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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from _____________ to _____________
Commission File Number: 0-25248
CONSOLIDATED WATER CO. LTD.
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(Exact name of Registrant as specified in its charter)
CAYMAN ISLANDS N/A
- -------------------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
TRAFALGAR PLACE, WEST BAY ROAD, P.O. BOX 1114GT,
GRAND CAYMAN, B.W.I. N/A
- -------------------------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone number, including area code: (345) 945-4277
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
ORDINARY SHARES, PAR VALUE CI$1.00
---------------------------------------------------------------
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this 10-K or any amendments to this
Form 10-K. [NOT APPLICABLE]
The aggregate market value of common stock held by non-affiliates of the
registrant, based on the closing sales price for the registrant's ordinary
shares, as reported on the Nasdaq National Market on March 19, 2002, was
$56,844,539.
As at March 19, 2002, there were 3,920,313 shares of the registrant's ordinary
shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
EXCHANGE RATES
Unless otherwise indicated, all dollar amounts are in United States Dollars and
references to "$", "U.S.", or "U.S.$" are to United States Dollars.
The official fixed exchange rate for conversion of CI$ into U.S.$, as determined
by the Cayman Islands Monetary Authority, has been fixed since April 1974 at
U.S. $1.20 per CI$1.00.
The official fixed exchange rate for conversion of BZE$ into U.S.$, as
determined by the Central Bank of Belize, has been fixed since 1976 at U.S.$
0.50 per BZE$ 1.00.
The official fixed exchange rate for conversion of BAH$ into U.S.$, as
determined by the Central Bank of The Bahamas, has been fixed since 1973 at
U.S.$ 1.00 per BAH$ 1.00.
TABLE OF CONTENTS
SECTION DESCRIPTION PAGE
- ------- ----------- ----
PART I
Item 1. Business................................................................ 1
Item 2. Properties.............................................................. 11
Item 3. Legal Proceedings....................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders..................... 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.............................................................. 14
Item 6. Selected Financial Data................................................. 20
Item 7. Management's Discussions and Analysis of Financial Condition and
Results of Operations................................................ 21
Item 7A. Quantitative and Qualitative Disclosure about Market Risk............... 44
Item 8. Financial Statements and Supplementary Data............................. 44
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................. 78
PART III
Item 10. Directors and Executive Officers of the Registrant...................... 78
Item 11. Executive Compensation.................................................. 81
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 86
Item 13. Certain Relationships and Related Transactions.......................... 88
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..... 89
SIGNATURES ......................................................................... 95
i
4 PART I
ITEM 1. BUSINESS
INTRODUCTION
Our company was incorporated in August 1973 in the Cayman Islands and
provides water services in the Cayman Islands, Belize, and the Commonwealth of
the Bahamas. Our principal executive offices are located at Trafalgar Place,
West Bay Road, Grand Cayman, Cayman Islands. We provide water services in areas
where the supply of potable water is scarce. These water services include the
production of potable water from seawater, and the distribution of potable water
through pipelines to our customers. Our customers include residential,
commercial and tourist properties, government facilities, and public utilities.
Our business activities are reported in three business segments, which
reflect a change in reporting during 2000 due to the acquisition of our wholly
owned subsidiary company, Belize Water Ltd., in Belize, Central America and our
entering into an agreement with South Bimini International Ltd., a Bahamian
company, to provide water to property in South Bimini Island, Commonwealth of
Bahamas. The business group structure is based on defined areas of management
responsibility and the geographical location of our operations. The business
group segments are Cayman Islands operations, Belize operations and Bahamas
operations. In 2001, the Cayman Island operations, Belize operations and Bahamas
operations accounted for 88.8%, 11.0% and 0.2%, respectively, of our total
income. In 2000 these percentages were 95.4%, 4.6% and nil respectively.
FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS
The information contained in Note 12 Segmented Information of our
consolidated financial statements found on page 65, in ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA for the year ended December 31, 2001, is
incorporated herein by reference.
BUSINESS COMBINATION
Consolidated financial statements have been presented which include our
wholly-owned subsidiary, Belize Water Ltd. This acquisition was accounted for by
the purchase method. Our other three subsidiaries, Commonwealth Water Limited,
Cayman Water Company Limited and Hurricane Hideaway Ltd. are dormant companies
and have been consolidated.
CAYMAN ISLANDS OPERATIONS
The Cayman Islands comprise three islands, Grand Cayman, Little Cayman
and Cayman Brac, located approximately 460 miles south of Miami, Florida. The
three islands have a total area of approximately 100 square miles.
Our Cayman Islands operations produce potable water at our three
reverse osmosis seawater conversion plants in Grand Cayman, namely our
Governor's Harbour plant, West Bay plant, and our newly acquired Britannia
plant. The Britannia plant was acquired and began operations on February 1,
2002, subsequent to entering into an agreement to purchase the facility on
December 10, 2001.
1
The current capacity of our Governor's Harbour plant is 1.2 million
U.S. gallons per day, which is in excess of the minimum quantities of water
which Ocean Conversion (Cayman) Ltd., a Cayman Islands company which operates
our Governor's Harbour plant, must supply to us under a water purchase
agreement. The current capacity of our West Bay plant, which we operate, is
710,000 U.S. gallons per day. The current capacity of our Britannia plant, which
we also operate, is 440,000 U.S. gallons per day. Since the plants began
production of water, they have consistently been capable of operating at or near
their rated capacity.
Feed water for the reverse osmosis units is drawn from deep wells with
associated pumps on the properties. Wastewater is discharged into brine wells on
the properties below the level of the feed water intakes.
Electricity to our plants is supplied by Caribbean Utilities Co. Ltd.,
a publicly traded utility company. At all three plant sites, we maintain diesel
driven, standby generators with sufficient capacity to operate our distribution
pumps and other essential equipment during any temporary interruptions in the
electricity supply.
In the event of an emergency, our distribution system is connected to
the George Town distribution system of Water Authority-Cayman. In order to
efficiently maintain our equipment, we have purchased water from them for brief
periods of time in the past. We have also sold potable water to the Water
Authority-Cayman, and have supplied substantial quantities of water almost
continuously over a seven-month period in late 1993 and early 1994.
Our pipeline system in the Cayman Islands covers the Seven Mile Beach
and West Bay areas of Grand Cayman and consists of approximately 65 miles of PVC
pipeline. We extend our distribution system periodically as property
developments are completed. We have a main pipe loop covering a major part of
the Seven Mile Beach area. We place extensions of smaller diameter pipe off our
main pipe to service new developments in our service area. This system of
building branches from the main pipe keeps our construction costs low and allows
us to provide service to new areas in a timely manner. During 2001 we completed
a number of small pipeline extensions into newly developed properties within our
franchise area, and replaced approximately 0.5 miles of main pipeline with
larger diameter pipe to accommodate future demand growth on our system.
Developers are responsible for laying the pipeline within the
development at their own cost, but in accordance with our specifications. When
the development is completed, the developer then transfers operation and
maintenance of the pipeline to us.
We have a comprehensive layout of our pipeline system, which is
maintained in a computer aided design ("CAD") system. This system is integrated
with digital aerial photographs and a computer generated hydraulic model, which
allows us to accurately locate pipes and equipment in need of repair and
maintenance. It also helps us to plan extensions of and upgrades to our existing
pipeline system.
2
The following table shows, for each of the five fiscal years ended
December 31, 2001, our total number of customer connections at the end of each
period and metered sales of water for that period:
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
Number of Customers 2,999 2,836 2,606 2,347 2,069
Miles of Pipeline 65 64 63 62 57
Metered Sales (in thousands of U.S. gallons):
Commercial 358,711 345,940 308,949 315,980 300,350
Residential 104,002 97,759 86,712 80,150 72,393
Government facilities 11,425 7,599 5,686 4,420 4,007
------- ------- ------- ------- -------
Total 474,138 451,298 401,347 400,550 376,750
======= ======= ======= ======= =======
The table above does not precisely represent the actual number of
customers we service. In hotels and condominiums, we may only have one customer,
which is the operator of the hotel or the condominium, but we actually supply
water to all of the units within that hotel or condominium development. Of the
customers indicated in the table above, as of 2001, 49.1% were residential,
49.2% were hotels, condominiums and other commercial customers and 1.7% were
government facilities.
During 2001, our prices per 1,000 US gallons ranged from $19.07 to
$23.16. The average sales price for the year ended December 31, 2001 was $20.61
per 1,000 US gallons. During 2000, our prices per 1,000 US gallons ranged from
$18.62 to $22.34. The average sales price for the year ended December 31, 2000
was $20.19 per 1,000 US gallons.
We have a five-year agreement with a developer to supply on demand a
minimum of 48 million U.S. gallons of non-potable water per year on a take or
pay basis to irrigate an 18-hole golf course.
Before 1991, any owner of property within our licensed area could
install water making equipment for its own use. Since 1991, that option is only
available to private residences, although water plants then in existence could
be maintained but not replaced or expanded. When the Marriott Hotel was built in
1990 in our licensed area, the developer installed its own reverse osmosis
equipment. The equipment proved unreliable and on February 4, 1994, we entered
into an agreement with the owner of the Marriott Hotel to supply water to the
Marriott Hotel at our standard tariff rates. The Marriott Hotel continues to
operate its own reverse osmosis equipment to produce water for themselves,
although generally in amounts less than their total monthly requirements.
In 1995, we entered into a 10-year agreement with the owner of the
Westin Hotel. This agreement requires us to supply up to 1.86 million U.S.
gallons on a monthly basis to the hotel at a discount to our standard tariff
rates, and to supply any additional demand on a best efforts basis. The Westin
Hotel maintains storage capacity on-site, assists pressurization with on-site
repumping facilities, and has provided us with a letter of credit which covers
the cost of 45 days of water supply.
In addition, on December 10, 2001, which took effect February 1, 2002,
we entered into a twenty-five year agreement to supply a minimum of 62 million
U.S. gallons of potable water per year on demand to our customer, Cayman Hotel
and Golf, Inc., ("CHGI") the owners of the Hyatt Grand Cayman Resort and
Britannia Golf course. CHGI has committed to pay for a minimum of 62 million US
gallons of water by year on a take or pay basis. We are required by our
government license to meet any water demand from CHGI above the 62 million US
gallons per year.
3
The current market which we service under our license in the Cayman
Islands consists of Seven Mile Beach and West Bay, Grand Cayman Island, two of
the three most populated areas in the Cayman Islands. Our plants and water
distribution system are equipped with efficient, state-of-the-art technology,
and we consistently provide high quality water to our customers. The Cayman
Islands Government, through Water Authority-Cayman, supplies water to parts of
Grand Cayman Island, which are not within our licensed area, as well as, Little
Cayman and Cayman Brac.
According to the most recent figures published by the Economics and
Statistics Office of the Cayman Islands Government, the population of the Cayman
Islands was approximately 39,410 persons in 1999. Most recent figures published
by the Cayman Islands Government Department of Tourism show that the growth rate
of tourism in the Cayman Islands has increased on average 8.83% annually over
the 10 year period from 1989 through 1999, with total visitor arrivals of 1.25
million persons from January through October 2001, up from 1.12 million arrivals
during the same period of 2000.
During 2001, construction continued slowly within our franchise area on
the 360-room Ritz Carlton Hotel, Condominiums and Golf Course development. The
developer of this project has announced an anticipated completion date of late
2003.
GOVERNMENT
The Cayman Islands are a British Overseas Territory of the United
Kingdom and have had a stable political climate since 1670, when the Cayman
Islands were ceded to England by the Treaty of Madrid. The Queen of England
appoints the Governor of the Cayman Islands to make laws with the advice and
consent of the legislative assembly. There are 15 elected members of the
legislative assembly and three members appointed by the Governor from the Civil
Service. The Executive Council is responsible for day-to-day government
operations. The Executive Council consists of five ministers who are chosen by
the legislative assembly from its 15 popularly elected members, and the three
Civil Service members. The Governor has reserved powers and the United Kingdom
retains full control over foreign affairs and defense. The Cayman Islands are a
common law jurisdiction and have adopted a legal system similar to that of the
United Kingdom.
CUSTOMS DUTIES AND TAXES
We are exempt from, or receive concessionary rates of, customs duties
on capital expenditures on plant and major consumable spares and supplies
imported into the Cayman Islands as follows:
o there are no taxes on profit, income, capital gains or appreciations
of our company in the Cayman Islands;
o we do not pay any import duty or taxes on permeator membranes,
electric pumps and motors and chemicals which we purchase; and
o we pay duty at the rate of 10% of the cost, including insurance and
transportation to the Cayman Islands, of other plant and associated
materials and equipment to manufacture or supply water in Seven Mile
Beach or West Bay.
4
BELIZE OPERATIONS
On July 21, 2000, we acquired Seatec Belize Ltd. and subsequently
changed the name of the company to Belize Water Limited. Belize Water Limited, a
wholly owned subsidiary of Consolidated Water Co. Ltd., provides potable water
from one reverse osmosis seawater conversion plant in Ambergris Caye, Belize,
Central America, capable of producing 420,000 U.S. gallons per day, to Belize
Water Services Limited ("BWSL"), who acquired the operations of the Belize Water
and Sewerage Authority in February 2001. Belize Water Limited provides water to
BWSL, which distributes the water through its own distribution system to
residential, commercial and tourist properties in Ambergris Caye, Belize. During
2001, we supplied BWSL with 93.8 million U.S. gallons of water.
During 2001, our prices per 1,000 US gallons ranged from $13.06 to
$14.75. The average sales price for the year ended December 31, 2001 was $13.12
per 1,000 US gallons. During 2000, our prices per 1,000 US gallons ranged from
$13.06 to $14.67. The average sales price for the six months ended December 31,
2000 was $13.06 per 1,000 US gallons.
Feed water for the reverse osmosis units is drawn from deep wells with
associated pumps on the property. Wastewater is discharged into brine wells on
the property below the level of the feed water intakes.
Electricity to our plants is supplied by Belize Electricity Limited. At
the plant site, we maintain a diesel driven, standby generators with sufficient
capacity to operate our essential equipment during any temporary interruptions
in the electricity supply.
Our market in Ambergris Caye consists of residential, commercial and
tourist properties in the town of San Pedro, which is located on the southern
end of Ambergris Caye. Ambergris Caye is one of about 1,000 islands located east
of the Belize mainland, and off the southeastern tip of the Yucatan Peninsula.
Ambergris Caye is approximately 25 miles long and according to the most recent
data from the Belize Government has a population of about 4,500 residents,
increased approximately 144% over the past ten years. We provide bulk potable
water to BWSL who distribute this water to this market. BWSL currently has no
other source of potable water in Ambergris Caye.
A 185 mile long barrier reef, which is the largest barrier reef in the
Western Hemisphere, is situated just offshore of Ambergris Caye. This natural
attraction is rapidly becoming a choice destination for SCUBA divers and
tourists. Tourism is Belize's second largest source of foreign income, next to
agriculture.
CUSTOMS DUTY, TAXES AND THE GOVERNMENT IN BELIZE
The Government of Belize has exempted Belize Water Ltd. from all duties
and sales taxes until January 2003 and company taxes until January 2004. While
the Government of Belize has confirmed its commitment to support all future
applications for extensions or additional tax exemptions for the life of the
water supply contract, future exemptions must be approved by the Belizean
legislature and we cannot give any assurance that we will be granted any further
tax exemptions after January 2004.
BAHAMAS OPERATIONS
The Bimini Islands consist of North Bimini and South Bimini, and are
two of 700 islands which comprise the Commonwealth of the Bahamas. The Bimini
Islands are located approximately 48 miles east of Ft. Lauderdale, Florida and
are a premier destination for sport fishing enthusiasts. The population of the
Biminis is approximately 1,600 persons and the islands have about 200 hotel and
guest rooms available for tourists. The total land area of the Biminis is
approximately 9 square miles.
5
In 2000, we entered into a water supply agreement with South Bimini
International Ltd., a company incorporated in the Commonwealth of Bahamas, and
on July 11, 2001 we began to provide potable water to the marina and condominium
development, Bimini Sands Resort and Bimini Beach Hotel. The developer of the
Bimini Sands Resort has developed half of a 150-slip marina and constructed 54
condominium units, and plans to construct a further 162 condominium units. We
are not currently aware of any time schedule by the developer for the completion
of the additional 162 condominium units.
We provide potable water to Bimini Sands Resort and to the Bimini Beach
Hotel, a 40-room hotel also owned by the same developer, from one reverse
osmosis seawater conversion plant in Bimini, Bahamas capable of producing
115,000 U.S. gallons per day. During 2001, we supplied South Bimini
International Ltd. with 1.0 million U.S. gallons of water.
During 2001, our prices per 1,000 US gallons ranged from $14.66 to
$26.32. The average sales price for the six months ended December 31, 2001 was
$26.32 per 1,000 US gallons.
Feed water for the reverse osmosis units is drawn from deep wells with
associated pumps on the property. Wastewater is discharged into brine wells on
the property below the level of the feed water intakes.
Electricity to our plants is supplied by Bahamas Electricity
Corporation. At the plant site, we maintain a diesel driven, standby generator
with sufficient capacity to operate our distribution pumps and other essential
equipment during any temporary interruptions in the electricity supply.
CUSTOMS DUTY, TAXES AND THE GOVERNMENT IN BAHAMAS
We have not been granted any tax exemptions for our Bahamian
operations.
We believe that we may be subject to tax ranging from 1% to 2% of the
gross revenues generated by our Bahamian operations and are currently reviewing
the matter with our Bahamian attorneys. We did not pay any tax to the Bahamian
government during 2001, other than National Insurance Board tax on our employee,
and we calculate our potential tax liability based on our 2001 sales to be less
than US$500.
GOVERNMENT REGULATION
We are regulated by the Water Authority of the Cayman Islands on behalf
of the Cayman Islands Government and believe that our operations comply with all
local laws and regulations.
We have been advised by our attorney in Belize that we may require a
license from the Government of Belize under the Water Industry Act 2001 in
relation to our water sales agreement with BWSL. We are currently reviewing our
obligations under this new legislation, which was enacted to facilitate the
privatization of the government Water and Sewerage Authority in February 2001.
Our Belize operations are regulated by the terms and conditions of our water
supply agreement with BWSL. However the new Water Industry Act 2001 requires all
water service providers to obtain a license from the Public Utilities
Commission, which was created under the Act. The Public Utilities Commission has
the power to set the terms and conditions on which all water services in Belize
are provided to the public. The Act also contains certain savings for operations
which were in existence before the new law was enacted, which we believe may
apply to our operations. To date we have not been advised by any Government
entity that we require such a license, and do not foresee any difficulty or
significant additional costs obtaining a license if necessary. We believe that
our operations in Belize comply with all other local laws and regulations.
6
We believe that our operations in the Bahamas comply with all local
laws and regulations, and we are currently reviewing our tax status as disclosed
above.
MARKET AND SERVICE AREA
We believe that our potential market consists of any location where
there is a need for potable water. While water sufficiency problems are not
nearly as severe in the United States as in some other nations, three major
states, California, Texas and Florida, are already facing water supply problems.
These states and most water-deficient nations in the world all have access to
significant amounts of ocean water, yet cannot economically process major
quantities for consumption. The desalination of ocean water, either through
distillation or reverse osmosis, is widely regarded as the most viable
alternative to fresh water in areas with an insufficient natural supply.
We have historically focused on the English speaking Caribbean basin
and adjacent areas as our primary market because (i) these areas have little or
no naturally occurring fresh water, (ii) limited local regulations allow our
operations to generate higher shareholder returns than could be achieved in more
highly regulated countries, and (iii) these areas contain a high proportion of
tourist properties, which generate higher volume sales than residential users.
GROWTH STRATEGY
Our growth strategy is as follows:
WE INTEND TO CONTINUE DEVELOPING OUR PRODUCTION AND DISTRIBUTION
INFRASTRUCTURE AND PROVIDE HIGH QUALITY POTABLE WATER TO OUR LICENSED AREA IN
THE CAYMAN ISLANDS. We intend to increase our customer base and revenues in the
Cayman Islands by providing water service on the most cost-efficient basis to
new residential, commercial and tourist properties that are being developed in
our exclusive licensed area. We intend to increase our service area by exploring
the possibility of acquiring other potable water suppliers within the Cayman
Islands.
WE INTEND TO EXPAND OUR OPERATIONS IN BELIZE BY MODIFYING OUR AGREEMENT
WITH BWSL. We intend to continue negotiations with BWSL to extend the term of
our current water supply agreement in Ambergris Caye, to increase the guaranteed
minimum quantities supplied under this agreement, and to provide desalinated
water to other areas of Belize, particularly the cayes and coastal areas that
could benefit from desalination technology.
WE INTEND TO EXPAND OUR OPERATIONS TO OTHER MARKETS WHERE THERE IS A
NEED FOR POTABLE WATER. We are currently in various stages of discussion to
supply potable water to several new markets, including the Bahamas, Mexico and
two other Caribbean countries. We may pursue these opportunities either on our
own or through joint ventures. So far we have focused on various locations
throughout the Caribbean and Central America.
WE ALSO INTEND TO EXPAND OUR EXISTING AND FUTURE OPERATIONS INTO
COMPLEMENTARY SERVICES, SUCH AS WASTEWATER SERVICES, WHICH WE HAVE PROVIDED IN
THE PAST. Prior to the installation of a central wastewater system by the Cayman
Islands government, we provided wastewater services on Grand Cayman. Since we
have expertise in wastewater services, we may provide these services in the
future.
7
REVERSE OSMOSIS ("RO") TECHNOLOGY
The conversion of saltwater to potable water is called desalination.
There are two primary forms of desalination: distillation and RO. Both methods
are used throughout the world and technologies are improving to lower the costs
of production. RO is a separation process in which the water from a pressurized
saline solution is separated from the dissolved material by passing it over a
semi-permeable membrane. An energy source is needed to pressurize the salinated
(or feed) water for pretreatment, which consists of fine filtration and in some
cases the addition of precipitation inhibitors. Pre-treatment removes suspended
solids, prevents salt precipitation and keeps the membranes free of
microorganisms. Next, a high-pressure pump enables the water to pass through the
membrane, while salts are rejected. The feed water is pumped into a closed
vessel where it is pressurized against the membrane. As a portion of the feed
water passes through the membrane, the remaining feed water increases in salt
content. This remaining feed water is discharged without passing through the
membrane. As the discharged feed water leaves the pressure vessel, its energy is
captured by an energy recovery device, which is used to pressurize incoming feed
water. The final step is post-treatment, which consists of stabilizing the
water, removing hydrogen sulfide and adjusting the pH and chlorination to
prepare it for distribution.
We use RO technology to convert seawater to potable water. We believe
that this technology is the most effective and efficient conversion process for
our market. However, we are always seeking ways to maximize efficiencies in our
current processes and to investigate new and more efficient processes to convert
seawater to potable water. The equipment at our plants is among the most energy
efficient available and we monitor and maintain our equipment in an efficient
manner. As a result of our many years of experience in seawater desalination, we
believe that we have an expertise in the development and operation of
desalination plants, which is easily transferable to locations outside the
Cayman Islands.
RAW MATERIALS AND SOURCES OF SUPPLY
All materials, parts and supplies essential to our business operations
can normally be obtained from multiple sources, except for the DWEER energy
recovery devices which are exclusively manufactured by DesalCo Ltd., and which
we use at our Governor's Harbour and West Bay RO plants in Grand Cayman. We do
not manufacture any parts or components for equipment essential to our business.
Our access to seawater for processing into potable water is granted through our
licenses and contracts with governments of the various jurisdictions in which we
have our operations.
LICENSES, FRANCHISES AND CONCESSIONS
With respect to our operations in the Cayman Islands, we rely on our
exclusive franchise granted by the government of the Cayman Islands to produce
and supply potable water within our franchise area in Grand Cayman. This
franchise was granted in July 11, 1990 and is for a term of 20 years. This
franchise agreement grants us the right of first refusal to extend the
franchise.
TECHNICAL BREACH OF CAYMAN ISLANDS' LICENSE
Our license requires us to obtain prior government approval for an
issuance or transfer of shares which (i) exceeds 5% of the issued ordinary
shares of our company, or (ii) would, upon registration, result in any
shareholder owning more than 5% of the issued shares. More than 5% of our
ordinary shares are registered in the name of Cede and Co., the nominee for the
Depository Trust Company, which is a clearing agency for shares held by
participating banks and brokers. We do not believe that these shareholdings by
Cede and Co. constitute a breach of the intent of the license. We believe that
the purpose of this clause of the license is to allow the government to approve
significant shareholders of our company. Cede and Co. and Depository Trust
Company, however, act solely as the nominee for banks and brokers, and have no
8
beneficial ownership in the ordinary shares. Nevertheless, our Cayman Islands'
legal counsel has advised us that these shareholdings by Cede & Co., which were
not approved by the Cayman Islands' government, may be a technical breach of our
license.
In August and September 1994, we completed an offering of 400,000
ordinary shares under Rule 504 of Regulation D of the Securities Act of 1933. In
September 1995, we completed a private placement of 100,000 ordinary shares plus
warrants to subscribe for an additional 100,000 ordinary shares under Regulation
S of the Securities Act 1933. In April 1996, we completed a public offering of
575,000 ordinary shares, and in June 2000 we completed a public offering of
773,000 ordinary shares. Based upon the advice of our Cayman Islands' legal
counsel, we determined that the license did not require the government's
approval to complete these offerings. However, if a court determined that the
government's approval of these offerings was required under the license, we
would be in breach of the license. Our Cayman Islands' legal counsel has advised
us that to make this determination, a court would have to disagree with our
interpretation of the license and dismiss several defenses, which would be
available to us. These defenses include acquiescence and waiver on the part of
the government with respect to these offerings.
We have received a letter dated June 1, 2000, from an official of the
Cayman Islands' government, stating that a public offering of our ordinary
shares, which we completed in 1996 without the government's approval, was a
breach of our license. The letter is not clear as to whether the government also
views the completion of our 2000 public offering as a breach of our license. We
have responded to this letter and stated that we do not believe that we are in
breach of our license. We have been advised by our Cayman Islands' legal counsel
that the June 1st letter from the Cayman Islands government does not constitute
a formal "notice of breach of the license" as contemplated in the license. In
June 2000, December 2000, and in 2002 we met with representatives of the
Government to discuss this matter. At our latest meeting on March 18, 2002, the
Government gave us indications that it is considering revisions to our license,
which would clarify the definition of share ownership in order to favorably
resolve the uncertainty regarding the technical breach of our license. Other
than providing us with its June 1, 2000 letter, the Government has not taken any
other action in connection with our license to date.
SEASONAL VARIATIONS IN OUR BUSINESS
Although, our water sales in the Cayman Islands, Belize and Bahamas are
seasonal, the variations between the periods are not significant. We normally
sell more water during the first and second quarters when greater numbers of
tourists are present. Our sales are also effected to some extent by the weather.
We sell less water during the third and fourth quarters, which normally
experience higher rainfall amounts than other times of the year.
COMPETITION
With respect to our operations in the Cayman Islands, we do not compete
with other utilities within our licensed area. Although we have been granted an
exclusive franchise for our present service area, our ability to expand our
service area is limited at the discretion of the government. At the present
time, we are the only non-municipal public water utility on Grand Cayman. The
Cayman Islands government, through Water Authority-Cayman, supplies water to
parts of Grand Cayman which are not within our licensed area.
With respect to our operations in Belize, our water supply contract
with BWSL is non-exclusive, and BWSL may seek contracts with other water
suppliers to meet their future needs in San Pedro, Ambergris Caye, Belize. There
are many companies throughout the world who provide desalination equipment and
turnkey water supply contracts. We are not able to say with any certainty who we
would compete against for future contracts in Belize.
9
With respect to our Bimini operation, we supply water to a private
developer and do not have competitors. However if we are invited by the Bahamian
government to provide a proposal to expand our operations to other areas of
Bimini we can expect competition from companies such as Ionics, Inc. and
Vivendi.
To implement our growth strategy outside our existing operating areas,
we will have to compete with companies such as Ionics Inc. and Vivendi. These
companies, among others, currently operate in areas in which we would like to
expand our operations. These companies already maintain world-wide operations
and have greater financial, managerial and other resources than our company. We
believe that our low overhead costs, knowledge of local markets and conditions,
and our efficient manner of operating desalinated water production and
distribution equipment will provide us competitive advantage on projects,
ranging in size from 5 million US gallons per day or less, in the Caribbean
basin and surrounding areas.
ENVIRONMENTAL MATTERS
With respect to our Cayman Islands operations, although not required by
local government regulations, we operate our water plants in accordance with
guidelines of the Cayman Islands Department of Environment. Under these
guidelines, our plants may not have emissions of hydrogen sulfide at levels
greater than 20 milligrams per liter at the exit of the air scrubbers. We are
licensed by the government to discharge concentrated seawater, which is a
byproduct of our desalination process, into deep disposal wells. Our potable
water also meets the guidelines of the World Health Organization and the U.S.
Safe Drinking Water Act. In addition, noise levels at our plants cannot exceed
the standards established by the U.S. Occupational Safety and Health Act. To
date, we have not received any complaints from any regulatory authorities
concerning hydrogen sulfide emissions or noise levels at our plants.
With respect to our Belize and Bahamas operations, we are required by
our water supply contracts to take all reasonable measures to prevent pollution
of the environment. We are licensed by the Belize and Bahamian governments to
discharge concentrated seawater, which is a byproduct of our desalination
process, into deep disposal wells. We operate our plants in a manner so as to
minimize the emission of hydrogen sulfide gas into the environment. We are not
aware of any existing or pending environmental legislation which may effect our
operations in Belize and the Bahamas. To date we have not received any
complaints from any regulatory authorities regarding hydrogen sulfide gas
emission, nor any other matter relating to operations.
EMPLOYEES
We presently employ 37 persons in the Cayman Islands, four of whom are
executive and management personnel who have an average of 16 years experience
with our company or in a directly related position. Nine employees are engaged
in administrative and clerical positions. The remaining staff are engaged in
engineering, plant maintenance and operations, pipe laying and repair, leak
detection, new customer connections, meter reading and laboratory analysis of
water quality. Our staff has significant experience and on average have worked
with us for 8 years with three of the employees having worked over 20 years with
us. We presently employ six persons in Belize to manage and operate our plant.
We presently employ one person in the Bahamas to manage and operate our water
plant and distribution system on South Bimini. Our employees are not parties to
a collective bargaining agreement. We consider our relationship with our
employees to be good.
10
ITEM 2. PROPERTIES
We own our Governor's Harbour facility in Grand Cayman, which consists
of a 3.2 acre site, including 485 feet of waterfront, and an 8,745 square foot
building which contains the water treatment facility. We own two storage
reservoirs with a total capacity of 2.0 million U.S. gallons of water at our
Governor's Harbour site. The property surrounding the facility has yet to be
fully developed, although these areas are beginning to be developed for
residential and tourist accommodations. The current production capacity of the
Governor's Harbour plant is 1.2 million U.S. gallons per day.
This RO plant is operated and maintained by OCL under a separate water
purchase agreement.
The primary components of the Governor's Harbour plant are:
o five feedwater supply wells that average a depth of 140 feet. The
combined pumping capability is approximately 3,750 U.S. gallons per
minute;
o two brine disposal wells drilled to an approximate depth of 200
feet;
o two positive displacement pumps with a pumping capacity of 410 U.S.
gallons per minute each;
o two "back up" centrifugal pumps with a pumping capacity of 300 U.S.
gallons per minute each;
o 77 vessels (measuring approximately 265" in length and 8" in
diameter) each housing six spiral wound seawater membranes
(measuring approximately 40" in length and 8" in diameter);
o a work exchanger energy recovery system;
o an air scrubber to remove the hydrogen sulfide from the product
water, which is capable of scrubbing approximately 800 U.S. gallons
of water per minute; and
o Paragon TNT v5.0 control software on Gateway Hardware with I/O
System Opto 22 and Optomux interface controller to control the
operations of the plant.
We own our West Bay facility in Grand Cayman, which consists of a 6.1
acre site in West Bay. The plant began operating on June 1, 1995 and was
expanded in February 1998 and February 2000. On this site, we have a 2,600
square foot building which houses our water production facilities, a 2,400
square foot building which houses the potable water distribution pumps, a water
quality testing laboratory, office space and water storage capacity consisting
of three 1.0 million U.S. gallon potable water tanks. The current production
capacity of the West Bay plant is 710,000 U.S. gallons per day.
The primary components of this plant are:
o three feedwater supply wells that average a depth of 140 feet. The
combined pumping capability is approximately 2,250 U.S. gallons per
minute;
o one brine disposal well drilled to an approximate depth of 200 feet;
o two positive displacement pumps with a pumping capacity of 386 U.S.
gallons per minute each;
o 43 vessels (measuring approximately 280" in length and 8" in
diameter) each housing seven spiral wound seawater membranes
(measuring approximately 40" in length and 8" in diameter);
o one hydraulic turbo energy recovery system;
11
o one work exchanger energy recovery system;
o an air scrubber to remove the hydrogen sulfide from the product
water, which is capable of scrubbing 1,000 U.S. gallons of water per
minute; and
o an Allen Bradley SLC500 Programmable Logic Controller (PLC) linked
to a Compaq PC computer running Windows NT 4.0 and Wintelligent View
interfaced with the PLC to control the operation of the plant.
On February 1, 2002, we purchased the Britannia water production and
distribution facility in Grand Cayman, which consists of four seawater RO plants
with a combined nominal production capacity of 440,000 US gallons of water per
day, an 840,000 US gallon bolted steel water tank, potable water high service
pumps, and various ancillary equipment to support the operation. We have entered
into a lease of the 0.73 acre site and steel frame building which houses the
plant, from Cayman Hotel and Golf Inc., for a term of 25 years at an annual rent
of US$1.00.
The primary components of this plant are:
o six feed water supply wells drilled to a depth of approximately 100
feet;
o one brine disposal well drilled to a depth of approximately 150
feet;
o four skid-mounted seawater RO plants with desalinated water
production capacities of 110,000 US gallons per day each, and
utilizing electric powered high pressure pumps and Calder energy
recovery devices;
o one potable water ozonation system used to neutralize hydrogen
sulphide and disinfect the product water;
o one 840,000 US gallon bolted steel tank used to store potable water;
o one high service pump station used to pump water from the bolted
steel tank to our distribution pipeline.
We own our Seven Mile Beach and West Bay potable water distribution
systems in Grand Cayman. The combined systems consist of approximately 65 miles
of polyvinyl chloride and polyethylene water pipes, valves, curb stops, meter
boxes, and water meters installed in accordance to accepted engineering
standards in the United States of America.
We own our San Pedro water production facility in Ambergris Caye,
Belize. The plant consists of a one story concrete block building, which
contains a seawater RO water production plant with a production capacity of
420,000 US gallons per day. We lease from the Government of Belize at a annual
rent of BZ$1.00, the parcel of land on which our plant is located. The lease
commenced on April 27, 1993 and the term is for 18 years.
The primary components of this plant are:
o two feed water supply wells drilled to an approximate depth of 100
feet;
o one brine disposal well drilled to a depth of approximately 150
feet;
o two multi-stage vertical turbine high pressure pumps with pumping
capacities of 400 U.S. gallons per minute each;
o two Caterpillar 3406 diesel engines which are the primary power
sources for the high pressure pumps;
o two 250 horse power electric motors which act as backup power
sources for the high pressure pumps;
12
o 18 pressure vessels each housing six spiral wound seawater RO
membranes;
o two hydraulic turbo energy recovery systems;
o one air scrubber to remove the hydrogen sulfide from the product
water;
o one calcite bed and ancillary pumps to increase the alkalinity of
the product water; and
o an Allen Bradley PLC5 Programmable Logic Controller (PLC) linked to
a Compaq PC computer running Windows NT 4.0 and Citect MMI software
and interfaced with the PLC to control the operation of the plant.
We own our Bahamas water production facility in South Bimini, Bahamas.
The plant consists of two 40 foot long standard refrigerated shipping
containers, which contain a seawater RO water production plant with a rated
capacity of 115,000 US gallons per day, a 250,000 US gallon bolted steel potable
water tank, and a high service pump skid. The facility is located on a parcel of
land owned by South Bimini International Ltd., and we are allowed, under the
terms of our water supply agreement, to utilize the land for the term of the
agreement, without charge.
The primary components of this plant are:
o two feed water supply wells drilled to a depth of approximately 100
feet;
o one brine disposal well drilled to a depth of approximately 150
feet;
o one containerized seawater RO plant with desalinated water
production capacity of 115,000 US gallons per day each, and
utilizing electric powered high pressure pumps and hydraulic
turbocharger energy recovery devices;
o one potable water ozonation system used to neutralize hydrogen
sulphide and disinfect the product water;
o one 250,000 US gallon bolted steel tank used to store potable water;
and
o one high service pump station used to pump water from the bolted
steel tank to our customer's pipeline.
In addition to the properties where our water plants are located, we
lease approximately 3,200 square feet of space for our executive offices at
Trafalgar Place, West Bay Road, Grand Cayman Island. We have an annual lease
expiring on January 31, 2003, with a yearly extension provision until January
31, 2005, on this property.
Our Governor's Harbour site includes a waterfront portion. This
waterfront portion is not essential to our operations. We initially bought this
property to enhance the value of the entire Governor's Harbour site if we
decided to sell the site or develop it for other purposes. We purchased this
water frontage in 1992 from Hurricane Hideaway Ltd. At the same time, we
purchased Hurricane Hideaway Ltd., which owns certain development rights and
which is now a wholly owned subsidiary of our company. We believe that our
properties are suitable for the conduct of our current operations for the
foreseeable future.
13
ITEM 3. LEGAL PROCEEDINGS
We are not currently a party to any ongoing or pending legal
proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our ordinary shares of common stock ("ordinary shares") are listed on
the Nasdaq National Market and trade under the symbol "CWCO". Our ordinary
shares are not traded on any market other than the Nasdaq National Market.
Listed below, for each quarter of the last two fiscal years, are the high and
low bid prices for the ordinary shares on the Nasdaq National Market.
HIGH LOW
---- ---
First Quarter 2000 $ 7.13 $ 6.00
Second Quarter 2000 8.25 6.00
Third Quarter 2000 8.00 6.13
Fourth Quarter 2000 9.13 6.19
First Quarter 2001 9.88 6.88
Second Quarter 2001 9.85 7.78
Third Quarter 2001 12.00 8.90
Fourth Quarter 2001 12.00 9.95
The high and low bid prices in the table reflect interdealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
There is no trading market for our redeemable preferred shares, which
are only issued to, or purchased by, long-term employees of our company and
which must be held by these employees for a period of four years before they
vest.
14
On December 10, 2001, we issued options to purchase 30,000 ordinary
shares having an exercise price of $11.17 to a director. These options are
exercisable until December 9, 2004. On December 31, 2001, we issued options to
purchase an additional 105,486 ordinary shares having an exercise price of
$10.84 to three other directors and one executive officer. These options are
exercisable until March 10, 2005. The options issued on December 10, 2001, were
exempt from registration under Section 4(2) of the Securities Act of 1933
because the director is a sophisticated investor who has knowledge of all
material information about us. The options issued on December 31, 2001 were
exempt from registration under Regulation S promulgated under the Securities Act
of 1933 because the options were offered and sold outside of the United States
to non-U.S. persons, as defined in Regulation S. All of the options were issued
as consideration for services that the directors and executive officer provided
to us during fiscal year 2001.
HOLDERS
On March 19, 2002, we had 573 holders of record of the ordinary shares.
Management believes that of the ordinary shares held of record, approximately
15% are registered to residents of the Cayman Islands and 85% are registered to
residents of other countries, primarily the United States. All of the redeemable
preferred shares are owned by residents of the Cayman Islands.
Other than for the terms of our license described in "ITEM 1.
BUSINESS," our company is not directly or indirectly owned or controlled by
another corporation or by any government.
DIVIDENDS
We have paid cash dividends on our ordinary shares since 1985. The
board of directors' policy is to pay cash dividends out of accumulated profits
on a quarterly basis, if funds are available. As of February 29, 2000, our board
of directors have established a policy, although not a binding obligation, that,
subject to annual review by the board of directors, our company will maintain a
dividend pay-out ratio in the range of 50% to 60% of net income. However, our
payment of any future cash dividends will still depend upon our earnings,
financial condition, capital demand and other factors. The board of directors
declares and approves all interim dividends. The final dividend in each year, if
any, is recommended by the board of directors and must be, and has always been,
approved by our shareholders before distribution.
Listed below, for each quarter of the last two fiscal years, is the
amount of interim dividends, in U.S. dollars, declared on our issued and
outstanding ordinary shares and redeemable preferred shares. No final dividend
was declared during the last two fiscal years.
First Quarter 2000 $ 0.08 Per Share
Second Quarter 2000 0.08 Per Share
Third Quarter 2000 0.08 Per Share
Fourth Quarter 2000 0.10 Per Share
First Quarter 2001 0.10 Per Share
Second Quarter 2001 0.10 Per Share
Third Quarter 2001 0.10 Per Share
Fourth Quarter 2001 0.10 Per Share
15
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
Our company is not subject to any governmental laws, decrees or
regulations in the Cayman Islands which restrict the export or import of
capital, or that affect the remittance of dividends, interest or other payments
to non-resident holders of our securities. The Cayman Islands does not impose
any limitations on the right of non-resident owners to hold or vote our ordinary
shares other than stated below. There are no exchange control restrictions in
the Cayman Islands.
In accordance with the terms of our license, the Cayman Islands'
government has the right to approve, in advance, any transfer of the ordinary
shares which increases the holdings of any shareholder who already owns more
than 5% of the issued share capital of the company or any transfer which would
increase the ownership of any existing or new shareholder above 5%. In
accordance with our Articles of Association, all share transfers are subject to
the approval of the board of directors at their sole discretion. To date, the
board of directors has never exercised the right to decline to register a
transfer. This provision has been incorporated into the our Articles of
Association in order to ensure that the board of directors is not put into a
position where it is legally obligated to register a transfer which would cause
our company to be in breach of the license. Although not intended as such, this
provision may discourage or prevent a change in control of our company by merger
or otherwise.
Belize has foreign currency exchange control laws and any purchase of
United States dollars must be made through the Central Bank of Belize. Under our
contract with BWSL, we are paid for our water in Belize dollars. Our Belizean
subsidiary has been provided with a guarantee from the Government of Belize to
repatriate any and all of the Belize Water Ltd. earnings in United States
dollars to any foreign destination.
The Commonwealth of the Bahamas has foreign currency exchange control
laws and any purchase of United States dollars must be made through the Central
Bank of the Bahamas. We are paid by our customer for water sold by our Bahamian
operation in United States dollars, and expenses are also incurred in United
States dollars, and therefore do not have any requirement to exchange currency
in the Bahamas.
TAXATION
The Cayman Islands presently impose no taxes on profit, income, capital
gains, or appreciations of our company and no taxes are currently imposed in the
Cayman Islands on profit, income, capital gains, or appreciations of the holders
of our securities or in the nature of estate duty, inheritance, or capital
transfer tax.
A major source of revenue to the Cayman Islands government is a 7.5% or
9% stamp tax, depending on location, on the transfer of ownership of land in the
Cayman Islands. During the period of November 14, 2001 to November 13, 2002 the
stamp tax rate was temporarily set at 5%. To prevent stamp tax avoidance by
transfer of the ownership of the shares of a company, which owns land in the
Cayman Islands (as opposed to transfer of the land itself), The Land Holding
Companies (Share Transfer Tax) Law was passed in 1976. The effect of this law is
to charge a company, which owns land or an interest in land in the Cayman
Islands a tax based on the value of its land or interest in land attributable to
each share transferred. The stamp tax calculation does not take into account the
proportion which the value of a company's Cayman land or interest bears to its
total assets and whether the intention of the transfer is to transfer ownership
of a part of a company's entire business or a part of its Cayman land or
interest. We requested the Cayman Islands government exempt us from the
landholding company's tax, which our company is required to pay on the transfer
16
of our shares. Prior to becoming quoted on Nasdaq, paid this tax on private
share transfers. We have never paid tax on transfers of our publicly traded
shares. Other local companies whose businesses are not primarily related to the
ownership of land, and whose shares are publicly traded have either received an
exemption from the tax, or have not been pursued by government for payment of
the tax. We believe that the likelihood that government will seek to collect
this tax on transfers of our publicly traded shares is remote and we are
currently engaged in discussions with the Cayman Islands government to obtain an
exemption.
As disclosed in Part I, Item 1 under the discussion of our Belize
Operations, the Government of Belize has exempted our subsidiary, Belize Water
Ltd., from all duties and sales taxes until January 2003 and company taxes until
January 2004. The Government of Belize has confirmed its commitment to support
all future applications for extensions or additional tax exemptions for the life
of the water supply contract.
As disclosed in Part I, Item 1 under the discussion of our Bahamian
Operations, we have not been granted any tax exemptions for our Bahamian
operations. We believe that we may be subject to a tax ranging from 1% to 2% on
the gross revenues generated by our Bahamian operations and are currently
reviewing the matter with our Bahamian attorneys. Our potential tax liability
for our 2001 sales in the Bahamas is immaterial.
DESCRIPTION OF SECURITIES
ORDINARY SHARES
We are authorized to issue 9,900,000 ordinary shares, par value CI$1.00
per share. At March 19, 2002, 3,920,313 ordinary shares were issued and
outstanding. Holders of ordinary shares may cast one vote for each share held of
record at all shareholder meetings. All voting is non-cumulative. Holders of
more than 50% of the outstanding shares present and voting at an annual meeting
at which a quorum is present are able to elect all of our directors. Holders of
ordinary shares do not have preemptive rights or rights to convert their
ordinary shares into any other securities. All of the outstanding ordinary
shares are fully paid and non-assessable.
Holders of ordinary shares are entitled to ratably receive dividends,
if any, distributed out of our accumulated profits. Subject to the preferential
rights of holders of the redeemable preferred shares, upon liquidation, all
holders of ordinary shares are entitled to participate pro rata in our assets,
which are available for distribution.
Other than 3,172 ordinary shares, for a member of senior management in
Belize, no ordinary shares have been set aside for any employee share plans.
REDEEMABLE PREFERRED SHARES
We are authorized to issue 100,000 redeemable preferred shares, par
value CI$1.00 per share. At March 19, 2002, 25,195 redeemable preferred shares
were issued and outstanding.
Holders of redeemable preferred shares may cast one vote for each share
held of record at all shareholder meetings and are entitled to receive ratably
dividends, if any, distributed out of our accumulated profits. All voting is on
a non-cumulative basis. In the event of a liquidation of our company, the
redeemable preferred shares rank in preference to the ordinary shares with
respect to the repayment of the par value of redeemable preferred shares plus
any premium paid or credited on the purchase of the shares. Under our employee
share plan, we may redeem any redeemable preferred shares issued to an employee.
The ordinary shares and the redeemable preferred shares rank equally in all
other respects.
Currently, no shares have been set aside for our employee share
incentive plan.
17
CLASS B ORDINARY SHARES
In 1997, we adopted an option deed under which option holders may
exercise rights to purchase our class B ordinary shares, par value CI$1.00 per
share. As of the date of this Annual Report, there are no class B ordinary
shares issued and outstanding.
Holders of class B ordinary shares are entitled to the same voting
rights and dividends paid on ordinary shares and redeemable preferred shares,
and we cannot pay a dividend on the ordinary shares without paying the same
dividend on the class B ordinary shares, and vice versa. We cannot redeem the
class B ordinary shares, and the holders of the class B ordinary shares are not
entitled to any repayments of capital upon the dissolution of our company.
If we enter into a transaction in which ordinary shares are exchanged
for securities or other consideration of another company, then the class B
ordinary shares will be also be exchanged pursuant to a formula. The class B
ordinary shares and the ordinary shares rank equally in all other respects.
OUTSTANDING WARRANTS
On April 9, 1996, we issued warrants to purchase up to 50,000 ordinary
shares at $6.30 per share to the underwriter of our initial public offering. All
of these warrants expired on April 3, 2001.
OPTION DEED
In 1997, in response to an attempt by Argyle/Cay Water, Ltd. to acquire
up to 50% of our company, our board of directors approved an option deed, which
is similar to a "poison pill." The option deed may delay or prevent a change in
control of our company.
The option deed grants to each holder of an ordinary and redeemable
preferred share an option to purchase one one-hundredth of a class B ordinary
share at an exercise price of $37.50, subject to adjustment. If a takeover
attempt occurs, each shareholder would be able to exercise the option and
receive class B ordinary shares with a value equal to twice the exercise price
of the option. Under circumstances described in the option deed, instead of
receiving ordinary shares, we may issue to each shareholder cash or other equity
or debt securities of our company, or the equity securities of the acquiring
company, as the case may be, with a value equal to twice the exercise price of
the option.
Takeover events that would trigger the options include a person or
group becoming the owner of 20% or more of our outstanding ordinary shares or
the commencement of, or announcement of an intention to make, a tender offer or
exchange offer, which upon completion would result in the beneficial ownership
by a person or group of 20% or more of the outstanding ordinary shares.
Accordingly, exercise of the options may cause substantial dilution to a person
who attempts to acquire our company.
The options are attached to each ordinary share and redeemable
preferred share and presently have no monetary value. The options will not trade
separately from our shares unless and until they become exercisable. The
options, which expire on July 31, 2007, may be redeemed, at the option of our
board of directors, at a price of CI$.01 per option at any time until ten
business days following the date that a group or person acquires ownership of
20% or more of the outstanding ordinary shares. Any amendment to the option deed
is subject to the terms and conditions of our agreement with Argyle/Cay-Water,
Ltd. described in the section of this Annual Report entitled "ITEM 10. DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT"
18
The option deed may have certain anti-takeover effects, although it is
not intended to prevent any acquisition or business combination that is at a
fair price and otherwise in the best interests of our company and our
shareholders as determined by our board of directors. However, a shareholder
could potentially disagree with the board's determination of what constitutes a
fair price or the best interests of our company and our shareholders.
The full terms and conditions of the options are contained in an option
deed between us and our option agent, American Stock Transfer & Trust Company.
The above description of the options is a summary only and does not purport to
be complete. You should read the entire option deed to understand the terms of
the options.
REPURCHASED SHARES
During 2001, we repurchased 25,000 shares at an average cost of $10.86.
Under Cayman Islands law, shares that we repurchase out of capital are treated
as cancelled upon repurchase, and our issued share capital is reduced by the par
value of those shares, with the difference being adjusted to additional paid up
capital. Also during 2001, we treated the purchase of our treasury shares of
8,000, 102,752 and 79,100 in 1998, 1999 and 2000, respectively, in the
Consolidated Balance Sheet and the Consolidated Statement of Shareholders'
Equity as cancelled on repurchase.
TRANSFER AGENT
The transfer agent for the ordinary shares is American Stock Transfer &
Trust Company, New York, New York.
19
ITEM 6. SELECTED FINANCIAL DATA
As a result of a management decision we have voluntarily adopted
accounting principles generally accepted in the United States of America
("US-GAAP") effective January 1, 2000. Previously, annual financial statements
were prepared in accordance with International Accounting Standards ("IAS"). As
a result all prior periods' financial information presented in the selected
financial data have been prepared in accordance with "US-GAAP".
The consolidated financial statements include the accounts of our
wholly-owned subsidiaries Belize Water Ltd, Commonwealth Water Limited, Cayman
Water Company Limited and Hurricane Hideaway Ltd. The operating results of
Belize Water Ltd. have been included in the financial statements since the date
of the acquisition (July 21, 2000). All inter-company balances and transactions
have been eliminated.
Set forth below is selected financial data based upon our consolidated
financial statements. The table contains information (expressed in US dollars)
derived from our audited consolidated financial statements for the five-year
period ended December 31, 2001. This selected financial data should be read in
conjunction with the more detailed financial statements and related notes
thereto contained elsewhere in this Annual Report. The audited consolidated
financial statements for the years ended December 31, 1998 and 1997 and
accountant's reports thereon are not included in this Annual Report.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
STATEMENT OF INCOME DATA:
Water Sales $11,026,923 $ 9,576,959 $ 7,936,118 $ 7,925,232 $ 7,214,557
Net Income (1) 2,764,573 2,404,820 1,569,717 1,451,933 1,112,402
BALANCE SHEET DATA:
Total Assets 22,721,178 21,845,672 16,431,321 15,594,021 14,814,817
Long Term Debt Obligation 1,213,804 1,131,986 1,926,786 2,470,112 1,769,746
Long Term Purchase Obligation -- -- -- 320,141 1,265,275
Redeemable preferred stock 30,234 40,361 49,270 52,686 40,906
DIVIDENDS DECLARED PER SHARE 0.40 0.34 0.20 0.19 0.13
BASIC EARNINGS PER SHARE 0.71 0.68 0.51 0.47 0.37
BASED ON NUMBER OF SHARES 3,897,969 3,532,501 3,044,293 3,055,845 2,986,216
DILUTED EARNINGS PER SHARE 0.69 0.67 0.49 0.45 0.35
BASED ON WEIGHTED NUMBER OF SHARES 3,999,691 3,616,271 3,188,048 3,191,583 3,136,574
(1) Net Income represents income after a cumulative change in accounting
principle in 1999 of $117,576 (see ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Change in
Accounting Principle), and an exceptional item of $97,886 in 1997
representing the remaining book value of the vapor compression
equipment previously used by our company that was written down to zero.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Our objective is to provide water services in areas where the supply of
potable water is scarce and where the use of RO technology to produce potable
water is economically feasible. By focusing on this market, we believe that we
can provide a superior financial return to our investors. To increase share
value and maintain dividend payouts in accordance with current company policy,
we need to expand our revenues by developing new business opportunities both
within our current service areas, and in new areas. We need to maintain our high
operating efficiencies by adhering to our strict equipment maintenance and water
loss mitigation programs in order to achieve gross profit margins between 40%
and 45%. We further believe that many Caribbean basin and adjacent countries,
while being water scarce, also present opportunities for operation of our plants
in limited regulatory settings which are less restrictive than the highly
regulated markets of North America, which promotes cost effective operation of
our equipment.
We have been operating our business on Grand Cayman Island since 1973
and have been using RO technology to convert seawater to potable water since
1989. There is no natural supply of fresh water on the Cayman Islands. We
currently have an exclusive license from the Cayman Islands government to
process potable water from seawater and then sell and distribute that water by
pipeline to Seven Mile Beach and West Bay, Grand Cayman Island. We obtain water
from our three RO plants on Grand Cayman (Governor's Harbour plant, West Bay
plant and our newly acquired Britannia plant), which together are capable of
producing 2.02 million U.S. gallons per day on a reliable basis, or
approximately 755 million U.S. gallons per year. We own our RO plants and
substantially all of the 65 miles of our underground distribution
infrastructure. For the year ended December 31, 2001, we supplied 474.1 million
U.S. gallons of water to hotels, residential customers, condominiums, other
commercial customers and government facilities on Grand Cayman.
On July 21, 2000, we acquired Seatec Belize Ltd., a company organized
under the laws of Belize. Seatec Belize Ltd., now renamed Belize Water Ltd.,
owns and operates a RO plant in Ambergris Caye, Belize and provides potable
water to BWSL under contract. BWSL provides water and sewage services to the
mainland Belize, and contracts us to produce potable water on Ambergris Caye,
which has no natural source of fresh water. Our RO seawater conversion plant, is
capable of producing 420,000 U.S. gallons per day or approximately 153 million
U.S. gallons per year, for BWSL, who distributes the water to residential,
commercial, and tourist properties in Ambergris Caye, Belize. During the year
ended December 31, 2001, we supplied approximately 93.8 million U.S. gallons to
BWSL.
Since July 11, 2001, we have been supplying desalinated water to South
Bimini International Ltd. under a ten-year water supply agreement. This Bahamian
company owns and operates resort properties on South Bimini Island, Bahamas and
we provide potable water to these properties. The island of South Bimini has no
natural source of fresh water. Our Bahamas operations provides water from one RO
seawater conversion plant, capable of producing 115,000 U.S. gallons per day or
approximately 42 million U.S. gallons per year, to South Bimini International
Ltd. This water is distributed to the condominiums, marina and hotel property in
South Bimini, Bahamas. For the year ended December 31, 2001, we supplied
approximately 1 million U.S. gallons to South Bimini International Ltd. Sales in
2001 were low because we only supplied water from July 2001, and the condominium
development is in its initial stages. We expect the demand for water from our
plant to increase as additional phases are completed at the Bimini Sands
development.
21
Although at a slower pace than in previous years, development is taking
place on Grand Cayman Island, and particularly in our licensed area to
accommodate both the growing local population and the tourism market. Because
our license requires us to supply water to developments in our licensed area,
the planning department of the Cayman Islands government routinely advises us of
proposed developments in our licensed area. This advance notice allows us to
manage our production capacity to meet anticipated demand. We believe that we
have, or have contracted for, a sufficient supply of water to meet the
foreseeable future demand.
We installed our first RO plant in December 1989 at Governor's Harbour,
located in the Seven Mile Beach area, through a water purchase agreement with
OCL. Under the agreement, OCL operates the plant, and we must purchase a minimum
volume of water from them. In addition, OCL has to provide us additional volumes
of water upon demand up to a fixed level, and any excess on a best efforts
basis. The agreement requires a plant capacity of 1.1 million U.S. gallons per
day, which is the maximum capacity of the plant. The agreement was amended in
December 2000 to increase the production capacity of the plant to 1.2 million US
gallons per day. The agreement expires on December 31, 2004, at which time we
will have fulfilled our obligations under the agreement and we will be the sole
operator of the plant. Upon expiration of our agreement with OCL, we expect that
our operating costs at Governor's Harbour will decrease significantly.
In 1995, we installed our second RO seawater conversion plant, at our
West Bay site. We own and are responsible for operation and maintenance of the
West Bay plant. This plant is capable of producing 710,000 U.S. gallons per day
of potable water.
In February 2002, we purchased our third RO seawater conversion plant,
which was previously owned and operated by Cayman Hotel & Golf Inc., a company
which owns and operates the Hyatt Hotel and Britannia Golf Course, and developed
the Britannia condominiums and villas. This plant is capable of producing
440,000 US gallons of desalinated water per day.
OUR OPERATIONS UNDER THE LICENSE IN THE CAYMAN ISLANDS
Our exclusive operational license was issued to us by the Cayman
Islands government under The Water (Production and Supply) Law of 1979. The
license terminates, unless further renewed, on July 11, 2010.
Two years prior to the expiration of the license, we have the right to
negotiate with the government to extend the license for an additional term.
Unless we are in default under the license, the government may not grant a
license to any other party without first offering the license to us on terms
that are no less favorable than those which the government offers to a third
party.
We must provide, within our licensed area, any requested piped water
service which, in the opinion of the Executive Council of the Cayman Islands
government, is commercially feasible. Where supply is not considered
commercially feasible, we may require the potential customer to contribute
toward the capital costs of pipe laying (Advances in Aid of Construction). We
then repay these advances to the customer, without interest, by way of a
discount of 10% on future billings for water sales until this indebtedness has
been repaid. We have been installing additional pipeline when we consider it to
be commercially feasible, and the Cayman Islands government has never objected
to our determination regarding commercial feasibility.
22
Under the license, we pay a royalty to the government of 7.5% of our
gross US gallon potable water sales revenue. The base selling price of water
under the license presently varies between $18.96 and $22.74 per 1,000 U.S.
gallons, depending upon the type and location of the customer and the monthly
volume of water purchased. The license provides for an automatic adjustment for
inflation/deflation on an annual basis, subject to temporary limited exceptions,
and an automatic adjustment for the cost of electricity on a monthly basis. The
Water Authority (Cayman), on behalf of government, reviews and approves the
calculations of the price adjustments for inflation and electricity costs.
If we want to increase our prices for any reason other than inflation,
we have to request prior approval of the Executive Council of the Cayman Islands
government. If the parties fail to agree, the matter is referred to arbitration.
The last price increase that we requested, other than automatic inflation
adjustments since 1990, was granted in full in June 1985.
RESIDENTIAL AND COMMERCIAL OPERATIONS IN THE CAYMAN ISLANDS
We enter into standard contracts with hotels, condominiums and other
properties located in our licensed area to provide potable water to such
properties. We currently have agreements on differing terms and rates to supply
potable water to the 309-room Marriott Hotel and the 343-room Westin Hotel, the
Hyatt Hotel and Britannia Golf Course, and to supply non-potable water to the
SafeHaven Golf Course. We bill on a monthly basis based on metered consumption.
Receivables are typically collected within 30 to 35 days after the billing date
and receivables not collected within 45 days subject the customer to
disconnection from our water service. In 2001, bad debts represented less than
1% of our total sales for the year. Customers who have had their service
disconnected must pay re-connection charges.
In the Seven Mile Beach area, our primary customers are the hotels and
condominium complexes which serve the tourists. In the West Bay area, our
primary customers are residential homes. Occasionally, we also supply to, or buy
from, on an as-needed basis, the Water Authority-Cayman, which serves the
business district of George Town and other parts of Grand Cayman Island.
WASTEWATER SERVICES IN THE CAYMAN ISLANDS
We began providing sewerage services on Grand Cayman in 1973. In 1987
the Cayman Islands government, through Water Authority-Cayman, constructed a
public sewerage system in part of the Seven Mile Beach area where Governor's
Harbour is located. On September 1, 1988, Water Authority-Cayman began
processing sewage delivered by the pipelines and lift stations in that area. We
stopped our processing of sewage on that date. Water Authority-Cayman currently
directly bills our former sewerage customers for its services. In October 2001,
we reached an agreement with the Water Authority-Cayman that they will take over
the ownership and operation of two remaining sewage lift stations, which we
presently operate. Our present obligation under this agreement is to replace
certain minor pieces of equipment in these stations prior to take over by the
Water Authority-Cayman. We expect the take over to occur in May 2002. No revenue
was earned for wastewater services during 2001.
23
DEMAND FOR WATER IN THE CAYMAN ISLANDS
In the past, demand on our pipeline distribution has varied throughout
the year. However, an increase in year-round tourism in recent years has created
more uniform demand for water throughout the year. Demand depends upon the
number of tourists visiting the Cayman Islands and the amount of rainfall during
any particular time of the year. In general, 75% of tourists come from the
United States. Our operating results in any particular quarter are not
indicative of the results to be expected for the full fiscal year. The table
below lists the total volume of water we supplied on a quarterly basis for the
years ended December 31, 2001, 2000, 1999, 1998 and 1997 to all our customers:
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
(in thousands of U.S. gallons)
First Quarter 119,115 125,869 107,031 109,255 100,853
Second Quarter 129,305 117,766 113,007 108,334 98,473
Third Quarter 118,733 100,259 90,888 90,950 87,483
Fourth Quarter 106,985 107,404 90,421 92,011 89,941
------- ------- ------- ------- -------
Total 474,138 451,298 401,347 400,550 376,750
======= ======= ======= ======= =======
OUR OPERATIONS UNDER THE CONTRACT IN BELIZE
We have entered into a contract with BWSL to supply a minimum of
135,000 US gallons of water per day to BWSL expiring in 2011. At the expiry of
the contract, BWSL may at its option extend the term of the agreement or
purchase the plant outright.
The base price of water supplied, and adjustments thereto, are
determined by the terms of the contract, which provides for adjustments based
upon the movement in the government price indices specified in the contract, as
well as, monthly adjustments for changes in the cost of diesel fuel and
electricity.
We bill on a monthly basis based on metered consumption. Receivables
are due within 21 days after the billing date. Interest of 1.5% per year is
charged on any delayed payments. We have had collection problems with BWSL in
the past, however, we are working on a solution that will ensure payment will be
made when required. As at the date of this Annual Report, BWSL is current on its
outstanding balance, with exception of interest, which has accrued on their
account. In 2001, we had no bad debts for our Belize sales for the year.
BWSL has submitted claims for compensation for damages, which it
believes resulted from our equipment failures during August and September 2001.
They have further claimed for the rectification of a minor mistake in the water
rate inflation adjustment formula in our agreement, a mistake which dates back
to November 1995. We have fully settled one claim for compensation which
resulted from an equipment failure during the first week of August 2001 by
crediting their account $14,864, but have rejected their other claim for
compensation relating to the temporary reduction of our production capacity on
another occasion. While we were not able to meet BWSL's demand for water during
certain periods when our equipment malfunctioned, we were able to provide
quantities of water well in excess of the minimum amount required in our
agreement.
24
We are currently engaged in discussions regarding BWSL's claim for
rectification of the inflation adjustment formula, and to collect unpaid
interest, which has accrued on their account because of their late payment of
invoices. At the date of this Annual Report, we have offered $38,790 to settle
all of their outstanding claims, and have agreed to correct the inflation
adjustment formula in the agreement. We believe that correcting this minor
mistake in the agreement will not have a significant impact on the profitability
of our Belize operations going forward, and that we will collect the outstanding
interest charges from BWSL.
BWSL distributes our water primarily to residential properties, small
hotels, and businesses which serve the tourist market.
DEMAND FOR WATER IN BELIZE
We have only operated our plant in Belize for about 21 months. However,
we believe that water sales in Belize are cyclical, and on a similar cycle to
sales in the Cayman Islands, since both operations cater to similar tourist
markets. We also believe that water sales will be higher in the future since
sales were limited before March 2000 because the production capacity of the
water plant was lower than demand. While 2001 sales indicate an increasing
trend, it may not be indicative of similarly high percentage increases in the
future because of production limitations in the first quarter of 2000.
Our sales in Belize were restricted in August, September and October
2001 because of several major component failures at our San Pedro plant. We
believe that we could have sold more water during these months if our plant had
been able to operate at full capacity. We have taken action to ensure this does
not occur again by increasing our inventory of critical spare parts.
The total volume of water we supplied (in thousands of U.S. gallons) to
BWSL on a quarterly basis for the years ended December 31, 2001 and 2000:
2001 2000
------ ------
(in thousands of U.S. gallons)
First Quarter 24,589 17,455*
Second Quarter 26,519 20,928*
Third Quarter 21,404 19,507
Fourth Quarter 21,266 19,624
------ ------
Total 93,778 77,514
====== ======
* Sales made pre-acquisition by Seatec Belize Ltd. Used only for comparison
purposes.
OUR OPERATIONS UNDER CONTRACT IN BAHAMAS
In 2000, we entered into a water supply agreement with South Bimini
International Ltd. and began supplying water under this contract on July 11,
2001. Under our agreement South Bimini International Ltd. is committed to pay
for a minimum of 3,000 US Gallons of water per customer per month (36,000 US
Gallons per year) on a take or pay basis in relation to the Bimini Sands Resort
property in South Bimini Island, Bahamas. The price of water supplied is
adjusted for inflation annually based on Bahamas government indices, and
adjusted monthly for changes in the cost of electricity.
25
DEMAND FOR WATER IN BAHAMAS
We have only been supplying water in Bimini for approximately eight
months, to a resort property, which is only partially completed and a small
40-room hotel. Currently the resort is comprised of 54 condominiums, and a
developing 150-slip marina. By the end of 2002, we anticipate that we will be
providing water to an additional 30 condominiums. The resort property is
ultimately expected to include over 300 condominium units, a large hotel casino,
and a marina that can accommodate twice as many boats as the existing facility.
We believe that water sales in Bimini will be cyclical. We expect that our sales
will be higher during the summer months when tourists and fisherman arrive from
the United States by boat, and when several large angling tournaments are
traditionally held in Bimini. We expect that our sales will be lower during
winter months when the weather is not conducive to pleasure boat travel from the
United States.
The total volume of water we supplied (in thousands of U.S. gallons) to
South Bimini International Ltd. during each of the third and fourth quarters for
the year ended December 31, 2001 was 449 and 551 respectively.
WATER SALES AND OTHER INCOME ("TOTAL INCOME")
Our total income includes water sales income, other income and interest
income from all of our business segments. Water sales income is comprised of
water sales to our individual Cayman Islands customers, to BWSL and to South
Bimini International Ltd. Other income consists of monthly meter rental charges,
sales to companies that deliver water by truck to customers not connected to our
pipeline in the Cayman Islands, connection charges for new customers and
re-connection charges for delinquent accounts. In April 1999, we settled a
dispute with the owner of the Hyatt Hotel and the developer of the Britannia
development, who supplied water to the Hyatt Hotel, a hotel located within our
Seven Mile Beach license area. Accordingly, other income also consists of
settlement fee payments for the supply of water to the Britannia development by
the Hyatt Hotel, which has its own water production facility. During 2001, we
negotiated the purchase of this water production facility and a separate water
supply agreement with the Hyatt Hotel and Britannia Golf Course. On February 1,
2002 we took possession of this facility and began supplying water under the new
agreement. At this time the settlement agreement ceased and no further revenue
will be collected under this settlement. Additionally, included in other income
is interest income relating to interest derived from excess cash balances placed
on term deposit and interest payable by BWSL due to late payment of invoices.
EXPENSES
Expenses include cost of water sales ("direct production expenses") and
our indirect, or general and administrative expenses. Direct production expenses
include royalty payments to the Cayman Islands government; electricity and
chemical expenses; payments to OCL relating to operation of the Governor's
Harbour plant; production equipment and facility depreciation costs; equipment
maintenance and expenses and operational staff costs. Indirect, or general and
administrative expenses, consist primarily of salaries and employee benefits for
administrative personnel, office lease payments, legal and professional expenses
and financing costs. There are no income taxes in the Cayman Islands and we are
currently exempt from taxes in Belize. We may be liable for gross revenue tax in
the Bahamas as disclosed in Part I, Item 1, under our discussion of our Bahamas
Operations.
26
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
WATER SALES AND OTHER INCOME ("TOTAL INCOME")
Total Income increased by 14.4% from $10,025,686 to $11,473,706 for the
year ended December 31, 2000 and 2001, respectively. Total Income is comprised
of water sales and other income.
The Cayman operations increased Total Income by $626,843 for the year
ended December 31, 2001, representing 43.3% of the increase.
The addition of the operations of Belize Water Ltd. as of July 21, 2000
increased Total Income by $794,401 for the year ended December 31, 2001,
representing 54.9% of the increase.
Finally, the addition of the Bahamas operations as of July 11, 2001
increased Total Income by $26,776 for the year ended December 31, 2001
representing 1.8% of the increase.
Sales in Cayman are made within our license area to approximately 3,000
customers. All sales in Belize are to one customer, Belize Water Services Ltd.,
a private company that recently acquired the assets of Belize Water and Sewerage
Authority, which was previously a government statutory corporation. The terms of
our contract have not changed as a result of the privatization of Belize Water
and Sewerage Authority. Currently in the Bahamas, all sales are to one customer,
South Bimini International Ltd. known as Bimini Sands Resort and Marina, which
uses water at their hotel, condominiums and full service marina.
Total water sales increased by 15.1% from $9,576,959 to $11,026,923 for
the years ended December 31, 2000 and 2001, respectively. The total water sales
increase of $1,449,964 was a result of several factors detailed below.
Our Cayman operation added $657,784 to water sales for the year ended
December 31, 2001, which is 45.4% of the total increase. Of this increase 70.1%
was due to a 5.1% increase in the number of US gallons sold over the same period
in the prior year. This increase was due to both an increase in our customer
base, as well as, increased usage of 3.5% from commercial, 6.4% increase from
residential, and a 50% increase from government facilities which was due to bulk
sales of $112,409 made to assist the Water-Authority (Cayman) to make up
temporary shortfalls in their production capacity. The automatic inflation
adjustment increased our Cayman Islands water rates in January 2001 for most of
our customers by an average of 2.5%, which makes up the remaining 29.9% of the
increase.
Our Belize operation added $765,847 to water sales for the year ended
December 31, 2001, which is 52.8% of the total increase. Of this increase 99.3%
was due to a full year of water sales in 2001 compared to six months in 2000.
The quantities of water produced by our Belize operations in 2001 were
approximately 21% higher than in 2000 (pre-acquisition as reported by the
previous owners of the Belize operations). These higher sales during the year
have resulted because in the prior year we had only six months of production and
sales. However, our water sales in Belize were lower than expected because of an
equipment malfunction in late August and September 2001, which temporarily
reduced the production capacity of our water plant by 50% for 3 days. This
malfunction has now been corrected and our plant is operating at full production
capacity. The automatic inflation adjustment increased our Belize water rates in
June 2001 by 0.53%, which makes up the remaining 0.7% of the increase.
27
Finally, the addition of the Bahamas operations as of July 11, 2001
increased water sales by $26,333 for the year ended December 31, 2001,
representing 1.8% of the increase.
In late 2000, the Cayman Islands Government changed the base year of
the Cayman Islands Consumer Price Index ("CI-CPI"), which is used in our license
to calculate our annual automatic inflation adjustment, rendering the then
license formula inoperable. As provided for in our license, our Cayman Islands
rates during the first nine months of 2001 were adjusted by substituting in the
formula the movement of the United States Producers Price Index ("US-PPI") for
Industrial Commodities for the CI-CPI. Our rates during the first nine months of
2001 were inflated by 3.7%. In September 2001 the Government agreed with us a
new automatic inflation adjustment formula, which uses the re-based CI-CPI. This
new formula took effect in October 2001 and reduced our Cayman Islands water
rates by 1.2% for the last three months of the year. The next automatic
inflation adjustment occurred in January 2002 and decreased our Cayman Island
water rates by 0.39%.
Other income decreased by 0.4% from $448,727 to $446,783 for the year
ended December 31, 2000 and 2001, respectively. This decrease was a result of a
reduction in interest earned from 2000 to 2001, which amounted to $32,314 and
$28,584, respectively. In 2001, interest was earned on our outstanding balance
in our Belize operations, due to the temporary delay in payment by BWSL. In 2000
interest was earned on our significant investment of unutilized cash from the
sale of shares until we purchased our Belize subsidiary.
EXPENSES
Cost of water sales increased by 12.6% from $5,423,297 to $6,109,117
for the years ended December 31, 2000 and 2001, respectively.
Our Cayman operations increased cost of water sales by $171,425 for the
year ended December 31, 2001, representing 25.0% of the increase. Although cost
of water sales increased, it increased at a lower rate than our water sales
since we benefit from efficiency savings in our water production operation when
we produce more water.
The addition of the operations of Belize Water Ltd. as of July 21, 2000
increased cost of water sales by $467,769 for the year ended December 31, 2001
representing 68.2% of the increase. This increase was due to increased water
production to meet increased sales, and machinery repairs related to the August
and September 2001 equipment malfunctions.
Finally, the addition of the Bahamas operations as of July 11, 2001
increased cost of water sales by $46,626 for the year ended December 21, 2001
representing 6.8% of the increase.
Gross profit margins increased from 43.4% to 44.6% for the years ended
December 31, 2000 and 2001, respectively.
Gross profit margins for our Cayman operations increased from 43.2% to
45.3% for the years ended December 31, 2000 and 2001, respectively. The reasons
for this 2.1% increase are increased plant efficiencies, as mentioned earlier,
and decreased depreciation expense of approximately $197,000, which resulted
from our reassessment of the useful economic lives of certain assets. These
lower expenses were offset by the increased full year of amortization expense of
our intangible asset, which arose on purchase of BWSL in July 2000, increased
insurance costs during the last two months of 2001, and additional labour costs
incurred for maintenance of our West Bay plant.
28
Gross profit margins for our Belize operations decreased from 46.2% to
41.7% for the years ended December 31, 2000 and 2001, respectively. This
decrease resulted from equipment repair costs, which we incurred during August
and September 2001 as a result of a major equipment malfunction, and higher
electricity costs resulting from the utilization of our 250 Horse Power standby
electric motor on one of our production trains. We were unable to utilize our
diesel engine to power that production train for most of 2001 because of a
mechanical failure of that engine in early 2001, which caused us to order a
replacement engine, as well as, the mechanical malfunctions of other equipment,
which occurred in August and September 2001. We have recently received all the
necessary replacements parts and that production train is now operating on the
more efficient diesel engine.
Gross profit margin for our Bahamas operations for the year ended
December 31, 2001 was a negative 77.1%. This was due to low water sales and a
relatively higher proportion of fixed costs such as depreciation, which we
expected in the early phases of the Bimini Sands Resort development project.
Both of these are temporary factors and are not expected to continue in the
future. We forecast that the Bahamas operation will generate positive cash flows
during May 2002.
Indirect expenses increased by 18.3% from $2,197,569 to $2,600,016 for
the years ended December 31, 2000 and 2001, respectively.
Our Cayman operations increased indirect expenses by $240,830 for the
year ended December 31, 2001, representing 59.9% of the increase. Of this
increase, 49.0% is due to a new executive position, Director of Special
Projects, and 5.6% is a result of increased costs incurred in the first quarter
resulting from the replacement of our former Chief Financial Officer who left us
on April 6, 2001. In addition, we had a 4% increase in salaries, and stock
compensation expense increased by $36,279 because ordinary share options granted
to our executive officers under the terms of their employment agreements, had
market values that were higher than the exercise price on the date of grant,
unlike in 2000.
The addition of the operations of Belize Water Ltd. as of July 21, 2000
increased indirect expenses by $157,491 for the year ended December 31, 2001,
representing 39.1% of the increase. This was due to the reallocation of employee
duties, which increased indirect expenses when compared to the same periods in
the prior year and the fact that the prior year included only six months of
operations after our acquisition of our Belize subsidiary in July 2000.
Finally, the addition of the Bahamas operations as of July 11, 2001
increased indirect expenses by $4,126 for the year ended December 31, 2001,
representing 1.0% of the increase. These costs relate to the administration of
the Bahamas operations.
As a percentage of the Total Income, indirect expenses were at 21.9%
and 22.7% for the year ended December 31, 2000 and 2001, respectively.
NET INCOME
Net income increased by 15.0% from $2,404,820 to $2,764,573 for the
years ended December 31, 2000 and 2001, respectively. This increase was due to
the several reasons detailed above.
29
DIVIDENDS
In December 2000 we increased our per share dividend to ordinary
shareholders from $0.32 to $0.40 per year and in December 2001, we increased our
per share dividend from $0.40 to $0.42 per year, payable on a quarterly basis.
We have consistently paid dividends to ordinary shareholders since we began
issuing dividends in 1985. Our board of directors has established a policy that
we will maintain a dividend pay-out ratio in the range of 50% to 60% of net
income. This policy is subject to modification by our board of directors,
however, we expect to continue increasing our dividend as our earnings grow.
REASSESSMENT OF USEFUL ECONOMIC LIVES OF PROPERTY, PLANT AND EQUIPMENT
During the year ended December 31, 2001 we carried out an extensive
engineering analysis of our potable water production and distribution equipment
in Grand Cayman. The result of which was the reassessment of the useful economic
lives of various assets and a decrease in depreciation expense on an annual
basis in the amount of $197,472, which increased basic and fully diluted
earnings per share by $0.05 for the year ended December 31, 2001.
This analysis included the revision of our computerized hydraulic model
of the pipeline system, and updating our water meter replacement schedule. Our
long-term strategic engineering analysis concluded that certain assets,
including portions of the Seven Mile Beach distribution system, the Governor's
Harbour VC Building, and water meters would not need to be replaced or relocated
as early as previously planned.
As a result of the circumstances detailed below, we considered it
appropriate to reassess the estimated useful economic life of the Seven Mile
Beach distribution system from 20 years to 40 years of which 13 years has
already elapsed, the Governor's Harbour VC building from 20 to 40 years of which
21 years had already elapsed, and water meters from 5 years to 10 years of which
3 years had already elapsed. Also as a result of these circumstances, it was
determined that the projected future utilization of a key piece of equipment
(the Vermeer Trencher), which we use to install or replace pipelines, would be
reduced. It was considered appropriate to reassess the useful economic life of
this piece of equipment from 10 years to 20 years, of which 3 years had already
elapsed.
Also during the year ended December 31, 2001 we carried out a review of
the condition and technology of our West Bay RO plant and concluded that the
plant was now meeting performance and operational requirements consistent with
those of the Governor's Harbour RO plant. A similar review had been carried out
on the Governor's Harbour RO plant in 1994. As a result of these circumstances,
it was considered appropriate to reassess the estimated useful economic life of
the West Bay RO plant from 10 years to 15 years, of which 3 years had already
elapsed, which is now consistent with depreciation parameters used for the
Governor's Harbour RO plant.
SEVEN MILE BEACH DISTRIBUTION SYSTEM
When the Seven Mile Beach ("SMB") distribution pipeline was initially
installed, the West Bay road was at an early stage of development. At the time
of installation, 20 years was considered to be an appropriate best estimate for
the useful life of the system, given the circumstances and relatively early
stage of development in the Cayman Islands. Fundamental changes regarding the
West Bay road that were being considered by Government had not been rejected. We
planned for several years to relocate our Governor's Harbour RO plant to enable
alternate use or sale of the waterfront land, and if undertaken, this relocation
would have involved the removal and relaying of pipeline.
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During 2001, we revised our master distribution plan, which includes
the SMB distribution system, in order to evaluate the possible addition of the
Britannia plant to the system, to determine whether contemplated upgrades to the
Governor's Harbour reservoirs were warranted, and to consider future capital
expenditure for pipeline replacements or new pipelines. It was determined that
certain pipeline replacements, which had been scheduled subsequent to the 1996
master distribution plan were no longer necessary, and that existing SMB
distribution system assets could be utilized for a much longer period than
previously anticipated. The Government also revised their schedule and layout
for significant road improvements within our service areas, which alleviated the
need for any major changes to our SMB distribution system. The West Bay road is
at a mature stage of development, and the level of construction, which has now
peaked, would inhibit any changes to the road layout and our distribution
system. We decided not to relocate our Governor's Harbour reservoirs,
distribution pumps, and RO plant.
As a result of these events and circumstances, in early 2001, we
considered it appropriate to reassess the remaining useful economic life of the
SMB distribution system and the Governor's Harbour pipeline. Based on our
experience and industry standards, it was concluded that the pipeline, being of
the same material and construction as the remainder of our pipeline, had a
useful economic life of 40 years, of which 13 had already elapsed.
GOVERNOR'S HARBOUR VAPOR COMPRESSION ("VC") BUILDING
The VC Building was initially constructed in 1976 to accommodate diesel
engine powered seawater desalination equipment, which we operated. In 1994 the
building was remodeled to house two large high pressure pumps, which are part of
the Ocean Conversion (Cayman) Ltd. ("OCL") seawater RO plant. The building is
comprised of a reinforced concrete foundation, and painted steel prefabricated
wall and roof structures. The foundation included a number of unusual features,
which were necessary because of the specialized equipment and piping in the
plant. We planned for several years to relocate our Governor's Harbour plant to
enable alternate use or sale of the waterfront land, and if undertaken, this
relocation would have involved removing the VC building. We did not believe that
the VC building would continue to be a useful asset after the Governor's Harbour
site was re-located. In 1998, we phased out the last seawater desalination unit,
which was housed in the VC Building. The large high pressure pumps for the OCL
RO plant remained. It was decided at that time that the VC building would be
remodeled to accommodate materials storage, and to improve the appearance of the
structure, and would continue to house the large pumps, which are part of the RO
plant. In 2000 we contracted with a local building contractor to completely
replace the painted steel wall and roof panels of the VC building with more
durable and rust-resistant material called Galv-Alum. The reinforced concrete
foundation was determined to be sound and only required filling of various holes
and trenches left over from the phased-out desalination equipment.
During 2001, we revised our master distribution plan, which includes
the VC building, in order to evaluate the possible addition of the Britannia
plant to the system, to determine whether contemplated upgrades to the
Governor's Harbour reservoirs were warranted, and to consider future capital
expenditure for pipeline replacements or new pipelines. We had decided not to
relocate our Governor's Harbour reservoirs, distribution pumps, VC building and
RO plant.
As a result of these events and circumstances, in 2001, we considered
it appropriate to reassess the remaining useful economic life of the VC
building. Based on our experience and industry standards, it was concluded that
the building had a remaining useful economic life of 20 years, of which 1 year
had already elapsed.
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DISTRIBUTION SYSTEM METERS
Our established policy is to replace customer water meters when they
have been in service for a specified number of years, or have registered a
certain volume of water, in accordance to published manufacturer
recommendations. This policy was implemented in 1988 in order to minimize
un-billed water, which could otherwise pass through a water meter, which was not
functioning properly because of age or fatigue.
We have for more than 10 years purchased water meters from ABB Kent,
who had guaranteed the proper functionality of their water meters for a period
of five years, or a specified registered volume, depending on the model. We were
advised in writing by ABB Kent that they now guarantee their new and existing
C700 water meters under new parameters, which include an extended functional
life of 6 to 15 years, and extended registered volumes.
It was deemed appropriate by us, at that time, to reassess the useful
economic life of all C700 water meters, which were presently in service, and to
change the useful economic life of these assets to 10 years, which is at the
midpoint of the manufacturer's guarantee period.
VERMEER TRENCHER
We use our Vermeer trencher to construct water distribution pipelines
within our franchise area. For reasons detailed in the section above entitled
"Seven Mile Beach Distribution System", we have over the past two years
significantly reduced the utilization of the Vermeer trencher. In early 2000 we
completed a large extension to our distribution system, the Harquail Bypass, but
have since only carried out minor extensions of our pipelines, within new
developments in the West Bay service area.
During 2001, the Government revised their schedule and layout for
significant road improvements within our service areas, which alleviated the
need for any major changes to our distribution system. Our franchise area is at
a mature stage of development, and it is not anticipated that any further
significant pipeline construction projects are eminent. We revised our master
distribution plan, which alleviated the need for any significant pipeline
upgrades or new pipelines for the foreseeable future.
As a result of these events and circumstances, in early 2001, we
considered it appropriate to reassess the remaining useful economic life of the
Vermeer trencher. Based on our experience and projected future utilization of
the asset, it was determined that the asset had a useful economic life of 20
years, of which 3 had already elapsed.
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WEST BAY RO PLANT
Our first sea water RO plant was manufactured and installed by OCL at
the Governor's Harbour location in 1990. At the time that this plant was
acquired, the technology was state-of-the-art and little operational experience
existed industry wide. This was one of the primary reasons that we
lease-purchased the technology instead of purchasing it outright. We furthermore
had concerns regarding potential accelerated obsolescence of the equipment,
resulting from continued research and development in the RO field. After three
years of operational experience on this OCL plant, we established that the
technology was meeting operational requirements of capacity, quality and
reliability. Other similar RO units had been installed in other locations and
evidence indicated that the technology was reliable. OCL had, in accordance to
the lease-purchase agreement, been maintaining the asset in like-new condition.
Individual components were replaced on schedule or as needed in accordance to
our conservative maintenance program, and these items were expensed as incurred.
Following an expansion in 1994 we considered it appropriate to reconsider the
useful life of the asset at that time, and based on experience, it was
considered that the asset had a 12 year remaining life at that time.
The second seawater RO plant (the West Bay RO plant) was manufactured
and installed by a different supplier, US Filter Corporation, in 1998. Again at
the time it was a state-of-the-art new technology (from a different supplier)
and we had concerns about potential accelerated obsolescence of the equipment
because of continuing research and development in the RO field. Given that
conditions were similar to those prevalent when the company purchased its first
RO plant from OCL, management contracted to lease-purchase the West Bay RO plant
and have the manufacturer operate the plant on a day-to-day basis. Consistent
with the treatment of the Governor's Harbour plant, we considered it appropriate
to initially depreciate the asset over ten years. The manufacturer, in
accordanc