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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-K (Mark One) [X]
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 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.  CAYMAN ISLANDS
    
    N/A(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)Trafalgar Place, West Bay Road, P.O.
Box1114GT, Grand Cayman, B.W.I.
    
    N/A(Address of principal executive offices)
    
    (Zip Code)
 Registrants Telephone number, including area code: (345) 945-4277 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: ORDINARY SHARES, PAR VALUE CI$1.00




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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.     
Yes [X]  No [   ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this 10-K or any amendments to this
Form 10-K. [Not Applicable] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act. Yes [   ]  No [X] The aggregate market value of common stock held by non-affiliates of the
registrant, based on the closing sales price for the registrants ordinary
shares, as reported on the Nasdaq National Market on March 29, 2004,was
$107,861,186. As at March 29, 2004,there were 5,746,467 shares of the registrants ordinary
shares outstanding. DOCUMENTS INCORPORATED BY REFERENCE None EXCHANGE RATES Unless otherwise indicated, all dollar amounts are in United States Dollars and
references to $, U.S., or U.S.$ are to United States Dollars. The official fixed exchange rate for conversion of CI$ into U.S.$, as
determined by the Cayman Islands Monetary Authority, has been fixed since April
1974 at U.S. $1.20 per CI$1.00. The official fixed exchange rate for conversion of BZE$ into U.S.$, as
determined by the Central Bank of Belize, has been fixed since 1976 at U.S.$
0.50 per BZE$ 1.00. The official fixed exchange rate for conversion of BAH$ into U.S.$, as
determined by the Central Bank of The Bahamas, has been fixed since 1973 at
U.S.$ 1.00 per BAH$ 1.00. 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.$.




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TABLE OF CONTENTS Section
    
    Description
    
    PagePART IItem 1.
    
    Business
    
    
    1Item 2.
    
    Properties
    
    
    21Item 3.
    
    Legal Proceedings
    
    
    23Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    23PART IIItem 5.
    
    Market for Registrants Common Equity and Related Stockholder Matters
    
    
    24Item 6.
    
    Selected Financial Data
    
    
    26Item 7.
    
    Managements Discussions and Analysis of Financial Condition and
Results of Operations

    
    
    27Item 7A.
    
    Quantitative and Qualitative Disclosure about Market Risk
    
    
    44Item 8.
    
    Financial Statements and Supplementary Data
    
    
    45Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    
    84Item 9A.
    
    Controls and Procedures
    
    
    84PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    85Item 11.
    
    Executive Compensation
    
    
    91Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
    
    
    99Item 13.
    
    Certain Relationships and Related Transactions
    
    
    102Item 14
    
    Principal Accounting Fees and Services
    
    
    102PART IVItem 15
    
    Exhibits, Financial Statement Schedules and Reports on Form 8-K
    
    
    103SIGNATURES
    
    
    
    
    110EMPLOYMENT CONTRACT/ PETER RIBBINSAMENDMENT TO EMPLOYMENT CONTRACT/ PETER RIBBINSEMPLOYMENT CONTRACT/ JEFFREY PARKEREMPLOYMENT CONTRACT/ FREDERICK MCTAGGART2ND AMENDT. EMPLOYMENT CONTRACT/ GREGORY MCTAGGARTLEASE OF PART DATED MARCH 1, 2003LEASE OF PART DATED JULY 1, 2003AMENDED LEASEAMENDMENT TO DISTRIBUTION AGREEMENTDISTRIBUTION AGREEMENTEMPLOYEE SHARE OPTION NOTICE LETTER/ ABEL CASTILLOEMPLOYEE SHARE OPTION NOTICE LETTER/ BILLY BANKEREMPLOYEE SHARE OPTION NOTICE LETTER/ CHET RITCHEMPLOYEE SHARE OPTION NOTICE LETTER/ DAVID HOOKEREMPLOYEE SHARE OPTION LETTER/ ELIZABETH TRIANAEMPLOYEE SHARE OPTION LETTER/ HELVERT RODRIGUEZEMPLOYEE SHARE OPTION NOTICE LETTER/ IVAN TABORAEMPLOYEE SHARE OPTION NOTICE LETTER/ LUIS WOODEMPLOYEE SHARE OPTION NOTICE LETTER/ MAGGIE JULIERCODE OF BUSINESS CONDUCT & ETHICSSUBSIDIARIES OF THE REGISTRANTCONSENT OF KPMG (CAYMAN ISLANDS)CONSENT OF KPMG (BRITISH VIRGIN ISLANDS)CERTIFICATION BY THE CEO PURSUANT SECTION 302CERTIFICATION BY THE CFO PURSUANT SECTION 302CERTIFICATION BY THE CEO PURSUANT SECTION 906CERTIFICATION BY THE CFO PURSUANT SECTION 906COMPENSATION COMMITTEE CHARTERAUDIT COMMITTEE CHARTERNOMINATIONS COMMITTEE CHARTER




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PART I 
 ITEM 1. BUSINESS Introduction Our company, Consolidated Water Co. Ltd., was incorporated in 1973 and
uses reverse osmosis technology to produce freshwater from seawater. We
process and supply water to our customers in the Cayman Islands, Belize,
Barbados, the British Virgin Islands and the Commonwealth of the Bahamas. We
sell water to a variety of customers, including public utilities, commercial
and tourist properties, residential properties and government facilities. Effective February 1, 2003, we acquired interests in five companies which
operate a total of seven desalination plant facilities. On July 30, 2003, we
acquired a further 13.5% of Waterfields and effective August 1, 2003, acquired
an additional 64.7% interest resulting in total controlling interest of 90.9%
of Waterfields. These acquisitions increased our daily water production
capacity in the Cayman Islands and the Commonwealth of the Bahamas and expanded
our geographic presence to include Barbados and the British Virgin Islands. As
a result of these acquisitions, our daily capacity has more than tripled from
approximately 2.9 to 10.9 million U.S. gallons per day. With one of these
acquisitions, we obtained the exclusive right through October 2009 to
distribute the DWEER Energy Recovery System for use in reverse osmosis
seawater desalination plants in the Caribbean basin. We believe the DWEER
System gives us a distinct competitive advantage when bidding for new plant
construction projects. Our strategy is to provide water services in areas where the supply of
potable water is scarce. We have focused on the Caribbean basin and adjacent
areas as our principal market because these areas have: little or no naturally
occurring fresh water; limited local regulations and taxes allowing for higher
returns than most highly regulated countries; a large proportion of tourist
properties, which historically have generated higher volume sales than
residential properties. To execute this strategy, we plan to grow our business by:  
    
    continuing to develop our production and distribution
infrastructure and providing high quality potable water to our
licensed area in the Cayman Islands;
    
    expanding our existing operations in Belize, Barbados, the
British Virgin Islands and the Commonwealth of the Bahamas;
    
    extending our operations to other markets outside our current
areas of operation where there is a need for potable water; and
    
    broadening our existing and future operations into
complimentary services. Our business group structure is defined based on areas of management
responsibility, which are (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. In 2003, we changed the
composition of our reportable segments. The operations in the Cayman Islands
and the Bahamas that had previously been reported as separate geographical
segments are included in Retail Water and the operation in Belize is included
in Bulk Water. Services is a new business segment created as a result of our
recent acquisitions. In 2003, our Retail Water, Bulk Water and Services
segments accounted for 57%, 37% and 6%, respectively of our total revenue. In
2002, these percentages were 88%, 12% and nil%, respectively. 1




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Financial Information about Business Segments Financial information about business segments is included in Note 17 of
the Consolidated Water Co. Ltd. consolidated statements set forth in ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA herein. Business Combination Consolidated financial statements have been presented which 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) Ltd, and its majority owned subsidiary Waterfields
Company Limited. The operating results of Ocean Conversion (Cayman) Limited,
DesalCo Limited, DesalCo (Barbados) Ltd. have been included in the consolidated
financial statements effective February 1, 2003. The operating results of
Waterfields Company Limited have been included in the financial statements
effective August 1, 2003. All inter-company balances and transactions have
been eliminated. Our investment in Ocean Conversion (BVI) Ltd. has been
accounted for under the equity method of accounting. RETAIL WATER OPERATIONS Our Retail water segment accounted for 57% of our revenues in 2003 and is
comprised of businesses in the Cayman Islands and the Commonwealth of the
Bahamas. These businesses produce potable water from seawater and distribute
this water to end-users, including residential, commercial and government
customers. Retail Water Operations in the Cayman Islands In the Cayman Islands, we sell retail water to a variety of customers
through our wholly-owned subsidiary Cayman Water Company Limited. Our retails operations in the Cayman Islands currently produce potable
water at three reverse osmosis seawater conversion plants in Grand Cayman,
namely our Governors Harbour plant, West Bay plant and Britannia plant. We
own the land where two of our three water plants are located and have entered
into a 25-year lease on the site where the third plant is located. The current
production capacities of our Governors Harbour plant, West Bay plant, and
Britannia plant are 1.2 million, 710,000, and 440,000 U.S. gallons per day,
respectively. Since the plants began production of water, they have
consistently been capable of operating at or near their rated capacity. Feed water for the reverse osmosis units is drawn from deep wells with
associated pumps on the properties. Reject water is discharged into brine
wells on the properties at a deeper level than the feed water intakes. Electricity to our plants is supplied by Caribbean Utilities Co. Ltd., a
publicly-traded utility company. At all three plant sites from which we supply
water to our distribution pipeline, we maintain diesel driven, standby
generators with sufficient capacity to operate our distribution pumps and other
essential equipment during any temporary interruptions in the electricity
supply. 2




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In the event of an emergency, our distribution system is connected to the
George Town, Grand Cayman distribution system of Water Authority-Cayman. In
prior years in order to efficiently maintain our equipment, we have purchased
water from Water Authority-Cayman for brief periods of time. We have also sold
potable water to the Water Authority-Cayman from time to time. Our pipeline system in the Cayman Islands covers the Seven Mile Beach and
West Bay areas of Grand Cayman and consists of approximately 67 miles of PVC
pipeline. We extend our distribution system periodically as property
developments are completed. We have a main pipe loop covering a major part of
the Seven Mile Beach area. We place extensions of smaller diameter pipe off
our main pipe to service new developments in our service area. This system of
building branches from the main pipe keeps our construction costs low and
allows us to provide service to new areas in a timely manner. During 2003, we
completed a number of small pipeline extensions into newly developed properties
within our franchise area. Developers are responsible for laying the pipeline within their
developments at their own cost, but in accordance with our specifications. When
a development is completed, the developer then transfers operation and
maintenance of the pipeline to us. We have a comprehensive layout of our pipeline system, which is maintained
in a computer aided design (CAD) system. This system is integrated with
digital aerial photographs and a computer generated hydraulic model, which
allows us to accurately locate pipes and equipment in need of repair and
maintenance. It also helps us to plan extensions of and upgrades to our
existing pipeline system. Residential and Commercial Operations in the Cayman Islands We enter into standard contracts with hotels, condominiums and other
properties located in our existing licensed area to provide potable water to
such properties. We currently have agreements on differing terms and rates to
supply potable water to the 309-room Marriott Hotel and the 343-room Westin
Hotel, the 357-room Hyatt Hotel and Britannia Golf Course, and to supply
non-potable water to the SafeHaven Golf Course. In the Seven Mile Beach area, our primary customers are the hotels and
condominium complexes which serve the tourist industry. In the West Bay area,
our primary customers are residential homes. Occasionally, we also supply to,
or buy from, on an as-needed basis, the Water Authority-Cayman, which serves
the business district of George Town and other parts of Grand Cayman. Although at a slower pace than in previous years, development is taking
place on Grand Cayman, and particularly in our licensed area to accommodate
both the growing local population and the tourism market. Because our license
requires us to supply water to developments in our licensed area, the planning
department of the Cayman Islands government routinely advises us of proposed
developments in our licensed area. This advance notice allows us to manage our
production capacity to meet anticipated demand. We believe that we have, or
have contracted for, a sufficient supply of water to meet the foreseeable
future demand. We bill on a monthly basis based on metered consumption. Receivables are
typically collected within 30 to 35 days after the billing date and receivables
not collected within 45 days subject the customer to disconnection from our
water service. In 2003, bad debts represented less than 1% of our total sales
for the year. Customers who have had their service disconnected must pay
re-connection charges. 3




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The following table shows, for each of the five years ended December 31,
2003, our total number of customer connections at the end of each year and
metered sales of water for that year: 2003
    
    2002
    
    2001
    
    2000
    
    1999Number of Customers
    
    
    3,300
    
    
    
    3,100
    
    
    
    2,999
    
    
    
    2,836
    
    
    
    2,606Miles of Pipeline
    
    
    67
    
    
    
    66
    
    
    
    65
    
    
    
    64
    
    
    
    63Metered Sales (in thousands of U.S. gallons):Commercial
    
    
    429,013
    
    
    
    405,545
    
    
    
    358,711
    
    
    
    345,940
    
    
    
    308,949Residential
    
    
    107,528
    
    
    
    103,661
    
    
    
    104,002
    
    
    
    97,759
    
    
    
    86,712Government facilities
    
    
    6,164
    
    
    
    13,789
    
    
    
    11,425
    
    
    
    7,599
    
    
    
    5,686Total Metered Sales
    
    
    542,705
    
    
    
    522,995
    
    
    
    474,138
    
    
    
    451,298
    
    
    
    401,347
 The table above does not precisely represent the actual number of
customers we service. In hotels and condominiums, we may only have one
customer, which is the operator of the hotel or the condominium, but we
actually supply water to all of the units within that hotel or condominium
development. Of the customers indicated in the table above, as of 2003, 51.0%
were residential, 48.3% were hotels, condominiums and other commercial
customers and 0.7% were government facilities. In the past, demand on our pipeline distribution has varied throughout the
year. Demand depends upon the number of tourists visiting and the amount of
rainfall during any particular time of the year. In general, the majority of
tourists come from the United States. We have a two-year agreement expiring on December 31, 2004 with Safehaven
Ltd. to supply non-potable water on demand to irrigate an 18-hole golf course.
After December 31, 2004, the agreement may be terminated by either party upon
four months notice. Before 1991, any owner of property within our licensed area could install
water-making equipment for its own use. Since 1991, that option is only
available to private residences, although water plants in existence prior to
1991 can be maintained but not replaced or expanded. When the Marriott Hotel
was built in 1990 in our licensed area, the developer installed its own reverse
osmosis seawater desalination equipment. The equipment proved unreliable, and
on February 4, 1994, we entered into an agreement with the owner of the
Marriott Hotel to supply between 60,000 and 180,000 U.S. gallons of water per
month at our standard tariff rates. If we are required to supply more than
180,000 U.S. gallons in a month, we will provide the water at our standard
tariff rates on a best efforts basis. The Marriott Hotel has recently
discontinued operation of its own reverse osmosis equipment, and increased the
capacity of its service connection to our pipe line. However the owner of the
hotel has indicated that it may refurbish the reverse osmosis equipment. We
believe that refurbishment or replacement of the plant may be a breach of law,
and have advised the Water Authority-Cayman of our concern. In 1995, we entered into a 10-year agreement with the owner of the Westin
Hotel. This agreement requires us to supply up to 1.86 million U.S. gallons per
month at a discount to our standard tariff rates, and to supply any additional
demand on a best efforts basis. The Westin Hotel maintains storage capacity
on-site, assists pressurization with on-site re-pumping facilities, and has
provided us with a letter of credit that covers the cost of water supply for 45
days. In 2001, we entered into a 25-five year agreement, which took effect
February 1, 2002, to acquire the Britannia plant and to supply a minimum of 62
million U.S. gallons of potable water per year on a take or pay basis to Cayman
Hotel and Golf, Inc., the owner of the Hyatt Grand Cayman Resort and Britannia
golf course. We are required by our government license to meet any water
demand from our customer above the 62 million U.S. gallons of water supplied
per year. 4




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Retail Water Operations in the Bahamas In 2000, we entered into a water supply agreement with South Bimini
International Ltd., a company incorporated in the Commonwealth of Bahamas, and
on July 11, 2001 we began to provide potable water from one reverse osmosis
seawater conversion plant in South Bimini, Bahamas capable of producing 115,000
U.S. gallons per day. Potable water is supplied to the marina and condominium
development, Bimini Sands Resort and Bimini Beach Hotel, a 40 room hotel. The
developer of the Bimini Sands Resort continues to develop the property, but we
are not currently aware of any time schedule by the developer for the
completion of the additional condominium units. Under our agreement, South
Bimini International Ltd. is committed to pay for a minimum of 3,000 U.S.
gallons of water per customer per month (36,000 U.S. gallons per customer per
year) on a take or pay basis in relation to the Bimini Sands Resort. The price
of water supplied is adjusted for inflation annually based on Bahamian and U.S.
government indices, and adjusted monthly for changes in the cost of
electricity. During 2003, we supplied South Bimini International Ltd. with 3.4
million U.S. gallons of water. We believe that water sales in Bimini will be cyclical. We expect that
our sales will be higher during the summer months when tourists and fisherman
arrive from the United States by boat, and when several large angling
tournaments are traditionally held in Bimini. We expect that our sales will be
lower during winter months when the weather is not conducive to pleasure boat
travel from the United States. Feed water for the reverse osmosis unit is drawn from deep wells with
associated pumps on the property. Reject water is discharged into brine wells
on the property at a deeper level than the feed water intakes. Electricity to our plants is supplied by Bahamas Electricity Corporation.
We maintain a diesel driven, standby generator with sufficient capacity to
operate our distribution pumps and other essential equipment during any
temporary interruptions in the electricity supply. Retail Water Demand and Average Sales Price The table below lists the total volume of water we supplied on a quarterly
basis for the five years ended December 31, 2003 to all of our Retail Water
customers: 2003
    
    2002
    
    2001
    
    2000
    
    1999(in thousands of U.S. gallons)First Quarter
    
    
    141,575
    
    
    
    141,559
    
    
    
    119,115
    
    
    
    125,869
    
    
    
    107,031Second Quarter
    
    
    144,134
    
    
    
    146,488
    
    
    
    129,305
    
    
    
    117,766
    
    
    
    113,007Third Quarter
    
    
    125,510
    
    
    
    120,201
    
    
    
    119,182
    
    
    
    100,259
    
    
    
    90,888Fourth Quarter
    
    
    134,957
    
    
    
    119,231
    
    
    
    107,536
    
    
    
    107,404
    
    
    
    90,421Total
    
    
    546,176
    
    
    
    527,479
    
    
    
    475,138
    
    
    
    451,298
    
    
    
    401,347
 5




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Our average sales price per 1,000 U.S. gallons of potable water sold to
our Retail water customers for the three years ended December 31, 2003, 2002
and 2001 are as follows: 2003
    
    2002
    
    2001(per 1,000 U.S. gallons)Average Sales Price
    
    $
    19.69
    
    
    $
    19.79
    
    
    $
    20.62
 BULK WATER OPERATIONS Our Bulk water segment accounted for 37% of our revenues in 2003 and is
comprised of businesses in the Cayman Islands, Belize, British Virgin Islands,
and the Commonwealth of the Bahamas. These businesses produce potable water
from seawater and sell this water to governments and private customers. Bulk Water Operations in the Cayman Islands In the Cayman Islands, we sell bulk water, through our wholly-owned
subsidiary Ocean Conversion (Cayman) Limited, to the Water Authority-Cayman who
in turn distribute that water to properties in the parts of Grand Cayman that
are outside of our retail licensed area. During 2003, we supplied the Water
Authority-Cayman with 646 million US gallons of water. As a result of our acquisition of Ocean Conversion (Cayman) Limited, we
operate, but do not own, three additional reverse osmosis seawater conversion
plants in Grand Cayman with a total installed capacity of 2.9 million U.S.
gallons per day: the Red Gate Road plant with a production capacity of 1.3
million U.S. gallons per day, the Lower Valley plant with a production capacity
of 792,000 U.S. gallons per day and the North Sound plant with a production
capacity of 792,000 U.S. gallons per day. The plants that we operate for Water
Authority-Cayman are located on land owned by the Cayman Islands government.
Ocean Conversion (Cayman) Limited provides water on a take or pay basis to the
Water Authority-Cayman, a government owned utility and regulatory agency, under
various licenses and agreements. In April 1994, our wholly-owned subsidiary, Ocean Conversion (Cayman)
Limited, was granted a seven-year water supply license by the government of the
Cayman Islands and the Water Authority-Cayman to supply desalinated water from
the Red Gate Road plant. In January 2001, this agreement was extended for
seven years with effect from December 2001. Under the terms of this license
Ocean Conversion (Cayman) Limited is obligated to deliver to the Water
Authority-Cayman the amount of water it demands or 1.2 million U.S. gallons of
water per day on average each month, which ever is less. In June 1997, our wholly-owned subsidiary, Ocean Conversion (Cayman)
Limited, was granted a seven-year water supply license by the government of the
Cayman Islands and the Water Authority-Cayman to supply desalinated water from
the Lower Valley plant. In August 1999, this agreement was extended with
effect from March 1999 until March 2006. Under the terms of this license Ocean
Conversion (Cayman) Limited is obligated to deliver to the Water
Authority-Cayman the amount of water it demands or 713,000 U.S. gallons of
water per day on average each month, which ever is less. 6




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In December 2001, our wholly-owned subsidiary, Ocean Conversion (Cayman)
Limited, was granted a seven-year water supply license, with effect from
November 2002, by the government of the Cayman Islands and the Water
Authority-Cayman to supply desalinated water from the North Sound plant. Under
the terms of this license Ocean Conversion (Cayman) Limited is obligated to
deliver to the Water Authority-Cayman the amount of water it demands or 713,000
U.S. gallons of water per day on average each month, which ever is less. Bulk Water Operations in Belize In Belize, we sell bulk water through our wholly-owned subsidiary Belize
Water Limited to Belize Water Services Ltd. (BWSL), which distributes the
water through its own pipe line system to residential, commercial and tourist
properties in Ambergris Caye, Belize. During 2003, we supplied BWSL with 99.9
million U.S. gallons of water. On July 21, 2000, we acquired Seatec Belize Ltd. and subsequently changed
the name of the company to Belize Water Limited. Belize Water Limited provides
potable water from one reverse osmosis seawater conversion plant in Ambergris
Caye, Belize, Central America, capable of producing 420,000 U.S. gallons per
day, to BWSL, which acquired the operations of the Belize Water and Sewerage
Authority in February 2001. On September 17, 2003 we entered into a new 23-year contract with BWSL
to supply a minimum of 1.75 million US gallons of water per week, or upon
BWSLs demand up to 2.1 million US gallons per week, on a take or pay basis.
Additionally we are BWSLs exclusive supplier of desalinated water on
Ambergris Caye, Belize throughout the term of the contract. The new
contract has been executed, but final completion is subject to satisfying
three conditions precedent, of which to date we have met one and BWSL has
met one. We are awaiting confirmation from the Government of Belize that
our application for extension of our existing import duty and tax exemptions
has been granted until at least September 17, 2009, which will satisfy the
final condition precedent. The terms and conditions of the contract signed
on June 26, 1992 between BWSL and our company remain in full force and
effect until all conditions precedent are satisfied. On November 12, 2003,
we offered and BWSL accepted a reduced concessionary water rate, effective
November 1, 2003, which is equal to the water rate that we will charge BWSL
under the new agreement. This reduced concessionary rate can be withdrawn by
us at any time and we expect to offer the reduced rate until we satisfy the
conditions precedent in the new contract. The new contract terminates on March 23, 2026. However BWSL has the
option to advise us no later than six months before the termination date
that it wishes to renew the contract for a further 25-year period on the
same terms and conditions. On June 26, 1992 we entered into a contract with BWSL to supply a
minimum of 135,000 U.S. gallons of water per day to BWSL, which expires in
2011, unless otherwise terminated in accordance with the terms of our new
contract signed on September 1, 2003. While we own our production plant in
Belize, we lease the parcel of land on which our plant is located from the
Government of Belize at an annual rent of BZE$1.00. The lease commenced on
April 27, 1993 and was extended on January 2, 2004 to a period of 33 years. When we originally acquired Belize Water Limited in July 2000, we were
contractually obligated to supply water to Belize Water and Sewerage
Authority, a Belize government organization. In early 2001, BWSL, a private
company, purchased Belize Water and Sewerage Authority and assumed our
contract with the Belize Water and Sewerage Authority. The base price of water supplied, and adjustments thereto, are
determined by the terms of the 7




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contracts, which provide for annual adjustments based upon the movement in
the government price indices specified in the contract, as well as monthly
adjustments for changes in the cost of diesel fuel and electricity. We bill on a monthly basis based on metered consumption. Receivables
are due within 21 days after the billing date. Interest of 1.5% per month
(1% per month under the new contract) is charged on any delayed payments. BWSL distributes our water primarily to residential properties, small
hotels, and businesses that serve the tourist market. We have operated our plant in Belize since July 2000. We believe that
water sales in Belize are less cyclical, but on a similar cycle to sales in
the Cayman Islands. Although both operations cater to similar tourist
markets, Belize has a greater proportion of residents to tourists. In early 2003 our customer, BWSL, repaired several leaks in its
distribution pipe line in Ambergris Caye. As a result, our water sales
decreased by approximately 19% during January 2003, and continued to be
lower than 2002 water sales for the full year in 2003. Our sales in 2003
were 11.2% lower by volume than in 2002. We expect this lower sales level
to continue, and that modest increases will occur because of ongoing
residential and tourist property development. Feed water for the reverse osmosis units is drawn from deep wells with
associated pumps on the property. Reject water is discharged into brine wells
on the property at a level below that of the feed water intakes. Electricity to our plant is supplied by Belize Electricity Limited. At the
plant site, we maintain a diesel driven, standby generator with sufficient
capacity to operate our essential equipment during any temporary interruptions
in the electricity supply. Bulk Water Operations in the British Virgin Islands In the British Virgin Islands, we sell bulk water through our affiliate,
Ocean Conversion (BVI) Ltd., to the Government of the British Virgin Islands
Water and Sewerage Department (BVIW&S), which distributes the water through
its own pipe line system to residential, commercial and tourist properties on
the islands of Tortola and Jost Van Dyke. During 2003, Ocean Conversion (BVI)
Ltd. supplied BVIW&S with 297 million U.S. gallons of water. We account for our interests in Ocean Conversion (BVI) Ltd. using the
equity investment method, and therefore the operating results of Ocean
Conversion (BVI) Ltd. are not consolidated in our financial statements. Income
from this equity investment has been included in our bulk water operations
segment, since the business of Ocean Conversion (BVI) Ltd. is similar to the
business of our bulk water operations segment. On February 7, 2003, we completed our purchase of 50% of the issued and
outstanding voting stock, certain profit sharing rights and all of the
non-voting shares of Ocean Conversion (BVI) Ltd. Also on that date we
surrendered 18.2% of our profit sharing rights for 45,000 non-voting shares of
Ocean Conversion (BVI) Ltd. On May 9, 2003 we sold all of our non-voting
shares of Ocean Conversion (BVI) Ltd. to Sage Water Holdings (BVI) Limited. We
now own 50% of the voting shares and 50% of the profit sharing rights of Ocean
Conversion (BVI) Ltd. 8




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Ocean Conversion (BVI) Ltd. supplies desalinated water produced from its
Baughers Bay desalination plant in Tortola, British Virgin Islands to BVIW&S.
On May 31, 1999, the British Virgin Islands Government did not extend the water
supply agreement for a seven-year period, and did not make a terminal payment
of $1.42 million to Ocean Conversion (BVI) Ltd., which would have entitled them
to take possession of the Baughers Bay plant. On January 28, 2000, the
government advised Ocean Conversion (BVI) Ltd. that it considered a water sales
arrangement to be in force on a monthly basis until negotiations for a new
agreement could be concluded. Negotiations on the terms of a new agreement
have not proceeded since our acquisition of interests in Ocean Conversion (BVI)
Ltd., and we are presently awaiting an indication from government that they
wish to meet to discuss the terms of a new agreement. Ocean Conversion (BVI) Ltd.s Baughers Bay plant was expanded in December
2003 to a capacity of 1.7 million U.S. Gallons per day. The plant is dual-train
seawater reverse osmosis plant with an advanced energy recovery system.
Ocean-Conversion (BVI) Ltd. generates its own electrical power on site using
two large Caterpillar diesel driven generator units. Ocean Conversion (BVI)
Ltd. also purchases electricity from the BVI Electric Co. to power ancillary
equipment and provide building lighting. Our wholly-owned subsidiary, DesalCo Limited, provides a Vice President
and Chief Executive Officer as well as other management and engineering
services to Ocean Conversion (BVI) Ltd. in the form of accounting services,
personnel management and plant management for a monthly fee of $20,400. DesalCo
Limited also receives a bonus of 4% of the annual net operating income of Ocean
Conversion (BVI) Ltd. Under the Articles of Association of Ocean Conversion (BVI) Ltd., we are
able to appoint three of the six directors of the company. Sage Water Holdings
(BVI) Limited, which owns the remaining 50% of the issued and outstanding
voting shares, is entitled to appoint the remaining three directors. If there
is a tied vote on any matter, the President of the Caribbean Water and
Wastewater Association will be entitled to appoint a junior director to break
the tie. Bulk Water Operations in the Bahamas In the Commonwealth of the Bahamas, we sell bulk water through our
majority-owned subsidiary, Waterfields Company Limited, to the Water and
Sewerage Corporation of the Bahamas (WSC), which distributes the water
through its own pipe line system to residential, commercial and tourist
properties on the island of New Providence. During 2003, Waterfields Company
Limited supplied WSC with 587 million U.S. gallons of water. As a result of our acquisition of DesalCo Limited on February 7, 2003 we
acquired a 12.7% interest in Waterfields Company Limited. On July 30, 2003, we
acquired a further 13.5% of Waterfields and effective August 1, 2003, acquired
an additional 64.7% interest resulting in total controlling interest of 90.9%
of Waterfields. We supply bulk water to WSC from our Windsor Plant under the terms of a
15-year water supply agreement dated May 7, 1996. We are required under this
agreement to provide WSC with at least 16.8 million US gallons per week of
potable water, and WSC has contracted to purchase at least that amount from us
on a take-or-pay basis. The water supply agreement expires on the later of
March 1, 2013 or after the plant has produced approximately 13.1 billion U.S.
gallons of water. At the conclusion of the initial term of the water supply
agreement, WSC has the following options:  
    
    extend the term of the agreement for an additional five years at a
reduced rate specified in the agreement; 9




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
    
    exercise a right of first refusal to purchase any materials,
equipment and facilities that Waterfields intends to remove from the
site, and negotiate a purchase price with Waterfields; or
    
    require Waterfields to remove all materials, equipment and
facilities from the site. Feed water for the reverse osmosis unit is drawn from deep wells with
associated pumps on the property. Reject water is discharged into brine wells
on the property at a deeper level than the feed water intakes. Electricity to our plants is supplied by Bahamas Electricity Corporation.
We maintain, standby generator with sufficient capacity to operate essential
equipment at our Windsor Plant and are able to produce water with this plant
during any temporary interruptions in the electricity supply. Bulk Water Demand and Average Sales Price The table below lists the total volume of water we supplied on a quarterly
basis for the four years ended December 31, 2003 to all of our Bulk water
customers: 2003
    
    2002
    
    2001
    
    2000(in thousands of U.S. gallons)First Quarter
    
    
    133,682
    
    
    
    24,751
    
    
    
    24,589
    
    
    
    Second Quarter
    
    
    208,107
    
    
    
    30,206
    
    
    
    26,519
    
    
    
    Third Quarter
    
    
    300,429
    
    
    
    30,028
    
    
    
    21,404
    
    
    
    19,507Fourth Quarter
    
    
    350,143
    
    
    
    27,552
    
    
    
    21,266
    
    
    
    19,624Total
    
    
    992,361
    
    
    
    112,537
    
    
    
    93,778
    
    
    
    39,131
 Our average sales price per 1,000 U.S. gallons of potable water sold to
our Bulk water customers for the three years ended December 31, 2003, 2002
and 2001 are as follows: 2003
    
    2002
    
    2001(per 1,000 U.S. gallons)Average Sales Price
    
    $
    7.10
    
    
    $
    13.07
    
    
    $
    13.12
 10




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SERVICES (ENGINEERING AND MANAGEMENT) OPERATIONS Engineering Services Operations acquired through DesalCo Limited As a result of our acquisition of DesalCo Limited effective February 1,
2003, we provide management, engineering and construction services for
desalination projects and are the exclusive agents for sales of DWEER energy
recovery systems for desalination plants in the Caribbean basin until October
2009. DesalCo Limited, which is recognized by suppliers as an original
equipment manufacturer of reverse osmosis seawater desalination plants, also
acts as the purchasing agent for all companies affiliated with our company. In 2003 DWEER Technology Ltd. (DWEER Tech), the owner of the DWEER
technology, licensed the world-wide rights to the DWEER technology to Calder
AG, a Swiss company. On February 26, 2004 we entered into a new exclusive
Caribbean distributorship agreement with Calder AG for the DWEER technology,
and amended the terms of our distributorship agreement with DWEER Tech. The
Calder agreement supercedes our agreement with DWEER Tech, and contains terms
comparable to the DWEER Tech agreement. Service Operations in Barbados Effective February 1, 2003, we acquired all of the issued and outstanding
stock of DesalCo Limited. DesalCo Limited owns all of the issued and
outstanding stock of DesalCo (Barbados) Ltd., a Barbados company, which
operates a desalination plant for Sandy Lane Properties Ltd. in St. James,
Barbados. As a result of our acquisition of DesalCo Limited, we acquired
control of its wholly-owned subsidiary, DesalCo (Barbados) Ltd. Under the terms of a supply agreement and operating agreement with Sandy
Lane Properties Ltd., DesalCo Limited constructed and operates a seawater
desalination plant, which provides irrigation water for several golf courses on
the Sandy Lane Resort in St. James, Barbados. The plant and property are owned
by Sandy Lane Properties Ltd. and DesalCo Limited operates the plant under the
terms of a five-year operating agreement, which expires in January 2006. Sandy
Lane Properties Ltd. has the option to cancel the operating agreement with
three months prior notice to DesalCo Limited, subject to certain penalties for
early termination of the operating agreement. The operating agreement was
assigned to DesalCo Limiteds wholly-owned subsidiary, DesalCo (Barbados) Ltd.,
in January 2001 and DesalCo (Barbados) Ltd. pays a monthly assignment fee to
DesalCo Limited equal to 8% of the gross revenue received under the operating
agreement. DesalCo Limited also provides certain engineering services and pays
a portion of the plant managers salary in exchange for a management fee of
approximately $12,640 per month and reimbursement of expenses. This management
fee was reduced in May 2003 from approximately $14,700 per month. OTHER INFORMATION REGARDING THE COMPANYS BUSINESS Wastewater Services in the Cayman Islands We began providing sewerage services on Grand Cayman in 1973. In 1987, the
Cayman Islands government, through Water Authority-Cayman, constructed a public
sewerage system in part of the Seven Mile Beach area where Governors Harbour
is located. In 1988, Water Authority-Cayman began processing sewage delivered
by the pipelines and lift stations in that area and we stopped our processing
of sewage. Water Authority-Cayman currently directly bills our former sewerage
customers for its services. In October 2001, we reached an agreement with the
Water Authority-Cayman pursuant to which 11




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Water Authority-Cayman assumed, in November 2002, the operation of two
remaining sewage lift stations, which we had operated. No revenue was earned
for wastewater services during the three years ended December 31, 2003. The Government in the Cayman Islands, Customs Duties and Taxes The Cayman Islands are a British Overseas Territory of the United Kingdom
and have had a stable political climate since 1670, when the Cayman Islands
were ceded to England by the Treaty of Madrid. The Queen of England appoints
the Governor of the Cayman Islands to make laws with the advice and consent of
the legislative assembly. There are 15 elected members of the legislative
assembly and three members appointed by the Governor from the Civil Service.
The Executive Council is responsible for day-to-day government operations. The
Executive Council consists of five ministers who are chosen by the legislative
assembly from its 15 popularly elected members, and the three Civil Service
members. The Governor has reserved powers and the United Kingdom retains full
control over foreign affairs and defense. The Cayman Islands are a common law
jurisdiction and have adopted a legal system similar to that of the United
Kingdom. We have exemptions from, or receive concessionary rates of, customs duties
on capital expenditures on plant and major consumable spares and supplies
imported into the Cayman Islands as follows:  
    
    there are no local taxes on profit, income, distributions, capital
gains or appreciations of our company in the Cayman Islands;
    
    we do not pay any import duty or taxes on permeator membranes,
electric pumps and motors and chemicals, and we pay duty at the rate of
10% of the cost, including insurance and transportation to the Cayman
Islands, of other plant and associated materials and equipment to
manufacture or supply water in Seven Mile Beach or West Bay areas; and
    
    Ocean Conversion (Cayman) Limited pays all customs duties up to 10%
in respect of materials and supplies imported for the Red Gate plant
and is reimbursed amounts in excess of this by Water Authority-Cayman. A major source of revenue to the Cayman Islands government is a 7.5% or 9%
stamp tax, depending on location, on the transfer of ownership of land in the
Cayman Islands. During the period of November 14, 2001 to date the stamp tax
rate is temporarily set at 5%. To prevent stamp tax avoidance by transfer of
ownership of the shares of a company, which owns land in the Cayman Islands (as
opposed to transfer of the land itself), The Land Holding Companies (Share
Transfer Tax) Law was passed in 1976. The effect of this law is to charge a
company, which owns land or an interest in land in the Cayman Islands, a tax
based on the value of its land or interest in land attributable to each share
transferred. The stamp tax calculation does not take into account the
proportion which the value of a companys Cayman land or interest bears to its
total assets and whether the intention of the transfer is to transfer ownership
or part of a companys entire business or a part of its Cayman land or
interest. Prior to our ordinary shares becoming quoted in the United States, we paid
this tax on private share transfers. We have never paid the tax on transfers of
our publicly traded shares. Since 1994, we requested that the Cayman Islands
government exempt us from the share transfer tax. On April 10, 2003, we
received notice that the Cayman Islands government had granted an exemption
from taxation for all transfers of our shares. We believe it is unlikely that
government will seek to collect this tax on transfers of our publicly traded
shares between the period 1994 through April 10, 2003. 12




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The Government in the Bahamas, Customs Duty, and Taxes The Commonwealth of the Bahamas is a constitutional parliamentary
democracy with the Queen of England as the constitutional head of state. The
basis of Bahamian law and legal system is the English common law tradition with
a Supreme Court, Court of Appeals, and a Magistrate court. We have not been granted any tax exemptions for our Bahamian operations.
Bahamian companies are subject to an annual business license fee ranging from
1% to 2% of their gross revenues. We did not pay any business license fees to
the Bahamian government in respect of our Bimini retail water operations during
2001, 2002, or 2003, other than National Insurance Board tax on our employees.
We estimate our potential tax liability based on our 2003, 2002 and 2001 gross
revenues to be less than $2,500. The Government in Belize, Customs Duty, and Taxes Belize (formerly British Honduras) achieved full independence from the
United Kingdom in 1981. Today, Belize is a constitutional monarchy with the
adoption of a constitution in 1991. Based on the British model with three
independent branches, the Queen of England is the constitutional head of state,
represented by a Governor General in the government. A prime minister and
cabinet make up the executive branch, while a 29 member elected House of
Representatives and a nine member appointed Senate form a bicameral
legislature. The cabinet consists of a prime minister, other ministers and
ministers of state who are appointed by the Governor-General on the advice of
the Prime Minister, who has the support of the majority party in the House of
Representatives. Belize is an English common law jurisdiction with a Supreme
Court, Court of Appeals and local Magistrate Courts. The Government of Belize has exempted Belize Water Limited from all import
duties and stamp taxes until January 28, 2005, and company taxes until January
28, 2006. Belize levies a gross receipts tax on corporations at a rate varying
between 0.75% and 25%, depending on the type of business, and a corporate
income tax at a rate of 25% of chargeable income. Gross receipts tax payable
amounts are credited towards corporate income tax. We believe our business
would be subject to a 1.25% gross receipts tax and income tax without our
exemption. Belize levies import duty on most imported items at rates varying
between 0% and 45%, with most items attracting a rate of 20%. While the
Government of Belize confirmed its commitment in a letter dated June 29, 1992
from the Financial Secretary of Belize to support all future applications for
extensions or additional tax exemptions for the life of the water supply
contract, future exemptions must be approved by the Belizean legislature and we
cannot give any assurance that we will be granted any further tax exemptions
after January 28, 2006. In January 2004, in connection with our new water sales contract with
BWSL, we submitted an application to the Government of Belize requesting that
our existing stamp tax, import duty, and company tax exemptions are extended
until March 23, 2026. We have received confirmation that our application is
currently under review, and we are awaiting a reply from the government. The Government in the British Virgin Islands and Customs, Duties and Taxes The British Virgin Islands is an Overseas Territory of the United Kingdom
that was first settled by the Dutch in 1648 and annexed by the British in 1672.
It adopted a constitution in 1977 and is now a constitutional democracy with
three branches of government: the Executive Council, the Judiciary and the
Legislative Council. Executive authority is vested in the Queen of England,
exercised through her representative, the Governor. The Governor has
responsibility for the courts, public service, police, and foreign affairs and
full policy-making authority. The Governor is not a member of the Executive
Council but receives assistance with the day-to-day operations of the
government. The Executive Council is made 13




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up of various members of the legislature. The Parliament or Legislative
Council is made up of (13) thirteen seats with members elected by popular vote,
serving up to but no more than five-year terms. The British Virgin Islands are
an English common law jurisdiction with a Supreme Court, Court of Appeals and
Magistrates Court. The British Virgin Islands imposes a corporate income tax at a rate of 15%
of net income. However, Ocean Conversion (BVI) Ltd. received an exemption,
under the water supply agreement with the British Virgin Islands government,
from all taxes, duties, levies and impositions on items which it imports for
the Baugers Bay plant. The Government in Barbados and Customs, Duties and Taxes Barbados is an independent island nation that was initially occupied by
the British in 1627. It remained a British colony until 1961 when it was
granted internal autonomy. Barbados gained full independence in 1966 but
remains a member of the British Commonwealth that appoints the Governor
General. The Governor General appoints members of the cabinet with the advice
of the prime minister. The parliament consists of the senate whose 21 members
are appointed by the Governor General and the assembly whose 28 members are
popularly elected. Barbados is an English common law jurisdiction with a
Supreme Court. The net income of DesalCo (Barbados) Ltd. is subject to a 40% Barbados
corporate tax, and all dividend payments and supplier payments are subject to a
Barbados withholding tax of 15%. All customs duties due on parts and equipment
for the plant are paid by DesalCo (Barbados) Ltd. since a concession on such
duties held by Sandy Lane Properties Ltd. expired in March 2004. Value added
taxes are paid by Sandy Lane Properties Ltd. DesalCo (Barbados) Ltd. has made
all necessary tax filing and payments. Government Regulation In the Cayman Islands, we are regulated by the Water Authority-Cayman on
behalf of the Cayman Islands Government and believe that our operations comply
with all local laws and regulations. We have received confirmation from the Public Utilities Commission of
Belize that they approve of the terms and conditions of our new contract with
Belize Water Services Limited. We believe that our operations in Belize comply
with all other local laws and regulations. We believe that our operations in the Bahamas, the British Virgin Islands
and Barbados comply with all local laws and regulations, and we are currently
reviewing our Bahamian tax status as it relates to our Bimini operation, as
disclosed above. Market and Service Area Although we currently operate in the Cayman Islands, Belize, Barbados, the
British Virgin Islands and the Bahamas, we believe that our potential market
consists of any location where there is a need for potable water. The
desalination of seawater, either through distillation or reverse osmosis, is
the most widely used process for producing fresh water in areas with an
insufficient natural supply. We believe our experience in the development and
operation of distillation and reverse osmosis desalination plants as well as
our exclusive rights in the Caribbean to the DWEER energy recovery system
provides us with a significant opportunity to successfully expand our
operations beyond the markets in which we currently operate. Prior to our acquisition of Ocean Conversion (Cayman) Limited in February
2003, the market that we serviced under our exclusive license in the Cayman
Islands consisted of Seven Mile Beach and 14




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West Bay, Grand Cayman, two of the three most populated areas in the Cayman
Islands. The Cayman Islands Government, through Water Authority-Cayman,
supplies water to parts of Grand Cayman, which are not within our licensed
area, as well as to Little Cayman and Cayman Brac. As a result of our
acquisition of Ocean Conversion (Cayman) Limited, we operate all the reverse
osmosis desalination plants of Water Authority-Cayman on Grand Cayman and
supply water under licenses and supply agreements held by Ocean Conversion
(Cayman) Limited with Water-Authority Cayman. According to the most recent figures published by the Economics and
Statistics Office of the Cayman Islands Government, the population of the
Cayman Islands was approximately 39,410 in 1999. The figures published by the
Cayman Islands Government Department of Tourism show that for the year ended
December 31, 2003, the tourist air arrivals decreased by 3% and tourists cruise
ship arrivals increased 16% from the prior year. Total visitors increased to
2.1 million persons for the year ended December 31, 2003 from 1.9 million
during the year ended December 31, 2002. We believe that our water sales in
the Cayman Islands are more positively impacted by tourists that arrive by air
than by those arriving by cruise ship, since cruise ship tourists generally
only remain on island for one day or less. During 2003, construction progresses markedly within our franchise area on
the 360-room Ritz Carlton Hotel, condominiums and golf course development. The
developer of this project has announced an anticipated completion date of
December 2004. We are not currently aware of any similar large developments in
the final planning stages or under construction within our service area in the
Cayman Islands. During 2002, the government of the Cayman Islands amended the Development
and Planning Law to permit construction of buildings up to seven stories in
certain zones within our franchise area, including commercial and hotel zones.
Previously, buildings in these zones were only permitted to be built to five
stories. We believe that this change in the law will facilitate the
development of certain properties within our franchise area that may have
otherwise not developed under the old height restriction, and it has already
facilitated the re-development of one existing property, which has been
demolished and re-built as a seven-story structure. Our current operations in Belize are located on Ambergris Caye, which
consists of residential, commercial and tourist properties in the town of San
Pedro. This town is located on the southern end of Ambergris Caye. Ambergris
Caye is one of many islands located east of the Belize mainland and off the
southeastern tip of the Yucatan Peninsula. Ambergris Caye is approximately 25
miles long and, according to the Belize National Population Census 2000, has a
population of about 4,500 residents, which has increased approximately 144%
over the past ten years. We provide bulk potable water to Belize Water Services
Limited which distributes this water to this market. Belize Water Services
Limited (BWSL) currently has no other source of potable water on Ambergris
Caye. Our new contract with BWSL makes us the exclusive producer of
desalinated water on Ambergris Caye though 2026. A 185 mile long barrier reef, which is the largest barrier reef in the
Western Hemisphere, is situated just offshore of Ambergris Caye. This natural
attraction is becoming a choice destination for scuba divers and tourists.
According to information published by the Belize Trade and Investment
Development Service, tourism is Belizes second largest source of foreign
income, next to agriculture. Our current operations in the Bahamas are located on South Bimini Island
and in New Providence. The Bimini Islands consist of North Bimini and South
Bimini, and are two of 700 islands which comprise the Bahamas. The Bimini
Islands are located approximately 50 miles east of Ft. Lauderdale, Florida and
are a premier destination for sport fishing enthusiasts. The population of the
Bimini Islands is approximately 1,600 persons and the islands have about 200
hotel and guest rooms available for tourists. The total land area of the Bimini
Islands is approximately 9 square miles. 15




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New Providence, Lyford Caye and Paradise Island, connected by several
bridges, are located approximately 150 miles east southeast of the Bimini
Islands. With an area of 151 square miles and a population of approximately
211,000, Nassau is the political capital and the commercial hub of the Bahamas.
As the largest city with its famed Cable Beach, it accounts for more than
two-thirds of the four million tourists who visit the Bahamas annually. New
Providence is presently experiencing intermittent water shortages and imports
about one-half of its water from Andros Island, which lies about 35 miles west
of New Providence. The British Virgin Islands, like the Cayman Islands, are an Overseas
Territory of the United Kingdom and are situated east of Puerto Rico. They
consist of 16 inhabited and more than 20 uninhabited islands, of which Tortola
is the largest and most populated island. The islands are the center for many
large yacht-chartering businesses. Barbados, located northeast of Venezuela between the Caribbean Sea and the
North Atlantic Ocean, is an independent sovereign nation member of the British
Commonwealth. It has a population of approximately 277,000 and was
traditionally known for its cultivation of sugar cane. More recently, the
economy has diversified to include tourism and light manufacturing. Growth Strategy Our strategy is to provide water services in areas where the supply of
potable water is scarce. We have focused on the Caribbean basin and adjacent
areas as our principal market because these areas have: little or no naturally
occurring fresh water; limited local regulations and taxes allow for higher
returns than most highly regulated countries; and a large proportion of tourist
properties, which historically have generated higher volume sales than
residential properties. Our growth strategy is as follows:  
    
    We intend to continue to develop our production and
distribution infrastructure and provide high quality potable water
to our licensed area in the Cayman Islands. We have increased our
share of the potable water market in the Cayman Islands as a result
of our purchase of the Britannia plant and recent acquisition of
Ocean Conversion (Cayman). We also intend to explore the feasibility
of either acquiring or obtaining the license from the Cayman Island
government to operate Water Authority-Cayman, which supplies water
to parts of Grand Cayman, Little Cayman and Cayman Brac.
    
    We intend to expand our existing operations in the Cayman
Islands, Belize, Barbados, the British Virgin Islands and the
Commonwealth of the Bahamas. For example, through negotiations with
Belize Water Services Limited, we have extended the term of our
agreement to 23 years and increased the guaranteed minimum
quantities supplied. We intend to seek new water supply agreements
for other areas in Belize. Similarly, as the development of resort
properties in Bimini continues, we expect to sell more water to
additional customers further utilizing our current plant until the
installation of a larger plant becomes necessary. We also believe
that the water supply needs in New Providence, Bahamas are growing
and we are pursuing two new opportunities to produce and sell more
water in New Providence. In the British Virgin Islands, we expanded
the capacity of our existing plant on the island of Tortola from 1.2
million to 1.7 million U.S. gallons per day, and we are constructing
a second plant on the island of Tortola.
    
    We intend to expand our operations to other markets outside
of our current areas of operation where there is need for potable
water. In addition to our recent acquisitions, we are currently
involved in preliminary discussions to operate water-making plants
and to supply water in other new markets and may pursue these
opportunities either on our own or through joint 16




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##### Table of Contents



ventures. So far, we have focused on various locations throughout the
Caribbean basin and Central America.
    
    We intend to broaden our existing and future operations into
complementary services. Prior to the installation of a central
wastewater system by the Cayman Islands government, we provided
wastewater services on Grand Cayman. We may reenter this field in
the Cayman Islands and intend to use our expertise to provide such
services outside of the Cayman Islands. Reverse Osmosis Technology The conversion of saltwater to potable water is called desalination. There
are two primary forms of desalination: distillation and reverse osmosis. Both
methods are used throughout the world and technologies are improving to lower
the costs of production. Reverse osmosis is a separation process in which the
water from a pressurized saline solution is separated from the dissolved
material by passing it over a semi-permeable membrane. An energy source is
needed to pressurize the saline (or feed) water for pretreatment, which
consists of fine filtration and the addition of precipitation inhibitors.
Pre-treatment removes suspended solids, prevents salt precipitation and keeps
the membranes free of microorganisms. Next, a high-pressure pump enables the
water actually to pass through the membrane, while salts are rejected. The feed
water is pumped into a closed vessel where it is pressurized against the
membrane. As a portion of the feed water passes through the membrane, the
remaining feed water increases in salt content. This remaining feed water is
discharged without passing through the membrane. As the discharged feed water
leaves the pressure vessel, its energy is captured by an energy recovery device
which is used to pressurize incoming feed water. The final step is
post-treatment, which consists of stabilizing the water, removing hydrogen
sulfide and adjusting the pH and chlorination to prepare it for distribution. We use reverse osmosis technology to convert seawater to potable water. We
believe that this technology is the most effective and efficient conversion
process for our market. However, we are always seeking ways to maximize
efficiencies in our current processes and to investigate new more efficient
processes to convert seawater to potable water. The equipment at our plants is
among the most energy efficient available and we monitor and maintain our
equipment in an efficient manner. As a result of our years of experience in
seawater desalination, we believe that we have an expertise in the development
and operation of desalination plants which is easily transferable to locations
outside of our current operating areas. In addition, DesalCo Limited, our recently acquired wholly-owned
subsidiary, is the exclusive distributor in the Caribbean basin for the DWEER
system produced by DWEER Technology Limited for use in reverse osmosis seawater
desalination plants. An advanced energy recovery system, the DWEER system is
utilized to efficiently recover energy from the high-pressure brine that is the
by-product of the reverse osmosis desalination process. Unlike pump/turbine
systems used in many desalination plants around the world, the DWEER system
recovers nearly 100% of the energy contained in the reject water (or brine)
from the reverse osmosis process. As a result, the DWEER energy recovery
system for reverse osmosis seawater desalination plants is one of the most
energy efficient systems of its kind. The DWEER system is used on all
desalination plants that DesalCo Limited has designed since 1990. As a result
of the completion of the DesalCo Limited acquisition in February 2003, our
company has the exclusive distribution rights for the DWEER system in the
Caribbean basin through October 2009. 17




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Raw Materials and Sources of Supply All materials, parts and supplies essential to our business operations can
normally be obtained from multiple sources, except for the DWEER energy
recovery devices which are exclusively manufactured by Calder AG, a Swiss
company, and which we use at all of our plants with the exception of the Belize
and Britannia plants. We have obtained, through our subsidiary DesalCo Limited,
a seven-year exclusive distributorship agreement with Calder AG for the DWEER
system. We do not manufacture any parts or components for equipment essential
to our business. Our access to seawater for processing into potable water is
granted through our licenses and contracts with governments of the various
jurisdictions in which we have our operations. Licenses, Franchises and Concessions Our exclusive operational license was issued to us by the Cayman Islands
government under The Water (Production and Supply) Law of 1979. Unless renewed,
the license terminates on July 11, 2010. Two years prior to the expiration of the license, we have the right to
negotiate with the government to extend the license for an additional term.
Unless we are in default under the license, the government may not grant a
license to any other party without first offering the license to us on terms
that are no less favorable than those which the government offers to a third
party. We must provide, within our licensed area, any requested piped water
service that, in the opinion of the Executive Council of the Cayman Islands
government, is commercially feasible. Where supply is not considered
commercially feasible, we may require the potential customer to contribute
toward the capital costs of pipe-laying. We then repay these contributions to
the customer, without interest, by way of a 10% discount on future billings for
water sales until this advance in aid of construction has been repaid. We have
been installing additional pipeline when we consider it to be commercially
feasible, and the Cayman Islands government has never objected to our
determination regarding commercial feasibility. Under our exclusive license, we pay a royalty to the government of 7.5% of
our gross water sales revenue. Other than the selling prices provided in our
agreements with the Westin Hotel, the Hyatt Hotel and Britannia Golf Course and
SafeHaven Golf Course, the selling price of water under the license varies
depending upon the type and location of the customer and the monthly volume of
water purchased. The license provides for an automatic adjustment for inflation
or deflation on an annual basis, subject to temporary limited exceptions, and
an automatic adjustment for the cost of electricity on a monthly basis. The
Water Authority-Cayman, on behalf of the government, reviews and approves the
calculations of the price adjustments for inflation and electricity costs. If we want to adjust our prices for any reason other than inflation or
electricity costs, we have to request prior approval of the Executive Council
of the Cayman Islands government. If the parties fail to agree, the matter is
referred to arbitration. The last such price increase that we requested was
granted in full in June 1985. Seasonal Variations in Our Business Although, our water sales in the Cayman Islands, Belize and Bimini are
seasonal, the variations between the periods are not significant. We normally
sell more water during the first and second quarters when greater numbers of
tourists are present. Our sales are also affected to some extent by the
weather. We sell less water during the third and fourth quarters, which
normally experience higher rainfall amounts than other times of the year. We
do not believe that our operations in Nassau and Tortola will be subject 18




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to significant seasonal variations in demand. Our operation in Barbados
has been subject to seasonal demand variations since Sandy Lane finished the
grow-in of the grass on their three golf courses in early 2003. Competition We do not compete with other utilities within our licensed area in the
Cayman Islands. Although we have been granted an exclusive franchise for our
present service area, our ability to expand our service area is limited at the
discretion of the government. At the present time, we are the only
non-municipal public water utility on Grand Cayman. The Cayman Islands
government, through Water Authority-Cayman, supplies water to parts of Grand
Cayman which are not within our licensed area. On Ambergris Caye in Belize, our new water supply contract with Belize
Water Services Limited is exclusive, and Belize Water Services Limited can no
longer seek contracts with other water suppliers, or produce water themselves,
to meet their future needs in San Pedro, Ambergris Caye, Belize. On South Bimini Island in the Bahamas, we supply water to a private
developer and do not have competitors. AquaDesign, an Ionics Inc. company,
operates a seawater desalination plant on North Bimini Island. We are aware
that AquaDesign/Ionics, Enerserve/Vivendi, IDE, Pridesa, Inima and Biwater are
competing with us for a new contract with the Bahamian government to build and
operate a seawater desalination plant at Blue Hills, New Providence, Bahamas.
We expect to compete with these companies in the future for similar projects. AquaDesign operates seawater desalination plants in West End and Sea Cows
Bay, Tortola, and on Virgin Gorda in the British Virgin Islands and generally
bids against Ocean Conversion (BVI) Ltd. for projects. There are currently
water shortages in certain areas of Tortola, particularly on the eastern end of
the island, and we believe that additional desalination plants will be required
to alleviate these shortages. Ocean Conversion (BVI) Ltd. is currently
designing a seawater desalination plant to be constructed on a site already
identified in East End, Tortola. DesalCo (Barbados) Ltd., the wholly-owned subsidiary of DesalCo Limited,
operates a seawater desalination plant which provides irrigation water for
several golf courses on the Sandy Lane Resort in St. James, Barbados. Ionics
Inc. competed with us for this operating agreement. We expect that Ionics and
other companies of comparable size and financial resources will compete with us
for future agreements with the Sandy Lane Resort as well as any other
agreements which we may seek in Barbados. To implement our growth strategy outside our existing operating areas, we
will have to compete with the same companies we are presently competing with
for the Blue Hills project in Nassau, Bahamas. These companies currently
operate in areas in which we would like to expand our operations. These
companies already maintain world-wide operations and have greater financial,
managerial and other resources than our company. We believe that our low
overhead costs, knowledge of local markets and conditions, exclusive rights in
the Caribbean to the DWEER energy recovery system and our efficient manner of
operating desalinated water production and distribution equipment will provide
us competitive advantage on projects, ranging in size up to 8 million U.S.
gallons per day, in the Caribbean basin and surrounding areas. Environmental Matters With respect to our Cayman Islands operations, although not required by
local government regulations, we operate our water plants in accordance with
guidelines of the Cayman Islands Department of Environment. Under these
guidelines, our plants may not have emissions of hydrogen sulfide at levels
greater than 20 milligrams per liter at the exit of the air scrubbers. We are
licensed by the government to 19




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##### Table of Contents



discharge concentrated seawater, which is a byproduct of our desalination
process, into deep disposal wells. Our Cayman Islands license requires that our potable water quality meet
the World Health Organizations Guidelines for Drinking Water Quality and
contain less than 200 mg/l of total dissolved solids. On February 1, 2003, we
entered into a license amendment with the government under which we were
required by October 1, 2003 to improve the aesthetic quality of our potable
water supply in our licensed area to the same quality as that supplied by Ocean
Conversion (Cayman) Limited to Water Authority-Cayman. We completed upgrades
to our Governors Harbour, West Bay and Britannia plants before the October 1st
deadline, and we meet all of the water quality requirements in our Cayman
license. In addition, noise levels at our plants cannot exceed the standards
established by the U.S. Occupational Safety and Health Act. To date, we have
not received any complaints from any regulatory authorities concerning hydrogen
sulfide emissions. With respect to our Belize, Bahamas and British Virgin Islands operations,
we are required by our water supply contracts to take all reasonable measures
to prevent pollution of the environment. We are licensed by the Belize and
Bahamian governments to discharge concentrated seawater, which is a byproduct
of our desalination process, into deep disposal wells, and by British Virgin
Islands government to discharge concentrated seawater into the coastal marine
environment. We operate our plants in a manner so as to minimize the emission
of hydrogen sulfide gas into the environment. We are not aware of any existing
or pending environmental legislation which may affect our operations in Belize,
the Bahamas and the British Virgin Islands. To date we have not received any
complaints from any regulatory authorities regarding hydrogen sulfide gas
emission, nor any other matter relating to operations. In Barbados, we operate a seawater desalination plant for Sandy Lane
Properties Ltd., who holds all of the government and environmental permits
relating to the construction and operation of the plant. We are not aware of
any existing or pending environmental legislation which may affect our
operations in Barbados. Employees Including employees from our acquisitions in February 2003, we employ 55
persons in the Cayman Islands, seven of whom are executive and management
personnel who have an average of 15 years experience with our company or in a
directly related position. Ten employees are engaged in administrative and
clerical positions. The remaining staff are engaged in engineering, plant
maintenance and operations, pipe laying and repair, leak detection, new
customer connections, meter reading and laboratory analysis of water quality.
Our staff has significant experience and on average has worked with us for
eight years, with three of the employees having worked over 20 years with us.
We presently employ six persons in Belize to manage and operate our plant.
Waterfields Company Limited presently employs eight persons to operate the
plant in New Providence, Bahamas. We directly employ one person to manage and
operate our water plant and distribution system in South Bimini, Bahamas. We
presently employ five persons in Barbados to operate the water plant for Sandy
Lane Properties. Currently, we manage the five employees of Ocean Conversion
(BVI) Ltd. in the British Virgin Islands. None of our employees is party to a
collective bargaining agreement. We consider our relationship with our
employees to be good. 20




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ITEM 2. PROPERTIES Cayman Island Properties Governors Harbour Plant We own our Governors Harbour plant and the 8,745 square feet of buildings
which contain the water treatment facility, and operate and maintain the plant
through our wholly-owned subsidiary Ocean Conversion (Cayman) Limited. The
plant is located on 3.2 acres, including 485 feet of waterfront. The current
water production capacity of our Governors Harbour plant is 1.2 million U.S.
gallons per day. On this site we also have three 1.0 million U.S. gallon
potable water storage tanks, which were constructed in 2003 to replace our
previous 2.0 million U.S. gallon fabric-lined storage tanks. The property
surrounding the facility has yet to be fully developed, although these areas
are being developed for residential and tourist accommodations. West Bay Plant We own, operate and maintain our West Bay plant in Grand Cayman, which is
located on 6.1 acres in West Bay. The plant began operating on June 1, 1995 and
was expanded in February 1998 and again in February 2000. On this site, we have
a 2,600 square foot building which houses our water production facilities, a
2,400 square foot building which houses the potable water distribution pumps, a
water quality testing laboratory, office space and water storage capacity
consisting of three 1.0 million U.S. gallon potable water tanks. The current
capacity of our West Bay plant is 710,000 U.S. gallons per day. Britannia Plant On February 1, 2002, we purchased the Britannia seawater desalination
plant in Grand Cayman, which consists of four seawater reverse osmosis
production units with a combined nominal production capacity of 440,000 U.S.
gallons of water per day, an 840,000 U.S. gallon bolted steel water tank,
potable water high service pumps, and various ancillary equipment to support
the operation. We have entered into a lease of the 0.73 acre site and steel
frame building which houses the plant, from Cayman Hotel and Golf Inc., for a
term of 25 years at an annual rent of $1.00. Distribution System We own our Seven Mile Beach and West Bay potable water distribution
systems in Grand Cayman. The combined systems consist of approximately 67
miles of polyvinyl chloride and polyethylene water pipes, valves, curb stops,
meter boxes, and water meters installed in accordance to accepted engineering
standards in the United States of America. Leased Properties In addition to the properties where our water plants are located, we rent
approximately 4,350 square feet of space for our executive offices at Trafalgar
Place, West Bay Road, Grand Cayman under a lease which expires on January 31,
2008, with an extension provision until January 31, 2010. Operations Acquired as a Result of Our Recent Acquisition of Ocean Conversion (Cayman) Limited Following completion of our acquisition of all of the outstanding stock of
each of DesalCo 21




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Limited and Ocean Conversion (Cayman) Limited, we assumed operational
control over four water production plants in the Cayman Islands, one of which
we already owned, but had contracted with Ocean Conversion (Cayman) Limited to
operate until December 2004. Red Gate Road Plant Under the terms of the water production and supply license between Ocean
Conversion (Cayman) Limited and the government of the Cayman Islands, Ocean
Conversion (Cayman) Limited is allowed to use the property on which the plant
is located to produce approximately 1.3 million U.S. gallons of desalinated
water per day for sale to the Water Authority-Cayman. Ocean Conversion
(Cayman) Limited owns all of the buildings, equipment feed water wells and
brine disposal wells with the exception of the piping from the wells to the
plant (including feed water and brine disposal) and the main electrical service
disconnect, both of which are owned by Water Authority-Cayman. The property on
which the plant is located is also owned by Water Authority-Cayman. The plant
was originally powered only by electricity, but was upgraded in 1994 to include
diesel driven high-pressure pumps. The original electric driven pumps are
still in place as backups, although the electric pumps alone are not capable of
powering the plant at the full production rate. Upon expiration of the water
production and supply license on November 30, 2008, Water Authority-Cayman will
take possession of the plant for no consideration. This license was extended in
November 2001 for a period of seven years and no further extension options are
included in the present license. Lower Valley Plant Ocean Conversion (Cayman) Limited provided the plant and equipment to
Water Authority-Cayman under a seven-year vendor-financed sale and operating
agreement. Ocean Conversion (Cayman) Limited operates the electrically-powered
850,000 U.S. gallons per day rated plant and supplies approximately 792,000
U.S. gallons of desalinated water per day to Water Authority-Cayman. Ocean
Conversion (Cayman) Limited leases the property on which the plant is located
from Water Authority-Cayman for a minimal annual rent for the duration for the
sale and operating agreement, which expires on March 9, 2006, but which
contains a provision to extend the operating portion of the agreement for an
additional period. Responsibility for operation of the plant passes to Water
Authority-Cayman upon expiration of the lease-purchase and operating agreement.
No further expansions of the plant are possible due to the restrictive size of
the site and special considerations related to the feed water and brine
disposal wells. North Sound Plant Construction of this plant commenced in June 2002 and was completed in
November 2002. Ocean Conversion (Cayman) Limited provided the plant and
equipment to Water Authority-Cayman under a seven-year vendor-financed sale and
operating agreement. Ocean Conversion (Cayman) Limited operates the
electrically powered plant and supplies approximately 792,000 U.S. gallons of
desalinated water per day to Water Authority-Cayman. Ocean Conversion (Cayman)
Limited leases the property on which the plant is located from Water
AuthorityCayman for a minimal annual rent, for the duration of the sale and
operating agreement. Responsibility for operation of the plant passes to Water
Authority-Cayman upon expiration of the sale and operating agreement on
November 28, 2009. Management Services Agreement The management services agreement between DesalCo Limited and Ocean
Conversion (Cayman) Limited was terminated on December 1, 2003. Our company
now provides management and engineering resources directly to its wholly-owned
subsidiary, Ocean Conversion (Cayman) Limited. 22




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Belize Properties We own our San Pedro water production facility in Ambergris Caye, Belize.
The plant consists of a one story concrete block building, which contains a
seawater RO water production plant with a production capacity of 420,000 US
gallons per day. We lease from the Government of Belize at an annual rent of
BZ$1.00, the parcel of land on which our plant is located. The lease commenced
on April 27, 1993 and was recently extended for a term of 33 years. Bahamas Properties We own our Bahamas water production facility in South Bimini, Bahamas. The
plant consists of two 40 foot long standard refrigerated shipping containers,
which contain a seawater RO water production plant with a rated capacity of
115,000 US gallons per day, a 250,000 US gallon bolted steel potable water
tank, and a high service pump skid. The facility is located on a parcel of
land owned by South Bimini International Ltd., and we are allowed, under the
terms of our water supply agreement, to utilize the land for the term of the
agreement, without charge. We own our Bahamas water production facility in Nassau, New Providence,
Bahamas. The plant consists of four independent seawater reverse osmosis
units, each with a production capacity of 700,000 U.S. gallons of water per
day, a brackish water reverse osmosis plant with a production capacity of 2.6
million U.S. gallons per day, feed water deep wells, brine injection wells,
fuel storage tanks, and other ancillary equipment. All of the seawater units
feed their product into the brackish water unit which produces water for the
Water and Sewerage Corporation of the Bahamas containing less than 50 mg/l of
total dissolved solids. The plant is powered by a combination of diesel
engine-driven high pressure pumps, and electrical power purchased from the
Bahamas Electricity Corporation to power all other loads in the plant. The
plant is contained within a 13,000 sq. ft. concrete and steel building, which
also contains a warehouse, workshop and offices. The plant is located on land
owned by the Water and Sewerage Corporation of the Bahamas and our fifteen-year
water sales agreement gives us a license to use the land throughout the term of
that agreement. 
 ITEM 3. LEGAL PROCEEDINGS We are not currently a party to any ongoing or pending legal proceeding. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of the fiscal year
covered by this Annual Report to a vote of security holders, through the
solicitation of proxies or otherwise. 23




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PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information Our ordinary shares of common stock (ordinary shares) are listed on the
Nasdaq National Market and trade under the symbol CWCO. Our ordinary shares
are not traded on any market other than the Nasdaq National Market. Listed
below, for each quarter of the last two fiscal years, are the high and low
closing bid prices for the ordinary shares on the Nasdaq National Market. HIGH
    
    LOWFirst Quarter 2002
    
    
    14.75
    
    
    
    11.49Second Quarter 2002
    
    
    15.10
    
    
    
    13.13Third Quarter 2002
    
    
    15.20
    
    
    
    11.24Fourth Quarter 2002
    
    
    14.74
    
    
    
    11.58First Quarter 2003
    
    
    15.47
    
    
    
    13.77Second Quarter 2003
    
    
    15.91
    
    
    
    13.50Third Quarter 2003
    
    
    17.75
    
    
    
    14.02Fourth Quarter 2003
    
    
    20.98
    
    
    
    17.37
 The high and low closing bid prices in the table reflect interdealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions. There is no trading market for our redeemable preferred shares, which are
only issued to, or purchased by, long-term employees of our company and which
must be held by these employees for a period of four years before they vest. On
December 31, 2003, we issued options to purchase an additional
165,752
ordinary shares having an exercise price of $20.05 to two directors and three
executive officers. These options are exercisable until April 7, 2007. The
options issued on December 31, 2003 were exempt from registration under
Regulation S promulgated under the Securities Act of 1933 because the options
were offered and sold outside of the United States to non-U.S. persons, as
defined in Regulation S. All of the options were issued as consideration for
services that the directors and the executive officer provided to us during
fiscal year 2003. Holders On March 29, 2004, we had 654 holders of record of our ordinary shares. Dividends We have paid cash dividends on our ordinary shares since 1985. The board
of directors policy is to pay cash dividends out of accumulated profits on a
quarterly basis, if funds are available. Our board of directors have
established a policy, although not a binding obligation, that, subject to
annual review by the board of directors, our company will maintain a dividend
pay-out ratio in the range of 50% to 60% of 24




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net income. Our payment of any future cash dividends, however, will still
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 from current cash flow. The board of
directors declares and approves all interim dividends. It is a requirement of
our Articles of Association for the board of directors to seek shareholder
approval of the final dividend, if any, at the annual meeting of our
shareholders. Listed below, for each quarter of the last two fiscal years, is the amount
of interim dividends, in U.S. dollars, declared on our issued and outstanding
ordinary shares and redeemable preferred shares. No final dividend was
declared during the last two fiscal years. First Quarter 2002
    
    
    0.105
    
    
    Per ShareSecond Quarter 2002
    
    
    0.105
    
    
    Per ShareThird Quarter 2002
    
    
    0.105
    
    
    Per ShareFourth Quarter 2002
    
    
    0.105
    
    
    Per ShareFirst Quarter 2003
    
    
    0.105
    
    
    Per ShareSecond Quarter 2003
    
    
    0.105
    
    
    Per ShareThird Quarter 2003
    
    
    0.105
    
    
    Per ShareFourth Quarter 2003
    
    
    0.105
    
    
    Per Share
 On February 10, 2004 our board of directors declared an interim cash
dividend of $0.115 per share, an increase of approximately 10%, payable on
April 30, 2004 to shareholders of record on March 31, 2004. Exchange Controls and Other Limitations Affecting Security Holders Our company is not subject to any governmental laws, decrees or
regulations in the Cayman Islands which restrict the export or import of
capital, or that affect the remittance of dividends, interest or other payments
to non-resident holders of our securities. The Cayman Islands does not impose
any limitations on the right of non-resident owners to hold or vote our
ordinary shares other than stated below. There are no exchange control
restrictions in the Cayman Islands. Taxation The Cayman Islands presently impose no taxes on profit, income,
distribution, capital gains, or appreciations of our company and no taxes are
currently imposed in the Cayman Islands on profit, income, capital gains, or
appreciations of the holders of our securities or in the nature of estate duty,
inheritance, or capital transfer tax. There is no income tax treaty between the
United States and the Cayman Islands. As discussed in Part I, Item 1, we were subject in the Cayman Islands to a
stamp tax when our shares are transferred. Prior to our ordinary shares
becoming quoted in the United States, we paid this tax on private share
transfers. We have never paid the tax on transfers of our publicly traded
shares. Since 1994, we requested that the Cayman Islands government exempt us
from the share transfer tax. On April 10, 2003, we received notice that the
Cayman Islands government had granted an exemption from taxation for all
transfers of our shares. We believe it is unlikely that government will seek to
collect this tax on transfers of our publicly traded shares during the period
1994 through April 10, 2003. 25




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ITEM 6. SELECTED FINANCIAL DATA As a result of a management decision we have voluntarily adopted
accounting principles generally accepted in the United States of America
(US-GAAP) effective January 1, 2000. Previously, annual financial statements
were prepared in accordance with International Accounting Standards (IAS).
As a result all prior periods financial information presented in the selected
financial data have been prepared in accordance with US-GAAP. The consolidated financial statements include the accounts of the
Companys wholly-owned subsidiaries Cayman Water Company Limited, Belize Water
Limited, Ocean Conversion (Cayman) Limited, DesalCo Limited, DesalCo (Barbados)
Ltd, and its majority owned subsidiary Waterfields Company Limited. The
operating results of Ocean Conversion (Cayman) Limited, DesalCo Limited,
DesalCo (Barbados) Ltd. have been included in the consolidated financial
statements effective February 1, 2003. The operating results of Waterfields
Company Limited have been included in the financial statements effective August
1, 2003. All inter-company balances and transactions have been eliminated. Set forth below is selected financial data based upon our consolidated
financial statements. The table contains information, expressed in US dollars,
derived from our audited consolidated financial statements for the five-year
period ended December 31, 2003. This selected financial data should be read in
conjunction with the more detailed financial statements and related notes
thereto contained elsewhere in this Annual Report. The audited consolidated
financial statements for the years ended December 31, 2000 and 1999 and
accountants reports thereon are not included in this Annual Report. YEAR ENDED DECEMBER 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Statement of Income Data:Revenue
    
    $
    19,054,205
    
    
    $
    12,154,689
    
    
    $
    11,248,105
    
    
    $
    9,795,751
    
    
    $
    7,936,118Net Income (1)
    
    
    4,177,081
    
    
    
    2,576,310
    
    
    
    2,764,573
    
    
    
    2,404,820
    
    
    
    1,569,717Balance Sheet Data:Total Assets
    
    
    68,562,126
    
    
    
    25,507,637
    
    
    
    22,721,178
    
    
    
    21,845,672
    
    
    
    16,431,321Long Term Debt Obligation
    
    
    16,633,437
    
    
    
    2,074,609
    
    
    
    1,213,804
    
    
    
    1,131,986
    
    
    
    1,926,786Redeemable preferred stock
    
    
    16,302
    
    
    
    23,688
    
    
    
    30,234
    
    
    
    40,361
    
    
    
    49,270Dividends Declared Per Share
    
    
    0.42
    
    
    
    0.42
    
    
    
    0.40
    
    
    
    0.34
    
    
    
    0.20Basic Earnings Per Share
    
    
    0.85
    
    
    
    0.65
    
    
    
    0.71
    
    
    
    0.68
    
    
    
    0.51Based on Number of Shares
    
    
    4,917,183
    
    
    
    3,969,861
    
    
    
    3,897,969
    
    
    
    3,532,501
    
    
    
    3,044,293Diluted Earnings Per Share
    
    
    0.83
    
    
    
    0.63
    
    
    
    0.69
    
    
    
    0.67
    
    
    
    0.49Based on Weighted Number of Shares
    
    
    5,037,530
    
    
    
    4,087,532
    
    
    
    3,999,691
    
    
    
    3,616,271
    
    
    
    3,188,048
  (1)
    
    Net Income represents income after a cumulative change in
accounting principle in 1999 of $117,576 as Statement of Position 98-5
Reporting on the Costs of Start-Up Activities requires start up costs
to be expensed as incurred rather than deferred. 26




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Our objective is to provide water services in areas where the supply of
potable water is scarce and where the use of RO technology to produce potable
water is economically feasible. By focusing on this market, we believe that we
can provide a superior financial return to our investors. To increase share
value and maintain dividend payouts in accordance with current company policy,
we need to expand our revenues by developing new business opportunities both
within our current service areas, and in new areas. We need to maintain our
high operating efficiencies by adhering to our strict equipment maintenance and
water loss mitigation programs in order to achieve gross profit margins between
40% and 45%. We further believe that many Caribbean basin and adjacent
countries, while being water scarce, also present opportunities for operation
of our plants in limited regulatory settings which are less restrictive than
the highly regulated markets of North America, which promotes cost effective
operation of our equipment. Our business operations and activities after our acquisitions in February
2003, are conducted in five countries: the Cayman Islands, Belize, Barbados,
the British Virgin Islands and the Bahamas. The recent acquisitions increase
our daily water production capacity in the Cayman Islands and the Bahamas and
expand our geographic presence to include Barbados and the British Virgin
Islands. Operations Before and After Recent Acquisitions Operations Before Recent Acquisitions
    
    Operations After Recent AcquisitionsLocation
    
    Plants
    
    Capacity*
    
    Location
    
    Plants
    
    Capacity*Cayman Islands
    
    
    3
    
    
    
    2.4
    
    
    Cayman Islands
    
    
    6
    
    
    
    5.3Bahamas
    
    
    1
    
    
    
    0.1
    
    
    Bahamas
    
    
    2
    
    
    
    2.7Belize
    
    
    1
    
    
    
    0.4
    
    
    Belize
    
    
    1
    
    
    
    0.4Barbados
    
    
    1
    
    
    
    1.3British Virgin Islands
    
    
    1
    
    
    
    1.2Total
    
    
    5
    
    
    
    2.9
    
    
    Total
    
    
    11
    
    
    
    10.9
 *Million U.S. gallons of water per day. Cayman Islands We have been operating our business on Grand Cayman Island since 1973 and
have been using RO technology to convert seawater to potable water since 1989.
There is a limited natural supply of fresh water on the Cayman Islands. We
currently have an exclusive license from the Cayman Islands government to
process potable water from seawater and then sell and distribute that water by
pipeline to Seven Mile Beach and West Bay, Grand Cayman. Prior to our
acquisition of Ocean Conversion (Cayman) Limited, our Cayman Islands operations
consisted of three reverse osmosis seawater conversion plants in Grand Cayman:
the Governors Harbour plant, the West Bay plant and the Britannia plant. The
combined capacity of these plants is 2.4 million U.S. gallons per day. Our
pipeline system in the Cayman Islands covers the Seven Mile Beach and West Bay
areas of Grand Cayman and consists of approximately 67 miles of polyvinyl
chloride pipe. Retail water sales in Grand Cayman are made within our licensed
area 27




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to approximately 3,300 customers. During 2003, we supplied approximately 543
million U.S. gallons of water to our Retail water customers in Grand Cayman. As a result of our recent acquisition of Ocean Conversion (Cayman)
Limited, we now operate an additional three reverse osmosis seawater conversion
plants in Grand Cayman with a total installed capacity of 2.9 million U.S.
gallons per day. Ocean Conversion (Cayman) Limited provides water on a take or
pay basis to the Water Authority-Cayman, a government regulatory agency, under
various licenses and agreements. During 2003, we supplied approximately 646
million U.S. gallons of water to our Bulk water customer in Grand Cayman. DesalCo Limited provides management, engineering and construction services
for desalination projects and is the exclusive agent for sales of DWEER energy
recovery systems for desalination plants in the Caribbean basin for the next
seven years. DesalCo Limited, which is recognized by suppliers as an original
equipment manufacturer, also acts as the purchasing agent for all companies
affiliated with our company. Belize Our Belize operation, which was acquired on July 21, 2000, consists of one
reverse osmosis seawater conversion plant on Ambergris Caye, Belize, Central
America, which is capable of producing 420,000 U.S. gallons per day. We sell
water to one customer, Belize Water Services Limited, which then distributes
the water through its own distribution system to residential, commercial and
tourist properties on Ambergris Caye. During 2003, we supplied approximately
100 million U.S. gallons of water to our Bulk water customer in Belize. Bahamas Prior to our acquisition of operational control of Waterfields Company
Limited, our Bahamas operations consisted of one reverse osmosis seawater
conversion plant in Bimini, Bahamas. Our Bimini plant is capable of producing
115,000 U.S. gallons per day and provides potable water to Bimini Sands Resort
and to the Bimini Beach Hotel. During 2003, we supplied approximately 3
million U.S. gallons of water to our retail water customer in Bimini, Bahamas.
We expect the demand for water from our plant in Bimini to increase as
additional phases are completed at the Bimini Sands development. As a result of our acquisition of Waterfields Company Limited, we acquired
an additional reverse osmosis seawater conversion plant in the Bahamas.
Waterfields produces potable water from one reverse osmosis seawater conversion
plant in New Providence and has a total installed capacity of 2.6 million U.S.
gallons per day. Waterfields Company Limited provides water on a take or pay
basis to the Water and Sewerage Corporation of the Bahamas under a long-term
build, own and operate supply agreement. During 2003, we supplied
approximately 247 million U.S. gallons of water to our Bulk water customer in
the Bahamas. Barbados The recently acquired Barbados operation consists of a service agreement
to operate one reverse osmosis seawater conversion plant with a capacity of 1.3
million U.S. gallons per day which is owned by Sandy Lane Resort. This plant
is operated by DesalCo (Barbados) Ltd., the wholly owned subsidiary of DesalCo
Limited. The plant provides water to the Sandy Lane Resort, and during 2003,
we produced approximately 261 million U.S. gallons. 28




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British Virgin Islands We recently entered the market in the British Virgin Islands when our
wholly-owned subsidiary, DesalCo Limited acquired an equity position and shared
management control of Ocean Conversion (BVI) Ltd., which produces potable water
from one reverse osmosis seawater conversion plant in Tortola, British Virgin
Islands. The plant has a total installed capacity of 1.7 million U.S. gallons
per day. Ocean Conversion (BVI) Ltd. provides water to the Department of Water
and Sewerage of the Ministry of Communications and Works of the Government of
the British Virgin Islands. During 2003, we supplied approximately 297 million
U.S. gallons of water to our bulk water customer in the British Virgin Islands. Critical Accounting Policies The preparation of our 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, intangible
assets and goodwill. 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 allowances 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 record allowances 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
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. Our annual impairment tests resulted in no goodwill impairment. 29




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Quarterly Results of Operations The following table presents unaudited quarterly results of operations for
the eight quarters ended December 31, 2003. We believe that all necessary
adjustments, consisting only of normal recurring adjustments, have been
included in the amounts started below to present fairly such quarterly
information. For the year ended December 31, 2003First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    QuarterTotal revenue
    
    $
    4,018,725
    
    
    $
    4,750,381
    
    
    $
    5,004,101
    
    
    $
    5,280,998Gross profit
    
    
    1,944,686
    
    
    
    2,351,485
    
    
    
    2,081,866
    
    
    
    1,999,887Net income
    
    
    1,017,998
    
    
    
    1,013,041
    
    
    
    1,121,298
    
    
    
    1,024,744Diluted earnings per share
    
    
    0.24
    
    
    
    0.23
    
    
    
    0.20
    
    
    
    0.18
 For the year ended December 31, 2002First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    QuarterTotal revenue
    
    $
    3,184,805
    
    
    $
    3,291,929
    
    
    $
    2,915,066
    
    
    $
    2,762,889Gross profit
    
    
    1,518,353
    
    
    
    1,494,795
    
    
    
    1,201,119
    
    
    
    1,058,245Net income
    
    
    926,500
    
    
    
    811,259
    
    
    
    604,769
    
    
    
    233,782Diluted earnings per share
    
    
    0.23
    
    
    
    0.20
    
    
    
    0.15
    
    
    
    0.06
 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. 30




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Results of Operations
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 Revenue Total revenue increased by 56.8% from $12,154,689 to $19,054,205 for the
year ended December 31, 2003 when compared to the same period in 2002. Revenue from our retail water (Retail) operations increased by 2.2% from
$10,683,592 to $10,918,151 for the year ended December 31, 2002 and 2003,
respectively. Sales in our primary market in the Cayman Islands were generally
flat during the year, although we did experience an increase in sales of 13.2%
during the fourth quarter of 2003 over the same period in the prior year. Revenue from our bulk water (Bulk) operations increased by 378.9% from
$1,471,097 to $7,045,761 for the year ended December 31, 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 15.3% decrease in our bulk water sales in Belize for the year ended
December 31, 2003. Revenue from services (Services) was $1,090,293 for the year ended
December 31, 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 $52,198 to income
of $182,748 for the year ended December 31, 2003 when compared to the same
period 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,
amortization of bank fees 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 and we expect amortization of
bank fees to decrease because we have fully amortized all fees relating to our
bridge financing that was used to complete our recent acquisition.. Cost of Sales Total cost of sales increased by 55.1% from $6,882,177 to $10,676,281 for
the year ended December 31, 2003 when compared to the same period in 2002.
During this same period, our total revenue increased by 56.8%. Cost of sales of our Retail operations decreased by 14.6% from $5,824,815
to $4,972,300 for the year ended December 31, 2002 and 2003, respectively,
while our Retail revenue increased by 2.2% for the year ended December 31,
2003. 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 393.0% from $1,057,362
to $5,212,388 for the 31




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year ended December 31, 2002 and 2003, respectively, while our Bulk
revenue increased by 378.9% for the same period. 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. Cost of sales of our Services reporting segment were $491,593 for the year
ended December 31, 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 assets that was recognized in conjunction
with our recent acquisition of DesalCo Limited and DesalCo (Barbados) Ltd. Gross Profit Overall gross profit margin increased from 43.4% to 44.0% for the year
ended December 31, 2003 when compared to the same period in 2002, for the
reasons explained below. Gross profit margin for our Retail operations increased from 45.5% to
54.5% for the year ended December 31, 2003 when compared to the same period 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 28.1% to 26.0%
for the year ended December 31, 2003 when compared to the same period 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. We ceased using the plant on September 30, 2003 and we
do not expect to incur costs for this plant beyond April 2004. 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 54.9% for the
year ended December 31, 2003. General and Administrative Expenses Total
general and administrative expenses increased by 64.1% from
$2,644,004 to $4,339,524 for the year ended December 31, 2003 when compared to
the same period in 2002. General and administrative expenses were at 21.8% and
22.8% of total revenue for the year ended December 31, 2002 and 2003,
respectively. General and administrative expenses related or allocated to our Retail
operations increased by 11.0% from $2,418,378 to $2,684,216 for the year ended
December 31, 2002 and 2003, respectively. This increase is comprised primarily
of higher insurance premiums, office rent and staff costs. General and administrative expenses related or allocated to our Bulk
operations increased by 547.5% from $225,626 to $1,460,883 for the year ended
December 31, 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 32




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$194,425 for the year ended December 31, 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 62.1% from $2,576,310 to $4,177,081 for the year
ended December 31, 2003 when compared to the same period in 2002. We expect
future 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 and we anticipate that general and
administrative expenses will decrease as we
continue to assimilate our recent acquisitions. 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. On February 10, 2004, our board of directors declared an interim cash
dividend of $0.115 per share, an increase of approximately 10%, payable on
April 30, 2004 to shareholders of record on March 31, 2004. Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 Revenue Total revenue increased by 8.1% from $11,248,105 to $12,154,689 for the
years ended December 31, 2001 and 2002, respectively. Total water sales
increased as a result of several factors detailed below. Revenue from our retail water (Retail) operations added $666,262 to
retail revenue for the year ended December 31, 2002, which is an increase of
6.7% over the prior year and represents 73.5% of the total increase in
revenues. The number of U.S. gallons we sold during the year ended December
31, 2002 increased by 10.3% over the prior year. This is the result of
supplying water to the Hyatt Hotel and the Britannia golf course. Our water
sales to customers other than the Hyatt Hotel and the Britannia golf course
were essentially flat when compared to the prior year, despite a 9.4% reduction
in tourist air arrivals to the Cayman Islands due to continued air travel
concerns and the downturn of the U.S. economy during the year ended December
31, 2002. Revenue from our bulk water (Bulk) operations added $240,322 to water
sales for the year ended December 31, 2002, which is an increase of 19.5% over
the prior year and represents 26.5% of the 33




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total increase in revenue. In June 2002, the automatic inflation adjustment
decreased our Belize water rates by an average of 0.08%. This was more than
offset by a 20.0% increase in the number of U.S. gallons sold for the year
ended December 31, 2002 over the prior year. This increase occurred because
during the year ended December 31, 2001, we experienced equipment malfunctions
which temporarily reduced the production capacity of our plant by 50% during
certain periods in August and September 2001. Other Income (Expenses) Total other income (expenses) changed from income of $125,645 to an
expense of $52,198 for the year ended December 31, 2002 when compared to the
same period in 2001. This decrease was a result of the February 1, 2002
termination of the dispute settlement agreement with Cayman Hotel and Golf
Inc., the owner of the Hyatt Grand Cayman Resort and Britannia golf course. Cost of Sales Total cost of sales increased by 12.7% from $6,109,117 to $6,882,177 for
the years ended December 31, 2001 and 2002, respectively, while water sales
revenues increased by 8.1% for the year ended December 31, 2002. Cost of sales of our Retail operations increased by $627,522 for the year
ended December 31, 2002, which is an increase of 12.1%, compared to an increase
of 6.7% in water sales revenue, over the prior year and represents 81.2% of the
total increase in cost of water sales. The cost of water sales increased as a
result of direct costs incurred to operate the Britannia plant in the Cayman
Islands, which was acquired on February 1, 2002. These costs included salaries
and benefits for additional staff, equipment maintenance costs, electricity,
chemicals and insurance, which will continue now that we operate the Britannia
plant. Higher insurance costs also increased cost of water sales due to higher
premium rates from our insurance provider, and additional insured values
following the purchase of the Britannia plant and the insurance for the full
replacement value of all our reverse osmosis desalination plants. Some of this
increase was offset, after the Britannia plant was purchased, by a decrease in
water purchase costs resulting from lower volume purchases from Ocean
Conversion (Cayman) Limited. We were unable to take full advantage of the
lower per gallon production costs of the Britannia plant as it only operated at
47.6% capacity in the eleven months that we owned the Britannia plant due to
contractual minimum purchase requirements from Ocean Conversion (Cayman)
Limited. Cost of sales of our Bulk operations increased by $145,538 for the year
ended December 31, 2002, which is an increase of 16.0%, compared to a 19.5%
increase in bulk revenues over the prior year and represents 18.8% of the total
increase in total cost of sales. During the year ended December 31, 2002, we
completed scheduled preventive maintenance on a major piece of equipment in
Belize, which increased our cost of water sales. Also increasing our cost of
water sales in 2002 were additional repairs and maintenance on the existing
reverse osmosis equipment. During the year ended December 31, 2002, we also
settled various claims for compensation made by our customer in Belize in March
2002. These claims were the result of our equipment failures that occurred in
August and September 2001 and a minor miscalculation in the annual inflation
adjustment formula in our contract. The miscalculation dated back to November
1995, which was prior to our acquisition of Belize Water Limited, and upon
correction, reduced our unit rate for water to our customer by $0.09 per 1,000
U.S. gallons. Gross Profit Overall gross profit margins decreased from 45.7% to 43.4% for the years
ended December 31, 2001 and 2002, respectively. 34




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Gross profit margins for our Retail operations decreased from 48.1% to
45.5% for the years ended December 31, 2001 and 2002, respectively. The
primary reasons for this decrease are (i) approximately two thirds of the water
produced by our Britannia plant in the Cayman Islands was sold to the Hyatt
Hotel and Britannia golf course at a lower rate than our standard commercial
water rate, (ii) due to flat water sales to other customers, we were only able
to utilize approximately 47.6% of the production capacity of the Britannia
plant and (iii) we were not able to acquire water from our lowest priced source
as a result of the minimum water purchase obligation we have with Ocean
Conversion (Cayman) Limited. Gross profit margins for our Bulk operations increased from 25.9% to 28.1%
for the years ended December 31, 2001 and 2002, respectively. The reason for
the increase in the gross profit margin is the increased revenues from the 20%
increase in the number of U.S. gallons sold over the prior year were greater
than in increase in cost of sales due to the settlement costs with Belize Water
Services Ltd. as discussed above and additional repairs and maintenance on the
reverse osmosis equipment in Belize. General and Administrative Expenses Total general and administrative expenses increased by 5.8% from
$2,500,060 to $2,644,004 for the years ended December 31, 2001 and 2002,
respectively. Indirect expenses were at 22.2% and 21.8% of total revenue for
the year ended December 31, 2001 and 2002, respectively. General and administrative expenses related or allocated to our Retail
operations increased by $109,140 for the year ended December 31, 2002, which is
an increase of 4.7% over the prior year and represents 75.8% of the total
increase in general and administrative expenses. We attribute this increase to
our accounting for stock compensation costs, unanticipated professional fees
relating to our December 31, 2001 audit and Form 10-K review together with
increased insurance premiums on our commercial and directors and officers
insurance. Stock compensation costs increased $266,773 for the year ended
December 31, 2002 as a result of an increase in our shares price during the
last fiscal quarter. Unanticipated professional fees relating to our December
31, 2001 audit and 10-K review were $59,311 and our commercial and directors
and officers insurance increased by $78,503. We also had additional reporting
costs in 2002 due to increased demand for our annual report and proxy
statements. These increases were mostly offset by a reduction in bonus costs
and subscription costs for the year ended December 31, 2002 compared to the
prior year. General and administrative expenses related or allocated to our Bulk
operations increased by $34,804 for the year ended December 31, 2002, which is
an increase of 18.2% over the prior year and represents 24.2% of the total
increase in indirect expenses. During the year ended December 31, 2002, we had
additional costs as a result of higher insurance premiums and increased costs
to repatriate funds. Net Income Net income decreased by 6.8% from $2,764,573 to $2,576,310 for the years
ended December 31, 2001 and 2002, respectively, as a result of the factors
indicated above. Dividends In December 2001, we increased our per share dividend from $0.10 to $0.105
per quarter and have paid dividends in this amount during the year ended
December 31, 2002 35




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Liquidity and Capital Resources Overview For the year ended December 31, 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 rights 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. Operating Activities Cash generated from operating activities for the years ended December 31,
2002 and 2003 was $4,115,090 and $6,506,826, 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 years ended December 31, 2002
and 2003 was $3,568,723 and $29,645,995, respectively. Cash in the amount of
$28,917,513 was used for our recent acquisitions of DesalCo Limited, its wholly
owned subsidiary DesalCo (Barbados) Limited, Ocean Conversion (Cayman) Limited,
Waterfields Company Limited and our equity investment in Ocean Conversion (BVI)
Ltd. Cash of $1,874,286 was also used in the construction of three 1.0 million
U.S. gallon potable water storage tanks at our Governors Harbour plant to
replace our previous 2.0 million U.S. gallon fabric-lined storage tanks.
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 used in financing activities for the year ended December 31, 2002 was
$494,509 and cash provided by financing activities for the year ended December
31, 2003 was $30,807,789, 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 year ended December 31, 2003, our primary
financing activities were to draw down $28,056,126 from our Scotiabank
facilities and $18,373,814 of equity through our secondary share offering.
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,
$869,091 was used for financing fees and $12,411,606 was repaid on our
Scotiabank bridge financing facilities. During the year ended December 31, 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 the investment in the Britannia reverse osmosis
plant, plus an increase in our short-term bank indebtedness. We also had
proceeds from an issuance of ordinary shares to certain directors and officers
who exercised stock 36




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options. These were offset by the payment of our quarterly dividends and
principal payments on our term loans. During the year ended December 31, 2003,
no shares were repurchased. During the year ended December 31, 2002, we
repurchased 2,184 ordinary shares from a long-term employee at an average price
of $15.05 and 702 redeemable preference shares from a former employee at an
average price of $5.47. All of the shares repurchased were cancelled in
accordance with Cayman Islands law. Material Commitments for Capital Expenditures and Contingencies The following table summaries our contractual obligations as at December
31, 2003: Less Than
    
    13
    
    35
    
    After 5Total
    
    1 Year
    
    Years
    
    Years
    
    YearsLong term debt
    
    $
    20,396,581
    
    
    $
    3,808,555
    
    
    
    10,159,459
    
    
    
    5,714,288
    
    
    
    714,279Operating leases
    
    
    481,100
    
    
    
    113,289
    
    
    
    357,282
    
    
    
    9,949
    
    
    
    Other
    
    
    352,495
    
    
    
    
    
    
    
    205,686
    
    
    
    
    
    
    
    146,809
 At December 31, 2003, we had committed approximately $600,000 for capital
expenditures for the purchase, site preparation and construction 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 the recent acquisitions and refinance our
existing debt. The facilities are comprised of the following:  
    
    $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 5.0%
    
    $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 consolidated debt to our consolidated earnings before interest,
taxes and depreciation. The present interest rate is 2.64%.
    
    $17.1 million six-month term loan bearing interest on the same
basis as the seven-year term loan. This facility was fully repaid by
the proceeds from our equity offering on July 9, 2003 We have used the proceeds from these facilities to refinance our existing
debt, for working capital and to finance our recent acquisitions. As of December 31, 2003, we have an outstanding balance of $17,857,143 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. We have collateralized all borrowings under the three facilities by
providing Scotiabank with a first lien on all of our assets, including the
capital stock of subsidiaries and investment in equity we acquired in our
recent acquisitions. The loan agreement for the three facilities contains standard terms and
conditions for similar bank loans made in the Cayman Islands, including
acceleration of the repayment of all borrowings either upon the demand of
Scotiabank (Cayman Islands) Ltd. or in the event of default under the loan
agreement. We have guaranteed to Scotiabank 50% of the Ocean Conversion (BVI) Ltd.
loan of $880,056. 37




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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. Impact of Inflation Under the terms of our Cayman Islands license and our water sales
agreements in Belize, Bahamas, British Virgin Islands and Barbados, our water
rates are automatically adjusted 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. Exchange Rates The official exchange rate for conversion of United States dollars into
Cayman Islands dollars, as determined by the Cayman Islands Monetary Authority,
has been fixed since 1974 at U.S. $ 1.00 = CI$ 0.83. The official exchange rate for conversion of United States dollars into
Belizean dollars, as determined by the Central Bank of Belize, has been fixed
since 1976 at U.S.$ 1.00 = BZE$ 2.00. The official fixed exchange rate for conversion of United States dollars
into Bahamian dollars as determined by the Central Bank of The Bahamas, has
been fixed since 1973 at U.S.$ 1.00 = BAH$ 1.00. The official fixed exchange rate for conversation of United States dollars
into Barbadian dollars as determined by the Central Bank of Barbados has been
fixed since 1975 at U.S.$ 1.00 = BDS$ 2.00. The British Virgin Islands currency is United States dollars. 38




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Forward-Looking Statements We discuss in this Annual Report matters which are not historical facts,
but which are forward-looking statements. We intend these forward looking
statements to qualify for safe harbor from liability established by the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
include, but are not limited to, our future plans, objectives, expectations and
events, assumptions and estimates about our company and our industry in
general. The forward-looking statements in this Annual Report reflect what we
currently anticipate will happen. What actually happens could differ materially
from what we currently anticipate will happen. We are not promising to make any
public announcement when we think forward looking statements in this Annual
Report are no longer accurate whether as a result of new information, what
actually happens in the future or for any other reason. Important matters that may affect what will actually happen include, but
are not limited to: tourism and weather conditions in the areas we service; our
ability to manage, integrate and realize the benefits from our recent
acquisitions; scheduled new construction within our operating areas; the
economies of the U.S. and the areas we service; regulatory matters;
availability of capital to repay a substantial portion of our bank debt and for
expansion of our operations; and other factors described in the Risk Factors
section below as well as elsewhere in this Annual Report. Risk Factors We have described for you below some risks which may materially and
adversely affect our business, financial condition or results of operations. Our exclusive license for our service area in the Cayman Islands may not
be renewed in the future and requires that we obtain prior approval for any
rate increase for reasons other than inflation.In the Cayman Islands, we
presently operate as a public water utility under an exclusive license
originally issued to us in December 1979 by the government of the Cayman
Islands. Our existing license expires on July 11, 2010. If we are not in
default of any terms of the license, we have a right of first refusal to renew
the license on terms that are no less favorable than those which the government
offers to a third party. Nevertheless, we cannot assure you that the government
will renew our license or that we will be able to negotiate a new license on
satisfactory terms. We would retain ownership of our production infrastructure
and substantially all of our distribution infrastructure if our license were
not renewed. Under our existing license, we must obtain prior approval from the Cayman
Islands government to increase our rates for any reason other than inflation.
Our ability to raise our rates is limited by this requirement, including
potential delays and costs involved in obtaining government approval for a rate
increase. Failure to obtain adequate rate increases could have an adverse
effect on our results of operations. We rely on water supply agreements with our customers in the Cayman
Islands, Belize, the Bahamas and Barbados which, upon their expiration, may not
be renewed or may be renegotiated on less favorable terms to us.We presently
operate as bulk water suppliers under water sales agreements in the Cayman
Islands with our customer the Water Authority-Cayman, in Belize with our
customer, the Belize Water Services Limited, in the Bahamas with our customers,
the Water & Sewerage Corporation and South Bimini International Ltd. and in
Barbados with our customer Sandy Lane Properties Ltd. Upon expiration, these
agreements may not be renewed or may be renewed on less favorable terms. 39




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Termination of our exclusive distributorship agreement with DWEER
Technology Ltd. would eliminate one competitive advantage that we presently
have over our competition in obtaining new plants in the Caribbean basin.Our
wholly-owned subsidiary, DesalCo Limited, is currently the exclusive
distributor in the Caribbean basin for the DWEER system produced by DWEER
Technology Ltd. for use in reverse osmosis seawater desalination plants. As a
result, none of our competitors are able to offer this technology when bidding
for new reverse osmosis seawater desalination plants in the Caribbean basin.
As the DWEER system is one of the most energy efficient recovery systems of
its kind, the distributorship agreement with DWEER Technology Ltd. gives us a
unique competitive advantage. If the distributorship agreement were terminated
or not renewed on equally favorable terms, we would lose this competitive
advantage, and it may be more difficult for us to obtain new contracts for
plants in the Caribbean basin. The British Virgin Islands Water and Sewerage Department has taken the
position that our water supply agreement is operating on a month-to month
basis.We have accepted the position of the British Virgin Islands Water and
Sewerage department that Ocean Conversion (BVI) Ltd.s existing water supply
arrangement the British Virgin Islands is in force on a month to month basis
until negotiations for a definitive agreement are finalized. In May 1999, the
British Virgin Islands government did not make a required buyout payment of
$1.42 million for the Baughers Bay plant and has taken the position that the
water supply agreement continues on a month-to-month basis. Thus, it is
possible, but in our opinion unlikely, that the government could cease
purchasing water at any time. While Ocean Conversion (BVI) Ltd. is currently
attempting to negotiate a new water supply agreement, there is no guarantee
such agreement will be obtained, or if obtained, would be on terms favorable to
Ocean Conversion (BVI) Ltd. Cessation of the government water purchases, or
failure to negotiate a new agreement on terms favorable to us, could have an
adverse effect on our results of operations. We may not be able to successfully integrate the new assets that we
acquired in the recent acquisitions.Increasing the size of our company in a
relatively short period of time has placed a significant strain on our
management resources. Management may be required to spend additional time and
money on integration that would otherwise be spent developing our business and
services and may not be successful in integrating the acquired assets into our
current operations. For example, integrating our new assets requires us to
expand our management information systems and control our operating expenses.
As a result, we cannot assure you that the acquisitions will provide us with
the expected benefits. In addition, we cannot assure you that the acquisitions
will not have a negative impact on our business and results of operation. The costs of integrating our new assets may affect our ability to pay
dividends.We have historically sought to pay cash dividends to our
shareholders out of our net income on a quarterly basis if funds are available.
The costs associated with integrating the new assets into our company,
however, may reduce our net income. If our net income is reduced, we will have
fewer funds available to pay dividends. In addition, our bank loan agreement
with Scotiabank (Cayman Islands) Ltd. requires that we pay dividends from
current cash flows. Our business is affected by tourism, weather conditions, the economies of
the locations where we provide service and the U.S. and European economies.
Tourist arrivals and weather conditions within our operating areas affect the
demand for our water to a greater extent in the Cayman Islands and in Belize
than in the Bahamas, the British Virgin Islands and Barbados. In the Cayman
Islands and Belize, the highest demand is normally in the first two quarters of
each calendar year. The lowest demand for water occurs in the third quarter of
each calendar year. A significant percentage of tourists visiting the Cayman
Islands and Belize come from the U.S. or certain European countries. In
addition, development activity in our service areas in the Cayman Islands is
significantly impacted by the U.S. economy. Accordingly, a significant downturn
in tourist arrivals to the Cayman Islands or in the U.S. or European economies
for any reason would be detrimental to our revenues and operating results. 40




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After the events of September 11, 2001, tourism decreased in the Cayman Islands
and is only gradually returning to historical levels. Additional terrorist
activities in the United States, Europe or in areas served by us or extended
hostilities in the Persian Gulf would likely have a material adverse effect on
our business and results of operations. We may have difficulty accomplishing our growth strategy within and
outside of our current operating areas.Even though we have an exclusive
license for our present operating area in the Cayman Islands and supply
agreements in the Cayman Islands, the Bahamas, the British Virgin Islands,
Barbados and Belize, our ability to expand our operating areas is often subject
to the approval of the respective governments in each location. Further, part of our long-term growth strategy is to expand our water
supply and distribution operations to other locations outside of the Cayman
Islands, the Bahamas, Barbados, the British Virgin Islands and Belize. Our
expansion into new locations depends on our ability to obtain necessary
permits, licenses and approvals to operate in new territories. We may not
obtain these necessary permits, licenses and approvals in a timely and cost
efficient manner, or at all. Our expansion to territories outside of our current operating areas
includes significant risks, including, but not limited to, the following:  
    
    regulatory risks, including government relations difficulties,
local regulations and currency controls;
    
    risks related to operating in foreign countries, including
political instability, reliance on local economies, environmental or
geographical problems, shortages of materials, immigration restrictions
and skilled labor;
    
    risks related to development of new operations, including assessing
the demand for water, engineering difficulties and inability to begin
operations as scheduled; and
    
    risks relating to greater competition in these new territories,
including the ability of our competitors to gain or retain market share
by reducing prices. Even if our expansion plans are successful, we may have difficulty
managing our growth. We cannot assure you that any new operations outside of
our current operating areas will attain or maintain profitability or that the
results from these new operations will not negatively affect our overall
profitability. We do not own a majority interest in Ocean Conversion (BVI) Ltd.We
recently acquired 50% of the voting shares of Ocean Conversion (BVI) Ltd. which
allows us to appoint three of the six directors of that company. Sage Water
Holdings (BVI) Limited, which owns the remaining 50% of the voting shares, is
entitled to appoint the remaining three directors. If there is a tied vote of
the directors on any matter, the president of the Caribbean Water and
Wastewater Association is entitled to appoint a temporary director to break the
tie. As a result, we have to share the management of Ocean Conversion (BVI)
Ltd. with Sage Water Holdings (BVI) Limited. Although we provide management
and engineering services to Ocean Conversion (BVI) Ltd. we do not fully control
the operations of the company. Our operations in the Caribbean could be harmed by hurricanes.A
significant hurricane could cause major damage to our equipment and properties
and the properties of our customers, including the large tourist properties in
these areas. This would result in decreased revenues and profits from water
sales until our damaged equipment and properties are repaired and our customers
and the tourism industry 41




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returned to the status quo before the hurricane. We do not insure our
underground water distribution system on the Cayman Islands. Contamination to our processed water may cause disruption in our services
and adversely affect our revenues.Our processed water may become contaminated
by naturally-occurring or man-made compounds and events. In the event that a
portion of our processed water is contaminated, we may have to interrupt the
supply of that water until we are able to install treatment equipment or
substitute the flow of water from an uncontaminated water production source.
In addition, we may incur significant costs in order to treat a contaminated
source of plant feed water through expansion of our current treatment
facilities, or development of new treatment methods. Our inability to
substitute processed water from an uncontaminated water source, or to
adequately treat the contaminated plant feed water in a cost-effective manner
may have an adverse effect on our revenues. In addition, in the wake of the September 11, 2001 terrorist attacks in
New York, Washington, D.C. and Pennsylvania, we have taken steps to heighten
employee awareness of threats to our water supply. While we are not aware of
any specific threats to our facilities, operations or supplies, we have and
will continue to take security precautions to protect our facilities,
operations and supplies. It is possible, however, that we would not be in a
position to control the outcome or the costs of such events should they occur,
which could have an adverse effect on the results of our operations. We could be negatively affected by potential government actions and
regulations.Any government that regulates our operations may issue
legislation or adopt new regulations, including but not limited to:  
    
    restricting foreign ownership of our company;
    
    providing for the expropriation of our assets by the government;
    
    providing for nationalization of public utilities by the government;
    
    providing for different water quality standards;
    
    resulting in unilateral changes to or renegotiation of our exclusive licenses; or
    
    causing currency exchange fluctuations or devaluations or changes in tax laws. We rely heavily on the efforts of several key employees.Our success
depends upon the abilities of our executive officers. In particular, the loss
of the services of Jeffrey Parker, our Chairman of the Board, or Fredrick
McTaggart, our President and Chief Executive Officer, could be detrimental to
our operations and our continued success. Although Messrs. Parker and McTaggart
have entered into three-year employment agreements which may be extended every
year for an additional one-year term, we cannot guarantee that Mr. Parker or
Mr. McTaggart will continue to work for us during the term of their agreements.
Except for Messrs. Parker and F. McTaggart, none of our other employees have
entered into non-compete agreements with us. Provisions in our articles of association and an option deed adopted by
our board of directors may discourage a change in control of our company and
may make it more difficult for you to sell your ordinary shares.Our articles
of association include provisions which may discourage or prevent a change in
control of our company. For instance, our board of directors consists of three
groups. Each group serves a staggered term of three years before the directors
in the group are up for re- 42




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election. Also, our board of directors may refuse to register any transfer of
shares on our books for any reason. We have also adopted an option deed, which is similar to a poison pill.
The option deed will discourage a change in control of our company by causing
substantial dilution to a person or group who attempts to acquire our company
on terms not approved by the board of directors. The option deed will expire
on July 31, 2007. As a result of these provisions, which discourage or prevent an unfriendly
or unapproved change in control of our company, our shareholders may not have
an opportunity to sell their ordinary shares at a higher market price, which,
at least temporarily, typically accompanies attempts to acquire control of a
company through a tender offer, open market purchase or otherwise. There may be a risk of variation in currency exchange rates.Although we
report our results in United States dollars, the majority of our revenue is
earned in Cayman Islands dollars, Belizean dollars, Bahamian dollars and
Barbados dollars. All of the currencies in our operating areas have been fixed
to the United States dollar for over 20 years. As a result, we do not intend
to hedge against any exchange rate risk associated with our reporting in United
States dollars. If any of these fixed exchange rates becomes a floating
exchange rate, however, our results of operations could be adversely affected. Service of process and enforcement of legal proceedings commenced against
us in the United States may be difficult to obtain.Service of process on our
company and our directors and officers, fourteen out of sixteen of whom reside
outside the United States, may be difficult to obtain within the United States.
Also, since substantially all of our assets are currently located outside the
United States, any judgment obtained in the United States against us may not be
collectible. There is no reciprocal statutory enforcement of foreign judgments between
the United States and the Cayman Islands, so foreign judgments originating from
the United States are not directly enforceable in the Cayman Islands. A
prevailing party in a United States proceeding against us or our officers or
directors would have to initiate a new proceeding in the Cayman Islands using
the United States judgment as evidence of the partys claim. A prevailing party
could rely on the summary judgment procedures available in the Cayman Islands,
subject to available defenses in the Cayman Islands courts, including, but not
limited to, the lack of competent jurisdiction in the United States courts,
lack of due service of process in the United States proceeding and the
possibility that enforcement or recognition of the United States judgment would
be contrary to the public policy of the Cayman Islands. Depending on the nature of damages awarded, civil liabilities under the
Securities Act of 1933 or the Securities Exchange Act of 1934 for original
actions instituted outside the Cayman Islands may or may not be enforceable.
For example, a United States judgment awarding remedies unobtainable in any
legal action in the courts of the Cayman Islands (for example, treble damages,
which would probably be regarded as penalties), would not likely be enforceable
under any circumstances. 43




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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 loan receivable is due from the Water
Authority-Cayman. Interest Rate Risk As of December 31, 2003, we had loans outstanding totaling $20,396,581,
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,
however, our results of operation could be adversely affected. 44




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PageCONSOLIDATED WATER CO. LTD.INDEX TO CONSOLIDATED FINANCIAL STATEMENTSIndependent Auditors Report
    
    
    46Consolidated Balance Sheet as at December 31, 2003 and
2002
    
    
    47Consolidated Statement of Income for each of the years
ended December 31, 2003, 2002, and 2001
    
    
    48Consolidated Statement of Stockholders Equity for each
of the years ended December 31, 2003, 2002, and
2001
    
    
    49Consolidated Statement of Cash Flows for each of the
years ended December 31, 2003, 2002, and
2001
    
    
    50Notes to Consolidated Financial Statements
    
    
    51OCEAN CONVERSION (BVI) LTD.INDEX TO CONSOLIDATED FINANCIAL STATEMENTSIndependent Auditors Report
    
    
    73Consolidated Balance Sheet as at December 31, 2003
    
    
    74Consolidated Statement of Income for the year
ended December 31, 2003
    
    
    75Consolidated Statement of Stockholders Equity for the year ended December 31, 2003
    
    
    76Consolidated Statement of Cash Flows for the
year ended December 31, 2003
    
    
    77Notes to Consolidated Financial Statements
    
    
    78
 45




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Independent Auditors Report The Board of Directors and Stockholders
Consolidated Water Co. Ltd We have audited the accompanying consolidated balance sheets of Consolidated
Water Co. Ltd. and subsidiaries (the Company) as of December 31, 2003 and
2002, and the related consolidated statements of income, stockholders equity
and cash flows for each of the years in the three-year period ended December
31, 2003. These consolidated financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We conducted our audits in accordance with the auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present
fairly, in all material aspects, the financial position of Consolidated Water
Co. Ltd. and subsidiaries as of December 31, 2003 and 2002, and the results of
their operations and cash flows for each of the three years in the three-year
period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America. George Town, Cayman Islands
April 7, 2004 46




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CONSOLIDATED WATER CO. LTD. CONSOLIDATED BALANCE SHEETS
(Expressed in United States dollars) December 31,2003
    
    2002ASSETSCurrent assetsCash and cash equivalents (Note 4)
    
    $
    8,236,924
    
    
    $
    568,304Accounts receivable (Note 5)
    
    
    3,859,496
    
    
    
    1,406,947Inventory (Note 6)
    
    
    1,546,185
    
    
    
    388,131Prepaid expenses and other assets
    
    
    596,386
    
    
    
    370,429Deferred expenditures
    
    
    
    
    
    
    887,856Current portion of loans receivable (Note 7)
    
    
    1,098,732
    
    
    
    Total current assets
    
    
    15,337,723
    
    
    
    3,621,667Loans receivable (Note 7)
    
    
    3,194,346
    
    
    
    Property, plant and equipment, net (Note 8)
    
    
    29,662,297
    
    
    
    20,253,646Other assets
    
    
    505,793
    
    
    
    Investment in affiliates (Note 9)
    
    
    10,034,260
    
    
    
    12,450Intangible assets (Note 10)
    
    
    6,431,955
    
    
    
    1,619,874Goodwill (Note 11)
    
    
    3,395,752
    
    
    
    Total assets
    
    $
    68,562,126
    
    
    $
    25,507,637LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesDividends payable (Note 12)
    
    $
    686,118
    
    
    $
    508,444Accounts payable and other liabilities
    

    
    2,072,245
    
    
    
    1,143,850Current portion of long term debt (Note 13)
    
    
    3,763,144
    
    
    
    518,275Total current liabilities
    
    
    6,521,507
    
    
    
    2,170,569Long term debt (Note 13)
    
    
    16,633,437
    
    
    
    2,074,609Other liabilities
    
    
    352,495
    
    
    
    136,235Total liabilities
    
    
    23,507,439
    
    
    
    4,381,413Minority Interest in Waterfields Company Limited
    
    
    806,160
    
    
    
    Stockholders equityRedeemable preferred stock, $1.20 par value. Authorized 100,000 shares;
issued and outstanding 13,585 shares in 2003
and 19,740 shares in 2002 (Note 14)
    
    
    16,302
    
    
    
    23,688Class A common stock, $1.20 par value. Authorized 9,840,000 shares;
issued and outstanding 5,687,010 shares in 2003 and
3,993,419 shares in 2002
    
    
    6,824,412
    
    
    
    4,792,103Class B common stock, $1.20 par value. Authorized 60,000 shares;
Issued and outstanding nil shares for 2003
and nil shares for 2002 (Note 14)
    
    
    
    
    
    
    Stock and options earned but not issued
    
    
    21,494
    
    
    
    424,841Additional paid-in capital
    
    
    26,773,342
    
    
    
    7,354,395Retained earnings
    
    
    10,612,977
    
    
    
    8,531,197Total stockholders equity
    
    
    44,248,527
    
    
    
    21,126,224Commitments (Note 20)Total liabilities and stockholders equity
    
    $
    68,562,126
    
    
    $
    25,507,637
 The accompanying notes are an integral part of these consolidated financial statements. 47




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CONSOLIDATED WATER CO. LTD. CONSOLIDATED STATEMENTS OF INCOME
(Expressed in United States dollars) For the year ended December 31,2003
    
    2002
    
    2001Retail water sales
    
    $
    10,918,151
    
    
    $
    10,683,592
    
    
    $
    10,017,330Bulk water sales
    
    
    7,045,761
    
    
    
    1,471,097
    
    
    
    1,230,775Services revenue
    
    
    1,090,293
    
    
    
    
    
    
    
    Total revenue
    
    
    19,054,205
    
    
    
    12,154,689
    
    
    
    11,248,105Retail cost of sales
    
    
    (4,972,300
    )
    
    
    (5,824,815
    )
    
    
    (5,197,293
    )Bulk cost of sales
    
    
    (5,212,388
    )
    
    
    (1,057,362
    )
    
    
    (911,824
    )Service cost of sales
    
    
    (491,593
    )
    
    
    
    
    
    

    Total cost of sales(Note 15)
    
    
    (10,676,281
    )
    
    
    (6,882,177
    )
    
    
    (6,109,117
    )Gross profit
    
    
    8,377,924
    
    
    
    5,272,512
    
    
    
    5,138,988General and administrative expenses (Note 15)
    
    
    (4,339,524
    )
    
    
    (2,644,004
    )
    
    
    (2,500,060
    )Income from operations
    
    
    4,038,400
    
    
    
    2,628,508
    
    
    
    2,638,928Other income (expenses)
    
    
    
    
    
    
    
    
    
    
    Interest income
    
    
    82,334
    
    
    
    14,711
    
    
    
    28,584Interest expense
    
    
    (1,163,637
    )
    
    
    (103,986
    )
    
    
    (99,956
    )Other income
    
    
    438,022
    
    
    
    37,077
    
    
    
    197,017Equity in earnings of affiliate
    
    
    826,029
    
    
    
    
    
    
    
    182,748
    
    
    
    (52,198
    )
    
    
    125,645Net income before income taxes and minority interest
    
    
    4,221,148
    
    
    
    2,576,310
    
    
    
    2,764,573Income taxes
    
    
    (23,743
    )
    
    
    
    
    
    
    Minority interest
    
    
    (20,324
    )
    
    
    
    
    
    
    Net income
    
    $
    4,177,081
    
    
    $
    2,576,310
    
    
    $
    2,764,573Basic earning per share(Note 16)
    
    $
    0.85
    
    
    $
    0.65
    
    
    $
    0.71Diluted earning per share(Note 16)
    
    $
    0.83
    
    
    $
    0.63
    
    
    $
    0.69Weighted average number of common shares
used in the determination of:Basic earnings per share (Note 16)
    
    
    4,917,183
    
    
    
    3,969,861
    
    
    
    3,897,969Diluted earnings per share (Note 16)
    
    
    5,037,530
    
    
    
    4,087,532
    
    
    
    3,999,691
 The accompanying notes are an integral part of these consolidated financial statements. 48




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##### Table of Contents



CONSOLIDATED WATER CO. LTD. CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2003
(Expressed in United States dollars) Redeemable preferredstock
    
    Common stockShares
    
    Dollars
    
    Shares
    
    DollarsBalance at December 31, 2000
    
    
    33,634
    
    
    $
    40,361
    
    
    
    3,863,144
    
    
    $
    4,635,774Issue of share capital
    
    
    5,821
    
    
    
    6,985
    
    
    
    67,860
    
    
    
    81,431Conversion of preferred shares
    
    
    (14,260
    )
    
    
    (17,112
    )
    
    
    14,260
    
    
    
    17,112Repurchase and cancellation of
ordinary shares
    
    
    
    
    
    
    
    
    
    
    (25,200
    )
    
    
    (30,240
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issue of options and share grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2001
    
    
    25,195
    
    
    $
    30,234
    
    
    
    3,920,064
    
    
    $
    4,704,077Issue of share capital
    
    
    3,330
    
    
    
    3,996
    
    
    
    67,456
    
    
    
    80,947Conversion of preferred shares
    
    
    (8,083
    )
    
    
    (9,700
    )
    
    
    8,083
    
    
    
    9,700Redemption of preferred shares
    
    
    (702
    )
    
    
    (842
    )
    
    
    
    
    
    
    Repurchase and cancellation of
ordinary shares
    
    
    
    
    
    
    
    
    
    
    (2,184
    )
    
    
    (2,621
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issue of options and share grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2002
    
    
    19,740
    
    
    $
    23,688
    
    
    
    3,993,419
    
    
    $
    4,792,103Public offering of ordinary shares,
$14.75, net of issue costs
    
    
    
    
    
    
    
    
    
    
    1,392,150
    
    
    
    1,670,580Issue of share capital
    
    
    3,837
    
    
    
    4,604
    
    
    
    291,463
    
    
    
    349,756Conversion of preferred shares
    
    
    (9,978
    )
    
    
    (11,973
    )
    
    
    9,978
    
    
    
    11,973Redemption of preferred shares
    
    
    (14
    )
    
    
    (17
    )
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issue of options and share grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2003
    
    
    13,585
    
    
    $
    16,302
    
    
    
    5,687,010
    
    
    $
    6,824,412
   [Continued from above table, first column(s) repeated] Stock andoptions
    
    Additional
    
    
    
    
    
    Totalearned but
    
    paid-in
    
    Retained
    
    stockholdersnot issued
    
    capital
    
    earnings
    
    equityBalance at December 31, 2000
    
    $
    380,850
    
    
    $
    6,726,749
    
    
    $
    6,443,709
    
    
    $
    18,227,443Issue of share capital
    
    
    (340,125
    )
    
    
    411,599
    
    
    
    
    
    
    
    159,890Conversion of preferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Repurchase and cancellation of
ordinary shares
    
    
    
    
    
    
    (241,595
    )
    
    
    
    
    
    
    (271,835
    )Net income
    
    
    
    
    
    
    
    
    
    
    2,764,573
    
    
    
    2,764,573Dividends declared
    
    
    
    
    
    
    
    
    
    
    (1,575,246
    )
    
    
    (1,575,246
    )Issue of options and share grants
    
    
    169,599
    
    
    
    
    
    
    
    
    
    
    
    169,599Balance at December 31, 2001
    
    $
    210,324
    
    
    $
    6,896,753
    
    
    $
    7,633,036
    
    
    $
    19,474,424Issue of share capital
    
    
    (227,980
    )
    
    
    490,889
    
    
    
    
    
    
    
    347,852Conversion of preferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Redemption of preferred shares
    
    
    
    
    
    
    (2,999
    )
    
    
    
    
    
    
    (3,841
    )Repurchase and cancellation of
ordinary shares
    
    
    
    
    
    
    (30,248
    )
    
    
    
    
    
    
    (32,869
    )Net income
    
    
    
    
    
    
    
    
    
    
    2,576,310
    
    
    
    2,576,310Dividends declared
    
    
    
    
    
    
    
    
    
    
    (1,678,149
    )
    
    
    (1,678,149
    )Issue of options and share grants
    
    
    442,497
    
    
    
    
    
    
    
    
    
    
    
    442,497Balance at December 31, 2002
    
    $
    424,841
    
    
    $
    7,354,395
    
    
    $
    8,531,197
    
    
    $
    21,126,224Public offering of ordinary shares,
$14.75, net of issue costs
    
    
    
    
    
    
    16,118,254
    
    
    
    
    
    
    
    17,788,834Issue of share capital
    
    
    (544,756
    )
    
    
    3,300,838
    
    
    
    
    
    
    
    3,110,442Conversion of preferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Redemption of preferred shares
    
    
    
    
    
    
    (145
    )
    
    
    
    
    
    
    (162
    )Net income
    
    
    
    
    
    
    
    
    
    
    4,177,081
    
    
    
    4,177,081Dividends declared
    
    
    
    
    
    
    
    
    
    
    (2,095,301
    )
    
    
    (2,095,301
    )Issue of options and share grants
    
    
    141,409
    
    
    
    
    
    
    
    
    
    
    
    141,409Balance at December 31, 2003
    
    $
    21,494
    
    
    $
    26,773,342
    
    
    $
    10,612,977
    
    
    $
    44,248,527
 The accompanying notes are an integral part of these consolidated financial statements. 49




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##### Table of Contents



CONSOLIDATED WATER CO. LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in United States dollars) For the year ended December 31,2003
    
    2002
    
    2001Net income
    
    $
    4,177,081
    
    
    $
    2,576,310
    
    
    $
    2,764,573Adjustments to reconcile net income to net cashDepreciation
    
    
    1,699,140
    
    
    
    1,269,126
    
    
    
    1,113,041Amortization of intangible assets and bank fees
    
    
    1,318,102
    
    
    
    194,906
    
    
    
    193,703Stock compensation on share grants
    
    
    138,750
    
    
    
    175,330
    
    
    
    289,174Loss on sale of fixed assets
    
    
    
    
    
    
    
    
    
    
    7,702Undistributed income from affiliates
    
    
    (1,060,188
    )
    
    
    
    
    
    
    Minority interest
    
    
    20,324
    
    
    
    
    
    
    
    (Increase) decrease in accounts receivable
    
    
    (82,939
    )
    
    
    (83,791
    )
    
    
    165,573Increase in inventory
    
    
    (10,088
    )
    
    
    (68,620
    )
    
    
    (165,278
    )(Increase) decrease in prepaid expenses and other assets
    
    
    60,041
    
    
    
    (50,529
    )
    
    
    (20,401
    )Increase in accounts payable and other liabilities
    
    
    230,725
    
    
    
    56,380
    
    
    
    19,956Increase (decrease) in other liabilities
    
    
    15,878
    
    
    
    45,978
    
    
    
    (3,596
    )Net cash provided by operating activities
    
    
    6,506,826
    
    
    
    4,115,090
    
    
    
    4,364,447Cash flows from investing activitiesDeferred expenditures
    
    
    
    
    
    
    (460,886
    )
    
    
    Purchase of property, plant and equipment
    
    
    (2,159,860
    )
    
    
    (3,107,837
    )
    
    
    (1,892,147
    )Business combinations, net of cash acquired
    
    
    (19,495,005
    )
    
    
    
    
    
    
    Investment in affiliate
    
    
    (8,961,622
    )
    
    
    
    
    
    
    (12,450
    )Collection from loans receivable
    
    
    970,492
    
    
    
    
    
    
    
    Proceeds from sale of property, plant and equipment
    
    
    
    
    
    
    
    
    
    
    360Cash used in investing activities
    
    
    (29,645,995
    )
    
    
    (3,568,723
    )
    
    
    (1,904,237
    )Cash flows from financing activitiesNet proceeds from credit facility
    
    
    27,187,035
    
    
    
    1,500,000
    
    
    
    500,000Deferred expenditures
    
    
    
    
    
    
    (426,970
    )
    
    
    Dividends paid
    
    
    (1,924,067
    )
    
    
    (1,669,088
    )
    
    
    (1,477,828
    )Net proceeds from issuance of stock
    
    
    19,037,034
    
    
    
    615,019
    
    
    
    40,075Principal repayments of long term debt
    
    
    (13,492,213
    )
    
    
    (476,760
    )
    
    
    (281,922
    )Payment to acquire common stock
    
    
    
    
    
    
    (32,869
    )
    
    
    (271,595
    )Payment to acquire redeemable preferred shares
    
    
    
    
    
    
    (3,841
    )
    
    
    Decrease in bank overdraft
    
    
    
    
    
    
    
    
    
    
    (703,331
    )Net cash provided by (used in) financing activities
    
    
    30,807,789
    
    
    
    (494,509
    )
    
    
    (2,194,601
    )Net increase in cash and cash equivalents
    
    
    7,668,620
    
    
    
    51,858
    
    
    
    265,609Cash and cash equivalents at beginning of year
    
    
    568,304
    
    
    
    516,446
    
    
    
    250,837Cash and cash equivalents at end of year
    
    $
    8,236,924
    
    
    $
    568,304
    
    
    $
    516,446Interest paid in cash
    
    $
    770,438
    
    
    $
    101,764
    
    
    $
    97,550Interest received in cash
    
    $
    81,836
    
    
    $
    11,380
    
    
    $
    15,676Corporation tax paid
    
    $
    40,090
    
    
    $
    
    
    
    $
    
 The accompanying notes are an integral part of these consolidated financial statements. 50




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##### Table of Contents



CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Principal activity Consolidated Water Co. Ltd., its wholly-owned subsidiaries, majority-owned
subsidiary and affiliate (together the Company) use reverse osmosis
technology to produce fresh water from seawater. The Company processes and
supplies water to its customers in the Cayman Islands, Belize, Bahamas,
Barbados and British Virgin Islands. The Company sells water to a variety of
customers, including public utilities, commercial and tourist properties,
residential properties and government facilities. The base price of water
supplied by the Company, and adjustments thereto, are generally determined by
the terms of the license and contracts, which provide for adjustments based
upon the movement in the government price indices specified in the license and
contracts, as well as monthly adjustments for changes in the cost of energy.
The Company also provides consulting services under long-term agreements, under
which the Company designs and constructs desalination plants, and manages and
operates plants owned by other companies. 2. Accounting policies Basis of preparation:The consolidated financial statements presented are
prepared in accordance with the accounting principles generally accepted in the
United States of America. Use of estimates:The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period.
Significant items subject to estimates and assumptions include the carrying
value of property, plant and equipment, intangible assets, goodwill, allowances
for receivables and inventory. Actual results could differ from those
estimates. Basis of consolidation:The 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) Ltd, and its majority owned subsidiary Waterfields
Company Limited. The operating results of Ocean Conversion (Cayman) Limited,
DesalCo Limited, DesalCo (Barbados) Ltd. have been included in the consolidated
financial statements effective February 1, 2003. The operating results of
Waterfields Company Limited have been included in the financial statements
effective August 1, 2003. All inter-company balances and transactions have
been eliminated. Foreign currency:The Companys reporting currency is the United States dollar.
The functional currency of the Company and its foreign subsidiaries is the
currency for each respective country. The exchange rates between the Cayman
Islands dollar, the Belize dollar, the Bahamian dollar and the Barbados dollar
have been fixed to the United States dollar during all periods presented. Monetary assets and liabilities denominated in foreign currencies are
translated at the rates of exchange ruling at the balance sheet date. Foreign
currency transactions are translated at the rate ruling on the date of the
transaction. Net exchange gains and losses are included in other income in the
consolidated statements of income. Cash and cash equivalents:Cash and cash equivalents comprise cash at bank on
call and highly liquid deposits with an original maturity of three months or
less. 51




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Accounting policies (continued) Trade accounts receivable:Trade accounts receivable are recorded at invoiced
amounts based on meter readings. The allowance for doubtful accounts is the
Companys best estimate of the amount of probable credit losses in the
Companys existing accounts receivable balance. The Company determines the
allowance for doubtful accounts based on historical write-off experience and
monthly review of delinquent accounts. Past due balances are reviewed
individually for collectibility and disconnection. Account balances are
charged off against the allowance for doubtful accounts after all means of
collection have been exhausted and the potential for recovery is considered by
management to be remote. Inventory:Inventory primarily includes replacement spares and parts that are
valued at the lower of cost and net realizable value on a first-in, first-out
basis. Inventory also includes potable water held in the Companys reservoirs.
The carrying amount of the water inventory is the lower of the average cost of
producing or purchasing water during the year and its net realizable value. Deferred expenditures:Deferred expenditures represented direct costs incurred
in connection with planned business combinations and financing transactions. Loans receivable:Loans receivable relate to amounts advanced to customers to
facilitate the construction of water desalination plants. The allowance for
loan losses, if any, is the Companys best estimate of the amount of portable
credit losses in the Companys existing loans and is determined on an
individual loan basis. Management believes the loans receivable are
collectible and, therefore, no loan allowance has been established as of
December 31, 2003. Property, plant and equipment:Property, plant and equipment are stated at
cost less accumulated depreciation. Depreciation is calculated using a straight
line method with an allowance for estimated residual values. Rates are
determined based on the estimated useful lives of the assets as follows: Buildings
    
    5 to 40 yearsPlant and equipment
    
    4 to 25 yearsDistribution system
    
    3 to 40 yearsOffice furniture, fixtures and equipment
    
    3 to 10 yearsVehicles
    
    3 to 10 yearsLeasehold improvements
    
    Shorter of 5 years and operating lease term outstandingLab Equipment
    
    3 to 10 years
 Additions to property, plant and equipment are comprised of the cost of the
contracted services, direct labour and materials. Assets under construction
are recorded as additions to property, plant and equipment upon completion of
the projects. Depreciation commences in the month of addition. Interest costs directly attributable to the construction of qualifying assets,
which are assets that necessarily take a substantial period of time to ready
for their intended use, are added to the cost of those assets until such time
as the assets are substantially ready for use or sale. During the year ended December 31, 2001, the Company carried out an extensive
engineering analysis of its potable water production and distribution equipment
in Grand Cayman. The Companys analysis concluded that certain assets would
not need to be replaced or relocated as early as previously planned. As a
result of these circumstances, management considered it appropriate to reassess
the estimated useful economic life of these assets. The reassessment of the
useful economic lives of these assets resulted in decreased depreciation
expense on an annual basis in the amount of $197,472, which increased basic and
fully diluted earnings per share by $0.05 for the year ended December 31, 2001. 52




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Accounting policies (continued) Goodwill and 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

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. The Companys annual impairment tests resulted in no goodwill
impairment. Investment:Investments where the Company does not exercise significant
influence over the operating and financial policies of the investee and holds
less than 20% of the voting stock are recorded at cost. Investments where the
Company has significant influence over the operating and financial policies of
the investee and holds 20% to 50% of the voting stock are recorded using the
equity method of accounting for investments in common stock. The Company
recognizes an impairment loss on declines in value that are other than
temporary. Other assets:Other assets consist of the bank financing fees paid on the
drawdown of the Companys long term debt and is being amortized on a straight
line basis over the term of the loans. Other liabilities:Other liabilities consist of security deposits and advances
in aid of construction. Security deposits are received from large customers as
security for trade receivables. Advances in aid of construction are recognized
as a liability when advances are received from condominium developers in the
licensed area to help defray the capital expenditure costs of the Company.
These advances do not represent loans to the Company and are interest free.
However, the Company allows a discount of ten percent on future supplies of
water to these developments until the aggregate discounts allowed are
equivalent to advances received. Discounts are charged against advances
received. Shares repurchased:Under Cayman Islands law, shares repurchased out of
capital by the Company are treated as cancelled upon redemption, and the
Companys issued share capital is reduced by the par value of those shares,
with the difference being adjusted to additional paid up capital. 53




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Accounting policies (continued) Stock and stock option incentive plans:The Company issues stock under
incentive plans that form part of employees and non-executive Directors
remuneration and grants options to purchase ordinary shares as part of
remuneration for certain long-serving employees and the executive Officers. The Company applies the intrinsic-value-based method of accounting prescribed
by Accounting Principles Board (APB) Opinion No. 25 Accounting for Stock
Issued to Employees, and related interpretations to account for its fixed-plan
stock options. Under this method, compensation expense is recorded on the date
of grant only if the current market price of the underlying stock exceeds the
exercise price. SFAS No. 123 Accounting for Stock-Based Compensation
established accounting and disclosure requirements using a fair-valued-based
method of accounting for stock-based employee compensation plans. As allowed
by SFAS No. 123, the Company continues to apply the intrinsic-value method of
accounting described above and has adopted the disclosure requirements of SFAS
No. 123. The following table illustrates the effect on net income if the
fair-value-based method has been applied to all outstanding and unvested awards
in each period. 2003
    
    2002
    
    2001Net income, as reported
    
    $
    4,177,081

    
    
    $
    2,576,310
    
    
    $
    2,764,573Add stock-based employee compensation expense included
in reporting net income
    
    
    138,750
    
    
    
    442,497
    
    
    
    169,599Deduct total stock-based employee compensation expense
determined under fair-value-based method for all rewards
    
    
    (950,147
    )
    
    
    (622,702
    )
    
    
    (645,290
    )Pro forma net income
    
    $
    3,365,684
    
    
    $
    2,396,105
    
    
    $
    2,288,882Earnings per share:Basic  as reported
    
    $
    0.85
    
    
    $
    0.65
    
    
    $
    0.71Basic  pro forma
    
    $
    0.68
    
    
    $
    0.60
    
    
    $
    0.59Diluted  as reported
    
    $
    0.83
    
    
    $
    0.63
    
    
    $
    0.69Diluted  pro forma
    
    $
    0.67
    
    
    $
    0.58
    
    
    $
    0.57
 The intrinsic value of stock based compensation is recorded in stockholders
equity and is expensed to the consolidated statements of income based on the
vesting period of the options. On exercise of options, proceeds up to the par
value of the stock issued are credited to ordinary share capital; any proceeds
in excess of the par value of the stock issued are credited to additional paid
in capital in the period in which the options are exercised. Options that
expire without exercise are also credited to additional paid in capital in the
period in which the option expired. Revenue and cost of 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. An accrual, where
necessary, is made for water delivered but unbilled at year end when readings
are not performed at the year end date. The accrual is matched with the direct
costs of producing, purchasing and delivering water. Consulting revenue is recognized on the accrual basis based upon time spent at
agreed upon rates and is included under service revenue. Plant construction revenue is recognized using the percentage-of-completion
method. The recognized income is that percentage of estimated total income
that incurred costs to date bear to estimated total costs after giving effect
to estimates of costs to complete based upon most recent information. This
revenue is included under services revenue. Interest income is recognized by the Company over the term of the loan based on
the interest rate stated in the loan and is included in interest income. 54




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Accounting policies (continued) Repairs and maintenance:All repair and maintenance costs are expensed as
incurred. Comparative figures:Certain of the prior years figures have been adjusted to
conform to the current years presentation. The Company has reallocated
maintenance expenses in cost of sales and general and administrative expenses
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. 3. 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. The total
consideration paid was $26,976,648, comprised of $24,202,651 in cash and
185,714 ordinary shares of the Company and $482,286 in costs related to the
acquisitions. Effective February 1, 2003, the Company acquired as part of this acquisition of
DesalCo Limited, 12.7% of the outstanding voting common shares of Waterfields
Company Limited (Waterfields). On July 30, 2003, the Company acquired a
further 13.5% of Waterfields and effective August 1, 2003, acquired an
additional 64.7% interest resulting in total controlling interest of 90.9% of
Waterfields. The total consideration paid was $9,652,491, comprising of
$9,431,610 in cash and $220,881 of acquisition related 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. The following table summarizes the estimated fair values of assets acquired and
liabilities assumed at the date of the acquisitions. Current assets
    
    
    7,187,798Property, plant and equipment
    
    
    8,947,932Investments in affiliates
    
    
    12,069,998Intangible assets
    
    
    5,766,886Goodwill
    
    
    3,395,752Other assets
    
    
    4,190,883Total assets acquired
    
    
    41,559,249Current liabilities
    
    
    1,877,490Long term debt and liabilities
    
    
    2,266,784Total liabilities assumed
    
    
    4,144,274Less: Minority interest in Waterfields Company Limited
    
    
    785,836Net assets acquired
    
    $
    36,629,139
 55




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. Acquisitions (continued) The results of operations of DesalCo Limited, DesalCo (Barbados) Limited, Ocean
Conversion (Cayman) Limited are included in the consolidated statements of
income from February 1, 2003 and the results of operations of Waterfields
Company Limited are included in the 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: December 31,2003
    
    2002Pro forma revenue
    
    $
    21,841,916
    
    
    $
    21,923,798Pro forma net income
    
    $
    4,704,114
    
    
    $
    4,145,465Pro forma earnings per share:Basic
    
    $
    0.83
    
    
    $
    0.75Diluted
    
    $
    0.82
    
    
    $
    0.73
 4. Cash and cash equivalents Cash and cash equivalents are not restricted as to withdrawal or use. At
December 31, 2003, the equivalent United States dollars are denominated in the
following currencies: December 31,2003
    
    2002Bank accountsUnited States dollars
    
    
    3,459,939
    
    
    
    144,354Cayman Islands dollar
    
    
    1,650,342
    
    
    
    27,755Bahamian dollar
    
    
    492,076
    
    
    
    297Belize dollar
    
    
    320,300
    
    
    
    88,599Barbadian dollar
    
    
    15,175
    
    
    
    5,937,832
    
    
    
    261,005Term depositsUnited States dollars
    
    
    1,505,192
    
    
    
    Bahamian dollar
    
    
    474,901
    
    
    
    Belize dollar
    
    
    318,999
    
    
    
    307,2992,299,092
    
    
    
    307,299Total cash and cash equivalents
    
    $
    8,236,924
    
    
    $
    568,304
 5. Accounts receivable Accounts receivable comprise receivables from customers and are shown net of an
allowance for doubtful accounts of $74,867 (2002: $12,000). Significant
concentrations of credit risk are disclosed in Note 25.  56




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. Inventory December 31,2003
    
    2002Water stock
    
    
    42,440
    
    
    
    40,409Consumables stock
    
    
    190,280
    
    
    
    122,150Spare parts stock
    
    
    1,313,465
    
    
    
    225,572$
    1,546,185
    
    
    $
    388,131
 7. Loans receivable As part of the acquisition of Ocean Conversion (Cayman) Limited, the following
loans receivable were acquired. Management estimates these loans to be fully
collectible and as such no impairment allowance has been provided at December
31, 2003. December 31,2003
    
    2002Due from Water Authority Cayman: Original loan of $1,216,000,
non-interest
bearing, balance receivable in monthly installments of $14,476
to November 30, 2008. Loan secured by Red Gate plant, machinery
and equipment.
    
    $
    854,095
    
    
    $
    Due from Water Authority Cayman: Two loans originally aggregated
$1,819,920, bearing interest at 5% per annum, receivable in combined
monthly installments of principle and interest of $25,721 to March 2005,
secured by Lower Valley plant, machinery and equipment.
    
    
    373,275
    
    
    
    Due from Water Authority Cayman: Two loans originally aggregated
$1,168,600, bearing interest at 5% per annum, receivable in combined
monthly installments of principle and interest of $16,516 to March 2006,
secured by Lower Valley plant, machinery and equipment.
    
    
    420,958Due from Water Authority Cayman: Two interest free loans originally
aggregated $3,129,000, receivable in monthly installments of $37,250
to November 2009, secured by North Sound Road plant, machinery
and equipment.
    
    
    2,644,750
    
    
    
    Total loans receivable
    
    
    4,293,078
    
    
    
    Less current portion
    
    
    (1,098,732
    )
    
    (
    
    )Loans receivable, excluding current portion
    
    $
    3,194,346
    
    
    $
    Principal amounts due in each of the next five years are as follows:2004
    
    
    
    
    
    $
    1,098,7322005
    
    
    
    
    
    
    887,7892006
    
    
    
    
    
    
    669,8552007
    
    
    
    
    
    
    620,7142008
    
    
    
    
    
    
    606,238Thereafter
    
    
    
    
    
    
    409,750
 57




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. Property, plant and equipment December 31,2003
    
    2002CostLand
    
    
    475,679
    
    
    
    475,679Buildings
    
    
    4,149,669
    
    
    
    2,211,200Plant and equipment
    
    
    15,923,840
    
    
    
    11,288,460Distribution system
    
    
    17,781,207
    
    
    
    13,237,043Office furniture, fixtures and equipment
    
    
    864,426
    
    
    
    715,539Vehicles
    
    
    700,750
    
    
    
    607,230Leasehold improvements
    
    
    246,777
    
    
    
    39,480Lab equipment
    
    
    41,305
    
    
    
    41,035Assets under construction
    
    
    628,504
    
    
    
    1,202,05840,812,157
    
    
    
    29,817,724Accumulated depreciation
    
    
    (11,149,860
    )
    
    
    (9,564,078
    )Net book value
    
    $
    29,662,297
    
    
    $
    20,253,646
 At December 31, 2003, the Company had outstanding capital commitments of
approximately $600,000 (2002: $1,080,000). It is the Companys policy to
maintain adequate insurance for loss or damage to all fixed assets that in
managements assessment may be susceptible to loss. The Company does not
insure the costs of its underground distribution system which total $9,751,456
(2002: $9,806,663). 9. 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) Limited for approximately $2,120,250. The Company now owns 50%
of the voting common shares of Ocean Conversion (BVI) Ltd., representing a
43.5% interest in the company. The Companys investment in Ocean Conversion (BVI) Ltd. is accounted for using
the equity method of accounting. The excess cost over the Companys share of fair value net assets acquired of
Ocean Conversion (BVI) Ltd. is $6,654,362 which is considered equity-method
goodwill. In accordance with SFAS No. 142 this equity-method goodwill is not
being amortized, but is analyzed for impairment. At December 31, 2003,
management believes there to be no impairment of this equity-method goodwill. 58




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. Investments in affiliates (continued) Summarized financial information of Ocean Conversion (BVI) Ltd. is presented as
follows: December 31,2003
    
    2002Current assets
    
    $
    2,154,380
    
    
    $
    2,771,844Non-current assets
    
    
    4,612,348
    
    
    
    3,608,175Total assets
    
    $
    6,766,728
    
    
    $
    6,380,019Current liabilities
    
    $
    1,006,733
    
    
    $
    540,617Non-current liabilities
    
    
    1,410,063
    
    
    
    1,739,379Total liabilities
    
    $
    2,416,796
    
    
    $
    2,279,996
 For the year ended December 31,2003
    
    2002Water sales
    
    $
    4,819,605
    
    
    $
    5,427,108Cost of water sales
    
    
    2,110,066
    
    
    
    1,862,747Income from operations
    
    
    1,663,353
    
    
    
    2,205,086Net income
    
    
    1,738,200
    
    
    
    2,229,625
 10. 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
$726,902 to an intangible asset which represents the fair value of a Management
Services Agreement originally dated December 4, 2000, under which DesalCo
Limited provides management and engineering services to Ocean Conversion (BVI)
Ltd an affiliated company. Original agreement was amended on February 7, 2003
such that there is no expiration term for this agreement. 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
$337,149 to an intangible asset which represents the fair value of the DWEER
Distribution Agreement between DesalCo Limited and DWEER Technology Limited
which expires on October 31, 2009. 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 attributable to the intangible asset of the DWEER
Distribution Agreement is being amortized over the remaining term of the
seven-year agreement and has a weighted average useful life of 6.83 years. (c)    As part of the acquisition of DesalCo Limited, the Company attributed
$104,050 to an intangible asset which represents the fair value of an
operations agreement between Sandy Lane Properties Ltd. and DesalCo (Barbados)
Limited, a wholly owned subsidiary of DesalCo Limited. Under the terms of the
agreement, DesalCo (Barbados) Limited provides operations and maintenance
services for a seawater reverse osmosis desalination plant. The carrying amount
attributable to the intangible asset of the operations agreement is being
amortized over the remaining term of the five-year agreement and has a weighted
average useful life of 3.0 years. 59




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. Intangible assets (continued) (d)    As part of the acquisition of Ocean Conversion (Cayman) Limited, the
Company attributed $4,598,785 to intangible assets which represent the fair
value of three Water Production and Supply Agreements between Ocean Conversion
(Cayman) Limited and the Government of the Cayman Islands, dated April 25,
1994, June 18, 1997 and 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 amounts attributable to the
intangible assets of the Water Production and Supply Agreements are being
amortized over the remaining term of the agreements, which are approximately 6,
3 and 7 years, respectively and has a weighted average useful life of 5.8
years. (e)    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 new agreement has been executed, but final
completion is subject to satisfying three conditions precedent, of which to
date we have met one and BWSL has met one. We are awaiting confirmation from
the Government of Belize that our application for extension of our existing
import duty and tax exemptions has been granted until at least September 17,
2009, which will satisfy the final condition precedent. The terms and
conditions of the contract signed on June 26, 1992 between BWSL and our company
remain in full force and effect until all conditions precedent are satisfied.
The carrying amount of the Belize Water Production and Supply Agreement which
was previously being amortized over its weighed average useful life of 10.75
years is now being amortized over the term of the new 23-year agreement and has
a weighted average useful life of 23.0 years. December 31,2003
    
    2002CostNon-amortizable intangible assetManagement service agreement
    
    
    726,902
    
    
    
    Amortizable intangible assetsDWEERTM distribution agreement
    
    
    337,149
    
    
    
    Operations agreement with Sandy Lane
    
    
    104,050
    
    
    
    Cayman water production and supply agreements
    
    
    4,598,785
    
    
    
    Belize water production and supply agreement
    
    
    2,095,255
    
    
    
    2,095,2557,862,141
    
    
    
    2,095,255Accumulated amortizationNon-amortizable intangible assetManagement service agreement
    
    
    
    
    
    
    Amortizable intangible assetsDWEERTM distribution agreement
    
    
    (45,250
    )
    
    
    Operations agreement with Sandy Lane
    
    
    (31,793
    )
    
    
    Cayman water production and supply agreements
    
    
    (718,346
    )
    
    
    Belize water production and supply agreement
    
    
    (634,797
    )
    
    
    (475,381
    )(1,430,186
    )
    
    
    (475,381
    )Net book value
    
    $
    6,431,955
    
    
    $
    1,619,874Amortization for each of the next five years are as follows:2004
    
    
    
    
    
    $
    966,4652005
    
    
    
    
    
    
    966,4652006
    
    
    
    
    
    
    857,5282007
    
    
    
    
    
    
    825,2442008
    
    
    
    
    
    
    703,073Thereafter
    
    
    
    
    
    
    1,386,278
 60




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. Goodwill As of January 1, 2002, the Company adopted SFAS No. 142 Goodwill and Other
Intangible Assets, and in accordance with this statement the goodwill is not
amortized, but is analyzed for impairment annually. The carrying amount of
goodwill allocated to the reporting units for the year ended December 31, 2003
are as follows: Retail
    
    Bulk
    
    ServicesSegment
    
    Segment
    
    Segment
    
    TotalBalance as of December 31, 2002
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Goodwill acquired during the year
    
    
    1,170,511
    
    
    
    2,136,524
    
    
    
    88,717
    
    
    
    3,395,752Balance as of December 31, 2003
    
    $
    1,170,511
    
    
    $
    2,136,524
    
    
    $
    88,717
    
    
    $
    3,395,752
 The reporting segments are tested for impairment in the fourth quarter, by
comparing the fair value of the reporting segments to the carrying value. The
fair value is determined using discounted cash flow based on managements best
estimates of forecasts for each segment. At December 31, 2003, the results of
the impairment tests did not require the Company to recognize an impairment
loss. 12. Dividends Quarterly interim dividends were declared in respect of class A common stock
and redeemable preferred stock as follows: 2003
    
    2002
    
    2001March 31
    
    $
    0.105
    
    
    $
    0.105
    
    
    $
    0.10June 30
    
    $
    0.105
    
    
    $
    0.105
    
    
    $
    0.10September 30
    
    $
    0.105
    
    
    $
    0.105
    
    
    $
    0.10December 31
    
    $
    0.105
    
    
    $
    0.105
    
    
    $
    0.10
 Interim dividends for the first three quarters were paid during each respective
year. The interim dividend for the fourth quarter was declared by the Board of
Directors in October of each respective year. These quarterly interim dividends
are subject to no further ratification and consequently the fourth quarter
interim dividends have been recorded as a liability in each respective year.
Included in dividends payable at December 31, 2003 are unclaimed dividends of
$79,311 (2002: $85,671). 13. Long term debt December 31,2003
    
    2002Scotiabank $20,000,000 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, repayable in quarterly payments of $714,286
plus interest, due February 6, 2010. (Rate at December 31, 2003 was 2.68%)
    
    $
    17,857,143
    
    
    
    Scotiabank $1,428,000 term loan bearing interest at 3-month LIBOR
plus 1.5%, repayable in semi-annual installments of $240,000 plus interest,
due December 31, 2007.
    
    
    1,188,000Royal Bank of Canada loan bearing interest at LIBOR plus 1.75%,
repayable in quarterly installments of principal and interest, due in 2007
    
    
    801,414
 61




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. Long term debt (continued) December 31,2003
    
    2002Royal Bank of Canada loan bearing interest at Nassau Prime Lending rate
plus 1.5%, repayable in quarterly installments of principal and interest,
due in 2007
    
    
    470,024Inter-American Investment Corporation loan bearing interest at LIBOR
plus 2.75%, repayable in quarterly installments of $40,000 plus interest,
due in 2004.
    
    
    80,000European Investment Bank loan bearing interest at 3.36%, repayable in
semi annual installments, repaid in full during the year ended December
31, 2003.
    
    
    
    
    
    
    905,384Royal Bank of Canada loan bearing interest at six month LIBOR plus 1.5%,
repayable in semi annual installments of $62,500 plus interest,
Repaid in full during the year ended December 31, 2003.
    
    
    
    
    
    
    312,500Royal Bank of Canada loan bearing interest at monthly LIBOR plus 1.5%,
repayable in monthly installments of $12,500 plus interest,
repaid in full during the year ended December 31, 2003.
    
    
    
    
    
    
    1,375,000Total long term debt
    
    
    20,396,581
    
    
    
    2,592,884Less current portion
    
    
    (3,763,144
    )
    
    
    (518,275
    )Long term debt, excluding current portion
    
    $
    16,633,437
    
    
    $
    2,074,609
 In addition to these facilities, as at December 31, 2003, 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. The Company has collateralized all borrowings under the $20,000,000 seven-year
term loan and the $2,000,000 un-drawn line of credit by providing Scotiabank
with a first debenture over fixed and floating assets, first legal charge over
land and buildings, security interest in all insurance policies and claims,
reimbursement agreement for standby letters of credit, pledge of capital stock
of each subsidiary and guarantees and negative pledges from each company where
majority interest was acquired. The two Royal Bank of Canada loans and the loan from Inter-American Investment
Corporation have been collateralized by the assets of Waterfields Company
Limited. The aggregate capital repayment obligations over the next five
years are as follows: 2004
    
    $
    3,808,5552005
    
    
    3,745,6102006
    
    
    3,461,9202007
    
    
    2,951,9292008
    
    
    2,857,144Thereafter
    
    
    3,571,423
 62




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. Share capital and additional paid in capital Redeemable preferred stock (preference shares) is issued under the Companys
Employee Share Incentive Plan as discussed in Note 22 and carries the same
voting and dividend rights as ordinary shares of common stock (ordinary
share). Preference shares vest over four years and convert to common stock on
a share for share basis on the fourth anniversary of each grant date.
Preference shares are only redeemable with the Companys agreement. Upon
liquidation, preference shares rank in preference to the ordinary shares to the
extent of the par value of the preference shares and any related additional
paid in capital. The Company has a Class B stock option plan designed to deter coercive
takeover tactics. Pursuant to this plan, holders of ordinary shares and
preference shares were granted options which entitle them to purchase 1/100 of
a share of Class B stock at an exercise price of $37.50 if a person or group
acquires or commences a tender offer for 20% or more of the Companys ordinary
shares. Option holders (other than the acquiring person or group) will also be
entitled to buy, for the $37.50 exercise price, ordinary shares with a then
market value of $75.00 in the event a person or group actually acquires 20% or
more of the Companys ordinary shares. Options may be redeemed at $0.01 under
certain circumstances. 60,000 of the Companys authorized but unissued
ordinary shares have been reserved for issue as Class B stock. The Class B
stock ranks pari passu with ordinary shares for dividend and voting rights. No
Class B stock options have been exercised or redeemed up to December 31,
2003. 15. Expenses For the year ended December 31,2003
    
    2002
    
    2001Cost of water sales comprise the following:Water purchases
    
    
    263,586
    
    
    
    1,952,331
    
    
    
    2,074,759Depreciation
    
    
    1,586,217
    
    
    
    1,175,349
    
    
    
    1,018,541Amortization of intangible asset (Note 10)
    
    
    954,804
    
    
    
    194,906
    
    
    
    193,703Employee costs
    
    
    2,046,181
    
    
    
    1,042,192
    
    
    
    939,976Fuel oil
    
    
    639,434
    
    
    
    179,275
    
    
    
    91,842Royalties (Note 20)
    
    
    781,632
    
    
    
    737,064
    
    
    
    694,351Electricity
    
    
    2,499,695
    
    
    
    710,168
    
    
    
    534,919Insurance
    
    
    224,386
    
    
    
    124,404
    
    
    
    89,808Maintenance
    
    
    1,144,141
    
    
    
    441,396
    
    
    
    262,092Other direct costs
    
    
    536,205
    
    
    
    325,092
    
    
    
    209,126$
    10,676,281
    
    
    $
    6,882,177
    
    
    $
    6,109,117General and administrative expenses
comprise the following:Employee costs
    
    
    2,198,906
    
    
    
    1,427,182
    
    
    
    1,299,877Depreciation
    
    
    112,923
    
    
    
    93,777
    
    
    
    94,500Professional fees
    
    
    352,340
    
    
    
    278,433
    
    
    
    280,297Insurance
    
    
    414,525
    
    
    
    141,650
    
    
    
    89,328Directors fees and expenses
    
    
    164,794
    
    
    
    157,877
    
    
    
    107,184Maintenance
    
    
    197,787
    
    
    
    21,339
    
    
    
    22,663Other indirect costs
    
    
    898,249
    
    
    
    523,746
    
    
    
    606,211$
    4,339,524
    
    
    $
    2,644,004
    
    
    $
    2,500,060
 63




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. 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 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 years ended December 31, 2003. 2003
    
    2002
    
    2001Net income
    
    $
    4,177,081
    
    
    $
    2,576,310
    
    
    $
    2,764,573Less:Dividends paid and earnings attributable on
preference shares
    
    
    (5,706
    )
    
    
    (8,913
    )
    
    
    (10,794
    )Net income available to holders of ordinary shares
in the determination of basic earnings per ordinary share
    
    $
    4,171,375
    
    
    $
    2,567,397
    
    
    $
    2,753,779Weighted average number of ordinary shares
in the determination of basic earnings per ordinary share
    
    
    4,917,183
    
    
    
    3,969,861
    
    
    
    3,897,969Plus:Weighted average number of preference
shares outstanding during the year
    
    
    19,604
    
    
    
    23,801
    
    
    
    31,213Potential dilutive effect of unexercised options and
warrants
    
    
    100,743
    
    
    
    93,870
    
    
    
    70,509Weighted average number of shares used for determining
diluted earnings per ordinary share
    
    
    5,037,530
    
    
    
    4,087,532
    
    
    
    3,999,691
 17. Segmented 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. 64




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. Segmented information (continued) As at December 31 and for the year then endedRetail
    
    Bulk
    
    Services2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001Water sales
    
    
    10,918,151
    
    
    
    10,683,592
    
    
    
    10,017,330
    
    
    
    9,130,741
    
    
    
    1,471,097
    
    
    
    1,230,775
    
    
    
    1,090,293
    
    
    
    
    
    
    
    Other income
    
    
    (297,793
    )
    
    
    (60,487
    )
    
    
    97,182
    
    
    
    (420,445
    )
    
    
    8,289
    
    
    
    28,463
    
    
    
    (51,694
    )
    
    
    
    
    
    
    Other income includes:Interest revenue
    
    
    11,597
    
    
    
    
    
    
    
    30
    
    
    
    89,679
    
    
    
    14,711
    
    
    
    28,554
    
    
    
    197
    
    
    
    
    
    
    
    Interest expense
    
    
    422,510
    
    
    
    103,427
    
    
    
    99,865
    
    
    
    368,462
    
    
    
    559
    
    
    
    91
    
    
    
    99,281
    
    
    
    
    
    
    
    Cost of water sales
    
    
    4,972,300
    
    
    
    5,824,815
    
    
    
    5,197,293
    
    
    
    5,920,393
    
    
    
    1,057,362
    
    
    
    911,824
    
    
    
    491,593
    
    
    
    
    
    
    
    General and
administrative
    
    
    2,684,216
    
    
    
    2,418,378
    
    
    
    2,309,238
    
    
    
    1,731,595
    
    
    
    225,626
    
    
    
    190,822
    
    
    
    194,425
    
    
    
    
    
    
    
    Cost of water sales
and general and
administrative
expenses include:Depreciation
    
    
    1,077,609
    
    
    
    1,089,021
    
    
    
    952,216
    
    
    
    835,315
    
    
    
    180,105
    
    
    
    160,825
    
    
    
    5,105
    
    
    
    
    
    
    
    Amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    877,761
    
    
    
    194,907
    
    
    
    193,703
    
    
    
    77,043
    
    
    
    
    
    
    
    Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,743
    
    
    
    
    
    
    
    Net income
    
    
    2,963,842
    
    
    
    2,379,912
    
    
    
    2,607,981
    
    
    
    1,038,771
    
    
    
    196,398
    
    
    
    156,592
    
    
    
    328,839
    
    
    
    
    
    
    
    Property, plant and
equipment
    
    
    19,701,187
    
    
    
    18,812,973
    
    
    
    16,873,140
    
    
    
    11,954,770
    
    
    
    1,440,673
    
    
    
    1,541,795
    
    
    
    14,095
    
    
    
    
    
    
    
    Total assets
    
    
    45,028,169
    
    
    
    23,347,530
    
    
    
    20,410,406
    
    
    
    22,224,004
    
    
    
    2,160,107
    
    
    
    2,310,772
    
    
    
    4,255,510
    
    
    
    
    
    
    
    
   [Continued from above table, first column(s) repeated] As at December 31 and for the year then endedReconciliation
    
    Total2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001Water sales
    
    
    (2,084,980
    )
    
    
    
    
    
    
    
    
    
    
    19,054,205
    
    
    
    12,154,689
    
    
    
    11,248,105Other income
    
    
    952,680
    
    
    
    
    
    
    
    
    
    
    
    182,748
    
    
    
    (52,198
    )
    
    
    125,645Other income includes:Interest revenue
    
    
    (19,139
    )
    
    
    
    
    
    
    
    
    
    
    82,334
    
    
    
    14,711
    
    
    
    28,584Interest expense
    
    
    273,384
    
    
    
    
    
    
    
    
    
    
    
    1,163,637
    
    
    
    103,986
    
    
    
    99,956Cost of water sales
    
    
    (708,005
    )
    
    
    
    
    
    
    
    
    
    
    10,676,281
    
    
    
    6,882,177
    
    
    
    6,109,117General and
administrative
    
    
    (269,924
    )
    
    
    
    
    
    
    
    
    
    
    4,339,524
    
    
    
    2,644,004
    
    
    
    2,500,060Cost of water sales
and general and
administrative
expenses include:Depreciation
    
    
    (218,889
    )
    
    
    
    
    
    
    
    
    
    
    1,699,140
    
    
    
    1,269,126
    
    
    
    1,113,041Amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    954,804
    
    
    
    194,907
    
    
    
    193,703Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,743
    
    
    
    
    
    
    
    Net income
    
    
    (154,371
    )
    
    
    
    
    
    
    
    
    
    
    4,177,081
    
    
    
    2,576,310
    
    
    
    2,764,573Property, plant and
equipment
    
    
    (2,007,755
    )
    
    
    
    
    
    
    
    
    
    
    29,662,297
    
    
    
    20,253,646
    
    
    
    18,414,935Total assets
    
    
    (2,945,557
    )
    
    
    
    
    
    
    
    
    
    
    68,562,126
    
    
    
    25,507,637
    
    
    
    22,721,178
 65




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. Segmented information (continued) For the year ended December 31, 2003, revenues from the Cayman Island
operations were $15,541,455 (2002: $10,565,568; 2001: $9,990,997). Revenues
from all foreign country operations were $3,512,750 (2002: $1,589,121; 2001:
$1,257,108). Included in the revenues from foreign countries is $1,869,077
(2002: $118,024; 2001: $26,333) from the operations in Bahamas, $1,245,744
(2002: $1,471,097; 2001: $1,230,775) from our operations in Belize and $397,929
(2002: $nil; 2001: $nil) from our operations in Barbados. For the year ended December 31, 2003, property, plant and equipment located in
the Cayman Islands was $19,375,384 (2002: 17,698,944; 2001: 15,770,560).
Property, plant and equipment in all the foreign country operations were
$10,286,913 (2002: $2,554,702: 2001: 2,644,375). Included in property, plant
and equipment from foreign operations is $8,904,739 (2002: $1,114,029; 2001:
$1,102,580) from the operations in Bahamas and $1,373,357 (2002: $1,440,673;
2001: $1,541,795) from our operations in Belize. For the year ended December 31, 2003, revenues in the amount of $4,022,544
(2002: $nil; 2001: $nil) were earned from one customer. These revenues are
located in the Bulk segment. During the year end December 31, 2003, revenues which were earned in the
Service segment from the Bulk segment through various management service
agreements and an engineering service agreement amounted to $1,038,435 (2002:
$nil; 2001: $nil). Any intercompany amounts included in this amount have been
eliminated in accordance with the basis of consolidation. 18. Related party transactions A professional service firm, of which a director was a partner, provided
professional services during the year ended December 31, 2003 for which it
charged $200,685 (2002: $225,400; 2001: $275). As at December 31, 2003, the amounts receivable from Ocean Conversion (BVI)
Ltd. relating to revenue earned was $227,432, from revenues of $579,950. 19. Leases The Company has committed to lease premises in the Cayman Islands for a period
of four years from February 1, 2004 to January 31, 2008 at approximately
$118,512 per annum. During the year ended December 31, 2003, the Company entered into a six month
lease which ended on September 30, 2003, to rent a portable reverse osmosis
machine capable of producing 150,000 US gallons of water per day. Total lease
payments made during the year were $120,000. 20. Commitments The Company is obligated to supply water, where feasible, to customers in the
Cayman Islands within its licence area in accordance with the terms of the
licence. Royalties are paid to the Government of the Cayman Islands at the rate
of 7.5% of gross water sales. The Company has six water supply agreements under which it is required to
provide minimum water quantities. 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. 66




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 20. Commitments (continued) The Company has guaranteed to Scotiabank 50% of the Ocean Conversion (BVI) Ltd.
loan 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%. At December 31, 2003 the
outstanding balance of this loan was $505,000 which is also collaterized by
other assets of Ocean Conversion (BVI) Ltd. 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. In addition to the above guarantee provided by the Company to Water & Sewerage
Company of the Bahamas, the Company also provides a bank guarantee, with the
Royal Bank of Canada, Nassau, in the amount of $1,910,775 to the Water &
Sewerage Corporation of The Bahamas in that the Company shall duly perform and
observe all terms and provisions pursuant to the contract between the Water &
Sewerage Corporation of The Bahamas and the Company. In the event of the
Companys default on its 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. 21. Water purchase agreement As a result of the Companys acquisition of Ocean Conversion (Cayman) Limited
(OCL), the Company cancelled its water purchase agreement with OCL, which
originally was planned to expire on December 31, 2004. Under the terms of the
agreement, the Company was required to purchase an annual minimum amount of
water. At December 31, 2003, accounts payable includes $nil (2002: $208,556)
outstanding under the agreement. 22. Stock compensation The Company operates various stock compensation plans that form part of
employees remuneration. Stock compensation expense of $138,750 (2002:
$442,497; 2001: $169,599) is recorded in accordance with APB Opinion No. 25 and
included within employee costs. Had compensation cost for the Companys stock
based compensation plans been determined on the fair value at the grant dates
for award under those plans consistent with the method of SFAS 123, the
Companys net income and earnings per shares would have been reduced to the pro
forma amounts below: For the Year ended December 31,2003
    
    2002
    
    2001Net income  as reported
    
    $
    4,177,081
    
    
    $
    2,576,310
    
    
    $
    2,764,573Net income  pro forma
    
    $
    3,365,684
    
    
    $
    2,396,105
    
    
    $
    2,288,882Earnings per share:Basic  as reported
    
    $
    0.85
    
    
    $
    0.65
    
    
    $
    0.71Basic  pro forma
    
    $
    0.68
    
    
    $
    0.60
    
    
    $
    0.59Diluted  as reported
    
    $
    0.83
    
    
    $
    0.63
    
    
    $
    0.69Diluted  pro forma
    
    $
    0.67
    
    
    $
    0.58
    
    
    $
    0.57
 67




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 22. Stock compensation (continued) In calculating the fair value for these options under SFAS 123 the
Black-Scholes model was used with the following weighted average assumptions: 2003
    
    2002
    
    2001Exercise price
    
    $
    19.59
    
    
    $
    12.17
    
    
    $
    10.55Grant date market value
    
    $
    19.50
    
    
    $
    14.71
    
    
    $
    10.97Risk free interest rate
    
    
    2.37
    %
    
    
    2.24
    %
    
    
    3.93
    %Expected life
    
    3.22
    years
    
    3.23
    years
    
    3.21
    yearsExpected volatility
    
    
    35.55
    %
    
    
    42.91
    %
    
    
    52.79
    %Expected dividend yield
    
    
    2.16
    %
    
    
    2.85
    %
    
    
    3.67
    %
 Employee Share Incentive Plan (Preference shares) The Company awards preference shares for $nil consideration under the Employee
Share Incentive Plan as part of compensation for eligible employee services,
excluding Directors and Executive Officers, that require future services as a
condition to the delivery of ordinary shares. In addition options are granted
to purchase preference shares at a fixed price, determined annually, which will
typically represent a discount to the market value of the ordinary shares. In
consideration for preference shares, the Company issues ordinary shares on a
share for share basis. Under the plan the conversion is conditional on the
grantees satisfying requirements outlined in the award agreements. Preference
shares are only redeemable with the Companys agreement. The details of preferred shares and preferred share options granted and
exercised under the Employee Share Incentive Plan are as follows: Year of
    
    
    
    
    
    Strike
    
    Options
    
    OptionsGrant
    
    Granted
    
    Price
    
    Exercised
    
    ExpiredPreferred shares
    
    
    2001
    
    
    
    3,963
    
    
    $nil
    
    
    N/A
    
    
    
    N/A2002
    
    
    
    2,713
    
    
    $nil
    
    
    N/A
    
    
    
    N/A2003
    
    
    
    2,993
    
    
    $nil
    
    
    N/A
    
    
    
    N/APreferred share options
    
    
    2001
    
    
    
    3,963
    
    
    $
    5.32
    
    
    
    1,858
    
    
    
    2,1052002
    
    
    
    2,713
    
    
    $
    8.13
    
    
    
    617
    
    
    
    2,0962003
    
    
    
    2,993
    
    
    $
    8.95
    
    
    
    844
    
    
    
    2,149
 Each employees option to purchase preferred shares must be exercised within 30
days of the grant date, which is the 90th day after the date of the auditors
certificate on the financial statements for the relevant year. Employee Share Option Plan (Ordinary Stock Options) In 2001, the Company introduced an employee stock option plan for certain
long-serving employees of the Company. Under the plan these employees are
granted in each calendar year, as long as the employee is a participant in the
Employee Share Incentive Plan, options to purchase ordinary shares. The price
at which the option may be exercised will be the closing market price on the
grant date, which is the 90th day after the date of the auditors certificate
on the financial statements for the relevant year. The number of options each
employee is granted is equal to five times the sum of (i) the number of
preference shares which that employee receives for $nil consideration and (ii)
the number of preference share options which that employee exercises in that
given year. Options may be exercised during the period commencing on the
fourth anniversary of the grant date and ending on the thirtieth day after the
fourth anniversary of the grant date. 68




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 22. Stock compensation (continued) Non-Executive Directors Share Plan In 1999, the Company introduced a stock grant plan, which forms part of
Directors remuneration. Under the plan Directors receive a combination of
cash and ordinary shares in consideration of remuneration for their
participation in Board meetings. All Directors are eligible except Executive
Officers, who are covered by individual employment contracts and the Government
elected board member. The number of ordinary shares granted is calculated with
reference to a strike price that is set on October 1 of the year preceding the
grant. Stock granted during the year ended December 31, 2003 totaled 7,735
shares (2002: 6,305) at a strike price of $11.79 (2002: $10.70). Directors and senior management stock compensation Certain members of senior management are entitled to receive, as part of the
compensation for their services to the Company, options to purchase ordinary
shares. During the year ended December 31, 2003, the option plan for senior
management was amended as part of renegotiations of employee contracts. The
amended contracts terminated the stock option plans for all years commencing
from January 1, 2004. The 2003 stock option exercise price was set at the
market price on December 31, 2003. The following table summarizes information about the Companys stock option
plans as of December 31, 2003, 2002 and 2001, and changes during the years
ended on those dates. 2003
    
    2002
    
    2001Exercise
    
    
    
    
    
    Exercise
    
    
    
    
    


    ExerciseNumber
    
    price
    
    Number
    
    price
    
    Number
    
    priceOutstanding at beginning
of year
    
    
    394,530
    
    
    $
    10.02
    
    
    
    341,136
    
    
    $
    8.59
    
    
    
    243,045
    
    
    $
    5.73Granted
    
    
    183,490
    
    
    $
    19.50
    
    
    
    114,086
    
    
    $
    12.17
    
    
    
    162,054
    
    
    $
    10.55Exercised
    
    
    (96,453
    )
    
    $
    8.51
    
    
    
    (58,596
    )
    
    $
    5.94
    
    
    
    (61,858
    )
    
    $
    2.58Forfeited
    
    
    (2,149
    )
    
    $
    8.95
    
    
    
    (2,096
    )
    
    $
    8.14
    
    
    
    (2,105
    )
    
    $
    5.32Outstanding at end of year
    
    
    479,418
    
    
    $
    13.96
    
    
    
    394,530
    
    
    $
    10.02
    
    
    
    341,136
    
    
    $
    8.59Exercisable at end of year
    
    
    428,373
    
    
    $
    14.13
    
    
    
    358,230
    
    
    $
    9.90
    
    
    
    318,531
    
    
    $
    8.55
 The following table summarizes the weighted average grant-date fair value of
options during the year: For the year ended December 31,2003
    
    2002
    
    2001Options granted with an exercise price below
market price on the date of grant:Senior management
    
    
    
    
    
    $
    4.93
    
    
    $
    3.78Non executive Director
    
    
    
    
    
    
    
    
    
    $
    3.89Employees  preferred shares
    
    $
    5.47
    
    
    $
    5.72
    
    
    $
    3.88Overall weighted average
    
    $
    5.47
    
    
    $
    4.95
    
    
    $
    3.81Options granted with an exercise price at
market price on the date of grant:Senior management
    
    $
    4.70
    
    
    
    
    
    
    
    Employees  ordinary share options
    
    $
    4.12
    
    
    $
    4.41
    
    
    $
    3.08Overall weighted average
    
    $
    4.65
    
    
    $
    4.41
    
    
    $
    3.08
 69




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 22. Stock compensation (continued) Summary of options outstanding at December 31, 2003 At December 31, 2003, the range of exercise prices on outstanding options was
$6.75  $20.05. Accordingly the following information is presented on options
outstanding, which are all exercisable, at December 31, 2003: Exercise pricesfrom
    
    Exercise pricesfrom$6.75 - $10.84
    
    $11.17 - $20.05Number of options outstanding at December 31, 2003
    
    
    164,943
    
    
    
    
    263,430Weighted average exercise price
    
    $
    9.49
    
    
    
    $
    17.04Weighted average remaining contractual life
    
    

    0.74
    years
    
    
    

    2.25
    years
 The weighted average fair value per share under SFAS 123 for shares granted
during the year below market price on the date of grant follows: 2003
    
    2002
    
    2001Exercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseNumber
    
    price
    
    Number
    
    price
    
    Number
    
    priceOverall weighted average
    
    
    13,133
    
    
    $
    12.42
    
    
    
    11,941
    
    
    $
    11.12
    
    
    
    11,456
    
    
    $
    7.86
 23. Taxation Under current laws of the Cayman Islands, there are no income, estate,
corporation, capital gains or other taxes payable by the Company on its Cayman
Islands operations. Under the current laws of Belize, the Company has received a tax exemption with
respect to its Belize operations. The exemption expires in January 2006 and may
be renewed in accordance with local legislation. Under current laws of The Commonwealth of The Bahamas, there are no income,
corporation, capital gains or other taxes payable by the Company. The Company
is required to pay an annual business license fee, the calculation of which is
based on the Bahamanian companys preceding years financial statements, and
such fees are payable between January and April of the subsequent year. Under the current laws of Barbados, the Companys Barbados operations are
subject to a 40% Barbados corporate tax and all dividend payments and non-tax
treaty supplier payments are subject to a Barbados withholding tax of 15%. As
at December 31, 2003, the Company had income tax receivable in the amount of
$3,335. The Company has not recorded any deferred tax asset or liability as
management believes that such items would be, if any, immaterial to the
financial statements. A significant majority of the net income of the Company is not subject to
current taxation. The overall net tax expense is less than 1%, which is
attributable to continuing operations in Barbados. There are no significant
permanent reconciling items. 70




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 24. Pension benefits Staff pension plans are offered to all employees in the Cayman Islands. The
plans are administered by third party pension plan providers and are defined
contribution plans whereby the Company matches the contribution of the first 5%
of each participating employees salary. The total amount recognized as an
expense under the plan during the year ended December 31, 2003 was $119,800
(2002: $70,210; 2001: $63,740). 25. Financial instruments Credit risk:
The Company is not exposed to significant credit risk on the vast majority of
customer accounts as the policy is to cease supply of water to customers
accounts that are more than 45 days overdue. The Companys exposure to credit
risk is concentrated on receivables from its Bulk water customers. The
balances from these customers are current or an allowance has been made for
collection as at December 31, 2003 and management does not anticipate any
losses on these concentrations. Interest rate risk:
The interest rates and terms of the Companys loans are presented in Note 13 of
these financial statements. The Company is subject to interest rate risk to
the extent that the LIBOR or Nassau Prime Lending rates change. Foreign exchange risk:
All relevant foreign currencies have fixed exchange rates to the United States
dollar as detailed under the foreign currency accounting policy note. If any
of these fixed exchange rates become floating exchange rates, the Companys
results of operations could be adversely affected. Fair values:
At December 31, 2003 and 2002, the carrying amounts of cash and cash
equivalents, accounts receivable, accounts payable and other liabilities and
dividends payable approximate fair values due to the short term maturities of
these assets and liabilities. Management considers that the carrying amounts
for loans receivable and long term debt due to Scotiabank and the Royal Bank of
Canada approximate their fair value. 26. Non-cash transactions The Company made the following non-cash transactions: 2003
    
    2002
    
    2001Redemption of preference shares and issue of
replacement ordinary shares at $nil consideration
    
    $
    11,974
    
    
    $
    9,700
    
    
    $
    17,112Preference shares issued to employees at $nil
consideration (Note 22)
    
    $
    3,592
    
    
    $
    3,256
    
    
    $
    4,756Redemption of preference shares at $nil
consideration
    
    
    (162
    )
    
    
    
    
    
    
    Ordinary shares issued under the Non-executive
Directors Share Plan at $nil consideration (Note 22)
    
    
    102,602
    
    
    
    66,600
    
    
    
    56,998Ordinary shares issued under senior management
employment agreements at $nil consideration (Note 22)
    
    
    28,715
    
    
    
    30,303
    
    
    
    Additional paid in capital from exercise of stock options
    
    
    37,500
    
    
    
    75,171
    
    
    
    227,420$
    172,247
    
    
    $
    175,330
    
    
    $
    289,174
 71




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 26. Non-cash transactions 2003
    
    2002
    
    2001Reduction in ordinary shares and additional paid-in capital
from cancellation of shares repurchased
    
    $
    
    
    
    $
    36,710
    
    
    $
    271,595Addition of ordinary shares and additional paid-in capital
from issuance of shares in the acquisition
    
    $
    2,291,711
    
    
    $
    
    
    
    $
    Dividends declared but not paid (Note 12)
    
    $
    686,118
    
    
    $
    508,444
    
    
    $
    499,383
 27. Impact of recent issued accounting standards The Financial Accounting
Standards Board issued three standards and one
interpretation that effect the Company. A summary of these standards and
interpretation is given below: In June 2001, the FASB issued SFAS No. 143, Accounting for Assets Retirement
Obligations. SFAS No. 143 requires the Company to record the fair value of an
asset retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible long-lived assets
that result from the acquisition, construction, development and/or normal use
of the assets. The Company also records a corresponding asset that is
depreciated over the life of the asset. Subsequent to the initial measurement
of the asset retirement obligation, the obligation will be adjusted at the end
of each period to reflect the passage of time and changes in the estimated
future cash flows underlying the obligation. The Company is required to adopt
SFAS No. 143 on January 1, 2003. The Company adopted SFAS No. 143 early during
the year ended December 31, 2002. The adoption did not have a material effect
on the Companys financial statements. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an amendment of FASB Statements No.
123. This Statement amends FASB Statement No. 123 Accounting for Stock-Based
Compensation, to provide alternative methods of transition for voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition the Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. All of the disclosure modifications required for the
annual financial statements have been included in the notes to these
consolidated financial statements. In January 2003, the Financial Accounting Standards Board (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 application of this Interpretation is not expected to have a
material effect on the Companys financial statements. In May 2003, FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This Statement is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatory redeemable financial
instruments of nonpublic entities. The Company does not expect the adoption of
the Statement to result in an impact on the Companys financial statements. 72




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Independent Auditors Report The Board of Directors
Ocean Conversion (BVI) Ltd We have audited the accompanying consolidated balance sheet of Ocean
Conversion (BVI) Ltd. and its subsidiary (the Company) as of December 31,
2003 and the related consolidated statements of income, stockholders equity
and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We conducted our audit in accordance with the auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present
fairly, in all material aspects, the financial position of Ocean Conversion
(BVI) Ltd. and its subsidiary as of December 31, 2003, and the results of their
operations and cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America. Chartered Accountants March 12, 2004 73




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OCEAN CONVERSION (BVI) LTD. CONSOLIDATED BALANCE SHEET DECEMBER 31, 2003 (Expressed in United States dollars) 2003ASSETSCurrent assetsCash and cash equivalents (Note 3)
    
    $
    1,196,267Accounts receivable (Note 4)
    
    
    696,818Deferred fees
    
    
    18,968Inventory
(Note 5)
    
    
    217,605Prepaid expenses and other assets
    
    
    24,722Total current assets
    
    
    2,154,380Property, plant and equipment, net (Note 6)
    
    
    4,612,348Total assets
    
    $
    6,766,728LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable and other liabilities
    
    $
    756,733Current portion of long term debt (Note 7)
    
    
    250,000Total current liabilities
    
    
    1,006,733Profit sharing provision (Note 11)
    
    
    905,063Long term debt (Note 7)
    
    
    505,000Total liabilities
    
    
    2,416,796Stockholders equityClass A, voting shares, $1 par value. Authorized 600,000 shares:Issued and outstanding 555,000 shares
    
    
    555,000Class B, voting shares, $1 par value. Authorized 600,000 shares:Issued and outstanding 555,000 shares
    
    
    555,000Class C, non-voting shares. $1 par value. Authorized 600,000 shares;Issued and
outstanding 165,000 shares
    
    
    165,000Additional paid-in capital
    
    
    225,659Retained earnings
    
    
    2,849,273Total stockholders equity
    
    
    4,349,932Commitments (Note 8)Total liabilities and stockholders equity
    
    $
    6,766,728
 The accompanying notes are an integral part of these consolidated financial statements. 74




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OCEAN CONVERSION (BVI) LTD. CONSOLIDATED STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 2003 (Expressed in United States dollars) 2003Water sales
    
    
    4,819,605Cost of water sales (Note 9)
    
    
    (2,110,066
    )Gross profit
    
    
    2,709,539General and administrative expenses (Note 9)
    
    
    (1,046,186
    )Income from operations
    
    
    1,663,353Other income (expense)Interest income
    
    
    103,225Interest expense
    
    
    (28,378
    )74,847Net income
    
    $
    1,738,200
 The accompanying notes are an integral part of these consolidated financial statements. 75




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OCEAN CONVERSION (BVI) LTD. CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY YEAR ENDED DECEMBER 31, 2003 (Expressed in United States dollars) Common stock
    
    Additionalpaid-in
    
    Retained
    

TotalstockholdersShares
    
    Dollars
    
    capital
    
    earnings
    
    equityBalance at
January 1, 2003
    
    
    1,230,000
    
    
    $
    1,230,000
    
    
    $
    165,200
    
    
    $
    2,704,823
    
    
    $
    4,100,023Issuance of Class C stock
    
    
    45,000
    
    
    
    45,000
    
    
    
    60,459
    
    
    
    
    
    
    
    105,459Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,738,200
    
    
    
    1,738,200Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,593,750
    )
    
    
    (1,593,750
    )Balance at December 31, 2003
    
    
    1,275,000
    
    
    $
    1,275,000
    
    
    $
    225,659
    
    
    $
    2,849,273
    
    
    $
    4,349,932
 The accompanying notes are an integral part of these consolidated financial statements. 76




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\

OCEAN CONVERSION (BVI) LTD. CONSOLIDATED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 2003 (Expressed in United States dollars) 2003Net income
    
    $
    1,738,200Adjustments to reconcile net income to net cashDepreciation
    
    
    502,666Profit sharing
    
    
    527,393Gain on disposal of property, plant and equipment
    
    
    Decrease in accounts receivable
    
    
    1,606,496(Increase) in inventory
    
    
    (38,779
    )(Increase) in prepaid expenses and other assets
    
    
    (18,974
    )Decrease (increase) in accounts payable and other
liabilities
    
    
    466,116Net cash provided by operating activities
    
    
    4,783,118Cash flows from investing activitiesProceeds on sale of property, plant and equipment
    
    
    Purchase of property, plant and equipment
    
    
    (1,506,839
    )Cash used in investing activities
    
    
    (1,506,839
    )Cash flows from financing activitiesProfit sharing rights paid
    
    
    (506,250
    )Proceeds from long term debt
    
    
    880,000Dividends paid
    
    
    (1,593,750
    )Principal repayment of long term debt
    
    
    (1,125,000
    )Cash used in financing activities
    
    
    (2,345,000
    )Net increase (decrease) in cash and cash equivalents
    
    
    931,279Cash and cash equivalents at beginning of year
    
    
    264,988Cash and cash equivalents at end of year
    
    $
    1,196,267Interest paid in cash
    
    $
    28,378Interest received in cash
    
    $
    103,225
 The accompanying notes are an integral part of these consolidated financial statements. 77




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OCEAN CONVERSION (BVI) LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Principal activity The Company was incorporated in the British Virgin Islands under the Companies
Act, Cap 285, on May 14, 1990 and is engaged in the production and sale of
potable water to the Government of the British Virgin Islands (the
Government). The Company has an agreement with the Government, its sole
customer, to produce and supply a guaranteed quantity and quality of potable
water. This agreement provides for specific penalties should the Company not
be able to provide the guaranteed quantity of water. On January 24, 1992, the Company amended the original agreement with the
Government to allow for the expansion of its plant in order to increase its
production capacity from 360,000 imperial gallons of water to 510,000 imperial
gallons per day. Under this agreement, the Government had the option to
purchase the facility, at a cost of $1,420,000, in May 1999 or renew the
agreement for a period of seven years. The Government has not exercised its
option to purchase the plant but advised the Company of its desire to negotiate
an amended agreement. 2. Accounting policies Basis of preparation:The consolidated financial statements presented are
prepared in accordance with the accounting principles generally accepted in the
United States of America. Basis of consolidation:The consolidated financial statements include the
financial statements of Ocean Conversion (BVI) Ltd. and its majority owned
subsidiary. All significant intercompany balances and transactions have been
eliminated. Use of estimates:The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the United States
of America requires management of the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant items subject to estimates and assumptions
include the carrying value of property, plant and equipment and inventory.
Actual results could differ from those estimates. Cash and cash equivalents:Cash and cash equivalents comprise cash at bank on

call and highly liquid deposits with an original maturity of three months or
less. Trade accounts receivable:Trade accounts receivable are recorded at invoiced
amounts based on meter readings reduced by appropriate allowances for estimated
irrecoverable amounts. The allowance for doubtful accounts is the Companys
best estimate of the amount of probable credit losses in the Companys existing
accounts receivable balance. The Company determines the allowance based on
historical write-off experience. Inventory:Inventory primarily includes replacement spares and parts that are
valued at the lower of cost and net realizable value on a first-in, first-out
basis. Impairment of Long-Lived Assets:In accordance with SFAS No. 144, long-lived
assets, such as property, plant and equipment, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected to be generated by the asset.
If the carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount of
the exceeds the fair value of the asset. 78




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OCEAN CONVERSION (BVI) LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. Accounting policies (continued) Property, plant and equipment:Property, plant and equipment are stated at
cost less accumulated depreciation. Depreciation is calculated using a straight
line method with an allowance for estimated residual values. Rates are
determined based on the estimated useful lives of the assets as follows: Plant and equipment
    
    4 to 25 yearsOffice furniture, fixtures and equipment
    
    3 to 10 yearsVehicles
    
    3 to 10 yearsLab Equipment
    
    3 to 10 years
 Additions to property, plant and equipment are comprised of the cost of the
contracted services, direct labour and materials. Assets under construction
are recorded as additions to property, plant and equipment upon completion of
the projects. Depreciation commences in the month of addition. Interest costs directly attributable to the construction of qualifying assets,
which are assets that necessarily take a substantial period of time to ready
for their intended use, are added to the cost of those assets until such time
as the assets are substantially ready for use or sale. Water sales and cost of water sales:The Government is billed monthly based on
meter readings performed at or near each month end and in accordance with the
water sales agreement which stipulates minimum monthly charges for water
service. Repairs and maintenance:All repair and maintenance costs are expensed as
incurred. 3. Cash and cash equivalents Cash and cash equivalents are not restricted as to withdrawal or use. 4. Accounts receivable Accounts receivable comprise receivables from our sole customer, the Government
of the British Virgin Islands. Significant concentrations of credit risk are
disclosed in Note 15. 5. Inventory 2003Inventory
    
    $
    248,000Less allowance for obsolescence
    
    
    (30,395
    )Total
    
    $
    217,605
 79




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OCEAN CONVERSION (BVI) LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6. Property, plant and equipment 2003CostPlant and equipment
    
    $
    8,973,271Office furniture, fixtures and equipment
    
    
    27,658Vehicles
    
    
    71,600Lab equipment
    
    
    11,637Assets under construction
    
    
    451,6669,535,832Accumulated depreciation
    
    
    (4,923,484
    )Net book value
    
    $
    4,612,348
 It is the Companys policy to maintain adequate insurance for loss or damage to
all fixed assets that in managements assessment may be susceptible to loss. 7. Long term debt 2003Scotiabank (Cayman Islands) Ltd., loan bearing interest at three month
LIBOR plus 1.5% per annum, with interest calculated daily and payable
quarterly, repayable in 6 equal semi-annual installments of $125,000
commencing December 31, 2002, the balance of principal and
interest then outstanding due May 31, 2006
    
    $
    755,000Bank of Butterfield loan bearing interest at three month LIBOR plus 1.5%,
repayable in semi annual installments of principal and interest of
$125,000; repaid in full during the year ended December 31, 2003.
    
    
    Total long term debt
    
    
    755,000Less current portion
    
    
    (250,000
    )Long term debt, excluding current portion
    
    $
    505,000The aggregate capital repayment obligations over the next five years
are as follows:2004
    
    
    $250,0002005
    
    
    250,0002006
    
    
    5,000Thereafter
    
    
    
 Any amounts drawn under the Scotiabank facility are collateralized by a fixed
and floating charge of $1,250,000. The fixed and the floating charge covers
all other assets of the Company. At year end the Company is in compliance with all restrictive covenants. 80




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OCEAN CONVERSION (BVI) LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8. Commitments The Company rents property upon which it has installed walls and boreholes
necessary for the production of water. Future minimum lease payments under the
non cancelable operating lease at December 31, 2003 are as follows: Operating Lease2004
    
    $
    18,0552005
    
    
    18,0552006
    
    
    18,0552007
    
    
    18,055Thereafter
    
    
    144,440
 9. Expenses 2003Cost of water sales comprise the following:Fuel oil
    
    $
    356,427Electricity
    
    
    324,162Maintenance
    
    
    288,697Depreciation
    
    
    502,573Employee costs
    
    
    417,861Insurance
    
    
    77,790Other direct cost
    
    
    142,556$
    2,110,066General and administrative expenses
comprise the following:Maintenance costs
    
    $
    709Depreciation
    
    
    92Professional fees
    
    
    13,150Management fees
    
    
    333,904Directors fees and expenses
    
    
    60,647Profit sharing
    
    
    527,393Other indirect costs
    
    
    110,291$
    1,046,186
 10. Related party transactions A professional service firm, of which a director is a principal, provided
pension services during the year ended December 31, 2003 for which it charged
$345. Pursuant to a Management Services Agreement dated October 1, 1992 between
DesalCo Ltd. and the Company, DesalCo Ltd. provides the Company with
management, administration, finance, operations, maintenance, engineering and
purchasing services, and is also entitled to be reimbursed for all reasonable
expenses incurred on behalf of the Company. The Company incurred fees of $333,904 related to this management service agreement for the year ended
December 31, 2003. 81




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OCEAN CONVERSION (BVI) LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 11. Profit sharing provision 2003Opening balance
    
    
    989,739Additions
    
    
    421,574Distributions
    
    
    (506,250
    )$
    905,063
 In 1993, the Company and its existing shareholders at that time, entered into
two Share Repurchase and Profit Sharing Agreements (the Agreements) to
repurchase 225,000 shares each from those shareholders (the Parties), whose
shares were issued in exchange for guarantees of the Companys long term debt.
The Agreements were subsequently approved by special dissolution at an
Extraordinary Meeting of all the Companys shareholders entitled to vote, held
on the same date. Under the terms of the Agreements, the Company, in exchange for the
above-mentioned shares, grants the Parties, profit sharing rights in the
Companys profits for as long as the Company remains in business as a going
concern. The Agreement states that where the Company has profits available for
the payment of dividends and pays a dividend there from, a distribution shall
be made to each of the Parties equal to 202,500 times the
dividend per share received by the remaining shareholder and paid concurrently
with such dividend. The factor of 202,500 shall be subject to
amendment by the same proportion and at the same time as changes take place or
adjustments are made in respect of the remaining shareholders. The current shareholders and an affiliate of a current shareholder have
acquired these profit sharing rights. The Company has made an allowance at
December 31, 2003 for the maximum profit shares payable to the Parties if all
retained earnings were to be distributed as dividends and profit shares. 12. Taxation Under the terms of the water sales agreement with the Government, the Company
is exempt from all taxation in the British Virgin Islands. 13. Non-cash transaction 2003Issuance of Class C shares
    
    $
    45,000
 During the year ended December 31, 2003, 45,000 Class C non-voting shares were
issued in exchange for cancellation of an equal portion of profit sharing
rights. 82




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OCEAN CONVERSION (BVI) LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 14. Pension plan Effective December 1, 2003, the Company established the MWM Global Retirement
Plan (the Plan). The Plan is a defined contribution plan whereby the Company
will contribute 5% of each participating employees salary to the Plan. The
total amount recognized as an expense under the plan during the year ended
December 31, 2003 was $nil and will approximate $17,900 per year
going forward. 15. Financial instruments Credit risk: Financial assets that potentially subject the Company to concentrations of
credit risk consist principally of cash and cash equivalents and accounts
receivable. The Companys cash is placed with high credit quality financial
institutions. The accounts receivable are due from the Companys sole
customer, the Government (Note 1). As a result, the Company is subject to
credit risk to the extent of any non-performance by the Government. Interest rate risk: The interest rates and terms of the Companys loans are presented in Note 7 of
these consolidated financial statements. The Company is subject to interest
rate risk to the extent that the LIBOR rate may fluctuate. Fair values: At December 31, 2003 the carrying amounts of cash and cash
equivalents, accounts receivable, accounts payable and other liabilities
approximate fair values due to the short term maturities of these assets and
liabilities. Management considers that the carrying amount for long-term debt
approximates fair value. 83




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OCEAN CONVERSION (BVI) LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE On June 27, 2002, we dismissed our independent auditors,
PricewaterhouseCoopers. The decision to dismiss PricewaterhouseCoopers was
recommended and approved by the audit committee of our board of directors.
During the fiscal years ended December 31, 2000 and 2001,
PricewaterhouseCoopers report on our financial statements did not contain an
adverse opinion or disclaimer of opinion and was not qualified or modified as
to uncertainty, audit scope, or accounting principles. In addition, during
each of our fiscal years ended December 31, 2000 and 2001 and the interim
period through June 27, 2002, we did not have any disagreements with
PricewaterhouseCoopers on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which, if not
resolved to the satisfaction of PricewaterhouseCoopers, would have caused
PricewaterhouseCoopers to make reference to the subject matter of the
disagreements in connection with its reports on our financial statements for
the year or period in question. We engaged KPMG to replace
PricewaterhouseCoopers on July 9, 2002. We have authorized
PricewaterhouseCoopers to respond fully to the inquiries, if any, of KPMG, our
present independent accountants, regarding any accounting or financial matters
relating to us. KPMG has re-audited the financial statements for the years
ended December 31, 2000 and 2001 and there have been no re-statements of the
prior audited financial statements resulting from the re-audits. 
 ITEM 9A. 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 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. 84




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PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Our Directors and Executive Officers This table lists information concerning our executive officers and
directors: Name
    
    Age
    
    PositionJeffrey M. Parker
    
    
    59
    
    
    Director, Chairman of the Board of DirectorsFrederick W. McTaggart
    
    
    41
    
    
    Director, President, Chief Executive OfficerKenneth R. Crowley
    
    
    39
    
    
    Vice President of Overseas OperationsGregory S. McTaggart
    
    
    40
    
    
    Vice President  Operations (Cayman Islands)Robert B. Morrison
    
    
    50
    
    
    Vice President of Purchasing and Information
TechnologyGerard J. Pereira
    
    
    33
    
    
    Vice President of EngineeringPeter D. Ribbins
    
    
    55
    
    
    Director of Public RelationsBrent J. Santha
    
    
    33
    
    
    Chief Financial Officer and Company SecretaryWilliam T. Andrews *
    
    
    55
    
    
    DirectorJ. Bruce Bugg, Jr.
    
    
    49
    
    
    DirectorBrian E. Butler *
    
    
    53
    
    
    DirectorSteven A. Carr *
    
    
    53
    
    
    DirectorCarson J. Ebanks *
    
    
    46
    
    
    DirectorRichard L. Finlay
    
    
    45
    
    
    DirectorClarence B. Flowers, Jr. *
    
    
    48
    
    
    DirectorWilmer Pergande *
    
    
    63
    
    
    DirectorRaymond Whittaker *
    
    
    49
    
    
    Director
 * The Board of Directors has determined that each of such persons is an
independent director under the corporate governance rules of The Nasdaq
Stock Market, Inc. (Nasdaq) Jeffrey M. Parkerhas been a director of our company since 1980 and the
Chairman of the Board since 1982. On January 1, 2004, Mr. Parker resigned as
Chief Executive Officer, a position he held since 1994 but remained employed by
the Company as Executive Director responsible for investor relations and
business expansion and Chairman of the Board. In addition to serving as our
Chairman of the Board, Mr. Parker is a Chartered Accountant and practices at
Moore Stephens in the Cayman Islands, a member of Moore Stephens International
Ltd. From 1993 to 1995, Mr. Parker served as a director of The International
Desalination Association representing the Caribbean & Latin America. Mr. Parker
received his ACA designation as a chartered accountant in England and Wales in
1967, and his FCA designation in 1977. Frederick W. McTaggarthas been a director of our company since 1998,
President since October 2000 and Chief Executive Officer since January 1, 2004.
Also on January 1, 2004, Mr. McTaggart resigned as Chief Financial Officer, a
position he held since February 2001. From April 1994 to October 2000, Mr.
McTaggart was the Managing Director of the Water Authority-Cayman, the
government-owned water utility serving certain areas of the Cayman Islands. He
received his B.S. degree in Building Construction from the Georgia Institute of Technology in 1985. Mr.
McTaggart is the brother of Mr. Gregory S. McTaggart, the Vice President -
Operations (Cayman Islands). 85




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Kenneth R. Crowleywas appointed our Vice President of Overseas Operations
in March 2003 and holds a Bachelor of Science degree in Mechanical Engineering
from the University of Maryland. In 1989, he joined Reliable Water Co. Ltd,
the predecessor of Ocean Conversion (Cayman) Limited, as Operations Engineer in
the Canary Islands and the Cayman Islands. He was promoted to Operations
Manager of Ocean Conversion (Cayman) Limited in 1991. In 1998, Mr. Crowley
transferred to DesalCo Limited to work on the design, construction and
operation of reverse osmosis water plants including high efficiency work
exchanger energy recovery systems in the Cayman Islands, the Bahamas, Barbados
and the British Virgin Islands with a combined capacity in excess of 9 million
U.S. gallons per day. Gregory S. McTaggartis our Vice President-Operations (Cayman Islands).
Mr. McTaggart joined our company in January 1991 as our resident engineer and
has served in his current capacity since 1994. For three years before joining
us, Mr. McTaggart worked for the Caribbean Utilities Company as a mechanical
engineer. Mr. McTaggart obtained his B.S. degree in Mechanical Engineering from
the Georgia Institute of Technology in 1986. Mr. McTaggart is the brother of
Frederick W. McTaggart, the President, Chief Executive Officer and a director
of our company. Robert B. Morrisonwas appointed Vice President of Purchasing &
Information Technology in March 2003. Mr. Morrison holds the designation
Certified Professional Purchaser and has over twenty five years experience in
the purchasing and logistics field. He joined DesalCo Limited as Purchasing
Manager in June of 1996 in which position he also employed his more than 20
years of information technology experience as software and systems developer,
network administrator and end user support resource for PC and mainframe
environments. Prior to joining DesalCo Limited, Mr. Morrison was Principal
Purchasing Officer for the Ministry of Works & Engineering of the Bermuda
government and Purchasing Manager for American-Standard in Toronto, Canada. Gerard J. Pereirawas appointed Vice President of Engineering in March
2003. Mr. Pereira obtained his BS and MS in Chemical Engineering from the
University of Waterloo, Ontario, Canada and joined Ocean Conversion (Cayman)
Limited as Operations Engineer in 1995. He was promoted to Operations Manager
of Ocean Conversion (Cayman) Limited in 1998, which post he held until our
acquisition of the company. Peter D. Ribbinsis our Director of Public Relations. In September 2003,
Mr. Ribbins resigned as Company Secretary and as a director, a position he held
since 1989. Mr. Ribbins joined our company in 1983 as its General Manager, a
position he held until 1989, when he was appointed Managing Director. He was
appointed President and Chief Operating Officer in 1994 and resigned from that
position in October 2000. Mr. Ribbins obtained his B.S. degree in
Kinanthropology from the University of Ottawa, Canada in 1971. Brent J. Santhajoined our Company as Management Accountant in January
2001 and was appointed Vice President of Finance and Assistant Company
Secretary in March 2003. In December 2003, Mr. Santha resigned as Assistant
Company Secretary and was appointed Company Secretary. On January 1, 2004, Mr.
Santha was appointed Chief Financial Officer. Mr. Santha is a member of the
Canadian Institute of Chartered Accountants having received his Chartered
Accountant designation in 1997. Previously, he was employed, for six years, by
Johnsen Archer Chartered Accountants leaving as Manager of Audit & Business
Services. William T. Andrewsbecame a director of our company upon completion of our
acquisition of DesalCo Limited in February 2003. Since 2002, he has been
Managing Director of DWEER Technology Ltd., which designs and manufactures
patented high efficiency energy reduction pumping equipment for seawater
reverse osmosis desalination. From 1991 to 2003, Dr. Andrews has been Managing
Director of DesalCo Limited. He was formerly President of Reliable Water Inc.,
and Vice President of Polymetrics Inc., focusing on seawater reverse osmosis
desalination in both cases. Dr. Andrews attended universities 86




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in England,
receiving a bachelors degree in Physics from the University of
Newcastle-upon-Tyne, and a doctorate in Atomic Physics at Oxford University, as
a Rhodes Scholar. He is a registered Mechanical Engineer in California and
Bermuda. Since 1976, Dr. Andrews has continuously been a member of the
International Desalination Association (IDA). He has been a director of IDA
since 1995, and had served as President until October 2003. He is a member of the European
Desalination Society and the Caribbean Water & Wastewater Association. J. Bruce Bugg, Jr.has been a director of our company since 1998 and in
2003 Mr. Bugg resigned as Vice-Chairman of the Board and member of the
Executive Committee, positions he has also held since 1998. Mr. Bugg is also,
and has been since 1997, the Chairman of the board of directors and Chief
Executive Officer of Argyle Investment Co., the general partner of Argyle
Partners Ltd., the sole general partner of Argyle/Cay-Water, Ltd. From 1996 to
1997, Mr. Bugg served as Vice Chairman of First Southwest Company and Chairman
of its Investment Banking Group. Brian E. Butlerhas been a director of our company since 1983. Since 1977,
Mr. Butler has been the principal of Butler Property Development Group, a
property development company specializing in luxury resort projects in the
Cayman Islands. Steven A. Carrhas served as a director of the Company since 1998. Since
1994, Mr. Carr has been the President of Carr & Associates, a private
investment firm located in Bryan, Texas. Mr. Carr received his Bachelor of
Science degree from Texas A&M University in 1973 and his Master of Arts degree
from the University of Texas in 1980. Before joining Carr & Associates, Mr.
Carr held executive positions and participated in the ownership and management
of a number of broadcast and telecommunications ventures throughout the United
States. From 1998 to 2000, Mr. Carr served as an alternate director on our
board of directors and was elected as a full director in May 2000. Mr. Carr is
a director of the First National Bank of Bryan and Waterfields, Ltd. He is
Senior Lecturer at Texas A&M Universitys Mays Business School, a councilor of
the Texas A&M Research Foundation and serves on numerous other boards and
councils. Carson K. Ebanksbecame the Cayman Islands government nominated director
of our company in May of 2001. Mr. Ebanks was the Director of Planning for the
Cayman Islands from 1991  1997. Since 1997, he has served the Cayman Islands
Government as a Permanent Secretary currently for the Ministry of Community
Services, Womens Affairs, Youth and Sports. Mr. Ebanks is a Justice of the
Peace, a Fellow of the Royal Geographic Society and a member of the American
Planning Association. He holds a Bachelor of Environmental Studies (Hons.
Urban and Regional Planning  Peace and Conflict Studies Minor) from the
University of Waterloo and a Master of Arts  Planning in Community and
Regional Planning from the University of British Columbia. He is a Director of
the Water Authority  Cayman and a trustee of the National Gallery of the
Cayman Islands. Mr. Ebanks has served on the Boards of the Trustees for the
Cayman Islands Museum, the Cayman Islands Civil Service Co-operative Credit
Union, the Housing Development Corporation and the Vice President of the Cayman
Islands Olympic Committee. Richard L. Finlayhas served as a director of our company since 1995. Mr.
Finlay is an attorney and partner with the Cayman Islands law firm of Conyers,
Dill and Pearman. Before joining this firm in 2003, he was a partner with Charles Adams, Ritchie and Duckworth since 1993.
Prior to that, Mr. Finlay served as Director of Legal Studies of the Cayman
Islands Government from 1989 to 1992. From 1983 to 1989, Mr. Finlay was a
partner with the Canadian law firm of Olive, Waller, Zinkhan and Waller. Mr.
Finlay has served as the Cayman Islands representative to the International
Company and Commercial Law Review and is a former editor of the Cayman Islands
Law Bulletin. Clarence B. Flowers, Jr.has been a director of our company since 1991.
Mr. Flowers is, and has been since 1985, the principal of Orchid Development
Company, a real estate developer in the Cayman 87




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Islands. Mr. Flowers also serves as a director of C.L. Flowers & Son, which is
the largest manufacturer of wall systems in the Cayman Islands, and Cayman
National Bank, a retail bank. Wilmer Pergandehas been a director of our company since 1978. Mr.
Pergande is the Global Leader for Desalination and Process Equipment,
GE Water Technologies/GE Osmonics. Mr. Pergande previously held the position of Vice-President of
Special Projects of Osmonics, Inc. of Minnetonka, Minnesota. Before joining
Osmonics, Mr. Pergande was the Chief Executive Officer of Licon International,
Inc., a publicly traded manufacturer of liquid processing equipment.
Previously, Mr. Pergande held several executive positions with Mechanical
Equipment Company, Inc., a manufacturer of seawater conversion equipment. Raymond Whittakerhas served as a director of our company since 1988. Mr.
Whittaker was the Managing Director of TransOcean Bank & Trust, Ltd., a bank
and trust company located in the Cayman Islands and a subsidiary of Johnson
International, Inc., a bank holding company located in Racine, Wisconsin from
1984 to December 2000. He is now the principal of his own company and
management firm. Composition of the Board of Directors The board of directors is organized into three groups. Each group holds
office for a three-year period and re-election of the board members is
staggered so that two-thirds of the board members are not subject to
re-election in any given year. The groups are organized alphabetically as
follows: Group 1
    
    Group 2
    
    Group 3William T. Andrews
    
    Carson K. Ebanks, JP
    
    Wilmer PergandeJ. Bruce Bugg Jr.
    
    Richard Finlay
    
    Raymond WhittakerBrian Butler
    
    Clarence Flowers, Jr.Steven A. Carr
    
    Frederick McTaggartJeffrey M. Parker
 The directors of Group 3 were re-elected at our annual shareholders
meeting in May 2003. The directors in Group 1 will be proposed for re-election
in 2004, Group 2 in 2005 and then Group 3 again in 2006. Under
our Cayman Islands license which was transferred to our wholly-owned
subsidiary, Cayman Water Company Limited in July 2003, the Cayman Islands government may nominate three
persons to serve on the board of directors of Cayman Water Company
Limited. We must cause one of the persons
nominated by the government to be elected as a director. In May 2001, Carson K.
Ebanks, JP was elected as the governments nominee but remains
on the board of Consolidated Water Co. Ltd. Government has not yet nominated their director for Cayman Water Company Limited. Under the terms of the Share Sale Agreement between DesalCo Limited and
our company under which we acquired all of the issued and outstanding stock of
DesalCo Limited on February 7, 2003, we appointed William T. Andrews to our
board of directors as a director in Group 1. Committees of the Board of Directors The board of directors has established the following committees: Executive Committee The Board of Directors has an Executive Committee, which is comprised of
Messrs. Frederick McTaggart, Finlay, Flowers, Parker and Whittaker. The
functions of the Executive Committee include 88




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meeting on a regular basis to
review the operations of the Company, ensuring that any matters, which must be
dealt with before the next Board of Directors meeting, are addressed in a
timely matter. Compensation Committee The Board of Directors has a Compensation Committee, which is comprised of
Messrs. Finlay, Flowers, and Pergande. Pursuant to the Compensation Committee
Charter, which is filed as Exhibit 99.1 to this Annual Report, the Compensation
Committee is responsible for reviewing and approving the executive compensation
program for the Company and its subsidiaries, assessing executive performance,
making grants of salary and annual incentive compensation, and approving
certain employment agreements. The Board of Directors has determined that all
members of the Compensation Committee, except Mr. Finlay, are independent
directors, as such term is defined under the corporate governance rules of
Nasdaq. Mr. Finlay is not an independent director as defined in Nasdaq Rule
4200 because the Company paid a law firm in which he was a partner for part of
2003 in excess of $200,000 for legal services provided to the Company during
2003. Notwithstanding Mr. Finlays previous relationship with that law firm,
the Board of Directors believes it is required in the best interest of the
Company and its shareholders for Mr. Finlay to serve as a member of the
Compensation Committee and the Audit Committee because of his experience as a
director or the Company since 1995 and his knowledge of corporate governance
matters relating to Cayman Islands corporations. Audit Committee The Board of Directors has an Audit Committee, which is comprised of
Messrs. Butler, Carr, Finlay and Whittaker. The Audit Committee assists the Board of Directors in monitoring the
financial reporting process, the internal control structure and the
independence and performance of the internal audit department and the
independent public accountants. Its primary duties are to serve as an
independent and objective party to monitor the Companys financial process and
internal control system, to review and appraise the audit effort of the
Companys independent accountants and to provide an open avenue of
communications among the independent accountants, financial, and senior
management and the Board of Directors. The Board of Directors has adopted a
written charter for the Audit Committee, which is filed as Exhibit 99.2 to this
Annual Report. During the year, the Board of Directors examined the
composition of the Audit Committee in light of Nasdaqs corporate governance
rules and the regulations under the Securities Exchange Act of 1934 (Exchange
Act) applicable to audit committees. Based upon this examination, the Board
of Directors has determined that all members of the Audit Committee, except Mr.
Finlay, are independent directors within the meaning of Nasdaqs rules and
the Exchange Act and the rules and regulations thereunder. The Board of
Directors has also determined that Steven A. Carr qualifies as an audit
committee financial expert under the regulations of the Exchange Act. Nominations Committee The Board of Directors has a Nominations Committee, which is comprised of
Messrs. Pergande, Carr and Parker. The Nominations Committee makes
recommendations to the Board of Directors regarding the size and composition of
the Board of Directors, establishes procedures for the nomination process,
recommends candidates for election to the Board of Directors and nominates
officers for election by the Board of Directors. The Board of Directors has
determined that all members of the Nominations Committee, except Mr. Parker,
are independent directors, as such term is defined under the corporate
governance rules of Nasdaq. Mr. Parker is not an independent director under
the Nasdaqs rules because he was Chief Executive Officer of the Company from
1994 until January 1, 2004 and he received compensation for his services to the
Company in excess of $60,000. See Item 11 of this Annual Report.
Notwithstanding Mr. Parkers employment relationship with the Company, the
Board of Directors 89




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believes that it is required in the best interest of the
Company and its shareholders for Mr. Parker to serve as a member of the
Nominations Committee because of his involvement with the Company since 1980
and his knowledge if corporate governance matters relating to Cayman Islands
corporations. The Nominations Committee Charter is filed as Exhibit 99.3 to
this Annual Report. To recommend a prospective nominee for the Nominations Committees
consideration, a shareholder may submit the candidates name and qualifications
in writing to the Secretary of the Company, Trafalgar Place, West Bay Road,
Grand Cayman, Cayman Islands, B.W.I. Code of Ethics Our Code of Ethics for the Chief Executive Officer and Chief Financial
Officer is filed as Exhibit 14 to this Annual Report. 90




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ITEM 11. EXECUTIVE COMPENSATION The following table provides summary information concerning the annual and
long-term compensation earned by the companys chief executive officer and each
of the four other most highly compensated executive officers of the company
during the fiscal years ended December 31, 2003, 2002 and 2001: Summary Compensation Table Annual Compensation
    
    Long-Term CompensationOther Annual
    
    Securities
    
    All OtherYear
    
    Salary
    
    Bonus
    
    Compensation
    
    Underlying Options (2)
    
    CompensationName and Principal Position
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    (#)
    
    ($)Frederick W. McTaggart (1)
    
    
    2001
    
    
    
    118,006
    
    
    
    88,765
    
    
    
    
    
    
    
    28,533
    
    
    
    Director, President and
Chief Executive Officer2002
    
    
    
    118,006
    
    
    
    66,066
    
    
    
    
    
    
    
    26,427
    
    
    
    2003
    
    
    
    118,006.
    
    
    
    185,890
    
    
    
    
    
    
    
    43,808
    
    
    
    Gregory S. McTaggart
    
    
    2001
    
    
    
    85,932
    
    
    
    8,759
    
    
    
    
    
    
    
    20,800
    
    
    
    Vice President   Operations
(Cayman Islands)
    
    
    2002
    
    
    
    85,932
    
    
    
    
    
    
    
    
    
    
    
    19,325
    
    
    
    2003
    
    
    
    85,932
    
    
    
    36,450
    
    
    
    
    
    
    
    31,735
    
    
    
    Jeffrey M. Parker (1)
    
    
    2001
    
    
    
    95,895
    
    
    
    86,176
    
    
    
    
    
    
    
    28,507
    
    
    
    Chairman of the Board of
Directors
    
    
    2002
    
    
    
    95,895
    
    
    
    39,243
    
    
    
    
    
    
    
    26,159
    
    
    
    2003
    
    
    
    95,895
    
    
    
    316,816
    
    
    
    
    
    
    
    45,117
    
    
    
    Peter D. Ribbins
    
    
    2001
    
    
    
    118,006
    
    
    
    
    
    
    
    
    
    
    
    27,646
    
    
    
    Director of Public Relations2002
    
    
    
    118,006
    
    
    
    
    
    
    
    
    
    
    
    25,767
    
    
    
    2003
    
    
    
    105,922
    
    
    
    
    
    
    
    
    
    
    
    34,957
    
    
    
    Brent J. Santha
    
    
    2001
    
    
    
    77,040
    
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    Chief Financial Officer and
Company Secretary
    
    
    2002
    
    
    
    80,899
    
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    2003
    
    
    
    90,000
    
    
    
    
    
    
    
    
    
    
    
    10,487
    
    
    
    
 (1) Mr. Parker and Mr. McTaggart served as the Chief Executive Officer and
Chief Financial Officer, respectively, until January 2004. (2) All options granted to Messrs. Frederick McTaggart, Gregory McTaggart,
Parker, Ribbins and Santha in 2001, 2002 and 2003 have an exercise price of
$10.84, $11.93 and $20.05 per share, respectively. 91




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Stock Option Grants The following table provides information, with respect to the chief
executive officer and the other named executive officers listed in the Summary
Compensation Table, concerning stock options granted on ordinary shares in
fiscal year 2003: Potential Realizable Value% of Total
    
    
    
    
    
    
    
    
    
    at Assumed Annual RatesOptions
    
    
    
    
    
    
    
    
    
    Of Stock Price AppreciationGranted
    
    
    
    
    
    
    
    
    
    for Option TermToOptions
    
    Employees
    
    Exercise or
    
    
    
    
    
    At 5% Annual
    
    At 10% AnnualGranted
    
    in
    
    Base Price
    
    Expiration
    
    Growth Rate
    
    Growth RateName
    
    (#)
    
    Fiscal Year
    
    ($/Sh)
    
    Date
    
    ($)
    
    ($)Frederick W. McTaggart
    
    
    43,808
    
    
    
    26
    %
    
    
    20.05
    
    
    
    04/07/07
    
    
    
    141,138
    
    
    
    282,275Gregory S. McTaggart
    
    
    31,735
    
    
    
    19
    %
    
    
    20.05
    
    
    
    04/07/07
    
    
    
    102,242
    
    
    
    204,483Jeffrey M. Parker
    
    
    45,117
    
    
    
    27
    %
    
    
    20.05
    
    
    
    04/07/07
    
    
    
    145,355
    
    
    
    290,710Peter D. Ribbins
    
    
    34,957
    
    
    
    21
    %
    
    
    20.05
    
    
    
    04/07/07
    
    
    
    112,622
    
    
    
    225,244Brent J. Santha
    
    
    10,487
    
    
    
    6
    %
    
    
    20.05
    
    
    
    04/07/07
    
    
    
    33,786
    
    
    
    67,573
 Stock Option Holdings The following table provides information, with respect to the chief
executive officer and the other named executive officers listed in the Summary
Compensation Table, concerning the holding of unexercised options at the end
of, fiscal year 2003: Number of Securities
    
    Value of UnexercisedUnderlying Unexercised
    
    In-The-MoneySharesAcquired on
    
    Value
    
    Options at Fiscal Year End
    
    Options at Fiscal Year EndExercise
    
    Realized
    
    Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisableName
    
    (#)
    
    ($)
    
    (#)
    
    (#)
    
    ($)
    
    ($)Frederick W. McTaggart
    
    
    5,607
    
    
    
    42,389
    
    
    
    98,768
    
    
    
    
    
    
    
    477,376
    
    
    
    Gregory S. McTaggart
    
    
    
    
    
    
    
    
    
    
    71,860
    
    
    
    
    
    
    
    348,487
    
    
    
    Jeffrey M. Parker
    
    
    
    
    
    
    
    
    
    
    126,707
    
    
    
    
    
    
    
    823,626
    
    
    
    Peter D. Ribbins
    
    
    
    
    
    
    
    
    
    
    93,979
    
    
    
    
    
    
    
    536,484
    
    
    
    Brent J. Santha
    
    
    
    
    
    
    
    
    
    
    10,487
    
    
    
    
    
    
    
    
    
    
    
    
 92




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Incentive Compensation Employee Share Incentive Plan Since April 8, 1987, we have maintained an employee share incentive plan
for our long-term employees who are not directors. To become eligible for the
employee share incentive plan, an employee must complete four years of service
with us and then retain the shares for an additional four years before he can
transfer or sell the shares. We may, at our option, offer to exchange the
redeemable preferred shares issued to the employee for an equal number of
freely tradable ordinary shares at any time during the four year holding
period. Within the four year holding period, if an employee ceases to be
employed by our company, our company, at the sole discretion of the board of
directors, may redeem the redeemable shares held by that employee for less than
four years at the price which the employee originally paid for the shares. Under the plan, employees are issued redeemable preferred shares on an
annual basis at no cost based on a formula which takes into consideration the
employees salary and the total dividend paid to ordinary shareholders as a
percentage of the total shareholders equity in each year. If an employee
remains employed by us for at least four years, or a person or affiliated group
of persons acquires 30% or more of our ordinary shares, we are obligated to
exchange the redeemable preferred shares (whether or not the redeemable
preferred shares have been held for four years) for the same number of ordinary
shares. We are also obligated to exchange the redeemable preferred shares for
an equal number of ordinary shares if an employees employment with us or any
of our 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 us or any of our affiliates terminates for any other
reason, we may at any time up to and including the first anniversary of such
termination, redeem the employees redeemable preferred shares for cash equal
to 75% of the average of the closing market price for our ordinary shares on
each of the first seven trading days in the month of October of the year in
which the redeemable preferred shares were issued to the employee. Under the plan, when an employee is issued redeemable preferred shares,
the employee is also granted an option to purchase an equal number of
redeemable preferred shares at approximately 75% of the average market price of
the ordinary shares. The exercise price is determined using the average of the
closing market price for our ordinary shares on each of the first seven trading
days in the month of October of the year in which the redeemable preferred
shares were issued to the employee. The grant date is determined as 90 days
after the date of the auditors certificate on the financial statements for the
relevant year.. This option expires, unless exercised by the employee, within
thirty (30) days after the date of grant. Since we adopted the employee share
incentive plan, our employees have acquired 128,183 redeemable preferred
shares, of which 114,598 have been redeemed for an equal number of ordinary
shares. Employee Share Option Plan In 2001, we established an employee share option plan for certain
long-term employees who participate in the share incentive plan. This plan was
introduced in order to compensate these employees for adjustments in the
employee share incentive plan. Under the share option plan, these employees
are granted in each calendar year, as long as the employee is a participant in
the employee share incentive plan, options to purchase ordinary shares of
common stock. The price at which the option may be exercised will be the
closing market price on the grant date, which is 90 days after the date of the
auditors certificate on the financial statements for the relevant year. The
number of options each employee is granted is equal to five times the sum of
(i) the number of redeemable preferred stock which that employee receives for
$nil consideration and (ii) the number of redeemable preferred stock options
which that employee exercises in that given year. The option may be exercised
during the period 93




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commencing on the fourth anniversary of the grant date and
ending on the thirtieth day after the fourth
anniversary of the grant date. Since we adopted the employee share option plan, we have granted 22,605
options to purchase ordinary shares at an exercise price of $9.20 with an
expiration date of August 4, 2005 and 13,695 options to purchase ordinary
shares at an exercise price of $14.69 with an expiration date of July 30, 2006. Non-Executive Directors Share Plan In 1999, we implemented a share grant plan for our directors who are not
executive officers or serving as the Cayman Islands government representative
on our board. Under this plan, a director receives ordinary shares based upon
the number of board and committee meetings that the director attends during the
year. On January 1, 2004, directors fees have been increased to take into
account the increasing responsibilities and duties of our directors, however
the share equivalent portion of these fees remains unchanged. Each board
meeting is worth the share equivalent of a $1,200 fee and each committee
meeting is worth the share equivalent of a $600 fee. Attendance fees are
accumulated throughout the year and then divided by the prevailing market price
on October 1st, or the next trading day if October 1st falls on a non-trading
day, of the preceding year to determine the number of shares to be granted for
the current year. As a result of the non-executive directors share plan, the directors, as
a group, as of December 31, 2003, are entitled to receive 1,082 ordinary
shares, based upon the prevailing market price for the ordinary shares on
October 1, 2003 of $17.75. Pension Plan As with every employer in the Cayman Islands, we are required by the
National Pension Law to provide a pension plan for our employees in the Cayman
Islands. We belong to both the Cayman Islands Chamber Pension Plan and the
Ocean Conversion Staff Pension Plan in the Cayman Islands. The Chamber Pension
Plan is a non-profit entity which is administered by the Bank of Butterfield
and the Ocean Conversion Staff Pension Plan has as its trustee, Colonial
Private Trustee Limited and is administered by the British Caymanian Insurance
Company Ltd. Under the Cayman Islands National Pensions Law, all employees between the
ages of 18 and 60 must contribute a specified minimum percentage of their
earnings to a pension plan. Until recently, the exact percentage of
contributions varied according to the age of each employee. Since June 1,
2002, however, all employees must contribute 5% of their earnings to a pension
plan. An employee also has the option of contributing more than the prescribed
minimum. Our company is required to match the contribution of the first 5% of
each participating employees salary to a maximum of $72,000. Employees
earning more than $72,000 are not required to make contributions on amounts
over $72,000. All contributions by our employees are collected by us and paid
into the various pension plans on a monthly basis. Both plans are defined benefit plans, and as such the amount that an
employee receives upon retirement is directly related to the amount contributed
to the plan by the employee while working. Once an employee retires (employees
become eligible for retirement at age 60 in the Cayman Islands), an employee
has the following options for receiving benefits:  
    
    Receive a cash payout if the employees retirement savings is less
than $6,000;  
    
    Transfer the retirement savings to a life annuity for investment by
a life insurance company and payment of a regular income stream to the
employee for the remainder of the employees life (and 94




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the employees
spouses life if the employee is married at the time of retirement); or
    
    Transfer the retirement savings to a Retirement Savings Arrangement
account with an approved provider or bank and receive regular income
payments until the account is depleted. Employment Agreements On January 1, 2004, we entered into a three-year employment agreement with
Jeffrey M. Parker, our Chairman of the Board of Directors. This agreement
supersedes all prior contracts and understandings between the parties save that
benefits earned or accrued under prior contracts shall not be extinguished or
affected. This agreement is subject to extension each year if the Board so
determines and shall be extended such that the term shall be for three years
from January 1st of the next following year. If we terminate Mr. Parker
without cause, he is entitled to twice the annual remuneration set out in this
agreement, adjusted for any annual increases received. Under a previous employment agreement for the year ended December 31,
2003, which was amended to adjust the exercise price of his options from the
first seven trading days in the month of October of that year to December 31st
of that year, Mr. Parker was granted an option to purchase 45,117 ordinary
shares at an exercise price of $20.05. For the year ended December 31, 2002,
Mr. Parker was granted an option to purchase 26,159 ordinary shares at an
exercise price of $11.93 per share. All options granted to Mr. Parker after
March 1999 expire on the third anniversary of the date of the auditors report
on the financial statements for the year of the grant. Under the terms of his
new employment agreement Mr. Parker will no longer be granted options. For the year ended December 31, 2003, under the terms of his previous
employment agreement, Mr. Parker is entitled to receive an annual bonus for
each completed financial year during which he serves in the capacities of
Chairman and Chief Executive Officer. The amount of the bonus consists of the
following two amounts: (a) 1.5% of our net profits for that financial year,
before charging this bonus, dividends, or crediting any amounts arising from
the re-valuation of our assets and (b) 15% of the amount by which our net
profits for that financial year (calculated in the same manner as in (a) above)
exceed the highest annual net profits earned by us in any prior financial year. For each completed financial year beginning with the financial year 2004,
Mr. Parker will be paid a bonus calculated as (a) 1.5% of the net profits for
that financial year, before charging this bonus, dividends, or crediting any
amounts arising from the re-valuation of our assets to a maximum of 40% of Mr.
Parkers annual remuneration and (b) 15% of the amount by which our net profits
for that financial year (calculated in the same manner as in (a) above) exceed
the highest annual net profits earned by us in any prior financial year. This
bonus shall be paid as to 75% in cash and , subject to approval of the members
of the Company at the Companys next annual general meeting, as to 25% in
ordinary shares of the Company valued at the market price at the close of
trading of the same on December 31st of the relevant financial year. If such
approval is not obtained the bonus shall be paid entirely in cash. On January 1, 2004, we entered into a three-year employment agreement with
Frederick W. McTaggart, our President and Chief Executive Officer. This
agreement supersedes all prior contracts and understandings between the parties
save that benefits earned or accrued under prior contracts shall not be
extinguished or affected. This agreement is subject to extension each year if
the Board so determines and shall be extended such that the term shall be for
three years from January 1st of the next following year. If we terminate Mr.
Frederick McTaggart without cause, he is entitled to twice the annual
remuneration set out in this agreement, adjusted for any annual increases
received. Under a previous employment agreement for the year ended December 31,
2003, which was amended to adjust the exercise price of his options from the
first seven trading days in the month of 95




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October of that year to December 31st
of that year, Mr. Frederick McTaggart was granted an option to purchase 43,808
ordinary shares at an exercise price of $20.05. For the year ended December
31, 2002, Mr. Frederick McTaggart was granted an option to purchase 26,427
ordinary shares at an exercise price of
$11.93 per share. All options granted to Mr. Frederick McTaggart expire on the
third anniversary of the date of the auditors report on the financial
statements for the year of the grant. Under the terms of his new employment
agreement Mr. Frederick McTaggart will no longer be granted options. For the year ended December 31, 2003, under the terms of his employment
agreement, Mr. Frederick McTaggart is entitled to receive an annual bonus for
each completed financial year during which he serves in the capacities of
President and Chief Operating Officer. The bonus consists of the following two
amounts: (a) 2.5% of our net profits for that financial year, before charging
this bonus, dividends or crediting any amounts arising from the re-valuation of
our assets and (b) 5% of the amount by which our net profits for that financial
year (calculated in the same manner as in (a) above) exceed the highest annual
net profits earned by us in any prior financial year. For each completed financial year beginning with the financial year 2004,
Mr. Frederick McTaggart will be paid a bonus calculated as (a) 2% of the net
profits for that financial year, before charging this bonus, dividends, or
crediting any amounts arising from the re-valuation of our assets to a maximum
of 50% of Mr. Frederick McTaggarts annual remuneration and (b) 5% of the
amount by which our net profits for that financial year (calculated in the same
manner as in (a) above) exceed the highest annual net profits earned by us in
any prior financial year. This bonus shall be paid as to 75% in cash and
subject to approval of the members of the Company at the Companys next annual
general meeting, as to 25% in ordinary shares of the Company valued at the
market price at the close of trading of the same on December 31st of the
relevant financial year. If such approval is not obtained the bonus shall be
paid entirely in cash. On September 30, 2003, we entered into an employment agreement with
Peter D. Ribbins, our former President and Chief Operating Officer and
currently Director of Public Relations. The agreement fixes the salary of
Mr. Ribbins until October 31, 2005 and thereafter it will be determined by
mutual consent. For the financial year 2003 only, Mr. Ribbins will be
granted an option to purchase that number of ordinary shares which equals
5/6 of 1% of our net profit for the 2003 year. The exercise price of the
options to be granted will be equal to the closing market price of the
ordinary shares on December 31, 2003. For the year ended December 31, 2003,
Mr. Ribbins was granted an option to purchase 34,957 ordinary shares at an
exercise price of $20.05 per share. For the year ended December 31, 2002,
Mr. Ribbins was granted an option to purchase 25,767 ordinary shares at an
exercise price of $11.93 per share. All options granted to Mr. Ribbins
expire on the third anniversary of the date of the auditors report on the
financial statements for the year of grant. Mr. Ribbins employment
agreement will be terminated if he dies, becomes bankrupt, gives the Company
six months written notice or conducts himself in a manner that would justify
his dismissal under the Cayman Islands Labour Law. If his employment
agreement is terminated, any unvested options will automatically vest on a
pro rata basis based upon the number of months remaining in the year from
the date of termination. In addition, if the employment agreement is
terminated, Mr. Ribbins will be allowed to purchase the medical insurance
provided by us to our employees for the rest of his life. We entered into a three-year employment agreement with Gregory McTaggart,
our Vice President of Operations. This agreement, as amended, was originally
scheduled to expire on August 19, 2001, although it extends automatically each
year for an additional one year term. Under the agreement, if we terminate Mr.
Gregory McTaggart without cause, he is entitled to all financial benefits under
the agreement for a period of one year. Under the terms of his employment
agreement, Mr. Gregory McTaggart is granted an option to purchase that number
of ordinary shares which equals 0.75% of our net profit for that year. The
exercise price of the options to be granted to Mr. Gregory McTaggart was 96




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amended on December 5, 2003 to be equal to the closing price of the Companys
ordinary shares on the 31st of December of the relevant financial year. For
the year ended December 31, 2003, Mr. Gregory McTaggart was granted an option
to purchase 31,735 ordinary shares at an exercise price of $20.05 per share.
For the year ended December 31, 2002, Mr. Gregory McTaggart was granted an
option to
purchase 19,325 ordinary shares at an exercise price of $11.93 per share. All
options granted to Mr. Gregory McTaggart expire on the third anniversary of the
date of the auditors report on the financial statements for the year of grant.
As a result of the option grant described above, Mr. Gregory McTaggart was no
longer eligible to participate in the employee share incentive plan for fiscal
years after 1999. Under the terms of his employment agreement, Mr. Gregory McTaggart is
entitled to receive an annual bonus for each completed financial year during
which he serves in the capacity of Vice President of Operations. The bonus
consists of 2.5% of the amount by which our net profits for that financial year
(before charging this bonus, dividends or crediting any amounts arising from
the re-valuation of our assets) exceed the highest annual net profits earned by
us in any prior financial year. As a result of our recent acquisitions, we entered into employment
agreements with Gerard Pereira, our new Vice President of Engineering,
Kenneth Crowley, our new Vice President of Overseas Operations and Robert
Morrison, our new Vice President of Purchasing and Information Technology.
Each employment agreement provides that the agreements shall remain in force
unless terminated by either party upon 90 days written notice (except in
cases of gross negligence or misconduct). Under the terms of Mr. Pereiras
employment agreement, he is entitled to receive an annual bonus equal to
0.6% of the sum of the net profits as at the end of each fiscal year of
Ocean Conversion (BVI) Ltd. and DesalCo (Barbados) Ltd. (before charging
this bonus, dividends or crediting any amounts arising from the re-valuation
of our assets). Under the terms of Mr. Crowleys employment agreement, he
is entitled to an annual bonus of 1.5% of the sum of net profits as at the
end of each fiscal year of Waterfields Company Limited and Belize Water
Limited (before charging this bonus, dividends or crediting any amounts
arising from the re-valuation of our assets). We have also entered into a two-year employment agreement with Brent
Santha, our Vice President of Finance and Assistant Secretary. During 2003,
Mr. Santha was appointed Company Secretary and resigned from the position of
Assistant Company Secretary and on January 1, 2004, Mr. Santha was appointed
Chief Financial Officer. Mr. Santha is currently in negotiations to amend
his employment agreement to incorporate his appointment of Chief Financial
Officer and is still working under the existing agreement. This agreement
will expire on January 1, 2005, unless extended by agreement of the parties.
In addition to his salary, Mr. Santha is entitled to an annual bonus as
determined at the discretion of the President of our company and an option
to purchase that number of ordinary shares which equals 0.25% of our net
profit for that year. The exercise price of the options to be granted to
Mr. Santha shall be equal to the average of the closing market price of our
ordinary shares on the last trading day of that year. For the year ended
December 31, 2003, Mr. Santha was granted an option to purchase 10,487
ordinary shares at an exercise price of $20.05 per share. All options
granted to Mr. Santha expire on the day before the third anniversary of the
date of the auditors report on the financial statement for the year of the
grant. Mr. Santha may terminate this employment agreement upon three months
written notice prior to the anniversary of this agreement. We may terminate
this employment agreement without reason if we pay Mr. Santha 25% of his
annual salary at the time the termination takes place. Compensation Committee Interlocks and Insider Participation in Compensation Decisions The Compensation Committee of the Board of Directors consists of
Richard Finlay, Clarence Flowers, Jr., and Wilmer Pergande. No member of
the Compensation Committee is, or at any time in the past has been, an
officer or employee of the Company or any of its subsidiaries. 97




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Indemnification Provision Pursuant to our Articles of Association, we have indemnified our directors
and officers from and against all actions, proceedings, costs, charges, losses,
damages and expenses incurred in connection with their service as a director or
officer. Our Articles of Association do not indemnify our officers or directors
for actions, proceedings, costs, charges, losses, damages and expenses incurred
by these officers or directors as a result of their willful neglect or default
of their obligations to us. The Board of Directors of the Company has approved that the Company enter
into indemnification agreements with each officer and director, pursuant to
which they would be indemnified from and against all actions, proceedings,
costs, charges, damages and expenses incurred in connection with the execution
of their duties on behalf of the Company, except for willful neglect or default
in connection with the exercise of their duties. The shareholders of the
Company must approve these agreements before they will be effective. To the extent that indemnification for liabilities arising under the
Securities Act of 1933 may be available under the above provisions, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission this indemnification is against public policy as expressed
in the Securities Act of 1933 and is unenforceable in the United States. 98




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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS The table below sets forth the beneficial ownership of our ordinary
shares, par value CI$1.00 per share, of which 5,746,467 are outstanding as of
March 29, 2004, and our redeemable preferred shares, par value CI$1.00 per
share, of which 13,585 are outstanding as of March 29, 2004 by:  
    
    each person or entity that we know beneficially owns more
than 5% of our ordinary shares or redeemable preferred shares;  
    
    each of our executive officers and directors; and  
    
    all of our officers and directors as a group. Title of
    
    Identity of
    
    Amount
    
    PercentageClass
    
    Person or Group
    
    Owned
    
    of ClassOrdinary Shares
    
    Jeffrey M. Parker,Chairman of the board,
    
    
    281,708
    
    
    
    4.9
    %Ordinary Shares
    
    Frederick W. McTaggart,Director, President andChief Executive Officer
    
    
    104,477
    
    
    
    1.8
    %Ordinary Shares
    
    Peter D. Ribbins,Director Public Relations
    
    
    193,579
    
    
    
    3.4
    %Ordinary Shares
    
    Gregory S McTaggart,Vice President - Operations(Cayman Islands)
    
    
    102,866
    
    
    
    1.8
    %Ordinary Shares
    
    Kenneth R. Crowley,Vice President of OverseasOperations
    
    
    
    
    
    
    *Ordinary Shares
    
    Robert B. Morrison,Vice President of Purchasingand Information Technology
    
    
    100
    
    
    
    *Ordinary Shares
    
    Gerard J. Pereira,Vice President of Engineering
    
    
    
    
    
    
    *Ordinary Shares
    
    Brent J Santha,Chief Financial Officer andCompany Secretary
    
    
    11,687
    
    
    
    *Ordinary Shares
    
    J. Bruce Bugg, Jr.,Director
    
    
    3,656
    
    
    
    *Ordinary Shares
    
    William T Andrews,Director
    
    
    254
    
    
    
    *Ordinary Shares
    
    Brian E. Butler,Director
    
    
    21,500
    
    
    
    *Ordinary Shares
    
    Steven A. Carr,Director
    
    
    46,252
    
    
    
    *Ordinary Shares
    
    Carson K. Ebanks,Director
    
    
    
    
    
    
    *Ordinary Shares
    
    Richard L. Finlay,Director
    
    
    10,574
    
    
    
    *Ordinary Shares
    
    Clarence B. Flowers, Jr.,Director
    
    
    5,204
    
    
    
    *
 99




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Title of
    
    Identity of
    
    Amount
    
    PercentageClass
    
    Person or Group
    
    Owned
    
    of ClassOrdinary Shares
    
    Wilmer Pergande,Director
    
    
    5,803
    
    
    
    *Ordinary Shares
    
    Raymond Whittaker,Director
    
    
    12,953
    
    
    
    *Ordinary Shares
    
    Directors and ExecutiveOfficers as a Group(17 persons)
    
    
    800,613
    
    
    
    13.1
    %Redeemable
    
    Gregory McTaggartPreferred Shares
    
    Vice President Operations
    
    
    297
    
    
    
    2.1
    %Redeemable
    
    Directors and ExecutivePreferred Shares
    
    Officers as a group (1person)
    
    
    297
    
    
    
    2.1
    %Redeemable
    
    Abel CastilloPreferred Shares
    
    Operations Manager
    
    
    2,388
    
    
    
    17.6
    %Redeemable
    
    Margaret Julier,Preferred Shares
    
    Office Manager
    
    
    2,274
    
    
    
    16.7
    %Redeemable
    
    William BankerPreferred Shares
    
    Operations Manager
    
    
    2,570
    
    
    
    18.9
    %Redeemable
    
    Chet RitchPreferred Shares
    
    Operations
    
    
    887
    
    
    
    6.5
    %Redeemable
    
    Helbert RodriquezPreferred Shares
    
    Operations
    
    
    868
    
    
    
    6.4
    %Redeemable
    
    Ivan TaboraPreferred Shares
    
    Operations
    
    
    731
    
    
    
    5.4
    %Redeemable
    
    Elizabeth TrianaPreferred Shares
    
    Customer Service
    
    
    744
    
    
    
    5.5
    %
 An asterisk (*) in the above table indicates less than one percent The address for Jeffrey Parker, Frederick McTaggart, Peter Ribbins,
Gregory McTaggart, Kenneth Crowley, Robert Morrison, Gerard Pereira, Brent
Santha Abel Castillo, Margaret Julier, William Banker, Chet Ritch, Helbert
Rodriquez, Ivan Tabora and Elizabeth Triana is as follows: c/o Consolidated
Water Co. Ltd., Trafalgar Place, West Bay Road, P.O. Box 1114GT, Grand Cayman,
B.W.I. The address for each of J. Bruce Bugg Jr. and Argyle/Cay-Water, Ltd. is
c/o Argyle Investment Corp., 1500 Nations Bank Plaza, 300 Convent Street, San
Antonio, Texas 78205. The address for William Andrews is De Salt House, 7
Salt Kettle Lane, Paget PG 01, Bermuda. The address for Brian Butler is P.O.
Box 2581GT, Grand Cayman, B.W.I. The address for Steven A. Carr c/o Carr &
Associates, 4103 South Texas Avenue, Suite 209, Bryan, Texas 77802. The
address for Caron Ebanks is Government Administration Building, Georgetown,
Grand Cayman, B.W.I. The address for Richard Finlay is P.O. Box 31442 SMB,
Grand Cayman, B.W.I. The address for Clarence Flowers, Jr. is P.O. Box 2581GT,
Grand Cayman, B.W.I. The address for Wilmer Pergande is 3724 Bengal Road, Gulf
Breeze, Florida 32561. The address for Raymond Whittaker is P.O. Box 1982GT,
Grand Cayman, B.W.I. Unless otherwise indicated, to our knowledge, the persons named in the
table above have sole voting and investment power with respect to the shares
listed. In computing the number of shares beneficially owned by a person and
the percentage ownership of that person, shares issuable under stock options
exercisable within 60 days after March 18, 2004 are deemed outstanding for that
person but are not deemed outstanding for computing the percentage of ownership
of any other person. Of the 281,708 ordinary shares owned by Mr. Parker, 5,100
have shared investment power and 99,783 are ordinary shares underlying options
granted to Mr. Parker, which may be exercised within 60 days after March 18,
2004. Of the 104,477 ordinary shares owned by Mr. Frederick McTaggart, 98,768
are ordinary shares underlying options granted to Mr. Frederick McTaggart,
which may be exercised within 60 days after
March 18, 100




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2004. Of the 193,579 ordinary shares owned by Mr. Ribbins, 88,370
are ordinary shares underlying options granted to Mr. Ribbins, which may be
exercised within 60 days after March 18, 2004. Of the 102,866 ordinary shares
owned by Mr. Gregory McTaggart, 71,860 are ordinary shares underlying options
granted to Mr. Gregory McTaggart, which may be exercised within 60 days after
March 18, 2004 and 297 are redeemable preferred shares, which may be exercised
or converted within 60 days after March 18, 2004. Of the 11,687 ordinary
shares owned by Mr. Santha, 1,200 have shared investment power and 10,487 are
ordinary shares underlying options granted to Mr. Santha, which may be
exercised within 60 days after March 18, 2004. Of the 21,500 ordinary shares
owned by Mr. Butler, 3,500 have shared investment power. Equity Compensation Plan Information The following table sets forth certain information as of December 31,
2003, with respect to compensation plans (including individual compensation
arrangements) under which our equity securities are authorized for issuance
under:  
    
    all compensation plans previously approved by our security holders; and  
    
    all compensation plans not previously approved by our security holders. Number of securitiesremaining available forfuture issuance underNumber of securities to
    
    Weighted-average
    
    equity compensationbe issued upon exercise
    
    exercise price of
    
    plans (excludingof outstanding options,
    
    outstanding options,
    
    securities reflected inwarrants and rights
    
    warrants and rights
    
    column (a))Plan category
    
    (a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
    
    
    428,373
    
    
    $
    14.13
    
    
    
    *Equity compensation
plans not approved
by security holders
    
    
    51,045
    **
    
    $
    12.47
    
    
    
    *Total
    
    
    479,418
    
    
    $
    13.96
    
    
    
    *
 * Our equity compensation plans do not have any limits on the amount of shares
reserved for issuance under the plans. ** Of these 51,045 shares, 51,045 are issuable pursuant to our employee stock
option plan. See Note 22 to the Notes to Consolidated Financial Statements. 101




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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS For a discussion of the employment agreements we have with our executive
officers, see Part III, Item 11 of this Annual Report. 
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The following table shows the fees that the Company paid or accrued for
the audit and other services provided by KPMG and PricewaterhouseCoopers for
the fiscal years ended December 31, 2003 and 2002. Services
    
    Dollar Amount (2003)
    
    Dollar Amount (2002)Audit Fees
    
    $
    122,859
    
    
    $
    134,652Audit-Related Fees
    
    $
    121,859
    
    
    $
    273,956Tax Fees
    
    $
    
    
    
    $
    All Other Fees
    
    $
    288,372
    
    
    $
    7,420Total
    
    $
    533,091
    
    
    $
    416,028
 The dollar amounts relating to KPMG for each of the fiscal years ended
December 31, 2003 and 2002 are $244,718 and $329,333, respectively. The dollar
amounts relating to PricewaterhouseCoopers for each of the fiscal years ended
December 31, 2003 and 2002 are $nil and $86,695, respectively. Audit Fees: This category includes the fees for the examination of the
Companys consolidated financial statements, review of the Companys Annual
Report on Form 10-K and the quarterly review of the interim financial
statements included in the Companys Quarterly Reports on Form 10-Q. Audit-Related Fees: This category consists of services that are closely
related to the financial audit process and primarily consists of review of
reports filed and to be filed with the U.S. Securities and Exchange Commission
and accounting advice relating thereto. Tax Fees: This category relates to professional services for tax
compliance, tax advice, and tax planning. No such services were provided to
the Company during the years ended December 31, 2003 and 2002. All Other Fees: During the year ended December 31, 2003, KPMG and
PricewaterhouseCoopers provided non-audit services related to our recent
acquisitions and subsequent share offering. During the fiscal years ended
December 31, 2002, KPMG and PricewaterhouseCoopers provided non-audit services
related to assistance with the implementation of FASB Statement No. 123, a
United States standard for accounting for stock compensation expense and it
also includes fees from PricewaterhouseCoopers for successor auditor inquires
made by KPMG. All audit and non-audit services performed by KPMG and
PricewaterhouseCoopers were approved by the Audit Committee. The Audit
Committee gives due consideration to the potential effect of non-audit services
on maintaining KPMGs audit independence. 102




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##### Table of Contents



PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND
REPORTS ON FROM 8-K (a)
    
    
    1.
    
    
    Financial StatementsThe Consolidated Water Co. Ltd. financial statements found in ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA for the year ended December
31, 2003 are incorporated herein by reference.Pursuant to Rule 3-09 of Regulation S-X, when either the first or third
condition set forth in Rule 1-02(w), substituting 20 percent for 10
percent, is met by a 50 percent-or-less-owned person accounted for by the
equity method separate financial statements shall be filed. The Ocean
Conversion (BVI) Ltd. financial statements found in ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA for the year ended December 31, 2003
are incorporated herein by reference.2.
    
    
    Financial Statement SchedulesNone3.
    
    
    Exhibits
 ExhibitNumber
    
    Exhibit Description2.1
    
    Share Sale Agreement dated October 4, 2002, among
Consolidated Water Co. Ltd. and William T. Andrews and Margaret D.
Andrews (incorporated herein by reference to the exhibit filed as a
part of our Form 8-K dated February 13, 2003, Commission File No.
0-25248)2.2
    
    Agreement to Amend Share Sale Agreement dated November 29,
2002 between the Company and William T. Andrews and Margaret D.
Andrews (incorporated herein by reference to the exhibit filed as a
part of our Form 8-K dated February 13, 2003, Commission File No.
0-25248)2.3
    
    Agreement to Amend Share Sale Agreement dated December 30,
2002 between the Company and William T. Andrews and Margaret D.
Andrews (incorporated herein by reference to the exhibit filed as a
part of our Form 8-K dated February 13, 2003, Commission File No.
0-25248)2.4
    
    Agreement to Amend Share Sale Agreement dated January 31,
2003 between the Company and William T. Andrews and Margaret D.
Andrews (incorporated herein by reference to the exhibit filed as a
part of our Form 8-K dated February 13, 2003, Commission File No.
0-25248)2.5
    
    Share Sale Agreement dated October 4, 2002, among
Consolidated Water Co. Ltd., North American Mortgage & Finance
Corporation and Transcontinental
 103




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##### Table of Contents



ExhibitNumber
    
    Exhibit DescriptionFinance Corporation Ltd. (incorporated herein by reference to
the exhibit filed as a part of our Form 8-K dated February
13, 2003, Commission File No. 0-25248)2.6
    
    Agreement to Amend Share Sale Agreement dated November 29,
2002 among the Company North-American Mortgage & Finance Corporation
and Transcontinental Finance Corporation Limited (incorporated
herein by reference to the exhibit filed as a part of our Form 8-K
dated February 13, 2003, Commission File No. 0-25248)2.7
    
    Agreement to Amend Share Sale Agreement dated December 30,
2002 among the Company North-American Mortgage & Finance Corporation
and Transcontinental Finance Corporation Limited (incorporated
herein by reference to the exhibit filed as a part of our Form 8-K
dated February 13, 2003, Commission File No. 0-25248)2.8
    
    Agreement to Amend Share Sale Agreement dated January 31,
2003 among the Company North-American Mortgage & Finance Corporation
and Transcontinental Finance Corporation Limited (incorporated
herein by reference to the exhibit filed as a part of our Form 8-K
dated February 13, 2003, Commission File No. 0-25248)2.9
    
    Agreement dated October 8, 2002 between Consolidated Water
Co. Ltd. and Sage Water Holdings (BVI) Limited (incorporated herein
by reference to the exhibit filed as a part of our Form 8-K dated
February 13, 2003, Commission File No. 0-25248)2.10
    
    Amending Agreement dated November 15, 2002 between the
Company and Sage Water Holdings (BVI) Limited (incorporated herein
by reference to the exhibit filed as a part of our Form 8-K dated
February 13, 2003, Commission File No. 0-25248)2.11
    
    Amending Agreement dated December 18, 2002 between the
Company and Sage Water Holdings (BVI) Limited (incorporated herein
by reference to the exhibit filed as a part of our Form 8-K dated
February 13, 2003, Commission File No. 0-25248)2.12
    
    Amending Agreement dated January 28, 2003 between the Company
and Sage Water Holdings (BVI) Limited (incorporated herein by
reference to the exhibit filed as a part of our Form 8-K dated
February 13, 2003, Commission File No. 0-25248)2.13
    
    Share Sale Agreement dated December 16, 2002 between
Consolidated Water Co. Ltd. and Bacardi & Co. Ltd. (incorporated
herein by reference to the exhibit filed as a part of our Form 8-K
dated February 13, 2003, Commission File No. 0-25248)2.14
    
    Registration Rights Agreement dated February 7, 2003 between
Consolidated Water Co. Ltd. and North American Mortgage & Finance
Corporation (incorporated herein by reference to the exhibit filed
as a part of our Form 8-K dated February 13, 2003, Commission File
No. 0-25248)
 104




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description4.1
    
    Amended and Restated Memorandum of Association of
Consolidated Water Co. Ltd., dated December 4, 1998 (incorporated by
reference to the exhibit filed as part of our Form 20-F for the
fiscal year ended December 31, 1998, Commission File No. 0-25248)4.2
    
    Amended and Restated Articles of Association of Consolidated
Water Co. Ltd., dated December 4, 1998 (incorporated by reference to
the exhibit filed as part of our Form 20-F for the fiscal year ended
December 31, 1998, Commission File No. 0-25248).10.1
    
    License Agreement, dated July 11, 1990, between Cayman Water
Company Limited and the Government of the Cayman Islands
(incorporated herein by reference to the exhibit filed as a part of
our Form 20-F dated December 7, 1994, Commission File No. 0-25248).10.2
    
    First Amendment to License Agreement, dated September 18,
1990, between Cayman Water Company Limited and the Government of the
Cayman Islands. (incorporated herein by reference to the exhibit
filed as a part of our Form 20-F dated December 7, 1994, Commission
File No. 0-25248).10.3
    
    Second Amendment to License Agreement, dated February 14,
1991 between Cayman Water Company Limited and the Government of the
Cayman Islands. (incorporated herein by reference to the exhibit
filed as a part of our Form 20-F dated December 7, 1994, Commission
File No. 0-25248).10.4
    
    An Amendment to a License to Produce Potable Water, dated
August 15, 2001, between Consolidated Water Co. Ltd. by the
Government of the Cayman Islands (incorporated herein by reference
to the exhibit filed as a part of our Form 10-K for the fiscal year
ended December 31, 2001, Commission File No. 0-25248)10.5
    
    Fourth Amendment to a License to Produce Potable Water, dated
February 1, 2003 between Consolidated Water Co. Ltd. by the
Government of the Cayman Islands (incorporated herein by reference
to the exhibit filed as a part of our Form 10-K for the fiscal year
ended December 31, 2002, Commission File No. 0-25248)10.6
    
    Agreement, dated December 19, 2002, between Consolidated
Water Co. Ltd. (formerly Cayman Water Company Limited) and Safe
Haven Ltd. (incorporated herein by reference to the exhibit filed as
a part of our Form 10-K for the fiscal year ended December 31, 2002,
Commission File No. 0-25248)10.9
    

    Water Supply Agreement, dated December 18, 2000, between
Consolidated Water Co. Ltd. and South Bimini International Ltd.
(incorporated herein by reference to the exhibit filed as a part of
our Form 10-K dated March 30, 2001, Commission File No. 0-25248)10.10
    
    Employment Agreement, dated August 30, 2000, between
Consolidated Water Co. Ltd. and Peter D. Ribbins (incorporated
herein by reference to the exhibit filed as a part of our Form 10-K
dated March 30, 2001, Commission File No. 0-25248)
 105




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description10.11
    
    Employment contract dated September 30, 2003 between Peter
Ribbins and Consolidated Water Co. Ltd.10.12
    
    Amendment of employment contract dated December 5, 2003
between Peter Ribbins and Consolidated Water Co. Ltd.10.13
    
    Engagement Agreement, dated December 30, 1998 between
Consolidated Water Co. Ltd. and Jeffrey Parker (incorporated herein
by reference to the exhibit filed as part of our Registration
Statement on Form F-2 dated May 17, 2000, Commission File No.
333-35356)10.14
    
    Amendment of Engagement Agreement, dated October 26, 1999,
between Consolidated Water Co. Ltd. and Jeffrey Parker (incorporated
herein by reference to the exhibit filed as part of our Registration
Statement on Form F-2 dated May 17, 2000, Commission File No.
333-35356)10.15
    
    Second Amendment of Engagement Agreement, dated March 21,
2000, between Consolidated Water Co. Ltd. and Jeffrey Parker
(incorporated herein by reference to the exhibit filed as part of
our Registration Statement on Form F-2 dated May 17, 2000,
Commission File No. 333-35356)10.16
    
    Employment contract dated December 5, 2003 between Jeffrey
Parker and Consolidated Water Co. Ltd.10.17
    
    Employment Contract, dated July 12, 2000, between
Consolidated Water Co. Ltd. and Frederick W. McTaggart (incorporated
herein by reference to the exhibit filed as a part of our Form 10-K
dated March 30, 2001, Commission File No. 0-25248)10.18
    
    Employment contract dated December 5, 2003 between Frederick
McTaggart and Consolidated Water Co. Ltd.10.19
    
    Employment Contract, dated August 19, 1998, between Cayman
Water Company Limited and Gregory Scott McTaggart (incorporated
herein by reference to the exhibit filed as part of our Registration
Statement on Form F-2 dated May 17, 2000, Commission File No.
333-35356)10.20
    
    First Amendment to Employment Contract, dated April 17,
2000, between Consolidated Water Co. Ltd. and Gregory Scott
McTaggart (incorporated herein by reference to the exhibit filed as
part of our Registration Statement on Form F-2 dated May 17, 2000,
Commission File No. 333-35356)10.21
    
    Second amendment of employment contract dated December 5,
2003 between Gregory McTaggart and Consolidated Water Co. Ltd.10.22
    
    Specimen Service Agreement, between Cayman Water Company
Limited and consumers (incorporated herein by reference to the
exhibit filed as part of our Registration Statement on Form F-1
dated March 26, 1996)10.23
    
    Summary Share Grant Plan for Directors (incorporated herein
by reference to the exhibit filed as part of our Registration
Statement on Form F-2 dated May 17, 2000, Commission File No.
333-35356)
 106




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description10.24
    
    Employee Share Option Plan (incorporated herein by reference
to the exhibit filed as a part of our Form 10-K for the fiscal year
ended December 31, 2001, Commission File No. 0-25248)10.25
    
    Option Deed, dated August 6, 1997, between Cayman Water
Company Limited and American Stock Transfer & Trust Company
(incorporated herein by reference to the exhibit filed on our Form
6-K, dated August 7, 1997, Commission File No. 0-25248)10.26
    
    Purchase and Sale Agreement, dated December 10, 2001,
between Consolidated Water Co. Ltd., Cayman Hotel and Golf Inc.,
Ellesmere Britannia Limited and Hyatt Britannia Corporation Ltd.
(incorporated herein by reference to the exhibit filed as a part of
our Form 10-K for the fiscal year ended December 31, 2001,
Commission File No. 0-25248)10.27
    
    Agreement, dated February 1, 2002, between Consolidated
Water Co. Ltd. and Cayman Hotel and Golf Inc. (incorporated herein
by reference to the exhibit filed as a part of our Form 10-K for the
fiscal year ended December 31, 2001, Commission File No. 0-25248)10.28
    
    Consulting Agreement, dated November 17, 1998, between
Cayman Water Company Limited and R.J. Falkner & Company, Inc.
(incorporated herein by reference to the exhibit filed as part of
our Registration Statement on Form F-2 dated May 17, 2000,
Commission File No. 333-35356)10.29
    
    Agreement, dated July 24, 1995, between Cayman Water Company
Limited and Galleon Beach Resort Limited (incorporated herein by
reference to the exhibit filed as part of our Registration Statement
on Form F-2 dated May 17, 2000, Commission File No. 333-35356)10.30
    
    Agreement, dated February 9, 1994, between Cayman Water
Company Limited and Widar Ltd. (incorporated herein by reference to
the exhibit filed as part of our Registration Statement on Form F-2
dated May 17, 2000, Commission File No. 333-35356)10.31
    
    Lease of Part, dated October 13, 2000, between Consolidated
Water Co. Ltd. and Colmar Ltd. (incorporated herein by reference to
the exhibit filed as a part of our Form 10-K dated March 30, 2001,
Commission File No. 0-25248)10.32
    
    Lease of Part, dated March 1, 2003, between Consolidated
Water Co. Ltd. and Colmar Ltd.10.33
    
    Lease of Part, dated July 1, 2003, between Consolidated
Water Co. Ltd. and Colmar Ltd.10.34
    
    Lease, dated December 10, 2001, between Cayman Hotel and
Golf Inc. and Consolidated Water Co. Ltd. (incorporated herein by
reference to the exhibit filed as a part of our Form 10-K for the
fiscal year ended December 31, 2001, Commission File No. 0-25248)
 107




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description10.35
    
    Lease, dated April 27, 1993, signed July 18, 2001 between
Government of Belize and Belize Water Limited (incorporated herein
by reference to the exhibit filed as a part of our Form 10-K for the
fiscal year ended December 31, 2001, Commission File No. 0-25248)10.36
    
    Amended lease, dated April 27, 1993, signed January 2, 2004
between Government of Belize and Belize Water Limited10.37
    
    Loan Agreement dated February 7, 2003 between Consolidated
Water Co. Ltd. and Scotiabank (Cayman Islands) Ltd. (incorporated
herein by reference to the exhibit filed as a part of our Form 8-K
dated February 13, 2003, Commission File No. 0-25248)10.38
    
    Employment Contract dated February 10, 2003 between Gerard
Pereira and Consolidated Water Co. Ltd. (incorporated herein by
reference to the exhibit filed as a part of our Form 10-K for the
fiscal year ended December 31, 2002, Commission File No. 0-25248)10.39
    
    Employment Contract dated February 21, 2003 between Kenneth
Crowley and Consolidated Water Co. Ltd. (incorporated herein by
reference to the exhibit filed as a part of our Form 10-K for the
fiscal year ended December 31, 2002, Commission File No. 0-25248)10.40
    
    Employment Contract dated March 7, 2003 between Robert
Morrison and Consolidated Water Co. Ltd. (incorporated herein by
reference to the exhibit filed as a part of our Form 10-K for the
fiscal year ended December 31, 2002, Commission File No. 0-25248)10.41
    
    Employment Contract dated December 31, 2002 between Brent
Joseph Santha and Consolidated Water Co. Ltd. (incorporated herein
by reference to the exhibit filed as a part of our Form 10-K for the
fiscal year ended December 31, 2002, Commission File No. 0-25248)10.42
    
    Distributorship Agreement dated September 24, 2002 between
DWEER Technology Ltd. and DesalCo Limited (incorporated herein by
reference to the exhibit filed as a part of our Form 10-K for the
fiscal year ended December 31, 2002, Commission File No. 0-25248)10.43
    
    Amendment to the Distributorship Agreement dated September
24, 2002 between DWEER Technologies Ltd. and DesalCo Limited10.44
    
    Distributorship Agreement dated February 26, 2004 between
Calder AG and DesalCo Limited10.45
    
    Employee share option notice letter dated May 26, 2003
between Abel Castillo and Consolidated Water Co. Ltd.10.46
    
    Employee share option notice letter dated May 26, 2003
between Billy Banker and Consolidated Water Co. Ltd.10.47
    
    Employee share option notice letter dated May 26, 2003
between Chet Ritch Consolidated Water Co. Ltd.
 108




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description10.48
    
    Employee share option notice letter dated May 26, 2003
between David Hooker and Consolidated Water Co. Ltd.10.49
    
    Employee share option notice letter dated May 26, 2003
between Elizabeth Triana and Consolidated Water Co. Ltd.10.50
    
    Employee share option notice letter dated May 26, 2003
between Helverth Rodriguez and Consolidated Water Co. Ltd.10.51
    
    Employee share option notice letter dated May 26, 2003
between Ivan Tabora and Consolidated Water Co. Ltd.10.52
    
    Employee share option notice letter dated May 26, 2003
between Luis Wood and Consolidated Water Co. Ltd.10.53
    
    Employee share option notice letter dated May 26, 2003
between Maggie Julier and Consolidated Water Co. Ltd.14
    
    Code of Business Conduct and Ethics21
    
    Subsidiaries of the Registrant23.1
    
    Consent of KPMG (Cayman Islands) Chartered Accountants23.2
    
    Consent of KPMG (British Virgin Islands) Chartered Accountants31.1
    
    Certification by the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification by the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification by the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification by the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, Section 906 of the Sarbanes-Oxley Act of 200299.1
    
    Compensation Committee Charter99.2
    
    Audit Committee Charter99.3
    
    Nominations Committee Charter
 (b) Reports on Form 8-K  A report on Form 8-K was filed with the Securities and Exchange
Commission on November 17, 2003 under Items 5 and 12. 109




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. ParkerJeffrey M. ParkerChairman of the board of directors
 Dated: April 14, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. Signature
    
    Title
    
    DateBy:
    
    /s/ Jeffrey M. ParkerJeffrey M. Parker
    
    Chairman of the board of directors
    
    April 14, 2004By:
    
    /s/ Frederick W. McTaggartFrederick W. McTaggart
    
    Director, Chief Executive Officer
and President (Principal Executive
Officer)
    
    April 14, 2004By:
    
    /s/ Brent J. SanthaBrent J. Santha
    
    Chief Financial Officer (Principal
Financial and Accounting Officer)
    
    April 14, 2004By:
    
    /s/ Peter D. RibbinsPeter D. Ribbins
    
    Director of Public Relations
    
    April 14, 2004By:
    
    /s/ J. Bruce Bugg, Jr.J. Bruce Bugg, Jr.
    
    Director
    
    April 14, 2004By:
    
    /s/ William T. AndrewsWilliam T. Andrews
    
    Director
    
    April 14, 2004
 110




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##### Table of Contents



Signature
    
    Title
    
    DateBy:
    
    /s/ Brian E. ButlerBrian E. Butler
    
    Director
    
    April 14, 2004By:
    
    /s/ Steven A. CarrSteven A. Carr
    
    Director
    
    April 14, 2004By:
    
    /s/ Richard L. FinlayRichard L. Finlay
    
    Director
    
    April 14, 2004By:
    
    /s/ Clarence B. Flowers, Jr.Clarence B. Flowers, Jr.
    
    Director
    
    April 14, 2004By:
    
    /s/ Wilmer PergandeWilmer Pergande
    
    Director
    
    April 14, 2004By:
    
    /s/ Raymond WhittakerRaymond Whittaker
    
    Director
    
    April 14, 2004By:
    
    /s/ Carson K. EbanksCarson K. Ebanks
    
    Director
    
    April 14, 2004
 111    Table of Contents  CONSOLIDATED WATER CO. LTD. INDEX TO EXHIBITS FILED WITH 10-K 10.11
    
    Employment contract dated September 30, 2003 between Peter
Ribbins and Consolidated Water Co. Ltd.10.12
    
    Amendment of employment contract dated December 5, 2003
between Peter Ribbins and Consolidated Water Co. Ltd.10.16
    
    Employment contract dated December 5, 2003 between Jeffrey
Parker and Consolidated Water Co. Ltd.10.18
    
    Employment contract dated December 5, 2003 between Frederick
McTaggart and Consolidated Water Co. Ltd.10.21
    
    Second amendment of employment contract dated December 5,
2003 between Gregory McTaggart and Consolidated Water Co. Ltd.10.32
    
    Lease of Part, dated March 1, 2003, between Consolidated
Water Co. Ltd. and Colmar Ltd.10.33
    
    Lease of Part, dated July 1, 2003, between Consolidated
Water Co. Ltd. and Colmar Ltd10.36
    
    Amended lease, dated April 27, 1993, signed January 2, 2004
between Government of Belize and Belize Water Limited10.43
    
    Amendment to the Distributorship Agreement dated September
24, 2002 between DWEER Technologies Ltd. and DesalCo Limited10.44
    
    Distributorship Agreement dated February 26, 2004 between
Calder AG and DesalCo Limited10.45
    
    Employee share option notice letter dated May 26, 2003
between Abel Castillo and Consolidated Water Co. Ltd.10.46
    
    Employee share option notice letter dated May 26, 2003
between Billy Banker and Consolidated Water Co. Ltd.10.47
    
    Employee share option notice letter dated May 26, 2003
between Chet Ritch Consolidated Water Co. Ltd.10.48
    
    Employee share option notice letter dated May 26, 2003
between David Hooker and Consolidated Water Co. Ltd.




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##### Table of Contents



10.49
    
    Employee share option notice letter dated May 26, 2003
between Elizabeth Triana and Consolidated Water Co. Ltd.10.50
    
    Employee share option notice letter dated May 26, 2003
between Helverth Rodriguez and Consolidated Water Co. Ltd.10.51
    
    Employee share option notice letter dated May 26, 2003
between Ivan Tabora and Consolidated Water Co. Ltd.10.52
    
    Employee share option notice letter dated May 26, 2003
between Luis Wood and Consolidated Water Co. Ltd.10.53
    
    Employee share option notice letter dated May 26, 2003
between Maggie Julier and Consolidated Water Co. Ltd.14
    
    Code of Business Conduct and Ethics21
    
    Subsidiaries of the Registrant.23.1
    
    Consent of KPMG (Cayman Islands) Chartered Accountants.23.2
    
    Consent of KPMG (British Virgin Islands) Chartered Accountants31.1
    
    Certification by the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification by the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification by the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification by the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, Section 906 of the Sarbanes-Oxley Act of 200299.1
    
    Compensation Committee Charter99.2
    
    Audit Committee Charter99.3
    
    Nominations Committee Charter