Annual Report of a Foreign Private Issuer — Form 20-F
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 20-F Consolidated Water Co, Inc 12/31/1999 72 332K
2: EX-2.1 Consent of Pricewaterhousecoopers 1 5K
3: EX-2.2 Stock Purchase Agreement 6/27/00 34 117K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 20-F
[ ] REGISTRATION STATEMENT
PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1999
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.
(Exact name of Registrant as specified in its charter)
CONSOLIDATED WATER CO. LTD.
(Translation of Registrant's name into English)
CAYMAN ISLANDS
(Jurisdiction of incorporation or organization)
Trafalgar Place, West Bay Road, P.O. Box 1114GT, Grand Cayman, B.W.I.
(Address of principal executive offices)
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)
OPTIONS TO PURCHASE CLASS B ORDINARY SHARES
--------------------------------------------------------------------------------
(Title of Class)
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
ORDINARY SHARES, PAR VALUE CI$1.00
--------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark which financial statement item the registrant
has elected to follow:
Item 17 [ ] Item 18 [X]
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST
FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
EXCHANGE RATES
Unless otherwise indicated, all dollar amounts are in United States
Dollars and references to "$", "U.S.", or "U.S. $" are to United States Dollars.
References in this Report to "CI$" are to Cayman Islands 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.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
Our company was incorporated in August 1973 in the Cayman Islands. Our
objective is to provide water services in areas where the supply of potable
water is scarce. In addition, we have expertise in providing wastewater
services. We currently provide potable water by pipeline from two reverse
osmosis seawater conversion plants in Grand Cayman Island to the most populated
areas of Grand Cayman. We supply potable water to business, residential and
tourist properties and government facilities in our licensed area, including any
new developments which are constructed in this area. In addition, we are in
discussions with parties in the Bahamas to operate reverse osmosis seawater
conversion plants which would provide water to developments on those islands.
MARKET AND SERVICE AREA
Although we are currently only operating in the Cayman Islands, we
believe that our potential market consists of any location where there is a need
for potable water. According to the information contained in the Paul Simon book
"Tapped Out: The Coming World Crisis in Water and What We Can Do About It"
(C)1998, the world's population of 5.9 billion will double in the next forty to
ninety years and the per capita world water consumption is growing twice as fast
as the world's population. The world's supply of water, however, is relatively
constant. While water sufficiency problems are not nearly as severe in the
United States as in most nations, three major states, California, Texas and
Florida, are already facing water supply problems. These states and most
water-deficient nations in the world all have access to huge amounts of ocean
water, yet cannot economically process major quantities for consumption. The
desalination of ocean water, either through distillation or reverse osmosis, is
widely regarded as the most viable alternative to fresh water in areas with an
insufficient natural supply.
The current market which we service under our license consists of Seven
Mile Beach and West Bay, Grand Cayman Island, two of the three most populated
areas in the Cayman Islands. Under a separate license from the Cayman Islands
government, we also supply non-potable water to irrigate a golf course in the
Cayman Islands. Our plants and water distribution system are equipped with
efficient, state-of-the-art technology, and we consistently provide high quality
water to our customers. The Cayman Islands government, through Water
Authority-Cayman, supplies water to parts of Grand Cayman Island which are not
within our licensed area.
According to the Economics and Statistics Office of the Cayman Islands
government, the population of the Cayman Islands was approximately 20,000
persons in 1984 and is estimated to be approximately 40,000 persons in 1999. The
rate of tourism in the Cayman Islands has increased on average 8% annually over
the past 10 years, with total visitor arrivals at a record 1.4 million persons
in 1999. From June 1989 through December 1999, stay-over tourist arrivals have
increased from 210,000 persons in 1989 to 395,000 persons in 1999, and
cruise-ship arrivals have increased from 404,000 persons in 1989 to 1,036,000
persons in 1999.
As of March 2000, several new developments have been completed in our
exclusive service area. These developments include a 132-room Sunshine Suites
Hotel, a 100-room Comfort Suites Hotel and a 152-suite Grand Caymanian Beach
Club time-share resort, which has opened phase I (76 suites). Phase II is
currently under construction. In addition, a new 231-room Holiday Inn is
scheduled to open in October 2000.
GROWTH STRATEGY
Our growth strategy is as follows:
WE INTEND TO CONTINUE DEVELOPING OUR PRODUCTION AND DISTRIBUTION
INFRASTRUCTURE AND PROVIDING 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. Primarily as a result of new customers, our total
income has increased from $3,166,751 in 1989 to $8,249,988 in 1999, representing
a compound annual growth rate of approximately 10%.
WE INTEND TO EXPAND OUR OPERATIONS TO MARKETS OUTSIDE THE CAYMAN
ISLANDS WHERE THERE IS A NEED FOR POTABLE WATER. We are currently in various
stages of discussion to supply to several new markets, including the Bahamas and
Belize. We may pursue these opportunities either on our own or through joint
ventures. So far we have focused on various locations throughout the Caribbean
and Central America.
WE ALSO INTEND TO EXPAND OUR EXISTING AND FUTURE OPERATIONS INTO
COMPLEMENTARY SERVICES, SUCH AS WASTEWATER SERVICES, WHICH WE HAVE PROVIDED IN
THE PAST. Prior to the installation of a central wastewater system by the Cayman
Islands government, we provided wastewater services on Grand Cayman Island.
Since we have expertise in wastewater services, we may provide these services to
areas to which we expand outside of the Cayman Islands.
THE BAHAMAS
On April 21, 1997, we signed a letter of intent to supply potable water
to a Bahamian company, which is owned by a United States developer who plans to
build a multi-purpose resort development called Bimini Bay Resort on 700 acres
in North Bimini Island.
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We have created a wholly-owned Bahamian subsidiary, Commonwealth Water
Limited, which has entered into a 10-year agreement with the Bimini Bay Resort
developer to supply water to the development. After development of the water
plant on North Bimini and the conveyance of the land where the plant is located
from the developer to our subsidiary, the developer will be issued 20% of the
shares of our subsidiary and may convert these shares into our ordinary shares
based on a conversion formula. As of the date of this Annual Report, the
developer has not begun construction of the development in North Bimini.
Our Bahamian subsidiary has all government approvals necessary to
conduct operations in the Bahamas. However, we are still in discussions to
finalize agreements with the Bahamian Water and Sewage Commission which would
give us an exclusive franchise to provide potable water to the Bimini Bay
development and a water sale agreement to supply potable water to the remainder
of the Bimini Islands. We are currently looking at other possibilities in the
Bahamas, including providing wastewater treatment to the Bimini Bay development.
WATER SUPPLY AND PRODUCTION
Our primary sources of potable water are our two reverse osmosis
seawater conversion plants. Our Governor's Harbour facility consists of 3.2
acres, including 485 feet of waterfront and a 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 and the land at our
Governor's Harbour site. The property surrounding the facility has yet to be
fully developed, although these areas are beginning to be developed for
residential and tourist accommodations.
The primary components of the Governor's Harbour plant are:
o five feedwater supply wells that average a depth of 140 feet.
The combined pumping capability is approximately 3,750 U.S.
gallons per minute;
o two positive displacement pumps with a pumping capacity of 410
U.S. gallons per minute each;
o two "back up" centrifugal pumps with a rated 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 (measuring
approximately 40" in length and 8" in diameter) seawater
membranes;
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
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o Paragon TNT v5.0 control software on Gateway Hardware with I/O
System Opto 22 and Optomux interface controller.
The current capacity of the Governor's Harbour plant is 1.1 million
U.S. gallons per day, which is in excess of the minimum quantities of water
which Ocean Conversion must supply to us under the water conversion agreement.
Since the plant began production of water, it has consistently produced at or
near its capacity. In the year 2000, we will purchase water from Ocean
Conversion at a base monthly fee of $45,152 plus an additional quantity fee of
$4.57 per 1,000 U.S. gallons for each 1,000 U.S. gallons supplied to us.
Our West Bay site consists of 6.1 acres in West Bay. In August 1994, we
retained United States Filter Corporation to design and build this plant and
then we paid off the obligations on the plant and terminated the operating
contract in November 1998. The plant began operating on June 1, 1995 and was
expanded in February 1998 and February 2000. On this site, we have a 2,600
square foot building which houses our water production facilities, a 2,400
square foot building which houses the potable water distribution pumps, a water
quality testing laboratory, office space and water storage capacity consisting
of two 1.0 million U.S. gallon potable water tanks. The current production
capacity of the West Bay plant is 710,000 U.S. gallons per day.
The primary components of this plant are:
o three feedwater supply wells that average a depth of 140 feet.
The combined pumping capability is approximately 2,250 U.S.
gallons per minute;
o two positive displacement pumps with a pumping capacity of 386
U.S. gallons per minute each;
o 43 vessels (measuring approximately 280" in length and 8" in
diameter) each housing seven spiral wound seawater membranes
(measuring approximately 40" in length and 8" in diameter);
o one hydraulic turbo energy recovery system;
o one work exchanger energy recovery system;
o an air scrubber to remove the hydrogen sulfide from the
product water, which is capable of scrubbing 1,000 U.S.
gallons of water per minute; and
o Allen Bradley SLC PIC500/RS Logix Ladder Logic Control
computer hardware and GUI Wintelligent View on Windows 3.51
Industrial PC Interfaced with PLC software to control the
operation of the plant.
Although not required by local government regulations, we operate our
water plants in
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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.
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.
Feedwater 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 feedwater intakes.
Electricity to our plants is supplied by Caribbean Utilities Co. Ltd.,
a publicly-traded utility company. At both sites, we maintain a diesel driven,
standby generator with sufficient capacity to operate our distribution pumps and
other essential equipment during any temporary interruptions in the electricity
supply.
In the event of an emergency, our distribution system is connected to
the George Town distribution system of Water Authority-Cayman. We can also
purchase water, if available, from a plant servicing the Hyatt Hotel in Grand
Cayman, which presently has excess production capacity. In order to efficiently
maintain our equipment, we have purchased water for brief periods of time from
both Water Authority-Cayman and the water plant servicing the Hyatt Hotel. We
have also sold potable water to these entities, and in the case of Water
Authority-Cayman, supplied substantial quantities of water almost continuously
over a seven-month period in late 1993 and early 1994.
WATER DISTRIBUTION
Our pipeline system covers the Seven Mile Beach and West Bay areas of
Grand Cayman and consists of approximately 63 miles of PVC pipeline. We extend
our distribution system periodically as property developments are completed. We
have a main pipe loop covering a major part of the Seven Mile Beach area. We
place extensions of smaller diameter pipe off our main pipe to service new
developments in our service area. This system of building branches from the main
pipe keeps our construction costs low and allows us to provide service to new
areas in a timely manner. We are currently installing a main pipe along a new
bypass road to service future developments, which will provide an additional
supply loop at the southern end of the Seven Mile Beach area.
For major developments in our service areas, most internal roads are
private until the development has been completed. Developers are responsible for
laying the pipeline within the development at their own cost but in accordance
with our specifications. When the development is completed, the developer then
transfers operation and maintenance of the pipeline to us.
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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 and
allows us to accurately locate pipes and equipment in need of repair and
maintenance. It also helps us to plan extensions of and upgrades to our existing
pipeline system.
The following table shows, for each of the fiscal years ended December
31, 1999, 1998, 1997, 1996, and 1995, our total number of customer connections
at the end of each period and metered sales of water for that period:
[Enlarge/Download Table]
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
Number of Customers .............................. 2,606 2,347 2,069 1,826 1,649
Miles of Pipeline ................................ 63 62 57 55 52
Metered Sales (in thousands of U.S. gallons):
Commercial .............................. 308,949 315,980 300,350 265,140 239,000
Residential ............................. 86,712 80,150 72,393 60,261 69,963
Government facilities ................... 5,686 4,420 4,007 3,064 2,971
Total .......................... 401,347 400,550 376,750 328,465 311,934
You should note that the table above does not precisely represent the
actual number of customers we service. In hotels and condominiums, we may only
have one customer, which is the operator of the hotel or the condominium, but we
actually supply water to all of the units within that hotel or condominium
development. Of the customers indicated in the table above, as of 1999, 51% were
residential, 48% were hotels, condominiums and other commercial customers and 1%
were government facilities.
We have a separate license from the Cayman Islands government and a
five-year agreement with a developer to supply on demand a minimum of 48 million
U.S. gallons of non-potable water per year on a take or pay basis to irrigate
an 18-hole golf course.
Before 1991, any owner of property within our licensed area could
install water making equipment for its own use. Since 1991, that option is only
available to private residences, although water plants then in existence could
be maintained but not replaced or expanded. When the Marriott Hotel was built in
1990 in our licensed area, the developer installed its own reverse osmosis
equipment. On February 4, 1994, we entered into an agreement with the owner of
the Marriott Hotel to supply water to the Marriott Hotel at our standard tariff
rates.
In 1995, we entered into a 10-year agreement with the owner of the
Westin Hotel. This agreement requires us to supply up to 60,000 U.S. gallons per
day on a monthly basis to the hotel
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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.
OUR TECHNOLOGY
The conversion of saltwater to potable water is called desalination.
There are two primary forms of desalination: distillation and reverse osmosis.
Both methods are used throughout the world and technologies are improving to
lower the costs of production. Reverse osmosis is a separation process in which
the water from a pressurized saline solution is separated from the dissolved
material by passing it over a semi-permeable membrane. A significant energy
source is needed to pressurize the salinated, or feed, water for pretreatment,
which consists of fine filtration and the addition of precipitation inhibitors.
Pre-treatment removes suspended solids, prevents salt precipitation and keeps
the membranes free of microorganisms. Next, a high-pressure pump enables the
water actually 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 in order to prevent the
pressurized feed water from continuing to increase in salt concentration. As the
discharged feed water leaves the pressure vessel, its energy is captured by an
energy recovery device which is used to pressurize incoming feed water. The
final step is post-treatment, which consists of stabilizing the water, removing
hydrogen sulfide and adjusting the pH and chlorination to prepare it for
distribution.
We use reverse osmosis technology to convert seawater to potable water.
We believe that this technology is the most effective and efficient conversion
process. However, we are always seeking ways to maximize efficiencies in our
current processes and to investigate new more efficient processes to convert
seawater to potable water. The equipment at our plants is among the most energy
efficient available and we monitor and maintain our equipment in this manner. As
a result of our many years of experience in water conversion, we believe that we
have an expertise in the development and operation of desalination plants which
is easily transferable to locations outside the Cayman Islands.
COMPETITION
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.
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To implement our growth strategy outside the Cayman Islands, we will
compete with companies such as Ionics Inc., Vivendi and Azurix Corp. These
companies, among others, currently operate in areas in which we would like to
expand our operations, maintain world-wide operations and have greater
financial, managerial and other resources than our company.
THE CAYMAN ISLANDS
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.
GOVERNMENT
The Cayman Islands are a British Overseas Territory of the United
Kingdom and have had a stable political climate since 1670, when the Cayman
Islands were ceded to England by the Treaty of Madrid. The Queen of England
appoints the governor of the Cayman Islands to make laws with the advice and
consent of the legislative assembly. There are 15 elected members of the
legislative assembly and three members appointed by the governor from the Civil
Service. The Executive Council is responsible for day-to-day government
operations. The Executive Council consists of five ministers who are chosen by
the legislative assembly from its 15 popularly-elected members, and the three
Civil Service members. The governor has reserved powers and the United Kingdom
retains full control over foreign affairs and defense. The Cayman Islands are a
common law jurisdiction and have adopted a legal system similar to that of the
United Kingdom.
CUSTOMS DUTIES AND TAXES
We are exempt from, or receive concessionary rates of, customs duties
on capital expenditures on plant and major consumable spares and supplies
imported into the Cayman Islands as follows:
o there are no income taxes in the Cayman Islands;
o we do not pay any import duty or taxes on permeator membranes,
electric pumps and motors and chemicals which we purchase;
o we pay 10% of the cost, including insurance and transportation
to the Cayman Islands, of other plant and associated materials
and equipment to manufacture or supply water in Seven Mile
Beach or West Bay.
GOVERNMENT REGULATION
Water Authority-Cayman is a statutory body which acts pursuant to the
provisions of The
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Water Authority Law, 1982. Water Authority-Cayman advises the executive council
of the Cayman Islands government regarding issuance and administration of
licenses under The Water (Production and Supply) Law of 1979, which is the law
under which we obtained our license. Water Authority-Cayman monitors our
operations on a continuing basis, including the quality of the water which we
supply. Our operations are also monitored by the government's Environmental
Health Department, which tests our water supply on a regular basis, as well as
the Public Works Department, Planning Department and Fire Service with respect
to our pipeline construction and other matters.
EMPLOYEES
We presently have 30 employees, four of whom are executive and
management personnel and six are engaged in administrative and clerical
positions. The remaining staff are engaged in plant maintenance and operations,
pipe laying and repair, leak detection, new customer connections, meter reading
and laboratory analysis of water quality. Our employees are not parties to a
collective bargaining agreement. We consider our relationship with our employees
to be good.
BREACH OF LICENSE
Our license requires us to obtain prior government approval for an
issuance or transfer of shares which (a) exceeds 5% of the issued shares of our
company, or (b) would, upon registration, result in any shareholder's owning
more than 5% of the issued shares. More than 5% of our ordinary shares are
registered in the name of Cede and Co., the nominee for the Depository Trust
Company, which is a clearing agency for shares held by participating banks and
brokers. We do not believe that these shareholdings by Cede and Co. constitute a
breach of the intent of the license. We believe that the purpose of this clause
of the license is to allow the government to approve significant shareholders of
our company. Cede and Co. and Depository Trust Company, however, act solely as
the nominee for banks and brokers, and have no beneficial ownership in the
ordinary shares. Nevertheless, our Cayman Islands' counsel has advised us that
these shareholdings by Cede & Co., which were not approved by the government,
are probably a technical breach of our license. In August and September 1994, we
completed an offering of 400,000 ordinary shares under Rule 504 of Regulation D
of the Securities Act of 1933. In September 1995, we completed a private
placement of 100,000 ordinary shares plus warrants to subscribe for an
additional 100,000 ordinary shares under Regulation S of the Securities Act
1933. In April 1996, we completed a public offering of 575,000 ordinary shares
and in June 2000 we completed a public offering of 773,000 ordinary shares.
Based upon the advice of our Cayman Islands' legal counsel, we determined that
the license did not require the government's approval to complete these
offerings.
However, if a court determined that the government's approval of these
offerings was required under the license, we would be in breach of the license.
Our Cayman Islands' legal counsel has advised us that to make this
determination, a court would have to disagree with our
9
interpretation of the license and dismiss several defenses which would be
available to us. These defenses include acquiescence and waiver on the part of
the government with respect to these offerings.
We have received a letter dated June 1, 2000, from an official of the
Cayman Islands' government, stating that a public offering of our ordinary
shares, which we completed in 1996 without the government's approval, was a
breach of our license. The letter is not clear as to whether the government also
views the completion of our 2000 public offering as a breach of our license. We
have responded to this letter and stated that we do not believe that we are in
breach of our license. A meeting with officials of the Cayman Islands'
government, to discuss this matter, was held on June 16, 2000 in accordance with
the government's suggestion in the June 1st letter. Discussion of the matter is
ongoing as of the date of this Annual Report. We have been advised by our Cayman
Islands' legal counsel that the June 1st letter from the Cayman Islands
government does not constitute a formal "notice of breach of the license" as
contemplated in the license. Accordingly, other than pursuing discussions of
this matter with the Cayman Islands' government, no other actions are presently
being pursued by us to "cure" any such alleged breaches.
ITEM 2. DESCRIPTION OF PROPERTY
In addition to the properties which we own where our water plants are
located, we lease approximately 3,200 square feet of space for our executive
offices at Trafalgar Place, West Bay Road, Grand Cayman Island. We have a
two-year lease with an extension provision on this property.
Our Governor's Harbour site consists of a waterfront portion. This
waterfront portion is not essential to our operations. We initially bought this
property to enhance the value of the entire Governor's Harbour site if we
decided to sell the site or develop it for other purposes. We purchased this
water frontage in 1992 from Hurricane Hideaway Ltd. At the same time, we
purchased Hurricane Hideaway Ltd., which owns certain development rights and
which is now a wholly-owned subsidiary of our company. We value our holdings in
Hurricane Hideaway Ltd. at CI$1.00 for balance sheet purposes. We believe that
our properties are suitable for the conduct of our current operations for the
foreseeable future.
Even though all properties on the Cayman Islands must comply with
government building codes, a large hurricane could cause significant damage to
our equipment and our customers' properties. We carry business interruption
insurance for an indemnity period of 12 months and employers'
liability/workmen's compensation insurance. Ocean Conversion, the current
operator of our Governor's Harbour plant, insures the plant for all
risks-material damage at its own expense. We and Ocean Conversion share equally
in the cost of public/product liability coverage for the plant. We also maintain
all risks or third party damage insurance in appropriate amounts on our motor
vehicles. We believe that we carry adequate insurance to cover any foreseeable
losses.
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ITEM 3. LEGAL PROCEEDINGS
We are not currently a party to any legal proceeding.
ITEM 4. CONTROL OF REGISTRANT
Other than for the terms of our license described in "ITEM 1.
DESCRIPTION OF BUSINESS," our company is not directly or indirectly owned or
controlled by another corporation or by any foreign government.
The table below sets forth the beneficial ownership of our ordinary
shares, par value CI$1.00 per share, and redeemable preference shares, par value
CI$1.00 per share, as of June 20, 2000, by: (i) all of our officers and
directors as a group, and (ii) each person who was known to us to be the
beneficial owner of more than 10% of the outstanding ordinary shares or
redeemable preference shares:
[Download Table]
Title of Identity of Amount Percentage
Class Person or Group Owned of Class
----- --------------- ----- --------
Ordinary J. Bruce Bugg, Jr. 537,662 14.0%
Shares /Argyle Cay-Water Ltd.
Ordinary Directors and Officers 1,035,201 26.9%
Shares as a group (12 persons)
Redeemable Abel Castillo 4,531 11.0%
Preference Operations Manager
Shares
Redeemable Gregory McTaggart 8,516 20.7%
Preference Vice President Operations
Shares
Redeemable Executive Officers 10,639 25.9%
Preference as a group (2 persons)
Shares
Our license with the Cayman Islands' government requires us to obtain
prior government approval for an issuance or transfer of shares which (a)
exceeds 5% of the issued shares of our company, or (b) would, upon registration,
result in any shareholder's owning more than 5% of the issued shares.
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ITEM 5. NATURE OF TRADING MARKET
Our 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. On June 20, 2000, we had approximately 569
holders of record of the ordinary shares. Management believes that of the
ordinary shares held of record, approximately 18% are registered to residents of
the Cayman Islands and 82% are registered to residents of other countries,
primarily the United States. All of the redeemable preference shares are owned
by residents of the Cayman Islands. Listed below for each quarter of the last
two fiscal years and the first quarter of 2000 are the high and low bid prices
for the ordinary shares on the Nasdaq National Market.
HIGH LOW
---- ---
First Quarter 1998 $ 6.00 $ 4.63
Second Quarter 1998 8.00 5.38
Third Quarter 1998 6.63 5.88
Fourth Quarter 1998 8.13 5.63
First Quarter 1999 7.75 6.50
Second Quarter 1999 7.75 6.75
Third Quarter 1999 7.44 6.25
Fourth Quarter 1999 7.25 5.94
First Quarter 2000 7.00 5.88
Second Quarter 2000 (through June 20, 2000) 8.00 5.88
The high and low bid prices in the table reflect interdealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
There is no trading market for the redeemable preference shares, which
are only issued to or purchased by long-term employees of our company and which
must be held by these employees for a period of four years before they may be
sold.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
Our company is not subject to any governmental laws, decrees or
regulations in the Cayman Islands which restrict the export or import of
capital, or that affect the remittance of dividends, interest or other payments
to non-resident holders of our securities. The Cayman Islands does not impose
any limitations on the right of non-resident owners to hold or vote the ordinary
shares. 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
12
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.
ITEM 7. TAXATION
The Cayman Islands presently impose no taxes on profit, income, capital
gains, or appreciations of our company and no taxes are currently imposed in the
Cayman Islands on profit, income, capital gains, or appreciations of the holders
of our securities or in the nature of estate duty, inheritance, or capital
transfer tax. There is no income tax treaty between the United States and the
Cayman Islands.
A major source of revenue to the Cayman Islands government is a 7.5% or
9% stamp tax, depending on location, on the transfer of ownership of land in the
Cayman Islands. To prevent stamp tax avoidance by transfer of the ownership of
the shares of a company which owns land in the Cayman Islands (as opposed to
transfer of the land itself), The Land Holding Companies (Share Transfer Tax)
Law was passed in 1976. The effect of this law is to charge a company which owns
land or an interest in land in the Cayman Islands a 7.5% tax on the value of its
land or interest in land attributable to each share transferred. The stamp tax
calculation does not take into account the proportion which the value of a
company's Cayman land or interest bears to its total assets and whether the
intention of the transfer is to transfer ownership of a part of a company's
entire business or a part of its Cayman land or interest. We no longer require
reimbursement of this tax from transferees as we have done in the past. We have
asked the Cayman Islands government to exempt our company from the landholding
companies which have to pay the tax on disposals of their shares. As of the date
of this Annual Report, the Cayman Islands government has not ruled on our
request.
ITEM 8. SELECTED FINANCIAL DATA
INTERNATIONAL ACCOUNTING STANDARDS
Set forth below is selected financial data based upon our financial
statements which have been prepared in accordance with International Accounting
Standards ("IAS"). The table contains information (expressed in US dollars)
derived from our audited financial statements for the five-year period ended
December 31, 1999. 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 financial statements for the years
ended December 31, 1996 and 1995 and accountant's reports thereon are not
included in this Annual Report.
13
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
STATEMENT OF INCOME DATA:
Total Income ......................... $ 8,249,988 $ 8,187,714 $ 7,468,726 $ 6,365,207 $ 5,934,433
Operating Income(1) .................. 1,946,599 1,656,996 1,345,640 1,138,174 1,268,044
Net Income(1)(2)... .................. 1,946,599 1,656,996 1,247,754 1,138,174 868,044
BALANCE SHEET DATA:
Net Fixed Assets ..................... 15,157,193 14,430,785 12,994,747 12,577,672 12,187,895
Current Assets ....................... 1,676,439 1,556,201 2,124,625 1,967,342 1,240,322
Total Assets ......................... 16,850,076 16,005,118 15,139,192 14,676,450 13,570,230
Current Liabilities .................. 2,306,079 1,515,971 1,499,865 1,371,345 2,661,795
LONG TERM LIABILITIES:
Long term debt obligation ............ 1,926,786 470,112 1,769,746 1,963,372 2,137,490
Long term purchase obligation ........ 320,141 1,256,275 1,692,011 2,127,748
Security deposit ..................... 42,482 42,482 42,482 42,482 42,482
Advances in aid of construction ...... 45,084 49,584 85,752 105,086 134,999
STOCKHOLDERS' EQUITY(3)................. 12,529,645 11,606,828 10,485,072 9,502,154 6,465,716
BASIC EARNINGS PER SHARE ............... 0.64 0.54 0.42 0.41 0.38
DIVIDENDS DECLARED PER SHARE............ 0.20 0.19 0.13 0.11 0.10
BASED ON NUMBER OF SHARES .............. 3,044,293 3,055,845 2,986,216 2,760,693 2,216,889
DILUTED EARNINGS PER SHARE ............. 0.61 0.52 0.40 0.38 0.37
BASED ON WEIGHTED NUMBER OF SHARES ..... 3,188,048 3,191,583 3,136,574 2,984,945 2,339,543
(1) Operating Income represents net income from operations before an exceptional
item of $400,000 in 1995 and $97,886 in 1997. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year Ended December
31, 1998 Compared to Year Ended December 31, 1997".
(2) Under US GAAP, compensation costs in stock option, purchase and award plans
are recognized as an expense over the periods in which the employee performs
services. Compensation costs are generally calculated as the difference between
fair value of shares of stock at the option's grant date and consideration
received. Therefore, under US GAAP, we would have been required to recognize
stock option compensation expense of $260,994,$205,063 and $135,352 for the
fiscal years ended 1999, 1998 and 1997 respectively. Under US GAAP, Statement of
Position 98-5 "Reporting on the Costs of Start-Up Activities" requires start up
costs to be expensed as incurred rather than deferred as currently allowed by
IAS. Therefore, under US GAAP, we would have been required to recognize start-up
costs of $115,888, $0 and $0 for the fiscal years ended 1999, 1998 and 1997,
respectively. Consequently, net income under US GAAP would have been $1,569,717,
$1,451,933 and $1,112,402 for the fiscal years ended 1999, 1998 and 1997,
respectively.
(3) Stockholders' equity under US GAAP would have been $11,778,299, $10,993,391
and $10,128,822 for the fiscal years ended 1999, 1998 and 1997, respectively.
This differs with stockholders' equity under IAS due to (i) recognition of stock
option compensation expenses; (ii) expensing of previously deferred start-up
costs; (iii) reversal of recognition of unrealized capital gains; and (iv)
reversal of certain dividends payable.
14
U.S. GAAP
Set forth below is the selected financial data prepared in accordance with
generally accepted accounting principles followed in the United States ("US
GAAP"). Please refer to Note 20 of the financial statements contained elsewhere
in this Annual Report for a summary of the differences between financial
statements prepared in accordance with IAS and financial statements prepared in
accordance with US GAAP. Under US GAAP, stockholders' equity would be
$11,778,299, $10,933,391 and $10,128,822 for the fiscal years ended 1999, 1998
and 1997, respectively due to: (i) the recognition of stock option compensation
expense and start-up costs referred to in footnote 2 above; (ii) the reversal of
certain dividends payable; and (iii) the reversal of recognition of unrealized
capital gains.
[Download Table]
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
---------- ---------- ----------
STATEMENT OF INCOME DATA:
Total Income ....................... 8,249,988 8,187,714 7,468,726
Net Income ......................... 1,569,717 1,451,933 1,112,402
BALANCE SHEET DATA:
Net Fixed Assets ..................... 14,738,438 14,127,918 12,691,880
Current Assets ..................... 1,676,439 1,556,201 2,124,625
Total Assets ....................... 16,431,321 15,702,251 14,836,325
Current Liabilities ................ 2,638,670 1,826,541 1,553,248
LONG TERM LIABILITIES:
Long Term Debt Obligation .......... 1,926,786 2,470,112 1,769,746
Long Term Purchase Obligation ...... -- 320,141 1,256,275
Security Deposit ................... 42,482 42,482 42,482
Advances in aid of construction .... 45,084 49,584 85,752
Stockholders' Equity ................. 11,778,299 10,933,391 10,128,822
BASIC EARNINGS PER SHARE ............. 0.51 0.47 0.37
DIVIDENDS DECLARED PER SHARE.......... 0.20 0.19 0.13
DILUTED EARNINGS PER SHARE ........... 0.49 0.45 0.35
15
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Our objective is to provide water services in areas where the supply of
potable water is scarce and where the use of reverse osmosis technology to
produce potable water is economically feasible. We have been operating our
business on Grand Cayman Island since 1973 and have been using reverse osmosis
technology to convert seawater to potable water since 1989. There is no natural
supply of fresh water on the Cayman Islands. We are currently in discussions
with government officials and private owners in North and South Bimini, Bahamas
and Belize to operate reverse osmosis plants and provide potable water to these
geographical areas.
For the year ended December 31, 1999, our net income increased by
approximately 17% to $1,946,599. There are no income taxes in the Cayman
Islands. In October 1999, we doubled our dividend to ordinary shareholders from
$0.16 per share to $0.32 per year, payable on a quarterly basis. As of February
29, 2000, our board of directors has established a policy that our company will
maintain a dividend pay-out ratio in the range of 50% to 60% of net income. This
policy is subject to modification by our board of directors. We expect to
continue increasing our dividend as our earnings grow.
We currently operate under an exclusive license from the Cayman Islands
government to provide potable water in Seven Mile Beach and West Bay, Grand
Cayman Island. We obtain water from two reverse osmosis plants on Grand Cayman,
which together are capable of producing 1.8 million U.S. gallons per day, or
approximately 657 million U.S. gallons per year. We own our reverse osmosis
plants and substantially all of the 63-miles of our underground distribution
infrastructure. For the year ended December 31, 1999, we supplied 401 million
U.S. gallons of water to hotels, residential customers, condominiums, other
commercial customers and government facilities.
Considerable development is taking place on Grand Cayman Island, and
particularly in our licensed areas, to accommodate both the growing local
population and increased tourism. Because our license requires us to supply
water to developments in our licensed area, the planning department of the
Cayman Islands government routinely advises us of proposed developments in our
licensed area. This advance notice allows us to manage our production capacity
to meet anticipated demand. We believe that we have or have contracted for a
sufficient supply of water to meet the foreseeable future demand.
We installed our first reverse osmosis plant in December 1989 at
Governor's Harbour, located in the Seven Mile Beach area, through a water
purchase agreement with Ocean Conversion (Cayman) Ltd. Under the agreement,
Ocean Conversion operates the plant, and we must purchase a minimum volume of
water from Ocean Conversion. In addition, Ocean
16
Conversion has to provide to us additional volumes of water upon demand up to a
fixed level, and any excess on a best efforts basis. The agreement requires a
plant capacity of 1.1 million U.S. gallons per day, which is the maximum
capacity of the plant. We make installment payments to Ocean Conversion against
the cost of the plant as part of the purchase price of the water provided to us
by them. As of March 31, 2000, the remaining installment payments owed to Ocean
Conversion totaled $234,065, and are scheduled to be completed by December 31,
2000. The agreement expires on December 31, 2004, at which time we will have
fulfilled our obligations under the agreement and we will be the sole owner and
sole operator of the plant. Upon expiration of our agreement with Ocean
Conversion, we expect that our operating costs at Governor's Harbour will
decrease significantly.
In 1995, we installed our second reverse osmosis seawater conversion
plant, this one at our West Bay site, and entered into a water purchase
agreement with United States Filter Corporation. Under this agreement, United
States Filter Corporation operated and maintained the plant until November 1998,
when we paid off the balance due for the plant and terminated the water purchase
agreement. We now own and are responsible for operation and maintenance of the
West Bay plant. This plant is capable of producing 710,000 U.S. gallons per day
of potable water.
OUR OPERATIONS UNDER THE LICENSE
The Cayman Islands government issued us an exclusive operational
license under The Water (Production and Supply) Law of 1979. The license gives
us the exclusive right to process potable water from seawater and then sell and
distribute that water by pipeline to Seven Mile Beach and West Bay, Grand Cayman
Island. The original twenty-year license was renegotiated in 1990 and extended
to expand our service area to include West Bay. The license terminates, unless
further renewed, on July 11, 2010.
Two years prior to the expiration of the license, we have the right to
negotiate with the government to extend the license for an additional term.
Unless we are in default under the license, the government may not grant a
license to any other party without first offering the license to us on terms
that are no less favorable than those which the government offers to a third
party.
We must provide, within our licensed area, any requested piped water
service which, in the opinion of the executive council of the Cayman Islands
government, is commercially feasible. Where supply is not considered
commercially feasible, we may require the potential customer to contribute
toward the capital costs of pipe laying. We then repay these contributions to
the customer, without interest, by way of a discount of 10% on future billings
for water sales until this indebtedness has been repaid. We have been installing
additional pipeline when we consider it to be commercially feasible, and the
Cayman Islands government has never objected to our determination regarding
commercial feasibility.
17
Under the license, we pay a royalty to the government of 7.5% of our
gross potable water sales revenue. The base selling price of water under the
license presently varies between $18.32 and $21.98 per 1,000 U.S. gallons,
depending upon the type and location of the customer and the monthly volume of
water purchased. The license provides for an automatic adjustment for inflation
on an annual basis, subject to temporary limited exceptions, and an automatic
adjustment for the cost of electricity on a monthly basis. The government
reviews and approves the calculations of the price adjustments for inflation and
electricity costs.
If we want to increase our prices for any reason other than inflation,
we have to request prior approval of the executive council of the Cayman Islands
government. If the parties fail to agree, the matter is referred to arbitration.
The last price increase that we requested, other than automatic inflation
adjustments since 1990, was granted in full in June 1985.
RESIDENTIAL AND COMMERCIAL OPERATIONS
We enter into standard contracts with hotels, condominiums and other
properties located in our licensed area to provide potable water to such
properties. We currently have agreements on differing terms and rates to supply
potable water to the 309-room Marriott Hotel and the 343- room Westin Hotel, and
to supply non-potable water to the SafeHaven Golf Course. We intend to enter
into standard contracts with four new hotel developments consisting of an
aggregate of approximately 540 additional rooms scheduled to open in 2000. We
bill on a monthly basis based on meter readings. Receivables are typically
collected within 30 or 35 days after the billing date and receivables not
collected within 45 days subject the customer to disconnection from our water
service. In 1999, we collected 99.9% of our receivables. Customers who have had
their service disconnected must pay re-connection charges.
In the Seven Mile Beach area, our primary customers are the hotels and
condominium complexes which serve the tourists. In the West Bay area, our
primary customers are residential homes. Occasionally, we also supply to, or buy
from, on an as-needed basis, the Water Authority-Cayman, which serves the
business district of George Town and other parts of Grand Cayman Island.
WASTEWATER SERVICES
We began providing sewerage services on Grand Cayman in 1973. The
Cayman Islands government, through Water Authority-Cayman, constructed a public
sewerage system in part of the Seven Mile Beach area where Governor's Harbour is
located. On September 1, 1988, Water Authority-Cayman began processing sewage
delivered by our pipelines and lift stations in that area. We stopped our
processing of sewage on that date. Water Authority-Cayman currently directly
bills our former sewerage customers for its services. We have advised Water
Authority-Cayman that on December 31, 2000 we will formally transfer ownership
of the sewerage system operations to the Governor's Harbour Homeowners'
Association.
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DEMAND FOR WATER IN THE CAYMAN ISLANDS
In the past, demand on our pipeline distribution has varied throughout
the year. However, an increase in year-round tourism in recent years has created
more uniform demand for water throughout the year. Demand depends upon the
number of tourists visiting the Cayman Islands and the amount of rainfall during
any particular time of the year. Traditionally the highest demand arises in the
first two quarters of the calendar year which corresponds with the high tourist
season and the lowest demand arises in the third quarter of the year which
corresponds with the period with the most rainfall and the least amount of
tourist arrivals. In general, 75% of tourists come from the United States. Our
operating results in any particular quarter are not indicative of the results to
be expected for the full fiscal year. The table below lists the total volume of
water we supplied on a quarterly basis for the years ended December 31, 1999,
1998, 1997 and 1996 to all our customers.
[Download Table]
1999 1998 1997 1996
------- ------- ------- -------
(in thousands of U.S. gallons)
First Quarter ...... 107,031 109,255 100,853 85,998
Second Quarter ..... 113,007 108,334 98,473 86,559
Third Quarter ...... 90,888 90,950 87,483 81,241
Fourth Quarter ..... 90,421 92,011 89,941 74,666
------- ------- ------- -------
Total .... 401,347 400,550 376,750 328,464
======= ======= ======= =======
RECENT DEVELOPMENTS
During the first quarter of this year, several new developments were
completed in our exclusive service area. These developments include a 132-room
Sunshine Suites Hotel, a 100-room Comfort Suites Hotel and Phase I, consisting
of 76 suites, of the 152-suite Grand Caymanian Beach Club time-share resort. For
the three months ended March 31, 2000, water pumped through our distribution
system to customers increased by approximately 7.5% compared with the same
period in 1999. Our total income increased by 23.8% from $2,160,000 to
$2,680,000 for the three-month periods ended March 31, 1999 and 2000,
respectively. Our net income for the same periods increased by 23% from $609,000
to $749,000.
On June 27, 2000, we entered into a stock purchase agreement to
purchase all of the issued and outstanding capital stock of a company organized
under the laws of Belize. This company owns an existing reverse osmosis plant
in Belize, which we will acquire upon closing of this transaction. Although we
paid a deposit to the seller, the closing of the transaction is subject to
approval by the appropriate governmental authorities in Belize, including the
Water and Sewerage Authority, as well as certain other conditions precedent to
closing. The closing date is currently scheduled for July 21, 2000, although it
may be re-scheduled by mutual agreement of the parties. Our deposit will be
returned to us if the appropriate government authorities do not approve the
transaction before the closing date or certain other closing conditions are not
satisfied.
TOTAL INCOME
Our total income includes pipeline sales income, other income and
interest income. Pipeline sales income derives from water sales to our customers
and to Water Authority-Cayman. Other income consists of monthly meter rental
charges, sales of water to trucks which deliver to customers not connected to
our pipeline, connection charges for new customers and re-
19
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. Interest income
relates to interest derived from excess cash balances placed on term deposit.
EXPENSES
Expenses include direct production expenses and our indirect, or
general and administrative expenses. Direct production expenses include royalty
payments to the Cayman Islands government, electricity and chemical expenses,
payments to Ocean Conversion relating to operation of the Governor's Harbour
plant, production equipment and facility depreciation costs, equipment
maintenance and expenses and operational staff costs. Indirect, or general and
administrative expenses, consist primarily of salaries and employee benefits for
personnel, administrative office lease payments, legal and professional expenses
and financing costs. There are no income taxes in the Cayman Islands.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998.
TOTAL INCOME
Total income increased by 1% from $8,187,714 to $8,249,988 for the
years ended December 31, 1998 and 1999, respectively. Total income increased
despite the closure of two hotels in May and August 1998 consisting of a total
of 350 rooms in the Seven Mile Beach area. The decline in available hotel rooms,
in addition to year 2000 concerns over the Christmas 1999 period, contributed to
a corresponding decrease in tourist arrivals during the year. In addition, our
automatic inflation adjustment led to a slight decrease in prices for most of
our customers in the West Bay and Seven Mile Beach areas. The decline in
pipeline sales in the Seven Mile Beach area, however, was more than offset by an
increase in sales volume to new West Bay customers and new revenues from the
Britannia settlement. Total pipeline sales in the Seven Mile Beach area
decreased by 3% from $5,391,455 to $5,231,465 for the years ended December 31,
1998 and 1999, respectively. Total pipeline sales in the West Bay area increased
by 15% from $1,960,392 to $2,248,931 for the years ended December 31,1998 and
1999, respectively.
EXPENSES
Direct expenses decreased by 9% from $5,095,373 to $4,624,422 for the
years ended December 31, 1998 and 1999, respectively. Direct expenses decreased
primarily due to the termination of the United States Filter contract, which
immediately decreased costs at the West Bay plant. As a percentage of total
income, direct expenses decreased from 62% of total income
20
to 56% for the years ended December 31, 1998 and 1999, respectively.
Indirect expenses increased by 17% from $1,435,345 to $1,678,967 for
the years ended December 31, 1998 and 1999, respectively, primarily due to
substantial legal costs incurred in the first quarter of 1999. These legal costs
principally relate to the final settlement of the Britannia development lawsuit
in April 1999. All legal costs were expensed as incurred. Other indirect costs,
such as executive and administrative staff costs, rent and utilities, increased
in line with inflation. As a percentage of total income, indirect expenses
increased from 18% of total income to 20% of total income for the years ended
December 31, 1998 and 1999, respectively.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997.
TOTAL INCOME
Total income increased by 9.6% from $7,468,726 to $8,187,714 for the
years ended December 31, 1997 and 1998, respectively. Total income increased
primarily as a result of increased pipeline sales volume in both the Seven Mile
Beach and West Bay areas, which reflected an increase in tourist arrivals and
additional new residential customers. Our automatic inflation adjustment led to
a slight increase in prices for most of our customers in the West Bay and Seven
Mile Beach areas. Total pipeline sales in the Seven Mile Beach area increased by
7% from $5,019,010 to $5,391,455 for the years ended December 31, 1997 and 1998,
respectively. Total pipeline sales in the West Bay area increased by 18% from
$1,666,854 to $1,960,392 for the years ended December 31, 1997 and 1998,
respectively. In addition, in the first quarter of 1998, sales to Water
Authority-Cayman were $120,146 in 1998 compared to $16,508 in 1997.
EXPENSES
Direct expenses increased by 6% from $4,806,552 to $5,095,373 for the
years ended December 31, 1997 and 1998, respectively, primarily due to severance
payments related to the closure of our vapor compression plant. Cost and
operating efficiencies of our reverse osmosis plants caused us to complete the
closing of our vapor compression plants in 1998. As a percentage of total
income, direct expenses decreased from 64% of total income to 62% for the years
ended December 31, 1997 and 1998, respectively.
Indirect expenses increased by 9% from $1,316,534 to $1,435,345 for the
years ended December 31, 1997 and 1998, respectively. Indirect expenses
increased due to significant legal and professional costs in connection with the
Britannia development dispute and other non-recurring matters such as the cost
of establishing our option deed. As a percentage of total income, indirect
expenses remained consistent at 18% of total income for the years ended December
31, 1997 and 1998, respectively.
21
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
We generate cash from our plant operations at West Bay and Seven Mile
Beach, from the sale of our shares and our two bank loans. Cash flow from
operating activities was provided by our plant operations, and is impacted by
operating and maintenance expenses, the timeliness and adequacy of rate
increases, excluding automatic adjustments to our rates for inflation and
electricity costs, and various factors affecting tourism in the Cayman Islands,
such as weather conditions and the economy. We use cash to fund our operations
in the Cayman Islands, to make payments under our operating agreement with Ocean
Conversion for our Governor's Harbour plant, to expand our infrastructure, to
pay dividends, to repay principal on our loans and to repurchase our shares when
appropriate.
OPERATING ACTIVITIES
Cash from operating activities in 1999 was $2,717,605, compared to
$2,570,558 in 1998. This increase was primarily due to an increase in net income
from operations. We expect cash from operating activities to increase in 2000 as
we begin to generate customer revenues from four new hotels scheduled to open in
our Seven Mile Beach license area in 2000. The construction of these new hotels
is scheduled to be completed in 2000.
INVESTING ACTIVITIES
Cash used in investing activities in 1999 was $1,541,448, compared to
$2,184,783 in 1998. In November 1998, we terminated our water purchase agreement
with United States Filter Corporation and fully repaid our capital lease
obligations at a total cost of $1,027,567. In 1999, investing activities
consisted primarily of purchase of property, plant and equipment. As of December
31, 1997, the remaining book value of the vapor compression equipment previously
used by our company was written down to zero, and this amount was recorded as an
exceptional item in the 1997 Statement of Income and Retained Earnings. Efforts
to dispose of the remaining equipment either intact or for scrap were completed
in 1998. Amounts raised from this process were not material.
FINANCING ACTIVITIES
Cash used in financing activities in 1999 was $1,995,718, compared to
$725,008 in 1998. On December 3, 1998, our shareholders approved a share
repurchase program. As of December 31, 1999, we had repurchased 110,752 ordinary
shares at an average cost of $7.44 per share, and on January 6, 2000 we
repurchased 79,100 shares at $6.25 per share from a shareholder whose assets
were being liquidated. As of October 26, 1999, we suspended the open-market
repurchase of our shares.
22
Our West Bay and Governor's Harbour plants were financed by an increase
in our long-term purchase obligation. We financed the expansion of the water
distribution system in the West Bay area with a $2,500,000 loan issued by the
European Investment Bank and our existing credit facility with the Royal Bank of
Canada. The interest rate on the European Investment Bank loan is the bank's
prevailing lending rate at the time of draw-down less a subsidy of 4%. As of the
date of this Annual Report, $1,568,126 is outstanding under the European
Investment Bank loan. The total lending facility from the Royal Bank of Canada
comprises a revolving line of credit with a limit of $1,500,000 and term loans
with a limit of $4,000,000. As of December 31, 2000, a term loan of $1,000,000
has been drawn down and is being repaid over a five-year period. We made an
accelerated payment of $200,000 against this loan in 1999 using excess operating
cash flow. The Royal Bank of Canada lending facility and the European Investment
Bank loan are secured by all of our land and other assets. We expect to use the
proceeds of this offering to pay down outstanding amounts under the Royal Bank
of Canada facility.
In 1999 we declared three quarterly dividends of $.04 per share per
quarter and a dividend of $.08 per share for the final quarter, compared to
$0.07 per share declared in the first quarter of 1998 and three quarterly
dividends of $.04 per share per quarter in the last three quarters of 1998.
PUBLIC OFFERING OF ORDINARY SHARES
In June 2000, we completed a public offering of 773,000 ordinary
shares at a per share price of $7.50. After deducting underwriting commissions
and other offering expenses, our net proceeds from the offering were
approximately $5,050,000. We intend to use the proceeds from this offering to
retire approximately $2.1 million of existing debt, for implementation of our
growth strategy and for capital expenditures and general corporate purposes.
IMPACT OF INFLATION
There has been little variation in the consumer price index for the
Cayman Islands in the past five years, ranging between 155 and 180, based on a
base point of 100 in September 1984. We believe that the impact of inflation and
changing prices on our net income will not be material. In addition, under the
terms of the license, there is an automatic price adjustment for inflation on an
annual basis, subject to temporary exceptions.
EXCHANGE RATE
The official exchange rate for conversion of Cayman Islands Dollars
into United States Dollars has been fixed since 1974 at US$1.00 to CI$.83.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
We will be subject to the following changes in International Accounting
Standards which will become effective for the year ending December 31, 2000.
Revised IAS 10 contains new guidelines regarding recognition of
post-balance sheet events, including dividends. We have not yet adopted revised
IAS 10 and it is not expected to have any effect on our financial statements.
IAS 37 specifies criteria for recognition of provisions, contingent
liabilities and contingent losses. It contains guidelines for determining when
an enterprise that has a present
23
legal or constructive obligation as a result of past events should recognize a
provision. We have not yet adopted IAS 37 and it is not expected to have any
effect on our financial statements.
IAS 38 specifies criteria for the recognition of intangible assets,
such as internally generated intangible assets. We have not yet adopted IAS 38,
but will have to do so for the fiscal year ending December 31, 2000. IAS 38 will
have a significant effect on our financial statements for the fiscal year ending
December 31, 2000 due to a required expensing of $115,888 for organizational
costs, which do not qualify as an intangible asset under IAS 38.
We will be subject to the following changes in International Accounting
Standards which will become effective for the year ending December 31, 2001.
IAS 39 requires all financial assets and financial liabilities to be
recognized on a company's balance sheet, including all derivatives. It increases
the use of fair value as a measurement of financial instruments, but does not
require this in all cases. IAS 39 supplements the disclosure requirements of IAS
32. We have not yet adopted IAS 39 and it is not expected to have any effect on
our financial statements.
DIFFERENCES BETWEEN IAS AND U.S. GAAP
Our financial statements are prepared in accordance with International
Accounting Standards, referred to as IAS. IAS differs from U.S. generally
accepted accounting principles, referred to as U.S.GAAP. There are four major
ways in which these differences impact the financial statements of our company.
The major differences involve asset treatment of land, treatment of dividends
payable, fixed asset impairment, and the recognition of stock option
compensation expense. Of these differences, stock option compensation expense
most significantly affects the net income in our historical financial
statements. Compensation costs are generally calculated as the difference
between fair value of shares of stock at the option grant date and consideration
received. Under IAS, stock options, option purchase and award plans are
recognized when effected, whereas in U.S. GAAP, they are recognized as an
expense over the periods in which the employee performs services. Under U.S.
GAAP, we would have been required to recognize stock option compensation expense
of $260,994, $205,063, $135,352, $176,542 and $423,584 for the fiscal years
ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively.
Correspondingly, under U.S. GAAP, stockholders' equity would be $11,778,229,
$10,933,391, $10,128,822, $8,595,315 and $5,676,189 for the fiscal years ended
December 31, 1999, 1998, 1997, 1996 and 1995, respectively. We expect that any
future adjustment due to stock option compensation expense will be immaterial
because we have amended the employment agreements with Jeffrey Parker and Peter
Ribbins so that the exercise price of any future stock options issued to these
persons will be at the prevailing market price. The notes to our financial
statements included in this Annual Report contain a discussion of recent U.S.
GAAP Accounting Pronouncements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements", or
SAB 101. Among other things, SAB 101 discusses the SEC staff's view on
accounting for connection fees received from customers. We are currently
evaluating the impact of SAB 101 on the accounting for connection fees income.
Should we determine that a change is necessary, such a change will be made
effective January 1, 2000 and would result in a charge to results of operations
for the cumulative effect of the change. This amount, if recognized, would be
recorded as deferred revenue and recognized as revenue in future periods. Prior
financial statements would not be restated.
24
FORWARD-LOOKING STATEMENTS
We discuss in this Annual Report and in documents which we have
incorporated into this Annual Report by reference matters which are not
historical facts, but which are "forward-looking statements." We intend these
forward looking statements to qualify for safe harbor from liability established
by the Private Securities Litigation Reform Act of 1995. These forward-looking
statements include, but are not limited to, our future plans, objectives,
expectations and events, assumptions and estimates about our company and our
industry in general.
The forward-looking statements in this Annual Report reflect what we
currently anticipate will happen. What actually happens could differ materially
from what we currently anticipate will happen. We are not promising to make any
public announcement when we think forward looking statements in this Annual
Report are no longer accurate whether as a result of new information, what
actually happens in the future or for any other reason.
Important matters that may affect what will actually happen include,
but are not limited to, tourism in the Cayman Islands, scheduled new
construction within our licensed area, the U.S. and Cayman Islands economies,
regulatory matters, weather conditions in the Cayman Islands, availability of
capital for expansion of our operations, and other factors described in the
"RISK FACTORS" section below as well as elsewhere in this Annual Report.
RISK FACTORS
We have described for you below some risks which may materially and
adversely affect our business, financial condition or results of operations.
WE RELY ON AN EXCLUSIVE LICENSE IN THE CAYMAN ISLANDS WHICH MAY NOT BE
RENEWED IN THE FUTURE AND UNDER WHICH WE MUST OBTAIN PRIOR APPROVAL FOR AN
INCREASE IN OUR RATES FOR ANY REASON OTHER THAN INFLATION. We presently operate
as a public water utility under an exclusive license originally issued to us in
December 1979 by the government of the Cayman Islands. We own our production
infrastructure and substantially all of our distribution infrastructure.
Our license expires on July 11, 2010. If we are not in default of any
terms of the license, we have a right of first refusal to renew the license on
terms that are no less favorable than those which the government offers to a
third party. Nevertheless, we cannot assure you that the government will renew
our license or that we will be able to negotiate a new license on satisfactory
terms.
Under our license, we must obtain prior approval from the Cayman
Islands government to increase our rates for any reason other than inflation.
Our ability to raise our rates is limited by this requirement, including
potential delays and costs involved in obtaining government approval for a rate
increase.
25
OUR BUSINESS IS AFFECTED BY TOURISM, WEATHER CONDITIONS, THE CAYMAN
ISLANDS ECONOMY AND THE U.S. ECONOMY. Tourist arrivals and weather conditions on
the Cayman Islands impact the demand for our water. Normally, the highest demand
is in the first two quarters of each calendar year, which corresponds with the
high tourist season. Lowest demand for water arises in the third quarter of each
calendar year, which corresponds with the period with the most rainfall and the
least tourist arrivals. Approximately 75% of tourists to the Cayman Islands come
from the U.S. In addition, development activity in the Cayman Islands often
decreases during downturns in the U.S. economy, which is tracked by the Cayman
Islands economy. Accordingly, a significant downturn in tourist arrivals to the
Cayman Islands or in the U.S. economy for any reason would be detrimental to our
revenues and operating results. As a result of the seasonal nature of our
operations, the revenues and profitability we achieve in any one quarter is not
indicative of our expected profitability for a full fiscal year.
WE MAY HAVE DIFFICULTY ACCOMPLISHING OUR GROWTH STRATEGY WITHIN AND
OUTSIDE OF THE CAYMAN ISLANDS. Even though we have an exclusive license for our
present service area, our ability to expand our service area in the Cayman
Islands is limited at the discretion of the Cayman Islands government.
Further, part of our long-term growth strategy is to expand our water
supply and distribution operations to locations outside the Cayman Islands, such
as the Bahamas. Our expansion into new locations depends on our ability to
identify suitable new service territories and to obtain necessary permits and
licenses to operate in these territories.
Although we believe that we have sufficient capital to satisfy our
capital requirements for expansion in the Cayman Islands for the next twelve
months, we will need additional financing to further expand our operations
elsewhere. We cannot make any assurances to you that we will be able to obtain
the additional financing which we may need to expand our operations on
satisfactory terms, if at all.
Our expansion to territories outside the Cayman Islands includes
significant risks, including, but not limited to, the following:
o regulatory risks, including government relations difficulties,
local regulations and currency controls;
o risks related to operating in foreign countries, including
political instability, reliance on local economies,
environmental or geographical problems, shortages of materials
and skilled labor; and
o risks related to development of new operations, including
assessing the demand for water, engineering difficulties and
inability to begin operations as scheduled.
If our expansion plans are successful, we may have difficulties in
managing our growth outside the Cayman Islands, which are currently the center
of our operations. Expanding our
26
operations to areas outside the Cayman Islands will require us to hire and train
new personnel, expand our management information systems and control our
operating expenses. We cannot currently estimate the costs required or assure
you that any new operations outside the Cayman Islands will attain or maintain
profitability or that the results from these new operations will not negatively
impact our overall profitability.
OUR OPERATIONS IN THE CARIBBEAN COULD BE HARMED BY HURRICANES. The
Cayman Islands, like the rest of the Caribbean, are susceptible to damage from
hurricanes. A significant hurricane could cause major damage to our equipment
and properties and the properties of our customers, including the large tourist
properties in the Seven Mile Beach area. This would result in decreased revenues
from water sales until the damaged equipment and properties are repaired and the
tourism industry returned to the status quo before the hurricane.
WE ARE NOT FULLY INSURED AGAINST HURRICANE DAMAGE. The Cayman Islands
have been directly hit by one hurricane since we began operations in 1973, and
the damage to our properties and equipment was minimal. We are not fully insured
on our underground water distribution system or the Governor's Harbour
reservoirs which are constructed from earthen berms, although we are fully
insured on all of our other above-ground property and equipment including our
reverse osmosis equipment, machinery, other equipment, buildings and the West
Bay reservoir tanks at their estimated replacement value. We will evaluate our
needs and obtain the insurance coverage that we believe is necessary for any new
operations outside the Cayman Islands. A severe hurricane which resulted in
major damage to our properties and equipment could have a material adverse
affect on our operating results.
WE COULD BE NEGATIVELY AFFECTED BY POTENTIAL GOVERNMENT ACTIONS AND
REGULATIONS. There is always a possibility that the government may issue
legislation or adopt new regulations:
o restricting foreign ownership of our company;
o providing for the expropriation of our assets by the
government;
o providing for nationalization of public utilities by the
government;
o providing for different water quality standards;
o resulting in unilateral changes to or renegotiation of our
exclusive license; or
o causing currency exchange fluctuations or devaluations or
changes in tax laws.
SERVICE OF PROCESS AND ENFORCEMENT OF LEGAL PROCEEDINGS AGAINST US IN
THE UNITED STATES MAY BE DIFFICULT TO OBTAIN. Service of process on our company
and our directors and officers, nine out of twelve of whom reside outside the
United States, may be difficult to obtain within the United States. Also, since
substantially all of our assets are located in the Cayman
27
Islands, any judgment obtained in the United States against us may not be
collectible within the United States.
Civil liabilities under the Securities Act of 1933 or the Securities
Exchange Act of 1934 for original actions instituted outside the Cayman Islands
may or may not be enforceable. There is no reciprocal enforcement of foreign
judgments between the United States and the Cayman Islands, so foreign judgments
originating from the United States are not directly enforceable in the Cayman
Islands.
A prevailing party in a United States proceeding against us or our
officers or directors would have to initiate a new proceeding in the Cayman
Islands using the United States judgment as evidence of the party's claim. Any
action would have to overcome available defenses in the Cayman Islands courts,
including, but not limited to:
o lack of competent jurisdiction in the United States courts
(including competent jurisdiction according to the rules of
private international law currently in effect in the Cayman
Islands);
o lack of due service of process in the United States
proceeding;
o that United States judgments or their enforcement are contrary
to the law, public policy, natural justice, security or
sovereignty of the Cayman Islands;
o that United States judgments were obtained by fraud or
conflict with any other valid judgment in the same matter
between the same parties; and
o that proceedings between the same parties in the same matter
were pending in a Cayman Islands court at the time the lawsuit
was instituted in the United States court.
A United States judgment awarding remedies unobtainable in any action
in the courts of the Cayman Islands (for example, treble damages, which would
probably be regarded as penalties), probably would not be enforceable under any
circumstances.
WE RELY HEAVILY ON THE EFFORTS OF SEVERAL KEY EMPLOYEES. Our success
depends upon the abilities of our executive officers. In particular, the loss of
the services of Jeffrey Parker, our Chairman and Chief Executive Officer, or
Peter Ribbins, our President and Chief Operating Officer, at any time could be
detrimental to our operations and our continued success. Although Messrs. Parker
and Ribbins have entered into employment agreements extending until December 31,
2001 and August 19, 2000, respectively, which extend automatically every year
for an additional one-year term, we cannot guarantee that Mr. Parker or Mr.
Ribbins will continue to work for us during the term of their agreements. Also,
none of our employees have entered into non-compete agreements with us.
28
PROVISIONS IN OUR ARTICLES OF ASSOCIATION, REQUIREMENTS OF GOVERNMENT
APPROVAL AND AN OPTION DEED ADOPTED BY OUR BOARD OF DIRECTORS MAY DISCOURAGE A
CHANGE IN CONTROL OF OUR COMPANY AND MAY MAKE IT MORE DIFFICULT FOR YOU TO SELL
YOUR ORDINARY SHARES. An issuance or transfer of a number of shares which (a)
exceeds 5% of the issued shares of our company, or (b) would, upon registration,
result in any shareholder owning more than 5% of the issued shares, requires the
prior approval of the Cayman Islands government.
It may be difficult for a shareholder to acquire more than 5% of our
shares and be able to influence significantly our board of directors or obtain a
controlling equity interest in our company and change our management and
policies.
Our articles of association include provisions which may discourage or
prevent a change in control of our company. For instance, our board of directors
consists of three groups. Each group serves a staggered term of three years
before the directors in the group are up for re-election. Also, the board of
directors may refuse to register any transfer of shares on our books. This
provision of the articles of association ensures that the board of directors is
not legally obligated to register a share transfer which would cause us to be in
breach of the government license as discussed above. Our board of directors has
never refused to approve the registration of the transfer of shares.
We have also adopted an option deed, which is similar to a poison pill.
The option deed will discourage a change in control of our company by causing
substantial dilution to a person or group who attempts to acquire our company on
terms not approved by the board of directors.
As a result of these provisions which discourage or prevent an
unfriendly or unapproved change in control of our company, you may not have an
opportunity to sell your ordinary shares at a higher market price, which, at
least temporarily, typically accompanies attempts to acquire control of a
company through a tender offer, open market purchases or otherwise.
WE ARE IN TECHNICAL BREACH OF THE TERMS OF OUR LICENSE. As stated
above, our license requires that the Cayman Islands government approves in
advance any issuance or transfer of ordinary shares which represents more than
5% of the issued shares, or which would increase the ownership of any
shareholder above 5% of the issued shares of our company.
More than 5% of our issued and outstanding shares are and in the future
may be registered in the name of Cede and Co. Cede and Co. is the nominee for
the Depository Trust Company, otherwise know as DTC, which is a clearing agency
for shares held by participating banks and brokers. We are probably in breach of
our license for failing to get prior approval for Cede and Co.'s shareholdings.
We may be in breach of our license for failing to get prior approval for prior
public and private offerings of our shares.
We have advised the government of these potential technical breaches on
numerous occasions and have requested that the government modify our license. As
of the date of this
29
Annual Report, the government has not made any determination as to our request
to modify the license. We cannot give you any assurances that the government
will either modify the license or refrain from exercising its rights under the
license with respect to our possible breach of this clause.
In June 2000, we received a letter from an official of the Cayman
Islands' government stating that a public offering which we completed in 1996
without government approval was a breach of our license. Our license requires
the Cayman Islands government to give us notice of and an opportunity to cure a
breach. We have been advised by our Cayman Islands' counsel that this letter
does not constitute a formal "notice of breach" as contemplated in the license.
If the government finds that we are in breach, we believe we could remedy this
breach by electing that the shares no longer be DTC eligible. However, this
election likely would adversely affect interest in our shares by banks, brokers,
market makers, investors and other persons who wish to hold the shares in
street name through DTC. This would impair the liquidity and market for our
shares.
If we cannot remedy a breach of our license, the government may appoint
a person to operate our business on an interim basis. We may then apply to the
government for reinstatement of our license. If the license is not reinstated,
the government may appoint a new licensee to service the licensed area using all
or a portion of our existing production and distribution systems. In this case,
the government would have to compensate us for taking any of our assets, based
upon the value of those assets as a unit of production excluding goodwill as
determined by three appointed appraisers. No assurance can be given that the
interim operator will manage the business successfully or that the price paid by
the government would reflect the growth potential of our company. In addition,
there can be no assurance that you would receive a cash dividend from such
proceeds in the event of a government purchase.
THERE MAY BE A RISK OF VARIATION IN CURRENCY EXCHANGE RATES. Although
we report our results in United States dollars, the majority of our revenue is
earned in Cayman Islands dollars. The Cayman Islands dollar is presently fixed
at US$1=CI$0.83. The rate of exchange has been fixed since 1974. As a result, we
do not hedge against any exchange rate risk associated with our reporting in
United States dollars. However, if the fixed exchange rate becomes a floating
exchange rate, our results of operations could be affected.
SHARES ELIGIBLE FOR FUTURE SALE UNDER RULE 144 OF THE SECURITIES ACT
MAY ADVERSELY AFFECT THE MARKET PRICE OF THE ORDINARY SHARES. As of June 20,
2000, there were 3,845,615 ordinary shares issued and outstanding. With the
exception of ordinary shares held by officers, directors, ten percent
shareholders and other affiliates of our company, all or substantially all of
the shares may be immediately sold without registration under the Securities Act
of 1933. These shares may be sold under Rule 144(k) or under the exemption
provided by Section 4(1) of the Securities Act for transactions by any person
other than an issuer, underwriter or dealer.
In addition, the estimated 904,915 ordinary shares held by our
affiliates are eligible for
30
resale in compliance with Rule 144 of the Securities Act. Any substantial sale
of the ordinary shares under Rule 144, or otherwise, may have an adverse effect
on the market price of the ordinary shares.
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not currently transact business in any foreign countries and
have not engaged in any currency hedging activities to date. We do not use
derivative financial instruments for speculative trading purposes and to date
have not been a party to any financial instruments or contracts that expose us
to material market risk.
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
OUR DIRECTORS AND EXECUTIVE OFFICERS
Under our license with the Cayman Islands government, the Cayman
Islands government must approve all of our executive officers and directors.
This table lists information concerning our executive officers and directors:
[Enlarge/Download Table]
Name Age Position with Consolidated Water
----- --- --------------------------------
Jeffrey M. Parker ...................................... 55 Chairman of the Board of Directors
and Chief Executive Officer
Peter D. Ribbins........................................ 52 Director, President and Chief
Operating Officer
Gregory S. McTaggart.................................... 36 Vice President - Operations
Alexander S. Bodden..................................... 36 Vice President - Finance and
Secretary
J. Bruce Bugg, Jr....................................... 45 Vice Chairman of the Board of
Directors
Brian E. Butler......................................... 50 Director
Steven A. Carr.......................................... 50 Director
Richard L. Finlay....................................... 41 Director
Clarence B. Flowers, Jr................................. 44 Director
Frederick W. McTaggart.................................. 37 Director
Wilmer Pergande......................................... 60 Director
Raymond Whittaker....................................... 46 Director
JEFFREY M. PARKER has been a director of our company since 1980, the
Chairman of the Board since 1982 and Chief Executive Officer since 1994. In
addition to serving as our Chief Executive Officer and Chairman of the Board,
Mr. Parker is a Chartered Accountant and practices as Moore Stephens in the
Cayman Islands, a member of Moore Stephens International Ltd. From 1993 to 1995,
Mr. Parker served as a director of The International Desalination Association
representing the Caribbean & Latin America. Mr. Parker received his ACA
31
designation as a chartered accountant in England in 1967, and his FCA
designation in 1977.
PETER D. RIBBINS is our President and Chief Operating Officer and has
served as a director since 1989. Mr. Ribbins joined our company in 1983 as its
General Manager, a position he held until 1989 when he was appointed Managing
Director. He was appointed President and Chief Operating Officer in 1994. Mr.
Ribbins obtained his B.S. degree in Kinanthropology from the University of
Ottawa, Canada in 1971.
GREGORY S. MCTAGGART is our Vice President-Operations. Mr. McTaggart
joined our company in January 1991 as our resident engineer and has served in
his current capacity since October 1994. For three years before joining us, Mr.
McTaggart worked for the Caribbean Utilities Company as a mechanical engineer.
Mr. McTaggart obtained his B.S. degree in Mechanical Engineering from the
Georgia Institute of Technology in 1986. Mr. McTaggart is the brother of
Frederick W. McTaggart, a director of our company.
ALEXANDER S. BODDEN is our Vice President-Finance and Secretary. Mr.
Bodden joined our company in July 1993 as Financial Controller and was appointed
Secretary in April 1994 and Vice President-Finance in October 1994. Before
joining our company, Mr. Bodden worked with Price Waterhouse in the Audit and
Business Services division. Mr. Bodden obtained his B.A. (Hons), in Accounting
and Finance from the City of London University in 1985 and his ACA designation
as a Chartered Accountant in England in 1990.
J. BRUCE BUGG, JR. has been our Vice-Chairman of the Board since April
1998. Mr. Bugg is also and has been since 1997, the Chairman of the Board of
Directors and Chief Executive Officer of Argyle Investment Co., the general
partner of Argyle Partners Ltd., the sole general partner of Argyle/Cay-Water,
Ltd. From 1996 to 1997, Mr. Bugg served as Vice Chairman of First Southwest
Company and Chairman of its Investment Banking Group.
BRIAN E. BUTLER has been a director of our company since 1983. Since
1977, Mr. Butler has been the principal of Columbus Developments Ltd., a
property development company specializing in luxury resort projects in the
Cayman Islands.
STEVEN A. CARR has served as a director of our company since May 2000.
Since 1994, Mr. Carr has been the President of Carr & Associates, a private
investment firm located in Bryan, Texas. Before joining Carr & Associates, Mr.
Carr held a variety of executive positions and participated in the ownership and
management of a number of telecommunications ventures throughout the United
States. Mr. Carr has served as an alternate director on our board of directors
for his father, Hal N. Carr, since 1998. Mr. Carr is also currently a director
of the First National Bank of Bryan. In addition to his business interests, Mr.
Carr is an instructor at the College of Business Administration at Texas A&M
University.
RICHARD L. FINLAY has served as a director of our company since January
1995. Mr. Finlay is an attorney and partner with the Cayman Islands law firm of
Charles Adams, Ritchie and Duckworth. Before joining this firm in 1993, he
served as Director of Legal Studies of the
32
Cayman Islands Government from 1989 to 1992. From 1983 to 1989, Mr. Finlay was a
partner with the Canadian law firm of Olive, Waller, Zinkhan and Waller. Mr.
Finlay has served as the Cayman Islands' representative to the International
Company and Commercial Law Review and is a former editor of the Cayman Islands
Law Bulletin.
CLARENCE B. FLOWERS, JR. has been a director of our company since 1991.
Mr. Flowers is and has been since 1985, the principal of Orchid Development
Company, a real estate developer in the Cayman Islands. Mr. Flowers also serves
as a director of C.L. Flowers & Son, which is the largest manufacturer of
concrete blocks in the Cayman Islands.
FREDERICK W. MCTAGGART has been a director of our company since 1998.
Mr. McTaggart is and has been since 1994, the Director of the Water
Authority-Cayman, the government-owned water utility serving certain areas of
the Cayman Islands.
WILMER PERGANDE has been a director of our company since 1978. Mr.
Pergande is the Vice-President of Special Projects of Osmonics, Inc. of
Minnetonka, Minnesota, a publicly traded company and the third largest water
treatment company in North America. Before joining Osmonics, Mr. Pergande was
the Chief Executive Officer of Licon International, Inc., a publicly traded
manufacturer of liquid processing equipment. Previously, Mr. Pergande held
several executive positions with Mechanical Equipment Company, Inc., a
manufacturer of seawater conversion equipment.
RAYMOND WHITTAKER has served as a director of our company since
November 1988. Mr. Whittaker is and has been since 1984, the Managing Director
of TransOcean Bank & Trust, Ltd., a bank and trust company located in the Cayman
Islands and a subsidiary of Johnson International, Inc., a bank holding company
located in Racine, Wisconsin.
COMPOSITION OF THE BOARD OF DIRECTORS
The board of directors is organized into three groups. Each group holds
office for a three year periods and re-election of the board members is
staggered so that two-thirds of the board members are not subject to re-election
in any given year. The groups are organized alphabetically as follows:
Group 1 Group 2 Group 3
------- ------- -------
J. Bruce Bugg Richard Finlay Wilmer Pergande
Brian Butler Clarence Flowers, Jr Peter D. Ribbins
Steven A. Carr Frederick McTaggart Raymond Whittaker
Jeffrey M. Parker
Group 2 was re-elected at our annual shareholders' meeting in May 2000.
Group 1 will be proposed for re-election in 2001 and then Group 3 in 2002. Hal
N. Carr, a former director, resigned in May 2000 after twenty years of serving
as a director and was replaced by his son, Steven A. Carr.
33
Under our license, the Cayman Islands government may nominate three
persons to serve on our board of directors. We must cause one of the persons
nominated by the government to be elected as a director. Frederick W. McTaggart,
the Director of Water Authority-Cayman, is the government's nominee currently
serving as a director on our board.
On April 17, 1997, Argyle/Cay-Water, Ltd. filed an application with the
Cayman Islands government for permission to acquire up to 50% of our issued and
outstanding shares. We did not support Argyle's attempt to gain control of our
company. On July 22, 1997, the Cayman Islands government approved Argyle's
application. J. Bruce Bugg, Jr. is the sole shareholder and manager of Argyle
Investment Co., the general partner of Argyle Partners Ltd., the sole general
partner of Argyle/Cay-Water, Ltd.
On March 31, 1998, we reached an agreement with Argyle/Cay-Water, Ltd.
During the five-year term of this agreement, we agreed to appoint Mr. Bugg as
Vice Chairman of our board of directors in exchange for which Mr. Bugg and
Argyle/Cay-Water, Ltd. agreed not to acquire more than 19.9% of the ordinary
shares. Our main obligations under the agreement are to recommend to our
shareholders the appointment of Mr. Bugg (or his successor) to the board of
directors and, with several exceptions, to obtain Argyle/Cay-Water, Ltd.'s
consent before issuing any of our securities.
During the term of the agreement, Argyle/Cay-Water, Ltd. and Mr. Bugg
may not participate in proxy solicitation, seek to control or influence our
management, except in accordance with Mr. Bugg's duties as a director, or
challenge the validity of the option deed.
COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors has established the following committees:
[Download Table]
Executive Committee Audit Committee Compensation Committee
------------------- --------------- ----------------------
Peter D. Ribbins, Chairman Brian E. Butler, Chairman Raymond Whittaker, Chairman
Richard L. Finlay Steven A. Carr Peter D. Ribbins
Clarence Flowers, Jr Raymond Whittaker Clarence B. Flowers, Jr.
Jeffrey M. Parker Wilmer Pergande
Raymond Whittaker
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
The aggregate amount of cash compensation paid to all directors and
officers as a group for services in all capacities was $537,707 for the fiscal
year ended December 31, 1998, and $609,892 for the fiscal year ended December
31, 1999. The aggregate amount set aside or accrued by our company for the
fiscal year ended December 31, 1999 to provide pension benefits for our
directors and officers was $13,817.
34
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
STOCK OPTIONS
Since April 8, 1987, we have maintained a share incentive plan for our
long-term employees who are not directors. To become eligible for the share
incentive plan, an employee must complete four years of service with us and then
retain the shares for an additional four years before he can transfer or sell
the shares. We may, at our option, offer to exchange the redeemable preference
shares issued to the employee for an equal number of freely tradable ordinary
shares at any time during the four year holding period. Within the four year
holding period, if an employee ceases to be employed by our company, our
company, at the sole discretion of the board of directors, may redeem the
redeemable shares held by that employee for less than four years at the price
which the employee originally paid for the shares.
Under the plan, employees are issued redeemable preference shares on an
annual basis at no cost based on a formula which takes into consideration the
employee's salary and the total dividend paid to ordinary shareholders as a
percentage of the total shareholder's equity in each year. In addition, the
employee is granted an option to purchase an equal number of redeemable
preference shares at approximately 75% of the average market price of the
ordinary shares. The exercise price is determined during the ten days after our
annual shareholder's meeting. This option expires, unless exercised by the
employee, within forty (40) days after the date of our annual shareholder's
meeting. Since we adopted the share incentive plan, our employees have acquired
111,795 redeemable preference shares, of which 70,736 have been redeemed for an
equal number of ordinary shares.
In 1999, we implemented a share grant plan for our directors who are
not executive officers or serving as the Cayman Islands' government
representative on our board. Under this plan, a director receives ordinary
shares based upon the number of board and committee meetings that the director
attends during the year. Each board meeting is worth the share equivalent of
$1,200 fee and each committee meeting is worth the share equivalent of a $600
fee. Attendance fees are accumulated throughout the year and then divided by the
prevailing market price on October 1st of the preceding year to determine the
number of shares to be granted for the current year.
As a result of the share incentive plan and the share grant plan, the
directors and executive officers, as a group, are presently entitled to exercise
outstanding options to purchase a total of 6,835 ordinary shares at an average
exercise price of $6.14 per share.
EMPLOYMENT AGREEMENTS
We entered into an employment agreement with Peter D. Ribbins, our
President and Chief Operating Officer. The agreement, as amended, was originally
scheduled to expire on
35
August 19, 2000, although it extends automatically each year for an additional
one year term. If we terminate Mr. Ribbins without cause, he is entitled to a
lump sum severance payment equal to two years' salary. In each of the five years
ended December 31, 1995, 1996, 1997, 1998 and 1999, Mr. Ribbins was granted an
option to purchase 20,000 ordinary shares at an exercise price of $2.50 per
share. For each year in which Mr. Ribbins remains the President of our company,
Mr. Ribbins will be granted options to purchase an additional 20,000 ordinary
shares, and the exercise price of these options will be equal to the average of
the closing market price of the ordinary shares on each of the first seven
trading days in the month of October of the year in which the options are
granted. In May 1999, Mr. Ribbins exercised options to purchase 60,000 ordinary
shares. All options granted to Mr. Ribbins expire on the third anniversary of
the date of the Auditor's Report on the financial statements for the year of
grant.
We entered into an employment agreement with Jeffrey M. Parker, our
Chairman of the Board of Directors and Chief Executive Officer. Mr. Parker
devotes at least 75% of his working time to our company and the remainder of his
working time to his accountancy practice. This agreement, as amended, was
originally scheduled to expire on December 31, 2001, although it extends
automatically each year for an additional one year term. If we terminate Mr.
Parker without cause, he is entitled to a lump sum severance payment equal to
two years' salary and any unvested stock options for the year in which Mr.
Parker is terminated automatically vest and become fully exercisable. Under
prior employment agreements, in each of the four years ended December 31, 1995,
1996, 1997 and 1998, Mr. Parker was granted an option to purchase that number of
ordinary shares which was equal to 2.5% of our net profit before dividends or
extraordinary items for that year. The exercise price of these options was $2.50
per share. For each of the three years ended December 31, 1999, 2000 and 2001,
Mr. Parker has been or will be granted an option to purchase that number of
ordinary shares which equals 1% of our net profit for that year. The exercise
price of the options granted in 1999 is $2.50 per share, and the exercise price
of the options to be granted in 2000 and 2001 will be equal to the average of
the closing market price of the ordinary shares on each of the first seven
trading days in the month of October of the year in which the options are
granted. In August 1997 and March 1999, Mr. Parker exercised options to purchase
101,705 and 29,010 ordinary shares, respectively, representing all the options
that were accrued to Mr. Parker on those dates. All options granted to Mr.
Parker after March 1999 expire on the third anniversary of the date of the
Auditor's Report on the financial statements for the year of grant.
In addition to serving as our Chairman of the Board and Chief Executive
Officer, Mr. Parker owns an accountancy practice in the Cayman Islands. Until
1999, we paid the accountancy practice for services rendered to us by Mr. Parker
through his practice. In 1999, we began paying Mr. Parker directly for his
services.
We entered into an employment agreement with Alex Bodden, our Vice
President of Finance and Secretary. This agreement was originally scheduled to
expire on August 31, 2000, although it extends automatically each year for an
additional one year term. Under the agreement, if we terminate Mr. Bodden
without cause, he is entitled to a lump sum severance
36
payment equal to one years' salary. For each year beginning in 2000, Mr. Bodden
will be granted an option to purchase that number of ordinary shares which
equals 1% of our net profit for that year. The exercise price of the options to
be granted to Mr. Bodden will be equal to the average of the closing market
price of the ordinary shares on each of the first seven trading days in the
month of October of the year in which the options are granted. All options
granted to Mr. Bodden expire on the third anniversary of the date of the
Auditor's Report on the financial statements for the year of grant. As a result
of the option grant described above, Mr. Bodden will no longer be eligible to
participate in the share incentive plan for fiscal years after 1999.
We entered into an employment agreement with Gregory McTaggart, our
Vice President of Operations. This agreement was originally scheduled to expire
on August 19, 2001, although it extends automatically each year for an
additional one year term. Under the agreement, if we terminate Mr. McTaggart
without cause, he is entitled to a lump sum severance payment equal to one
years' salary. For each year beginning in 2000, Mr. McTaggart will be granted an
option to purchase that number of ordinary shares which equals 0.75% of our net
profit for that year. The exercise price of the options to be granted to Mr.
McTaggart will be equal to the average of the closing market price of the
ordinary shares on each of the first seven trading days in the month of October
of the year in which the options are granted. All options granted to Mr.
McTaggart expire on the third anniversary of the date of the Auditor's Report on
the financial statements for the year of grant. As a result of the option grant
described above, Mr. McTaggart will no longer be eligible to participate in the
share incentive plan for fiscal years after 1999.
OPTION DEED
In 1997, in response to an attempt by Argyle/Cay Water, Ltd. to acquire
up to 50% of our company, our board of directors approved an option deed, which
is similar to a "poison pill." The option deed may delay or prevent a change in
control of our company.
The option deed grants to each holder of an ordinary and redeemable
preference share an option to purchase one one-hundredth of a class B ordinary
share at an exercise price of $37.50, subject to adjustment. If a takeover
attempt occurs, each shareholder would be able to exercise the option and
receive ordinary shares with a value equal to twice the exercise price of the
option. Under circumstances described in the option deed, instead of receiving
ordinary shares, we may issue to each shareholder cash or other equity or debt
securities of our company, or the equity securities of the acquiring company, as
the case may be, with a value equal to twice the exercise price of the option.
Takeover events that would trigger the options include a person or
group becoming the owner of 20% or more of our outstanding ordinary shares or
the commencement of, or announcement of an intention to make, a tender offer or
exchange offer, which upon completion would result in the beneficial ownership
by a person or group of 20% or more of the outstanding ordinary shares.
Accordingly, exercise of the options may cause substantial dilution to a person
who attempts to acquire our company.
37
The options are attached to each ordinary share and redeemable
preference share and presently have no monetary value. The options will not
trade separately from our shares unless and until they become exercisable. The
options, which expire on July 31, 2007, may be redeemed, at the option of our
board of directors, at a price of CI$.01 per option at any time until ten
business days following the date that a group or person acquires ownership of
20% or more of the outstanding ordinary shares. Any amendment to the option deed
is subject to the terms and conditions of our agreement with Argyle/Cay-Water,
Ltd. described in the section of this Annual Report entitled "MANAGEMENT
--Composition of Board of Directors."
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.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
We sell water, on commercial terms, to several trucking businesses, one
of which is partially owned by Clarence Flowers, Jr., one of our directors. In
1999, 1998 and 1997, we made sales totalling $11,621, $30,593, and $22,500,
respectively, to the business in which Mr. Flowers has an interest.
On November 17, 1998, R.J. Falkner & Company, Inc. entered into a
consulting agreement with us to provide consulting services to us. As part of
the consulting agreement, we issued to R. Jerry Falkner, a principal of R.J.
Falkner & Company, options to purchase up to 30,000 ordinary shares at an
exercise price of $7.875 per share. The options may be exercised until twelve
months after the consulting agreement is terminated.
As consideration for J. Bruce Bugg, Jr.'s services to us as
Vice-Chairman of the board of directors, we granted to Mr. Bugg options to
purchase 30,000 ordinary shares at $6.00 per share, exercisable until May 1,
2002. On May 1, 2000, we granted to Mr. Bugg options to purchase an additional
30,000 ordinary shares at $6.75 per share, which was the market price of the
ordinary shares on October 1, 1999. These additional 30,000 options are
exercisable until May 1, 2003.
These agreements, as well as all the employment agreements with Messrs.
Ribbins, Parker, Bodden and McTaggart, were approved by a majority of the
disinterested members of the Board of Directors. It is management's opinion that
all agreements set forth in this section were
38
on terms no less favorable than could have been obtained from unaffiliated
parties.
PART II
ITEM 14. DESCRIPTION OF SECURITIES
ORDINARY SHARES
We are authorized to issue 9,900,000 ordinary shares, par value CI$1.00
per share. At June 20, 2000, 3,845,615 ordinary shares were issued and
outstanding. Holders of ordinary shares may cast one vote for each share held of
record at all shareholder meetings. All voting is non-cumulative. Holders of
more than 50% of the outstanding shares present and voting at an annual meeting
at which a quorum is present are able to elect all of our directors. Holders of
ordinary shares do not have preemptive rights or rights to convert their
ordinary shares into any other securities. All of the outstanding ordinary
shares are fully paid and non-assessable.
Holders of ordinary shares are entitled to receive ratably dividends,
if any, distributed out of our accumulated profits. Subject to the preferential
rights of holders of the redeemable preference shares, upon liquidation, all
holders of ordinary shares are entitled to participate pro rata in our assets
which are available for distribution.
REDEEMABLE PREFERENCE SHARES
We are authorized to issue 100,000 redeemable preference shares, par
value CI$1.00 per share. At June 20, 2000, 41,058 redeemable preference shares
were issued and outstanding.
Holders of redeemable preference shares may cast one vote for each
share held of record at all shareholder meetings. All voting is on a
non-cumulative basis. Upon a liquidation of our company, the redeemable
preference shares rank in preference to the ordinary shares with respect to the
repayment of the par value of redeemable preference shares plus any premium paid
or credited on the purchase of the shares. Under our share incentive plan, we
may redeem any redeemable preference shares issued to an employee. The ordinary
shares and the redeemable preference shares rank equally in all other respects.
CLASS B ORDINARY SHARES
In 1997, we adopted an option deed under which option holders may
exercise rights to purchase our class B ordinary shares, par value CI$1.00 per
share. As of the date of this Annual Report, there are no class B ordinary
shares issued and outstanding.
Holders of class B ordinary shares are entitled to the same dividends
paid on ordinary
39
shares and redeemable preference 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. As
of the date of this Annual Report, all of these warrants are issued and
outstanding. These warrants must be exercised before April 3, 2001. We have
granted the underwriter of our initial public offering one demand and unlimited
piggyback registration rights with respect to these warrants and the ordinary
shares underlying the warrants.
TRANSFER AGENT
The transfer agent for the ordinary shares is American Stock Transfer &
Trust Company, New York, New York.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
There has not been any material default in the payment of principal,
interest or sinking or purchase fund installment, or any other material default
not cured within 30 days, with respect to any indebtedness of the Company.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES
On April 8, 1987, a class of shares called redeemable preference shares
was created in order to implement the Share Incentive Plan described in Item 12
of this Annual Report. Upon a liquidation of our company, the redeemable
preference shares rank in preference to the ordinary shares with respect to the
repayment of the par value of the redeemable preference shares together with any
premium paid or credited as paid on the purchase of such shares. The ordinary
shares and the redeemable preference shares rank pari passu in all other
respects.
40
PART IV
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
Our financial statements are included elsewhere in this Annual Report.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants.
Balance Sheets as of December 31, 1999 and 1998.
Statement of Income and Retained Earnings for each of the years ended
December 31, 1999, 1998 and 1997.
Statement of Changes in Stockholders' Equity for each of the years
ended December 31, 1999, 1998 and 1997.
Statement of Cash Flows for each of the years ended December 31, 1999,
1998 and 1997.
Notes to Financial Statements.
EXHIBITS
2.1. Consent of PricewaterhouseCoopers.
2.2. Stock Purchase Agreement dated June 27, 2000 among SeaTec
Systems, Inc., William G. Wurster, SeaTec Belize Limited and
Consolidated Water Co. Ltd.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CONSOLIDATED WATER CO. LTD.
Dated: June 30, 2000 By: /s/ Alexander S. Bodden
------------------------------------
Alexander S. Bodden,
Vice President-Finance and Secretary
41
INDEX TO FINANCIAL STATEMENTS
[Download Table]
PAGE
----
Report of Independent Accountants........................... F-2
Balance Sheets as of December 31, 1998 and 1999............. F-3
Statements of Income for the Years Ended December 31, 1997,
1998 and 1999............................................. F-4
Statements of Changes in Stockholders' Equity for the Years
Ended
December 31, 1997, 1998 and 1999.......................... F-5
Statements of Cash Flows for the Years Ended December 31,
1997, 1998 and 1999....................................... F-6
Notes to Financial Statements............................... F-8
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Consolidated Water Co. Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, changes in stockholders' equity and cash flows present fairly, in all
material respects, the financial position of Consolidated Water Co. Ltd. (the
"Company") at December 31, 1999 and 1998, and the related income, cash flows and
changes in stockholders' equity for each of the three years in the period ended
December 31, 1999 in conformity with International Accounting Standards. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States of America which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
International Accounting Standards utilized by the Company vary in certain
significant respects from accounting principles generally accepted in the United
States of America. The application of the latter affects the determination of
net income for each of the three years in the period ended December 31, 1999 and
the determination of stockholders' equity at December 31, 1999 and 1998. The
extent of these effects are summarized in Note 20.
PricewaterhouseCoopers
Grand Cayman, Cayman Islands
March 22, 2000
F-2
CONSOLIDATED WATER CO. LTD.
BALANCE SHEETS
(EXPRESSED IN UNITED STATES DOLLARS)
[Enlarge/Download Table]
DECEMBER 31,
--------------------------
1999 1998
----------- -----------
ASSETS
Current assets
Cash at bank (Note 6)..................................... 22,146 439,032
Accounts receivable (Note 3).............................. 1,230,412 828,486
Spares stock.............................................. 94,303 68,641
Inventory of water........................................ 28,984 30,661
Prepaid expenses and other assets......................... 209,761 187,693
Current portion of deferred expenditure (Notes 2 and 7)... 90,833 1,688
----------- -----------
Total current assets.............................. 1,676,439 1,556,201
Fixed assets (Notes 4 and 13)............................... 15,157,193 14,430,785
Deferred expenditure (Note 2)............................... 16,444 18,132
----------- -----------
Total assets...................................... $16,850,076 $16,005,118
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank overdrafts (Note 6).................................. 651,606 60,247
Dividends payable (Note 5)................................ 266,585 257,117
Accounts payable and accrued expenses..................... 757,612 554,141
Current portion of long term purchase obligation (Note
13).................................................... 320,141 344,304
Current portion of long term debt obligation (Note 6)..... 310,135 300,162
----------- -----------
Total current liabilities......................... 2,306,079 1,515,971
Long term purchase obligation (Note 13)..................... -- 320,141
Long term debt obligation (Note 6).......................... 1,926,786 2,470,112
Security deposit (Note 14).................................. 42,482 42,482
Advances in aid of construction (Note 2).................... 45,084 49,584
----------- -----------
Total liabilities................................. 4,320,431 4,398,290
----------- -----------
Stockholders' equity
Ordinary shares (Note 7).................................. 3,794,960 3,667,466
Additional paid in capital (Note 7)....................... 2,402,195 2,276,466
Treasury shares (Note 7).................................. (821,303) (62,375)
Vested redeemable preference shares (Note 7).............. 14,801 16,930
Non-vested redeemable preference (Notes 7 and 15)......... 34,469 35,756
Retained earnings and other reserves...................... 7,104,523 5,672,585
----------- -----------
Total stockholders' equity........................ 12,529,645 11,606,828
----------- -----------
Total liabilities and stockholders' equity........ $16,850,076 $16,005,118
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
CONSOLIDATED WATER CO. LTD.
STATEMENTS OF INCOME
(EXPRESSED IN UNITED STATES DOLLARS)
[Enlarge/Download Table]
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------------
1999 1998 1997
---------- ------------ ----------
Income
Water sales......................................... 7,936,118 7,925,232 7,214,557
Interest income..................................... 594 28,062 53,797
Other income........................................ 285,844 204,384 170,648
Connection charges.................................. 27,432 30,036 29,724
---------- ---------- ----------
8,249,988 8,187,714 7,468,726
---------- ---------- ----------
Expenses (Note 8)
Direct expenses..................................... 4,624,422 5,095,373 4,806,552
Indirect expenses................................... 1,678,967 1,435,345 1,316,534
---------- ---------- ----------
6,303,389 6,530,718 6,123,086
---------- ---------- ----------
Net income before exceptional item.................... 1,946,599 1,656,996 1,345,640
Exceptional item (Note 4)............................. -- -- (97,886)
---------- ---------- ----------
Net income............................................ $1,946,599 $1,656,996 $1,247,754
========== ========== ==========
Basic earnings per ordinary share (Note 10)........... $ 0.64 $ 0.54 $ 0.42
========== ========== ==========
Diluted earnings per ordinary share (Note 10)......... $ 0.61 $ 0.52 $ 0.40
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-4
CONSOLIDATED WATER CO. LTD.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS ENDED DECEMBER 31, 1999
(EXPRESSED IN UNITED STATES DOLLARS)
[Enlarge/Download Table]
VESTED NON-VESTED
ADDITIONAL REDEEMABLE REDEEMABLE
ORDINARY PAID TREASURY PREFERENCE PREFERENCE REVALUATION RETAINED
SHARES IN CAPITAL SHARES SHARES SHARES SURPLUS EARNINGS
---------- ---------- -------- ---------- ---------- ----------- ----------
Balance at 31 December
1996...................... 3,525,290 2,230,312 -- 13,963 37,209 302,867 3,392,513
Issue of share capital (net)
(Note 7).................. 141,924 36,120 -- (5,477) (4,789) -- --
Net income for the period... -- -- -- -- -- -- 1,247,754
Dividends................... -- -- -- -- -- -- (432,614)
---------- ---------- -------- ------- ------- -------- ----------
Balance at 31 December
1997...................... 3,667,214 2,266,432 -- 8,486 32,420 302,867 4,207,653
---------- ---------- -------- ------- ------- -------- ----------
Issue of share capital (net)
(Note 7).................. 252 10,034 -- 8,444 3,336 -- --
Purchase of treasury shares
(Note 7).................. -- -- (62,375) -- -- -- --
Net income for the period... -- -- -- -- -- -- 1,656,996
Dividends................... -- -- -- -- -- -- (494,931)
---------- ---------- -------- ------- ------- -------- ----------
Balance at 31 December
1998...................... 3,667,466 2,276,466 (62,375) 16,930 35,756 302,867 5,369,718
---------- ---------- -------- ------- ------- -------- ----------
Issue of share capital (net)
(Note 7).................. 127,494 125,729 -- (2,129) (1,287) -- --
Purchase of treasury shares
(Note 7).................. -- -- (758,928) -- -- -- --
Net income for the period... -- -- -- -- -- -- 1,946,599
Dividends................... -- -- -- -- -- -- (514,661)
---------- ---------- -------- ------- ------- -------- ----------
Balance at 31 December
1999...................... $3,794,960 $2,402,195 (821,303) $14,801 $34,469 $302,867 $6,801,656
========== ========== ======== ======= ======= ======== ==========
TOTAL
STOCKHOLDERS'
EQUITY
-------------
Balance at 31 December
1996...................... 9,502,154
Issue of share capital (net)
(Note 7).................. 167,778
Net income for the period... 1,247,754
Dividends................... (432,614)
-----------
Balance at 31 December
1997...................... 10,485,072
-----------
Issue of share capital (net)
(Note 7).................. 22,066
Purchase of treasury shares
(Note 7).................. (62,375)
Net income for the period... 1,656,996
Dividends................... (494,931)
-----------
Balance at 31 December
1998...................... 11,606,828
-----------
Issue of share capital (net)
(Note 7).................. 249,807
Purchase of treasury shares
(Note 7).................. (758,928)
Net income for the period... 1,946,599
Dividends................... (514,661)
-----------
Balance at 31 December
1999...................... $12,529,645
===========
The accompanying notes are an integral part of these financial statements.
F-5
CONSOLIDATED WATER CO. LTD.
STATEMENTS OF CASH FLOWS
(EXPRESSED IN UNITED STATES DOLLARS)
[Enlarge/Download Table]
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------------
1999 1998 1997
---------- ----------- -----------
Cash flows from operating activities
Cash receipts from customers........................ 7,845,789 8,123,768 7,214,796
Cash paid to suppliers and employees................ (5,128,184) (5,553,210) (5,173,042)
---------- ----------- -----------
Cash generated from operations...................... 2,717,605 2,570,558 2,041,754
Interest received................................... 594 28,062 53,797
Interest paid....................................... (189,278) (277,877) (301,606)
---------- ----------- -----------
Net cash from operating activities.................... 2,528,921 2,320,743 1,793,945
---------- ----------- -----------
Cash flows from investing activities
Purchase of property, plant and equipment........... (1,543,368) (2,184,783) (1,106,820)
Proceeds from sale of equipment and assets held for
resale........................................... 1,920 -- 13,242
---------- ----------- -----------
Net cash used in investing activities................. (1,541,448) (2,184,783) (1,093,578)
---------- ----------- -----------
Cash flows from financing activities
Net proceeds from issuance of share capital......... 235,205 12,957 159,400
Cost associated with public offering................ (89,145) -- --
Repurchase of ordinary shares....................... (758,928) (62,375) --
Proceeds from term loan............................. -- 1,000,000 --
Repayment of principal on long term borrowing....... (533,353) (190,111) (184,690)
Repayments under capital lease obligations.......... (344,304) (1,027,567) (435,736)
Dividends paid...................................... (505,193) (457,912) (393,632)
---------- ----------- -----------
Net cash (used in) from financing activities.......... (1,995,718) (725,008) (854,658)
---------- ----------- -----------
Net decrease in cash and cash equivalents............. (1,008,245) (589,048) (154,291)
Cash and cash equivalents at beginning of period...... 378,785 967,833 1,122,124
---------- ----------- -----------
Cash and cash equivalents at end of period............ $ (629,460) $ 378,785 $ 967,833
========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-6
FOOTNOTES TO THE STATEMENTS OF CASH FLOWS:
[Enlarge/Download Table]
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
i. Cash and cash equivalents:
Cash and cash equivalents consist of:
22,146 439,032 1,082,425
Cash at bank............................................
(651,606) (60,247) (114,592)
Bank overdraft..........................................
---------- ---------- ----------
$ (629,460) $ 378,785 $ 967,833
========== ========== ==========
ii. Reconciliation of net cash from operating activities to
net income from operations:
1,946,599 1,656,996 1,247,754
Net income..............................................
Adjustments to reconcile net income to net cash from
operating activities
816,960 768,745 689,745
Depreciation............................................
-- -- 97,886
Exceptional item (Note 4)...............................
1,688 1,688 1,688
Amortization of deferred costs..........................
11,722 9,108 8,378
Preference shares issued at $nil consideration (Note
22)................................................
2,880 -- --
Ordinary shares issued at $nil consideration (Note
22)................................................
(1,920) (20,000) (1,200)
Profit from sale of fixed assets........................
Change in assets and liabilities
(23,985) (74,528) 21,725
(Increase) decrease in spares stock and inventory of
water..............................................
(423,994) (441) (218,707)
Change in accounts receivable and prepaid expenses and
other assets.......................................
198,971 (20,825) (53,324)
Increase (decrease) in accounts payable and other
liabilities and advances in aid of construction.........
---------- ---------- ----------
$2,528,921 $2,320,743 $1,793,945
Net cash from operating activities......................
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-7
CONSOLIDATED WATER CO. LTD.
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
1. PRINCIPAL ACTIVITY AND STATUS
By Special Resolution dated December 3, 1998, Cayman Water Company
Limited's name was changed to Consolidated Water Co. Ltd. (the "Company"). The
Company was incorporated as an ordinary resident company in the Cayman Islands
on August 31, 1973 to provide water distribution and sewage disposal services.
The registered and principal office of the Company is Trafalgar Place, West Bay
Road, PO Box 1114GT, Grand Cayman, Cayman Islands, British West Indies.
On December 7, 1979 the Company was granted an exclusive license by the
government of the Cayman Islands ("government") to process and supply water to
certain areas of Grand Cayman for a period of twenty years commencing February
1, 1979. On July 11, 1990 that license was replaced by a new, exclusive license
for a period of twenty years from July 11, 1990 which substantially extended the
area of supply and granted to the Company a right of first refusal on the
extension or renewal thereof. The base price of water supplied by the Company
and adjustments thereto are determined by the terms of the license which provide
for automatic inflationary increases.
With effect from September 1, 1988 sewage delivered by the Company's
Governor's Harbour system is being processed by the Water Authority. The Water
Authority is the government entity established by The Water Authority Law 1982
to provide a public water supply system in any part of the Cayman Islands. The
Water Authority has agreed under the current license not to exercise its right
to supply water in the Company's licensed areas providing the Company is not in
default under the terms of its license.
On August 21, 1997, Commonwealth Water Limited ("Commonwealth") was
incorporated with nominal share capital in the Bahamas for the purpose of
entering into a joint venture whereby Commonwealth would design, construct and
equip a plant and related facilities for the purpose of providing water to the
Bimini Islands. The Company maintains a 100% interest in Commonwealth which is
in a pre-operating stage. As at December 31, 1999, the Company had incurred
costs on behalf of Commonwealth which have been deferred (see Note 4).
2. ACCOUNTING POLICIES
The Company's financial statements have been prepared under the historical
cost convention, modified by the revaluation of land, and in accordance with
International Accounting Standards. The preparation of financial statements in
conformity with International Accounting Standards requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The following is a summary of the significant accounting policies:
Direct revenue and expenses: The Company bills customers monthly for
water delivered based on meter readings performed at or near each month
end. An accrual, where necessary, is made for water delivered but unbilled
at year end where readings are not performed at the year end date. This
accrual is matched with the associated direct costs of producing and
purchasing water. A connection charge is billed and recognized in income on
the initial supply of water to a new customer. The charge is set at a level
intended to defray the cost of connection of the water supply and the
installation of the required water meter.
Foreign currency translation: Monetary assets and liabilities
denominated in foreign currencies (currencies other than the United States
dollar -- see Note 21), are translated at the
F-8
CONSOLIDATED WATER CO. LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. ACCOUNTING POLICIES -- (CONTINUED)
rates of exchange ruling at the balance sheet date. Foreign currency
transactions are translated at the rate ruling on the date of the
transaction. Net exchange gains of $36,512 (1998: $31,846; 1997: $36,494)
are included in other income.
Share and share option incentive plans: The Company issues shares
under incentive plans that form part of employees and Directors
remuneration. A compensatory expense is recorded equal to the par value of
shares issued under the schemes on the date granted. The Company grants
options to purchase ordinary shares as part of remuneration for Directors.
No compensatory expense is recognized for options granted or shares
purchased under option. On exercise of options, proceeds up to the par
value of the shares issued are credited to ordinary share capital, any
proceeds in excess of the par value of shares issued are credited to
additional paid in capital in the period in which the options are
exercised.
Treasury shares: Treasury shares are recorded at cost as a deduction
from stockholders' equity. Any profit or loss on the re-issue of these
shares is recorded directly as a movement in stockholders' equity.
Spares stock: Spares stock, which consists primarily of replacement
spares and parts, are valued at the lower of cost and net realizable value
on a first-in, first-out basis.
Deferred expenditure: Costs which can be identified as benefiting
future periods, including salaries and professional fees, are carried
forward and amortized accordingly. Legal, accounting and salary costs
relating to the license (Note 1) are being amortized over the period of the
license. In addition, incremental external costs directly attributable to
an equity transaction that are incurred at a preliminary stage of
proceedings are deferred. Such offering costs will be deducted from the
proceeds when the equity transaction is completed.
Long term purchase obligation: The Company assumes substantially all
the benefits and risks of the plant and equipment covered by the Water
Purchase Agreement (Note 13). The assets have been capitalized at the
amount specified in the agreement and the related obligation is recorded as
a liability of the Company. Interest expense is calculated based on the
outstanding balance of the purchase obligation.
Repairs and maintenance: All repair and maintenance costs are
expensed as incurred.
Cash and cash equivalents: Cash and cash equivalents comprise cash at
bank on call and cash overdrafts.
Inventory of water: Inventory of water represents the cost of
desalinated potable water produced and purchased by the Company and held in
the Company's reservoirs at year end. The value of the inventory of water
is based on the lower of average cost of producing and purchasing water
during the year and the volume of water on hand at year end or net
realizable value.
Fixed assets: Fixed assets, except land, are stated at cost less
accumulated depreciation. Land is stated at appraised value as determined
by the Directors in 1987 having regard, inter alia, to the value placed on
the land by government for share transfer tax purposes. The value of land
is appraised when in the opinion of the Directors the market value is
materially different from the carrying value. Depreciation is calculated
using a straight line method with allowance being made
F-9
CONSOLIDATED WATER CO. LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. ACCOUNTING POLICIES -- (CONTINUED)
for estimated residual values. Rates are determined based on the estimated
useful lives of the assets as follows:
[Download Table]
Buildings........................ 5 to 40 years
Plant and equipment.............. 5 to 15 years
Office furniture, fixtures and
equipment...................... 3 to 10 years
Vehicles....................... 3 to 10 years
Sewage equipment............... 10 to 20 years
Leasehold improvements........... Shorter of 5 years and lease term outstanding
Distribution system.............. 3 to 40 years
Advances in aid of construction: The Company recognizes a liability
in respect of advances in aid of construction when such advances are
received from certain condominium developers in the licensed area to help
defray the capital expenditure costs of the Company. These advances do not
represent a loan to the Company and are interest free. However, the Company
allows a discount of 10% on future supplies of water to these developments
until the aggregate discounts allowed are equivalent to advances received.
Such discounts are charged against advances received.
3. ACCOUNTS RECEIVABLE
Accounts receivable comprise receivables from customers and are shown net
of an allowance for doubtful accounts of $12,000 (1998: $12,000).
4. FIXED ASSETS
Certain fixed assets are pledged as collateral for certain obligations of
the Company, as more fully described in Notes 6 and 13.
[Enlarge/Download Table]
JANUARY 1, DECEMBER 31,
COST/VALUATION 1999 ADDITIONS DISPOSALS 1999
-------------- ----------- ---------- --------- ------------
Land............................................ 778,546 -- -- 778,546
Buildings....................................... 2,090,876 5,311 -- 2,096,187
Plant and equipment............................. 6,075,182 550,499 -- 6,625,681
Distribution.................................... 10,003,880 764,883 -- 10,768,763
Sewage equipment................................ 155,477 -- -- 155,477
Office furniture, fixtures and equipment........ 393,726 143,525 -- 537,251
Vehicles........................................ 502,391 112,459 26,400 588,450
Leasehold improvements.......................... 17,658 -- -- 17,658
Lab equipment................................... 29,778 2,440 -- 32,218
----------- ---------- ------- -----------
$20,047,514 $1,579,117 $26,400 $21,600,231
=========== ========== ======= ===========
F-10
CONSOLIDATED WATER CO. LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. FIXED ASSETS -- (CONTINUED)
[Enlarge/Download Table]
JANUARY 1, DECEMBER 31,
ACCUMULATED DEPRECIATION 1999 ADDITIONS DISPOSALS 1999
------------------------ ----------- ---------- --------- ------------
Buildings....................................... 612,315 73,283 -- 685,598
Plant and equipment............................. 2,338,669 347,342 -- 2,686,011
Distribution.................................... 2,060,386 307,698 -- 2,368,084
Sewage equipment................................ 144,428 5,525 -- 149,953
Office furniture, fixtures and equipment........ 188,885 51,926 -- 240,811
Vehicles........................................ 227,939 64,574 26,400 266,113
Leasehold improvements.......................... 17,657 1 -- 17,658
Lab equipment................................... 26,450 2,360 -- 28,810
----------- ---------- ------- -----------
$ 5,616,729 $ 852,709 $26,400 $ 6,443,038
=========== ========== ======= ===========
Net book value................................ $14,430,785 $15,157,193
=========== ===========
Included in plant and equipment are development costs of $97,756 (1998:
$88,410) and equipment of $307,395 (1998: $252,310) incurred on behalf of
Commonwealth (see Note 1) and assets under construction of $nil (1998:
$102,822). Also included in plant and equipment is the reverse osmosis water
production plant which has been acquired under a capital lease (see Note 13).
Included in distribution are assets under construction of $486,799 (1998:
$58,279) and included in buildings are costs of $105,742 (1998: $100,429)
relating to ongoing property developments.
At December 31, 1999, the Company had outstanding commitments of $512,000
relating to the expansion of the distribution system (1998: $nil).
During 1995, following the completion of the expansion of the Company's
Governor's Harbour reverse osmosis plant capacity and the supply and
installation of a reverse osmosis plant at the Company's West Bay site, the
Company decided that the two remaining operational vapour compression units
should be taken out of service. At this time management estimated their
recoverable value, along with associated spare parts, and separately disclosed
the resulting written down value of these assets as assets held for resale.
Fair value was estimated at December 31, 1996 and 1995 based on current
ongoing negotiations for disposal held with third parties. As a result of the
limited market for the assets held for resale, the fair value was written down
to nil in 1997. The write downs of these assets to fair value have been recorded
as exceptional items. The write downs are summarized as follows:
F-11
CONSOLIDATED WATER CO. LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. FIXED ASSETS -- (CONTINUED)
Previously included under fixed assets:
[Download Table]
Plant and equipment......................................... 2,282,598
Less: accumulated depreciation.............................. (2,073,797)
-----------
208,801
-----------
Distribution................................................ 284,350
Less: accumulated depreciation.............................. (262,010)
-----------
22,340
-----------
Previously included under fixed assets...................... 231,141
Previously included under spares stock...................... 285,987
-----------
Total book value of units and spares prior to write-down.... 517,128
Excess of carrying amount over estimated fair value......... (400,000)
-----------
Assets held for resale, December 31, 1995, at estimated fair
value..................................................... 117,128
1996 sale proceeds.......................................... (7,200)
-----------
Assets held for resale, December 31, 1996, at estimated fair
value..................................................... 109,928
1997 sale proceeds.......................................... (12,042)
Further write down, charged as an exceptional item in
1997...................................................... (97,886)
-----------
Assets held for resale, December 31, 1998 and 1999, at
estimated fair value...................................... $ --
===========
It is Company policy to maintain adequate insurance for loss or damage to
all fixed assets except for the underground distribution system and assets
insured by third parties under agreement.
5. DIVIDENDS PAID/PAYABLE
Quarterly dividends each of $0.04 per share were declared in respect of
both classes of shareholders on record at June 30, 1999 and September 30, 1999,
respectively. These dividends were paid during the year. In October 1999 the
Board of Directors declared a final dividend of $0.08 (1998: $0.04) per share in
respect of both classes of shareholders. In the prior year three quarterly
dividends of $0.04 per share were declared and paid in respect of both classes
of shareholders on record at June 30, 1998, September 30, 1998 and December 31,
1998 respectively. For the year ended December 31, 1997, a single interim
dividend of $0.07 and a final dividend of $0.07 per share was declared and paid
to both classes of shareholders on record at September 30, 1997 and March 31,
1998 respectively. Included in dividends payable at December 31, 1999 are
unclaimed dividends of $10,303 (1998: $9,459).
6. BANK BALANCES AND LOANS
[Download Table]
1999 1998
---------- ----------
Cash on hand and in current account......................... $ 22,146 $ 439,032
========== ==========
Bank overdrafts -- Royal Bank of Canada..................... $ 651,606 $ 60,247
========== ==========
European Investment Bank:
Long term debt............................................ $1,568,126 $1,770,274
========== ==========
Royal Bank of Canada:
Long term debt............................................ $ 668,795 $1,000,000
========== ==========
F-12
CONSOLIDATED WATER CO. LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. BANK BALANCES AND LOANS -- (CONTINUED)
Cash on hand and in current account is not restricted as to withdrawal or
use.
As at December 31, 1999, the total lending facility made available by the
Royal Bank of Canada comprises a revolving line of credit with a limit of
$1,000,000, bearing interest at New York Prime plus 1%, and term loans with a
limit of $4,000,000, bearing interest at LIBOR plus 1.5%. Any amounts drawn down
under the line of credit and any term loans are collateralised by a fixed and
floating charge ("the first charge") of $2,500,000 (to be increased to maximum
of $5,500,000). The fixed charge covers land owned by the Company and the
floating charge covers all other assets of the Company, except those assets
charged in connection with the Water Purchase Agreement (see Note 13). Of this
facility, a term loan of $668,795 (from initial draw down of $1,000,000) and
bank overdraft of $651,606 were outstanding at December 31, 1999 (1998:
$1,000,000 and $60,247, respectively). Based on a 10 year amortization period,
the term loan is repayable in monthly installments of $8,333 plus interest,
commencing January 1999.
During 1991, in order to fund an extension to the water distribution
system, the European Investment Bank, Luxembourg (the "bank"), agreed to loan
the US$ equivalent of 2 million European Currency Units (approximately US$2.5
million at that time). The loan is guaranteed by the Overseas Development
Administration ("ODA") of the Foreign and Commonwealth Office of the Government
of the United Kingdom and is repayable in 24 semi annual installments, which
commenced on December 20, 1994. The interest rate for the entire term is fixed
at the bank's prevailing lending rate, less a subsidy of 4% per annum, at the
date each tranche is drawn down.
The rates of interest applicable to, and the amounts of each tranche at the
current year end exchange rates are:
[Enlarge/Download Table]
DATE OF INTEREST
DRAWDOWN RATE
----------------- --------
Tranche 1....................................... April 11, 1991 $ 322,814 4.25%
Tranche 2....................................... September 8, 1992 1,018,895 3.15%
Tranche 3....................................... February 12, 1992 847,727 3.45%
Tranche 4....................................... March 17, 1993 362,736 3.00%
----------
2,552,172
Capital repayments to December 31, 1999......... (984,046)
----------
Total debt obligation as at December
31, 1999............................ $1,568,126
==========
Of the final tranche, the equivalent of $76,726 is repayable in pounds
sterling, as at December 31, 1999 (1998: $88,776), all other obligations under
this loan are repayable in United States dollars.
The Government of the Cayman Islands have, for a fee of 1% per annum,
provided a counter guarantee to the ODA. The Company, with the approval of the
Royal Bank of Canada, the holder of the first charge, has agreed to secure the
counter guarantee by a second charge over all assets of the Company.
F-13
CONSOLIDATED WATER CO. LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. BANK BALANCES AND LOANS -- (CONTINUED)
Current portion of long term debt obligation
[Download Table]
Royal Bank of Canada........................................ 99,996
European Investment Bank.................................... 210,139
----------
$ 310,135
==========
Long term debt obligation
Royal Bank of Canada...................................... 568,799
European Investment Bank.................................. 1,357,987
----------
$1,926,786
==========
The aggregate capital repayment obligations for the next five years are as
follows:
[Download Table]
2000........................................................ 310,135
2001........................................................ 320,616
2002........................................................ 331,608
2003........................................................ 343,368
2004........................................................ 355,383
2005 and thereafter......................................... 575,811
----------
$2,236,921
==========
7. SHARE CAPITAL AND ADDITIONAL PAID IN CAPITAL
[Enlarge/Download Table]
1999 1998 1997
----------- ----------- -----------
Capital stock:
Authorized:
9,900,000 ordinary shares of common stock CI$1.00
each............................................. 11,880,000 11,880,000 11,880,000
100,000 redeemable preference shares of CI$1.00
each............................................. 120,000 120,000 120,000
----------- ----------- -----------
$12,000,000 $12,000,000 $12,000,000
=========== =========== ===========
Ordinary shares of common stock of CI$1.00 each issued
and fully paid:
Balance of ordinary shares at beginning of year
3,056,222 (1998: 3,056,012; 1997: 2,937,742)....... 3,667,466 3,667,214 3,525,290
Ordinary shares issued on exercise of options 89,010
(1998: nil; 1997: 101,705)......................... 106,812 -- 122,046
Ordinary shares issued under Directors share grant
plan 2,400 (1998: nil; 1997: nil).................. 2,880 -- --
Ordinary shares issued on redemption of preference
shares 14,835 (1998: 210; 1997: 16,565)............ 17,802 252 19,878
----------- ----------- -----------
Balance of ordinary shares at end of year 3,162,467
(1998: 3,056,222; 1997: 3,056,012)................. $ 3,794,960 $ 3,667,466 $ 3,667,214
=========== =========== ===========
F-14
CONSOLIDATED WATER CO. LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. SHARE CAPITAL AND ADDITIONAL PAID IN CAPITAL -- (CONTINUED)
[Enlarge/Download Table]
1999 1998 1997
----------- ----------- -----------
Additional paid in capital:
Balance at beginning of year.......................... 2,276,466 2,266,432 2,230,312
Additional paid in capital from exercise of options
(see Note 15)...................................... 115,713 -- 32,330
Additional paid in capital on preference shares issued
under employee option scheme (see Note 15)......... 10,016 10,034 7,754
Redemption of preference shares issued under employee
option scheme (see Note 15)........................ -- -- (3,964)
----------- ----------- -----------
Balance at end of year................................ $ 2,402,195 $ 2,276,466 $ 2,266,432
=========== =========== ===========
Treasury shares:
Balance of treasury shares at beginning of year 8,000
(1998: nil; 1997: nil)............................. 62,375 -- --
102,752 treasury shares acquired at cost (1998: 8,000;
1997: nil)......................................... 758,928 62,375 --
----------- ----------- -----------
Balance of treasury shares at end of year 110,752
(1998: 8,000; (1997: nil).......................... $ 821,303 $ 62,375 $ --
=========== =========== ===========
Vested redeemable preference shares of CI$1.00 each
issued and fully paid (Note 15):
Balance of vested redeemable preference shares at
beginning of year 14,108 (1998: 7,072; 1997:
11,637)............................................ 16,930 8,486 13.963
Preference shares vested during the period 11,970
(1998: 7,036; 1997: 12,000)........................ 14,364 8,444 14,401
Vested preference shares redeemed and issued as
ordinary shares 13,744 (1998: nil; 1997: 16,565)... (16,493) -- (19,878)
----------- ----------- -----------
Balance of vested redeemable preference shares at end
of year 12,334 (1998: 14,108, 1997: 7,072)......... $ 14,801 $ 16,930 $ 8,486
=========== =========== ===========
Non-vested redeemable preference shares of CI$1.00 each
issued and fully paid (Note 15):
Balance of non-vested redeemable preference shares at
beginning of year 29,797 (1998: 27,016; 1997:
31,007)............................................ 35,756 32,420 37,209
Preference shares vested during the period 11,970
(1998: 7,036; 1997: 12,000)........................ (14,364) (8,444) (14,401)
Non-vested preference shares issued 11,988
(1998: 10,027; 1997: 9,556)........................... 14,386 12,032 11,468
Non-vested preference shares redeemed -- nil (1998:
nil; 1997: 1,547).................................. -- -- (1,856)
Non-vested preference shares redeemed and issued as
Ordinary shares 1,091 (1998: 210; 1997: nil)....... (1,309) (252) --
----------- ----------- -----------
Balance of non-vested redeemable preference
shares at end of year 28,724 (1998: 29,797;
1997: 27,016)................................. $ 34,469 $ 35,756 $ 32,420
=========== =========== ===========
The redeemable preference shares are issued under the Company's employee
share incentive plan (Note 15) and carry the same voting and dividend rights as
ordinary shares. The redeemable preference shares are only redeemable with the
Company's agreement. In consideration for redeemed vested
F-15
CONSOLIDATED WATER CO. LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. SHARE CAPITAL AND ADDITIONAL PAID IN CAPITAL -- (CONTINUED)
preference shares, ordinary share capital is issued on a share for share basis.
Upon liquidation of the Company, the redeemable preference shares rank in
preference to the ordinary shares to the extent of the par value of such shares
and any related additional paid in capital.
The Company entered into subscription agreements with two investment
companies on August 8, 1995 for the private placement of 100,000 "units", each
unit consisting of one ordinary share of common stock and one warrant for the
purchase of one additional ordinary share of common stock. On September 18,
1995, the Company issued 100,000 units at a price of $3.00 per unit, under these
agreements. Each warrant issued under these agreements entitles the holder to
purchase one ordinary share of common stock at a price of $4.00 per share for a
period of four years, commencing one year after the date of the agreements. The
warrants are transferable, subject to certain restrictions, and are redeemable
by the Company at $0.10 per warrant if, during the exercise period, the average
bid price of the Company's ordinary shares exceeds 150% of the exercise price of
the warrants for a period of 20 consecutive trading days. The Company has not
recognised any amounts in stockholders' equity relating to these warrants. On
exercise of warrants, proceeds up to the par value of the shares issued are
credited to ordinary share capital, any proceeds in excess of the par value of
shares issued are credited to additional paid in capital in the period in which
the warrants are exercised. As at December 31, 1999, no warrants had been
exercised or redeemed under these agreements. On January 10, 2000, 50,000
warrants were exercised.
In April 1996 the Company filed a Form F-1 registration statement with the
SEC in connection with the issue of 575,000 ordinary shares of common stock at
$5.25 per share. Under the terms of the related underwriting agreement, the
underwriter was issued a warrant to purchase 50,000 ordinary shares of common
stock at $6.30 per share, for $500 consideration which management considered to
approximate fair value. The warrants are exercisable during the four year period
commencing April 3, 1997. As at December 31, 1999, no warrants have been
exercised under this agreement.
In August 1997 the Company established a Class "B" share option plan
designed to deter coercive takeover tactics. Pursuant to this plan, holders of
ordinary shares of common stock and redeemable preference shares were granted
options which entitle them to purchase 1/100 of a share of Class "B" stock at an
exercise price of $37.50 if a person or group acquires or commences a tender
offer for 20% or more of the Company's ordinary shares of common stock. Option
holders (other than the acquiring person or group) will also be entitled to buy,
for the $37.50 exercise price, ordinary shares of the Company's common stock
with a then market value of $75.00 in the event a person or group actually
acquires 20% or more of the Company's ordinary shares of common stock. Options
may be redeemed at $0.01 under certain circumstances. 30,000 of the Company's
authorized but unissued ordinary shares have been reserved for issue as Class
"B" shares. The Class "B" shares rank pari passu with the ordinary shares of
common stock for dividend and voting rights. As at December 31, 1999, no options
have been exercised or redeemed.
On December 3, 1998 the Company established a share repurchase plan whereby
the Company may repurchase up to 10% of the number of ordinary shares
outstanding. The plan was established to repurchase shares that, in the opinion
of the Company, were undervalued in the market. As at December 31, 1999, 110,752
(1998: 8,000) ordinary shares of common stock have been repurchased at a total
cost of $821,303 (1998: $62,375). The Company intends to reissue the shares in
March 2000 as part of a public share offering.
Stockholders are advised that under the provisions of the Land Holding
Companies Share Transfer Tax Law of the Cayman Islands, transfer tax is payable
on the transfer of shares in the Company. The amount of transfer tax payable
under the provisions of this Law is computed by reference to the
F-16
CONSOLIDATED WATER CO. LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. SHARE CAPITAL AND ADDITIONAL PAID IN CAPITAL -- (CONTINUED)
proportion of the total market value of land, as valued by the Government,
attributable to each share in issue ("the taxable value"). The tax payable by
the transferor per share transferred is at the rate of 7.5% of the taxable
value.
In December 1999, the Company commenced proceedings for the public offering
of a further 1,000,000 ordinary shares of common stock, comprising new shares,
shares held as treasury stock and shares of existing shareholders. Preliminary
incremental external costs directly attributable to the public offering totaling
$89,145 have been deferred at December 31, 1999. These offering costs will be
deducted from the proceeds when the offering is completed. The offering is
planned to be made in May 2000. On January 6, 2000, the Company purchased a
further 79,100 treasury shares at a total cost of $494,375.
8. EXPENSES
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31
------------------------------------
1999 1998 1997
---------- ---------- ----------
Direct expenses comprise the following:
Water purchases.......................................... 2,091,321 2,579,279 2,475,498
Depreciation............................................. 760,901 714,830 653,890
Employee costs........................................... 393,415 456,676 488,470
Fuel oil................................................. -- -- 5,222
Royalties (Note 17)...................................... 560,441 570,416 492,590
Lease obligation interest................................ 58,042 193,589 209,508
Electricity.............................................. 131,344 119,674 116,546
Insurance................................................ 56,308 37,555 46,758
Other direct costs....................................... 572,650 423,354 318,070
---------- ---------- ----------
$4,624,422 $5,095,373 $4,806,552
========== ========== ==========
Indirect expenses comprise the following:
Employee costs........................................... 660,658 555,599 492,331
Interest and bank charges................................ 131,236 84,288 92,098
Depreciation............................................. 56,059 53,915 35,855
Professional fees........................................ 227,821 279,841 269,083
Insurance................................................ 41,083 29,890 61,277
Directors' fees and expenses............................. 99,760 77,011 63,847
Other indirect costs..................................... 462,350 354,801 302,043
---------- ---------- ----------
$1,678,967 $1,435,345 $1,316,534
========== ========== ==========
Direct expenses relate to the production and distribution of water,
indirect expenses represent the administrative costs of the Company. During the
year the Company has capitalized $35,749 (1998: $30,319) of depreciation charges
in relation to plant and equipment specifically purchased to continue further
development of the distribution system.
9. NUMBER OF EMPLOYEES
[Enlarge/Download Table]
1999 1998 1997
---------- ---------- ----------
Number of employees at December 31......................... 30 29 26
========== ========== ==========
F-17
CONSOLIDATED WATER CO. LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. EARNINGS PER ORDINARY SHARE
Basic earnings per share is calculated by dividing the net profit
attributable to stockholders by the weighted average number of ordinary shares
in issue during the year, excluding the average number of ordinary shares
purchased by the Company and held as treasury shares (see Note 7).
The net income and weighted average number of ordinary shares and potential
ordinary shares figures used in the determination of the basic and diluted
earnings per ordinary share are summarized as follows:
[Enlarge/Download Table]
1999 1998 1997
---------- ---------- ----------
Net income used in determination of diluted earnings per
ordinary share........................................... 1,946,599 1,656,996 1,247,754
Less:
Dividends paid on non-vested redeemable preference
shares................................................... (4,596) (4,768) (3,782)
Earnings attributable to vested redeemable preference
shares................................................... (7,817) (7,617) (2,872)
---------- ---------- ----------
Net income available to holders of ordinary shares in the
determination of basic earnings per ordinary share....... $1,934,186 $1,644,611 $1,241,100
========== ========== ==========
Weighted average number of ordinary shares used in the
determination of basic earnings per ordinary share....... 3,044,293 3,055,845 2,986,216
Plus:
Weighted average number of redeemable preference shares
outstanding during the year.............................. 44,707 40,231 42,107
Potential dilutive effect of unexercised options........... 48,954 56,596 79,048
Potential dilutive effect of unexercised warrants.......... 50,094 38,911 29,203
---------- ---------- ----------
Weighted average number of shares used for determining
diluted earnings per ordinary share...................... 3,188,048 3,191,583 3,136,574
========== ========== ==========
As detailed in Note 7, 30,000 options were granted to an investment company
on December 15, 1998 with an exercise price of $7 7/8. At December 31, 1999
these options were antidilutive for the purpose of determining diluted earnings
per ordinary share.
11. RELATED PARTY TRANSACTIONS
In the two years ending December 31, 1998, the professional services of a
Director were made available to the Company through a company owned by that
Director. During 1998 the Company paid $88,699 (1997: $66,323) for such
services. Of this amount, $280 (1997: $12,653) relates to a specific capital
project and has been included as part of plant and equipment within fixed
assets. Amounts outstanding for such services at December 31, 1998 totaled
$9,739 (1997: $Nil). During the year ended December 31, 1999, these fees were
paid directly to the Director.
The Company sells water to a company in which a Director has a significant
interest. During 1999 sales totaling $11,621 (1998: $30,593; 1997: $22,500) were
made to that company. Accounts receivable for such sales at year end total $286
(1998: $464).
During the year ended December 31, 1998 the Company purchased a Seawater
Reserve Osmosis Unit ("RO Unit") from a company in which a Director is a member
of senior management. The RO Unit was acquired at a cost of $307,396 which
amount has been included in plant and equipment in Note 4.
F-18
CONSOLIDATED WATER CO. LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES
The Company has leased office space in Trafalgar Place, West Bay Road, for
a period of one year. The rental commitment for 2000 is $55,248.
The Company is subject to an ongoing obligation to supply water to new
customers within the areas in which it is licensed to operate and where the
supply of such water is considered commercially feasible.
The Company is also subject to a commitment under the Water Purchase
Agreement (Note 13).
13. WATER PURCHASE AGREEMENT
OCEAN CONVERSION (CAYMAN) LIMITED
During 1989 the Company entered into a five year water supply agreement
(the "Water Purchase Agreement") with Ocean Conversion (Cayman) Limited ("OCL"),
formerly Reliable Water Company. In 1992 this agreement was renegotiated and
extended for a further five year period to expire December 31, 1999. On October
14, 1993 the extended agreement was replaced by a new agreement, the Water
Purchase Agreement #2, expiring on the same date. That agreement required OCL to
increase the capacity of the existing plant by January 31, 1994 and to further
increase the capacity, at the request of the Company, prior to December 31, 1997
(the "scheduled date"). Both of these expansions were performed during 1994 and
on October 21, 1994, a new agreement, the Water Purchase Agreement #3, was
negotiated which expires on December 31, 2004.
The Water Purchase Agreement #3 effectively transfers the possession of the
reverse osmosis ("RO") plant to the Company in 2000, although the operation and
maintenance of the plant will be the responsibility of OCL until the termination
of the agreement on December 31, 2004. On January 1, 2005 responsibility for
operation and maintenance of the plant will be assumed by the Company. Under the
terms of the agreement, the Company must purchase a fixed minimum amount of
water annually with a portion of the monthly payments to be applied toward the
purchase of the plant. Under the terms of the original agreement, the Company
had a minimum water purchase commitment of 144 million US Gallons per annum
which was increased to 240 million US Gallons per annum with effect from January
1, 1993 under the extended agreement.
The Water Purchase Agreement #2 increased the commitment further to 260
million US Gallons per annum commencing February 1, 1994 and 280 million US
Gallons per annum commencing on the first day of the calendar month following
the scheduled date. The minimum water purchase commitment under the Water
Purchase Agreement #3 remains at 280 million US Gallons per annum until expiry
of the contract on December 31, 2004. Implicit in the agreement are financing
charges relating to the purchase of the plant over the ten year period, based on
the Company's cost of capital at
F-19
CONSOLIDATED WATER CO. LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
13. WATER PURCHASE AGREEMENT -- (CONTINUED)
the inception of the agreement. Under the current agreement, guaranteed minimum
deliveries of water were increased and penalties for failure to supply such
minimum deliveries were also increased.
As at December 31, 1999 minimum future payments (based on the existing 280
million US Gallon annual commitment) are as follows:
[Download Table]
2000...................................................... 1,670,845
2001...................................................... 1,350,704
2002...................................................... 1,350,704
2003...................................................... 1,350,704
2004...................................................... 1,350,704
-----------
Total minimum payments............................ 7,073,661
Less: payments relating to water purchases................ (6,753,520)
-----------
Total equipment purchase obligation............... 320,141
Less: current portion..................................... ( 320,141)
-----------
$ --
===========
The RO plant under capital lease is included in plant and equipment in Note
4 at a gross amount of $3,550,897 and at December 31, 1999 had a net book value
of $1,253,718 (1998: $1,672,798). Amortization of the plant under capital lease
is included in the depreciation charge for each of the three years ended
December 31, 1999. Future minimum lease payments, excluding financing charges,
are $320,141. The plant is pledged as collateral for certain borrowings of OCL
under the terms of the Water Purchase Agreement. Accounts payable and accrued
expenses includes $223,213 (1998: $203,770) outstanding under the Water Purchase
Agreement.
14. CUSTOMER SUPPLY AGREEMENTS
During 1993 the Company entered into a five year agreement to supply
non-potable water to Safe Haven Limited, the developers of a golf course. On
November 1, 1997 this agreement was renegotiated and renewed for a further five
year period. Under the terms of the renewed supply agreement, the Company must
supply a minimum of 4 million US Gallons per month (48 million US Gallons per
year). The price of the water supplied is adjusted annually based on Government
Price Indices. Water sales for the year ended December 31, 1999 resulting from
the supply agreement amounted to $444,098 (1998: $422,641; 1997: $489,685). At
December 31, 1999 the Company holds a security deposit of $42,482 (1998:
$42,482) under the terms of the supply agreement.
From October 15, 1995 the Company entered into a ten year agreement to
supply a minimum of 30,000 US Gallons per day (10.95 million US Gallons per
year) of potable water to Galleon Beach Resort Limited, the operator of the
Westin Hotel which initially opened in December 1995. The price of the water
supplied is adjusted annually based on Government Price Indices, and water
supplied in excess of the monthly maximum of 60,000 US Gallons per day is
invoiced at the Company's standard tariff rate. Water sales for the year ended
December 31, 1998 resulting from this agreement amounted to $314,884 (1998:
$343,800; 1997: $294,000).
There are no other individually significant sales to customers.
F-20
CONSOLIDATED WATER CO. LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
15. SHARE INCENTIVE PLAN, REDEEMABLE PREFERRED SHARES AND
COMPENSATORY OPTIONS
The Company maintains a share incentive plan for the benefit of eligible
employees, excluding Directors, for the purpose of compensating such employees
by way of granting redeemable preference shares for nil consideration and, in
addition, granting options to purchase preference shares at a fixed price,
determined annually, which will typically represent a discount to market value.
The amount of preference shares granted to employees is determined with
reference to each eligible individual employee's salary and dividends paid and
declared. Each employee's option to purchase preference shares must be exercised
within 40 days of the annual general meeting of the Company following the date
of grant. In order to qualify for the plan an employee must complete four years
of service with the Company. In addition, preference shares granted and issued
under option are restricted as to sale for a four year period from the date of
grant or issue and therefore do not vest with the employee until that time. The
redeemable preference shares are only redeemable with the Company's agreement.
Under the plan vested preference shares are redeemed when an employee leaves the
Company. In consideration for redeemed vested preference shares, the Company
issues ordinary share capital of common stock on a share for share basis. In
1997, 1998, and 1999 the Board of Directors offered to redeem the vested
preferred shares of shareholders remaining employed by the Company, and issue
ordinary shares of common stock on a share for share basis. Accordingly in 1999,
13,744 vested redeemable preferred shares were redeemed and a corresponding
number of ordinary shares issued (1998: nil; 1997: 16,565).
Should an employee voluntarily leave the Company within the four year
vesting period, the Company may repurchase preference shares issued and granted
at the employees purchase price (nil consideration for shares granted). In 1999,
1,091 (1998: 210) preference shares were repurchased under this provision and,
as a special concession, the Company issued 1,091 (1998: 210; 1997: nil)
replacement ordinary shares. Outstanding non-vested preference shares currently
redeemable are as follows:
[Enlarge/Download Table]
NO. OF SHARES REDEMPTION REDEMPTION
REDEEMABLE PRICE VALUE
------------- ---------- ----------
Up to the year ended December 31, 2000.............. 22,075 -- --
1,992 $4.0680 8,103
2,437 $5.3175 12,959
2,220 $5.7120 12,681
------ -------
28,724 $33,743
====== =======
Up to the year ended December 31, 2001.............. 16,965 -- --
2,437 $5.3175 12,959
2,220 $5.7120 12,681
------ -------
21,622 $25,640
====== =======
Up to the year ended December 31, 2002.............. 9,768 -- --
2,220 $5.7120 12,681
------ -------
11,988 $12,681
====== =======
The Company records a compensatory expense equal to the par value of shares
granted under the scheme on the date granted. No compensatory expense is
recognized for shares purchased under option. During the year, employees were
granted 9,768 (1998: 7,590) preference shares for nil consideration and
exercised options to purchase 2,220 (1998: 2,437) preference shares at $5.712
(1998: $5.3175). Subsequent to December 31, 1999, employees were granted a
further 10,431 preference
F-21
CONSOLIDATED WATER CO. LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
15. SHARE INCENTIVE PLAN, REDEEMABLE PREFERRED SHARES AND
COMPENSATORY OPTIONS -- (CONTINUED)
shares for nil consideration and, in addition, were granted options to purchase
10,431 preference shares, the price of which will be ratified at the next Annual
General Meeting of the Company.
In 1999, the Company introduced a share grant plan which forms part of
Directors remuneration. Under the plan Directors receive a combination of cash
and shares in consideration of remuneration for their participation in Board
meetings. All Directors are eligible except Executive Officers (who are covered
by individual employment contracts) and the Government elected board member.
Shares granted are calculated with reference to a strike price which is set by
the Board of Directors on October 1 of the year preceding the share grant.
Shares granted on September 30, 1999 totaled 13,452. The strike price set on
October 1, 1998 was $6.00 (October 1, 1999 $6.75).
The Chairman and Chief Executive Officer ("CEO") is entitled to receive, as
part of the compensation for his services to the Company, options to purchase
ordinary shares. Effective for each of the five fiscal years ended December 31,
1993, the Chairman and CEO was granted the option to subscribe at par for that
number of shares which equals 5% of the net profit of the Company before
charging dividends or crediting any asset revaluation. The options were
exercisable at any time up to three months after the date of the audit report
for the period ended December 31, 1993. As at December 31, 1993 there were
76,836 shares under option. During 1994, and in consideration for the Chairman
and CEO agreeing to continue in office until December 31, 1996, whether or not
he was in fact re-elected on an annual basis, the date for exercising such
options was extended to the date three months after the date of the audit report
for the period ended December 31, 1996. No compensatory expense has been
recognized for such shares purchased under option or options granted.
In addition, the Chairman and CEO was granted the option, for each of the
three years ending December 31, 1996, to purchase ordinary shares at $2.50,
exercisable at any time up to three months after the date of the audit report
for the period ended December 31, 1996 in the amount of the lesser of (i) the
number of ordinary shares which equals 2.5% of the net income of the Company
before charging dividends or crediting any asset revaluation, or (ii) the number
of shares which, when added to the existing number of ordinary shares which the
Chairman and CEO beneficially owns, will equal 6% of the then issued ordinary
shares of the Company.
During 1995, the Chairman and CEO's contract was further revised. In
consideration for the Chairman and CEO agreeing to continue in office until
December 31, 1998, whether or not he was in fact re-elected on an annual basis,
the date for exercising such options was further extended to the date three
months after the date of the audit report for the period ended December 31,
1998. In addition, for each of the five fiscal years ended December 31, 1998 the
Chairman and CEO was granted options to purchase shares under the same terms as
the previous agreement. In August 1997 the Chairman exercised options to
purchase 101,705 ordinary shares representing all of the options that were
granted under the agreements described above in respect of all years up to and
including December 31, 1996.
On December 31, 1998, the Chairman and CEO signed a new employment contract
for three years ending December 31, 2001. Under this contract the Chairman and
CEO will be granted options, for the year ended December 31, 1999, to purchase
ordinary shares at $2.50, and for each of the two years ending December 31,
2001, to purchase ordinary shares at the average of closing market price on each
of the first seven trading days in October of that financial year, exercisable
at any time up to three years after the date of the audit report for the year of
grant, in the amount of the number of ordinary shares which equals 1% of the net
income of the Company before charging dividends or crediting any asset
revaluation.
F-22
CONSOLIDATED WATER CO. LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
15. SHARE INCENTIVE PLAN, REDEEMABLE PREFERRED SHARES AND
COMPENSATORY OPTIONS -- (CONTINUED)
In respect of each of the three years ending December 31, 1999, the
Chairman and CEO was granted options to purchase 7,786, 16,570 and 12,440
ordinary shares, respectively, of which 7,786 remained unexercised at December
31, 1999. No compensatory expense has been recognized for such shares purchased
under option or options granted.
The President and Chief Operating Officer ("COO") was granted the option,
for each of the two years ending February 28, 1995 and 1996, to purchase
ordinary shares at $2.50, exercisable at any time before May 31, 1996 in the
amount of 20,000 ordinary shares.
The President and COO's contract was also revised during 1995 and again
during 1997. For each of the financial years ended December 31, 1996 and
thereafter whilst in office, the President and COO was granted an option to
purchase 20,000 shares under the same terms as the previous agreement. Options
granted in respect of the two years ended February 28, 1996 and the year ended
December 31, 1996 could be exercised until three months after the date of the
audit report for the period ended December 31, 1998. All options granted in
respect of the years ended February 28, 1996 have been exercised at December 31,
1999. Options granted in respect of the years ended December 31, 1997 and
thereafter may be exercised until the third anniversary of the date of the audit
report for that financial year. As at December 31, 1999, 120,000 options had
been granted, of which 60,000 remain unexercised at that date. No compensatory
expense has been recognized for such shares purchased under option or options
granted.
On July 20, 1999 as remuneration for services rendered to the Company, a
Director, was granted 30,000 options to purchase ordinary shares that may be
exercised until May 1, 2002. A further 30,000 options will be granted on May 1,
2000 that may be exercised until May 1, 2003. The strike price set for the
exercise of the options was $6.00 and $6.75 respectively. No compensatory
expense has been recognized for such options granted.
As part of an agreement for market representation, the Company issued
30,000 options to an investment company on December 15, 1998, for nil
consideration. Each option issued under this agreement entitles the holder to
purchase one ordinary share at a price of $7 7/8 for a period of two years,
commencing December 1, 1998. The fair value of the options was determined by
management to be $30,000, based on the fair value of the services to be
received. No compensatory expense is recognized of in respect of the options
granted.
Summary of options granted, exercised and outstanding:
[Enlarge/Download Table]
OPTIONS EXPIRY OPTIONS DATE
GRANT DATE GRANTED STRIKE PRICE DATE EXERCISED EXERCISED
---------- ------- ------------ --------- --------- ---------
CHAIRMAN AND CEO
December 31, 1993 and prior...................... 76,836 US$1.20 01-Jun-99 76,836 02-Aug-97
December 31, 1994................................ 4,808 US$2.50 01-Jun-99 4,808 02-Aug-97
December 31, 1995................................ 8,680 US$2.50 01-Jun-99 8,680 02-Aug-97
December 31, 1996................................ 11,381 US$2.50 01-Jun-99 11,381 02-Aug-97
December 31, 1997................................ 12,440 US$2.50 01-Jun-99 12,440 31-Mar-99
December 31, 1998................................ 16,570 US$2.50 01-Jun-99 16,570 31-Mar-99
December 31, 1999................................ 7,786 US$2.50 20-Mar-03 -- --
F-23
CONSOLIDATED WATER CO. LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
15. SHARE INCENTIVE PLAN, REDEEMABLE PREFERRED SHARES AND
COMPENSATORY OPTIONS -- (CONTINUED)
[Enlarge/Download Table]
OPTIONS EXPIRY OPTIONS DATE
GRANT DATE GRANTED STRIKE PRICE DATE EXERCISED EXERCISED
---------- ------- ------------ --------- --------- ---------
PRESIDENT AND COO
February 28, 1995................................ 20,000 US$2.50 01-Jun-99 20,000 31-May-99
February 28, 1996................................ 20,000 US$2.50 01-Jun-99 20,000 31-May-99
December 31, 1996................................ 20,000 US$2.50 01-Jun-99 20,000 31-May-99
December 31, 1997................................ 20,000 US$2.50 24-Feb-01 -- --
December 31, 1998................................ 20,000 US$2.50 01-Mar-02 -- --
December 31, 1999................................ 20,000 US$2.50 20-Mar-03 -- --
OTHER DIRECTORS
July 20, 1999.................................... 30,000 US$6.00 01-May-02 -- --
NON-EMPLOYEE
December 1, 1998................................. 30,000 US$7.88 01-Dec-00 -- --
Weighted average number and exercise price of options:
[Enlarge/Download Table]
1999 1998 1997
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
PRICE PRICE PRICE
NUMBER PER NUMBER PER NUMBER PER
OF SHARE OF SHARE OF SHARE
OPTIONS US$ OPTIONS US$ OPTIONS US$
--------- -------- --------- -------- --------- --------
Outstanding at beginning of year......................... 159,010 $3.51 92,440 $2.50 161,705 $1.88
Granted.................................................. 67,554 $4.52 74,160 $4.96 39,422 $2.78
Exerised................................................. (91,230) $2.58 (2,437) $5.32 (104,280) $1.58
Forfeited................................................ (7,548) $5.71 (5,153) $5.32 (4,407) $4.07
------- ------- --------
Outstanding at end of year............................... 127,786 $4.58 159,010 $3.51 92,440 $2.50
Exercisable at end of year............................... 127,786 $4.58 159,010 $3.51 92,440 $2.50
16. TAXATION
Under current laws of the Cayman Islands, there are no income, estate,
corporation, capital gains or other taxes payable by the Company.
17. GOVERNMENT ROYALTIES
Royalty expenses incurred during the year under the terms of the license to
process and supply potable water, granted by the government, amounted to
$560,441 (1998: $570,416; 1997: $492,590). In accordance with the terms of the
license, royalties are payable at the rate of 7.5% of gross water sales,
payments are made monthly in arrears.
18. PENSION BENEFITS
A staff pension scheme commenced during June 1995 and was offered to all
employees, both full and part-time. The scheme is administered by the Cayman
Islands Chamber of Commerce and is a defined contribution plan, whereby the
Company matches the contribution of the first 5% of each participating
employee's salary. The total amount recognized as an expense under the scheme
during 1998 was $48,554 (1998: $45,537; 1997: $40,362).
F-24
CONSOLIDATED WATER CO. LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
19. FINANCIAL INSTRUMENTS
CREDIT RISK
Financial assets which potentially subject the Company to concentrations of
credit risk consist principally of cash and accounts receivable. The Company's
cash balances are placed with high credit quality financial institutions.
Accounts receivable are presented net of an allowance for doubtful accounts.
Credit risk with respect to accounts receivable is limited due to the large
number of customers comprising the Company's customer base and the ability of
the Company to withdraw supply in the event of non-payment. Accordingly, the
Company has no significant concentration of credit risk.
INTEREST RATE RISK
The interest rates and terms of the Company's loans and Water Purchase
Agreement are presented in Notes 6 and 13 respectively.
FAIR VALUES
At December 31, 1999 and 1998 the carrying amounts of cash and short term
bank deposits and bank overdrafts, accounts receivable, accounts payable and
accrued expenses approximated their fair values due to the short term maturities
of these assets and liabilities. The Directors consider that the carrying amount
for long term debt (Note 6) due to Royal Bank of Canada approximates fair value
due to the characteristics of this debt. The fair value for long term debt due
to European Investment Bank is approximately $1,400,000 (1998: $1,600,000)
although this does not necessarily indicate that the Companys' could extinguish
this debt for an amount lower than the carrying value. Fair value of this long
term debt for which no market value is readily available is determined by the
Company using predetermined future cash flows discounted at an estimated current
incremental rate of borrowing for a similar liability. In establishing an
estimated incremental rate, the Company has evaluated the existing transactions,
as well as comparable industry and economic data and other relevant factors such
as pending transactions, subsequent events and the amount the Company would have
to pay a credit worthy third party to assume the liability, with the creditors
legal consent.
20. SUMMARY OF GAAP ACCOUNTING DIFFERENCES
Material differences between the financial statements as prepared under
International Accounting Standards ("IAS") and financial statements prepared in
accordance with accounting principles generally accepted in the United States
("US GAAP") are as follows:
i. As detailed in Note 15, redeemable preference shares are issued under
the Company's employee option scheme, and ordinary shares are granted
under the Directors share grant plan. In addition, the Chairman and
CEO, the President and COO, another Director of the Company and a
non-employee have been granted options to purchase ordinary shares.
Under US GAAP, compensation costs in stock option, purchase and award
plans granted to employees and non-employees are recognized as an
expense over the periods in which the services are performed. For the
purpose of determining US GAAP accounting differences, compensation
costs have been calculated according to the methodology outlined in
APB
F-25
CONSOLIDATED WATER CO. LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
20. SUMMARY OF GAAP ACCOUNTING DIFFERENCES -- (CONTINUED)
Opinion No. 25. The table below summarizes the pro forma effect if
FASB Statement No. 123, the alternative applicable standard, were
adopted:
[Enlarge/Download Table]
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
Net income............................................. $1,498,105 $1,451,975 $1,133,678
Basic earnings per ordinary share under................ $ 0.49 $ 0.47 $ 0.38
Diluted earnings per ordinary share.................... $ 0.47 $ 0.45 $ 0.36
Weighted average fair value per share under FAS 123 for options
granted during the year with an exercise price below market price on
the date of grant:
[Download Table]
Chairman and CEO............................................ $4.07 $4.48 3.29
President and COO........................................... $4.07 $4.48 3.29
Other Executive director.................................... $3.69 -- --
Employees................................................... $1.84 $2.07 0.92
----- ----- -----
Overall weighted average.................................... $3.80 $4.33 $2.87
In calculating the fair value for these options under FASB Statement
No. 123 the Black-Scholes model was used with the following weighted
average assumptions:
[Enlarge/Download Table]
Exercise price........................................... $ 4.37 $ 2.68 $ 2.78
Grant date market value.................................. $ 6.98 $ 7.02 $ 5.36
Risk free interest rate.................................. 5.75% 4.75% 5.66%
Expected life............................................ 2.8 years 0.4 years 1.3 years
Expected volatility...................................... 72.55% 29.32% 78.09%
Expected dividend yield.................................. 3.46% 2.28% 2.62%
Weighted average fair value per share under FAS 123 for shares issued
during the year below market price on the date of grant:
[Enlarge/Download Table]
1999 1998 1997
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
FAIR FAIR FAIR
VALUE VALUE VALUE
NUMBER PER NUMBER PER NUMBER PER
OF SHARE OF SHARE OF SHARE
SHARES US$ SHARES US$ SHARES US$
--------- -------- --------- -------- --------- --------
Employee share incentive plan........................ 9,768 $5.83 7,590 $4.58 6,982 $4.90
Directors share grant plan........................... 2,400 $6.75 -- -- -- --
------- ----- ------- ----- -------- -----
Overall weighted average............................. 12,168 $6.01 7,590 $4.58 6,982 $4.90
ii. Statement of Position 98-5 "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5") requires start up costs to be expensed as
incurred rather than deferred as currently allowed by International
Accounting Standards ("IAS"). As a result of this, certain costs
previously deferred have to be expensed under US GAAP. With the
introduction of IAS 38, effective for periods beginning on or after
July 1, 1999, International Accounting Standards for such costs will
become aligned with the requirements of SOP 98-5 in the financial
statements of the Company for the year ending December 31, 2000. The
costs expensed relate to deferred expenditure of $18,132 and costs of
$97,756 relating to Commonwealth (Note 4).
iii. Included in fixed assets is land which is stated at appraised value
as determined by the Board of Directors in 1987 (Note 2). As a
result, the valuation of land includes unrealized capital
F-26
CONSOLIDATED WATER CO. LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
20. SUMMARY OF GAAP ACCOUNTING DIFFERENCES -- (CONTINUED)
gains of $302,867, which have been accounted for within stockholders'
equity for each of the two years ended December 31, 1999 and 1998.
Under US GAAP, this unrealized capital gain would not be recorded and
land would be carried at historical cost.
iv. Under US GAAP, liabilities relating to dividends are not recognized
until declared by the full Board of Directors.
v. In 1995, the Company elected to adopt early the provisions of FASB
Statement No. 121. This statement requires that assets to be disposed
of be measured at the lower of carrying amount or fair value less cost
to sell. In 1995, management decided to take the Company's two vapour
compression units permanently out of service and recorded an
impairment write-down of $400,000, as described in Note 4. In 1997,
the remaining balance of $97,886 was written down to nil value. In
adopting the provisions of the Statement, the Company is fully in
compliance with the relevant International Accounting Standards. Under
US GAAP, the fixed asset impairment would be included in operating
income.
[Enlarge/Download Table]
1999 1998 1997
---------- ---------- ----------
Net income under IAS....................................... $1,946,599 $1,656,996 $1,247,754
Description of items that affect reported income:
i. Recognition of stock option compensation expenses (see
Note i.)............................................... (260,994) (205,063) (135,352)
ii. Start up costs expensed as a result of the adoption of
SOP 98-5 (see Note ii)................................. (115,888) -- --
---------- ---------- ----------
Net income under US GAAP................................... $1,569,717 $1,451,933 $1,112,402
========== ========== ==========
Basic earnings per ordinary share under US GAAP............ $ 0.51 $ 0.47 $ 0.37
========== ========== ==========
Diluted earnings per ordinary share under US GAAP.......... $ 0.49 $ 0.45 $ 0.35
========== ========== ==========
There are no other items of comprehensive income as envisaged under FASB
Statement No. 130 and, accordingly, no statement of comprehensive income is
included.
[Enlarge/Download Table]
1999 1998
----------- -----------
Stockholders' equity under IAS.............................. $12,529,645 $11,606,828
Description of items that affect Stockholders equity:
i. Recognition of stock option compensation expenses (see
Note i.)............................................... (332,591) (434,255)
ii. Expensing of previously deferred start up costs (see
Note ii.).............................................. (115,888) --
iii. Reversal of recognition of unrealized capital gains
(see Note iii.)....................................... (302,867) (302,867)
iv. Reversal of dividends payable (see Note iv.)........... -- 123,685
----------- -----------
Stockholders' equity under US GAAP..................... $11,778,299 $10,993,391
=========== ===========
Under US GAAP, FASB Statement No. 71 provides guidance in respect of the
treatment of costs of certain regulated operations. The Company does not fall
within the criteria for this statement to apply.
The Company has determined that the provisions of FASB Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities" are not
applicable to the Company's operations. The Company does not have any
off-balance sheet financing arrangements, including swaps and other derivative
instruments.
F-27
CONSOLIDATED WATER CO. LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
21. REPORTING CURRENCY
Effective December 31, 1994, the Company changed its reporting currency
from the Cayman Islands dollar to the United States dollar pursuant to
amendments to S-X Rule 3-19 of the United States Securities Exchange Commission.
The reason for the change in reporting currency was to provide existing and
potential United States investors with financial information which does not
require conversion into United States dollars. It is the intention of the
Company to declare and pay dividends in United States dollars. The exchange rate
between the Cayman Islands dollar and the United States dollar has been fixed
during all periods presented at CI$1.00 to US$1.20.
22. SIGNIFICANT NON-CASH TRANSACTIONS
The Company made the following significant non-cash transactions:
[Enlarge/Download Table]
1999 1998 1997
------- ------ -------
Preference shares issued to employees an $Nil consideration
(9,768, 7,590 and 6,982 shares respectively) (Note 14)... $11,722 $9,108 $ 8,378
======= ====== =======
Redemption of vested preferred shares and issue of
replacement ordinary shares at $Nil consideration
(14,835, 210 and 16,565 shares respectively) (Note 14)... $17,802 $ 252 $19,878
======= ====== =======
Ordinary shares issued under the Directors share grant plan
at $Nil consideration (2,400, nil and nil respectively)
(Note 15)................................................ $ 2,880 $ -- $ --
======= ====== =======
Write down of vapor compression unites (Note 4)............ $ -- $ -- $97,886
======= ====== =======
23. EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT
ACCOUNTANT'S REPORT
The following events (unaudited) occurred subsequent to the date of the
Independent Accountant's report:
i. In June 2000, the Company completed a public offering of 773,000
ordinary shares at a per share price of $7.50. After deducting
underwriting commissions and other offering expenses, the net proceeds
from the offering were approximately $5.05 million. The Company intends
to use the proceeds from this offering to retire approximately $2.10
million of existing debt, for implementation of its growth strategy and
for capital expenditures and general corporate purposes.
ii. The Company received a letter dated June 1, 2000, from an official of
the Cayman Islands' government, stating that a public offering of
ordinary shares, which was completed in 1996 without the government's
approval, was a breach of the license. The letter is not clear as to
whether the government also views the completion of the June 2000
public offering as a breach of the license. The Company has responded
to this letter and stated that it does not believe that it is in breach
of the license. A meeting with officials of the Cayman Islands'
government, to discuss this matter, was held on June 16, 2000 in
accordance with the government's suggestion in the June 1, 2000 letter.
Discussion of the matter is ongoing. The Company's Cayman Islands'
legal counsel has advised that the June 1, 2000 letter from the Cayman
Islands government does not constitute a formal "notice of breach of
the license" as contemplated in the license. Accordingly, other than
pursuing discussions of this matter with the Cayman Islands'
government, no other actions are presently being pursued by the Company
to "cure" any such alleged breaches.
The license requires that the Cayman Islands government approves in
advance any issuance or transfer of ordinary shares which represents
more than 5% of the issued shares, or which would increase the
ownership of any shareholder above 5% of the issued shares of the
Company. More than 5% of the Company's issued and outstanding shares
are and in the future may be registered in the name of Cede and Co.,
the nominee for the Depository Trust Company, otherwise know as DTC,
which is a clearing agency for shares held by participating banks and
brokers.
If the government finds that the Company is in breach, the Company
could remedy this breach by electing that the shares no longer be DTC
eligible. However, this election likely would adversely affect interest
in the Company's shares by banks, brokers, market makers, investors and
other persons who wish to hold the shares in street name through DTC.
This would impair the liquidity and market for the shares.
F-28
CONSOLIDATED WATER CO. LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
23. EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT
ACCOUNTANT'S REPORT (CONTINUED)
If the Company cannot remedy a breach of the license, the government
may appoint a person to operate the business on an interim basis. The
Company may then apply to the government for reinstatement of the
license. If the license is not reinstated, the government may appoint a
new licensee to service the licensed area using all or a portion of the
Company's existing production and distribution systems. In this case,
the government would have to compensate the Company for taking any of
its assets, based upon the value of those assets as a unit of
production excluding goodwill as determined by three appointed
appraisers. No assurance can be given that the interim operator will
manage the business successfully or that the price paid by the
government would reflect the growth potential of the Company. In
addition, there can be no assurance that shareholders would receive a
cash dividend from such proceeds in the event of a government purchase.
iii. On June 27, 2000, the Company entered into a stock purchase agreement
to purchase all of the issued and outstanding capital stock of a
company organised under the laws of Belize. This company owns and
operates an existing reverse osmosis plant in Belize, which the Company
will acquire upon closing of this transaction. Although the Company
paid a deposit of $25,000 on June 27, 2000, to the seller, the
closing of the transaction is subject to approval by the appropriate
governmental authorities in Belize, including the Water and Sewerage
Authority, as well as certain other conditions precedent to closing.
The closing date is currently scheduled for July 21, 2000, although it
may be re-scheduled by mutual agreement of the parties. The deposit
will be returned to the Company if the appropriate government
authorities do not approve the transaction before the closing date or
certain other closing conditions are not satisfied, such as completion
of the due diligence process to the Company's satisfaction.
F-29
Dates Referenced Herein and Documents Incorporated by Reference
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