FORM 10-K
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
         
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934    
For the fiscal year ended December 31, 2005
Commission file number 1-6686
THE INTERPUBLIC GROUP OF COMPANIES, INC.
(Exact name of registrant as specified in its charter)
     
Delaware   13-1024020
State or other jurisdiction of
incorporation or organization
  (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
53/8% 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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.
  Yes o     No þ
 
     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.   Yes o     No þ
 
     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 þ     No o
     
     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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
          Large accelerated filer þ          Accelerated filer o          Non-accelerated filer 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 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 February 28, 2006 was 436,029,334.
DOCUMENTS INCORPORATED BY REFERENCE
      The following sections of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 25, 2006 are incorporated by reference in Part III: “Election of Directors,” “Corporate Governance Practices and Board Matters,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Compensation of Executive Officers,” “Report of the Compensation Committee of the Board of Directors,” “Outstanding Shares,” “Related Party Transactions” and “Appointment of Independent Auditors.”
 
 


 

TABLE OF CONTENTS
             
        Page
         
 PART I.
   Business     1  
   Risk Factors     5  
   Unresolved Staff Comments     9  
   Properties     9  
   Legal Proceedings     10  
   Submission of Matters to a Vote of Security Holders     10  
 
 PART II.
   Market for Registrant’s Common Equity and Related Stockholder Matters     13  
   Selected Financial Data     15  
   Management’s Discussion and Analysis of Financial Condition and Results of Operations     17  
   Quantitative and Qualitative Disclosures About Market Risk     83  
   Financial Statements and Supplementary Data     84  
   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure     173  
   Controls and Procedures     173  
   Other Information     173  
 
 PART III.
   Directors and Executive Officers of Interpublic     174  
   Executive Compensation     174  
   Security Ownership of Certain Beneficial Owners and Management     174  
   Certain Relationships and Related Transactions     174  
   Principal Accountant Fees and Services     174  
 
 PART IV.
   Exhibits and Financial Statements Schedule     175  
 EX-10.I.D: AMENDMENT #3 TO AMENDED AND RESTATED 3-YEAR CREDIT AGREEMENT
 EX-10.I.E: LETTER AGREEMENT
 EX-18: LETTER FROM PRICEWATERHOUSECOOPERS LLP
 EX-21: SUBSIDIARIES
 EX-24: POWER OF ATTORNEY AND RESOLUTION OF BOARD OF DIRECTORS RE POWER OF ATTORNEY
 EX-31.1: CERTIFICATION
 EX-31.2: CERTIFICATION
 EX-32: CERTIFICATION


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EXPLANATORY NOTE
      In this report, we have restated the financial data we previously published for each interim period in 2005. The interim period restatements relate primarily to accounting for goodwill impairments, revenue recognition and a number of miscellaneous items including accounting for leases and international compensation arrangements.
      The restated financial data and related disclosures are contained in Note 23 to the Consolidated Financial Statements in Item 8. We have not amended any of our previously filed reports. The financial data and other financial information for interim periods in 2005 in our quarterly reports on Form 10-Q for the quarters ended March 31, June 30 and September 30, 2005 should no longer be relied upon.

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STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
      This annual report on Form 10-K contains forward-looking statements. Statements in this report that are not historical facts, including statements about management’s beliefs and expectations, 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 1A, 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 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 restatements of financial statements;
 
  •  our ability to satisfy covenants under our 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;
 
  •  risks associated with assumptions we make in connection with our critical accounting estimates;
 
  •  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 Securities and Exchange Commission (“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 and communications services companies around the world.
      Investors should carefully consider these factors and the additional risk factors outlined in more detail in Item 1A, 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 (“NYSE”). For further information on obtaining copies of our public filings at the NYSE, please call (212) 656-5060.
      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.

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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., together with its subsidiaries (the “Company”, “Interpublic”, “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 over 100 countries and approximately 43,000 employees, our agencies work with our clients to create global and local marketing campaigns. 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, or models. In the single-discipline model, clients work directly with one agency in one discipline. The project collaboration model is employed when sister agencies are brought in on a project basis as a client’s needs expand. In the integrated agency-of-record model, a multi-disciplinary agency provides a fuller range of marketing services for a client. The lead company model is applied when a lead agency manages the work at several of our agencies. Finally, in the virtual network model, clients have a representative at the holding company level to oversee the fullest range of our marketing spectrum.
      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.
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 over 100 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

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  •  Hill Holliday
 
  •  Mullen
      We also have many domestic advertising agencies that provide North American clients with traditional services in print and broadcast media:
  •  Avrett Free & Ginsberg
 
  •  Campbell Mithun
 
  •  Dailey & Associates
 
  •  Gillespie
 
  •  Gotham
 
  •  Jay Advertising
 
  •  Tierney Communications
 
  •  TM Advertising
      Our one-to-one marketing companies specialize in using a full range of digital, interactive and traditional media services to communicate directly with consumers in relevant and innovative ways:
  •  Draft Worldwide
 
  •  FCBi
 
  •  MRM Partners Worldwide
 
  •  The Hacker Group
 
  •  R/ GA
      The worldwide leader in experiential marketing, Jack Morton Worldwide, is part of our 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 addresses changes in today’s fragmented media landscape, with capabilities in planning, research, negotiating and buying, as well as media research, product placement and programming. Our major media agencies are:
  •  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

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      Our public relations agencies offer such worldwide services as consumer PR, corporate communications, crisis management, web relations and investor relations:
  •  DeVries
 
  •  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 (women’s marketing)
 
  •  KidCom (youth marketing)
 
  •  NAS (recruitment)
 
  •  Newspaper Services of America (newspaper services)
 
  •  OSI (outdoor advertising)
 
  •  Wahlstrom Group (yellowpages)
 
  •  Women2Women Communications (women’s marketing)
 
  •  FutureBrand (corporate identity and branding)
      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
      Our affiliated multicultural agency partners, in which we own a minority interest, target specific demographic segments:
  •  Accent Marketing (Hispanic)
 
  •  Casanova Pendrill (Hispanic)
 
  •  IW Group (Asian-Pacific-American)
 
  •  SiboneyUSA (Hispanic)
      Interpublic maintains separate agency brands to manage the broadest range of clients, even ones that operate in similar business areas. Having distinct agencies allows us to avoid potential conflicts of interest among our clients in the same industry. To help manage these companies effectively, however, we have organized our agencies into five global operating divisions. Four of these divisions, McCann WorldGroup (“McCann”), The FCB Group (“FCB”), Lowe Worldwide (“Lowe”) and Draft Worldwide (“Draft”), provide a distinct comprehensive array of global communications and marketing services. The fifth global operating division, The Constituency Management Group (“CMG”), which includes Weber Shandwick, MWW Group, 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.

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      A group of 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 Campbell-Ewald, Hill Holliday, Deutsch and Mullen.
      We believe this organizational structure allows us to provide comprehensive solutions for clients and enables stronger financial and operational growth opportunities. We practice a decentralized management style, providing agency management with a great deal of operational autonomy.
Our Financial Reporting Segments
      As of December 31, 2005, for financial reporting purposes we have three reportable segments. The largest segment, Integrated Agency Networks (“IAN”), is comprised of McCann, FCB, Lowe, Draft, our media agencies, and our leading stand-alone agencies. CMG comprises our second reportable segment. Our third reportable segment is comprised of our Motorsports operations (“Motorsports”), which were sold during 2004 and had immaterial residual operating results in 2005. See Note 20 to the Consolidated Financial Statements for further discussion.
Principal Markets
      Our agencies are located in over 100 countries and in every significant world 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. The United States (“U.S.”), Europe (excluding the United Kingdom (“UK”)), the UK, Asia Pacific and Latin America represented 55.2%, 18.1%, 9.9%, 7.5% and 4.1% of our total revenue, respectively, in 2005. For further discussion concerning revenues and long-lived assets on a geographical basis for each of the last three years, see Note 20 to the Consolidated Financial Statements.
Sources of Revenue
      Our revenues are primarily derived from the planning and execution of advertising programs in various media and the planning and execution of other marketing and communications programs. Most of our client contracts are individually negotiated. Accordingly, the terms of client engagements and the basis on which we earn commissions and fees vary significantly. Our client contracts are becoming increasingly complex arrangements that frequently include provisions for incentive compensation and govern vendor rebates and credits. Our largest clients are multinational entities and we often provide services to these clients out of multiple offices and across various agencies. In arranging for such services to be provided, we may enter into global, regional and local agreements. Multiple agreements of this nature are reviewed by legal counsel to determine the governing terms to be followed by the offices and agencies involved.
      Revenues for creation, planning and placement of advertising are primarily determined 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 include an incentive compensation component in their total compensation package. This provides added revenue based on achieving mutually agreed-upon qualitative and/or quantitative metrics within specified time periods. Commissions are earned based on services provided, and are usually derived from a percentage or fee over the total cost to complete the assignment. Commissions 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 we earn, which is either retained in total or shared with the client depending on the nature of the services agreement.
      We pay 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 typically pay media charges only after we receive 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.

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      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 directly 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 in client activity. Depending on the terms of the client contract, fees for services performed can be primarily recognized three ways: proportional performance, straight-line (or monthly basis) or completed contract. 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 based on revenue accounted for approximately 24.7% and 23.5% of revenue in 2005 and 2004, respectively. Based on revenue for the year ended December 31, 2005, our largest clients were General Motors Corporation, Microsoft, Unilever, Johnson & Johnson, and Verizon. 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 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, as well as provide services across multiple advertising and marketing disciplines, 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, 2005, we employed approximately 43,000 persons, of whom approximately 18,000 were employed in the U.S. 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.
Item 1A. 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 numerous material weaknesses in our internal control over financial reporting.
      We have identified numerous material weaknesses in our internal control over financial reporting, and our internal control over financial reporting was not effective as of December 31, 2005. For a detailed description of these material weaknesses, see Item 8, Management’s Assessment on Internal Control Over Financial Reporting, of our Form 10-K. 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 reasonable assurance regarding the reliability of our financial statements. Given the extensive material weaknesses identified, even with this additional work there is a risk of errors not being prevented or detected, which could result in further restatements.

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  •  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 a work plan for remedying all of the identified material weaknesses, and this work will extend beyond 2006. There can be no assurance as to when the remediation plan will be completed or when the material weaknesses will be remedied. There will also continue to be a serious risk that we will be unable to file future periodic reports with the SEC in a timely manner, that a default could result under the indentures governing our debt securities or under our three-year revolving credit agreement (the “Three-Year Revolving Credit Facility”) or credit facilities of our subsidiaries and that our future financial statements could contain errors that will be undetected.
  •  We face substantial ongoing costs associated with complying with the requirements of Section 404 of the Sarbanes-Oxley Act.
      As a result of the extent of the deficiencies in our internal control over financial reporting, we incurred significant professional fees and other expenses in 2005 to prepare our consolidated financial statements and to comply with the requirements of Section 404 of the Sarbanes-Oxley Act. Until our remediation is 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. The cost of this work will continue to be significant in 2006 and beyond.
  •  We have restated our financial statements.
      We may continue to suffer adverse effects from the restatement of previously issued financial statements that we presented in our annual report on Form 10-K for the year ended December 31, 2004, as amended (the “2004 Form 10-K”). In the 2004 Form 10-K, we restated our previously reported financial statements for the years ended December 31, 2003, 2002, 2001 and 2000, and for the first three quarters of 2004 and all four quarters of 2003 (the “Prior Restatement”). In this report, we have restated the financial data for the first three quarters of 2005.
      As a result of these matters, we have recorded liabilities for vendor discounts and other obligations that will necessitate cash settlement that may negatively impact our cash flow in future years. We may also become subject to fines or other penalties or damages in our ongoing SEC investigation or new regulatory actions or civil litigation. Any of these matters may also contribute to further ratings downgrades, negative publicity and difficulties in attracting and retaining key clients, employees and management personnel.
  •  Ongoing SEC investigations regarding our accounting restatements could adversely affect us.
      The SEC opened a formal investigation in response to the restatement we first announced in August 2002 and, as previously disclosed, the SEC staff’s investigation has expanded to encompass our Prior Restatement. In particular, since we filed our 2004 Form 10-K, we have received subpoenas from the SEC relating to matters addressed in our Prior Restatement. We continue to cooperate with the investigation. We expect that the investigation will result in monetary liability, but because the investigation is ongoing, in particular with respect to the Prior Restatement, we cannot reasonably estimate either the timing of a resolution or the amount. Accordingly, we have not yet established any accounting provision relating to these matters. Potential adverse developments in connection with the investigation, including any expansion of the scope of the investigation, could also negatively impact us and could divert the efforts and attention of our management team from our ordinary business operations.
  •  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 agencies’ reputations are important factors in determining our

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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.
      Many companies put their advertising and marketing communications business up for competitive review from time to time. We have won and lost client accounts in the past as a result of such periodic competitions. Our ability to attract new clients and to retain existing clients may also, 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.
      In addition, issues arising from our deficiencies in our internal control over financial reporting could divert the efforts and attention of our management from our ordinary business operations or have an adverse impact on clients’ perceptions 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. Our ability to do so is influenced by a variety of factors, including the compensation we award, and could be adversely affected by our recent financial performance and financial reporting difficulties.
  •  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 other industries. In the past, some clients have responded 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. This pattern may recur in the future.
  •  Our liquidity profile has recently been adversely affected.
      In recent periods we have experienced operating losses that have adversely affected our cash flows from operations. We have recorded liabilities and incurred substantial professional fees in connection with the Prior 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. 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 liquidity position could be adversely affected.
  •  Downgrades of our credit ratings could adversely affect us.
      Our long-term debt is currently rated B+ with negative outlook by Standard and Poor’s, Ba1 with negative outlook by Moody’s, and B+ with stable outlook by Fitch. It is possible that our credit ratings will be reduced further. Ratings downgrades or comparatively weak ratings can adversely affect us, because ratings are an important factor influencing our ability to access capital. Our clients and vendors may also consider our credit profile when negotiating contract terms, and if they were to change the terms on which they deal with us, it could have a significant adverse affect on our liquidity.
  •  If some of our clients experience financial distress, their weakened financial position could negatively affect our own financial position and results.
      We have a large and diverse client base and at any given time, one or more of our clients may experience financial distress, file for bankruptcy protection or go out of business. If any client with whom we have a substantial amount of business experiences financial difficulty, it could delay or jeopardize the

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collection of accounts receivable, may result in significant reductions in services provided by us and may have a material adverse effect on our financial position, results of operations and liquidity. For a description of our client base, see Item 1, Business- Clients.
  •  International business risks could adversely affect our operations.
      International revenues represent a significant portion of our revenues, approximately 45% in 2005. Our international operations are exposed to risks that affect foreign operations of all kinds, including 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 currencies other than the U.S. dollar, primarily the Euro and Pound Sterling, fluctuations in exchange rates between the U.S. dollar and such currencies may materially affect our financial results.
  •  In 2005 and prior years, we recognized 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, 2005, we have substantial amounts of intangibles, investments and deferred tax assets on our Consolidated Balance Sheet. Future events, including our financial performance and strategic decisions, 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. In connection with the U.S. deferred tax assets, management believes that it is more likely than not that a substantial amount of the deferred tax assets will be realized; a valuation allowance has been established for the remainder. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future U.S. taxable income are lower than anticipated.
  •  We are subject to certain restrictions and must meet certain minimum financial covenants under our Three-Year Revolving Credit Facility.
      Our Three-Year Revolving Credit Facility contains covenants that limit our operational flexibility and require us to meet specified financial ratios. 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 5.375% Series A Mandatory Convertible Preferred Stock and our 5.25% Series B Cumulative Convertible Perpetual Preferred Stock), 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 of our subsidiaries outside the U.S. and unsecured debt, which may not exceed $10.0 million in the aggregate, incurred in the ordinary course of business of our U.S. 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 in the past been required to seek and successfully have obtained amendments and waivers of the financial covenants under our committed bank facility. There can be no assurance that we will be in compliance with these covenants in future periods. If we do not comply and are unable to obtain the necessary amendments or waivers at that time, we would be unable to borrow or obtain additional letters

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of credit under the Three-Year Revolving Credit Facility and could choose to terminate the facility and provide a cash deposit in connection with any outstanding letters of credit. The lenders under the Three-Year Revolving Credit Facility would also have the right to terminate the facility, accelerate any outstanding principal and require us to provide a cash deposit in an amount equal to the total amount of outstanding letters of credit. The outstanding amount of letters of credit was $162.4 million as of December 31, 2005. We have not drawn under the Three-Year Revolving Credit Facility over the past two years, and we do not currently expect to draw under it. So long as there are no amounts to be accelerated under the Three-Year Revolving Credit Facility, termination of the facility would not trigger the cross-acceleration provisions of our public debt.
      Any future impairment charge (excluding valuation allowance charges) could 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 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 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 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 and other governmental scrutiny that could restrict our activities or negatively impact our revenues.
      Our industry is subject to government regulation and other governmental action, both domestic and foreign. There has been an increasing tendency on the part of advertisers and consumer groups to challenge advertising through legislation, regulation, the courts or otherwise, for example on the grounds that the advertising is false and deceptive or injurious to public welfare. 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 1B. Unresolved Staff Comments
      None.
Item 2. Properties
      Substantially all of our office space is leased from third parties. Several of our leases will be expiring within the next few months, while the remainder will be expiring within the next 19 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 21 to the Consolidated Financial Statements for a discussion of our lease commitments.

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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.
SEC Investigation
      The SEC opened a formal investigation in response to the restatement we first announced in August 2002 and, as previously disclosed, the SEC staff’s investigation has expanded to encompass our Prior Restatement. In particular, since we filed our 2004 Form 10-K, we have received subpoenas from the SEC relating to matters addressed in our Prior Restatement. We continue to cooperate with the investigation. We expect that the investigation will result in monetary liability, but because the investigation is ongoing, in particular with respect to the Prior Restatement, we cannot reasonably estimate either the timing of a resolution or the amount. Accordingly, we have not yet established any accounting provision relating to these matters.
Item 4. Submission of Matters to a Vote of Security Holders
      This item is answered in respect of the Annual Meeting of Stockholders held on November 14, 2005 (the “Annual Meeting”). At the Annual Meeting, the following number of votes were cast with respect to each matter voted upon:
      Proposal to approve Management’s nominees for director as follows:
                         
Nominee   For   Withheld   Broker Nonvotes
             
Frank J. Borelli
    311,766,433       59,959,629       0  
Reginald K. Brack
    315,032,540       56,693,522       0  
Jill M. Considine
    315,037,081       56,688,981       0  
Richard A. Goldstein
    339,686,209       32,039,853       0  
H. John Greeniaus
    339,976,351       31,749,711       0  
Michael I. Roth
    337,559,779       34,166,283       0  
J. Phillip Samper
    336,415,059       35,311,003       0  
David M. Thomas
    339,228,386       32,497,676       0  
      Proposal to approve The Interpublic Group of Companies Employee Stock Purchase Plan (2006):
                             
For   Against   Abstain   Broker Nonvotes
             
  318,034,359       18,975,362       3,237,702       31,478,639  
      Proposal to approve confirmation of the appointment of PricewaterhouseCoopers LLP as independent auditors for 2005:
                             
For   Against   Abstain   Broker Nonvotes
             
  341,855,593       27,225,891       2,644,578       0  
      Shareholder proposal to arrange for the prompt sale of the Company to the highest bidder:
                             
For   Against   Abstain   Broker Nonvotes
             
  11,397,027       323,825,408       5,024,987       31,478,640  

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Executive Officers of Interpublic
             
Name   Age   Office
         
Michael Roth(1)
    60     Chairman of the Board and Chief Executive Officer
Nicholas J. Camera
    59     Senior Vice President, General Counsel and Secretary
Albert S. Conte
    55     Senior Vice President, Taxes and General Tax Counsel
Nick Cyprus
    52     Senior Vice President, Controller and Chief Accounting Officer
Thomas A. Dowling
    54     Senior Vice President, Chief Risk Officer
Stephen Gatfield
    47     Executive Vice President, Network Operations, Chief Executive Officer of Lowe Worldwide
Philippe Krakowsky
    43     Executive Vice President, Strategy and Corporate Communications
Frank Mergenthaler
    45     Executive Vice President and Chief Financial Officer
Timothy Sompolski
    53     Executive Vice President, Chief Human Resources Officer
 
(1)  Also a Director
      There is no family relationship among any of the executive officers.
      Mr. Roth became our Chairman of the Board and Chief Executive Officer, effective January 19, 2005. Prior to that time, Mr. Roth served as our Chairman of the Board from July 13, 2004 to January 2005. Mr. Roth served as Chairman and Chief Executive Officer of The MONY Group Inc. from February 1994 to June 2004. Mr. Roth has been a member of the Board of Directors of Interpublic since February 2002. He is also a director of Pitney Bowes Inc. and Gaylord Entertainment Company.
      Mr. Camera was hired in May 1993. He was elected Vice President, Assistant General Counsel and Assistant Secretary in June 1994, Vice President, General Counsel and Secretary in December 1995, and Senior Vice President, General Counsel and Secretary in February 2000.
      Mr. Conte was hired in March 2000 as Senior Vice President, Taxes and General Tax Counsel. Prior to joining us, Mr. Conte served as Vice President, Senior Tax Counsel for Revlon Consumer Products Corporation from September 1987 to February 2000.
      Mr. Cyprus was hired in May 2004 as Senior Vice President, Controller and Chief Accounting Officer. Prior to joining us, Mr. Cyprus served as Vice President and Controller of AT&T from January 1999 to May 2004. On March 22, 2006, we announced that Mr. Cyprus would be leaving the Company effective March 31, 2006.
      Mr. Dowling was hired in January 2000 as Vice President and General Auditor. He was elected Senior Vice President, Financial Administration of Interpublic in February 2001, and Senior Vice President, Chief Risk Officer in November 2002. Prior to joining us, Mr. Dowling served as Vice President and General Auditor for Avon Products, Inc. from April 1992 to December 1999.
      Mr. Gatfield was hired in April 2004 as Executive Vice President, Global Operations and Innovation. He was elected Executive Vice President, Strategy and Network Operations in December 2005, and in February 2006 was also named Chief Executive Officer of Lowe Worldwide. Prior to joining us, he served as Chief Operating Officer from 2001 to 2004 and as Regional Managing Director for the Asia Pacific region from 1997 to 2000 for Leo Burnett Worldwide.

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      Mr. Krakowsky was hired in January 2002 as Senior Vice President, Director of Corporate Communications. He was elected Executive Vice President, Strategy and Corporate Relations in December 2005. Prior to joining us, he served as Senior Vice President, Communications Director for Young & Rubicam from August 1996 to December 2000. During 2001, Mr. Krakowsky was complying with the terms of a non-competition agreement entered into with Young & Rubicam.
      Mr. Mergenthaler was hired in August 2005 as Executive Vice President and Chief Financial Officer. Prior to joining us, he served as Executive Vice President and Chief Financial Officer for Columbia House Company from July 2002 to July 2005. Mr. Mergenthaler served as Senior Vice President and Deputy Chief Financial Officer for Vivendi Universal from December 2001 to March 2002. Prior to that time Mr. Mergenthaler was an executive at Seagram Company Ltd. from November 1996 to December 2001.
      Mr. Sompolski was hired in July 2004 as Executive Vice President, Chief Human Resources Officer. Prior to joining us, he served as Senior Vice President of Human Resources and Administration for Altria Group from November 1996 to January 2003.

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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 February 28, 2006, there were 43,701 registered holders of our common stock.
                   
    NYSE Sale Price
     
Period   High   Low
         
2005:
               
 
Fourth Quarter
  $ 11.75     $ 9.14  
 
Third Quarter
  $ 12.67     $ 11.04  
 
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  
Dividend Policy
      No dividend was paid on our common stock during 2003, 2004, or 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. The current terms of our Three-Year Revolving Credit Facility limit our ability to declare and pay dividends. For a discussion of the restrictions under our Three-Year Revolving Credit Facility, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources. In addition, the terms of our outstanding series of preferred stock do not permit us to pay dividends on our common stock unless all accumulated and unpaid dividends have been or contemporaneously are declared and paid or provision for the payment thereof has been made. Our future dividend policy may also be influenced by the impact of our securities with participating rights in earnings available to common stockholders, including our 4.50% Convertible Senior Notes and Series A Mandatory Convertible Preferred Stock. For a discussion of our participating securities, see Note 13 to the Consolidated Financial Statements.
Transfer Agent and Registrar for Common Stock
      The transfer agent and registrar for our common stock is:
          Mellon Investor Services, Inc.
          480 Washington Boulevard
          29th Floor
          Jersey City, NJ 07310
          Tel: (877) 363-6398

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Sales of Unregistered Securities
      In the fourth quarter of 2005, we issued securities without registration under the Securities Act of 1933, as amended (the “Securities Act”) in payment of deferred compensation for acquisitions we made in earlier periods and for raising capital. The specific transactions were as follows:
  •  On November 21, 2005, we issued 77,006 shares of our common stock to two shareholders of a company in connection with the purchase of 31% of the shares of the company. The shares of our common stock were valued at $800,000 as of the date of issuance and were issued without registration in reliance on Regulation S under the Securities Act.
 
  •  On October 24, 2005, we issued 525,000 shares of our 5.25% Series B Cumulative Convertible Perpetual Preferred Stock (the “Series B Preferred Stock”) at an aggregate offering price of $525,000,000. The shares of our Series B Preferred Stock were sold on October 18, 2005 in a private placement to a syndicate of initial purchasers at an aggregate discount of $15,750,000 and may be resold to qualified institutional buyers in reliance on the exemption from registration provided by Rule 144A under the Securities Act.
      Each share of our Series B Preferred Stock may be converted at any time, at the option of the holder, into 73.1904 shares of our common stock, which is equivalent to an initial conversion price of approximately $13.66, plus cash in lieu of fractional shares. The conversion rate is subject to adjustment upon the occurrence of certain events. On or after October 15, 2010, we may cause shares of our Series B Preferred Stock to be automatically converted into shares of our common stock at the then prevailing conversion rate if the closing price of our common stock multiplied by the conversion rate then in effect equals or exceeds 130% of the liquidation preference for 20 trading days during any consecutive 30 trading day period.
Repurchase of Equity Securities
      The following table provides information regarding our purchases of equity securities during the fourth quarter of 2005:
                                 
                Maximum
                Number of
                Shares that May
        Average   Total Number of Shares   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
    37,019     $ 11.03              
November 1-30
    7,072     $ 10.97              
December 1-31
    238,077     $ 9.84              
Total(1)
    282,168     $ 10.03              
 
(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 during each month of the fourth quarter of 2005 (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. Summary Selected Financial Data
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
SUMMARY SELECTED FINANCIAL DATA
(Amounts in Millions, Except Per Share Amounts)
                                           
    For the Years Ended December 31,
     
    2005   2004   2003   2002   2001
                     
REVENUE
  $ 6,274.3     $ 6,387.0     $ 6,161.7     $ 6,059.1     $ 6,598.5  
OPERATING (INCOME) EXPENSES:
                                       
 
Salaries and related expenses
    3,999.1       3,733.0       3,501.4       3,397.1       3,634.9  
 
Office and general expenses
    2,288.1       2,250.4       2,225.3       2,248.3       2,397.9 (1)
 
Restructuring (reversals) charges
    (7.3 )     62.2       172.9       7.9       629.5  
 
Long-lived asset impairment and other charges
    98.6       322.2       294.0       130.0       300.7  
 
Motorsports contract termination costs
          113.6                    
                               
Total operating (income) expenses
    6,378.5       6,481.4       6,193.6       5,783.3       6,963.0  
                               
OPERATING INCOME (LOSS)
    (104.2 )     (94.4 )     (31.9 )     275.8       (364.5 )
                               
EXPENSES AND OTHER INCOME:
                                       
 
Interest expense
    (181.9 )     (172.0 )     (206.6 )     (158.3 )     (169.1 )
 
Debt prepayment penalty
    (1.4 )     (9.8 )     (24.8 )            
 
Interest income
    80.0       50.8       39.3       30.6       41.7  
 
Investment impairments
    (12.2 )     (63.4 )     (71.5 )     (40.3 )     (212.4 )
 
Litigation reversals (charges)
          32.5       (127.6 )            
 
Other income (expense)
    33.1       (10.7 )     50.3       8.0       14.4  
                               
Total expenses and other income
    (82.4 )     (172.6 )     (340.9 )     (160.0 )     (325.4 )
                               
Income (loss) from continuing operations before provision for income taxes
    (186.6 )     (267.0 )     (372.8 )     115.8       (689.9 )
 
Provision for (benefit of) income taxes
    81.9       262.2       242.7       106.4       (88.1 )
                               
Income (loss) from continuing operations of consolidated companies
    (268.5 )     (529.2 )     (615.5 )     9.4       (601.8 )
 
Income applicable to minority interests (net of tax)
    (16.7 )     (21.5 )     (27.0 )     (30.1 )     (27.3 )
 
Equity in net income of unconsolidated affiliates (net of tax)
    13.3       5.8       2.4       5.9       3.2  
                               
Loss from continuing operations
    (271.9 )     (544.9 )     (640.1 )     (14.8 )     (625.9 )
Income from discontinued operations (net of tax)
    9.0       6.5       101.0       31.5       15.5  
                               
Net income (loss)
    (262.9 )     (538.4 )     (539.1 )     16.7       (610.4 )
Dividends on preferred stock
    26.3       19.8                    
                               
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS
  $ (289.2 )   $ (558.2 )   $ (539.1 )   $ 16.7     $ (610.4 )
                               
Earnings (loss) per share of common stock:
                                       
Basic and diluted
                                       
 
Continuing operations
  $ (0.70 )   $ (1.36 )   $ (1.66 )   $ (0.04 )   $ (1.70 )
 
Discontinued operations
    0.02       0.02       0.26       0.08       0.04  
                               
Total*
  $ (0.68 )   $ (1.34 )   $ (1.40 )   $ 0.04     $ (1.65 )
                               
Weighted average shares:
                                       
 
Basic and diluted
    424.8       415.3       385.5       376.1       369.0  
OTHER DATA
                                       
 
Cash dividends per share of common stock
  $     $     $     $ 0.38     $ 0.38  
 
Cash dividends per share of preferred stock
  $ 14.50     $ 2.69     $     $     $  
 
Capital Expenditures
  $ (140.7 )   $ (194.0 )   $ (159.6 )   $ (171.4 )   $ (257.5 )
 
Market price on December 31,
  $ 9.65     $ 13.40     $ 15.60     $ 14.08     $ 29.02  
 
Number of Employees
    42,600       43,700       43,400       45,800       50,500  
 
(1)  Includes amortization expense of $161.0 in 2001.
  * 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,
     
    2005   2004   2003   2002   2001
                     
ASSETS:
                                       
Cash and cash equivalents
  $ 2,075.9     $ 1,550.4     $ 1,871.9     $ 953.2     $ 938.1  
Marketable securities
    115.6       420.0       195.1       30.7       21.2  
Accounts receivable, net of allowances
    4,015.7       4,319.2       4,106.3       4,263.4       4,403.9  
Expenditures billable to clients
    917.6       882.9       831.9       703.5       607.6  
Deferred income taxes
    184.3       261.0       279.7       103.0       136.0  
Prepaid expenses and other current assets
    188.3       184.6       269.8       423.3       324.6  
                               
 
Total current assets
    7,497.4       7,618.1       7,554.7       6,477.1       6,431.4  
Land, buildings and equipment, net
    650.0       722.9       697.9       851.1       871.0  
Deferred income taxes
    297.3       274.2       378.3       534.3       514.0  
Investments
    170.6       168.7       246.8       326.5       334.6  
Goodwill
    3,030.9       3,141.6       3,267.9       3,320.9       2,933.9  
Other assets
    299.0       328.2       322.3       397.9       379.9  
                               
 
Total non-current assets
    4,447.8       4,635.6       4,913.2       5,430.7       5,033.4  
                               
TOTAL ASSETS
  $ 11,945.2     $ 12,253.7     $ 12,467.9     $ 11,907.8     $ 11,464.8  
                               
 
LIABILITIES:
                                       
Accounts payable
  $ 4,245.4     $ 4,733.5     $ 4,473.4     $ 4,333.0     $ 3,771.2  
Accrued liabilities
    2,554.3       2,485.2       2,420.0       2,314.5       2,501.0  
Short-term debt
    56.8       325.9       316.9       841.9       428.5  
                               
 
Total current liabilities
    6,856.5       7,544.6       7,210.3       7,489.4       6,700.7  
Long-term debt
    2,183.0       1,936.0       2,198.7       1,822.2       2,484.6  
Deferred compensation and employee benefits
    592.1       590.7       548.6       534.9       438.6  
Other non-current liabilities
    319.0       408.9       326.7       270.7       177.3  
Minority interests in consolidated subsidiaries
    49.3       55.2       64.8       68.0       84.0  
                               
 
Total non-current liabilities
    3,143.4       2,990.8       3,138.8       2,695.8       3,184.5  
                               
TOTAL LIABILITIES
    9,999.9       10,535.4       10,349.1       10,185.2       9,885.2  
                               
TOTAL STOCKHOLDERS’ EQUITY
    1,945.3       1,718.3       2,118.8       1,722.6       1,579.6  
                               
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 11,945.2     $ 12,253.7     $ 12,467.9     $ 11,907.8     $ 11,464.8  
                               
      Certain classification revisions have been made to the prior period financial statements to conform to the current year presentation. These classification revisions included amounts previously recorded in current assets as accounts receivable of $537.7, $528.6, $315.8 and $249.2 to expenditures billable to clients and amounts previously recorded in current liabilities as accounts payable of $1,411.5, $1,197.0, $1,075.1 and $1,010.0 to accrued liabilities in the accompanying Consolidated Balance Sheets as of December 31, 2004, 2003, 2002 and 2001, respectively. The classification of these amounts were revised to more appropriately reflect the composition of the year end balances of accounts receivable as amounts billed to clients and accounts payable as amounts for which we have received invoices from vendors. These classification revisions had no impact on our results of operations or changes in our stockholders’ equity.

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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”, “Interpublic”, “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. 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 2005 performance and a description of the significant events impacting 2005 and thereafter.
      RESULTS OF OPERATIONS provides an analysis of the consolidated and segment results of operations for 2005 compared to 2004 and 2004 compared to 2003.
      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, and Item 9A, Controls and Procedures.
      LIABILITIES RELATED TO OUR PRIOR RESTATEMENT provides a description and update of the significant liabilities recorded as part of our previously reported restated financial statements for the years ended December 31, 2003, 2002, 2001 and 2000 (“Prior Restatement”). For additional information, see Item 8, Financial Statements and Supplementary Data.
      OUT OF PERIOD ADJUSTMENTS provides a description and impact of amounts recorded as part of our 2005 financial statements which relate to a prior annual period. The out of period adjustments primarily relate to errors in accounting related to vendor credits or discounts, income taxes as well as the impact of other miscellaneous adjustments.
      CRITICAL ACCOUNTING ESTIMATES 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.
      RECENT ACCOUNTING STANDARDS by reference to Note 22 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 future operations, as well as those significant accounting standards which were adopted during 2005.
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 newer disciplines such as experiential marketing and branded entertainment. With offices in over 100 countries and approximately 43,000 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.

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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)
      Interpublic maintains separate agency brands to manage the broadest range of clients, even ones that operate in similar business areas. Having distinct agencies allows us to avoid potential conflicts of interest among our clients in the same industry. To help manage these companies effectively, however, we have organized our agencies into five global operating divisions. Four of these divisions, McCann WorldGroup (“McCann”), The FCB Group (“FCB”), Lowe Worldwide (“Lowe”) and Draft Worldwide (“Draft”), provide a distinct, comprehensive array of global communications and marketing services. The fifth global operating division, The Constituency Management Group (“CMG”), which includes Weber Shandwick, MWW Group, 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.
      A group of 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 Campbell-Ewald, Hill Holiday, Deutsch and Mullen.
      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.
      As of December 31, 2005, for financial reporting purposes we have three reportable segments. The largest segment, Integrated Agency Networks (“IAN”), is comprised of McCann, FCB, Lowe, Draft, our media agencies, and our leading stand-alone agencies. CMG comprises our second reportable segment. Our third reportable segment is comprised of our Motorsports operations (“Motorsports”), which were sold during 2004 and had immaterial residual operating results in 2005.
Business Drivers
      Our revenues are primarily derived from the planning and execution of advertising programs in various media and the planning and execution of other marketing and communications programs. Most of our client contracts are individually negotiated and accordingly, the terms of client engagements and the basis on which we earn commissions and fees vary significantly. Our client contracts are also becoming increasingly complex arrangements that frequently include provisions for incentive compensation and govern vendor rebates and credits.
      Revenues for creation, planning and placement of advertising are primarily determined 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 include an incentive compensation component in their total compensation package. This provides added revenue based on achieving mutually agreed-upon qualitative and/or quantitative metrics within specified time periods. Commissions are earned based on services provided, and are usually derived from a percentage or fee over the total cost to complete the assignment. Commissions 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 we earn, which is either retained in total or shared with the client depending on the nature of the services agreement.
      We pay 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 typically pay media charges only after we receive 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.

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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 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 directly 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 in client activity. Depending on the terms of the client contract, fees for services performed can be primarily recognized three ways: proportional performance, straight-line (or monthly basis) or completed contract. 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.
      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.
2005 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 exchange rate changes, the impact of net 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 analyze the increase or decrease in operating expenses by reviewing the following components of the change: the impact of foreign currency exchange rate changes, the impact of net 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.
      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, restructuring and other charges. 2005 performance was impacted by higher salaries and related and office and general expenses and lower revenues as discussed in more detail below. However, both impairment and restructuring charges have decreased and we are no longer burdened with Motorsports related costs.

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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)
Strategic Initiatives
      Organic revenue growth and improving operating margin are our key corporate metrics. Our performance priorities are to:
  •  Achieve organic revenue growth by strengthening collaboration among our agencies, increasing the number of marketing services provided to existing clients and winning new clients. We have established a supplemental incentive plan, expanded internal tools and resources, and heightened internal communications aimed at encouraging collaboration. We have also focused our efforts on attracting and retaining the highest quality industry talent and further improving client retention. We analyze our performance by calculating the percentage increase in revenue related to organic growth between comparable periods.
 
  •  Improve operating margin by increasing revenue and by controlling salaries and related expenses, as well as office and general expenses. In addition, we are working to improve our back office efficiency through our shared services initiatives as well as improve our real estate utilization. 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.
      Our revenue is directly dependent upon the advertising, marketing and corporate communications requirements of our clients. Historically, we typically experience increased revenue and profitability in the fourth quarter of our fiscal year as a result of increased holiday-related client spending activity. The increase in fourth quarter revenue and profitability is also attributable to higher seasonal revenues due to the timing of revenue recognition for contracts that are accounted for on the completed contract method. For the three years ended December 31, 2005, 2004 and 2003, our fourth quarter revenue as a percentage of the respective full year revenue was approximately 30% for all years.
                                 
        Organic Changes
    Organic Changes   for the Three
    for the Years Ended   Months Ended
    December 31,   December 31,
         
Increase (Decrease)   2005   2004   2005   2004
                 
Revenue
  $ (45.7 )   $ 75.6     $ (34.1 )   $ 44.5  
Salaries and related expenses
  $ 293.4     $ 142.6     $ 116.7     $ 73.6  
Office and general expenses
  $ 112.4     $ (13.9 )   $ 26.3     $ 47.1  
      The organic decrease in revenue for the year ended and three months ended December 31, 2005 was $45.7 and $34.1, respectively when compared to the comparative period in 2004. Operating margin declined for the year ended and three months ended December 31, 2005 due to a significant organic increase in salaries and related expenses for the year ended and three months ended December 31, 2005 of $293.4 and $116.7, respectively when compared to the prior year, and an organic increase in office and general expenses for year ended and three months ended December 31, 2005 of $112.4 and $26.3, respectively when compared to the prior year. See below for discussion of the drivers of these changes.
      Included in our results of operations for the three months ended December 31, 2005 were certain out of period adjustments that resulted in decreased revenue and operating income of $17.3 and $21.6, respectively. When compared to the slight organic decrease in revenue and significant organic increase in salaries and related expenses and office and general expenses for the three months ended December 31, 2005, these out of period adjustments were immaterial to our quarterly results of operations. These adjustments were immaterial to the annual period ended December 31, 2005 and to any other prior annual period.

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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   For the Three
    Ended   Months Ended
    December 31,   December 31,
         
    2005   2004   2005   2004
                 
Organic revenue change percentage (vs. prior year)
    (0.7 )%     1.2 %     (1.7 )%     2.4 %
Operating margin percentage
    (1.7 )%     (1.5 )%     3.0 %     15.9 %
Salaries and related expenses as a percentage of revenue
    63.7 %     58.4 %     58.4 %     52.0 %
Office and general expenses as a percentage of revenue
    36.5 %     35.2 %     33.6 %     32.1 %
      Organic revenue growth. In 2005, we experienced a small organic revenue decrease, compared to small organic revenue growth in 2004. The decrease resulted from client losses and a reduction in revenue from existing clients at IAN, offset partially by an increase at CMG due to client wins and additional business from existing clients in the U.S. and Europe. As a result, there were domestic and international organic revenue decreases of 0.5% and 0.9%, respectively. We experienced a small organic revenue decrease for the three months ended December 31, 2005 when compared to the comparative periods in 2004.
      Operating margin. Our operating margin was negative in 2005 and 2004. The decline in 2005 resulted from organic revenue decreases and increases in salaries and related as well as office and general expenses. Salaries and related expenses increased, both in absolute terms and as a percentage of revenues, due to increased severance expense as international headcount reductions occurred across several agencies. In addition, the increase was attributable to hiring additional creative talent to enable future revenue growth and additional staff to address weaknesses in our accounting and control environment and to develop shared services, which almost offset the number of employees severed. Office and general expenses increased, both in absolute terms and as a percentage of revenues, primarily due to higher professional fees associated with the Prior Restatement and our ongoing efforts in internal control compliance. Salary expense attributable to the additional headcount and the costs of remedying our internal control weaknesses will continue to be significant in 2006.
      These negative impacts to operating margin were partially offset by a decrease in the amount of charges related to impairment, restructuring and contract termination costs. If not for the reduction in these charges, our operating margin would have deteriorated significantly from 2004 to 2005 as described above. During 2005, we recorded asset impairments of $98.6, restructuring reversals of $7.3 and had no contract termination charges related to the Motorsports business, which is a $406.7 decrease when compared to these charges in 2004. Operating margin in 2004 was impacted by approximately $322.2 of asset impairment charges, $62.2 of restructuring charges and $113.6 of contract termination costs related to the Motorsports business.
      For the three months ended December 31, 2005 and 2004, our operating margin decreased significantly, to 3.0% from 15.9%. The decline in 2005 resulted from significant increases in salaries and related expenses and impairment charges, as well an increase in office and general expenses and an organic revenue decrease. Salaries and related expenses significantly increased, both in absolute terms and as a percentage of revenues, primarily due to an increase in severance expense as international headcount reductions occurred across several agencies as a result of client losses. In addition, the increase was attributable to hiring additional creative talent to enable future revenue growth and staff to address weaknesses in our accounting and control environment. During the three months ended December 31, 2005, impairment charges of $92.1 were recorded primarily related to our Lowe reporting unit following a major client loss and recent management defections. Office and general expenses increased, both in absolute terms and as a percentage of revenues, primarily due to higher production and media expenses

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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)
due to an increase in arrangements where we act as principal, which requires us to record expenses on a gross basis, as well as higher professional fees.
Significant 2005 Activity and Subsequent Events
Income Statement
  •  Total salaries and related expenses increased by approximately $266.1 to $3,999.1 for 2005. This increase includes higher severance expense, which increased by approximately $87.9 to $162.5. Severance activity in 2005 covered approximately 3,000 employees, of which approximately 2,500 had left the Company by year-end. Our severance actions were concentrated in our international businesses and included several agencies, mostly within IAN. The increase of salaries and related expenses was also attributable to hiring in several areas of our business, including creative talent to enable future revenue growth, and finance and information technology staff to address weaknesses in our accounting and control environment, as well as to develop shared services, which approximately offset the number of employees addressed by severance during the year.
 
  •  A net charge of $69.9 was recorded to increase our valuation allowance for deferred income tax assets primarily relating to foreign net operating loss carry forwards, in relation to which we do not have the historical earning trends or tax planning strategies necessary to recognize the benefits of operating losses. See Note 11 to the Consolidated Financial Statements for additional information.
 
  •  Total professional fees increased $94.8 to $332.8 for 2005. These increases related primarily to our ongoing efforts in internal control compliance, the Prior Restatement process and the preliminary application development and maintenance of information technology systems and processes related to our shared services initiatives. Professional fees are included in office and general expenses in the Consolidated Statements of Operations.
 
  •  Long-lived asset impairment charges of $98.6 were recorded, including $91.0 of goodwill impairments at Lowe following a major client loss and recent management defections and $5.8 at an agency within our sports and entertainment marketing business. See Note 9 to the Consolidated Financial Statements for additional information.
Operating Cash Flow
  •  Our operating activities utilized cash of approximately $20.2, compared to cash provided by operating activities of $464.8 in 2004. The decrease in cash provided by operating activities in 2005 was primarily attributable to significant increases in our operating costs. Additional cash was used during 2005 for severance costs primarily related to international headcount reductions, salary costs primarily attributable to our hiring additional creative talent to enable future revenue growth and additional staff to address weaknesses in our accounting and control environment, and professional fees primarily related to our Prior Restatement and our ongoing efforts in internal control compliance. The decrease in cash provided by operating activities in 2005 was also attributable to year-over-year changes in working capital accounts.
Financing Activities
  •  Throughout 2005, we entered into waivers and amendments to our 364-Day and Three-Year Revolving Credit Facilities related to our reporting requirements, financial covenants and the Prior Restatement.

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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 July 2005, we completed the issuance and sale of our $250.0 Floating Rate Notes due 2008 and used the proceeds to redeem all $250.0 of our 7.875% Senior Unsecured Notes maturing October 2005.
 
  •  In September 2005 our $250.0 364-Day Revolving Credit Facility expired.
 
  •  In October 2005, we added a new bank to the syndicate of our Three-Year Revolving Credit Facility, increasing the size of the facility by $50.0 to $500.0.
 
  •  In October 2005, we issued 0.525 shares of our 5.25% Series B Cumulative Convertible Perpetual Preferred Stock at gross proceeds of $525.0, with net proceeds totaling approximately $507.3 after deducting discounts to the initial purchasers and the estimated expenses of the offering.
     Subsequent to 2005
  •  On March 21, 2006, we entered into an amendment to our Three-Year Revolving Credit Facility, effective as of December 31, 2005. The amendment changed the financial covenants with respect to periods ended December 31, 2005, March 31, 2006 and June 30, 2006, added a new minimum cash balance covenant and amended the provisions governing letters of credit to permit the issuance of letters of credit with expiration dates beyond the termination date of the facility, subject to certain conditions. We also obtained a waiver from the lenders under the Three-Year Revolving Credit Facility in March, 2006, to waive any default arising from the restatement of our financials presented in this report.
RESULTS OF OPERATIONS
Consolidated Results of Operations — 2005 Compared to 2004
REVENUE
      The components of the 2005 change were as follows:
                                                                   
    Total   Domestic   International
             
    $   % Change   $   % Change   % of Total   $   % Change   % of Total
                                 
2004
  $ 6,387.0             $ 3,509.2               54.9 %   $ 2,877.8               45.1 %
                                                 
Foreign currency changes
    40.4       0.6 %           0.0 %             40.4       1.4 %        
Net acquisitions/divestitures
    (107.4 )     (1.7 )%     (28.9 )     (0.8 )%             (78.5 )     (2.7 )%        
Organic
    (45.7 )     (0.7 )%     (19.2 )     (0.5 )%             (26.5 )     (0.9 )%        
                                                 
 
Total change
    (112.7 )     (1.8 )%     (48.1 )     (1.4 )%             (64.6 )     (2.2 )%        
2005
  $ 6,274.3             $ 3,461.1               55.2 %   $ 2,813.2               44.8 %
                                                 
      For the year ended December 31, 2005, consolidated revenues decreased $112.7, or 1.8%, as compared to 2004, which was attributable to the effect of net acquisitions and divestitures of $107.4 and an organic revenue decrease of $45.7, partially offset by favorable foreign currency exchange rate changes of $40.4.
      The increase due to foreign currency changes was primarily attributable to the strengthening of the Brazilian Real and the Canadian Dollar in relation to the U.S. Dollar, which primarily affected our IAN segment. The net effect of acquisitions and divestitures is comprised of $46.0 at IAN, largely from dispositions at McCann during 2005, $12.1 at CMG and $49.3 from the sale of the Motorsports business during 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)
      During 2005, the organic revenue decrease of $45.7, or 0.7%, was driven by a decrease at IAN, partially offset by an increase at CMG. The decrease at IAN was a result of client losses and a reduction in revenue from existing clients primarily in our European offices. The increase at CMG was primarily driven by growth in public relations and sports marketing business both domestically and internationally as a result of increased revenue from existing clients and new client wins.
      For 2006, we expect the organic change in revenue to be flat or to decline due to the continuing impact of client losses that we experienced during 2005.
      Our revenue recognition policies are in accordance with Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition. 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 of an arrangement, the related revenue is deferred to a future quarter when the evidence is obtained. However, our costs of services 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 and did not have a significant impact on revenue recognition in 2005 as compared to 2004, it may affect organic revenue growth and margins in future periods. This effect is likely to be greater in comparing quarters than in comparing full years.
      In addition, we fulfill the role of an agent in most of our customer contracts however, in certain arrangements we act as principal. In accordance with Emerging Issues Task Force (“EITF”) Issue No. 99-19, when we act as principal, we recognize gross revenue and expenses inclusive of external media or production costs; when we act as an agent, we recognize revenue net of such costs. The mix of where we act as agent and where we act as principal is contract-dependent and varies from agency to agency, and from period to period. Accordingly, while our cash flows and profitability are not impacted, and while this effect did not have a significant impact on revenue in 2005 compared to 2004, it may affect organic revenue growth patterns in future periods.
OPERATING EXPENSES
                                                   
    For the Years Ended December 31,        
             
    2005   2004        
                 
        % of       % of        
    $   Revenue   $   Revenue   $ Change   % Change
                         
Salaries and related expenses
  $ 3,999.1       63.7 %   $ 3,733.0       58.4 %   $ 266.1       7.1 %
Office and general expenses
    2,288.1       36.5 %     2,250.4       35.2 %     37.7       1.7 %
Restructuring charges
    (7.3 )             62.2               (69.5 )     (111.7 )%
Long-lived asset impairment and other charges
    98.6               322.2               (223.6 )     (69.4 )%
Motorsports contract termination costs
                  113.6               (113.6 )     (100.0 )%
                                     
 
Total operating expenses
  $ 6,378.5             $ 6,481.4             $ (102.9 )     (1.6 )%
                                     

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
Salaries and Related Expenses
      The components of the 2005 change were as follows:
                         
    Total    
        % of
    $   % Change   Revenue
             
2004
  $ 3,733.0               58.4 %
                   
Foreign currency changes
    19.3       0.5 %        
Net acquisitions/divestitures
    (46.6 )     (1.2 )%        
Organic
    293.4       7.9 %        
                   
Total change
    266.1       7.1 %        
2005
  $ 3,999.1               63.7 %
                   
      Salaries and related expenses are the largest component of operating expenses and consist primarily of salaries and related benefits, and performance incentives. During 2005, salaries and related expenses increased to 63.7% of revenues, compared to 58.4% in 2004. In 2005, salaries and related expenses increased $293.4, excluding the increase related to foreign currency exchange rate changes of $19.3 and a decrease related to net acquisitions and divestitures of $46.6.
      Salaries and related expenses were impacted by changes in foreign currency rates, primarily attributable to the strengthening of the Brazilian Real and the Canadian Dollar in relation to the U.S. 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 dispositions at McCann during 2005 and the sale of the Motorsports business during 2004.
      The increase in salaries and related expenses, both in absolute terms and as a percentage of revenue, excluding the impact of foreign currency and net acquisitions and divestitures, was primarily the result of higher severance expense, largely recorded in the fourth quarter for international headcount reductions within IAN as a result of client losses. In addition, the increase was attributable to our hiring additional creative talent to enable future revenue growth and additional staff to address weaknesses in our accounting and control environment and develop shared services at certain locations, which almost offset the number of employees severed. The increase in salaries and related expense as a percentage of revenue was also due, in part, to the fact that revenue decreased at the same time that salaries and related expenses increased for the reasons explained above.
Office and General Expenses
      The components of the 2005 change were as follows:
                         
    Total    
        % of
    $   % Change   Revenue
             
2004
  $ 2,250.4               35.2 %
                   
Foreign currency changes
    13.9       0.6 %        
Net acquisitions/divestitures
    (88.6 )     (3.9 )%        
Organic
    112.4       5.0 %        
                   
Total change
    37.7       1.7 %        
2005
  $ 2,288.1               36.5 %
                   

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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)
      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 2005, office and general expenses increased to 36.5% of revenues, compared to 35.2% in 2004, largely due to the decrease in revenue year on year. In 2005, office and general expenses increased $112.4, excluding the increase related to foreign currency exchange rate changes of $13.9 and a decrease related to net acquisitions and divestitures of $88.6.
      Office and general expenses were impacted by changes in foreign currency rates, primarily attributable to the strengthening of the Brazilian Real and Canadian Dollar in relation to the U.S. Dollar. The increase due to foreign currency rate changes was offset by the impact of net acquisitions and divestitures activity, which resulted largely from dispositions at McCann during 2005 and the sale of the Motorsports business and McCann’s Transworld Marketing during 2004.
      The increase in office and general expenses, excluding the impact of foreign currency and net acquisition and divestitures activity, was primarily the result of higher professional fees at both IAN and our Corporate group driven by our ongoing efforts in internal control compliance, the Prior Restatement process and the preliminary application development and maintenance of information technology systems and processes related to our shared services initiatives. Except for the costs associated with the Prior Restatement process, these costs will continue to significantly impact financial results in 2006.
Restructuring (Reversals) Charges
      During 2005 and 2004, we recorded net (reversals) and charges related to lease termination and other exit costs and severance and termination costs for the 2003 and 2001 restructuring programs of ($7.3) and $62.2, respectively. Included in the net (reversals) and charges were adjustments resulting from changes in management’s estimates for the 2003 and 2001 restructuring programs which decreased the restructuring reserves by $9.3 and $32.0 in 2005 and 2004, respectively. 2005 net reversals primarily consisted of changes to management’s estimates for the 2003 and 2001 restructuring programs primarily relating to our lease termination costs. 2004 net charges primarily related to the vacating of 43 offices and workforce reduction of approximately 400 employees related to the 2003 restructuring program and adjustments to management’s estimates for the 2001 restructuring program. A summary of the net (reversals) and charges 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
                             
2005 Net (Reversals) Charges
                                                       
IAN
  $ (6.3 )   $ (0.3 )   $ (6.6 )   $ (0.4 )   $     $ (0.4 )   $ (7.0 )
CMG
    1.1       0.2       1.3       (0.7 )           (0.7 )     0.6  
Corporate
    (0.2 )     (0.4 )     (0.6 )     (0.3 )           (0.3 )     (0.9 )
                                           
 
Total
  $ (5.4 )   $ (0.5 )   $ (5.9 )   $ (1.4 )   $     $ (1.4 )   $ (7.3 )
                                           
2004 Net (Reversals) Charges
                                                       
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  
                                           

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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 to amounts recorded as restructuring charges, we recorded charges of $11.1 during 2004 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. For additional information, see Note 6 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. When necessary, we record an impairment charge for the amount that the carrying value of the asset exceeds the implied fair value. See Note 1 to the Consolidated Financial Statements for fair value determination and impairment testing methodologies.
      The following table summarizes long-lived asset impairment and other charges:
                                                                   
    For the Years Ended December 31,
     
    2005   2004
         
        Motor-           Motor-    
    IAN   CMG   sports   Total   IAN   CMG   sports   Total
                                 
Goodwill impairment
  $ 97.0     $     $     $ 97.0     $ 220.2     $ 91.7     $     $ 311.9  
Fixed asset impairment
    0.5                   0.5       2.0       0.4       3.0       5.4  
Other
    1.0       0.1             1.1       4.9                   4.9  
                                                 
 
Total
  $ 98.5     $ 0.1     $     $ 98.6     $ 227.1     $ 92.1     $ 3.0     $ 322.2  
                                                 
      The long-lived asset impairment charges recorded in 2005 and 2004 are due to the following:
2005 Impairments
      IAN — During the fourth quarter of 2005, we recorded a goodwill impairment charge of $91.0 at our Lowe reporting unit. A triggering event occurred subsequent to our 2005 annual impairment test that led us to believe that Lowe’s goodwill and other indefinite lived intangible assets may no longer be recoverable. As a result, we were required to assess whether our goodwill balance at Lowe was impaired. Specifically, in the fourth quarter, a major client was lost by Lowe’s London agency and the possibility of losing other clients is now considered a higher risk due to recent management defections and changes in the competitive landscape. This caused projected revenue growth to decline. As a result of these changes our long-term projections showed declines in discounted future operating cash flows. These revised cash flows caused the implied fair value of Lowe’s goodwill to be less than the book value.
      During the third quarter of 2005 as restated, we recorded a goodwill impairment charge of $5.8 at a reporting unit within our sports and entertainment marketing business. The long-term projections showed previously unanticipated declines in discounted future operating cash flows and, as a result, these discounted future operating cash flows caused the implied fair value of goodwill to be less than the related book value.
2004 Impairments
      IAN — During the third quarter of 2004, we recorded goodwill impairment charges of $220.2 at The Partnership reporting unit, which was comprised of Lowe Worldwide, Draft Worldwide, Mullen, Dailey & Associates and Berenter Greenhouse & Webster (“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

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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)
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.
      CMG — As a result of the annual impairment review, a goodwill impairment charge of $91.7 was recorded at our CMG reporting unit, which was comprised of Weber Shandwick, GolinHarris, DeVries, MWW Group 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.
      For additional information, see Note 9 to the Consolidated Financial Statements.
Motorsports Contract Termination Costs
      As discussed in Note 5 to the Consolidated Financial Statements, during 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 released 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,        
             
    2005   2004   $ Change   % Change
                 
Interest expense
  $ (181.9 )   $ (172.0 )   $ (9.9 )     5.8 %
Debt prepayment penalty
    (1.4 )     (9.8 )     8.4       (85.7 )%
Interest income
    80.0       50.8       29.2       57.5 %
Investment impairments
    (12.2 )     (63.4 )     51.2       (80.8 )%
Litigation reversals (charges)
          32.5       (32.5 )     (100.0 )%
Other income (expense)
    33.1       (10.7 )     43.8       (409.3 )%
                         
 
Total
  $ (82.4 )   $ (172.6 )   $ 90.2       (52.3 )%
                         
Interest Expense
      The increase in interest expense of $9.9 during 2005 was primarily due to waiver and consent fees incurred for the amendment of our existing debt agreements in 2005 and higher average interest rates on newly issued debt when compared to extinguished debt. Our interest income and interest expense reflect daily balances which may vary from period-end balances. They also reflect the gross amounts of debt and cash under certain of our cash pooling arrangements that are reflected on a net basis on our Consolidated Balance Sheets.
Debt Prepayment Penalty
      During the third quarter of 2005, a prepayment penalty of $1.4 was recorded related to the early redemption of the remaining $250.0 of the 7.875% Senior Unsecured Notes due in 2005. During the fourth quarter of 2004, a prepayment penalty of $9.8 was recorded related to the early redemption of $250.0 of our 7.875% Senior Unsecured Notes due in 2005, which represented one half of the then $500.0 outstanding.

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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)
Interest Income
      The increase in interest income of $29.2 during 2005 was primarily due to an increase in average interest rates as well an increase in cash and cash equivalents primarily resulting from our Series B Cumulative Convertible Perpetual Preferred Stock offering.
      Our interest income and interest expense reflect daily balances which may vary from period-end balances. They also reflect the gross amounts of debt and cash under certain of our cash pooling arrangements that are reflected on a net basis on our Consolidated Balance Sheets.
Investment Impairments
      During 2005, we recorded investment impairment charges of $12.2, primarily related to a $7.1 charge for our remaining unconsolidated investment in Koch Tavares in Latin America to adjust the carrying amount of the investment to fair value as a result of our intent to sell and a $3.7 charge related to a decline in value of certain available-for-sale investments that were determined to be other than temporary.
      During 2004, we recorded investment impairment charges of $63.4, primarily related to a $50.9 charge for an unconsolidated investment in 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.
Litigation Charges
      During 2004, with court approval of the settlement of the class action shareholder suits discussed in Note 21 to the Consolidated Financial Statements, 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.
Other Income (Expense)
      In 2005, other income (expense) included net gains from the sales of businesses of $10.1, net gains on sales of available-for-sale securities and miscellaneous investment income of $20.3 and $2.6 related to credits adjustments. The principal components of net gains from the sales of businesses relate to the sale of Target Research, a McCann agency, during the fourth quarter of 2005, which resulted in a gain of $18.6, offset partially by a sale of a significant component of FCB Spain during the fourth quarter of 2005 which resulted in a loss of approximately $13.0. The principal components of net gains on sales of available-for-sale securities and miscellaneous investment income relate to the sale of our remaining ownership interest in Delaney Lund Knox Warren & Partners, an agency within FCB, for a gain of approximately $8.3, and net gains on sales of available-for-sale securities of $7.9, of which approximately $3.8 relates to appreciation of Rabbi Trust investments restricted for the purpose of paying our deferred compensation and deferred benefit arrangement liabilities.
      In 2005, we also recorded $2.6 for the settlement of our contractual liabilities for vendor credits and discounts. This amount represents a negotiated client settlement below the amount originally recorded. It is recorded as Other Income because we do not view negotiating a favorable outcome as a revenue generating activity.
      In 2004, other income (expense) included $18.2 of net losses on the sale of 19 agencies. The losses related primarily to the sale of McCann’s Transworld Marketing, a U.S.-based promotions agency, which

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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)
resulted in a loss of $8.6, and a $6.2 loss for the final liquidation of the Motorsports investment. See Note 5 to the Consolidated Financial Statements for further discussion of the Motorsports disposition.
OTHER ITEMS
Income Taxes
                                 
    For the Years Ended        
    December 31,        
             
    2005   2004   $ Change   % Change
                 
Provision for income taxes
  $ 81.9     $ 262.2     $ (180.3 )     (68.8 )%
                         
Effective tax rate
    43.9 %     98.2 %                
                         
      Our effective tax rate was negatively impacted in both 2005 and 2004 by the establishment of valuation allowances, as described below, 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 rate and the statutory federal rate of 35% is also due to state and local taxes and the effect of non-U.S. 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 U.S. capital loss carryforwards, and foreign tax credits.
      During 2005, a net valuation allowance of $69.9 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, 2005 was $501.0. Our income tax expense recorded in the future will be reduced to the extent of decreases in our valuation allowance. The establishment or reversal of valuation allowances could have a significant negative or positive impact on future earnings.
      During 2004, a valuation allowance of $236.0 was established in continuing operations on existing deferred tax assets and 2004 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 decreases in our valuation allowance. The establishment or reversal of valuation allowances could have a significant negative or positive impact on future earnings.
      In connection with the U.S. deferred tax assets, management believes that it is more likely than not that a substantial amount of the deferred tax assets will be realized; a valuation allowance has been established for the remainder. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future U.S. taxable income are lower than anticipated.
      For additional information, see Note 11 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)
Minority Interest and Unconsolidated Affiliates
                                 
    For the Years Ended        
    December 31,        
             
    2005   2004   $ Change   % Change
                 
Income applicable to minority interests, net of tax
  $ (16.7 )   $ (21.5 )   $ 4.8       (22.3 )%
                         
Equity in net income of unconsolidated affiliates, net of tax
  $ 13.3     $ 5.8     $ 7.5       129.3 %
                         
      The decrease in income applicable to minority interests of $4.8 was primarily due to lower earnings of majority-owned international businesses offset by increases in minority interests at several businesses.
      The increase in equity in net income of unconsolidated affiliates of $7.5 was primarily due to the impact of prior year losses at an African unconsolidated affiliate within McCann, which was fully consolidated due to the purchase of an additional interest in 2005, and the impact of positive results at unconsolidated investments at FCB and McCann.
NET LOSS
                                 
    For the Years Ended        
    December 31,        
             
    2005   2004   $ Change   % Change
                 
Loss from continuing operations
  $ (271.9 )   $ (544.9 )   $ 273.0       (50.1 )%
Income from discontinued operations, net of taxes of ($9.0) and $3.5, respectively
    9.0       6.5       2.5       38.5 %
                         
Net loss
    (262.9 )     (538.4 )     275.5       (51.2 )%
Less: Preferred stock dividends
    26.3       19.8       6.5       32.8 %
                         
Net loss applicable to common stockholders
  $ (289.2 )   $ (558.2 )   $ 269.0       (48.2 )%
                         
Loss from Continuing Operations
      In 2005, our loss from continuing operations decreased by $273.0 or 50.1% as a result of a decrease reduced long-lived asset impairment charges and Motorsports contract termination costs in 2004, partially offset by a decrease in operating income which was driven by decreases in revenue and increases in expenses as previously discussed.
Income from Discontinued operations (net of tax)
      In conjunction with the disposition of our NFO operations in the fourth quarter of 2003, we established reserves for certain income tax contingencies with respect to the determination of our investment in NFO for income tax purposes. During the fourth quarter of 2005, these reserves of $9.0 were reversed as the related income tax contingencies are no longer considered probable.

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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 — Three Months Ended December 31, 2005 Compared to Three Months Ended December 31, 2004
REVENUE
      The components of the change were as follows:
                                                                   
    Total   Domestic   International
             
Three Months Ended   $   % Change   $   % Change   % of Total   $   % Change   % of Total
                                 
December 31, 2004
  $ 1,965.7             $ 983.0               50.0 %   $ 982.7               50.0 %
                                                 
Foreign currency changes
    (12.9 )     (0.7 )%           0.0 %             (12.9 )     (1.3 )%        
Net acquisitions/divestitures
    (23.0 )     (1.2 )%     (15.2 )     (1.5 )%             (7.8 )     (0.8 )%        
Organic
    (34.1 )     (1.7 )%     15.8       1.6 %             (49.9 )     (5.1 )%        
                                                 
 
Total change
    (70.0 )     (3.6 )%     0.6       0.1 %             (70.6 )     (7.2 )%        
December 31, 2005
  $ 1,895.7             $ 983.6               51.9 %   $ 912.1               48.1 %
                                                 
      For the three months ended December 31, 2005, consolidated revenues decreased $70.0, or 3.6%, as compared to 2004, which was attributable to an organic revenue decrease of $34.1, a decrease in net acquisitions and divestitures of $23.0 and a decrease related to foreign currency exchange rate changes of $12.9. We recorded certain out of period adjustments in the three months ended December 31, 2005. See Note 3 to the Consolidated Financial Statements. Excluding out of period adjustments of $17.3 recorded in the three months ended December 31, 2005, the consolidated revenue decrease would have been $52.7.
      During 2005, the organic decrease in revenue excluding the impact to out of period adjustments was primarily driven by a decrease at IAN, partially offset by an increase at CMG. The decrease at IAN was primarily a result of a reduction in revenue from existing clients primarily due to client losses at our international agencies. In the fourth quarter of 2005, we recorded approximately $10.0 for certain client negotiations at IAN. The increase at CMG was primarily driven by worldwide growth in sports marketing business and events marketing business as a result of increased revenue from existing clients and new client wins.
OPERATING EXPENSES
                                                   
    Three Months Ended December 31,        
             
    2005   2004        
                 
        % of       % of        
    $   Revenue   $   Revenue   $ Change   % Change
                         
Salaries and related expenses
  $ 1,107.5       58.4 %   $ 1,021.9       52.0%     $ 85.6       8.4 %
Office and general expenses
    637.1       33.6 %     630.3       32.1%       6.8       1.1 %
Restructuring charges
    1.4               (4.4 )             5.8       (131.8 )%
Long-lived asset impairment and other charges
    92.1               5.8               86.3       1487.9 %
                                     
 
Total operating expenses
  $ 1,838.1             $ 1,653.6             $ 184.5       11.2 %
                                     
Salaries and Related Expenses
      Salaries and related expenses is the largest component of operating expenses and consist primarily of salaries, related benefits and performance incentives. During the three months ended December 31, 2005, salaries and related expenses increased to 58.4% of revenue, compared to 52.0% in the prior year. During the three months ended December 31, 2005, salaries and related expenses increased by approximately $85.6 including the impact of out of period adjustments, to $1,107.5 when compared to the comparative

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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)
period in 2004. Excluding the impact of out of period adjustments of $3.2, the increase of $82.4 was primarily attributable to an increase in severance expense of $59.7 to $97.2. In addition, the increase was attributable to our hiring additional creative talent to enable future revenue growth and staff to address weaknesses in our accounting and control environment. The components of the change were as follows:
                         
    Total    
        % of
Three Months Ended   $   % Change   Revenue
             
December 31, 2004
  $ 1,021.9               52.0 %
                   
Foreign currency changes
    (10.3 )     (1.0 )%        
Net acquisitions/divestitures
    (20.8 )     (2.0 )%        
Organic
    116.7       11.4 %        
                   
Total change
    85.6       8.4 %        
December 31, 2005
  $ 1,107.5               58.4 %
                   
      For the three months ended December 31, 2005, salaries and related expenses increased $116.7, excluding the decrease related to net acquisitions and divestitures of $20.8 and a decrease related to foreign currency exchange rate changes of $10.3.
      The increase in salaries and related expenses, excluding the impact of out of period adjustments and foreign currency and net acquisition and divestiture activity, was primarily the result of higher severance expense for international headcount reductions within IAN as a result of client losses. In addition, the increase was attributable to our hiring additional creative talent to enable future revenue growth and staff to address weaknesses in our accounting and control environment.
Office and General Expenses
      Office and general expenses primarily consist of rent, office and equipment, depreciation, professional fees, other overhead expenses and certain out-of-pocket expenses related to our revenue. During the three months ended December 31, 2005, office and general expenses increased to 33.6% of revenue, compared to 32.1% in the prior year. During the three months ended December 31, 2005, office and general expenses increased by approximately $6.8 including the impact of out of period adjustments, to $637.1 when compared to the comparative period in 2004. Excluding the impact of out of period adjustments of $6.1, the increase of $0.7 was primarily attributable to higher production and media expenses due to an increase in arrangements entered into where we act as a principal, which requires us to record expenses on a gross basis. The increase was partially offset by acquisitions and divestitures. The components of the change were as follows:
                         
    Total    
        % of
Three Months Ended   $   % Change   Revenue
             
December 31, 2004
  $ 630.3               32.1%  
                   
Foreign currency changes
    (6.3 )     (1.0 )%        
Net acquisitions/divestitures
    (13.2 )     (2.1 )%        
Organic
    26.3       4.2 %        
                   
Total change
    6.8       1.1 %        
December 31, 2005
  $ 637.1               33.6%  
                   

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
      For the three months ended December 31, 2005, office and general expenses increased $26.3, excluding a decrease related to net acquisitions and divestitures of $13.2 and a decrease related to foreign currency exchange rate changes of $6.3.
      The increase in office and general expenses, excluding the impact of out of period adjustments and foreign currency and net acquisition and divestitures activity, was primarily the result of higher production and media expenses at IAN due to an increase in arrangements entered into where we act as a principal, which requires us to record expenses on a gross basis and higher professional fees at both IAN and CMG. The higher professional fees were driven by our ongoing efforts in internal control compliance, the Prior Restatement process and the preliminary application development and maintenance of information technology systems and processes related to our shared services initiatives.
Restructuring Charges (Reversals)
      During the three months ended December 31, 2005 and 2004, we recorded net charges and (reversals) related to lease termination and other exit costs and severance and termination costs for the 2003 and 2001 restructuring programs of $1.4 and ($4.4), respectively. 2005 net charges and 2004 net reversals primarily consisted of changes to management’s estimates for the 2003 and 2001 restructuring programs primarily relating to our lease termination costs.
Long-Lived Asset Impairment and Other Charges
      During the three months ended December 31, 2005 and 2004, we recorded charges of $92.1 and $5.8, respectively. 2005 charges primarily related to a goodwill impairment charge of $91.0 at our Lowe reporting unit.
EXPENSE AND OTHER INCOME
Interest Expense & Interest Income
      During the three months ended December 31, 2005 and 2004, we recorded interest expense of $46.1 and $44.3, respectively. During the three months ended December 31, 2005 and 2004, we recorded interest income of $26.8 and $19.5, respectively. The increase in interest income of $7.3 primarily relates to an increase in average interest rates and higher cash balances when compared to the prior year.
Investment Impairments
      During the three months ended December 31, 2005 and 2004, we recorded investment impairments of $7.1 and $26.4, respectively. For the three months ended December 31, 2005, we recorded a $7.1 charge for our remaining unconsolidated investment in Koch Tavares in Latin America. For the three months ended December 31, 2004, the primary component of the balance related to a $19.9 charge for our unconsolidated investment in German advertising agency Springer & Jacoby.
Other Income (Expense)
      During the three months ended December 31, 2005 and 2004, we recorded other income (expense) amounts of $13.4 and $(13.5), respectively. The primary components of our income amount for the three months ended December 31, 2005 are a gain on the sale of Target Research, a McCann agency, of $18.6, offset by the sale of a significant component of FCB Spain, which resulted in a loss of approximately $13.0. The remainder of the amount relates to miscellaneous income and expense amounts. The primary components of our expense amount for the three months ended December 31, 2004 are an $8.6 loss on the

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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)
sale of McCann’s Transworld Marketing, a U.S.-based promotions agency, as well as a $6.2 loss for the final liquidation of the Motorsports investment.
OTHER ITEMS
Income Taxes
      For the three months ended December 31, 2005 and 2004, we recorded an income tax provision of $77.4 and $130.6, respectively. Excluding out of period adjustments of $19.5, the income tax provision would have been $96.9 for the three months ended December 31, 2005.
      We recorded income tax provisions of $81.9 and $262.2 for the twelve months ended December 31, 2005 and 2004, respectively, although we had a pretax loss in each period. The difference between the effective tax rate and statutory rate of 35% is due to state and local taxes and the effect of non-US operations. Several discrete items also impacted the effective tax rate in 2005. The most significant item negatively impacting the effective tax rate was the establishment of approximately $69.9 of valuation allowances on certain deferred tax assets, as well as on losses incurred in non-U.S. jurisdictions which receive no benefit. Other discrete items impacting the effective tax rates for 2005 and 2004 were restructuring charges, long-lived asset and investment impairment charges.
Minority Interest and Unconsolidated Affiliates
      During the three months ended December 31, 2005 and 2004, we recorded $7.2 and $10.3 of income applicable to minority interests, respectively. This decrease was primarily due to lower earnings of majority-owned international businesses.
      During the three months ended December 31, 2005 and 2004, we recorded $8.1 and $1.1 of equity in net income of unconsolidated affiliates, respectively. The increase is primarily due to the impact of prior year losses at an African unconsolidated affiliate within McCann, which was fully consolidated in the second quarter of 2005, as well as positive results at unconsolidated investments at FCB and Lowe.
NET INCOME (LOSS)
Loss from Continuing Operations
      For the three months ended December 31, 2005 and 2004, we recorded a loss from continuing operations of $31.9 and income from continuing operations of $130.3, respectively. The decrease in income from continuing operations of $162.1 largely resulted from a decrease in revenue of $70.0, and an increase in operating expenses of $184.5, which was driven by goodwill impairment charges of $92.1 and increased severance and temporary staffing changes of $59.7 and $20.3, respectively. This change was offset by a decrease in taxes of $53.2 and an increase in total expenses and other income of $28.9, which was driven by decreased litigation charges and gains from the sales of businesses. Excluding out of period adjustments of $2.7, the loss from continuing operations would have been $34.6 for the three months ended December 31, 2005.
Income from Discontinued Operations (net of tax)
      In conjunction with the disposition of our NFO operations in the fourth quarter of 2003, we established reserves for certain income tax contingencies with respect to the determination of our investment in NFO for income tax purposes. During the fourth quarter of 2005, these reserves of $9.0 were reversed as the related income tax contingencies are no longer considered probable.

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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 three months ended December 31, 2004 and 2003, there was no impact of discontinued operations on our consolidated financial statements.
Segment Results of Operations — 2005 Compared to 2004
      As discussed in Note 20 to the Consolidated Financial Statements, we have three reportable segments as of December 31, 2005: our operating divisions IAN, CMG and Motorsports. Our Motorsports operations were sold during 2004 and had immaterial residual operating results in 2005. 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 segment operating income (loss), which is calculated by subtracting segment salaries and related expenses and office and general expenses from segment revenue. Amounts reported as segment operating income (loss) exclude the impact of restructuring and impairment charges, as we do not typically consider these charges when assessing operating division performance. The impact of restructuring and impairment charges to each reporting segment are reported separately in Notes 6 and 9 to the Consolidated Financial Statements, respectively. Segment income (loss) excludes interest income and expense, debt prepayment penalties, investment impairments, litigation charges and other non-operating income. Other than the recording of long-lived asset impairment and contract termination costs during 2004, the operating results of Motorsports during 2005 and 2004 were not material to consolidated results, and therefore are not discussed in detail below. The following table summarizes revenue and operating income (loss) by segment:
                                   
    For the Years Ended        
    December 31,        
             
    2005   2004   $ Change   % Change
                 
Revenue:
                               
IAN
  $ 5,327.8     $ 5,399.2     $ (71.4 )     (1.3 )%
CMG
    944.2       935.8       8.4       0.9 %
Motorsports
    2.3       52.0       (49.7 )     (95.6 )%
                         
 
Consolidated revenue
  $ 6,274.3     $ 6,387.0     $ (112.7 )     (1.8 )%
                         
Segment operating income (loss):
                               
IAN
  $ 249.7     $ 577.1     $ (327.4 )     (56.7 )%
CMG
    53.0       83.7       (30.7 )     (36.7 )%
Motorsports
    0.7       (14.0 )     14.7       (105.0 )%
Corporate and other
    (316.3 )     (243.2 )     (73.1 )     30.1 %

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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)
                                                                                   
    For the Years Ended December 31,
     
    2005   2004
         
    IAN   CMG   Motorsports   Corporate   Total   IAN   CMG   Motorsports   Corporate   Total
                                         
Reconciliation to consolidated operating income:
                                                                               
Consolidated operating income (loss)
  $ 158.2     $ 52.3     $ 0.7     $ (315.4 )   $ (104.2 )   $ 307.2     $ (24.9 )   $ (130.6 )   $ (246.1 )   $ (94.4 )
Adjustments:
                                                                               
 
Restructuring reversals (charges)
    7.0       (0.6 )           0.9       7.3       (42.8 )     (16.5 )           (2.9 )     (62.2 )
 
Long lived asset impairment and other charges:
    (98.5 )     (0.1 )                 (98.6 )     (227.1 )     (92.1 )     (116.6 )           (435.8 )
                                                             
Segment operating income (loss)
  $ 249.7     $ 53.0     $ 0.7     $ (316.3 )           $ 577.1     $ 83.7     $ (14.0 )   $ (243.2 )        
                                                             
INTEGRATED AGENCY NETWORKS (“IAN”)
REVENUE
      The components of the 2005 change were as follows:
                                                                   
    Total   Domestic   International
             
    $   % Change   $   % Change   % of Total   $   % Change   % of Total
                                 
2004
  $ 5,399.2             $ 2,933.3               54.3 %   $ 2,465.9               45.7 %
                                                 
Foreign currency changes
    39.5       0.7 %           0.0 %             39.5       1.6 %        
Net acquisitions/divestitures
    (46.0 )     (0.9 )%     (23.1 )     (0.8 )%             (22.9 )     (0.9 )%        
Organic
    (64.9 )     (1.2 )%     (5.6 )     (0.2 )%             (59.3 )     (2.4 )%        
                                                 
 
Total change
    (71.4 )     (1.3 )%     (28.7 )     (1.0 )%             (42.7 )     (1.7 )%        
2005
  $ 5,327.8             $ 2,904.6               54.5 %   $ 2,423.2               45.5 %
                                                 
      For the year ended December 31, 2005, IAN experienced a net decrease in revenue as compared to 2004 by $71.4, or 1.3%, which was comprised of an organic decrease in revenue of $64.9 and a decrease attributable to net acquisitions and divestitures of $46.0, partially offset by an increase in foreign currency exchange rate changes of $39.5. The decrease due to the net effect of divestitures and acquisitions, primarily related to the sale of small businesses at McCann and Draft. This decrease was partially offset by foreign currency exchange rate changes primarily attributable to the strengthening of the Brazilian Real and the Canadian Dollar in relation to the U.S. Dollar, which mainly affected the results of McCann and FCB.
      The organic revenue decrease was primarily driven by decreases at Deutsch and Lowe, partially offset by an increase at Draft. Deutsch experienced a decline in revenues primarily due to lost clients and a reduction in revenue from existing clients in the U.S., partially offset by new business wins. Lowe’s decline in revenue was primarily driven by lost clients and a reduction in revenue from existing clients in their European offices, as well as a reduction in client spending in the U.S. Draft experienced growth mainly in the U.S. due to client wins and additional revenue from existing clients. Although McCann and FCB are a significant part of the business, they did not contribute significantly to the organic change in revenue year on 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)
SEGMENT OPERATING INCOME
                                 
    For the Years Ended        
    December 31,        
             
    2005   2004   $ Change   % Change
                 
Segment operating income
  $ 249.7     $ 577.1     $ (327.4 )     (56.7 )%
                         
Operating margin
    4.7 %     10.7 %                
                         
      For the year ended December 31, 2005, IAN operating income decreased by $327.4, or 56.7%, which was a result of a decrease in revenue of $71.4, an increase in salaries and related expenses of $202.3 and increased office and general expenses of $53.7.
      The decrease in IAN’s operating income, excluding the impact of foreign currency and net effects of acquisitions and divestitures, was primarily driven by decreased operating income at McCann and FCB, increased losses at Lowe and decreased operating income at Deutsch. The operating income decrease at McCann was primarily caused by increased severance, temporary staffing costs, salary and related benefits and professional fees. Higher severance expense was the result of international headcount reductions. Temporary staffing and salary and related benefits were impacted by additional staffing necessary to address weaknesses in our accounting and control environment. Professional fees increased as a result of costs associated with the Prior Restatement process and internal control compliance. Operating income decreases at FCB were due to higher salaries and freelance costs as additional staff were hired to service new clients and additional business from existing clients, whose revenue will impact 2006 more than 2005, as well as increased severance costs reflecting headcount reductions at our international agencies. Operating income was further impacted by increases in professional fees to assist in the restatement process and internal control compliance. Declines at Lowe were primarily due to organic revenue decreases as compared to the prior year. Deutsch experienced decreases as a result of organic revenue decreases as compared to the prior year, partially offset by lower salaries, related benefits and freelance costs due to lost clients and reduced incentive compensation expense as a result of a reduction in operating performance.
CONSTITUENCY MANAGEMENT GROUP (“CMG”)
REVENUE
      The components of the 2005 change were as follows:
                                                                   
    Total   Domestic   International
             
    $   % Change   $   % Change   % of Total   $   % Change   % of Total
                                 
2004
  $ 935.8             $ 576.0               61.6 %   $ 359.8               38.4 %
                                                 
Foreign currency changes
    1.2       0.1 %           0.0 %             1.2       0.3 %        
Net acquisitions/divestitures
    (12.1 )     (1.3 )%     (5.9 )     (1.0 )%             (6.2 )     (1.7 )%        
Organic
    19.3       2.1 %     (13.6 )     (2.4 )%             32.9       9.1 %        
                                                 
 
Total change
    8.4       0.9 %     (19.5 )     (3.4 )%             27.9       7.8 %        
2005
  $ 944.2             $ 556.5               58.9 %   $ 387.7               41.1 %
                                                 
      For the year ended December 31, 2005, CMG experienced increased revenues as compared to 2004 of $8.4, or 0.9%, which was comprised of an organic revenue increase of $19.3 and positive foreign currency exchange rate changes of $1.2, partially offset by decreases attributable to net acquisitions and divestitures of $12.1. Net effects of acquisitions and divestitures primarily related to the disposition of two businesses in 2005 and three businesses in 2004.

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Table of Contents

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 increase was primarily driven by growth in public relations and sports marketing business both domestically and internationally as a result of increased revenue from existing clients and new client wins. Domestically, the increase in the sports marketing business was offset by a decline in the events marketing business. Although the events marketing business declined domestically it had an overall positive impact to our organic revenue increase due to international client wins.
SEGMENT OPERATING INCOME
                                 
    For the Years Ended        
    December 31,        
             
    2005   2004   $ Change   % Change
                 
Segment operating income
  $ 53.0     $ 83.7     $ (30.7 )     (36.7 )%
                         
Operating margin
    5.6 %     8.9 %                
                         
      For the year ended December 31, 2005, CMG operating income decreased by $30.7, or 36.7%, which was the result of a $23.3 increase in salary and related expenses and a $15.8 increase in office and general expenses, offset by a $8.4 increase in revenue.
      The decrease in operating income, excluding the impact of foreign currency and net effects of acquisition and divestitures, was primarily driven by increases in salary expense across all businesses due to increased headcount to further address weaknesses in our accounting and control environment. In addition, the decrease in operating income was attributable to increases in salary expenses in public relations to support ongoing revenue growth.
CORPORATE AND OTHER
      Certain corporate and other charges are reported as a separate line within total segment operating income and include corporate office expenses and shared service center expenses, as well as certain other centrally managed expenses that are not fully allocated to operating divisions. The following significant expenses are included in corporate and other:
                                   
    For the Years Ended        
    December 31,        
             
    2005   2004   $ Change   % Change
                 
Salaries, benefits and related expenses
  $ 201.3     $ 151.2     $ 50.1       33.1 %
Professional fees
    199.3       145.3       54.0       37.2 %
Rent and depreciation
    50.3       38.0       12.3       32.4 %
Corporate Insurance
    26.0       29.7       (3.7 )     (12.5 )%
Bank fees
    2.2       2.8       (0.6 )     (21.4 )%
Other
    (1.5 )     9.6       (11.1 )     (115.6 )%
Expenses allocated to operating divisions
    (161.3 )     (133.4 )     (27.9 )     20.9 %
                         
 
Total corporate and other
  $ 316.3     $ 243.2     $ 73.1       30.1 %
                         
      Salaries, benefits and related expenses include salaries, pension, bonus and medical and dental insurance expenses for corporate office employees, as well as the cost of temporary employees at the corporate office. Professional fees include costs related to the internal control compliance, cost of Prior Restatement efforts, financial statement audits, legal, information technology and other consulting fees, which are engaged and managed through the corporate office. Professional fees also include the cost of

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Table of Contents

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)
temporary financial professionals associated with work on our Prior Restatement activities. Rent and depreciation includes rental expense and depreciation of leasehold improvements for properties occupied by corporate office employees. Corporate insurance expense includes the cost for fire, liability and automobile premiums. Bank fees relate to cash management activity administered by the corporate office. The amounts allocated to operating divisions are calculated monthly based on a formula that uses the revenues of the operating unit. Amounts allocated also include specific charges for information technology related projects which are allocated based on utilization.
      The increase in corporate and other expense of $73.1 or 30.1% is primarily related to the increase in salaries and related expenses and professional fees. The increase in salary expenses was the result of additional staffing to address weaknesses in our accounting and control environment, and develop shared services. The increase in professional fees are the result of costs associated with internal control compliance, costs associated with the Prior Restatement process, and related audit costs. Amounts allocated to operating divisions primarily increased due to the implementation of new information technology related projects and the consolidation of information technology support staff, the costs of which are now being allocated back to operating divisions.
Segment Results of Operations — Three Months Ended December 31, 2005 Compared to Three Months Ended December 31, 2004
      The following table summarizes revenue and operating income (loss) by segment for the three months ended December 31, 2005 and 2004. Other than long-lived asset impairment and contract termination costs, the operating results of Motorsports are not material to our consolidated results, and are therefore not discussed below:
                                   
    For the        
    Three Months Ended        
    December 31,        
             
    2005   2004   $ Change   % Change
                 
Revenue:
                               
IAN
  $ 1,614.8     $ 1,700.0     $ (85.2 )     (5.0 )%
CMG
    280.6       261.0       19.6       7.5 %
Motorsports
    0.3       4.7       (4.4 )     (93.6 )%
                         
 
Consolidated revenue
  $ 1,895.7     $ 1,965.7     $ (70.0 )     (3.6 )%
                         
Segment operating income (loss):
                               
IAN
  $ 221.2     $ 359.2     $ (138.0 )     (38.4 )%
CMG
    30.7       29.7       1.0       3.4 %
Motorsports
    (0.3 )     (2.0 )     1.7       (85.0 )%
Corporate and other
    (100.5 )     (73.4 )     (27.1 )     36.9 %

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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 Three Months Ended December 31,
     
    2005   2004
         
    IAN   CMG   Motorsports   Corporate   Total   IAN   CMG   Motorsports   Corporate   Total
                                         
Reconciliation to consolidated operating income:
                                                                               
Consolidated operating income (loss)
  $ 130.4     $ 27.7     $ (0.3 )   $ (100.2 )   $ 57.6     $ 353.3     $ 33.3     $ (2.3 )   $ (72.2 )   $ 312.1  
Adjustments:
                                                                               
 
Restructuring reversals (charges)
    1.2       (2.9 )           0.3       (1.4 )     (1.7 )     4.9             1.2       4.4  
 
Long lived asset impairment and other charges:
    (92.0 )     (0.1 )                 (92.1 )     (4.2 )     (1.3 )     (0.3 )           (5.8 )
                                                             
Segment operating income (loss)
  $ 221.2     $ 30.7     $ (0.3 )   $ (100.5 )           $ 359.2     $ 29.7     $ (2.0 )   $ (73.4 )        
                                                             
INTEGRATED AGENCY NETWORKS (“IAN”)
REVENUE
      The components of the 2005 change were as follows:
                                                                   
    Total   Domestic   International
             
Three Months Ended   $   % Change   $   % Change   % of Total   $   % Change   % of Total
                                 
December 31, 2004
  $ 1,700.0             $ 838.3               49.3 %   $ 861.7               50.7 %
                                                 
Foreign currency changes
    (9.9 )     (0.6 )%           0.0 %             (9.9 )     (1.1 )%        
Net acquisitions/divestitures
    (17.1 )     (1.0 )%     (14.3 )     (1.7 )%             (2.8 )     (0.3 )%        
Organic
    (58.2 )     (3.4 )%     (0.9 )     (0.1 )%             (57.3 )     (6.6 )%        
                                                 
 
Total change
    (85.2 )     (5.0 )%     (15.2 )     (1.8 )%             (70.0 )     (8.1 )%        
December 31, 2005
  $ 1,614.8             $ 823.1               51.0 %   $ 791.7               49.0 %
                                                 
      IAN experienced a net decrease in revenue as compared to 2004 of $85.2, or 5.0%, which was comprised of an organic decrease in revenue of $58.2, a decrease attributable to net acquisitions and divestitures of $17.1 and a decrease in foreign currency exchange rate changes of $9.9. Excluding out of period adjustments of $17.8 recorded in the three months ended December 31, 2005, the net revenue decrease would have been $67.4.
      The organic decrease in revenue excluding the impact of out of period adjustments was primarily driven by decreases at McCann, Lowe and Deutsch. McCann experienced a decline in revenues primarily due to a reduction in revenue from existing international clients, particularly in Europe and Asia Pacific. This reduction was partially offset by new client wins, particularly in Europe. Lowe’s decline in revenue was primarily driven by a change in the structure of certain client contracts which resulted in a deferral of revenue and a reduction in revenue from existing international clients, particularly in Europe. Deutsch experienced a decline in revenues primarily due to lost clients and a reduction in revenue from existing clients in the U.S. partially offset by new client wins.

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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)
SEGMENT OPERATING INCOME
                                 
    For the Three Months        
    Ended December 31,        
             
    2005   2004   $ Change   % Change
                 
Segment operating income
  $ 221.2     $ 359.2     $ (138.0 )     (38.4 )%
                         
Operating margin
    13.7 %     21.1 %                
                         
      For the three months ended December 31, 2005, IAN operating income decreased by $138.0, or 38.4%, which was the result of a decrease in revenue of $85.2, an increase in salaries and related expenses of $41.1 and increased office and general expenses of $11.7. Excluding out of period adjustments of $22.1, the total operating income decrease would have been $115.9.
      The decrease in IAN’s operating income, excluding the impact of out of period adjustments and foreign currency and net effects of acquisitions and divestitures, was primarily driven by decreased operating income at McCann and Lowe. The operating income decrease at McCann was primarily due to increased severance, production and media expenses, occupancy costs and temporary staffing costs. Higher severance expense was the result of domestic and international headcount reductions. The increase in production and media expenses was due to an increase in arrangements entered into where we act as a principal, which requires us to record expenses on a gross basis. The increase in occupancy costs was primarily due to the termination of several operating leases. Temporary staffing was impacted by additional staffing necessary to address weaknesses in our accounting and control environment. In the fourth quarter of 2005, we recorded approximately $10.0 for certain client negotiations. The operating income decrease at Lowe was primarily due to the organic decrease in revenue as compared to the prior year.
CONSTITUENCY MANAGEMENT GROUP (“CMG”)
REVENUE
      The components of the 2005 change were as follows:
                                                                   
    Total   Domestic   International
             
Three Months Ended   $   % Change   $   % Change   % of Total   $   % Change   % of Total
                                 
December 31, 2004
  $ 261.0             $ 144.9               55.5 %   $ 116.1               44.5 %
                                                 
Foreign currency changes
    (2.5 )     (1.0 )%           0.0 %             (2.5 )     (2.2 )%        
Net acquisitions/divestitures
    (2.0 )     (0.8 )%     (0.7 )     (0.5 )%             (1.3 )     (1.1 )%        
Organic
    24.1       9.2 %     16.7       11.5 %             7.4       6.4 %        
                                                 
 
Total change
    19.6       7.5 %     16.0       11.0 %             3.6       3.1 %        
December 31, 2005
  $ 280.6             $ 160.9               57.3 %   $ 119.7               42.7 %
                                                 
      For the three months ended December 31, 2005, CMG experienced a net increase in revenue as compared to 2004 of $19.6, or 7.5%, which was comprised of an organic revenue increase of $24.1, partially offset by a decrease in foreign currency exchange rate changes of $2.5 and decreases attributable to net acquisitions and divestitures of $2.0. Excluding out of period adjustments of $0.5, the net revenue increase would have been $19.1.
      The organic revenue increase excluding the impact of out of period adjustments was primarily driven by worldwide growth in sports marketing business, events marketing business and public relations business as a result of increased revenue from existing clients and new client wins.

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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)
SEGMENT OPERATING INCOME
                                 
    For the Three Months        
    Ended December 31,        
             
    2005   2004   $ Change   % Change
                 
Segment operating income
  $ 30.7     $ 29.7     $ 1.0       3.4 %
                         
Operating margin
    10.9 %     11.4 %                
                         
      For the three months ended December 31, 2005, CMG operating income increased by $1.0, or 3.4%, which was the result of an increase in revenue of $19.6, offset by increased salaries and related expenses of $10.4 and office and general expenses of $8.2. Excluding out of period adjustments of $3.5, the total operating income increase would have been $4.5.
      The increase in CMG’s operating income, excluding the impact of out of period adjustments and foreign currency and net effects of acquisitions and divestitures, was due to an organic revenue increase primarily driven by worldwide growth in sports marketing business as a result of increased revenue from existing clients and new client wins. This increase was partially offset by an increase in professional fees as a result of costs associated with the Prior Restatement process and internal control compliance and an increase in salary expenses across all businesses due to increased headcount to further address weaknesses in our accounting and control environment.
CORPORATE AND OTHER
      Certain corporate and other charges are reported as a separate line within total segment operating income and include corporate office expenses and shared service center expenses, as well as certain other centrally managed expenses that are not fully allocated to operating divisions. The following significant expenses are included in corporate and other:
                                   
    For the        
    Three Months        
    Ended December 31,        
             
    2005   2004   $ Change   % Change
                 
Salaries, benefits and related expenses
  $ 70.7     $ 34.3     $ 36.4       106.1 %
Professional fees
    53.0       56.7       (3.7 )     (6.5 )%
Rent and depreciation
    14.2       10.0       4.2       42.0 %
Corporate Insurance
    6.2       6.0       0.2       3.3 %
Bank fees
    0.6       0.7       (0.1 )     (14.3 )%
Other
    (7.8 )     2.0       (9.8 )     (490.0 )%
Expenses allocated to operating divisions
    (36.4 )     (36.3 )     (0.1 )     0.3 %
                         
 
Total corporate and other
  $ 100.5     $ 73.4     $ 27.1       36.9 %
                         
      Salaries, benefits and related expenses include salaries, pension, bonus and medical and dental insurance expenses for corporate office employees, as well as the cost of temporary employees at the corporate office. Professional fees include costs related to the internal control compliance, cost of Prior Restatement efforts, financial statement audits, legal, information technology and other consulting fees, which are engaged and managed through the corporate office. Professional fees also include the cost of temporary financial professionals associated with work on our Prior Restatement activities. Rent and depreciation includes rental expense and depreciation of leasehold improvements for properties occupied by corporate office employees. Corporate insurance expense includes the cost for fire, liability and automobile

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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)
premiums. Bank fees relate to cash management activity administered by the corporate office. The amounts allocated to operating divisions are calculated monthly based on a formula that uses the revenues of the operating unit. Amounts allocated also include specific charges for information technology related projects which are allocated based on utilization.
      The increase in corporate and other expense of $27.1 or 36.9% for the three months ended December 31, 2005 is primarily related to the increase in salaries and related expenses, partially offset by a decrease in professional fees. The increase in salary expenses was the result of additional staffing to address weaknesses in our accounting and control environment, and develop shared services. The decrease in professional fees is the result of a reduction in temporary employees as compared to prior year in conjunction with the additional staffing.
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
  $ 6,161.7             $ 3,459.3               56.1 %   $ 2,702.4               43.9 %
                                                 
Foreign currency changes
    237.7       3.9 %           0.0 %             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 U.S. 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.
      For the three months ended December 31, 2004, consolidated revenues increased $109.0, or 5.9%, as compared to the comparable period in 2003, which was attributable to an increase related to foreign currency exchange rate changes of $87.4 and an organic increase in revenue of $44.5, partially offset by a decrease in net acquisitions and divestitures of $22.9.

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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
                         
Salaries and related expenses
  $ 3,733.0       58.4 %   $ 3,501.4       56.8 %   $ 231.6       6.6 %
Office and general expenses
    2,250.4       35.2 %     2,225.3       36.1 %     25.1       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       100.0 %
                                     
 
Total operating expenses
  $ 6,481.4             $ 6,193.6             $ 287.8       4.6 %
                                     
Salaries and Related Expenses
      The components of the 2004 change were as follows:
                           
    Total    
        % of
    $   % Change   Revenue
             
2003
  $ 3,501.4               56.8 %
                   
 
Foreign currency changes
    129.5       3.7 %        
 
Net acquisitions/divestitures
    (40.5 )     (1.2 )%        
 
Organic
    142.6       4.1 %        
                   
 
Total change
    231.6       6.6 %        
2004
  $ 3,733.0               58.4 %
                   
      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 58.4% of revenues, compared to 56.8% in 2003. In 2004, salaries and related expenses increased $142.6, excluding the increase related to foreign currency exchange rate changes of $129.5 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 U.S. 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 lost. Cost savings associated with headcount reductions were partially offset by increased severance costs associate with the headcount reductions.

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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 three months ended December 31, 2004, salaries and related expenses increased $73.6, excluding the increase related to foreign currency exchange rate changes of $38.8 and a decrease related to net acquisitions and divestitures of $8.8 as compared to 2003.
Office and General Expenses
      The components of the 2004 change were as follows:
                           
    Total    
        % of
    $   % Change   Revenue
             
2003
  $ 2,225.3               36.1 %
                   
Foreign currency changes
    102.8       4.6 %        
Net acquisitions/divestitures
    (63.8 )     (2.9 )%        
Organic
    (13.9 )     (0.6 )%        
                   
 
Total change
    25.1       1.1 %        
2004
  $ 2,250.4               35.2 %
                   
      Office and general expenses primarily consist 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 $13.9, excluding the increase related to foreign currency exchange rate changes of $102.8 and a decrease related to net acquisitions and divestitures of $63.8.
      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 U.S. 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 preliminary application development and maintenance of information technology systems and processes related to our shared services initiatives.
      For the three months ended December 31, 2004, office and general expenses increased $47.1, excluding an increase related to foreign currency exchange rate changes of $27.2 and a decrease related to net acquisitions and divestitures of $20.0 when compared to 2003.
Restructuring (Reversals) Charges
      During 2004 and 2003, we recorded net (reversals) and charges 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. Included in the net (reversals) and charges were adjustments resulting from changes in management’s estimates for the 2003 and 2001 restructuring programs which decreased the restructuring reserves by $32.0 and $2.4 in 2004 and 2003, respectively. 2004 net charges primarily related to the vacating of 43 offices and workforce reduction of approximately 400 employees related to the 2003 restructuring program and adjustments to management’s estimates for the 2001 restructuring program. 2003 net charges primarily related to the vacating of 55 offices and workforce reduction of approximately

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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)
2,900 employees related to the 2003 restructuring program and adjustments to management’s estimates for the 2001 restructuring program. A summary of the net (reversals) and charges 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 (Reversals) Charges
                                                       
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 (Reversals) Charges
                                                       
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  
                                           
      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. For additional information, see Note 6 to the Consolidated Financial Statements.
      During the three months ended December 31, 2004 and 2003, we recorded net (reversals) and charges related to lease termination and other exit costs and severance and termination costs for the 2003 and 2001 restructuring programs of $(4.4) and $30.2, respectively. 2004 net reversals primarily consisted of changes to management’s estimates for the 2003 and 2001 restructuring programs primarily relating to our lease termination costs. 2003 net charges related primarily to the vacating of offices and workforce reduction related to the 2003 restructuring program and adjustments to management’s estimates for the 2001 restructuring program.
Long-Lived Asset Impairment and Other Charges
      The following table summarizes the long-lived asset impairment and other charges for 2004 and 2003:
                                                                   
    For the Years Ended December 31,
     
    2004   2003
         
    IAN   CMG   Motor-sports   Total   IAN   CMG   Motor-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  
                                                 

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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)
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 their book values. 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.
      CMG — As a result of the annual impairment review, a goodwill impairment charge of $91.7 was recorded at our CMG reporting unit, which was comprised of Weber Shandwick, GolinHarris, DeVries, MWW Group 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, $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.
      During the three months ended December 31, 2003, we recorded charges of $44.9. This primarily related to a Motorsports’ fixed asset impairment charge of $38.0 in conjunction with the sale of a business comprised of Motorsports four owned auto racing circuits.
      For additional information, see Note 9 to the Consolidated Financial Statements.
Motorsports Contract Termination Costs
      As discussed in Note 5 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 released us from certain guarantees and lease obligations in the United Kingdom. We have exited this business and do not anticipate any additional material charges.

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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,        
             
    2004   2003   $ Change   % Change
                 
Interest expense
  $ (172.0 )   $ (206.6 )   $ 34.6       (16.7 )%
Debt prepayment penalty
    (9.8 )     (24.8 )     15.0       (60.5 )%
Interest income
    50.8       39.3       11.5       29.3 %
Investment impairments
    (63.4 )     (71.5 )     8.1       (11.3 )%
Litigation (reversals) charges
    32.5       (127.6 )     160.1       (125.5 )%
Other income (expense)
    (10.7 )     50.3       (61.0 )     (121.3 )%
                         
 
Total
  $ (172.6 )   $ (340.9 )   $ 168.3       (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. During the three months ended December 31, 2003, we recorded interest expense of $51.6.
Debt Prepayment Penalty
      During the fourth quarter of 2004, a prepayment penalty of $9.8 was recorded related to the early redemption of $250.0 of our 7.875% Senior Unsecured Notes due in 2005, which represented one half of the $500.0 outstanding. 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. During the three months ended December 31, 2003, we recorded interest income of $11.5.
Investment Impairments
      During 2004, we recorded investment impairment charges of $63.4, primarily related to a $50.9 charge for our unconsolidated investment in 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.
      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 U.S. The majority of the impairment charges resulted from deteriorating economic conditions in the countries in which the agencies operate or the loss of one or several key clients.
      During the three months ended December 31, 2004, investment impairments decreased $15.6 as compared to the comparable period in the 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)
Litigation Charges
      During 2004, with the court approval of the settlement of the class action shareholder suits discussed in Note 21 to the Consolidated Financial Statements, 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 above. 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 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, other income (expense) included $18.2 of net losses on the sale of 19 agencies. The losses related primarily to the sale of Transworld Marketing, a U.S.-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 5 to the Consolidated Financial Statements for further discussion of the Motorsports disposition.
      In December 2003, we sold approximately 11.0 shares of Modem Media 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.
      During the three months ended December 31, 2004, other income (expense) decreased by $8.7, primarily due to the losses described above for the sale of Transworld Marketing and the Motorsports liquidation.
OTHER ITEMS
Income Taxes
                                 
    For the Years        
    Ended        
    December 31,        
             
    2004   2003   $ Change   % Change
                 
Provision for income taxes
  $ 262.2     $ 242.7     $ 19.5       8.0 %
                         
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 rate and the statutory federal rate of 35% is also due to state and local taxes and the effect of non-U.S. operations.
      For the three months ended December 31, 2004 and 2003, we recorded an income tax provision of $130.6 and $247.6, respectively.

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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)
Valuation Allowance
      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 U.S. capital and other loss carryforwards. The total valuation allowance as of December 31, 2003 was $252.6.
      For additional information, see Note 11 to the Consolidated Financial Statements.
Minority Interest and Unconsolidated Affiliates
                                 
    For the Years        
    Ended        
    December 31,        
             
    2004   2003   $ Change   % Change
                 
Income applicable to minority interests
  $ (21.5 )   $ (27.0 )   $ 5.5       (20.4 )%
                         
Equity in net income of unconsolidated affiliates, net of tax
  $ 5.8     $ 2.4     $ 3.4       141.7 %
                         
      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 U.S.-based sports and entertainment event business.
      During the three months ended December 31, 2004 and 2003, we recorded $10.3 and $13.6 of income applicable to minority interests, respectively. During the three months ended December 31, 2004 and 2003, we recorded $1.1 and $3.8 of equity in net income of unconsolidated affiliates, respectively.
NET LOSS
                                 
    For the Years Ended        
    December 31,        
             
    2004   2003   $ Change   % Change
                 
Loss from continuing operations
  $ (544.9 )   $ (640.1 )   $ 95.2       (14.9 )%
Income from discontinued operations, net of taxes of $3.5 and $18.5, respectively
    6.5       101.0       (94.5 )     (93.6 )%
                         
Net loss
    (538.4 )     (539.1 )     0.7       (0.1 )%
Less: Preferred stock dividends
    19.8             19.8       100.0 %
                         
Net loss applicable to common stockholders
  $ (558.2 )   $ (539.1 )   $ (19.1 )     3.5 %
                         

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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)
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 $287.8, which includes Motorsports contract termination costs of $113.6.
      For the three months ended December 31, 2004 and 2003, we recorded income from continuing operations of $130.3 and a loss from continuing operations of $3.6, respectively.
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 5 to the Consolidated Financial Statements.
Segment Results of Operations — 2004 Compared to 2003
      The following table summarizes revenue and operating income (loss) by segment in 2004 and 2003. As previously discussed, in 2004 and 2003 we had a third reportable segment, comprised of our Motorsports operations, which were sold during 2004. Other than long-lived asset impairment and contract termination costs, the operating results of Motorsports are not material to our consolidated results, and are therefore not discussed below:
                                   
    For the Years Ended        
    December 31,        
             
    2004   2003   $ Change   % Change
                 
Revenue:
                               
IAN
  $ 5,399.2     $ 5,140.5     $ 258.7       5.0 %
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
  $ 577.1     $ 551.6     $ 25.5       4.6 %
CMG
    83.7       55.7       28.0       50.3 %
Motorsports
    (14.0 )     (43.5 )     29.5       (67.8 )%
Corporate and other
    (243.2 )     (128.8 )     (114.4 )     88.8 %

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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,
     
    2004   2003
         
    IAN   CMG   Motorsports   Corporate   Total   IAN   CMG   Motorsports   Corporate   Total
                                         
Reconciliation to consolidated operating income:
                                                                               
Consolidated operating income (loss)
  $ 307.2     $ (24.9 )   $ (130.6 )   $ (246.1 )   $ (94.4 )   $ 401.4     $ (197.2 )   $ (107.7 )   $ (128.4 )   $ (31.9 )
Adjustments:
                                                                               
 
Restructuring reversals (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 (loss)
  $ 577.1     $ 83.7     $ (14.0 )   $ (243.2 )           $ 551.6     $ 55.7     $ (43.5 )   $ (128.8 )        
                                                             
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
  $ 5,140.5             $ 2,862.1               55.7 %   $ 2,278.4               44.3 %
                                                 
Foreign currency changes
    194.1       3.8 %           0.0 %             194.1       8.5 %        
Net acquisitions/divestiturs
    (40.0 )     (0.8 )%     (27.5 )     (1.0 )%             (12.5 )     (0.5 )%        
Organic
    104.6       2.0 %     98.7       3.4 %             5.9       0.3 %        
                                                 
 
Total change
    258.7       5.0 %     71.2       2.5 %             187.5       8.2 %        
2004
  $ 5,399.2             $ 2,933.3               54.3 %   $ 2,465.9               45.7 %
                                                 
      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 U.S. 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 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 U.S. and European agencies. Draft experienced an organic revenue increase mainly in the U.S. 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 U.S. and Germany. Deutsch experienced organic revenue growth stemming from

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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)
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.
      For the three months ended December 31, 2004 IAN experienced a net increase in revenue as compared to 2003 of $119.7, or 7.6%, which was comprised of an increase in foreign currency exchange rate changes of $76.0 and an organic increase in revenue of $53.2, partially offset by a decrease attributable to net acquisitions and divestitures of $9.5.
SEGMENT OPERATING INCOME
                                 
    For the Years        
    Ended        
    December 31,        
             
    2004   2003   $ Change   % Change
                 
Segment operating income
  $ 577.1     $ 551.6     $ 25.5       4.6 %
                         
Operating margin
    10.7 %     10.7 %                
                         
      For the year ended December 31, 2004, IAN operating income increased by $25.5, 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 $201.4 and increased office and general expenses of $31.8.
      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.
      For the three months ended December 31, 2004, IAN operating income decreased by $27.4, or 7.1%, which was the result of an increase in salaries and related expenses of $130.6 and increased office and general expenses of $16.5, offset by an increase in revenue of $119.7.

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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)
CONSTITUENCY MANAGEMENT GROUP (“CMG”)
REVENUE
      The components of the 2004 change were as follows:
                                                                   
    Total   Domestic   International
             
    $   % Change   $   % Change   % of Total   $   % Change   % of Total
                                 
2003
  $ 942.4             $ 593.2               62.9%     $ 349.2               37.1%  
                                                 
Foreign currency changes
    34.4       3.7 %           0.0 %             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 U.S. Dollar. Net effects of acquisitions and divestitures primarily related to the disposition of three businesses in 2004 and two 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.
      For the three months ended December 31, 2004, CMG experienced a net decrease in revenue as compared to 2004 of $6.5, or 2.4%, which was comprised of an organic revenue decrease of $11.0 and decreases attributable to net acquisitions and divestitures of $5.7, offset by an increase in foreign currency exchange rate changes of $10.2.
Segment Operating Income
                                 
    For the Years        
    Ended        
    December 31,        
             
    2004   2003   $ Change   % Change
                 
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 an organic revenue decrease sports marketing business operating expenses decreased at a higher rate than the 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)
      For the three months ended December 31, 2004, CMG operating income decreased by $18.8, or 38.8%, which was the result of a decrease in revenue of $6.5 and increased salaries and related expenses of $15.0, partially offset by a decrease in office and general expenses of $2.7.
CORPORATE AND OTHER
      Certain corporate and other charges are reported as a separate line within total segment operating income and include corporate office expenses and shared service center expenses, as well as certain other centrally managed expenses which are not fully allocated to operating divisions. The following significant expenses are included in corporate and other:
                                   
    For the Years Ended        
    December 31,        
             
    2004   2003   $ Change   % Change
                 
Salaries, benefits and related expenses
  $ 151.2     $ 129.0     $ 22.2       17.2 %
Professional fees
    145.3       50.6       94.7       187.2 %
Rent and depreciation
    38.0       30.6       7.4       24.2 %
Corporate Insurance
    29.7       26.5       3.2       12.1 %
Bank fees
    2.8       1.6       1.2       75.0 %
Other
    9.6       8.9       0.7       7.9 %
Expenses allocated to operating divisions
    (133.4 )     (118.4 )     (15.0 )     12.7 %
                         
 
Total corporate and other
  $ 243.2     $ 128.8     $ 114.4       88.8 %
                         
      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, as well as the cost of temporary employees at the corporate office. 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. Corporate insurance expense includes the cost for fire, liability and automobile premiums. 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 revenues of the operating unit.
      The increase in corporate and other expense of $114.4 or 88.8% 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 preliminary application development and maintenance 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.
      The increase in corporate and other expense of $7.0 or 10.5% for the three months ended December 31, 2004 is primarily related to the increase in professional fees offset by the decrease in salaries and related expenses. The increase in professional fees are the result of costs associated with internal control compliance, costs associated with the Prior Restatement process, and related audit costs. Amounts allocated to operating divisions primarily increased due to the implementation of new information

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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)
December 31, 2005 technology related projects and the consolidation of information technology support staff, the costs of which are now being allocated back to operating divisions.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW OVERVIEW
Operating cash flow
      Our operating activities utilized cash of approximately $20.2, compared to cash provided by operating activities of $464.8 in 2004 and $502.6 in 2003. The decrease in cash provided by operating activities in 2005 was primarily attributable to significant increases in our operating costs as well as a decline in revenues. Additional cash was used during 2005 for severance costs primarily related to international headcount reductions, salary costs primarily attributable to our hiring additional creative talent to enable future revenue growth and additional staff to address weaknesses in our accounting and control environment, and professional fees primarily related to the Prior Restatement and our ongoing efforts in internal control compliance. The decrease in cash provided by operating activities in 2005 was also attributable in part to year-over-year changes in accounts payable and other changes in working capital accounts.
      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 after we have received funds from our clients, and our risk from client nonpayment has historically not been significant.
      We manage substantially all our domestic cash and liquidity centrally through the corporate treasury department. Each day, domestic agencies with excess funds invest these funds with corporate treasury and domestic agencies that require funding will borrow funds from corporate treasury. The corporate treasury department aggregates the net domestic cash position on a daily basis. The net position is either invested or borrowed. Given the amount of cash on hand, we have not had short-term domestic borrowings over the past two years.
      The amount of our cash held by the banks under our International pooling arrangements is subject to a full right of offset against the amounts advanced to us, and the cash and advances are recorded net on our balance sheet. The gross amounts vary depending on how much funding is provided to agencies through the pooling arrangements. At December 31, 2005 and 2004, cash of $842.6 and $939.9, respectively, was netted against an equal amount of advances under pooling arrangements. We typically pay interest on our larger arrangements based on the gross amounts of the advances and receive interest income on the gross amount of cash deposited, albeit at a lower rate.
Funding requirements
      Our most significant funding requirements include: non-cancelable operating lease obligations, capital expenditures, payments related to vendor discounts and credits, payments related to past acquisitions, interest payments, preferred stock dividends and taxes.

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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 non-cancelable lease commitments primarily relate to office premises and equipment. These commitments are partially offset by sublease rental income we receive under non-cancelable subleases. Our projected obligations for 2005 and beyond are set forth below under Contractual Obligations.
      Our capital expenditures are primarily to upgrade computer and telecommunications systems and to modernize offices. Our principal bank credit facility currently limits spending on capital expenditures in any calendar year to $210.0. Our capital expenditures were $140.7 in 2005, $194.0 in 2004 and $159.6 in 2003.
      We acquired a large number of agencies through 2001, but in recent years the number and value of acquisitions have been significantly less. There were no acquisitions in 2005 and cash paid for acquisitions was approximately $14.6 in 2004 and $4.0 in 2003. Under the contractual 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, mostly operating performance, 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 $97.0 in 2005, $161.7 in 2004 and $221.2 in 2003. Our projected obligations for 2006 and beyond are set forth below under Contractual Obligations.
      We are required to post letters of credit primarily to support commitments to purchase media placements, predominantly in locations outside the U.S., or to satisfy other obligations. We generally obtain these letters of credit from our principal bank syndicate under the Three-Year Revolving Credit Facility described under Credit Arrangements below. The outstanding amount of letters of credit was $162.4 and $165.4 as of December 31, 2005 and 2004, respectively. These letters of credit have not been drawn upon in recent years.
Sources of funds
      At December 31, 2005 our total of cash and cash equivalents plus short-term marketable securities was $2,191.5 compared to $1,970.4 at December 31, 2004.
      We have obtained financing through 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, 4.50% Convertible Senior Notes (“4.50% Notes”) and Convertible Preferred Stock below.
      In July 2005, we issued $250.0 of Floating Rate Notes due 2008 in a private placement to refinance maturing debt, as described below. In October 2005, we issued 0.525 shares of Series B Cumulative Convertible Perpetual Preferred Stock at gross proceeds of $525.0 with the proceeds to be used for general corporate purposes as described below under Convertible Preferred Stock.
      We have committed and uncommitted credit facilities, the terms of which are described below. We maintain our committed credit facility primarily as stand-by short-term liquidity and for the issuance of letters of credit. We have not drawn on our committed facility over the past two years, although letters of credit have been and continue to be issued under this facility, as described above. Our outstanding borrowings under uncommitted credit facilities were $53.7 and $67.8 as of December 31, 2005 and 2004, 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.

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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 at a minimum for the next twelve months. We have no significant scheduled amounts of long-term debt due until 2008 when $250.0 of our Floating Rate Senior Unsecured Notes are due. In addition, holders of our $800.0 4.50% Notes may require us to repurchase the 4.50% Notes for cash at par in March 2008. We continue to have a level of cash and cash equivalents that we consider to be conservative, particularly after receiving net proceeds of approximately $507.3 from our offering of Series B Preferred Stock in October 2005. We consider this approach to be important in view of the cash requirements resulting, among other things, from the higher professional fees, from our liabilities to our customers for vendor discounts and credits and from any potential penalties or fines that may have to be paid in connection with our SEC investigation. In 2006, we will be required to pay to the IRS and state and local taxing authorities approximately $93.4 (including interest), related to tax audit matters. This amount has been reclassified from non-current liabilities to current liabilities on the balance sheet. As a result of our Prior Restatement review, we estimate that we will pay approximately $250.0 related to Vendor Discounts or Credits, Internal Investigations and International Compensation Agreements over the next 18 months. We regularly evaluate market conditions for opportunities to raise additional financing on favorable terms, in order to enhance our financial flexibility.
      Substantially all of our operating cash flow is generated by the agencies. 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.

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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)
FINANCING
Long-Term Debt
      A summary of our long-term debt is as follows:
                   
    December 31,
     
    2005   2004
         
7.875% Senior Unsecured Notes due 2005
  $     $ 255.0  
Floating Rate Senior Unsecured Notes due 2008
    250.0        
5.40% Senior Unsecured Notes due 2009 (less unamortized discount of $0.3)
    249.7       249.7  
7.25% Senior Unsecured Notes due 2011
    499.2       500.0  
6.25% Senior Unsecured Notes due 2014 (less unamortized discount of $0.9)
    350.3       347.3  
4.50% Convertible Senior Notes due 2023
    800.0       800.0  
Other notes payable and capitalized leases — at interest rates from 3.3% to 14.44%
    36.9       42.1  
             
 
Total long-term debt
    2,186.1       2,194.1  
Less: current portion
    3.1       258.1  
             
Long-term debt, excluding current portion
  $ 2,183.0     $ 1,936.0  
             
      Annual repayments of long-term debt as of December 31, 2005 are scheduled as follows:
           
2006
  $ 3.1  
2007
    4.7  
2008*
    256.7  
2009
    250.8  
2010
    0.8  
Thereafter*
    1,670.0  
       
 
Total long-term debt
  $ 2,186.1  
       
 
Holders of our $800.0 4.50% Notes may require us to repurchase the 4.50% Notes for cash at par in March 2008. If all holders require us to repurchase these Notes, a total of $1,056.7 will be payable in 2008 in respect of long-term debt. These Notes will mature in 2023 if not converted or repurchased.
Redemption and Repurchase of Long-Term Debt
      In August 2005, we redeemed the remainder of the outstanding 7.875% Senior Unsecured Notes with an aggregate principal amount of $250.0 at maturity at gross proceeds of approximately $258.6, which included the principal amount of the Notes, accrued interest to the redemption date and a prepayment penalty. To redeem these Notes we used the proceeds from the sale and issuance in July 2005 of $250.0 Floating Rate Senior Unsecured 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

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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)
SEC reports, including our 2004 Annual Report on Form 10-K and Quarterly Reports for the first and second quarters of 2005 on Form 10-Q, would not constitute a default under the indentures until October 1, 2005.
      The indenture governing our 4.50% Notes was also amended in March 2005 to provide for: (i) an extension from March 15, 2008 to September 15, 2009 of the date on or after which we may redeem the 4.50% Notes and (ii) an additional “make-whole” adjustment to the conversion rate in the event of a change of control meeting specified conditions.
4.50% Convertible Senior Notes
      Our 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 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.
      Holders of the 4.50% Notes may require us to repurchase the 4.50% Notes on March 15, 2008 for cash and 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 repurchase 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.
      In accordance with EITF Issue No. 03-6, Participating Securities and the Two — Class Method under FASB Statement No. 128, Earnings Per Share, the 4.50% Notes are considered securities with participation rights in earnings available to common stockholders due to the feature of these securities that allows investors to participate in cash dividends paid on our common stock. For periods in which we experience net income, the impact of these securities’ participation rights is included in the calculation of earnings per share. For periods in which we experience a net loss, the 4.50% Notes have no impact on the calculation of earnings per share due to the fact that the holders of these securities do not participate in our losses.
Convertible Preferred Stock
      We currently have two series of convertible preferred stock outstanding: our 5.375% Series A Mandatory Convertible Preferred Stock (“Series A Preferred Stock”) and our 5.25% Series B Cumulative Convertible Perpetual Preferred Stock (“Series B Preferred Stock”).

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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)
      Series B Preferred Stock — On October 24, 2005, we completed a private offering of 0.525 shares of our Series B Preferred Stock at an aggregate offering price of $525.0. The net proceeds from the sale were approximately $507.3 after deducting discounts to the initial purchasers and the estimated expenses of the offering.
      Each share of the Series B Preferred Stock has a liquidation preference of $1,000.00 per share and is convertible at the option of the holder at any time into 73.1904 shares of our common stock, subject to adjustment upon the occurrence of certain events, which represents a conversion price of approximately $13.66, representing a conversion premium of approximately 30% over our closing stock price on October 18, 2005 of $10.51 per share. On or after October 15, 2010, each share of the Series B Preferred Stock may be converted at our option if the closing price of our common stock multiplied by the conversion rate then in effect equals or exceeds 130% of the liquidation preference of $1,000.00 per share for 20 trading days during any consecutive 30 trading day period. Holders of the Series B Preferred Stock will be entitled to an adjustment to the conversion rate if they convert their shares in connection with a fundamental change meeting certain specified conditions.
      The Series B Preferred Stock is junior to all of our existing and future debt obligations, on parity with our Series A Preferred Stock and senior to our common stock, with respect to payments of dividends and rights upon liquidation, winding up or dissolution, to the extent of the liquidation preference of $1,000.00 per share. There are no registration rights with respect to the Series B Preferred Stock, shares of our common stock issuable upon conversion thereof or any shares of our common stock that may be delivered in connection with a dividend payment.
      In accordance with EITF Issue No. 03-6, the Series B Preferred Stock is not considered a security with participation rights in earnings available to common stockholders due to the contingent nature of the conversion feature of these securities.
      Series A Preferred Stock — We currently have outstanding 7.475 shares of our Series A Preferred Stock with a liquidation preference of $50.00 per share. On the automatic conversion date of December 15, 2006, each share of the Series A Preferred Stock will convert, subject to certain adjustments, into between 3.0358 and 3.7037 shares of common stock, depending on the then-current market price of our common stock.
      At any time prior to December 15, 2006, holders may elect to convert each share of their Series A Preferred Stock, subject to certain adjustments, into 3.0358 shares of our common stock. If the closing price per share of our common stock exceeds $24.71 for at least 20 trading days within a period of 30 consecutive trading days, we may elect, subject to certain limitations, to cause the conversion of all of the shares of Series A Preferred Stock then outstanding into shares of our common stock at a conversion rate of 3.0358 shares of our common stock for each share of our Series A Preferred Stock.
      The Series A Preferred Stock is junior to all of our existing and future debt obligations, on parity with our Series B Preferred Stock and senior to our common stock, with respect to payments of dividends and rights upon liquidation, winding up or dissolution, to the extent of the liquidation preference of $50.00 per share.
      In accordance with EITF Issue No. 03-6, the Series A Preferred Stock is considered a security with participation rights in earnings available to common stockholders due to the conversion feature of these securities. For periods in which we experience net income, the impact of these securities’ participation rights is included in the calculation of earnings per share. For periods in which we experience a net loss, the Series A Preferred Stock has no impact on the calculation of earnings per share due to the fact that the holders of these securities do not participate in our losses.

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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 Arrangements
      We have committed and uncommitted credit facilities with various banks that permit borrowings at variable interest rates. At December 31, 2005 and 2004, there were no borrowings under our committed facilities. However, there were borrowings under the uncommitted facilities made by several of our subsidiaries outside the U.S. totaling $53.7 and $67.8, 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, 2005 and 2004 was approximately 5% in each year. A summary of our credit facilities is as follows:
                                                                   
    December 31,
     
    2005   2004
         
    Total   Amount   Letters   Total   Total   Amount   Letters   Total
    Facility   Outstanding   of Credit   Available   Facility   Outstanding   of Credit   Available
                                 
Committed
                                                               
 
364-Day Revolving Credit Facility
  $     $     $     $     $ 250.0     $     $     $ 250.0  
 
Three-Year Revolving Credit Facility
    500.0             162.4       337.6       450.0             165.4       284.6  
 
Other Facilities
    0.7                   0.7       0.8                   0.8  
                                                 
    $ 500.7     $     $ 162.4     $ 338.3     $ 700.8     $     $ 165.4     $ 535.4  
Uncommitted
                                                               
 
Non-U.S. 
  $ 516.2     $ 53.7     $     $ 462.5     $ 738.1     $ 67.8     $     $ 670.3  
      Our primary bank credit agreement is a three-year revolving credit facility (as amended, the “Three-Year Revolving Credit Facility”). The Three-Year Revolving Credit Facility expires on May 9, 2007 and provides for borrowings of up to $500.0, of which $200.0 is available for the issuance of letters of credit. This facility was amended as of October 17, 2005 to increase the amount that we may borrow under the facility by $50.0 to $500.0. Our $250.0 364-Day Revolving Credit Facility expired on September 30, 2005.
      The terms of our Three-Year Revolving Credit Facility at December 31, 2005 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 during the applicable period from any disposition of assets or any business; (ii) to make capital expenditures in excess of $210.0 annually; (iii) to repurchase our common stock or to declare or pay dividends on our capital stock, except that we may declare or pay dividends in shares of our common stock, declare or pay cash dividends on our preferred stock, and 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; or (iv) to incur new debt at our subsidiaries, other than unsecured debt incurred in the ordinary course of business of our subsidiaries outside the U.S. and unsecured debt, which may not exceed $10.0 in the aggregate, incurred in the ordinary course of business of our U.S. subsidiaries. The terms also permit the issuance of letters of credit with expiration dates beyond the termination date of the facility, subject to certain conditions. Such conditions include the requirement for us, on the 105th day prior to the termination date of the facility, to provide a cash deposit in an amount equal to the total amount of outstanding letters of credit with expiration dates beyond the termination date of the facility. These terms were previously modified by three amendments on March 31, June 22 and September 27, 2005, respectively. The March 21, 2006 amendment effective as of December 31, 2005 added one new financial covenant so that we are required to maintain, based on a five business day testing period, in cash and securities, an average daily ending balance of $300.0 plus the aggregate principal amount of

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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)
borrowings under the credit facility in domestic accounts with our lenders. For further explanation of these and other amendments see Note 13 of the Consolidated Financial Statements. We also obtained a waiver from the lenders under the Three-Year Revolving Credit Facility on March 21, 2006, to waive any default arising from the restatement of our financial data presented in this report.
      Our Three-Year Revolving Credit Facility now contains certain financial covenants. These covenants have been modified by amendments and waivers on March 31, 2005, June 22, 2005, September 27, 2005, November 7, 2005 (effective as of September 30, 2005) and March 21, 2006 (effective as of December 31, 2005). We have been in compliance with all covenants under the Three-Year Revolving Credit Facility, as amended or waived from time to time. For further detail of these changes to the financial covenants see Note 13 of the Consolidated Financial Statements. Our financial covenants, effective as of December 31, 2005, require us to maintain with respect to each fiscal quarter set forth below:
(i) an interest coverage ratio 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   Ratio
     
December 31, 2005
    *  
March 31, 2006
    *  
June 30, 2006
    *  
September 30, 2006
    1.75 to 1  
December 31, 2006
    2.15 to 1  
March 31, 2007
    2.50 to 1  
 
The March 21, 2006 amendment, effective as of December 31, 2005, removed the financial covenant requirements with respect to the interest coverage ratio for the fiscal quarters ending December 31, 2005, March 31, 2006 and June 30, 2006.
(ii) a debt to EBITDA ratio, where debt is the balance at period-end and EBITDA is for the four fiscal quarters then ended, of not greater than that set forth opposite the corresponding quarter in the table below:
         
Four Fiscal Quarters Ending   Ratio
     
December 31, 2005
    *  
March 31, 2006
    *  
June 30, 2006
    *  
September 30, 2006
    5.15 to 1  
December 31, 2006
    4.15 to 1  
March 31, 2007
    3.90 to 1  
 
The March 21, 2006 amendment, effective as of December 31, 2005, removed the financial covenant requirements with respect to the debt to EBITDA ratio for the fiscal quarters ending December 31, 2005, March 31, 2006 and June 30, 2006.

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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)
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
     
December 31, 2005
  $ 233.0  
March 31, 2006
    175.0  
June 30, 2006
    100.0  
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. Interest coverage is defined as a ratio of EBITDA of the period of four fiscal quarters then ended to interest expense during such period.
      We have in the past been required to seek and have obtained amendments and waivers of t