UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
   
þ
x
 ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20052006
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 organizationorganization)		 (I.R.S. Employer
Identification No.)
1114 Avenue of the Americas, New York, New York 10036
(Address of principal executive offices) (Zip Code)
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)
(212) 704-1200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
   
Title of Each Classeach class Name of Each Exchangeeach exchange on Which Registeredwhich registered
 
Common Stock, $0.10 par value
 New York Stock Exchange
53/8% Series A Mandatory Convertible Preferred Stock, no par valueNew 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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No x
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 x
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 x     No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation 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 thisForm 10-K or any amendment to thisForm 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” inRule 12b-2 of the Exchange Act.
 
Large accelerated filerþx     Accelerated filer o     Non-accelerated filero
     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
 
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).  Yes o     No x
As of June 30, 2005,2006, the aggregate market value of the shares of registrant’s common stock held by non-affiliates was $5,201,493,786.$3,678,790,921. The number of shares of the registrant’s common stock outstanding as of February 28, 200616, 2007 was 436,029,334.468,710,972.
DOCUMENTS INCORPORATED BY REFERENCE
 
The following sections of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 25, 200624, 2007 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,” “Non-Management Director Compensation,” “Compensation Discussion and Analysis,” “Report of the Compensation Committee of the Board of Directors,” “Outstanding Shares,” “Related Party Transactions” and “Appointment of Independent Auditors.Registered Public Accountants.”
 

 

TABLE OF CONTENTS
       
    Page
 
PARTPart I.
Item 1.
 Business 14
Item 1A.
 Risk Factors 57
Item 1B.
 Unresolved Staff Comments 9
Item 2.
 Properties 9
Item 3.
 Legal Proceedings 10
Item 4.
 Submission of Matters to a Vote of Security Holders 10
 
PARTPart II.
Item 5.
 Market for Registrant’s Common Equity and Related Stockholder Matters 1312
Item 6.
 Selected Financial Data 1514
Item 7.
 Management’s Discussion and Analysis of Financial Condition and Results of Operations 1715
Item 7A.
 Quantitative and Qualitative Disclosures About Market Risk 8339
Item 8.
 Financial Statements and Supplementary Data 8440
Item 9.
 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 173100
Item 9A.
 Controls and Procedures 173100
Item 9B.
 Other Information 173100
 
PARTPart III.
Item 10.
 Directors and Executive Officers of Interpublic 174101
Item 11.
 Executive Compensation 174101
Item 12.
 Security Ownership of Certain Beneficial Owners and Management 174101
Item 13.
 Certain Relationships and Related Transactions 174102
Item 14.
 Principal Accountant Fees and Services 174102
 
PARTPart IV.
Item 15.
 Exhibits, and Financial Statements ScheduleSchedules 175103
 EX-10.I.D: AMENDMENT #3 TO AMENDED AND RESTATED 3-YEAR CREDIT AGREEMENTEX-10.III.A.91: DESCRIPTION OF THE CHANGE IN COMPENSATION FOR NON-MANAGEMENT DIRECTORS.
 EX-10.I.E: LETTER AGREEMENT
EX-18: LETTER FROM PRICEWATERHOUSECOOPERS LLPEX-12: SUPPLEMENTAL CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
 EX-21: SUBSIDIARIES
 EX-24: POWEREX-23: CONSENT OF ATTORNEY AND RESOLUTION OF BOARD OF DIRECTORS REPRICEWATERHOUSECOOPERS LLP
EX-24: 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 onForm 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,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 economic growth rates, 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,1A., Risk Factors, in this report.
AVAILABLE INFORMATION
 Information regarding our Annual Report
Our annual reports onForm 10-K, quarterly reports onForm 10-Q, current reports onForm 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 at1-800-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 OfferingsAbout Us
 
The Interpublic Group of Companies, Inc., together with its subsidiaries (the “Company”, “Interpublic”, “we”,“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. OurThese agencies cover the spectrum of marketing disciplines and specialties, from traditional services such as consumer advertising and direct marketing, to emerging services such as experiential marketingmobile and branded entertainment.search engine marketing. With hundreds of offices in over 100 countries and approximately 43,00042,000 employees, our agencies work with our clients to create global and local marketing campaigns. Thesedevelop marketing programs seek tothat 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. EngagementsThese solutions vary from project-based work between clients and agencies fall into five basic categories, or models. In thesingle-discipline model, clients work directly with one agency in one discipline. Theproject collaboration modelis employed when sister agencies are brought in on a project basis as a client’s needs expand. In theintegratedagency-of-record model, a multi-disciplinary agency provides a fuller range of marketing services for a client. Thelead company modelis applied when a lead agency manages the work atand its client to long-term, fully-integrated campaigns involving several of our agencies. Finally,companies working on behalf of a client. Furthermore, our agencies cover all major markets geographically and can operate in thevirtual network model, clients have a representative atsingle region or align work globally across many markets.
The role of the holding company levelis 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 companyInterpublic sets company-wide financial objectives and corporate strategy, directs collaborative inter-agency programs, establishes fiscalfinancial management and operational controls, guides personnel policy, conducts investor relations and initiates, manages and approves mergers and acquisitions. In addition, it provideswe provide 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, travel services, recruitment aid, employee benefits and executive compensation management.
Our Disciplines and AgenciesStrategy
 
We have hundredscompete in a fast-changing industry. To keep pace with the trends transforming the media landscape, including new technologies, a proliferation of specialized agencies. The following is a sample of some of our brands.
      Ourglobal networksoffer our largest clients a full range of marketingmedia channels and communications services. Combined, their footprint spans over 100 countries:
• McCann Erickson Worldwide
• Foote Cone & Belding Worldwide
• Lowe Worldwide
      We have manyfull-service marketing agencieswhose distinctive resources provide clients with multi-disciplinary communication services:
• Campbell-Ewald
• Carmichael Lynch
• Deutsch

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• Hill Holliday
• Mullen
      We also have manydomestic advertising agenciesthat 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
      Ourone-to-one marketing companiesspecialize 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 inexperiential 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.
      Ourmedia offeringaddresses 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, ourpromotion agenciesoffer 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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      Ourpublic relationsagencies 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 havespecial marketing services agenciesthathabits, we believe arebest-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)
      Oursports and entertainmenta marketingfirms manage top athletes and sporting events and represent some communications group must have a broad spectrum of the world’s most-recognized celebrities:
• Bragman Nyman Cafarelli
• Octagon
• PMK/ HBH
• Rogers & Cowan
      Our affiliatedmulticultural 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 separateinnovative agency brands to help clients navigate a fragmented market.
To keep our company well-positioned, we support our agencies’ initiatives to expand their high-growth capabilities and build their offerings in key developing markets. When appropriate, we also develop relationships with companies that are building leading-edge marketing tools that complement our agencies and the programs they are developing for clients. In addition, we look for opportunities within our company to modernize operations through mergers, strategic alliances and the development of internal programs that encourage intra-company collaboration.
In 2006, we took a number of steps to lead our company forward strategically. These initiatives include merging two of our companies to form Draftfcb, a modern, integrated global agency; a realignment of our media assets with our two largest global advertising networks to create a closer working relationship between the two disciplines; a newly focused Lowe with hubs in eight key markets; and strategic digital investments both internally and externally.
To manage the broadest range of clients, even ones that operatewe continue to maintain separate agency brands in similar business areas.competing disciplines. Having distinct agencies allows us to create custom solutions best suited to specific clients, as well as avoid potential conflicts of interest among our clients in the same industry. To help manage these companies effectively, however,
Our Brands
Within Interpublic, we have organizedsome of the world’s best known and most innovative communication specialists.


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Globally, we offer three distinct options for clients seeking large-scale, integrated capabilities across all our agencies into five global operating divisions. Four of these divisions, McCann WorldGroup (“McCann”), The FCB Group (“FCB”),disciplines. These include Draftfcb, Lowe Worldwide (“Lowe”) and DraftMcCann Worldgroup.
Launched in 2006, Draftfcb is a modern agency model for clients seeking creative and accountable marketing programs. With more than 130 years of combined expertise, the newly formed company has its roots in both consumer advertising and behavioral, data-driven direct marketing. The agency is the first global, behavior-based, highly creative and accountable marketing communications organization to operate with a single income statement.
Lowe Worldwide (“Draft”)is a premier creative agency that operates in the world’s largest advertising markets. Lowe is focused on delivering and sustaining high-value ideas for some of the world’s largest clients. The quality of the agency’s product is evident in its global creative rankings and its standing in major markets, including the United Kingdom, United States, India, Sweden and much of Latin America. By partnering with Interpublic’s marketing services companies, Lowe generates and executes ideas that are frequently recognized for effectiveness, amplified by smart communication channel planning.
McCann Worldgroup, one of the world’s leading marketing communications companies, offersbest-in-class communications tools and resources to many of the world’s top companies and most famous brands. As more and more marketers seek additional ways to reach consumers, McCann Worldgroup is exceptionally qualified to meet their demands, in all regions of the world and in all marketing disciplines, through its operating units: McCann Erickson Advertising, with operations in over 100 countries; MRM Worldwide for relationship marketing and digital expertise; Momentum Worldwide for experiential marketing; and McCann Healthcare Worldwide for healthcare communications.
Within our group, we also have a unique roster of strong full-service domestic agency brands, including Campbell-Ewald, Campbell Mithun, Deutsch, Hill Holliday, The Martin Agency and Mullen. The integrated marketing programs created by this group have helped build some of the most powerful brands in the U.S., provide a distinct comprehensive array of globalacross all sectors and industries.
Interpublic also has two leading media specialists, Initiative and Universal McCann. To develop creative ideas that resonate with consumers, brand-building agencies must work closely with media agencies. Initiative and Universal McCann operate independently but were aligned with Draftfcb and McCann Erickson, respectively, in late 2006. This approach is intended to improve cross-media communications and our ability to deliver integrated marketing programs. Our “aligned model” with respect to media differentiates us from our principal competitors.
Interpublic also has exceptional specialist firms across the full range of marketing services. The fifth global operating division, TheThese include FutureBrand (corporate branding), Jack Morton (experiential marketing), Octagon (sports marketing), Regan Campbell Ward (healthcare communications), and WeberShandwick (public relations), all of which report into our Constituency Management Group (“CMG”),. We also havebest-in-class digital agencies, led by R/GA. To further strengthen our emerging-media offering, in late 2006 we formed the Futures Marketing Group, which includes Weber Shandwick, MWW Group, FutureBrand, DeVries, Golin Harris, Jack Mortonhouses existing high-growth media offerings such as the Interpublic Emerging Media Lab and Octagon Worldwide (“Octagon”), provides clients with diversified services, including public relations, meetingfosters new media investments and event production, sports and entertainmentalliances. Many more of our 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 withspecialists can be found using the “Company Finder” tool on our global operating groups as needed, and include Campbell-Ewald, Hill Holliday, Deutsch and Mullen.website, www.interpublic.com.
 We believe this organizational structure allows us to provide comprehensive solutions for
To help clients target fast-growth demographic segments in the U.S. market, Interpublic owns a stake in several multicultural agencies, including abecé (Hispanic), Accent Marketing (Hispanic), The Axis Agency (African American), Casanova Pendrill (Hispanic), IW Group (Asian-Pacific American) and enables stronger financial and operational growth opportunities. We practice a decentralized management style, providing agency management with a great deal of operational autonomy.SiboneyUSA (Hispanic).
Our Financial Reporting Segments
 As of December 31, 2005, for
For financial reporting purposes, we have threetwo reportable segments. The largest segment,segments: Integrated Agency NetworksNetwork (“IAN”), which is comprised of McCann, FCB,Draftfcb, Lowe, Draft,McCann, our media agencies and our leading stand-alone agencies.agencies, and CMG, comprises our second reportable segment. Our third reportable segmentwhich is comprised of the bulk of our specialist marketing service offerings. We also report results for the “Corporate and other” group. Until December 31, 2005, we had an additional segment, Motorsports operations (“Motorsports”), which werewas sold during 2004 and had immaterial residual operating results in 2005. See Note 2015 to the Consolidated Financial Statements for further discussion.
Principal Markets
 
Our agencies are located in over 100 countries, and inincluding 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


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a single country or a small number of countries. The United States (“U.S.”), Europe (excluding the United Kingdom (“UK”U.K.”)), the UK,U.K., Asia Pacific and Latin America represented 55.2%55.6%, 18.1%16.8%, 9.9%9.1%, 7.5%8.3% and 4.1%4.9% of our total revenue, respectively, in 2005.2006. For further discussion concerning revenues and long-lived assets on a geographical basis for each of the last three years, see Note 2015 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,negotiated and 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 frequentlymay include provisions for incentive compensation and govern vendor rebates and credits. Our largest clients are multinational entities and, as such, 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 determined 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 amark-up. Many clients include an incentive compensation component in their total compensation package. This provides added revenue based on achieving mutually agreed-upon qualitativeand/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 the media charges with respect to contracts for advertising time or space that we place on behalf of our clients. To reduce our risk from a client’s non-payment, we typically pay media charges only after we receivehave received funds from our clients. Generally, we act as the client’s agent rather than the primary obligor. In some instances we agree with the media provider that we will only be liable to pay the media after the client has paid us for the media charges.

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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 tobecause the majority of our contracts endingend at December 31. As is customary in the industry, theseour contracts generally 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%25% of revenue in 20052006 and 2004, respectively.2005. Based on revenue for the year ended December 31, 2005,2006, our largest clients were General Motors Corporation, Microsoft, Unilever, Johnson & Johnson, Microsoft, Unilever 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.


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Personnel
 
As of December 31, 2005,2006, we employed approximately 43,00042,000 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.reporting and extensive work remaining to remediate these weaknesses.
 
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, 2005.2006. For a detailed description of these material weaknesses, see Item 8, Management’s Assessment onof Internal Control Over Financial Reporting, of our Form 10-K.in this report. 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 require us to restate our financial statements in the future. Any such restatements could result in further restatements.or contribute to regulatory actions or civil litigation, ratings downgrades, negative publicity or difficulties in attracting or retaining key clients, employees and management personnel.

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• We have extensive work remaining to remedy the material weaknesses in our internal control over financial reporting.
 
We incurred significant professional fees and other expenses in 2006 to prepare our consolidated financial statements and to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, in particular as a result of the extent of the deficiencies in our internal control over financial reporting and the extensive additional work and resources required to obtain reasonable assurance regarding the reliability of our financial statements. The cost of this work will continue to be significant in 2007 and beyond.
Because of our decentralized structure and our many disparate accounting systems of varying quality and sophistication, we have extensive work remaining to remedyremediate our material weaknesses in internal control over financial reporting. We are in the process of developinghave developed a work plan for remedyingwith the goal of remediating all of the identified material weaknesses and this work will extend beyond 2006.by the time we file our Annual Report onForm 10-K for the year ending December 31, 2007. There can be no assurance, however, as to when the remediation plan will be completed or whenfully implemented and all the material weaknesses will be remedied. Thereremediated. Until our remediation is completed, 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 and that a default could result under the indentures governing our debt securities, under any of our credit facilities or under our three-year revolving credit agreement (the “Three-Year Revolving Credit Facility”) orany 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.subsidiaries.
 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 the restatement we presented in our Prior Restatement.Annual Report onForm 10-K for the year ended December 31, 2004 that we filed in September 2005 (the “2005 Restatement”). In particular, since we filed our 2004 Annual Report onForm 10-K, we have received subpoenas from the SEC relating to matters addressed in our Prior2005 Restatement. We have also responded to inquiries from the SEC staff concerning the restatement of the first three quarters of 2005 that we made in our 2005 Annual Report onForm 10-K. 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 Prior2005 Restatement, we cannot reasonably estimate either the amount, range of amounts or timing of a resolution or the amount.resolution. Accordingly, we have not yet established any accounting provision relating to these matters. Potential adverseAdverse 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.


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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

6

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.or market performance.
 •  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, Ba1Ba3 with negative outlook by Moody’s, B CreditWatch negative by Standard and B+Poor’s, and B with stablenegative 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 affecteffect on our liquidity.
•  Our liquidity profile could be adversely affected.
In previous years, we have experienced operating losses and weak operating cash flow. Until our margins consistently improve in connection with our turnaround, cash generation from operations could be challenged in certain periods. This could have a negative impact on our liquidity in future years and could lead 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 new sources of liquidity on commercially reasonable terms or at all. If we were unable to do so, our liquidity position could be adversely affected.
 •  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

7

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-Business — Clients.
 •  International business risks could adversely affect our operations.


8

 
International revenues represent a significant portion of our revenues, approximately 45%44% in 2005.2006. 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 levelsignificant portion of our revenues and expensesbusiness is denominated in currencies other than the U.S. dollar, primarilysuch as the Euro, and Pound Sterling, Canadian Dollar, Brazilian Real, Japanese Yen and South African Rand, fluctuations in exchange rates between the U.S. dollar and such currencies may materially affect our financial results.
 •  In 20052006 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, 2005,2006, we have substantial amounts of intangibles,long-lived assets, 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,long-lived assets, 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

8

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 1918 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 2118 to the Consolidated Financial Statements for a discussion of our lease commitments.


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9

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 Prior2005 Restatement. In particular, since we filed our 2004 Annual Report onForm 10-K, we have received subpoenas from the SEC relating to matters addressed in our Prior2005 Restatement. We have also responded to inquiries from the SEC staff concerning the restatement of the first three quarters of 2005 that we made in our 2005 Annual Report onForm 10-K. 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 Prior2005 Restatement, we cannot reasonably estimate either the amount, range of amounts or timing of a resolution or the amount.resolution. 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:
Not applicable.
 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 

10

Executive Officers of Interpublic
       
Name Age Office
 
Michael Roth 1
 61
Michael Roth(1)60 Chairman of the Board and Chief Executive Officer
Nicholas J. Camera 5960 Senior Vice President, General Counsel and Secretary
Albert S. ConteChristopher Carroll 5540Senior Vice President, Taxes and General Tax Counsel
Nick Cyprus52 Senior Vice President, Controller and Chief Accounting Officer
Thomas A. Dowling 5455 Senior Vice President, Chief Risk Officer
Stephen Gatfield47Executive Vice President, Network Operations, Chief Executive Officer of Lowe Worldwide
Philippe Krakowsky 4344 Executive Vice President, Strategy and Corporate CommunicationsRelations
Frank Mergenthaler 4546 Executive Vice President and Chief Financial Officer
Timothy Sompolski 5354 Executive Vice President, Chief Human Resources Officer
 
(1)1 Also a Director
 
There is no family relationship among any of the executive officers.
 
Mr. Rothbecame 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. Camerawas 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. ConteCarrollwas 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 asnamed Senior Vice President, Controller and Chief Accounting Officer.Officer in April 2006. Prior to joining us, Mr. CyprusCarroll served as Senior Vice President and Controller of AT&TMcCann WorldGroup from November 2005 to March 2006. Mr. Carroll served as Chief Accounting Officer and Controller at Eyetech Pharmaceuticals from June 2004 to October 2005. Prior to that time, Mr. Carroll served as Chief Accounting Officer and Controller at MIM Corporation from January 19992003 to May 2004. On March 22, 2006, we announced that Mr. Cyprus would be leaving the Company effective March 31, 2006.June 2004 and served as a Financial Vice President at Lucent Technologies, Inc. from July 2001 to January 2003.
 
Mr. Dowlingwas 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. Krakowskywas 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. MergenthaleMergenthalerr 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. Sompolskiwas 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”)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. AtAs of February 28, 2006,16, 2007, there were 43,70125,018 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 
         
  NYSE Sale Price
Period
 High Low
 
2006:
        
Fourth Quarter $ 12.35  $  9.79 
Third Quarter $9.98  $7.86 
Second Quarter $10.04  $8.35 
First Quarter $10.56  $9.51 
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 
Dividend Policy
 
No dividend was paid on our common stock during 2003, 2004, 2005 or 2005.2006. Our future dividend policy will be determined on aquarter-by-quarter basis and will depend on earnings, financial condition, capital requirements and other factors. The currentOur future dividend policy may also be influenced by the terms of certain 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, theoutstanding securities. 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 byIn the impactevent we pay dividends on our common stock, holders of our securities with participating rights in earnings available to common stockholders, including our 4.50% Convertible Senior Notes will be entitled to additional interest and the conversion terms of our 4.25% Convertible Senior Notes and our Series A MandatoryB Convertible Preferred Stock. For a discussionStock, and the exercise prices of our participating securities, see Note 13outstanding warrants, will be adjusted (see Notes 10, 11 and 12 to the Consolidated Financial Statements.Statements).
Transfer Agent and Registrar for Common Stock
 
The transfer agent and registrar for our common stock is:
 
Mellon Investor Services Inc.LLC
480 Washington Boulevard
          29th29th Floor
Jersey City, NJ 07310
Tel:(877) 363-6398
Sales of Unregistered Securities
Not applicable


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13

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 providestables provide information regarding our purchases of equity securities during the fourth quarter of 2005:2006:
                 
        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   —   — 
 
(i) Repurchase of Common Equity Securities
                 
        Maximum
        Number
        of Shares
    Average
 Total Number of Shares
 that May Yet Be
  Total Number
 Price
 Purchased as Part of
 Purchased
  of Shares
 Paid per
 Publicly Announced
 Under the Plans
  Purchased Share 2 Plans or Programs or Programs
 
October 1-31  13,546  $10.04   —   — 
November 1-30  10,218  $11.65   —   — 
December 1-31  506  $12.06   —   — 
                 
Total 1
  24,270  $10.76   —   — 
                 
(1)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 20052006 (the “Withheld Shares”).
 
(2)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.
(ii) Automatic Conversion of 53/8% Series A Mandatory Convertible Preferred Stock
Maximum
Number
Total Number of
of Preferred Shares
Average
Preferred Shares
that May Yet Be
Total Number
Price
Purchased as Part of
Purchased
of Preferred Shares
Paid per
Publicly Announced
Under the Plans
PurchasedPreferred Share 1Plans or Programsor Programs
October 1-31————
November 1-30————
December 1-317,475,000———
Total 1
7,475,000———
1Pursuant to the terms of our Series A Preferred Stock, all outstanding shares of the Series A Preferred Stock were automatically converted on December 15, 2006, into shares of our common stock at a conversion rate of 3.7037 shares of common stock per share of Series A Preferred Stock.


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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)Amounts and Ratios)
(Unaudited)
                      
  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 
 
                     
  Years ended December 31,
  2006 2005 2004 2003 2002
 
Revenue $6,190.8  $6,274.3  $6,387.0  $6,161.7  $6,059.1 
                     
Salaries and related expenses  3,944.1   3,999.1   3,733.0   3,501.4   3,397.1 
Office and general expenses  2,079.0   2,288.1   2,250.4   2,225.3   2,248.3 
Restructuring and other reorganization-related charges (reversals)  34.5   (7.3)  62.2   172.9   7.9 
Long-lived asset impairment and other charges  27.2   98.6   322.2   294.0   130.0 
Motorsports contract termination costs  —   —   113.6   —   — 
                     
Operating income (loss)  106.0   (104.2)  (94.4)  (31.9)  275.8 
                     
Total (expenses) and other income  (111.0)  (82.4)  (172.6)  (340.9)  (160.0)
                     
Provision for income taxes  18.7   81.9   262.2   242.7   106.4 
                     
Loss from continuing operations  (36.7)  (271.9)  (544.9)  (640.1)  (14.8)
                     
Income from discontinued operations, net of tax  5.0   9.0   6.5   101.0   31.5 
                     
Net (loss) income applicable to common stockholders $(79.3) $(289.2) $(558.2) $(539.1) $16.7 
                     
Earnings (loss) per share of common stock:                    
Basic and diluted                    
Continuing operations $(0.20) $(0.70) $(1.36) $(1.66) $(0.04)
Discontinued operations  0.01   0.02   0.02   0.26   0.08 
                     
Total $(0.19) $(0.68) $(1.34) $(1.40) $0.04 
                     
                     
Weighted average shares:                    
Basic and diluted  428.1   424.8   415.3   385.5   376.1 
                     
OTHER DATA
                    
Cash dividends per share of common stock $—  $—  $—  $—  $0.38 
Cash dividends per share of preferred stock $55.19  $14.50  $2.69  $—  $— 
                     
As of December 31,                    
                     
Cash and cash equivalents and marketable securities $1,957.1  $2,191.5  $1,970.4  $2,067.0  $983.9 
Total assets  11,864.1   11,945.2   12,253.7   12,467.9   11,907.8 
Long-term debt  2,248.6   2,183.0   1,936.0   2,198.7   1,822.2 
Total liabilities  9,923.5   9,999.9   10,535.4   10,349.1   10,185.2 
Preferred stock — Series A  —   373.7   373.7   373.7   — 
Preferred stock — Series B  525.0   525.0   —   —   — 
Total stockholders’ equity  1,940.6   1,945.3   1,718.3   2,118.8   1,722.6 
                     
Ratios of earnings to fixed charges 1
  N/A    N/A    N/A    N/A    1.3 
(1)1 Includes amortization expenseWe had a less than 1:1 ratio of $161.0 in 2001.
*Earnings (loss) per share does not addearnings to fixed charges due to rounding.our losses in the years ended December 31, 2006, 2005, 2004 and 2003. To provide a 1:1 coverage ratio for the deficient periods, results as reported would have required additional earnings of $5.0, $186.6, $267.0 and $372.8 in 2006, 2005, 2004 and 2003, respectively.


14

15

THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(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.

16

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
EXECUTIVE SUMMARY provides an overview of our results of operations and liquidity.
CRITICAL ACCOUNTING ESTIMATES provides a descriptiondiscussion of our business, the drivers of our business,accounting policies that require critical judgment, assumptions 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.estimates.
 
RESULTS OF OPERATIONS provides an analysis of the consolidated and segment results of operations for 2006 compared to 2005 and 2005 compared to 2004 and 2004 compared to 2003.2004.
 
LIQUIDITY AND CAPITAL RESOURCES provides an overview of our cash flows, financing, contractual obligations and derivatives and hedging activities.
 
OUT-OF-PERIOD AMOUNTS provides a summary of the impact ofout-of-period amounts for 2006 and 2005.
INTERNAL CONTROL OVER FINANCIAL REPORTING provides a description ofdescribes 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 ourother significant non-operational items which impact our financial statements, such as the SEC investigation.investigation as well as the review of our stock option practices.
 
RECENT ACCOUNTING STANDARDS by reference to Note 2219 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 2005.2006.
OVERVIEWEXECUTIVE SUMMARY
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. OurThese agencies cover the spectrum of marketing disciplines and specialties, from traditional services such as consumer advertising and direct marketing, to newer disciplinesemerging services such as experientialmobile and search engine marketing. To meet the challenge of an increasingly complex consumer culture, we create customized 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 comprisedeach of our Motorsports operations (“Motorsports”), which were sold during 2004clients. These solutions vary from project-based work between one agency 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. Mostits client to long-term, fully-integrated campaigns involving several 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 placecompanies working on behalf of a client. Furthermore, our clients. To reduce our risk fromagencies cover all major markets geographically and can operate in 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.

18

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)single region or align work globally across many markets.
 We also generate
Our strategy is focused on improving organic revenue in negotiated fees fromgrowth and our public relations, sales promotion, event marketing, sportsoperating income, 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 difficultare working to achieve profitability. Our business is highly competitive, which tendsa level of organic revenue growth comparable to mitigateindustry peers and double-digit operating margins by 2008. We analyzeperiod-to-period changes in 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 analyzeby determining the increase or decrease in revenue by reviewing the componentsportion of the change including: the impact ofthat is attributable to foreign currency exchange rate changes,rates and the impactchange attributable to the net effect of net acquisitions and divestitures, and the balance, which we refer to asremainder is considered the 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 componentsFor purposes of the change: the impact of foreign currency exchange rate changes, the impact of netanalyzing this change, acquisitions and divestitures andare treated as if they occurred on the organic componentfirst day 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,quarter during which have both a fixed and variable component, tend not to vary as much with revenue.the transaction occurred.
 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.

19

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 growthby 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 marginby 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 revenueRevenue is directly dependent upon the advertising, marketing and corporate communications requirements of our clients. Historically,For 2006, our revenues were negatively affected primarily by the client losses and dispositions that occurred in 2005, and we typically experience increased revenue and profitability in the fourth quarter ofexpect our fiscal yearoperating margin will continue to be negatively affected, 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 declinedour peers, by high expenses for the year ended and three months ended December 31, 2005 dueprofessional fees, although 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.
      Includeddecreasing extent. It is typical in our results of operationsindustry to lose or resign from client accounts and assignments 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.many reasons, including conflicts with recent client wins. We


15

20

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%

believe we are continuing our turnaround and our results for 2006 reflect the challenges we face improving revenues and operating margins. However, we have achieved some notable success in new client wins as well as fewer client losses in 2006, which supports our efforts in our turnaround.
 Organic revenue growth.
Our reported results are affected by fluctuations in the exchange rates of the foreign currencies of our international businesses, principally the Brazilian Real, Canadian Dollar, Japanese Yen, Pound Sterling, South African Rand and Euro. In 2006, the U.S. Dollar was weaker against most of these currencies compared to 2005. In 2005, we experienced a small organic revenue decrease,the U.S. Dollar was weaker against most of these currencies 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 domesticthe net effect of foreign currency changes from comparable prior year periods was to increase revenues and international organic revenue decreases of 0.5%operating expenses in 2006 and 0.9%, respectively. We experienced a small organic revenue decrease2005.
As discussed in more detail in this MD&A, for the three months ended December 31, 2005 when2006 compared to the comparative periods in 2004.2005:
 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

21

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 increasedrevenue declined 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.
1.3%.
 •  A net charge of $69.9Organic revenue increase was recorded1.0% primarily due 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.higher revenue from existing clients.
 •  Operating margin was 1.7% in 2006, compared to (1.7%) in 2005. Operating margin was negatively impacted by restructuring and other reorganization-related charges and long-lived asset impairment and other charges by 1.0% and 1.5% in 2006 and 2005, respectively. Excluding the impact of these items, operating margin improved to 2.7% in 2006 from (0.2%) in 2005.
•  Operating expenses were $6,084.8 in 2006, compared to $6,378.5 in 2005, a decrease of 4.6%. Operating expenses were negatively impacted by restructuring and other reorganization-related charges and long-lived asset impairment and other charges of $61.7 and $91.3, in 2006 and 2005, respectively. Excluding the impact of these items, operating expenses decreased by $264.1, or 4.2%, in 2006.
 •  Total professional fees increased $94.8salaries and related expenses decreased 1.4% mainly due to $332.8 for 2005. These increases related primarily to our ongoing efforts in internal control compliance, the Prior Restatement processnet divestitures 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.
lower severance charges, partly offset by higher incentive compensation. The organic increase was 0.5%.
 •  Long-lived asset impairment charges of $98.6 were recorded, including $91.0 of goodwill impairments at Lowe following a major client lossTotal office and recent management defections and $5.8 at an agency within our sports and entertainment marketing business. See Note 9general expenses decreased 9.1% mainly due to the Consolidated Financial Statements for additional information.
Operating Cash Flow
effect of net divestitures and lower professional fees. The organic decrease was 5.2%.
 •  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 our364-Day and Three-Year Revolving Credit Facilities related to our reporting requirements, financial covenants and the Prior Restatement.

22

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 $250.0364-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 asAs of December 31, 2005. The amendment changed the financial covenants with respect2006, cash and cash equivalents and marketable securities decreased $234.4 primarily due 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.

23

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)%
                   

24

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%
          

25

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 certainout-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 
                      

26

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

27

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.

28

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, aU.S.-based promotions agency, which

29

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.

30

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.

31

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

32

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 certainout-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% 
          

33

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

34

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, aU.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 innon-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.

35

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%

36

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.

37

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.

38

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

39

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%

40

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.

41

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.

42

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

43

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.

44

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.

45

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 certainout-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

46

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 
                         

47

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.

48

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.

49

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, aU.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 ofnon-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.

50

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 aU.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%
             

51

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%

52

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

53

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.

54

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.

55

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

56

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.

57

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.

58

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.

59

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

60

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”).

61

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.

62

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 $250.0364-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

63

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 EndingRatio
December 31, 2005*
March 31, 2006*
June 30, 2006*
September 30, 20061.75 to 1
December 31, 20062.15 to 1
March 31, 20072.50 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 EndingRatio
December 31, 2005*
March 31, 2006*
June 30, 2006*
September 30, 20065.15 to 1
December 31, 20064.15 to 1
March 31, 20073.90 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.

64

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 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 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 amount under the 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 aggregate amount of outstanding letters of credit. The outstanding amount of letters of credit was $162.4 as of December 31, 2005. We have not drawn under the Three-Year Credit Facility over the past two years, and we do not currently expect to do so. 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.
Credit Agency Ratings
      Our credit ratings at year-end 2005 and 2004 were as follows:
             
  December 31,
   
  2005 2004
     
  Senior   Senior  
  Unsecured Outlook Unsecured Outlook
         
Moody’s  Ba1  Negative  Baa3  Stable
Standard & Poor’s  B+  Negative  BB+  Credit watch Negative
Fitch  B+  Stable  BB+  Stable
      Although a ratings downgrade by any of the ratings agencies will not trigger an acceleration of any of our indebtedness, a downgrade may adversely affect our ability to access capital and would likely result in more stringent covenants and higher interest rates under the terms of any new indebtedness. Our current long-term debt credit ratings as of March 15, 2006 are Ba1 with negative outlook, B+ with negative

65

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)
outlook and B+ with stable outlook, as reported by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, respectively.
Payment of Dividends
      We have not paid any dividends on our common stock since December of 2002. As previously discussed, our ability to declare or pay dividends on common stock is currently restricted by the terms of our Three-Year Revolving Credit Facility. 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.
      We pay annual dividends on each share of Series A Preferred Stock in the amount of $2.6875. Annual dividends on each share of Series A Preferred Stock are payable quarterly in cash or, if certain conditions are met, in common stock, at our option, on March 15, June 15, September 15 and December 15 of each year. In addition to the stated annual dividend, if at any time on or before December 15, 2006, we pay a cash dividend on our common stock, the holders of Series A Preferred Stock participate in such distributions via adjustments to the conversion ratio, thereby increasing the number of common shares into which the Preferred Stock will ultimately convert. In March 2006, the Board of Directors declared a dividend of $0.671875 per share on our Series A Preferred Stock, resulting in a maximum possible aggregate dividend of $5.0.
      We pay annual dividends on each share of Series B Preferred Stock in the amount of $52.50 per share. The initial dividend on our Series B Preferred Stock is $11.8125 per share and was declared on December 19, 2005 and paid in cash on January 17, 2006. Annual dividends on each share of Series B Preferred Stock are payable quarterly in cash or, if certain conditions are met, in common stock, at our option, on January 15, April 15, July 15 and October 15 of each year. The dividend rate of the Series B Preferred Stock will be increased by 1.0% if we do not pay dividends on the Series B Preferred Stock for six quarterly periods (whether consecutive or not). The dividend rate will revert back to the original rate once all unpaid dividends are paid in full. The dividend rate of the Series B Preferred Stock will also be increased by 1.0% if we do not file our periodic reports with the SEC within 15 days after the required filing date during the first two-year period following the closing of the offering. In March 2006, the Board of Directors declared a dividend of $13.125 per share on our Series B Preferred Stock, resulting in a maximum possible aggregate dividend of $6.9.
      Dividends on each series of our preferred stock are cumulative from the date of issuance and are payable on each payment date to the extent that we are in compliance with our Three-Year Revolving Credit Facility, assets are legally available to pay dividends and our Board of Directors or an authorized committee of our Board declares a dividend payable. If we do not pay dividends on any series of our preferred stock for six quarterly periods (whether consecutive or not), then holders of all series of our preferred stock then outstanding will have the right to elect two additional directors to the Board. These additional directors will remain on the Board until all accumulated and unpaid dividends on our cumulative preferred stock have been paid in full, or to the extent our series of non-cumulative preferred stock is outstanding, until non-cumulative dividends have been paid regularly for at least one year.

66

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)
CONTRACTUAL OBLIGATIONS
      The following summarizes our estimated contractual obligations at December 31, 2005, and their effect on our liquidity and cash flow in future periods:
                             
  2006 2007 2008 2009 2010 Thereafter Total
               
Long-term debt* $3.1  $4.7  $256.7  $250.8  $0.8  $1,670.0  $2,186.1 
Interest payments $128.1  $128.8  $123.5  $107.6  $58.1  $123.8  $669.9 
Non-cancelable operating lease obligations $287.1  $250.2  $222.5  $194.6  $172.2  $793.6  $1,920.2 
* 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.
      We have contingent obligations under guarantees of certain obligations of our subsidiaries (“parent company guarantees”) relating principally to credit facilities, guarantees of certain media payables and operating leases of certain subsidiaries. The amount of such parent company guarantees was approximately $306.8 and $601.8 at December 31, 2005 and 2004, respectively. In the event of non-payment by the applicable subsidiary of the obligations covered by a guarantee, we would be obliged to pay the amounts covered by that guarantee. As of December 31, 2005, there are no material assets pledged as security for such parent company guarantees.
      We have not included obligations under our pension and postretirement benefit plans in the contractual obligations table. Our funding policy regarding our funded pension plan is to contribute amounts necessary to satisfy minimum pension funding requirements plus such additional amounts from time to time as are determined to be appropriate to improve the plans’ funded status. The funded status of our pension plans is dependent upon many factors, including returns on invested assets, level of market interest rates and levels of voluntary contributions to the plans. Declines in long-term interest rates have had a negative impact on the funded status of the plans. For 2006, we expect to contribute $17.8 to fund our domestic pension plans, and expect to contribute $22.1 to our foreign pension plans.
      We have structured certain acquisitions with additional contingent purchase price obligations in order to reduce the potential risk associated with negative future performance of the acquired entity. In addition, we have entered into agreements that may require us to purchase additional equity interests in certain consolidated and unconsolidated subsidiaries. The amounts relating to these transactions are based on estimates of the future financial performance of the acquired entity, the timing of the exercise of these rights, changes in foreign currency exchange rates and other factors. We have not recorded a liability for these items on the balance sheet since the definitive amounts payable are not determinable or distributable. When the contingent acquisition obligations have been met and the consideration is distributable, we will record the fair value of this consideration as an additional cost of the acquired entity. The following table details the estimated liability and the estimated amount that would be paid under such options, in the event of exercise at the earliest exercise date. All payments are contingent upon achieving projected operating performance targets and satisfying other conditions specified in the related agreements and are subject to revisions as the earn-out periods progress.

67

THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
      The following contingent acquisition obligations are net of compensation expense, except as noted below, as defined by the terms and conditions of the respective acquisition agreements and employment terms of the former owners of the acquired businesses. This future expense will not be allocated to the assets and liabilities acquired. As of December 31, 2005, our estimated contingent acquisition obligations are as follows:
                              
  2006 2007 2008 2009 2010 Thereafter Total
               
Deferred Acquisition Payments                            
 Cash $18.3  $1.8  $0.9  $10.5  $—  $—  $31.5 
 Stock  11.3   0.3   —   —   —   —   11.6 
Put Options with Consolidated Affiliates*                            
 Cash  23.4   2.3   11.4   2.8   1.8   2.9   44.6 
 Stock  0.1   0.3   0.5   —   —   —   0.9 
Put Options with Unconsolidated Affiliates*                            
 Cash  1.3   2.5   11.5   0.3   —   —   15.6 
 Stock  0.4   1.0   0.6   0.3   —   —   2.3 
Call Options with Consolidated Affiliates*                            
 Cash  3.3   0.4   0.4   0.1   2.7   —   6.9 
 Stock  0.1   —   —   —   —   —   0.1 
                      
 Subtotal — Cash  46.3   7.0   24.2   13.7   4.5   2.9   98.6 
 Subtotal — Stock  11.9   1.6   1.1   0.3   —   —   14.9 
                      
 Total Contingent Acquisition Payments $58.2  $8.6  $25.3  $14.0  $4.5  $2.9  $113.5 
                      
      In accounting for acquisitions, we recognize deferred payments and purchases of additional interests after the effective date of purchase that are contingent upon the future employment of owners as compensation expense in our Consolidated Statement of Operations. As of December 31, 2005, our estimated contingent acquisition payments with associated compensation expense impacts are as follows:
                              
  2006 2007 2008 2009 2010 Thereafter Total
               
Compensation Expense- Related Payments                            
 Cash $16.6  $0.8  $12.8  $5.4  $1.3  $0.9  $37.8 
 Stock  0.1   —   —   —   —   —   0.1 
                      
 Subtotal  16.7   0.8   12.8   5.4   1.3   0.9   37.9 
                      
Total Payments $74.9  $9.4  $38.1  $19.4  $5.8  $3.8  $151.4 
                      
* We have entered into certain acquisitions that contain both put and call options with similar terms and conditions. In such instances, we have included the related estimated contingent acquisition obligations with Put Options.
      We maintain certain put options with consolidated affiliates that are exercisable at the discretion of the minority owners as of December 31, 2005. These put options are assumed to be exercised in the earliest possible period subsequent to December 31, 2005. Therefore, the related estimated acquisition payments of $33.5 have been included within the total payments expected to be made in 2006 in the table above. These payments, if not made in 2006, will continue to carry-forward into 2007 or beyond until they are exercised or expire.
      The 2006 obligations relate primarily to acquisitions that were completed prior to December 31, 2001.

68

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)
DERIVATIVES AND HEDGING ACTIVITIES
      We periodically enter into interest rate swap agreements and forward contracts to manage exposure to interest rate fluctuations and to mitigate foreign exchange volatility. In January 2005, we executed an interest rate swap which synthetically converted $150.0 of the $500.0, 7.25% Senior Unsecured Notes due August 2011, of fixed rate debt to floating rates. We entered into the swap to hedge a portion of our floating interest rate exposure on our cash investments. In May of 2005, we terminated all of our long-term interest rate swap agreements covering the $350.0 6.25% Senior Unsecured Notes and $150.0 of the $500.0 7.25% Senior Unsecured Notes. In connection with the interest rate swap termination, our net cash receipts were approximately $1.1, which will be recorded as an offset to interest expense over the remaining life of the related debt.
      We have entered into foreign currency transactions in which various foreign currencies are bought or sold forward. These contracts were entered into to meet currency requirements arising from specific transactions. The changes in value of these forward contracts have been recorded as other income or expense in our Consolidated Statement of Operations. As of December 31, 2005 and 2004, we had contracts covering approximately $6.2 and $1.8, respectively, of notional amount of currency and the fair value of the forward contracts was negligible.
      The terms of the 4.50% Notes include two embedded derivative instruments and the terms of our Series B Preferred Stock include one embedded derivative. The fair value of the three derivatives on December 31, 2005 was negligible.
INTERNAL CONTROL OVER FINANCIAL REPORTING
      We have identified numerous material weaknesses in our internal control over financial reporting, as set forth in greater detail in Item 8, Management’s Assessment on Internal Control Over Financial Reporting and Item 9A, Controls and Procedures, of this report. Each of our material weaknesses results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As a result, we have assessed that our internal control over financial reporting was not effective as of December 31, 2005.
      We are in the process of developing and implementing remedial measures to address the material weaknesses in our internal control over financial reporting. However, because of our decentralized structure and our many disparate accounting systems of varying quality and sophistication, we have extensive work remaining to remedy these material weaknesses. We are in the process of developing a work plan for remedying all of the identified material weaknesses and this work will extend beyond the 2006 fiscal year. At present, there can be no assurance as to when these material weaknesses will be remedied. 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. There will also continue to be a substantial risk that we will be unable to file our periodic reports with the SEC in a timely manner. We discuss these risks in Item 1A, Risk Factors, of this Annual Report.
LIABILITIES RELATING TO OUR PRIOR RESTATEMENT
Restatement Related Matters
      As described in Note 1 to the Consolidated Financial Statements, in our 2004 Annual Report on Form 10-K filed in September 2005, we restated previously reported financial statements for 2003, 2002, 2001, 2000 and for the first three quarters of 2004 and all four quarters of 2003. We refer to that restatement as the “Prior Restatement”. During our Prior Restatement, we conducted an extensive

69

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)
examination of financial information and significant transactions and recorded expense and liabilities related to Vendor Discounts or Credits, Internal Investigations, and International Compensation Arrangements.
      A summary of the remaining liabilities related to these matters is as follows:
          
  Balance as of Balance as of
  12/31/05 12/31/04
     
Vendor Discounts or Credits* $284.8  $283.9 
Internal Investigations* (includes asset reserves)  24.7   61.7 
International Compensation Arrangements  36.2   40.3 
       
 Total $345.7  $385.9 
       
* $37.5 of vendor credits disclosed within Internal Investigations as of December 31, 2004 has been reclassified to Vendor Discounts or Credits for current year presentation.
Vendor Discounts or Credits
      We receive credits from our vendors and media outlets for the acquisition of goods and services that are entered into on behalf of our clients. The expenses include the purchase of various forms of media, including television, radio, and print advertising space, or production costs, such as the creation of advertising campaigns, commercials, and print advertisements. Revenues in the advertising and communicative services business are frequently recorded net of third party costs as the business is primarily an agent for its clients. Since these costs are billed to clients, there are times when vendor credits or price differences can affect the net revenue recorded by the agency. These third party discounts, rebates, or price differences are frequently referred to as credits.
      Our contracts are typically “fixed-fee” arrangements or “cost-based” arrangements. In “fixed-fee” arrangements, the amount we charge our clients is comprised of a fee for our services. The fee we earn, however, is not affected by the level of expenses incurred. Therefore, any rebates or credits received in servicing these accounts do not create a liability to the client. In “cost-based” arrangements, we earn a percentage commission or flat fee based on or incremental to the expenses incurred. In these cases, rebates or credits received may accrue to the benefit of our clients and create a liability payable to the client. The interpretation of cost language included in our contracts can vary across international and domestic markets in which we operate and can affect whether or not we have a liability to the client.
      The terms of agreements with our clients are significantly impacted by the following: 1) the types of vendor credits obtained (rebates, discounts, media and production credits); 2) differing contract types with clients (fixed fee vs. cost-based arrangements); 3) varying industry practices and laws in the regions of the world in which we operate; 4) determining which contract (global, regional or local) governs our relationships with clients; and 5) unique contract provisions in specific contracts.
      Prior to filing our 2004 Annual Report, we performed an extensive examination of our client contracts and arrangements and considered local law in the international jurisdictions where we conduct business to determine the impact of improperly recognizing these vendor credits as additional revenue instead of recognizing a liability to our clients. We identified areas where there were differences in prices billed to customers and prices received from vendors. All differences associated with cost-based contracts not already passed back to customers were established as liabilities.

70

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)
      Following the filing of the 2004 10-K in September of 2005, we began contacting clients to notify them of these liabilities and to negotiate an appropriate settlement. During this process the additional following information came to our attention.
• Additional global or regional master contracts, with contractual terms that required us to rebate vendor discounts or credits, took precedence over local contracts that did not require us to rebate vendor discounts or credits.
• Certain misinterpretations of contractual terms and or applicable local law in our Prior Restatement led us to re-examine our agencies’ legal assessment process. As a result, our legal department coordinated the engagement of local counsel in order to provide definitive guidance regarding specific local laws, existing legal precedent and historical,working capital usage, as well as ongoing legal market practices. This legal guidance required additional adjustments to be made to the liabilities established in the Prior Restatement.
• The liability recorded during our Prior Restatement in some instances either covered too many years or did not cover enough years as requiredcosts associated with capital markets activity and capital expenditures, partially offset by the statute of limitations, based on the contract we determined ultimately governed. We adjusted our liabilities for all years required under the statute of limitations in the appropriate jurisdiction.
• In connection with our Prior Restatement, we estimated certain amounts of our exposures. We have determined that in certain instances our initial estimate of the liability recorded required adjustment. Additionally, certain entries originally recorded as estimates have been revised based on actual data retrieved from agency books and records.
improved operating results.
 •  We performed a detailed review of situationsmade substantial progress in which billings from vendors and billings to our clients were different. An appropriate adjustment was recorded for any known scenarios where such information was fully reconciled and the difference was not related to a cost-based contract.
• For certain liabilities where the statute of limitations has lapsed, we appropriately released such liabilities, unless the liabilities were associated with customers with whom we are in the process of settling or we intend to settle such liabilities.remediating previous material weaknesses.
 We have included a table that depicts the beginning balance, the additional liabilities recorded and the adjustment reducing these liabilities. While we had changes to our original reserve positions, the net impact of adjustments, excluding fluctuations related to payments and foreign currency and other was an increase to the liability balance of $22.9, and that was primarily attributable to the out of period vendor discounts or credits adjustments.
                         
  Balance as of Liability Additional     Balance as of
  12/31/04 Reversals Liabilities Payments Other 12/31/05
             
Vendor Discounts or Credits $283.9   (76.5)  99.4   (11.6)  (10.4) $284.8 
                   
Internal Investigations
      In our Prior Restatement review, we noted instances of possible employee misconduct. As a result, through December 31, 2004, we recorded adjustments with a cumulative impact on income of $114.8. Of this amount, $61.7 related to liabilities and asset reserves, $15.6 to asset write-offs, and $37.5 related to Vendor Discounts or Credits as of December 31, 2004. These adjustments were recorded to correct certain unintentional errors in our accounting that were discovered as a result of investigations and primarily related to agencies outside the United States. However, certain of these investigations revealed deliberate

71

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)
falsification of accounting records, evasion of taxes in jurisdictions outside the United States, inappropriate charges to clients, diversion of corporate assets, non-compliance with local laws and regulations, and other improprieties. These errors were not prevented or detected earlier because of material weaknesses in our control environment and decentralized operating structure. We recorded liabilities related to these matters, for business locations under investigation in our Prior Restatement review, which represented management’s best estimate of probable exposure based on the facts available at that time.
      The law firm of Dewey Ballantine LLP was retained to advise the Audit Committee of the Board of Directors regarding the discharge of its obligations. Through the filing of this document, Dewey Ballantine has reviewed all internal investigations cases that were included in our Prior Restatement and continues to oversee our related remediation plans. Dewey Ballantine retained a forensic accounting firm to assist with its review.
      During 2005, we recorded a net decrease in our liabilities for Internal Investigations of $37.0. The decrease is primarily due to write-off of assets reserves, the recognition of deferred revenue, and payment of taxes, penalties and interest. We also divested certain agencies in Greece, Spain, Azerbaijan, Ukraine, Uzbekistan, Bulgaria and Kazakhstan. We have increased our reserves related to additional VAT and payroll related taxes.
Below is an update of our significant cases.
      At our McCann and FCB agencies in Turkey we recorded adjustments related to the retention of vendor discounts that should have been remitted to clients, the improper valuation of a previously acquired business over-billing clients for payments to vendors and evasion of local taxes. In 2005, the investigation has concluded and we have taken the appropriate personnel actions, including the termination of local senior management. As of December 31, 2005 and 2004, the remaining liabilities were $12.6 and $19.8, respectively.
      At Media First in New York City we recorded adjustments related primarily to inadequate recordkeeping and the payment of certain employee salaries through accounts payable, without appropriate tax withholdings, resulting in increased earn-out payments. In 2005, we recorded asset write-offs and have taken the appropriate personnel actions, including the termination of local senior management. As of December 31, 2005 and 2004, the remaining liabilities and asset reserves were $1.2 and $10.8, respectively.
      At our FCB agency in Spain we recorded adjustments related to the use of companies that were formed to account for the production and media volume discounts received from production suppliers on a separate set of books and records, to prevent the detection of discounts and rebates in the event of a client audit. In addition compensation was paid to an agency executive’s personal service company out of these companies without proper withholding for income taxes. In 2005, we have divested our interest in a component of FCB Spain and signed an affiliation agreement with the management, with an appropriate control structure to assure future business is properly conducted. As of December 31, 2005 and 2004, the remaining liabilities and asset reserves were $0 and $9.8, respectively.
      At five McCann agencies in Azerbaijan, Ukraine, Uzbekistan, Bulgaria and Kazakhstan we recorded adjustments related to the failure to record and pay compensation-related taxes, value added taxes and corporate income taxes, and inadequate record keeping. In 2005, we have sold these entities and signed affiliation agreements with Azerbaijan, Uzbekistan Bulgaria and Kazakhstan and intend to sign an affiliation agreement with Ukraine agency management. There will be an appropriate control structure to assure business is properly conducted. As of December 31, 2005 and 2004, the remaining liabilities and asset reserves were $6.2 and $8.7, respectively.

72

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, we also conducted other investigations in our Prior Restatement review for errors found that were similar in nature to those described above. In the aggregate, for these other investigations, we recorded $4.7 and $12.6 in liabilities as of December 31, 2005 and 2004, respectively.
International Compensation Arrangements
      In our Prior Restatement review, we performed an extensive examination of employee compensation practices across our organization. While most practices were found to be acceptable, we identified some practices in certain jurisdictions that required additional review. In certain jurisdictions in which we operate, particularly in Europe and Latin America, it is common for individuals to establish a personal service company (“PSC”), in which case the hiring company will normally contract directly with the PSC for the services of the individual. We reviewed every situation where one of our agencies had contracted with a PSC and determined that in a number of instances, the use of a PSC was determined not to be supportable. We also identified other arrangements or practices in certain jurisdictions, such as payment of personal expenses outside the normal payroll mechanism, split salary payments, equity grants and retirement payments, and independent contractors/employees that led to an avoidance of paying certain taxes as well as not reporting compensation to local authorities.
      For these issues, liabilities represented our best estimate of expected payments to various governmental organizations in the jurisdictions involved. These amounts were estimates as of such date of our liabilities that we believed were sufficient to cover the obligations that we may have had to various authorities. As a result of the disclosures that were made in our 2004 Annual Report, we anticipate that the authorities in certain jurisdictions may undertake reviews to determine whether any of the activities disclosed violated local laws and regulations. This may lead to further investigations and the levy of additional assessments including possible fines and penalties. While we intend to defend against any assessment that we determine to be unfounded, nevertheless we could receive assessments which may be substantial. However, it cannot be determined at this time whether such investigations would be commenced or, if they are, what the outcome will be with any reasonable certainty.
      During 2005, we recorded a net decrease in our liabilities for International Compensation Arrangements of $4.1. The decrease is comprised of reductions in our liabilities due to the expiration of one year under the statutes of limitations, changes in management’s estimates and the favorable outcome of audits in certain jurisdictions. The decrease is net of increases to our accruals due to additional liabilities incurred in 2005 through the continued use of a PSC or other such arrangements which we are in the process of terminating, as well as interest on amounts not yet settled.
OUT OF PERIOD ADJUSTMENTS
      In the fourth quarter, we identified certain vendor discounts and credits, tax, and other miscellaneous adjustments in which our previously reported financial statements were in error or did not conform to GAAP. Because these changes are not material to our financial statements for the periods prior to 2005, or to 2005 as a whole, we have recorded them in the fourth quarter of 2005.
      The errors in our previously reported financial information, and the failure to prevent them or detect them in our financial reporting process, were largely attributable to weak internal controls. We concluded that our control environment has not progressed sufficiently to serve as an effective foundation for all other components of internal control. See Management’s Assessment on Internal Control Over Financial Reporting.

73

THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
      The following tables summarize the impact to the fourth quarter of 2005 of amounts recorded in the fourth quarter of 2005 which relate to reported revenue, operating income (loss), income (loss) from continuing operations before provision for income taxes, loss from continuing operations and loss per share.
      
  Impact of Adjustments
  on Revenue
   
  For the Three Months
  Ended December 31, 2005
   
Revenue as reported
 $1,895.7 
Impact of adjustments:
    
 Vendor Discounts or Credits  21.2 
 Other adjustments  (3.9)
     
Total net adjustments  17.3 
     
Revenue (exclusive of out of period amounts)
 $1,913.0 
     
      
  Impact of Adjustments on
  Operating Income
   
  For the Three Months
  Ended December 31, 2005
   
Operating Income as reported
 $57.6 
Impact of adjustments:
    
 Vendor Discounts or Credits  23.2 
 Other adjustments  (1.6)
     
Total net adjustments  21.6 
     
Operating Income (exclusive of out period amounts)
 $79.2 
     
      
  Impact of Adjustments
  on Income
  from Continuing Operations
  Before Provision For
  Income Taxes
   
  For the Three Months
  Ended December 31, 2005
   
Income from continuing operations before provision for income taxes as reported
 $44.6 
Impact of adjustments:
    
 Vendor Discounts or Credits  22.9 
 Other adjustments  (2.2)
     
Total net adjustments  20.7 
     
Income from continuing operations before provision for income taxes (exclusive of out of period amounts)
 $65.3 
     

74

THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
      
  Impact of Adjustments
  on Loss from
  Continuing Operations
  and Loss per Share
   
  For the Three Months
  Ended December 31, 2005
   
Loss from continuing operations as reported
 $(31.9)
Impact of adjustments:
    
 Vendor Discounts or Credits  22.9 
 Other adjustments  (2.2)
    
Total adjustments (pre-tax)  20.7 
 Tax adjustments  19.5 
 Equity in net income of unconsolidated affiliates  3.9 
    
Total net adjustments  (2.7)
    
Loss from continuing operations (exclusive of out of period amounts)
 $(34.6)
    
Loss per share of common stock — basic and diluted:
    
 Loss per share as reported $(0.10)
 Effect of adjustments  (0.01)
 Loss per share (exclusive of out of period amounts)  (0.11)
 Weighted-average shares  425.5 
      The impact to 2004, 2003 and prior periods related to out of period amounts recorded in the fourth quarter of 2005 was immaterial.
Description of Out of Period Adjustments:
Vendor Discounts or Credits:
      We performed extensive procedures as a result of the initiation of settlement discussions with clients. The procedures broadly considered global or regional contracts, review of key changes in legal interpretations, review of statutes of limitations, estimated exposures and vendor price differences related to cost-based contracts. As a result of these additional procedures, adjustments were recorded to our previously established liabilities.
Other Adjustments
      We have identified other items which do not conform to GAAP and recorded adjustments to our 2005 Consolidated Financial Statements which relate to previously reported periods. The most significant include accounting related to the capitalization of software costs, acquisition related costs and international compensation arrangements.
Tax Adjustments
      We recorded adjustments to correct the Accrued and Deferred income taxes for items primarily related to the computation of income tax benefits on the 2004 Long-lived Asset Impairment Charges, the establishment of certain valuation allowances, the accounting for certain international tax structures and

75

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 computation of interest accruals on certain non-US income tax contingencies. The impact of amounts recorded in the fourth quarter of 2005 was $8.7 of tax benefit.
      We also record the tax impact of the out of period adjustments described above, where applicable, based on the local statutory tax rate in the jurisdiction of the entity recording the adjustment. The impact of amounts recorded in the fourth quarter of 2005 was $10.8 of tax benefit.
CRITICAL ACCOUNTING ESTIMATES
 
Our Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles in the United States of America. Preparation of the Consolidated Financial Statements and related disclosures requires us to make judgments, assumptions and estimates that affect the amounts reported and disclosed in the accompanying notes. We believe that of our significant accounting policies, the following critical accounting estimates involve management’s most difficult, subjective or complex judgments. We consider these accounting estimates to be critical because changes in the underlying assumptions or estimates have the potential to materially impact our financial statements. Management has discussed with our Audit Committee the development, selection, application and disclosure of these critical accounting estimates. We regularly evaluate our judgments, assumptions and estimates based on historical experience and various other factors that we believe to be relevant under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition
Revenue Recognition
 
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 basesbasis on which we earn commissions and fees vary significantly. Our client contracts are also becoming increasingly complex arrangements that frequentlymay include provisions for incentive compensation and govern vendor rebates and credits. Our largest clients are multinational entities and, as such, we often provide services to these clients out of multiple offices and across


16

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)

various agencies. In arranging for such services to be provided, it is possible for both a global, regional and local agreement to be initiated. Multiple agreements of this nature are reviewed by legal counsel to determine the governing terms to be followed by the offices and agencies involved. Critical judgments and estimates are involved in determining both the amount and timing of revenue recognition under these arrangements.
 
Revenue for our services is recognized when all of the following criteria are satisfied: (i) persuasive evidence of an arrangement exists; (ii) the price is fixed or determinable; (iii) collectibility is reasonably assured; and (iv) services have been performed. Depending on the terms of thea client contract, fees for services performed can be primarily recognized in one of three ways: proportional performance, straight-line (or monthly basis) or completed contract. See Note 1 to the Consolidated Financial Statements for further information.
• Fees are generally recognized as earned based on the proportional performance method of revenue recognition in situations where our fee is reconcilable to the actual hours incurred to service the client as detailed in a contractual staffing plan or where the fee is earned on a per hour basis, with the amount of revenue recognized in both situations limited to the amount realizable under the client contract. We believe an input based measure (the “hour’) is appropriate in situations where the client arrangement essentially functions as a time andout-of-pocket expense contract and the client receives the benefit of the services provided throughout the contract term.
• Fees are recognized on a straight-line or monthly basis when service is provided essentially on a pro rata basis and the terms of the contract support monthly basis accounting.

76

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)
• Certain fees (such as for major marketing events) are deferred untilDepending on the terms of the client contract, completion as the final act is so significant in relation to the service transaction taken as a whole. Fees are also recognized on a completed contract basis when the terms of the contract call for the delivery of discrete projects (“milestone’ arrangements), if any of the criteria of SAB No. 104 were not satisfied prior to job completion or the terms of the contract do not otherwise qualify for proportional performance or monthly basis recognition.
      Incremental direct costs incurred related to contracts where revenue is accountedderived from diverse arrangements involving fees for on a completed contract basis are generally expensed as incurred. There are certain exceptions made for significant contracts or for certain agencies where the majorityservices performed, commissions, performance incentive provisions and combinations of the contracts are project-based and systems are in place to properly capture appropriate direct costs.three. Commissions are generally earned on the date of the broadcast or publication. Contractual arrangements with clients may also include performance incentive provisions designed to link a portion of the revenue to our performance relative to both qualitative and quantitative goals. Performance incentives are recognized as revenue for quantitative targets when the target has been achieved and for qualitative targets when confirmation of the incentive is received from the client. Therefore, depending on the terms of the client contract, revenue is derived from diverse arrangements involving fees for services performed, commissions, performance incentive provisions and combinations of the three. The classification of client arrangements to determine the appropriate revenue recognition involves judgments. If the judgments change there can be a material impact on our financial statements, and particularly on the allocation of revenues between periods. Incremental direct costs incurred related to contracts where revenue is accounted for on a completed contract basis are generally expensed as incurred. There are certain exceptions made for significant contracts or for certain agencies where the majority of the contracts are project-based and systems are in place to properly capture appropriate direct costs.
 
Substantially all of our revenue is recorded as the net amount of our gross billings less pass-through expenses charged to a client. In most cases, the amount that is billed to clients significantly exceeds the amount of revenue that is earned and reflected in our financial statements, because of various pass-through expenses such as production and media costs. In compliance with EITFEmerging Issues Task Force (“EITF”) IssueNo. 99-19,Reporting Revenue Gross as a Principal versus Net as an Agent, we assess whether theour agency or the third-party supplier is the primary obligor. We evaluate the terms of our client agreements as part of this assessment. In addition, we give appropriate consideration to other key indicators such as latitude in establishing price, discretion in supplier selection and credit risk to the vendor. Because we operate broadly as an advertising agency based on our primary lines of business and given the industry practice to generally record revenue on a net versus gross basis, we believe that there must be strong evidence in place to overcome the presumption of net revenue accounting. Accordingly, we generally record revenue net of pass-through charges as we believe the key indicators of the business suggest we generally act as an agent on behalf of our clients in our primary lines of business. In those businesses (primarily sales promotion, event, sports and entertainment marketing and corporate and brand identity services) where the key indicators suggest we act as a principal, we record the gross amount billed to the client as revenue and the related costs incurred as operating expenses. Revenue is reported net of taxes assessed by governmental authorities that are directly imposed on our revenue producing transactions.
 
The determination as to whether revenue in a particular line of business should be recognized net or gross involves difficult judgments. If we make these judgments differently, it could significantly affect our financial performance. If it were determined that we must recognize a significant portion of revenues on a gross basis rather than a net basis, it would positively impact revenues, but have no impact on our operating income.income and an adverse impact on operating margin. Conversely, if it were determined that we must recognize a significant portion of revenues on a net basis rather than a gross basis, it would negatively impact revenues, but have no impact on our operating income.income and a positive impact on operation margin.
 As we provide services as part of our core operations, we generally incur incidental expenses, which, in practice, are commonly referred to as “out of pocket” expenses. These expenses often include expenses related to airfare, mileage, hotel stays, out of town meals and telecommunication charges. In accordance

77

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)
with EITF Issue No. 01-14,Income Statement Characterization of Reimbursements Received for“Out-of-Pocket’ Expenses Incurred, we record the reimbursements received for incidental expenses as revenue.
We receive credits from our vendors and media outlets for transactions entered into on behalf of our clients whichthat, based on the terms of our contracts and local law, are either remitted to our clients or retained by us. If amounts are to be passed through to our clients they are recorded as liabilities until settlement or, if retained by us, are recorded as revenue when earned.


17

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)

Negotiations with a client at the close of a current engagement could result in either payments to the client in excess of the contractual liability or in payments less than the contractual liability. These items, referred to as concessions, relate directly to the operations of the period and are recorded as operating expense or income.
Concession income or expense may also be realized in connection with settling vendor discount or credit liabilities that were established as part of the 2005 Restatement. In these situations, and given the historical nature of these liabilities, we have recorded such items as other income or expense in order to prevent distortion of current operating results. See also Notes 1 and 4 to the Consolidated Financial Statements.
  Stock-Based Compensation
On January 1, 2006, we adopted SFAS No. 123 (revised 2004),Share-Based Payment(“SFAS No. 123R”). SFAS No. 123R requires compensation costs related to share-based transactions, including employee stock options, to be recognized in the financial statements based on fair value. We implemented SFAS No. 123R using the modified prospective transition method. Under this transition method, the compensation expense recognized beginning January 1, 2006 includes compensation expense for (i) all stock-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with contractualthe original provisions of SFAS No. 123, and local law. If a pass-through(ii) all stock-based awards granted subsequent to December 31, 2005 based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. Compensation cost is not required, then these credits are a reductiongenerally recognized ratably over the requisite service period, net of vendor cost, and are generally recorded as additions to revenue. In connection with our Prior Restatement, where it was impractical to review client contracts, we used statistical methodsestimated forfeitures.
We use the Black-Scholes option-pricing model to estimate our exposure that could arise from credits, discountsthe fair value of options granted, which requires the input of subjective assumptions including the option’s expected term and other rebates owed to clients. If our estimate is insufficient, we may be required to recognize additional liabilities. If the initialprice volatility of the underlying stock. Changes in the assumptions can materially affect the estimate of fair value and our results of operations could be materially impacted. The expected volatility factor is based on a blend of historical volatility of our common stock and implied volatility of our tradable forward put and call options to purchase and sell shares of our common stock. The expected term is based on the liabilityaverage of an assumption that outstanding options are exercised upon achieving their full vesting date and will be exercised at the midpoint between the current date (i.e., the date awards have been ratably vested through) and their full contractual term. Additionally, we calculate an estimated forfeiture rate which impacts our recorded is subsequently determined to be over or under provided for, the difference is recorded as an adjustment to revenue. If we are able to negotiate a favorable settlement of a recorded liability, however, the reversal of this amount is recorded in a non-operating income account since negotiating a favorable outcome with a client is not considered a revenue generating activity.expense. See Note 214 to the Consolidated Financial Statements for further information.
Allowance for Doubtful Accounts
  Income Taxes
 The allowance for doubtful accounts is estimated based on the aging of accounts receivable, reviews of client credit reports, industry trends and economic indicators, as well as analysis of recent payment history for specific customers. The estimate is based largely on a formula-driven calculation but is supplemented with economic indicators and knowledge of potential write-offs of specific client accounts. Though we consider the balance to be adequate, changes in general domestic and international economic conditions in specific markets could have a material impact on the required reserve balance. A 10% increase in the allowance for doubtful accounts would result in a $10.6 increase in bad debt expense for 2005.
Income Taxes
The provision for income taxes includes federal, state, local and foreign taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences between the financial statement carrying amounts and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which the temporary differences are expected to be recoveredreversed. Changes to enacted tax rates would result in either increases or settled.decreases in the provision for income taxes in the period of changes. We evaluate the realizability of our deferred tax assets and establishrecognize a valuation allowance when it is more likely than not that all or a portion of deferred tax assets will not be realized.
 
The realization of our deferred tax assets is primarily dependent on future earnings. Any reduction in estimated forecasted results may require that we record additional valuation allowances against our deferred tax assets. 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. Once a valuation allowance has been established, it will be maintained until there is sufficient positive evidence to conclude that it is more likely than not that the deferred tax assets will be realized. A pattern of sustained profitability will generally be considered as sufficient positive evidence to reverse a valuation allowance. If the allowance is reversed in a future period, our income tax provision will be correspondingly reduced. Accordingly, the establishmentincrease and reversaldecrease of valuation allowances has had and could have a significant negative or positive impact on our future earnings. See Note 119 to the Consolidated Financial Statements for further information.

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18

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)

  Goodwill and Other Intangible Assets
 We measure deferred tax assets and liabilities using enacted tax rates that, if changed, would result in either an increase or decrease in the provision for income taxes in the period of change.
      Undistributed earnings of our foreign subsidiaries are permanently reinvested. While the American Jobs Creation Act of 2004 (the “Jobs Act”) creates a temporary incentive for U.S. corporations to repatriate undistributed international earnings by providing an 85% dividends received deduction, we have reviewed the provisions and determined not to take advantage of this provision to repatriate undistributed earnings of our foreign subsidiaries to the U.S.
Land, Buildings and Equipment
      The assignment of useful lives to buildings and equipment involves judgments and the use of estimates. Buildings and equipment are depreciated generally using the straight-line method over the estimated useful lives of the related assets, which range from 3 to 7 years for furniture, equipment and computer software costs, 10 to 35 years for buildings and the shorter of the useful life of the asset (which ranges from 3 to 10 years) or the remaining lease term for leasehold improvements. A one-year decrease in the useful lives of these assets would result in an $19.1 increase in annual depreciation expense for 2005.
      Certain events or changes in circumstances could cause us to conclude that the carrying value of our buildings and equipment may not be recoverable. Events or circumstances that might require impairment testing include, but are not limited to, decrease in market price, negative forecasted cash flow, or a significant adverse change in business climate of the asset grouping. If the total estimate of the expected future undiscounted cash flows of an asset grouping over its useful life is less than its carrying value, an impairment loss is recognized in the financial statements equal to the difference between the estimated fair value and carrying value of the asset grouping. If our estimates change, it may have a material impact on our financial statements.
Investments
      We regularly review our cost and equity method investments to determine whether a significant event or change in circumstances has occurred that may have an adverse effect on the fair value of each investment. In the event a decline in fair value of an investment occurs, we must determine if the decline has been other than temporary. We consider our investments strategic and long-term in nature, so we must determine if the fair value decline is recoverable within a reasonable period. For investments accounted for using the cost or equity basis, we evaluate fair value based on specific information (valuation methodologies, estimates of appraisals, financial statements, etc.) in addition to quoted market price, if available. Factors indicative of an other than temporary decline also include recurring operating losses, credit defaults and subsequent rounds of financing with pricing that is below the cost basis of the investment. This list is not all-inclusive; we consider all known quantitative and qualitative factors in determining if an other than temporary decline in value of an investment has occurred. Our assessments of fair value represent our best estimates at the time of impairment review. If different fair values are later estimated, it could have a material impact on our financial statements. See Note 10 to the Consolidated Financial Statements for further information.
Goodwill and Other Intangible Assets
We account for our business combinations using the purchase accounting method. The total costs of the acquisitions are allocated to the underlying net assets, based on their respective estimated fair market values and the remainder allocated to goodwill and other intangible assets. Considering the characteristics

79

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)
of advertising, specialized marketing and communication services companies, our acquisitions usually do not have significant amounts of tangible assets as the principal asset we typically acquire is creative talent. As a result, a substantial portion of the purchase price is allocated to goodwill. Determining the fair market value of assets acquired and liabilities assumed requires management’s judgment and involves the use of significant estimates, including future cash inflows and outflows, discount rates, asset lives and market multiples.
 
We review goodwill and other intangible assets with indefinite lives not subject to amortization (e.g., customer lists, trade names and customer relationships) annuallyduring the fourth quarter or whenever events or significant changes in circumstances indicate that the carrying value may not be recoverable. We evaluate the recoverability of goodwill at a reporting unit level. We have 16identified 14 reporting units for the 2006 annual impairment testing that are either the entities at the operating segment level or one level below the operating segment level. For 2005, in accordance with SFAS No. 142,Goodwill and Other Intangible Assets, we did not test certain reporting units whose 2004 fair value determination exceeded their carrying amount by a substantial margin, where no significant event occurred since the last fair value determination that would significantly change this margin and where the reporting units did not have a triggering event during 2005. The remaining reporting units were tested either as part of the 2005 annual impairment testing as their 2004 fair value did not significantly exceed their carrying value by a substantial margin or as a result of a triggering event. We review intangible assets with definite lives subject to amortization whenever events or circumstances indicate that a carrying amount of an asset may not be recoverable. Intangible assets with definite lives subject to amortization are amortized on a straight-line basis with estimated useful lives generally ranging from 1of up to 15 years. Events or circumstances that might require impairment testing include the loss of a significant client, the identification of other impaired assets within a reporting unit, loss of key personnel, the disposition of a significant portion of a reporting unit, or a significant adverse change in business climate or regulations.
 
SFAS No. 142,Goodwill and Other Intangible Assets, specifies a two-step process for testing for goodwill impairment testing and measuring the magnitude of any impairment. The first step of the impairment test is a comparison of the fair value of a reporting unit to its carrying value, including goodwill. Goodwill allocated to a reporting unit whose fair value is equal to or greater than its carrying value is not impaired, and no further testing is required. Should the carrying amount for a reporting unit exceed its fair value, then the first step of the impairment test is failed and the magnitude of any goodwill impairment is determined under the second step. The second step is a comparison of the implied fair value of a reporting unit’s goodwill to its carrying value. Goodwill of a reporting unit is impaired when its carrying value exceeds its implied fair value. Impaired goodwill is written down to its implied fair value with a charge to expense in the period the impairment is identified.
 
The fair value of a reporting unit is estimated using our projections of discounted future operating cash flows (without interest)traditional valuation techniques such as the income approach, which incorporates the use of the unit. Suchdiscounted cash flow method and the market approach, which incorporates the use of earning and revenue multiples. These techniques use projections which require the use of significant estimates and assumptions as to matters such as future revenue growth, profit margins, capital expenditures, assumed tax rates and discount rates. We believe that the estimates and assumptions made are reasonable but they are susceptible to change from period to period. For example, our strategic decisions or changes in market valuation multiples could lead to impairment charges. Actual results of operations, cash flows and other factors used in a discounted cash flow valuation will likely differ from the estimates used and it is possible that differences and changes could be material.
 For the year ended December 31, 2005, we changed the date of our annual impairment test for goodwill and other intangible assets with indefinite lives from September 30th to October 1st. During 2005 we performed this annual impairment test on September 30th and then again on October 1st to ensure that multiples used in the reporting units tested were consistent. By moving the date into the fourth

80

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)
quarter we will be able to utilize the most current and accurate plan and forecast information. The new date also provides us additional time to meet future accelerated public reporting requirements. This change did not delay, accelerate or avoid an impairment charge. This change in accounting principle also did not have an effect on our Consolidated Financial Statements. Accordingly, we believe that the accounting change described above is an alternative accounting principle that is preferable.
Our annual impairment reviews as of September 30th and October 1st, 20052006 resulted in an impairment charge at a reporting unit within our sports and entertainment marketing business. In addition, during the fourth quarter of 2005, there was a loss of a significant client$27.2 at one of our domestic advertising reporting units that caused us to perform additional impairment testing. As a result, we recorded $97.0 of impairments during 2005.units. See NotesNote 8 and 9 to the Consolidated Financial Statements for further information. The excess of the low range of the fair value over the carrying value at the low end of the valuation range for each of the non-impaired reporting units ranged from approximately$0.2 to $1,990.2 and $2.4 to $1,501.9 in 2006 and $6.42005, respectively. For 2006, this excess ranged from $2.4 to $1,501.9 in 2005 and 2004, respectively.$2,400.2 at the high end of the valuation range. In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test, we applied a hypothetical 10% decrease to the fair values of each reporting unit. The hypothetical 10% decrease applied to 2005 fair values for each of the non-impaired reporting unitsFor 2006, this would result in a range of an impairment charge of approximately $38.2 to excessthe total carrying value being less than the total fair value over carrying valueat the low end of approximately $871.9. Thisthe range by $46.8, which would have triggered additional step two tests. For 2005, this hypothetical 10% decrease would result in excessthe total carrying value being less than the total fair value over carrying value for eachat the low end of the non-impaired reporting units ranging from approximately $3.4 to $871.9 in 2004.
Acquisitions
      The majority of our acquisitions involve an initial payment at the time of closing and provide forrange by $38.2, which would have triggered additional contingent purchase price payments over a specified time. The initial purchase price of an acquisition is allocated to identifiable assets acquired and liabilities assumed based on estimated fair values with any excess being recorded as goodwill and other intangible assets. These contingent payments, which are also known as “earn-outs” and “put options,” are calculated based on estimates of the future financial performance of the acquired entity, the timing of the exercise of these rights, changes in foreign currency exchange rates and other factors. Earn-outs and put options are recorded within the financial statements as an increase to goodwill and other intangible assets once the terms and conditions of the contingent acquisition obligations have been met and the consideration is distributable or expensed as compensation based on the acquisition agreement and the terms and conditions of employment for the former owners of the acquired businesses. See the Liquidity and Capital Resources section of this report and Note 21 to the Consolidated Financial Statements for further information regarding future contingent acquisition obligations.
Restructuring Reserves
      When appropriate, we establish restructuring reserves for severance and termination costs and lease termination and other exit costs related to our restructuring programs. We have established reserves for restructuring programs initiated in 2001 and 2003. The reserves reflect our best estimates for the costs of the plans. However, actual results may differ from the estimated amounts based on, but not limited to, changes in demand for advertising services and unexpected usage of leased properties. Comparison of actual results to estimates may materially impact the amount of the restructuring charges or reversals. We will continue to monitor our restructuring reserves and may adjust the current balances based on future events. See Note 6 to the Consolidated Financial Statements for further information.step two tests.

81
19

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)

  Pension and Postretirement Benefits
Pension and Postretirement Benefits
We use various actuarial methods and assumptions in determining our net pension and postretirement benefit costs and obligations, including theobligations. These assumptions include discount rate used to determine the present value of future benefits,rates and expected long-term rate of returnreturns on plan assets and healthcare cost trend rates. are updated annually or more frequently with the occurrence of significant events. Changes in the related pension and postretirement benefit costs may occur in the future due to changes in the assumptions.
The discount rate determination is one of the significant assumptions that impacts our benefit cost and recorded obligations fornet pension and postretirement plans. Discountcosts and obligations. The discount rates used for our benefit plans attemptare determined at the beginning of the year based on prevailing interest rates as of the measurement date and are adjusted to match the duration of the underlying liability with highly rated securities that could be used to effectively settle the obligation. For example,2007, we plan to use weighted average discount rates of 5.68%, 4.82% and 5.75% for the domestic pension plans, foreign plans and the postretirement plan, respectively. Changes in 2005, athe discount rates are generally due to increases or decreases in long-term interest rates. A higher discount rate will decrease our pension cost. A 25 basis point increase or decrease in the discount rate would have decreased or increased the 2006 net pension and postretirement cost by $2.3 and $0.1, respectively. In addition, a 25 basis point increase or decrease in the discount rate would have decreased or increased the December 31, 2006 benefit obligation by $31.4.
The expected rate of return on pension plan assets is another significant assumption that impacts our net benefitpension cost and is determined at the beginning of the year. Changes in the rates are due to lower or higher expected future returns based on the mix of assets held and studies performed by our external investment advisors. For 2007, we plan to use weighted average expected rates of return of 8.16% and 7.57% for the domestic and foreign pension plans, respectively. A lower expected rate of return will increase our net pension cost. A 25 basis point increase or decrease in the expected return on plan assets would have decreased or increased the 2006 net pension cost by approximately $2.0.$1.1. See Note 1613 to the Consolidated Financial Statements for further information.
OTHER MATTERSRESULTS OF OPERATIONS
Consolidated Results of Operations
  REVENUE
  2006 Compared to 2005
                                     
    Components of change during 2006   Change
      Net
       Net
    
    Foreign
 acquisitions/
     Foreign
 acquisitions/
    
  2005 currency (divestitures) Organic 2006 currency (divestitures) Organic Total
 
Total
 $6,274.3   20.6   (165.4)  61.3  $6,190.8   0.3%  (2.6)%  1.0%  (1.3)%
Domestic
  3,461.1   —   (38.3)  18.4   3,441.2   —   (1.1)%  0.5%  (0.6)%
International
  2,813.2   20.6   (127.1)  42.9   2,749.6   0.7%  (4.5)%  1.5%  (2.3)%
Revenue decreased due to net divestitures partially offset by organic revenue increases and changes in foreign currency exchange rates. Net divestitures primarily impacted the Integrated Agency Networks (“IAN”) segment, largely from Draftfcb and McCann during 2005. There were net organic revenue increases in both our international and domestic locations. The international organic increase was driven by higher revenue from existing clients primarily in the Asia Pacific and Latin America regions partially offset by net client losses, primarily in 2005, at IAN as well as decreases in the events marketing businesses at the Constituency Management Group (“CMG”) in the United Kingdom region. The domestic organic increase was primarily driven by growth in the public relations and branding businesses at CMG as well as higher revenue from existing clients, partially offset by net client losses and decreased client spending at IAN.


20

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)

  2005 Compared to 2004
                                     
    Components of change during 2005   Change
      Net
       Net
    
    Foreign
 acquisitions/
     Foreign
 acquisitions/
    
  2004 currency (divestitures) Organic 2005 currency (divestitures) Organic Total
 
Total
 $6,387.0   40.4   (107.4)  (45.7) $6,274.3   0.6%  (1.7)%  (0.7)%  (1.8)%
Domestic
  3,509.2   —   (28.9)  (19.2)  3,461.1   —   (0.8)%  (0.5)%  (1.4)%
International
  2,877.8   40.4   (78.5)  (26.5)  2,813.2   1.4%  (2.7)%  (0.9)%  (2.2)%
Revenue decreased during 2005 due to net divestitures and organic revenue decreases, partially offset by changes in foreign currency exchange rates. The revenue decline from net divestitures was largely due to dispositions at McCann during 2005 primarily in the Europe and United States regions and the sale of the Motorsports business during 2004. The organic revenue decrease was driven by 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 businesses internationally and the sports marketing businesses domestically as a result of increased spending from existing clients and client wins.
OPERATING EXPENSES
                         
  Years ended December 31,
  2006 2005 2004
  $ % of Revenue $ % of Revenue $ % of Revenue
 
Salaries and related expenses $3,944.1   63.7% $3,999.1   63.7% $3,733.0   58.4%
Office and general expenses  2,079.0   33.6%  2,288.1   36.5%  2,250.4   35.2%
Restructuring and other reorganization-related charges (reversals)  34.5       (7.3)      62.2     
Long-lived asset impairment and other charges  27.2       98.6       322.2     
Motorsports contract termination costs  —       —       113.6     
                         
Total operating expenses $6,084.8      $6,378.5      $6,481.4     
                         
Salaries and Related Expenses
Salaries and related expenses are the largest component of operating expenses and consist of payroll costs, employee performance incentives, including short and long-term incentive awards, and other benefits associated with client service professional staff and administrative staff. Salaries and related expenses do not vary significantly with short-term changes in revenue levels. However, salaries may fluctuate due to the timing of hiring freelance contractors who are utilized to support business development, changes in the funding levels of short and long-term incentive awards and changes in foreign currency exchange rates. Our financial performance over the past few years has lagged behind our peers, primarily due to lower revenue growth. As a result, salaries and related expenses reflect significant severance charges, primarily incurred in previous years, and investments in hiring creative talent to realign the business for revenue growth and improved operating margins. Also, salaries and related expenses reflect the hiring of additional finance professionals and information technology staff to upgrade system infrastructure and to address weaknesses in our accounting and control environment, as well as to develop shared services.
                                     
    Components of change during the year   Change
      Net
       Net
    
  Prior year
 Foreign
 acquisitions/
   Reported
 Foreign
 acquisitions/
    
  amount currency (divestitures) Organic amount currency (divestitures) Organic Total
 
2006
 $3,999.1   11.7   (85.0)  18.3  $3,944.1   0.3%  (2.1)%  0.5%  (1.4)%
2005
  3,733.0   19.3   (46.6)  293.4   3,999.1   0.5%  (1.2)%  7.9%  7.1%


21

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)

2006 Compared to 2005
Salaries and related expenses decreased during 2006 due to net divestitures, primarily from the sale of several businesses at IAN during 2005, partially offset by changes in foreign currency exchange rates and a slight organic increase. Total salaries and related expenses as a percentage of revenue remained flat as a result of the decline in revenue. Key factors behind the change in salaries and related expenses from the prior year were a significant reduction in severance expense of $63.7, offset by an increase in long-term incentive awards and bonus awards of $67.2. Expenses related to incentive awards increased in 2006 due to long-term equity based awards granted in June 2006 and the full year impact of awards granted in August 2005, while expenses related to bonus awards increased primarily due to performance. The slight organic increase reflected in CMG and Corporate was offset by a decrease at IAN and was primarily the result of higher salary costs to upgrade our talent and to support revenue initiatives and technology-related projects, increased incentive awards and bonus awards. This was partially offset by a decrease in severance expense, primarily at international locations within IAN, which we incurred in 2005 due to client losses.
2005 Compared to 2004
Salaries and related expenses increased primarily due to an organic increase and changes in foreign currency exchange rates, partially offset by net divestitures, primarily at McCann during 2005 and the sale of the Motorsports business during 2004. The organic increase was primarily the result of higher severance expense, largely recorded in the fourth quarter of 2005 for international headcount reductions within IAN as a result of client losses, the hiring of additional creative talent to enable future revenue growth, additional staff to address weaknesses in our accounting and control environment, and to develop shared services at certain locations.
Office and General Expenses
Office and general expenses include rent expense, professional fees, expenses attributable to the support of client service professional staff, depreciation and amortization costs, bad debt expense relating to accounts receivable, the costs associated with the development of a shared services center and implementation costs associated with upgrading our information technology infrastructure. Office and general expenses also include costs directly attributable to client engagements. These costs includeout-of-pocket costs such as travel for client service professional staff, production costs and other direct costs that are rebilled to our clients.
                                     
    Components of change during the year   Change
      Net
       Net
    
  Prior year
 Foreign
 acquisitions/
   Reported
 Foreign
 acquisitions/
    
  amount currency (divestitures) Organic amount currency (divestitures) Organic Total
 
2006
 $2,288.1   6.5   (95.8)  (119.8) $2,079.0   0.3%  (4.2)%  (5.2)%  (9.1)%
2005
  2,250.4   13.9   (88.6)  112.4   2,288.1   0.6%  (3.9)%  5.0%  1.7%
2006 Compared to 2005
Office and general expenses for 2006 declined as a result of significant reductions in professional fees, which decreased by $93.7, primarily for projects related to our restatement activities and internal control compliance that occurred in 2005, lower production expenses, lower bad debt expenses and net divestitures, primarily due to the sale of several businesses at IAN during 2005. The decline in office and general expenses occurred in both segments as well as Corporate. Partially offsetting this decrease were higher rent expense and reduced foreign exchange gains on certain balance sheet items. The above items resulted in an organic decline which was primarily reflected at Corporate and IAN.
2005 Compared to 2004
Office and general expenses for 2005 increased as a result of an organic increase and changes in foreign currency exchange rates, partially offset by net divestitures, primarily at McCann during 2005 and the sale of the Motorsports business during 2004. The organic increase was primarily the result of higher professional fees,


22

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)

primarily at IAN and our Corporate group, driven by our ongoing efforts in internal control compliance, the 2005 Restatement process and the preliminary development, application and maintenance of information technology systems and processes related to our shared services initiatives.
Restructuring and Other Reorganization-Related Charges (Reversals)
The components of restructuring and other reorganization-related charges (reversals) were as follows:
             
  Years ended December 31,
  2006 2005 2004
 
Other reorganization-related charges $33.0  $—  $— 
Restructuring charges (reversals)  1.5   (7.3)  62.2 
             
Total $34.5  $(7.3) $62.2 
             
Other Reorganization-Related Charges
Other reorganization-related charges primarily represent severance charges directly associated with two significant strategic business decisions: the merger of Draft Worldwide and Foote, Cone and Belding Worldwide to create a global integrated marketing organization called Draftfcb; and our realignment of our media business to meet evolving client needs. In addition, we have recorded lease termination charges in relation to the exit of certain properties for these strategic business decisions. These charges were separated from salaries and related expenses and office and general expenses as they did not result from charges that occurred in the normal course of business. We expect charges relating to these business decisions to be complete during the first half of 2007.
Restructuring Charges (Reversals)
We record charges and (reversals) primarily related to changes in assumptions in connection with lease termination and other exit costs and severance and termination costs for the 2003 and 2001 restructuring programs. The 2003 program was initiated in response to softness in demand for advertising and marketing services. The 2001 program was initiated following the acquisition of True North Communications Inc. and was designed to integrate the acquisition and improve productivity. A summary of the net charges and (reversals) for the 2003 and 2001 restructuring program is as follows:
             
  Years ended December 31,
  2006 2005 2004
 
Lease termination and other exit costs $1.5  $(5.9) $47.8 
Severance and termination costs  —   (1.4)  14.4 
             
Total $1.5  $(7.3) $62.2 
             
During the years ended December 31, 2006 and 2005 net lease termination and other exit costs were primarily related to adjustments to management’s estimates to decrease the restructuring reserves as a result of changes in sublease rental income assumptions and utilization of previously vacated properties relating to the 2003 program by certain of our agencies due to improved economic conditions in certain markets.
During the year ended December 31, 2004 net lease termination and other exit costs were recorded primarily for the 2003 restructuring program for the vacating of 43 offices located primarily in the U.S. and Europe. Charges were recorded at net present value and were net of estimated sublease rental income. These charges were partially offset primarily by management’s adjustments to estimates as a result of our negotiation of terms upon the exit of leased properties and for other reasons similar to those mentioned above for 2006 and 2005. Severance and termination costs were recorded for a worldwide workforce reduction of approximately 400 employees. The restructuring program affected employee groups across all levels and functions, including executive, regional and account management and administrative, creative and media production personnel. These charges were partially


23

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)

offset by adjustments to management’s estimates to reduce the prior restructuring reserves primarily as a result of decreases in the number of terminated employees, change in amounts paid to terminated employees and change in estimates of related restricted stock payments and payroll taxes.
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 generally depreciated or amortized on a straight-line basis over their respective estimated useful lives. When necessary, we record an impairment charge for the amount by which 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:
                                 
  Years ended December 31,
  2006 2005 2004
  IAN IAN CMG Total IAN CMG Motorsports Total
 
Goodwill impairment $27.2  $97.0  $—  $97.0  $220.2  $91.7  $—  $311.9 
Other  —   1.5   0.1   1.6   6.9   0.4   3.0   10.3 
                                 
Total $27.2  $98.5  $0.1  $98.6  $227.1  $92.1  $3.0  $322.2 
                                 
2006
IAN — Our long-term projections, which were updated in the fourth quarter of 2006, showed previously unanticipated declines in discounted future operating cash flows due primarily to recent client losses at one of our domestic advertising reporting units. These discounted future operating cash flow projections indicated that the implied fair value of goodwill at this reporting unit was less than its book value, resulting in a goodwill impairment charge of $27.2.
2005
IAN — A triggering event occurred subsequent to our 2005 annual impairment test when a major client was lost by Lowe’s London agency and the possibility of losing other clients was 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 indicated that the implied fair value of Lowe’s goodwill was less than the related book value resulting in a goodwill impairment charge of $91.0 at our Lowe reporting unit.
IAN — During the third quarter of 2005, 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 indicated that the implied fair value of goodwill was less than the related book value.
2004
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 indicated that the implied fair value of goodwill was less than the related book value. The Partnership was subsequently disbanded in the fourth quarter of 2004 and the remaining goodwill was allocated to the agencies within the Partnership based on the relative fair value of its component agencies at the time of disbandment.


24

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)

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 indicated that the implied fair value of goodwill was less than the related book value.
Motorsports Contract Termination Costs
We recorded a pre-tax charge of $113.6 during 2004 terminating 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.
EXPENSE AND OTHER INCOME
             
  Years ended December 31,
  2006 2005 2004
 
Interest expense $(218.7) $(181.9) $(172.0)
Interest income  113.3   80.0   50.8 
Other (expense) income  (5.6)  19.5   (51.4)
             
Total $(111.0) $(82.4) $(172.6)
             
Interest Expense
The increase in interest expense during 2006 was primarily due to increases in non-cash amortization of approximately $27.0. This included the amortization of fees and deferred warrant costs incurred as a result of the ELF Financing transaction, prior year benefit from the amortization of gains on terminated swaps and the amortization of the remaining costs associated with our previous committed credit agreement. Additionally, the increase was due to one-time fees associated with the exchange of our Floating Rate Notes in 2006. The2006 year-over-year comparison benefited from the fact that we did not incur waiver and consent fees similar to those incurred in 2005 for the amendment of the indentures governing our debt securities and our credit facility.
The increase in interest expense 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.
Interest Income
The increase in interest income during 2006 was primarily due to an increase in interest rates and higher average cash balances compared to the prior year.
The increase in interest income 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.


25

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)

Other Income (Expense)
             
  Years ended December 31,
  2006 2005 2004
 
Loss on early extinguishment of debt $(80.8) $—  $— 
Gains (losses) on sales of businesses  8.1   10.1   (18.2)
Vendor discount and credit adjustments  28.2   2.6   — 
Gains on sales ofavailable-for-sale securities and miscellaneous investment income
  36.1   16.3   5.4 
Investment impairments  (0.3)  (12.2)  (63.4)
Litigation reversals  —   —   32.5 
Other income (expense)  3.1   2.7   (7.7)
             
Total $(5.6) $19.5  $(51.4)
             
Loss on early extinguishment of debt — In November 2006, we exchanged $400.0 of our 4.50% Convertible Senior Notes due 2023 (the “4.50% Notes”) for $400.0 aggregate principal amount of 4.25% Convertible Senior Notes due 2023 (the “4.25% Notes”). In accordance with Emerging Issues Task Force (“EITF”) IssueNo. 96-19,Debtor’s Accounting for a Modification or Exchange of Debt Instruments, this exchange is treated as an extinguishment of the 4.50% Notes and an issuance of 4.25% Notes for accounting purposes because the present value of the remaining cash flows plus the fair value of the embedded conversion option under the terms of the original instrument differ substantially from the new instrument. As a result, we recorded a non-cash charge at issuance of $77.0, reflecting the difference between the fair value of the new debt and the carrying value of the old debt. The difference between fair value and carrying value will be amortized to interest expense through March 15, 2012, which is the first date holders may require us to repurchase the 4.25% Notes. This results in a reduction of reported interest expense of $14.4 per year in future annual periods. We also recorded a non-cash charge of $3.8 for the extinguishment of unamortized debt issuance costs related to the exchanged 4.50% Notes.
Gains (losses) on sales of businesses — In connection with the 2005 sale of a European FCB agency, we released $11.1 into income in the fourth quarter of 2006. This primarily related to certain contingent liabilities that we retained subsequent to the sale, which were resolved in the fourth quarter of 2006. During the fourth quarter of 2005, we had net gains related to the sale of a McCann agency of $18.6, offset partially by a loss of $13.0 from the sale of a European FCB agency. In 2004, we had net losses related to the sale of 19 agencies. The losses related primarily to the sale of aU.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.
We have evaluated each asset held for sale and disposed entity on an individual and an aggregate basis to determine if they should be classified as a component of discontinued operations in our consolidated financial statements. We believe that the impact of these dispositions and assets held for sale are not material to our consolidated financial statements. These dispositions and assets held for sale, in the aggregate, provided income to continuing operations of $2.5 for the year ended December 31, 2006.
Vendor discount and credit adjustments — These adjustments reflect the reversal of certain liabilities, primarily established during the 2005 Restatement, where the statute of limitations has lapsed or where negotiations with clients have resulted in concessions. We may have similar reversals in the future, although to a lesser extent than in 2006. We believe that presenting amounts realized due to lapses in the statute of limitations or concession settlements as other income or expense prevents the trend of operating results from being distorted. For further information on vendor discounts and credits see Notes 1 and 4 to the Consolidated Financial Statements.
Gains on sales ofavailable-for-sale securities and miscellaneous investment income — In the second quarter of 2006, we had net gains of $20.9 related to the sale of an investment located in Asia Pacific and the sale of our remaining ownership interest in an agency within The Lowe Group. In addition, during the third quarter of 2006, we sold our interest in a German advertising agency and recognized the related remaining cumulative translation adjustment balance, which resulted in a non-cash benefit of $17.0. In 2005, we had net gains of $8.3 related to the


26

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 our remaining equity ownership interest in an agency within FCB, and net gains on sales ofavailable-for-sale securities of $7.9, of which $3.8 related to appreciation of Rabbi Trust investments restricted for the purpose of paying our deferred compensation and deferred benefit arrangement liabilities.
Investment Impairments — We recorded charges of $12.2 during 2005, primarily related to a $7.1 adjustment of the carrying amount of our remaining unconsolidated investment in Latin America to fair value as a result of our intent to sell and $3.7 related to a decline in value of certainavailable-for-sale investments that were determined to be other than temporary.
We recorded investment impairment charges of $63.4 during 2004, primarily related to a $50.9 charge for an unconsolidated investment in a German advertising agency 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 otheravailable-for-sale investments.
Litigation Reversals — During 2004 the settlement of thirteen class actions under the federal securities laws became final and we agreed to pay $115.0, comprised of $20.0 in cash and $95.0 in shares of our common stock valued at $14.50 per share. We received insurance proceeds of $20.0, which we recorded as a reduction in litigation charges. 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.
INCOME TAXES
                     
  Years ended December 31, Change
  2006 2005 2004 ’06 vs. ’05 ’05 vs. ’04
 
Loss from continuing operations before provision for income taxes $(5.0) $(186.6) $(267.0)  (97.3)%  (30.1)%
                     
                     
Provision for income taxes — continuing operations $18.7  $81.9  $262.2   (77.2)%  (68.8)%
(Benefit) provision for income taxes — discontinued operations  (5.0)  (9.0)  3.5   (44.4)%  — 
                     
Total provision for income taxes $13.7  $72.9  $265.7   (81.2)%  (72.6)%
                     
The tax provision for 2006 was primarily impacted by domestic losses, foreign profits subject to tax at different rates and losses in certain foreign locations where we receive no tax benefit due to 100% valuation allowances. Other factors included state and local taxes, the write-off of deferred tax assets from restricted stock, the release of valuation allowances, non-deductible financing costs and the reversal of previously claimed foreign tax credits.
The tax provision for 2005 was primarily impacted by an increase in valuation allowances, a non-deductible asset impairment, state and local taxes and the resolution of various income tax audits and issues.
Valuation Allowance
Under Statement of Financial Accounting Standards (“SFAS”) No. 109,Accounting for Income Taxes, we are required to evaluate the realizability of our deferred tax assets. SFAS No. 109 requires that a valuation allowance be recognized 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 significant negative evidence, establishment of valuation allowance must be considered. We believe that cumulative losses in the most recent three-year period represent significant negative evidence under the provisions of SFAS No. 109 and, as a result, we recognized a valuation allowance for certain deferred tax assets. The deferred tax assets for which an allowance was recognized relate primarily to tax credit carryforwards, foreign tax loss and U.S. capital loss carryforwards, which may not be realized in the future.
During 2006 and 2005, valuation allowances of $63.6 and $69.9, respectively, were recorded in continuing operations on existing deferred tax assets, each year’s loss and temporary differences. The total valuation allowance as of December 31, 2006 and 2005 was $504.0 and $501.0, respectively.


27

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 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.
For additional information, see Note 9 to the Consolidated Financial Statements.
Segment Results of Operations
As discussed in Note 15 to the Consolidated Financial Statements, we have two reportable segments as of December 31, 2006: IAN and CMG. We also report results for the Corporate and other group. As of December 31, 2005, we had an additional segment, Motorsports operations (“Motorsports”), which was sold during 2004 and had immaterial residual operating results in 2005.
On June 1, 2006, we announced we would merge two units included in our IAN segment, Draft Worldwide (“Draft”) and Foote, Cone & Belding Worldwide (“FCB”), to create a global integrated marketing organization. The new merged entity, Draftfcb, remains within the IAN segment.
INTEGRATED AGENCY NETWORKS (‘‘IAN”)
REVENUE
2006 Compared to 2005
                                     
    Components of change during 2006   Change
      Net
       Net
    
    Foreign
 acquisitions/
     Foreign
 acquisitions/
    
  2005 currency (divestitures) Organic 2006 currency (divestitures) Organic Total
 
Total
 $5,327.8   19.7   (151.9)  35.0  $5,230.6   0.4%  (2.9)%  0.7%  (1.8)%
Domestic
  2,904.6   —   (37.8)  (26.8)  2,840.0   —   (1.3)%  (0.9)%  (2.2)%
International
  2,423.2   19.7   (114.1)  61.8   2,390.6   0.8%  (4.7)%  2.6%  (1.3)%
The revenue decline in 2006 was a result of net divestitures, primarily from the sale of several businesses at Draftfcb and McCann in 2005, partially offset by an organic increase and changes in foreign currency exchange rates. The organic increase was driven primarily by McCann and Draftfcb, partially offset by decreases at Lowe and The Works, one of our independent agencies. The organic increase at McCann was the result of higher revenue from existing clients across domestic and international regions, primarily Asia Pacific and Latin America. McCann’s increase was primarily driven by digital, direct and event marketing services. The increase at Draftfcb was primarily the result of increased spending from existing clients partially offset by net client losses, primarily in 2005, across domestic and most international regions, primarily Europe, Asia Pacific and Latin America. The decrease at Lowe was primarily due to reduced spending by existing clients and net client losses, primarily in domestic locations in 2005. The revenue decrease at The Works, a dedicated General Motors resource, was primarily due to the loss of the General Motors U.S. media buying business in 2005.
2005 Compared to 2004
                                     
    Components of change during 2005   Change
      Net
       Net
    
    Foreign
 acquisitions/
     Foreign
 acquisitions/
    
  2004 currency (divestitures) Organic 2005 currency (divestitures) Organic Total
 
Total
 $5,399.2   39.5   (46.0)  (64.9) $5,327.8   0.7%  (0.9)%  (1.2)%  (1.3)%
Domestic
  2,933.3   —   (23.1)  (5.6)  2,904.6   —   (0.8)%  (0.2)%  (1.0)%
International
  2,465.9   39.5   (22.9)  (59.3)  2,423.2   1.6%  (0.9)%  (2.4)%  (1.7)%
The revenue decline in 2005 primarily resulted from organic revenue decreases and net divestitures, partially offset by changes in foreign currency exchange rates. The organic revenue decrease was primarily driven by declines at Deutsch and Lowe, partially offset by increases at Draftfcb and Mullen. The decline at Deutsch was due to client losses and reduced spending from existing clients domestically, partially offset by client wins. The decline


28

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)

at Lowe was primarily driven by client losses and reduced spending from existing clients in their European offices, as well as reduced spending domestically. Draftfcb experienced growth mainly domestically due to client wins and increased spending from existing clients. Although McCann is a significant part of the business, they did not contribute considerably to the organic change in revenue year over year. The decrease due to net divestitures primarily related to the sale of small businesses at McCann and Draftfcb.
SEGMENT OPERATING INCOME
                     
  Years ended December 31, Change
  2006 2005 2004 ’06 vs. ’05 ’05 vs. ’04
 
Segment operating income $391.4  $249.7  $577.1   56.7%  (56.7)%
                     
Operating margin  7.5%  4.7%  10.7%        
                     
2006 Compared to 2005
Operating income increased during 2006 due to a decrease in office and general expenses of $139.7, a decrease in salaries and related expenses of $99.2, partially offset by a decrease in revenue of $97.2. The primary drivers for our reduced office and general expenses related to lower production expenses of $46.4, reduced professional fees of $26.3 and lower bad debt expense of $22.2. The primary drivers for our reduced salaries and related expenses related to lower severance expense of $63.1 and decreased salaries of $42.0.
The organic segment operating income increase was driven primarily by increases at McCann, partially offset by net decreases at our independent agencies. The increase at McCann was due to higher revenue as discussed above in the revenue section and reduced office and general expenses and salaries and related expenses. Office and general expenses decreased due to lower production expenses, reduced professional fees in connection with accounting projects, such as those related to our restatement activities, and lower bad debt expenses. Salaries and related expenses decreased primarily due to reduced severance expense for headcount reductions that occurred in international locations in 2005 and reduced pension costs, partially offset by higher incentive and bonus awards due to improved performance. The net decline at our independent agencies was driven by decreased revenue, primarily at The Works, for the reasons mentioned above in the revenue section.
2005 Compared to 2004
A decrease in revenues of $71.4, an increase in salaries and related expenses of $202.3 and an increase in office and general expenses of $53.7 were the primary drivers that contributed to the decrease in operating income during 2005. IAN’s organic operating income decrease was primarily driven by McCann, Draftfcb, Lowe and Deutsch. The 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 2005 Restatement process and internal control compliance. The decrease at Draftfcb was due to higher salaries and freelance costs as additional staff were hired to service new clients and additional business from existing clients as well as increased severance costs reflecting headcount reductions at our international agencies. At Lowe, the decrease was primarily due to organic revenue decreases as compared to the prior year. Deutsch experienced organic revenue decreases as compared to the prior year, partially offset by lower salaries, related benefits and freelance costs due to client losses and reduced incentive compensation expense as a result of a reduction in operating performance. Also, operating income of most units was negatively impacted by higher professional fees to support the 2005 Restatement process and internal control compliance.


29

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
2006 Compared to 2005
                                     
    Components of change during 2006   Change
      Net
       Net
    
    Foreign
 acquisitions/
     Foreign
 acquisitions/
    
  2005 currency (divestitures) Organic 2006 currency (divestitures) Organic Total
 
Total
 $944.2   0.9   (11.2)  26.3  $960.2   0.1%  (1.2)%  2.8%  1.7%
Domestic
  556.5   —   (0.5)  45.2   601.2   —   (0.1)%  8.1%  8.0%
International
  387.7   0.9   (10.7)  (18.9)  359.0   0.2%  (2.8)%  (4.9)%  (7.4)%
Revenue growth was a result of organic revenue increases in the public relations and branding businesses domestically, which was due to higher revenue from existing clients. Additionally, there were organic revenue increases domestically in the sports marketing and events marketing businesses due to higher revenue from existing clients and client wins. The domestic increase was partially offset by declines at some CMG agencies that lost clients. Internationally, the decline related primarily to a decrease in the events marketing and sports marketing businesses caused by client losses. The international decrease was partially offset by increases in the public relations and branding businesses due to higher revenue from existing clients.
2005 Compared to 2004
                                     
    Components of change during 2005   Change
      Net
       Net
    
    Foreign
 acquisitions/
     Foreign
 acquisitions/
    
  2004 currency (divestitures) Organic 2005 currency (divestitures) Organic Total
 
Total
 $935.8   1.2   (12.1)  19.3  $944.2   0.1%  (1.3)%  2.1%  0.9%
Domestic
  576.0   —   (5.9)  (13.6)  556.5   —   (1.0)%  (2.4)%  (3.4)%
International
  359.8   1.2   (6.2)  32.9   387.7   0.3%  (1.7)%  9.1%  7.8%
Revenue growth was a result of an organic revenue increase in the public relations businesses internationally and the sports marketing businesses domestically as a result of increased spending from existing clients and client wins. Domestically, the increase in the sports marketing businesses was offset by a decline in the events marketing businesses. Although revenue from the events marketing businesses declined domestically, they had an overall positive impact on our organic revenue increase due to international client wins. Partially offsetting this increase were the dispositions of two businesses in 2005 and three businesses in 2004.
SEGMENT OPERATING INCOME
                     
  Years ended December 31, Change
  2006 2005 2004 ’06 vs. ’05 ’05 vs. ’04
 
Segment operating income $51.6  $53.0  $83.7   (2.6)%  (36.7)%
                     
Operating margin  5.4%  5.6%  8.9%        
                     
2006 Compared to 2005
Operating income decreased slightly, primarily as a result of an increase in salaries and related expenses of $32.0, partially offset by a decrease in office and general expenses of $14.6 and an increase in revenue of $16.0. The primary driver for our increase in salaries and related expenses was higher base salaries expense of $22.3 and the primary driver for our decrease in office and general expenses was lower production expenses of $19.8. The slight organic segment operating income decrease was due to decreases in the sports marketing businesses and other CMG agencies, offset by growth at the public relations and branding businesses. The decline in the sports marketing


30

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)

businesses was due to revenue decreases due to client losses and increases in salaries and related expenses due to higher bonus awards related to improved domestic performance. The decrease in other CMG agencies was due to decreased revenue for the reasons described in the revenue section. Growth at the public relations businesses was driven by increased revenue, partially offset by higher salaries and related expenses from increased headcount to support the growth in the business. The increase at the branding businesses was driven primarily by higher revenue from existing clients.
2005 Compared to 2004
Operating income decreased due to an increase of $23.3 in salary and related expenses and an increase in office and general expenses of $15.8, partially offset by an increase in revenue of $8.4. The organic operating income decrease was primarily driven by increases in salary expense across all businesses due to increased headcount to address weaknesses in our accounting and control environment. The decrease was also attributable to increases in salary expenses in the public relations businesses to support revenue growth.
CORPORATE AND OTHER
Certain corporate and other charges are reported as a separate line within total segment operating income (loss) and include corporate office expenses and shared services center expenses, as well as certain other centrally managed expenses that are not fully allocated to operating divisions, as shown in the table below. 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. See Note 15 to the Consolidated Financial Statements for further discussion of corporate and other charges. The following expenses are included in corporate and other:
                     
  Years ended December 31, Change
  2006 2005 2004 ’06 vs. ’05 ’05 vs. ’04
 
Salaries and related expenses $214.1  $201.3  $151.2   6.4%  33.1%
Professional fees  139.7   199.3   145.3   (29.9)%  37.2%
Rent, depreciation and amortization  65.4   45.3   38.4   44.4%  18.0%
Corporate insurance  21.7   26.0   29.7   (16.5)%  (12.5)%
Other  25.3   15.2   16.8   66.4%  (9.5)%
Expenses allocated to operating divisions  (190.9)  (170.8)  (138.2)  11.8%  23.6%
                     
Total $275.3  $316.3  $243.2   (13.0)%  30.1%
                     
2006 Compared to 2005
Corporate and other expenses decreased primarily due to reduced professional fees and higher amounts allocated to operating divisions, partially offset by higher rent, depreciation and amortization and increased salaries and related expenses. We incurred lower professional fees for accounting projects, which included those related to our prior-year restatement activities. Higher rent, depreciation and amortization were due to software-related costs from our ongoing initiatives to consolidate and upgrade our financial systems, as well as to further develop our shared services. Salaries and related expenses increased due to higher headcount, primarily related to our technology initiatives, and for larger incentive compensation and bonus awards related to performance. Amounts allocated to operating divisions increased primarily due to the implementation of new information technology-related projects, the consolidation of information technology support staff, and the allocation of audit fees, which are now being allocated back to operating divisions.
2005 Compared to 2004
Corporate and other expenses increased primarily due to higher salaries and related expenses and professional fees. Salary expenses increased from additional staffing to address weaknesses in our accounting and control


31

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)

environment and to develop shared services. Professional fees increased due to costs associated with internal control compliance, costs associated with the 2005 Restatement process, and related audit costs. Amounts allocated to operating divisions increased primarily due to the implementation of new information technology-related projects and the consolidation of information technology support staff, the costs of which were not being allocated back to operating divisions in 2004.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW OVERVIEW
Cash, cash equivalents and marketable securities decreased by $234.4 to $1,957.1 during 2006 primarily due to fees associated with capital market activity, capital expenditures and working capital usage, partially offset by improved operating results and proceeds from sales of investments. Of this change, marketable securities decreased by $114.2. A summary of our cash flow activities is as follows:
             
  Years ended December 31,
  2006 2005 2004
 
Net cash provided by (used in) operating activities $  9.0  $  (20.2)  $  464.8 
Net cash provided by (used in) investing activities  11.6   166.4   (544.6)
Net cash (used in) provided by financing activities  (129.7)  410.1   (259.5)
Operating Activities
Cash provided by operating activities was primarily due to improved operating results during 2006, partially offset by working capital usage of $250.6. Working capital usages reflects changes in accounts receivable, expenditures billable to clients, prepaid expenses and other current assets, accounts payable and accrued liabilities. Media buying on behalf of our clients 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 primarily impact the level of accounts receivable, expenditures billable to clients, accounts payable and accrued media and production liabilities in any given period for these pass-through arrangements. Our assets include both cash received and accounts receivable from clients for these pass-through arrangements, while our liabilities include amounts owed on behalf of clients 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.
During 2006, a reduction in accounts payable of $370.0 was partially offset by a reduction in accounts receivable of $235.4. The change in accounts payable includes a reduction of our vendor discount and credit liabilities established as part of the 2005 Restatement of $73.6, of which $53.1 was satisfied through cash payments. Cash used by changes in accrued liabilities of $21.4 was primarily the result of higher accrued media liabilities, offset by payments for professional fees primarily related to our prior year restatement activities. Accrued liabilities are also affected by the timing of certain payments. For example, while employee incentive awards are accrued throughout the year, they are generally paid during the first quarter of the subsequent year.
The net loss of $31.7 during 2006 includes non-cash items that are not expected to generate cash or require the use of cash. Net non-cash expense items of $294.4 primarily include the loss on early extinguishment of debt, long lived asset impairment and other charges, add-back of depreciation of fixed assets and the amortization of intangible assets, restricted stock awards and non-cash compensation, bond discounts and deferred financing costs.
Investing Activities
Cash provided by investing activities during 2006 primarily reflects net maturities of short-term marketable securities, capital expenditures, acquisitions and divestitures and purchases and sales of investments. The cash flows attributable to short-term marketable securities vary from one period to another because of changes in the


32

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)

maturity profile of our treasury investments. The net amount of these securities was $193.8 lower as of December 31, 2006 compared to December 31, 2005. Cash provided by investing activities was also impacted by capital expenditures of $127.8, primarily related to computer hardware and leasehold improvements.
Financing Activities
Cash used in financing activities during 2006 reflects fees and costs of $90.1 that we incurred in connection with our financing transactions. This includes fees of $41.8 and call spread costs of $29.2 for our new credit agreement and related transactions in the second quarter. We incurred fees of $19.1 in the fourth quarter when we exchanged $400.0 of our 4.50% Convertible Senior Notes due 2023 for the same aggregate principal amount of our 4.25% Convertible Senior Notes due 2023 and when we exchanged all of our $250.0 Floating Rate Notes due 2008 for the same aggregate principal amount of Floating Rate Notes due 2010. These costs are being amortized in interest expense. In addition, $3.5 of fees, incurred as part of the Floating Rate Note exchange, were recorded in interest expense and will not be amortized.
Cash used in financing activities also included dividend payments of $47.0 on our Series A and Series B Preferred Stock.
LIQUIDITY OUTLOOK
We expect our operating cash flow, cash and cash equivalents to be sufficient to meet our anticipated operating requirements at a minimum for the next twelve months.
We believe that a conservative approach to liquidity is appropriate for our Company, in view of the cash requirements resulting from, among other things, high professional fees, liabilities to our clients for vendor discounts and credits, any potential penalties or fines that may have to be paid in connection with the ongoing SEC investigation, the normal cash variability inherent in our operations and other unanticipated requirements. In addition, until our margins consistently improve in connection with our turnaround, cash generation from operations could be challenged in certain periods.
A reduction in our liquidity in future periods as a result of the above items or other business objectives could lead us to seek new or additional sources of liquidity to fund our working capital needs. From time to time we evaluate market conditions and financing alternatives for opportunities to raise additional financing or otherwise improve our liquidity profile and enhance our financial flexibility. There can be no guarantee that we would be able to access new sources of liquidity on commercially reasonable terms, or at all.
Funding Requirements
Our most significant funding requirements include: our operations, non-cancelable operating lease obligations, capital expenditures, payments related to vendor discounts and credits, debt service, preferred stock dividends, contributions to pension and postretirement plans, acquisitions and dispositions and taxes.
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.
Capital expenditures are primarily to upgrade computer and telecommunications systems and to modernize offices.
Of the liabilities recognized as part of the 2005 Restatement, we estimate that we will pay approximately $100.0 related to vendor discounts and credits, internal investigations and international compensation arrangements over the next 12 months.
We have no significant scheduled amounts of long-term debt due until March 2008, when holders of our $400.0 4.50% Convertible Senior Notes may require us to repurchase the Notes for cash at par.


33

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 pay annual dividends on each share of Series B Preferred Stock in the amount of $52.50 per share, or $27.6. Dividends on each share of Series B Preferred Stock are payable quarterly in cash or, if certain conditions are met, in common stock, at our option. See Note 12 to the Consolidated Financial Statements for further information.
We have not paid any dividends on our common stock since December of 2002. The terms of our Series B Preferred Stock do not permit us to pay dividends on our common stock unless all accumulated and unpaid dividends on our Series B Preferred Stock have been, or contemporaneously are, declared and paid, or provision for the payment thereof has been made.
We make contributions to our pension and postretirement benefit plans throughout the year, as determined using actuarial methods and assumptions. For the years ended December 31, 2006 and 2005, we made contributions of $42.7 and $34.1, respectively, to our domestic and foreign pension plans. For 2007, we do not anticipate making additional contributions to our domestic pension plans. We expect to contribute an additional $20.6 to our foreign pension plans.
Our capital requirements are affected by purchases and sales of agencies. From time to time we contemplate acquisitions that may require payment in cash or stock. In past years, deferred payments related to past acquisitions were a significant funding requirement for us, although these payments have decreased significantly in recent years as we have made fewer acquisitions. 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 relating to operating performance, are met. Some of the consideration under these arrangements is in shares of our common stock, but most is in cash. For the years ended December 31, 2006, 2005 and 2004, we made cash payments related to past acquisitions of $22.9, $97.0 and $161.7, respectively. In relation to our contingent acquisition obligations, $7.8, $5.3 and $20.1 were recorded as compensation expense for the years ended December 31, 2006, 2005 and 2004, respectively.
We have various tax years under examination in various countries in which we have significant business operations. We do not know whether these examinations will, in the aggregate, result in our paying additional income taxes, which we believe are adequately reserved for.
FINANCING AND SOURCES OF FUNDS
Substantially all of our operating cash flow is generated by our agencies. Our liquid assets are held primarily at the holding company level, and to a lesser extent at our largest subsidiaries.
In recent years, we have obtained long-term financing in the capital markets by issuing debt securities, convertible debt securities and convertible preferred stock. We have also used bank borrowing facilities to provide us with liquidity for working capital needs. Our outstanding long-term debt, including convertible debt, is detailed in Note 10 to the Consolidated Financial Statements, and our convertible preferred stock is detailed in Note 12 to the Consolidated Financial Statements. We also have two series of equity warrants outstanding. We have entered into call spread transactions in connection with one of the series of equity warrants. See Note 11 to the Consolidated Financial Statements.
In 2006, we engaged in several transactions to improve our liquidity and debt maturity profile:
•  In June 2006, we replaced our existing $500.0 Three-Year Revolving Credit Facility, which would have expired in May 2007, with a new $750.0 Three-Year Credit Agreement (the “Credit Agreement”) as part of a capital markets transaction that we refer to as the “ELF Financing.”
•  In November 2006, we exchanged $400.0 of our 4.50% Convertible Senior Notes due 2023 for the same aggregate principal amount of our 4.25% Convertible Senior Notes due 2023. This transaction extended the first date on which holders can require us to repurchase this portion of our debt for cash from 2008 to 2012. It also extended the second date on which holders can require us to repurchase this portion of our debt for cash, stock or a combination at our option from 2013 to 2015.


34

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 December 2006, we exchanged all of our $250.0 Floating Rate Notes due 2008 for the same aggregate principal amount of Floating Rate Notes due 2010. The new Floating Rate Notes bear interest at a per annum rate equal to three-month LIBOR plus 200 basis points, 125 basis points less than the interest rate on the old Floating Rate Notes.

Also in December 2006, each share of our Series A Preferred Stock converted into 3.7037 shares of our common stock. We issued a total of 27.7 shares of common stock to holders of the Series A Preferred Stock. As a result of this conversion, future preferred stock dividend requirements will be lower.
ELF Financing
Under the Credit Agreement, a special-purpose entity called ELF Special Financing Ltd. (“ELF”) acts as the lender and letter of credit issuer. ELF is obligated at our request to make cash advances to us and to issue letters of credit for our account, in an aggregate amount not to exceed $750.0 outstanding at any time. The aggregate face amount of letters of credit may not exceed $600.0 at any time. The Credit Agreement is a revolving facility, under which amounts borrowed may be repaid and borrowed again, and the aggregate available amount of letters of credit may decrease or increase, subject to the overall limit of $750.0 and the $600.0 limit on letters of credit. We have not drawn on the Credit Agreement or our previous committed credit agreements since late 2003. We are not subject to any financial or other material restrictive covenants under the Credit Agreement. For additional information, see Notes 10 and 11 to the Consolidated Financial Statements.
Other Credit Facilities
In addition to the Credit Agreement, we have uncommitted credit facilities with various banks that permit borrowings at variable interest rates. We use our uncommitted credit lines for working capital needs at some of our operations outside the United States. There were borrowings under the uncommitted facilities made by several of our subsidiaries outside the United States totaling $80.3 and $53.7 as of December 31, 2006 and 2005, respectively. We have guaranteed the repayment of some of these borrowings by our subsidiaries. If we lose access to these credit lines, we would have to provide funding directly to some overseas operations. The weighted-average interest rate on outstanding balances under the uncommitted short-term facilities as of December 31, 2006 and 2005 was approximately 5% in each year.
Letters of Credit
We are required from time to time to post letters of credit, primarily to support our commitments, or those of our subsidiaries, to purchase media placements, mostly in locations outside the United States, or to satisfy other obligations. These letters of credit are generally backed by letters of credit issued under the Credit Agreement. The aggregate amount of outstanding letters of credit issued for our account under the Credit Agreement and our previous committed credit agreement was $219.9 and $162.4 as of December 31, 2006 and 2005, respectively. These letters of credit have historically not been drawn upon.
Cash Pooling
We aggregate our net domestic cash position on a daily basis. Outside the United States, we use cash pooling arrangements with banks to help manage our liquidity requirements. In these pooling arrangements, several Interpublic agencies agree with a single bank that the cash balances of any of the agencies with the bank will be subject to a full right of setoff against amounts the other agencies owe the bank, and the bank provides overdrafts as long as the net balance for all the agencies does not exceed anagreed-upon level. Typically each agency pays interest on outstanding overdrafts and receives interest on cash balances. Our Consolidated Balance Sheets reflect cash net of overdrafts for each pooling arrangement. As of December 31, 2006 and 2005 a gross amount of $1,052.5 and $842.6, respectively, in cash was netted against an equal gross amount of overdrafts under pooling arrangements.


35

THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)

CREDIT AGENCY RATINGS
Our long-term debt credit ratings as of February 16, 2007 were Ba3 with negative outlook, B CreditWatch negative and B with negative outlook, as reported by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, respectively. A downgrade in our credit ratings could adversely affect our ability to access capital and could result in more stringent covenants and higher interest rates under the terms of any new indebtedness.
CONTRACTUAL OBLIGATIONS
The following summarizes our estimated contractual obligations at December 31, 2006, and their effect on our liquidity and cash flow in future periods:
                             
  2007 2008 2009 2010 2011 Thereafter Total
 
Long-term debt 1
 $2.6  $2.8  $257.0  $240.9  $500.0  $1,247.9  $2,251.2 
Interest payments  122.0   116.1   107.1   93.6   75.1   74.1   588.0 
Non-cancelable operating lease obligations  292.3   265.2   237.4   207.9   181.9   861.2   2,045.9 
Contingent acquisition payments 2
  47.2   34.2   20.8   2.5   2.0   3.1   109.8 
1SEC InvestigationHolders of our $400.0 4.50% Notes may require us to repurchase their Notes for cash at par in March 2008. These Notes will mature in 2023 if not converted or repurchased.
2We have structured certain acquisitions with additional contingent purchase price obligations in order to reduce the potential risk associated with negative future performance of the acquired entity. All payments are contingent upon achieving projected operating performance targets and satisfying other conditions specified in the related agreements and are subject to revisions as the earn-out periods progress. See Note 18 to the Consolidated Financial Statements for further information.
 
We have not included obligations under our pension and postretirement benefit plans in the contractual obligations table. Our funding policy regarding our funded pension plan is to contribute amounts necessary to satisfy minimum pension funding requirements plus such additional amounts from time to time as are determined to be appropriate to improve the plans’ funded status. The funded status of our pension plans is dependent upon many factors, including returns on invested assets, level of market interest rates and levels of voluntary contributions to the plans. Declines in long-term interest rates have had a negative impact on the funded status of the plans. For 2007, we do not expect to contribute to our domestic pension plans, and expect to contribute $20.6 to our foreign pension plans.
We have not included our deferred tax obligations in the contractual obligations table as the timing of any future payments in relation to these obligations is uncertain.
DERIVATIVES AND HEDGING ACTIVITIES
We periodically enter into interest rate swap agreements and forward contracts to manage exposure to interest rate fluctuations and to mitigate foreign exchange volatility. In May of 2005, we terminated all of our long-term interest rate swap agreements covering the $350.0 6.25% Senior Unsecured Notes and $150.0 of the $500.0 7.25% Senior Unsecured Notes. In connection with the interest rate swap termination, our net cash receipts were $1.1, which is recorded as an offset to interest expense over the remaining life of the related debt.
We have entered into foreign currency transactions in which various foreign currencies are bought or sold forward. These contracts were entered into to meet currency requirements arising from specific transactions. The changes in value of these forward contracts have been recorded in other income or expense. As of December 31, 2006 and 2005, we had contracts covering $0.2 and $6.2, respectively, of notional amount of currency and the fair value of the forward contracts was negligible.
The terms of the 4.50% Notes include two embedded derivative instruments and the terms of our 4.25% Notes and our Series B Preferred Stock each include one embedded derivative instrument. The fair value of these derivatives on December 31, 2006 was negligible.


36

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)

OUT-OF-PERIOD AMOUNTS
Year Ended December 31, 2006
During 2006, we recorded adjustments to certain vendor discounts and credits, contractual liabilities, foreign exchange, tax and other miscellaneous items which related to prior periods. For the year ended December 31, 2006, these adjustments resulted in a net favorable impact to revenue of $9.1, a net favorable impact to salaries and related expenses of $5.1, a net unfavorable impact to office and general expenses of $6.6 and a net favorable impact to net loss of $6.9. The operating income impact of these adjustments primarily affected our IAN segment. Because these changes are not material to our financial statements for the periods prior to 2006, for the quarters of 2006 or for 2006 as a whole, we recorded theseout-of-period amounts in their respective quarters of 2006. See also Note 21 to the Consolidated Financial Statements for additional information.
Three Months Ended December 31, 2005
In the fourth quarter of 2005, we recorded adjustments to certain vendor discounts and credits, tax, and other miscellaneous items which related to prior periods. Because these adjustments were not material to our financial statements for the periods prior to 2005 or for 2005 as a whole, we have recorded them in the fourth quarter of 2005.
The following table details the impact theseout-of-period amounts have on the results for the three months ended December 31, 2005 compared to the three months ended December 31, 2004 on a consolidated and segment basis.
                     
          Favorable/
  For the three months ended December 31,
 (unfavorable)
  (as reported) out-of-period
  2005 2004 $ change % change amounts
 
Consolidated results of operations
                    
Revenue $1,895.7  $1,965.7  $(70.0)  (3.6)% $(17.3)
Salaries and related expenses  1,107.5   1,021.9   85.6   8.4%  (3.2)
Office and general expenses  637.1   630.3   6.8   1.1%  (6.1)
                     
Segment results of operations
                    
IAN
                    
Revenue $1,614.8  $1,700.0  $(85.2)  (5.0)% $(17.8)
Operating income  221.2   359.2   (138.0)  (38.4)%  (22.1)
CMG
                    
Revenue $280.6  $261.0  $19.6   7.5% $0.5 
Operating income  30.7   29.7   1.0   3.4%  (3.5)
INTERNAL CONTROL OVER FINANCIAL REPORTING
We have identified numerous material weaknesses in our internal control over financial reporting, as set forth in greater detail in Item 8, Management’s Assessment of Internal Control Over Financial Reporting and Item 9A, Controls and Procedures, in this report. Each of our material weaknesses results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As a result, we have determined that our internal control over financial reporting was not effective as of December 31, 2006.
We are in the process of implementing remedial measures to address the material weaknesses in our internal control over financial reporting. We continue to have extensive work remaining to remediate our remaining material weaknesses. The magnitude of the work is attributable partly to our decentralized structure and the number of disparate accounting systems of varying quality and sophistication. We have developed a work plan with the goal of remediating all of the identified material weaknesses by the time we file our Annual Report onForm 10-K for the year ending December 31, 2007. There can be no assurance, however, as to when the remediation plan will be fully implemented and all the material weaknesses remediated. There also can be no assurance that new problems will not


37

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)

be found in the future. 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.
OTHER MATTERS
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 the 2005 Restatement set forth in our Prior Restatement.2004 Annual Report onForm 10-K filed in September 2005. In particular, since we filed our 2004 Annual Report onForm 10-K, we have received subpoenas from the SEC relating to matters addressed in our Prior2005 Restatement. We have also responded to inquiries from the SEC staff concerning the restatement of the first three quarters of 2005 that we made in our 2005 Annual Report onForm 10-K. 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 Prior2005 Restatement, we cannot reasonably estimate either the amount, range of amounts or timing of a resolution or the amount.resolution. Accordingly, we have not yet established any accounting provision relating to these matters.
Review of Stock Option Practices
During the third quarter of 2006, at our recommendation, our Audit Committee retained independent counsel to review our stock option practices related to our current and prior senior officers for a10-year period beginning in 1996. We also performed a comprehensive accounting review that supplemented the review done by independent counsel. These reviews were completed during the fourth quarter of 2006. Based on these reviews, in the third quarter of 2006 we recorded a charge of $26.4 to accumulated deficit, a $23.3 credit to additional paid-in capital and a $3.1 credit to other non-current liabilities. See Note 20 to the Consolidated Financial Statements for further discussion.
RECENT ACCOUNTING STANDARDS
 
See Note 2219 to the Consolidated Financial Statements for a complete description of recent accounting pronouncements that have affected us or may affect us.

82
38

THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES

(Amounts in Millions, Except Per Share Amounts)
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
 
In the normal course of business, we are exposed to market risks related to interest rates and foreign currency rates. From time to time, we use derivatives, pursuant to established guidelines and policies, to manage some portion of these risks. Derivative instruments utilized in our hedging activities are viewed as risk management tools, involve little complexity and are not used for trading or speculative purposes. See Note 18 to the Consolidated Financial Statements.
Interest Rates
 
Our exposure to market risk for changes in interest rates relates primarily to our debt obligations. As further described in Note 13 to the Consolidated Financial Statements, our principal debt obligations atof December 31, 2006 and 2005, consisted of our 4.50% Notes85.1% and Senior Unsecured Notes, with expiration dates ranging from 2009 to 2014.
      At December 31, 2005 and 2004, 86.0% and 81.1% of our debt obligations bore interest at fixed interest rates. Accordingly, assuming the fixed-rate debt is not refinanced, there would be no impact on interest expense or cash flow from either a 10% increase or decrease in market rates of interest. However, there would be an impact on the fair market value of the debt, as the fair market value of debt is sensitive to changes in interest rates. For 2005,2006, the fair market value of the debt obligations would decrease by approximately $27.7$28.8 if market rates were to increase by 10% and would increase by approximately $28.0$29.5 if market rates were to decrease by 10%. For 2004,2005, the fair market value of the debt obligations would have decreased by approximately $16.3$27.7 if market rates increased by 10% and would have increased by approximately $19.5$28.0 if market rates decreased by 10%. For that portion of the debt that bore interest at variable rates, based on outstanding amounts and rates at December 31, 2005,2006, interest expense and cash out-flow would increase or decrease by approximately $2.1$2.3 if market rates were to increase or decrease by 10%, respectively. For that portion of the debt that bore interest at variable rates, based on outstanding amounts and rates at December 31, 2004,2005, interest expense and cash out-flow would have increased or decreased by approximately $1.8$2.1 if market rates increased or decreased by 10%, respectively. From time to time weInterest rate swaps have been used interest rate swaps to manage the mix of our fixed and floating rate debt obligations. In May 2005, we terminated all our existing long-term interest rate swap agreements, and currently have none outstanding.
Foreign Currencies
 
We face translation and transaction risks related to changes in foreign currency exchange rates. Amounts invested in our foreign operations are translated into U.S. Dollars at the exchange rates in effect at the balance sheet date. The resulting translation adjustments are recorded as a component of accumulated other comprehensive income (loss) in the stockholders’ equity section of our Consolidated Balance Sheet. Our foreign subsidiaries generally collect revenues and pay expenses in currencies other than the U.S. Dollar, mitigating transaction risk. Since the functional currency of our foreign operations is generally the local currency, foreign currency translation of the balance sheet is reflected as a component of stockholders’ equity and does not impact operating results. RevenuesSince we report revenues and expenses in foreign currencies translate into varying amounts of U.S. Dollars depending upon whether the U.S. Dollar weakens or strengthens against other currencies. Therefore, changes in exchange rates may either positively or negatively affect our consolidated revenues and expenses (as expressed in U.S. Dollars) from foreign operations. Currency transaction gains or losses arising from transactions in currencies other than the functional currency are included in results of operations and were not significant in the years ended December 31, 20052006 and 2004.2005. We have not entered into a material amount of foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates.


39

83

Item 8.Financial Statements and Supplementary Data
INDEX
     
  Page
 
Management’s Assessment onof Internal Control over Financial Reporting
 8541
 
Report of Independent Registered Public Accounting Firm
 9246
 
Consolidated Statements of Operations for the years ended December 31, 2006, 2005 2004 and 20032004
 9949
 
Consolidated Balance Sheets as of December 31, 20052006 and 20042005
 10050
 
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 2004 and 20032004
 10151
 
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)Loss for the years ended December 31, 2006, 2005 2004 and 20032004
 10252
 
Notes to Consolidated Financial Statements
 10353
Financial Statement Schedule — Valuation and Qualifying Accounts for the years ended December 31, 2005, 2004 and 20031. Summary of Significant Accounting Policies
 17153
2. Restructuring and Other Reorganization-Related Charges (Reversals)
 58
3. Acquisitions and Dispositions
60
4. Supplementary Data
62
5. Loss Per Share
65
6. Accumulated Other Comprehensive Loss
66
7. Goodwill and Other Intangible Assets
66
8. Long-Lived Asset Impairment and Other Charges
67
9. Provision for Income Taxes
68
10. Debt
71
11. Warrants
75
12. Convertible Preferred Stock
76
13. Employee Benefits
77
14. Stock-Based Compensation
84
15. Segment Information
88
16. Financial Instruments
91
17. Derivative and Hedging Instruments
92
18. Commitments and Contingencies
93
19. Recent Accounting Standards
95
20. Review of Stock Option Practices
96
21.Out-of-Period Adjustments
98
22. Results by Quarter (Unaudited)
99


40

84

MANAGEMENT’S ASSESSMENT ONOF INTERNAL CONTROL OVER FINANCIAL REPORTING
 
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined inRules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934.1934, as amended. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America (“GAAP”). We recognize that because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
 
To evaluate the effectiveness of our internal control over financial reporting, management used the criteria described inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
 
A material weakness (within the meaning of PCAOB Auditing Standard No. 2) in internal control over financial reporting is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
      Management’s In connection with management’s assessment is thatof our internal control over financial reporting, was not effectivewe identified the following material weaknesses in our internal control over financial reporting as of December 31, 2005 because of the material weaknesses identified and described below. 2006.
1.  The Company did not maintain an effective control environment. Specifically, the Company did not maintain a sufficient complement of personnel throughout its worldwide offices with an appropriate level of accounting knowledge, experience and training in the application of GAAP commensurate with the Company’s financial reporting requirements. In addition, the Company did not maintain effective controls over the monitoring of its existing internal control activities over financial reporting and, instead, placed heavy reliance on manual procedures without sufficient review. Further, controls were not effective at ensuring employees’ acknowledgement of the Company’s Code of Conduct.
The material weaknesses identified by us at December 31, 2005 are grouped according to the components of the COSO framework to which they relate. These material weaknesses resulted in restatements, misstatements and audit adjustments asweakness described below, and could result in misstatements that would be material to the annual or interim consolidated financial statements that would not be prevented or detected.
Control Environment
      1. The Company did not maintain an effective control environment. Specifically, controls were not designed and in place to ensure compliance with the Company’s policies and procedures, including those contained in the Company’s Code of Conduct. Further, the Company did not maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience and training in the application of GAAP commensurate with the Company’s financial reporting requirements. The Company also failed to implement processes to ensure periodic monitoring of its existing internal control activities over financial reporting by placing heavy reliance on manual procedures without quality control review and other monitoring controls in place to adequately identify and assess significant risks that may impact financial statements and related disclosures. This deficiency results in a control environment that allowed instances of falsified books and records, violations of laws, regulations and the Company’s policies, misappropriation of assets and improper customer charges and dealings with vendors. This deficiency resulted in a restatement of the first three interim periods of 2005 and misstatements and audit adjustments, including the out of period adjustments, to the 2005 annual and interim consolidated financial statements. Additionally, this control deficiency could result in a misstatement of account balances or disclosure that would result in a material misstatement to annual or interim consolidated financial statements that would not be prevented or detected. This deficiencyabove has had a pervasive impact on the Company’s control environment and has contributed to the material weaknesses described below.
Control Activities
      2. The Company did not maintain effective controls over the accounting for purchase business combinations. Specifically, the Company did not have controls designed and in place to ensure the completeness, accuracy and valuation of revenue and expenses of acquired companies related to periods after the closing date of the transactions. In addition, the Company did not maintain effective controls to ensure the completeness, accuracy and valuation of assets and liabilities recorded for compensatory earn-out and put arrangements or derivatives embedded within acquisition transactions. This deficiency resulted in a restatement of the first three interim periods of 2005 and misstatements and audit adjustments, including out of period adjustments, to the 2005 annual and interim consolidated financial statements,

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which primarily impacted accounts receivable, net, accounts payable, minority interests in consolidated subsidiaries, goodwill, and other income. Additionally, this control deficiency could result in a misstatement of account balances or disclosure, including, but not limited to, the aforementioned accounts above that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
      3. The Company did not maintain effective controls over the accuracy and presentation and disclosure of recording of revenue. Specifically, controls were not designed and in place to ensure that customer contracts were authorized, that customer contracts were analyzed to select the appropriate method of revenue recognition, and billable job costs were compared to client cost estimates to ensure that no amounts were owed to clients. In addition, controls were not designed and in place to ensure that revenue transactions were analyzed for appropriate presentation and disclosure of billable client pass-through expenses or for recognition of revenue on a gross or net basis. This deficiency resulted in a restatement of the first three interim periods of 2005, and misstatements and audit adjustments, including out of period adjustments, to the 2005 annual and interim consolidated financial statements, which impacted revenue, office and general expenses, accounts receivable, net, expenditures billable to clients, accounts payable, and accrued liabilities. Additionally, this control deficiency could result in a misstatement of account balances or disclosure, including the aforementioned accounts above, that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
      4. The Company did not maintain effective controls to ensure that certain financial statement transactions were appropriately initiated, authorized, processed, documented and accurately recorded. This was primarily evident in the following specific areas:
 2.  
i.clientThe Company did not maintain effective controls over accuracy, presentation and disclosure in recording revenue. Specifically, controls were not designed and in place to ensure that customer contracts were authorized, that customer contracts were analyzed to select the appropriate method of revenue recognition and to identify contracts with client or vendor incentives and rebates;rebates, that amounts recorded were compared to amounts billed to clients, and that billable job costs were compared to client cost estimates to ensure that no amounts were owed to clients. In addition, controls were not designed and in place to ensure that revenue transactions were analyzed for appropriate presentation and disclosure of billable client pass-through expenses or for recognition of revenue on a gross or net basis.
ii.
 3.  The Company did not maintain effective controls to ensure that certain financial statement transactions and journal entries, both recurring and non-recurring, were appropriately initiated, authorized, processed, documented, accurately recorded, and reviewed. This was evident in the following specific areas:
i.    accounts receivable transactions, expenditures and fees billable to clients;
ii.   fixed asset purchases, disposals and depreciable lives;
iii.  accounts payable and accrued liabilities;
iv.   employee and executive compensation and benefits;
v.    derivative instruments;
vi.   cash and cash equivalents, wire transfers, and foreign currency transactions;
vii.  equity investments in unconsolidated entities; and
viii. debt and equity transactions.
iii.4.  The Company did not maintain effective controls over (1) the accounting for income taxes to ensure amounts are accurately recorded in accordance with GAAP, and (2) the reporting of income tax in the


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 fixed assets purchases, disposals, depreciable livesstatutory accounts or income tax returns for operations outside of the United States. Specifically, the Company did not have controls designed and leases;in place to:
iv.i.   analyze the income tax provision on the statement of operations, and deferred taxes on the balance sheet, to determine appropriate account balances for GAAP reporting;
 accounts payable and accrued liabilities;ii.  reconcile income tax returns to the appropriate period income tax calculations;
v.iii. payments made for employeeidentify income tax exposures and executive compensationcontingencies, including interest and payments for benefits;
vi.cash and cash equivalents, wire transfers, and foreign currency transactions;
vii.arrangements with derivative instruments;
viii.intercompany transactions;
ix.purchase of equity of investmentspenalties, in unconsolidated entities;
x.purchase, disposal or write-off of intangible assets;a timely manner; and
xi.iv.  debtfor non-U.S. operations only, maintain an accurate and equity transactions.current legal entity listing, and adhere to policy and procedures regarding compliance with local laws and regulations.
This deficiency resulted in a restatement of the first three interim periods of 2005, and misstatements and audit adjustments, including out of period adjustments, to the 2005 annual and interim consolidated financial statements, which impacted substantially all accounts in the consolidated financial statements. Additionally, this control deficiency could result in a misstatement of account balances or disclosure, including the aforementioned accounts above, that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
      5. The Company did not maintain effective controls over the complete and accurate recording of leases in accordance with GAAP. Specifically, the Company did not completely evaluate and accurately account for leases with rent holidays, rent escalation clauses, leasehold improvements or asset retirement obligations associated with real estate leases. This deficiency resulted in audit adjustments to the 2005 annual and interim consolidated financial statements, which primarily impacted office and general expenses, restructuring charges, land, buildings and equipment, net, accrued liabilities and other non-current liabilities. Additionally, this control deficiency could result in a misstatement of account balances or disclosure, including the aforementioned accounts above, that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

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      6. The Company did not maintain effective controls over the accounting for income taxes in domestic operations and operations outside of the United States to ensure amounts are accurately accounted for in accordance with GAAP. Specifically, the Company did not have controls designed and in place to ensure that accounting personnel performed the following: recorded income tax provision between current and deferred tax accounts in the balance sheet; reconciled prior years’ income tax returns to the appropriate period income tax provision computations; timely identified income tax exposures and contingencies, including interest and penalties; and reconciled tax accounts to tax filings. This deficiency resulted in misstatements and audit adjustments, including out of period adjustments, to the 20052006 annual consolidated financial statements, which impacted accrued liabilities, deferred income taxes, other non-current liabilities and the provision for income taxes. Additionally, this control deficiency could result in a misstatement of account balances or disclosure, including the aforementioned accounts above, that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
      7. The Company did not maintain effective controls over reporting local income tax in the local statutory accounts or local income tax returns in operations outside of the United States. Specifically, the Company did not have controls designed and in place to ensure that accounting personnel adhere to policy and procedures regarding compliance with local laws and regulations, and reconcile its accounts between GAAP and local income tax reporting. This allowed in prior periods the violation of local tax regulations and incomplete and inaccurate recording of income taxes in the Company’s consolidated financial statements. This deficiency did not result in an audit adjustment to the consolidated financial statements. However, this deficiency could result in a misstatement of account balances or disclosure, including, but not limited to, accrued liabilities, deferred income taxes, other non-current liabilities and the provision for income taxes that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.and other comprehensive loss.
 8. The Company did not maintain effective controls relating to the completeness and accuracy of local payroll and compensation related liabilities in certain operations outside of the United States. Specifically the Company did not have controls designed and in place to identify instances where local reporting regulations and payroll tax withholding requirements were not met or identification of compensation practices which were either not supportable under local law or were not fully in accordance with the Company’s policies and procedures. This allowed in prior periods improperly omitting, or instances of purposefully omitting, certain liabilities in the consolidated financial statements. This deficiency resulted in a restatement of the first three interim periods of 2005, and misstatements and audit adjustments, including out of period adjustments, to the 2005 annual and interim consolidated financial statements, which impacted salaries and related expenses and accrued liabilities. Additionally, this deficiency could result in a misstatement of account balances or disclosure, including the aforementioned accounts above, that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
      9. The Company did not maintain effective controls over the accuracy and completeness of the processing and monitoring of intercompany transactions, including appropriate authorization for intercompany charges. Specifically, controls were not designed and in place to ensure that intercompany balances were accurately classified and completely reported in the Company’s consolidated financial statements, and intercompany confirmations were not completed timely or accurately between the Company’s agencies to ensure proper elimination as part of the consolidation process. This deficiency resulted in immaterial audit adjustments to the 2005 annual and interim consolidated financial statements. Additionally, this control deficiency could result in a misstatement of account balances or disclosure that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
      10. The Company did not maintain effective controls over the reconciliation of certain financial statement accounts. Specifically, controls were not designed and in place to ensure that the Company’s accounts were accurate and agreed to detailed support. This deficiency resulted in a restatement of the first three interim periods of 2005, and misstatements and audit adjustments, including the out of period

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adjustments, to the 2005 annual and interim consolidated financial statements, which impacted substantially all accounts in the Company’s consolidated financial statements. Additionally, this control deficiency could result in a misstatement of account balances or disclosure that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
      11. The Company did not maintain effective control over the monitoring of financial statement accounts to value and record them in a timely, accurate and complete manner. Specifically, controls were not designed and in place to:
 5.  The Company did not maintain effective controls relating to the completeness and accuracy of local payroll and compensation-related liabilities in certain operations. Specifically, the Company did not have controls designed and in place to:
i.identify instances where local reporting regulations and payroll tax withholding requirements were not met, or to identify compensation practices which were either not supportable under local law or were not fully in accordance with the Company’s policies and procedures; and
 compare revenue recorded to amounts billed to clients;
ii.identify contracts with potential client rebates and vendor incentives;
iii.analyze collectibility of aged accounts receivable or expenditures billable to clients;
iv.compare billable job costs to client cost estimates;
v.review fixed asset records for under utilized, missing or fully depreciated assets;
vi.  ensure that the underlying records support liabilities related to employee compensation, including an inventory of employee benefit plans, the calculation of pension liabilities and changes made to benefit plans which impact the Company’s compliance with certain employment and tax regulations;regulations.
vii.6.  The Company did not maintain effective controls over the safeguarding of assets. Controls were not designed and in place to segregate responsibility and authority between initiating, processing and recording of transactions.
 review intercompany balances7.  The Company did not maintain effective controls over access and transactions for appropriate classification;
viii.review cash, foreign currency translation adjustmentschanges to the Company’s financial applications and other derivative transactions;
ix.analyze accrued expenses, including restructuring charges;
x.test tangibledata, and intangible assets for impairmentscontrols over spreadsheets used in the Company’s financial reporting process. Specifically, controls were not designed and appropriate economic lives;
xi.reviewin place to ensure that access to certain financial applications, data and spreadsheets at certain locations was adequately restricted to authorized personnel, and that changes to financial applications were documented and tested. Also, controls were not designed and in place to ensure that unauthorized modification of other asset and other liability accounts, equity and revenue and expense accounts for appropriate activitythe data or roll-forward of balances; and
xii.analyze amounts recorded as income tax liabilities or deferred tax assets or liabilities and the related income tax provision or benefit.formulas within spreadsheets would be prevented.
 This deficiency resulted in a restatement of the first three interim periods of 2005, and misstatements and audit adjustments, including out of period adjustments, to the 2005 annual and interim consolidated financial statements, which impacted substantially all accounts in the Company’s consolidated financial statements. Additionally, this
The control deficiencydeficiencies described above could result in a misstatementmisstatements of account balances or disclosure, including the aforementioned accounts above,disclosures that would result in abe material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
      12. The Company did not maintain effective controls over the period end financial reporting process. Specifically, controls were not designed and in place to ensure Accordingly, management has concluded that (i) journal entries, both recurring and non-recurring, were reviewed and approved, (ii) timely and complete review procedures were properly performed over the accounts and disclosures in our financial statements by personnel with knowledge sufficient to reach appropriate accounting conclusions, and (iii) a reconciliation of its legal entity financial results to the financial results recorded in the consolidated financial statements was performed. This deficiency resulted in a restatementeach of the first three interim periods of 2005, and misstatements and audit adjustments, including the out of period adjustments, to the 2005 annual and interim consolidated financial statements, which impacted substantially all accounts in the Company’s consolidated financial statements. Additionally, this control deficiency could result in a misstatement of account balances or disclosure that would result indeficiencies noted above constitutes a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
      13. The Company did not maintain effective controls over the safeguarding of assets. Controls were not designed and in place to segregate responsibility and authority between initiating, processing and recording of transactions which has impacted many accounts in the Company’s consolidated financial statements. This deficiency has resulted in certain improper transactions being entered into and those transactions being recorded or not recorded in the Company’s financial statements. This deficiency resulted

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in a restatement of the first three interim periods of 2005, and misstatements and audit adjustments, including the out of period adjustments, to the 2005 annual and interim consolidated financial statements, which impacted substantially all accounts in the Company’s consolidated financial statements. Additionally, this control deficiency could result in a misstatement of account balances or disclosure that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
      14. The Company did not maintain effective controls over certain independent service providers. Specifically, the Company was unable to document, test, and evaluate controls at third party vendors to which the Company outsources certain payroll processing services in North America. This deficiency did not result in an adjustment to the consolidated financial statements. However, this deficiency could result in a misstatement of account balances or disclosure, including salaries and related expenses and accrued liabilities that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
      15. The Company did not maintain effective controls over access to the Company’s financial applications and data as well as controls over changes to financial applications. Specifically, controls were not designed and in place to ensure that access to certain financial applications and data at certain locations were adequately restricted or changes to financial applications were documented or tested. In addition, the Company did not adequately monitor the access to financial applications and data. This deficiency has had a pervasive impact on the Company’s information technology control environment. Additionally, this deficiency could result in a misstatement of account balances or disclosure to substantially all accounts that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
      16. The Company did not maintain effective controls over spreadsheets used in the Company’s financial reporting process. Specifically, controls were not designed and in place to ensure that access was restricted to appropriate personnel,weakness and that unauthorized modification of the data or formulas within spreadsheets was prevented. This deficiency did not result in material adjustments to the consolidated financial statements. However, this deficiency could result in a misstatement of account balances or disclosure to substantially all accounts that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
Information and Communication
      17. The Company did not maintain effective controls over the communication of policies and procedures. Specifically, controls were not designed and in place to ensure corporate communications, including the Company’s code of conduct, were received by personnel across the Company. This deficiency has had a pervasive impact on the Company’sour internal control environment and has contributed to the material weaknesses described above. Additionally, this deficiency could result in a misstatement of account balances or disclosure to substantially all accounts that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
Monitoring
      18. The Company did not maintain effective controls over monitoring the performance of proper application of the Company’s internal controls over financial reporting and related policies and procedures. Specifically, controls werewas not designed and in place to ensure that the Company identifies and remediates control deficiencies timely. This deficiency has had a pervasive impact on the Company’s control environment and has contributed to the material weaknesses described above. Additionally, this deficiency could result in a misstatementeffective as of account balances or disclosure to substantially all accounts that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.December 31, 2006.

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Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 20052006 has been audited by PricewaterhouseCoopers LLP (PwC)(“PwC”), our independent registered public accounting firm. Refer to PwC’s report withinis included in this Item 8.
REMEDIATION OF CERTAIN MATERIAL WEAKNESSES IN
INTERNAL CONTROL OVER FINANCIAL REPORTING DISCLOSED IN OUR
2005 ANNUAL REPORT ONFORM 10-K
During the fourth quarter of 2006, there were changes in internal control that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Also, in relation to these changes in internal controls, during the fourth quarter of 2006, management completed its testing to validate the effectiveness of its remedial measures, and concluded that controls related to the remediation of certain of the material weaknesses previously disclosed in the 2005 Annual Report onForm 10-K were designed, in place and operating effectively for a sufficient period of time for management to determine that


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the material weaknesses were remediated as of December 31, 2006. Material weaknesses in the following areas were remediated:
•  the accounting for purchase business combinations and the completeness, accuracy and valuation of assets and liabilities recorded for compensatory earn-out and put arrangements and derivatives embedded within acquisition transactions;
•  the complete and accurate recording of leases in accordance with GAAP;
•  the accuracy and completeness of the processing and monitoring of intercompany transactions;
•  the reconciliation of financial statement accounts;
•  the analysis of certain financial statement accounts to value and record them in a timely, accurate and complete manner;
•  the period-end financial reporting process;
•  the documentation, testing and evaluation of controls at independent service providers, including those to which we outsource certain payroll processing services in North America; and
•  the communication of policies and procedures.
The changes to our internal control over financial reporting for each of the remediated material weaknesses were as follows:
•  For purchase business combinations, we have (i) implemented controls to ensure that our acquisition database, which is used to track all pending and completed acquisitions, properly reflects all information relevant to an acquisition, including the review sign-offs by appropriate personnel, (ii) developed new procedures to ensure the term sheet and acquisition agreements are circulated to and reviewed by the appropriate personnel in the Controllers, Corporate Development, Treasury and Legal departments, and (iii) instituted monthly meetings between the Corporate Controllers and Corporate Development departments to review the status of current and potential acquisitions. For compensatory earn-out and put arrangements or derivatives embedded within acquisition transactions, we implemented controls to require approval from our operating management, as well as members of our Corporate Controllers, Corporate Development and Tax departments, prior to the execution of the related agreement.
•  For leases, we centralized the review, recording and monitoring of lease accounting and reporting at one of our shared service centers. Also, we now require that our Accounting Policy group review the accounting for significant new or amended leases, the early termination of leases, and the exit of facilities under lease.
•  For intercompany transactions, we established a standard set of accounts, implemented standard processes around intercompany settlements and dispute resolution, and rolled out a company-wide intercompany matching tool designed to facilitate the identification and resolution of intercompany differences. Controls have been established to facilitate the timely review, resolution and elimination of intercompany balances and activity.
•  For account reconciliations, we implemented a web-based reconciliation and monitoring tool for certain accounts based on the risk, size and level of activity in accounts. Additionally, we performed extensive, mandatory training throughout the Company to ensure that personnel understood and adhered to the revised policies and procedures related to account reconciliations.
•  For account analyses, we implemented ongoing review procedures at the local, regional and consolidated reporting levels as part of the monthly closing process. We also performed extensive, mandatory training throughout the Company to ensure that personnel understood and adhered to the policies and procedures related to account analyses.
•  For the period-end financial reporting process, we hired personnel in the Corporate Controllers department possessing GAAP and SEC reporting knowledge and experience, and implemented procedures and controls, including closing schedules, checklists and revised reporting package schedules, to allow for the timely and accurate presentation and review of financial statement accounts and disclosures.
•  For independent service providers, we performed an inventory of outsourced processes and controls, and developed a standard set of user controls, assessment forms, and guidelines for determining whether outsourced work requires a service auditor’s report in accordance with Statement on Auditing Standards No. 70,Service Organizations.
•  For the communication of and adherence to Company policies and procedures, our Chief Risk Officer distributed a summary of new or modified policies and procedures that have been posted to the Company’s Policy and Procedure website each quarter. Updated policies and procedures were prepared and


43

communicated, and training provided, in relation to all of the above material weaknesses remediated in the fourth quarter of 2006.
ONGOING REMEDIATION OF MATERIAL WEAKNESSES IN
INTERNAL CONTROL OVER FINANCIAL REPORTING AS OF DECEMBER 31, 2006
 
Management initiated a comprehensive remediation program, aimed at remediating the material weaknesses disclosed in our 2005 Annual Report onForm 10-K by December 31, 2007. Cross-functional teams were established to focus on the material weaknesses. Each team, led by the Corporate Controller, went through a comprehensive process to identify and assess the problems relating to the material weaknesses, outline and assess potential solutions, finalize recommended solutions, and create an implementation plan to improve financial controls and remediate the material weaknesses. During 2006, we combined multiple agency controller organizations by region, except in North America, into a central unit. Each region operates using a consistent methods and procedures manual, which is intended to provide uniform monitoring control of our agencies around the world. We also developed tools and documentation to apply uniform monitoring control standards throughout the organization. The regional teams also conduct site visits to various agencies to review results and perform monitoring procedures to ensure that the appropriate processes are followed. As discussed in the previous section, these actions and specific changes in internal control over financial reporting resulted in the remediation of certain material weaknesses during the fourth quarter of 2006.
We continue to have extensive work remaining to remedy theremediate our remaining material weaknesses described above.weaknesses. The magnitude of the work is attributable partly to our significantly decentralized structure and the number of our disparate accounting systems of varying quality and sophistication.sophistication that we utilize across the Company. We continuehave developed a work plan with the processgoal of developing and implementing aremediating all of the identified material weaknesses by the time we file our Annual Report onForm 10-K for the year ending December 31, 2007. There can be no assurance, however, as to when the remediation plan will be fully implemented and all the material weaknesses remediated. There also can be no assurance that new problems will not be found in the future.
Common actions we have taken and continue to address our deficienciestake, and expect that this plan will extend intowhich were instrumental in remediating certain material weaknesses during the fourth quarter of 2006, fiscal year and beyond. Theinclude:
•  new or enhanced policies, and methods and procedure guides;
•  revised work processes;
•  enhanced monitoring and communications;
•  new or enhanced templates and analytic tools;
•  training and skills development;
•  clarified accountabilities and structure; and
•  updated control procedures and test plans to reflect new policies, processes and procedures and evidenced implementation.
In addition, the following list describesongoing remedial actions that have been implemented to date or continue to be implemented across the Company’sour operating units.units:
 Continuing meetings•  Meetings with management of our financial and operating units to ensure their understanding of the procedures to be followed and requirements to be met prior to executing required internal management certification letters to accompany the financial statements they submit. These meetings have been occurring and will continue.
 Requiring Interpublic Group Code•  Continuing to formalize direct Corporate oversight of Conduct compliance certifications by all significant management of the Companyfinancial personnel company-wide with accounting and our agencies prior to the submission of the financial and operating units’ financial statements.control-related responsibilities.
 
•  Continuing a focused effort to establish controls to deter and detect fraud with significant oversight and input by our Board of Directors and Audit Committee, including, but not limited to, ensuring properfollow-up and resolution of whistleblowers’ assertions.
We have communicated to our locations that an anonymous alert line is in place and is there to use if employees do not feel comfortable with communicating with their local management.
 Established•  Establishing standard global documentation and testing requirements of internal controls over financial reporting to ensure consistency in the overall evaluation of internal controls within our operating units and to enable focused future remediation efforts related to our control deficiencies.
 
•  Implementing a new enterprise-wide resource-planning software system starting with initial implementations at select entities during the latter part of 2005 with continuing rollouts through early 2007. This implementation will allow for more transparency in theenhanced reporting of our results of operationsinternally across the Company, and will also allow for numerous controls to be automated as part ofwithin the system.


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•  Continuing the development throughout 2006 of a shared service center programservices organization to consolidate various financial transactional functions to attain efficiencies and improve controls surrounding these activities.
 
•  Reorganizing and restructuring our Controllers and Finance Group by hiring additional qualified personnel and revising the reporting structure. We are also continuing our assessment ofContinuing to assess the accounting and finance departmentspersonnel at our agencies and, inagencies. In some cases, we have already either replaced personnel or hired additional resources. This assessment is continuing and the remediation will continue throughout 2006 before our agencies are appropriately staffed to levels we consider appropriate.
 With assistance from the Corporate Controllers Group and the Internal Control Group, we continue to conduct surprise audits of selected income statement items and balance sheet accounts at various financial and operating units to ensure accuracy of results.
•  Updating and continuing to enhance accounting and finance-related policies and procedures. The maintenance of policies is a constantly evolving process subject to continuous update, and in that regard, we have recently issued or in the process of updated policies with respect to revenue recognition, accounting for expenditures under real estate leases, and the processing of inter-company transactions among others.

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 Maintaining an ongoing program of continuing professional education for financial employees in various areas and disciplines, including revenue recognition, lease accounting, financial reporting and ethics.
Established standard global manual documentation requirements at the local reporting levels for the assessment of processing and monitoring of intercompany transactions, appropriate revenue recognition and the proper recognition of expenditures under real estate leases.
Establishing and continuing to improve ongoing analytical review procedures, at the local reporting levels as well as the consolidated level, as part of the monthly closing process and continuing the detailed monthly results analysis and meetings with all significant entities by the Corporate Controllers Group.
•  Establishing revised quarterly reporting for tax accounts, updateupdating and enhance tax relatedenhancing tax-related policies and procedures, and increaseincreasing tax training at regional and local levels. We also hired a team of professionals solely responsible for interacting with all levels of financial personnel in the agencies to ensure that the tax reporting information is being provided timely and accurately.
 
•  Engaging outside professional tax advisors to review the local income tax returns of each subsidiary outside of the U.S. prior to filing in order to ensure they are filed on a timely basis and are prepared in accordance with local law and regulations.
 
•  Requiring written approval of a corporate committee consisting of senior representatives of the human resources, tax, legal and accounting functions for any non-traditional employment arrangement or payroll practice. In addition, all existing non-traditional employment arrangements must be reviewed by senior agency financial executives and a formal plan proposed to eliminate those arrangements which are not supportable under both local law and practice, as well as our policies and procedures.
      Given the presence of material weaknesses in our internal control over financial reporting, there is more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Our financial reporting process includes extensive procedures we undertake so that our published financial statements are presented in accordance with GAAP, notwithstanding the material weaknesses in internal control. We have significantly expanded our year-end closing procedures. We have expanded our review of customer contracts and agreements to address revenue recognition issues. In addition, we have other procedures to monitor account analysis, specifically related to liabilities arising from vendor discounts or credits, future obligations related to prior acquisitions, internal investigations and international compensation arrangements, as well as account reconciliations. All of the above mentioned procedures have been designed so that our consolidated financial statements are presented in accordance with GAAP. As a result, management, to the best of its knowledge, believes that (i) this report does not contain any untrue statements of a material fact or omits any material fact and (ii) the consolidated financial statements and other financial information included in this report for the year ended December 31, 2005 have been prepared in conformity with GAAP and fairly present in all material respects our financial condition, results of operations and cash flows.


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91

Report of Independent Registered Public Accounting FirmREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To theThe Board of Directors and Stockholders of
 The Interpublic Group of Companies, Inc.:
We have completed an integrated audit of The Interpublic Group of Companies, Inc.
We have completed integrated audits of The Interpublic Group of Companies, Inc.’s 2006 and 2005 consolidated financial statements and of its internal control over financial reporting as of December 31, 20052006 and auditsan audit of its 2004 and 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders’cash flows, of stockholders equity and of cash flowscomprehensive loss present fairly, in all material respects, the financial position of The Interpublic Group of Companies, Inc. and its subsidiaries at December 31, 20052006 and 2004,December 31, 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20052006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 8 presents fairly, in all material respects, the information set forth therein when read in conjunction with the relatedThese consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As describeddiscussed in Note 813 to the consolidated financial statements, the Company has changed the date of its annual goodwill impairment test from September 30 to October 1.manner in which it accounts for defined benefit pension and other postretirement plans in 2006.
Internal control over financial reporting
Also, we have audited management’s assessment, included in Management’s Assessment onof Internal Control Over Financial Reporting appearing under Item 8, that The Interpublic Group of Companies, Inc.the Company did not maintain effective internal control over financial reporting as of December 31, 2005,2006, because the Company did not maintain: (1) an effective control environment; (2) effective controls over the accounting for purchase business combinations; (3) effective controls over the accuracy, and presentation and disclosure ofin recording of revenue; (4)(3) effective controls to ensure that certain financial statement transactions and journal entries, both recurring and non-recurring, were appropriately initiated, authorized, processed, documented, accurately recorded, and accurately recorded; (5) effective controls over the complete and accurate recording of leases in accordance with GAAP; (6)reviewed; (4) effective controls over the accounting for income taxes in domestic operations and operations outside of the United States to ensure amounts are accurately accounted forrecorded in accordance with GAAP; (7) effective controls overGAAP, and the reporting localof income tax in the local statutory accounts or local income tax returns infor operations outside of the United States; (8)(5) effective controls relating to the completeness and accuracy of local payroll and compensation relatedcompensation-related liabilities in certain operations outside of the United States; (9) effective controls over the accuracy and completeness of the processing and monitoring of intercompany transactions, including appropriate authorization for intercompany charges; (10) effective controls over the reconciliation of certain financial statement accounts; (11) effective control over the monitoring of financial statement accounts to value and record them in a timely, accurate and complete manner; (12) effective controls over the period end financial reporting process; (13)operations; (6) effective controls over the safeguarding of assets; (14)and (7) effective controls over certain independent service providers; (15) effective

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controls over access and changes to the Company’s financial applications and data, as well as controls over changes to financial applications; (16) effectiveand controls over spreadsheets used in the Company’s financial reporting process; (17) effective controls over the communication of policies and procedures; and (18) effective controls over monitoring the performance of proper application of the Company’s internal controls over financial reporting and related policies and procedures,process, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting


46

includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weaknesses have been identified and included in management’s assessment.
1.  The Company did not maintain an effective control environment. Specifically, the Company did not maintain a sufficient complement of personnel throughout its worldwide offices with an appropriate level of accounting knowledge, experience and training in the application of GAAP commensurate with the Company’s financial reporting requirements. In addition, the Company did not maintain effective controls over the monitoring of its existing internal control activities over financial reporting and, instead, placed heavy reliance on manual procedures without sufficient review. Further, controls were not effective at ensuring employees’ acknowledgement of the Company’s Code of Conduct.
The Company did not maintain an effective control environment. Specifically, controls were not designed and in place to ensure compliance with the Company’s policies and procedures, including those contained in the Company’s Code of Conduct. Further, the Company did not maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience and training in the application of GAAP commensurate with the Company’s financial reporting requirements. The Company also failed to implement processes to ensure periodic monitoring of its existing internal control activities over financial reporting by placing heavy reliance on manual procedures without quality control review and other monitoring controls in place to adequately identify and assess significant risks that may impact financial statements and related disclosures. This deficiency results in a control environment that allowed instances of falsified books and records, violations of laws, regulations and the Company’s policies, misappropriation of assets and improper customer charges and dealings with vendors. This deficiency resulted in a restatement of the first three interim periods of 2005, and misstatements and audit adjustments, including the out of period adjustments, to the 2005 annual and interim consolidated financial

93

statements. Additionally, this control deficiency could result in a misstatement of account balances or disclosure that would result in a material misstatement to annual or interim consolidated financial statements that would not be prevented or detected. This deficiencyweakness described above has had a pervasive impact on the Company’s control environment and has contributed to the material weaknesses described below.
2. The Company did not maintain effective controls over the accounting for purchase business combinations. Specifically, the Company did not have controls designed and in place to ensure the completeness, accuracy and valuation of revenue and expenses of acquired companies related to periods after the closing date of the transactions. In addition, the Company did not maintain effective controls to ensure the completeness, accuracy and valuation of assets and liabilities recorded for compensatory earn-out and put arrangements or derivatives embedded within acquisition transactions. This deficiency resulted in a restatement of the first three interim periods of 2005, and misstatements and audit adjustments, including out of period adjustments, to the 2005 annual and interim consolidated financial statements, which primarily impacted accounts receivable, net, accounts payable, minority interests in consolidated subsidiaries, goodwill, and other income. Additionally, this control deficiency could result in a misstatement of account balances or disclosure, including, but not limited to, the aforementioned accounts above that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
3. The Company did not maintain effective controls over the accuracy and presentation and disclosure of recording of revenue. Specifically, controls were not designed and in place to ensure that customer contracts were authorized, that customer contracts were analyzed to select the appropriate method of revenue recognition, and billable job costs were compared to client cost estimates to ensure that no amounts were owed to clients. In addition, controls were not designed and in place to ensure that revenue transactions were analyzed for appropriate presentation and disclosure of billable client pass-through expenses or for recognition of revenue on a gross or net basis. This deficiency resulted in a restatement of the first three interim periods of 2005, and misstatements and audit adjustments, including out of period adjustments, to the 2005 annual and interim consolidated financial statements, which impacted revenue, office and general expenses, accounts receivable, net, expenditures billable to clients, accounts payable, and accrued liabilities. Additionally, this control deficiency could result in a misstatement of account balances or disclosure, including the aforementioned accounts above, that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
4. The Company did not maintain effective controls to ensure that certain financial statement transactions were appropriately initiated, authorized, processed, documented and accurately recorded. This was primarily evident in the following specific areas:
 2.  
i.clientThe Company did not maintain effective controls over accuracy, presentation and disclosure in recording revenue. Specifically, controls were not designed and in place to ensure that customer contracts were authorized, that customer contracts were analyzed to select the appropriate method of revenue recognition and to identify contracts with client or vendor incentives and rebates;rebates, that amounts recorded were compared to amounts billed to clients, and that billable job costs were compared to client cost estimates to ensure that no amounts were owed to clients. In addition, controls were not designed and in place to ensure that revenue transactions were analyzed for appropriate presentation and disclosure of billable client pass-through expenses or for recognition of revenue on a gross or net basis.
ii.
3.  The Company did not maintain effective controls to ensure that certain financial statement transactions and journal entries, both recurring and non-recurring, were appropriately initiated, authorized, processed, documented, accurately recorded, and reviewed. This was evident in the following specific areas:
i.    accounts receivable transactions, expenditures and fees billable to clients;
iii.ii.   fixed asset purchases, disposals and depreciable lives;
 fixed assets purchases, disposals, depreciable lives and leases;
iv.iii.  accounts payable and accrued liabilities;
v.iv.   payments made for employee and executive compensation and payments for benefits;
vi.v.    derivative instruments;
vi.   cash and cash equivalents, wire transfers, and foreign currency transactions;
vii.vii.  arrangements with derivative instruments;
viii.intercompany transactions;
ix.purchase of equity of investments in unconsolidated entities;
x.purchase, disposal or write-off of intangible assets; and
xi.viii. debt and equity transactions.
This deficiency resulted in a restatement of the first three interim periods of 2005, and misstatements and audit adjustments, including out of period adjustments, to the 2005 annual and interim consolidated financial statements, which impacted substantially all accounts in the consolidated financial statements. Additionally, this control deficiency could result in a misstatement of account balances or disclosure,
4.  The Company did not maintain effective controls over (1) the accounting for income taxes to ensure amounts are accurately recorded in accordance with GAAP, and (2) the reporting of income tax in the statutory accounts or income tax returns for operations outside of the United States. Specifically, the Company did not have controls designed and in place to:
i.   analyze the income tax provision on the statement of operations, and deferred taxes on the balance sheet, to determine appropriate account balances for GAAP reporting;
ii.  reconcile income tax returns to the appropriate period income tax calculations;
iii. identify income tax exposures and contingencies, including interest and penalties, in a timely manner; and


47

94

including the aforementioned accounts above, that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
iv.  for non-U.S. operations only, maintain an accurate and current legal entity listing, and adhere to policy and procedures regarding compliance with local laws and regulations.
5. The Company did not maintain effective controls over the complete and accurate recording of leases in accordance with GAAP. Specifically, the Company did not completely evaluate and accurately account for leases with rent holidays, rent escalation clauses, leasehold improvements or asset retirement obligations associated with real estate leases. This deficiency resulted in audit adjustments to the 2005 annual and interim consolidated financial statements, which primarily impacted office and general expenses, restructuring charges, land, buildings and equipment, net, accrued liabilities and other non-current liabilities. Additionally, this control deficiency could result in a misstatement of account balances or disclosure, including the aforementioned accounts above, that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
6. The Company did not maintain effective controls over the accounting for income taxes in domestic operations and operations outside of the United States to ensure amounts are accurately accounted for in accordance with GAAP. Specifically, the Company did not have controls designed and in place to ensure that accounting personnel performed the following: recorded income tax provision between current and deferred tax accounts in the balance sheet; reconciled prior years’ income tax returns to the appropriate period income tax provision computations; timely identified income tax exposures and contingencies, including interest and penalties; and reconciled tax accounts to tax filings. This deficiency resulted in misstatements and audit adjustments, including out of period adjustments, to the 20052006 annual consolidated financial statements, which impacted accrued liabilities, deferred income taxes, other non-current liabilities and the provision for income taxes. Additionally, this control deficiency could result in a misstatement of account balances or disclosure, including the aforementioned accounts above, that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
7. The Company did not maintain effective controls over reporting local income tax in the local statutory accounts or local income tax returns in operations outside of the United States. Specifically, the Company did not have controls designed and in place to ensure that accounting personnel adhere to policy and procedures regarding compliance with local laws and regulations, and reconcile its accounts between GAAP and local income tax reporting. This allowed in prior periods the violation of local tax regulations and incomplete and inaccurate recording of income taxes in the Company’s consolidated financial statements. This deficiency did not result in an audit adjustment to the consolidated financial statements. However, this deficiency could result in a misstatement of account balances or disclosure, including, but not limited to, accrued liabilities, deferred income taxes, other non-current liabilities and the provision for income taxes that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.and other comprehensive loss.
8. The Company did not maintain effective controls relating to the completeness and accuracy of local payroll and compensation related liabilities in certain operations outside of the United States. Specifically the Company did not have controls designed and in place to identify instances where local reporting regulations and payroll tax withholding requirements were not met or identification of compensation practices which were either not supportable under local law or were not fully in accordance with the Company’s policies and procedures. This allowed in prior periods improperly omitting, or instances of purposefully omitting, certain liabilities in the consolidated financial statements. This deficiency resulted in a restatement of the first three interim periods of 2005, and misstatements and audit adjustments, including out of period adjustments, to the 2005 annual and interim consolidated financial statements, which impacted salaries and related expenses and accrued liabilities. Additionally, this deficiency could result in a misstatement of account balances or disclosure, including the aforementioned accounts above, that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
9. The Company did not maintain effective controls over the accuracy and completeness of the processing and monitoring of intercompany transactions, including appropriate authorization for intercompany charges.

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Specifically, controls were not designed and in place to ensure that intercompany balances were accurately classified and completely reported in the Company’s consolidated financial statements, and intercompany confirmations were not completed timely or accurately between the Company’s agencies to ensure proper elimination as part of the consolidation process. This deficiency resulted in immaterial audit adjustments to the 2005 annual and interim consolidated financial statements. Additionally, this control deficiency could result in a misstatement of account balances or disclosure that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
10. The Company did not maintain effective controls over the reconciliation of certain financial statement accounts. Specifically, controls were not designed and in place to ensure that the Company’s accounts were accurate and agreed to detailed support. This deficiency resulted in a restatement of the first three interim periods of 2005, and misstatements and audit adjustments, including the out of period adjustments, to the 2005 annual and interim consolidated financial statements, which impacted substantially all accounts in the Company’s consolidated financial statements. Additionally, this control deficiency could result in a misstatement of account balances or disclosure that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
11. The Company did not maintain effective control over the monitoring of financial statement accounts to value and record them in a timely, accurate and complete manner. Specifically, controls were not designed and in place to:
 5.  The Company did not maintain effective controls relating to the completeness and accuracy of local payroll and compensation-related liabilities in certain operations. Specifically, the Company did not have controls designed and in place to:
i.identify instances where local reporting regulations and payroll tax withholding requirements were not met, or to identify compensation practices which were either not supportable under local law or were not fully in accordance with the Company’s policies and procedures; and
 compare revenue recorded to amounts billed to clients;
ii.identify contracts with potential client rebates and vendor incentives;
iii.analyze collectibility of aged accounts receivable or expenditures billable to clients;
iv.compare billable job costs to client cost estimates;
v.review fixed asset records for under utilized, missing or fully depreciated assets;
vi. ensure that the underlying records support liabilities related to employee compensation, including an inventory of employee benefit plans, the calculation of pension liabilities and changes made to benefit plans which impact the Company’s compliance with certain employment and tax regulations;regulations.
vii.6. The Company did not maintain effective controls over the safeguarding of assets. Controls were not designed and in place to segregate responsibility and authority between initiating, processing and recording of transactions.
 review intercompany balances7. The Company did not maintain effective controls over access and transactions for appropriate classification;
viii.review cash, foreign currency translation adjustmentschanges to the Company’s financial applications and other derivative transactions;
ix.analyze accrued expenses, including restructuring charges;
x.test tangibledata, and intangible assets for impairmentscontrols over spreadsheets used in the Company’s financial reporting process. Specifically, controls were not designed and appropriate economic lives;
xi.reviewin place to ensure that access to certain financial applications, data and spreadsheets at certain locations was adequately restricted to authorized personnel, and that changes to financial applications were documented and tested. Also, controls were not designed and in place to ensure that unauthorized modification of other asset and other liability accounts, equity and revenue and expense accounts for appropriate activitythe data or roll-forward of balances; and
xii.analyze amounts recorded as income tax liabilities or deferred tax assets or liabilities and the related income tax provision or benefit.formulas within spreadsheets would be prevented.
This deficiency resulted in a restatement of the first three interim periods of 2005, and misstatements and audit adjustments, including out of period adjustments, to the 2005 annual and interim consolidated financial statements, which impacted substantially all accounts in the Company’s consolidated financial statements. Additionally, this
The control deficiencydeficiencies described above could result in a misstatementmisstatements of account balances or disclosure, including the aforementioned accounts above,disclosures that would result in abe material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
12. The Company did not maintain effective controls over the period end financial reporting process. Specifically, controls were not designed and in place to ensure that (i) journal entries, both recurring and non-recurring, were reviewed and approved, (ii) timely and complete review procedures were properly performed over the accounts and disclosures in our financial statements by personnel with knowledge sufficient to reach appropriate accounting conclusions, and (iii) a reconciliation of its legal entity financial results to the financial results recorded in the consolidated financial statements was performed. This deficiency resulted in a restatement of the first three interim periods of 2005, and misstatements and audit

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adjustments, including the out of period adjustments, to the 2005 annual and interim consolidated financial statements, which impacted substantially all accounts in the Company’s consolidated financial statements. Additionally, this control deficiency could result in a misstatement of account balances or disclosure that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
13. The Company did not maintain effective controls over the safeguarding of assets. Controls were not designed and in place to segregate responsibility and authority between initiating, processing and recording of transactions which has impacted many accounts in the Company’s consolidated financial statements. This deficiency has resulted in certain improper transactions being entered into and those transactions being recorded or not recorded in the Company’s financial statements. This deficiency resulted in a restatement of the first three interim periods of 2005, and misstatements and audit adjustments, including the out of period adjustments, to the 2005 annual and interim consolidated financial statements, which impacted substantially all accounts in the Company’s consolidated financial statements. Additionally, this control deficiency could result in a misstatement of account balances or disclosure that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
14. The Company did not maintain effective controls over certain independent service providers. Specifically, the Company was unable to document, test, and evaluate controls at third party vendors to which the Company outsources certain payroll processing services in North America. This deficiency did not result in an adjustment to the consolidated financial statements. However, this deficiency could result in a misstatement of account balances or disclosure, including salaries and related expenses and accrued liabilities that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
15. The Company did not maintain effective controls over access to the Company’s financial applications and data as well as controls over changes to financial applications. Specifically, controls were not designed and in place to ensure that access to certain financial applications and data at certain locations were adequately restricted or changes to financial applications were documented or tested. In addition, the Company did not adequately monitor the access to financial applications and data. This deficiency has had a pervasive impact on the Company’s information technology control environment. Additionally, this deficiency could result in a misstatement of account balances or disclosure to substantially all accounts that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
16. The Company did not maintain effective controls over spreadsheets used in the Company’s financial reporting process. Specifically, controls were not designed and in place to ensure that access was restricted to appropriate personnel, and that unauthorized modification of the data or formulas within spreadsheets was prevented. This deficiency did not result in material adjustments to the consolidated financial statements. However, this deficiency could result in a misstatement of account balances or disclosure to substantially all accounts that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
17. The Company did not maintain effective controls over the communication of policies and procedures. Specifically, controls were not designed and in place to ensure corporate communications, including the Company’s code of conduct, were received by personnel across the Company. This deficiency has had a pervasive impact on the Company’s control environment and has contributed to the material weaknesses described above. Additionally, this deficiency could result in a misstatement of account balances or disclosure to substantially all accounts that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
18. The Company did not maintain effective controls over monitoring the performance of proper application of the Company’s internal controls over financial reporting and related policies and procedures. Specifically, controls were not designed and in place to ensure that the Company identifies and remediates control deficiencies timely. This deficiency has had a pervasive impact on the Company’s control

97

environment and has contributed to the material weaknesses described above. Additionally, this deficiency could result in a misstatement of account balances or disclosure to substantially all accounts that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 20052006 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.
In our opinion, management’s assessment that the Company did not maintain effective internal control over financial reporting as of December 31, 2005,2006, is fairly stated, in all material respects, based on criteria established inInternal Control — Integrated Frameworkissued by the COSO. Also, in our opinion, because of the effects of the material weaknesses described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2005,2006, based on criteria established inInternal Control — Integrated Frameworkissued by the COSO.
/s/ PricewaterhouseCoopers LLP
/s/  PricewaterhouseCoopers LLP
New York, New York
March 22, 2006February 28, 2007


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98

THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in Millions, Except Per Share Amounts)
              
  Years Ended December 31,
   
  2005 2004 2003
       
REVENUE
 $6,274.3  $6,387.0  $6,161.7 
          
OPERATING (INCOME) EXPENSES:
            
 Salaries and related expenses  3,999.1   3,733.0   3,501.4 
 Office and general expenses  2,288.1   2,250.4   2,225.3 
 Restructuring (reversals) charges  (7.3)  62.2   172.9 
 Long-lived asset impairment and other charges  98.6   322.2   294.0 
 Motorsports contract termination costs  —   113.6   — 
          
Total operating (income) expenses  6,378.5   6,481.4   6,193.6 
          
OPERATING LOSS
  (104.2)  (94.4)  (31.9)
          
EXPENSES AND OTHER INCOME:
            
 Interest expense  (181.9)  (172.0)  (206.6)
 Debt prepayment penalty  (1.4)  (9.8)  (24.8)
 Interest income  80.0   50.8   39.3 
 Investment impairments  (12.2)  (63.4)  (71.5)
 Litigation reversals (charges)  —   32.5   (127.6)
 Other income (expense)  33.1   (10.7)  50.3 
          
Total expenses and other income  (82.4)  (172.6)  (340.9)
          
Loss from continuing operations before provision for income taxes
  (186.6)  (267.0)  (372.8)
 Provision for income taxes  81.9   262.2   242.7 
          
Loss from continuing operations of consolidated companies
  (268.5)  (529.2)  (615.5)
 Income applicable to minority interests (net of tax)  (16.7)  (21.5)  (27.0)
 Equity in net income of unconsolidated affiliates (net of tax)  13.3   5.8   2.4 
          
Loss from continuing operations
  (271.9)  (544.9)  (640.1)
Income from discontinued operations (net of tax)
  9.0   6.5   101.0 
          
Net loss
  (262.9)  (538.4)  (539.1)
Dividends on preferred stock  26.3   19.8   — 
          
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
 $(289.2) $(558.2) $(539.1)
          
Earnings (loss) per share of common stock:            
Basic and diluted:            
 Continuing operations $(0.70) $(1.36) $(1.66)
 Discontinued operations  0.02   0.02   0.26 
          
Total $(0.68) $(1.34) $(1.40)
          
Weighted-average shares:            
 Basic and diluted  424.8   415.3   385.5 
             
  Years ended December 31,
  2006 2005 2004
 
REVENUE
 $6,190.8  $6,274.3  $6,387.0 
             
             
OPERATING EXPENSES:
            
Salaries and related expenses  3,944.1   3,999.1   3,733.0 
Office and general expenses  2,079.0   2,288.1   2,250.4 
Restructuring and other reorganization-related charges (reversals)  34.5   (7.3)  62.2 
Long-lived asset impairment and other charges  27.2   98.6   322.2 
Motorsports contract termination costs  —   —   113.6 
             
Total operating expenses  6,084.8   6,378.5   6,481.4 
             
             
OPERATING INCOME (LOSS)
  106.0   (104.2)  (94.4)
             
             
EXPENSES AND OTHER INCOME:
            
Interest expense  (218.7)  (181.9)  (172.0)
Interest income  113.3   80.0   50.8 
Other (expense) income  (5.6)  19.5   (51.4)
             
Total (expenses) and other income  (111.0)  (82.4)  (172.6)
             
             
Loss from continuing operations before provision for income taxes
  (5.0)  (186.6)  (267.0)
Provision for income taxes  18.7   81.9   262.2 
             
Loss from continuing operations of consolidated companies
  (23.7)  (268.5)  (529.2)
Income applicable to minority interests, net of tax  (20.0)  (16.7)  (21.5)
Equity in net income of unconsolidated affiliates, net of tax  7.0   13.3   5.8 
             
Loss from continuing operations  (36.7)  (271.9)  (544.9)
Income from discontinued operations, net of tax  5.0   9.0   6.5 
             
NET LOSS
  (31.7)  (262.9)  (538.4)
Dividends on preferred stock  47.6   26.3   19.8 
             
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
 $(79.3) $(289.2) $(558.2)
             
             
Loss per share of common stock — basic and diluted            
Continuing operations $(0.20) $(0.70) $(1.36)
Discontinued operations  0.01   0.02   0.02 
             
Total $(0.19) $(0.68) $(1.34)
             
             
Weighted-average number of common shares outstanding — basic and diluted  428.1   424.8   415.3 
The accompanying notes are an integral part of these financial statements.


49

99

THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in Millions, Except Per Share Amounts)Millions)
          
  December 31
   
  2005 2004
     
ASSETS:
Cash and cash equivalents $2,075.9  $1,550.4 
Marketable securities  115.6   420.0 
Accounts receivable, net of allowance of $105.5 and $136.1  4,015.7   4,319.2 
Expenditures billable to clients  917.6   882.9 
Deferred income taxes  184.3   261.0 
Prepaid expenses and other current assets  188.3   184.6 
       
 Total current assets  7,497.4   7,618.1 
Land, buildings and equipment, net  650.0   722.9 
Deferred income taxes  297.3   274.2 
Investments  170.6   168.7 
Goodwill  3,030.9   3,141.6 
Other assets  299.0   328.2 
       
 Total non-current assets  4,447.8   4,635.6 
       
TOTAL ASSETS
 $11,945.2  $12,253.7 
       
 
LIABILITIES:
Accounts payable $4,245.4  $4,733.5 
Accrued liabilities  2,554.3   2,485.2 
Short-term debt  56.8   325.9 
       
 Total current liabilities  6,856.5   7,544.6 
Long-term debt  2,183.0   1,936.0 
Deferred compensation and employee benefits  592.1   590.7 
Other non-current liabilities  319.0   408.9 
Minority interests in consolidated subsidiaries  49.3   55.2 
       
 Total non-current liabilities  3,143.4   2,990.8 
       
TOTAL LIABILITIES
  9,999.9   10,535.4 
       
Commitments and contingencies (Note 21)        
 
STOCKHOLDERS’ EQUITY:
Preferred stock, no par value, shares authorized: 20.0        
 Series A shares issued and outstanding: 2005 — 7.5; 2004 — 7.5  373.7   373.7 
 Series B shares issued and outstanding: 2005 — 0.5  525.0   — 
Common stock, $0.10 par value, shares authorized: 800.0  43.0   42.5 
 shares issued: 2005 — 430.3; 2004 — 424.9         
 shares outstanding: 2005 — 429.9; 2004 — 424.5        
Additional paid-in capital  2,224.1   2,208.9 
Accumulated deficit  (841.1)  (578.2)
Accumulated other comprehensive loss, net of tax  (276.0)  (248.6)
       
   2,048.7   1,798.3 
Less:        
Treasury stock, at cost: 2005 — 0.4 shares; 2004 — 0.4 shares  (14.0)  (14.0)
Unamortized deferred compensation  (89.4)  (66.0)
       
TOTAL STOCKHOLDERS’ EQUITY
  1,945.3   1,718.3 
       
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 $11,945.2  $12,253.7 
       
         
  December 31,
  2006 2005
 
ASSETS:
        
Cash and cash equivalents $1,955.7  $2,075.9 
Marketable securities  1.4   115.6 
Accounts receivable, net of allowance of $81.3 and $105.5  3,934.9   4,015.7 
Expenditures billable to clients  1,021.4   917.6 
Deferred income taxes  70.9   184.3 
Prepaid expenses and other current assets  224.5   188.3 
         
Total current assets  7,208.8   7,497.4 
Land, buildings and equipment, net  624.0   650.0 
Deferred income taxes  476.5   297.3 
Investments  128.1   170.6 
Goodwill  3,067.8   3,030.9 
Other assets  358.9   299.0 
         
TOTAL ASSETS
 $11,864.1  $11,945.2 
         
         
LIABILITIES:
        
Accounts payable $4,124.1  $4,438.6 
Accrued liabilities  2,456.0   2,361.1 
Short-term debt  82.9   56.8 
         
Total current liabilities  6,663.0   6,856.5 
Long-term debt  2,248.6   2,183.0 
Deferred compensation and employee benefits  606.3   592.1 
Other non-current liabilities  359.1   319.0 
Minority interests in consolidated subsidiaries  46.5   49.3 
         
TOTAL LIABILITIES
  9,923.5   9,999.9 
         
         
Commitments and contingencies (Note 18)        
         
STOCKHOLDERS’ EQUITY:
        
Preferred stock, no par value, shares authorized: 20.0        
Series A shares issued and outstanding: 2005 — 7.5  —   373.7 
Series B shares issued and outstanding: 0.5  525.0   525.0 
         
Common stock, $0.10 par value, shares authorized: 800.0        
shares issued: 2006 — 469.0; 2005 — 430.3        
shares outstanding: 2006 — 468.6; 2005 — 429.9  45.6   43.0 
Additional paid-in capital  2,586.2   2,224.1 
Accumulated deficit  (899.2)  (841.1)
Accumulated other comprehensive loss, net of tax  (303.0)  (276.0)
         
   1,954.6   2,048.7 
         
Less:        
Treasury stock, at cost: 0.4 shares  (14.0)  (14.0)
Unamortized deferred compensation  —   (89.4)
         
TOTAL STOCKHOLDERS’ EQUITY
  1,940.6   1,945.3 
         
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 $11,864.1  $11,945.2 
         
The accompanying notes are an integral part of these financial statements.


50

100

THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Millions)
               
  Years Ended December 31,
   
  2005 2004 2003
       
  (Revised — See Note 1)
CASH FLOWS FROM OPERATING ACTIVITIES:
            
Net loss $(262.9) $(538.4) $(539.1)
Income from discontinued operations, net of tax  (9.0)  (6.5)  (101.0)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
            
 Depreciation and amortization of fixed assets and intangible assets  168.8   185.1   216.5 
 Provision for bad debt  16.9   36.7   32.6 
 Amortization of restricted stock and other non-cash compensation  42.3   31.4   38.8 
 Amortization of bond discounts and deferred financing costs  9.1   22.9   35.0 
 Deferred income tax provision  44.6   128.2   58.1 
 Equity in (income) loss of unconsolidated affiliates, net of dividends  (7.4)  3.5   6.4 
 Income applicable to minority interests, net of tax  16.7   21.5   27.0 
 Restructuring charges (reversals) — non-cash  (0.1)  6.7   — 
 Long-lived asset impairment and other charges  98.6   322.2   294.0 
 Investment impairments  12.2   63.4   71.5 
 Litigation (reversals) charges  —   (12.5)  127.6 
 Gain on sales of investments  (16.3)  (5.4)  (47.9)
 (Gain) loss on sales of businesses  (10.1)  18.2   0.3 
 Other  9.8   (6.6)  0.9 
Change in assets and liabilities, net of acquisitions and disposals:
            
 Accounts receivable  39.6   (38.4)  385.0 
 Expenditures billable to clients  (54.3)  (34.4)  (136.0)
 Prepaid expenses and other current assets  (6.6)  50.6   83.1 
 Accounts payable and accrued expenses  (152.4)  202.4   (122.1)
 Other non-current assets and liabilities  40.3   14.2   77.8 
 Net cash used in operating activities of discontinued operations  —   —   (5.9)
          
  Net cash provided by (used in) operating activities  (20.2)  464.8   502.6 
          
CASH FLOWS FROM INVESTING ACTIVITIES:
            
 Acquisitions, including deferred payments, net of cash acquired  (91.7)  (175.4)  (224.6)
 Capital expenditures  (140.7)  (194.0)  (159.6)
 Proceeds from sales of businesses and fixed assets  61.8   30.4   26.8 
 Proceeds from sales of investments  70.4   43.0   128.8 
 Purchases of investments  (39.9)  (34.3)  (65.8)
 Maturities of short-term marketable securities  690.5   1,148.4   177.0 
 Purchases of short-term marketable securities  (384.0)  (1,372.7)  (339.1)
 Proceeds from the sale of discontinued operations, net of cash sold  —   10.0   376.7 
 Net cash used in investing activities of discontinued operations  —   —   (5.8)
          
  Net cash provided by (used in) investing activities  166.4   (544.6)  (85.6)
          
CASH FLOWS FROM FINANCING ACTIVITIES:
            
 Increase (decrease) in short-term bank borrowings  (35.9)  7.0   (214.4)
 Payments of long-term debt  (257.1)  (843.0)  (745.6)
 Proceeds from long-term debt  252.4   602.3   801.2 
 Debt issuance costs and consent fees  (17.9)  (8.0)  (27.0)
 Issuance of preferred stock, net of issuance costs  508.0   —   361.6 
 Issuance of common stock, net of issuance costs  3.2   25.6   335.3 
 Distributions to minority interests, net  (22.6)  (23.6)  (26.4)
 Preferred stock dividends  (20.0)  (19.8)  — 
 Net cash used in financing activities of discontinued operations  —   —   (1.7)
          
  Net cash provided by (used in) financing activities  410.1   (259.5)  483.0 
          
Effect of exchange rates on cash and cash equivalents  (30.8)  17.8   18.7 
          
Increase (decrease) in cash and cash equivalents  525.5   (321.5)  918.7 
Cash and cash equivalents at beginning of year  1,550.4   1,871.9   953.2 
          
Cash and cash equivalents at end of year $2,075.9  $1,550.4  $1,871.9 
          
SUPPLEMENTAL CASH FLOW INFORMATION
            
 Cash paid for interest $180.2  $162.8  $155.6 
 Cash paid for income taxes, net of $34.1 and $47.3 of refunds in 2005 and 2004, respectively $94.9  $66.2  $122.7 
             
  Years ended December 31,
  2006 2005 2004
 
CASH FLOWS FROM OPERATING ACTIVITIES:
            
Net loss $(31.7) $(262.9) $(538.4)
Income from discontinued operations, net of tax  (5.0)  (9.0)  (6.5)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
            
Depreciation and amortization of fixed assets and intangible assets  173.6   168.8   185.1 
Provision for bad debt  1.2   16.9   36.7 
Amortization of restricted stock and other non-cash compensation  55.1   42.3   31.4 
Amortization of bond discounts and deferred financing costs  31.8   9.1   22.9 
Deferred income tax (benefit) provision  (57.9)  44.6   128.2 
Long-lived asset impairment and other charges  27.2   98.6   322.2 
Investment impairments  0.3   12.2   63.4 
Loss on early extinguishment of debt  80.8   —   — 
Gain on sales of investments  (36.1)  (16.3)  (5.4)
Income applicable to minority interests, net of tax  20.0   16.7   21.5 
Other  (1.6)  (7.8)  9.3 
Change in assets and liabilities, net of acquisitions and dispositions:
            
Accounts receivable  235.4   39.6   (38.4)
Expenditures billable to clients  (87.7)  (54.3)  (34.4)
Prepaid expenses and other current assets  (6.9)  (6.6)  50.6 
Accounts payable  (370.0)  (163.5)  55.1 
Accrued liabilities  (21.4)  11.1   147.3 
Other non-current assets and liabilities  (3.1)  40.3   14.2 
Net change in assets and liabilities related to discontinued operations  5.0   —   — 
             
Net cash provided by (used in) operating activities  9.0   (20.2)  464.8 
             
             
CASH FLOWS FROM INVESTING ACTIVITIES:
            
Acquisitions, including deferred payments, net of cash acquired  (15.1)  (91.7)  (175.4)
Capital expenditures  (127.8)  (140.7)  (194.0)
Maturities of short-term marketable securities  951.8   690.5   1,148.4 
Purchases of short-term marketable securities  (839.1)  (384.0)  (1,372.7)
Proceeds from sales of businesses and fixed assets, net of cash sold  (15.6)  61.8   30.4 
Proceeds from sales of investments  93.8   70.4   43.0 
Purchases of investments  (36.4)  (39.9)  (34.3)
Proceeds from the sale of discontinued operations, net of cash sold  —   —   10.0 
             
Net cash provided by (used in) investing activities  11.6   166.4   (544.6)
             
             
CASH FLOWS FROM FINANCING ACTIVITIES:
            
Increase (decrease) in short-term bank borrowings  34.3   (35.9)  7.0 
Payments of long-term debt  (5.2)  (257.1)  (843.0)
Proceeds from long-term debt  1.8   252.4   602.3 
Issuance costs and consent fees  (50.6)  (17.9)  (8.0)
Issuance of preferred stock, net of issuance costs  —   508.0   — 
Issuance of common stock, net of issuance costs  0.9   3.2   25.6 
Early participation payment on exchange of $250.0 Floating Rate Notes  (10.3)  —   — 
Call spread transactions in connection with ELF Financing  (29.2)  —   — 
Distributions to minority interests, net  (24.4)  (22.6)  (23.6)
Preferred stock dividends  (47.0)  (20.0)  (19.8)
             
Net cash (used in) provided by financing activities  (129.7)  410.1   (259.5)
             
             
Effect of exchange rates on cash and cash equivalents  (11.1)  (30.8)  17.8 
             
Increase (decrease) in cash and cash equivalents  (120.2)  525.5   (321.5)
Cash and cash equivalents at beginning of year  2,075.9   1,550.4   1,871.9 
             
Cash and cash equivalents at end of year $1,955.7  $2,075.9  $1,550.4 
             
             
SUPPLEMENTAL CASH FLOW INFORMATION
            
Cash paid for interest $185.7  $180.2  $162.8 
Cash paid for income taxes, net of $41.4, $34.1 and $47.3 of refunds in 2006, 2005 and 2004, respectively $111.0  $94.9  $66.2 
The accompanying notes are an integral part of these financial statements.


51

101

THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME (LOSS)
LOSS
(Amounts in Millions, Except Per Share Amounts)Millions)
              
  Years Ended December 31,
   
  2005 2004 2003
       
COMMON STOCK
            
Balance at beginning of year $42.5  $41.8  $38.9 
 Restricted stock, net of forfeitures and amortization  0.4   0.3   — 
 Employee stock purchases  —   0.1   0.1 
 Issuance of common stock, net of fees  —   —   2.6 
 Issuance of shares for acquisitions  0.1   0.2   0.2 
 Issuance of common stock- litigation settlement  —   0.1   — 
          
Balance at end of year  43.0   42.5   41.8 
          
PREFERRED STOCK
            
Balance at beginning of year, Series A  373.7   373.7   — 
 Issuance of preferred stock  —   —   373.7 
          
Balance at end of year, Series A  373.7   373.7   373.7 
          
Balance at beginning of year, Series B  —   —   — 
 Issuance of preferred stock  525.0   —   — 
          
Balance at end of year, Series B  525.0   —   — 
          
ADDITIONAL PAID IN CAPITAL
            
Balance at beginning of year  2,208.9   2,076.0   1,797.8 
 Restricted stock, net of forfeitures and amortization  42.7   26.4   (3.9)
 Employee stock purchases  1.2   7.6   9.6 
 Exercise of stock options, including tax benefit  2.1   7.8   1.6 
 Issuance of common stock, net of fees  —   —   326.9 
 Issuance of shares for acquisitions  12.9   33.9   (45.6)
 Issuance of common stock- litigation settlement  —   72.6   — 
 Issuance of preferred stock  (17.4)  —   (12.1)
 Preferred stock dividends  (26.3)  (19.8)  — 
 Other  —   4.4   1.7 
          
Balance at end of year  2,224.1   2,208.9   2,076.0 
          
RETAINED EARNINGS (ACCUMULATED DEFICIT)
            
Balance at beginning of year  (578.2)  (39.8)  499.3 
 Net loss  (262.9)  (538.4)  (539.1)
          
Balance at end of year  (841.1)  (578.2)  (39.8)
          
ACCUMULATED OTHER COMPREHENSIVE LOSS
            
Balance at beginning of year  (248.6)  (259.1)  (395.2)
 Adjustment for minimum pension liability (net of tax of ($1.0), ($5.4) and ($0.6) in 2005, 2004 and 2003, respectively)  1.4   (47.6)  4.0 
 Changes in market value of securities available-for-sale, net of tax of ($7.8) in 2005  14.6   3.4   10.1 
 Foreign currency translation adjustment  (43.0)  51.5   122.0 
 Recognition of previously unrealized loss on securities available-for-sale, net of tax  (0.4)  3.2   — 
          
 Net other comprehensive loss adjustments  (27.4)  10.5   136.1 
          
Balance at end of year  (276.0)  (248.6)  (259.1)
          
TREASURY STOCK
            
Balance at beginning of year  (14.0)  (11.3)  (119.2)
 Issuance of shares for acquisitions  —   (2.7)  107.9 
          
Balance at end of year  (14.0)  (14.0)  (11.3)
          
UNAMORTIZED DEFERRED COMPENSATION
            
Balance at beginning of year  (66.0)  (62.5)  (99.0)
 Restricted stock, net of forfeitures and amortization  (23.4)  (3.5)  36.5 
          
Balance at end of year  (89.4)  (66.0)  (62.5)
          
TOTAL STOCKHOLDERS’ EQUITY
 $1,945.3  $1,718.3  $2,118.8 
          
COMPREHENSIVE INCOME (LOSS)
            
 Net loss applicable to common stockholders $(289.2) $(558.2) $(539.1)
 Preferred stock dividends  26.3   19.8   — 
 Net other comprehensive income (loss) adjustments  (27.4)  10.5   136.1 
          
Total comprehensive loss $(290.3) $(527.9) $(403.0)
          
NUMBER OF COMMON SHARES
            
Balance at beginning of year  424.9   418.4   389.3 
 Restricted stock, net of forfeitures and amortization  4.1   2.7   — 
 Employee stock purchases  0.1   0.7   0.9 
 Exercise of stock options, including tax benefit  0.3   0.5   — 
 Issuance of common stock, net of fees  —   —   25.8 
 Issuance of shares for acquisitions  0.9   1.8   2.4 
 Issuance of common stock- litigation settlement  —   0.8   — 
          
Balance at end of year  430.3   424.9   418.4 
          
             
  Years ended December 31,
  2006 2005 2004
 
COMMON STOCK
            
Balance at beginning of year $43.0  $42.5  $41.8 
Series A conversion to common stock  2.8   —   — 
Reclassification upon adoption of SFAS No. 123R  (1.0)  —   — 
Other  0.8   0.5   0.7 
             
Balance at end of year  45.6   43.0   42.5 
             
PREFERRED STOCK
            
Balance at beginning of year, Series A  373.7   373.7   373.7 
Conversion to common stock  (373.7)  —   — 
             
Balance at end of year, Series A  —   373.7   373.7 
             
Balance at beginning of year, Series B  525.0   —   — 
Issuance of preferred stock  —   525.0   — 
             
Balance at end of year, Series B  525.0   525.0   — 
             
ADDITIONAL PAID IN CAPITAL
            
Balance at beginning of year  2,224.1   2,208.9   2,076.0 
Cumulative effect of the adoption of SAB No. 108  23.3   —   — 
Stock-based compensation  60.0   —   — 
Reclassification upon adoption of SFAS No. 123R  (88.4)  —   — 
Restricted stock grants, net of forfeitures and amortization  —   42.7   26.4 
Series A conversion to common stock  370.9   —   — 
Issuance of shares for acquisitions  11.3   12.9   33.9 
Issuance of preferred stock  —   (17.4)  — 
Preferred stock dividends  (47.6)  (26.3)  (19.8)
Call spread transactions in connection with ELF Financing  (29.2)  —   — 
Issuance of common stock — litigation settlement  (0.6)  —   72.6 
Warrants issued to investors  63.4   —   — 
Other  (1.0)  3.3   19.8 
             
Balance at end of year  2,586.2   2,224.1   2,208.9 
             
ACCUMULATED DEFICIT
            
Balance at beginning of year  (841.1)  (578.2)  (39.8)
Cumulative effect of the adoption of SAB No. 108  (26.4)  —   — 
Net loss  (31.7)  (262.9)  (538.4)
             
Balance at end of year  (899.2)  (841.1)  (578.2)
             
ACCUMULATED OTHER COMPREHENSIVE LOSS
            
Balance at beginning of year  (276.0)  (248.6)  (259.1)
Adjustment for minimum pension liability (net of tax of ($1.7), ($1.0) and ($5.4) in 2006, 2005 and 2004, respectively)  39.7   1.4   (47.6)
Changes in market value of securitiesavailable-for-sale, net of tax of ($2.7) and ($7.8) in 2006 and 2005, respectively
  (9.0)  14.6   3.4 
Foreign currency translation adjustment  (23.3)  (43.0)  51.5 
Reclassification of investment gain to net earnings  17.0   —   — 
Recognition of previously unrealized (gain) loss on securitiesavailable-for-sale, net of tax
  (8.8)  (0.4)  3.2 
             
Net other comprehensive loss adjustments  15.6   (27.4)  10.5 
Adoption of SFAS No. 158  (42.6)  —   — 
             
Balance at end of year  (303.0)  (276.0)  (248.6)
             
TREASURY STOCK
            
Balance at beginning of year  (14.0)  (14.0)  (11.3)
Issuance of shares for acquisitions  —   —   (2.7)
             
Balance at end of year  (14.0)  (14.0)  (14.0)
             
UNAMORTIZED DEFERRED COMPENSATION
            
Balance at beginning of year  (89.4)  (66.0)  (62.5)
Reclassification upon adoption of SFAS No. 123R  89.4   —   — 
Restricted stock, net of forfeitures and amortization  —   (23.4)  (3.5)
             
Balance at end of year  —   (89.4)  (66.0)
             
TOTAL STOCKHOLDERS’ EQUITY
 $1,940.6  $1,945.3  $1,718.3 
             
COMPREHENSIVE LOSS
            
Net loss applicable to common stockholders $(79.3) $(289.2) $(558.2)
Preferred stock dividends  47.6   26.3   19.8 
Net other comprehensive income (loss) adjustments  15.6   (27.4)  10.5 
             
Total comprehensive loss $(16.1) $(290.3) $(527.9)
             
NUMBER OF COMMON SHARES
            
Balance at beginning of year  430.3   424.9   418.4 
Restricted stock, net of forfeitures  4.3   4.1   2.7 
Series A conversion to common stock  27.7   —   — 
Other  6.7   1.3   3.8 
             
Balance at end of year  469.0   430.3   424.9 
             
The accompanying notes are an integral part of these financial statements.


52

102

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in Millions, Except Per Share Amounts)
Note 1:Summary of Significant Accounting Policies
Business Description
 
The Interpublic Group of Companies, Inc. and 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 emerging services such as experiential marketingmobile and branded entertainment.search engine marketing. With hundreds of offices in over 100 countries and approximately 43,00042,000 employees, our agencies work with our clients to create global and local marketing campaigns. Thesedevelop marketing programs seek tothat build brands, influence consumer behavior and sell products.
Prior RestatementRestatements
In our 2005 Annual Report onForm 10-K, we restated our previously reported financial statements for the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005. In our 2004 Annual Report onForm 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“2005 Restatement”). The Prior Restatement also affected periods prior to 2000, which was reflected as an adjustment to opening retained earnings as of January 1, 2000. All of the financial statements and financial information contained in this Form 10-K related to the prior periods mentioned above reflect the effect of the Prior Restatement adjustments.
Principles of Consolidation
 
The Consolidated Financial Statements include the accounts of the Company and its subsidiaries, most of which are wholly owned. Investments in companies inover which we do not have control, but the ability to exercise significant influence, but not control, are accounted for using the equity method of accounting. Investments in companies inover which we have less than a 20% ownership interest and do notneither control nor the ability to exercise significant influence are accounted for at cost.under the cost method. All intercompany accounts and transactions have been eliminated in consolidation.
 
In accordance with Statements of Financial Accounting Standards Board (“SFAS”FASB”) Interpretation No. 46,Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, along with certain revisions, we have consolidated certain entities meeting the definition of variable interest entities. The inclusion of these entities does not have a material impact on our Consolidated Balance Sheets or Statements of Operations.Financial Statements.
Reclassifications and Revisions
 
Certain classification revisionsreclassifications 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 to expenditures billable to clients and amounts previously recorded in current liabilities as accounts payable of $1,411.5 to accrued liabilities in the accompanying Consolidated Balance Sheet as of December 31, 2004. The classification of these amounts was 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.
 During 2003, we completed the sale of NFO World Group Inc. (“NFO”), and its related activity is classified as discontinued operations for all periods presented. We have revised our 2004 and 2003 Consolidated Statements of Cash Flows to separately disclose the operating, investing and financing portions of the cash flows attributable to our discontinued operations. We had previously reported these amounts on a combined basis as a separate caption.

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(Amounts in Millions, Except Per Share Amounts)
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted accounting principlesin the United States of America (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates are used when accounting for certain items such as revenue recognition, allowances for doubtful accounts, depreciation and amortization, income taxes, restructuring reserves, valuation of tangible and intangible assets, recoverability of goodwill, business combinations, contingencies and pension and postretirement benefit obligations, among others.
SegmentsRevenue Recognition
 As of December 31, 2005, we have three reportable segments: Integrated Agency Network (“IAN”), Constituency Management Group (“CMG”) and Motorsports. We also report results for the Corporate group. The largest segment, IAN, is comprised of McCann WorldGroup (“McCann”), The FCB Group (“FCB”), Lowe Worldwide (“Lowe”), Draft Worldwide (“Draft”) and our leading stand-alone agencies. Our stand-alone agencies include Campbell-Ewald, Hill Holliday, Deutsch and Mullen. The second segment, CMG, is comprised of Weber Shandwick, GolinHarris, DeVries, Jack Morton, MWW Group, FutureBrand and Octagon Worldwide (“Octagon”). Our third reportable segment is comprised of our Motorsports operations, which were sold during 2004 and had immaterial residual operating results in 2005.
Revenue Recognition
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 bases on which we earn commissions and fees vary significantly. Our client contracts are also becoming increasingly complex arrangements that frequentlymay include provisions for incentive compensation and govern vendor rebates and credits. Our largest clients are multinational entities and, as such, we often provide services to these clients out of multiple offices and across various agencies. In arranging for such services to be provided, it is possible for both a global, regional and local agreement to be initiated. Multiple agreements of this nature are reviewed by legal counsel to determine the governing terms to be followed by the offices and agencies involved.
 
Revenue for our services is recognized when all of the following criteria are satisfied: (i) persuasive evidence of an arrangement exists; (ii) the price is fixed or determinable; (iii) collectibility is reasonably assured; and


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(iv) services have been performed. Depending on the terms of thea client contract, fees for services performed can be primarily recognized in one of three ways: proportional performance, straight-line (or monthly basis) or completed contract.
 •  Fees are generally recognized as earned based on the proportional performance method of revenue recognition in situations where our fee is reconcilable to the actual hours incurred to service the client as detailed in a contractual staffing plan or where the fee is earned on a per hour basis, with the amount of revenue recognized in both situations limited to the amount realizable under the client contract. We believe an input based measure (the ‘hour’’hour’) is appropriate in situations where the client arrangement essentially functions as a time andout-of-pocket expense contract and the client receives the benefit of the services provided throughout the contract term.
 •  Fees are recognized on a straight-line or monthly basis when service is provided essentially on a pro rata basis and the terms of the contract support monthly basis accounting.

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 •  Certain fees (such as for major marketing events) are deferred until contract completion as the final act is so significant in relation to the service transaction taken as a whole. Fees are also recognized on a completed contract basis when the terms of the contract call for the delivery of discrete projects (‘milestone’(’milestone’ arrangements), if any of the criteria of Staff Accounting Bulletin (“SAB”) No. 104,Revenue Recognition,were not satisfied prior to job completion or the terms of the contract do not otherwise qualify for proportional performance or monthly basis recognition.
 Incremental direct costs incurred related to contracts where
Depending on the terms of the client contract, revenue is accountedderived from diverse arrangements involving fees for on a completed contract basis are generally expensed as incurred. There are certain exceptions made for significant contracts or for certain agencies where the majorityservices performed, commissions, performance incentive provisions and combinations of the contracts are project-based and systems are in place to properly capture appropriate direct costs.three. Commissions are generally earned on the date of the broadcast or publication. Contractual arrangements with clients may also include performance incentive provisions designed to link a portion of the revenue to our performance relative to both qualitative and quantitative goals. Performance incentives are recognized as revenue for quantitative targets when the target has been achieved and for qualitative targets when confirmation of the incentive is received from the client. Therefore, dependingIncremental direct costs incurred related to contracts where revenue is accounted for on a completed contract basis are generally expensed as incurred. There are certain exceptions made for significant contracts or for certain agencies where the termsmajority of the client contract, revenue is derived from diverse arrangements involving fees for services performed, commissions, performance incentive provisionscontracts are project-based and combinations of the three.systems are in place to properly capture appropriate direct costs.
 
Substantially all of our revenue is recorded as the net amount of our gross billings less pass-through expenses charged to a client. In most cases, the amount that is billed to clients significantly exceeds the amount of revenue that is earned and reflected in our financial statements, because of various pass-through expenses such as production and media costs. In compliance with Emerging Issues Task Force (“EITF”) IssueNo. 99-19,Reporting Revenue Gross as a Principal versus Net as an Agent, we assess whether theour agency or the third-party supplier is the primary obligor. We evaluate the terms of our client agreements as part of this assessment. In addition, we give appropriate consideration to other key indicators such as latitude in establishing price, discretion in supplier selection and credit risk to the vendor. Because we operate broadly as an advertising agency based on our primary lines of business and given the industry practice to generally record revenue on a net versus gross basis, we believe that there must be strong evidence in place to overcome the presumption of net revenue accounting. Accordingly, we generally record revenue net of pass-through charges as we believe the key indicators of the business suggest we generally act as an agent on behalf of our clients in our primary lines of business. In those businesses (primarily sales promotion, event, sports and entertainment marketing and corporate and brand identity services) where the key indicators suggest we act as a principal, we record the gross amount billed to the client as revenue and the related costs incurred as operating expenses. Revenue is reported net of taxes assessed by governmental authorities that are directly imposed on our revenue-producing transactions.
 
As we provide services as part of our core operations, we generally incur incidental expenses, which, in practice, are commonly referred to as“out-ofout-of-pocket”-pocket” expenses. These expenses often include expenses related to airfare, mileage, hotel stays, out of town meals and telecommunication charges. In accordance with EITF IssueNo. 01-14,Income Statement Characterization of Reimbursements Received for‘Out-ofOut-of-Pocket’-Pocket’ Expenses Incurred, we record the reimbursements received for incidental expenses as revenue.revenue with a corresponding offset to expense.


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We receive credits from our vendors and media outlets for transactions entered into on behalf of our clients whichthat, based on the terms of our contracts and local law, are either remitted to our clients or retained by us. If amounts are to be passed through to our clients they are recorded as liabilities until settlement or, if retained by us, are recorded as revenue when earned.
Negotiations with a client at the close of a current engagement could result in accordance witheither payments to the client in excess of the contractual provisions and local law. If a pass-through is not required, then these credits are a reductionliability or in payments less than the contractual liability. These items, referred to as concessions, relate directly to the operations of vendor cost,the period and are recorded as additions to revenue. Inoperating expense or income.
Concession income or expense may also be realized in connection with our Prior Restatement, where it was impractical to review client contracts, we used statistical methods to estimate our exposuresettling vendor discount or credit liabilities that could arise from credits, discounts and other rebates owed to clients. If our estimate is insufficient, we may be required to recognize additional liabilities. If the initial estimatewere established as part of the liability2005 Restatement. In these situations, and given the historical nature of these liabilities, we have recorded is subsequently determinedsuch items as other income or expense in order to be over or under provided for,prevent distortion of current operating results.
For certain of these credit liabilities where the difference is recorded as an adjustment to revenue. Ifstatute of limitations has lapsed, we release such liabilities unless the liabilities are associated with customers with whom we are able to negotiate a favorable settlementin the process of a recorded liability, however, the reversal of this amount is recordedsettling such liabilities. These amounts are reported in a non-operatingother income (expense).

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income account since negotiating a favorable outcome with a client is not considered a revenue generating activity. See Note 2 for further information.
Costs of Services (Salaries and Related Expenses and Office and General Expenses)Cash Equivalents
 Salaries and related expenses consist of payroll costs and related benefits associated with client service professional staff and administrative staff, including severance associated with reductions in workforce and costs incurred for freelance contractors who are utilized to support business development. Office and general expenses include costs directly attributable to client engagements. These costs includeout-of-pocket costs such as travel for client service professional staff, production costs and other direct costs that are rebilled to our clients. Office and general expenses also include expenses attributable to the support of client service professional staff, depreciation and amortization costs, rent expense, bad debt expense relating to accounts receivable, professional fees, the costs associated with the development of a shared services center and implementation costs associated with upgrading our information technology infrastructure.
Cash Equivalents and Short-Term Marketable Securities
Cash equivalents are highly liquid investments, including certificates of deposit, government securities, commercial paper and time deposits with original maturities of three months or less at the time of purchase and are stated at estimated fair value, which approximates cost. Cash is maintained at high-credit quality financial institutions.
 
As of December 31, 20052006 and 2004,2005, we held restricted cash of $34.2$44.0 and $32.0,$34.2, respectively, included in prepaid expenses and other current assets on our Consolidated Balance Sheets.assets. Restricted cash primarily represents cash equivalents that are maintained on behalf of our clients and are legally restricted for a specified business purpose.
 
Short-Term Marketable Securities
We classify all of our short-term marketable debt and equity securities asavailable-for-sale. These Available-for sale securities are carried at fair value with the corresponding unrealized gains and losses reported as a separate component of comprehensive loss. The cost of securities sold is determined based upon the average cost of the securities sold.
 Certain auction rate securities are classified as short-term marketable securities based upon our evaluation of the maturity dates associated with the underlying bonds. Although these securities are issued and rated as long-term bonds, with maturities ranging from 20 to 30 years, they are priced and traded as short-term instruments because of the significant degree of market liquidity provided through the interest rate resets.
Allowance for Doubtful Accounts
 
The allowance for doubtful accounts is estimated based on the aging of accounts receivable, reviews of client credit reports, industry trends and economic indicators, as well as analysis of recent payment history for specific customers. The estimate is based largely on a formula-driven calculation but is supplemented with economic indicators and knowledge of potential write-offs of specific client accounts.
Expenditures Billable to Clients
 As is typical of our normal business operations, it is common for agencies to incur costs on behalf of clients, including media and production costs. These costs are applicable when providing advertising, marketing and other services to clients.
Expenditures billable to clients isare primarily comprised of production and media costs whichthat have been incurred but have not yet been billed to clients, as well as internal labor and overhead amounts and other accrued receivables which have not yet been billed to

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(Amounts in Millions, Except Per Share Amounts)
clients. Unbilled amounts are presented in expenditures billable to clients regardless of whether they relate to feeour fees or production/media.production and media costs. A provision is made for unrecoverable costs as deemed appropriate.
Investments
 Investments
Publicly traded investments in companies over which we do not exert a significant influence are classified asavailable-for-sale and reported at fair value with net unrealized gains and losses reported as a component of other comprehensive loss. Non-publicly traded investments and all other publicly traded investments are accounted for on the equity basis or cost basis, including investments to fund certain deferred compensation and retirement obligations. We regularly review our equity and cost method investments to determine whether a significant event or change in circumstances has occurred that may have an adverse effect on the fair value of each investment. In the event a decline in fair value of an investment occurs, we must determine if the decline has been other than


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temporary. We consider our investments strategic and long-term in nature, so we must determine if the fair value decline is recoverable within a reasonable period. For investments accounted for using the equity basis or cost basis, we evaluate fair value based on specific information (valuation methodologies, estimates of appraisals, financial statements, etc.) in addition to quoted market price, if available. In the absence of other evidence, cost is presumed to equal fair value for our cost and equity method investments. Factors indicative of an other than temporary decline include recurring operating losses, credit defaults and subsequent rounds of financing with pricing that is below the cost basis of the investment. This list is not all-inclusive; we consider all known quantitative and qualitative factors in determining if an other than temporary decline in value of an investment has occurred. Our assessments of fair value represent our best estimates at the time of impairment review. See Note 104 for further information.
Land, Buildings and Equipment
 
Land, buildings and equipment are stated at cost, net of accumulated depreciation. Buildings and equipment are depreciated generally using the straight-line method over the estimated useful lives of the related assets, which range from 3 to 7 years for furniture, equipment and computer software costs, 10 to 35 years for buildings and the shorter of the useful life of the asset (which ranges from 3 to 10 years) or the remaining lease term for leasehold improvements. The total depreciation expense for the years ended December 31, 2006, 2005 and 2004 was $167.4, $167.3 and 2003 was $167.3, $178.3, and $204.4, respectively.
 During 2005, we revised the estimated depreciable lives from 3 to 20 years for furniture, equipment, and computer software costs, 10 to 45 years for buildings and the shorter of the useful life of the asset (which ranged from 3 to 12 years) or the remaining lease term for leasehold improvements to more accurately reflect the productive lives of these assets. The change in depreciable lives was accounted for as a change in accounting estimate on a prospective basis from July 1, 2005 and had an immaterial impact on depreciation expense for 2005.
      Certain events or changes in circumstances could cause us to conclude that the carrying value of our buildings and equipment may not be recoverable. Events or circumstances that might require impairment testing include, but are not limited to, decrease in market price, negative forecasted cash flow, or a significant adverse change in business climate of the asset. If the total estimate of the expected future undiscounted cash flows of an asset grouping over its useful life is less than its carrying value, an impairment loss is recognized in the financial statements equal to the difference between the estimated fair value and carrying value of the asset grouping.
Goodwill and Other Intangible Assets
 
We account for our business combinations using the purchase accounting method. The total costsperform an annual impairment review of the acquisitions are allocated to the underlying net assets, based on their respective estimated fair market values and the remainder is allocated to goodwill and other intangible assets. Considering the characteristicsas of advertising, specialized marketing and communication services companies, our acquisitions usually do not have significant amountsOctober 1st of tangible assets as the principal assets we acquire are mostly creative talent. As a result, a substantial portion of the purchase price is allocated to goodwill.

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(Amounts in Millions, Except Per Share Amounts)
Determining the fair market value of assets acquired and liabilities assumed requires management’s judgment and involves the use of significant estimates, including future cash inflows and outflows, discount rates, asset lives, and market multiples.
      We review goodwill and other intangible assets with indefinite lives not subject to amortization (e.g., customer lists, trade names and customer relationships) annuallyeach year or whenever events or significant changes in circumstances indicate that the carrying value may not be recoverable. We evaluate the recoverability of goodwill at a reporting unit level. We have 16identified 14 reporting units for the 2006 annual impairment testing that are either the entities at the operating segment level or one level below the operating segment level. For 2005, in accordance with SFAS No. 142,Goodwill and Other Intangible Assets, we did not test certain reporting units because their 2004 fair value determination exceeded their carrying amount by a substantial margin, where no significant event occurred since the last fair value determination that would significantly change this margin and where the reporting units did not have a triggering event during 2005. The remaining reporting units were tested either as part of the 2005 annual impairment testing as their 2004 fair value did not significantly exceed their carrying value by a substantial margin or as a result of a triggering event. We review intangible assets with definite lives subject to amortization whenever events or circumstances indicate that a carrying amount of an asset may not be recoverable. Events or circumstances that might require impairment testing include the loss of a significant client, the identification of other impaired assets within a reporting unit, loss of key personnel, the disposition of a significant portion of a reporting unit, or a significant adverse change in business climate or regulations.
      SFAS Statement of Financial Accounting Standards (“SFAS”) No. 142,Goodwill and Other Intangible Assets, specifies a two-step process for testing for goodwill impairment testing and measuring the magnitude of any impairment. The first step of the impairment test is a comparison of the fair value of a reporting unit to its carrying value, including goodwill. Goodwill allocated to a reporting unit whose fair value is equal to or greater than its carrying value is not impaired and no further testing is required. Should the carrying amount for a reporting unit exceed its fair value, then the first step of the impairment test is failed and the magnitude of any goodwill impairment is determined under the second step. The second step is a comparison of the implied fair value of a reporting unit’s goodwill to its carrying value. Goodwill of a reporting unit is impaired when its carrying value exceeds its implied fair value. Impaired goodwill is written down to its implied fair value with a charge to expense in the period the impairment is identified.
The fair value of a reporting unit is estimated using our projections of discounted future operating cash flows (without interest) oftraditional valuation techniques such as the unit. Such projections requireincome approach, which incorporates the use of significant estimates and assumptions as to matters such as future revenue growth, profit margins, capital expenditures, assumed tax rates and discount rates. We believe that the estimates and assumptions made are reasonable but are susceptible to change from period to period. Additionally, our strategic decisions or changes in market valuation multiples could lead to impairment charges. Actual results of operations, cash flows and other factors used in a discounted cash flow valuation will likely differ frommethod and the estimates usedmarket approach, which incorporates the use of earning and it is possible that differences and changes could be material.
      For the year ended December 31, 2005, we changed the date of our annual impairment test for all goodwill and other intangible assets with indefinite lives from September 30th to October 1st. During 2005 we performed this annual impairment test on September 30th and then again on October 1st to ensure that multiples used in the reporting units tested were consistent.revenue multiples. See Note 87 for further explanation.discussion.
Foreign Currencies
 
The financial statements of our foreign operations, when the local currency is the functional currency, are translated into U.S. Dollars at the exchange rates in effect at each year end for assets and liabilities and average exchange rates during each year for the results of operations. The related unrealized gains or losses from translation are reported as a separate component of comprehensive loss. Transactions

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denominated in currencies other than the functional currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in transaction gains or losses, which are reflected within other income (expense) in the Consolidated Statements of Operations.office and general expenses.
Concentrations of Credit Risk
 
Financial instruments that potentially subject us to concentrations of credit risk are primarily cash and cash equivalents, short-term marketable securities, accounts receivable, expenditures billable to clients, interest rate instruments and foreign exchange contracts. We invest our excess cash in investment-grade, short-term securities with financial institutions and limit the amount of credit exposure to any one counterparty. Concentrations of credit risk with accounts receivable are limited due to our large number of clients and their dispersion across different industries and geographical areas. We perform ongoing credit evaluations of our clients and maintain an allowance for doubtful accounts based upon the expected collectibility of all accounts receivable. We are exposed to credit loss in the event of nonperformance by the counterparties of the foreign currency contracts. We limit our exposure to any one financial institution and do not anticipate nonperformance by these counterparties.
A downgrade in our credit ratings could adversely affect our ability to access capital and could result in more stringent covenants and higher interest rates under the terms of any new indebtedness.


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Income Taxes
 
The provision for income taxes includes federal, state, local and foreign taxes. Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences between the financial statement carrying amounts and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which the temporary differences are expected to be recovered or settled.reversed. We evaluate the realizability of our deferred tax assets and establish a valuation allowance when it is more likely than not that all or a portion of deferred tax assets will not be realized. See Note 119 for further explanation.
Earnings (Loss) Per Share
 In periods when we generate a loss, basic loss per share is computed by dividing the loss attributable to common shareholders by the weighted-average number of common shares and contingently issuable shares outstanding for the period.
In periods when we generate income, we calculate basic Earnings Per Share (“EPS”) is calculated using the two-class method, pursuant to EITF IssueNo. 03-6,Participating Securities and the Two — ClassTwo-Class Method under SFAS Statement No. 128.128 (“EITF03-6”). The two-class method is required as our 4.50% Convertible Senior Notes and Series A Mandatory Convertible Preferred Stock (“Series A Preferred Stock”) qualify as participating securities, each having the right to receive dividends or dividend equivalents should dividends be declared on common stock. Under this method, earnings for the period (after deduction for contractual preferred stock dividends) are allocated on a pro-rata basis to the common shareholders and to the holders of participating securities based on their right to receive dividends. The weighted-average number of shares outstanding is increased to reflect the number of common shares into which the participating securities could convert. In periods when we generate a loss, basic loss per share is computed by dividing the loss attributable to common shareholders by the weighted-average number of common shares and contingently issuable shares outstanding for the period. We do not use the two-class method in periods when we generate a loss as the 4.50% Convertible Notes and Series A Preferred Stock do not participate in losses.
 
Diluted earnings (loss) per share reflects the potential dilution that would occur if certain contingently issuable shares were issued and if stock-based incentives and option plans (including stock options, awards of restricted stock and restricted stock units), the 4.50% Notes as described in Note 13 and the Series A Preferred Stock as discussed in Note 14potentially dilutive securities or debt obligations were exercised or converted into common stock. The potential issuance of common stock is assumed to occur at the beginning of the year (or at the time of issuance of the dilutionpotentially dilutive instrument, if later), and the incremental shares are included using the treasury stock or “if-converted” methods. The proceeds utilized in applying the treasury stock method consist of: (1)of the amount, if any, to be paid upon exercise; (2)exercise and, as it relates to stock-based compensation, the amount of compensation cost attributed to future

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service not yet recognized;recognized and (3) any tax benefits credited to additionalpaid-inpaid-in-capital-capital related to the exercise. These proceeds are then assumed to be used by us to purchase common stock at the average market price during the period. The incremental shares (difference between the shares assumed to be issued and the shares assumed to be purchased), to the extent they would have been dilutive, are included in the denominator of the diluted EPS calculation.
Derivative Instruments and Hedging Activities
      Derivative instruments, including those that are embedded in other contracts, are recorded at fair value in the balance sheet as either an asset or a liability. Changes in the fair value of the derivatives are recorded each period in earnings unless specific hedge accounting criteria are met. We do not enter into derivative financial instruments for speculative purposes and do not have a material portfolio of derivative financial instruments. See Note 18 for a further discussion.
Pension and Postretirement Benefits
 
We have pension and postretirement benefit plans covering certain domestic and international employees. We use various actuarial methods and assumptions in determining our pension and postretirement benefit costs and obligations, including the discount rate used to determine the present value of future benefits, expected long-term rate of return on plan assets and healthcare cost trend rates. On December 31, 2006 we adopted SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans(“SFAS No. 158”). SFAS No. 158 requires, among other things, balance sheet recognition of the overfunded or underfunded status of pension and postretirement benefit plans. See Note 1613 for a further discussion.
Stock-Based Compensation
 In accordance with
On January 1, 2006, we adopted SFAS No. 123 (revised 2004),AccountingShare-Based Payment(“SFAS No. 123R”). SFAS No. 123R requires compensation costs related to share-based transactions, including employee stock options, to be recognized in the financial statements based on fair value. We implemented SFAS No. 123R using the modified prospective transition method. Under this transition method, the compensation expense recognized beginning January 1, 2006 includes compensation expense for Stock-Based Compensation,(i) all stock-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and (ii) all stock-based payments granted subsequent to December 31, 2005 based on


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the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. Stock-based compensation expense is generally recognized ratably over the requisite service period, net of estimated forfeitures.
Prior to January 1, 2006, we have accounted for our various stock-based compensation plans underin accordance with the intrinsic value recognition and measurement principlesprovisions of Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees(“APB No. 25”), and its related interpretations.
      Generally, the exercise price of stock options granted equals the market price of the underlying shares on the date of the grant and, therefore, no compensation expense is recorded. The intrinsic value of restricted stock grants and certain other stock-based compensation issued to employees and Board Members as of the date of grant is amortized to compensation expense over the vesting period. Certain stock options and restricted stock units are subject to variable accounting. See Note 22 for information regarding recent accounting standards and Note 15 for further discussion of incentive plans.
      On December 20, 2005, the Compensation Committee of our Board of Directors (“Compensation Committee”) approved the immediate acceleration of vesting of all of our“out-of-the-money” outstanding and unvested stock options previously awarded to our employees under equity compensation plans, excluding certain specified unvested options. See Note 15 for further discussion. On January 1, 2006, we plan to implement SFAS No. 123R using the modified prospective method, which requires that compensation expense be recorded for all unvested stock options and other equity-based awards. We estimate the impact of applying the provisions of SFAS No. 123R,Share-Based Payment, will result in an incremental pre-tax expense in our Consolidated Statements of Operations of approximately $15.5 from 2006 through 2011 based on the outstanding options as of December 31, 2005. See Note 22 for further discussion.
      If compensation expense for our stock option plans and Employee Stock Purchase Plan (“ESPP”) had been determined based on the fair value at the grant dates as definedpermitted by SFAS No. 123, and amended by SFASaccordingly did not recognize compensation expense for the issuance of stock options with an exercise price equal or greater than the market price at the date of grant. However, see Note 20 for detail of our review of our stock option practices. In addition, our previous Employee Stock Purchase Plan (’ESPP’) was not considered compensatory under APB No. 148,Accounting25 and, therefore, no expense was required to be recognized. Compensation expense was previously recognized for Stock-Based Compensation — Transitionrestricted stock, restricted stock units, performance-based stock and Disclosure — Anshare appreciation performance-based units. The effect of forfeitures on restricted stock, restricted stock units and performance-based stock was recognized when such forfeitures occurred. See Note 14 for further discussion.
Note 2: Restructuring and Other Reorganization-Related Charges (Reversals)
The components of restructuring and other reorganization-related charges (reversals) consist of the following:
             
  Years ended December 31,
  2006 2005 2004
 
Other reorganization-related charges $33.0  $—  $— 
Restructuring charges (reversals)  1.5   (7.3)  62.2 
             
Total $34.5  $(7.3) $62.2 
             
Other Reorganization-Related Charges
Other reorganization-related charges primarily represent severance charges directly associated with two significant strategic business decisions: the merger of Draft Worldwide and Foote, Cone and Belding Worldwide to create a global integrated marketing organization called Draftfcb; and our realignment of our media business to meet evolving client needs. In addition, we have recorded lease termination charges in relation to the exit of certain properties for these strategic business decisions. These charges were separated from salaries and related expenses and office and general expenses as they did not result from charges that occurred in the normal course of business.
Restructuring Charges (Reversals)
We record charges and (reversals) primarily related to changes in assumptions in connection with lease termination and other exit costs and severance and termination costs for the 2003 and 2001 restructuring programs. Included in net charges and (reversals) for the years ended December 31, 2006, 2005 and 2004 are adjustments resulting from changes in management’s estimates. Severance amounts incurred outside the parameters of our restructuring programs are recorded in the financial statements when they become both probable and estimable. With the exception of medical and dental benefits paid to employees who are on long-term disability, we do not establish liabilities associated with ongoing post-employment benefits that may vest or accumulate as the employee provides service as we cannot reasonably predict what our future experience will be. See Note 13 for further discussion.
The 2003 program was initiated in response to softness in demand for advertising and marketing services. The 2001 program was initiated following the acquisition of True North Communications Inc. and was designed to integrate the acquisition and improve productivity. Since their inception, total net charges for the 2003 and 2001 programs were $221.9 and $644.8, respectively. Substantially all activities under the 2003 and 2001 programs have been completed. 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.

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58

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Amounts in Millions, Except Per Share Amounts)

Amendment
A summary of FASB No. 123the net charges and (reversals), classified by our pro forma net loss applicable to common stockholdersIntegrated Agency Network (“IAN”) and loss per share would have beenConstituency Management Group (“CMG”) segments and our Corporate group, is as follows:
              
  For the Years Ended December 31,
   
  2005 2004 2003
       
As reported, net loss $(262.9) $(538.4) $(539.1)
Dividends on preferred stock  (26.3)  (19.8)  — 
          
Net loss applicable to common stockholders  (289.2)  (558.2)  (539.1)
Add:            
 Stock-based employee compensation expense included in net loss applicable to common stockholders, net of tax  30.2   22.5   22.9 
Less:            
 Total fair value of stock-based employee compensation expense, net of tax  (62.6)  (51.3)  (57.6)
          
Pro forma net loss applicable to common stockholders $(321.6) $(587.0) $(573.8)
          
Loss per share
            
Basic and diluted loss per share*            
 As reported $(0.68) $(1.34) $(1.40)
 Pro forma $(0.76) $(1.41) $(1.49)
 
                     
  Lease Termination
 Severance and
  
  and Other Exit Costs Termination Costs  
  2003
 2001
 2003
 2001
  
Years ended December 31,
 Program Program Program Program Total
 
2006
                    
IAN $(1.0) $1.0  $—  $—  $— 
CMG  (1.3)  2.8   —   —   1.5 
                     
Total $(2.3) $3.8  $—  $—  $1.5 
                     
2005
                    
IAN $(6.3) $(0.3) $(0.4) $—  $(7.0)
CMG  1.1   0.2   (0.7)  —   0.6 
Corporate  (0.2)  (0.4)  (0.3)  —   (0.9)
                     
Total $(5.4) $(0.5) $(1.4) $—  $(7.3)
                     
2004
                    
IAN $40.3  $(7.3) $14.1  $(4.3) $42.8 
CMG  8.1   4.0   5.1   (0.7)  16.5 
Corporate  3.7   (1.0)  0.3   (0.1)  2.9 
                     
Total $52.1  $(4.3) $19.5  $(5.1) $62.2 
                     
* Diluted loss per share is equal to basic loss per share for the years ended December 31, 2005, 2004 and 2003 due to the anti-dilutive impact of our stock options, restricted stock and convertible securities as a result of the net loss applicable to common stockholders in all related periods.
During the years ended December 31, 2006 and 2005 net lease termination and other exit costs were primarily related to adjustments to management’s estimates to decrease the restructuring reserves as a result of changes in sublease rental income assumptions and utilization of previously vacated properties by certain of our agencies due to improved economic conditions in certain markets.
 For purposes
During the year ended December 31, 2004 net lease termination and other exit costs were recorded for the vacating of this pro forma information, the weighted-average fair value of the 15% discount received by employees on the date that stock was purchased under the ESPP was $1.97, $2.03 and $1.88 per share in 2005, 2004 and 2003, respectively, and is included43 offices located primarily in the total fairU.S. and Europe. Charges were recorded at net present value and were net of stock-basedestimated sublease rental income. These charges were partially offset primarily by management’s adjustments to estimates as a result of our negotiation of terms upon the exit of leased properties and for reasons similar to those mentioned above for 2006 and 2005. Severance and termination costs were recorded for a worldwide workforce reduction of approximately 400 employees. The restructuring program affected employee compensation expense. No stock was purchased undergroups across all levels and functions, including executive, regional and account management and administrative, creative and media production personnel. These charges were partially offset by adjustments to management’s estimates to reduce the ESPP during the second quarterprior restructuring reserves primarily as a result of 2005. The ESPP expired effective June 30, 2005 and shares are no longer available for issuance under the ESPP.
      We use the Black-Scholes option-pricing model which requires the input of subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. Changesdecreases in the assumptions can materially affect the estimatenumber of fair valueterminated employees, change in amounts paid to terminated employees and change in estimates of options grantedrelated restricted stock payments and our pro forma results of operations could be materially impacted. In light of recent guidance in SAB No. 107,Share-Based Payment, we re-evaluated the assumptions used to estimate the value of stock options granted in the third quarter of 2005. The following assumptions have been modified:
Expected Volatility: We determined that implied volatility of publicly traded options in our common stock is expected to be more reflective of market conditions and, therefore, can be a reasonable indicator of expected volatility of our common stock, rather than based only on historical volatility of common stock. Therefore, we revised the expected volatility factor used to estimate the fair value of stock options awarded during the third quarter of 2005 to be based on a blend of historical volatility of our common stock and implied volatility of our tradable forward put and call options to purchase and sell shares of our common stock. Prior to the third quarter of 2005, we estimated future volatility based on historical volatility of our common stock over the most recent period commensurate with the estimated expected lives of our stock options.payroll taxes.

111
59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Amounts in Millions, Except Per Share Amounts)

 Expected Option Lives: In the third quarter of 2005, we revised our estimate of expected lives based on our review of historical patterns for exercises of stock options. We took the average of (1) an assumption that all outstanding options are exercised upon achieving their full vesting date and (2) an assumption that all outstanding options will be exercised at the midpoint between the current date (i.e., the date awards have ratably vested through) and their full contractual term. In determining the estimate, we considered several factors, including the historical option exercise behavior of our employees and the terms and vesting periods
A summary of the options granted.remaining liability for the 2003 and 2001 restructuring programs is as follows:
 The fair value of each option grant has been estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
             
  For the Years Ended December 31,
   
  2005 2004 2003
       
Expected option lives  6 years   6 years   6 years 
Risk free interest rate  4.0%  4.0%  3.3%
Expected volatility  41.0%  44.7%  43.9%
Dividend yield  0.0%  0.0%  0.0%
Weighted-average option grant price $12.39  $14.19  $10.59 
Weighted-average fair value of options granted $5.62  $6.91  $4.96 
                             
    Charges
 Payments
   Charges
 Payments
  
  December 31,
 and
 and
 December 31,
 and
 and
 December 31,
  2004 Adjustments Other 1 2005 Adjustments Other 1 2006
 
2003 Program
                            
Lease termination and other exit costs $51.0  $(5.4) $(22.0) $23.6  $(2.3) $(10.3) $11.0 
Severance and termination costs  7.2   (1.4)  (3.4)  2.4   —   (0.8)  1.6 
                             
Total $58.2  $(6.8) $(25.4) $26.0  $(2.3) $(11.1) $12.6 
                             
2001 Program
                            
Lease termination and other exit costs $37.2  $(0.5) $(14.2) $22.5  $3.8  $(7.6) $18.7 
Severance and termination costs  1.6   —   (1.1)  0.5   —   —   0.5 
                             
Total $38.8  $(0.5) $(15.3) $23.0  $3.8  $(7.6) $19.2 
                             
Total Restructuring
 $97.0  $(7.3) $(40.7) $49.0  $1.5  $(18.7) $31.8 
                             
Note 2:1Liabilities RelatingIncludes amounts representing adjustments to our Prior Restatementthe liability for changes in foreign currency exchange rates.
 As described in Note 1, during our Prior Restatement, we conducted an extensive examination of financial information and significant transactions and recorded expense and liabilities related to Vendor Discounts or Credits, Internal Investigations, and International Compensation Arrangements.
      A summary of the remaining liabilities related to these matters is as follows:
          
  Balance as of 12/31/05 Balance as of 12/31/04
     
Vendor Discounts or Credits* $284.8  $283.9 
Internal Investigations* (includes asset reserves)  24.7   61.7 
International Compensation Arrangements  36.2   40.3 
       
 Total $345.7  $385.9 
       
* $37.5 of vendor credits disclosed within Internal Investigations as of December 31, 2004 has been reclassified to Vendor Discounts or Credits for current year presentation.
Note 3: Vendor Discounts or CreditsAcquisitions and Dispositions
 We receive credits from our vendors and media outlets for the acquisition of goods and services that are entered into on behalf of our clients. The expenses include the purchase of various forms of media, including television, radio, and print advertising space, or production costs, such as the creation of advertising campaigns, commercials, and print advertisements. Revenues in the advertising and communicative services business are frequently recorded net of third party costs as the business is primarily an agent for its clients. Since these costs are billed to clients, there are times when vendor credits or price differences can affect the net revenue recorded by the agency. These third party discounts, rebates, or price differences are frequently referred to as credits.
      Our contracts are typically “fixed-fee” arrangements or “cost-based” arrangements. In “fixed-fee” arrangements, the amount we charge our clients is comprised of a fee for our services. The fee we earn, however, is not affected by the level of expenses incurred. Therefore, any rebates or credits received in

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
servicing these accounts do not create a liability to the client. In “cost-based” arrangements, we earn a percentage commission or flat fee based on or incremental to the expenses incurred. In these cases, rebates or credits received may accrue to the benefit of our clients and create a liability payable to the client. The interpretation of cost language included in our contracts can vary across international and domestic markets in which we operate and can affect whether or not we have a liability to the client.
      The terms of agreements with our clients are significantly impacted by the following: 1) the types of vendor credits obtained (rebates, discounts, media and production credits); 2) differing contract types with clients (fixed fee vs. cost-based arrangements); 3) varying industry practices and laws in the regions of the world in which we operate; 4) determining which contract (global, regional or local) governs our relationships with clients; and 5) unique contract provisions in specific contracts.
      Prior to filing our 2004 Annual Report, we performed an extensive examination of our client contracts and arrangements and considered local law in the international jurisdictions where we conduct business to determine the impact of improperly recognizing these vendor credits as additional revenue instead of recognizing a liability to our clients. We identified areas where there were differences in prices billed to customers and prices received from vendors. All differences associated with cost-based contracts not already passed back to customers were established as liabilities.
      Following the filing of the 2004 10-KAcquisitions in September of 2005, we began contacting clients to notify them of these liabilities and to negotiate an appropriate settlement. During this process the additional following information came to our attention.
• Additional global or regional master contracts, with contractual terms that required us to rebate vendor discounts or credits, took precedence over local contracts that did not require us to rebate vendor discounts or credits.
• Certain misinterpretation of contractual terms and or applicable local law in our Prior Restatement led us to re-examine our agencies’ legal assessment process. As a result, our legal department coordinated the engagement of local counsel in order to provide definitive guidance regarding specific local laws, existing legal precedent and historical, as well as, ongoing legal market practices. This legal guidance required additional adjustments to be made to the liabilities established in the Prior Restatement.
• The liability recorded during our Prior Restatement in some instances either covered too many years or did not cover enough years as required by the statute of limitations, based on the contract we determined ultimately governed. We adjusted our liabilities for all years required under the statute of limitations in the appropriate jurisdiction.
• In connection with our Prior Restatement, we estimated certain amounts of our exposures. We have determined that in certain instances our initial estimate of the liability recorded required adjustment. Additionally, certain entries originally recorded as estimates have been revised based on actual data retrieved from agency books and records.
• We performed a detailed review of situations in which billings from vendors and billings to our clients were different. An appropriate adjustment was recorded for any known scenarios where such information was fully reconciled and the difference was not related to a cost-based contract.
• For certain liabilities where the statute of limitations has lapsed, we appropriately released such liabilities, unless the liabilities were associated with customers with whom we are in the process of settling or we intend to settle such liabilities.
      We have included a table that depicts the beginning balance, the additional liabilities recorded and the adjustment reducing these liabilities. While we had changes to our original reserve positions,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
the net impact of adjustments, excluding fluctuations related to payments and foreign currency and other was an increase to the liability balance of $22.9, and that was primarily attributable to the out of period adjustments discussed below.
                         
  Balance as of Liability Additional     Balance as of
  12/31/04 Reversals Liabilities Payments Other 12/31/05
             
Vendor Discounts or Credits $283.9   (76.5)  99.4   (11.6)  (10.4) $284.8 
                   
Internal Investigations
      In our Prior Restatement review, we noted instances of possible employee misconduct. As a result, through December 31, 2004, we recorded adjustments with a cumulative impact on income of $114.8. Of this amount, $61.7 related to liabilities and asset reserves, $15.6 to asset write-offs, and $37.5 related to Vendor Discounts or Credits as of December 31, 2004. These adjustments were recorded to correct certain unintentional errors in our accounting that were discovered as a result of investigations and primarily related to agencies outside the United States. However, certain of these investigations revealed deliberate falsification of accounting records, evasion of taxes in jurisdictions outside the United States, inappropriate charges to clients, diversion of corporate assets, non-compliance with local laws and regulations, and other improprieties. These errors were not prevented or detected earlier because of material weaknesses in our control environment and decentralized operating structure. We recorded liabilities related to these matters, for business locations under investigation in our Prior Restatement review, which represented management’s best estimate of probable exposure based on the facts available at that time.
      The law firm of Dewey Ballantine LLP was retained to advise the Audit Committee of the Board of Directors regarding the discharge of its obligations. Through the filing of this document, Dewey Ballantine has reviewed all internal investigations cases that were included in our Prior Restatement and continues to oversee our related remediation plans. Dewey Ballantine retained a forensic accounting firm to assist with its review.
      During 2005, we recorded a net decrease in our liabilities for Internal Investigations of $37.0. The decrease is primarily due to write-off of assets reserves, the recognition of deferred revenue, and payment of taxes, penalties and interest. We also divested certain agencies in Greece, Spain, Azerbaijan, Ukraine, Uzbekistan, Bulgaria and Kazakhstan. We have increased our reserves related to additional VAT and payroll related taxes.
Below is an update of our significant cases.
      At our McCann and FCB agencies in Turkey we recorded adjustments related to the retention of vendor discounts that should have been remitted to clients, the improper valuation of a previously acquired business and over-billing clients for payments to vendors and evasion of local taxes. In 2005, the investigation has concluded and we have taken the appropriate personnel actions, including the termination of local senior management. As of December 31, 2005 and 2004, the remaining liabilities were $12.6 and $19.8, respectively.
      At Media First in New York City we recorded adjustments related primarily to inadequate recordkeeping and the payment of certain employee salaries through accounts payable, without appropriate tax withholdings, resulting in increased earn-out payments. In 2005, we recorded asset write-offs and have taken the appropriate personnel actions, including the termination of local senior management. As of December 31, 2005 and 2004, the remaining liabilities and asset reserves were $1.2 and $10.8, respectively.
      At our FCB agency in Spain we recorded adjustments related to the use of companies that were formed to account for the production and media volume discounts received from production suppliers on a separate set of books and records, to prevent the detection of discounts and rebates in the event of a client

114

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
audit. In addition, compensation was paid to an agency executive’s personal service company out of these companies without proper withholding for income taxes. In 2005, we have divested our interest in a component of FCB Spain and signed an affiliation agreement with the management, with an appropriate control structure to assure future business is properly conducted. As of December 31, 2005 and 2004, the remaining liabilities and asset reserves were $0 and $9.8, respectively.
      At five McCann agencies in Azerbaijan, Ukraine, Uzbekistan, Bulgaria and Kazakhstan we recorded adjustments related to the failure to record and pay compensation-related taxes, value added taxes and corporate income taxes, and inadequate record keeping. In 2005, we have sold these entities and signed affiliation agreements with Azerbaijan, Uzbekistan, Bulgaria and Kazakhstan and intend to sign an affiliation agreement with Ukraine agency management. There will be an appropriate control structure to assure business is properly conducted. As of December 31, 2005 and 2004, the remaining liabilities and asset reserves were $6.2 and $8.7, respectively.
      In addition, we also conducted other investigations in our Prior Restatement review for errors found that were similar in nature to those described above. In the aggregate, for these other investigations, we recorded $4.7 and $12.6 in liabilities as of December 31, 2005 and 2004, respectively.
International Compensation Arrangements
      In our Prior Restatement review, we performed an extensive examination of employee compensation practices across our organization. While most practices were found to be acceptable, we identified some practices in certain jurisdictions that required additional review. In certain jurisdictions in which we operate, particularly in Europe and Latin America, it is common for individuals to establish a personal service company (“PSC”), in which case the hiring company will normally contract directly with the PSC for the services of the individual. We reviewed every situation where one of our agencies had contracted with a PSC and determined that in a number of instances, the use of a PSC was determined not to be supportable. We also identified other arrangements or practices in certain jurisdictions, such as payment of personal expenses outside the normal payroll mechanism, split salary payments, equity grants and retirement payments, and independent contractors/employees that led to an avoidance of paying certain taxes as well as not reporting compensation to local authorities.
      For these issues, liabilities represented our best estimate of expected payments to various governmental organizations in the jurisdictions involved. These amounts were estimates as of such date of our liabilities that we believed were sufficient to cover the obligations that we may have had to various authorities. As a result of the disclosures that were made in our 2004 Annual Report, we anticipate that the authorities in certain jurisdictions may undertake reviews to determine whether any of the activities disclosed violated local laws and regulations. This may lead to further investigations and the levy of additional assessments including possible fines and penalties. While we intend to defend against any assessment that we determine to be unfounded, nevertheless we could receive assessments which may be substantial. However, it cannot be determined at this time whether such investigations would be commenced or, if they are, what the outcome will be with any reasonable certainty.
      During 2005, we recorded a net decrease in our liabilities for International Compensation Arrangements of $4.1. The decrease is comprised of reductions in our liabilities due to the expiration of one year under the statutes of limitations, changes in management’s estimates and the favorable outcome of audits in certain jurisdictions. The decrease is net of increases to our accruals due to additional liabilities incurred in 2005 through the continued use of a PSC or other such arrangements which we are in the process of terminating, as well as interest on amounts not yet settled.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
Note 3:Out of Period Adjustments
      In the fourth quarter, we identified certain vendor discounts and credits, tax, and other miscellaneous adjustments in which our previously reported financial statements were in error or did not conform to GAAP. Because these changes are not material to our financial statements for the periods prior to 2005, or to 2005 as a whole, we have recorded them in the fourth quarter of 2005.
      The errors in our previously reported financial information, and the failure to prevent them or detect them in our financial reporting process, were largely attributable to weak internal controls. We concluded that our control environment has not progressed sufficiently to serve as an effective foundation for all other components of internal control. See Management’s Assessment on Internal Control Over Financial Reporting.
      The following tables summarize the impact to the fourth quarter of 2005 of amounts recorded in the fourth quarter of 2005 which relate to reported revenue, operating income (loss), income (loss) from continuing operations before provision for income taxes, loss from continuing operations and loss per share.
      
  Impact of
  Adjustments
  on Revenue
   
  For the Three
  Months Ended
  December 31,
  2005
   
Revenue
 $1,895.7 
Impact of adjustments:
    
 Vendor Discounts or Credits  21.2 
 Other adjustments  (3.9)
    
Total net adjustments  17.3 
    
  $1,913.0 
    
      
  Impact of
  Adjustments on
  Operating Income
   
  For the Three
  Months Ended
  December 31,
  2005
   
Operating income
 $57.6 
Impact of adjustments:
    
 Vendor Discounts or Credits  23.2 
 Other adjustments  (1.6)
    
Total net adjustments  21.6 
    
  $79.2 
    

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
      
  Impact of
  Adjustments on
  Income from
  Continuing
  Operations Before
  Provision for
  Income Taxes
   
  For the Three
  Months Ended
  December 31,
  2005
   
Income from continuing operations before provision for income taxes
 $44.6 
Impact of adjustments:
    
 Vendor Discounts or Credits  22.9 
 Other adjustments  (2.2)
     
Total net adjustments  20.7 
     
  $65.3 
     
      
  Impact of
  Adjustments on
  Loss from
  Continuing
  Operations and
  Loss per Share
   
  For the Three
  Months Ended
  December 31,
  2005
   
Loss from continuing operations
 $(31.9)
Impact of adjustments:
    
 Vendor Discounts or Credits  22.9 
 Other adjustments  (2.2)
     
Total adjustments (pre-tax)  20.7 
 Tax adjustments  19.5 
 Equity in net income of unconsolidated affiliates  3.9 
     
Total net adjustments  (2.7)
     
  $(34.6)
     
Loss per share of common stock — basic and diluted:
    
 Loss per share $(0.10)
 Effect of adjustments  (0.01)
     
    (0.11)
     
 Weighted-average shares  425.5 
      The impact to 2004, 2003 and prior periods related to out of period amounts recorded in the fourth quarter of 2005 was immaterial.

117

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
Description of Out of Period Adjustments:
Vendor Discounts or Credits:
      We performed extensive procedures as a result of the initiation of settlement discussions with clients. The procedures broadly considered global or regional contracts, review of key changes in legal interpretations, review of statutes of limitations, estimated exposures and vendor price differences related to cost-based contracts. As a result of these additional procedures, adjustments were recorded to our previously established liabilities.
Other Adjustments
      We have identified other items which do not conform to GAAP and recorded adjustments to our 2005 Consolidated Financial Statements which relate to previously reported periods. The most significant include accounting related to the capitalization of software costs, acquisition related costs and international compensation arrangements.
Tax Adjustments
      We recorded adjustments to correct the Accrued and Deferred income taxes for items primarily related to the computation of income tax benefits on the 2004 Long-lived Asset Impairment Charges, the establishment of certain valuation allowances, the accounting for certain international tax structures and the computation of interest accruals on certain non-US income tax contingencies. The impact of amounts recorded in the fourth quarter of 2005 was $8.7 of tax benefit.
      We also recorded the tax impact of the out of period adjustments described above, where applicable, based on the local statutory tax rate in the jurisdiction of the entity recording the adjustment. The impact of amounts recorded in the fourth quarter of 2005 was $10.8 of tax benefit.
Note 4:Loss Per Share
      The following table sets forth the computation of basic and diluted loss per common share for net loss available to common stockholders:
             
  For the Years Ended December 31,
   
  2005 2004 2003
       
Basic and Diluted
            
Loss from continuing operations $(271.9) $(544.9) $(640.1)
Less: preferred stock dividends  26.3   19.8   — 
          
   (298.2)  (564.7)  (640.1)
Income from discontinued operations, net of taxes of ($9.0), $3.5 and $18.5, respectively  9.0   6.5   101.0 
          
Net loss applicable to common stockholders
 $(289.2) $(558.2) $(539.1)
          
Weighted-average number of common shares outstanding — basic and diluted
  424.8   415.3   385.5 
Loss per share from continuing operations $(0.70) $(1.36) $(1.66)
Earnings per share from discontinued operations  0.02   0.02   0.26 
          
Loss per share — basic and diluted
 $(0.68) $(1.34) $(1.40)
          

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
 Basic and diluted shares outstanding and loss per share are equal for the years ended December 31, 2005, 2004 and 2003 due to the anti-dilutive impact of our stock options, restricted stock and convertible securities as a result of the net loss applicable to common stockholders in all related periods. The following table presents the weighted-average number of incremental anti-dilutive shares excluded from the computations of diluted loss per share for the years ended December 31, 2005, 2004 and 2003:
              
  December 31,
   
  2005 2004 2003
       
Stock Options, Non-vested Restricted Stock            
Awards and Restricted Stock Units  4.8   4.0   4.1 
Contingently Issuable Shares  —   1.2   — 
1.80% Convertible Notes  —   0.4   6.7 
1.87% Convertible Notes  —   6.1   6.4 
4.50% Convertible Notes  64.4   64.4   51.5 
Series A Mandatory Convertible Preferred Stock  27.7   26.3   0.8 
Series B Cumulative Convertible Perpetual Preferred Stock  7.3   —   — 
          
 Total  104.2   102.4   69.5 
          
      Our Series B Cumulative Convertible Perpetual Preferred Stock was issued on October 24, 2005. Had these convertible securities been outstanding for the full year, 38.4 of incremental shares would be excluded from the computation of diluted loss per share for the year ended December 31, 2005.
      In September 2004, the EITF reached a consensus on the guidance provided by EITF Issue No. 04-8,The Effect of Contingently Convertible Instruments on Diluted Earnings per Share. The guidance requires that the share impact of contingently convertible instruments (including debt securities) with a market price conversion trigger be included in diluted EPS computations (if dilutive), regardless of whether the market price conversion trigger (or other contingent feature) has been met. We implemented the requirements of EITF Issue No. 04-8 for the quarter and fiscal year ended December 31, 2004. The adoption of EITF Issue No. 04-8 requires that we include approximately 64.4 shares in our calculation of diluted EPS to reflect the assumed conversion of our 4.50% Notes in periods when dilutive. The adoption of this pronouncement had no impact on the calculation of earnings per share for any period presented, due to the anti-dilutive impact of the convertible instruments.
      We adopted EITF Issue No. 03-6,Participating Securities and the Two — Class Method Under FASB Statement No. 128, during the quarter ended June 30, 2004. The adoption of this pronouncement had no impact on the calculation of earnings per share for any period presented, as the holders of our 4.50% Notes and Series A Preferred Stock, which are participating securities, do not participate in our net loss.
Note 5:Acquisitions and Dispositions
Acquisitions
The majority of our acquisitions include an initial payment at the time of closing and provide for additional contingent purchase price payments over a specified time. The initial purchase price of an acquisition is allocated to identifiable assets acquired and liabilities assumed based on estimated fair values with any excess being recorded as goodwill and other intangible assets. These contingent payments, which are also known as “earn-outs” and “put options,” are calculated based on estimates of the future financial performance of the acquired entity, the timing of the exercise of these rights, changes in foreign currency exchange rates and other factors. Earn-outs and put options are recorded within the financial statements as an increase to goodwill and other intangible assets once the terms and conditions of the contingent acquisition obligations have been met and the consideration is determinable and distributable, or expensed as compensation

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
our Consolidated Statements of Operations based on the acquisition agreement and the terms and conditions of employment for the former owners of the acquired businesses.
 
Cash paid and stock issued for prior acquisitions are comprised of: (i) contingent payments as described above; (ii) further investments in companies in which we already have an ownership interest; and (iii) other payments related to loan notes and guaranteed deferred payments that have been previously recognized on the balance sheet.
 
We did not complete any acquisitions during 2006 and 2005. We completed two acquisitions during 2004, and two during 2003, none of which were not significant on an individual basis. The results of operations of these acquired companies were included in our consolidated results from the date of close of the transaction. Cash paid and stock issued in 2006 were primarily recorded as an increase to goodwill and other intangible assets and related primarily to acquisitions that were completed prior to December 31, 2000. We did, however, makemade stock payments related to acquisitions initiated in prior years of $11.3, $12.9 and $23.8 during 2006, 2005 and $56.2 during 2005, 2004, and 2003, respectively.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)

Details of cash paid for new and prior acquisitions are as follows:
              
  For the Years Ended
  December 31,
   
  2005 2004 2003
       
Cash paid for current year acquisitions $—  $14.6  $4.0 
Cash paid for prior acquisitions:            
 Cost of Investment  91.7   141.6   216.9 
 Compensation Expense — Related Payments  5.3   20.1   4.3 
Less: cash acquired  —   (0.9)  (0.6)
          
Net cash paid for acquisitions $97.0  $175.4  $224.6 
          
 The following table includes the cash paid and stock issued for prior acquisitions that were primarily recorded as an increase to goodwill and other intangibles in 2005 relating to companies acquired during prior periods:
                              
  Year of Original Acquisition Total Paid
    During
  1999 and Prior 2000 2001 2002 2003 2004 2005
               
Cash payments for prior acquisitions $40.1  $26.1  $26.8  $1.9  $0.4  $1.7  $97.0 
Stock issued for prior acquisitions  0.8   12.1   —   —   —   —   12.9 
                      
 Total consideration $40.9  $38.2  $26.8  $1.9  $0.4  $1.7  $109.9 
                      
             
  Years ended December 31,
  2006 2005 2004
 
Cash paid for current year acquisitions $—  $—  $14.6 
Cash paid for prior acquisitions:            
Cost of investment  15.1   91.7   141.6 
Compensation expense-related payments  7.8   5.3   20.1 
Less: cash acquired  —   —   (0.9)
             
Net cash paid for acquisitions $22.9  $97.0  $175.4 
             
Dispositions
      During 2005 we completed the sale of twenty-seven businesses at our IAN segment and two businesses at our CMG segment, which comprised approximately $31.0 of revenue. The results of operations as well as the gain or loss on sale of each of these agencies were not material to the Consolidated Financial Statements in any of the periods presented.
 
Dispositions
Motorsports — On January 12, 2004, we completed the sale of a business comprising the four Motorsports circuits, including Brands Hatch, Oulton Park, Cadwell Park and Snetterton (the “four owned circuits”), owned by our Brands Hatch subsidiaries, to MotorSport Vision Limited. The consideration for the sale was approximately $26.0. An additional contingent amount of approximately $4.0 may be paid to us depending upon the future financial results of the operations sold. We recognized a fixed asset impairment loss related to the four owned circuits of $38.0 in the fourth quarter of 2003. Additionally, we recognized a fixed asset impairment of $9.6 related to the other Motorsports entities and a capital expenditure impairment of $16.2 for outlays that Motorsports was contractually required to spend to upgrade and maintain certain remaining racing facilities.
 
On April 19, 2004, we reached an agreement with the Formula One Administration Limited (“FOA”) to terminate and release our respective guarantee and promoter obligations relating to the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
British Grand Prix held at the Silverstone racetrack in the United Kingdom (“UK”U.K.”). Under this agreement, we were released from our obligations following the British Grand Prix in July 2004. In exchange for the early termination of the obligations and liabilities, we paid a total of $93.0 to the FOA in two installments of $46.5 each on April 19, 2004 and May 24, 2004. A pre-tax charge of $80.0 was recorded in Motorsports contract termination costs related to this transaction during the second quarter of 2004, net of approximately $13.0 in existing reserves related to the termination of this agreement.2004.
 
On July 1, 2004, the British Racing Drivers Club (“BRDC”) agreed to vary the terms of the lease agreement relating to the Silverstone race track and we entered into a series of agreements regarding the potential termination of our remaining Motorsports obligations in the UK.U.K. These agreements gave us the right to terminate our lease obligations at the Silverstone race track and related agreements, which we exercised on November 1, 2004. In connection with these agreements, we paid the BRDC approximately $49.0 in three installments. The first installment of approximately $24.5 was paid on July 1, 2004, the second installment of approximately $16.0 was paid on September 30, 2004, and the third installment of approximately $8.5 was paid on October 7,installments during 2004. As a result of these agreements, we recorded a pre-tax charge in the third quarter of 2004 of $33.6 in Motorsports contract termination costs. This charge is net of existing reserves of $9.9. The payments also include $5.5 in office and general expenses reflecting the amount of lease expense associated with our continued use of the leased property through the third and fourth quarters of 2004. We have exited this business and do not anticipate any additional material charges. Total Motorsports charges consist of long-lived asset impairment and other charges of $3.0 and contract termination costs of $113.6 for the following:year ended December 31, 2004.
          
  For the Years
  Ended
  December 31,
   
  2004 2003
     
Long-lived asset impairment and other charges $3.0  $63.8 
Motorsports contract termination costs  113.6   — 
       
 Total $116.6  $63.8 
       
 
NFO — On July 10, 2003, we completed the sale of NFO, our research unit, to Taylor Nelson Sofres plc (“TNS”) for $415.6 in cash ($376.7 net of cash sold and expenses) and approximately 11.7 shares of TNS stock that were sold in December 2003 for net proceeds of approximately $42.0. As a result of this sale, 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 recorded in Other income (expense) in the Consolidated Statements of Operations. In July 2004, we received $10.0 from TNSTaylor Nelson Sofres plc (“TNS”) as a final payment with respect to the sale of NFO, which resulted in a $6.5 gain, net of tax. We established reserves for certain income tax contingencies with respect to the determination of our investmenttax basis in NFO for income tax purposes at the time of the disposition of NFO. During the fourth quarter of 2005, $9.0 of these reserves of $9.0 were reversed, as the related income tax contingencies arewere no longer considered probable.probable based on our preliminary review of our tax basis. The results of NFO are classified as discontinued operations in accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long Lived Assets, and, accordingly, the results of operations and cash flows have been removed from our results of continuing operations and cash flows for prior periods.
In connection with the disposition of our NFO World Group Inc. (“NFO”) operations in the fourth quarter of 2003, we established a reserve for certain income tax contingencies with respect to the determination of our tax basis in NFO for income tax purposes. During the third quarter of 2006 we received a final study of the tax basis of our investment, and we determined that the remaining reserve of $5.0 should be reversed as the related contingency is no longer considered probable. The amount was reversed through income from discontinued operations for the year ended December 31, 2006.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Amounts in Millions, Except Per Share Amounts)

 Income from discontinued operations consists of the following:
              
  For the Years Ended
  December 31,
   
  2005 2004 2003
       
Revenue $—  $—  $250.1 
          
Pre-tax income from discontinued operations $—  $—  $20.4 
Tax expense  —   —   (8.5)
          
Net income  —   —   11.9 
Gain on sale, net of taxes of ($9.0), $3.5 and $10.0, respectively  9.0   6.5   89.1 
          
 Income from discontinued operations $9.0  $6.5  $101.0 
          
Note 6:4: Restructuring (Reversals) ChargesSupplementary Data
 During
Valuation and Qualifying Accounts — Allowance for uncollectible accounts receivable
             
  Years ended December 31,
  2006 2005 2004
 
Balance at beginning of period $105.5  $136.1  $134.1 
Charged to costs and expenses  1.2   16.9   36.7 
Charged to other accounts  0.2   (2.7)  6.0 
Deductions:            
Dispositions  (5.3)  (3.3)  (3.0)
Uncollectible accounts written off  (25.4)  (32.9)  (45.6)
Foreign currency translation adjustment  5.1   (8.6)  7.9 
             
Balance at end of period $81.3  $105.5  $136.1 
             
Land, Buildings and Equipment
                     
    December 31,    
    2006 2005    
 
Land and buildings     $104.1  $97.0         
Furniture and equipment      952.0   954.3         
Leasehold improvements      584.9   549.6         
                     
       1,641.0   1,600.9         
Less: accumulated depreciation      (1,017.0)  (950.9)        
                     
Total     $624.0  $650.0         
                     
Accrued Liabilities
                     
    December 31,    
    2006 2005    
 
Media and production expenses     $1,690.7  $1,517.6         
Salaries, benefits and related expenses      460.6   447.2         
Office and related expenses      99.2   93.6         
Professional fees      46.1   70.4         
Restructuring and other reorganization-related      47.3   49.0         
Interest      30.0   35.2         
Taxes      7.3   46.7         
Other      74.8   101.4         
                     
Total     $2,456.0  $2,361.1         
                     
2005 2004 and 2003,Restatement Liabilities
As part of the 2005 Restatement, we recorded net (reversals) and chargesrecognized liabilities related to lease terminationvendor discounts and other exit costscredits where we had a contractual or legal obligation to rebate such amounts to our clients or vendors. Reductions to these liabilities are primarily achieved through settlements with clients and severance and termination costs forvendors but also may occur if a statute of limitations in a jurisdiction has lapsed. For the 2003 and 2001 restructuring programs of ($7.3), $62.2 and $172.9, respectively, which included the impact of adjustments resulting from changes in management’s estimates as described below. The 2003 program was initiated in response to softness in demand for advertising and marketing services. The 2001 program was initiated following the acquisition of True North Communications Inc. and was designed to integrate the acquisition and improve productivity. Total inception to date net charges for the 2003 and 2001 programs were $224.2 and $641.0, respectively. The 2003 and 2001 restructuring programs focused on decreasing our overall cost structure mainly through total reductions in head count of approximately 10,300 employees and through downsizing or closing approximately 280 non-strategic or excess office locations. As ofyear ended December 31, 2005, substantially all activities under2006, we satisfied $59.1 of these liabilities through cash payments of $53.1 and reductions of certain client receivables of $6.0. The remaining decline was primarily through the 2003 and 2001 programs were completed. A summaryrelease of liabilities due to the lapse of the net (reversals) and charges by segment is as follows:respective statutes of limitations.
                              
  Lease Termination and   Severance and
  Other Exit Costs   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 
                      
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 
                      

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(Amounts in Millions, Except Per Share Amounts)

Lease termination and other exit costs
2003 Program
      Net (reversals) and chargesAlso as part of the 2005 Restatement, we recognized liabilities related to lease terminationinternal investigations and other exit costsinternational compensation arrangements. A summary of ($5.4), $52.1these and $33.6the vendor discounts and credits liabilities is as follows:
                 
    December 31,  
    2006 2005  
 
Vendor discounts and credits     $211.2  $284.8     
Internal investigations (includes asset reserves)      19.5   24.7     
International compensation arrangements      32.3   36.2     
                 
Total     $263.0  $345.7     
                 
Other Income (Expense)
             
  Years ended December 31,
  2006 2005 2004
 
Loss on early extinguishment of debt $(80.8) $—  $— 
Gains (losses) on sales of businesses  8.1   10.1   (18.2)
Vendor discount and credit adjustments  28.2   2.6   — 
Gains on sales ofavailable-for-sale securities and miscellaneous investment income
  36.1   16.3   5.4 
Investment impairments  (0.3)  (12.2)  (63.4)
Litigation reversals  —   —   32.5 
Other income (expense)  3.1   2.7   (7.7)
             
Total $(5.6) $19.5  $(51.4)
             
Loss on early extinguishment of debt — In November 2006, we retired $400.0 of our 4.50% Convertible Senior Notes due 2023 in connection with the issuance of $400.0 aggregate principal amount of 4.25% Convertible Senior Notes due 2023 and as a result we recorded for 2005, 2004, and 2003, respectively, were comprised ofnon-cash charges of $2.0, $67.8 and $41.6 offset by adjustments to management’s estimates$80.8. See Note 10 for further discussion.
Gains (losses) on sales of $7.4, $15.7 and $8.0, respectively. The discountbusinesses — In connection with the 2005 sale of a European FCB agency, we released $11.1 into income in the fourth quarter of 2006. This primarily related to lease terminations is being amortized overcertain contingent liabilities that we retained subsequent to the expected remaining term of the related lease and is the primary amount included as charges for 2005. Additionally, chargessale, which were recorded for the vacating of 43 and 55 offices in 2004 and 2003, respectively, located primarilyresolved in the U.S. and Europe. Charges were recorded atfourth quarter of 2006. During the fourth quarter of 2005, we had net present value and were net of estimated sublease rental income. Given the remaining life of the vacated leased properties, cash payments are expected to be made through 2015. In addition to amounts recorded as restructuring charges, we recorded charges of $11.1 and $16.5 during 2004 and 2003, respectively,gains related to the accelerated amortizationsale of leasehold improvements on properties includeda McCann agency of $18.6, offset partially by a loss of $13.0 from the sale of a European FCB agency. In 2004, we had net losses related to the sale of 19 agencies. The losses related primarily to the sale of aU.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.
Vendor discount and credit adjustments — These adjustments reflect the reversal of certain liabilities, primarily established during the 2005 Restatement, where the statute of limitations has lapsed or where negotiations with clients have resulted in concessions. We believe that presenting amounts realized due to lapses in the 2003 program. These charges were included in officestatute of limitations or concession settlements as other income or expense prevents the trend of operating results from being distorted.
Gains on sales ofavailable-for-sale securities and general expenses inmiscellaneous investment income — In the Consolidated Statementssecond quarter of Operations.
2001 Program
      Net (reversals) and charges2006, we had net gains of $20.9 related to lease terminationthe sale of an investment located in Asia Pacific and other exit coststhe sale of ($0.5), ($4.3)our remaining ownership interest in an agency within The Lowe Group. In addition, during the third quarter of 2006, we sold our interest in a German advertising agency and $13.6, recorded for 2005, 2004 and 2003, respectively, resulted exclusively fromrecognized the impact of adjustments to management’s estimates. The 2001 programrelated remaining cumulative translation adjustment balance, which resulted in approximately 180 offices being vacated worldwide. Givena non-cash benefit of $17.0. In 2005, we had net gains of $8.3 related to the sale of our remaining lifeequity ownership interest in an agency within FCB, and net gains on sales of the vacated properties, cash payments are expectedavailable-for-sale securities of $7.9, of which $3.8 related to be made through 2024.
Adjustments to Estimates
      Lease termination and other exit costsappreciation of Rabbi Trust investments restricted for the 2003purpose of paying our deferred compensation and 2001 restructuring programs included the net impact of adjustments for changes in management’s estimates to decrease the restructuring reserves by $7.9 and $20.0 in 2005 and 2004, respectively, and increase the reserve by $5.6 in 2003. The significant factors that caused the adjustments to management’s estimates were our negotiation of terms upon the exit of leased properties, changes in sublease rental income, revised valuations and utilization of previously vacated properties by certain of our agencies due to improved economic conditions in certain markets, all of which occurred during the period recorded.deferred benefit arrangement liabilities.
Severance and termination costs
2003 Program
      Net reversals related to severance and termination costs of ($1.4) for 2005, resulted from the impact of adjustments to management’s estimates. NetInvestment Impairments — We recorded investment impairment charges of $19.5 recorded for 2004 were comprised of charges of $26.4, partially offset by adjustments to management’s estimates of $6.9. For 2003, net charges of $125.8 were comprised of charges of $133.7 partially offset by adjustments of $7.9. These charges$12.2 during 2005, primarily related to a worldwide workforce reduction of approximately 400 employees in 2004 and 2,900 in 2003. The restructuring program affected employee groups across all levels and functions, including executive, regional and account management and administrative, creative and media production personnel. The majority$7.1 adjustment of the severance charges relatedcarrying amount of our remaining unconsolidated investment in Latin America to the U.S. and Europe, with the remainder in Asia and Latin America.
2001 Program
      Net reversals related to severance and termination costs of ($5.1) and ($0.1) recorded for 2004 and 2003, respectively, resulted from the impact of adjustments to management’s estimates. The 2001 program related to a worldwide reduction of approximately 7,000 employees.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Amounts in Millions, Except Per Share Amounts)

fair value as a result of our intent to sell and $3.7 related to a decline in value of certainavailable-for-sale investments that were determined to be other than temporary.
Adjustments to Estimates
 Severance
We recorded investment impairment charges of $63.4 during 2004, primarily related to a $50.9 charge for an unconsolidated investment in a German advertising agency 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 termination costs associated withIndia, and $7.8 related to several otheravailable-for-sale investments.
Litigation Reversals — During 2004 the 2003settlement of thirteen class actions under the federal securities laws became final and 2001 restructuring programs included the net impactwe agreed to pay $115.0, comprised of adjustments for changes$20.0 in management’s estimatescash and $95.0 in shares of our common stock valued at $14.50 per share. We received insurance proceeds of $20.0, which we recorded as a reduction in litigation charges. We also recorded a reduction of $12.5 relating to decrease the restructuring reserves by $1.4, $12.0 and $8.0 in 2005, 2004 and 2003, respectively. The significant factors that caused the adjustments to management’s estimates were thea decrease in the number of terminated employees, changeshare price between the tentative settlement date and the final settlement date.
Equity Investments in amounts paid to terminated employees and changeUnconsolidated Affiliates
Summarized financial information for our equity-basis investments in estimates of taxes and restricted stock payments related to terminated employees, all of which occurred duringunconsolidated affiliates, in the period recorded.
      A summary of the remaining liability for the 2003 and 2001 restructuring programsaggregate, is as follows:
                          
  Liability at     Estimate   Liability at
  12/31/04 Charges Payments Adjustments Other(1) 12/31/05
             
2003 Program
                        
Lease termination and other exit costs $51.0  $2.0  $(19.9) $(7.4) $(2.1) $23.6 
Severance and termination costs  7.2   —   (3.0)  (1.4)  (0.4)  2.4 
                   
 Total $58.2  $2.0  $(22.9) $(8.8) $(2.5) $26.0 
                   
2001 Program
                        
Lease termination and other exit costs $37.2  $—  $(14.3) $(0.5) $0.1  $22.5 
Severance and termination costs  1.6   —   (1.1)  —   —   0.5 
                   
 Total $38.8  $—  $(15.4) $(0.5) $0.1  $23.0 
                   
Total Restructuring
 $97.0  $2.0  $(38.3) $(9.3) $(2.4) $49.0 
                   
                          
  Liability at     Estimate   Liability at
  12/31/03 Charges Payments Adjustments Other(1) 12/31/04
             
2003 Program
                        
Lease termination and other exit costs $37.7  $67.8  $(32.6) $(15.7) $(6.2) $51.0 
Severance and termination costs  39.0   26.4   (52.4)  (6.9)  1.1   7.2 
                   
 Total $76.7  $94.2  $(85.0) $(22.6) $(5.1) $58.2 
                   
2001 Program
                        
Lease termination and other exit costs $65.6  $—  $(28.0) $(4.3) $3.9  $37.2 
Severance and termination costs  10.2   —   (3.1)  (5.1)  (0.4)  1.6 
                   
 Total $75.8  $—  $(31.1) $(9.4) $3.5  $38.8 
                   
Total Restructuring
 $152.5  $94.2  $(116.1) $(32.0) $(1.6) $97.0 
                   
     
  December 31,
  2006
 
Consolidated Balance Sheet:
    
Total current assets $141.6 
Total non-current assets  30.5 
Total current liabilities  84.3 
Total non-current liabilities  3.5 
     
  Year ended
  December 31,
  2006
 
Consolidated Statement of Operations:
    
Revenue $186.2 
Operating income  22.8 
Net income  16.5 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Amounts in Millions, Except Per Share Amounts)

 
(1) Note 5: Amounts represent adjustments to the liability for changes in foreign currency exchange rates as well as liabilities that were previously maintained on the Consolidated Balance Sheet in other balance sheet accounts.Loss Per Share
 Severance amounts incurred outside
Earnings (loss) per basic common share equals net loss applicable to common stockholders divided by the parametersweighted average number of common shares outstanding for the period. Diluted earnings (loss) per share equals net loss applicable to common stockholders adjusted to exclude preferred stock dividends, allocation to participating securities and interest expense related to potentially dilutive securities divided by the weighted average number of common shares outstanding, plus any additional common shares that would have been outstanding if potentially dilutive shares had been issued. The following sets forth basic and diluted earnings (loss) per common share applicable to common stock:
             
  Years ended December 31,
  2006 2005 2004
 
Basic and Diluted
            
Loss from continuing operations $(36.7) $(271.9) $(544.9)
Less: preferred stock dividends  47.6   26.3   19.8 
             
   (84.3)  (298.2)  (564.7)
             
Income from discontinued operations, net of tax  5.0   9.0   6.5 
             
Net loss applicable to common stockholders
 $(79.3) $(289.2) $(558.2)
             
             
Weighted-average number of common shares outstanding — basic and diluted  428.1   424.8   415.3 
Loss per share from continuing operations $(0.20) $(0.70) $(1.36)
Earnings per share from discontinued operations  0.01   0.02   0.02 
             
Loss per share — basic and diluted
 $(0.19) $(0.68) $(1.34)
             
Basic and diluted shares outstanding and loss per share are equal for all periods presented because our restructuring programspotentially dilutive securities are recorded inantidilutive as a result of the financial statements when they become both probable and estimable. With the exception of medical and dental benefits paidnet loss applicable to employees who arecommon stockholders. Our participating securities have no impact on long-term disability, weour net loss applicable to common stockholders for all full year periods since these securities do not establish liabilities associated with ongoing post-employment benefits that may vest or accumulate asparticipate in our net loss.
The following table presents the employee provides service as we cannot reasonably predict what our future experience will be. See Note 16 for further discussion.potential shares excluded from diluted earnings (loss) per share because the effect of including these potential shares would be antidilutive:
             
  Years ended December 31,
  2006 2005 2004
 
Stock Options and Non-vested Restricted Stock Awards  5.5   4.8   4.0 
Contingently Issuable Shares  —   —   1.2 
1.80% Convertible Notes  —   —   0.4 
1.87% Convertible Notes  —   —   6.1 
4.50% Convertible Notes  60.3   64.4   64.4 
4.25% Convertible Notes  4.1   —   — 
Series A Mandatory Convertible Preferred Stock 1
  26.5   27.7   26.3 
Series B Cumulative Convertible Perpetual Preferred Stock  38.4   7.3   — 
             
Total  134.8   104.2   102.4 
             
Securities excluded from diluted earnings (loss) per share calculation because the exercise price was greater than the average market price:            
Stock Options 2
  26.3   32.4   35.4 
Warrants 3
  37.4   —   — 
Note 7:1Land, BuildingsThe Series A Mandatory Convertible Preferred Stock was no longer outstanding on December 31, 2006 due to the conversion to common stock on December 15, 2006.
2These options represent what is outstanding at the end of the respective year. At the point that the exercise price is less than the average market price, these options have the potential to be dilutive and Equipmentapplication of the treasury stock method would reduce this amount.


65

 The following table provides a summary of the components of land, buildings and equipment:
         
  December 31,
   
  2005 2004
     
Land and buildings $97.0  $111.1 
Furniture and equipment  954.3   1,038.6 
Leasehold improvements  549.6   571.3 
       
   1,600.9   1,721.0 
Less: accumulated depreciation  (950.9)  (998.1)
       
Land, buildings and equipment, net $650.0  $722.9 
       
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)

3The potential dilutive impact of the warrants would be based upon the difference between the market price of one share of our common stock and the stated exercise prices of the warrants. See Note 8:11 for further discussion.
There were an additional 6.2, 3.3 and 3.0 outstanding options to purchase common shares as of December 31, 2006, 2005 and 2004, respectively, with exercise prices less than the average market price for the respective year. However, these options are not included in the table above presenting the potential shares excluded from diluted earnings (loss) per share due to the application of the treasury stock method and the rules related to stock-based compensation arrangements.
Note 6: Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are as follows:
         
  Years ended December 31,
  2006 2005
 
Foreign currency translation adjustment $(195.1) $(188.8)
Unrealized holding gains on securities, net  6.4   24.2 
Adjustment for minimum pension liability, net 1
  —   (111.4)
Unrecognized losses, transition obligation and prior service cost, net 2
  (114.3)  — 
         
Accumulated other comprehensive loss, net of tax $(303.0) $(276.0)
         
1The minimum pension liability was eliminated upon the adoption of SFAS No. 158.
2In connection with the adoption of SFAS No. 158 on December 31, 2006, previously unrecognized prior service costs and credits and unrecognized actuarial gains and losses were recognized as an adjustment to accumulated other comprehensive income (loss), net of tax. Such amounts will be adjusted as they are subsequently recognized as components of net periodic benefit cost or income according to current recognition and amortization provisions. See Note 13 for further discussion.
Note 7: Goodwill and Other Intangible Assets
Goodwill
 
Goodwill is the excess purchase price remaining from an acquisition after an allocation of purchase price has been made to identifiable assets acquired and liabilities assumed based on estimated fair values. In order to determine the fair value of net assets for new agency acquisitions, valuations are performed based on several factors, including the type of service offered, competitive market position, brand reputation and geographic coverage. Considering the characteristics of advertising, specialized marketing and communication services companies, our acquisitions usually do not have significant amounts of tangible assets as the principleprincipal asset we typically acquire is creative talent. As a result, a substantial portion of the purchase price is allocated to goodwill. Subsequent changes to goodwill include both current year and deferred payments related to acquisitions. We perform an annual impairment review of goodwill as of October 1st or whenever events or significant changes in circumstances indicate that the carrying value may not be recoverable. See Note 1 for fair value determination and impairment testing methodologies. For more discussion on impairment charges, refer to Note 9.
      For the year ended December 31, 2005, we changed the date of our annual impairment test for all goodwill and other intangible assets with indefinite lives from September 30th to October 1st. During 2005 we performed this annual impairment test on September 30th and then again on October 1st to ensure that multiples used in the reporting units tested were consistent. By moving the date into the fourth quarter we will be able to utilize the most current and accurate plan and forecast information. The new date also provides us additional time to meet future accelerated public reporting requirements. This change did not delay, accelerate or avoid an impairment charge. This change in accounting principle also did not have an effect on our Consolidated Financial Statements. Accordingly, we believe that the accounting change described above is an alternative accounting principle that is preferable.

125
66

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Amounts in Millions, Except Per Share Amounts)

 
The changes in the carrying value of goodwill by segment for the years ended December 31, 20052006 and 20042005 are as follows:
              
  IAN CMG Total
       
Balance as of December 31, 2003 $2,845.3  $422.6  $3,267.9 
 Goodwill from current acquisitions  10.1   —   10.1 
 Goodwill from prior acquisitions  93.8   56.6   150.4 
 Impairment charges  (220.2)  (91.7)  (311.9)
 Other (primarily currency translation)  24.5   0.6   25.1 
          
Balance as of December 31, 2004 $2,753.5  $388.1  $3,141.6 
          
 Goodwill disposed of  (24.2)  (1.7)  (25.9)
 Goodwill from prior acquisitions  45.4   37.8   83.2 
 Impairment charges  (97.0)  —   (97.0)
 Other (primarily currency translation)  (65.0)  (6.0)  (71.0)
          
Balance as of December 31, 2005 $2,612.7  $418.2  $3,030.9 
          
             
  IAN CMG Total
 
Balance as of December 31, 2004 $2,753.5  $388.1  $3,141.6 
Goodwill allocated to business dispositions  (24.2)  (1.7)  (25.9)
Goodwill from prior acquisitions  45.4   37.8   83.2 
Impairment charges (see Note 8)  (97.0)  —   (97.0)
Other (primarily currency translation)  (65.0)  (6.0)  (71.0)
             
Balance as of December 31, 2005 $2,612.7  $418.2  $3,030.9 
             
Goodwill allocated to business dispositions  (9.1)  (2.7)  (11.8)
Goodwill from prior acquisitions  11.1   13.2   24.3 
Impairment charges (see Note 8)  (27.2)  —   (27.2)
Other (primarily currency translation)  45.0   6.6   51.6 
             
Balance as of December 31, 2006 $2,632.5  $435.3  $3,067.8 
             
Other Intangible Assets
 As of December 31, 2005 and 2004, the net carrying value of other intangible assets was $35.0 and $37.6, respectively.
Included in other intangible assets are assets with indefinite lives not subject to amortization and assets with definite lives subject to amortization. Other intangible assets include non-compete agreements, license costs, trade names and customer lists. Intangible assets with definitive lives subject to amortization are amortized on a straight-line basis with estimated useful lives generally ranging from 1of up to 15 years. The total amortization expense for the twelve monthsyears ended December 31, 2006, 2005 and 2004 was $6.2, $1.5 and 2003 was $1.5, $6.8, and $12.1, respectively. See Note 1 for fair value determination and impairment testing methodologies. The following table provides a summary of other intangible assets:assets, which are included in Other Assets:
         
  December 31,
   
  2005 2004
     
Other intangible assets $64.4  $63.4 
Less: accumulated amortization  (29.4)  (25.8)
       
Other intangible assets, net $35.0  $37.6 
       
         
  Years ended December 31,
  2006 2005
 
Other intangible assets $63.4  $64.4 
Less: accumulated amortization  (34.4)  (29.4)
         
Other intangible assets, net $29.0  $35.0 
         
Note 9:8: 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 for fair value determination and impairment testing methodologies.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
 
The following table summarizes the long-lived asset impairment and other charges:
                                                  
  For the Years Ended December 31,
   
  2005 2004 2003
       
  IAN CMG Motorsports Total IAN CMG Motorsports Total IAN CMG Motorsports Total
                         
Goodwill impairment $97.0  $—  $—  $97.0  $220.2  $91.7  $—  $311.9  $0.4  $218.0  $—  $218.4 
Fixed asset impairment  0.5   —   —   0.5   2.0   0.4   3.0   5.4   2.3   —   63.8   66.1 
Other  1.0   0.1   —   1.1   4.9   —   —   4.9   9.1   0.4   —   9.5 
                                     
 Total $98.5  $0.1  $—  $98.6  $227.1  $92.1  $3.0  $322.2  $11.8  $218.4  $63.8  $294.0 
                                     
                                 
  Years ended December 31,
  2006 2005 2004
              Motor-
  
  IAN IAN CMG Total IAN CMG sports Total
 
Goodwill impairment $27.2  $97.0  $—  $97.0  $220.2  $91.7  $—  $311.9 
Other  —   1.5   0.1   1.6   6.9   0.4   3.0   10.3 
                                 
Total $27.2  $98.5  $0.1  $98.6  $227.1  $92.1  $3.0  $322.2 
                                 
2005 Impairments2006
 
IAN — DuringOur long-term projections, which were updated in the fourth quarter of 2005, we recorded2006, showed previously unanticipated declines in discounted future operating cash flows due primarily to recent client losses at one of our domestic advertising reporting units. These discounted future operating cash flow projections indicated that the


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)

implied fair value of the goodwill at this reporting unit was less than its book value resulting in a goodwill impairment charge of approximately $91.0 at our Lowe reporting unit.$27.2.
2005
IAN — 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,when a major client was lost by Lowe’s London agency and the possibility of losing other clients is nowwas 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 causedindicated that the implied fair value of Lowe’s goodwill to bewas less than the related book value.value resulting in a goodwill impairment charge of $91.0 at our Lowe reporting unit.
IAN — During the third quarter of 2005, as restated, we recorded a goodwill impairment charge of approximately $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 causedindicated that the implied fair value of goodwill to bewas less than the related book value.
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 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 causedindicated that the estimatedimplied fair valuesvalue of The Partnership to begoodwill was less than theirthe related book values.value. The Partnership was subsequently disbanded in the fourth quarter of 2004 and the remaining goodwill was allocated to the agencies within the Partnership based on the relative fair value of the agencies at the time of disbandment. We considered the possibility of impairment at Lowe and Draft, the two largest agencies previously within The Partnership. However, we determined that there was no discernible triggering event that would have led us to believe that goodwill was impaired.
 
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 causedindicated that the calculatedimplied fair value of CMG goodwill to bewas less than the related book value.

127

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
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.
Note 10:9: Expenses and Other Income
Investment Impairment
      We monitor our investments to determine whether a significant event or changes in circumstances have occurred that may have an adverse effect on the fair value of each investment. When an other than temporary decline in value is deemed to have occurred, an impairment charge is recorded to adjust the carrying value of the investment to the estimated fair value. See Note 1 for further discussion of fair value determination and impairment testing methodologies.
      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 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.
      During 2003, we recorded $71.5 of investment impairment charges related to 20 investments. The charges related principally to investments in Fortune Promo 7 of $9.5 in the Middle East, Koch Tavares of $7.7 in Latin America, Daiko of $10.0 in Japan, Roche Macaulay Partners of $7.9 in Canada, Springer & Jacoby of $6.5 in Germany and Global Hue of $6.9 in the U.S. The majority of the impairment charges resulted from deteriorating economic conditions in the countries in which the agencies operate, due to the loss of one or several key clients.

128

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
Other Income (Expense)
      The following table sets forth the components of other income (expense):
              
  For the Years Ended December 31,
   
  2005 2004 2003
       
Gains (losses) on sales of businesses $10.1  $(18.2) $0.3 
Gain on sale of Modem Media shares  0.1   0.8   30.3 
Gain on sale of TNS shares  —   —   13.3 
Contractual liability settlements  2.6   —   — 
Gains on sales of other available-for-sale securities and miscellaneous investment income  20.3   6.7   6.4 
          
 Total $33.1  $(10.7) $50.3 
          
      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.
      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, aU.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 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, resulting in a pre-tax gain of $30.3. Also in December 2003, 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.
Note 11:Provision for Income Taxes
 
The components of income (loss) from continuing operations before provision for (benefit of) income taxes, equity earnings, and minority interest expense are as follows:
              
  For the Years Ended December 31,
   
  2005 2004 2003
       
Domestic $54.4  $(72.4) $(8.8)
Foreign  (241.0)  (194.6)  (364.0)
          
 Total $(186.6) $(267.0) $(372.8)
          
             
  Years ended December 31,
  2006 2005 2004
 
Domestic $(103.5) $54.4  $(72.4)
Foreign  98.5   (241.0)  (194.6)
             
Total $(5.0) $(186.6) $(267.0)
             

129
68

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Amounts in Millions, Except Per Share Amounts)

The provision for (benefit of) income taxes on continuing operations consists of:
              
  For the Years Ended
  December 31,
   
  2005 2004 2003
       
Federal income taxes (including foreign withholding taxes):            
Current $20.8  $37.2  $16.2 
Deferred  16.0   18.2   39.6 
          
   36.8   55.4   55.8 
          
State and local income taxes:            
Current  12.2   12.8   27.0 
Deferred  4.6   (22.6)  (9.0)
          
   16.8   (9.8)  18.0 
          
Foreign income taxes:            
Current  4.3   84.0   141.4 
Deferred  24.0   132.6   27.5 
          
   28.3   216.6   168.9 
          
 Total $81.9  $262.2  $242.7 
          
 The components of deferred tax assets consist of the following items:
          
  December 31,
   
  2005 2004
     
Postretirement/postemployment benefits $36.4  $18.6 
Deferred compensation  162.7   234.1 
Pension costs  36.1   50.1 
Basis differences in fixed assets  59.8   14.8 
Rent  19.8   8.8 
Interest  (13.7)  (4.5)
Accruals and reserves  239.3   130.5 
Allowance for doubtful accounts  23.0   33.3 
Basis differences in intangible assets  (35.4)  (5.3)
Investments in equity securities  (6.8)  16.2 
Tax loss/tax credit carry forwards  447.3   411.6 
Restructuring and other merger-related costs  16.9   45.2 
Other  (2.8)  70.4 
       
 Total deferred tax assets, net  982.6   1,023.8 
Valuation allowance  (501.0)  (488.6)
       
 Net deferred tax assets $481.6  $535.2 
       
             
  Years ended December 31,
  2006 2005 2004
 
Federal income taxes (including foreign withholding taxes):            
Current $(0.7) $20.8  $37.2 
Deferred  (14.8)  16.0   18.2 
             
   (15.5)  36.8   55.4 
             
State and local income taxes:            
Current  14.8   12.2   12.8 
Deferred  (24.8)  4.6   (22.6)
             
   (10.0)  16.8   (9.8)
             
Foreign income taxes:            
Current  62.5   4.3   84.0 
Deferred  (18.3)  24.0   132.6 
             
   44.2   28.3   216.6 
             
Total $18.7  $81.9  $262.2 
             
 The valuation allowance of $501.0 and $488.6 at December 31, 2005 and 2004, respectively, applies to certain deferred tax assets, including U.S. tax credits, capital loss carryforwards and net operating loss carryforwards in certain jurisdictions that, in our opinion, are more likely than not, not to be utilized. The change during 2005 in the deferred tax valuation allowance primarily relates to uncertainties regarding the

130

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
utilization of capital loss and foreign net operating loss carryforwards. At December 31, 2005, there are $51.9 of tax credit carryforwards with expiration periods beginning in 2009 and ending in 2013.
      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. There are $999.1 of tax loss carryforwards, of which $294.2 are U.S. capital and net operating loss carryforwards that expire in the years 2006 through 2025. The majority of the remaining $704.9 arenon-U.S. net operating loss carryforwards with unlimited carry forward periods. We have concluded that it is more likely than not that the net deferred tax asset balance will be realized.
Effective Tax Rate Reconciliation on Continuing Operations
 
A reconciliation of the effective income tax rate on continuing operations before equity earnings and minority interest expense as reflected in the Consolidated Statements of IncomeOperations to the U.S. Federalfederal statutory income tax rate is as follows:
             
  For the Years Ended
  December 31,
   
  2005 2004 2003
       
US Federal statutory income tax rate  35.0%  35.0%  35.0%
Federal income tax provision (benefit) at statutory rate  (65.3) $(93.5) $(130.5)
State and local income taxes, net of federal income tax benefit  3.6   13.7   11.1 
Impact of foreign operations, including withholding taxes  44.4   77.6   114.8 
Change in valuation allowance  69.9   236.0   111.4 
Goodwill and other long-lived asset impairment charges  21.5   26.3   103.6 
Goodwill amortization  (1.7)  —   — 
Restructuring and other merger-related costs  —   (1.2)  15.2 
Liquidation of Motorsports  —   (19.7)  — 
Capitalized expenses  10.0   —   — 
Other  (0.5)  23.0   17.1 
          
Provision (benefit) for income taxes $81.9  $262.2  $242.7 
          
Effective tax rate on operations  43.9%  98.2%  65.1%
 
             
  Years ended December 31,
  2006 2005 2004
 
U.S. federal statutory income tax rate  35.0%  35.0%  35.0%
             
Federal income tax benefit at statutory rate $(1.8) $(65.3) $(93.5)
             
State and local income taxes, net of federal income tax benefit  (6.5)  3.6   13.7 
Impact of foreign operations, including withholding taxes  (5.3)  44.4   77.6 
Change in valuation allowance  63.6   69.9   236.0 
Goodwill and other long-lived asset impairment charges  3.8   19.8   26.3 
Liquidation of Motorsports  —   —   (19.7)
Capitalized expenses  —   10.0   — 
Restricted stock  5.3   —   — 
Capital gains (losses)  (34.8)  2.2   1.2 
Other  (5.6)  (2.7)  20.6 
             
Provision for income taxes $18.7  $81.9  $262.2 
             
Effective tax rate on operations  (374.0)%  (43.9)%  (98.2)%
Our effective tax rate was negatively impacted by the establishment offoreign profits subject to tax at different rates and losses in certain foreign locations where we receive no tax benefit due to 100% valuation allowances, as described below, and non-deductible long-lived asset impairment charges.allowances. The difference between the effective tax rate and the statutory federal rate of 35% is also due to state and local taxes, the write-off of deferred tax assets from restricted stock, the release of valuation allowances, non-deductible financing costs and the effectreversal of previously claimed foreign tax credits.


69

non-U.S. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)operations.

The components of deferred tax assets consist of the following items:
 
         
  Years ended December 31,
  2006 2005
 
Postretirement/post-employment benefits $32.4  $36.4 
Deferred compensation  187.2   162.7 
Pension costs  37.6   36.1 
Basis differences in fixed assets  66.2   59.8 
Rent  19.8   19.8 
Interest  (3.4)  (13.7)
Accruals and reserves  63.7   239.3 
Allowance for doubtful accounts  16.3   23.0 
Basis differences in intangible assets  (93.1)  (35.4)
Investments in equity securities  3.2   (6.8)
Tax loss/tax credit carry forwards  646.9   447.3 
Restructuring and other merger-related costs  11.9   16.9 
Other  62.7   (2.8)
         
Total deferred tax assets, net  1,051.4   982.6 
Valuation allowance  (504.0)  (501.0)
         
Net deferred tax assets $547.4  $481.6 
         
Valuation and Qualifying Accounts — Valuation Allowance
As required by SFAS No. 109,Accounting for Income Tax(“SFAS No. 109”), we are required to evaluate on a quarterly basis the realizability of our deferred tax assets. SFAS No. 109Accounting for Income Tax,requires a valuation allowance to 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 a 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,Accounting for Income Tax,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 establishedrecognized relate primarily to tax credit carryforwards, foreign net operatingtax loss and U.S. capital loss carryforwards. During 2005, a net
             
  Years ended December 31,
  2006 2005 2004
 
Balance at beginning of period $501.0  $488.6  $252.6 
Charged to costs and expenses  63.6   69.9   236.0 
Charged to gross tax assets and other accounts  (60.6)  (57.5)  — 
             
Balance at end of period $504.0  $501.0  $488.6 
             
The valuation allowance is $504.0 and $501.0 at December 31, 2006 and 2005, respectively. The change during 2006 in the deferred tax valuation allowance relates to uncertainties regarding future utilization of $69.9 was establishedtax loss carryforwards, offset primarily by reversals of $45.0 of valuation allowances in two European countries where we believe that it is now more likely than not that those tax loss carryforwards will be utilized. In addition, we believe that it is more likely than not that approximately $29.0 of U.S. capital loss carryforwards and $17.0 of foreign tax credits will not be utilized. We also wrote off previously reserved for deferred tax assets that were deemed to be permanently unrealizable due to the expiration of tax loss carryforwards and sales of certain businesses.
At December 31, 2006, there are $68.6 of tax credit carryforwards with expiration periods beginning in 2009 and ending in 2013. There are also $1,521.8 of loss carryforwards, of which $571.9 are U.S. capital and tax loss carryforwards that expire in the years 2007 through 2024. The remaining $949.9 arenon-U.S. tax loss carryforwards of which $718.6 have unlimited carry forward periods and $231.3 have expiration periods from 2007 through 2022
As of December 31, 2006 and December 31, 2005, we had approximately $991.8 and $825.9 of undistributed earnings attributable to foreign subsidiaries, respectively. It is our intention to reinvest undistributed earnings of our

131
70

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Amounts in Millions, Except Per Share Amounts)

continuing operationsforeign subsidiaries and thereby postpone their remittance. We have not provided deferred U.S. income taxes or foreign withholding taxes on existingtemporary differences resulting from earnings for certain foreign subsidiaries which are permanently reinvested outside the United States. It is not practicable to determine the amount of unrecognized deferred tax assets and current year lossesliability associated with nothese temporary differences.
In 2006 we finalized the1994-1996 IRS audit cycle. We agreed to an IRS adjustment to move a tax benefits.deduction into later years. The total valuation allowance asdeferral of December 31, 2005 was $501.0.this deduction has not impacted our tax provision in 2006.
 The total amount of undistributed earnings of foreign subsidiaries for income tax purposes was $663.2 and $734.6 at December 31, 2005 and 2004, respectively. The undistributed earnings of our foreign subsidiaries are permanently reinvested. After the completion of our evaluation, we have determined that we will not take advantage of the provisions of the Jobs Act which grants a temporary incentive to repatriate foreign earnings.
      On April 21, 2003 the Internal Revenue Service (“IRS”) proposed additions to our taxable income for the years 1994 through 1996 that would have resultedIn addition, in additional income taxes, including conforming state and local tax adjustments, of $41.5 million plus appropriate interest. The Company is close to finalizing a settlement covering all of the adjustments proposed by2006 the IRS and the IRS has also tentatively agreed to a refund claim which we filed in respect of certain business expenses for which we had previously failed to claim deductions in those years. While we anticipate finalizing this settlement shortly, any additional payments, will not have a material effect on our cash flow, financial position or the results of operations.
      The IRS has recently completed thetheir field audit of the years 1997-20021997 through 2002 and has proposed additions to our taxable income. OneWe have appealed a number of these proposed additions. Further, during the second quarter of 2006, the IRS commenced the audit of the adjustments proposed by2003 and 2004 income tax returns.
In 2006, we presented the IRS would disallow thewith an adjustment to our taxable loss for 2004 to claim a deduction offor a worthlessness loss claimed in 2002 on the grounds that the Company had not established that the claimed worthlessness of an acquired business had yet occurred in 2002. The Companywhich we originally claimed on our 2002 tax return but which the IRS disallowed. We had previously received a refund of approximately $45 million$45.0 from the carryback of tax on accountthe 2002 loss to a previous year. In 2006, we paid $52.7, including interest, as a result of the disallowance of this claimed loss. The proposed disallowance will result in the Company having to repay that amount, plus appropriate interest. Further, the Company intends to amend its 2004 tax return toloss deduction for 2002. This loss claim this deduction in that return, which we anticipate will be subject to auditis currently being reviewed by the IRS commencing in Q2, 2006. In connectionconjunction with their audit of the2003-2004 income tax return.
Also in 2006, a decision was reached to carryback our loss generated in 2005 to 2003. The taxable income in 2003 would be reduced, with the remaining proposed adjustments, subjectcorollary effect of previously claimed foreign tax credits being displaced. The displaced foreign tax credits will become part of our foreign tax credit carryforward, on which a full valuation allowance has been recorded. Accordingly, we have recorded a charge to our further review, we intend to file an administrative protest of, and to challenge vigorously, those adjustmentstax expense in 2006 for which we believe the IRS does not have adequate support. Although the ultimate resolution of these proposed adjustment may result in final adjustments against the company, we do not anticipate that there will be significant cash tax payments in addition to the repayment of the refund described above, and therefore do not expect a material effect on our cash flow, financial position or results of operations.this item.
 
We have various tax years under examination by tax authorities in various countries, such as the United Kingdom, and in various states, such as New York, in which we have significant business operations. It is not yet known whether these examinations will, in the aggregate, result in our paying additional taxes. We have established tax reserves that we believe to be adequate in relation to the potential for additional assessments in each of the jurisdictions in which we are subject to taxation. We regularly assess the likelihood of additional tax assessments in those jurisdictions and adjust our reserves as additional information requires.or events require. See Note 19 for further information.

132

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
Note 12:10: Accrued LiabilitiesDebt
 The following table provides a summary of the components of accrued liabilities:
          
  December 31,
   
  2005 2004
     
Accrued media and production expenses $1,517.6  $1,411.5 
Salaries, benefits and related expenses  447.2   441.5 
Accrued vendor discounts and credits  195.1   153.1 
Accrued office and related expenses  93.6   113.8 
Accrued professional fees  70.4   73.6 
Accrued restructuring charges  49.0   97.0 
Accrued interest  35.2   35.0 
Accrued taxes  46.7   58.8 
Other  99.5   100.9 
       
 Total $2,554.3  $2,485.2 
       
Note 13:Debt
Long-Term Debt
 
A summary of the carrying amounts and fair values of our long-term debt is as follows:
                  
  December 31,
   
  2005 2004
     
  Book Value Fair Value Book Value Fair Value
         
7.875% Senior Unsecured Notes due 2005 $—  $—  $255.0  $257.5 
Floating Rate Senior Unsecured Notes due 2008  250.0   250.6   —   — 
5.40% Senior Unsecured Notes due 2009 (less unamortized discount of $0.3)  249.7   225.0   249.7   252.9 
7.25% Senior Unsecured Notes due 2011  499.2   465.0   500.0   537.3 
6.25% Senior Unsecured Notes due 2014 (less unamortized discount of $0.9)  350.3   297.5   347.3   354.3 
4.50% Convertible Senior Notes due 2023  800.0   834.0   800.0   1,045.0 
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     
             
                     
    Years ended December 31,
  Effective
 2006 2005
  Interest
 Book
 Fair
 Book
 Fair
  Rate 1 Value Value Value Value
 
Floating Rate Senior Unsecured Notes due 2008  —  $—  $—  $250.0  $250.6 
5.40% Senior Unsecured Notes due 2009 (less unamortized discount of $0.2)  5.43%  249.8   245.0   249.7   225.0 
Floating Rate Senior Unsecured Notes due 2010 (less unamortized discount of $10.1)  8.65%  239.9   253.8   —   — 
7.25% Senior Unsecured Notes due 2011  7.25%  499.3   500.0   499.2   465.0 
6.25% Senior Unsecured Notes due 2014 (less unamortized discount of $0.8)  6.29%  350.2   322.0   350.3   297.5 
4.50% Convertible Senior Notes due 2023  4.50%  400.0   467.2   800.0   834.0 
4.25% Convertible Senior Notes due 2023 (plus unamortized premium of $75.2)  0.58%  475.2   487.2   —   — 
Other notes payable and capitalized leases — at interest rates from 1.2% to 19.5%      36.8       36.9     
                     
Total long-term debt      2,251.2       2,186.1     
Less: current portion      2.6       3.1     
                     
Long-term debt, excluding current portion     $2,248.6      $2,183.0     
                     
1Excludes the effect of related gains/losses on interest rate swaps, as applicable.

133
71

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Amounts in Millions, Except Per Share Amounts)

 
Annual repayments of long-term debtmaturities as of December 31, 20052006 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 
    
 
     
2007 $2.6 
2008 1
  2.8 
2009  257.0 
2010  240.9 
2011  500.0 
Thereafter  1,247.9 
     
Total long-term debt $2,251.2 
     
*1 HoldersIn addition, holders of our $800.0$400.0 4.50% Notes may require us to repurchase thetheir 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 outstandingour 7.875% Senior Unsecured Notes with an aggregate principal amount of $250.0 at maturity at gross proceedsfor a total cost of approximately $258.6, which included the principal amount of the Notes, accrued interest to the redemption date, and a prepayment penalty.penalty of $1.4. 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.
 In November 2004, we tendered for $250.0 of the $500.0 outstanding face value 7.875%
Floating Rate Senior Unsecured Notes
In December 2006, we exchanged all of our $250.0 Floating Rate Notes due 2008 for $250.0 aggregate principal amount Floating Rate Notes due 2010. The new Floating Rate Notes mature on November 15, 2010 and bear interest at gross proceedsa per annum rate equal to three-month LIBOR plus 200 basis points, 125 basis points less than the interest rate on the old Floating Rate Notes. In connection with the exchange, we made an early participation payment of approximately $263.1,$41.25 (actual amount) in cash per $1,000 (actual amount) principal amount of old Floating Rate Notes for a total payment of $10.3.
In accordance with EITF IssueNo. 96-19,Debtor’s Accounting for a Modification or Exchange of Debt Instruments(“EITF 96-19”), this transaction is treated as an exchange of debt for accounting purposes because the present value of the remaining cash flows under the terms of the original instrument are not substantially different from those of the new instrument. The new Floating Rate Notes are reflected on our Consolidated Balance Sheet net of the $10.3 early participation payment, which includedis amortized over the life of the new Floating Rate Notes as a discount, using an effective interest method, and recorded in interest expense. Direct fees associated with the exchange of $3.5 were reflected in interest expense.
4.25% and 4.50% Convertible Senior Notes
In November 2006, we exchanged $400.0 of our 4.50% Convertible Senior Notes due 2023 (the “4.50% Notes”) for $400.0 aggregate principal amount of 4.25% Convertible Senior Notes due 2023 (the “4.25% Notes”). As required byEITF 96-19, this exchange is treated as an extinguishment of the 4.50% Notes and an issuance of 4.25% Notes for accounting purposes because the present value of the remaining cash flows plus the fair value of the embedded conversion option under the terms of the original instrument are substantially different from those of the new instrument. As a result, the 4.25% Notes are reflected on our Consolidated Balance Sheet at their fair value at issuance, or $477.0. We recorded a non-cash charge in the fourth quarter of 2006 of $77.0 reflecting the difference between the fair value of the new debt and the carrying value of the old debt. The difference between fair value and carrying value will be amortized through March 15, 2012, which is the first date holders may require us to repurchase the 4.25% Notes, resulting in a reduction of reported interest expense in future periods. We also recorded a non-cash charge of $3.8 for the extinguishment of unamortized debt issuance costs related to the exchanged 4.50% Notes.
Our 4.25% Notes are convertible into our common stock at a conversion price of $12.42 per share, subject to adjustment in specified circumstances including any payment of cash dividends on our common stock. The conversion rate of the new notes is also subject to adjustment for certain events arising from stock splits and combinations, stock dividends, certain cash dividends and certain other actions by us that modify our capital


72

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)

structure. The 4.25% Notes 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 of the conversion price, beginning at 118.5% in 2006 and declining 0.5% each year until it reaches 110% at maturity. They are also convertible, regardless of the price of our common stock, if: (i) we call the 4.25% 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 4.25% 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 4.25% Notes are no longer rated by at least two of these ratings services. Because of our current credit ratings, the 4.25% Notes are currently convertible. The 4.25% Notes are also convertible, whether or not the above conditions are met, from February 15 to March 15, 2023.
Holders of the 4.25% Notes may require us to repurchase the 4.25% Notes on March 15, 2012 for cash and on March 15, 2015 and March 15, 2018, for cash or our common stock or a combination of cash and common stock, at our election. Additionally, investors may require us to repurchase the 4.25% Notes in the event of certain change of control events that occur prior to March 15, 2012, for cash or our common stock or a combination of cash and common stock, at our election. At our option, we may redeem the 4.25% Notes on or after March 15, 2012 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, to the tender date. A prepayment premium of $9.8 was recorded on the early retirement of $250.0 of these Notes. In December 2004, we redeemed our outstanding 1.87% Convertible Subordinatedif any. The 4.25% Notes with an aggregate principal amount of approximately $361.0 at maturity at gross proceeds of approximately $346.8, which included the principal amount of the Notes plus accrued interest to the redemption date. To tenderalso provide for the 7.875% Senior Unsecured Notes and redeem the 1.87% Convertible Subordinated Notes, we used approximately $250.0 and $350.0, respectively, of the net proceeds from the sale and issuance in November 2004 of the 5.40% Senior Unsecured Notes due November 2009 and 6.25% Senior Unsecured Notes due November 2014.
      In January 2004, we redeemed the 1.80% Convertible Subordinated Notes with an aggregate principal amount of $250.0 at maturity at gross proceeds of approximately $246.0, which included the principal amount of the Notes plus original issue discount and accrued interest to the redemption date. To redeem these Convertible Subordinated Notes, we used approximately $246.0 of the net proceeds from the 2003 Common and Mandatory Convertible Preferred Stock offerings as discussed in Note 14.
Consent Solicitation
      In March 2005, we completed a consent solicitation to amend the indentures governing five series of our outstanding public debt to provide, among other things, that our failure to file with the trustee our SEC reports, including our 2004 Annual Report on Form 10-K and Quarterly Reports for the first and second 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.

134

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(AmountsIn accordance with EITF03-6, the 4.25% Notes are not considered securities with participation rights in Millions, Except Per Share Amounts)
4.50% Convertible Senior Notesearnings available to common stockholders as there are no features attached to this security that allow holders to participate in our undistributed earnings.
 The
Our 4.50% Notes are convertible tointo our 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.convertible.
 
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 iswill 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.
      See Note 19 for additional discussion of fair market value of our long-term debt.
Cash Poolings
      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 the gross amounts of the advances and receive interest income on the cash deposited, albeit at a lower rate.

135
73

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Amounts in Millions, Except Per Share Amounts)

Credit ArrangementsConsent Solicitation
 
In March 2005, we completed a consent solicitation to amend the indentures governing five series of our outstanding public debt to provide, among other things, that our failure to file with the trustee our SEC reports, including our 2004 Annual Report onForm 10-K and Quarterly Reports for the first and second quarters of 2005 onForm 10-Q, would not constitute a default under the indentures until October 1, 2005.
Credit Arrangements
We have a committed credit agreement and uncommitted credit facilities with various banks that permit borrowings at variable interest rates. AtAs of December 31, 20052006 and 2004,2005, there were no borrowings under our committed credit 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.United States. 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 atas of December 31, 20052006 and 20042005 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 
 
                                 
  Years ended December 31,
  2006 2005
  Total
 Amount
 Letters
 Total
 Total
 Amount
 Letters
 Total
  Facility Outstanding of Credit Available Facility Outstanding of Credit Available
 
Committed
                                
Credit Agreement $750.0   —  $219.9  $530.1  $—  $—  $—  $— 
Three-Year Revolving Credit Facility  —   —   —   —   500.0   —   162.4   337.6 
Other Facilities  —   —   —   —   0.7   —   —   0.7 
     
     
  $750.0  $—  $219.9  $530.1  $500.7  $—  $162.4  $338.3 
Uncommitted
                                
Non-U.S.  $518.9  $80.3  $1.1  $437.5  $516.2  $53.7  $—  $462.5 
Our primary bank credit agreement is a three-year revolving$750.0 Three-Year Credit Agreement, dated as of June 13, 2006 (the “Credit Agreement”). Under the Credit Agreement, a special-purpose entity called ELF Special Financing Ltd. (“ELF”) acts as the lender and letter of credit facility (as amended, “Three-Year Revolvingissuer. In connection with entering into the Credit Facility”).Agreement, we terminated our previous committed credit agreement, the Amended and Restated Three-Year Credit Agreement, dated as of May 10, 2004, as amended. ELF is obligated at our request to make cash advances to us and to issue letters of credit for our account, in an aggregate amount not to exceed $750.0 outstanding at any time. 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 issuanceaggregate face amount of letters of credit may not exceed $600.0 at any time. Our obligations under the Credit Agreement are unsecured. The Credit Agreement is a revolving facility, under which amounts borrowed may be repaid and borrowed again, and the aggregate available amount of letters of credit may decrease or increase, subject to the overall limit of $750.0 and the $600.0 limit on letters of credit. ThisWe are not subject to any financial or other material restrictive covenants under the Credit Agreement.
We pay commitment fees on the undrawn amount, less the letters of credit, under the Credit Agreement and commissions on the amounts available to be drawn under the letters of credit at 0.78% per annum. In addition, we pay a facility was amended asfee equal to 0.15% per annum on the undrawn amount, including letters of October 17, 2005 to increasecredit, under the amount thatfacility. If we may borrowdraw under the facility, by $50.0 to $500.0. Our $250.0364-Day Revolving Credit Facility expiredinterest is payable on September 30, 2005. The Three-Year Revolving Credit Facility has been modified multiple times since inception as noted below. We have been in compliance with all covenantsany outstanding advances under the Three-Year Revolving Credit Facility, as amended or waived from time to time.Agreement at3-month LIBOR plus 0.78% per annum. The Credit Agreement will expire on June 15, 2009.
 Borrowings
We entered into the Credit Agreement during the second quarter of 2006 as part of a transaction we refer to as the “ELF Financing.” ELF is a special-purpose entity incorporated in the Cayman Islands, in which we have no equity or other interest and which we do not consolidate for financial reporting purposes. In the ELF Financing, institutional investors purchased from ELF debt securities issued by ELF (the “ELF Notes”) and warrants issued by us (refer to Note 11). ELF received $750.0 in proceeds from these sales, which it used to purchase AAA-rated liquid assets. It will hold the liquid assets pending any request for borrowing from us or any drawing on any letters of credit issued for our account under the Three-Year Revolving Credit FacilityAgreement, which ELF will fund by selling liquid assets. We are unsecured. Outstanding balances bear interest at variable rates based on either LIBOR or a bank’s base rate, at our option. The interest rates on LIBOR loans and base rate loans undernot the Three-Year Revolving Credit Facility are affected by the facility’s utilization levels and our credit ratings.
      The original termsissuer of the Three-Year Revolving Credit Facility restricted our ability to declare or pay dividends, repurchase shares of common stock, make cash acquisitions or investmentsELF Notes and make capital expenditures, as well as the ability of our subsidiaries to incur additional unsecured debt. The original terms of the Three-Year Revolving Credit Facility limited annual cash consideration paid for acquisitions to $100.0 in the aggregate for any calendar year, provided that amounts unused in any year could have been rolled overare not party to the following years, but could not have exceeded $250.0indenture governing the ELF Notes. In conjunction with the ELF Financing we paid $41.2 of issuance costs, with the offset recorded in any calendar year. Annual common stock buybacks and dividend payments on our capital stock were limited to $95.0 in the aggregate for any calendar year,other assets. The issuance costs consist of which $45.0 could have been used for dividend payments on our convertible preferred stock and $50.0 could have been used for dividend payments on our capital stock (including common stock) and for common stock buybacks. Any unused portion of the permitted amount of $50.0 could have been rolled over into successive years; provided that the payments in any calendar year did not exceed $125.0 in the aggregate. Our permitted level of annual capital expenditures was limited to $225.0, provided that amounts unused in any year up to $50.0 could have been rolled over to the next year. These

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(Amounts in Millions, Except Per Share Amounts)

terms were subsequently modifiedapproximately $25.0 of underwriting commissions, legal and accounting fees, printing costs and other fees or expenses, with three amendments madethe balance in a fee to one of the initial purchasers for its services as structuring agent for the offering. These costs will be amortized through the exercise date of the warrants on a straight-line basis as a component of interest expense.
Under certain circumstances, including certain events of default involving us or occurring under the ELF Notes, the commitment to make advances and issue letters of credit under the Credit Agreement may be terminated by ELF, acting on instruction of the holders of the ELF Notes. We will be entitled, prior to any such termination, to make a borrowing of up to the Three-Year Revolvingentire available amount of the commitment under the Credit FacilityAgreement (regardless of whether our obligations under the Credit Agreement have been accelerated). Upon termination of the commitment, the holders of the ELF Notes will automatically receive interests in the outstanding loans in exchange for their ELF Notes. Thereafter we will not be able to borrow or reborrow additional funds under the Credit Agreement, but the advances will remain outstanding as term loans maturing on March 31, June 22 and September 27, 2005.
      The March 31, 2005 waiver and amendment15, 2009 (subject to the Three-Year Revolving Credit Facility, amongrights of the holders to accelerate the loans upon an event of default).
Cash Poolings
We aggregate our net domestic cash position on a daily basis. Outside the United States, we use cash pooling arrangements with banks to help manage our liquidity requirements. In these pooling arrangements, several Interpublic agencies agree with a single bank that the cash balances of any of the agencies with the bank will be subject to a full right of setoff against amounts the other things, (i) required usagencies owe the bank, and the bank provides overdrafts as long as the net balance for all the agencies does not exceed anagreed-upon level. Typically each agency pays interest on outstanding overdrafts and receives interest on cash balances. Our Consolidated Balance Sheets reflect cash net of overdrafts for each pooling arrangement. As of December 31, 2006 and 2005, a gross amount of $1,052.5 and $842.6, respectively, in cash was netted against an equal gross amount of overdrafts under pooling arrangements.
Note 11: Warrants
As part of the ELF Financing completed during the second quarter of 2006, we issued 67.9 warrants, consisting of 29.1 capped warrants (“Capped Warrants”) and 38.8 uncapped warrants (“Uncapped Warrants”). In accordance with EITF IssueNo. 00-19,Accounting for Derivative Financial Instruments Indexed to, maintain an ending balanceand Potentially Settled in, a Company’s Own Stock(“EITF00-19”), we recorded $63.4 of $225.0deferred warrant cost in other assets, with the offset recorded to additional paid-in capital within stockholders’ equity. This amount is a non-cash transaction and represents the fair value of cash in domestic accounts with our lenders for the seven days precedingwarrants at the transaction close date estimated using the Black-Scholes option-pricing model, which requires reliance on variables including the price volatility of the underlying stock. The deferred warrant cost will be amortized through the exercise date of the warrants as issuance costs on a borrowing, (ii) restricted cash consideration paid for acquisitions to less than $5.0 forstraight-line basis as a non-cash element of interest expense. As of December 31, 2006, $11.4 has been recognized as interest expense.
The stated exercise date of the period between March 31, 2005 and July 11, 2005, and (iii) restricted our ability to make certain restricted payments such as dividends until July 11, 2005 to paying dividends on our preferred stock and to repurchase capital stock in connection with employees’warrants is June 15, 2009. Following the exercise of options.
      The June 22, 2005 waiver and amendmentthe warrants each warrant will entitle the warrant holder to the Three-Year Revolving Credit Facility, among other things, (i) required us to maintainreceive an amount in cash, shares of our common stock, or a daily ending balance of $225.0combination of cash and securities in domestic accountsshares of our common stock, at our option. The amount will be based, subject to customary adjustments, on the difference between the market price of one share of our common stock (calculated as the average share price over 30 trading days following expiration) and the stated exercise price of the warrant. For the Uncapped Warrants, the exercise price is $11.91 per warrant. For the Capped Warrants, the exercise price is $9.89 per warrant but the amount deliverable upon exercise is capped so a holder will not benefit from appreciation of the common stock above $12.36 per share.
Concurrently with our lenders, (ii) restricted our abilitythe issuance of the warrants described above, we entered into call spread transactions with four different counterparties to makereduce the potential dilution or cash acquisitions in excess of $7.5 in the aggregate until September 30, 2005, and (iii) restricted our ability to make certain restricted payments such as dividends until September 30, 2005 to paying dividends on our preferred stock and to repurchase capital stock in connection with employees’cost upon exercise of options.
      The terms of the September 27, 2005 amendmentUncapped Warrants. Each transaction gives us the right to the Three-Year Revolving Credit Facility did not permit us: (i) to make cash acquisitions in excess of $50.0 until October 2006, or thereafter in excess of $50.0 untilreceive, upon expiration of the agreementoptions thereunder, an amount in May 2007, subject to increases equal to the net cash, proceeds received during the applicable period from any disposition of assets; (ii) to make capital expenditures in excess of $210.0 annually; (iii) to repurchase or to declare or 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), 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;common stock, or (iv) to incur new debt by 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. In addition the daily ending balancea combination of cash and securities requirement fromshares of our common stock, at our option. The amount will be based, subject to customary adjustments, on the previous amendment was removed through this amendment.
difference between the market price of one share of our common stock (calculated as the average share price over 30 trading days following expiration) and $11.91 per share, the exercise price of the Uncapped Warrants. The October 17, 2005 amendment increased the amount that we may borrowdeliverable to us under the facility by $50.0 to $500.0.
      The November 7, 2005 amendment, effective as of September 30, 2005, amended the financial covenants with respect to the period ended September 30, 2005 and extended the period during which long-lived asset and impairment charges in an aggregate amount not in excess of $500.0 may be recognized and added back to the calculation of EBITDA.
      The March 21, 2006 amendment, effective as of December 31, 2005, amended the financial covenants with respect to periods ended December 31, 2005, March 31, 2006 and June 30, 2006 and certain provisions relating to letters of credit, so that letters of credit issued under the facility may have expiration dates beyond the termination date of the facility, subject to certain conditions. Such conditions include, among others, 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 the outstanding letters of credit with expiration dates beyond the termination date of the facility. The amendment also 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 borrowings under the credit facility in domestic accounts with our lenders. 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.call spread transactions, however,

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(Amounts in Millions, Except Per Share Amounts)

is capped so we will not receive any amount relating to appreciation of our common stock above $14.38 per share, and we will incur dilution or cash costs upon exercise of the Uncapped Warrants to the extent our share price exceeds $14.38 per share at that time. The four transactions cover an aggregate notional amount of 38.8 shares, equivalent to the full number of the Uncapped Warrants, and had an aggregate purchase price of $29.2. In accordance with EITF00-19 the cost of the four transactions has been recorded as a reduction to additional paid-in capital within stockholders’ equity.
 The Three-Year Revolving Credit Facility now contains revised financial covenants. These covenants have been modified previously by amendments and waivers on March 31, 2005, June 22, 2005, September 27, 2005, November 7, 2005 (effective as
In accordance with EITF03-6, the warrants are not considered securities with participation rights in earnings available to common stockholders due to the contingent nature of September 30, 2005) and March 21, 2006 (effective asthe exercise feature of December 31, 2005). The revisions in the covenants subsequent to each amendment are detailed below. These covenants require us to maintain with respect to each fiscal quarter set forth below:these securities.
Note 12:       (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:
Year-End
Original TermsCovenant Revisions Effective as of:Terms
Four Fiscal Quarters Ending5/10/043/31/056/22/059/27/059/30/0512/31/05
December 31, 20043.75 to 13.00 to 1
March 31, 20053.75 to 13.75 to 12.40 to 1
June 30, 20053.75 to 13.75 to 12.00 to 1
September 30, 20053.75 to 13.75 to 13.75 to 12.15 to 11.95 to 1
December 31, 20053.75 to 13.75 to 13.75 to 11.75 to 11.75 to 1*
March 31, 20063.75 to 13.75 to 13.75 to 11.85 to 11.85 to 1*
June 30, 20063.75 to 13.75 to 13.75 to 11.45 to 11.45 to 1*
September 30, 20063.75 to 13.75 to 13.75 to 11.75 to 11.75 to 11.75 to 1
December 31, 20063.75 to 13.75 to 13.75 to 12.15 to 12.15 to 12.15 to 1
March 31, 20073.75 to 13.75 to 13.75 to 12.50 to 12.50 to 12.50 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:
Original TermsCovenant Revisions Effective as of:Year-End Terms
Four Fiscal Quarters Ending5/10/043/31/056/22/059/27/059/30/0512/31/05
December 31, 20043.25 to 14.25 to 1
March 31, 20053.25 to 13.25 to 14.80 to 1
June 30, 20053.25 to 13.25 to 15.65 to 1
September 30, 20053.25 to 13.25 to 13.25 to 15.20 to 15.70 to 1
December 31, 20053.25 to 13.25 to 13.25 to 16.30 to 16.30 to 1*
March 31, 20063.25 to 13.25 to 13.25 to 15.65 to 15.65 to 1*
June 30, 20063.25 to 13.25 to 13.25 to 16.65 to 16.65 to 1*
September 30, 20063.25 to 13.25 to 13.25 to 15.15 to 15.15 to 15.15 to 1
December 31, 20063.25 to 13.25 to 13.25 to 14.15 to 14.15 to 14.15 to 1
March 31, 20073.25 to 13.25 to 13.25 to 13.90 to 13.90 to 13.90 to 1

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
* 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.
      (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:
                         
  Original Terms Covenant Revisions Effective as of: Year-End Terms
       
Four Fiscal Quarters Ending 5/10/04 3/31/05 6/22/05 9/27/05 9/30/05 12/31/05
             
December 31, 2004 $750.0  $550.0                 
March 31, 2005  750.0   750.0  $470.0             
June 30, 2005  750.0   750.0   400.0             
September 30, 2005  750.0   750.0   750.0  $435.0  $400.0     
December 31, 2005  750.0   750.0   750.0   360.0   360.0  $233.0 
March 31, 2006  750.0   750.0   750.0   400.0   400.0   175.0 
June 30, 2006  750.0   750.0   750.0   340.0   340.0   100.0 
September 30, 2006  750.0   750.0   750.0   440.0   440.0   440.0 
December 31, 2006  750.0   750.0   750.0   545.0   545.0   545.0 
March 31, 2007  750.0   750.0   750.0   585.0   585.0   585.0 
      The terms used in these financial covenant 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 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 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 as of December 31, 2005. We have not drawn under the Three-Year Credit Facility over the past two years, and we do not currently expect to do so. 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.
Note 14:Convertible Preferred Stock
 We currently have two series
Series A Preferred Stock
On December 15, 2006, each share of convertible preferred stock outstanding: our 5.375% Series A Mandatory Convertible Preferred Stock (“Series A Preferred Stock”) andconverted into 3.7037 shares of our 5.25%common stock. We had 7.475 shares of Series B Cumulative Convertible PerpetualA Preferred Stock (“outstanding which resulted in an issuance of 27.7 shares of our common stock. We paid dividends of $20.1, or $2.6875 per share, on our Series BA Preferred Stock”).Stock during 2006 and 2005, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (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 5.25% Series B Cumulative Convertible Perpetual Preferred Stock (“Series B Preferred StockStock”) 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 theour Series B Preferred Stock has a liquidation preference of $1,000.00$1,000 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$1,000 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$1,000 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,Participating Securities and the Two — Class Method under FASB Statement No. 128, Earnings Per Share, 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 StockPayment of Dividends
 We currently have outstanding 7.475 shares
The terms 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 our 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,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
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.
Payment of Dividends
      We have not paid any dividends on our common stock since December of 2002. Our ability to declare or pay dividends on common stock is currently restricted by the terms of our Three-Year Revolving Credit Facility. 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 on the Series B Preferred Stock have been or contemporaneously are declared and paid, or provision for the payment thereof has been made.
 
We pay annualpaid dividends on each share of Series A Preferred Stock in the amount of $2.6875. Annual dividends on each share of Series A Preferred Stock are payable quarterly in cash$26.9, or if certain conditions are met, in common stock, at our option, on March 15, June 15, September 15 and December 15 of each year. In addition to the stated annual dividend, if at any time on or before December 15, 2006, we pay a cash dividend on our common stock, the holders of Series A Preferred Stock participate in such distributions via adjustments to the conversion ratio, thereby increasing the number of common shares into which the Preferred Stock will ultimately convert. In March 2006, the Board of Directors declared a dividend of $0.671875$51.1875 per share, on our Series A Preferred Stock, resulting in a maximum possible aggregate dividend of $5.0.
      We pay annual dividends on each share of Series B Preferred Stock in the amount of $52.50 per share.during 2006. The initial dividend on our Series B Preferred Stock iswas $6.2, or $11.8125 per share, and was declared on December 19, 2005 payableand paid in cash on January 17, 2006. AnnualRegular quarterly dividends, if declared, are $6.9, or $13.125 per share. Dividends on each share of Series B Preferred Stock are payable quarterly in cash or, if certain conditions are met, in common stock, at our option, on January 15, April 15, July 15 and October 15 of each year. The dividend rate of the Series B Preferred Stock will be increased by 1.0% if we do not pay dividends on the Series B Preferred Stock for six


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)

quarterly periods (whether consecutive or not). The dividend rate will revert back to the original rate once all unpaid dividends are paid in full. The dividend rate of the Series B Preferred Stock will also be increased by 1.0% if we do not file our periodic reports with the SEC within 15 days after the required filing date during the first two yeartwo-year period following the closing of the offering. In March 2006, the Board of Directors declared a dividend of $13.125 per share
Dividends on our Series B Preferred Stock resulting in a maximum possible aggregate dividend of $6.9.
      Dividends on each share of preferred stock are cumulative from the date of issuance and are payable on each payment date to the extent that:that we are in compliance with our Three-Year Revolving Credit Facility,have assets that are legally available to pay dividends and our Board of Directors or an authorized committee of our Board declares a dividend payable. IfPursuant to the terms of the Series B Preferred Stock, if we do not pay dividends on any series of our preferred stock for six quarterly periods (whether consecutive or not), then holders of all series of our preferred stock then outstanding will have the right to elect two additional directors to the Board. These additional directors will remain on the Board until all accumulated and unpaid dividends on our cumulative preferred stock have been paid in full, or to the extent ourany series of non-cumulative preferred stock is outstanding, until non-cumulative dividends have been paid regularly for at least one year.
Note 15:13: Incentive PlansEmployee Benefits
 We issue stock and cash based incentive awards to our employees under a plan established by the Compensation Committee and approved by our shareholders. Common stock may be granted under the current plan, up to 4.5 shares for stock options and 14.0 shares for awards other than stock options, however there are limits as to the number of shares available for certain awards and to any one participant. Additional stock options and shares for awards other than stock options may be granted under the current plan if stock options and shares for awards other than stock options previously awarded under prior year

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
compensation plans are forfeited. During the year ended December 31, 2005, forfeitures of stock options and shares for awards other than stock options previously granted of 6.2 and 1.9, respectively, resulted in an additional 8.1 shares available to be issued in future awards. At December 31, 2005, there were 8.2 shares for stock options and 2.3 shares for awards other than stock options that were available under the plan.
Stock OptionsPension Plans
 Stock options are granted at the fair market value of our common stock on the date of grant and are generally exercisable between two and five years after the date of grant and expire ten years from the grant date.
      Following is a summary of stock option transactions during the three-year period ended December 31:
                         
  2005 2004 2003
       
    Weighted-   Weighted-   Weighted-
    Average   Average   Average
    Exercise   Exercise   Exercise
  Options Price Options Price Options Price
             
Stock options, beginning of year  39.5  $26.36   41.9  $26.60   42.3  $29.35 
Options granted  3.3   12.39   2.2   14.14   6.4   10.60 
Options exercised  (0.2)  10.75   (0.7)  10.64   (0.1)  10.49 
Options cancelled, forfeited and expired  (6.3)  26.91   (3.9)  25.40   (6.7)  29.23 
                   
Stock options, end of year  36.3   25.06   39.5   26.36   41.9   26.60 
                   
Options exercisable at year-end  32.9   26.39   21.1   28.94   20.8   27.49 
                   
      The following table summarizes information about stock options outstanding and exercisable at December 31, 2005:
                      
  Options Outstanding Options Exercisable
     
    Weighted-    
    Average Weighted-   Weighted-
  Number of Remaining Average Number of Average
  Options Contractual Life Exercise Price Options Exercise Price
           
Range of Exercise Prices
                    
 $ 9.12 to $14.99  10.2   8.1  $11.79   6.8  $11.46 
 $15.00 to $24.99  7.3   2.0   18.90   7.3   18.90 
 $25.00 to $34.99  12.2   4.6   31.26   12.2   31.26 
 $35.00 to $56.28  6.6   4.5   40.95   6.6   40.95 
                
   36.3       25.06   32.9   26.39 
                
Acceleration of Stock Options
      On December 20, 2005, the Compensation Committee approved the immediate acceleration of vesting of all of our“out-of-the-money” outstanding and unvested stock options previously awarded to our employees under equity compensation plans, excluding unvested options (1) granted during the 2005 calendar year, (2) held by our CEO or CFO or (3) held by non-management directors. All of the outstanding non-excluded unvested options were considered“out-of-the-money” if on December 20, 2005, the options had per share exercise prices equal to or in excess of $9.585, the average of the high and low price per share as quoted on the New York Stock Exchange on that date. As a result of the accelerated

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
vesting, options to purchase approximately 7.8 shares of our common stock became exercisable immediately. The weighted-average exercise price of the options subject to the acceleration was $18.40 per share. The number of shares, exercise prices and other terms of the options subject to the acceleration remain unchanged. The options are exercisable under their modified terms; however we were unable to issue securities upon the exercise of stock options due to the SEC’s position concerning our ineligibility to use the applicable registration forms.
      The accelerated vesting eliminates the future compensation expense that we would otherwise recognize in our Consolidated Statements of Operations with respect to these options upon the adoption of SFAS No. 123R (revised 2004),Share-Based Payment, as of January 1, 2006. The accelerated vesting of these stock options is expected to reduce the non-cash compensation expense that wouldWe have been recorded in the Consolidated Statements of Operations by $26.7 over the course of the original vesting periods through 2009. Upon adoption of SFAS No. 123R, we will recognize compensation expense related to any unvested options as of that date, as well as any options granted on or after that date. Since most of the accelerated options are considerably“out-of-the-money,” we expect that the accelerated vesting of these stock options will have a positive effect on employee retention and perception of stock option value. Because our near-term, share-based compensation expenses were reduced by the acceleration of vesting, share-based compensation expenses could grow significantly in future periods if we continue to grant amounts of new share-based compensation awards similar to recent periods.
      As of January 1, 2006, we plan to implement SFAS No. 123R using the modified prospective method, which requires that compensation expense be recorded for all unvested stock options and other equity-based awards. We estimate the impact of applying the provisions of SFAS No. 123R will result in an incremental expense in our Consolidated Statements of Operations of approximately $15.5 from 2006 through 2011 related to the outstanding options as of December 31, 2005. See Note 22 for further explanation.
Restricted Stock and Performance-Based Stock
      Restricted stock is granted to certain key employees and is subject to certain restrictions and vesting requirements as determined by the Compensation Committee. The vesting period is generally two to five years. No monetary consideration is paid by a recipient for a restricted stock award and the fair value of the shares on the grant date is amortized over the vesting period. There were 10.1 and 7.5 shares of restricted stock outstanding at December 31, 2005 and 2004, respectively. We awarded 5.2 shares, 4.1 shares and 0.5 shares of restricted stock with a weighted-average grant date fair value of $12.13, $13.72 and $11.51 during 2005, 2004 and 2003, respectively. The expense recorded for restricted stock awards, net of forfeitures, was $39.9, $31.1 and $34.9 during 2005, 2004 and 2003, respectively.
      Performance-based stock awards are a form of stock-award in which the number of shares ultimately received by the holder depends on our performance against specific performance targets. Performance-based stock awards were granted to certain key employees and were subject to certain restrictions and vesting requirements as determined by the Compensation Committee. The awards generally vest over a three-year period tied to the employees’ continuing employment and the achievement of certain performance conditions. No monetary consideration is paid by a recipient for a performance-based stock award and the fair value of the shares on the grant date is amortized over the vesting period. At December 31, 2005, there were 2.1 shares of the performance-based stock outstanding. During 2005, we awarded 2.3 shares of performance-based stock with a weighted-average grant date fair value of $12.09. The expense recorded for the performance-based stock awards, net of forfeitures, was $3.0 during 2005.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
Restricted Stock Units and Share Appreciation Performance-Based Units
      Restricted stock units are granted to employees and generally vest in three years. The grantee is entitled to receive a payment in cash or in shares of common stock, at the discretion of the Company, based on the fair market value of the corresponding number of shares of common stock upon completion of the vesting period. The holder of restricted stock units has no ownership interest in the underlying shares of common stock until the restricted stock units vest and the shares of common stock are issued. At December 31, 2005, there were 2.4 restricted stock units outstanding. During 2005 and 2004, we awarded 1.6 and 1.0 shares of restricted stock units with a weighted-average grant date fair value of $12.09 and $13.41, respectively. The expense recorded for the restricted stock units, net of forfeitures, was $4.3 and $2.2 during 2005 and 2004, respectively.
      In 2005, we granted Michael Roth, Chairman of the Board and Chief Executive Officer, 0.3 share appreciation performance-based units (“SAPUs”) based on a weighted-average grant date stock price of $12.17. Based on the discretion of the Company, the grantee is entitled to receive a payment in cash or shares of common stock upon completion of the four-year vesting period. The holder of the SAPUs has no ownership interest in the underlying shares of common stock until the SAPUs vest and the shares of common stock are issued. No expense was recorded for the SAPUs, as the awards were“out-of-the-money” due to the exercise price exceeding the market price during 2005.
Performance Units
      Before December 2003, performance units had been awarded to certain key employees. The payout for these performance units was contingent upon the annual growth in profits (as defined) over the performance periods. The awards are generally paid in cash. The projected value of these units is accrued and charged to expense over the performance period. The expense recorded for performance units, net of forfeitures, was $5.3, $12.1 and $19.7 during 2005, 2004 and 2003, respectively. In December 2003, the Compensation Committee terminated the existing Performance Units Plan. Final payments under this plan totaling approximately $9.6 are expected to be made in 2006.
Note 16:Employee Benefits
Pension Plans
      Through March 31, 1998, we had a defined benefit pension plan (“Domestic Plan”) which coveredcovers substantially all regular domestic employees. In 1992, the Domestic Plan was amended to offer newemployees employed through March 31, 1998. This plan participantsfeatures a traditional career pay benefit as well as a cash balance benefit, as opposed to a career pay formula benefit which was the previous plan formula prior to the amendment. Underadded in 1992. Post-1992 participants are eligible for the cash balance benefit participants were credited with an annual allocation equal to a percentage of their compensation, ranging from 1.5% to 5.0%, based on the participant’s age and years of service.only. Forpre-1992 participants, the benefit is the greater of the cash balance accountbenefit or the career pay formula benefit. Under the career pay formula benefit annual accruals were earned based on 1.0% of compensation up to $15,000 (actual number) plus 1.3% of compensation above $15,000 (actual number).formula. Participants are eligible to receive their benefit in the form of a lump sum payment or as an annuity. Effective April 1, 1998, plan participation and benefit accruals for thisthe Domestic Plan were frozen and participants with less than five or less years of service became fully vested. As of December 31, 2005,2006, there were approximately 4,9004,700 participants (actual number) in the Domestic Plan. Participants with five or more years of participation in the Domestic Plan as of March 31, 1998 retained their vested balances in the Domestic Plan and also became eligible for payments under a new compensation arrangement, the “Supplemental Compensation Plan” (described below). OneSome of our agencies has anhave additional domestic planplans covering a total of approximately 200 employees (actual number). This plan is300 employees. These plans are also closed to new participants.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
We also have numerous plans outside the United States, some of which are funded, while others provide payments at the time of retirement or termination under applicable labor laws or agreements. The Interpublic Pension Plan in the UKU.K. (“UKU.K. Pension Plan”) is the most material foreign pension plan in terms of the liabilitybenefit obligation and plan assets. The UK Pension PlanThis plan is a defined benefit plan offering plan participants a final average pay benefit. Under the final average pay benefit formula, the normal retirement benefit is 1.67% of final average pay per each year of service, where final average pay is the highest consecutive 36 months of pay out of the last ten years prior to retirement. Effective November 1, 2002, the UKU.K. Pension Plan was closed to new entrants, but existing participants continue to earn benefits under the plan. New employees after November 1, 2002 may be eligible to join the industry wide plan that operates on a defined contribution basis. As of December 31, 2005,2006, there were approximately 1,8001,700 participants (actual number) in the UKU.K. Pension Plan.
 During 2005, we identified
We included certain additional foreign pension plans.plans’ information in our 2006 disclosure that was not included in our 2005 disclosure. We have included the net periodic cost, as well as the benefit obligations and assets related to these plans as of and for the yearyears ended December 31, 2006 and 2005. The benefit obligations and plan assets for these plans are classified as “other” adjustments within the Pension and Postretirement Benefit Obligation table below. These plans do not have a material impact on our Consolidated Balance Sheets or Statements of Operations in 20052006 or 2004.2005.
Postretirement Benefit Plans
 
Some of our subsidiaries provide postretirement health benefits to eligible employees and their dependents and postretirement life insurance to eligible employees. For domestic employees to be eligible for postretirement health benefits, an employee had to be hired prior to January 1, 1988. Benefits are provided to retirees before and after eligibility1988 (June 22, 2001 for Medicare, anddomestic employees of the Company’s cost is limited to $7,000 (actual number) per covered individual pre-Medicare eligibility and $2,000 (actual number) per covered individual post-Medicare eligibility. For both pre-Medicare and post-Medicare retirees, prescription drug coverage is included in the benefits that are subject to the cap. Employees that retired prior to May 1, 1993 and their dependents are not subject to the annual cap on company costs. Retiree contributions are required for pre-Medicare coverage.former True North Communications companies). To be eligible for life insurance, an employee had to be hired prior to December 1, 1961. As of December 31, 2005, there were approximately 1,400 participants (actual number) in the postretirement health benefits plan and approximately 230 participants (actual number) in the postretirement life insurance plan.
      In addition to the participants in the postretirement health benefits plan described above, certain1961 (June 22, 2001 for domestic employees of the former True North Communications companies acquired in June 2001companies). Benefits are provided to retirees before and their dependents are eligibleafter eligibility for postretirement health benefitsMedicare, and life insurance. Generally, only employees hired prior to June 22, 2001 are eligible for coverage. Certain cost-sharing featuresour cost is based on each participant’s retirement date and limitations on Company cost apply to most of these participants.pre- and post-Medicare eligibility. As of December 31, 2005,2006, there were approximately 2,3003,500 participants (actual number) in both the True North postretirement health benefits plan and postretirement life insurance plan.these plans.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)

Our postretirement health benefits plans are unfunded, and the Company payswe pay claims as presented by the plans’ administrator. The postretirement life insurance plan is insured and the Company payswe pay premiums to the plan administrator.
 
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was enacted. The Act established a prescription drug benefit under Medicare, known as “Medicare Part D,” and a federal subsidy to sponsors of postretirement health benefits plans that provide a benefit that is at least actuarially equivalent to the Medicare Part D benefit. The prescription drug benefit provided to certain participants in the postretirement medical plan is at least actuarially equivalent to the Medicare Part D benefit, and, accordingly, we are entitled to a subsidy. Our application for the subsidy for our retirees was accepted by the Department of Health and Human Services, with the exception of certain

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
participants of the True North postretirement benefit plan, whose benefits we believe are not actuarially equivalent to the Medicare Part D benefit and therefore not eligible for the Medicare Part D subsidy. We have adopted FASB Staff Position (“FSP”) No. FAS 106-2,Accounting and Disclosure Requirements Relatedelected to prospectively recognize the Medicare Prescription Drug, Improvement and Modernizationeffect of the Act during the third quarter of 2003,prospectively from July 1, 2004. The expected subsidy reduced the accumulated postretirement benefit obligation by $5.0 at adoption, and the net periodic cost by $1.0, $1.0 and $0.3 for 2006, 2005 and 2004, respectively, as compared withto the amount calculated without considering the effects of the subsidy.
Adoption of SFAS No. 158
On September 29, 2006, the FASB issued SFAS No. 158. SFAS No. 158 requires an employer to recognize an asset or liability for the overfunded or underfunded status of their pension and other postretirement benefit plans. For a pension plan, the asset or liability is the difference between the fair value of the plan’s assets and the projected benefit obligation. For any other postretirement benefit plan, the asset or liability is the difference between the fair value of the plan’s assets and the accumulated postretirement benefit obligation. SFAS No. 158 requires employers to recognize all unrecognized transition obligations and assets, prior service costs and credits and actuarial gains and losses in accumulated other comprehensive income (loss), net of tax. Such amounts are adjusted as they subsequently recognize the components of net periodic benefit cost or income pursuant to the current recognition and amortization provisions. The following table summarizes the effect of required changes in the additional minimum liability (AML) as of December 31, 2006 prior to the adoption of SFAS No. 158 as well as the impact of the initial adoption of SFAS No. 158 for domestic plans, the principal foreign pension plans and the postretirement benefit plan.
             
  December 31, 2006
    
  Prior to
   December 31, 2006
  SFAS No. 158
   Post SFAS No. 158
  Adjustments Adjustments Adjustments
 
Pension assets $6.9  $(0.7) $6.2 
Other assets  0.7   (0.7)  — 
Pension liabilities  187.6   37.6   225.2 
Postretirement liabilities  49.1   20.8   69.9 
Accumulated other comprehensive loss  (71.7)  (42.6)  (114.3)
The amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit cost during 2007 are as follows:
                 
  Domestic
 Foreign
    
  Pension
 Pension
 Postretirement
  
  Plans Plans Benefit Plans Total
 
Actuarial gain $4.9  $3.2  $1.1  $9.2 
Prior service cost (credit)  —   0.5   (0.1)  0.4 
Transition obligation  —   0.1   0.1   0.2 


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)

Pension and Postretirement Net Periodic Cost
 We use a measurement date of December 31 for all material plans.
The following table identifies the components of net periodic cost for the domestic pension plans, the principal foreign pension plans, and the post retirementpostretirement benefit plans.
                                      
      Postretirement Benefit
  Domestic Pension Plans Foreign Pension Plans Plans
       
For the Years Ended December 31, 2005 2004 2003 2005 2004 2003 2005 2004 2003
                   
Service cost $0.7  $0.7  $0.7  $17.2  $17.1  $15.6  $0.7  $0.4  $0.6 
Interest cost  8.6   8.7   9.7   21.7   18.1   14.7   3.8   3.9   3.1 
Expected return on plan assets  (9.4)  (9.9)  (7.3)  (14.9)  (11.6)  (9.0)  —   —   — 
Curtailment gains  —   —   —   (2.2)  —   —   —   —   — 
Settlement losses  —   —   —   1.4   —   —   —   —   — 
Special termination benefits  —   —   —   4.9   —   —   —   —   — 
Amortization of:                                    
 Transition obligation  —   —   —   1.4   —   1.4   0.1   0.2   0.2 
 Prior service cost  (0.2)  (0.1)  (0.2)  0.1   —   0.1   (0.1)  —   — 
 Unrecognized actuarial losses (gains)  6.3   4.1   6.1   6.7   4.9   3.5   0.9   0.4   (0.1)
Other  —   —   —   0.8   —   —   —   —   — 
                            
Net periodic cost $6.0  $3.5  $9.0  $37.1  $28.5  $26.3  $5.4  $4.9  $3.8 
                            
 
                                     
      Postretirement
  Domestic Pension Plans Foreign Pension Plans Benefit Plans
Years ended December 31,
 2006 2005 2004 2006 2005 2004 2006 2005 2004
 
Service cost $0.8  $0.7  $0.7  $17.5  $17.2  $17.1  $0.5  $0.7  $0.4 
Interest cost  8.9   8.6   8.7   22.8   21.7   18.1   3.5   3.8   3.9 
Expected return on plan assets  (9.3)  (9.4)  (9.9)  (19.8)  (14.9)  (11.6)  —   —   — 
Curtailment gains  (0.1)  —   —   (2.3)  (2.2)  —   —   —   — 
Settlement losses  —   —   —   0.5   1.4   —   —   —   — 
Special termination benefits  —   —   —   —   4.9   —   —   —   — 
Amortization of:                                    
Transition obligation  —   —   —   0.2   1.4   —   0.1   0.1   0.2 
Prior service cost (credit)  0.1   (0.2)  (0.1)  0.2   0.1   —   (0.1)  (0.1)  — 
Unrecognized actuarial losses  7.0   6.3   4.1   6.5   6.7   4.9   0.7   0.9   0.4 
Other  —   —   —   (0.2)  0.8   —   —   —   — 
                                     
Net periodic cost $7.4  $6.0  $3.5  $25.4  $37.1  $28.5  $4.7  $5.4  $4.9 
                                     
The weighted-average assumptions used to determine the net periodic cost are as follows:
                                     
  Domestic Pension Plans Foreign Pension Plans Postretirement Benefit Plans
       
For the Years Ended December 31, 2005 2004 2003 2005 2004 2003 2005 2004 2003
                   
Discount rate  5.45%   6.15%   6.60%   4.81%   5.20%   5.40%   5.50%   6.25%   6.75% 
Rate of compensation increase  N/A   N/A   N/A   3.26%   3.50%   3.10%   N/A   N/A   N/A 
Expected return on plan assets  8.63%   8.65%   8.65%   6.28%   6.35%   6.50%   N/A   N/A   N/A 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
                                     
      Postretirement
  Domestic Pension Plans Foreign Pension Plans Benefit Plans
Years ended December 31,
 2006 2005 2004 2006 2005 2004 2006 2005 2004
 
Discount rate  5.41%  5.45%  6.15%  4.38%  4.81%  5.20%  5.50%  5.50%  6.25%
Rate of compensation increase  N/A   N/A   N/A   3.29%  3.26%  3.50%  N/A   N/A   N/A 
Expected return on plan assets  8.17%  8.63%  8.65%  6.52%  6.28%  6.35%  N/A   N/A   N/A 
(Amounts in Millions, Except Per Share Amounts)
Pension and Postretirement Benefit Obligation
 We use a measurement date of December 31 for all material
Significant foreign pension plan settlements occurred during 2006, primarily related to the Netherlands pension plans’ conversion to defined contribution plans. Previously unrecognized actuarial gains were recognized as the obligations related to those plans were settled.
The change in the benefit obligation, the change in plan assets, the funded status and amounts recognized for the domestic pension plans, the principal foreign pension plans, and the postretirement benefit plans are as follows:
                          
  Domestic Pension Foreign Pension Postretirement
  Plans Plans Benefit Plans
       
For the Years Ended December 31, 2005 2004 2005 2004 2005 2004
             
Change in projected benefit obligation
                        
Projected benefit obligation at January 1 $167.6  $154.8  $447.5  $356.6  $72.2  $62.1 
Service cost  0.7   0.7   17.2   17.1   0.7   0.4 
Interest cost  8.6   8.7   21.7   18.1   3.8   3.9 
Benefits paid  (13.4)  (14.2)  (25.3)  (16.3)  (6.4)  (7.0)
Plan participant contributions  —   —   2.9   2.7   1.4   1.3 
Plan amendments  —   —   —   —   (1.2)  — 
Actuarial losses  5.5   17.6   49.7   38.8   2.7   11.5 
Curtailments  —   —   (2.4)  —   —   — 
Settlements  —   —   (5.3)  —   —   — 
Special termination benefits  —   —   4.9   —   —   — 
Foreign currency effect  —   —   (49.3)  28.8   —   — 
Other  —   —   35.5   1.7   —   — 
                   
Projected benefit obligation at December 31 $169.0  $167.6  $497.1  $447.5  $73.2  $72.2 
                   
Change in fair value of plan assets
                        
Fair value of plan assets at January 1 $119.2  $93.6  $213.6  $179.0  $—  $— 
Actual return on plan assets  9.4   7.7   48.0   20.7   —   — 
Employer contributions  1.1   32.1   33.0   15.1   5.0   5.7 
Plan participant contributions  —   —   2.9   2.7   1.4   1.3 
Benefits paid  (13.4)  (14.2)  (25.3)  (16.3)  (6.4)  (7.0)
Settlements  —   —   (5.3)  —   —   — 
Foreign currency effect  —   —   (24.6)  13.1   —   — 
Other  —   —   33.0   (0.7)  —   — 
                   
Fair value of plan assets at December 31 $116.3  $119.2  $275.3  $213.6  $—  $— 
                   
Reconciliation of funded status to total amount recognized
                        
Funded status of the plans $(52.7) $(48.4) $(221.8) $(233.9) $(73.2) $(72.2)
Unrecognized net actuarial losses  77.5   78.4   111.9   112.4   22.8   21.0 
Unrecognized prior service cost  0.6   0.3   0.2   0.4   (1.1)  — 
Unrecognized transition cost  —   —   1.4   3.2   1.1   1.2 
                   
Net asset (liability) recognized $25.4  $30.3  $(108.3) $(117.9) $(50.4) $(50.0)
                   
Amounts recognized in consolidated balance sheet
                        
Accrued benefit liability $(47.4) $(43.9) $(182.0) $(201.1) $(50.4) $(50.0)
Intangible asset  0.6   0.3   1.1   2.9   —   — 
 Accumulated other comprehensive loss  72.2   73.9   72.6   80.3   —   — 
                   
 Net asset (liability) recognized $25.4  $30.3  $(108.3) $(117.9) $(50.4) $(50.0)
                   
Accumulated benefit obligation
 $163.7  $163.1  $454.6  $411.2         
                   
                         
  Domestic Pension Plans Foreign Pension Plans Postretirement Benefit Plans
Years ended December 31,
 2006 2005 2006 2005 2006 2005
 
Change in projected benefit obligation
                        
Projected benefit obligation at January 1 $169.0  $167.6  $497.1  $447.5  $73.2  $72.2 
Service cost  0.8   0.7   17.5   17.2   0.5   0.7 
Interest cost  9.0   8.6   22.7   21.7   3.5   3.8 
Benefits paid  (17.4)  (13.4)  (24.1)  (25.3)  (7.5)  (6.4)
Plan participant contributions  —   —   2.2   2.9   1.5   1.4 
Plan amendments  —   —   1.4   —   —   (1.2)
Actuarial losses (gains)  —   5.5   (25.8)  49.7   (1.3)  2.7 
Curtailments  (5.8)  —   (3.1)  (2.4)  —   — 
Settlements  —   —   (34.8)  (5.3)  —   — 
Special termination benefits  —   —   —   4.9   —   — 
Foreign currency effect  —   —   49.3   (49.3)  —   — 
Other  0.8   —   6.0   35.5   —   — 
                         
Projected benefit obligation at December 31 $156.4  $169.0  $508.4  $497.1  $69.9  $73.2 
                         

147
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Amounts in Millions, Except Per Share Amounts)

                         
  Domestic Pension Plans Foreign Pension Plans Postretirement Benefit Plans
Years ended December 31,
 2006 2005 2006 2005 2006 2005
 
                         
Change in fair value of plan assets
                        
Fair value of plan assets at January 1 $116.3  $119.2  $275.3  $213.6  $—  $— 
Actual return on plan assets  15.5   9.4   30.2   48.0   —   — 
Employer contributions  17.9   1.1   24.8   33.0   6.0   5.0 
Plan participant contributions  —   —   2.2   2.9   1.5   1.4 
Benefits paid  (17.4)  (13.4)  (24.2)  (25.3)  (7.5)  (6.4)
Settlements  —   —   (35.6)  (5.3)  —   — 
Foreign currency effect  —   —   30.4   (24.6)  —   — 
Other  0.8   —   9.6   33.0   —   — 
                         
Fair value of plan assets at December 31 $133.1  $116.3  $312.7  $275.3  $—  $— 
                         
                         
Reconciliation of funded status to total amount recognized
                        
Funded status of the plans $(23.3) $(52.7) $(195.7) $(221.8) $(69.9) $(73.2)
Unrecognized net actuarial losses  —   77.5   —   111.9   —   22.8 
Unrecognized prior service cost (credit)  —   0.6   —   0.2   —   (1.1)
Unrecognized transition cost  —   —   —   1.4   —   1.1 
                         
Net asset (liability) recognized $(23.3) $25.4  $(195.7) $(108.3) $(69.9) $(50.4)
                         
                         
Amounts recognized in consolidated balance sheet
                        
Non-current asset $1.8  $—  $4.4  $—  $—  $— 
Current liability  —   —   (7.0)  —   (5.9)  — 
Non-current liability  (25.1)  —   (193.1)  —   (64.0)  — 
Accrued benefit liability  —   (47.4)  —   (182.0)  —   (50.4)
Intangible asset  —   0.6   —   1.1   —   — 
Accumulated other comprehensive loss  —   72.2   —   72.6   —   — 
                         
Net asset (liability) recognized $(23.3) $25.4  $(195.7) $(108.3) $(69.9) $(50.4)
                         
                         
Accumulated benefit obligation
 $156.4  $163.7  $462.2  $454.6         
                         
                         
Amounts recognized in accumulated other comprehensive loss
                        
Net actuarial loss $59.0      $76.4      $20.8     
Prior service cost (credit)  0.2       1.5       (0.9)    
Transition obligation  —       0.9       0.9     
                         
Total amount recognized $59.2      $78.8      $20.8     
                         

 
                 
  Domestic Pension Plans Foreign Pension Plans
Years ended December 31,
 2006 2005 2006 2005
 
Plans with underfunded or unfunded accumulated benefit obligation
                
Aggregate projected benefit obligation $142.9  $169.0  $496.3  $493.7 
Aggregate accumulated benefit obligation  142.9   163.7   455.0   452.5 
Aggregate fair value of plan assets  117.7   116.3   296.3   271.9 
Differences between the aggregate balance sheet amounts listed above and the totals reported in our Consolidated Balance Sheets and our Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)Loss relate to the non-material foreign plans.

80

 The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for domestic pension plans with accumulated benefit obligations
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in excess of plan assets were $169.0, $163.7 and $116.3, respectively, at December 31, 2005 and $167.6, $163.1 and $119.2, respectively, at December 31, 2004.Millions, Except Per Share Amounts)

      The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for foreign pension plans with accumulated benefit obligations in excess of plan assets were $493.7, $452.5 and $271.9, respectively, at December 31, 2005 and $445.3, $409.0 and $211.3, respectively, at December 31, 2004. Our foreign pension plans are largely under funded due to different funding incentives that exist outside of the U.S. In certain countries where we have major operations, there are no legal requirements or financial incentives provided to companies to pre-fund pension obligations. In these instances, benefit payments are typically paid directly from our cash as they become due.
The weighted-average assumptions used in determining the actuarial present value of our benefit obligations are as follows:
                         
  Domestic Pension Foreign Pension Postretirement
  Plans Plans Benefit Plans
       
At December 31, 2005 2004 2005 2004 2005 2004
             
Discount rate  5.41%   5.45%   4.34%   5.00%   5.50%   5.50% 
Rate of compensation increase  N/A   N/A   3.28%   3.55%   N/A   N/A 
Healthcare cost trend rate assumed for next year Initial rate (weighted-average)                  10.00%   9.00% 
Year ultimate rate is reached                  2015   2012 
Ultimate rate                  5.50%   5.50% 
                         
  Domestic
 Foreign
 Postretirement
  Pension Plans Pension Plans Benefit Plans
Years ended December 31,
 2006 2005 2006 2005 2006 2005
 
Discount rate  5.68%  5.41%  4.82%  4.34%  5.75%  5.50%
Rate of compensation increase          3.66%  3.28%        
Healthcare cost trend rate assumed for next year Initial rate (weighted-average)                  9.50%  10.00%
Year ultimate rate is reached                  2015   2015 
Ultimate rate                  5.50%  5.50%
Determination of Discount Rates
 
For the domestic pension and postretirement benefit plans, we determine our discount rate based on the estimated rate at which annuity contracts could be purchased to effectively settle the respective benefit obligations. In determining the discount rate, we utilize a yield curve based on high-qualityMoody Aa-rated corporate non-callable bonds. Each plan’s projected cash flow is matched to this yield curve and a present value is developed, which is then used to develop a single equivalent discount rate. When identifying the bonds to be used, we exclude bonds with outlier yieldsThe average duration of our domestic pension and postretirement health care obligations was 10 years as these bonds are more likely to be mispriced or misgraded.of December 31, 2006.
 
For the foreign pension plans, we determine a discount rate by referencing market yields on high quality corporate bonds in the local markets with the appropriate term at December 31, 2005.2006.
Determination of the Expected Return on Assets
 
For the Domestic Plan, we develop the long-term expected rate of return assumptions which we use to model and determine overall asset allocations. Our rate of return analyses factor in historical trends, current market conditions, risk premiums associated with asset classes, and long-term inflation rates. We determine both a short-term (5-7 year) and long-term (30 year) view and then attempt to select a long-term rate of return assumption that matches the duration of our liabilities. Factors included in the analysis of returns include historical trends of asset class index returns over various market cycles and economic conditions.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
Approximately 84%90% of the foreign plan assets are part of the UKU.K. Pension Plan. The UKU.K. Pension Plan’s statement of investment principles specifies benchmark allocations by asset category for each investment manager employed, with specified ranges around the central benchmark allocation. For the UKU.K. Pension Plan, we determine the expected rate of return by utilizing a weighted average approach based on the current long-term expected rates of return for each asset category. The long-term expected rate of return for the equity category is based on the current long-term rates of return available on government bonds and applying suitable risk premiums that consider historical market returns and current market expectations.
Asset Allocation
 
The primary investment goal for our plans’ assets is to maximize total asset returns while ensuring the plans’ assets are available to fund the plans’ liabilities as they become due. The plans’ assets in aggregate and at the individual portfolio level are invested so that total portfolio risk exposure and risk-adjusted returns best meet this objective.


81

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)

As of December 31, 20052006 our domestic and foreign (primarily the UK)U.K.) pension planplans’ target asset allocations for 2006,2007, as well as the actual asset allocations at December 31, 20052006 and 2004,2005, are as follows:
                          
      Plan Assets at December 31,
     
  2006 Target    
  Allocation Domestic Foreign
       
Asset category Domestic Foreign 2005 2004 2005 2004
             
Equity securities  51%  64%  49%  54%  64%  73%
Fixed income securities  27%  28%  23%  21%  28%  18%
Real estate  9%  3%  9%  6%  3%  4%
Other  13%  5%  19%  19%  5%  5%
                   
 Total  100%  100%  100%  100%  100%  100%
                   
 
                         
      Plan Assets at December 31,
  2007 Target Allocation Domestic Foreign
Asset category
 Domestic Foreign 2006 2005 2006 2005
 
Equity securities  50%  66%  52%  49%  66%  64%
Fixed income securities  25%  22%  22%  23%  22%  28%
Real estate  10%  5%  7%  9%  5%  3%
Other  15%  7%  19%  19%  7%  5%
                         
Total  100%  100%  100%  100%  100%  100%
                         
The aggregate amount of our own stock held as investment for our domestic and foreign pension funds is considered negligible relative to the total fund assets.
Healthcare Cost Trend
 
Assumed healthcare cost trend rates have a moderate effect on the amounts reported for the postretirement benefit plans. We develop our healthcare cost trend rate assumptions based on data collected on recent trends and forecasts. A one percentage point change in assumed healthcare cost trend rates would have the following effects:
          
  1% Increase 1% Decrease
     
Effect of a one percentage point change in assumed healthcare cost trend        
 -on total service and interest cost components $0.1  $(0.1)
 -on postretirement benefit obligation $1.6  $(1.6)
         
  1% Increase 1% Decrease
 
Effect of a one percentage point change in assumed healthcare cost trend        
— on total service and interest cost components $0.1  $(0.1)
— on postretirement benefit obligation  1.5   (1.5)
Cash Flows
Contributions
Contributions — For 2006,2007, we do not expect to contribute $17.8 to fund our domestic pension plans, and we expect to contribute $22.1$20.6 to our foreign pension plans. The minimum funding obligation for 2005 is $0 forDuring 2006, we contributed $17.9 to our domestic pension plans and $12.7 for$24.8 to our foreign pension plans.

149

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
Estimated Future Payments
Estimated Future Payments — The following estimated future payments, which reflect future service, as appropriate, are expected to be paid in the years indicated:
              
  Domestic Foreign Postretirement
Years Pension Plans Pension Plans Benefit Plans
       
 2006 $12.1  $15.4  $6.6 
 2007  13.2   18.3   6.6 
 2008  13.1   17.2   6.5 
 2009  12.0   24.0   6.5 
 2010  12.5   19.2   6.5 
2011-2015  59.9   110.0   31.0 
 
             
  Domestic
 Foreign
 Postretirement
Years
 Pension Plans Pension Plans Benefit Plans
 
2007 $13.2  $20.4  $6.3 
2008  12.9   19.9   6.1 
2009  12.6   26.2   6.1 
2010  11.9   21.3   6.0 
2011  11.7   22.5   5.9 
2012-2016  55.3   139.2   26.9 
The estimated future payments for our postretirement benefit plans are before any estimated federal subsidies expected to be received under the Act. Federal subsidies are estimated to range from $0.6$0.4 in 2006,2007, to $0.9$0.5 in 20102011 and are estimated to be $5.3$2.4 for the period 2011-2015.2012-2016.
Supplemental Compensation Plan
 
As discussed above, participants with five or more years of participation in the Domestic Plan as of March 31, 1998 became eligible for payments under the Supplemental Compensation Plan. Under the Supplemental Compensation Plan,this plan, each participant is eligible for an annual allocation, which approximates the projected discontinued pension benefit accrual (formerly made under the cash balance formula in the Domestic Plan) plus interest, while they continue to work for us. Participants in active service are eligible to receive up to ten years of allocations coinciding with the number of years of plan participation in the Domestic Plan as of March 31, 1998. After five years of plan participation, a participant starts to receive an annual cash payment equal to 50% of the accumulated plan balance. Participants must be employed with us as of the scheduled payment date to receive a payment. However, a participant is entitled to 100% of the accumulated plan balance at termination of employment if certain age and service requirements are met. Payments began in 2003 and are scheduled to end in 2008. As of December 31, 20052006 and 2004,2005, the Supplemental Compensation Plan liability recorded on our Consolidated Balance Sheet was $7.3$5.4 and $9.7,$7.3, respectively. Amounts expensed for the Supplemental Compensation Plan in 2006, 2005 and 2004 were $0.6, $1.0 and 2003 were $1.0, $5.4, and $3.4, respectively.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)

Savings Plans
 
We sponsor a defined contribution plan (“Savings Plan”) that covers substantially all domestic employees. The Savings Plan permits participants to make contributions on a pre-taxand/or after-tax basis. The Savings Plan allows participants to choose among various investment alternatives. We match a portion of participant contributions based upon their years of service. We contributed $31.2, $29.9 $28.0 and $26.9$28.0 to the Savings Plan in 2006, 2005 and 2004, respectively. We also expect to contribute $8.9 to the Savings Plan for the performance-based discretionary match for 2006. In addition, we maintain defined contribution plans in various countries and 2003,contributed $11.8, $5.3 and $3.9 to these plans in 2006, 2005 and 2004, respectively.
Deferred Compensation and Benefit Arrangements
 
We have deferred compensation arrangements which (i) permit certain of our key officers and employees to defer a portion of their salary or incentive compensation, or (ii) result in us contributing an amount to the participant’s account. The arrangements typically provide that the participant will receive the amounts deferred plus interest upon attaining certain conditions, such as completing a certain number of years of service or upon retirement or termination. As of December 31, 20052006 and 2004,2005, the deferred compensation liability balance recorded on our Consolidated Balance Sheets was $143.9 and $141.3, and $154.3,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
respectively. Amounts expensed for deferred compensation arrangements in 2006, 2005 and 2004 were $10.3, $10.2 and 2003 were $10.2, $8.8, and $5.0, respectively.
 
We have deferred benefit arrangements with certain key officers and employees which provide participants with an annual payment, payable when the participant attains a certain age and after the participant’s employment has terminated. The deferred benefit liability recorded on our Consolidated Balance Sheets atas of December 31, 2006 and 2005 was $157.9 and 2004 was $151.5, and $128.3, respectively. Amounts expensed for deferred benefit arrangements in 2006, 2005 and 2004 were $13.7, $30.9 and 2003 were $30.9, $17.1, and $12.7, respectively.
 We use various actuarial methods and assumptions in determining our pension and postretirement benefit costs and obligations, including the discount rate used to determine the present value of future benefits, expected long-term rate of return on plan assets and healthcare cost trend rates.
A significant assumption used to estimate certain deferred benefit liabilities is a participant’s retirement age. For one of our more significant deferred benefit arrangements, during the fourth quarter of 2005, based on an analysis of recent trends, we determined that participants are eligible to retire and begin collecting their deferred benefits at age 60. Historically, based upon prior experience and trending data we assumed that related participants would retire at age 65. However, more recent experience indicates that a majority ofmost eligible participants were retiring and beginning to collect their deferred benefits at age 60. Therefore, in conjunction with our annual review of pension and postretirement benefit assumptions in the fourth quarter of 2005, we revised theThis compares to previous periods which used an assumed retirement of age from 65 to 60 within the related deferred benefit liability calculation. As a result of thisThis change in estimate, recorded during the fourth quarter of 2005, the deferred benefit expense increasedresulted in a $14.8 charge to salaries and related expenses, on our Consolidated Statements of Operations by $14.8, with a corresponding increase to the deferred benefit liability.
 
We have purchased life insurance policies on participants’ lives to assist in the funding of the related deferred compensation and deferred benefit liabilities. As of December 31, 20052006 and 2004,2005, the cash surrender value of these policies was $132.8$117.0 and $141.4,$132.8, respectively. In addition to the life insurance policies, certain investments are held for the purpose of paying the deferred compensation and deferred benefit liabilities. These investments, along with the life insurance policies, are held in a separate trust and are restricted for the purpose of paying the deferred compensation and the deferred benefit arrangement liabilities. As of December 31, 20052006 and 2004,2005, the value of such restricted assetsinvestments in the trust was $86.1$88.5 and $80.2,$86.1, respectively. The short-term investments, long-term investments and cash surrender value of the policies in the trust are included in Other Current Assets, Investmentscash and Other Assets, respectively, on our Consolidated Balance Sheets.cash equivalents, investments and other assets, respectively.
Long-term Disability Plan
 
We have a Long-term Disability (“LTD”) plan which provides income replacement benefits to eligible participants who are unable to perform their job duties during the first 24 months of disability. Benefits are continued thereafter if the participant is unable to perform any job related to his or her education, training or experience, provided the participants receive disability benefits from Social Security. As all income replacement benefits are fully insured, no related obligation is required at December 31, 20052006 and 2004.2005. In addition to income replacement benefits, all LTD participants continue to receive medical, dental and life insurance benefits up to age 65 (subject to minimum periods depending on the participants’ age at time of disability). We have recorded an obligation of $9.3$6.9 and $6.1$9.3 as of December 31, 20052006 and 2004,2005, respectively, related to medical, dental benefits and life insurance benefits for LTD participants.
Employee Stock Purchase Plan
      Under the ESPP, employees could purchase our common stock through payroll deductions not exceeding 10% of their compensation. The price an employee paid for a share of stock under the ESPP was 85% of the average market price on the last business day of each month. In 2005, 2004 and 2003, we

151
83

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Amounts in Millions, Except Per Share Amounts)

Note 14: Stock-Based Compensation
2006 Performance Incentive Plan
issued 0.1 shares, 0.7 shares
We issue stock and 0.9 shares, respectively, purchased bycash based incentive awards to our employees under a plan established by the ESPP. Shares issuedCompensation Committee of the Board of Directors and approved by our shareholders. In May 2006, our shareholders approved the 2006 Performance Incentive Plan (the “2006 PIP”). Under the 2006 PIP, up to employees6.0 shares of common stock may be used for granting stock options and stock appreciation rights and up to 33.0 shares of common stock may be used for granting performance-based awards and other stock-based awards. Subject to the terms of the 2006 PIP, additional awards may be granted from shares available for issuance under previous plans and in other limited circumstances. Only a certain number of shares are available for each type of award under the ESPP have no impact2006 PIP, and there are similar limits on our Consolidated Statementsthe number of Operations. Noshares that may be awarded to any one participant. The vesting period of awards granted is generally commensurate with the requisite service period. We generally issue new shares to satisfy the exercise of stock was purchased underoptions or the ESPP duringdistribution of other stock-based awards. During the second quarter of 2005. The ESPP expired effective June 30, 2005 and shares are no longer available for issuance2006 the Compensation Committee began to grant new awards under the ESPP.2006 PIP.
Adoption of SFAS No. 123R
The following table summarizes the net incremental stock-based compensation expense included in salaries and related expenses as a result of the adoption of SFAS No. 123R:
     
  Year ended
  December 31,
  2006
 
Loss from continuing operations before provision for income taxes $1.9 
Net loss $0.7 
Net loss applicable to common stockholders $0.7 
The impact on basic and diluted loss per share was less than one cent for the year ended December 31, 2006. On January 1, 2006, we recorded a benefit from the cumulative effect of the change in accounting principle due to the initial adoption of SFAS No. 123R of $3.6 ($2.3, net of tax) in salaries and related expenses.
The following table summarizes stock-based compensation expense included in salaries and related expenses:
             
  Years ended December 31,
  2006 2005 2004
 
Stock-based compensation expense $72.3  $46.1  $34.1 
Tax benefit $24.4  $15.9  $11.6 
In addition, stock-based compensation expense of $4.9 is included in other reorganization-related charges for the year ended December 31, 2006. See Note 2 for further explanation.
In accordance with FSPNo. SFAS 123R-3,Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards, we elected an alternative simplified method to calculate the windfall tax pool (the “APIC pool”). Under this FSP, a company may use a simplified method to calculate the beginning balance of the APIC pool related to employee compensation and to determine the subsequent impact on the APIC pool of employee awards that are fully vested and outstanding upon the adoption of SFAS No. 123R. As a result of this change in accounting principle, SFAS No. 154,Accounting Changes and Error Corrections — A Replacement of APB Opinion No. 20 and FASB Statement No. 3, requires us to record the impact of this election retrospectively to all prior periods affected. See Note 22 for discussion offurther information describing the impact of shares issuedimpact.


84

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)

The following table illustrates the pro forma effect on net loss applicable to employees undercommon stockholders and loss per share if we had applied the ESPP upon our adoptionfair value recognition provisions of SFAS No. 123R.123 and SFAS No. 148,Accounting for Stock-Based Compensation — Transition and Disclosure — An Amendment of FASB No. 123to all stock-based employee compensation, net of forfeitures for our stock option and ESPP plans for the year ended December 31, 2005 and 2004.
 
         
  Years ended December 31,
  2005 2004
 
As reported, net loss $(262.9) $(538.4)
Dividends on preferred stock  26.3   19.8 
         
Net loss applicable to common stockholders
 $(289.2) $(558.2)
Add back:        
Stock-based employee compensation expense included in net loss applicable to common stockholders, net of tax  30.2   22.5 
Less:        
Total fair value of stock-based employee compensation expense, net of tax  (62.6)  (51.3)
         
Pro forma net loss applicable to common stockholders $(321.6) $(587.0)
         
         
Loss per share — basic and diluted        
As reported $(0.68) $(1.34)
Pro forma $(0.76) $(1.41)
Employee Stock Purchase Plans
In November 2005, the Company’sour stockholders approved the establishment of an Interpublic Group of Companies Employee Stock Purchase Plan (2006) (the “2006 Plan”) to replace the previously existing ESPP. Under the 2006 Plan, employees may purchase our common stock through payroll deductions not exceeding 10% of their compensation. The price an employee pays for a share of stock under the 2006 Plan is 90% of the lesser of the average market price of a share on the first business day of the offering dateperiod or the average market price of a share on the last business day of the offering period of three months. An aggregate of 15.0 shares are reserved for issuance under the 2006 Plan. BeginningDuring the second quarter of 2006, we filed a registration statement with the SEC to register the shares that may be purchased under the 2006 Plan. This plan is not yet active.
Under the former ESPP, employees could purchase our common stock through payroll deductions not exceeding 10% of their compensation. The price an employee paid for a share of stock under the ESPP was 85% of the average market price on March 17,the last business day of each month. The 15% discount received by employees on the date that common stock was purchased under our former ESPP had a weighted-average fair value of $1.97 and $2.03 per share for 2005 and ending2004, respectively, and is included in the total fair value of stock-based employee compensation expense in the pro forma table above. In 2005 and 2004, we issued 0.1 shares and 0.7 shares, respectively, purchased by employees under the ESPP. Shares issued to employees under the former ESPP had no impact on our Consolidated Statements of Operations. The ESPP expired effective June 30, 2005.
Stock Options
Stock options are granted at the fair market value of our common stock on the filinggrant date and are generally exercisable between two and five years from the grant date and expire ten years from the grant date.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)

The following tables are a summary of this annual report, westock option activity during 2006:
                 
      Weighted-Average
  
    Weighted-Average
 Remaining
 Aggregate
    Exercise
 Contractual Term
 Intrinsic
  Options Price (in years) Value
 
Stock options outstanding as of January 1, 2006  36.3  $25.06         
Granted  3.2   8.73         
Exercised  (0.1)  9.64         
Cancelled/expired  (6.6)  23.56         
Forfeited  (0.2)  10.38         
                 
Stock options outstanding as of December 31, 2006  32.6   23.94   5.0  $19.7 
Stock options vested and expected to vest as of December 31, 2006  31.5   24.40   4.9  $18.3 
Stock options exercisable at December 31, 2006  26.3   27.16   4.1  $8.6 
                 
    Weighted-Average
 Weighted-Average
  
    Grant Date
 Remaining
 Aggregate
    Fair Value
 Contractual Term
 Intrinsic
  Options (per option) (in years) Value
 
Non-vested as of January 1, 2006  3.4  $5.65         
Granted  3.2   3.91         
Vested  (0.1)  6.30         
Forfeited  (0.2)  4.58         
                 
Non-vested as of December 31, 2006  6.3   4.80   8.9  $11.1 
There were unable0.1, 0.2 and 0.7 stock options exercised during 2006, 2005 and 2004, respectively. The total intrinsic value of stock options exercised during 2006, 2005 and 2004 was $0.2, $0.4, and $2.3, respectively. Accordingly, the related excess tax benefit classified as a financing inflow for 2006 was $0.1. The cash received from the stock options exercised in 2006 was $0.9. As of December 31, 2006 there was $18.9 of total unrecognized compensation expense related to issue securities pursuantnon-vested stock options granted, which is expected to the ESPP or the 2006 Plan due to the SEC’s position concerning our ineligibility tobe recognized over a weighted-average period of 3.0 years.
We use the applicable registration forms.Black-Scholes option-pricing model to estimate the fair value of options granted, which requires the input of subjective assumptions including the option’s expected term and the price volatility of the underlying stock. Changes in the assumptions can materially affect the estimate of fair value and our results of operations could be materially impacted.
The fair value of each option grant has been estimated with the following weighted-average assumptions:
             
  Years ended December 31,
  2006 2005 2004
 
Expected volatility 1
  38.9%  41.0%  44.7%
Expected term (years) 2
  5.9   5.8   6.0 
Risk free interest rate 3
  5.1%  4.0%  4.0%
Expected dividend yield 4
  0.0%  0.0%  0.0%
Option grant price $8.73  $12.39  $14.19 
Option grant-date fair value $3.91  $5.62  $6.90 
Note 17:1Accumulated Other Comprehensive Income (Loss)The expected volatility for the second half of 2005 and the twelve months ended December 31, 2006 used to estimate the fair value of stock options awarded is based on a blend of: (i) historical volatility of our common stock for periods equal to the expected term of our stock options and (ii) implied volatility of tradable forward put and call options to purchase and sell shares of our common stock. For the twelve months ended December 31, 2004 and the first half of 2005, the expected volatility factor was based on historical volatility of our common stock over the most recent period commensurate with the estimated expected term of our stock options.
2The estimate of our expected term for the second half of 2005 and the twelve months ended December 31, 2006 is based on the average of (i) an assumption that all outstanding options are exercised upon achieving their full vesting date and (ii) an assumption that all outstanding options will be exercised at the midpoint between the current date, (i.e., the date awards have ratably vested through), and their full contractual term. In determining the estimate, we considered several factors, including the historical option exercise behavior of our employees and the terms and


86

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)

vesting periods of the options. For the twelve months ended December 31, 2004 and the first half of 2005, our estimate of expected term was based on the historical patterns of exercises.

 Comprehensive income (loss)
3The risk free rate is determined using the implied yield currently available for zero-coupon U.S. government issuers with a remaining term equal to the expected term of the options.
4No dividend yield was assumed because we currently do not pay cash dividends on our common stock and have no current plans to reinstate a dividend.
On December 20, 2005, the Compensation Committee approved the immediate acceleration of vesting of all of our“out-of-the-money” outstanding and unvested stock options previously awarded to our employees under equity compensation plans, excluding unvested options (1) granted during the 2005 calendar year, (2) held by our CEO or CFO or (3) held by non-management directors. The number of shares, exercise prices and other terms of the options subject to the acceleration remain unchanged. The accelerated vesting of these stock options reduced the non-cash compensation expense recorded in our Consolidated Statements of Operations when we adopted SFAS No. 123R.
Restricted Stock
Restricted stock is includedgranted to certain key employees and is subject to certain restrictions and vesting requirements as determined by the Compensation Committee. The vesting period is generally three years. No monetary consideration is paid by a recipient for a restricted stock award, and the fair value of the shares on the Consolidated Statementgrant date is amortized over the vesting period.
During 2006, 2005 and 2004, we awarded 5.3, 4.6 and 4.1 shares of Stockholders’ Equityrestricted stock with a weighted-average grant-date fair value of $8.77, $11.98 and Comprehensive Income (Loss). Accumulated other comprehensive loss, net$13.72 per award, respectively. The total fair value of tax,vested restricted stock that was distributed to participants during 2006, 2005 and 2004 was $11.0, $19.8 and $23.7, respectively.
Restricted Stock Units
Restricted stock units are granted to certain key employees and generally vest over three years. Upon completion of the vesting period, the grantee is reflectedentitled, at the Compensation Committee’s discretion, to receive a payment in cash or in shares of common stock based on the fair market value of the corresponding number of shares of common stock. The holder of restricted stock units has no ownership interest in the underlying shares of common stock until the restricted stock units vest and the shares of common stock are issued. No monetary consideration is paid by a recipient for a restricted stock unit award. The fair value of restricted stock unit awards is adjusted at the end of each quarter based on our share price. We amortize stock-based compensation expense related to these awards over the vesting period based upon the quarterly-adjusted fair value.
During 2006, 2005 and 2004, we awarded 2.2, 1.6 and 1.0 restricted stock units with a weighted-average grant-date fair value of $8.88, $12.09 and $13.41 per award, respectively. The total fair value of cash in respect of restricted stock units distributed to participants during 2006 and 2005 was $0.2 and $0.1, respectively. No restricted stock units vested during 2004.
Performance-Based Stock
Performance-based stock awards have been granted to certain key employees subject to certain restrictions and vesting requirements as determined by the Compensation Committee. Performance-based stock awards are a form of stock award in which the number of shares ultimately received by the participant depends on performance against specific performance targets. The awards generally vest over a three-year period related to the employees’ continuing employment and the achievement of certain performance objectives. The final number of shares that could ultimately be received by a participant ranges from 0% to 200% of the target amount of shares originally granted. The holder of an award of performance-based stock has no ownership interest in the underlying shares of common stock until the award vests and the shares of common stock are issued. We amortize stock-based compensation expense for the estimated number of performance-based stock awards that we expect to vest over the vesting period generally using the grant-date fair value of the shares. No monetary consideration is paid by a participant for a performance-based stock award.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)

During 2006 and 2005 we awarded 9.9 and 2.9 shares of performance-based stock, at target, with a weighted-average grant-date fair value of $9.68 and $12.35 per award, respectively. No performance-based stock was granted during 2004. The total fair value of performance-based stock distributed to participants during 2006 was $0.1. No performance-based stock awards were distributed during 2005.
Certain stock-based compensation awards expected to be settled in cash have been classified as liabilities in the Consolidated Balance Sheets as follows:of December 31, 2006 and 2005.
         
  December 31,
   
  2005 2004
     
Foreign currency translation adjustment $(188.8) $(145.8)
Adjustment for minimum pension liability, net  (111.4)  (112.8)
Unrealized holding gain on securities, net  24.2   10.0 
       
Accumulated other comprehensive loss, net of tax $(276.0) $(248.6)
       
A summary of the activity of our non-vested restricted stock, restricted stock units, and performance-based stock during 2006 is presented below (performance-based stock awards are shown at 100% of the shares originally granted):
                         
  Restricted Stock Restricted Stock Units Performance-Based Stock
    Weighted-Average
   Weighted-Average
   Weighted-Average
    Grant-Date Fair
   Grant-Date Fair
   Grant-Date Fair
  Awards Value (per award) Awards Value (per award) Awards Value (per award)
 
Non-vested as of January 1, 2006  9.5  $15.35   2.3  $12.54   2.8  $12.34 
Granted  5.3   8.77   2.2   8.88   9.9   9.68 
Vested  (1.2)  22.07   —   12.37   —   12.15 
Forfeited  (1.0)  12.89   (0.4)  12.11   (0.9)  11.16 
                         
Non-vested as of December 31, 2006  12.6  $12.16   4.1  $10.61   11.8  $10.21 
Total unrecognized compensation expense remaining $64.2      $30.4      $45.6     
Weighted-average years expected to be recognized over  1.6       1.8       2.2     
Share Appreciation Performance-Based Units
In August 2005, we granted Michael Roth, Chairman of the Board and Chief Executive Officer, 0.3 share appreciation performance-based units (“SAPUs”) based on a weighted-average grant-date stock price of $12.17. At the Compensation Committee’s discretion, Mr. Roth is entitled to receive a payment in cash or shares of common stock upon completion of a four-year vesting period. Mr. Roth has no ownership interest in the underlying shares of common stock until the SAPUs vest and the shares of common stock are issued. The fair value of the SAPUs is estimated using the Black-Scholes valuation model, using assumptions similar to those used for stock options. For 2006, we recorded stock-based compensation expense for SAPUs of $0.6. There was no compensation expense recorded in 2005 for SAPUs, as the exercise price exceeded the market price. As of December 31, 2006, there was $0.9 of total unrecognized compensation expense related to non-vested SAPUs that is expected to be recognized over a weighted-average period of 2.6 years. We amortize stock-based compensation expense related to these awards over the vesting period based upon the quarterly-adjusted fair value.
Note 18:15: Segment Information
As of December 31, 2006, we are organized into five global operating divisions and a group of leading stand-alone agencies that are grouped into two reportable segments, IAN and CMG. We also report results for the Corporate group. As of December 31, 2005, we had an additional segment, Motorsports operations (“Motorsports”), which was sold during 2004 and had immaterial residual operating results in 2005. Future changes to our organizational structure may result in changes to the reportable segment disclosure.
Within the IAN segment, McCann Worldgroup, Draftfcb, Lowe Worldwide, Initiative and our stand-alone agencies provide a comprehensive array of global communications and marketing services, each offering a distinctive range of solutions for our clients. Our stand-alone agencies, including Campbell-Ewald, Hill Holliday, Deutsch and Mullen, provide a full range of advertising, marketing communications servicesand/or marketing services and partner with our global operating divisions as needed. Each of IAN’s operating divisions share similar economic characteristics and are similar in other areas, specifically related to the nature of their respective services, the manner in which the services are provided and the similarity of their respective customers.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)

CMG, which includes Weber Shandwick, MWW Group, FutureBrand, DeVries, GolinHarris, Jack Morton, and Octagon Worldwide, provides clients with diversified services, including public relations, meeting and event production, sports and entertainment marketing, corporate and brand identity and strategic marketing consulting. CMG shares some similarities to other service lines offered by IAN, however, CMG’s businesses, on an aggregate basis, have a higher proportion of arrangements for which it acts as principal, a different distribution model than IAN and different margins.
During 2004, we exited our Motorsports business, which owned and operated venue-based motorsports businesses. 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, and are therefore not discussed in detail.
The profitability measure employed by our chief operating decision makers for allocating resources to operating divisions and assessing operating division performance is operating income (loss), excluding the impact of restructuring and other reorganization-related charges (reversals), long-lived asset impairment charges and Motorsports contract termination costs. With the exception of excluding these amounts from reportable segment operating income (loss), all segments follow the same accounting policies as those described in Note 1.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)

Summarized financial information concerning our reportable segments is shown in the following table:
             
  Years ended December 31,
  2006 2005 2004
 
Revenue:
            
IAN $5,230.6  $5,327.8  $5,399.2 
CMG  960.2   944.2   935.8 
Motorsports  —   2.3   52.0 
             
Total $6,190.8  $6,274.3  $6,387.0 
             
             
Segment operating income (loss):
            
IAN $391.4  $249.7  $577.1 
CMG  51.6   53.0   83.7 
Motorsports  —   0.7   (14.0)
Corporate and other  (275.3)  (316.3)  (243.2)
             
Total  167.7   (12.9)  403.6 
             
             
Restructuring and other reorganization-related charges (reversals)  (34.5)  7.3   (62.2)
Long-lived asset impairment and other charges  (27.2)  (98.6)  (322.2)
Motorsports contract termination costs  —   —   (113.6)
Interest expense  (218.7)  (181.9)  (172.0)
Interest income  113.3   80.0   50.8 
Other (expense) income  (5.6)  19.5   (51.4)
             
Loss from continuing operations before provision for income taxes
 $(5.0) $(186.6) $(267.0)
             
Depreciation and amortization of fixed assets and intangible assets:
            
IAN $126.1  $135.3  $146.5 
CMG  19.2   18.3   22.1 
Corporate and other  28.3   15.2   16.5 
             
Total $173.6  $168.8  $185.1 
             
Capital expenditures:
            
IAN $92.8  $89.7  $133.7 
CMG  11.4   14.8   27.1 
Corporate and other  23.6   36.2   33.2 
             
Total $127.8  $140.7  $194.0 
             
             
             
             
  December 31,  
Total assets: 2006 2005  
 
IAN $9,359.5  $9,217.1     
CMG  908.3   965.9     
Corporate and other  1,596.3   1,762.2     
             
Total $11,864.1  $11,945.2     
             
Corporate and other charges includes corporate office expenses and shared service center expenses, as well as certain other centrally managed expenses which are not fully allocated to operating divisions, as shown in the table below. Salaries and related expenses include salaries, pension, bonus and medical and dental insurance expenses for corporate office employees. Professional fees include costs related to the internal control compliance, cost of 2005 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 2005 Restatement activities. Rent, depreciation and amortization 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. The amounts allocated to operating divisions are calculated monthly based on a formula that uses the revenues of the operating


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)

unit. Amounts allocated also include specific charges for information technology-related projects, which are allocated based on utilization. The following expenses are included in Corporate and Other:
             
  Years ended December 31,
  2006 2005 2004
 
Salaries and related expenses $214.1  $201.3  $151.2 
Professional fees  139.7   199.3   145.3 
Rent, depreciation and amortization  65.4   45.3   38.4 
Corporate insurance  21.7   26.0   29.7 
Other  25.3   15.2   16.8 
Expenses allocated to operating divisions  (190.9)  (170.8)  (138.2)
             
Total $275.3  $316.3  $243.2 
             
Revenue and long-lived assets are presented below by major geographic area:
                     
  Revenue Long-Lived Assets
  Years ended December 31, December 31,
  2006 2005 2004 2006 2005
 
U.S.  $3,441.2  $3,461.1  $3,509.2  $2,818.2  $2,733.6 
                     
International:                    
U.K.  565.6   619.9   657.6   306.8   306.9 
All Other Europe  1,043.0   1,135.5   1,225.9   606.0   615.2 
Asia Pacific  512.0   473.5   477.3   122.4   119.1 
Latin America  303.4   259.7   242.1   109.4   144.9 
Other  325.6   324.6   274.9   216.0   230.8 
                     
Total international  2,749.6   2,813.2   2,877.8   1,360.6   1,416.9 
                     
Total consolidated $6,190.8  $6,274.3  $6,387.0  $4,178.8  $4,150.5 
                     
Revenue is attributed to geographic areas based on where the services are performed. Property and equipment is allocated based upon physical location. Intangible assets, other assets and investments are allocated based on the location of the related operations.
Note 16: Financial Instruments
The following table presents the carrying amounts and fair values of our financial instruments as of December 31, 2006 and 2005. The carrying amounts reflected in our Consolidated Balance Sheet for cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and short-term borrowings approximated their respective fair values as of December 31, 2006 and 2005.
                 
  Years ended December 31,
  2006 2005
  Book Value Fair Value Book Value Fair Value
 
Investment securities:                
Short-term marketable securities $1.4  $1.4  $115.6  $115.6 
Long-term investments  73.0   91.2   120.7   120.7 
Equity method investments  55.1   55.1   49.9   49.9 
Long-term debt  (2,214.4)  (2,275.2)  (2,149.2)  (2,072.1)
Financial commitments:                
Other forward contracts  (13.7)  (13.7)  (11.5)  (11.5)
Investment Securities
Short-term marketable securities consist primarily ofavailable-for-sale debt and equity securities that are publicly traded. Long-term investments consisted primarily of public and non-publicavailable-for-sale equity securities. These are mostly equity interests of less than 20% that we have in various agencies and are accounted for under the cost method. Equity method investments consisted primarily of investments in unconsolidated affiliated companies accounted for under the equity method and have been carried at cost, which approximates fair value.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)

Dividends received from our investments in unconsolidated affiliated companies were $4.4, $5.9 and $9.3 in 2006, 2005 and 2004, respectively, and reduced the carrying values of the related investments.
Gross unrealized gains on our investments, which are reported as a component of other comprehensive loss, were $7.2, $22.6 and $3.6 for the years ended December 31, 2006, 2005 and 2004, respectively. Gross unrealized losses on our investments, were ($13.5), ($0.2) and ($0.1) for the years ended December 31, 2006, 2005 and 2004, respectively.
Gross realized gains on our investments, which are reported in other income (expense), were $19.2, $0.6 and $0.0 for the years ended December 31, 2006, 2005 and 2004, respectively. Gross realized losses on our investments, were $0.0, ($0.2) and ($3.2) for the years ended December 31, 2006, 2005 and 2004, respectively.
Long-Term Debt
Long-term debt includes variable and fixed rate debt. The fair value of our long-term debt instruments is based on market prices for debt instruments with similar terms and maturities.
Financial Commitments
Financial commitments include other forward contracts relating primarily to an obligation to repurchase 49% of the minority-owned equity shares of a consolidated subsidiary, valued pursuant to SFAS No. 150,Accounting for Certain Financial Instruments with Characteristic of Both Liabilities and Equity. Fair value measurement of the obligation was based upon the amount payable as if the forward contract was settled at December 31, 2006 and 2005. Changes in the fair value of the obligation have been recorded as interest expense or income in the Consolidated Statement of Operations.
Note 17: Derivative and Hedging Instruments
 
We periodically enter into interest rate swap agreements and forward contracts to manage exposure to interest rate fluctuations and to mitigate foreign exchange volatility. Derivative instruments, including those that are embedded in other contracts, are recorded at fair value in the balance sheet as either an asset or a liability. Changes in the fair value of the derivatives are recorded each period in our Consolidated Statement of Operations unless specific hedge accounting criteria are met. We do not enter into derivative financial instruments for speculative purposes and do not have a material portfolio of derivative financial instruments.
Interest Rate Swaps
 During the fourth quarter of 2004, we executed three interest rate swaps which synthetically converted $350.0 of fixed rate debt to floating rates, to hedge a portion of our floating rate exposure on our cash investments. The interest rate swaps effectively converted the $350.0, 6.25% Senior Unsecured Notes due November 2014 to floating rate debt and mature on the same day the debt is due. As of December 31, 2004, the floating rate was approximately 4.2%. Under the terms of the interest rate swap agreement, we paid a floating interest rate, based on one-month LIBOR plus an average spread of 176.6 basis points, and received the fixed interest rate of the underlying bond being hedged. Fair value adjustments decreased the carrying amount of our debt outstanding at December 31, 2004 by approximately $1.7.
In January 2005, we executed an interest rate swap which synthetically converted an additional $150.0 of fixed rate debt to floating rates.rate debt. The interest rate swap effectively converted $150.0 of the $500.0 7.25% Senior Unsecured Notes due August 2011 to floating rate debt and matures on the same day the debt is due. Under the terms of the interest rate swap agreement we paid a floating interest rate, based on one-month LIBOR plus a spread of 297.0 basis points, and received the fixed interest rate of the underlying bond being hedged.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
      OnIn May 25, 2005, we terminated all of our long-term interest rate swap agreements covering the $350.0 6.25% Notes due November 2014 and $150.0 of the $500.0 7.25% Notes due August 2011. In connection with the interest rate swap termination, our net cash receipts were approximately $1.1, which will be recorded as an offset to interest expense over the remaining life of the related debt.
 
We accounted for interest rate swaps related to our existing long-term debt as fair value hedges. As a result, the incremental interest payments or receipts from the swaps were recorded as adjustments to interest expense in the Consolidated Statement of Operations. The interest rate swaps settled on the underlying bond interest payment dates until maturity. There was no assumed hedge ineffectiveness as the interest rate swap terms matched the terms of the hedged bond.
Forward Contracts
 
We have entered into foreign currency transactions in which various foreign currencies are bought or sold forward. These contracts were entered into to meet currency requirements arising from specific transactions. The


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)

changes in value of these forward contracts have been recorded as other income or expense in our Consolidated Statement of Operations. As of December 31, 20052006 and 2004,2005, we had contracts covering approximately$0.2 and $6.2, and $1.8, respectively, of notional amount of currency and the fair value of the forward contracts was negligible.
Other
 
The terms of the 4.50% Notes include two embedded derivative instruments and the terms of our 4.25% Notes and our Series B Preferred Stock each include one embedded derivative.derivative instrument. The fair value of the threethese derivatives on December 31, 20052006 was negligible.
Note 19:18: Financial InstrumentsCommitments and Contingencies
 The following table presents the carrying amounts and fair values of our financial instruments at December 31, 2005 and 2004. The carrying amounts reflected in our Consolidated Balance Sheet for cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and short-term borrowings approximated their respective fair values at December 31, 2005 and 2004.
                  
  December 31,
   
  2005 2004
     
  Book Value Fair Value Book Value Fair Value
         
Investment securities:                
 — Marketable securities $115.6  $115.6  $420.0  $420.0 
 — Cost investments  120.7   120.7   121.6   121.6 
 — Other investments  49.9   49.9   47.1   47.1 
Long-term debt  (2,149.2)  (2,072.1)  (2,152.0)  (2,447.0)
Financial commitments:                
 — Other forward contracts  (4.5)  (4.5)  (4.0)  (4.0)
 — Put option obligations  —   —   (10.1)  (10.1)
Investment SecuritiesLeases
 Marketable securities consisted primarily of available-for-sale equity securities that are publicly traded and have been reported at fair value with net unrealized gains and losses reported as a component of other comprehensive income. Cost investments consisted primarily of public available-for-sale equity securities accounted for under the cost method. Other investments consisted primarily of investments in

153

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
unconsolidated affiliated companies accounted for under the equity method and have been carried at cost, which approximates fair value. Dividends received from our investments in unconsolidated affiliated companies were $5.9, $9.3 and $8.8 in 2005, 2004 and 2003, respectively, and reduced the carrying values of the related investments. The estimated fair values of financial assets have been determined using available market information and appropriate valuation methodologies. Judgment is required in interpreting market information to develop the estimated fair value amounts, and accordingly, changes in assumptions and valuation methodologies may affect these amounts. In the absence of other evidence, cost is presumed to equal fair value for our cost and other investments. Net unrealized holding gains on our investments were $24.2, $10.0 and $3.4 at December 31, 2005, 2004 and 2003, respectively.
Long-Term Debt
      Long-term debt included variable and fixed rate debt. The fair value of our long-term debt instruments was based on market prices for debt instruments with similar terms and maturities. During 2005 and 2004, we executed four interest rate swaps to hedge a portion of our floating rate debt exposure. The interest rate swaps were subsequently terminated in May of 2005. The fair value of the interest rate swap agreements was estimated based on quotes from the financial institutions of these instruments and represents the estimated amounts that we would expect to receive or pay to terminate the agreements at the reporting date. Fair value adjustments increased/decreased the carrying value of our debt outstanding at December 31, 2004 by approximately $1.7, as discussed in Note 18.
Financial Commitments
      Financial commitments include other forward contracts and put obligations. Other forward contracts related primarily to an obligation to repurchase 49% of the minority-owned equity shares of a consolidated subsidiary, valued pursuant to SFAS No. 150,Accounting for Certain Financial Instruments with Characteristic of Both Liabilities and Equity. Fair value measurement of the obligation was based upon the amount payable as if the forward contract was settled at December 31, 2005 and 2004. Changes in the fair value of the obligation have been recorded as interest expense or income in the Consolidated Statement of Operations.
      Financial commitments included a written put option representing an obligation to repurchase 40% of the minority-owned equity shares of a consolidated subsidiary as of December 31, 2004. The put option obligation has beenmarked-to-market by assessing the fair value of the 40% interest as compared to the amount payable if the put option was exercised at December 31, 2004. Changes in the fair value of the put option obligation have been recorded as long-lived asset impairment and other charges in the Consolidated Statement of Operations. During the fourth quarter of 2005, the put option was exercised by the minority owners and the existing put option obligation of $11.5 was relieved against the purchase price paid by the Company.
Note 20:Segment Information
      As of December 31, 2005, we are organized into five global operating divisions and a group of leading stand-alone agencies. Our operating divisions are grouped into three reportable segments. The IAN reportable segment is comprised of McCann, FCB, Lowe, Draft and our stand-alone agencies. CMG comprises our second reportable segment. Our third reportable segment is comprised of our Motorsports operations, which were sold during 2004 and had immaterial residual operating results in 2005. We also report results for the Corporate group. Future changes to our organizational structure may result in changes to the reportable segment disclosure.
      Within the IAN segment, McCann, FCB, Lowe, Draft and our stand-alone agencies provide a comprehensive array of global communications and marketing services, each offering a distinctive range of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
solutions for our clients. Our leading stand-alone agencies, including Campbell-Ewald, Hill Holliday, Deutsch and Mullen, provide a full range of advertising, marketing communications services and/or marketing services and partner with our global operating divisions as needed. Each of IAN’s operating divisions share economic characteristics, specifically related to the nature of their respective services, the manner in which the services are provided and the similarity of their respective customers. The annual margins of each of the operating divisions may vary due to global economic conditions and client spending. However, based on the respective future prospects of the operating divisions, we believe that the long-term average gross margin of each of these divisions will converge over time and, given the similarity of their operations, they have been aggregated into a single reportable segment.
      CMG, which includes Weber Shandwick, MWW Group, FutureBrand, DeVries, GolinHarris, Jack Morton, and Octagon Worldwide, provides clients with diversified services, including public relations, meeting and event production, sports and entertainment marketing, corporate and brand identity and strategic marketing consulting. CMG shares some similarities to other service lines offered by IAN, however, on a stand-alone basis, its economic characteristics and expected margin performance are sufficiently different to support CMG as a separate reportable segment. Specifically, CMG’s businesses, on an aggregate basis, have a higher proportion of arrangements for which it acts as principal, a greater proportion of non-global clients and different margins.
      During 2004, we exited our Motorsports business, which owned and operated venue-based motorsports businesses. 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, and therefore not discussed in detail.
      The profitability measure employed by our chief operating decision makers for allocating resources to operating divisions and assessing operating division performance is 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, respectively. Segment income (loss) excludes interest income and expense, debt prepayment penalties, investment impairments, litigation charges and other non-operating income. With the exception of excluding certain amounts for reportable segment operating income (loss), all segments follow the same accounting policies as those described in Note 1.
      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, as shown in the table below. Salaries, benefits and related expenses include salaries, pension, bonus and medical and dental insurance expenses for corporate office employees. 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 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

155

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
charges for information technology related projects which are allocated based on utilization. The following expenses are included in Corporate and Other:
             
  For the Year Ended December 31,
   
  2005 2004 2003
       
Salaries, and related expenses $201.3  $151.2  $129.0 
Professional fees  199.3   145.3   50.6 
Rent and depreciation  50.3   38.0   30.6 
Corporate insurance  26.0   29.7   26.5 
Bank fees  2.2   2.8   1.6 
Other  (1.5)  9.6   8.9 
Expenses allocated to operating divisions  (161.3)  (133.4)  (118.4)
          
Total corporate and other $316.3  $243.2  $128.8 
          

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
      Summarized financial information concerning our reportable segments is shown in the following table:
               
  For the Years Ended December 31,
   
  2005 2004 2003
       
Revenue:
            
IAN $5,327.8  $5,399.2  $5,140.5 
CMG  944.2   935.8   942.4 
Motorsports  2.3   52.0   78.8 
          
Consolidated revenue $6,274.3  $6,387.0  $6,161.7 
          
Segment operating income (loss):
            
IAN $249.7  $577.1  $551.6 
CMG  53.0   83.7   55.7 
Motorsports  0.7   (14.0)  (43.5)
Corporate and other  (316.3)  (243.2)  (128.8)
          
 Total segment operating income $(12.9) $403.6  $435.0 
          
Reconciliation of total segment operating income (loss) to loss from continuing operations before provision for income taxes:
            
Restructuring reversals (charges)  7.3   (62.2)  (172.9)
Long-lived asset impairment and other charges  (98.6)  (322.2)  (294.0)
Motorsports contract termination costs  —   (113.6)  — 
Interest expense  (181.9)  (172.0)  (206.6)
Debt prepayment penalty  (1.4)  (9.8)  (24.8)
Interest income  80.0   50.8   39.3 
Investment impairments  (12.2)  (63.4)  (71.5)
Litigation reversals (charges)  —   32.5   (127.6)
Other income (expense)  33.1   (10.7)  50.3 
          
  
Loss from continuing operations before provision for income taxes:
 $(186.6) $(267.0) $(372.8)
          
Depreciation and amortization:
            
IAN $135.3  $146.5  $171.2 
CMG  18.3   22.1   28.5 
Motorsports  —   —   3.7 
Corporate and other  15.2   16.5   13.1 
          
Total depreciation and amortization $168.8  $185.1  $216.5 
          
Capital expenditures:
            
IAN $89.7  $133.7  $104.0 
CMG  14.8   27.1   12.3 
Motorsports  —   —   25.7 
Corporate and other  36.2   33.2   17.6 
          
 Total capital expenditures $140.7  $194.0  $159.6 
          
Total assets:
            
IAN $9,217.1  $9,799.6     
CMG  965.9   960.3     
Corporate and other  1,762.2   1,493.8     
          
 Total assets $11,945.2  $12,253.7     
          

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
      Revenue and long-lived assets are presented below by major geographic area:
              
  For the Years Ended December 31,
   
  2005 2004 2003
       
Revenue:
            
US $3,461.1  $3,509.2  $3,459.3 
          
International:            
 UK  619.3   654.1   662.6 
 All Other Europe  1,143.4   1,219.3   1,130.5 
 Asia Pacific  473.0   474.7   429.4 
 Latin America  275.2   240.8   233.3 
 Other  302.3   288.9   246.6 
          
Total international  2,813.2   2,877.8   2,702.4 
          
Total consolidated $6,274.3  $6,387.0  $6,161.7 
          
Long-Lived Assets:
            
US $2,733.6  $2,721.7     
          
International:            
 UK  306.9   296.9     
 All Other Europe  615.2   852.5     
 Asia Pacific  119.1   127.7     
 Latin America  144.9   139.4     
 Other  230.8   223.2     
          
Total international  1,416.9   1,639.7     
          
Total consolidated $4,150.5  $4,361.4     
          
      Revenue is attributed to geographic areas based on where the services are performed. Property and equipment is allocated based upon physical location. Intangible assets, other assets and investments are allocated based on the location of the related operations.
      Our largest client contributed approximately 8% in 2005, 7% in 2004 and 8% in 2003 to revenue. Our second largest client contributed approximately 3% in 2005, 3% in 2004 and 3% in 2003 to revenue. The IAN segment reported the majority of the revenue for both clients in all periods.
Note 21:Commitments and Contingencies
Leases
We lease certain facilitiesoffice premises and equipment. Where leases contain escalation clauses or concessions, such as rent holidays and landlord/tenant incentives or allowances, the impact of such adjustments is recognized on a straight-line basis over the minimum lease period. Certain leases provide for renewal

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
options and require the payment of real estate taxes or other occupancy costs, which are also subject to escalation clauses. Rent expense was as follows:
             
  For the Years Ended
  December 31,
   
  2005 2004 2003
       
Gross rent expense $404.4  $433.0  $440.2 
Third-party sublease rental income  (25.4)  (24.6)  (31.6)
          
Net rent expense $379.0  $408.4  $408.6 
          
 
             
  Years ended December 31,
  2006 2005 2004
 
Gross rent expense $389.9  $404.4  $433.0 
Third-party sublease rental income  (20.7)  (25.4)  (24.6)
             
Net rent expense $369.2  $379.0  $408.4 
             
Future minimum lease commitments for office premises and equipment under non-cancelable leases, along with minimum sublease rental income to be received under non-cancelable subleases, are as follows:
              
  Gross Sublease  
  Rent Rental Net Rent
Period Expense Income Expense
       
2006 $335.5  $(48.4) $287.1 
2007  292.1   (41.9)  250.2 
2008  257.0   (34.5)  222.5 
2009  225.6   (31.0)  194.6 
2010  195.3   (23.1)  172.2 
2011 and thereafter  862.3   (68.7)  793.6 
          
 Total $2,167.8  $(247.6) $1,920.2 
          
             
    Sublease
  
  Gross Rent
 Rental
 Net Rent
Period
 Expense Income Expense
 
2007 $330.2  $(37.9) $292.3 
2008  296.5   (31.3)  265.2 
2009  265.3   (27.9)  237.4 
2010  230.0   (22.1)  207.9 
2011  200.2   (18.3)  181.9 
2012 and thereafter  905.8   (44.6)  861.2 
             
Total $2,228.0  $(182.1) $2,045.9 
             
Contingent Acquisition Obligations
 
Guarantees
We have contingent obligations under guarantees of certain obligations of our subsidiaries (“parent company guarantees”) relating principally to credit facilities, guarantees of certain media payables and operating leases of certain subsidiaries. The amount of such parent company guarantees was $327.9 and $306.8 at December 31, 2006 and 2005, respectively. In the event of non-payment by the applicable subsidiary of the obligations covered by a guarantee, we would be obligated to pay the amounts covered by that guarantee. As of December 31, 2006, there are no material assets pledged as security for such parent company guarantees.
Contingent Acquisition Obligations
We have structured certain acquisitions with additional contingent purchase price obligations in order to reduce the potential risk associated with negative future performance of the acquired entity. In addition, we have entered into agreements that may require us to purchase additional equity interests in certain consolidated and unconsolidated subsidiaries. The amounts relating to these transactions are based on estimates of the future financial performance of the acquired entity, the timing of the exercise of these rights, changes in foreign currency exchange rates and other factors. We have not recorded a liability for these items on the Balance Sheet since the definitive amounts payable are not determinable or distributable. When the contingent acquisition obligations have been met and


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)

consideration is determinable and distributable, we will record the fair value of this consideration as an additional cost of the acquired entity. However, we recognize deferred payments and purchases of additional interests after the effective date of purchase that are contingent upon the future employment of owners as compensation expense. Compensation expense is determined based on the terms and conditions of the respective acquisition agreements and employment terms of the former owners of the acquired businesses. This future expense will not be allocated to the assets and liabilities acquired and is amortized over the required employment terms of the former owners.
The following table details the estimated liability with respect to our contingent acquisition obligations and the estimated amount that would be paid under suchthe options, in the event of exercise at the earliest exercise date. All payments are contingent upon achieving projected operating performance targets and satisfying other conditions specified in the related agreements and are subject to revisions as the earn-out periods progress.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
The following contingent acquisition obligations are net ofinclude compensation expense, except as noted below, as defined by the terms and conditions of the respective acquisition agreements and employment terms of the former owners of the acquired businesses. This future expense will not be allocated to the assets and liabilities acquired.below. As of December 31, 2005,2006, our estimated future contingent acquisition obligations are as follows:
                              
  2006 2007 2008 2009 2010 Thereafter Total
               
Deferred Acquisition Payments                            
 Cash $18.3  $1.8  $0.9  $10.5  $—  $—  $31.5 
 Stock  11.3   0.3   —   —   —   —   11.6 
Put Options with Consolidated Affiliates *                            
 Cash  23.4   2.3   11.4   2.8   1.8   2.9   44.6 
 Stock  0.1   0.3   0.5   —   —   —   0.9 
Put Options with Unconsolidated Affiliates *                            
 Cash  1.3   2.5   11.5   0.3   —   —   15.6 
 Stock  0.4   1.0   0.6   0.3   —   —   2.3 
Call Options with Consolidated Affiliates *                            
 Cash  3.3   0.4   0.4   0.1   2.7   —   6.9 
 Stock  0.1   —   —   —   —   —   0.1 
                      
 Subtotal — Cash  46.3   7.0   24.2   13.7   4.5   2.9   98.6 
 Subtotal — Stock  11.9   1.6   1.1   0.3   —   —   14.9 
                      
Total Contingent Acquisition Payments $58.2  $8.6  $25.3  $14.0  $4.5  $2.9  $113.5 
                      
 In accounting for acquisitions, we recognize deferred payments and purchases of additional interests after the effective date of purchase that are contingent upon the future employment of owners as compensation expense in our Consolidated Statements of Operations.
                             
  2007 2008 2009 2010 2011 Thereafter Total
 
Deferred acquisition payments                            
Cash $9.1  $0.9  $13.5  $—  $—  $—  $23.5 
Stock  0.4   —   —   —   —   —   0.4 
Put options with consolidated affiliates 1
                            
Cash  35.1   22.5   2.9   0.2   2.0   3.1   65.8 
Stock  —   0.9   —   —   —   —   0.9 
Put options with unconsolidated affiliates 1
                            
Cash  0.3   8.8   3.9   0.1   —   —   13.1 
Stock  0.3   0.7   0.5   0.1   —   —   1.6 
Call options with consolidated affiliates 1
                            
Cash  2.0   0.3   —   2.1   —   —   4.4 
Stock  —   0.1   —   —   —   —   0.1 
                             
Subtotal — Cash  46.5   32.5   20.3   2.4   2.0   3.1   106.8 
Subtotal — Stock  0.7   1.7   0.5   0.1   —   —   3.0 
                             
Total contingent acquisition payments $47.2  $34.2  $20.8  $2.5  $2.0  $3.1  $109.8 
                             
As of December 31, 20052006 our compensation expense associated with our estimated contingent acquisition payments with associated compensation expense impacts areis as follows:
                              
Compensation Expenses Related Payments 2006 2007 2008 2009 2010 Thereafter Total
               
 Cash $16.6  $0.8  $12.8  $5.4  $1.3  $0.9  $37.8 
 Stock  0.1   —   —   —   —   —   0.1 
                      
 Subtotal  16.7   0.8   12.8   5.4   1.3   0.9   37.9 
                      
Total Payments $74.9  $9.4  $38.1  $19.4  $5.8  $3.8  $151.4 
                      
 
                             
  2007 2008 2009 2010 2011 Thereafter Total
 
Cash $2.5  $1.8  $1.1  $0.4  $—  $—  $5.8 
                             
Total contingent acquisition payments, net of compensation expense $44.7  $32.4  $19.7  $2.1  $2.0  $3.1  $104.0 
                             
*1 We have entered into certain acquisitions that contain both put and call options with similar terms and conditions. In such instances, we have included the related estimated contingent acquisition obligations with put options.
 
We maintain certain put options with consolidated affiliates that are exercisable at the discretion of the minority owners as of December 31, 2005.2006. These put options are assumed to be exercised in the earliest possible period subsequent to December 31, 2005.2006. Therefore, the related estimated acquisition payments of $33.5$33.8 have been included within the total payments expected to be made in 20062007 in the table above. These payments, if not made in 2006,2007, will continue to carry-forward into 20072008 or beyond until they are exercised or expire.
 The 2006 obligations relate primarily to acquisitions that were completed prior to December 31, 2001.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
Legal Matters
Shares Deliverable Under Securities Class Actions
      In the fourth quarter of 2004, we reached a final settlement of the consolidated class action shareholders suits against us. The class actions were filed against the Company and certain of our present and former directors and officers on behalf of a purported class of purchasers of our stock shortly after our August 13, 2002 announcement regarding the restatement of our previously reported earnings for the periods January 1, 1997 through March 31, 2002. Under the terms of the settlement, we agreed to issue a total of 6.6 shares of our common stock. During the fourth quarter of 2004, we issued 0.8 of the shares to the plaintiffs’ counsel as payment for their fee and will issue the remaining 5.8 shares once the appropriate allocation of the shares is made by plaintiffs’ counsel. Beginning in the fourth quarter of 2004, the 6.6 shares have been included in our shares of common stock outstanding for purposes of determining earnings (loss) per share.
SEC Investigation
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 Prior2005 Restatement. In particular, since we filed our 2004 Annual Report onForm 10-K, we have received subpoenas from the SEC relating to matters addressed in our Prior2005 Restatement. We have also responded to inquiries from the SEC staff concerning the restatement of the first three quarters of 2005 that we made in our 2005 Annual Report onForm 10-K. We continue to cooperate with the investigation. We expect that the investigation will result in monetary liability, but because the investigation is


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)

ongoing, in particular with respect to the Prior2005 Restatement, we cannot reasonably estimate either the amount, range of amounts or timing of a resolution or the amount.resolution. Accordingly, we have not yet established any accounting provision relating to these matters.
Other Legal Matters —
We are involved in other 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, results of operations or our cash flows.
Note 22:19: Recent Accounting Standards
 
In November 2005,September 2006, the Securities and Exchange Commission (“SEC”) issued SAB No. 108, which provides interpretive guidance on how registrants should quantify financial-statement misstatements. Currently, the two methods most commonly used by preparers and auditors to quantify misstatements are the “rollover” method (which focuses primarily on the income statement impact of misstatements) and the “iron curtain” method (which focuses primarily on the balance sheet impact of misstatements). In connection with our review of the Company’s stock option practices we initially applied the provisions of SAB No. 108 as a cumulative effect adjustment effective January 1, 2006. See also Note 20. Under SAB No. 108, we are required to consider both the rollover and iron curtain methods (i.e., a dual approach) when evaluating the materiality of financial statement errors. Prior to the adoption of SAB No. 108 we used the “iron curtain” method for quantifying identified financial statement misstatements.
In September 2006, the FASB issued FSPSFAS No. FAS 115-1157,Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in GAAP, and FAS 124-1,expands disclosures about fair value measurements. Under the standard, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. The Meaningstandard clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of Other-Than-Temporary Impairment and Its Applicationthis principle, the standard establishes a fair value hierarchy that prioritizes the information used to Certain Investments. This FSP addressesdevelop those assumptions. The fair value hierarchy gives the determination ashighest priority to when an investment is considered impaired, whether the impairment is other than temporary,quoted prices in active markets and the measurement of an impairment loss. This FSP specifically nullifieslowest priority to unobservable data, for example, the requirements of paragraphs 10-18 of EITF Issuereporting entity’s own data. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS No. 03-1,The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investmentsand references existing other-than-temporary impairment guidance. The guidance in this FSP157 is effective for reportingfinancial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the impact of SFAS No. 157 on our Consolidated Financial Statements.
In July 2006, the FASB issued FASB Interpretation (“FIN”) No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in tax positions. FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. FIN 48 is effective for fiscal years beginning after December 15, 2006, with any cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings effective January 1, 2007. We are currently assessing the potential impact on retained earnings upon adoption. We do not expect the increase to accumulated deficit as of January 1, 2007 to be material.
In June 2006, the FASB ratified the consensus reached in EITF Issue No.06-3,How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation).The scope of EITF IssueNo. 06-3 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer. This issue provides that a company may adopt a policy of presenting taxes either gross within revenue or net. If taxes subject to this issue are significant, a company is required to disclose its accounting policy for presenting taxes and the amount of such taxes that are recognized on a gross basis. EITF IssueNo. 06-3 is effective for periods beginning after December 15, 2005.2006. Taxes subject to this issue are reported net in our Consolidated Statements of Operations. We do not expect the adoption of FSP EITFNo. FAS 115-1 & FAS 124-106-3 to have a material impact on our Consolidated Balance Sheet or Statement of Operations.Financial Statements.
 
In May 2005,February 2006, SFAS No. 154,155,Accounting Changes and Error Corrections,for Certain Hybrid Financial Instruments, was issued, which replaces APB Opinionamends SFAS No. 20,Accounting Changes,133 and SFAS No. 3,Reporting Accounting Changes in Interim Financial Statements. Among other changes,140. SFAS No. 154 requires retrospective application of a voluntary change in accounting principle to prior period155 permits fair value remeasurement for any hybrid financial statements presented on the new accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. Further, the Statement requires that corrections of errors in previously issued financial statements be termed a “restatement.” The new standard is effective for accounting

161
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Amounts in Millions, Except Per Share Amounts)

instruments that contain an embedded derivative that would otherwise require bifurcation in accordance with the provisions of SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, with changes and error corrections made in fair value recognized in the Statement of Operations. SFAS No. 155 is effective for fiscal years beginning after DecemberSeptember 15, 2005.2006. We do not expect the adoption of SFAS No. 154155 to have a material impact on our Consolidated Balance Sheet or Statement of Operations.Financial Statements.
 In March 2005, FASB Interpretation (“FIN”) No. 47,Accounting for Conditional Asset Retirement Obligations, was issued, an interpretation of SFAS No. 143,Accounting for Asset Retirement Obligations. FIN No. 47 clarifies the timing of liability recognition for legal obligations associated with the retirement of a tangible long-lived asset when the timing and/or method of settlement are conditional on a future event. We adopted the provisions of FIN No. 47 during the quarter ended December 31, 2005.
The adoption of FIN No. 47the following accounting pronouncements during 2006 did not have a material impact on our Consolidated Balance Sheet or Statement of Operations.Financial Statements:
 In December 2004, SFAS No. 123R (revised 2004),Share-Based Payment, was issued, which replaces SFAS No. 123,Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options and the shares issued under our employee stock purchase plan to be recognized in the financial statements based on their fair values, as of the beginning of the first fiscal year that starts after June 15, 2005. We are required to adopt SFAS No. 123R effective January 1, 2006. The pro forma disclosures previously permitted under SFAS No. 123 will no longer be an alternative to financial statement recognition. In March 2005, SAB No. 107,Share-Based Payment, was issued regarding the SEC’s interpretation of SFAS No. 123R and the valuation of share-based payments for public companies. At adoption, we plan to use the modified prospective method which requires expense recognition for all unvested and outstanding awards and any awards granted thereafter. The adoption of SFAS No. 123R is expected to result in an increase in compensation expense for the year ended December 31, 2006 of approximately $6.3, as compared with the expense that would have been recognized under our prior accounting policy.
      In November 2005, the FASB issued FSP FAS 123R-3,Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards(“FSP 123R-3”). FSP 123R-3 provides an elective alternative simplified method to calculate the windfall tax pool (the “APIC pool”). Under this FSP, a company may calculate the beginning balance of the APIC pool related to employee compensation and a simplified method to determine the subsequent impact on the APIC pool of employee awards that are fully vested and outstanding upon the adoption of SFAS No. 123R. We are currently evaluating this alternative transition method and have until December 31, 2006 to make our one-time election. We do not expect the adoption of FSP 123R-3 to have a material impact on our Consolidated Balance Sheet or Statement of Operations.
      In December 2004, SFAS No. 153,Exchanges of Nonmonetary Assets, was issued, an amendment of APB Opinion No. 29,Accounting for Nonmonetary Transactions. SFAS No. 153 is based on the principle that exchanges of nonmonetary assets should be recorded and measured at the fair value of the assets exchanged. APB Opinion No. 29 provided an exception to its basic measurement principle (fair value) for exchanges of similar productive assets. Under APB Opinion No. 29, an exchange of a productive asset for a similar productive asset was based on the recorded amount of the asset relinquished. SFAS No. 153 eliminates this exception and replaces it with exceptions for exchanges of nonmonetary assets that do not have reasonably determinable fair values or commercial substance. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in reporting periods beginning after June 15, 2005. The adoption of SFAS No. 153 did not have a material impact on our Consolidated Balance Sheet or Statement of Operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
      The adoption of the following accounting pronouncements during 2005 did not have a material impact on our Consolidated Balance Sheet or Statement of Operations:
 •  EITF IssueSFAS No. 05-6,154,Determining the Amortization Period for Leasehold Improvements Purchased after Lease Inception or Acquired in a Business CombinationAccounting Changes and Error Corrections; and
•  FSPNo. FAS 115-1 andFAS 124-1,The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments.
 
 •  EITF IssueNo. 05-2,05-1,The MeaningAccounting for the Conversion of “Conventionalan Instrument That Becomes Convertible Debt Instrument” in Issue 00-19Upon the Issuer’s Exercise of a Call Option;
 
 •  EITF IssueNo. 03-13,06-6,ApplyingDebtor’s Accounting for a Modification (or Exchange) of Convertible Debt Instruments
•  EITF IssueNo. 06-7,Issuers Accounting for a Previously Bifurcated Conversion Option in a Convertible Debt Instrument When the ConditionConversion Option No Longer Meets the Bifurcation Criteria in Paragraph 42 of FASB Statement No. 144133, “Accounting for Derivative Instruments and Hedging Activities”
•  FSPNo. FIN 46R-6,Determining the Variability to be Considered in Determining Whether to Report Discontinued OperationsApplying FASB Interpretation No. 46R;
•  FSP EITFNo. 00-19-2,Accounting for Registration Payment Arrangements
 
 •  FSP No. FAS 13-1,123(R)-5,Accounting for Rental Costs Incurred during a Construction PeriodAmendment of FASB Staff Position FAS 123(R)-1;
 
 •  FSP No. APB 18-1,FAS 123(R)-6,Accounting by an Investor for Its Proportionate ShareTechnical Corrections of Accumulated Other Comprehensive Income of an Investee Accounted for under the Equity Method in Accordance with APB OpinionFASB Statement No. 18 upon a Loss of Significant Influence123(R).
Note 23:20: Results by Quarter (Unaudited)Review of Stock Option Practices
 The first set of tables below presents unaudited quarterly financial information for 2005 and 2004. The 2005 amounts presented have been restated from those previously reported on Form 10-Q for the applicable periods. The tables below also set forth, for each
As a result of the quarters and for each of the interim balance sheet dates presented the amounts of the restatement adjustments and a reconciliation from previously reported amounts to restated amounts.
      The quarterly restatement adjustments relate primarily to accounting for goodwill impairments, revenue recognition and asignificant number of miscellaneous items including accountingcompanies identifying issues with their stock option practices, during the third quarter of 2006 we decided to conduct a review of our practices for leases and international compensation arrangements. The third set of tables below summarizes, for each of the quarters and for each of the interim balance sheet dates presented, the impact of each category of adjustmentstock option grants. At our recommendation, on previously reported revenue, operating income (loss), income (loss) from continuing operations before provision for income taxes, net income (loss) and earnings per share, and assets, liabilities and stockholders’ equity. Below is a description of the restatement adjustments.
Goodwill Impairment: Adjustments were madeSeptember 8, 2006, our Audit Committee retained independent counsel to properly record goodwill impairment at a reporting unit withinreview our sports and marketing business.
Revenue Recognitionstock option practices related to Customer Contracts: Adjustmentsthe Company’s current and prior senior officers for a10-year period beginning in 1996. We also performed a comprehensive accounting review that supplemented the review done by independent counsel. Preliminary findings of these reviews were recorded to properly state the revenue in accordance with the terms of customer contracts and our policies. In certain transactions with our customers the persuasive evidence of the customer arrangement was not always adequate to support revenue recognition, or the timing of revenue recognition did appropriately follow the specific contract terms.
Other Adjustments: We have identified other items which do not conform to GAAP and recorded adjustments to our 2005 Consolidated Financial Statements which relate to previously reported periods. Cash and accounts payable balances were increased duepresented to the identification of cash accounts heldAudit Committee on behalf of our clients.October 26, 2006 and November 7, 2006. These reviews are both complete and did not result in any changes to the preliminary findings.
The reviews determined, among other things, the following:
•  There was no systematic pattern of selecting an exercise price based on the lowest stock price over the period preceding the grant.
•  All grants made after 2002 were accounted for correctly.
•  There were certain deficiencies in the process of granting, documenting and accounting for stock options.
•  The date used to determine the exercise price for certain stock option grants made between 1996 and 2002 preceded the finalization of the approval process of those grants for accounting purposes. (Discussed in more detail below.)
•  Certain stock options were granted at prices inconsistent with the related stock option plans.
The most significant deficiencies the reviews identified were as follows:
•  In certain situations from 1996 through 2002, in connection with our broad based annual option grants, an exercise price for such options was set as of a specified date in the future. This date, however, preceded the final determination of the number of shares individual employees were to receive, which resulted in some grants being issuedin-the-money, and some grants being issuedout-of-the-money, as of the measurement date.

163
96

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Amounts in Millions, Except Per Share Amounts)
Results by Quarter (Unaudited)
                                 
  Three Months Three Months Three Months Three Months
  Ended March 31, Ended June 30, Ended September 30, Ended December 31,
         
  2005 2004 2005 2004 2005 2004 2005 2004
                 
  (Restated)   (Restated)   (Restated)      
REVENUE
 $1,328.2  $1,389.4  $1,610.7  $1,512.8  $1,439.7  $1,519.1  $1,895.7  $1,965.7 
                         
OPERATING (INCOME) EXPENSES:
                                
Salaries and related expenses  975.1   887.0   953.7   898.7   962.8   925.4   1,107.5   1,021.9 
Office and general expenses  529.1   510.7   543.4   552.8   578.5   556.6   637.1   630.3 
Restructuring charges (reversals)  (6.9)  61.6   (1.9)  3.9   0.1   1.1   1.4   (4.4)
Long-lived asset impairment and other charges  —   5.7   —   3.1   6.5   307.6   92.1   5.8 
Motorsports contract termination costs  —   —   —   80.0   —   33.6   —   — 
                         
Total operating (income) expenses  1,497.3   1,465.0   1,495.2   1,538.5   1,547.9   1,824.3   1,838.1   1,653.6 
                         
OPERATING INCOME (LOSS)
  (169.1)  (75.6)  115.5   (25.7)  (108.2)  (305.2)  57.6   312.1 
                         
EXPENSES AND OTHER INCOME:
                                
Interest expense  (46.9)  (43.6)  (42.2)  (41.8)  (46.7)  (42.3)  (46.1)  (44.3)
Debt prepayment penalty  —   —   —   —   (1.4)  —   —   (9.8)
Interest income  14.9   9.8   16.5   10.4   21.8   11.1   26.8   19.5 
Investment impairments  —   (3.2)  (3.6)  —   (1.5)  (33.8)  (7.1)  (26.4)
Litigation reversal  —   —   —   —   —   —   —   32.5 
Other income (expense)  14.7   1.3   4.3   2.2   0.7   (0.7)  13.4   (13.5)
                         
Total expenses and other income  (17.3)  (35.7)  (25.0)  (29.2)  (27.1)  (65.7)  (13.0)  (42.0)
                         
Income (loss) from continuing operations before provision for income taxes  (186.4)  (111.3)  90.5   (54.9)  (135.3)  (370.9)  44.6   270.1 
Provision (benefit) for income taxes  (40.6)  (29.0)  79.9   30.6   (34.8)  130.0   77.4   130.6 
                         
Income (loss) from continuing operations of consolidated companies  (145.8)  (82.3)  10.6   (85.5)  (100.5)  (500.9)  (32.8)  139.5 
Income applicable to minority interests (net of tax)  (1.2)  (2.6)  (3.7)  (4.2)  (4.6)  (4.4)  (7.2)  (10.3)
Equity in net income of unconsolidated affiliates (net of tax)  0.6   1.1   2.3   1.3   2.3   2.3   8.1   1.1 
                         
Income (loss) from continuing operations  (146.4)  (83.8)  9.2   (88.4)  (102.8)  (503.0)  (31.9)  130.3 
Income from discontinued operations (net of tax)  —   —   —   —   —   6.5   9.0   — 
                         
Net income (loss)  (146.4)  (83.8)  9.2   (88.4)  (102.8)  (496.5)  (22.9)  130.3 
Dividends on preferred stock  5.0   4.8   5.0   5.0   5.0   5.0   11.3   5.0 
                         
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $(151.4) $(88.6) $4.2  $(93.4) $(107.8) $(501.5) $(34.2) $125.3 
                         
Earnings (loss) per share of common stock:                                
Basic:                                
Continuing operations $(0.36) $(0.21) $0.01** $(0.23) $(0.25) $(1.22) $(0.10) $0.25**
Discontinued operations  —   —   —   —   —   0.02   0.02   — 
                         
Total $(0.36) $(0.21) $0.01  $(0.23) $(0.25) $(1.21)* $(0.08) $0.25 
                         
Diluted:                                
Continuing operations $(0.36) $(0.21) $0.01** $(0.23) $(0.25) $(1.22) $(0.10) $0.22**
Discontinued operations  —   —   —   —   —   0.02   0.02   — 
                         
Total $(0.36) $(0.21) $0.01  $(0.23) $(0.25) $(1.21)* $(0.08) $0.22 
                         
Weighted-average shares:                                
Basic  423.8   413.3   424.8   414.6   425.3   415.4   425.5   417.8 
Diluted  423.8   413.3   429.6   414.6   425.3   415.4   425.5   518.9 

* Does•  For certain annual grants, as well as numerous individual grants from 1996 through 2002, the date used for the exercise price was a date from an earlier period. In many cases, that earlier date was at or about the date of a prior meeting of the compensation committee or a management committee authorized by the compensation committee.
•  In addition, the review identified many grants from 1996 through 2005 for which not add due to rounding.all of the relevant documentation could be located and, in some cases, no authorizing documentation could be located. However, in most of these instances, there was no indication, using all available relevant information, that the grants were not appropriately accounted for.

** Due to the existence of income from continuing operations, basic and diluted EPS have been calculated using the two-class method pursuant to EITF Issue No. 03-6 for the quarters ended June 30, 2005 and December 31, 2004. For the quarter ended June 30, 2005, the two-class method resulted in a decrease of $0.7 in net income (numerator) for both basic and diluted EPS calculations. For the quarter ended December 31, 2004, the two-class method resulted in a decrease of $22.6 and $12.2 in net income (numerator) for the basic and diluted EPS calculations, respectively.
Under applicable accounting standards prior to January 1, 2006 (APB No. 25), compensation expense should reflect the difference, if any, between an option’s exercise price and the market price of the Company’s stock at the measurement date, the point at which the terms and the recipients of the option grant are determined with finality. In some instances, we incorrectly determined the measurement date for accounting purposes to be the date as of which the exercise price was set rather than the date the grants were finalized. As a result, compensation expense in the pretax amount of $40.6 should have been recorded over the years 1996 through 2003.
In accordance with SAB No. 108, the materiality of these newly-identified errors was assessed against prior periods using the Company’s pre-SAB No. 108 policy (“iron-curtain” method) for quantifying materiality. After considering all of the quantitative and qualitative factors these errors were not considered to be material to prior periods. Given that the effect of correcting these errors during 2006 would cause our 2006 financial statements to be materially misstated, the Company concluded that the cumulative effect adjustment method of initially applying the guidance in SAB No. 108 was appropriate. The impact of the cumulative effect adjustment was a $26.4 charge to accumulated deficit, a $23.3 credit to additional paid-in capital and a $3.1 credit to other non-current liabilities to reflect certain taxes payable effective January 1, 2006. The following table shows the impact on the previously reported accounts as of December 31, 2005 adjusted effective January 1, 2006:
         
  December 31, 2005 January 1, 2006
 
Other non-current liabilities $319.0  $322.1 
Additional paid-in capital  2,224.1   2,247.4 
Accumulated deficit  (841.1)  (867.5)
Total stockholders’ equity  1,945.3   1,942.2 

164
97

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Amounts in Millions, Except Per Share Amounts)
                         
  2005
   
  Three Months Ended Three Months Ended Three Months Ended
  March 31, June 30, September 30,
       
  As Previously As As Previously As As Previously As
  Reported Restated Reported Restated Reported Restated
             
REVENUE
 $1,330.3  $1,328.2  $1,616.2  $1,610.7  $1,442.2  $1,439.7 
                   
OPERATING (INCOME) EXPENSES:
                        
Salaries and related expenses  973.9   975.1   951.8   953.7   959.8   962.8 
Office and general expenses  528.0   529.1   542.0   543.4   579.9   578.5 
Restructuring charges (reversals)  (6.9)  (6.9)  (1.9)  (1.9)  (0.9)  0.1 
Long-lived asset impairment and other charges  —   —   —   —   0.7   6.5 
Motorsports contract termination costs  —   —   —   —   —   — 
                   
Total operating (income) expenses  1,495.0   1,497.3   1,491.9   1,495.2   1,539.5   1,547.9 
                   
OPERATING INCOME (LOSS)
  (164.7)  (169.1)  124.3   115.5   (97.3)  (108.2)
                   
EXPENSES AND OTHER INCOME:
                        
Interest expense  (46.9)  (46.9)  (42.2)  (42.2)  (46.7)  (46.7)
Debt prepayment penalty  —   —   —   —   (1.4)  (1.4)
Interest income  14.9   14.9   16.5   16.5   21.8   21.8 
Investment impairments  —   —   (3.6)  (3.6)  (1.5)  (1.5)
Litigation charges  —   —   —   —   —   — 
Other income  14.4   14.7   4.7   4.3   0.8   0.7 
                   
Total expenses and other income  (17.6)  (17.3)  (24.6)  (25.0)  (27.0)  (27.1)
                   
Income (loss) from continuing operations before provision for income taxes  (182.3)  (186.4)  99.7   90.5   (124.3)  (135.3)
Provision (benefit) for income taxes  (39.1)  (40.6)  83.8   79.9   (29.9)  (34.8)
                   
Income (loss) from continuing operations of consolidated companies  (143.2)  (145.8)  15.9   10.6   (94.4)  (100.5)
Income applicable to minority interests (net of tax)  (1.2)  (1.2)  (3.7)  (3.7)  (4.6)  (4.6)
Equity in net income of unconsolidated affiliates (net of tax)  0.6   0.6   2.3   2.3   2.4   2.3 
                   
Net income (loss)  (143.8)  (146.4)  14.5   9.2   (96.6)  (102.8)
Dividends on preferred stock  5.0   5.0   5.0   5.0   5.0   5.0 
                   
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $(148.8) $(151.4) $9.5  $4.2  $(101.6) $(107.8)
                   
Earnings (loss) per share of common stock:                        
Basic:                        
Continuing operations $(0.35) $(0.36) $0.02* $0.01* $(0.24) $(0.25)
Discontinued operations  —   —   —   —   —   — 
                   
Total $(0.35) $(0.36) $0.02  $0.01  $(0.24) $(0.25)
                   
Diluted:                        
Continuing operations $(0.35) $(0.36) $0.02* $0.01* $(0.24) $(0.25)
Discontinued operations  —   —   —   —   —   — 
                   
Total $(0.35) $(0.36) $0.02  $0.01  $(0.24) $(0.25)
                   
Weighted-average shares:                        
Basic  423.8   423.8   424.8   424.8   425.3   425.3 
Diluted  423.8   423.8   429.6   429.6   425.3   425.3 

 
* Note 21: Due to the existence of income from continuing operations, basic and diluted EPS have been calculated using the two-class method pursuant to EITF Issue No. 03-6 for the quarter ended June 30, 2005. For the quarter ended June 30, 2005 as previously reported, the two-class method resulted in a decrease of $1.7 in net income (numerator) for both basic and diluted EPS calculations. For the quarter ended June 30, 2005 as restated, the two-class method resulted in a decrease of $0.7 in net income (numerator) for both basic and diluted EPS calculations.Out-of-Period Adjustments
During 2006, we recorded adjustments to certain vendor discounts and credits, contractual liabilities, foreign exchange, tax and other miscellaneous items which related to prior periods. Because these changes are not material to our financial statements for the periods prior to 2006, for the quarters of 2006 or for 2006 as a whole, we recorded theseout-of-period amounts in their respective quarters of 2006.
                 
  For the year ended December 31, 2006
      Loss from
  
      continuing
  
      operations
  
      before
 Loss from
    Operating
 provision for
 continuing
  Revenue income income taxes operations
 
As reported
 $6,190.8  $106.0  $(5.0) $(36.7)
                 
Favorable/(unfavorable) adjustments:
                
Vendor discounts and credits  6.3   6.3   1.2   1.2 
Contractual liabilities  —   4.4   4.4   4.4 
Foreign exchange adjustments  —   —   4.8   4.8 
Other adjustments  2.8   (2.9)  (7.4)  (7.4)
   
   
Total pre-tax adjustments  9.1   7.8   3.0   3.0 
   
   
Tax adjustments              3.9 
                 
Total net adjustments             $6.9 
                 
                 
Loss per share of common stock — basic and diluted:
                
As reported             $(0.20)
                 
Effect of adjustments             $0.02 
                 
                 
Weighted-average shares              428.1 
                 
Description ofOut-of-Period Adjustments:
Vendor Discounts and Credits — In connection with our 2005 Restatement certain liabilities were recorded that were determined at that time to be a contractual obligation to clients. The revenue adjustment primarily relates to obtaining certain evidence in the fourth quarter of 2006 indicating that no actual contractual obligation existed in regard to those clients. The loss from continuing operations adjustment also includes a concession payment to a certain client.
Contractual Liabilities — As part of our remediation efforts for accounting for purchase business combinations we mandated a procedure whereby compensatory earn-out liabilities should be evaluated quarterly to ensure that the amount being accrued is still appropriate. As a result, we identified an instance where the earn-out liability was overstated and should have been adjusted in prior periods based on the future financial performance projections for that respective acquired entity.
Foreign Exchange Adjustments — We recorded adjustments related to the cumulative translation adjustment balances that remained on our books and records subsequent to the sale of certain agencies. In accordance with SFAS No. 52,Foreign Currency Translation, these amounts should have been reported as part of the gain or loss on sale or liquidation of the respective agency during the period in which that transaction occurred.
Other Adjustments — Primarily relates to an adjustment to one of our cost investments of $4.1 which had been inappropriately marked to market.
Tax Adjustments — Includes the tax effect of the adjustments noted above and the correction of certain deferred tax assets and liabilities.

165
98

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Amounts in Millions, Except Per Share Amounts)
                          
  2005
   
  As of March 31, As of June 30, As of September 30,
       
  As Previously As As Previously As As Previously As
  Reported Restated Reported Restated Reported Restated
             
ASSETS:
                        
Cash and cash equivalents $1,549.5  $1,549.5  $1,588.0  $1,588.0  $1,352.0  $1,351.8 
Marketable securities  1.2   1.2   1.3   1.3   2.0   2.0 
Accounts receivable, net  3,986.5   3,986.5   4,208.9   4,209.0   3,795.6   3,796.5 
Expenditures billable to clients  1,044.5   1,044.5   1,111.0   1,111.6   1,104.5   1,105.4 
Deferred income taxes  310.9   311.9   268.8   272.8   268.9   277.2 
Prepaid expenses and other current assets  187.5   187.4   170.1   170.0   175.3   174.3 
                   
 Total current assets  7,080.1   7,081.0   7,348.1   7,352.7   6,698.3   6,707.2 
Land, buildings and equipment, net  703.3   702.7   682.5   681.4   673.8   672.3 
Deferred income taxes  264.9   265.1   245.4   245.6   295.5   295.7 
Investments  180.5   180.5   175.5   175.4   169.2   169.0 
Goodwill  3,141.0   3,141.0   3,145.6   3,145.1   3,165.8   3,159.5 
Other assets  324.6   324.6   319.8   319.8   316.4   316.5 
                   
 Total non-current assets  4,614.3   4,613.9   4,568.8   4,567.3   4,620.7   4,613.0 
                   
TOTAL ASSETS
 $11,694.4  $11,694.9  $11,916.9  $11,920.0  $11,319.0  $11,320.2 
                   
 
LIABILITIES:
Accounts payable $4,327.2  $4,329.2  $4,594.0  $4,601.2  $4,238.8  $4,249.2 
Accrued liabilities  2,493.8   2,495.0   2,463.8   2,465.8   2,279.2   2,281.4 
Short-term debt  337.2   337.2   332.6   332.6   66.7   66.7 
                   
 Total current liabilities  7,158.2   7,161.4   7,390.4   7,399.6   6,584.7   6,597.3 
Long-term debt  1,923.9   1,923.9   1,933.5   1,933.5   2,184.0   2,184.0 
Deferred compensation and employee benefits  571.2   571.4   575.8   577.5   583.8   585.7 
Other non-current liabilities  422.4   422.1   404.1   404.1   429.4   430.3 
Minority interests in consolidated subsidiaries  50.9   50.9   45.5   45.5   44.5   44.5 
                   
 Total non-current liabilities  2,968.4   2,968.3   2,958.9   2,960.6   3,241.7   3,244.5 
                   
TOTAL LIABILITIES
  10,126.6   10,129.7   10,349.3   10,360.2   9,826.4   9,841.8 
                   
STOCKHOLDERS’ EQUITY:
                        
Preferred Stock  373.7   373.7   373.7   373.7   373.7   373.7 
Common Stock  42.6   42.6   42.7   42.7   43.0   43.0 
Additional paid-in capital  2,212.5   2,212.5   2,226.3   2,226.3   2,275.2   2,275.2 
Accumulated deficit  (722.0)  (724.5)  (707.6)  (715.3)  (804.2)  (818.1)
Accumulated other comprehensive loss, net  (264.1)  (264.2)  (290.8)  (290.9)  (275.1)  (275.4)
                   
   1,642.7   1,640.1   1,644.3   1,636.5   1,612.6   1,598.4 
Less:                        
Treasury stock, at cost  (14.0)  (14.0)  (14.0)  (14.0)  (14.0)  (14.0)
Unamortized deferred compensation  (60.9)  (60.9)  (62.7)  (62.7)  (106.0)  (106.0)
TOTAL STOCKHOLDERS’ EQUITY
  1,567.8   1,565.2   1,567.6   1,559.8   1,492.6   1,478.4 
                   
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY
 $11,694.4  $11,694.9  $11,916.9  $11,920.0  $11,319.0  $11,320.2 
                   

166

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 22: Results by Quarter (Unaudited)
(Amounts in Millions, Except Per Share Amounts)
                          
  2005
   
  Three Months Ended Six Months Ended Nine Months Ended
  March 31, June 30, September 30,
       
  As Previously As��As Previously As As Previously As
  Reported Restated Reported Restated Reported Restated
             
CASH FLOWS FROM OPERATING ACTIVITIES
                        
Net cash used in operating activities
 $(334.5) $(339.9) $(231.8) $(231.6) $(359.8) $(369.8)
                   
CASH FLOWS FROM INVESTING ACTIVITIES
                        
 Acquisitions, including deferred payments, net of cash acquired  (16.6)  (12.5)  (55.5)  (50.8)  (86.4)  (81.7)
 Capital expenditures  (32.6)  (31.8)  (65.5)  (64.0)  (99.2)  (97.0)
 Proceeds from sales of businesses and fixed assets  1.8   1.8   7.9   7.9   10.8   10.8 
 Proceeds from sales of investments  20.6   20.6   40.4   40.4   63.7   63.7 
 Purchase of investments  (13.5)  (13.5)  (18.4)  (18.4)  (34.3)  (34.3)
 Maturities of short-term marketable securities  669.0   669.0   689.7   689.7   689.5   689.5 
 Purchases of short-term marketable securities  (270.0)  (270.0)  (270.4)  (270.4)  (271.3)  (271.3)
                   
Net cash provided by investing activities
  358.7   363.6   328.2   334.4   272.8   279.7 
                   
CASH FLOWS FROM FINANCING ACTIVITIES
                        
 Increase (decrease) in short-term bank borrowings  8.8   8.8   (12.1)  (12.1)  (25.6)  (25.6)
 Payments of long-term debt  (0.3)  (0.3)  (0.6)  (0.6)  (257.1)  (257.1)
 Proceeds from long-term debt  1.9   1.9   2.0   2.0   252.3   252.3 
 Debt issuance costs  (6.3)  (6.3)  (9.7)  (9.7)  (17.6)  (17.6)
 Preferred stock dividends  (5.0)  (5.0)  (10.0)  (10.0)  (15.0)  (15.0)
 Issuance of common stock, net of issuance costs  0.3   0.3   13.7   4.9   0.2   0.2 
 Distributions to minority interests  (4.7)  (4.7)  (10.9)  (10.9)  (18.7)  (18.7)
                   
Net cash used in financing activities
  (5.3)  (5.3)  (27.6)  (36.4)  (81.5)  (81.5)
                   
Effect of exchange rates on cash and cash equivalents  (19.8)  (19.3)  (31.2)  (28.8)  (29.9)  (27.0)
                   
Increase (decrease) in cash and cash equivalents  (0.9)  (0.9)  37.6   37.6   (198.4)  (198.6)
Cash and cash equivalents at beginning of year  1,550.4   1,550.4   1,550.4   1,550.4   1,550.4   1,550.4 
                   
Cash and cash equivalents at end of period $1,549.5  $1,549.5  $1,588.0  $1,588.0  $1,352.0  $1,351.8 
                   

167

                                 
  Three Months Ended March 31, Three Months Ended June 30, Three Months Ended September 30, Three Months Ended December 31, 3
  2006 2005 2006 2005 2006 2005 2006 2005
 
Revenue $1,327.0  $1,328.2  $1,532.9  $1,610.7  $1,453.8  $1,439.7  $1,877.1  $1,895.7 
                                 
Salaries and related expenses  950.7   975.1   945.12  953.7   960.7   962.8   1,087.6   1,107.5 
Office and general expenses  535.5   529.1   504.6   543.4   466.0   578.5   572.9   637.1 
Restructuring and other reorganization-related charges (reversals)  0.4   (6.9)  6.32  (1.9)  6.2   0.1   21.6   1.4 
Long-lived asset impairment and other charges  —   —   —   —   —   6.5   27.2   92.1 
                                 
Operating income (loss)  (159.6)  (169.1)  76.9   115.5   20.9   (108.2)  167.8   57.6 
                                 
Other income (expense)  0.6   14.7   24.3   0.7   22.6   (2.2)  (53.1)  6.3 
                                 
Total (expenses) and other income  (19.6)  (17.3)  (1.3)  (25.0)  (9.3)  (27.1)  (80.8)  (13.0)
                                 
Provision (benefit) for income taxes  (8.8)  (40.6)  5.01  79.9   10.51  (34.8)  12.0   77.4 
                                 
Income (loss) from continuing operations  (170.2)  (146.4)  65.71  9.2   (1.3)1  (102.8)  69.1   (31.9)
                                 
Net income (loss)  (170.2)  (146.4)  65.7   9.2   3.7   (102.8)  69.1   (22.9)
                                 
Net income (loss) applicable to common stockholders $(182.1) $(151.4) $43.7  $3.5  $(8.2) $(107.8) $49.1  $(34.2)
                                 
Earnings (loss) per share of common stock:                                
Basic:                                
Continuing operations $(0.43) $(0.36) $0.10  $0.01  $(0.03) $(0.25) $0.11  $(0.10)
Discontinued operations  —   —   —   —   0.01   —   —   0.02 
                                 
Total $(0.43) $(0.36) $0.10  $0.01  $(0.02) $(0.25) $0.11  $(0.08)
                                 
                                 
Diluted:                                
Continuing operations $(0.43) $(0.36) $0.09  $0.01  $(0.03) $(0.25) $0.11  $(0.10)
Discontinued operations  —   —   —   —   0.01   —   —   0.02 
                                 
Total $(0.43) $(0.36) $0.09  $0.01  $(0.02) $(0.25) $0.11  $(0.08)
                                 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
 The following tables summarize, for each of the 2005 quarters, the impact of each category of adjustment on previously reported revenue, operating income (loss), income (loss) from continuing operations before provision for income taxes, net income (loss) and earnings per share, and assets, liabilities and stockholders’ equity.
              
  Impact of Adjustments on Revenue
   
  For the Quarter Ended
   
  3/31/2005 6/30/2005 9/30/2005
       
As previously reported
 $1,330.3  $1,616.2  $1,442.2 
 Revenue recognition  (2.2)  (3.6)  (3.5)
 Other adjustments  0.1   (1.9)  1.0 
          
Total restatement adjustments  (2.1)  (5.5)  (2.5)
          
As restated
 $1,328.2  $1,610.7  $1,439.7 
          
              
  Impact of Adjustments on Operating
  Income (Loss)
   
  For the Quarter Ended
   
  3/31/2005 6/30/2005 9/30/2005
       
As previously reported
 $(164.7) $124.3  $(97.3)
 Revenue recognition  (1.9)  (3.1)  (2.8)
 Goodwill  —   —   (5.8)
 Other adjustments  (2.5)  (5.7)  (2.3)
          
Total restatement adjustments  (4.4)  (8.8)  (10.9)
          
As restated
 $(169.1) $115.5  $(108.2)
          
              
  Impact of Adjustments on Income
  (Loss) from Continuing Operations
  before Provision for Income Taxes
   
  For the Quarter Ended
   
  3/31/2005 6/30/2005 9/30/2005
       
As previously reported
 $(182.3) $99.7  $(124.3)
 Revenue recognition  (1.9)  (3.1)  (2.8)
 Goodwill  —   (0.5)  (5.8)
 Other adjustments  (2.2)  (5.6)  (2.4)
          
Total restatement adjustments  (4.1)  (9.2)  (11.0)
          
As restated
 $(186.4) $90.5  $(135.3)
          

168

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
              
  Impact of Adjustments on Net Income (Loss)
  and Earnings (Loss) per Share
   
  For the Quarter Ended
   
  3/31/2005 6/30/2005 9/30/2005
       
Net income (loss) as previously reported
 $(143.8) $14.5  $(96.6)
Restatement adjustments (pre-tax):            
 Revenue recognition  (1.9)  (3.1)  (2.8)
 Goodwill  —   (0.5)  (5.8)
 Other adjustments  (2.2)  (5.6)  (2.4)
          
Total restatement adjustments (pre-tax)  (4.1)  (9.2)  (11.0)
          
 Tax adjustments  (1.5)  (3.9)  (4.8)
          
Total net restatement adjustments  (2.6)  (5.3)  (6.2)
          
Net income (loss) as restated
 $(146.4) $9.2  $(102.8)
          
Earnings (loss) per share of common stock:
            
Basic            
 As previously reported $(0.35) $0.02  $(0.24)
 Effect of restatement  (0.01)  (0.01)  (0.01)
          
 As restated $(0.36) $0.01  $(0.25)
          
 Weighted-average shares  423.8   424.8   425.3 
Diluted            
 As previously reported $(0.35) $0.02  $(0.24)
 Effect of restatement  (0.01)  (0.01)  (0.01)
          
 As restated $(0.36) $0.01  $(0.25)
          
 Weighted-average shares  423.8   429.6   425.3 
                          
  Impact of Adjustments on Consolidated Balance Sheet Accounts
   
  As of March 31, 2005 As of June 30, 2005
     
  Total Total Stockholders’ Total Total Stockholders’
  Assets Liabilities Equity Assets Liabilities Equity
             
As previously reported
 $11,694.4  $10,126.6  $1,567.8  $11,916.9  $10,349.3  $1,567.6 
 Revenue recognition  0.1   2.0   (1.9)  0.3   5.2   (4.9)
 Goodwill  —   —   —   (0.5)  —   (0.5)
 Other adjustments  (0.8)  1.4   (2.2)  (0.9)  6.8   (7.7)
 Tax adjustments  1.2   (0.3)  1.5   4.2   (1.1)  5.3 
                   
Total restatement adjustments  0.5   3.1   (2.6)  3.1   10.9   (7.8)
                   
As restated
 $11,694.9  $10,129.7  $1,565.2  $11,920.0  $10,360.2  $1,559.8 
                   

169

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
              
  As of September 30, 2005
   
    Stockholders’
  Total Assets Total Liabilities Equity
       
As previously reported
 $11,319.0  $9,826.4  $1,492.6 
 Revenue Recognition  0.5   8.3   (7.8)
 Goodwill  (6.3)  —   (6.3)
 Other adjustments  (1.5)  8.8   (10.3)
 Tax adjustments  8.5   (1.7)  10.2 
          
Total restatement adjustments  1.2   15.4   (14.2)
          
As restated
 $11,320.2  $9,841.8  $1,478.4 
          

170

SCHEDULE II — 1 of 2
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Amounts in Millions)
For the Three Years Ended December 31, 2005
                      
Column A Column B Column C Column D Column E Column F
           
  Additions/(Deductions)
   
  Balance at Charged to Charged   Balance
  Beginning Costs & to Other   at End
Description of Period Expenses Accounts Deductions of Period
           
Allowance for Doubtful Accounts — deducted from Accounts Receivable in the Consolidated Balance Sheet:
 
2005
 $136.1  $16.9  $—  $(3.3)(4) $105.5 
          $(2.7)(2) $(32.9)(5)    
          $—  $(8.6)(6)    
 
2004
 $134.1  $36.7  $—  $(3.0)(4) $136.1 
          $(0.8)(2) $(45.6)(5)    
          $6.8 (3) $7.9 (6)    
 
2003
 $138.3  $32.6  $8.5 (1) $(2.3)(4) $134.1 
          $(2.1)(2) $(34.0)(5)    
              $(6.9)(6)    
(1)1 AllowanceAs discussed in Note 14, as a result of our election to select an alternative simplified method to calculate our windfall tax pool we have retrospectively recorded the impact of this election on all affected prior periods. There was no impact for doubtful accountsthe three months ended March 31, 2006. The following table details the impact of acquiredthe change for the applicable periods:
                 
  Three Months Ended
 Three Months Ended
  June 30, 2006 September 30, 2006
  As Previously
   As Previously
  
  Reported As Adjusted Reported As Adjusted
 
Consolidated Balance Sheets:
                
Total stockholders’ equity $1,883.5  $1,886.7  $1,872.0  $1,874.1 
                 
Consolidated Statements of Operations:
                
Provision for income taxes  1.8   5.0   8.4   10.5 
Income (loss) from continuing operations  68.9   65.7   0.8   (1.3)
2As discussed in Note 2, as a result of two strategic business decisions we separated certain costs from salaries and newly consolidated companies.related expenses of $6.3 and retrospectively recorded the impact of this change for the three months ended June 30, 2006.
 
(2)3 Miscellaneous.
(3)Reclassifications.
(4)Dispositions.
(5)Uncollectible accounts written off.
(6)Foreign currency translation adjustment.As discussed in Note 21, we recorded adjustments to certain vendor discounts and credits, contractual liabilities, foreign exchange, tax and other miscellaneous items which related to prior periods. For the fourth quarter of 2006, these adjustments resulted in a net favorable impact to revenue of $8.3, net favorable impact to salaries and related expenses of $4.2, net unfavorable impact to office and general expenses of $2.8 and a net favorable impact to net income of $11.9. For the fourth quarter of 2005, these adjustments resulted in a net unfavorable impact to revenue, salaries and related expenses and office and general expenses of $17.3, $3.2 and $6.1, respectively, and a net favorable impact to provision for income taxes and net loss of $19.5 and $2.7, respectively.

171
99

SCHEDULE II — 2 of 2
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Amounts in Millions)
For the Three Years Ended December 31, 2005
                      
Column A Column B Column C Column D Column E Column F
           
  Additions
   
  Balance at Charged to Charged   Balance
  Beginning Costs & to Other   at End
Description of Period Expenses Accounts Deductions of Period
           
Valuation Allowance — deducted from Deferred Income Taxes on the Consolidated Balance Sheet:
 
2005
 $488.6  $69.9  $(57.5) $—  $501.0 
 
2004
 $252.6  $236.0  $—  $—  $488.6 
 
2003
 $123.9  $111.4  $17.3(1) $—  $252.6 
 
(1) Included in discontinued operations related to NFO.

172

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
Not applicable.
Item 9A.Controls and Procedures
 
Management’s Assessment onof Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm located in Item 8 are incorporated by reference herein.
Disclosure controls and procedures
 
We have carried out an evaluation under the supervision of, and with the participation of, our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2005.2006. Our evaluation has disclosed numerous material weaknesses in our internal control over financial reporting as noted in Management’s Assessment onof Internal Control over Financial Reporting located in Item 8. Material weaknesses in internal controls may also constitute deficiencies in our disclosure controls and procedures. Based on an evaluation of these material weaknesses, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are not effective as of December 31, 2005,2006, to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. However, based on work performed to date, management believes that there are no material inaccuracies or omissions of any material fact in this 2005 Annual Report. Management, to the best of its knowledge, believes that the financial statements contained in the 2005 Annual Report are fairly presented in all material respects.
 
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Changes in internal control over financial reporting
 We have assessed
As described in “Remediation of Certain Material Weaknesses in Internal Control Over Financial Reporting Disclosed in our internal control over financial reporting as of December 31, 2005 and reportedAnnual Report on our assessmentForm 10-K,” which is located in Item 8 of this report.
      There has been no changeand is incorporated by reference herein, there were changes in internal control over financial reporting induring the fiscalfourth quarter ended December 31, 2005,of 2006 that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting. We continue to develop a remediation plan to address the material weaknesses in our internal control over financial reporting. The development of our remediation plan is described in Remediation of Material Weaknesses in Internal Control over Financial Reporting in Item 8. We expect that the implementation of this plan will extend into 2006 and beyond.
Item 9B.Other Information
 
Not applicable.


100

173

PART III
Item 10.Directors and Executive Officers of Interpublic
 
The information required by this Item is incorporated by reference to the “Election of Directors” section, the “Corporate Governance Practices and Board Matters” section and the “Section 16(a) Beneficial Ownership Reporting Compliance” section of the Proxy Statement, except for the description of the Company’s Executive Officers, which appears in Part I of this Report onForm 10-K under the heading “Executive Officers of Interpublic.”
NYSE Certification
 
In 2005,2006, our CEO provided the Annual CEO Certification to the NYSE, as required under Section 303A.12(a) of the New York Stock Exchange Listed Company Manual.
Item 11.Executive Compensation
 
The information required by this Item is incorporated by reference to the “Compensation of Executive Officers” section, the “Non-Management Director Compensation” section, the “Compensation Discussion and Analysis” section and the “Report of the Compensation Committee of the Board of Directors” section of the Proxy Statement. Such incorporation by reference shall not be deemed to incorporate specifically by reference the information referred to in Item 402(a)(8) of Regulation S-K.
Item 12.Security Ownership of Certain Beneficial Owners and Management
 
The information required by this Item is incorporated by reference to the “Outstanding Shares” section andof the “CompensationProxy Statement, except for information regarding the shares of Executive Officers — Common Stock to be issued or which may be issued under our equity compensation plans, which is provided in the following table:
Equity Compensation Plan Information Table” section of the Proxy Statement.
             
      Number of Securities Remaining
  Number of Shares of
   Available for Future
  Common Stock to be
 Weighted Average
 Issuance Under
  Issued Upon Exercise of
 Exercise Price of
 Equity Compensation Plans
  Outstanding Options,
 Outstanding Stock
 (Excluding Securities
  Warrants and Rights
 Options
 Reflected in Column (a))
Plan Category
 (a)(1)(2) (b) (c)(3)
 
Equity Compensation Plans Approved by Security Holders  47,101,910  $23.86   40,226,669 
Equity Compensation Plans Not Approved by Security Holders(4)  744,075  $27.53   — 
(1)Includes a total of 10,287,077 performance-based share awards made under the 2004 and 2006 Performance Incentive Plan representing the target number of shares to be issued to employees following the completion of the2005-2007 performance period (the “2007 LTIP Share Awards”) and the2006-2008 performance period (the “2008 LTIP Share Awards”), respectively. The computation of the weighted average exercise price in column (b) of this table does not take the 2007 LTIP Share Awards or the 2008 LTIP Share Awards into account.
(2)Includes a total of 5,007,356 restricted share unit and performance-based awards (“Share Unit Awards”) which may be settled in shares or cash. The computation of the weighted average exercise price in column (b) of this table does not take the Share Unit Awards into account. Each Share Unit Award actually settled in cash will increase the number of shares of Common Stock available for issuance shown in column (c).
(3)Includes 15,000,000 shares of our common stock available for issuance under the Employee Stock Purchase Plan (2006) (the “2006 Stock Purchase Plan”) as of December 31, 2006.
(4)Consists of special stock option grants awarded to certain True North executives following our acquisition of True North (the “True North Options”). The True North Options have an exercise price equal to the fair market value of Interpublic’s common stock on the date of the grant. The terms and conditions of these stock option awards are governed by Interpublic’s 1997 Performance Incentive Plan. Generally, the options become exercisable between two and five years after the date of the grant and expire ten years from the grant date.


101

Item 13.Certain Relationships and Related Transactions
 
The information required by this Item is incorporated by reference to the “Related Party Transactions” section of the Proxy Statement. Such incorporation by reference shall not be deemed to incorporate specifically by reference the information referred to in Item 402(a)(8) of Regulation S-K.
Item 14.Principal Accountant Fees and Services
 
The information required by this Item is incorporated by reference to the “Appointment of Independent Auditors”Registered Public Accountants” section of the Proxy Statement.


102

174

PART IV
Item 15.Exhibits, and Financial Statement ScheduleSchedules
 
(a) Listed below are all financial statements, financial statement schedules and exhibits filed as part of this Report onForm 10-K.
 1. Financial Statements:
The Interpublic Group of Companies, Inc. and Subsidiaries Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations for the years ended December 31, 2006, 2005 2004 and 20032004
Consolidated Balance Sheets as of December 31, 20052006 and 20042005
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 2004 and 20032004
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income (Loss)Loss for the years ended December 31, 2006, 2005 2004 and 20032004
Notes to Consolidated Financial Statements
 2. Financial Statement Schedule:Schedules:
Valuation and Qualifying Accounts (for the three years ended December 31, 2005)
All otherfinancial statement schedules are omitted because they are either not applicable.applicable or the required information is otherwise provided.
3. Exhibits:
3. Exhibits:
(Numbers used are the numbers assigned in Item 601 ofRegulation S-K and the EDGAR Filer Manual. An additional copy of this exhibit index immediately precedes the exhibits filed with this Report onForm 10-K and the exhibits transmitted to the SEC as part of the electronic filing of this Report.)
   
Exhibit No.
 
Description
 
3(i) Restated Certificate of Incorporation of the Registrant, as amended through October 24, 2005, is incorporated by reference to Exhibit 3(i) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2005 filed with the Securities and Exchange Commission (the “SEC”)SEC on November 9, 2005.
3(ii) By-Laws of the Registrant, as amended and restated through January 18, 2005,March 23, 2006, are incorporated by reference to Exhibit 3.23(ii) to the Registrant’s Current Report onForm 8-K filed with the SEC on January 21, 2005.March 29, 2006.
4(iii)(A) Certificate of Designations of 53/8% Series A Mandatory Convertible Preferred Stock of the Registrant, as filed with the Delaware Secretary of State on December 17, 2003 is incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on December 19, 2003.
4(iii)(B)Certificate of Designations of 5.25% Series B Cumulative Convertible Perpetual Preferred Stock of the Registrant, as filed with the Delaware Secretary of State on October 24, 2005 is incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on October 24, 2005.
4(iii)(C)(B) Senior Debt Indenture, dated as of October 20, 2000 (the “2000‘‘2000 Indenture”), between the Registrant and The Bank of New York, as trustee, is incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on October 24, 2000.

175

Exhibit No.Description
   
4(iii)(D)(C) First Supplemental Indenture, dated as of August 22, 2001, to the 2000 Indenture, with respect to the 7.25% Senior Unsecured Notes due 2011 is incorporated by reference to Exhibit 4.2 to the Registrant’s Registration Statement onForm S-4 filed with the SEC on December 4, 2001.
4(iii)(E)(D) Second Supplemental Indenture, dated as of December 14, 2001, to the 2000 Indenture, with respect to the Zero-Coupon Convertible Senior Notes due 2021 is incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement onForm S-3 filed with the SEC on April 5, 2002.


103

4(iii)(F)(E) Third Supplemental Indenture, dated as of March 13, 2003, to the 2000 Indenture, with respect to the 4.50% Convertible Senior Notes due 2023 is incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on March 18, 2003.
4(iii)(G)(F) Fifth Supplemental Indenture, dated as of March 28, 2005, to the 2000 Indenture, as modified by the First Supplemental Indenture, dated as of August 22, 2001, with respect to the 7.25% Senior Unsecured Notes due 2011 is incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report onForm 8-K filed with the SEC on April 1, 2005.
4(iii)(H)(G) Sixth Supplemental Indenture, dated as of March 30, 2005, to the 2000 Indenture, as modified by the Third Supplemental Indenture, dated as of March 13, 2003, with respect to the 4.50% Convertible Senior Notes due 2023 is incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report onForm 8-K filed with the SEC on April 1, 2005.
4(iii)(I)(H) Seventh Supplemental Indenture, dated as of August 11, 2005, to the 2000 Indenture, as modified by the Third Supplemental Indenture, dated as of March 13, 2003, and the Sixth Supplemental Indenture, dated as of March 30, 2005, with respect to the 4.50% Convertible Senior Notes due 2023 is incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on August 15, 2005.
4(iii)(J)(I) Senior Debt Indenture dated as of November 12, 2004 (the “2004‘‘2004 Indenture”), between the Registrant and Suntrust Bank, as trustee, is incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on November 15, 2004.
4(iii)(K)(J) First Supplemental Indenture, dated as of November 18, 2004, to the 2004 Indenture, with respect to the 5.40% Notes due 2009 is incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on November 19, 2004.
4(iii)(L)(K) Second Supplemental Indenture, dated as of November 18, 2004, to the 2004 Indenture, with respect to the 6.25% Notes due 2014 is incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report onForm 8-K filed with the SEC on November 19, 2004.
4(iii)(M)(L) Third Supplemental Indenture, dated as of March 28, 2005, to the 2004 Indenture, as modified by the Second Supplemental Indenture, dated as of November 18, 2004, with respect to the 6.25% Senior Unsecured Notes due 2014 is incorporated by reference to Exhibit 4.4 to the Registrant’s Current Report onForm 8-K filed with the SEC on April 1, 2005.
4(iii)(N)(M) Fourth Supplemental Indenture, dated as of March 29, 2005, to the 2004 Indenture, as modified by the First Supplemental Indenture, dated as of November 18, 2004, with respect to the 5.40% Senior Unsecured Notes due 2009 is incorporated by reference to Exhibit 4.5 to the Registrant’s Current Report onForm 8-K filed with the SEC on April 1, 2005.
4(iii)(O)(N) FifthSixth Supplemental Indenture, dated as of July 25, 2005,December 8, 2006, to the 2004 Indenture, with respect to the Floating Rate Notes due 20082010 is incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on July 26, 2005.December 8, 2006.
4(iii)(O)Senior Debt Indenture, dated as of November 15, 2006 (the ‘‘2006 Indenture”), between the Registrant and The Bank of New York, as trustee, is incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on November 17, 2006.
4(iii)(P)First Supplemental Indenture, dated as of November 15, 2006, to the 2006 Indenture, with respect to the 4.25% Convertible Senior Notes Due 2023 is incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report onForm 8-K filed with the SEC on November 17, 2006.

104

176

   
Exhibit No. Description
4(iii)(Q)Warrant Agreement, dated as of June 13, 2006, between the Registrant and LaSalle Bank National Association, as Warrant Agent, is incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report onForm 8-K filed with the SEC on June 19, 2006.
   
10(i)(A) Amended and Restated 3-Year CreditCall Option Agreement, dated as of May 10, 2004, amended and restated as of September 27, 2005, amongJune 6, 2006, between the Registrant the Initial Lenders Named Therein, and Citibank, N.A., as Administrative AgentUBS AG, London Branch, is incorporated by reference to Exhibit 10(i)(G)10.4 to the Registrant’s AnnualCurrent Report onForm 10-K for the year ended December 31, 20048-K filed with the SEC on September 30, 2005.June 12, 2006.
10(i)(B) Amendment No. 1, dated as of October 17, 2005, to the Amended and Restated 3-Year CreditCall Option Agreement, dated as of May 10, 2004, amendedJune 6, 2006, between the Registrant and restatedMorgan Stanley & Co. International Limited, is incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report onForm 8-K filed with the SEC on June 12, 2006.
10(i)(C)Call Option Agreement, dated as of September 27, 2005, amongJune 6, 2006, between the Registrant and JP Morgan Chase Bank, National Association, London Branch, is incorporated by reference to Exhibit 10.2 to the Initial Lenders Named Therein,Registrant’s Current Report onForm 8-K filed with the SEC on June 12, 2006.
10(i)(D)Call Option Agreement, dated as of June 6, 2006, between the Registrant and Citibank, N.A., as Administrative Agent, is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on October 17, 2005.June 12, 2006.
10(i)(C)(E) Amendment No. 2, dated as of September 30, 2005, to the Amended and Restated 3-Year CreditL/C Issuance Agreement, dated as of May 10, 2004, amended and restated as of September 27, 2005, amongJune 13, 2006, between the Registrant, the Initial Lenders Named Therein,as Account Party, and Citibank, N.A.Morgan Stanley Capital Services, Inc., as Administrative Agent,L/C Issuer, is incorporated by reference to Exhibit 10(i)(C)10.4 to the Registrant’s QuarterlyCurrent Report onForm 10-Q for8-K filed with the quarter ended September 30, 2005SEC on June 19, 2006.
10(i)(F)Letter of Credit Agreement, dated as of June 13, 2006, between the Registrant and Citibank, N.A., is incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report onForm 8-K filed with the SEC on June 19, 2006.
10(i)(G)3-Year Credit Agreement, dated as of June 13, 2006, among the Registrant, as Borrower, ELF Special Financing Ltd., as Initial Lender and L/C Issuer, and Morgan Stanley Capital Services, Inc., as Administrative Agent and L/C Administrator, is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on June 19, 2006.
10(i)(H)Registration Rights Agreement, dated as of November 15, 2006, is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on November 9, 2005.17, 2006.
10(i)(D)(I) Amendment No. 3,Registration Rights Agreement, dated as of December 31, 2005,8, 2006 is incorporated by reference to Exhibit 10.1 to the Amended and Restated 3-Year Credit Agreement, dated as of May 10, 2004, amended and restated as of September 27, 2005, amongRegistrant’s Current Report onForm 8-K filed with the Registrant, the Initial Lenders Named Therein, and Citibank, N.A., as Administrative Agent.SEC on December 8, 2006.
10(i)(E)Letter Agreement, dated as of March 21, 2006, between the Registrant and the Lenders party to the Amended and Restated 3-Year Credit Agreement, dated as of May 10, 2004, amended and restated as of September 27, 2005, among the Registrant, the Initial Lenders Named Therein, and Citibank, N.A., as Administrative Agent, waiving breaches of the 3-Year Credit Agreement.
Management contracts and compensation plans and arrangements:
(i) Michael Roth
10(iii)(A)(1) Employment Agreement, made as of July 13, 2004, by and between the Registrant and Michael I. Roth, is incorporated by reference to Exhibit 10(iii)(A)(9) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2004. *
10(iii)(A)(2) Executive Severance Agreement, dated July 13, 2004 and executed as of July 27, 2004, by and between the Registrant and Michael I. Roth, is incorporated by reference to Exhibit 10(iii)(A)(10) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2004. *

105

10(iii)(A)(3) Supplemental Employment Agreement, dated as of January 19, 2005, between the Registrant and Michael I. Roth, is incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report onForm 8-K filed with the SEC on January 21, 2005. *
10(iii)(A)(4) Supplemental Employment Agreement, dated as of February 14, 2005, between the Registrant and Michael I. Roth, is incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report onForm 8-K filed with the SEC on February 17, 2005. *
(ii) David A. Bell
10(iii)(A)(5)David A. Bell Employment Agreement, dated as of January 1, 2000, between True North Communications Inc. and David A. Bell is incorporated by reference to Exhibit 10(b)(iii)(a) to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001.
10(iii)(A)(6)Employment Agreement Amendment, dated as of March 1, 2001, to an Employment Agreement, dated as of January 1, 2000, between True North Communications Inc. and David A. Bell is incorporated by reference to Exhibit 10(b)(iii)(b) to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001.

177

Exhibit No.DescriptionNicholas J. Camera
   
10(iii)(A)(7)(5) Employment Agreement Amendment, dated as of June 1, 2001, and signed as of October 1, 2002, between True North Communications Inc. and David A. Bell to an Employment Agreement, dated as of January 1, 2000, as amended, is incorporated by reference to Exhibit 10(b)(i)(a) to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002.
10(iii)(A)(8)Supplemental Agreement, made as of February 28, 2003, to an Employment Agreement, made as of January 1, 2000, between the Registrant and David A. Bell, is incorporated by reference to Exhibit 10(iii)(A)(i) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.
10(iii)(A)(9)Executive Special Benefit Agreement, made as of April 1, 2003, by and between the Registrant and David A. Bell, is incorporated by reference to Exhibit 10(iii)(A)(i)(a) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.
10(iii)(A)(10)Memorandum dated May 1, 2003, from David A. Bell, providing for Cancellation of Certain Stock Options, is incorporated by reference to Exhibit 10(iii)(A)(I)(b) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.
10(iii)(A)(11)Employment Agreement, dated as of January 18, 2005, between the Registrant and David A. Bell, is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on January 21, 2005.
(iii) Nicholas J. Camera
10(iii)(A)(12)Executive Special Benefit Agreement, dated as of January 1, 1995, between the Registrant and Nicholas J. Camera, is incorporated by reference to Exhibit 10(b)(v)(c) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2002. *
10(iii)(A)(13)(6) Executive Severance Agreement, dated as of January 1, 1998, between the Registrant and Nicholas J. Camera, is incorporated by reference to Exhibit 10(b)(vi)(a) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2001. *
10(iii)(A)(14)(7) Employment Agreement, dated as of November 14, 2002, between the Registrant and Nicholas J. Camera, is incorporated by reference to Exhibit 10(b)(v)(a) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2002. *
10(iii)(A)(15)(8) Supplemental Agreement, made as of January 1, 2003 and executed as of June 23, 2003 to an Executive Severance Agreement, made as of January 1, 1998, by and between the Registrant and Nicholas J. Camera, is incorporated by reference to Exhibit 10(iii)(A)(iii)(a) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2003. *
10(iii)(A)(16)(9) Supplemental Agreement, made as of June 16, 2003, to an Executive Severance Agreement, made as of January 1, 1998, by and between the Registrant and Nicholas J. Camera, is incorporated by reference to Exhibit 10(iii)(A)(iii)(b) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2003. *
(iv) Albert Conte
10(iii)(A)(17)Employment Agreement, dated as of February 21, 2000, between the Registrant and Albert Conte, is incorporated by reference to Exhibit 10(b)(vii)(a) to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001.
10(iii)(A)(18)Supplemental Agreement, made as of June 15, 2004, to an Employment Agreement, made as of February 21, 2000, by and between the Registrant and Albert Conte, is incorporated by reference to Exhibit 10(iii)(A)(3) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.
10(iii)(A)(19)The Interpublic Capital Accumulation Plan Participation Agreement, effective June 15, 2004, by and between the Registrant and Albert Conte, is incorporated by reference to Exhibit 10(iii)(A)(4) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.

178

 
Exhibit No.Description(iii) Christopher F. Carroll
   
10(iii)(A)(20)(10) Executive Special BenefitEmployment Agreement, made as of JanuaryApril 1, 2002 and executed as of June 26, 2004,2006, by and between the Registrant and Albert Conte,Christopher F. Carroll, is incorporated by reference to Exhibit 10(iii)(A)(5)10.1 to the Registrant’s QuarterlyCurrent Report onForm 10-Q for8-K filed with the quarter ended June 30, 2004.SEC on April 6, 2006. *
(v) Nicholas S. Cyprus
10(iii)(A)(21)(11) EmploymentExecutive Severance Agreement, made as of May 2004,dated April 1, 2006, by and between the Registrant and Nicholas S. Cyprus,Christopher F. Carroll, is incorporated by reference to Exhibit 10(iii)(A)(6)10.2 to the Registrant’s QuarterlyCurrent Report onForm 10-Q for8-K filed with the quarter ended June 30, 2004.SEC on April 6, 2006. *
10(iii)(A)(22)Executive Severance Agreement, made as of May 24, 2004, by and between the Registrant and Nicholas S. Cyprus, is incorporated by reference to Exhibit 10(iii)(A)(7) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.
10(iii)(A)(23)The Interpublic Capital Accumulation Plan Participation Agreement, effective May 15, 2004, by and between the Registrant and Nicholas S. Cyprus, is incorporated by reference to Exhibit 10(iii)(A)(8) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.
(vi)(iv) Thomas Dowling
10(iii)(A)(24) 
10(iii)(A)(12)Employment Agreement, dated as of November 1999, between the Registrant and Thomas Dowling, is incorporated by reference to Exhibit 10(b)(iii)(A)(1) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2002. *
10(iii)(A)(25)(13) Executive Special Benefit Agreement, dated as of February 1, 2000, between the Registrant and Thomas Dowling, is incorporated by reference to Exhibit 10(b)(viii)(a) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2001. *
10(iii)(A)(26)(14) Executive Special Benefit Agreement, dated as of February 1, 2001, between the Registrant and Thomas Dowling, is incorporated by reference to Exhibit 10(b)(viii)(b) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2001. *

106

10(iii)(A)(27)(15) Supplemental Agreement, dated as of October 1, 2002, to an Employment Agreement, dated as of November 1999, between the Registrant and Thomas Dowling, is incorporated by reference to Exhibit 10(b)(vii)(b) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2002. *
10(iii)(A)(28)(16) Supplemental Agreement, dated as of November 14, 2002, to an Employment Agreement, dated as of November 1999, between the Registrant and Thomas Dowling, is incorporated by reference to Exhibit 10(b)(vii)(a) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2002. *
10(iii)(A)(29)(17) Executive Severance Agreement, dated November 14, 2002, between the Registrant and Thomas Dowling, is incorporated by reference to Exhibit 10(iii)(A)(vii) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2003. *
(vii) Steven Gatfield
10(iii)(A)(30)Employment Agreement, made as of February 2, 2004, by and between the Registrant and Steve Gatfield, is incorporated by reference to Exhibit 10(iii)(A)(1) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.
10(iii)(A)(31)Participation Agreement under The Interpublic Senior Executive Retirement Income Plan, dated as of January 30, 2004, between the Registrant and Steve Gatfield, is incorporated by reference to Exhibit 10(iii)(A)(2) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.
10(iii)(A)(32)Executive Severance Agreement, made as of April 1, 2004, by and between the Registrant and Steve Gatfield, is incorporated by reference to Exhibit 10(iii)(A)(3) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.

179

 
Exhibit No.Description(v) Philippe Krakowsky
   
10(iii)(A)(33)(18) Supplemental Agreement, dated as of February 24, 2006, between Interpublic and Stephen Gatfield, is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K/ A filed with the SEC on March 3, 2006.
(viii) Philippe Krakowsky
10(iii)(A)(34)Employment Agreement, dated as of January 28, 2002, between the Registrant and Philippe Krakowsky, is incorporated by reference to Exhibit 10(iii)(A)(2) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.
10(iii)(A)(35)Executive Special Benefit Agreement, dated as of February 1, 2002, and signed as of July 1, 2002, between the Registrant and Philippe Krakowsky, is incorporated by reference to Exhibit 10(iii)(A)(v) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2002. *
10(iii)(A)(36)(19) Special Deferred Compensation Agreement, dated as of April 1, 2002, and signed as of July 1, 2002, between the Registrant and Philippe Krakowsky, is incorporated by reference to Exhibit 10(iii)(A)(iv) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2002. *
10(iii)(A)(37)(20) Executive Severance Agreement, dated September 13, 2002, between the Registrant and Philippe Krakowsky, is incorporated by reference to Exhibit 10(iii)(A)(vi) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2002. *
10(iii)(A)(38)(21) Executive Special Benefit Agreement, dated September 30, 2002, between the Registrant and Philippe Krakowsky, is incorporated by reference to Exhibit 10(iii)(A)(vi) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2002. *
10(iii)(A)(39)(22) Supplemental Agreement, made as of April 8, 2003, to an Employment Agreement, made as of January 28, 2002, by and between the Registrant and Philippe Krakowsky, is incorporated by reference to Exhibit 10(iii)(A)(viii)(a) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.
10(iii)(A)(40)Supplemental Agreement, made as of June 16, 2003, to an Executive Severance Agreement, made as of November 14, 2002, by and between the Registrant and Philippe Krakowsky, is incorporated by reference to Exhibit 10(iii)(A)(viii)(b) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2003. *
(ix)
10(iii)(A)(23)Employment Agreement, made as of January 1, 2006 and executed on March 20, 2006, by and between the Registrant and Philippe Krakowsky, is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on March 24, 2006. *
(vi) Frank Mergenthaler
10(iii)(A)(41) 
10(iii)(A)(24)Employment Agreement, made as of July 13, 2005, between the Registrant and Frank Mergenthaler is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on July 19, 2005. *
10(iii)(A)(42)(25) Executive Severance Agreement, made as of July 13, 2005, between the Registrant and Frank Mergenthaler is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on July 19, 2005. *

107

(x)
(vii) Timothy A. Sompolski
10(iii)(A)(43) 
10(iii)(A)(26)Employment Agreement, made as of July 6, 2004, by and between the Registrant and Timothy Sompolski, is incorporated by reference to Exhibit 10(iii)(A)(11) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2004. *
10(iii)(A)(44)(27) Executive Severance Agreement, made as of July 6, 2004, by and between the Registrant and Timothy Sompolski, is incorporated by reference to Exhibit 10(iii)(A)(12) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2004. *
10(iii)(A)(45)(28) The Interpublic Capital Accumulation Plan Participation Agreement, effective July 6, 2004, by and between the Registrant and Timothy Sompolski, is incorporated by reference to Exhibit 10(iii)(A)(13) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2004. *
(xi)
(viii) John J. Dooner, Jr.

180

Exhibit No.Description
   
10(iii)(A)(46)(29) Executive Special Benefit Agreement, dated as of July 1, 1986, between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(e) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 1995. *
10(iii)(A)(47)(30) Executive Severance Agreement, dated as of August 10, 1987, between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(h) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 1995. *
10(iii)(A)(48)(31) Supplemental Agreement, dated as of May 23, 1990, to an Executive Special Benefit Agreement, dated as of July 1, 1986, between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(l) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 1995. *
10(iii)(A)(49)(32) Executive Special Benefit Agreement, dated as of, July 1, 1992, between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(q) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 1995. *
10(iii)(A)(50)(33) Supplemental Agreement, dated as of August 10, 1992, to an Executive Severance Agreement, dated as of August 10, 1987, between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(p) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 1995. *
10(iii)(A)(51)(34) Employment Agreement, dated as of January 1, 1994, between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(r) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 1995. *
10(iii)(A)(52)(35) Executive Special Benefit Agreement, dated as of June 1, 1994, between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(s) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 1995. *
10(iii)(A)(53)(36) Supplemental Agreement, dated as of July 1, 1995, to an Employment Agreement between the Registrant and John J. Dooner, Jr., dated as of January 1, 1994, is incorporated by reference to Exhibit 10(B) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1995.
10(iii)(A)(54)Supplemental Agreement, dated as of July 1, 1995, to an Employment Agreement, dated as of January 1, 1994, between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(t) to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1995.
10(iii)(A)(55)Supplemental Agreement, dated as of September 1, 1997, to an Employment Agreement between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(k) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
10(iii)(A)(56)Executive Severance Agreement, dated January 1, 1998, between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(b) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended March 31, 1998. *
10(iii)(A)(57)(37) Supplemental Agreement, dated as of January 1, 1999, to an Employment Agreement dated as of January 1, 1994, between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(e) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
10(iii)(A)(58)Supplemental Agreement, dated as of April 1, 2000, to an Employment Agreement between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(b) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2000. *

108

10(iii)(A)(59)(38) Executive Special Benefit Agreement, dated as of May 20, 2002, between the Registrant and John J. Dooner, Jr., signed as of November 11, 2002, is incorporated by reference to Exhibit 10(b)(xv)(c) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2002.

181

Exhibit No.Description *
   
10(iii)(A)(60)(39) Supplemental Agreement, dated as of November 7, 2002, to an Employment Agreement between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(b)(xv)(a) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2002. *
10(iii)(A)(61)(40) Supplemental Agreement, dated as of November 7, 2002, to an Executive Special Benefit Agreement between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(b)(xv)(b) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2002. *
10(iii)(A)(62)(41) Supplemental Agreement, made as of January 1, 2003 and executed as of June 17, 2003, to an Executive Severance Agreement, made as of January 1, 1998, by and between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(iii)(A)(iv)(b) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2003. *
10(iii)(A)(63)(42) Supplemental Agreement, made as of March 31, 2003, to an Employment Agreement made as of January 1, 1994, as amended between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(iii)(A)(v) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.
10(iii)(A)(64)Supplemental Agreement, made as of March 31, 2003 and executed as of April 15, 2003, to an Employment Agreement, made as of January 1, 1994, by and between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(iii)(A)(iv)(a) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2003. *
10(iii)(A)(65)(43) Letter Agreement, dated May 8, 2003, between the Registrant and John J. Dooner, Jr., providing for cancellation of certain Stock Options, is incorporated by reference to Exhibit 10(iii)(A)(iv)(c) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.
10(iii)(A)(66)Supplemental Agreement dated as of November 12, 2003, to an Employment Agreement between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(b)(viii)(u) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2003. *
(xii)
(ix) Stephen Gatfield
10(iii)(A)(44)Employment Agreement, made as of February 2, 2004, by and between the Registrant and Stephen Gatfield, is incorporated by reference to Exhibit 10(iii)(A)(1) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2004. *
10(iii)(A)(45)Participation Agreement under The Interpublic Senior Executive Retirement Income Plan, dated as of January 30, 2004, between the Registrant and Stephen Gatfield, is incorporated by reference to Exhibit 10(iii)(A)(2) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2004. *
10(iii)(A)(46)Executive Severance Agreement, made as of April 1, 2004, by and between the Registrant and Stephen Gatfield, is incorporated by reference to Exhibit 10(iii)(A)(3) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2004. *
10(iii)(A)(47)Supplemental Agreement, dated as of February 24, 2006, between the Registrant and Stephen Gatfield, is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report onForm 8-K/A filed with the SEC on March 3, 2006. *
10(iii)(A)(48)Letter Agreement, dated March 15, 2006, by and between the Registrant and Stephen Gatfield, is incorporated by reference to Exhibit 10(iii)(A)(2) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2006. *

109

(x) Jill M. Considine
10(iii)(A)(67) 
10(iii)(A)(49)Deferred Compensation Agreement, dated as of April 1, 2002, between the Registrant and Jill M. Considine, is incorporated by reference to Exhibit 10(c)10(iii)(A)(i) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2002. *
(xiii)
10(iii)(A)(50)Letter, dated November 2, 2006, from Jill M. Considine to the Registrant, is incorporated by reference to Exhibit 10(iii)(B) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2006. *
(xi) Richard A. Goldstein
10(iii)(A)(68) Richard A Goldstein
10(iii)(A)(51)Deferred Compensation Agreement, dated as of June 1, 2001, between the Registrant and Richard A. Goldstein, is incorporated by reference to Exhibit 10(c) to Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2001.
(xiv) Christopher J. Coughlin
10(iii)(A)(69)Employment Agreement, made as of May 6, 2003, by and between the Registrant and Christopher J. Coughlin, is incorporated by reference to Exhibit 10(iii)(A)(ii) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.
10(iii)(A)(70)Executive Special Benefit Agreement, made as of June 16, 2003, by and between the Registrant and Christopher J. Coughlin, is incorporated by reference to Exhibit 10(iii)(A)(iii) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.
10(iii)(A)(71)Executive Severance Agreement, made as of June 16, 2003, by and between the Registrant and Christopher J. Coughlin, is incorporated by reference to Exhibit 10(iii)(A)(iv) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.

182

Exhibit No.Description *
   
10(iii)(A)(72)(52) Confidential SeparationLetter, dated July 24, 2006, from Richard A. Goldstein to the Registrant, is incorporated by reference to Exhibit 10(iii)(A) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2006. *
(xii) David A. Bell
10(iii)(A)(53)Executive Special Benefit Agreement, made as of April 1, 2003, by and General Release, between the Registrant and Christopher J. CoughlinDavid A. Bell, is incorporated by reference to Exhibit 10(iii)(A)(i)(a) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2003. *
10(iii)(A)(54)Employment Agreement, dated as of January 18, 2005, between the Registrant and David A. Bell, is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on January 6,21, 2005. *
(xv) Other
10(iii)(A)(73)(55) Amendment, dated March 16, 2006, to an Employment Agreement, made as of January 18, 2005, by and between the Registrant and David A. Bell, is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on March 22, 2006. *
Compensation Plans and Arrangements:
10(iii)(A)(56)Trust Agreement, dated as of June 1, 1990, between the Registrant, Lintas Campbell-Ewald Company, McCann-Erickson USA, Inc., McCann-Erickson Marketing, Inc., Lintas, Inc. and Chemical Bank, as Trustee, is incorporated by reference to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 1990. *
10(iii)(A)(74)(57) The Stock Option Plan (1988) and the Achievement Stock Award Plan of the Registrant are incorporated by reference to Appendices C and D of the Prospectus, dated May 4, 1989, forming part of its Registration Statement onForm S-8 (No.33-28143). *
10(iii)(A)(75)(58) The Management Incentive Compensation Plan of the Registrant is incorporated by reference to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 1995. *
10(iii)(A)(76)(59) The 1986 Stock Incentive Plan of the Registrant is incorporated by reference to Registrant’s Annual Report onForm 10-K for the year ended December 31, 1993. *
10(iii)(A)(77)(60) The 1986 United Kingdom Stock Option Plan of the Registrant is incorporated by reference to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 1992. *

110

10(iii)(A)(78)(61) The Long-Term Performance Incentive Plan of the Registrant is incorporated by reference to Appendix A of the Prospectus dated December 12, 1988 forming part of its Registration Statement onForm S-8 (No.33-25555). *
10(iii)(A)(79)(62) Resolution of the Board of Directors adopted on February 16, 1993, amending the Long-Term Performance Incentive Plan is incorporated by reference to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 1992. *
10(iii)(A)(80)(63) Resolution of the Board of Directors adopted on May 16, 1989 amending the Long-Term Performance Incentive Plan is incorporated by reference to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 1989. *
10(iii)(A)(81)(64) The 1996 Stock Incentive Plan of the Registrant is incorporated by reference to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 1996. *
10(iii)(A)(82)(65) The 1997 Performance Incentive Plan of the Registrant is incorporated by reference to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 1997. *
10(iii)(A)(83)(66) True North Communications Inc. Stock Option Plan is incorporated by reference to Exhibit 4.5 of Post-Effective Amendment No. 1 onForm S-8 to Registration Statement onForm S-4 (RegistrationNo. 333-59254). *
10(iii)(A)(84)(67) Bozell, Jacobs, Kenyon & Eckhardt, Inc. Stock Option Plan is incorporated by reference to Exhibit 4.5 of Post-Effective Amendment No. 1 onForm S-8 to Registration Statement onForm S-4 (Registration No.333-59254). *
10(iii)(A)(85)(68) True North Communications Inc. Deferred Compensation Plan is incorporated by reference to Exhibit(c)Exhibit (c)(xiv) of the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2002. *
10(iii)(A)(86)(69) Resolution of the Board of Directors of True North Communications Inc. adopted on March 1, 2002 amending the Deferred Compensation Plan is incorporated by reference to Exhibit(c)Exhibit (c)(xv) of the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2002. *
10(iii)(A)(87)(70) The 2002 Performance Incentive Plan of the Registrant is incorporated by reference to Appendix A to the Registrant’s Proxy Statement on Schedule 14A, filed April 17, 2002. *
10(iii)(A)(88)(71) The Interpublic Registrant Senior Executive Retirement Income Plan is incorporated by reference to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2003.

183

Exhibit No.Description *
   
10(iii)(A)(89)(72) The Interpublic Capital Accumulation Plan is incorporated by reference to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2003. *
10(iii)(A)(90)(73) The Interpublic Outside Directors Stock Incentive Plan of Interpublic,the Registrant, as amended through August 1, 2003, is incorporated by reference to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2003. *
10(iii)(A)(91)(74) The Interpublic 2004 Performance Incentive Plan of the Registrant(the ‘‘2004 PIP”) is incorporated by reference to Appendix B to the Registrant’s Proxy Statement on Schedule 14A, filed with the SEC on April 23, 2004. *
10(iii)(A)(92)(75) The Interpublic Non-Management Directors’ Stock Incentive Plan (the ‘‘Non-Management Directors’ Plan”) is incorporated by reference to Appendix C to the Registrant’s Proxy Statement on Schedule 14A, filed with the SEC on April 23, 2004. *

111

10(iii)(A)(93)(76) 2004 PIP — Form of Option Certificate is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on October 27, 2004. *
10(iii)(A)(77)2004 PIP — Form of Instrument of Restricted Stock is incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report onForm 8-K filed with the SEC on October 27, 2004. *
10(iii)(A)(78)2004 PIP — Form of Instrument of Restricted Stock Units is incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report onForm 8-K filed with the SEC on October 27, 2004. *
10(iii)(A)(79)Non-Management Directors’ Plan — Form of Plan Option Certificate is incorporated by reference to Exhibit 10.4 of the Registrant’s Current Report onForm 8-K filed with the SEC on October 27, 2004. *
10(iii)(A)(80)Non-Management Directors’ Plan — Form of Instrument of Restricted Shares is incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report onForm 8-K filed with the SEC on October 27, 2004. *
10(iii)(A)(81)Non-Management Directors’ Plan — Form of Instrument of Restricted Share Units is incorporated by reference to Exhibit 10.6 of the Registrant’s Current Report onForm 8-K filed with the SEC on October 27, 2004. *
10(iii)(A)(82)The Interpublic Senior Executive Retirement Income Plan — Form of Participation Agreement is incorporated by reference to Exhibit 10.7 of the Registrant’s Current Report onForm 8-K filed with the SEC on October 27, 2004. *
10(iii)(A)(94)(83) The Interpublic Capital Accumulation Plan — Form of Participation Agreement is incorporated by reference to Exhibit 10.8 of the Registrant’s Current Report onForm 8-K filed with the SEC on October 27, 2004. *
10(iii)(A)(95)The Interpublic Group of Companies, Inc. 2004 Performance Incentive Plan (the “PIP”) — Form of Instrument of Restricted Stock is incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on October 27, 2004.
10(iii)(A)(96)PIP — Form of Instrument of Restricted Stock Units is incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed with the SEC on October 27, 2004.
10(iii)(A)(97)PIP — Form of Option Certificate is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on October 27, 2004.
10(iii)(A)(98)Interpublic’s Non-Management Directors’ Stock Incentive Plan (the “Non-Management Directors’ Plan”) — Form of Instrument of Restricted Shares is incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed with the SEC on October 27, 2004.
10(iii)(A)(99)The Non-Management Directors’ Plan — Form of Instrument of Restricted Share Units is incorporated by reference to Exhibit 10.6 of the Registrant’s Current Report on Form 8-K filed with the SEC on October 27, 2004.
10(iii)(A)(100)The Non-Management Directors’ Plan — Form of Plan Option Certificate is incorporated by reference to Exhibit 10.4 of the Registrant’s Current Report on Form 8-K filed with the SEC on October 27, 2004.
10(iii)(A)(101)(84) The Employee Stock Purchase Plan (2006) of the Registrant is incorporated by reference to Appendix B to the Registrant’s Proxy Statement on Schedule 14A, filed with the SEC on October 21, 2005. *
(18) Preferability Letter from PricewaterhouseCoopers LLP, dated March 22,
10(iii)(A)(85)The Interpublic 2006 Performance Incentive Plan (the “2006 PIP”) is incorporated by reference to Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed with the SEC on April 27, 2006. *
10(iii)(A)(86)2006 PIP — Form of Instrument of Performance Shares, is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on June 21, 2006. *
10(iii)(A)(87)2006 PIP — Form of Instrument of Performance Units is incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report onForm 8-K filed with the SEC on June 21, 2006. *
10(iii)(A)(88)2006 PIP — Form of Instrument of Restricted Stock, is incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report onForm 8-K filed with the SEC on June 21, 2006. *
10(iii)(A)(89)2006 PIP — Form of Instrument of Restricted Stock Units, is incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report onForm 8-K filed with the SEC on June 21, 2006. *

112

10(iii)(A)(90)2006 PIP — Form of Instrument of Nonstatutory Stock Options, is incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report onForm 8-K filed with the SEC on June 21, 2006. *
10(iii)(A)(91)Description of the Change in Compensation for Non-Management Directors.
(12)Supplemental Calculation of Ratio of Earnings to Fixed Charges.
(21) Subsidiaries of the Registrant.
(23)Consent of PricewaterhouseCoopers LLP.
(24) Power of Attorney to signForm 10-K and resolution of Board of Directors re Power of Attorney.
(31.1) Certification dated as of March 22, 2006 and executed by Michael I. Roth, under Section 302 of the Sarbanes-OxleyChief Executive Officer pursuant toRule 13a-14(a) under the Securities Exchange Act of 2002 (“S-OX”).1934, as amended.
(31.2) Certification datedof the Chief Financial Officer pursuant toRule 13a-14(a) under the Securities Exchange Act of 1934, as of March 22, 2006 and executed by Frank Mergenthaler, under Section 302 of S-OX.amended.
(32) Certification dated as of March 22, 2006the Chief Executive Officer and executed by Michael I. Roth and Frank Mergenthaler,the Chief Financial Officer furnished pursuant to 18 U.S.C. Section 9061350 andRule 13a-14(b) under the Securities Exchange Act of S-OX.1934, as amended.
*Management contracts and compensation plans and arrangements.

113

184

SIGNATURES
 
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this Reportreport to be signed on its behalf by the undersigned, thereunto duly authorized.
THE INTERPUBLIC GROUP OF COMPANIES, INC.
(Registrant)
THE INTERPUBLIC GROUP OF COMPANIES, INC.
(Registrant)
 By: /s/  Michael I. Roth
Michael I. Roth
Chairman of the Board
Michael I. Roth
Chairman of the Board
and Chief Executive Officer
March 22, 2006
 
February 28, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
       
Name Title
Name
 Date
Title
 
Date
 
/s/  Michael I. Roth

Michael I. Roth		 Chairman of the Board and Chief Executive Officer (Principal
(Principal Executive Officer)		 March 22, 2006February 28, 2007
 
/s/  Frank Mergenthaler

Frank Mergenthaler		 Executive Vice President,
Chief Financial Officer (Principal
(Principal Financial Officer)		 March 22, 2006February 28, 2007
 
/s/  Nicholas S. CyprusChristopher F. Carroll

Nicholas S. Cyprus
Christopher F. Carroll
 Senior Vice President, and Controller (Principaland
Chief Accounting Officer
(Principal Accounting Officer)		 March 22, 2006February 28, 2007
 
/s/  Frank J. Borelli

Frank J. Borelli
 Director March 22, 2006February 28, 2007
 
/s/  Reginald K. Brack

Reginald K. Brack
 Director March 22, 2006February 28, 2007
 
/s/  Jill M. Considine

Jill M. Considine
 Director March 22, 2006February 28, 2007
 
/s/  Richard A. Goldstein

Richard A. Goldstein
 Director March 22, 2006February 28, 2007
 
/s/  H. John Greeniaus

H. John Greeniaus
 Director March 22, 2006February 28, 2007
 
/s/  J. Phillip SamperWilliam T. Kerr

J. Phillip Samper
William T. Kerr
 Director March 22, 2006February 28, 2007
 
/s/  David M. ThomasJ. Phillip Samper

David M. Thomas
J. Phillip Samper
 Director March 22, 2006February 28, 2007
/s/  David M. Thomas

David M. Thomas
DirectorFebruary 28, 2007


114

185

EXHIBIT INDEX
   
Exhibit No.
 
Description
 
3(i) Restated Certificate of Incorporation of the Registrant, as amended through October 24, 2005, is incorporated by reference to Exhibit 3(i) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2005 filed with the Securities and Exchange Commission (the “SEC”)SEC on November 9, 2005.
3(ii) By-Laws of the Registrant, as amended and restated through January 18, 2005,March 23, 2006, are incorporated by reference to Exhibit 3.23(ii) to the Registrant’s Current Report onForm 8-K filed with the SEC on January 21, 2005.March 29, 2006.
4(iii)(A) Certificate of Designations of 53/8% Series A Mandatory Convertible Preferred Stock of the Registrant, as filed with the Delaware Secretary of State on December 17, 2003 is incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on December 19, 2003.
4(iii)(B)Certificate of Designations of 5.25% Series B Cumulative Convertible Perpetual Preferred Stock of the Registrant, as filed with the Delaware Secretary of State on October 24, 2005 is incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on October 24, 2005.
4(iii)(C)(B) Senior Debt Indenture, dated as of October 20, 2000 (the “2000‘‘2000 Indenture”), between the Registrant and The Bank of New York, as trustee, is incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on October 24, 2000.
4(iii)(D)(C) First Supplemental Indenture, dated as of August 22, 2001, to the 2000 Indenture, with respect to the 7.25% Senior Unsecured Notes due 2011 is incorporated by reference to Exhibit 4.2 to the Registrant’s Registration Statement onForm S-4 filed with the SEC on December 4, 2001.
4(iii)(E)(D) Second Supplemental Indenture, dated as of December 14, 2001, to the 2000 Indenture, with respect to the Zero-Coupon Convertible Senior Notes due 2021 is incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement onForm S-3 filed with the SEC on April 5, 2002.
4(iii)(F)(E) Third Supplemental Indenture, dated as of March 13, 2003, to the 2000 Indenture, with respect to the 4.50% Convertible Senior Notes due 2023 is incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on March 18, 2003.
4(iii)(G)(F) Fifth Supplemental Indenture, dated as of March 28, 2005, to the 2000 Indenture, as modified by the First Supplemental Indenture, dated as of August 22, 2001, with respect to the 7.25% Senior Unsecured Notes due 2011 is incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report onForm 8-K filed with the SEC on April 1, 2005.
4(iii)(H)(G) Sixth Supplemental Indenture, dated as of March 30, 2005, to the 2000 Indenture, as modified by the Third Supplemental Indenture, dated as of March 13, 2003, with respect to the 4.50% Convertible Senior Notes due 2023 is incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report onForm 8-K filed with the SEC on April 1, 2005.
4(iii)(I)(H) Seventh Supplemental Indenture, dated as of August 11, 2005, to the 2000 Indenture, as modified by the Third Supplemental Indenture, dated as of March 13, 2003, and the Sixth Supplemental Indenture, dated as of March 30, 2005, with respect to the 4.50% Convertible Senior Notes due 2023 is incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on August 15, 2005.
4(iii)(J)(I) Senior Debt Indenture dated as of November 12, 2004 (the “2004‘‘2004 Indenture”), between the Registrant and Suntrust Bank, as trustee, is incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on November 15, 2004.


115

   
Exhibit No.Description
   
4(iii)(K)(J) First Supplemental Indenture, dated as of November 18, 2004, to the 2004 Indenture, with respect to the 5.40% Notes due 2009 is incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on November 19, 2004.
4(iii)(L)(K) Second Supplemental Indenture, dated as of November 18, 2004, to the 2004 Indenture, with respect to the 6.25% Notes due 2014 is incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report onForm 8-K filed with the SEC on November 19, 2004.
4(iii)(M)(L) Third Supplemental Indenture, dated as of March 28, 2005, to the 2004 Indenture, as modified by the Second Supplemental Indenture, dated as of November 18, 2004, with respect to the 6.25% Senior Unsecured Notes due 2014 is incorporated by reference to Exhibit 4.4 to the Registrant’s Current Report onForm 8-K filed with the SEC on April 1, 2005.
4(iii)(N)(M) Fourth Supplemental Indenture, dated as of March 29, 2005, to the 2004 Indenture, as modified by the First Supplemental Indenture, dated as of November 18, 2004, with respect to the 5.40% Senior Unsecured Notes due 2009 is incorporated by reference to Exhibit 4.5 to the Registrant’s Current Report onForm 8-K filed with the SEC on April 1, 2005.
4(iii)(O)(N) FifthSixth Supplemental Indenture, dated as of July 25, 2005,December 8, 2006, to the 2004 Indenture, with respect to the Floating Rate Notes due 20082010 is incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on July 26, 2005.December 8, 2006.
10(i)(A) Amended
4(iii)(O)Senior Debt Indenture, dated as of November 15, 2006 (the ‘‘2006 Indenture”), between the Registrant and Restated 3-Year CreditThe Bank of New York, as trustee, is incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on November 17, 2006.
4(iii)(P)First Supplemental Indenture, dated as of November 15, 2006, to the 2006 Indenture, with respect to the 4.25% Convertible Senior Notes Due 2023 is incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report onForm 8-K filed with the SEC on November 17, 2006.
4(iii)(Q)Warrant Agreement, dated as of May 10, 2004, amended and restated as of September 27, 2005, amongJune 13, 2006, between the Registrant the Initial Lenders Named Therein, and Citibank, N.A.,LaSalle Bank National Association, as AdministrativeWarrant Agent, is incorporated by reference to Exhibit 10(i)(G)10.2 to the Registrant’s AnnualCurrent Report onForm 10-K for the year ended December 31, 20048-K filed with the SEC on September 30, 2005.June 19, 2006.
10(i)(A)Call Option Agreement, dated as of June 6, 2006, between the Registrant and UBS AG, London Branch, is incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report onForm 8-K filed with the SEC on June 12, 2006.
10(i)(B) Amendment No. 1, dated as of October 17, 2005, to the Amended and Restated 3-Year CreditCall Option Agreement, dated as of May 10, 2004, amendedJune 6, 2006, between the Registrant and restatedMorgan Stanley & Co. International Limited, is incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report onForm 8-K filed with the SEC on June 12, 2006.
10(i)(C)Call Option Agreement, dated as of September 27, 2005, amongJune 6, 2006, between the Registrant and JP Morgan Chase Bank, National Association, London Branch, is incorporated by reference to Exhibit 10.2 to the Initial Lenders Named Therein,Registrant’s Current Report onForm 8-K filed with the SEC on June 12, 2006.
10(i)(D)Call Option Agreement, dated as of June 6, 2006, between the Registrant and Citibank, N.A., as Administrative Agent, is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on October 17, 2005.June 12, 2006.

116

10(i)(C)(E) Amendment No. 2, dated as of September 30, 2005, to the Amended and Restated 3-Year CreditL/C Issuance Agreement, dated as of May 10, 2004, amended and restated as of September 27, 2005, amongJune 13, 2006, between the Registrant, the Initial Lenders Named Therein,as Account Party, and Citibank, N.A.Morgan Stanley Capital Services, Inc., as Administrative Agent,L/C Issuer, is incorporated by reference to Exhibit 10(i)(C)10.4 to the Registrant’s QuarterlyCurrent Report onForm 10-Q for8-K filed with the quarter ended September 30, 2005SEC on June 19, 2006.
10(i)(F)Letter of Credit Agreement, dated as of June 13, 2006, between the Registrant and Citibank, N.A., is incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report onForm 8-K filed with the SEC on June 19, 2006.
10(i)(G)3-Year Credit Agreement, dated as of June 13, 2006, among the Registrant, as Borrower, ELF Special Financing Ltd., as Initial Lender and L/C Issuer, and Morgan Stanley Capital Services, Inc., as Administrative Agent and L/C Administrator, is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on June 19, 2006.
10(i)(H)Registration Rights Agreement, dated as of November 15, 2006, is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on November 9, 2005.17, 2006.
10(i)(D)(I) Amendment No. 3,Registration Rights Agreement, dated as of December 31, 2005,8, 2006 is incorporated by reference to Exhibit 10.1 to the Amended and Restated 3-Year Credit Agreement, dated as of May 10, 2004, amended and restated as of September 27, 2005, amongRegistrant’s Current Report onForm 8-K filed with the Registrant, the Initial Lenders Named Therein, and Citibank, N.A., as Administrative Agent.SEC on December 8, 2006.
10(i)(E)Letter Agreement, dated as of March 21, 2006, between the Registrant and the Lenders party to the Amended and Restated 3-Year Credit Agreement, dated as of May 10, 2004, amended and restated as of September 27, 2005, among the Registrant, the Initial Lenders Named Therein, and Citibank, N.A., as Administrative Agent, waiving breaches of the 3-Year Credit Agreement.
Management contracts and compensation plans and arrangements:
(i) Michael Roth
10(iii)(A)(1) Employment Agreement, made as of July 13, 2004, by and between the Registrant and Michael I. Roth, is incorporated by reference to Exhibit 10(iii)(A)(9) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2004.

Exhibit No.Description *
   
10(iii)(A)(2) Executive Severance Agreement, dated July 13, 2004 and executed as of July 27, 2004, by and between the Registrant and Michael I. Roth, is incorporated by reference to Exhibit 10(iii)(A)(10) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2004. *
10(iii)(A)(3) Supplemental Employment Agreement, dated as of January 19, 2005, between the Registrant and Michael I. Roth, is incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report onForm 8-K filed with the SEC on January 21, 2005. *
10(iii)(A)(4) Supplemental Employment Agreement, dated as of February 14, 2005, between the Registrant and Michael I. Roth, is incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report onForm 8-K filed with the SEC on February 17, 2005. *
(ii) David A. BellNicholas J. Camera
10(iii)(A)(5) David A. Bell Employment Agreement, dated as of January 1, 2000, between True North Communications Inc. and David A. Bell is incorporated by reference to Exhibit 10(b)(iii)(a) to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001.
10(iii)(A)(6)Employment Agreement Amendment, dated as of March 1, 2001, to an Employment Agreement, dated as of January 1, 2000, between True North Communications Inc. and David A. Bell is incorporated by reference to Exhibit 10(b)(iii)(b) to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001.
10(iii)(A)(7)Employment Agreement Amendment, dated as of June 1, 2001, and signed as of October 1, 2002, between True North Communications Inc. and David A. Bell to an Employment Agreement, dated as of January 1, 2000, as amended, is incorporated by reference to Exhibit 10(b)(i)(a) to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002.
10(iii)(A)(8)Supplemental Agreement, made as of February 28, 2003, to an Employment Agreement, made as of January 1, 2000, between the Registrant and David A. Bell, is incorporated by reference to Exhibit 10(iii)(A)(i) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.
10(iii)(A)(9)Executive Special Benefit Agreement, made as of April 1, 2003, by and between the Registrant and David A. Bell, is incorporated by reference to Exhibit 10(iii)(A)(i)(a) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.
10(iii)(A)(10)Memorandum dated May 1, 2003, from David A. Bell, providing for Cancellation of Certain Stock Options, is incorporated by reference to Exhibit 10(iii)(A)(I)(b) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.
10(iii)(A)(11)Employment Agreement, dated as of January 18, 2005, between the Registrant and David A. Bell, is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on January 21, 2005.
(iii) Nicholas J. Camera
10(iii)(A)(12)Executive Special Benefit Agreement, dated as of January 1, 1995, between the Registrant and Nicholas J. Camera, is incorporated by reference to Exhibit 10(b)(v)(c) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2002. *
10(iii)(A)(13)(6) Executive Severance Agreement, dated as of January 1, 1998, between the Registrant and Nicholas J. Camera, is incorporated by reference to Exhibit 10(b)(vi)(a) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2001. *
10(iii)(A)(14)(7) Employment Agreement, dated as of November 14, 2002, between the Registrant and Nicholas J. Camera, is incorporated by reference to Exhibit 10(b)(v)(a) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2002. *

117

   
Exhibit No.Description
   
10(iii)(A)(15)(8) Supplemental Agreement, made as of January 1, 2003 and executed as of June 23, 2003 to an Executive Severance Agreement, made as of January 1, 1998, by and between the Registrant and Nicholas J. Camera, is incorporated by reference to Exhibit 10(iii)(A)(iii)(a) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2003. *
10(iii)(A)(16)(9) Supplemental Agreement, made as of June 16, 2003, to an Executive Severance Agreement, made as of January 1, 1998, by and between the Registrant and Nicholas J. Camera, is incorporated by reference to Exhibit 10(iii)(A)(iii)(b) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2003. *
(iv) Albert Conte
(iii) Christopher F. Carroll
10(iii)(A)(17)(10) Employment Agreement, datedmade as of February 21, 2000,April 1, 2006, by and between the Registrant and Albert Conte,Christopher F. Carroll, is incorporated by reference to Exhibit 10(b)(vii)(a)10.1 to the Registrant’s AnnualCurrent Report onForm 10-K for8-K filed with the year ended December 31, 2001.SEC on April 6, 2006. *
10(iii)(A)(18)(11) SupplementalExecutive Severance Agreement, made as of June 15, 2004, to an Employment Agreement, made as of February 21, 2000,dated April 1, 2006, by and between the Registrant and Albert Conte,Christopher F. Carroll, is incorporated by reference to Exhibit 10(iii)(A)(3)10.2 to the Registrant’s QuarterlyCurrent Report onForm 10-Q for8-K filed with the quarter ended June 30, 2004.SEC on April 6, 2006. *
10(iii)(A)(19)The Interpublic Capital Accumulation Plan Participation Agreement, effective June 15, 2004, by and between the Registrant and Albert Conte, is incorporated by reference to Exhibit 10(iii)(A)(4) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.
10(iii)(A)(20)Executive Special Benefit Agreement, made as of January 1, 2002 and executed as of June 26, 2004, by and between the Registrant and Albert Conte, is incorporated by reference to Exhibit 10(iii)(A)(5) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.
(v) Nicholas S. Cyprus
10(iii)(A)(21)Employment Agreement, made as of May 2004, by and between the Registrant and Nicholas S. Cyprus, is incorporated by reference to Exhibit 10(iii)(A)(6) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.
10(iii)(A)(22)Executive Severance Agreement, made as of May 24, 2004, by and between the Registrant and Nicholas S. Cyprus, is incorporated by reference to Exhibit 10(iii)(A)(7) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.
10(iii)(A)(23)The Interpublic Capital Accumulation Plan Participation Agreement, effective May 15, 2004, by and between the Registrant and Nicholas S. Cyprus, is incorporated by reference to Exhibit 10(iii)(A)(8) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.
(vi)(iv) Thomas Dowling
10(iii)(A)(24) 
10(iii)(A)(12)Employment Agreement, dated as of November 1999, between the Registrant and Thomas Dowling, is incorporated by reference to Exhibit 10(b)(iii)(A)(1) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2002. *
10(iii)(A)(25)(13) Executive Special Benefit Agreement, dated as of February 1, 2000, between the Registrant and Thomas Dowling, is incorporated by reference to Exhibit 10(b)(viii)(a) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2001. *
10(iii)(A)(26)(14) Executive Special Benefit Agreement, dated as of February 1, 2001, between the Registrant and Thomas Dowling, is incorporated by reference to Exhibit 10(b)(viii)(b) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2001.

Exhibit No.Description *
   
10(iii)(A)(27)(15) Supplemental Agreement, dated as of October 1, 2002, to an Employment Agreement, dated as of November 1999, between the Registrant and Thomas Dowling, is incorporated by reference to Exhibit 10(b)(vii)(b) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2002. *
10(iii)(A)(28)(16) Supplemental Agreement, dated as of November 14, 2002, to an Employment Agreement, dated as of November 1999, between the Registrant and Thomas Dowling, is incorporated by reference to Exhibit 10(b)(vii)(a) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2002. *
10(iii)(A)(29)(17) Executive Severance Agreement, dated November 14, 2002, between the Registrant and Thomas Dowling, is incorporated by reference to Exhibit 10(iii)(A)(vii) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2003. *
(vii) Steven Gatfield
10(iii)(A)(30)Employment Agreement, made as of February 2, 2004, by and between the Registrant and Steve Gatfield, is incorporated by reference to Exhibit 10(iii)(A)(1) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.
10(iii)(A)(31)Participation Agreement under The Interpublic Senior Executive Retirement Income Plan, dated as of January 30, 2004, between the Registrant and Steve Gatfield, is incorporated by reference to Exhibit 10(iii)(A)(2) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.
10(iii)(A)(32)Executive Severance Agreement, made as of April 1, 2004, by and between the Registrant and Steve Gatfield, is incorporated by reference to Exhibit 10(iii)(A)(3) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.
10(iii)(A)(33)Supplemental Agreement, dated as of February 24, 2006, between Interpublic and Stephen Gatfield, is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K/ A filed with the SEC on March 3, 2006.
(viii)(v) Philippe Krakowsky
10(iii)(A)(34) Employment Agreement, dated as of January 28, 2002, between the Registrant and Philippe Krakowsky, is incorporated by reference to Exhibit 10(iii)(A)(2) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.
10(iii)(A)(35)(18) Executive Special Benefit Agreement, dated as of February 1, 2002, and signed as of July 1, 2002, between the Registrant and Philippe Krakowsky, is incorporated by reference to Exhibit 10(iii)(A)(v) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2002. *

118

10(iii)(A)(36)(19) Special Deferred Compensation Agreement, dated as of April 1, 2002, and signed as of July 1, 2002, between the Registrant and Philippe Krakowsky, is incorporated by reference to Exhibit 10(iii)(A)(iv) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2002. *
10(iii)(A)(37)(20) Executive Severance Agreement, dated September 13, 2002, between the Registrant and Philippe Krakowsky, is incorporated by reference to Exhibit 10(iii)(A)(vi) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2002. *
10(iii)(A)(38)(21) Executive Special Benefit Agreement, dated September 30, 2002, between the Registrant and Philippe Krakowsky, is incorporated by reference to Exhibit 10(iii)(A)(vi) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2002.
10(iii)(A)(39)Supplemental Agreement, made as of April 8, 2003, to an Employment Agreement, made as of January 28, 2002, by and between the Registrant and Philippe Krakowsky, is incorporated by reference to Exhibit 10(iii)(A)(viii)(a) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.

Exhibit No.Description *
   
10(iii)(A)(40)(22) Supplemental Agreement, made as of June 16, 2003, to an Executive Severance Agreement, made as of November 14, 2002, by and between the Registrant and Philippe Krakowsky, is incorporated by reference to Exhibit 10(iii)(A)(viii)(b) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2003. *
(ix)
10(iii)(A)(23)Employment Agreement, made as of January 1, 2006 and executed on March 20, 2006, by and between the Registrant and Philippe Krakowsky, is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on March 24, 2006. *
(vi) Frank Mergenthaler
10(iii)(A)(41) 
10(iii)(A)(24)Employment Agreement, made as of July 13, 2005, between the Registrant and Frank Mergenthaler is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on July 19, 2005. *
10(iii)(A)(42)(25) Executive Severance Agreement, made as of July 13, 2005, between the Registrant and Frank Mergenthaler is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on July 19, 2005. *
(x)
(vii) Timothy A. Sompolski
10(iii)(A)(43) 
10(iii)(A)(26)Employment Agreement, made as of July 6, 2004, by and between the Registrant and Timothy Sompolski, is incorporated by reference to Exhibit 10(iii)(A)(11) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2004. *
10(iii)(A)(44)(27) Executive Severance Agreement, made as of July 6, 2004, by and between the Registrant and Timothy Sompolski, is incorporated by reference to Exhibit 10(iii)(A)(12) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2004. *
10(iii)(A)(45)(28) The Interpublic Capital Accumulation Plan Participation Agreement, effective July 6, 2004, by and between the Registrant and Timothy Sompolski, is incorporated by reference to Exhibit 10(iii)(A)(13) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2004. *
(xi)
(viii) John J. Dooner, Jr.
10(iii)(A)(46) 
10(iii)(A)(29)Executive Special Benefit Agreement, dated as of July 1, 1986, between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(e) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 1995. *
10(iii)(A)(47)(30) Executive Severance Agreement, dated as of August 10, 1987, between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(h) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 1995. *

119

10(iii)(A)(48)(31) Supplemental Agreement, dated as of May 23, 1990, to an Executive Special Benefit Agreement, dated as of July 1, 1986, between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(l) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 1995. *
10(iii)(A)(49)(32) Executive Special Benefit Agreement, dated as of, July 1, 1992, between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(q) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 1995. *
10(iii)(A)(50)(33) Supplemental Agreement, dated as of August 10, 1992, to an Executive Severance Agreement, dated as of August 10, 1987, between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(p) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 1995. *
10(iii)(A)(51)(34) Employment Agreement, dated as of January 1, 1994, between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(r) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 1995. *
10(iii)(A)(52)(35) Executive Special Benefit Agreement, dated as of June 1, 1994, between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(s) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 1995.
10(iii)(A)(53)Supplemental Agreement, dated as of July 1, 1995, to an Employment Agreement between the Registrant and John J. Dooner, Jr., dated as of January 1, 1994, is incorporated by reference to Exhibit 10(B) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1995.

Exhibit No.Description *
   
10(iii)(A)(54)(36) Supplemental Agreement, dated as of July 1, 1995, to an Employment Agreement, dated as of January 1, 1994, between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(t) to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1995.
10(iii)(A)(55)Supplemental Agreement, dated as of September 1, 1997, to an Employment Agreement between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(k) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
10(iii)(A)(56)Executive Severance Agreement, dated January 1, 1998, between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(b) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended March 31, 1998. *
10(iii)(A)(57)(37) Supplemental Agreement, dated as of January 1, 1999, to an Employment Agreement dated as of January 1, 1994, between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(e) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
10(iii)(A)(58)Supplemental Agreement, dated as of April 1, 2000, to an Employment Agreement between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(b) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2000. *
10(iii)(A)(59)(38) Executive Special Benefit Agreement, dated as of May 20, 2002, between the Registrant and John J. Dooner, Jr., signed as of November 11, 2002, is incorporated by reference to Exhibit 10(b)(xv)(c) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2002. *
10(iii)(A)(60)(39) Supplemental Agreement, dated as of November 7, 2002, to an Employment Agreement between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(b)(xv)(a) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2002. *
10(iii)(A)(61)(40) Supplemental Agreement, dated as of November 7, 2002, to an Executive Special Benefit Agreement between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(b)(xv)(b) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2002. *
10(iii)(A)(62)(41) Supplemental Agreement, made as of January 1, 2003 and executed as of June 17, 2003, to an Executive Severance Agreement, made as of January 1, 1998, by and between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(iii)(A)(iv)(b) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2003. *
10(iii)(A)(63)(42) Supplemental Agreement, made as of March 31, 2003, to an Employment Agreement made as of January 1, 1994, as amended between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(iii)(A)(v) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.
10(iii)(A)(64)Supplemental Agreement, made as of March 31, 2003 and executed as of April 15, 2003, to an Employment Agreement, made as of January 1, 1994, by and between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(iii)(A)(iv)(a) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2003. *

120

10(iii)(A)(65)(43) Letter Agreement, dated May 8, 2003, between the Registrant and John J. Dooner, Jr., providing for cancellation of certain Stock Options, is incorporated by reference to Exhibit 10(iii)(A)(iv)(c) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.
10(iii)(A)(66)Supplemental Agreement dated as of November 12, 2003, to an Employment Agreement between the Registrant and John J. Dooner, Jr., is incorporated by reference to Exhibit 10(b)(viii)(u) to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2003. *

 
Exhibit No.Description(ix) Stephen Gatfield
   
(xii)10(iii)(A)(44)Employment Agreement, made as of February 2, 2004, by and between the Registrant and Stephen Gatfield, is incorporated by reference to Exhibit 10(iii)(A)(1) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2004. *
10(iii)(A)(45)Participation Agreement under The Interpublic Senior Executive Retirement Income Plan, dated as of January 30, 2004, between the Registrant and Stephen Gatfield, is incorporated by reference to Exhibit 10(iii)(A)(2) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2004. *
10(iii)(A)(46)Executive Severance Agreement, made as of April 1, 2004, by and between the Registrant and Stephen Gatfield, is incorporated by reference to Exhibit 10(iii)(A)(3) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2004. *
10(iii)(A)(47)Supplemental Agreement, dated as of February 24, 2006, between the Registrant and Stephen Gatfield, is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report onForm 8-K/A filed with the SEC on March 3, 2006. *
10(iii)(A)(48)Letter Agreement, dated March 15, 2006, by and between the Registrant and Stephen Gatfield, is incorporated by reference to Exhibit 10(iii)(A)(2) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2006. *
(x) Jill M. Considine
10(iii)(A)(67) 
10(iii)(A)(49)Deferred Compensation Agreement, dated as of April 1, 2002, between the Registrant and Jill M. Considine, is incorporated by reference to Exhibit 10(c)10(iii)(A)(i) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2002. *
(xiii)
10(iii)(A)(50)Letter, dated November 2, 2006, from Jill M. Considine to the Registrant, is incorporated by reference to Exhibit 10(iii)(B) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2006. *
(xi) Richard A. Goldstein
10(iii)(A)(68) Richard A Goldstein
10(iii)(A)(51)Deferred Compensation Agreement, dated as of June 1, 2001, between the Registrant and Richard A. Goldstein, is incorporated by reference to Exhibit 10(c) to Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2001. *
(xiv) Christopher J. Coughlin
10(iii)(A)(69)(52) EmploymentLetter, dated July 24, 2006, from Richard A. Goldstein to the Registrant, is incorporated by reference to Exhibit 10(iii)(A) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2006. *
(xii) David A. Bell
10(iii)(A)(53)Executive Special Benefit Agreement, made as of May 6,April 1, 2003, by and between the Registrant and Christopher J. Coughlin,David A. Bell, is incorporated by reference to Exhibit 10(iii)(A)(ii)(i)(a) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended March 31,June 30, 2003. *
10(iii)(A)(70)(54) Executive Special BenefitEmployment Agreement, madedated as of June 16, 2003, by andJanuary 18, 2005, between the Registrant and Christopher J. Coughlin, is incorporated by reference to Exhibit 10(iii)(A)(iii) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.
10(iii)(A)(71)Executive Severance Agreement, made as of June 16, 2003, by and between the Registrant and Christopher J. Coughlin, is incorporated by reference to Exhibit 10(iii)(A)(iv) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.
10(iii)(A)(72)Confidential Separation Agreement and General Release, between the Registrant and Christopher J. CoughlinDavid A. Bell, is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on January 6,21, 2005. *

121

(xv) Other
10(iii)(A)(73)(55) Amendment, dated March 16, 2006, to an Employment Agreement, made as of January 18, 2005, by and between the Registrant and David A. Bell, is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on March 22, 2006. *
Compensation Plans and Arrangements:
10(iii)(A)(56)Trust Agreement, dated as of June 1, 1990, between the Registrant, Lintas Campbell-Ewald Company, McCann-Erickson USA, Inc., McCann-Erickson Marketing, Inc., Lintas, Inc. and Chemical Bank, as Trustee, is incorporated by reference to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 1990. *
10(iii)(A)(74)(57) The Stock Option Plan (1988) and the Achievement Stock Award Plan of the Registrant are incorporated by reference to Appendices C and D of the Prospectus, dated May 4, 1989, forming part of its Registration Statement onForm S-8 (No.33-28143). *
10(iii)(A)(75)(58) The Management Incentive Compensation Plan of the Registrant is incorporated by reference to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 1995. *
10(iii)(A)(76)(59) The 1986 Stock Incentive Plan of the Registrant is incorporated by reference to Registrant’s Annual Report onForm 10-K for the year ended December 31, 1993. *
10(iii)(A)(77)(60) The 1986 United Kingdom Stock Option Plan of the Registrant is incorporated by reference to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 1992. *
10(iii)(A)(78)(61) The Long-Term Performance Incentive Plan of the Registrant is incorporated by reference to Appendix A of the Prospectus dated December 12, 1988 forming part of its Registration Statement onForm S-8 (No.33-25555). *
10(iii)(A)(79)(62) Resolution of the Board of Directors adopted on February 16, 1993, amending the Long-Term Performance Incentive Plan is incorporated by reference to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 1992.

Exhibit No.Description *
   
10(iii)(A)(80)(63) Resolution of the Board of Directors adopted on May 16, 1989 amending the Long-Term Performance Incentive Plan is incorporated by reference to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 1989. *
10(iii)(A)(81)(64) The 1996 Stock Incentive Plan of the Registrant is incorporated by reference to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 1996. *
10(iii)(A)(82)(65) The 1997 Performance Incentive Plan of the Registrant is incorporated by reference to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 1997. *
10(iii)(A)(83)(66) True North Communications Inc. Stock Option Plan is incorporated by reference to Exhibit 4.5 of Post-Effective Amendment No. 1 onForm S-8 to Registration Statement onForm S-4 (RegistrationNo. 333-59254). *
10(iii)(A)(84)(67) Bozell, Jacobs, Kenyon & Eckhardt, Inc. Stock Option Plan is incorporated by reference to Exhibit 4.5 of Post-Effective Amendment No. 1 onForm S-8 to Registration Statement onForm S-4 (Registration No.333-59254). *
10(iii)(A)(85)(68) True North Communications Inc. Deferred Compensation Plan is incorporated by reference to Exhibit(c)Exhibit (c)(xiv) of the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2002. *

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10(iii)(A)(86)(69) Resolution of the Board of Directors of True North Communications Inc. adopted on March 1, 2002 amending the Deferred Compensation Plan is incorporated by reference to Exhibit(c)Exhibit (c)(xv) of the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2002. *
10(iii)(A)(87)(70) The 2002 Performance Incentive Plan of the Registrant is incorporated by reference to Appendix A to the Registrant’s Proxy Statement on Schedule 14A, filed April 17, 2002. *
10(iii)(A)(88)(71) The Interpublic Registrant Senior Executive Retirement Income Plan is incorporated by reference to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2003. *
10(iii)(A)(89)(72) The Interpublic Capital Accumulation Plan is incorporated by reference to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2003. *
10(iii)(A)(90)(73) The Interpublic Outside Directors Stock Incentive Plan of Interpublic,the Registrant, as amended through August 1, 2003, is incorporated by reference to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2003. *
10(iii)(A)(91)(74) The Interpublic 2004 Performance Incentive Plan of the Registrant(the “2004 PIP”) is incorporated by reference to Appendix B to the Registrant’s Proxy Statement on Schedule 14A, filed with the SEC on April 23, 2004. *
10(iii)(A)(92)(75) The Interpublic Non-Management Directors’ Stock Incentive Plan (the ‘‘Non-Management Directors’ Plan”) is incorporated by reference to Appendix C to the Registrant’s Proxy Statement on Schedule 14A, filed with the SEC on April 23, 2004. *
10(iii)(A)(93)(76) 2004 PIP — Form of Option Certificate is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on October 27, 2004. *
10(iii)(A)(77)2004 PIP — Form of Instrument of Restricted Stock is incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report onForm 8-K filed with the SEC on October 27, 2004. *
10(iii)(A)(78)2004 PIP — Form of Instrument of Restricted Stock Units is incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report onForm 8-K filed with the SEC on October 27, 2004. *
10(iii)(A)(79)Non-Management Directors’ Plan — Form of Plan Option Certificate is incorporated by reference to Exhibit 10.4 of the Registrant’s Current Report onForm 8-K filed with the SEC on October 27, 2004. *
10(iii)(A)(80)Non-Management Directors’ Plan — Form of Instrument of Restricted Shares is incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report onForm 8-K filed with the SEC on October 27, 2004. *
10(iii)(A)(81)Non-Management Directors’ Plan — Form of Instrument of Restricted Share Units is incorporated by reference to Exhibit 10.6 of the Registrant’s Current Report onForm 8-K filed with the SEC on October 27, 2004. *
10(iii)(A)(82)The Interpublic Senior Executive Retirement Income Plan — Form of Participation Agreement is incorporated by reference to Exhibit 10.7 of the Registrant’s Current Report onForm 8-K filed with the SEC on October 27, 2004. *
10(iii)(A)(94)(83) The Interpublic Capital Accumulation Plan — Form of Participation Agreement is incorporated by reference to Exhibit 10.8 of the Registrant’s Current Report onForm 8-K filed with the SEC on October 27, 2004.
10(iii)(A)(95)The Interpublic Group of Companies, Inc. 2004 Performance Incentive Plan (the “PIP”) — Form of Instrument of Restricted Stock is incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on October 27, 2004.
10(iii)(A)(96)PIP — Form of Instrument of Restricted Stock Units is incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed with the SEC on October 27, 2004.
10(iii)(A)(97)PIP — Form of Option Certificate is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on October 27, 2004. *

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Exhibit No.Description
   
10(iii)(A)(98)Interpublic’s Non-Management Directors’ Stock Incentive Plan (the “Non-Management Directors’ Plan”) — Form of Instrument of Restricted Shares is incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed with the SEC on October 27, 2004.
10(iii)(A)(99)The Non-Management Directors’ Plan — Form of Instrument of Restricted Share Units is incorporated by reference to Exhibit 10.6 of the Registrant’s Current Report on Form 8-K filed with the SEC on October 27, 2004.
10(iii)(A)(100)The Non-Management Directors’ Plan — Form of Plan Option Certificate is incorporated by reference to Exhibit 10.4 of the Registrant’s Current Report on Form 8-K filed with the SEC on October 27, 2004.
10(iii)(A)(101)(84) The Employee Stock Purchase Plan (2006) of the Registrant is incorporated by reference to Appendix B to the Registrant’s Proxy Statement on Schedule 14A, filed with the SEC on October 31,21, 2005. *
(18) Preferability Letter from PricewaterhouseCoopers LLP, dated March 22,
10(iii)(A)(85)The Interpublic 2006 Performance Incentive Plan (the “2006 PIP”) is incorporated by reference to Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed with the SEC on April 27, 2006. *
10(iii)(A)(86)2006 PIP — Form of Instrument of Performance Shares, is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on June 21, 2006. *
10(iii)(A)(87)2006 PIP — Form of Instrument of Performance Units is incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report onForm 8-K filed with the SEC on June 21, 2006. *
10(iii)(A)(88)2006 PIP — Form of Instrument of Restricted Stock, is incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report onForm 8-K filed with the SEC on June 21, 2006. *
10(iii)(A)(89)2006 PIP — Form of Instrument of Restricted Stock Units, is incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report onForm 8-K filed with the SEC on June 21, 2006. *
10(iii)(A)(90)2006 PIP — Form of Instrument of Nonstatutory Stock Options, is incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report onForm 8-K filed with the SEC on June 21, 2006. *
10(iii)(A)(91)Description of the Change in Compensation for Non-Management Directors.
(12)Supplemental Calculation of Ratio of Earnings to Fixed Charges.
(21) Subsidiaries of the Registrant.
(23)Consent of PricewaterhouseCoopers LLP.
(24) Power of Attorney to signForm 10-K and resolution of Board of Directors re Power of Attorney.
(31.1) Certification dated as of March 22, 2006 and executed by Michael I. Roth, under Section 302 of the Sarbanes-OxleyChief Executive Officer pursuant toRule 13a-14(a) under the Securities Exchange Act of 2002 (“S-OX”).1934, as amended.
(31.2) Certification datedof the Chief Financial Officer pursuant toRule 13a-14(a) under the Securities Exchange Act of 1934, as of March 22, 2006 and executed by Frank Mergenthaler, under Section 302 of S-OX.amended.
(32) Certification dated as of March 22, 2006the Chief Executive Officer and executed by Michael I. Roth and Frank Mergenthaler,the Chief Financial Officer furnished pursuant to 18 U.S.C. Section 9061350 andRule 13a-14(b) under the Securities Exchange Act of S-OX.1934, as amended.
*Management contracts and compensation plans and arrangements.

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