SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the month of November, 2002
W.P. STEWART & CO., LTD.
(Translation of Registrant's Name Into English)
Trinity Hall
43 Cedar Avenue
P.O. Box HM 2905
Hamilton, HM LX
Bermuda
(Address of Principal Executive Offices)
(Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F.)
Form 20-F |X| Form 40-F |_|
(Indicate by check mark whether the registrant by furnishing the
information contained in this form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.)
Yes |_| No |X|
(If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82-______.)
W.P. STEWART & CO., LTD.
Form 6-K: Table of Contents
1. Unaudited Condensed Consolidated Financial Statements of W.P. Stewart &
Co., Ltd. as of September 30, 2002 and for the nine months ended September
30, 2002 and 2001
2. Interim Financial Report
3. Exhibit - Press release dated October 31, 2002
Forward-Looking Statements
Certain statements in this Report on Form 6-K 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 the Annual Report on Form 20-F of
W.P. Stewart & Co., Ltd. as well as the following:
o general economic and business conditions;
o a challenge to our U.S. tax status;
o industry capacity and trends;
o competition;
o the loss of major clients;
o changes in demand for our services;
o changes in business strategy or development plans and the ability to
implement such strategies and plans;
o changes in the laws and/or regulatory circumstances in the United
States, Bermuda, Europe or other jurisdictions;
o the adverse effect from a decline or volatility in the securities
market in general or our products' performance;
o quality of management and the ability to attract and retain
qualified personnel;
o actions taken or omitted to be taken by third parties including our
shareholders, clients, competitors and 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 Report on Form 6-K in light of future events. You are
cautioned not to put undue reliance on any forward-looking statements.
W.P. Stewart & Co., Ltd.
Condensed Consolidated Statements of Financial Condition
September 30, December 31,
2002 2001
------------- -------------
(unaudited)
Assets:
Cash and cash equivalents $ 32,523,201 $ 62,302,344
Fees receivable 4,717,816 2,952,580
Receivable from broker-dealer 933,364 582,091
Investments in unconsolidated affiliates (net of accumulated
amortization of $144,151 and $82,372 at September 30, 2002 and
December 31, 2001, respectively) 4,003,992 3,979,317
Receivables from affiliates, net 802,885 666,192
Investments, available for sale (cost $8,892,529 and $1,012,400
at September 30, 2002 and December 31, 2001, respectively) 8,747,575 879,116
Investment in aircraft (net of accumulated depreciation of
$14,736,587 and $12,633,445 at September 30, 2002 and
December 31, 2001, respectively) 7,714,888 9,818,030
Goodwill 5,631,797 5,631,797
Intangible assets (net of accumulated amortization of $7,518,653 and
$4,464,891 at September 30, 2002 and December 31, 2001, respectively) 61,448,316 44,299,495
Furniture, equipment and leasehold improvements (net of
accumulated depreciation and amortization of $3,130,119 and
$2,361,376 at September 30, 2002 and December 31, 2001, respectively) 4,349,951 4,789,744
Interest receivable on shareholders' notes 381,265 317,292
Income taxes receivable 3,094,993 4,071,171
Other assets 3,265,217 2,988,942
------------- -------------
$ 137,615,260 $ 143,278,111
============= =============
Liabilities and Shareholders' Equity:
Liabilities:
Loans payable $ 17,661,929 $ 18,098,337
Employee compensation and benefits payable 754,225 983,824
Fees payable 1,442,304 878,334
Income taxes payable -- 1,078,713
Professional fees payable 2,609,586 3,127,077
Dividends payable -- 8,528
Accrued expenses and other liabilities 5,657,752 4,997,670
------------- -------------
28,125,796 29,172,483
------------- -------------
Minority Interest 162,959 65,639
------------- -------------
Shareholders' Equity:
Common shares, $0.001 par value (125,000,000 shares authorized,
46,251,108 and 47,831,864 shares issued and outstanding at
September 30, 2002 and December 31, 2001, respectively) 46,251 47,832
Additional paid-in-capital 79,767,641 105,472,859
Contingently returnable shares (975,766 and 1,788,732 shares
at September 30, 2002 and December 31, 2001, respectively) (14,263,158) (24,902,377)
Accumulated other comprehensive income (178,099) (471,369)
Retained earnings 61,361,285 57,007,661
------------- -------------
126,733,920 137,154,606
Less: notes receivable for common shares (17,407,415) (23,114,617)
------------- -------------
109,326,505 114,039,989
------------- -------------
$ 137,615,260 $ 143,278,111
============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
W.P. Stewart & Co., Ltd.
Unaudited Condensed Consolidated Statements of Operations
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
----------- ------------ ------------ ------------
Revenue:
Fees $25,616,124 $ 28,582,833 $ 82,979,085 $ 89,806,433
Commissions 8,096,957 8,738,686 22,501,051 31,273,486
Interest and other 805,928 1,080,777 2,777,962 4,265,079
----------- ------------ ------------ ------------
34,519,009 38,402,296 108,258,098 125,344,998
----------- ------------ ------------ ------------
Expenses:
Employee compensation and benefits 6,104,193 6,398,189 19,701,313 20,941,449
Fees paid out 1,685,749 158,043 5,729,493 3,657,607
Commissions, clearance and trading 1,676,277 1,706,852 4,638,936 5,744,386
Research and administration 3,925,803 3,100,997 10,809,754 10,013,157
Marketing 1,490,012 623,227 3,588,452 1,977,994
Depreciation and amortization 2,055,380 1,898,638 5,984,908 5,557,487
Other operating 1,823,251 2,584,546 6,369,804 7,643,435
----------- ------------ ------------ ------------
18,760,665 16,470,492 56,822,660 55,535,515
----------- ------------ ------------ ------------
Income before taxes 15,758,344 21,931,804 51,435,438 69,809,483
Provision for taxes 1,768,428 2,193,180 5,336,137 6,980,948
----------- ------------ ------------ ------------
Net income $13,989,916 $ 19,738,624 $ 46,099,301 $ 62,828,535
=========== ============ ============ ============
Earnings per share:
Basic earnings per share $ 0.32 $ 0.46 $ 1.05 $ 1.45
=========== ============ ============ ============
Diluted earnings per share $ 0.31 $ 0.42 $ 0.99 $ 1.34
=========== ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
W.P. Stewart & Co., Ltd.
Unaudited Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2002 and 2001
2002 2001
------------ ------------
Cash flows from operating activities:
Net income $ 46,099,301 $ 62,828,535
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 22,432 --
Depreciation and amortization 5,984,908 5,557,487
Equity in income of unconsolidated affiliates (86,454) (456,063)
Non-cash compensation 312,827 --
Minority interest 97,320 --
Changes in operating assets and liabilities:
Fees receivable (1,765,236) (169,020)
Receivable from broker-dealer (351,273) (294,423)
Receivables from affiliates, net (136,693) 1,204,754
Income taxes receivable 976,178 --
Other assets (276,275) (911,875)
Employee compensation and benefits payable (229,599) 3,174,960
Fees payable 563,970 (1,223,316)
Income taxes payable (1,078,713) 481,877
Professional fees payable (517,491) 203,921
Accrued expenses and other liabilities 660,082 536,567
------------ ------------
Net cash provided by operating activities 50,283,806 70,408,050
------------ ------------
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)
Cash dividends paid on shares subject to repurchase (975,870) (1,707,539)
Purchase of furniture, equipment and leasehold improvements (326,428) (530,962)
------------ ------------
Net cash (used for) investing activities (9,190,948) (2,132,537)
------------ ------------
Cash flows (used for) financing activities:
Payments on loans payable (436,409) (407,358)
Proceeds from issuance of common shares 642,367 --
Repurchase of common shares (35,182,222) (22,046,577)
Proceeds from notes receivable for common shares 5,639,932 3,694,634
Interest receivable on shareholders' notes (63,973) 8,878
Dividends to shareholders (41,754,203) (41,339,244)
------------ ------------
Net cash (used for) financing activities (71,154,508) (60,089,667)
Effect of exchange rate changes in cash 282,507 (69,486)
------------ ------------
Net (decrease)/increase in cash and cash equivalents (29,779,143) 8,116,360
Cash and cash equivalents, beginning of period 62,302,344 56,764,420
------------ ------------
Cash and cash equivalents, end of period $ 32,523,201 $ 64,880,780
============ ============
Supplemental disclosures of cash flows information
Cash paid during the period for:
Income taxes $ 5,649,811 $ 6,544,071
============ ============
Interest expense $ 927,765 $ 956,815
============ ============
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.
The Company issued common shares for notes receivable for the nine months ended
September 30, 2002 and 2001, in the amounts of $787,891 and $4,036,200,
respectively, and cancelled outstanding notes of $855,161 and $6,278 for the
nine months ended September 30, 2002 and 2001, respectively.
At September 30, 2001, the Company had dividends payable to shareholders of
$8,528.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying condensed 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 ("US")
Investment Advisers Act of 1940, as amended, ("WPS & Co., Ltd." and, together
with its subsidiaries, the "Company") are presented on a condensed consolidated
basis.
These condensed consolidated financial statements are unaudited and should be
read in conjunction with the audited consolidated financial statements
incorporated by reference in the Annual Report on Form 20-F of the Company for
the year ended December 31, 2001. The condensed consolidated financial
information as of and for the year ended December 31, 2001 has been derived from
audited consolidated financial statements not included herein. Certain
reclassifications have been made to prior-year amounts to conform to the
current-year presentation. All material intercompany transactions and balances
have been eliminated.
The unaudited condensed financial statements include all adjustments, consisting
only of normal recurring adjustments that are, in the opinion of management,
necessary for a fair statement of the results in the interim periods presented.
Interim period operating results for the three months and nine months ended
September 30, 2002 are not necessarily indicative of results that may be
expected for the entire year or any other period.
NOTE 2: BACKGROUND AND ORGANIZATION
For the nine months ended September 30, 2002 and 2001, the Company consisted of
several worldwide affiliated entities under common control, which provide
investment advisory and related services including securities brokerage. The
Company's revenues will fluctuate based upon the market performance of its
clients' investments in US, European and Asian financial markets.
Business Acquisitions
In 1999 the Company acquired 50% of TPRS Services N.V. ("TPRS") and 100% of NS
Money Management (Bermuda) Limited ("NSMM") and First Long Island Investors,
Inc. ("FLII"). On December 29, 2000, the Company acquired the remaining 50% of
TPRS. The repurchase provisions of the 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 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
5
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.
On January 1, 2002, 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. Accordingly, the
shareholders' equity account "contingently returnable shares" was reduced by
$7,015,291 and additional paid-in-capital was increased by $8,315,623, being the
excess of the shares' fair value over their initial issue price. The respective
purchase price allocations were increased accordingly.
On July 1, 2002, in accordance with the 2000 TPRS acquisition agreement,
repurchase provisions on 20% of the initial number of shares issued and recorded
as contingently returnable shares lapsed. Accordingly, the shareholders' equity
account "contingently returnable shares" was reduced by $3,623,928 and
additional paid-in-capital was increased by $271,876, being the excess of the
shares' fair value over their initial issue price. The respective purchase price
allocations were increased accordingly.
The following table shows information for each acquisition as of and for the
nine months ended September 30, 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 Period
- ----------- --------- ---------- -------- ----------- ---------- --------------
TPRS 1,966,000 1,410,000 556,000 $ 598,080 $31,831,660 $1,326,917
NSMM 898,831 719,065 179,766 161,790 14,654,833 603,610
FLII 1,200,000 960,000 240,000 216,000 19,762,288 967,683
--------- --------- -------- ----------- ----------- ----------
4,064,831 3,089,065 975,766 $ 975,870 $66,248,781 $2,898,210
========= ========= ======== =========== =========== ==========
6
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
========= ========= ========= =========== =========== ==========
NOTE 3: EARNINGS PER SHARE
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------- ---------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Basic Earnings Per Share:
Net income $13,989,916 $19,738,624 $46,099,301 $62,828,535
=========== =========== =========== ===========
Weighted average basic shares
outstanding 43,457,488 43,142,875 43,716,022 43,451,888
----------- ----------- ----------- -----------
Net income per share $ 0.32 $ 0.46 $ 1.05 $ 1.45
=========== =========== =========== ===========
Diluted Earnings Per Share:
Net income $13,989,916 $19,738,624 $46,099,301 $62,828,535
=========== =========== =========== ===========
Weighted average basic shares
outstanding 43,457,488 43,142,875 43,716,022 43,451,888
Add: Unvested shares, contingently
returnable shares and unvested
options 1,992,433 3,308,081 2,665,823 3,542,337
----------- ----------- ----------- -----------
Weighted average diluted shares
outstanding 45,449,921 46,450,956 46,381,845 46,994,225
----------- ----------- ----------- -----------
Net income per share $ 0.31 $ 0.42 $ 0.99 $ 1.34
=========== =========== =========== ===========
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.
7
During the third quarter of 2002, the Company repurchased and cancelled an
aggregate of 493,300 shares in open market transactions for an aggregate
purchase price of $8,374,789.
On September 30, 2002 and 2001, respectively, 46,251,108 and 47,069,073 shares
were issued and outstanding. The shareholders of record are entitled to full
voting rights and dividends on these shares; 2,269,955 and 2,398,653 of these
shares were unvested and held by the Company's or affiliates' employees on
September 30, 2002 and 2001, respectively.
NOTE 4: COMPREHENSIVE INCOME
The following table details the components of comprehensive income as described
in Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income".
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net income $ 13,989,916 $ 19,738,624 $ 46,099,301 $ 62,828,535
Other comprehensive income,
net of tax:
Reclassification adjustment for
realized gains on available for
sale securities included in
interest and other -- -- 133,284 (432,447)
Unrealized losses on available for
sale securities (91,199) (162,514) (122,521) (205,333)
Foreign currency translation
adjustment 125,143 103,416 282,507 (69,486)
------------ ------------ ------------ ------------
Comprehensive income $ 14,023,860 $ 19,679,526 $ 46,392,571 $ 62,121,269
============ ============ ============ ============
NOTE 5: RELATED PARTY TRANSACTIONS
Research and administrative expenses include travel expenses of $1,695,361 and
$1,021,632 for the nine months ended September 30, 2002 and 2001, which were
paid to Shamrock Aviation, Inc. ("Shamrock"), a company owned by principal
shareholders of the Company.
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. These costs, reflected in
research and administration expenses, include $2,093,420 and $1,872,954 for the
nine months ended September 30, 2002 and 2001, respectively.
A portion of the office space located in New York includes space occupied by
Stewart family interests. W.P. Stewart & Co., Inc. ("WPSI") is reimbursed on a
monthly basis for rent and other costs associated with the space, which
approximated $116,149 and $95,303 for the nine months ended September 30, 2002
and 2001, respectively. These amounts are directly affected by the actual space
utilized in each of those periods.
W.P. Stewart Fund Management Limited ("WPS Dublin") serves as the investment
manager to an Irish fund solely advised by WPS Investissements S.A., a Swiss
investment management firm. WPS Investissements S.A. is principally owned by a
beneficial owner of a minority interest in the Company.
8
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 $24,633
and $34,814 for the nine months ended September 30, 2002 and 2001, 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 $15,127 and $23,809 for the nine
months ended September 30, 2002 and 2001, respectively.
The Company pays Bowen Asia Limited ("Bowen"), an unconsolidated affiliate of
the Company, 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 $549,454 and
$386,307 for the nine months ended September 30, 2002 and 2001, 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 nine months ended September 30, 2002 and 2001 were
$13,284 and $20,109, respectively.
Prior to our acquisition of a controlling interest in TPR & Partners NV ("TPR"),
the Company paid TPR, a principal owner of which is an executive officer of the
Company, fees for marketing services. These fees amounted to $403,009 for the
nine months ended September 30, 2001.
The Company pays Carl Spangler Kapitalanlagegesellschaft mbH, which is
controlled by one of the Company's directors, fees for solicitation services.
These fees amounted to $328,177 and $10,475 for the nine months ended September
30, 2002 and 2001, respectively.
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 $4,361,548 and $3,861,941
for the nine months ended September 30, 2002 and 2001, respectively.
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 the Company's directors is the President and 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 $135,000 for each of the nine-month periods ended September
30, 2002 and 2001, respectively.
Included in receivables from affiliates, net, at September 30, 2002 and 2001 is
a subordinated loan of $212,526 and accrued interest on such loan in the amount
of $34,132 due from Kirk Management Ltd. The loan has no fixed repayment date.
Included in investments available for sale at September 30, 2002 is an amount of
$882,312, which is an investment in a fund managed by WPS Dublin, a wholly-owned
subsidiary of the Company.
Included in research and administration expenses for the nine months ended
September 30, 2002 is rent expense in the amount of $96,649 which is paid to a
company owned by the former principals of TPR.
NOTE 6: LONG-TERM DEBT
Interest expense on long-term debt totaled $927,765 and $956,815 for the nine
months ended September 30, 2002 and 2001, respectively.
9
NOTE 7: COMMITMENTS AND CONTINGENCIES
At September 30, 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 W.P. Stewart & Co. (Europe), Ltd.'s
landlord. The latter amount is guaranteed by the Company, and is collateralized
by a fixed deposit cash account, which will remain intact over the term of the
lease and is reflected in other assets at September 30, 2002 and December 31,
2001.
W.P. Stewart Securities Limited ("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. WPSSL is subject to credit
risk to the extent that the clearing broker may be unable to repay amounts owed.
NOTE 8: NOTES RECEIVABLE FOR COMMON SHARES
During the nine months ended September 30, 2002, the Company issued 42,333
common shares to certain employees and employees of affiliated entities, in
connection with the Company's 2001 Employee Equity Incentive Plan, for
installment notes totaling $787,891. The installment notes are full recourse,
bear interest at 8.5% 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.
Pursuant to employee 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 nine months ended
September 30, 2002, 64,189 unvested common shares of former employees were
repurchased and their installment notes totaling $855,161, were abated.
10
Future minimum payments, expected to be received, on notes receivable for common
shares as of September 30, 2002 are as follows:
2002 (3 months) $ 974,100
2003 3,782,347
2004 3,787,889
2005 3,194,602
2006 2,336,901
Thereafter (through 2009) 3,331,576
-----------
$17,407,415
===========
Interest income on all such notes was $1,391,868 and $1,019,182 for the nine
months ended September 30, 2002 and 2001, respectively.
NOTE 9: 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 addition to the options granted under the 2001
Employee Equity Incentive Plan, during the fourth quarter of 2001 the Company
granted 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". The Company applies Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" 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 grant.
During the third quarter of 2002, the Company granted awards under the Plan that
consisted of rights to purchase 70,333 restricted common shares, which vest in
equal amounts in each of the 28 calendar quarters following the grant, and
options to purchase 140,667 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 10: 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 US
subsidiaries of the Company is subject to income taxes imposed by US
authorities. In addition, the Company's non-US 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.
11
The income tax provision, all current, for the periods ended September 30, 2002
and 2001 is as follows:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
US:
Federal $1,354,485 $1,725,383 $3,996,661 $5,491,939
State and local 410,067 467,797 1,327,966 1,489,009
---------- ---------- ---------- ----------
1,764,552 2,193,180 5,324,627 6,980,948
Other: 3,876 -- 11,510 --
---------- ---------- ---------- ----------
$1,768,428 $2,193,180 $5,336,137 $6,980,948
========== ========== ========== ==========
NOTE 11: PENSION BENEFITS
Total employer contributions amounted to $959,125 and $992,264 for the nine
months ended September 30, 2002 and 2001, respectively. Participants are
immediately vested in their account balances.
NOTE 12: 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
-----------
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2002 2001 2002 2001
---- ---- ---- ----
US $19,322,118 $22,503,035 $62,402,942 $70,410,718
Non-US 6,294,006 6,079,798 20,576,143 19,395,715
----------- ----------- ----------- -----------
Total $25,616,124 $28,582,833 $82,979,085 $89,806,433
=========== =========== =========== ===========
NOTE 13: SUBSEQUENT EVENTS
On October 2, 2002, the Company declared a dividend of $0.30 per share to
shareholders of record as of October 17, 2002, payable on October 31, 2002 in
the aggregate amount of $13,875,732.
On October 3, 2002, the Company granted awards under the Plan that consisted of
rights to purchase 1,333 restricted common shares, which vest in equal amounts
in each of the 28 calendar quarters following the grant, and options to purchase
197,167 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.
As of October 24, 2002, the Board of Directors replenished the Company's
authority to repurchase up to $30 million of the Company's shares at the
discretion of the Company's Executive Committee.
12
INTERIM FINANCIAL REPORT
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 comprise 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
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 for the year ended
December 31, 2001 was approximately 21.5% of adjusted operating profit, and it
is currently anticipated that compensation expense for the year ending December
31, 2002 will be approximately 23%.
Fees paid out are paid to select banks, investment firms and individuals
in at least 10 countries, with whom we have formal marketing arrangements and
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.
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.
13
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.
Operating Results
Three Months Ended September 30, 2002 as Compared to Three Months Ended
September 30, 2001
Assets Under Management
Assets under management were approximately $7.3 billion at September 30,
2002, a decrease of approximately $1.0 billion, or 12.1% from approximately $8.3
billion at June 30, 2002. Assets under management were approximately $8.2
billion at September 30, 2001.
The following table sets forth the net flows of assets under management
for the three months ended September 30, 2002 and 2001, which include changes in
net contributions and net new accounts opened/closed. The table excludes total
capital appreciation or depreciation in assets under management with the
exception of the amount attributable to withdrawals and closed accounts.
Net Flows of Assets Under Management
(in millions)
Three Months Ended
September 30,
--------------------
2002 2001
----- -----
Existing Accounts:
Contributions $ 246 $ 258
Withdrawals (233) (167)
----- -----
Net Flows of Existing Accounts 13 91
Publicly Available Funds:
Contributions 130 30
Withdrawals (93) (11)
Direct Accounts Opened 51 73
Direct Accounts Closed (88) (133)
----- -----
Net Flows of Assets Under Management $ 13 $ 50
===== =====
14
Revenues
Revenues were $34.5 million for the third quarter of 2002, a decrease of
$3.9 million or 10.1% from $38.4 million earned for the third quarter of 2001.
The changes were due to a $3.0 million or 10.4% decrease in fees, $0.6 million
or 7.3% decrease in commission revenue and a $0.3 million or 25.4% decrease in
interest and other revenues. The average gross fee earned from client accounts
was 1.23% for the quarter ended September 30, 2002 as compared to 1.26% for the
quarter ended September 30, 2001. The decline in the average gross fee reflects
a slight change in account mix. The decrease in commission revenue was primarily
due to lower levels of trading volume during the third quarter of 2002 as
compared with the higher levels of trading volume experienced in the third
quarter of 2001. The lower commission income reflects levels that we would
anticipate in relation to the prevailing market environment. Turnover was lower
for the quarter ended September 30, 2002 as compared to the third quarter of
2001. Interest and other revenues decreased $0.3 million primarily due to lower
interest earned based on the prevailing market rates and lower equity income
from our unconsolidated affiliates.
Expenses
Expenses, excluding income taxes, increased $2.3 million, or 13.9%, to
$18.8 million for the third quarter of 2002, from $16.5 million in the same
period of the prior year. The increase was primarily due to a change in variable
expenses, including an increase in fees paid out to marketers, which are
directly related to assets under management of referred accounts, of $1.5
million. In the third quarter of 2001, fees paid to marketers included an
adjustment to fees payable of $1.5 million. Research and administration expenses
increased $0.8 million, marketing expenses increased $0.9 million, which
reflects our additional marketing and client servicing initiatives, and other
operating expenses decreased $0.8 million. Employee compensation and benefits
decreased $0.3 million due to a decrease in adjusted operating profit and a
change in the compensation percentage from 21% for the quarter ended September
30, 2001 to 23% for the quarter ended September 30, 2002. As stated previously,
it is currently anticipated that the compensation percentage for 2002 will be
23% of adjusted operating profit. Depreciation and amortization increased $0.2
million.
Our income tax expense decreased $0.4 million, to $1.8 million, for the
third quarter of 2002, from $2.2 million in the same period of the prior year.
The effective tax rate for the third quarter of 2002 was 11.2%. This is the
result of our anticipated 10% tax rate for 2002 plus an adjustment in our prior
year tax accrual determined when our tax returns were finalized in September
2002. The effective tax rate was 10% for September 30, 2001.
Net Income
Net income for the quarter ended September 30, 2002 decreased $5.7
million, or 29.1%, to $14.0 million, from $19.7 million in the third quarter of
the prior year as a result of the items described above.
Nine Months Ended September 30, 2002 as Compared to Nine Months Ended September
30, 2001
Assets Under Management
Assets under management were approximately $7.3 billion at September 30,
2002, a decrease of approximately $1.9 billion, or 20.7% from approximately $9.2
billion at December 31, 2001. Assets under management were approximately $8.2
billion at September 30, 2001, a decline of approximately $2.1 billion, or
20.4%, from approximately $10.3 billion at December 31, 2000.
15
The following table sets forth the net flows of assets under management
for the nine months ended September 30, 2002 and 2001, which include changes in
net contributions and net new accounts opened/closed. The table excludes total
capital appreciation or depreciation in assets under management with the
exception of the amount attributable to withdrawals and closed accounts.
Net Flows of Assets Under Management
(in millions)
Nine Months Ended
September 30,
--------------------
2002 2001
----- -----
Existing Accounts:
Contributions $ 686 $ 624
Withdrawals (671) (710)
----- -----
Net Flows of Existing Accounts 15 (86)
Publicly Available Funds:
Contributions 331 100
Withdrawals (196) (67)
Direct Accounts Opened 213 298
Direct Accounts Closed (390) (466)
----- -----
Net Flows of Assets Under Management $ (27) $(221)
===== =====
Revenues
Revenues were $108.3 million for the nine months ended September 30, 2002,
a decrease of $17.0 million or 13.6% from $125.3 million earned for the nine
months ended September 30, 2001. The changes were due to a $6.8 million or 7.6%
decrease in fee revenue, an $8.8 million or 28.1% decrease in commission revenue
and a $1.4 million or 34.9% decrease in interest and other revenues. The average
gross fee earned from client accounts was 1.23% for the nine months ended
September 30, 2002 as compared to 1.25% for the nine months ended September 30,
2001. The decline in the average gross fee reflects a slight change in account
mix. The decrease in commission revenue was primarily due to lower levels of
trading volume during the first nine months of 2002 as compared with the higher
levels of trading volume experienced in the first nine months of 2001. The lower
commission income reflects levels that we would anticipate in relation to the
prevailing market environment. Turnover was lower for the nine months ended
September 30, 2002 as compared to the nine months ended September 30, 2001.
Interest and other revenues decreased primarily due to a gain on the sale of an
investment in the first quarter of 2001, lower interest earned based on the
prevailing market rates and lower equity income from our unconsolidated
affiliates.
Expenses
Expenses, excluding income taxes, increased $1.3 million, or 2.3%, to
$56.8 million for the nine months ended September 30, 2002, from $55.5 million
in the same period of the prior year. The increase was primarily due to a change
in variable expenses, including a decrease of $1.1 million in commissions,
clearance and trading costs, which vary with account activity, offset by an
increase in fees paid out to marketers, which are directly related to assets
under management of referred accounts, of $2.1 million. Included in the third
quarter of 2001 was an adjustment to marketing fees payable of $1.5 million.
Research and administration increased $0.8 million, marketing expenses increased
$1.6 million, which reflects our additional marketing and client servicing
initiatives, and other operating expenses decreased $1.3 million due to lower
costs. Employee compensation and benefits decreased $1.2 million due to a
decrease in adjusted operating profit and a change in the compensation
percentage for the nine months ended September 30, 2002 as compared to the
percentage for the nine months ended September 30, 2001. Depreciation and
amortization increased $0.4 million.
16
Our income tax expense decreased $1.7 million, to $5.3 million, for the
nine months ended September 30, 2002, from $7.0 million in the same period of
the prior year. The effective tax rate for the nine months ended September 30,
2002 was 10.4%. This is the result of our anticipated 10% tax rate for 2002 plus
an adjustment in our prior year tax accrual determined when our tax returns were
finalized in September 2002. The effective tax rate was 10% for the nine months
ended September 30, 2001.
Net Income
Net income for the nine months ended September 30, 2002 decreased $16.7
million, or 26.6%, to $46.1 million, from $62.8 million in the same period of
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 condensed consolidated
financial statements. The following tables set forth these contractual
obligations and contingent commitments as of September 30, 2002:
Contractual Obligations
(in millions)
Remaining 2002 2003-2004 2005-2006 2007-Thereafter Total
-------------- --------- --------- --------------- -----
Long-Term Debt $0.2 $1.3 $1.5 $14.7 $17.7
Minimum Rental Commitments $0.6 $5.3 $5.1 $ 8.5 $19.5
Contingent Commitments
(in millions)
Amount of Commitment Expiration Per Period
------------------------------------------
2002 2003-2004 2005-2006 2007-Thereafter Total
---- --------- --------- --------------- -----
Commitments under letters
of credit (1) -- $1.2 -- $0.7 $1.9
(1) See Note 7 to the condensed consolidated financial statements for
additional information.
17
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 U.S. 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 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 believe that our cash flow from operations is sufficient to meet our
debt and other obligations as they come due as well as our anticipated capital
requirements.
EXHIBITS
See press release attached hereto dated October 31, 2002 regarding the
Company's financial results for the third quarter of 2002.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
W.P. STEWART & CO., LTD.
Date: November 12, 2002 By: /s/ Rocco Macri
-----------------------------------
Name: Rocco Macri
Title: Deputy Managing Director -
Chief Financial Officer
19