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WPP plc – ‘20-F’ for 12/31/02

On:  Friday, 6/27/03, at 4:19pm ET   ·   For:  12/31/02   ·   Accession #:  1193125-3-14181   ·   File #:  0-16350

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 6/27/03  WPP plc                           20-F       12/31/02    6:2.4M                                   RR Donnelley/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 20-F        Annual Report of a Foreign Private Issuer           HTML   1.97M 
 2: EX-4.24     2002-2004 Ltip Ogilvy & Mather Participant Guide    HTML     32K 
 3: EX-4.25     2002-2004 Ltip J Walter Thompson Company, Inc.      HTML     30K 
                          Participant Guide                                      
 4: EX-8.1      List of Subsidiaries                                HTML     18K 
 5: EX-12.1     Consent of Independent Auditors                     HTML      6K 
 6: EX-99.1     Certifications Under Section 906 of the             HTML      9K 
                          Sarbanes-Oxley Act of 2002                             

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

(Mark One)

¨    Registration statement pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934

or

x    Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Fiscal year ended December 31, 2002

or

¨    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                          to             

Commission file number 0-16350

WPP Group plc

(Exact Name of Registrant as Specified in Its Charter)

(Translation of Registrant’s Name Into English)

United Kingdom

(Jurisdiction of Incorporation or Organization)

27 Farm Street, London W1J 5RJ England

(Address of Principal Executive Offices)

Securities registered or to be registered pursuant to Section 12 (b) of the Act:

Securities registered or to be registered pursuant to Section 12 (g) of the Act:

Ordinary Shares of 10p each

(Title of Class)

American Depositary Shares, each representing five Ordinary Shares (“ADSs”)

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15 (d) of the Act:

None

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

The number of outstanding ordinary shares is 1,157,325,640, which includes the underlying ordinary shares represented by 18,481,422 ADSs.

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES    x        NO    ¨

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17    ¨        Item 18    x

2

Forward-Looking Statements

In connection with the provisions of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”), the Company may include forward-looking statements (as defined in the Reform Act) in oral or written public statements issued by or on behalf of the Company. These forward-looking statements may include, among other things, plans, objectives, projections and anticipated future economic performance based on assumptions and the like that are subject to risks and uncertainties. As such, actual results or outcomes may differ materially from those discussed in the forward-looking statements. Important factors which may cause actual results to differ include but are not limited to: the unanticipated loss of a material client or key personnel, delays or reductions in client advertising budgets, shifts in industry rates of compensation, government compliance costs or litigation, natural disasters or acts of terrorism, the Company’s exposure to changes in the values of other major currencies (because a substantial portion of its revenues are derived and costs incurred outside of the United Kingdom) and the overall level of economic activity in the Company’s major markets (which varies depending on, among other things, regional, national and international political and economic conditions and government regulations in the world’s advertising markets). In light of these and other uncertainties, the forward-looking statements included in the document should not be regarded as a representation by the Company that the Company’s plans and objectives will be achieved.

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

Overview

WPP Group plc (“WPP”) is one of the world’s largest communications services groups offering a comprehensive and, when appropriate, integrated range of communications services to national, multinational and global clients. These services include advertising; media investment management; information, insight and consultancy; public relations and public affairs; branding and identity; healthcare; direct, promotion and relationship marketing; and specialist communications. The Group’s revenues in 2002 were approximately $5.9 billion. At year-end, WPP (including affiliated companies, or associates) employed approximately 62,000 people in 1,400 offices in 103 countries throughout the world. As of May 30, 2003, these numbers have not changed significantly.

Unless the context otherwise requires, the terms “Company”, “Group” and “Registrant” as used herein shall mean WPP and its subsidiaries.

A. Selected Financial Data

The selected financial data should be read in conjunction with, and are qualified in their entirety by reference to, the Consolidated Financial Statements of the Company, including the notes thereto.

The selected financial data for the three years ended December 31, 2002 is derived from the Consolidated Financial Statements of the Company, which appear elsewhere in this Form 20-F. The selected financial data for the two years ended December 31, 1999 is derived from the Consolidated Financial Statements of the Company previously filed with the Securities and Exchange Commission on Form 20-F.

The Consolidated Financial Statements of the Company are prepared in accordance with applicable accounting standards in the UK (UK GAAP), which differ in certain significant respects from generally accepted accounting principles in the US (US GAAP). A reconciliation to US GAAP is set forth on pages F-26 to F-34 of the Consolidated Financial Statements.

No operations with a material impact on the Group’s results were acquired or discontinued in the periods presented except during 2000. For 2000, aggregated figures for acquisitions were revenue of £438.9 million, operating profit of £61.5 million and profit on ordinary activities before interest and taxation of £66.4 million.

The reporting currency of the Group is the pound sterling and the selected financial data have been prepared on this basis.

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Selected Consolidated Profit and Loss Account Data

Selected Consolidated Balance Sheet Data

Notes

4

EBITDA reconciliation

Dividends

Dividends on the Company’s ordinary shares, when paid, are paid to share owners as of a record date, which is fixed after consultation between the Company and The London Stock Exchange Limited (“The London Stock Exchange”).

The table below sets forth the amounts of interim, final and total dividends paid on the Company’s ordinary shares in respect of each fiscal year indicated. In the United States, the Company’s ordinary shares are represented by ADSs, which are evidenced by American Depositary Receipts (“ADRs”). The dividends are also shown translated into US cents per ADS using the average Bloomberg Closing Mid Point rate for £ sterling on each of the respective payment dates for such dividends.

The 2002 interim dividend was paid on November 18, 2002 to share owners on the register at September 13, 2002. The 2002 final dividend is expected to be paid on July 7, 2003 to share owners on the register at June 6, 2003. The 2002 proposed final dividend has been translated into US cents using the 2002 average exchange rate of $1.5036 = £1.

Exchange rates

Fluctuations in the exchange rate between the pound sterling and the United States dollar will affect the dollar equivalent of the pound sterling prices of the Company’s ordinary shares on The London Stock Exchange, and as a result, are likely to affect the market price of the ADS in the United States. Such fluctuations will also affect the dollar amounts received by holders of ADSs on conversion by the Depositary for the ADSs (the “Depositary”) of cash dividends paid in £ sterling by the ordinary shares represented by the ADSs. The average Bloomberg Closing Mid Point rate for £ sterling expressed in US dollars for each of the five years ended December 31, 2002 were:

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The following table sets forth for each of the most recent six months, the high and low Bloomberg Closing Mid Point rates. As of May 30, 2003, the Bloomberg Closing Mid Point rate was 1.6381.

B.    Capitalization and Indebtedness

Not applicable.

C.    Reasons for the Offer and Use of Proceeds

Not applicable.

D.    Risk Factors

The Company competes for clients in a highly competitive industry.

The communications services industry is highly competitive and fragmented. At the parent company level, the Company’s principal

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competitors are other large multinational communications services companies, including Omnicom Group, Interpublic Group of Companies and Publicis Groupe. The actual competition for clients, however, takes place at the operating company level, within the different sectors of advertising and media investment management; information, insight and consultancy; public relations and public affairs; and branding and identity, healthcare, and specialist communications. The Company’s principal competitors in the advertising industry are large multinational agencies, including BBDO Worldwide, Leo Burnett Worldwide, DDB Worldwide Communications, Foote, Cone & Belding Worldwide, Lowe & Partners Worldwide, McCann-Erickson Worldwide, Saatchi & Saatchi and TBWA Worldwide, as well as numerous smaller agencies that operate in local markets. The Company’s agencies must compete with other agencies to maintain existing client relationships and to obtain new clients. Principal competitive factors include the agency’s creative reputation, knowledge of media alternatives and purchasing power, geographic coverage and diversity, quality of service and understanding of clients’ needs. Improved global communications and free trade, and more stable, less inflationary worldwide economic growth have contributed to increased competition in the communications services industry. At the same time, however, advertising and marketing services companies are consolidating, diversifying and growing market share through acquisitions.

Clients are not generally bound to an individual agency and may move their accounts to another agency, usually with 90 days notice. Clients may also reduce advertising and marketing budgets at any time and for any reason with no compensation to the agency. Larger clients tend to use more than one agency for their advertising requirements. In many cases, the Company represents a client for only a portion of its advertising or marketing services needs or only in particular geographic areas thus enabling the client to continually compare the effectiveness of its different agencies’ work. Industry practices in the other communications services businesses reflect similar concerns with respect to client relationships. Despite these circumstances, there is continued evidence that clients are moving towards the consolidation of their marketing activities. Consolidation trends continue amongst clients, media owners, retailers and agencies.

An agency’s ability to compete for new advertising, and marketing services clients and assignments, is limited somewhat by the policy followed by many clients of not permitting agencies working for them to represent competitive accounts or product lines in the same market. A lesser number of companies will not permit their advertising and/or marketing services firms to work on competitive accounts in any market, although, increasingly, converging strategies seem to be reducing the incidence of this. Client conflict policies can and sometimes do prevent our agencies from winning new clients and assignments. However, there are also some signs of a weakening of client conflict policies, as clients wrestle with the difficulties that increasing globalisation, acquisitions, mass product launches and joint ventures bring.

The Company receives a significant portion of its revenues from a limited number of large clients.

A relatively small number of clients contribute a significant percentage of the Company’s consolidated revenues. The Company’s ten largest clients accounted for 28% of revenues in the year ended December 31, 2002. The Company’s clients generally are able to reduce advertising and marketing spending or cancel projects at any time for any reason. There can be no assurance that any of the Company’s clients will continue to utilize the Company’s services to the same extent, or at all, in the future. A significant reduction in advertising and marketing spending by, or the loss of one or more of, the Company’s largest clients, if not replaced by new client accounts or an increase in business from existing clients, would adversely affect the Company’s prospects, business, financial condition and results of operations.

The Company may be subject to certain regulations that could restrict the Company’s activities.

From time to time, governments, government agencies and industry self-regulatory bodies in the United States and other countries in which the Company operates have adopted statutes, regulations, and rulings which directly or indirectly affect the form, content, and scheduling of advertising, and public relations and public affairs, or otherwise affect the activities of the Company and its clients. Some of the foregoing relate to general considerations such as truthfulness, substantiation and interpretation of claims made, comparative advertising, relative responsibilities of clients and advertising, public relations and public affairs firms, and registration of public relations and public affairs firms’ representation of foreign governments.

In addition, there is an increasing tendency towards consideration and adoption of specific rules, prohibitions, and media restrictions, and labeling, disclosure and warning requirements, with respect to advertising for certain products, such as over-the-counter drugs and pharmaceuticals, cigarettes, food and certain alcoholic beverages, and to certain groups, such as children.

Proposals have been made for the adoption of additional laws and regulations that could further restrict the activities of advertising and public relations and public affairs firms and their clients. Though the Company does not expect any existing, proposed or future regulations to materially adversely impact the Company’s business, the Company is unable to estimate the effect on its future operations of the application of existing statutes or regulations or the extent or nature of future regulatory action.

The Company is dependent on its employees.

The assets of advertising and marketing services businesses are primarily their employees, and the Company is highly dependent on the talent, creative abilities and technical skills of its personnel and the relationships its personnel have with clients. The Company believes that its operating companies have established reputations in the industry that attract talented personnel. However, the Company, like all communications services businesses, is vulnerable to adverse consequences from the loss of key employees due to the competition among these businesses for talented personnel.

The Company is exposed to international business risk.

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The Company operates in 103 countries throughout the world. Its operations are exposed to the normal business risks and limitations caused by currency fluctuations, exchange control restrictions, restrictions on repatriation of earnings and investment of capital and political instability. In addition, the communications services industry is widely viewed as among the first industry sectors affected by changes in economic cycles. For details of the effect of the recent weaker global economic environment on the Group, see the discussion under Item 5.

ITEM 4.    INFORMATION ON THE COMPANY

The Company operates through a number of established national, multinational and global advertising and marketing services companies. Among these are the well known advertising networks J. Walter Thompson Company, Ogilvy & Mather Worldwide, Red Cell and Y&R Advertising; Mediaedge:cia and MindShare in media investment management; The Kantar Group (including Kantar Media Research, Millward Brown and Research International) in information, insight and consultancy; the worldwide public relations and public affairs companies Burson-Marsteller, Cohn & Wolfe, Hill and Knowlton and Ogilvy Public Relations Worldwide; the Enterprise Identity Group and Landor Associates, specialising in branding and identity; CommonHealth and Sudler & Hennessey, specialising in healthcare; OgilvyOne and Wunderman, in direct, promotion and relationship marketing. The Company’s ten largest clients in 2002 were American Express, AT&T, Colgate-Palmolive, Ford, GlaxoSmithKline, IBM, Nestle, Pfizer, Philip Morris and Unilever.

The Company’s ordinary shares are admitted to the Official List of the UK Listing Authority and trade on The London Stock Exchange and American Depositary Shares (evidenced by American Depositary Receipts) representing deposited ordinary shares are quoted on the NASDAQ National Market (“NASDAQ”). At May 30, 2003, the Company had a market capitalisation of £5.7 billion ($9.3 billion).

The Company’s executive office is located at 27 Farm Street, London W1J 5RJ, England, Tel: (44) 20-7408-2204 and its registered office is located at Pennypot Industrial Estate, Hythe, Kent CT21 6PE, England.

A.    History and Development of the Company

WPP Group plc was incorporated under the laws of England and Wales in 1971, and until 1985 operated as a manufacturer and distributor of wire and plastic products. In 1985, new investors acquired a significant interest in WPP and changed the strategic direction of the Company from being a wire and plastics manufacturer and distributor to being a multinational communications services organisation. Since then, the Company has grown both organically and by the acquisition of companies, most significantly the acquisitions of JWT Group, Inc. in 1987, The Ogilvy Group, Inc. in 1989, Young & Rubicam Inc. (“Young & Rubicam”) in 2000 and Tempus Group plc (“Tempus”) in 2001.

On October 4, 2000, the Company finalised its acquisition of Young & Rubicam. The value of the consideration, which was satisfied entirely by the issue of new WPP ordinary shares or WPP ADSs, was £3.0 billion. The consideration was calculated by reference to the opening WPP share price on October 4, 2000, which was £7.99. The merger with Young & Rubicam brought together two organisations sharing a common approach to the integration of advertising and marketing services for clients. The management of WPP believes that the companies complement one another in providing alternative operating brands in common business areas while adding the market research expertise of WPP to the Young & Rubicam businesses. The WPP and Young & Rubicam companies continue to share a large number of major clients including The Ford Motor Company, Philip Morris, and AT&T. Within the enlarged Group client conflicts can be managed more effectively through separate operating brands so that clients will be assured of confidentiality. In addition, the merger has strengthened the Group geographically, particularly in North America and Continental Europe.

On November 6, 2001, the Company finalised its acquisition of Tempus. The consideration was satisfied principally by £369 million in cash. Prior to the acquisition, the Group owned a 22% interest in the ordinary share capital of Tempus. Subsequent to the acquisition, The Media Edge and CIA, Tempus’ core brand, merged operations to create Mediaedge:cia. Mediaedge:cia’s geographically balanced network enables it to develop, manage and implement national, regional and global communications and media solutions for the benefit of its clients.

The Company spent £343.4 million, £736.0 million and £247.4 million for acquisitions and investments in 2002, 2001 and 2000, respectively, including payments on loan note redemptions and earnout consideration resulting from acquisitions in prior years. For the same periods, cash spent on purchases of tangible fixed assets were £100.5 million, £118.1 million, and £111.9 million, respectively, and cash spent on share repurchases was £67.6 million, £103.3 million and £94.1 million, respectively.

Subsequent Event

        On June 19, 2003, WPP and Cordiant Communications Group plc announced the terms of a recommended proposed acquisition of Cordiant by means of a scheme of arrangement. Under the terms of the scheme of arrangement, holders of outstanding ordinary shares of Cordiant Communications Group plc will receive one new ordinary share of WPP for each 205 ordinary shares of Cordiant they hold. WPP has also purchased or agreed to purchase all of Cordiant’s outstanding secured debt obligations for £267 million. The scheme of arrangement is expected to be completed in August 2003; however, because the transaction is subject to approval by the High Court of Justice in England and Wales and Cordiant shareholder approval, the exact timing of the transaction cannot be predicted and WPP cannot give any assurance that the transaction will be completed.

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B.    Business Overview

In 2002 turnover decreased to £18.0 billion ($27.1 billion), and revenues decreased almost 3% to £3.9 billion ($5.9 billion). On a like-for-like basis, (which adjusts prior year results to include the results of acquisitions for the commensurate period in the prior year as is included in current year results from the relevant date of completion) revenues were down by 6%. Reported operating profit (excluding income from associates) decreased by 46% to £273 million ($410 million), including a £146 million goodwill impairment charge taken in 2002. Pre-goodwill amortisation and impairment, operating margins (including income from associates) fell to 12.3% from 14.0%. Excluding income from associates, these operating margins fell less, by 1.4% from 12.9% to 11.5%. Post-goodwill amortisation and impairment, reported profit before interest, tax, investment gains and write-downs was down 44% to £303 million ($455 million) from £546 million ($787 million). Profit before tax fell 50% to £205 million ($309 million) and diluted earnings per share by almost 68% to 7.7p (11.6c). Headline diluted earnings per share, which excludes goodwill amortisation and impairment, fixed asset gains and write-downs, and net interest charges on defined benefit pension schemes, fell by 19% to 24.9p (37.4c).

Approximately 46% of the Company’s reported revenues in 2002 were from advertising and media investment management, with the remaining 54% of its revenues being derived from the business segments of information, insight and consultancy; public relations and public affairs; and branding and identity, healthcare and specialist communications. Over the past several years, the pattern of revenue growth varied by communications services sector and brand. The following table shows reported revenue attributable to each business segment in which the Company operates for the last three fiscal years.

The pattern of revenue growth also differed regionally. The following table shows, for the last three fiscal years, reported revenue attributable to each geographic area in which the Company operates and demonstrates the Company’s regional diversity.

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(i)  The business segment and geographic data set out in the above tables are also expressed in US dollars using the approximate average exchange rate for the year (2002: $1.5036 = £1; 2001: $1.4401 =£1; 2000: $1.5162 = £1).

The Company’s principal activities within each of its business segments are described below.

Advertising and Media investment management

Advertising

The principal functions of an advertising agency are the planning and creation of marketing and branding campaigns and the design and production of advertisements for all types of media such as television, cable, the internet, radio, magazines, newspapers and outdoor locations such as billboards.

Revenue is typically derived from commissions on media placements and fees for advertising services. Traditionally, the Group’s advertising clients were charged a standard commission on their total media and production expenditure. In recent years, however, this frequently has tended to become a matter of individual negotiation. Revenue may therefore consist of various arrangements involving commissions, fees, incentive-based revenue or a combination of the three, as agreed upon with each client.

The Company’s advertising agencies include J. Walter Thompson Company, Ogilvy & Mather Worldwide, Red Cell and Y&R Advertising. The Company also owns interests in Asatsu-DK (20%) and DYR Tokyo Agency (49%).

J. Walter Thompson Company (J. Walter Thompson). J. Walter Thompson, one of the world’s first advertising agencies, was founded in 1864 and is a full service multinational advertising agency. J. Walter Thompson is headquartered in New York. J. Walter Thompson’s relationships with a number of its major clients have been in existence for many years, exhibiting an ability to continually adapt to meet the clients’ and market’s new demands. No single client accounted for more than 19% of J. Walter Thompson’s 2002 revenues. The agency added significant net new billings in 2002, including such multinationals as Vodafone, Reckitt Benckiser, Shell, Diageo, Pfizer and Kimberly Clark, as well as significant new assignments from current global clients including Ford, Kellogg’s, Nestle, Unilever and Kraft.

Ogilvy & Mather Worldwide (Ogilvy & Mather). Ogilvy & Mather is a full service multinational advertising agency. Its strategy includes an integrated service offering known as 360 Degree Brand Stewardship, through which it covers a range of offerings from sales promotion to healthcare communications, event and entertainment marketing, data mining and brand identity. Ogilvy & Mather, formed in 1948, is headquartered in New York. Major clients of Ogilvy & Mather include IBM, Unilever, American Express, Eastman Kodak, BP, Motorola, Mattel, Nestle, SAP and Kraft, among many others. No single client accounted for more than 12% of Ogilvy & Mather’s 2002 revenues. The results of OgilvyOne Worldwide, Ogilvy & Mather’s direct marketing division, are included within the Group’s branding and identity, healthcare and specialist communications sector. The results of Ogilvy Public Relations Worldwide, Ogilvy & Mather’s public relations division, are included within the Group’s public relations and public affairs sector.

Y&R Advertising (Y&R). Y&R, Young & Rubicam’s largest line of business, formed in 1923, is a full service multinational advertising agency network headquartered in New York. New business wins in 2002 for Y&R offices included the global assignment for Glenlivet Whisky, the Carlsberg sports sponsorship, Hewlett-Packard, the consolidated Boys Division at Mattel and new product launches for Dr Pepper/7Up, Sears, Mattel and Ford. Major clients of Y&R include Ford, AT&T, Colgate-Palmolive, Philip Morris and Sony. No single client accounted for more than 13% of Y&R’s 2002 revenues.

Red Cell. Red Cell, formed in 2001, is a global communications network offering full-service marketing solutions. During 2002, Red Cell added the premium and luxury goods-focused agency Les Ouvriers Du Paradis in Paris, and the international consumer insight and research consultancy, Headlight Vision, to its network, followed more recently by HHCL & Partners in London. New business wins in 2002 included Coca-Coca Classic by Berlin Cameron/RedCell in the US.

Media investment management

The Group’s worldwide media investment management companies plan, and buy media to communicate, clients’ brand messages in the most effective manner using their buying power to negotiate competitive rates for space and time using sophisticated consumer and media research tools. These companies offer an integrated service covering conventional media like television, print and posters as well as digital and interactive media, sponsorship, event management and TV programming. They help clients to optimise their media spending through advice on the strategic benefit of each medium (e.g., TV, print, internet, radio, etc.), and passing economies of scale in the purchasing of media time and space through to clients. The business is conducted through WPP’s subsidiaries MindShare and Mediaedge:cia. Plans to form a worldwide “WPP Media” parent company, to be called Group M, are currently being implemented.

MindShare. MindShare, formed from the merger of the media departments of J. Walter Thompson and Ogilvy & Mather, offers media planning, buying and research services for its clients, including existing J. Walter Thompson and Ogilvy & Mather clients. 2002 new business included the global Gillette account representing an estimated $600 million of new business. No single client accounted for more than 12% of

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MindShare’s 2002 revenues.

Mediaedge:cia. Mediaedge:cia was formed following WPP’s acquisition of Tempus in 2001 with the merger of its core brand CIA with The MediaEdge. Mediaedge:cia provides integrated media planning and buying of both traditional and direct response media, and offers a range of media-related services to a client base that includes Y&R and Wunderman clients, independent clients and other agencies. 2002 new business wins included such key international wins as Chevron Texaco, Reebok, Sony Ericsson, Novel, United Airlines, DHL, NEC and Schick Wilkinson. Mediaedge:cia also includes the digital operations Outrider and The Digital Edge, and OHAL, an econometric modeling group.

Information, insight and consultancy

Information, insight and consultancy, previously information and consultancy, was re-named following the transfer of the strategic marketing consultancy businesses from Specialist Communications on 1 January 2003. Research activities include consumer, media, corporate communication and policy research, advertising research, pre-testing and tracking and evaluation of advertising and promotions, design and management of international market studies and new product development and testing.

To help optimise its worldwide research offering to clients, the Company’s separate global research and strategic marketing consultancy businesses are managed on a centralised basis under the umbrella of the Kantar Group. Kantar’s research businesses include Research International, Millward Brown, Kantar Media Research and IMRB International. The Group’s strategic marketing consultancy businesses include Management Ventures, Glendinning and The Henley Centre.

Public relations and public affairs

Public relations and public affairs companies advise clients who are seeking to communicate with consumers, governments and/or the business and financial communities. Public relations and public affairs activities include national and international corporate, financial and marketing communications, crisis management, public affairs and government lobbying. The Company’s main businesses in this area are Burson-Marsteller, Hill and Knowlton, Ogilvy Public Relations Worldwide and Cohn & Wolfe.

Burson-Marsteller (BM). BM, founded in 1953, specialises in corporate and marketing communications, business-to-business, crisis management, employee relations and government relations. New business gains from both new and existing clients in 2002 include the US Treasury, Aventis, GNC, Ford, Lincoln-Mercury, Sony, Altria Groups, Accenture, Merrill Lynch, SAP, GlaxoSmithKline, US Postal Service and Astra Zeneca.

Hill and Knowlton (H&K). H&K, founded in 1927, is a worldwide public relations and public affairs firm headquartered in New York. H&K provides national and multinational clients with a wide range of communications services, including corporate and financial public relations, marketing communications, crisis communications, and public affairs counseling. New business gains from both new and existing clients in 2002 include Johnson & Johnson, Kellogg, Boeing, American Express and Hewlett-Packard (with Burson-Marsteller).

Ogilvy Public Relations Worldwide (OPR). OPR is a leading public relations and public affairs firm based in New York with practice areas in marketing, health and medical, corporate public affairs, and technology. The firm has offices in key financial, governmental and media centers as well as relationships with affiliates worldwide. New business gains in 2002 include UPS in Asia, GSK/Bayer, NASDAQ, Uniden, Quicksilver, Nevada Department of Public Safety and the American Red Cross.

Cohn & Wolfe (C&W). C&W, an international public relations agency, was established in 1970 and offers marketing-related public relations for its clients, such as Hilton, Aventis, Smuckers, Danone and Visa.

Others. The Group owns a number of other companies specialising in public relations and public affairs, including BKSH, Blanc & Otus, Buchanan Communications, Finsbury, Penn, Schoen and Berland, Robinson Lerer & Montgomery, Timmons and Company and Wexler and Walker Public Policy Associates.

Branding & identity, Healthcare and Specialist communications

Branding and identity

        The Company delivers a large range of branding and identity services through its Brand Union, a co-operative group of certain of WPP’s specialist consulting brands, as well as a number of other operating subsidiaries, including Landor Associates and The Partners. These companies provide complementary services, including space planning, retail and work interiors, point-of-sale displays, marketing literature, annual reports and corporate literature, packaging and brand and corporate identity.

The Brand Union. The goal of the Brand Union, formed in 2001, is to build a group of leading consulting brands capable of meeting all the brand, identity and design needs of the world’s most demanding brand owners. It comprises a diverse portfolio of consulting and creative businesses, including Enterprise IG, Eurosem, The Clinic, Addison Corporate Marketing, BDG workfutures, BPRI, Coley Porter Bell, Dovetail, Lambie-Nairn, MJM Creative, Oakley Young, WalkerGroup/CNI and Warwicks.

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Landor Associates (Landor). Landor is a leading branding consultancy and strategic design firm. Landor creates, builds and revitalises clients’ brands and helps position these brands for continued success. Landor’s branding and identity consultants, designers and researchers work with clients on a full range of branding and identity projects, including corporate identity, packaging and brand identity systems, retail design and branded environments, interactive branding and design, verbal branding and nomenclature systems, corporate literature, brand extensions and new brand development. Landor, headquartered in San Francisco, was founded in 1941.

Healthcare

The Company has extensive expertise in healthcare marketing and communications services. CommonHealth and Sudler & Hennessey offer two of the most comprehensive specialist healthcare communications networks in the world.

Specialist communications

Direct, promotion and relationship marketing

The Company has a number of operating businesses in this category, including:

- OgilvyOne Worldwide, including its interactive unit, Ogilvy Interactive, is a worldwide direct marketing group, providing direct mail, database marketing and direct response advertising techniques.

- Wunderman is an integrated marketing solutions company that delivers customer relationship management services to its clients. Wunderman combines strategic consulting, data-driven and creative marketing services, the Internet, and the latest information technologies to drive and measure business results for its clients.

- KnowledgeBase Marketing (KBM) is a single source provider of integrated information-based marketing solutions to businesses in targeted high-growth industries. KBM delivers its integrated business solutions services by creating consolidated databases, and then designing, implementing and evaluating database marketing programs for clients. KBM’s capabilities include data warehousing, data mining, information services and data analysis.

- A. Eicoff & Co specialises in targeted cable and broadcast television advertising.

- EWA specialises in customer service and loyalty support programs, with units specialising in government, education, the automobile industry, retail and agriculture.

- Savatar specialises in marketing and technology, and acts as a single source for business technology, interactive strategy, and database and call center marketing.

- VML, headquartered in Kansas City, specialises in full service integrated on-line and traditional advertising.

Custom Media

The Company’s custom media businesses include Forward, a content-provider for page and screen, and Spafax, specialising in the aviation sector.

Sector marketing

The Company organises its sector marketing businesses under the following divisions: Corporate/B2B, Demographic Marketing, Employer Branding/Recruitment, Face-to-face marketing, Foodservice, Investor Relations, Sports Marketing, Real Estate and Technology. The Company’s operating businesses in this category include:

- Banner Corporation is a European marketing communications firm specialising in the technology sector.

- Mendoza Dillon specialises in advertising for the Hispanic community and provides clients with integrated marketing services in this fast-growing specialist market.

- Pace is one of the largest specialists in the real estate communications market in the United States, offering comprehensive services in the marketing of both commercial and residential property to developers, builders and real estate agents.

- Ogilvy Primary Contact is a leading UK based provider of business-to-business, financial and corporate advertising.

- The Geppetto Group assists clients in communicating their products and services to the youth market (children and teens) and implementing creative branding solutions.

- The Bravo Group and Kang & Lee create multi-cultural marketing and communications programs targeted to the fast-growing US Hispanic

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and Asian communities, respectively. Their multi-disciplinary services include advertising, promotion and event marketing, public relations, research and direct marketing.

- PRISM, on a global basis, offers sports marketing and consultancy, event management, public relations and communication design.

Media, technology and production services

The Company’s operating businesses in this category include:

- Metro Group provides a diverse range of technical and creative services, including multimedia, film, video and asset archiving, equipment sales and post-production systems to clients in the UK.

- The Farm Group, headquartered in the UK, is a film and video production services company.

Manufacturing

The original business of the Company remains as the manufacturing division, which operates through subsidiaries of Wire and Plastic Products Limited. The division produces a wide range of products for commercial, industrial and retail applications. The Company’s revenues from manufacturing activities in 2002 were less than 1% of the Company total.

WPP Group plc

WPP, the parent company, develops the professional and financial strategy of the Group, promotes operating efficiencies, coordinates cross referrals of clients among the Group companies and monitors the financial performance of its operating companies. The parent company complements the operating companies in two distinct ways. First, the parent company relieves them of much administrative work. Financial matters (such as planning, budgeting, reporting, control, treasury, tax, mergers, acquisitions, investor relations) are coordinated centrally. In property, procurement, information technology, recruitment, training and knowledge sharing, the parent company also has a significant across-the-Group part to play. Second, and increasingly, the parent company encourages and enables operating companies of different disciplines to work together for the benefit of clients and our people. The parent company operates with a relatively small team of approximately 200 people at the center, predominantly based in London and New York, with some support in Hong Kong and Sao Paulo.

WPP Strategy

The Group has three strategic priorities. First, in the short term, to weather the recession. Second, in the medium term, to continue to successfully integrate the acquisitions of Young & Rubicam and Tempus. Third, to increase the share of marketing services revenues from approximately 53% where it is now on a constant currency basis (under which local currency results are translated into US dollars at a budget, or “constant”, foreign exchange rate), to two-thirds, within five to ten years; and similarly increase the share of Asia Pacific, Latin America, Africa and the Middle East revenues from 20% to one-third; and finally, to increase the share of information, insight and consultancy, direct and interactive revenues from just over one-third to 50%.

The Group has established the following financial and strategic objectives:

- To continue to raise operating margins to the levels of the best performing competition, to 13.3% in 2003 and 13.8% in 2004. In addition, the Group’s longer-term objective, beyond 2004, is to raise operating margins to 15% in the medium term and longer term up to 20%.

- To continue to increase the flexibility in the Group’s cost structure. Our success in this area proved very valuable in 2001 and 2002. Variable staff costs, freelance and consultants’ fees have fallen to approximately 5% of revenues from approximately 7% in 2000. The Group aims to rebuild this ratio again.

- To improve share owner value by optimising the investments of the Company’s cash flow across the alternatives of capital expenditure, mergers and acquisitions, dividends and share buy-backs.

- To continue to develop the role of WPP as a parent company, beyond that of a financial holding or investment company. The key added value areas that WPP has identified are human resources, property, procurement, information technology and practice development.

- To place greater emphasis on revenue growth by better positioning the Group’s portfolio in faster-growing functional and geographical areas.

        - To improve still further the quality of our creative output by stepping up training and development programs; by recruiting the finest talent from outside; by celebrating and rewarding outstanding creative success both tangibly and intangibly; by acquiring strong creative companies; and by encouraging, monitoring and promoting our companies’ achievements in winning creative awards.

Clients

The Company’s structure of independent, autonomous companies and associates allows it to provide a comprehensive and, when appropriate,

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integrated range of communications services to national, multinational and global clients and to serve their increasingly complex and diverse geographic needs. The Company serves over 330 clients in three or more service disciplines; more than 230 clients in four disciplines and over 200 clients in six or more countries. All together, the Company now serves more than 330 of the Fortune Global 500, over one-half of the NASDAQ 100, and 42 of the Fortune e-50. The Company’s ten largest clients in 2002 were American Express, AT&T, Colgate-Palmolive, Ford, GlaxoSmithKline, IBM, Nestle, Pfizer, Philip Morris, and Unilever. Together, these clients accounted for approximately 28% of the Company’s revenues in 2002. No client of the Company represents more than 9% of the Company’s aggregate revenues. The Company has maintained long-standing relationships with many of its clients, with the average length of relationship for the top 10 clients approximately 50 years.

While the operating companies owned by the Company operate separately and independently of each other, and service different clients and/or business segments, they nevertheless have the opportunity to share certain corporate resources. The potential for cross-referral of clients among the Company’s subsidiaries is significant, and increasing, as contacts and introductions between the various subsidiaries of the Company often produce new ideas for services and new client opportunities, nationally, internationally and by service functions. To enhance this process, the Company has implemented incentive plans whereby a portion of the incentive compensation for senior executives in the Group is based upon their cooperation with, and cross referrals to, other Group companies.

Acquisitions

Total initial cash consideration spent on acquisitions and investments was £167 million in 2002. WPP or its operating companies acquired or made an investment in a number of companies in 2002, including:

In the first quarter of 2003, the Group completed acquisitions or investments in Advertising and Media Investment Management, including Media Club (Italy), LG Ad (South Korea), Shanghai Advertising (China), Guye Benker Werbeaugentur (Switzerland), HHCL (UK), and Concept Media (Germany).

Government regulation

From time to time, governments, government agencies and industry self-regulatory bodies in the United States and other countries in which the Company operates have adopted statutes, regulations, and rulings which directly or indirectly affect the form, content, and scheduling of advertising, and public relations and public affairs, or otherwise affect the activities of the Company and its clients. Some of the foregoing relate to general considerations such as truthfulness, substantiation and interpretation of claims made, comparative advertising, relative responsibilities of clients and advertising, public relations and public affairs firms, and registration of public relations and public affairs firms’ representation of foreign governments.

In addition, there is an increasing tendency towards consideration and adoption of specific rules, prohibitions, and media restrictions, and labeling, disclosure and warning requirements, with respect to advertising for certain products, such as over-the-counter drugs and pharmaceuticals, cigarettes, food and certain alcoholic beverages, and to certain groups, such as children.

        Proposals have been made for the adoption of additional laws and regulations that could further restrict the activities of advertising and public relations and public affairs firms and their clients. Though the Company does not expect any existing, proposed or future regulations to materially adversely impact the Company’s business, the Company is unable to estimate the effect on its future operations of the application of existing statutes or regulations or the extent or nature of future regulatory action.

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C.    Organizational Structure

The Company’s business comprises the provision of communications services on a national, multinational and global basis. It operates from 1,400 offices in 103 countries. The Company organises its businesses in the following areas: advertising and media investment management; information, insight and consultancy; public relations and public affairs; and branding and identity, healthcare, and specialist communications (including direct, promotion and relationship marketing). Set forth below is a listing of the Group companies operating within these business segments as at May 14, 2003.

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D.    Property, Plant and Equipment

The majority of the Company’s properties are leased, although certain properties which are used mainly for office space are owned in the US (including the 370,000 net square foot Young & Rubicam headquarters office building located at 285 Madison Avenue in New York, NY), Argentina, Brazil, Mexico, Peru and Thailand, and a manufacturing plant is owned in the UK. Principal leased properties include office space at the following locations:

The Company actively manages its rental costs to revenue ratio and believes that it is still capable of achieving significant improvements in this area. With the recession, the task of eliminating under-utilised property costs continues to be a priority. At the beginning of 2002 the Group occupied approximately 14 million square feet worldwide. By the end of the year, occupancy had fallen to 13.5 million square feet or a 4% reduction. In addition, a further 1.1 million square feet or an additional 8% is expected to be eliminated by the end of 2003.

The Company considers its properties, owned or leased, to be in good condition and generally suitable and adequate for the purposes for which they are used. See also Item 5—Operating and Financial Review and Prospects. As of December 31, 2002, the fixed asset value (cost less depreciation) representing properties, both owned and leased, as reflected in the Company’s consolidated financial statements was approximately £179.6 million ($289.2 million).

See Note 2 of Notes to the Company’s Consolidated Financial Statements for a schedule by years of future minimum rental payments to be made and future sublease rental payments to be received, as of December 31, 2002, under non-cancelable operating leases of the Company.

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ITEM 5.    OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Overview

The following discussion is based on the Company’s audited Consolidated Financial Statements included elsewhere in the document. The Consolidated Financial Statements have been prepared in accordance with UK GAAP. See pages F-26 to F-34 of the Consolidated Financial Statements, which contain a discussion of the principal differences between UK and US GAAP relevant to the Company. Throughout this section we refer to profits before interest, taxation, fixed asset gains and write-downs in order to provide a meaningful discussion of underlying business performance. See note 28 to the Consolidated Financial Statements for a tabular reconciliation to the relevant headings under UK GAAP.

Impact of Exchange Rate Fluctuations

The Company’s reporting currency has always been the UK pound sterling. However, the Group’s significant international operations give rise to an exposure to changes in foreign exchange rates. The Group seeks to mitigate the effect of these structural currency exposures by borrowing in the same currencies as the operating (or “functional”) currencies of its main operating units. Its principal borrowing currencies, therefore, are US dollars, pounds sterling and euros, as these are the predominant currencies of revenues.

To neutralise foreign exchange impact and to better illustrate the underlying change in revenue and profit from one year to the next, the Company has adopted the practice of discussing results in both reportable currency (local currency results translated into pounds sterling at the prevailing foreign exchange rate) and constant currency (current and prior year local currency results translated into US dollars at a budget, or “constant”, foreign exchange rate).

£295 million of the proceeds from the issuance of the £450 million of convertible bonds in April 2002 were converted into US dollars, Euros and Japanese Yen through cross-currency swap agreements with the Group’s bankers. See Item 11 of this Report for further information on these cross-currency swaps. The Group’s operating companies conduct the majority of their activities in their own local currency and consequently the Group has no significant transactional foreign exchange exposures. Any significant cross-border trading exposures are hedged by the use of forward foreign exchange contracts. There were no such material contracts in place at December 31, 2002. No speculative foreign exchange trading is undertaken.

No hedging is undertaken in relation to the accounting translation of overseas balance sheets. In 2002 this resulted in an increase of £82 million (2001: decrease of £81 million) in the sterling value of share owners’ funds due to movements in exchange rates.

A.    Operating Results

Fiscal 2002 Compared with Fiscal 2001

Despite very difficult trading conditions throughout the world, the Group’s 2002 results reflect the achievement of balancing market pressure on revenues against reducing costs. Public relations and public affairs continued to be most affected by the recession. Branding and identity, healthcare and specialist communications was somewhat affected, with healthcare and direct, a part of specialist communications, being more resilient. Advertising and media investment management has been less affected than anticipated and information, insight and consultancy has continued to see some limited growth, although it has been increasingly affected by the recession. Geographically, Continental Europe, Asia Pacific, Latin America, Africa and the Middle East were less affected by the slow-down, with the US and UK being most affected.

Revenues—Reported revenues were down almost 3% in 2002 to £3,908.3 million from £4,021.7 million in 2001. On a constant currency basis, revenue increased by almost 1% with growth in the advertising and media investment management (up 2.5%) and information, insight and consultancy (up 4%) sectors, declining revenues in public relations and public affairs (down 8%) and flat revenues in branding and identity, healthcare and specialist communications. Geographically, also in constant currency, North America and the United Kingdom declined by 2.4% and 1.3%, respectively, while Continental Europe increased by 5.3% and Asia Pacific, Latin America, Africa and the Middle East grew by 4.7%. On a like-for-like basis revenues were down almost 6%.

        Operating income—Reported operating income (including associate income) was down 44% to £302.5 million in 2002 from £546.3 million in 2001. Reported operating margins decreased from 13.6% to 7.7%, including the effect of £177.7 million of goodwill amortisation and impairment in 2002. Included in the £177.7 million is a £145.7 million impairment charge, which relates to a number of under-performing businesses principally in the information, insight and consultancy, and branding and identity, healthcare and specialist communications sectors. The impact of the current economic climate on these businesses is sufficiently severe to indicate an impairment to the carrying value of goodwill. Excluding goodwill amortisation and impairment, the 2002 operating margin was 12.3%. During 2002 and 2001, the Group took measures to reduce its fixed and variable cost base in response to the global downturn in its core markets. These actions resulted in a number of charges which, although recurring in nature, were at a considerably higher level than would normally be expected and were included within operating costs. These items principally comprised property rationalisation costs, severance costs and amounts written off trade receivables and other current assets. At the same time the Group has released £13.0 million in 2002 to operating profit relating to excess provisions established in respect of acquisitions completed prior to 2001. In 2001, £22.5 million of excess provisions were released in respect of

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acquisitions completed in 1999 and prior.

Reported operating costs including direct costs fell by almost 1%, but rose by 3% in constant currency. On a like-for-like basis, total operating and direct costs were down 4.6% on the previous year. Operating margins before short and long-term incentive payments (totaling £90 million in 2002, or over 16% of operating profit before bonuses, income from associates and taxes) decreased to 13.8% from 14.9%, reflecting stronger performance of some operating units against last year and increased provision for the LEAP senior management incentive program, due to stronger than anticipated WPP total shareholder return against the peer group. On a reported basis, the staff cost to gross margin ratio excluding severance and incentives increased to 56.9% from 56.6%. Variable staff costs as a proportion of total staff costs increased to 9.2% in 2002 from 8.2% in 2001 and, as a proportion of revenues, increased to 5.3% from 4.6%.

Fixed asset gains and write-downs—In 2001, the Group wrote down the value of certain minority investments in new media and technology by £70.8 million following the collapse in equity valuations in these sectors. 2002 has seen further declines in these technology investments, many of which are in private companies. An additional write-down of £19.9 million has been taken in 2002, mitigated by gains on asset disposals of £9.2 million. The carrying value of these investments is now written down to £19.3 million.

Interest expense—In reported currency, net interest expense (including a charge for the early adoption of Financial Reporting Standard No. 17, Retirement Benefits, or “FRS 17”), increased from £71.3 million to £86.4 million, reflecting lower cash generated from operations, the full-year impact of the increased level of acquisition activity in 2001 and share repurchases and cancellations in the current year. Interest cover on profits before goodwill amortisation and impairment, interest, taxation, and fixed asset gains and write-downs was 5.6x in 2002, compared to 7.9x in 2001.

Taxes—The Company’s tax rate on reported profits for the year ended December 31, 2002 was 50.3% compared to 30.7% in 2001. This increase is due to significant additional fixed asset impairments and write-offs in 2002, for which no tax relief is available. Excluding goodwill amortisation and impairment, fixed asset gains and write-downs, and net interest charges on defined benefit pension schemes, the tax rate was 26% in 2002, down from 27% in the previous year, reflecting the impact of further improvements in tax planning.

Net income—Net income available to ordinary share owners was £88.0 million in the year ended December 31, 2002 against £271.2 million in 2001.

Fiscal 2001 Compared with Fiscal 2000

Revenues—Reported revenues increased by 35% in 2001 to £4,021.7 million from £2,980.7 million in 2000. On a constant currency basis, the revenue increase was 33%. 2001 includes a full year of Young & Rubicam, which was acquired in October 2000. The pattern of revenue growth varied by communications services sector and regionally. By discipline, advertising and media investment management revenue increased 30.8%, information, insight and consultancy 14.4%, public relations and public affairs 49.3% and branding and identity, healthcare and specialist communications 43.1%. Regionally, North America revenue increased 32.8%, Continental Europe 46.7%, Asia Pacific, Latin America, Africa and the Middle East 33.9% and the United Kingdom 17.7%. Pro forma for the merger with Young & Rubicam constant currency revenue was up over 1%. On a like-for-like basis, adjusting for all acquisitions, revenue was down by 3%.

Operating income—Reported operating income (including associate income) rose by almost 31% to £546.3 million in 2001 from £417.4 million in 2000. Reported operating margins remained relatively flat at 14%. Operating income on a constant currency basis rose by over 30%. Reported operating costs rose by over 39% and by over 37% in constant currency. However, like-for-like total operating and direct costs were down 3.5% on the previous year. Operating margins before short and long-term incentive payments (totaling £81 million in 2001, or under 14% of operating profit before bonuses, income from associates and taxes) fell to 15% from 17%, reflecting the impact of more difficult trading conditions and of the Group’s pay-for-performance compensation strategy. On a reported basis, the staff cost to gross margin ratio, excluding severance and incentives, rose to 56.6% from 54.1%. Variable staff costs as a proportion of total staff costs decreased to 8.2% in 2001 from 12.1% in 2000 and, as a proportion of revenues, decreased to 4.6% from 6.6%, reflecting the impact of the recession in 2001. During 2001, £22.5 million of excess provisions established in respect of acquisitions completed in 1999 and prior years were released to the income statement within operating income, compared to £7.9 million in 2000. Also in 2001, there were a number of charges within operating income that, although recurring in nature, were at a considerably higher level than would normally be expected. These items principally consisted of increased severance expenses and bad debt write-offs that were caused by the deterioration in the economic environment in the Group’s major markets.

        Fixed asset gains and write-downs—The Group wrote down fixed asset investments related to non-core minority investments in new media companies and other technology ventures by £70.8 million. Write-downs were based upon market values at December 31, 2001 for listed holdings and on valuations utilised for latest funding rounds together with latest trading information for unlisted investments. Businesses that are in financial difficulties and have ceased trading or are shortly expected to cease trading have been fully written down. The Company also recognized a net gain of £6.8 million on the disposal of investments in Singleton Group Limited, Chime Communications PLC and Symmetrical Holdings Inc.

Interest expense—In reported currency, net interest expense, including a notional charge for the early adoption of FRS 17, increased to £71.3 million from £51.7 million, reflecting increased profitability more than offset by debt acquired, the increased level of acquisition activity and share repurchases. Interest cover on profits before goodwill amortisation, interest, taxation, and fixed asset gains and write-downs was 7.9x in 2001, compared to 8.4x in 2000.

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Taxes—The Company’s tax rate on reported profits for the year ended December 31, 2001 was 30.7%, compared to 30.0% in 2000. Excluding goodwill amortisation, fixed asset gains and write-downs, and net interest charges on defined benefit pension schemes, the tax rate on profits was 27%.

Net income—Net income available to ordinary share owners was £271.2 million in the year ended December 31, 2001 against £244.7 million in 2000.

B.    Liquidity and Capital Resources

General—The primary sources of funds for the Group are cash generated from operations and funds available under its credit facilities. The primary uses of cash funds in recent years have been for debt service and repayment, capital expenditures, acquisitions, share repurchases and cancellations and dividends. The Company has decided to increase the dividend by 20% to 3.67p per share, taking the full year dividend to 5.40p per share for 2002 which is four and a half times covered by earnings, excluding goodwill amortisation and impairment, fixed asset gains and write-downs, and net interest charges on defined benefit pension schemes. In addition, as current opportunities for cash acquisitions may be limited particularly in the US, the Company will continue to commit to repurchasing up to 2% of its share base in the open market, when market conditions are appropriate. For a breakdown of the Company’s sources and uses of cash see the “Consolidated Statements of Cash Flows” included as part of the Company’s Consolidated Financial Statements in Item 18 of this Report.

Liquidity risk management—The Group manages liquidity risk by ensuring continuity and flexibility of funding even in difficult market conditions. Undrawn committed borrowing facilities are maintained in excess of average gross borrowing levels and debt maturities are closely monitored.

Euro bond—The Company has in issue €605 million of 6.0% bonds due 2008 and €350 million of 5.125% bonds due 2004. During 2002, the Group purchased €45 million of the 6% bonds due 2008 in the open market at a price of 94.72%. The total cost of these market purchases was €43.6 million including accrued interest. The gain recorded was €2.3 million and was included within interest income in the profit and loss account. During 2003, these bonds were resold at a price of 105.18%.

USA bond—The Company has in issue $200 million of 6.625% Notes due 2005 and $100 million of 6.875% Notes due 2008.

Revolving credit facilities—The Company’s debt is also funded by a five-year $750 million Revolving Credit Facility due September 2006. A facility of £360 million, arranged during 2001 to acquire Tempus, was cancelled in April 2002. The Company’s syndicated borrowings drawn down, predominantly in US dollars, under these arrangements averaged $388.7 million during the year at an average rate of 2.6% inclusive of margin. Borrowings under the Revolving Credit Facilities are governed by certain financial covenants based on the results and financial position of the Group, including requirements that (i) the interest coverage ratio for each financial period equal or exceed 5.0 to 1 and (ii) the ratio of borrowed funds to earnings before interest, taxes, depreciation and amortisation at June 30 and December 31 in each year shall not exceed 3.5 to 1, both covenants as defined in the relevant agreements. The Group had available undrawn committed facilities of £466 million at December 31, 2002.

Interest on the Company’s borrowings, other than the bonds, is payable at a margin of between 0.4% and 0.475% over the relevant London Interbank Offered Rate (“LIBOR”). As of December 31, 2002, interest is hedged for $200 million of borrowings at the US dollar LIBOR rate of 6.22% (excluding margin costs), which matured in January 2003. Additionally, as of December 31, 2002, the Company has entered into a €400 million interest rate swap effectively converting 6% fixed rate debt to floating rate payable at EURIBOR plus a margin of 0.81% through its maturity in June 2008.

Convertible debt—In October 2000, with the purchase of Young & Rubicam, the Group acquired $287.5 million of 3% convertible bonds due January 15, 2005. At the option of the holder, the bonds are convertible into 3,272,400 WPP ADSs at a conversion price of $87.856. The bonds may be redeemed at WPP’s option on or after January 20, 2003. Additionally, under certain circumstances, holders of the bonds may have the right to require WPP to repurchase the bonds. Interest on the notes is payable on January 15 and July 15 of each year. The bonds are unsecured obligations of Young & Rubicam and are guaranteed by WPP.

In April 2002, the Group issued £450 million of 2% convertible bonds due April 2007. At the option of the holder, the bonds are convertible into 41,860,465 WPP ordinary shares at an initial share price of £10.75. As the bonds are redeemable at a premium of 5.35% over par, the conversion price increases during the life of the bonds to £11.33 per share into the same number of shares as above.

There are no investor put options on any outstanding debt instruments.

Current asset investments/liquid resources—At December 31, 2002, the Group had £190.4 million (2001: £76.8 million, 2000: £Nil) of cash deposits with a maturity greater than 24 hours.

We believe that cash provided by operations and funds available under our credit facilities will be sufficient to meet the Group’s anticipated cash requirements as presently contemplated.

See note 9 to the Consolidated Financial Statements, which contains an analysis of net funds with debt analysed by year of repayment.

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C.    Research and Development, Patents and Licenses

Not applicable.

D.    Trend Information

2001 and 2002 were very difficult years for the advertising and marketing services industry, with the industry declining by an estimated 2% and 1% in 2001 and 2002, respectively. We expect that 2003 will be another difficult year, but not as difficult as either 2001 or 2002. As well as geo-political issues, the major cause for concern remains the state of the world economy. However, we believe the prospects for 2004 look better, including the benefit of the ‘quadrennial factors’, such as the US presidential elections, the Athens Olympic Games and the European football championships in Portugal. We believe advertising and marketing services will grow by 3-4% in 2004, versus a flat or marginally growing market in 2003.

The Company’s budgets for 2003 have been prepared on a conservative basis, largely excluding new business particularly in advertising and media investment management. They predict broadly flat like-for-like revenues in comparison to 2002 and a stronger second half of the year relative to the first. They also indicate advertising and media investment management revenue up by 1%, counterbalanced by flat marketing services revenues. The Group uses ‘like-for-like’ comparisons, under which current year results on a constant currency basis (which include acquisitions from the relevant date of completion) are compared with prior year actual results, adjusted to include the results of acquisitions for the commensurate period in the prior year, to supplement discussions of its operating trends.

Revenues for the first three months of 2003 on a reported basis were down almost 4%; however, revenues increased by over 1% compared to last year in constant currency and were flat on a like-for-like basis. Net debt at March 31, 2003 was £1,335 million, compared to £1,505 million at March 31, 2002. Average net debt in the first quarter of 2003 was £1,252 million compared to £1,227 million in 2002, at 2003 exchange rates. The Group continues to focus on its key objectives of improving operating profits and margins, increasing cost flexibility (particularly in the areas of staff and property costs), using free cash flow to enhance share owner value, continuing to develop the role of the parent company in adding value to its clients and employees, placing a greater emphasis on revenue growth by positioning its portfolio in faster growing functional and geographic areas and through practice development activities, and improving its creative quality and capabilities. The Company does not believe that there are any functional, geographic, account concentration or structural reasons that should prevent the Group from achieving operating margins of up to 13.8% by 2004. The best listed performer in the industry is or has been at margins of 15-16%.

E.    Off-Balance Sheet Arrangements

Within the Group’s overall working capital facilities, certain trade debts have been assigned as security against the advance of cash, for which a new agreement was entered into by the Company with various conduit and bank purchasers effective in November 2002. This security is represented by the assignment of a pool of trade debts to a bankruptcy remote subsidiary of the Group, with further assignment to the providers of this working capital facility. The financing provided against the pool takes into account the risks that may be attached to individual debtors and the expected collection period.

The Group is not obliged (and does not intend) to support any credit-related losses arising from the assigned debts against which cash has been advanced. The transaction documents stipulate that, in the event of default in payment by a debtor, the providers of the facility may only seek repayment of cash advanced from the remainder of the pool of debts in which they hold an interest, and that recourse from the Group is not available in any other way.

The securitisation is accounted for under a linked presentation in accordance with UK GAAP, whereby the non-returnable proceeds are shown deducted from the related gross asset on the face of the balance sheet. Gross debts of £385.7 million, less non-returnable proceeds of £217.4 million are included in debtors within the Group’s working capital facilities at December 31, 2002, compared to £331.0 million of gross debts, less non-returnable proceeds of £82.5 million, at December 31, 2001. See the notes to the reconciliation to US accounting principles elsewhere in this Annual Report on Form 20-F for discussion of the accounting treatment for the securitisation under US GAAP.

F.    Tabular Disclosure of Contractual Obligations

The following summarises the Company’s estimated contractual obligations at December 31, 2002, and the effect such obligations are expected to have on its liquidity and cash flows in the future periods:

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Cash Flows

2002. As at December 31, 2002, the Group had net debt of £723 million compared with net debt of £885 million at December 31, 2001, following net cash expenditure of £281 million on acquisitions and investments (including £94 million of loan note redemptions and £82 million of earnout consideration resulting from acquisitions in prior years) and £76 million on share repurchases and cancellations.

Net debt averaged £1,343 million in 2002, up £509 million against £834 million in 2001, primarily reflecting the full-year impact of acquisitions made in 2001.

Cash flow strengthened as a result of improved working capital management and cash flow from operations. In 2002, operating profit before depreciation and amortisation (including impairment) was £567 million, with capital expenditure of £101 million, tax paid of £85 million, interest and similar charges paid of £78 million and other net cash inflows of £46 million. Free cash flow available for debt repayment, acquisitions, share buy-backs and dividends was therefore £349 million. Free cash flow is calculated as profits before interest, taxation, goodwill amortisation and impairment, fixed asset gains and write-downs, equity income and depreciation (including dividends received from associates, proceeds from the issue of shares, and proceeds from disposal of tangible fixed assets and investments), less tax paid, returns on investments and servicing of finance and the purchase of tangible fixed assets. A tabular reconciliation of free cash flow is shown below. The Company almost fulfilled its recently set objective of covering acquisition payments and share repurchases and cancellations from free cash flow.

2001. As at December 31, 2001, the Group had net debt of £885 million compared with net debt of £25 million at December 31, 2000. Net debt averaged £834 million in 2001, up £411 million against £423 million in 2000.

Cash flow remained strong as a result of increased profits and daily management of working capital. In 2001, operating profit before depreciation and amortisation was £631 million, capital expenditure of £118 million, tax paid of £78 million, interest and similar charges paid of £56 million and other net cash inflows of £115 million. Free cash flow available for debt repayment, acquisitions, share buy-backs and dividends was therefore £494 million. This free cash flow was more than absorbed by acquisition payments and investments of £736 million, share repurchases and cancellations of £103 million and dividends of £44 million.

A tabular reconciliation of free cash flow is shown below:

Capital Structure

At December 31, 2002, the Company’s capital base was comprised of 1,157,325,640 ordinary shares of 10 pence each.

Property Costs

With the recession, the task of eliminating under-utilised property costs continues to be a priority. At the beginning of 2002, the Group occupied approximately 14 million square feet worldwide. By the end of the year, occupancy had fallen to 13.5 million square feet or a 4% reduction. In addition, a further 1.1 million square feet or an additional 8% is expected to be eliminated by the end of 2003.

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Inflation

As in 2001 and 2000, in management’s opinion the effect of inflation has not had a material impact on the Company’s results for the year or financial position as at December 31, 2002.

Use of estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting during the reporting period. Actual results could differ from those estimates.

Critical Accounting Policies

The Company’s financial statements have been prepared in accordance with UK GAAP and reconciled to US GAAP. A summary of the Group’s principal accounting policies are described in the first section of Notes to the Consolidated Financial Statements, entitled “Accounting Policies” with discussion of UK to US GAAP differences in section (ix) to Item 18. The Company believes certain of these accounting policies are particularly critical to understanding the more significant judgments and estimates used in the preparation of its consolidated financial statements. Therefore, we have prepared the following supplemental discussion of critical accounting policies, which should be read together with our consolidated financial statements and notes thereto.

Goodwill and intangible fixed assets

The Company has a significant amount of goodwill and intangible fixed assets. The Company annually tests the carrying value of indefinite life goodwill and other intangible assets for impairment. Certain estimates and assumptions are made in connection with impairment testing, as described in more detail below, which could differ from future actual results of operations and cash flows. Future events could cause the Company to conclude that impairment indicators exist and that the asset values associated with a given operation have become impaired. Any resulting impairment loss could have a material impact on the Company’s financial condition and results of operations. The carrying value of goodwill and other intangible assets will continue to be reviewed annually for impairment and adjusted to the recoverable amount if required.

The 2002 impairment review assessed whether the carrying value of goodwill was supported by the net present value of future cash flows derived from assets using a projection period of up to five years for each income generating unit. After the projection period, growth rates of nominal gross domestic product (“GDP”) have been assumed for each income generating unit. £145.7 million was taken as an impairment charge in 2002 primarily reflecting accelerated amortisation of goodwill on first generation businesses which have suffered in the recession. Continuing recessionary conditions could negatively affect the ability of the underlying units to achieve their projected cash flows.

The impairment reviews relating to Young & Rubicam (goodwill of £2,498.3 million) and Mediaedge:cia (goodwill of £838.5 million) were carried out using a 10 year projection period as the Group believes that this longer period is more appropriate to assess the carrying value of these global networks given current economic volatility. The projections for the initial three years were derived from existing budgets and three year plans and form the base period. Projections for the remaining seven years assume an annual 4.4% growth in revenues and an improvement in operating margins to 17% by 2007. At the end of the 10 year period growth is assumed to be in line with nominal GDP.

The projections above include assumptions about payments for cash taxes and cash flows have therefore been discounted using the Group’s weighted average cost of capital of 8.5%.

For certain acquisitions, where the directors consider it appropriate, goodwill is amortised over its useful life up to a 20-year period, from the date of acquisition. At December 31, 2002, gross goodwill of £572.3 million was subject to amortisation. The remaining goodwill and intangible assets of the Group are considered to have an indefinite economic life because of the institutional nature of the corporate brand names, their proven ability to maintain market leadership and profitable operations over long periods of time and WPP’s commitment to develop and enhance their value.

The financial statements depart from the specific requirement of UK companies legislation to amortise goodwill over a finite period in order to give a true and fair view. The directors consider this to be necessary for the reasons given above and the Company’s approach is consistent with FRS 10 (Goodwill and Intangible Assets). Because of the indefinite life of these intangible assets, it is not possible to quantify its impact. However, for illustrative purposes only, if the Group were to change its accounting policy and regard all intangible assets as having a limited useful economic life, and the useful economic life it chose was 20 years, then the resulting impact on the profit and loss account in 2002 would have been a charge of £231.0 million (2001: £182.0 million, 2000: £27.0 million).

Future anticipated payments to vendors in respect of earnouts are based on the directors’ best estimates of future obligations, which are dependent on the future performance of the interests acquired and assume the operating companies improve profits in line with directors’ estimates. When earnouts are to be settled by cash consideration, the fair value of the consideration is obtained by discounting to present value the amounts expected to be payable in the future. A summary of earnout related obligations included in creditors is shown in note 20 to the Consolidated Financial Statements.

WPP has also entered into agreements with certain share owners of partially owned subsidiaries and associate companies to acquire equity interests. These agreements typically contain options requiring WPP to purchase their shares at specified times up to 2009 on the basis of

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average earnings both before and after the exercise of the option. A summary of these contingent liabilities is shown in note 21 to the Consolidated Financial Statements.

Revenue recognition

Turnover comprises the gross amounts billed to clients in respect of commission-based income together with the total of other fees earned. Revenue comprises commissions and fees earned in respect of turnover. Revenue is recognised when the service is performed, in accordance with the terms of the contractual arrangement.

Advertising and media investment management arrangements may include incentive-based revenue. Incentive-base revenue typically comprises both quantitative and qualitative elements; on the element related to quantitative targets, revenue is recognised when the quantitative targets have been achieved; on the element related to qualitative targets, revenue is recognised when the incentive is received/receivable. Revenue is recognised on market research contracts in proportion to the level of service performed. Revenue is recognised on long-term contracts, if the final outcome can be assessed with reasonable certainty, by including in the profit and loss account revenue and related costs as contract activity progresses.

Pension costs

Pension costs are assessed in accordance with the advice of local independent qualified actuaries. The latest full actuarial valuations for the various schemes were carried out as at various dates in the last three years. These valuations have been updated by the local independent qualified actuaries to December 31, 2002.

The Group has a policy of closing defined benefit schemes to new members which has been effected in respect of a significant number of the schemes. As a result, these schemes generally have an ageing membership population. Actuarial calculations have been carried out using the Projected Unit Method. In these circumstances, use of this method implies that the contribution rate implicit in the current service cost will increase in future years.

Contributions to funded schemes are determined in line with local conditions and practices. Certain contributions in respect of unfunded schemes are paid as they fall due.

In light of recent stock market declines and consequent poor equity investment returns, the Company has reduced its forecasted weighted average return on US pension assets from 9.1% to 7.2% and on UK pension assets from 5.8% to 5.4%. Our advisors indicate that further average cash contributions of approximately £12-£13 million per annum would be necessary to fully fund all funded pension schemes over their remaining lives, unless stock markets recover.

Deferred taxes

We record deferred tax assets and liabilities using substantially enacted tax rates for the effect of temporary differences between book and tax bases of assets and liabilities. The Company then assesses the likelihood of whether future taxable income will be sufficient enough to recover the net deferred tax assets, if not a valuation allowance is established. In the event that actual results differ from these estimates or the Company adjusts these estimates in future periods, the Company will need to adjust the validation allowance.

US GAAP

The Company’s Consolidated Financial Statements included elsewhere herein have been prepared in accordance with UK GAAP, which differ in certain significant respects from US GAAP.

For the year ended December 31, 2002 net income under US GAAP was £53.5 million compared with net income of £79.2 million for the same period in 2001. The corresponding figures under UK GAAP were net income of £88.0 million and £271.2 million, respectively. Share owners’ funds, (i.e. shareholders’ equity), under US GAAP at December 31, 2002 were £3,740.8 million, as compared with share owners’ funds of £3,675.6 million under UK GAAP. See pages F-26 to
F-34 of the Consolidated Financial Statements for a discussion of the principal differences between US GAAP and UK GAAP that affect the Group’s financial statements.

New Accounting Pronouncements

The Group has considered the following recent US GAAP accounting pronouncements for their potential impact on its results of operations and financial position.

In June 2002, Statement of Financial Accounting Standards (SFAS) No.146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146) was issued. SFAS 146 requires that costs associated with exit or disposal activities, including restructuring charges, be recognised and measured initially at fair value only when the liability is incurred, and is effective for any such activities initiated after 31 December 2002. It has no effect on charges recorded for exit activities begun prior to this date. The Group does not expect that adoption of SFAS 146 will have a material impact on its consolidated results of operations or financial position.

In November 2002, Interpretation (FIN) No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45) was issued. This interpretation elaborates on the existing disclosure accounting and reporting standards under US GAAP requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be

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recorded in the balance sheet as either an asset or liability measured at its fair value. The application of FIN 45 did not result in additional disclosures in our 2002 financial statements and is not expected to have a material impact on our consolidated results of operations or financial position.

In December 2002, SFAS No.148, Accounting for Stock-Based Compensation-Transition and Disclosure (SFAS 148), was issued as an amendment of SFAS No.123, Accounting for Stock-Based Compensation. The Group has elected to continue with its current practice of applying the recognition and measurement principles of Accounting Principles Board Opinion No. 25 under US GAAP and has adopted the disclosure requirements of SFAS 148.

In January 2003, FIN No. 46, Consolidation of Variable Interest Entities (FIN 46), an interpretation of Accounting Research Bulletin (ARB) No. 51. FIN 46 clarifies the application of ARB 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 explains how to identify variable interest entities and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity. It requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. It also requires certain disclosures by the primary beneficiary of a variable interest entity and by an enterprise that holds significant variable interests in a variable interest entity where the enterprise is not the primary beneficiary. FIN 46 is effective immediately to variable interest entities created after 31 January 2003 and to variable interest entities in which an enterprise obtains an interest after that date, and effective for the first fiscal year or interim period beginning after 15 June 2003 to variable interest entities in which an enterprise holds a variable interest that it acquired before 1 February 2003. FIN 46 requires an entity to disclose certain information regarding a variable interest entity, if when the Interpretation becomes effective, it is reasonably possible that an enterprise will consolidate or have to disclose information about that variable interest entity, regardless of the date on which the variable entity interest was created. The Group does not expect that when FIN 46 becomes effective that it will have to consolidate or disclose any information regarding variable interest.

The Emerging Issues Task Force (EITF) of the FASB also released interpretive guidance covering several topics that impact our business. These topics include customer relationship intangible assets acquired (EITF 02-17) and vendor rebates (EITF 02-16). The application of this guidance did not have a material impact on our consolidated results of operations or financial position.

In April 2003, the FASB issued SFAS No. 149 Amendment to Statement 133 on Derivative Instruments and Hedging Activities (SFAS 149). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. SFAS 149 is applied prospectively and is effective for contracts entered into or modified after 30 June 2003, except for SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to 15 June 2003 and certain provisions relating to forward purchases and sales on securities that do not yet exist. The Company has not determined the effect, if any, that SFAS 149 will have on its consolidated financial statements.

In May 2003, the FASB issued SFAS No.150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150). SFAS 150 modifies the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. The Statement requires that those instruments be classified as liabilities in statements of financial position. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Group does not expect that adoption of SFAS 150 will have a material impact on its consolidated results of operations or financial position.

The FASB also issued SFAS No. 143, Obligations Associated with the Retirement of Long Lived Assets, and SFAS No. 147, Acquisition of Certain Financial Institutions, during 2002. These standards are not expected to impact the Company’s financial statements.

ITEM 6.    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.    Directors and Senior Management

The directors and executive officers of the Company as of May 14, 2003 are as follows:

Philip Lader, age 57: Non-executive chairman. Philip Lader was appointed chairman in 2001. The US Ambassador to the Court of St. James’s from 1997 to 2001, he previously served in several senior executive roles in the US Government, including as a Member of the President’s Cabinet and as White House Deputy Chief of Staff. Before entering government service, he was executive vice president of the company managing the late Sir James Goldsmith’s US holdings and president of both a prominent American real estate company and universities in the US and Australia. A lawyer, he is also a Senior Advisor to Morgan Stanley International, a director of RAND, Marathon Oil and AES Corporations, a Trustee of the British Museum, a member of the Council on Foreign Relations and chairman of the American Associates of the Royal Academy of Arts.

Sir Martin Sorrell, age 58: Group chief executive. Sir Martin Sorrell joined WPP in 1986 as a director, becoming Group chief executive in the same year. He is a non-executive director of Colefax & Fowler Group plc and a member of the Nasdaq board.

Paul Richardson, age 45: Group finance director. Paul Richardson became Group finance director of WPP in 1996 after four years with the Company as director of treasury. He is responsible for the Group’s worldwide functions in finance, information technology, taxation, treasury,

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procurement and property. Previously he spent six years with the central financial team of Hanson plc. He is a chartered accountant and member of the Association of Corporate Treasurers. He is a non-executive director of Chime Communications PLC and STW Communications Group Limited in Australia, both of which are companies associated with the Group.

Beth Axelrod, age 40: Chief talent officer. Beth Axelrod, WPP’s chief talent officer since May 2002, was appointed a director in September 2002. She is responsible for the recruitment, development, compensation and retention of WPP’s people worldwide. She leads the performance management and succession planning of WPP’s executives. Prior to WPP, she was a partner at McKinsey & Company. She co-led the consultancy’s Organisation and Leadership Practice and led the consultancy’s talent management research and client service efforts. She co-authored The War for Talent (published by Harvard Business School Press, 2001) and is a frequent speaker on talent, performance and other organisation issues. Prior to McKinsey, she worked on mergers and acquisitions for First Boston Inc in New York and London.

Howard Paster, age 58: Director. Howard Paster was appointed a director in January 2003. He was previously chairman and chief executive officer of Hill & Knowlton, Inc. He joined the WPP parent company in August 2002, overseeing WPP’s portfolio of public relations and public affairs businesses. Prior to joining Hill & Knowlton, he served as assistant to President Clinton and director of the White House Office of Legislative Affairs. He is a member of the board of trustees of Tuskegee University, president of the Little League Foundation and a member of the Council on Foreign Relations.

Jeremy Bullmore, age 73: Non-executive director. Jeremy Bullmore was appointed a director in 1988 after 33 years at J. Walter Thompson, London, the last 11 as chairman. He was chairman of the Advertising Association from 1981 to 1987 and continues to write and lecture extensively on marketing and advertising.

Esther Dyson, age 51: Non-executive director. Esther Dyson was appointed a director in 1999. She is chairman of EDventure Holdings, the pioneering US-based company involved in information technology and new media. She is an acknowledged luminary in the technology industry, highly influential in her field for the past 20 years, with a state-of-the-art knowledge of the online/information technology industry worldwide and the emerging computer markets of Central and Eastern Europe. An investor as well as an observer, she sits on the boards of IBS Group, Meetup, NewspaperDirect, Electrobug and CV-Online, among others.

Masao Inagaki, age 80: Non-executive director. Masao Inagaki was appointed a director in 1998 following WPP’s equity investment in Asatsu-DK, Japan’s third largest advertising and communications company. He founded Asatsu in 1956 and has been chairman and group chief executive officer since 1992. He is also vice president of the Japan Advertising Agencies Association.

John Jackson, age 73: Non-executive director. John Jackson was appointed a director in 1993. He is chairman or senior independent director of a number of public companies. He is non-solicitor chairman of Mishcon de Reya. He has extensive experience of a broad range of businesses, including television broadcasting, high technology industries, retailing, publishing, printing, biotechnology, electronics and pharmaceuticals.

Michael Jordan, age 66: Non-executive director. Michael Jordan was appointed a director in 2000 and had been a director of Young & Rubicam since December 1999. He is chairman and chief executive officer of EDS. He is chairman of the National Foreign Trade Council (US), a member and former chairman of the US-Japan Business Council and chairman of The United Negro College Fund. He serves on the boards of Aetna Inc and i2 Technologies, Inc. He retired as chairman and chief executive officer of the CBS Corporation in 1998 after having led one of the most comprehensive transformations of a major US corporation.

David H Komansky, age 63: Non-executive director. David Komansky was appointed a director in January 2003. He was chairman of the Board of Merrill Lynch & Co, Inc, serving until his retirement on April 28, 2003. He served as chief executive officer from 1996 to 2002, having begun his career at Merrill Lynch in 1968. Among many professional affiliations, he serves as vice chairman of the Board of directors of the New York Stock Exchange, as a director of Schering-Plough Corp, and as a member of the International Advisory Board of the British American Business Council. Active in many civic and charitable organisations, he serves on the Boards of New York Presbyterian Hospital, the American Museum of Natural History, the National Academy Foundation and the New York City Police Foundation.

Christopher Mackenzie, age 48: Non-executive director. Christopher Mackenzie was appointed a director in 2000. He is chief executive of Equilibrium, a London-based financial advisory partnership, and Executive Chairman of Brunswick Capital, Russia’s leading investment bank and non-bank financial services group. He is also a Board member of ALJ, Saudi Arabia’s largest non-governmental industrial group. He was previously president and CEO of Trizec Properties and company officer of GE, heading GE Capital’s international business development.

        Stanley (Bud) Morten, age 59: Non-executive director. Bud Morten was appointed a director in 1991. He is a private investor with a focus on companies in the genomics sector of the biotechnology industry. Previously he was the chief operating officer of Punk, Ziegel & Co, a New York investment banking firm with a focus on the healthcare and technology industries. Before that he was the managing director of the equity division of Wertheim Schroder & Co, Inc in New York. He is a non-executive director of Register.com Inc, a NASDAQ-listed company.

John Quelch, age 51: Non-executive director. John Quelch was appointed a director in February 1988. John Quelch is Senior Associate Dean and Lincoln Filene Professor of Business Administration at Harvard Business School. Between 1998 and 2001 he was Dean of the London Business School. Professor Quelch is an expert on global business practice in emerging as well as developed markets, international marketing and human resource management, the role of the multinational corporation and the nation state, and issues at the interface of business management, public policy and society. He was a founding non-executive director of Reebok International Ltd and has served as a non-executive director of three other listed companies in the US and the UK.

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The following also served as directors during 2002:

Eric Salama served as an executive director during the year and retired from the Board in October 2002 to take up his appointment as chairman and chief executive officer of Kantar, the Group’s Information, insight & consultancy businesses.

Brian Brooks served as an executive director during the year and resigned in September 2002.

Warren Hellman and Sir Christopher Lewinton served as non-executive directors during the year and retired in January 2003.

Terms of Directors and Executive Officers

The Company’s Articles of Association provide that a director appointed since the last Annual General Meeting, or who has held office for more than 30 months since his election or re-election by the Company in general meeting (whether annual or extraordinary) shall retire from office but shall be eligible for re-election. The Board has also decided that those directors who are aged 70 or over on the date of the Notice of Annual General Meeting will retire from office at the forthcoming Annual General Meeting but shall be eligible for re-election. The following directors, whether under the Articles of Association of the Company or otherwise, will retire from office but shall be eligible for re-election at the forthcoming Annual General Meeting:

-  Appointed since the last Annual General Meeting — Beth Axelrod, Howard Paster and David H Komansky.

-  Now aged 70 or over — Masao Inagaki, Jeremy Bullmore (also on the Board for 15 years) and John Jackson (also on the Board for 10 years).

-  Directors for more than nine years — Bud Morten (12 years) and John Quelch (15 years).

-  Retiring by rotation — Esther Dyson, Paul Richardson, Christopher Mackenzie and Michael Jordan.

The directors may from time to time appoint any other person to be a director. Any director so appointed shall hold office only until the next Annual General Meeting following his appointment when he shall retire but shall be eligible for re-election at that meeting.

B. Compensation

Directors’ remuneration and interests

The following information on directors’ remuneration and interests is presented in accordance with UK reporting requirements.

Non-executive directors

Remuneration for non-executive directors consists of fees for their services in connection with Board and Board committee meetings and, where appropriate, for devoting additional time and expertise for the benefit of the Group in a wider capacity. Non-executive directors do not participate in the Company’s pension plans, share option or other incentive plans. Non-executive directors may receive a part of their fees in ordinary shares of the Company. For technical reasons, these may be delivered in the form of options exercisable, at par value, on completion of the non-executive directors’ services.

Each of the following non-executive directors have been appointed for terms of three years respectively: Philip Lader; Jeremy Bullmore; Esther Dyson; John Jackson; David Komansky; Christopher Mackenzie; Bud Morten; John Quelch and Masao Inagaki. Michael Jordan has been appointed for a term of two years.

For the fiscal year ended December 31, 2002 the aggregate compensation paid by WPP and its subsidiaries to all directors and officers of WPP as a group for services in all capacities was £4,341,936. Such compensation was primarily paid by WPP and its subsidiaries in the form of salaries, performance-related bonuses and a deferred share award.

The sum of £461,785 was set aside and paid in the last fiscal year to provide pension benefits for directors and officers of WPP.

Directors’ remuneration

        The compensation of all executive directors is determined by the Compensation committee of the Board (`the Compensation committee’) which is comprised of non-executive directors whom the Company considers to be independent and who are independent under NASDAQ’s rules.

The Compensation committee regularly consults with Group executives, particularly the Group chief executive (Sir Martin Sorrell) and the Group chief talent officer (Beth Axelrod). The committee appointed Deloitte & Touche as advisors and received material assistance from that firm’s Executive Compensation Consulting Practice. Deloitte & Touche are also engaged as the external auditors to the Company. As such the appointment as remuneration advisors is also subject to, and has received, pre-approval by the Audit committee. Information on other services provided by Deloitte & Touche is given in Item 16C of this report. Arthur Andersen provided the same services to the committee during part of the year. Advice on the remuneration of the chairman and the non-executive directors was provided by the same advisors to the Board and not to the committee.

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Remuneration of the directors was as follows:

Pension contributions

Notes

¹Brian Brooks resigned and Beth Axelrod was appointed a director in September 2002, having commenced her duties in May 2002. Eric Salama retired from the Board in October 2002 to take up his appointment as chairman and chief executive officer of Kantar in January 2003. Sir Christopher Lewinton and Warren Hellman retired from the Board in January 2003. All amounts shown above constitute the total amounts which the respective director received during 2002 and for the annual bonus in respect of 2002 but received in 2003.

² Amounts paid in 2003 in respect of bonus entitlements for 2002. Sir Martin Sorrell and JMS Financial Services Limited (‘JMS’) declined their respective cash bonuses for the year ended 31 December 2002 and instead agreed with the Compensation committee an award of restricted shares. The restricted shares will be deliverable from the Company’s ESOP no earlier than May 2005 (save in limited circumstances) and prior thereto will be subject to forfeiture in certain circumstances.

³ The amount of salary and fees comprise the fees payable under the UK Agreement with JMS and the salary payable under the US Agreement referred to elsewhere in Item 6.

⁴ In addition to fees paid to them in 2002 as non-executive directors of the Company additional fees were received by Jeremy Bullmore £51,000 and John Quelch £26,000. Masao Inagaki is a director and chairman of Asatsu-DK.

⁵ All amounts payable in US dollars have been converted into £ sterling at $1.5036 to £1. The amounts paid to Sir Martin Sorrell and Paul Richardson were paid part in US dollars and part in £ sterling.

⁶ Neither Paul Richardson nor the Company received any payment from Chime Communications PLC or STW Communications Group Limited in respect of his non-executive directorships in those companies.

⁷ Other benefits include healthcare, life assurance and allowances for cars, housing and club memberships.

⁸ Additional information concerning Beth Axelrod’s service agreement and arrangements are referred to elsewhere in Item 6.

Share Options

Other than as referred to below, no director was granted options over ordinary shares or ADSs in 2002 and as at May 14, 2003 no director had any options outstanding and unexercised.

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The two awards shown in respect of Sir Martin Sorrell, relate to phantom option awards made to JMS in 1993 and 1994 (see note 3 in ordinary shares table above). The award made in 1993 was in respect of 2,196,190 phantom options. JMS exercised 625,000 of the 1993 phantom options in 1997, leaving the current balance of 1,571,190 unexercised. As noted above the exercise period for the 2003 phantom option has been extended until 31 December 2003 and JMS has agreed not to exercise the 1994 phantom options before March 2004, subject to the further extension to be sought at the Annual General Meeting (see note 3 in ordinary shares table above) and subject also to good leaver and change of control provisions. Further details are given elsewhere in Item 6.

Where market value stock options are granted under any WPP stock option plan or LEAP, and such options are subject to performance conditions which may accelerate the vesting, in accordance with the requirements of fixed compensation accounting under US GAAP, such options are exercisable with no restriction other than that the participant remains employed within the Group for a period prior to the expiry of the option.

The Company’s approach to utilising share options within the overall remuneration policy is discussed elsewhere in Item 6.

Other long-term incentive plan awards

Long-term incentive plan awards granted to directors comprise the Performance Share Plan (PSP) and the WPP Leadership Equity Acquisition Plan (LEAP). The operation of the PSP and LEAP are described elsewhere in Item 6. Sir Martin Sorrell also has awards under the Notional Share Award Plan (NSAP) and Capital Investment Plan (CIP), which were granted in 1994 and Beth Axelrod has a Restricted Stock Award granted in 2002.

Performance Share Plan awards to directors¹