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THE
INTERPUBLIC
GROUP
OF
COMPANIES
2 0 0 5 A N N U A L R E P O R T
A LETTER FROM THE CHAIRMAN
TO OUR SHAREHOLDERS:
There is no doubt that 2005 was a challenging year for our
company.
It was also a year in which we set and accomplished a
number of important goals — such as aggressively addressing
financial controls, as well as shoring up our talent base, across
most all of our major operating units. We believe that our
success in these key areas, along with our ability to harness the
power of our agency brands, will set the stage for a period of
stabilization in 2006 and the achievement of our turnaround
by 2008.
In January of last year, shortly after our Board of Directors
mandated a new management team for the company, we
alerted the market to the extent of material weaknesses in our
company’s internal controls. At that time, we were clear that
our top priority would be to come to grips with the shortcom-
ings in our financial systems. This was a necessary step, not
only to ensure the integrity of our financial results, but
ultimately to break a recurring cycle of accounting errors that
have hampered our company for the past few years.
I firmly believe that an incremental approach is not ade-
quate to addressing such issues. We therefore undertook a
comprehensive review process during much of the year, which
saw us significantly expand internal management work and
external audit activity. This, in turn, led to the restatement we
announced in September. Our review was also notable in that
it reconciled the company’s past practices with the require-
ments faced today by a major, publicly traded multinational.
The new level of transparency to which we have committed
is appropriate so that investors can have confidence in our
results going forward. The changes we are making will also
allow you to better understand our company, track our per-
formance and measure progress against our stated objectives.
As was apparent from our 2005 results, we remain a work in
progress.
2005 RESULTS
Revenue for the year decreased 1.8% to $6.27 billion. Organic
revenue performance was down 0.7%, with a marginal drop in
the United States and poor performance in continental Europe
offset by strength in Latin America and the United Kingdom.
Net divestitures had a negative impact of 1.7% on comparative
year-to-year reported revenue results. This year, we will con-
tinue to divest a number of businesses that are non-strategic,
chronically unprofitable or would never be Sarbanes-Oxley
compliant at reasonable cost. The impact of these divestitures,
coupled with the effect of accounts lost during 2005, results in
T H E I N T E R P U B L I C G R O U P O F C O M PA N I E S
2 0 0 5 A N N U A L R E P O RT 1
our estimate that the company entered 2006 with a revenue
base of approximately $5.9 billion.
needed new talent to bring a spark, or new direction, to
troubled operations.
Salary and related expense increased 7.1% in 2005, to
$4.0 billion. This reflects higher severance associated with
streamlining certain operations and upgrading talent, the
global hiring of finance staff to address weaknesses in the
accounting and control environment, as well as increased
headcount at certain units to support new business. Total
severance for the full-year 2005 was $162.5 million, compared
to $74.6 million in 2004.
Office and general expense also rose, to $2.3 billion, a 1.7%
increase compared to the previous year. Adjusted for currency
and the net effect of divestitures, office and general expenses
increased 5.0%, reflecting a significant increase in professional
fees related to the restatement process and Sarbanes-Oxley
compliance efforts. Professional
totaled
$332.8 million, compared to $238.0 million the previous year.
The effect of a challenged revenue line and extremely high
transitional expenses was evident in our operating results.
Full-year operating loss was $104.2 million, compared to a loss
of $94.4 million in 2004. Net loss narrowed, from $558.2 mil-
lion, or ($1.34) per diluted share a year ago, to $289.2 million,
or ($0.68) per share, for 2005.
in 2005
fees
INVESTING IN OUR FUTURE
The costs associated with our accounting review and with
putting quality financial management into place within many
of our companies were significant. But, 2005 also saw us
significantly strengthen our finance teams and processes, at the
corporate level and within our operating units.
We made major progress in moving from a diffuse, opaque
organization to one that is more cohesive and fully transpar-
ent. The time and costs involved were undeniably large, but we
are a better company for it.
Another equally vital investment took place on the talent
front. Ours has always been an industry in which talent is a key
differentiator. As the media and marketing landscape becomes
more complex and cluttered every day, creativity and innova-
tion are becoming even more important. Yet the acquisition
strategy that Interpublic pursued in the late 1990s and the
period of uncertainty that followed were not conducive to
attracting or developing the industry’s best people. At many of
our agencies, new talent was required to bring the professional
offerings to the level clients demand today. At others, we
2 T H E I N T E R P U B L I C G R O U P O F C O M PA N I E S
2 0 0 5 A N N U A L R E P O RT
This is why the second key priority I set for the organiza-
tion last year was to significantly upgrade both strength and
depth at the top levels of our operating units and at corporate.
Although this also required investment, as apparent in our
high severance costs, I am pleased to say that improving our
talent base is another area in which we made substantial
progress in 2005.
There is a newly-configured senior management team at the
corporate center. We made major upgrades across McCann
and at its marketing services companies. We also have new
senior leadership at our media operations, as well as through-
out fcb and Lowe. All of these are key investments in our
brands and, ultimately, in our ability to grow the top line of
our business — which will be vital for us to achieve our
turnaround.
Early returns on these investments have been encouraging.
As previously indicated, we enter 2006 working against a
headwind from past client losses. But recent developments
demonstrate that we are very much back in the game when it
comes to pursuing and winning business, from both existing
and new clients. The success our agency brands continue to
have in the marketplace is testament to the strength of the
management teams we now have in place at these operating
units. It also speaks to their ability to put together the right
combination of talent, capabilities, strategic insight and crea-
tivity so as to deliver results for clients — and for Interpublic.
LOOKING FORWARD
During 2005, we made significant progress in clearing away
historical problems and laying a solid foundation for future
growth.
We successfully got up-to-date with our financial filings and
improved both our financial
leadership and reporting
processes. We stayed true to our conservative approach to
financial management, which is appropriate given the early
stage at which we find ourselves in our recovery. We continued
to attract top talent into the company, across many of our
operating units. And we have a new management team at the
corporate center.
This team brings a new commitment to breaking down
operating silos and adopting an ‘‘open architecture’’ model.
This will enhance our ability to meet clients’ market-
ing needs by allowing us to use all our resources — regardless
of where they reside within the company — to provide seam-
less, integrated business solutions. Our new management is
also fully focused on integrity and transparency, which are
vital for a professional services firm seeking to build more
open and higher-value partnerships with clients in a fast-
changing consumer and media environment.
As we look forward, we will be working to deliver on what I
call ‘‘the 21st century service contract.’’ Clients are increas-
ingly telling agencies that they must move beyond a business-
as-usual approach to marketing services. That all of our
companies must deliver programs which reach the empowered
consumer, embrace digital forms of communication, quantify
return on investment and share in accountability for results.
For Interpublic, these trends represent a significant oppor-
tunity. We have all of the assets necessary to win in the
evolving marketplace — including strong global agency net-
works, exceptional public relations, one-to-one and digital
marketing agencies and unique offerings in events, sports and
entertainment marketing.
The steps we took last year to place Interpublic on solid
footing, combined with our strong agency brands and a major
infusion of talent, position us to once again become a recog-
nized leader in marketing services. This, in turn, will allow us
to convert our renewed competitive vitality into enhanced
shareholder value.
Sincerely,
Michael I. Roth
Chairman and Chief Executive Officer
T H E I N T E R P U B L I C G R O U P O F C O M PA N I E S
2 0 0 5 A N N U A L R E P O RT 3
BOARD OF DIRECTORS
EXECUTIVE OFFICERS
CORPORATE HEADQUARTERS
FORM 10-K
MICHAEL I. ROTH
Chairman &
Chief Executive Officer
1114 Avenue of the Americas
New York, NY 10036
(212) 704-1200
NICHOLAS J. CAMERA
Senior Vice President,
General Counsel and Secretary
CHRISTOPHER CARROLL
Senior Vice President, Controller
and Chief Accounting Officer
ALBERT S. CONTE
Senior Vice President,
Taxes and General Tax Counsel
THOMAS A. DOWLING
Senior Vice President, Chief Risk
Officer
STEPHEN J. GATFIELD
Executive Vice President,
Network Operations
Chief Executive Officer,
Lowe Worldwide
PHILIPPE KRAKOWSKY
Executive Vice President,
Strategy and Corporate Relations
FRANK MERGENTHALER
Executive Vice President,
Chief Financial Officer
TIMOTHY A. SOMPOLSKI
Executive Vice President,
Chief Human Resources Officer
TRANSFER AGENT & REGISTRAR
FOR COMMON STOCK
Mellon Investor Services, LLC
Newport Office Center VII
480 Washington Boulevard
Jersey City, NJ 07310
Stock of The Interpublic Group
of Companies, Inc., is traded on
the New York Stock Exchange
At February 28, 2006, there were
43,701 stockholders of record.
ANNUAL MEETING
The annual meeting will be held on
May 25, 2006 at 9:30 am at:
The McGraw Hill Building
1221 Avenue of the Americas
New York, NY 10020
AUTOMATIC DIVIDEND
REINVESTMENT PLAN
An Automatic Dividend
Reinvestment Plan is offered to all
stockholders of record. The Plan,
which is administered by Mellon
Investor Services, provides a way to
acquire additional shares of
Interpublic Common Stock in a
systematic and convenient manner
that affords savings in commissions
for most stockholders. Those
interested in participating in this
plan are invited to write for details
and an authorization form to:
Mellon Investor Services
Attn: Shareholder Relations
P.O. Box 3338
South Hackensack
NJ 07606-1917
A copy of the Company’s annual
report (Form 10-K) to the Securities
and Exchange Commission may be
obtained without charge by writing to:
Nicholas J. Camera,
Senior Vice President,
General Counsel & Secretary,
The Interpublic Group of
Companies, Inc.
1114 Avenue of the Americas
New York, NY 10036
Exhibits to the annual report will also
be furnished, but will be sent only
upon payment of the Company’s
reasonable expense in furnishing them.
STOCK OWNER INTERNET
ACCOUNT ACCESS
Stock owners of record may access
their account via the Internet. By
accessing their account they may view
share balances, obtain current market
price of shares, historical stock prices,
and the total value of their
investment. In addition, they may sell
or request issuance of dividend and
cash investment plan shares.
For information on how to access this
secure site, please call Mellon Investor
Services toll free at (800) 522-6645, or
visit www.melloninvestor.com
Outside the US, call (201) 680-6578
For hearing impaired: (800) 231-5469
E-MAIL: shrrelations@mellon.com
INTERNET: www.melloninvestor.com
For more information regarding The
Interpublic Group of Companies, visit
its Web site at www.interpublic.com.
MICHAEL I. ROTH
(2002) 3
Chairman &
Chief Executive Officer
FRANK J. BORELLI
(1995) 3
Presiding Director
Senior Advisor,
Retired Chief Financial
Officer & Director,
Marsh & McLennan
Companies, Inc.
REGINALD K. BRACK
(1996) 2, 3, 5
Former Chairman &
Chief Executive Officer,
Time, Inc.
JILL M. CONSIDINE
(1997) 4, 5
Chairman &
Chief Executive Officer,
The Depository Trust
& Clearing Corporation
RICHARD A. GOLDSTEIN
(2001) 1, 4, 5
Chairman & Chief
Executive Officer,
International Flavors &
Fragrances Inc.
H. JOHN GREENIAUS
(2001) 1, 2, 4
Former Chairman &
Chief Executive Officer,
Nabisco, Inc.
J. PHILLIP SAMPER
(1990) 1, 2, 5
Managing Director,
Gabriel Venture Partners
DAVID M. THOMAS
(2004) 1, 5
Chairman & Chief
Executive Officer,
IMS Health Inc.
(Year Elected)
1 Audit Committee
2 Compensation Committee
3 Executive Policy Committee
4 Finance Committee
5 Corporate Governance Committee
4 T H E I N T E R P U B L I C G R O U P O F C O M PA N I E S
2 0 0 5 A N N U A L R E P O RT
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
¥
ANNUAL REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
Commission file number 1-6686
THE INTERPUBLIC GROUP OF COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
State or other jurisdiction of
incorporation or organization
13-1024020
(I.R.S. Employer
Identification No.)
1114 Avenue of the Americas, New York, New York 10036
(Address of principal executive offices) (Zip Code)
(212) 704-1200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $0.10 par value
53/8% Series A Mandatory Convertible Preferred Stock, no par
value
New York Stock Exchange
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Securities Registered Pursuant to Section 12(g) of the Act: None
Act.
Yes n
No ¥
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.
No ¥
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Yes n
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 ¥
No n
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Û229.405 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.
n
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of ""accelerated filer and large accelerated filer'' in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Large accelerated filer ¥
Accelerated filer n
Non-accelerated filer n
Act).
Yes n
No ¥
As of June 30, 2005, the aggregate market value of the shares of registrant's common stock held by non-affiliates was
$5,201,493,786. The number of shares of the registrant's common stock outstanding as of February 28, 2006 was 436,029,334.
DOCUMENTS INCORPORATED BY REFERENCE
The following sections of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 25, 2006 are
incorporated by reference in Part III: ""Election of Directors,'' ""Corporate Governance Practices and Board Matters,''
""Section 16(a) Beneficial Ownership Reporting Compliance,'' ""Compensation of Executive Officers,'' ""Report of the
Compensation Committee of the Board of Directors,'' ""Outstanding Shares,'' ""Related Party Transactions'' and ""Appointment
of Independent Auditors.''
TABLE OF CONTENTS
PART I.
Business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 1.
Item 1A. Risk Factors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 1B. Unresolved Staff Comments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 2.
Legal Proceedings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 3.
Submission of Matters to a Vote of Security Holders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 4.
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 6.
Selected Financial Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsÏÏ
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Financial Statements and Supplementary Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 8.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and ProceduresÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 9B. Other Information ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PART III.
Item 10. Directors and Executive Officers of Interpublic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 11. Executive Compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 12.
Security Ownership of Certain Beneficial Owners and Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 13. Certain Relationships and Related Transactions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Principal Accountant Fees and ServicesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 14.
Page
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5
9
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15
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83
84
173
173
173
174
174
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174
174
Item 15. Exhibits and Financial Statements Schedule ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
175
PART IV.
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.
i
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
This annual report on Form 10-K contains forward-looking statements. Statements in this report that
are not historical facts, including statements about management's beliefs and expectations, constitute
forward-looking statements. These statements are based on current plans, estimates and projections, and
are subject to change based on a number of factors, including those outlined in this report under Item 1A,
Risk Factors. Forward-looking statements speak only as of the date they are made, and we undertake no
obligation to update publicly any of them in light of new information or future events.
Forward-looking statements involve inherent risks and uncertainties. A number of important factors
could cause actual results to differ materially from those contained in any forward-looking statement. Such
factors include, but are not limited to, the following:
‚ risks arising from material weaknesses in our internal control over financial reporting, including
material weaknesses in our control environment;
‚ potential adverse effects to our financial condition, results of operations or prospects as a result of
our restatements of financial statements;
‚ our ability to satisfy covenants under our credit facilities;
‚ our ability to satisfy certain reporting covenants under our indentures;
‚ our ability to attract new clients and retain existing clients;
‚ our ability to retain and attract key employees;
‚ risks associated with assumptions we make in connection with our critical accounting estimates;
‚ potential adverse effects if we are required to recognize additional impairment charges or other
adverse accounting-related developments;
‚ potential adverse developments in connection with the ongoing Securities and Exchange
Commission (""SEC'') investigation;
‚ potential downgrades in the credit ratings of our securities;
‚ risks associated with the effects of global, national and regional economic and political conditions,
including with respect to fluctuations in interest rates and currency exchange rates; and
‚ developments from changes in the regulatory and legal environment for advertising and marketing
and communications services companies around the world.
Investors should carefully consider these factors and the additional risk factors outlined in more detail
in Item 1A, Risk Factors, in this report.
AVAILABLE INFORMATION
Information regarding our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and any amendments to these reports, will be made available, free of charge, at our
website at http://www.interpublic.com, as soon as reasonably practicable after we electronically file such
reports with, or furnish them to, the SEC. Any document that we file with the SEC may also be read and
copied at the SEC's Public Reference Room located at Room 1580, 100 F Street, N.E., Washington,
DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room.
Our filings are also available to the public from the SEC's website at http://www.sec.gov, and at the
offices of the New York Stock Exchange (""NYSE''). For further information on obtaining copies of our
public filings at the NYSE, please call (212) 656-5060.
Our Corporate Governance Guidelines, Code of Conduct and each of the charters for the Audit
Committee, Compensation Committee and the Corporate Governance Committee are available free of
charge on our website at http://www.interpublic.com, or by writing to The Interpublic Group of
Companies, Inc., 1114 Avenue of the Americas, New York, New York 10036, Attention: Secretary.
ii
Item 1. Business
PART I
The Interpublic Group of Companies, Inc. was incorporated in Delaware in September 1930 under
the name of McCann-Erickson Incorporated as the successor to the advertising agency businesses founded
in 1902 by A.W. Erickson and in 1911 by Harrison K. McCann. The Company has operated under the
Interpublic name since January 1961.
Our Client Offerings
The Interpublic Group of Companies, Inc., together with its subsidiaries (the ""Company'',
""Interpublic'', ""we'', ""us'' or ""our''), is one of the world's largest advertising and marketing services
companies, comprised of hundreds of communication agencies around the world that deliver custom
marketing solutions on behalf of our clients. Our agencies cover the spectrum of marketing disciplines and
specialties, from traditional services such as consumer advertising and direct marketing, to services such as
experiential marketing and branded entertainment. With offices in over 100 countries and approximately
43,000 employees, our agencies work with our clients to create global and local marketing campaigns.
These marketing programs seek to build brands, influence consumer behavior and sell products.
To meet the challenge of an increasingly complex consumer culture, we create customized marketing
solutions for each of our clients. Engagements between clients and agencies fall into five basic categories,
or models. In the single-discipline model, clients work directly with one agency in one discipline. The
project collaboration model is employed when sister agencies are brought in on a project basis as a client's
needs expand. In the integrated agency-of-record model, a multi-disciplinary agency provides a fuller range
of marketing services for a client. The lead company model is applied when a lead agency manages the
work at several of our agencies. Finally, in the virtual network model, clients have a representative at the
holding company level to oversee the fullest range of our marketing spectrum.
While our agencies work on behalf of our clients using one of these models, we provide resources and
support to ensure that our agencies can best meet our clients' needs. Based in New York City, the holding
company sets company-wide financial objectives, directs collaborative inter-agency programs, establishes
fiscal management and operational controls, guides personnel policy, conducts investor relations and
initiates, manages and approves mergers and acquisitions. In addition, it provides limited centralized
functional services that offer our companies some operational efficiencies, including accounting and
finance, marketing information retrieval and analysis, legal services, real estate expertise, recruitment aid,
employee benefits and executive compensation management.
Our Disciplines and Agencies
We have hundreds of specialized agencies. The following is a sample of some of our brands.
Our global networks offer our largest clients a full range of marketing and communications services.
Combined, their footprint spans over 100 countries:
‚ McCann Erickson Worldwide
‚ Foote Cone & Belding Worldwide
‚ Lowe Worldwide
We have many full-service marketing agencies whose distinctive resources provide clients with multi-
disciplinary communication services:
‚ Campbell-Ewald
‚ Carmichael Lynch
‚ Deutsch
1
‚ Hill Holliday
‚ Mullen
We also have many domestic advertising agencies that provide North American clients with
traditional services in print and broadcast media:
‚ Avrett Free & Ginsberg
‚ Campbell Mithun
‚ Dailey & Associates
‚ Gillespie
‚ Gotham
‚ Jay Advertising
‚ Tierney Communications
‚ TM Advertising
Our one-to-one marketing companies specialize in using a full range of digital, interactive and
traditional media services to communicate directly with consumers in relevant and innovative ways:
‚ Draft Worldwide
‚ FCBi
‚ MRM Partners Worldwide
‚ The Hacker Group
‚ R/GA
The worldwide leader in experiential marketing, Jack Morton Worldwide, is part of our group. Jack
Morton creates interactive experiences whose goal is to improve performance, increase sales and build
brand recognition. The agency produces meetings and events, environmental design, exhibits, digital media
and learning programs.
Our media offering addresses changes in today's fragmented media landscape, with capabilities in
planning, research, negotiating and buying, as well as media research, product placement and
programming. Our major media agencies are:
‚ Initiative
‚ MAGNA Global
‚ Universal McCann
To help activate consumer demand, our promotion agencies offer clients a range of options, including
sweepstakes, incentive programs, sampling opportunities and trade programming:
‚ Marketing Drive
‚ Momentum
‚ The Properties Group
‚ Zipatoni
2
Our public relations agencies offer such worldwide services as consumer PR, corporate communica-
tions, crisis management, web relations and investor relations:
‚ DeVries
‚ Golin Harris
‚ MWW Group
‚ Weber Shandwick
We also have special marketing services agencies that we believe are best-in-class for their niche
markets:
‚ Marketing Accountability Practice (marketing accountability/ROI)
‚ frank about women (women's marketing)
‚ KidCom (youth marketing)
‚ NAS (recruitment)
‚ Newspaper Services of America (newspaper services)
‚ OSI (outdoor advertising)
‚ Wahlstrom Group (yellowpages)
‚ Women2Women Communications (women's marketing)
‚ FutureBrand (corporate identity and branding)
Our sports and entertainment marketing firms manage top athletes and sporting events and represent
some of the world's most-recognized celebrities:
‚ Bragman Nyman Cafarelli
‚ Octagon
‚ PMK/HBH
‚ Rogers & Cowan
Our affiliated multicultural agency partners, in which we own a minority interest, target specific
demographic segments:
‚ Accent Marketing (Hispanic)
‚ Casanova Pendrill (Hispanic)
‚ IW Group (Asian-Pacific-American)
‚ SiboneyUSA (Hispanic)
Interpublic maintains separate agency brands to manage the broadest range of clients, even ones that
operate in similar business areas. Having distinct agencies allows us to avoid potential conflicts of interest
among our clients in the same industry. To help manage these companies effectively, however, we have
organized our agencies into five global operating divisions. Four of these divisions, McCann WorldGroup
(""McCann''), The FCB Group (""FCB''), Lowe Worldwide (""Lowe'') and Draft Worldwide (""Draft''),
provide a distinct comprehensive array of global communications and marketing services. The fifth global
operating division, The Constituency Management Group (""CMG''), which includes Weber Shandwick,
MWW Group, FutureBrand, DeVries, Golin Harris, Jack Morton and Octagon Worldwide (""Octagon''),
provides clients with diversified services, including public relations, meeting and event production, sports
and entertainment marketing, corporate and brand identity and strategic marketing consulting.
3
A group of leading stand-alone agencies provide clients with a full range of advertising and marketing
services. These agencies partner with our global operating groups as needed, and include Campbell-Ewald,
Hill Holliday, Deutsch and Mullen.
We believe this organizational structure allows us to provide comprehensive solutions for clients and
enables stronger financial and operational growth opportunities. We practice a decentralized management
style, providing agency management with a great deal of operational autonomy.
Our Financial Reporting Segments
As of December 31, 2005, for financial reporting purposes we have three reportable segments. The
largest segment, Integrated Agency Networks (""IAN''), is comprised of McCann, FCB, Lowe, Draft, our
media agencies, and our leading stand-alone agencies. CMG comprises our second reportable segment.
Our third reportable segment is comprised of our Motorsports operations (""Motorsports''), which were
sold during 2004 and had immaterial residual operating results in 2005. See Note 20 to the Consolidated
Financial Statements for further discussion.
Principal Markets
Our agencies are located in over 100 countries and in every significant world market. We provide
services for clients whose businesses are broadly international in scope, as well as for clients whose
businesses are limited to a single country or a small number of countries. The United States (""U.S.''),
Europe (excluding the United Kingdom (""UK'')), the UK, Asia Pacific and Latin America represented
55.2%, 18.1%, 9.9%, 7.5% and 4.1% of our total revenue, respectively, in 2005. For further discussion
concerning revenues and long-lived assets on a geographical basis for each of the last three years, see
Note 20 to the Consolidated Financial Statements.
Sources of Revenue
Our revenues are primarily derived from the planning and execution of advertising programs in various
media and the planning and execution of other marketing and communications programs. Most of our
client contracts are individually negotiated. Accordingly, the terms of client engagements and the basis on
which we earn commissions and fees vary significantly. Our client contracts are becoming increasingly
complex arrangements that frequently include provisions for incentive compensation and govern vendor
rebates and credits. Our largest clients are multinational entities and we often provide services to these
clients out of multiple offices and across various agencies. In arranging for such services to be provided, we
may enter into global, regional and local agreements. Multiple agreements of this nature are reviewed by
legal counsel to determine the governing terms to be followed by the offices and agencies involved.
Revenues for creation, planning and placement of advertising are primarily determined on a negotiated
fee basis and, to a lesser extent, on a commission basis. Fees are usually calculated to reflect hourly rates
plus proportional overhead and a mark-up. Many clients include an incentive compensation component in
their total compensation package. This provides added revenue based on achieving mutually agreed-upon
qualitative and/or quantitative metrics within specified time periods. Commissions are earned based on
services provided, and are usually derived from a percentage or fee over the total cost to complete the
assignment. Commissions can also be derived when clients pay us the gross rate billed by media and we
pay for media at a lower net rate; the difference is the commission that we earn, which is either retained
in total or shared with the client depending on the nature of the services agreement.
We pay media charges with respect to contracts for advertising time or space that we place on behalf
of our clients. To reduce our risk from a client's non-payment, we typically pay media charges only after
we receive funds from our clients. Generally, we act as the client's agent rather than the primary obligor.
In some instances we agree with the media provider that we will only be liable to pay the media after the
client has paid us for the media charges.
4
We also generate revenue in negotiated fees from our public relations, sales promotion, event
marketing, sports and entertainment marketing and corporate and brand identity services.
Our revenue is directly dependent upon the advertising, marketing and corporate communications
requirements of our clients and tends to be higher in the second half of the calendar year as a result of the
holiday season and lower in the first half as a result of the post-holiday slow-down in client activity.
Depending on the terms of the client contract, fees for services performed can be primarily recognized
three ways: proportional performance, straight-line (or monthly basis) or completed contract. Fee revenue
recognized on a completed contract basis also contributes to the higher seasonal revenues experienced in
the fourth quarter due to the majority of our contracts ending at December 31. As is customary in the
industry, these contracts provide for termination by either party on relatively short notice, usually 90 days.
See Note 1 to the Consolidated Financial Statements for further discussion of our revenue recognition
accounting policies.
Clients
In the aggregate, our top ten clients based on revenue accounted for approximately 24.7% and 23.5%
of revenue in 2005 and 2004, respectively. Based on revenue for the year ended December 31, 2005, our
largest clients were General Motors Corporation, Microsoft, Unilever, Johnson & Johnson, and Verizon.
While the loss of the entire business of any one of our largest clients might have a material adverse effect
upon our business, we believe that it is unlikely that the entire business of any of these clients would be
lost at the same time. This is because we represent several different brands or divisions of each of these
clients in a number of geographic markets, as well as provide services across multiple advertising and
marketing disciplines, in each case through more than one of our agency systems. Representation of a
client rarely means that we handle advertising for all brands or product lines of the client in all
geographical locations. Any client may transfer its business from one of our agencies to a competing
agency, and a client may reduce its marketing budget at any time.
Personnel
As of December 31, 2005, we employed approximately 43,000 persons, of whom approximately 18,000
were employed in the U.S. Because of the personal service character of the advertising and marketing
communications business, the quality of personnel is of crucial importance to our continuing success.
There is keen competition for qualified employees.
Item 1A. Risk Factors
We are subject to a variety of possible risks that could adversely impact our revenues, results of
operations or financial condition. Some of these risks relate to the industry in which we operate, while
others are more specific to us. The following factors set out potential risks we have identified that could
adversely affect us. See also Statement Regarding Forward-Looking Disclosure.
‚ We have numerous material weaknesses in our internal control over financial reporting.
We have identified numerous material weaknesses in our internal control over financial reporting, and
our internal control over financial reporting was not effective as of December 31, 2005. For a detailed
description of these material weaknesses, see Item 8, Management's Assessment on Internal Control Over
Financial Reporting, of our Form 10-K. Each of our material weaknesses results in more than a remote
likelihood that a material misstatement will not be prevented or detected. As a result, we must perform
extensive additional work to obtain reasonable assurance regarding the reliability of our financial
statements. Given the extensive material weaknesses identified, even with this additional work there is a
risk of errors not being prevented or detected, which could result in further restatements.
5
‚ We have extensive work remaining to remedy the material weaknesses in our internal control over
financial reporting.
Because of our decentralized structure and our many disparate accounting systems of varying quality
and sophistication, we have extensive work remaining to remedy our material weaknesses in internal
control over financial reporting. We are in the process of developing a work plan for remedying all of the
identified material weaknesses, and this work will extend beyond 2006. There can be no assurance as to
when the remediation plan will be completed or when the material weaknesses will be remedied. There
will also continue to be a serious risk that we will be unable to file future periodic reports with the SEC in
a timely manner, that a default could result under the indentures governing our debt securities or under
our three-year revolving credit agreement (the ""Three-Year Revolving Credit Facility'') or credit facilities
of our subsidiaries and that our future financial statements could contain errors that will be undetected.
‚ We face substantial ongoing costs associated with complying with the requirements of Section 404
of the Sarbanes-Oxley Act.
As a result of the extent of the deficiencies in our internal control over financial reporting, we
incurred significant professional fees and other expenses in 2005 to prepare our consolidated financial
statements and to comply with the requirements of Section 404 of the Sarbanes-Oxley Act. Until our
remediation is completed, we will continue to incur the expenses and management burdens associated with
the manual procedures and additional resources required to prepare our consolidated financial statements.
The cost of this work will continue to be significant in 2006 and beyond.
‚ We have restated our financial statements.
We may continue to suffer adverse effects from the restatement of previously issued financial
statements that we presented in our annual report on Form 10-K for the year ended December 31, 2004,
as amended (the ""2004 Form 10-K''). In the 2004 Form 10-K, we restated our previously reported
financial statements for the years ended December 31, 2003, 2002, 2001 and 2000, and for the first three
quarters of 2004 and all four quarters of 2003 (the ""Prior Restatement''). In this report, we have restated
the financial data for the first three quarters of 2005.
As a result of these matters, we have recorded liabilities for vendor discounts and other obligations
that will necessitate cash settlement that may negatively impact our cash flow in future years. We may
also become subject to fines or other penalties or damages in our ongoing SEC investigation or new
regulatory actions or civil litigation. Any of these matters may also contribute to further ratings
downgrades, negative publicity and difficulties in attracting and retaining key clients, employees and
management personnel.
‚ Ongoing SEC investigations regarding our accounting restatements could adversely affect us.
The SEC opened a formal investigation in response to the restatement we first announced in August
2002 and, as previously disclosed, the SEC staff's investigation has expanded to encompass our Prior
Restatement. In particular, since we filed our 2004 Form 10-K, we have received subpoenas from the SEC
relating to matters addressed in our Prior Restatement. We continue to cooperate with the investigation.
We expect that the investigation will result in monetary liability, but because the investigation is ongoing,
in particular with respect to the Prior Restatement, we cannot reasonably estimate either the timing of a
resolution or the amount. Accordingly, we have not yet established any accounting provision relating to
these matters. Potential adverse developments in connection with the investigation, including any expansion
of the scope of the investigation, could also negatively impact us and could divert the efforts and attention
of our management team from our ordinary business operations.
‚ We operate in a highly competitive industry.
The marketing communications business is highly competitive. Our agencies and media services must
compete with other agencies, and with other providers of creative or media services, in order to maintain
existing client relationships and to win new clients. The client's perception of the quality of an agency's
creative work, our reputation and the agencies' reputations are important factors in determining our
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.
‚ As a marketing services company, our revenues are highly susceptible to declines as a result of
unfavorable economic conditions.
Economic downturns often more severely affect the marketing services industry than other industries.
In the past, some clients have responded to weak economic performance in any region where we operate
by reducing their marketing budgets, which are generally discretionary in nature and easier to reduce in
the short-term than other expenses related to operations. This pattern may recur in the future.
‚ Our liquidity profile has recently been adversely affected.
In recent periods we have experienced operating losses that have adversely affected our cash flows
from operations. We have recorded liabilities and incurred substantial professional fees in connection with
the Prior Restatement. It is also possible that we will be required to pay fines or other penalties or
damages in connection with the ongoing SEC investigation or future regulatory actions or civil litigation.
These items have impacted and will impact our liquidity in future years negatively and could require us to
seek new or additional sources of liquidity to fund our working capital needs. There can be no guarantee
that we would be able to access any such new sources of new liquidity on commercially reasonable terms
or at all. If we are unable to do so, our liquidity position could be adversely affected.
‚ Downgrades of our credit ratings could adversely affect us.
Our long-term debt is currently rated B° with negative outlook by Standard and Poor's, Ba1 with
negative outlook by Moody's, and B° with stable outlook by Fitch. It is possible that our credit ratings
will be reduced further. Ratings downgrades or comparatively weak ratings can adversely affect us, because
ratings are an important factor influencing our ability to access capital. Our clients and vendors may also
consider our credit profile when negotiating contract terms, and if they were to change the terms on which
they deal with us, it could have a significant adverse affect on our liquidity.
‚ If some of our clients experience financial distress, their weakened financial position could
negatively affect our own financial position and results.
We have a large and diverse client base and at any given time, one or more of our clients may
experience financial distress, file for bankruptcy protection or go out of business. If any client with whom
we have a substantial amount of business experiences financial difficulty, it could delay or jeopardize the
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- Clients.
‚ International business risks could adversely affect our operations.
International revenues represent a significant portion of our revenues, approximately 45% in 2005. Our
international operations are exposed to risks that affect foreign operations of all kinds, including local
legislation, monetary devaluation, exchange control restrictions and unstable political conditions. These
risks may limit our ability to grow our business and effectively manage our operations in those countries.
In addition, because a high level of our revenues and expenses is denominated in currencies other than the
U.S. dollar, primarily the Euro and Pound Sterling, fluctuations in exchange rates between the U.S. dollar
and such currencies may materially affect our financial results.
‚ In 2005 and prior years, we recognized impairment charges and increased our deferred tax valuation
allowances, and we may be required to record additional charges in the future related to these matters.
We evaluate all of our long-lived assets (including goodwill, other intangible assets and fixed assets),
investments and deferred tax assets for possible impairment or realizability at least annually and whenever
there is an indication of impairment or lack of realizability. If certain criteria are met, we are required to
record an impairment charge or valuation allowance. In the past, we have recorded substantial amounts of
goodwill, investment and other impairment charges, and have been required to establish substantial
valuation allowances with respect to deferred tax assets and loss carry-forwards.
As of December 31, 2005, we have substantial amounts of intangibles, investments and deferred tax
assets on our Consolidated Balance Sheet. Future events, including our financial performance and strategic
decisions, could cause us to conclude that further impairment indicators exist and that the asset values
associated with intangibles, investments and deferred tax assets may have become impaired. Any resulting
impairment loss would have an adverse impact on our reported earnings in the period in which the charge
is recognized. In connection with the U.S. deferred tax assets, management believes that it is more likely
than not that a substantial amount of the deferred tax assets will be realized; a valuation allowance has
been established for the remainder. The amount of the deferred tax assets considered realizable, however,
could be reduced in the near term if estimates of future U.S. taxable income are lower than anticipated.
‚ We are subject to certain restrictions and must meet certain minimum financial covenants under our
Three-Year Revolving Credit Facility.
Our Three-Year Revolving Credit Facility contains covenants that limit our operational flexibility and
require us to meet specified financial ratios. The Three-Year Revolving Credit Facility does not permit us
(i) to make cash acquisitions in excess of $50.0 million until October 2006, or thereafter in excess of
$50.0 million until expiration of the agreement in May 2007, subject to increases equal to the net cash
proceeds received in the applicable period from any disposition of assets; (ii) to make capital expenditures in
excess of $210.0 million annually; (iii) to repurchase or to declare or pay dividends on our capital stock
(except for any convertible preferred stock, convertible trust preferred instrument or similar security, which
includes our outstanding 5.375% Series A Mandatory Convertible Preferred Stock and our 5.25% Series B
Cumulative Convertible Perpetual Preferred Stock), except that we may repurchase our capital stock in
connection with the exercise of options by our employees or with proceeds contemporaneously received from an
issue of new shares of our capital stock; and (iv) to incur new debt at our subsidiaries, other than unsecured
debt incurred in the ordinary course of business of our subsidiaries outside the U.S. and unsecured debt, which
may not exceed $10.0 million in the aggregate, incurred in the ordinary course of business of our
U.S. subsidiaries. Under the Three-Year Revolving Credit Facility, we are also subject to financial covenants
with respect to our interest coverage ratio, debt to EBITDA ratio and minimum EBITDA.
We have in the past been required to seek and successfully have obtained amendments and waivers of
the financial covenants under our committed bank facility. There can be no assurance that we will be in
compliance with these covenants in future periods. If we do not comply and are unable to obtain the
necessary amendments or waivers at that time, we would be unable to borrow or obtain additional letters
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 19 years. Certain leases
are subject to rent reviews or contain escalation clauses, and certain of our leases require the payment of
various operating expenses, which may also be subject to escalation. Physical properties include leasehold
improvements, furniture, fixtures and equipment located in our offices. We believe that facilities leased or
owned by us are adequate for the purposes for which they are currently used and are well maintained. See
Note 21 to the Consolidated Financial Statements for a discussion of our lease commitments.
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 Prior
Restatement. In particular, since we filed our 2004 Form 10-K, we have received subpoenas from the SEC
relating to matters addressed in our Prior Restatement. We continue to cooperate with the investigation.
We expect that the investigation will result in monetary liability, but because the investigation is ongoing,
in particular with respect to the Prior Restatement, we cannot reasonably estimate either the timing of a
resolution or the amount. Accordingly, we have not yet established any accounting provision relating to
these matters.
Item 4. Submission of Matters to a Vote of Security Holders
This item is answered in respect of the Annual Meeting of Stockholders held on November 14, 2005
(the ""Annual Meeting''). At the Annual Meeting, the following number of votes were cast with respect to
each matter voted upon:
Proposal to approve Management's nominees for director as follows:
Nominee
For
Withheld
Broker Nonvotes
Frank J. Borelli ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Reginald K. Brack ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Jill M. Considine ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Richard A. Goldstein ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
H. John Greeniaus ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Michael I. Roth ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
J. Phillip Samper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
David M. ThomasÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
311,766,433
315,032,540
315,037,081
339,686,209
339,976,351
337,559,779
336,415,059
339,228,386
59,959,629
56,693,522
56,688,981
32,039,853
31,749,711
34,166,283
35,311,003
32,497,676
0
0
0
0
0
0
0
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) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
60
Nicholas J. Camera ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
59
Albert S. ConteÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
55
Nick Cyprus ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
52
Thomas A. Dowling ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stephen Gatfield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
54
47
Philippe Krakowsky ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
43
Frank Mergenthaler ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
45
Timothy SompolskiÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
53
Chairman of the Board and Chief Executive
Officer
Senior Vice President, General Counsel and
Secretary
Senior Vice President, Taxes and General Tax
Counsel
Senior Vice President, Controller and Chief
Accounting Officer
Senior Vice President, Chief Risk Officer
Executive Vice President, Network Operations,
Chief Executive Officer of Lowe Worldwide
Executive Vice President, Strategy and
Corporate Communications
Executive Vice President and Chief Financial
Officer
Executive Vice President, Chief Human
Resources Officer
(1) Also a Director
There is no family relationship among any of the executive officers.
Mr. Roth became our Chairman of the Board and Chief Executive Officer, effective January 19,
2005. Prior to that time, Mr. Roth served as our Chairman of the Board from July 13, 2004 to January
2005. Mr. Roth served as Chairman and Chief Executive Officer of The MONY Group Inc. from
February 1994 to June 2004. Mr. Roth has been a member of the Board of Directors of Interpublic since
February 2002. He is also a director of Pitney Bowes Inc. and Gaylord Entertainment Company.
Mr. Camera was hired in May 1993. He was elected Vice President, Assistant General Counsel and
Assistant Secretary in June 1994, Vice President, General Counsel and Secretary in December 1995, and
Senior Vice President, General Counsel and Secretary in February 2000.
Mr. Conte was hired in March 2000 as Senior Vice President, Taxes and General Tax Counsel. Prior
to joining us, Mr. Conte served as Vice President, Senior Tax Counsel for Revlon Consumer Products
Corporation from September 1987 to February 2000.
Mr. Cyprus was hired in May 2004 as Senior Vice President, Controller and Chief Accounting
Officer. Prior to joining us, Mr. Cyprus served as Vice President and Controller of AT&T from January
1999 to May 2004. On March 22, 2006, we announced that Mr. Cyprus would be leaving the Company
effective March 31, 2006.
Mr. Dowling was hired in January 2000 as Vice President and General Auditor. He was elected
Senior Vice President, Financial Administration of Interpublic in February 2001, and Senior Vice
President, Chief Risk Officer in November 2002. Prior to joining us, Mr. Dowling served as Vice President
and General Auditor for Avon Products, Inc. from April 1992 to December 1999.
Mr. Gatfield was hired in April 2004 as Executive Vice President, Global Operations and Innovation.
He was elected Executive Vice President, Strategy and Network Operations in December 2005, and in
February 2006 was also named Chief Executive Officer of Lowe Worldwide. Prior to joining us, he served
as Chief Operating Officer from 2001 to 2004 and as Regional Managing Director for the Asia Pacific
region from 1997 to 2000 for Leo Burnett Worldwide.
11
Mr. Krakowsky was hired in January 2002 as Senior Vice President, Director of Corporate
Communications. He was elected Executive Vice President, Strategy and Corporate Relations in
December 2005. Prior to joining us, he served as Senior Vice President, Communications Director for
Young & Rubicam from August 1996 to December 2000. During 2001, Mr. Krakowsky was complying
with the terms of a non-competition agreement entered into with Young & Rubicam.
Mr. Mergenthaler was hired in August 2005 as Executive Vice President and Chief Financial Officer.
Prior to joining us, he served as Executive Vice President and Chief Financial Officer for Columbia House
Company from July 2002 to July 2005. Mr. Mergenthaler served as Senior Vice President and Deputy
Chief Financial Officer for Vivendi Universal from December 2001 to March 2002. Prior to that time
Mr. Mergenthaler was an executive at Seagram Company Ltd. from November 1996 to December 2001.
Mr. Sompolski was hired in July 2004 as Executive Vice President, Chief Human Resources Officer.
Prior to joining us, he served as Senior Vice President of Human Resources and Administration for Altria
Group from November 1996 to January 2003.
12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Price Range of Common Stock
Our common stock is listed and traded on the New York Stock Exchange (""NYSE'') under the
symbol ""IPG.'' The following table provides the high and low closing sales prices per share for the periods
shown below as reported on the NYSE. At February 28, 2006, there were 43,701 registered holders of our
common stock.
Period
2005:
Fourth Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Third Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Second Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
First QuarterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004:
Fourth Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Third Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Second Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
First QuarterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
NYSE Sale Price
Low
High
$11.75
$12.67
$13.28
$13.68
$13.50
$13.62
$16.43
$17.19
$ 9.14
$11.04
$12.11
$11.50
$10.95
$10.51
$13.73
$14.86
Dividend Policy
No dividend was paid on our common stock during 2003, 2004, or 2005. Our future dividend policy
will be determined on a quarter-by-quarter basis and will depend on earnings, financial condition, capital
requirements and other factors. The current terms of our Three-Year Revolving Credit Facility limit our
ability to declare and pay dividends. For a discussion of the restrictions under our Three-Year Revolving
Credit Facility, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of
Operations Ì Liquidity and Capital Resources. In addition, the terms of our outstanding series of preferred
stock do not permit us to pay dividends on our common stock unless all accumulated and unpaid dividends
have been or contemporaneously are declared and paid or provision for the payment thereof has been
made. Our future dividend policy may also be influenced by the impact of our securities with participating
rights in earnings available to common stockholders, including our 4.50% Convertible Senior Notes and
Series A Mandatory Convertible Preferred Stock. For a discussion of our participating securities, see
Note 13 to the Consolidated Financial Statements.
Transfer Agent and Registrar for Common Stock
The transfer agent and registrar for our common stock is:
Mellon Investor Services, Inc.
480 Washington Boulevard
29th Floor
Jersey City, NJ 07310
Tel: (877) 363-6398
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 provides information regarding our purchases of equity securities during the fourth
quarter of 2005:
Total Number
of Shares
Purchased
Average
Price
Paid per
Share(2)
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
October 1-31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
November 1-30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 1-31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
37,019
7,072
238,077
282,168
$11.03
$10.97
$ 9.84
$10.03
Ì
Ì
Ì
Ì
Maximum
Number of
Shares that May
Yet Be
Purchased
Under the Plans
or Programs
Ì
Ì
Ì
Ì
(1) Consists of restricted shares of our common stock withheld under the terms of grants under employee
stock compensation plans to offset tax withholding obligations that occurred upon vesting and release
of restricted shares during each month of the fourth quarter of 2005 (the ""Withheld Shares'').
(2) The average price per month of the Withheld Shares was calculated by dividing the aggregate value
of the tax withholding obligations for each month by the aggregate number of shares of our common
stock withheld each month.
14
Item 6. Summary Selected Financial Data
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
SUMMARY SELECTED FINANCIAL DATA
(Amounts in Millions, Except Per Share Amounts)
For the Years Ended December 31,
2003
2002
2004
2005
2001
REVENUE ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OPERATING (INCOME) EXPENSES:
Salaries and related expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Office and general expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Restructuring (reversals) chargesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-lived asset impairment and other charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Motorsports contract termination costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total operating (income) expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OPERATING INCOME (LOSS) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EXPENSES AND OTHER INCOME:
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Debt prepayment penalty ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment impairments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Litigation reversals (charges) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other income (expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total expenses and other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income (loss) from continuing operations before provision for
income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for (benefit of) income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income (loss) from continuing operations of consolidated
companies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income applicable to minority interests (net of tax) ÏÏÏÏÏÏÏÏÏÏ
Equity in net income of unconsolidated affiliates (net of tax) ÏÏ
Loss from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income from discontinued operations (net of tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividends on preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
NET INCOME (LOSS) APPLICABLE TO COMMON
$6,274.3
$6,387.0
$6,161.7
$6,059.1
$6,598.5
3,999.1
2,288.1
(7.3)
98.6
Ì
6,378.5
(104.2)
(181.9)
(1.4)
80.0
(12.2)
Ì
33.1
(82.4)
3,733.0
2,250.4
62.2
322.2
113.6
6,481.4
(94.4)
(172.0)
(9.8)
50.8
(63.4)
32.5
(10.7)
(172.6)
3,501.4
2,225.3
172.9
294.0
Ì
6,193.6
(31.9)
(206.6)
(24.8)
39.3
(71.5)
(127.6)
50.3
(340.9)
3,397.1
2,248.3
7.9
130.0
Ì
5,783.3
275.8
3,634.9
2,397.9(1)
629.5
300.7
Ì
6,963.0
(364.5)
(158.3)
Ì
30.6
(40.3)
Ì
8.0
(160.0)
(169.1)
Ì
41.7
(212.4)
Ì
14.4
(325.4)
(186.6)
81.9
(267.0)
262.2
(372.8)
242.7
115.8
106.4
(689.9)
(88.1)
(268.5)
(16.7)
13.3
(271.9)
9.0
(262.9)
26.3
(529.2)
(21.5)
5.8
(544.9)
6.5
(538.4)
19.8
(615.5)
(27.0)
2.4
(640.1)
101.0
(539.1)
Ì
9.4
(30.1)
5.9
(14.8)
31.5
16.7
Ì
(601.8)
(27.3)
3.2
(625.9)
15.5
(610.4)
Ì
STOCKHOLDERS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (289.2) $ (558.2) $ (539.1) $
16.7 $ (610.4)
Earnings (loss) per share of common stock:
Basic and diluted
Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total* ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted average shares:
$ (0.70) $ (1.36) $ (1.66) $ (0.04) $ (1.70)
0.04
0.08
0.04 $ (1.65)
0.02
$ (0.68) $ (1.34) $ (1.40) $
0.26
0.02
Basic and diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
424.8
415.3
385.5
376.1
369.0
Ì $
2.69 $
0.38
Ì $
$
$ 14.50 $
Ì $ Ì
$ (140.7) $ (194.0) $ (159.6) $ (171.4) $ (257.5)
9.65 $ 13.40 $ 15.60 $ 14.08 $ 29.02
$
50,500
43,400
Ì $
Ì $
0.38 $
43,700
42,600
45,800
OTHER DATA
Cash dividends per share of common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash dividends per share of preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capital Expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Market price on December 31,ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Number of EmployeesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(1) Includes amortization expense of $161.0 in 2001.
* Earnings (loss) per share does not add due to rounding.
15
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Millions, Except Per Share Amounts)
2005
2004
As of December 31,
2003
2002
2001
ASSETS:
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Marketable securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts receivable, net of allowances ÏÏÏÏ
Expenditures billable to clientsÏÏÏÏÏÏÏÏÏÏÏ
Deferred income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Prepaid expenses and other current assets
Total current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Land, buildings and equipment, netÏÏÏÏÏÏÏ
Deferred income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
InvestmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total non-current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$ 2,075.9
115.6
4,015.7
917.6
184.3
188.3
$ 1,550.4
420.0
4,319.2
882.9
261.0
184.6
$ 1,871.9
195.1
4,106.3
831.9
279.7
269.8
7,497.4
650.0
297.3
170.6
3,030.9
299.0
4,447.8
7,618.1
722.9
274.2
168.7
3,141.6
328.2
4,635.6
7,554.7
697.9
378.3
246.8
3,267.9
322.3
4,913.2
953.2
30.7
4,263.4
703.5
103.0
423.3
6,477.1
851.1
534.3
326.5
3,320.9
397.9
5,430.7
$
938.1
21.2
4,403.9
607.6
136.0
324.6
6,431.4
871.0
514.0
334.6
2,933.9
379.9
5,033.4
TOTAL ASSETS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$11,945.2
$12,253.7
$12,467.9
$11,907.8
$11,464.8
LIABILITIES:
Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred compensation and employee
benefits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other non-current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interests in consolidated
subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total non-current liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏ
TOTAL LIABILITIES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
TOTAL STOCKHOLDERS' EQUITY ÏÏ
TOTAL LIABILITIES AND
$ 4,245.4
2,554.3
56.8
6,856.5
2,183.0
$ 4,733.5
2,485.2
325.9
7,544.6
1,936.0
$ 4,473.4
2,420.0
316.9
7,210.3
2,198.7
$ 4,333.0
2,314.5
841.9
7,489.4
1,822.2
$ 3,771.2
2,501.0
428.5
6,700.7
2,484.6
592.1
319.0
49.3
3,143.4
9,999.9
1,945.3
590.7
408.9
55.2
548.6
326.7
64.8
534.9
270.7
68.0
2,990.8
3,138.8
2,695.8
10,535.4
10,349.1
10,185.2
1,718.3
2,118.8
1,722.6
438.6
177.3
84.0
3,184.5
9,885.2
1,579.6
STOCKHOLDERS' EQUITY ÏÏÏÏÏÏÏÏ
$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 provides a description of our business, the drivers of our business, and how we analyze
our business. It then provides an analysis of our 2005 performance and a description of the significant
events impacting 2005 and thereafter.
RESULTS OF OPERATIONS provides an analysis of the consolidated and segment results of
operations for 2005 compared to 2004 and 2004 compared to 2003.
LIQUIDITY AND CAPITAL RESOURCES provides an overview of our cash flows, financing,
contractual obligations and derivatives and hedging activities.
INTERNAL CONTROL OVER FINANCIAL REPORTING provides a description of the status of
our compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and related rules. For more detail,
see Item 8, Financial Statements and Supplementary Data, and Item 9A, Controls and Procedures.
LIABILITIES RELATED TO OUR PRIOR RESTATEMENT provides a description and update
of the significant liabilities recorded as part of our previously reported restated financial statements for the
years ended December 31, 2003, 2002, 2001 and 2000 (""Prior Restatement''). For additional information,
see Item 8, Financial Statements and Supplementary Data.
OUT OF PERIOD ADJUSTMENTS provides a description and impact of amounts recorded as part
of our 2005 financial statements which relate to a prior annual period. The out of period adjustments
primarily relate to errors in accounting related to vendor credits or discounts, income taxes as well as the
impact of other miscellaneous adjustments.
CRITICAL ACCOUNTING ESTIMATES provides a discussion of our accounting policies that
require critical judgment, assumptions and estimates.
OTHER MATTERS provides a discussion of our significant non-operational items which impact our
financial statements, such as the SEC investigation.
RECENT ACCOUNTING STANDARDS by reference to Note 22 to the Consolidated Financial
Statements, provides a description of accounting standards which we have not yet been required to
implement and may be applicable to our future operations, as well as those significant accounting
standards which were adopted during 2005.
OVERVIEW
Our Business
We are one of the world's largest advertising and marketing services companies, comprised of hundreds of
communication agencies around the world that deliver custom marketing solutions on behalf of our clients. Our
agencies cover the spectrum of marketing disciplines and specialties, from traditional services such as consumer
advertising and direct marketing, to newer disciplines such as experiential marketing and branded
entertainment. With offices in over 100 countries and approximately 43,000 employees, our agencies work with
our clients to create global and local marketing campaigns that cross borders and media. These marketing
programs seek to build brands, influence consumer behavior and sell products.
17
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
Interpublic maintains separate agency brands to manage the broadest range of clients, even ones that
operate in similar business areas. Having distinct agencies allows us to avoid potential conflicts of interest
among our clients in the same industry. To help manage these companies effectively, however, we have
organized our agencies into five global operating divisions. Four of these divisions, McCann WorldGroup
(""McCann''), The FCB Group (""FCB''), Lowe Worldwide (""Lowe'') and Draft Worldwide (""Draft''),
provide a distinct, comprehensive array of global communications and marketing services. The fifth global
operating division, The Constituency Management Group (""CMG''), which includes Weber Shandwick,
MWW Group, FutureBrand, DeVries, Golin Harris, Jack Morton and Octagon Worldwide (""Octagon''),
provides clients with diversified services, including public relations, meeting and event production, sports
and entertainment marketing, corporate and brand identity and strategic marketing consulting.
A group of leading stand-alone agencies provide clients with a full range of advertising and marketing
services. These agencies partner with our global operating groups as needed, and include Campbell-Ewald,
Hill Holiday, Deutsch and Mullen.
We believe this organizational structure allows us to provide comprehensive solutions for clients,
enables stronger financial and operational growth opportunities and allows us to improve operating
efficiencies within our organization. We practice a decentralized management style, providing agency
management with a great deal of operational autonomy, while holding them broadly responsible for their
agencies' financial and operational performance.
As of December 31, 2005, for financial reporting purposes we have three reportable segments. The
largest segment, Integrated Agency Networks (""IAN''), is comprised of McCann, FCB, Lowe, Draft, our
media agencies, and our leading stand-alone agencies. CMG comprises our second reportable segment.
Our third reportable segment is comprised of our Motorsports operations (""Motorsports''), which were
sold during 2004 and had immaterial residual operating results in 2005.
Business Drivers
Our revenues are primarily derived from the planning and execution of advertising programs in various
media and the planning and execution of other marketing and communications programs. Most of our
client contracts are individually negotiated and accordingly, the terms of client engagements and the basis
on which we earn commissions and fees vary significantly. Our client contracts are also becoming
increasingly complex arrangements that frequently include provisions for incentive compensation and
govern vendor rebates and credits.
Revenues for creation, planning and placement of advertising are primarily determined on a negotiated
fee basis and, to a lesser extent, on a commission basis. Fees are usually calculated to reflect hourly rates
plus proportional overhead and a mark-up. Many clients include an incentive compensation component in
their total compensation package. This provides added revenue based on achieving mutually agreed-upon
qualitative and/or quantitative metrics within specified time periods. Commissions are earned based on
services provided, and are usually derived from a percentage or fee over the total cost to complete the
assignment. Commissions can also be derived when clients pay us the gross rate billed by media and we
pay for media at a lower net rate; the difference is the commission that we earn, which is either retained
in total or shared with the client depending on the nature of the services agreement.
We pay media charges with respect to contracts for advertising time or space that we place on behalf
of our clients. To reduce our risk from a client's non-payment, we typically pay media charges only after
we receive funds from our clients. Generally, we act as the client's agent rather than the primary obligor.
In some instances we agree with the media provider that we will only be liable to pay the media after the
client has paid us for the media charges.
18
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
We also generate revenue in negotiated fees from our public relations, sales promotion, event
marketing, sports and entertainment marketing and corporate and brand identity services.
Our revenue is directly dependent upon the advertising, marketing and corporate communications
requirements of our clients and tends to be higher in the second half of the calendar year as a result of the
holiday season and lower in the first half as a result of the post-holiday slow-down in client activity.
Depending on the terms of the client contract, fees for services performed can be primarily recognized
three ways: proportional performance, straight-line (or monthly basis) or completed contract. Fee revenue
recognized on a completed contract basis also contributes to the higher seasonal revenues experienced in
the fourth quarter due to the majority of our contracts ending at December 31. As is customary in the
industry, these contracts provide for termination by either party on relatively short notice, usually 90 days.
See Note 1 to the Consolidated Financial Statements for further discussion of our revenue recognition
accounting policies.
Our revenue is driven by our ability to maintain and grow existing business, as well as generate new
business. Our business is directly affected by economic conditions in the industries and regions we serve
and by the marketing and advertising requirements and practices of our clients and potential clients. When
economic conditions decline, companies generally decrease advertising and marketing budgets, and it
becomes more difficult to achieve profitability. Our business is highly competitive, which tends to mitigate
our pricing power and that of our competition.
We believe that expanding the range of services we provide to our key clients is critical to our
continued growth. We are focused on strengthening our collaboration across agencies, which we believe
will increase our ability to better service existing clients and win new clients.
2005 Performance
The primary focus of our business analysis is on operating performance, specifically, changes in
revenues and operating expenses.
We analyze the increase or decrease in revenue by reviewing the components of the change, including:
the impact of foreign currency exchange rate changes, the impact of net acquisitions and divestitures, and
the balance, which we refer to as organic revenue change. As economic conditions and demand for our
services can vary between geographic regions, we also analyze revenues by domestic and international
sources.
Our operating expenses are in two primary categories: salaries and related expenses, and office and
general expenses. As with revenue, we analyze the increase or decrease in operating expenses by reviewing
the following components of the change: the impact of foreign currency exchange rate changes, the impact
of net acquisitions and divestitures, and the organic component of the change. Salaries and related
expenses tend to fluctuate with changes in revenues and are measured as a percentage of revenues. Office
and general expenses, which have both a fixed and variable component, tend not to vary as much with
revenue.
Our financial performance over the past several years has lagged behind that of our industry peers,
due to lower revenue growth, as well as impairment, restructuring and other charges. 2005 performance
was impacted by higher salaries and related and office and general expenses and lower revenues as
discussed in more detail below. However, both impairment and restructuring charges have decreased and
we are no longer burdened with Motorsports related costs.
19
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
Strategic Initiatives
Organic revenue growth and improving operating margin are our key corporate metrics. Our
performance priorities are to:
‚ Achieve organic revenue growth by strengthening collaboration among our agencies, increasing the
number of marketing services provided to existing clients and winning new clients. We have
established a supplemental incentive plan, expanded internal tools and resources, and heightened
internal communications aimed at encouraging collaboration. We have also focused our efforts on
attracting and retaining the highest quality industry talent and further improving client retention.
We analyze our performance by calculating the percentage increase in revenue related to organic
growth between comparable periods.
‚ Improve operating margin by increasing revenue and by controlling salaries and related expenses, as
well as office and general expenses. In addition, we are working to improve our back office
efficiency through our shared services initiatives as well as improve our real estate utilization. We
analyze our performance by comparing revenue to prior periods and measuring salaries and related
expenses, as well as office and general expenses, as a percentage of revenue. We define operating
margin as operating income divided by reported revenue.
Our revenue is directly dependent upon the advertising, marketing and corporate communications
requirements of our clients. Historically, we typically experience increased revenue and profitability in the
fourth quarter of our fiscal year as a result of increased holiday-related client spending activity. The
increase in fourth quarter revenue and profitability is also attributable to higher seasonal revenues due to
the timing of revenue recognition for contracts that are accounted for on the completed contract method.
For the three years ended December 31, 2005, 2004 and 2003, our fourth quarter revenue as a percentage
of the respective full year revenue was approximately 30% for all years.
Increase (Decrease)
Organic Changes
for the Years Ended
December 31,
2005
2004
Organic Changes
for the Three
Months Ended
December 31,
2005
2004
Revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Salaries and related expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Office and general expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(45.7)
$293.4
$112.4
$ 75.6
$142.6
$(13.9)
$(34.1)
$116.7
$ 26.3
$44.5
$73.6
$47.1
The organic decrease in revenue for the year ended and three months ended December 31, 2005 was
$45.7 and $34.1, respectively when compared to the comparative period in 2004. Operating margin
declined for the year ended and three months ended December 31, 2005 due to a significant organic
increase in salaries and related expenses for the year ended and three months ended December 31, 2005 of
$293.4 and $116.7, respectively when compared to the prior year, and an organic increase in office and
general expenses for year ended and three months ended December 31, 2005 of $112.4 and $26.3,
respectively when compared to the prior year. See below for discussion of the drivers of these changes.
Included in our results of operations for the three months ended December 31, 2005 were certain out
of period adjustments that resulted in decreased revenue and operating income of $17.3 and $21.6,
respectively. When compared to the slight organic decrease in revenue and significant organic increase in
salaries and related expenses and office and general expenses for the three months ended December 31,
2005, these out of period adjustments were immaterial to our quarterly results of operations. These
adjustments were immaterial to the annual period ended December 31, 2005 and to any other prior annual
period.
20
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
For the Years
Ended
December 31,
2004
2005
For the Three
Months Ended
December 31,
2004
2005
Organic revenue change percentage (vs. prior year) ÏÏÏÏÏÏÏÏÏÏÏ
Operating margin percentage ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Salaries and related expenses as a percentage of revenue ÏÏÏÏÏÏÏ
Office and general expenses as a percentage of revenue ÏÏÏÏÏÏÏÏ
(0.7)% 1.2% (1.7)% 2.4%
(1.7)% (1.5)% 3.0% 15.9%
63.7% 58.4% 58.4% 52.0%
36.5% 35.2% 33.6% 32.1%
Organic revenue growth. In 2005, we experienced a small organic revenue decrease, compared to
small organic revenue growth in 2004. The decrease resulted from client losses and a reduction in revenue
from existing clients at IAN, offset partially by an increase at CMG due to client wins and additional
business from existing clients in the U.S. and Europe. As a result, there were domestic and international
organic revenue decreases of 0.5% and 0.9%, respectively. We experienced a small organic revenue
decrease for the three months ended December 31, 2005 when compared to the comparative periods in
2004.
Operating margin. Our operating margin was negative in 2005 and 2004. The decline in 2005 resulted
from organic revenue decreases and increases in salaries and related as well as office and general expenses.
Salaries and related expenses increased, both in absolute terms and as a percentage of revenues, due to
increased severance expense as international headcount reductions occurred across several agencies. In
addition, the increase was attributable to hiring additional creative talent to enable future revenue growth
and additional staff to address weaknesses in our accounting and control environment and to develop
shared services, which almost offset the number of employees severed. Office and general expenses
increased, both in absolute terms and as a percentage of revenues, primarily due to higher professional fees
associated with the Prior Restatement and our ongoing efforts in internal control compliance. Salary
expense attributable to the additional headcount and the costs of remedying our internal control
weaknesses will continue to be significant in 2006.
These negative impacts to operating margin were partially offset by a decrease in the amount of
charges related to impairment, restructuring and contract termination costs. If not for the reduction in
these charges, our operating margin would have deteriorated significantly from 2004 to 2005 as described
above. During 2005, we recorded asset impairments of $98.6, restructuring reversals of $7.3 and had no
contract termination charges related to the Motorsports business, which is a $406.7 decrease when
compared to these charges in 2004. Operating margin in 2004 was impacted by approximately $322.2 of
asset impairment charges, $62.2 of restructuring charges and $113.6 of contract termination costs related
to the Motorsports business.
For the three months ended December 31, 2005 and 2004, our operating margin decreased
significantly, to 3.0% from 15.9%. The decline in 2005 resulted from significant increases in salaries and
related expenses and impairment charges, as well an increase in office and general expenses and an organic
revenue decrease. Salaries and related expenses significantly increased, both in absolute terms and as a
percentage of revenues, primarily due to an increase in severance expense as international headcount
reductions occurred across several agencies as a result of client losses. In addition, the increase was
attributable to hiring additional creative talent to enable future revenue growth and staff to address
weaknesses in our accounting and control environment. During the three months ended December 31,
2005, impairment charges of $92.1 were recorded primarily related to our Lowe reporting unit following a
major client loss and recent management defections. Office and general expenses increased, both in
absolute terms and as a percentage of revenues, primarily due to higher production and media expenses
21
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
due to an increase in arrangements where we act as principal, which requires us to record expenses on a
gross basis, as well as higher professional fees.
Significant 2005 Activity and Subsequent Events
Income Statement
‚ Total salaries and related expenses increased by approximately $266.1 to $3,999.1 for 2005. This
increase includes higher severance expense, which increased by approximately $87.9 to $162.5.
Severance activity in 2005 covered approximately 3,000 employees, of which approximately 2,500
had left the Company by year-end. Our severance actions were concentrated in our international
businesses and included several agencies, mostly within IAN. The increase of salaries and related
expenses was also attributable to hiring in several areas of our business, including creative talent to
enable future revenue growth, and finance and information technology staff to address weaknesses
in our accounting and control environment, as well as to develop shared services, which
approximately offset the number of employees addressed by severance during the year.
‚ A net charge of $69.9 was recorded to increase our valuation allowance for deferred income tax
assets primarily relating to foreign net operating loss carry forwards, in relation to which we do not
have the historical earning trends or tax planning strategies necessary to recognize the benefits of
operating losses. See Note 11 to the Consolidated Financial Statements for additional information.
‚ Total professional fees increased $94.8 to $332.8 for 2005. These increases related primarily to our
ongoing efforts in internal control compliance, the Prior Restatement process and the preliminary
application development and maintenance of information technology systems and processes related
to our shared services initiatives. Professional fees are included in office and general expenses in the
Consolidated Statements of Operations.
‚ Long-lived asset impairment charges of $98.6 were recorded, including $91.0 of goodwill
impairments at Lowe following a major client loss and recent management defections and $5.8 at
an agency within our sports and entertainment marketing business. See Note 9 to the Consolidated
Financial Statements for additional information.
Operating Cash Flow
‚ Our operating activities utilized cash of approximately $20.2, compared to cash provided by
operating activities of $464.8 in 2004. The decrease in cash provided by operating activities in 2005
was primarily attributable to significant increases in our operating costs. Additional cash was used
during 2005 for severance costs primarily related to international headcount reductions, salary costs
primarily attributable to our hiring additional creative talent to enable future revenue growth and
additional staff to address weaknesses in our accounting and control environment, and professional
fees primarily related to our Prior Restatement and our ongoing efforts in internal control
compliance. The decrease in cash provided by operating activities in 2005 was also attributable to
year-over-year changes in working capital accounts.
Financing Activities
‚ Throughout 2005, we entered into waivers and amendments to our 364-Day and Three-Year
Revolving Credit Facilities related to our reporting requirements, financial covenants and the Prior
Restatement.
22
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
‚ In July 2005, we completed the issuance and sale of our $250.0 Floating Rate Notes due 2008 and
used the proceeds to redeem all $250.0 of our 7.875% Senior Unsecured Notes maturing October
2005.
‚ In September 2005 our $250.0 364-Day Revolving Credit Facility expired.
‚ In October 2005, we added a new bank to the syndicate of our Three-Year Revolving Credit
Facility, increasing the size of the facility by $50.0 to $500.0.
‚ In October 2005, we issued 0.525 shares of our 5.25% Series B Cumulative Convertible Perpetual
Preferred Stock at gross proceeds of $525.0, with net proceeds totaling approximately $507.3 after
deducting discounts to the initial purchasers and the estimated expenses of the offering.
Subsequent to 2005
‚ On March 21, 2006, we entered into an amendment to our Three-Year Revolving Credit Facility,
effective as of December 31, 2005. The amendment changed the financial covenants with respect to
periods ended December 31, 2005, March 31, 2006 and June 30, 2006, added a new minimum cash
balance covenant and amended the provisions governing letters of credit to permit the issuance of
letters of credit with expiration dates beyond the termination date of the facility, subject to certain
conditions. We also obtained a waiver from the lenders under the Three-Year Revolving Credit
Facility in March, 2006, to waive any default arising from the restatement of our financials
presented in this report.
RESULTS OF OPERATIONS
Consolidated Results of Operations Ì 2005 Compared to 2004
REVENUE
The components of the 2005 change were as follows:
2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$6,387.0
$3,509.2
54.9% $2,877.8
45.1%
Total
$
% Change
$
Domestic
% Change % of Total
International
$
% Change % of Total
Foreign currency changes ÏÏÏÏ
Net acquisitions/divestitures ÏÏ
Organic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
40.4
(107.4)
(45.7)
0.6%
(1.7)%
(0.7)%
Ì
(28.9)
(19.2)
0.0%
(0.8)%
(0.5)%
40.4
(78.5)
(26.5)
1.4%
(2.7)%
(0.9)%
(64.6)
(2.2)%
Total change ÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(112.7)
(1.8)%
(48.1)
(1.4)%
$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 Ì (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
Salaries and related expenses ÏÏ
Office and general expenses ÏÏÏ
Restructuring charges ÏÏÏÏÏÏÏÏÏ
Long-lived asset impairment
and other charges ÏÏÏÏÏÏÏÏÏÏ
Motorsports contract
termination costs ÏÏÏÏÏÏÏÏÏÏÏ
For the Years Ended December 31,
2005
2004
$
% of
Revenue
$
% of
Revenue
$ Change
% Change
$3,999.1
2,288.1
(7.3)
63.7% $3,733.0
2,250.4
36.5%
62.2
58.4% $ 266.1
37.7
35.2%
(69.5)
7.1%
1.7%
(111.7)%
98.6
Ì
322.2
113.6
(223.6)
(69.4)%
(113.6)
(100.0)%
Total operating expenses ÏÏÏÏ
$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 Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
Salaries and Related Expenses
The components of the 2005 change were as follows:
Total
$
% Change
2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$3,733.0
Foreign currency changesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net acquisitions/divestitures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OrganicÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
19.3
(46.6)
293.4
Total change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
266.1
$3,999.1
0.5%
(1.2)%
7.9%
7.1%
% of
Revenue
58.4%
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
$
% Change
2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,250.4
Foreign currency changesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net acquisitions/divestitures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OrganicÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
13.9
(88.6)
112.4
Total change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
37.7
$2,288.1
0.6%
(3.9)%
5.0%
1.7%
% of
Revenue
35.2%
36.5%
25
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
Office and general expenses primarily consists of rent, office and equipment, depreciation, professional
fees, other overhead expenses and certain out-of-pocket expenses related to our revenue. During 2005,
office and general expenses increased to 36.5% of revenues, compared to 35.2% in 2004, largely due to the
decrease in revenue year on year. In 2005, office and general expenses increased $112.4, excluding the
increase related to foreign currency exchange rate changes of $13.9 and a decrease related to net
acquisitions and divestitures of $88.6.
Office and general expenses were impacted by changes in foreign currency rates, primarily attributable
to the strengthening of the Brazilian Real and Canadian Dollar in relation to the U.S. Dollar. The increase
due to foreign currency rate changes was offset by the impact of net acquisitions and divestitures activity,
which resulted largely from dispositions at McCann during 2005 and the sale of the Motorsports business
and McCann's Transworld Marketing during 2004.
The increase in office and general expenses, excluding the impact of foreign currency and net
acquisition and divestitures activity, was primarily the result of higher professional fees at both IAN and
our Corporate group driven by our ongoing efforts in internal control compliance, the Prior Restatement
process and the preliminary application development and maintenance of information technology systems
and processes related to our shared services initiatives. Except for the costs associated with the Prior
Restatement process, these costs will continue to significantly impact financial results in 2006.
Restructuring (Reversals) Charges
During 2005 and 2004, we recorded net (reversals) and charges related to lease termination and other
exit costs and severance and termination costs for the 2003 and 2001 restructuring programs of ($7.3) and
$62.2, respectively. Included in the net (reversals) and charges were adjustments resulting from changes in
management's estimates for the 2003 and 2001 restructuring programs which decreased the restructuring
reserves by $9.3 and $32.0 in 2005 and 2004, respectively. 2005 net reversals primarily consisted of
changes to management's estimates for the 2003 and 2001 restructuring programs primarily relating to our
lease termination costs. 2004 net charges primarily related to the vacating of 43 offices and workforce
reduction of approximately 400 employees related to the 2003 restructuring program and adjustments to
management's estimates for the 2001 restructuring program. A summary of the net (reversals) and charges
by segment is as follows:
Lease Termination and
Other Exit Costs
2001
Program
2003
Program
Total
Severance and Termination Costs
2001
Program
2003
Program
Total
Total
2005 Net (Reversals) Charges
IAN ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CMG ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CorporateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(6.3)
1.1
(0.2)
$(0.3)
0.2
(0.4)
$(6.6)
1.3
(0.6)
$(0.4)
(0.7)
(0.3)
$ Ì $(0.4) $(7.0)
(0.7)
(0.3)
0.6
(0.9)
Ì
Ì
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(5.4)
$(0.5)
$(5.9)
$(1.4)
$ Ì $(1.4)
$(7.3)
2004 Net (Reversals) Charges
IAN ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CMG ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CorporateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$40.3
8.1
3.7
$(7.3)
4.0
(1.0)
$33.0
12.1
2.7
$14.1
5.1
0.3
$(4.3)
(0.7)
(0.1)
$ 9.8
4.4
0.2
$42.8
16.5
2.9
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$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 Ì (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
Motor-
sports
IAN
CMG
Total
IAN
CMG
2004
Motor-
sports
Total
Goodwill impairment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fixed asset impairment ÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$97.0
0.5
1.0
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$98.5
$ Ì
Ì
0.1
$0.1
$Ì $97.0
0.5
Ì
1.1
Ì
$220.2
2.0
4.9
$91.7
0.4
Ì
$ Ì $311.9
5.4
3.0
4.9
Ì
$Ì $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 Ì 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 Ì 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 Ì (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 Ì 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 expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Debt prepayment penalty ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment impairments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Litigation reversals (charges) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other income (expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(181.9)
(1.4)
80.0
(12.2)
Ì
33.1
$(172.0)
(9.8)
50.8
(63.4)
32.5
(10.7)
$ (9.9)
8.4
29.2
51.2
(32.5)
43.8
5.8%
(85.7)%
57.5%
(80.8)%
(100.0)%
(409.3)%
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (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 Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
Interest Income
The increase in interest income of $29.2 during 2005 was primarily due to an increase in average
interest rates as well an increase in cash and cash equivalents primarily resulting from our Series B
Cumulative Convertible Perpetual Preferred Stock offering.
Our interest income and interest expense reflect daily balances which may vary from period-end
balances. They also reflect the gross amounts of debt and cash under certain of our cash pooling
arrangements that are reflected on a net basis on our Consolidated Balance Sheets.
Investment Impairments
During 2005, we recorded investment impairment charges of $12.2, primarily related to a $7.1 charge
for our remaining unconsolidated investment in Koch Tavares in Latin America to adjust the carrying
amount of the investment to fair value as a result of our intent to sell and a $3.7 charge related to a
decline in value of certain available-for-sale investments that were determined to be other than temporary.
During 2004, we recorded investment impairment charges of $63.4, primarily related to a $50.9 charge
for an unconsolidated investment in German advertising agency Springer & Jacoby as a result of a
decrease in projected operating results. Additionally, we recorded impairment charges of $4.7 related to
unconsolidated affiliates primarily in Israel, Brazil, Japan and India, and $7.8 related to several other
available-for-sale investments.
Litigation Charges
During 2004, with court approval of the settlement of the class action shareholder suits discussed in
Note 21 to the Consolidated Financial Statements, we received $20.0 from insurance proceeds which we
recorded as a reduction in litigation charges because we had not previously established a receivable. We
also recorded a reduction of $12.5 relating to a decrease in the share price between the tentative
settlement date and the final settlement date.
Other Income (Expense)
In 2005, other income (expense) included net gains from the sales of businesses of $10.1, net gains
on sales of available-for-sale securities and miscellaneous investment income of $20.3 and $2.6 related to
credits adjustments. The principal components of net gains from the sales of businesses relate to the sale
of Target Research, a McCann agency, during the fourth quarter of 2005, which resulted in a gain of
$18.6, offset partially by a sale of a significant component of FCB Spain during the fourth quarter of 2005
which resulted in a loss of approximately $13.0. The principal components of net gains on sales of
available-for-sale securities and miscellaneous investment income relate to the sale of our remaining
ownership interest in Delaney Lund Knox Warren & Partners, an agency within FCB, for a gain of
approximately $8.3, and net gains on sales of available-for-sale securities of $7.9, of which approximately
$3.8 relates to appreciation of Rabbi Trust investments restricted for the purpose of paying our deferred
compensation and deferred benefit arrangement liabilities.
In 2005, we also recorded $2.6 for the settlement of our contractual liabilities for vendor credits and
discounts. This amount represents a negotiated client settlement below the amount originally recorded. It
is recorded as Other Income because we do not view negotiating a favorable outcome as a revenue
generating activity.
In 2004, other income (expense) included $18.2 of net losses on the sale of 19 agencies. The losses
related primarily to the sale of McCann's Transworld Marketing, a U.S.-based promotions agency, which
29
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Ì (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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$81.9
$262.2
$(180.3)
(68.8)%
Effective tax rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
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 Ì (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 ÏÏÏÏ
$(16.7)
$(21.5)
$4.8
(22.3)%
Equity in net income of unconsolidated affiliates, net
of tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 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
Loss from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income from discontinued operations, net of taxes of
($9.0) and $3.5, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
For the Years Ended
December 31,
2005
2004
$ Change
% Change
$(271.9)
$(544.9)
$273.0
(50.1)%
9.0
6.5
Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less: Preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(262.9)
26.3
(538.4)
19.8
Net loss applicable to common stockholders ÏÏÏÏÏÏÏ $(289.2)
$(558.2)
$269.0
2.5
275.5
6.5
38.5%
(51.2)%
32.8%
(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 Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
Consolidated Results of Operations Ì Three Months Ended December 31, 2005 Compared to Three
Months Ended December 31, 2004
REVENUE
The components of the change were as follows:
Three Months Ended
$
% Change
$
Total
Domestic
% Change
% of Total
$
International
% Change
December 31, 2004 ÏÏÏÏÏÏÏÏÏ $1,965.7
$983.0
50.0% $982.7
Foreign currency changes ÏÏÏÏ
Net acquisitions/divestituresÏÏ
Organic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(12.9) (0.7)%
Ì
(23.0) (1.2)% (15.2)
15.8
(34.1) (1.7)%
Total change ÏÏÏÏÏÏÏÏÏÏÏÏÏ
(70.0) (3.6)%
December 31, 2005 ÏÏÏÏÏÏÏÏÏ $1,895.7
0.6
$983.6
0.0%
(1.5)%
1.6%
0.1%
(12.9)
(7.8)
(49.9)
(70.6)
51.9% $912.1
(1.3)%
(0.8)%
(5.1)%
(7.2)%
% of Total
50.0%
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
Salaries and related expenses ÏÏÏÏÏÏÏÏÏÏ
Office and general expenses ÏÏÏÏÏÏÏÏÏÏÏ
Restructuring charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-lived asset impairment and other
Three Months Ended December 31,
2005
2004
$
$1,107.5
637.1
1.4
% of
Revenue
$
58.4% $1,021.9
630.3
33.6%
(4.4)
% of
Revenue
52.0%
32.1%
charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
92.1
Total operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏ
$1,838.1
5.8
$1,653.6
$ Change
% Change
$ 85.6
6.8
5.8
8.4%
1.1%
(131.8)%
86.3
1487.9%
$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 Ì (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:
Three Months Ended
Total
$
% Change
December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,021.9
Foreign currency changesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net acquisitions/divestitures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OrganicÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(10.3)
(20.8)
116.7
Total change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
85.6
$1,107.5
(1.0)%
(2.0)%
11.4%
8.4%
% of
Revenue
52.0%
58.4%
For the three months ended December 31, 2005, salaries and related expenses increased $116.7,
excluding the decrease related to net acquisitions and divestitures of $20.8 and a decrease related to
foreign currency exchange rate changes of $10.3.
The increase in salaries and related expenses, excluding the impact of out of period adjustments and
foreign currency and net acquisition and divestiture activity, was primarily the result of higher severance
expense for international headcount reductions within IAN as a result of client losses. In addition, the
increase was attributable to our hiring additional creative talent to enable future revenue growth and staff
to address weaknesses in our accounting and control environment.
Office and General Expenses
Office and general expenses primarily consist of rent, office and equipment, depreciation, professional
fees, other overhead expenses and certain out-of-pocket expenses related to our revenue. During the three
months ended December 31, 2005, office and general expenses increased to 33.6% of revenue, compared to
32.1% in the prior year. During the three months ended December 31, 2005, office and general expenses
increased by approximately $6.8 including the impact of out of period adjustments, to $637.1 when
compared to the comparative period in 2004. Excluding the impact of out of period adjustments of $6.1,
the increase of $0.7 was primarily attributable to higher production and media expenses due to an increase
in arrangements entered into where we act as a principal, which requires us to record expenses on a gross
basis. The increase was partially offset by acquisitions and divestitures. The components of the change
were as follows:
Three Months Ended
Total
$
% Change
December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$630.3
Foreign currency changes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net acquisitions/divestitures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OrganicÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(6.3)
(13.2)
26.3
Total change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6.8
$637.1
(1.0)%
(2.1)%
4.2%
1.1%
% of
Revenue
32.1%
33.6%
33
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Ì (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 Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
sale of McCann's Transworld Marketing, a U.S.-based promotions agency, as well as a $6.2 loss for the
final liquidation of the Motorsports investment.
OTHER ITEMS
Income Taxes
For the three months ended December 31, 2005 and 2004, we recorded an income tax provision of
$77.4 and $130.6, respectively. Excluding out of period adjustments of $19.5, the income tax provision
would have been $96.9 for the three months ended December 31, 2005.
We recorded income tax provisions of $81.9 and $262.2 for the twelve months ended December 31,
2005 and 2004, respectively, although we had a pretax loss in each period. The difference between the
effective tax rate and statutory rate of 35% is due to state and local taxes and the effect of non-US
operations. Several discrete items also impacted the effective tax rate in 2005. The most significant item
negatively impacting the effective tax rate was the establishment of approximately $69.9 of valuation
allowances on certain deferred tax assets, as well as on losses incurred in non-U.S. jurisdictions which
receive no benefit. Other discrete items impacting the effective tax rates for 2005 and 2004 were
restructuring charges, long-lived asset and investment impairment charges.
Minority Interest and Unconsolidated Affiliates
During the three months ended December 31, 2005 and 2004, we recorded $7.2 and $10.3 of income
applicable to minority interests, respectively. This decrease was primarily due to lower earnings of
majority-owned international businesses.
During the three months ended December 31, 2005 and 2004, we recorded $8.1 and $1.1 of equity in
net income of unconsolidated affiliates, respectively. The increase is primarily due to the impact of prior
year losses at an African unconsolidated affiliate within McCann, which was fully consolidated in the
second quarter of 2005, as well as positive results at unconsolidated investments at FCB and Lowe.
NET INCOME (LOSS)
Loss from Continuing Operations
For the three months ended December 31, 2005 and 2004, we recorded a loss from continuing
operations of $31.9 and income from continuing operations of $130.3, respectively. The decrease in income
from continuing operations of $162.1 largely resulted from a decrease in revenue of $70.0, and an increase
in operating expenses of $184.5, which was driven by goodwill impairment charges of $92.1 and increased
severance and temporary staffing changes of $59.7 and $20.3, respectively. This change was offset by a
decrease in taxes of $53.2 and an increase in total expenses and other income of $28.9, which was driven
by decreased litigation charges and gains from the sales of businesses. Excluding out of period adjustments
of $2.7, the loss from continuing operations would have been $34.6 for the three months ended
December 31, 2005.
Income from Discontinued Operations (net of tax)
In conjunction with the disposition of our NFO operations in the fourth quarter of 2003, we
established reserves for certain income tax contingencies with respect to the determination of our
investment in NFO for income tax purposes. During the fourth quarter of 2005, these reserves of $9.0
were reversed as the related income tax contingencies are no longer considered probable.
35
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Ì (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 Ì 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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CMG ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Motorsports ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$5,327.8
944.2
2.3
$5,399.2
935.8
52.0
$ (71.4)
8.4
(49.7)
(1.3)%
0.9%
(95.6)%
Consolidated revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$6,274.3
$6,387.0
$(112.7)
(1.8)%
Segment operating income (loss):
IAN ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CMG ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Motorsports ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 249.7
53.0
0.7
(316.3)
$ 577.1
83.7
(14.0)
(243.2)
$(327.4)
(30.7)
14.7
(73.1)
(56.7)%
(36.7)%
(105.0)%
30.1%
36
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Ì (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) ÏÏÏÏÏÏÏÏ
$ 158.2 $
52.3
$
0.7
$(315.4) $(104.2) $ 307.2 $(24.9) $(130.6) $(246.1) $ (94.4)
Adjustments:
Restructuring reversals
(charges)ÏÏÏÏÏÏÏÏÏÏ
Long lived asset
impairment and
other charges: ÏÏÏÏÏÏ
Segment operating
7.0
(0.6)
(98.5)
(0.1)
Ì
Ì
0.9
7.3
(42.8) (16.5)
Ì
(2.9)
(62.2)
Ì (98.6) (227.1) (92.1)
(116.6)
Ì (435.8)
income (loss) ÏÏÏÏÏÏÏÏ
$ 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
$
% Change
$
Domestic
% Change
% of Total
$
International
% Change
2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$5,399.2
$2,933.3
54.3%
$2,465.9
Foreign currency changes ÏÏÏÏ
Net acquisitions/divestitures
Organic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
39.5
(46.0)
(64.9)
Total change ÏÏÏÏÏÏÏÏÏÏÏÏ
2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(71.4)
$5,327.8
0.7%
(0.9)%
(1.2)%
(1.3)%
Ì
(23.1)
(5.6)
(28.7)
$2,904.6
0.0%
(0.8)%
(0.2)%
(1.0)%
39.5
(22.9)
(59.3)
(42.7)
$2,423.2
54.5%
1.6%
(0.9)%
(2.4)%
(1.7)%
% of Total
45.7%
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 Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
SEGMENT OPERATING INCOME
For the Years Ended
December 31,
2005
2004
$ Change
% Change
Segment operating income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$249.7
$577.1
$(327.4)
(56.7)%
Operating margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
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
$
% Change
$
% Change % of Total
$
2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$935.8
Foreign currency changes ÏÏÏÏÏÏÏÏÏ
Net acquisitions/divestitures ÏÏÏÏÏÏÏ
Organic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1.2
(12.1)
19.3
Total change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
8.4
$944.2
0.1%
(1.3)%
2.1%
0.9%
$576.0
Ì
(5.9)
(13.6)
(19.5)
$556.5
0.0%
(1.0)%
(2.4)%
(3.4)%
International
% Change
% of Total
38.4%
61.6%
$359.8
1.2
(6.2)
32.9
27.9
$387.7
0.3%
(1.7)%
9.1%
7.8%
58.9%
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 Ì (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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$53.0
$83.7
$(30.7)
(36.7)%
Operating margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
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 ÏÏÏÏÏÏÏÏÏÏÏ
Professional fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Rent and depreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate Insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Bank fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expenses allocated to operating divisions ÏÏÏÏÏÏÏÏÏ
$ 201.3
199.3
50.3
26.0
2.2
(1.5)
(161.3)
$ 151.2
145.3
38.0
29.7
2.8
9.6
(133.4)
$ 50.1
54.0
12.3
(3.7)
(0.6)
(11.1)
(27.9)
33.1%
37.2%
32.4%
(12.5)%
(21.4)%
(115.6)%
20.9%
Total corporate and otherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 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 Ì (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 Ì 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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CMG ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Motorsports ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,614.8
280.6
0.3
$1,700.0
261.0
4.7
$ (85.2)
19.6
(4.4)
(5.0)%
7.5%
(93.6)%
Consolidated revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,895.7
$1,965.7
$ (70.0)
(3.6)%
Segment operating income (loss):
IAN ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CMG ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Motorsports ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 221.2
30.7
(0.3)
(100.5)
$ 359.2
29.7
(2.0)
(73.4)
$(138.0)
1.0
1.7
(27.1)
(38.4)%
3.4%
(85.0)%
36.9%
40
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
2005
CMG Motorsports Corporate
IAN
Total
IAN
2004
CMG Motorsports Corporate
Total
For the Three Months Ended December 31,
Reconciliation to
consolidated operating
income:
Consolidated operating
income (loss) ÏÏÏÏÏÏÏÏÏ $130.4 $27.7
$(0.3)
$(100.2) $ 57.6 $353.3 $33.3
$(2.3)
$(72.2) $312.1
Adjustments:
Restructuring reversals
(charges) ÏÏÏÏÏÏÏÏÏÏ
1.2
(2.9)
Long lived asset
impairment and other
charges: ÏÏÏÏÏÏÏÏÏÏÏÏ
Segment operating income
(loss)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Ì
0.3
(1.4)
(1.7)
4.9
Ì
1.2
4.4
Ì (92.1)
(4.2) (1.3)
(0.3)
Ì
(5.8)
(92.0) (0.1)
$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:
Three Months Ended
$
% Change
$
Total
Domestic
% Change
% of Total
$
International
% Change
December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏ
$1,700.0
$838.3
49.3%
$861.7
Foreign currency changes ÏÏÏÏÏÏ
Net acquisitions/divestitures ÏÏÏ
Organic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(9.9)
(17.1)
(58.2)
(0.6)%
Ì
(1.0)% (14.3)
(0.9)
(3.4)%
Total change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31, 2005 ÏÏÏÏÏÏÏÏÏÏÏ
(85.2)
$1,614.8
(5.0)% (15.2)
$823.1
0.0%
(1.7)%
(0.1)%
(1.8)%
51.0%
(9.9)
(2.8)
(57.3)
(70.0)
$791.7
(1.1)%
(0.3)%
(6.6)%
(8.1)%
% of Total
50.7%
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 Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
SEGMENT OPERATING INCOME
For the Three Months
Ended December 31,
2004
2005
$ Change
% Change
Segment operating income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$221.2
$359.2
$(138.0)
(38.4)%
Operating margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
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:
Three Months Ended
$
% Change
$
% Change % of Total
$
Total
Domestic
International
% Change % of Total
December 31, 2004 ÏÏÏÏÏÏÏÏÏ
$261.0
$144.9
55.5% $116.1
44.5%
Foreign currency changes ÏÏÏÏ
Net acquisitions/divestitures ÏÏ
Organic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(2.5)
(2.0)
24.1
Total change ÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31, 2005 ÏÏÏÏÏÏÏÏÏ
19.6
$280.6
(1.0)%
(0.8)%
9.2%
7.5%
Ì
(0.7)
16.7
16.0
$160.9
0.0%
(0.5)%
11.5%
11.0%
(2.5)
(1.3)
7.4
3.6
57.3% $119.7
(2.2)%
(1.1)%
6.4%
3.1%
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 Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
SEGMENT OPERATING INCOME
For the Three Months
Ended December 31,
2004
2005
$ Change
% Change
Segment operating income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$30.7
$29.7
$1.0
3.4%
Operating margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
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,
2004
2005
Salaries, benefits and related expenses ÏÏÏÏÏÏÏÏÏÏÏ
Professional fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Rent and depreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate Insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Bank fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expenses allocated to operating divisions ÏÏÏÏÏÏÏÏÏ
$ 70.7
53.0
14.2
6.2
0.6
(7.8)
(36.4)
$ 34.3
56.7
10.0
6.0
0.7
2.0
(36.3)
$ Change
% Change
$36.4
(3.7)
4.2
0.2
(0.1)
(9.8)
(0.1)
106.1%
(6.5)%
42.0%
3.3%
(14.3)%
(490.0)%
0.3%
Total corporate and otherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$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 Ì (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 Ì 2004 Compared to 2003
REVENUE
The components of the 2004 change were as follows:
Total
$
% Change
$
Domestic
% Change % of Total
International
$
% Change % of Total
2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $6,161.7
$3,459.3
56.1% $2,702.4
43.9%
Foreign currency
changes ÏÏÏÏÏÏÏÏÏÏ
237.7
3.9%
Ì 0.0%
237.7
8.8%
Net
acquisitions/divestitures (88.0) (1.4)% (35.4) (1.0)%
2.5%
Organic ÏÏÏÏÏÏÏÏÏÏÏÏ
1.2%
85.3
75.6
(52.6) (1.9)%
(9.7) (0.4)%
Total change ÏÏÏÏÏÏ
225.3
2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $6,387.0
3.7%
49.9
$3,509.2
1.4%
175.4
54.9% $2,877.8
6.5%
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 Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
OPERATING EXPENSES
For the Years Ended December 31,
2004
2003
$
% of
Revenue
$
% of
Revenue
$ Change % Change
Salaries and related expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Office and general expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Restructuring charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-lived asset impairment and other charges
Motorsports contract termination costs ÏÏÏÏÏÏÏ
$3,733.0
2,250.4
62.2
322.2
113.6
58.4% $3,501.4
35.2% 2,225.3
172.9
294.0
Ì
56.8% $ 231.6
25.1
36.1%
(110.7)
28.2
113.6
6.6%
1.1%
(64.0)%
9.6%
100.0%
Total operating expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$3,501.4
56.8%
Foreign currency changesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net acquisitions/divestitures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OrganicÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
129.5
(40.5)
142.6
Total change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
231.6
$3,733.0
3.7%
(1.2)%
4.1%
6.6%
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 Ì (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
$
% Change
2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,225.3
Foreign currency changesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net acquisitions/divestitures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OrganicÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
102.8
(63.8)
(13.9)
Total change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
25.1
$2,250.4
4.6%
(2.9)%
(0.6)%
1.1%
% of
Revenue
36.1%
35.2%
Office and general expenses primarily consist of rent, office and equipment, depreciation, professional
fees, other overhead expenses and certain out-of-pocket expenses related to our revenue. During 2004,
office and general expenses decreased to 35.2% of revenues, compared to 36.1% in 2003. In 2004, office
and general expenses decreased $13.9, excluding the increase related to foreign currency exchange rate
changes of $102.8 and a decrease related to net acquisitions and divestitures of $63.8.
Office and general expenses were impacted by changes in foreign currency rates, attributable to the
strengthening of the Euro and Pound Sterling in relation to the U.S. Dollar. The increase due to foreign
currency rate changes was offset by the impact of net acquisitions and divestitures activity, which resulted
largely from the sale of the Motorsports business in 2004.
The decrease in office and general expenses, excluding the impact of foreign currency and net
acquisition and divestitures activity, was primarily the result of lower occupancy and overhead costs, and a
decrease related to charges recorded by CMG in 2003 to secure certain sports television rights. These
decreases, however, were partially offset by increases driven by a rise in professional fees as part of our
ongoing efforts in achieving Sarbanes-Oxley compliance, and the preliminary application development and
maintenance of information technology systems and processes related to our shared services initiatives.
For the three months ended December 31, 2004, office and general expenses increased $47.1,
excluding an increase related to foreign currency exchange rate changes of $27.2 and a decrease related to
net acquisitions and divestitures of $20.0 when compared to 2003.
Restructuring (Reversals) Charges
During 2004 and 2003, we recorded net (reversals) and charges related to lease termination and other
exit costs and severance and termination costs for the 2003 and 2001 restructuring programs of $62.2 and
$172.9, respectively. Included in the net (reversals) and charges were adjustments resulting from changes
in management's estimates for the 2003 and 2001 restructuring programs which decreased the restructuring
reserves by $32.0 and $2.4 in 2004 and 2003, respectively. 2004 net charges primarily related to the
vacating of 43 offices and workforce reduction of approximately 400 employees related to the 2003
restructuring program and adjustments to management's estimates for the 2001 restructuring program.
2003 net charges primarily related to the vacating of 55 offices and workforce reduction of approximately
46
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Ì (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
2001
Program
2003
Program
Total
Severance and Termination Costs
2001
Program
2003
Program
Total
Total
2004 Net (Reversals) Charges
IAN ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CMG ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$40.3
8.1
3.7
$(7.3)
4.0
(1.0)
$33.0
12.1
2.7
$ 14.1
5.1
0.3
$(4.3)
(0.7)
(0.1)
$
9.8
4.4
0.2
$ 42.8
16.5
2.9
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$52.1
$(4.3)
$47.8
$ 19.5
$(5.1)
$ 14.4
$ 62.2
2003 Net (Reversals) Charges
IAN ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CMG ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Motorsports ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$23.1
12.7
Ì
(2.2)
$ 8.8
6.1
Ì
(1.3)
$31.9
18.8
Ì
(3.5)
$106.6
15.7
0.4
3.1
$(0.1)
Ì
Ì
Ì
$106.5
15.7
0.4
3.1
$138.4
34.5
0.4
(0.4)
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$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,
IAN
CMG
2004
Motor-sports
Goodwill impairment ÏÏÏ
Fixed asset impairment
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$220.2
2.0
4.9
$91.7
0.4
Ì
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$227.1
$92.1
$ Ì
3.0
Ì
$3.0
Total
IAN
CMG
$311.9
5.4
4.9
$ 0.4
2.3
9.1
$218.0
Ì
0.4
$322.2
$11.8
$218.4
2003
Motor-sports
$ Ì
63.8
Ì
$63.8
Total
$218.4
66.1
9.5
$294.0
47
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
2004 Impairments
IAN Ì 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 Ì 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 Ì 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 Ì 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 Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
EXPENSE AND OTHER INCOME
For the Years Ended
December 31,
2004
2003
$ Change
% Change
Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Debt prepayment penalty ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment impairments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Litigation (reversals) charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other income (expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(172.0)
(9.8)
50.8
(63.4)
32.5
(10.7)
$(206.6)
(24.8)
39.3
(71.5)
(127.6)
50.3
$ 34.6
15.0
11.5
8.1
160.1
(61.0)
(16.7)%
(60.5)%
29.3%
(11.3)%
(125.5)%
(121.3)%
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(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 Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
Litigation Charges
During 2004, with the court approval of the settlement of the class action shareholder suits discussed
in Note 21 to the Consolidated Financial Statements, we received $20.0 from insurance proceeds which we
recorded as a reduction in litigation charges because we had not previously established a receivable. We
also recorded a reduction of $12.5 relating to a decrease in the share price between the tentative
settlement date and the final settlement date.
During 2003, we recorded litigation charges of $127.6 for various legal matters, of which $115.0
related to a then-tentative settlement of the class action shareholder suits discussed above. Under the
terms of the settlement, we were required to pay $20.0 in cash and issue 6.6 shares of our common stock.
The ultimate amount of the litigation charge related to the settlement was dependent upon our stock price
at the time of the final settlement (as the number of shares was fixed in the agreement), which took place
in December 2004.
Other Income (Expense)
In 2004, other income (expense) included $18.2 of net losses on the sale of 19 agencies. The losses
related primarily to the sale of Transworld Marketing, a U.S.-based promotions agency, which resulted in a
loss of $8.6, and a $6.2 loss for the final liquidation of the Motorsports investment. See Note 5 to the
Consolidated Financial Statements for further discussion of the Motorsports disposition.
In December 2003, we sold approximately 11.0 shares of Modem Media for net proceeds of
approximately $57.0 in December, resulting in a pre-tax gain of $30.3. Also in December, we sold all of
the approximately 11.7 shares of TNS we had acquired through the sale of NFO, for approximately $42.0
of net proceeds. A pre-tax gain of $13.3 was recorded.
During the three months ended December 31, 2004, other income (expense) decreased by $8.7,
primarily due to the losses described above for the sale of Transworld Marketing and the Motorsports
liquidation.
OTHER ITEMS
Income Taxes
For the Years
Ended
December 31,
2004
2003
$ Change
% Change
Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$262.2
$242.7
$19.5
8.0%
Effective tax rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
98.2%
65.1%
Our effective tax rate was negatively impacted in both 2004 and 2003 by the establishment of
valuation allowances, as described below, restructuring charges, and non-deductible long-lived asset
impairment charges. In 2004, our effective tax rate was also impacted by pretax charges and related tax
benefits resulting from the Motorsports contract termination costs. The difference between the effective tax
rate and the statutory federal rate of 35% is also due to state and local taxes and the effect of
non-U.S. operations.
For the three months ended December 31, 2004 and 2003, we recorded an income tax provision of
$130.6 and $247.6, respectively.
50
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Ì (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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(21.5)
$(27.0)
$5.5
(20.4)%
Equity in net income of unconsolidated affiliates, net of
tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
5.8
$
2.4
$3.4
141.7%
The decrease in income applicable to minority interests was primarily due to lower earnings of
majority-owned international businesses, primarily in Europe, and the sale of majority-owned businesses in
Latin America.
The increase in equity in net income of unconsolidated affiliates was primarily due to the impact of
prior year losses at Modem Media, which was sold in 2003, and the impact of higher 2003 losses at an
unconsolidated investment in Brazil and a U.S.-based sports and entertainment event business.
During the three months ended December 31, 2004 and 2003, we recorded $10.3 and $13.6 of income
applicable to minority interests, respectively. During the three months ended December 31, 2004 and 2003,
we recorded $1.1 and $3.8 of equity in net income of unconsolidated affiliates, respectively.
NET LOSS
Loss from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income from discontinued operations, net of taxes of
For the Years Ended
December 31,
2004
2003
$ Change
% Change
$(544.9)
$(640.1)
$ 95.2
(14.9)%
$3.5 and $18.5, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6.5
101.0
(94.5)
(93.6)%
Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less: Preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(538.4)
19.8
(539.1)
Ì
0.7
19.8
(0.1)%
100.0%
Net loss applicable to common stockholders ÏÏÏÏÏÏÏ $(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 Ì (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 Ì 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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CMG ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Motorsports ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$5,399.2
935.8
52.0
$5,140.5
942.4
78.8
$258.7
(6.6)
(26.8)
5.0%
(0.7)%
(34.0)%
Consolidated revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$6,387.0
$6,161.7
$225.3
3.7%
Segment operating income (loss):
IAN ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CMG ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Motorsports ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 577.1
83.7
(14.0)
(243.2)
$ 551.6
55.7
(43.5)
(128.8)
$ 25.5
28.0
29.5
(114.4)
4.6%
50.3%
(67.8)%
88.8%
52
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
2004
2003
For the Years Ended December 31,
IAN
CMG
Motorsports
Corporate
Total
IAN
CMG
Motorsports
Corporate
Total
Reconciliation to
consolidated operating
income:
Consolidated operating
income (loss)ÏÏÏÏÏÏÏÏ
$ 307.2
$(24.9)
$(130.6)
$(246.1) $ (94.4) $ 401.4
$(197.2)
$(107.7)
$(128.4) $ (31.9)
Adjustments:
Restructuring reversals
(charges) ÏÏÏÏÏÏÏÏÏ
Long lived asset
impairment and
other charges:ÏÏÏÏÏÏ
Segment operating
(42.8)
(16.5)
Ì
(2.9)
(62.2)
(138.4)
(34.5)
(0.4)
0.4
(172.9)
(227.1)
(92.1)
(116.6)
Ì (435.8)
(11.8)
(218.4)
(63.8)
Ì (294.0)
income (loss)ÏÏÏÏÏÏÏÏ
$ 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
$
% Change
$
Domestic
% Change % of Total
International
$
% Change % of Total
2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,140.5
$2,862.1
55.7%
$2,278.4
44.3%
Foreign currency changes ÏÏÏ
Net acquisitions/divestiturs ÏÏ
Organic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
194.1
(40.0)
104.6
Total change ÏÏÏÏÏÏÏÏÏÏÏÏ
258.7
2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,399.2
3.8%
(0.8)%
2.0%
5.0%
Ì
(27.5)
98.7
71.2
$2,933.3
0.0%
(1.0)%
3.4%
2.5%
194.1
(12.5)
5.9
187.5
$2,465.9
54.3%
8.5%
(0.5)%
0.3%
8.2%
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 Ì (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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$577.1
$551.6
$25.5
4.6%
Operating marginÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
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 Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
CONSTITUENCY MANAGEMENT GROUP (""CMG'')
REVENUE
The components of the 2004 change were as follows:
Total
$
% Change
$
Domestic
% Change % of Total
International
% Change % of Total
$
2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$942.4
$593.2
62.9% $349.2
37.1%
Foreign currency changesÏÏÏÏÏ
Net acquisitions/divestitures ÏÏ
OrganicÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
34.4
(11.0)
(30.0)
3.7%
Ì
(1.2)% (7.9)
(3.2)% (9.3)
Total change ÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(6.6)
$935.8
(0.7)% (17.2)
$576.0
0.0%
(1.3)%
(1.6)%
(2.9)%
34.4
(3.1)
(20.7)
10.6
61.6% $359.8
9.9%
(0.9)%
(5.9)%
3.0%
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,
2003
2004
$ Change
% Change
Segment operating income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$83.7
$55.7
$28.0
50.3%
Operating marginÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
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 Ì (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 ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Professional fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Rent and depreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate Insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Bank fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expenses allocated to operating divisions ÏÏÏÏÏÏÏÏÏÏÏ
$ 151.2
145.3
38.0
29.7
2.8
9.6
(133.4)
$ 129.0
50.6
30.6
26.5
1.6
8.9
(118.4)
$ 22.2
94.7
7.4
3.2
1.2
0.7
(15.0)
Total corporate and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 243.2
$ 128.8
$114.4
17.2%
187.2%
24.2%
12.1%
75.0%
7.9%
12.7%
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 Ì (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 Ì (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 Ì (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 Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
FINANCING
Long-Term Debt
A summary of our long-term debt is as follows:
7.875% Senior Unsecured Notes due 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Floating Rate Senior Unsecured Notes due 2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.40% Senior Unsecured Notes due 2009 (less unamortized discount of
$0.3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
7.25% Senior Unsecured Notes due 2011 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6.25% Senior Unsecured Notes due 2014 (less unamortized discount of
$0.9) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4.50% Convertible Senior Notes due 2023 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other notes payable and capitalized leases Ì at interest rates from 3.3% to
14.44% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less: current portion ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31,
2005
2004
$
Ì $ 255.0
Ì
250.0
249.7
499.2
350.3
800.0
249.7
500.0
347.3
800.0
36.9
2,186.1
3.1
42.1
2,194.1
258.1
Long-term debt, excluding current portion ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,183.0
$1,936.0
Annual repayments of long-term debt as of December 31, 2005 are scheduled as follows:
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2008* ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2010 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Thereafter* ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
3.1
4.7
256.7
250.8
0.8
1,670.0
Total long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$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 Ì (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 Ì 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 Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
Series B Preferred Stock Ì 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 Ì 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 Ì (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:
2005
2004
December 31,
Total
Facility
Amount
Outstanding
Letters
of Credit
Total
Available
Total
Facility
Amount
Outstanding
Letters
of Credit
Total
Available
Committed
364-Day Revolving
Credit Facility ÏÏ
Three-Year
Revolving Credit
Facility ÏÏÏÏÏÏÏÏ
Other Facilities ÏÏÏ
Uncommitted
$ Ì
$ Ì
$ Ì $ Ì $250.0
$ Ì
$ Ì $250.0
500.0
0.7
Ì
Ì
162.4
Ì
337.6
0.7
450.0
0.8
Ì
Ì
165.4
Ì
284.6
0.8
$500.7
$ Ì
$162.4
$338.3
$700.8
$ Ì
$165.4
$535.4
Non-U.S. ÏÏÏÏÏÏÏÏ
$516.2
$53.7
$ Ì $462.5
$738.1
$67.8
$ Ì $670.3
Our primary bank credit agreement is a three-year revolving credit facility (as amended, the ""Three-
Year Revolving Credit Facility''). The Three-Year Revolving Credit Facility expires on May 9, 2007 and
provides for borrowings of up to $500.0, of which $200.0 is available for the issuance of letters of credit.
This facility was amended as of October 17, 2005 to increase the amount that we may borrow under the
facility by $50.0 to $500.0. Our $250.0 364-Day Revolving Credit Facility expired on September 30, 2005.
The terms of our Three-Year Revolving Credit Facility at December 31, 2005 do not permit us: (i) to
make cash acquisitions in excess of $50.0 until October 2006, or thereafter in excess of $50.0 until
expiration of the agreement in May 2007, subject to increases equal to the net cash proceeds received
during the applicable period from any disposition of assets or any business; (ii) to make capital
expenditures in excess of $210.0 annually; (iii) to repurchase our common stock or to declare or pay
dividends on our capital stock, except that we may declare or pay dividends in shares of our common
stock, declare or pay cash dividends on our preferred stock, and repurchase our capital stock in connection
with the exercise of options by our employees or with proceeds contemporaneously received from an issue
of new shares of our capital stock; or (iv) to incur new debt at our subsidiaries, other than unsecured debt
incurred in the ordinary course of business of our subsidiaries outside the U.S. and unsecured debt, which
may not exceed $10.0 in the aggregate, incurred in the ordinary course of business of our U.S. subsidiaries.
The terms also permit the issuance of letters of credit with expiration dates beyond the termination date of
the facility, subject to certain conditions. Such conditions include the requirement for us, on the 105th day
prior to the termination date of the facility, to provide a cash deposit in an amount equal to the total
amount of outstanding letters of credit with expiration dates beyond the termination date of the facility.
These terms were previously modified by three amendments on March 31, June 22 and September 27,
2005, respectively. The March 21, 2006 amendment effective as of December 31, 2005 added one new
financial covenant so that we are required to maintain, based on a five business day testing period, in cash
and securities, an average daily ending balance of $300.0 plus the aggregate principal amount of
63
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
borrowings under the credit facility in domestic accounts with our lenders. For further explanation of these
and other amendments see Note 13 of the Consolidated Financial Statements. We also obtained a waiver
from the lenders under the Three-Year Revolving Credit Facility on March 21, 2006, to waive any default
arising from the restatement of our financial data presented in this report.
Our Three-Year Revolving Credit Facility now contains certain financial covenants. These covenants
have been modified by amendments and waivers on March 31, 2005, June 22, 2005, September 27, 2005,
November 7, 2005 (effective as of September 30, 2005) and March 21, 2006 (effective as of
December 31, 2005). We have been in compliance with all covenants under the Three-Year Revolving
Credit Facility, as amended or waived from time to time. For further detail of these changes to the
financial covenants see Note 13 of the Consolidated Financial Statements. Our financial covenants,
effective as of December 31, 2005, require us to maintain with respect to each fiscal quarter set forth
below:
(i) an interest coverage ratio for the four fiscal quarters then ended of not less than that set forth opposite
the corresponding quarter in the table below:
Four Fiscal Quarters Ending
December 31, 2005ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
March 31, 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
June 30, 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
September 30, 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31, 2006ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
March 31, 2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ratio
*
*
*
1.75 to 1
2.15 to 1
2.50 to 1
* The March 21, 2006 amendment, effective as of December 31, 2005, removed the financial covenant
requirements with respect to the interest coverage ratio for the fiscal quarters ending December 31,
2005, March 31, 2006 and June 30, 2006.
(ii) a debt to EBITDA ratio, where debt is the balance at period-end and EBITDA is for the four fiscal
quarters then ended, of not greater than that set forth opposite the corresponding quarter in the table
below:
Four Fiscal Quarters Ending
December 31, 2005ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
March 31, 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
June 30, 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
September 30, 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31, 2006ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
March 31, 2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ratio
*
*
*
5.15 to 1
4.15 to 1
3.90 to 1
* The March 21, 2006 amendment, effective as of December 31, 2005, removed the financial covenant
requirements with respect to the debt to EBITDA ratio for the fiscal quarters ending December 31,
2005, March 31, 2006 and June 30, 2006.
64
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Ì (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
December 31, 2005ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
March 31, 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
June 30, 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
September 30, 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31, 2006ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
March 31, 2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amount
$233.0
175.0
100.0
440.0
545.0
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:
2005
Senior
Unsecured
Moody'sÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Standard & Poor's ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fitch ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ba1
B°
B°
December 31,
Senior
Unsecured
2004
Outlook
Baa3
BB°
BB°
Stable
Credit watch Negative
Stable
Outlook
Negative
Negative
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 Ì (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 Ì (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
$
3.1
Long-term debt* ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest payments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$128.1
Non-cancelable operating lease obligations ÏÏÏ $287.1
$
4.7
$128.8
$250.2
$256.7
$123.5
$222.5
$250.8
$107.6
$194.6
$
0.8
$ 58.1
$172.2
$1,670.0
$ 123.8
$ 793.6
$2,186.1
$ 669.9
$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 Ì (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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$18.3
11.3
$1.8
0.3
$ 0.9
Ì
$10.5
Ì
$ Ì
Ì
$ Ì
Ì
$ 31.5
11.6
Put Options with Consolidated Affiliates*
Cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
23.4
0.1
Put Options with Unconsolidated Affiliates*
Cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Call Options with Consolidated Affiliates*
Cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1.3
0.4
3.3
0.1
Subtotal Ì CashÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subtotal Ì Stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
46.3
11.9
2.3
0.3
2.5
1.0
0.4
Ì
7.0
1.6
11.4
0.5
11.5
0.6
0.4
Ì
24.2
1.1
2.8
Ì
0.3
0.3
0.1
Ì
13.7
0.3
1.8
Ì
Ì
Ì
2.7
Ì
4.5
Ì
2.9
Ì
Ì
Ì
Ì
Ì
2.9
Ì
44.6
0.9
15.6
2.3
6.9
0.1
98.6
14.9
Total Contingent Acquisition PaymentsÏÏÏÏÏ
$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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$16.6
0.1
Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
16.7
$0.8
Ì
0.8
$12.8
Ì
12.8
$ 5.4
Ì
5.4
$1.3
Ì
1.3
Total Payments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$74.9
$9.4
$38.1
$19.4
$5.8
$0.9
Ì
0.9
$3.8
$ 37.8
0.1
37.9
$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 Ì (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 Ì (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
12/31/05
Balance as of
12/31/04
Vendor Discounts or Credits* ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Internal Investigations* (includes asset reserves)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
International Compensation Arrangements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$284.8
24.7
36.2
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$345.7
$283.9
61.7
40.3
$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 Ì (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, 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, 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
12/31/04
Liability
Reversals
Additional
Liabilities
Payments
Other
Balance as of
12/31/05
Vendor Discounts or
CreditsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$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 Ì (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 manage-
ment'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 Ì (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 Ì (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.
Revenue as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact of adjustments:
Vendor Discounts or Credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total net adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact of Adjustments
on Revenue
For the Three Months
Ended December 31, 2005
$ 1,895.7
21.2
(3.9)
17.3
Revenue (exclusive of out of period amounts)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 1,913.0
Impact of Adjustments on
Operating Income
For the Three Months
Ended December 31, 2005
Operating Income as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact of adjustments:
Vendor Discounts or Credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total net adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 57.6
23.2
(1.6)
21.6
Operating Income (exclusive of out period amounts)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 44.6
Impact of adjustments:
Vendor Discounts or Credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total net adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
22.9
(2.2)
20.7
Income from continuing operations before provision for income
taxes (exclusive of out of period amounts) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 65.3
74
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
Loss from continuing operations as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact of adjustments:
Vendor Discounts or Credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total adjustments (pre-tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Tax adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity in net income of unconsolidated affiliates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total net adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact of Adjustments
on Loss from
Continuing Operations
and Loss per Share
For the Three Months
Ended December 31, 2005
$(31.9)
22.9
(2.2)
20.7
19.5
3.9
(2.7)
Loss from continuing operations (exclusive of out of period
amounts)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(34.6)
Loss per share of common stock Ì basic and diluted:
Loss per share as reportedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Effect of adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loss per share (exclusive of out of period amounts) ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted-average shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(0.10)
(0.01)
(0.11)
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 Ì (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
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 frequently 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 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 the client contract, fees for
services performed can be primarily recognized 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') is appropriate in situations where
the client arrangement essentially functions as a time and out-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 Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
‚ 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' 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 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. 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.
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 EITF Issue No. 99-19, Reporting
Revenue Gross as a Principal versus Net as an Agent, we assess whether the 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.
The determination 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. 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.
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 Ì (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, which are passed through to our clients in accordance with contractual provisions and local law. If
a pass-through is not required, then these credits are a reduction 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 methods to estimate our exposure 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 estimate of the liability 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. See Note 2 to the Consolidated Financial Statements for further information.
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. 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 recovered or settled. 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.
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 establishment and reversal of valuation allowances has had and
could have a significant negative or positive impact on our future earnings. See Note 11 to the
Consolidated Financial Statements for further information.
78
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
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 Ì (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) annually 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 16 reporting units 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 1 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 specifies a two-step process for testing for goodwill impairment 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) of the unit. Such projections 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 Ì (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, 2005 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 at one of our reporting units that
caused us to perform additional impairment testing. As a result, we recorded $97.0 of impairments during
2005. See Notes 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 for each of the non-impaired reporting units ranged
from approximately $2.4 to $1,501.9 and $6.4 to $1,501.9 in 2005 and 2004, respectively. 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 units would result in a range of an impairment
charge of approximately $38.2 to excess fair value over carrying value of approximately $871.9. This
hypothetical 10% decrease would result in excess fair value over carrying value for each 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 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 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.
81
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
Pension and Postretirement Benefits
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. The discount
rate determination is one of the significant assumptions that impacts our benefit cost and recorded
obligations for pension and postretirement plans. Discount rates used for our benefit plans attempt to
match the duration of the underlying liability with highly rated securities that could be used to effectively
settle the obligation. For example, in 2005, a 25 basis point decrease in the discount rate would have
increased our net benefit cost by approximately $2.0. See Note 16 to the Consolidated Financial
Statements for further information.
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 our Prior
Restatement. In particular, since we filed our 2004 Form 10-K, we have received subpoenas from the SEC
relating to matters addressed in our Prior Restatement. We continue to cooperate with the investigation.
We expect that the investigation will result in monetary liability, but because the investigation is ongoing,
in particular with respect to the Prior Restatement, we cannot reasonably estimate either the timing of a
resolution or the amount. Accordingly, we have not yet established any accounting provision relating to
these matters.
RECENT ACCOUNTING STANDARDS
See Note 22 to the Consolidated Financial Statements for a complete description of recent accounting
pronouncements that have affected us or may affect us.
82
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 at
December 31, 2005 consisted of our 4.50% Notes 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, the fair market value of the debt obligations would decrease by
approximately $27.7 if market rates were to increase by 10% and would increase by approximately $28.0 if
market rates were to decrease by 10%. For 2004, the fair market value of the debt obligations would have
decreased by approximately $16.3 if market rates increased by 10% and would have increased by
approximately $19.5 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, interest expense and cash
out-flow would increase or decrease by approximately $2.1 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, interest expense and cash out-flow would have increased or
decreased by approximately $1.8 if market rates increased or decreased by 10%, respectively. From time to
time we have 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. 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, 2005 and 2004. 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.
83
Item 8. Financial Statements and Supplementary Data
INDEX
Management's Assessment on Internal Control over Financial Reporting ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Report of Independent Registered Public Accounting Firm ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003 ÏÏÏÏ
Consolidated Balance Sheets as of December 31, 2005 and 2004ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 ÏÏÏÏ
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) for the years
ended December 31, 2005, 2004 and 2003ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Notes to Consolidated Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Financial Statement Schedule Ì Valuation and Qualifying Accounts for the years ended
Page
85
92
99
100
101
102
103
December 31, 2005, 2004 and 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
171
84
MANAGEMENT'S ASSESSMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.
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 in Internal Control Ì Integrated Framework issued 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 assessment is that our internal control over financial reporting was not effective as of
December 31, 2005 because of the material weaknesses identified and described below. 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 as 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 deficiency 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,
85
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:
client contracts, and client or vendor incentives and rebates;
accounts receivable transactions, expenditures and fees billable to clients;
fixed assets purchases, disposals, depreciable lives and leases;
accounts payable and accrued liabilities;
i.
ii.
iii.
iv.
v. payments made for employee and executive compensation and payments for benefits;
vi.
vii.
viii.
ix. purchase of equity of investments in unconsolidated entities;
x. purchase, disposal or write-off of intangible assets; and
xi. debt and equity transactions.
cash and cash equivalents, wire transfers, and foreign currency transactions;
arrangements with derivative instruments;
intercompany 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,
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.
86
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 2005 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.
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 intercom-
pany 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
87
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:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.
xii.
compare revenue recorded to amounts billed to clients;
identify contracts with potential client rebates and vendor incentives;
analyze collectibility of aged accounts receivable or expenditures billable to clients;
compare billable job costs to client cost estimates;
review fixed asset records for under utilized, missing or fully depreciated assets;
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;
review intercompany balances and transactions for appropriate classification;
review cash, foreign currency translation adjustments and other derivative transactions;
analyze accrued expenses, including restructuring charges;
test tangible and intangible assets for impairments and appropriate economic lives;
review of other asset and other liability accounts, equity and revenue and expense accounts for
appropriate activity or roll-forward of balances; and
analyze amounts recorded as income tax liabilities or deferred tax assets or liabilities and the
related income tax provision or benefit.
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 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.
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
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
88
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. Addition-
ally, 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.
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'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.
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 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
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.
89
Management's assessment of the effectiveness of the Company's internal control over financial
reporting as of December 31, 2005 has been audited by PricewaterhouseCoopers LLP (PwC), our
independent registered public accounting firm. Refer to PwC's report within Item 8.
REMEDIATION OF MATERIAL WEAKNESSES IN
INTERNAL CONTROL OVER FINANCIAL REPORTING
We continue to have extensive work remaining to remedy the material weaknesses described above.
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. We continue the process
of developing and implementing a remediation plan to address our deficiencies and expect that this plan
will extend into the 2006 fiscal year and beyond. The following list describes remedial actions that have
been implemented to date or continue to be implemented across the Company's operating units.
Continuing 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 of Conduct compliance certifications by all significant management
of the Company and our agencies prior to the submission of the financial and operating units'
financial statements.
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
proper follow-up and resolution of whistleblowers' assertions.
Established 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 the reporting of our results of
operations and will also allow for numerous controls to be automated as part of the system.
Continuing the development throughout 2006 of a shared service center program to consolidate
various financial transactional functions to attain efficiencies and 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 of the
accounting and finance departments at our agencies and, in some cases, 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.
90
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, update and enhance tax related policies and
procedures, and increase 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 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.
91
Report of Independent Registered Public Accounting Firm
To the 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.'s 2005 consolidated
financial statements and of its internal control over financial reporting as of December 31, 2005 and audits
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' equity and of cash flows present fairly, in all material respects, the financial
position of The Interpublic Group of Companies, Inc. and its subsidiaries at December 31, 2005 and 2004,
and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2005 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 related 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 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 described in Note 8 to the consolidated financial statements the Company has changed the date of its
annual goodwill impairment test from September 30 to October 1.
Internal control over financial reporting
Also, we have audited management's assessment, included in Management's Assessment on Internal
Control Over Financial Reporting appearing under Item 8, that The Interpublic Group of Companies, Inc.
did not maintain effective internal control over financial reporting as of December 31, 2005, 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 of recording of revenue; (4) effective controls to ensure that certain financial statement
transactions were appropriately initiated, authorized, processed, documented and accurately recorded;
(5) effective controls over the complete and accurate recording of leases in accordance with GAAP;
(6) 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;
(7) effective controls over reporting local income tax in the local statutory accounts or local income tax
returns in operations outside of the United States; (8) effective controls relating to the completeness and
accuracy of local payroll and compensation 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) effective controls over
the safeguarding of assets; (14) effective controls over certain independent service providers; (15) effective
92
controls over access to the Company's financial applications and data as well as controls over changes to
financial applications; (16) effective 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, based on criteria established in Internal Control Ì
Integrated Framework issued 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 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, 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 deficiency 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:
client contracts, and client or vendor incentives and rebates;
accounts receivable transactions, expenditures and fees billable to clients;
fixed assets purchases, disposals, depreciable lives and leases;
accounts payable and accrued liabilities;
i.
ii.
iii.
iv.
v. payments made for employee and executive compensation and payments for benefits;
vi.
vii.
viii.
cash and cash equivalents, wire transfers, and foreign currency transactions;
arrangements with derivative instruments;
intercompany transactions;
ix. purchase of equity of investments in unconsolidated entities;
x. purchase, disposal or write-off of intangible assets; and
xi. 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,
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.
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 2005 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.
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.
95
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:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.
xii.
compare revenue recorded to amounts billed to clients;
identify contracts with potential client rebates and vendor incentives;
analyze collectibility of aged accounts receivable or expenditures billable to clients;
compare billable job costs to client cost estimates;
review fixed asset records for under utilized, missing or fully depreciated assets;
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;
review intercompany balances and transactions for appropriate classification;
review cash, foreign currency translation adjustments and other derivative transactions;
analyze accrued expenses, including restructuring charges;
test tangible and intangible assets for impairments and appropriate economic lives;
review of other asset and other liability accounts, equity and revenue and expense
accounts for appropriate activity or roll-forward of balances; and
analyze amounts recorded as income tax liabilities or deferred tax assets or liabilities and
the related income tax provision or benefit.
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 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.
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
96
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 2005 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, is fairly stated, in all material respects, based on criteria
established in Internal Control Ì Integrated Framework issued 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, based on criteria established in Internal Control Ì Integrated Framework issued by
the COSO.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 22, 2006
98
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Millions, Except Per Share Amounts)
Years Ended December 31,
2004
2005
2003
REVENUEÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$6,274.3
$6,387.0
$6,161.7
OPERATING (INCOME) EXPENSES:
Salaries and related expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Office and general expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Restructuring (reversals) charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-lived asset impairment and other charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Motorsports contract termination costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3,999.1
2,288.1
(7.3)
98.6
Ì
3,733.0
2,250.4
62.2
322.2
113.6
3,501.4
2,225.3
172.9
294.0
Ì
Total operating (income) expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6,378.5
6,481.4
6,193.6
OPERATING LOSSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(104.2)
(94.4)
(31.9)
EXPENSES AND OTHER INCOME:
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Debt prepayment penalty ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment impairments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Litigation reversals (charges) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other income (expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(181.9)
(1.4)
80.0
(12.2)
Ì
33.1
(172.0)
(9.8)
50.8
(63.4)
32.5
(10.7)
(206.6)
(24.8)
39.3
(71.5)
(127.6)
50.3
Total expenses and other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(82.4)
(172.6)
(340.9)
Loss from continuing operations before provision for income taxesÏÏÏÏÏ
Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loss from continuing operations of consolidated companiesÏÏÏÏÏÏÏÏÏÏÏ
Income applicable to minority interests (net of tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity in net income of unconsolidated affiliates (net of tax) ÏÏÏÏÏÏÏÏ
Loss from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income from discontinued operations (net of tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividends on preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(186.6)
81.9
(268.5)
(16.7)
13.3
(271.9)
9.0
(262.9)
26.3
(267.0)
262.2
(529.2)
(21.5)
5.8
(544.9)
6.5
(538.4)
19.8
(372.8)
242.7
(615.5)
(27.0)
2.4
(640.1)
101.0
(539.1)
Ì
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS ÏÏÏÏÏÏ
$ (289.2)
$ (558.2)
$ (539.1)
Earnings (loss) per share of common stock:
Basic and diluted:
Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (0.70)
0.02
$ (1.36)
0.02
$ (1.66)
0.26
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (0.68)
$ (1.34)
$ (1.40)
Weighted-average shares:
Basic and diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
424.8
415.3
385.5
The accompanying notes are an integral part of these financial statements.
99
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in Millions, Except Per Share Amounts)
ASSETS:
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Marketable securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts receivable, net of allowance of $105.5 and $136.1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expenditures billable to clients ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Prepaid expenses and other current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Land, buildings and equipment, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total non-current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
TOTAL ASSETS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
LIABILITIES:
Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred compensation and employee benefits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other non-current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interests in consolidated subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total non-current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
TOTAL LIABILITIESÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commitments and contingencies (Note 21)
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, shares authorized: 20.0
December 31
2005
2004
$ 2,075.9
115.6
4,015.7
917.6
184.3
188.3
7,497.4
650.0
297.3
170.6
3,030.9
299.0
4,447.8
$11,945.2
$ 4,245.4
2,554.3
56.8
6,856.5
2,183.0
592.1
319.0
49.3
3,143.4
9,999.9
$ 1,550.4
420.0
4,319.2
882.9
261.0
184.6
7,618.1
722.9
274.2
168.7
3,141.6
328.2
4,635.6
$12,253.7
$ 4,733.5
2,485.2
325.9
7,544.6
1,936.0
590.7
408.9
55.2
2,990.8
10,535.4
Series A shares issued and outstanding: 2005 Ì 7.5; 2004 Ì 7.5 ÏÏÏÏÏÏÏÏÏÏÏÏ
Series B shares issued and outstanding: 2005 Ì 0.5 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock, $0.10 par value, shares authorized: 800.0 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
373.7
525.0
43.0
373.7
Ì
42.5
shares issued: 2005 Ì 430.3; 2004 Ì 424.9
shares outstanding: 2005 Ì 429.9; 2004 Ì 424.5
Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated deficit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated other comprehensive loss, net of tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less:
Treasury stock, at cost: 2005 Ì 0.4 shares; 2004 Ì 0.4 shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unamortized deferred compensationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
TOTAL STOCKHOLDERS' EQUITY ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITYÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2,224.1
(841.1)
(276.0)
2,048.7
(14.0)
(89.4)
2,208.9
(578.2)
(248.6)
1,798.3
(14.0)
(66.0)
1,945.3
$11,945.2
1,718.3
$12,253.7
The accompanying notes are an integral part of these financial statements.
100
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Millions)
Years Ended December 31,
2003
2004
2005
(Revised Ì See Note 1)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income from discontinued operations, net of taxÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Depreciation and amortization of fixed assets and intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for bad debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of restricted stock and other non-cash compensationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of bond discounts and deferred financing costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred income tax provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity in (income) loss of unconsolidated affiliates, net of dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income applicable to minority interests, net of tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Restructuring charges (reversals) Ì non-cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-lived asset impairment and other chargesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment impairments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Litigation (reversals) chargesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gain on sales of investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(Gain) loss on sales of businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change in assets and liabilities, net of acquisitions and disposals:
Accounts receivableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expenditures billable to clients ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Prepaid expenses and other current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts payable and accrued expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other non-current assets and liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash used in operating activities of discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash provided by (used in) operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, including deferred payments, net of cash acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from sales of businesses and fixed assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from sales of investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchases of investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Maturities of short-term marketable securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchases of short-term marketable securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from the sale of discontinued operations, net of cash sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash used in investing activities of discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (262.9) $ (538.4) $ (539.1)
(101.0)
(9.0)
(6.5)
168.8
16.9
42.3
9.1
44.6
(7.4)
16.7
(0.1)
98.6
12.2
Ì
(16.3)
(10.1)
9.8
39.6
(54.3)
(6.6)
(152.4)
40.3
Ì
(20.2)
(91.7)
(140.7)
61.8
70.4
(39.9)
690.5
(384.0)
Ì
Ì
185.1
36.7
31.4
22.9
128.2
3.5
21.5
6.7
322.2
63.4
(12.5)
(5.4)
18.2
(6.6)
(38.4)
(34.4)
50.6
202.4
14.2
Ì
464.8
(175.4)
(194.0)
30.4
43.0
(34.3)
1,148.4
(1,372.7)
10.0
Ì
216.5
32.6
38.8
35.0
58.1
6.4
27.0
Ì
294.0
71.5
127.6
(47.9)
0.3
0.9
385.0
(136.0)
83.1
(122.1)
77.8
(5.9)
502.6
(224.6)
(159.6)
26.8
128.8
(65.8)
177.0
(339.1)
376.7
(5.8)
Net cash provided by (used in) investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
166.4
(544.6)
(85.6)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term bank borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Payments of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Debt issuance costs and consent fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Issuance of preferred stock, net of issuance costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Issuance of common stock, net of issuance costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Distributions to minority interests, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash used in financing activities of discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash provided by (used in) financing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Effect of exchange rates on cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(35.9)
(257.1)
252.4
(17.9)
508.0
3.2
(22.6)
(20.0)
Ì
410.1
(30.8)
Increase (decrease) in cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and cash equivalents at beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
525.5
1,550.4
7.0
(843.0)
602.3
(8.0)
Ì
25.6
(23.6)
(19.8)
Ì
(259.5)
17.8
(321.5)
1,871.9
(214.4)
(745.6)
801.2
(27.0)
361.6
335.3
(26.4)
Ì
(1.7)
483.0
18.7
918.7
953.2
Cash and cash equivalents at end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,075.9
$ 1,550.4
$1,871.9
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash paid for income taxes, net of $34.1 and $47.3 of refunds in 2005 and 2004, respectivelyÏÏÏÏÏ
$ 180.2
94.9
$
$
$
162.8
66.2
$ 155.6
$ 122.7
The accompanying notes are an integral part of these financial statements.
101
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (LOSS)
(Amounts in Millions, Except Per Share Amounts)
Years Ended December 31,
2005
2004
2003
373.7
373.7
Ì
Ì
Ì
38.9
Ì
0.1
2.6
0.2
Ì
41.8
373.7
Ì
373.7
Ì
525.0
525.0
42.5 $
0.4
Ì
Ì
0.1
Ì
43.0
41.8 $
0.3
0.1
Ì
0.2
0.1
42.5
Ì
Ì 373.7
373.7
Ì
Ì
Ì
Restricted stock, net of forfeitures and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Employee stock purchasesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercise of stock options, including tax benefit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Issuance of common stock, net of fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Issuance of shares for acquisitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Issuance of common stock- litigation settlement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Issuance of preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
COMMON STOCK
Balance at beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $
Restricted stock, net of forfeitures and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Employee stock purchasesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Issuance of common stock, net of fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Issuance of shares for acquisitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Issuance of common stock- litigation settlement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance at end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PREFERRED STOCK
Balance at beginning of year, Series A ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Issuance of preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance at end of year, Series A ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance at beginning of year, Series B ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Issuance of preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance at end of year, Series B ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ADDITIONAL PAID IN CAPITAL
Balance at beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,208.9
42.7
1.2
2.1
Ì
12.9
Ì
(17.4)
(26.3)
Ì
Balance at end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,224.1
RETAINED EARNINGS (ACCUMULATED DEFICIT)
Balance at beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance at end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustment for minimum pension liability (net of tax of ($1.0), ($5.4) and ($0.6) in 2005, 2004 and 2003, respectively) ÏÏÏ
Changes in market value of securities available-for-sale, net of tax of ($7.8) in 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign currency translation adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Recognition of previously unrealized loss on securities available-for-sale, net of tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net other comprehensive loss adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance at end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
TREASURY STOCK
Balance at beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Issuance of shares for acquisitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance at end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
UNAMORTIZED DEFERRED COMPENSATION
Balance at beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Restricted stock, net of forfeitures and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance at end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
TOTAL STOCKHOLDERS' EQUITY ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,945.3 $1,718.3 $2,118.8
(248.6) (259.1) (395.2)
4.0
(47.6)
1.4
10.1
3.4
14.6
122.0
51.5
(43.0)
Ì
3.2
(0.4)
(27.4)
136.1
10.5
(276.0) (248.6) (259.1)
2,076.0
(3.9)
26.4
9.6
7.6
7.8
1.6
Ì 326.9
(45.6)
Ì
(578.2)
(39.8)
(262.9) (538.4) (539.1)
(39.8)
(841.1) (578.2)
Ì (12.1)
Ì
1.7
2,076.0
(11.3) (119.2)
107.9
(2.7)
(11.3)
(14.0)
(19.8)
4.4
2,208.9
(14.0)
Ì
(14.0)
(66.0)
(23.4)
(89.4)
(99.0)
36.5
(62.5)
(62.5)
(3.5)
(66.0)
33.9
72.6
1,797.8
499.3
COMPREHENSIVE INCOME (LOSS)
Net loss applicable to common stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (289.2)$ (558.2)$ (539.1)
Preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net other comprehensive income (loss) adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
136.1
Total comprehensive lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (290.3)$ (527.9)$ (403.0)
26.3
(27.4)
19.8
10.5
NUMBER OF COMMON SHARES
Balance at beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Restricted stock, net of forfeitures and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Employee stock purchasesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercise of stock options, including tax benefit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Issuance of common stock, net of fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Issuance of shares for acquisitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Issuance of common stock- litigation settlement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance at end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
424.9
4.1
0.1
0.3
Ì
0.9
Ì
430.3
418.4
2.7
0.7
0.5
Ì
1.8
0.8
424.9
389.3
Ì
0.9
Ì
25.8
2.4
Ì
418.4
The accompanying notes are an integral part of these financial statements.
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 services such as experiential marketing and
branded entertainment. With offices in over 100 countries and approximately 43,000 employees, our
agencies work with our clients to create global and local marketing campaigns. These marketing programs
seek to build brands, influence consumer behavior and sell products.
Prior Restatement
In our 2004 Annual Report on 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''). 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, most of which are
wholly owned. Investments in companies in which we exercise significant influence, but not control, are
accounted for using the equity method of accounting. Investments in companies in which we have less
than a 20% ownership interest and do not exercise significant influence are accounted for at cost. All
intercompany accounts and transactions have been eliminated in consolidation.
In accordance with Statements of Financial Accounting Standards (""SFAS'') 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.
Reclassifications and Revisions
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 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.
103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles
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.
Segments
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 frequently 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 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 (iv) services have been performed. 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.
‚ 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 and out-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.
104
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
‚ 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' 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 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. 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.
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'')
Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, we assess whether the
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.
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
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, which are passed through to our clients in accordance with contractual provisions and local law. If
a pass-through is not required, then these credits are a reduction of vendor cost, and are recorded as
additions to revenue. In connection with our Prior Restatement, where it was impractical to review client
contracts, we used statistical methods to estimate our exposure 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 estimate of the liability 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
105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
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)
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 include out-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
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, 2005 and 2004, we held restricted cash of $34.2 and $32.0, respectively, included
in prepaid expenses and other current assets on our Consolidated Balance Sheets. Restricted cash
represents cash equivalents that are maintained on behalf of our clients and are legally restricted for a
specified business purpose.
We classify all of our short-term marketable equity securities as available-for-sale. These 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 is primarily comprised of
production and media costs which 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
106
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
clients. Unbilled amounts are presented in expenditures billable to clients regardless of whether they relate
to fee or production/media. A provision is made for unrecoverable costs as deemed appropriate.
Investments
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 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. 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 10 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, 2005, 2004 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 costs 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
characteristics of advertising, specialized marketing and communication services companies, our acquisi-
tions usually do not have significant amounts 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.
107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(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) annually 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 16 reporting units 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 No. 142 specifies a two-step process for testing for goodwill impairment 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) of the unit. Such projections 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 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 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 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. See Note 8 for further explanation.
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
108
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
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.
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.
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. 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 11 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, basic Earnings Per Share (""EPS'')
is calculated using the two-class method, pursuant to EITF Issue No. 03-6, Participating Securities and
the Two Ì Class Method under SFAS Statement No. 128. 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.
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 14 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 dilution 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) the amount, if any, to be paid upon exercise; (2) the amount of compensation cost attributed to future
109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
service not yet recognized; and (3) any tax benefits credited to paid-in-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.
See Note 16 for a further discussion.
Stock-Based Compensation
In accordance with SFAS No. 123, Accounting for Stock-Based Compensation, we have accounted for
our various stock-based compensation plans under the intrinsic value recognition and measurement
principles of Accounting Principles Board (""APB'') Opinion No. 25, Accounting for Stock Issued to
Employees, 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 defined by SFAS No. 123 and amended
by SFAS No. 148, Accounting for Stock-Based Compensation Ì Transition and Disclosure Ì An
110
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
Amendment of FASB No. 123, our pro forma net loss applicable to common stockholders and loss per
share would have been as follows:
For the Years Ended December 31,
2004
2003
2005
As reported, net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividends on preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(262.9)
(26.3)
$(538.4)
(19.8)
$(539.1)
Ì
Net loss applicable to common stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Add:
Stock-based employee compensation expense included in net
(289.2)
(558.2)
(539.1)
loss applicable to common stockholders, net of tax ÏÏÏÏÏÏÏÏ
30.2
22.5
22.9
Less:
Total fair value of stock-based employee compensation
expense, net of tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(62.6)
(51.3)
(57.6)
Pro forma net loss applicable to common stockholders ÏÏÏÏÏÏÏÏÏ
$(321.6)
$(587.0)
$(573.8)
Loss per share
Basic and diluted loss per share*
As reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Pro formaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (0.68)
$ (0.76)
$ (1.34)
$ (1.41)
$ (1.40)
$ (1.49)
* 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.
For purposes 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 included in the total fair value of stock-based
employee compensation expense. No stock was purchased under the ESPP during the second quarter 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. Changes in the
assumptions can materially affect the estimate of fair value of options granted 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.
111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (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 of the options granted.
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,
2004
2005
2003
Expected option lives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Risk free interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected volatility ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividend yieldÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted-average option grant price ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted-average fair value of options granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6 years
6 years
6 years
4.0%
41.0%
0.0%
4.0%
44.7%
0.0%
3.3%
43.9%
0.0%
$ 12.39
$ 5.62
$ 14.19
$ 6.91
$ 10.59
$ 4.96
Note 2: Liabilities Relating to our Prior Restatement
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* ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Internal Investigations* (includes asset reserves) ÏÏÏÏ
International Compensation Arrangements ÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$284.8
24.7
36.2
$345.7
$283.9
61.7
40.3
$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
112
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (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-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 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,
113
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (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
Reversals Liabilities
12/31/04
Payments Other
Balance as of
12/31/05
Vendor Discounts or CreditsÏÏÏÏ
$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 manage-
ment'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 Ì (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.
115
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (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.
Revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact of adjustments:
Vendor Discounts or Credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total net adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact of adjustments:
Vendor Discounts or Credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total net adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact of
Adjustments
on Revenue
For the Three
Months Ended
December 31,
2005
$1,895.7
21.2
(3.9)
17.3
$1,913.0
Impact of
Adjustments on
Operating Income
For the Three
Months Ended
December 31,
2005
$
57.6
23.2
(1.6)
21.6
$
79.2
116
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
Income from continuing operations before provision for income taxesÏÏÏÏÏÏÏÏ
Impact of adjustments:
Vendor Discounts or Credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total net adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loss from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact of adjustments:
Vendor Discounts or Credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total adjustments (pre-tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Tax adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity in net income of unconsolidated affiliates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total net adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loss per share of common stock Ì basic and diluted:
Loss per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Effect of adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact of
Adjustments on
Income from
Continuing
Operations Before
Provision for
Income Taxes
For the Three
Months Ended
December 31,
2005
$44.6
22.9
(2.2)
20.7
$65.3
Impact of
Adjustments on
Loss from
Continuing
Operations and
Loss per Share
For the Three
Months Ended
December 31,
2005
$(31.9)
22.9
(2.2)
20.7
19.5
3.9
(2.7)
$(34.6)
$(0.10)
(0.01)
(0.11)
Weighted-average shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
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 Ì (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,
2004
2005
2003
Basic and Diluted
Loss from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less: preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(271.9)
26.3
$(544.9)
19.8
$(640.1)
Ì
(298.2)
(564.7)
(640.1)
Income from discontinued operations, net of taxes of ($9.0),
$3.5 and $18.5, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
9.0
6.5
101.0
Net loss applicable to common stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(289.2)
$(558.2)
$(539.1)
Weighted-average number of common shares outstanding Ì
basic and dilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loss per share from continuing operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Earnings per share from discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
424.8
$ (0.70)
0.02
415.3
$ (1.36)
0.02
385.5
$ (1.66)
0.26
Loss per share Ì basic and diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (0.68)
$ (1.34)
$ (1.40)
118
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (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,
2004
2005
2003
Stock Options, Non-vested Restricted Stock
Awards and Restricted Stock Units ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Contingently Issuable SharesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1.80% Convertible Notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1.87% Convertible Notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4.50% Convertible Notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Series A Mandatory Convertible Preferred Stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Series B Cumulative Convertible Perpetual Preferred StockÏÏÏÏÏÏÏÏÏÏÏÏ
4.8
Ì
Ì
Ì
64.4
27.7
7.3
4.0
1.2
0.4
6.1
64.4
26.3
Ì
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
104.2
102.4
4.1
Ì
6.7
6.4
51.5
0.8
Ì
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 Ì 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 distributable or expensed as compensation
119
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
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 2005. We completed two acquisitions during 2004 and
two during 2003, none of which were 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. We
did, however, make stock payments related to acquisitions initiated in prior years of $12.9, $23.8 and $56.2
during 2005, 2004 and 2003, respectively. Details of cash paid for new and prior acquisitions are as follows:
For the Years Ended
December 31,
2004
2003
2005
Cash paid for current year acquisitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash paid for prior acquisitions:
$ Ì $ 14.6
$
4.0
Cost of Investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Compensation Expense Ì Related Payments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less: cash acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
91.7
5.3
Ì
141.6
20.1
(0.9)
216.9
4.3
(0.6)
Net cash paid for acquisitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$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:
1999 and Prior
Cash payments for prior acquisitions ÏÏÏÏÏ
Stock issued for prior acquisitions ÏÏÏÏÏÏÏ
Total consideration ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$40.1
0.8
$40.9
Year of Original Acquisition
2002
2001
2000
$26.1
12.1
$26.8
Ì
$38.2
$26.8
$1.9
Ì
$1.9
2003
2004
$0.4
Ì
$0.4
$1.7
Ì
$1.7
Total Paid
During
2005
$ 97.0
12.9
$109.9
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.
Motorsports Ì 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
120
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
British Grand Prix held at the Silverstone racetrack in the United Kingdom (""UK''). 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.
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. 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, 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. Motorsports charges consist of the following:
For the Years
Ended
December 31,
2004
2003
Long-lived asset impairment and other charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Motorsports contract termination costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
3.0
113.6
$63.8
Ì
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$116.6
$63.8
NFO Ì 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
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
investment in NFO for income tax purposes at the time of the disposition of NFO. During the fourth
quarter of 2005, these reserves of $9.0 were reversed, as the related income tax contingencies are no longer
considered probable. 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.
121
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
Income from discontinued operations consists of the following:
Revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ Ì $ Ì $250.1
For the Years Ended
December 31,
2005
2004
2003
Pre-tax income from discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì
$ Ì $ Ì $ 20.4
Ì
(8.5)
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì
9.0
Gain on sale, net of taxes of ($9.0), $3.5 and $10.0, respectively ÏÏÏÏÏÏÏ
Ì
6.5
11.9
89.1
Income from discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$9.0
$6.5
$101.0
Note 6: Restructuring (Reversals) Charges
During 2005, 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
($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 of December 31, 2005, substantially all
activities under the 2003 and 2001 programs were completed. A summary of the net (reversals) and
charges by segment is as follows:
Lease Termination and
Other Exit Costs
2001
Program
2003
Program
Total
Severance and
Termination Costs
2003
Program
2001
Program
Total
Total
2005 Net (Reversals) Charges
IAN ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CMG ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(6.3)
1.1
(0.2)
$(0.3)
0.2
(0.4)
$(6.6)
1.3
(0.6)
$ (0.4)
(0.7)
(0.3)
$ Ì $ (0.4)
(0.7)
(0.3)
Ì
Ì
$ (7.0)
0.6
(0.9)
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(5.4)
$(0.5)
$(5.9)
$ (1.4)
$ Ì $ (1.4)
$ (7.3)
2004 Net (Reversals) Charges
IAN ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CMG ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$40.3
8.1
3.7
$(7.3)
4.0
(1.0)
$33.0
12.1
2.7
$ 14.1
5.1
0.3
$(4.3)
(0.7)
(0.1)
$
9.8
4.4
0.2
$ 42.8
16.5
2.9
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$52.1
$(4.3)
$47.8
$ 19.5
$(5.1)
$ 14.4
$ 62.2
2003 Net (Reversals) Charges
IAN ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CMG ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Motorsports ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$23.1
12.7
Ì
(2.2)
$ 8.8
6.1
Ì
(1.3)
$31.9
18.8
Ì
(3.5)
$106.6
15.7
0.4
3.1
$(0.1)
Ì
Ì
Ì
$106.5
15.7
0.4
3.1
$138.4
34.5
0.4
(0.4)
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$33.6
$13.6
$47.2
$125.8
$(0.1)
$125.7
$172.9
122
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
Lease termination and other exit costs
2003 Program
Net (reversals) and charges related to lease termination and other exit costs of ($5.4), $52.1 and
$33.6 recorded for 2005, 2004, and 2003, respectively, were comprised of charges of $2.0, $67.8 and $41.6
offset by adjustments to management's estimates of $7.4, $15.7 and $8.0, respectively. The discount related
to lease terminations is being amortized over the expected remaining term of the related lease and is the
primary amount included as charges for 2005. Additionally, charges were recorded for the vacating of 43
and 55 offices in 2004 and 2003, respectively, located primarily in the U.S. and Europe. Charges were
recorded at 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, related to the accelerated amortization of leasehold improvements on properties included in
the 2003 program. These charges were included in office and general expenses in the Consolidated
Statements of Operations.
2001 Program
Net (reversals) and charges related to lease termination and other exit costs of ($0.5), ($4.3) and
$13.6, recorded for 2005, 2004 and 2003, respectively, resulted exclusively from the impact of adjustments
to management's estimates. The 2001 program resulted in approximately 180 offices being vacated
worldwide. Given the remaining life of the vacated properties, cash payments are expected to be made
through 2024.
Adjustments to Estimates
Lease termination and other exit costs for the 2003 and 2001 restructuring programs included the net
impact of adjustments for changes in management'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.
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. Net 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
related to a worldwide workforce reduction of approximately 400 employees in 2004 and 2,900 in 2003.
The restructuring program affected employee groups across all levels and functions, including executive,
regional and account management and administrative, creative and media production personnel. The majority
of the severance charges related to the 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.
123
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
Adjustments to Estimates
Severance and termination costs associated with the 2003 and 2001 restructuring programs included
the net impact of adjustments for changes in management's estimates 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 the decrease in the number of terminated employees,
change in amounts paid to terminated employees and change in estimates of taxes and restricted stock
payments related to terminated employees, all of which occurred during the period recorded.
A summary of the remaining liability for the 2003 and 2001 restructuring programs is as follows:
Liability at
12/31/04
Charges
Payments
Estimate
Adjustments
Other(1)
Liability at
12/31/05
2003 Program
Lease termination and
other exit costsÏÏÏÏÏÏÏÏÏ
$51.0
$2.0
$(19.9)
$(7.4)
$(2.1)
$23.6
Severance and termination
costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
7.2
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$58.2
Ì
$2.0
(3.0)
(1.4)
(0.4)
2.4
$(22.9)
$(8.8)
$(2.5)
$26.0
2001 Program
Lease termination and
other exit costsÏÏÏÏÏÏÏÏÏ
$37.2
$ Ì
$(14.3)
$(0.5)
$ 0.1
$22.5
Severance and termination
costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1.6
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$38.8
Total Restructuring ÏÏÏÏÏÏ
$97.0
Ì
$ Ì
$2.0
(1.1)
Ì
Ì
$(15.4)
$(0.5)
$ 0.1
$(38.3)
$(9.3)
$(2.4)
0.5
$23.0
$49.0
Liability at
12/31/03
Charges
Payments
Estimate
Adjustments
Other(1)
Liability at
12/31/04
2003 Program
Lease termination and
other exit costsÏÏÏÏÏÏÏÏÏ
$ 37.7
$67.8
$ (32.6)
$(15.7)
$(6.2)
$51.0
Severance and termination
costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
39.0
26.4
(52.4)
(6.9)
1.1
7.2
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 76.7
$94.2
$ (85.0)
$(22.6)
$(5.1)
$58.2
2001 Program
Lease termination and
other exit costsÏÏÏÏÏÏÏÏÏ
$ 65.6
$ Ì $ (28.0)
$ (4.3)
$ 3.9
$37.2
Severance and termination
costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
10.2
Ì
(3.1)
(5.1)
(0.4)
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 75.8
$ Ì $ (31.1)
$ (9.4)
$ 3.5
Total Restructuring ÏÏÏÏÏÏ
$152.5
$94.2
$(116.1)
$(32.0)
$(1.6)
1.6
$38.8
$97.0
124
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
(1) 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.
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 16 for further discussion.
Note 7: Land, Buildings and Equipment
The following table provides a summary of the components of land, buildings and equipment:
December 31,
2005
2004
Land and buildings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Furniture and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Leasehold improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
97.0
954.3
549.6
$ 111.1
1,038.6
571.3
Less: accumulated depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,600.9
(950.9)
1,721.0
(998.1)
Land, buildings and equipment, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 650.0
$ 722.9
Note 8: 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 principle 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
The changes in the carrying value of goodwill by segment for the years ended December 31, 2005 and
2004 are as follows:
IAN
CMG
Total
Balance as of December 31, 2003ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill from current acquisitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill from prior acquisitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impairment charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other (primarily currency translation)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,845.3
10.1
93.8
(220.2)
24.5
$422.6
Ì
56.6
(91.7)
0.6
$3,267.9
10.1
150.4
(311.9)
25.1
Balance as of December 31, 2004ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,753.5
$388.1
$3,141.6
Goodwill disposed ofÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill from prior acquisitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impairment charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other (primarily currency translation)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(24.2)
45.4
(97.0)
(65.0)
(1.7)
37.8
Ì
(6.0)
(25.9)
83.2
(97.0)
(71.0)
Balance as of December 31, 2005ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,612.7
$418.2
$3,030.9
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 1 to 15 years. The total amortization expense for the twelve months ended December 31, 2005, 2004
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:
December 31,
2005
2004
Other intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less: accumulated amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 64.4
(29.4)
$ 63.4
(25.8)
Other intangible assets, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 35.0
$ 37.6
Note 9: 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.
126
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
The following table summarizes the long-lived asset impairment and other charges:
2005
IAN CMG Motorsports Total
2004
CMG Motorsports
IAN
Total
IAN
2003
CMG Motorsports
Total
For the Years Ended December 31,
Goodwill
impairmentÏÏÏ $97.0 $ Ì
$Ì
$97.0 $220.2 $91.7
$ Ì $311.9 $ 0.4 $218.0
$ Ì $218.4
Fixed asset
impairmentÏÏÏ
Other ÏÏÏÏÏÏÏÏÏ
0.5 Ì
0.1
1.0
Ì
Ì
0.5
1.1
2.0
0.4
4.9 Ì
3.0
Ì
5.4
4.9
2.3
9.1
Ì
0.4
63.8
Ì
66.1
9.5
Total ÏÏÏÏÏÏÏÏ $98.5 $0.1
$Ì
$98.6 $227.1 $92.1
$3.0
$322.2 $11.8 $218.4
$63.8
$294.0
2005 Impairments
IAN Ì During the fourth quarter of 2005, we recorded a goodwill impairment charge of
approximately $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, 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
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 caused the implied fair value of goodwill to be less
than the related book value.
2004 Impairments
IAN Ì 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 caused the estimated fair values 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. 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 Ì 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.
127
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
2003 Impairments
CMG Ì 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 Ì 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: 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 Ì (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,
2003
2004
2005
Gains (losses) on sales of businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gain on sale of Modem Media shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gain on sale of TNS sharesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Contractual liability settlements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gains on sales of other available-for-sale securities and
$10.1
0.1
Ì
2.6
miscellaneous investment income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
20.3
$(18.2)
0.8
Ì
Ì
6.7
$ 0.3
30.3
13.3
Ì
6.4
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$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, a U.S.-based promotions agency, which resulted in a
loss of $8.6, and a $6.2 loss for the final liquidation of the Motorsports investment. See Note 5 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,
2004
2005
2003
Domestic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
54.4
(241.0)
$ (72.4)
(194.6)
$
(8.8)
(364.0)
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(186.6)
$(267.0)
$(372.8)
129
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (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,
2004
2003
2005
Federal income taxes (including foreign withholding taxes):
CurrentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State and local income taxes:
CurrentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign income taxes:
CurrentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$20.8
16.0
36.8
$ 37.2
18.2
$ 16.2
39.6
55.4
55.8
12.2
4.6
16.8
4.3
24.0
28.3
12.8
(22.6)
27.0
(9.0)
(9.8)
18.0
84.0
132.6
216.6
141.4
27.5
168.9
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$81.9
$262.2
$242.7
The components of deferred tax assets consist of the following items:
December 31,
2005
2004
Postretirement/postemployment benefits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred compensationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Pension costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basis differences in fixed assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Rent ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accruals and reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Allowance for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basis differences in intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investments in equity securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Tax loss/tax credit carry forwardsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Restructuring and other merger-related costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
36.4
162.7
36.1
59.8
19.8
(13.7)
239.3
23.0
(35.4)
(6.8)
447.3
16.9
(2.8)
$
18.6
234.1
50.1
14.8
8.8
(4.5)
130.5
33.3
(5.3)
16.2
411.6
45.2
70.4
Total deferred tax assets, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Valuation allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
982.6
(501.0)
1,023.8
(488.6)
Net deferred tax assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 481.6
$ 535.2
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 Ì (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 are non-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 Income to the U.S. Federal
statutory income tax rate is as follows:
For the Years Ended
December 31,
2004
2003
2005
US Federal statutory income tax rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Federal income tax provision (benefit) at statutory rate ÏÏÏÏÏÏÏÏÏÏ
State and local income taxes, net of federal income tax benefit ÏÏÏÏ
Impact of foreign operations, including withholding taxes ÏÏÏÏÏÏÏÏÏ
Change in valuation allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill and other long-lived asset impairment charges ÏÏÏÏÏÏÏÏÏÏ
Goodwill amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Restructuring and other merger-related costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Liquidation of Motorsports ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capitalized expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
35.0%
(65.3)
3.6
44.4
69.9
21.5
(1.7)
Ì
Ì
10.0
(0.5)
35.0%
$(93.5)
13.7
77.6
236.0
26.3
Ì
(1.2)
(19.7)
Ì
23.0
35.0%
$(130.5)
11.1
114.8
111.4
103.6
Ì
15.2
Ì
Ì
17.1
Provision (benefit) for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 81.9
$262.2
$ 242.7
Effective tax rate on operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
43.9%
98.2%
65.1%
Our effective tax rate was negatively impacted by the establishment of valuation allowances, as
described below, and non-deductible long-lived asset impairment charges. The difference between the
effective tax rate and the statutory federal rate of 35% is also due to state and local taxes and the effect of
non-U.S. operations.
As required by SFAS No. 109, we are required to evaluate on a quarterly basis the realizability of our
deferred tax assets. SFAS No. 109, Accounting 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 established relate primarily to foreign net operating and
U.S. capital loss carryforwards. During 2005, a net valuation allowance of $69.9 was established in
131
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
continuing operations on existing deferred tax assets and current year losses with no tax benefits. The total
valuation allowance as of December 31, 2005 was $501.0.
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 resulted 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 by 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 the field audit of the years 1997-2002 and has proposed additions to
our taxable income. One of the adjustments proposed by the IRS would disallow the deduction of a 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 Company had previously received a refund of
approximately $45 million of tax on account 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 to claim this deduction in that return, which we anticipate will be subject to
audit by the IRS commencing in Q2, 2006. In connection with the remaining proposed adjustments,
subject to our further review, we intend to file an administrative protest of, and to challenge vigorously,
those adjustments 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.
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.
132
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
Note 12: Accrued Liabilities
The following table provides a summary of the components of accrued liabilities:
December 31,
2005
2004
Accrued media and production expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Salaries, benefits and related expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued vendor discounts and credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued office and related expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued professional fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued restructuring charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,517.6
447.2
195.1
93.6
70.4
49.0
35.2
46.7
99.5
$1,411.5
441.5
153.1
113.8
73.6
97.0
35.0
58.8
100.9
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$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:
7.875% Senior Unsecured Notes due 2005 ÏÏÏÏÏ
Floating Rate Senior Unsecured Notes due
December 31,
2005
2004
Book Value
Fair Value
Book Value
Fair Value
$
Ì
$ Ì
$ 255.0
$ 257.5
2008ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
250.0
250.6
Ì
Ì
5.40% Senior Unsecured Notes due 2009 (less
unamortized discount of $0.3) ÏÏÏÏÏÏÏÏÏÏÏÏÏ
7.25% Senior Unsecured Notes due 2011 ÏÏÏÏÏÏ
6.25% Senior Unsecured Notes due 2014 (less
unamortized discount of $0.9) ÏÏÏÏÏÏÏÏÏÏÏÏÏ
4.50% Convertible Senior Notes due 2023 ÏÏÏÏÏ
Other notes payable and capitalized leases Ì at
interest rates from 3.3% to 14.44% ÏÏÏÏÏÏÏÏÏ
Total long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less: current portion ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
249.7
499.2
350.3
800.0
36.9
2,186.1
3.1
Long-term debt, excluding current portion ÏÏÏÏÏ
$2,183.0
225.0
465.0
297.5
834.0
249.7
500.0
347.3
800.0
42.1
2,194.1
258.1
$1,936.0
252.9
537.3
354.3
1,045.0
133
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
Annual repayments of long-term debt as of December 31, 2005 are scheduled as follows:
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2008* ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2010 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Thereafter* ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
3.1
4.7
256.7
250.8
0.8
1,670.0
Total long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$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.
In November 2004, we tendered for $250.0 of the $500.0 outstanding face value 7.875% Senior
Unsecured Notes at gross proceeds of approximately $263.1, which included the principal amount of the
Notes plus accrued interest to the tender date. A prepayment premium of $9.8 was recorded on the early
retirement of $250.0 of these Notes. In December 2004, we redeemed our outstanding 1.87% Convertible
Subordinated Notes with an aggregate principal amount of approximately $361.0 at maturity at gross
proceeds of approximately $346.8, which included the principal amount of the Notes plus accrued interest
to the redemption date. To tender for the 7.875% Senior Unsecured Notes and redeem the
1.87% Convertible Subordinated Notes, we used approximately $250.0 and $350.0, respectively, of the net
proceeds from the sale and issuance in November 2004 of the 5.40% Senior Unsecured Notes due
November 2009 and 6.25% Senior Unsecured Notes due November 2014.
In 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 Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
4.50% Convertible Senior Notes
The 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 is 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 Ì 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (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:
2005
2004
December 31,
Total
Facility
Amount
Outstanding
Letters
of Credit
Total
Available
Total
Facility
Amount
Outstanding
Letters
of Credit
Total
Available
Committed
364-Day Revolving Credit
Facility ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Three-Year Revolving Credit
Facility ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other Facilities ÏÏÏÏÏÏÏÏÏÏÏ
Uncommitted
$ Ì
$ Ì
$ Ì $ Ì $250.0
$ Ì
$ Ì $250.0
500.0
0.7
Ì
Ì
162.4
Ì
337.6
0.7
450.0
0.8
Ì
Ì
165.4
Ì
284.6
0.8
$500.7
$ Ì
$162.4
$338.3
$700.8
$ Ì
$165.4
$535.4
Non-U.S. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$516.2
$53.7
$ Ì $462.5
$738.1
$67.8
$ Ì $670.3
Our primary bank credit agreement is a three-year revolving credit facility (as amended, ""Three-Year
Revolving Credit Facility''). The Three-Year Revolving Credit Facility expires on May 9, 2007 and
provides for borrowings of up to $500.0, of which $200.0 is available for the issuance of letters of credit.
This facility was amended as of October 17, 2005 to increase the amount that we may borrow under the
facility by $50.0 to $500.0. Our $250.0 364-Day Revolving Credit Facility expired on September 30, 2005.
The Three-Year Revolving Credit Facility has been modified multiple times since inception as noted
below. We have been in compliance with all covenants under the Three-Year Revolving Credit Facility, as
amended or waived from time to time.
Borrowings under the Three-Year Revolving Credit Facility 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 under the Three-Year Revolving Credit Facility are affected by the
facility's utilization levels and our credit ratings.
The original terms of the Three-Year Revolving Credit Facility restricted our ability to declare or pay
dividends, repurchase shares of common stock, make cash acquisitions or investments 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 over to the following years, but could not have exceeded $250.0 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, 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
136
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
terms were subsequently modified with three amendments made to the Three-Year Revolving Credit
Facility on March 31, June 22 and September 27, 2005.
The March 31, 2005 waiver and amendment to the Three-Year Revolving Credit Facility, among
other things, (i) required us to maintain an ending balance of $225.0 of cash in domestic accounts with
our lenders for the seven days preceding a borrowing, (ii) restricted cash consideration paid for
acquisitions to less than $5.0 for 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' exercise of options.
The June 22, 2005 waiver and amendment to the Three-Year Revolving Credit Facility, among other
things, (i) required us to maintain a daily ending balance of $225.0 of cash and securities in domestic
accounts with our lenders, (ii) restricted our ability to make 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' exercise of options.
The terms of the September 27, 2005 amendment 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 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; (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; 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 balance of cash and
securities requirement from the previous amendment was removed through this amendment.
The October 17, 2005 amendment increased the amount that we may borrow 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.
137
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
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 of September 30, 2005) and March 21, 2006
(effective as 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:
(i) an interest coverage ratio for the four fiscal quarters then ended of not less than that set
forth opposite the corresponding quarter in the table below:
Four Fiscal Quarters Ending
December 31, 2004 ÏÏÏÏÏ
March 31, 2005 ÏÏÏÏÏÏÏÏ
June 30, 2005 ÏÏÏÏÏÏÏÏÏÏ
September 30, 2005 ÏÏÏÏÏ
December 31, 2005 ÏÏÏÏÏ
March 31, 2006 ÏÏÏÏÏÏÏÏ
June 30, 2006 ÏÏÏÏÏÏÏÏÏÏ
September 30, 2006 ÏÏÏÏÏ
December 31, 2006 ÏÏÏÏÏ
March 31, 2007 ÏÏÏÏÏÏÏÏ
Original Terms
5/10/04
Covenant Revisions Effective as of:
3/31/05
6/22/05
9/27/05
9/30/05
3.75 to 1
3.75 to 1
3.75 to 1
3.75 to 1
3.75 to 1
3.75 to 1
3.75 to 1
3.75 to 1
3.75 to 1
3.75 to 1
3.00 to 1
3.75 to 1
3.75 to 1
3.75 to 1
3.75 to 1
3.75 to 1
3.75 to 1
3.75 to 1
3.75 to 1
3.75 to 1
2.40 to 1
2.00 to 1
3.75 to 1
3.75 to 1
3.75 to 1
3.75 to 1
3.75 to 1
3.75 to 1
3.75 to 1
2.15 to 1
1.75 to 1
1.85 to 1
1.45 to 1
1.75 to 1
2.15 to 1
2.50 to 1
1.95 to 1
1.75 to 1
1.85 to 1
1.45 to 1
1.75 to 1
2.15 to 1
2.50 to 1
Year-End
Terms
12/31/05
*
*
*
1.75 to 1
2.15 to 1
2.50 to 1
* The March 21, 2006 amendment, effective as of December 31, 2005, removed the financial covenant
requirements with respect to the interest coverage ratio for the fiscal quarters ending December 31,
2005, March 31, 2006 and June 30, 2006.
(ii) a debt to EBITDA ratio, where debt is the balance at period-end and EBITDA is for the
four fiscal quarters then ended, of not greater than that set forth opposite the corresponding quarter in
the table below:
Four Fiscal Quarters Ending
December 31, 2004 ÏÏÏÏÏ
March 31, 2005 ÏÏÏÏÏÏÏÏ
June 30, 2005 ÏÏÏÏÏÏÏÏÏÏ
September 30, 2005 ÏÏÏÏÏ
December 31, 2005 ÏÏÏÏÏ
March 31, 2006 ÏÏÏÏÏÏÏÏ
June 30, 2006 ÏÏÏÏÏÏÏÏÏÏ
September 30, 2006 ÏÏÏÏÏ
December 31, 2006 ÏÏÏÏÏ
March 31, 2007 ÏÏÏÏÏÏÏÏ
Original Terms
5/10/04
Covenant Revisions Effective as of:
3/31/05
6/22/05
9/27/05
9/30/05
Year-End Terms
12/31/05
3.25 to 1
3.25 to 1
3.25 to 1
3.25 to 1
3.25 to 1
3.25 to 1
3.25 to 1
3.25 to 1
3.25 to 1
3.25 to 1
4.25 to 1
3.25 to 1
3.25 to 1
3.25 to 1
3.25 to 1
3.25 to 1
3.25 to 1
3.25 to 1
3.25 to 1
3.25 to 1
4.80 to 1
5.65 to 1
3.25 to 1
3.25 to 1
3.25 to 1
3.25 to 1
3.25 to 1
3.25 to 1
3.25 to 1
5.20 to 1
6.30 to 1
5.65 to 1
6.65 to 1
5.15 to 1
4.15 to 1
3.90 to 1
5.70 to 1
6.30 to 1
5.65 to 1
6.65 to 1
5.15 to 1
4.15 to 1
3.90 to 1
*
*
*
5.15 to 1
4.15 to 1
3.90 to 1
138
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (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:
Four Fiscal Quarters Ending
December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏ
March 31, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
June 30, 2005ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
September 30, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏ
December 31, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏ
March 31, 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
June 30, 2006ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
September 30, 2006 ÏÏÏÏÏÏÏÏÏÏÏÏ
December 31, 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏ
March 31, 2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Original Terms
5/10/04
Covenant Revisions Effective as of:
3/31/05
6/22/05
9/27/05
9/30/05
Year-End Terms
12/31/05
$750.0
750.0
750.0
750.0
750.0
750.0
750.0
750.0
750.0
750.0
$550.0
750.0
750.0
750.0
750.0
750.0
750.0
750.0
750.0
750.0
$470.0
400.0
750.0
750.0
750.0
750.0
750.0
750.0
750.0
$435.0
360.0
400.0
340.0
440.0
545.0
585.0
$400.0
360.0
400.0
340.0
440.0
545.0
585.0
$233.0
175.0
100.0
440.0
545.0
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 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'').
139
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (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, Participating Securities and the Two Ì 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 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 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,
140
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (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 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 payable 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 share of 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.
Note 15:
Incentive Plans
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
141
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (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 Options
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:
Stock options, beginning of yearÏÏÏÏ
Options granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Options exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Options cancelled, forfeited and
Options
39.5
3.3
(0.2)
expired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(6.3)
Stock options, end of yearÏÏÏÏÏÏÏÏÏ
36.3
Options exercisable at year-end ÏÏÏÏ
32.9
2005
2004
2003
Weighted-
Average
Exercise
Price
$26.36
12.39
10.75
26.91
25.06
26.39
Weighted-
Average
Exercise
Price
$26.60
14.14
10.64
25.40
26.36
28.94
Options
41.9
2.2
(0.7)
(3.9)
39.5
21.1
Options
42.3
6.4
(0.1)
(6.7)
41.9
20.8
Weighted-
Average
Exercise
Price
$29.35
10.60
10.49
29.23
26.60
27.49
The following table summarizes information about stock options outstanding and exercisable at
December 31, 2005:
Options Outstanding
Options Exercisable
Number of
Options
Weighted-
Average
Remaining
Contractual Life
Weighted-
Average
Exercise Price
Number of
Options
Weighted-
Average
Exercise Price
10.2
7.3
12.2
6.6
36.3
8.1
2.0
4.6
4.5
$11.79
18.90
31.26
40.95
25.06
6.8
7.3
12.2
6.6
32.9
$11.46
18.90
31.26
40.95
26.39
Range of Exercise Prices
$ 9.12 to $14.99ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$15.00 to $24.99ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$25.00 to $34.99ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$35.00 to $56.28ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
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
142
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (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 would 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.
143
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (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 plan (""Domestic Plan'') which covered
substantially all regular domestic employees. In 1992, the Domestic Plan was amended to offer new plan
participants a cash balance benefit as opposed to a career pay formula benefit which was the previous plan
formula prior to the amendment. Under 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. For pre-1992 participants, the benefit is the greater of the cash
balance account 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). 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 this
Domestic Plan were frozen and participants with five or less years of service became fully vested. As of
December 31, 2005, there were approximately 4,900 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). One of our
agencies has an additional domestic plan covering approximately 200 employees (actual number). This
plan is closed to new participants.
144
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (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 UK (""UK Pension Plan'') is the most material foreign pension plan in
terms of the liability and plan assets. The UK Pension 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 UK 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, there were approximately 1,800
participants (actual number) in the UK Pension Plan.
During 2005, we identified certain additional foreign pension plans. We have included the net periodic
cost, as well as the benefit obligations and assets related to these plans as of and for the year ended
December 31, 2005. The benefit obligations and plan assets 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 2005 or 2004.
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 eligibility for Medicare, and 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. 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, certain
domestic employees of the former True North Communications companies acquired in June 2001 and
their dependents are eligible for postretirement health benefits and life insurance. Generally, only
employees hired prior to June 22, 2001 are eligible for coverage. Certain cost-sharing features and
limitations on Company cost apply to most of these participants. As of December 31, 2005, there were
approximately 2,300 participants (actual number) in both the True North postretirement health benefits
plan and postretirement life insurance plan.
Our postretirement health benefits plans are unfunded, and the Company pays claims as presented by
the plans' administrator. The postretirement life insurance plan is insured and the Company pays
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
145
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (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
Related to the Medicare Prescription Drug, Improvement and Modernization Act 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 and $0.3 for 2005 and 2004, respectively, as compared
with the amount calculated without considering the effects of the subsidy.
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 retirement benefit plans.
For the Years Ended December 31,
Domestic Pension Plans
2003
2004
2005
Service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected return on plan assets ÏÏÏÏÏÏÏ
Curtailment gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Settlement losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Special termination benefits ÏÏÏÏÏÏÏÏÏÏ
Amortization of:
Transition obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Prior service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrecognized actuarial losses (gains)
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 0.7
8.6
(9.4)
Ì
Ì
Ì
Ì
(0.2)
6.3
Ì
$ 0.7
8.7
(9.9)
Ì
Ì
Ì
Ì
(0.1)
4.1
Ì
$ 0.7
9.7
(7.3)
Ì
Ì
Ì
Ì
(0.2)
6.1
Ì
Foreign Pension Plans
2004
2005
2003
Postretirement Benefit
Plans
2004
2003
2005
$ 17.2
21.7
(14.9)
(2.2)
1.4
4.9
$ 17.1
18.1
(11.6)
Ì
Ì
Ì
$15.6
14.7
(9.0)
Ì
Ì
Ì
$ 0.7
3.8
Ì
Ì
Ì
Ì
$0.4
3.9
Ì
Ì
Ì
Ì
1.4
0.1
6.7
0.8
Ì
Ì
4.9
Ì
1.4
0.1
3.5
Ì
0.1
0.2
(0.1) Ì
0.4
Ì
0.9
Ì
$ 0.6
3.1
Ì
Ì
Ì
Ì
0.2
Ì
(0.1)
Ì
Net periodic cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 6.0
$ 3.5
$ 9.0
$ 37.1
$ 28.5
$26.3
$ 5.4
$4.9
$ 3.8
The weighted-average assumptions used to determine the net periodic cost are as follows:
For the Years Ended December 31,
Domestic Pension Plans
2004
2003
2005
Foreign Pension Plans
2004
2003
2005
Postretirement Benefit Plans
2003
2004
2005
Discount rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.45%
Rate of compensation increase ÏÏÏÏÏ N/A
8.63%
Expected return on plan assets ÏÏÏÏÏ
6.15%
N/A
8.65%
6.60%
4.81%
N/A 3.26%
6.28%
8.65%
5.20%
3.50%
6.35%
5.40% 5.50%
3.10% N/A
6.50% N/A
6.25%
N/A
N/A
6.75%
N/A
N/A
146
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
Pension and Postretirement Benefit Obligation
We use a measurement date of December 31 for all material plans. 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:
For the Years Ended December 31,
Change in projected benefit obligation
Projected benefit obligation at January 1 ÏÏÏÏÏÏÏ
Service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Benefits paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Plan participant contributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Plan amendments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Actuarial losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Curtailments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Settlements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Special termination benefitsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign currency effectÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Domestic Pension
Plans
Foreign Pension
Plans
Postretirement
Benefit Plans
2005
2004
2005
2004
2005
2004
$167.6
0.7
8.6
(13.4)
Ì
Ì
5.5
Ì
Ì
Ì
Ì
Ì
$154.8
0.7
8.7
(14.2)
Ì
Ì
17.6
Ì
Ì
Ì
Ì
Ì
$ 447.5
17.2
21.7
(25.3)
2.9
Ì
49.7
(2.4)
(5.3)
4.9
(49.3)
35.5
$ 356.6
17.1
18.1
(16.3)
2.7
Ì
38.8
Ì
Ì
Ì
28.8
1.7
$ 72.2
0.7
3.8
(6.4)
1.4
(1.2)
2.7
Ì
Ì
Ì
Ì
Ì
$ 62.1
0.4
3.9
(7.0)
1.3
Ì
11.5
Ì
Ì
Ì
Ì
Ì
Projected benefit obligation at December 31ÏÏÏÏ
$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 ÏÏÏÏÏÏÏÏÏ
Actual return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Employer contributionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Plan participant contributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Benefits paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Settlements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign currency effectÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$119.2
9.4
1.1
Ì
(13.4)
Ì
Ì
Ì
$ 93.6
7.7
32.1
Ì
(14.2)
Ì
Ì
Ì
$ 213.6
48.0
33.0
2.9
(25.3)
(5.3)
(24.6)
33.0
$ 179.0
20.7
15.1
2.7
(16.3)
Ì
13.1
(0.7)
$ Ì $ Ì
Ì
5.7
1.3
(7.0)
Ì
Ì
Ì
Ì
5.0
1.4
(6.4)
Ì
Ì
Ì
Fair value of plan assets at December 31 ÏÏÏÏÏÏ
$116.3
$119.2
$ 275.3
$ 213.6
$ Ì $ Ì
Reconciliation of funded status to total amount
recognized
Funded status of the plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrecognized net actuarial losses ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrecognized prior service costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrecognized transition cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(52.7) $(48.4) $(221.8) $(233.9) $(73.2) $(72.2)
21.0
Ì
1.2
111.9
0.2
1.4
22.8
(1.1)
1.1
112.4
0.4
3.2
77.5
0.6
Ì
78.4
0.3
Ì
Net asset (liability) recognizedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 25.4
$ 30.3
$(108.3) $(117.9) $(50.4) $(50.0)
Amounts recognized in consolidated balance
sheet
Accrued benefit liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Intangible asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated other comprehensive loss ÏÏÏÏÏÏ
$(47.4) $(43.9) $(182.0) $(201.1) $(50.4) $(50.0)
Ì
Ì
0.6
72.2
2.9
80.3
1.1
72.6
0.3
73.9
Ì
Ì
Net asset (liability) recognizedÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 25.4
$ 30.3
$(108.3) $(117.9) $(50.4) $(50.0)
Accumulated benefit obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$163.7
$163.1
$ 454.6
$ 411.2
147
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
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) relate to the non-material foreign plans.
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for
domestic pension plans with accumulated benefit obligations 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.
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:
At December 31,
Domestic Pension
Plans
2005
2004
Foreign Pension
Plans
2005
2004
Postretirement
Benefit Plans
2005
2004
5.41%
Discount rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Rate of compensation increase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ N/A
Healthcare cost trend rate assumed for next year
Initial rate (weighted-average)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Year ultimate rate is reached ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ultimate rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Determination of Discount Rates
4.34%
5.45%
N/A 3.28%
5.00%
3.55%
5.50%
N/A
5.50%
N/A
10.00% 9.00%
2012
2015
5.50%
5.50%
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-quality corporate
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 yields as these bonds are more likely to be mispriced or misgraded.
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.
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.
148
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
Approximately 84% of the foreign plan assets are part of the UK Pension Plan. The UK 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 UK
Pension Plan, we determine the expected rate of return by utilizing 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.
As of December 31, 2005 our domestic and foreign (primarily the UK) pension plan target asset
allocations for 2006, as well as the actual asset allocations at December 31, 2005 and 2004, are as follows:
Asset category
2006 Target
Allocation
Plan Assets at December 31,
Domestic
Foreign
Domestic
Foreign
2005
2004
2005
2004
Equity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fixed income securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
51%
27%
9%
13%
64%
28%
3%
5%
49% 54% 64% 73%
23% 21% 28% 18%
4%
6%
9%
5%
19% 19%
3%
5%
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
-on postretirement benefit obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$0.1
$1.6
$(0.1)
$(1.6)
Cash Flows
Contributions
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. The minimum funding obligation for 2005 is $0 for our domestic
pension plans and $12.7 for our foreign pension plans.
149
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
Estimated Future Payments
The following estimated future payments, which reflect future service, as appropriate, are expected to
be paid in the years indicated:
Years
Domestic
Pension Plans
Foreign
Pension Plans
Postretirement
Benefit Plans
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2010 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2011-2015 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$12.1
13.2
13.1
12.0
12.5
59.9
$ 15.4
18.3
17.2
24.0
19.2
110.0
$ 6.6
6.6
6.5
6.5
6.5
31.0
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 in
2006, to $0.9 in 2010 and are estimated to be $5.3 for the period 2011-2015.
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, 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, 2005 and 2004, the
Supplemental Compensation Plan liability recorded on our Consolidated Balance Sheet was $7.3 and $9.7,
respectively. Amounts expensed for the Supplemental Compensation Plan in 2005, 2004 and 2003 were
$1.0, $5.4 and $3.4, respectively.
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-tax and/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 $29.9, $28.0 and
$26.9 to the Savings Plan in 2005, 2004 and 2003, 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, 2005 and 2004, the deferred
compensation liability balance recorded on our Consolidated Balance Sheets was $141.3 and $154.3,
150
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
respectively. Amounts expensed for deferred compensation arrangements in 2005, 2004 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 at December 31, 2005 and 2004 was $151.5 and $128.3, respectively. Amounts expensed
for deferred benefit arrangements in 2005, 2004 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 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 of 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 the assumed retirement age from 65 to 60
within the related deferred benefit liability calculation. As a result of this change in estimate, during the
fourth quarter of 2005 the deferred benefit expense increased 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, 2005 and 2004, the cash
surrender value of these policies was $132.8 and $141.4, 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, 2005 and 2004, the value of such restricted assets was $86.1 and $80.2,
respectively. The short-term investments, long-term investments and cash surrender value of the policies in
the trust are included in Other Current Assets, Investments and Other Assets, respectively, on our
Consolidated Balance Sheets.
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, 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,
2005 and 2004. 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 and $6.1 as of
December 31, 2005 and 2004, 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
issued 0.1 shares, 0.7 shares and 0.9 shares, respectively, purchased by employees under the ESPP. Shares
issued to employees under the ESPP have no impact on our Consolidated Statements of Operations. No
stock was purchased under the ESPP during the second quarter of 2005. The ESPP expired effective
June 30, 2005 and shares are no longer available for issuance under the ESPP. See Note 22 for discussion
of the impact of shares issued to employees under the ESPP upon our adoption of SFAS No. 123R.
In November 2005, the Company's stockholders approved the establishment of an Interpublic Group
of Companies Employee Stock Purchase Plan (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 market price of a share on the offering date or the 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. Beginning on March 17, 2005 and ending on the filing date of this
annual report, we were unable to issue securities pursuant to the ESPP or the 2006 Plan due to the SEC's
position concerning our ineligibility to use the applicable registration forms.
Note 17: Accumulated Other Comprehensive Income (Loss)
Comprehensive income (loss) is included on the Consolidated Statement of Stockholders' Equity and
Comprehensive Income (Loss). Accumulated other comprehensive loss, net of tax, is reflected in the
Consolidated Balance Sheets as follows:
December 31,
2005
2004
Foreign currency translation adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustment for minimum pension liability, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrealized holding gain on securities, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(188.8)
(111.4)
24.2
$(145.8)
(112.8)
10.0
Accumulated other comprehensive loss, net of tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(276.0)
$(248.6)
Note 18: 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.
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. 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.
152
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
On 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 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.
Other
The terms of the 4.50% Notes include two embedded derivative instruments and our Series B
Preferred Stock include one embedded derivative. The fair value of the three derivatives on December 31,
2005 was negligible.
Note 19: Financial Instruments
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.
Investment securities:
Ì Marketable securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì Cost investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì Other investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Financial commitments:
December 31,
2005
2004
Book Value
Fair Value
Book Value
Fair Value
$
115.6
120.7
49.9
$
115.6
120.7
49.9
$
420.0
121.6
47.1
(2,149.2)
(2,072.1)
(2,152.0)
$
420.0
121.6
47.1
(2,447.0)
Ì Other forward contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì Put option obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(4.5)
Ì
(4.5)
Ì
(4.0)
(10.1)
(4.0)
(10.1)
Investment Securities
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 Ì (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 been marked-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
154
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (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 Ì (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,
2003
2004
2005
Salaries, and related expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Professional fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Rent and depreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Bank fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expenses allocated to operating divisions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 201.3
199.3
50.3
26.0
2.2
(1.5)
(161.3)
$ 151.2
145.3
38.0
29.7
2.8
9.6
(133.4)
$ 129.0
50.6
30.6
26.5
1.6
8.9
(118.4)
Total corporate and otherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 316.3
$ 243.2
$ 128.8
156
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (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,
2003
2004
2005
Revenue:
IANÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CMG ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
MotorsportsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 5,327.8
944.2
2.3
$ 5,399.2
935.8
52.0
$5,140.5
942.4
78.8
Consolidated revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 6,274.3
$ 6,387.0
$6,161.7
Segment operating income (loss):
IANÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CMG ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
MotorsportsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate and otherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
249.7
53.0
0.7
(316.3)
$
577.1
83.7
(14.0)
(243.2)
$ 551.6
55.7
(43.5)
(128.8)
Total segment operating incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
(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) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-lived asset impairment and other charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Motorsports contract termination costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Debt prepayment penalty ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment impairments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Litigation reversals (charges) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other income (expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loss from continuing operations before provision for income
7.3
(98.6)
Ì
(181.9)
(1.4)
80.0
(12.2)
Ì
33.1
(62.2)
(322.2)
(113.6)
(172.0)
(9.8)
50.8
(63.4)
32.5
(10.7)
(172.9)
(294.0)
Ì
(206.6)
(24.8)
39.3
(71.5)
(127.6)
50.3
taxes:
$ (186.6)
$ (267.0)
$ (372.8)
Depreciation and amortization:
IANÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CMG ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
MotorsportsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate and otherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total depreciation and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capital expenditures:
IANÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CMG ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
MotorsportsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate and otherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
$
$
$
$
135.3
18.3
Ì
15.2
168.8
89.7
14.8
Ì
36.2
Total capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
140.7
$
146.5
22.1
Ì
16.5
185.1
133.7
27.1
Ì
33.2
194.0
$ 171.2
28.5
3.7
13.1
$ 216.5
$ 104.0
12.3
25.7
17.6
$ 159.6
Total assets:
IANÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CMG ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate and otherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 9,217.1
965.9
1,762.2
$ 9,799.6
960.3
1,493.8
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$11,945.2
$12,253.7
157
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (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,
2003
2004
2005
Revenue:
US ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$3,461.1
$3,509.2
$3,459.3
International:
UKÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
All Other Europe ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Asia PacificÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Latin America ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
619.3
1,143.4
473.0
275.2
302.3
654.1
1,219.3
474.7
240.8
288.9
662.6
1,130.5
429.4
233.3
246.6
Total international ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2,813.2
2,877.8
2,702.4
Total consolidated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$6,274.3
$6,387.0
$6,161.7
Long-Lived Assets:
US ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,733.6
$2,721.7
International:
UKÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
All Other Europe ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Asia PacificÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Latin America ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
306.9
615.2
119.1
144.9
230.8
296.9
852.5
127.7
139.4
223.2
Total international ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,416.9
1,639.7
Total consolidated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$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 facilities 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
158
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (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,
2004
2003
2005
Gross rent expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Third-party sublease rental incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$404.4
(25.4)
$433.0
(24.6)
$440.2
(31.6)
Net rent expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$379.0
$408.4
$408.6
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:
Period
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2010 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2011 and thereafterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross
Rent
Expense
$ 335.5
292.1
257.0
225.6
195.3
862.3
Sublease
Rental
Income
$ (48.4)
(41.9)
(34.5)
(31.0)
(23.1)
(68.7)
Net Rent
Expense
$ 287.1
250.2
222.5
194.6
172.2
793.6
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,167.8
$(247.6)
$1,920.2
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 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.
159
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$18.3
11.3
$1.8
0.3
$ 0.9
Ì
$10.5
Ì
$ Ì
Ì
$ Ì
Ì
$ 31.5
11.6
Put Options with Consolidated Affiliates *
Cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
23.4
0.1
Put Options with Unconsolidated Affiliates *
Cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Call Options with Consolidated Affiliates *
Cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1.3
0.4
3.3
0.1
Subtotal Ì CashÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subtotal Ì Stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
46.3
11.9
2.3
0.3
2.5
1.0
0.4
Ì
7.0
1.6
11.4
0.5
11.5
0.6
0.4
Ì
24.2
1.1
2.8
Ì
0.3
0.3
0.1
Ì
13.7
0.3
1.8
Ì
Ì
Ì
2.7
Ì
4.5
Ì
2.9
Ì
Ì
Ì
Ì
Ì
2.9
Ì
44.6
0.9
15.6
2.3
6.9
0.1
98.6
14.9
Total Contingent Acquisition PaymentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$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. As of December 31, 2005 our
estimated contingent acquisition payments with associated compensation expense impacts are as follows:
Compensation Expenses Related Payments
Cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2006
$16.6
0.1
Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
16.7
2007
$0.8
Ì
0.8
$12.8
Ì
12.8
$ 5.4
Ì
5.4
$1.3
Ì
1.3
Total Payments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$74.9
$9.4
$38.1
$19.4
$5.8
$0.9
Ì
0.9
$3.8
$ 37.8
0.1
37.9
$151.4
2008
2009
2010
Thereafter
Total
* 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.
160
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (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
The SEC opened a formal investigation in response to the restatement we first announced in August
2002 and, as previously disclosed, the SEC staff's investigation has expanded to encompass our Prior
Restatement. In particular, since we filed our 2004 Form 10-K, we have received subpoenas from the SEC
relating to matters addressed in our Prior Restatement. We continue to cooperate with the investigation.
We expect that the investigation will result in monetary liability, but because the investigation is ongoing,
in particular with respect to the Prior Restatement, we cannot reasonably estimate either the timing of a
resolution or the amount. Accordingly, we have not yet established any accounting provision relating to
these matters.
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: Recent Accounting Standards
In November 2005, the FASB issued FSP No. FAS 115-1 and FAS 124-1, The Meaning of Other-
Than-Temporary Impairment and Its Application to Certain Investments. This FSP addresses the
determination as to when an investment is considered impaired, whether the impairment is other than
temporary, and the measurement of an impairment loss. This FSP specifically nullifies the requirements of
paragraphs 10-18 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments and references existing other-than-temporary impairment guidance. The
guidance in this FSP is effective for reporting periods beginning after December 15, 2005. We do not
expect the adoption of FSP No. FAS 115-1 & FAS 124-1 to have a material impact on our Consolidated
Balance Sheet or Statement of Operations.
In May 2005, SFAS No. 154, Accounting Changes and Error Corrections, was issued, which replaces
APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim
Financial Statements. Among other changes, SFAS No. 154 requires retrospective application of a
voluntary change in accounting principle to prior period 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
changes and error corrections made in fiscal years beginning after December 15, 2005. We do not expect
the adoption of SFAS No. 154 to have a material impact on our Consolidated Balance Sheet or Statement
of Operations.
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. 47 did not have a material impact on our Consolidated Balance Sheet or Statement
of Operations.
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.
162
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (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 Issue No. 05-6, Determining the Amortization Period for Leasehold Improvements Purchased
after Lease Inception or Acquired in a Business Combination;
‚ EITF Issue No. 05-2, The Meaning of ""Conventional Convertible Debt Instrument'' in Issue 00-19;
‚ EITF Issue No. 03-13, Applying the Condition in Paragraph 42 of FASB Statement No. 144 in
Determining Whether to Report Discontinued Operations;
‚ FSP No. FAS 13-1, Accounting for Rental Costs Incurred during a Construction Period;
‚ FSP No. APB 18-1, Accounting by an Investor for Its Proportionate Share of Accumulated Other
Comprehensive Income of an Investee Accounted for under the Equity Method in Accordance with
APB Opinion No. 18 upon a Loss of Significant Influence.
Note 23: Results by Quarter (Unaudited)
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 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 a number of miscellaneous items including accounting 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 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.
Below is a description of the restatement adjustments.
Goodwill Impairment: Adjustments were made to properly record goodwill impairment at a reporting
unit within our sports and marketing business.
Revenue Recognition related to Customer Contracts: Adjustments 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 due to the identification of cash accounts held on
behalf of our clients.
163
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
Results by Quarter (Unaudited)
REVENUE ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OPERATING (INCOME) EXPENSES:
Salaries and related expenses ÏÏÏÏÏÏÏÏÏÏÏ
Office and general expenses ÏÏÏÏÏÏÏÏÏÏÏÏ
Restructuring charges (reversals)ÏÏÏÏÏÏÏÏ
Long-lived asset impairment and other
chargesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Motorsports contract termination costs ÏÏÏ
Total operating (income) expenses ÏÏÏÏÏÏ
OPERATING INCOME (LOSS) ÏÏÏÏÏÏ
EXPENSES AND OTHER INCOME:
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Debt prepayment penalty ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment impairments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Litigation reversalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other income (expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total expenses and other income ÏÏÏÏÏÏÏÏ
Income (loss) from continuing operations
before provision for income taxes ÏÏÏÏÏÏ
Provision (benefit) for income taxes ÏÏÏÏÏ
Income (loss) from continuing operations
of consolidated companiesÏÏÏÏÏÏÏÏÏÏÏÏ
Income applicable to minority interests
(net of tax)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity in net income of unconsolidated
affiliates (net of tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income (loss) from continuing operations
Income from discontinued operations (net
of tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividends on preferred stock ÏÏÏÏÏÏÏÏÏÏÏ
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCKHOLDERS ÏÏ
Earnings (loss) per share of common stock:
Basic:
Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted:
Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted-average shares:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
* Does not add due to rounding.
975.1
529.1
(6.9)
Ì
Ì
1,497.3
(169.1)
(46.9)
Ì
14.9
Ì
Ì
14.7
(17.3)
1,107.5
637.1
1.4
92.1
Ì
1,838.1
57.6
(46.1)
Ì
26.8
(7.1)
Ì
13.4
(13.0)
1,021.9
630.3
(4.4)
5.8
Ì
1,653.6
312.1
(44.3)
(9.8)
19.5
(26.4)
32.5
(13.5)
(42.0)
Three Months
Ended March 31,
2005
2004
(Restated)
$1,328.2
$1,389.4
Three Months
Ended June 30,
Three Months
Ended September 30,
Three Months
Ended December 31,
2005
(Restated)
$1,610.7
2004
$1,512.8
2005
(Restated)
$1,439.7
2004
2005
2004
$1,519.1
$1,895.7
$1,965.7
887.0
510.7
61.6
953.7
543.4
(1.9)
898.7
552.8
3.9
962.8
578.5
0.1
925.4
556.6
1.1
5.7
Ì
1,465.0
(75.6)
Ì
Ì
1,495.2
115.5
3.1
80.0
1,538.5
(25.7)
6.5
Ì
1,547.9
(108.2)
307.6
33.6
1,824.3
(305.2)
(41.8)
Ì
10.4
Ì
Ì
2.2
(29.2)
(46.7)
(1.4)
21.8
(1.5)
Ì
0.7
(27.1)
(42.3)
Ì
11.1
(33.8)
Ì
(0.7)
(65.7)
(43.6)
Ì
9.8
(3.2)
Ì
1.3
(35.7)
(42.2)
Ì
16.5
(3.6)
Ì
4.3
(25.0)
90.5
79.9
10.6
(186.4)
(40.6)
(111.3)
(29.0)
(145.8)
(82.3)
(54.9)
30.6
(135.3)
(34.8)
(370.9)
130.0
44.6
77.4
270.1
130.6
(85.5)
(100.5)
(500.9)
(32.8)
139.5
(1.2)
(2.6)
(3.7)
(4.2)
(4.6)
(4.4)
(7.2)
(10.3)
0.6
(146.4)
Ì
(146.4)
5.0
1.1
(83.8)
Ì
(83.8)
4.8
$ (151.4) $ (88.6) $
2.3
9.2
Ì
9.2
5.0
4.2
1.3
(88.4)
Ì
(88.4)
5.0
2.3
(102.8)
Ì
(102.8)
5.0
2.3
(503.0)
6.5
(496.5)
5.0
8.1
(31.9)
9.0
(22.9)
11.3
1.1
130.3
Ì
130.3
5.0
$ (93.4) $ (107.8) $ (501.5)
$ (34.2) $ 125.3
$ (0.36) $ (0.21) $
Ì
Ì
$ (0.36) $ (0.21) $
$ (0.36) $ (0.21) $
Ì
Ì
$ (0.36) $ (0.21) $
Ì
0.01
Ì
0.01
0.01** $ (0.23) $ (0.25) $ (1.22)
0.02
Ì
Ì
$ (0.10) $
0.02
$ (0.23) $ (0.25) $ (1.21)* $ (0.08) $
0.01** $ (0.23) $ (0.25) $ (1.22)
0.02
Ì
Ì
$ (0.10) $
0.02
$ (0.23) $ (0.25) $ (1.21)* $ (0.08) $
0.25**
Ì
0.25
0.22**
Ì
0.22
423.8
423.8
413.3
413.3
424.8
429.6
414.6
414.6
425.3
425.3
415.4
415.4
425.5
425.5
417.8
518.9
** 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.
164
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
REVENUE ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OPERATING (INCOME) EXPENSES:
Salaries and related expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Office and general expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Restructuring charges (reversals)ÏÏÏÏÏÏÏÏÏÏÏÏ
Long-lived asset impairment and other charges
Motorsports contract termination costs ÏÏÏÏÏÏÏ
Total operating (income) expenses ÏÏÏÏÏÏÏÏÏÏ
OPERATING INCOME (LOSS) ÏÏÏÏÏÏÏÏÏÏ
EXPENSES AND OTHER INCOME:
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Debt prepayment penalty ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment impairments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Litigation chargesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total expenses and other income ÏÏÏÏÏÏÏÏÏÏÏÏ
Income (loss) from continuing operations
before provision for income taxes ÏÏÏÏÏÏÏÏÏÏ
Provision (benefit) for income taxes ÏÏÏÏÏÏÏÏÏ
Income (loss) from continuing operations of
consolidated companies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income applicable to minority interests (net of
tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity in net income of unconsolidated
affiliates (net of tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividends on preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCKHOLDERS ÏÏÏÏÏÏÏÏÏÏ
Earnings (loss) per share of common stock:
Basic:
Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted:
Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted-average shares:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Three Months Ended
March 31,
2005
Three Months Ended
June 30,
Three Months Ended
September 30,
As Previously
Reported
As
Restated
As Previously
Reported
As
Restated
As Previously
Reported
As
Restated
$1,330.3
$1,328.2
$1,616.2
$1,610.7
$1,442.2
$1,439.7
973.9
528.0
(6.9)
Ì
Ì
1,495.0
(164.7)
(46.9)
Ì
14.9
Ì
Ì
14.4
(17.6)
975.1
529.1
(6.9)
Ì
Ì
1,497.3
(169.1)
(46.9)
Ì
14.9
Ì
Ì
14.7
(17.3)
(182.3)
(39.1)
(186.4)
(40.6)
(143.2)
(145.8)
951.8
542.0
(1.9)
Ì
Ì
1,491.9
124.3
953.7
543.4
(1.9)
Ì
Ì
1,495.2
115.5
(42.2)
Ì
16.5
(3.6)
Ì
4.7
(24.6)
99.7
83.8
15.9
(42.2)
Ì
16.5
(3.6)
Ì
4.3
(25.0)
90.5
79.9
10.6
959.8
579.9
(0.9)
0.7
Ì
1,539.5
(97.3)
(46.7)
(1.4)
21.8
(1.5)
Ì
0.8
(27.0)
962.8
578.5
0.1
6.5
Ì
1,547.9
(108.2)
(46.7)
(1.4)
21.8
(1.5)
Ì
0.7
(27.1)
(124.3)
(29.9)
(135.3)
(34.8)
(94.4)
(100.5)
(1.2)
(1.2)
(3.7)
(3.7)
(4.6)
(4.6)
0.6
(143.8)
5.0
0.6
(146.4)
5.0
2.3
14.5
5.0
2.3
9.2
5.0
2.4
(96.6)
5.0
2.3
(102.8)
5.0
$ (148.8)
$ (151.4)
$
9.5
$ (0.35)
Ì
$ (0.35)
$ (0.36)
Ì
$ (0.36)
$ (0.35)
Ì
$ (0.35)
$ (0.36)
Ì
$ (0.36)
$
$
$
$
0.02*
Ì
0.02
0.02*
Ì
0.02
$
$
$
$
$
4.2
$ (101.6)
$ (107.8)
0.01*
Ì
0.01
0.01*
Ì
0.01
$ (0.24)
Ì
$ (0.24)
$ (0.25)
Ì
$ (0.25)
$ (0.24)
Ì
$ (0.24)
$ (0.25)
Ì
$ (0.25)
423.8
423.8
423.8
423.8
424.8
429.6
424.8
429.6
425.3
425.3
425.3
425.3
* 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.
165
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
As of March 31,
As
Restated
As Previously
Reported
2005
As of June 30,
As Previously
Reported
As
Restated
As of September 30,
As
Restated
As Previously
Reported
ASSETS:
Cash and cash equivalentsÏÏÏÏÏÏÏÏÏÏÏÏÏ
Marketable securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts receivable, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expenditures billable to clients ÏÏÏÏÏÏÏÏÏ
Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Prepaid expenses and other current assets
Total current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Land, buildings and equipment, net ÏÏÏÏÏ
Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total non-current assets ÏÏÏÏÏÏÏÏÏÏÏÏ
$ 1,549.5
1.2
3,986.5
1,044.5
310.9
187.5
7,080.1
703.3
264.9
180.5
3,141.0
324.6
4,614.3
$ 1,549.5
1.2
3,986.5
1,044.5
311.9
187.4
7,081.0
702.7
265.1
180.5
3,141.0
324.6
4,613.9
$ 1,588.0
1.3
4,208.9
1,111.0
268.8
170.1
7,348.1
682.5
245.4
175.5
3,145.6
319.8
4,568.8
$ 1,588.0
1.3
4,209.0
1,111.6
272.8
170.0
7,352.7
681.4
245.6
175.4
3,145.1
319.8
4,567.3
$ 1,352.0
2.0
3,795.6
1,104.5
268.9
175.3
6,698.3
673.8
295.5
169.2
3,165.8
316.4
4,620.7
$ 1,351.8
2.0
3,796.5
1,105.4
277.2
174.3
6,707.2
672.3
295.7
169.0
3,159.5
316.5
4,613.0
TOTAL ASSETSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$11,694.4
$11,694.9
$11,916.9
$11,920.0
$11,319.0
$11,320.2
LIABILITIES:
Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total current liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred compensation and employee
benefits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other non-current liabilities ÏÏÏÏÏÏÏÏÏÏÏ
Minority interests in consolidated
subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 4,327.2
2,493.8
337.2
7,158.2
1,923.9
$ 4,329.2
2,495.0
337.2
7,161.4
1,923.9
$ 4,594.0
2,463.8
332.6
7,390.4
1,933.5
$ 4,601.2
2,465.8
332.6
7,399.6
1,933.5
$ 4,238.8
2,279.2
66.7
6,584.7
2,184.0
$ 4,249.2
2,281.4
66.7
6,597.3
2,184.0
571.2
422.4
50.9
571.4
422.1
50.9
575.8
404.1
45.5
577.5
404.1
45.5
583.8
429.4
44.5
3,241.7
9,826.4
585.7
430.3
44.5
3,244.5
9,841.8
Total non-current liabilities ÏÏÏÏÏÏÏÏÏÏ
2,968.4
2,968.3
2,958.9
2,960.6
TOTAL LIABILITIES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
10,126.6
10,129.7
10,349.3
10,360.2
STOCKHOLDERS' EQUITY:
Preferred StockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common StockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated deficitÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated other comprehensive loss,
373.7
42.6
2,212.5
(722.0)
373.7
42.6
2,212.5
(724.5)
373.7
42.7
2,226.3
(707.6)
373.7
42.7
2,226.3
(715.3)
373.7
43.0
2,275.2
(804.2)
373.7
43.0
2,275.2
(818.1)
net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(264.1)
(264.2)
(290.8)
(290.9)
(275.1)
(275.4)
Less:
Treasury stock, at cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unamortized deferred compensation ÏÏÏÏ
TOTAL STOCKHOLDERS' EQUITY
TOTAL LIABILITIES &
1,642.7
1,640.1
1,644.3
1,636.5
1,612.6
1,598.4
(14.0)
(60.9)
1,567.8
(14.0)
(60.9)
1,565.2
(14.0)
(62.7)
1,567.6
(14.0)
(62.7)
1,559.8
(14.0)
(106.0)
1,492.6
(14.0)
(106.0)
1,478.4
STOCKHOLDERS' EQUITY ÏÏÏÏÏÏÏ
$11,694.4
$11,694.9
$11,916.9
$11,920.0
$11,319.0
$11,320.2
166
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
Three Months Ended
March 31,
2005
Six Months Ended
June 30,
Nine Months Ended
September 30,
As Previously
Reported
As
Restated
As Previously
Reported
As
Restated
As Previously
Reported
As
Restated
CASH FLOWS FROM OPERATING
ACTIVITIES
Net cash used in operating activities ÏÏÏÏÏÏÏÏÏ
$ (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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from sales of businesses and fixed
assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from sales of investments ÏÏÏÏÏÏÏÏÏ
Purchase of investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Maturities of short-term marketable
securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchases of short-term marketable securities
(16.6)
(32.6)
1.8
20.6
(13.5)
(12.5)
(31.8)
1.8
20.6
(13.5)
(55.5)
(65.5)
7.9
40.4
(18.4)
(50.8)
(64.0)
7.9
40.4
(18.4)
(86.4)
(99.2)
10.8
63.7
(34.3)
(81.7)
(97.0)
10.8
63.7
(34.3)
669.0
(270.0)
669.0
(270.0)
689.7
(270.4)
689.7
(270.4)
689.5
(271.3)
689.5
(271.3)
Net cash provided by investing activities ÏÏÏÏÏÏ
358.7
363.6
328.2
334.4
272.8
279.7
CASH FLOWS FROM FINANCING
ACTIVITIES
Increase (decrease) in short-term bank
borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Payments of long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Debt issuance costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Preferred stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Issuance of common stock, net of issuance
costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Distributions to minority interests ÏÏÏÏÏÏÏÏÏÏ
Net cash used in financing activities ÏÏÏÏÏÏÏÏÏ
Effect of exchange rates on cash and cash
8.8
(0.3)
1.9
(6.3)
(5.0)
0.3
(4.7)
(5.3)
8.8
(0.3)
1.9
(6.3)
(5.0)
0.3
(4.7)
(5.3)
(12.1)
(0.6)
2.0
(9.7)
(10.0)
13.7
(10.9)
(27.6)
(12.1)
(0.6)
2.0
(9.7)
(10.0)
4.9
(10.9)
(36.4)
(25.6)
(257.1)
252.3
(17.6)
(15.0)
0.2
(18.7)
(81.5)
(25.6)
(257.1)
252.3
(17.6)
(15.0)
0.2
(18.7)
(81.5)
equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(19.8)
(19.3)
(31.2)
(28.8)
(29.9)
(27.0)
Increase (decrease) in cash and cash
equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and cash equivalents at beginning of year
(0.9)
1,550.4
(0.9)
1,550.4
37.6
1,550.4
37.6
1,550.4
(198.4)
1,550.4
(198.6)
1,550.4
Cash and cash equivalents at end of period ÏÏÏÏ
$ 1,549.5
$1,549.5
$1,588.0
$1,588.0
$1,352.0
$1,351.8
167
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (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
6/30/2005
3/31/2005
9/30/2005
As previously reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Revenue recognition ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total restatement adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,330.3
$1,616.2
$1,442.2
(2.2)
0.1
(2.1)
(3.6)
(1.9)
(5.5)
(3.5)
1.0
(2.5)
As restatedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,328.2
$1,610.7
$1,439.7
Impact of Adjustments on Operating
Income (Loss)
For the Quarter Ended
6/30/2005
3/31/2005
9/30/2005
As previously reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Revenue recognition ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(164.7)
(1.9)
Ì
(2.5)
Total restatement adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(4.4)
As restated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(169.1)
$124.3
(3.1)
Ì
(5.7)
(8.8)
$115.5
$ (97.3)
(2.8)
(5.8)
(2.3)
(10.9)
$(108.2)
Impact of Adjustments on Income
(Loss) from Continuing Operations
before Provision for Income Taxes
For the Quarter Ended
6/30/2005
3/31/2005
9/30/2005
As previously reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Revenue recognition ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
GoodwillÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(182.3)
(1.9)
Ì
(2.2)
Total restatement adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(4.1)
$99.7
(3.1)
(0.5)
(5.6)
(9.2)
$(124.3)
(2.8)
(5.8)
(2.4)
(11.0)
As restatedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(186.4)
$90.5
$(135.3)
168
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
Impact of Adjustments on Net Income (Loss)
and Earnings (Loss) per Share
For the Quarter Ended
6/30/2005
3/31/2005
9/30/2005
Net income (loss) as previously reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Restatement adjustments (pre-tax):
Revenue recognition ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total restatement adjustments (pre-tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Tax adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total net restatement adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(143.8)
$14.5
$ (96.6)
(1.9)
Ì
(2.2)
(4.1)
(1.5)
(2.6)
(3.1)
(0.5)
(5.6)
(9.2)
(3.9)
(5.3)
(2.8)
(5.8)
(2.4)
(11.0)
(4.8)
(6.2)
Net income (loss) as restatedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(146.4)
$ 9.2
$(102.8)
Earnings (loss) per share of common stock:
Basic
As previously reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Effect of restatement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (0.35)
(0.01)
As restated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (0.36)
Weighted-average shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
423.8
Diluted
As previously reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Effect of restatement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (0.35)
(0.01)
As restated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (0.36)
Weighted-average shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
423.8
$0.02
(0.01)
$0.01
424.8
$0.02
(0.01)
$0.01
429.6
$ (0.24)
(0.01)
$ (0.25)
425.3
$ (0.24)
(0.01)
$ (0.25)
425.3
Impact of Adjustments on Consolidated Balance Sheet Accounts
As of June 30, 2005
Total
Liabilities
As of March 31, 2005
Total
Liabilities
Stockholders'
Equity
Total
Assets
Stockholders'
Equity
Total
Assets
As previously reported ÏÏÏÏÏÏÏÏÏ
Revenue recognition ÏÏÏÏÏÏÏÏÏ
GoodwillÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other adjustmentsÏÏÏÏÏÏÏÏÏÏÏ
Tax adjustments ÏÏÏÏÏÏÏÏÏÏÏÏ
$11,694.4
0.1
Ì
(0.8)
1.2
$10,126.6
2.0
Ì
1.4
(0.3)
Total restatement adjustmentsÏÏÏ
0.5
3.1
$1,567.8
(1.9)
Ì
(2.2)
1.5
(2.6)
$11,916.9
0.3
(0.5)
(0.9)
4.2
$10,349.3
5.2
Ì
6.8
(1.1)
3.1
10.9
$1,567.6
(4.9)
(0.5)
(7.7)
5.3
(7.8)
As restatedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$11,694.9
$10,129.7
$1,565.2
$11,920.0
$10,360.2
$1,559.8
169
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Amounts in Millions, Except Per Share Amounts)
As of September 30, 2005
Total Assets
Total Liabilities
As previously reportedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Revenue RecognitionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Tax adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$11,319.0
0.5
(6.3)
(1.5)
8.5
$9,826.4
8.3
Ì
8.8
(1.7)
Total restatement adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1.2
15.4
Stockholders'
Equity
$1,492.6
(7.8)
(6.3)
(10.3)
10.2
(14.2)
As restated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$11,320.2
$9,841.8
$1,478.4
170
SCHEDULE II Ì 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
Description
Balance at
Beginning
of Period
Charged to
Costs &
Expenses
Column D
Additions/(Deductions)
Charged
to Other
Accounts
Column E
Column F
Deductions
Balance
at End
of Period
Allowance for Doubtful Accounts Ì deducted from Accounts Receivable in the Consolidated Balance
Sheet:
2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$136.1
$16.9
2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$134.1
$36.7
2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$138.3
$32.6
$ Ì
$(2.7)(2)
$ Ì
$ Ì
$(0.8)(2)
$ 6.8 (3)
$ 8.5 (1)
$(2.1)(2)
$105.5
$136.1
$134.1
$ (3.3)(4)
$(32.9)(5)
$ (8.6)(6)
$ (3.0)(4)
$(45.6)(5)
7.9 (6)
$
$ (2.3)(4)
$(34.0)(5)
$ (6.9)(6)
(1) Allowance for doubtful accounts of acquired and newly consolidated companies.
(2) Miscellaneous.
(3) Reclassifications.
(4) Dispositions.
(5) Uncollectible accounts written off.
(6) Foreign currency translation adjustment.
171
SCHEDULE II Ì 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
Description
Balance at
Beginning
of Period
Charged to
Costs &
Expenses
Column D
Additions
Charged
to Other
Accounts
Column E
Column F
Deductions
Balance
at End
of Period
Valuation Allowance Ì deducted from Deferred Income Taxes on the Consolidated Balance Sheet:
2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$488.6
$252.6
$123.9
$ 69.9
$236.0
$111.4
$(57.5)
$ Ì
$ 17.3(1)
$Ì
$Ì
$Ì
$501.0
$488.6
$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 on 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. Our evaluation
has disclosed numerous material weaknesses in our internal control over financial reporting as noted in
Management's Assessment on 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, to provide reasonable assurance that information required to be disclosed by us in the reports that
we file or submit under the Exchange Act 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 our internal control over financial reporting as of December 31, 2005 and reported
on our assessment in Item 8 of this report.
There has been no change in internal control over financial reporting in the fiscal quarter ended
December 31, 2005, that has materially affected, or is 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.
173
Item 10. Directors and Executive Officers of Interpublic
PART III
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 on Form 10-K under the heading
""Executive Officers of Interpublic.''
NYSE Certification
In 2005, 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 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 and the ""Compensation of Executive Officers Ì Equity Compensation Plan Information Table''
section of the Proxy Statement.
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'' section of the Proxy Statement.
174
Item 15. Exhibits and Financial Statement Schedule
PART IV
(a) Listed below are all financial statements, financial statement schedules and exhibits filed as part
of this Report on Form 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, 2005, 2004 and
2003
Consolidated Balance Sheets as of December 31, 2005 and 2004
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and
2003
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income
(Loss) for the years ended December 31, 2005, 2004 and 2003
Notes to Consolidated Financial Statements
2. Financial Statement Schedule:
Valuation and Qualifying Accounts (for the three years ended December 31, 2005)
All other schedules are omitted because they are not applicable.
3. Exhibits:
(Numbers used are the numbers assigned in Item 601 of Regulation S-K and the EDGAR Filer Manual.
An additional copy of this exhibit index immediately precedes the exhibits filed with this Report on
Form 10-K and the exhibits transmitted to the SEC as part of the electronic filing of this Report.)
Exhibit No.
3(i)
3(ii)
4(iii)(A)
4(iii)(B)
4(iii)(C)
Description
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 on Form 10-Q for the quarter ended September 30, 2005 filed with
the Securities and Exchange Commission (the ""SEC'') on November 9, 2005.
By-Laws of the Registrant, as amended and restated through January 18, 2005, are
incorporated by reference to Exhibit 3.2 to the Registrant's Current Report on
Form 8-K filed with the SEC on January 21, 2005.
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.
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 on Form 8-K filed with the SEC on October 24, 2005.
Senior Debt Indenture, dated as of October 20, 2000 (the ""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 on Form 8-K filed with the SEC on
October 24, 2000.
175
Exhibit No.
4(iii)(D)
4(iii)(E)
4(iii)(F)
4(iii)(G)
4(iii)(H)
4(iii)(I)
4(iii)(J)
4(iii)(K)
4(iii)(L)
4(iii)(M)
4(iii)(N)
4(iii)(O)
Description
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 on Form S-4 filed with the SEC
on December 4, 2001.
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 on
Form S-3 filed with the SEC on April 5, 2002.
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 on Form 8-K filed with the SEC on
March 18, 2003.
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 on Form 8-K filed with the SEC on
April 1, 2005.
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 on Form 8-K filed with the SEC on
April 1, 2005.
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 on Form 8-K filed with the SEC on August 15, 2005.
Senior Debt Indenture dated as of November 12, 2004 (the ""2004 Indenture''),
between the Registrant and Suntrust Bank, as trustee, is incorporated by reference to
Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed with the SEC on
November 15, 2004.
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 on Form 8-K filed with the SEC on November 19,
2004.
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 on Form 8-K filed with the SEC on
November 19, 2004.
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 on Form 8-K filed with the SEC on
April 1, 2005.
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 on Form 8-K filed with the SEC on
April 1, 2005.
Fifth Supplemental Indenture, dated as of July 25, 2005, to the 2004 Indenture, with
respect to the Floating Rate Notes due 2008 is incorporated by reference to Exhibit 4.1
to the Registrant's Current Report on Form 8-K filed with the SEC on July 26, 2005.
176
Exhibit No.
10(i)(A)
10(i)(B)
10(i)(C)
10(i)(D)
10(i)(E)
Description
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 is incorporated by
reference to Exhibit 10(i)(G) to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2004 filed with the SEC on September 30, 2005.
Amendment No. 1, dated as of October 17, 2005, 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, is incorporated by reference to Exhibit 10.1 to
the Registrant's Current Report on Form 8-K filed with the SEC on October 17, 2005.
Amendment No. 2, dated as of September 30, 2005, 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, is incorporated by reference to
Exhibit 10(i)(C) to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2005 filed with the SEC on November 9, 2005.
Amendment No. 3, dated as of December 31, 2005, 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.
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)
10(iii)(A)(2)
10(iii)(A)(3)
10(iii)(A)(4)
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 on Form 10-Q for the quarter ended June 30, 2004.
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 on Form 10-Q for the
quarter ended June 30, 2004.
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 on Form 8-K filed with the SEC on January 21, 2005.
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 on Form 8-K filed with the SEC on February 17, 2005.
(ii) David A. Bell
10(iii)(A)(5)
10(iii)(A)(6)
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.
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.
10(iii)(A)(7)
10(iii)(A)(8)
10(iii)(A)(9)
Description
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.
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.
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
10(iii)(A)(11)
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.
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)
10(iii)(A)(13)
10(iii)(A)(14)
10(iii)(A)(15)
10(iii)(A)(16)
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 on Form 10-K for the year
ended December 31, 2002.
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 on Form 10-K for the year ended December 31, 2001.
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 on Form 10-K for the year ended December 31, 2002.
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 on Form 10-Q for the
quarter ended June 30, 2003.
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 on Form 10-Q for the quarter ended June 30, 2003.
(iv) Albert Conte
10(iii)(A)(17)
10(iii)(A)(18)
10(iii)(A)(19)
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.
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.
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.
10(iii)(A)(20)
Description
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)
10(iii)(A)(22)
10(iii)(A)(23)
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.
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.
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) Thomas Dowling
10(iii)(A)(24)
10(iii)(A)(25)
10(iii)(A)(26)
10(iii)(A)(27)
10(iii)(A)(28)
10(iii)(A)(29)
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 on Form 10-Q for the quarter ended March 31, 2002.
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 on Form 10-K for the year ended December 31,
2001.
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 on Form 10-K for the year ended December 31,
2001.
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
on Form 10-K for the year ended December 31, 2002.
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
on Form 10-K for the year ended December 31, 2002.
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 on Form 10-Q for the quarter ended March 31, 2003.
(vii) Steven Gatfield
10(iii)(A)(30)
10(iii)(A)(31)
10(iii)(A)(32)
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.
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.
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.
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.
Description
(viii) Philippe Krakowsky
10(iii)(A)(34)
10(iii)(A)(35)
10(iii)(A)(36)
10(iii)(A)(37)
10(iii)(A)(38)
10(iii)(A)(39)
10(iii)(A)(40)
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.
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 on Form 10-Q
for the quarter ended September 30, 2002.
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 on Form 10-Q
for the quarter ended September 30, 2002.
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 on Form 10-Q for the quarter ended September 30, 2002.
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 on Form 10-Q for the
quarter ended September 30, 2002.
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.
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 on Form 10-Q for the quarter ended June 30, 2003.
(ix) Frank Mergenthaler
10(iii)(A)(41)
10(iii)(A)(42)
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 on Form 8-K filed with the SEC on July 19, 2005.
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 on Form 8-K filed with the SEC on July 19, 2005.
(x) Timothy A. Sompolski
10(iii)(A)(43)
10(iii)(A)(44)
10(iii)(A)(45)
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 on Form 10-Q for the quarter ended March 31, 2004.
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 on Form 10-Q for the
quarter ended March 31, 2004.
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 on
Form 10-Q for the quarter ended June 30, 2004.
(xi) John J. Dooner, Jr.
180
Exhibit No.
10(iii)(A)(46)
10(iii)(A)(47)
10(iii)(A)(48)
10(iii)(A)(49)
10(iii)(A)(50)
10(iii)(A)(51)
10(iii)(A)(52)
10(iii)(A)(53)
10(iii)(A)(54)
10(iii)(A)(55)
10(iii)(A)(56)
10(iii)(A)(57)
10(iii)(A)(58)
10(iii)(A)(59)
Description
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 on Form 10-K for the year ended December 31, 1995.
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 on Form 10-K for the year ended December 31, 1995.
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 on
Form 10-K for the year ended December 31, 1995.
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 on Form 10-K for the year ended December 31, 1995.
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 on Form 10-K for the year ended December 31, 1995.
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 on Form 10-K for the year ended December 31, 1995.
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 on Form 10-K for the year ended December 31, 1995.
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.
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.
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.
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 on Form 10-Q for the quarter ended March 31, 1998.
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.
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 on Form 10-Q for the quarter ended
March 31, 2000.
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 on Form 10-K for
the year ended December 31, 2002.
181
Exhibit No.
10(iii)(A)(60)
10(iii)(A)(61)
10(iii)(A)(62)
10(iii)(A)(63)
10(iii)(A)(64)
10(iii)(A)(65)
10(iii)(A)(66)
Description
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 on Form 10-K for the year
ended December 31, 2002.
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 on Form 10-K for
the year ended December 31, 2002.
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 on Form 10-Q for the
quarter ended June 30, 2003.
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.
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 on Form 10-Q for the
quarter ended June 30, 2003.
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.
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 on Form 10-K for the year
ended December 31, 2003.
(xii) Jill Considine
10(iii)(A)(67) Deferred Compensation Agreement, dated as of April 1, 2002, between the Registrant
and Jill Considine, is incorporated by reference to Exhibit 10(c) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
(xiii) Richard A. Goldstein
10(iii)(A)(68)
Richard A Goldstein 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 on Form 10-Q for the quarter ended
June 30, 2001.
(xiv) Christopher J. Coughlin
10(iii)(A)(69)
10(iii)(A)(70)
10(iii)(A)(71)
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.
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.
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.
10(iii)(A)(72)
(xv) Other
10(iii)(A)(73)
10(iii)(A)(74)
10(iii)(A)(75)
10(iii)(A)(76)
10(iii)(A)(77)
10(iii)(A)(78)
10(iii)(A)(79)
10(iii)(A)(80)
10(iii)(A)(81)
10(iii)(A)(82)
10(iii)(A)(83)
10(iii)(A)(84)
10(iii)(A)(85)
10(iii)(A)(86)
10(iii)(A)(87)
10(iii)(A)(88)
Confidential Separation Agreement and General Release, between the Registrant and
Christopher J. Coughlin is incorporated by reference to Exhibit 10.1 to the Registrant's
Current Report on Form 8-K filed with the SEC on January 6, 2005.
Description
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 on Form 10-K for the year ended December 31, 1990.
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 on Form S-8
(No. 33-28143).
The Management Incentive Compensation Plan of the Registrant is incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995.
The 1986 Stock Incentive Plan of the Registrant is incorporated by reference to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.
The 1986 United Kingdom Stock Option Plan of the Registrant is incorporated by
reference to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1992.
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 on Form S-8 (No. 33-25555).
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 on Form 10-K for the year ended December 31, 1992.
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 on Form 10-K for the year ended December 31, 1989.
The 1996 Stock Incentive Plan of the Registrant is incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.
The 1997 Performance Incentive Plan of the Registrant is incorporated by reference to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
True North Communications Inc. Stock Option Plan is incorporated by reference to
Exhibit 4.5 of Post-Effective Amendment No. 1 on Form S-8 to Registration Statement
on Form S-4 (Registration No. 333-59254).
Bozell, Jacobs, Kenyon & Eckhardt, Inc. Stock Option Plan is incorporated by
reference to Exhibit 4.5 of Post-Effective Amendment No. 1 on Form S-8 to
Registration Statement on Form S-4 (Registration No. 333-59254).
True North Communications Inc. Deferred Compensation Plan is incorporated by
reference to Exhibit(c)(xiv) of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2002.
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)(xv) of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2002.
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.
The Interpublic Senior Executive Retirement Income Plan is incorporated by reference
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003.
183
Exhibit No.
10(iii)(A)(89)
10(iii)(A)(90)
10(iii)(A)(91)
10(iii)(A)(92)
10(iii)(A)(93)
10(iii)(A)(94)
10(iii)(A)(95)
10(iii)(A)(96)
10(iii)(A)(97)
10(iii)(A)(98)
10(iii)(A)(99)
Description
The Interpublic Capital Accumulation Plan is incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.
The Interpublic Outside Directors Stock Incentive Plan of Interpublic, as amended
through August 1, 2003, is incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2003.
2004 Performance Incentive Plan of the Registrant is incorporated by reference to
Appendix B to the Registrant's Proxy Statement on Schedule 14A, filed with the SEC
on April 23, 2004.
The Interpublic Non-Management Directors' Stock Incentive 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.
The Interpublic Senior Executive Retirement Income Plan Ì Form of Participation
Agreement is incorporated by reference to Exhibit 10.7 of the Registrant's Current
Report on Form 8-K filed with the SEC on October 27, 2004.
The Interpublic Capital Accumulation Plan Ì Form of Participation Agreement is
incorporated by reference to Exhibit 10.8 of the Registrant's Current Report on
Form 8-K filed with the SEC on October 27, 2004.
The Interpublic Group of Companies, Inc. 2004 Performance Incentive Plan (the
""PIP'') Ì 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.
PIP Ì 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.
PIP Ì 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.
Interpublic's Non-Management Directors' Stock Incentive Plan (the ""Non-Manage-
ment Directors' Plan'') Ì 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.
The Non-Management Directors' Plan Ì 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 Ì Form of Plan Option Certificate is incorpo-
rated 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) The Employee Stock Purchase Plan (2006) of the Registrant is incorporated by
(18)
(21)
(24)
(31.1)
(31.2)
(32)
reference to Appendix B to the Registrant's Proxy Statement on Schedule 14A, filed
with the SEC on October 21, 2005.
Preferability Letter from PricewaterhouseCoopers LLP, dated March 22, 2006.
Subsidiaries of the Registrant.
Power of Attorney to sign Form 10-K and resolution of Board of Directors re Power of
Attorney.
Certification dated as of March 22, 2006 and executed by Michael I. Roth, under
Section 302 of the Sarbanes-Oxley Act of 2002 (""S-OX'').
Certification dated as of March 22, 2006 and executed by Frank Mergenthaler, under
Section 302 of S-OX.
Certification dated as of March 22, 2006 and executed by Michael I. Roth and Frank
Mergenthaler, furnished pursuant to Section 906 of S-OX.
184
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant
has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
THE INTERPUBLIC GROUP OF COMPANIES, INC.
(Registrant)
By: /s/ Michael I. Roth
Michael I. Roth
Chairman of the Board
and Chief Executive Officer
March 22, 2006
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
Date
/s/ Michael I. Roth
Michael I. Roth
/s/ Frank Mergenthaler
Frank Mergenthaler
/s/ Nicholas S. Cyprus
Nicholas S. Cyprus
/s/ Frank J. Borelli
Frank J. Borelli
/s/ Reginald K. Brack
Reginald K. Brack
/s/
Jill M. Considine
Jill M. Considine
/s/ Richard A. Goldstein
Richard A. Goldstein
/s/ H. John Greeniaus
H. John Greeniaus
/s/
J. Phillip Samper
J. Phillip Samper
/s/ David M. Thomas
David M. Thomas
Chairman of the Board, and Chief
Executive Officer (Principal
Executive Officer)
Executive Vice President, Chief
Financial Officer (Principal
Financial Officer)
March 22, 2006
March 22, 2006
Senior Vice President and Controller
(Principal Accounting Officer)
March 22, 2006
March 22, 2006
March 22, 2006
March 22, 2006
March 22, 2006
March 22, 2006
March 22, 2006
March 22, 2006
Director
Director
Director
Director
Director
Director
Director
185
Exhibit 31.1
I, Michael I. Roth, certify that:
CERTIFICATION
1. I have reviewed this annual report on Form 10-K of The Interpublic Group of Companies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting
that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant's internal control over financial reporting.
Date: March 22, 2006
/s/ Michael I. Roth
Michael I. Roth
Chairman and Chief Executive Officer
Exhibit 31.2
I, Frank Mergenthaler, certify that:
CERTIFICATION
1. I have reviewed this annual report on Form 10-K of The Interpublic Group of Companies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting
that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant's internal control over financial reporting.
/s/ Frank Mergenthaler
Frank Mergenthaler
Executive Vice President and
Chief Financial Officer
Date: March 22, 2006
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of
Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of The
Interpublic Group of Companies, Inc. (the ""Company''), does hereby certify, to such officer's knowledge,
that:
The annual report on Form 10-K for the year ended December 31, 2005 of the Company fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the
information contained in the annual report on Form 10-K fairly presents, in all material respects, the
financial condition and results of operations of the Company.
Dated: March 22, 2006
Dated: March 22, 2006
/s/ Michael I. Roth
Michael I. Roth
Chairman and Chief Executive Officer
/s/ Frank Mergenthaler
Frank Mergenthaler
Executive Vice President and
Chief Financial Officer