UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

OR

Commission File Number: 0-25248

CONSOLIDATED WATER CO. LTD.

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 November 5, 2004, there were 5,753,485 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.

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 per BDS$ 1.00.

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

TABLE OF CONTENTS

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.

The accompanying information and notes are an
integral part of these condensed consolidated financial statements.

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CONSOLIDATED WATER CO. LTD.

The accompanying information and notes are an
integral part of these condensed consolidated financial statements.

2

CONSOLIDATED WATER CO. LTD.

The accompanying information and notes are an
integral part of these condensed consolidated financial statements.

3

CONSOLIDATED WATER CO. LTD.

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 period ended September 30, 2004 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 for the year ended December 31, 2003.

Certain of the prior period’s figures have been reclassified to conform to the current period’s presentation. The Company has reallocated various expenses in cost of sales, general and administrative expenses and interest expense, as management has determined it more appropriate to reflect these amounts in its current allocations. There is no impact to net income of the Company as a result of these reclassifications.

2 Principles of Consolidation

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of the Company’s wholly-owned subsidiaries, Cayman Water Company Limited, Belize Water Limited, Ocean Conversion (Cayman) Limited, DesalCo Limited, DesalCo (Barbados) Limited, and its majority owned subsidiary Waterfields Company Limited. All intercompany balances and transactions have been eliminated in consolidation.

3. Stock Based Compensation

The Company currently has four stock compensation plans. 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.

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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:

4. Segment Information

Under the Statements of Financial Accounting Standards 131, “Disclosure about Segments of an Enterprise and Related Information”, management 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.

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.

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

4. Segment Information (continued)

As at September 30 and for the three months then ended

[Additional columns below]

[Continued from above table, first column(s) repeated]

As at September 30 and for the nine months then ended

[Additional columns below]

[Continued from above table, first column(s) repeated]

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

5. 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. In addition, 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 period ended September 30, 2004 and 2003.

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

6. Unusual loss

On September 11 and 12, 2004 Hurricane Ivan significantly affected the Company’s Cayman Islands operations. As a result, the Company suffered damage to its seawater conversion plants, which are covered by property insurance. Under generally accepted accounting principles, the Company is required to record the loss of any property, which must be replaced, in the period the loss occurs, and record any gain from the related insurance claim only when the recovery is probable. The Company has preliminarily estimated the total loss to its plant and equipment to be $1,342,274, its spare parts inventories to be $111,839 and costs relating to rebuilding Cayman Islands operations to be $133,359. These amounts have been recorded as an unusual loss on the income statement as “Net loss due to Hurricane Ivan”. The Company also suffered loss of profits during the period that it was unable to sell water to its Cayman Islands customers. The Company is currently quantifying this loss of profits with the intention of submitting a claim for such loss to its insurer under its Loss of Profits insurance policy. The Company has recorded probable recoveries from insurance of $1,200,000 partially offsetting the estimated loss of $1,587,472. At the time of this filing, the Company is still in the process of determining the exact extent of the damage to its plants and equipment and with the assistance of advisors, is preparing an insurance claim in an effort to recover losses sustained as a result of Hurricane Ivan.

7. Subsequent events

On November 12, 2004, the Company accepted a proposal from the loss adjuster of the insurance company for an advance payment of $1,200,000 towards claims for loss and damage to property resulting in the passing of Hurricane Ivan, which affected the Company’s Cayman Islands operations on September 11 and 12, 2004. This amount has been recorded as a receivable on the September 30, 2004 balance sheet and has offset part of the unusual loss of $1,587,472.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Our objective is to provide water services in areas where the supply of potable water is scarce and where the use of reverse osmosis technology to produce potable water is economically feasible. By focusing on this market, we believe that we can provide a superior financial return to our investors. To increase share value and maintain dividend payouts in accordance with current company policy, we need to expand our revenues by developing new business opportunities both within our current service areas, and in new areas. We need to maintain our high operating efficiencies by adhering to our strict equipment maintenance and water loss mitigation programs in order to achieve gross profit margins that have historically been between 40% and 45%. We further believe that many Caribbean basin and adjacent countries, while being water scarce, also present opportunities for operation of our plants in limited regulatory settings which are less restrictive than the highly regulated markets of North America, which promotes cost effective operation of our equipment.

Our business operations and activities are conducted in five countries: the Cayman Islands, Belize, Barbados, the British Virgin Islands and the Bahamas.

Critical Accounting Policies

The preparation of our condensed consolidated 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, goodwill and other intangible assets. Our company bases its 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 from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies are the most important to the portrayal of our financial condition and results and require management’s more significant judgments and estimates in the preparation of our company’s 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 an allowance for doubtful accounts based on estimates of the level of actual write-offs, which 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.

Goodwill and other intangible assets: Goodwill represents the excess costs over fair value of the assets of an acquired business. Goodwill and intangible assets acquired in a business combination accounted for as a purchase and determined to have an indefinite useful life are not amortized, but are tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimatable useful lives be 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 Company periodically evaluates the possible impairment of goodwill. Management identifies its reporting units and determines the carrying value of each reporting unit by assigning the assets and liabilities, including the existing

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goodwill and intangible assets, to those reporting units. The Company determines the fair value of each reporting unit and compares it to the carrying amount of the reporting unit. To the extent the carrying amount of the reporting unit exceeds the fair value of the reporting unit, the Company is required to perform the second step of the impairment test, as this is an indication that the reporting unit goodwill may be impaired. In this step, the Company compares the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No. 141, “Business Combinations”. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. If the implied fair value is less than its carrying amount, the impairment loss is recorded.

Retail water sales: Customers are billed monthly based on meter readings performed at or near each month end and in accordance with agreements, which stipulate minimum monthly charges for water service. Due to Hurricane Ivan, we were unable to perform our normal September month end billing procedures and did not charge our minimum monthly amounts to our Retail customers for the month of September. This resulted in an accrual being made based on an estimate of water delivered but unbilled at quarter end, when the readings were not performed. The accrual is matched with the direct costs of producing, purchasing and delivering water.

Bulk water sales: Customers are billed monthly based on meter readings performed at or near each month end and in accordance with agreements, which stipulate minimum monthly charges for water service. September meter readings were performed at month end and monthly minimums were invoiced as normal, but due to Hurricane Ivan, we had to estimate our electricity usage for our Cayman Operations, as we did not receive any billing data from our electrical supplier for the month of September. This resulted in an accrual being made for the electricity adjustment portion for the September Cayman Islands Bulk water bills. The accrual is matched with the direct costs of producing, purchasing and delivering water.

Recognition of net loss due to Hurricane Ivan: Under generally accepted accounting principles, we are required to record the loss of any property, which must be replaced, in the period the loss occurs, and record any gain from the related insurance claim only when the recovery is probable. We have preliminarily estimated the total loss to our plant and equipment to be $1,342,274, our spare parts inventories to be $111,839 and costs relating to rebuilding Cayman Islands operations to be $133,359. These amounts have been recorded as an unusual loss on the income statement as “Net loss due to Hurricane Ivan”. We also accepted a proposal from the loss adjuster of the insurance company for an advance payment of $1,200,000 towards claims for loss and damage to property resulting in the passing of Hurricane Ivan, which affected our Cayman Islands operations on September 11 and 12, 2004. This amount has been recorded as a receivable on the September 30, 2004 balance sheet and has offset part of the unusual loss of $1,587,472. At the time of this filing, we are preparing an insurance claim with the assistance of advisors, and plan to submit the claims in an effort to recover all losses sustained as a result of Hurricane Ivan.

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 indirect, or general and administrative, expenses. Direct expenses include royalty payments to the Cayman Islands government, electricity and chemicals expenses, production equipment and facility depreciation costs, equipment maintenance expenses, operational staff costs and amortization of intangible assets. Indirect, or general and administrative, 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 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.

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Results of Operations

Three and Nine Months Ended September 30, 2004 Compared to Three and Nine Months Ended September 30, 2003

Revenue

Total revenue increased by 5.5% from $5,004,101 to $5,279,054 for the three months ended September 30, 2004 and by 31.2% from $13,742,794 to $18,026,116 for the nine months ended September 30, 2004 when compared to the same three and nine month period in 2003.

Revenue from our retail water (“Retail”) operations decreased by 1.9% from $2,572,152 to $2,522,708 for the three months ended September 30, 2003 and 2004, respectively, and increased by 16.7% from $8,253,530 to $9,634,096 for the nine months ended September 30, 2003 and 2004, respectively. For the three month period, this decrease was primarily due to the effects of Hurricane Ivan, which reduced our Cayman Islands Retail sales for September by more than half the budgeted amount. In the last half of September, our operations were only operating at limited capacity, due to the damage to our plants, and many of our retail customers were unable to take any water due to damage to their premises. For the nine month period, this increase was due to higher water sales in our primary market in the Cayman Islands, due to increased demand in both our tourist and residential markets before Hurricane Ivan. Published tourist air arrivals records are only available thru July 2004, however, they show a 25.0% increase for the month of July 2004 and a 14.5% increase for the seven months ended July 31, 2004 over the same periods in the prior year. Management feels that this trend is similar for August and September up to the time Hurricane Ivan hit the Island but since that time no visitors have been allowed on to the Island. It is reported that tourist air arrivals will resume on November 20, 2004. Residential markets increased due to increased residential development over the nine month period.

Revenue from our bulk water (“Bulk”) operations increased by 19.2% from $2,141,092 to $2,552,605 for the three months ended September 30, 2003 and 2004, respectively, and by 67.0% from $4,621,534 to $7,716,477 for the nine months ended September 30, 2003 and 2004, respectively. For the three month period this increase was due to the additional one month of revenue from our acquisition of Waterfields Company Limited when compared to the same three month period in 2003. For the nine month period this increase was due to an additional month of revenue from our acquisition of Ocean Conversion (Cayman) Limited operations and seven months of revenue from our acquisition of Waterfields Company Limited operations when compared to the same nine month period in 2003. Our Bulk operations on the Cayman Islands were less affected by Hurricane Ivan than our Cayman Islands Retail operations and therefore did not experience the same drop in revenue. Revenues from our Belize operations declined by 26.3% and 25.0%, respectively during the same three and nine month periods due to the reduced water rates in the new long-term contract which was signed in September 2003 and came into full effect on June 1, 2004 after all conditions precedent had been met or waived. These reduced prices have been partially offset by reduced amortization costs on an intangible asset representing the Belize water sale contract, which is now being amortized over 23 years. The new contract also makes us the exclusive producer of potable water for our customer on Ambergris Caye for the term of the agreement.

Revenue from services (“Service”) decreased by 30.0% from $290,857 to $203,741 for the three months ended September 30, 2003 and 2004, respectively, and by 22.1% from $867,730 to $675,543 for the nine months ended September 30, 2003 and 2004, respectively. For the three and nine month periods these decreases were due to fewer construction projects and the related decrease in engineering fees that are charged on labour and material costs associated with these projects. During 2003, we substantially completed our existing construction projects and have not commenced any new construction projects.

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Other Income (Expenses)

Total other income increased from $210,869 to $306,326 for the three months ended September 30, 2003 and 2004, respectively, and from $81,138 to $776,373 for the nine months ended September 30, 2003 and 2004, respectively. For the three months ended, this increase was due to increased profit sharing and equity income from our investment in Ocean Conversion (BVI) Ltd. For the nine month ended, this increase was due primarily to decreased interest expense because we repaid our bridge loan facility on July 8, 2003 with proceeds from our 2003 equity offering, and the associated reduction of amortization costs of these bridge loan closing costs in the prior year. Increased profit sharing and equity income from our investment in Ocean Conversion (BVI) Ltd. also contributed to the increase in the nine month comparative period.

Cost of Sales

Total cost of sales increased by 10.2% from $3,027,680 to $3,336,631 for the three months ended September 30, 2004 and by 30.9% from $7,886,974 to $10,327,401 for the nine months ended September 30, 2004 when compared to the same three and nine month periods in 2003. During these same periods in 2004, our total revenue increased by 5.5% and 31.2%, respectively.

Cost of sales of our Retail operations increased by 6.0% from $1,208,113 to $1,280,030 for the three months ended September 30, 2003 and 2004, respectively, and by 11.8% from $3,642,109 to $4,071,181 for the nine months ended September 30, 2003 and 2004, respectively, while our Retail revenue decreased by 1.9% and increased by 16.7% for the same periods. For the three and nine month periods, these increases in cost of sales resulted primarily from additional variable costs related to the production of the additional water sold up to September 12, 2004 when Hurricane Ivan damaged our Cayman Island operations. From that point until September 30, 2004 we produced significantly less water than last year but still incurred our fixed operating costs.

Cost of sales of our Bulk operations increased by 10.9% from $1,725,331 to $1,913,867 for the three months ended September 30, 2003 and 2004, respectively, and by 49.3% from $3,889,921 to $5,808,369 for the nine months ended September 30, 2003 and 2004, respectively, while our Bulk revenue increased by 19.2% and 67.0% for the same periods. For the three month period this increase was due to the additional one month of cost of sales from our acquisition of Waterfields Company Limited when compared to the same three month period in 2003. For the nine months periods these increases in cost of sales were due to an additional month of expenses from our Ocean Conversion (Cayman) Limited operations and an additional seven months of expenses from our Waterfields Company Limited operations when compared to the same nine month periods in 2003. This increase was also affected by increased maintenance costs in our Belize operations. We have changed management and a number of other staff in our Belize operations and are working successfully to reduce these unscheduled repair costs by improving the capabilities of our staff and preventative maintenance program.

Cost of sales from our Service operations increased by 51.5% from $94,236 to $142,734 for the three months ended September 30, 2003 and 2004, respectively, and by 26.2% from $354,944 to $447,851 for the nine months ended September 30, 2003 and September 30, 2004, respectively, while our Service revenue decreased by 30.0% and 22.1% for the same periods. For the three and nine month periods these increases were due to additional labour expense because certain permanent staff were not charged out to construction projects. In addition for the nine month period the increase in cost of sales is due to an additional month of operations from both DesalCo Limited and its wholly-owned subsidiary DesalCo (Barbados) Ltd. For the three and nine month periods our Barbados operation also experienced increased maintenance when compared to the same periods is 2003.

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Gross Profit

Overall gross profit margin decreased from 39.5% to 36.8% for the three months ended September 30, 2004 and increased from 42.6% to 42.7% for the nine months ended September 30, 2004 when compared to the same three and nine month periods in 2003, for the reasons explained below.

Gross profit margin for our Retail operations decreased from 53.0% to 49.3% for the three months ended September 30, 2004 and increased from 55.9% to 57.7% for the nine months ended September 30, 2004 when compared to the same three and nine month periods in 2003. The primary reason for the three month decrease was due to the effect of Hurricane Ivan, which limited our water sales for the last half of September, during which period we still incurred our fixed operational costs. For the nine months ended, this increase is due to a decrease in our Retail cost of sales resulting from (i) the cancellation of the Governor’s Harbour plant operating contract in February 2003, and (ii) higher production volumes from our Cayman water production equipment to meet increased customer demand with no additional fixed overhead costs.

Gross profit margin for our Bulk operations increased from 19.4% to 25.0% for the three months ended September 30, 2004 and from 15.8% to 24.7% for the nine months ended September 30, 2004 when compared to the same three and nine month periods in 2003. The primary reason for these increases is due to the addition of the operations of Waterfields Company Limited, which is producing water at a higher gross margin than our other bulk operations. The reason Waterfields Company Limited is able to operate at higher gross profit margins than some of our other Bulk operations is because Waterfields does not incur the amortization expense that our other Bulk operations incur. Various intangible assets were recognized in Ocean Conversion (Cayman) Limited when we acquired that company in February 2003, and in Belize Water Limited when we acquired that company in September 2000. Amortization expense of $529,676 and $581,591 was taken during each of the nine month ended September 30, 2003 and 2004, respectively in our Bulk operations.

Gross profit margin for our Service reporting segment decreased from 67.6% to 29.9% for the three months ended September 30, 2004 and from 59.1% to 33.7% for the nine months ended September 30, 2004 when compared to the same three and nine month periods in 2003. The primary reason for these decreases is because we did not have any new construction projects in 2004 from which we earn engineering revenues and to which we charge out certain labour costs. In addition, we carried out certain intermittent maintenance work in Barbados, which increased our costs.

General and Administrative Expenses

Total general and administrative expenses increased by 35.4% from $1,048,257 to $1,419,611 for the three months ended September 30, 2004 and by 41.7% from $2,748,131 to $3,892,809 for the nine months ended September 30, 2004 when compared to the same three and nine month periods in 2003. General and administrative expenses were at 20.9% and 26.9% of total revenue for the three months ended September 30, 2003 and 2004, respectively and at 20.0% and 21.6% of total revenue for the nine months ended September 30, 2003 and 2004, respectively.

General and administrative expenses for our Retail operations increased by 31.3% from $886,226 to $1,163,291 for the three months ended September 30, 2003 and 2004, respectively, and by 55.3% from $2,109,878 to $3,276,086 for the nine months ended September 30, 2003 and 2004, respectively. These increases are comprised of additional 2003 audit costs related to the work performed on the 2003 acquisitions, significantly higher 2004 audit fees, higher legal fees, new consulting fees related to the new internal control review and testing procedures, increases in salaries and bonuses, costs relating to

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our purchasing department, additional administration staff, increases in director fees and higher insurance premiums.

General and administrative expenses for our Bulk operations increased by 84.7% from $130,544 to $241,110 for the three months ended September 30, 2003 and 2004, respectively, and by 40.0% from $415,900 to $582,088 for the nine months ended September 30, 2003 and 2004, respectively. The three and nine month increases were due to additional expenses incurred by our Waterfields Company Limited operations for bank charges and government fees relating to the exchange of Bahamian dollars to U.S. dollars, higher directors fees and expenses, and increased legal fees relating to general legal advise. The nine month increase was also affected by an additional seven months of expenses from our Waterfields Company Limited operations when compared to the same nine month period in 2003.

General and administrative expenses for our Service reporting segment decreased by 51.7% from $31,487 to $15,210 for the three months ended September 30, 2003 and 2004, respectively, and by 84.4% from $222,353 to $34,635 for the nine months ended September 30, 2003 and 2004, respectively. In May 2003, we closed our Bermuda office and relocated those operations to the Cayman Islands. These decreases are the result of our assimilation of the general and administrative functions of that office.

Unusual loss

On September 11 and 12, 2004 Hurricane Ivan significantly affected our Cayman Islands operations. As a result, we suffered damage to our seawater conversion plants, which are covered by property insurance. Five out of six of our seawater conversion plants in the Cayman Islands suffered minor to moderate damage and our Britannia plant suffered catastrophic damage. We believe based on our assessment to date that the Britannia water production, post treatment and distribution equipment is a total loss. We are in the process of claiming such loss with our insurer. We are currently meeting all of our customers’ water demands without this plant in operation and we expect to replace this equipment before the end of March 2005. We believe that our remaining production capacity will be sufficient to meet the needs of our customers until the production capacity of our Britannia plant can be replaced.

Under generally accepted accounting principles, we are required to record the loss of any property, which must be replaced, in the period the loss occurs, and record any gain from the related insurance claim only when the recovery is probable. We have preliminarily estimated the total loss to our plant and equipment to be $1,342,274, $111,839 to our spare parts inventories and $133,359 relating to the rebuilding of the Cayman Islands operations. These amounts have been recorded as part of income from operations as an unusual loss in the income statement as “Net loss from Hurricane Ivan”. We also suffered loss of profits during the period that we were unable to sell water to our Cayman Islands customers. We are currently quantifying this loss of profits with the intention of submitting a claim for such loss to our insurer under our Loss of Profits insurance policy. We recorded probable recoveries of insurance of $1,200,000 partially offsetting our estimated loss of $1,587,472. At the time of this filing, management is preparing an insurance claim with the assistance of advisors, and plans to submit the claims in an effort to recover all losses sustained as a result of Hurricane Ivan. We expect that the resulting unusual loss for this quarter will be offset in future periods when we finalize our insurance claims and reach a final settlement.

The probable recoveries of insurance of $1,200,000 were recorded as part of accounts receivable and explain part of the accounts receivable increase. Accounts receivable also increased, as we were unable to perform our normal collection procedures for our Cayman Islands Retail operations during September 2004 due to Hurricane Ivan.

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Net Income

Net income decreased by 62.2% from $1,121,298 to $424,032 for the three months ended September 30, 2004 and increased by 30.6% from $3,149,579 to $4,111,990 for the nine months ended September 30, 2004 when compared to the same three and nine month periods in 2003 as the result of factors explained above.

Dividends

On January 31, 2004, we paid a dividend of $0.105 per share to shareholders of record on December 31, 2003, on April 30, 2004, we paid a dividend of $0.115 per share to shareholders of record on March 31, 2004, on July 31, 2004, we paid a dividend of $0.115 per share to shareholders of record on June 30, 2004, and on October 31, 2004, we paid a dividend of $0.115 per share to shareholders of record on September 30, 2004. 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 loan agreement with Scotiabank (Cayman Islands) Ltd. that dividends be paid only from current cash flows.

In October 2004, Waterfields Company Limited paid a dividend of BAH $10 per share to shareholders of record on September 9, 2004.

Liquidity and Capital Resources

Overview

For the three and nine months ended September 30, 2004, we generated cash primarily from our various business segments in the Cayman Islands, the Bahamas, Belize and Barbados and from dividends and profit sharing rights from our equity investment in the British Virgin Islands. Cash flow is affected by the timely receipt of customer payments, by 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 areas in which we operate, such as weather conditions and the world economy. We use cash to fund our various business segments in the Cayman Islands, the Bahamas, Belize and Barbados, 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.

Operating Activities

Cash generated from operating activities for the nine months ended September 30, 2003 and 2004 was $4,472,623 and $5,297,563, 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.

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Investing Activities

Cash used in investing activities during the nine months ended September 30, 2003 and 2004 was $29,623,280 and $204,970, respectively. During the nine months ended September 30, 2004, we used cash to make capital purchases and improvements to our water production plant and equipment in our Bulk and Retail segments and to our existing distribution system in our Retail segment. As at September 30, 2004, we had only purchased a small amount of replacement equipment due to Hurricane Ivan, but intend to replace most of the damaged assets in the next quarter. This was offset by cash provided by an advance payment received from our insurance claim, the collection of our loans receivable and from our investment in affiliates through receipt of profit sharing and dividends. During the same period in 2003, cash in the amount of $31,966,916 was used for acquisitions. We also continued to make minor expansions to our water distribution system in our Retail segment by constructing additional pipelines to service new developments within our exclusive licensed area.

Financing Activities

Cash provided by financing activities during the nine months ended September 30, 2003 was $32,287,820 and cash used in financing activities during the nine months ended September 30, 2004 was $4,210,133. During the nine months ended September 30, 2004 our primary financing activities were the payment of dividends and the repayment of long-term debt. This was partially offset by the issuance of shares though the exercise of stock options by management. During the comparable nine months ended September 30, 2003, our primary financing activity was to draw down $28,056,126 from our Scotiabank facilities. Also during that period, $2,214,286 was repaid on our Scotiabank facilities and $2,832,883 to repay another credit facility, which was closed.

Material Commitments for Capital Expenditures and Contingencies

At September 30, 2004, we had committed approximately $680,000 for capital expenditures for the purchase, site preparation and construction of one water storage tank at our Ambergris Caye, Belize plant which we intend to finance using cash from our Belize Bulk operations. We also expect to replace all plant and equipment, which was damaged by Hurricane Ivan during the fourth quarter of 2004 and in early 2005. We intend to finance these replacements using the proceeds of an insurance claim under our property insurance policy.

We have guaranteed to Scotiabank 50% of the Ocean Conversion (BVI) Ltd. loan of $630,000. 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 our acquisition of interests in Waterfields Company Limited, we 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.

Through a performance and operation bond, the Royal Bank of Canada, Nassau, has made a guarantee in the amount of $1,910,775 to the Water & Sewerage Corporation of The Bahamas that we shall duly perform and observe all terms and provisions pursuant to the contract between the Water & Sewerage Corporation of The Bahamas and us. In the event of our default on our obligations, the Royal Bank of Canada, Nassau, shall satisfy and discharge any damages sustained by the Water & Sewerage Corporation of The Bahamas up to the guaranteed amount.

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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, measured in consistent dollars, 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 Bahamas, the British Virgin Islands, Barbados and the Cayman Islands. In addition, the entire balance of our loans receivable is with one Bulk water customer, Water Authority-Cayman. These loans receivable are secured by assets which we hold until the receivable is paid in full.

Interest Rate Risk

As of September 30, 2004, we had loans outstanding totaling $17,642,228, all of which are based on various lending rates including 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 exchange rates to the U.S. dollar. If any of these fixed exchange rates become a floating exchange rate, however, 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 us. Such officers have concluded (based upon their evaluation of these controls and procedures as of a date within 90 days of the filing of 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 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

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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 systems 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. 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. Unregistered Sales of Equity Securities and Use of Proceeds

As consideration for their services to the Company, on July 6, 2004, the Company granted to 29 of its employees located in the Cayman Islands, Barbados and British Virgin Islands an aggregate of 1,960 shares of redeemable preferred stock (“Preferred Stock”) of which ten of these employees purchased an additional 764 shares at $13.45 per share. In addition, the Company issued to eight of its employees options to purchase an additional 4,240 ordinary shares of common stock having an exercise price of $23.47 per share. The securities issued to the employees 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.

If an employee remains employed by the Company for at least four years, or a person or affiliated group of persons acquires 30% or more of the Company’s ordinary shares of common stock (whether or not the Preferred Stock has been held for four years), the Company is obligated to exchange the Preferred Stock for the same number of ordinary shares of common stock. The Company is also obligated to exchange the Preferred Stock for an equal number of ordinary shares of common stock if an employee’s employment with the Company or any of its affiliates terminates by reason of the employee’s death, permanent disability or the employee reaches the age of 65 years. However, if an employee’s employment with the Company or any of its affiliates terminates for any other reason, the Company may at any time up to and including the first anniversary of such termination, redeem the employee’s Preferred Stock for cash equal to 75% of the average of the closing market price for the Company’s ordinary shares of common stock on each of the first seven trading days in the month of October of the year in which such Preferred Stock was issued to the employee.

The options to purchase ordinary shares of common stock, which were issued to the employees as, discussed above vest on August 4, 2008 and expire one month thereafter. However, an option may be exercised by an employee at any time during the period commencing on the earliest of the date of death of the employee, the date on which the employment of the employee is terminated as a result of permanent disability or the date on which the employee retires having reached the age of 65 years.

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Item 4. Submission of Matters to a Vote of Security Holders

(a) The Annual Meeting of the Company’s shareholders was held on August 11, 2004. Of the 5,746,467 ordinary shares outstanding and 13,585 Redeemable Preferred Shares outstanding on the record date of May 31, 2004, a total of 4,804,126 ordinary shares and 956 Redeemable Preferred Shares were present in person or by proxy. The ordinary shares and the Redeemable Preferred Shares are hereafter collectively referred to as the “Shares”.

(b)(i) The following directors were re-elected effective August 11, 2004:

(b)(ii) The following directors were not up for election at the Annual Meeting and their terms of office as directors continued after the Annual Meeting: Jeffrey M. Parker, Carson K. Ebanks, Richard L. Finlay, Clarence B. Flowers, Jr., Frederick W. McTaggart, Wilmer Pergande and Raymond Whittaker.

(c)(i) The shareholders approved the issuance of the Company’s ordinary shares to Jeffrey M. Parker and Frederick W. McTaggart as part of their annual bonuses, if earned, in accordance with their respective employment agreements. Of the votes cast on this matter, 2,218,628 Shares voted for the approval of the issuance of shares to Messrs. Parker and McTaggart, 391,608 Shares voted against the matter and 39,503 Shares abstained from voting on the matter.

(c)(ii) The shareholders approved the elimination of Article 8.04 from the Company’s Articles of Association, which gives the Board of Directors the absolute discretion to decline to register a transfer of the Company’s ordinary shares without any reason, the renumbering of the first of the two Articles numbered 8.05 as 8.04 and the deletion from the first sentence of Article 9.02 of language referring to the right of the Board of Directors to decline to register a transfer of the Company’s ordinary shares. Of the votes cast on this matter, 2,508,824 Shares voted for the matter, 99,443 Shares voted against the matter and 41,472 Shares abstained from voting on the matter.

(c)(iii) The shareholders approved the Deed of Indemnity Agreements for members of the Company’s Board of Directors. Of the votes cast on this matter, 4,639,013 Shares voted for the matter, 118,780 Shares voted against the matter and 46,332 Shares abstained from voting on the matter.

(c)(iv) The shareholders voted to approve KPMG as the Company’s independent accountants for the year ending December 31, 2004, at the remuneration to be determined by the Board of Directors. Of the votes cast on this matter, 4,493,592 Shares voted for the matter, 282,171 Shares voted against the matter and 28,363_Shares abstained from voting on the matter.

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Item 6. Exhibits

Exhibits

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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.

Dated: November 22, 2004

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