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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, 2001
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
- -------------------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
TRAFALGAR PLACE, WEST BAY ROAD, P.O. BOX 1114GT,
GRAND CAYMAN, B.W.I. N/A
- -------------------------------------------------------- ------------------------------------
(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
---------------------------------------------------------------
(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, 2002, was
$56,844,539.
As at March 19, 2002, there were 3,920,313 shares of the registrant's ordinary
shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
EXCHANGE RATES
Unless otherwise indicated, all dollar amounts are in United States Dollars and
references to "$", "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.
The official fixed exchange rate for conversion of BAH$ into U.S.$, as
determined by the Central Bank of The Bahamas, has been fixed since 1973 at
U.S.$ 1.00 per BAH$ 1.00.
TABLE OF CONTENTS
SECTION DESCRIPTION PAGE
- ------- ----------- ----
PART I
Item 1. Business................................................................ 1
Item 2. Properties.............................................................. 11
Item 3. Legal Proceedings....................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders..................... 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.............................................................. 14
Item 6. Selected Financial Data................................................. 20
Item 7. Management's Discussions and Analysis of Financial Condition and
Results of Operations................................................ 21
Item 7A. Quantitative and Qualitative Disclosure about Market Risk............... 44
Item 8. Financial Statements and Supplementary Data............................. 44
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................. 78
PART III
Item 10. Directors and Executive Officers of the Registrant...................... 78
Item 11. Executive Compensation.................................................. 81
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 86
Item 13. Certain Relationships and Related Transactions.......................... 88
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..... 89
SIGNATURES ......................................................................... 95
i
4 PART I
ITEM 1. BUSINESS
INTRODUCTION
Our company was incorporated in August 1973 in the Cayman Islands and
provides water services in the Cayman Islands, Belize, and the Commonwealth of
the Bahamas. 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. Our customers include residential,
commercial and tourist properties, government facilities, and public utilities.
Our business activities are reported in three business segments, which
reflect a change in reporting during 2000 due to the acquisition of our wholly
owned subsidiary company, Belize Water Ltd., 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 2001, the Cayman Island operations, Belize operations and Bahamas
operations accounted for 88.8%, 11.0% and 0.2%, respectively, of our total
income. In 2000 these percentages were 95.4%, 4.6% and nil respectively.
FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS
The information contained in Note 12 Segmented Information of our
consolidated financial statements found on page 65, in ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA for the year ended December 31, 2001, is
incorporated herein by reference.
BUSINESS COMBINATION
Consolidated financial statements have been presented which include our
wholly-owned subsidiary, Belize Water Ltd. This acquisition was accounted for by
the purchase method. Our other three subsidiaries, Commonwealth Water Limited,
Cayman Water Company Limited and Hurricane Hideaway Ltd. are dormant companies
and have been consolidated.
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 three
reverse osmosis seawater conversion plants in Grand Cayman, namely our
Governor's Harbour plant, West Bay plant, and our newly acquired Britannia
plant. The Britannia plant was acquired and began operations on February 1,
2002, subsequent to entering into an agreement to purchase the facility on
December 10, 2001.
1
The current capacity of our Governor's Harbour plant is 1.2 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. The current capacity of our West Bay plant, which we operate, is
710,000 U.S. gallons per day. The current capacity of our Britannia plant, which
we also operate, is 440,000 U.S. gallons per day. Since the plants began
production of water, they have consistently been capable of operating at or near
their rated capacity.
Feed water for the reverse osmosis units is drawn from deep wells with
associated pumps on the properties. Wastewater is discharged into brine wells on
the properties 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 all three plant sites, we maintain diesel
driven, standby generators 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. In order to
efficiently maintain our equipment, we have purchased water from them for brief
periods of time in the past. We have also sold potable water to the Water
Authority-Cayman, and have 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 65 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. During 2001 we completed
a number of small pipeline extensions into newly developed properties within our
franchise area, and replaced approximately 0.5 miles of main pipeline with
larger diameter pipe to accommodate future demand growth on our system.
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.
2
The following table shows, for each of the five fiscal years ended
December 31, 2001, our total number of customer connections at the end of each
period and metered sales of water for that period:
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
Number of Customers 2,999 2,836 2,606 2,347 2,069
Miles of Pipeline 65 64 63 62 57
Metered Sales (in thousands of U.S. gallons):
Commercial 358,711 345,940 308,949 315,980 300,350
Residential 104,002 97,759 86,712 80,150 72,393
Government facilities 11,425 7,599 5,686 4,420 4,007
------- ------- ------- ------- -------
Total 474,138 451,298 401,347 400,550 376,750
======= ======= ======= ======= =======
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 2001, 49.1% were residential,
49.2% were hotels, condominiums and other commercial customers and 1.7% were
government facilities.
During 2001, our prices per 1,000 US gallons ranged from $19.07 to
$23.16. The average sales price for the year ended December 31, 2001 was $20.61
per 1,000 US gallons. During 2000, our prices per 1,000 US gallons ranged from
$18.62 to $22.34. The average sales price for the year ended December 31, 2000
was $20.19 per 1,000 US gallons.
We have 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. The equipment proved unreliable and 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. The Marriott Hotel continues to
operate its own reverse osmosis equipment to produce water for themselves,
although generally in amounts less than their total monthly requirements.
In 1995, we entered into a 10-year agreement with the owner of the
Westin Hotel. This agreement requires us to supply up to 1.86 million U.S.
gallons 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.
In addition, on December 10, 2001, which took effect February 1, 2002,
we entered into a twenty-five year agreement to supply a minimum of 62 million
U.S. gallons of potable water per year on demand to our customer, Cayman Hotel
and Golf, Inc., ("CHGI") the owners of the Hyatt Grand Cayman Resort and
Britannia Golf course. CHGI has committed to pay for a minimum of 62 million US
gallons of water by year on a take or pay basis. We are required by our
government license to meet any water demand from CHGI above the 62 million US
gallons per year.
3
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, as well as, Little
Cayman and Cayman Brac.
According to the most recent figures published by 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 1.25
million persons from January through October 2001, up from 1.12 million arrivals
during the same period of 2000.
During 2001, construction continued slowly within our franchise area on
the 360-room Ritz Carlton Hotel, Condominiums and Golf Course development. The
developer of this project has announced an anticipated completion date of late
2003.
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 taxes on profit, income, capital gains or appreciations
of our company 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 duty at the rate of 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.
4
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, capable of producing 420,000 U.S. gallons per day, to Belize
Water Services Limited ("BWSL"), who acquired the operations of the Belize Water
and Sewerage Authority in February 2001. Belize Water Limited provides water to
BWSL, which distributes the water through its own distribution system to
residential, commercial and tourist properties in Ambergris Caye, Belize. During
2001, we supplied BWSL with 93.8 million U.S. gallons of water.
During 2001, our prices per 1,000 US gallons ranged from $13.06 to
$14.75. The average sales price for the year ended December 31, 2001 was $13.12
per 1,000 US gallons. During 2000, our prices per 1,000 US gallons ranged from
$13.06 to $14.67. The average sales price for the six months ended December 31,
2000 was $13.06 per 1,000 US gallons.
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 Belize Electricity Limited. At
the plant site, we maintain a diesel driven, standby generators with sufficient
capacity to operate our essential equipment during any temporary interruptions
in the electricity supply.
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 according to the most recent
data from the Belize Government has a population of about 4,500 residents,
increased approximately 144% over the past ten years. We provide bulk potable
water to BWSL who distribute this water to this market. BWSL 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 source of foreign income, next to
agriculture.
CUSTOMS DUTY, TAXES AND THE GOVERNMENT IN BELIZE
The Government of Belize has exempted Belize Water Ltd. from all duties
and sales taxes until January 2003 and company taxes until January 2004. While
the Government of Belize has confirmed its commitment to support all future
applications for extensions or additional tax exemptions for the life of the
water supply contract, future exemptions must be approved by the Belizean
legislature and we cannot give any assurance that we will be granted any further
tax exemptions after January 2004.
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 48 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.
5
In 2000, we entered into a water supply agreement with South Bimini
International Ltd., a company incorporated in the Commonwealth of Bahamas, and
on July 11, 2001 we began to provide potable water to the marina and condominium
development, Bimini Sands Resort and Bimini Beach Hotel. The developer of the
Bimini Sands Resort has developed half of a 150-slip marina and constructed 54
condominium units, and plans to construct a further 162 condominium units. We
are not currently aware of any time schedule by the developer for the completion
of the additional 162 condominium units.
We provide potable water to Bimini Sands Resort and to the Bimini Beach
Hotel, a 40-room hotel also owned by the same developer, from one reverse
osmosis seawater conversion plant in Bimini, Bahamas capable of producing
115,000 U.S. gallons per day. During 2001, we supplied South Bimini
International Ltd. with 1.0 million U.S. gallons of water.
During 2001, our prices per 1,000 US gallons ranged from $14.66 to
$26.32. The average sales price for the six months ended December 31, 2001 was
$26.32 per 1,000 US gallons.
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 Bahamas Electricity
Corporation. At the plant site, 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.
CUSTOMS DUTY, TAXES AND THE GOVERNMENT IN BAHAMAS
We have not been granted any tax exemptions for our Bahamian
operations.
We believe that we may be subject to tax ranging from 1% to 2% of the
gross revenues generated by our Bahamian operations and are currently reviewing
the matter with our Bahamian attorneys. We did not pay any tax to the Bahamian
government during 2001, other than National Insurance Board tax on our employee,
and we calculate our potential tax liability based on our 2001 sales to be less
than US$500.
GOVERNMENT REGULATION
We are regulated by the Water Authority of the Cayman Islands on behalf
of the Cayman Islands Government and believe that our operations comply with all
local laws and regulations.
We have been advised by our attorney in Belize that we may require a
license from the Government of Belize under the Water Industry Act 2001 in
relation to our water sales agreement with BWSL. We are currently reviewing our
obligations under this new legislation, which was enacted to facilitate the
privatization of the government Water and Sewerage Authority in February 2001.
Our Belize operations are regulated by the terms and conditions of our water
supply agreement with BWSL. However the new Water Industry Act 2001 requires all
water service providers to obtain a license from the Public Utilities
Commission, which was created under the Act. The Public Utilities Commission has
the power to set the terms and conditions on which all water services in Belize
are provided to the public. The Act also contains certain savings for operations
which were in existence before the new law was enacted, which we believe may
apply to our operations. To date we have not been advised by any Government
entity that we require such a license, and do not foresee any difficulty or
significant additional costs obtaining a license if necessary. We believe that
our operations in Belize comply with all other local laws and regulations.
6
We believe that our operations in the Bahamas comply with all local
laws and regulations, and we are currently reviewing our tax status as disclosed
above.
MARKET AND SERVICE AREA
We believe that our potential market consists of any location where
there is a need for potable water. 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
significant amounts of ocean water, yet cannot economically process major
quantities for consumption. The desalination of ocean water, either through
distillation or reverse osmosis, is widely regarded as the most viable
alternative to fresh water in areas with an insufficient natural supply.
We have historically focused on the English speaking Caribbean basin
and adjacent areas as our primary market because (i) these areas have little or
no naturally occurring fresh water, (ii) limited local regulations allow our
operations to generate higher shareholder returns than could be achieved in more
highly regulated countries, and (iii) these areas contain a high proportion of
tourist properties, which generate higher volume sales than residential users.
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 BY MODIFYING OUR AGREEMENT
WITH BWSL. We intend to continue negotiations with BWSL to extend the term of
our current water supply agreement in Ambergris Caye, to increase the guaranteed
minimum quantities supplied under this agreement, and to provide desalinated
water to other areas of Belize, particularly the cayes and coastal areas that
could benefit from 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 potable water to several new markets, including the Bahamas, Mexico and
two other Caribbean countries. 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. Since we
have expertise in wastewater services, we may provide these services in the
future.
7
REVERSE OSMOSIS ("RO") TECHNOLOGY
The conversion of saltwater to potable water is called desalination.
There are two primary forms of desalination: distillation and RO. Both methods
are used throughout the world and technologies are improving to lower the costs
of production. RO 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 in some
cases 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 RO technology to convert seawater to potable water. We believe
that this technology is the most effective and efficient conversion process for
our market. However, we are always seeking ways to maximize efficiencies in our
current processes and to investigate new and more efficient processes to convert
seawater to potable water. The equipment at our plants is among the most energy
efficient available and we monitor and maintain our equipment in an efficient
manner. As a result of our many years of experience in seawater desalination, 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, except for the DWEER energy
recovery devices which are exclusively manufactured by DesalCo Ltd., and which
we use at our Governor's Harbour and West Bay RO plants in Grand Cayman. 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 of the Cayman Islands 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 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 (i) exceeds 5% of the issued ordinary
shares of our company, or (ii) 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
8
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, may be 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. 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. In
June 2000, December 2000, and in 2002 we met with representatives of the
Government to discuss this matter. At our latest meeting on March 18, 2002, the
Government gave us indications that it is considering revisions to our license,
which would clarify the definition of share ownership in order to favorably
resolve the uncertainty regarding the technical breach of our license. Other
than providing us with its June 1, 2000 letter, the Government has not taken any
other action in connection with our license to date.
SEASONAL VARIATIONS IN OUR BUSINESS
Although, our water sales in the Cayman Islands, Belize and Bahamas are
seasonal, the variations between the periods are not significant. 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 BWSL is non-exclusive, and BWSL 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.
9
With respect to our Bimini operation, we supply water to a private
developer and do not have competitors. However if we are invited by the Bahamian
government to provide a proposal to expand our operations to other areas of
Bimini we can expect competition from companies such as Ionics, Inc. and
Vivendi.
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. These companies already maintain world-wide operations
and have greater financial, managerial and other resources than our company. We
believe that our low overhead costs, knowledge of local markets and conditions,
and our efficient manner of operating desalinated water production and
distribution equipment will provide us competitive advantage on projects,
ranging in size from 5 million US gallons per day or less, in the Caribbean
basin and surrounding areas.
ENVIRONMENTAL MATTERS
With respect to our Cayman Islands operations, although not required by
local government regulations, we operate our water plants in accordance with
guidelines of the Cayman Islands Department of Environment. 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. We are
licensed by the government to discharge concentrated seawater, which is a
byproduct of our desalination process, into deep disposal wells. 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 and Bahamas operations, we are required by
our water supply contracts to take all reasonable measures to prevent pollution
of the environment. We are licensed by the Belize and Bahamian governments to
discharge concentrated seawater, which is a byproduct of our desalination
process, into deep disposal wells. We operate our plants in a manner so 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 and the Bahamas. To date we have not received any
complaints from any regulatory authorities regarding hydrogen sulfide gas
emission, nor any other matter relating to operations.
EMPLOYEES
We presently employ 37 persons in the Cayman Islands, four of whom are
executive and management personnel who have an average of 16 years experience
with our company or in a directly related position. Nine employees are engaged
in administrative and clerical positions. The remaining staff are engaged in
engineering, plant maintenance and operations, pipe laying and repair, leak
detection, new customer connections, meter reading and laboratory analysis of
water quality. Our staff has significant experience and on average have worked
with us for 8 years with three of the employees having worked over 20 years with
us. We presently employ six persons in Belize to manage and operate our plant.
We presently employ one person in the Bahamas to manage and operate 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.
10
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 current production capacity of the
Governor's Harbour plant is 1.2 million U.S. gallons per day.
This RO plant is operated and maintained by OCL under a separate water
purchase agreement.
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 brine disposal wells drilled to an approximate depth of 200
feet;
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 to control the
operations of the plant.
We own our West Bay facility in Grand Cayman, which consists of a 6.1
acre site in West Bay. 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 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 one brine disposal well drilled to an approximate depth of 200 feet;
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;
11
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.
On February 1, 2002, we purchased the Britannia water production and
distribution facility in Grand Cayman, which consists of four seawater RO plants
with a combined nominal production capacity of 440,000 US gallons of water per
day, an 840,000 US gallon bolted steel water tank, potable water high service
pumps, and various ancillary equipment to support the operation. We have entered
into a lease of the 0.73 acre site and steel frame building which houses the
plant, from Cayman Hotel and Golf Inc., for a term of 25 years at an annual rent
of US$1.00.
The primary components of this plant are:
o six feed water supply wells drilled to a depth of approximately 100
feet;
o one brine disposal well drilled to a depth of approximately 150
feet;
o four skid-mounted seawater RO plants with desalinated water
production capacities of 110,000 US gallons per day each, and
utilizing electric powered high pressure pumps and Calder energy
recovery devices;
o one potable water ozonation system used to neutralize hydrogen
sulphide and disinfect the product water;
o one 840,000 US gallon bolted steel tank used to store potable water;
o one high service pump station used to pump water from the bolted
steel tank to our distribution pipeline.
We own our Seven Mile Beach and West Bay potable water distribution
systems in Grand Cayman. The combined systems consist of approximately 65 miles
of polyvinyl chloride and polyethylene water pipes, valves, curb stops, meter
boxes, and water meters installed in accordance to accepted engineering
standards in the United States of America.
We own our San Pedro water production facility in Ambergris Caye,
Belize. The plant consists of a one story concrete block building, which
contains a seawater RO water production plant with a production 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 April 27, 1993 and the term is for 18 years.
The primary components of this plant are:
o two feed water supply wells drilled to an approximate depth of 100
feet;
o one brine disposal well drilled to a depth of approximately 150
feet;
o two multi-stage vertical turbine high pressure pumps with pumping
capacities of 400 U.S. gallons per minute each;
o two Caterpillar 3406 diesel engines which are the primary power
sources for the high pressure pumps;
o two 250 horse power electric motors which act as backup power
sources for the high pressure pumps;
12
o 18 pressure vessels each housing six spiral wound seawater RO
membranes;
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.
We own our Bahamas water production facility in South Bimini, Bahamas.
The plant consists of two 40 foot long standard refrigerated shipping
containers, which contain a seawater RO water production plant with a rated
capacity of 115,000 US gallons per day, a 250,000 US gallon bolted steel potable
water tank, and a high service pump skid. The facility is located on a parcel of
land owned by South Bimini International Ltd., and we are allowed, under the
terms of our water supply agreement, to utilize the land for the term of the
agreement, without charge.
The primary components of this plant are:
o two feed water supply wells drilled to a depth of approximately 100
feet;
o one brine disposal well drilled to a depth of approximately 150
feet;
o one containerized seawater RO plant with desalinated water
production capacity of 115,000 US gallons per day each, and
utilizing electric powered high pressure pumps and hydraulic
turbocharger energy recovery devices;
o one potable water ozonation system used to neutralize hydrogen
sulphide and disinfect the product water;
o one 250,000 US gallon bolted steel tank used to store potable water;
and
o one high service pump station used to pump water from the bolted
steel tank to our customer's pipeline.
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 an annual lease
expiring on January 31, 2003, with a yearly extension provision until January
31, 2005, on this property.
Our Governor's Harbour site includes 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 believe that our
properties are suitable for the conduct of our current operations for the
foreseeable future.
13
ITEM 3. LEGAL PROCEEDINGS
We are not currently a party to any 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.
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 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
First Quarter 2001 9.88 6.88
Second Quarter 2001 9.85 7.78
Third Quarter 2001 12.00 8.90
Fourth Quarter 2001 12.00 9.95
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 our redeemable preferred 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
vest.
14
On December 10, 2001, we issued options to purchase 30,000 ordinary
shares having an exercise price of $11.17 to a director. These options are
exercisable until December 9, 2004. On December 31, 2001, we issued options to
purchase an additional 105,486 ordinary shares having an exercise price of
$10.84 to three other directors and one executive officer. These options are
exercisable until March 10, 2005. The options issued on December 10, 2001, were
exempt from registration under Section 4(2) of the Securities Act of 1933
because the director is a sophisticated investor who has knowledge of all
material information about us. The options issued on December 31, 2001 were
exempt from registration under Regulation S promulgated under the Securities Act
of 1933 because the options were offered and sold outside of the United States
to non-U.S. persons, as defined in Regulation S. All of the options were issued
as consideration for services that the directors and executive officer provided
to us during fiscal year 2001.
HOLDERS
On March 19, 2002, we had 573 holders of record of the ordinary shares.
Management believes that of the ordinary shares held of record, approximately
15% are registered to residents of the Cayman Islands and 85% are registered to
residents of other countries, primarily the United States. All of the redeemable
preferred 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 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 interim dividends, in U.S. dollars, declared on our issued and
outstanding ordinary shares and redeemable preferred shares. No final dividend
was declared during the last two fiscal years.
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
First Quarter 2001 0.10 Per Share
Second Quarter 2001 0.10 Per Share
Third Quarter 2001 0.10 Per Share
Fourth Quarter 2001 0.10 Per Share
15
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 our 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.
Belize has foreign currency exchange control laws and any purchase of
United States dollars must be made through the Central Bank of Belize. Under our
contract with BWSL, we are paid for our water in Belize dollars. Our Belizean
subsidiary has been provided with a guarantee from the Government of Belize to
repatriate any and all of the Belize Water Ltd. earnings in United States
dollars to any foreign destination.
The Commonwealth of the Bahamas has foreign currency exchange control
laws and any purchase of United States dollars must be made through the Central
Bank of the Bahamas. We are paid by our customer for water sold by our Bahamian
operation in United States dollars, and expenses are also incurred in United
States dollars, and therefore do not have any requirement to exchange currency
in the Bahamas.
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.
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. During the period of November 14, 2001 to November 13, 2002 the
stamp tax rate was temporarily set at 5%. 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 tax based 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 transfer ownership
of a part of a company's entire business or a part of its Cayman land or
interest. We requested the Cayman Islands government exempt us from the
landholding company's tax, which our company is required to pay on the transfer
16
of our shares. Prior to becoming quoted on Nasdaq, paid this tax on private
share transfers. We have never paid tax on transfers of our publicly traded
shares. Other local companies whose businesses are not primarily related to the
ownership of land, and whose shares are publicly traded have either received an
exemption from the tax, or have not been pursued by government for payment of
the tax. We believe that the likelihood that government will seek to collect
this tax on transfers of our publicly traded shares is remote and we are
currently engaged in discussions with the Cayman Islands government to obtain an
exemption.
As disclosed in Part I, Item 1 under the discussion of our Belize
Operations, the Government of Belize has exempted our subsidiary, Belize Water
Ltd., from all duties and sales taxes until January 2003 and company taxes until
January 2004. The Government of Belize has confirmed its commitment to support
all future applications for extensions or additional tax exemptions for the life
of the water supply contract.
As disclosed in Part I, Item 1 under the discussion of our Bahamian
Operations, we have not been granted any tax exemptions for our Bahamian
operations. We believe that we may be subject to a tax ranging from 1% to 2% on
the gross revenues generated by our Bahamian operations and are currently
reviewing the matter with our Bahamian attorneys. Our potential tax liability
for our 2001 sales in the Bahamas is immaterial.
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, 2002, 3,920,313 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 ratably receive 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.
Other than 3,172 ordinary shares, for a member of senior management in
Belize, no ordinary shares have been set aside for any employee share plans.
REDEEMABLE PREFERRED SHARES
We are authorized to issue 100,000 redeemable preferred shares, par
value CI$1.00 per share. At March 19, 2002, 25,195 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. In the event of 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 employee
share 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.
Currently, no shares have been set aside for our employee share
incentive plan.
17
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 voting
rights and 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.
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. All
of these warrants expired on April 3, 2001.
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
preferred share an option to purchase one one-hundredth of a class B ordinary
share at an exercise price of $37.50, subject to adjustment. If a takeover
attempt occurs, each shareholder would be able to exercise the option and
receive class B ordinary shares with a value equal to twice the exercise price
of the option. Under circumstances described in the option deed, instead of
receiving ordinary shares, we may issue to each shareholder cash or other equity
or debt securities of our company, or the equity securities of the acquiring
company, as the case may be, with a value equal to twice the exercise price of
the option.
Takeover events that would trigger the options include a person or
group becoming the owner of 20% or more of our outstanding ordinary shares or
the commencement of, or announcement of an intention to make, a tender offer or
exchange offer, which upon completion would result in the beneficial ownership
by a person or group of 20% or more of the outstanding ordinary shares.
Accordingly, exercise of the options may cause substantial dilution to a person
who attempts to acquire our company.
The options are attached to each ordinary share and redeemable
preferred share and presently have no monetary value. The options will not trade
separately from our shares unless and until they become exercisable. The
options, which expire on July 31, 2007, may be redeemed, at the option of our
board of directors, at a price of CI$.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"
18
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 summary only and does not purport to
be complete. You should read the entire option deed to understand the terms of
the options.
REPURCHASED SHARES
During 2001, we repurchased 25,000 shares at an average cost of $10.86.
Under Cayman Islands law, shares that we repurchase out of capital are treated
as cancelled upon repurchase, and our issued share capital is reduced by the par
value of those shares, with the difference being adjusted to additional paid up
capital. Also during 2001, we treated the purchase of our treasury shares of
8,000, 102,752 and 79,100 in 1998, 1999 and 2000, respectively, in the
Consolidated Balance Sheet and the Consolidated Statement of Shareholders'
Equity as cancelled on repurchase.
TRANSFER AGENT
The transfer agent for the ordinary shares is American Stock Transfer &
Trust Company, New York, New York.
19
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".
The consolidated financial statements include the accounts of our
wholly-owned subsidiaries Belize Water Ltd, Commonwealth Water Limited, Cayman
Water Company Limited and Hurricane Hideaway 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, 2001. 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, 1998 and 1997 and
accountant's reports thereon are not included in this Annual Report.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
STATEMENT OF INCOME DATA:
Water Sales $11,026,923 $ 9,576,959 $ 7,936,118 $ 7,925,232 $ 7,214,557
Net Income (1) 2,764,573 2,404,820 1,569,717 1,451,933 1,112,402
BALANCE SHEET DATA:
Total Assets 22,721,178 21,845,672 16,431,321 15,594,021 14,814,817
Long Term Debt Obligation 1,213,804 1,131,986 1,926,786 2,470,112 1,769,746
Long Term Purchase Obligation -- -- -- 320,141 1,265,275
Redeemable preferred stock 30,234 40,361 49,270 52,686 40,906
DIVIDENDS DECLARED PER SHARE 0.40 0.34 0.20 0.19 0.13
BASIC EARNINGS PER SHARE 0.71 0.68 0.51 0.47 0.37
BASED ON NUMBER OF SHARES 3,897,969 3,532,501 3,044,293 3,055,845 2,986,216
DILUTED EARNINGS PER SHARE 0.69 0.67 0.49 0.45 0.35
BASED ON WEIGHTED NUMBER OF SHARES 3,999,691 3,616,271 3,188,048 3,191,583 3,136,574
(1) Net Income represents income after 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 exceptional 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.
20
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 RO technology to produce potable
water is economically feasible. By focusing on this market, we believe that we
can provide a superior financial return to our investors. To increase share
value and maintain dividend payouts in accordance with current company policy,
we need to expand our revenues by developing new business opportunities both
within our current service areas, and in new areas. We need to maintain our high
operating efficiencies by adhering to our strict equipment maintenance and water
loss mitigation programs in order to achieve gross profit margins between 40%
and 45%. We further believe that many Caribbean basin and adjacent countries,
while being water scarce, also present opportunities for operation of our plants
in limited regulatory settings which are less restrictive than the highly
regulated markets of North America, which promotes cost effective operation of
our equipment.
We have been operating our business on Grand Cayman Island since 1973
and have been using RO technology to convert seawater to potable water since
1989. There is no natural supply of fresh water on the Cayman Islands. We
currently have an exclusive license from the Cayman Islands government 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. We obtain water
from our three RO plants on Grand Cayman (Governor's Harbour plant, West Bay
plant and our newly acquired Britannia plant), which together are capable of
producing 2.02 million U.S. gallons per day on a reliable basis, or
approximately 755 million U.S. gallons per year. We own our RO plants and
substantially all of the 65 miles of our underground distribution
infrastructure. For the year ended December 31, 2001, we supplied 474.1 million
U.S. gallons of water to hotels, residential customers, condominiums, other
commercial customers and government facilities on Grand Cayman.
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 RO plant in Ambergris Caye, Belize and provides potable
water to BWSL under contract. BWSL provides water and sewage services to the
mainland Belize, and contracts us to produce potable water on Ambergris Caye,
which has no natural source of fresh water. Our RO seawater conversion plant, is
capable of producing 420,000 U.S. gallons per day or approximately 153 million
U.S. gallons per year, for BWSL, who distributes the water to residential,
commercial, and tourist properties in Ambergris Caye, Belize. During the year
ended December 31, 2001, we supplied approximately 93.8 million U.S. gallons to
BWSL.
Since July 11, 2001, we have been supplying desalinated water to South
Bimini International Ltd. under a ten-year water supply agreement. This Bahamian
company owns and operates resort properties on South Bimini Island, Bahamas and
we provide potable water to these properties. The island of South Bimini has no
natural source of fresh water. Our Bahamas operations provides water from one RO
seawater conversion plant, capable of producing 115,000 U.S. gallons per day or
approximately 42 million U.S. gallons per year, to South Bimini International
Ltd. This water is distributed to the condominiums, marina and hotel property in
South Bimini, Bahamas. For the year ended December 31, 2001, we supplied
approximately 1 million U.S. gallons to South Bimini International Ltd. Sales in
2001 were low because we only supplied water from July 2001, and the condominium
development is in its initial stages. We expect the demand for water from our
plant to increase as additional phases are completed at the Bimini Sands
development.
21
Although at a slower pace than in previous years, development is taking
place on Grand Cayman Island, and particularly in our licensed area to
accommodate both the growing local population and the tourism market. 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 RO plant in December 1989 at Governor's Harbour,
located in the Seven Mile Beach area, through a water purchase agreement with
OCL. Under the agreement, OCL operates the plant, and we must purchase a minimum
volume of water from them. In addition, OCL has to provide 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. 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
operator of the plant. Upon expiration of our agreement with OCL, we expect that
our operating costs at Governor's Harbour will decrease significantly.
In 1995, we installed our second RO seawater conversion plant, 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.
In February 2002, we purchased our third RO seawater conversion plant,
which was previously owned and operated by Cayman Hotel & Golf Inc., a company
which owns and operates the Hyatt Hotel and Britannia Golf Course, and developed
the Britannia condominiums and villas. This plant is capable of producing
440,000 US gallons of desalinated water per day.
OUR OPERATIONS UNDER THE LICENSE IN THE CAYMAN ISLANDS
Our exclusive operational license was issued to us by the Cayman
Islands government under The Water (Production and Supply) Law of 1979. 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 (Advances in Aid of Construction). We
then repay these advances 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 the Cayman Islands government has never objected
to our determination regarding commercial feasibility.
22
Under the license, we pay a royalty to the government of 7.5% of our
gross US gallon potable water sales revenue. The base selling price of water
under the license presently varies between $18.96 and $22.74 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/deflation on an annual basis, subject to temporary limited exceptions,
and an automatic adjustment for the cost of electricity on a monthly basis. The
Water Authority (Cayman), on behalf of 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, the
Hyatt Hotel and Britannia Golf Course, and to supply non-potable water to the
SafeHaven Golf Course. We bill on a monthly basis based on metered consumption.
Receivables are typically collected within 30 to 35 days after the billing date
and receivables not collected within 45 days subject the customer to
disconnection from our water service. In 2001, bad debts represented less than
1% of our total sales for the year. 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. In 1987
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. In October 2001,
we reached an agreement with the Water Authority-Cayman that they will take over
the ownership and operation of two remaining sewage lift stations, which we
presently operate. Our present obligation under this agreement is to replace
certain minor pieces of equipment in these stations prior to take over by the
Water Authority-Cayman. We expect the take over to occur in May 2002. No revenue
was earned for wastewater services during 2001.
23
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. 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, 2001, 2000, 1999, 1998 and 1997 to all our customers:
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
(in thousands of U.S. gallons)
First Quarter 119,115 125,869 107,031 109,255 100,853
Second Quarter 129,305 117,766 113,007 108,334 98,473
Third Quarter 118,733 100,259 90,888 90,950 87,483
Fourth Quarter 106,985 107,404 90,421 92,011 89,941
------- ------- ------- ------- -------
Total 474,138 451,298 401,347 400,550 376,750
======= ======= ======= ======= =======
OUR OPERATIONS UNDER THE CONTRACT IN BELIZE
We have entered into a contract with BWSL to supply a minimum of
135,000 US gallons of water per day to BWSL expiring in 2011. At the expiry of
the contract, BWSL 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 diesel fuel and
electricity.
We bill on a monthly basis based on metered consumption. Receivables
are due within 21 days after the billing date. Interest of 1.5% per year is
charged on any delayed payments. We have had collection problems with BWSL in
the past, however, we are working on a solution that will ensure payment will be
made when required. As at the date of this Annual Report, BWSL is current on its
outstanding balance, with exception of interest, which has accrued on their
account. In 2001, we had no bad debts for our Belize sales for the year.
BWSL has submitted claims for compensation for damages, which it
believes resulted from our equipment failures during August and September 2001.
They have further claimed for the rectification of a minor mistake in the water
rate inflation adjustment formula in our agreement, a mistake which dates back
to November 1995. We have fully settled one claim for compensation which
resulted from an equipment failure during the first week of August 2001 by
crediting their account $14,864, but have rejected their other claim for
compensation relating to the temporary reduction of our production capacity on
another occasion. While we were not able to meet BWSL's demand for water during
certain periods when our equipment malfunctioned, we were able to provide
quantities of water well in excess of the minimum amount required in our
agreement.
24
We are currently engaged in discussions regarding BWSL's claim for
rectification of the inflation adjustment formula, and to collect unpaid
interest, which has accrued on their account because of their late payment of
invoices. At the date of this Annual Report, we have offered $38,790 to settle
all of their outstanding claims, and have agreed to correct the inflation
adjustment formula in the agreement. We believe that correcting this minor
mistake in the agreement will not have a significant impact on the profitability
of our Belize operations going forward, and that we will collect the outstanding
interest charges from BWSL.
BWSL distributes our water primarily to residential properties, small
hotels, and businesses which serve the tourist market.
DEMAND FOR WATER IN BELIZE
We have only operated our plant in Belize for about 21 months. However,
we believe that water sales in Belize are cyclical, and on a similar cycle to
sales in the Cayman Islands, since both operations cater to similar tourist
markets. We also 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. While 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.
Our sales in Belize were restricted in August, September and October
2001 because of several major component failures at our San Pedro plant. We
believe that we could have sold more water during these months if our plant had
been able to operate at full capacity. We have taken action to ensure this does
not occur again by increasing our inventory of critical spare parts.
The total volume of water we supplied (in thousands of U.S. gallons) to
BWSL on a quarterly basis for the years ended December 31, 2001 and 2000:
2001 2000
------ ------
(in thousands of U.S. gallons)
First Quarter 24,589 17,455*
Second Quarter 26,519 20,928*
Third Quarter 21,404 19,507
Fourth Quarter 21,266 19,624
------ ------
Total 93,778 77,514
====== ======
* Sales made pre-acquisition by Seatec Belize Ltd. Used only for comparison
purposes.
OUR OPERATIONS UNDER CONTRACT IN BAHAMAS
In 2000, we entered into a water supply agreement with South Bimini
International Ltd. and began supplying water under this contract on July 11,
2001. Under our agreement South Bimini International Ltd. is committed to pay
for a minimum of 3,000 US Gallons of water per customer per month (36,000 US
Gallons 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, and
adjusted monthly for changes in the cost of electricity.
25
DEMAND FOR WATER IN BAHAMAS
We have only been supplying water in Bimini for approximately eight
months, to a resort property, which is only partially completed and a small
40-room hotel. Currently the resort is comprised of 54 condominiums, and a
developing 150-slip marina. By the end of 2002, we anticipate that we will be
providing water to an additional 30 condominiums. The resort property is
ultimately expected to include over 300 condominium units, a large hotel casino,
and a marina that can accommodate twice as many boats as the existing facility.
We believe that water sales in Bimini will be cyclical. We expect that our sales
will be higher during the summer months when tourists and fisherman arrive from
the United States by boat, and when several large angling tournaments are
traditionally held in Bimini. We expect that our sales will be lower during
winter months when the weather is not conducive to pleasure boat travel from the
United States.
The total volume of water we supplied (in thousands of U.S. gallons) to
South Bimini International Ltd. during each of the third and fourth quarters for
the year ended December 31, 2001 was 449 and 551 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, to BWSL and to South
Bimini International Ltd. Other income consists of monthly meter rental charges,
sales to companies that deliver water by truck 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 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. During 2001, we
negotiated the purchase of this water production facility and a separate water
supply agreement with the Hyatt Hotel and Britannia Golf Course. On February 1,
2002 we took possession of this facility and began supplying water under the new
agreement. At this time the settlement agreement ceased and no further revenue
will be collected under this settlement. Additionally, included in other income
is interest income relating to interest derived from excess cash balances placed
on term deposit and interest payable by BWSL due to late payment of invoices.
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 OCL 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
administrative personnel, 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. We may be liable for gross revenue tax in
the Bahamas as disclosed in Part I, Item 1, under our discussion of our Bahamas
Operations.
26
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
WATER SALES AND OTHER INCOME ("TOTAL INCOME")
Total Income increased by 14.4% from $10,025,686 to $11,473,706 for the
year ended December 31, 2000 and 2001, respectively. Total Income is comprised
of water sales and other income.
The Cayman operations increased Total Income by $626,843 for the year
ended December 31, 2001, representing 43.3% of the increase.
The addition of the operations of Belize Water Ltd. as of July 21, 2000
increased Total Income by $794,401 for the year ended December 31, 2001,
representing 54.9% of the increase.
Finally, the addition of the Bahamas operations as of July 11, 2001
increased Total Income by $26,776 for the year ended December 31, 2001
representing 1.8% of the increase.
Sales in Cayman are made within our license area to approximately 3,000
customers. All sales in Belize are to one customer, Belize Water Services Ltd.,
a private company that recently acquired the assets of Belize Water and Sewerage
Authority, which was previously a government statutory corporation. The terms of
our contract have not changed as a result of the privatization of Belize Water
and Sewerage Authority. Currently in the Bahamas, all sales are to one customer,
South Bimini International Ltd. known as Bimini Sands Resort and Marina, which
uses water at their hotel, condominiums and full service marina.
Total water sales increased by 15.1% from $9,576,959 to $11,026,923 for
the years ended December 31, 2000 and 2001, respectively. The total water sales
increase of $1,449,964 was a result of several factors detailed below.
Our Cayman operation added $657,784 to water sales for the year ended
December 31, 2001, which is 45.4% of the total increase. Of this increase 70.1%
was due to a 5.1% increase in the number of US gallons sold over the same period
in the prior year. This increase was due to both an increase in our customer
base, as well as, increased usage of 3.5% from commercial, 6.4% increase from
residential, and a 50% increase from government facilities which was due to bulk
sales of $112,409 made to assist the Water-Authority (Cayman) to make up
temporary shortfalls in their production capacity. The automatic inflation
adjustment increased our Cayman Islands water rates in January 2001 for most of
our customers by an average of 2.5%, which makes up the remaining 29.9% of the
increase.
Our Belize operation added $765,847 to water sales for the year ended
December 31, 2001, which is 52.8% of the total increase. Of this increase 99.3%
was due to a full year of water sales in 2001 compared to six months in 2000.
The quantities of water produced by our Belize operations in 2001 were
approximately 21% higher than in 2000 (pre-acquisition as reported by the
previous owners of the Belize operations). These higher sales during the year
have resulted because in the prior year we had only six months of production and
sales. However, our water sales in Belize were lower than expected because of an
equipment malfunction in late August and September 2001, which temporarily
reduced the production capacity of our water plant by 50% for 3 days. This
malfunction has now been corrected and our plant is operating at full production
capacity. The automatic inflation adjustment increased our Belize water rates in
June 2001 by 0.53%, which makes up the remaining 0.7% of the increase.
27
Finally, the addition of the Bahamas operations as of July 11, 2001
increased water sales by $26,333 for the year ended December 31, 2001,
representing 1.8% of the increase.
In late 2000, the Cayman Islands Government changed the base year of
the Cayman Islands Consumer Price Index ("CI-CPI"), which is used in our license
to calculate our annual automatic inflation adjustment, rendering the then
license formula inoperable. As provided for in our license, our Cayman Islands
rates during the first nine months of 2001 were adjusted by substituting in the
formula the movement of the United States Producers Price Index ("US-PPI") for
Industrial Commodities for the CI-CPI. Our rates during the first nine months of
2001 were inflated by 3.7%. In September 2001 the Government agreed with us a
new automatic inflation adjustment formula, which uses the re-based CI-CPI. This
new formula took effect in October 2001 and reduced our Cayman Islands water
rates by 1.2% for the last three months of the year. The next automatic
inflation adjustment occurred in January 2002 and decreased our Cayman Island
water rates by 0.39%.
Other income decreased by 0.4% from $448,727 to $446,783 for the year
ended December 31, 2000 and 2001, respectively. This decrease was a result of a
reduction in interest earned from 2000 to 2001, which amounted to $32,314 and
$28,584, respectively. In 2001, interest was earned on our outstanding balance
in our Belize operations, due to the temporary delay in payment by BWSL. In 2000
interest was earned on our significant investment of unutilized cash from the
sale of shares until we purchased our Belize subsidiary.
EXPENSES
Cost of water sales increased by 12.6% from $5,423,297 to $6,109,117
for the years ended December 31, 2000 and 2001, respectively.
Our Cayman operations increased cost of water sales by $171,425 for the
year ended December 31, 2001, representing 25.0% of the increase. Although cost
of water sales increased, it increased at a lower rate than our water sales
since we benefit from efficiency savings in our water production operation when
we produce more water.
The addition of the operations of Belize Water Ltd. as of July 21, 2000
increased cost of water sales by $467,769 for the year ended December 31, 2001
representing 68.2% of the increase. This increase was due to increased water
production to meet increased sales, and machinery repairs related to the August
and September 2001 equipment malfunctions.
Finally, the addition of the Bahamas operations as of July 11, 2001
increased cost of water sales by $46,626 for the year ended December 21, 2001
representing 6.8% of the increase.
Gross profit margins increased from 43.4% to 44.6% for the years ended
December 31, 2000 and 2001, respectively.
Gross profit margins for our Cayman operations increased from 43.2% to
45.3% for the years ended December 31, 2000 and 2001, respectively. The reasons
for this 2.1% increase are increased plant efficiencies, as mentioned earlier,
and decreased depreciation expense of approximately $197,000, which resulted
from our reassessment of the useful economic lives of certain assets. These
lower expenses were offset by the increased full year of amortization expense of
our intangible asset, which arose on purchase of BWSL in July 2000, increased
insurance costs during the last two months of 2001, and additional labour costs
incurred for maintenance of our West Bay plant.
28
Gross profit margins for our Belize operations decreased from 46.2% to
41.7% for the years ended December 31, 2000 and 2001, respectively. This
decrease resulted from equipment repair costs, which we incurred during August
and September 2001 as a result of a major equipment malfunction, and higher
electricity costs resulting from the utilization of our 250 Horse Power standby
electric motor on one of our production trains. We were unable to utilize our
diesel engine to power that production train for most of 2001 because of a
mechanical failure of that engine in early 2001, which caused us to order a
replacement engine, as well as, the mechanical malfunctions of other equipment,
which occurred in August and September 2001. We have recently received all the
necessary replacements parts and that production train is now operating on the
more efficient diesel engine.
Gross profit margin for our Bahamas operations for the year ended
December 31, 2001 was a negative 77.1%. This was due to low water sales and a
relatively higher proportion of fixed costs such as depreciation, which we
expected in the early phases of the Bimini Sands Resort development project.
Both of these are temporary factors and are not expected to continue in the
future. We forecast that the Bahamas operation will generate positive cash flows
during May 2002.
Indirect expenses increased by 18.3% from $2,197,569 to $2,600,016 for
the years ended December 31, 2000 and 2001, respectively.
Our Cayman operations increased indirect expenses by $240,830 for the
year ended December 31, 2001, representing 59.9% of the increase. Of this
increase, 49.0% is due to a new executive position, Director of Special
Projects, and 5.6% is a result of increased costs incurred in the first quarter
resulting from the replacement of our former Chief Financial Officer who left us
on April 6, 2001. In addition, we had a 4% increase in salaries, and stock
compensation expense increased by $36,279 because ordinary share options granted
to our executive officers under the terms of their employment agreements, had
market values that were higher than the exercise price on the date of grant,
unlike in 2000.
The addition of the operations of Belize Water Ltd. as of July 21, 2000
increased indirect expenses by $157,491 for the year ended December 31, 2001,
representing 39.1% of the increase. This was due to the reallocation of employee
duties, which increased indirect expenses when compared to the same periods in
the prior year and the fact that the prior year included only six months of
operations after our acquisition of our Belize subsidiary in July 2000.
Finally, the addition of the Bahamas operations as of July 11, 2001
increased indirect expenses by $4,126 for the year ended December 31, 2001,
representing 1.0% of the increase. These costs relate to the administration of
the Bahamas operations.
As a percentage of the Total Income, indirect expenses were at 21.9%
and 22.7% for the year ended December 31, 2000 and 2001, respectively.
NET INCOME
Net income increased by 15.0% from $2,404,820 to $2,764,573 for the
years ended December 31, 2000 and 2001, respectively. This increase was due to
the several reasons detailed above.
29
DIVIDENDS
In December 2000 we increased our per share dividend to ordinary
shareholders from $0.32 to $0.40 per year and in December 2001, we increased our
per share dividend from $0.40 to $0.42 per year, payable on a quarterly basis.
We have consistently paid dividends to ordinary shareholders since we began
issuing dividends in 1985. Our board of directors has established a policy that
we 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,
however, we expect to continue increasing our dividend as our earnings grow.
REASSESSMENT OF USEFUL ECONOMIC LIVES OF PROPERTY, PLANT AND EQUIPMENT
During the year ended December 31, 2001 we carried out an extensive
engineering analysis of our potable water production and distribution equipment
in Grand Cayman. The result of which was the reassessment of the useful economic
lives of various assets and a decrease in depreciation expense on an annual
basis in the amount of $197,472, which increased basic and fully diluted
earnings per share by $0.05 for the year ended December 31, 2001.
This analysis included the revision of our computerized hydraulic model
of the pipeline system, and updating our water meter replacement schedule. Our
long-term strategic engineering analysis concluded that certain assets,
including portions of the Seven Mile Beach distribution system, the Governor's
Harbour VC Building, and water meters would not need to be replaced or relocated
as early as previously planned.
As a result of the circumstances detailed below, we considered it
appropriate to reassess the estimated useful economic life of the Seven Mile
Beach distribution system from 20 years to 40 years of which 13 years has
already elapsed, the Governor's Harbour VC building from 20 to 40 years of which
21 years had already elapsed, and water meters from 5 years to 10 years of which
3 years had already elapsed. Also as a result of these circumstances, it was
determined that the projected future utilization of a key piece of equipment
(the Vermeer Trencher), which we use to install or replace pipelines, would be
reduced. It was considered appropriate to reassess the useful economic life of
this piece of equipment from 10 years to 20 years, of which 3 years had already
elapsed.
Also during the year ended December 31, 2001 we carried out a review of
the condition and technology of our West Bay RO plant and concluded that the
plant was now meeting performance and operational requirements consistent with
those of the Governor's Harbour RO plant. A similar review had been carried out
on the Governor's Harbour RO plant in 1994. As a result of these circumstances,
it was considered appropriate to reassess the estimated useful economic life of
the West Bay RO plant from 10 years to 15 years, of which 3 years had already
elapsed, which is now consistent with depreciation parameters used for the
Governor's Harbour RO plant.
SEVEN MILE BEACH DISTRIBUTION SYSTEM
When the Seven Mile Beach ("SMB") distribution pipeline was initially
installed, the West Bay road was at an early stage of development. At the time
of installation, 20 years was considered to be an appropriate best estimate for
the useful life of the system, given the circumstances and relatively early
stage of development in the Cayman Islands. Fundamental changes regarding the
West Bay road that were being considered by Government had not been rejected. We
planned for several years to relocate our Governor's Harbour RO plant to enable
alternate use or sale of the waterfront land, and if undertaken, this relocation
would have involved the removal and relaying of pipeline.
30
During 2001, we revised our master distribution plan, which includes
the SMB distribution system, in order to evaluate the possible addition of the
Britannia plant to the system, to determine whether contemplated upgrades to the
Governor's Harbour reservoirs were warranted, and to consider future capital
expenditure for pipeline replacements or new pipelines. It was determined that
certain pipeline replacements, which had been scheduled subsequent to the 1996
master distribution plan were no longer necessary, and that existing SMB
distribution system assets could be utilized for a much longer period than
previously anticipated. The Government also revised their schedule and layout
for significant road improvements within our service areas, which alleviated the
need for any major changes to our SMB distribution system. The West Bay road is
at a mature stage of development, and the level of construction, which has now
peaked, would inhibit any changes to the road layout and our distribution
system. We decided not to relocate our Governor's Harbour reservoirs,
distribution pumps, and RO plant.
As a result of these events and circumstances, in early 2001, we
considered it appropriate to reassess the remaining useful economic life of the
SMB distribution system and the Governor's Harbour pipeline. Based on our
experience and industry standards, it was concluded that the pipeline, being of
the same material and construction as the remainder of our pipeline, had a
useful economic life of 40 years, of which 13 had already elapsed.
GOVERNOR'S HARBOUR VAPOR COMPRESSION ("VC") BUILDING
The VC Building was initially constructed in 1976 to accommodate diesel
engine powered seawater desalination equipment, which we operated. In 1994 the
building was remodeled to house two large high pressure pumps, which are part of
the Ocean Conversion (Cayman) Ltd. ("OCL") seawater RO plant. The building is
comprised of a reinforced concrete foundation, and painted steel prefabricated
wall and roof structures. The foundation included a number of unusual features,
which were necessary because of the specialized equipment and piping in the
plant. We planned for several years to relocate our Governor's Harbour plant to
enable alternate use or sale of the waterfront land, and if undertaken, this
relocation would have involved removing the VC building. We did not believe that
the VC building would continue to be a useful asset after the Governor's Harbour
site was re-located. In 1998, we phased out the last seawater desalination unit,
which was housed in the VC Building. The large high pressure pumps for the OCL
RO plant remained. It was decided at that time that the VC building would be
remodeled to accommodate materials storage, and to improve the appearance of the
structure, and would continue to house the large pumps, which are part of the RO
plant. In 2000 we contracted with a local building contractor to completely
replace the painted steel wall and roof panels of the VC building with more
durable and rust-resistant material called Galv-Alum. The reinforced concrete
foundation was determined to be sound and only required filling of various holes
and trenches left over from the phased-out desalination equipment.
During 2001, we revised our master distribution plan, which includes
the VC building, in order to evaluate the possible addition of the Britannia
plant to the system, to determine whether contemplated upgrades to the
Governor's Harbour reservoirs were warranted, and to consider future capital
expenditure for pipeline replacements or new pipelines. We had decided not to
relocate our Governor's Harbour reservoirs, distribution pumps, VC building and
RO plant.
As a result of these events and circumstances, in 2001, we considered
it appropriate to reassess the remaining useful economic life of the VC
building. Based on our experience and industry standards, it was concluded that
the building had a remaining useful economic life of 20 years, of which 1 year
had already elapsed.
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DISTRIBUTION SYSTEM METERS
Our established policy is to replace customer water meters when they
have been in service for a specified number of years, or have registered a
certain volume of water, in accordance to published manufacturer
recommendations. This policy was implemented in 1988 in order to minimize
un-billed water, which could otherwise pass through a water meter, which was not
functioning properly because of age or fatigue.
We have for more than 10 years purchased water meters from ABB Kent,
who had guaranteed the proper functionality of their water meters for a period
of five years, or a specified registered volume, depending on the model. We were
advised in writing by ABB Kent that they now guarantee their new and existing
C700 water meters under new parameters, which include an extended functional
life of 6 to 15 years, and extended registered volumes.
It was deemed appropriate by us, at that time, to reassess the useful
economic life of all C700 water meters, which were presently in service, and to
change the useful economic life of these assets to 10 years, which is at the
midpoint of the manufacturer's guarantee period.
VERMEER TRENCHER
We use our Vermeer trencher to construct water distribution pipelines
within our franchise area. For reasons detailed in the section above entitled
"Seven Mile Beach Distribution System", we have over the past two years
significantly reduced the utilization of the Vermeer trencher. In early 2000 we
completed a large extension to our distribution system, the Harquail Bypass, but
have since only carried out minor extensions of our pipelines, within new
developments in the West Bay service area.
During 2001, the Government revised their schedule and layout for
significant road improvements within our service areas, which alleviated the
need for any major changes to our distribution system. Our franchise area is at
a mature stage of development, and it is not anticipated that any further
significant pipeline construction projects are eminent. We revised our master
distribution plan, which alleviated the need for any significant pipeline
upgrades or new pipelines for the foreseeable future.
As a result of these events and circumstances, in early 2001, we
considered it appropriate to reassess the remaining useful economic life of the
Vermeer trencher. Based on our experience and projected future utilization of
the asset, it was determined that the asset had a useful economic life of 20
years, of which 3 had already elapsed.
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WEST BAY RO PLANT
Our first sea water RO plant was manufactured and installed by OCL at
the Governor's Harbour location in 1990. At the time that this plant was
acquired, the technology was state-of-the-art and little operational experience
existed industry wide. This was one of the primary reasons that we
lease-purchased the technology instead of purchasing it outright. We furthermore
had concerns regarding potential accelerated obsolescence of the equipment,
resulting from continued research and development in the RO field. After three
years of operational experience on this OCL plant, we established that the
technology was meeting operational requirements of capacity, quality and
reliability. Other similar RO units had been installed in other locations and
evidence indicated that the technology was reliable. OCL had, in accordance to
the lease-purchase agreement, been maintaining the asset in like-new condition.
Individual components were replaced on schedule or as needed in accordance to
our conservative maintenance program, and these items were expensed as incurred.
Following an expansion in 1994 we considered it appropriate to reconsider the
useful life of the asset at that time, and based on experience, it was
considered that the asset had a 12 year remaining life at that time.
The second seawater RO plant (the West Bay RO plant) was manufactured
and installed by a different supplier, US Filter Corporation, in 1998. Again at
the time it was a state-of-the-art new technology (from a different supplier)
and we had concerns about potential accelerated obsolescence of the equipment
because of continuing research and development in the RO field. Given that
conditions were similar to those prevalent when the company purchased its first
RO plant from OCL, management contracted to lease-purchase the West Bay RO plant
and have the manufacturer operate the plant on a day-to-day basis. Consistent
with the treatment of the Governor's Harbour plant, we considered it appropriate
to initially depreciate the asset over ten years. The manufacturer, in
accordance with the lease-purchase agreement, maintained the West Bay RO plant
in a like-new condition. Individual components were replaced on schedule or as
needed in accordance to our conservative maintenance program, and these items
were expensed as incurred.
By 2001, we have had ten years experience operating seawater RO plants.
There has been no change in the technology used in the RO plant, and it has
become evident from operational experience that the plant is reliable and meets
the requirements of its purpose. Mr. Wil Pergande of Osmonics, Inc., is an
expert in the RO field and member of our board of directors, and is well placed
to reach such a conclusion on the current mature state of RO technology. There
are currently no alternatives and no research or development underway which
would indicate any upcoming significant changes in the underlying technology.
There has been progress in membrane technology, however we replace membranes in
both of our RO plants on a regular basis in accordance to set maintenance
schedules.
As a result of these developments, at the beginning of 2001, we
considered it appropriate to reassess the remaining useful life of the West Bay
RO plant based on our experience. It was considered that the situation and
circumstances of the two RO plants were now consistent and that the asset had a
remaining useful economic life of 12 years.
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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. Total Income is comprised
of water sales and other income.
The Cayman operations increased Total Income by $1,310,770 for the year
ended December 31, 2000, representing 73.8% of the increase.
The addition of the operations of Belize Water Ltd. as of July 21, 2000
increased Total Income by $464,928 for the year ended December 31, 2000,
representing 26.2% of the increase.
Total water sales increased by 20.7% from $7,936,118 to $9,576,959 for
the years ended December 31, 1999 and 2000, respectively.
Our Cayman operation added $1,175,913 to water sales for the year ended
December 31, 2000, which is 71.7% of the total increase. This increase was due
to an 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.
Our Belize operation added $464,928 to water sales for the year ended
December 31, 2000, which is 28.3% of the total increase.
Other income increased by 43.0% from $313,870 to $448,727 for the years
ended December 31, 1999 and 2000, respectively. This increase was a result of a
full twelve months of revenue being recorded from the Hyatt Settlement versus
six months in 1999, as well as, more interest being earned during 2000 than in
1999 being $32,314 and $594, respectively. In 2000, interest was earned on our
significant investment of unutilized cash from the sale of shares until we
purchased our Belize subsidiary.
EXPENSES
Cost of water sales increased by 14% from $4,770,179 to $5,423,297 for
the years ended December 31, 1999 and 2000, respectively.
Our Cayman operations increased cost of water sales by $402,766 for the
year ended December 31, 2000, representing 61.7% of the increase. This increase
is due to costs of producing additional water to provide for the increased
sales, the additional six months of amortization expense from the purchase of
our Belize subsidiary and an increase in depreciation due to the significant
number of projects that were completed in 2000.
The addition of the operations of Belize Water Ltd. as of July 21, 2000
increased cost of water sales by $250,352 for the year ended December 31, 2000
representing 38.3% of the increase.
Gross profit margins increased from 39.9% to 43.4% for the years ended
December 31, 1999 and 2000, respectively.
Gross profit margins for our Cayman operations increased from 39.9% to
43.2% for the years ended December 31, 1999 and 2000, respectively. These
increases were due to the increased plant efficiencies, as well as, much lower
electricity costs due to the installation of a new energy recovery system in our
West Bay RO plant, which allows us to produce the same water at a much lower
cost.
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Gross profit margins for our Belize operations were 46.2% for the year
ended December 31, 2000.
Indirect expenses increased by 23% from $1,792,516 to $2,197,569 for
the years ended December 31, 1999 and 2000, respectively.
Our Cayman operations increased indirect expenses by $371,631 for the
year ended December 31, 2000, representing 91.7% of the increase. This 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.
The addition of the operations of Belize Water Ltd. as of July 21, 2000
increased indirect expenses by $33,422 for the year ended December 31, 2000,
representing 8.3% of the increase.
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.
NET INCOME
Net income increased by 53.2% from $1,569,717 to $2,404,820 for the
years ended December 31, 1999 and 2000, respectively. This increase was due to
the reasons stated above, in addition to, a 14.1% increase due to a cumulative
effect of a change in account principle noted below.
DIVIDENDS
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. We have consistently
increased our dividend to ordinary shareholders since we began issuing dividends
in 1985. As of February 29, 2000, our board of directors has established a
policy that we 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,
however, we expect to continue increasing our dividend as our earnings grow.
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.
35
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
We generate cash primarily from our operations in the Cayman Islands,
Belize and Bahamas, and at a lesser frequency from the sale of our shares, and
through our loans and facilities obtained from two banks. Cash flow 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,
Belize and Bahamas, such as weather conditions and the economy. We use cash to
fund our operations in the Cayman Islands, Belize and Bahamas, fund capital
projects, to make payments under our operating agreement with Ocean Conversion
(Cayman) Ltd., a Cayman Islands company which operates our Governor's Harbour
plant, to expand our infrastructure, to pay dividends, to repay principal on our
loans, to repurchase our shares when appropriate and to take advantage of new
investment opportunities which expand our operations.
OPERATING ACTIVITIES
Cash from operating activities for the years ended December 31, 2000
and 2001 was $3,922,712 and $4,193,921, respectively. We generated cash by
increasing our net income through greater utilization of our existing plants,
equipment and resources in all three segments of the business, minimization of
water losses and efficiencies created by a strong management team. The loss in
the Bahamas operation for the year ended December 31, 2001 was $23,976. This
investment is long-term and we do not expect to produce a positive cash flow
until the second quarter 2002. Currently we provide water to 54 condominiums,
half of a developing marina and a small existing hotel. By the end of 2002 we
anticipate that we will be providing water to 30 additional condominiums, and
the marina is projected to be doubled in size. The change between 2000 and 1999
was due to increased cash generated from operations due to the acquisition of
our Belize operations.
WORKING CAPITAL
At December 31, 2001, we had a working capital surplus of $325,996.
This surplus relates to the increase of cash we received from our operating
activities which allowed us to payback our bank overdraft and continue to build
our cash balances. Currently 72.2% of our cash is denominated in Belize dollars.
Through our Belize government guarantees we are in the process of repatriating
United States dollars to the Cayman Islands.
INVESTING ACTIVITIES
Cash used in investing activities during the years ended December 31,
2000 and 2001 was $6,268,738 and $1,904,237, respectively. Cash was used in
investing activities for expenditures for new property, plant and equipment with
the majority associated with the construction of our new water production and
distribution system in Bimini, Bahamas. The investment in the Bahamas operation
totals $1,085,759 of which $307,395 relates to costs associated with the prior
year. We also continued to expand our water distribution system in the Cayman
Islands by constructing pipelines to service several new developments within our
franchise area. In addition, we purchased 16,600 shares of Belize Water Services
Ltd. for $12,450. This investment has been recorded at cost and represents less
than 1% of the total issued and outstanding share capital of Belize Water
Services Ltd. As these shares are not publicly traded, there is a risk that a
market for resale may not be available. During the similar period in 2000,
36
investing activities consisted of the purchase of our Belize subsidiary on July
21, 2000, the installation of a new energy recovery system and the expansion of
our water production plant in West Bay, Cayman Islands, and the completion of a
major pipeline extension within our franchise area in the Cayman Islands. In
1999, investing activities consisted primary of purchase of property, plant and
equipment.
FINANCING ACTIVITIES
Cash generated from financing activities for the year ended December
31, 2000 was $2,574,717, compared to cash used of $2,024,075 for the year ended
December 31, 2001. During 2001, the primary financing activity was the payment
of four interim quarterly dividends totaling $0.40 per share. This was offset by
proceeds from an issuance of ordinary shares of common stock due to a director
exercising certain options and a net increase in our long-term bank debt due to
the draw down of a new credit facility in order to assist with the financing of
the investment in the Bahamas. During the same period during 2000, we had
substantial proceeds from an issuance of common stock due to our share offering,
which was primarily used for the purchase of the Belize subsidiary. These cash
amounts were offset by the payment of four interim quarterly dividends in 2000
totaling $0.34 per share and the repayment of both short-term and long-term debt
including the plant purchase portion of our water supply agreement with OCL. In
1999, a term loan of $1,000,000 was drawn down of which $200,000 was repaid
using excess operating cash flow and we also paid four interim quarterly
dividends totaling $0.20 per share.
On September 21, 2001, the Company reactivated its stock repurchase
program, which was originally approved by the Board of Directors in October
1998, and may repurchase up to 10% of the outstanding ordinary shares of common
stock in the open market and in private negotiated transactions. Depending upon
market conditions and other factors, purchases under this program may be
commenced or suspended at any time. During the year ended December 31, 2001,
25,000 ordinary shares of common stock were repurchased at an average price of
$10.86. These shares were cancelled in accordance with Cayman Island's law.
During the same period in 2000, we repurchased 79,100 ordinary shares of common
stock at $6.25 per share from a shareholder whose assets were being liquidated.
These shares were also cancelled in accordance with Cayman Island's law. During
the same period in 1999, we repurchased 110,752 at an average price of $7.44 per
share. These shares were also cancelled in accordance with Cayman Island's law.
MATERIAL COMMITMENTS FOR CAPITAL EXPENDITURES
As at December 31, 2001, we had approximately $1,620,000 committed for
capital expenditures for the purchase of the Hyatt hotel water production
facilities and construction of pipeline to connect the facility to our
distribution network. On February 1, 2002 we used our existing credit facilities
to finance the purchase of the Hyatt RO plant and equipment for $1.5 million. We
also intend to finance our pipeline construction project using existing credit
facilities.
IMPACT OF INFLATION
Under the terms of our Cayman Islands license, Belize water sales
agreement and Bimini 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.
37
EXCHANGE RATES
The official exchange rate for conversion of United States Dollars into
Cayman Islands Dollars, as determined by the Cayman Islands Monetary Authority,
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
Belizean Dollars, as determined by the Central Bank of Belize, has been fixed
since 1976 at U.S.$0.50 per BZE$1.00.
The official fixed exchange rate for conversion of BAH$ into U.S.$, as
determined by the Central Bank of The Bahamas, has been fixed since 1973 at
U.S.$ 1.00 per BAH$ 1.00.
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 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.
38
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.
WE RELY ON WATER SUPPLY AGREEMENTS WITH OUR CUSTOMERS IN BELIZE AND THE
BAHAMAS WHICH MAY OR MAY NOT, UPON THEIR EXPIRATION, BE RENEWED OR RENEGOTIATED.
We presently operate as bulk water suppliers in Belize and the Bahamas under
water sales agreements with our customers BWSL and South Bimini International
Ltd. respectively. We own our production plant in Belize and BWSL has the option
to purchase the plant at the expiration of our agreement, at a price to be
agreed by BWSL and ourselves 6 months prior to expiration of the agreement. We
own our production and distribution plant in the Bahamas which, in the absence
of any new agreement, must be removed from the property of South Bimini
International Ltd. at the expiration of our water supply agreement.
OUR BUSINESS IS AFFECTED BY TOURISM, WEATHER CONDITIONS, THE ECONOMIES
OF CAYMAN, BELIZE, BAHAMAS AND THE U.S. 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. After the events of
September 11, 2001, tourism undoubtedly suffered, but management has observed
that tourist visits has improved dramatically in recent months. We believe that
Cayman Islands long-standing relationships, coupled with the fact it is a close
and safe tourist destination served to lessen the impact.
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 in the Cayman Islands, our ability to expand our
service area in the Cayman Islands is limited to 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 12 months, we will need additional financing to further expand our
operations elsewhere. We cannot make any assurances 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;
39
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 give any
assurance 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.
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 do not
insure our underground water distribution system on the Cayman Islands, nor the
Governor's Harbour reservoirs, which are constructed from earthen berms. We are
however, fully insured on all of our other above-ground property that may be
susceptible to loss, including our RO equipment, machinery, other equipment,
buildings and the West Bay and Britannia reservoir tanks. Currently in Belize we
are insured at the estimated replacement value of these assets. In the Cayman
Islands and Bahamas we are insured, by a different provider for the depreciated
value of our above ground assets and we are working to obtain coverage for the
estimated replacement value of these assets as well. We have experienced some
difficulty obtaining full replacement value coverage for our Cayman Islands and
Bahamas assets because of the conditions in the insurance market after the
events of September 11, 2001. We believe that it is highly unlikely, based on
our previous experience with hurricane damage to our operations in Belize, that
our insured equipment would be damaged so severely that it would require full
and complete replacement. 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 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
from our Cayman, Belize and Bahamas operations.
40
WE COULD BE NEGATIVELY AFFECTED BY POTENTIAL GOVERNMENT ACTIONS AND
REGULATIONS. There is always a possibility that the governments in our service
areas 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 and exchange controls.
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, 9 out of 12 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 outside the United States, 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
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.
41
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.
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 TO SELL OUR
ORDINARY SHARES. An issuance or transfer of a number of shares which (i) exceeds
5% of the issued shares of our company, or (ii) 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 scheduled 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, a shareholder may not
have an opportunity to sell his or her 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 MAY BE IN TECHNICAL BREACH OF THE TERMS OF OUR CAYMAN ISLANDS
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 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, may be a technical breach of its license.
42
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. We have been advised by our Cayman Islands'
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. 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. In December 2000, and in 2002, we had additional
meetings with Government representatives. At our latest meeting on March 18,
2002, the Government gave us indications that it is considering revisions to our
license, which would clarify the definition of share ownership in order to
favorably resolve the uncertainty regarding the technical breach of our license.
Nevertheless, there can be no assurance that Government will revise our license
in a manner favorable to us.
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 Belizean dollars. Our Bahamas revenue
is earned in United States dollars. The Cayman Islands dollar is presently fixed
at U.S.$1.20 per CI$1.00, the Belizean dollar is presently fixed at U.S.$0.50
per BZE$1.00 and the Bahamian dollar is presently fixed at U.S. $1.00 per
BAH$1.00. These rates of exchange have been fixed since 1974, 1976 and 1973
respectively. As a result, we do not hedge against any exchange rate risk
associated with our reporting in United States dollars. However, if any 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,
2002, there were 3,920,313 ordinary shares issued and outstanding. With the
exception of ordinary shares held by officers, directors 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 824,124 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.
43
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 Belizean
dollars. Our Bahamas operations revenue is earned in United States dollars. The
Cayman Islands dollar is presently fixed at U.S.$1.20 per CI$1.00 and the
Belizean 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.............................................. 45
Consolidated Balance Sheets as at December 31, 2001 and 2000................... 46
Consolidated Statements of Income for each of the years ended December 31,
2001, 2000 and 1999......................................................... 47
Consolidated Statements of Stockholders' Equity for each of the years ended
December 31, 2001, 2000 and 1999............................................ 48
Consolidated Statements of Cash Flows for each of the years ended
December 31, 2001, 2000, and 1999........................................... 49
Notes to Consolidated Financial Statements..................................... 51
44
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, 2001 and 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2001 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 13, 2002
45
CONSOLIDATED WATER CO. LTD.
CONSOLIDATED BALANCE SHEETS
(Expressed in United States dollars)
DECEMBER 31,
---------------------------
2001 2000
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Note 8) 516,446 250,837
Accounts receivable (Note 3) 1,323,156 1,488,729
Spares inventory 271,134 120,014
Inventory of water 48,377 34,219
Prepaid expenses and other assets 319,900 299,499
----------- -----------
Total current assets 2,479,013 2,193,298
PROPERTY, PLANT AND EQUIPMENT (Notes 4 and 15) 18,414,935 17,643,891
INTANGIBLE ASSET (Note 5) 1,814,780 2,008,483
INVESTMENT (Note 6) 12,450 --
----------- -----------
Total assets $22,721,178 $21,845,672
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdrafts (Note 8) -- 703,331
Dividends payable (Note 7) 499,383 401,965
Accounts payable and other liabilities 1,087,470 1,067,514
Stock compensation liability (Note 17) 210,324 380,850
Current portion of long term debt (Note 8) 355,840 219,580
----------- -----------
Total current liabilities 2,153,017 2,773,240
LONG TERM DEBT (Note 8) 1,213,804 1,131,986
SECURITY DEPOSIT (Note 16) 52,763 52,763
ADVANCES IN AID OF CONSTRUCTION 37,494 41,090
----------- -----------
Total liabilities 3,457,078 3,999,079
----------- -----------
STOCKHOLDERS' EQUITY
Common stock (Note 9) 4,704,077 4,635,774
Additional paid-in capital (Note 9) 6,896,753 6,726,749
Vested redeemable preferred stock (Note 9) 2,841 11,983
Non-vested redeemable preferred stock (Note 9) 27,393 28,378
Retained earnings 7,633,036 6,443,709
----------- -----------
Total stockholders' equity 19,264,100 17,846,593
----------- -----------
Total liabilities and stockholders' equity $22,721,178 $21,845,672
=========== ===========
The accompanying notes are an integral part of these financial statements.
46
CONSOLIDATED WATER CO. LTD.
CONSOLIDATED STATEMENTS OF INCOME
(Expressed in United States dollars)
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Water sales (Note 16) 11,026,923 9,576,959 7,936,118
Cost of water sales (Note 10) (6,109,117) (5,423,297) (4,770,179)
------------ ------------ ------------
Gross profit 4,917,806 4,153,662 3,165,939
------------ ------------ ------------
Indirect expenses (Note 10) (2,600,016) (2,197,569) (1,792,516)
------------ ------------ ------------
Income from operations 2,317,790 1,956,093 1,373,423
------------ ------------ ------------
Other income:
Interest income 28,584 32,314 594
Other income 418,199 416,413 313,276
------------ ------------ ------------
446,783 448,727 313,870
------------ ------------ ------------
Income before accounting change 2,764,573 2,404,820 1,687,293
Cumulative effect of a change in accounting principle -- -- (117,576)
------------ ------------ ------------
Net income $ 2,764,573 $ 2,404,820 $ 1,569,717
============ ============ ============
BASIC EARNINGS PER SHARE (Note 11)
Income before accounting change 0.71 0.68 0.55
Accounting changes -- -- (0.04)
------------ ------------ ------------
Net income 0.71 $ 0.68 $ 0.51
============ ============ ============
DILUTED EARNINGS PER SHARE (Note 11)
Income before accounting change 0.69 0.67 0.53
Accounting changes -- -- (0.04)
------------ ------------ ------------
Net income $ 0.69 $ 0.67 $ 0.49
============ ============ ============
Weighted average number of common shares used
in the determination of:
Basic earnings per share (Note 11) 3,897,969 3,532,501 3,044,293
============ ============ ============
Diluted earnings per share (Note 11) 3,999,691 3,616,271 3,188,048
============ ============ ============
The accompanying notes are an integral part of these financial statements.
47
CONSOLIDATED WATER CO. LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2001
(Expressed in United States dollars)
VESTED
REDEEMABLE
COMMON ADDITIONAL SHARES PREFERRED
STOCK PAID-IN CAPITAL REPURCHASED STOCK
---------- --------------- ----------- -----------
Balance at December 31, 1998 3,657,866 2,912,646 -- 8,486
Issue of share capital (Note 9) 127,494 488,387 -- (7,365)
Repurchase of shares (Note 9) -- -- (758,928) --
Cancellation of shares repurchased (Note 9) (123,302) (635,626) 758,928 --
Net income for the year -- -- -- --
Dividends -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1999 3,662,058 2,765,407 -- 1,121
Issue of share capital (net of issue
costs) (Note 9) 1,068,636 4,360,797 -- 10,862
Repurchase of shares (Note 9) -- -- (494,375) --
Cancellation of shares repurchased (Note 9) (94,920) (399,455) 494,375 --
Net income for the year -- -- -- --
Dividends -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 2000 4,635,774 6,726,749 -- 11,983
Issue of share capital (Note 9) 98,303 411,599 -- (9,142)
Repurchase of shares (Note 9) -- -- (271,595) --
Cancellation of shares repurchased (Note 9) (30,000) (241,595) 271,595 --
Net income for the year -- -- -- --
Dividends -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 2001 $ 4,704,077 $ 6,896,753 $ -- $ 2,841
============ ============ ============ ============
NON-VESTED
REDEEMABLE TOTAL
PREFERRED RETAINED STOCKHOLDERS'
STOCK EARNINGS EQUITY
----------- -------- ------------
Balance at December 31, 1998 44,200 4,370,193 10,993,391
Issue of share capital (Note 9) 3,949 -- 612,465
Repurchase of shares (Note 9) -- -- (758,928)
Cancellation of shares repurchased (Note 9) -- -- --
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 9) (19,771) -- 5,420,524
Repurchase of shares (Note 9) -- -- (494,375)
Cancellation of shares repurchased (Note 9) -- -- --
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
Issue of share capital (Note 9) (985) -- 499,775
Repurchase of shares (Note 9) -- -- (271,595)
Cancellation of shares repurchased (Note 9) -- -- --
Net income for the year -- 2,764,573 2,764,573
Dividends -- (1,575,246) (1,575,246)
------------ ------------ ------------
Balance at December 31, 2001 $ 27,393 $ 7,633,036 $ 19,264,100
============ ============ ============
The accompanying notes are an integral part of these financial statements.
48
CONSOLIDATED WATER CO. LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in United States dollars)
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
2001 2000 1999
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash receipts from customers 11,607,099 9,919,966 7,841,289
Cash paid to suppliers and employees (7,344,692) (5,876,811) (5,127,240)
------------ ------------ ------------
Cash generated from operations 4,262,407 4,043,155 2,714,049
Interest received 28,584 32,314 594
Interest paid (97,070) (152,757) (185,722)
------------ ------------ ------------
Net cash provided by operating activities 4,193,921 3,922,712 2,528,921
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of subsidiary, net of cash acquired (Note 5) -- (3,966,979) --
Purchase of property, plant and equipment (1,892,147) (2,301,759) (1,543,368)
Purchase of investment (12,450) -- --
Proceeds from sale of property, plant and equipment 360 -- 1,920
------------ ------------ ------------
Net cash used in investing activities (1,904,237) (6,268,738) (1,541,448)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of
ordinary shares of common stock and preference stock 210,601 5,368,945 146,060
Repurchase of ordinary shares of common stock (271,595) (494,375) (758,928)
Draw down of credit facility 500,000 -- --
Increase (decrease) in bank overdraft (703,331) 32,938 591,359
Repayment of principal on long term debt (281,922) (885,355) (533,353)
Principal payments under Water Purchase Agreement -- (320,141) (344,304)
Dividends paid (1,477,828) (1,127,295) (505,193)
------------ ------------ ------------
Net cash provided by (used in) financing activities (2,024,075) 2,574,717 (1,404,359)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 265,609 228,691 (416,886)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 250,837 22,146 439,032
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 516,446 $ 250,837 $ 22,146
============ ============ ============
The accompanying notes are an integral part of these financial statements.
49
CONSOLIDATED WATER CO. LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in United States dollars)
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
2001 2000 1999
----------- ----------- -----------
RECONCILIATION OF NET CASH FROM OPERATING ACTIVITIES
TO NET INCOME FROM OPERATIONS:
Net income 2,764,573 2,404,820 1,569,717
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
FROM OPERATING ACTIVITIES
Depreciation (Notes 4 and 10) 1,113,041 1,071,455 816,960
Loss (gain) on sale of fixed assets 7,702 -- (1,920)
Amortization of intangible asset (Note 5) 193,703 64,979 --
Share issue costs deferred -- -- 89,145
Stock compensation (Note 22) 289,174 51,579 377,260
Cumulative effect of a change in accounting principle -- -- 117,576
CHANGE IN ASSETS AND LIABILITIES
Decrease (increase) in spares inventory (151,120) 25,278 (25,662)
Decrease (increase) in inventory of water (14,158) (5,235) 1,677
Decrease (increase) in accounts receivable 165,573 (56,259) (401,926)
Decrease (increase) in prepaid expenses and other assets (20,401) 1,647 (111,213)
Increase in accounts payable and other liabilities 19,956 320,183 203,471
Increase (decrease) in stock compensation liability (170,526) 48,259 (101,664)
Decrease in advances in aid of construction (3,596) (3,994) (4,500)
----------- ----------- -----------
NET CASH FROM OPERATING ACTIVITIES $ 4,193,921 $ 3,922,712 $ 2,528,921
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
50
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, Ambergris Caye, Belize, and South Bimini, Bahamas. 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 has a contract with Belize Water Services Ltd. (
"BWSL") of Belize, formally known as Water and Sewerage Authority of Belize, to
supply water to BWSL in Ambergris Caye expiring in 2011. At the expiry of the
contract, BWSL may at its option extend the term of the agreement or purchase
the plant outright. In addition, on July 11, 2001 the Company commenced
supplying water under a ten year agreement to South Bimini International Ltd., a
Bahamian company, which owns and operates resort properties on South Bimini
Island, Bahamas. The base price of water supplied by the Group, and adjustments
thereto, are generally determined by the terms of the license and contracts,
which provide for adjustments based upon the movement in the government price
indices specified in the license and contracts respectively as well as monthly
adjustments for changes in the cost of energy.
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".
The following income statement captions contain certain items, the accounting
for which has changed as a result of the change from IAS to US-GAAP:
INCOME STATEMENT: Indirect expenses 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."
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 Limited,
Commonwealth Water Limited, Hurricane Hide-A-Way Ltd., and Cayman Water Company
Limited. The operating results of Belize Water Limited 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, Hurricane Hide-A-Way Ltd. and
Cayman Water Company Limited as these companies have been dormant since
inception and have no assets and liabilities.
51
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The exchange
rate between the Belize Dollar and the United States dollar has been fixed
during all periods presented at BZE$1.00 to US$0.50. The exchange rate between
the Bahamian Dollar and the United States dollar has been fixed during all
periods presented at BAH$1.00 to US$1.00. Accordingly, no foreign currency gain
or losses arise on the translation of the foreign 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 $2,477 (2000: $3,812; 1999:
$36,512) are included in other income.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents comprise cash at bank on
call and highly liquid deposits 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 or 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 estimated useful lives of the assets as follows:
Buildings 5 to 40 years
Plant and equipment 5 to 15 years
Distribution system 3 to 40 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
Lab Equipment 3 to 10 years
Additions to property, plant and equipment comprise of the cost of the
contracted services, direct labour and materials. Assets under construction are
recorded as additions for the year upon completion of the projects. Depreciation
commences in the month of completion and transfer from assets under construction
into the other categories of Property, plant and equipment.
52
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSET: The intangible asset consists of the contract acquired on the
acquisition of Belize Water Limited (Note 5) 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.
INVESTMENT: Investments are recorded at cost less provision for impairment, if
any.
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 15). The assets have been capitalized at the amount specified in
the agreement.
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.
SHARES REPURCHASED: Under Cayman Island law, shares repurchased out of capital
by the Company are treated as cancelled upon redemption, and the Company's
issued share capital is reduced by the par value of those shares, with the
difference being adjusted to additional paid up capital.
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 certain
long-serving employees and the executive Officers.
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, and in
accordance with various agreements which stipulate minimum monthly charges for
water service. 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 Cayman Hotel and Golf
Inc. are recorded as other income.
REPAIRS AND MAINTENANCE: All repair and maintenance costs are expensed as
incurred.
53
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACCOUNTS RECEIVABLE
Accounts receivable comprise receivables from customers and are shown net of an
allowance for doubtful accounts of $12,000 (2000: $12,000). Significant
concentrations of credit risk are disclosed in Note 21.
4. PROPERTY, PLANT AND EQUIPMENT
Certain fixed assets are pledged as collateral for certain obligations of the
Company, as more fully described in Note 8.
DISPOSALS/
TRANSFERS FROM
DECEMBER 31, ASSETS UNDER DECEMBER 31,
2000 ADDITIONS CONSTRUCTION 2001
----------- --------- -------------- -------------
COST
Land 475,679 -- -- 475,679
Buildings 2,115,025 32,392 -- 2,147,417
Plant and equipment 8,812,711 719,028 -- 9,531,739
Distribution 11,386,877 1,449,668 -- 12,836,545
Office furniture, fixtures and equipment 636,514 38,936 -- 675,450
Vehicles 698,176 76,199 (23,484) 750,891
Leasehold improvements 26,032 13,448 -- 39,480
Lab equipment 34,324 3,585 -- 37,909
Assets under construction 701,251 1,557,154 (1,973,499) 284,906
------------ ------------ ------------ ------------
$ 24,886,589 $ 3,890,410 $ (1,996,983) $ 26,780,016
============ ============ ============ ============
DECEMBER 31, CHARGE FOR DECEMBER 31,
2000 THE YEAR DISPOSALS 2001
------------ ------------ ------------ ------------
ACCUMULATED DEPRECIATION
Buildings 610,177 66,542 -- 676,719
Plant and equipment 3,097,203 630,798 -- 3,728,001
Distribution 2,837,004 268,189 -- 3,105,193
Office furniture, fixtures and equipment 311,213 90,996 -- 402,209
Vehicles 337,135 73,464 (15,422) 395,177
Leasehold improvements 20,100 6,152 -- 26,252
Lab equipment 29,866 1,664 -- 31,530
------------ ------------ ------------ ------------
$ 7,242,698 $ 1,137,805 $ (15,422) $ 8,365,081
============ ============ ============ ============
Net book value $ 17,643,891 $ 18,414,935
============ ============
54
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. 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 15).
Included within additions for the year are transfers of completed projects from
assets under construction comprising of buildings $7,420, plant and equipment
$616,651 and distribution $1,349,428.
During the year the Company capitalized $24,764 (2000: $33,682; 1999: $35,749)
of depreciation charges in relation to plant and equipment specifically
purchased to continue further development of the distribution system.
At December 31, 2001, the Group had outstanding capital commitments of
$1,620,000 (2000: $570,000). It is Company policy to maintain adequate insurance
for loss or damage to all fixed assets that in management's assessment may be
susceptible to loss. The Company does not insure its underground distribution
system which totals $9,471,931 (2000: $8,791,350) and assets insured by third
parties under agreement that have a total cost of $3,633,997 (2000: $3,550,897)
(Note 15).
During the year ended December 31, 2001 the Company carried out an extensive
engineering analysis of its potable water production and distribution equipment
in Grand Cayman, which included the revision of the Company's computerized
hydraulic model of the pipeline system, and updating of the Company's water
meter replacement schedule. The Company's engineering analysis concluded that
certain assets, including portions of the Seven Mile Beach Distribution System,
the Governor's Harbour VC Building, and water meters would not need to be
replaced or relocated as early as previously planned. Furthermore extensive
renovation of the Governor's Harbour VC Building was completed in 2000. As a
result of these circumstances, management considered it appropriate to reassess
the estimated useful economic life of the Seven Mile Beach distribution system
from 20 years to 40 years of which 13 years has already elapsed, the Governor's
Harbour VC building from 20 to 40 years of which 21 years had already elapsed,
and water meters from 5 years to 10 years of which 3 years had already elapsed.
Also as a result of these circumstances, it was determined that the projected
future utilization of a key piece of equipment, which the Company uses to
install or replace pipelines, would be reduced. It was considered appropriate by
management to reassess the useful economic life of this piece of equipment from
10 years to 20 years, of which 3 years had already elapsed.
Also during the year ended December 31, 2001 the Company carried out a review of
the condition and technology of its West Bay RO Plant and concluded that the
plant was now meeting performance and operational requirements consistent with
those of the Governor's Harbour RO Plant. A similar review had been carried out
on the Governor's Harbour RO Plant in 1994. As a result of these circumstances,
it was considered appropriate by management to reassess the estimated useful
economic life of the West Bay RO Plant from 10 years to 15 years, of which 3
years had already elapsed, which is now consistent with depreciation parameters
used for the Governor's Harbour RO Plant.
The reassessment of the useful economic lives of these assets resulted in
decreased depreciation expense on an annual basis in the amount of $197,472,
which increased basic and fully diluted earnings per share by $0.05 for the year
ended December 31, 2001.
55
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INTANGIBLE ASSET
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, for a
total purchase price, less cash and cash equivalents acquired, of $3,966,979. Of
this amount, $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 Belize Water Services Limited. Seatec Belize Ltd., now renamed
Belize Water Limited, owns and operates a reverse osmosis plant in Ambergris
Caye, Belize. This acquisition has been accounted for by the purchase method and
the intangible asset is being amortised on a straight line basis over the
remaining period of the contract, which expires in April 2011.
DECEMBER 31,
-----------------------------
2001 2000
----------- -----------
Intangible asset - contract 2,073,462 2,073,462
Accumulated amortisation (258,682) (64,979)
----------- -----------
Net book value $ 1,814,780 $ 2,008,483
=========== ===========
6. INVESTMENT
DECEMBER 31,
-----------------------------
2001 2000
----------- -----------
Investment in Belize Water Services Ltd. 12,450 --
----------- -----------
Total investment $ 12,450 $ --
=========== ===========
The investment in Belize Water Services Ltd. represents less than a 1% holding
of total issued and outstanding shares of Belize Water Services Ltd.
56
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DIVIDENDS PAID / PAYABLE
Quarterly interim dividends per share were declared in respect of both classes
of shareholders on record as follows:
Dividend per share: 2001 2000 1999
---- ---- ----
March 31 $ 0.10 $ 0.08 $ 0.04
June 30 $ 0.10 $ 0.08 $ 0.04
September 30 $ 0.10 $ 0.08 $ 0.04
December 31 $ 0.10 $ 0.10 $ 0.08
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, 2001 are unclaimed dividends of
$100,160 (2000: $10,051).
8. BANK BALANCES AND LOANS
DECEMBER 31,
---------------------------
2001 2000
---------- -----------
Cash and cash equivalents $ 516,446 $ 250,837
=========== ===========
Cash and cash equivalents are not restricted as to withdrawal or use. At
December 31, 2001, the equivalent of $372,688 (2000: $10,414) is denominated in
Belize dollars. The Group has a guarantee from the Government of Belize to
repatriate any and all of the Belize Water Ltd. earnings in United States
dollars to any foreign destination.
Bank overdrafts - Royal Bank of Canada $ -- $ 703,331
=========== ==========
European Investment Bank:
Long term debt $ 1,132,144 $1,351,566
=========== ==========
Royal Bank of Canada:
Long term debt $ 437,500 $ --
=========== ==========
As at December 31, 2001, the total lending facility made available by the Royal
Bank of Canada comprised of a) a revolving line of credit with a limit of
$1,000,000, bearing interest at New York Prime plus 1%, which is convertible in
$100,000 increments into a monthly revolving LIBOR note, bearing interest at
LIBOR plus 1.5%, and b) term loans with a limit of $3,500,000, 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 $4,500,000). 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 15). Of this facility, a bank overdraft of $nil (2000:
$703,331) and a term loan of $437,500 (2000: $nil) was outstanding at December
31, 2001.
57
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. BANK BALANCES AND LOANS (CONTINUED)
During 1991, in order to fund an extension to the water distribution system, the
European Investment Bank, Luxembourg (the "bank"), agreed to loan the US$
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, 2001 (1,420,028)
----------
Total debt obligation as at December 31, 2001 $ 1,132,144
==========
Of the final tranche, at December 31, 2001 the equivalent of $50,437 (2000:
$60,034) is repayable in pounds sterling, all other obligations under this loan
are repayable in United States dollars.
The Government of the Cayman Islands has, 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.
2001
----------
CURRENT PORTION OF LONG TERM DEBT OBLIGATION:
Royal Bank of Canada 125,000
European Investment Bank 230,840
----------
$ 355,840
==========
LONG TERM DEBT OBLIGATION:
Royal Bank of Canada 312,500
European Investment Bank 901,304
----------
$1,213,804
==========
THE AGGREGATE CAPITAL REPAYMENT OBLIGATIONS FOR THE NEXT FIVE YEARS ARE AS
FOLLOWS:
2002 355,840
2003 362,300
2004 369,000
2005 313,800
2006 168,704
----------
$1,569,644
==========
58
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. SHARE CAPITAL AND ADDITIONAL PAID IN CAPITAL
2001 2000 1999
------------ ------------ ------------
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
3,863,144 (2000: 3,154,467; 1999: 3,048,222) 4,635,774 3,662,058 3,657,866
Ordinary shares issued under public
offering nil (2000: 773,000; 1999: nil) -- 927,600 --
Cancellation of repurchased shares 25,000
(2000: 79,100; 1999: 102,752) (30,000) (94,920) (123,302)
Cancellation of ordinary shares 200
(2000: nil; 1999: nil) (240) -- --
Ordinary shares issued on exercise of
options 60,000 (2000: nil; 1999: 89,010) 72,000 -- 106,812
Ordinary shares issued on exercise of
warrants nil (2000: 100,000; 1999: nil) -- 120,000 --
Ordinary shares issued under Directors' Share
Plan 7,860 (2000: 6,890; 1999: 2,400) 9,431 8,269 2,880
Ordinary shares issued on redemption of
preferred stock 14,260 (2000: 10,639; 1999: 14,835) 17,112 12,767 17,802
------------ ------------ ------------
Balance of ordinary shares at end of year
3,920,064 (2000: 3,863,144; 1999: 3,154,467) $ 4,704,077 $ 4,635,774 $ 3,662,058
============ ============ ============
SHARES REPURCHASED:
Balance of shares repurchased at beginning of
year nil (2000: nil; 1999: nil) -- -- --
Shares acquired at cost 25,000 (2000: 79,100;
1999: 102,752) (271,595) (494,375) (758,928)
Repurchased shares cancelled during the
year 25,000 (2000: 79,100; 1999: 102,752) 271,595 494,375 758,928
------------ ------------ ------------
Balance of shares repurchased at end of
year nil (2000: nil; 1999: nil) $ -- $ -- $ --
============ ============ ============
59
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. SHARE CAPITAL AND ADDITIONAL PAID IN CAPITAL (CONTINUED)
2001 2000 1999
----------- ----------- -----------
ADDITIONAL PAID IN CAPITAL:
Balance at beginning of year 6,726,749 2,765,407 2,912,646
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 shares repurchased (241,595) (399,455) (635,626)
Additional paid in capital from ordinary
shares of common stock issued under
Directors' Share Plan (see Note 17) 47,567 40,815 11,970
Additional paid in capital from exercise of
stock options (see Note 17) 305,420 -- 466,401
Additional paid in capital from exercise of
warrants (see Note 17) -- 280,000 --
Additional paid in capital on preferred stock
issued under employee share plan (see Note 17) 58,612 4,851 10,016
----------- ----------- -----------
Balance at end of year $ 6,896,753 $ 6,726,749 $ 2,765,407
=========== =========== ===========
VESTED REDEEMABLE PREFERRED STOCK OF CI$1.00
EACH ISSUED AND FULLY PAID (NOTE 17):
Balance of vested redeemable preferred stock at
beginning of year 9,986 (2000: 934; 1999: 7,072) 11,983 1,121 8,486
Preferred stock vested during the year 5,358
(2000: 11,400; 1999: 7,036) 6,430 13,680 8,444
Vested preferred stock redeemed and issued as
ordinary shares 12,977 (2000: 2,348; 1999: 13,174) (15,572) (2,818) (15,809)
----------- ----------- -----------
Balance of vested redeemable preferred stock at
end of year 2,367 (2000: 9,986; 1999: 934) $ 2,841 $ 11,983 $ 1,121
=========== =========== ===========
NON-VESTED REDEEMABLE PREFERRED STOCK OF
CI$1.00 EACH ISSUED AND FULLY PAID (NOTE 17):
Balance of non-vested redeemable preferred stock at
beginning of year 23,648 (2000: 40,124; 1999: 36,833) 28,378 48,149 44,200
Preferred stock vested during the year 5,358
(2000: 11,400; 1999: 7,036) (6,430) (13,680) (8,444)
Non-vested preferred stock issued 5,821
(2000: 3,415; 1999: 11,988) 6,985 4,098 14,386
Non-vested preferred stock redeemed nil
(2000: 200; 1999: nil) -- (240) --
Non-vested preferred stock redeemed and issued as
Ordinary shares 1,283 (2000: 8,291; 1999: 1,661) (1,540) (9,949) (1,993)
----------- ----------- -----------
Balance of non-vested redeemable preferred stock
at end of year 22,828 (2000: 23,648; 1999: 40,124) $ 27,393 $ 28,378 $ 48,149
=========== =========== ===========
60
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. SHARE CAPITAL AND ADDITIONAL PAID IN CAPITAL (CONTINUED)
The redeemable preferred stock are issued under the Company's Employee Share
Incentive Plan (Note 17) and carry the same voting and dividend rights as
ordinary shares. The redeemable preferred stock is 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, 2002 17,881 -- --
872 $5.3175 4,637
1,081 $5.7120 6,175
1,136 $5.4720 6,216
1,858 $5.3238 9,892
------- -------
22,828 $26,920
======= =======
Up to the year ended December 31, 2003 12,791 -- --
1,081 $5.7120 6,175
1,136 $5.4720 6,216
1,858 $5.3238 9,892
------- -------
16,866 $22,283
======= =======
Up to the year ended December 31, 2004 6,087 -- --
1,136 $5.4720 6,216
1,858 $5.3238 9,892
------- -------
9,081 $16,108
======= =======
Up to the year ended December 31, 2005 3,963 -- --
1,858 $5.3238 9,892
------- -------
5,821 $ 9,892
======= =======
61
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. SHARE CAPITAL AND ADDITIONAL PAID IN CAPITAL (CONTINUED)
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 were exercisable
during the four year period commencing April 3, 1997 and expired on April 3,
2001. During the year ended December 31, 2001, no warrants were exercised under
this agreement.
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.
Under the provisions of the Land Holding Companies Share Transfer Tax Law of the
Cayman Islands, tax is payable on the transfer of shares in the Company. Prior
to becoming quoted on Nasdaq, the Company paid this tax on private share
transfers. The Company has never paid tax on transfers of its publicly traded
shares. Management believes that the likelihood that Government will seek to
collect this tax on transfers of the Company's publicly traded shares is remote.
Management, therefore, has not provided for a share transfer tax liability in
these financial statements.
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, 2001, no Class `B' stock options
have been exercised or redeemed.
The Company purchased treasury shares of 8,000, 102,752, and 79,100 in 1998,
1999 and 2000 respectively. The Company paid $62,375, $758,928 and $494,375 in
1998, 1999 and 2000, respectively to acquire these shares. Under the Cayman
Island's Companies Law, treasury shares purchased are to be treated as cancelled
on purchase. Accordingly, the Company has reclassified the purchase of these
treasury shares in the Consolidated Balance Sheet and the Consolidated Statement
of Shareholders' Equity as cancelled on purchase for the fiscal years ended
December 31, 1998, 1999 and 2000.
62
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. EXPENSES
YEAR ENDED DECEMBER 31,
----------------------------------------
2001 2000 1999
---------- ---------- ----------
COST OF WATER SALES COMPRISE THE FOLLOWING:
Water purchases 2,074,759 2,062,582 1,775,494
Depreciation 1,018,541 992,410 760,901
Amortisation of intangible asset (Note 5) 193,703 64,979 --
Employee costs 939,976 741,789 601,678
Fuel oil 91,842 81,102 --
Royalties (Note 19) 694,351 641,428 560,441
Water Purchase Agreement obligation interest (Note 15) -- 16,910 58,042
Electricity 534,919 316,135 450,451
Insurance 89,808 64,160 56,308
Other direct costs 471,218 441,802 506,864
---------- ---------- ----------
$6,109,117 $5,423,297 $4,770,179
========== ========== ==========
INDIRECT EXPENSES COMPRISE THE FOLLOWING:
Employee costs 1,299,877 1,045,244 907,695
Interest 99,956 135,847 127,680
Depreciation 94,500 56,059 79,045
Professional fees 280,297 275,589 131,366
Insurance 89,328 34,829 41,083
Directors' fees and expenses 107,184 104,149 99,760
Other indirect costs 628,874 522,866 428,873
---------- ---------- ----------
$2,600,016 $2,197,569 $1,792,516
========== ========== ==========
Direct expenses relate to the production and distribution of water, indirect
expenses represent the administrative costs of the Company.
63
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. 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.
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:
2001 2000 1999
----------- ----------- -----------
Net income used in determination of diluted
earnings per ordinary share of common stock $ 2,764,573 $ 2,404,820 $ 1,569,717
Less:
Dividends paid on non-vested
redeemable preferred stock (9,131) (8,040) (8,025)
Earnings attributable to vested
redeemable preferred stock (1,663) (6,180) (461)
----------- ----------- -----------
Net income available to holders of ordinary shares
of common stock in the determination of basic
earnings per ordinary share of common stock $ 2,753,779 $ 2,390,600 $ 1,561,231
=========== =========== ===========
Weighted average number of ordinary shares
of common stock in the determination of basic
earnings per ordinary share of common stock 3,897,969 3,532,501 3,044,293
Plus:
Weighted average number of redeemable
preferred stock outstanding during the year 31,213 37,145 44,707
Potential dilutive effect of unexercised options 70,509 41,147 48,954
Potential dilutive effect of unexercised warrants -- 5,478 50,094
----------- ----------- -----------
Weighted average number of shares
used for determining diluted earnings
per ordinary share of common stock 3,999,691 3,616,271 3,188,048
=========== =========== ===========
As detailed in Note 17, 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. However, as at December 31, 2001 these options were no longer
antidilutive and were included in the determination of diluted earnings per
share.
64
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. SEGMENTED INFORMATION
On July 21, 2000, the Company acquired a 100% stake in Belize Water Limited
(Note 5 and 16) that has been consolidated in these financial statements. In
addition, on December 18, 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 17) and began operations on July 11, 2001.
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. The basis of measurement of segment
information is similar to that adopted for the financial statements.
AS AT DECEMBER 31 AND FOR THE YEAR THEN ENDED
CAYMAN ISLANDS BELIZE BAHAMAS TOTAL
----------------------- ---------------------- -------------------- -----------------------
2001 2000 2001 2000 2001 2000 2001 2000
---------- ---------- ---------- ---------- ---------- ------- ---------- ----------
Water sales 9,769,815 9,112,031 1,230,775 464,928 26,333 -- 11,026,923 9,576,959
Other income 417,786 448,727 28,554 -- 443 -- 446,783 448,727
Cost of water 5,344,370 5,172,945 718,121 250,352 46,626 -- 6,109,117 5,423,297
sales
Indirect expenses 2,404,977 2,164,147 190,913 33,422 4,126 -- 2,600,016 2,197,569
Cost of water
sales and
indirect expenses
include:
Interest 99,865 152,757 91 -- -- -- 99,956 152,757
Depreciation 932,029 1,009,420 160,825 62,035 20,187 -- 1,113,041 1,071,455
Net income (loss) 2,438,254 2,223,666 350,295 181,154 (23,976) -- 2,764,573 2,404,820
Property Plant
and Equipment 15,770,560 15,735,330 1,541,795 1,601,166 1,102,580 307,395 18,414,935 17,643,891
13. RELATED PARTY TRANSACTIONS
A company, owned by a Director, provided professional services during the year
ended December 31, 2001 for which it charged $4,523 (2000: $13,369). This
company was also reimbursed for communication charges made by the Director on
behalf of the Company in the amount of $1,355 (2000: $nil).
The Company sells water to a company in which a Director has a significant
interest. During 2001 sales totaling $9,735 (2000: $5,647; 1999: $11,621) were
made to that company. Accounts receivable for such sales at year end total $934
(2000: $411; 1999: $286).
65
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company has committed to lease premises in the Cayman Islands for a period
of one year from February 1, 2002 to January 31, 2003 at approximately $79,000
per annum, with the right to extend the term of this lease for two further terms
of one year each ending on January 31, 2005.
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 15).
The Group is subject to a commitment to supply certain minimum quantities of
water under the terms of various customer supply agreements (Note 16).
The Company has entered into an agreement with Cayman Hotel and Golf Inc., a
Canadian company, to purchase a seawater desalination plant, potable water
storage tank and water distribution pumps, which supply water to a large hotel
and golf course in West Bay Beach, Grand Cayman, Cayman Islands (Note 25). As a
condition of this equipment purchase agreement, the Company has committed to an
operating lease for $1 per year from Cayman Hotel and Golf Inc, for a term of 25
years, subject to renewal of Cayman Island water supply license, to lease a
building and approximately 0.78 acres of land on which the water plant is
situated, and to supply potable water to the Hyatt Hotel and Britannia Golf
Course (Note 16). Upon commencement of supply the existing dispute settlement
agreement with Cayman Hotel and Golf Inc., described in Note 2, will be
extinguished.
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 an issuance
or transfer of shares which (a) exceeds 5% of the issued shares of our company,
or (b) would, upon registration, result in any shareholder holding 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 the 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 &
Co. may be a technical breach of the Company's license.
In August and September 1994 and in September 1995, the Company completed
private placements of an aggregate of 500,000 ordinary shares of common stock
and warrants to purchase an additional 100,000 ordinary shares of common stock.
In April 1996 and May 2000, the Company completed public offerings 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.
66
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company received a letter dated June 1, 2000, from an official in the
Government, stating that the Company's April 1996 public offering of the
ordinary shares of common stock 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 our license. The Company has advised the Government that it does
not believe that it is in breach of the license. The Company has been advised by
Legal Counsel that the June 1st letter from the Government does not constitute a
"notice of breach of the license" as contemplated in the license. In June 2000,
December 2000, and January 2002 the Company met with representatives of the
Government to discuss this matter. Other than providing the Company with it's
June 1, 2000 letter the Government has not taken any other action in connection
with the Company's license to date.
15. 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 2001, 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. With the purchase of the
equipment in 2000 financing charges for 2001 are $nil.
As at December 31, 2001 minimum future payments are as follows:
2002 1,350,704
2003 1,350,704
2004 1,350,704
-----------
Total minimum payments $4,052,112
===========
The RO plant acquired under the Water Purchase Agreement is included in plant
and equipment in Note 4 at a gross amount of $3,633,997 (2000: $3,550,897) and
at December 31, 2001 had a net book value of $1,250,890 (2000: $1,336,126).
Amortization of this plant is included in the depreciation charge for each of
the three years ended December 31, 2001. During the year ended December 31, 2000
the Company fulfilled the equipment purchase obligation as calculated under the
Water Purchase Agreement. Accounts payable includes $192,340 (2000: $204,076)
outstanding under the Water Purchase Agreement.
67
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. 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, 2001
resulting from the supply agreement amounted to $374,965 (2000: $571,969; 1999:
$444,098). At December 31, 2001 the Company holds a non-interest bearing
security deposit of $52,763 (2000: $52,763) under the terms of the supply
agreement.
From October 15, 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, 2001 resulting from this agreement amounted to $298,160 (2000:
$299,333; 1999: $314,884).
From the acquisition date of Belize Water 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 BWSL of Belize. The price of water supplied is adjusted
annually based on Government indices. Water sales for the year ended December
31, 2001 resulting from this agreement amounted to $1,230,775 (2000: $464,928)
(Note 12).
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 customer per
month (36,000 US Gallons 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. On July 11, 2001 the
Company began to supply water under the agreement and water sales for the period
ended December 31, 2001 resulting from this agreement amounted to $26,333 (Note
12).
On December 10, 2001 the Company entered into a twenty-five year agreement to
supply a minimum of 170,000 US gallons of potable water per day to Cayman Hotel
and Golf Inc., the owners of the Hyatt Grand Cayman Resort and Britannia Golf
Course in Grand Cayman. The price of the water supplied is adjusted annually
based on Government Price Indices, and water supplied in excess of the monthly
minimum of 170,000 US Gallons per day is invoiced at the Company's standard
tariff rate. Water sales for the year ended December 31, 2001 resulting from
this agreement amounted to $nil (Notes 14 and 25).
There are no other individually significant supply agreements.
17. STOCK COMPENSATION
The Company operates various stock compensation plans (described below) that
form part of employee's remuneration. Stock compensation expenses of $169,599
are recorded in accordance with APB 25 and included within employee costs (2000:
$124,772; 1999: $245,117).
68
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. STOCK COMPENSATION (CONTINUED)
EMPLOYEE SHARE INCENTIVE PLAN (PREFERRED STOCK)
The Company awards redeemable preferred stock (restricted stock) for $nil
consideration under the Employee Share Incentive Plan as part of compensation
for eligible employee services (excluding Directors and Executive Officers) 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 ordinary shares of 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 9 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 Incentive Plan is as follows:
YEAR OF STRIKE OPTIONS OPTIONS
GRANT GRANTED PRICE EXERCISED EXPIRED
----- ------- ----- --------- -------
Preferred stock granted 1999 9,768 $nil N/A N/A
2000 2,279 $nil N/A N/A
2001 3,963 $nil N/A N/A
Preferred stock options granted 1999 9,768 $5.71 2,220 7,548
2000 2,279 $5.47 1,136 1,143
2001 3,963 $5.32 1,858 2,105
Each employee's option to purchase preferred stock must be exercised within 40
days of the annual general meeting of the Company following the date of grant.
EMPLOYEE SHARE OPTION PLAN (ORDINARY STOCK OPTIONS)
In 2001, the Company introduced an employee stock option plan for certain
long-serving employees of the Company. Under the plan these employees are
granted in each calendar year, as long as the employee is a participant in the
Employee Share Incentive Plan, options to purchase ordinary shares of common
stock. The price at which the option may be exercised will be the closing market
price on the grant date, which is 40 days after the date of the Company's annual
shareholder meeting. The number of options each employee is granted is equal to
five times the sum of (i) the number of Redeemable Preferred Stock which that
employee receives for $nil consideration and (ii) the number of Redeemable
Preferred Stock option which that employee exercises in that given year. The
option may be exercised during the period commencing on the fourth anniversary
of the grant date and ending on the thirtieth day after the fourth anniversary
of the grant date.
NON-EXECUTIVE DIRECTORS' SHARE PLAN
In 1999, the Company introduced a stock grant plan, which forms part of
Directors' remuneration. Under the plan Directors receive a combination of cash
and ordinary shares of 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. Ordinary shares of 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, 2001 totaled
7,860 (2000: 6,890). The strike price set on October 1, 2001 was $10.70 (October
1, 2000 $7.25).
69
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. STOCK COMPENSATION (CONTINUED)
DIRECTORS AND SENIOR MANAGEMENT STOCK COMPENSATION
The Chairman and Chief Executive Officer ("CEO"), the President, Chief Operating
Officer ("COO") and Chief Financial Officer ("CFO"), the Vice President -
Operations, and Director of Special Projects are entitled to receive, as part of
the compensation for their services to the Company, options to purchase ordinary
shares of common stock. One other director was 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 management is entitled to receive,
as part of compensation for services to the Group, ordinary shares of common
stock of the Company. As at December 31, 2001 an amount of 3,172 shares (2000:
1,092) was due 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 have an expiry date of one year commencing on the termination of the
agreement, which management intends to formally terminate on April 3, 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 were included within other indirect costs.
SUMMARY OF OPTION PLANS:
OPTIONS STRIKE OPTIONS DATE
GRANT DATE GRANTED PRICE EXPIRY DATE EXERCISED EXERCISED
---------- ------- ----- ----------- --------- ---------
CHAIRMAN AND CEO:
December 31, 1999 7,786 US$2.50 20-Mar-03 -- --
December 31, 2000 26,924 US$7.10 15-Mar-04 -- --
December 31, 2001 28,507 US$10.84 10-Mar-05 -- --
PRESIDENT, COO AND CFO:
December 31, 2000 5,609 US$7.10 15-Mar-04 -- --
December 31, 2001 28,533 US$10.84 10-Mar-05 -- --
VICE PRESIDENT - OPERATIONS:
December 31, 2000 20,193 US$7.10 15-Mar-04 -- --
December 31, 2001 20,800 US$10.84 10-Mar-05 -- --
DIRECTOR OF SPECIAL PROJECTS:
December 31, 1997 20,000 US$2.50 24-Feb-01 20,000 23-Feb-01
December 31, 1998 20,000 US$2.50 01-Mar-02 20,000 17-July-01
December 31, 1999 20,000 US$2.50 20-Mar-03 20,000 17-July-01
December 31, 2000 5,609 US$7.10 15-Mar-04 -- --
December 31, 2001 27,646 US$10.84 10-Mar-05 -- --
70
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. STOCK COMPENSATION (CONTINUED)
OPTIONS STRIKE OPTIONS DATE
GRANT DATE GRANTED PRICE EXPIRY DATE EXERCISED EXERCISED
---------- ------- ----- ----------- --------- ---------
OTHER DIRECTOR:
July 20, 1999 30,000 US$6.00 01-May-02 -- --
May 1, 2000 30,000 US$6.75 01-May-03 -- --
December 10, 2001 30,000 US$11.17 09-Dec-04 -- --
FORMER OFFICER:
December 31, 2000 26,924 US$7.10 15-Mar-04 -- --
NON-EMPLOYEE:
December 15, 1998 30,000 US$7.88 03-Apr-03 -- --
EMPLOYEES:
July 6, 2001 22,605 US$ 9.20 04-Aug-05 -- --
Weighted average number and exercise price of options (all plans):
2001 2000 1999
-------------------- -------------------- ---------------------
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 243,045 $ 5.73 127,786 $4.58 159,010 $3.51
Granted 162,054 $10.55 117,538 $6.98 67,554 $4.96
Exercised (61,858) $ 2.58 (1,136) $5.47 (91,230) $5.32
Forfeited (2,105) $ 5.32 (1,143) $5.47 (7,548) $5.32
------------- ----------- -----------
Outstanding and exercisable at
end of year 341,136 $ 8.59 243,045 $5.73 127,786 $4.58
============= =========== ===========
71
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. STOCK COMPENSATION (CONTINUED)
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,
--------------------------------------------
2001 2000 1999
------------ ------------- -------------
Net income $2,288,882 $2,111,755 $1,498,105
Basic earnings per ordinary share $ 0.59 $ 0.59 $ 0.48
Diluted earnings per ordinary share $ 0.57 $ 0.58 $ 0.47
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:
FOR THE YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
---- ---- ----
Chairman and CEO $3.78 -- $4.07
President, COO and CFO $3.78 -- $4.07
Vice President - Operations $3.78 -- --
Director of Special Projects $3.78 -- --
Non-executive director $3.89 $2.69 $3.69
Former Officer -- -- $1.84
Employees - preferred stock $3.88 $2.66 --
Employees - ordinary share options $3.08 -- --
Overall weighted average $3.71 $2.69 $3.80
Options granted with an exercise price above market price on the date of
grant:
Chairman and CEO -- $2.57 --
President, COO and CFO -- $2.57 --
Vice President - Operations -- $2.57 --
Director of Special Projects -- $2.57 --
Non-executive director -- -- --
Former Officer -- $2.57 --
Employees - preferred stock -- -- --
Employees - ordinary share options -- -- --
Overall weighted average $2.57 --
72
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. 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:
2001 2000 1999
---- ---- ----
Exercise price $ 10.55 $ 6.70 $ 4.37
Grant date market value $ 10.97 $ 6.97 $ 6.98
Risk free interest rate 3.93% 6.56% 5.75%
Expected life 3.21 years 3.0 years 2.8 years
Expected volatility 52.79% 62.64% 72.55%
Expected dividend yield 3.67% 4.59% 3.46%
Options granted with an exercise price above market price on the date of
grant:
2001 2000 1999
---- ---- ----
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:
2001 2000 1999
-------------------- ------------------- --------------------
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 Incentive Plan 3,963 $9.00 2,279 $7.00 9,768 $5.83
Directors Share Plan 7,860 $7.25 6,889 $7.13 2,400 $6.75
Overall weighted average 11,456 $7.86 9,168 $7.09 12,168 $6.01
73
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. 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 BWSL contract. Services to our customer in the Bahamas are provided by the
Company, which is a Cayman Islands company that is not subject to taxation in
the Commonwealth of the Bahamas.
19. GOVERNMENT ROYALTIES
Royalty expenses incurred during the year under the terms of the license to
process and supply potable water, granted by the Government of the Cayman
Islands, amounted to $694,351 (2000: $641,428; 1999: $560,441). In accordance
with the terms of the license, royalties are payable at the rate of 7.5% of
gross US gallon water sales. Payments are made monthly in arrears.
20. 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 2001 was $63,740 (2000: $67,760 1999: $48,554).
21. FINANCIAL INSTRUMENTS
CREDIT RISK:
Financial assets that potentially subject the Group to concentrations of credit
risk consist principally of cash and accounts receivable. The majority of the
Group's cash balances are placed with high credit quality financial
institutions. With respect to accounts receivable, the Group's operations in
Belize as described in Note 1 are concentrated with one customer. In addition,
the Group's operations in Bahamas also described in Note 1 are also concentrated
with one customer. As a result, the Group is subject to credit risk to the
extent of any non-performance by these customers. As at December 31, 2001 the
Group was owed $213,647 from the Belize customer and $448 from the Bahamian
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 8 and 15 respectively.
74
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. FINANCIAL INSTRUMENTS (CONTINUED)
FAIR VALUES:
At December 31, 2001 and 2000 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 8) 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 $1,041,000 (2000: $1,207,000)
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.
22. NON-CASH TRANSACTIONS
The Company made the following non-cash transactions:
2001 2000 1999
-------- --------- --------
Redemption of preferred stock and issue of
replacement ordinary shares of common
stock at $nil consideration (14,260, 10,639,
and 14,835 shares respectively) (Note 9) $ 17,112 $ 12,767 $ 17,802
======== ========= ========
Preferred stock issued to employees at $nil
consideration (3,963, 2,279, and 9,768 shares
respectively) (Notes 9 and 17) $ 4,756 $ 2,735 $ 11,722
Redemption of non-vested preferred stock at $nil
consideration (nil, 200, and nil shares
respectively) (Note 9) -- (240) --
Ordinary shares of common stock issued under the
Directors Share Plan at $nil consideration
(7,861, 6,890, and 2,400, respectively) (Note 17) 56,998 49,084 14,850
Additional paid in capital from stock options 227,420 -- 350,688
-------- --------- --------
$289,174 $ 51,579 $377,260
======== ========= ========
Reduction in ordinary shares and additional
paid in capital from cancellation of shares
repurchased (Note 9) $271,595 $ 494,375 $758,928
======== ========= ========
Dividends declared but not paid (Note 7) $499,383 $ 401,965 $266,585
======== ========= ========
Depreciation charges capitalized (Note 4) $ 24,764 $ 33,682 $ 35,749
======== ========= ========
75
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
During the year ended December 31, 2001, the Financial Accounting Standards
Board issued four standards. A summary of these standards is given below:
Statement of Financial Accounting Standard No. 141, "Business Combinations" (FAS
141) addresses financial accounting and reporting for business combinations. It
requires all business combinations covered by the scope of the Standard to be
accounted for using the purchase method. It is effective for business
combinations initiated after June 30, 2001 and business combinations completed
on July 1, 2001 and later which use the purchase method of accounting. Although
the Company has no pending business combinations that would be affected by this
statement, the requirements of this statement will be considered in any business
combination contemplated in the future.
Statement of Financial Accounting Standard No. 142, "Goodwill and Other
Intangible Assets" (FAS 142) addresses financial accounting and reporting for
goodwill and other intangible assets subsequent to their acquisition. It
requires that goodwill and other intangible assets having indefinite useful
lives be tested annually for impairment using a fair-value based test and
prohibits amortization. Assets having finite useful lives would continue to be
amortized over those lives. The Standard also provides specific guidance for
testing goodwill and other intangible assets for impairment and also requires
additional disclosures concerning goodwill and other intangible assets. FAS 142
is effective for fiscal years beginning after December 15, 2001 and must be
applied to all goodwill and other intangible assets recognized in financial
statements as of the start of that fiscal year. Impairment losses resulting from
the initial application of the Standard are to be reported as resulting from a
change in accounting principle. At this time, the Company does not believe the
adoption of the Standard will have an impact on its financial position or
results of operations.
Statement of Financial Accounting Standard No. 143, "Accounting for Asset
Retirement Obligations" (FAS 143) addresses the recognition and measurement of a
liability for an asset retirement obligation and the associated asset retirement
costs. It requires that an existing legal obligation associated with the
retirement of a tangible long-lived asset be recognized as a liability when
incurred and outlines the method of measuring that liability. It is effective
for financial years beginning after June 15, 2002. Currently the Company has no
legal obligations relating to asset retirement, however the requirements of this
statement will be considered if any legal obligations relating to the retirement
of long-lived assets arise in the future.
Statement of Financial Accounting Standard No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (FAS 144) addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. It requires that an impairment loss be
recognized if the carrying amount of a long-lived asset is not recoverable and
exceeds the fair value of the long-lived asset. The Standard also provides
guidance on estimating future cash flows used to test a long-lived asset for
recoverability. The test for impairment should be performed whenever events or
circumstances indicate that its carrying value may not be recoverable.
Restoration of previously recognized impairment loss is prohibited. FAS 144 is
effective for fiscal years beginning after December 15, 2001. For the year ended
December 31, 2001 the Company performed an impairment test on its long-lived
assets of which no impairment was found.
76
CONSOLIDATED WATER CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
24. COMPARATIVE FIGURES
Certain of the prior years figures have been adjusted to conform to the current
years presentation.
25. SUBSEQUENT EVENT
Subsequent to the year end, on February 1, 2002 the Company acquired and took
possession of the reverse osmosis plant, equipment and water storage facilities
comprising the potable water production plant at the Hyatt Grand Cayman Hotel
and Ellesmere Britannia Golf Course located on Grand Cayman, Cayman Islands. The
consideration for the operations acquired was a cash payment of $1,500,000.
(Notes 14 and 16)
77
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 57 Director, Chairman of the board of directors
and Chief Executive Officer
Frederick W. McTaggart 39 Director, President, Chief Operating
Officer and Chief Financial Officer
Peter D. Ribbins 54 Director - Special Projects and Company
Secretary
Gregory S. McTaggart 38 Vice President - Operations
J. Bruce Bugg, Jr. 47 Director and Vice Chairman of the board of
directors
Brian E. Butler 52 Director
Steven A. Carr 51 Director
Richard L. Finlay 43 Director
Clarence B. Flowers, Jr. 44 Director
Wilmer Pergande 62 Director
Raymond Whittaker 48 Director
Carson J. Ebanks, JP 45 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 1998,
and the President and Chief Operating Officer since October 2000 and Chief
Financial Officer since February 2001. 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.
78
PETER D. RIBBINS is our Director-Special Projects and Company Secretary
and has served as a director since 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 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 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, Chief Financial
Officer and director.
J. BRUCE BUGG, JR. has been a director and our Vice-Chairman of the
Board since 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 a senior lecturer at the Mays College and Graduate School of Business at
Texas A&M University and a councilor of the Texas A&M Research Foundation.
RICHARD L. FINLAY has served as a director of our company since 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
manufacturer of liquid processing equipment. Previously, Mr. Pergande held
several executive positions with Mechanical Equipment Company, Inc., a
manufacturer of seawater conversion equipment.
79
RAYMOND WHITTAKER has served as a director of our company since 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
1984 to December 2000. He is now the principal of his own company and management
firm.
CARSON K. EBANKS, JP, became the government nominated Director of our
company in May of 2001. Mr. Ebanks was the Director of Planning for the Cayman
Islands from 1991 - 1997. Since 1997, he has served the Cayman Islands
Government as a Permanent Secretary currently for the Ministry of Community
Services, Women's Affairs, Youth and Sports. Mr. Ebanks is a Justice of the
Peace, a Fellow of the Royal Geographic Society and a member of the American
Planning Association. He holds a Bachelor of Environmental Studies (Hons. Urban
and Regional Planning - Peace and Conflict Studies Minor) from the University of
Waterloo and a Master of Arts - Planning in Community and Regional Planning from
the University of British Columbia. He is a Director of the Water Authority -
Cayman and a trustee of the National Gallery of the Cayman Islands. Mr. Ebanks
has served on the Boards of the Trustees for the Cayman Islands Museum, the
Cayman Islands Civil Service Co-operative Credit Union, the Housing Development
Corporation and the Vice President of the Cayman Islands Olympic Committee.
COMPOSITION OF THE BOARD OF DIRECTORS
The board of directors is organized into three groups. Each group holds
office for a three year period 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. Carson K. Ebanks, JP Wilmer Pergande
Brian Butler Richard Finlay Peter D. Ribbins
Steven A. Carr Clarence Flowers, Jr. Raymond Whittaker
Frederick McTaggart
Jeffrey M. Parker
Group 1 was re-elected at our annual shareholders' meeting in May 2001.
Group 2 will be proposed for re-election during the year ending December 31,
2002 and then Group 3 during the year ending December 31, 2003.
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. In May 2001, Carson K.
Ebanks, JP was elected as the government's nominee.
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 Chairman and Chief
Executive Officer of Argyle Investment Co., the general partner of Argyle
Partners Ltd., the sole general partner of Argyle/Cay-Water, Ltd.
80
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.
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 three other most highly compensated executive officers of the
company during the fiscal years ended December 31, 2001, 2000 and 1999:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------------- ----------------------------------
OTHER ANNUAL SECURITIES ALL OTHER
YEAR SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION ($) ($) ($) ($) OPTIONS(#) ($)
- --------------------------- --- --- --- ------------ ---------- ------------
Jeffrey M. Parker 1999 90,000 91,262 -- 7,786 --
Chairman and Chief Executive 2000 94,590 143,314 -- 26,294 --
Officer 2001 95,895 86,176 -- 28,507 --
Frederick W. McTaggart 1999 -- -- -- -- --
Director, President and 2000 116,400 21,171 -- 5,609 --
Chief Operating Officer 2001 118,006 88,765 -- 28,533 --
Peter D. Ribbins 1999 116,496 66,265 -- 20,000 --
Director - Special Projects 2000 121,447 80,448 -- 5,609 --
2001 118,006 -- -- 27,646 --
Gregory S. McTaggart 1999 79,209 10,730 8,678 -- --
Vice President Operations 2000 83,248 17,155 1,808 20,193 --
2001 85,932 8,759 -- 20,800 --
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 for
comparative purposes. Mr. Frederick McTaggart's actual salary for 2000 was
$24,772.
81
All options granted to Messrs. Parker, Frederick McTaggart, Ribbins and
Gregory McTaggart in 1999 have an exercise price of $2.50 per share, in 2000
they have an exercise price of $7.10 per share and in 2001 they have an exercise
price of $10.84 per share.
The other annual compensation granted to 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 at no cost to the employee and the employee may purchase, for cash, an
equal number of redeemable preferred shares at an exercise price of
approximately 75% of the market price of the ordinary shares at the time of
issuance. These shares issued to Mr. Gregory McTaggart had a market price of
$5.71 per share and $5.47 per share, in 1999 and 2000, respectively, on the date
of grant.
STOCK OPTION GRANTS
The following table provides information, with respect to the chief
executive officer and the other named executive officers listed in the Summary
Compensation Table, concerning stock options granted on ordinary shares in
fiscal year 2001:
POTENTIAL REALIZABLE VALUE
% OF TOTAL AT ASSUMED ANNUAL RATES
OPTIONS OF STOCK PRICE APPRECIATION
GRANTED FOR OPTION TERM
TO ------------------------------
OPTIONS EMPLOYEES EXERCISE OR AT 5% ANNUAL AT 10% ANNUAL
GRANTED IN FISCAL BASE PRICE EXPIRATION GROWTH RATE GROWTH RATE
NAME (#) YEAR ($/SH) DATE ($) ($)
- ---- --- --------- ----------- ---------- ----------- -------------
Jeffrey M. Parker 28,507 18% 10.84 03/10/05 65,844 117,434
Frederick W. McTaggart 28,533 18% 10.84 03/10/05 65,904 117,541
Peter D. Ribbins 27,646 17% 10.84 03/10/05 63,855 113,887
Gregory S. McTaggart 20,800 13% 10.84 03/10/05 48,043 85,685
Market value on grant date (December 31, 2001) of these options was
U.S. $11.34.
STOCK OPTION HOLDINGS
The following table provides information, with respect to the chief
executive officer and the other named executive officers listed in the Summary
Compensation Table, concerning the holding of unexercised options at the end of,
fiscal year 2001:
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT FISCAL YEAR END OPTIONS AT FISCAL YEAR END
ACQUIRED VALUE ----------------------------- -----------------------------
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) ($) (#) (#) ($) ($)
- ---- ----------- --------- ----------- ------------- ----------- -------------
Jeffrey M. Parker -- -- 63,217 -- 197,240 --
Frederick W. McTaggart -- -- 34,142 -- 38,049 --
Peter D. Ribbins 60,000 427,600 33,255 -- 37,605 --
Gregory S. McTaggart -- -- 40,993 -- 96,018 --
82
EMPLOYEE SHARE INCENTIVE PLAN
Since April 8, 1987, we have maintained an employee share incentive
plan for our long-term employees who are not directors. To become eligible for
the employee 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. If an employee
remains employed by us for at least four years, or a person or affiliated group
of persons acquires 30% or more of our ordinary shares, we are obligated to
exchange the redeemable preferred shares (whether or not the redeemable
preferred shares have been held for four years) for the same number of ordinary
shares. We are also obligated to exchange the redeemable preferred shares for an
equal number of ordinary shares if an employee's employment with us or any of
our affiliates terminates by reason of the employee's death, permanent
disability or the employee reaches the age of 65 years. However, if an
employee's employment with us or any of our affiliates terminates for any other
reason, we may at any time up to and including the first anniversary of such
termination, redeem the employee's redeemable preferred shares for cash equal to
75% of the average of the closing market price for our ordinary shares on each
of the first seven trading days in the month of October of the year in which the
redeemable preferred shares were issued to the employee.
Under the plan, when an employee is issued redeemable preferred shares,
the employee is also 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 shareholders'
meeting. Since we adopted the employee share incentive plan, our employees, who
are currently in the plan, have acquired 98,929 redeemable preferred shares, of
which 73,734 have been redeemed for an equal number of ordinary shares.
EMPLOYEE SHARE OPTION PLAN
In 2001 we established an employee share option plan for certain
long-term employees who participate in the share incentive plan. This plan was
introduced in order to compensate these employees for adjustments in the
employee share incentive plan. Under the share option plan, these employees are
granted in each calendar year, as long as the employee is a participant in the
employee share incentive plan, options to purchase ordinary shares of common
stock. The price at which the option may be exercised will be the closing market
price on the grant date, which is 40 days after the date of the Company's annual
shareholder meeting. The number of options each employee is granted is equal to
five times the sum of (i) the number of redeemable preferred stock which that
employee receives for $nil consideration and (ii) the number of redeemable
preferred stock options which that employee exercises in that given year. The
option may be exercised during the period commencing on the fourth anniversary
of the grant date and ending on the thirtieth day after the fourth anniversary
of the grant date.
83
NON-EXECUTIVE DIRECTORS' SHARE 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, 2001, the
directors as a group received 7,860 ordinary shares at the prevailing market
price on October 1, 2000 of $7.25 per share. The strike price set on October 1,
2001 was $10.70. The necessary accrual has been made as at December 31, 2001 for
the last 3 months attendance costs.
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 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 from 2000 and on 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. In
1999, Mr. Parker was granted an option to purchase 7,786 ordinary shares at an
exercise price of $2.50. In 2000, Mr. Parker was granted an option to purchase
26,924 ordinary shares at an exercise price of $7.10. For the year ended
December 31, 2001, Mr. Parker was granted an option to purchase 28,507 ordinary
shares at an exercise price of $10.84. 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 held by 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. During 2001, his accounting practice provided us professional services
in the amount of $4,523. In addition, we reimbursed his accounting practice
$1,355 for communication charges made on our behalf.
We entered into an employment agreement with Frederick W. McTaggart,
our President, Chief Operating Officer and Chief Financial 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. Mr. Frederick McTaggart shall be granted an option to
purchase that number of ordinary shares which equals 1% of our net profit for
each year. The exercise price of the options to be granted will be equal to the
84
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. In 2000, Mr.
Frederick McTaggart was granted an option to purchase 5,609 ordinary shares at
an exercise price of $7.10. For the year ended December 31, 2001, Mr. Frederick
McTaggart was granted an option to purchase 28,533 ordinary shares at an
exercise price of $10.84. 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. In 2000, Mr. Ribbins was granted an option to purchase 5,609
ordinary shares at an exercise price of $7.10. Mr. Ribbins was granted an option
to purchase that number of ordinary shares which equals 1% of our net profit for
each 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. For the year
ended December 31, 2001, Mr. Ribbins was granted an option to purchase 27,646
ordinary shares at an exercise price of $10.84. In May 1999, February 2001 and
July 2001, Mr. Ribbins exercised options to purchase 60,000, 20,000 and 40,000
ordinary shares, respectively. 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 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. In 2000, Mr. Gregory McTaggart was granted an option to purchase 20,193
ordinary shares at an exercise price of $7.10. For the year ended December 31,
2001, Mr. Gregory McTaggart was granted an option to purchase 20,800 ordinary
shares at an exercise price of $10.84. 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 employee share incentive plan for fiscal years after 1999.
85
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 3,920,313 are outstanding as of
March 19, 2002, and our redeemable preferred shares, par value CI$1.00 per
share, of which 25,195 are outstanding as of March 19, 2002 by:
o each person or entity that we know beneficially owns more than 5% of
our ordinary shares or redeemable preferred 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 12.2%
Ordinary Shares Jeffrey M. Parker, 210,432 5.4%
Chairman of the board, and CEO
Ordinary Shares Frederick W. McTaggart, 34,242 *
Director, President, Chief
Operating Officer and Chief
Financial Officer
Ordinary Shares Peter D. Ribbins, 132,855 3.4%
Director - Special Projects
and Company Secretary
Ordinary Shares Gregory S McTaggart, 51,806 1.3%
Vice President Operations
Ordinary Shares J. Bruce Bugg, Jr., 569,622 14.5%
Director and Vice Chairman of
the board of directors
Ordinary Shares Brian E. Butler, 16,250 *
Director
Ordinary Shares Steven A. Carr, 44,235 1.1%
Director
Ordinary Shares Richard L. Finlay, 8,417 *
Director
Ordinary Shares Clarence B. Flowers, Jr., 3,340 *
Director
Ordinary Shares Wilmer Pergande, 3,877 *
Director
Ordinary Shares Raymond Whittaker, 10,655 *
Director
Ordinary Shares Carson K. Ebanks, -- --
Director
Ordinary Shares Directors and Executive 1,085,731 27.7%
Officers as a Group
(12 persons)
86
TITLE OF IDENTITY OF AMOUNT PERCENTAGE
CLASS PERSON OR GROUP OWNED OF CLASS
----- --------------- ----- --------
Redeemable Gregory McTaggart 297 1.2%
Preferred Shares Vice President Operations
Redeemable Directors and Executive 297 1.2%
Preferred Shares Officers as a group (1 person)
Redeemable Abel Castillo 3,582 14.2%
Preferred Shares Operations Manager
Redeemable Margaret Julier, 2,707 10.7%
Preferred Shares Office Manager
Redeemable William Banker 4,880 19.4%
Preferred Shares Operations Manager
Redeemable Rayburn Conolly 2,877 11.4%
Preferred Shares Retired employee
Redeemable Chet Ritch 1,496 5.9%
Preferred Shares Operations
Redeemable Rudy Ritch 2,367 9.4%
Preferred Shares Operations
Redeemable Helbert Rodriquez 1,496 5.9%
Preferred Shares Operations
Redeemable Ivan Tabora 1,342 5.3%
Preferred Shares Operations
An asterisk (*) in the above table indicates less than one percent
The address for Jeffrey Parker, Frederick McTaggart, Peter Ribbins,
Gregory McTaggart, Abel Castillo, Margaret Julier, William Banker, Chet Ritch,
Rudy Ritch, Helbert Rodriquez and Ivan Tabora 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., 1500 Nations Bank Plaza, 300 Convent Street, San
Antonio, Texas 78205. 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 Whittaker is
P.O. Box 1982GT, Grand Cayman, B.W.I. The address from Rayburn Conolly is P.O
Box 27 East End, Grand Cayman, B.W.I.
87
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 March 19, 2002 are deemed outstanding for that
person but are not deemed outstanding for computing the percentage of ownership
of any other person. Of the 210,432 ordinary shares owned by Mr. Parker, 63,217
of these shares are ordinary shares underlying options granted to Mr. Parker,
which may be exercised within 60 days after March 19, 2002. Of the 34,242
ordinary shares owned by Mr. Frederick McTaggart, 34,142 are ordinary shares
underlying options granted to Mr. Frederick McTaggart, which may be exercised
within 60 days after March 19, 2002. Of the 132,855 ordinary shares owned by Mr.
Ribbins, 33,255 are ordinary shares underlying options granted to Mr. Ribbins,
which may be exercised within 60 days after March 19, 2002. Mr. Bugg is deemed
the beneficial owner of the 477,662 ordinary shares held by Argyle/Cay-Water,
Ltd. Of the 569,622 ordinary shares beneficially owned by Mr. Bugg, 90,000 are
ordinary shares underlying options granted to Mr. Bugg, which may be exercised
within 60 days after March 19, 2002. Of the 51,806 ordinary shares owned by Mr.
Gregory McTaggart, 40,993 are ordinary shares underlying options granted to Mr.
Gregory McTaggart, which may be exercised within 60 days after March 19, 2002
and 297 are redeemable preferred shares, which may be exercised or converted
within 60 days after March 19, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As consideration for J. Bruce Bugg, Jr.'s services to us as in an
additional capacity to us other than a director and Vice-Chairman of the board
of directors we granted to Mr. Bugg various options. 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 for services provided for work on the U.S.
Filter project. 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 options were for services provided for work on
the settlement agreement concerning the Ellesmere Britannia lawsuit. These
additional 30,000 options are exercisable until May 1, 2003. On December 10,
2001, we granted further options to Mr. Bugg to purchase 30,000 ordinary shares
at $11.17 per share. These were provided as payment of services in negotiating
the purchase of the Hyatt water production facilities on Grand Cayman, Cayman
Islands. The market price on December 10, 2001 was $11.17 per share. These
options are exercisable until December 9, 2004.
The options granted to Mr. Bugg, Jr., in 1999 and 2000, as well as all
the employment agreements with Messrs. Frederick W. McTaggart, Ribbins, Parker,
and Gregory S. McTaggart, were approved by a majority of the disinterested
members of the board of directors and ratified by the shareholders at the Annual
General Meeting held in 2001. Mr. Bugg's 2001 options were approved by a
majority of the disinterested members of the board of directors and are to be
put to the shareholders for ratification in the Annual General Meeting to be
held in 2002. 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.
88
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The financial statements found in ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA for the year ended December 31, 2001 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 An Amendment to a License to Produce Potable Water, dated
August 15, 2001, between Consolidated Water Co. Ltd. by The
Government of The Cayman Islands.
89
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
10.5 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).
10.6 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).
10.7 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).
10.8 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).
10.9 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).
10.10 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).
10.11 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).
10.12 Water Purchase Agreement #3 (Revision #1), dated January
10, 1995, between Cayman Water Company Limited and Ocean
Conversion (Cayman) Limited. (incorporated herein by
reference to the exhibit filed as a part of our Form 10-K
dated March 30, 2001, Commission File No. 0-25248).
10.13 Water Purchase Agreement #3 (Revision #2), dated December
29, 2000, between Consolidated Water Co. Ltd. and Ocean
Conversion (Cayman) Limited. (incorporated herein by
reference to the exhibit filed as a part of our Form 10-K
dated March 30, 2001, Commission File No. 0-25248).
10.14 Water Supply Agreement, dated December 18, 2000, between
Consolidated Water Co. Ltd. and South Bimini International
Ltd. (incorporated herein by reference to the exhibit filed
as a part of our Form 10-K dated March 30, 2001, Commission
File No. 0-25248).
90
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
10.15 Employment Agreement, dated August 30, 2000, between
Consolidated Water Co. Ltd. and Peter D. Ribbins.
(incorporated herein by reference to the exhibit filed as a
part of our Form 10-K dated March 30, 2001, Commission File
No. 0-25248).
10.16 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).
10.17 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).
10.18 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).
10.19 Employment Contract, dated July 12, 2000, between
Consolidated Water Co. Ltd. and Frederick W. McTaggart.
(incorporated herein by reference to the exhibit filed as a
part of our Form 10-K dated March 30, 2001, Commission File
No. 0-25248).
10.20 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).
10.21 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).
10.22 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 Letter Agreement, dated January 19, 2002, between
Consolidated Water Co. Ltd. and J. Bruce Bugg.
10.24 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).
10.25 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).
91
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
10.26 Employee Share Option Plan.
10.27 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).
10.28 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).
10.29 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).
10.30 Purchase and Sale Agreement, dated December 10, 2001,
between Consolidated Water Co. Ltd., Cayman Hotel and Golf
Inc., Ellesmere Britannia Limited and Hyatt Britannia
Corporation Ltd.
10.31 Agreement, dated February 1, 2002, between Consolidated
Water Co. Ltd. and Cayman Hotel and Golf Inc.
10.32 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).
10.33 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).
10.34 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).
10.35 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).
10.36 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).
92
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
10.37 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).
10.38 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).
10.39 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).
10.40 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).
10.41 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).
10.42 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).
10.43 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).
10.44 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).
10.45 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).
10.46 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).
93
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
10.47 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).
10.48 Credit Facility Agreement, dated April 25, 2001 between
Consolidated Water Co. Ltd. and the Royal Bank of Canada.
10.49 Variation of Debenture, dated February 22, 2002 between
Consolidated Water Co. Ltd. and the Royal Bank of Canada.
10.50 Second Collateral Change to a Variation of Debenture, dated
February 22, 2002 between Consolidated Water Co. Ltd. and
the Royal Bank of Canada.
10.51 Lease of Part, dated October 13, 2000, between Consolidated
Water Co. Ltd. and Colmar LTD. (incorporated herein by
reference to the exhibit filed as a part of our Form 10-K
dated March 30, 2001, Commission File No. 0-25248).
10.52 Lease, dated December 10, 2001, between Cayman Hotel and
Golf Inc. and Consolidated Water Co. Ltd.
10.53 Lease, dated April 27, 1993, between Government of Belize
and Belize Water Ltd.
21 Subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers.
(b) Reports on Form 8-K
None
94
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 27, 2002
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
---------------------------------- Chairman of the board of directors March 27, 2002
Jeffrey M. Parker and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Frederick W. McTaggart
---------------------------------- Director, President, Chief March 27, 2002
Frederick W. McTaggart Operating Officer and Chief
Financial Officer (Principal
Financial and Accounting Officer)
By: /s/ Peter D. Ribbins
---------------------------------- Director - Special Projects March 27, 2002
Peter D. Ribbins
By: /s/ J. Bruce Bugg, Jr.
---------------------------------- Director and Vice Chairman of the March 27, 2002
J. Bruce Bugg, Jr. board of directors
By: /s/ Brian E. Butler
---------------------------------- Director March 27, 2002
Brian E. Butler
95
SIGNATURE TITLE DATE
--------- ----- ----
By: /s/ Steven A. Carr
---------------------------------- Director March 27, 2002
Steven A. Carr
By: /s/ Richard L. Finlay
---------------------------------- Director March 27, 2002
Richard L. Finlay
By: /s/ Clarence B. Flowers, Jr.
---------------------------------- Director March 27, 2002
Clarence B. Flowers, Jr.
By: /s/ Wilmer Pergande
---------------------------------- Director March 27, 2002
Wilmer Pergande
By: /s/ Raymond Whittaker
---------------------------------- Director March 27, 2002
Raymond Whittaker
By: /s/ Carson K. Ebanks
---------------------------------- Director March 27, 2002
Carson K. Ebanks
96
CONSOLIDATED WATER CO. LTD.
INDEX TO EXHIBITS FILED WITH 10-K
10.4 An Amendment to a License to Produce Potable Water, dated August 15,
2001, between Consolidated Water Co. Ltd. by The Government of The
Cayman Islands.
10.23 Letter Agreement, dated January 19, 2002, between Consolidated Water
Co. Ltd. and J. Bruce Bugg.
10.26 Employee Share Option Plan.
10.30 Purchase and Sale Agreement, dated December10, 2001, between
Consolidated Water Co. Ltd., Cayman Hotel and Golf Inc., Ellesmere
Britannia Limited and Hyatt Britannia Corporation Ltd.
10.31 Agreement, dated February 1, 2002, between Consolidated Water Co. Ltd.
and Cayman Hotel and Golf Inc.
10.48 Credit Facility Agreement, dated April 25, 2001 between Consolidated
Water Co. Ltd. and the Royal Bank of Canada.
10.49 Variation of Debenture, dated February 22, 2002 between Consolidated
Water Co. Ltd. and the Royal Bank of Canada.
10.50 Second Collateral Change to a Variation of Debenture, dated February
22, 2002 between Consolidated Water Co. Ltd. and the Royal Bank of
Canada.
10.52 Lease, dated December 10, 2001, between Cayman Hotel and Golf Inc. and
Consolidated Water Co. Ltd.
10.53 Lease, dated April 27, 1993, between Government of Belize and Belize
Water Ltd.
21 Subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers.