UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 2002 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) CAYMAN ISLANDS N/A - ---------------------------------- ----------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) TRAFALGAR PLACE, WEST BAY ROAD, P.O. BOX 1114GT, GRAND CAYMAN, B.W.I. N/A - ----------------------------------------------------- ---------------------- (Address of principal executive offices) (Zip Code) Registrant's Telephone number, including area code: (345) 945-4277 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 [ ] As at May 10, 2002, there were 3,981,464 of the registrant's ordinary shares of common stock, with CI$ 1.00 par value, outstanding.
EXCHANGE RATES Unless otherwise indicated, all dollar amounts are in United States Dollars and references to "$", "U.S.", or "U.S. $" are to United States Dollars. The official fixed exchange rate for conversion of CI$ into U.S. $, as determined by the Cayman Islands Monetary Authority, has been fixed since April 1974 at U.S. $1.20 per CI $1.00. The official fixed exchange rate for conversion of BZE$ into U.S. $, as determined by the Central Bank of Belize, has been fixed since 1976 at U.S. $0.50 per BZE $1.00. The official fixed exchange rate for conversion of BAH$ into U.S.$, as determined by the Central Bank of The Bahamas, has been fixed since 1973 at U.S. $1.00 per BAH $1.00.
TABLE OF CONTENTS <TABLE> <CAPTION> SECTION DESCRIPTION PAGE - ------- ----------- ---- <S> <C> PART I FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001................................................. 1 Condensed Consolidated Statements of Income for each of the Three Months ended March 31, 2002 and 2001 ............................. 2 Condensed Consolidated Statements of Cash Flows for each of the Three Months ended March 31, 2002 and 2001..................... 3 Notes to Condensed Consolidated Financial Statements............. 4 Item 2. Management's Discussions and Analysis of Financial Condition and Results of Operations............................................. 7 Item 3. Quantitative and Qualitative Disclosures about Market Risk........... 11 PART II OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds............................. 12 Item 6. Exhibits and Reports on Form 8-K...................................... 12 SIGNATURES ....................................................................... 13 </TABLE> FORWARD-LOOKING STATEMENTS This Form 10-Q for Consolidated Water Co. Ltd. (the "Company") includes statements that may constitute "forward-looking" statements, usually containing the words "believe," "estimate," "project," "intend," "expect" or similar expressions. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to, continued acceptance of the Company's products and services in the marketplace, changes in its relationship with the governments of the jurisdictions in which it operates, the ability to successfully secure contracts for water projects in other countries, the ability to develop and operate such projects profitably, and other risks detailed in the Company's other periodic report filings with the Securities and Exchange Commission. By making these forward-looking statements, the Company undertakes no obligation to update these statements for revisions or changes after the date of this Form 10-Q.
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED WATER CO. LTD. CONDENSED CONSOLIDATED BALANCE SHEETS (Expressed in United States Dollars) <TABLE> <CAPTION> MARCH 31, DECEMBER 31, 2002 2001 ----------- ----------- (UNAUDITED) <S> <C> <C> ASSETS CURRENT ASSETS Cash and cash equivalents ............ 1,177,293 516,446 Accounts receivable .................. 1,781,750 1,323,156 Spares inventory ..................... 312,583 271,134 Inventory of water ................... 52,859 48,377 Prepaid expenses and other assets .... 241,893 319,900 ----------- ----------- Total current assets ...................... 3,566,378 2,479,013 Property, plant and equipment ........ 19,789,383 18,414,935 Intangible asset ..................... 1,766,066 1,814,780 Investment ........................... 12,450 12,450 ----------- ----------- Total assets .............................. $25,134,277 $22,721,178 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Bank overdrafts ...................... 500,000 -- Dividends payable .................... 473,416 499,383 Accounts payable and other liabilities 821,097 1,087,470 Stock compensation liability ......... 148,050 210,324 Current portion of long term debt .... 505,840 355,840 ----------- ----------- Total current liabilities ................. 2,448,403 2,153,017 Long term debt ....................... 2,551,304 1,213,804 Security deposit ..................... 102,763 52,763 Advances in aid of construction ...... 36,274 37,494 ----------- ----------- Total liabilities ......................... 5,138,744 3,457,078 ----------- ----------- STOCKHOLDERS' EQUITY Common stock ......................... 4,741,759 4,704,077 Additional paid-in capital ........... 7,084,181 6,896,753 Vested redeemable preferred stock .... 2,841 2,841 Non-vested redeemable preferred stock 27,393 27,393 Retained earnings .................... 8,139,359 7,633,036 ----------- ----------- Total stockholders' equity ................ 19,995,533 19,264,100 ----------- ----------- Total liabilities and stockholders' equity $25,134,277 $22,721,178 =========== =========== </TABLE> The accompanying information and notes are an integral part of these condensed consolidated financial statements 1
CONSOLIDATED WATER CO. LTD. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Expressed in United States Dollars) <TABLE> <CAPTION> THREE MONTHS THREE MONTHS ENDED MARCH 31, ENDED MARCH 31, 2002 2001 --------------- --------------- <S> <C> <C> Water sales .......................................................... 3,107,496 2,857,204 Cost of water sales .................................................. (1,666,452) (1,483,389) ----------- ----------- Gross profit ......................................................... 1,441,044 1,373,815 ----------- ----------- Indirect expenses .................................................... (600,223) (647,360) ----------- ----------- Income from operations ............................................... 840,821 726,455 ----------- ----------- Other income: Interest income ................................................. 6,432 30 Other income .................................................... 79,247 104,405 ----------- ----------- 85,679 104,435 ----------- ----------- Net income ........................................................... $ 926,500 $ 830,890 =========== =========== Basic earnings per share ............................................. $ 0.24 $ 0.21 =========== =========== Diluted earnings per common share .................................... $ 0.23 $ 0.21 =========== =========== Dividends declared per share ......................................... $ 0.105 $ 0.10 =========== =========== Weighted average number of common shares used in the determination of: Basic earnings per share ............................................. 3,923,209 3,866,921 =========== =========== Diluted earnings per share ........................................... 4,054,949 3,977,299 =========== =========== </TABLE> The accompanying information and notes are an integral part of these condensed consolidated financial statements. 2
CONSOLIDATED WATER CO. LTD. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Expressed in United States Dollars) <TABLE> <CAPTION> THREE MONTHS THREE MONTHS ENDED MARCH 31, ENDED MARCH 31, 2002 2001 --------------- --------------- <S> <C> <C> NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES ..... 590,025 676,906 ----------- ----------- CASH FLOWS USED IN INVESTING ACTIVITIES Purchase of property, plant and equipment ........ (1,681,993) (446,231) ----------- ----------- Net cash used in investing activities ............... (1,681,993) (446,231) ----------- ----------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES Net proceeds from issuance of common stock ....... 162,835 50,000 Draw down of credit facility ..................... 1,500,000 -- Principal payments of long term debt ............. (12,500) -- Dividends paid ................................... (397,520) (390,146) Increase in bank overdraft ....................... 500,000 189,226 ----------- ----------- Net cash provided by (used in) financing activities . 1,752,815 (150,920) ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS ........... 660,847 79,755 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .... 516,446 250,837 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD .......... $ 1,177,293 $ 330,592 =========== =========== </TABLE> The accompanying information and notes are an integral part of these condensed consolidated financial statements. 3
CONSOLIDATED WATER CO. LTD. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The accompanying financial statements should be read in conjunction with the 2001 Annual Report for the Company on Form 10-K. The interim condensed consolidated financial statements are unaudited, but in the opinion of management, reflect all adjustments necessary for a fair presentation of results for such periods. All adjustments are of a normal recurring nature. 1. PRINCIPAL ACTIVITY AND STATUS Consolidated Water Co. Ltd. (the "Company") and its wholly-owned subsidiaries (together the "Group") use reverse osmosis technology to produce fresh water from seawater. The Group processes and supplies water to its customers in Grand Cayman, Cayman Islands; Ambergris Caye, Belize; and South Bimini, Bahamas. The Company's exclusive license in Grand Cayman allows it to process and supply water to certain areas of Grand Cayman for a period of twenty years from July 11, 1990 in addition to having a right of first refusal on the extension or renewal thereof. The Group has a contract with Belize Water Services Ltd. ("BWSL") of Belize, formally known as Water and Sewerage Authority of Belize, to supply water to BWSL in Ambergris Caye expiring in 2011. At the expiry of the contract, BWSL may at its option extend the term of the agreement or purchase the plant outright. In addition, on July 11, 2001 the Company commenced supplying water under a ten year agreement to South Bimini International Ltd., a Bahamian company, which owns and operates resort properties on South Bimini Island, Bahamas. The base price of water supplied by the Group, and adjustments thereto, are generally determined by the terms of the license and contracts, which provide for adjustments based upon the movement in the government price indices specified in the license and contracts respectively as well as monthly adjustments for changes in the cost of energy. 2. PURCHASE OF ASSETS On February 1, 2002, the Company acquired the reverse osmosis plant that was previously owned and operated by Cayman Hotel and Golf Inc., a company which owns and operates the Hyatt Hotel and Britannia Golf Course and developed the Britannia condominiums and villas. The acquisition has been accounted for by the purchase method. The total purchase price of $1,500,000 was paid in cash. The fair value of assets acquired was $1,500,000 which comprised solely of property, plant and equipment representing the reverse osmosis plant. 3. SEGMENTED INFORMATION Under FAS 131 `Disclosure about Segments of an Enterprise and Related Information' the supply of water to Cayman Islands, Belize and Bahamas are considered by management as separate business segments. The basis of measurement of segment information is the same as that adopted for the condensed financial statements. 4
CONSOLIDATED WATER CO. LTD. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 3. SEGMENT INFORMATION (CONTINUED) AS AT MARCH 31 AND FOR THE THREE MONTHS THEN ENDED <TABLE> <CAPTION> Cayman Islands Belize Bahamas (*) Total ------------------------ ------------------------ ---------------------- ------------------------ 2002 2001 2002 2001 2002 2001 2002 2001 ---------- ---------- ---------- ---------- ---------- ------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> Water sales ...... 2,761,821 2,537,292 325,906 319,912 19,769 -- 3,107,496 2,857,204 Other income ..... 79,635 104,435 6,040 -- 4 -- 85,679 104,435 Cost of water sales.......... 1,440,001 1,311,384 196,051 172,005 30,400 -- 1,666,452 1,483,389 Indirect expenses 557,406 608,186 41,375 39,174 1,442 -- 600,223 647,360 Cost of water sales and indirect expenses include: Interest ...... 20,941 29,367 544 -- -- -- 21,485 29,367 Depreciation .. 251,983 218,453 44,614 39,837 10,948 -- 307,545 258,290 Net income (loss) 844,049 722,157 94,520 108,733 (12,069) -- 926,500 830,890 Property Plant and Equipment.. 17,178,724 15,366,563 1,500,375 1,630,343 1,110,284 834,925 19,789,383 17,831,831 </TABLE> - --------------- (*) On December 18, 2000, the Company entered into the agreement with South Bimini International Ltd., and began operations in the Bahamas on July 11, 2001. 4. SHARE CAPITAL Under the provisions of the Land Holding Companies Share Transfer Tax Law of the Cayman Islands, tax is payable on the transfer of shares in the Company. Prior to becoming quoted on Nasdaq, the Company paid this tax on private share transfers. The Company has never paid tax on transfers of its publicly traded shares. Management believes that the likelihood that Government will seek to collect this tax on transfers of the Company's publicly traded shares is remote. Management, therefore, has not provided for a share transfer tax liability in these financial statements 5. CONTINGENCIES The license that the Company has with the government of the Cayman Islands (the "Government") requires it to obtain approval from the Government for an issuance or transfer of shares which (a) exceeds 5% of the issued shares of our company, or (b) would, upon registration, result in any shareholder owning more than 5% of the issued share capital of the Company. By letter dated May 3, 2002, the Government of the Cayman Islands advised the Company that the 5% ownership and transfer restrictions imposed in the Licence will be removed. 5
CONSOLIDATED WATER CO. LTD. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. EARNINGS PER SHARE Basic earnings per share is calculated by dividing the net profit attributable to stockholders by the weighted average number of ordinary shares of common stock in issue during the year. The net income and weighted average number of ordinary shares of common stock and potential ordinary shares figures used in the determination of the basic and diluted earnings per ordinary share of common stock are summarized as follows: <TABLE> <CAPTION> THREE MONTHS THREE MONTHS ENDED MARCH 31, ENDED MARCH 31, 2002 2001 --------------- --------------- <S> <C> <C> Net income used in determination of diluted earnings per ordinary share of common stock ......................... $ 926,500 $ 830,890 Less: Dividends paid on non-vested redeemable preferred stock ............................. (2,397) (2,365) Earnings attributable to vested redeemable preferred stock ............................. (553) (2,125) ----------- ----------- Net income available to holders of ordinary shares of common stock in the determination of basic earnings per ordinary share of common stock ......................... $ 923,550 $ 826,400 =========== =========== Weighted average number of ordinary shares of common stock used in the determination of basic earnings per ordinary share of common stock ......................... 3,923,209 3,866,921 Plus: Weighted average number of redeemable preferred stock outstanding during the year ............................ 25,195 33,634 Potential dilutive effect of unexercised options ....... 106,545 76,744 ----------- ----------- Weighted average number of shares used for determining diluted earnings per ordinary share of common stock ..................... 4,054,949 3,977,299 =========== =========== </TABLE> 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001 WATER SALES AND OTHER INCOME ("TOTAL INCOME") Total Income increased by 7.8% from $2,961,639 to $3,193,175 for the three months ended March 31, 2001 and 2002, respectively. Total Income is comprised of water sales and other income. The Cayman operations increased Total Income by $199,729 for the three months ended March 31, 2002, representing 86.3% of the increase. The Belize operations increased Total Income by $12,034 for the three months ended March 31, 2002, representing 5.2% of the increase. Finally, the addition of the Bahamas operations as of July 11, 2001 increased Total Income by $19,773 for the three months ended March 31, 2002, representing 8.5% of the increase. Sales in Cayman are made within our license area to approximately 3,000 customers. All sales in Belize are to one customer, Belize Water Services Ltd., a private company that acquired the assets of Belize Water and Sewerage Authority, which was previously a government statutory corporation. The terms of our contract have not changed as a result of the privatization of Belize Water and Sewerage Authority. Currently in the Bahamas, all sales are to one customer, South Bimini International Ltd. known as Bimini Sands Resort and Marina, which uses water at their hotel, condominiums and full service marina. The largest changes occurred in the Cayman operations and were the result of the purchase of the Hyatt reverse osmosis seawater conversion plant on February 1, 2002. This plant was previously owned and operated by Cayman Hotel and Golf Inc., a company which owns and operates the Hyatt Hotel and Britannia Golf Course and developed the Britannia condominiums and villas. As a result of this purchase, the Hyatt Hotel and Britannia Golf Course entered into a 25 year water supply agreement, and we also began to supply water to the Britannia condominiums and villas under our customer contracts. When we began supplying water to the hotel, condominiums and villas the existing dispute settlement agreement with Cayman Hotel and Golf Inc. was extinguished. Total water sales increased by 8.8% from $2,857,204 to $3,107,496 for the three months ended March 31, 2001 and 2002, respectively. The total water sales increase of $250,292 was a result of several factors detailed below. Our Cayman operation added $224,529 to water sales for the three months ended March 31, 2002, which is 89.7% of the total increase. In January 2002, the automatic inflation adjustment decreased our Cayman Islands water rates for most of our customers by an average of 0.4%. This was offset by an 18.2% increase in the number of US gallons sold over the same period in the prior year. This increase in the number of US gallons sold was the result of supplying water to the Hyatt Hotel which makes up 39.3% of the increase, and the Britannia condominiums and villas which makes up an additional 39.0% of the increase. In addition, bulk sales of $59,257 were made to the Water-Authority (Cayman) to make up temporary shortfalls in their production capacity, which did not occur in the same period as the prior year. 7
Our Belize operation added $5,994 to water sales for the three months ended March 31, 2002, which is 2.4% of the total increase. This increase was due to both an increase of 0.7% increase in the US gallons sold and the automatic inflation adjustment, which increased our Belize water rates in June 2001 by 0.53%. Finally, the addition of the Bahamas operations as of July 11, 2001 increased water sales by $19,769 for the three months ended March 31, 2002, representing 7.9% of the increase. Other income decreased by 18.0% from $104,435 to $85,679 for the three months ended March 31, 2001 and 2002, respectively. This decrease was a result of the February 1, 2002 termination of the dispute settlement agreement with Cayman Hotel and Golf Inc. as discussed above. This decrease was partially offset by small increases in meter rentals, due to increased customers, and interest income on receivables in our Belize operations, due to the temporary delay in payment by Belize Water Services Ltd. EXPENSES Cost of water sales increased by 12.3% from $1,483,389 to $1,666,452 for the three months ended March 31, 2001 and 2002, respectively. Our Cayman operations increased cost of water sales by $128,617 for the three months ended March 31, 2002, representing 70.3% of the increase. Although cost of water sales increased, it increased at a lower rate than our water sales since we benefit from efficiency savings in our water production operation when we produce more water. This increase was mainly due to the costs associated with operations of the new Britannia RO seawater conversion plant which can produce water at a lesser cost than we purchase from OCL at our Governor's Harbour plant. Our Belize operations increased our cost of sales by $24,046 for the three months ended March 31, 2002, which represents 13.1% of the overall cost of sales increase. This increase resulted from the cost of settling various claims for compensation with our customer in Belize, which were the result of our equipment failures that occurred in August and September 2001, and a minor miscalculation in the annual inflation adjustment formula in our contract. This miscalculation dates back to November 1995 and upon correction reduced our unit rate for water to our customer by $0.09 per 1,000 US gallons. The total cost of the settlement with BWSL is $41,597, of which $12,209 was already accrued at December 31, 2001, and the balance of $29,388 expensed in 2002. These settlement costs were partially offset by late payment interest accrued on receivables, which amounted to $33,812 of which $27,772 was already accrued at December 31, 2001, and the balance of $6,040 accrued in 2002. The remaining $7,785 due to BWSL after offsetting the interest was credited against their April 2002 invoice. Although our Belize operations were not as efficient as our Cayman operations during this same period in respect of our cost of sales per unit of water produced, for the period ended March 31, 2002, our electricity and diesel costs in Belize were $20,821 lower than in the same period in the prior year. This resulted because in 2002 we were able to utilize a more efficient diesel engine instead of an electric motor to power one of our production trains. In early 2001 we experienced a mechanical failure of one of our diesel engines, which caused us to incur additional repair and operational costs. This failure was rectified in late 2001. Finally, the addition of the Bahamas operations as of July 11, 2001 increased cost of water sales by $30,400 for the three months ended March 31, 2002, representing 16.6% of the increase. Gross profit margins decreased from 48.1% to 46.4% for the three months ended March 31, 2001 and 2002, respectively. Gross profit margins for our Cayman operations decreased from 48.3% to 47.9% for the three months ended March 31, 2001 and 2002, respectively. The reasons for 8
this 0.4% decrease are increased insurance costs over the same period in the prior year and increased labour costs due to inflationary wage increases. Gross profit margins for our Belize operations decreased from 46.2% to 39.8% for the three months ended March 31, 2001 and 2002, respectively. The reason for this 6.4% decrease is related to the settlement costs with Belize Water Services Ltd. as discussed above. Gross profit margin for our Bahamas operations for the three months ended March 31, 2002 was a negative 53.8%. This was due to low water sales and a relatively higher proportion of fixed costs such as depreciation, which we expected in the early phases of the Bimini Sands Resort development project. Both of these are temporary factors and are not expected to continue in the future. We forecast that the Bahamas operation will generate net income during the first quarter of 2003. Indirect expenses decreased by 7.3% from $647,360 to $600,223 for the three months ended March 31, 2001 and 2002, respectively. Our Cayman operations decreased indirect expenses by $50,780 for the three months ended March 31, 2002. This decrease was offset by small increases in both the Belize and Bahamas operations. The greatest decreases in our expenses related to our banking and loan facilities. We are benefiting from low LIBOR interest rates on our term loan and overdraft facilities with Royal Bank of Canada, and because the principal on our European Investment Bank loan reduced because of a payment made on December 21, 2001, we are paying both less interest and lower government guarantee fees in 2002. Additional saving occurred on our communication costs due to a new telecommunications service plan offered by our local provider. The Belize operations increased indirect expenses by $2,201 for the three months ended March 31, 2002. This was due to increased insurance costs. Finally, the addition of the Bahamas operations as of July 11, 2001 increased indirect expenses by $1,442 for the three months ended March 31, 2002. These costs relate to the administration of the Bahamas operations. As a percentage of the Total Income, indirect expenses were at 21.9% and 18.8% for the three months ended March 31, 2001 and 2002, respectively. NET INCOME Net income increased by 11.5% from $830,890 to $926,500 for the three months ended March 31, 2001 and 2002, respectively. This increase was due to the several reasons detailed above. DIVIDENDS In December 2001, we increased our per share dividend from $0.40 to $0.42 per year, payable on a quarterly basis. We have consistently paid dividends to ordinary shareholders since we began declaring dividends in 1985. Our board of directors has established a policy that we will maintain a dividend pay-out ratio in the range of 50% to 60% of net income. This policy is subject to modification by our board of directors, however, we expect to continue increasing our dividend as our earnings grow. 9
LIQUIDITY AND CAPITAL RESOURCES OVERVIEW We generate cash primarily from our operations in the Cayman Islands, Belize and Bahamas, and at a lesser frequency from the sale of our shares, and through our loans and facilities obtained from two banks. Cash flow is impacted by operating and maintenance expenses, the timeliness and adequacy of rate increases (excluding automatic adjustments to our rates for inflation and electricity costs), and various factors affecting tourism in the Cayman Islands, Belize and Bahamas, such as weather conditions and the economy. We use cash to fund our operations in the Cayman Islands, Belize and Bahamas, fund capital projects, to make payments under our operating agreement with Ocean Conversion (Cayman) Ltd., a Cayman Islands company which operates our Governor's Harbour plant, to expand our infrastructure, to pay dividends, to repay principal on our loans, to repurchase our shares when appropriate and to take advantage of new investment opportunities which expand our operations. OPERATING ACTIVITIES Cash from operating activities for the three months ended March 31, 2001 and 2002 was $676,906 and $590,025, respectively. We generated cash through the utilization of our existing plants, equipment and resources in all three segments of the business, minimization of water losses and efficiencies created by a strong management team. The loss in the Bahamas operation for the three months ended March 31, 2002 was $12,069. This investment is long-term and we do not expect to produce a positive cash flow until the second quarter 2002. Currently, we provide water to 54 condominiums, half of a developing marina and a small existing hotel. By the end of 2002, we anticipate that we will be providing water to 30 additional condominiums, and the expanded marina. During the month of March 2002, our Cayman operations sold approximately 19 million US gallons more than in the same month of the previous year. This resulted in the increased receivables for the month of March 2002. WORKING CAPITAL At March 31, 2002, we had a working capital surplus of $1,117,975. This surplus relates to the cash we received from our operating activities and the increased Cayman operations receivable due to the sales in the month of March 2002. Currently, 42.0% of our cash is denominated in Belize dollars. Through our Belize government guarantees we are in the process of repatriating United States dollars to the Cayman Islands. INVESTING ACTIVITIES Cash used in investing activities during the three months ended March 31, 2001 and 2002 was $446,231 and $1,681,993, respectively. Cash was used in investing activities for expenditures for new property, plant and equipment with the majority associated with the purchase of the RO seawater conversion plant on February 1, 2002. We also continued to expand our water distribution system in the Cayman Islands by constructing pipelines to service new developments within our franchise area. During the same period in 2001, our investing activities consisted of construction costs relating to our new water production and distribution system in Bimini, Bahamas. It also includes expansion costs relating to our water distribution system in the Cayman Islands by constructing pipelines to service several new developments within our franchise area. FINANCING ACTIVITIES Cash used in financing activities for the three months ended March 31, 2001 was $150,920, compared to cash provided by of $1,752,815 for the three months ended March 31, 2002. During the three months ended March 31, 2002, our primary financing activity was a draw down of our credit facility for an additional $1,500,000 in order to assist with the financing of the investment of our new RO 10
seawater conversion plant plus the increase in our short-term bank overdraft to assist with US dollar denominated payments of our dividends and supplier invoices. We also had proceeds from an issuance of ordinary shares of common stock due to certain directors exercising certain options. These were offset by the payment of our December 31, 2001 interim quarterly dividend totaling $0.10 per share and a principal payment on one of our term loans. During same period in 2001, the primary financing activity was the payment of our December 31, 2000 interim quarterly dividend totaling $0.10 per share. This was offset by proceeds from an issuance of ordinary shares of common stock due to a director exercising certain options and a net increase in our short-term bank overdraft to cover some of the construction costs of our new water production facilities in Bimini, Bahamas. MATERIAL COMMITMENTS FOR CAPITAL EXPENDITURES As at March 31, 2002, we had approximately $120,000 committed for capital expenditures for the construction of pipeline to connect the Britannia plant facility to our distribution network. We intend to finance our pipeline construction project using cash from operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not use derivative financial instruments for speculative trading purposes and as of March 31, 2002 have not been a party to any financial instruments or contracts that expose us to material market risk. 11
PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS In March 2002, we issued 27,979 ordinary shares of common stock to two of our executive officers pursuant to the exercise of stock options. The aggregate exercise price of the options was $162,835. Also in March 2002, we issued 3,172 ordinary shares of common stock to our Belize managers as a bonus pursuant to the terms of the Belize managers' employment agreement and we also issued 249 ordinary shares of common stock to three of our directors as compensation under the directors share grant plan. The issuances of these shares were exempt from registration under Regulation S promulgated under the Securities Act of 1933 because the shares were offered and sold outside of the United States to non-US persons (as defined in Regulation S) and under Section 4(2) of the Securities Act of 1933 because the individuals receiving the shares are sophisticated investors who have knowledge of all material information about the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits EXHIBIT NO. DESCRIPTION ----------- ----------- None (b) Reports on Form 8-K None 12
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CONSOLIDATED WATER CO. LTD. By: /s/ Jeffrey M. Parker -------------------------------------- Jeffrey M. Parker Chairman of the board of directors and Chief Executive Officer Dated: May 13, 2002 13