SECURITIES AND EXCHANGE COMMISSION
FORM 20-F
[ ] 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: 011-16245
W.P. STEWART & CO., LTD.
(Exact name of Registrant as specified in its charter)
BERMUDA
(Jurisdiction of incorporation or organization)
Trinity Hall
43 Cedar Avenue
P.O. Box HM 2905
Hamilton, HM LX
Bermuda
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12 (b) of the Act:
Name of each exchange
Title of Each Class on which registered
- ----------------------------------------------- ----------------------
Common Shares, par value $0.001 per share New York Stock Exchange
Securities registered or to be registered pursuant to Section 12 (g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15 (d)
of the Act:
None
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:
As of December 31, 2002, 46,179,822 common shares, par value $0.001 per share,
were issued and outstanding.
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 [X] Item 18 [ ]
Table of Contents
Page
----
PART I.......................................................................1
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS...........1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.........................1
ITEM 3. KEY INFORMATION.................................................2
ITEM 4. INFORMATION ON THE COMPANY......................................9
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS...................29
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.....................35
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS..............43
ITEM 8. FINANCIAL INFORMATION..........................................46
ITEM 9. THE OFFER AND LISTING..........................................47
ITEM 10. ADDITIONAL INFORMATION.........................................48
ITEM 11. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT RISK............57
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.........57
PART II.....................................................................57
ITEM 13. DEFAULT, DIVIDEND ARREARAGES AND DELINQUENCIES.................57
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF
SECURITY HOLDERS AND USE OF PROCEEDS...........................58
ITEM 15. CONTROLS AND PROCEDURES........................................58
ITEM 16. [RESERVED].....................................................58
PART III....................................................................58
ITEM 17. FINANCIAL STATEMENTS...........................................58
ITEM 18. FINANCIAL STATEMENTS...........................................58
ITEM 19. EXHIBITS.......................................................58
i
Forward-Looking Statements
Certain statements in this Annual Report are forward-looking
statements, including, without limitation, statements concerning our
assumptions, expectations, beliefs, intentions, plans or strategies regarding
the future. Such forward-looking statements are based on beliefs of our
management as well as on estimates and assumptions made by, and information
currently available to, our management. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause our
actual results, performance or achievements, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the risk factors set forth in this Annual Report as well as the
following:
o general economic and business conditions;
o industry capacity and trends;
o competition;
o the loss of major clients;
o changes in demand for our services;
o changes in, or inability to implement, business strategy or
development plans;
o changes in the laws and/or regulatory circumstances in
Bermuda, the United States, the United Kingdom, Ireland, The
Netherlands or other jurisdictions;
o changes in contingent liabilities;
o quality of management;
o actions taken or omitted to be taken by third parties
including our shareholders, clients, competitors, legislative,
regulatory, judicial and governmental authorities; and
o availability, terms and deployment of capital.
Should one or more of these risks or uncertainties materialize, or
should the underlying assumptions prove incorrect, actual results may vary
significantly from those anticipated, believed, estimated, expected, intended or
planned. We do not intend to review or revise any particular forward-looking
statements made in this Annual Report in light of future events. You are
cautioned not to put undue reliance on any forward-looking statements.
Part I.
Item 1. Identity of Directors, Senior Management and Advisors
Not Applicable.
Item 2. Offer Statistics and Expected Timetable
Not Applicable.
Item 3. Key Information
A. Selected Financial and Unaudited Other Data
The following table sets forth selected financial and unaudited other
data for the Stewart Group, which includes W.P. Stewart & Co., Ltd. and its
subsidiaries and predecessors, for the periods and as of the dates indicated.
The data set forth below are presented on a consolidated or a
combined/consolidated basis.
The income statement and balance sheet data set forth below as of and
for the years ended December 31, 2002, 2001, 2000, 1999 and 1998 are derived
from our audited financial statements. You should read the financial data set
forth below in conjunction with "Operating and Financial Review and Prospects"
and the consolidated audited financial statements for the years ended December
31, 2002, 2001 and 2000 and related notes of the Stewart Group included
elsewhere in this Annual Report. The audited financial statements were prepared
and presented in accordance with accounting principles generally accepted in the
United States of America, or U.S. GaaP, as they are commonly known.
As of, and for the Year ended, December 31,
----------------------------------------------------
2002 2001 2000 1999 1998,(1)
-------- -------- -------- -------- --------
Income Statement Data: (in thousands, except per share data)
Revenues:
Fees .................................... $105,419 $115,993 $149,351 $153,307 $121,043
Commissions ............................. 28,293 39,695 48,273 35,511 27,574
Interest and Other ...................... 3,570 5,028 5,680 4,501 3,662
-------- -------- -------- -------- --------
137,282 160,716 203,304 193,319 152,279
-------- -------- -------- -------- --------
Expenses:
Employee Compensation and Benefits ...... 26,337 28,246 38,546 37,385 29,718(2)
Fees Paid Out ........................... 7,250 5,157 11,639 14,953 11,480
Commissions, Clearance and Trading ...... 5,919 7,376 8,353 6,936 7,743
Research and Administration ............. 14,358 13,516 14,523 13,775 9,486
Marketing ............................... 5,166 1,901 2,923 2,336 1,709
Depreciation and Amortization ........... 8,049 7,527 7,538 3,918 493
Other Operating ......................... 8,371 9,543 9,607 10,851 10,430
-------- -------- -------- -------- --------
75,450 73,266 93,129 90,154 71,059
-------- -------- -------- -------- --------
Income Before Taxes ........................ 61,832 87,450 110,175 103,165 81,220
Provision for Taxes(3) ..................... 6,381 7,153 11,029 8,410 8,654
-------- -------- -------- -------- --------
Net Income ................................. $ 55,451 $ 80,297 $ 99,146 $ 94,755 $ 72,566
======== ======== ======== ======== ========
Earnings Per Share:(4)
Basic Earnings Per Share ................ $ 1.27 $ 1.85 $ 2.37 $ 2.37 $ 1.89
======== ======== ======== ======== ========
Diluted Earnings Per Share .............. $ 1.21 $ 1.71 $ 2.18 $ 2.21 $ 1.80
======== ======== ======== ======== ========
Weighted Average Shares Used in Computation:
Basic ................................... 43,576 43,425 41,873 40,036 38,374
Diluted ................................. 46,013 46,943 45,524 42,864 40,416
Balance Sheet Data:
Total Assets ............................... $134,979 $143,278 $114,262 $ 71,201 $ 43,258
Total Liabilities .......................... $ 26,914 $ 29,238 $ 31,430 $ 32,300 $ 26,179
Shareholders' Equity ....................... $108,065 $114,040 $ 82,832 $ 38,901 $ 17,079
Other Data (unaudited): (in millions, except per share data)
Long-Term Debt ............................. $ 16.9 $ 17.5 $ 18.1 $ 18.6 $ 16.9
Cash Dividends Per Share ................... $ 1.20 $ 1.20 $ 1.73 $ 1.94 $ 1.72
Assets Under Management .................... $ 7,655 $ 9,171 $ 10,324 $ 12,255 $ 11,157
- --------------------------
(1) Capital Managers Limited, a Bermuda company incorporated in August
1996, was merged into W.P. Stewart & Co., Ltd. on October 30, 1998. See
Item 4 under the caption "Information on the Company."
2
(2) In 1998, the percentage of operating profit allocated to compensation
was reduced as part of a generational transition by which the founding
partners reduced their participation and increased participation was
given to the next generation of managers. This transition involved
retirements, reassignments, reallocation of compensation and an
increase in equity participation in our company.
(3) Prior to June 30, 1998, our U.S. predecessor company operated as an S
Corporation under the provisions of the Internal Revenue Code and,
accordingly, was not subject to U.S. federal income tax; however, it
was subject to certain state and local income taxes. For information
regarding our U.S. predecessor company, see Item 4 under the caption
"Information on the Company."
(4) Common shares purchased by our employees and options granted to our
employees are subject to vesting. For treatment of non-vested common
shares and unvested employee options, see Note 4 of the notes to the
consolidated financial statements contained herein.
B. Capitalization and Indebtedness
Not Applicable
C. Reasons for the Offer and Use of Proceeds
Not Applicable
D. Risk Factors
Volatility in the securities markets could result in a decrease in the
market value of our assets under management which, in turn, would
result in a decrease in our earnings.
The securities markets are highly volatile, and securities prices may
increase or decrease for many reasons, including economic, financial or
political events, which we cannot control. These events could result in a
decrease in the overall value or amount of assets that we manage and on which we
earn our fees.
We earn most of our revenues from asset management contracts with
clients. Under these contracts, clients pay us an asset management fee equal to
a percentage of the market value of the assets we manage. As a result, if
securities prices fluctuate, the market value of the assets may fluctuate, and
our revenues and profitability may fluctuate as well. All other factors being
equal, if securities prices fall, the value of our clients' portfolios, and our
revenues, would fall as well.
If securities prices fall, securities may become less attractive
investments as compared to other investments. Clients have the right to remove
their assets from our management at any time, and may be more likely to do so
when securities prices decrease. In that case, the amount of assets we manage
may also decrease, and our revenues and net income may fall as well. If our
revenues were to decrease substantially, there could be an impairment of the
value of our acquired intangible assets and goodwill, which would, in turn, have
an adverse effect on our reportable earnings.
The ability of all of our clients to terminate their asset management
contracts with us at will makes our future client and revenue base
unpredictable.
Our clients have the right to terminate their asset management
contracts with us at any time without paying any penalty. Therefore, we cannot
be certain that we will continue to receive the fees that the client agreed to
pay in its asset management contract with us, particularly if the client decides
that a competitor's services or fees are more attractive. In addition, if
clients terminate agreements covering a significant portion of the assets we
manage, this would result in a significant loss in our revenues which would
adversely affect our financial condition.
3
The market for qualified personnel is highly competitive. If we are
unable to continue to attract and retain qualified personnel we will be
unable to adequately serve our client base.
Our asset management approach depends on the expertise of our personnel
and their ability to work together as an effective team. Our business depends on
our ability to attract and retain highly skilled asset management, investment
advisory, research and administrative professionals. Competition for employees
with the necessary qualifications is intense, especially for asset management
and research professionals. If we are unable to attract and retain these
professionals, we will be unable to continue to provide a consistent level of
service to our clients. A failure to adequately serve our clients could result
in clients' withdrawing their assets from our management and could also affect
our ability to attract new clients.
Our core investment management team currently consists of managers who
have been with us for an average of over eight years. If a substantial number of
these managers were to leave the Stewart Group within a short period of time, it
would be difficult to replace them without disrupting our business. A disruption
in our business could also cause us to lose clients.
Our U.S. tax status could be challenged. If U.S. federal, state or
local taxing authorities successfully challenge our assessment of how
much of our net income was derived from activities in the United
States, we could be forced to pay significant additional taxes.
The Internal Revenue Service, or IRS as it is commonly known, and/or
other U.S. taxing authorities may assert that the Stewart Group has
significantly understated its taxable income and impose tax on the
understatement. The U.S. income tax we have paid and expect to pay is as
follows:
o W.P. Stewart & Co., Inc. pays U.S. income tax on its taxable
income, consisting primarily of fees received from W.P.
Stewart & Co., Ltd. and W.P. Stewart Asset Management Ltd. for
sub-advisory and research services less applicable expenses;
o W.P. Stewart Asset Management (NA), Inc. pays U.S. income tax
on its taxable client servicing fee income on a consolidated
federal basis with its wholly-owned subsidiary, W.P. Stewart
Asset Management, Inc.; and
o W.P. Stewart & Co., Ltd. and W.P. Stewart Asset Management
Ltd. paid U.S. income tax on approximately 10% of their
earnings in 2000 and on approximately 5% of their earnings in
2001, and expect to pay U.S. income tax on approximately 4% of
their earnings in 2002, (as computed under U.S. GAAP), the
percentage which is, or is expected to be, derived from
activities directly carried on in the United States.
We continue to take the position, which we believe is supported under
existing authority, that no U.S. income tax will be imposed on any additional
income of the Stewart Group for 2000, 2001 and 2002. In particular, no portion
of the income of W.P. Stewart Securities Limited, W.P. Stewart & Co. (Europe),
Ltd., W.P. Stewart Asset Management (Europe), Ltd. and its subsidiaries, NS
Money Management Ltd. or TPRS Services N.V. should be subject to U.S. income
tax. As a consequence, the overall effective tax rate on our earnings was 10%
for 2000 and 8.2% in 2001. We believe that the overall tax rate will not exceed
10.3% for 2002 and intend to file tax returns on that basis. The overall
effective tax rate on our earnings in future years using a similar methodology
will vary in accordance with the relative nature and extent of our activities in
the United States and in countries other than the United States.
The IRS, New York State and/or New York City may disagree with our
positions and assert that (i) the fees paid to W.P. Stewart & Co., Inc. (50
basis points annually calculated on the assets in accounts for which W.P.
Stewart & Co., Inc. provides sub-advisory services and $1.2 million annually for
research
4
relating to other accounts) or W.P. Stewart Asset Management (NA), Inc. and
its subsidiary understated their taxable incomes and/or (ii) the net income of
W.P. Stewart & Co., Ltd. and W.P. Stewart Asset Management Ltd. from business
that they carry on directly in the United States represents more than the amount
reported by those two companies. Any additional net income attributed to W.P.
Stewart & Co., Inc., W.P. Stewart Asset Management (NA), Inc. and its
subsidiaries or the directly-conducted U.S. business of W.P. Stewart & Co., Ltd.
and W.P. Stewart Asset Management Ltd. would be subject to U.S. taxes, at rates
that are currently up to 62.62%.
Competition in our industry is intense. This competition makes client
retention difficult and our revenue base uncertain.
The asset management business is highly competitive. Our ability to
compete is based on a number of factors, including:
o investment performance;
o business reputation;
o continuity of client relationships and of assets under management; and
o the level of fees charged for services.
We currently compete with a large number of other asset management
firms, as well as broker-dealers, commercial banks, investment banks, insurance
companies and other financial institutions. Because the cost of entering the
asset management business is relatively low, entities may easily be formed which
also may compete with us. If we are not able to compete successfully against
existing and future competitors, current clients may withdraw their assets from
our management, and we may be unable to attract a sufficient number of new
clients to maintain or improve our revenue base and net income.
We are subject to the control of many regulatory bodies. These
regulators have the power to restrict or limit our business activities,
to cause us to change the manner in which we conduct our businesses and
to levy substantial penalties or fines on us.
The asset management industry is subject to regulation in most of the
jurisdictions in which we do business. Our Bermuda companies are subject to the
Investment Business Act 1998 of Bermuda, but by virtue of their regulation in
other jurisdictions and/or the nature of their clients, they are exempt from the
requirement to hold a license under that Act. W.P. Stewart & Co., Ltd., W.P.
Stewart Asset Management Ltd. and W.P. Stewart & Co., Inc. are registered as
investment advisers with the U.S. Securities and Exchange Commission, or SEC as
it is commonly known, and various state regulatory agencies. W.P. Stewart
Securities Limited, our Bermuda-based broker-dealer, is registered with the SEC
and various state regulatory agencies as a broker-dealer. In addition, W.P.
Stewart Securities Limited is regulated by the National Association of
Securities Dealers, Inc., or NASD as it is commonly known. W.P. Stewart & Co.
(Europe), Ltd. is authorized and regulated by the Financial Services Authority,
or FSA as it is commonly known, previously regulated by the Investment
Management Regulatory Organisation Limited, or IMRO as it was commonly known,
and W.P. Stewart Fund Management Limited, our Dublin-based fund management
company, is regulated by the Central Bank of Ireland.
These regulatory regimes are designed to protect clients and other
third parties who deal with us and our subsidiaries and to ensure the integrity
of the financial markets. They are not designed to protect our shareholders.
5
These regulations often limit our activities through requirements
relating to customer protection, market conduct, money laundering and net
capital. We also face the risk of significant intervention by regulatory
authorities, including extended investigation and surveillance activity,
adoption of costly or restrictive new regulations and judicial or administrative
proceedings that may result in substantial penalties to us. Among other things,
if we were found to have violated a significant regulatory requirement, we could
be fined or enjoined from engaging in certain business activities, and the
registration of certain members of the Stewart Group as investment advisers,
broker-dealers or fund managers could be terminated. If new regulations are
adopted, these consequences could be more significant.
As a shareholder of a Bermuda company you may, in some instances, have
fewer rights and protections than you would have as a shareholder of a
U.S. company.
W.P. Stewart & Co., Ltd. is incorporated in Bermuda and its corporate
affairs are governed by its memorandum of association, its bye-laws and Bermuda
law. Under Bermuda law, shareholders have fewer rights than they might have as
shareholders of a corporation incorporated in a U.S. jurisdiction, and these
rights are less well-defined. It is also more difficult in some respects for
investors to protect their interests in connection with actions by the
management, board of directors or controlling shareholders of a company. For a
description of some of the rights that you will have as a shareholder of W.P.
Stewart & Co., Ltd., see Item 10 B under the caption "Additional Information -
Memorandum and Articles of Association."
The United States and Bermuda do not have a treaty requiring Bermuda
courts to recognize and enforce U.S. court judgments in civil or criminal
matters. It is not clear that a Bermuda court would enforce a United States
court judgment based solely on the U.S. federal securities laws.
We are and will continue to be controlled by affiliated shareholders.
All shareholders of WPS II, Inc., our largest shareholder, owning
approximately 43% of the common shares as of March 20, 2003, are current or
former employees of the Stewart Group, members of their families or trusts for
members of their families. Additionally, our directors and executive officers
beneficially own approximately 14% of the common shares. Also, substantially all
of our other employees own common shares. Furthermore, the majority of these
shareholders (including WPS II, Inc.) will not be subject to the voting
limitations described below. WPS II, Inc. and these affiliated individuals,
therefore, will have the power (without the consent of our other shareholders)
to elect the entire board of directors and, as a result, to control the
management and policies of the Stewart Group, including making all decisions
about mergers, acquisitions, sales, borrowings, issuances and redemptions of our
securities and declaration of dividends on the common shares. They also will be
able to decide all other matters submitted to our shareholders for approval,
including amendments to our memorandum of association and bye-laws.
Our bye-laws restrict shareholders' voting rights. You may not be able
to vote all of the common shares that you own.
Our bye-laws limit the voting power of natural persons to 5% of all
votes attributable to our outstanding shares and the voting power of other
entities, "groups" (as defined in the Securities Exchange Act of 1934) and
persons other than natural persons to 9.5% of the votes attributable to our
outstanding shares. These limitations apply regardless of how many common shares
are actually owned or controlled by a shareholder. These restrictions, however,
will not apply to:
o WPS II, Inc.;
6
o Other shareholders or groups of shareholders who were
shareholders of W.P. Stewart & Co., Ltd. immediately before
our initial public offering in December 2000; and
o Certain persons, entities or groups that are designated by our
board of directors.
The votes that could have been cast by shareholders who are subject to
these voting restrictions will be allocated to the other shareholders pro rata
based on the number of shares they hold. However, no shareholder subject to
these restrictions may be allocated additional voting rights to the extent that
the allocation would cause that shareholder to have more than 5% (for natural
persons) or 9.5% (for legal persons, entities or groups) of the total voting
power. This voting limitation was put in place to reduce the likelihood that we
will become a controlled foreign corporation for U.S. tax purposes. See Item 10
E under the caption "Additional Information - Taxation" for a discussion of the
tax consequences associated with our becoming a controlled foreign corporation.
Our bye-laws also limit the overall voting power of all persons,
entities or groups to 20% of the total number of all votes attributable to our
outstanding shares. These limitations apply regardless of how many common shares
are actually owned or controlled by a shareholder and regardless of whether the
voting restrictions described in the previous paragraph apply to that
shareholder. These restrictions, however, will not apply to:
o WPS II, Inc. or its affiliates;
o Direct or indirect subsidiaries of W.P. Stewart & Co., Ltd.;
o Any shareholding entity that may be established for the
purpose of our employee benefit plans and that is designated
by our board of directors; and
o Other persons, entities or groups that are designated by our
board of directors.
This voting limitation was put in place to reduce the likelihood of
inadvertent terminations of our advisory agreements as a result of "assignments"
of such contracts.
These voting limitations and reallocation provisions in our bye-laws
make it difficult or impossible for any person, entity or group to acquire
control of us unless our board of directors, WPS II, Inc. and the other
affiliated shareholders discussed above agree. These provisions also may make it
difficult to remove incumbent directors of the Stewart Group and may limit the
price that investors will be willing to pay in the future for common shares.
A change of control of the Stewart Group would automatically terminate
our clients' investment advisory agreements with us unless the clients
elect not to terminate and could prevent us for a two-year period from
increasing the investment advisory fees we are able to charge our
clients.
Under the Investment Advisers Act of 1940, as amended, or the Advisers
Act as it is commonly known, a client's investment management agreement will
terminate unless the client elects otherwise if the agreement is "assigned" by
the investment adviser without the client's consent. An advisory agreement is
considered to be assigned to another party when a "controlling block" of the
adviser's voting securities is transferred. In our case, an assignment of the
Stewart Group's asset management contracts may occur if, among other things, we
sell or issue a certain number of additional common shares. We cannot be certain
that our clients will consent to the assignment of investment advisory
agreements or approve new agreements with the Stewart Group if a change of
control occurs.
7
While the limitation in our bye-laws prohibiting any person or group
from voting more than 20% of the total number of shares of W.P. Stewart & Co.,
Ltd. was put in place to reduce the likelihood of inadvertent terminations of
our advisory agreements as a result of "assignments" of such contracts, there
can be no guarantee that this voting limitation will prevent such a termination
from occurring.
Under the Investment Company Act of 1940, as amended, or the Investment
Company Act as it is commonly known, a party that acquires control of an
investment company may not impose an "unfair burden" on that company for a
two-year period after a change of control. The term "unfair burden" has been
interpreted to include certain increases in investment advisory fees. This
restriction, along with the difficulty of obtaining a controlling voting
interest in the Stewart Group described above, may discourage potential
purchasers from acquiring a controlling interest in W.P. Stewart & Co., Ltd.
Future sales of currently restricted common shares could cause the
market price for the common shares to decline. If too many shareholders
who are currently restricted from selling their common shares decide to
sell these shares once the restrictions are lifted, the market price of
your common shares could be adversely affected.
As of December 31, 2002, there were 46,179,822 common shares issued and
outstanding. Of these shares, 16,763,049 common shares are freely transferable
without restriction or further registration under the Securities Act of 1933, as
amended or the Securities Act, as it is commonly known.
In connection with our initial public offering, WPS II, Inc. agreed
that it would retain at least 7,000,000 common shares until the later of
December 13, 2003 or the expiration of its indemnity obligation relating to tax
liabilities resulting from the merger with our U.S. predecessor. See Item 7
under the caption "Major Shareholders and Related Party Transactions." WPS II,
Inc. currently beneficially owns 19,775,834 common shares.
Sales of substantial numbers of common shares, or the possibility of
such sales, pursuant to Rule 144 under the Securities Act or otherwise, may
adversely affect the market price of the common shares and make it more
difficult for us to raise capital by issuing equity securities.
The market price of the common shares will fluctuate.
The market price for the common shares may be volatile and may
fluctuate based upon a number of factors including, but not limited to:
o our operating results;
o changes in financial estimates by securities analysts for the
Stewart Group and/or its competitors;
o conditions or trends in the asset management industry;
o adoption of new accounting standards affecting the investment
advisory business;
o news announcements; or
o changes in general economic and market conditions.
In addition, the stock market in recent years and months has
experienced extreme price and volume fluctuations that often have been unrelated
or disproportionate to the operating performance of companies. These
fluctuations may materially affect the market price of our common shares.
8
Item 4. Information on the Company
A. History and Development of the Company
The Stewart Group
The Stewart Group, which includes W.P. Stewart & Co., Ltd. and its
subsidiaries and predecessors, is an asset management company that has provided
research-intensive equity investment management services to clients throughout
the world since 1975. Headquartered in Hamilton, Bermuda and with additional
operations or affiliates in the United States, Europe and Asia, we managed
approximately $7.7 billion in assets as of December 31, 2002. Our client
accounts are primarily for high net-worth individuals and trusts, partnerships,
private corporations and other entities in which high net-worth individuals have
a substantial interest, as well as for institutions. Our client base is
geographically diverse, with 28.2% of our assets under management from non-U.S.
clients as of December 31, 2002.
Our investment management approach is to seek above-average long-term
investment returns, while accepting what we believe to be below-average risk. We
invest the capital entrusted to us in what we believe are some of the world's
finest growing businesses - large enterprises that are leaders in their
respective fields and that operate businesses with relatively predictable
growth. We focus on a five-year investment horizon and do not engage in market
timing. Our investment approach has realized a compound annualized return,
before fees, of 20.4% and 19.2%, after fees, on funds under discretionary
management from January 1, 1975 through December 31, 2002, as compared with a
return of 13.3% for the S&P 500 over the same period. Our compound annualized
returns for the five and 10 years ended December 31, 2002, before fees, were
3.4% and 11.2%, respectively, as compared to -0.6% and 9.4%, respectively, for
the S&P 500 during the same periods. Our compound annualized returns for the
five and 10 years ended December 31, 2002, after fees, were 2.1% and 9.9%,
respectively. Our return for the year ended December 31, 2002, before fees, was
- -14.4% as compared to a return of -22.1% for the S&P 500 during the same period.
Our return for the year ended December 31, 2002, after fees, was -15.6%. See
Item 4 B under the caption "Information on the Company - Business Overview."
Our culture emphasizes teamwork, reinforced by profit sharing and
equity ownership by our employees. All of our employees are given the
opportunity to become shareholders during their first year of employment with
us, and as a result, substantially all of our employees own common shares.
We believe that our focused investment approach consistently applied,
together with our compensation policy and stock ownership practice, aligns the
interests of all of our employees with the interests of our clients and
shareholders. This has contributed to close and enduring relationships with our
clients and our long-term record of significant growth in assets under
management.
The Stewart Group began its business in 1975. Expansion of our client
base throughout the world and enhancement of our global research capability have
been principal elements of our business strategy. We believe that our global
position, described below, will continue to increase our ability to execute this
business strategy and expand our marketing relationships.
The Global Consolidation
W.P. Stewart & Co., Ltd. was incorporated on June 29, 1998 under the
laws of Bermuda. On June 30, 1998, the shareholders of our U.S. predecessor
company exchanged all of their interests in that company for shares of WPS II,
Inc., a newly formed holding company. Effective as of July 1, 1998, our U.S.
predecessor company merged into W.P. Stewart & Co., Ltd. with W.P. Stewart &
Co., Ltd. continuing as the surviving company. Upon completion of this merger,
WPS II, Inc. received 29,321,436 common shares representing all of the
outstanding common shares of W.P. Stewart & Co., Ltd. at the effective time of
the merger.
9
As the first step in the establishment of the Stewart Group's global
business, Capital Managers Limited, a Bermuda company under common control with
our U.S. predecessor company, was organized in 1996. As of October 30, 1998,
W.P. Stewart & Co., Ltd. merged with Capital Managers Limited with W.P. Stewart
& Co., Ltd. continuing as the surviving company. As a result of the Capital
Managers Limited merger, W.P. Stewart & Co., Ltd. became the owner of Capital
Managers Limited's subsidiaries, W.P. Stewart Securities Limited, W.P. Stewart
Asset Management Ltd. and W.P. Stewart Fund Management Limited. As consideration
in the merger, we issued 13,904,305 common shares to the Capital Managers
Limited shareholders. Each of the Capital Managers Limited shareholders was and
continues to be either an employee, a retired employee or director of the
Stewart Group or a trustee for the members of an employee's, or retired
employee's, family or a member of an employee's family. Each shareholder of WPS
II, Inc. is also a former shareholder of Capital Managers Limited.
Global Expansion
In 1999, we completed three acquisitions and established our London
subsidiary. By these actions, we increased our access to a broader European
clientele, enhanced our global research capability and improved our asset
gathering in Europe and North America.
In 1999, we acquired 50% of the capital stock of TPRS Services N.V.
from TPR & Partners N.V. and TPR Curacao N.V. TPRS Services N.V. is a Curacao
company that is engaged in the business of gathering assets for us. As
consideration for the TPRS Services N.V. acquisition, we issued 1,152,000 common
shares. On December 29, 2000, we consummated the acquisition of the remaining
50% of TPRS Services N.V. in exchange for 814,000 common shares.
In 1999, we acquired from Stewart Notz Stucki Limited, an affiliate of
the Notz Stucki group of companies, all of the outstanding capital stock of NS
Money Management Ltd. NS Money Management Ltd. is an international investment
adviser based in Bermuda that has approximately $160 million in assets under
management. W.P. Stewart & Co., Ltd. serves as sub-adviser for all of NS Money
Management Ltd.'s client accounts. We issued 898,831 common shares as
consideration for the acquisition. We believe that the acquisition of NS Money
Management Ltd. has enabled us to benefit from several long-term Notz Stucki
advisory client relationships and has strengthened our 17 year relationship with
the Notz Stucki group of companies. Headquartered in Geneva, Switzerland, the
Notz Stucki group is an independent financial institution that specializes in
the management of investments of private individuals on a discretionary basis.
The Notz Stucki group of companies currently has over $8 billion in assets under
administration.
We acquired, in 1999, from First Long Island Holdings, LLC, 100% of the
capital stock of First Long Island Investors, Inc., a significant symbiotic
marketer for us. W.P. Stewart Asset Management (NA), Inc. (as the company is now
known) is an asset-gathering firm based in Jericho, New York, and currently
provides client servicing for the majority of our North American clients. We
issued 1,200,000 common shares as consideration for this acquisition. Robert D.
Rosenthal, a co-founder of First Long Island Investors, Inc., serves as a
director of W.P. Stewart Asset Management (NA), Inc. To enhance our
asset-gathering in North America, we entered into ongoing arrangements with
First Long Island Investors, LLC, an entity under common ownership with First
Long Island Holdings, LLC, under which First Long Island Investors, LLC
continues to service W.P. Stewart Asset Management (NA), Inc.'s former clients,
refers new clients to us and assists us in developing, supervising and
coordinating our asset-gathering activities in North America. We believe that
First Long Island Investors, LLC's expertise in asset-gathering allows us to
accelerate growth of our new asset mandates while remaining focused on
investment performance.
Under the terms of the acquisitions of TPRS Services N.V., First Long
Island Investors, Inc. and NS Money Management Ltd., we have the right to
repurchase at nominal consideration, on an annual
10
basis in each year during the four years after the effective dates of each of
those transactions, a portion of the common shares issued by W.P. Stewart & Co.,
Ltd. as consideration in those transactions (not to exceed in the aggregate 80%
of the common shares issued in each transaction) if certain levels of assets
under management are not maintained by the acquired businesses. In January 2003,
in accordance with the provisions of the NS Money Management Ltd. acquisition
agreement, we reacquired 35,000 shares.
In January 2000, W.P. Stewart & Co. (Europe), Ltd. commenced its
investment management business in London. W.P. Stewart & Co. (Europe), Ltd., a
wholly-owned subsidiary of W.P. Stewart & Co., Ltd., provides investment
research and sub-advisory services to our two Bermuda investment advisory
companies (W.P. Stewart & Co., Ltd. and W.P. Stewart Asset Management Ltd.). Our
investment professionals in London developed a European portfolio for our
clientele using the time-tested principles of our U.S. investment philosophy and
approach. In 2002 Lisa Stewart, a founder of Bowen Asia Limited, our 40%
unconsolidated affiliate in Hong Kong, and the daughter of William P. Stewart,
assumed the responsibility for integrating our European and Asian investment
teams to develop a single team responsible for all non-North-American research.
We intend to strengthen our London capabilities to advise on European and global
portfolio products. In order to achieve this, we plan on recruiting two
additional analysts/portfolio managers for our London operations.
These initiatives in London are intended to ensure that the research
and investment management services offered by W.P. Stewart across all
geographies are consistent in style and quality.
On November 14, 2001, we acquired a controlling interest in TPR &
Partners N.V., an asset gathering firm based in The Netherlands via the
acquisition of shares in a Bermuda holding company that indirectly owns 100% of
the shares of TPR. TPR was subsequently renamed W.P. Stewart Asset Management
(Europe) N.V. Going forward, the Bermuda company, which is named W.P. Stewart
Asset Management (Europe), Ltd., serves as the umbrella for our European asset
gathering and client servicing activities. In the transaction, we initially
acquired 9,000 of W.P. Stewart Asset Management (Europe), Ltd.'s 12,000
outstanding shares in exchange for 330,000 of our common shares. The former
beneficial owners of TPR and their assigns will continue to hold the remaining
3,000 shares of W.P. Stewart Asset Management (Europe), Ltd. until June 30,
2006, at which time we have agreed to acquire those shares at a fair value price
determined on that date. In addition, W.P. Stewart Asset Management (Europe),
Ltd. currently provides client services for approximately $1.8 billion of our
assets under management, and has now taken the lead role in nurturing
established relationships, and developing new relationships, with Europe-based
clients and asset gatherers.
W.P. Stewart & Co., Ltd.'s principal executive offices are located at
Trinity Hall, 43 Cedar Avenue, P.O. Box HM 2905, Hamilton HM LX, Bermuda,
telephone number: (441) 295-8585. W.P. Stewart & Co., Ltd.'s agent in the United
States is W.P. Stewart & Co., Inc., 527 Madison Avenue, 20th Floor, New York,
New York 10022, Attention: Michael W. Stamm, Esq., telephone number (212)
750-8585.
B. Business Overview
The Stewart Group offers research-intensive equity investment
management services worldwide. Central to our success are three interdependent
competitive strengths - culture, investment methodology and performance record.
We foster team effort, collaboration and a comprehensive focus on achieving
superior portfolio performance. The long-term commitment between the Stewart
Group and our employees is evidenced by our performance-based compensation
policies, employee share ownership and the tenure of our employees. The culture
is a key factor in our ability to implement, over an extended period of time, an
investment methodology that requires intense, shared, continuous research and
debate.
11
These elements have contributed to a 20.4% compound annual return
before fees (19.2% after fees) for client accounts from January 1, 1975 to
December 31, 2002.
While investment performance is our primary focus, asset gathering is
also important to our business. We have developed mutually beneficial
relationships with select institutions and individuals to accumulate new assets
and have internalized relationships with our strongest partners. We will
continue to cultivate long-term relationships with our current network of
marketers and to establish relationships with additional marketers for
additional asset gathering.
Finally, we intend to continue to pursue a global strategy, both in our
research effort and in the expansion of our client base.
Competitive Strengths
We believe we have a franchise, culture, long-term historical
performance record and investment methodology that position us well to continue
to compete in the global wealth management business. We have built a business
model we believe is unique and have developed and successfully implemented our
disciplined investment philosophy over the past 28 years. Our experienced
investment team consists of 20 investment analyst/portfolio managers with an
average of approximately 17 years of experience in the industry. Twelve of our
analyst/portfolio managers have worked at the Stewart Group for five years or
longer. With eight offices around the world and a selective network of marketing
relationships in more than 10 countries, we have established an international
presence and offer services to a broad range of high net-worth individuals and
institutions throughout the world.
Culture
We place great emphasis on teamwork and client service. Cooperation is
reinforced through a profit sharing plan and equity ownership by our employees.
All employee compensation is based solely on a percentage of the firm's annual
operating profits; our policy is not to pay fixed salaries or to guarantee
compensation. All of our employees are given the opportunity to become
shareholders during their first year of employment with us. As a result,
virtually every employee owns common shares of W.P. Stewart & Co., Ltd., which
have been accumulated through voluntary personal investments. As a policy, we do
not issue shares to employees without consideration. We intend to continue our
performance-based compensation practice and to reserve annually up to 1% of our
outstanding common shares for purchase by our employees. Pursuant to our 2001
Employee Equity Incentive Plan, as amended, an aggregate of approximately
2,125,000 restricted share awards and option grants were made in 2001 and 2002,
and another approximately 375,000 shares have been reserved for future awards
and grants. All employee options and share purchases under such Plan have been,
and will continue to be, subject to seven year vesting. It is our present
intention to continue to make available common shares for purchase by our
employees in proportion to their relative contributions to the Stewart Group.
See Item 6 B under the caption "Directors, Senior Management and Employees-
Compensation."
We believe that a key to our continued success is our highly motivated
team of experienced investment professionals. Each acts in the dual role of
analyst and portfolio manager, with every investment portfolio handled by an
individual manager, backed up by at least one other manager to provide
continuity and stability. The group of analyst/portfolio managers is relatively
small, a structure we intend to maintain. The investment professionals meet
regularly and are able to interact quickly, informally and effectively.
All of our investment professionals share a common commitment to both
the demanding standards required to seek to invest only in the world's best
companies and the discipline of our appraisal process. All of them have a record
of successful investing, and most of them have either known each
12
other or worked closely together for many years. Their investment performance
and tenure show them to be a complementary and effective team.
Long-Term Performance Record
During the 28-year period from January 1, 1975 through December 31,
2002, we experienced a 20.4% compound annual return, before fees, and a 19.2%
compound annual return, after fees, compared to a 13.3% return for the S&P 500
Index for the same period. The years ended December 31, 1993, 2000, 2001 and
2002 were the only years since our inception that we experienced negative
performance. We believe that our long-term record and strong investment returns
provide an advantage in our efforts to accumulate assets through strategic
marketing relationships, client referrals and increases to existing client
mandates. As a result of retained investment gains as well as the contribution
of new funds by existing and new clients, our assets under management have grown
at a compound annual rate of approximately 8% during the period from December
31, 1995 to December 31, 2002.
Look Through Earning Power
W.P. Stewart & Co., Ltd. concentrates its investments in large,
generally less cyclical, growing businesses. Throughout most of the Company's
28-year history, the growth in earning power behind clients' portfolios has
ranged from approximately 11% to 22% annually.
The extraordinary combination of economic and political events in 2001
resulted in the growth in portfolio earning power in 2001 dropping below the
historical range even while remaining solidly positive. Portfolio earnings
growth recovered in 2002 and the Company's research analysts expect portfolio
earnings to be within the historical range over the next five years.
Investment Methodology
Our investment professionals focus on one objective - providing our
advisory clients with well above-average investment returns over a long period
of time, while accepting what we believe to be below-average risk. In making
investments, the investment team focuses on a five-year investment horizon and
does not engage in market timing. We believe that our investment research is
distinguished by its intensity. Our analysts/portfolio managers do their own
research on companies they select, and on many they do not select, and derive
investment research information from a variety of sources, both external and
internal. Our analysts visit these companies regularly, contact managements
frequently, talk to competitors, customers and suppliers, and draw upon other
diverse sources of information. While one analyst has the primary responsibility
for each company (generally four to six companies per analyst), information is
also gathered by other analysts and is shared among all investment
professionals.
Because we consider ourself a long-term investor, the investment
professionals prepare detailed five-year projections for all investment
prospects and investments. These forecasts and the related appraisal of fair
current value for each company under review are used to determine what we
believe to be the intrinsic value of that company and are a critical tool in
developing a comprehensive and detailed evaluation of a company's business. This
appraisal technique systematically examines numerous factors, such as the
company's growth prospects, business and product line strength, management
capabilities, financial resources and many others. The purpose of this appraisal
technique is to evaluate the investment potential and to assess the related risk
of companies under review. Our goal is to construct portfolios of great
businesses, rather than portfolios of stocks. As a result, we consider each
client's portfolio to be a quasi-holding company.
The purpose of our thorough investment appraisal process is to
concentrate our clients' investments only in those businesses that appear to
offer the greatest long-term appreciation potential. The five-year forecasts,
and the appraisals for companies under review, are refined frequently as our
13
investment professionals update their research. This consistent coverage allows
our investment professionals to act decisively when changes in price and
circumstances occur.
At any given time, few businesses meet our standards. Accordingly, our
worldwide investment universe has historically been limited to fewer than 50
investment candidates from each of the United States, Europe, Japan and
Asia-ex-Japan, which are selected based upon a consensus of our investment team.
This has allowed us to concentrate our clients' investments in a portfolio
typically of 15-20 companies that appear to offer the greatest long-term
appreciation potential. The businesses in which we invest normally increase
profits every year. These businesses normally achieve cumulative earnings growth
at a rate we expect will approximately double earning power behind a client's
portfolio every five years. We believe that this pattern of consistent, fairly
rapid, earnings growth has been the primary driver behind the improving value of
our clients' portfolios and the growth of our business over the years.
Using thorough analysis and intensive research, we select investment
candidates based in part on the following criteria:
o a proven track record of consistent profit growth;
o strong financial condition;
o predictable earnings growth that we believe will continue for
the next five years and beyond;
o accurate and reliable information that is readily available;
o successful, experienced management that is accessible to our
investment team;
o strong product lines and competitive position, preferably with
worldwide presence;
o lack of cyclicality; and
o large market capitalization and significant trading liquidity.
The determination of whether a particular investment prospect is
eligible for inclusion in our investment universe is the result of a collective,
debate-driven process that actively involves all members of our investment team
and reflects their collective research and analytical judgment and experience.
While the entire investment team contributes to the research and appraisal
process, each member has the freedom and responsibility to make investment
decisions with respect to specific client accounts within the confines of the
defined universe.
Business Strategy
Our business strategy is to continue to provide premier equity
investment management services on a worldwide basis. We believe that our pursuit
of a more global clientele will lead to continued growth in our assets under
management and our revenues, and that both new and existing clients will benefit
from our increased focus on international research and stock selection. We
intend to adhere to the distinctive and disciplined investment philosophy which
we have pursued over our 28-year history. In addition, we believe that a culture
of ownership and compensation for performance will be a key element for our
continued growth and future success and aligns the interests of our clients,
employees and shareholders.
14
Extend Investment Performance
Central to our strategy is our objective to achieve above-average
investment returns over a long period of time for our clients while accepting
what we believe to be below-average risk. We intend to continue to adhere, in
expanding and contracting markets alike, without regard to "benchmarks", to a
philosophy that emphasizes investment over a relatively long-term horizon in
what we believe are high quality, steadily-growing businesses. We intend to
remain focused on investment performance while using our network of symbiotic
marketers as the primary means to gather assets.
Increase Global Research Focus
We want our clients to own equity in the finest growing businesses in
the world. We believe that having a global integrated research capability is a
critical element in providing the best investment product. We also believe that
the introduction of the euro in the European monetary union has led to an
improvement in the quality and availability of financial information and a more
consistent basis for comparing European companies with competitors inside and
outside their home countries. As the universe of high quality companies expands
globally, we intend to maintain a research effort parallel with the growing
investment opportunities. This global research capability will also allow us to
meet particular client needs to the extent that they express any regional or
national preferences. The establishment of W.P. Stewart & Co. (Europe), Ltd. and
our ownership of approximately 40% of Bowen Asia Limited, a British Virgin
Islands company operating in Hong Kong, have enabled us to expand our non-U.S.
research capability.
Pursue Global Clientele
We believe that our services and performance have been well-received by
clients throughout the world and that there exists significant opportunity to
expand our clientele internationally, especially in Europe. We believe that
non-U.S. investors are generally under-invested in equity securities and will
look to established professionals like the Stewart Group to invest their wealth.
The introduction of the euro has minimized currency risk within Europe and
should reduce the tendency of Europe-based investors to consider domicile an
important factor in equity investing. As part of our strategy to exploit this
opportunity, our acquisition of NS Money Management Ltd., TPRS Services N.V. and
TPR & Partners N.V., including its wholly owned subsidiary, TPR Curacao N.V. and
our establishment of W.P. Stewart & Co. (Europe), Ltd. have increased our access
to a broader Europe-based clientele, provided us with a Europe-based investment
management team and formed the basis for our European client servicing and asset
gathering activities.
15
Investment Management Team
Our highly experienced and motivated team of investment professionals has been
critical to our strong long-term investment performance. We have 20 senior
investment professionals and 16 associate portfolio managers who directly
participate in the investment process. The following table identifies the senior
investment professionals and summarizes their experience in the industry as of
March 28, 2003:
Years in Years with
Name Location Age Industry Company
- ----------------------------------------------- ------------- --- -------- -------
John A. Allison................................ Bermuda 54 20 7
David Altman................................... New York 45 21 9
Marilyn G. Breslow............................. New York 58 19 12
Ebrahim Busheri................................ New York 37 14 2
Tomaso Cremonesi............................... London 33 6 2
Samantha Epstein-Smith......................... New York 33 11 4
Alexander Farman-Farmaian...................... Bermuda 37 14 14
Robert Gebhart................................. New York 31 5 1
Peter H. Jennison.............................. New York 41 18 13
Robert Kahn.................................... New York 70 43 28
Celina Lin..................................... Hong Kong 44 14 7*
Miguel Nogales................................. London 29 7 3
Keith Olson.................................... Hong Kong 44 20 0(1)
Robert L. Rohn................................. New York 41 15 11
Harry W. Segalas............................... New York 42 20 12
Lisa M. Stewart................................ Hong Kong/London 45 20 9*
William P. Stewart............................. Bermuda 65 48 28
Heike Tesch.................................... Hong Kong 30 7 6*
James T. Tierney............................... New York 36 15 3
Harfun Ven..................................... Hong Kong 31 4 3*
- --------------------------
* Includes years with Bowen Asia Limited.
(1) Joined Bowen on March 3, 2003.
16
Historical Performance Record
January 1, 1975-December 31, 2002 Performance
We have achieved a 20.4% compound annual return before fees, and a
19.2% compound annual return after fees for the period from January 1, 1975
through December 31, 2002. This compares to a 13.3% return of the S&P 500 Index
over the same period computed on a comparable basis. Our compound annualized
returns for the five and 10 years ended December 31, 2002, before fees, were
3.4% and 11.2%, respectively, as compared to -0.6% and 9.4%, respectively, for
the S&P 500 during the same periods. Our compound annualized returns for the
five and 10 years ended December 31, 2002, after fees, were 2.1% and 9.9%,
respectively. Our return for the year ended December 31, 2002, before fees, was
- -14.4% as compared to a return of -22.1% for the S&P 500 during the same period.
Our return for the year ended December 31, 2002, after fees, was -15.6%. We
believe our superior investment results over long time periods are due largely
to our strict adherence to a consistent long-term investment philosophy.
We believe that our concentration in less cyclical businesses reduces
risk relative to the S&P 500 Index. In the six down market years experienced
since our formation (1977, 1981, 1990, 2000, 2001 and 2002), the S&P 500 Index
declined by approximately 7.4%, 5.0%, 3.1%, 9.1%, 11.9% and 22.1%, respectively.
In those years, accounts managed by us appreciated by approximately 16.0%, 10.8%
and 13.2% in 1977, 1981 and 1990, respectively, and depreciated by approximately
1.3%, 5.8% and 14.4% in 2000, 2001 and 2002, respectively, in each case before
fees, as calculated in the manner described below.
17
The chart below illustrates our annual return in client accounts in our
W.P. Stewart U.S. Equity Composite from January 1, 1975 through December 31,
2002. See "Method of Performance Calculation" below.
Managed Accounts vs. S&P 500
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Year S&P 500 WPS Pre-Fee WPS Post-Fee
---- ------- ----------- ------------
'74 100 100 100
'75 137 165 164
'76 170 217 213
'77 157 251 245
'78 167 284 273
'79 197 377 361
'80 261 504 477
'81 248 558 523
'82 301 764 710
'83 369 980 903
'84 391 1,154 1,052
'85 515 1,720 1,554
'86 611 2,083 1,863
'87 642 2,266 2,005
'88 748 2,482 2,170
'89 986 3,377 2,925
'90 955 3,823 3,266
'91 1,247 5,892 4,988
'92 1,342 6,307 5,274
'93 1,477 6,177 5,108
'94 1,496 6,377 5,212
'95 2,059 8,592 6,950
'96 2,532 11,682 9,352
'97 3,377 15,444 12,242
'98 4,343 20,486 16,074
'99 5,256 22,901 17,762
'00 4,778 22,613 17,318
'01 4,210 21,296 16,116
'02 3,279 18,226 13,610
Examination of Performance Record
Our independent accountants, PricewaterhouseCoopers LLP, have performed
an examination of our performance record for the period January 1, 1989 through
December 31, 2002, including the five and ten year periods ended December 31,
2002.
18
Method of Performance Calculation
Account Inclusion. Our performance data, since 1989, reflects the
performance of all client U.S. equity accounts having at least $1 million in
market value as of January 1 of each year for which W.P. Stewart & Co., Ltd.
(including its U.S. predecessor company) and W.P. Stewart Asset Management Ltd.,
our Bermuda-based investment adviser subsidiary, acted with complete
discretionary authority. With respect to periods prior to 1989, the data
reflects performance of a group of accounts believed by management to be
representative of all fully discretionary client equity accounts. If the
criteria for account inclusion since 1989 had been applied for periods prior to
1989, there is no assurance that the results would be consistent, although we
believe the results would not be materially different. The accounts included for
the period from January 1, 1975 through December 31, 2002 are referred to as the
"composite" or the "managed accounts."
In the case of one portfolio manager who joined the Stewart Group as of
1981, the performance data includes the performance of portfolios managed by him
at a different firm during the period 1975 through 1980 using an investment
philosophy similar to that practiced by us at the time. The effect of this
inclusion is to increase the compound annual return since inception by
approximately one-tenth of one percentage point.
The managed accounts exclude one portfolio manager's 1977 performance
data, in compliance with certain Advisers Act requirements. The performance
return excluding this data is substantially the same as the performance return
would have been if such data had been included.
Performance Calculation. Beginning in 1989, performance figures for the
managed accounts have been calculated using a "time-weighted" rate of return
method, such that additions and withdrawals of capital are weighted based on the
amount of time such capital is held in the account during the period. The annual
performance of an account is derived by linking the periodic rates of return for
such account. Prior to 1989, performance figures were calculated using a linear
non-weighted method, such that beginning of year market values were adjusted to
reflect additions and withdrawals of capital during the year.
For 1975 through 1988, the annual performance of the managed accounts
is the average of the average performance of the individual managers'
portfolios. Beginning in 1989, the annual performance is the average of all
accounts in the composite. For 1975 through 1992, accounts are given equal
weighting regardless of market value. Beginning in 1993, account performance has
been asset-weighted based on the beginning of year market value of all accounts
in the composite.
The pre-fee performance of our accounts for all years shown on the
chart reflects the deduction of brokerage commissions but not the deduction of
advisory fees which would reduce the overall return. The post-fee performance of
our accounts for all years shown reflects the deduction of brokerage commissions
as well as advisory fees.
Effect of Advisory Fees. After 1983, the post-fee performance of our
accounts reflects the deduction of the actual advisory fees charged each account
in the composite, adjusted for the effect of capital additions and withdrawals.
For the period 1975 through 1983, we have used the actual fee rates or the
highest fee rates then prevailing.
From 1975 through 1988, advisory fees were deducted from performance at
the end of each year. If fees had been deducted from performance on a quarterly
basis when charged, the return since inception would have been decreased by
approximately one-tenth of one percentage point.
S&P 500. The S&P 500 Index annual change shown in the chart relating to
our 1975 through December 31, 2002 performance includes the reinvestment of
dividend income, using a methodology
19
similar to that used for our accounts. It does not reflect the deduction of any
transaction or custodial costs that would be involved in investing in the S&P
500. The effect of these costs would be to reduce the indicated return from 1975
through December 31, 2002 for the S&P 500 by an undetermined amount. The S&P 500
Index annual percentage change was obtained from the Standard & Poor's
Corporation, New York, New York.
Assets Under Management
The following table shows assets under management during the period
from January 1, 2000 through December 31, 2002. Changes between beginning and
ending assets under management include capital appreciation or depreciation, net
contributions and net new accounts opened/closed.
ASSETS UNDER MANAGEMENT
Year Ended
December 31,
-----------------------------------------
2002 2001 2000
---------- ------- -------
(in millions)
Beginning Assets Under Management...... $ 9,171 $10,324 $12,255
========== ======= =======
Ending Assets Under Management......... $ 7,655 $ 9,171 $10,324
========== ======== =======
The table below illustrates the total net flows of assets under
management which include changes in net flows of existing accounts and net new
flows (net contributions to our publicly available funds and flows from new
accounts minus closed accounts). The table excludes total capital appreciation
or depreciation in assets under management with the exception of the amounts
attributable to withdrawals and accounts closed.
NET FLOWS OF ASSETS UNDER MANAGEMENT
Year Ended
December 31,
-----------------------------------------
2002 2001 2000
---------- --------- ---------
(in millions)
Existing Accounts:
Contributions.................................... $ 932 $ 862 $ 660
Withdrawals...................................... (883) (1,042) (1,223)
---------- --------- ---------
Net Flows of Existing Accounts...................... 49 (180) (563)
Publicly Available Funds:
Contributions.................................... 401 149 90
Withdrawals...................................... (242) (88) (121)
Direct Accounts Opened.............................. 289 353 277
Direct Accounts Closed.............................. (472) (593) (999)
---------- ---------- ----------
Net New Flows ...................................... (24) (179) (753)
---------- ---------- ----------
Net Flows of Assets Under Management................ $ 25 $ (359) $ (1,316)
========= ========== ==========
20
The following table shows client retention information for the last
three years.
ACCOUNT RETENTION
Year Ended
December 31,
---------------------------------
2002 2001 2000
------ ------ ------
Number of Accounts at Beginning of Period.......... 2,251 2,346 2,383
Number of Accounts Closed During Period............ 200 249 221
Retention Rate..................................... 91.1% 89.4% 90.7%
Client Base
Our client base is diverse. Approximately 61% of our assets under
management, and 81.5% of our accounts, as of December 31, 2002, were associated
with high net-worth individuals and their affiliates. As of December 31, 2002,
approximately 28.2% of our assets under management were contributed by non-U.S.
clients. The following tables set forth information regarding our client base
and changes in our assets under management over time.
The following tables show, as of December 31, 2002, 2001 and 2000, the
amount of assets under management in direct relationship client accounts and in
accounts referred to us by clients' consultants, and the number of accounts by
relationship type.
ASSETS UNDER MANAGEMENT
BY RELATIONSHIP TYPE
As of December 31,
-----------------------------------------
2002 2001 2000
---------- ---------- ----------
(in millions)
Direct Relationship......................... $ 6,972 $ 8,334 $ 9,320
Consultant Related.......................... 683 837 1,004
--------- ---------- ----------
Total.................................. $ 7,655 $ 9,171 $ 10,324
========= ========== ==========
Over the years we have established relationships with a select group of
symbiotic marketers that refer portfolio management clients to us in return for
a share of the fees paid by such clients. The value of direct relationship
accounts referred by our symbiotic marketers as of December 31, 2002, 2001 and
2000 represented 37.4%, 36.4% and 34.1%, respectively, of our direct
relationship accounts as of such dates.
NUMBER OF ACCOUNTS
BY RELATIONSHIP TYPE
As of December 31,
-----------------------------------------
2002 2001 2000
---------- ---------- ----------
Direct Relationship......................... 2,019 2,051 2,136
Consultant Related.......................... 185 200 210
--------- --------- ---------
Total.................................. 2,204 2,251 2,346
========= ========= =========
21
The following table shows our assets under management by client type.
ASSETS UNDER MANAGEMENT
BY CLIENT TYPE
Assets Under Management as of Number of Accounts as of
December 31, 2002 December 31, 2002
------------------------------------ --------------------------------
U.S. Non-U.S. Total U.S. Non-U.S. Total
------ --------- ------- ------ -------- ---------
(in millions)
High Net-Worth Individual
Relationships/Pooled Funds* ......... $2,903 $1,747 $4,650 1,620 176 1,796
Foundations & Other
Relationship Directed
Institutional ....................... 2,307 144 2,451 282 4 286
Other Institutional ...................... 286 268 554 58 64 122
------ ------ ------ ------ ------ ------
Total ............................... $5,496 $2,159 $7,655 1,960 244 2,204
====== ====== ====== ====== ====== ======
- ---------------------
* Pooled funds have been included in High Net-Worth/Individual Relationships
because the underlying clients of the pooled fund vehicles are high
net-worth individuals.
The following table shows the amount of assets under management
contributed by U.S. and non-U.S. clients.
ASSETS UNDER MANAGEMENT
U.S./NON-U.S. CLIENTS
As of December 31,
-------------------------------------------
2002 2001 2000
------------ ----------- ----------
(in millions)
U.S. Clients.............. $ 5,496 $ 6,745 $ 8,037
Non-U.S. Clients.......... 2,159 2,426 2,287
------------ ----------- ----------
Total................ $ 7,655 $ 9,171 $ 10,324
============ =========== ==========
Investment Advisory Revenues
Advisory fee revenues are generated from investment advisory contracts
between the Stewart Group and clients for whom we manage discretionary accounts.
These agreements are terminable at will by either party on short notice. Under
our current standard fee arrangement, we receive a management fee equal to 1.5%
per annum of the value of the client's account up to $25 million, plus 1.25% per
annum of any account balance in excess of $25 million up to $100 million, plus
1.0% per annum of any account balance in excess of $100 million. Our standard
fee arrangement is non-negotiable. We do not typically offer fixed income
investment management service, although we make this service available to our
clients for whom we manage equity portfolios. Clients' funds held on a long-term
basis in fixed income investments (approximately $33 million at December 31,
2002) are subject to a 0.30% annual fee. Fees under our investment advisory
contracts are billed and payable quarterly, in advance. The following table
shows the
22
average annualized gross management fee, as a percentage of assets under
management received by us from various segments of our client base during the
year ended December 31, 2002:
Average Gross Management
Fee as a Percent of Assets
Under Management
---------------------------
Year Ended
Client Type December 31, 2002
- ------------------------------------ ---------------------------
Institutional....................... 1.17%
Non-Institutional................... 1.27%
U.S. Clients........................ 1.27%
Non-U.S. Clients.................... 1.11%
Overall Weighted Average............ 1.23%
The average gross management fee was 1.23% for the year ended December
31, 2002. The average fee was less than our standard fee of 1.5% because a
number of advisory contracts were entered into prior to 1989, when we adopted
our current fee arrangement, and because account balances in excess of $25
million and $100 million are subject to lower fees.
Currently, each of our investment advisory contracts names either W.P.
Stewart & Co., Ltd. or W.P. Stewart Asset Management Ltd., our Bermuda-based
investment adviser subsidiary, as the investment adviser. These entities have
engaged and may engage in the future W.P. Stewart & Co., Inc., W.P. Stewart &
Co. (Europe), Ltd. or Bowen Asia Limited to act as sub-adviser for certain
accounts or mandates. Under written sub-advisory agreements, the sub-adviser is
entitled to receive from the named investment advisory entity a fee which is
comparable to fees charged by other unrelated advisers for similar mandates.
W.P. Stewart & Co., Inc. is the investment adviser with respect to W.P. Stewart
& Co. Growth Fund, Inc., a U.S. registered mutual fund sponsored by the Stewart
Group.
Geographic Area Data
The Company's primary business is the provision of investment advisory
services to clients located throughout the world. The amounts of fee revenue
received from clients in the U.S. and elsewhere for the years ended December 31,
2002, 2001 and 2000 were as follows:
Fee Revenue
-------------------------------------------------------
2002 2001 2000
--------------- ---------------- ---------------
U.S. $ 79,095,944 $ 90,348,326 $ 113,865,779
Non-U.S. 26,322,834 25,644,745 35,484,673
--------------- ---------------- ---------------
Total $ 105,418,778 $ 115,993,071 $ 149,350,452
=============== ================ ===============
Collective Investment Funds
Mutual fund and pooled accounts are not a primary focus of the Stewart
Group or its future business strategy. Our U.S. mutual fund is used primarily to
efficiently invest smaller accounts. As of December 31, 2002, we also served as
investment adviser to 44 collective investment funds and other pooled vehicles
organized to meet the fiscal and regulatory requirements of certain U.S. and
non-U.S.
23
clients. The following table sets forth information regarding collective
investment funds and other pooled vehicles with assets under management in
excess of $50 million as of December 31, 2002:
Jurisdiction of Assets Under
Formation of Fund Management
------------------------------------------ ------------------
(in millions)
Netherlands Antilles...................... $ 539
British Virgin Islands.................... 156
Luxembourg................................ 149
Austria................................... 109
United States............................. 56
British Virgin Islands.................... 51
Clearing Custodian and Brokerage Arrangements
We do not hold any funds or securities of our clients. Clients' funds
and securities are held by custodians appointed either by the client or, if no
custodian is named by the client, by the Stewart Group. We currently utilize, on
a fully disclosed basis, the services of Neuberger Berman, LLC as clearing agent
and as custodian on accounts where the client makes no custodial designation. We
believe that our current relationship with Neuberger Berman, LLC is satisfactory
but believe that a comparable agreement with a different clearing agent and/or
custodian could be reached if necessary.
Our investment advisory contracts authorize us to select the broker
through which any transaction may be executed and specifically authorize the use
of our affiliated broker-dealer, W.P. Stewart Securities Limited.
Competition
We believe that currently only a limited number of companies with a
similar investment philosophy and practice compete directly with us in our core
business of providing wealth management services to the upper tier of the wealth
management market. However, the investment management business in general is
intensely competitive. In providing investment management services, we compete
with a large number of asset management firms as well as broker-dealers, trust
companies, commercial banks and other specialized wealth management providers.
Our future growth and profitability will be affected by our ability to retain
and increase our market share, which could be adversely affected over the longer
term as competitors seek to develop high net-worth relationships. Many of our
current and potential competitors are significantly larger in terms of capital,
assets, geographic presence, distribution network and other important business
criteria, provide a wider range of services and may have access to greater
financial resources than the Stewart Group.
Regulation
Our business and the investment management industry in general are
subject to extensive regulation in Bermuda, the United States at both the
federal and state levels, the United Kingdom and the Republic of Ireland, as
well as by various self-regulatory organizations, or SROs as they are commonly
known, in these and other jurisdictions. A number of regulatory agencies of
various jurisdictions are charged with safeguarding the integrity of the
securities and other financial markets and with protecting the interests of
customers participating in markets in those jurisdictions.
24
In Bermuda, our investment business is subject to the jurisdiction of
the Bermuda Monetary Authority. Effective January 1, 2000, the Investment
Business Act 1998 requires licensing of all persons carrying on investment
business in or from within Bermuda, unless there is an exemption available under
the Act. Our investment businesses are exempt from the licensing requirements of
the Act due to the nature of our clientele and our regulation by the SEC.
In the United States, the SEC is the federal agency that is primarily
responsible for the regulation of investment advisers and broker-dealers, and
the Board of Governors of the Federal Reserve System promulgates regulations
applicable to securities credit transactions involving broker-dealers and
certain other U.S. persons. Investment advisers and broker-dealers are subject
to registration and regulation by state securities regulators in those states in
which they conduct business. Industry SROs, including the NASD and national
securities exchanges, have authority over the firms that are their members.
In the United Kingdom, the main regulatory body is the Financial
Services Authority. During 2001, IMRO's regulatory function was subsumed into
the Financial Services Authority, which became the sole UK regulatory body for
the investment management business. W.P. Stewart & Co. (Europe), Ltd. is
authorized and regulated by the Financial Services Authority. In the Republic of
Ireland, the Central Bank of Ireland is responsible for the regulation of fund
management activities and is the regulatory body that supervises W.P. Stewart
Fund Management Limited and the Dublin domiciled investment funds which it
manages. In The Netherlands, De Nederlandsche Bank N.V., known as the Dutch
Central Bank, has historically been responsible for the regulation of fund
management activities, such as the supervision of WPSH Management N.V. and the
publicly traded funds that it manages, including W.P. Stewart Holdings N.V., the
shares of which fund are traded on Euronext Amsterdam. Most of those
responsibilities of the Dutch Central Bank have been transferred to the
Netherlands Authority for the Financial Markets, formerly known as the Dutch
Securities Board, as of September 1, 2002.
W.P. Stewart & Co., Ltd., W.P. Stewart Asset Management Ltd. and W.P.
Stewart & Co., Inc. are registered as investment advisers with the SEC. As
investment advisers, each is subject to the requirements of the Advisers Act and
the SEC's regulations thereunder. They, and their employees engaged in advisory
services, are also subject to certain state securities laws and regulations, and
to laws regarding fiduciaries. Federal and state regulations impose, among other
things, limitations on the ability of investment advisers to charge
performance-based or non-refundable fees to clients, record-keeping and
reporting requirements, disclosure requirements, limitations on principal
transactions between an adviser or its affiliates and advisory clients,
requirements as to fees paid to solicitors (paid client referral sources),
restrictions on commission and fee arrangements with broker-dealers, and
advertising restrictions, as well as general anti-fraud prohibitions. The state
securities law requirements applicable to employees of investment advisers
include certain qualification requirements as to advisory employees. In
addition, W.P. Stewart & Co., Inc., as investment adviser to a mutual fund
registered under the Investment Company Act, is subject to requirements under
the Investment Company Act and the SEC's regulations thereunder. Such
requirements include, among other things, record-keeping and reporting
requirements and procedures for handling funds. Each of W.P. Stewart & Co.,
Ltd., W.P. Stewart Asset Management Ltd. and W.P. Stewart & Co., Inc. also are
subject to the requirements of the USA Patriot Act of 2001 including the money
laundering prevention provisions thereof.
Under the Advisers Act, every investment advisory agreement with a
client must expressly provide that it may not be assigned by the investment
adviser without the consent of the client. Under the Investment Company Act,
every investment adviser's agreement with a registered investment company must
provide for the agreement's automatic termination in the event of its
assignment. Under both Acts, an investment advisory agreement is deemed to have
been assigned when there is a direct or indirect transfer of the agreement,
including a direct assignment or a transfer of a "controlling block" of the
firm's voting securities or, under certain circumstances, upon the transfer of a
"controlling block" of the voting securities of its parent corporation. A
transaction is not an assignment under the Advisers Act or the
25
Investment Company Act, however, if it does not result in a change of actual
control or management of the investment adviser. Any assignment of our
investment advisory agreements would require, as to any registered investment
company client, the prior approval by a majority of its shareholders, and as to
our other clients, the prior consent of such clients to such assignments. Sales
by WPS II, Inc. or other shareholders or our issuances of common shares, among
other things, could result in a deemed assignment of our investment advisory
agreements under such statutes. See Item 3 D under the captions "Key Information
- - Risk Factors - We Are Subject to the Control of Many Regulatory Bodies" and
"Key Information - Risk Factors - A Change of Control of the Stewart Group Would
Give Our Clients the Right to Terminate Their Investment Advisory Agreements
With Us."
The officers, directors and employees of our investment management
business may from time to time own securities which are also owned by one or
more of their clients. We have internal policies with respect to, among other
things, individual investments, required reporting of securities transactions
and restrictions on certain transactions so as to reduce the possibility of
conflicts of interest.
W.P. Stewart Securities Limited, our Bermuda-based broker-dealer, is
registered as a broker-dealer with the SEC and in all 50 states of the United
States and is a member of, and subject to regulation by, the NASD. As a result
of federal and state broker-dealer registration and SRO memberships, W.P.
Stewart Securities Limited is subject to overlapping schemes of regulation which
cover many aspects of its securities business. Such regulations cover matters
including the use and safekeeping of clients' funds and securities,
record-keeping and reporting requirements, and supervisory and organizational
procedures intended to assure compliance with securities laws and prevent
improper trading on material nonpublic information. As a broker-dealer
registered with the SEC and certain states and a member firm of the NASD, W.P.
Stewart Securities Limited is also subject to the capital requirements of the
SEC, the states and the NASD. These capital requirements specify minimum levels
of capital, computed in accordance with regulatory requirements ("net capital"),
that W.P. Stewart Securities Limited is required to maintain and also limit the
amount of leverage that W.P. Stewart Securities Limited is able to obtain in its
business. A failure of W.P. Stewart Securities Limited to maintain its minimum
required capital could require it to cease executing client transactions until
it returned to capital compliance, and could cause it to lose its membership on
an exchange or in an SRO, lose its registration with the SEC or a state, or
require its liquidation. At December 31, 2002, W.P. Stewart Securities Limited
was required to maintain minimum net capital, in accordance with SEC rules, of
approximately $100,000 and had total net capital of approximately $7.2 million,
or approximately $7.1 million in excess of the amount required. W.P. Stewart
Securities Limited also is subject to the requirements of the USA Patriot Act of
2001 including the money laundering prevention provisions thereof.
W.P. Stewart & Co. (Europe), Ltd. is a member of, and subject to
regulation by, FSA in the United Kingdom. Its permitted activities are limited
to providing investment management and investment advice, together with the
marketing of unregulated collective investment schemes. FSA regulations cover
matters such as the use and safekeeping of clients' funds and securities,
record-keeping and reporting requirements, employee-related matters, including
qualification and approval of supervisory, investment management and sales
personnel, disclosure requirements, advertising restrictions and minimum levels
of capital. W.P. Stewart & Co. (Europe), Ltd. currently satisfies its minimum
capital requirements.
W.P. Stewart Fund Management Limited is subject to the supervisory
control of the Central Bank of Ireland. The permitted activities of W.P. Stewart
Fund Management Limited include the provision of services consisting of the
establishment and management of specified collective investment undertakings,
the provision of management and administration services and of investment and
financial advice. W.P. Stewart Fund Management Limited also is subject to
minimum capital requirements, ongoing reporting and disclosure requirements and
such other prudential and supervisory requirements as the Central Bank of
Ireland may issue from time to time. W.P. Stewart Fund Management Limited
currently satisfies its minimum capital requirements.
26
Compliance with many of the regulations applicable to us involves a
number of risks, particularly because applicable regulations in a number of
areas may be subject to varying interpretation. Regulators make periodic
examinations and review annual, monthly and other reports on our operations,
track record and financial condition. In the event of a violation of or
non-compliance with any applicable law or regulation, governmental regulators
and SROs may institute administrative or judicial proceedings that may result in
censure, fine, compensation orders, civil penalties (including treble damages in
the case of insider trading violations), criminal penalties, the issuance of
cease-and-desist orders, the deregistration or suspension of the non-compliant
firm, the suspension or disqualification of the firm's officers or employees and
other adverse consequences. We have not experienced any such penalties to date.
Such violations or non-compliance also could subject us and/or our employees to
civil actions by private persons. Any governmental, SRO or private proceeding
alleging violation of or non-compliance with laws or regulations could have a
material adverse effect upon our business, financial condition, results of
operations and business prospects.
The regulatory environment in which we operate is subject to change. We
may be adversely affected as a result of new or revised legislation or
regulations imposed by the SEC, other U.S., state or non-U.S. governmental
regulatory authorities or SROs. We also may be adversely affected by changes in
the interpretation or enforcement of existing laws and rules by these
governmental authorities and SROs. Our businesses may be materially affected not
only by securities regulations but also by regulations of general application.
For example, the volume of our principal investment advisory business in a given
time period could be affected by, among other things, existing and proposed tax
legislation and other governmental regulations and policies (including the
interest rate policies of the Federal Reserve Board) and changes in the
interpretation or enforcement of existing laws and rules that affect the
business and financial communities.
27
C. Organization Structure
The organizational chart set forth below shows our operating structure,
our principal operating subsidiaries, the jurisdiction of incorporation of our
subsidiaries and the percentage of shares that we hold in those subsidiaries. We
believe this operating structure positions us effectively to service our global
clientele and pursue our global strategy.
W.P. Stewart & Co., Ltd.,
our Bermuda-based
investment adviser
------------------------------------------------------------------------------------------------------------------------
| | | | | | | | |
| | | | | | | | |
| 75% | | | | | | | Approx. |
| | | | | | | | 40% |
| | | | | | | | |
W.P. Stewart W.P. NS Money W.P. W.P. W.P. W.P. Stewart TPRS Bowen
Asset Stewart & Management Stewart & Stewart Stewart Asset Services Asia
Management Co. Ltd., our Co., Inc., Asset Securities Management N.V., our Limited,(1)
(Europe), (Europe), Bermuda- our New Management Limited, our (NA), Inc., Curacao- our
Ltd.,(2) our Ltd., our based asset York- Ltd., our Bermuda- our based asset Hong
Bermuda- London- manager based Bermuda- based New York- gatherer Kong-
based based research based broker- based asset based
umbrella research affiliate investment dealer gatherer research
company for affiliate adviser affiliate
European
asset gathering
| |
| (3) |
| |
W.P. Stewart W.P.
Asset Stewart
Management Fund
(Europe) N.V., Management
our Limited, our
Netherlands- Dublin-
based asset based fund
gatherer management
company
1. W.P. Stewart & Co., Ltd. has entered into an agreement pursuant to which
it has an option to increase ownership to 50% or more beginning in 2004.
2. W.P. Stewart & Co., Ltd. has entered into an agreement pursuant to which it
will acquire the remaining 25% on June 30, 2006.
3. Indirectly owned.
28
D. Property, Plant and Equipment
Our headquarters and certain of our executive offices are located at
Trinity Hall, 43 Cedar Avenue, Hamilton, Bermuda in a building owned by a joint
venture between the Stewart Group and The Bank of Bermuda Limited and leased to
us by the joint venture on arms-length commercial terms. We also lease offices
in New York, New York; Portland, Maine; London, England; Curacao, Netherlands
Antilles; and Oegstgeest, The Netherlands. We believe our facilities have been
well maintained, are in good operating condition, are adequate for our current
operational requirements and could be replaced, if necessary, on acceptable
terms.
Item 5. Operating and Financial Review and Prospects
Overview
W.P. Stewart & Co., Ltd., together with its subsidiaries, is a
research-focused investment counselor that manages assets for high net-worth
individuals and institutions located throughout the world. Our principal source
of revenues is investment advisory fees and, accordingly, fluctuations in
financial markets and client contributions and withdrawals have a direct effect
on revenues and net income. Significant components of our expenses are variable
in nature and may offset fluctuations in revenue.
Advisory fees are computed quarterly based on account market values and
fee rates pursuant to investment advisory contracts with clients. Our policy is
to bill clients quarterly, in advance.
Commission revenues earned on our brokerage activities, substantially
all of which relate to client accounts, vary directly with account trading
activity and new account generation. Transaction costs are reviewed quarterly
and are competitive.
Interest and other revenue primarily consists of interest earned on
notes receivable for employee purchases of common shares, interest earned on our
cash management activities and equity income relating to our investments in
unconsolidated affiliates.
We provide competitive rewards to our employees through our
compensation and benefits policies, together with our employee equity ownership
practices. Employee compensation and benefits are our largest operating expense,
the most significant component of which is compensation paid to our research
analysts/portfolio managers. Compensation for all employees varies with
operating profit. At the beginning of each year, each employee is allocated a
participation in our compensation pool. Compensation paid depends upon our
actual operating profit, as adjusted for amortization of intangibles and
retirement benefits ("adjusted operating profit"). We review, from time to time
the percentage of operating profit made available for the compensation pool.
Under our variable compensation program, which heavily weights compensation
against profit performance, compensation expense currently may vary between
20.7% and 24.5% of adjusted operating profit. Compensation expense was
approximately 24%, 21.5% and 25% of adjusted operating profit for the years
ended December 31, 2002, 2001 and 2000, respectively. It is currently
anticipated that compensation expense for the year ending December 31, 2003 will
be in the range of approximately 22% to 24%.
Fees paid out are paid to select banks, investment firms and
individuals in at least 10 countries, with whom we have formal marketing
arrangements that make up our network of symbiotic marketers. We consider the
banks, investment firms and individuals who gather assets for us to be symbiotic
marketers of our services because of the mutual benefits that flow from the
relationship - they are able to offer premier equity investment management
services to their clients and we are able to extend the reach of our
asset-gathering efforts. These fees are based on the market value of referred
accounts and vary based on new account generation and fluctuations in the market
value of referred accounts.
29
Commissions, clearance and trading expenses include fees incurred
related to brokerage activities. These transaction-related costs vary directly
with trading activity.
Research and administration expenses include research, travel and
entertainment, communications, information technology systems support and
occupancy.
Marketing expenses represent costs associated with our internal
marketing initiatives and client servicing activities, and include client
seminars and marketing related travel and operational expenses.
Other operating expenses include professional fees consisting of
auditing, tax, legal and consulting fees, charitable contributions and other
administration expenses.
All of our employees are given the opportunity to become shareholders
during their first year of employment with us. As a result, virtually all of our
employees are shareholders of W.P. Stewart & Co., Ltd. and all participate in
the results of our operations.
A. Operating Results
Year Ended December 31, 2002 as Compared to Year Ended December 31, 2001
Assets Under Management
Assets under management were approximately $7.7 billion at December 31,
2002, a decrease of approximately $1.5 billion or 16.3% from approximately $9.2
billion at December 31, 2001.
The following table sets forth the total net flows of assets under
management for the years ended December 31, 2002 and 2001, which include changes
in net flows of existing accounts and net new flows (net contributions to our
publicly available funds and flows from new accounts minus closed accounts). The
table excludes total capital appreciation or depreciation in assets under
management with the exception of the amounts attributable to withdrawals and
closed accounts.
Net Flows of Assets Under Management
------------------------------------
(in millions)
-------------
Years Ended December 31,
------------------------
2002 2001
-------- ----------
Existing Accounts
Contributions $ 932 $ 862
Withdrawals (883) (1,042)
------- -------
Net Flows of Existing Accounts 49 (180)
Publicly Available Funds
Contributions 401 149
Withdrawals (242) (88)
Direct Accounts Opened 289 353
Direct Accounts Closed (472) (593)
------- -------
Net New Flows (24) (179)
------- -------
Net Flows of Assets Under Management $ 25 $ (359)
======= =======
30
Revenues
Revenues were $137.3 million for the year ended December 31, 2002, a
decrease of $23.4 million or 14.6% from $160.7 million earned during the year
ended December 31, 2001. The changes were due to a $10.6 million or 9.1%
decrease in fee revenue, an $11.4 million or 28.7% decrease in commission
revenue and a $1.4 million or 29.0% decrease in interest and other revenues. The
average fee earned from client accounts was 1.23% for the year ended December
31, 2002 and 1.26% for the year ended December 31, 2001. The decrease was due to
a slight change in client account mix due to larger accounts subject to our fee
break. In addition there were certain European client accounts that transferred
to W.P. Stewart Holdings N.V., our mutual fund listed on Euronext Amsterdam.
This fund has a fixed fee of 25 basis points and a 10% performance fee. There
was no performance fee earned in either 2002 or 2001. The decrease in commission
revenue was primarily due to lower levels of trading volume during 2002 as
compared with the higher levels of trading volume experienced in 2001. Turnover
was lower for the year ended December 31, 2002 as compared to the year ended
December 31, 2001. Interest and other revenues decreased primarily due to lower
equity income from our unconsolidated affiliates, the absence in 2002 of any
gain on the sale of investments which we experienced in 2001, lower cash
balances in 2002 reflecting our share repurchases and lower interest earned on
our cash balances due to prevailing market rates.
Expenses
Expenses, excluding income taxes, increased $2.2 million, or 3.0%, to
$75.5 million for the year ended December 31, 2002, from $73.3 million in the
prior year. The increase was primarily due to a change in variable expenses,
including an increase of $2.1 million in fees paid out to marketers, which are
directly related to assets under management of referred accounts. (Included in
the third quarter of 2001 was an adjustment to fees payable to marketers of $1.5
million.) This was partially offset by a decrease of $1.4 million in
commissions, clearance and trading costs, which vary with account activity.
Marketing expenses increased $3.3 million, which reflects our additional
marketing and client servicing initiatives. Depreciation and amortization
increased $0.5 million primarily due to an increase in the amortization of
intangible assets. Research and administration expenses increased $0.8 million
due to higher costs. Other operating expenses decreased $1.2 million, due to
lower costs. Employee compensation and benefits decreased $1.9 million due to a
decrease in adjusted operating profit combined with an increase in the
compensation percentage for the year ended December 31, 2002 to approximately
24% of adjusted operating profit from approximately 21.5% for the year ended
December 31, 2001.
Our income tax expense decreased $0.8 million, to $6.4 million, for the
year ended December 31, 2002 from $7.2 million in the prior year. The effective
tax rate for 2002 was 10.3%, compared to 8.2% for 2001. This is the result of
our anticipated 10% tax rate for both years with adjustments in our prior year's
tax accruals, for each respective year, determined when our tax returns were
finalized.
Net Income
Net income for the year ended December 31, 2002 decreased $24.8
million, or 30.9%, to $55.5 million, from $80.3 million for the prior year as a
result of the items described above.
Year Ended December 31, 2001 as Compared to Year Ended December 31, 2000
Assets Under Management
Assets under management were approximately $9.2 billion at December
31, 2001, a decrease of approximately $1.1 billion, or 10.7% from approximately
$10.3 billion at December 31, 2000.
31
The following table sets forth the total net flows of assets under
management for the years ended December 31, 2001 and 2000, which include changes
in net flows of existing accounts and net new flows (net contributions to our
publicly available funds and flows from new accounts minus closed accounts). The
table excludes total capital appreciation or depreciation in assets under
management with the exception of the amounts attributable to withdrawals and
closed accounts.
Net Flows of Assets Under Management
------------------------------------
(in millions)
-------------
Years Ended December 31,
-------------------------
2001 2000
-------- ------------
Existing Accounts
Contributions $ 862 $ 660
Withdrawals (1,042) (1,223)
-------- --------
Net Flows of Existing Accounts (180) (563)
Publicly Available Funds
Contributions 149 90
Withdrawals (88) (121)
-------- --------
Direct Accounts Opened 353 277
Direct Accounts Closed (593) (999)
-------- --------
Net New Flows (179) (753)
-------- --------
Net Flows of Assets Under Management $ (359) $ (1,316)
========= =========
Revenues
Revenues were $160.7 million for the year ended December 31, 2001, a
decrease of $42.6 million or 21.0% from $203.3 million earned during the year
ended December 31, 2000. The changes were due to a $33.4 million or 22.3%
decrease in fee revenue, an $8.6 million or 17.8% decrease in commission revenue
and a $0.6 million or 11.5% decrease in interest and other revenues. Included in
2000 revenues were performance fees of $3.7 million and $2.3 million recorded in
March and December, respectively, for one of our accounts. There was no
performance fee paid by this account in 2001. The average fee earned from client
accounts was 1.26% for the year ended December 31, 2001 and 1.27% for the year
ended December 31, 2000, which included performance fees that applied to two
accounts. The decrease was due to a slight change in client account mix due to
larger accounts subject to our fee break. The decrease in commission revenue was
primarily due to lower levels of trading volume during 2001 as compared with the
higher levels of trading volume experienced in 2000, which were primarily due to
a reallocation and rebalancing of accounts in 2000. Interest and other revenues
decreased $0.6 million primarily due to a decrease of $0.7 million in earnings
from our unconsolidated affiliates offset by an increase of $0.1 million in
interest and other revenue.
Expenses
Expenses, excluding income taxes, decreased $19.9 million, or 21.3%,
to $73.3 million for the year ended December 31, 2001, from $93.1 million in the
prior year. The decrease was primarily due to a decline in variable expenses,
including a decrease of $6.5 million in fees paid to marketers, which are
directly related to assets under management of referred accounts. (Included in
the third quarter of 2001 was an adjustment to fees payable to marketers of $1.5
million.) There was a decrease of $1.0 million in
32
commissions, clearance and trading costs, which vary with account activity.
Research and administration expenses and marketing expenses each decreased $1.0
million and other operating expenses decreased $0.1 million, all due to lower
costs. Employee compensation and benefits decreased $10.3 million due to a
decrease in adjusted operating profit and a completed refinement in 2001 to our
variable compensation program.
Our income tax expense decreased $3.9 million, to $7.2 million, for the
year ended December 31, 2001 from $11.0 million in the same period of the prior
year. The effective tax rate for 2001 was 8.2%. This is the result of our
anticipated 10% tax rate for 2001 less an adjustment in our prior year's tax
accrual determined when our tax returns were finalized in December 2001.
Net Income
Net income for the year ended December 31, 2001 decreased $18.8
million, or 19.0%, to $80.3 million, from $99.1 million for the prior year as a
result of the items described above.
Inflation
Our assets are largely liquid in nature and, therefore, not
significantly affected by inflation. However, the rate of inflation may affect
our expenses, such as information technology and occupancy costs, which may not
be readily recoverable in the pricing of the services that we provide. To the
extent inflation results in rising interest rates and has other negative effects
upon the securities markets, it may adversely affect our financial position and
results of operations.
Contractual Obligations and Contingent Commitments
W.P. Stewart & Co., Ltd. has contractual obligations to make future
payments under long-term debt and non-cancelable lease agreements and has
contingent commitments as disclosed in the notes to the consolidated financial
statements. The following tables set forth these contractual obligations and
contingent commitments as of December 31, 2002:
Contractual Obligations
-----------------------
(in millions)
-------------
2008 -
2003 2004 - 2005 2006 - 2007 Thereafter Total
---- ----------- ----------- ---------- -----
Long-Term Debt (1) $0.6 $1.4 $1.6 $13.9 $17.5
Minimum Rental Commitments (2) $2.6 $5.5 $5.2 $ 6.7 $20.0
(1) See Note 8 to the consolidated financial statements for additional
information.
(2) See Note 16 to the consolidated financial statements for additional
information.
Contingent Commitments
----------------------
(in millions)
-------------
Amount of Commitment Expiration Per Period
--------------------------------------------------------------------
2008 -
2003 2004 - 2005 2006 - 2007 Thereafter Total
---- ----------- ----------- ---------- -----
Commitments under letters of
credit (3) - $1.2 - $0.7 $1.9
(3) See Note 9 to the consolidated financial statements for additional
information.
33
B. Liquidity and Capital Resources
Our financial condition is highly liquid with principal assets
including cash and cash equivalents, investments available for sale and
receivables from clients. Cash equivalents are primarily short-term, highly
liquid investments with an original maturity of three months or less at the date
of purchase. Liabilities include operating payables and accrued compensation.
Our investment advisory activities do not require us to maintain significant
capital balances. However, the activities of W.P. Stewart Securities Limited,
our Bermuda-based broker-dealer, and the sub-advisory activities of W.P. Stewart
& Co. (Europe), Ltd., our London-based research affiliate, require us to
maintain certain minimum levels of capital.
We continually monitor and evaluate the adequacy of the capital
maintained for those brokerage and sub-advisory activities. W.P. Stewart
Securities Limited and W.P. Stewart & Co. (Europe), Ltd. have consistently
maintained net capital in excess of the regulatory requirements prescribed by
the Securities and Exchange Commission and the U.K. Financial Services Authority
(and the former Investment Management Regulatory Organisation Limited),
respectively, as well as by other regulatory authorities. Historically, we have
met our liquidity requirements with cash generated from our operations.
In 1998 a newly-formed limited liability company wholly owned by us
acquired, by assignment, the rights and obligations of Shamrock Aviation, Inc.,
a company controlled by certain shareholders of W.P. Stewart & Co., Ltd., under
a purchase agreement to buy a Challenger aircraft for $22.5 million. The
aircraft was placed in service on April 8, 1999. General Electric Capital
Corporation is financing the aircraft with 10-year, amortizing loans with fixed
rates that range from 6.87% to 7.35%. During 1999, we paid $22.5 million under
the purchase agreement, of which General Electric Capital Corporation provided
$19.6 million under the loans. A company under common control with Shamrock
Aviation, Inc., controlled by certain shareholders of W.P. Stewart & Co., Ltd.,
operates the Challenger aircraft for us. We are charged actual cost of
operations for such operating services. We believe that ownership of this
aircraft enables us to efficiently manage the heavy travel schedules of our
investment and research professionals, at rates more favorable to us than would
be charged by an unaffiliated charterer.
We anticipate that our cash flow from operations will be sufficient to
meet our debt and other obligations as they come due as well as our anticipated
capital requirements.
Other Events and Global Trends
Our business principally involves the management of assets invested in
the United States, European and Asian equity markets, all of which suffered
significant losses for the year ended December 31, 2002. The combination of
sluggish economic growth, the recent wave of corporate scandals and geopolitical
concerns, led by the outbreak of war in Iraq, unsettling events on the Korean
peninsula and the continuing threat posed by international terrorism, have
clearly taken a toll on investor confidence. Reliable predictions as to the
beginning of a return to a bull market are not possible in the face of these
issues.
On the other hand there are positive forces that favor our business.
The legislative, regulatory and self-regulatory responses to the recent
corporate scandals have been swift and should enhance future investor
confidence. We believe that the current investment environment places a premium
on stock picking and that the types of great companies in which we traditionally
invest are better able than most to weather these challenging times. The
continued strong out-performance of the W.P. Stewart U.S. Equity Composite, as
compared to the benchmark S&P 500, is indicative of our abilities to both invest
our clients' funds wisely and attract more of those funds. While our assets
under management have trended downward since 1999, our net flows have trended
upward since 2000, attesting to the fundamental soundness of our business and
our investment philosophy.
34
Our liquidity, facilities and overall financial condition remain
strong. We have maintained our customary quarterly dividend and have funded that
dividend out of net income. We have applied a portion of our excess cash to
opportunistic repurchases of our shares, and we have increased our marketing
efforts to continue building shareholder value. Our board of directors carefully
scrutinizes our earnings and cash position quarter-by-quarter to ascertain the
prudence of our dividend. Although there can be no guarantee that the dividend
will remain at historic levels indefinitely, there currently are no plans for
reducing it. Consistent with this focus, our board of directors will continue to
consider opportunities for share repurchase with a view toward increasing
long-term shareholder value, while at the same time maintaining our liquidity
and our ability to pay dividends.
C. Research and Development, Patents and Licenses, etc.
Not Applicable.
D. Trend Information
See Item 5 B above under the heading "Other Events and Global Trends."
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
Members of the board of directors of W.P. Stewart & Co., Ltd. are
elected by the shareholders of W.P. Stewart & Co., Ltd. All directors serve
until re-elected at the next annual general meeting or their successors are
elected or appointed.
The following table sets forth information with respect to the current
directors and executive officers of W.P. Stewart & Co., Ltd.
Name Position Position Held Since
- ------------------------------------ ---------------------------------------------------------------- ---------------------
William P. Stewart................. Chairman, Chief Executive Officer and Director(1)(2) June 1998
John C. Russell.................... Deputy Chairman, Managing Director and Director(1) June 1998
Richard C. Breeden................. Director(2)(3) June 1998
Edgar H. Brunner................... Director(2) June 1998
Henry B. Smith..................... Director(1)(3) June 1998
Heinrich Spangler.................. Director(3) June 1998
Richard D. Spurling................ Director June 2002
John A. Allison.................... Deputy Managing Director January 2001
Salim Chaar........................ Deputy Managing Director - Administration September 2001
Mark A. Henderson.................. Deputy Managing Director November 1998
Susan G. Leber..................... Deputy Managing Director - Financial Operations March 2003
Rocco Macri........................ Deputy Managing Director - Chief Financial Officer September 2001
Peter Jan P. Rubingh............... Deputy Managing Director January 2001
Frederick M. Ryan.................. Deputy Managing Director - Investor Relations September 2001
Charles G.R. Target................ Deputy Managing Director - International Development June 1999
Debra Randall...................... Corporate Secretary January 2001
- --------------------------
(1) Denotes member of the Executive Committee of the board of directors.
(2) Denotes member of the Compensation Committee of the board of directors.
(3) Denotes member of the Audit Committee of the board of directors.
35
William P. Stewart is Chairman, Chief Executive Officer and a Director
of W.P. Stewart & Co., Ltd. Mr. Stewart started on Wall Street in 1955 on the
trading floor of the New York Stock Exchange. He joined Spingarn, Heine & Co. in
1957 as an analyst/registered representative and, in 1961, moved to Pyne,
Kendall & Hollister in the same capacity. He was successively Director of
Research, General Partner responsible for the firm's investment advisory and
institutional operations, President of its international investment banking
subsidiary, Managing Partner and Chairman and Chief Executive Officer of Riter,
Pyne, Kendall & Hollister, Inc. After the sale of Riter, Pyne's principal
business in early 1973, Mr. Stewart joined Ruane, Cunniff & Co., an investment
management firm, as Vice Chairman, while simultaneously founding our U.S.
predecessor company as a corporate consultant. He established our U.S.
predecessor company as an investment advisory firm in 1975.
John C. Russell serves as Deputy Chairman, Managing Director and a
Director of W.P. Stewart & Co., Ltd. and is the Chairman of the Stewart Group's
Management Committee. He joined the Stewart Group in 1996 as General Counsel,
relinquishing that position after becoming the firm's Chief Operating Officer in
April 1997. From 1992 to 1996, Mr. Russell was a partner in the law firm of
Kroll & Tract. From 1987 through 1992, Mr. Russell served as President and Chief
Executive Officer of the Ohio Brass Company, a manufacturing company, and OB
Systems and Mining, Inc., another manufacturing company. From 1980 to 1987, he
served as President and Chief Executive Officer of Naarden International, Inc.,
an international fragrance company. In 1970, Mr. Russell was a founding partner
of the law firm Anderson Russell Kill & Olick. Mr. Russell has more than 40
years of experience in domestic and international corporate and securities law.
Richard C. Breeden became a Director of W.P. Stewart & Co., Ltd. in
June 1998. From 1996 through the present time, Mr. Breeden has been Chairman of
Richard C. Breeden & Co., a consulting firm. Since July 2002, he has also served
as Corporate Monitor of WorldCom, Inc., a position to which he was appointed by
the U.S. District Court for the Southern District of New York. Mr. Breeden
currently serves as a Director of Banco Bilbao Vizcaya Argentaria. From
1997-2002, Mr. Breeden served as Chairman, President and Chief Executive Officer
of Equivest Finance, Inc., a publicly traded company in the resort development
and financing business. Since 1996, Mr. Breeden also served as the
court-appointed bankruptcy trustee of The Bennett Funding Group, Inc. From 1993
to 1996, Mr. Breeden served as the chairman of the worldwide financial services
practice of Coopers & Lybrand LLP. From 1989 to 1993, Mr. Breeden served as
Chairman of the U.S. Securities and Exchange Commission after appointment to
that position by President George Bush and confirmation by the U.S. Senate.
Prior to the Commission, Mr. Breeden served in the White House as Assistant to
the President (1989) and Deputy Counsel to the Vice President (1982-1985). Mr.
Breeden also practiced corporate and securities law in private practice in New
York City and Washington, D.C. Mr. Breeden has more than 25 years experience
with securities markets, financial accounting and corporate transactions.
Edgar H. Brunner has served as a Director of W.P. Stewart & Co., Ltd.
since June 1998. Dr. Brunner was a former General Partner with Armand von Ernst
& Cie., a private bank in Berne, Switzerland and was appointed Chief Executive
Officer of that company in the acquisition of Armand von Ernst & Cie. by Swiss
Bank Corporation. In addition, he was a member of the Berne Council of Burghers
and President of the Swiss Private Bankers Association. From 1973 until 1997,
Dr. Brunner served as Chairman of the Board of Bankers Trust AG of Zurich,
Switzerland. Dr. Brunner also serves as a Director of Compagnie Bancaire
Espirito Santo S.A.
Henry B. Smith has been a Director of W.P. Stewart & Co., Ltd. since
June 1998. Mr. Smith is Chief Executive Officer and a Director of The Bank of
Bermuda, with which he has been employed in various capacities since 1973. In
May 1997, Mr. Smith was appointed Deputy Chairman of the Bermuda Stock Exchange
Council and is Chairman of the Council Partners Charitable Trust.
36
Heinrich Spangler has served as a Director of W.P. Stewart & Co., Ltd.
since June 1998. For the last 23 years, Mr. Spangler has served in various
capacities, including managing partner, and presently serves as Spokesman of the
Board of Management and Chief Executive Officer of Bankhaus Carl Spangler & Co.
AG, the oldest private bank in Austria. Mr. Spangler also serves as Chairman of
the Supervisory Board of Carl Spangler Kapitalanlageges. m.b.H., a private
investment company located in Salzburg, Austria.
Richard D. Spurling has been a Director of W.P. Stewart & Co., Ltd.
since June 2002. Mr. Spurling is the Senior Partner at Appleby Spurling & Kempe,
an international law firm with offices in Bermuda, London (UK) and Hong Kong,
where he has practiced since 1977. He obtained his English Bar qualification in
1975 and was called to the English Bar in November 1976 following pupilage at
Law Chambers in London. He was called to the Bermuda Bar in 1977. Mr. Spurling
also serves as a director of Belco Holdings Limited, Bermuda Electric Light
Company Limited, BF&M Life Insurance Company Limited and BF&M Limited in Bermuda
and a Trustee of the Bermuda Biological Station for Research, Inc. Mr. Spurling
was an elected Member of the Bermuda Parliament for five years and served as the
Government Whip.
John A. Allison has been with W.P. Stewart since 1995 and became Deputy
Managing Director in January 2001. Mr. Allison serves as a member of the Stewart
Group's Management Committee. He began his professional career in 1973 as an
analyst of global economic trends for the Canadian government. From 1978 to
1983, he lectured in Western Intellectual and Economic History at Columbia
University. He joined Morgan Stanley Asset Management in 1983 where, as a Vice
President and senior portfolio manager/analyst, he managed large institutional
growth stock portfolios for major foreign and domestic clients. In 1989, Mr.
Allison joined Auchincloss & Lawrence Inc., where he became the firm's Chief
Executive and Investment Officer and its majority shareholder. Mr. Allison
combined his business with W.P. Stewart & Co., Inc. in November 1995.
Salim Chaar has served as Deputy Managing Director - Administration of
W.P. Stewart & Co., Ltd. since September 2001. He joined W.P. Stewart from Bowen
Capital Management, the company's Hong Kong-based research and sub-advisory
affiliate, where he served as its Managing Director, and a member of the board
of directors of its parent company, Bowen Asia Limited, since March 2000. Mr.
Chaar began his career with Banque Indosuez in Paris in 1976, and worked in
various management capacities for Indosuez in the Middle East and in Asia until
1993, including Chief Operating Officer and then Managing Director of Indosuez
Investment Services in Hong Kong from 1988 to 1992. Mr. Chaar was based in Paris
from 1993 to 1997, as President and Chief Operating Officer of Union Financiere
de France Banque, an asset management, brokerage and insurance subsidiary of
Indosuez listed on the French stock exchange. He left Banque Indosuez in 1997,
and joined the Belgian group Generale de Banque, where he was appointed Chief
Executive Officer of Grand Generale Asset Management Ltd.
Mark A. Henderson has served as Deputy Managing Director of W.P.
Stewart & Co., Ltd. since November 1998. Mr. Henderson began his career in New
York with Rheem International, Inc., a steel manufacturer and subsidiary of City
Investing Corp. He was seconded by Rheem to South Africa between 1969 and 1973
to establish their South African subsidiary. In 1974 he joined Panmure Gordon &
Co., a financial adviser, brokerage concern and member of the London Stock
Exchange. He became an individual member of the London Stock Exchange in 1979
and a partner of Panmure Gordon & Co. in 1981. Panmure Gordon & Co. was acquired
by NationsBank Corp. in 1986. In that year he became a Director of NationsBank
(Europe) Ltd. and a member of the Executive Committee of Panmure Gordon & Co.,
Ltd. He was responsible for the international expansion of the firm's business
which included the establishment of an office in New York. He is currently a
member of The Securities Institute in London.
Susan G. Leber has served as Deputy Managing Director - Financial
Operations since March 2003, as Director of Financial Operations since December
2001 and as Deputy Finance Director-Group
37
Controller since March 1999. Ms. Leber is a Certified Public Accountant. From
1993 to 1999 she was a Senior Manager with the accounting firm of Lopez Edwards
Frank & Co., LLP, and was manager of the Stewart Group audit.
Rocco Macri has served as Deputy Managing Director - Chief Financial
Officer of W.P. Stewart & Co., Ltd. since September 2001 and as Finance Director
since March 1999. Mr. Macri is a Certified Public Accountant. From 1993 through
1999, he was a Partner with the accounting firm of Lopez Edwards Frank & Co.,
LLP, where he was a Manager from 1984 through 1993. From 1984 through 1998, Mr.
Macri had principal responsibility for our audit while a partner at our previous
independent accounting firm.
Peter Jan P. Rubingh became Deputy Managing Director of W.P. Stewart
and Co., Ltd. in January 2001. He is a co-founder and Managing Director of TPR &
Partners N.V. (now W.P. Stewart Asset Management (Europe), N.V.), an
Amsterdam-based business which has concentrated on gathering assets and
servicing clients for W.P. Stewart since TPR's inception in 1993. Mr. Rubingh
began his career at Moret & Limperg (now Ernst & Young), Amsterdam, in 1978 as
an Assistant Accountant within the audit team. He joined Noro Nederland B.V.
(The Noro Group of Companies), a fund management group, in 1979 and served in
various capacities within the group, including Group Controller, Assistant
Managing Director, Management Team Member and Portfolio Manager (Venture
Capital) in The Netherlands, the United States and the Netherlands Antilles.
While at Noro, Mr. Rubingh also served as a non-executive member of the
Supervisory Boards of HomeBanc in Atlanta, Georgia and ICON International in New
York City.
Frederick M. Ryan has served as Deputy Managing Director - Investor
Relations of W.P. Stewart & Co., Ltd. since September 2001. Mr. Ryan served as
Deputy Managing Director from February 1999 through August 2001 and as Deputy
Managing Director - Europe from October 1998 through January 1999. Prior to
that, Mr. Ryan was a consultant with FMR Capital Advisory, financial and
business consultants. From 1991 through 1997, he was president of Canada Life
Investment Management. Mr. Ryan worked with the investment and business
consulting group of FMR & Associates from 1982 through 1991. From 1969 through
1982, Mr. Ryan was a shareholder, officer and Director of R.A. Daly & Co., Ltd.,
a brokerage firm and a former member firm of the Toronto Stock Exchange. Mr.
Ryan has been a member of the Association for Investment Management & Research
since 1967 and served as president of the Toronto Society of Financial Analysts
(a constituent member society of the Association for Investment Management &
Research) in 1976-1977.
Charles G.R. Target has served as Deputy Managing Director -
International Development of W.P. Stewart & Co., Ltd. since June 1999. Mr.
Target is an Executive Director of our Asian affiliate, Bowen Asia Limited.
Prior to the founding of Bowen, Mr. Target was a general partner and director of
Alan Patricof Associates, the London-based international venture capital
company. Before joining Patricof in 1988, Mr. Target served as Managing Director
of Business International Asia/Pacific Ltd., an economic research and consulting
company owned by the Economist Group, where he was responsible for the Asian
regional operations of the company.
Debra Randall has served as Corporate Secretary of W.P. Stewart & Co.,
Ltd. since January 2001. Ms. Randall, a certified Law Clerk in the Province of
Ontario, Canada and a student member of the Institute of Chartered Secretaries,
has more than 11 years' experience in the legal and corporate services sector.
Charles Target is the son-in-law of William P. Stewart. There are no
other family relationships between any directors and executive officers.
38
B. Compensation
The aggregate compensation paid or accrued in 2002 by W.P. Stewart &
Co., Ltd. to individuals serving as directors and executive officers during that
year, including bonuses and compensation payable pursuant to employee benefit
plans, was $7.9 million. During 2002, these individuals were granted options to
purchase an aggregate of 61,000 common shares of W.P. Stewart & Co. Ltd. For the
terms of these options, see Item 6 E below under the caption "Share Ownership".
We sponsor both a defined contribution profit-sharing plan (including a
401(k) feature) and a defined contribution money-purchase plan in the United
States. In 2000, we implemented a Bermuda pension plan and in 2001 a plan was
created in the United Kingdom. These plans cover substantially all employees who
meet the minimum age, service and eligibility requirements. The aggregate amount
paid, set aside or accrued by W.P. Stewart & Co., Ltd. in 2002 to provide
pension, retirement or other employee benefits to individuals serving as
directors and executive officers during that year was $227,099.
W.P. Stewart & Co., Ltd. has agreed to pay each of Messrs. Breeden,
Brunner, Smith, Spangler and Spurling (the "non-executive directors") $20,000
per annum for his services on the board of directors. In June 2002, upon
becoming a director of W.P. Stewart & Co., Ltd., Mr. Spurling purchased 3,000
common shares and was granted options to acquire 6,000 common shares of W.P.
Stewart & Co., Ltd. This is the same non-cash compensation granted to each of
the other non-executive directors in 2001. Also during 2002, in consideration
for Mr. Breeden's services as Chairman of the Audit Committee, he received
additional directors fees of $10,000 and Messrs. Smith and Spangler each
received additional fees of $5,000 for serving as members of the Audit
Committee.
C. Board Practices
The terms of office of our directors and officers will run until the
election of successor directors (or until the shareholders resolve in a general
meeting not to re-appoint a director) or the appointment of successor officers.
Executive Committee. The Executive Committee of the board of directors
is composed of Messrs. Russell, Smith and Stewart. The Executive Committee has
the power and authority to manage the affairs of the company on behalf of the
board of directors when it is not in session, consistent with the expressed
desires of the board of directors. The Executive Committee maintains a record of
any and all actions it takes and notifies the board of directors after it takes
any such action. The agenda for each regular quarterly meeting of the board of
directors includes discussion and ratification of actions that have been taken
by the Executive Committee since the previous regular quarterly board meeting.
Compensation Committee. The Compensation Committee of the board of
directors is composed of Messrs. Breeden and Stewart and Dr. Brunner. The
Compensation Committee reviews, and makes recommendations to the board of
directors concerning, executive compensation policy and its implementation.
Audit Committee. The Audit Committee of the board of directors is
composed of Messrs. Breeden, Smith and Spangler. The Audit Committee is
responsible for, among other things, reviewing the structure of our internal
controls, including internal audit; considering and recommending to the board
the annual appointment of the external auditors; reviewing and recommending to
the board the terms of the annual external audit engagement; reviewing the
annual audit plan; reviewing our audited and unaudited financial statements;
reviewing non-audit service engagements of our external auditors; reviewing
compliance with regulatory requirements; reviewing compliance with polices and
practices involving ethics, conflicts and other such matters; and reviewing the
above activities of subsidiary companies. The Audit Committee meets and reports
to the board of directors no less than twice annually.
39
We have not entered into any contracts with directors for benefits upon
termination of service.
D. Employees
At December 31, 2000, 2001 and 2002, we employed 80, 105 and 110
persons, respectively. We consider our relations with our employees to be good.
E. Share Ownership
The following table presents information regarding the beneficial
ownership of our common shares by our directors and executive officers:
Number of Common
Name Shares Owned Percentage
------------------------------------------ ------------------------ ----------------
William P. Stewart (1) 4,182,711 9.06%
John C. Russell (2) 464,481 1.01%
John A. Allison (3) 523,458 1.13%
Peter Jan P. Rubingh (4) 730,419 1.58%
All other Directors and Executive
Officers as a group (5) 598,300 *
* Each individual's ownership is less than 1%.
(1) Includes 4,144,140 shares owned by trusts for which Mr. Stewart serves
as trustee (with respect to which Mr. Stewart disclaims beneficial
ownership) and 8,571 shares that may be purchased upon exercise of
currently exercisable options.
(2) Includes 125,000 shares held by a trust (with respect to which Mr.
Russell disclaims beneficial ownership) and 4,286 shares that may be
purchased upon exercise of currently exercisable options.
(3) Includes 8,571 shares that may be purchased upon exercise of currently
exercisable options.
(4) Includes 80,000 shares which are owned by two trusts established for
Mr. Rubingh's children, for which Mr. Rubingh is the trustee.
(5) Includes 28,143 shares that may be purchased upon exercise of currently
exercisable options.
Our directors and executive officers own options to purchase an
aggregate of 408,000 of our common shares. Each option vests in equal portions
on the first seven anniversaries of the grant date. 347,000 of these options
were granted on October 24, 2001 at an exercise price of $20.80 per share and
will expire on October 24, 2008. An additional 45,000, 6,000 and 10,000 of these
options were granted on May 1, 2002, August 20, 2002 and October 3, 2002 at
exercise prices of $28.42, $22.10 and $16.58, respectively, for an aggregate of
61,000 options. These options will expire on May 1, 2009, August 20, 2009 and
October 3, 2009, respectively.
W.P. Stewart & Co., Ltd. periodically sells common shares to its
employees and those of its affiliates at fair value for cash and/or installment
notes. The installment notes are full recourse, bear interest at 8.5% or 10% per
annum and are collateralized by the shares purchased. The principal amount of
the note is payable in 28 quarterly installments, subject to mandatory payment
in full upon termination of employment. Shares vest in 28 equal quarterly
installments. Unvested shares are, and vested shares may be, repurchased from
the employee upon termination. Different, but substantially equivalent, terms
may apply in respect of individuals employed in certain countries outside
Bermuda and the United States.
40
W.P. Stewart & Co., Ltd. 2001 Employee Equity Incentive Plan, as
amended
We operate a share option and restricted share plan, the W.P. Stewart &
Co., Ltd. 2001 Employee Equity Incentive Plan, as amended, to promote the
interests of W.P. Stewart and its shareholders by aiding us and our affiliates
in attracting and retaining employees and directors capable of assuring our
future success, by offering such persons incentives to put forth maximum efforts
for the success of our business, and by affording such persons an opportunity to
acquire a proprietary interest in our Company.
The plan was adopted by our board of directors and became effective on
July 24, 2001, and was approved by our shareholders at the annual general
meeting on May 3, 2002. The plan was amended on January 25, 2002. Our board of
directors may further amend, alter, suspend, discontinue or terminate the plan
at any time, except that no alteration or amendment will be effective without
shareholder approval if absent such approval:
o it would violate the rules or regulations of the New York
Stock Exchange or any other securities exchanges that are
applicable to us; or
o it would cause us to be unable, under the U.S. Internal
Revenue Code of 1986, as amended, to grant incentive stock
options under the plan.
The plan will continue in effect until July 23, 2004. No award will be
granted under the plan after the termination of the plan. Unless otherwise
expressly provided in the plan or in an award agreement, any award granted may
extend beyond the termination of the plan, and the authority of management and
our Compensation and Executive Committees to administer the plan and our board
of directors to amend it, will extend beyond the termination of the plan.
The shares available for awards under the plan will be authorized but
unissued shares of W.P. Stewart & Co., Ltd. or shares that will have been
previously reacquired by a subsidiary of ours. As originally adopted, the plan
provided for a maximum of 1,500,000 shares available for granting awards. The
amendment in January 2002 increased this number by 1,000,000 shares.
All of our or our affiliates' employees and all of our directors are
eligible to receive awards under the plan. In determining which eligible persons
shall receive an award and the terms of any award, the committee administering
the plan will periodically review the recommendations of management and may take
into account the nature of the services provided by the eligible persons, their
present and potential contributions to our success, and such other factors as
the committee, in its discretion, shall deem relevant. An incentive stock option
will not be granted to an employee of an affiliate unless the affiliate is also
our "subsidiary corporation" within the meaning of Section 424(f) of the
Internal Revenue Code of 1986, as amended, or any successor provision.
The plan is administered by our management, subject to oversight by the
Compensation and Executive Committees of our board of directors. Subject to
review and approval by the committee, as appropriate, management has the
authority to:
o designate participants;
o determine the type or types of awards to be granted to each
participant under the plan;
o determine the number of shares to be covered by (or the method
by which payments or other rights are to be calculated in
connection with) each award;
o determine the terms and conditions of any award or award
agreement;
41
o subject to certain conditions, amend the terms and conditions
of any award or award agreement and accelerate the
exercisability of any award or the lapse of restrictions
relating to any award;
o determine whether, to what extent and under what circumstances
awards may be exercised with the payment of cash, shares,
other securities, other awards or other property, or canceled,
forfeited or suspended;
o determine whether, to what extent and under what circumstances
cash, shares, other securities, other awards, other property
and other amounts payable by W.P. Stewart with respect to an
award under the plan shall be deferred either automatically or
at the election of the holder thereof or the committee;
o interpret and administer the plan and any instrument or
agreement, including any award agreement, relating to the
plan;
o establish, amend, suspend or waive such rules and regulations
and appoint such agents as it shall deem appropriate for the
proper administration of the plan; and
o make any other determination and take any other action that
the committee deems necessary or desirable for the
administration of the plan.
The plan permits the granting of:
o share options that are not intended to meet the requirements
for "incentive stock options" under Section 422 of the
Internal Revenue Code;
o share options that are "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code; and
o restricted shares.
Subject to limited exceptions permitted by the committee, awards may
not be transferred other than by will or by the laws of descent and
distribution. Except as otherwise provided in the plan, no award or right under
an award may be pledged, alienated, attached or otherwise encumbered, and any
attempt to pledge, alienate, attach or encumber an award will be void and
unenforceable against us or any of our affiliates.
The committee may waive any conditions of or our rights under any
outstanding award, prospectively or retroactively. Except as otherwise provided
in the plan or an award agreement, unless we or the committee obtains consent
from the participant, holder or beneficiary of the award, the committee may not
amend, alter, suspend, discontinue or terminate any outstanding award
prospectively or retroactively.
If the committee determines that any event affecting the shares, would
result in the dilution or enlargement of any of the benefits or potential
benefits intended to be made available under the plan, the committee will, in a
manner it deems equitable, adjust any or all of:
o the number and type of shares (or other securities or other
property) that may be made the subject of awards;
o the number and type of shares (or other securities or other
property) subject to outstanding awards; and
o the purchase or exercise price with respect to any award.
42
All awards under the plan are required to be evidenced by appropriate
agreements executed on our behalf and by the participants. Awards generally vest
over a seven-year period. The exercise price of a share option is not less than
the New York Stock Exchange closing price of our common shares on the date of
grant. Restricted shares may be purchased at a discount of up to 20% from the
New York Stock Exchange closing price value.
Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
The following table presents information regarding the beneficial
ownership of our common shares as of March 20, 2003 by persons or groups of
affiliated persons known to us to own more than 5% of our common shares. See
also Item 6 E above under the caption "Directors, Senior Management and
Employees - Share Ownership."
Name Number Percentage
- ----------------- -------------------------- ------------------------
WPS II, Inc. 19,775,834 42.8%
The above-listed beneficial owner has the same voting rights per share
as all other holders of common shares; however, our bye-laws specifically exempt
such holder from the limitations on voting power that may apply to other holders
if they become owners of more than a specified percentage of common shares. See
Item 3 D under the caption "Key Information - Risk Factors - Our bye-laws
restrict shareholders' voting rights."
As of March 26, 2003, we had 195 shareholders of record, of which 142,
owning approximately 91% of our common shares, were U.S. persons.
B. Related Party Transactions
In connection with purchases of shares of W.P. Stewart & Co., Ltd. and
its predecessors, since at least 1991, our employees, including our directors
and executive officers, have entered into loan agreements with, and signed
promissory notes to us in respect of some or all of the purchase price of such
shares. Most of our employees are or have been parties to such loans. In
connection with such share purchases, Messrs. Stewart, Russell, Breeden, Smith,
Chaar, Henderson, Macri, Ryan, Allison and Target and Ms. Leber have entered
into loan agreements with, and signed promissory notes to, the Stewart Group.
During 2002, Messrs. Stewart and Allison repaid their loans in full. Each of
these loans accrues interest at a rate of either 8.5% or 10% per annum. Pursuant
to Section 402 of the Sarbanes-Oxley Act of 2002, there have been no loans made
subsequent to July 30, 2002 to any directors or executive officers.
43
The table set forth below provides the details with respect to the
aggregate amount outstanding under these loan agreements and promissory notes as
of December 31, 2002 and the largest aggregate amount of indebtedness
outstanding under each of these loan agreements and promissory notes during the
year ended December 31, 2002 for each of the above-named directors and executive
officers.
Largest Amount
Outstanding During
Amount Outstanding the Year Ended
Name as of December 31, 2002 December 31, 2002
- ---------------------------------- ---------------------------------- ---------------------------
William P. Stewart $ 0 $ 495,000
John C. Russell 495,446 658,574
Richard C. Breeden 43,607 88,871
Henry B. Smith 68,214 83,950
Salim Chaar 726,786 825,000
Mark A. Henderson 568,000 688,000
Rocco Macri 744,691 928,298
Frederick M. Ryan 599,333 763,298
John A. Allison 0 495,000
Charles G.R. Target 446,250 558,638
Susan G. Leber 445,024 546,649
The lease agreement relating to W.P. Stewart & Co., Inc.'s office space
in New York covers space utilized by Stewart family interests that reimburse
W.P. Stewart & Co., Inc., on a monthly basis, for that portion of the rental and
other costs associated with the space so utilized. Such lease-related amount was
$144,619 for the year ended December 31, 2002. We believe that the reimbursement
amounts that we receive from the Stewart family interests for the utilization of
this space are as favorable as the amounts we could receive from an unaffiliated
party for utilization of the same space.
W.P. Stewart & Co., Ltd. owns approximately 40% of Bowen Asia Limited.
Ms. Lisa M. Stewart, the daughter of Mr. William P. Stewart, and Mr. Charles
G.R. Target, Ms. Stewart's husband and a Deputy Managing Director of W.P.
Stewart & Co., Ltd., together own a majority of the stock of Bowen Asia Limited.
We have been granted an option exercisable beginning in 2004 to expand our
ownership of Bowen Asia Limited to a majority interest. In addition to payments
in connection with our investment in Bowen Asia Limited, we pay solicitation,
sub-advisory and research fees to Bowen Asia Limited. Such fees were, in the
aggregate, $665,319 for the year ended December 31, 2002. We believe that the
solicitation, sub-advisory and research fees that we pay to Bowen Asia Limited
are as favorable as the fees we would pay to an unaffiliated party for similar
services. We have entered into an agreement with Bowen Capital Management, a
subsidiary of Bowen Asia Limited, which entitles us to receive solicitation fees
for client referrals to Bowen Capital Management. Total solicitation fees
received under the terms of this agreement were $26,117 for the year ended
December 31, 2002.
Since April 30, 1999, we have used an aircraft owned by Shamrock
Aviation, Inc. and have compensated Shamrock Aviation, Inc. for its use by
paying charter fees that we believe are more favorable to the Stewart Group than
the fees that would be paid to an unaffiliated charterer. Shamrock Aviation,
Inc. is owned by Mr. William P. Stewart and trusts for the benefit of his four
adult children. Mr. Stewart serves as President, and Mr. Gregory S. Stewart, his
son, serves as Vice President, of Shamrock
44
Aviation, Inc. We paid fees to Shamrock Aviation, Inc. in the amount of
$2,000,796 for the year ended December 31, 2002. In February 1999, we entered
into an agreement with Shamrock Aviation, Inc. in which Shamrock Aviation, Inc.
agreed to delay the sale of an aircraft owned by Shamrock Aviation, Inc. so that
such aircraft would continue to be available for use in our business. At that
time, Shamrock Aviation, Inc. agreed to release W.P. Stewart & Co., Inc. from
any and all obligations of approximately $37 million to participate in the
purchase of an additional aircraft. In return, we had agreed to indemnify
Shamrock Aviation, Inc. for any loss in value of the aircraft that Shamrock
Aviation, Inc. had agreed not to sell from the time the agreement was made until
the aircraft was sold or replaced. The value of that aircraft as of the date of
the agreement was estimated to be $27 million. In May 2002, in exchange for a
payment of $100,000, Shamrock released us from this agreement. We have an
agreement pursuant to which an entity affiliated with Shamrock Aviation, Inc.
has agreed to provide operational and maintenance services at cost for a
Challenger aircraft owned by one of our subsidiaries. These costs, reflected in
research and administration expenses, include $2,855,298 for the year ended
December 31, 2002. We believe that the terms of this transaction are more
favorable to us than the terms that we could obtain from an unaffiliated party
in a comparable transaction.
W.P. Stewart Fund Management Limited serves as the investment manager
to an Irish fund solely managed by WPS Investissements S.A., a Swiss investment
management firm. WPS Investissements S.A. is principally owned by Mr. William P.
Stewart III, a son of Mr. William P. Stewart. The Stewart Group has no ownership
interest in either the Irish fund or WPS Investissements S.A. W.P. Stewart Fund
Management Limited collects and remits to WPS Investissements S.A. all of the
advisory fees in respect of such fund. Such fees amounted to $31,871 for the
year ended December 31, 2002. In addition, we pay to WPS Investissements S.A.
solicitation fees in respect of certain accounts and an amount calculated on the
basis of a portion of the brokerage commissions paid by such fund and certain
accounts, as directed by those clients. Such payments amounted to $16,425 for
the year ended December 31, 2002. We believe that the payments made to WPS
Investissements S.A. are as favorable as those we would pay to an unaffiliated
party in a similar transaction.
W.P. Stewart & Co., Ltd. believes, upon advice of Nixon Peabody LLP,
special tax counsel, that, at the time of our merger with our U.S. predecessor
company, WPS II, Inc. qualified as an S corporation and our U.S. predecessor
company qualified as a "qualified subchapter S subsidiary" for U.S. federal
income tax purposes and that, accordingly, W.P. Stewart & Co., Ltd. incurred no
U.S. tax liability as a result of the Bermuda merger. Notwithstanding such
belief, WPS II, Inc. has agreed to indemnify W.P. Stewart & Co., Ltd. for any
harm suffered by W.P. Stewart & Co., Ltd. arising from any U.S. tax liability
imposed upon W.P. Stewart & Co., Ltd. as a result of our merger with our U.S.
predecessor company. In addition, certain stockholders of WPS II, Inc. have
agreed to severally guarantee their proportionate shares of the indemnity
obligation of WPS II, Inc. based on their interests in WPS II, Inc. at the time
of the merger, which represented an aggregate of approximately 92% of the amount
which may be payable by WPS II, Inc. under the indemnity.
The Company pays Carl Spangler Kapitalanlageges. m.b.H., which is
controlled by Bankhaus Carl Spangler & Co. AG, the Chief Executive Officer of
which is Heinrich Spangler, one of our directors, fees for solicitation
services. These fees amounted to $631,756 for the year ended December 31, 2002.
Certain directors of W.P. Stewart & Co., Ltd. serve as directors of
funds from which we have received investment advisory fees, fund management
fees, subscription fees and commissions. Such fees and commissions were
$5,743,933 for the year ended December 31, 2002.
The Company owns a 40% interest in Kirk Management Ltd., a real estate
joint venture, incorporated in Bermuda. The remaining 60% interest is owned by
The Bank of Bermuda, of which one of our directors is the Chief Executive
Officer. Included in receivables from affiliates, net, is a subordinated loan of
$212,526 and accrued interest on such loan in the amount of $34,132 due from
Kirk
45
Management Ltd. The loan has no fixed repayment date. Kirk Management Ltd. also
owns and leases to W.P. Stewart & Co., Ltd. its Hamilton, Bermuda headquarters.
The lease expires in 2020 and calls for annual rent of approximately $180,000.
The Company leases its office space in The Netherlands from Duinzigt I,
a company owned by the former principals of TPR & Partners N.V., including one
of our Deputy Managing Directors. Total rent expense for the year ended December
31, 2002 was $135,274.
Appleby, Spurling & Kempe, a law firm of which Richard D. Spurling, one
of our directors, is a partner, and its affiliate A.S & K. Services Ltd. provide
legal and corporate administrative and secretarial services to the Company. Fees
for such services amounted to $29,648 for the year ended December 31, 2002.
Included in investments available for sale at December 31, 2002 is an
amount of $681,073, which is an investment in a fund managed by W.P. Stewart
Fund Management Limited, an indirect wholly-owned subsidiary of W.P. Stewart &
Co., Ltd.
C. Interests of Experts and Counsel
Not Applicable.
Item 8. Financial Information
A. Consolidated Statement and Other Financial Information
See pages F-1 to F-23.
We currently have no pending litigation of a material nature.
The holders of our common shares are entitled to receive, on a pro rata
basis, dividends when, as and if declared by our board of directors. Dividends
may be paid only in accordance with the Companies Act 1981 of Bermuda, which
provides that dividends and other distributions to shareholders may not be paid
if there are reasonable grounds for believing that:
o W.P. Stewart & Co., Ltd. is, or would after the dividend
payment be, unable to pay its liabilities as they become due;
or
o the realizable value of W.P. Stewart & Co., Ltd.'s assets
after such payment would be less than the aggregate of its
liabilities and its issued share capital and share premium
accounts.
W.P. Stewart & Co., Ltd.'s ability to declare dividends on the common
shares may also be limited by regulatory restrictions derived from the net
capital rules of various regulatory bodies applicable to W.P. Stewart & Co.,
Ltd. and its subsidiaries. Rights to dividends and distributions that have not
been claimed within six years after the date on which they were declared revert
to W.P. Stewart & Co., Ltd.
We have a policy of declaring quarterly dividends on the common shares.
We expect that the amount of those dividends will be determined as approximately
$1.20 per annum. We paid a dividend of $0.30 per share in January 2003 and
currently anticipate similar dividends in April, July and October of this year.
However, the declaration and payment of dividends to holders of common shares is
in the discretion of the board of directors and depends on our capital
requirements, operating and financial condition and business plan at the time,
legal restrictions, regulatory restrictions and such other factors as the board
of directors may deem relevant.
46
B. Significant Changes
Not Applicable
Item 9. The Offer and Listing
Not Applicable, except for Items 9.A.4 and 9.C.
Trading Markets
Our common shares, par value US $0.001 per share, have traded on the
New York Stock Exchange under the symbol "WPL" since December 8, 2000 and have
been listed on the Bermuda Stock Exchange under the symbol "WPS" since December
11, 2000. Prior to December 8, 2000, there was no established market for our
common shares. On March 27, 2002, the last reported sale price for our common
shares on the New York Stock Exchange was $17.20 per share. As of that date
there had been no trading of our common shares on the Bermuda Stock Exchange.
Certain historical market price data is set forth below, with certain prices for
2000 and 2001 rounded to the nearest hundredth of a dollar.
New York Stock Exchange
----------------------------------
Period High Low
- ---------------------------------------- --------------- ---------------
Annual
2000 $27.12 $22.69
2001 $29.62 $18.01
2002 $31.73 $14.35
Quarter
First Quarter 2001 $29.62 $20.50
Second Quarter 2001 $27.25 $20.50
Third Quarter 2001 $26.50 $18.01
Fourth Quarter 2001 $26.50 $19.25
First Quarter 2002 $31.73 $25.25
Second Quarter 2002 $30.40 $24.60
Third Quarter 2002 $25.44 $14.35
Fourth Quarter 2002 $21.02 $14.85
Month
September 2002 $21.10 $16.32
October 2002 $18.15 $14.85
November 2002 $20.71 $18.14
December 2002 $21.02 $17.35
January 2003 $20.55 $15.76
February 2003 $16.79 $15.10
March 1 - 27, 2003 $18.19 $14.94
47
Item 10. Additional Information
A. Share Capital
Not Applicable.
B. Memorandum and Articles of Association
Organization and Register
W.P. Stewart & Co., Ltd. is a company incorporated under the Companies
Act 1981 of Bermuda. It is registered in the Register maintained by the Bermuda
Registrar of Companies under the entry number "EC25146."
Objects and Purposes
Clause 6 of our Memorandum of Association states that W.P. Stewart &
Co., Ltd. was formed for the following objects:
o To carry on business as a holding company and to acquire and
hold shares, stocks, debenture stock, bonds, mortgages,
obligations and securities of any kind issued or guaranteed by
any company, corporation or undertaking of whatever nature and
wherever constituted or carrying on business, and shares,
stock, debentures, debenture stock, bonds, obligations and
other securities issued or guaranteed by any government,
sovereign ruler, commissioners, trust, local authority or
other public body, whether in Bermuda or elsewhere, and to
vary, transpose, dispose of or otherwise deal with from time
to time as may be considered expedient any of our investments
for the time being;
o To acquire any such shares and other securities as are
mentioned in the preceding paragraph by subscription,
syndicate participation, tender, purchase, exchange or
otherwise and to subscribe for the same, either conditionally
or otherwise, and to guarantee the subscription thereof and to
exercise and enforce all rights and powers conferred by or
incident to the ownership thereof;
o To co-ordinate the administration, policies, management,
supervision, control, research, planning, trading and any and
all other activities of any company or companies now or
hereafter incorporated or acquired which may be or may become
a company, wherever incorporated, which is or becomes a
holding company or a subsidiary of, or affiliated with, us
within the meanings respectively assigned to those terms in
the Companies Act 1981 or, with the prior written approval of
the Minister of Finance, any company or companies now or
hereafter incorporated or acquired with which we may be or may
become associated;
o To act as sponsors or representatives for any company, unit
trust, partnership or other entity seeking a listing of its
shares, units or other instruments on any stock exchange, and
to act as agent or representative of any company listed on any
stock exchange and to arrange and sponsor public and private
issues of shares and loan capital and to negotiate and
underwrite such issues;
o To act as agents for the sale and purchase of any stocks,
shares or securities, or for any other monetary or mercantile
transaction and as managers and investment advisers for
48
any company, partnership, public or private body, association,
individual or entity wherever incorporated, formed or based
outside Bermuda and, with the prior permission in writing of
the Minister of Finance for any person or any class or group
of persons incorporated, formed or based in Bermuda;
o To act as underwriters, sponsors and agents for any government
and other authority and, for any person and, with the prior
permission in writing of the Minister of Finance, any person
incorporated, formed or based in Bermuda;
o To provide financial services, advice and facilities of every
description, including (but without limiting the generality of
the foregoing words) all these capable of being provided by
stockholders, stockjobbers, promoters and managers of
investment vehicles, investment media, financial advisers,
underwriters and issuing houses to any person and, with the
prior permission in writing of the Minister of Finance, any
persons incorporated, formed or based in Bermuda;
o To invest the funds of or available to us in the share or loan
capital of any other company, partnership or other enterprise
wherever incorporated, formed or carrying on business, and in
the bonds or other obligations of any authority, undertaking
or corporation, whether public or private; and
o As set forth in paragraphs (b) to (n) and (p) to (u) inclusive
in the Second Schedule to the Companies Act 1981.
Directors' Interests
Pursuant to the terms of clause 96 of our bye-laws, a director shall
not vote at a meeting of the board of directors or of a committee of the board
of directors on any resolution concerning a matter in which he has a material
interest unless such interest arises only because the situation falls within one
or more of the following:
o the resolution relates to our giving the director a guarantee,
security or indemnity in respect of a liability incurred by
him for our benefit;
o the resolution relates to our giving a third party a
guarantee, security or indemnity in respect of an obligation
of ours for which the director has assumed responsibility
under a guarantee or indemnity or by the giving a security;
o the director's interest arises in relation to the subscription
or purchase by him of our securities pursuant to a general
offer to our shareholders or to the public;
o the director's interest arises from being a participant in the
underwriting of any of our securities;
o the resolution relates to a proposal concerning another
corporation in which he holds less than 1% of the shares;
o the resolution relates to a retirement benefits scheme which
has been approved by the authorities of any country for tax
purposes;
49
o the resolution relates to any contract or arrangement for the
benefit of our employees and does not provide the director any
advantage or privilege not accorded to the employees; or
o any proposal concerning any insurance which we are empowered
to purchase for the benefit of any of our directors.
The board of directors may exercise all the powers of the company to
borrow money and to mortgage or charge all or any part of our undertaking,
property and assets and to issue debentures and other securities, whether
outright or as collateral security for any debt, liability or obligation of ours
or of any other person.
Shareholders' Rights
The holders of our common shares are entitled to receive, on a pro rata
basis, dividends when, as and if declared by our board of directors. Dividends
may be paid only in accordance with the Companies Act 1981 of Bermuda which
provides that dividends and other distributions to shareholders may not be paid
if there are reasonable grounds for believing that:
o W.P. Stewart & Co., Ltd. is, or would after the dividend
payment be, unable to pay its liabilities as they become due;
or
o the realizable value of W.P. Stewart & Co., Ltd.'s assets
after such payment would be less than the aggregate of its
liabilities and its issued share capital and share premium
accounts.
W.P. Stewart & Co., Ltd.'s ability to declare dividends on the common
shares may also be limited by regulatory restrictions derived from the net
capital rules of various regulatory bodies applicable to W.P. Stewart & Co.,
Ltd. and its subsidiaries. Rights to dividends and distributions that have not
been claimed within six years after the date on which they were declared revert
to W.P. Stewart & Co., Ltd.
Subject to the provisions set forth below and any other special rights
or restrictions as to voting for the time being attached to any class of shares
by or in accordance with our bye-laws, at any general meeting on a poll, every
shareholder who is present in person or by proxy shall have one vote for every
common share of which such person is the holder. Most matters to be approved by
holders of common shares require approval by a simple majority vote of the
common shares represented at the shareholders' meeting. A resolution passed by
the holders of a majority of the issued common shares either in person or by
proxy at a general meeting is required to approve an amalgamation with another
company. Shareholders do not have cumulative voting rights. Shareholders have
the power to elect directors, appoint auditors and make changes in the amount of
authorized share capital of W.P. Stewart & Co., Ltd. The current maximum number
of directors is 10; however seven directors have been elected. All directors are
elected at each annual general meeting, except that the board of directors may
fill interim vacancies (including the vacancies caused by the difference between
the maximum and actual numbers of directors) between general meetings.
Our bye-laws limit the voting power of natural persons to 5% of all
votes attributable to our outstanding shares (including the common shares) and
the voting power of other entities, "groups" (as defined in the Securities
Exchange Act of 1934) and persons other than natural persons to 9.5% of the
votes attributable to our outstanding shares. These limitations apply regardless
of how many common shares are actually owned or controlled by a shareholder.
These restrictions, however, will not apply to:
o WPS II, Inc.;
50
o Other shareholders or groups of shareholders who were
shareholders of W.P. Stewart & Co., Ltd. immediately before
our initial public offering; and
o Additional persons, entities or groups that are designated by
our board of directors.
The votes that could have been cast by shareholders who are subject to
these voting restrictions will be allocated to the other shareholders pro rata
based on the number of shares they hold.
However, no shareholder subject to these restrictions may be allocated
additional voting rights to the extent that the allocation would cause that
shareholder to have more than 5% (for natural persons) or 9.5% (for legal
persons, entities or groups) of the total voting power. This voting limitation
was put in place to reduce the likelihood of our becoming a controlled foreign
corporation for U.S. tax purposes. See Item 3 D under the caption "Risk Factors
- - Our U.S. tax status could be challenged..." and Item 10 E under the caption
"Taxation - United States - Controlled Foreign Corporation Rules" for a
discussion of the tax consequences associated with our becoming a controlled
foreign corporation.
Our bye-laws also limit the overall voting power of all persons,
entities or groups to 20% of the total number of all votes attributable to our
outstanding shares (including the common shares). These limitations apply
regardless of how many common shares are actually owned or controlled by a
shareholder and regardless of whether the voting restrictions described in the
previous paragraph apply to that shareholder. These restrictions, however, will
not apply to:
o WPS II, Inc. or its affiliates;
o Direct or indirect subsidiaries of W.P. Stewart & Co., Ltd.;
o New or existing employee benefit plans of W.P. Stewart & Co.,
Ltd., as may be designated by our board of directors; and
o Other persons, entities or groups that are designated by our
board of directors.
If W.P. Stewart & Co., Ltd. is wound up, the liquidator may, with the
sanction of a resolution of shareholders, divide among the shareholders in kind
all or part of our assets and may, with that sanction, vest all or part of the
assets in trustees of trusts for the benefit of the shareholders in the
liquidator's discretion, provided that a shareholder may not be compelled to
accept any securities or other assets which would subject that shareholder to
liability.
Changes in Shareholders' Rights
Any change in the rights relating to the common shares requires either
the adoption of a resolution by the holders of a majority of the common shares
at a duly held meeting of the common shareholders of W.P. Stewart & Co., Ltd. or
the written consent of the holders of not less than 75% of the common shares.
General Meetings of Shareholders
The annual general meeting of shareholders shall be held at such time
and place as the board of directors shall appoint. The board may convene special
general meetings of shareholders on its own initiative or when requisitioned by
shareholders in accordance with applicable Bermuda law. Under the Companies Act
1981 of Bermuda, the directors of the Company are required, on the request of
shareholders holding not less than 10% of the paid-up voting share capital of
the Company, to convene a special general meeting of the Company for the purpose
stated in the request.
51
The quorum required for a meeting of shareholders consists of at least
two shareholders present in person or by proxy representing not less than
one-third in nominal value of the total issued common shares. Shareholders'
meetings are convened upon advance notice of at least 14 days.
No Limitation on Foreign Ownership
There are no limitations under Bermuda law or our memorandum of
association on the rights of persons who are not citizens or residents of
Bermuda, as such, to hold or vote our shares.
Change in Control
There are no provisions in our memorandum of association or bye-laws
that would have the effect of delaying, deferring or preventing a change in
control of W.P. Stewart & Co., Ltd. and that would only operate with respect to
an amalgamation, acquisition or corporate restructuring involving it or any of
its subsidiaries.
Disclosure of Share Holdings
Our bye-laws do not require shareholders to disclose their
shareholdings.
As an exempted company, W.P. Stewart & Co., Ltd. is exempted from
Bermuda laws which restrict the percentage of share capital that may be held by
non-Bermudians, but, as an exempted company, we may not, except with the express
authorization of the Bermuda legislature or under a license granted by the
Minister of Finance of Bermuda, participate in certain business transactions
including:
o the acquisition or holding of land in Bermuda (except as
required for our business and held by way of lease or tenancy
for terms of not more than 50 years or with the consent of the
Minister of Finance of Bermuda, as required to provide
accommodation or recreational facilities for our employees and
held by way of lease or tenancy for terms of not more than 21
years);
o the taking of mortgages on land in Bermuda to secure an amount
in excess of BD$50,000 without the consent of the Minister of
Finance of Bermuda;
o the acquisition of any bonds or debentures secured on any land
in Bermuda except bonds or debentures issued by the Bermuda
government or a public authority; or
o the carrying on of business of any kind in Bermuda other than
with persons outside Bermuda, except in certain limited
circumstances such as doing business with another exempted
company in furtherance of the business of W.P. Stewart & Co.,
Ltd. carried on outside Bermuda.
C. Material Contracts
Pursuant to an agreement to which we became party on October 30, 1998,
shareholders of W.P. Stewart & Co., Ltd. who currently own or control
approximately 20% of the outstanding common shares have certain demand and
piggyback registration rights with respect to their common shares. The demand
registration rights will only be available if a sufficient number of
shareholders with similar rights join in the request so that at least 15% of the
outstanding common shares are to be registered; and the offerings will be firm
commitment underwritten offerings.
W.P. Stewart & Co., Ltd. exchanged 1,152,000 of its shares for 50% of
the issued and outstanding capital stock of TPRS Services N.V. pursuant to a
share exchange agreement dated as of May
52
19, 1999 with TPR & Partners N.V. and TPR Curacao N.V. On December 29, 2000,
W.P. Stewart & Co., Ltd. exchanged 814,000 of its shares for the remaining 50%
of the issued and outstanding shares of TPRS Services N.V. pursuant to a share
exchange agreement with TPR & Partners N.V. The parties also entered into a
stock restriction agreement under which, if certain performance criteria are not
met by TPRS Services N.V., W.P. Stewart & Co., Ltd. may repurchase up to 20% of
the 814,000 shares, for US$0.001 per share, on each of July 1 of 2003 and 2004.
The agreement imposes certain restriction on transfers of shares by TPR &
Partners N.V. and its permitted assigns.
W.P. Stewart & Co., Ltd. exchanged 898,831 of its shares for all of the
issued and outstanding shares of NS Money Management Ltd. pursuant to a share
exchange agreement dated as of June 1, 1999 with Stewart Notz Stucki Ltd. The
parties also entered into a stock call agreement under which, if certain
performance criteria were not met by NS Money Management Ltd., W.P. Stewart &
Co., Ltd. could repurchase up to 179,766 of the W.P. Stewart & Co., Ltd. shares
for US$0.001 per share, on January 1, 2003. In 2003, pursuant to the provisions
of the stock call agreement, 35,000 common shares were reacquired by W.P.
Stewart & Co., Ltd.
Pursuant to an agreement with Bowen Asia Limited and its shareholders,
dated as of June 30, 1999, W.P. Stewart & Co., Ltd., increased its total
investment in Bowen Asia Limited from 21.9% to 40%. The price of this increase
was $500,000 and 27,769 of our shares. We have the option (exercisable from June
30, 2004 to June 30, 2009) to purchase such number of shares of Bowen as would
increase our ownership to 50.1% of Bowen's issued and outstanding shares. If we
exercise this option, the Bowen shareholders will have the option to put their
remaining shares in Bowen to us. In either case the option price per share would
equal 15 times Bowen's trailing four quarters' after-tax earnings (or, if
greater, $10 million in the case of our purchase option), divided by the number
of outstanding Bowen shares. The agreement imposes limitations on any transfers
or issuances of Bowen shares. If there is a change of control of W.P. Stewart &
Co., Ltd., Bowen has the right to repurchase all Bowen shares then owned by W.P.
Stewart & Co., Ltd. Bowen and its shareholders have a right of first refusal in
the event we propose to sell any of our Bowen shares. The agreement also calls
for us to have representation on Bowen's board of directors.
By agreement dated as of December 7, 2000, WPS II, Inc. agreed to
indemnify W.P. Stewart & Co., Ltd. for any harm suffered by W.P. Stewart & Co.,
Ltd. arising from any U.S. tax liability imposed upon W.P. Stewart & Co., Ltd.
as a result of our merger with our U.S. predecessor company. In addition,
certain stockholders of WPS II, Inc. have agreed to severally guarantee their
proportionate shares of the indemnity obligation of WPS II, Inc. based on their
interests in WPS II, Inc. at the time of the merger, which represented an
aggregate of approximately 92% of the amount which may be payable by WPS II,
Inc. under the indemnity. WPS II, Inc. also has agreed to continue to own at
least 7,000,000 of our shares during the period of the indemnity.
Pursuant to a share exchange agreement with TPR Holding B.V. dated as
of November 14, 2001, W.P. Stewart and Co., Ltd. exchanged 330,000 of its shares
for 75% of the outstanding shares of W.P. Stewart Asset Management (Europe),
Ltd., which in turn owns all of the shares of W.P. Stewart Asset Management
(Europe) N.V. (formerly TPR & Partners N.V.). The parties also entered into a
deferred share exchange agreement as of November 14, 2001 pursuant to which W.P.
Stewart & Co., Ltd. agreed to acquire the remaining shares of W.P. Stewart Asset
Management (Europe), Ltd. as of June 30, 2006 at a fair value price determined
on that date and payable in shares of W.P. Stewart & Co., Ltd.
53
D. Exchange Controls
Because we have been designated as non-resident in Bermuda for exchange
control purposes, there are no restrictions on our ability to transfer funds in
and out of Bermuda or to pay dividends to non-Bermuda residents who are holders
of our shares, other than in local Bermuda currency.
E. Taxation
The following summary describes the principal tax consequences under
U.S. federal income tax law and the laws of Bermuda of the ownership and
disposition of the common shares. Except where otherwise noted, this summary
does not describe any tax consequences arising under the law of any State,
locality or taxing jurisdiction other than Bermuda or the U.S. federal
government. There is no income tax treaty between Bermuda and the United States.
The discussion below is based upon the nature and conduct of our
business, which may change, and upon our understanding of our position under the
tax laws of the various countries in which we have assets or conduct activities,
which position is subject to review and possible challenge by taxing authorities
and to possible changes in law, which may have retroactive effect.
Bermuda
We have obtained from the Minister of Finance of Bermuda under the
Exempted Undertakings Tax Protection Act 1966 (as amended), an undertaking that,
in the event that Bermuda enacts any legislation imposing tax computed on
profits, income, any capital asset, gain or appreciation, or any tax in the
nature of estate duty or inheritance tax, then the imposition of such tax will
not be applicable to the shares, debentures or other obligations of W.P. Stewart
& Co., Ltd., until at least March 28, 2016. Under current Bermuda law, no
income, withholding or other taxes or stamp or other duties are imposed upon the
issue, transfer or sale of the common shares or on any payments thereunder.
United States
This summary is based on the Internal Revenue Code, Treasury
regulations and rulings promulgated thereunder and judicial decisions in effect
or available on the date of this Annual Report. All of the foregoing are subject
to change with or without retroactive effect, which could affect the continued
accuracy of this summary. No advance rulings have been or will be sought from
the IRS regarding the matters discussed in this Annual Report. Accordingly, you
are urged to consult your tax adviser to determine the U.S. federal, state,
local and foreign income and other tax consequences to you of acquiring, holding
and disposing of common shares.
U.S. Holders. As used in this section, the term "U.S. person" means for
U.S. federal income tax purposes:
o a citizen or resident of the United States or any political
subdivision thereof;
o a corporation or partnership created or organized in the
United States or under the laws of the United States or of any
State; or
o an estate or trust the income of which is subject to U.S.
federal income taxation regardless of its source.
The term "U.S. holder" means a person, a holder or a beneficial owner
of common shares who is a U.S. person. A "non-U.S. holder" is any holder who is
not a U.S. holder.
54
In general, U.S. holders will include dividends in income, in
accordance with their method of accounting, as ordinary income. Assuming the
common shares are held as a capital asset, gain or loss on a subsequent sale or
other taxable disposition of the stock will be a capital gain or loss, which
will be long term if such stock is held for more than one year. At least a
portion of any dividend will constitute foreign source dividend income, which
may be relevant for a U.S. holder's foreign tax credit limit computation.
Passive Foreign Investment Company Rules. W.P. Stewart & Co., Ltd.,
based on the nature of its assets and income, does not believe it should
currently be classified as a "passive foreign investment company" (as defined
below). However, it is possible, though W.P. Stewart & Co., Ltd. believes it
unlikely, that W.P. Stewart & Co., Ltd. could be classified as a passive foreign
investment company in the future.
A foreign corporation will be treated as a passive foreign investment
company if either 75% or more of its gross income is "passive income" or at
least 50% of the average percentage of its assets are assets which produce or
are held for the production of "passive income" (hereinafter "passive assets").
"Passive income" is generally defined as any income included in the definition
of "foreign personal holding company income" under Section 954(c) of the
Internal Revenue Code. Among these items are income consisting of:
o dividends, interest, rent, royalties; and
o gains and losses from the sale of property giving rise to the
income described in the preceding item, as well as other types
of income not here relevant.
For these purposes, cash held by a foreign corporation generally
constitutes a passive asset, but trade or service receivables resulting from a
business which produces non-passive income does not. Intangibles that produce
identifiable types of income (including goodwill) are similarly characterized in
terms of the type of income they produce. A foreign corporation owning at least
25% by value of the stock of another corporation is treated, for purposes of
passive foreign investment company classification, as if it held its
proportionate share of such corporate assets and received directly its
proportional share of such corporation's income.
If a foreign corporation constitutes a passive foreign investment
company, any U.S. person holding any amount of stock in such corporation will
generally be subject to an interest charge on "excess distributions" of the
passive foreign investment company. Alternatively, such U.S. person may elect to
be taxed currently on its share of passive foreign investment company income by
being treated as receiving a distribution of its pro rata share of the passive
foreign investment company earnings and profits. A U.S. person may also make a
"mark-to-market" election with respect to "marketable" passive foreign
investment company stock to recognize (at the close of each taxable year) any
excess of the fair market value of such stock over its adjusted basis as
ordinary income and any excess of the adjusted basis of such stock over its fair
market value as ordinary loss.
Controlled Foreign Corporation Rules. Our bye-laws contain provisions
which attempt to prevent us from becoming a "controlled foreign corporation."
Specifically, the provisions restrict the voting rights associated with voting
shares in the case of any shareholder who acquires sufficient shares to become a
U.S. Shareholder (as defined below) if the effect of such acquisition would be
to cause us to become a controlled foreign corporation. In any event, the
controlled foreign corporation rules will not apply to a U.S. holder that never
owns 10% or more of the common shares.
In general, a foreign corporation will constitute a controlled foreign
corporation if more than 50% of the shares of the corporation, measured by
reference to combined voting power or value, is held, directly or indirectly, by
"U.S. Shareholders." A "U.S. Shareholder", for this purpose, is any person that
55
is a U.S. person for U.S. federal income tax purposes that possesses 10% or more
of the combined voting power of all classes of shares of a corporation. Neither
W.P. Stewart & Co., Ltd. nor any of its foreign affiliates is a controlled
foreign corporation.
If W.P. Stewart & Co., Ltd. (or any foreign affiliate) were in the
future to constitute a controlled foreign corporation, a U.S. Shareholder of
W.P. Stewart & Co., Ltd. would be treated, subject to certain exceptions, as
receiving a dividend at the end of our taxable year in an amount equal to that
person's pro rata share of the "subpart F income" and certain U.S. source income
of W.P. Stewart & Co., Ltd. (or any controlled foreign corporation foreign
affiliate), whether or not distributed. Among other items, and subject to
certain exceptions, "subpart F income" includes dividends, interest, annuities,
gains from the sale of shares and securities, certain gains from commodities
transactions, certain types of insurance income and income from certain
transactions with related parties. If W.P. Stewart & Co., Ltd. (or any foreign
affiliate) were in the future to constitute a controlled foreign corporation, we
believe only a relatively small portion of our income would be subpart F income.
In addition, however, if a U.S. person owning 10% or more of the
combined voting power of all classes of stock entitled to vote of a controlled
foreign corporation sells or exchanges such stock, the gain recognized is
treated as ordinary dividend income (and not capital gain) to the extent of the
earnings and profits of such corporation accumulated after December 31, 1962 and
during the period(s) the stock was held by such U.S. person while such foreign
corporation was a controlled foreign corporation.
If W.P. Stewart & Co., Ltd. were treated as a controlled foreign
corporation, a U.S. Shareholder of W.P. Stewart & Co., Ltd. would be taxable on
the subpart F income of W.P. Stewart & Co., Ltd. under rules described in the
preceding paragraph and not under the passive foreign investment company rules
previously described.
Backup Withholding. A U.S. holder of common shares may, under certain
circumstances, be subject to "backup withholding" at the rate of 31% with
respect to dividends paid on the common shares or the proceeds of sale, exchange
or redemption of common shares unless such U.S. holder:
o is a corporation or comes within certain other exempt
categories, and, when required, demonstrates this fact; or
o provides a correct taxpayer identification number, certifies
that such holder is not subject to backup withholding and
otherwise complies with applicable requirements of the backup
withholding rules.
Any amount withheld under these rules will be creditable against the
U.S. holder's U.S. federal income tax liability. A U.S. holder who does not
provide a correct taxpayer identification number may be subject to penalties
imposed by the IRS. Assuming proper shareholder information is provided, we
believe that back-up withholding will not be required.
Non-U.S. Holders. Dividends paid by foreign corporations are treated as
income from U.S. sources and subject to withholding at a rate of 30% if 25% or
more of the foreign corporation's gross income for the three-year period (or
such part of the period such corporation was in existence) ending with the close
of its taxable year preceding the declaration of such dividend was effectively
connected (or treated as effectively connected) with the conduct of a U.S. trade
or business, but only in an amount that bears the same ratio to the dividend as
the gross income which is effectively connected with a U.S. trade or business
bears to the foreign corporation's gross income from all sources. The Internal
Revenue Code provides, however, that if a foreign corporation is "subject to"
the branch profits tax, then the above-described withholding tax does not apply.
56
Accordingly, because W.P. Stewart & Co., Ltd. and W.P. Stewart Asset
Management Ltd., if more than 25% of their gross income were deemed connected
with the United States, will be subject to the branch profits tax we do not
believe that non-U.S. holders will be subject to the 30% withholding tax.
Moreover, gains and losses on the sale or exchange of common shares
generally will not be subject to U.S. income or withholding tax unless:
o in the case of a non-U.S. holder who is an individual, such
non-U.S. holder is present in the United States for a period
or periods aggregating 183 days or more during the taxable
year of disposition (in which case such individual may be
taxed as a U.S. holder in any event); or
o any gain is effectively connected with the non-U.S. holder's
trade or business in the United States.
The value of common shares should not be includible in the gross estate
of any individual non-U.S. holder for purposes of determining such non-U.S.
holder's liability, if any, for U.S. estate tax on non-resident alien
individuals.
F. Dividends and Paying Agents
Not Applicable.
G. Statements by Experts
Not Applicable.
H. Documents on Display
You may read and copy any documents filed by W.P. Stewart & Co., Ltd.
at the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information about the
public reference room. You may also access our filings electronically at
www.sec.gov. Our filings with the SEC are also available to the public through
the New York Stock Exchange, 20 Broad Street, New York, New York 10005, on which
the common shares are listed.
I. Subsidiary Information
Not Applicable
Item 11. Qualitative and Quantitative Disclosures About Risk
Not Applicable
Item 12. Description of Securities Other Than Equity Securities
Not Applicable.
Part II.
Item 13. Default, Dividend Arrearages and Delinquencies
Not Applicable.
57
Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds
Not Applicable.
Item 15. Controls and Procedures
Under the supervision and with the participation of our management,
including our Chairman and Chief Executive Officer and our Deputy Managing
Director--Chief Financial Officer, we evaluated the effectiveness of the design
and operation of our disclosure controls and procedures (as defined in Rule
13a-14 under the Securities Exchange Act of 1934) as of a date (the "Evaluation
Date") within 90 days prior to the filing of this report on Form 20-F. Based
upon that evaluation, the Chairman and Chief Executive Officer and the Deputy
Managing Director--Chief Financial Officer concluded that, as of the Evaluation
Date, our disclosure controls and procedures were effective in timely alerting
them to the material information relating to us (or our consolidated
subsidiaries) required to be included in our periodic SEC filings.
There were no significant changes made in our internal controls or in
other factors that could significantly affect those controls subsequent to the
date of their evaluation.
Item 16. [Reserved]
Part III.
Item 17. Financial Statements
See pages F-1 through F-23, incorporated herein by reference.
Item 18. Financial Statements
Not Applicable
Item 19. Exhibits
1.1* Memorandum of Association
1.2* Bye-Laws
2.1** Form of Stock Certificate
4.1* 1996 Shareholders Agreement among Global Reach, Limited and
Shareholders of Global Reach Limited
4.2* Share Exchange Agreement, dated as of June 1, 1999, between
W.P. Stewart & Co. Ltd. and Stewart Notz Stucki Ltd.
4.3* Purchase Agreement, dated as of June 30, 1999, between
W.P. Stewart & Co., Ltd. and Bowen Asia Limited.
4.4*** Indemnity Agreement by WPS II, Inc. and the Guarantors thereunder
in favor of W.P. Stewart & Co., Ltd.
4.5**** Share Exchange Agreement, dated as of December 29, 2000, between
W.P. Stewart & Co., Ltd. and TPR & Partners N.V.
4.6**** Amendment to 1996 Shareholder Agreement
58
4.7# Share Exchange Agreement, dated as of November 14, 2001, between
W.P. Stewart & Co., Ltd. and TPR Holding B.V.
4.8# Deferred Share Exchange Agreement, dated as of November 14, 2001,
among W.P. Stewart & Co., Ltd., W.P. Stewart Asset Management
(Europe), Ltd. and TPR Holding B.V.
8.1 Subsidiaries of the Registrant
10.1 Consent of PricewaterhouseCoopers LLP
10.2 Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
10.3 Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
- --------------------------
* Previously filed on November 21, 2000 as an exhibit to the Registrant's
Registration Statement on Form F-1 (333-49420).
** Previously filed on December 6, 2000 as an exhibit to the Registrant's
Registration Statement on Form 8-A/A (011-16245).
*** Previously filed on December 6, 2000 as an exhibit to the Registrant's
Registration Statement on Form F-1 (333-49420).
**** Previously filed on March 30, 2001 as an exhibit to the Registrant's
Report on Form 20-F (011-16245).
# Previously filed on March 29, 2002 as an exhibit to the Registrant's
Report on Form 20-F (011-16245).
59
Index To Consolidated
Financial Statements
Page
----
Consolidated Financial Statements as of, and for the three
years ended December 31, 2002, 2001 and 2000
Report of Independent Accountants F-2
Consolidated Statements of Financial Condition F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Changes in Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to the Consolidated Financial Statements F-7 to F-23
F-1
Report of Independent Accountants
---------------------------------
To the Board of Directors and
Shareholders of W.P. Stewart & Co., Ltd.
In our opinion, the accompanying consolidated statements of financial
condition and the related consolidated statements of operations, changes in
shareholders' equity and of cash flows appearing on pages F-3 through F-23
present fairly, in all material respects, the financial position of W.P. Stewart
& Co., Ltd. and its subsidiaries (the "Company") at December 31, 2002, 2001 and
2000, and the results of its operations and its cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 28, 2003
F-2
W.P. Stewart & Co., Ltd.
Consolidated Statements of Financial Condition
December 31, 2002, 2001 and 2000
2002 2001 2000
------------- ------------- -------------
Assets:
Cash and cash equivalents $ 34,426,192 $ 62,302,344 $ 56,764,420
Fees receivable 2,634,631 2,952,580 3,277,399
Receivable from broker-dealer 866,462 582,091 1,605,520
Investments in unconsolidated affiliates (net of accumulated amortization
of $164,744, $82,372 and $0 for 2002, 2001 and 2000, respectively) 3,983,259 3,979,317 3,649,298
Receivables from affiliates, net 684,810 666,192 1,761,858
Investments, available for sale (cost $8,892,529 [primarily municipal
securities], $1,012,400 and $575,140 for 2002, 2001 and 2000, respectively) 8,769,788 879,116 1,025,458
Investment in aircraft (net of accumulated depreciation of $15,437,634,
$12,633,445 and $8,706,682 for 2002, 2001 and 2000, respectively) 7,013,841 9,818,030 13,744,793
Goodwill 5,631,797 5,631,797 -
Intangible assets (net of accumulated amortization of $8,590,080,
$4,464,891 and $1,702,939 for 2002, 2001 and 2000, respectively) 60,669,624 44,299,495 24,763,700
Furniture, equipment and leasehold improvements (net of accumulated
depreciation and amortization of $3,401,457, $2,361,376 and $1,325,482
for 2002, 2001 and 2000, respectively) 4,089,795 4,789,744 4,944,497
Interest receivable on shareholders' notes 297,006 317,292 366,030
Income taxes receivable 3,214,280 4,071,171 -
Other assets 2,697,322 2,988,942 2,358,663
------------- ------------- -------------
$ 134,978,807 $ 143,278,111 $ 114,261,636
============= ============= =============
Liabilities and Shareholders' Equity:
Liabilities:
Loans payable $ 17,511,376 $ 18,098,337 $ 18,646,226
Employee compensation and benefits payable 1,016,970 983,824 447,973
Fees payable 1,103,030 878,334 2,261,591
Income taxes payable - 1,078,713 1,324,017
Professional fees payable 2,606,981 3,127,077 3,448,332
Dividends payable - 8,528 10,643
Accrued expenses and other liabilities 4,510,103 4,997,670 5,291,236
------------- ------------- -------------
26,748,460 29,172,483 31,430,018
------------- ------------- -------------
Minority Interest 165,132 65,639 -
------------- ------------- -------------
Shareholders' Equity:
Common shares, $0.001 par value (125,000,000 shares authorized 46,179,822,
47,831,864 and 47,912,112 shares issued and outstanding for 2002,
2001 and 2000, respectively) 46,180 47,832 47,912
Subscriptions for common shares - - 4,036,200
Additional paid-in-capital 78,673,127 105,472,859 101,482,513
Contingently returnable shares (975,766, 1,788,732 and 2,601,699
shares for 2002, 2001 and 2000, respectively) (14,263,158) (24,902,377) (35,541,596)
Accumulated other comprehensive income 34,576 (471,369) 217,413
Retained earnings 57,129,989 57,007,661 31,630,834
------------- ------------- -------------
121,620,714 137,154,606 101,873,276
Less: notes receivable for common shares (13,555,499) (23,114,617) (15,005,458)
Less: subscriptions receivable - - (4,036,200)
------------- ------------- -------------
108,065,215 114,039,989 82,831,618
------------- ------------- -------------
$ 134,978,807 $ 143,278,111 $ 114,261,636
============= ============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
W.P. Stewart & Co., Ltd.
Consolidated Statements of Operations
For the Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
------------ ------------ ------------
Revenue:
Fees $105,418,778 $115,993,071 $149,350,452
Commissions 28,293,063 39,695,130 48,273,444
Interest and other 3,569,988 5,027,579 5,679,876
------------ ------------ ------------
137,281,829 160,715,780 203,303,772
------------ ------------ ------------
Expenses:
Employee compensation and benefits 26,336,544 28,245,788 38,545,634
Fees paid out 7,250,443 5,156,489 11,639,240
Commissions, clearance and trading 5,919,022 7,376,148 8,353,552
Research and administration 14,358,071 13,515,984 14,522,756
Marketing 5,166,360 1,901,284 2,922,867
Depreciation and amortization 8,048,637 7,527,195 7,537,669
Other operating 8,370,546 9,543,228 9,606,558
------------ ------------ ------------
75,449,623 73,266,116 93,128,276
------------ ------------ ------------
Income before taxes 61,832,206 87,449,664 110,175,496
Provision for taxes 6,381,199 7,152,803 11,029,612
------------ ------------ ------------
Net income $ 55,451,007 $ 80,296,861 $ 99,145,884
============ ============ ============
Earnings per share:
Basic earnings per share $ 1.27 $ 1.85 $ 2.37
============ ============ ============
Diluted earnings per share $ 1.21 $ 1.71 $ 2.18
============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
W.P. Stewart & Co., Ltd.
Consolidated Statement of Changes in Shareholders' Equity
For the Years Ended December 31, 2002, 2001 and 2000
Common Shares Additional Contingently
---------------------- Paid-In Returnable
Shares Amount Subscriptions Capital Shares
----------- -------- ------------- ------------ ------------
Balance @ December 31, 1999 47,225,336 $ 47,225 $ - $ 81,646,968 $(28,061,175)
Issuance of common shares, @ $0.001 par value
Acquisitions 814,000 814 18,118,826 (14,495,712)
Cash 59,189 59 770,582
Notes receivable 107,593 108 1,400,753
Subscriptions for common shares 4,036,200
Contingently returnable shares, no longer
subject to repurchase 1,449,870 7,015,291
Repurchase and cancellation of common
shares, @ $0.001 par value (8,143) (8) (106,012)
Cancellation of common shares, @ $0.001
par value (285,863) (286) (1,798,474)
Net income
Dividends
Other comprehensive income
Proceeds from notes receivable
for common shares
Subscriptions receivable (4,036,200)
----------- --------- ------------- ------------ ------------
Balance @ December 31, 2000 47,912,112 47,912 - 101,482,513 (35,541,596)
Issuance of common shares, @ $0.001 par value
Acquisitions 330,000 330 8,051,670
Cash 134,000 134 2,210,866
Notes receivable 826,017 826 12,761,656
Contingently returnable shares, no longer
subject to repurchase 7,164,364 10,639,219
Repurchase and cancellation of common
shares, @ $0.001 par value (1,357,545) (1,357) (26,145,340)
Cancellation of common shares, @ $0.001
par value (12,720) (13) (87,099)
Non-cash compensation 34,229
Net income
Dividends
Other comprehensive income
Proceeds from notes receivable
for common shares
----------- --------- ------------- ------------ ------------
Balance @ December 31, 2001 47,831,864 47,832 - 105,472,859 (24,902,377)
Issuance of common shares, @ $0.001 par value
Cash 39,333 39 684,208
Notes receivable 54,666 55 960,083
Contingently returnable shares, no longer
subject to repurchase 8,587,499 10,639,219
Repurchase and cancellation of common
shares, @ $0.001 par value (1,595,720) (1,596) (35,188,930)
Cancellation of common shares, @ $0.001
par value (150,321) (150) (2,281,509)
Non-cash compensation 438,917
Net income
Dividends
Other comprehensive income
Proceeds from notes receivable
for common shares
----------- --------- ------------- ------------ ------------
Balance @ December 31, 2002 46,179,822 $ 46,180 $ - $ 78,673,127 $(14,263,158)
=========== ========= ============= ============ ============
Accumulated
Other
Comprehensive Retained Notes
Income Earnings Receivable Total
------------- ---------- ----------- -----------
Balance @ December 31, 1999 $ (13,920) $ 10,922,661 $(25,640,577) $ 38,901,182
Issuance of common shares, @ $0.001 par value
Acquisitions 3,623,928
Cash 770,641
Notes receivable (1,400,861) -
Subscriptions for common shares 4,036,200
Contingently returnable shares, no longer
subject to repurchase 8,465,161
Repurchase and cancellation of common
shares, @ $0.001 par value (106,020)
Cancellation of common shares, @ $0.001
par value 1,798,760 -
Net income 99,145,884 99,145,884
Dividends (78,437,711) (78,437,711)
Other comprehensive income 231,333 231,333
Proceeds from notes receivable
for common shares 10,237,220 10,237,220
Subscriptions receivable (4,036,200)
---------- ------------ ------------ ------------
Balance @ December 31, 2000 217,413 31,630,834 (15,005,458) 82,831,618
Issuance of common shares, @ $0.001 par value
Acquisitions 8,052,000
Cash 2,211,000
Notes receivable (12,762,482) -
Contingently returnable shares, no longer
subject to repurchase 17,803,583
Repurchase and cancellation of common
shares, @ $0.001 par value (26,146,697)
Cancellation of common shares, @ $0.001
par value 87,112 -
Non-cash compensation 34,229
Net income 80,296,861 80,296,861
Dividends (54,920,034) (54,920,034)
Other comprehensive income (688,782) (688,782)
Proceeds from notes receivable
for common shares 4,566,211 4,566,211
---------- ------------ ------------ ------------
Balance @ December 31, 2001 (471,369) 57,007,661 (23,114,617) 114,039,989
Issuance of common shares, @ $0.001 par value
Cash 684,247
Notes receivable (960,138) -
Contingently returnable shares, no longer
subject to repurchase 19,226,718
Repurchase and cancellation of common
shares, @ $0.001 par value (35,190,526)
Cancellation of common shares, @ $0.001
par value 2,281,659 -
Non-cash compensation 438,917
Net income 55,451,007 55,451,007
Dividends (55,328,679) (55,328,679)
Other comprehensive income 505,945 505,945
Proceeds from notes receivable
for common shares 8,237,597 8,237,597
---------- ------------ ------------ ------------
Balance @ December 31, 2002 $ 34,576 $ 57,129,989 $(13,555,499) $108,065,215
========== ============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
W.P. Stewart & Co., Ltd.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
------------- ------------ -------------
Cash flows from operating activities:
Net income $ 55,451,007 $ 80,296,861 $ 99,145,884
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss/(gain) on sale of available for sale securities 8,522 (525,354) -
Amortization of bond premium 43,807 - -
Depreciation and amortization 8,048,637 7,527,195 7,537,669
Equity in income of unconsolidated affiliates (86,314) (412,391) (500,575)
Non-cash compensation 438,917 34,229 -
Minority interest 99,493 8,905 -
Changes in operating assets and liabilities:
Fees receivable 317,949 324,819 (1,152,964)
Receivable from broker-dealer (284,371) 1,023,429 581,613
Receivables from affiliates, net (18,618) 1,095,666 (1,761,858)
Income taxes receivable 856,891 (3,645,444) -
Other assets 291,620 (239,588) 1,794,758
Payables to affiliates, net - - (327,868)
Employee compensation and benefits payable 33,146 535,851 (1,333,196)
Fees payable 224,696 (1,383,257) 251,121
Income taxes payable (1,078,713) (245,304) (778,055)
Professional fees payable (520,096) (321,255) 616,098
Accrued expenses and other liabilities (487,567) (1,449,486) 1,263,087
------------- ------------- -------------
Net cash provided by operating activities 63,339,006 82,624,876 105,335,714
------------- ------------- -------------
Cash flows (used for) investing activities:
Proceeds from sale of available for sale securities 991,478 1,115,064 -
Purchase of available for sale securities (8,880,128) (1,009,100) (3,300)
Cash dividends paid on shares subject to repurchase (1,268,600) (2,244,159) (3,374,363)
Cash acquired in purchase acquisition - 136,620 -
Purchase of furniture, equipment and leasehold improvements (336,938) (171,540) (1,858,166)
------------- ------------- -------------
Net cash (used for) investing activities (9,494,188) (2,173,115) (5,235,829)
------------- ------------- -------------
Cash flows (used for) financing activities:
Payments on loans payable (586,961) (547,889) (511,419)
Proceeds from issuance of common shares 684,247 2,211,000 770,641
Repurchase of common shares (35,190,526) (26,146,697) (106,020)
Proceeds from notes receivable for common shares 8,237,597 4,566,211 10,237,220
Interest receivable on shareholders' notes 20,286 48,738 170,335
Dividends to shareholders (55,337,207) (54,922,149) (78,486,921)
------------- ------------- -------------
Net cash (used for) financing activities (82,172,564) (74,790,786) (67,926,164)
Effect of exchange rate changes in cash 451,594 (123,051) (201,114)
------------- ------------- -------------
Net increase in cash and cash equivalents (27,876,152) 5,537,924 31,972,607
Cash and cash equivalents, beginning of year 62,302,344 56,764,420 24,791,813
------------- ------------- -------------
Cash and cash equivalents, end of year $ 34,426,192 $ 62,302,344 $ 56,764,420
============= ============= =============
Supplemental disclosures of cash flows information
--------------------------------------------------
Cash paid during the period for:
--------------------------------
Income taxes $ 6,800,811 $ 11,044,418 $ 10,118,293
============= ============= =============
Interest $ 1,231,937 $ 1,271,010 $ 1,307,480
============= ============= =============
Supplemental Schedule of Non-Cash Investing and Financing Activities:
- ---------------------------------------------------------------------
In 2002, 20% of the shares originally issued in connection with our acquisitions
of NS Money Management (Bermuda) Limited, First Long Island Investors, Inc. and
TPRS Services N.V. ceased to be subject to repurchase, and were recorded with a
fair value of $4,238,882, $5,659,200 and $9,328,636, respectively (see Note 2).
In addition, as discussed in Note 2, in 2001, 20% of the shares originally
issued in connection with our acquisitions of NS Money Management (Bermuda)
Limited, First Long Island Investors, Inc. and TPRS Services N.V. ceased to be
subject to repurchase, and were recorded with a fair value of $4,001,591,
$5,342,400 and $8,459,592, respectively. Also, as discussed in Note 2, in 2000,
20% of the shares originally issued in connection with our acquisitions of NS
Money Management (Bermuda) Limited, First Long Island Investors, Inc. and TPRS
Services N.V. ceased to be subject to repurchase, and were recorded with a fair
value of $2,340,553, $3,124,800 and $2,999,808, respectively, and the Company
issued common shares with a fair value of $3,623,928 to acquire the remaining
50% of TPRS Services N.V.
On November 14, 2001, as discussed in Note 2, in connection with our acquisition
of a controlling interest in W.P. Stewart Asset Management (Europe), Ltd. the
Company issued 330,000 common shares which were recorded with a fair value of
$8,052,000.
As discussed in Note 10, the Company issued common shares for notes receivable
for the years ended December 31, 2002, 2001 and 2000, in the amounts of
$960,138, $12,762,482 and $1,400,861, respectively, and cancelled outstanding
notes of $2,281,659, $87,112 and $1,798,760 for the years ended December 31,
2002, 2001 and 2000, respectively.
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying consolidated financial statements of W.P. Stewart & Co., Ltd.,
a Bermuda exempt company incorporated on August 16, 1996 and a registered
investment adviser under the United States of America ("U.S.") Investment
Advisers Act of 1940, as amended, ("WPS & Co., Ltd." and, together with its
subsidiaries, the "Company") are presented on a consolidated basis and include
the historical operations of the Company.
NOTE 2: BACKGROUND AND ORGANIZATION
For the years ended December 31, 2002, 2001 and 2000, the consolidated Company
consisted of several worldwide affiliated entities under common control, which
provide investment advisory and related services including securities brokerage.
The background and organization of the entities presented in the Company's
consolidated financial statements are set out below.
The Company's subsidiaries and affiliates include:
W.P. Stewart Asset Management Ltd. ("WPSAM"), formerly W.P. Stewart & Company,
Limited, a wholly-owned subsidiary, which was incorporated in Bermuda on July
10, 1995, and is a registered investment adviser under the U.S. Investment
Advisers Act of 1940 for clients throughout the world.
W.P. Stewart Securities Limited ("WPSSL"), a wholly-owned subsidiary,
incorporated as an exempt company under the laws of Bermuda on January 2, 1996.
WPSSL acts as an introducing broker, clearing all transactions with, and for,
customers of its affiliates on a fully-disclosed basis through an independent
clearing broker. WPSSL is a registered broker-dealer under the U.S. Securities
Exchange Act of 1934, as amended, and is a member of the National Association of
Securities Dealers.
W.P. Stewart Fund Management Limited ("WPS Dublin"), a wholly-owned subsidiary
of WPSAM, was incorporated in Ireland on January 27, 1997. The primary business
of WPS Dublin is providing management and administrative services to investment
funds. WPS Dublin is the manager of W.P. Stewart Funds plc, W.P. Stewart
(Distributor) Funds plc and W.P. Stewart Global Fund plc, umbrella-type
open-ended investment companies regulated by the Central Bank of Ireland.
W.P. Stewart & Co., Inc. ("WPSI"), formerly WPS III, Inc., which was
incorporated in Delaware on May 15, 1998 and became a wholly-owned subsidiary of
WPS & Co., Ltd. on June 30, 1998. WPSI is a registered investment adviser under
the U.S. Investment Advisers Act of 1940. Its principal business is to provide
investment research and sub-advisory services to the Company.
W.P. Stewart & Co. (Europe), Ltd. ("WPS Europe") formerly W.P. Stewart Global
Management, Ltd., is a wholly-owned subsidiary of the Company and was formed on
September 14, 1998 in the United Kingdom under the laws of England and Wales, as
a private limited company. WPS Europe is authorized and regulated by the
Financial Services Authority ("FSA") and previously was regulated by the
Investment Management Regulatory Organisation Limited ("IMRO"). Its principal
business is to provide investment research and sub-advisory services to the
Company.
WPS Aviation Holdings LLC ("WPS Aviation") was formed in Delaware on November
12, 1998, and is a wholly-owned subsidiary of WPSI.
F-7
Business Acquisitions
On May 19, 1999, the Company consummated its acquisition of 50% of the capital
stock of TPRS Services N.V. ("TPRS"), a then newly formed Curacao company that
is engaged in marketing of investment services, in exchange for 1,152,000 common
shares of the Company, subject to repurchase provisions. On December 29, 2000
the Company consummated its acquisition of the remaining 50% of TPRS in exchange
for 814,000 common shares of the Company, subject to repurchase provisions.
On June 1, 1999, the Company consummated its acquisition of all of the
outstanding capital shares of NS Money Management (Bermuda) Limited, currently
known as NS Money Management Ltd. ("NSMM"), a Bermuda holding company, in
exchange for 898,831 common shares of the Company, subject to repurchase
provisions. NSMM operates as an investment adviser for clients located
throughout the world.
On October 1, 1999, the Company consummated its acquisition of all of the
outstanding capital stock of First Long Island Investors, Inc. ("FLII"), a then
newly formed company engaged in marketing of investment services, in
consideration for 1,200,000 common shares of the Company, subject to repurchase
provisions. Operations of this entity continue under the name W.P. Stewart Asset
Management (NA), Inc.
The repurchase provisions of the TPRS, NSMM and FLII acquisition agreements
specify that 80% of the Company's common shares issued in connection therewith
can be repurchased ("contingently returnable shares") at par value by the
Company up to a maximum of 20% per year as of January 1, 2000, 2001, 2002 and
2003, except in the case of the December 29, 2000 TPRS acquisition where the
reference dates are July 1, 2001, 2002, 2003 and 2004, if assets under
management which were part of the acquisitions decrease below defined reference
amounts at the specified dates and are not replaced.
The recorded purchase price for each acquisition is determined by the sum of:
1. the number of shares issued on acquisition not subject to
repurchase multiplied by the fair value of each of those shares at
the acquisition date;
2. the number of shares that cease to be subject to repurchase at each
anniversary date multiplied by the fair value of each of those
shares at that date; and
3. the cumulative cash dividends paid on shares subject to repurchase.
The shares issued in connection with the TPRS, NSMM and FLII acquisitions were
initially reported in shareholders' equity (within share capital and as a
contra-equity account captioned contingently returnable shares) at their
issuance prices as of the dates the acquisitions were consummated. On the dates
on which the contingently returnable shares cease to be subject to repurchase,
the contra-equity account is relieved and any difference between the initial
issue price and the then current fair value of the shares is charged or credited
to additional paid-in capital. Cash dividends on shares no longer subject to
repurchase are recorded as a reduction of shareholders' equity.
F-8
The following table shows information for each acquisition as of and for the
year ended December 31, 2002.
Cash
Dividends
Paid on
Aggregate Shares Not Contingently Contingently Purchase Intangible
Number of Subject to Returnable Returnable Price Amortization
Acquisition Shares Repurchase Shares Shares Allocation for the Year
- ----------- ---------- ---------- ----------- ------------ ------------ -------------
TPRS 1,966,000 1,410,000 556,000 $764,881 $31,998,460 $ 1,815,314
NSMM 898,831 719,065 179,766 215,719 14,708,762 807,986
FLII 1,200,000 960,000 240,000 288,000 19,834,288 1,294,479
--------- ---------- -------- --------- ------------ -----------
4,064,831 3,089,065 975,766 1,268,600 $66,541,510 $ 3,917,779
========= ========= ======= ========= ============ ===========
The following table shows information for each acquisition as of and for the
year ended December 31, 2001.
Cash
Dividends
Paid on
Aggregate Shares Not Contingently Contingently Purchase Intangible
Number of Subject to Returnable Returnable Price Amortization
Acquisition Shares Repurchase Shares Shares Allocation For the Year
- ----------- ---------- ---------- ----------- ------------ ------------ -------------
TPRS 1,966,000 1,016,800 949,200 $1,236,720 $21,904,944 $ 1,224,254
NSMM 898,831 539,299 359,532 431,439 10,254,161 545,951
FLII 1,200,000 720,000 480,000 576,000 13,887,088 944,644
--------- ---------- ---------- ---------- ------------ ------------
4,064,831 2,276,099 1,788,732 $2,244,159 $46,046,193 $ 2,714,849
========= ========= ========= ========== ============ ============
The following table shows information for each acquisition as of and for the
year ended December 31, 2000.
Cash
Dividends
Paid on
Aggregate Shares Not Contingently Contingently Purchase Intangible
Number of Subject to Returnable Returnable Price Amortization
Acquisition Shares Repurchase Shares Shares Allocation For the Year
- ----------- ---------- ---------- ----------- ------------ ------------ -------------
TPRS 1,966,000 623,600 1,342,400 $1,195,776 $12,208,632 $ 534,783
NSMM 898,831 359,532 539,299 932,987 5,821,131 299,671
FLII 1,200,000 480,000 720,000 1,245,600 7,968,688 557,922
--------- ---------- ---------- ---------- ----------- -----------
4,064,831 1,463,132 2,601,699 $3,374,363 $25,998,451 $1,392,376
========= ========= ========= ========== =========== ==========
F-9
On November 14, 2001, the Company acquired a controlling interest in TPR &
Partners N.V. ("TPR"), an asset-gathering firm based in The Netherlands via the
acquisition of shares in a Bermuda holding company that indirectly owns 100% of
the shares of TPR. Going forward, the Bermuda company which is named W.P.
Stewart Asset Management (Europe), Ltd. ("WPSAM- Europe"), will serve as the
umbrella for the Company's European asset gathering and client servicing
activities. In the transaction, the Company initially acquired 9,000 of
WPSAM-Europe's 12,000 outstanding shares in exchange for 330,000 common shares
of the Company. The former beneficial owners of TPR and their assigns will
continue to hold the remaining 3,000 shares of WPSAM-Europe until June 30, 2006,
at which time the Company will acquire those shares at a fair value price
determined on that date. The acquisition price of $8,052,000 less the fair value
of net assets acquired of $170,203 has been allocated to intangible assets and
goodwill. For the year ended December 31, 2002 there were no changes in the
carrying value of goodwill.
NOTE 3: ACCOUNTING POLICIES
These consolidated financial statements are presented in conformity with
accounting principles generally accepted in the U.S. The functional currency for
the Company and its affiliates is the U.S. dollar with the exceptions of WPS
Europe and WPSAM-Europe for which the Pound Sterling and the Euro, respectively,
are the functional currencies.
The process of preparing consolidated financial statements in conformity with
generally accepted accounting principles in the U.S. requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the dates of
the consolidated financial statements, as well as the reported amounts of
revenues and expenses during the reporting periods. Actual results may differ
from those estimates.
Principles of Consolidation
The Company consolidates all affiliated entities in which it has a majority
ownership interest or maintains effective control. All material inter-company
transactions have been eliminated.
Cash and Cash Equivalents
The Company considers cash in banks, money market funds and short-term highly
liquid investments with an original maturity of three months or less at the date
of purchase to be cash equivalents. The Company maintains the majority of its
cash in money market funds at The Bank of Bermuda, a Bermuda-domiciled bank.
Investments in Unconsolidated Affiliates
The Company includes its investments in the common stock of investees in which
it owns between 20-50% in the caption "Investments in Unconsolidated Affiliates"
and accounts for such investments under the equity method of accounting.
Investments, Available for Sale
Investments in equity and municipal securities have been classified as
"available for sale" in accordance with Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" and, as such, are recorded at quoted market values. Transactions are
recorded on a trade date basis. Unrealized gains and losses are recorded in
accumulated other comprehensive income within shareholders' equity.
F-10
Furniture, Equipment, Leasehold Improvements and Investment in Aircraft
Furniture, equipment, leasehold improvements and investment in aircraft are
stated at cost less accumulated depreciation and amortization. Depreciation is
computed using straight-line and accelerated methods over the estimated useful
lives of the assets. Leasehold improvements are amortized over the shorter of
the lease term or the estimated life of the improvements. The aircraft is
depreciated using an accelerated method over seven years.
Fees
Fees for the management of clients' accounts are based on terms stated in client
contracts and are based upon a percentage of assets under management determined
as of the last day of the prior quarter as specified in the contracts. Fees are
recognized in the period in which they are earned. Included within fees are
performance fees which the Company earns in accordance with specified
performance terms in certain client contracts. Performance fees are recorded as
of the date on which they are earned.
Commissions
Commissions on brokerage activities and related trading costs are recorded on a
trade date basis.
Income Taxes
The Company uses the asset and liability method required by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"), to record income taxes. SFAS 109 states that "deferred tax assets and
liabilities are recognized principally for the expected tax consequences of
temporary differences between the tax bases of assets and liabilities and their
reported amounts". A valuation allowance is established to reduce deferred tax
assets to amounts that are expected to be realized.
Foreign Currency Translation
The Company accounts for foreign currency translation in accordance with
Statement of Financial Accounting Standards No. 52, "Foreign Currency
Translation". Assets and liabilities are translated at the exchange rate in
effect at year-end, and revenue and expenses are translated at the average rates
of exchange prevailing during the year. Gains or losses resulting from foreign
currency transactions are included in net income. The U.S. dollar effect that
arises from translating the net assets of WPS Europe and WPSAM-Europe is
recorded in "accumulated other comprehensive income", a separate component of
shareholders' equity.
Intangible Assets and Goodwill
Intangible assets arising from the Company's business acquisitions (see Note 2)
are amortized on a straight-line basis over periods of five to 20 years. The
carrying value of the intangibles acquired is reviewed for impairment, at least
annually, whenever events or changes in circumstances indicate that they may not
be recoverable based upon expectations of future undiscounted cash flows over
their remaining lives. Where the undiscounted cash flow is less than the
carrying amount of the asset, an impairment loss will be recognized. The loss
will be the difference between the fair value of the asset and the carrying
value of the asset.
Goodwill arising from the Company's acquisition of TPR (see Note 2) is accounted
for pursuant to Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" ("SFAS No. 142"). In accordance with SFAS No. 142
goodwill is not amortized but will be tested at least annually for impairment.
Earnings Per Share
Basic earnings per share is computed by dividing the net income applicable to
common shares outstanding by the weighted average number of shares outstanding,
excluding unvested shares issued to
F-11
employees of the Company or its affiliates, contingently returnable shares and
unvested employee options. Diluted earnings per share is computed using the same
method as basic earnings per share, but also reflects the impact of unvested
shares issued to employees of the Company or its affiliates, contingently
returnable shares and the dilutive effect of unvested options issued to
employees of the Company or its affiliates using the treasury stock method.
Share-Based Compensation
The Company has elected to account for its share-based employee compensation
plan in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB No. 25"). In accordance with APB No. 25,
compensation expense is not recognized for employee options that have no
intrinsic value on the date of grant.
Effective January 1, 2003, the Company will begin to account for share-based
employee compensation in accordance with the fair-value method prescribed by
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), as amended by Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" ("SFAS No. 148"), using the prospective adoption method. Under this
method of adoption, compensation expense will be recognized based on the fair
value of the share options granted in 2003 and future years over the related
vesting periods. The amount of share-based compensation to be recognized under
SFAS No. 123 for the year ended December 31, 2003 and beyond is not currently
determinable because the number and value of share options to be granted to
employees in the future is not yet known.
Share options granted for the years ended December 31, 2002 and 2001 were
accounted for, and will continue to be accounted for, under the intrinsic
value-based method as prescribed by APB No. 25. Therefore, no compensation
expense was recognized for those share options that had no intrinsic value on
the date of grant (see Note 12).
Business Segments
The Company operates predominantly in one business segment, the investment
advisory and asset management industry.
Reclassification of Comparative Financial Statements
Certain prior year amounts have been reclassified to conform with current year
presentation.
New Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN No.
45"). FIN No. 45 specifies the disclosures to be made about obligations under
certain issued guarantees and requires a liability to be recognized for the fair
value of a guarantee obligation. The recognition and measurement provisions of
the interpretation apply prospectively to guarantees issued after December 31,
2002. The provisions of FIN No. 45 became effective for the Company on January
1, 2003. The Company does not expect that the adoption of the recognition and
measurement provisions will have a material impact on the Company's results of
operations or financial position.
F-12
NOTE 4: EARNINGS PER SHARE
2002 2001 2000
---- ---- ----
Basic Earnings Per Share:
Net income $55,451,007 $80,296,861 $99,145,884
=========== =========== ===========
Weighted average basic shares outstanding 43,575,633 43,424,732 41,873,418
----------- ----------- -----------
Net income per share $ 1.27 $ 1.85 $ 2.37
=========== =========== ===========
Diluted Earnings Per Share:
Net income $55,451,007 $80,296,861 $99,145,884
=========== =========== ===========
Weighted average basic shares outstanding 43,575,633 43,424,732 41,873,418
Add: Unvested shares, contingently returnable
shares and unvested options 2,437,739 3,517,959 3,650,203
----------- ----------- -----------
Weighted average diluted shares outstanding 46,013,372 46,942,691 45,523,621
----------- ----------- -----------
Net income per share $ 1.21 $ 1.71 $ 2.18
=========== =========== ===========
Basic earnings per share is computed by dividing the net income applicable to
common shares outstanding by the weighted average number of shares outstanding,
excluding unvested shares issued to employees of the Company or its affiliates,
contingently returnable shares and unvested employee options. Diluted earnings
per share is computed using the same method as basic earnings per share, but
also reflects the impact of unvested shares issued to employees of the Company
or its affiliates, contingently returnable shares and the dilutive effect of
unvested options issued to employees of the Company or its affiliates using the
treasury stock method.
On December 31, 2002, 2001 and 2000, respectively, 46,179,822, 47,831,864 and
47,912,112 shares were issued and outstanding. The shareholders of record are
entitled to full voting rights (see Note 13) and dividends on these shares;
1,988,415, 2,764,620 and 2,515,657 of these shares were unvested and held by the
Company's or affiliates' employees on December 31, 2002, 2001 and 2000,
respectively.
NOTE 5: COMPREHENSIVE INCOME
The following table details the components of comprehensive income as described
in Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income".
F-13
2002 2001 2000
------------ ------------ ------------
Net income $ 55,451,007 $ 80,296,861 $ 99,145,884
Other comprehensive income, net of tax
Reclassification adjustment for
realized gains/(losses) on available
for sale securities included in
interest and other 133,284 (432,447) -
Unrealized (losses)/gains on available
for sale securities (78,933) (133,284) 432,447
Foreign currency translation
adjustment 451,594 (123,051) (201,114)
------------ ------------ ------------
Comprehensive income $ 55,956,952 $ 79,608,079 $ 99,377,217
============ ============ ============
NOTE 6: INVESTMENTS IN UNCONSOLIDATED AFFILIATES
Investments in unconsolidated affiliates include the following:
2002 2001 2000
---------- ---------- ----------
Investment in Bowen Asia Limited $2,826,185 $2,897,703 $2,641,387
Investment in Kirk Management Ltd. 1,157,074 1,081,614 1,007,911
---------- ---------- ----------
Total $3,983,259 $3,979,317 $3,649,298
========== ========== ==========
At December 31, 2002, the Company owned approximately 40% of Bowen Asia Limited
("Bowen").
The Company owns a 40% interest in Kirk Management Ltd., a real estate joint
venture incorporated in Bermuda. Kirk Management Ltd. owns Trinity Hall, a
building located in Hamilton, Bermuda, which is leased by the Company from the
joint venture and serves as the Company's headquarters.
NOTE 7: RELATED PARTY TRANSACTIONS
Research and administrative expenses include travel expenses of approximately
$2,000,796, $2,018,897 and $2,302,000 for the years ended December 31, 2002,
2001 and 2000, respectively, which were paid to Shamrock Aviation, Inc.
("Shamrock"), a company owned by principal shareholders of the Company (see Note
8).
The Company has entered into an agreement pursuant to which an entity affiliated
with Shamrock has agreed to provide operational and maintenance services at cost
for the Challenger aircraft owned by the Company (see Note 8). These costs,
reflected in research and administration expenses, include approximately
$2,855,298, $2,415,044 and $2,141,700 for the years ended December 31, 2002,
2001 and 2000, respectively.
In February 1999, the Company entered into an agreement with Shamrock in which
Shamrock agreed to delay the sale of an aircraft owned by Shamrock so that such
aircraft would continue to be available for use in the Company's business. At
that time, Shamrock agreed to release WPSI from any and all obligations of
approximately $37 million, to participate in the purchase of an additional
aircraft, delivery of which was scheduled for 2002. In return, the Company had
agreed to indemnify Shamrock for any loss in value of the aircraft Shamrock had
agreed not to sell from the time the agreement was made until the
F-14
aircraft was sold or replaced. The value of that aircraft as of the date of
Shamrock's agreement with the Company was estimated to be $27 million. In May
2002, in exchange for a payment of $100,000, Shamrock released the Company from
this indemnity agreement.
A portion of the office space located in New York includes space occupied by
Stewart family interests. WPSI is reimbursed on a monthly basis for rent and
other costs associated with the space, which approximated $144,619, $131,471 and
$184,900 for the years ended December 31, 2002, 2001 and 2000, respectively.
These amounts are based upon the actual space utilized in each of those years.
WPS Dublin serves as the investment manager to an Irish fund solely advised by
WPS Investissements S.A., a Swiss investment management firm, principally owned
by a beneficial owner of a minority interest in the Company. The Company has no
ownership interest in either the Irish fund or WPS Investissements S.A. WPS
Dublin collects and remits to WPS Investissements S.A. all of the advisory fees
in respect of such fund. Such fees amounted to $31,871, $44,558 and $327,711 for
the years ended December 31, 2002, 2001 and 2000, respectively. In addition, the
Company pays WPS Investissements S.A. solicitation fees in respect of certain
accounts and an amount calculated on the basis of a portion of the brokerage
commissions paid by such fund and certain accounts, as directed by those
clients. Such payments amounted to $16,425, $27,622 and $20,089 for the years
ended December 31, 2002, 2001 and 2000, respectively.
The Company pays Bowen, an unconsolidated affiliate of the Company (see Note 6),
the principal owners of which are an executive officer and a beneficial owner of
a minority interest in the Company, fees for solicitation, sub-advisory, and
research services. Such costs approximated $665,319, $533,681 and $520,900 for
the years ended December 31, 2002, 2001 and 2000, respectively. The Company
receives solicitation fees from Bowen Capital Management ("BCM"), a subsidiary
of Bowen, for client referrals to BCM. Total solicitation fees received from BCM
for the years ended December 31, 2002, 2001 and 2000 were $26,117, $27,004 and
$30,539, respectively.
Prior to the completion of the acquisition of 100% of TPRS on December 29, 2000,
the Company paid TPRS fees for marketing services. These fees amounted to
approximately $5,694,885 for the year ended December 31, 2000. Inter-company
eliminations of approximately $2,847,443 related to the Company's 50% ownership
in TPRS, resulted in a net expense to the Company of $2,847,442 for the year
ended December 31, 2000.
In connection with our acquisition of 50% of TPRS in 1999, TPR and TPR Curacao
N.V. (the sellers) signed a promissory note to WPSAM in the amount of
$2,750,000. The note bore interest at the rate of 6.625% per annum and was
collateralized by shares of W.P. Stewart & Co., Ltd. issued in the acquisition.
The terms of the repayment provided for quarterly installments of principal and
interest commencing on October 20, 1999. During December 2000, this amount was
repaid in full.
Prior to our acquisition of a controlling interest in TPR, the Company paid TPR,
a principal owner of which is currently an executive officer of the Company,
fees for marketing services. These fees amounted to $459,313 for the year ended
December 31, 2001.
The Company pays Carl Spangler Kapitalanlageges. m.b.H., which is controlled by
Bankhaus Carl Spangler & Co. AG, the Chief Executive Officer of which is one of
the Company's directors, fees for solicitation services. These fees amounted to
$631,756 and $167,749 for the years ended December 31, 2002 and 2001.
The Company pays Appleby, Spurling & Kempe and A.S. & K. Services Ltd., a
partner of which in June 2002 became a director of the Company, fees for various
legal, corporate administrative and secretarial services. Such fees for services
amounted to $29,648 for the year ended December 31, 2002.
F-15
Certain directors of the Company serve as directors of funds from which the
Company receives investment advisory fees, fund management fees, subscription
fees and commissions. Such fees and commissions were $5,743,933, $4,906,228 and
$11,629,389 for the years ended December 31, 2002, 2001 and 2000, respectively.
The Company owns a 40% interest in Kirk Management Ltd. (see Note 6), a real
estate joint venture incorporated in Bermuda. The remaining 60% interest is
owned by The Bank of Bermuda, of which one of the Company's directors is the
Chief Executive Officer. Kirk Management Ltd. also owns and leases to the
Company its Hamilton, Bermuda headquarters. Included in research and
administration expenses is rent expense of $180,000 for each of the years ended
December 31, 2002 and 2001 and $221,917 for the year ended December 31, 2000.
Included in receivables from affiliates, net, at December 31, 2002, 2001 and
2000 is a subordinated loan of $212,526 and accrued interest on such loan in the
amount of $34,132 for each of the years ended December 31, 2002 and 2001, and
$17,416 for the year ended December 31, 2000, due from Kirk Management Ltd. The
loan has no fixed repayment date. Interest income on the subordinated loan was
$16,716 and $17,416 for the years ended December 31, 2001 and 2000,
respectively.
Included in investments available for sale at December 31, 2002 and 2001 are
amounts of $681,073 and $866,716, respectively, which were investments in
various funds managed by WPS Dublin, a wholly-owned subsidiary of the Company.
Included in research and administration expenses for the year ended December 31,
2002 is rent expense in the amount of $135,274 which is paid to a company owned
by the former principals of TPR.
In connection with the Company's initial public offering completed in December
2000, the Company was reimbursed by the selling shareholders in the amount of
$2,500,000.
NOTE 8: LONG-TERM DEBT
On December 16, 1998, WPS Aviation assumed from Shamrock Aviation, all the
rights and obligations of a purchase agreement ("Challenger Purchase Agreement")
dated July 8, 1998, relating to the purchase of a Challenger aircraft. On
December 17, 1998, WPS Aviation entered into a 10 year, amortizing loan
agreement with General Electric Capital Corporation to finance the obligations
of the Challenger Purchase Agreement. The loan was for the principal sum of
$17,340,000 at a fixed interest rate of 6.87% to be paid in 120 monthly
installments of principal and interest of $133,326 and a final installment of
$11,621,076. The first monthly periodic installment was due and paid on January
17, 1999 with installments due and payable on the same day of each succeeding
month.
On February 10, 1999, WPS Aviation entered into an additional 10 year,
amortizing loan agreement with General Electric Capital Corporation for the
principal sum of $757,382 at a fixed interest rate of 6.89% to be paid in an
initial installment of $1,015 and 118 monthly installments of principal and
interest of $5,869 and a final installment of $507,635. The first monthly
periodic installment was paid on March 17, 1999 with installments due and
payable on the same day of each succeeding month.
On March 30, 1999, WPS Aviation entered into an additional 10 year, amortizing
loan agreement with General Electric Capital Corporation for the principal sum
of $1,522,618 at a fixed interest rate of 7.35% to be paid in an initial
installment of $5,285 and 116 monthly installments of principal and interest of
$12,380 and a final installment of $1,021,114. The first monthly periodic
installment was paid on May 17, 1999 with installments due and payable on the
same day of each succeeding month.
F-16
Future principal payments on the loans as of December 31, 2002 are as follows:
2003 $ 628,683
2004 673,519
2005 721,554
2006 773,016
2007 828,150
Thereafter (through 2009) 13,886,454
------------
$17,511,376
All loans are collateralized by the Challenger aircraft.
Interest expense on long-term debt totaled $1,231,937, $1,271,010 and $1,307,480
for the years ended December 31, 2002, 2001 and 2000, respectively.
The fair value of these loans based on discounted cash flow techniques as of
December 31, 2002 amounted to approximately $18 million.
Provisions of the loan agreements require the Company to maintain certain
financial ratios and a minimum level of $15 million of tangible net worth (as
defined in the loan agreements).
NOTE 9: COMMITMENTS AND CONTINGENCIES
At December 31, 2002, the Company was contingently liable on three irrevocable
standby letters of credit. One letter of credit is in the amount of $1,000,000
in favor of Wachovia Corporate Services Inc. ("Wachovia") and collateralizes
amounts received from the Company's clients that Wachovia wires daily to the
Company's account at The Bank of Bermuda. The second letter of credit is in the
amount of $200,000, in favor of WPSI's landlord. The third letter of credit is
in the amount of $699,033 in favor of WPS Europe's landlord. The latter amount
is guaranteed by the Company, and is collateralized by a fixed deposit cash
account in the same amount, which will remain intact over the term of the lease
and, is reflected in other assets at December 31, 2002, 2001 and 2000.
WPSSL conducts business with a clearing broker on behalf of its customers
subject to a clearing agreement. WPSSL earns commissions as an introducing
broker for the transactions of its customers, which are normally settled on a
delivery-against-settlement basis. Under the clearing agreement, WPSSL has
agreed to indemnify the clearing broker for non-performance by any customers
introduced by WPSSL. As the right to charge WPSSL has no maximum amount, and
applies to all trades executed through the clearing broker, WPSSL believes there
is no maximum amount assignable to this right. At December 31, 2002, WPSSL has
recorded no liability with respect to this right. WPSSL is subject to credit
risk to the extent that the clearing broker may be unable to repay amounts owed.
In 2000, the Company had accepted subscriptions from employees to purchase
310,000 common shares, at an aggregate purchase price of $4,036,200. Pursuant to
the subscription agreements, the employees' right to receive shares was not
subject to sale, assignment or transfer. All shares were issued on February 1,
2001.
NOTE 10: NOTES RECEIVABLE FOR COMMON SHARES
In 2002, the Company issued 54,666 common shares to certain employees and
employees of affiliates, all of which were issued in connection with the
Company's 2001 Employee Equity Incentive Plan, for installment notes totaling
$960,138. The installment notes are full recourse, bear interest at 8.5% per
F-17
annum, are for a term of seven years and are collateralized by the shares
issued. Each principal payment, as defined in each of the promissory notes, is
equal to one twenty-eighth of the total face value of the note. During 2002, the
Company also issued 39,333 common shares to certain employees and employees of
affiliates, all of which were issued in connection with the Company's 2001
Employee Equity Incentive Plan, for cash payments totaling $684,247.
Pursuant to purchase agreements for common shares, in the event a purchaser is
not in the employment of, or does not serve as a director of, the Company or any
of its affiliates, the purchaser, shall transfer to the Company all rights to
shares that have not vested at the time of such termination. The remaining
balance of the outstanding notes receivable related to the unvested shares shall
be abated.
Pursuant to the terms of the purchase agreements, during the year ended December
31, 2002, 150,321 unvested common shares of former employees were repurchased
and their installment notes totaling $2,281,659 were abated.
In 2001, the Company issued 826,017 common shares to certain employees and
employees of affiliates, including 191,050 common shares issued in connection
with the Company's 2001 Employee Equity Incentive Plan, for installment notes
totaling $12,762,482. The installment notes are full recourse, bear interest at
8.5% to 10% per annum, are for a term of seven years and are collateralized by
the shares issued. Each principal payment, as defined in each of the promissory
notes, is equal to one twenty-eighth of the total face value of the note. During
2001, the Company also issued 134,000 common shares to certain employees and
employees of affiliates, including 99,000 common shares issued in connection
with the Company's 2001 Employee Equity Incentive Plan, for cash payments
totaling $2,211,000.
Pursuant to the terms of the purchase agreements, during the year ended December
31, 2001, 12,720 unvested common shares of former employees were repurchased and
their installment notes totaling $87,112 were abated.
During the year ended December 31, 2000, the Company issued 107,593 common
shares to certain employees and employees of affiliated entities, for
installment notes totaling $1,400,861. The installment notes are full recourse,
bear interest at 10% per annum and are collateralized by the shares issued. Each
principal payment, as defined in each of the promissory notes, is equal to one
twenty-eighth of the total outstanding note receivable.
In addition, pursuant to the terms of the purchase agreements, during the year
ended December 31, 2000, 285,863 unvested common shares of former employees were
repurchased and their installment notes totaling $1,798,760 were abated.
All the common shares described above are subject to vesting provisions.
Future minimum payments expected to be received on notes receivable for common
shares as of December 31, 2002 are as follows:
2003 $3,123,602
2004 3,124,406
2005 2,667,376
2006 1,968,197
2007 1,390,736
Thereafter (through 2010) 1,281,182
-------------
$13,555,499
Interest income on all such notes was $1,790,120, $1,367,874 and $2,337,933 for
the years ended December 31, 2002, 2001 and 2000, respectively.
F-18
NOTE 11: 2001 EMPLOYEE EQUITY INCENTIVE PLAN
The Company's Board of Directors adopted the W.P. Stewart & Co., Ltd. 2001
Employee Equity Incentive Plan, as amended (the "Plan"). The Plan provides for
awards of up to 2,500,000 common shares of the Company, to be granted to
eligible employees of the Company and its affiliates in the form of restricted
common shares and/or options.
In 2002, the Company granted awards under the Plan that consisted of rights to
purchase 93,999 restricted common shares, which vest in equal amounts in each of
the 28 calendar quarters following the grant, and options to purchase 559,501
shares which vest in equal amounts on each of the first seven anniversaries of
the grant date. The exercise price of the options is equal to the market value
of the Company's shares on the date of grant.
During 2002, pursuant to the terms of the Plan, 172,314 unexercised options
issued in 2001, were forfeited by former employees of the Company.
Additionally, during the fourth quarter of 2001, the Company granted awards
under the Plan that consisted of rights to purchase 290,050 restricted common
shares, which vest in equal amounts in each of the 28 calendar quarters
following the grant, and options to purchase 1,201,500 shares which vest in
equal amounts on each of the first seven anniversaries of the grant date. The
exercise price of the options is equal to the market value of the Company's
shares on the date of the grant.
NOTE 12: SHARE OPTIONS
In addition to the options granted under the 2001 Employee Equity Incentive Plan
(see Note 11), during the fourth quarter of 2001 the Company granted a total of
157,333 options to purchase its common shares to employees and to certain
non-employee directors of the Company. The exercise price of the options is
equal to the market value of the Company's shares on the date of the grant. All
options vest and are exercisable in equal annual amounts on each of the first
seven anniversaries, beginning in 2002, of the respective grant dates. The
dilutive effect of these options is included in the weighted average diluted
shares outstanding in accordance with Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
The options outstanding as of December 31, 2002 are set forth below:
Options Weighted Average Remaining Weighted Average
Exercise Prices Outstanding Contractual Life (Years) Exercise Price
--------------- ----------- --------------------------- ------------------
$20.80 - $25.65 1,186,519 6 $20.94
$16.58 - $28.42 559,501 7 $22.08
---------
1,746,020
=========
The Company applies APB No. 25 and related interpretations in accounting for
options granted to employees. No compensation cost has been recognized for
options granted as the exercise price of the options is equal to the market
value of the Company's shares on the date of the grant. Had compensation cost
for the Company's options been determined based on fair value at the grant dates
for awards under the Plan consistent with the method of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"), the Company's net income and net income per share diluted for the
years ended December 31, 2002 and 2001, would have been the following pro forma
amounts:
F-19
(In thousands, except per share data) 2002 2001
- ------------------------------------- ---- ----
Net income, as reported $55,451,007 $80,296,861
Pro forma net income $53,358,194 $80,049,745
Earnings per share, as reported:
Basic $1.27 $1.85
Diluted $1.21 $1.71
Pro forma earnings per share:
Basic $1.22 $1.84
Diluted $1.16 $1.71
In the preceding table, pro forma compensation expense associated with option
grants is recognized over the relevant vesting periods.
The following range assumptions were applied in determining pro forma
compensation cost:
2002 2001
---- ----
Expected Life 1 to 7 years 1 to 7 years
Risk free interest rate 1.45% - 3.70% 2.44% - 5.44%
Dividend yield 4.24% - 7.30% 4.78% - 5.89%
Volatility 39.96% 25.74%
The effects of applying SFAS No. 123 on pro forma disclosures of net
income and earnings per share for the years ended December 31, 2002 and 2001,
are not likely to be representative of the pro forma effects on net income and
earnings per share in future years for the following reasons: (i) the number of
future shares to be issued under the Plan is not known, and (ii) the assumptions
used to determine the fair value can vary significantly.
Disclosures of the fair value of options granted for the years ended December
31, 2002 and 2001, have been estimated at the date of grant using a
Black-Scholes option-pricing model. The Black-Scholes option model was developed
for use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions, including the expected share
price volatility. The Company's options have characteristics significantly
different from those of traded options, and changes in the subjective input
assumptions can materially affect the fair value estimate. The weighted average
fair value of the options granted for the years ended December 31, 2002 and
2001, was $4.85 and $3.65, respectively.
NOTE 13: SHAREHOLDERS' VOTING RIGHTS
The Company's Bye-Laws limit the voting power of natural persons to 5%, and the
voting power of other entities, "groups" (as defined in the U.S. Securities
Exchange Act of 1934) and persons other than natural persons (legal persons) to
9.5%, of the votes attributable to the outstanding shares of the Company
regardless of how many of our shares (including common shares) they own or
control. This restriction does not apply to parties who were shareholders
immediately before our initial public offering, including WPS II, Inc. and
certain individuals designated by the Company's Board of Directors who are
currently affiliated with the Company. Votes that could have been cast by
shareholders but for these voting restrictions are allocated to the other
holders of the common shares pro-rata based on the number of shares they hold,
except that no shareholder subject to the restrictions may receive an allocation
to the
F-20
extent that it would result in the shareholder holding more than 5% (for
natural persons) or 9.5% (for legal persons, entities or groups) of the total
voting power. The Company's Board of Directors may approve the exemption of
other persons or groups from this restriction.
In addition, the Bye-Laws provide that no person or group (other than WPS II,
Inc. or its affiliates, direct or indirect subsidiaries of the Company, certain
employee benefit plans designated by the Board of Directors which may be
established by the Company or as otherwise exempted by the Board of Directors)
deemed to be a beneficial owner of common shares may vote more than 20% of the
total number of votes attributable to the common shares outstanding.
NOTE 14: INCOME TAXES
Under current Bermuda law, the Company and its Bermuda subsidiaries are not
required to pay any Bermuda taxes on their income or capital gains. The Company
and its Bermuda subsidiaries will be exempt from such forms of taxation in
Bermuda until at least March 2016.
Income from the Company's operations in the United States and from U.S.
subsidiaries of the Company is subject to income taxes imposed by U.S.
authorities. In addition, the Company's non-U.S. subsidiaries are subject to
income taxes imposed by the jurisdictions in which those subsidiaries conduct
business.
The provision for income taxes detailed below represents the Company's estimate
of taxes on income applicable to all jurisdictions and is calculated at rates
equal to the statutory income tax rate in each jurisdiction.
The income tax provision, all current, for the years ended December 31, 2002,
2001 and 2000 is as follows:
2002 2001 2000
----------- ----------- ------------
U.S.:
Federal $ 4,928,254 $ 5,852,480 $ 8,568,658
State and local 1,437,829 1,286,945 2,460,954
----------- ----------- -------------
6,366,083 7,139,425 11,029,612
Other: 15,116 13,378 -
----------- ----------- -------------
$ 6,381,199 $ 7,152,803 $11,029,612
=========== =========== ===========
NOTE 15: PENSION BENEFITS
The Company sponsors both a defined contribution profit-sharing plan (including
a 401(k) feature) and a defined contribution money-purchase plan in the U.S. In
2000, the Company implemented a Bermuda pension plan and in 2001 a plan was
created in the United Kingdom. These plans cover substantially all employees who
meet the minimum age, service and eligibility requirements.
F-21
Total employer contributions amounted to $1,259,929, $1,258,631 and $1,165,643
for the years ended December 31, 2002, 2001 and 2000, respectively. Participants
are immediately vested in their account balances.
NOTE 16: LEASE COMMITMENTS
The Company has several lease agreements in various locations including Bermuda,
New York, Maine, London and The Netherlands. The lease agreements are for
various periods through December 31, 2021. The leases are subject to escalation
charges based on increases in real estate taxes and maintenance costs.
Future minimum rental commitments under non-cancellable operating leases in
effect as of December 31, 2002 were as follows:
2003 $ 2,629,847
2004 2,718,721
2005 2,744,395
2006 2,582,519
2007 2,582,519
Thereafter (through 2021) 6,733,207
------------
$ 19,991,208
============
Total rent expense for all operating leases was $2,525,139, $2,173,441 and
$1,785,499, for the years ended December 31, 2002, 2001 and 2000, respectively.
Included in the table above is an annual amount of $180,000 and an aggregate 19
year total commitment amount of $3,300,000 payable to Kirk Management Ltd., a
40% unconsolidated affiliate of the Company, which owns Trinity Hall, the
Company's headquarters in Hamilton, Bermuda. In addition, included in the table
above is an annual amount of $161,876 and an aggregate three-year total
commitment amount of approximately $486,000 payable to a company owned by the
former principals of TPR.
NOTE 17: GEOGRAPHIC AREA DATA
The Company's primary business is the provision of investment advisory services
to clients located throughout the world, in primarily two geographic areas, as
follows:
Fee Revenue
-------------
2002 2001 2000
------------ ------------- ------------
U.S. $ 79,095,944 $ 90,348,326 $113,865,779
Non-U.S. 26,322,834 25,644,745 35,484,673
------------ ------------- ------------
Total $105,418,778 $ 115,993,071 $149,350,452
============ ============= ============
NOTE 18: SUBSEQUENT EVENTS
On January 1, 2003, in accordance with the 1999 TPRS, NSMM and FLII acquisition
agreements, repurchase provisions on 20% of the initial number of shares issued
and recorded as contingently returnable shares lapsed (see Note 2). Accordingly,
the shareholders' equity account contingently returnable shares was relieved of
$6,637,652 and additional paid-in capital was credited with $3,278,840, being
the excess of the shares' fair value over their initial issue price. The
respective purchase price
F-22
allocations were increased accordingly. Additionally, in accordance with the
provisions of the acquisition agreements (see Note 2), the Company reacquired
35,000 shares. Accordingly, the shareholders' equity account contingently
returnable shares, was relieved of $377,650, which represents the initial issue
price of the shares.
On January 8, 2003, the Company declared a dividend of $0.30 per share to
shareholders of record as of January 17, 2003, payable on January 31, 2003 in
the aggregate amount of $13,853,947.
F-23
SIGNATURES
The Registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
W.P. STEWART & CO., LTD.
By: /s/ John C. Russell
-----------------------------------
Name: John C. Russell
Title: Managing Director
Date: March 31, 2003
CERTIFICATIONS
I, William P. Stewart, certify that:
1. I have reviewed this annual report on Form 20-F of W.P. Stewart & Co., Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ William P. Stewart, Jr.
- -------------------------------------
William P. Stewart, Jr.
Chairman and Chief Executive Officer
CERTIFICATIONS
I, Rocco Macri, certify that:
1. I have reviewed this annual report on Form 20-F of W.P. Stewart & Co., Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Rocco Macri
- ------------------------------
Rocco Macri
Deputy Managing Director--Chief Financial Officer
INDEX TO EXHIBITS
Number Exhibit
- -------- --------------------------------------------------------------------
8.1 Subsidiaries of the Registrant
10.1 Consent of PricewaterhouseCoopers LLP
10.2 Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
10.3 Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
E-1