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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from _____________ to _____________
Commission File Number: 0-25248
CONSOLIDATED WATER CO. LTD.
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(Exact name of Registrant as specified in its charter)
CAYMAN ISLANDS N/A
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
TRAFALGAR PLACE, WEST BAY ROAD, P.O. BOX 1114GT,
GRAND CAYMAN, B.W.I. N/A
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone number, including area code: (345) 945-4277
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
ORDINARY SHARES, PAR VALUE CI$1.00
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(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this 10-K or any amendments to this
Form 10-K. [NOT APPLICABLE]
The aggregate market value of common stock held by non-affiliates of the
registrant, based on the closing sales price for the registrant's ordinary
shares, as reported on the Nasdaq National Market on March 19, 2001, was
$30,903,544.
As at March 19, 2001, there were 3,862,943 shares of the registrant's ordinary
shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
EXCHANGE RATES
Unless otherwise indicated, all dollar amounts are in United States Dollars and
references to "$", "U.S.", or "U.S. $" are to United States Dollars.
The official fixed exchange rate for conversion of CI$ into U.S. $, as
determined by the Cayman Islands Monetary Authority, has been fixed since April
1974 at U.S. $1.20 per CI$1.00.
The official fixed exchange rate for conversion of BZE$ into U.S. $, as
determined by the Central Bank of Belize, has been fixed since 1976 at U.S.$
0.50 per BZE$ 1.00.
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TABLE OF CONTENTS
SECTION DESCRIPTION PAGE
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PART I
Item 1. Business .......................................................... 1
Item 2. Properties ........................................................ 9
Item 3. Legal Proceedings ................................................. 11
Item 4. Submission of Matters to a Vote of Security Holders ............... 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters ........................................................ 12
Item 6. Selected Financial Data ........................................... 17
Item 7. Management's Discussions and Analysis of Financial Condition and
Results of Operations .......................................... 18
Item 7A. Quantitative and Qualitative Disclosure about Market Risk ......... 31
Item 8. Financial Statements and Supplementary Data ....................... 31
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ........................................... 60
PART III
Item 10. Directors and Executive Officers of the Registrant ................ 60
Item 11. Executive Compensation ............................................ 63
Item 12. Security Ownership of Certain Beneficial Owners and Management .... 68
Item 13. Certain Relationships and Related Transactions .................... 69
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K ... 71
SIGNATURES ................................................................... 77
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Our company was incorporated in August 1973 in the Cayman Islands and
in July 2000 acquired all of the issued and outstanding capital stock of Seatec
Belize Ltd., now renamed Belize Water Ltd. Our principal executive offices are
located at Trafalgar Place, West Bay Road, Grand Cayman, Cayman Islands. We
provide water services in areas where the supply of potable water is scarce.
These water services include the production of potable water from seawater, and
the distribution of potable water through pipelines to our customers. In
addition, we have expertise in providing wastewater services. Our customers
include residential, commercial and tourist properties, government facilities,
and public utilities.
Our business activities are now reported in three business segments,
which reflect a change in reporting during 2000 due to the acquisition of our
wholly owned subsidiary company in Belize, Central America and our entering into
an agreement with South Bimini International Ltd., a Bahamian company, to
provide water to property in South Bimini Island, Commonwealth of Bahamas. The
business group structure is based on defined areas of management responsibility
and the geographical location of our operations. The business group segments are
Cayman Islands Operations, Belize Operations and Bahamas Operations. In 2000,
the Cayman Island Operations and Belize Operations accounted for 95% and 5%,
respectively, of our total revenue. As at March 19, 2001 our Bahamas Operations
were still in the construction phase.
FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS
The information contained in Note 11 Segmented Information of our
consolidated financial statements found on page 51, in ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA for the year ended December 31, 2000, is
incorporated herein by reference.
BUSINESS COMBINATION
Consolidated financial statements have been presented for the first
time this year due to the acquisition of our wholly-owned subsidiary, Belize
Water Ltd. This acquisition has been accounted for by the purchase method. Our
other two subsidiaries are not consolidated as they are dormant companies.
CAYMAN ISLANDS OPERATIONS
The Cayman Islands comprise three islands, Grand Cayman, Little Cayman
and Cayman Brac, located approximately 460 miles south of Miami, Florida. The
three islands have a total area of approximately 100 square miles.
Our Cayman Islands operations produce potable water at our two reverse
osmosis seawater conversion plants in Grand Cayman. The current capacity of our
Governor's Harbour plant is 1.1 million U.S. gallons per day, which is in excess
of the minimum quantities of water which Ocean Conversion (Cayman) Ltd., a
Cayman Islands company which operates our Governor's Harbour plant, must supply
to us under a water purchase agreement, and the current capacity of our West Bay
plant, which we operate, is 710,000 U.S. gallons per day. Since the plants began
production of water, they have consistently produced at or near their capacity.
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Feed water for the reverse osmosis units is drawn from deep wells with
associated pumps on the property. Wastewater is discharged into brine wells on
the property below the level of the feed water intakes.
Electricity to our plants is supplied by Caribbean Utilities Co. Ltd.,
a publicly traded utility company. At both plant sites, we maintain a diesel
driven, standby generator with sufficient capacity to operate our distribution
pumps and other essential equipment during any temporary interruptions in the
electricity supply.
In the event of an emergency, our distribution system is connected to
the George Town distribution system of Water Authority-Cayman. We can also
purchase water, if available, from a plant servicing the Hyatt Hotel in Grand
Cayman, which presently has excess production capacity. In order to efficiently
maintain our equipment, we have purchased water for brief periods of time from
both Water Authority-Cayman and the water plant servicing the Hyatt Hotel. We
have also sold potable water to these entities, and in the case of Water
Authority-Cayman, supplied substantial quantities of water almost continuously
over a seven-month period in late 1993 and early 1994.
Our pipeline system in the Cayman Islands covers the Seven Mile Beach
and West Bay areas of Grand Cayman and consists of approximately 64 miles of PVC
pipeline. We extend our distribution system periodically as property
developments are completed. We have a main pipe loop covering a major part of
the Seven Mile Beach area. We place extensions of smaller diameter pipe off our
main pipe to service new developments in our service area. This system of
building branches from the main pipe keeps our construction costs low and allows
us to provide service to new areas in a timely manner. We completed in 2000 a
main pipe along a new road to service future developments, which provides an
additional supply loop at the southern end of the Seven Mile Beach area.
For major developments in our service areas, most internal roads are
private until the development has been completed. Developers are responsible for
laying the pipeline within the development at their own cost, but in accordance
with our specifications. When the development is completed, the developer then
transfers operation and maintenance of the pipeline to us.
We have a comprehensive layout of our pipeline system which is
maintained in a computer aided design (CAD) system. This system is integrated
with digital aerial photographs and a computer generated hydraulic model which
allows us to accurately locate pipes and equipment in need of repair and
maintenance. It also helps us to plan extensions of and upgrades to our existing
pipeline system.
The following table shows, for each of the fiscal years ended December
31, 2000, 1999, 1998, 1997, and 1996, our total number of customer connections
at the end of each period and metered sales of water for that period:
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
Number of Customers 2,936 2,606 2,347 2,069 1,826
Miles of Pipeline 64 63 62 57 55
Metered Sales (in thousands of U.S. gallons):
Commercial 346,005 308,949 315,980 300,350 265,140
Residential 97,759 86,712 80,150 72,393 60,261
Government facilities 7,599 5,686 4,420 4,007 3,064
------- ------- ------- ------- -------
Total 451,363 401,347 400,550 376,750 328,465
======= ======= ======= ======= =======
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You should note that the table above does not precisely represent the
actual number of customers we service. In hotels and condominiums, we may only
have one customer, which is the operator of the hotel or the condominium, but we
actually supply water to all of the units within that hotel or condominium
development. Of the customers indicated in the table above, as of 2000, 49.5%
were residential, 49.5% were hotels, condominiums and other commercial customers
and 1% were government facilities.
We have a separate license from the Cayman Islands government and a
five-year agreement with a developer to supply on demand a minimum of 48 million
U.S. gallons of non-potable water per year on a take or pay basis to irrigate an
18-hole golf course.
Before 1991, any owner of property within our licensed area could
install water making equipment for its own use. Since 1991, that option is only
available to private residences, although water plants then in existence could
be maintained but not replaced or expanded. When the Marriott Hotel was built in
1990 in our licensed area, the developer installed its own reverse osmosis
equipment. On February 4, 1994, we entered into an agreement with the owner of
the Marriott Hotel to supply water to the Marriott Hotel at our standard tariff
rates.
In 1995, we entered into a 10-year agreement with the owner of the
Westin Hotel. This agreement requires us to supply up to 60,000 U.S. gallons per
day on a monthly basis to the hotel at a discount to our standard tariff rates,
and to supply any additional demand on a best efforts basis. The Westin Hotel
maintains storage capacity on-site, assists pressurization with on-site
repumping facilities, and has provided us with a letter of credit which covers
the cost of 45 days of water supply.
The current market which we service under our license in the Cayman
Islands consists of Seven Mile Beach and West Bay, Grand Cayman Island, two of
the three most populated areas in the Cayman Islands. Our plants and water
distribution system are equipped with efficient, state-of-the-art technology,
and we consistently provide high quality water to our customers. The Cayman
Islands Government, through Water Authority-Cayman, supplies water to parts of
Grand Cayman Island, which are not within our licensed area.
According to the Economics and Statistics Office of the Cayman Islands
Government, the population of the Cayman Islands was approximately 39,410
persons in 1999. Most recent figures published by the Cayman Islands Government
Department of Tourism show that the growth rate of tourism in the Cayman Islands
has increased on average 8.83% annually over the 10 year period from 1989
through 1999, with total visitor arrivals of 1.08 million persons from January
through September 2000, up from 1.04 million arrivals during the same period of
1999.
A new 233 room Holiday Inn Hotel opened in our license area in November
2000, and construction commenced on a 360 room Ritz Carlton Hotel during 2000.
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Government
The Cayman Islands are a British Overseas Territory of the United
Kingdom and have had a stable political climate since 1670, when the Cayman
Islands were ceded to England by the Treaty of Madrid. The Queen of England
appoints the Governor of the Cayman Islands to make laws with the advice and
consent of the legislative assembly. There are 15 elected members of the
legislative assembly and three members appointed by the Governor from the Civil
Service. The Executive Council is responsible for day-to-day government
operations. The Executive Council consists of five ministers who are chosen by
the legislative assembly from its 15 popularly elected members, and the three
Civil Service members. The Governor has reserved powers and the United Kingdom
retains full control over foreign affairs and defense. The Cayman Islands are a
common law jurisdiction and have adopted a legal system similar to that of the
United Kingdom.
Customs Duties And Taxes
We are exempt from, or receive concessionary rates of, customs duties
on capital expenditures on plant and major consumable spares and supplies
imported into the Cayman Islands as follows:
o there are no income taxes in the Cayman Islands;
o we do not pay any import duty or taxes on permeator membranes,
electric pumps and motors and chemicals which we purchase; and
o we pay 10% of the cost, including insurance and transportation
to the Cayman Islands, of other plant and associated materials
and equipment to manufacture or supply water in Seven Mile
Beach or West Bay.
BELIZE OPERATIONS
On July 21, 2000, we acquired Seatec Belize Ltd. and subsequently
changed the name of the company to Belize Water Limited. Belize Water Limited, a
wholly owned subsidiary of Consolidated Water Co. Ltd., provides potable water
from one reverse osmosis seawater conversion plant in Ambergris Caye, Belize,
Central America to the Belize Water and Sewerage Authority (WASA), which has
recently been privatized. Belize Water Limited provides water to WASA, who
distribute the water through its own distribution system to residential,
commercial and tourist properties in Ambergris Caye, Belize.
Our market in Ambergris Caye consists of residential, commercial and
tourist properties in the town of San Pedro, which is located on the southern
end of Ambergris Caye. Ambergris Caye is one of about 1,000 islands located east
of the Belize mainland, and off the southeastern tip of the Yucatan Peninsula.
Ambergris Caye is approximately 25 miles long and has a population of about
7,000 residents. We provide bulk potable water to WASA who distribute this water
to this market. WASA currently has no other source of potable water in Ambergris
Caye.
A 185 mile long barrier reef, which is the largest barrier reef in the
Western Hemisphere, is situated just offshore of Ambergris Caye. This natural
attraction is rapidly becoming a choice destination for SCUBA divers and
tourists. Tourism is Belize's second largest foreign exchange earner, next to
agriculture. The Belize Government reported 326,642 tourist arrivals in 1999.
CUSTOMS DUTY, TAXES AND THE GOVERNMENT IN BELIZE
The Government of Belize has exempted Belize Water Ltd. from all
duties, sales taxes and Company taxes until January 2003 with respect to duties
and January 2004 with respect to Company
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taxes. However, the government has given its commitment to support all future
applications for extensions or additional tax exemptions for the life of the
water supply contract.
BAHAMAS OPERATIONS
The Bimini Islands consist of North Bimini and South Bimini, and are
two of 700 islands which comprise the Commonwealth of the Bahamas. The Bimini
Islands are located approximately 45 miles east of Ft. Lauderdale, Florida and
are a premier destination for sport fishing enthusiasts. The population of the
Biminis is approximately 1,600 persons and the islands have about 200 hotel and
guest rooms available for tourists. The total land area of the Biminis is
approximately 9 square miles.
In 1997, we signed a letter of intent to supply potable water to a
Bahamian company, which is owned by a United States developer who plans to build
a multi-purpose resort development called Bimini Bay Resort on 700 acres in
North Bimini Island. We later created a wholly owned Bahamian subsidiary,
Commonwealth Water Limited, which entered into a 10-year agreement with the
Bimini Bay Resort developer to supply water to the development. As of December
2000, the developer had not honored his obligations under the water supply
agreement, and the agreement was terminated in February 2001.
On December 18, 2000, we signed a separate agreement with a Bahamian
developer on South Bimini Island, Bahamas to provide potable water to his marina
and condominium development, Bimini Sands Resort. The developer of the Bimini
Sands Resort has constructed a marina and 36 condominium units, and plans to
construct a further 180 condominium units. We will provide potable water to
Bimini Sands Resort and to the Bimini Beach Hotel, a 40 room hotel also owned by
the developer. The agreement is contingent on us obtaining the necessary
approvals from the Government of the Bahamas to supply water to the developer.
As of March 2001, we have applied for the necessary permissions from the
Government of the Bahamas and are awaiting a reply.
We are also in discussions with the Government of the Bahamas regarding
the provision of potable water to other properties in Bimini, including
residential, commercial and tourist properties.
GOVERNMENT REGULATION
We are regulated by the Water Authority of the Cayman Islands on behalf
of the Cayman Islands Government.
We believe that our operations in Belize and the Bahamas comply with
all local laws and regulations.
MARKET AND SERVICE AREA
We believe that our potential market consists of any location where
there is a need for potable water. According to the information contained in the
Paul Simon book "Tapped Out: The Coming World Crisis in Water and What We Can Do
About It" (C)1998, the world's population of 5.9 billion will double in the next
forty to ninety years and the per capita world water consumption is growing
twice as fast as the world's population. The world's supply of water, however,
is relatively constant. While water sufficiency problems are not nearly as
severe in the United States as in some other nations, three major states,
California, Texas and Florida, are already facing water supply problems. These
states and most water-deficient nations in the world all have access to huge
amounts of ocean water, yet cannot economically process major quantities for
consumption. The desalination of ocean water, either through distillation or
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reverse osmosis, is widely regarded as the most viable alternative to fresh
water in areas with an insufficient natural supply.
GROWTH STRATEGY
Our growth strategy is as follows:
WE INTEND TO CONTINUE DEVELOPING OUR PRODUCTION AND DISTRIBUTION
INFRASTRUCTURE AND PROVIDE HIGH QUALITY POTABLE WATER TO OUR LICENSED AREA IN
THE CAYMAN ISLANDS. We intend to increase our customer base and revenues in the
Cayman Islands by providing water service on the most cost-efficient basis to
new residential, commercial and tourist properties that are being developed in
our exclusive licensed area. We intend to increase our service area by exploring
the possibility of acquiring other potable water suppliers within the Cayman
Islands.
WE INTEND TO EXPAND OUR OPERATIONS IN BELIZE, CENTRAL AMERICA BY
PURSUING OPPORTUNITIES TO PROVIDE POTABLE WATER TO OTHER PARTS OF BELIZE,
PARTICULARLY THE CAYES AND COASTAL AREAS WHICH COULD BENEFIT FROM OUR
DESALINATION TECHNOLOGY.
WE INTEND TO EXPAND OUR OPERATIONS TO OTHER MARKETS WHERE THERE IS A
NEED FOR POTABLE WATER. We are currently in various stages of discussion to
supply to several new markets, including the Bahamas and Mexico. We may pursue
these opportunities either on our own or through joint ventures. So far we have
focused on various locations throughout the Caribbean and Central America.
WE ALSO INTEND TO EXPAND OUR EXISTING AND FUTURE OPERATIONS INTO
COMPLEMENTARY SERVICES, SUCH AS WASTEWATER SERVICES, WHICH WE HAVE PROVIDED IN
THE PAST. Prior to the installation of a central wastewater system by the Cayman
Islands government, we provided wastewater services on Grand Cayman Island.
Since we have expertise in wastewater services, we may provide these services in
the future.
OUR TECHNOLOGY
The conversion of saltwater to potable water is called desalination.
There are two primary forms of desalination: distillation and reverse osmosis.
Both methods are used throughout the world and technologies are improving to
lower the costs of production. Reverse osmosis is a separation process in which
the water from a pressurized saline solution is separated from the dissolved
material by passing it over a semi-permeable membrane. An energy source is
needed to pressurize the salinated, or feed, water for pretreatment, which
consists of fine filtration and the addition of precipitation inhibitors.
Pre-treatment removes suspended solids, prevents salt precipitation and keeps
the membranes free of microorganisms. Next, a high-pressure pump enables the
water to pass through the membrane, while salts are rejected. The feed water is
pumped into a closed vessel where it is pressurized against the membrane. As a
portion of the feed water passes through the membrane, the remaining feed water
increases in salt content. This remaining feed water is discharged without
passing through the membrane. As the discharged feed water leaves the pressure
vessel, its energy is captured by an energy recovery device which is used to
pressurize incoming feed water. The final step is post-treatment, which consists
of stabilizing the water, removing hydrogen sulfide and adjusting the pH and
chlorination to prepare it for distribution.
We use reverse osmosis technology to convert seawater to potable water.
We believe that this technology is the most effective and efficient conversion
process. However, we are always seeking ways to maximize efficiencies in our
current processes and to investigate new more efficient processes to convert
seawater to potable water. The equipment at our plants is among the most energy
efficient
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available and we monitor and maintain our equipment in this manner. As a result
of our many years of experience in water conversion, we believe that we have an
expertise in the development and operation of desalination plants which is
easily transferable to locations outside the Cayman Islands.
RAW MATERIALS AND SOURCES OF SUPPLY
All materials, parts and supplies essential to our business operations
can normally be obtained from multiple sources. We do not manufacture any parts
or components for equipment essential to our business. Our access to seawater
for processing into potable water is granted through our licenses and contracts
with governments of the various jurisdictions in which we have our operations.
LICENSES, FRANCHISES AND CONCESSIONS
With respect to our operations in the Cayman Islands, we rely on our
exclusive franchise granted by the government to produce and supply potable
water within our franchise area in Grand Cayman. This franchise was granted in
July 11, 1990 and is for a term of twenty (20) years. This franchise agreement
grants us the right of first refusal to extend the franchise.
Technical Breach of Cayman Islands' License
Our license requires us to obtain prior government approval for an
issuance or transfer of shares which (a) exceeds 5% of the issued ordinary
shares of our company, or (b) would, upon registration, result in any
shareholder owning more than 5% of the issued shares. More than 5% of our
ordinary shares are registered in the name of Cede and Co., the nominee for the
Depository Trust Company, which is a clearing agency for shares held by
participating banks and brokers. We do not believe that these shareholdings by
Cede and Co. constitute a breach of the intent of the license. We believe that
the purpose of this clause of the license is to allow the government to approve
significant shareholders of our company. Cede and Co. and Depository Trust
Company, however, act solely as the nominee for banks and brokers, and have no
beneficial ownership in the ordinary shares. Nevertheless, our Cayman Islands'
legal counsel has advised us that these shareholdings by Cede & Co., which were
not approved by the Cayman Islands' government, are probably a technical breach
of our license.
In August and September 1994, we completed an offering of 400,000
ordinary shares under Rule 504 of Regulation D of the Securities Act of 1933. In
September 1995, we completed a private placement of 100,000 ordinary shares plus
warrants to subscribe for an additional 100,000 ordinary shares under Regulation
S of the Securities Act 1933. In April 1996, we completed a public offering of
575,000 ordinary shares and in June 2000 we completed a public offering of
773,000 ordinary shares. Based upon the advice of our Cayman Islands' legal
counsel, we determined that the license did not require the government's
approval to complete these offerings. However, if a court determined that the
government's approval of these offerings was required under the license, we
would be in breach of the license. Our Cayman Islands' legal counsel has advised
us that to make this determination, a court would have to disagree with our
interpretation of the license and dismiss several defenses which would be
available to us. These defenses include acquiescence and waiver on the part of
the government with respect to these offerings.
We have received a letter dated June 1, 2000, from an official of the
Cayman Islands' government, stating that a public offering of our ordinary
shares, which we completed in 1996 without the government's approval, was a
breach of our license. The letter is not clear as to whether the government also
views the completion of our 2000 public offering as a breach of our license. We
have responded to this letter and stated that we do not believe that we are in
breach of our license. A meeting with officials of the Cayman Islands'
government, to discuss this matter, was held on June 16, 2000 in accordance with
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the government's suggestion in the June 1st letter. Discussion of the matter is
ongoing as of the date of this Annual Report. We have been advised by our Cayman
Islands' legal counsel that the June 1st letter from the Cayman Islands
government does not constitute a formal "notice of breach of the license" as
contemplated in the license. Accordingly, other than pursuing discussions of
this matter with the Cayman Islands' government, no other actions are presently
being pursued by us to "cure" any such alleged breaches.
SEASONAL VARIATIONS IN OUR BUSINESS
Our water sales in the Cayman Islands and Belize are seasonal. We
normally sell more water during the first and second quarters when greater
numbers of tourists are present. Our sales are also effected to some extent by
the weather. We sell less water during the third and fourth quarters which
normally experience higher rainfall amounts than other times of the year.
COMPETITION
With respect to our operations in the Cayman Islands, we do not compete
with other utilities within our licensed area. Although we have been granted an
exclusive franchise for our present service area, our ability to expand our
service area is limited at the discretion of the government. At the present
time, we are the only non-municipal public water utility on Grand Cayman. The
Cayman Islands government, through Water Authority-Cayman, supplies water to
parts of Grand Cayman which are not within our licensed area.
With respect to our operations in Belize, our water supply contract
with the Government of Belize Water and Sewerage Authority ("WASA") is
non-exclusive, and WASA may seek contracts with other water suppliers to meet
their future needs in San Pedro, Ambergris Caye, Belize. There are many
companies throughout the world who provide desalination equipment and turnkey
water supply contracts. We are not able to say with any certainty who we would
compete against for future contracts in Belize.
To implement our growth strategy outside our existing operating areas,
we will have to compete with companies such as Ionics Inc. and Vivendi. These
companies, among others, currently operate in areas in which we would like to
expand our operations, maintain world-wide operations and have greater
financial, managerial and other resources than our company.
ENVIRONMENTAL MATTERS
With respect to our Cayman Islands operations, we operate our water
plants in accordance with guidelines of the Cayman Islands Department of
Environment, although not required by local government regulations. Under these
guidelines, our plants may not have emissions of hydrogen sulfide at levels
greater than 20 milligrams per liter at the exit of the air scrubbers. Our
potable water also meets the guidelines of the World Health Organization and the
U.S. Safe Drinking Water Act. In addition, noise levels at our plants cannot
exceed the standards established by the U.S. Occupational Safety and Health Act.
To date, we have not received any complaints from any regulatory authorities
concerning hydrogen sulfide emissions or noise levels at our plants.
With respect to our Belize operations, we are required by our water
supply contract to take all reasonable measures to prevent pollution of the
environment. We operate our plant in a manner as to minimize the emission of
hydrogen sulfide gas into the environment. We are not aware of any existing or
pending environmental legislation which may effect our operations in Belize. To
date we have not received any complaints from any regulatory authorities
regarding hydrogen sulfide gas emission, nor any other matter at our plant.
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EMPLOYEES
We presently employ 38 persons in the Cayman Islands, five of whom are
executive and management personnel and six are engaged in administrative and
clerical positions. The remaining staff are engaged in plant maintenance and
operations, pipe laying and repair, leak detection, new customer connections,
meter reading and laboratory analysis of water quality. We presently employ five
persons in Belize to manage and operate our plant. We presently employ one
person in the Bahamas who is assisting with the construction of our water plant
and distribution system on South Bimini. Our employees are not parties to a
collective bargaining agreement. We consider our relationship with our employees
to be good.
ITEM 2. PROPERTIES
We own our Governor's Harbour facility in Grand Cayman, which consists
of a 3.2 acre site, including 485 feet of waterfront, and an 8,745 square foot
building which contains the water treatment facility. We own two storage
reservoirs with a total capacity of 2.0 million U.S. gallons of water at our
Governor's Harbour site. The property surrounding the facility has yet to be
fully developed, although these areas are beginning to be developed for
residential and tourist accommodations.
The primary components of the Governor's Harbour plant are:
o five feedwater supply wells that average a depth of 140 feet.
The combined pumping capability is approximately 3,750 U.S.
gallons per minute;
o two positive displacement pumps with a pumping capacity of 410
U.S. gallons per minute each;
o two "back up" centrifugal pumps with a pumping capacity of 300
U.S. gallons per minute each;
o 77 vessels (measuring approximately 265" in length and 8" in
diameter) each housing six spiral wound seawater membranes
(measuring approximately 40" in length and 8" in diameter);
o a work exchanger energy recovery system;
o an air scrubber to remove the hydrogen sulfide from the
product water, which is capable of scrubbing approximately 800
U.S. gallons of water per minute; and
o Paragon TNT v5.0 control software on Gateway Hardware with I/O
System Opto 22 and Optomux interface controller.
We own our West Bay facility in Grand Cayman, which consists of 6.1
acres in West Bay. In August 1994, we retained United States Filter Corporation
to design and build this plant and then we paid off the obligations on the plant
and terminated the operating contract in November 1998. The plant began
operating on June 1, 1995 and was expanded in February 1998 and February 2000.
On this site, we have a 2,600 square foot building which houses our water
production facilities, a 2,400 square foot building which houses the potable
water distribution pumps, a water quality testing laboratory, office space and
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water storage capacity consisting of three 1.0 million U.S. gallon potable water
tanks. The current production capacity of the West Bay plant is 710,000 U.S.
gallons per day.
The primary components of this plant are:
o three feedwater supply wells that average a depth of 140 feet.
The combined pumping capability is approximately 2,250 U.S.
gallons per minute;
o two positive displacement pumps with a pumping capacity of 386
U.S. gallons per minute each;
o 43 vessels (measuring approximately 280" in length and 8" in
diameter) each housing seven spiral wound seawater membranes
(measuring approximately 40" in length and 8" in diameter);
o one hydraulic turbo energy recovery system;
o one work exchanger energy recovery system;
o an air scrubber to remove the hydrogen sulfide from the
product water, which is capable of scrubbing 1,000 U.S.
gallons of water per minute; and
o an Allen Bradley SLC500 Programmable Logic Controller (PLC)
linked to a Compaq PC computer running Windows NT 4.0 and
Wintelligent View interfaced with the PLC to control the
operation of the plant.
We own our San Pedro water production facility in Ambergris Caye,
Belize, Central America. The plant consists of a one story concrete block
building, which contains a seawater RO water production plant with a rated
capacity of 420,000 US gallons per day. We lease from the Government of Belize
at a annual rent of BZ$1.00, the parcel of land on which our plant is located.
The lease commenced on June 26, 1996 and the term is for ten years. We are
currently finalizing an extension of the lease for an additional five years to
coincide with the term of the water supply agreement.
The primary components of this plant are:
o two feed water supply wells drilled to an approximate depth of
100 feet;
o two multi-stage vertical turbine high pressure pumps with an
individual pumping capacity of 400 U.S. gallons per minute at
1620 feet TDH;
o two Caterpillar 3406 diesel engines which are the primary
drivers for the high pressure pumps;
o two 200 HP electric motors which act as backup drives for the
high pressure pumps;
o 18 pressure vessels each housing six spiral wound seawater RO
membranes;
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o two hydraulic turbo energy recovery systems;
o one air scrubber to remove the hydrogen sulfide from the
product water;
o one calcite bed and ancillary pumps to increase the alkalinity
of the product water; and
o an Allen Bradley PLC5 Programmable Logic Controller (PLC)
linked to a Compaq PC computer running Windows NT 4.0 and
Citect MMI software and interfaced with the PLC to control the
operation of the plant.
In addition to the properties where our water plants are located, we
lease approximately 3,200 square feet of space for our executive offices at
Trafalgar Place, West Bay Road, Grand Cayman Island. We have a three-year lease
with an extension provision on this property.
Our Governor's Harbour site consists of a waterfront portion. This
waterfront portion is not essential to our operations. We initially bought this
property to enhance the value of the entire Governor's Harbour site if we
decided to sell the site or develop it for other purposes. We purchased this
water frontage in 1992 from Hurricane Hideaway Ltd. At the same time, we
purchased Hurricane Hideaway Ltd., which owns certain development rights and
which is now a wholly owned subsidiary of our company. We value our holdings in
Hurricane Hideaway Ltd. at CI$1.00 for balance sheet purposes. We believe that
our properties are suitable for the conduct of our current operations for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
We are not currently a party to any material ongoing or pending legal
proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our ordinary shares of common stock ("ordinary shares") are listed on
the Nasdaq National Market and trade under the symbol "CWCO". Our ordinary
shares are not traded on any market other than the Nasdaq National Market.
Listed below for each quarter of the last two fiscal years are the high and low
bid prices for the ordinary shares on the Nasdaq National Market.
HIGH LOW
---- ---
First Quarter 1999 $ 7.75 $ 6.50
Second Quarter 1999 7.75 6.75
Third Quarter 1999 7.44 6.25
Fourth Quarter 1999 7.25 5.94
First Quarter 2000 7.13 6.00
Second Quarter 2000 8.25 6.00
Third Quarter 2000 8.00 6.13
Fourth Quarter 2000 9.13 6.19
The high and low bid prices in the table reflect interdealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
There is no trading market for the redeemable preference shares, which
are only issued to or purchased by long-term employees of our company and which
must be held by these employees for a period of four years before they may be
sold.
HOLDERS
On March 19, 2001, we had 583 holders of record of the ordinary shares.
Management believes that of the ordinary shares held of record, 16% are
registered to residents of the Cayman Islands and 84% are registered to
residents of other countries, primarily the United States. All of the redeemable
preference shares are owned by residents of the Cayman Islands.
Other than for the terms of our license described in "ITEM 1.
BUSINESS," our company is not directly or indirectly owned or controlled by
another corporation or by any government.
DIVIDENDS
We have paid cash dividends on our ordinary shares since 1985. The
board of directors' policy is to pay cash dividends out of accumulated profits
on a quarterly basis if funds are available. As of February 29, 2000, our board
of directors have established a policy, although not a binding obligation, that,
subject to annual review by the board of directors, our company will maintain a
dividend pay-out ratio in the range of 50% to 60% of net income. However, our
payment of any future cash dividends will still depend upon our earnings,
financial condition, capital demand and other factors. The board of
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directors declares and approves all interim dividends. The final dividend in
each year, if any, is recommended by the board of directors and must be, and has
always been, approved by our shareholders before distribution.
Listed below for each quarter of the last two fiscal years is the
amount of cash dividend, in U.S. dollars, declared on our issued and outstanding
ordinary shares and redeemable preference shares.
First Quarter 1999 $ 0.04 Per Share
Second Quarter 1999 0.04 Per Share
Third Quarter 1999 0.04 Per Share
Fourth Quarter 1999 0.08 Per Share
First Quarter 2000 0.08 Per Share
Second Quarter 2000 0.08 Per Share
Third Quarter 2000 0.08 Per Share
Fourth Quarter 2000 0.10 Per Share
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
Our company is not subject to any governmental laws, decrees or
regulations in the Cayman Islands which restrict the export or import of
capital, or that affect the remittance of dividends, interest or other payments
to non-resident holders of our securities. The Cayman Islands does not impose
any limitations on the right of non-resident owners to hold or vote the ordinary
shares other than stated below. There are no exchange control restrictions in
the Cayman Islands.
In accordance with the terms of our license, the Cayman Islands'
government has the right to approve, in advance, any transfer of the ordinary
shares which increases the holdings of any shareholder who already owns more
than 5% of the issued share capital of the company or any transfer which would
increase the ownership of any existing or new shareholder above 5%. In
accordance with our Articles of Association, all share transfers are subject to
the approval of the board of directors at their sole discretion. To date, the
board of directors has never exercised the right to decline to register a
transfer. This provision has been incorporated into the our Articles of
Association in order to ensure that the board of directors is not put into a
position where it is legally obligated to register a transfer which would cause
our company to be in breach of the License. Although not intended as such, this
provision may discourage or prevent a change in control of our company by merger
or otherwise.
TAXATION
The Cayman Islands presently impose no taxes on profit, income, capital
gains, or appreciations of our company and no taxes are currently imposed in the
Cayman Islands on profit, income, capital gains, or appreciations of the holders
of our securities or in the nature of estate duty, inheritance, or capital
transfer tax. There is no income tax treaty between the United States and the
Cayman Islands.
A major source of revenue to the Cayman Islands government is a 7.5% or
9% stamp tax, depending on location, on the transfer of ownership of land in the
Cayman Islands. To prevent stamp tax avoidance by transfer of the ownership of
the shares of a company which owns land in the Cayman Islands (as opposed to
transfer of the land itself), The Land Holding Companies (Share Transfer Tax)
Law was passed in 1976. The effect of this law is to charge a company which owns
land or an interest in land in the Cayman Islands a 7.5% tax on the value of its
land or interest in land attributable to each share transferred. The stamp tax
calculation does not take into account the proportion which the value of a
company's Cayman land or interest bears to its total assets and whether the
intention of the transfer is to
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transfer ownership of a part of a company's entire business or a part of its
Cayman land or interest. We asked the Cayman Islands government to exempt our
shareholders from the landholding companies tax which our shareholders have to
pay on disposals of their shares. We are engaged in discussions with the Cayman
Islands government regarding this matter.
DESCRIPTION OF SECURITIES
ORDINARY SHARES
We are authorized to issue 9,900,000 ordinary shares, par value CI$1.00
per share. At March 19, 2001, 3,862,943 ordinary shares were issued and
outstanding. Holders of ordinary shares may cast one vote for each share held of
record at all shareholder meetings. All voting is non-cumulative. Holders of
more than 50% of the outstanding shares present and voting at an annual meeting
at which a quorum is present are able to elect all of our directors. Holders of
ordinary shares do not have preemptive rights or rights to convert their
ordinary shares into any other securities. All of the outstanding ordinary
shares are fully paid and non-assessable.
Holders of ordinary shares are entitled to receive ratably dividends,
if any, distributed out of our accumulated profits. Subject to the preferential
rights of holders of the redeemable preferred shares, upon liquidation, all
holders of ordinary shares are entitled to participate pro rata in our assets
which are available for distribution.
REDEEMABLE PREFERRED SHARES
We are authorized to issue 100,000 redeemable preferred shares, par
value CI$1.00 per share. At March 19, 2001, 33,634 redeemable preferred shares
were issued and outstanding.
Holders of redeemable preferred shares may cast one vote for each share
held of record at all shareholder meetings and are entitled to receive ratably
dividends, if any, distributed out of our accumulated profits. All voting is on
a non-cumulative basis. Upon a liquidation of our company, the redeemable
preferred shares rank in preference to the ordinary shares with respect to the
repayment of the par value of redeemable preferred shares plus any premium paid
or credited on the purchase of the shares. Under our share incentive plan, we
may redeem any redeemable preferred shares issued to an employee. The ordinary
shares and the redeemable preferred shares rank equally in all other respects.
CLASS B ORDINARY SHARES
In 1997, we adopted an option deed under which option holders may
exercise rights to purchase our class B ordinary shares, par value CI$1.00 per
share. As of the date of this Annual Report, there are no class B ordinary
shares issued and outstanding.
Holders of class B ordinary shares are entitled to the same dividends
paid on ordinary shares and redeemable preferred shares, and we cannot pay a
dividend on the ordinary shares without paying the same dividend on the class B
ordinary shares, and vice versa. We cannot redeem the class B ordinary shares,
and the holders of the class B ordinary shares are not entitled to any
repayments of capital upon the dissolution of our company.
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If we enter into a transaction in which ordinary shares are exchanged
for securities or other consideration of another company, then the class B
ordinary shares will be also be exchanged pursuant to a formula. The class B
ordinary shares and the ordinary shares rank equally in all other respects.
OUTSTANDING WARRANTS
On April 9, 1996, we issued warrants to purchase up to 50,000 ordinary
shares at $6.30 per share to the underwriter of our initial public offering. As
of the date of this Annual Report, all of these warrants are issued and
outstanding. These warrants must be exercised before April 3, 2001. We have
granted the underwriter of our initial public offering one demand and unlimited
piggyback registration rights with respect to these warrants and the ordinary
shares underlying the warrants. It is our understanding that the underwriter is
no longer trading as a going concern.
OPTION DEED
In 1997, in response to an attempt by Argyle/Cay Water, Ltd. to acquire
up to 50% of our company, our board of directors approved an option deed, which
is similar to a "poison pill." The option deed may delay or prevent a change in
control of our company.
The option deed grants to each holder of an ordinary and redeemable
preference share an option to purchase one one-hundredth of a class B ordinary
share at an exercise price of $37.50, subject to adjustment. If a takeover
attempt occurs, each shareholder would be able to exercise the option and
receive ordinary shares with a value equal to twice the exercise price of the
option. Under circumstances described in the option deed, instead of receiving
ordinary shares, we may issue to each shareholder cash or other equity or debt
securities of our company, or the equity securities of the acquiring company, as
the case may be, with a value equal to twice the exercise price of the option.
Takeover events that would trigger the options include a person or
group becoming the owner of 20% or more of our outstanding ordinary shares or
the commencement of, or announcement of an intention to make, a tender offer or
exchange offer, which upon completion would result in the beneficial ownership
by a person or group of 20% or more of the outstanding ordinary shares.
Accordingly, exercise of the options may cause substantial dilution to a person
who attempts to acquire our company.
The options are attached to each ordinary share and redeemable
preference share and presently have no monetary value. The options will not
trade separately from our shares unless and until they become exercisable. The
options, which expire on July 31, 2007, may be redeemed, at the option of our
board of directors, at a price of CI$.01 per option at any time until ten
business days following the date that a group or person acquires ownership of
20% or more of the outstanding ordinary shares. Any amendment to the option deed
is subject to the terms and conditions of our agreement with Argyle/Cay-Water,
Ltd. described in the section of this Annual Report entitled "ITEM 10. DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT"
The option deed may have certain anti-takeover effects, although it is
not intended to prevent any acquisition or business combination that is at a
fair price and otherwise in the best interests of our company and our
shareholders as determined by our board of directors. However, a shareholder
could potentially disagree with the board's determination of what constitutes a
fair price or the best interests of our company and our shareholders.
The full terms and conditions of the options are contained in an option
deed between us and our option agent, American Stock Transfer & Trust Company.
The above description of the options is a
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summary only and does not purport to be complete. You should read the entire
option deed to understand the terms of the options.
TRANSFER AGENT
The transfer agent for the ordinary shares is American Stock Transfer &
Trust Company, New York, New York.
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ITEM 6. SELECTED FINANCIAL DATA
As a result of a management decision we have voluntarily adopted
accounting principles generally accepted in the United States of America
("US-GAAP") effective January 1, 2000. Previously, annual financial statements
were prepared in accordance with International Accounting Standards ("IAS"). As
a result all prior periods' financial information presented in the selected
financial data have been prepared in accordance with "US-GAAP".
On July 21, 2000, we acquired all of the issued and outstanding capital
stock of Seatec Belize Ltd., now renamed Belize Water Ltd., a company organized
under the laws of Belize. This acquisition has been accounted for by the
purchase method.
The consolidated financial statements include the accounts of our
wholly-owned subsidiary Belize Water Ltd. The operating results of Belize Water
Ltd. have been included in the financial statements since the date of the
acquisition (July 21, 2000). All inter-company balances and transactions have
been eliminated.
Set forth below is selected financial data based upon our consolidated
financial statements. The table contains information (expressed in US dollars)
derived from our audited consolidated financial statements for the five-year
period ended December 31, 2000. This selected financial data should be read in
conjunction with the more detailed financial statements and related notes
thereto contained elsewhere in this Annual Report. The audited consolidated
financial statements for the years ended December 31, 1997 and 1996 and
accountant's reports thereon are not included in this Annual Report.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
STATEMENT OF INCOME DATA:
Water Sales $ 9,576,959 $ 7,936,118 $ 7,925,232 $ 7,214,557 $ 6,150,700
Operating Income (1) 2,404,820 1,687,293 1,451,933 1,210,288 961,632
Net Income (1) 2,404,820 1,569,717 1,451,933 1,112,402 961,632
BALANCE SHEET DATA:
Total Assets 21,845,672 16,431,321 15,594,021 14,814,817 14,350,387
Long Term Debt Obligation 1,131,986 1,926,786 2,470,112 1,769,746 1,963,372
Long Term Purchase Obligation -- -- 320,141 1,265,275 1,692,011
Redeemable Preferred Stock 40,361 49,270 52,686 40,906 51,172
DIVIDENDS DECLARED PER SHARE 0.34 0.20 0.19 0.13 0.11
BASIC EARNINGS PER SHARE 0.68 0.51 0.47 0.37 0.35
BASED ON NUMBER OF SHARES 3,532,501 3,044,293 3,055,845 2,986,216 2,760,693
DILUTED EARNINGS PER SHARE 0.67 0.49 0.45 0.35 0.32
BASED ON WEIGHTED NUMBER OF SHARES 3,616,271 3,188,048 3,191,583 3,136,574 2,984,945
(1) Operating Income represents net income from operations before a
cumulative change in accounting principle in 1999 of $117,576. (See ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Change in Accounting Principle), and an exception item of
$97,886 in 1997 representing the remaining book value of the vapor
compression equipment previously used by our company that was written down
to zero.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Our objective is to provide water services in areas where the supply of
potable water is scarce and where the use of reverse osmosis technology to
produce potable water is economically feasible. We have been operating our
business on Grand Cayman Island since 1973 and have been using reverse osmosis
technology to convert seawater to potable water since 1989. There is no natural
supply of fresh water on the Cayman Islands. On July 21, 2000 we acquired Seatec
Belize Ltd., a company organized under the laws of Belize. Seatec Belize Ltd.,
now renamed Belize Water Ltd., owns and operates a reverse osmosis plant in
Ambergris Caye, Belize and provides potable water to WASA. In December 2000, we
signed a water supply agreement with a Bahamian Developer, to provide potable
water to Bimini Sands Resort, a property in South Bimini Island, Bahamas. We are
also in discussions with the Government of the Bahamas regarding the provision
of potable water to other properties in Bimini, including residential,
commercial and tourist properties.
For the year ended December 31, 2000, our net income increased by 53%
to $2,404,820, when compared with net income of $1,569,717 in 1999. There are no
income taxes in the Cayman Islands. In October 1999, we doubled our per share
dividend to ordinary shareholders from $0.16 to $0.32 per year and in December
2000, we increased it from $0.32 to $0.40 per year, payable on a quarterly
basis. As of February 29, 2000, our board of directors has established a policy
that our company will maintain a dividend pay-out ratio in the range of 50% to
60% of net income. This policy is subject to modification by our board of
directors. We expect to continue increasing our dividend as our earnings grow.
We currently have an exclusive license from the Cayman Islands
government to provide potable water in Seven Mile Beach and West Bay, Grand
Cayman Island. We obtain water from two reverse osmosis plants on Grand Cayman,
which together are capable of producing 1.8 million U.S. gallons per day, or
approximately 657 million U.S. gallons per year. We own our reverse osmosis
plants and substantially all of the 64-miles of our underground distribution
infrastructure. For the year ended December 31, 2000, we supplied 451 million
U.S. gallons of water to hotels, residential customers, condominiums, other
commercial customers and government facilities.
We also have operations in Ambergris Caye, Belize which provides water
from one reverse osmosis seawater conversion plant, capable of producing 420,000
U.S. gallons per day or approximately 153 million U.S. gallons per year, to WASA
which distributes the water to residential, commercial and tourist properties in
Ambergris Caye, Belize. For the year ended December 31, 2000, we supplied
approximately 39.1 million U.S. gallons to WASA.
We also entered into a water supply agreement with South Bimini
International Ltd., a company incorporated in the Commonwealth of Bahamas. Under
the agreement South Bimini International Ltd. is
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committed to pay for a minimum of 3,000 US Gallons of water per residential unit
per month (36,000 US Gallons residential per unit per year) on a take or pay
basis in relation to the Bimini Sands Resort property in South Bimini Island,
Bahamas. The price of water supplied is adjusted for inflation annually based on
Bahamas government indices. The implementation of the agreement is subject to
approval by certain regulatory bodies, which is expected by May 2001. No water
sales resulted from this agreement for the year ended December 31, 2000.
Considerable development is taking place on Grand Cayman Island, and
particularly in our licensed areas, to accommodate both the growing local
population and increased tourism. Because our license requires us to supply
water to developments in our licensed area, the planning department of the
Cayman Islands government routinely advises us of proposed developments in our
licensed area. This advance notice allows us to manage our production capacity
to meet anticipated demand. We believe that we have or have contracted for a
sufficient supply of water to meet the foreseeable future demand.
We installed our first reverse osmosis plant in December 1989 at
Governor's Harbour, located in the Seven Mile Beach area, through a water
purchase agreement with Ocean Conversion (Cayman) Ltd. Under the agreement,
Ocean Conversion operates the plant, and we must purchase a minimum volume of
water from Ocean Conversion. In addition, Ocean Conversion has to provide to us
additional volumes of water upon demand up to a fixed level, and any excess on a
best efforts basis. The agreement requires a plant capacity of 1.1 million U.S.
gallons per day, which is the maximum capacity of the plant. We make installment
payments to Ocean Conversion against the cost of the plant as part of the
purchase price of the water provided to us by them. As of December 31, 2000, all
installment payments against the cost of the plant have been completed and no
amounts remain owing. The agreement was amended in December 2000 to increase the
production capacity of the plant to 1.2 million US gallons per day. The
agreement expires on December 31, 2004, at which time we will have fulfilled our
obligations under the agreement and we will be the sole owner and sole operator
of the plant. Upon expiration of our agreement with Ocean Conversion, we expect
that our operating costs at Governor's Harbour will decrease significantly.
In 1995, we installed our second reverse osmosis seawater conversion
plant, this one at our West Bay site. We own and are responsible for operation
and maintenance of the West Bay plant. This plant is capable of producing
710,000 U.S. gallons per day of potable water.
OUR OPERATIONS UNDER THE LICENSE IN THE CAYMAN ISLANDS
The Cayman Islands government issued us an exclusive operational
license under The Water (Production and Supply) Law of 1979. The license gives
us the exclusive right to process potable water from seawater and then sell and
distribute that water by pipeline to Seven Mile Beach and West Bay, Grand Cayman
Island. The original twenty-year license was renegotiated in 1990 and extended
to expand our service area to include West Bay. The license terminates, unless
further renewed, on July 11, 2010.
Two years prior to the expiration of the license, we have the right to
negotiate with the government to extend the license for an additional term.
Unless we are in default under the license, the government may not grant a
license to any other party without first offering the license to us on terms
that are no less favorable than those which the government offers to a third
party.
We must provide, within our licensed area, any requested piped water
service which, in the opinion of the executive council of the Cayman Islands
government, is commercially feasible. Where supply is not considered
commercially feasible, we may require the potential customer to contribute
toward the capital costs of pipe laying. We then repay these contributions to
the customer, without interest, by way of a discount of 10% on future billings
for water sales until this indebtedness has been repaid. We have been installing
additional pipeline when we consider it to be commercially feasible, and
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the Cayman Islands government has never objected to our determination regarding
commercial feasibility.
Under the license, we pay a royalty to the government of 7.5% of our
gross potable water sales revenue. The base selling price of water under the
license presently varies between $19.00 and $22.79 per 1,000 U.S. gallons,
depending upon the type and location of the customer and the monthly volume of
water purchased. The license provides for an automatic adjustment for inflation
on an annual basis, subject to temporary limited exceptions, and an automatic
adjustment for the cost of electricity on a monthly basis. The government
reviews and approves the calculations of the price adjustments for inflation and
electricity costs.
If we want to increase our prices for any reason other than inflation,
we have to request prior approval of the executive council of the Cayman Islands
government. If the parties fail to agree, the matter is referred to arbitration.
The last price increase that we requested, other than automatic inflation
adjustments since 1990, was granted in full in June 1985.
RESIDENTIAL AND COMMERCIAL OPERATIONS IN THE CAYMAN ISLANDS
We enter into standard contracts with hotels, condominiums and other
properties located in our licensed area to provide potable water to such
properties. We currently have agreements on differing terms and rates to supply
potable water to the 309-room Marriott Hotel and the 343- room Westin Hotel, and
to supply non-potable water to the SafeHaven Golf Course. We bill on a monthly
basis based on meter readings. Receivables are typically collected within 30 or
35 days after the billing date and receivables not collected within 45 days
subject the customer to disconnection from our water service. In 2000, we
collected 99.9% of our receivables. Customers who have had their service
disconnected must pay re-connection charges.
In the Seven Mile Beach area, our primary customers are the hotels and
condominium complexes which serve the tourists. In the West Bay area, our
primary customers are residential homes. Occasionally, we also supply to, or buy
from, on an as-needed basis, the Water Authority-Cayman, which serves the
business district of George Town and other parts of Grand Cayman Island.
WASTEWATER SERVICES IN THE CAYMAN ISLANDS
We began providing sewerage services on Grand Cayman in 1973. The
Cayman Islands government, through Water Authority-Cayman, constructed a public
sewerage system in part of the Seven Mile Beach area where Governor's Harbour is
located. On September 1, 1988, Water Authority-Cayman began processing sewage
delivered by the pipelines and lift stations in that area. We stopped our
processing of sewage on that date. Water Authority-Cayman currently directly
bills our former sewerage customers for its services. We have advised the Cayman
Islands government that we do not intend to operate or maintain the system after
March 31, 2001, after having extended a previous deadline of November 30, 2000
upon the request of the Cayman Islands government.
DEMAND FOR WATER IN THE CAYMAN ISLANDS
In the past, demand on our pipeline distribution has varied throughout
the year. However, an increase in year-round tourism in recent years has created
more uniform demand for water throughout the year. Demand depends upon the
number of tourists visiting the Cayman Islands and the amount of rainfall during
any particular time of the year. Traditionally the highest demand arises in the
first two quarters of the calendar year which corresponds with the high tourist
season and the lowest demand arises in the third quarter of the year which
corresponds with the period with the most rainfall and the least amount of
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tourist arrivals. In general, 75% of tourists come from the United States. Our
operating results in any particular quarter are not indicative of the results to
be expected for the full fiscal year. The table below lists the total volume of
water we supplied on a quarterly basis for the years ended December 31, 2000,
1999, 1998, 1997 and 1996 to all our customers:
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(in thousands of U.S. gallons)
First Quarter 125,869 107,031 109,255 100,853 85,998
Second Quarter 117,766 113,007 108,334 98,473 86,559
Third Quarter 100,324 90,888 90,950 87,483 81,241
Fourth Quarter 107,404 90,421 92,011 89,941 74,666
------- ------- ------- ------- -------
Total 451,363 401,347 400,550 376,750 328,464
======= ======= ======= ======= =======
OUR OPERATIONS UNDER THE CONTRACT IN BELIZE
We have entered into a contract with WASA to supply a minimum of
135,000 US gallons of water per day to WASA expiring in 2011. At the expiry of
the contract, WASA may at its option extend the term of the agreement or
purchase the plant outright.
The base price of water supplied, and adjustments thereto, are
determined by the terms of the contract, which provides for adjustments based
upon the movement in the government price indices specified in the contract, as
well as, monthly adjustments for changes in the cost of fuel.
DEMAND FOR WATER IN BELIZE
We have not operated our plant in Belize for a full year. However we
believe that water sales in Belize will be cyclical, and on a similar cycle to
sales in the Cayman Islands, since both operations cater to similar tourist
markets. We believe that water sales will be higher in the future since sales
were limited before March 2000 because the production capacity of the water
plant was lower than demand. We have already generated sales in January and
February 2001 which are 79% higher than sales during the same period in 2000.
While early 2001 sales indicate an increasing trend, it may not be indicative of
similarly high percentage increases in the future because of production
limitations in the first quarter of 2000.
The total volume of water we supplied (in thousands of U.S. gallons) to the
Water and Sewage Authority of Belize in each of the third and fourth quarters of
the year ended December 31, 2000 was 19,433 and 19,624, respectively.
WATER SALES AND OTHER INCOME ("TOTAL INCOME")
Our total income includes water sales income, other income and interest
income from all of our business segments. Water sales income is comprised of
water sales to our individual Cayman Islands customers and to the Water and
Sewerage Authority of Belize. Other income consists of monthly meter rental
charges, sales of water to trucks which deliver to customers not connected to
our pipeline in the Cayman Islands, connection charges for new customers and
re-connection charges for delinquent accounts. In April 1999, we settled a
dispute with the owner of the Hyatt Hotel and the developer of the Britannia
development, who supplied water to the Hyatt Hotel, a hotel located within our
Seven Mile
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Beach license area. Accordingly, other income also consists of settlement fee
payments for the supply of water to the Britannia development by the Hyatt
Hotel, which has its own water production facility. Interest income relates to
interest derived from excess cash balances placed on term deposit.
EXPENSES
Expenses include cost of water sales ("direct production expenses") and
our indirect, or general and administrative expenses. Direct production expenses
include royalty payments to the Cayman Islands government, electricity and
chemical expenses, payments to Ocean Conversion relating to operation of the
Governor's Harbour plant, production equipment and facility depreciation costs,
equipment maintenance and expenses and operational staff costs. Indirect, or
general and administrative expenses, consist primarily of salaries and employee
benefits for personnel, administrative office lease payments, legal and
professional expenses and financing costs. There are no income taxes in the
Cayman Islands and we are currently exempt from taxes in Belize.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999.
WATER SALES AND OTHER INCOME ("TOTAL INCOME")
Total income increased by 22% from $8,249,988 to $10,025,686 for the
years ended December 31, 1999 and 2000, respectively. Part of this increase is
due to the income generated in a five month period ended December 31, 2000 by
our newly acquired Belize operation. This income amounts to $464,928 which makes
up 26% of the increase. The additional 74% of the increase is due to a full
twelve months of revenue from the Hyatt Settlement versus six months in 1999,
inflationary increase in base rates, as well as, generic growth in our customer
base, due to increased housing and new hotel properties which came on line in
our Cayman Islands franchise area.
EXPENSES
Direct expenses increased by 14% from $4,770,179 to $5,423,297 for the
years ended December 31, 1999 and 2000, respectively. Part of this increase is
due to our newly acquired Belize operation. Our direct expenses from Belize, for
the five month period ended December 31, 2000, amount to $250,352 which makes up
40% of the increase. The additional 60% of the increase is due to costs of
producing additional water to provide for the increased sales. As a percentage
of total income, direct expenses decreased from 58% of total income to 54% of
total income for the years ended December 31, 1999 and 2000, respectively.
Indirect expenses increased by 23% from $1,792,516 to $2,197,569 for
the years ended December 31, 1999 and 2000, respectively. Part of this increase
is due to our indirect expenses from Belize. For the five month period ended
December 31, 2000, indirect expenses from Belize amounted to $33,422, which
contributed to 8% of the increase. The additional 92% of the increase is due to
increase employment costs, increased professional fees due to the change in
accounting policy and the voluntary increase of SEC disclosure, increased
financial and investor public relations and increased expenditures looking for
new business. As a percentage of total income, indirect expenses remained
unchanged at 22% of total income for the years ended December 31, 1999 and 2000,
respectively.
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YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998.
WATER SALES AND OTHER INCOME ("TOTAL INCOME")
Total income increased by 1% from $8,187,714 to $8,249,988 for the
years ended December 31, 1998 and 1999, respectively. Total income increased
despite the closure of two hotels in May and August 1998 consisting of a total
of 350 rooms in the Seven Mile Beach area. The decline in available hotel rooms,
in addition to year 2000 concerns over the Christmas 1999 period, contributed to
a corresponding decrease in tourist arrivals during the year. In addition, our
automatic inflation adjustment led to a slight decrease in prices for most of
our customers in the West Bay and Seven Mile Beach areas. The decline in
water sales in the Seven Mile Beach area, however, was more than offset by an
increase in sales volume to new West Bay customers and new six months of
revenues from the Hyatt settlement.
EXPENSES
Direct expenses decreased by 8% from $5,166,401 to $4,770,179 for the
years ended December 31, 1998 and 1999, respectively. Direct expenses decreased
primarily due to the termination of the United States Filter contract, which
immediately decreased costs at the West Bay plant. As a percentage of total
income, direct expenses decreased from 63% of total income to 58% for the years
ended December 31, 1998 and 1999, respectively.
Indirect expenses increased by 14% from $1,569,380 to $1,792,516 for
the years ended December 31, 1998 and 1999, respectively, primarily due to
substantial legal costs incurred in the first quarter of 1999. These legal costs
principally relate to the final settlement of the Britannia development lawsuit
in April 1999. All legal costs were expensed as incurred. Other indirect costs,
such as executive and administrative staff costs, rent and utilities, increased
in line with inflation. As a percentage of total income, indirect expenses
increased from 19% of total income to 22% of total income for the years ended
December 31, 1998 and 1999, respectively.
CHANGE IN ACCOUNTING PRINCIPLE
Statement of Position 98-5 "Reporting on the Costs of Start-Up
Activities" requires start up costs to be expensed as incurred rather than
deferred. As a result, the cumulative effect of this change was $117,576, and
this item was recorded as a change in accounting principle in the 1999
Consolidated Statements of Income.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
We generate cash from our plant operations at West Bay, Seven Mile
Beach and Ambergris Caye, Belize and from the sale of our shares and through our
loans and facilities obtained from two banks. Cash flow from operating
activities was provided by our plant operations, and is impacted by operating
and maintenance expenses, the timeliness and adequacy of rate increases,
excluding automatic adjustments to our rates for inflation and electricity
costs, and various factors affecting tourism in the Cayman Islands and Belize,
such as weather conditions and the economy. We use cash to fund our operations
in the Cayman Islands and Belize, to make payments under our operating agreement
with Ocean Conversion for our Governor's Harbour plant, to expand our
infrastructure, to pay dividends, to repay principal on our loans and to
repurchase our shares when appropriate.
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OPERATING ACTIVITIES
Net cash from operating activities in 2000 was $3,922,712, compared to
$2,528,921 in 1999. This increase was primarily due to an increase in cash
generated from operations. We expect cash from operating activities to continue
to increase in 2001 as we continue to generate customer revenues from our Belize
operations acquired in July 2000.
WORKING CAPITAL
At December 31, 2000, we had a working capital deficiency of $579,942,
primarily due to the fourth quarter interim dividends payable which is recorded
as a liability within accounts payable and other liabilities for unexercised
stock option compensation costs. Management believes that sufficient resources,
from funds generated by operations and existing unutilized credit lines, are
available to maintain liquidity.
INVESTING ACTIVITIES
Cash used in investing activities in 2000 was $6,268,738, compared to
$1,541,448 in 1999. On July 21, 2000, we acquired all the issued and outstanding
capital stock of Seatec Belize Ltd., now renamed Belize Water Ltd.. Also in 2000
we purchased water production and distribution equipment to expand our
infrastructure in the Cayman Islands. In 1999, investing activities consisted
primarily of purchase of property, plant and equipment.
FINANCING ACTIVITIES
Cash provided by financing activities in 2000 was $2,547,717, compared
to cash used in 1999 of $1,404,359. In May and June 2000, we completed a second
public offering totaling 773,000 ordinary shares at a per share price of $7.50.
After deducting underwriting commissions and other offering expenses, our net
proceeds from the offering was $5,384,102 We used the proceeds from this
offering to retire approximately $2.1 million of existing debt, for
implementation of our growth strategy and for capital expenditures and general
corporate purposes.
On December 3, 1998, our shareholders approved a share repurchase
program. As of December 31, 1999, we had repurchased 110,752 ordinary shares at
an average cost of $7.44 per share, and on January 6, 2000 we repurchased 79,100
shares at $6.25 per share from a shareholder whose assets were being liquidated.
No other shares were repurchased during the year ended December 31, 2000. As of
October 26, 1999, we suspended the open-market repurchase of our shares.
Our Governor's Harbour plant was financed, through a capital lease, by
an increase in our long-term water purchase obligation. In 1991, we financed the
expansion of the water distribution system in the West Bay area with a
$2,500,000 loan issued by the European Investment Bank and our existing credit
facility with the Royal Bank of Canada. The interest rate on the European
Investment Bank loan is the bank's prevailing lending rate at the time of
draw-down less a subsidy of 4%. As of December 31, 2000, $1,351,566 is
outstanding under the European Investment Bank loan. Our total lending facility
from the Royal Bank of Canada comprises a revolving line of credit with a limit
of $1,000,000 and term loans with a limit of $4,000,000. In 1999, a term loan of
$1,000,000 was drawn down. We made an accelerated payment of $200,000 against
this loan in 1999 using excess operating cash flow and repaid the
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outstanding amount of approximately $570,000 during the year ended December 31,
2000 from the proceeds of our second public share issue. The Royal Bank of
Canada lending facility and the European Investment Bank loan are secured by all
of our land and other assets.
During the year ended December 31, 2000, we declared three quarterly
interim dividends of $0.08 per share per quarter and an interim dividend of
$0.10 per share for the fourth quarter, compared to $0.04 per share interim
dividends declared in the first three quarters of 1999 and an interim dividend
of $0.08 per share for the forth quarter of 1999.
MATERIAL COMMITMENTS FOR CAPITAL EXPENDITURES
As at December 31, 2000, we had approximately $625,000 committed for
capital expenditures for the Bimini Sands Resort development. These expenditures
are for the construction of the plant site, as well as, installation of pipeline
for distribution. We intend to finance this project using existing credit
facilities.
IMPACT OF INFLATION
Under the terms of our Cayman Islands license and Belize water sales
agreement, there is an automatic price adjustment for inflation on an annual
basis, subject to temporary exceptions. We therefore believe that the impact of
inflation on our net income will not be material.
EXCHANGE RATES
The official exchange rate for conversion of United States Dollars into
Cayman Islands Dollars has been fixed since 1974 at U.S. $1.20 per CI$1.00.
The official exchange rate for conversion of United States Dollars into
Belizian Dollars has been fixed since 1976 at U.S.$0.50 per BZE$1.00.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
We are subject to the following recent accounting pronouncements:
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). Among other things, SAB 101 discusses the SEC staff's view on accounting
for connection fees received from customers. We have determined that SAB 101
does not impact our revenue recognition policy and that no adjustments arise
from compliance with this pronouncement.
Financial Accounting Standards board ("FASB") Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of APB Opinion 25" was effective July 1, 2000. This
Interpretation clarifies the application of APB Opinion 25 for certain issues.
We have determined that the interpretation does not impact our treatment of
stock compensation and that no adjustments arise from compliance with this
pronouncement.
FORWARD-LOOKING STATEMENTS
We discuss in this Annual Report and in documents which we have
incorporated into this Annual Report by reference matters which are not
historical facts, but which are "forward-looking statements." We intend these
forward looking statements to qualify for safe harbor from liability established
by the Private Securities Litigation Reform Act of 1995. These forward-looking
statements include, but are not
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limited to, our future plans, objectives, expectations and events, assumptions
and estimates about our company and our industry in general.
The forward-looking statements in this Annual Report reflect what we
currently anticipate will happen. What actually happens could differ materially
from what we currently anticipate will happen. We are not promising to make any
public announcement when we think forward looking statements in this Annual
Report are no longer accurate whether as a result of new information, what
actually happens in the future or for any other reason.
Important matters that may affect what will actually happen include,
but are not limited to, tourism in the Cayman Islands, Belize and Bahamas,
scheduled new construction within our operating areas, the U.S., Cayman Islands,
Belize and Bahamas economies, regulatory matters, weather conditions in the
Cayman Islands, Belize and Bahamas, availability of capital for expansion of our
operations, and other factors described in the "RISK FACTORS" section below as
well as elsewhere in this Annual Report.
RISK FACTORS
We have described for you below some risks which may materially and
adversely affect our business, financial condition or results of operations.
WE RELY ON AN EXCLUSIVE LICENSE IN THE CAYMAN ISLANDS WHICH MAY NOT BE
RENEWED IN THE FUTURE AND UNDER WHICH WE MUST OBTAIN PRIOR APPROVAL FOR AN
INCREASE IN OUR RATES FOR ANY REASON OTHER THAN INFLATION. We presently operate
as a public water utility under an exclusive license originally issued to us in
December 1979 by the government of the Cayman Islands. We own our production
infrastructure and substantially all of our distribution infrastructure.
Our license expires on July 11, 2010. If we are not in default of any
terms of the license, we have a right of first refusal to renew the license on
terms that are no less favorable than those which the government offers to a
third party. Nevertheless, we cannot assure you that the government will renew
our license or that we will be able to negotiate a new license on satisfactory
terms.
Under our license, we must obtain prior approval from the Cayman
Islands government to increase our rates for any reason other than inflation.
Our ability to raise our rates is limited by this requirement, including
potential delays and costs involved in obtaining government approval for a rate
increase.
OUR BUSINESS IS AFFECTED BY TOURISM, WEATHER CONDITIONS, THE CAYMAN
ISLANDS ECONOMY, THE BELIZE ECONOMY AND THE U.S. economy. Tourist arrivals and
weather conditions within our operating areas impact the demand for our water.
Normally, the highest demand is in the first two quarters of each calendar year,
which corresponds with the high tourist season. Lowest demand for water arises
in the third quarter of each calendar year, which corresponds with the period
with the most rainfall and the least tourist arrivals. Approximately 75% of
tourists to the Cayman Islands come from the U.S. In addition, development
activity in the Cayman Islands often decreases during downturns in the U.S.
economy, which is tracked by the Cayman Islands economy. Accordingly, a
significant downturn in tourist arrivals to the Cayman Islands or in the U.S.
economy for any reason would be detrimental to our revenues and operating
results. As a result of the seasonal nature of our operations, the revenues and
profitability we achieve in any one quarter is not indicative of our expected
profitability for a full fiscal year.
WE MAY HAVE DIFFICULTY ACCOMPLISHING OUR GROWTH STRATEGY WITHIN AND
OUTSIDE OF OUR CURRENT OPERATING AREAS. Even though we have an exclusive license
for our present service area, our
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ability to expand our service area in the Cayman Islands is limited at the
discretion of the Cayman Islands government.
Further, part of our long-term growth strategy is to expand our water
supply and distribution operations to locations outside the Cayman Islands, such
as Belize and the Bahamas. Our expansion into new locations depends on our
ability to identify suitable new service territories and to obtain necessary
permits and licenses to operate in these territories.
Although we believe that we have sufficient capital to satisfy our
capital requirements for expansion in the Cayman Islands, Belize and Bahamas for
the next twelve months, we will need additional financing to further expand our
operations elsewhere. We cannot make any assurances to you that we will be able
to obtain the additional financing which we may need to expand our operations on
satisfactory terms, if at all.
Our expansion to territories outside our current operations includes
significant risks, including, but not limited to, the following:
o regulatory risks, including government relations difficulties,
local regulations and currency controls;
o risks related to operating in foreign countries, including
political instability, reliance on local economies,
environmental or geographical problems, shortages of materials
and skilled labor; and
o risks related to development of new operations, including
assessing the demand for water, engineering difficulties and
inability to begin operations as scheduled.
If our expansion plans are successful, we may have difficulties in
managing our growth outside our current operations. Expanding our operations to
areas outside the Cayman Islands, Belize and Bahamas will require us to hire and
train new personnel, expand our management information systems and control our
operating expenses. We cannot currently estimate the costs required or assure
you that any new operations outside our current operations will attain or
maintain profitability or that the results from these new operations will not
negatively impact our overall profitability.
OUR OPERATIONS IN THE CARIBBEAN COULD BE HARMED BY HURRICANES. The
Cayman Islands, Belize and Bahamas, like the rest of the Caribbean, are
susceptible to damage from hurricanes. A significant hurricane could cause major
damage to our equipment and properties and the properties of our customers,
including the large tourist properties. This would result in decreased revenues
from water sales until the damaged equipment and properties are repaired and the
tourism industry returned to the status quo before the hurricane.
WE ARE NOT FULLY INSURED AGAINST HURRICANE DAMAGE. The Cayman Islands
have been directly hit by one hurricane since we began operations in 1973 and
Belize has been directly hit by one hurricane since we began operations on July
21, 2000, and the damage to our properties and equipment was minimal. We are not
fully insured on our underground water distribution system on the Cayman
Islands, or the Governor's Harbour reservoirs which are constructed from earthen
berms, although we are fully insured on all of our other above-ground property
and equipment including our reverse osmosis equipment, machinery, other
equipment, buildings and the West Bay reservoir tanks at their estimated
replacement value. We will evaluate our needs and obtain the insurance coverage
that we believe is necessary for any new operations outside our current
operating areas. A severe hurricane which resulted
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in major damage to our properties and equipment could have a material adverse
affect on our operating results. Even though we are not fully insured, we have
mitigated the risks by implementing disaster recovery plans and obtaining
insurance for loss of revenue.
WE COULD BE NEGATIVELY AFFECTED BY POTENTIAL GOVERNMENT ACTIONS AND
REGULATIONS. There is always a possibility that the government may issue
legislation or adopt new regulations:
o restricting foreign ownership of our company;
o providing for the expropriation of our assets by the
government;
o providing for nationalization of public utilities by the
government;
o providing for different water quality standards;
o resulting in unilateral changes to or renegotiation of our
exclusive license or water supply contracts; or
o causing currency exchange fluctuations or devaluations or
changes in tax laws.
SERVICE OF PROCESS AND ENFORCEMENT OF LEGAL PROCEEDINGS AGAINST US IN
THE UNITED STATES MAY BE DIFFICULT TO OBTAIN. Service of process on our company
and our directors and officers, nine out of twelve of whom reside outside the
United States, may be difficult to obtain within the United States. Also, since
substantially all of our assets are located in the Cayman Islands, any judgment
obtained in the United States against us may not be collectible within the
United States.
Civil liabilities under the Securities Act of 1933 or the Securities
Exchange Act of 1934 for original actions instituted outside the Cayman Islands
may or may not be enforceable. There is no reciprocal enforcement of foreign
judgments between the United States and the Cayman Islands, so foreign judgments
originating from the United States are not directly enforceable in the Cayman
Islands.
A prevailing party in a United States proceeding against us or our
officers or directors would have to initiate a new proceeding in the Cayman
Islands using the United States judgment as evidence of the party's claim. Any
action would have to overcome available defenses in the Cayman Islands courts,
including, but not limited to:
o lack of competent jurisdiction in the United States courts
(including competent jurisdiction according to the rules of
private international law currently in effect in the Cayman
Islands);
o lack of due service of process in the United States
proceeding;
o that United States judgments or their enforcement are contrary
to the law, public policy, natural justice, security or
sovereignty of the Cayman Islands;
o that United States judgments were obtained by fraud or
conflict with any other valid judgment in the same matter
between the same parties; and
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o that proceedings between the same parties in the same matter
were pending in a Cayman Islands court at the time the lawsuit
was instituted in the United States court.
A United States judgment awarding remedies unobtainable in any action
in the courts of the Cayman Islands (for example, treble damages, which would
probably be regarded as penalties), probably would not be enforceable under any
circumstances.
WE RELY HEAVILY ON THE EFFORTS OF SEVERAL KEY EMPLOYEES. Our success
depends upon the abilities of our executive officers. In particular, the loss of
the services of Jeffrey Parker, our Chairman and Chief Executive Officer, at any
time could be detrimental to our operations and our continued success. Although
Mr. Parker has entered into an employment agreement extending until December 29,
2001, which extend automatically every year for an additional one-year term, we
cannot guarantee that Mr. Parker will continue to work for us during the term of
his agreement. Also, none of our employees has entered into a non-compete
agreement with us.
PROVISIONS IN OUR ARTICLES OF ASSOCIATION, REQUIREMENTS OF GOVERNMENT
APPROVAL AND AN OPTION DEED ADOPTED BY OUR BOARD OF DIRECTORS MAY DISCOURAGE A
CHANGE IN CONTROL OF OUR COMPANY AND MAY MAKE IT MORE DIFFICULT FOR YOU TO SELL
YOUR ORDINARY SHARES. An issuance or transfer of a number of shares which (a)
exceeds 5% of the issued shares of our company, or (b) would, upon registration,
result in any shareholder owning more than 5% of the issued shares, requires the
prior approval of the Cayman Islands government.
It may be difficult for a shareholder to acquire more than 5% of our
shares and be able to influence significantly our board of directors or obtain a
controlling equity interest in our company and change our management and
policies.
Our articles of association include provisions which may discourage or
prevent a change in control of our company. For instance, our board of directors
consists of three groups. Each group serves a staggered term of three years
before the directors in the group are up for re-election. Also, the board of
directors may refuse to register any transfer of shares on our books. This
provision of the articles of association ensures that the board of directors is
not legally obligated to register a share transfer which would cause us to be in
breach of the government license in the Cayman Islands as discussed above. Our
board of directors has never refused to approve the registration of the transfer
of shares.
We have also adopted an option deed, which is similar to a poison pill.
The option deed will discourage a change in control of our company by causing
substantial dilution to a person or group who attempts to acquire our company on
terms not approved by the board of directors.
As a result of these provisions which discourage or prevent an
unfriendly or unapproved change in control of our company, you may not have an
opportunity to sell your ordinary shares at a higher market price, which, at
least temporarily, typically accompanies attempts to acquire control of a
company through a tender offer, open market purchases or otherwise.
WE ARE IN TECHNICAL BREACH OF THE TERMS OF OUR LICENSE. As stated
above, our Cayman Islands license requires that government approves in advance
any issuance or transfer of ordinary shares which represents more than 5% of the
issued shares, or which would increase the ownership of any shareholder above 5%
of the issued shares of our company.
More than 5% of our issued and outstanding ordinary shares are and in the
future may be registered in the name of Cede and Co. Cede and Co. is the
nominee for the Depository Trust Company, otherwise
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know as DTC, which is a clearing agency for shares held by participating banks
and brokers. . We do not believe that these shareholdings by Cede and Co.
constitute a breach of the intent of the license. We believe that the purpose of
this clause of the license is to allow the Government to approve significant
shareholders of the company. Cede and Co. and Depository Trust Company, however,
act solely as the nominee for banks and brokers, and have no beneficial
ownership in the ordinary shares of common stock. Nevertheless, our Cayman
Islands' legal counsel has advised us that these shareholdings by Cede & Co.,
which were not approved by the government, are probably a technical breach of
its license.
On June 1, 2000, we received a letter from an official of the Cayman
Islands' government stating that a public offering which we completed in 1996
without government approval was a breach of our license. We have responded to
this letter and stated that we do not believe that we are in breach of our
license. A meeting with officials of the Cayman Islands' government, to discuss
this matter, was held on June 16, 2000 in accordance with the Government's
suggestion in the June 1st letter. Discussion of the matter is ongoing as of the
date of this Annual Report. We have been advised by our Cayman Islands' legal
counsel that this letter does not constitute a formal "notice of breach" as
contemplated in the license. However, if a court determined that the
Government's approval of these offerings was required under the license, we
would be in breach of the license. Our legal counsel has advised us that in
order to make this determination, a court would have to disagree with our
interpretation of the license and dismiss several defenses that would be
available to us. These defenses include acquiescence and waiver on the part of
the Government with respect to these offerings.
THERE MAY BE A RISK OF VARIATION IN CURRENCY EXCHANGE RATES. Although
we report our results in United States dollars, the majority of our revenue is
earned in both Cayman Islands dollars and Belizian dollars. The Cayman Islands
dollar is presently fixed at U.S.$1.20 per CI$1.00 and the Belizian dollar is
presently fixed at U.S.$0.50 per BZE$1.00. These rates of exchange have been
fixed since 1974 and 1976 respectively. As a result, we do not hedge against any
exchange rate risk associated with our reporting in United States dollars.
However, if either of the fixed exchange rates becomes a floating exchange rate,
our results of operations could be affected.
SHARES ELIGIBLE FOR FUTURE SALE UNDER RULE 144 OF THE SECURITIES ACT
MAY ADVERSELY AFFECT THE MARKET PRICE OF THE ORDINARY SHARES. As of March 19,
2001, there were 3,862,943 ordinary shares issued and outstanding. With the
exception of ordinary shares held by officers, directors, ten percent
shareholders and other affiliates of our company, all or substantially all of
the shares may be immediately sold without registration under the Securities Act
of 1933. These shares may be sold under Rule 144(k) or under the exemption
provided by Section 4(1) of the Securities Act for transactions by any person
other than an issuer, underwriter or dealer. In addition, the estimated 808,809
ordinary shares held by our affiliates (as this term is defined in the
Securities Act of 1933) are eligible for resale in compliance with Rule 144 of
the Securities Act.
Generally, Rule 144 permits the sale, within any three-month period, of
shares in an amount which does not exceed the greater of one percent of the
then-outstanding ordinary shares or the average weekly trading volume during the
four calendar weeks before a sale. We can not predict the effect sales made
under Rule 144, or otherwise, may have on the then-prevailing market price of
the ordinary shares. Any substantial sale of the ordinary shares under Rule 144,
or otherwise, may have an adverse effect on the market price of the ordinary
shares.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our primary market risk exposure is in the area of currency exchange
rate fluctuations. Although we report our results in United States dollars, the
majority of our revenue is earned in both Cayman Islands dollars and Belizian
dollars. The Cayman Islands dollar is presently fixed at U.S.$1.20 per CI$1.00
and the Belizian dollar is presently fixed at U.S.$0.50 per BZE$1.00. These
rates of exchange have been fixed since 1974 and 1976, respectively. As a
result, we do not hedge against any exchange rate risk associated with our
reporting in United States dollars. However, if either of the fixed exchange
rates becomes a floating exchange rate, our results of operations could be
affected.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED WATER CO. LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
Report of Independent Accountants .......................................................... 32
Consolidated Balance Sheets as of December 31, 2000 and 1999 ............................... 33
Consolidated Statements of Income for each of the years ended December 31, 2000, 1999 and
1998 .................................................................................... 34
Consolidated Statements of Stockholders' Equity for each of the years ended December 31,
2000, 1999 and 1998 ..................................................................... 35
Consolidated Statements of Cash Flows for each of the years ended December 31, 2000, 1999
and 1998 ................................................................................ 36
Notes to Consolidated Financial Statements ................................................. 38
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REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
CONSOLIDATED WATER CO. LTD.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of Consolidated Water
Co. Ltd. and its subsidiaries (the "Group") at December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Group's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers
Grand Cayman, Cayman Islands
March 15, 2001
32
35
CONSOLIDATED WATER CO. LTD.
CONSOLIDATED BALANCE SHEETS
(Expressed in United States dollars)
DECEMBER 31,
------------------------------
2000 1999
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Note 7) 250,837 22,146
Accounts receivable (Note 4) 1,488,729 1,230,412
Spares inventory 120,014 94,303
Inventory of water 34,219 28,984
Prepaid expenses and other assets 299,499 298,906
------------ ------------
Total current assets 2,193,298 1,674,751
PROPERTY, PLANT AND EQUIPMENT (Notes 5 and 14) 17,643,891 14,756,570
INTANGIBLE ASSET (Note 3) 2,008,483 --
------------ ------------
Total assets $ 21,845,672 $ 16,431,321
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdrafts (Note 7) 703,331 651,606
Dividends payable (Note 6) 401,965 266,585
Accounts payable and other liabilities 1,448,364 1,079,922
Obligations under Water Purchase Agreement (Note 14) -- 320,141
Current portion of long term debt (Note 7) 219,580 310,135
------------ ------------
Total current liabilities 2,773,240 2,628,389
LONG TERM DEBT (Note 7) 1,131,986 1,926,786
SECURITY DEPOSIT (Note 15) 52,763 52,763
ADVANCES IN AID OF CONSTRUCTION 41,090 45,084
------------ ------------
Total liabilities 3,999,079 4,653,022
------------ ------------
STOCKHOLDERS' EQUITY
Common stock (Notes 8 and 16) 4,635,774 3,794,960
Additional paid-in capital (Note 8) 6,726,749 3,453,808
Treasury shares (Note 8) -- (821,303)
Vested redeemable preferred stock (Note 8) 11,983 1,121
Non-vested redeemable preferred stock (Notes 8 and 16) 28,378 48,149
Retained earnings 6,443,709 5,301,564
------------ ------------
Total stockholders' equity 17,846,593 11,778,299
------------ ------------
Total liabilities and stockholders' equity $ 21,845,672 $ 16,431,321
============ ============
The accompanying notes are an integral part of these financial statements.
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CONSOLIDATED WATER CO. LTD.
CONSOLIDATED STATEMENTS OF INCOME
(Expressed in United States dollars)
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
2000 1999 1998
----------- ----------- -----------
Water sales (Note 15) 9,576,959 7,936,118 7,925,232
Cost of water sales (Note 9) (5,423,297) (4,770,179) (5,166,401)
----------- ----------- -----------
Gross profit 4,153,662 3,165,939 2,758,831
----------- ----------- -----------
Indirect expenses (Note 9) (2,197,569) (1,792,516) (1,569,380)
----------- ----------- -----------
Income from operations 1,956,093 1,373,423 1,189,451
----------- ----------- -----------
Other income:
Interest income 32,314 594 28,062
Other income 416,413 313,276 234,420
----------- ----------- -----------
448,727 313,870 262,482
----------- ----------- -----------
Income before accounting change 2,404,820 1,687,293 1,451,933
Cumulative effect of a change in accounting principle -- (117,576) --
----------- ----------- -----------
Net income