-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L9mgKJiCUlWOWwUnjsxZWOo/Ou0qyy8EyJUwXEvlj8heyGDuDUHEirS3nuiBNCW+ wn/p6XFbvB/gNBleocQ52g== 0001125282-04-001035.txt : 20040315 0001125282-04-001035.hdr.sgml : 20040315 20040315164659 ACCESSION NUMBER: 0001125282-04-001035 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STEWART W P & CO LTD CENTRAL INDEX KEY: 0000750443 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 980201080 STATE OF INCORPORATION: X0 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 001-16245 FILM NUMBER: 04670096 BUSINESS ADDRESS: STREET 1: TRINITY HALL 43 CEDAR AVE PO BOX 2905 STREET 2: HAMILTON HM LX CITY: BERMUDA STATE: X0 ZIP: 10022 BUSINESS PHONE: 4412958585 MAIL ADDRESS: STREET 1: C/O W P STEWART & CO INC STREET 2: 527 MADISON AVE CITY: NEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: STEWART W P & CO INC DATE OF NAME CHANGE: 19980320 20-F 1 b330710_20f.txt ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION FORM 20-F [ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 - FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 - For the transition period from _____________ to _____________ Commission file number: 011-16245 W.P. STEWART & CO., LTD. (Exact name of Registrant as specified in its charter) BERMUDA (Jurisdiction of incorporation or organization) Trinity Hall 43 Cedar Avenue P.O. Box HM 2905 Hamilton, HM LX Bermuda (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12 (b) of the Act: Name of each exchange Title of Each Class on which registered - ----------------------------------------- ------------------------- Common Shares, par value $0.001 per share New York Stock Exchange Securities registered or to be registered pursuant to Section 12 (g) of the Act: None Securities for which there is a reporting obligation pursuant to Section 15 (d) of the Act: None Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the Annual Report: As of December 31, 2003, 46,035,726 common shares, par value $0.001 per share, were issued and outstanding. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 [X] Item 18 [ ] Table of Contents Page ---- Part I........................................................................1 Item 1. Identity of Directors, Senior Management and Advisors........1 Item 2. Offer Statistics and Expected Timetable......................1 Item 3. Key Information..............................................2 Item 4. Information on the Company...................................8 Item 5. Operating and Financial Review and Prospects................29 Item 6. Directors, Senior Management and Employees..................37 Item 7. Major Shareholders and Related Party Transactions...........45 Item 8. Financial Information.......................................48 Item 9. The Offer and Listing.......................................49 Item 10. Additional Information......................................50 Item 11. Qualitative and Quantitative Disclosures About Market Risk.............................60 Item 12. Description of Securities Other Than Equity Securities......61 Part II......................................................................61 Item 13. Default, Dividend Arrearages and Delinquencies..............61 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds...............................61 Item 15. Controls and Procedures.....................................61 Item 16A. Audit Committee Financial Expert............................62 Item 16B. Code of Ethics..............................................62 Item 16C. Principal Accountant Fees and Services......................62 Item 16D. Exemptions from the Listing Standards for Audit Committees......................................63 Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers..........................63 Part III.....................................................................63 Item 17. Financial Statements........................................63 Item 18. Financial Statements........................................63 Item 19. Exhibits....................................................63 i Forward-Looking Statements Certain statements in this Annual Report are forward-looking statements, including, without limitation, statements concerning our assumptions, expectations, beliefs, intentions, plans or strategies regarding the future. Such forward-looking statements are based on beliefs of our management as well as on estimates and assumptions made by, and information currently available to, our management. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the risk factors set forth in this Annual Report as well as the following: o general economic and business conditions; o industry capacity and trends; o competition; o the loss of major clients; o changes in demand for our services; o changes in, or inability to implement, business strategy or development plans; o changes in the laws and/or regulatory circumstances in Bermuda, the United States, the United Kingdom, Ireland, The Netherlands or other jurisdictions; o changes in contingent liabilities; o quality of management; o actions taken or omitted to be taken by third parties, including our shareholders, clients, competitors, legislative, regulatory, judicial and governmental authorities; and o availability, terms and deployment of capital. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may vary significantly from those anticipated, believed, estimated, expected, intended or planned. We do not intend to review or revise any particular forward-looking statements made in this Annual Report in light of future events. You are cautioned not to put undue reliance on any forward-looking statements. Part I. Item 1. Identity of Directors, Senior Management and Advisors Not Applicable. Item 2. Offer Statistics and Expected Timetable Not Applicable. Item 3. Key Information A. Selected Financial and Unaudited Other Data The following table sets forth selected financial and unaudited other data for the Stewart Group, which includes W.P. Stewart & Co., Ltd. and its subsidiaries and predecessors, for the periods and as of the dates indicated. The data set forth below are presented on a consolidated basis. The income statement and balance sheet data set forth below as of and for the years ended December 31, 2003, 2002, 2001, 2000 and 1999 are derived from our audited financial statements. You should read the financial data set forth below in conjunction with "Operating and Financial Review and Prospects" and the consolidated audited financial statements for the years ended December 31, 2003, 2002 and 2001 and related notes of the Stewart Group included elsewhere in this Annual Report. The audited financial statements were prepared and presented in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP, as they are commonly known.
As of, and for the Year Ended, December 31, ------------------------------------------------------------------------ 2003 2002 2001 2000 1999 ----------- ----------- ------------ ------------ ----------- Income Statement Data: (in thousands, except per share data) Revenues: Fees............................................. $ 94,062 $ 105,419 $ 115,993 $ 149,351 $ 153,307 Commissions...................................... 22,461 28,293 39,695 48,273 35,511 Interest and Other............................... 2,279 3,570 5,028 5,680 4,501 ---------- ---------- ---------- ---------- ---------- 118,802 137,282 160,716 203,304 193,319 ---------- ---------- ---------- ---------- ---------- Expenses: Employee Compensation and Benefits............... 22,942 26,337 28,246 38,546 37,385 Fees Paid Out.................................... 6,059 7,250 5,157 11,639 14,953 Commissions, Clearance and Trading............... 4,811 5,919 7,376 8,353 6,936 Research and Administration...................... 14,429 14,358 13,516 14,523 13,775 Marketing...................................... 4,709 5,166 1,901 2,923 2,336 Depreciation and Amortization.................... 7,933 8,049 7,527 7,538 3,918 Other Operating.................................. 8,861 8,371 9,543 9,607 10,851 ---------- ---------- ---------- ---------- ---------- 69,744 75,450 73,266 93,129 90,154 ---------- ---------- ---------- ---------- ---------- Income Before Taxes................................. 49,058 61,832 87,450 110,175 103,165 Provision for Taxes................................. 5,983 6,381 7,153 11,029 8,410 ---------- ---------- ---------- ---------- ---------- Net Income.......................................... $ 43,075 $ 55,451 $ 80,297 $ 99,146 $ 94,755 ========= ========= ========= ========= ========== Earnings Per Share:(1) Basic Earnings Per Share......................... $ 0.97 $ 1.27 $ 1.85 $ 2.37 $ 2.37 ========= ========= ========= ========= ========== Diluted Earnings Per Share....................... $ 0.95 $ 1.21 $ 1.71 $ 2.18 $ 2.21 ========= ========= ========= ========= ========== Weighted Average Shares Used in Computation: Basic............................................ 44,312 43,576 43,425 41,873 40,036 Diluted.......................................... 45,198 46,013 46,943 45,524 42,864 Balance Sheet Data: Total Assets........................................ $ 141,008 $ 134,979 $ 143,278 $ 114,262 $ 71,201 Total Liabilities................................... $ 26,339 $ 26,914 $ 29,238 $ 31,430 $ 32,300 Shareholders' Equity................................ $ 114,669 $ 108,065 $ 114,040 $ 82,832 $ 38,901 Other Data (unaudited): (in millions, except per share data) Long-Term Debt................................ $ 16.2 $ 16.9 $ 17.5 $ 18.1 $ 18.6 Cash Dividends Per Share...................... $ 1.20 $ 1.20 $ 1.20 $ 1.73 $ 1.94 Assets Under Management....................... $ 8,561 $ 7,655 $ 9,171 $ 10,324 $ 12,255
- -------------------------- (1) Common shares purchased by our employees and options granted to our employees are subject to vesting. For treatment of non-vested common shares, unvested options and vested unexercised options, see Note 4 of the notes to the consolidated financial statements contained herein. 2 B. Capitalization and Indebtedness Not Applicable C. Reasons for the Offer and Use of Proceeds Not Applicable D. Risk Factors Volatility in the securities markets could result in a decrease in the market value of our assets under management which, in turn, would result in a decrease in our earnings. The securities markets are highly volatile, and securities prices may increase or decrease for many reasons, including economic, financial or political events, which we cannot control. These events could result in a decrease in the overall value or amount of assets that we manage and on which we earn our fees. We earn most of our revenues from asset management contracts with clients. Under these contracts, clients pay us an asset management fee equal to a percentage of the market value of the assets we manage. As a result, if securities prices fluctuate, the market value of the assets may fluctuate, and our revenues and profitability may fluctuate as well. All other factors being equal, if securities prices fall, the value of our clients' portfolios, and our revenues, would fall as well. If securities prices fall, securities may become less attractive investments as compared to other investments. Clients have the right to remove their assets from our management at any time, and may be more likely to do so when securities prices decrease. In that case, the amount of assets we manage may also decrease, and our revenues and net income may fall as well. If our revenues were to decrease substantially, there could be an impairment of the value of our acquired intangible assets and goodwill, which would, in turn, have an adverse effect on our reportable earnings. The ability of all of our clients to terminate their asset management contracts with us at will makes our future client and revenue base unpredictable. Our clients have the right to terminate their asset management contracts with us at any time without paying any penalty. Therefore, we cannot be certain that we will continue to receive the fees that the client agreed to pay in its asset management contract with us, particularly if the client decides that a competitor's services or fees are more attractive. In addition, if clients terminate agreements covering a significant portion of the assets we manage, this would result in a significant loss in our revenues which would adversely affect our financial condition. The market for qualified personnel is highly competitive. If we are unable to continue to attract and retain qualified personnel we will be unable to adequately serve our client base. Our asset management approach depends on the expertise of our personnel and their ability to work together as an effective team. Our business depends on our ability to attract and retain highly skilled asset management, investment advisory, research and administrative professionals. Competition for employees with the necessary qualifications is intense, especially for asset management and research professionals. If we are unable to attract and retain these professionals, we will be unable to continue to provide a consistent level of service to our clients. A failure to adequately serve our clients could result in clients' withdrawing their assets from our management and could also affect our ability to attract new clients. Our core investment management team currently consists of managers who have been with us for an average of approximately eight years. If a substantial number of these managers were to leave the Stewart Group within a short period of time, it would be difficult to replace them without disrupting our business. A disruption in our business could also cause us to lose clients. 3 Our U.S. tax status could be challenged. If U.S. federal, state or local taxing authorities successfully challenge our assessment of how much of our net income was derived from activities in the United States, we could be forced to pay significant additional taxes. The Internal Revenue Service, or IRS as it is commonly known, and/or other U.S. taxing authorities may assert that the Stewart Group has significantly understated its taxable income and impose tax on the understatement. The U.S. income tax we have paid and expect to pay is as follows: o W.P. Stewart & Co., Inc. pays U.S. income tax on its taxable income, consisting primarily of fees received from W.P. Stewart & Co., Ltd. and W.P. Stewart Asset Management Ltd. for sub-advisory and research services less applicable expenses; o W.P. Stewart Asset Management (NA), Inc. pays U.S. income tax on its taxable client servicing fee income on a consolidated federal basis with its wholly-owned subsidiary, W.P. Stewart Asset Management, Inc.; and o W.P. Stewart & Co., Ltd. and W.P. Stewart Asset Management Ltd. paid U.S. income tax on approximately 5% of their earnings in 2001 and on approximately 4% of their earnings in 2002, and expect to pay U.S. income tax on approximately 5% of their earnings in 2003, (as computed under U.S. GAAP), the percentage which is, or is expected to be, derived from activities directly carried on in the United States. We continue to take the position, which we believe is supported under existing authority, that no U.S. income tax will be imposed on any additional income of the Stewart Group for 2001, 2002 and 2003. In particular, no portion of the income of W.P. Stewart Securities Limited, W.P. Stewart & Co. (Europe), Ltd., W.P. Stewart Asset Management (Europe), Ltd. and its subsidiaries, NS Money Management Ltd. or TPRS Services N.V. should be subject to U.S. income tax. As a consequence, the overall effective tax rate on our earnings was 8.2% for 2001 and 10.3% in 2002. We believe that the overall tax rate will not exceed 12.2% for 2003 and intend to file tax returns on that basis. The overall effective tax rate on our earnings in future years using a similar methodology will vary in accordance with the relative nature and extent of our activities in the United States and in countries other than the United States. The IRS, New York State and/or New York City may disagree with our positions and assert that (i) the fees paid to W.P. Stewart & Co., Inc. (50 basis points annually calculated on the assets in accounts for which W.P. Stewart & Co., Inc. provides sub-advisory services and $1.2 million annually for research relating to other accounts) or W.P. Stewart Asset Management (NA), Inc. and its subsidiary understated their taxable incomes and/or (ii) the net income of W.P. Stewart & Co., Ltd. and W.P. Stewart Asset Management Ltd. from business that they carry on directly in the United States represents more than the amount reported by those two companies. Any additional net income attributed to W.P. Stewart & Co., Inc., W.P. Stewart Asset Management (NA), Inc. and its subsidiaries or the directly-conducted U.S. business of W.P. Stewart & Co., Ltd. and W.P. Stewart Asset Management Ltd. would be subject to U.S. taxes, at rates that are currently up to 62.62%. Competition in our industry is intense. This competition makes client retention difficult and our revenue base uncertain. The asset management business is highly competitive. Our ability to compete is based on a number of factors, including: 4 o investment performance; o business reputation; o continuity of client relationships and of assets under management; and o the level of fees charged for services. We currently compete with a large number of other asset management firms, as well as broker-dealers, commercial banks, investment banks, insurance companies and other financial institutions. Because the cost of entering the asset management business is relatively low, entities may easily be formed which also may compete with us. If we are not able to compete successfully against existing and future competitors, current clients may withdraw their assets from our management, and we may be unable to attract a sufficient number of new clients to maintain or improve our revenue base and net income. We are subject to the control of many regulatory bodies. These regulators have the power to restrict or limit our business activities, to cause us to change the manner in which we conduct our businesses and to levy substantial penalties or fines on us. The asset management industry is subject to regulation in most of the jurisdictions in which we do business. Our Bermuda companies are subject to the Investment Business Act 2003 of Bermuda, but by virtue of their regulation in other jurisdictions and/or the nature of their clients, they are currently exempt from the requirement to hold a license under that Act. W.P. Stewart & Co., Ltd., W.P. Stewart Asset Management Ltd. and W.P. Stewart & Co., Inc. are registered as investment advisers with the U.S. Securities and Exchange Commission, or SEC as it is commonly known, and various state regulatory agencies. W.P. Stewart Securities Limited, our Bermuda-based broker-dealer, is registered with the SEC and various state regulatory agencies as a broker-dealer. In addition, W.P. Stewart Securities Limited is regulated by the National Association of Securities Dealers, Inc., or NASD as it is commonly known. W.P. Stewart & Co. (Europe), Ltd. is authorized and regulated by the Financial Services Authority, or FSA as it is commonly known, previously regulated by the Investment Management Regulatory Organisation Limited, or IMRO as it was commonly known, and W.P. Stewart Fund Management Limited, our Dublin-based fund management company, is regulated by the Central Bank of Ireland. WPSH Management N.V. and the publicly traded funds that it manages, including W.P. Stewart Holdings N.V., are primarily regulated by the Netherlands Authority for the Financial Markets, commonly referred to as the AFM. W.P. Stewart & Co., Ltd. has also been issued a license by the AFM to conduct certain activities in The Netherlands, which license is conditioned upon certain obligations of the licensee. These regulatory regimes are designed to protect clients and other third parties who deal with us and our subsidiaries and to ensure the integrity of the financial markets. They are not designed to protect our shareholders. These regulations often limit our activities through requirements relating to customer protection, market conduct, money laundering and net capital. We also face the risk of significant intervention by regulatory authorities, including extended investigation and surveillance activity, adoption of costly or restrictive new regulations and judicial or administrative proceedings that may result in substantial penalties to us. Among other things, if we were found to have violated a significant regulatory requirement, we could be fined or enjoined from engaging in certain business activities, and the registration of certain members of the Stewart Group as investment advisers, broker-dealers or fund managers could be terminated. If new regulations are adopted, these consequences could be more significant. 5 As a shareholder of a Bermuda company you may, in some instances, have fewer rights and protections than you would have as a shareholder of a U.S. company. W.P. Stewart & Co., Ltd. is incorporated in Bermuda and its corporate affairs are governed by its memorandum of association, its bye-laws and Bermuda law. Under Bermuda law, shareholders have fewer rights than they might have as shareholders of a corporation incorporated in a U.S. jurisdiction, and these rights are less well-defined. It is also more difficult in some respects for investors to protect their interests in connection with actions by the management, board of directors or controlling shareholders of a company. For a description of some of the rights that you will have as a shareholder of W.P. Stewart & Co., Ltd., see Item 10 B under the caption "Additional Information - Memorandum and Articles of Association." The United States and Bermuda do not have a treaty requiring Bermuda courts to recognize and enforce U.S. court judgments in civil or criminal matters. It is not clear that a Bermuda court would enforce a United States court judgment based solely on the U.S. federal securities laws. We are and will continue to be controlled by affiliated shareholders. All shareholders of WPS II, Inc., our largest shareholder, owning approximately 43% of the common shares as of March 1, 2004, are current or former employees of the Stewart Group, members of their families or trusts for members of their families. Additionally, our directors and executive officers beneficially own approximately 14% of the common shares. Also, substantially all of our other employees own common shares. Furthermore, the majority of these shareholders (including WPS II, Inc.) will not be subject to the voting limitations described below. WPS II, Inc. and these affiliated individuals, therefore, will have the power (without the consent of our other shareholders) to elect the entire board of directors and, as a result, to control the management and policies of the Stewart Group, including making all decisions about mergers, acquisitions, sales, borrowings, issuances and redemptions of our securities and declaration of dividends on the common shares. They also will be able to decide all other matters submitted to our shareholders for approval, including amendments to our memorandum of association and bye-laws. Our bye-laws restrict shareholders' voting rights. You may not be able to vote all of the common shares that you own. Our bye-laws limit the voting power of natural persons to a maximum of 5% of all votes attributable to our outstanding shares and the voting power of entities and persons other than natural persons to a maximum of 9.5% of the votes attributable to our outstanding shares. For these purposes, voting power held by any person or entity is deemed to include voting power held or shared by that person or entity as part of a "group" (as defined in the Securities Exchange Act of 1934). These limitations apply regardless of how many common shares are actually owned or controlled by a shareholder. These restrictions, however, will not apply to: o WPS II, Inc.; o Other shareholders or groups of shareholders who were shareholders of W.P. Stewart & Co., Ltd. immediately before our initial public offering in December 2000; and o Certain persons, entities or groups that are designated by our board of directors. The votes that could have been cast by shareholders who are subject to these voting restrictions will be allocated to the other shareholders pro rata based on the number of shares they hold. However, no shareholder subject to these restrictions may be allocated additional voting rights to the extent that the allocation would cause that shareholder to have more than 5% (for natural persons) or 9.5% (for legal persons or entities) of the total voting power. This voting limitation was put in place to reduce the likelihood that we will become a controlled foreign corporation for U.S. tax purposes. See Item 10 E under the caption "Additional Information - Taxation" for a discussion of the tax consequences associated with our becoming a controlled foreign corporation. 6 Our bye-laws also limit the overall voting power of all persons, entities or groups to 20% of the total number of all votes attributable to our outstanding shares. These limitations apply regardless of how many common shares are actually owned or controlled by a shareholder and regardless of whether the voting restrictions described in the previous paragraph apply to that shareholder. These restrictions, however, will not apply to: o WPS II, Inc. or its affiliates; o Direct or indirect subsidiaries of W.P. Stewart & Co., Ltd.; o Any shareholding entity that may be established for the purpose of our employee benefit plans and that is designated by our board of directors; and o Other persons, entities or groups that are designated by our board of directors. This voting limitation was put in place to reduce the likelihood of inadvertent terminations of our advisory agreements as a result of "assignments" of such contracts. These voting limitations and reallocation provisions in our bye-laws make it difficult or impossible for any person, entity or group to acquire control of us unless our board of directors, WPS II, Inc. and the other affiliated shareholders discussed above agree. These provisions also may make it difficult to remove incumbent directors of the Stewart Group and may limit the price that investors will be willing to pay in the future for common shares. A change of control of the Stewart Group would automatically terminate our clients' investment advisory agreements with us unless the clients elect not to terminate and could prevent us for a two-year period from increasing the investment advisory fees we are able to charge our clients. Under the Investment Advisers Act of 1940, as amended, or the Advisers Act as it is commonly known, a client's investment management agreement will terminate, unless the client elects otherwise, if the agreement is "assigned" by the investment adviser without the client's consent. An advisory agreement is considered to be assigned to another party when a "controlling block" of the adviser's voting securities is transferred. In our case, an assignment of the Stewart Group's asset management contracts may occur if, among other things, we sell or issue a certain number of additional common shares. We cannot be certain that our clients will consent to the assignment of investment advisory agreements or approve new agreements with the Stewart Group if a change of control occurs. While the limitation in our bye-laws prohibiting any person or group from voting more than 20% of the total number of shares of W.P. Stewart & Co., Ltd. was put in place to reduce the likelihood of inadvertent terminations of our advisory agreements as a result of "assignments" of such contracts, there can be no guarantee that this voting limitation will prevent such a termination from occurring. Under the Investment Company Act of 1940, as amended, or the Investment Company Act as it is commonly known, a party that acquires control of an investment company may not impose an "unfair burden" on that company for a two-year period after a change of control. The term "unfair burden" has been interpreted to include certain increases in investment advisory fees. This restriction, along with the difficulty of obtaining a controlling voting interest in the Stewart Group described above, may discourage potential purchasers from acquiring a controlling interest in W.P. Stewart & Co., Ltd. 7 Future sales of currently restricted common shares could cause the market price for the common shares to decline. If too many shareholders who are currently restricted from selling their common shares decide to sell these shares once the restrictions are lifted, the market price of your common shares could be adversely affected. As of December 31, 2003, there were 46,035,726 common shares issued and outstanding. Of these shares, 18,341,860 common shares are freely transferable without restriction or further registration under the Securities Act of 1933, as amended or the Securities Act, as it is commonly known. In connection with our initial public offering, WPS II, Inc. agreed that it would retain at least 7,000,000 common shares until the expiration of its indemnity obligation relating to tax liabilities resulting from the merger with our U.S. predecessor. See Item 7 under the caption "Major Shareholders and Related Party Transactions." WPS II, Inc. currently beneficially owns 19,775,834 common shares. Sales of substantial numbers of common shares, or the possibility of such sales, pursuant to Rule 144 under the Securities Act or otherwise, may adversely affect the market price of the common shares and make it more difficult for us to raise capital by issuing equity securities. The market price of the common shares will fluctuate. The market price for the common shares may be volatile and may fluctuate based upon a number of factors including, but not limited to: o our operating results; o changes in financial estimates by securities analysts for the Stewart Group and/or its competitors; o conditions or trends in the asset management industry; o adoption of new accounting standards affecting the investment advisory business; o news announcements; or o changes in general economic and market conditions. In addition, the stock market in recent years and months has experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of companies. These fluctuations may materially affect the market price of our common shares. Item 4. Information on the Company A. History and Development of the Company The Stewart Group The Stewart Group, which includes W.P. Stewart & Co., Ltd. and its subsidiaries and predecessors, is an asset management company that has provided research-intensive equity investment management services to clients throughout the world since 1975. Headquartered in Hamilton, Bermuda with additional operations or affiliates in the United States, Europe and Asia, we managed approximately $8.6 billion in assets as of December 31, 2003. Our client accounts are primarily for high net-worth individuals and trusts, partnerships, private corporations and other entities in which high net-worth individuals have a substantial interest, as well as for institutions. Our client base is geographically diverse, with 30% of our assets under management from non-U.S. clients as of December 31, 2003. 8 Our investment management approach is to seek above-average long-term investment returns, while accepting what we believe to be below-average risk. We invest the capital entrusted to us in what we believe are some of the world's finest growing businesses - large enterprises that are leaders in their respective fields and that operate businesses with relatively predictable growth. We focus on a five-year investment horizon and do not engage in market timing. Our investment approach has realized a compound annualized return, before fees, of 20.4% and 19.1%, after fees, on funds under discretionary management from January 1, 1975 through December 31, 2003, as compared with a return of 13.8% for the S&P 500 over the same period. Our compound annualized returns for the five and 10 years ended December 31, 2003, before fees, were 1.3% and 13.5%, respectively, as compared to -0.6% and 11.1%, respectively, for the S&P 500 during the same periods. Our compound annualized returns for the five and 10 years ended December 31, 2003, after fees, were 0.1% and 12.2%, respectively. Our return for the year ended December 31, 2003, before fees, was 19.8% as compared to a return of 28.7% for the S&P 500 during the same period. Our return for the year ended December 31, 2003, after fees, was 18.6%. See Item 4 B under the caption "Information on the Company - Business Overview." Our culture emphasizes teamwork, reinforced by profit sharing and equity ownership by our employees. All of our employees are given the opportunity to become shareholders during their first year of employment with us, and as a result, substantially all of our employees own common shares. We believe that our focused investment approach consistently applied, together with our compensation policy and stock ownership practice, aligns the interests of all of our employees with the interests of our clients and shareholders. This has contributed to close and enduring relationships with our clients and our long-term record of significant growth in assets under management. The Stewart Group began its business in 1975. Expansion of our client base throughout the world and enhancement of our global research capability have been principal elements of our business strategy. We believe that our global position, described below, will continue to increase our ability to execute this business strategy and expand our marketing relationships. The Global Consolidation W.P. Stewart & Co., Ltd. was incorporated on June 29, 1998 under the laws of Bermuda. On June 30, 1998, the shareholders of our U.S. predecessor company exchanged all of their interests in that company for shares of WPS II, Inc., a newly formed holding company. Effective as of July 1, 1998, our U.S. predecessor company merged into W.P. Stewart & Co., Ltd. with W.P. Stewart & Co., Ltd. continuing as the surviving company. Upon completion of this merger, WPS II, Inc. received 29,321,436 common shares representing all of the outstanding common shares of W.P. Stewart & Co., Ltd. at the effective time of the merger. As the first step in the establishment of the Stewart Group's global business, Capital Managers Limited, a Bermuda company under common control with our U.S. predecessor company, was organized in 1996. As of October 30, 1998, W.P. Stewart & Co., Ltd. merged with Capital Managers Limited with W.P. Stewart & Co., Ltd. continuing as the surviving company. As a result of the Capital Managers Limited merger, W.P. Stewart & Co., Ltd. became the owner of Capital Managers Limited's subsidiaries, W.P. Stewart Securities Limited, W.P. Stewart Asset Management Ltd. and W.P. Stewart Fund Management Limited. As consideration in the merger, we issued 13,904,305 common shares to the Capital Managers Limited shareholders. Each of the Capital Managers Limited shareholders was either an employee, a retired employee or director of the Stewart Group or a trustee for the members of an employee's, or retired employee's, family or a member of an employee's family. Each shareholder of WPS II, Inc. is also a former shareholder of Capital Managers Limited. 9 Global Expansion In 1999, we completed three acquisitions and established our London subsidiary. By these actions, we increased our access to a broader European clientele, enhanced our global research capability and improved our asset-gathering in Europe and North America. In 1999, we acquired from TPR & Partners N.V. and TPR Curacao N.V. 50% of the capital stock of TPRS Services N.V., a Curacao company that is engaged in the business of gathering assets for us. As consideration for the TPRS Services N.V. acquisition, we issued 1,152,000 common shares. On December 29, 2000, we consummated the acquisition of the remaining 50% of TPRS Services N.V. in exchange for 814,000 common shares. In 1999, we acquired from Stewart Notz Stucki Limited, an affiliate of the Notz Stucki group of companies, all of the outstanding capital stock of NS Money Management Ltd. NS Money Management Ltd. is an international investment adviser based in Bermuda that has approximately $174 million in assets under management. W.P. Stewart & Co., Ltd. serves as sub-adviser for all of NS Money Management Ltd.'s client accounts. We issued 898,831 common shares as consideration for the acquisition. We believe that the acquisition of NS Money Management Ltd. has enabled us to benefit from several long-term Notz Stucki advisory client relationships and has strengthened our 18-year relationship with the Notz Stucki group of companies. Headquartered in Geneva, Switzerland, the Notz Stucki group is an independent financial institution that specializes in the management of investments of private individuals on a discretionary basis. The Notz Stucki group of companies currently has approximately $10 billion in assets under administration. We acquired, in 1999, from First Long Island Holdings, LLC, 100% of the capital stock of First Long Island Investors, Inc., a significant symbiotic marketer for us. W.P. Stewart Asset Management (NA), Inc. (as the company is now known) is an asset-gathering firm based in Jericho, New York, and currently provides client servicing for the majority of our North American clients. We issued 1,200,000 common shares as consideration for this acquisition. Robert D. Rosenthal, a co-founder of First Long Island Investors, Inc., serves as a director of W.P. Stewart Asset Management (NA), Inc. To enhance our asset-gathering in North America, we entered into ongoing arrangements with First Long Island Investors, LLC, an entity under common ownership with First Long Island Holdings, LLC, under which First Long Island Investors, LLC continues to service W.P. Stewart Asset Management (NA), Inc.'s former clients and refers new clients to us. We believe that First Long Island Investors, LLC's expertise in asset-gathering allows us to accelerate growth of our new asset mandates while remaining focused on investment performance. Under the terms of the acquisitions of TPRS Services N.V., First Long Island Investors, Inc. and NS Money Management Ltd., we have the right to repurchase at nominal consideration, on an annual basis in each year during the four years after the effective dates of each of those transactions, a portion of the common shares issued by W.P. Stewart & Co., Ltd. as consideration in those transactions (not to exceed in the aggregate 80% of the common shares issued in each transaction) if certain levels of assets under management are not maintained by the acquired businesses. In January 2003, in accordance with the provisions of the NS Money Management Ltd. acquisition agreement, we reacquired 35,000 shares. In January 2000, W.P. Stewart & Co. (Europe), Ltd. commenced its investment management business in London. W.P. Stewart & Co. (Europe), Ltd., a wholly-owned subsidiary of W.P. Stewart & Co., Ltd., provides investment research and sub-advisory services to our two Bermuda investment advisory companies (W.P. Stewart & Co., Ltd. and W.P. Stewart Asset Management Ltd.). Our investment professionals in London developed a European portfolio for our clientele using the time-tested principles of our U.S. investment philosophy and approach. In 2002 Lisa Stewart, a founder of Bowen Asia Limited, our 40% unconsolidated affiliate in Hong Kong, and the daughter of William P. Stewart, assumed the responsibility for integrating our European and Asian investment teams to develop a single team responsible for all non-North-American research. We intend to continue to strengthen our London capabilities to advise on European and global portfolio products. 10 These London initiatives will ensure that the research and investment management services offered by W.P. Stewart across all geographies are consistent in style and quality. On November 14, 2001, we acquired a controlling interest in TPR & Partners N.V., an asset-gathering firm based in The Netherlands via the acquisition of shares in a Bermuda holding company that indirectly owns 100% of the shares of TPR. TPR was subsequently renamed W.P. Stewart Asset Management (Europe) N.V. Going forward, the Bermuda company, which is named W.P. Stewart Asset Management (Europe), Ltd., serves as the umbrella for our European asset gathering and client servicing activities. In the transaction, we initially acquired 9,000 of W.P. Stewart Asset Management (Europe), Ltd.'s 12,000 outstanding shares in exchange for 330,000 of our common shares. The former beneficial owners of TPR and their assigns will continue to hold the remaining 3,000 shares of W.P. Stewart Asset Management (Europe), Ltd. until June 30, 2006, at which time we have agreed to acquire those shares at a fair value price determined on that date. In addition, W.P. Stewart Asset Management (Europe), Ltd. currently provides client services for approximately $2.2 billion of our assets under management, and has now taken the lead role in nurturing established relationships, and developing new relationships, with Europe-based clients and asset gatherers. W.P. Stewart & Co., Ltd.'s principal executive offices are located at Trinity Hall, 43 Cedar Avenue, P.O. Box HM 2905, Hamilton HM LX, Bermuda, telephone number: (441) 295-8585. W.P. Stewart & Co., Ltd.'s agent in the United States is W.P. Stewart & Co., Inc., 527 Madison Avenue, 20th Floor, New York, New York 10022, Attention: Michael W. Stamm, Esq., telephone number (212) 750-8585. B. Business Overview The Stewart Group offers research-intensive equity investment management services worldwide. Central to our success are three interdependent competitive strengths - culture, investment methodology and performance record. We foster team effort, collaboration and a comprehensive focus on achieving superior portfolio performance. The long-term commitment between the Stewart Group and our employees is evidenced by our performance-based compensation policies, employee share ownership and the tenure of our employees. The culture is a key factor in our ability to implement, over an extended period of time, an investment methodology that requires intense, shared, continuous research and debate. These elements have contributed to a 20.4% compound annual return before fees (19.1% after fees) for client accounts from January 1, 1975 to December 31, 2003. While investment performance is our primary focus, asset gathering is also important to our business. We have developed mutually beneficial relationships with select institutions and individuals to accumulate new assets and have internalized relationships with our strongest partners. We will continue to cultivate long-term relationships with our current network of marketers and to establish relationships with additional marketers for additional asset gathering. Finally, we intend to continue to pursue a global strategy, both in our research effort and in the expansion of our client base. Competitive Strengths We believe we have a franchise, culture, long-term historical performance record and investment methodology that position us well to continue to compete in the global wealth management business. We have built a business model we believe is unique and have developed and successfully implemented our disciplined investment philosophy over the past 29 years. Our experienced investment team consists of 22 investment analyst/portfolio managers with an average of approximately 18 years of experience in the industry. Eleven of our analyst/portfolio managers have worked at the Stewart Group for five years or longer. With nine offices around the world and a selective network of marketing relationships in more than 10 countries, we have established an international presence and offer services to a broad range of high net-worth individuals and institutions throughout the world. 11 Culture We place great emphasis on teamwork and client service. Cooperation is reinforced through a profit sharing plan and equity ownership by our employees. All employee compensation is based solely on a percentage of the firm's annual operating profits; our policy is not to pay fixed salaries or to guarantee compensation. All of our employees are given the opportunity to become shareholders during their first year of employment with us. As a result, virtually every employee owns common shares of W.P. Stewart & Co., Ltd., which have been accumulated through voluntary personal investments. As a policy, we do not issue shares to employees without consideration. We intend to continue our performance-based compensation practice and to reserve annually up to 1% of our outstanding common shares for purchase by our employees. Pursuant to our 2001 Employee Equity Incentive Plan, as amended, as of December 31, 2003, an aggregate of approximately 1,818,000 restricted share awards and option grants were outstanding or had been exercised, and 1,182,000 shares remained reserved for future grants and awards. All employee options and share purchases under such Plan have been, and will continue to be, subject to seven year vesting. It is our present intention to continue to make available common shares for purchase by our employees in proportion to their relative contributions to the Stewart Group. See Item 6 B under the caption "Directors, Senior Management and Employees- Compensation." We believe that a key to our continued success is our highly motivated team of experienced investment professionals. Each acts in the dual role of analyst and portfolio manager, with every investment portfolio handled by an individual manager, backed up by at least one other manager to provide continuity and stability. The group of analyst/portfolio managers is relatively small, a structure we intend to maintain. The investment professionals meet regularly and are able to interact quickly, informally and effectively. All of our investment professionals share a common commitment to both the demanding standards required to seek to invest only in the world's best companies and the discipline of our appraisal process. All of them have a record of successful investing, and most of them have either known each other or worked closely together for many years. Their investment performance and tenure show them to be a complementary and effective team. Long-Term Performance Record During the 29-year period from January 1, 1975 through December 31, 2003, we experienced a 20.4% compound annual return, before fees, and a 19.1% compound annual return, after fees, compared to a 13.8% return for the S&P 500 Index for the same period. The years ended December 31, 1993, 2000, 2001 and 2002 were the only years since our inception that we experienced negative performance. We believe that our long-term record and strong investment returns provide an advantage in our efforts to accumulate assets through strategic marketing relationships, client referrals and increases to existing client mandates. As a result of retained investment gains as well as the contribution of new funds by existing and new clients, our assets under management have grown at a compound annual rate of approximately 8% during the period from December 31, 1995 to December 31, 2003. 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 29-year history, the growth in earning power behind clients' portfolios has ranged from approximately 11% to 22% annually. 12 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. Investment Methodology Our investment professionals focus on one objective - providing our advisory clients with above-average investment returns over a long period of time, while accepting what we believe to be below-average risk. In making investments, the investment team focuses on a five-year investment horizon and does not engage in market timing. We believe that our investment research is distinguished by its intensity. Our analysts/portfolio managers do their own research on companies they select, and on many they do not select, and derive investment research information from a variety of sources, both external and internal. Our analysts visit these companies regularly, contact managements frequently, talk to competitors, customers and suppliers, and draw upon other diverse sources of information. While one analyst has the primary responsibility for each company (generally four to six companies per analyst), information is also gathered by other analysts and is shared among all investment professionals. Because we consider ourself a long-term investor, the investment professionals prepare detailed five-year projections for all investment prospects and investments. These forecasts and the related appraisal of fair current value for each company under review are used to determine what we believe to be the intrinsic value of that company and are a critical tool in developing a comprehensive and detailed evaluation of a company's business. This appraisal technique systematically examines numerous factors, such as the company's growth prospects, business and product line strength, management capabilities, financial resources and many others. The purpose of this appraisal technique is to evaluate the investment potential and to assess the related risks of companies under review. Our goal is to construct portfolios of great businesses, rather than portfolios of stocks. As a result, we consider each client's portfolio to be a quasi-holding company. The purpose of our thorough investment appraisal process is to concentrate our clients' investments only in those businesses that appear to offer the greatest long-term appreciation potential. The five-year forecasts, and the appraisals for companies under review, are refined frequently as our investment professionals update their research. This consistent coverage allows our investment professionals to act decisively when changes in price and circumstances occur. At any given time, few businesses meet our standards. Accordingly, our worldwide investment universe has historically been limited to fewer than 50 investment candidates from each of the United States, Europe, Japan and Asia-ex-Japan, which are selected based upon a consensus of our investment team. This has allowed us to concentrate our clients' investments in a portfolio typically of 15-20 companies that appear to offer the greatest long-term appreciation potential. The businesses in which we invest normally increase profits every year. These businesses normally achieve cumulative earnings growth at a rate we expect will approximately double earning power behind a client's portfolio every five years. We believe that this pattern of consistent, fairly rapid, earnings growth has been the primary driver behind the improving value of our clients' portfolios and the growth of our business over the years. Using thorough analysis and intensive research, we select investment candidates based in part on the following criteria: o a proven track record of consistent profit growth; o strong financial condition; o predictable earnings growth that we believe will continue for the next five years and beyond; o accurate and reliable information that is readily available; 13 o successful, experienced management that is accessible to our investment team; o strong product lines and competitive position, preferably with worldwide presence; o lack of cyclicality; and o large market capitalization and significant trading liquidity. The determination of whether a particular investment prospect is eligible for inclusion in our investment universe is the result of a collective, debate-driven process that actively involves all members of our investment team and reflects their collective research and analytical judgment and experience. While the entire investment team contributes to the research and appraisal process, each member has the freedom and responsibility to make investment decisions with respect to specific client accounts within the confines of the defined universe. Business Strategy Our business strategy is to continue to provide premier equity investment management services on a worldwide basis. We believe that our pursuit of a more global clientele will lead to continued growth in our assets under management and our revenues, and that both new and existing clients will benefit from our increased focus on international research and stock selection. We intend to adhere to the distinctive and disciplined investment philosophy which we have pursued over our 29-year history. In addition, we believe that a culture of ownership and compensation for performance will be a key element for our continued growth and future success and aligns the interests of our clients, employees and shareholders. Extend Investment Performance Central to our strategy is our objective to achieve above-average investment returns over a long period of time for our clients while accepting what we believe to be below-average risk. We intend to continue to adhere, in expanding and contracting markets alike, without regard to "benchmarks", to a philosophy that emphasizes investment over a relatively long-term horizon in what we believe are high quality, steadily-growing businesses. We intend to remain focused on investment performance while using our network of symbiotic marketers as the primary means to gather assets. Increase Global Research Focus We want our clients to own equity in the finest growing businesses in the world. We believe that having a global integrated research capability is a critical element in providing the best investment product. We also believe that the introduction of the euro in the European monetary union has led to an improvement in the quality and availability of financial information and a more consistent basis for comparing European companies with competitors inside and outside their home countries. As the universe of high quality companies expands globally, we intend to maintain a research effort parallel with the growing investment opportunities. This global research capability will also allow us to meet particular client needs to the extent that they express any regional or national preferences. The establishment of W.P. Stewart & Co. (Europe), Ltd. and our ownership of approximately 40% of Bowen Asia Limited, a British Virgin Islands company operating in Hong Kong, have enabled us to expand our non-U.S. research capability. 14 Pursue Global Clientele We believe that our services and performance have been well-received by clients throughout the world and that there exists significant opportunity to expand our clientele internationally, especially in Europe. We believe that non-U.S. investors are generally under-invested in equity securities and will look to established professionals like the Stewart Group to invest their wealth. As part of our strategy to exploit this opportunity, our acquisition of NS Money Management Ltd., TPRS Services N.V. and TPR & Partners N.V., including its wholly owned subsidiary, TPR Curacao N.V. and our establishment of W.P. Stewart & Co. (Europe), Ltd. have increased our access to a broader Europe-based clientele, provided us with a Europe-based investment management team and formed the basis for our European client servicing and asset-gathering activities. 15 Investment Management Team Our highly experienced and motivated team of investment professionals has been critical to our strong long-term investment performance. We have 22 senior investment professionals and 15 associate portfolio managers who directly participate in the investment process. The following table identifies the senior investment professionals and summarizes their experience in the industry as of March 1, 2004:
Years in Years with Name Location Age Industry Company - ------------------------------------------------ -------- -------- -------- -------- John A. Allison................................ Bermuda 55 21 8 David A. Altman................................ New York 46 22 10 Marilyn G. Breslow............................. New York 59 20 13 Ebrahim Busheri................................ New York 38 14 2 Sang Chung..................................... Hong Kong 34 11 0(1) Christian Diebitsch............................ London 40 13 0(2) Arend E. Dikkers............................... London 46 20 1 Aadil Ebrahim.................................. Hong Kong 28 6 0(3) Samantha Epstein-Smith......................... New York 34 12 5 Alexander Farman-Farmaian...................... Bermuda 38 15 15 Robert G. Gebhart.............................. New York 32 10 1 Timothy A. Huff................................ London 34 10 0(4) Peter H. Jennison.............................. New York 42 19 14 Robert Kahn.................................... New York 71 44 29 Naomitsu Kimoto................................ Tokyo 40 15 0(5) Celina Lin..................................... Hong Kong 44 14 9* Keith Olson.................................... Hong Kong 45 21 1* Harry W. Segalas............................... New York 43 21 13 Lisa M. Stewart................................ Hong Kong/London 46 21 10* William P. Stewart............................. Bermuda 66 49 29 James T. Tierney............................... New York 37 16 4 Harfun Ven..................................... Hong Kong 32 4 4*
- ------------------ * Includes years with Bowen Asia Limited. (1) Joined Bowen in September 2003. (2) Joined W.P. Stewart in January 2004. (3) Joined Bowen in July 2003. (4) Joined W.P. Stewart in February 2004. (5) Joined Bowen in January 2004. 16 Historical Performance Record January 1, 1975-December 31, 2003 Performance We have achieved a 20.4% compound annual return before fees, and a 19.1% compound annual return after fees for the period from January 1, 1975 through December 31, 2003. This compares to a 13.8% return of the S&P 500 Index over the same period computed on a comparable basis. Our compound annualized returns for the five and 10 years ended December 31, 2003, before fees, were 1.3% and 13.5%, respectively, as compared to -0.6% and 11.1%, respectively, for the S&P 500 during the same periods. Our compound annualized returns for the five and 10 years ended December 31, 2003, after fees, were 0.1% and 12.2%, respectively. Our return for the year ended December 31, 2003, before fees, was 19.8% as compared to a return of 28.7% for the S&P 500 during the same period. Our return for the year ended December 31, 2003, after fees, was 18.6%. We believe our superior investment results over long time periods are due largely to our strict adherence to a consistent long-term investment philosophy. We believe that our concentration in less cyclical businesses reduces risk relative to the S&P 500 Index. In the six down market years experienced since our formation (1977, 1981, 1990, 2000, 2001 and 2002), the S&P 500 Index declined by approximately 7.4%, 5.0%, 3.1%, 9.1%, 11.9% and 22.1%, respectively. In those years, accounts managed by us appreciated by approximately 16.0%, 10.8% and 13.2% in 1977, 1981 and 1990, respectively, and depreciated by approximately 1.3%, 5.8% and 14.4% in 2000, 2001 and 2002, respectively, in each case before fees, as calculated in the manner described below. 17 The chart below illustrates our annual return in client accounts in our W.P. Stewart U.S. Equity Composite from January 1, 1975 through December 31, 2003. See "Method of Performance Calculation" below. Managed Accounts vs. S&P 500 [GRAPH] Year S&P 500 WPS Pre-Fee WPS Post-Fee - ---- ------- ----------- ------------ '74 100 100 100 '75 137 165 164 '76 170 217 213 '77 157 251 245 '78 167 284 273 '79 197 377 361 '80 261 504 477 '81 248 558 523 '82 301 764 710 '83 369 980 903 '84 391 1,154 1,052 '85 515 1,720 1,554 '86 611 2,083 1,863 '87 642 2,266 2,005 '88 748 2,482 2,170 '89 986 3,377 2,925 '90 955 3,823 3,266 '91 1,247 5,892 4,988 '92 1,342 6,307 5,274 '93 1,477 6,177 5,108 '94 1,496 6,377 5,212 '95 2,059 8,592 6,950 '96 2,532 11,682 9,352 '97 3,377 15,444 12,242 '98 4,343 20,486 16,074 '99 5,256 22,901 17,762 '00 4,778 22,613 17,318 '01 4,210 21,296 16,116 '02 3,279.0 18,226 13,610 '03 4,220.0 21,838 16,141 Examination of Performance Record Our independent accountants, PricewaterhouseCoopers LLP, have performed an examination of our performance record for the period January 1, 1989 through December 31, 2003, including the five and ten year periods ended December 31, 2003. Method of Performance Calculation Account Inclusion. Our performance data, since 1989, reflects the performance of all client U.S. equity accounts having at least $1 million in market value as of January 1 of each year for which W.P. Stewart & Co., Ltd. (including its U.S. predecessor company) and W.P. Stewart Asset Management Ltd., our Bermuda-based investment adviser subsidiary, acted with complete discretionary authority. With respect to periods prior to 1989, the data reflects performance of a group of accounts believed by management to be representative of all fully discretionary client equity accounts. If the criteria for account inclusion since 1989 had been applied for periods prior to 1989, there is no assurance that the results would be consistent, although we believe the results would not be materially different. The accounts included for the period from January 1, 1975 through December 31, 2003 are referred to as the "composite" or the "managed accounts." 18 In the case of one portfolio manager who joined the Stewart Group as of 1981, the performance data includes the performance of portfolios managed by him at a different firm during the period 1975 through 1980 using an investment philosophy similar to that practiced by us at the time. The effect of this inclusion is to increase the compound annual return since inception by approximately one-tenth of one percentage point. The managed accounts exclude one portfolio manager's 1977 performance data, in compliance with certain Advisers Act requirements. The performance return excluding this data is substantially the same as the performance return would have been if such data had been included. Performance Calculation. Beginning in 1989, performance figures for the managed accounts have been calculated using a "time-weighted" rate of return method, such that additions and withdrawals of capital are weighted based on the amount of time such capital is held in the account during the period. The annual performance of an account is derived by linking the periodic rates of return for such account. Prior to 1989, performance figures were calculated using a linear non-weighted method, such that beginning of year market values were adjusted to reflect additions and withdrawals of capital during the year. For 1975 through 1988, the annual performance of the managed accounts is the average of the average performance of the individual managers' portfolios. Beginning in 1989, the annual performance is the average of all accounts in the composite. For 1975 through 1992, accounts are given equal weighting regardless of market value. Beginning in 1993, account performance has been asset-weighted based on the beginning of year market value of all accounts in the composite. The pre-fee performance of our accounts for all years shown on the chart reflects the deduction of brokerage commissions but not the deduction of advisory fees which would reduce the overall return. The post-fee performance of our accounts for all years shown reflects the deduction of brokerage commissions as well as advisory fees. Effect of Advisory Fees. After 1983, the post-fee performance of our accounts reflects the deduction of the actual advisory fees charged each account in the composite, adjusted for the effect of capital additions and withdrawals. For the period 1975 through 1983, we have used the actual fee rates or the highest fee rates then prevailing. From 1975 through 1988, advisory fees were deducted from performance at the end of each year. If fees had been deducted from performance on a quarterly basis when charged, the return since inception would have been decreased by approximately one-tenth of one percentage point. S&P 500. The S&P 500 Index annual change shown in the chart relating to our 1975 through December 31, 2003 performance includes the reinvestment of dividend income, using a methodology similar to that used for our accounts. It does not reflect the deduction of any transaction or custodial costs that would be involved in investing in the S&P 500. The effect of these costs would be to reduce the indicated return from 1975 through December 31, 2003 for the S&P 500 by an undetermined amount. The S&P 500 Index annual percentage change was obtained from the Standard & Poor's Corporation, New York, New York. 19 Assets Under Management The following table shows assets under management during the period from January 1, 2001 through December 31, 2003. Changes between beginning and ending assets under management include capital appreciation or depreciation, net contributions and net new accounts opened/closed. ASSETS UNDER MANAGEMENT
Year Ended December 31, ----------------------------------------- 2003 2002 2001 ---------- ---------- ---------- (in millions) Beginning Assets Under Management................................. $ 7,655 $ 9,171 $10,324 ========== ======== ======= Ending Assets Under Management.................................... $ 8,561 $ 7,655 $ 9,171 ========== ======== ========
The table below illustrates the total net flows of assets under management which include changes in net flows of existing accounts and net new flows (net contributions to our publicly available funds and flows from new accounts minus closed accounts). The table excludes total capital appreciation or depreciation in assets under management with the exception of the amounts attributable to withdrawals and accounts closed. NET FLOWS OF ASSETS UNDER MANAGEMENT
Year Ended December 31, ----------------------------------------- 2003 2002 2001 ---------- ---------- ---------- (in millions) Existing Accounts: Contributions.................................................. $ 844 $ 932 $ 862 Withdrawals.................................................... (892) (883) (1,042) ---------- ---------- --------- Net Flows of Existing Accounts.................................... (48) 49 (180) Publicly Available Funds: Contributions.................................................. 171 401 149 Withdrawals.................................................... (167) (242) (88) Direct Accounts Opened............................................ 326 289 353 Direct Accounts Closed............................................ (618) (472) (593) ---------- ---------- ---------- Net New Flows..................................................... (288) (24) (179) ---------- ---------- ---------- Net Flows of Assets Under Management.............................. $ (336) $ 25 $ (359) ========== ========= ==========
20 The following table shows client retention information for the last three years. ACCOUNT RETENTION
Year Ended December 31, ----------------------------------------- 2003 2002 2001 ---------- ---------- ---------- Number of Accounts at Beginning of Period..................... 2,204 2,251 2,346 Number of Accounts Closed During Period....................... 250 200 249 Retention Rate................................................ 88.7% 91.1% 89.4%
Client Base Our client base is diverse. Approximately 60% of our assets under management, and 82% of our accounts, as of December 31, 2003, were associated with high net-worth individuals and their affiliates. As of December 31, 2003, approximately 30% of our assets under management were contributed by non-U.S. clients. The following tables set forth information regarding our client base and changes in our assets under management over time. The following tables show, as of December 31, 2003, 2002 and 2001, the amount of assets under management in direct relationship client accounts and in accounts referred to us by clients' consultants, and the number of accounts by relationship type. ASSETS UNDER MANAGEMENT BY RELATIONSHIP TYPE
As of December 31, ----------------------------------------- 2003 2002 2001 ---------- ---------- ---------- (in millions) Direct Relationship............................................... $ 7,766 $ 6,972 $ 8,334 Consultant Related................................................ 795 683 837 ---------- ---------- ---------- Total........................................................ $ 8,561 $ 7,655 $ 9,171 ========= ========== ==========
NUMBER OF ACCOUNTS BY RELATIONSHIP TYPE
As of December 31, ----------------------------------------- 2003 2002 2001 ---------- ---------- ---------- Direct Relationship............................................... 1,914 2,019 2,051 Consultant Related................................................ 167 185 200 --------- --------- --------- Total........................................................ 2,081 2,204 2,251 ========= ========= =========
Over the years we have established relationships with a select group of symbiotic marketers that refer portfolio management clients to us in return for a share of the fees paid by such clients. The value of direct relationship accounts referred by our symbiotic marketers as of December 31, 2003, 2002 and 2001 represented 37.2%, 37.4% and 36.4%, respectively, of our direct relationship accounts as of such dates. 21 The following table shows our assets under management by client type. ASSETS UNDER MANAGEMENT BY CLIENT TYPE
Assets Under Management as of Number of Accounts as of December 31, 2003 December 31, 2003 -------------------------------------- ------------------------------------ U.S. Non-U.S. Total U.S. Non-U.S. Total --------- ---------- --------- --------- --------- -------- (in millions) High Net-Worth Individual Relationships/Pooled Funds*...... $ 3,099 $ 2,036 $ 5,135 1,534 165 1,699 Foundations & Other Relationship Directed Institutional.................... 2,644 175 2,819 266 4 270 Other Institutional................... 269 338 607 55 57 112 --------- ---------- --------- --------- --------- -------- Total............................ $ 6,012 $ 2,549 $ 8,561 1,855 226 2,081 ========= ========== ========= ========= ========= ========
* Pooled funds have been included in High Net-Worth Individual Relationships because the underlying clients of the pooled fund vehicles are high net-worth individuals. The following table shows the amount of assets under management contributed by U.S. and non-U.S. clients. ASSETS UNDER MANAGEMENT U.S./NON-U.S. CLIENTS
As of December 31, ----------------------------------------- 2003 2002 2001 ---------- ---------- ---------- (in millions) U.S. Clients...................................................... $ 6,012 $ 5,496 $ 6,745 Non-U.S. Clients.................................................. 2,549 2,159 2,426 ----------- ----------- ---------- Total........................................................ $ 8,561 $ 7,655 $ 9,171 =========== =========== ==========
Investment Advisory Revenues Advisory fee revenues are generated from investment advisory contracts between the Stewart Group and clients for whom we manage discretionary accounts. These agreements are terminable at will by either party on short notice. Under our current standard fee arrangement, we receive a management fee equal to 1.5% per annum of the value of the client's account up to $25 million, plus 1.25% per annum of any account balance in excess of $25 million up to $100 million, plus 1.0% per annum of any account balance in excess of $100 million. Our standard fee arrangement is non-negotiable. We do not typically offer fixed income investment management service, although we make this service available to our clients for whom we manage equity portfolios. Clients' funds held on a long-term basis in fixed income investments (approximately $27 million at December 31, 2003) are subject to a 0.30% annual fee. Fees under our investment advisory contracts are billed and payable quarterly, in advance. The following table shows the average annualized gross management fee, as a percentage of assets under management received by us from various segments of our client base during the year ended December 31, 2003: 22 Average Gross Management Fee as a Percent of Assets Under Management -------------------------- Year Ended Client Type December 31, 2003 - ----------- -------------------------- Institutional............................ 1.16% Non-Institutional........................ 1.25% U.S. Clients............................. 1.27% Non-U.S. Clients......................... 1.07% Overall Weighted Average................. 1.22% The average gross management fee was 1.22% for the year ended December 31, 2003. The average fee was less than our standard fee of 1.5% because a number of advisory contracts were entered into prior to 1989, when we adopted our current fee arrangement, and because account balances in excess of $25 million and $100 million are subject to lower fees. Currently, each of our investment advisory contracts names either W.P. Stewart & Co., Ltd. or W.P. Stewart Asset Management Ltd., our Bermuda-based investment adviser subsidiary, as the investment adviser. These entities have engaged and may engage in the future W.P. Stewart & Co., Inc., W.P. Stewart & Co. (Europe), Ltd. or Bowen Asia Limited to act as sub-adviser for certain accounts or mandates. Under written sub-advisory agreements, the sub-adviser is entitled to receive from the named investment advisory entity a fee which is comparable to fees charged by other unrelated advisers for similar mandates. W.P. Stewart & Co., Inc. is the investment adviser with respect to W.P. Stewart & Co. Growth Fund, Inc., a U.S. registered mutual fund sponsored by the Stewart Group. W.P. Stewart & Co. (Europe), Ltd. is the investment manager with respect to W.P. Stewart Funds plc and W.P. Stewart (Distributor) Funds plc, open-ended umbrella funds organized under the laws of Ireland. Geographic Area Data The Company's primary business is the provision of investment advisory services to clients located throughout the world. The amounts of fee revenue received from clients in the U.S. and elsewhere for the years ended December 31, 2003, 2002 and 2001 were as follows: Fee Revenue ------------------------------------------------------ 2003 2002 2001 ---- ---- ---- U.S. $ 70,657,079 $ 79,095,944 $ 90,348,326 Non-U.S. 23,405,259 26,322,834 25,644,745 -------------- -------------- -------------- Total $ 94,062,338 $ 105,418,778 $ 115,993,071 ============== ============== ============== Collective Investment Funds Mutual fund and pooled accounts are not a primary focus of the Stewart Group or its future business strategy. Our U.S. mutual fund is used primarily to efficiently invest smaller accounts. As of December 31, 2003, we also served as investment adviser to 40 collective investment funds and other pooled vehicles organized to meet the fiscal and regulatory requirements of certain U.S. and non-U.S. clients. The following table sets forth information regarding collective investment funds and other pooled vehicles with assets under management in excess of $50 million as of December 31, 2003: 23 Jurisdiction of Assets Under Formation of Fund Management - ------------------------------------------------------------ ---------------- (in millions) Netherlands Antilles........................................ $ 686 Luxembourg.................................................. 273 British Virgin Islands...................................... 170 Austria..................................................... 79 United States............................................... 76 Austria..................................................... 76 British Virgin Islands...................................... 50 Clearing Custodian and Brokerage Arrangements We do not hold any funds or securities of our clients. Clients' funds and securities are held by custodians appointed either by the client or, if no custodian is named by the client, by the Stewart Group. We currently utilize, on a fully disclosed basis, the services of Neuberger Berman, LLC as clearing agent and as custodian on accounts where the client makes no custodial designation. We believe that our current relationship with Neuberger Berman, LLC is satisfactory but believe that a comparable agreement with a different clearing agent and/or custodian could be reached if necessary. Our investment advisory contracts authorize us to select the broker through which any transaction may be executed and specifically authorize the use of our affiliated broker-dealer, W.P. Stewart Securities Limited. Competition We believe that currently only a limited number of companies with a similar investment philosophy and practice compete directly with us in our core business of providing wealth management services to the upper tier of the wealth management market. However, the investment management business in general is intensely competitive. In providing investment management services, we compete with a large number of asset management firms as well as broker-dealers, trust companies, commercial banks and other specialized wealth management providers. Our future growth and profitability will be affected by our ability to retain and increase our market share, which could be adversely affected over the longer term as competitors seek to develop high net-worth relationships. Many of our current and potential competitors are significantly larger in terms of capital, assets, geographic presence, distribution network and other important business criteria, provide a wider range of services and may have access to greater financial resources than the Stewart Group. Regulation Our business and the investment management industry in general are subject to extensive regulation in Bermuda, the United States at both the federal and state levels, the United Kingdom, the Republic of Ireland and The Netherlands, as well as by various self-regulatory organizations, or SROs as they are commonly known, in these and other jurisdictions. A number of regulatory agencies of various jurisdictions are charged with safeguarding the integrity of the securities and other financial markets and with protecting the interests of customers participating in markets in those jurisdictions. 24 In Bermuda, our investment business is subject to the jurisdiction of the Bermuda Monetary Authority. The Investment Business Act 2003 requires licensing of all persons carrying on investment business in or from Bermuda, unless there is an exemption available to that person under the Act. Our investment businesses are currently exempt from the licensing requirements of the Act due to the nature of our clientele and our regulation by the SEC. In the United States, the SEC is the federal agency that is primarily responsible for the regulation of investment advisers and broker-dealers, and the Board of Governors of the Federal Reserve System promulgates regulations applicable to securities credit transactions involving broker-dealers and certain other U.S. persons. Investment advisers and broker-dealers are subject to registration and regulation by state securities regulators in those states in which they conduct business. Industry SROs, including the NASD and national securities exchanges, have authority over the firms that are their members. In the United Kingdom, the main regulatory body is the Financial Services Authority. During 2001, IMRO's regulatory function was subsumed into the Financial Services Authority, which became the sole UK regulatory body for the investment management business. W.P. Stewart & Co. (Europe), Ltd. is authorized and regulated by the Financial Services Authority. In the Republic of Ireland, the Central Bank of Ireland is responsible for the regulation of fund management activities and is the regulatory body that supervises W.P. Stewart Fund Management Limited and the Dublin domiciled investment funds which it manages. In The Netherlands, De Nederlandsche Bank N.V., known as the Dutch Central Bank, has historically been responsible for the regulation of fund management activities, such as the supervision of WPSH Management N.V. and the publicly traded funds that it manages, including W.P. Stewart Holdings N.V., the shares of which fund are traded on Euronext Amsterdam. Most of those responsibilities of the Dutch Central Bank have been transferred to the Netherlands Authority for the Financial Markets, formerly known as the Dutch Securities Board and commonly referred to as the AFM, as of September 1, 2002. W.P. Stewart & Co., Ltd. has also been issued a license by the AFM to conduct certain activities in The Netherlands, which license is conditioned upon certain obligations of the licensee, including compliance with the AFM's capital adequacy requirements. W.P. Stewart & Co., Ltd. currently satisfies these requirements. W.P. Stewart & Co., Ltd., W.P. Stewart Asset Management Ltd. and W.P. Stewart & Co., Inc. are registered as investment advisers with the SEC. As investment advisers, each is subject to the requirements of the Advisers Act and the SEC's regulations thereunder. They, and their employees engaged in advisory services, are also subject to certain state securities laws and regulations, and to laws regarding fiduciaries. Federal and state regulations impose, among other things, limitations on the ability of investment advisers to charge performance-based or non-refundable fees to clients, record-keeping and reporting requirements, disclosure requirements, limitations on principal transactions between an adviser or its affiliates and advisory clients, requirements as to fees paid to solicitors (paid client referral sources), restrictions on commission and fee arrangements with broker-dealers, and advertising restrictions, as well as general anti-fraud prohibitions. The state securities law requirements applicable to employees of investment advisers include certain qualification requirements as to advisory employees. In addition, W.P. Stewart & Co., Inc., as investment adviser to a mutual fund registered under the Investment Company Act, is subject to requirements under the Investment Company Act and the SEC's regulations thereunder. Such requirements include, among other things, record-keeping and reporting requirements and procedures for handling funds. Each of W.P. Stewart & Co., Ltd., W.P. Stewart Asset Management Ltd. and W.P. Stewart & Co., Inc. also are subject to the requirements of the USA Patriot Act of 2001 including the money laundering prevention provisions thereof. 25 Under the Advisers Act, every investment advisory agreement with a client must expressly provide that it may not be assigned by the investment adviser without the consent of the client. Under the Investment Company Act, every investment adviser's agreement with a registered investment company must provide for the agreement's automatic termination in the event of its assignment. Under both Acts, an investment advisory agreement is deemed to have been assigned when there is a direct or indirect transfer of the agreement, including a direct assignment or a transfer of a "controlling block" of the firm's voting securities or, under certain circumstances, upon the transfer of a "controlling block" of the voting securities of its parent corporation. A transaction is not an assignment under the Advisers Act or the Investment Company Act, however, if it does not result in a change of actual control or management of the investment adviser. Any assignment of our investment advisory agreements would require, as to any registered investment company client, the prior approval by a majority of its shareholders, and as to our other clients, the prior consent of such clients to such assignments. Sales by WPS II, Inc. or other shareholders or our issuances of common shares, among other things, could result in a deemed assignment of our investment advisory agreements under such statutes. See Item 3 D under the captions "Key Information - Risk Factors - We Are Subject to the Control of Many Regulatory Bodies" and "Key Information - Risk Factors - A Change of Control of the Stewart Group Would Give Our Clients the Right to Terminate Their Investment Advisory Agreements With Us." The officers, directors and employees of our investment management business may from time to time own securities which are also owned by one or more of their clients. We have internal policies with respect to, among other things, individual investments, required reporting of securities transactions and restrictions on certain transactions so as to reduce the possibility of conflicts of interest. W.P. Stewart Securities Limited, our Bermuda-based broker-dealer, is registered as a broker-dealer with the SEC and in all 50 states of the United States and is a member of, and subject to regulation by, the NASD. As a result of federal and state broker-dealer registration and SRO memberships, W.P. Stewart Securities Limited is subject to overlapping schemes of regulation which cover many aspects of its securities business. Such regulations cover matters including the use and safekeeping of clients' funds and securities, record-keeping and reporting requirements, and supervisory and organizational procedures intended to assure compliance with securities laws and prevent improper trading on material nonpublic information. As a broker-dealer registered with the SEC and certain states and a member firm of the NASD, W.P. Stewart Securities Limited is also subject to the capital requirements of the SEC, the states and the NASD. These capital requirements specify minimum levels of capital, computed in accordance with regulatory requirements ("net capital"), that W.P. Stewart Securities Limited is required to maintain and also limit the amount of leverage that W.P. Stewart Securities Limited is able to obtain in its business. A failure of W.P. Stewart Securities Limited to maintain its minimum required capital could require it to cease executing client transactions until it returned to capital compliance, and could cause it to lose its membership on an exchange or in an SRO, lose its registration with the SEC or a state, or require its liquidation. At December 31, 2003, W.P. Stewart Securities Limited was required to maintain minimum net capital, in accordance with SEC rules, of approximately $100,000 and had total net capital of approximately $7.6 million, or approximately $7.5 million in excess of the amount required. W.P. Stewart Securities Limited also is subject to the requirements of the USA Patriot Act of 2001, including the money laundering prevention provisions thereof. W.P. Stewart & Co. (Europe), Ltd. is a member of, and subject to regulation by, FSA in the United Kingdom. Its permitted activities are limited to providing investment management and investment advice, together with the marketing of unregulated collective investment schemes. FSA regulations cover matters such as the use and safekeeping of clients' funds and securities, record-keeping and reporting requirements, employee-related matters, including qualification and approval of supervisory, investment management and sales personnel, disclosure requirements, advertising restrictions and minimum levels of capital. W.P. Stewart & Co. (Europe), Ltd. currently satisfies its minimum capital requirements. W.P. Stewart Fund Management Limited is subject to the supervisory control of the Central Bank of Ireland. The permitted activities of W.P. Stewart Fund Management Limited include the provision of services consisting of the establishment and management of specified collective investment undertakings, the provision of management and administration services and of investment and financial advice. W.P. Stewart Fund Management Limited also is subject to minimum capital requirements, ongoing reporting and disclosure requirements and such other prudential and supervisory requirements as the Central Bank of Ireland may issue from time to time. W.P. Stewart Fund Management Limited currently satisfies its minimum capital requirements. 26 Compliance with many of the regulations applicable to us involves a number of risks, particularly because applicable regulations in a number of areas may be subject to varying interpretation. Regulators make periodic examinations and review annual, monthly and other reports on our operations, track record and financial condition. In the event of a violation of or non-compliance with any applicable law or regulation, governmental regulators and SROs may institute administrative or judicial proceedings that may result in censure, fine, compensation orders, civil penalties (including treble damages in the case of insider trading violations), criminal penalties, the issuance of cease-and-desist orders, the deregistration or suspension of the non-compliant firm, the suspension or disqualification of the firm's officers or employees and other adverse consequences. We have not experienced any such penalties to date. Such violations or non-compliance also could subject us and/or our employees to civil actions by private persons. Any governmental, SRO or private proceeding alleging violation of or non-compliance with laws or regulations could have a material adverse effect upon our business, financial condition, results of operations and business prospects. The regulatory environment in which we operate is subject to change. We may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other U.S., state or non-U.S. governmental regulatory authorities or SROs. We also may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and SROs. Our businesses may be materially affected not only by securities regulations but also by regulations of general application. For example, the volume of our principal investment advisory business in a given time period could be affected by, among other things, existing and proposed tax legislation and other governmental regulations and policies (including the interest rate policies of the Federal Reserve Board) and changes in the interpretation or enforcement of existing laws and rules that affect the business and financial communities. 27 C. Organization Structure The organizational chart set forth below shows our operating structure, our principal operating subsidiaries, the jurisdiction of incorporation of our subsidiaries and, in the case of subsidiaries that are not wholly-owned, the percentage of shares that we hold in those subsidiaries. We believe this operating structure positions us effectively to service our global clientele and pursue our global strategy.
-------------------------- W.P. Stewart & Co., Ltd., our Bermuda-based investment adviser -------------------------- | | | ------------------------------------------------------------------------------------------------------------------------| | | | | | | | | | | | | | | | | | Approx.| |75% | | | | | | | 40% | - -------------- ------------ ------------ ----------- ------------ -------------- ------------- ----------- ----------- W.P. Stewart W.P. NS Money W.P. W.P. W.P. W.P. Stewart TPRS Bowen Asset Stewart & Management Stewart & Stewart Stewart Asset Services Asia Management Co. Ltd., our Co., Inc., Asset Securities Management N.V., our Limited,(1) (Europe), (Europe), Bermuda- our New Management Limited, our (NA), Inc., Curacao- our Ltd.,(2) our Ltd., our based asset York- Ltd., our Bermuda- our based asset Hong Bermuda - London- manager based Bermuda- based New York- gatherer Kong- based based research based broker- based asset based umbrella research affiliate investment dealer gatherer research company for affiliate adviser affiliate European asset gathering - --------------- ------------ ------------ ----------- ------------ -------------- ------------- ----------- ----------- | | | (3) | | | - -------------- ------------ W.P. Stewart W.P. Asset Stewart Management Fund (Europe) N.V., Management our Limited, our Netherlands- Dublin- based asset based fund gatherer management company - -------------- ------------
1. W.P. Stewart & Co., Ltd. has entered into an agreement pursuant to which it has an option to increase ownership to 50% or more beginning in June 2004. 2. W.P. Stewart & Co., Ltd. has entered into an agreement pursuant to which it will acquire the remaining 25% on June 30, 2006. 3. Indirectly owned. 28 D. Property, Plant and Equipment Our headquarters and certain of our executive offices are located at Trinity Hall, 43 Cedar Avenue, Hamilton, Bermuda in a building owned by a joint venture between the Stewart Group and The Bank of Bermuda Limited and leased to us by the joint venture on arms-length commercial terms. We also lease offices in New York, New York; Portland, Maine; London, England; Curacao, Netherlands Antilles; Oegstgeest, The Netherlands; and, through a joint venture with Bowen Asia Limited, Tokyo, Japan. We believe our facilities have been well maintained, are in good operating condition, are adequate for our current operational requirements and could be replaced, if necessary, on acceptable terms. Item 5. Operating and Financial Review and Prospects Overview W.P. Stewart & Co., Ltd., together with its subsidiaries, is a research-focused investment counselor that manages assets for high net-worth individuals and institutions located throughout the world. Our principal source of revenues is investment advisory fees and, accordingly, fluctuations in financial markets and client contributions and withdrawals have a direct effect on revenues and net income. 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. As a result of this policy, revenues were negatively impacted during 2002, and continued to be negatively affected into the second quarter of 2003 due to a decline in assets under management in the first quarter of 2003. Assets under management increased after the first quarter of 2003; however, the increase in assets under management during the fourth quarter did not affect revenue until the first quarter of 2004. 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 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%, 24% and 21.5% of adjusted operating profit for the years ended December 31, 2003, 2002 and 2001, respectively. 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. 29 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. 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 participate in the results of our operations. A. Operating Results Year Ended December 31, 2003 as Compared to Year Ended December 31, 2002 Assets Under Management Assets under management were approximately $8.6 billion at December 31, 2003, an increase of approximately $0.9 billion or 11.7% from approximately $7.7 billion at December 31, 2002. This reflected the strong investment performance of our clients' portfolios in 2003, especially in the second and fourth quarters of the year, partially offset by negative net flows of assets under management. The following table sets forth the total net flows of assets under management for the years ended December 31, 2003 and 2002, 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. 30 Net Flows of Assets Under Management ( in millions ) Years Ended December 31, -------------------------- 2003 2002 ---------- ---------- Existing Accounts: Contributions $ 844 $ 932 Withdrawals (892) (883) ---------- ---------- Net Flows of Existing Accounts (48) 49 ---------- ---------- Publicly Available Funds: Contributions 171 401 Withdrawals (167) (242) Direct Accounts Opened 326 289 Direct Accounts Closed (618) (472) ---------- ---------- Net New Flows (288) (24) ---------- ---------- Net Flows of Assets Under Management $ (336) $ 25 =========== ========== Revenues Revenues were $118.8 million for the year ended December 31, 2003, a decrease of $18.5 million or 13.5% from $137.3 million earned for the year ended December 31, 2002. The changes were due to an $11.4 million or 10.8% decrease in fee revenue, a $5.8 million or 20.6% decrease in commission revenue and a $1.3 million or 36.2% decrease in interest and other revenues. The average gross fee earned from client accounts was 1.22% for the year ended December 31, 2003 as compared to 1.23% for the year ended December 31, 2002, due to a slight change in client account mix due to larger accounts subject to our fee break. The decrease in fee revenue was attributable to the decrease in assets under management during 2002 and the first quarter of 2003. Because we bill our fees quarterly, in advance, the strong fourth quarter increase in assets under management had no effect on our 2003 fee revenue. The decrease in commission revenue was primarily due to lower levels of trading volume during 2003 as compared with the higher levels of trading volume experienced in 2002. Interest and other revenues decreased primarily due to lower equity income from our unconsolidated affiliates, lower cash balances during 2003 reflecting our use of cash for share repurchases in 2002, lower interest earned on our cash balances due to prevailing market rates and lower interest earned on shareholders' loans, reflecting lower average interest rates and substantial repayments of principal. Expenses Expenses, excluding income taxes, decreased approximately $5.7 million or 7.6% to $69.7 million for the year ended December 31, 2003 from $75.4 million in the prior year. The decrease was due to changes in operating expenses, including a decrease in variable expenses of $1.2 million in fees paid out, which are directly related to assets under management of referred accounts, a decrease in commissions, clearance and trading of $1.1 million, which vary with account activity, and a decrease in employee compensation and benefits of $3.4 million due to a decrease in adjusted operating profit, on which that compensation is based. Additionally, marketing expenses decreased $0.5 million due to slightly lower costs and other operating expenses increased $0.5 million primarily due to generally higher costs relating to a variety of operating expenses and an increase in professional fees. 31 Our income tax expense decreased $0.4 million to $6.0 million for the year ended December 31, 2003 from $6.4 million in the prior year. The effective tax rate was approximately 12.2% and 10.3% respectively. The increase in the effective tax rate was primarily due to the substantial decrease in the commission income of our Bermuda-based broker-dealer subsidiary and an increase in our U.S. effectively connected business income. Net Income Net income for the year ended December 31, 2003 decreased $12.4 million or 22.3% to $43.1 million from $55.5 million for the prior year as a result of the items described above. Year Ended December 31, 2002 as Compared to Year Ended December 31, 2001 Assets Under Management Assets under management were approximately $7.7 billion at December 31, 2002, a decrease of approximately $1.5 billion or 16.3% from approximately $9.2 billion at December 31, 2001. This reflected the negative investment results in our client's portfolios for 2002. The following table sets forth the total net flows of assets under management for the years ended December 31, 2002 and 2001, which include changes in net flows of existing accounts and net new flows (net contributions to our publicly available funds and flows from new accounts minus closed accounts). The table excludes total capital appreciation or depreciation in assets under management with the exception of the amounts attributable to withdrawals and closed accounts. Net Flows of Assets Under Management ( in millions ) Years Ended December 31, --------------------------- 2002 2001 ---------- ---------- Existing Accounts: Contributions $ 932 $ 862 Withdrawals (883) (1,042) ---------- ---------- Net Flows of Existing Accounts 49 (180) ---------- ----------- Publicly Available Funds: Contributions 401 149 Withdrawals (242) (88) Direct Accounts Opened 289 353 Direct Accounts Closed (472) (593) ---------- ---------- Net New Flows (24) (179) ---------- ---------- Net Flows of Assets Under Management $ 25 $ (359) ========== =========== 32 Revenues Revenues were $137.3 million for the year ended December 31, 2002, a decrease of $23.4 million or 14.6% from $160.7 million earned during the year ended December 31, 2001. The changes were due to a $10.6 million or 9.1% decrease in fee revenue, an $11.4 million or 28.7% decrease in commission revenue and a $1.4 million or 29.0% decrease in interest and other revenues. The average fee earned from client accounts was 1.23% for the year ended December 31, 2002 and 1.26% for the year ended December 31, 2001. The decrease was due to a slight change in client account mix due to larger accounts subject to our fee break. In addition there were certain European client accounts that transferred to W.P. Stewart Holdings N.V., our mutual fund listed on Euronext Amsterdam. This fund has a fixed fee of 25 basis points and a 10% performance fee. There was no performance fee earned in either 2002 or 2001. The decrease in commission revenue was primarily due to lower levels of trading volume during 2002 as compared with the higher levels of trading volume experienced in 2001. Turnover was lower for the year ended December 31, 2002 as compared to the year ended December 31, 2001. Interest and other revenues decreased primarily due to lower equity income from our unconsolidated affiliates, the absence in 2002 of any gain on the sale of investments which we experienced in 2001, lower cash balances in 2002 reflecting our share repurchases and lower interest earned on our cash balances due to prevailing market rates. Expenses Expenses, excluding income taxes, increased $2.2 million or 3.0% to $75.5 million for the year ended December 31, 2002 from $73.3 million in the prior year. The increase was primarily due to a change in variable expenses, including an increase of $2.1 million in fees paid out to marketers, which are directly related to assets under management of referred accounts. (Included in the third quarter of 2001 was an adjustment to fees payable to marketers of $1.5 million.) This was partially offset by a decrease of $1.4 million in commissions, clearance and trading costs, which vary with account activity. Marketing expenses increased $3.3 million, which reflects our additional marketing and client servicing initiatives. Depreciation and amortization increased $0.5 million primarily due to an increase in the amortization of intangible assets. Research and administration expenses increased $0.8 million due to higher costs. Other operating expenses decreased $1.2 million, due to lower costs. Employee compensation and benefits decreased $1.9 million due to a decrease in adjusted operating profit combined with an increase in the compensation percentage for the year ended December 31, 2002 to approximately 24% of adjusted operating profit from approximately 21.5% for the year ended December 31, 2001. Our income tax expense decreased $0.8 million to $6.4 million for the year ended December 31, 2002 from $7.2 million in the prior year. The effective tax rate for 2002 was 10.3%, compared to 8.2% for 2001. This is the result of our anticipated 10% tax rate for both years with adjustments in our prior year's tax accruals, for each respective year, determined when our tax returns were finalized. Net Income Net income for the year ended December 31, 2002 decreased $24.8 million or 30.9% to $55.5 million from $80.3 million for the prior year as a result of the items described above. 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. 33 B. Liquidity and Capital Resources Our financial condition is highly liquid with principal assets including cash and cash equivalents, investments available for sale and receivables from clients. Cash equivalents are primarily short-term, highly liquid investments with an original maturity of three months or less at the date of purchase. Liabilities include operating payables and accrued compensation. Our investment advisory activities do not in general require us to maintain significant capital balances. However, our advisory activities for 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. In 1998, WPS Aviation Holdings LLC, 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 financed the aircraft with 10-year, amortizing loans. During 1999, we paid $22.5 million under the purchase agreement, of which GECC provided $19.6 million under the loans. Shamrock Aviation, Inc. or an entity affiliated with Shamrock has operated 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. On July 10, 2003, WPS Aviation entered into a 10-year amortizing loan agreement with GECC to continue to finance its obligations under the Challenger Purchase Agreement. 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 $17.3 million 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 $8.6 million 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). 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. 34 C. Research and Development, Patents and Licenses, etc. Not Applicable. D. Trend Information The market conditions that depressed our performance in 2001 and 2002 largely continued into the first quarter of 2003. Therefore, due to our practice of billing quarterly in advance, revenues were negatively affected into the second quarter of 2003. After the first quarter of 2003, our assets under management increased due to positive performance, but this increase was partially offset by negative net flows. Positive performance in the last quarter of 2003 did not affect revenue until the first quarter of 2004. Although our performance results lagged the S&P 500 in 2003, we believe this is not uncommon in the early stages of an economic recovery. Our clients' portfolios withstood the bear market better than most and therefore experienced less of an upswing as compared to equities that saw a more significant loss of the prior few years. In the longer-term, for the three, five and ten-year periods ended December 31, 2003, our U.S. Equity Composite outperformed the S&P 500 on both a pre-fee and post-fee basis. Positive performance in the last three quarters of 2003 will figure into our financial results for 2004. We believe other factors may also have a favorable impact on our assets under management. We are cognizant of the potential effects on investor confidence and behavior that are inherent in the continuing threat posed by international terrorism, the fear of nuclear weapons proliferation, the ongoing conflicts in the Middle East and other pockets of unrest around the globe. We are also mindful that historically low interest rates must eventually increase, that rising energy prices can dampen economic recovery, that corporate scandals are not only ongoing but still emerging with some frequency and that the United States, our most important market, is in a presidential election year. All of these factors could lead to negative market results and, therefore, have a negative impact on our business. Nevertheless, the combination of low interest rates, low inflation, a strengthened stock trading environment and the impressive pace of economic recovery in the United States and many other parts of the world should auger well for our business. Moreover, while legislative, regulatory and self-regulatory responses to corporate scandals may have diverted the attention of corporations and consumed some of their resources, new corporate governance standards should enhance future investor confidence. Finally, the companies in our clients' portfolios share many of the following characteristics: strong cash flows, active share repurchase programs or dividend increases, market share increases gained during the recent recession, strong earnings growth and market valuations well off their peak levels. Indeed the current pace of earnings growth underlying our U.S. Equity Composite is in the 12% - 14% range, which we consider sustainable over the next few years. Throughout our history, the investment of our clients' funds in companies of such high quality has produced solid long-term results. E. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. F. Tabular Disclosure of Contractual Arrangements 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 35 notes to the consolidated financial statements. The following tables set forth these contractual obligations and contingent commitments as of December 31, 2003:
Contractual Obligations (in millions) 2009 - 2004 2005 - 2006 2007 - 2008 Thereafter Total ---- ----------- ----------- ---------- ----- Long-Term Debt (1) $0.8 $1.6 $1.7 $12.9 $17.0 Minimum Rental Commitments (2) $2.9 $5.6 $3.7 $ 6.2 $18.4
(1) See Note 8 to the consolidated financial statements for additional information. (2) See Note 16 to the consolidated financial statements for additional information.
Contingent Commitments (in millions) Amount of Commitment Expiration Per Period 2009 - 2004 2005 - 2006 2007 - 2008 Thereafter Total ---- ----------- ----------- ---------- ----- Commitments under letters of credit (3) - $1.2 - $0.7 $1.9
(3) See Note 9 to the consolidated financial statements for additional information. 36 Item 6. Directors, Senior Management and Employees A. Directors and Senior Management Members of the board of directors of W.P. Stewart & Co., Ltd. are elected by the shareholders of W.P. Stewart & Co., Ltd. All directors serve until re-elected at the next annual general meeting or their successors are elected or appointed. The following table sets forth information with respect to the current directors and executive officers of W.P. Stewart & Co., Ltd.
Name Position Position Held Since - --------------------------------------------------------------------------------------------------------------------------- William P. Stewart................. Chairman, Chief Executive Officer and Director(1) June 1998 John C. Russell.................... Deputy Chairman, Managing Director and Director(1) June 1998 Richard C. Breeden................. Director(2)(3) June 1998 Edgar H. Brunner................... Director(4) June 1998 Angus S. King, Jr.................. Director(4) February 2004 Henry B. Smith..................... Director(1)(3) June 1998 Heinrich Spangler.................. Director(2)(3)(4) June 1998 Richard D. Spurling................ Director (2)(4) June 2002 John A. Allison.................... Deputy Managing Director January 2001 Salim Chaar........................ Deputy Managing Director September 2001 Mark A. Henderson.................. Deputy Managing Director November 1998 Susan G. Leber..................... Deputy Managing Director - Financial Operations March 2003 Rocco Macri........................ Deputy Managing Director - Chief Financial Officer September 2001 Peter Jan P. Rubingh............... Deputy Managing Director January 2001 Frederick M. Ryan.................. Deputy Managing Director - Investor Relations September 2001 Charles G.R. Target................ Deputy Managing Director - International Development June 1999 Debra Randall...................... Corporate Secretary January 2001
- --------------- (1) Denotes member of the Executive Committee of the board of directors. (2) Denotes member of the Compensation Committee of the board of directors. (3) Denotes member of the Audit Committee of the board of directors. (4) Denotes member of the Nominating and Corporate Governance Committee of the board of directors. William P. Stewart is Chairman, Chief Executive Officer and a Director of W.P. Stewart & Co., Ltd. Mr. Stewart started on Wall Street in 1955 on the trading floor of the New York Stock Exchange. He joined Spingarn, Heine & Co. in 1957 as an analyst/registered representative and, in 1961, moved to Pyne, Kendall & Hollister in the same capacity. He was successively Director of Research, General Partner responsible for the firm's investment advisory and institutional operations, President of its international investment banking subsidiary, Managing Partner and Chairman and Chief Executive Officer of Riter, Pyne, Kendall & Hollister, Inc. After the sale of Riter, Pyne's principal business in early 1973, Mr. Stewart joined Ruane, Cunniff & Co., an investment management firm, as Vice Chairman, while simultaneously founding our U.S. predecessor company as a corporate consultant. He established our U.S. predecessor company as an investment advisory firm in 1975. 37 John C. Russell serves as Deputy Chairman, Managing Director and a Director of W.P. Stewart & Co., Ltd. He joined the Stewart Group in 1996 as General Counsel, relinquishing that position after becoming the firm's Chief Operating Officer in April 1997. From 1992 to 1996, Mr. Russell was a partner in the law firm of Kroll & Tract. From 1987 through 1992, Mr. Russell served as President and Chief Executive Officer of the Ohio Brass Company, a manufacturing company, and OB Systems and Mining, Inc., another manufacturing company. From 1980 to 1987, he served as President and Chief Executive Officer of Naarden International, Inc., an international fragrance and flavor company. In 1970, Mr. Russell was a founding partner of the law firm Anderson Russell Kill & Olick. Mr. Russell has more than 40 years of experience in domestic and international corporate and securities law. Richard C. Breeden became a Director of W.P. Stewart & Co., Ltd. in June 1998. From 1996 through the present time, Mr. Breeden has been Chairman of Richard C. Breeden & Co., a consulting firm. Since July 2002, he has also served as Corporate Monitor of WorldCom, Inc., a position to which he was appointed by the U.S. District Court for the Southern District of New York. Mr. Breeden currently serves as a Director of Banco Bilbao Vizcaya Argentaria. From 1997-2002, Mr. Breeden served as Chairman, President and Chief Executive Officer of Equivest Finance, Inc., a publicly traded company in the resort development and financing business. Since 1996, Mr. Breeden also served as the court-appointed bankruptcy trustee of The Bennett Funding Group, Inc. From 1993 to 1996, Mr. Breeden served as the chairman of the worldwide financial services practice of Coopers & Lybrand LLP. From 1989 to 1993, Mr. Breeden served as Chairman of the U.S. Securities and Exchange Commission after appointment to that position by President George Bush and confirmation by the U.S. Senate. Prior to the Commission, Mr. Breeden served in the White House as Assistant to the President (1989) and Deputy Counsel to the Vice President (1982-1985). Mr. Breeden also practiced corporate and securities law in private practice in New York City and Washington, D.C. Mr. Breeden has more than 25 years experience with securities markets, financial accounting and corporate transactions. Edgar H. Brunner has served as a Director of W.P. Stewart & Co., Ltd. since June 1998. Dr. Brunner was a former General Partner with Armand von Ernst & Cie., a private bank in Berne, Switzerland and was appointed Chief Executive Officer of that company in the acquisition of Armand von Ernst & Cie. by Swiss Bank Corporation. In addition, he was a member of the Berne Council of Burghers and President of the Swiss Private Bankers Association. From 1973 until 1997, Dr. Brunner served as Chairman of the Board of Bankers Trust AG of Zurich, Switzerland. Dr. Brunner also serves as a Director of Compagnie Bancaire Espirito Santo S.A. Angus S. King, Jr. became a Director of W.P. Stewart & Co., Ltd. in February 2004. Mr. King is currently Of Counsel to the law firm of Bernstein, Shur, Sawyer and Nelson and is affiliated with Leaders, LLC, a mergers and acquisitions firm, both groups being headquartered in Portland, Maine. Mr. King is also a Distinguished Lecturer at Bowdoin College in Brunswick, Maine. Mr. King served as the Governor of the State of Maine from 1995 to 2003. He was first elected as an independent in 1994 and was re-elected in 1998. Prior to this, Mr. King was in the private practice of law from 1975 until 1983 with the firm Smith, Loyd and King in Brunswick, Maine. From 1976 until 1993 Mr. King hosted and co-produced a variety of public affairs programming on Maine PBS stations. He was employed for six years as the Vice President and Chief Counsel in Portland, Maine for the Swift River-Hafslund Company. From 1989 to 1994 he served as the President of Northeast Energy Management, Inc., a company that he founded. Henry B. Smith has been a Director of W.P. Stewart & Co., Ltd. since June 1998. Until its acquisition by HSBC Holdings PLC in February 2004, Mr. Smith was Chief Executive Officer and a Director of The Bank of Bermuda, with which he has been employed in various capacities since 1973. He now holds the position of Executive Director of The Bank of Bermuda, with oversight responsibility for the integration of the Bank's businesses into the HSBC group. 38 Heinrich Spangler has served as a Director of W.P. Stewart & Co., Ltd. since June 1998. For the last 24 years, Mr. Spangler has served in various capacities, including managing partner, and presently serves as Spokesman of the Board of Management and Chief Executive Officer of Bankhaus Carl Spangler & Co. AG, the oldest private bank in Austria. Mr. Spangler also serves as Chairman of the Supervisory Board of Carl Spangler Kapitalanlageges. m.b.H., a private investment company located in Salzburg, Austria. Richard D. Spurling has been a Director of W.P. Stewart & Co., Ltd. since June 2002. Mr. Spurling is the Senior Partner at Appleby Spurling & Kempe, an international law firm with offices in Bermuda, London (UK) and Hong Kong, where he has practiced since 1977. Appleby Spurling & Kempe has announced that on April 1, 2004 it will unite business operations with Hunter & Hunter, a law firm with offices in the Cayman Islands and London; the combined group will be known as Appleby Spurling Hunter. Mr. Spurling obtained his English Bar qualification in 1975 and was called to the English Bar in November 1976 following pupilage at Law Chambers in London. He was called to the Bermuda Bar in 1977. Mr. Spurling also serves as a director of Belco Holdings Limited, Bermuda Electric Light Company Limited, BF&M Life Insurance Company Limited and BF&M Limited in Bermuda and a Trustee of the Bermuda Biological Station for Research, Inc. Mr. Spurling was an elected Member of the Bermuda Parliament for five years and served as the Government Whip. John A. Allison has been with W.P. Stewart since 1995 and became Deputy Managing Director in January 2001. Mr. Allison serves as a member of the Stewart Group's Management Committee. He began his professional career in 1973 as an analyst of global economic trends for the Canadian government. From 1978 to 1983, he lectured in Western Intellectual and Economic History at Columbia University. He joined Morgan Stanley Asset Management in 1983 where, as a Vice President and senior portfolio manager/analyst, he managed large institutional growth stock portfolios for major foreign and domestic clients. In 1989, Mr. Allison joined Auchincloss & Lawrence Inc., where he became the firm's Chief Executive and Investment Officer and its majority shareholder. Mr. Allison combined his business with W.P. Stewart & Co., Inc. in November 1995. Salim Chaar has served as Deputy Managing Director of W.P. Stewart & Co., Ltd. since January 2004 and as Deputy Managing Director - Administration since September 2001. He joined W.P. Stewart from Bowen Capital Management, the company's Hong Kong-based research and sub-advisory affiliate, where he served as its Managing Director, and a member of the board of directors of its parent company, Bowen Asia Limited, since March 2000. Mr. Chaar began his career with Banque Indosuez in Paris in 1976, and worked in various management capacities for Indosuez in the Middle East and in Asia until 1993, including Chief Operating Officer and then Managing Director of Indosuez Investment Services in Hong Kong from 1988 to 1992. Mr. Chaar was based in Paris from 1993 to 1997, as President and Chief Operating Officer of Union Financiere de France Banque, an asset management, brokerage and insurance subsidiary of Indosuez listed on the French stock exchange. He left Banque Indosuez in 1997, and joined the Belgian group Generale de Banque, where he was appointed Chief Executive Officer of Grand Generale Asset Management Ltd. Mark A. Henderson has served as Deputy Managing Director of W.P. Stewart & Co., Ltd. since November 1998. Mr. Henderson began his career in New York with Rheem International, Inc., a steel manufacturer and subsidiary of City Investing Corp. He was seconded by Rheem to South Africa between 1969 and 1973 to establish their South African subsidiary. In 1974 he joined Panmure Gordon & Co., a financial adviser, brokerage concern and member of the London Stock Exchange. He became an individual member of the London Stock Exchange in 1979 and a partner of Panmure Gordon & Co. in 1981. Panmure Gordon & Co. was acquired by NationsBank Corp. in 1986. In that year he became a Director of NationsBank (Europe) Ltd. and a member of the Executive Committee of Panmure Gordon & Co., Ltd. He was responsible for the international expansion of the firm's business which included the establishment of an office in New York. He is currently a member of The Securities Institute in London. 39 Susan G. Leber has served as Deputy Managing Director - Financial Operations since March 2003, as Director of Financial Operations since December 2001 and as Deputy Finance Director-Group Controller since March 1999. Ms. Leber is a Certified Public Accountant. From 1993 to 1999 she was a Senior Manager with the accounting firm of Lopez Edwards Frank & Co., LLP, and was manager of the Stewart Group audit. Rocco Macri has served as Deputy Managing Director - Chief Financial Officer of W.P. Stewart & Co., Ltd. since September 2001 and as Finance Director since March 1999. Mr. Macri is a Certified Public Accountant. From 1993 through 1999, he was a Partner with the accounting firm of Lopez Edwards Frank & Co., LLP, where he was a Manager from 1984 through 1993. From 1984 through 1998, Mr. Macri had principal responsibility for our audit while a partner at our previous independent accounting firm. Peter Jan P. Rubingh became Deputy Managing Director of W.P. Stewart and Co., Ltd. in January 2001. He is a co-founder and Managing Director of TPR & Partners N.V. (now W.P. Stewart Asset Management (Europe), N.V.), an Amsterdam-based business which has concentrated on gathering assets and servicing clients for W.P. Stewart since TPR's inception in 1993. Mr. Rubingh began his career at Moret & Limperg (now Ernst & Young), Amsterdam, in 1978 as an Assistant Accountant within the audit team. He joined Noro Nederland B.V. (The Noro Group of Companies), a fund management group, in 1979 and served in various capacities within the group, including Group Controller, Assistant Managing Director, Management Team Member and Portfolio Manager (Venture Capital) in The Netherlands, the United States and the Netherlands Antilles. While at Noro, Mr. Rubingh also served as a non-executive member of the Supervisory Boards of HomeBanc in Atlanta, Georgia and ICON International in New York City. Frederick M. Ryan has served as Deputy Managing Director - Investor Relations of W.P. Stewart & Co., Ltd. since September 2001. Mr. Ryan served as Deputy Managing Director from February 1999 through August 2001 and as Deputy Managing Director - Europe from October 1998 through January 1999. Prior to that, Mr. Ryan was a consultant with FMR Capital Advisory, financial and business consultants. From 1991 through 1997, he was president of Canada Life Investment Management. Mr. Ryan worked with the investment and business consulting group of FMR & Associates from 1982 through 1991. From 1969 through 1982, Mr. Ryan was a shareholder, officer and Director of R.A. Daly & Co., Ltd., a brokerage firm and a former member firm of the Toronto Stock Exchange. Mr. Ryan has been a member of the Association for Investment Management & Research since 1967 and served as president of the Toronto Society of Financial Analysts (a constituent member society of the Association for Investment Management & Research) in 1976-1977. Charles G.R. Target has served as Deputy Managing Director - International Development of W.P. Stewart & Co., Ltd. since June 1999. Mr. Target is an Executive Director of our Asian affiliate, Bowen Asia Limited. Prior to the founding of Bowen, Mr. Target was a general partner and director of Alan Patricof Associates, the London-based international venture capital company. Before joining Patricof in 1988, Mr. Target served as Managing Director of Business International Asia/Pacific Ltd., an economic research and consulting company owned by the Economist Group, where he was responsible for the Asian regional operations of the company. Debra Randall has served as Corporate Secretary of W.P. Stewart & Co., Ltd. since January 2001. Ms. Randall, a graduate of the Institute of Chartered Secretaries and Administrators, has more than 13 years' experience in the legal and corporate services sector. Charles Target is the son-in-law of William P. Stewart. There are no other family relationships between any directors and executive officers. 40 B. Compensation The aggregate compensation paid or accrued in 2003 by W.P. Stewart & Co., Ltd. to individuals serving as directors and executive officers during that year, including bonuses and compensation payable pursuant to employee benefit plans, was $4.7 million. We sponsor both a defined contribution profit-sharing plan (including a 401(k) feature) and a defined contribution money-purchase plan in the United States. In 2000, we implemented a Bermuda pension plan and in 2001 a plan was created in the United Kingdom. These plans cover substantially all employees who meet the minimum age, service and eligibility requirements. The aggregate amount paid, set aside or accrued by W.P. Stewart & Co., Ltd. in 2003 to provide pension, retirement or other employee benefits to individuals serving as directors and executive officers during that year was $250,069. W.P. Stewart & Co., Ltd. has agreed to pay each of Messrs. Breeden, Brunner, King, Smith, Spangler and Spurling (the "non-executive directors") $20,000 per annum for his services on the board of directors. Also during 2003, in consideration for Mr. Breeden's services as Chairman of the Audit Committee, he received additional directors fees of $10,000 and Messrs. Smith and Spangler each received additional fees of $5,000 for serving as members of the Audit Committee. C. Board Practices The terms of office of our directors and officers will run until the election of successor directors (or until the shareholders resolve in a general meeting not to re-appoint a director) or the appointment of successor officers. Executive Committee. The Executive Committee of the board of directors is composed of Messrs. Russell, Smith and Stewart. The Executive Committee has the power and authority to manage the affairs of the company on behalf of the board of directors when it is not in session, consistent with the expressed desires of the board of directors. The Executive Committee maintains a record of any and all actions it takes and notifies the board of directors after it takes any such action. The agenda for each regular quarterly meeting of the board of directors includes discussion and ratification of actions that have been taken by the Executive Committee since the previous regular quarterly board meeting. Compensation Committee. The Compensation Committee of the board of directors is composed of Messrs. Breeden, Spangler and Spurling. The Compensation Committee is responsible for, among other things, making recommendations to the board of directors as to our compensation philosophy; overseeing the development of compensation programs; evaluating the performance of senior management and determining compensation levels for senior management; making recommendations to the board of directors concerning non-senior management compensation, incentive compensation plans and equity-based plans; and overseeing implementation of, and compliance with, incentive compensation plans and equity based plans. Audit Committee. The Audit Committee of the board of directors is composed of Messrs. Breeden, Smith and Spangler. The Audit Committee is responsible for, among other things, reviewing the structure of our internal controls, including internal audit; the annual appointment of the external auditors, including the approval of audit engagement fees and terms; considering the independence of the external auditor; approving audit and non-audit engagements with the external auditor; reviewing the annual audit plan; reviewing our audited and unaudited financial statements; reviewing disclosures made in connection with certifications provided by management for our annual report on Form 20-F; reviewing compliance with regulatory requirements; reviewing compliance with polices and practices involving ethics, conflicts and other such matters; establishing procedures for submission and treatment of complaints regarding accounting, internal controls and auditing matters; and reviewing the above activities of subsidiary companies. The Audit Committee meets and reports to the board of directors no less than once per quarter. 41 Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee of the board of directors is composed of Messrs. King, Spangler and Spurling and Dr. Brunner. This committee is responsible for, among other things, recommending to the board of directors the desirable size of the board or any committee thereof; developing criteria for board members and evaluating potential candidates against such criteria; reviewing and responding to nominations for board membership; identifying and recommending to the board candidates for board membership; developing and recommending to the board a set of corporate governance principles; monitoring compliance with our corporate governance principles and code of ethics; developing and recommending to the board standards in determining whether a board member is independent; and establishing procedures to oversee the annual evaluation of the board and management. We have not entered into any contracts with directors for benefits upon termination of service. Our Board of Directors has adopted Corporate Governance Guidelines as well as charters for the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee which comply with the recently-adopted corporate governance rules of the New York Stock Exchange. We intend to make a copy of the Corporate Governance Guidelines and each of these charters available on our website at www.wpstewart.com prior to the earlier of our next annual general meeting of shareholders or October 31, 2004. A copy of such documents will also be made available to our shareholders upon request by contacting our Deputy Managing Director--Investor Relations by phone at (441) 295-8585, by fax at (441) 296-8357 or by e-mail at IRINFO@wpstewart.com. D. Employees At December 31, 2001, 2002 and 2003, we employed 105, 110 and 105 persons, respectively. We consider our relations with our employees to be good. E. Share Ownership The following table presents information regarding the beneficial ownership of our common shares by our directors and executive officers:
Number of Common Name Shares Owned Percentage ------------------------------------------ ------------------------ ---------------- William P. Stewart (1) 4,182,711 9.08% John C. Russell (2) 463,231 1.01% John A. Allison (3) 517,258 1.12% Peter Jan P. Rubingh (4) 730,419 1.59% All other Directors and Executive Officers as a group (5) 564,494 *
* Each individual's ownership is less than 1%. (1) Includes 4,144,140 shares owned by trusts for which Mr. Stewart serves as trustee (with respect to which Mr. Stewart disclaims beneficial ownership) and 8,571 shares that may be purchased upon exercise of currently exercisable options. 42 (2) Includes 125,000 shares held by a trust (with respect to which Mr. Russell disclaims beneficial ownership) and 4,286 shares that may be purchased upon exercise of currently exercisable options. (3) Includes 8,571 shares that may be purchased upon exercise of currently exercisable options. (4) Includes 80,000 shares which are owned by two trusts established for Mr. Rubingh's children, for which Mr. Rubingh is the trustee. (5) Includes 36,858 shares that may be purchased upon exercise of currently exercisable options. Our directors and executive officers currently own options to purchase an aggregate of 358,428 of our common shares. Each option vests in equal portions on the first seven anniversaries of the grant date. 297,428 of these options were granted on October 24, 2001 at an exercise price of $20.80 per share and will expire on October 24, 2008. An additional 45,000, 6,000 and 10,000 of these options were granted on May 1, 2002, August 20, 2002 and October 3, 2002 at exercise prices of $28.42, $22.10 and $16.58, respectively, for an aggregate of 61,000 options. These options will expire on May 1, 2009, August 20, 2009 and October 3, 2009, respectively. W.P. Stewart & Co., Ltd. periodically sells common shares to its employees and those of its affiliates at fair value for cash and/or installment notes. The installment notes are full recourse, bear interest at 8.5% or 10% per annum and are collateralized by the shares purchased. The principal amount of each note is payable in 28 quarterly installments, subject to mandatory payment in full upon termination of employment. Shares vest in 28 equal quarterly installments. Unvested shares are, and vested shares may be, repurchased from the employee upon termination. Different, but substantially equivalent, terms may apply in respect of individuals employed in certain countries outside Bermuda and the United States. W.P. Stewart & Co., Ltd. 2001 Employee Equity Incentive Plan, as amended We operate a share option and restricted share plan, the W.P. Stewart & Co., Ltd. 2001 Employee Equity Incentive Plan, as amended, to promote the interests of W.P. Stewart & Co., Ltd. and its shareholders by aiding us and our affiliates in attracting and retaining employees and directors capable of assuring our future success, by offering such persons incentives to put forth maximum efforts for the success of our business, and by affording such persons an opportunity to acquire a proprietary interest in our Company. The plan was adopted by our board of directors and became effective on July 24, 2001, and was approved by our shareholders at the annual general meeting on May 3, 2002. The plan was amended on January 25, 2002 and May 12, 2003. Our board of directors may further amend, alter, suspend, discontinue or terminate the plan at any time, except that no alteration or amendment will be effective without shareholder approval if absent such approval: o it would violate the rules or regulations of the New York Stock Exchange or any other securities exchanges that are applicable to us; or o it would cause us to be unable, under the U.S. Internal Revenue Code of 1986, as amended, to grant incentive stock options under the plan. The plan will continue in effect until July 23, 2004. No award will be granted under the plan after the termination of the plan. Unless otherwise expressly provided in the plan or in an award agreement, any award granted may extend beyond the termination of the plan, and the authority of management and our Compensation and Executive Committees to administer the plan and our board of directors to amend it, will extend beyond the termination of the plan. 43 The shares available for awards under the plan will be authorized but unissued shares of W.P. Stewart & Co., Ltd. or shares that will have been previously reacquired by a subsidiary of ours. As originally adopted, the plan provided for a maximum of 1,500,000 shares available for granting awards. The amendment in January 2002 increased this number by 1,000,000 shares. The amendment in May 2003 additionally increased this number by 500,000 shares. All of our or our affiliates' employees and all of our directors are eligible to receive awards under the plan. In determining which eligible persons shall receive an award and the terms of any award, the committee administering the plan will periodically review the recommendations of management and may take into account the nature of the services provided by the eligible persons, their present and potential contributions to our success, and such other factors as the committee, in its discretion, shall deem relevant. An incentive stock option will not be granted to an employee of an affiliate unless the affiliate is also our "subsidiary corporation" within the meaning of Section 424(f) of the Internal Revenue Code of 1986, as amended, or any successor provision. The plan is administered by our management, subject to oversight by the Compensation and Executive Committees of our board of directors. Subject to review and approval by the committee, as appropriate, management has the authority to: o designate participants; o determine the type or types of awards to be granted to each participant under the plan; o determine the number of shares to be covered by (or the method by which payments or other rights are to be calculated in connection with) each award; o determine the terms and conditions of any award or award agreement; o subject to certain conditions, amend the terms and conditions of any award or award agreement and accelerate the exercisability of any award or the lapse of restrictions relating to any award; o determine whether, to what extent and under what circumstances awards may be exercised with the payment of cash, shares, other securities, other awards or other property, or canceled, forfeited or suspended; o determine whether, to what extent and under what circumstances cash, shares, other securities, other awards, other property and other amounts payable by W.P. Stewart & Co., Ltd. with respect to an award under the plan shall be deferred either automatically or at the election of the holder thereof or the committee; o interpret and administer the plan and any instrument or agreement, including any award agreement, relating to the plan; o establish, amend, suspend or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the plan; and o make any other determination and take any other action that the committee deems necessary or desirable for the administration of the plan. The plan permits the granting of: o share options that are not intended to meet the requirements for "incentive stock options" under Section 422 of the Internal Revenue Code; o share options that are "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code; and o restricted shares. 44 Subject to limited exceptions permitted by the committee, awards may not be transferred other than by will or by the laws of descent and distribution. Except as otherwise provided in the plan, no award or right under an award may be pledged, alienated, attached or otherwise encumbered, and any attempt to pledge, alienate, attach or encumber an award will be void and unenforceable against us or any of our affiliates. The committee may waive any conditions of or our rights under any outstanding award, prospectively or retroactively. Except as otherwise provided in the plan or an award agreement, unless we or the committee obtains consent from the participant, holder or beneficiary of the award, the committee may not amend, alter, suspend, discontinue or terminate any outstanding award prospectively or retroactively. If the committee determines that any event affecting the shares, would result in the dilution or enlargement of any of the benefits or potential benefits intended to be made available under the plan, the committee will, in a manner it deems equitable, adjust any or all of: o the number and type of shares (or other securities or other property) that may be made the subject of awards; o the number and type of shares (or other securities or other property) subject to outstanding awards; and o the purchase or exercise price with respect to any award. All awards under the plan are required to be evidenced by appropriate agreements executed on our behalf and by the participants. Awards generally vest over a seven-year period. The exercise price of a share option is not less than the New York Stock Exchange closing price of our common shares on the date of grant. Restricted shares may be purchased at a discount of up to 20% from the New York Stock Exchange closing price value. Item 7. Major Shareholders and Related Party Transactions A. Major Shareholders The following table presents information regarding the beneficial ownership of our common shares as of March 1, 2004 by persons or groups of affiliated persons known to us to own more than 5% of our common shares. See also Item 6 E above under the caption "Directors, Senior Management and Employees - Share Ownership." Name Number Percentage - ------------------------ -------------------------- ---------------------- WPS II, Inc. 19,775,834 43.0% The above-listed beneficial owner has the same voting rights per share as all other holders of common shares; however, our bye-laws specifically exempt such holder from the limitations on voting power that may apply to other holders if they become owners of more than a specified percentage of common shares. See Item 3 D under the caption "Key Information - Risk Factors - Our bye-laws restrict shareholders' voting rights." As of March 1, 2003, we had 188 shareholders of record, of which 144, owning approximately 98% of our common shares, were U.S. persons. 45 B. Related Party Transactions In connection with purchases of shares of W.P. Stewart & Co., Ltd. and its predecessors, since at least 1991, our employees, including our executive officers, and our directors have entered into loan agreements with, and signed promissory notes to, us in respect of some or all of the purchase price of such shares. Most of our employees are or have been parties to such loans. In connection with such share purchases, Messrs. Russell, Chaar, Henderson, Macri, Ryan and Target and Ms. Leber have outstanding loans pursuant to loan agreements with, and signed promissory notes to, the Stewart Group. Each of these loans accrues interest at a rate of either 8.5% or 10% per annum. Pursuant to Section 402 of the Sarbanes-Oxley Act of 2002, there have been no material changes to these loans nor have there been any new loans made subsequent to July 30, 2002 to any directors or executive officers. The table set forth below provides the details with respect to the aggregate amount outstanding under these loan agreements and promissory notes as of December 31, 2003 and the largest aggregate amount of indebtedness outstanding under each of these loan agreements and promissory notes during the year ended December 31, 2003 for each of the above-named directors and executive officers. Largest Amount Outstanding During Amount Outstanding the Year Ended Name as of December 31, 2003 December 31, 2003 - ------------------------- ------------------------- ------------------- John C. Russell $ 394,816 $ 495,446 Richard C. Breeden 0 43,607 Henry B. Smith 0 68,214 Salim Chaar 608,929 726,786 Mark A. Henderson 448,000 568,000 Rocco Macri 555,191 744,691 Frederick M. Ryan 433,409 599,333 Charles G.R. Target 86,006 446,250 Susan G. Leber 338,488 445,024 The lease agreement relating to W.P. Stewart & Co., Inc.'s office space in New York covers space utilized by Stewart family interests that reimburse W.P. Stewart & Co., Inc., on a monthly basis, for that portion of the rental and other costs associated with the space so utilized. Such lease-related amount was $162,477 for the year ended December 31, 2003. We believe that the reimbursement amounts that we receive from the Stewart family interests for the utilization of this space are as favorable as the amounts we could receive from an unaffiliated party for utilization of the same space. W.P. Stewart & Co., Ltd. owns approximately 40% of Bowen Asia Limited. Ms. Lisa M. Stewart, the daughter of Mr. William P. Stewart, and Mr. Charles G.R. Target, Ms. Stewart's husband and a Deputy Managing Director of W.P. Stewart & Co., Ltd., together own a majority of the stock of Bowen Asia Limited. We have been granted an option exercisable beginning in June 2004 to expand our ownership of Bowen Asia Limited to a majority interest. In addition to payments in connection with our investment in Bowen Asia Limited, we pay solicitation, sub-advisory and research fees to Bowen Asia Limited. Such fees were, in the aggregate, $859,333 for the year ended December 31, 2003. We believe that the solicitation, sub-advisory and research fees that we pay to Bowen Asia Limited are as favorable as the fees we would pay to an unaffiliated party for similar services. We have entered into an agreement with Bowen Capital Management, a subsidiary of Bowen Asia Limited, which entitles us to receive solicitation fees for client referrals to Bowen Capital Management. Total solicitation fees received under the terms of this agreement were $7,600 for the year ended December 31, 2003. 46 Since April 30, 1999, we have used an aircraft owned by Shamrock Aviation, Inc. and have compensated Shamrock Aviation, Inc. for its use by paying charter fees that we believe are more favorable to the Stewart Group than the fees that would be paid to an unaffiliated charterer. Shamrock Aviation, Inc. is owned by Mr. William P. Stewart and trusts for the benefit of his four adult children. Mr. Stewart serves as President, and Mr. Gregory S. Stewart, his son, serves as Vice President, of Shamrock Aviation, Inc. Fees to Shamrock Aviation, Inc., reflected in research and administration expenses, amounted to $2,311,783 for the year ended December 31, 2003. We entered into agreements pursuant to which Shamrock Aviation, Inc. or an entity affiliated with Shamrock has agreed to provide operational and maintenance services at cost for a Challenger aircraft owned by one of our subsidiaries. These costs, reflected in research and administration expenses, include $2,584,769 for the year ended December 31, 2003. We believe that the terms of this transaction are more favorable to us than the terms that we could obtain from an unaffiliated party in a comparable transaction. W.P. Stewart Fund Management Limited serves as the investment manager to an Irish fund solely managed by WPS Investissements S.A., a Swiss investment management firm. WPS Investissements S.A. is principally owned by Mr. William P. Stewart III, a son of Mr. William P. Stewart. The Stewart Group has no ownership interest in either the Irish fund or WPS Investissements S.A. W.P. Stewart Fund Management Limited collected and remitted to WPS Investissements S.A. all of the advisory fees in respect of such fund. Such fees amounted to $25,405 for the year ended December 31, 2003. In addition, we pay to WPS Investissements S.A. solicitation fees in respect of certain accounts and an amount calculated on the basis of a portion of the brokerage commissions paid by such fund and certain accounts, as directed by those clients. Such payments amounted to $12,995 for the year ended December 31, 2003. We believe that the payments made to WPS Investissements S.A. are as favorable as those we would pay to an unaffiliated party in a similar transaction. W.P. Stewart & Co., Ltd. believes, upon advice of Nixon Peabody LLP, special tax counsel, that, at the time of our merger with our U.S. predecessor company, WPS II, Inc. qualified as an S corporation and our U.S. predecessor company qualified as a "qualified subchapter S subsidiary" for U.S. federal income tax purposes and that, accordingly, W.P. Stewart & Co., Ltd. incurred no U.S. tax liability as a result of the Bermuda merger. Notwithstanding such belief, WPS II, Inc. has agreed to indemnify W.P. Stewart & Co., Ltd. for any harm suffered by W.P. Stewart & Co., Ltd. arising from any U.S. tax liability imposed upon W.P. Stewart & Co., Ltd. as a result of our merger with our U.S. predecessor company. In addition, certain stockholders of WPS II, Inc. have agreed to severally guarantee their proportionate shares of the indemnity obligation of WPS II, Inc. based on their interests in WPS II, Inc. at the time of the merger, which represented an aggregate of approximately 92% of the amount which may be payable by WPS II, Inc. under the indemnity. The Company pays Carl Spangler Kapitalanlageges. m.b.H., which is controlled by Bankhaus Carl Spangler & Co. AG, the Chief Executive Officer of which is Heinrich Spangler, one of our directors, fees for solicitation services. These fees amounted to $988,184 for the year ended December 31, 2003. Certain directors of W.P. Stewart & Co., Ltd. serve as directors of funds from which we have received investment advisory fees, fund management fees, subscription fees and commissions. Such fees and commissions were $5,765,255 for the year ended December 31, 2003. 47 The Company owns a 40% interest in Kirk Management Ltd., a real estate joint venture, incorporated in Bermuda. The remaining 60% interest is owned by The Bank of Bermuda, of which one of our directors is Executive Director. Included in receivables from affiliates, net, is a subordinated loan of $212,526 and accrued interest on such loan in the amount of $34,132 due from Kirk Management Ltd. The loan has no fixed repayment date. Kirk Management Ltd. also owns and leases to W.P. Stewart & Co., Ltd. its Hamilton, Bermuda headquarters. The lease expires in 2020 and calls for annual rent of approximately $180,000. The Company leases its office space in The Netherlands from Duinzigt I, a company owned by the former principals of TPR & Partners N.V., including one of our Deputy Managing Directors. Total rent expense for the year ended December 31, 2003 was $155,581. Appleby, Spurling & Kempe, a law firm of which Richard D. Spurling, one of our directors, is a partner, and its affiliate A.S & K. Services Ltd. provide legal and corporate administrative and secretarial services to the Company. Fees for such services amounted to $50,339 for the year ended December 31, 2003. Included in investments available for sale at December 31, 2003 is an amount of $833,958, which is an investment in a fund managed by W.P. Stewart Fund Management Limited, an indirect wholly-owned subsidiary of W.P. Stewart & Co., Ltd. Included in operating expenses for the year ended December 31, 2003 are contributions in the amount of $222,450 paid to the W.P. Stewart & Co. Foundation, Inc., a private charitable foundation. C. Interests of Experts and Counsel Not Applicable. Item 8. Financial Information A. Consolidated Statement and Other Financial Information See pages F-1 to F-24. We currently have no pending litigation of a material nature. We note, however, that, although we have not yet been officially served, we have been made aware that Logicom Inclusive, Inc. has filed a complaint against us relating to an alleged copyright infringement of software programs. We do not believe that any such claim is merited, and we therefore do not believe this claim, if pursued, will have a material adverse effect on our financial condition or results of operations. The holders of our common shares are entitled to receive, on a pro rata basis, dividends when, as and if declared by our board of directors. Dividends may be paid only in accordance with the Companies Act 1981 of Bermuda, which provides that dividends and other distributions to shareholders may not be paid if there are reasonable grounds for believing that: o W.P. Stewart & Co., Ltd. is, or would after the dividend payment be, unable to pay its liabilities as they become due; or o the realizable value of W.P. Stewart & Co., Ltd.'s assets after such payment would be less than the aggregate of its liabilities and its issued share capital and share premium accounts. 48 W.P. Stewart & Co., Ltd.'s ability to declare dividends on the common shares may also be limited by regulatory restrictions derived from the net capital rules of various regulatory bodies applicable to W.P. Stewart & Co., Ltd. and its subsidiaries. Rights to dividends and distributions that have not been claimed within six years after the date on which they were declared revert to W.P. Stewart & Co., Ltd. We have a policy of declaring quarterly dividends on the common shares. We expect that the amount of those dividends will be determined as approximately $1.20 per annum. We paid a dividend of $0.30 per share in January 2004 and currently anticipate similar dividends in April, July and October of this year. However, the declaration and payment of dividends to holders of common shares is in the discretion of the board of directors and depends on our capital requirements, operating and financial condition and business plan at the time, legal restrictions, regulatory restrictions and such other factors as the board of directors may deem relevant. B. Significant Changes Not Applicable Item 9. The Offer and Listing Not Applicable, except for Items 9.A.4 and 9.C. Trading Markets Our common shares, par value US $0.001 per share, have traded on the New York Stock Exchange under the symbol "WPL" since December 8, 2000 and have been listed on the Bermuda Stock Exchange under the symbol "WPS" since December 11, 2000. Prior to December 8, 2000, there was no established market for our common shares. On March 11, 2004, the last reported sale price for our common shares on the New York Stock Exchange was $19.13 per share. As of that date there had been no trading of our common shares on the Bermuda Stock Exchange. Certain historical market price data is set forth below, with certain prices for 2000 and 2001 rounded to the nearest hundredth of a dollar. New York Stock Exchange ---------------------------------- Period High Low - ---------------------------------------- --------------- --------------- Annual 2000 $27.12 $22.69 2001 $29.62 $18.01 2002 $31.73 $14.35 2003 $22.58 $14.94 Quarter First Quarter 2002 $31.73 $25.25 Second Quarter 2002 $30.40 $24.60 Third Quarter 2002 $25.44 $14.35 Fourth Quarter 2002 $21.02 $14.85 First Quarter 2003 $20.55 $14.94 Second Quarter 2003 $22.50 $16.69 Third Quarter 2003 $25.57 $18.91 49 New York Stock Exchange ---------------------------------- Period High Low - ---------------------------------------- --------------- --------------- Fourth Quarter 2003 $22.58 $20.05 Month September 2003 $21.65 $19.54 October 2003 $22.58 $20.91 November 2003 $21.59 $20.05 December 2003 $21.55 $20.05 January 2004 $23.55 $19.77 February 2004 $20.46 $19.05 March 1 - 11, 2004 $19.98 $18.90 Item 10. Additional Information A. Share Capital Not Applicable. B. Memorandum and Articles of Association Organization and Register W.P. Stewart & Co., Ltd. is a company incorporated under the Companies Act 1981 of Bermuda. It is registered in the Register maintained by the Bermuda Registrar of Companies under the entry number "EC25146." Objects and Purposes Clause 6 of our Memorandum of Association states that W.P. Stewart & Co., Ltd. was formed for the following objects: o To carry on business as a holding company and to acquire and hold shares, stocks, debenture stock, bonds, mortgages, obligations and securities of any kind issued or guaranteed by any company, corporation or undertaking of whatever nature and wherever constituted or carrying on business, and shares, stock, debentures, debenture stock, bonds, obligations and other securities issued or guaranteed by any government, sovereign ruler, commissioners, trust, local authority or other public body, whether in Bermuda or elsewhere, and to vary, transpose, dispose of or otherwise deal with from time to time as may be considered expedient any of our investments for the time being; o To acquire any such shares and other securities as are mentioned in the preceding paragraph by subscription, syndicate participation, tender, purchase, exchange or otherwise and to subscribe for the same, either conditionally or otherwise, and to guarantee the subscription thereof and to exercise and enforce all rights and powers conferred by or incident to the ownership thereof; 50 o To co-ordinate the administration, policies, management, supervision, control, research, planning, trading and any and all other activities of any company or companies now or hereafter incorporated or acquired which may be or may become a company, wherever incorporated, which is or becomes a holding company or a subsidiary of, or affiliated with, us within the meanings respectively assigned to those terms in the Companies Act 1981 or, with the prior written approval of the Minister of Finance, any company or companies now or hereafter incorporated or acquired with which we may be or may become associated; o To act as sponsors or representatives for any company, unit trust, partnership or other entity seeking a listing of its shares, units or other instruments on any stock exchange, and to act as agent or representative of any company listed on any stock exchange and to arrange and sponsor public and private issues of shares and loan capital and to negotiate and underwrite such issues; o To act as agents for the sale and purchase of any stocks, shares or securities, or for any other monetary or mercantile transaction and as managers and investment advisers for any company, partnership, public or private body, association, individual or entity wherever incorporated, formed or based outside Bermuda and, with the prior permission in writing of the Minister of Finance for any person or any class or group of persons incorporated, formed or based in Bermuda; o To act as underwriters, sponsors and agents for any government and other authority and, for any person and, with the prior permission in writing of the Minister of Finance, any person incorporated, formed or based in Bermuda; o To provide financial services, advice and facilities of every description, including (but without limiting the generality of the foregoing words) all these capable of being provided by stockholders, stockjobbers, promoters and managers of investment vehicles, investment media, financial advisers, underwriters and issuing houses to any person and, with the prior permission in writing of the Minister of Finance, any persons incorporated, formed or based in Bermuda; o To invest the funds of or available to us in the share or loan capital of any other company, partnership or other enterprise wherever incorporated, formed or carrying on business, and in the bonds or other obligations of any authority, undertaking or corporation, whether public or private; and o As set forth in paragraphs (b) to (n) and (p) to (u) inclusive in the Second Schedule to the Companies Act 1981. Directors' Interests Pursuant to the terms of clause 96 of our bye-laws, a director shall not generally vote at a meeting of the board of directors or of a committee of the board of directors on any resolution concerning a matter in which he has a material interest unless such interest arises only because the situation falls within one or more of the following: o the resolution relates to our giving the director a guarantee, security or indemnity in respect of a liability incurred by him for our benefit; 51 o the resolution relates to our giving a third party a guarantee, security or indemnity in respect of an obligation of ours for which the director has assumed responsibility under a guarantee or indemnity or by the giving a security; o the director's interest arises in relation to the subscription or purchase by him of our securities pursuant to a general offer to our shareholders or to the public; o the director's interest arises from being a participant in the underwriting of any of our securities; o the resolution relates to a proposal concerning another corporation in which he holds less than 1% of the shares; o the resolution relates to a retirement benefits scheme which has been approved by the authorities of any country for tax purposes; o the resolution relates to any contract or arrangement for the benefit of our employees and does not provide the director any advantage or privilege not accorded to the employees; or o any proposal concerning any insurance which we are empowered to purchase for the benefit of any of our directors. The board of directors may exercise all the powers of the company to borrow money and to mortgage or charge all or any part of our undertaking, property and assets and to issue debentures and other securities, whether outright or as collateral security for any debt, liability or obligation of ours or of any other person. Shareholders' Rights The holders of our common shares are entitled to receive, on a pro rata basis, dividends when, as and if declared by our board of directors. Dividends may be paid only in accordance with the Companies Act 1981 of Bermuda which provides that dividends and other distributions to shareholders may not be paid if there are reasonable grounds for believing that: o W.P. Stewart & Co., Ltd. is, or would after the dividend payment be, unable to pay its liabilities as they become due; or o the realizable value of W.P. Stewart & Co., Ltd.'s assets after such payment would be less than the aggregate of its liabilities and its issued share capital and share premium accounts. W.P. Stewart & Co., Ltd.'s ability to declare dividends on the common shares may also be limited by regulatory restrictions derived from the net capital rules of various regulatory bodies applicable to W.P. Stewart & Co., Ltd. and its subsidiaries. Rights to dividends and distributions that have not been claimed within six years after the date on which they were declared revert to W.P. Stewart & Co., Ltd. Subject to the provisions set forth below and any other special rights or restrictions as to voting for the time being attached to any class of shares by or in accordance with our bye-laws, at any general meeting on a poll vote, every shareholder who is present in person or by proxy shall have one vote for every common share of which such person is the holder. Most matters to be approved by holders of common shares require approval by a simple majority vote of the common shares represented at the shareholders' meeting. A resolution passed by the holders of a majority of the issued common shares either in person or by proxy at a general meeting is required to approve an amalgamation with another company. Shareholders do not have cumulative voting rights. Shareholders have the power to elect directors, appoint auditors and make changes in the amount of authorized share capital of W.P. Stewart & Co., Ltd. The current maximum number of directors is 10; however seven directors were elected at the most recent annual general meeting of shareholders and one director was appointed in February 2004 to fill a vacancy. All directors are elected at each annual general meeting, except that the board of directors may fill interim vacancies (including the vacancies caused by the difference between the maximum and actual numbers of directors) between general meetings. 52 Our bye-laws limit the voting power of natural persons to a maximum of 5% of all votes attributable to our outstanding shares and the voting power of entities and persons other than natural persons to a maximum of 9.5% of the votes attributable to our outstanding shares. For these purposes, voting power held by any person or entity is deemed to include power held or shared by that person or entity as part of a "group" (as defined in the Securities Exchange Act of 1934). These limitations apply regardless of how many common shares are actually owned or controlled by a shareholder. These restrictions, however, will not apply to: o WPS II, Inc.; o Other shareholders or groups of shareholders who were shareholders of W.P. Stewart & Co., Ltd. immediately before our initial public offering; and o Additional persons, entities or groups that are designated by our board of directors. The votes that could have been cast by shareholders who are subject to these voting restrictions will be allocated to the other shareholders pro rata based on the number of shares they hold. However, no shareholder subject to these restrictions may be allocated additional voting rights to the extent that the allocation would cause that shareholder to have more than 5% (for natural persons) or 9.5% (for legal persons or entities) of the total voting power. This voting limitation was put in place to reduce the likelihood of our becoming a controlled foreign corporation for U.S. tax purposes. See Item 3 D under the caption "Risk Factors - Our U.S. tax status could be challenged..." and Item 10 E under the caption "Taxation - United States - Controlled Foreign Corporation Rules" for a discussion of the tax consequences associated with our becoming a controlled foreign corporation. Our bye-laws also limit the overall voting power of all persons, entities or groups to 20% of the total number of all votes attributable to our outstanding shares (including the common shares). These limitations apply regardless of how many common shares are actually owned or controlled by a shareholder and regardless of whether the voting restrictions described in the previous paragraph apply to that shareholder. These restrictions, however, will not apply to: o WPS II, Inc. or its affiliates; o Direct or indirect subsidiaries of W.P. Stewart & Co., Ltd.; o Any shareholding entity that may be established for the purpose of our employee benefit plans and that is designated by our board of directors; and o Other persons, entities or groups that are designated by our board of directors. If W.P. Stewart & Co., Ltd. is wound up, the liquidator may, with the sanction of a resolution of shareholders, divide among the shareholders in kind all or part of our assets and may, with that sanction, vest all or part of the assets in trustees of trusts for the benefit of the shareholders in the liquidator's discretion, provided that a shareholder may not be compelled to accept any securities or other assets which would subject that shareholder to liability. 53 Changes in Shareholders' Rights Any change in the rights relating to the common shares requires either the adoption of a resolution by the holders of a majority of the common shares at a duly held meeting of the common shareholders of W.P. Stewart & Co., Ltd. or the written consent of the holders of not less than 75% of the common shares. General Meetings of Shareholders The annual general meeting of shareholders shall be held at such time and place as the board of directors shall appoint. The board may convene special general meetings of shareholders on its own initiative or when requisitioned by shareholders in accordance with applicable Bermuda law. Under the Companies Act 1981 of Bermuda, the directors of the Company are required, on the request of shareholders holding not less than 10% of the paid-up voting share capital of the Company, to convene a special general meeting of the Company for the purpose stated in the request. The quorum required for a meeting of shareholders is generally at least two shareholders present in person or by proxy representing not less than one-third in nominal value of the total issued common shares. Shareholders' meetings are convened upon advance notice of at least 14 days. No Limitation on Foreign Ownership There are no limitations under Bermuda law or our memorandum of association on the rights of persons who are not citizens or residents of Bermuda, as such, to hold or vote our shares. Change in Control There are no provisions in our memorandum of association or bye-laws that would have the effect of delaying, deferring or preventing a change in control of W.P. Stewart & Co., Ltd. and that would only operate with respect to an amalgamation, acquisition or corporate restructuring involving it or any of its subsidiaries. Disclosure of Share Holdings Our bye-laws do not require shareholders to disclose their shareholdings except to our board of directors. As an exempted company, W.P. Stewart & Co., Ltd. is exempted from Bermuda laws which restrict the percentage of share capital that may be held by non-Bermudians, but, as an exempted company, we may not, except with the express authorization of the Bermuda legislature or under a license granted by the Minister of Finance of Bermuda, participate in certain business transactions including: o the acquisition or holding of land in Bermuda (except as required for our business and held by way of lease or tenancy for terms of not more than 50 years or with the consent of the Minister of Finance of Bermuda, as required to provide accommodation or recreational facilities for our employees and held by way of lease or tenancy for terms of not more than 21 years); 54 o the taking of mortgages on land in Bermuda to secure an amount in excess of BD$50,000 without the consent of the Minister of Finance of Bermuda; o the acquisition of any bonds or debentures secured on any land in Bermuda except bonds or debentures issued by the Bermuda government or a public authority; or o the carrying on of business of any kind in Bermuda other than with persons outside Bermuda, except in certain limited circumstances such as doing business with another exempted company in furtherance of the business of W.P. Stewart & Co., Ltd. carried on outside Bermuda. C. Material Contracts Pursuant to an agreement to which we became party on October 30, 1998, shareholders of W.P. Stewart & Co., Ltd. who currently own or control approximately 20% of the outstanding common shares have certain demand and piggyback registration rights with respect to their common shares. The demand registration rights will only be available if a sufficient number of shareholders with similar rights join in the request so that at least 15% of the outstanding common shares are to be registered; and the offerings will be firm commitment underwritten offerings. W.P. Stewart & Co., Ltd. exchanged 1,152,000 of its shares for 50% of the issued and outstanding capital stock of TPRS Services N.V. pursuant to a share exchange agreement dated as of May 19, 1999 with TPR & Partners N.V. and TPR Curacao N.V. On December 29, 2000, W.P. Stewart & Co., Ltd. exchanged 814,000 of its shares for the remaining 50% of the issued and outstanding shares of TPRS Services N.V. pursuant to a share exchange agreement with TPR & Partners N.V. The parties also entered into a stock restriction agreement under which, if certain performance criteria are not met by TPRS Services N.V., W.P. Stewart & Co., Ltd. may repurchase up to 20% of the 814,000 shares, for US$0.001 per share, on July 1, 2004. The agreement imposes certain restriction on transfers of shares by TPR & Partners N.V. and its permitted assigns. W.P. Stewart & Co., Ltd. exchanged 898,831 of its shares for all of the issued and outstanding shares of NS Money Management Ltd. pursuant to a share exchange agreement dated as of June 1, 1999 with Stewart Notz Stucki Ltd. The parties also entered into a stock call agreement under which, if certain performance criteria were not met by NS Money Management Ltd., W.P. Stewart & Co., Ltd. could repurchase up to 179,766 of the W.P. Stewart & Co., Ltd. shares for US$0.001 per share, on January 1, 2003. In 2003, pursuant to the provisions of the stock call agreement, 35,000 common shares were reacquired by W.P. Stewart & Co., Ltd. Pursuant to an agreement with Bowen Asia Limited and its shareholders, dated as of June 30, 1999, W.P. Stewart & Co., Ltd., increased its total investment in Bowen Asia Limited from 21.9% to 40%. The price of this increase was $500,000 and 27,769 of our shares. We have the option (exercisable from June 30, 2004 to June 30, 2009) to purchase such number of shares of Bowen as would increase our ownership to 50.1% of Bowen's issued and outstanding shares. If we exercise this option, the Bowen shareholders will have the option to put their remaining shares in Bowen to us. In either case the option price per share would equal 15 times Bowen's trailing four quarters' after-tax earnings (or, if greater, $10 million in the case of our purchase option), divided by the number of outstanding Bowen shares. The agreement imposes limitations on any transfers or issuances of Bowen shares. If there is a change of control of W.P. Stewart & Co., Ltd., Bowen has the right to repurchase all Bowen shares then owned by W.P. Stewart & Co., Ltd. Bowen and its shareholders have a right of first refusal in the event we propose to sell any of our Bowen shares. The agreement also calls for us to have representation on Bowen's board of directors. 55 By agreement dated as of December 7, 2000, WPS II, Inc. agreed to indemnify W.P. Stewart & Co., Ltd. for any harm suffered by W.P. Stewart & Co., Ltd. arising from any U.S. tax liability imposed upon W.P. Stewart & Co., Ltd. as a result of our merger with our U.S. predecessor company. In addition, certain stockholders of WPS II, Inc. have agreed to severally guarantee their proportionate shares of the indemnity obligation of WPS II, Inc. based on their interests in WPS II, Inc. at the time of the merger, which represented an aggregate of approximately 92% of the amount which may be payable by WPS II, Inc. under the indemnity. WPS II, Inc. also has agreed to continue to own at least 7,000,000 of our shares during the period of the indemnity. Pursuant to a share exchange agreement with TPR Holding B.V. dated as of November 14, 2001, W.P. Stewart and Co., Ltd. exchanged 330,000 of its shares for 75% of the outstanding shares of W.P. Stewart Asset Management (Europe), Ltd., which in turn indirectly owns all of the shares of W.P. Stewart Asset Management (Europe) N.V. (formerly TPR & Partners N.V.). The parties also entered into a deferred share exchange agreement as of November 14, 2001 pursuant to which W.P. Stewart & Co., Ltd. agreed to acquire the remaining shares of W.P. Stewart Asset Management (Europe), Ltd. as of June 30, 2006 at a fair value price determined on that date and payable in shares of W.P. Stewart & Co., Ltd. D. Exchange Controls Because we have been designated as non-resident in Bermuda for exchange control purposes, there are no restrictions on our ability to transfer funds in and out of Bermuda or to pay dividends to non-Bermuda residents who are holders of our shares, other than in local Bermuda currency. E. Taxation The following summary describes the principal tax consequences under U.S. federal income tax law and the laws of Bermuda of the ownership and disposition of the common shares. Except where otherwise noted, this summary does not describe any tax consequences arising under the law of any State, locality or taxing jurisdiction other than Bermuda or the U.S. federal government. There is no income tax treaty between Bermuda and the United States. The discussion below is based upon the nature and conduct of our business, which may change, and upon our understanding of our position under the tax laws of the various countries in which we have assets or conduct activities, which position is subject to review and possible challenge by taxing authorities and to possible changes in law, which may have retroactive effect. Bermuda We have obtained from the Minister of Finance of Bermuda under the Exempted Undertakings Tax Protection Act 1966 (as amended), an undertaking that, in the event that Bermuda enacts any legislation imposing tax computed on profits, income, any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of such tax will not be applicable to the shares, debentures or other obligations of W.P. Stewart & Co., Ltd., until at least March 28, 2016. Under current Bermuda law, no income, withholding or other taxes or stamp or other duties are imposed upon the issue, transfer or sale of the common shares or on any payments thereunder. United States This summary is based on the Internal Revenue Code, Treasury regulations and rulings promulgated thereunder and judicial decisions in effect or available on the date of this Annual Report. All of the foregoing are subject to change with or without retroactive effect, which could affect the continued accuracy of this summary. No advance rulings have been or will be sought from the IRS regarding the matters discussed in this Annual Report. Accordingly, you are urged to consult your tax adviser to determine the U.S. federal, state, local and foreign income and other tax consequences to you of acquiring, holding and disposing of common shares. 56 U.S. Holders. As used in this section, the term "U.S. person" means for U.S. federal income tax purposes: o a citizen or resident of the United States or any political subdivision thereof; o a corporation or partnership created or organized in the United States or under the laws of the United States or of any State; or o an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source. The term "U.S. holder" means a person, a holder or a beneficial owner of common shares who is a U.S. person. A "non-U.S. holder" is any holder who is not a U.S. holder. In general, U.S. holders will include dividends in income, in accordance with their method of accounting, as ordinary income. Assuming the common shares are held as a capital asset, gain or loss on a subsequent sale or other taxable disposition of the stock will be a capital gain or loss, which will be long-term if such stock is held for more than one year. At least a portion of any dividend will constitute foreign source dividend income, which may be relevant for a U.S. holder's foreign tax credit limit computation. Passive Foreign Investment Company Rules. W.P. Stewart & Co., Ltd., based on the nature of its assets and income, does not believe it should currently be classified as a "passive foreign investment company" (as defined below). However, it is possible, though W.P. Stewart & Co., Ltd. believes it unlikely, that W.P. Stewart & Co., Ltd. could be classified as a passive foreign investment company in the future. A foreign corporation will be treated as a passive foreign investment company if either 75% or more of its gross income is "passive income" or at least 50% of the average percentage of its assets are assets which produce or are held for the production of "passive income" (hereinafter "passive assets"). "Passive income" is generally defined as any income included in the definition of "foreign personal holding company income" under Section 954(c) of the Internal Revenue Code. Among these items are income consisting of: o dividends, interest, rent, royalties; and o gains and losses from the sale of property giving rise to the income described in the preceding item, as well as other types of income not here relevant. For these purposes, cash held by a foreign corporation generally constitutes a passive asset, but trade or service receivables resulting from a business which produces non-passive income does not. Intangibles that produce identifiable types of income (including goodwill) are similarly characterized in terms of the type of income they produce. A foreign corporation owning at least 25% by value of the stock of another corporation is treated, for purposes of passive foreign investment company classification, as if it held its proportionate share of such corporate assets and received directly its proportional share of such corporation's income. 57 If a foreign corporation constitutes a passive foreign investment company, any U.S. person holding any amount of stock in such corporation will generally be subject to an interest charge on "excess distributions" of the passive foreign investment company. Alternatively, such U.S. person may elect to be taxed currently on its share of passive foreign investment company income by being treated as receiving a distribution of its pro rata share of the passive foreign investment company earnings and profits. A U.S. person may also make a "mark-to-market" election with respect to "marketable" passive foreign investment company stock to recognize (at the close of each taxable year) any excess of the fair market value of such stock over its adjusted basis as ordinary income and any excess of the adjusted basis of such stock over its fair market value as ordinary loss. Controlled Foreign Corporation Rules. Our bye-laws contain provisions which attempt to prevent us from becoming a "controlled foreign corporation." Specifically, the provisions restrict the voting rights associated with voting shares in the case of any shareholder who acquires sufficient shares to become a U.S. Shareholder (as defined below) if the effect of such acquisition would be to cause us to become a controlled foreign corporation. In any event, the controlled foreign corporation rules will not apply to a U.S. holder that never owns 10% or more of the common shares. In general, a foreign corporation will constitute a controlled foreign corporation if more than 50% of the shares of the corporation, measured by reference to combined voting power or value, is held, directly or indirectly, by "U.S. Shareholders." A "U.S. Shareholder", for this purpose, is any person that is a U.S. person for U.S. federal income tax purposes that possesses 10% or more of the combined voting power of all classes of shares of a corporation. Neither W.P. Stewart & Co., Ltd. nor any of its foreign affiliates is a controlled foreign corporation. If W.P. Stewart & Co., Ltd. (or any foreign affiliate) were in the future to constitute a controlled foreign corporation, a U.S. Shareholder of W.P. Stewart & Co., Ltd. would be treated, subject to certain exceptions, as receiving a dividend at the end of our taxable year in an amount equal to that person's pro rata share of the "subpart F income" and certain U.S. source income of W.P. Stewart & Co., Ltd. (or any controlled foreign corporation foreign affiliate), whether or not distributed. Among other items, and subject to certain exceptions, "subpart F income" includes dividends, interest, annuities, gains from the sale of shares and securities, certain gains from commodities transactions, certain types of insurance income and income from certain transactions with related parties. If W.P. Stewart & Co., Ltd. (or any foreign affiliate) were in the future to constitute a controlled foreign corporation, we believe only a relatively small portion of our income would be subpart F income. In addition, however, if a U.S. person owning 10% or more of the combined voting power of all classes of stock entitled to vote of a controlled foreign corporation sells or exchanges such stock, the gain recognized is treated as ordinary dividend income (and not capital gain) to the extent of the earnings and profits of such corporation accumulated after December 31, 1962 and during the period(s) the stock was held by such U.S. person while such foreign corporation was a controlled foreign corporation. If W.P. Stewart & Co., Ltd. were treated as a controlled foreign corporation, a U.S. Shareholder of W.P. Stewart & Co., Ltd. would be taxable on the subpart F income of W.P. Stewart & Co., Ltd. under rules described in the preceding paragraph and not under the passive foreign investment company rules previously described. Backup Withholding. A U.S. holder of common shares may, under certain circumstances, be subject to "backup withholding" at the rate of 28% with respect to dividends paid on the common shares or the proceeds of sale, exchange or redemption of common shares unless such U.S. holder: o is a corporation or comes within certain other exempt categories, and, when required, demonstrates this fact; or 58 o provides a correct taxpayer identification number, certifies that such holder is not subject to backup withholding and otherwise complies with applicable requirements of the backup withholding rules. Any amount withheld under these rules will be creditable against the U.S. holder's U.S. federal income tax liability. A U.S. holder who does not provide a correct taxpayer identification number may be subject to penalties imposed by the IRS. Assuming proper shareholder information is provided, we believe that back-up withholding will not be required. Non-U.S. Holders. Dividends paid by foreign corporations are treated as income from U.S. sources and subject to withholding at a rate of 30% if 25% or more of the foreign corporation's gross income for the three-year period (or such part of the period such corporation was in existence) ending with the close of its taxable year preceding the declaration of such dividend was effectively connected (or treated as effectively connected) with the conduct of a U.S. trade or business, but only in an amount that bears the same ratio to the dividend as the gross income which is effectively connected with a U.S. trade or business bears to the foreign corporation's gross income from all sources. The Internal Revenue Code provides, however, that if a foreign corporation is "subject to" the branch profits tax, then the above-described withholding tax does not apply. Accordingly, because W.P. Stewart & Co., Ltd. and W.P. Stewart Asset Management Ltd., if more than 25% of their gross income were deemed connected with the United States, will be subject to the branch profits tax, we do not believe that non-U.S. holders will be subject to the 30% withholding tax. Moreover, gains and losses on the sale or exchange of common shares generally will not be subject to U.S. income or withholding tax unless: o in the case of a non-U.S. holder who is an individual, such non-U.S. holder is present in the United States for a period or periods aggregating 183 days or more during the taxable year of disposition (in which case such individual may be taxed as a U.S. holder in any event); or o any gain is effectively connected with the non-U.S. holder's trade or business in the United States. The value of common shares should not be includible in the gross estate of any individual non-U.S. holder for purposes of determining such non-U.S. holder's liability, if any, for U.S. estate tax on non-resident alien individuals. F. Dividends and Paying Agents Not Applicable. G. Statements by Experts Not Applicable. H. Documents on Display You may read and copy any documents filed by W.P. Stewart & Co., Ltd. at the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. You may also access our filings electronically at www.sec.gov. Our filings with the SEC are also available to the public through the New York Stock Exchange, 20 Broad Street, New York, New York 10005, on which the common shares are listed. 59 I. Subsidiary Information Not Applicable Item 11. Qualitative and Quantitative Disclosures About Market Risk The following discusses our exposure to market risk related to foreign currency exchange rates, interest rates and equity prices. We do not utilize or hold derivative financial instruments to hedge against such risks. Foreign Currency Exchange Rate Risk Although we have significant foreign-based operations, the majority of our transactions are denominated in U.S. dollars. We do, however, have various operations where transactions are denominated in foreign currencies and are subject to market risk with respect to fluctuations in the relative values of currencies. We have international operations in Europe, Asia and the Netherlands Antilles and conduct transactions in the local currency of each location. Therefore, our operating results may be affected by changes in the values of those currencies. Historically, our exposure to fluctuations in the relative values of currencies has been limited because substantially all of our assets are denominated in U.S. dollars, and those assets which are not denominated in U.S. dollars have generally been denominated in historically stable currencies. The impact to our cash and cash equivalents balances has therefore not been material. Currency transaction gains or losses, derived on monetary assets and liabilities stated in a currency other than our functional currency, are recognized in current operations and have not been significant to our operating results in any period. To date, we have not entered into any foreign exchange hedges or other derivative financial instruments. We will continue to evaluate our exposure to foreign currency exchange rate risk on a regular basis. Interest Rate Risk Our exposure to market risk for changes in interest rates relates primarily to our investment in municipal bonds and our long-term debt. We have invested excess cash in municipal securities, with varying fixed interest rates and maturity dates. Fixed rate securities may have their fair market values adversely impacted due to a rise in interest rates. The table below provides information about our available for sale securities that are sensitive to changes in interest rates as of December 31, 2003. The table presents the principal amounts and related weighted average interest rates by year of maturity. It should be noted that the securities listed below consist of municipal bonds, some of which may be called prior to the scheduled maturity dates.
By Scheduled Maturity Date (in millions) Fair 2004 2005 2006 2007 2008 Thereafter Total Value ---- ---- ---- ---- ---- ---------- ----- ----- Available for sale securities: Fixed Rate $4.2 $0.8 $0.2 $0.3 $0.1 $2.4 $8.0 $8.4 Weighted average interest rate 3.04% 5.58% 8.13% 6.51% 6.40% 7.08%
60 As of December 31, 2003, we had one long-term debt instrument with a principal amount of $17.0 million. This loan bears interest at a rate 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). Due to the variable interest rate of this loan, should interest rates rise, the results of our operations may be impacted by the additional costs of carrying this long-term debt. The table below presents the details of this loan as of December 31, 2003.
By Scheduled Maturity Date (in millions) Fair 2004 2005 2006 2007 2008 Thereafter Total Value ---- ---- ---- ---- ---- ---------- ----- ----- Long term debt: Variable rate $0.8 $0.8 $0.8 $0.8 $0.9 $12.9 $17.0 $17.0 Average interest rate 3.25% 3.25% 3.25% 3.25% 3.25% 3.26%
Equity Price Risk The securities markets are highly volatile, and securities prices may increase or decrease for many reasons, including economic, financial or political events, which we cannot control. These events could result in a decrease in the overall value or amount of assets that we manage and on which we earn our fees. We have exposure to equity price risks since we earn most of our revenues from asset management contracts with clients pursuant to which clients pay us an asset management fee equal to a percentage of the market value of the assets we manage. As a result, if securities prices fluctuate, the market value of the assets may fluctuate, and our revenues and profitability may fluctuate as well. All other factors being equal, if securities prices fall, the value of our clients' portfolios, and our revenues, would fall as well. In addition, if securities prices fall, securities may become less attractive investments as compared to other investments. Clients have the right to remove their assets from our management at any time, and may be more likely to do so when securities prices decrease. In that case, the amount of assets we manage may decrease, and our revenues and net income may fall as well. Item 12. Description of Securities Other Than Equity Securities Not Applicable. Part II. Item 13. Default, Dividend Arrearages and Delinquencies Not Applicable. Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds Not Applicable. Item 15. Controls and Procedures 61 Under the supervision and with the participation of our management, including our Chairman and Chief Executive Officer and our Deputy Managing Director--Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of December 31, 2003. Based upon that evaluation, the Chairman and Chief Executive Officer and the Deputy Managing Director--Chief Financial Officer concluded that, as of December 31, 2003, our disclosure controls and procedures were effective in timely alerting them to the material information relating to us (or our consolidated subsidiaries) required to be included in our periodic SEC filings. There were no significant changes made in our internal controls or in other factors that could significantly affect those controls subsequent to the date of their evaluation. Item 16A. Audit Committee Financial Expert Our Board of Directors has determined that at least one member of the Audit Committee, Richard C. Breeden, qualifies as a financial expert as that term is defined by the Securities and Exchange Commission. Mr. Breeden's business experience is described under Item 6 A "Directors, Senior Management and Employees--Directors and Senior Management." Item 16B. Code of Ethics We have adopted a Code of Business Conduct and Ethics which applies to all of our directors, executive officers and other employees. A copy of this Code of Business Conduct and Ethics has been posted and is available on our website at www.wpstewart.com. A copy of this Code will also be made available to our shareholders upon request by contacting our Deputy Managing Director--Investor Relations by phone at (441) 295-8585, by fax at (441) 296-8357 or by e-mail at IRINFO@wpstewart.com. We intend to disclose any amendment (other than technical, administrative or other non-substantive amendments) or waiver to our Code of Business Conduct and Ethics on our website, www.wpstewart.com, within five business days of such amendment or waiver if the amendment or waiver applies to our Chief Executive Officer, Deputy Managing Director--Chief Financial Officer or Deputy Managing Director--Financial Operations. Item 16C. Principal Accountant Fees and Services Audit Fees The aggregate fees billed by PricewaterhouseCoopers LLP, our independent accounts, for the audit of our financial statements and other services provided in connection with statutory and regulatory filings were $553,104 and $572,222 for fiscal years ended December 31, 2003 and 2002, respectively. Audit-Related Fees The aggregate fees billed by PricewaterhouseCoopers LLP for assurance and related services related to the performance of an audit or review of our financial statements were $16,000 and $28,500 for fiscal years ended December 31, 2003 and 2002, respectively. Audit-related fees are for the examination of the performance of the W.P. Stewart U.S. Equity Composite. Tax Fees The aggregate fees billed by PricewaterhouseCoopers LLP for services related to tax compliance, tax advice and tax planning were $254,076 and $391,117 for fiscal years ended December 31, 2003 and 2002, respectively. Tax fees are fees in respect of tax return preparation, consultation on tax matters and other tax planning and advice. 62 All Other Fees The aggregate fees billed by PricewaterehouseCoopers LLP for all services other than those described above were $27,764 and $34,951 for fiscal years ended December 31, 2003 and 2002, respectively. These fees were primarily for pension plan and retirement plan consulting services. All of the audit-related, tax and other fees described above were pre-approved by the Audit Committee. The Audit Committee, or a designated member thereof, pre-approves each audit and non-audit service rendered by our external auditor. The following are "prohibited non-auditing services": (i) bookkeeping or other services related to the accounting records or financial statements of W.P. Stewart & Co., Ltd.; (ii) financial information systems design and implementation; (iii) appraisal or valuation services, providing fairness opinions or preparing contribution-in-kind reports; (iv) actuarial services; (v) internal audit outsourcing services; (vi) management functions or human resources; (vii) broker or dealer, investment adviser or investment banking services; (viii) legal services and expert services unrelated to the audit; and (ix) any other service that the Public Company Accounting Oversight Board prohibits through regulation. The services discussed in clauses (i) through (v) are permitted provided the Audit Committee reasonably concludes that the results of such services will not be subject to audit procedures during an audit. Notwithstanding the foregoing, pre-approval is not necessary for minor permitted non-audit services if: (i) the aggregate amount of all such non-audit services provided constitutes not more than five percent of the total amount of revenues paid by W.P. Stewart & Co., Ltd. to its auditor during the fiscal year in which the non-audit services are provided; (ii) such services were not recognized at the time of the engagement to be non-audit services; and (iii) such services are promptly brought to the attention of the Audit Committee and approved prior to the completion of the audit by the Audit Committee or by one or more members of the Audit Committee to whom authority to grant such approvals has been delegated by the Audit Committee. Item 16D. Exemptions from the Listing Standards for Audit Committees Not Applicable Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers Not Applicable Part III. Item 17. Financial Statements See pages F-1 through F-24, incorporated herein by reference. Item 18. Financial Statements Not Applicable Item 19. Exhibits 1.1* Memorandum of Association 1.2* Bye-Laws 63 2.1** Form of Stock Certificate 4.1* 1996 Shareholders Agreement among Global Reach, Limited and Shareholders of Global Reach Limited 4.2* Share Exchange Agreement, dated as of June 1, 1999, between W.P. Stewart & Co. Ltd. and Stewart Notz Stucki Ltd. 4.3* Purchase Agreement, dated as of June 30, 1999, between W.P. Stewart & Co., Ltd. and Bowen Asia Limited. 4.4*** Indemnity Agreement by WPS II, Inc. and the Guarantors thereunder in favor of W.P. Stewart & Co., Ltd. 4.5**** Share Exchange Agreement, dated as of December 29, 2000, between W.P. Stewart & Co., Ltd. and TPR & Partners N.V. 4.6**** Amendment to 1996 Shareholder Agreement 4.7# Share Exchange Agreement, dated as of November 14, 2001, between W.P. Stewart & Co., Ltd. and TPR Holding B.V. 4.8# Deferred Share Exchange Agreement, dated as of November 14, 2001, among W.P. Stewart & Co., Ltd., W.P. Stewart Asset Management (Europe), Ltd. and TPR Holding B.V. 8.1 Subsidiaries of the Registrant 12.1 Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 12.2 Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 13.1 Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 13.2 Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 14.1 Consent of PricewaterhouseCoopers LLP - -------------------------- * Previously filed on November 21, 2000 as an exhibit to the Registrant's Registration Statement on Form F-1 (333-49420). ** Previously filed on December 6, 2000 as an exhibit to the Registrant's Registration Statement on Form 8-A/A (011-16245). *** Previously filed on December 6, 2000 as an exhibit to the Registrant's Registration Statement on Form F-1 (333-49420). **** Previously filed on March 30, 2001 as an exhibit to the Registrant's Report on Form 20-F (011-16245). # Previously filed on March 29, 2002 as an exhibit to the Registrant's Report on Form 20-F (011-16245). 64 Index To Consolidated Financial Statements Page Consolidated Financial Statements as of, and for the three years ended December 31, 2003, 2002 and 2001 Report of Independent Accountants F-2 Consolidated Statements of Financial Condition F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Changes in Shareholders' Equity F-5 Consolidated Statements of Cash Flows F-6 Notes to the Consolidated Financial Statements F-7 to F-24 F-1 Report of Independent Auditors To the Board of Directors and Shareholders of W.P. Stewart & Co., Ltd. In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of operations, changes in shareholders' equity and of cash flows appearing on pages F-3 through F-24 present fairly, in all material respects, the financial position of W.P. Stewart & Co., Ltd. and its subsidiaries (the "Company") at December 31, 2003, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP New York, New York February 27, 2004 F-2 W.P. Stewart & Co., Ltd. Consolidated Statements of Financial Condition December 31, 2003, 2002 and 2001 Assets:
2003 2002 2001 ------------- ------------- ------------- Cash and cash equivalents $ 36,824,614 $ 34,426,192 $ 62,302,344 Fees receivable 1,895,426 2,634,631 2,952,580 Receivable from broker-dealer 395,617 866,462 582,091 Investments in unconsolidated affiliates (net of accumulated amortization of $247,116, $164,744 and $82,372 for 2003, 2002 and 2001, respectively) 3,855,406 3,983,259 3,979,317 Receivables from affiliates, net 903,029 684,810 666,192 Investments, available for sale (cost $9,469,688, $8,892,529 [primarily municipal securities] and $1,012,400 for 2003, 2002 and 2001, respectively) 9,291,201 8,769,788 879,116 Investment in aircraft (net of accumulated depreciation of $17,442,551, $15,437,634 and $12,633,445 for 2003, 2002 and 2001, respectively) 5,008,924 7,013,841 9,818,030 Goodwill 5,631,797 5,631,797 5,631,797 Intangible assets (net of accumulated amortization of $13,572,643, $8,590,080 and $4,464,891 for 2003, 2002 and 2001, respectively) 69,160,735 60,669,624 44,299,495 Furniture, equipment and leasehold improvements (net of accumulated depreciation and amortization of $4,264,880, $3,401,457 and $2,361,376 for 2003, 2002 and 2001, respectively) 3,320,096 4,089,795 4,789,744 Interest receivable on shareholders' notes 146,158 297,006 317,292 Income taxes receivable 1,510,692 3,214,280 4,071,171 Other assets 3,064,215 2,697,322 2,988,942 ------------- ------------- ------------- $ 141,007,910 $ 134,978,807 $ 143,278,111 ============= ============= ============= Liabilities and Shareholders' Equity: Liabilities: Loans payable $ 16,968,114 $ 17,511,376 $ 18,098,337 Employee compensation and benefits payable 1,075,306 1,016,970 983,824 Fees payable 678,937 1,103,030 878,334 Income taxes payable -- -- 1,078,713 Professional fees payable 3,280,871 2,606,981 3,127,077 Dividends payable -- -- 8,528 Accrued expenses and other liabilities 3,919,361 4,510,103 4,997,670 ------------- ------------- ------------- 25,922,589 26,748,460 29,172,483 ------------- ------------- ------------- Minority Interest 416,731 165,132 65,639 ------------- ------------- ------------- Shareholders' Equity: Common shares, $0.001 par value (125,000,000 shares authorized 46,035,726, 46,179,822 and 47,831,864 shares issued and outstanding for 2003, 2002 and 2001, respectively) 46,036 46,180 47,832 Additional paid-in-capital 80,419,304 78,673,127 105,472,859 Contingently returnable shares (162,800, 975,766 and 1,788,732 shares for 2003, 2002 and 2001, respectively) (3,623,928) (14,263,158) (24,902,377) Accumulated other comprehensive income 573,284 34,576 (471,369) Retained earnings 45,217,876 57,129,989 57,007,661 ------------- ------------- ------------- 122,632,572 121,620,714 137,154,606 Less: notes receivable for common shares (7,963,982) (13,555,499) (23,114,617) ------------- ------------- ------------- 114,668,590 108,065,215 114,039,989 ------------- ------------- ------------- $ 141,007,910 $ 134,978,807 $ 143,278,111 ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements. F-3 W.P. Stewart & Co., Ltd. Consolidated Statements of Operations For the Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001 ------------ ------------ ------------ Revenue: Fees $ 94,062,338 $105,418,778 $115,993,071 Commissions 22,461,350 28,293,063 39,695,130 Interest and other 2,278,783 3,569,988 5,027,579 ------------ ------------ ------------ 118,802,471 137,281,829 160,715,780 ------------ ------------ ------------ Expenses: Employee compensation and benefits 22,941,582 26,336,544 28,245,788 Fees paid out 6,058,705 7,250,443 5,156,489 Commissions, clearance and trading 4,810,992 5,919,022 7,376,148 Research and administration 14,429,008 14,358,071 13,515,984 Marketing 4,709,203 5,166,360 1,901,284 Depreciation and amortization 7,933,277 8,048,637 7,527,195 Other operating 8,861,154 8,370,546 9,543,228 ------------ ------------ ------------ 69,743,921 75,449,623 73,266,116 ------------ ------------ ------------ Income before taxes 49,058,550 61,832,206 87,449,664 Provision for taxes 5,983,267 6,381,199 7,152,803 ------------ ------------ ------------ Net income $ 43,075,283 $ 55,451,007 $ 80,296,861 ============ ============ ============ Earnings per share: Basic earnings per share $ 0.97 $ 1.27 $ 1.85 ============ ============ ============ Diluted earnings per share $ 0.95 $ 1.21 $ 1.71 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-4 W.P. Stewart & Co., Ltd. Consolidated Statement of Changes in Shareholders' Equity For the Years Ended December 31, 2003, 2002 and 2001
Accumulated Common Shares Additional Contingently Other ---------------------- Paid-In Returnable Comprehensive Shares Amount Capital Shares Income ----------- --------- ------------- ------------ ------------- Balance @ December 31, 2000 47,912,112 47,912 101,482,513 (35,541,596) 217,413 Issuance of common shares, @ $0.001 par value Acquisitions 330,000 330 8,051,670 Cash 134,000 134 2,210,866 Notes receivable 826,017 826 12,761,656 Contingently returnable shares, no longer subject to repurchase 7,164,364 10,639,219 Repurchase and cancellation of common shares, @ $0.001 par value (1,357,545) (1,357) (26,145,340) Cancellation of common shares, @ $0.001 par value (12,720) (13) (87,099) Non-cash compensation 34,229 Net income Dividends Other comprehensive income (688,782) Proceeds from notes receivable for common shares ----------- --------- ------------- ------------- ----------- Balance @ December 31, 2001 47,831,864 47,832 105,472,859 (24,902,377) (471,369) Issuance of common shares, @ $0.001 par value Cash 39,333 39 684,208 Notes receivable 54,666 55 960,083 Contingently returnable shares, no longer subject to repurchase 8,587,499 10,639,219 Repurchase and cancellation of common shares, @ $0.001 par value (1,595,720) (1,596) (35,188,930) Cancellation of common shares, @ $0.001 par value (150,321) (150) (2,281,509) Non-cash compensation 438,917 Net income Dividends Other comprehensive income 505,945 Proceeds from notes receivable for common shares ----------- --------- ------------- ------------- ----------- Balance @ December 31, 2002 46,179,822 $ 46,180 $ 78,673,127 $(14,263,158) $ 34,576 Issuance of common shares, @ $0.001 par value Cash 47,273 47 971,654 Notes receivable 20,750 21 335,299 Contingently returnable shares, no longer subject to repurchase 2,919,052 10,261,580 Repurchase and cancellation of common shares, @ $0.001 par value (85,312) (85) (1,189,609) Cancellation of common shares, @ $0.001 par value (126,807) (127) (1,671,852) 377,650 Non-cash compensation 381,633 Net income Dividends Other comprehensive income 538,708 Proceeds from notes receivable for common shares ----------- --------- ------------- ------------- ----------- Balance @ December 31, 2003 46,035,726 $ 46,036 $ 80,419,304 $ (3,623,928) $ 573,284 =========== ========= ============= ============= =========== Retained Notes Earnings Receivable Total ------------ ------------- -------------- Balance @ December 31, 2000 31,630,834 (15,005,458) 82,831,618 Issuance of common shares, @ $0.001 par value Acquisitions 8,052,000 Cash 2,211,000 Notes receivable (12,762,482) - Contingently returnable shares, no longer subject to repurchase 17,803,583 Repurchase and cancellation of common shares, @ $0.001 par value (26,146,697) Cancellation of common shares, @ $0.001 par value 87,112 - Non-cash compensation 34,229 Net income 80,296,861 80,296,861 Dividends (54,920,034) (54,920,034) Other comprehensive income (688,782) Proceeds from notes receivable for common shares 4,566,211 4,566,211 ------------- -------------- -------------- Balance @ December 31, 2001 57,007,661 (23,114,617) 114,039,989 Issuance of common shares, @ $0.001 par value Cash 684,247 Notes receivable (960,138) - Contingently returnable shares, no longer subject to repurchase 19,226,718 Repurchase and cancellation of common shares, @ $0.001 par value (35,190,526) Cancellation of common shares, @ $0.001 par value 2,281,659 - Non-cash compensation 438,917 Net income 55,451,007 55,451,007 Dividends (55,328,679) (55,328,679) Other comprehensive income 505,945 Proceeds from notes receivable for common shares 8,237,597 8,237,597 ------------- -------------- -------------- Balance @ December 31, 2002 $ 57,129,989 $(13,555,499) $ 108,065,215 Issuance of common shares, @ $0.001 par value Cash 971,701 Notes receivable (335,320) - Contingently returnable shares, no longer subject to repurchase 13,180,632 Repurchase and cancellation of common shares, @ $0.001 par value (1,189,694) Cancellation of common shares, @ $0.001 par value 1,294,329 - Non-cash compensation 381,633 Net income 43,075,283 43,075,283 Dividends (54,987,396) (54,987,396) Other comprehensive income 538,708 Proceeds from notes receivable for common shares 4,632,508 4,632,508 ------------- -------------- -------------- Balance @ December 31, 2003 $ 45,217,876 $ (7,963,982) $114,668,590 ============= ============== ==============
The accompanying notes are an integral part of these consolidated financial statements. F-5 W.P. Stewart & Co., Ltd. Consolidated Statements of Cash Flows For the Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001 ------------ ------------ ------------ Cash flows from operating activities: Net income $ 43,075,283 $ 55,451,007 $ 80,296,861 Adjustments to reconcile net income to net cash provided by operating activities: (Gain)/loss on sale of available for sale securities (219,790) 8,522 (525,354) Amortization of bond premium 262,527 43,807 -- Depreciation and amortization 7,933,277 8,048,637 7,527,195 Equity in income of unconsolidated affiliates 45,481 (86,314) (412,391) Non-cash compensation 381,633 438,917 34,229 Minority interest 251,599 99,493 8,905 Changes in operating assets and liabilities: Fees receivable 739,205 317,949 324,819 Receivable from broker-dealer 470,845 (284,371) 1,023,429 Receivables from affiliates, net (218,219) (18,618) 1,095,666 Income taxes receivable 1,703,588 856,891 (3,645,444) Interest receivable on shareholders' notes 150,848 20,286 48,738 Other assets (366,893) 291,620 (239,588) Employee compensation and benefits payable 58,336 33,146 535,851 Fees payable (424,093) 224,696 (1,383,257) Income taxes payable -- (1,078,713) (245,304) Professional fees payable 673,890 (520,096) (321,255) Accrued expenses and other liabilities (590,742) (487,567) (1,449,486) ------------ ------------ ------------ Net cash provided by operating activities 53,926,775 63,359,292 82,673,614 ------------ ------------ ------------ Cash flows (used for) investing activities: Proceeds from sale of available for sale securities 4,004,790 991,478 1,115,064 Purchase of available for sale securities (4,567,763) (8,880,128) (1,009,100) Cash dividends paid on shares subject to repurchase (293,040) (1,268,600) (2,244,159) Cash acquired in purchase acquisition -- -- 136,620 Purchase of furniture, equipment and leasehold improvements (93,729) (336,938) (171,540) ------------ ------------ ------------ Net cash (used for) investing activities (949,742) (9,494,188) (2,173,115) ------------ ------------ ------------ Cash flows (used for) financing activities: Payments on loans payable (543,262) (586,961) (547,889) Proceeds from issuance of common shares 971,701 684,247 2,211,000 Repurchase of common shares (1,189,694) (35,190,526) (26,146,697) Proceeds from notes receivable for common shares 4,632,508 8,237,597 4,566,211 Dividends to shareholders (54,987,396) (55,337,207) (54,922,149) ------------ ------------ ------------ Net cash (used for) financing activities (51,116,143) (82,192,850) (74,839,524) Effect of exchange rate changes in cash 537,532 451,594 (123,051) ------------ ------------ ------------ Net increase in cash and cash equivalents 2,398,422 (27,876,152) 5,537,924 Cash and cash equivalents, beginning of year 34,426,192 62,302,344 56,764,420 ------------ ------------ ------------ Cash and cash equivalents, end of year $ 36,824,614 $ 34,426,192 $ 62,302,344 ============ ============ ============ Supplemental disclosures of cash flows information Cash paid during the period for: Income taxes $ 4,516,783 $ 6,800,811 $ 11,044,418 ============ ============ ============ Interest $ 998,364 $ 1,231,937 $ 1,271,010 ============ ============ ============
Supplemental Schedule of Non-Cash Investing and Financing Activities: 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. 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, 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 (see Note 2). In addition, as discussed in Note 2, 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. Also, as discussed in Note 2, in 2001, 20% of the shares originally issued in connection with our acquisitons 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. On November 14, 2001, as discussed in Note 2, in connection with our acquisition of a controlling interest in W.P. Stewart Asset Management (Europe), Ltd. the Company issued 330,000 common shares which were recorded with a fair value of $8,052,000. As discussed in Note 10, the Company issued common shares for notes receivable for the years ended December 31, 2003, 2002 and 2001, in the amounts of $335,320, $960,138 and $12,762,482, respectively, and cancelled outstanding notes of $1,294,329, $2,281,659 and $87,112 for the years ended December 31, 2003, 2002 and 2001, respectively. The accompanying notes are an integral part of these consolidated financial statements. F-6 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION The accompanying consolidated financial statements of W.P. Stewart & Co., Ltd., a Bermuda exempt company incorporated on August 16, 1996 and a registered investment adviser under the United States of America ("U.S.") Investment Advisers Act of 1940, as amended, ("WPS & Co., Ltd." and, together with its subsidiaries, the "Company") are presented on a consolidated basis and include the historical operations of the Company. NOTE 2: BACKGROUND AND ORGANIZATION For the years ended December 31, 2003, 2002 and 2001, the consolidated Company consisted of several worldwide affiliated entities under common control, which provide investment advisory and related services including securities brokerage. The background and organization of the entities presented in the Company's consolidated financial statements are set out below. The Company's subsidiaries and affiliates include: W.P. Stewart Asset Management Ltd. ("WPSAM"), formerly W.P. Stewart & Company, Limited, a wholly-owned subsidiary, which was incorporated in Bermuda on July 10, 1995, and is a registered investment adviser under the U.S. Investment Advisers Act of 1940 for clients throughout the world. W.P. Stewart Securities Limited ("WPSSL"), a wholly-owned subsidiary, incorporated as an exempt company under the laws of Bermuda on January 2, 1996. WPSSL acts as an introducing broker, clearing all transactions with, and for, customers of its affiliates on a fully-disclosed basis through an independent clearing broker. WPSSL is a registered broker-dealer under the U.S. Securities Exchange Act of 1934, as amended, and is a member of the National Association of Securities Dealers. W.P. Stewart Fund Management Limited ("WPS Dublin"), a wholly-owned subsidiary of WPSAM, which was incorporated in Ireland on January 27, 1997. The primary business of WPS Dublin is providing management and administrative services to investment funds. WPS Dublin is the manager of W.P. Stewart Funds plc, W.P. Stewart (Distributor) Funds plc and W.P. Stewart Global Fund plc, umbrella-type open-ended investment companies regulated by the Central Bank of Ireland. W.P. Stewart & Co., Inc. ("WPSI"), formerly WPS III, Inc., which was incorporated in Delaware on May 15, 1998 and became a wholly-owned subsidiary of WPS & Co., Ltd. on June 30, 1998. WPSI is a registered investment adviser under the U.S. Investment Advisers Act of 1940. Its principal business is to provide investment research and sub-advisory services to the Company. W.P. Stewart & Co. (Europe), Ltd. ("WPS Europe") formerly W.P. Stewart Global Management, Ltd., a wholly-owned subsidiary of the Company which was formed on September 14, 1998 in the United Kingdom under the laws of England and Wales, as a private limited company. WPS Europe is authorized and regulated by the Financial Services Authority ("FSA") and previously was regulated by the Investment Management Regulatory Organisation Limited ("IMRO"). Its principal business is to provide investment research and sub-advisory services to the Company. WPS Aviation Holdings LLC ("WPS Aviation") was formed in Delaware on November 12, 1998, and is a wholly-owned subsidiary of WPSI. F-7 Business Acquisitions On May 19, 1999, the Company consummated its acquisition of 50% of the capital stock of TPRS Services N.V. ("TPRS"), a then newly formed Curacao company that is engaged in marketing of investment services, in exchange for 1,152,000 common shares of the Company, subject to repurchase provisions. On December 29, 2000 the Company consummated its acquisition of the remaining 50% of TPRS in exchange for 814,000 common shares of the Company, subject to repurchase provisions. On June 1, 1999, the Company consummated its acquisition of all of the outstanding capital shares of NS Money Management (Bermuda) Limited, currently known as NS Money Management Ltd. ("NSMM"), a Bermuda holding company, in exchange for 898,831 common shares of the Company, subject to repurchase provisions. NSMM operates as an investment adviser for clients located throughout the world. On October 1, 1999, the Company consummated its acquisition of all of the outstanding capital stock of First Long Island Investors, Inc. ("FLII"), a then newly formed company engaged in marketing of investment services, in consideration for 1,200,000 common shares of the Company, subject to repurchase provisions. Operations of this entity continue under the name W.P. Stewart Asset Management (NA), Inc. The repurchase provisions of the TPRS, NSMM and FLII acquisition agreements specify that 80% of the Company's common shares issued in connection therewith can be repurchased ("contingently returnable shares") at par value by the Company up to a maximum of 20% per year as of January 1, 2000, 2001, 2002 and 2003, except in the case of the December 29, 2000 TPRS acquisition where the reference dates are July 1, 2001, 2002, 2003 and 2004, if assets under management which were part of the acquisitions decrease below defined reference amounts at the specified dates and are not replaced. The recorded purchase price for each acquisition is determined by the sum of: 1. the number of shares issued on acquisition not subject to repurchase multiplied by the fair value of each of those shares at the acquisition date; 2. the number of shares that cease to be subject to repurchase at each anniversary date multiplied by the fair value of each of those shares at that date; and 3. the cumulative cash dividends paid on shares subject to repurchase. The shares issued in connection with the TPRS, NSMM and FLII acquisitions were initially reported in shareholders' equity (within share capital and as a contra-equity account captioned "contingently returnable shares") at their issuance prices as of the dates the acquisitions were consummated. On the dates on which the contingently returnable shares cease to be subject to repurchase, the contra-equity account is relieved and any difference between the initial issue price and the then current fair value of the shares is charged or credited to additional paid-in capital, and the purchase price is adjusted for the fair value of the shares. Cash dividends on shares no longer subject to repurchase are recorded as a reduction of shareholders' equity. On January 1, 2003, in accordance with the provisions of the acquisition agreements, the Company reacquired 35,000 shares from NSMM. Accordingly, the shareholders' equity account contingently returnable shares, was relieved of $377,650, which represents the initial issue price of the shares. F-8 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 ========= ========= ============== ============= ============ ===========
The following table shows information for each acquisition as of and for the year ended December 31, 2002.
Cash Dividends Paid on Aggregate Shares Not Contingently Contingently Purchase Intangible Number of Subject to Returnable Returnable Price Amortization Acquisition Shares Repurchase Shares Shares Allocation For the Year - ----------- --------- ---------- -------- --------- ------------ ----------- TPRS 1,966,000 1,410,000 556,000 $764,881 $31,998,460 $ 1,815,314 NSMM 898,831 719,065 179,766 215,719 14,708,762 807,986 FLII 1,200,000 960,000 240,000 288,000 19,834,288 1,294,479 --------- ---------- -------- ---------- ------------ ----------- 4,064,831 3,089,065 975,766 $1,268,600 $66,541,510 $3,917,779 ========= ========== ======== ========== ============ ===========
The following table shows information for each acquisition as of and for the year ended December 31, 2001.
Cash Dividends Paid on Aggregate Shares Not Contingently Contingently Purchase Intangible Number of Subject to Returnable Returnable Price Amortization Acquisition Shares Repurchase Shares Shares Allocation For the Year - ----------- --------- ---------- ---------- ---------- ------------ ------------ TPRS 1,966,000 1,016,800 949,200 $ 1,236,720 $21,904,944 $ 1,224,254 NSMM 898,831 539,299 359,532 431,439 10,254,161 545,951 FLII 1,200,000 720,000 480,000 576,000 13,887,088 944,644 --------- ---------- ---------- ----------- ------------ ------------ 4,064,831 2,276,099 1,788,732 $ 2,244,159 $46,046,193 $2,714,849 ========= ========== ========== =========== ============ ==========
On November 14, 2001, the Company acquired a controlling interest in TPR & Partners N.V. ("TPR"), an asset-gathering firm based in The Netherlands via the acquisition of shares in a Bermuda holding company that indirectly owns 100% of the shares of TPR. Going forward, the Bermuda company which is named W.P. Stewart Asset Management (Europe), Ltd. ("WPSAM Europe"), will serve as the umbrella for the Company's European asset gathering and client servicing activities. In the transaction, the Company initially acquired 9,000 of WPSAM Europe's 12,000 outstanding shares in exchange for 330,000 common shares of the Company. The former beneficial owners of TPR and their assigns will continue to hold the remaining 3,000 shares of WPSAM Europe until June 30, 2006, at which time the Company will acquire those shares at a fair value price determined on that date. The acquisition price of $8,052,000 less the fair value of net assets acquired of $170,203 has been allocated to intangible assets and goodwill. For the year ended December 31, 2003 there were no changes in the carrying value of goodwill. F-9 NOTE 3: ACCOUNTING POLICIES These consolidated financial statements are presented in conformity with accounting principles generally accepted in the U.S. The functional currency for the Company and its affiliates is the U.S. dollar with the exceptions of WPS Europe and WPSAM Europe for which the Pound Sterling and the Euro, respectively, are the functional currencies. The process of preparing consolidated financial statements in conformity with generally accepted accounting principles in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from those estimates. Principles of Consolidation The Company consolidates all affiliated entities in which it has a majority ownership interest or maintains effective control. All material inter-company transactions have been eliminated. Cash and Cash Equivalents The Company considers cash in banks, money market funds and short-term highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. The Company maintains the majority of its cash in money market funds at The Bank of Bermuda, a Bermuda-domiciled bank. Investments in Unconsolidated Affiliates The Company includes its investments in the common stock of investees in which it owns between 20-50% in the caption "Investments in Unconsolidated Affiliates" and accounts for such investments under the equity method of accounting. Investments, Available for Sale Investments in equity and municipal securities have been classified as "available for sale" in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and, as such, are recorded at quoted market values. Transactions are recorded on a trade date basis. Unrealized gains and losses are recorded in accumulated other comprehensive income within shareholders' equity. Furniture, Equipment, Leasehold Improvements and Investment in Aircraft Furniture, equipment, leasehold improvements and investment in aircraft are stated at cost less accumulated depreciation and amortization. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the lease term or the estimated life of the improvements. The aircraft is depreciated using an accelerated method over seven years. F-10 Fees Fees for the management of clients' accounts are based on terms stated in client contracts and are based upon a percentage of assets under management determined as of the last day of the prior quarter as specified in the contracts. Fees are recognized in the period in which they are earned. Commissions Commissions on brokerage activities and related trading costs are recorded on a trade date basis. Income Taxes The Company uses the asset and liability method required by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), to record income taxes. SFAS 109 states that "deferred tax assets and liabilities are recognized principally for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts". A valuation allowance is established to reduce deferred tax assets to amounts that are expected to be realized. Foreign Currency Translation The Company accounts for foreign currency translation in accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation". Assets and liabilities are translated at the exchange rate in effect at year-end, and revenue and expenses are translated at the average rates of exchange prevailing during the year. Gains or losses resulting from foreign currency transactions are included in net income. The U.S. dollar effect that arises from translating the net assets of WPS Europe and WPSAM Europe is recorded in "accumulated other comprehensive income", a separate component of shareholders' equity. Intangible Assets and Goodwill Intangible assets arising from the Company's business acquisitions (see Note 2) are amortized on a straight-line basis over periods of five to 20 years. The carrying value of the intangibles acquired is reviewed for impairment annually or whenever events or changes in circumstances indicate that they may not be recoverable based upon expectations of future undiscounted cash flows over their remaining lives. Where the undiscounted cash flow is less than the carrying amount of the asset, an impairment loss will be recognized. The loss will be the difference between the fair value of the asset and the carrying value of the asset. Goodwill from the Company's acquisition of TPR (see Note 2) is accounted for pursuant to Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). In accordance with SFAS No. 142, goodwill is not amortized but is tested annually for impairment. Earnings Per Share Basic earnings per share is computed by dividing the net income applicable to common shares outstanding by the weighted average number of shares outstanding, excluding unvested shares issued to 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. Share-Based Compensation Effective 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 adoption of SFAS No. 123 did not have a material effect on the Company's results of operations or financial position. F-11 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 the years ended December 31, 2002 and 2001 were accounted for, and will continue to be accounted for, under the intrinsic value-based method as prescribed by APB No. 25. Therefore, no compensation expense was recognized for those share options that had no intrinsic value on the date of grant (see Note 12). Business Segments The Company operates predominantly in one business segment, the investment advisory and asset management industry. Reclassification of Comparative Financial Statements Certain prior year amounts have been reclassified to conform with current year presentation. New Accounting Pronouncements In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN No. 45"). FIN No. 45 specifies the disclosures to be made about obligations under certain issued guarantees and requires a liability to be recognized for the fair value of a guarantee obligation. The recognition and measurement provisions of the interpretation apply prospectively to guarantees issued after December 31, 2002. The Company adopted the disclosure provisions of FIN No. 45 effective January 1, 2003. The adoption of the recognition and measurement provisions did not have a material impact on the Company's results of operations or financial position. F-12 NOTE 4: EARNINGS PER SHARE
2003 2002 2001 ----------- ----------- ----------- Basic Earnings Per Share: Net income $43,075,283 $55,451,007 $80,296,861 =========== =========== =========== Weighted average basic shares outstanding 44,311,905 43,575,633 43,424,732 ----------- ----------- ----------- Net income per share $ 0.97 $ 1.27 $ 1.85 =========== =========== =========== Diluted Earnings Per Share: Net income $43,075,283 $55,451,007 $80,296,861 =========== =========== =========== Weighted average basic shares outstanding 44,311,905 43,575,633 43,424,732 Add: Unvested shares, contingently returnable shares, unvested options and vested unexercised options 886,060 2,437,739 3,517,959 ----------- ----------- ----------- Weighted average diluted shares outstanding 45,197,965 46,013,372 46,942,691 ----------- ----------- ----------- Net income per share $ 0.95 $ 1.21 $ 1.71 =========== =========== ===========
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 December 31, 2003, 2002 and 2001, respectively, 46,035,726, 46,179,822 and 47,831,864 shares were issued and outstanding. The shareholders of record are entitled to full voting rights (see Note 13) and dividends on these shares; 1,212,254, 1,988,415 and 2,764,620 of these shares were unvested and held by the Company's or affiliates' employees on December 31, 2003, 2002 and 2001, respectively. F-13 NOTE 5: COMPREHENSIVE INCOME The following table details the components of comprehensive income as described in Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income".
2003 2002 2001 ------------ ------------ ------------ Net income $ 43,075,283 $ 55,451,007 $ 80,296,861 Other comprehensive income, net of tax Reclassification adjustment for realized gains/(losses) on available for sale securities included in interest and other (72,251) 133,284 (432,447) Unrealized gains/(losses) on available for sale securities 73,427 (78,933) (133,284) Foreign currency translation adjustment 537,532 451,594 (123,051) ------------ ------------ ------------ Comprehensive income $ 43,613,991 $ 55,956,952 $ 79,608,079 ============ ============ ============
NOTE 6: INVESTMENTS IN UNCONSOLIDATED AFFILIATES Investments in unconsolidated affiliates include the following:
2003 2002 2001 ---------- ---------- ---------- Investment in Bowen Asia Limited $2,624,008 $2,826,185 $2,897,703 Investment in Kirk Management Ltd. 1,231,398 1,157,074 1,081,614 ---------- ---------- ---------- Total $3,855,406 $3,983,259 $3,979,317 ========== ========== ==========
At December 31, 2003, the Company owned approximately 40% of Bowen Asia Limited ("Bowen"). The Company owns a 40% interest in Kirk Management Ltd., a real estate joint venture incorporated in Bermuda. Kirk Management Ltd. owns Trinity Hall, a building located in Hamilton, Bermuda, which is leased by the Company from the joint venture and serves as the Company's headquarters. NOTE 7: RELATED PARTY TRANSACTIONS Research and administrative expenses include travel expenses of $2,311,783, $2,000,796 and $2,018,897 for the years ended December 31, 2003, 2002 and 2001, respectively, which were paid to Shamrock Aviation, Inc. ("Shamrock"), a company owned by principal shareholders of the Company (see Note 8). The Company has entered into agreements 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 (see Note 8). These costs, reflected in research and administration expenses, include $2,584,769, $2,855,298 and $2,415,044 for the years ended December 31, 2003, 2002 and 2001, respectively. F-14 In February 1999, the Company entered into an agreement with Shamrock in which Shamrock agreed to delay the sale of an aircraft owned by Shamrock so that such aircraft would continue to be available for use in the Company's business. At that time, Shamrock agreed to release WPSI from any and all obligations of approximately $37 million, to participate in the purchase of an additional aircraft, delivery of which was scheduled for 2002. In return, the Company had agreed to indemnify Shamrock for any loss in value of the aircraft Shamrock had agreed not to sell from the time the agreement was made until the aircraft was sold or replaced. The value of that aircraft as of the date of Shamrock's agreement with the Company was estimated to be $27 million. In May 2002, in exchange for a payment of $100,000, Shamrock released the Company from this indemnity agreement. A portion of the office space located in New York includes space occupied by Stewart family interests. WPSI is reimbursed on a monthly basis for rent and other costs associated with the space, which amounted to $162,477, $144,619 and $131,471 for the years ended December 31, 2003, 2002 and 2001, respectively. These amounts are based upon the actual space utilized in each of those years. WPS Dublin serves as the investment manager to an Irish fund solely advised by WPS Investissements S.A., a Swiss investment management firm, principally owned by a beneficial owner of a minority interest in the Company. The Company has no ownership interest in either the Irish fund or WPS Investissements S.A. WPS Dublin collects and remits to WPS Investissements S.A. all of the advisory fees in respect of such fund. Such fees amounted to $25,405, $31,871 and $44,558 for the years ended December 31, 2003, 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 $12,995, $16,425 and $27,622 for the years ended December 31, 2003, 2002 and 2001, respectively. The Company pays Bowen, an unconsolidated affiliate of the Company (see Note 6), the principal owners of which are an executive officer and a beneficial owner of a minority interest in the Company, fees for solicitation, sub-advisory and research services. Such costs amounted to $859,333, $665,319 and $533,681 for the years ended December 31, 2003, 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 years ended December 31, 2003, 2002 and 2001 were $7,600, $26,117 and $27,004, respectively. Prior to our acquisition of a controlling interest in TPR, the Company paid TPR, a principal owner of which is currently an executive officer of the Company, fees for marketing services. These fees amounted to $459,313 for the year ended December 31, 2001. The Company pays Carl Spangler Kapitalanlageges. m.b.H., which is controlled by Bankhaus Carl Spangler & Co. AG, the Chief Executive Officer of which is one of the Company's directors, fees for solicitation services. These fees amounted to $988,184, $631,756 and $167,749 for the years ended December 31, 2003, 2002 and 2001, respectively. The Company pays Appleby, Spurling & Kempe and A.S. & K. Services Ltd., a partner of which in June 2002 became a director of the Company, fees for various legal, corporate administrative and secretarial services. Such fees for services amounted to $50,339 and $29,648 for the years ended December 31, 2003 and 2002, respectively. F-15 Certain directors of the Company serve as directors of funds from which the Company receives investment advisory fees, fund management fees, subscription fees and commissions. Such fees and commissions were $5,765,255, $5,743,933 and $4,906,228 for the years ended December 31, 2003, 2002 and 2001, respectively. The Company owns a 40% interest in Kirk Management Ltd. (see Note 6), a real estate joint venture incorporated in Bermuda. The remaining 60% interest is owned by The Bank of Bermuda, of which one of the Company's directors is the Chief Executive Officer. Kirk Management Ltd. also owns and leases to the Company its Hamilton, Bermuda headquarters. Included in research and administration expenses is rent expense of $180,000 for each of the years ended December 31, 2003, 2002 and 2001. Included in receivables from affiliates, net, at December 31, 2003, 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 December 31, 2003, 2002 and 2001 are amounts of $833,958, $681,073 and $866,716, respectively, which were investments in various funds managed by WPS Dublin, a wholly-owned subsidiary of the Company. Included in research and administration expenses for the years ended December 31, 2003 and 2002 is rent expense in the amount of $155,581 and $135,274 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 year ended December 31, 2003 are contributions in the amount of $222,450 paid to the W.P. Stewart & Co. Foundation, Inc. (the "Foundation"), a private charitable foundation. NOTE 8: LONG-TERM DEBT On December 16, 1998, WPS Aviation assumed from Shamrock Aviation, all the rights and obligations of a purchase agreement ("Challenger Purchase Agreement") dated July 8, 1998, relating to the purchase of a Challenger aircraft. On December 17, 1998, WPS Aviation entered into a 10-year, amortizing loan agreement with General Electric Capital Corporation ("GECC") to finance the obligations of the Challenger Purchase Agreement. The loan was for the principal sum of $17,340,000 at a fixed interest rate of 6.87% to be paid in 120 monthly installments of principal and interest of $133,326 and a final installment of $11,621,076. The first monthly periodic installment was due and paid on January 17, 1999 with installments due and payable on the same day of each succeeding month. On February 10, 1999, WPS Aviation entered into an additional 10-year, amortizing loan agreement with GECC for the principal sum of $757,382 at a fixed interest rate of 6.89% to be paid in an initial installment of $1,015 and 118 monthly installments of principal and interest of $5,869 and a final installment of $507,635. The first monthly periodic installment was paid on March 17, 1999 with installments due and payable on the same day of each succeeding month. On March 30, 1999, WPS Aviation entered into an additional 10-year, amortizing loan agreement with GECC for the principal sum of $1,522,618 at a fixed interest rate of 7.35% to be paid in an initial installment of $5,285 and 116 monthly installments of principal and interest of $12,380 and a final installment of $1,021,114. The first monthly periodic installment was paid on May 17, 1999 with installments due and payable on the same day of each succeeding month. F-16 On July 10, 2003, WPS Aviation entered into a 10-year amortizing loan agreement with GECC to continue to finance its obligations under the Challenger Purchase Agreement. 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. Future principal payments on the loan as of December 31, 2003 are as follows: 2004 $ 765,122 2005 790,651 2006 816,729 2007 843,756 2008 871,570 Thereafter (through 2013) 12,880,286 ------------ $16,968,114 ============ Interest expense on long-term debt totaled $913,992, $1,231,937 and $1,271,010 for the years ended December 31, 2003, 2002 and 2001, respectively. The carrying value of this loan approximates its fair value as of December 31, 2003. 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). NOTE 9: COMMITMENTS AND CONTINGENCIES At December 31, 2003, the Company was contingently liable on three irrevocable standby letters of credit. One letter of credit is in the amount of $1,000,000 in favor of Wachovia Corporate Services Inc. ("Wachovia") and collateralizes amounts received from the Company's clients that Wachovia wires daily to the Company's account at The Bank of Bermuda. The second letter of credit is in the amount of $200,000, in favor of WPSI's landlord. The third letter of credit is in the amount of $699,033 in favor of WPS Europe's landlord. The latter amount is guaranteed by the Company, and is collateralized by a fixed deposit cash account in the same amount, which will remain intact over the term of the lease and, is reflected in other assets at December 31, 2003, 2002 and 2001. WPSSL conducts business with a clearing broker on behalf of its customers subject to a clearing agreement. WPSSL earns commissions as an introducing broker for the transactions of its customers, which are normally settled on a delivery-against-settlement basis. Under the clearing agreement, WPSSL has agreed to indemnify the clearing broker for non-performance by any customers introduced by WPSSL. As the right to charge WPSSL has no maximum amount, and applies to all trades executed through the clearing broker, WPSSL believes there is no maximum amount assignable to this right. At December 31, 2003, 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. F-17 NOTE 10: NOTES RECEIVABLE FOR COMMON SHARES In 2003, the Company issued 20,750 common shares to certain employees and employees of affiliates, all of which were issued in connection with the Company's 2001 Employee Equity Incentive Plan, for installment notes totaling $335,320. 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. During 2003, the Company also issued 1,000 common shares to certain employees and employees of affiliates, all of which were issued in connection with the Company's 2001 Employee Equity Incentive Plan, for cash payments totaling $16,160. Pursuant to purchase agreements for common shares, in the event a purchaser is not in the employment of, or does not serve as a director of, the Company or any of its affiliates, the purchaser, shall transfer to the Company all rights to shares that have not vested at the time of such termination. The remaining balance of the outstanding notes receivable related to the unvested shares shall be abated. Pursuant to the terms of the purchase agreements, during the year ended December 31, 2003, 91,807 unvested common shares of former employees were repurchased and their installment notes totaling $1,294,329 were abated. In 2002, the Company issued 54,666 common shares to certain employees and employees of affiliates, all of which were issued in connection with the Company's 2001 Employee Equity Incentive Plan, for installment notes totaling $960,138. The installment notes are full recourse, bear interest at 8.5% per annum, are for a term of seven years and are collateralized by the shares issued. Each principal payment, as defined in each of the promissory notes, is equal to one twenty-eighth of the total face value of the note. During 2002, the Company also issued 39,333 common shares to certain employees and employees of affiliates, all of which were issued in connection with the Company's 2001 Employee Equity Incentive Plan, for cash payments totaling $684,247. Pursuant to the terms of the purchase agreements, during the year ended December 31, 2002, 150,321 unvested common shares of former employees were repurchased and their installment notes totaling $2,281,659 were abated. In 2001, the Company issued 826,017 common shares to certain employees and employees of affiliates, including 191,050 common shares issued in connection with the Company's 2001 Employee Equity Incentive Plan, for installment notes totaling $12,762,482. The installment notes are full recourse, bear interest at 8.5% to 10% per annum, are for a term of seven years and are collateralized by the shares issued. Each principal payment, as defined in each of the promissory notes, is equal to one twenty-eighth of the total face value of the note. During 2001, the Company also issued 134,000 common shares to certain employees and employees of affiliates, including 99,000 common shares issued in connection with the Company's 2001 Employee Equity Incentive Plan, for cash payments totaling $2,211,000. Pursuant to the terms of the purchase agreements, during the year ended December 31, 2001, 12,720 unvested common shares of former employees were repurchased and their installment notes totaling $87,112 were abated. All the common shares described above are subject to vesting provisions. F-18 Future minimum payments expected to be received, on notes receivable for common shares as of December 31, 2003 are as follows: 2004 $2,557,867 2005 2,046,483 2006 1,366,796 2007 878,892 2008 785,188 Thereafter (through 2011) 328,756 ----------- $7,963,982 ============ Interest income on all such notes was $825,778, $1,790,120 and $1,367,874 for the years ended December 31, 2003, 2002 and 2001, respectively. NOTE 11: 2001 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 was 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". 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. In 2003, the Company granted awards under the Plan that consisted of rights to purchase 21,750 restricted common shares, which vest in equal amounts in each of the 28 calendar quarters following the grant, and options to purchase 65,250 shares, which vest in equal amounts on each of the first seven anniversaries of the grant date. The exercise price of the options is equal to the market value of the Company's shares on the date of grant. During 2003, pursuant to the terms of the Plan, 44,629 and 1,644 vested options granted in 2001 and 2002, respectively, were exercised for an aggregate amount of $955,541. In 2003, 195,561 and 53,929 unexercised options granted in 2001 and 2002, respectively, were forfeited by former employees of the Company. Additionally, in 2003, 109,678 vested options granted in 2001 expired. In 2002, the Company granted awards under the Plan that consisted of rights to purchase 93,999 restricted common shares, which vest in equal amounts in each of the 28 calendar quarters following the grant, and options to purchase 559,501 shares, which vest in equal amounts on each of the first seven anniversaries of the grant date. The exercise price of the options is equal to the market value of the Company's shares on the date of grant. During 2002, pursuant to the terms of the Plan, 172,314 unexercised options issued in 2001, were forfeited by former employees of the Company. F-19 Additionally, during the fourth quarter of 2001, the Company granted awards under the Plan that consisted of rights to purchase 290,050 restricted common shares, which vest in equal amounts in each of the 28 calendar quarters following the grant, and options to purchase 1,201,500 shares, which vest in equal amounts on each of the first seven anniversaries of the grant date. The exercise price of the options is equal to the market value of the Company's shares on the date of the grant. In addition to the options granted under the Plan, during the fourth quarter of 2001, the Company granted a total of 157,333 options to purchase its common shares to employees and to certain non-employee directors of the Company. The exercise price of the options is equal to the market value of the Company's shares on the date of the grant. All options vest and are exercisable in equal annual amounts on each of the first seven anniversaries, beginning in 2002, of the respective grant dates. NOTE 12: 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 year ended December 31, 2003 on 65,250 share options granted in the fourth quarter of 2003 was $1,008. The options outstanding as of December 31, 2003 for grants made in the fourth quarter of 2003, are set forth below:
Options Weighted Average Remaining Weighted Average Exercise Exercise Prices Outstanding Contractual Life (Years) Price --------------- ----------- ------------------------- --------------------------- $20.20 65,250 7 $20.20
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 the years ended December 31, 2002 and 2001 were accounted for, and will continue to be accounted for, under the intrinsic value-based method as prescribed by APB No. 25. Therefore, no compensation expense was recognized for those share options that had no intrinsic value on the date of grant. The dilutive effect of these options is included in the weighted average diluted shares outstanding in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). F-20 The options outstanding as of December 31, 2003, 2002 and 2001 for grants made prior to January 1, 2003 are set forth below:
Weighted Average Remaining Contractual Weighted Average December 31, Exercise Prices Options Outstanding Life (Years) Exercise Price ------------- --------------- ------------------- ------------ -------------- $20.80 - $25.65 836,651 5 $20.89 $16.58 - $28.42 503,928 6 $21.88 --------- 2003 1,340,579 ========= $20.80 - $25.65 1,186,519 6 $20.94 $16.58 - $28.42 559,501 7 $22.08 --------- 2002 1,746,020 ========= 2001 $20.80 - $25.65 1,358,833 7 $21.24 =========
Options exercisable at December 31, 2003, 2002 and 2001 were 227,378, 185,976 and 0, respectively. Had compensation cost for the Company's options been determined based on fair value at the grant dates for awards under the Plan consistent with the fair value method prescribed by SFAS No. 123, the Company's net income and net income per share diluted for the years ended December 31, 2003, 2002 and 2001, would have been the following pro forma amounts:
(In thousands, except per share data) 2003 2002 2001 - ------------------------------------- ----------- ----------- ----------- Net income, as reported $43,075,283 $55,451,007 $80,296,861 Pro forma net income $42,161,890 $53,358,194 $80,049,745 Earnings per share, as reported: Basic $0.97 $1.27 $1.85 Diluted $0.95 $1.21 $1.71 Pro forma earnings per share: Basic $0.95 $1.22 $1.84 Diluted $0.93 $1.16 $1.71
In the preceding table, pro forma compensation expense associated with option grants is recognized over the relevant vesting periods. F-21 The following range assumptions were applied in determining pro forma compensation cost:
2003 2002 2001 ------------- -------------- ------------- Expected Life 1 to 7 years 1 to 7 years 1 to 7 years Risk free interest rate 1.60% - 4.32% 1.45% - 3.70% 2.44% - 5.44% Dividend yield 4.22% - 7.24% 4.24% - 7.30% 4.78% - 5.89% Volatility 22.07% 39.96% 25.74%
The effects of applying SFAS No. 123 on pro forma disclosures of net income and earnings per share for the years ended December 31, 2003, 2002 and 2001, are not likely to be representative of the pro forma effects on net income and earnings per share in future years, because the assumptions used to determine the fair value can vary significantly. Disclosures of the fair value of options granted for the years ended December 31, 2003, 2002 and 2001, have been estimated at the date of grant using a Black-Scholes option-pricing model. The Black-Scholes option model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected share price volatility. The Company's options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate. The weighted average fair value of the options granted for the years ended December 31, 2003, 2002 and 2001, was $2.79, $4.85 and $3.65, respectively. NOTE 13: SHAREHOLDERS' VOTING RIGHTS The Company's Bye-Laws limit the voting power of natural persons to 5%, and the voting power of other entities, "groups" (as defined in the U.S. Securities Exchange Act of 1934) and persons other than natural persons (legal persons) to 9.5%, of the votes attributable to the outstanding shares of the Company regardless of how many of our shares (including common shares) they own or control. This restriction does not apply to parties who were shareholders immediately before our initial public offering, including WPS II, Inc. and certain individuals designated by the Company's Board of Directors who are currently affiliated with the Company. Votes that could have been cast by shareholders but for these voting restrictions are allocated to the other holders of the common shares pro-rata based on the number of shares they hold, except that no shareholder subject to the restrictions may receive an allocation to the extent that it would result in the shareholder holding more than 5% (for natural persons) or 9.5% (for legal persons, entities or groups) of the total voting power. The Company's Board of Directors may approve the exemption of other persons or groups from this restriction. In addition, the Bye-Laws provide that no person or group (other than WPS II, Inc. or its affiliates, direct or indirect subsidiaries of the Company, certain employee benefit plans designated by the Board of Directors which may be established by the Company or as otherwise exempted by the Board of Directors) deemed to be a beneficial owner of common shares may vote more than 20% of the total number of votes attributable to the common shares outstanding. NOTE 14: INCOME TAXES Under current Bermuda law, the Company and its Bermuda subsidiaries are not required to pay any Bermuda taxes on their income or capital gains. The Company and its Bermuda subsidiaries will be exempt from such forms of taxation in Bermuda until at least March 2016. F-22 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/(benefit), all current, for the years ended December 31, 2003, 2002 and 2001 is as follows:
2003 2002 2001 -------------- --------------- --------- U.S.: Federal $ 5,046,492 $ 4,928,254 $ 5,852,480 State and local 1,600,296 1,437,829 1,286,945 ----------- ------------ ------------ 6,646,788 6,366,083 7,139,425 Other: (663,521) 15,116 13,378 ------------ -------------- -------------- $ 5,983,267 $ 6,381,199 $ 7,152,803 =========== =========== ===========
NOTE 15: PENSION BENEFITS The Company sponsors both a defined contribution profit-sharing plan (including a 401(k) feature) and a defined contribution money-purchase plan in the U.S. In 2000, the Company implemented a Bermuda pension plan and in 2001 a plan was created in the United Kingdom. These plans cover substantially all employees who meet the minimum age, service and eligibility requirements. Total employer contributions amounted to $1,486,044, $1,259,929 and $1,258,631 for the years ended December 31, 2003, 2002 and 2001, respectively. Participants are immediately vested in their account balances. NOTE 16: LEASE COMMITMENTS The Company has several lease agreements in various locations including Bermuda, New York, Maine, London, Curacao and The Netherlands. The lease agreements are for various periods through December 31, 2021. The leases are subject to escalation charges based on increases in real estate taxes and maintenance costs. Future minimum rental commitments under non-cancellable operating leases in effect as of December 31, 2003 were as follows: 2004 $ 2,888,911 2005 2,914,585 2006 2,720,263 2007 2,720,263 2008 947,889 Thereafter (through 2021) 6,206,546 ------------- $ 18,398,457 ============= F-23 Total rent expense for all operating leases was $2,834,537, $2,525,139 and $2,173,441, for the years ended December 31, 2003, 2002 and 2001, respectively. Included in the table above is an annual amount of $180,000 and an aggregate 18-year total commitment amount of $3,150,000 payable to Kirk Management Ltd., a 40% unconsolidated affiliate of the Company, which owns Trinity Hall, the Company's headquarters in Hamilton, Bermuda. In addition, included in the table above is an annual amount of $194,322 and an aggregate two-year total commitment amount of approximately $389,000 payable to a company owned by the former principals of TPR. NOTE 17: GEOGRAPHIC AREA DATA The Company's primary business is the provision of investment advisory services to clients located throughout the world, in primarily two geographic areas, as follows: Fee Revenue 2003 2002 2001 ------------ ------------ ------------ U.S. $ 70,657,079 $ 79,095,944 $ 90,348,326 Non-U.S. 23,405,259 26,322,834 25,644,745 ------------ ------------ ------------ Total $ 94,062,338 $105,418,778 $115,993,071 ============ ============ ============ NOTE 18: SUBSEQUENT EVENTS On January 5, 2004, the Company declared a dividend of $0.30 per share to shareholders of record as of January 15, 2004, payable on January 30, 2004 in the aggregate amount of $13,816,834. F-24 SIGNATURES The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf. W.P. STEWART & CO., LTD. By: /s/ John C. Russell ---------------------------- Name: John C. Russell Title: Managing Director Date: March 15, 2004 INDEX TO EXHIBITS Number Exhibit - --------- ------------------------------------------------------------------- 8.1 Subsidiaries of the Registrant 12.1 Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 12.2 Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 13.1 Certification pursuant to Rule 13a-14(b) and 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 13.2 Certification pursuant to Rule 13a-14(b) and 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 14.1 Consent of PricewaterhouseCoopers LLP EX-8.1 3 b330710_ex8-1.txt SUBSIDIARIES OF THE REGISTRANT Exhibit 8.1 SUBSIDIARIES OF W.P. STEWART & CO., LTD. Subsidiary JURISDICTION OF INCORPORATION - ------------------------------------------------- ----------------------------- W.P. Stewart & Co. (Europe), Ltd. ............... England NS Money Management Ltd. ........................ Bermuda Cribewell Investments ........................... Curacao TPRS Services N.V. .............................. Curacao W.P. Stewart & Co., Inc. ........................ Delaware W.P. Stewart Securities Limited ................. Bermuda W.P. Stewart Asset Management Ltd. .............. Bermuda W.P. Stewart Fund Management Limited............. Ireland W.P. Stewart Asset Management (NA), Inc. ........ New York W.P. Stewart Asset Management, Inc. ............. Delaware W.P. Stewart Asset Management (Europe), Ltd. .... Bermuda W.P. Stewart Asset Management (Curacao), N.V. ... Netherlands Antilles W.P. Stewart Asset Management (Europe), N.V. .... The Netherlands TPR Curacao N.V. ................................ Netherlands Antilles WPSH Management N.V. ............................ Netherlands Antilles EX-12.1 4 b330710_ex12-1.txt CERTIFICATION OF WILLIAM P. STEWART, JR. Exhibit 12.1 CERTIFICATIONS I, William P. Stewart, certify that: 1. I have reviewed this annual report on Form 20-F of W.P. Stewart & Co., Ltd.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and c) disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting. Date: March 15, 2004 /s/ William P. Stewart, Jr. - ------------------------------------ William P. Stewart, Jr. Chairman and Chief Executive Officer EX-12.2 5 b330710_ex12-2.txt CERTIFICATION OF ROCCO MACRI Exhibit 12.2 CERTIFICATIONS I, Rocco Macri, certify that: 1. I have reviewed this annual report on Form 20-F of W.P. Stewart & Co., Ltd.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and c) disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting. Date: March 15, 2004 /s/ Rocco Macri - ----------------------------- Rocco Macri Deputy Managing Director--Chief Financial Officer EX-13.1 6 b330710_ex13-1.txt CERTIFICATION PURSUANT TO 18 U.S.C. Exhibit 13.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of W.P. Stewart & Co., Ltd. (the "Company") on Form 20-F for the period ended December 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge: 1. The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 15, 2004 /s/ William P. Stewart, Jr. - ----------------------------- William P. Stewart, Jr. Chairman and Chief Executive Officer [A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.] EX-13.2 7 b330710_ex13-2.txt CERTIFICATION PURSUANT TO 18 U.S.C. Exhibit 13.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of W.P. Stewart & Co., Ltd. (the "Company") on Form 20-F for the period ended December 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge: 1. The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 15, 2004 /s/Rocco Macri - ---------------------------- Rocco Macri Deputy Managing Director--Chief Financial Officer [A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.] EX-14.1 8 b330710_ex14-1.txt CONSENT OF INDEPENDENT AUDITORS Exhibit 14.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statements No. 333-71444, 333-83046 and 333-108844 of W.P. Stewart & Co., Ltd. on Form S-8 of our report dated February 27, 2004 appearing in this Annual Report on Form 20-F of W.P. Stewart & Co., Ltd. for the year ended December 31, 2003. /s/ PricewaterhouseCoopers LLP ------------------------------ PricewaterhouseCoopers LLP New York, NY March 15, 2004 -----END PRIVACY-ENHANCED MESSAGE-----