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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from _____________ to _____________
Commission File Number: 0-25248
CONSOLIDATED WATER CO. LTD.
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(Exact name of Registrant as specified in its charter)
CAYMAN ISLANDS N/A
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
TRAFALGAR PLACE, WEST BAY ROAD, P.O. BOX 1114GT,
GRAND CAYMAN, B.W.I. N/A
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone number, including area code: (345) 945-4277
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
ORDINARY SHARES, PAR VALUE CI$1.00
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(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: NONE
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this 10-K or any amendments to this
Form 10-K. [NOT APPLICABLE]
The aggregate market value of common stock held by non-affiliates of the
registrant, based on the closing sales price for the registrant's ordinary
shares, as reported on the Nasdaq National Market on March 19, 2001, was
$30,903,544.
As at March 19, 2001, there were 3,862,943 shares of the registrant's ordinary
shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
EXCHANGE RATES
Unless otherwise indicated, all dollar amounts are in United States Dollars and
references to "$", "U.S.", or "U.S. $" are to United States Dollars.
The official fixed exchange rate for conversion of CI$ into U.S. $, as
determined by the Cayman Islands Monetary Authority, has been fixed since April
1974 at U.S. $1.20 per CI$1.00.
The official fixed exchange rate for conversion of BZE$ into U.S. $, as
determined by the Central Bank of Belize, has been fixed since 1976 at U.S.$
0.50 per BZE$ 1.00.
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TABLE OF CONTENTS
SECTION DESCRIPTION PAGE
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PART I
Item 1. Business .......................................................... 1
Item 2. Properties ........................................................ 9
Item 3. Legal Proceedings ................................................. 11
Item 4. Submission of Matters to a Vote of Security Holders ............... 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters ........................................................ 12
Item 6. Selected Financial Data ........................................... 17
Item 7. Management's Discussions and Analysis of Financial Condition and
Results of Operations .......................................... 18
Item 7A. Quantitative and Qualitative Disclosure about Market Risk ......... 31
Item 8. Financial Statements and Supplementary Data ....................... 31
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ........................................... 60
PART III
Item 10. Directors and Executive Officers of the Registrant ................ 60
Item 11. Executive Compensation ............................................ 63
Item 12. Security Ownership of Certain Beneficial Owners and Management .... 68
Item 13. Certain Relationships and Related Transactions .................... 69
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K ... 71
SIGNATURES ................................................................... 77
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Our company was incorporated in August 1973 in the Cayman Islands and
in July 2000 acquired all of the issued and outstanding capital stock of Seatec
Belize Ltd., now renamed Belize Water Ltd. Our principal executive offices are
located at Trafalgar Place, West Bay Road, Grand Cayman, Cayman Islands. We
provide water services in areas where the supply of potable water is scarce.
These water services include the production of potable water from seawater, and
the distribution of potable water through pipelines to our customers. In
addition, we have expertise in providing wastewater services. Our customers
include residential, commercial and tourist properties, government facilities,
and public utilities.
Our business activities are now reported in three business segments,
which reflect a change in reporting during 2000 due to the acquisition of our
wholly owned subsidiary company in Belize, Central America and our entering into
an agreement with South Bimini International Ltd., a Bahamian company, to
provide water to property in South Bimini Island, Commonwealth of Bahamas. The
business group structure is based on defined areas of management responsibility
and the geographical location of our operations. The business group segments are
Cayman Islands Operations, Belize Operations and Bahamas Operations. In 2000,
the Cayman Island Operations and Belize Operations accounted for 95% and 5%,
respectively, of our total revenue. As at March 19, 2001 our Bahamas Operations
were still in the construction phase.
FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS
The information contained in Note 11 Segmented Information of our
consolidated financial statements found on page 51, in ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA for the year ended December 31, 2000, is
incorporated herein by reference.
BUSINESS COMBINATION
Consolidated financial statements have been presented for the first
time this year due to the acquisition of our wholly-owned subsidiary, Belize
Water Ltd. This acquisition has been accounted for by the purchase method. Our
other two subsidiaries are not consolidated as they are dormant companies.
CAYMAN ISLANDS OPERATIONS
The Cayman Islands comprise three islands, Grand Cayman, Little Cayman
and Cayman Brac, located approximately 460 miles south of Miami, Florida. The
three islands have a total area of approximately 100 square miles.
Our Cayman Islands operations produce potable water at our two reverse
osmosis seawater conversion plants in Grand Cayman. The current capacity of our
Governor's Harbour plant is 1.1 million U.S. gallons per day, which is in excess
of the minimum quantities of water which Ocean Conversion (Cayman) Ltd., a
Cayman Islands company which operates our Governor's Harbour plant, must supply
to us under a water purchase agreement, and the current capacity of our West Bay
plant, which we operate, is 710,000 U.S. gallons per day. Since the plants began
production of water, they have consistently produced at or near their capacity.
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Feed water for the reverse osmosis units is drawn from deep wells with
associated pumps on the property. Wastewater is discharged into brine wells on
the property below the level of the feed water intakes.
Electricity to our plants is supplied by Caribbean Utilities Co. Ltd.,
a publicly traded utility company. At both plant sites, we maintain a diesel
driven, standby generator with sufficient capacity to operate our distribution
pumps and other essential equipment during any temporary interruptions in the
electricity supply.
In the event of an emergency, our distribution system is connected to
the George Town distribution system of Water Authority-Cayman. We can also
purchase water, if available, from a plant servicing the Hyatt Hotel in Grand
Cayman, which presently has excess production capacity. In order to efficiently
maintain our equipment, we have purchased water for brief periods of time from
both Water Authority-Cayman and the water plant servicing the Hyatt Hotel. We
have also sold potable water to these entities, and in the case of Water
Authority-Cayman, supplied substantial quantities of water almost continuously
over a seven-month period in late 1993 and early 1994.
Our pipeline system in the Cayman Islands covers the Seven Mile Beach
and West Bay areas of Grand Cayman and consists of approximately 64 miles of PVC
pipeline. We extend our distribution system periodically as property
developments are completed. We have a main pipe loop covering a major part of
the Seven Mile Beach area. We place extensions of smaller diameter pipe off our
main pipe to service new developments in our service area. This system of
building branches from the main pipe keeps our construction costs low and allows
us to provide service to new areas in a timely manner. We completed in 2000 a
main pipe along a new road to service future developments, which provides an
additional supply loop at the southern end of the Seven Mile Beach area.
For major developments in our service areas, most internal roads are
private until the development has been completed. Developers are responsible for
laying the pipeline within the development at their own cost, but in accordance
with our specifications. When the development is completed, the developer then
transfers operation and maintenance of the pipeline to us.
We have a comprehensive layout of our pipeline system which is
maintained in a computer aided design (CAD) system. This system is integrated
with digital aerial photographs and a computer generated hydraulic model which
allows us to accurately locate pipes and equipment in need of repair and
maintenance. It also helps us to plan extensions of and upgrades to our existing
pipeline system.
The following table shows, for each of the fiscal years ended December
31, 2000, 1999, 1998, 1997, and 1996, our total number of customer connections
at the end of each period and metered sales of water for that period:
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
Number of Customers 2,936 2,606 2,347 2,069 1,826
Miles of Pipeline 64 63 62 57 55
Metered Sales (in thousands of U.S. gallons):
Commercial 346,005 308,949 315,980 300,350 265,140
Residential 97,759 86,712 80,150 72,393 60,261
Government facilities 7,599 5,686 4,420 4,007 3,064
------- ------- ------- ------- -------
Total 451,363 401,347 400,550 376,750 328,465
======= ======= ======= ======= =======
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You should note that the table above does not precisely represent the
actual number of customers we service. In hotels and condominiums, we may only
have one customer, which is the operator of the hotel or the condominium, but we
actually supply water to all of the units within that hotel or condominium
development. Of the customers indicated in the table above, as of 2000, 49.5%
were residential, 49.5% were hotels, condominiums and other commercial customers
and 1% were government facilities.
We have a separate license from the Cayman Islands government and a
five-year agreement with a developer to supply on demand a minimum of 48 million
U.S. gallons of non-potable water per year on a take or pay basis to irrigate an
18-hole golf course.
Before 1991, any owner of property within our licensed area could
install water making equipment for its own use. Since 1991, that option is only
available to private residences, although water plants then in existence could
be maintained but not replaced or expanded. When the Marriott Hotel was built in
1990 in our licensed area, the developer installed its own reverse osmosis
equipment. On February 4, 1994, we entered into an agreement with the owner of
the Marriott Hotel to supply water to the Marriott Hotel at our standard tariff
rates.
In 1995, we entered into a 10-year agreement with the owner of the
Westin Hotel. This agreement requires us to supply up to 60,000 U.S. gallons per
day on a monthly basis to the hotel at a discount to our standard tariff rates,
and to supply any additional demand on a best efforts basis. The Westin Hotel
maintains storage capacity on-site, assists pressurization with on-site
repumping facilities, and has provided us with a letter of credit which covers
the cost of 45 days of water supply.
The current market which we service under our license in the Cayman
Islands consists of Seven Mile Beach and West Bay, Grand Cayman Island, two of
the three most populated areas in the Cayman Islands. Our plants and water
distribution system are equipped with efficient, state-of-the-art technology,
and we consistently provide high quality water to our customers. The Cayman
Islands Government, through Water Authority-Cayman, supplies water to parts of
Grand Cayman Island, which are not within our licensed area.
According to the Economics and Statistics Office of the Cayman Islands
Government, the population of the Cayman Islands was approximately 39,410
persons in 1999. Most recent figures published by the Cayman Islands Government
Department of Tourism show that the growth rate of tourism in the Cayman Islands
has increased on average 8.83% annually over the 10 year period from 1989
through 1999, with total visitor arrivals of 1.08 million persons from January
through September 2000, up from 1.04 million arrivals during the same period of
1999.
A new 233 room Holiday Inn Hotel opened in our license area in November
2000, and construction commenced on a 360 room Ritz Carlton Hotel during 2000.
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Government
The Cayman Islands are a British Overseas Territory of the United
Kingdom and have had a stable political climate since 1670, when the Cayman
Islands were ceded to England by the Treaty of Madrid. The Queen of England
appoints the Governor of the Cayman Islands to make laws with the advice and
consent of the legislative assembly. There are 15 elected members of the
legislative assembly and three members appointed by the Governor from the Civil
Service. The Executive Council is responsible for day-to-day government
operations. The Executive Council consists of five ministers who are chosen by
the legislative assembly from its 15 popularly elected members, and the three
Civil Service members. The Governor has reserved powers and the United Kingdom
retains full control over foreign affairs and defense. The Cayman Islands are a
common law jurisdiction and have adopted a legal system similar to that of the
United Kingdom.
Customs Duties And Taxes
We are exempt from, or receive concessionary rates of, customs duties
on capital expenditures on plant and major consumable spares and supplies
imported into the Cayman Islands as follows:
o there are no income taxes in the Cayman Islands;
o we do not pay any import duty or taxes on permeator membranes,
electric pumps and motors and chemicals which we purchase; and
o we pay 10% of the cost, including insurance and transportation
to the Cayman Islands, of other plant and associated materials
and equipment to manufacture or supply water in Seven Mile
Beach or West Bay.
BELIZE OPERATIONS
On July 21, 2000, we acquired Seatec Belize Ltd. and subsequently
changed the name of the company to Belize Water Limited. Belize Water Limited, a
wholly owned subsidiary of Consolidated Water Co. Ltd., provides potable water
from one reverse osmosis seawater conversion plant in Ambergris Caye, Belize,
Central America to the Belize Water and Sewerage Authority (WASA), which has
recently been privatized. Belize Water Limited provides water to WASA, who
distribute the water through its own distribution system to residential,
commercial and tourist properties in Ambergris Caye, Belize.
Our market in Ambergris Caye consists of residential, commercial and
tourist properties in the town of San Pedro, which is located on the southern
end of Ambergris Caye. Ambergris Caye is one of about 1,000 islands located east
of the Belize mainland, and off the southeastern tip of the Yucatan Peninsula.
Ambergris Caye is approximately 25 miles long and has a population of about
7,000 residents. We provide bulk potable water to WASA who distribute this water
to this market. WASA currently has no other source of potable water in Ambergris
Caye.
A 185 mile long barrier reef, which is the largest barrier reef in the
Western Hemisphere, is situated just offshore of Ambergris Caye. This natural
attraction is rapidly becoming a choice destination for SCUBA divers and
tourists. Tourism is Belize's second largest foreign exchange earner, next to
agriculture. The Belize Government reported 326,642 tourist arrivals in 1999.
CUSTOMS DUTY, TAXES AND THE GOVERNMENT IN BELIZE
The Government of Belize has exempted Belize Water Ltd. from all
duties, sales taxes and Company taxes until January 2003 with respect to duties
and January 2004 with respect to Company
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taxes. However, the government has given its commitment to support all future
applications for extensions or additional tax exemptions for the life of the
water supply contract.
BAHAMAS OPERATIONS
The Bimini Islands consist of North Bimini and South Bimini, and are
two of 700 islands which comprise the Commonwealth of the Bahamas. The Bimini
Islands are located approximately 45 miles east of Ft. Lauderdale, Florida and
are a premier destination for sport fishing enthusiasts. The population of the
Biminis is approximately 1,600 persons and the islands have about 200 hotel and
guest rooms available for tourists. The total land area of the Biminis is
approximately 9 square miles.
In 1997, we signed a letter of intent to supply potable water to a
Bahamian company, which is owned by a United States developer who plans to build
a multi-purpose resort development called Bimini Bay Resort on 700 acres in
North Bimini Island. We later created a wholly owned Bahamian subsidiary,
Commonwealth Water Limited, which entered into a 10-year agreement with the
Bimini Bay Resort developer to supply water to the development. As of December
2000, the developer had not honored his obligations under the water supply
agreement, and the agreement was terminated in February 2001.
On December 18, 2000, we signed a separate agreement with a Bahamian
developer on South Bimini Island, Bahamas to provide potable water to his marina
and condominium development, Bimini Sands Resort. The developer of the Bimini
Sands Resort has constructed a marina and 36 condominium units, and plans to
construct a further 180 condominium units. We will provide potable water to
Bimini Sands Resort and to the Bimini Beach Hotel, a 40 room hotel also owned by
the developer. The agreement is contingent on us obtaining the necessary
approvals from the Government of the Bahamas to supply water to the developer.
As of March 2001, we have applied for the necessary permissions from the
Government of the Bahamas and are awaiting a reply.
We are also in discussions with the Government of the Bahamas regarding
the provision of potable water to other properties in Bimini, including
residential, commercial and tourist properties.
GOVERNMENT REGULATION
We are regulated by the Water Authority of the Cayman Islands on behalf
of the Cayman Islands Government.
We believe that our operations in Belize and the Bahamas comply with
all local laws and regulations.
MARKET AND SERVICE AREA
We believe that our potential market consists of any location where
there is a need for potable water. According to the information contained in the
Paul Simon book "Tapped Out: The Coming World Crisis in Water and What We Can Do
About It" (C)1998, the world's population of 5.9 billion will double in the next
forty to ninety years and the per capita world water consumption is growing
twice as fast as the world's population. The world's supply of water, however,
is relatively constant. While water sufficiency problems are not nearly as
severe in the United States as in some other nations, three major states,
California, Texas and Florida, are already facing water supply problems. These
states and most water-deficient nations in the world all have access to huge
amounts of ocean water, yet cannot economically process major quantities for
consumption. The desalination of ocean water, either through distillation or
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reverse osmosis, is widely regarded as the most viable alternative to fresh
water in areas with an insufficient natural supply.
GROWTH STRATEGY
Our growth strategy is as follows:
WE INTEND TO CONTINUE DEVELOPING OUR PRODUCTION AND DISTRIBUTION
INFRASTRUCTURE AND PROVIDE HIGH QUALITY POTABLE WATER TO OUR LICENSED AREA IN
THE CAYMAN ISLANDS. We intend to increase our customer base and revenues in the
Cayman Islands by providing water service on the most cost-efficient basis to
new residential, commercial and tourist properties that are being developed in
our exclusive licensed area. We intend to increase our service area by exploring
the possibility of acquiring other potable water suppliers within the Cayman
Islands.
WE INTEND TO EXPAND OUR OPERATIONS IN BELIZE, CENTRAL AMERICA BY
PURSUING OPPORTUNITIES TO PROVIDE POTABLE WATER TO OTHER PARTS OF BELIZE,
PARTICULARLY THE CAYES AND COASTAL AREAS WHICH COULD BENEFIT FROM OUR
DESALINATION TECHNOLOGY.
WE INTEND TO EXPAND OUR OPERATIONS TO OTHER MARKETS WHERE THERE IS A
NEED FOR POTABLE WATER. We are currently in various stages of discussion to
supply to several new markets, including the Bahamas and Mexico. We may pursue
these opportunities either on our own or through joint ventures. So far we have
focused on various locations throughout the Caribbean and Central America.
WE ALSO INTEND TO EXPAND OUR EXISTING AND FUTURE OPERATIONS INTO
COMPLEMENTARY SERVICES, SUCH AS WASTEWATER SERVICES, WHICH WE HAVE PROVIDED IN
THE PAST. Prior to the installation of a central wastewater system by the Cayman
Islands government, we provided wastewater services on Grand Cayman Island.
Since we have expertise in wastewater services, we may provide these services in
the future.
OUR TECHNOLOGY
The conversion of saltwater to potable water is called desalination.
There are two primary forms of desalination: distillation and reverse osmosis.
Both methods are used throughout the world and technologies are improving to
lower the costs of production. Reverse osmosis is a separation process in which
the water from a pressurized saline solution is separated from the dissolved
material by passing it over a semi-permeable membrane. An energy source is
needed to pressurize the salinated, or feed, water for pretreatment, which
consists of fine filtration and the addition of precipitation inhibitors.
Pre-treatment removes suspended solids, prevents salt precipitation and keeps
the membranes free of microorganisms. Next, a high-pressure pump enables the
water to pass through the membrane, while salts are rejected. The feed water is
pumped into a closed vessel where it is pressurized against the membrane. As a
portion of the feed water passes through the membrane, the remaining feed water
increases in salt content. This remaining feed water is discharged without
passing through the membrane. As the discharged feed water leaves the pressure
vessel, its energy is captured by an energy recovery device which is used to
pressurize incoming feed water. The final step is post-treatment, which consists
of stabilizing the water, removing hydrogen sulfide and adjusting the pH and
chlorination to prepare it for distribution.
We use reverse osmosis technology to convert seawater to potable water.
We believe that this technology is the most effective and efficient conversion
process. However, we are always seeking ways to maximize efficiencies in our
current processes and to investigate new more efficient processes to convert
seawater to potable water. The equipment at our plants is among the most energy
efficient
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available and we monitor and maintain our equipment in this manner. As a result
of our many years of experience in water conversion, we believe that we have an
expertise in the development and operation of desalination plants which is
easily transferable to locations outside the Cayman Islands.
RAW MATERIALS AND SOURCES OF SUPPLY
All materials, parts and supplies essential to our business operations
can normally be obtained from multiple sources. We do not manufacture any parts
or components for equipment essential to our business. Our access to seawater
for processing into potable water is granted through our licenses and contracts
with governments of the various jurisdictions in which we have our operations.
LICENSES, FRANCHISES AND CONCESSIONS
With respect to our operations in the Cayman Islands, we rely on our
exclusive franchise granted by the government to produce and supply potable
water within our franchise area in Grand Cayman. This franchise was granted in
July 11, 1990 and is for a term of twenty (20) years. This franchise agreement
grants us the right of first refusal to extend the franchise.
Technical Breach of Cayman Islands' License
Our license requires us to obtain prior government approval for an
issuance or transfer of shares which (a) exceeds 5% of the issued ordinary
shares of our company, or (b) would, upon registration, result in any
shareholder owning more than 5% of the issued shares. More than 5% of our
ordinary shares are registered in the name of Cede and Co., the nominee for the
Depository Trust Company, which is a clearing agency for shares held by
participating banks and brokers. We do not believe that these shareholdings by
Cede and Co. constitute a breach of the intent of the license. We believe that
the purpose of this clause of the license is to allow the government to approve
significant shareholders of our company. Cede and Co. and Depository Trust
Company, however, act solely as the nominee for banks and brokers, and have no
beneficial ownership in the ordinary shares. Nevertheless, our Cayman Islands'
legal counsel has advised us that these shareholdings by Cede & Co., which were
not approved by the Cayman Islands' government, are probably a technical breach
of our license.
In August and September 1994, we completed an offering of 400,000
ordinary shares under Rule 504 of Regulation D of the Securities Act of 1933. In
September 1995, we completed a private placement of 100,000 ordinary shares plus
warrants to subscribe for an additional 100,000 ordinary shares under Regulation
S of the Securities Act 1933. In April 1996, we completed a public offering of
575,000 ordinary shares and in June 2000 we completed a public offering of
773,000 ordinary shares. Based upon the advice of our Cayman Islands' legal
counsel, we determined that the license did not require the government's
approval to complete these offerings. However, if a court determined that the
government's approval of these offerings was required under the license, we
would be in breach of the license. Our Cayman Islands' legal counsel has advised
us that to make this determination, a court would have to disagree with our
interpretation of the license and dismiss several defenses which would be
available to us. These defenses include acquiescence and waiver on the part of
the government with respect to these offerings.
We have received a letter dated June 1, 2000, from an official of the
Cayman Islands' government, stating that a public offering of our ordinary
shares, which we completed in 1996 without the government's approval, was a
breach of our license. The letter is not clear as to whether the government also
views the completion of our 2000 public offering as a breach of our license. We
have responded to this letter and stated that we do not believe that we are in
breach of our license. A meeting with officials of the Cayman Islands'
government, to discuss this matter, was held on June 16, 2000 in accordance with
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the government's suggestion in the June 1st letter. Discussion of the matter is
ongoing as of the date of this Annual Report. We have been advised by our Cayman
Islands' legal counsel that the June 1st letter from the Cayman Islands
government does not constitute a formal "notice of breach of the license" as
contemplated in the license. Accordingly, other than pursuing discussions of
this matter with the Cayman Islands' government, no other actions are presently
being pursued by us to "cure" any such alleged breaches.
SEASONAL VARIATIONS IN OUR BUSINESS
Our water sales in the Cayman Islands and Belize are seasonal. We
normally sell more water during the first and second quarters when greater
numbers of tourists are present. Our sales are also effected to some extent by
the weather. We sell less water during the third and fourth quarters which
normally experience higher rainfall amounts than other times of the year.
COMPETITION
With respect to our operations in the Cayman Islands, we do not compete
with other utilities within our licensed area. Although we have been granted an
exclusive franchise for our present service area, our ability to expand our
service area is limited at the discretion of the government. At the present
time, we are the only non-municipal public water utility on Grand Cayman. The
Cayman Islands government, through Water Authority-Cayman, supplies water to
parts of Grand Cayman which are not within our licensed area.
With respect to our operations in Belize, our water supply contract
with the Government of Belize Water and Sewerage Authority ("WASA") is
non-exclusive, and WASA may seek contracts with other water suppliers to meet
their future needs in San Pedro, Ambergris Caye, Belize. There are many
companies throughout the world who provide desalination equipment and turnkey
water supply contracts. We are not able to say with any certainty who we would
compete against for future contracts in Belize.
To implement our growth strategy outside our existing operating areas,
we will have to compete with companies such as Ionics Inc. and Vivendi. These
companies, among others, currently operate in areas in which we would like to
expand our operations, maintain world-wide operations and have greater
financial, managerial and other resources than our company.
ENVIRONMENTAL MATTERS
With respect to our Cayman Islands operations, we operate our water
plants in accordance with guidelines of the Cayman Islands Department of
Environment, although not required by local government regulations. Under these
guidelines, our plants may not have emissions of hydrogen sulfide at levels
greater than 20 milligrams per liter at the exit of the air scrubbers. Our
potable water also meets the guidelines of the World Health Organization and the
U.S. Safe Drinking Water Act. In addition, noise levels at our plants cannot
exceed the standards established by the U.S. Occupational Safety and Health Act.
To date, we have not received any complaints from any regulatory authorities
concerning hydrogen sulfide emissions or noise levels at our plants.
With respect to our Belize operations, we are required by our water
supply contract to take all reasonable measures to prevent pollution of the
environment. We operate our plant in a manner as to minimize the emission of
hydrogen sulfide gas into the environment. We are not aware of any existing or
pending environmental legislation which may effect our operations in Belize. To
date we have not received any complaints from any regulatory authorities
regarding hydrogen sulfide gas emission, nor any other matter at our plant.
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EMPLOYEES
We presently employ 38 persons in the Cayman Islands, five of whom are
executive and management personnel and six are engaged in administrative and
clerical positions. The remaining staff are engaged in plant maintenance and
operations, pipe laying and repair, leak detection, new customer connections,
meter reading and laboratory analysis of water quality. We presently employ five
persons in Belize to manage and operate our plant. We presently employ one
person in the Bahamas who is assisting with the construction of our water plant
and distribution system on South Bimini. Our employees are not parties to a
collective bargaining agreement. We consider our relationship with our employees
to be good.
ITEM 2. PROPERTIES
We own our Governor's Harbour facility in Grand Cayman, which consists
of a 3.2 acre site, including 485 feet of waterfront, and an 8,745 square foot
building which contains the water treatment facility. We own two storage
reservoirs with a total capacity of 2.0 million U.S. gallons of water at our
Governor's Harbour site. The property surrounding the facility has yet to be
fully developed, although these areas are beginning to be developed for
residential and tourist accommodations.
The primary components of the Governor's Harbour plant are:
o five feedwater supply wells that average a depth of 140 feet.
The combined pumping capability is approximately 3,750 U.S.
gallons per minute;
o two positive displacement pumps with a pumping capacity of 410
U.S. gallons per minute each;
o two "back up" centrifugal pumps with a pumping capacity of 300
U.S. gallons per minute each;
o 77 vessels (measuring approximately 265" in length and 8" in
diameter) each housing six spiral wound seawater membranes
(measuring approximately 40" in length and 8" in diameter);
o a work exchanger energy recovery system;
o an air scrubber to remove the hydrogen sulfide from the
product water, which is capable of scrubbing approximately 800
U.S. gallons of water per minute; and
o Paragon TNT v5.0 control software on Gateway Hardware with I/O
System Opto 22 and Optomux interface controller.
We own our West Bay facility in Grand Cayman, which consists of 6.1
acres in West Bay. In August 1994, we retained United States Filter Corporation
to design and build this plant and then we paid off the obligations on the plant
and terminated the operating contract in November 1998. The plant began
operating on June 1, 1995 and was expanded in February 1998 and February 2000.
On this site, we have a 2,600 square foot building which houses our water
production facilities, a 2,400 square foot building which houses the potable
water distribution pumps, a water quality testing laboratory, office space and
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water storage capacity consisting of three 1.0 million U.S. gallon potable water
tanks. The current production capacity of the West Bay plant is 710,000 U.S.
gallons per day.
The primary components of this plant are:
o three feedwater supply wells that average a depth of 140 feet.
The combined pumping capability is approximately 2,250 U.S.
gallons per minute;
o two positive displacement pumps with a pumping capacity of 386
U.S. gallons per minute each;
o 43 vessels (measuring approximately 280" in length and 8" in
diameter) each housing seven spiral wound seawater membranes
(measuring approximately 40" in length and 8" in diameter);
o one hydraulic turbo energy recovery system;
o one work exchanger energy recovery system;
o an air scrubber to remove the hydrogen sulfide from the
product water, which is capable of scrubbing 1,000 U.S.
gallons of water per minute; and
o an Allen Bradley SLC500 Programmable Logic Controller (PLC)
linked to a Compaq PC computer running Windows NT 4.0 and
Wintelligent View interfaced with the PLC to control the
operation of the plant.
We own our San Pedro water production facility in Ambergris Caye,
Belize, Central America. The plant consists of a one story concrete block
building, which contains a seawater RO water production plant with a rated
capacity of 420,000 US gallons per day. We lease from the Government of Belize
at a annual rent of BZ$1.00, the parcel of land on which our plant is located.
The lease commenced on June 26, 1996 and the term is for ten years. We are
currently finalizing an extension of the lease for an additional five years to
coincide with the term of the water supply agreement.
The primary components of this plant are:
o two feed water supply wells drilled to an approximate depth of
100 feet;
o two multi-stage vertical turbine high pressure pumps with an
individual pumping capacity of 400 U.S. gallons per minute at
1620 feet TDH;
o two Caterpillar 3406 diesel engines which are the primary
drivers for the high pressure pumps;
o two 200 HP electric motors which act as backup drives for the
high pressure pumps;
o 18 pressure vessels each housing six spiral wound seawater RO
membranes;
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o two hydraulic turbo energy recovery systems;
o one air scrubber to remove the hydrogen sulfide from the
product water;
o one calcite bed and ancillary pumps to increase the alkalinity
of the product water; and
o an Allen Bradley PLC5 Programmable Logic Controller (PLC)
linked to a Compaq PC computer running Windows NT 4.0 and
Citect MMI software and interfaced with the PLC to control the
operation of the plant.
In addition to the properties where our water plants are located, we
lease approximately 3,200 square feet of space for our executive offices at
Trafalgar Place, West Bay Road, Grand Cayman Island. We have a three-year lease
with an extension provision on this property.
Our Governor's Harbour site consists of a waterfront portion. This
waterfront portion is not essential to our operations. We initially bought this
property to enhance the value of the entire Governor's Harbour site if we
decided to sell the site or develop it for other purposes. We purchased this
water frontage in 1992 from Hurricane Hideaway Ltd. At the same time, we
purchased Hurricane Hideaway Ltd., which owns certain development rights and
which is now a wholly owned subsidiary of our company. We value our holdings in
Hurricane Hideaway Ltd. at CI$1.00 for balance sheet purposes. We believe that
our properties are suitable for the conduct of our current operations for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
We are not currently a party to any material ongoing or pending legal
proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our ordinary shares of common stock ("ordinary shares") are listed on
the Nasdaq National Market and trade under the symbol "CWCO". Our ordinary
shares are not traded on any market other than the Nasdaq National Market.
Listed below for each quarter of the last two fiscal years are the high and low
bid prices for the ordinary shares on the Nasdaq National Market.
HIGH LOW
---- ---
First Quarter 1999 $ 7.75 $ 6.50
Second Quarter 1999 7.75 6.75
Third Quarter 1999 7.44 6.25
Fourth Quarter 1999 7.25 5.94
First Quarter 2000 7.13 6.00
Second Quarter 2000 8.25 6.00
Third Quarter 2000 8.00 6.13
Fourth Quarter 2000 9.13 6.19
The high and low bid prices in the table reflect interdealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
There is no trading market for the redeemable preference shares, which
are only issued to or purchased by long-term employees of our company and which
must be held by these employees for a period of four years before they may be
sold.
HOLDERS
On March 19, 2001, we had 583 holders of record of the ordinary shares.
Management believes that of the ordinary shares held of record, 16% are
registered to residents of the Cayman Islands and 84% are registered to
residents of other countries, primarily the United States. All of the redeemable
preference shares are owned by residents of the Cayman Islands.
Other than for the terms of our license described in "ITEM 1.
BUSINESS," our company is not directly or indirectly owned or controlled by
another corporation or by any government.
DIVIDENDS
We have paid cash dividends on our ordinary shares since 1985. The
board of directors' policy is to pay cash dividends out of accumulated profits
on a quarterly basis if funds are available. As of February 29, 2000, our board
of directors have established a policy, although not a binding obligation, that,
subject to annual review by the board of directors, our company will maintain a
dividend pay-out ratio in the range of 50% to 60% of net income. However, our
payment of any future cash dividends will still depend upon our earnings,
financial condition, capital demand and other factors. The board of
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directors declares and approves all interim dividends. The final dividend in
each year, if any, is recommended by the board of directors and must be, and has
always been, approved by our shareholders before distribution.
Listed below for each quarter of the last two fiscal years is the
amount of cash dividend, in U.S. dollars, declared on our issued and outstanding
ordinary shares and redeemable preference shares.
First Quarter 1999 $ 0.04 Per Share
Second Quarter 1999 0.04 Per Share
Third Quarter 1999 0.04 Per Share
Fourth Quarter 1999 0.08 Per Share
First Quarter 2000 0.08 Per Share
Second Quarter 2000 0.08 Per Share
Third Quarter 2000 0.08 Per Share
Fourth Quarter 2000 0.10 Per Share
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
Our company is not subject to any governmental laws, decrees or
regulations in the Cayman Islands which restrict the export or import of
capital, or that affect the remittance of dividends, interest or other payments
to non-resident holders of our securities. The Cayman Islands does not impose
any limitations on the right of non-resident owners to hold or vote the ordinary
shares other than stated below. There are no exchange control restrictions in
the Cayman Islands.
In accordance with the terms of our license, the Cayman Islands'
government has the right to approve, in advance, any transfer of the ordinary
shares which increases the holdings of any shareholder who already owns more
than 5% of the issued share capital of the company or any transfer which would
increase the ownership of any existing or new shareholder above 5%. In
accordance with our Articles of Association, all share transfers are subject to
the approval of the board of directors at their sole discretion. To date, the
board of directors has never exercised the right to decline to register a
transfer. This provision has been incorporated into the our Articles of
Association in order to ensure that the board of directors is not put into a
position where it is legally obligated to register a transfer which would cause
our company to be in breach of the License. Although not intended as such, this
provision may discourage or prevent a change in control of our company by merger
or otherwise.
TAXATION
The Cayman Islands presently impose no taxes on profit, income, capital
gains, or appreciations of our company and no taxes are currently imposed in the
Cayman Islands on profit, income, capital gains, or appreciations of the holders
of our securities or in the nature of estate duty, inheritance, or capital
transfer tax. There is no income tax treaty between the United States and the
Cayman Islands.
A major source of revenue to the Cayman Islands government is a 7.5% or
9% stamp tax, depending on location, on the transfer of ownership of land in the
Cayman Islands. To prevent stamp tax avoidance by transfer of the ownership of
the shares of a company which owns land in the Cayman Islands (as opposed to
transfer of the land itself), The Land Holding Companies (Share Transfer Tax)
Law was passed in 1976. The effect of this law is to charge a company which owns
land or an interest in land in the Cayman Islands a 7.5% tax on the value of its
land or interest in land attributable to each share transferred. The stamp tax
calculation does not take into account the proportion which the value of a
company's Cayman land or interest bears to its total assets and whether the
intention of the transfer is to
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transfer ownership of a part of a company's entire business or a part of its
Cayman land or interest. We asked the Cayman Islands government to exempt our
shareholders from the landholding companies tax which our shareholders have to
pay on disposals of their shares. We are engaged in discussions with the Cayman
Islands government regarding this matter.
DESCRIPTION OF SECURITIES
ORDINARY SHARES
We are authorized to issue 9,900,000 ordinary shares, par value CI$1.00
per share. At March 19, 2001, 3,862,943 ordinary shares were issued and
outstanding. Holders of ordinary shares may cast one vote for each share held of
record at all shareholder meetings. All voting is non-cumulative. Holders of
more than 50% of the outstanding shares present and voting at an annual meeting
at which a quorum is present are able to elect all of our directors. Holders of
ordinary shares do not have preemptive rights or rights to convert their
ordinary shares into any other securities. All of the outstanding ordinary
shares are fully paid and non-assessable.
Holders of ordinary shares are entitled to receive ratably dividends,
if any, distributed out of our accumulated profits. Subject to the preferential
rights of holders of the redeemable preferred shares, upon liquidation, all
holders of ordinary shares are entitled to participate pro rata in our assets
which are available for distribution.
REDEEMABLE PREFERRED SHARES
We are authorized to issue 100,000 redeemable preferred shares, par
value CI$1.00 per share. At March 19, 2001, 33,634 redeemable preferred shares
were issued and outstanding.
Holders of redeemable preferred shares may cast one vote for each share
held of record at all shareholder meetings and are entitled to receive ratably
dividends, if any, distributed out of our accumulated profits. All voting is on
a non-cumulative basis. Upon a liquidation of our company, the redeemable
preferred shares rank in preference to the ordinary shares with respect to the
repayment of the par value of redeemable preferred shares plus any premium paid
or credited on the purchase of the shares. Under our share incentive plan, we
may redeem any redeemable preferred shares issued to an employee. The ordinary
shares and the redeemable preferred shares rank equally in all other respects.
CLASS B ORDINARY SHARES
In 1997, we adopted an option deed under which option holders may
exercise rights to purchase our class B ordinary shares, par value CI$1.00 per
share. As of the date of this Annual Report, there are no class B ordinary
shares issued and outstanding.
Holders of class B ordinary shares are entitled to the same dividends
paid on ordinary shares and redeemable preferred shares, and we cannot pay a
dividend on the ordinary shares without paying the same dividend on the class B
ordinary shares, and vice versa. We cannot redeem the class B ordinary shares,
and the holders of the class B ordinary shares are not entitled to any
repayments of capital upon the dissolution of our company.
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If we enter into a transaction in which ordinary shares are exchanged
for securities or other consideration of another company, then the class B
ordinary shares will be also be exchanged pursuant to a formula. The class B
ordinary shares and the ordinary shares rank equally in all other respects.
OUTSTANDING WARRANTS
On April 9, 1996, we issued warrants to purchase up to 50,000 ordinary
shares at $6.30 per share to the underwriter of our initial public offering. As
of the date of this Annual Report, all of these warrants are issued and
outstanding. These warrants must be exercised before April 3, 2001. We have
granted the underwriter of our initial public offering one demand and unlimited
piggyback registration rights with respect to these warrants and the ordinary
shares underlying the warrants. It is our understanding that the underwriter is
no longer trading as a going concern.
OPTION DEED
In 1997, in response to an attempt by Argyle/Cay Water, Ltd. to acquire
up to 50% of our company, our board of directors approved an option deed, which
is similar to a "poison pill." The option deed may delay or prevent a change in
control of our company.
The option deed grants to each holder of an ordinary and redeemable
preference share an option to purchase one one-hundredth of a class B ordinary
share at an exercise price of $37.50, subject to adjustment. If a takeover
attempt occurs, each shareholder would be able to exercise the option and
receive ordinary shares with a value equal to twice the exercise price of the
option. Under circumstances described in the option deed, instead of receiving
ordinary shares, we may issue to each shareholder cash or other equity or debt
securities of our company, or the equity securities of the acquiring company, as
the case may be, with a value equal to twice the exercise price of the option.
Takeover events that would trigger the options include a person or
group becoming the owner of 20% or more of our outstanding ordinary shares or
the commencement of, or announcement of an intention to make, a tender offer or
exchange offer, which upon completion would result in the beneficial ownership
by a person or group of 20% or more of the outstanding ordinary shares.
Accordingly, exercise of the options may cause substantial dilution to a person
who attempts to acquire our company.
The options are attached to each ordinary share and redeemable
preference share and presently have no monetary value. The options will not
trade separately from our shares unless and until they become exercisable. The
options, which expire on July 31, 2007, may be redeemed, at the option of our
board of directors, at a price of CI$.01 per option at any time until ten
business days following the date that a group or person acquires ownership of
20% or more of the outstanding ordinary shares. Any amendment to the option deed
is subject to the terms and conditions of our agreement with Argyle/Cay-Water,
Ltd. described in the section of this Annual Report entitled "ITEM 10. DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT"
The option deed may have certain anti-takeover effects, although it is
not intended to prevent any acquisition or business combination that is at a
fair price and otherwise in the best interests of our company and our
shareholders as determined by our board of directors. However, a shareholder
could potentially disagree with the board's determination of what constitutes a
fair price or the best interests of our company and our shareholders.
The full terms and conditions of the options are contained in an option
deed between us and our option agent, American Stock Transfer & Trust Company.
The above description of the options is a
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summary only and does not purport to be complete. You should read the entire
option deed to understand the terms of the options.
TRANSFER AGENT
The transfer agent for the ordinary shares is American Stock Transfer &
Trust Company, New York, New York.
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ITEM 6. SELECTED FINANCIAL DATA
As a result of a management decision we have voluntarily adopted
accounting principles generally accepted in the United States of America
("US-GAAP") effective January 1, 2000. Previously, annual financial statements
were prepared in accordance with International Accounting Standards ("IAS"). As
a result all prior periods' financial information presented in the selected
financial data have been prepared in accordance with "US-GAAP".
On July 21, 2000, we acquired all of the issued and outstanding capital
stock of Seatec Belize Ltd., now renamed Belize Water Ltd., a company organized
under the laws of Belize. This acquisition has been accounted for by the
purchase method.
The consolidated financial statements include the accounts of our
wholly-owned subsidiary Belize Water Ltd. The operating results of Belize Water
Ltd. have been included in the financial statements since the date of the
acquisition (July 21, 2000). All inter-company balances and transactions have
been eliminated.
Set forth below is selected financial data based upon our consolidated
financial statements. The table contains information (expressed in US dollars)
derived from our audited consolidated financial statements for the five-year
period ended December 31, 2000. This selected financial data should be read in
conjunction with the more detailed financial statements and related notes
thereto contained elsewhere in this Annual Report. The audited consolidated
financial statements for the years ended December 31, 1997 and 1996 and
accountant's reports thereon are not included in this Annual Report.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
STATEMENT OF INCOME DATA:
Water Sales $ 9,576,959 $ 7,936,118 $ 7,925,232 $ 7,214,557 $ 6,150,700
Operating Income (1) 2,404,820 1,687,293 1,451,933 1,210,288 961,632
Net Income (1) 2,404,820 1,569,717 1,451,933 1,112,402 961,632
BALANCE SHEET DATA:
Total Assets 21,845,672 16,431,321 15,594,021 14,814,817 14,350,387
Long Term Debt Obligation 1,131,986 1,926,786 2,470,112 1,769,746 1,963,372
Long Term Purchase Obligation -- -- 320,141 1,265,275 1,692,011
Redeemable Preferred Stock 40,361 49,270 52,686 40,906 51,172
DIVIDENDS DECLARED PER SHARE 0.34 0.20 0.19 0.13 0.11
BASIC EARNINGS PER SHARE 0.68 0.51 0.47 0.37 0.35
BASED ON NUMBER OF SHARES 3,532,501 3,044,293 3,055,845 2,986,216 2,760,693
DILUTED EARNINGS PER SHARE 0.67 0.49 0.45 0.35 0.32
BASED ON WEIGHTED NUMBER OF SHARES 3,616,271 3,188,048 3,191,583 3,136,574 2,984,945
(1) Operating Income represents net income from operations before a
cumulative change in accounting principle in 1999 of $117,576. (See ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Change in Accounting Principle), and an exception item of
$97,886 in 1997 representing the remaining book value of the vapor
compression equipment previously used by our company that was written down
to zero.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Our objective is to provide water services in areas where the supply of
potable water is scarce and where the use of reverse osmosis technology to
produce potable water is economically feasible. We have been operating our
business on Grand Cayman Island since 1973 and have been using reverse osmosis
technology to convert seawater to potable water since 1989. There is no natural
supply of fresh water on the Cayman Islands. On July 21, 2000 we acquired Seatec
Belize Ltd., a company organized under the laws of Belize. Seatec Belize Ltd.,
now renamed Belize Water Ltd., owns and operates a reverse osmosis plant in
Ambergris Caye, Belize and provides potable water to WASA. In December 2000, we
signed a water supply agreement with a Bahamian Developer, to provide potable
water to Bimini Sands Resort, a property in South Bimini Island, Bahamas. We are
also in discussions with the Government of the Bahamas regarding the provision
of potable water to other properties in Bimini, including residential,
commercial and tourist properties.
For the year ended December 31, 2000, our net income increased by 53%
to $2,404,820, when compared with net income of $1,569,717 in 1999. There are no
income taxes in the Cayman Islands. In October 1999, we doubled our per share
dividend to ordinary shareholders from $0.16 to $0.32 per year and in December
2000, we increased it from $0.32 to $0.40 per year, payable on a quarterly
basis. As of February 29, 2000, our board of directors has established a policy
that our company will maintain a dividend pay-out ratio in the range of 50% to
60% of net income. This policy is subject to modification by our board of
directors. We expect to continue increasing our dividend as our earnings grow.
We currently have an exclusive license from the Cayman Islands
government to provide potable water in Seven Mile Beach and West Bay, Grand
Cayman Island. We obtain water from two reverse osmosis plants on Grand Cayman,
which together are capable of producing 1.8 million U.S. gallons per day, or
approximately 657 million U.S. gallons per year. We own our reverse osmosis
plants and substantially all of the 64-miles of our underground distribution
infrastructure. For the year ended December 31, 2000, we supplied 451 million
U.S. gallons of water to hotels, residential customers, condominiums, other
commercial customers and government facilities.
We also have operations in Ambergris Caye, Belize which provides water
from one reverse osmosis seawater conversion plant, capable of producing 420,000
U.S. gallons per day or approximately 153 million U.S. gallons per year, to WASA
which distributes the water to residential, commercial and tourist properties in
Ambergris Caye, Belize. For the year ended December 31, 2000, we supplied
approximately 39.1 million U.S. gallons to WASA.
We also entered into a water supply agreement with South Bimini
International Ltd., a company incorporated in the Commonwealth of Bahamas. Under
the agreement South Bimini International Ltd. is
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committed to pay for a minimum of 3,000 US Gallons of water per residential unit
per month (36,000 US Gallons residential per unit per year) on a take or pay
basis in relation to the Bimini Sands Resort property in South Bimini Island,
Bahamas. The price of water supplied is adjusted for inflation annually based on
Bahamas government indices. The implementation of the agreement is subject to
approval by certain regulatory bodies, which is expected by May 2001. No water
sales resulted from this agreement for the year ended December 31, 2000.
Considerable development is taking place on Grand Cayman Island, and
particularly in our licensed areas, to accommodate both the growing local
population and increased tourism. Because our license requires us to supply
water to developments in our licensed area, the planning department of the
Cayman Islands government routinely advises us of proposed developments in our
licensed area. This advance notice allows us to manage our production capacity
to meet anticipated demand. We believe that we have or have contracted for a
sufficient supply of water to meet the foreseeable future demand.
We installed our first reverse osmosis plant in December 1989 at
Governor's Harbour, located in the Seven Mile Beach area, through a water
purchase agreement with Ocean Conversion (Cayman) Ltd. Under the agreement,
Ocean Conversion operates the plant, and we must purchase a minimum volume of
water from Ocean Conversion. In addition, Ocean Conversion has to provide to us
additional volumes of water upon demand up to a fixed level, and any excess on a
best efforts basis. The agreement requires a plant capacity of 1.1 million U.S.
gallons per day, which is the maximum capacity of the plant. We make installment
payments to Ocean Conversion against the cost of the plant as part of the
purchase price of the water provided to us by them. As of December 31, 2000, all
installment payments against the cost of the plant have been completed and no
amounts remain owing. The agreement was amended in December 2000 to increase the
production capacity of the plant to 1.2 million US gallons per day. The
agreement expires on December 31, 2004, at which time we will have fulfilled our
obligations under the agreement and we will be the sole owner and sole operator
of the plant. Upon expiration of our agreement with Ocean Conversion, we expect
that our operating costs at Governor's Harbour will decrease significantly.
In 1995, we installed our second reverse osmosis seawater conversion
plant, this one at our West Bay site. We own and are responsible for operation
and maintenance of the West Bay plant. This plant is capable of producing
710,000 U.S. gallons per day of potable water.
OUR OPERATIONS UNDER THE LICENSE IN THE CAYMAN ISLANDS
The Cayman Islands government issued us an exclusive operational
license under The Water (Production and Supply) Law of 1979. The license gives
us the exclusive right to process potable water from seawater and then sell and
distribute that water by pipeline to Seven Mile Beach and West Bay, Grand Cayman
Island. The original twenty-year license was renegotiated in 1990 and extended
to expand our service area to include West Bay. The license terminates, unless
further renewed, on July 11, 2010.
Two years prior to the expiration of the license, we have the right to
negotiate with the government to extend the license for an additional term.
Unless we are in default under the license, the government may not grant a
license to any other party without first offering the license to us on terms
that are no less favorable than those which the government offers to a third
party.
We must provide, within our licensed area, any requested piped water
service which, in the opinion of the executive council of the Cayman Islands
government, is commercially feasible. Where supply is not considered
commercially feasible, we may require the potential customer to contribute
toward the capital costs of pipe laying. We then repay these contributions to
the customer, without interest, by way of a discount of 10% on future billings
for water sales until this indebtedness has been repaid. We have been installing
additional pipeline when we consider it to be commercially feasible, and
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the Cayman Islands government has never objected to our determination regarding
commercial feasibility.
Under the license, we pay a royalty to the government of 7.5% of our
gross potable water sales revenue. The base selling price of water under the
license presently varies between $19.00 and $22.79 per 1,000 U.S. gallons,
depending upon the type and location of the customer and the monthly volume of
water purchased. The license provides for an automatic adjustment for inflation
on an annual basis, subject to temporary limited exceptions, and an automatic
adjustment for the cost of electricity on a monthly basis. The government
reviews and approves the calculations of the price adjustments for inflation and
electricity costs.
If we want to increase our prices for any reason other than inflation,
we have to request prior approval of the executive council of the Cayman Islands
government. If the parties fail to agree, the matter is referred to arbitration.
The last price increase that we requested, other than automatic inflation
adjustments since 1990, was granted in full in June 1985.
RESIDENTIAL AND COMMERCIAL OPERATIONS IN THE CAYMAN ISLANDS
We enter into standard contracts with hotels, condominiums and other
properties located in our licensed area to provide potable water to such
properties. We currently have agreements on differing terms and rates to supply
potable water to the 309-room Marriott Hotel and the 343- room Westin Hotel, and
to supply non-potable water to the SafeHaven Golf Course. We bill on a monthly
basis based on meter readings. Receivables are typically collected within 30 or
35 days after the billing date and receivables not collected within 45 days
subject the customer to disconnection from our water service. In 2000, we
collected 99.9% of our receivables. Customers who have had their service
disconnected must pay re-connection charges.
In the Seven Mile Beach area, our primary customers are the hotels and
condominium complexes which serve the tourists. In the West Bay area, our
primary customers are residential homes. Occasionally, we also supply to, or buy
from, on an as-needed basis, the Water Authority-Cayman, which serves the
business district of George Town and other parts of Grand Cayman Island.
WASTEWATER SERVICES IN THE CAYMAN ISLANDS
We began providing sewerage services on Grand Cayman in 1973. The
Cayman Islands government, through Water Authority-Cayman, constructed a public
sewerage system in part of the Seven Mile Beach area where Governor's Harbour is
located. On September 1, 1988, Water Authority-Cayman began processing sewage
delivered by the pipelines and lift stations in that area. We stopped our
processing of sewage on that date. Water Authority-Cayman currently directly
bills our former sewerage customers for its services. We have advised the Cayman
Islands government that we do not intend to operate or maintain the system after
March 31, 2001, after having extended a previous deadline of November 30, 2000
upon the request of the Cayman Islands government.
DEMAND FOR WATER IN THE CAYMAN ISLANDS
In the past, demand on our pipeline distribution has varied throughout
the year. However, an increase in year-round tourism in recent years has created
more uniform demand for water throughout the year. Demand depends upon the
number of tourists visiting the Cayman Islands and the amount of rainfall during
any particular time of the year. Traditionally the highest demand arises in the
first two quarters of the calendar year which corresponds with the high tourist
season and the lowest demand arises in the third quarter of the year which
corresponds with the period with the most rainfall and the least amount of
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tourist arrivals. In general, 75% of tourists come from the United States. Our
operating results in any particular quarter are not indicative of the results to
be expected for the full fiscal year. The table below lists the total volume of
water we supplied on a quarterly basis for the years ended December 31, 2000,
1999, 1998, 1997 and 1996 to all our customers:
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(in thousands of U.S. gallons)
First Quarter 125,869 107,031 109,255 100,853 85,998
Second Quarter 117,766 113,007 108,334 98,473 86,559
Third Quarter 100,324 90,888 90,950 87,483 81,241
Fourth Quarter 107,404 90,421 92,011 89,941 74,666
------- ------- ------- ------- -------
Total 451,363 401,347 400,550 376,750 328,464
======= ======= ======= ======= =======
OUR OPERATIONS UNDER THE CONTRACT IN BELIZE
We have entered into a contract with WASA to supply a minimum of
135,000 US gallons of water per day to WASA expiring in 2011. At the expiry of
the contract, WASA may at its option extend the term of the agreement or
purchase the plant outright.
The base price of water supplied, and adjustments thereto, are
determined by the terms of the contract, which provides for adjustments based
upon the movement in the government price indices specified in the contract, as
well as, monthly adjustments for changes in the cost of fuel.
DEMAND FOR WATER IN BELIZE
We have not operated our plant in Belize for a full year. However we
believe that water sales in Belize will be cyclical, and on a similar cycle to
sales in the Cayman Islands, since both operations cater to similar tourist
markets. We believe that water sales will be higher in the future since sales
were limited before March 2000 because the production capacity of the water
plant was lower than demand. We have already generated sales in January and
February 2001 which are 79% higher than sales during the same period in 2000.
While early 2001 sales indicate an increasing trend, it may not be indicative of
similarly high percentage increases in the future because of production
limitations in the first quarter of 2000.
The total volume of water we supplied (in thousands of U.S. gallons) to the
Water and Sewage Authority of Belize in each of the third and fourth quarters of
the year ended December 31, 2000 was 19,433 and 19,624, respectively.
WATER SALES AND OTHER INCOME ("TOTAL INCOME")
Our total income includes water sales income, other income and interest
income from all of our business segments. Water sales income is comprised of
water sales to our individual Cayman Islands customers and to the Water and
Sewerage Authority of Belize. Other income consists of monthly meter rental
charges, sales of water to trucks which deliver to customers not connected to
our pipeline in the Cayman Islands, connection charges for new customers and
re-connection charges for delinquent accounts. In April 1999, we settled a
dispute with the owner of the Hyatt Hotel and the developer of the Britannia
development, who supplied water to the Hyatt Hotel, a hotel located within our
Seven Mile
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Beach license area. Accordingly, other income also consists of settlement fee
payments for the supply of water to the Britannia development by the Hyatt
Hotel, which has its own water production facility. Interest income relates to
interest derived from excess cash balances placed on term deposit.
EXPENSES
Expenses include cost of water sales ("direct production expenses") and
our indirect, or general and administrative expenses. Direct production expenses
include royalty payments to the Cayman Islands government, electricity and
chemical expenses, payments to Ocean Conversion relating to operation of the
Governor's Harbour plant, production equipment and facility depreciation costs,
equipment maintenance and expenses and operational staff costs. Indirect, or
general and administrative expenses, consist primarily of salaries and employee
benefits for personnel, administrative office lease payments, legal and
professional expenses and financing costs. There are no income taxes in the
Cayman Islands and we are currently exempt from taxes in Belize.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999.
WATER SALES AND OTHER INCOME ("TOTAL INCOME")
Total income increased by 22% from $8,249,988 to $10,025,686 for the
years ended December 31, 1999 and 2000, respectively. Part of this increase is
due to the income generated in a five month period ended December 31, 2000 by
our newly acquired Belize operation. This income amounts to $464,928 which makes
up 26% of the increase. The additional 74% of the increase is due to a full
twelve months of revenue from the Hyatt Settlement versus six months in 1999,
inflationary increase in base rates, as well as, generic growth in our customer
base, due to increased housing and new hotel properties which came on line in
our Cayman Islands franchise area.
EXPENSES
Direct expenses increased by 14% from $4,770,179 to $5,423,297 for the
years ended December 31, 1999 and 2000, respectively. Part of this increase is
due to our newly acquired Belize operation. Our direct expenses from Belize, for
the five month period ended December 31, 2000, amount to $250,352 which makes up
40% of the increase. The additional 60% of the increase is due to costs of
producing additional water to provide for the increased sales. As a percentage
of total income, direct expenses decreased from 58% of total income to 54% of
total income for the years ended December 31, 1999 and 2000, respectively.
Indirect expenses increased by 23% from $1,792,516 to $2,197,569 for
the years ended December 31, 1999 and 2000, respectively. Part of this increase
is due to our indirect expenses from Belize. For the five month period ended
December 31, 2000, indirect expenses from Belize amounted to $33,422, which
contributed to 8% of the increase. The additional 92% of the increase is due to
increase employment costs, increased professional fees due to the change in
accounting policy and the voluntary increase of SEC disclosure, increased
financial and investor public relations and increased expenditures looking for
new business. As a percentage of total income, indirect expenses remained
unchanged at 22% of total income for the years ended December 31, 1999 and 2000,
respectively.
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YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998.
WATER SALES AND OTHER INCOME ("TOTAL INCOME")
Total income increased by 1% from $8,187,714 to $8,249,988 for the
years ended December 31, 1998 and 1999, respectively. Total income increased
despite the closure of two hotels in May and August 1998 consisting of a total
of 350 rooms in the Seven Mile Beach area. The decline in available hotel rooms,
in addition to year 2000 concerns over the Christmas 1999 period, contributed to
a corresponding decrease in tourist arrivals during the year. In addition, our
automatic inflation adjustment led to a slight decrease in prices for most of
our customers in the West Bay and Seven Mile Beach areas. The decline in
water sales in the Seven Mile Beach area, however, was more than offset by an
increase in sales volume to new West Bay customers and new six months of
revenues from the Hyatt settlement.
EXPENSES
Direct expenses decreased by 8% from $5,166,401 to $4,770,179 for the
years ended December 31, 1998 and 1999, respectively. Direct expenses decreased
primarily due to the termination of the United States Filter contract, which
immediately decreased costs at the West Bay plant. As a percentage of total
income, direct expenses decreased from 63% of total income to 58% for the years
ended December 31, 1998 and 1999, respectively.
Indirect expenses increased by 14% from $1,569,380 to $1,792,516 for
the years ended December 31, 1998 and 1999, respectively, primarily due to
substantial legal costs incurred in the first quarter of 1999. These legal costs
principally relate to the final settlement of the Britannia development lawsuit
in April 1999. All legal costs were expensed as incurred. Other indirect costs,
such as executive and administrative staff costs, rent and utilities, increased
in line with inflation. As a percentage of total income, indirect expenses
increased from 19% of total income to 22% of total income for the years ended
December 31, 1998 and 1999, respectively.
CHANGE IN ACCOUNTING PRINCIPLE
Statement of Position 98-5 "Reporting on the Costs of Start-Up
Activities" requires start up costs to be expensed as incurred rather than
deferred. As a result, the cumulative effect of this change was $117,576, and
this item was recorded as a change in accounting principle in the 1999
Consolidated Statements of Income.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
We generate cash from our plant operations at West Bay, Seven Mile
Beach and Ambergris Caye, Belize and from the sale of our shares and through our
loans and facilities obtained from two banks. Cash flow from operating
activities was provided by our plant operations, and is impacted by operating
and maintenance expenses, the timeliness and adequacy of rate increases,
excluding automatic adjustments to our rates for inflation and electricity
costs, and various factors affecting tourism in the Cayman Islands and Belize,
such as weather conditions and the economy. We use cash to fund our operations
in the Cayman Islands and Belize, to make payments under our operating agreement
with Ocean Conversion for our Governor's Harbour plant, to expand our
infrastructure, to pay dividends, to repay principal on our loans and to
repurchase our shares when appropriate.
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OPERATING ACTIVITIES
Net cash from operating activities in 2000 was $3,922,712, compared to
$2,528,921 in 1999. This increase was primarily due to an increase in cash
generated from operations. We expect cash from operating activities to continue
to increase in 2001 as we continue to generate customer revenues from our Belize
operations acquired in July 2000.
WORKING CAPITAL
At December 31, 2000, we had a working capital deficiency of $579,942,
primarily due to the fourth quarter interim dividends payable which is recorded
as a liability within accounts payable and other liabilities for unexercised
stock option compensation costs. Management believes that sufficient resources,
from funds generated by operations and existing unutilized credit lines, are
available to maintain liquidity.
INVESTING ACTIVITIES
Cash used in investing activities in 2000 was $6,268,738, compared to
$1,541,448 in 1999. On July 21, 2000, we acquired all the issued and outstanding
capital stock of Seatec Belize Ltd., now renamed Belize Water Ltd.. Also in 2000
we purchased water production and distribution equipment to expand our
infrastructure in the Cayman Islands. In 1999, investing activities consisted
primarily of purchase of property, plant and equipment.
FINANCING ACTIVITIES
Cash provided by financing activities in 2000 was $2,547,717, compared
to cash used in 1999 of $1,404,359. In May and June 2000, we completed a second
public offering totaling 773,000 ordinary shares at a per share price of $7.50.
After deducting underwriting commissions and other offering expenses, our net
proceeds from the offering was $5,384,102 We used the proceeds from this
offering to retire approximately $2.1 million of existing debt, for
implementation of our growth strategy and for capital expenditures and general
corporate purposes.
On December 3, 1998, our shareholders approved a share repurchase
program. As of December 31, 1999, we had repurchased 110,752 ordinary shares at
an average cost of $7.44 per share, and on January 6, 2000 we repurchased 79,100
shares at $6.25 per share from a shareholder whose assets were being liquidated.
No other shares were repurchased during the year ended December 31, 2000. As of
October 26, 1999, we suspended the open-market repurchase of our shares.
Our Governor's Harbour plant was financed, through a capital lease, by
an increase in our long-term water purchase obligation. In 1991, we financed the
expansion of the water distribution system in the West Bay area with a
$2,500,000 loan issued by the European Investment Bank and our existing credit
facility with the Royal Bank of Canada. The interest rate on the European
Investment Bank loan is the bank's prevailing lending rate at the time of
draw-down less a subsidy of 4%. As of December 31, 2000, $1,351,566 is
outstanding under the European Investment Bank loan. Our total lending facility
from the Royal Bank of Canada comprises a revolving line of credit with a limit
of $1,000,000 and term loans with a limit of $4,000,000. In 1999, a term loan of
$1,000,000 was drawn down. We made an accelerated payment of $200,000 against
this loan in 1999 using excess operating cash flow and repaid the
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outstanding amount of approximately $570,000 during the year ended December 31,
2000 from the proceeds of our second public share issue. The Royal Bank of
Canada lending facility and the European Investment Bank loan are secured by all
of our land and other assets.
During the year ended December 31, 2000, we declared three quarterly
interim dividends of $0.08 per share per quarter and an interim dividend of
$0.10 per share for the fourth quarter, compared to $0.04 per share interim
dividends declared in the first three quarters of 1999 and an interim dividend
of $0.08 per share for the forth quarter of 1999.
MATERIAL COMMITMENTS FOR CAPITAL EXPENDITURES
As at December 31, 2000, we had approximately $625,000 committed for
capital expenditures for the Bimini Sands Resort development. These expenditures
are for the construction of the plant site, as well as, installation of pipeline
for distribution. We intend to finance this project using existing credit
facilities.
IMPACT OF INFLATION
Under the terms of our Cayman Islands license and Belize water sales
agreement, there is an automatic price adjustment for inflation on an annual
basis, subject to temporary exceptions. We therefore believe that the impact of
inflation on our net income will not be material.
EXCHANGE RATES
The official exchange rate for conversion of United States Dollars into
Cayman Islands Dollars has been fixed since 1974 at U.S. $1.20 per CI$1.00.
The official exchange rate for conversion of United States Dollars into
Belizian Dollars has been fixed since 1976 at U.S.$0.50 per BZE$1.00.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
We are subject to the following recent accounting pronouncements:
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). Among other things, SAB 101 discusses the SEC staff's view on accounting
for connection fees received from customers. We have determined that SAB 101
does not impact our revenue recognition policy and that no adjustments arise
from compliance with this pronouncement.
Financial Accounting Standards board ("FASB") Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of APB Opinion 25" was effective July 1, 2000. This
Interpretation clarifies the application of APB Opinion 25 for certain issues.
We have determined that the interpretation does not impact our treatment of
stock compensation and that no adjustments arise from compliance with this
pronouncement.
FORWARD-LOOKING STATEMENTS
We discuss in this Annual Report and in documents which we have
incorporated into this Annual Report by reference matters which are not
historical facts, but which are "forward-looking statements." We intend these
forward looking statements to qualify for safe harbor from liability established
by the Private Securities Litigation Reform Act of 1995. These forward-looking
statements include, but are not
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limited to, our future plans, objectives, expectations and events, assumptions
and estimates about our company and our industry in general.
The forward-looking statements in this Annual Report reflect what we
currently anticipate will happen. What actually happens could differ materially
from what we currently anticipate will happen. We are not promising to make any
public announcement when we think forward looking statements in this Annual
Report are no longer accurate whether as a result of new information, what
actually happens in the future or for any other reason.
Important matters that may affect what will actually happen include,
but are not limited to, tourism in the Cayman Islands, Belize and Bahamas,
scheduled new construction within our operating areas, the U.S., Cayman Islands,
Belize and Bahamas economies, regulatory matters, weather conditions in the
Cayman Islands, Belize and Bahamas, availability of capital for expansion of our
operations, and other factors described in the "RISK FACTORS" section below as
well as elsewhere in this Annual Report.
RISK FACTORS
We have described for you below some risks which may materially and
adversely affect our business, financial condition or results of operations.
WE RELY ON AN EXCLUSIVE LICENSE IN THE CAYMAN ISLANDS WHICH MAY NOT BE
RENEWED IN THE FUTURE AND UNDER WHICH WE MUST OBTAIN PRIOR APPROVAL FOR AN
INCREASE IN OUR RATES FOR ANY REASON OTHER THAN INFLATION. We presently operate
as a public water utility under an exclusive license originally issued to us in
December 1979 by the government of the Cayman Islands. We own our production
infrastructure and substantially all of our distribution infrastructure.
Our license expires on July 11, 2010. If we are not in default of any
terms of the license, we have a right of first refusal to renew the license on
terms that are no less favorable than those which the government offers to a
third party. Nevertheless, we cannot assure you that the government will renew
our license or that we will be able to negotiate a new license on satisfactory
terms.
Under our license, we must obtain prior approval from the Cayman
Islands government to increase our rates for any reason other than inflation.
Our ability to raise our rates is limited by this requirement, including
potential delays and costs involved in obtaining government approval for a rate
increase.
OUR BUSINESS IS AFFECTED BY TOURISM, WEATHER CONDITIONS, THE CAYMAN
ISLANDS ECONOMY, THE BELIZE ECONOMY AND THE U.S. economy. Tourist arrivals and
weather conditions within our operating areas impact the demand for our water.
Normally, the highest demand is in the first two quarters of each calendar year,
which corresponds with the high tourist season. Lowest demand for water arises
in the third quarter of each calendar year, which corresponds with the period
with the most rainfall and the least tourist arrivals. Approximately 75% of
tourists to the Cayman Islands come from the U.S. In addition, development
activity in the Cayman Islands often decreases during downturns in the U.S.
economy, which is tracked by the Cayman Islands economy. Accordingly, a
significant downturn in tourist arrivals to the Cayman Islands or in the U.S.
economy for any reason would be detrimental to our revenues and operating
results. As a result of the seasonal nature of our operations, the revenues and
profitability we achieve in any one quarter is not indicative of our expected
profitability for a full fiscal year.
WE MAY HAVE DIFFICULTY ACCOMPLISHING OUR GROWTH STRATEGY WITHIN AND
OUTSIDE OF OUR CURRENT OPERATING AREAS. Even though we have an exclusive license
for our present service area, our
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ability to expand our service area in the Cayman Islands is limited at the
discretion of the Cayman Islands government.
Further, part of our long-term growth strategy is to expand our water
supply and distribution operations to locations outside the Cayman Islands, such
as Belize and the Bahamas. Our expansion into new locations depends on our
ability to identify suitable new service territories and to obtain necessary
permits and licenses to operate in these territories.
Although we believe that we have sufficient capital to satisfy our
capital requirements for expansion in the Cayman Islands, Belize and Bahamas for
the next twelve months, we will need additional financing to further expand our
operations elsewhere. We cannot make any assurances to you that we will be able
to obtain the additional financing which we may need to expand our operations on
satisfactory terms, if at all.
Our expansion to territories outside our current operations includes
significant risks, including, but not limited to, the following:
o regulatory risks, including government relations difficulties,
local regulations and currency controls;
o risks related to operating in foreign countries, including
political instability, reliance on local economies,
environmental or geographical problems, shortages of materials
and skilled labor; and
o risks related to development of new operations, including
assessing the demand for water, engineering difficulties and
inability to begin operations as scheduled.
If our expansion plans are successful, we may have difficulties in
managing our growth outside our current operations. Expanding our operations to
areas outside the Cayman Islands, Belize and Bahamas will require us to hire and
train new personnel, expand our management information systems and control our
operating expenses. We cannot currently estimate the costs required or assure
you that any new operations outside our current operations will attain or
maintain profitability or that the results from these new operations will not
negatively impact our overall profitability.
OUR OPERATIONS IN THE CARIBBEAN COULD BE HARMED BY HURRICANES. The
Cayman Islands, Belize and Bahamas, like the rest of the Caribbean, are
susceptible to damage from hurricanes. A significant hurricane could cause major
damage to our equipment and properties and the properties of our customers,
including the large tourist properties. This would result in decreased revenues
from water sales until the damaged equipment and properties are repaired and the
tourism industry returned to the status quo before the hurricane.
WE ARE NOT FULLY INSURED AGAINST HURRICANE DAMAGE. The Cayman Islands
have been directly hit by one hurricane since we began operations in 1973 and
Belize has been directly hit by one hurricane since we began operations on July
21, 2000, and the damage to our properties and equipment was minimal. We are not
fully insured on our underground water distribution system on the Cayman
Islands, or the Governor's Harbour reservoirs which are constructed from earthen
berms, although we are fully insured on all of our other above-ground property
and equipment including our reverse osmosis equipment, machinery, other
equipment, buildings and the West Bay reservoir tanks at their estimated
replacement value. We will evaluate our needs and obtain the insurance coverage
that we believe is necessary for any new operations outside our current
operating areas. A severe hurricane which resulted
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in major damage to our properties and equipment could have a material adverse
affect on our operating results. Even though we are not fully insured, we have
mitigated the risks by implementing disaster recovery plans and obtaining
insurance for loss of revenue.
WE COULD BE NEGATIVELY AFFECTED BY POTENTIAL GOVERNMENT ACTIONS AND
REGULATIONS. There is always a possibility that the government may issue
legislation or adopt new regulations:
o restricting foreign ownership of our company;
o providing for the expropriation of our assets by the
government;
o providing for nationalization of public utilities by the
government;
o providing for different water quality standards;
o resulting in unilateral changes to or renegotiation of our
exclusive license or water supply contracts; or
o causing currency exchange fluctuations or devaluations or
changes in tax laws.
SERVICE OF PROCESS AND ENFORCEMENT OF LEGAL PROCEEDINGS AGAINST US IN
THE UNITED STATES MAY BE DIFFICULT TO OBTAIN. Service of process on our company
and our directors and officers, nine out of twelve of whom reside outside the
United States, may be difficult to obtain within the United States. Also, since
substantially all of our assets are located in the Cayman Islands, any judgment
obtained in the United States against us may not be collectible within the
United States.
Civil liabilities under the Securities Act of 1933 or the Securities
Exchange Act of 1934 for original actions instituted outside the Cayman Islands
may or may not be enforceable. There is no reciprocal enforcement of foreign
judgments between the United States and the Cayman Islands, so foreign judgments
originating from the United States are not directly enforceable in the Cayman
Islands.
A prevailing party in a United States proceeding against us or our
officers or directors would have to initiate a new proceeding in the Cayman
Islands using the United States judgment as evidence of the party's claim. Any
action would have to overcome available defenses in the Cayman Islands courts,
including, but not limited to:
o lack of competent jurisdiction in the United States courts
(including competent jurisdiction according to the rules of
private international law currently in effect in the Cayman
Islands);
o lack of due service of process in the United States
proceeding;
o that United States judgments or their enforcement are contrary
to the law, public policy, natural justice, security or
sovereignty of the Cayman Islands;
o that United States judgments were obtained by fraud or
conflict with any other valid judgment in the same matter
between the same parties; and
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o that proceedings between the same parties in the same matter
were pending in a Cayman Islands court at the time the lawsuit
was instituted in the United States court.
A United States judgment awarding remedies unobtainable in any action
in the courts of the Cayman Islands (for example, treble damages, which would
probably be regarded as penalties), probably would not be enforceable under any
circumstances.
WE RELY HEAVILY ON THE EFFORTS OF SEVERAL KEY EMPLOYEES. Our success
depends upon the abilities of our executive officers. In particular, the loss of
the services of Jeffrey Parker, our Chairman and Chief Executive Officer, at any
time could be detrimental to our operations and our continued success. Although
Mr. Parker has entered into an employment agreement extending until December 29,
2001, which extend automatically every year for an additional one-year term, we
cannot guarantee that Mr. Parker will continue to work for us during the term of
his agreement. Also, none of our employees has entered into a non-compete
agreement with us.
PROVISIONS IN OUR ARTICLES OF ASSOCIATION, REQUIREMENTS OF GOVERNMENT
APPROVAL AND AN OPTION DEED ADOPTED BY OUR BOARD OF DIRECTORS MAY DISCOURAGE A
CHANGE IN CONTROL OF OUR COMPANY AND MAY MAKE IT MORE DIFFICULT FOR YOU TO SELL
YOUR ORDINARY SHARES. An issuance or transfer of a number of shares which (a)
exceeds 5% of the issued shares of our company, or (b) would, upon registration,
result in any shareholder owning more than 5% of the issued shares, requires the
prior approval of the Cayman Islands government.
It may be difficult for a shareholder to acquire more than 5% of our
shares and be able to influence significantly our board of directors or obtain a
controlling equity interest in our company and change our management and
policies.
Our articles of association include provisions which may discourage or
prevent a change in control of our company. For instance, our board of directors
consists of three groups. Each group serves a staggered term of three years
before the directors in the group are up for re-election. Also, the board of
directors may refuse to register any transfer of shares on our books. This
provision of the articles of association ensures that the board of directors is
not legally obligated to register a share transfer which would cause us to be in
breach of the government license in the Cayman Islands as discussed above. Our
board of directors has never refused to approve the registration of the transfer
of shares.
We have also adopted an option deed, which is similar to a poison pill.
The option deed will discourage a change in control of our company by causing
substantial dilution to a person or group who attempts to acquire our company on
terms not approved by the board of directors.
As a result of these provisions which discourage or prevent an
unfriendly or unapproved change in control of our company, you may not have an
opportunity to sell your ordinary shares at a higher market price, which, at
least temporarily, typically accompanies attempts to acquire control of a
company through a tender offer, open market purchases or otherwise.
WE ARE IN TECHNICAL BREACH OF THE TERMS OF OUR LICENSE. As stated
above, our Cayman Islands license requires that government approves in advance
any issuance or transfer of ordinary shares which represents more than 5% of the
issued shares, or which would increase the ownership of any shareholder above 5%
of the issued shares of our company.
More than 5% of our issued and outstanding ordinary shares are and in the
future may be registered in the name of Cede and Co. Cede and Co. is the
nominee for the Depository Trust Company, otherwise
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know as DTC, which is a clearing agency for shares held by participating banks
and brokers. . We do not believe that these shareholdings by Cede and Co.
constitute a breach of the intent of the license. We believe that the purpose of
this clause of the license is to allow the Government to approve significant
shareholders of the company. Cede and Co. and Depository Trust Company, however,
act solely as the nominee for banks and brokers, and have no beneficial
ownership in the ordinary shares of common stock. Nevertheless, our Cayman
Islands' legal counsel has advised us that these shareholdings by Cede & Co.,
which were not approved by the government, are probably a technical breach of
its license.
On June 1, 2000, we received a letter from an official of the Cayman
Islands' government stating that a public offering which we completed in 1996
without government approval was a breach of our license. We have responded to
this letter and stated that we do not believe that we are in breach of our
license. A meeting with officials of the Cayman Islands' government, to discuss
this matter, was held on June 16, 2000 in accordance with the Government's
suggestion in the June 1st letter. Discussion of the matter is ongoing as of the
date of this Annual Report. We have been advised by our Cayman Islands' legal
counsel that this letter does not constitute a formal "notice of breach" as
contemplated in the license. However, if a court determined that the
Government's approval of these offerings was required under the license, we
would be in breach of the license. Our legal counsel has advised us that in
order to make this determination, a court would have to disagree with our
interpretation of the license and dismiss several defenses that would be
available to us. These defenses include acquiescence and waiver on the part of
the Government with respect to these offerings.
THERE MAY BE A RISK OF VARIATION IN CURRENCY EXCHANGE RATES. Although
we report our results in United States dollars, the majority of our revenue is
earned in both Cayman Islands dollars and Belizian dollars. The Cayman Islands
dollar is presently fixed at U.S.$1.20 per CI$1.00 and the Belizian dollar is
presently fixed at U.S.$0.50 per BZE$1.00. These rates of exchange have been
fixed since 1974 and 1976 respectively. As a result, we do not hedge against any
exchange rate risk associated with our reporting in United States dollars.
However, if either of the fixed exchange rates becomes a floating exchange rate,
our results of operations could be affected.
SHARES ELIGIBLE FOR FUTURE SALE UNDER RULE 144 OF THE SECURITIES ACT
MAY ADVERSELY AFFECT THE MARKET PRICE OF THE ORDINARY SHARES. As of March 19,
2001, there were 3,862,943 ordinary shares issued and outstanding. With the
exception of ordinary shares held by officers, directors, ten percent
shareholders and other affiliates of our company, all or substantially all of
the shares may be immediately sold without registration under the Securities Act
of 1933. These shares may be sold under Rule 144(k) or under the exemption
provided by Section 4(1) of the Securities Act for transactions by any person
other than an issuer, underwriter or dealer. In addition, the estimated 808,809
ordinary shares held by our affiliates (as this term is defined in the
Securities Act of 1933) are eligible for resale in compliance with Rule 144 of
the Securities Act.
Generally, Rule 144 permits the sale, within any three-month period, of
shares in an amount which does not exceed the greater of one percent of the
then-outstanding ordinary shares or the average weekly trading volume during the
four calendar weeks before a sale. We can not predict the effect sales made
under Rule 144, or otherwise, may have on the then-prevailing market price of
the ordinary shares. Any substantial sale of the ordinary shares under Rule 144,
or otherwise, may have an adverse effect on the market price of the ordinary
shares.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our primary market risk exposure is in the area of currency exchange
rate fluctuations. Although we report our results in United States dollars, the
majority of our revenue is earned in both Cayman Islands dollars and Belizian
dollars. The Cayman Islands dollar is presently fixed at U.S.$1.20 per CI$1.00
and the Belizian dollar is presently fixed at U.S.$0.50 per BZE$1.00. These
rates of exchange have been fixed since 1974 and 1976, respectively. As a
result, we do not hedge against any exchange rate risk associated with our
reporting in United States dollars. However, if either of the fixed exchange
rates becomes a floating exchange rate, our results of operations could be
affected.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED WATER CO. LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
Report of Independent Accountants .......................................................... 32
Consolidated Balance Sheets as of December 31, 2000 and 1999 ............................... 33
Consolidated Statements of Income for each of the years ended December 31, 2000, 1999 and
1998 .................................................................................... 34
Consolidated Statements of Stockholders' Equity for each of the years ended December 31,
2000, 1999 and 1998 ..................................................................... 35
Consolidated Statements of Cash Flows for each of the years ended December 31, 2000, 1999
and 1998 ................................................................................ 36
Notes to Consolidated Financial Statements ................................................. 38
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REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
CONSOLIDATED WATER CO. LTD.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of Consolidated Water
Co. Ltd. and its subsidiaries (the "Group") at December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Group's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these 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.
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers
Grand Cayman, Cayman Islands
March 15, 2001
32
35
CONSOLIDATED WATER CO. LTD.
CONSOLIDATED BALANCE SHEETS
(Expressed in United States dollars)
DECEMBER 31,
------------------------------
2000 1999
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Note 7) 250,837 22,146
Accounts receivable (Note 4) 1,488,729 1,230,412
Spares inventory 120,014 94,303
Inventory of water 34,219 28,984
Prepaid expenses and other assets 299,499 298,906
------------ ------------
Total current assets 2,193,298 1,674,751
PROPERTY, PLANT AND EQUIPMENT (Notes 5 and 14) 17,643,891 14,756,570
INTANGIBLE ASSET (Note 3) 2,008,483 --
------------ ------------
Total assets $ 21,845,672 $ 16,431,321
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdrafts (Note 7) 703,331 651,606
Dividends payable (Note 6) 401,965 266,585
Accounts payable and other liabilities 1,448,364 1,079,922
Obligations under Water Purchase Agreement (Note 14) -- 320,141
Current portion of long term debt (Note 7) 219,580 310,135
------------ ------------
Total current liabilities 2,773,240 2,628,389
LONG TERM DEBT (Note 7) 1,131,986 1,926,786
SECURITY DEPOSIT (Note 15) 52,763 52,763
ADVANCES IN AID OF CONSTRUCTION 41,090 45,084
------------ ------------
Total liabilities 3,999,079 4,653,022
------------ ------------
STOCKHOLDERS' EQUITY
Common stock (Notes 8 and 16) 4,635,774 3,794,960
Additional paid-in capital (Note 8) 6,726,749 3,453,808
Treasury shares (Note 8) -- (821,303)
Vested redeemable preferred stock (Note 8) 11,983 1,121
Non-vested redeemable preferred stock (Notes 8 and 16) 28,378 48,149
Retained earnings 6,443,709 5,301,564
------------ ------------
Total stockholders' equity 17,846,593 11,778,299
------------ ------------
Total liabilities and stockholders' equity $ 21,845,672 $ 16,431,321
============ ============
The accompanying notes are an integral part of these financial statements.
33
36
CONSOLIDATED WATER CO. LTD.
CONSOLIDATED STATEMENTS OF INCOME
(Expressed in United States dollars)
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
2000 1999 1998
----------- ----------- -----------
Water sales (Note 15) 9,576,959 7,936,118 7,925,232
Cost of water sales (Note 9) (5,423,297) (4,770,179) (5,166,401)
----------- ----------- -----------
Gross profit 4,153,662 3,165,939 2,758,831
----------- ----------- -----------
Indirect expenses (Note 9) (2,197,569) (1,792,516) (1,569,380)
----------- ----------- -----------
Income from operations 1,956,093 1,373,423 1,189,451
----------- ----------- -----------
Other income:
Interest income 32,314 594 28,062
Other income 416,413 313,276 234,420
----------- ----------- -----------
448,727 313,870 262,482
----------- ----------- -----------
Income before accounting change 2,404,820 1,687,293 1,451,933
Cumulative effect of a change in accounting principle -- (117,576) --
----------- ----------- -----------
Net income $ 2,404,820 $ 1,569,717 $ 1,451,933
=========== =========== ===========
BASIC EARNINGS PER SHARE (NOTE 10)
Income before accounting change 0.68 0.55 0.47
Accounting changes -- (0.04) --
----------- ----------- -----------
Net income $ 0.68 $ 0.51 $ 0.47
=========== =========== ===========
DILUTED EARNINGS PER SHARE (NOTE 10)
Income before accounting change 0.67 0.53 0.45
Accounting changes -- (0.04)
----------- ----------- -----------
Net income $ 0.67 $ 0.49 $ 0.45
=========== =========== ===========
Weighted average number of common shares used in the determination of:
Basic earnings per share (Note 10) 3,532,501 3,044,293 3,055,845
=========== =========== ===========
Diluted earnings per share (Note 10) 3,616,271 3,188,048 3,191,583
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
34
37
CONSOLIDATED WATER CO. LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2000
(Expressed in United States dollars)
VESTED
REDEEMABLE
COMMON ADDITIONAL TREASURY PREFERRED
STOCK PAID-IN CAPITAL SHARES STOCK
------------ --------------- ------------ ------------
Balance at December 31, 1997 3,667,214 2,914,889 -- --
Issue of share capital (net of issue costs) (Note 8) 252 50,532 -- 8,486
Purchase of treasury shares (Note 8) -- -- (62,375) --
Net income for the year -- -- -- --
Dividends -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1998 3,667,466 2,965,421 (62,375) 8,486
------------ ------------ ------------ ------------
Issue of share capital (net of issue costs) (Note 8) 127,494 488,387 -- (7,365)
Purchase of treasury shares (Note 8) -- -- (758,928) --
Net income for the year -- -- -- --
Dividends -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1999 3,794,960 3,453,808 (821,303) 1,121
------------ ------------ ------------ ------------
Issue of share capital (net of issue costs) (Note 8) 1,068,636 4,360,797 10,862 (19,771)
Purchase of treasury shares (Note 8) -- -- (494,375) --
Cancellation of treasury shares (Note 8) (227,822) (1,087,856) 1,315,678 --
Net income for the year -- -- -- --
Dividends -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 2000 $ 4,635,774 $ 6,726,749 $ -- $ 11,983
============ ============ ============ ============
NON-VESTED
REDEEMABLE TOTAL
PREFERRED RETAINED STOCKHOLDERS'
STOCK EARNINGS EQUITY
------------ ------------ ------------
Balance at December 31, 1997 40,906 3,505,813 10,128,822
Issue of share capital (net of issue costs) (Note 8) 3,294 -- 62,564
Purchase of treasury shares (Note 8) -- -- (62,375)
Net income for the year -- 1,451,933 1,451,933
Dividends -- (587,553) (587,553)
------------ ------------ ------------
Balance at December 31, 1998 44,200 4,370,193 10,993,391
------------ ------------ ------------
Issue of share capital (net of issue costs) (Note 8) 3,949 -- 612,465
Purchase of treasury shares (Note 8) -- -- (758,928)
Net income for the year -- 1,569,717 1,569,717
Dividends -- (638,346) (638,346)
------------ ------------ ------------
Balance at December 31, 1999 48,149 5,301,564 11,778,299
------------ ------------ ------------
Issue of share capital (net of issue costs) (Note 8) --
5,420,524
Purchase of treasury shares (Note 8) -- -- (494,375)
Cancellation of treasury shares (Note 8) -- -- --
Net income for the year -- 2,404,820 2,404,820
Dividends -- (1,262,675) (1,262,675)
------------ ------------ ------------
Balance at December 31, 2000 $ 28,378 $ 6,443,709 $ 17,846,593
============ ============ ============
The accompanying notes are an integral part of these financial statements.
35
38
CONSOLIDATED WATER CO. LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in United States dollars)
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
2000 1999 1998
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash receipts from customers 9,919,966 7,841,289 8,102,406
Cash paid to suppliers and employees (5,876,811) (5,127,240) (5,542,642)
----------- ----------- -----------
Cash generated from operations 4,043,155 2,714,049 2,559,764
Interest received 32,314 594 28,062
Interest paid (152,757) (185,722) (267,084)
----------- ----------- -----------
Net cash provided by operating activities 3,922,712 2,528,921 2,320,742
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of subsidiary, net of cash acquired (Note 3) (3,966,979) -- --
Purchase of property, plant and equipment (2,301,759) (1,543,368) (2,204,783)
Proceeds from sale of property, plant and equipment -- 1,920 20,000
----------- ----------- -----------
Net cash used in investing activities (6,268,738) (1,541,448) (2,184,783)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of
ordinary shares of common stock 5,368,945 146,060 12,958
Repurchase of ordinary shares of common stock (494,375) (758,928) (62,375)
Proceeds from term loan -- -- 1,000,000
Increase/(decrease) in bank overdraft 32,938 591,359 (54,345)
Repayment of principal on long term debt (885,355) (533,353) (190,111)
Principal payments under Water Purchase Agreement (320,141) (344,304) (1,027,567)
Dividends paid (1,127,295) (505,193) (457,912)
----------- ----------- -----------
Net cash provided by/(used in) financing activities 2,574,717 (1,404,359) (779,352)
----------- ----------- -----------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 228,691 (416,886) (643,393)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 22,146 439,032 1,082,425
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 250,837 $ 22,146 $ 439,032
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
36
39
CONSOLIDATED WATER CO. LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in United States dollars)
FOOTNOTES TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS:
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
2000 1999 1998
----------- ----------- -----------
RECONCILIATION OF NET CASH FROM OPERATING ACTIVITIES
TO NET INCOME FROM OPERATIONS:
Net income 2,404,820 1,569,717 1,451,933
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
FROM OPERATING ACTIVITIES
Depreciation (Notes 5 and 9) 1,071,455 816,960 768,745
Gain on sale of fixed assets -- (1,920) (20,000)
Amortization of intangible asset (Note 3) 64,979 -- --
Amortization of deferred costs -- -- 1,688
Share issue costs deferred -- 89,145 --
Stock compensation (Note 21) 51,579 377,260 49,606
Cumulative effect of a change in accounting principle -- 117,576 --
CHANGE IN ASSETS AND LIABILITIES
Decrease/(increase) in spares inventory 25,278 (25,662) (60,176)
(Increase)/decrease in inventory of water (5,235) 1,677 (14,352)
Increase in accounts receivable (56,259) (401,926) (13,578)
Decrease/(increase) in prepaid expenses and other assets 1,647 (111,213) 13,137
Increase in accounts payable and other liabilities 368,442 101,807 179,907
Decrease in advances in aid of construction (3,994) (4,500) (36,168)
----------- ----------- -----------
NET CASH FROM OPERATING ACTIVITIES $ 3,922,712 $ 2,528,921 $ 2,320,742
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
37
40
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
1. PRINCIPAL ACTIVITY AND STATUS
Consolidated Water Co. Ltd. (the "Company") and its wholly-owned subsidiaries
(together the "Group") use reverse osmosis technology to produce fresh water
from seawater. The Group processes and supplies water to its customers in Grand
Cayman, Cayman Islands as well as Ambergris Caye, Belize. The Company's
exclusive license in Grand Cayman allows it to process and supply water to
certain areas of Grand Cayman for a period of twenty years from July 11, 1990 in
addition to having a right of first refusal on the extension or renewal thereof.
The Group also has a contract with the Water and Sewerage Authority of Belize
(the "Water Authority") to supply water to the Water Authority in Ambergris Caye
expiring in 2011. At the expiry of the contract, the Water Authority may at its
option extend the term of the agreement or purchase the plant outright. The base
price of water supplied by the Group, and adjustments thereto, are determined by
the terms of the license and contract, which provide for adjustments based upon
the movement in the government price indices specified in the license and
contract respectively as well as monthly adjustments for changes in the cost of
fuel.
2. ACCOUNTING POLICIES
BASIS OF PREPARATION
As a result of a management decision the Group has voluntarily adopted
accounting principles generally accepted in the United States of America
("US-GAAP") effective January 1, 2000. Previously, annual financial statements
were prepared in accordance with International Accounting Standards ("IAS"). As
a result all prior periods' financial statements presented in these financial
statements have been prepared in accordance with "US-GAAP".
38
41
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
2. ACCOUNTING POLICES (CONTINUED)
The following income statement and balance sheet captions contain certain
items, the accounting for which has changed as a result of the change from IAS
to US-GAAP:
INCOME STATEMENT: Administrative costs include: i) recognition of stock option
compensation expenses and ii) start up costs expensed following the change in
accounting policy to effect the application of Statement of Position 98-5
"Reporting on the Costs of Start Up Activities."
BALANCE SHEET: Accounts payable and accrued expenses are affected by: stock
compensation relating to unexercised options. Fixed assets are affected by:
reversal of recognition of unrealized capital gains arising on the revaluation
of land. Additional paid in capital is affected by: stock compensation relating
to exercised options. Retained earnings and other reserves are affected by: i)
stock option compensation expense, ii) start up costs and iii) reversal of
recognition of unrealized capital gains. Cash and cash equivalents: As a result
of the application of US-GAAP, cash and cash equivalents now represents cash,
and highly liquid bank deposits with original maturity of three months or less.
Detailed information on accounting principles for the above items under US-GAAP,
as well as the value of the reconciling items between US-GAAP and IAS at
December 31, 1999 and 1998 and other dates and for other periods can be found in
Note 20 of the Group's previous financial statements filed on Form 20-F.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The Group's significant accounting policies are:
BASIS OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company's wholly-owned subsidiaries Belize Water Ltd. and
Commonwealth Water Limited. The operating results of Belize Water Ltd. have been
included in the financial statements since the date of the acquisition (July 21,
2000). All inter-company balances and transactions have been eliminated. There
are no operating results for Commonwealth Water Limited as the Company has been
dormant since inception.
39
42
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
2. ACCOUNTING POLICIES (CONTINUED)
REPORTING CURRENCY: The functional currency of the Company and its foreign
subsidiaries are their respective local currencies. The consolidated operations
are reported using United States dollars. It is the intention of the Company to
declare and pay dividends in United States dollars.
The exchange rate between the Cayman Islands dollar and the United States dollar
has been fixed during all periods presented at CI$1.00 to US$1.20. In addition,
the exchange rate between the Belize Dollar and the United States dollar has
been fixed during all periods presented at Bel$1.00 to US$0.50. Accordingly, no
foreign currency gain or losses arise on the translation of the foreign
subsidiary's operations due to the fixed exchange rate.
FOREIGN CURRENCY: Monetary assets and liabilities denominated in foreign
currencies are translated at the rates of exchange ruling at the balance sheet
date. Foreign currency transactions are translated at the rate ruling on the
date of the transaction. Net exchange gains of $3,812 (1999: $36,512; 1998:
$31,846) are included in other income.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents comprise cash at bank on
call and highly liquid deposit with an original maturity of three months or
less.
SPARES INVENTORY: Spares inventory, which consists primarily of replacement
spares and parts, are valued at the lower of cost and net realizable value on a
first-in, first-out basis.
INVENTORY OF WATER: Inventory of water represents the cost of desalinated
potable water produced and purchased by the Company and held in the Company's
reservoirs at year end. The value of the inventory of water is based on the
lower of average cost of producing and purchasing water during the year and the
volume of water on hand at year end or net realizable value.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost
less accumulated depreciation. Depreciation is calculated using a straight line
method with allowance being made for estimated residual values. Rates are
determined based on the shorter of the license expiry date or the estimated
useful lives of the assets as follows:
Buildings 5 to 40 years
Plant and equipment 5 to 15 years
Office furniture, fixtures and equipment 3 to 10 years
Vehicles 3 to 10 years
Leasehold Improvements Shorter of 5 Years and Operating
Lease Term Outstanding
Distribution system 3 to 40 years
Additions to property, plant and equipment comprise of the cost of the
contracted services, direct labour and materials.
INTANGIBLE ASSET: The intangible asset consists of the contract acquired on the
acquisition of Belize Water Ltd. (Note 3) on July 21, 2000 and is being
amortised on a straight line basis over the remaining period of the license,
which expires in April 2011.
OBLIGATIONS UNDER WATER PURCHASE AGREEMENT: The Company assumed substantially
all the benefits and risks of the plant and equipment under the Water Purchase
Agreement (Note 14). The assets have been capitalized at the amount specified in
the agreement and the related obligation is recorded as a liability of the
Company. Interest expense is calculated based on the outstanding balance of the
obligation.
40
43
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
2. ACCOUNTING POLICIES (CONTINUED)
ADVANCES IN AID OF CONSTRUCTION: The Company recognizes a liability in respect
of advances in aid of construction when such advances are received from certain
condominium developers in the licensed area to help defray the capital
expenditure costs of the Company. These advances do not represent a loan to the
Company and are interest free. However, the Company allows a discount of 10% on
future supplies of water to these developments until the aggregate discounts
allowed are equivalent to advances received. Such discounts are charged against
advances received.
TREASURY SHARES: Treasury shares are recorded at cost as a deduction from
stockholders' equity. Any profit or loss on the re-issue of these shares is
recorded directly as a movement in stockholders' equity.
STOCK AND STOCK OPTION INCENTIVE PLANS: The Company issues stock under incentive
plans that form part of employees and non-executive Directors' remuneration and
grants options to purchase ordinary shares as part of remuneration for executive
Directors.
The Company has elected to account for stock-based employee compensation plans
in accordance with Accounting Principles Board Opinion (APB) No. 25, "Accounting
for Stock Issued to Employees," as permitted by SFAS 123, "Accounting for
Stock-Based Compensation." In accordance with APB No. 25, compensation expense
is not recognized for stock options that have no intrinsic value on the date of
grant. Compensation expense is recognized immediately for restricted stock for
which future service is not required as a condition to the delivery of the
underlying shares of common stock. For restricted stock with future service
requirements, compensation expense is recognized over the relevant vesting
period. Stock compensation expenses are recorded within employee costs.
The liability for unexercised stock option compensation expense is recorded as
other liabilities. On exercise of options, proceeds up to the par value of the
stock issued are credited to ordinary share capital, any proceeds in excess of
the par value of the stock issued are credited to additional paid in capital in
the period in which the options are exercised.
WATER SALES AND COST OF WATER SALES: The Group bills customers monthly for water
delivered based on meter readings performed at or near each month end. An
accrual, where necessary, is made for water delivered but unbilled at year end
where readings are not performed at the year end date. This accrual is matched
with the associated direct costs of producing and purchasing water.
OTHER INCOME: Foreign exchange gains, water meter and fire hydrant rental and
recurring income from a dispute settlement agreement with a customer within the
Company's license area are recorded as other income.
REPAIRS AND MAINTENANCE: All repair and maintenance costs are expensed as
incurred.
3. BUSINESS COMBINATION
On July 21, 2000, the Company acquired all of the issued and outstanding capital
stock of Seatec Belize Ltd., a company organized under the laws of Belize.
Seatec Belize Ltd., now renamed Belize Water Ltd., owns and operates a reverse
osmosis plant in Ambergris Caye, Belize, which was acquired upon closing of this
transaction. This acquisition has been accounted for by the purchase method.
The total purchase price of $3,971,730 was paid in cash including direct
external costs incurred in the acquisition amounting to $29,734. The purchase
price was allocated among the identifiable tangible and intangible assets and
liabilities based on their respective fair values as detailed below. Of this
purchase price $2,073,462 has been attributed to intangible assets and
represents the value of the water purveyor contract (the "contract") that the
acquired company has with the Water and Sewerage Authority of Belize. This
intangible asset is being amortised on a straight line basis over the remaining
period of the contract.
41
44
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
3. BUSINESS COMBINATION (CONTINUED)
The fair values of assets and liabilities acquired as at July 21, 2000 are as
follows:
Cash and cash equivalents 4,751
Accounts receivable 202,058
Spares inventory 50,989
Prepayments 2,240
Property, plant and equipment 1,657,017
Bank overdrafts (18,787)
-----------
Fair value of net assets acquired $ 1,898,268
Intangible asset - contract 2,073,462
-----------
Total purchase consideration $ 3,971,730
Less: cash and cash equivalents of the subsidiary acquired (4,751)
-----------
Cash outflow on acquisition $ 3,966,979
===========
DECEMBER 31,
-----------------------------
2000 1999
----------- -----------
Intangible asset - contract 2,073,462 --
Amortisation charge for the period (64,979) --
----------- -----------
Net book value $ 2,008,483 --
=========== ===========
The results of operations of Belize Water Ltd. are included in the consolidated
statements of operations from the date of acquisition. Unaudited proforma
combined results of operations of Consolidated Water Co. Ltd. and Belize Water
Ltd. would be as follows:
(UNAUDITED)
YEAR ENDED DECEMBER 31,
----------- -----------
2000 1999
----------- -----------
Revenue $10,139,450 $ 8,814,971
Income before accounting change $ 2,516,041 $ 1,927,522
Cumulative effect of a change in accounting principle -- $ (117,576)
Net income $ 2,516,041 $ 1,809,946
Basic earnings per ordinary share of common stock:
Income before accounting change 0.71 0.67
Accounting change -- (0.04)
----------- -----------
Net income $ 0.71 $ 0.63
=========== ===========
42
45
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
3. BUSINESS COMBINATION (CONTINUED)
The above proforma results of operations are for comparative purposes only and
reflect increased amortisation expenses resulting from the acquisition but do
not include any potential cost savings from combining the acquired business.
Consequently, the proforma results do not reflect the actual results of
operations had the acquisition occurred on January 1, 1999 and are not intended
to be projections of future results or trends.
4. ACCOUNTS RECEIVABLE
Accounts receivable comprise receivables from customers and are shown net of an
allowance for doubtful accounts of $12,000 (1999: $12,000). Significant
concentrations of credit risk are disclosed in Note 20.
5. PROPERTY, PLANT AND EQUIPMENT
Certain fixed assets are pledged as collateral for certain obligations of the
Company, as more fully described in Note 7.
ACQUISITION DISPOSALS/ TRANSFERS
JANUARY 1, OF FROM ASSETS UNDER DECEMBER 31,
2000 SUBSIDIARY ADDITIONS CONSTRUCTION 2000
------------ ------------ ------------ -------------------- ------------
Cost
Land 475,679 -- -- 475,679
Buildings 1,990,446 110,289 164,290 (150,000) 2,115,025
Plant and equipment 6,227,267 1,540,839 1,200,082 (155,477) 8,812,711
Distribution 10,240,274 -- 1,146,603 -- 11,386,877
Office furniture, fixtures
and equipment 447,880 1,071 187,563 -- 636,514
Vehicles 588,450 4,818 104,908 -- 698,176
Leasehold improvements 17,658 -- 8,374 -- 26,032
Lab equipment 32,218 -- 2,106 -- 34,324
Assets under construction 1,179,736 -- 1,858,722 (2,337,207) 701,251
------------ ------------ ------------ ------------ ------------
$ 21,199,608 $ 1,657,017 $ 4,672,648 $ (2,642,684) $ 24,886,589
============ ============ ============ ============ ============
JANUARY 1, CHARGE FOR DECEMBER 31,
2000 THE YEAR DISPOSALS 2000
------------ ------------ ------------ ------------
ACCUMULATED DEPRECIATION
Buildings 685,598 74,579 (150,000) 610,177
Plant and equipment 2,835,964 416,716 (155,477) 3,097,203
Distribution 2,368,084 468,920 -- 2,837,004
Office furniture, fixtures and equipment 240,811 70,402 -- 311,213
Vehicles 266,113 71,022 -- 337,135
Leasehold improvements 17,658 2,442 -- 20,100
Lab equipment 28,810 1,056 -- 29,866
------------ ------------ ------------ ------------
$ 6,443,038 $ 1,105,137 $ (305,477) $ 7,242,698
============ ============ ============ ============
Net book value $ 14,756,570 $ 17,643,891
============ ============
43
46
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
5. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
Included in plant and equipment is the reverse osmosis water production plant,
which has been acquired under the Water Purchase Agreement (see Note 14).
Included within additions for the year are transfers of completed projects from
assets under construction comprising of buildings $159,506, plant and equipment
$1,122,350, distribution $939,751 and office furniture, fixtures and equipment
$115,600.
During the year the Company capitalized $33,682 (1999: $35,749; 1998: $30,319)
of depreciation charges in relation to plant and equipment specifically
purchased to continue further development of the distribution system.
At December 31, 2000, the Group had outstanding capital commitments of $570,000
(1999: $512,000). It is Company policy to maintain adequate insurance for loss
or damage to all fixed assets except for the underground distribution system and
assets insured by third parties under agreement.
6. DIVIDENDS PAID/PAYABLE
Quarterly interim dividends per share were declared in respect of both classes
of shareholders on record as follows:
Dividend per share: 2000 1999 1998
---- ---- ----
March 31 (1998: semi annual dividend) $ 0.08 $ 0.04 $ 0.07
June 30 $ 0.08 $ 0.04 $ 0.04
September 30 $ 0.08 $ 0.04 $ 0.04
December 31 $ 0.10 $ 0.08 $ 0.04
Interim dividends for the first three quarters were paid during each respective
year. The interim dividend for the fourth quarter was declared by the Board of
directors in October of each respective year. These quarterly interim dividends
are subject to no further ratification and consequently the fourth quarter
interim dividends have been recorded as a liability in each respective year.
Included in dividends payable at December 31, 2000 are unclaimed dividends of
$10,051 (1999: $10,303).
7. BANK BALANCES AND LOANS
2000 1999
----------- ----------
Cash on hand and in current account $ 250,837 $ 22,146
=========== ==========
Cash on hand and in current account is not restricted as to withdrawal or use
Bank overdrafts - Royal Bank of Canada $ 703,331 $ 651,606
=========== ==========
European Investment Bank:
Long term debt $ 1,351,566 $1,568,126
=========== ==========
Royal Bank of Canada:
Long term debt $ -- $ 668,795
=========== ==========
44
47
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
7. BANK BALANCES AND LOANS (CONTINUED)
As at December 31, 2000, the total lending facility made available by the Royal
Bank of Canada comprises a revolving line of credit with a limit of $1,000,000,
bearing interest at New York Prime plus 1%, and term loans with a limit of
$4,000,000, bearing interest at LIBOR plus 1.5%. Any amounts drawn down under
the line of credit and any term loans are collateralised by a fixed and floating
charge ("the first charge") of $2,500,000 (to be increased to maximum of
$5,500,000). The fixed charge covers land owned by the Company and the floating
charge covers all other assets of the Company, except those assets charged in
connection with the Water Purchase Agreement (see Note 14). Of this facility, a
bank overdraft of $703,331 was outstanding at December 31, 2000 (1999:
$651,606).
During 1991, in order to fund an extension to the water distribution system, the
European Investment Bank, Luxembourg (the "bank"), agreed to loan the US$
equivalent of 2 million European Currency Units (approximately US$2.5 million at
that time). The loan is guaranteed by the Overseas Development Administration
("ODA") of the Foreign and Commonwealth Office of the Government of the United
Kingdom and is repayable in 24 semi annual installments, which commenced on
December 20, 1994. The interest rate for the entire term is fixed at the bank's
prevailing lending rate, less a subsidy of 4% per annum, at the date each
tranche is drawn down.
The rates of interest applicable to, and the amounts of each tranche at the
current year end exchange rates are:
DATE OF INTEREST
DRAWDOWN RATE
-------- --------
Tranche 1 April 11, 1991 $ 322,814 4.25%
Tranche 2 September 8, 1992 1,018,895 3.15%
Tranche 3 February 12, 1992 847,727 3.45%
Tranche 4 March 17, 1993 362,736 3.00%
-----------
2,552,172
Capital repayments to December 31, 2000 (1,200,606)
-----------
Total debt obligation as at December 31, 2000 $ 1,351,566
===========
Of the final tranche, at December 31, 2000 the equivalent of $60,034 (1999:
$76,726) is repayable in pounds sterling, all other obligations under this loan
are repayable in United States dollars.
The Government of the Cayman Islands have, for a fee of 1% per annum, provided a
counter guarantee to the ODA. The Company, with the approval of the Royal Bank
of Canada, the holder of the first charge, has agreed to secure the counter
guarantee by a second charge over all assets of the Company.
2000
----------
CURRENT PORTION OF LONG TERM DEBT OBLIGATION:
Royal Bank of Canada --
European Investment Bank 219,580
----------
$ 219,580
==========
LONG TERM DEBT OBLIGATION:
Royal Bank of Canada --
European Investment Bank 1,131,986
----------
$1,131,986
==========
45
48
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
7. BANK BALANCES AND LOANS (CONTINUED)
THE AGGREGATE CAPITAL REPAYMENT OBLIGATIONS FOR THE NEXT SIX YEARS ARE AS
FOLLOWS:
2001 219,580
2002 230,519
2003 242,224
2004 254,182
2005 266,905
2006 and thereafter 138,156
----------
$1,351,566
==========
8. SHARE CAPITAL AND ADDITIONAL PAID IN CAPITAL
2000 1999 1998
------------ ------------ ------------
CAPITAL STOCK AUTHORIZED:
9,900,000 ordinary shares of common
stock CI$1.00 each 11,880,000 11,880,000 11,880,000
100,000 redeemable preferred
stock of CI$1.00 each 120,000 120,000 120,000
------------ ------------ ------------
$ 12,000,000 $ 12,000,000 $ 12,000,000
============ ============ ============
ORDINARY SHARES OF COMMON
STOCK OF CI$1.00 EACH ISSUED AND FULLY PAID:
Balance of ordinary shares at beginning of year
3,162,467 (1999: 3,056,222; 1998: 3,056,012) 3,794,960 3,667,466 3,667,214
Ordinary shares issued under public
offering 773,000 (1999: nil; 1998: nil) 927,600 -- --
Cancellation of treasury shares 189,852
(1999: nil; 1998: nil) (227,822) -- --
Ordinary shares issued on exercise of
options (1999: 89,010; 1998: nil) -- 106,812 --
Ordinary shares issued on exercise of
warrants 100,000 (1999: nil; 1998: nil) 120,000 -- --
Ordinary shares issued under Directors' Share
Plan 6,890 (1999: 2,400; 1998: nil) 8,269 2,880 --
Ordinary shares issued on redemption of
preferred stock 10,639 (1999: 14,835; 1998: 210) 12,767 17,802 252
------------ ------------ ------------
Balance of ordinary shares at end of year
3,863,144 (1999: 3,162,467; 1998: 3,056,222) $ 4,635,774 $ 3,794,960 $ 3,667,466
============ ============ ============
TREASURY SHARES:
Balance of treasury shares at beginning of
year 110,752 (1999: 8,000; 1998: nil) 821,303 62,375 --
Shares acquired at cost 79,100 (1999:102,752;
1998: 8000) 494,375 758,928 62,375
Treasury shares cancelled during the
year 189,852 (1999: nil; 1998: nil) (1,315,678) -- --
------------ ------------ ------------
Balance of treasury shares at end of
year nil (1999: 110,752; 1998: 8,000) $ -- $ 821,303 $ 62,375
============ ============ ============
46
49
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
8. SHARE CAPITAL AND ADDITIONAL PAID IN CAPITAL (CONTINUED)
2000 1999 1998
----------- ----------- -----------
ADDITIONAL PAID IN CAPITAL:
Balance at beginning of year 3,453,808 2,965,421 2,914,889
Additional paid in capital from ordinary shares
of common stock issued under public offering 4,825,800 -- --
Share issue costs arising on ordinary shares of
common stock issued under public offering (790,669) -- --
Reduction in additional paid in capital from
cancellation of treasury shares (1,087,856) -- --
Additional paid in shares issued under
Directors' Share Plan (see Note 16) 40,815 11,970 --
Additional paid in capital on stock
options (see Note 16) -- 466,401 40,498
Additional paid in capital from exercise of
warrants (see Note 16) 280,000 -- --
Additional paid in capital on preferred stock
issued under employee share plan (see Note 16) 4,851 10,016 10,034
----------- ----------- -----------
Balance at end of year $ 6,726,749 $ 3,453,808 $ 2,965,421
=========== =========== ===========
VESTED REDEEMABLE PREFERRED STOCK OF CI$1.00
EACH ISSUED AND FULLY PAID (NOTE
16): Balance of vested redeemable preferred stock at
beginning of year 934 (1999: 7,072; 1998: nil) 1,121 8,486 --
Preferred stock vested during the year 11,400
(1999: 7,036; 1998: 7,072) 13,680 8,444 8,486
Vested preferred stock redeemed and issued as
ordinary shares 2,348 (1999: 13,174; 1998: nil) (2,818) (15,809) --
----------- ----------- -----------
Balance of vested redeemable preferred stock at
end of year 9,986 (1999: 934; 1998: 7,072) $ 11,983 $ 1,121 $ 8,486
=========== =========== ===========
NON-VESTED REDEEMABLE PREFERRED STOCK OF CI$1.00
EACH ISSUED AND FULLY PAID
(NOTE 16): Balance of non-vested redeemable
preferred stock at beginning of year 40,124
(1999:36,833; 1998: 34,088) 48,149 44,200 40,906
Preferred stock vested during the year 11,400
(1999: 7,036; 1998: 7,072) (13,680) (8,444) (8,486)
Non-vested preferred stock issued 3,415
(1999: 11,988; 1998: 10,027) 4,098 14,386 12,032
Non-vested preferred stock redeemed 200
(1999: nil; 1998: nil) (240) -- --
Non-vested preferred stock redeemed and issued as
Ordinary shares 8,291 (1999: 1,661; 1998: 210) (9,949) (1,993) (252)
----------- ----------- -----------
Balance of non-vested redeemable preferred stock
at end of year 23,648 (1999: 40,124; 1998: 36,833) $ 28,378 $ 48,149 $ 44,200
=========== =========== ===========
47
50
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
8. SHARE CAPITAL AND ADDITIONAL PAID IN CAPITAL (CONTINUED)
The redeemable preferred stock are issued under the Company's employee share
plan (Note 16) and carry the same voting and dividend rights as ordinary shares.
The redeemable preferred stock are only redeemable with the Company's agreement.
In consideration for redeemed vested preferred stock, ordinary share capital is
issued on a share for share basis. Upon liquidation of the Company, the
redeemable preferred stock rank in preference to the common stock to the extent
of the par value of the redeemable preferred stock and any related additional
paid in capital.
Outstanding non-vested preferred stock currently redeemable are as follows:
NO. OF SHARES REDEMPTION REDEMPTION
REDEEMABLE PRICE VALUE
------------- ---------- ----------
Up to the year ended December 31, 2001 19,439 -- --
1,120 $4.0680 4,556
872 $5.3175 4,637
1,081 $5.7120 6,175
1,136 $5.4720 6,216
------- --------
23,648 $ 21,584
======= ========
Up to the year ended December 31, 2002 15,201 -- --
872 $5.3175 4,637
1,081 $5.7120 6,175
1,136 $5.4720 6,216
------- --------
18,290 $ 17,028
======= ========
Up to the year ended December 31, 2003 9,769 -- --
1,081 $5.7120 6,175
1,136 $5.4720 6,216
------- --------
11,986 $ 12,391
======= ========
Up to the year ended December 31, 2004 2,279 -- --
1,136 $5.4720 6,216
------- --------
3,415 $ 6,216
======= ========
In April 1996 the Company filed a Form F-1 registration statement with the SEC
in connection with the issue of 575,000 ordinary shares of common stock at $5.25
per share. Under the terms of the related underwriting agreement, the
underwriter was issued a warrant to purchase 50,000 ordinary shares of common
stock at $6.30 per share. Consideration of $500 was paid for the warrant which
management considered to approximate fair value. The warrants are exercisable
during the four year period commencing April 3, 1997. As at December 31, 2000,
no warrants have been exercised under this agreement and the underwriter is no
longer in business.
In conjunction with the private placement of ordinary shares of common stock
that took place in August 1995, the Company issued warrants to purchase 100,000
ordinary shares of common stock at a price of $4.00 per share. The warrants were
exercised in January and February 2000.
48
51
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
8. SHARE CAPITAL AND ADDITIONAL PAID IN CAPITAL (CONTINUED)
Stockholders are advised that under the provisions of the Land Holding Companies
Share Transfer Tax Law of the Cayman Islands, transfer tax is payable on the
transfer of shares in the Company. The amount of transfer tax payable under the
provisions of this Law is computed by reference to the proportion of the total
market value of land, as valued by the Government, attributable to each share in
issue ("the taxable value"). The tax payable by the transferor per share
transferred is at the rate of 7.5% to 9.0% of the taxable value.
In August 1997 the Company established a Class `B' stock option plan designed to
deter coercive takeover tactics. Pursuant to this plan, holders of ordinary
shares of common stock and redeemable preferred stock were granted options which
entitle them to purchase 1/100 of a share of Class `B' stock at an exercise
price of $37.50 if a person or group acquires or commences a tender offer for
20% or more of the Company's ordinary shares of common stock. Option holders
(other than the acquiring person or group) will also be entitled to buy, for the
$37.50 exercise price, ordinary shares of the Company's common stock with a then
market value of $75.00 in the event a person or group actually acquires 20% or
more of the Company's ordinary shares of common stock. Options may be redeemed
at $0.01 under certain circumstances. 30,000 of the Company's authorized but
unissued ordinary shares have been reserved for issue as Class `B' stock. The
Class `B' stock rank pari passu with the ordinary shares of common stock for
dividend and voting rights. As at December 31, 2000, no Class `B' stock options
have been exercised or redeemed.
9. EXPENSES
YEAR ENDED DECEMBER 31
------------------------------------------
2000 1999 1998
---------- ---------- ----------
COST OF WATER SALES COMPRISE THE FOLLOWING:
Water purchases 2,257,532 2,091,322 2,579,279
Depreciation 992,410 760,901 714,830
Amortisation of intangible asset (Note 3) 64,979
Employee costs 741,789 601,678 550,499
Fuel oil 81,102 --
Royalties (Note 18) 641,428 560,441 570,416
Water Purchase Agreement obligation interest (Note 14) 16,910 58,042 193,589
Electricity 121,185 134,623 121,645
Insurance 64,160 56,308 37,555
Other direct costs 441,802 506,864 398,588
---------- ---------- ----------
$5,423,297 $4,770,179 $5,166,401
========== ========== ==========
INDIRECT EXPENSES COMPRISE THE FOLLOWING:
Employee costs 1,057,900 921,593 721,547
Interest 127,680 73,495 135,847
Depreciation 56,059 53,915 79,045
Professional fees 131,366 231,739 275,589
Insurance 41,083 29,890 34,829
Directors' fees and expenses 99,760 77,011 104,149
Other indirect costs 510,210 414,975 381,783
---------- ---------- ----------
$2,197,569 $1,792,516 $1,569,380
========== ========== ==========
Direct expenses relate to the production and distribution of water, indirect
expenses represent the administrative costs of the Company.
49
52
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
10. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing the net profit attributable
to stockholders by the weighted average number of ordinary shares of common
stock in issue during the year, excluding the average number of ordinary shares
of common stock purchased by the Company and held as treasury shares (see Note
8).
The net income and weighted average number of ordinary shares of common stock
and potential ordinary shares figures used in the determination of the basic and
diluted earnings per ordinary share of common stock are summarized as follows:
2000 1999 1998
----------- ----------- -----------
Net income used in determination of diluted
earnings per ordinary share of common stock $ 2,404,820 $ 1,569,717 $ 1,451,933
Less:
Dividends paid on non-vested
redeemable preferred stock (8,040) (8,025) (6,998)
Earnings attributable to vested
redeemable preferred stock (6,180) (461) (3,336)
----------- ----------- -----------
Net income available to holders of ordinary shares
of common stock in the determination of basic
earnings per ordinary share of common stock $ 2,390,600 $ 1,561,231 $ 1,441,599
=========== =========== ===========
Weighted average number of ordinary shares
of common stock in the determination of basic
earnings per ordinary share of common stock 3,532,501 3,044,293 3,055,845
Plus:
Weighted average number of redeemable
preferred stock outstanding during the year 37,145 44,707 40,231
Potential dilutive effect of unexercised options 41,147 48,954 56,596
Potential dilutive effect of unexercised warrants 5,478 50,094 38,911
----------- ----------- -----------
Weighted average number of shares
used for determining diluted earnings
per ordinary share of common stock 3,616,271 3,188,048 3,191,583
=========== =========== ===========
As detailed in Note 16, 30,000 options were granted to an investment company on
December 15, 1998 with an exercise price of $7.88. In addition, 85,259 options
were granted to executive directors and senior management of the Company on
December 31, 2000 with an exercise price of $7.10. At December 31, 2000, these
options were antidilutive for the purpose of determining diluted earnings per
share.
50
53
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
11. SEGMENTED INFORMATION
During the year ended December 31, 2000, the Company acquired a 100% stake in
Belize Water Ltd. (Note 3 and 15) that has been consolidated in these financial
statements. In addition, during the year ended December 31, 2000, the Company
entered into an agreement with South Bimini International Ltd., a Bahamian
company, to provide water to property in South Bimini Island, Bahamas (Note 15).
Though operations have not begun at December 31, 2000, equipment presently
located in the United States, with a carrying value of $307,395, will be
transferred to the Bahamas for use on this project.
Under FAS 131 "Disclosure about Segments of an Enterprise and Related
Information" the supply of water to Belize and Bahamas are considered by
management as separate business segments. Previously the Group's operations in
the Cayman Islands was the only reportable business segment and as such,
segmented information for the years ended December 31, 1999 and 1998 has not
been reproduced below. The basis of measurement of segment information is
similar to that adopted for the financial statements.
AS AT DECEMBER 31, 2000 AND FOR THE YEAR THEN ENDED
------------------------------------------------------
CAYMAN
ISLANDS BELIZE BAHAMAS TOTAL
------- ------ ------- -----
Water sales 9,112,031 464,928 -- 9,576,959
Other income 448,727 -- -- 448,727
Cost of water sales 5,172,945 250,352 -- 5,423,297
Indirect expenses 2,164,147 33,422 -- 2,197,569
Cost of water sales and
indirect expenses include:
Interest 152,757 -- -- 152,757
Depreciation 1,009,420 62,035 -- 1,071,455
Net income 2,223,666 181,154 -- 2,404,820
Segment assets 19,421,195 2,117,082 307,395 21,845,672
12. RELATED PARTY TRANSACTIONS
In the year ended December 31, 1998, the professional services of a Director
were made available to the Company through a company owned by that Director.
During 1998 the Company paid $88,699 for such services. During the years ended
December 31, 2000 and 1999, such compensation was paid directly to the Director.
In addition, the company owned by that Director provided professional services
during the year ended December 31, 2000 for which it charged $13,369 (1999: nil;
1998; nil); an amount of $4,290 is outstanding and unpaid at December 31, 2000.
The Company sells water to a company in which a Director has a significant
interest. During 2000 sales totaling $5,647 (1999: $11,621; 1998: $30,593) were
made to that company. Accounts receivable for such sales at year end total $411
(1999: $286).
During the year ended December 31, 1998 the Company purchased a Seawater Reverse
Osmosis Unit ("RO Unit") from a company in which a Director is a member of
senior management. The RO Unit was acquired at a cost of $307,395 which has been
included in plant and equipment in Note 5.
51
54
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
13. COMMITMENTS AND CONTINGENCIES
Commitments:
The Company has committed to lease premises in the Cayman Islands for a period
of two years from February 1, 2000 at approximately $75,000 per annum.
The Company is subject to an ongoing obligation to supply water to new customers
in the Cayman Islands within the areas in which it is licensed to operate and
where the supply of such water is considered commercially feasible.
The Company is subject to a commitment in the Cayman Islands under the Water
Purchase Agreement (Note 14).
The Group is subject to a commitment to supply water to the Water and Sewerage
Authority of Belize and property in South Bimini Island, Bahamas (Note 15).
Contingencies:
The license that the Company has with the government of the Cayman Islands (the
"Government") requires it to obtain approval from the Government for the
issuance or transfer of shares which a) exceeds 5% of the issued share capital
of the Company, or b) would, upon registration, result in any shareholder owning
more than 5% of the issued share capital of the Company.
More than 5% of the ordinary shares of common stock are registered in the name
of Cede and Co., the nominee for Depository Trust Company, which is a clearing
agency for shares held by participating banks and brokers. The Company does not
believe that these shareholdings by Cede and Co. constitute a breach of the
intent of the license. The Company believes that the purpose of this clause of
the license is to allow the Government to approve significant shareholders of
the Company. Cede and Co. and Depository Trust Company, however, act solely as
the nominee for banks and brokers, and have no beneficial ownership in the
ordinary shares of common stock. Nevertheless, the Company's Cayman Islands
legal counsel ("Legal Counsel") has advised it that the shareholdings by Cede
and Co. are probably a technical breach of its license.
In August and September 1994, the Company completed an offering of 400,000
ordinary shares of common stock under rule 504 of Regulation D of the Securities
Act of 1933. In September 1995, the Company completed a private placement of
100,000 ordinary shares of common stock plus warrants to subscribe for an
additional 100,000 ordinary shares of common stock under Regulation S of the
Securities Act of 1933. In April 1996 and May 2000, the Company completed a
public offering of 515,000 and 773,000 ordinary shares, respectively. Based upon
the advice of Legal Counsel, the Company determined that the license did not
require the Government's approval to complete these offerings. However, if a
court determined that the Government's approval of these offerings was required
under the license, the Company would be in breach of the license. Legal Counsel
has advised the Company that in order to make this determination, a court would
have to disagree with the Company's interpretation of the license and dismiss
several defenses that would be available to the Company. These defenses include
acquiescence and waiver on the part of the Government with respect to these
offerings.
Further, the Company received a letter dated June 1, 2000, from an official in
the Government, stating that the public offering of the ordinary shares of
common stock that was completed in 1996 was a breach of the license. The letter
is not clear as to whether the Government views the public offering completed in
2000 as a breach of the license. The Company responded to this letter and stated
that it does not believe that it is in breach of the license. A meeting with
officials of the Government, to discuss this matter, was held on June 16, 2000
in accordance with the Government's suggestion in the June 1st letter.
Discussion of the matter is ongoing as of December 31, 2000. The Company has
been advised by Legal Counsel that the June 1st letter from the Government does
not constitute a formal "notice of breach of the license" as contemplated in the
license. Accordingly, other than pursuing discussions of this matter with the
Government, no other actions are presently being pursued by the Company to
"cure" any such alleged breaches.
52
55
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
14. WATER PURCHASE AGREEMENT
The Company is party to a water purchase agreement (the "Water Purchase
Agreement") with Ocean Conversion (Cayman) Limited ("OCL"), which expires on
December 31, 2004. The Water Purchase Agreement effectively transferred the
possession of a reverse osmosis ("RO") plant to the Company in 2000, although
the operation and maintenance of the plant will be the responsibility of OCL
until the termination of the agreement on December 31, 2004. On January 1, 2005
responsibility for the operation and maintenance of the plant will be assumed by
the Company. Under the terms of the agreement, the Company must purchase a fixed
minimum amount of water annually with a portion of the monthly payments to be
applied toward the purchase of the plant. Implicit in the agreement are
financing charges relating to the purchase of the plant, based on the Company's
cost of capital at the inception of the agreement.
As at December 31, 2000 minimum future payments are as follows:
2001 1,350,704
2002 1,350,704
2003 1,350,704
2004 1,350,704
------------
Total minimum payments $ 5,402,816
============
The RO plant acquired under the Water Purchase Agreement is included in plant
and equipment in Note 5 at a gross amount of $3,550,897 and at December 31, 2000
had a net book value of $1,059,239 (1999: $1,253,718). Amortization of this
plant is included in the depreciation charge for each of the three years ended
December 31, 2000. During the year ended December 31, 2000 the Company fulfilled
the equipment purchase obligation as calculated under the Water Purchase
Agreement. Accounts payable includes $204,076 (1999: $223,213) outstanding under
the Water Purchase Agreement.
15. CUSTOMER SUPPLY AGREEMENTS
During 1993 the Company entered into a five year agreement to supply non-potable
water to Safe Haven Limited, the developers of a golf course in the Cayman
Islands. On November 1, 1997 this agreement was renegotiated and renewed for a
further five year period. Under the terms of the renewed supply agreement, the
Company must supply a minimum of 4 million US Gallons per month (48 million US
Gallons per year). The price of the water supplied is adjusted annually based on
Government Price Indices. Water sales for the year ended December 31, 2000
resulting from the supply agreement amounted to $571,969 (1999: $444,098; 1998:
$422,641). At December 31, 2000 the Company holds a security deposit of $52,763
(1999: $52,763) under the terms of the supply agreement.
From 15 October, 1995 the Company entered into a ten year agreement to supply a
minimum of 30,000 US Gallons per day (10.95 million US Gallons per year) of
potable water to Galleon Beach Resort Limited, the operator of the Westin Hotel
in the Cayman Islands which initially opened in December 1995. The price of the
water supplied is adjusted annually based on Government Price Indices, and water
supplied in excess of the monthly maximum of 60,000 US Gallons per day is
invoiced at the Company's standard tariff rate. Water sales for the year ended
December 31, 2000 resulting from this agreement amounted to $299,333 (1999:
$314,884; 1998: $343,800).
From the acquisition of Belize Water Co, Ltd. in 2000, the Company is under
contract to supply a minimum of 135,000 US Gallons per day (49.27 million US
Gallons per year) to the Water and Sewerage Authority of Belize. The price of
water supplied is adjusted annually based on Government indices. Post
acquisition water sales for the period ended December 31, 2000 resulting from
this agreement amounted to $464,928 (Note 11).
53
56
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
15. CUSTOMER SUPPLY AGREEMENTS (CONTINUED)
During the year ended December 31, 2000 the Company entered into a Water Supply
Agreement with South Bimini International Ltd., a company incorporated in the
Commonwealth of Bahamas. Under the agreement South Bimini International Ltd. is
committed to pay for a minimum of 3,000 US Gallons of water per residential unit
per month (36,000 US Gallons residential unit per year) on a take or pay basis
in relation to the Bimini Sands Resort property in South Bimini Island, Bahamas.
The price of water supplied is adjusted annually based on Government indices.
The agreement is subject to approval by certain regulatory bodies, which is
expected by May 2001. No water sales resulted from this agreement for the year
ended December 31, 2000.
There are no other individually significant supply agreements.
16. STOCK COMPENSATION
The Company operates various stock compensation plans (described below) that
form part of employee's remuneration. Stock compensation expenses of $124,772
are recorded in accordance with APB 25 and included within employee costs (1999:
$245,117; 1998: $244,171).
EMPLOYEE SHARE PLAN:
The Company awards redeemable preferred stock (restricted stock) for NIL
consideration under the employee share plan as part of compensation for eligible
employee services (excluding directors) that require future services as a
condition to the delivery of the underlying shares of common stock. In addition
options are granted to purchase preferred stock at a fixed price, determined
annually, which will typically represent a discount to the market value of the
underlying shares of common stock. In consideration for redeemed vested
preferred stock, the Company issues common stock on a share for share basis.
Under the plan the conversion is conditional on the grantee's satisfying
requirements outlined in the award agreements. The redeemable preferred stock is
only redeemable with the Company's agreement. See note 8 for the vesting
schedule of outstanding preferred stock currently redeemable. The details of
preferred stock and stock options granted and exercised under the employee share
plan is as follows:
YEAR OF STRIKE OPTIONS OPTIONS
GRANT GRANTED PRICE EXERCISED EXPIRED
----- ------- ----- --------- -------
Preferred stock granted 1998 7,590 $nil N/A N/A
1999 9,768 $nil N/A N/A
2000 2,279 $nil N/A N/A
Preferred stock options granted 1998 7,590 $5.32 2,437 5,153
1999 9,768 $5.71 2,220 7,548
2000 2,279 $5.47 1,136 1,143
Each employee's option to purchase preference shares must be exercised within 40
days of the annual general meeting of the Company following the date of grant.
NON-EXECUTIVE DIRECTORS' SHARE PLAN:
In 1999, the Company introduced a share grant plan which forms part of
Directors' remuneration. Under the plan Directors receive a combination of cash
and common stock in consideration of remuneration for their participation in
Board meetings. All Directors are eligible except Executive Officers (who are
covered by individual employment contracts) and the Government elected board
member. Common stock granted is calculated with reference to a strike price that
is set by the Board of directors on October 1 of the year preceding the grant.
Stock granted on September 30, 2000 totaled 6,890 (1999: 2,400). The strike
price set on October 1, 2000 was $7.25 (October 1, 1999 $6.75).
54
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CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
16. STOCK COMPENSATION (CONTINUED)
DIRECTORS AND SENIOR MANAGEMENT STOCK COMPENSATION:
The Chairman and Chief Executive Officer ("CEO"), the President and Chief
Operating Officer ("COO"), the Vice President - Finance, the Vice President -
Operations, and two senior managers are entitled to receive, as part of the
compensation for their services to the Company, options to purchase common
stock. Two other directors were granted options as remuneration for services
rendered to the Company. Details of the options granted to and exercised by
these directors and senior management are included in the table below. In
addition, another member of senior manager is entitled to receive, as part of
compensation for services to the Company, common stock of the Company. In March
2001 1,086 shares of common stock were issued to this employee.
NON-EMPLOYEE:
As part of an agreement for market representation, the Company issued options to
purchase common stock to an investment company for nil consideration. These
options had an original expiry date of December 1, 2000. During the year ended
December 31, 2000 the Company extended this expiry date to March 31, 2002. The
fair value of these options was determined by management to be $30,000, based on
the fair value of the services to be received. Stock compensation expenses
arising on these options are included within other indirect costs.
OPTIONS STRIKE OPTIONS DATE
GRANT DATE GRANTED PRICE EXPIRY DATE EXERCISED EXERCISED
---------- ------- ----- ----------- --------- ---------
CHAIRMAN AND CEO:
December 31, 1998 16,570 US$2.50 01-Jun-99 16,570 31-Mar-99
December 31, 1999 7,786 US$2.50 20-Mar-03 -- --
December 31, 2000 26,924 US$7.10 15-Mar-04 -- --
PRESIDENT AND COO:
December 31, 2000 5,609 US$7.10 15-Mar-04 -- --
OTHER DIRECTORS:
December 31, 1997 20,000 US$2.50 24-Feb-01 -- --
December 31, 1998 20,000 US$2.50 01-Mar-02 -- --
July 20, 1999 30,000 US$6.00 01-May-02 -- --
December 31, 1999 20,000 US$2.50 20-Mar-03 -- --
May 1, 2000 30,000 US$6.75 01-May-03 -- --
December 31, 2000 5,609 US$7.10 15-Mar-04 -- --
SENIOR MANAGEMENT:
December 31, 2000 47,117 US$7.10 15-Mar-04 -- --
NON-EMPLOYEE:
December 15, 1998 30,000 US$7.88 31-Mar-02 -- --
55
58
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
16. STOCK COMPENSATION (CONTINUED)
WEIGHTED AVERAGE NUMBER AND EXERCISE PRICE OF OPTIONS (ALL SCHEMES):
2000 1999 1998
-------------------------- ------------------------ -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE PER PRICE PER PRICE PER
OF SHARE NUMBER OF SHARE NUMBER OF SHARE
OPTIONS US$ OPTIONS US$ OPTIONS US$
------- --------- -------- ---------- -------- ----------
Outstanding at beginning of year 127,786 $ 4.58 159,010 $ 3.51 92,440 $ 2.50
Granted 117,538 $ 6.98 67,554 $ 4.96 74,160 $ 2.78
Exercised (1,136) $ 5.47 (91,230) $ 5.32 (2,437) $ 1.58
Forfeited (1,143) $ 5.47 (7,548) $ 5.32 (5,153) $ 4.07
-------- -------- ---------
Outstanding and exercisable at end of
year 243,045 $ 5.73 127,786 $ 4.58 159,010 $ 3.51
======== ======== =========
The Company determines stock compensation costs according to the methodology
outlined in APB Opinion No. 25. The table below summarizes the proforma effect
if FASB Statement No. 123, the alternative applicable standard, was adopted:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------
2000 1999 1998
------------- ------------- -------------
Net income $ 2,111,755 $ 1,498,105 $ 1,451,975
Basic earnings per ordinary share $ 0.59 $ 0.48 $ 0.48
Diluted earnings per ordinary share $ 0.58 $ 0.47 $ 0.45
Weighted average fair value per share under FAS 123 for options granted during
the year:
Options granted with an exercise price below market price on the date of grant:
Chairman and CEO -- $ 4.07 $ 4.48
President and COO -- $ 4.07 $ 4.48
Non-executive directors $ 2.69 $ 3.69 --
Senior Management -- $ 1.84 $ 2.07
Other employees $ 2.66
Overall weighted average $ 2.69 $ 3.80 $ 4.33
Options granted with an exercise price above market price on the date of grant:
Chairman and CEO $ 2.57 -- --
President and COO $ 2.57 -- --
Non-executive directors -- -- --
Senior Management $ 2.57 -- --
Other employees -- -- --
Overall weighted average $ 2.57 -- --
56
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CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
16. STOCK COMPENSATION (CONTINUED)
In calculating the fair value for these options under FAS 123 the Black-Scholes
model was used with the following weighted average assumptions:
Options granted with an exercise price below market price on the date of grant:
2000 1999 1998
---- ---- ----
Exercise price $ 6.70 $ 4.37 $ 2.68
Grant date market value $ 6.97 $ 6.98 $ 7.02
Risk free interest rate 6.56% 5.75% 4.75%
Expected life 3.0 years 2.8 years 0.4 years
Expected volatility 62.64% 72.55% 29.32%
Expected dividend yield 4.59% 3.46% 2.28%
Options granted with an exercise price above market price on the date of grant:
2000 1999 1998
---- ---- ----
Exercise price $ 7.1 -- --
Grant date market value $ 7.0 -- --
Risk free interest rate 5.0% -- --
Expected life 3.2 years -- --
Expected volatility 62.57% -- --
Expected dividend yield 4.57% -- --
Weighted average fair value per share under FAS 123 for shares issued during the
year below market price on the date of grant:
2000 1999 1998
------------------- ---------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER FAIR VALUE NUMBER FAIR VALUE NUMBER FAIR VALUE
OF PER SHARE OF PER SHARE OF PER SHARE
SHARES US$ SHARES US$ SHARES US$
------ ---------- -------- ---------- ------ ----------
Employee Share Plan 2,279 $ 7.00 9,768 $ 5.83 7,590 $ 4.58
Directors Share Plan 6,889 $ 7.13 2,400 $ 6.75 -- --
Overall weighted average 9,168 $ 7.09 12,168 $ 6.01 7,590 $ 4.58
17. TAXATION
Under current laws of the Cayman Islands, there are no income, estate,
corporation, capital gains or other taxes payable by the Company. The Company
has received a tax exemption with respect to their Belize operations. The
exemption expires in 2006 and is renewable in accordance with the provisions of
the license (Note 3).
57
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CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
18. GOVERNMENT ROYALTIES
Royalty expenses incurred during the year under the terms of the license to
process and supply potable water, granted by the Government, amounted to
$641,428 (1999: $560,441; 1998: $570,416). In accordance with the terms of the
license, royalties are payable at the rate of 7.5% of gross water sales.
Payments are made monthly in arrears.
19. PENSION BENEFITS
A staff pension scheme commenced during June 1995 and was offered to all
employees, both full and part-time. The scheme is administered by the Cayman
Islands Chamber of Commerce and is a defined contribution plan, whereby the
Company matches the contribution of the first 5% of each participating
employee's salary. The total amount recognized as an expense under the scheme
during 2000 was $67,760 (1999: $48,554 1998: $45,537).
20. FINANCIAL INSTRUMENTS
CREDIT RISK:
Financial assets that potentially subject the Company to concentrations of
credit risk consist principally of cash and accounts receivable. The majority of
the Company's cash balances are placed with high credit quality financial
institutions. With respect to accounts receivable, the Company's operations in
Belize as described in Note 1 are concentrated with one customer. As a result,
the Company is subject to credit risk to the extent of any non-performance by
this customer. As at December 31, 2000 the Company was owed $348,959 from this
customer. Credit risk with respect to the remainder of the accounts receivable
balance is limited due to the large number of customers comprising the Company's
customer base and the ability of the Company to withdraw supply in the event of
non-payment.
INTEREST RATE RISK:
The interest rates and terms of the Company's loans and Water Purchase Agreement
are presented in Notes 7 and 14 respectively.
FAIR VALUES:
At December 31, 2000 and 1999 the carrying amounts of cash and short term bank
deposits and bank overdrafts, accounts receivable, accounts payable and accrued
expenses approximated their fair values due to the short term maturities of
these assets and liabilities. The Directors consider that the carrying amount
for long term debt (Note 7) due to Royal Bank of Canada approximates fair value
due to the characteristics of this debt. The fair value for long term debt due
to European Investment Bank is approximately $1,207,000 (1999: $1,400,000)
although this does not necessarily indicate that the Company could extinguish
this debt for an amount lower than the carrying value. Fair value of this long
term debt for which no market value is readily available is determined by the
Company using predetermined future cash flows discounted at an estimated current
incremental rate of borrowing for a similar liability. In establishing an
estimated incremental rate, the Company has evaluated the existing transactions,
as well as comparable industry and economic data and other relevant factors such
as pending transactions, subsequent events and the amount the Company would have
to pay a credit worthy third party to assume the liability, with the creditors
legal consent.
58
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CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
21. NON-CASH TRANSACTIONS
The Company made the following non-cash transactions:
2000 1999 1998
----------- ----------- -----------
Redemption of preferred stock and issue of replacement
ordinary shares of common stock at $Nil consideration
(10,639, 14,835, and 210 shares respectively) (Note 8) $ 12,767 $ 17,802 $ 252
=========== =========== ===========
Preferred stock issued to employees at $Nil
consideration (2,279, 9,768, and 7,590 shares
respectively) (Note 8 and 16) $ 2,735 $ 11,722 $ 9,108
Redemption of preferred stock at $Nil consideration
(200, nil, and nil shares respectively) (Note 8) (240) -- --
Ordinary shares of common stock issued under the
Directors Share Plan at $Nil consideration
(6,890, 2,400, and nil respectively) (Note 16) 49,084 14,850 --
Additional paid in capital from stock options -- 350,688 40,498
----------- ----------- -----------
$ 51,579 $ 377,260 $ 49,606
=========== =========== ===========
Reduction in additional paid in capital from
cancellation of treasury shares (Note 8) $ 1,315,678 $ -- $ --
=========== =========== ===========
Dividends declared but not paid (Note 6) $ 401,965 $ 266,585 $ 257,117
=========== =========== ===========
Depreciation charges capitalized (Note 5) $ 33,682 $ 35,749 $ 30,319
=========== =========== ===========
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
OUR DIRECTORS AND EXECUTIVE OFFICERS
Under our license with the Cayman Islands government, the Cayman
Islands government must approve all of our executive officers and directors.
This table lists information concerning our executive officers and directors:
NAME AGE POSITION WITH CONSOLIDATED WATER
---- --- --------------------------------
Jeffrey M. Parker 56 Director, Chairman of the board of directors
and Chief Executive Officer
Frederick W. McTaggart 38 Director, President and Chief Operating
Officer
Peter D. Ribbins 53 Director - Special Projects
Gregory S. McTaggart 37 Vice President - Operations
Alexander S. Bodden 36 Vice President - Finance and Secretary
J. Bruce Bugg, Jr. 46 Vice Chairman of the board of directors
Brian E. Butler 51 Director
Steven A. Carr 50 Director
Richard L. Finlay 42 Director
Clarence B. Flowers, Jr. 45 Director
Wilmer Pergande 61 Director
Raymond Whittaker 47 Director
JEFFREY M. PARKER has been a director of our company since 1980, the
Chairman of the Board since 1982 and Chief Executive Officer since 1994. In
addition to serving as our Chief Executive Officer and Chairman of the Board,
Mr. Parker is a Chartered Accountant and practices at Moore Stephens in the
Cayman Islands, a member of Moore Stephens International Ltd. From 1993 to 1995,
Mr. Parker served as a director of The International Desalination Association
representing the Caribbean & Latin America. Mr. Parker received his ACA
designation as a chartered accountant in England and Wales in 1967, and his FCA
designation in 1977.
FREDERICK W. MCTAGGART has been a director of our company since April
1998, and the President and Chief Operating Officer since October 2000. From
April 1994 to October 2000, Mr. McTaggart was the Managing Director of the Water
Authority-Cayman, the government-owned water utility serving certain areas of
the Cayman Islands. He received his B.S. degree in Building Construction from
the Georgia Institute of Technology in 1985. Mr. McTaggart is the brother of Mr.
Gregory S. McTaggart, the Vice President - Operations of our company.
PETER D. RIBBINS is our Director-Special Projects and has served as a
director since April 1989. Mr. Ribbins joined our company in 1983 as its General
Manager, a position he held until 1989, when he was appointed Managing Director.
He was appointed President and Chief Operating Officer in 1994
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and resigned from that position in October 2000 for personal reasons. Mr.
Ribbins obtained his B.S. degree in Kinanthropology from the University of
Ottawa, Canada in 1971.
GREGORY S. MCTAGGART is our Vice President-Operations. Mr. McTaggart
joined our company in January 1991 as our resident engineer and has served in
his current capacity since October 1994. For three years before joining us, Mr.
McTaggart worked for the Caribbean Utilities Company as a mechanical engineer.
Mr. McTaggart obtained his B.S. degree in Mechanical Engineering from the
Georgia Institute of Technology in 1986. Mr. McTaggart is the brother of
Frederick W. McTaggart, the President, Chief Operating Officer and a director of
our company.
ALEXANDER S. BODDEN is our Vice President-Finance and Secretary. Mr.
Bodden joined our company in July 1993 as Financial Controller and was appointed
Secretary in April 1994 and Vice President-Finance in October 1994. Before
joining our company, Mr. Bodden worked with Price Waterhouse in the Audit and
Business Services division. Mr. Bodden obtained his B.A. (Hons), in Accounting
and Finance from the City of London University in 1985 and his ACA designation
as a Chartered Accountant in England in 1990. Mr. Bodden will be leaving our
company on April 5, 2001. Frederick W. McTaggart was elected by the board in
February 2001 to replace Mr. Bodden as Chief Financial Officer upon his
departure from the company.
J. BRUCE BUGG, JR. has been our Vice-Chairman of the Board since April
1998. Mr. Bugg is also and has been since 1997, the Chairman of the Board of
directors and Chief Executive Officer of Argyle Investment Co., the general
partner of Argyle Partners Ltd., the sole general partner of Argyle/Cay-Water,
Ltd. From 1996 to 1997, Mr. Bugg served as Vice Chairman of First Southwest
Company and Chairman of its Investment Banking Group.
BRIAN E. BUTLER has been a director of our company since 1983. Since
1977, Mr. Butler has been the principal of Columbus Developments Ltd., a
property development company specializing in luxury resort projects in the
Cayman Islands.
STEVEN A. CARR has served as a director of our company since May 2000.
Since 1994, Mr. Carr has been the President of Carr & Associates, a private
investment firm located in Bryan, Texas. Before joining Carr & Associates, Mr.
Carr held a variety of executive positions and participated in the ownership and
management of a number of telecommunications ventures throughout the United
States. Mr. Carr has served as an alternate director on our board of directors
for his father, Hal N. Carr, since 1998. Mr. Carr is also currently a director
of the First National Bank of Bryan. In addition to his business interests, Mr.
Carr is an instructor at the College of Business Administration at Texas A&M
University.
RICHARD L. FINLAY has served as a director of our company since January
1995. Mr. Finlay is an attorney and partner with the Cayman Islands law firm of
Charles Adams, Ritchie and Duckworth. Before joining this firm in 1993, he
served as Director of Legal Studies of the Cayman Islands Government from 1989
to 1992. From 1983 to 1989, Mr. Finlay was a partner with the Canadian law firm
of Olive, Waller, Zinkhan and Waller. Mr. Finlay has served as the Cayman
Islands' representative to the International Company and Commercial Law Review
and is a former editor of the Cayman Islands Law Bulletin.
CLARENCE B. FLOWERS, JR. has been a director of our company since 1991.
Mr. Flowers is and has been since 1985, the principal of Orchid Development
Company, a real estate developer in the Cayman Islands. Mr. Flowers also serves
as a director of C.L. Flowers & Son, which is the largest manufacturer of
concrete blocks in the Cayman Islands.
WILMER PERGANDE has been a director of our company since 1978. Mr.
Pergande is the Vice-President of Special Projects of Osmonics, Inc. of
Minnetonka, Minnesota, a publicly traded company and the third largest water
treatment company in North America. Before joining Osmonics, Mr. Pergande was
the Chief Executive Officer of Licon International, Inc., a publicly traded
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manufacturer of liquid processing equipment. Previously, Mr. Pergande held
several executive positions with Mechanical Equipment Company, Inc., a
manufacturer of seawater conversion equipment.
RAYMOND WHITTAKER has served as a director of our company since
November 1988. Mr. Whittaker was the Managing Director of TransOcean Bank &
Trust, Ltd., a bank and trust company located in the Cayman Islands and a
subsidiary of Johnson International, Inc., a bank holding company located in
Racine, Wisconsin from October 1984 to December 2000. He is now the principal of
his own company and management firm.
COMPOSITION OF THE BOARD OF DIRECTORS
The board of directors is organized into three groups. Each group holds
office for a three year periods and re-election of the board members is
staggered so that two-thirds of the board members are not subject to re-election
in any given year. The groups are organized alphabetically as follows:
GROUP 1 GROUP 2 GROUP 3
------- ------- -------
J. Bruce Bugg Jr. Richard Finlay Wilmer Pergande
Brian Butler Clarence Flowers, Jr Peter D. Ribbins
Steven A. Carr Frederick McTaggart Raymond Whittaker
Jeffrey M. Parker
Group 2 was re-elected at our annual shareholders' meeting in May 2000.
Group 1 will be proposed for re-election during the year ended December 31, 2001
and then Group 3 during the year ended December 31, 2002. Hal N. Carr, a former
director, resigned in May 2000 after twenty years of serving as a director and
was replaced by his son, Steven A. Carr.
Under our license, the Cayman Islands government may nominate three
persons to serve on our board of directors. We must cause one of the persons
nominated by the government to be elected as a director. Frederick W. McTaggart,
was serving as a director who was elected as the government's nominee when he
joined the company as President and COO in October 2000. The government has
indicated that they intend to propose a new nominee in the near future.
On April 17, 1997, Argyle/Cay-Water, Ltd. filed an application with the
Cayman Islands government for permission to acquire up to 50% of our issued and
outstanding shares. We did not support Argyle's attempt to gain control of our
company. On July 22, 1997, the Cayman Islands government approved Argyle's
application. J. Bruce Bugg, Jr. is the sole shareholder and manager of Argyle
Investment Co., the general partner of Argyle Partners Ltd., the sole general
partner of Argyle/Cay-Water, Ltd.
On March 31, 1998, we reached an agreement with Argyle/Cay-Water, Ltd.
During the five-year term of this agreement, we agreed to appoint Mr. Bugg as
Vice Chairman of our board of directors in exchange for which Mr. Bugg and
Argyle/Cay-Water, Ltd. agreed not to acquire more than 19.9% of the ordinary
shares. Our main obligations under the agreement are to recommend to our
shareholders the appointment of Mr. Bugg (or his successor) to the board of
directors and, with several exceptions, to obtain Argyle/Cay-Water, Ltd.'s
consent before issuing any of our securities.
During the term of the agreement, Argyle/Cay-Water, Ltd. and Mr. Bugg
may not participate in proxy solicitation, seek to control or influence our
management, except in accordance with Mr. Bugg's duties as a director, or
challenge the validity of the option deed.
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ITEM 11. EXECUTIVE COMPENSATION
The following table provides summary information concerning the annual
and long-term compensation earned by the company's chief executive officer and
each of the four other most highly compensated executive officers of the company
during the fiscal years ended December 31, 2000, 1999 and 1998:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------------------------------- -------------------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- --------------------------- ---- ------ ----- ------------ -------- ------------
Jeffrey M. Parker
Chairman and Chief Executive 1998 -- $ 50,872 -- 16,570 $ 88,699
Officer
1999 $ 90,000 91,262 -- 7,786 --
2000 94,590 143,314 -- 26,294 --
Frederick W. McTaggart
Director, President and 1998 -- -- -- -- --
Chief Operating Officer
1999 -- -- -- -- --
2000 116,400 21,171 -- 5,609 --
Peter D. Ribbins
Director - Special Projects 1998 113,103 44.218 -- 20,000 --
1999 116,496 66,265 -- 20,000 --
2000 121,447 80,448 -- 5,609 --
Alexander S. Bodden
Vice President Finance and 1998 76,902 5,071 $ 3,488 -- --
Secretary
1999 93,600 10,730 8,678 -- --
2000 98,374 17,155 2,777 26,924 --
Gregory S. McTaggart
Vice President Operations 1998 76,902 5,071 7,608 -- --
1999 79,209 10,730 8,678 -- --
2000 83,248 17,155 1,808 20,193 --
The salary shown in 2000 for Mr. Frederick McTaggart, who joined the
company in October 2000, is annualized based upon a full year of employment. Mr.
Frederick McTaggart's actual salary for 2000 was $24,772.
All options granted to Mr. Parker in 1998 and 1999 have an exercise
price of $2.50 per share and in 2000 they have an exercise price of $7.10 per
share. The other compensation totaling $88,699 which was paid to Mr. Parker in
1998 was paid for services rendered to us by an accounting practice owned by
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Mr. Parker. In 1999, the payment method regarding Mr. Parker's services was
changed from a payment to the accountancy practice owned by Mr. Parker to a
direct salary payment to Mr. Parker.
All options granted to Mr. Ribbins in 1998 and 1999 have an exercise
price of $2.50 per share and in 2000 they have an exercise price of $7.10 per
share.
All options granted to Mr. Frederick McTaggart in 2000 have an exercise
price of $7.10 per share.
The other annual compensation to Alexander Bodden and Gregory McTaggart
is comprised of redeemable preferred shares issued to them under our share
incentive plan. Under our share incentive plan, half of the redeemable
preferred shares are issued as additional compensation at no cost to the
employee and the employee may purchase, for cash, the balance at an exercise
price of approximately 75% of the market price of the ordinary shares at the
time of issuance. These shares issued to Messrs. Bodden and G. McTaggart has an
issue price of $5.31 per share, $5.71 per share and $5.47 per share, in 1998,
1999 and 2000 respectively.
STOCK OPTION GRANTS
The following table provides information, with respect to the chief
executive officer and the other named executive officers listed in the Summary
Compensation Table, concerning stock options granted on ordinary shares in
fiscal year 2000:
% OF TOTAL POTENTIAL REALIZABLE VALUE
OPTIONS AT ASSUMED ANNUAL RATES
GRANTED OF STOCK PRICE APPRECIATION
TO FOR OPTION TERM
EMPLOYEES --------------------------------
OPTIONS IN EXERCISE OR AT 5% ANNUAL AT 10% ANNUAL
GRANTED FISCAL BASE PRICE EXPIRATION GROWTH RATE GROWTH RATE
NAME (#) YEAR ($/SH) DATE ($) ($)
- ---- ------- --------- ----------- ---------- ------------ ---------------
Jeffrey M. Parker 26,924 19% 7.10 03/15/04 27,538 57,768
Frederwick W. McTaggart 5,609 5% 7.10 03/15/04 5,737 12,035
Peter D. Ribbins 5,609 5% 7.10 03/15/04 5,737 12,035
Alexander S. Bodden 26,924 19% 7.10 03/15/04 27,538 57,768
Gregory S. McTaggart 20,193 15% 7.10 03/15/04 20,653 43,326
Market value on grant date (December 31, 2000) of these options was U.S. $7.00.
64
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STOCK OPTION HOLDINGS
The following table provides information, with respect to the chief
executive officer and the other named executive officers listed in the Summary
Compensation Table, concerning the holding of unexercised options at the end of
fiscal year 2000:
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR END OPTIONS AT FISCAL YEAR END
------------------------------- -----------------------------
SHARES
ACQUIRED VALUE
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) ($) (#) (#) ($) ($)
- ---- ----------- -------- ----------- ------------- ----------- -------------
Jeffrey M. Parker -- -- 34,710 -- 54,502 --
Frederwick W. McTaggart -- -- 5,609 -- -- --
Peter D. Ribbins -- -- 65,609 -- 420,000 --
Alexander S. Bodden -- -- 26,924 -- -- --
Gregory S. McTaggart -- -- 20,193 -- -- --
SHARE INCENTIVE PLAN
Since April 8, 1987, we have maintained a share incentive plan for our
long-term employees who are not directors. To become eligible for the share
incentive plan, an employee must complete four years of service with us and then
retain the shares for an additional four years before he can transfer or sell
the shares. We may, at our option, offer to exchange the redeemable preferred
shares issued to the employee for an equal number of freely tradable ordinary
shares at any time during the four year holding period. Within the four year
holding period, if an employee ceases to be employed by our company, our
company, at the sole discretion of the board of directors, may redeem the
redeemable shares held by that employee for less than four years at the price
which the employee originally paid for the shares.
Under the plan, employees are issued redeemable preferred shares on an
annual basis at no cost based on a formula which takes into consideration the
employee's salary and the total dividend paid to ordinary shareholders as a
percentage of the total shareholder's equity in each year. In addition, the
employee is granted an option to purchase an equal number of redeemable
preferred shares at approximately 75% of the average market price of the
ordinary shares. The exercise price is determined during the ten days after our
annual shareholder's meeting. This option expires, unless exercised by the
employee, within forty (40) days after the date of our annual shareholder's
meeting. Since we adopted the share incentive plan, our employees, who are
currently in the plan, have acquired 93,108 redeemable preferred shares, of
which 59,474 have been redeemed for an equal number of ordinary shares.
SHARE GRANT PLAN
In 1999, we implemented a share grant plan for our directors who are
not executive officers or serving as the Cayman Islands' government
representative on our board. Under this plan, a director receives ordinary
shares based upon the number of board and committee meetings that the director
attends during the year. Each board meeting is worth the share equivalent of a
$1,200 fee and each committee meeting is worth the share equivalent of a $600
fee. Attendance fees are accumulated throughout the year and then divided by the
prevailing market price on October 1st of the preceding year to determine the
number of shares to be granted for the current year. On October 1, 2000 the
directors as a group received 6,889 ordinary shares at the prevailing market
price of $6.75 per share.
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EMPLOYMENT AGREEMENTS
We entered into an employment agreement with Jeffrey M. Parker, our
Chairman of the Board of directors and Chief Executive Officer. Mr. Parker
devotes at least 75% of his working time to our company and the remainder of his
working time to his accountancy practice. This agreement, as amended, was
originally scheduled to expire on December 31, 2001, although it extends
automatically each year for an additional one year term. If we terminate Mr.
Parker without cause, he is entitled to all financial benefits under the
agreement for a period of two years and any unvested stock options for the year
in which Mr. Parker is terminated automatically vest and become fully
exercisable. Under prior employment agreements, in each of the four years ended
December 31, 1995, 1996, 1997 and 1998, Mr. Parker was granted an option to
purchase that number of ordinary shares which was equal to 2.5% of our net
profit before dividends or extraordinary items for that year. The exercise price
of these options was $2.50 per share. For each of the three years ended December
31, 1999, 2000 and 2001, Mr. Parker has been or will be granted an option to
purchase that number of ordinary shares which equals 1% of our net profit for
that year. The exercise price of the options granted in 1999 is $2.50 per share,
and the exercise price of the options to be granted in 2000 is $7.10 per share
and the exercise price of the options to be granted in 2001 will be equal to the
average of the closing market price of the ordinary shares on each of the first
seven trading days in the month of October of 2001. In August 1997 and March
1999, Mr. Parker exercised options to purchase 101,705 and 29,010 ordinary
shares, respectively, representing all the options that were accrued to Mr.
Parker on those dates. All options granted to Mr. Parker after March 1999 expire
on the third anniversary of the date of the Auditor's Report on the financial
statements for the year of grant.
In addition to serving as our Chairman of the Board and Chief Executive
Officer, Mr. Parker owns an accountancy practice in the Cayman Islands. Until
1999, we paid the accountancy practice for services rendered to us by Mr. Parker
through his practice. In 1999, we began paying Mr. Parker directly for his
services.
We entered into an employment agreement with Frederick W. McTaggart,
our President and Chief Operating Officer. The agreement is scheduled to expire
on October 16, 2003, although it extends automatically each year for an
additional one year term. If we terminate Mr. Frederick McTaggart without cause,
he is entitled to all financial benefits under the agreement for a period of two
years and any unvested stock options for the year in which Mr. Frederick
McTaggart is terminated automatically vest and become fully exercisable. For the
year ended December 31, 2000, Mr. Frederick McTaggart was granted an option to
purchase 5,609 ordinary shares at an exercise price of $7.10. Mr. Frederick
McTaggart shall be granted an option to purchase that number of ordinary shares
which equals 1% of our net profit for that year. The exercise price of the
options to be granted will be equal to the average of the closing market price
of the ordinary shares on each of the first seven trading days in the month of
October of that financial year. All options granted to Mr. Frederick McTaggart
expire on the third anniversary of the date of the Auditor's Report on the
financial statements for the year of grant.
We entered into an employment agreement with Peter D. Ribbins, our
former President and Chief Operating Officer and currently Director - Special
Projects. The agreement fixes the salary of Mr. Ribbins until October 31, 2003
and thereafter it will be determined by mutual consent. In each of the five
years ended December 31, 1995, 1996, 1997, 1998 and 1999, Mr. Ribbins was
granted an option to purchase 20,000 ordinary shares at an exercise price of
$2.50 per share. For the year ended December 31, 2000, Mr. Ribbins was granted
an option to purchase 5,609 ordinary shares at an exercise price of $7.10. In
May 1999, Mr. Ribbins exercised options to purchase 60,000 ordinary
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shares. All options granted to Mr. Ribbins expire on the third anniversary of
the date of the Auditor's Report on the financial statements for the year of
grant.
We entered into an employment agreement with Alex Bodden, our Vice
President of Finance and Secretary. This agreement was originally scheduled to
expire on August 31, 2000, although it extends automatically each year for an
additional one year term. Under the agreement, if we terminate Mr. Bodden
without cause, he is entitled to all financial benefits under the agreement for
a period of one year. For each year beginning in 2000, Mr. Bodden will be
granted an option to purchase that number of ordinary shares which equals 1% of
our net profit for that year. The exercise price of the options to be granted to
Mr. Bodden will be equal to the average of the closing market price of the
ordinary shares on each of the first seven trading days in the month of October
of the year in which the options are granted. All options granted to Mr. Bodden
expire on the third anniversary of the date of the Auditor's Report on the
financial statements for the year of grant. As a result of the option grant
described above, Mr. Bodden will no longer be eligible to participate in the
share incentive plan for fiscal years after 1999.
We entered into an employment agreement with Gregory McTaggart, our
Vice President of Operations. This agreement was originally scheduled to expire
on August 19, 2001, although it extends automatically each year for an
additional one year term. Under the agreement, if we terminate Mr. Gregory
McTaggart without cause, he is entitled to all financial benefits under the
agreement for a period of one year. For each year beginning in 2000, Mr. Gregory
McTaggart will be granted an option to purchase that number of ordinary shares
which equals 0.75% of our net profit for that year. The exercise price of the
options to be granted to Mr. Gregory McTaggart will be equal to the average of
the closing market price of the ordinary shares on each of the first seven
trading days in the month of October of the year in which the options are
granted. All options granted to Mr. Gregory McTaggart expire on the third
anniversary of the date of the Auditor's Report on the financial statements for
the year of grant. As a result of the option grant described above, Mr. Gregory
McTaggart will no longer be eligible to participate in the share incentive plan
for fiscal years after 1999.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The table below sets forth the beneficial ownership of our ordinary
shares, par value CI$1.00 per share, of which 3,862,943 are outstanding as of
March 19, 2001, and our redeemable preference shares, par value CI$1.00 per
share, of which 33,634 are outstanding as of March 19, 2001 by:
o each person or entity that we know beneficially owns more than
5% of our ordinary shares or redeemable preference shares;
o each of our executive officers and directors; and
o all of our officers and directors as a group.
TITLE OF IDENTITY OF AMOUNT PERCENTAGE
CLASS PERSON OR GROUP OWNED OF CLASS
----- --------------- ------ -----------
Ordinary Shares Argyle/Cay-Water, Ltd. 477,662 12.4%
Ordinary Shares Jeffrey M. Parker, 191,826 4.9%
Chairman of the Board
Ordinary Shares Frederick W. McTaggart, 5,709 *
Director, President and Chief
Operating Officer
Ordinary Shares Peter D. Ribbins, 65,609 1.7%
Director - Special Projects
Ordinary Shares Gregory S McTaggart, 30,709 *
Vice President Operations
Ordinary Shares Alexander S. Bodden, 34,167 *
Vice President Finance and
Secretary
Ordinary Shares J. Bruce Bugg, Jr., 537,662 13.7%
Vice Chairman of the Board of
directors
Ordinary Shares Brian E. Butler, 15,250 *
Director
Ordinary Shares Steven A. Carr, 42,353 1.1%
Director
Ordinary Shares Richard L. Finlay, 7,507 *
Director
Ordinary Shares Clarence B. Flowers, Jr., 0 *
Director
Ordinary Shares Wilmer Pergande, 2,432 *
Director
Ordinary Shares Raymond Whittaker, 28,000 *
Director
Ordinary Shares Directors and Executive 961,224 23.9%
Officers as a Group
(12 persons)
Redeemable Alexander S. Bodden, 644 1.9%
Preference Shares Vice President Finance and
Secretary
Redeemable Abel Castillo 5,092 15.1%
Preference Shares Operations Manager
Redeemable Gregory McTaggart 248 1.0%
Preference Shares Vice President Operations
Redeemable Margaret Julier, 4,851 14.4%
Preference Shares Office Manager
Redeemable Directors and Executive 892 2.7%
Preference Shares Officers as a group (2 persons)
An asterisk (*) in the above table indicates less than one percent
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The address for Jeffrey Parker, Frederick McTaggart, Peter Ribbins,
Gregory McTaggart, Alexander Bodden, Abel Castillo and Margaret Julier is as
follows: c/o Consolidated Water Co. Ltd., Trafalgar Place, West Bay Road, P.O.
Box 1114GT, Grand Cayman, B.W.I. The address for each of J. Bruce Bugg Jr. and
Argyle/Cay-Water, Ltd. is c/o Argyle Investment Corp., 1599 Nations Bank Plaza,
300 Convent Street, San Antonio, Texas 77802. The address for Brian Butler is
P.O. Box 2581GT, Grand Cayman, B.W.I.. The address for Steven A. Carr c/o Carr &
Associates, 4103 South Texas Avenue, Suite 209, Bryan, Texas 77802. The address
for Richard Finlay is P.O. Box 709GT, Grand Cayman, B.W.I.. The address for
Clarence Flowers, Jr. is P.O. Box 2581GT, Grand Cayman, B.W.I.. The address for
Wilmer Pergande is 3724 Bengal Road, Gulf Breeze, Florida 32561. The address for
Raymond Wittaker is P.O. Box 1959GT, Grand Cayman, B.W.I.
Unless otherwise indicated, to our knowledge, the persons named in the
table above have sole voting and investment power with respect to the shares
listed. In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares issuable under stock options
exercisable within 60 days after December 31, 2000 are deemed outstanding for
that person but are not deemed outstanding for computing the percentage of
ownership of any other person. Of the 191,826 ordinary shares owned by Mr.
Parker, 34,080 of these shares are ordinary shares underlying options granted to
Mr. Parker which may be exercised within 60 days after December 31, 2000. Of the
5,709 ordinary shares owned by Mr. Frederick McTaggart, 5,609 are ordinary
shares underlying options granted to Mr. Frederick McTaggart which may be
exercised within 60 days after December 31, 2000. Of the 65,609 ordinary shares
owned by Mr. Ribbins, all of such shares underlie options granted to Mr.
Ribbins which may be exercised within 60 days after December 31, 2000. Mr. Bugg
is deemed the beneficial owner of the 477,662 ordinary shares held by
Argyle/Cay-Water, Ltd.. Of the 537,662 ordinary shares beneficially owned by Mr.
Bugg, 60,000 are ordinary shares underlying options granted to Mr. Bugg which
may be exercised within 60 days after December 31, 2000. Of the 30,709 ordinary
shares owned by Mr. Gregory McTaggart, 20,193 are ordinary shares underlying
options granted to Mr. Gregory McTaggart which may be exercised within 60 days
after December 31, 2000. Of the 34,167 ordinary shares held by Mr. Bodden 4,476
are owned by Mr. Bodden and his wife as joint tenants, over which they share
voting and investment power and 26,924 are ordinary shares underlying options
granted to Mr. Bodden which may be exercised within 60 days after December 31,
2000. Of the 28,000 ordinary shares held by Mr. Whittaker. Mr. Whittaker has
shared voting power over 22,000 shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As consideration for J. Bruce Bugg, Jr.'s services to us as
Vice-Chairman of the board of directors, on July 20, 1999, we granted to Mr.
Bugg options to purchase 30,000 ordinary shares at $6.00 per share, exercisable
until May 1, 2002. There was no trading of the Company's ordinary shares on July
20, 1999. The market price of the ordinary shares was $7.50 on July 21, 1999. On
May 1, 2000, we granted to Mr. Bugg options to purchase an additional 30,000
ordinary shares at $6.75 per share, which was the market price of the ordinary
shares on October 1, 1999. These additional 30,000 options are exercisable until
May 1, 2003.
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The options granted to Mr. Bugg, Jr., as well as all the employment
agreements with Messrs. Frederick W. McTaggart, Ribbins, Parker, Bodden and
Gregory S. McTaggart, were approved by a majority of the disinterested members
of the board of directors. It is management's opinion that all agreements set
forth in this section were on terms no less favorable than could have been
obtained from unaffiliated parties.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FROM 8-K
(a) 1. Financial Statements
The financial statements found in ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA for the year ended December 31, 2000 is incorporated herein
by reference.
2. Financial Statement Schedules
None
3. Exhibits
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
3.1 Amended and Restated Memorandum of Association of Consolidated
Water Co. Ltd., dated December 4, 1998 (incorporated by
reference to the exhibit filed as part of our Form 20-F for
the fiscal year ended December 31, 1998, Commission File No.
0-25248).
3.2 Amended and Restated Articles of Association of Consolidated
Water Co. Ltd., dated December 4, 1998 (incorporated by
reference to the exhibit filed as part of our Form 20-F for
the fiscal year ended December 31, 1998, Commission File No.
0-25248).
10.1 License Agreement, dated July 11, 1990, between Cayman Water
Company Limited and the Government of the Cayman Islands
(incorporated herein by reference to the exhibit filed as a
part of our Form 20-F dated December 7, 1994, Commission File
No. 0-25248).
10.2 First Amendment to License Agreement, dated September 18,
1990, between Cayman Water Company Limited and the Government
of the Cayman Islands. (incorporated herein by reference to
the exhibit filed as a part of our Form 20-F dated December 7,
1994, Commission File No. 0-25248).
10.3 Second Amendment to License Agreement, dated February 14,
1991, between Cayman Water Company Limited and the Government
of the Cayman Islands. (incorporated herein by reference to
the exhibit filed as a part of our Form 20-F dated December 7,
1994, Commission File No. 0-25248).
10.4 License Agreement, dated October 26, 1992, between Cayman
Island Government-Portfolio of Communications, Works and
Agriculture and Cayman Water Company Limited for the supply of
non-potable water to SafeHaven Ltd. (incorporated herein by
reference to the exhibit filed as a part of our Form 20-F
dated December 7, 1994, Commission File No. 0-25248).
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10.5 Amendment to License Agreement, dated November 12, 1992,
between Cayman Island Government -- Portfolio of
Communications, Works and Agriculture and Cayman Water Company
Limited for the supply of non-potable water to SafeHaven Ltd.
(incorporated herein by reference to the exhibit filed as a
part of our Form 20-F dated December 7, 1994, Commission File
No. 0-25248).
10.6 Service Agreement, dated October 27, 1992, between Cayman
Water Company Limited and SafeHaven Ltd. (incorporated herein
by reference to the exhibit filed as a part of our Form 20-F
dated December 7, 1994, Commission File No. 0-25248).
10.7 Amendment to Service Agreement, dated November 25, 1992,
between Cayman Water Company Limited and SafeHaven Ltd.
(incorporated herein by reference to the exhibit filed as a
part of our Form 20-F dated December 7, 1994, Commission File
No. 0-25248).
10.8 Amendment to Service Agreement, dated September 4, 1995,
between Cayman Water Company Limited and SafeHaven Ltd.
(incorporated herein by reference to the exhibit filed as a
part of our Registration Statement on Form F-1 dated March 26,
1996, Commission File No. 333-00038).
10.9 Water Purchase Agreement #2, dated October 14, 1994, between
Cayman Water Company Limited and Ocean Conversion (Cayman)
Limited. (incorporated herein by reference to the exhibit
filed as a part of our Form 20-F dated December 7, 1994,
Commission File No. 0-25248).
10.10 Water Purchase Agreement #3, dated October 21, 1994, between
Cayman Water Company Limited and Ocean Conversion (Cayman)
Limited. (incorporated herein by reference to the exhibit
filed as a part of our Form 20-F dated December 7, 1994,
Commission File No. 0-25248).
10.11 Water Purchase Agreement #3 (Revision #2), dated December 29,
2000, between Consolidated Water Co. Ltd. and Ocean Conversion
(Cayman) Limited.
10.12 Water Supply Agreement, dated December 18, 2000, between
Consolidated Water Co. Ltd. and South Bimini International
ltd.
10.13 Employment Agreement, dated August 30, 2000, between
Consolidated Water Co. Ltd. and Peter D. Ribbins.
10.14 Engagement Agreement, dated December 30, 1998 between
Consolidated Water Co. Ltd. and Jeffrey Parker (incorporated
herein by reference to the exhibit filed as part of our
Registration Statement on Form F-2 dated May 17, 2000,
Commission File No. 333-35356).
10.15 Amendment of Engagement Agreement, dated October 26, 1999,
between Consolidated Water Co. Ltd. and Jeffrey Parker
(incorporated herein by reference to the exhibit filed as part
of our Registration Statement on Form F-2 dated May 17, 2000,
Commission File No. 333-35356).
10.16 Second Amendment of Engagement Agreement, dated March 21,
2000, between Consolidated Water Co. Ltd. and Jeffrey Parker
(incorporated herein by reference to the exhibit filed as part
of our Registration Statement on Form F-2 dated May 17, 2000,
Commission File No. 333-35356).
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10.17 Employment Contract, dated July 12, 2000, between Consolidated
Water Co. Ltd. and Frederick W. McTaggart.
10.18 Employment Contract, dated August 19, 1998, between Cayman
Water Company Limited and Gregory Scott McTaggart
(incorporated herein by reference to the exhibit filed as part
of our Registration Statement on Form F-2 dated May 17, 2000,
Commission File No. 333-35356).
10.19 First Amendment to Employment Contract, dated April 17, 2000,
between Consolidated Water Co. Ltd. and Gregory Scott
McTaggart (incorporated herein by reference to the exhibit
filed as part of our Registration Statement on Form F-2 dated
May 17, 2000, Commission File No. 333-35356).
10.20 Employment Contract, dated August 31, 1997, between Cayman
Water Company Limited and Alexander S. Bodden (incorporated
herein by reference to the exhibit filed as part of our
Registration Statement on Form F-2 dated May 17, 2000,
Commission File No. 333-35356).
10.21 First Amendment to Employment Contract, dated April 17, 2000,
between Consolidated Water Co. Ltd. and Alexander S. Bodden
(incorporated herein by reference to the exhibit filed as part
of our Registration Statement on Form F-2 dated May 17, 2000,
Commission File No. 333-35356).
10.22 Letter Agreement, dated August 2, 1999, between Consolidated
Water Co. Ltd. and J. Bruce Bugg (incorporated herein by
reference to the exhibit filed as part of our Registration
Statement on Form F-2 dated May 17, 2000, Commission File No.
333-35356).
10.23 Specimen Service Agreement, between Cayman Water Company
Limited and consumers (incorporated herein by reference to the
exhibit filed as part of our Registration Statement on Form
F-1 dated March 26, 1996).
10.24 Summary Share Grant Plan for Directors (incorporated herein by
reference to the exhibit filed as part of our Registration
Statement on Form F-2 dated May 17, 2000, Commission File No.
333-35356).
10.25 Agreement, dated March 31, 1998, among Argyle/Cay-Water
Limited, J. Bruce Bugg and Cayman Water Company Limited
(incorporated herein by reference to the exhibit filed as part
of our Form 20-F for the fiscal year ended December 31, 1997,
Commission File No. 0-25248).
10.26 Option Deed, dated August 6, 1997, between Cayman Water
Company Limited and American Stock Transfer & Trust Company
(incorporated herein by reference to the exhibit filed on our
Form 6-K, dated August 7, 1997, Commission File No. 0-25248).
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10.27 Stock Option Agreement, dated December 15, 1998, between
Consolidated Water Co. Ltd. and R. Jerry Falkner (incorporated
herein by reference to the exhibit filed as part of our
Registration Statement on Form F-2 dated May 17, 2000,
Commission File No. 333-35356).
10.28 Agreement, dated April 20, 1999, among Consolidated Water Co.
Ltd., Ellesmere Britannia Ltd., Cayman Hotel & Golf, Inc. and
Hyatt Britannia Corporation (incorporated herein by reference
to the exhibit filed on our Form 20-F, for the fiscal year
ended December 31, 1998, Commission File No. 0-25248).
10.29 Settlement Agreement, dated April 20, 1999, among Consolidated
Water Co. Ltd., Ellesmere Britannia Ltd., Cayman Hotel & Golf,
Inc. and Hyatt Britannia Corporation (incorporated herein by
reference to the exhibit filed on our Form 20-F, for the
fiscal year ended December 31, 1998, Commission File No.
0-25248).
10.30 Consulting Agreement, dated November 17, 1998, between Cayman
Water Company Limited and R.J. Falkner & Company, Inc.
(incorporated herein by reference to the exhibit filed as part
of our Registration Statement on Form F-2 dated May 17, 2000,
Commission File No. 333-35356).
10.31 Agreement, dated July 24, 1995, between Cayman Water Company
Limited and Galleon Beach Resort Limited (incorporated herein
by reference to the exhibit filed as part of our Registration
Statement on Form F-2 dated May 17, 2000, Commission File No.
333-35356).
10.32 Agreement, dated February 9, 1994, between Cayman Water
Company Limited and Widar Ltd. (incorporated herein by
reference to the exhibit filed as part of our Registration
Statement on Form F-2 dated May 17, 2000, Commission File No.
333-35356).
10.33 Credit Facility Agreement, dated December 30, 1998, between
Consolidated Water Co. Ltd. and Royal Bank of Canada
(incorporated herein by reference to the exhibit filed as part
of our Registration Statement on Form F-2 dated May 17, 2000,
Commission File No. 333-35356).
10.34 Finance Contract, dated October 3, 1991, between European
Investment Bank and Cayman Water Company Limited (incorporated
herein by reference to the exhibit filed as part of our Form
20-F, dated December 7, 1994, Commission File No. 0-25248).
10.35 Warrant issued to Joseph Roberts & Co., Inc. (incorporated
herein by reference to the exhibit filed as part of our
Registration Statement on Form F-1 dated March 26, 1996,
Commission File No. 333-00038).
10.36 Credit Facility Agreement, dated March 22, 2000, between
Consolidated Water Co. Ltd. and Royal Bank of Canada
(incorporated herein by reference to the exhibit filed as part
of Post-Effective Amendment No. 1 to our Registration
Statement on Form F-2 dated May 22, 2000).
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10.37 Debenture, dated June 1, 1979, among Cayman Water Company
Limited, The Royal Bank of Canada, Philip Lustig and Cayman
Public Utilities, Ltd. (incorporated herein by reference to
the exhibit filed as part of Post-Effective Amendment No. 1 to
our Registration Statement on Form F-2 dated May 22, 2000).
10.38 Deed, dated April 30, 1981, between Cayman Water Company
Limited and The Royal Bank of Canada (incorporated herein by
reference to the exhibit filed as part of Post-Effective
Amendment No. 1 to our Registration Statement on Form F-2
dated May 22, 2000).
10.39 Second Deed, dated March 10, 1983, between Cayman Water
Company Limited and The Royal Bank of Canada (incorporated
herein by reference to the exhibit filed as part of
Post-Effective Amendment No. 1 to our Registration Statement
on Form F-2 dated May 22, 2000).
10.40 Third Deed, dated December 6, 1984, between Cayman Water
Company Limited and The Royal Bank of Canada (incorporated
herein by reference to the exhibit filed as part of
Post-Effective Amendment No. 1 to our Registration Statement
on Form F-2 dated May 22, 2000).
10.41 Fourth Deed, dated August 31, 1989, between Cayman Water
Company Limited and The Royal Bank of Canada. (incorporated
herein by reference to the exhibit filed as part of
Post-Effective Amendment No. 1 to our Registration Statement
on Form F-2 dated May 22, 2000).
10.42 Fifth Deed, dated June 16, 1992, between Cayman Water Company
Limited and The Royal Bank of Canada (incorporated herein by
reference to the exhibit filed as part of Post-Effective
Amendment No. 1 to our Registration Statement on Form F-2
dated May 22, 2000).
10.43 Variation of Debenture, dated October 11, 1999, between
Consolidated Water Co. Ltd. and The Royal Bank of Canada
(incorporated herein by reference to the exhibit filed as part
of Post-Effective Amendment No. 1 to our Registration
Statement on Form F-2 dated May 22, 2000).
10.44 Collateral Charge, dated June 1, 1979, between Cayman Water
Company Limited and The Royal Bank of Canada (incorporated
herein by reference to the exhibit filed as part of
Post-Effective Amendment No. 1 to our Registration Statement
on Form F-2 dated May 22, 2000).
10.45 Deed, dated June 1, 1979, between Cayman Water Company
Limited, The Royal Bank of Canada and Philip Lustig
(incorporated herein by reference to the exhibit filed as part
of Post-Effective Amendment No. 1 to our Registration
Statement on Form F-2 dated May 22, 2000).
10.46 Variation of Charge, dated April 30, 1981, between Cayman
Water Company Limited and The Royal Bank of Canada
(incorporated herein by reference to the exhibit filed as part
of Post-Effective Amendment No. 1 to our Registration
Statement on Form F-2 dated May 22, 2000).
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10.47 Collateral Charge to a Variation of Debenture, dated October
11, 1999, between Consolidated Water Co. Ltd. and Royal Bank
of Canada (incorporated herein by reference to the exhibit
filed as part of Post-Effective Amendment No. 1 to our
Registration Statement on Form F-2 dated May 22, 2000).
10.48 Second Debenture of Cayman Water Company Limited, dated July
16, 1992, together with Second Collateral Charge dated July
23, 1992 (incorporated by reference to the exhibit filed as
part of our Form 20-F, dated December 7, 1994, Commission file
No. 0-25248).
10.49 Lease of Part, dated October 13, 2000, between Consolidated
Water Co. Ltd. and Colmar LTD.
10.50 Water Purchase Agreement #3 (Revision #1), dated January 10,
1995, between Cayman Water Company Limited and Ocean
Conversion (Cayman) Limited.
21 Subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the last
quarter of Fiscal 2000.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CONSOLIDATED WATER CO. LTD.
By: /s/ Jeffrey M. Parker
-----------------------------------------
Jeffrey M. Parker
Chairman of the Board of directors and
Chief Executive Officer
Dated: March 30, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
By: /s/ Jeffrey M. Parker
----------------------------------------
Jeffrey M. Parker Chairman of the Board of directors March 30, 2001
and Chief Executive Officer
By: /s/ Frederick W. McTaggart
----------------------------------------
Frederick W. McTaggart Director, President and Chief March 30, 2001
Operating Officer
By: /s/ Peter D. Ribbins
----------------------------------------
Peter D. Ribbins Director - Special Projects March 30, 2001
By: /s/ Alexander S. Bodden
----------------------------------------
Alexander S. Bodden Vice President - Finance and Secretary March 30, 2001
By: /s/ J. Bruce Bugg, Jr.
----------------------------------------
J. Bruce Bugg, Jr. Vice Chairman of the Board of March 30, 2001
directors
By: /s/ Brian E. Butler
----------------------------------------
Brian E. Butler Director March 30, 2001
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By: /s/ Steven A. Carr
----------------------------------------
Steven A. Carr Director March 30, 2001
By: /s/ Richard L. Finlay
----------------------------------------
Richard L. Finlay Director March 30, 2001
By: /s/ Clarence B. Flowers, Jr.
----------------------------------------
Clarence B. Flowers, Jr. Director March 30, 2001
By: /s/ Wilmer Pergande
----------------------------------------
Wilmer Pergande Director March 30, 2001
By: /s/ Raymond Whittaker
----------------------------------------
Raymond Whittaker Director March 30, 2001
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INDEX TO EXHIBITS
10.11 Water Purchase Agreement #3 (Revision #2), dated December 29,
2000, between Consolidated Water Co. Ltd. and Ocean Conversion
(Cayman) Limited.
10.12 Water Supply Agreement, dated December 18, 2000, between
Consolidated Water Co. Ltd. and South Bimini International
ltd.
10.13 Employment Agreement, dated August 30, 2000, between
Consolidated Water Co. Ltd. and Peter D. Ribbins.
10.17 Employment Contract, dated July 12, 2000, between Consolidated
Water Co. Ltd. and Frederick W. McTaggart.
10.49 Lease of Part, dated October 13, 2000, between Consolidated
Water Co. Ltd. and Colmar LTD.
10.50 Water Purchase Agreement #3 (Revision #1), dated January 10,
1995, between Cayman Water Company Limited and Ocean
Conversion (Cayman) Limited.
21 Subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers.