may have to our clients, vendors, and various governmental organizations in the jurisdictions involved. The Company estimates it will pay approximately $250 related to these liabilities over the next 24 months.
      We have contingent obligations under guarantees of certain obligations of our subsidiaries (“parent company guarantees”) relating principally to lines of credit, guarantees of certain media payables and operating leases of certain subsidiaries. The amount of such parent company guarantees was approximately $601.8 and $658.0 at December 31, 2004 and 2003, respectively. In the event of non-payment by the subsidiary of the obligations covered by the guarantees, we would be obliged to pay the amounts. As of December 31, 2004, there are no assets pledged as security for amounts owed or guaranteed.
      We have not included obligations under our pension and postretirement benefit plans in the contractual obligations table. Our funding policy regarding our funded pension plan is to contribute amounts necessary to satisfy minimum pension funding requirements plus such additional amounts from time to time as are determined to be appropriate to improve the plans’ funded status. The funded status of our pension plans is dependent upon many factors, including returns on invested assets, level of market interest rates and levels of voluntary contributions to the plans. Declines in long-term interest rates have had a negative impact on the funded status of the plans. During 2004, we made voluntary cash contributions of $32.1 to our domestic pension plans only. We can contribute cash to these plans at our discretion; however we do not expect to make any contributions to our postretirement benefits plans or domestic pension plans during 2005. We expect to contribute $24.3 to our international plans in 2005.
      We have structured certain acquisitions with additional contingent purchase price obligations in order to reduce the potential risk associated with negative future performance of the acquired entity. In addition, we have entered into agreements that may require us to purchase additional equity interests in certain consolidated and unconsolidated subsidiaries. The amounts relating to these transactions are based on estimates of the future financial performance of the acquired entity, the timing of the exercise of these rights, changes in foreign currency exchange rates and other factors. In accordance with GAAP, we have not recorded a liability for these items on the balance sheet since the definitive amounts payable are not determinable or distributable. When the contingent acquisition obligations have been met and the consideration is distributable, we will record the fair value of this consideration as an additional cost of the acquired entity. The following table details the estimated liability and the estimated amount that would be paid under such options, in the event of exercise at the earliest exercise date. All payments are contingent upon achieving projected operating performance targets and satisfying other conditions specified in the related agreements and are subject to revisions as the earn-out periods progress.

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
      The following contingent acquisition obligations are net of compensation expense, except as noted below, as defined by the terms and conditions of the respective acquisition agreements and employment terms of the former owners of the acquired businesses. This future expense will not be allocated to the assets and liabilities acquired. As of December 31, 2004, our estimated contingent acquisition obligations are as follows:
                                                           
    2005   2006   2007   2008   2009   Thereafter   Total
                             
Deferred Acquisition Payments
                                                       
 
Cash
  $ 48.0     $ 5.7     $ 2.1     $ 0.9     $ 4.3     $     $ 61.0  
 
Stock
    12.4       5.4                               17.8  
Put Options with Consolidated Affiliates*
                                                       
 
Cash
    30.2       1.8       9.5       3.4       3.0       7.3       55.2  
 
Stock
    0.1       0.1                               0.2  
Put Options with Unconsolidated Affiliates*
                                                       
 
Cash
    5.4       3.4       3.9       3.0       2.2       1.4       19.3  
 
Stock
    0.8       0.9             0.9             0.3       2.9  
Call Options with Consolidated Affiliates*
                                                       
 
Cash
    4.2       1.1                         4.8       10.1  
 
Stock
          0.5                               0.5  
                                           
 
Subtotal — Cash
  $ 87.8     $ 12.0     $ 15.5     $ 7.3     $ 9.5     $ 13.5     $ 145.6  
 
Subtotal — Stock
  $ 13.3     $ 6.9     $     $ 0.9     $     $ 0.3     $ 21.4  
                                           
 
Total Contingent Acquisition Payments
  $ 101.1     $ 18.9     $ 15.5     $ 8.2     $ 9.5     $ 13.8     $ 167.0  
                                           
      In accounting for acquisitions, we recognize deferred payments and purchases of additional interests after the effective date of purchase that are contingent upon the future employment of owners as compensation expense in our Consolidated Statement of Operations. As of December 31, 2004, our estimated contingent acquisition payments with associated compensation expense impacts are as follows:
                                                           
Compensation Expense — Related Payments
                                                       
 
Cash
  $ 34.1     $ 4.9     $ 2.1     $ 1.4     $     $ 1.3     $ 43.8  
 
Stock
  $ 1.8     $ 0.2     $     $     $     $     $ 2.0  
                                           
 
Subtotal
  $ 35.9     $ 5.1     $ 2.1     $ 1.4     $     $ 1.3     $ 45.8  
                                           
Total Payments
  $ 137.0     $ 24.0     $ 17.6     $ 9.6     $ 9.5     $ 15.1     $ 212.8  
                                           
 
We have entered into certain acquisitions that contain both put and call options with similar terms and conditions. In such instances, we have included the related estimated contingent acquisition obligations with Put Options.
      The 2005 obligations relate primarily to acquisitions that were completed prior to December 31, 2001.
DERIVATIVES AND HEDGING ACTIVITIES
      We periodically enter into interest rate swap agreements and forward contracts to manage exposure to interest rate fluctuations and to mitigate foreign exchange volatility. During the fourth quarter of 2004, we executed three interest rate swaps which synthetically converted our $350.0, 6.25% Senior Unsecured Notes due November 2014, of fixed rate debt to floating rates. Fair value adjustments decreased the carrying amount of our debt outstanding at December 31, 2004 by approximately $1.7. In January 2005,

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
we executed an interest rate swap which synthetically converted an additional $150.0 of the $500.0, 7.25% Senior Unsecured Notes due August 2011, of fixed rate debt to floating rates. We entered into the swaps to hedge a portion of our floating interest rate exposure on our cash investments. In May of 2005, we terminated all of our long-term interest rate swap agreements covering the $350.0, 6.25% Senior Unsecured Notes and $150.0 of the $500.0, 7.25% Senior Unsecured Notes. In connection with the interest rate swap termination, our net cash receipts were approximately $1.1, which will be recorded as an offset to interest expense over the remaining life of the related debt.
      We have entered into foreign currency transactions in which various foreign currencies are bought or sold forward. These contracts were entered into to meet currency requirements arising from specific transactions. The changes in value of these forward contracts were reflected in our Consolidated Statement of Operations. As of December 31, 2004 and 2003, we had contracts covering approximately $1.8 and $2.4, respectively, of notional amount of currency and the fair value of the forward contracts was negligible.
      The terms of the 4.50% Convertible Senior Notes include two embedded derivative instruments. The fair value of the two derivatives on December 31, 2004 was immaterial.
INTERNAL CONTROL OVER FINANCIAL REPORTING
      We have identified numerous material weaknesses in our internal control over financial reporting, as set forth in greater detail in Item 8, Management’s Assessment on Internal Control Over Financial Reporting and Item 9A, Controls and Procedures, of this report. Each of our material weaknesses results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As a result, we have assessed that our internal control over financial reporting was not effective as of December 31, 2004. Management will, however, be unable to determine whether the elements of internal control over financial reporting related directly to preparing the financial statements for external purposes, as well as the preparation and calculation of the provision for income taxes, were operating effectively as of December 31, 2004 because internal controls in place at year-end have been extensively modified prior to the Company’s evaluation of these controls which can no longer be observed or assessed.
      The report of PricewaterhouseCoopers LLP (“PwC”), our independent registered public accounting firm, on our internal control over financial reporting disclaims an opinion on management’s assessment and on the effectiveness of our internal control over financial reporting. Until we file an annual report containing an audit report on our internal control over financial reporting that does not disclaim an opinion on our assessment or on the effectiveness of our internal control over financial reporting, we are subject to certain limitations under the US federal securities laws as further described in Item 1, Business-Risk Factors.
      We are in the process of developing and implementing remedial measures to address the material weaknesses in our internal control over financial reporting. However, because of our decentralized structure and our many disparate accounting systems of varying quality and sophistication, we have extensive work remaining to remedy these material weaknesses. While we have made considerable progress, we have yet to complete the formal work plan for remedying the identified material weaknesses. At present, there can be no assurance as to when the remediation plan will be completed or when it will be implemented. Until our remedial efforts are completed, we will continue to incur the expenses and management burdens associated with the manual procedures and additional resources required to prepare our Consolidated Financial Statements. There will also continue to be a substantial risk that we will be unable to make future SEC filings on time. These developments, and the effect on our actual or perceived liquidity and credit standing, could have material adverse effects on our financial condition and further adverse affects

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
on our business or our liquidity that we cannot predict. We discuss these risks under Risk Factors in Item 1 of this Annual Report.
RESTATEMENT
      In connection with our work to comply with Section 404 of the Sarbanes-Oxley Act of 2002, we identified errors in our accounting and previously reported financial results. In March 2005, we announced that we would delay filing our Annual Report on Form 10-K, and began a comprehensive review of previously reported financial information. The scope of our review included the analysis of accounting for acquisitions, revenue and leases, internal investigations into potential employee misconduct, as well as other miscellaneous areas impacted by the identified material weaknesses. The review, conducted under the direction of our senior management with the oversight of the Audit Committee of the Board of Directors, included our operating agencies and consisted of an extensive examination of financial information and significant transactions.
      Our procedures were substantially manual and involved hundreds of our employees and external consultants and took over six months to complete. These procedures included examining the accounting for more than 400 acquisitions, leases at approximately 370 entities, approximately 10,000 account reconciliations and account analyses and over 300,000 intercompany transactions, as well as a comprehensive review of over 20,000 client contracts with respect to timing of revenue recognition, vendor related discounts or credits and income statement classification. In addition, we are in various stages of completing approximately 50 internal investigations addressing employee misconduct predominantly outside the US. In order to complete this work, we have hired or replaced hundreds of temporary and permanent accountants. Management believes the scope and process of its internal review of previously reported financial information was sufficient to identify issues of a material nature that could affect our Consolidated Financial Statements and all dates and periods presented herein have been restated to fairly present the results of our operations.
      The errors in our previously reported financial information, and the failure to prevent them or detect them in our financial reporting process, were largely attributable to weak internal controls, our decentralized operational structure, general lack of compliance with our policies and procedures, numerous disparate operating information technology systems, inadequate oversight by management at various levels within our organization, and an inadequate staff of competent accounting personnel with an appropriate level of knowledge of GAAP. We concluded that our control environment has not progressed sufficiently to serve as an effective foundation for all other components of internal control.
      As a result of our review, we determined that a restatement of previously reported financial information was required. Our previously reported financial information should no longer be relied upon. Accordingly, we have restated our previously reported financial information for the years ended December 31, 2003, 2002, 2001, and 2000 and our previously reported financial information for the first, second and third quarters of 2004 and 2003 (the “restatement”). The restatement also affects periods prior to 2000, which is reflected as an adjustment to opening retained earnings as of January 1, 2000. The restatement covers a number of separate matters, each of which is described below and in further detail in Item 8, Financial Statements and Supplementary Data, Note 2, Restatement of Previously Issued Financial Statements.
      The law firm of Dewey Ballantine LLP was retained to advise the Audit Committee of the Board of Directors regarding the discharge of its obligations. The scope of the Dewey Ballantine LLP work included oversight of the internal investigations into potential employee misconduct being conducted by our internal audit group and the overall restatement process conducted by management. Dewey Ballantine LLP

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
retained a forensic accounting firm to assist with its work involving the internal investigations and review of the overall restatement process.
      For the quarterly impact of the restatement issue and the restated financial results for the first, second and third quarters of 2004, see Item 8, Financial Statements and Supplementary Data, Note 20, Results by Quarter.
      The following tables summarize the impact of all of these adjustments on previously reported revenue; net income (loss) from continuing operations and earnings per share; and assets, liabilities, and stockholders’ equity. The overall impact on stockholders’ equity of the restatement adjustments as of September 30, 2004, the date for which we last published financial statements, is approximately $550 million or 27.5% of the previously reported September 30, 2004 equity balance.
                                   
    For the Years Ended December 31,
     
    Impact of Adjustments on Revenue
     
    2003   2002   2001   2000
                 
As previously reported
  $ 5,863.4     $ 5,737.5     $ 6,352.7     $ 6,728.5  
 
Revenue Recognition Related to Vendor Discounts or Credits
    (50.6 )     (40.2 )     (42.8 )     (25.9 )
 
Revenue Recognition related to Customer Contracts
    (18.7 )     (8.6 )     (3.6 )     (6.8 )
 
Revenue Presentation
    355.6       358.5       340.2       264.3  
 
Pre-Acquisition Earnings
          (2.5 )     (4.2 )     (42.2 )
 
Internal Investigations
    (7.2 )     (6.1 )     (2.9 )     (4.6 )
 
Other Adjustments
    19.2       20.5       (40.9 )     (41.1 )
                         
Total Adjustments
    298.3       321.6       245.8       143.7  
                         
As restated
  $ 6,161.7     $ 6,059.1     $ 6,598.5     $ 6,872.2  
                         

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
                                                   
    Impact of Adjustments on Net Income (Loss) from Continuing Operations and Earnings per Share
     
    For the Year Ended December 31, 2003   For the Year Ended December 31, 2002
         
        Basic Earnings           Basic Earnings    
        (Loss) Per   Diluted Earnings       (Loss) Per   Diluted Earnings
        Share of   (Loss) Per       Share of   (Loss) Per
    Net Income   Common   Share of   Net Income   Common   Share of
    (Loss)   Stock   Common Stock   (Loss)   Stock   Common Stock
                         
As previously reported
  $ (552.9 )   $ (1.43 )   $ (1.43 )   $ 68.0     $ 0.18     $ 0.18  
 
Revenue Recognition Related to Vendor Discounts or Credits
    (45.4 )     (0.12 )     (0.12 )     (32.9 )     (0.09 )     (0.09 )
 
Revenue Recognition Related to Customer Contracts
    (15.8 )     (0.04 )     (0.04 )     (4.5 )     (0.01 )     (0.01 )
 
Future Obligations Related to Prior Acquisitions
    (24.2 )     (0.06 )     (0.06 )     (13.8 )     (0.04 )     (0.04 )
 
Pre-Acquisition Earnings
                      (0.7 )            
 
Internal Investigations
    (18.6 )     (0.05 )     (0.05 )     (14.4 )     (0.04 )     (0.04 )
 
International Compensation Arrangements
    (8.8 )     (0.02 )     (0.02 )     (8.5 )     (0.02 )     (0.02 )
 
Accounting for Leases
    (2.5 )     (0.01 )     (0.01 )     (0.3 )            
 
Other Adjustments
    28.1       0.07       0.07       (7.7 )     (0.02 )     (0.02 )
                                     
Total Restatement Adjustments
    (87.2 )     (0.23 )     (0.23 )     (82.8 )     (0.22 )     (0.22 )
                                     
As restated
  $ (640.1 )   $ (1.66 )   $ (1.66 )   $ (14.8 )   $ (0.04 )   $ (0.04 )
                                     
 
Weighted-average shares:
            385.5       385.5               376.1       376.1  
                                                   
    Impact of Adjustments on Net Income (Loss) from Continuing Operations and Earnings per Share
     
    For the Year Ended December 31, 2001   For the Year Ended December 31, 2000
         
        Basic Earnings   Diluted       Basic Earnings    
        (Loss) Per   Earnings       (Loss) Per   Diluted Earnings
        Share of   (Loss) Per       Share of   (Loss) Per
    Net Income   Common   Share of   Net Income   Common   Share of
    (Loss)   Stock   Common Stock   (Loss)   Stock   Common Stock
                         
As previously reported
  $ (550.1 )   $ (1.49 )   $ (1.49 )   $ 386.4     $ 1.07     $ 1.04  
 
Revenue Recognition Related to Vendor Discounts or Credits
    (35.7 )     (0.10 )     (0.10 )     (19.6 )     (0.05 )     (0.05 )
 
Revenue Recognition Related to Customer Contracts
    (2.4 )     (0.01 )     (0.01 )     (4.3 )     (0.01 )     (0.01 )
 
Future Obligations Related to Prior Acquisitions
    (14.0 )     (0.04 )     (0.04 )     (10.1 )     (0.03 )     (0.03 )
 
Pre-Acquisition Earnings
    2.8       0.01       0.01       (5.1 )     (0.01 )     (0.01 )
 
Internal Investigations
    (10.9 )     (0.03 )     (0.03 )     (3.7 )     (0.01 )     (0.01 )
 
International Compensation Arrangements
    (4.4 )     (0.01 )     (0.01 )     (4.6 )     (0.01 )     (0.01 )
 
Accounting for Leases
    (2.9 )     (0.01 )     (0.01 )     (7.0 )     (0.02 )     (0.02 )
 
Other Adjustments
    (8.3 )     (0.02 )     (0.02 )     (8.1 )     (0.02 )     (0.02 )
                                     
Total Restatement Adjustments*
    (75.8 )     (0.21 )     (0.21 )     (62.5 )     (0.17 )     (0.17 )
                                     
As restated
  $ (625.9 )   $ (1.70 )   $ (1.70 )   $ 323.9     $ 0.90     $ 0.87  
                                     
 
Weighted-average shares
            369.0       369.0               359.6       370.5  
 
Earnings (loss) per share does not add due to rounding.

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
                                                   
    Impact of Adjustments on Consolidated Balance Sheet Accounts
     
    As of December 31, 2003   As of December 31, 2002
         
    Total   Total   Stockholders’   Total   Total   Stockholders’
    Assets   Liabilities   Equity   Assets   Liabilities   Equity
                         
As previously reported
  $ 12,234.5     $ 9,628.6     $ 2,605.9     $ 11,793.7     $ 9,693.7     $ 2,100.0  
 
Revenue Recognition Related to Vendor Discounts or Credits
    36.3       198.5       (162.2 )     26.8       130.8       (104.0 )
 
Revenue Recognition Related to Customer Contracts
    33.7       122.8       (89.1 )     37.5       101.1       (63.6 )
 
Future Obligations Related to Prior Acquisitions
    (2.3 )     64.2       (66.5 )     (5.0 )     37.2       (42.2 )
 
Pre-Acquisition Earnings
    (33.3 )     (2.6 )     (30.7 )     (32.9 )     (2.6 )     (30.3 )
 
Internal Investigations
    9.2       61.5       (52.3 )     (3.4 )     27.7       (31.1 )
 
International Compensation Arrangements
    2.8       29.2       (26.4 )     2.1       19.6       (17.5 )
 
Accounting for Leases
    38.8       67.5       (28.7 )     38.3       61.7       (23.4 )
 
Other Adjustments
    126.2       157.4       (31.2 )     47.9       113.2       (65.3 )
Total Adjustments
    211.4       698.5       (487.1 )     111.3       488.7       (377.4 )
                                     
As restated
  $ 12,445.9     $ 10,327.1     $ 2,118.8     $ 11,905.0     $ 10,182.4     $ 1,722.6  
                                     
                                                   
    Impact of Adjustments on Consolidated Balance Sheet Accounts
     
    As of December 31, 2001   As of December 31, 2000
         
    Total   Total   Stockholders’   Total   Total   Stockholders’
    Assets   Liabilities   Equity   Assets   Liabilities   Equity
                         
As previously reported
  $ 11,375.3     $ 9,535.2     $ 1,840.1     $ 12,253.6     $ 9,883.3     $ 2,370.3  
 
Revenue Recognition Related to Vendor Discounts or Credits
    19.8       85.8       (66.0 )     11.0       42.3       (31.3 )
 
Revenue Recognition Related to Customer Contracts
    32.6       86.3       (53.7 )     30.7       82.6       (51.9 )
 
Future Obligations Related to Prior Acquisitions
    (0.6 )     28.2       (28.8 )     (0.5 )     14.5       (15.0 )
 
Pre-Acquisition Earnings
    (32.3 )     (2.6 )     (29.7 )     (36.0 )     (2.7 )     (33.3 )
 
Internal Investigations
    (1.4 )     14.0       (15.4 )     0.6       5.4       (4.8 )
 
International Compensation Arrangements
    1.2       10.2       (9.0 )     0.3       5.0       (4.7 )
 
Accounting for Leases
    46.1       67.6       (21.5 )     37.9       57.4       (19.5 )
 
Other Adjustments
    (0.4 )     36.0       (36.4 )     (20.0 )     9.8       (29.8 )
Total Adjustments
    65.0       325.5       (260.5 )     24.0       214.3       (190.3 )
                                     
As restated
  $ 11,440.3     $ 9,860.7     $ 1,579.6     $ 12,277.6     $ 10,097.6     $ 2,180.0  
                                     

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
           
    Impact of
    Adjustments on
    Retained Earnings
     
As previously reported at December 31, 1999
  $ 1,320.4  
 
Revenue Recognition Related to Vendor Discounts or Credits
    (12.7 )
 
Revenue Recognition Related to Customer Contracts
    (47.7 )
 
Future Obligations Related to Prior Acquisitions
    (5.2 )
 
Pre-Acquisition Earnings
    (31.8 )
 
Internal Investigations
    (1.1 )
 
Accounting for Leases
    (13.3 )
 
Other Adjustments
    (25.9 )
       
Total Restatement Adjustments
    (137.7 )
       
As restated at January 1, 2000
  $ 1,182.7  
       
Description of Restatement Adjustments:
Revenue Recognition
Revenue Recognition related to Vendor Discounts or Credits:
      We receive rebates, discounts, and other credits from our vendors and media outlets for the acquisition of goods and services that are entered into on behalf of our clients. The expenses include the purchase of various forms of media, including television, radio, and print advertising space, or production costs, such as the creation of advertising campaigns, commercials, and print advertisements. Revenues in the advertising and communicative services business are frequently recorded net of third party costs as the business is primarily an agent for its clients. Since these costs are billed to clients, there are times when vendor discounts, credits, or price differences can affect the net revenue recorded by the agency. These third party discounts, rebates, or price differences are frequently referred to as credits.
      Our contracts are typically “fixed-fee arrangements” or “cost-based arrangements.” In “fixed-fee arrangements,” the amount we charge our clients is comprised of a fee for our services. The fee we earn, however, is not affected by the level of expenses incurred. Therefore, any rebates or credits received in servicing these accounts do not create a liability to the client. In “cost-based arrangements,” we earn a percentage commission or flat fee based on or incremental to the expenses incurred. In these cases, rebates or credits received may accrue to the benefit of our clients and create a liability payable to the client. The implication and interpretation of cost language included in our contracts can vary across international and domestic markets in which we operate and can affect whether or not we have a liability to the client.
      Without adequate contract review procedures the operating practice and the accounting in some of our agencies, predominantly outside the United States, relied on local customs and practices. As a result, in some instances, our accounting for the vendor discount was inconsistent with the underlying contractual requirements, which necessitated accounting adjustments. To correct for improperly recorded revenue, we have established a liability to refund these credits, discounts and rebates to our customers in accordance with our contractual obligations.
      As part of the restatement, we have performed an extensive review of our client contracts and local law to determine the impact of improperly recognizing these media and vendor credits as additional revenue instead of recognizing a liability to our clients. We have determined our exposure to each type of these credits by agency, reviewed our legal obligations considering our client contracts and local law, and

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
established a liability as necessary. Where it was impractical to review client contracts we have estimated our exposure. If our estimate is incorrect we may need to materially adjust our liability.
      In order to remediate this issue, we are in the process of issuing a formal policy to require proper transparency in our contracts, and proper handling and accounting for these types of vendor discounts or credits received in the normal course of business.
      The impact on our Consolidated Financial Statements of this element of the restatement is presented in the following table. The restatement also affects periods prior to 2000; we have recorded an adjustment of $12.7 to retained earnings at January 1, 2000 related to vendor discounts or credits.
                                   
Revenue Recognition Related to Vendor Discounts or Credits   Impact of Restatement
     
Increase (Decrease) for the Years Ended and as of December 31,   2003   2002   2001   2000
                 
Consolidated Statement of Operations:
                               
 
Revenue
    (50.6 )     (40.2 )     (42.8 )     (25.9 )
 
Operating Income (Loss)
    (53.3 )     (41.4 )     (48.8 )     (26.7 )
 
Provision for Income Taxes
    (7.9 )     (8.5 )     (13.0 )     (7.1 )
 
Income (Loss) from Continuing Operations
    (45.4 )     (32.9 )     (35.7 )     (19.6 )
                         
Consolidated Balance Sheet:
                               
 
Total Assets
    9.6       7.0       8.7       7.0  
 
Total Liabilities
    67.7       45.0       43.4       25.6  
                         
Revenue Recognition related to Customer Contracts:
      We recognize revenue when persuasive evidence of an arrangement exists, there is fixed and determinable pricing, and upon completion of the earnings process in accordance with the terms of the arrangement with our clients, which is generally as services are performed and/or when the media placements or production are completed.
      For project based arrangements, revenue is recognized based upon the agreement that we have in place with our customers. Our fees are generally recognized as earned, based on the proportional performance method of revenue recognition in situations where our fee is reconcilable to the actual hours incurred to service the client, as detailed in a contractual staffing plan, or where the fee is earned on a per hour basis, with the amount of revenue recognized in both situations limited to the amount realizable per the terms of the client contract. Where it is determined that the contractual staffing plan is incomplete or there is no staffing plan, we defer the recognition of revenue until the period in which all work is completed. For retainer-based arrangements, fees are recognized on a straight line or monthly basis when service is provided, essentially on a pro rata basis, and the terms of the contract support that accounting. We require explicit language in the contract evidencing that our obligation to the client for services rendered is satisfied on a monthly basis. We evaluate the termination provisions of the contract for a determination of amounts realizable at an interim date. Where it is determined that the terms of the contract do not clearly support monthly recognition of revenue, we defer the recognition of revenue until the period in which all work is completed.
      In certain transactions with our customers the persuasive evidence of the customer arrangement was not always adequate to support revenue recognition, or the timing of revenue recognition did not appropriately follow the specific contract terms. As part of our review, we reviewed significant client contracts to ensure that revenue was recognized in accordance with the terms of the contract and/or with our policies as outlined above.

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
      We have established the following terms as the specific criteria to be followed consistently across our global operating divisions. For adequate persuasive evidence of arrangements, we required signed contractual agreements or in lieu of a signed contract, other evidence or documentation from our customers was required in the period in which revenue was recognized. This evidence was required to define our compensation, to give a clear indication of how revenue was to be earned, and to describe how our obligation to the client was to be satisfied. In the absence of persuasive evidence of an arrangement or detailed invoices indicating the level of services performed were not available, we deferred the recognition of revenue for the entire contract, until we could assure that all internal work was completed. Where it was determined that persuasive evidence was lacking or insufficient, we deferred the recognition of revenue until that period in which persuasive evidence was obtained, cash was received accompanied by a detailed customer invoice, or all work was completed.
      In connection with the restatement, we have established a formal policy with specific guidelines