CONSOLIDATED WATER CO LTD - 10-Q Quarterly Report

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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 SEPTEMBER 30, 2003

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 1114 GT,
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 [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

As at October 15, 2003, there were 5,670,123 of the registrant's ordinary shares
of common stock, with CI$ 1.00 par value, outstanding.

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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.

The official fixed exchange rate for conversation of BDS$ into U.S.$ as
determined by the Central Bank of Barbados has been fixed since 1975 at U.S.$
0.50 = BDS$ 1.00.

The British Virgin Islands' currency is U.S.$.

TABLE OF CONTENTS

Section Description Page
- ------- ----------- ----

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets as at September 30, 2003
and December 31, 2002................................................. 1

Condensed Consolidated Statements of Income for each of the
three and nine months ended September 30, 2003 and 2002 .............. 2

Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2003 and 2002......................... 3

Notes to Condensed Consolidated Financial Statements..................... 4

Item 2. Management's Discussions and Analysis of Financial Condition
and Results of Operations............................................. 13

Item 3. Quantitative and Qualitative Disclosures about Market Risk............... 19

Item 4. Controls and Procedures.................................................. 19

PART II OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds................................ 20
Item 6. Exhibits and Reports on Form 8-K......................................... 21

SIGNATURE ........................................................................... 22

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, the ability
to successfully integrate the recently acquired companies into our business, the
ability of the Company to repay the debt incurred to complete the recent
acquisitions described in this Form 10-Q, 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)

September 30, December 31,
2003 2002
----------- -----------
(Unaudited)

ASSETS
CURRENT ASSETS
Cash and cash equivalents 7,705,467 568,304
Accounts receivable 3,720,730 1,406,947
Inventory 1,591,240 388,131
Prepaid expenses and other assets 650,623 370,429
Deferred expenditures -- 887,856
Current portion of loans receivable 1,072,687 --
----------- -----------
TOTAL CURRENT ASSETS 14,740,747 3,621,667

Loans receivable 3,476,371 --
Property, plant and equipment, net 29,093,858 20,253,646
Other assets 563,264 --
Investments in affiliates (Note 5) 9,791,468 12,450
Intangible assets (Note 7) 5,822,268 1,619,874
Goodwill (Note 4) 4,942,140 --
----------- -----------
TOTAL ASSETS $68,430,116 $25,507,637
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Dividends payable 657,872 508,444
Accounts payable and other liabilities 1,650,753 1,143,850
Current portion of long term debt (Note 8) 3,830,144 518,275
----------- -----------
TOTAL CURRENT LIABILITIES 6,138,769 2,170,569

Long term debt (Note 8) 17,647,044 2,074,609
Security deposits and other liabilities 136,235 136,235
----------- -----------
TOTAL LIABILITIES 23,922,048 4,381,413
----------- -----------
Minority interest in Waterfields Company Limited 730,220 --
----------- -----------
STOCKHOLDERS' EQUITY
Redeemable preferred stock, $1.20 par value. Authorized 100,000
shares; issued and outstanding 22,751 shares as at September 30,
2003 and 19,740 shares at as December 31, 2002 27,301 23,688
Class A common stock, $1.20 par value. Authorized 9,840,000 shares;
issued and outstanding 5,670,123 shares as at September 30, 2003 and
3,993,419 shares at as December 31, 2002 6,804,148 4,792,103
Class B common stock, $1.20 par value. Authorized 60,000 shares;
issued and outstanding nil shares as at September 30, 2003 and nil
shares as at December 31, 2002 -- --
Stock and options earned but not issued 91,200 424,841
Additional paid-in capital 26,671,229 7,354,395
Retained earnings 10,183,970 8,531,197
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 43,777,848 21,126,224
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $68,430,116 $25,507,637
=========== ===========

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)

Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- -----------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------

Retail water sales 2,572,152 2,523,957 8,253,530 8,279,984
Bulk water sales 2,141,092 391,109 4,621,534 1,111,817
Service revenue 290,857 -- 867,730 --
------------ ------------ ------------ ------------
TOTAL REVENUE 5,004,101 2,915,066 13,742,794 9,391,801
------------ ------------ ------------ ------------

Retail cost of sales (1,208,113) (1,418,825) (3,642,109) (4,383,641)
Bulk cost of sales (1,619,886) (295,122) (3,382,423) (793,892)
Service cost of sales (94,236) -- (354,944) --
------------ ------------ ------------ ------------
TOTAL COST OF SALES (2,922,235) (1,713,947) (7,379,476) (5,177,533)
------------ ------------ ------------ ------------

GROSS PROFIT 2,081,866 1,201,119 6,363,318 4,214,268

General and administrative expenses (1,216,816) (574,266) (3,561,457) (1,811,251)
------------ ------------ ------------ ------------

INCOME FROM OPERATIONS 865,050 626,853 2,801,861 2,403,017
------------ ------------ ------------ ------------

Other income (expenses):
Interest income 24,975 -- 56,768 6,040
Interest expense (91,920) (26,199) (650,425) (78,472)
Other income 119,155 4,115 310,848 11,943
Equity in earnings of affiliate 221,773 -- 669,775 --
------------ ------------ ------------ ------------

273,983 (22,084) 386,966 (60,489)
------------ ------------ ------------ ------------

NET INCOME BEFORE INCOME TAXES 1,139,033 604,769 3,188,827 2,342,528

Income taxes (2,538) -- (24,051) --
Minority interest (15,197) -- (15,197) --
------------ ------------ ------------ ------------
NET INCOME $ 1,121,298 $ 604,769 $ 3,149,579 $ 2,342,528

BASIC EARNINGS PER SHARE $ 0.20 $ 0.15 $ 0.67 $ 0.59
============ ============ ============ ============

DILUTED EARNINGS PER COMMON SHARE $ 0.20 $ 0.15 $ 0.66 $ 0.57
============ ============ ============ ============

DIVIDENDS DECLARED PER SHARE $ 0.105 $ 0.105 $ 0.315 $ 0.315
============ ============ ============ ============

WEIGHTED AVERAGE NUMBER OF COMMON SHARES
USED IN THE DETERMINATION OF:

Basic earnings per share 5,570,570 3,983,072 4,660,588 3,961,922

Diluted earnings per share 5,676,375 4,095,369 4,770,941 4,081,489

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)

Nine Months Nine Months
Ended Ended
September 30, September 30,
2003 2002
------------ ------------

NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 4,472,623 3,685,757
------------ ------------

CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Deferred expenditures 401,971 (306,694)
Purchase of property, plant and equipment (1,841,816) (2,036,900)
Business combinations, net of cash acquired (19,892,894) --
Investment in affiliate (8,961,624) --
Collections from loans receivable 671,083 --
------------ ------------

Net cash used in investing activities (29,623,280) (2,343,594)
------------ ------------

CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Proceeds from new credit facility 28,056,126 1,500,000
Deferred expenditures (383,207) (289,121)
Dividends paid (1,347,307) (1,233,550)
Proceeds from issuance of stock 18,373,814 347,855
Principal payments of long term debt (12,411,606) (263,970)
Repurchase of common stock -- (32,869)
Repurchase of redeemable preferred stock -- (3,841)
------------ ------------

Net cash provided by financing activities 32,287,820 24,504
------------ ------------

NET INCREASE IN CASH AND CASH EQUIVALENTS 7,137,163 1,366,667

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 568,304 516,446
------------ ------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,705,467 $ 1,883,113
============ ============

Interest paid in cash $ 600,335 $ 66,533
Interest received in cash $ 55,957 $ 6,040

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)

1. PRESENTATION OF FINANCIAL INFORMATION

The accompanying unaudited condensed consolidated financial statements were
prepared in accordance with the instructions for Form 10-Q and, therefore, do
not include all disclosures necessary for a complete presentation of financial
condition, results of operations, and cash flows in conformity with accounting
principles generally accepted in the United States of America. All adjustments
that are, in the opinion of management, of a normal recurring nature and are
necessary for a fair presentation of the interim financial statements have been
included. The results of operations for the three and nine month periods ended
September 30, 2003 are not necessarily indicative of the results that may be
expected for the entire fiscal year or any other interim period. The
accompanying consolidated financial statements of the Company should be read in
conjunction with the consolidated financial statements and notes included in the
Company's Annual Report on Form 10-K, as amended, for the year ended December
31, 2002.

2. PRINCIPLES OF CONSOLIDATION

The accompanying unaudited condensed consolidated financial statements include
the accounts of Cayman Water Company Limited, Belize Water Limited, DesalCo
Limited, its wholly owned subsidiary DesalCo (Barbados) Limited, Ocean
Conversion (Cayman) Limited and Waterfields Company Limited. All significant
intercompany balances and transactions have been eliminated in consolidation.

3. STOCK BASED COMPENSATION

The Company currently has various stock option plans and an employee stock
purchase plan. The Company accounts for stock-based compensation plans for
employees and directors using the intrinsic value method. Under this method, the
Company records no compensation expense for stock options granted when the
exercise price of options granted is equal to or greater than the fair market
value of the Company's common stock on the date of grant.

4

CONSOLIDATED WATER CO. LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

3. STOCK BASED COMPENSATION (CONTINUED)

The following table presents the effect on net income and earnings per share if
the Company had applied a fair value recognition method:

Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ---------------------------------
2003 2002 2003 2002
---------- -------- ---------- -------------

Net income, as reported 1,121,298 604,769 3,149,579 2,342,528

Add: Stock-based compensation expense included
in reported net income 31,738 32,452 97,078 92,236

Deduct: Total stock-based compensation expense
determined under fair value based method for all
awards (38,082) (94,786) (175,576) (156,506)
---------- -------- ---------- -------------

Pro forma net income $1,114,954 $542,435 $3,071,081 $ 2,278,258
========== ======== ========== =============
Earnings per share
Basic - as reported $ 0.20 $ 0.15 $ 0.67 $ 0.59
========== ======== ========== =============
Basic - pro forma $ 0.20 $ 0.14 $ 0.66 $ 0.57
========== ======== ========== =============

Diluted - as reported $ 0.20 $ 0.15 $ 0.66 $ 0.57
========== ======== ========== =============
Diluted - pro forma $ 0.20 $ 0.13 $ 0.64 $ 0.56
========== ======== ========== =============

4. ACQUISITIONS

Effective February 1, 2003, the Company acquired 100% of the outstanding voting
common shares of DesalCo Limited, its wholly owned subsidiary DesalCo (Barbados)
Limited and Ocean Conversion (Cayman) Limited. In addition, the Company acquired
as part of this acquisition, 12.7% of the outstanding voting common shares of
Waterfields Company Limited ("Waterfields"). The total consideration paid was
$28,319,074, comprised of $25,520,519 in cash and 185,714 ordinary shares of the
Company and $506,122 in costs related to the acquisitions.

On July 30, 2003, the Company acquired a further 13.5% of Waterfields and
effective August 1, 2003, had the contractual right to acquire an additional
64.7% interest resulting in total controlling interest of 90.9% of Waterfields.
The total consideration paid for the 78.2% was $8,251,091, comprising of
$8,113,020 in cash and $138,071 in related acquisition costs.

These acquisitions provide the Company with a reverse osmosis plant design,
construction and facility management and engineering services firm, as well as
facilities and contracts to supply additional bulk potable water services in the
Cayman Islands, Bahamas and Barbados and investments in desalination companies
in the British Virgin Islands.

5

CONSOLIDATED WATER CO. LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

4. ACQUISITIONS (CONTINUED)

The following table summarizes the estimated fair values of assets acquired and
liabilities assumed during the nine month period ending September 30, 2003. The
Company is in the process of finalizing the allocations of purchase prices,
which are subject to refinement:

Current assets 7,245,814
Property, plant and equipment 8,169,783
Investments in affiliates 12,011,981
Intangible assets 4,868,861
Goodwill 4,942,140
Other assets 4,190,883
-----------
Total assets acquired 41,429,462
-----------
Current liabilities 1,877,492
Long term debt and liabilities 2,266,782
-----------
Total liabilities assumed 4,144,274
-----------
Less: Minority interest in Waterfields Company Limited 715,023
-----------

Net assets acquired $36,570,165
===========

The goodwill represents the excess of costs over fair value of assets of
businesses acquired. Goodwill and any intangible assets acquired in a business
combination accounted for using the purchase method and determined to have an
indefinite useful life are not amortized, but instead tested for impairment at
least annually in accordance with the provisions of SFAS No. 142. Intangible
assets with useful lives are amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 144, "Accounting for Impairment or Disposal of
Long-Lived Assets".

The results of operations of DesalCo Limited, DesalCo (Barbados) Limited, Ocean
Conversion (Cayman) Limited are included in the condensed consolidated
statements of income from February 1, 2003 and the results of operations of
Waterfields Company Limited are included in the condensed consolidated
statements of income from August 1, 2003. The unaudited pro forma consolidated
results of operations of Consolidated Water Co. Ltd., DesalCo Limited, DesalCo
(Barbados) Limited, Ocean Conversion (Cayman) Limited, Waterfields Company
Limited and an equity interest in Ocean Conversion (BVI) Ltd., had the companies
been acquired at January 1, 2003 or 2002 would be as follows:

Nine Months Nine Months
Ended Ended
September 30, September 30,
2003 2002
----------- -----------
Pro forma revenue $16,654,675 $15,972,317
Pro forma net income $ 3,654,653 $ 3,482,356
Pro forma earnings per share
Basic $ 0.65 $ 0.63
Diluted $ 0.64 $ 0.62

6

CONSOLIDATED WATER CO. LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

5. INVESTMENTS IN AFFILIATES

The Company also acquired as part of the acquisition described in Note 3, 50%
and 100% of the outstanding voting common shares and non-voting common shares of
Ocean Conversion (BVI) Ltd., respectively. On May 9, 2003, the Company sold 100%
of its non-voting shares in Ocean Conversion (BVI) Ltd., to Sage Water Holdings
(BVI) Ltd. for approximately $2.1 million. The Company now owns 50% of the
voting common shares of Ocean Conversion (BVI) Ltd.

The Company's investment in Ocean Conversion (BVI) Ltd. is accounted for using
the equity method of accounting.

6. SEGMENT INFORMATION

Due to the recent acquisitions, management changed the Company's internal
organizational structure to effectively assimilate the business activities of
the acquired companies. Consequently, management no longer considers it
appropriate to report separate business segments based on geographical location.
Under the Statements of Financial Accounting Standards 131, "Disclosure about
Segments of an Enterprise and Related Information", management now considers;
(i) the operations to supply water to retail customers, (ii) the operations to
supply water to bulk customers, and (iii) the provision of engineering and
management services, as separate business segments. The segmented information
that was previously reported for the Cayman Islands and the Bahamas is now
reported as part of the Retail Water segment, and segmented information for
Belize is now reported as part of the Bulk Water segment.

For purposes of segment information the accounts of Ocean Conversion (BVI) Ltd.
have been proportionally consolidated into the Bulk Water segment. An adjustment
has been made in reconciling items to account for the investment under the
equity method. Also included in reconciling items are corporate expenses
including interest expense that do not relate to any specific operating segment.

7

CONSOLIDATED WATER CO. LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

6. SEGMENT INFORMATION (CONTINUED)

AS AT SEPTEMBER 30 AND FOR THE THREE MONTHS THEN ENDED

Retail Water Bulk Water Services Reconciling items Total
--------------------- --------------------- --------------- ----------------- ---------------------
2003 2002 2003 2002 2003 2002 2003 2002 2003 2002
--------- --------- --------- ------- ------- ---- -------- ---- --------- ---------

Revenue 2,572,152 2,523,957 2,660,242 391,109 290,857 -- (519,150) -- 5,004,101 2,915,066
Cost of sales 1,208,113 1,418,825 1,782,659 295,122 94,236 -- (162,773) -- 2,922,235 1,713,947
Net income 504,735 556,964 440,677 47,805 145,166 -- 30,720 -- 1,121,298 604,769
Property, plant and
equipment 19,407,313 18,069,332 11,591,488 1,435,774 10,215 -- (1,915,158) -- 29,093,858 19,505,106

AS AT SEPTEMBER 30 AND FOR THE NINE MONTHS THEN ENDED

Retail Water Bulk Water Services Reconciling items Total
--------------------- --------------------- ----------------- ----------------- ---------------------
2003 2002 2003 2002 2003 2002 2003 2002 2003 2002
--------- --------- --------- ------- ------- ---- -------- ---- --------- ---------

Revenue 8,253,530 8,279,984 6,224,568 1,111,817 867,730 -- (1,603,034) -- 13,742,794 9,391,801
Cost of sales 3,642,109 4,383,641 3,949,410 793,892 354,944 -- (566,987) -- 7,379,476 5,177,533
Net income 2,499,787 2,161,209 645,098 181,319 195,034 -- (190,340) -- 3,149,579 2,342,528
Property, plant and
equipment 19,407,313 18,069,332 11,591,488 1,435,774 10,215 -- (1,915,158) -- 29,093,858 19,505,106

8

CONSOLIDATED WATER CO. LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

7. INTANGIBLE ASSETS

Effective February 1, 2003, the Company acquired 100% of the outstanding voting
common shares of DesalCo Limited, its wholly-owned subsidiary DesalCo (Barbados)
Ltd., and Ocean Conversion (Cayman) Limited. A portion of the purchase price was
allocated to the following identifiable intangible assets.

(a) As part of the acquisition of DesalCo Limited the Company attributed
$650,978 to intangible assets which represents the fair value of a Management
Services Agreement dated December 4, 2000, under which DesalCo Limited provides
management and engineering services to Ocean Conversion (BVI) Ltd. Management of
the Company has determined that this intangible asset has an indefinite life,
and therefore it is not being amortized.

(b) As part of the acquisition of DesalCo Limited the Company attributed
$239,263 to intangible assets which represents the fair value of the DWEER(TM)
Distribution Agreement between DesalCo Limited and DWEER Technology Limited
dated September 24, 2002. Under this agreement DesalCo Limited was granted an
exclusive right, within certain geographical areas in the Caribbean, Central and
South America, to distribute certain patented equipment, which can increase the
operational efficiency of reverse osmosis seawater desalination plants. The
carrying amount of the DWEER(TM) Distribution Agreement is being amortized over
the remaining term of the seven-year agreement.

(c) As part of the acquisition of Ocean Conversion (Cayman) Limited the Company
attributed $3,978,620 to intangible assets which represent the fair value of two
Water Production and Supply Agreements between Ocean Conversion (Cayman) Limited
and the Government of the Cayman Islands, dated April 25, 1994 and dated
December 31, 2001. Under these agreements, Ocean Conversion (Cayman) Limited
built reverse osmosis seawater desalination plants for the Government of the
Cayman Islands. Ocean Conversion (Cayman) Limited operates the plants until the
expiration of the agreement term, as extended, at which time the plant
operations will be transferred to the Government of the Cayman Islands for no
consideration. The carrying amount of the Water Production and Supply Agreements
are being amortized over the remaining term of the agreements, which are
approximately 5 and 13 years, respectively.

(d) On September 17, 2003, the Company signed a new agreement with its Belize
customer for the provision of water from a seawater desalination plant for an
initial term of 23 years. The carrying amount of the Belize Water Production and
Supply Agreement which was being amortized over 10.75 years is now being
amortized over the term of the new 23 year agreement.

Nine Months Nine Months
Ended Ended
September 30, September 30,
2003 2002
------------ -------------

Intangible assets
Management Service Agreement 650,978 --
DWEER(TM)Distribution Agreement 239,263 --
Cayman Water Production and Supply Agreements 3,978,620 --
Belize Water Production and Supply Agreement 2,095,255 2,095,255
----------- -----------
6,964,116 2,095,255
Accumulated amortization (1,141,848) (426,656)
----------- -----------

Net book value $ 5,822,268 $ 1,668,599
=========== ===========

9

8. LONG TERM DEBT

As of September 30, 2003, the Company has the following credit facilities with
the following principal balances:

o $18,571,428 Scotiabank seven-year term loan bearing interest at an
annually adjusted floating rate of LIBOR plus 1.5% to 3%, depending on
the ratio of the Company's consolidated debt to its consolidated
earnings before interest, taxes and depreciation. The average interest
rate for the nine months ended September 30, 2003 was 3.06%.

o $1,420,000 Scotiabank five-year term loan bearing interest at 3-month
LIBOR plus 1.5% that is repayable in 9 semi-annual installments. The
interest rate at September 30, 2003 was 2.64%.

o $868,043 Royal Bank of Canada loan bearing interest at LIBOR plus
1.75% repayable in quarterly payments of principal and interest
through the year 2007.

o BAH$497,717 Royal Bank of Canada loan bearing interest at Nassau Prime
Lending rate plus 1.5% repayable in quarterly payments of principal
and interest through the year 2007.

o $120,000 Inter-American Investment Corporation loan bearing interest
at LIBOR plus 2.75% repayable in quarterly repayments of principal and
interest through the year 2004.

o In addition to these facilities, the Company has un-drawn available
lines of credit with Scotiabank for $2,000,000 bearing interest at the
floating base rate as established by Cayman Islands Class A licensed
banks from time to time and with Royal Bank of Canada for $500,000
bearing interest at Nassau Prime plus 1%.

The Company is in compliance with restrictive covenants associated with all its
long term debts.

We have collateralized all borrowings under the $18,571,428 seven-year term loan
and the $2,000,000 un-drawn line of credit by providing Scotiabank with a first
lien on all of our assets, including the capital stock we acquired in our recent
acquisitions.

10

9. EARNINGS PER SHARE

Basic earnings per common share ("EPS") is calculated by dividing net income
available to common stockholders by the weighted average number of common shares
outstanding during the period. The computation of diluted EPS assumes the
issuance of common shares for all dilutive-potential common shares outstanding
during the reporting period. The dilutive effect of stock options is considered
in earnings per common share calculations, if dilutive, using the treasury stock
method.

The following summarizes information related to the computation of basic and
diluted earnings per share for the three and nine month periods ended September
30, 2003 and 2002.

11

10. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities". This interpretation addresses the consolidation by
business enterprises of variable interest entities as defined in the
Interpretation. The Interpretation applies immediately to variable interests in
variable interest entities created after January 31, 2003, and to variable
interests in variable interest entities obtained after January 31, 2003. For
public enterprises with a variable interest entity created before February 1,
2003 the Interpretation applies to that enterprise no later than the beginning
of the first interim or annual reporting period beginning after June 15, 2003.
The interpretation requires certain disclosures in financial statements issued
after January 31, 2003 if it is reasonably possible that the Company will
consolidate or disclose information about variable interest entities when the
Interpretation becomes effective. The adoption of this Interpretation is not
expected to have a material effect on the Company's financial statements.

11. COMMITMENTS

As part of the acquisition of the Company's interests in Ocean Conversion
(Cayman) Limited, with the approval of Scotiabank (Cayman Islands) Ltd., the
Company has guaranteed the performance of Ocean Conversion (Cayman) Limited to
the Cayman Islands government, pursuant to the water supply contract with the
Water Authority-Cayman dated April 25, 1994 as amended.

As part of the acquisition of the Company's interests in Ocean Conversion
(Cayman) Limited, it agreed to indemnify the seller in respect of a guarantee
given by the seller to the bank N.T. Butterfield & Son Ltd. for 100% of the
borrowing of Ocean Conversion (Cayman) Limited totaling $2,400,000. On September
18, 2003, the loan and guarantee to N.T. Butterfield & Son Ltd. were
extinguished when the Company refinanced Ocean Conversion (Cayman) Limited's
debt with proceeds from a new loan with Scotiabank (Cayman Islands) Ltd. As a
condition of the new Scotiabank financing, the Company provided a 100% guarantee
to Scotiabank of the refinanced amount of $1,420,000. The Scotiabank loan is
repayable in 9 equal semi-annual installments of $240,000 with the balance of
principal due December 31, 2007 bearing interest at 3-month LIBOR plus 1.5%.

As part of the acquisition of the Company's interests in Ocean Conversion (BVI)
Ltd., it agreed to indemnify the seller in respect of a guarantee given by the
seller to the bank N.T. Butterfield & Son Ltd. for 55% of the borrowing of Ocean
Conversion (BVI) Ltd. totaling $1,250,000. On September 18, 2003, the loan and
guarantee to N.T. Butterfield & Son Ltd. were extinguished when Ocean Conversion
(BVI) Ltd. refinanced it's debt with proceeds from a new loan with Scotiabank
(Cayman Islands) Ltd. As a condition of the new Scotiabank financing, the
Company guaranteed to Scotiabank 50% of the refinanced amount of $880,056. The
Scotiabank loan is repayable in 6 equal semi-annual installments of $125,000
with the balance of principal due May 31, 2006, bearing interest at 3-month
LIBOR plus 1.5%.

As a result of the Company's acquisition of interests in Waterfields Company
Limited, it guaranteed the performance of Waterfields Company Limited to the
Water & Sewerage Corporation of the Bahamas in relation to the water supply
contract between Waterfields Company Limited and the Water & Sewerage
Corporation.

12

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RECENT ACQUISITIONS

Effective February 1, 2003, the Company acquired 100% of the outstanding voting
common shares of DesalCo Limited, its wholly-owned subsidiary DesalCo (Barbados)
Ltd., and Ocean Conversion (Cayman) Limited. In February 2003, the Company also
acquired 50% of the voting common shares of Ocean Conversion (BVI) Ltd. and
12.7% of the voting common shares of Waterfields Company Limited. On July 30,
2003, the Company acquired a further 13.5% and effective August 1, 2003, had the
contractual right to acquire an additional 64.7% in Waterfields Company Limited,
resulting in the Company as at August 1, 2003, controlling 90.9% of Waterfields
Company Limited. These acquisitions increase our daily water production capacity
in the Cayman Islands and the Commonwealth of the Bahamas and expand our
geographic presence to include Barbados and the British Virgin Islands. As a
result of these acquisitions, our water production capacity has more than
tripled from approximately 2.9 to approximately 10.9 million U.S. gallons per
day. With one of these acquisitions, we obtained the exclusive right through
2009 to distribute the DWEER(TM) Energy Recovery System for use in reverse
osmosis seawater desalination plants in the Caribbean basin. We believe the
DWEER(TM) System gives us a distinct competitive advantage when bidding for new
plant construction projects.

The financial results of DesalCo Limited, its wholly-owned subsidiary DesalCo
(Barbados) Limited and Ocean Conversion (Cayman) Limited are included in the
condensed consolidated financial statements from February 1, 2003 and the
financial results of Waterfields Company Limited are included in the condensed
consolidated financial statements from August 1, 2003.

REVENUE

Revenue is comprised of retail water sales via pipeline to individual customers,
bulk water sales to large commercial or municipal customers, and fees for
management and engineering services.

EXPENSES

Expenses include the cost of sales ("direct expenses") and general and
administrative expenses ("indirect expenses"). Direct expenses include royalty
payments, electricity and chemicals expenses, production equipment and facility
depreciation costs, equipment maintenance expenses, operational staff costs and
amortization of intangible assets. Indirect expenses consist primarily of
salaries and employee benefits for administrative personnel, stock compensation
expenses, office lease payments, depreciation on fixed assets used for
administrative purposes, amortization of bank fees and legal and professional
fees. There are no income taxes in the Cayman Islands, and we are currently
exempt from taxes in the British Virgin Islands and Belize. We pay an annual
business license fee in the Bahamas. We pay income tax in Barbados.

CRITICAL ACCOUNTING POLICIES

The preparation of our financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to trade accounts receivable, inventory, intangible assets and goodwill.
We base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent

13

from other sources. Actual results may differ from these estimates. We believe
the following critical accounting policies are the most important to the
presentation of our financial condition and results and require management's
more significant judgments and estimates in the preparation of our consolidated
financial statements.

TRADE ACCOUNTS RECEIVABLE: We maintain an allowance for doubtful accounts for
estimated losses resulting from the inability of our customers to make required
payments. Management continuously evaluates the collectibility of accounts
receivable and records allowances for doubtful accounts based on estimates of
the level of actual write-offs that might be experienced. These estimates are
based on, among other things, comparisons of the relative age of accounts and
consideration of actual write-off history.

INTANGIBLE ASSETS: Intangible assets with a determined useful life are amortized
over their estimated useful lives and reviewed for impairment in accordance with
SFAS No. 142. Management tests for impairment by evaluating the remaining useful
life of an intangible asset that is being amortized each reporting period to
determine whether events and circumstances warrant a revision to the remaining
period of amortization. Impairment is tested based on projected discounted
future cash flows using a discount rate reflecting our average cost of funds. If
our estimated projections are greater than our actual results there may be an
impairment that has not been reflected in the accounts. Intangible assets with
indefinite useful lives are recorded at fair value and are not amortized.
Management reevaluates the indefinite useful life of such intangible assets at
each reporting period. In addition, intangible assets with indefinite lives are
reviewed annually for impairment by comparing the fair value of the intangible
asset with its carrying value.

GOODWILL: We account for acquisitions under the purchase method using the
accounting standards established in Statements of Financial Accounting
Statements No. 141, "Business Combinations" and No. 142, "Goodwill and Other
Intangible Assets". These rules require us to assess goodwill that arises from
the acquisition under the purchase method for impairment at least annually or
more frequently if certain indicators are present. These statements require
estimates in both the purchase price allocation and the fair value of our
reporting units. Impairment of goodwill is tested based on projected discounted
future cash flows of our reporting units using a discount rate reflecting our
average cost of funds.

RESULTS OF OPERATIONS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 2002

REVENUE

Total revenue increased by 71.7% from $2,915,066 to $5,004,101 for the three
months ended September 30, 2003 and by 46.3% from $9,391,801 to $13,742,794 for
the nine months ended September 30, 2003 when compared to the same three and
nine month periods in 2002.

Revenue from our retail water ("Retail") operations increased by 1.9% from
$2,523,957 to $2,572,152 for the three months ended September 30, 2002 and 2003,
respectively, and decreased by 0.3% from $8,279,984 to $8,253,530 for the nine
months ended September 30, 2002 and 2003, respectively. Sales in our primary
market in the Cayman Islands were flat during both periods.

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Revenue from our bulk water ("Bulk") operations increased by 447.4% from
$391,109 to $2,141,092 for the three months ended September 30, 2002 and 2003,
respectively, and by 315.7% from $1,111,817 to $4,621,534 for the nine months
ended September 30, 2002 and 2003, respectively. This increase was due to our
recent acquisitions of Ocean Conversion (Cayman) Limited and Waterfields Company
Limited and was slightly offset by a 11.2% and 9.9% decrease in our bulk water
sales in Belize for the three and nine months ended September 30, 2003,
respectively.

Revenue from services ("Services") was $290,857 for the three months ended
September 30, 2003, and was $867,730 for the nine months ended September 30,
2003. All Services revenues pertain to our recent acquisition of DesalCo Limited
and its wholly-owned subsidiary DesalCo (Barbados) Ltd.

OTHER INCOME (EXPENSES)

Total other income (expenses) changed from an expense of $22,084 to income of
$273,983 for the three months ended September 30, 2003 and from an expense of
$60,489 to income of $386,966 for the nine months ended September 30, 2003 when
compared to the same three and nine month periods in 2002. This increase was
comprised of income and profit sharing from our equity investment in Ocean
Conversion (BVI) Ltd. and was offset by interest expense related to the loan
used to finance our recent acquisitions and the early repayment fees paid on our
loan from the European Investment Bank that was extinguished on June 20, 2003.

We expect loan interest costs to decrease because a portion of the proceeds
received from our completed equity offering was used to repay our Scotiabank
six-month term loan on July 9, 2003.

COST OF SALES

Total cost of sales increased by 70.5% from $1,713,947 to $2,922,235 for the
three months ended September 30, 2003 and by 42.5% from $5,177,533 to $7,379,476
for the nine months ended September 30, 2003 when compared to the same three and
nine month periods in 2002. During these same periods, our total revenue
increased by 71.7% and 46.3%, respectively.

Cost of sales of our Retail operations decreased by 14.9% from $1,418,825 to
$1,208,113 for the three months ended September 30, 2002 and 2003, respectively,
and by 16.9% from $4,383,641 to $3,642,109 for the nine months ended September
30, 2002 and 2003, respectively, while our Retail revenue increased by 1.9% for
the three months ended September 30, 2003 and decreased by 0.3% for the nine
months ended September 30, 2002. This decrease in cost of sales resulted
primarily from the cancellation of the Governor's Harbour plant operating
contract on February 7, 2003, which decreased our water purchase expense. We
expect our Retail cost of sales going forward to remain at this lower percentage
of Retail revenues.

Cost of sales of our Bulk operations increased by 448.9% from $295,122 to
$1,619,886 for the three months ended September 30, 2002 and 2003, respectively,
and by 326.1% from $793,892 to $3,382,423 for the nine months ended September
30, 2002 and 2003, respectively, while our Bulk revenue increased by 447.4% and
315.7% for the same periods. This increase in cost of sales resulted almost
entirely from the operating costs of Ocean Conversion (Cayman) Limited and
Waterfields Company Limited, which were consolidated in our accounts from
February 1, 2003 and August 1, 2003 respectively. It also includes the
amortization costs of the intangible assets that were recognized in conjunction
with our recent acquisition of Ocean Conversion (Cayman) Limited.

15

Cost of sales of our Services reporting segment were $94,236 for the three
months ended September 30, 2003 and $354,944 for the nine months ended September
30, 2003. These relate to our recent acquisition of DesalCo Limited and its
wholly-owned subsidiary DesalCo (Barbados) Ltd. and include the amortization
cost of the intangible asset that was recognized in conjunction with our recent
acquisition of DesalCo Limited.

GROSS PROFIT

Overall gross profit margin increased from 41.2% to 41.6% for the three months
ended September 30, 2003 and from 44.9% to 46.3% for the nine months ended
September 30, 2003 when compared to the same three and nine month periods in
2002, for the reasons explained below.

Gross profit margin for our Retail operations increased from 43.8% to 53.0% for
the three months ended September 30, 2003 and from 47.1% to 55.9% for the nine
months ended September 30, 2003 when compared to the same three and nine month
periods in 2002. The primary reason for this increase is that our Retail cost of
sales decreased as a result of the cancellation of the Governor's Harbour plant
operating contract.

Gross profit margin for our Bulk operations decreased from 24.5% to 24.3% for
the three months ended September 30, 2003 and decreased from 28.6% to 26.8% for
the nine months ended September 30, 2003 when compared to the same three and
nine month periods in 2002. In 2003 we incurred additional direct costs in our
Belize Bulk operations for leasing a temporary potable Reverse Osmosis unit
which we operated to meet our customer's water demand while we carried out
maintenance on our permanent Reverse Osmosis units. This operating lease expired
on September 30, 2003 and we do not expect these leasing costs to continue into
the future. We generally sell water to our Bulk customers at a lower profit
margin than to our Retail customers.

Gross profit margin for our Services reporting segment was 67.6% for the three
months ended September 30, 2003 and 59.1% for the nine months ended September
30, 2003.

GENERAL AND ADMINISTRATIVE EXPENSES

Total general and administrative expenses increased by 111.9% from $574,266 to
$1,216,816 for the three months ended September 30, 2003 and by 96.6% from
$1,811,251 to $3,561,457 for the nine months ended September 30, 2003 when
compared to the same three and nine month periods in 2002. General and
administrative expenses were at 19.7% and 24.3% of total revenue for the three
months ended September 30, 2002 and 2003, respectively and at 19.3% and 25.9% of
total revenue for the nine months ended September 30, 2002 and 2003,
respectively.

General and administrative expenses related or allocated to our Retail
operations increased by 68.5% from $526,084 to $886,225 for the three months
ended September 30, 2002 and 2003, respectively, and by 26.2% from $1,671,789 to
$2,109,878 for the nine months ended September 30, 2002 and 2003, respectively.
This increase is comprised primarily of the amortization of financing fees
expense, higher insurance premiums, office rent and staff costs. During the
three months ended September 30, 2003, we expensed $63,115 of financing fees and
during the nine months ended September 30, 2003 we expensed $305,828 of
financing fees. Amortization of financing fees expense has reduced because all
fees relating to the bridge financing that was used to complete our recent
acquisitions were fully amortized in July 2003.

General and administrative expenses related or allocated to our Bulk operations
increased by 501.4% from $48,182 to $289,757 for the three months ended
September 30, 2002 and 2003, respectively, and by 748.9% from $139,462 to
$1,183,932 for the nine months ended September

16

30, 2002 and 2003, respectively. This increase is almost entirely the result of
the inclusion of the general and administrative expenses of Ocean Conversion
(Cayman) Limited and Waterfields Company Limited. We expect to reduce general
and administrative expenses as we continue to assimilate the administrative
functions of our recent acquisitions.

General and administrative expenses related or allocated to our Services
reporting segment were $40,834 for the three months ended September 30, 2003 and
$267,647 for the nine months ended September 30, 2003. This is entirely the
result of our recent acquisitions of DesalCo Limited and its wholly-owned
subsidiary DesalCo (Barbados) Ltd. We expect to reduce general and
administrative expenses as we continue to assimilate the administrative
functions of our recent acquisitions.

NET INCOME

Net income increased by 85.4% from $604,769 to $1,121,298 for the three months
ended September 30, 2003 and by 34.5% from $2,342,528 to $3,149,579 for the nine
months ended September 30, 2003 when compared to the same three and nine month
periods in 2002. We expect net income to be positively affected because interest
expense decreased after we repaid the bridge financing using the proceeds from
our recent equity offering and we fully amortized the bank fees related to this
bridge financing on July 9, 2003.

DIVIDENDS

On January 31, 2003, we paid a dividend of $0.105 to shareholders of record on
December 31, 2002; on April 30, 2003, we paid a dividend of $0.105 to
shareholders of record on March 31, 2003; on July 31, 2003, we paid a dividend
of $0.105 to shareholders of record on June 30, 2003 and on October 31, 2003, we
paid a dividend of $0.105 to shareholders of record on September 30, 2003. We
have consistently paid dividends to owners of our ordinary and redeemable
preferred shares since we began declaring dividends in 1985. Our board of
directors has established a policy, but not a binding obligation, that we will
seek to maintain a dividend pay out ratio in the range of 50% to 60% of net
income. While this policy is subject to modification by our board of directors,
we expect to continue increasing our dividends, if our earnings grow. Our
payment of any future cash dividends, however, will depend upon our earnings,
financial condition, capital demand and other factors, including the condition
in our new loan agreement effective February 7, 2003, with Scotiabank (Cayman
Islands) Ltd. that dividends be paid only from current cash flows.

LIQUIDITY AND CAPITAL RESOURCES

OVERVIEW

For the nine months ended September 30, 2003, we generated cash primarily from
the sale of our shares and through loans and credit facilities and to a lesser
extent, from our operations in the Cayman Islands, the Bahamas, Belize and
Barbados and from dividends and profit sharing from our equity investment in the
British Virgin Islands. Cash flow is dependent upon the timely receipt of
customer payments, operating 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, the British Virgin Islands, Barbados and the Bahamas, such as weather
conditions and the economy. We use cash to fund our operations in the Cayman
Islands, Belize, the British Virgin Islands, Barbados and the Bahamas, to fund
capital projects, 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.

17

OPERATING ACTIVITIES

Cash generated from operating activities for the nine months ended September 30,
2002 and 2003 was $3,685,757 and $4,472,623, respectively. We generate cash
through the utilization of our existing plants, equipment and resources in all
segments of the business, minimization of water losses and operating
efficiencies created by our management team. We believe that our administrative
staff will be able to manage all our combined operations so that our indirect
costs will not increase in proportion to revenues.

INVESTING ACTIVITIES

Cash used in investing activities during the nine months ended September 30,
2002 and 2003 was $2,343,594 and $29,623,280, respectively. Cash in the amount
of $31,966,916 was used for our recent acquisitions of DesalCo Limited, its
wholly owned subsidiary DesalCo (Barbados) Limited and Ocean Conversion (Cayman)
Limited, Waterfields Company Limited and our equity investment in Ocean
Conversion (BVI) Ltd. During the same period in 2002, our investing activities
consisted of expenditures for new property, plant and equipment, including
$1,500,000 used to purchase the Britannia reverse osmosis plant in the Cayman
Islands.

FINANCING ACTIVITIES

Cash provided by financing activities for the nine months ended September 30,
2002 and 2003 was $24,504 and $32,287,820, respectively. On February 7, 2003, we
utilized a credit facility with Scotiabank (Cayman Islands) Ltd. to complete our
recent acquisitions and repay our debts with the Royal Bank of Canada and the
European Investment Bank. During the nine months ended September 30, 2003, our
primary financing activities were to draw down $28,056,126 from our Scotiabank
facilities and through our secondary share offering, to raise $18,373,814 of
equity. From these amounts $1,687,500 was used to repay our Royal Bank of Canada
credit facility, $905,384 was used to fully repay our European Investment Bank
loan and $12,411,606 was repaid on our Scotiabank bridge financing facilities.
During the nine months ended September 30, 2002, our primary financing activity
was a draw down of our Royal Bank of Canada credit facility for an additional
$1,500,000 in order to finance our purchase of the Britannia reverse osmosis
plant. This was offset by the accumulated payment of dividends during 2002.

MATERIAL COMMITMENTS FOR CAPITAL EXPENDITURES AND CONTINGENCIES

At September 30, 2003, we had committed approximately $600,000 for capital
expenditures for the purchase, construction and site preparation of one water
storage tank at our Ambergris Caye, Belize plant. We intend to finance these
projects using cash from operations.

On February 7, 2003, we entered into a loan agreement with Scotiabank (Cayman
Islands) Ltd. to finance our recent acquisitions and pay off our existing debt.
The facilities are comprised of the following:

o $2 million revolving line of credit bearing interest at the floating
base rate as established by Cayman Island Class A licensed banks from
time to time. The present interest rate is 6.00%

o $20 million seven-year term loan bearing interest at an annually
adjusted floating rate of LIBOR plus 1.5% to 3%, depending on the
ratio of our

18

consolidated debt to our consolidated earnings before interest, taxes
and depreciation. The average interest rate for the nine months ended
September 30, 2003 was 3.06%. The current interest rate is 2.62%.

We used the proceeds from these facilities to repay our debt with Royal Bank of
Canada and the European Investment Bank, to finance our recent acquisitions and
for working capital.

As of September 30, 2003, we have an outstanding balance of $18,571,428 on our
Scotiabank loan facilities. We are required to make monthly payments of interest
for all borrowings under the revolving line of credit and quarterly payments of
interest for all amounts drawn down under the two term loans. We are obligated
to make 28 equal quarterly payments of principal under the seven-year term loan.

IMPACT OF INFLATION

Under the terms of our Cayman Islands license, Belize, Bahamas, British Virgin
Islands and Barbados water sales agreements, there is an automatic price
adjustment for inflation on an annual basis, subject to temporary exceptions.
We, therefore, believe that the impact of inflation on our net income, over each
of the various currencies, will not be material.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

CREDIT RISK

We are not exposed to significant credit risk on retail customer accounts in the
Cayman Islands and Bimini, Bahamas, as our policy is to cease supply of water to
customers whose accounts are more than 45 days overdue. Our main exposure to
credit risk is from our bulk water sales customers in Belize, the British Virgin
Islands, Barbados, the Bahamas and the Cayman Islands. In addition, the entire
balance of our loan receivable is due from the Water Authority-Cayman.

INTEREST RATE RISK

As of September 30, 2003, we had loans outstanding totaling $21,477,188, all of
which bear interest at various lending rates such as LIBOR, Cayman Island's
Prime Rate or Nassau Prime Rate. We are subject to interest rate risk to the
extent that any of these lending rates change.

FOREIGN EXCHANGE RISK

All of our foreign currencies have fixed exchanged rates to the U.S. dollar. If
any of these fixed exchange rates become a floating exchange rate our results of
operation could be adversely affected.

ITEM 4. CONTROLS AND PROCEDURES

Our Chief Executive Officer and Chief Financial Officer (collectively, the
"Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures for our company and our subsidiaries. Such
officers have concluded (based upon their evaluation of these controls and
procedures as of the end of the period covered by this report) that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in this report is accumulated and communicated to
management, including our

19

principal executive officers as appropriate, to allow timely decisions regarding
required disclosure.

The Certifying Officers also have indicated that there were no significant
changes in our internal controls or other factors that could significantly
affect such controls subsequent to the date of their evaluation, and there were
no corrective actions with regard to significant deficiencies and material
weaknesses.

Our management, including each of the Certifying Officers, does not expect that
our disclosure controls or our internal controls will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. In addition, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within a company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of these inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.

PART II - OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On July 15, 2003, we issued 2,405 ordinary shares of common stock to our Belize
managers as a bonus pursuant to the terms of the employment agreement with our
Belize managers. The issuance of these shares was 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).

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit
Number Exhibit Description
------- -------------------

31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer of the Company

31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer of the Company

32.1 Section 1350 Certification of Chief Executive Officer of the
Company

32.2 Section 1350 Certification of Chief Financial Officer of the
Company

(b) Reports on Form 8-K

A Current Report on Form 8-K was filed with the SEC on July 30, 2003 by
the Company reporting its acquisition of 13.5% of the outstanding
voting common shares of Waterfields Company Limited. Such information
was included under Item 5. Other Events and Regulation FD Disclosure.

A Current Report on Form 8-K was filed with the SEC on August 4, 2003
by the Company reporting that the underwriters of the Company's
recently completed secondary stock offering exercised an option to
purchase an additional 192,150 ordinary shares to cover
over-allotments. Such information was included under Item 5. Other
Events and Regulation FD Disclosure.

A Current Report on Form 8-K was filed with the SEC on August 14, 2003
by the Company reporting its second quarter operating results for 2003.
Such information was included under Item 9. Regulation FD Disclosure
and Item 12. Results of Operations and Financial Conditions.

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SIGNATURE

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: November 14, 2003

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