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, 2004
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, 2004 and for the nine months ended September
30, 2004 and 2003
2. Interim Financial Report
3. Exhibit - Press release dated October 28, 2004
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.
1
W.P. Stewart & Co., Ltd.
Condensed Consolidated Statements of Financial Condition
September 30, December 31,
2004 2003
------------- -------------
(unaudited)
Assets:
Cash and cash equivalents $ 49,865,303 $ 36,824,614
Fees receivable 1,616,521 1,895,426
Receivable from broker-dealer 1,219,625 395,617
Investments in unconsolidated affiliates (net of accumulated amortization
of $308,895 and $247,116 at September 30, 2004 and December 31, 2003,
respectively) 3,492,367 3,855,406
Receivables from affiliates, net 1,627,258 903,029
Investments, available for sale [primarily municipal securities]
(cost $9,205,831 and $9,469,688 at September 30, 2004 and December 31, 2003,
respectively) 8,977,179 9,291,201
Investment in aircraft (net of accumulated depreciation of $18,944,801 and
$17,442,551 at September 30, 2004 and December 31, 2003, respectively) 3,506,674 5,008,924
Goodwill 5,631,797 5,631,797
Intangible assets (net of accumulated amortization of $17,443,248 and
$13,572,643 at September 30, 2004 and December 31, 2003, respectively) 68,388,211 69,160,735
Furniture, equipment and leasehold improvements (net of accumulated
depreciation and amortization of $4,743,492 and $4,264,880 at
September 30, 2004 and December 31, 2003, respectively) 3,163,052 3,320,096
Interest receivable on shareholders' notes 104,057 146,158
Income taxes receivable 880,427 1,510,692
Other assets 3,479,529 3,064,215
------------- -------------
$ 151,952,000 $ 141,007,910
============= =============
Liabilities and Shareholders' Equity:
Liabilities:
Loan payable $ 16,397,362 $ 16,968,114
Employee compensation and benefits payable 3,612,282 1,075,306
Fees payable 1,812,883 678,937
Professional fees payable 4,008,005 3,280,871
Accrued expenses and other liabilities 4,566,978 3,919,361
------------- -------------
30,397,510 25,922,589
------------- -------------
Minority Interest -- 416,731
------------- -------------
Shareholders' Equity:
Common shares, $0.001 par value (125,000,000 shares authorized, 46,129,022 and
46,035,726 shares issued and outstanding at September 30, 2004 and
December 31, 2003, respectively) 46,129 46,036
Additional paid-in-capital 82,482,265 80,419,304
Contingently returnable shares (162,800 shares at December 31, 2003) -- (3,623,928)
Unearned compensation (2,436,708) --
Accumulated other comprehensive income 645,921 573,284
Retained earnings 45,239,797 45,217,876
------------- -------------
125,977,404 122,632,572
Less: notes receivable for common shares (4,422,914) (7,963,982)
------------- -------------
121,554,490 114,668,590
------------- -------------
$ 151,952,000 $ 141,007,910
============= =============
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 Ended September 30, For the Nine Months Ended September 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenue:
Fees $ 25,717,280 $ 24,327,761 $ 77,087,812 $ 69,997,646
Commissions 8,078,565 4,613,917 25,911,314 17,525,818
Interest and other 285,539 710,096 890,366 1,950,376
------------ ------------ ------------ ------------
34,081,384 29,651,774 103,889,492 89,473,840
------------ ------------ ------------ ------------
Expenses:
Employee compensation and benefits 6,398,023 5,224,556 19,415,825 17,568,872
Fees paid out 1,812,177 1,517,274 5,271,647 4,518,523
Commissions, clearance and trading 1,729,340 1,064,392 5,571,157 3,744,450
Research and administration 3,637,164 3,513,126 11,068,427 10,782,706
Marketing 1,056,972 1,070,342 3,782,718 3,411,582
Depreciation and amortization 2,021,273 2,007,883 6,029,445 5,932,015
Other operating 2,230,870 1,811,782 6,812,782 6,872,276
------------ ------------ ------------ ------------
18,885,819 16,209,355 57,952,001 52,830,424
------------ ------------ ------------ ------------
Income before taxes 15,195,565 13,442,419 45,937,491 36,643,416
Provision for taxes 1,519,556 1,487,104 4,593,749 3,795,830
------------ ------------ ------------ ------------
Net income $ 13,676,009 $ 11,955,315 $ 41,343,742 $ 32,847,586
============ ============ ============ ============
Earnings per share:
Basic earnings per share $ 0.30 $ 0.27 $ 0.92 $ 0.74
============ ============ ============ ============
Diluted earnings per share $ 0.30 $ 0.26 $ 0.91 $ 0.73
============ ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
W.P. Stewart & Co., Ltd.
Unaudited Condensed Consolidated Statement of Changes in Shareholders' Equity
For the Nine Months Ended September 30, 2004 and 2003
Common Shares Additional Contingently
------------------------------ Paid-In Returnable
Shares Amount Capital Shares
------------- ------------- ------------- -------------
Balance @ December 31, 2003 46,035,726 $ 46,036 $ 80,419,304 $ (3,623,928)
Issuance of common shares, @ $0.001 par value
Cash 13,974 13 242,347
Notes receivable 7,858 7 148,366
Restricted shares 138,000 138 2,706,162
Contingently returnable shares, no longer
subject to repurchase (623,524) 3,623,928
Repurchase and cancellation of common
shares, @ $0.001 par value (45,164) (44) (333,436)
Cancellation of common shares, @ $0.001
par value (21,372) (21) (349,946)
Non-cash compensation 272,992
Net income
Dividends
Other comprehensive income
Proceeds from notes receivable
for common shares
------------- ------------- ------------- -------------
Balance @ September 30, 2004 46,129,022 $ 46,129 $ 82,482,265 $ 0
============= ============= ============= =============
Balance @ December 31, 2002 46,179,822 $ 46,180 $ 78,673,127 $ (14,263,158)
Issuance of common shares, @ $0.001 par value
Cash 39,822 40 828,258
Notes receivable
Contingently returnable shares, no longer
subject to repurchase 2,919,052 10,261,580
Repurchase and cancellation of common
shares, @ $0.001 par value (83,812) (84) (1,158,260)
Cancellation of common shares, @ $0.001
par value (124,308) (124) (1,634,871) 377,650
Non-cash compensation 290,881
Net income
Dividends
Other comprehensive income
Proceeds from notes receivable
for common shares
------------- ------------- ------------- -------------
Balance @ September 30, 2003 46,011,524 $ 46,012 $ 79,918,187 $ (3,623,928)
============= ============= ============= =============
Accumulated
Other
Unearned Comprehensive Retained Notes
Compensation Income Earnings Receivable Total
------------- ------------- ------------- ------------- -------------
Balance @ December 31, 2003 $ $ 573,284 $ 45,217,876 $ (7,963,982) $ 114,668,590
Issuance of common shares, @ $0.001 par value
Cash 242,360
Notes receivable (148,373) --
Restricted shares (2,706,300) --
Contingently returnable shares, no longer
subject to repurchase 3,000,404
Repurchase and cancellation of common
shares, @ $0.001 par value (333,480)
Cancellation of common shares, @ $0.001
par value 349,967 --
Non-cash compensation 269,592 542,584
Net income 41,343,742 41,343,742
Dividends (41,321,821) (41,321,821)
Other comprehensive income 72,637 72,637
Proceeds from notes receivable
for common shares 3,339,474 3,339,474
------------- ------------- ------------- ------------- -------------
Balance @ September 30, 2004 $ (2,436,708) $ 645,921 $ 45,239,797 $ (4,422,914) $ 121,554,490
============= ============= ============= ============= =============
Balance @ December 31, 2002 $ -- $ 34,576 $ 57,129,989 $ (13,555,499) $ 108,065,215
Issuance of common shares, @ $0.001 par value
Cash 828,298
Notes receivable --
Contingently returnable shares, no longer
subject to repurchase 13,180,632
Repurchase and cancellation of common
shares, @ $0.001 par value (1,158,344)
Cancellation of common shares, @ $0.001
par value 1,257,345 --
Non-cash compensation 290,881
Net income 32,847,586 32,847,586
Dividends (41,231,271) (41,231,271)
Other comprehensive income 110,653 110,653
Proceeds from notes receivable
for common shares 3,289,078 3,289,078
------------- ------------- ------------- ------------- -------------
Balance @ September 30, 2003 $ -- $ 145,229 $ 48,746,304 $ (9,009,076) $ 116,222,728
============= ============= ============= ============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
W.P. Stewart & Co., Ltd.
Unaudited Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2004 and 2003
2004 2003
------------ ------------
Cash flows from operating activities:
Net income $ 41,343,742 $ 32,847,586
Adjustments to reconcile net income to net cash
provided by operating activities:
(Gain)/loss on sale of available for sale securities -- (219,790)
Amortization of bond premium 56,964 234,453
Depreciation and amortization 6,029,445 5,932,015
Equity in income of unconsolidated affiliates 301,261 12,233
Non-cash compensation 542,584 290,881
Minority interest (416,731) 63,300
Changes in operating assets and liabilities:
Fees receivable 278,905 324,665
Receivable from broker-dealer (824,008) 494,399
Receivables from affiliates, net (724,229) (279,614)
Income taxes receivable 630,265 837,572
Interest receivable on shareholders' notes 42,101 85,346
Other assets (415,314) (860,177)
Employee compensation and benefits payable 2,536,976 29,761
Fees payable 1,133,946 (82,287)
Professional fees payable 727,134 867,589
Accrued expenses and other liabilities 647,617 (331,186)
------------ ------------
Net cash provided by operating activities 51,890,658 40,246,746
------------ ------------
Cash flows (used for) investing activities:
Proceeds from sale of available for sale securities 4,010,267 3,919,308
Purchase of available for sale securities (3,766,635) (4,477,133)
Cash dividends paid on shares subject to repurchase (97,680) (244,200)
Purchase of furniture, equipment and leasehold improvements (437,764) (29,757)
------------ ------------
Net cash (used for) investing activities (291,812) (831,782)
------------ ------------
Cash flows (used for) financing activities:
Payments on loans payable (570,752) (433,322)
Proceeds from issuance of common shares 242,360 828,298
Repurchase of common shares (333,480) (1,158,344)
Proceeds from notes receivable for common shares 3,339,474 3,289,078
Dividends to shareholders (41,321,821) (41,231,271)
------------ ------------
Net cash (used for) financing activities (38,644,219) (38,705,561)
Effect of exchange rate changes in cash 86,062 164,741
------------ ------------
Net increase in cash and cash equivalents 13,040,689 874,144
Cash and cash equivalents, beginning of period 36,824,614 34,426,192
------------ ------------
Cash and cash equivalents, end of period $ 49,865,303 $ 35,300,336
============ ============
Supplemental disclosures of cash flows information
Cash paid during the period for:
Income taxes $ 4,665,381 $ 3,027,874
============ ============
Interest $ 418,466 $ 781,127
============ ============
Supplemental Schedule of Non-Cash Investing and Financing Activities:
On July 1, 2004, the final 20% of the shares originally issued in connection
with our acquisition of TPRS Services N.V. in 2000, ceased to be subject to
repurchase, and were recorded with a fair value of $3,000,404 (see Note 2). In
addition, as discussed in Note 2, in 2003, 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. in 1999, ceased to be
subject to repurchase, and were recorded with a fair value of $2,333,644,
$3,868,800 and $6,978,188, respectively. Additionally, on January 1, 2003, in
accordance with the provisions of the acquisition agreements, the Company
reacquired 35,000 shares which were recorded with a value of $377,650
representing the initial issue price of the shares.
The Company cancelled outstanding notes of $349,967 and $1,257,345 for the nine
months ended September 30, 2004 and 2003, respectively (see Note 8).
The Company issued common shares for notes receivable for the nine months ended
September 30, 2004 in the amount of $148,373 (see Note 9).
The Company issued 138,000 common shares for the nine months ended September 30,
2004 in the amount of $2,706,300 (see Note 11).
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying 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 condensed consolidated basis.
These condensed consolidated financial statements are unaudited and should be
read in conjunction with the audited consolidated financial statements in the
Annual Report on Form 20-F of the Company for the year ended December 31, 2003.
The condensed consolidated financial information as of and for the year ended
December 31, 2003 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 presentation of the results in the interim periods. Interim
period operating results for the three months and nine months ended September
30, 2004 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, 2004 and 2003, the consolidated Company
consisted of several worldwide affiliated entities under common control, which
provide investment advisory and related services including securities brokerage.
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 specified that 80%
of the Company's common shares issued in connection therewith could 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
were July 1, 2001, 2002, 2003 and 2004, if assets under management which were
part of the acquisitions decreased below defined reference amounts at the
specified dates and were not replaced.
The recorded purchase price for each acquisition was 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
3. the cumulative cash dividends paid on shares subject to repurchase.
6
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 ceased to be subject to repurchase,
the contra-equity account was relieved and any difference between the initial
issue price and the then current fair value of the shares was charged or
credited to additional paid-in capital, and the purchase price was adjusted for
the fair value of the shares. Cash dividends on shares no longer subject to
repurchase were recorded as a reduction of shareholders' equity.
On July 1, 2004, in accordance with the 2000 TPRS acquisition agreement,
repurchase provisions on the final 20% of the initial number of shares issued
and recorded as contingently returnable shares lapsed. Accordingly, the
shareholders' contra-equity account "contingently returnable shares" was reduced
by $3,623,928 and additional paid-in-capital was reduced by $623,524, 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, 2004.
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 1,966,000 -- $ 97,680 $ 42,367,772 $ 1,847,461
NSMM 863,831 863,831 -- -- 17,042,406 715,379
FLII 1,200,000 1,200,000 -- -- 23,703,088 1,152,209
---------- ---------- ----------- ---------- ------------ -----------
4,029,831 4,029,831 -- $ 97,680 $ 83,113,266 $ 3,715,049
========== ========== =========== ========== ============ ===========
The following table shows information for each acquisition as of and for the
year ended December 31, 2003.
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 1,803,200 162,800 $ 293,040 $ 39,269,688 $ 2,285,037
NSMM 863,831 863,831 -- -- 17,042,406 953,839
FLII 1,200,000 1,200,000 -- -- 23,703,088 1,536,279
--------- --------- -------- --------- ------------ -----------
4,029,831 3,867,031 162,800 $ 293,040 $ 80,015,182 $ 4,775,155
========= ========= ======== ========= ============ ===========
7
NOTE 3: EARNINGS PER SHARE
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ -----------
Basic Earnings Per Share:
Net income $ 13,676,009 $ 11,955,315 $ 41,343,742 $32,847,586
============ ============ ============ ===========
Weighted average basic shares
outstanding 45,262,593 44,482,893 45,013,177 44,202,387
------------ ------------ ------------ -----------
Net income per share $ 0.30 $ 0.27 $ 0.92 $ 0.74
============ ============ ============ ===========
Diluted Earnings Per Share:
Net income $ 13,676,009 $ 11,955,315 $ 41,343,742 $32,847,586
============ ============ ============ ===========
Weighted average basic shares outstanding 45,262,593 44,482,893 45,013,177 44,202,387
============ ============ ============ ===========
Add: Unvested shares, contingently
returnable shares, unvested
options and vested
unexercised options 269,546 850,326 459,625 930,614
------------ ------------ ------------ -----------
Weighted average diluted shares outstanding 45,532,139 45,333,219 45,472,802 45,133,001
------------ ------------ ------------ -----------
Net income per share $ 0.30 $ 0.26 $ 0.91 $ 0.73
============ ============ ============ ===========
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, unvested options and vested unexercised 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 and vested unexercised options issued to
employees of the Company or its affiliates using the treasury stock method.
On September 30, 2004 and 2003, respectively, 46,129,022 and 46,011,524 shares
were issued and outstanding. The shareholders of record are entitled to full
voting rights and dividends on these shares; 867,853 and 1,363,370 of these
shares were unvested and held by the Company's or affiliates' employees on
September 30, 2004 and 2003, respectively.
8
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,
----------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net income $ 13,676,009 $ 11,955,315 $ 41,343,742 $ 32,847,586
Other comprehensive
income, net of tax:
Reclassification
adjustment for unrealized
(losses) on available for
sale securities included
in interest and other (42) (17,164) (12,661) (70,522)
Unrealized (losses) /
gains on available for
sale securities 28,970 (35,091) (764) 16,434
Foreign currency
translation adjustment (24,244) 34,320 86,062 164,741
------------ ------------ ------------ ------------
Comprehensive income $ 13,680,693 $ 11,937,380 $ 41,416,379 $ 32,958,239
============ ============ ============ ============
NOTE 5: RELATED PARTY TRANSACTIONS
Research and administrative expenses include travel expenses of $2,071,689 and
$1,677,096 for the nine months ended September 30, 2004 and 2003, respectively,
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 either Shamrock, or
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
$1,832,936 and $2,047,293 for the nine months ended September 30, 2004 and 2003,
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 amounted
to $137,383 and $123,719 for the nine months ended September 30, 2004 and 2003,
respectively. These amounts are based upon 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, principally
9
owned by a beneficial owner of a minority interest in the Company. In 2004, the
fund entered into liquidation proceedings. The Company had no ownership interest
in either the Irish fund or WPS Investissements S.A. WPS Dublin collected and
remitted to WPS Investissements S.A. all of the advisory fees in respect of such
fund. There were no fees received in respect of such fund during the nine months
ended September 30, 2004 and such fees amounted to $20,830 for the nine months
ended September 30, 2003. 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 $4,792 and
$7,193 for the nine months ended September 30, 2004 and 2003, 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 amounted to $789,461 and
$631,447 for the nine months ended September 30, 2004 and 2003, 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, 2004 and 2003 were
$4,578 and $6,183 respectively.
The Company owns a 50% interest in Stewart Bowen Japan Ltd. ("SBJL"), a joint
venture incorporated in the British Virgin Islands. W.P. Stewart Japan K.K., a
wholly-owned subsidiary of SBJL, is located in Tokyo, Japan and provides client
servicing and asset gathering activities. Bowen owns the remaining 50% interest
in SBJL. Included in receivables from affiliates, net, at September 30, 2004 is
a loan to SBJL in the amount of $250,577. The loan has no fixed repayment date.
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
$484,330 and $839,045 for the nine months ended September 30, 2004 and 2003,
respectively.
The Company pays Appleby Spurling Hunter & Appleby Corporate Services (formerly
Appleby, Spurling & Kempe and A.S. & K. Services Ltd.), a senior partner of
which is a director of the Company, fees for various legal, corporate
administrative and secretarial services. Such fees for services amounted to
$43,333 and $44,261 for the nine months ended September 30, 2004 and 2003,
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 $5,174,781 and $4,298,062
for the nine months ended September 30, 2004 and 2003, 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 an 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, 2004 and
2003, respectively.
Included in receivables from affiliates, net, at September 30, 2004 and 2003 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.
10
Included in investments available for sale at September 30, 2004 and 2003 are
amounts of $824,051 and $735,070, 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 nine months ended
September 30, 2004 and 2003 is rent expense in the amounts of $141,952 and
$109,607 respectively, which is paid to a company owned by the former principals
of W.P. Stewart Asset Management (Europe) N.V., one of whom is an executive
officer of the Company.
Included in other operating expenses for the nine months ended September 30,
2004 and 2003, are contributions in the amounts of $311,000 and $100,000,
respectively, paid to the W.P. Stewart & Co. Foundation, Inc., a private
charitable foundation.
NOTE 6: LONG-TERM DEBT
On July 10, 2003, WPS Aviation Holdings LLC entered into a 10-year amortizing
loan agreement with General Electric Capital Corporation ("GECC") to continue to
finance its obligations under the purchase agreement relating to the purchase of
a Challenger aircraft. The purpose of this new agreement was solely to
consolidate all prior obligations to GECC and to reduce the fixed interest rates
under the previous obligations. This new loan was for the principal sum of
$17,278,264 at a floating per annum simple interest rate, as defined in the loan
agreement as the contract rate, to be paid in 120 monthly installments and a
final installment of $8,608,913 plus any outstanding interest. The contract rate
of interest is equal to the sum of (i) two and 25/100 percent (2.25%) per annum
plus (ii) a variable per annum interest rate equal to the rate listed for one
month commercial paper (non-financial). The first monthly periodic installment
was due and paid on August 10, 2003 with installments due and payable on the
same day of each succeeding month. The loan is collateralized by the Challenger
aircraft.
The loan documents require the Company to maintain certain financial ratios and
a minimum level of $15 million of tangible net worth (as defined in the loan
documents).
Interest expense on long-term debt totaled $417,973 and $696,756 for the nine
months ended September 30, 2004 and 2003, respectively.
NOTE 7: COMMITMENTS AND CONTINGENCIES
At September 30, 2004, 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 in the same amount, which will remain intact
over the term of the lease and is reflected in other assets at September 30,
2004 and 2003.
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. 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
11
to this right. At September 30, 2004, 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.
The Company is involved in a legal action with a vendor arising in the ordinary
course of business. Management believes, based on currently available
information, that the results of such proceedings will not have a material
adverse effect on the financial condition or results of operations of the
Company.
NOTE 8: NOTES RECEIVABLE FOR COMMON SHARES
Pursuant to employee purchase agreements for common shares, in the event a
purchaser is no longer in the employment of, or no longer serves as a director
of, the Company or any of its affiliates, the purchaser shall transfer to the
Company all rights to the 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, 2004, 21,372 unvested common shares of former employees were
repurchased and their installment notes totaling $349,967 were abated.
Future minimum payments, expected to be received, on notes receivable for common
shares as of September 30, 2004 are as follows:
2004 (3 months) $ 414,542
2005 1,314,374
2006 1,006,546
2007 734,379
2008 648,027
Thereafter (through 2011) 305,046
-----------
$ 4,422,914
===========
Interest income on all such notes was $385,360 and $638,215 for the nine months
ended September 30, 2004 and 2003, respectively.
NOTE 9: EMPLOYEE EQUITY INCENTIVE PLAN
The W.P. Stewart & Co., Ltd. 2001 Employee Equity Incentive Plan, as amended
(the "Plan") provides for awards of 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. The exercise price of the options is
equal to the market value of the Company's shares on the date of the grant. All
awards that vest are exercisable in equal annual amounts on each of the first
seven anniversaries of the grant dates. The dilutive effect of unvested options
and vested unexercised 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").
On May 12, 2003, the Board of Directors approved an amendment to the Plan that
(i) increased the total number of common shares available for awards under the
Plan from 2,500,000 to a total of 3,000,000, inclusive of awards previously
granted, and (ii) increased the duration of the period during which vested
options may be exercised from one year to two years with respect to any option
grants made in the future.
As provided in the Plan, as of July 24, 2004 no further grants may be awarded
under the Plan. However, all previously issued grants will extend beyond that
date as expressly provided for in the Plan documents.
12
During the three months ended September 30, 2004, pursuant to the terms of the
Plan, 300 vested employee share options granted in 2002 were exercised for an
aggregate amount of $4,974. For the three months ended September 30, 2003,
pursuant to the terms of the Plan, 34,964 vested employee share options granted
in 2001 were exercised for an aggregate amount of $727,251.
During the three months ended September 30, 2004 and 2003, pursuant to the terms
of the Plan, 86 and 34,284 unexercised options granted in 2001, were forfeited
by former employees and non-employee directors of the Company. Additionally,
during the three months ended September 30, 2004, 20,095 vested options granted
in 2002 expired.
During the three months ended June 30, 2004, pursuant to the terms of the Plan,
429 vested employee share options granted in 2002 were exercised for an
aggregate amount of $7,113. For the three months ended June 30, 2003, pursuant
to the terms of the Plan, 4,858 vested employee share options granted in 2001
were exercised for an aggregate amount of $101,046.
During the three months ended June 30, 2004 and 2003, pursuant to the terms of
the Plan, 13,628 and 10,114 unexercised options granted in 2001, were forfeited
by former employees and non-employee directors of the Company. Additionally,
during the three months ended June 30, 2004, 21,809 vested options granted in
2002 expired.
During the three months ended March 31, 2004, pursuant to the terms of the Plan,
2,529 and 10,716 vested employee share options granted in 2001 and 2002,
respectively, were exercised for an aggregate amount of $230,274. Also, during
the same period, 4,286 and 3,572 vested employee share options granted in 2001
and 2002, respectively, were exercised for installment notes in the amount of
$148,373. The installment notes bear interest at 8.5% per annum, are for a term
of two years and are collateralized by the shares issued.
During the three months ended March 31, 2004 and 2003, pursuant to the terms of
the Plan, 6,042 and 105,447 unexercised options granted in 2001 and 5,714 and
2,500 unexercised options granted in 2002, were forfeited by former employees of
the Company.
NOTE 10: SHARE OPTIONS
On January 1, 2003, the Company began 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 is 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 recognized under SFAS No. 123
for the nine months ended September 30, 2004, for share options granted in 2003,
was $4,230. There were no share options granted during the nine months ended
September 30, 2004.
The options outstanding as of September 30, 2004 for grants awarded during the
year ended December 31, 2003, are set forth below:
Options Weighted Average Remaining Weighted Average
Exercise Prices Outstanding Contractual Life (Years) Exercise Price
--------------- ----------- ------------------------ --------------
$20.20 65,250 7 $20.20
13
Prior to January 1, 2003, the Company had 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.
Share options granted for all periods prior to January 1, 2003 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 has been
recognized for those share options that had no intrinsic value on the date of
grant. The dilutive effect of these options is included in the weighted average
diluted shares outstanding in accordance with SFAS No. 128.
The options outstanding as of September 30, 2004 and 2003 for grants made prior
to January 1, 2003 are set forth below:
Weighted Average
Remaining Contractual Weighted Average
September 30, Exercise Prices Options Outstanding Life (Years) Exercise Price
------------- --------------- ------------------- ------------ --------------
$20.80 - $25.65 810,080 5 $20.90
$16.58 - $28.42 439,294 6 $21.67
2004 1,249,374
=========
$20.80 - $25.65 996,852 6 $20.89
$16.58 - $28.42 557,001 7 $22.11
---------
2003 1,553,853
=========
Options exercisable at September 30, 2004 and 2003 were 188,363 and 164,962,
respectively.
Had compensation cost for the options granted under the Plan prior to January 1,
2003 been determined based on fair value at the grant dates consistent with the
fair value method prescribed by SFAS No. 123, the Company's net income and
earnings per share for the periods ended September 30, 2004 and 2003, would have
been the following pro forma amounts:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income, as reported $ 13,676,009 $ 11,955,315 $ 41,343,742 $ 32,847,586
Pro forma net income $ 13,803,942 $ 11,753,624 $ 41,299,080 $ 31,930,062
Earnings Per Share, as reported:
Basic $ 0.30 $ 0.27 $ 0.92 $ 0.74
Diluted $ 0.30 $ 0.26 $ 0.91 $ 0.73
Pro forma Earnings Per Share:
Basic $ 0.30 $ 0.26 $ 0.92 $ 0.72
Diluted $ 0.30 $ 0.26 $ 0.91 $ 0.71
In the preceding table, pro forma compensation expense associated with option
grants is recognized over the relevant vesting periods.
14
NOTE 11: RESTRICTED SHARES
On June 1, 2004, 20,000 restricted shares were granted to certain non-employee
directors of the Company and on August 1, 2004, 118,000 restricted shares were
granted to certain employees of the Company. These shares are subject to vesting
schedules and resale restrictions set forth in the associated Restricted Share
Agreement. Unearned compensation equivalent to the market value of the shares at
the date of grant was charged to shareholder's equity as of that date and is
being amortized over the four-year vesting period. Compensation expense
resulting from the amortization of the unearned compensation for the period
ended September 30, 2004 was $269,592.
NOTE 12: 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 periods ended September 30, 2004
and 2003 is as follows:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
US:
Federal $ 1,074,073 $ 912,613 $ 3,382,182 $ 2,545,395
State and local 506,149 568,846 1,267,870 1,239,099
----------- ----------- ----------- -----------
1,580,222 1,481,459 4,650,052 3,784,494
Other: (60,666) 5,645 (56,303) 11,336
----------- ----------- ----------- -----------
$ 1,519,556 $ 1,487,104 $ 4,593,749 $ 3,795,830
=========== =========== =========== ===========
NOTE 13: PENSION BENEFITS
Total employer contributions amounted to $1,132,807 and $1,188,176 for the nine
months ended September 30, 2004 and 2003, respectively. Participants are
immediately vested in their account balances.
15
NOTE 14: 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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
U.S. $18,854,877 $18,300,542 $58,028,265 $52,668,264
Non-U.S 6,862,403 6,027,219 19,059,547 17,329,382
----------- ----------- ----------- -----------
Total $25,717,280 $24,327,761 $77,087,812 $69,997,646
=========== =========== =========== ===========
NOTE 15: SUBSEQUENT EVENTS
On October 4, 2004, the Company declared a dividend of $0.30 per share to
shareholders of record as of October 15, 2004, payable on October 29, 2004 in
the aggregate amount of $13,840,036.
During the month of October 2004, 5,789 vested employee share options granted in
2002 were exercised for an aggregate amount of $95,982.
16
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. Additionally, significant components of our expenses
are variable in nature and tend to partially offset fluctuations in revenue.
Our 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.
Another component of our revenues is brokerage commissions. 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. Therefore, commission revenue is also affected by market conditions.
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, investment and foreign currency gains and losses,
subscription fees earned from our mutual funds 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 24.8% of adjusted operating profit for the year ended December 31,
2003. It is currently anticipated that compensation expense for the year ending
December 31, 2004 will be approximately 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.
Commissions, clearance and trading expenses include fees incurred related
to brokerage activities. These transaction-related costs vary directly with
trading activity. Transaction costs are reviewed quarterly and are competitive.
Research and administration expenses include research, travel and
entertainment, communications, information technology systems support and
occupancy.
17
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.
Substantially 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
participate in the results of our operations.
Operating Results
Three Months Ended September 30, 2004 as Compared to Three Months Ended
September 30, 2003
Assets Under Management
Assets under management were approximately $8.5 billion at September 30,
2004, a decrease of approximately $0.1 billion or 1.2% from $8.6 billion at June
30, 2004. Assets under management were slightly more than $8.0 billion at
September 30, 2003, essentially unchanged from approximately $8.0 billion at
June 30, 2003.
The following table sets forth the total net flows of assets under
management for the three months ended September 30, 2004 and 2003, 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)
Three Months Ended
September 30,
-----------------------
2004 2003
--------- ---------
Existing Accounts:
Contributions $ 156 $ 256
Withdrawals (185) (274)
--------- ---------
Net Flows of Existing Accounts (29) (18)
--------- ---------
Publicly Available Funds:
Contributions 61 51
Withdrawals (40) (32)
Direct Accounts Opened 36 70
Direct Accounts Closed (95) (55)
--------- ---------
Net New Flows (38) 34
--------- ---------
Net Flows of Assets Under Management $ (67) $ 16
========= =========
18
Revenues
Revenues were $34.1 million for the third quarter of 2004, an increase of
$4.4 million or 14.9% from $29.7 million earned for the third quarter of 2003.
The change was due to a $1.4 million or 5.7% increase in fee revenue, a $3.5
million or 75.1% increase in commission revenue and a $0.4 million or 59.8%
decrease in interest and other revenues. The average gross fee earned from
client accounts was 1.19% for the quarter ended September 30, 2004 as compared
to 1.21% for the quarter ended September 30, 2003, due to a slight change in
client account mix due to larger accounts subject to our fee break. The increase
in fee revenue was attributable to the increase in assets under management,
which was in turn due to investment performance. Commission revenue was higher
in the quarter, which continues to reflect the addition of new companies to our
clients' portfolios and the corresponding buys and sells. Interest and other
revenues decreased primarily due to foreign currency losses incurred in the
third quarter of 2004 in our European operations due to the weaker U.S. dollar
as compared to the British Pound Sterling and the Euro, a decrease in
subscription fees earned from our mutual funds and lower equity income earned
from our unconsolidated affiliates.
Expenses
Expenses, excluding income taxes, increased approximately $2.7 million or
16.5% to $18.9 million for the third quarter of 2004 from $16.2 million in the
same period of the prior year. The increase was due to changes in operating
expenses, including an increase in variable expenses of $0.3 million in fees
paid out, which are directly related to assets under management of referred
accounts, an increase of $0.7 million in commissions, clearance and trading,
which vary with account activity and an increase in employee compensation and
benefits of $1.2 million due to an increase in adjusted operating profit, on
which that compensation is based. Additionally, research and administration
increased $0.1 million and other operating expenses increased $0.4 million.
Our income tax expense was $1.5 million for each of the three month
periods ended September 30, 2004 and 2003. The effective tax rate was 10% and
11% for the three months ended September 30, 2004 and 2003, respectively.
Net Income
Net income for the quarter ended September 30, 2004 increased $1.7 million
or 14.4% to $13.7 million from $12.0 million in the third quarter of the prior
year as revenues increased at a higher rate than operating expenses.
Nine Months Ended September 30, 2004 as Compared to Nine Months Ended September
30, 2003
Assets Under Management
Assets under management were approximately $8.5 billion at September 30,
2004, a decrease of approximately $0.1 billion or 1.2% from approximately $8.6
billion at December 31, 2003. Assets under management were approximately $8.0
billion at September 30, 2003, an increase of approximately $0.3 billion or
3.9%, from approximately $7.7 billion at December 31, 2002.
The following table sets forth the total net flows of assets under
management for the nine months ended September 30, 2004 and 2003, 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
19
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)
Nine Months Ended
September 30,
-------------------
2004 2003
------- -------
Existing Accounts:
Contributions $ 536 $ 659
Withdrawals (569) (664)
------- -------
Net Flows of Existing Accounts (33) (5)
------- -------
Publicly Available Funds:
Contributions 159 139
Withdrawals (101) (113)
Direct Accounts Opened 154 241
Direct Accounts Closed (454) (411)
------- -------
Net New Flows (242) (144)
------- -------
Net Flows of Assets Under Management $ (275) $ (149)
======= =======
Revenues
Revenues were $103.9 million for the nine months ended September 30, 2004
an increase of $14.4 million or 16.1% from $89.5 million earned for the nine
months ended September 30, 2003. The change was due to a $7.1 million or 10.1%
increase in fee revenue, an $8.4 million or 47.9% increase in commission revenue
and a $1.1 million or 54.4% decrease in interest and other revenues. The average
gross fee earned from client accounts was 1.20% for the nine months ended
September 30, 2004 as compared to 1.22% for the nine months ended September 30,
2003, due to a slight change in client account mix due to larger accounts
subject to our fee break. The increase in fee revenue was attributable to the
increase in assets under management. Because we bill our fees quarterly, in
advance, the strong fourth quarter 2003 increase in assets under management had
a direct impact on our 2004 fee revenue. Commission revenue was significantly
higher for the nine months ended September 30, 2004, compared to the nine months
ended September 30, 2003, and reflects among other factors, that new companies
were added to most clients' portfolios during the nine months ended September
30, 2004, resulting in corresponding buys and sells. Interest and other revenues
decreased primarily due to a gain realized on the sale of municipal bonds during
the nine months ended September 30, 2003, foreign currency losses incurred
during the nine months ended September 30, 2004 in our European operations due
to the weaker U.S. dollar as compared to the British Pound Sterling and the
Euro, lower subscription fees earned from our mutual funds and lower equity
income earned from our unconsolidated affiliates.
Expenses
Expenses, excluding income taxes, increased approximately $5.1 million or
9.7% to $58.0 million for the nine months ended September 30, 2004 from $52.8
million in the same period of the prior year. The increase was due to changes in
operating expenses, including an increase in variable expenses of $0.8 million
in fees paid out, which are directly related to assets under management of
referred accounts, an increase of $1.8 million in commissions, clearance and
trading, which vary with account activity and an increase in employee
compensation and benefits of $1.8 million due to an increase in adjusted
operating profit, on which that compensation is based. Additionally, marketing
expenses increased $0.4 million due to higher costs related to marketing travel
and seminars, research and administration increased $0.3
20
million, depreciation and amortization increased $0.1 million and other
operating expenses decreased $0.1 million.
Our income tax expense increased $0.8 million to $4.6 million for the nine
months ended September 30, 2004 from $3.8 million in the same period of the
prior year. The effective tax rate was 10% and 10.4% for the nine months ended
September 30, 2004 and 2003 respectively.
Net Income
Net income for the nine months ended September 30, 2004 increased $8.5
million or 25.9% to $41.3 million from $32.8 million in the first nine months of
the prior year as revenues increased at a higher rate than operating expenses.
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 operating 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 September 30, 2004:
Contractual Obligations
(in millions)
Remaining 2004 2005-2006 2007-2008 2009-Thereafter Total
-------------- --------- --------- --------------- -----
Long-Term Debt (1) $0.2 $1.6 $1.7 $12.9 $16.4
Minimum Rental Commitments $0.7 $5.6 $3.7 $ 6.2 $16.2
(1) See Note 6 to the condensed consolidated financial statements for
additional information.
Contingent Commitments
(in millions)
Amount of Commitment Expiration Per Period
------------------------------------------
2004 2005-2006 2007-2008 2009-Thereafter Total
---- --------- --------- --------------- -----
Commitments under letters of credit (2) -- $1.2 -- $0.7 $1.9
(2) See Note 7 to the condensed consolidated financial statements for
additional information.
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 in general require us to maintain significant capital
balances. However, our advisory activities for
21
clients in The Netherlands, 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 activities and have consistently maintained net capital in excess of
the prescribed amounts. Historically, we have met our liquidity requirements
with cash generated from our operations.
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. Our liquidity, facilities and overall financial condition
remain strong. We have maintained our customary quarterly dividend and have
funded that dividend essentially out of operating cash flow. 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 monitor our liquidity and our ability to pay
dividends and will also consider opportunities for share repurchases with a view
toward increasing long-term shareholder value.
EXHIBITS
See press release attached hereto dated October 28, 2004 regarding the
Company's financial results for the third quarter of 2004.
22
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 9, 2004 By: /s/ Rocco Macri
-----------------------------------
Name: Rocco Macri
Title: Deputy Managing Director -
Chief Financial Officer
23
W.P. STEWART & CO., LTD.
Press Release
- --------------------------------------------------------------------------------
Investor Contact:
Fred M. Ryan
(441) 295 8585
W.P. Stewart & Co., Ltd. Reports Net Income For
Third Quarter and First Nine Months of 2004
of $13.7 Million and $41.3 Million
Diluted earnings per share of $ 0.30 and $0.91 for the third quarter
and first nine months, respectively
28 October, 2004
Hamilton, Bermuda
W.P. Stewart & Co., Ltd. today reported net income of $13.7 million, or
$0.30 per share (diluted) and $0.30 per share (basic), for the third quarter
ended 30 September 2004. This compares with net income in the third quarter of
the prior year of $12.0 million, or $0.26 per share (diluted) and $0.27 per
share (basic).
Third Quarter 2004 Highlights
For the third quarter of 2004 there were 45,532,139 common shares
outstanding on a weighted average diluted basis compared to 45,333,219 common
shares outstanding for the third quarter of 2003 on the same weighted average
diluted basis.
Cash earnings for the quarter ended 30 September 2004 were $15.8 million
(net income of $13.7 million adjusted to include $2.1 million representing
non-cash expenses of depreciation, amortization and other non-cash charges on a
tax effected basis), or $0.35 per share (diluted). In the same quarter of the
prior year, cash earnings were $13.8 million (net income of $12.0 million
adjusted for the inclusion of $1.8 million representing non-cash expenses of
depreciation, amortization and other non-cash charges on a tax-effected basis),
or $0.30 per share (diluted).
1
Assets under management at quarter-end were approximately $8.5 billion,
compared to more than $8.6 billion at the end of the prior quarter, a decrease
of 1.2% and an increase of 6.3% from the $8.0 billion reported at 30 September
2003.
Nine Month Results
For the nine months ended 30 September 2004, net income was up 25.9%,
compared to the first nine months of 2003, to $41.3 million, or $0.91 per share
(diluted) and $0.92 per share (basic), on revenues of $103.9 million. Net income
for the nine months ended 30 September 2003 was $32.8 million, or $0.73 per
share (diluted) and $0.74 per share (basic), on revenues of $89.5 million.
Cash earnings for the nine months ended 30 September 2004 were $47.2
million (net income of $41.3 million adjusted to include $5.9 million,
representing non-cash expenses of depreciation, amortization and other non-cash
charges on a tax-effected basis), or $1.04 per share (diluted). In the same
period of the prior year, cash earnings were $38.4 million (net income of $32.8
million adjusted for the inclusion of $5.6 million representing non-cash
expenses of depreciation, amortization and other non-cash charges on a
tax-effected basis), or $0.85 per share (diluted).
Since December 2000 performance fees have not been earned in respect to
our management of W.P. Stewart Holdings N.V., our mutual fund listed on Euronext
Amsterdam. Based on the Fund's performance during 2004, there is a possibility
that a performance fee will be earned this year. Performance fees, if any, are
only recorded as of the date these are earned which, in the case of W.P. Stewart
Holdings N.V., would be 31 December.
For the nine months ended 30 September 2004, there were 45,472,802 common
shares outstanding on a weighted average diluted basis compared to 45,133,001
common shares outstanding for the same period in 2003 on the same weighted
average diluted basis.
Performance
Performance in the W.P. Stewart & Co., Ltd. U.S. Equity Composite (the
"Composite") for the third quarter of 2004 was -0.6% pre-fee and -0.9% post-fee.
For the nine months ended 30 September 2004, performance in the Composite was
+3.9% pre-fee and +3.0% post-fee. For the
2
twelve month period ending 30 September 2004, performance in the Composite was
+14.3%, pre-fee and +13.1% post-fee.
W.P. Stewart's five-year performance record for the period ended 30
September 2004 averaged +1.7% pre-fee (+0.5% post-fee), compounded annually,
compared to an average of -1.3% for the S&P 500 in the five-year period.
In each of the one, three, five and ten-year periods, ended 30 September
2004, performance of the Composite has exceeded the performance of the S&P 500
on a pre-fee basis and for the three, five and ten-year periods on a post-fee
basis.
Assets Under Management
Assets under management (AUM) at quarter-end were approximately $8.5
billion, compared with more than $8.6 billion for the quarter ended 30 June
2004, and $8.0 billion reported at the quarter ended 30 September 2003.
Total net flows of AUM for the quarter ended 30 September 2004 were -$67
million, compared with +$16 million in the comparable quarter of 2003 and -$66
million in the second quarter of 2004. Total net flows of AUM for the nine
months ended 30 September 2004 and 2003 were -$275 million and -$149 million,
respectively.
In the third quarter of 2004, net cash flows to existing accounts were
- -$29 million compared with net cash flows of -$18 million in the third quarter
of 2003. Net cash flows to existing accounts for the nine months ended 30
September 2004 were -$33 million compared to -$5 million for the nine months
ended 30 September 2003.
Net new flows (net contributions to our publicly available funds and flows
from new accounts minus closed accounts) were -$38 million for the quarter
compared to +$34 million for the same quarter of the prior year. Net new flows
were -$242 million and -$144 million for the nine months ended 30 September 2004
and 2003, respectively.
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 history, the
growth in earning power behind clients' portfolios has ranged from approximately
11% to 22%, annually.
3
Currently, portfolio earnings growth remains solidly positive and the
Company's research analysts expect portfolio earnings growth to be within the
historical range over the next few years.
Revenues and Profitability
Revenues were $34.1 million for the quarter ended 30 September 2004, up
14.9% from $29.7 million, for the same quarter of 2003. Revenues for the nine
months ended 30 September 2004 and 2003 were $103.9 million and $89.5 million,
respectively.
The average gross management fee was 1.19% for the quarter ended 30
September 2004 and 1.20% for the nine months ended 30 September 2004, compared
to 1.21% and 1.22% in each of the comparable periods of the prior year.
Total operating expenses increased 16.5% to $18.9 million, for the third
quarter 2004, from $16.2 million in the same quarter of the prior year. Total
operating expenses were $58.0 million and $52.8 million for the nine months
ended 30 September 2004 and 2003, respectively.
Pre-tax income, at $15.2 million, was 44.6% of gross revenues for the
quarter ended 30 September 2004 compared to $13.4 million or 45.3% of gross
revenues in the comparable quarter of the prior year. Pre-tax income was $45.9
million (44.2% of gross revenues) for the nine months ended 30 September 2004,
and $36.6 million (41.0% of gross revenues) for the nine months ended 30
September 2003.
The Company's provision for taxes was $1.5 million for each of the
three-month periods ended 30 September 2004 and 30 September 2003. The provision
for taxes for the nine months ended 30 September 2004 was $4.6 million versus
$3.8 million in the comparable period of the prior year. The tax rate was
approximately 10% and 10.4% of income before taxes for the nine-month periods
ended 30 September 2004 and 2003, respectively.
Other Events
The Company paid a dividend of $0.30 per common share on 30 July 2004 to
shareholders of record as of 16 July 2004 and will pay a dividend of $0.30 per
share on 29 October 2004 to shareholders of record as of 15 October 2004.
4
Conference Call
In conjunction with this third quarter 2004 earnings release, W.P. Stewart
& Co., Ltd. will host a conference call on Thursday, 28 October 2004. The
conference call will commence promptly at 9:15am (EDT) and will conclude at
10:00am (EDT). Those who are interested in participating in the teleconference
should dial 1-800-370-0898 (within the United States) or +973-409-9260 (outside
the United States). The conference ID is "W.P. Stewart".
To listen to the live broadcast of the conference over the Internet,
simply log on to the web at the following address:
http://www.firstcallevents.com/service/ajwz410327404gf12.html
The teleconference will be available for replay from Thursday 28 October,
2004 at 12:00 noon (EDT) through Friday, 29 October, 2004 at 5:00 p.m. (EDT). To
access the replay, please dial 1-877-519-4471 (within the United States) or +
973-341-3080 (outside the United States). The PIN number for accessing this
replay is 5279141.
You will be able to access a replay of the Internet broadcast through
Thursday, 4 November, 2004, on the Company's website at www.wpstewart.com. The
Company will respond to questions submitted by e-mail, following the conference.
W.P. Stewart & Co., Ltd. is an asset management company that has provided
research-intensive equity management services to clients throughout the world
since 1975. The Company is headquartered in Hamilton, Bermuda and has additional
operations or affiliates in the United States, Europe and Asia.
The Company's shares are listed for trading on the New York Stock Exchange
(symbol: WPL) and on the Bermuda Stock Exchange (symbol: WPS).
For more information, please visit the Company's website at
www.wpstewart.com , or call W.P. Stewart Investor Relations (Fred M. Ryan) at
1-888-695-4092 (toll-free within the United States) or + 441-295-8585 (outside
the United States) or e-mail to IRINFO@wpstewart.com .
Statements made in this release concerning our assumptions, expectations,
beliefs, intentions, plans or strategies are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements involve risks and uncertainties that may cause actual results to
differ from those expressed or implied in these statements. Such risks and
uncertainties include, without limitation, the adverse effect from a decline or
volatility in the
5
securities markets, a general downturn in the economy, the effects of economic,
financial or political events, a loss of client accounts, inability of the
Company to attract or retain qualified personnel, a challenge to our U.S. tax
status, competition from other companies, changes in government policy or
regulation, a decline in the Company's products' performance, inability of the
Company to implement its operating strategy, inability of the Company to manage
unforeseen costs and other effects related to legal proceedings or
investigations of governmental and self-regulatory organizations, industry
capacity and trends, changes in demand for the Company's services, changes in
the Company's business strategy or development plans and contingent liabilities.
The information in this release is as of the date of this release, and will not
be updated as a result of new information or future events or developments.
# # #
6
W.P. Stewart & Co., Ltd.
Unaudited Condensed Consolidated Statements of Operations
For the Three Months Ended % Change From
------------------------------------------------ -------------------------------
Sept. 30, 2004 June 30, 2004 Sept. 30, 2003 June 30, 2004 Sept. 30, 2003
-------------- ------------- -------------- ------------- --------------
Revenue:
Fees $ 25,717,280 $ 25,601,138 $ 24,327,761 0.45% 5.71%
Commissions 8,078,565 8,421,456 4,613,917 -4.07% 75.09%
Interest and other 285,539 326,763 710,096 -12.62% -59.79%
------------ ------------ ------------ ------------ ------------
34,081,384 34,349,357 29,651,774 -0.78% 14.94%
------------ ------------ ------------ ------------ ------------
Expenses:
Employee compensation and benefits 6,398,023 6,263,513 5,224,556 2.15% 22.46%
Fees paid out 1,812,177 1,728,946 1,517,274 4.81% 19.44%
Commissions, clearance and trading 1,729,340 1,866,977 1,064,392 -7.37% 62.47%
Research and administration 3,637,164 3,694,866 3,513,126 -1.56% 3.53%
Marketing 1,056,972 1,279,263 1,070,342 -17.38% -1.25%
Depreciation and amortization 2,021,273 2,002,720 2,007,883 0.93% 0.67%
Other operating 2,230,870 2,212,547 1,811,782 0.83% 23.13%
------------ ------------ ------------ ------------ ------------
18,885,819 19,048,832 16,209,355 -0.86% 16.51%
------------ ------------ ------------ ------------ ------------
Income before taxes 15,195,565 15,300,525 13,442,419 -0.69% 13.04%
Provision for taxes 1,519,556 1,530,101 1,487,104 -0.69% 2.18%
------------ ------------ ------------ ------------ ------------
Net income $ 13,676,009 $ 13,770,424 $ 11,955,315 -0.69% 14.39%
============ ============ ============ ============ ============
Earnings per share:
Basic earnings per share $ 0.30 $ 0.31 $ 0.27 -3.23% 11.11%
============ ============ ============ ============ ============
Diluted earnings per share $ 0.30 $ 0.30 $ 0.26 0.00% 15.38%
============ ============ ============ ============ ============
W.P. Stewart & Co., Ltd.
Unaudited Condensed Consolidated Statements of Operations
For the Nine Months Ended September 30,
---------------------------------------------
2004 2003 %
------------ ------------ ------------
Revenue:
Fees $ 77,087,812 $ 69,997,646 10.13%
Commissions 25,911,314 17,525,818 47.85%
Interest and other 890,366 1,950,376 -54.35%
------------ ------------ ------------
103,889,492 89,473,840 16.11%
------------ ------------ ------------
Expenses:
Employee compensation and benefits 19,415,825 17,568,872 10.51%
Fees paid out 5,271,647 4,518,523 16.67%
Commissions, clearance and trading 5,571,157 3,744,450 48.78%
Research and administration 11,068,427 10,782,706 2.65%
Marketing 3,782,718 3,411,582 10.88%
Depreciation and amortization 6,029,445 5,932,015 1.64%
Other operating 6,812,782 6,872,276 -0.87%
------------ ------------ ------------
57,952,001 52,830,424 9.69%
------------ ------------ ------------
Income before taxes 45,937,491 36,643,416 25.36%
Provision for taxes 4,593,749 3,795,830 21.02%
------------ ------------ ------------
Net income $ 41,343,742 $ 32,847,586 25.87%
============ ============ ============
Earnings per share:
Basic earnings per share $ 0.92 $ 0.74 24.32%
============ ============ ============
Diluted earnings per share $ 0.91 $ 0.73 24.66%
============ ============ ============
W.P. Stewart & Co., Ltd.
Net Flows of Assets Under Management*
(in millions)
-------------
For the Three Months Ended For the Nine Months Ended
----------------------------------------------- -------------------------------
Sept. 30, 2004 Jun. 30, 2004 Sept. 30, 2003 Sept. 30, 2004 Sept. 30, 2003
-------------- ------------- -------------- -------------- --------------
Existing Accounts:
Contributions $ 156 $ 185 $ 256 $ 536 $ 659
Withdrawals (185) (178) (274) (569) (664)
---------- ---------- ---------- ---------- ----------
Net Flows of Existing Accounts (29) 7 (18) (33) (5)
---------- ---------- ---------- ---------- ----------
Publicly Available Funds:
Contributions 61 48 51 159 139
Withdrawals (40) (26) (32) (101) (113)
Direct Accounts Opened 36 49 70 154 241
Direct Accounts Closed (95) (144) (55) (454) (411)
---------- ---------- ---------- ---------- ----------
Net New Flows (38) (73) 34 (242) (144)
---------- ---------- ---------- ---------- ----------
Net Flows of Assets Under Management $ (67) $ (66) $ 16 $ (275) $ (149)
========== ========== ========== ========== ==========
* The table above sets forth the total net flows of assets under management
for the three months ended September 30, 2004, June 30, 2004 and September
30, 2003, respectively, and for the nine months ended September 30, 2004
and 2003, respectively, 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 amount attributable to withdrawals
and closed accounts.