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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2005 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the transaction period from _______________ to _______________ Commission File Number: 0-25248 CONSOLIDATED WATER CO. LTD. 
  CAYMAN ISLANDS
    
    N/A(State or other jurisdiction of incorporation or
organization)
    
    (I.R.S. Employer Identification No.)Regatta Office Park
Windward Three, 4th Floor
West Bay Road
P.O. Box 1114 GT
Grand Cayman, Cayman Islands
    
    N/A(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (345) 945-4277 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes   x   No   
o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes   x   No   
o As at April 28, 2005,there were 5,861,062 of the registrants common shares of common stock, with
US$ 1.20 par value, outstanding.




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EXCHANGE RATES Unless otherwise indicated, all dollar amounts are in United States Dollars and references to $,
U.S., or U.S. $ are to United States Dollars. The official fixed exchange rate for conversion of CI$ into U.S.$, as determined by the Cayman
Islands Monetary Authority, has been fixed since April 1974 at U.S. $1.20 per CI$1.00. The official fixed exchange rate for conversion of BZE$ into U.S.$, as determined by the Central
Bank of Belize, has been fixed since 1976 at U.S.$ 0.50 per BZE$ 1.00. The official fixed exchange rate for conversion of BAH$ into U.S.$, as determined by the Central
Bank of The Bahamas, has been fixed since 1973 at U.S. $1.00 per BAH $1.00. The official fixed exchange rate for conversation of BDS$ into U.S.$ as determined by the
Central Bank of Barbados has been fixed since 1975 at U.S.$ 0.50 = BDS$ 1.00. The British Virgin Islands currency is the U.S.$.




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TABLE OF CONTENTS Section
    
    Description
    
    PagePART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets as at March 31, 2005 and December 31, 2004
    
    
    1Condensed Consolidated Statements of Income for the three months ended March 31, 2005 and 2004
    
    
    2Condensed Consolidated Statements of Cash Flows for each of the three months ended March 31, 2005 and 2004
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2.
    
    Managements Discussions and Analysis of Financial Condition and Results of Operations
    
    
    8Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    13Item 4.
    
    Controls and Procedures
    
    
    14PART II
    
    OTHER INFORMATIONItem 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    15Item 6.
    
    Exhibits
    
    
    16SIGNATURE
    
    
    
    
    17Section 302 CEO CertificationSection 302 CFO CertificationSection 906 CEO CertificationSection 906 CFO Certification




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Forward-Looking Statements We discuss in this Form 10-Q for Consolidated Water Co. Ltd. (the Company) matters which are not
historical facts, but which are forward-looking statements. We intend these forward-looking
statements to qualify for safe harbor from liability established by the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to,
our future plans, objectives, expectations and events, assumptions and estimates about our company
and our industry in general. The forward-looking statements in this Form 10-Q reflect what we currently anticipate will happen.
What actually happens could differ materially from what we currently anticipate will happen. We are
not promising to make any public announcement when we think forward looking statements in this Form
10-Q are no longer accurate whether as a result of new information, what actually happens in the
future or for any other reason. Important matters that may affect what will actually happen include, but are not limited to:
tourism and weather conditions in the areas we service; our ability to manage, integrate and
realize the benefits from our acquisitions; scheduled new construction within our operating areas;
the economies of the U.S. and the areas we service; regulatory matters; availability of capital to
repay a substantial portion of our bank debt and for expansion of our operations, and other risks
described in the Companys other reports filed with the Securities and Exchange Commission. By
making these forward-looking statements, the Company undertakes no obligation to update these
statements for revisions or changes after the date of this Form 10-Q.




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PART I  FINANCIAL INFORMATION 
 Item 1. Financial Statements CONSOLIDATED WATER CO. LTD. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
  March 31,
    
    
    December 31,2005
    
    
    2004(unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    8,629,580
    
    
    $
    9,216,908Accounts receivable
    
    
    5,893,972
    
    
    
    4,879,410Insurance claim receivable
    
    
    
    
    
    
    1,932,905Inventory
    
    
    2,150,694
    
    
    
    1,629,348Prepaid expenses and other assets
    
    
    489,860
    
    
    
    625,563Current portion of loans receivable
    
    
    813,652
    
    
    
    924,020Total current assets
    
    
    17,977,758
    
    
    
    19,208,154Loans receivable
    
    
    2,102,238
    
    
    
    2,270,326Property, plant and equipment, net
    
    
    29,886,339
    
    
    
    28,861,402Other assets
    
    
    401,782
    
    
    
    424,564Investments in affiliates
    
    
    11,602,704
    
    
    
    11,070,848Intangible assets
    
    
    5,188,911
    
    
    
    5,421,381Goodwill
    
    
    3,568,374
    
    
    
    3,568,374Total assets
    
    $
    70,728,106
    
    
    $
    70,825,049LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesDividends payable
    
    $
    795,872
    
    
    $
    783,854Accounts payable and other liabilities
    
    
    2,652,820
    
    
    
    3,860,511Current portion of long term debt
    
    
    3,733,144
    
    
    
    3,733,144Total current liabilities
    
    
    7,181,836
    
    
    
    8,377,509Long term debt
    
    
    12,042,671
    
    
    
    12,856,226Security deposits and other liabilities
    
    
    357,957
    
    
    
    357,957Minority interest in Waterfields Company Limited
    
    
    863,388
    
    
    
    861,463Total liabilities
    
    
    20,445,852
    
    
    
    22,453,155Stockholders equityRedeemable preferred stock, $1.20 par value. Authorized 100,000shares; issued and outstanding 11,830 shares at March 31, 2005and 13,921 shares at December 31, 2004
    
    
    14,196
    
    
    
    16,705Class A common stock, $1.20 par value. Authorized 9,840,000shares; issued and outstanding 5,861,062 shares at March 31,2005 and 5,753,485 shares at December 31, 2004
    
    
    7,033,274
    
    
    
    6,904,183Class B common stock, $1.20 par value. Authorized 60,000 shares;issued and outstanding nil shares at March 31, 2005 and nilshares at December 31, 2004
    
    
    
    
    
    
    Stock and options earned but not issued
    
    
    66,934
    
    
    
    20,746Additional paid-in capital
    
    
    28,320,189
    
    
    
    27,281,728Retained earnings
    
    
    14,847,661
    
    
    
    14,148,532Total stockholders equity
    
    
    50,282,254
    
    
    
    48,371,894Total liabilities and stockholders equity
    
    $
    70,728,106
    
    
    $
    70,825,049
 The accompanying information and notes are an
integral part of these condensed consolidated financial statements. 1




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CONSOLIDATED WATER CO. LTD. 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (Unaudited)
 Three Months
    
    
    Three MonthsEnded March 31,
    
    
    Ended March 31,2005
    
    
    2004Retail water sales
    
    $
    3,131,728
    
    
    $
    3,575,076Bulk water sales
    
    
    2,695,301
    
    
    
    2,508,179Service revenue
    
    
    230,456
    
    
    
    254,442Total revenue
    
    
    6,057,485
    
    
    
    6,337,697Retail cost of sales
    
    
    (1,255,117
    )
    
    
    (1,370,282
    )Bulk cost of sales
    
    
    (2,259,324
    )
    
    
    (1,916,058
    )Service cost of sales
    
    
    (145,184
    )
    
    
    (144,134
    )Total cost of sales
    
    
    (3,659,625
    )
    
    
    (3,430,474
    )Gross profit
    
    
    2,397,860
    
    
    
    2,907,223General and administrative expense
    
    
    (1,423,803
    )
    
    
    (1,080,159
    )Income from operations
    
    
    974,057
    
    
    
    1,827,064Other income (expense):Interest income
    
    
    14,317
    
    
    
    17,783Interest expense
    
    
    (186,674
    )
    
    
    (162,295
    )Other income
    
    
    196,469
    
    
    
    83,708Equity in earnings of affiliate
    
    
    354,408
    
    
    
    199,595378,520
    
    
    
    138,791Net income before income taxes and minority interest
    
    
    1,352,577
    
    
    
    1,965,855Income tax benefit (expense)
    
    
    23,399
    
    
    
    (13,006
    )Minority interest
    
    
    (1,925
    )
    
    
    (28,927
    )Net Income
    
    $
    1,374,051
    
    
    $
    1,923,922Basic earnings per share
    
    $
    0.24
    
    
    $
    0.34Diluted earnings per share
    
    $
    0.23
    
    
    $
    0.33Dividends declared per share
    
    $
    0.115
    
    
    $
    0.115Weighted average number of common stock used in thedetermination of:Basic earnings per share
    
    
    5,776,058
    
    
    
    5,699,609Diluted earnings per share
    
    
    5,959,758
    
    
    
    5,828,890
 The accompanying information and notes are an
integral part of these condensed consolidated financial statements. 2




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CONSOLIDATED WATER CO. LTD. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Three Months
    
    
    Three MonthsEnded March 31,
    
    
    Ended March 31,2005
    
    
    2004Net cash flows provided by operating activities
    
    $
    989,300
    
    
    $
    1,684,292Cash flows provided by (used in) investing activitiesPurchase of property, plant and equipment
    
    
    (1,522,091
    )
    
    
    (384,908
    )Collections from loans receivable
    
    
    278,456
    
    
    
    272,456Receipt of income from affiliate
    
    
    
    
    
    
    227,250Net cash provided by (used in) investing activities
    
    
    (1,243,635
    )
    
    
    114,798Cash flows provided by (used in) financing activitiesDividends paid
    
    
    (662,905
    )
    
    
    (602,532
    )Proceeds from issuance of common stock
    
    
    1,143,468
    
    
    
    422,145Principal payments of long term debt
    
    
    (813,556
    )
    
    
    (890,658
    )Net cash (used in) financing activities
    
    
    (332,993
    )
    
    
    (1,071,045
    )Net increase (decrease) in cash and cash equivalents
    
    
    (587,328
    )
    
    
    728,045Cash and cash equivalents at beginning of period
    
    
    9,216,908
    
    
    
    8,236,924Cash and cash equivalents at end of period
    
    $
    8,629,580
    
    
    $
    8,964,969Interest paid in cash
    
    $
    161,037
    
    
    $
    132,209Interest received in cash
    
    $
    15,804
    
    
    $
    17,783
 The accompanying information and notes are an
integral part of these condensed consolidated financial statements. 3




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CONSOLIDATED WATER CO.
LTD. 
 NOTES TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 1. Presentation of Financial Information The accompanying unaudited Condensed Consolidated Financial Statements were prepared in accordance
with the instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a
complete presentation of financial condition, results of operations and cash flows in conformity
with accounting principles generally accepted in the United States of America. All adjustments
that are, in the opinion of management, of a normal recurring nature and are necessary for a fair
presentation of the interim financial statements have been included. The results of operations for
the period ended March 31, 2005 are not necessarily indicative of the results that may be expected
for the entire fiscal year or any other interim period. The accompanying consolidated financial statements of the Company should be read in conjunction
with the consolidated financial statements and notes included in the Companys Annual Report on
Form 10K for the year ended December 31, 2004. 2. Principles of Consolidation The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of the
Companys wholly-owned subsidiaries Cayman Water Company Limited, Belize Water Limited, Ocean
Conversion (Cayman) Limited, DesalCo Limited, DesalCo (Barbados) Limited, and its majority owned
subsidiary Waterfields Company Limited. All intercompany balances and transactions have been
eliminated in consolidation. 3. Stock Based Compensation The Company issues stock under incentive plans that form part of employees and non-executive
directors remuneration. The Company also grants options to purchase common shares as part of
remuneration for certain long-serving employees and certain management employees. During the year ended December 31, 2003, the option plan for certain management employees was
amended as part of renegotiations of employee contracts. The amended contracts terminated the
stock option plans for all years commencing from January 1, 2004. Options issued prior to January
1, 2004 are still in place. The Company applies the intrinsic-value-based method of accounting prescribed by Accounting
Principles Board (APB) Opinion No. 25 Accounting for Stock Issued to Employees, and related
interpretations to account for its fixed-plan stock options. Under this method, compensation
expense is recorded on the date of grant only if the current market price of the underlying stock
exceeds the exercise price. SFAS No. 123 Accounting for Stock-Based Compensation established
accounting and disclosure requirements using a fair-valued-based method of accounting for
stock-based employee compensation plans. As allowed by SFAS No. 123, the Company continues to
apply the intrinsic-value method of accounting described above and has adopted the disclosure
requirements of SFAS No. 123. 4




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CONSOLIDATED WATER CO.
LTD. NOTES TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 3. Stock Based Compensation (continued) The following table illustrates the effect on net income if the fair-value-based method had been
applied to all outstanding and unvested awards in each period: Three Months
    
    
    Three MonthsEnded March 31,
    
    
    Ended March 31,2005
    
    
    2004Net income, as reported
    
    $
    1,374,051
    
    
    $
    1,923,922Add: Stock-based compensation expense included inreported net income
    
    
    67,765
    
    
    
    33,078Deduct: Total stock-based compensation expensedetermined under fair value based method for all awards
    
    
    (77,578
    )
    
    
    (45,559
    )Pro forma net income
    
    $
    1,364,238
    
    
    $
    1,911,441Earnings per shareBasic  as reported
    
    $
    0.24
    
    
    $
    0.34Basic  pro forma
    
    $
    0.24
    
    
    $
    0.34Diluted  as reported
    
    $
    0.23
    
    
    $
    0.33Diluted  pro forma
    
    $
    0.23
    
    
    $
    0.33
 The intrinsic value of stock based compensation is recorded in stockholders equity and is
expensed to the condensed consolidated statements of income based on the vesting period of the
options. On exercise of options, proceeds up to the par value of the stock issued are credited to
common share capital; any proceeds in excess of the par value of the stock issued are credited to
additional paid in capital in the period in which the options are exercised. Options that expire
without exercise are also credited to additional paid in capital in the period in which the option
expired. 4. Segment Information Under Statement of Financial Accounting Standards No. 131, Disclosure about Segments of an
Enterprise and Related Information, management considers; (i) the operations to supply water to
retail customers, (ii) the operations to supply water to bulk customers, and (iii) the provision of
engineering and management services as separate business segments. Included in the Bulk segment is the proportional share of results of operations and property, plant
and equipment of Ocean Conversion (BVI) Ltd. An adjustment has been made in Reconciling Items to
adjust the Companys interest in its investment under the equity method of accounting. Also included in Reconciling Items are corporate expenses that do not directly relate to any
specific operating segment. 5




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CONSOLIDATED WATER CO.
LTD. NOTES TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 4. Segment Information (continued) As at March 31 and for the
three months then endedRetail
    
    
    Bulk
    
    
    Services
    
    
    Reconciling Items
    
    
    Total2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Revenue
    
    
    3,131,728
    
    
    
    3,575,076
    
    
    
    3,529,258
    
    
    
    3,123,886
    
    
    
    230,456
    
    
    
    254,442
    
    
    
    (833,957
    )
    
    
    (615,707
    )
    
    
    6,057,485
    
    
    
    6,337,697Cost of sales
    
    
    1,255,117
    
    
    
    1,370,282
    
    
    
    2,550,094
    
    
    
    2,181,734
    
    
    
    145,184
    
    
    
    144,134
    
    
    
    (290,770
    )
    
    
    (265,676
    )
    
    
    3,659,625
    
    
    
    3,430,474Net income
    
    
    605,979
    
    
    
    1,316,533
    
    
    
    573,285
    
    
    
    526,701
    
    
    
    73,548
    
    
    
    68,026
    
    
    
    121,239
    
    
    
    12,662
    
    
    
    1,374,051
    
    
    
    1,923,922Property, plant and
equipment
    
    
    19,512,400
    
    
    
    19,664,606
    
    
    
    11,889,890
    
    
    
    11,751,540
    
    
    
    273,435
    
    
    
    17,521
    
    
    
    (1,789,386
    )
    
    
    (2,012,656
    )
    
    
    29,886,339
    
    
    
    29,421,011
 6




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CONSOLIDATED WATER CO.
LTD. NOTES TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 5. Earnings Per Share Basic earnings per common share (EPS) is calculated by dividing net income available to common
stockholders by the weighted average number of common shares outstanding during the period. The
computation of diluted EPS assumes the issuance of common shares for all dilutive-potential common
shares outstanding during the reporting period. In addition, the dilutive effect of stock options
is considered in earnings per common share calculations, if dilutive, using the treasury stock
method. The following summarizes information related to the computation of basic and diluted earnings per
share for the three-month period ended March 31, 2005 and 2004. Three Months EndedMarch 31,2005
    
    
    2004Net income
    
    $
    1,374,051
    
    
    $
    1,923,922Less:Dividends paid and earnings attributable on preferred shares
    
    
    (1,372
    )
    
    
    (1,562
    )Net income available to holders of common shares in thedetermination of basic earnings per common share
    
    $
    1,372,679
    
    
    $
    1,922,360Weighted average number of common shares in the determination ofbasic earnings per common share
    
    
    5,776,058
    
    
    
    5,699,609Plus:Weighted average number of preferred shares outstanding during theperiod
    
    
    13,373
    
    
    
    13,585Potential dilutive effect of unexercised options
    
    
    170,327
    
    
    
    115,696Weighted average number of shares used for determining dilutedearnings per common share
    
    
    5,959,758
    
    
    
    5,828,890
 7




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Overview Our objective is to provide water services in areas where the supply of potable water is scarce and
where the use of reverse osmosis (RO) technology to produce potable water is economically
feasible. In our Retail operations, sales decreased due to continued impact of reduced tourist arrivals
resulting from the effects of Hurricane Ivan. In our Bulk operations, sales increased primarily due to higher demand for water for domestic
consumption by our Cayman customers. The Waterfields operation had increased demand but was
negatively impacted by price adjustments relating to production shortfalls caused by continued
fouling of the RO membrane elements. These price adjustments reduced our sales, and significantly
higher energy costs increased our cost to desalinate water. Earnings from our equity affiliate in the British Virgin Islands increased because of greater sales
after our affiliates customer made significant repairs to its distribution system in mid 2004
which has since increased water deliveries. In our Service operation, sales were reduced due to fewer construction projects. We intend to expand revenues by developing new business opportunities both within our current
service areas and in new areas. We also intend to maintain our operating efficiencies by executing
our equipment maintenance and water loss mitigation programs. We believe that many Caribbean basin
and adjacent countries, being water scarce, present opportunities for operation of our plants in
limited regulatory environments, which are less restrictive than the highly regulated markets of
North America. Our business operations and activities are conducted in five countries: the Cayman Islands, Belize,
Barbados, the British Virgin Islands and the Bahamas. Critical Accounting Policies The preparation of our consolidated financial statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and
related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to trade accounts receivable, goodwill and other intangible
assets. Our company bases its estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that may not be 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 these condensed consolidated financial
statements. Trade accounts receivable: We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make payments. Management continuously evaluates
the collectibility of accounts receivable and records allowances based on estimates of the level of
actual write-offs that might be experienced. These estimates are based on, among other things,
comparisons of the relative age of accounts and consideration of actual write-off history. 8




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Goodwill and other intangible assets: Goodwill represents the excess costs over fair value of
the assets of an acquired business. Goodwill and intangible assets acquired in a business
combination accounted for as a purchase and determined to have an indefinite useful life are not
amortized, but are tested for impairment at least annually in accordance with the provisions of
SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimatable useful lives be
amortized over their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of
Long-Lived Assets. The Company periodically evaluates the possible impairment of goodwill.
Management identifies its reporting units and determines the carrying value of each reporting unit
by assigning the assets and liabilities, including the existing goodwill and intangible assets, to
those reporting units. The Company determines the fair value of each reporting unit and compares
it to the carrying amount of the reporting unit. To the extent the carrying amount of the
reporting unit exceeds the fair value of the reporting unit, the Company is required to perform the
second step of the impairment test, as this is an indication that the reporting unit goodwill may
be impaired. In this step, the Company compares the implied fair value of the reporting unit
goodwill with the carrying amount of the reporting unit goodwill. The implied fair value of
goodwill is determined by allocating the fair value of the reporting unit to all the assets
(recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a
purchase price allocation, in accordance with SFAS No. 141, Business Combinations. The residual
fair value after this allocation is the implied fair value of the reporting unit goodwill. If the
implied fair value is less than its carrying amount, the impairment
loss is recorded. Our annual tests resulted in no goodwill impairment. Revenue Revenue is comprised of retail water sales to individual customers, bulk water sales to large
commercial and municipal customers and fees for management and engineering services. Expenses Expenses include cost of sales (direct expenses) and general and administrative expense
(indirect expenses). Direct expenses include royalty payments, electricity and chemicals
expenses, production equipment and facility depreciation costs, equipment maintenance expenses,
operational staff costs and the amortization of intangible assets. Indirect expenses consist
primarily of salaries and employee benefits for administrative personnel, stock compensation
expenses, office lease payments, depreciation on fixed assets used for administrative purposes and professional fees. There are no income taxes in the Cayman Islands, and we are currently exempt from taxes in the
British Virgin Islands and Belize. We pay an annual business license fee in the Bahamas. We pay
income tax in Barbados. 9




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Results of Operations Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004 Revenue Total revenue decreased by 4.4% from $6,337,697 to $6,057,485 for the three months ended March 31,
2005 when compared to the same period in 2004. Revenue from our retail water (Retail) operations decreased by 12.4% from $3,575,076 to
$3,131,728 for the three months ended March 31, 2005 when compared to the same period in 2004.
This decrease was due to the continued impact of decreased demand for water due to reduced tourist
arrivals resulting from the effects of Hurricane Ivan. Efforts to rebuild are continuing at a
rapid pace but a number of hotels and condominiums within our Cayman market have not yet reopened
and new construction projects are still experiencing problems due to labour shortages and delayed
material deliveries. Until tourism returns to pre-hurricane levels in the Cayman market, we expect
revenues from Retail to continue to be lower than revenues reported for prior year comparable
periods. Revenue from our bulk water (Bulk) operations increased by 7.5% from $2,508,179 to $2,695,301 for
the three months ended March 31, 2005, when compared to the same period in 2004. This increase was
primarily due to additional consumption by our customer (Water Authority-Cayman) in our Ocean
Conversion (Cayman) Limited operations and was somewhat offset by lower net sales in our
Waterfields operation. The latter continues to incur pricing adjustments related to reduced
deliveries associated with the fouling of RO membrane elements. We are in the process of
remediating this problem and in the second quarter ordered containerized desalination units to
temporarily supplement production capacity until a permanent solution to the fouling to the RO
membrane elements is effected. Revenue from services (Services) operations decreased by 9.4% from $254,442 to $230,456 for the
three months ended March 31, 2005 when compared to the same period in 2004. This decrease was due
to fewer construction projects, which resulted in a reduction in engineering fees that are charged
on labour and material costs associated with these projects. We expect this segment to improve
after we commence work on two planned engineering and construction projects in the second quarter
of 2005. Cost of Sales Total cost of sales increased by 6.7% from $3,430,474 to $3,659,625 for the three months ended
March 31, 2005 when compared to the same period in 2004 for the reasons explained below. Cost of sales of Retail decreased by 8.4% from $1,370,282 to $1,255,117 for the three months ended
March 31, 2005 when compared to the same period in 2004 primarily due to a decrease in variable
costs associated with the 12.4% reduction in revenue. Cost of sales of Bulk increased by 17.9% from $1,916,058 to $2,259,324 for the three months ended
March 31, 2005 when compared to the same period in 2004 primarily due to additional variable costs
associated with increased deliveries and reduced production in our Waterfields operation due to RO
membrane element fouling. Cost of sales from Services increased by $1,050 (0.7%) for the three months ended March 31, 2005
when compared to the same period in 2004 despite a decrease of 9.4% in sales. This was the result
of increased idle time and non-billable labour costs associated with a reduced level of projects. 10




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Gross Profit The gross profit margin decreased from 45.9% to 39.6% for the three months ended March 31, 2005
when compared to the same period in 2004, for the reasons explained above. General and Administrative Expense Total general and administrative expense (G&A) increased by $343,644 (31.8%) from $1,080,159 to
$1,423,803 for the three months ended March 31, 2005 when compared to the same period in 2004. G&A
was 17.0% and 23.5% of total revenue for the three months ended March 31, 2004 and 2005,
respectively. G&A for Retail increased by $386,162 (42.9%) from $900,715 to $1,286,877 for the three months ended
March 31, 2005 when compared to the same period in 2004 primarily due to additional unanticipated
audit, accounting and legal fees related to the Sarbanes-Oxley internal control review and
certification process. Our policy is and has been to allocate all corporate G&A to Retail. G&A expense for Bulk decreased by $44,228 (25.9%) from $170,892 to $126,664 for the three months
ended March 31, 2005 when compared to the same period in 2004 due to general non-specific
administrative cost reductions in all of our operations. The change in G&A expense for Services for the three months ended March 31, 2005 when compared to
the same period in 2004 was negligible. Other Income (Expense) Total other income increased by 172.7% from $138,791 to $378,520 for the three months ended March
31, 2005 when compared to the same period in 2004. This increase was primarily the result of an
increase in both profit sharing and equity income from the investment in Ocean Conversion (BVI)
Ltd. (OCBVI). OCBVI has benefited since August 2004 from significant repairs made by the
customer to their distribution system. Net Income As a result of factors described above, net income decreased by 28.6% from $1,923,922 to $1,374,051
for the three months ended March 31, 2005 when compared to the same period in 2004. Liquidity and Capital Resources Overview For the three months ended March 31, 2005, we generated cash from the exercise of options by
management, from all of our business segment operations, from the collection of loans receivable
and from an insurance claim payment. We used cash for various capital expenditures related to our
Cayman Island, Belize and Bahamas operations. Cash flow is dependent upon the timely receipt of customer payments, operating expenses, the
timeliness and adequacy of rate increases (excluding automatic adjustments to our rates for
inflation and electricity costs), and various factors affecting tourism in the areas we operate
such as weather conditions and the world economy. We use cash to fund our various business
segments in the Cayman Islands, Belize, the 11




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Bahamas, and Barbados, to fund capital projects, to expand our infrastructure, to pay dividends, to
repay borrowings, to repurchase our shares when appropriate and to take advantage of new investment
opportunities which expand operations. Operating Activities Cash generated from operating activities for the three-months ended March 31, 2004 and 2005 was
$1,684,292 and $989,300, respectively. We generate cash through the utilization of our existing
plants, equipment and resources in all segments of the business. In the three-months ended March 31, 2005, we also generated cash from the collection of a payment
from our insurance claim. Additionally, after Hurricane Ivan struck in September 2004, some of our
customers suffered damage to their commercial and residential premises, which caused metered water
to be lost within these premises. We did not begin our normal monthly disconnection procedures
until January 2005 and consequently, the Cayman Islands Retail receivables were unusually high at
quarter end. We have been working with customers to settle outstanding accounts and an adequate
provision has been made in our financial statements for amounts we believe to be uncollectible. Investing Activities Cash provided by investing activities during the three months ended March 31, 2004 was $114,798
while cash used in investing activities during the three months ended March 31, 2005 was
$1,243,635. During the three-months ended March 31, 2005, our investing activities primarily
consisted of expenditures for new property, plant and equipment to replace equipment destroyed by
Hurricane Ivan, a new water storage tank in Belize, the Blue Hills plant in the Bahamas and a
deposit on two containerized RO desalination plants to be used at our existing Bahamas plant. Financing Activities Cash used in financing activities during the three months ended March 31, 2004 and 2005 was
$1,071,045 and $332,993, respectively. During the three months ended March 31, 2005 our primary
financing activity was the receipt of an additional $1,143,468 from the issuance of shares though
the exercise of stock options by certain members of management. Material Commitments for Capital Expenditures and Contingencies At March 31, 2005, we had committed approximately $1.2 million for capital expenditures related to
various projects, in various stages of completion, in all of our operations. This includes
$850,000 for the purchase of two containerized RO desalination plants to be utilized at the
existing Bahamas plant. On April 11, 2005, the Company through Waterfields Company Limited accepted the terms set forth in
the letter of acceptance with the Water and Sewerage Corporation (WSC) of the Bahamas relating to
the construction of the Blue Hills Plant and as part of its agreement with WSC, the Company is
required to provide engineering services and equipment to reduce the amount of water that is lost
throughout WSCs pipeline distribution system on New Providence. The Company will commit
approximately $22.0 million for these projects. As of March 31, 2005, we have an outstanding balance of $14,285,714 on our Scotiabank loan
facilities. We are required to make monthly payments of interest for all borrowings under the
revolving line of credit and quarterly payments of interest for all amounts drawn down under the
two term loans. We are obligated to make 28 equal quarterly payments of principal under the
seven-year term loan. 12




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We have collateralized all borrowings under the three loan facilities by providing Scotiabank with
a first lien on all of our assets, including the capital stock of subsidiaries and the investment
in equity we acquired. The loan agreement for the three facilities contains standard terms and conditions for similar bank
loans made in the Cayman Islands, including acceleration of the repayment of all borrowings upon
the demand of Scotiabank (Cayman Islands) Ltd. in the event of default. We have guaranteed to Scotiabank 50% of the Ocean Conversion (BVI) Ltd. loan of $505,000. This
loan is repayable in 6 equal semi-annual installments of $125,000 with the balance of principal due
May 31, 2006, bearing interest at 3-month LIBOR plus 1.5%. As a result of our acquisition of interests in Waterfields Company Limited, we guaranteed the
performance of Waterfields Company Limited to the Water & Sewerage Corporation of the Bahamas in
relation to the water supply contract between the two parties. Through a performance and operation bond, the Royal Bank of Canada, Nassau, has made a guarantee in
the amount of $1,910,775 to the Water & Sewerage Corporation of The Bahamas that we shall duly
perform and observe all terms and provisions pursuant to the contract between the Water & Sewerage
Corporation of The Bahamas and us. In the event of our default on our obligations, the Royal Bank
of Canada, Nassau, shall satisfy and discharge any damages sustained by the Water & Sewerage
Corporation of The Bahamas up to the guaranteed amount. Dividends On January 31, 2005, we paid a dividend of $0.115 to shareholders of record on December 31, 2004,
and on April 30, 2005, we paid a dividend of $0.115 to shareholders of record on March 31, 2005.
We have consistently paid dividends to owners of our common and redeemable preferred shares since
we began declaring dividends in 1985. Our Board of Directors has established a policy, but not a
binding obligation, that we will seek to maintain a dividend payout ratio in the range of 50% to
60% of net income. This policy is subject to modification by our Board of Directors. Our payment
of any future cash dividends, however, will depend upon our earnings, financial condition, capital
demand and other factors, including the condition in our loan agreement with Scotiabank (Cayman
Islands) Ltd. that dividends be paid only from current cash flows. Impact of Inflation Under the terms of our Cayman Islands license, Belize, Bahamas, British Virgin Islands and Barbados
water sales agreements, there is an automatic price adjustment for inflation on an annual basis,
subject to temporary exceptions. We, therefore, believe that the impact of inflation on our net
income, measured in consistent dollars, will not be material. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk Credit Risk We are not exposed to significant credit risk on retail customer accounts in the Cayman Islands and
Bimini, Bahamas, as our policy is to cease supply of water to customers whose accounts are more
than 45 days overdue. Our main exposure to credit risk is from our bulk water sales customers in
Belize, the 13




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Bahamas, the British Virgin Islands, Barbados and the Cayman Islands. In addition, the entire
balance of our loan receivable is with one Bulk water customer, Water Authority-Cayman. Interest Rate Risk As of March 31, 2005, we had loans outstanding totaling $15,775,815, all of which bear interest at
various lending rates such as LIBOR, Cayman Islands Prime Rate or the Nassau Prime Lending Rate.
We are subject to interest rate risk to the extent that any of these rates change. Foreign Exchange Risk All of our foreign currencies have fixed exchange rates to the U.S. dollar. If any of these fixed
exchange rates become a floating exchange rate, however, our results of operation could be
adversely affected. 
 Item 4. Controls and Procedures As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the Exchange
Act), as of the end of the period covered by this report, the Companys management conducted an
evaluation with the participation of the Companys Chief Executive Officer and Chief Financial
Officer (collectively, the Certifying Officers) regarding the effectiveness of the design and
operation of the Companys disclosure controls and procedures (as defined in Rules13a-15(e) and
15d-15(e) under the Exchange Act). Based on this evaluation of these controls and procedures and the material weakness in the
Companys internal control over financial reporting described in the Companys Form 10-K (the Form
10-K) for the fiscal year ended December 31, 2004, the Chief Executive Officer and Chief Financial
Officer conclude that the Companys disclosure controls and procedures were ineffective as of March
31, 2005. The Certifying Officers also have indicated that there were no significant changes in our internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) and that the corrective actions described in the Companys Form 10-K for the fiscal year ended
December 31, 2004 have not yet remediated the material weakness in the Companys internal control
over financial reporting described in such Form 10-K. Our management, including each of the Certifying Officers, does not expect that our disclosure
controls or our internal controls will prevent all error and all fraud. A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. In addition, the design of a control system must reflect
the fact that there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances of fraud, if any,
within a company have been detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur because of simple error
or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by
collusion of two or more people or by management override of the control. The design of any systems
of controls also is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Because of these inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected. 14




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PART II  OTHER INFORMATION 
 Item 2. Changes in Securities and Use of Proceeds On March 13, 2005, we issued 56,153 common shares to two of our executive officers, pursuant to the
exercise of stock options. The aggregate exercise price of the options was $608,698. The issuance
of the shares was exempt from registration under Regulation S promulgated under the Securities Act
of 1933 because the shares were offered and sold outside of the United States to non-US persons (as
defined in Regulation S). Proceeds of the transaction were used for general corporate purposes. Also, on March 13, 2005, we issued 49,333 common shares to two other executive officers, pursuant
to the exercise of stock options. The aggregate exercise price of the options was $534,770. The
issuance of the shares was exempt from registration under Section 4(2) of the Securities Act of
1933 because the executive officers have knowledge of all material information relating to us.
Proceeds of the transaction were used for general corporate purposes. On March 8th and 17th, 2005 we converted a total of 2,091 shares of vested
redeemable preferred stock for an equal number of common shares under our Employee Share Incentive
Plan. The issuance of the common shares was exempt from registration under Regulation S
promulgated under the Securities Act of 1933 (the 1933 Act) because the common shares were issued
outside of the United States to non-U.S. persons (as defined in Regulation S) upon conversion of
the redeemable preferred stock. 15




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Item 6. Exhibits Exhibit
Number
    
    Exhibit Description31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of the
Company31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of the
Company32.1
    
    Section 1350 Certification of Chief Executive Officer of the Company32.2
    
    Section 1350 Certification of Chief Financial Officer of the Company
 16




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SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized. CONSOLIDATED WATER CO. LTD.By:
    /s/ Frederick W. McTaggartFrederick W. McTaggartChief Executive Officer Dated: May 10, 2005 17