CONSOLIDATED WATER CO LTD - 10-K Annual Report

Back to GetFilings.com

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

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, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSACTION PERIOD FROM TO

COMMISSION FILE NUMBER: 0-25248

---------------------

CONSOLIDATED WATER CO. LTD.
(Exact name of Registrant as specified in its charter)

CAYMAN ISLANDS N/A
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

TRAFALGAR PLACE, WEST BAY ROAD, N/A
P.O. BOX 1114GT, (Zip Code)
GRAND CAYMAN, B.W.I.
(Address of principal executive offices)

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
------------------------------------------
(TITLE OF CLASS)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark 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 18, 2003, was
$63,260,188.

As at March 18, 2003, there were 4,239,959 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.$.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

TABLE OF CONTENTS

1

PART I

ITEM 1. BUSINESS

INTRODUCTION

Our company was incorporated in August 1973 in the Cayman Islands and
provides water services in the Cayman Islands, Belize, Barbados, the British
Virgin Islands and the Commonwealth of the Bahamas ("the Bahamas"). Our
principal executive offices are located at Trafalgar Place, West Bay Road, Grand
Cayman, Cayman Islands. Our objective is to provide water services in areas
where the supply of potable water is scarce. In addition, we have expertise in
providing wastewater services. We supply potable water, via pipeline, to
business, residential and tourist properties and government facilities,
including any new developments, in our licensed area in the Cayman Islands and
in bulk, pursuant to contracts in Belize, Barbados, the British Virgin Islands
and the Bahamas.

On February 7, 2003, we completed acquisitions of interests in five
companies for a total consideration of approximately $27.8 million, comprised of
$25.5 million in cash and the issue of 185,714 of our ordinary shares. This has
enabled us to increase our presence in the Cayman Islands and the Bahamas and
expand our geographic presence to Barbados and the British Virgin Islands. The
financial results of our company for the year ended December 31, 2002 and
discussion included herein in Parts II Item 6, Item 7, and Item 8 do not include
results from these five companies since they were acquired after the year's end.
In addition to these transactions, by April 30, 2003 or at a later date agreed
to by the parties, we expect to acquire an additional 78.2% interest in
Waterfields Company Limited, a company providing potable water services in
Nassau, the Bahamas for approximately $8.1 million, which would provide us with
a 90.9% interest in Waterfields Company Limited.

In 2000, we completed our acquisition of our wholly owned subsidiary
company, Belize Water Limited, in Belize, Central America and executed an
agreement with South Bimini International Ltd., a Bahamian company, and in 2001,
began to provide water in South Bimini Island, the Bahamas. The business group
structure is based on defined areas of management responsibility and the
geographical location of our operations. The business group segments are Cayman
Islands operations, Belize operations and Bahamas operations. In 2002, the
Cayman Islands operations, Belize operations and Bahamas operations accounted
for 86.9%, 12.1% and 1.0%, respectively, of our total income. In 2001, these
percentages were 88.8%, 11.0% and 0.2%, respectively.

FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS

The information contained in Note 12 Segmented Information to our
consolidated financial statements found on page 56, in ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA for the year ended December 31, 2002, 2001 and
2000, is incorporated herein by reference.

BUSINESS COMBINATION

Consolidated financial statements have been presented which include our
wholly-owned subsidiary, Belize Water Limited. This acquisition was accounted
for by the purchase method. Our other two subsidiaries, Cayman Water Company
Limited and Hurricane Hide-A-Way Ltd., which are dormant companies, have been
consolidated. Our recently completed acquisitions of interest in five companies:
DesalCo Limited, its wholly-owned subsidiary DesalCo (Barbados) Ltd., Ocean
Conversion (Cayman) Limited, Ocean Conversion (BVI) Ltd. and Waterfields Company
Limited, which have not been consolidated as the acquisitions had not be
completed as at December 31, 2002.

CAYMAN ISLANDS OPERATIONS

The Cayman Islands comprise three islands, Grand Cayman, Little Cayman and
Cayman Brac, located approximately 460 miles south of Miami, Florida. The three
islands have a total area of approximately 100 square miles.

2

Our existing Cayman Islands operations 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
properties 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 capacity of our Governor's Harbour plant is 1.2 million U.S. gallons
per day. The current production capacity of our West Bay plant, which we
operate, is 710,000 U.S. gallons per day. The current production capacity of our
Britannia plant, which we also operate, is 440,000 U.S. gallons per day. Since
the plants began production of water, they have consistently been capable of
operating at or near their rated capacity.

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 Red Gate II 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.

Feed water for the reverse osmosis units is drawn from deep wells with
associated pumps on the properties. Wastewater is discharged into brine wells on
the properties below the level of 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.

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 66 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 2002, 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.

We rent approximately 3,200 square feet of space for our executive offices
at Trafalgar Place, West Bay Road, Grand Cayman under a lease which expires on
January 31, 2004, with an extension provision until January 31, 2005.

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

3

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.

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
licensed area.

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 2002, 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.

The following table shows, for each of the five years ended December 31,
2002, our total number of customer connections at the end of each year and
metered sales of water for that year:

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 2002, 49.5% were residential, 49.8% were
hotels, condominiums and other commercial customers and 0.7% were government
facilities.

Our contractual range and average sales price per 1,000 U.S. gallons of
potable water sold to our customers for the three years ended December 31, 2002,
2001 and 2000 are as follows:

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.

4

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 continues to operate its own reverse
osmosis equipment to produce water for themselves, although generally in amounts
less than their total monthly requirements.

In 1995, we entered into a ten-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 addition, in 2001, we entered into a twenty-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.

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 November 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.

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 Red Gate II 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.

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 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, 2002.

5

ENGINEERING SERVICES ACQUIRED

As a result of our acquisition of DesalCo Limited in February 2003, we
provide management, engineering and construction services for desalination
projects and are the exclusive agents for sales of DWEER(TM) 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. DesalCo Limited's revenues were $3.4 million for the year
ended December 31, 2002.

DesalCo Limited provides a Managing Director as well as other management,
purchasing and engineering services to Ocean Conversion (Cayman) Limited in the
form of accounting services, personnel management and plant management for a
monthly fee of $30,900. DesalCo Limited also receives a bonus of 4% of the
annual net operating income of Ocean Conversion (Cayman) Limited.

GOVERNMENT

The Cayman Islands are a British Overseas Territory of the United Kingdom
and have had a stable political climate since 1670, when the Cayman Islands were
ceded to England by the Treaty of Madrid. The Queen of England appoints the
Governor of the Cayman Islands to make laws with the advice and consent of the
legislative assembly. There are 15 elected members of the legislative assembly
and three members appointed by the Governor from the Civil Service. The
Executive Council is responsible for day-to-day government operations. The
Executive Council consists of five ministers who are chosen by the legislative
assembly from its 15 popularly elected members, and the three Civil Service
members. The Governor has reserved powers and the United Kingdom retains full
control over foreign affairs and defense. The Cayman Islands are a common law
jurisdiction and have adopted a legal system similar to that of the United
Kingdom.

CUSTOMS DUTIES AND TAXES

We 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.

- 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 from November 14, 2001 to May 13, 2003 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 have requested

6

that the Cayman Islands government exempt us from the share transfer tax. An
exemption from taxation, which was requested to be granted to our company, was
granted to our wholly-owned subsidiary, Cayman Water Company Limited, on January
31, 2003. We have notified the Cayman Islands government that this exemption
from taxation was issued to the wrong company. Other local companies whose
businesses are not primarily related to ownership of land and whose shares are
publicly traded have either received an exemption from the tax or have not been
pursued by government for payment of the tax. We believe it is unlikely that
government will seek to collect this tax on transfers of our publicly traded
shares.

BELIZE OPERATIONS

On July 21, 2000, we acquired Seatec Belize Ltd. and subsequently changed
the name of the company to Belize Water Limited. Belize Water Limited, a wholly
owned subsidiary of Consolidated Water Co. Ltd., 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 Belize Water
Services Ltd. ("BWSL"), which acquired the operations of the Belize Water and
Sewerage Authority in February 2001. Belize Water Limited provides water to
BWSL, which distributes the water through its own distribution system to
residential, commercial and tourist properties in Ambergris Caye, Belize. During
2002, we supplied BWSL with 112.5 million U.S. gallons of water.

OUR OPERATIONS UNDER THE CONTRACT IN BELIZE

We have entered into a contract with Belize Water Services Limited to
supply a minimum of 135,000 U.S. gallons of water per day to Belize Water
Services Limited, which expires in 2011. 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, 1994 and the term is for 18 years. While we own the plant, at the end of the
contract term, Belize Water Services Limited has the option to:

- purchase the plant at a mutually agreed upon price;

- extend the contract for a mutually agreed period of at least two years,
and upon expiration of such extension, Belize Water Services Limited may
either purchase the production plant at a price to be negotiated with us
or may again extend the agreement for another ten years in exchange for
the transfer of (50%) of the ownership of the production plant to Belize
Water Services Limited at the time of the extension with the transfer of
the remaining 50% of the production plant at the expiration of the ten-
year term; or

- extend the agreement for ten years in exchange for the transfer of 50% of
the ownership of the production plant to Belize Water Services Limited at
the time of the extension with the transfer of the remaining 50% of the
production plant at the expiration of the ten-year term.

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, Belize Water Services Limited,
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 contract, which provides 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 is charged
on any delayed payments.

In 2001, Belize Water Services Limited submitted claims for compensation
for damages that it believed resulted from our equipment failures during August
2001. They further claimed for the rectification of a minor mistake in the water
rate inflation adjustment formula in the water supply contract that was
negotiated by the previous management and dates back to November 1995. We fully
settled the claim for compensation that resulted from an equipment failure
during the first week of August 2001 and also fully settled Belize Water

7

Services Limited's claim for rectification of the inflation adjustment formula.
We believe that correcting this minor mistake in the agreement will not have a
significant impact on the profitability of our Belize operations going forward.

Belize Water Services Limited distributes our water primarily to
residential properties, small hotels, and businesses that serve the tourist
market.

DEMAND FOR WATER IN BELIZE

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. Sales were limited before March
2000 because the production capacity of the water plant was lower than demand
and the 21% increase in the number of U.S. gallons supplied in 2001 over 2000
could be expected. Demand does, however, continue to grow as is evidenced by the
20% increase in the number of U.S. gallons supplied in 2002 over 2001.

Our sales in Belize were restricted in August and September 2001 because of
several equipment failures at our plant. We believe that we could have sold more
water during these months if our plant had been able to operate at full
capacity. We have taken action to ensure this does not occur again by increasing
our inventory of critical spare parts.

Our contractual range and average sales price per 1,000 U.S. gallons of
water sold to Belize Water Services Limited for the three years ended December
31, 2002, 2001 and 2000 are as follows:

Feed water for the reverse osmosis units is drawn from deep wells with
associated pumps on the property. Wastewater is discharged into brine wells on
the property below the level of the 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.

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. 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.

8

BAHAMAS OPERATIONS

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 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 has developed half of a 150-slip marina and
constructed 72 condominium units, and plans to construct a further 138
condominium units. We are not currently aware of any time schedule by the
developer for the completion of the additional 138 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 2002, we supplied South Bimini International Ltd.
with 4.5 million U.S. gallons of water.

Our contractual range and average sales price per 1,000 U.S. gallons of
water sold to South Bimini International Ltd. for the two years ended December
31, 2002 and 2001 are as follows:

By April 30, 2003 or such later date as agreed to by the parties, we expect
to acquire a controlling interest in Waterfields Company Limited and continue
selling desalinated seawater on a take or pay basis to the Water & Sewerage
Corporation of the Bahamas under a long-term build, own and operate supply
agreement. The variable elements for direct and indirect costs are changed each
year based on a variety of local and internationally published cost and price
indices.

Feed water for the reverse osmosis units is drawn from deep wells with
associated pumps on the property. Wastewater is discharged into brine wells on
the property below the level of the feed water intakes.

Electricity to our plants is supplied by Bahamas Electricity Corporation.
At the Bimini plant site, 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.

THE GOVERNMENT IN THE BAHAMAS, CUSTOMS DUTY, AND TAXES

The Bahamas gained independence from the United Kingdom in 1973 and since
that time has enjoyed a constitutional parliamentary democracy. The Bahamas are
a member of the Commonwealth of Nations, and as such the Queen of England is the
constitutional head of state. The Governor-General serves as the Queens formal
representative in the Bahamian government. The executive branch is made up of
the Prime Minister and cabinet appointees. The cabinet must be made up of nine
ministers inclusive of the Prime Minister and the Attorney General. The
legislator is a bicameral parliament consisting of the Senate (16 member body),
and a lower legislative House of Assembly (40 member body). 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. Justices of the Supreme Court,
Justices of the Court of Appeals and Magistrates are all appointed by the
Governor-General upon the recommendation of the Prime Minister.

We have not been granted any tax exemptions for our Bahamian operations. We
believe that we may be subject to tax ranging from 1% to 2% of the gross
revenues generated by our Bahamian operations. We are currently reviewing the
matter with our Bahamian attorneys. We did not pay any tax to the Bahamian
government during 2002 or 2001, other than National Insurance Board tax on our
employee. We estimate our potential tax liability based on our 2002 and 2001
gross revenues to be less than $3,000.

9

BRITISH VIRGIN ISLANDS OPERATIONS

On February 7, 2003, we began operations in the British Virgin Islands when
we completed our transaction with Transcontinental Finance Corporation Ltd. and
North American Mortgage & Finance Corporation to purchase, 50% of the issued and
outstanding voting stock, certain profit sharing rights and all of the
non-voting shares of Ocean Conversion (BVI) Ltd. Ocean Conversion (BVI) Ltd.
supplies desalinated water produced from its Baughers Bay desalination plant in
Tortola, British Virgin Islands, to the British Virgin Islands Water and
Sewerage Department pursuant to the terms of a water supply agreement.

Ocean Conversion (BVI) Ltd.'s Baughers Bay plant currently has a capacity
of 1.2 million U.S. Gallons per day, although a current expansion project will
enable the plant to produce up to 1.6 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 a large Caterpillar diesel driven generator unit. Ocean Conversion (BVI)
Ltd. also purchases electricity from the BVI Electric Co. to power ancillary
equipment and provide building lighting.

Ocean Conversion (BVI) Ltd. believes that the current water supply
agreement with the British Virgin Islands Water and Sewerage Department was
automatically extended on May 31, 1999 to May 31, 2006 when the British Virgin
Islands Water and Sewerage Department did not make a buyout payment to Ocean
Conversion (BVI) Ltd. as required under the water supply agreement. The British
Virgin Islands Water and Sewerage Department, however, has taken the position,
that the agreement is in force on a month-to-month basis as the parties are
currently negotiating to extend the contract for 15 years at a lower cost to the
British Virgin Islands Water and Sewerage Department.

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 $16,639. 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) Ltd., 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.

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 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 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.

BARBADOS OPERATIONS

On February 7, 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,
10

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 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 $
14,000 per month and reimbursement of expenses.

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 and value added taxes are paid by Sandy Lane Properties Ltd.

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 been advised by our attorney in Belize that we may require a
license from the Government of Belize under the Water Industry Act 2001 in
relation to our water sales agreement with Belize Water Services Ltd. We are
currently reviewing our obligations under this new legislation, which was
enacted to facilitate the privatization of the government Water and Sewerage
Authority in February 2001. Our Belize operations are regulated by the terms and
conditions of our water supply agreement with Belize Water Services Ltd.
However, the new Water Industry Act 2001 requires all water service providers to
obtain a license from the Public Utilities Commission, which was created under
the Water Industry Act 2001. The Public Utilities Commission has the power to
set the terms and conditions on which all water services in Belize are provided
to the public. The Water Industry Act 2001 also contains certain savings for
operations which were in existence before the new law was enacted, which we
believe may apply to our operations. To date we have not been advised by any
government entity that we require such a license, and do not foresee any
difficulty or significant additional costs in obtaining a license if necessary.
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 disclosed above.

MARKET AND SERVICE AREA

Although we are currently only operating 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

11

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(TM) energy recovery systems 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 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, 2002 the tourist air arrivals decreased 9.4% and tourists cruise ship
arrivals increased 29.63% from the prior year. Total visitors increased to 1.6
million persons for the year ended December 31, 2002 from 1.2 million during the
year ended December 31, 2001.

During 2002, construction continued slowly within our franchise area on the
360-room Ritz Carlton Hotel, condominiums and golf course development, but
construction activity has become more active with the award of a general
construction contract to a large construction company from the United States.
The developer of this project has announced an anticipated completion date of
late 2003. 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 restrictions.

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 currently has no other source of potable water on Ambergris Caye.

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 rapidly 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.

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

12

city with its famed Cable Beach, it accounts for more than two-thirds of the
four million tourists who visit the Bahamas annually.

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.

We have historically focused on the English speaking Caribbean basin and
adjacent areas as our primary market because:

- many of these areas have little or no naturally occurring fresh water,

- limited local regulations and taxes in the Caribbean basin and adjacent
areas allow for higher returns than more highly regulated countries, and

- these areas contain a greater proportion of tourist properties, which
historically generate higher volume sales than residential properties.

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; 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.

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

13

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 the Cayman Islands.

In addition, DesalCo Limited, our recently acquired wholly-owned
subsidiary, is the exclusive distributor in the Caribbean basin for the
DWEER(TM) system produced by DWEER Technology Limited for use in reverse osmosis
seawater desalination plants. An advanced energy recovery system, the DWEER(TM)
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(TM) system recovers nearly 100% of the energy used to pressurize the
salinated (or feed) water after pretreatment. As a result, the DWEER(TM) energy
recovery system for reverse osmosis seawater desalination plants is one of the
most energy efficient systems of its kind. The DWEER(TM) 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(TM) system in the Caribbean
basin for seven years.

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(TM) energy
recovery devices which are exclusively manufactured by DWEER Technology Ltd.,
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 DWEER Technology Ltd. for
the DWEER(TM) 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

14

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, Tortola and Barbados will be subject to
seasonal variations in demand.

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 water supply contract with Belize Water
Services Limited is non-exclusive, and Belize Water Services Limited may seek
contracts with other water suppliers to meet their future needs in San Pedro,
Ambergris Caye, Belize. There are many companies throughout the world which
provide desalination equipment and turnkey water supply contracts, including
Ionics Inc. and Vivendi. We expect to compete with these companies and others
for any future contracts in 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 can expect
that AquaDesign and Vivendi will compete with us for future water supply
agreements with the Bahamian government on New Providence, Bahamas following our
acquisition of Waterfields Company Limited.

AquaDesign operates seawater desalination plants in West End, 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 examining the feasibility of
constructing a seawater desalination plant in East End, Tortola and has
purchased a small plant for installation in Jost Van Dyke, a small island
northwest of 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 companies such as Ionics Inc. and Vivendi. These
companies, among others, 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(TM) energy

15

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 5 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 discharge concentrated seawater, which is a
by-product 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. On February
1, 2003, we entered into a license amendment with the government under which we
are 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 will improve our
water's aesthetic quality by reducing the total dissolved solids in the potable
water supply to less than 200 parts per million. We anticipate making capital
expenditures of approximately $500,000 on new plant and equipment and increasing
operating costs by approximately 1% in the first full year. 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, Bahamian
and British Virgin Islands governments to discharge concentrated seawater, which
is a by-product of our desalination process, into deep disposal wells. 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 provide potable water to Sandy Lane Properties Ltd. 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 47
persons in the Cayman Islands and six persons in Bermuda, eight 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 in the
Bahamas to manage and operate our water plant and distribution system in South
Bimini. We presently employ five persons in Barbados to operate the water plant
for Sandy Lane Properties. Of the six persons employed in Bermuda, we will
relocate three of them to the Cayman Islands in May 2003 and the remaining three
employees in Bermuda will be made redundant. 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.

16

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. The plant is located on 3.2 acres,
including 485 feet of waterfront. The current capacity of our Governor's Harbour
plant is 1.2 million U.S. gallons per day. 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 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 66 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 lease
approximately 3,200 square feet of space for our executive offices at Trafalgar
Place, West Bay Road, Grand Cayman, Cayman Islands. We have an annual lease
expiring on January 31, 2004, with a yearly extension provision until January
31, 2005, on this property.

OPERATIONS ACQUIRED AS A RESULT OF OUR RECENT ACQUISITION OF OCEAN CONVERSION
(CAYMAN) LIMITED

We recently completed a transaction with Transcontinental Finance
Corporation Ltd. and North American Mortgage & Finance Corporation in which we
purchased all of the voting stock and certain profit sharing rights relating to
Ocean Conversion (Cayman) Limited, a Cayman Islands company, and 50% of the
issued and outstanding voting stock and certain profit sharing rights relating
to Ocean Conversion (BVI) Ltd., a British Virgin Islands company. Simultaneously
with the completion of this transaction, we also purchased all of the issued and
outstanding stock of DesalCo Limited from William and Margaret Andrews. As a
result of these two transactions, we own 100% of the voting and non-voting stock
of Ocean Conversion (Cayman) Limited as well as all of the profit sharing rights
relating to Ocean Conversion (Cayman) Limited.

Following completion of our acquisition of all of the outstanding stock of
each of DesalCo 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)

17

Limited to operate until December 2004. The following table provides additional
information about each of these plants and their current operations:

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, as extended, 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.

GOVERNOR'S HARBOUR PLANT

Ocean Conversion (Cayman) Limited uses the Governor's Harbour Plant to
produce approximately 1.2 million U.S. gallons of desalinated water per day for
sale to us under the terms of a water purchase agreement. We own the property on
which the plant is located, the building, the desalination equipment, feed water
wells and brine disposal wells. The plant was originally powered by multi-stage
centrifugal high-pressure pumps, but was upgraded in 1995 to include positive
displacement high-pressure pumps. The original centrifugal pumps are still in
place as backups, although they are not capable of powering the plant at the
full production rate without the positive displacement high-pressure pumps. The
water purchase agreement was cancelled on completion of our acquisition of Ocean
Conversion (Cayman) Limited.

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

18

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 of seven years. 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.

RED GATE II 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 operated the electrically
powered plant and supplied 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 in November 2009.

MANAGEMENT SERVICES AGREEMENT

DesalCo Limited provides a managing director as well as management and
engineering services for each of the plants operated by Ocean Conversion
(Cayman) Limited for a monthly fee of $30,900. The services include high-level
management support, audit coordination, personnel management and plant
management and maintenance. DesalCo Limited also purchases various parts and
materials for Ocean Conversion (Cayman) Limited at a specified mark-up of 10%,
and provides design services for new plants at a rate of 13% of the project
costs. DesalCo Limited also receives a bonus of 4% of the annual net operating
income of Ocean Conversion (Cayman) Limited. We do not currently expect to
change the contractual arrangements between DesalCo Limited and Ocean Conversion
(Cayman) Limited as a result of the acquisition of these companies.

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 the term is for 18 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.

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.

19

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.

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, 2002, we issued options to purchase an additional 97,678
ordinary shares having an exercise price of $11.93 to three directors and one
executive officer. These options are exercisable until March 18, 2006. The
options issued on December 31, 2002 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 2002.

HOLDERS

On March 18, 2003, we had 577 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 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.

20

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 2001.......................................... $ 0.10 Per Share
Second Quarter 2001......................................... 0.10 Per Share
Third Quarter 2001.......................................... 0.10 Per Share
Fourth Quarter 2001......................................... 0.10 Per Share

First Quarter 2002.......................................... 0.105 Per Share
Second Quarter 2002......................................... 0.105 Per Share
Third Quarter 2002.......................................... 0.105 Per Share
Fourth Quarter 2002......................................... 0.105 Per Share

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. On January 31, 2003, Cayman Water
Company Limited, our wholly-owned subsidiary, obtained an exemption from this
tax from the government of the Cayman Islands. We have notified the Cayman
Islands government that this exemption from taxation was issued to the wrong
company. As of the date of this Annual Report, we have not received notice that
the Cayman Islands government has reissued the exemption to our company, but we
expect this to occur within the near future.

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 our
wholly-owned subsidiaries Belize Water Limited, Cayman Water Company Limited and
Hurricane Hide-A-Way Ltd. The operating results of Belize Water Limited have
been included in the financial statements since the date of the acquisition on
July 21, 2000. All inter-company balances and transactions have been eliminated.

Set forth below is selected financial data based upon our consolidated
financial statements, which does not reflect the acquisitions completed on
February 7, 2003. The table contains information, expressed in US dollars,
derived from our audited consolidated financial statements for the five-year
period ended December 31, 2002. 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

21

financial statements for the years ended December 31, 1999 and 1998 and
accountant's reports thereon are not included in this Annual Report.

- ---------------

(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.

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

- ---------------

* Million U.S. gallons of water per day.

22

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 65 miles of polyvinyl
chloride pipe. Sales in Grand Cayman are made within our licensed area to
approximately 3,100 customers. During 2002, we supplied approximately 523
million U.S. gallons of water 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, and to us under
various licenses and agreements. Revenues of Ocean Conversion (Cayman) Limited
were $6.2 million for the year ended December 31, 2002.

DesalCo Limited provides management, engineering and construction services
for desalination projects and is the exclusive agent for sales of DWEER(TM)
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. DesalCo Limited's revenues were $3.4
million for the year ended December 31, 2002.

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 2002, we supplied approximately 113 million
U.S. gallons of water in Belize. Revenues of our wholly owned subsidiary, Belize
Water Limited, were $1.5 million for the year ended December 31, 2002.

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 2002, we supplied approximately five
million U.S. gallons of water in the Bahamas and revenues were $0.1 million for
the year ended December 31, 2002. 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 2.64 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. Revenues for Waterfields Company
Limited were $4 million for the year ended December 31, 2002.

BARBADOS

The recently acquired Barbados operation consists of one reverse osmosis
seawater conversion plant with a capacity of 1.3 million U.S. gallons per day
which is operated by DesalCo (Barbados) Ltd., the wholly

23

owned subsidiary of DesalCo Limited. The plant provides water to the Sandy Lane
Resort, and during 2002, supplied approximately 393 million U.S. gallons.
DesalCo (Barbados) Ltd. had revenues of $0.7 million for the year ended December
31, 2002.

BRITISH VIRGIN ISLANDS

We recently entered the market in the British Virgin Islands when our
wholly-owned subsidiary, DesalCo Limited acquired operational control 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 1.2 million U.S. gallons
per day. Ocean Conversion (BVI) Ltd. provides water on a take or pay basis to
the Department of Water and Sewerage of the Ministry of Communications and Works
under an agreement with the Government of the British Virgin Islands. Ocean
Conversion (BVI) Ltd.'s revenues were $5.4 million for the year ended December
31, 2002.

OUR OPERATIONS UNDER THE LICENSE IN THE CAYMAN ISLANDS

Our exclusive operational license was issued to us by the Cayman Islands
government under The Water (Production and Supply) Law of 1979. The license
terminates, unless further renewed, on July 11, 2010.

Two years prior to the expiration of the license, we have the right to
negotiate with the government to extend the license for an additional term.
Unless we are in default under the license, the government may not grant a
license to any other party without first offering the license to us on terms
that are no less favorable than those which the government offers to a third
party.

We must provide, within our licensed area, any requested piped water
service which, in the opinion of the Executive Council of the Cayman Islands
government, is commercially feasible. Where supply is not considered
commercially feasible, we may require the potential customer to contribute
toward the capital costs of pipe laying (Advances in Aid of Construction). We
then repay these advances to the customer, without interest, by way of a
discount of 10% 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 the license, we pay a royalty to the government of 7.5% of our gross
US gallon potable water sales revenue. The base selling price of water under the
license presently varies between $8.50 and $22.74 per 1,000 U.S. gallons,
depending upon the type and location of the customer and the monthly volume of
water purchased. The license provides for an automatic adjustment for
inflation/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 government, reviews and approves the
calculations of the price adjustments for inflation and electricity costs.

If we want to increase our prices for any reason other than inflation, we
have to request prior approval of the Executive Council of the Cayman Islands
government. If the parties fail to agree, the matter is referred to arbitration.
The last price increase that we requested, other than automatic inflation
adjustments since 1990, was granted in full in June 1985.

DEMAND FOR WATER IN THE CAYMAN ISLANDS

In the past, demand on our pipeline distribution has varied throughout the
year. However, an increase in year-round tourism in recent years has created
more uniform demand for water throughout the year. Demand depends upon the
number of tourists visiting the Cayman Islands and the amount of rainfall during
any particular time of the year. In general, 75% of tourists come from the
United States. Our operating results in any particular quarter are not
indicative of the results to be expected for the full year. The table below
lists the

24

total volume of water we supplied on a quarterly basis for the five years ended
December 31, 2002 to all of our customers:

OUR OPERATIONS UNDER THE CONTRACT IN BELIZE

We have entered into a contract with BWSL to supply a minimum of 135,000 US
gallons of water per day to BWSL expiring in 2011. At the expiry of the
contract, BWSL may at its option extend the term of the agreement or purchase
the plant outright.

The base price of water supplied, and adjustments thereto, are determined
by the terms of the contract, which provides for 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 year is charged
on any delayed payments. As at the date of this Annual Report, BWSL is current
on its outstanding balance. We had no bad debts for our Belize sales for the
year ended December 31, 2002.

BWSL distributes our water primarily to residential properties, small
hotels, and businesses which serve the tourist market.

DEMAND FOR WATER IN BELIZE

We believe that water sales in Belize are cyclical, and on a similar cycle
to sales in the Cayman Islands, since both operations cater to similar tourist
markets. We also believe that water sales will be higher in the future since
sales were limited before March 2000 because the production capacity of the
water plant was lower than demand.

Our sales in Belize were restricted in August, September and October 2001
because of several major component failures at our San Pedro plant. We believe
that we could have sold more water during these months if our plant had been
able to operate at full capacity. We have taken action to ensure this does not
occur again by increasing our inventory of critical spare parts.

The table below lists the total volume of water we supplied to BWSL on a
quarterly basis for the three years ended December 31, 2002:

- ---------------

* Sales made pre-acquisition by Seatec Belize Ltd. Used only for comparison
purposes.

25

OUR OPERATIONS UNDER CONTRACT IN BAHAMAS

In 2000, we entered into a water supply agreement with South Bimini
International Ltd. and began supplying water under this contract on July 11,
2001. Under our agreement South Bimini International Ltd. is committed to pay
for a minimum of 3,000 US gallons of water per customer per month (36,000 US
gallons per customer per year) on a take or pay basis in relation to the Bimini
Sands Resort property in South Bimini Island, Bahamas. The price of water
supplied is adjusted for inflation annually based on Bahamas government indices,
and adjusted monthly for changes in the cost of electricity.

DEMAND FOR WATER IN BAHAMAS

We have only been supplying water in Bimini for approximately twenty-one
months, to a resort property, which is partially completed and a small 40-room
hotel. Currently the resort is comprised of 72 condominiums, and a developing
150-slip marina. By the end of 2003, we anticipate that we will be providing
water to an additional 42 condominiums. The resort property is ultimately
expected to include over 300 condominium units, a large hotel casino, and a
marina that can accommodate twice as many boats as the existing facility. 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.

The table below lists the total volume of water we supplied to South Bimini
International Ltd. on a quarterly basis for the year ended December 31, 2002 and
the six month period ended December 31, 2001:

CRITICAL ACCOUNTING POLICIES

The preparation of our financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues, and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to trade accounts receivable, deferred expenditures, property, plant and
equipment and intangible assets. Our company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. We believe the following
critical accounting policies are the most important to the portrayal of our
financial condition and results and require management's more significant
judgments and estimates in the preparation of our company's consolidated
financial statements.

Trade accounts receivable: We maintain 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 recorded 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.

Deferred expenditures: These costs were incurred in connection with the
recent acquisitions and pending financing transactions. Costs relating to the
acquisition will be included as part of the purchase price allocation and our
company will seek to repay our existing debt with either new debt, equity or a
hybrid financing. If we

26

do not proceed with new financing, we may be required to expense the amounts
relating to the financing transaction.

Property, plant and equipment: Management makes estimates for the useful
life of assets and reviews its policies from time to time. In 2001, we carried
out an extensive engineering analysis of our potable water production and
distribution equipment in Grand Cayman. As a result of the analysis, management
reassessed the useful economic lives of certain assets. The reassessment
resulted in reduced depreciation of $197,472, or $0.05 per share on a basic and
fully diluted basis for the year ended December 31, 2001.

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

TOTAL INCOME

Our total income includes water sales and other income from all of our
business segments. Water sales income is comprised of retail water sales, via
pipeline, to our individual Cayman Islands customers, and bulk water sales to
Belize Water Services Limited and South Bimini International Ltd. Other income
consists of monthly meter rental charges, sales to companies that deliver water
by truck, connection and re-connection charges and interest income. Until
February 1, 2002, other income also included settlement fee payments for the
supply of water to the Britannia development by the operators of the Hyatt
Hotel, which had its own water production facility.

EXPENSES

Expenses include the cost of water sales ("direct expenses") and our
indirect, or general and administrative expenses. Direct expenses include
royalty payments to the Cayman Islands government; electricity and chemical
expenses; payments to Ocean Conversion (Cayman) Limited relating to the
operation of the Governor's Harbour plant; production equipment and facility
depreciation costs; equipment maintenance and expenses and operational staff
costs. Indirect, or general and administrative, expenses consist primarily of
salaries and employee benefits for administrative personnel, stock compensation
expenses, office lease payments, depreciation on fixed assets used for
administrative purposes, legal and professional fees and financing costs. There
are no income taxes in the Cayman Islands and we are currently exempt from taxes
in Belize. We may be liable for gross revenue tax in the Bahamas as disclosed in
Part I, Item 1, under our discussion of our Bahamas operations.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

Total Income

Total income increased by 6.4% from $11,473,706 to $12,206,477 for the
years ended December 31, 2001 and 2002, respectively. Total income is comprised
of water sales and other income.

The Cayman operations increased total income by $420,901 for the year ended
December 31, 2002, which is an increase of 4.1% over the prior year and
represents 57.4% of the increase in total income.

The Belize operations increased total income by $220,618 for the year ended
December 31, 2002, which is an increase of 17.5% over the prior year and
represents 30.1% of the increase in total income.

The addition of the Bahamas operations as of July 11, 2001 increased total
income by $91,252 for the year ended December 31, 2002, which is an increase of
340.8% over the prior year and represents 12.5% of the increase in total income.

27

Water Sales

Total water sales increased by 8.0% from $11,026,923 to $11,910,720 for the
years ended December 31, 2001 and 2002, respectively. Total water sales
increased as a result of several factors detailed below.

Our Cayman operation added $551,783 to water sales for the year ended
December 31, 2002, which is an increase of 5.6% over