UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
10-K





(Mark One)


þ
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended December 31, 2009OR ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transaction period from __________________ to
      __________________





Commission
File Number: 0-25248





CONSOLIDATED
WATER CO. LTD.


(Exact
name of Registrant as specified in its charter)





CAYMAN ISLANDS
            
            N/A(State
      or other jurisdiction of
            
            (I.R.S.
      Employer Identification No.)incorporation
      or organization)Regatta
      Office ParkWindward
      Three, 4th Floor, West Bay RoadP.O.
      Box 1114Grand Cayman, KY1-1102, Cayman
      Islands
            
            N/A(Address
      of principal executive offices)
            
            (Zip
      Code)





Registrant’s
Telephone number, including area code: (345) 945-4277





Securities
registered pursuant to Section 12(b) of the Act:





Title
      of each class:
            
            Name
      of each exchange on which registered:Common
      Stock, $.60 Par Value
            
            The
      NASDAQ Stock Market LLC (NASDAQ Global  Select
      Market)





Securities
registered pursuant to Section 12(g) of the Act: None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes  ̈     No
þ




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


Yes  ̈     No
þ





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 þ     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 a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large
      accelerated filer  ̈
            Accelerated
      filer þ
            Non-accelerated
      filer  ̈
            Smaller
      reporting company  ̈





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes  ̈     No
þ





The
aggregate market value of common stock held by non-affiliates of the registrant,
based on the closing sales price for the registrant’s common shares, as reported
on the NASDAQ Global Select Market on June 30, 2009, was
$230,334,831.





As of
March 10, 2010,14,541,878 shares of the registrant’s common shares were
outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE: None







TABLE
OF CONTENTS





Section
                                                                                
                                                                                Description
                                                                                
                                                                                PageCautionary
      Note Regarding Forward-Looking Statements
                                                                                
                                                                                3PART
      I
                                                                                
                                                                                
                                                                                
                                                                                4Item
      1.
                                                                                
                                                                                Business
                                                                                
                                                                                4Item
      1A.
                                                                                
                                                                                Risk
      Factors
                                                                                
                                                                                21Item
      1B.
                                                                                
                                                                                Unresolved
      Staff Comments
                                                                                
                                                                                28Item
      2.
                                                                                
                                                                                Properties
                                                                                
                                                                                28Item
      3.
                                                                                
                                                                                Legal
      Proceedings
                                                                                
                                                                                31Item
      4.
                                                                                
                                                                                Submission
      of Matters to a Vote of Security Holders
                                                                                
                                                                                31PART
      II
                                                                                
                                                                                
                                                                                
                                                                                31Item
      5.
                                                                                
                                                                                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                                                                                
                                                                                31Item
      6.
                                                                                
                                                                                Selected
      Financial Data
                                                                                
                                                                                34Item
      7.
                                                                                
                                                                                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                                                                
                                                                                34Item
      7A.
                                                                                
                                                                                Quantitative
      and Qualitative Disclosure about Market Risk
                                                                                
                                                                                48Item
      8.
                                                                                
                                                                                Financial
      Statements and Supplementary Data
                                                                                
                                                                                49Item
      9.
                                                                                
                                                                                Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                                                                                
                                                                                87Item
      9A.
                                                                                
                                                                                Controls
      and Procedures
                                                                                
                                                                                87PART
      III
                                                                                
                                                                                
                                                                                
                                                                                88Item
      10.
                                                                                
                                                                                Directors,
      Executive Officers and Corporate Governance
                                                                                
                                                                                88Item
      11.
                                                                                
                                                                                Executive
      Compensation
                                                                                
                                                                                94Item
      12.
                                                                                
                                                                                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                                                                                
                                                                                115Item
      13.
                                                                                
                                                                                Certain
      Relationships and Related Transactions, and Director
      Independence
                                                                                
                                                                                118Item
      14.
                                                                                
                                                                                Principal
      Accounting Fees and Services
                                                                                
                                                                                118PART
      IV
                                                                                
                                                                                
                                                                                
                                                                                119Item
      15.
                                                                                
                                                                                Exhibits,
      Financial Statement Schedules
                                                                                
                                                                                119SIGNATURES
                                                                                
                                                                                
                                                                                
                                                                                120


2


CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS





This
Annual Report on Form 10-K contains forward-looking statements, including but
not limited to, statements regarding our future revenues, future plans,
objectives, expectations and events, assumptions and estimates. Forward-looking
statements can be identified by use of the words or phrases “will”, “will likely
result”, “are expected to”, “will continue”, “estimate”, “project”, “potential”,
“believe”, “plan”, “anticipate”, “expect”, “intend”, or similar expressions and
variations of such words. Statements that are not historical facts are based on
our current expectations, beliefs, assumptions, estimates, forecasts and
projections for our business and the industry and markets related to our
business.





The
forward-looking statements contained in this report are not guarantees of future
performance and involve certain risks, uncertainties and assumptions which are
difficult to predict. Actual outcomes and results may differ materially from
what is expressed in such forward-looking statements. Important factors which
may affect these actual outcomes and results include, without limitation,
tourism and weather conditions in the areas we service, 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 debt and for
expansion of our operations, and other factors, including those set forth under
Part I, Item 1A. “Risk Factors” in this Annual Report.





The
forward-looking statements in this Annual Report speak as of its date. We
expressly disclaim any obligation or undertaking to update or revise any
forward-looking statement contained in this Annual Report to reflect any change
in our expectations with regard thereto or any change in events, conditions or
circumstances on which any forward-looking statement is based, except as may be
required by law.





Unless
otherwise indicated, references to “we,” “our,” “ours” and “us” refer to
Consolidated Water Co. Ltd. and its subsidiaries.





Note Regarding Currency and Exchange
Rates.





Unless
otherwise indicated, all references to “$” or “US$” are to United States
dollars.





The
exchange rate for conversion of Cayman Island dollars (CI$) into US$, as
determined by the Cayman Islands Monetary Authority, has been fixed since April
1974 at US$1.20 per CI$1.00.





The
exchange rate for conversion of Belize dollars (BZE$) into US$, as determined by
the Central Bank of Belize, has been fixed since 1976 at US $0.50 per
BZE$1.00.





The
exchange rate for conversion of Bahamas dollars (B$) into US$, as determined by
the Central Bank of The Bahamas, has been fixed since 1973 at US$1.00 per
B$1.00.





The
official currency of the British Virgin Islands is the United States
dollar.





The
exchange rate for conversion of Bermuda dollars (BMD$) into US$ as determined by
the Bermuda Monetary Authority, has been fixed since 1970 at US$1.00 per
BMD$1.00.


3


PART
I





ITEM 1. BUSINESS





Overview





We
develop and operate seawater desalination plants and water distribution systems
in areas where naturally occurring supplies of potable water are scarce or
nonexistent. Through our subsidiaries and affiliates, we operate 16 reverse
osmosis desalination plants and provide the following services to our customers
in the Cayman Islands, the Bahamas, Belize, the British Virgin Islands and
Bermuda:





•
            Retail Water Operations.We produce and supply water to end-users, including residential,
      commercial and government customers in the Cayman Islands under an
      exclusive retail license issued by the government to provide water in two
      of the most populated and rapidly developing areas in the Cayman Islands.
      In 2009, our retail water operations generated approximately 40% of our
      consolidated revenues.





•
            Bulk Water Operations.We produce and supply water to government-owned distributors in the
      Cayman Islands, Belize and the Bahamas. In 2009, our bulk water operations
      generated approximately 45% of our consolidated
  revenues.





•
            Services Operations.We
      provide engineering and management services for desalination projects,
      including designing and constructing desalination plants and managing and
      operating desalination plants owned by other companies. In 2009, our
      services operations generated approximately 15% of our consolidated
      revenues.





•
            Affiliate Operations.Our affiliate, Ocean Conversion (BVI) Ltd. (“OC-BVI”), produces and
      supplies bulk water to the British Virgin Islands Water and Sewerage
      Department. We account for our interests in OC-BVI using the equity method
      of accounting and do not consolidate OC-BVI’s operating results in our
      consolidated financial statements. Our affiliate, Consolidated Water
      (Bermuda) Limited, has constructed and sold a plant to the Bermuda
      government and is presently operating this plant on behalf of the Bermuda
      government.  We expect to continue to manage the plant on behalf
      of the Bermuda government into mid
2011.





As of
December 31, 2009, the number of plants we, or our affiliates, manage in each
country and the production capacities of these plants are as
follows:





Location
                    
                    Plants
                    
                    
                    Capacity(1)Cayman
      Islands
                    
                    
                    8
                    
                    
                    
                    10.2Bahamas
                    
                    
                    3
                    
                    
                    
                    10.4Belize
                    
                    
                    1
                    
                    
                    
                    0.6British
      Virgin Islands
                    
                    
                    3
                    
                    
                    
                    2.5Bermuda
                    
                    
                    1
                    
                    
                    
                    0.6Total
                    
                    
                    16
                    
                    
                    
                    24.3





(1)
            In
      millions of U.S. gallons per day.








Strategy





Our
strategy is to provide water services in areas where the supply of potable water
is scarce and we believe the production of potable water by reverse osmosis
desalination is, or will be, profitable. We have focused on the Caribbean basin
and adjacent areas as our principal market because they possess the following
characteristics which make them attractive for our business:





•
            little
      or no naturally occurring fresh
water;





•
            limited
      regulations and taxes allowing for higher
  returns;




4




•
            a
      large proportion of tourist properties, which historically have generated
      higher volume sales than residential properties;
  and





•
            growing
      population and tourism levels.





Although
we are currently focused primarily on these areas, we believe that our potential
market includes any location with a demand for, but a limited supply of, potable
water. The desalination of seawater is the most widely used process for
producing fresh water in areas with an insufficient natural supply. In addition,
in many locations, desalination is the only commercially viable means to expand
the existing water supply. We believe that our experience in the development and
operation of reverse osmosis desalination plants provides us with the
capabilities to successfully expand our operations.





Key
elements of our strategy include:





• Maximizing the benefits of our
exclusive retail license on Grand Cayman.We plan to continue to increase
operations within our exclusive retail license service area through organic
growth and possible further investments, if opportunities become
available.





• Expanding our existing operations
in the Cayman Islands, Belize and The Bahamas.We plan to continue
to seek new water supply agreements and licenses and focus on renewing our
existing service contracts with extended terms and greater production
levels.





• Penetrating new markets where there
is demand for potable water and where we believe production would be
profitable.We plan to continue to seek opportunities to expand our
operations into new markets including, but not limited to, markets throughout
the Caribbean basin, Central America and South America. We may pursue these
opportunities either on our own or through joint ventures and strategic
alliances.





• Broadening our existing and future
operations into complementary services.We continue to consider and
pursue opportunities to leverage our water-related expertise to enter
complementary service industries, such as wastewater management.





Our
Company





We
conduct our operations in the Cayman Islands, The Bahamas, the British Virgin
Islands, Belize, Bermuda and the United States through the following principal
operating subsidiaries and affiliates:











•
            Cayman
      Water Company Limited (“Cayman Water”).In 1998, we
      established Cayman Water, which operates under an exclusive retail license
      granted by the Cayman Islands government to provide water to customers
      within a prescribed service area on Grand Cayman that includes the Seven
      Mile Beach and West Bay areas, two of the three most populated areas in
      the Cayman Islands. The only non-government owned public water utility on
      Grand Cayman, Cayman Water owns and operates four desalination plants on
      Grand Cayman.




5




•
            Ocean
      Conversion (Cayman) Limited (“OC-Cayman”).OC-Cayman provides bulk
      water under various licenses and agreements to the Water Authority-Cayman,
      a government-owned utility and regulatory agency, which distributes the
      water to properties located outside our exclusive retail license service
      area in Grand Cayman. OC-Cayman operates four desalination plants owned by
      the Water Authority-Cayman.





•
            Consolidated
      Water (Bahamas) Limited (“CW-Bahamas”).We own a 90.9% equity
      interest in CW-Bahamas, which provides bulk water under long-term
      contracts to the Water and Sewerage Corporation of The Bahamas, a
      government agency. CW-Bahamas’ operates our largest desalination plant.
      CW-Bahamas pays fees to two of our other subsidiaries for certain
      administrative services.





•
            Consolidated
      Water (Belize) Limited (“CW-Belize”).CW-Belize, (formerly Belize
      Water Limited), has an exclusive contract to provide bulk water to Belize
      Water Services Ltd., a water distributor that serves residential,
      commercial and tourist properties in Ambergris Caye,
    Belize.





•
            Aquilex,
      Inc.This subsidiary, a United States company, provides financial,
      engineering and supply chain management support services to our
      subsidiaries and affiliates.





•
            Ocean
      Conversion (BVI) Ltd. (“OC-BVI”).We own 50% of the voting stock of
      our affiliate, OC-BVI, a British Virgin Islands company, which sells bulk
      water on a month-to-month basis to the Government of The British Virgin
      Islands Water and Sewage Department. We own an overall 43.5% equity
      interest in OC-BVI’s profits and certain profit sharing rights that raise
      our effective interest in OC-BVI’s profits to approximately 45%. OC-BVI
      also pays our subsidiary DesalCo Limited fees for certain engineering and
      administrative services.





•
            DesalCo
      Limited (“DesalCo”).A Cayman Islands company, DesalCo provides
      management, engineering and construction services for desalination
      projects.





•
            Consolidated
      Water (Bermuda) Limited (“CW-Bermuda”).In January 2007, our
      affiliate, Consolidated Water (Bermuda) Limited (“CW-Bermuda”) entered
      into a design, build, sale and operating agreement with the Government of
      Bermuda for a desalination plant to be built in two phases at Tynes Bay
      along the northern coast of Bermuda. Under the agreement, CW-Bermuda
      constructed and has been operating the plant since the second quarter of
      2009. We expect CW-Bermuda to operate the plant through
      mid-2011.  We have entered into a management services agreement
      with CW-Bermuda for the design, construction and operation of the Tynes
      Bay plant, under which we receive fees for direct services, purchasing
      activities and proprietary technology. Although we own only 40% of the
      common shares of CW-Bermuda, we consolidate its results in our
      consolidated financial statements as we are its primary financial
      beneficiary.





Our
Operations





We have
three principal business segments: retail water operations, bulk water
operations and services operations. Our retail water operations supply water to
end-users, including residential, commercial and government customers. Through
our bulk water operations we supply water to distributors and commercial
suppliers, including governments and wholesalers. Our retail and bulk operations
serve customers in the Cayman Islands, Belize, the British Virgin Islands and
The Bahamas. Our services operations provide engineering and management
services, which include designing and constructing desalination plants, and
managing and operating plants owned by other companies.





For
fiscal year 2009, our retail water, bulk water and service operations generated
approximately 40%, 45% and 15%, respectively, of our consolidated revenues. For
information about our business segments and geographical information about our
operating revenues and long-lived assets, see Note 17 to our audited
consolidated financial statements at Item 8 of this Annual Report.





Retail
Water Operations





For
fiscal years 2009, 2008 and 2007, our retail water operations accounted for
approximately 40%, 34% and 41%, respectively, of our consolidated revenues. This
business in the Cayman Islands produces and supplies water to end-users,
including residential, commercial and government customers.




6




We sell
water through our retail operations to a variety of residential and commercial
customers through our wholly-owned subsidiary Cayman Water, which operates under
an exclusive license issued to us by the Cayman Islands government under The
Water Production and Supply Law of 1979. Pursuant to the license, we have the
exclusive right to produce potable water and distribute it by pipeline to our
licensed service area which consists of the Seven Mile Beach and West Bay areas
of Grand Cayman, two of the three most populated areas in the Cayman
Islands.





Under our
exclusive license, we pay a royalty to the government of 7.5% of our gross
retail water sales revenues (excluding energy adjustments). The selling prices
of water sold to our customers, except for the prices under our agreements with
the Cayman Beach Suites Hotel, Britannia Golf Course and North Sound Golf Club,
are set out under the license and vary depending upon the type and location of
the customer and the monthly volume of water purchased. The license provides for
an automatic adjustment for inflation or deflation on an annual basis, subject
to temporary limited exceptions, and an automatic adjustment for the cost of
electricity on a monthly basis. The Water Authority-Cayman, on behalf of the
government, reviews and confirms 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 Cabinet of the Cayman Islands government. Disputes regarding price
adjustments are referred to arbitration. Our last price increase, requested in
June 1985, was granted in full.





Under our
exclusive license, we must provide any requested piped water service within our
exclusive retail license service area that is commercially feasible, as
determined by the Cabinet of the Cayman Islands government. Where service 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.





Unless
renewed, our exclusive license expires in July 2010. We
began  negotiations to renew this license in 2008. Unless we are in
default under the license, and upon expiration of 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 are not, nor have we been in the past, in default under the
retail license.





During
our retail license renewal negotiations conducted with representatives of the
Cayman Island government during the fourth quarter of 2009, we were informed
that the Cayman Island government seeks to restructure the terms of our retail
license to employ a “rate of return on invested capital model’ similar to that
governing the sale of water to most U.S. municipalities.  We have
formally objected to the implementation of a “rate of return on invested capital
model” on the basis that we believe that such a model would not promote the
efficient operation of our water utility, and could ultimately increase water
rates to our customers.  We believe such a model, if ultimately
implemented, could significantly reduce the operating income we have
historically generated from our retail license.





Facilities





Our
retail operations in the Cayman Islands currently produce potable water at four
reverse osmosis seawater conversion plants in Grand Cayman located at our Abel
Castillo Water Works (“ACWW”, formerly Governor’s Harbour), West Bay and
Britannia sites. We own the land for our ACWW and West Bay plants and have
entered into a lease for the land for our Britannia plant which has more than 18
years remaining. The current production capacity of the two plants located at
ACWW is 2.2 million U.S. gallons of water per day. This production capacity was
expanded on a temporary basis during 2007 from the original capacity of 1.2
million U.S. gallons per day.  The temporary capacity was replaced by
permanent production capacity which came online at the end of
2009.  The production capacity of the Britannia plant is 715,000 U.S.
gallons of water per day. The Britannia plant was destroyed by Hurricane Ivan in
September 2004 but was rebuilt and placed back in operation in October 2005. The
production capacity of the West Bay plant is 910,000 U.S. gallons of water per
day; we completed an expansion of the production capacity of this plant from
710,000 U.S. gallons of water per day in January 2008. Since the ACWW and West
Bay plants began production of water and the Britannia plant was rebuilt, these
plants have consistently been capable of operating at or near their rated
capacity.





Electricity
to our plants is supplied by Caribbean Utilities Co. Ltd., a publicly traded
utility company. At all four 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 electricity supply. Standby
generation capacity is also maintained at our West Bay Plant and ACWW plant to
operate a portion of the water production capacity as well.





In the
event of an emergency, our distribution system is connected to the distribution
system of the Water Authority-Cayman. In prior years in order to efficiently
maintain our equipment, we have purchased water from the Water Authority-Cayman
for brief periods of time. We have also sold potable water to the Water
Authority-Cayman.




7




Our
pipeline system in the Cayman Islands covers the Seven Mile Beach and West Bay
areas of Grand Cayman and consists of approximately 71 miles of
polyvinylchloride and polyethylene 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
construction costs low and allows us to provide service to new areas in a timely
manner. During 2009, we completed a number of small pipeline extensions into
newly developed properties within our distribution system. 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, superimposed upon digital aerial
photographs, which is maintained using a computer aided design system. This
system is interconnected with 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 and upgrades.





Customers





We enter
into standard contracts with hotels, condominiums and other properties located
in our existing licensed area to provide potable water. In the Seven Mile Beach
area, our primary customers are the hotels and condominium complexes that serve
the tourist industry. In the West Bay area, our primary customers are
residential homes.


8


Development
continues to take 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. This advance notice allows us to manage our production
capacity to meet anticipated demand. We believe that we have a sufficient supply
of water to meet the foreseeable future demand.





We bill
our customers on a monthly basis based on metered consumption and bills 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 water
service. In 2009, 2008 and 2007, bad debts represented less than 1% of our total
annual retail sales. Customers who have had their service disconnected must pay
re-connection charges.





The
following table sets forth our approximate total number of customer connections
and the volume of water sold in the Cayman Islands as of, and for the indicated
years ended December 31:





Retail
Water Customer Connections and Volume of Water Sold





2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005Number
      of Customer Connections
                  
                  
                  5,000
                  
                  
                  
                  4,600
                  
                  
                  
                  4,600
                  
                  
                  
                  4,300
                  
                  
                  
                  3,800Volume
      of Water Sold (U.S. Gallons, In Thousands):Commercial
                  
                  
                  543,658
                  
                  
                  
                  534,614
                  
                  
                  
                  554,087
                  
                  
                  
                  562,702
                  
                  
                  
                  427,439Residential
                  
                  
                  218,662
                  
                  
                  
                  211,090
                  
                  
                  
                  202,988
                  
                  
                  
                  173,665
                  
                  
                  
                  157,924Government
                  
                  
                  41,714
                  
                  
                  
                  25,967
                  
                  
                  
                  45,623
                  
                  
                  
                  12,789
                  
                  
                  
                  8,929Total
                  
                  
                  804,034
                  
                  
                  
                  771,671
                  
                  
                  
                  802,698
                  
                  
                  
                  749,156
                  
                  
                  
                  594,292








The table
above does not precisely represent our actual number of customers or facilities
that we serve. For example, in hotels and condominiums, we may only have a
single customer who is the operator of the hotel or the condominium while
supplying water to all of the units within that hotel or condominium
development. Historically, demand on our pipeline distribution has varied
throughout the year. Demand depends upon the number of tourists visiting and the
amount of rainfall during any particular time of the year. In general, the
majority of tourists come from the United States during the winter
months.





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. We know of only one plant that continues to
operate under such exemption at a hotel within our license area and we believe
that the amount of water produced by this plant is insignificant to our
operations.





Retail
Water Demand and Average Sales Prices





The table
below sets forth the total volume of water we supplied to our retail water
customers on a quarterly basis for the indicated years ended December
31:





Retail
Water Total Volume by Quarter


(U.S.
Gallons, In Thousands)





2009
                    
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005First
      Quarter
                    
                    
                    217,890
                    
                    
                    
                    203,899
                    
                    
                    
                    215,044
                    
                    
                    
                    207,572
                    
                    
                    
                    145,295Second
      Quarter
                    
                    
                    214,854
                    
                    
                    
                    213,679
                    
                    
                    
                    219,191
                    
                    
                    
                    211,772
                    
                    
                    
                    158,474Third
      Quarter
                    
                    
                    194,076
                    
                    
                    
                    194,971
                    
                    
                    
                    187,796
                    
                    
                    
                    174,490
                    
                    
                    
                    136,784Fourth
      Quarter
                    
                    
                    177,214
                    
                    
                    
                    159,122
                    
                    
                    
                    180,667
                    
                    
                    
                    155,322
                    
                    
                    
                    153,739Total
                    
                    
                    804,034
                    
                    
                    
                    771,671
                    
                    
                    
                    802,698
                    
                    
                    
                    749,156
                    
                    
                    
                    594,292




9





Our
average sales prices of potable water sold to our retail water customers for the
indicated years ended December 31 were:





Retail
Water Average Sales Prices





2009
                  
                  
                  2008
                  
                  
                  2007Average
      Sales Price Per 1,000 U.S. Gallons
                  
                  $
                  28.90
                  
                  
                  $
                  28.99
                  
                  
                  $
                  27.69





Bulk
Water Operations





For
fiscal years 2009, 2008 and 2007, our bulk water operations accounted for
approximately 45%, 46% and 45%, respectively, of our consolidated revenues and
are comprised of businesses in the Cayman Islands, The Bahamas and Belize. These
businesses produce potable water from seawater and sell this water to
governments and private customers.





Bulk
Water Operations in the Cayman Islands





We sell
bulk water in the Cayman Islands through our wholly-owned subsidiary
OC-Cayman.





Facilities





We
operate four reverse osmosis seawater conversion plants in Grand Cayman that are
owned by the Water Authority-Cayman: the Red Gate Road, Lower Valley, North
Sound and North Side Water Works plants, which have production capacities of
approximately 1.3 million, 1.1 million, 1.6 million and 2.4 million U.S. gallons
of water per day, respectively. The North Side Water Works (“NSWW”) plant was
commissioned in June 2009.  The North Sound plant operating capacity
was expanded from approximately 0.8 million U.S. gallons to 1.6 million U.S.
gallons of water per day during 2007. The Red Gate plant was temporarily
de-commissioned in December 2009 in order to carry out extensive rehabilitative
and upgrade work to the plant.  We expect the Red Gate plant to be
re-commissioned in April 2010.  The plants that we operate for the
Water Authority-Cayman are located on land owned by the Cayman Islands
government.





Customers





We
provide bulk water on a take-or-pay basis to the Water Authority-Cayman, a
government owned utility and regulatory agency, under various licenses and
agreements. The Water Authority-Cayman in turn distributes that water to
properties in the parts of Grand Cayman that are outside of our retail licensed
area. During 2009, we supplied the Water Authority-Cayman with approximately 1.1
billion U.S. gallons of water.





In
January 2001, we were granted a 7-year extension, effective December 2001, to
the water supply license by the Cayman Islands government to supply desalinated
water from the Red Gate Road plant through November 2008. Under the terms of the
water production and supply license between OC-Cayman and the government of the
Cayman Islands, we are allowed to use the property and the plant to produce
approximately 1.3 million U.S. gallons of desalinated water per day for sale to
the Water Authority-Cayman. On November 30, 2008, the Water Authority-Cayman
took possession of the plant for no consideration, in accordance with the terms
of the water production and supply license, and the license was also extended
for a period of one year, during which time we are required to operate and
maintain the plant. The plant was originally powered only by electricity, but
was upgraded in 1994 to include diesel driven high-pressure pumps. In August
2008, the Water Authority-Cayman contracted with us to convert the high-pressure
pumps back to electrical power and make other modifications and improvements to
the plant. This work is expected to be completed in April 2010, for which
OC-Cayman will obtain a seven year license and operating agreement for the
plant.





In
December 2001, we were granted a seven-year water supply license, effective
November 2002, by the Cayman Islands government to supply desalinated water from
the North Sound plant through November 2009. Under the terms of this license
OC-Cayman 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,
whichever is less. In January 2007, we were granted an extension to this water
supply license for a period of seven years by the Cayman Island government,
effective on April 1, 2007. Under the terms of this extension, we are obligated
to deliver to the Water Authority-Cayman the amount of water it demands from the
North Sound Plant or 1.43 million U.S. gallons per day, whichever is
less.




10




In August
2005, we were granted a seven-year extension to the water supply license, with
effect from January 2006, by the Cayman Islands government to supply desalinated
water from the Lower Valley plant through January 2013. Under the terms of this
license, we increased the capacity of the Lower Valley plant to 1.1 million U.S.
gallons of water per day in exchange for an increase in the capital component of
the total price we charge for the water produced by the plant.





On March
11, 2008, we signed a ten-year agreement with the Water Authority-Cayman to
finance, design, build and operate a seawater reverse osmosis water production
plant at their NSWW site on Grand Cayman. Under the terms of this license,
OC-Cayman is obligated to deliver to the Water Authority-Cayman the amount of
water it demands or 2.14 million U.S. gallons of water per day on average each
month, whichever is less. The NSWW plant was completed in June 2009 and has a
production capacity of 2.4 million U.S. gallons per day.


11


Bulk
Water Operations in Belize





In
Belize, we sell bulk water through our wholly-owned subsidiary
CW-Belize.





Facilities





We own
the reverse osmosis seawater conversion plant in Belize and lease the land on
which our plant is located from the Belize government at an annual rent of
BZE$1.00. The lease, which was entered into in April 1993 and extended in
January 2004, expires in April 2026. The production capacity of the plant is
550,000 U.S. gallons of water per day.





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 water production equipment during any temporary interruption in the
electricity supply. Feed water for the reverse osmosis units is drawn from deep
wells with associated pumps on the property. Reject water is discharged into
brine wells on the property at a level below that of the feed water
intakes.





Customers





We are
the exclusive provider of water in Ambergris Caye, Belize to Belize Water
Services Ltd. (“BWSL”), which distributes the water through its own pipeline
system to residential, commercial and tourist properties. BWSL distributes our
water primarily to residential properties, small hotels, and businesses that
serve the tourist market. 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. Demand is less cyclical than in our other locations due to
a higher proportion of residential to tourist demand. During 2009, we supplied
BWSL with 151.7 million U.S. gallons of water.





We have
an exclusive 23-year contract with BWSL to supply a minimum of 1.75 million U.S.
gallons of water per week, or upon demand up to 2.1 million U.S. gallons per
week, on a take or pay basis. This contract terminates on March 23, 2026. BWSL
has the right, with six months advance notice to us before the termination date,
to renew the contract for a further 25-year period on the same terms and
conditions.





On
October 3, 2005, a controlling interest in BWSL was sold back to the Belize
government. This transaction effectively reversed the 2001 privatization of
BWSL. This change in control of our customer has not affected our contractual
arrangement with BWSL.





Bulk
Water Operations in The Bahamas





In The
Bahamas, we sell bulk water through our majority-owned subsidiary,
CW-Bahamas.





Facilities





We
currently supply bulk water in The Bahamas from our Windsor, Blue Hills and
Bimini plants. We supply water from our Windsor plant under the terms of a
15-year water supply agreement dated May 7, 1996 effective March 1998. In
October 2005, we temporarily expanded this plant’s capacity from 2.6 to 4.1
million U.S. gallons per day. During August 2006 we relocated some of the
portable reverse osmosis units used to expand our Windsor plant to our retail
water operations in the Cayman Islands, reducing our Windsor plant production
capacity to 3.1 million U.S. gallons per day. We supply water from our Blue
Hills plant under the terms of a twenty-year water supply agreement dated May
20, 2005, effective July 2006. The Blue Hills plant is capable of producing 7.2
million U.S. gallons of potable water per day, and is our largest seawater
conversion facility to date.  The Bimini plant has a capacity of
115,000 U.S gallons per day.





Electricity
to our plants is supplied by Bahamas Electricity Corporation. We maintain a
standby generator with sufficient capacity to operate essential equipment at our
Windsor and Blue Hills plants and are able to produce water with these plants
during any temporary interruptions in the electricity supply.





Feed
water for the reverse osmosis unit is drawn from deep wells with associated
pumps on the property. Reject water is discharged into brine wells on the
property at a deeper level than the feed water intakes.


12


Customers





We
provide bulk water to the Water and Sewerage Corporation of The Bahamas (“WSC”),
which distributes the water through its own pipeline system to residential,
commercial and tourist properties on the Island of New Providence. During 2009,
CW-Bahamas supplied WSC with approximately 3.1 billion U.S. gallons of
water.





We are
required to provide the WSC with at least 16.8 million U.S. gallons per week of
potable water from our Windsor plant, and the WSC has contracted to purchase at
least that amount from us on a take-or-pay basis. This water supply agreement
expires on the later of March 1, 2013 or after the plant has produced
approximately 13.1 billion U.S. gallons of water. At the conclusion of the
initial term, the WSC has the option to:





•
            extend
      the term for an additional five years at a rate to be
      negotiated;





•
            exercise
      a right of first refusal to purchase any materials, equipment and
      facilities that CW-Bahamas intends to remove from the site, and negotiate
      a purchase price with CW-Bahamas;
or





•
            require
      CW-Bahamas to remove all materials, equipment and facilities from the
      site.





Within
the past three years, we have incurred penalties relating to the Windsor plant
for not meeting diesel fuel and electricity efficiencies specified in our water
sale agreement with the WSC. These penalties totaled $63,433, $112,622, and
$436,184 in 2009, 2008 and 2007, respectively. We have undertaken a program to
replace certain equipment prone to repetitive failure, and in 2008 successfully
completed a program which significantly reduced the adverse impact on our
operations of the fouling tendency of the feed water to the plant.





We are
required to provide the WSC with at least 33.6 million U.S. gallons per week of
potable water from the Blue Hills plant, and the WSC has contracted to purchase
at least that amount from us on a take-or-pay basis. This water supply agreement
expires on the later of July 26, 2026 or after the plant has produced 35.0
billion U.S. gallons of water. At the conclusion of the initial term, the WSC
has the option to:





•
            extend
      the term for an additional five years at a rate to be
      negotiated;





•
            exercise
      a right of first refusal to purchase any materials, equipment and
      facilities that CW-Bahamas intends to remove from the site, and negotiate
      a purchase price with CW-Bahamas;
or





•
            require
      CW-Bahamas to remove all materials, equipment and facilities from the
      site.





Bulk
Water Demand and Average Sales Prices





The table
below sets forth the total volume of water we supplied to our bulk water
customers on a quarterly basis for the indicated years ended December
31:





Bulk
Water Total Volume By Quarter


(U.S.
Gallons, In Thousands)





2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005First
      Quarter
                  
                  
                  1,086,979
                  
                  
                  
                  1,066,238
                  
                  
                  
                  1,101,720
                  
                  
                  
                  585,297
                  
                  
                  
                  441,498Second
      Quarter
                  
                  
                  1,087,330
                  
                  
                  
                  1,088,372
                  
                  
                  
                  1,079,858
                  
                  
                  
                  684,452
                  
                  
                  
                  456,625Third
      Quarter
                  
                  
                  1,119,447
                  
                  
                  
                  1,046,255
                  
                  
                  
                  1,070,677
                  
                  
                  
                  1,040,096
                  
                  
                  
                  442,404Fourth
      Quarter
                  
                  
                  1,080,275
                  
                  
                  
                  1,043,686
                  
                  
                  
                  1,112,370
                  
                  
                  
                  1,044,701
                  
                  
                  
                  506,892Total
                  
                  
                  4,374,031
                  
                  
                  
                  4,244,551
                  
                  
                  
                  4,364,625
                  
                  
                  
                  3,354,546
                  
                  
                  
                  1,847,419




13





Our
average sales prices of potable water sold to our bulk water customers for the
indicated years ended December 31 were as follows:





Bulk
Water Average Sales Prices





2009
                  
                  
                  2008
                  
                  
                  2007Average
      Sales Price Per 1,000 U.S. Gallons
                  
                  $
                  5.92
                  
                  
                  $
                  7.10
                  
                  
                  $
                  5.57





Services
Operations





For
fiscal years 2009, 2008 and 2007, our services operations accounted for
approximately 15%, 20%, and, 14%, respectively, of our consolidated revenues and
are comprised of businesses in the Cayman Islands, the British Virgin Islands
and Bermuda. These businesses provide engineering and management services,
including designing and constructing desalination plants, and managing and
operating plants owned by other companies. Through June 2007, we had a service
contract for a plant in Barbados.  Revenues recorded from this
contract amounted to $238,000 in 2007.





Engineering
and Management Services Operations





We
provide management, engineering and construction services for desalination
projects through DesalCo, which is recognized by suppliers as an original
equipment manufacturer of reverse osmosis seawater desalination plants for our
Company.





In late
2005, we established Aquilex, Inc., a wholly-owned U.S. subsidiary located in
Deerfield Beach, Florida, to provide financial, engineering and supply chain
support services to our operating segments.





Affiliate
Operations





Our
affiliate, OC-BVI, sells water to one bulk customer in the British Virgin
Islands. We own 50% of the voting shares of OC-BVI and have an overall 43.5%
equity interest in the profits of OC-BVI. We also own separate profit sharing
rights in OC-BVI that raise our effective interest in OC-BVI’s profits from
43.5% to approximately 45%. Sage Water Holdings (BVI) Limited (“Sage”) owns the
remaining 50% of the voting shares of OC-BVI and the remaining 55% interest in
its profits. Under the Articles of Association of OC-BVI, we have the right to
appoint three of the six directors of OC-BVI. Sage is entitled to appoint the
remaining three directors. In the event of a tied vote of the Board, the
President of the Caribbean Water and Wastewater Association, a regional trade
association comprised primarily of government representatives, is entitled to
appoint a junior director to cast a deciding vote.





We
provide certain engineering and administrative services to OC-BVI for a monthly
fee and a bonus arrangement which provides for payment of 4.0% of the net
operating income of OC-BVI.





We
account for our interests in OC-BVI using the equity method of
accounting.





Customer





OC-BVI
sells bulk water to the Government of The British Virgin Islands Water and
Sewerage Department (“BVIW&S”), which distributes the water through its own
pipeline system to residential, commercial and tourist properties on the islands
of Tortola and Jost Van Dyke in the British Virgin Islands. During 2009, OC-BVI
supplied BVIW&S with 576 million U.S. gallons of water from three
desalination plants located at Baughers Bay and Bar Bay, Tortola, and the island
of Jost Van Dyke in the British Virgin Islands.





Facilities





Through
the end of 2009, OC-BVI operated a seawater reverse osmosis plant at Baughers
Bay, Tortola, in the British Virgin Islands, which has a production capacity of
1.7 million U.S. gallons per day. The plant has an advanced energy recovery
system, generates its own electrical power on site using two large diesel driven
generator units and also purchases electricity from the BVI Electric Co. to
power ancillary equipment and provide building lighting.




14




In
October 2006, we were notified by OC-BVI that the Ministry of Communications and
Works of the Government of the British Virgin Islands (the “Ministry”) had
asserted a purported right of ownership of OC-BVI’s Baughers Bay desalination
plant pursuant to the terms of a Water Supply Agreement dated May 1990 (the
“1990 Agreement”) and had invited OC-BVI to submit a proposal for its continued
involvement in the production of water at the Baughers Bay plant in light of the
Ministry’s planned assumption of ownership. In November 2007 the Ministry
commenced litigation against OC-BVI in the Eastern Supreme Court of the
Caribbean seeking ownership of the Baughers Bay plant and was awarded ownership
and possession of this plant by the Court in October 2009.  See
further discussion at “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Material Commitments, Expenditures and
Contingencies.”





In 2007,
OC-BVI completed the construction of a 720,000 U.S. gallons per day plant at Bar
Bay, Tortola, in the British Virgin Islands. This plant began supplying water to
the BVI government in January 2009.  The definitive contract for the
sale of water from this plant was signed in March 2010.  The contract
has a term of seven years with a seven year renewal option exercisable by the
BVI government.





OC-BVI’s
plant on the island of Jost Van Dyke was expanded in 2009 and has a capacity of
60,000 U.S. gallons per day.  This plant operates under a contract
with the BVI government that expires July 8, 2013.


15


Reverse
Osmosis Technology





The
conversion of seawater to potable water is called desalination. The two primary
forms of desalination are 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 fluid separation process in which the saline
water is pressurized and the fresh water is separated from the saline water by
passing through a semi-permeable membrane which rejects the salts. The saline
(or seawater) water is first passed through a pretreatment system, which
generally consists of fine filtration and the addition of treatment chemicals if
required. Pre-treatment removes suspended solids and organics which could cause
fouling of the membrane surface. Next, a high-pressure pump pressurizes the
saline water thus enabling a 40% conversion of the saline water to fresh water
as it passes through the membrane, while 99% of the dissolved salts are rejected
and remain the concentrated saline water. This remaining feed water which has
now been concentrated is discharged without passing through the membrane. The
remaining hydraulic energy in the concentrated feed water is transferred to the
initial saline feed water with an energy recovery device thus reducing the total
energy requirement for the reverse osmosis system. The final step is
post-treatment, which consists of stabilizing the produced fresh water, thereby
removing undesirable dissolved gases, adjusting the pH and providing
chlorination to prepare it for distribution.





We use
reverse osmosis technology to convert seawater to potable water at all of the
plants we construct and operate. 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
investigating 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 the equipment in an efficient manner. As a result of
our decades of experience in seawater desalination, we believe that we have an
expertise in the development and operation of desalination plants which is
easily transferable to locations outside of our current operating
areas.





Raw
Materials and Sources of Supply





All
materials, parts and supplies essential to our business operations are obtained
from multiple sources and we use the latest industry technology. 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.





Seasonal
Variations in Our Business





Our
operations are affected by the levels of tourism and are subject to seasonal
variations in our service areas. Demand for our water in the Cayman Islands,
Belize, the British Virgin Islands and The Bahamas is affected by variations in
the level of tourism and local weather, primarily rainfall. Tourism in our
service areas is affected by the economies of the tourists’ home countries,
primarily the United States and Europe, terrorist activity and perceived threats
thereof, and increased costs of fuel and airfares. We normally sell slightly
more water during the first and second quarters, when the number of tourists is
greater and local rainfall is less, than in the third and fourth quarters. We do
not believe that our operations in Nassau and Tortola are subject to significant
seasonal variations in demand.





Government
Regulations, Custom Duties and Taxes





Our
operations and activities are subject to the governmental regulations and taxes
of the countries in which we operate. The following summary of regulatory
developments and legislation does not purport to describe all present and
proposed regulation and legislation that may affect our businesses. Legislative
or regulatory requirements currently applicable to our businesses may change in
the future. Any such changes could impose new obligations on us that may
adversely affect our businesses and operating results.





The
Cayman Islands





The
Cayman Islands are a British Overseas Territory and have had a stable political
climate since 1670, when the Treaty of Madrid ceded the Cayman Islands to
England. 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 Cabinet is responsible for day-to-day
government operations. The Cabinet consists of five ministers who are chosen by
the legislative assembly from its 15 popularly elected members, and the three
Civil Service members. The elected members choose from among themselves a leader
who is designated the Premier and is in effect the leader of the elected
government. 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.




16




The
Cayman Islands have no taxes on profits, income, distributions, capital gains or
appreciation. We have exemptions from, or receive concessionaire rates of
customs duties on capital expenditures for plant and major consumable spare
parts and supplies imported into the Cayman Islands as follows:





•
            We
      do not pay import duty or taxes on reverse osmosis membranes, electric
      pumps and motors and chemicals, but we do 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 the Seven Mile Beach or West Bay areas;
  and





•
            OC-Cayman
      pays full customs duties in respect of all plants that it operates for the
      Water Authority-Cayman.





The stamp
tax on the transfer of ownership of land in the Cayman Islands is a major source
of revenue to the Cayman Islands government. 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 in land bears to its
total assets and whether the intention of the transfer is to transfer ownership
of part of a company’s entire business or a part of its Cayman land or interest
in land.





Prior to
our common shares becoming publicly traded 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 and requested an exemption in 1994. On April 10, 2003, we
received notice that the Cayman Islands government had granted an exemption from
taxation for all transfers of our shares. We believe it is unlikely that
government will seek to collect this tax on transfers of our publicly traded
shares during 1994 through April 10, 2003.





The
Bahamas





The
Commonwealth of The Bahamas is an independent nation and a constitutional
parliamentary democracy with the Queen of England as the constitutional head of
state. The basis of the Bahamian law and legal system is the English common law
tradition with a Supreme Court, Court of Appeals, and a Magistrates
court.





We have
not been granted any tax exemptions for our Bahamian operations. Bahamian
companies are subject to an annual business license fee ranging from 1% to 2% of
their gross revenues.





Belize





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 CW-Belize from certain customs duties and all
revenue replacement duties until April 18, 2026, and had exempted CW-Belize from
company taxes until January 28, 2006. Belize levies a gross receipts tax on
corporations at a rate varying between 0.75% and 25%, depending on the type of
business, and a corporate income tax at a rate of 25% of chargeable income.
Gross receipts tax payable amounts are credited towards corporate income tax.
The Government of Belize also implemented certain environmental taxes and a
general sales tax effective July 1, 2006 and increased certain business and
personal taxes and created new taxes effective March 1, 2005. Belize levies
import duty on most imported items at rates varying between 0% and 45%, with
most items attracting a rate of 20%. In 2008, it was determined that the tax
exemption was no longer valid and CW-Belize paid approximately $156,000 of
business and corporate income tax for the period 2004 through 2008. Under the
terms of our water supply agreement with BWSL we are reimbursed by BWSL for all
taxes and customs duties that we are required to pay and have recorded this
reimbursement as an offset to our tax expense.


17


The
British Virgin Islands





The
British Virgin Islands is a British Overseas Territory that was first settled by
the Dutch in 1648 and annexed by the British in 1672. It adopted a new
constitution in 2007 and is 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, defense 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, comprised of various members of the legislature, is nominated by the
Premier and appointed by the Governor. The Parliament or Legislative Council is
made up of thirteen (13) seats with members elected by popular vote, serving up
to but no more than four-year terms. The British Virgin Islands are an English
common law jurisdiction with a Supreme Court, Court of Appeals and Magistrates
Court.





OC-BVI
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 Baughers Bay plant.  Under the terms of the March
2010 Bar Bay water sale agreement, OC-BVI must apply to the British Virgin
Islands government for duty and tax concessions relating to the Bar Bay plant’s
construction and operation.  In the event that such concessions are
not granted or are partially granted, the British Virgin Islands government has
agreed to allow OC-BVI to increase its water rate to account for any duties and
taxes that are payable by OC-BVI.





Market
and Service Area





Although
we currently operate in the Cayman Islands, Belize, The British Virgin Islands,
The Bahamas and Bermuda, we believe that our potential market consists of any
location where there is a need for potable water. The desalination of seawater,
either through distillation or reverse osmosis, is the most widely used process
for producing fresh water in areas with an insufficient natural supply. We
believe our experience in the development and operation of distillation and
reverse osmosis desalination plants provides us with a significant opportunity
to successfully expand our operations beyond the markets in which we currently
operate.





Prior to
our acquisition of OC-Cayman 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 the 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. We operate all the reverse osmosis
desalination plants owned by the Water Authority-Cayman on Grand Cayman and
supply water under licenses and supply agreements held by OC-Cayman with the
Water Authority-Cayman.





According
to the most recent information published by the Economics and Statistics Office
of the Cayman Islands Government, the population of the Cayman Islands was
estimated in December 2005 to be approximately 52,000. According to the figures
published by the Department of Tourism Statistics Information Center, during the
year ended December 31, 2009, tourist air arrivals decreased by 10.2% and
tourist cruise ship arrivals decreased 2.1% over the same period in
2008.





Total
visitors for the year decreased from 1.9 million in 2009 to 1.8 million in 2008.
We believe that our water sales in the Cayman Islands are more positively
impacted by tourists that arrive by air than by those arriving by cruise ship,
since cruise ship tourists generally only remain on island for one day or less
as they do not remain on island overnight.





Tourist
air arrivals increased 6.8% and cruise ship arrivals increased 2.3% in January
2010, compared to the same period in 2009. At this time we are not able to
determine whether these trends will continue through 2010.





In
December 2005, the Ritz-Carlton Hotel, condominiums and golf course development
began operations. This development is required to purchase potable water from us
for the hotel and condominiums under the terms of our exclusive license
agreement, but not for its golf course.





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 license area, including commercial and hotel zones. Previously,
buildings in these zones were only permitted to be built to three stories. We
believe that this change in the law has and will continue to facilitate the
development of certain properties within our license area that may have
otherwise not developed under the old height restriction, and it has already
facilitated the re-development of a number of existing properties, which have
been demolished re-built under the terms of the new height
restrictions.




18




The Town
of Camana Bay commenced construction in 2005 and will be developed over several
decades. The Camana Bay development is situated on 500 acres stretching from the
Caribbean sea to the North Sound within our retail license area on West Bay
Beach, and is mixed-use masterplanned community, which includes retail,
residential and institutional properties.





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 previous
ten years. We provide bulk potable water to BWSL, which distributes this water
to this market. BWSL currently has no other source of potable water on Ambergris
Caye. Our contract with BWSL makes us their exclusive producer of desalinated
water on Ambergris Caye though 2026.





A 185
mile long barrier reef, which is the largest barrier reef in the Western
Hemisphere, is situated just offshore of Ambergris Caye. This natural attraction
is becoming a choice destination for scuba divers and tourists. According to
information published by the Belize Trade and Investment Development Service,
tourism is Belize’s second largest source of foreign income, next to
agriculture.





Our
current operations in The Bahamas are located on South Bimini Island and in
Nassau on 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 city with its famed Cable Beach,
it accounts for more than two-thirds of the 4.0 million tourists who visit The
Bahamas annually.





The
British Virgin Islands are a British Overseas Territory 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.





Competition





Cayman Islands.Pursuant to
our license granted by the Cayman Islands government, we have the exclusive
right to provide potable, piped water within our licensed service area on Grand
Cayman. At the present time, we are the only non-government-owned public water
utility on Grand Cayman. The Cayman Islands government, through the Water
Authority-Cayman, supplies water to parts of Grand Cayman located outside of our
licensed service area. Although we have no competition within our exclusive
retail license service area, our ability to expand our service area is at the
discretion of the Cayman Island government. Prior to 1991, any owner of property
within our exclusive retail license service 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. The Cayman Islands government, through the Water
Authority-Cayman, supplies water to parts of Grand Cayman outside of our
licensed service area. We have competed with such companies as GE Water, Veolia,
and IDE for bulk water supply contracts with the Water
Authority-Cayman.





Belize.On Ambergris Caye in
Belize, our water supply contract with Belize Water Services Limited is
exclusive, and Belize Water Services Limited can no longer seek contracts with
other water suppliers, or produce water themselves, to meet their future needs
in San Pedro, Ambergris Caye, Belize.





The Bahamas.On South Bimini
Island in The Bahamas, we supply water to a private developer and do not have
competitors. GE Water operates a seawater desalination plant on North Bimini
Island. We competed with companies such as GE Water, Veolia,
IDE,  Inima and Biwater for the new contract with the Bahamian
government to build and operate a seawater desalination plant at Blue Hills, New
Providence, Bahamas. We expect to compete with these companies and others for
future water supply contracts in The Bahamas.





British Virgin Islands.In
the British Virgin Islands, GE Water operates seawater desalination plants in
West End and Sea Cows Bay, Tortola, and on Virgin Gorda and generally bids
against OC-BVI for projects.  Biwater PLC was recently awarded a 16
year contract to construct and operate a 2.75 million US gallon per day
desalination plant in Tortola for the British Virgin Islands
government.  This contract was negotiated solely with Biwater and did
not go to competitive tender.




19




To
implement our growth strategy outside our existing operating areas, we will have
to compete with some of the same companies we competed with for the Blue Hills
project in Nassau, Bahamas such as GE Water, Veolia, IDE Technologies,
Inima, and Biwater and as well as other smaller companies like Seven Seas
Water. Some of these companies currently operate in areas in which we would like
to expand our operations and already maintain worldwide operations having
greater financial, managerial and other resources than our company. We believe
that our low overhead costs, knowledge of local markets and conditions and our
efficient manner of operating desalinated water production and distribution
equipment provide us with the capabilities to effectively compete for new
projects in the Caribbean basin and surrounding areas.





Environmental
Matters





Cayman Islands.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. We are licensed by the government to
discharge concentrated seawater, which is a byproduct of our desalination
process, into deep disposal wells.





Our
Cayman Islands license requires that our potable water quality meet the World
Health Organization’s Guidelines for Drinking Water Quality and contain less
than 200 mg/l of total dissolved solids. We completed upgrades to our ACWW, West
Bay and Britannia plants before October 1, 2003, and we meet all of the water
quality requirements in our Cayman license. In addition, noise levels at our
plants cannot exceed the standards established by the U.S. Occupational Safety
and Health Act.





Belize, The Bahamas, British Virgin
Islands.With respect to our Belize and Bahamas operations and OC-BVI’s
British Virgin Islands operations, we and OC-BVI are required by our water
supply contracts to take all reasonable measures to prevent pollution of the
environment. We are licensed by the Belize and Bahamian governments to discharge
concentrated seawater, which is a byproduct of our desalination process, into
deep disposal wells. OC-BVI is licensed by the British Virgin Islands government
to discharge concentrated seawater into the sea. 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. To date we have not received any complaints from any regulatory
authorities.





Employees





As of
March 3, 2010, we employed a total of 120 persons, 73 in the Cayman Islands, 20
in The Bahamas, 19 in the United States, two in Bermuda and six in Belize. We
also managed the eight employees of OC-BVI in the British Virgin Islands. We
have eight management personnel and 27 administrative and clerical employees.
The remaining employees are engaged in engineering, purchasing, plant
maintenance and operations, pipe laying and repair, leak detection, new customer
connections, meter reading and laboratory analysis of water quality. None of our
employees is a party to a collective bargaining agreement. We consider our
relationships with our employees to be good.





Available
Information





Our
website address is http://www.cwco.com.
Information contained on our website is not incorporated by reference into this
Annual Report, and you should not consider information contained on our website
as part of this Annual Report.





We have
adopted a written code of conduct and ethics that applies to all of our
employees and directors, including, but not limited to, our principal executive
officer, principal financial officer, and principal accounting officer or
controller, or persons performing similar functions. The code of conduct and
ethics, the charters of the audit, compensation, and nomination committees of
our Board of Directors, are available at the Investors portion of our
website.





You may
access, free of charge, our annual reports on Form 10-K, quarterly reports on
Form 10-Q, and current reports on Form 8-K, plus amendments to such reports as
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, as amended, on our website and on the website of the Securities and
Exchange Commission (the “SEC”) as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC. In addition,
paper copies of these documents may be obtained free of charge by writing us at
the following address: Consolidated Water Co. Ltd., Regatta Office Park ,
Windward Three, 4th Floor, West Bay Road, P.O. Box 1114, Grand Cayman, KY1-1102,
Cayman Islands, Attention: Investor Relations; or by calling us at (345)
945-4277.




20




ITEM 1A. RISK
FACTORS





Investing
in our common shares involves risks. Prior to making a decision about investing
in our common shares, you should consider carefully the factors discussed below
and the information contained in this Annual Report. Each of these risks, as
well as other risks and uncertainties not presently known to us or that we
currently deem immaterial, could adversely affect our business, operating
results, cash flows and financial condition, and cause the value of our common
shares to decline, which may result in the loss of all or part of your
investment.





Our exclusive license to provide
water to retail customers in the Cayman Islands may not be renewed in the
future.





In the
Cayman Islands, we provide water to retail customers under a license, issued to
us in July 1990 by the Cayman Islands government that grants us the exclusive
right to provide water to retail customers within our licensed service area. Our
service area is comprised of an area on Grand Cayman that includes the Seven
Mile Beach and West Bay areas, two of the three most populated areas in the
Cayman Islands. For the year ended December 31, 2009, we generated approximately
40% of our consolidated revenues and 58% of our consolidated gross profits from
the retail water operations conducted pursuant to our exclusive license. Our
license expires in July 2010. If we are not in default of any terms of the
license, we have a right of first refusal to renew the license on terms that are
no less favorable than those that the government offers to any third
party.





During
our retail license renewal negotiations conducted with representatives of the
Cayman Island government during the fourth quarter of 2009 we were informed that
the Cayman Island government seeks to restructure the terms of our license to
employ a “rate of return on invested capital model’ similar to that governing
the sale of water to most U.S. municipalities.  We have formally
objected to the implementation of a “rate of return on invested capital model”
on the basis that we believe that such a model would not promote the efficient
operation of our water utility, and could ultimately increase water rates to our
customers. We believe such a model, if ultimately implemented, could
significantly reduce the operating income we have historically generated from
our retail license.





If we are
unable to renew our license or if we negotiate a new license on terms that are
less favorable to us, we could lose a significant portion of our current
revenues and our results of operations, cash flows and financial condition could
be adversely affected.





We rely on fixed-term water supply
and/or service agreements with our bulk customers in the Cayman Islands,
Belize and The Bahamas, which may not be renewed or may be renewed on terms
less favorable to us.





All of
our bulk water supply agreements are for fixed terms ranging originally from
seven to 23 years and with a range of approximately one to 17 years remaining.
Upon expiration, these agreements may not be renewed or may be renewed on terms
less favorable to us. In addition, certain of these agreements for plants not
owned by us provide for our customers to take over the operations of the plant
upon expiration of the contract term. If this occurs, we may no longer generate
income from such plant. In instances where we own the plant that produces the
water under an agreement that is not renewed or renewed with lower production
quantities, we may not be able to find a new customer for the plant’s excess
production capacity. If our fixed-term agreements are not renewed or are renewed
on terms less favorable to us, our results of operations, cash flows and
financial condition could be adversely affected.





The
value of our investment in our affiliate OC-BVI is dependent upon the collection
of amounts recently awarded by the Eastern Supreme Court of the
Caribbean.





Since
expiration in May 1999 of the initial term of their bulk water supply agreement
dated May 1990 (the “1990 Agreement”), OC-BVI has supplied water to the British
Virgin Islands Water and Sewerage Department under what OC-BVI considers to be a
month-to-month supply arrangement. Under this arrangement, the British Virgin
Islands government could cease purchasing water from OC-BVI at any time.
Subsequent to May 1999, OC-BVI continued to make attempts to negotiate a new
water supply agreement.





In
October 2006, the British Virgin Islands government notified OC-BVI that it was
asserting a purported right of ownership of OC-BVI’s desalination plant in
Baughers Bay, Tortola pursuant to the terms of the 1990 Agreement and invited
OC-BVI to submit a proposal for its continued involvement in the production of
water at the Baughers Bay plant. Early in 2007, the British Virgin Islands
government unilaterally took the position that until such time as a new
agreement is reached on the ownership of the Baughers Bay plant and for the
price of the water produced by the plant, the BVI government would only pay that
amount of OC-BVI’s invoices that the BVI government purports constitutes
OC-BVI’s costs of producing the water. OC-BVI responded to the BVI government
that the amount the Ministry proposed to pay was significantly less than
OC-BVI’s production costs.  Payments made by the BVI government to
OC-BVI since the BVI government’s assumption of this reduced price have been
sporadic.




21




On
November 15, 2007, OC-BVI issued a demand letter to the BVI government for
approximately $6.2 million representing amounts that OC-BVI claimed were due by
the BVI government for water sold and delivered plus interest and legal
fees.  In response to OC-BVI’s demand for payment, the BVI government
issued a letter dated November 19, 2007 that reasserted its claim that ownership
of the Baughers Bay plant has passed to the BVI government and rejected OC-BVI’s
claim for payment.  On November 22, 2007, OC-BVI’s management was
informed that the BVI government had filed a lawsuit with the Eastern Caribbean
Supreme Court seeking ownership and possession of the Baughers Bay
plant.  OC-BVI counterclaimed that it was entitled to continued
possession and operation of the Baughers Bay plant until the BVI government pays
OC-BVI approximately $4.7 million, which it believes represents the value of the
Baughers Bay plant at its present expanded production
capacity.  OC-BVI also took the legal position that since the BVI
government never paid the $1.42 million to purchase the Baughers Bay plant, the
1990 agreement terminated on May 31, 1999, which was eight months after the date
that the Ministry provided written notice of its intention to purchase the
plant.





On July
4, 2008, OC-BVI filed a claim with the Eastern Caribbean Supreme Court seeking
recovery of $7,806,629, representing amounts owed to OC-BVI for water sold and
delivered to the BVI government from the Baughers Bay plant through May 31,
2008, $842,188 for interest accrued on amounts owed as of May 31, 2008 and
future interest and costs.  This claim was amended and increased on
April 22, 2009 to $13,773,954 for amounts owed for water delivered through March
31, 2009 plus accrued interest of $2,537,334 on amounts owed as of March 31,
2009 plus future interest and costs.  The $13,773,954 amount
represents amounts billed at the contract prices in effect before the BVI
government asserted its purported right of ownership of the plant.





The
Eastern Caribbean Supreme Court held a three-day trial from July 22 through July
24, 2009 to address both the Baughers Bay ownership issue and OC-BVI’s claim for
payment of amounts owed for water sold and delivered to the BVI
government.  On September 17, 2009, the Court issued a preliminary
ruling with respect to the litigation between the BVI government and
OC-BVI.  The Court determined that the BVI government was entitled to
immediate possession of the Baughers Bay plant and dismissed OC-BVI’s claim for
compensation of approximately $4.7 million for improvements to the
plant.  However, the Court determined that OC-BVI was entitled to full
payment of water invoices issued up to December 20, 2007, which had been
calculated under the terms of the original 1990 water supply agreement, and
ordered the BVI government to make an immediate interim payment of $5.0 million
to OC-BVI for amounts owed to OC-BVI.  The Court deferred deciding the
entire dispute between the parties until it could conduct a hearing to determine
the reasonable rate for water produced by OC-BVI for the period from December
20, 2007 to the present.





After
conducting hearings on October 12 and 16, 2009, on October 28, 2009, the Court
ordered the BVI government to pay OC-BVI at the rate of $13.91 per thousand
imperial gallons for water produced by OC-BVI from December 20, 2007 to present,
which amounted to a total recovery for OC-BVI of $10.3 million as of September
30, 2009.  The BVI government made a payment of $2 million to OC-BVI
under the Court order during the fourth quarter of 2009.





On
October 28, 2009, OC-BVI filed an appeal with the Eastern Caribbean Court of
Appeals (the “Appellate Court”) asking the Appellate Court to review the
September 17, 2009 ruling by the Eastern Caribbean Supreme Court as it relates
to OC-BVI’s claim for compensation for improvements to the Baughers Bay
plant.





On
October 29, 2009, the BVI government filed an appeal with the Appellate Court
seeking the Appellate Court’s review of the September 17, 2009 ruling of the
Court that the BVI government pay OC-BVI the reasonable rate for water produced
by OC-BVI for the period from December 20, 2007 to the present.  The
BVI government is requesting a ruling from the Appellate Court that the BVI
government should only pay OC-BVI the actual cost of water produced at the
plant.





After
considering the September and October 2009 rulings of the Court of the Caribbean
relating to the Baughers Bay dispute, we determined that the carrying value of
our investment in OC-BVI exceeded the estimated fair value for our investment in
OC-BVI by approximately $160,000 as of September 30, 2009 and therefore
recognized an impairment loss of this amount on this investment during the three
months ended September 30, 2009. In February 2010, the BVI government announced
it had signed a long term contract with Biwater, PLC for the construction of a
new water plant to serve Tortola.  We believe this new contract with
Biwater makes it unlikely that OC-BVI will be able to obtain a new long-term
operating contract for Baughers Bay.  Accordingly, our calculation of
the estimated fair value of our equity investment in OC-BVI as of December 31,
2009 did not include any future cash flows to OC-BVI from a long term operating
contract for the Baughers Bay plant and as a result we recorded an additional
impairment loss for our equity investment in OC-BVI of $(4,500,000) during the
fourth quarter of 2009.  The remaining carrying value of our
investment in OC-BVI of $9,157,995 at December 31, 2009 assumes OC-BVI will
collect in full the remaining $8 million awarded by the Court and will not be
required to return any of the $2 million paid to date by the BVI government on
the award.   Should the BVI government be successful in its
appeal to reduce the $10 million award we will be required to record an
additional impairment charge in an amount equal to any reduction in the amount
previously awarded.  Such impairment loss would reduce our earnings
and could have a significant adverse impact on our results of operations,
financial condition and cash flows.




22





We do not have sole control over our
affiliate, OC-BVI. A divergence of our interests and the interests of
OC-BVI’s other voting shareholder may adversely affect the operations of OC-BVI and,
in turn, decrease the value of our investment in
OC-BVI.





We own
43.5% of the equity and 50% of the voting shares of OC-BVI. We and Sage, which
owns the remaining 50% of the voting shares, are each entitled to appoint three
of the six directors of OC-BVI. If there is a tie vote of the directors on any
matter, the president of the Caribbean Water and Wastewater Association, a
regional trade association comprised primarily of government representatives, is
entitled to appoint a temporary director to cast the deciding vote. As a result,
although we provide operating management and engineering services to OC-BVI, we
share the overall management of OC-BVI with Sage and do not fully control its
operations. A divergence of our interests and the interests of Sage could
adversely affect the operations of OC-BVI and in turn decrease the value of our
investment in OC-BVI, in which case we could be required to record an impairment
charge to reduce the carrying value of our investment in OC-BVI. Such an
impairment charge would reduce our earnings and have a significant adverse
impact on our result of operations and financial condition.





The profitability of our plants is
dependent upon our ability to accurately estimate the costs of their
construction and operation.





The cost
estimates prepared in connection with the construction and operation of our
plants are subject to inherent uncertainties. Additionally, the terms of our
supply contracts may require us to guarantee the price of water on a per unit
basis, subject to certain annual inflation and monthly fuel cost adjustments,
and to assume the risk that the costs associated with producing this water may
be greater than anticipated. Because we base our contracted price of water in
part on our estimation of future construction and operating costs, the
profitability of our plants is dependent on our ability to estimate these costs
accurately. The cost of materials and services and the cost of the delivery of
such services may increase significantly after we submit our bid for a plant,
which could cause the gross margin and net return on investment for a plant to
be less than we anticipated when the bid was made. The profit margins we
initially expect to generate from a plant could be further reduced if future
operating costs for that plant exceed our estimates of such costs. These future
operating costs could be affected by a variety of factors, including lower than
anticipated production efficiencies and hydrological conditions at the plant
site that differ materially from those that existed at the time we submitted our
bid. Any construction and operating costs for our plants that significantly
exceed our initial estimates could adversely affect our results of operations,
financial condition and cash flows.





A significant portion of our
consolidated revenues are derived from two customers. A loss of, or a less
favorable relationship with, either of these customers would adversely affect our
results of operations.





Our top
two bulk water customers, the Water Authority-Cayman and the WSC, accounted for
approximately 15% and 26%, respectively, of our consolidated revenues for the
year ended December 31, 2009. If either of these customers terminate or decide
not to renew their contracts with us, or renew such contracts on terms that are
less favorable to us, or become unable for financial or other reasons to comply
with the terms of our contracts with them, our results of operations and
financial condition would be adversely affected.





Our operations are affected by
tourism and are subject to seasonal fluctuations which could affect demand for our
water and impact our revenues and results of operations.





Our
operations are affected by the levels of tourism and are subject to seasonal
variations in our service areas. Demand for our water in the Cayman Islands,
Belize and The Bahamas is affected by variations in the level of tourism and
local weather, primarily rainfall. Tourism in our service areas is affected by
the economies of the tourists’ home countries, primarily the United States and
Europe, terrorist activity and perceived threats thereof, and increased costs of
fuel and airfares. We normally sell slightly more water during the first and
second quarters, when the number of tourists is greater and local rainfall is
less, than in the third and fourth quarters. A downturn in tourism or greater
than expected rainfall in the locations we serve could adversely affect our
revenues and results of operations.




23




We may have difficulty accomplishing
our growth strategy within and outside of our current operating
areas.





Our
expansion both within our current operating areas and into new areas involves
significant risks, including, but not limited to, the following:





•
            regulatory
      risks, including government relations difficulties, local regulations and
      currency controls;





•
            receiving
      and maintaining necessary permits, licenses and
  approvals;





•
            risks
      related to operating in foreign countries, including political
      instability, reliance on local economies, environmental problems,
      shortages of materials, immigration restrictions and limited skilled
      labor;





•
            risks
      related to development of new operations, including inaccurate assessment
      of the demand for water, engineering difficulties and inability to begin
      operations as scheduled; and





•
            risks
      relating to greater competition in these new territories, including the
      ability of our competitors to gain or retain market share by reducing
      prices.





Even if
we successfully expand our operations, we may have difficulty managing our
growth. We cannot assure you that any new operations within or outside of our
current operating areas will attain or maintain profitability or that the
results from these new operations will not negatively affect our overall
profitability.





Production shortfalls under any of
our bulk supply contracts could result in penalties or cancellation of the
contract.





Our bulk
water supply contracts require us to deliver specified minimum volumes of water.
From time to time since October 2004, we have been unable to deliver the minimum
water volumes required under one of our bulk water supply contracts because of
mechanical equipment problems and membrane fouling. At present, we believe we
have resolved the minimum supply issues for this plant. However, membrane
fouling or other technical problems could occur at any of our plants, and if we
are unable to meet the production minimums due to such operating issues, we
could be in technical default of the supply contract and subject to various
adverse consequences, including financial penalties or cancellation of the
contract.





Our operations could be harmed by
hurricanes or tropical storms.





A
hurricane or tropical storm could cause major damage to our equipment and
properties and the properties of our customers, including the large tourist
properties in our areas of operation. For example, in September 2004 Hurricane
Ivan caused significant damage to our plants and our customers’ properties,
which adversely affected our revenues. Any future damage could cause us to lose
use of our equipment and properties and incur additional repair costs. Damage to
our customers’ properties and the adverse impact on tourism could result in a
decrease in water demand. A hurricane or tropical storm could also disrupt the
delivery of equipment and supplies, including electricity, necessary to our
operations. These and other possible effects of hurricanes or tropical storms
could have an adverse impact on our results of operations and financial
condition.





Contamination of our processed water
may cause disruption in our services and adversely affect our
revenues.





Our
processed water may become contaminated by natural occurrences and by
inadvertent or intentional human interference, including acts of terrorism. In
the event that a portion of our processed water is contaminated, we may have to
interrupt the supply of water until we are able to install treatment equipment
or substitute the flow of water from an uncontaminated water production source.
In addition, we may incur significant costs in order to treat a contaminated
source of plant feed water through expansion of our current treatment
facilities, or development of new treatment methods. An inability by us to
substitute processed water from an uncontaminated water source or to adequately
treat the contaminated plant feed water in a cost-effective manner may have an
adverse effect on our revenues and our results of operations.





Potential government decisions,
actions and regulations could negatively affect our operations.





We are
subject to the local regulations of the Cayman Islands, Belize, the British
Virgin Islands, The Bahamas and Bermuda, all of which are subject to change. Any
government that regulates our operations may issue legislation or adopt new
regulations, including but not limited to:





•
            restricting
      foreign ownership of us;




24




•
            providing
      for the expropriation of our assets by the
  government;





•
            providing
      for nationalization of public utilities by the
  government;





•
            providing
      for different water quality
standards;





•
            unilaterally
      changing or renegotiating our licenses and
  agreements;





•
            restricting
      the transfer of U.S. currency; or





•
            causing
      currency exchange fluctuations/devaluations or making changes in tax
      laws.





As new
laws and regulations are issued, we may be required to modify our operations and
business strategy, which we may be unable to do in a cost-effective manner.
Failure by us to comply with applicable regulations could result in the loss of
our licenses or authorizations to operate, the assessment of penalties or fines,
or otherwise may have a material adverse effect on our results of
operations.





The rates we charge our retail
customers in the Cayman Islands are subject to regulation. If we are unable to
obtain government approval of our requests for rate increases, or if approved rate
increases are untimely or inadequate to cover our projected expenses, our
results of operations may be adversely affected.





Under our
exclusive retail license in the Cayman Islands, we must obtain prior approval
from the Cayman Islands government to increase our water supply rates, except
for inflation-related and energy-related adjustments. However, the expenses we
incur in supplying water under this license may increase due to circumstances
that were unforeseen at the time we entered into the license. We may incur
additional costs in attempting to obtain government approval of any rate
increase, which may be granted on a delayed basis, if at all. Failure to obtain
timely and adequate rate increases could have an adverse effect on our results
of operations.





We rely on the efforts of key
employees. Our failure to retain these employees could adversely affect our results of
operations.





Our
success depends upon the abilities of our executive officers. In particular, the
loss of the services of Fredrick W. McTaggart, our President and Chief Executive
Officer, could be detrimental to our operations and our continued success. Mr.
McTaggart has an employment agreement expiring on December 31, 2012. Each year,
the term of this agreement may be extended for an additional year. However, we
cannot guarantee that Mr. McTaggart will continue to work for us during the term
of his agreement or will enter into any extensions thereof.





We are exposed to credit risk through
our relationships with several customers and our
affiliate.





We are
subject to credit risk posed by possible defaults in payment by our bulk water
customers in the Cayman Islands, Belize, the British Virgin Islands and The
Bahamas and by possible defaults in payment of loan receivables by OC-BVI and
the Water Authority-Cayman. Adverse economic conditions affecting, or financial
difficulties of, those parties could impair their ability to pay us or cause
them to delay payment. We depend on these parties to pay us on a timely basis.
Our outstanding accounts receivable are not covered by collateral or credit
insurance. Any delay or default in payment could adversely affect our cash
flows, financial condition and results of operations.





We are exposed to the risk of
variations in currency exchange rates.





Although
we report our results in United States dollars, the majority of our revenue is
earned in other currencies. All of the currencies in our operating areas have
been fixed to the United States dollar for over 20 years and we do not employ a
hedging strategy against exchange rate risk associated with our reporting in
United States dollars. If any of these fixed exchange rates becomes a floating
exchange rate our results of operations and financial condition could be
adversely affected.




25




We may enter new markets in the
future in which we do not have a contractual commitment for our products or
existing customers.





Our
strategy contemplates potential entry into new markets where we believe a demand
for potable water exists beyond the current supply of potable water in those
markets.  We may incur significant business development expenses in
the pursuit of new markets prior to obtaining a contract for services in these
markets, and such expenses could have an adverse impact on our results of
operations.  We may decide to enter such markets by building new
reverse osmosis desalination plants before we have obtained a contract for the
sale of water produced by the new plant or before we have established a customer
base for the water produced by the new plant. If after completing such plant we
are unable to obtain a contract or sufficient number of customers for the plant,
we may be unable to recover the cost of our investment in the plant, which could
have a material adverse effect on our financial condition, results of operations
and cash flows.





Future sales of our common shares may
depress the market price of our common shares.





If we or
our existing shareholders sell substantial amounts of common shares or if it is
perceived that such sales could occur, the market price of our common shares
could decline. In addition, if these sales were to occur, we may find it
difficult to sell equity or equity-related securities in the future at a time
and price that we deem desirable.





We may not pay dividends in the
future. If dividends are paid, they may be in lesser amounts than past
dividends.





Our
shareholders may receive dividends out of legally available funds if, and when,
they are declared by our Board of Directors. We have paid dividends in the past,
but may cease to do so at any time. Under the agreements governing certain of
our outstanding debt obligations, we may only pay dividends from “cash flows,”
defined under the applicable agreement as consolidated net income plus non-cash
charges less capital expenditures and scheduled debt repayment, calculated
annually on a fiscal year basis. We may incur increased capital requirements or
additional indebtedness in the future that may restrict our ability to declare
and pay dividends. We may also be restricted from paying dividends in the future
due to restrictions imposed by applicable corporate laws, our financial
condition and results of operations, covenants contained in our financing
agreements, management’s assessment of future capital needs and other factors
considered by our Board of Directors. We may not continue to pay dividends in
the future or, if dividends are paid, they may not be in amounts similar to past
dividends.


26


Service of process and enforcement of
legal proceedings commenced against us in the United States may be difficult to
obtain.





We are
incorporated under the laws of the Cayman Islands and a substantial portion of
our assets are located outside of the United States. In addition, 11 out of 15
of our directors and officers reside outside the United States. As a result, it
may be difficult for investors to affect service of process within the United
States upon us and such other persons, or to enforce judgments obtained against
such persons in United States courts, and bring any action, including actions
predicated upon the civil liability provisions of the United States securities
laws. In addition, it may be difficult for investors to enforce, in original
actions brought in courts or jurisdictions located outside of the United States,
rights predicated upon the United States securities laws.





Based on
the advice of our Cayman Islands legal counsel, we believe there is no
reciprocal statutory enforcement of foreign judgments between the United States
and the Cayman Islands, and that foreign judgments originating from the United
States are not directly enforceable in the Cayman Islands. A prevailing party in
a United States proceeding against us or our officers or directors would have to
initiate a new proceeding in the Cayman Islands using the United States judgment
as evidence of the party’s claim. A prevailing party could rely on the summary
judgment procedures available in the Cayman Islands, subject to available
defenses in the Cayman Islands courts, including, but not limited to, the lack
of competent jurisdiction in the United States courts, lack of due service of
process in the United States proceeding and the possibility that enforcement or
recognition of the United States judgment would be contrary to the public policy
of the Cayman Islands.





Depending
on the nature of damages awarded, civil liabilities under the Securities Act of
1933, as amended (or the Securities Act), or the Securities Exchange Act of
1934, as amended (or the Exchange Act), for original actions instituted outside
the Cayman Islands may or may not be enforceable. For example, a United States
judgment awarding remedies unobtainable in any legal action in the courts of the
Cayman Islands, such as treble damages, would likely not be enforceable under
any circumstances.





Low trading volume of our stock may
limit your ability to sell your shares at or above the price you pay for
them.





During
the year ended December 31, 2009, the average daily trading volume of our common
shares was approximately 94,284 shares, a much lower trading volume than the
stock of many other companies listed on the NASDAQ Global Select Market. A
public trading market having the desired characteristics of depth, liquidity and
orderliness depends on the presence in the market of willing buyers and sellers
of our common shares at any given time. This presence in turn depends on the
individual decisions of investors and general economic and market conditions
over which we have no control. As a consequence of the limited volume of trading
in our common shares, an investor in our stock may have difficulty selling a
large number of our common shares in the manner or at the price that might be
attainable if our common shares were more actively traded. In addition, as a
result of our low trading volume, the market price of our common shares may not
accurately reflect their value.





Competition may threaten the
sustainability and growth of our current operations and impede the expansion
of our operations into new areas.





We face
competition in our areas of operation in renewing our present supply contracts
and in our efforts to expand our current operations within those areas. We also
face competition in attempting to expand our operations to new areas. We often
compete with larger companies, including units of General Electric Company and
Veolia Environment. Some of our current and potential competitors have technical
and financial resources and marketing and service organizations that are
significantly greater than ours. Moreover, our competitors may forecast the
course of market developments more accurately and could in the future develop
new technologies that compete with our services. Additional competitors with
significant market presence and financial resources may enter those markets,
thereby further intensifying competition. These competitors may be able to
reduce our market share by adopting more aggressive pricing policies than we can
adopt or by developing technology and services that gain wider market acceptance
than our technology and/or services. If we do not compete successfully, we may
be unable to maintain or increase our operations and our results of operations
and financial condition could be adversely affected.





We are subject to anti-takeover
measures that may discourage, delay or prevent changes of control of Consolidated
Water Co. Ltd.





Classified Board of
Directors. We have a classified Board that consists of three groups of
directors. Only one group of directors is elected each year. Our classified
Board may increase the length of time necessary for an acquirer to change the
composition of a majority of directors in order to gain control of our
Board.


27


Option Deed. Our Board of
Directors has adopted an Option Deed that is intended to improve the bargaining
position of our Board of Directors in the event of an unsolicited offer to
acquire our outstanding stock. Under the terms of the Option Deed, a stock
purchase right is attached to each of our current or future outstanding common
shares issued prior to the time the purchase rights become exercisable, are
redeemed or expire. The purchase rights will become exercisable only if an
individual or group has acquired, or obtained the right to acquire, or announced
a tender or exchange offer that if consummated would result in such individual
or group acquiring beneficial ownership of 20% or more of our outstanding common
shares. Upon the occurrence of a triggering event, the rights will entitle every
holder of our common shares, other than the acquirer, to purchase our shares or
shares of our successor on terms that would likely be economically dilutive to
the acquirer. Under certain circumstances, instead of common shares, our Board
of Directors may issue cash or debt securities. Our Board of Directors, however,
has the power to amend the Option Deed so that it does not apply to a particular
acquisition proposal or to redeem the rights for a nominal value before they
become exercisable. These features will likely encourage an acquirer to
negotiate with our Board of Directors before commencing a tender offer or to
condition a tender offer on our Board of Directors taking action to prevent the
purchase rights from becoming exercisable. In March 2007, our Board extended the
expiration date of the Option Deed through July 2017.





As a
result of these anti-takeover measures, we could deter efforts to make changes
to, or exercise control over, current management. In addition, our shareholders
may not have an opportunity to sell their common shares to a potential acquirer
at the acquirer’s offering price, which is typically at a premium to market
price.





Restrictive covenants in our credit
facilities and trust deeds could adversely affect our business by limiting our
flexibility; our failure to comply with these covenants could cause
foreclosure on our assets.





Our
credit facilities and the trust deeds governing the terms of our debt securities
contain restrictive covenants. These covenants and requirements limit our
ability, without approval of the lender or trustee, to take various actions,
including incurring additional debt, making capital expenditures, guaranteeing
indebtedness, engaging in various types of transactions, including mergers and
sales of assets, and paying dividends and making distributions or other
restricted payments. These covenants could place us at a disadvantage compared
to some of our competitors which may not be required to operate under these or
similar restrictions. Further, these covenants could have an adverse effect on
our business by limiting our ability to take advantage of financing, acquisition
or investment opportunities. A material breach of any of these covenants would
constitute a default under our credit facilities or trust deeds. In the event of
default, the lender or trustee may accelerate repayment of our outstanding
indebtedness. If we are unable to repay the amounts accelerated, the lender or
trustee has the right to foreclose on substantially all of our assets, which we
have pledged to secure that indebtedness. Foreclosure upon our assets would have
a significant adverse affect on our results of operations, financial condition
and our ability to continue operations.





ITEM 1B. UNRESOLVED STAFF
COMMENTS





None.





ITEM
2.      PROPERTIES





Cayman
Island Properties





Abel Castillo Water Works
(formerly Governor’s Harbour)





We own
our Abel Castillo Water Works (“ACWW”) site and the 12,812 square feet of
buildings, which contain two reverse osmosis water treatment plants, a
distribution pump house and warehouse space, and operate and maintain the site
through our wholly-owned subsidiary, Cayman Water. The site is located on 3.2
acres, including 485 feet of waterfront. The current water production capacity
of our site is 2.2 million U.S. gallons per day by two separate water plants
designated GHB-1 and GHB-2 with rated production capacities of 1.2 million and 1
million US gallons per day respectively. On this site we also have three 1.0
million U.S. gallon potable water storage tanks and a high service distribution
pump house.





We own an
approximately 1 acre property adjacent to our ACWW plant which we purchased in
2007 to provide space for future additional water production and storage
facilities. An approximately 8,000 square foot, single story concrete block
building is currently on the site, which was formerly used as a school. We
expect to demolish this building in the future in order to utilize this site for
its ultimate intended purpose.


28


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 in 1995 and was expanded in 1998,
2000 and 2008. 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, and office
space and water storage capacity consisting of three 1.0 million U.S. gallon
potable water tanks. The capacity of our West Bay plant was expanded to 910,000
U.S. gallons per day in 2008.





Britannia
Plant





We own
the Britannia seawater desalination plant in Grand Cayman, which consists of a
seawater reverse osmosis production plant with a capacity of 715,000 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 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.





Corporate
Office





We lease
approximately 5,500 square feet of office space at the Regatta Office Park, West
Bay Road, Grand Cayman, Cayman Islands. In October 2007, we exercised an option
to extend this lease through April 30, 2011.





Red Gate Road
Plant





Under the
terms of the water production and supply license between OC-Cayman and the
government of the Cayman Islands, OC-Cayman is allowed to use the property and
the plant for the Red Gate Road plant to produce approximately 1.3 million U.S.
gallons of desalinated water per day for sale to the Water Authority-Cayman. On
November 30, 2008, the license was extended for a period of one year, during
which time OC-Cayman was required to continue to operate and maintain the plant.
The plant was originally powered only by electricity, but was upgraded in 1994
to include diesel driven high-pressure pumps. In August 2008, the Water
Authority-Cayman asked OC-Cayman to convert the high-pressure pumps back to
electrical power and make other modifications and improvements to the plant.
This work is expected to be completed by April 2010, for which OC-Cayman will
obtain a seven year license and operating agreement for the plant.





Lower Valley
Plant





OC-Cayman
provided the plant and equipment to the Water Authority-Cayman under a
vendor-financed sale and operating agreement which has been extended on two
occasions. OC-Cayman operates the electrically-powered 1.1 million U.S. gallons
per day rated plant and supplies approximately 916,000 U.S. gallons of
desalinated water per day to the Water Authority-Cayman.





In 2005,
the Water Authority-Cayman accepted our proposal to increase the capacity of the
Lower Valley plant to 1.1 million U.S. gallons per day in exchange for a
seven-year extension of the license.





OC-Cayman
leases the property on which the plant is located from the Water
Authority-Cayman for a minimal annual rent for the duration of the operating
agreement, which originally was set to expire on March 9, 2006, but was extended
effective January 2006 with the seven-year extension of the license.
Responsibility for operation of the plant passes to the Water Authority-Cayman
upon expiration of the operating agreement.


29




North Sound
Plant





Construction
of this plant was completed in November 2002. OC-Cayman provided the plant and
equipment to the Water Authority-Cayman under a seven-year vendor-financed sale
and operating agreement. OC-Cayman operates the electrically powered plant and
supplies approximately 1.59 million U.S. gallons of desalinated water per day to
the Water Authority-Cayman. OC-Cayman leases the property on which the plant is
located from the Water Authority-Cayman for a minimal annual rent, for the
duration of the sale and operating agreement. The sale and operating agreement
and property lease were recently extended and are expected to expire in the
first quarter of 2014. Responsibility for operation of the plant passes to the
Water Authority-Cayman upon expiration of the sale and operating
agreement.





North Side Water Works Plant
(NSWW)




Construction
of this plant was completed in June 2009. OC-Cayman provided the plant and
equipment to the Water Authority-Cayman under a ten-year vendor-financed sale
and operating agreement. OC-Cayman operates the electrically powered plant which
can supply up to approximately 2.38 million U.S. gallons of
desalinated water per day to the Water Authority-Cayman. OC-Cayman leases the
property on which the plant is located from the 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 the Water Authority-Cayman
upon expiration of the sale and operating agreement.





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 550,000 U.S. gallons per
day. We lease the land on which our plant is located from the Government of
Belize at an annual rent of BZE$1.00. This lease expires in April
2026.





Bahamas
Properties





We own
the water production facility in South Bimini. The facility consists of a
250,000 U.S. gallon bolted steel potable water tank and two 40 foot long
standard shipping containers which contain a seawater reverse osmosis production
plant with a rated capacity of 115,000 U.S. gallons per day, a high service pump
skid and an office. The facility is located on a parcel of land owned by South
Bimini International Ltd., and we are allowed, under the terms of our agreement,
to utilize the land for the term of the agreement without charge.





We own a
water production facility, the Windsor plant, located in Nassau, New Providence,
with a production capacity of 3.1 million U.S. gallons per day. The plant is
powered by a combination of diesel engine-driven high-pressure pumps, and
electrical power purchased from the Bahamas Electricity Corporation to power all
other loads in the plant. The plant is contained within a 13,000 sq. ft.
concrete and steel building that also contains a warehouse, workshop and
offices. It is located on land owned by the Water and Sewerage Corporation of
The Bahamas and our 15 year water sales agreement gives us a license to use the
land throughout the term of that agreement.





In July
2006, we substantially completed construction of a second water production
facility in Nassau, New Providence: the Blue Hills plant. With a production
capacity of 7.2 million U.S. gallons per day this plant is the largest
desalination plant we have built or operated to date. The plant is powered by a
combination of diesel engine-driven high-pressure pumps, and electrical power
purchased from the Bahamas Electricity Corporation to power all other loads in
the plant. The plant is contained within a 16,000 sq. ft. concrete and steel
building that also contains a warehouse, workshop and offices. It is located on
land owned by the Water and Sewerage Corporation of The Bahamas and our 20 year
water sales agreement gives us a license to use the land throughout the term of
that agreement.





U.S.
Property





In July
2005, we guaranteed the financial obligations of a five year lease in Deerfield
Beach, Florida for approximately 7,200 square feet of office and warehouse space
for Aquilex, Inc., our wholly-owned subsidiary that was incorporated in the
United States for the purpose of providing financial, engineering and supply
chain management support services to our operating
subsidiaries.


30


ITEM
3.      LEGAL PROCEEDINGS





On
November 17, 2006, Gruppozecca Bahamas Limited (“GBL”) filed a Statement of
Claim in the Supreme Court of the Commonwealth of The Bahamas against CW-Bahamas
seeking damages in excess of $950,000 for CW-Bahamas alleged breach of its
obligations under an agreement between GBL and CW-Bahamas relating to the
construction of our Blue Hills plant.  On April 2, 2009, this
litigation was settled and all claims against CW-Bahamas were dismissed in
exchange for a final progress payment under the construction agreement between
the parties in the amount of $480,000.





Our
affiliate, OC-BVI, is involved in litigation with the BVI
government.  For information relating to this dispute, see “Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations Material Commitments, Expenditures and
Contingencies.”





From time
to time the Company is involved in legal proceedings or claims arising in the
normal course of business. Other than already disclosed, the Company is not
aware of any legal proceedings or claims, either threatened or pending, that
management believes would result in a material adverse effect on the financial
position or results of operations.





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.





PART
II





ITEM 5.
            MARKET FOR REGISTRANT’S COMMON
      EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
      SECURITIES





Market
Information





Our Class
A common stock is listed on the NASDAQ Global Select Market and trades under the
symbol “CWCO.” Listed below, for each quarter of the last two fiscal years, are
the high and low closing prices for our Class A common stock on the NASDAQ
Global Select Market.





High
                  
                  
                  LowFirst
      Quarter 2009
                  
                  $
                  12.71
                  
                  
                  $
                  6.56Second
      Quarter 2009
                  
                  
                  18.18
                  
                  
                  
                  10.30Third
      Quarter 2009
                  
                  
                  19.96
                  
                  
                  
                  14.85Fourth
      Quarter 2009
                  
                  
                  14.29
                  
                  
                  
                  12.63First
      Quarter 2008
                  
                  $
                  28.78
                  
                  
                  $
                  18.00Second
      Quarter 2008
                  
                  
                  24.95
                  
                  
                  
                  15.92Third
      Quarter 2008
                  
                  
                  23.20
                  
                  
                  
                  16.00Fourth
      Quarter 2008
                  
                  
                  15.12
                  
                  
                  
                  8.64





No
trading market exists for our redeemable preferred shares, which are only issued
to, or purchased by, long-term employees of our company and must be held by
these employees for a period of four years before they vest.





On
October 12, 2009, we issued 3,928 shares of common stock to our directors under
the Non-Executive Directors’ Share Plan in consideration for their service on
our Board of Directors and the committees thereof. See “Item 11. Executive
Compensation — Director Compensation.”





On
September 27, 2005, the Company entered into a Second Deed of Amendment (the
“Amendment”) to its Option Deed dated as of August 6, 1997 and as amended on
August 8, 2005 between the Company and American Stock Transfer & Trust
Company (the “Option Deed”). In March 2007, our Board extended the expiration
date of the Option Deed through July 2017.


31


The
Option Deed grants to each holder of a common and preferred share an option to
purchase one one-hundredth of a class B common share at an exercise price of
$100.00, subject to adjustment. If an attempt to take over control of the
Company occurs, each shareholder of the Company would be able to exercise the
option and receive common shares with a value equal to twice the exercise price
of the option. Under circumstances described in the Option Deed, as amended,
instead of receiving common shares, the Company may issue to each shareholder
(i) cash; (ii)other equity or debt securities of the Company; or (iii) the
equity securities of the acquiring company, as the case may be, with a value
equal to twice the exercise price of the option.





Pursuant
to the Amendment to the Option Deed, each holder of a common and redeemable
preferred share has the option to purchase one one-hundredth of a class B common
share at an exercise price of $50.00, subject to adjustment. The Amendment does
not modify the Option Deed in any other material respect.





The
options are attached to each common share and redeemable preferred share, and
presently have no monetary value. The options will not trade separately from the
Company’s shares unless and until they become exercisable. The options, which
expire on July 31, 2017, may be redeemed, at the option of the Company’s Board
of Directors, at a price of CI$.01 per option at any time until ten business
days following the date that a group or person acquires ownership of 20% or more
of the Company’s outstanding common shares.





Our
2,023,850 Bahamian Depository Receipts (“BDRs”) are listed and traded only on
the Bahamian International Stock Exchange (“BISX”). Currently 404,770 shares of
our common stock underlie the BDRs and are held in a custodial account in The
Bahamas. The BDRs are subject to dividend payments, when and if declared, in
proportion to their relative value to our common shares.





Holders





On March
10, 2010, we had 859 holders of record of our common stock.





Dividends





We have
paid dividends to owners of our common shares and redeemable preference shares
since we began declaring dividends in 1985. However, the payment of any future
cash dividends will depend upon our earnings, financial condition, cash flows,
capital requirements and other factors our Board deems relevant in determining
the amount and timing of such dividends.





The Board
of Directors declares and approves all dividends.





Listed
below, for each quarter of the last two fiscal years, is the amount of dividends
declared on our issued and outstanding shares of common stock and redeemable
preferred shares.





Fourth
      Quarter 2009
                    
                    $
                    0.075
                    
                    Per ShareThird
      Quarter 2009
                    
                    
                    0.075
                    
                    Per
      ShareSecond
      Quarter 2009
                    
                    
                    0.065
                    
                    Per
      ShareFirst
      Quarter 2009
                    
                    
                    0.065
                    
                    Per
      ShareFourth
      Quarter 2008
                    
                    $
                    0.065
                    
                    Per
      ShareThird
      Quarter 2008
                    
                    
                    0.065
                    
                    Per
      ShareSecond
      Quarter 2008
                    
                    
                    0.065
                    
                    Per
      ShareFirst
      Quarter 2008
                    
                    
                    0.13
                    
                    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 common stock other than stated
below. There are no exchange control restrictions in the Cayman
Islands.


32


Taxation





The
Cayman Islands presently impose no taxes on profit, income, distribution,
capital gains, or appreciations of our Company and no taxes are currently
imposed in the Cayman Islands on profit, income, capital gains, or appreciations
of the holders of our securities or in the nature of estate duty, inheritance,
or capital transfer tax. There is no income tax treaty between the United States
and the Cayman Islands.





As
discussed in Part I, Item 1, we were subject in the Cayman Islands to a stamp
tax when our shares are transferred. Prior to our common shares becoming quoted
in the United States, we paid this tax on private share transfers. We have never
paid the tax on transfers of our publicly traded shares. Since 1994, we
requested that the Cayman Islands government exempt us from the share transfer
tax. On April 10, 2003, we received notice that the Cayman Islands government
had granted an exemption from taxation for all transfers of our shares. The
government has not, and we believe it is unlikely that government will, seek to
collect this tax on transfers of our publicly traded shares during the period
1994 through April 10, 2003.





The
information required by Item 201(d) of Regulation S-K is provided under Item 12
of this Annual Report.


33




ITEM
6.      SELECTED FINANCIAL
DATA





The table
below contains selected financial data, expressed in U.S. dollars, derived from
our audited consolidated financial statements for each of the years in the
five-year period ended December 31, 2009. Our consolidated financial statements
are prepared in accordance with the accounting principles generally accepted in
the United States (“US-GAAP”). As a result, all financial information presented
herein has been prepared in accordance with US-GAAP. This selected financial
data should be read in conjunction with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and with our consolidated
financial statements and related notes thereto contained elsewhere in this
Annual Report.





Year Ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005Statement
      of Income Data:Revenue
      (1)
                    
                    $
                    58,019,517
                    
                    
                    $
                    65,678,959
                    
                    
                    $
                    54,076,865
                    
                    
                    $
                    42,607,330
                    
                    
                    $
                    28,365,680Net
      Income
                    
                    
                    6,098,571
                    
                    
                    
                    7,209,716
                    
                    
                    
                    11,387,651
                    
                    
                    
                    7,521,126
                    
                    
                    
                    5,514,258Balance
      Sheet Data:Total
      Assets
                    
                    
                    154,475,781
                    
                    
                    
                    154,656,574
                    
                    
                    
                    149,330,884
                    
                    
                    
                    138,961,343
                    
                    
                    
                    88,365,191Long
      Term Debt Obligations (including current portion)
                    
                    
                    21,129,267
                    
                    
                    
                    22,358,340
                    
                    
                    
                    23,500,593
                    
                    
                    
                    24,654,660
                    
                    
                    
                    19,378,212Redeemable
      Preferred Stock
                    
                    
                    10,315
                    
                    
                    
                    10,420
                    
                    
                    
                    12,650
                    
                    
                    
                    14,983
                    
                    
                    
                    19,382Noncontrolling
      interests
                    
                    
                    1,449,030
                    
                    
                    
                    2,020,721
                    
                    
                    
                    1,954,754
                    
                    
                    
                    1,495,755
                    
                    
                    
                    833,695Dividends
      Declared Per Share
                    
                    $
                    0.28
                    
                    
                    $
                    0.325
                    
                    
                    $
                    0.195
                    
                    
                    $
                    0.24
                    
                    
                    $
                    0.24Basic
      Earnings Per Share
                    
                    $
                    0.42
                    
                    
                    $
                    0.50
                    
                    
                    $
                    0.79
                    
                    
                    $
                    0.60
                    
                    
                    $
                    0.47Weighted
      Average Number of Shares
                    
                    
                    14,535,192
                    
                    
                    
                    14,519,847
                    
                    
                    
                    14,404,732
                    
                    
                    
                    12,440,195
                    
                    
                    
                    11,767,573Diluted
      Earnings Per Share
                    
                    $
                    0.42
                    
                    
                    $
                    0.50
                    
                    
                    $
                    0.79
                    
                    
                    $
                    0.59
                    
                    
                    $
                    0.45Weighted
      Average Number of Shares
                    
                    
                    14,588,144
                    
                    
                    
                    14,538,971
                    
                    
                    
                    14,495,364
                    
                    
                    
                    12,737,486
                    
                    
                    
                    12,161,407





(1)   During
the fourth quarter of 2008, we reclassified to revenues certain amounts charged
to our customers for increases in energy costs. Such amounts had previously been
reflected in our consolidated results of operations as a reduction of the energy
component of our cost of revenues. These reclassifications had no impact on
previously reported amounts of gross profit or net income. Revenues amounts
presented above have been revised consistent with this reclassification for all
years presented.





ITEM 7.
            MANAGEMENT’S DISCUSSION AND
      ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS





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.





We intend
to increase revenues by developing new business opportunities both within our
current service areas and in new areas. We expect to maintain operating
efficiencies by continuing to focus on our successful business model and by
properly 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 favorable regulatory
environments.





Our
operations and activities are now conducted at 16 plants in five countries: the
Cayman Islands, The Bahamas, the British Virgin Islands, Belize and Bermuda and
in three business segments: retail, bulk and services. The following table sets
forth the comparative combined production capacity of our retail, bulk and
affiliate operations as of December 31 of each year.





Comparative Operations2009
                                    
                                    
                                    2008Location
                                    
                                    Plants
                                    
                                    
                                    Capacity(1)
                                    
                                    
                                    Location
                                    
                                    Plants
                                    
                                    
                                    Capacity(1)Cayman
      Islands
                                    
                                    
                                    8
                                    
                                    
                                    
                                    10.2
                                    
                                    
                                    Cayman
      Islands
                                    
                                    
                                    6
                                    
                                    
                                    
                                    7.8Bahamas
                                    
                                    
                                    3
                                    
                                    
                                    
                                    10.4
                                    
                                    
                                    Bahamas
                                    
                                    
                                    3
                                    
                                    
                                    
                                    10.4Belize
                                    
                                    
                                    1
                                    
                                    
                                    
                                    0.6
                                    
                                    
                                    Belize
                                    
                                    
                                    1
                                    
                                    
                                    
                                    0.6British
      Virgin Islands
                                    
                                    
                                    3
                                    
                                    
                                    
                                    2.5
                                    
                                    
                                    British
      Virgin Islands
                                    
                                    
                                    3
                                    
                                    
                                    
                                    2.4Bermuda
                                    
                                    
                                    1
                                    
                                    
                                    
                                    0.6
                                    
                                    
                                    Bermuda
                                    
                                    
                                    1
                                    
                                    
                                    
                                    0.6Total
                                    
                                    
                                    16
                                    
                                    
                                    
                                    24.3
                                    
                                    
                                    Total
                                    
                                    
                                    14
                                    
                                    
                                    
                                    21.8


(1)
              In
      millions of U.S. gallons per day.


34




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. Our operations consist of eight reverse
osmosis seawater conversion plants which provide water to approximately 5,000
retail residential and commercial customers within a government licensed area
and bulk water sales to the Water Authority-Cayman. Our pipeline system in the
Cayman Islands covers the Seven Mile Beach and West Bay areas of Grand Cayman
and consists of approximately 71 miles of polyvinyl chloride and high density
polyethylene pipe. During 2009, we supplied approximately 804 million U.S.
gallons (2008: 772 million U.S. gallons) of water to our retail water customers
and 1,108 million U.S. gallons (2008: 1,045 million U.S. gallons) to our bulk
customers in Grand Cayman.





Bahamas





CW-Bahamas
produces potable water from three reverse osmosis seawater conversion plants.
Two of these plants, the Windsor plant and the Blue Hills plant, are located in
New Providence and have a total installed capacity of 10.4 million U.S. gallons
per day. CW-Bahamas supplies water from these plants on a take or pay basis to
the Water and Sewerage Corporation of The Bahamas under long-term build, own and
operate supply agreements. During 2009, we supplied approximately 3.1 billion
U.S. gallons (2008: 3.2 billion U.S. gallons) of water to the Water and Sewerage
Corporation from these plants. CW-Bahamas’ third plant is located in Bimini, has
a capacity of 115,000 U.S. gallons per day, and provides potable water to the
Bimini Sands Resort and to the Bimini Beach Hotel. During 2009, we supplied
approximately 6.1 million U.S. gallons (2008: 6.0 million U.S. gallons) of water
to these customers. We have also sold water intermittently to the WSC from our
Bimini plant when their regular supply was unavailable. During 2009, we supplied
the WSC with 0.5 million U.S. gallons of water from our Bimini
plant.





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
capable of producing 550,000 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 2009, we supplied approximately 152 million
U.S. gallons (2008: 155 million U.S. gallons) of water to our Bulk water
customer in Belize.





British
Virgin Islands





We hold
an equity position in, and shared management of, OC-BVI. This affiliate produces
potable water from two reverse osmosis seawater conversion plants in Tortola,
British Virgin Islands. These plants have a total installed capacity of 2.4
million U.S. gallons per day and provide water to the Department of Water and
Sewerage of the Ministry of Communications and Works of the Government of the
British Virgin Islands. OC-BVI’s third plant, located on the island of Jost van
Dyke, has a capacity of 60,000 U.S. gallons per day and provides potable water
to the Department of Water and Sewerage of the British Virgin Islands
Government. During 2009, OC-BVI supplied approximately 531 million U.S. gallons
(2008: 536 million U.S. gallons) of water to its customer.





Bermuda





In June
2006, we formed a Bermuda-based affiliate, CW-Bermuda with two other
shareholders. We own 40% of the equity interest and voting rights of CW-Bermuda.
CW-Bermuda entered into a contract with the Government of Bermuda for the
design, construction, sale and operation of a desalination plant in two phases,
located on Tynes Bay along the northern coast of Bermuda. The plant was
completed at the end of 2008 and began operating during the second quarter of
2009.  We expect to operate the plant until mid 2011.





We have
entered into a management services agreement with CW-Bermuda for the design,
construction and operation of the Tynes Bay plant, under which we receive fees
for direct services, purchasing activities and proprietary
technology.


35


Critical
Accounting Estimates





The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Our actual results could differ
significantly from such estimates and assumptions.





Certain
of our accounting estimates or assumptions constitute “critical accounting
estimates” for us due to the fact that:





•
            the
      nature of these estimates or assumptions is material due to the levels of
      subjectivity and judgment necessary to account for highly uncertain
      matters or the susceptibility of such matters to change;
    and





•
            the
      impact of the estimates and assumptions on financial condition and results
      of operations is material.





Our
critical accounting estimates relate to (i) the valuation of our equity
investment in our affiliate, OC-BVI; (ii) goodwill and intangible assets; and
(iii) plant construction revenues and costs.





Valuation of Equity Investment in
Affiliate. We account for our investment in OC-BVI under the equity
method of accounting for investments in common stock.   This
method requires recognition of a loss on an equity investment that is other than
temporary, and indicates that a current fair value of an equity investment that
is less than its carrying amount may indicate a loss in the value of the
investment. OC-BVI’s on-going dispute with the BVI government relating to its
Baughers Bay plant may indicate that the current fair value of our investment in
OC-BVI is less than our carrying value for this investment.





As a
quoted market price for OC-BVI’s stock is not available, to test for possible
impairment of our investment in OC-BVI we estimate its fair value by calculating
the expected cash flows from our investment in OC-BVI by (i) identifying various
possible outcomes of the Baughers Bay dispute; (ii) estimating the cash flows
associated with each possible outcome, and (iii) assigning a probability to each
outcome based upon discussions held to date by OC-BVI’s management with the BVI
government and OC-BVI’s legal counsel. The resulting probability weighted sum
represents the expected cash flows, and our best estimate of future cash flows,
to be derived from our investment in OC-BVI.





The
identification of the possible outcomes for the Baughers Bay dispute, the
projections of cash flows for each outcome, and the assignment of relative
probabilities to each outcome all represent significant estimates made by us.
While we have used our best judgment to identify the possible outcomes and
expected cash flows for these outcomes and assign relative probabilities to each
outcome, these estimates are by their nature highly subjective and are also
subject to material change by our management over time based upon additional
information from OC-BVI’s management and legal counsel, a change in the status
of negotiations and/or OC-BVI’s litigation with the BVI government. After
considering the September and October 2009 rulings of the Eastern Supreme Court
of the Caribbean relating to the Baughers Bay dispute, we determined that the
carrying value of our investment in OC-BVI exceeded the estimated fair value for
our investment in OC-BVI by approximately $160,000 as of September 30,
2009 and therefore recognized an impairment loss of this amount on this
investment during the three months ended September 30, 2009.   In
February 2010, the BVI government announced that it had signed a 16 year
contract with Biwater, PLC for the construction and operation of a water plant
with a production capacity of 2.75 million U.S. gallons per day.  This
new plant will provide potable water to the greater Tortola area and we believe
will replace the current production of the Baughers Bay plant.  As a
result of the decision by the BVI government to enter into the agreement with
Biwater PLC, we now believe it unlikely that OC-BVI will derive any significant
future revenues from an operating contract for the Baughers Bay
plant.  Consequently, we determined that an additional impairment loss
of $(4,500,000) was required (and was recorded) during the fourth quarter of
2009 to reduce our investment in OC-BVI to its estimated fair
value.




The
Appellate Court could ultimately overturn the ruling of the Court requiring the
BVI government to pay OC-BVI at the rate of $13.91 per thousand imperial gallons
for water previously supplied.    If this occurs, the actual
cash flows from OC-BVI will vary materially from the expected cash flows we used
in determining OC-BVI’s fair value as of December 31, 2009, and we would be
required to record an additional loss to reduce the carrying value of our
investment in OC-BVI. Such impairment loss would reduce our earnings and could
have a material adverse impact on our results of operations and financial
condition.


36


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.  Generally accepted accounting principles  require
the amortization of intangible assets with estimable useful lives over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment periodically.  We evaluate the possible
impairment of goodwill annually.  Management identifies our 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. We determine the fair value of each reporting unit by
calculating the expected cash flows from each reporting unit and compare the
fair value 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, we are 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,
we compare 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. 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. Based upon our annual tests to date, we have not experienced any
impairment losses on our recorded amounts of goodwill.





Plant construction revenue and cost
of plant construction revenue.We recognize revenue and related costs as
work progresses on fixed price contracts for the construction of desalination
plants to be sold to third parties using the percentage-of-completion method,
which relies on contract revenue and estimates of total expected costs. We
follow this method since we can make reasonably dependable estimates of the
revenue and costs applicable to various stages of a contract. Under the
percentage-of-completion method, we record revenue and recognize profit or loss
as work on the contract progresses. Our engineering personnel estimate total
project costs and profit to be earned on each long term, fixed price contract
prior to commencement of work on the contract and update these estimates as work
on the contract progresses. The cumulative amount of revenue recorded on a
contract at a specified point in time is that percentage of total estimated
revenue that incurred costs to date comprise of estimated total contract costs.
As work progresses, if the actual contract costs exceed estimates, the profit
recognized on revenue from that contract decreases. We recognize the full amount
of any estimated loss on a contract at the time the estimates indicate such a
loss. To date we have not experienced a material adverse variation from our cost
estimates for plants constructed for sale to third parties.





We assume
the risk that the costs associated with constructing the plant may be greater
than we anticipated in preparing our bid. However, the terms of each of the
sales contracts with our customers require us to guarantee the sales price for
the plant at the bid amount. Because we base our contracted sales price in part
on our estimation of future construction costs, the profitability of our plant
sales is dependent on our ability to estimate these costs accurately. The cost
estimates we prepare in connection with the construction of plants to be sold to
third parties are subject to inherent uncertainties. The cost of materials and
construction may increase significantly after we submit our bid for a plant due
to factors beyond our control, which could cause the gross margin for a plant to
be less than we anticipated when the bid was made. The profit margin we
initially expect to generate from a plant sale could be further affected by
other factors, such as hydro-geologic conditions at the plant site that differ
materially from those we believed existed and relied upon when we submitted our
bid.





Quarterly
Results of Operations





The
following table presents unaudited quarterly results of operations for the eight
quarters ended December 31, 2009. We believe that all necessary adjustments,
consisting only of normal recurring adjustments, have been included in the
amounts stated below to present fairly such quarterly information.





Year Ended December 31,
2009First
                                Quarter
                              
                              
                              Second
                                Quarter
                              
                              
                              Third
                                Quarter
                              
                              
                              Fourth
                                QuarterTotal
      revenues
                              
                              $
                              15,864,055
                              
                              
                              $
                              15,454,998
                              
                              
                              $
                              13,526,059
                              
                              
                              $
                              13,174,405Gross
      profit
                              
                              
                              5,980,500
                              
                              
                              
                              7,587,053
                              
                              
                              
                              5,036,068
                              
                              
                              
                              4,395,456Net
      income (loss)
                              
                              
                              2,550,158
                              
                              
                              
                              3,867,616
                              
                              
                              
                              657,900
                              
                              
                              
                              (977,103
                              )Diluted
      earnings per share
                              
                              
                              0.18
                              
                              
                              
                              0.26
                              
                              
                              
                              0.05
                              
                              
                              
                              (0.07
                              )Year Ended December 31,
2008First
                                Quarter
                              
                              
                              Second
                                Quarter
                              
                              
                              Third
                                Quarter
                              
                              
                              Fourth
                                QuarterTotal
      revenues
                              
                              $
                              14,291,562
                              
                              
                              $
                              17,842,585
                              
                              
                              $
                              17,204,593
                              
                              
                              $
                              16,340,219Gross
      profit
                              
                              
                              4,536,058
                              
                              
                              
                              4,907,175
                              
                              
                              
                              4,625,261
                              
                              
                              
                              4,565,349Net
      income
                              
                              
                              1,673,867
                              
                              
                              
                              1,979,623
                              
                              
                              
                              1,780,017
                              
                              
                              
                              1,776,209Diluted
      earnings per share
                              
                              
                              0.12
                              
                              
                              
                              0.14
                              
                              
                              
                              0.12
                              
                              
                              
                              0.12


37





Results
of Operations





The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our audited consolidated financial
statements and accompanying notes included under Part II, Item 8 of this Annual
Report.





Year
Ended December 31, 2009 Compared to Year Ended December 31, 2008





Consolidated
Results





Net
income attributable to controlling interests for the year ended
December  31, 2009 was $6,098,571 ($0.42 per share on a fully-diluted
basis) as compared to $7,209,716 ($0.50 per share on a fully-diluted basis) for
the year ended December 31, 2008. Our results for both of these years were
adversely affected by the losses we recorded for our equity investment in OC-BVI
which amounted to $(5,685,968) and $(2,345,612) for 2009 and 2008,
respectively.





Total
revenues for the years ended December 31, 2009 and 2008 were $58,019,517 and
$65,678,959, respectively.  The decrease in consolidated revenues from
2008 to 2009 reflects lower revenues for our bulk and services segments. Gross
profit for the year ended December 31, 2009 was $22,999,077 or 40% of total
revenues, as compared to $18,633,843 or 28% of total revenues, for the year
ended December 31, 2008. All three segments reported increased gross profits for
2009 as compared to 2008.  For further discussion of revenues and
gross profit for the year ended December 31, 2009, see the “Results by Segment”
analysis that follows.





General
and administrative (“G&A”) expenses on a consolidated basis were $10,101,257
for the year ended December 31, 2009 as compared to $8,789,185 for 2008.
Increases in (i) employee costs of approximately $585,000 attributable to salary
increases, incremental hires, accrued bonuses and stock option compensation;
(ii) professional fees of approximately $63,000; (iii) insurance expenses
of $94,000 due to higher premiums; (iv) bank charges of approximately
$158,000 resulting from our Bahamas subsidiary’s conversion
of  Bahamian dollars to U.S. dollars and the subsequent transfer of
such dollars to other Company bank accounts; and (v) costs incurred of
approximately $90,000 to bid new projects constituted the majority of the
additional G&A expense for 2009. Our G&A expense for 2009 also includes
approximately $183,000 in penalties and interest assessed against our Belize
subsidiary for delinquent business taxes.  These penalties and
interest arose because we were erroneously informed in the past that our Belize
subsidiary was not subject to these taxes.





Interest
income decreased, from $1,393,691 in 2008 to $917,330 in 2009, as a result of a
reduction in the rates of interest earned on the average balances invested in
interest bearing deposit accounts.





See
further discussion of the OC-BVI situation at “Liquidity and Capital Resources —
Material Commitments, Contingencies and Expenditures — OC-BVI Contract Dispute
..”





Results by
Segment





Retail
Segment:





The
retail segment contributed $5,212,180 to our income from operations for the year
ended December 31, 2009, as compared to $4,652,610 for the year ended December
31, 2008.





Revenues
generated by our retail water operations were $23,239,756 and $22,369,806 for
the years ended December 31, 2009 and 2008, respectively.  The volume
of water sold increased by 4% in 2009 from 2008.  This increase in
volume and inflation index related increases in base water rates that went
into effect during the first quarter of 2009 served to offset a decrease of
approximately $1,014,000 in revenues attributable to our pass-through billing of
energy costs to our customers, as energy prices declined significantly from 2008
to 2009.


38


Retail
segment gross profit was $13,427,322 (58% of revenues) and $11,803,059 (53% of
revenues) for the years ended December 31, 2009 and 2008,
respectively.  The retail segment’s gross profit percentage in 2009
benefited from a reduction in certain operating and maintenance costs, lower
energy prices and inflation index related increases in base water rates
that went into effect in the first quarter of 2009.





Consistent with prior periods, we record all non-direct G&A
expenses in our retail business segment and do not allocate any of these
non-direct costs to our other two business segments. Retail G&A expenses for
the year ended December 31, 2009 were $8,215,142, up $1,064,693 from the
$7,150,449 in G&A expenses for the year ended December 31, 2008. Employee
costs for 2009 exceeded those for 2008 by approximately $615,000 due to salary
increases, new hires, accrued bonuses and stock option expense . Costs incurred
in connection with bidding for new projects in 2009 exceeded such costs for 2008
by approximately $90,000 and professional fees for 2009 were approximately
$63,000 higher than for 2008.





Bulk
Segment:





The bulk
segment contributed $4,078,781 and $3,184,107 to our income from operations for
the years ended December 31, 2009 and 2008, respectively.





Bulk
segment revenues in 2009 and 2008 were $25,905,077 and $30,121,536,
respectively. Total gallons of water sold by the bulk segment increased by 2% in
2009 from 2008.  However, revenues from the bulk segment decreased
from 2008 to 2009 due to a reduction in energy costs passed through to our
customers, as diesel and electricity prices were significantly lower in 2009
than in 2008.





Gross
profit for our bulk segment was $5,755,108 and $4,563,704 for the years ended
December 31, 2009 and 2008, respectively. Gross profit as a percentage of bulk
revenues was 22% for 2009 and 15% for 2008. Approximately $778,000 of the
increase from 2008 to 2009 in bulk gross profits is attributable to our Cayman
operations, which benefited from (i) the expiration of the original contract for
the Red Gate plant and the elimination of approximately $400,000 in amortization
expense for the intangible asset associated with this contract; and (ii) the
annual inflation index related increases in base water rates that went into
effect during the first quarter of 2009.  Our Bahamas operations
generated approximately $264,000 more in gross profits in 2009 than 2008 as a
result of improved operating efficiencies for our Windsor operations located in
Nassau, New Providence. We constructed and commissioned new feed water wells and
replaced the reverse osmosis membranes on 50% of our production trains at our
Windsor plant effective September 2008 and replaced the reverse osmosis
membranes on the remaining production trains at the Windsor plant during the
quarter ended June 30, 2009.  These capital expenditures improved the
energy efficiency of the Windsor plant.  In addition, last year we
implemented an improved feed water pretreatment regime at our Blue Hills plant
in Nassau which has reduced electrical power consumption at that plant.  
Our overall bulk segment gross profit percentage for 2009 also benefited
from a reduction in diesel and electricity prices.





Bulk
segment G&A expenses for the year ended December 31, 2009 increased to
$1,676,327 from $1,379,597 for the same period in 2008 primarily as a
result of approximately $183,000 in penalties and interest assessed to our
Belize operations during the first quarter of 2009 relating to delinquent
business taxes (these penalties and interest arose because we were erroneously
informed in the past that our Belize subsidiary was not subject to these
taxes).and an increase in bank charges of approximately $158,000 resulting from
our Bahamas subsidiary’s conversion of  Bahamian dollars to U.S.
dollars and the subsequent transfer of such dollars to other Company bank
accounts





Services
Segment:





The
services segment contributed $3,606,859 and $2,007,941 to our income from
operations for the years ended December 31, 2009 and 2008,
respectively.





Revenues
from services provided in 2009 were $8,874,684 as compared to $13,187,617 in
2008.  Services revenues decreased from 2008 to 2009 due to relatively
lower project construction activity in 2009.  The decline in project
revenues in 2009 was partially offset by fees from our services
contract for the Tynes Bay, Bermuda plant, which commenced during the
second quarter of 2009.


39


The
increase in gross profit for the services segment to $3,816,647 in 2009 from
$2,267,080 in 2008 reflects incremental revenues arising from the commencement
during the second quarter of 2009 of our contract to operate the Tynes Bay,
Bermuda plant and downward adjustments made during the second quarter of 2009 of
our estimated costs to complete the North Side Water Works (NSWW) and Bermuda
plants.  These downward adjustments of estimated costs to complete
increased the percentages of completion to date on these projects, thus we
recorded a cumulative upward adjustment to construction revenues. Both the NSWW
and Bermuda projects were accepted by the customers as of June 30,
2009.





G&A
expenses for the services segment were $209,788 and $259,139 for 2009 and 2008,
respectively.





Year
Ended December 31, 2008 Compared to Year Ended December 31, 2007





Consolidated
Results





Net
income attributable to controlling interests was $7,209,716 ($0.50 per share on
a fully-diluted basis) for the year ended December 31, 2008 as compared to
$11,387,651 ($0.79 per share on a fully-diluted basis) for the year ended
December 31, 2007. The variation in the amount we recognized in our results of
operations relating to our equity investment in our affiliate OC-BVI was the
primary factor for our decline in net income from 2007 to 2008.





Total
revenues for the year ended December 31, 2008 increased to $65,678,959 from
$54,076,865 for the year ended December 31, 2007 due to an increase in bulk
water revenues and revenues from plant construction contracts. Gross profit for
the year ended December 31, 2008 was $18,633,843, or 28% of total revenues, as
compared to $18,684,226, or 35%, for the previous year. For further discussion
of revenues and gross profit for the year ended December 31, 2008, see the
“Results by Segment” analysis that follows.





General
and administrative (“G&A”) expenses were $8,789,185 and $9,478,308 on a
consolidated basis for 2008 and 2007, respectively. During 2008, we changed the
bonus arrangements for our executive management. Consequently, consolidated
compensation expense declined from 2007 to 2008 by approximately $376,000 due to
a reduction of approximately $911,000 in bonuses paid to our Chairman and our
Chief Executive Officer. We also lowered professional fees by approximately
$399,000 from 2007 to 2008 by reducing our use of consultants. Offsetting these
cost reductions was an increase of approximately $166,000 in insurance expense,
reflecting an increase in premiums.





Interest
income for 2008 was $1,393,691, down $518,000 from 2007 due to a decrease in
both the average balance of funds invested and the rates earned on such
balances.





Due to
OC-BVI’s inability to resolve its on-going contractual dispute with the BVI
government relating to its Baughers Bay plant, we changed our policy for
recognizing the results of this affiliate effective January 1, 2008.
Consequently, we reported a loss from our investment in OC-BVI for the year
ended December 31, 2008 of approximately $(2,346,000). For the year ended
December 31, 2007, our equity in the earnings of OC-BVI was approximately
$1,663,000 and we earned approximately $652,000 on our profit sharing agreement
for OC-BVI. See further discussion of the OC-BVI situation at “Liquidity and
Capital Resources — Material Commitments, Contingencies and Expenditures — OC-BVI Contract
Dispute.”





Results by
Segment





Retail Segment:





The
retail segment contributed $4,652,610 to our income from operations in 2008 as
compared to $4,472,237 in 2007.





Revenues
generated by our retail water operations were $22,369,806 and $22,225,765 for
2008 and 2007, respectively. Total U.S. gallons sold by retail operations
decreased by approximately 4% from 2007 to 2008. The increase in retail revenues
for 2008, despite the decrease in volume of water sold, is attributable to
energy cost increases billed to customers which in 2008 exceeded by
approximately $939,000 the comparable amounts billed to customers in
2007.





The
retail segment generated gross profit of $11,803,059 (53% of revenues) in 2008
as compared to $12,294,829 (55% of revenues) in 2007. The slightly lower gross
profit in 2008 results from the decrease in plant utilization.


40


Consistent
with prior periods, we record all non-direct G&A expenses in our retail
business segment and do not allocate any of these non-direct costs to our other
two business segments. Retail G&A expenses for 2008 were $7,150,449, down
$672,143 from 2007. During 2008 we changed the bonus arrangements for our
executive management. Consequently, consolidated compensation expense declined
from 2007 to 2008 by approximately $419,000 due to a reduction of approximately
$911,000 in bonuses paid to our Chairman and our Chief Executive Officer. We
also lowered professional fees by approximately $191,000 from 2007 to 2008 by
reducing our use of consultants.





Bulk Segment:





The bulk
segment contributed $3,184,107 to our income from operations in 2008, as
compared to $2,803,738 in 2007.





Revenues
from our bulk segment for the year ended December 31, 2008 and 2007 were
$30,121,536 and $24,320,392, respectively. Revenues from the bulk segment grew
from 2007 to 2008 due to increased revenues for our operations in the Bahamas
and Grand Cayman of approximately $3,999,000 and $1,527,000, respectively. The
additional revenues in 2008 for our Bahamas operations result from water
produced and invoiced by our Blue Hills plant and from an increase in diesel and
electricity pass-through charges. In 2007, we provided a comparable amount of
water from our Blue Hills plant but did not invoice for the equivalent of 1.2
million U.S. gallons per day for the first six months of 2007 due to our
commitment under our non-revenue water (“NRW”) agreement with the WSC. The
additional revenues in 2008 for our Grand Cayman operations result primarily
from an increase in diesel and electricity pass-through charges.





Gross
profit for our bulk segment was $4,563,704 and $4,241,634 for the year ended
December 31, 2008 and 2007, respectively. Gross profit as a percentage of bulk
revenues was 15% for the year ended December 31, 2008 and 17% for the year ended
December 31, 2007. In 2007, we incurred approximately $427,000 in variable
production costs for NRW we supplied from our Blue Hills plant which were not
incurred in 2008. Our gross profit in 2008 for our bulk segment was adversely
impacted by our Bahamas operations due to additional diesel costs for our
Windsor plant. Our contracts with the WSC allow us to invoice increases in
diesel costs to the WSC if our plants are operating at or better than the
efficiency specified in the contracts. In early 2006, we reconfigured the
Windsor plant in order to mitigate membrane fouling. However, this
reconfiguration resulted in a decrease in the fuel efficiency of the Windsor
plant to a level below that required under our contract with the WSC and as a
result, we could not charge a portion of the Windsor plant’s diesel costs to the
WSC. The impact of this inefficiency was exacerbated by a 70.2% rise in diesel
fuel prices over the first nine months of 2008 as compared to same period of
2007. Consequently, our diesel costs for the Windsor plant for the nine months
ended September 30, 2008 exceeded the amount that could be billed to the WSC by
approximately $638,000. We constructed and commissioned new feed water wells and
replaced the reverse osmosis membranes on two of four of our production trains
effective September 2008. These improvements have allowed us to reverse the
plant reconfiguration, and the results for the fourth quarter of 2008 indicate
that the Windsor plant’s fuel efficiency has improved. However, the gross profit
for our Bahamas operations may continue to be adversely affected by its diesel
costs if these improvements do not maintain the efficiency of the plant at the
minimum required by contract. Our gross profit in 2008 was also adversely
impacted by our Belize operations due to a fixed asset write-off of
approximately $82,000.





Bulk
segment G&A expenses for, 2008 and 2007 were $1,379,597 and $1,437,896
respectively. The reduction in G&A expenses from 2007 to 2008 primarily
reflects a $172,000 reduction in consultant fees.





Services
Segment:





The
services segment contributed $2,007,941 and $1,929,943 to our income from
operations years ended December 31, 2008 and 2007, respectively.





Revenues
from services were $13,187,617 for the year ended December 31, 2008 as compared
to $7,530,708 for the same period in 2007. Services revenues increased from 2007
to 2008 due to higher relative project construction expenditures in
2008.





Gross
profit for the year ended December 31, 2008 increased to $2,267,080 from
$2,147,763 for the same period in 2007. Gross profit in 2008 was reduced by a
write-off of approximately $177,000 relating to a damaged diesel generator that
was leased to our Windsor plant in the Bahamas by our services segment.
Additionally, the gross profit for our services segment no longer benefits from
our former Barbados service contract which expired in June 2007. Our Barbados
gross profit amounted to approximately $114,000 for the year ended December 31,
2007.





G&A
expenses for the services segment were $259,139 and $217,820 for 2008 and 2007,
respectively.


41


LIQUIDITY
AND CAPITAL RESOURCES





Overview





Our
sources of cash are (i) revenues generated from our retail license, plant
operating contracts and management agreements; (ii)  borrowings under
term loans, credit facilities and debt securities; and (iii) sales of equity
securities.





Our cash
flows from operations are affected by tourism, rainfall patterns, weather
conditions (such as hurricanes), changes in our customer base, the timing and
level of rate increases, overall economic conditions and other factors and the
timing of the collection of these revenues from our customers.





Our
ability to access the debt and equity capital markets is impacted by our current
and anticipated financial results, financial condition; existing level of
borrowings; credit rating, and terms of debt agreements (including our
compliance therewith), and by conditions in the debt and equity
markets.





Our
primary uses of cash other than for operations are construction costs and
capital expenditures, including plant expansion and new plant construction.
Other significant uses include payment of dividends, repayment of debt and
pursuit of new business opportunities.





We have
generated approximately $31.3 million in net cash from our operating activities
over the last three years.  As of December 31, 2009, we had cash
balances totaling approximately $44.4 million and working capital of
approximately $50.5 million.  We believe our cash on hand and cash to
be generated from operations will be sufficient to meet our liquidity
requirements for the next 12 months.  These requirements include
approximately $2,100,000 in principal and interest payments on debt, capital
expenditures of approximately $1,378,000, and quarterly dividends, if declared
by our Board.  Our dividend payments amounted to approximately
$3,997,000 in 2009.





We are
not presently aware of anything that would lead us to believe that we will not
have sufficient liquidity to meet our needs for 2011 and
thereafter.





Discussion
of Cash Flows for the Year Ended December 31, 2009





Our cash
and cash equivalents increased to $44,429,190 as of December 31, 2009 from
$36,261,345 as of December 31, 2008.





Cash
Flows from Operating Activities





Operating
activities provided net cash for the year ended December 31, 2009 of
$15,471,092.  This cash provided reflects net income generated for the
year of $6,098,571 as adjusted for (i) various items included in the
determination of net income that do not affect cash flows during the year and
(ii) changes in the other components of working capital. The more significant of
such items for 2009 included depreciation and amortization of approximately $6.4
million, the impairment of the investment in OC-BVI of approximately $4.7
million and a net increase in accounts receivable during the year of
approximately $2.2 million.





Cash
Flows Used in Investing Activities





Our
investing activities used $951,927 in net cash during the year ended December
31, 2009. Approximately $600,000 was used to fund expansion of new desalination
plant at the Abel Castillo Water Works location Harbour, and we has
miscellaneous  other property additions of approximately $1.1
million.  We collected $1,608,567 on our loans receivable.





Cash
Flows Used in Financing Activities





Our
financing activities used $6,351,320 in net cash during the year ended December
31, 2009.  During the year, we made $1,361,267 in scheduled payments
on our debt and paid dividends of $4,999,514.


42


Financial
Position





Accounts
receivable as of December 31, 2009 were approximately $10 million, down almost
$4 million from December 31, 2008. This decrease is due to WSC’s more timely
payment of amounts invoiced by CW-Bahamas.





The
balance of costs and estimated earnings in excess of billings — construction
project of approximately $1.9 million as of December 31, 2009 represents
revenues earned to date on the construction of the Red Gate plant for the Water
Authority — Cayman. This receivable balance is non-current as it will be paid by
the Water Authority — Cayman through the issuance of a long term note to us upon
the commissioning of the plant.  The decrease in this balance from the
prior year is due to the completion and sale of the North Side Water Works plant
to the WAC in 2009.





Borrowings
Outstanding





As of
December 31, 2009, we had total borrowings outstanding aggregating $21,129,267,
all of which consisted of bonds payable.





5.95% Secured
Bonds





In August
2006, we issued $15,771,997 principal amount secured fixed rate bonds in a
private offering and received net proceeds (excluding issuance costs and after
the offering discount) of $14,445,720. These bonds bear interest at a rate of
5.95%, are repayable in quarterly principal and interest installments of
$526,010, and mature in 2016. We have the right to redeem the bonds in full at
any time after August 4, 2009 at a premium of 1.5% of the outstanding principal
and accrued interest on the bonds on the date of redemption. As of December 31,
2009, $11,626,534 in principal amount was outstanding on these secured bonds.
Our obligations under the bonds are secured by fixed and floating charges (i) on
all of our assets, including an equitable charge of all of the shares of Cayman
Water, and (ii) on all of Cayman Water’s assets including its real estate.
Cayman Water has also guaranteed our payment obligations under the
bonds.





The trust
deed for these bonds restricts our ability to enter into new borrowing
agreements or any new guarantees without prior approval of the trustee and
limits our capital expenditures, with the exception of capital expenditures to
be incurred on certain defined projects, to $2,000,000 annually without prior
approval by the trustee. The trust deed also contains financial covenants that
require us to maintain a debt service coverage ratio of not less than 1.25 to 1,
a ratio of long term debt to EBITDA (i.e. earnings before interest, taxes,
depreciation and amortization) for the 12 months preceding the ratio calculation
date not greater than 2.5 to 1 and a ratio of long term debt to equity equal to
or less than 1.5 to 1. As of December 31, 2009, we were in compliance with the
covenants under the trust.





CW-Bahamas
Series A Bonds





In July
2005, CW-Bahamas sold B$10,000,000 Series A bonds to Bahamian citizens and
permanent resident investors in The Bahamas to finance a portion of the
construction cost of its Blue Hills plant. These bonds mature on June 30, 2015
and accrue interest at the annual fixed rate of 7.5%. Interest is payable
quarterly. CW-Bahamas’ option to redeem the bonds in whole or in part without
penalty commenced June 30, 2008. We have guaranteed CW-Bahamas repayment
obligations upon an “event of default” as defined in the guarantee agreement. If
we pay any amounts pursuant to the guarantee, we will be subrogated to all
rights of the bondholders in respect of any such payments. The guarantee is a
general unsecured obligation junior to our other secured obligations. As of
December 31, 2009, B$10,000,000 of the Series A bonds was
outstanding.





CW-Bahamas
Credit Facility





CW-Bahamas
has a credit facility with Scotiabank of Canada that consists of a B$500,000
revolving working capital loan. The obligations under the credit facility are
secured by the assets of CW-Bahamas. Borrowings under the working capital loan
accrue interest at the Nassau Prime rate plus 1.50% per annum. As of December
31, 2009, no amounts were outstanding under this facility.





The
credit facility contains certain covenants applicable to CW-Bahamas, including
restrictions on additional debt, guarantees and sale of assets. The credit
facility limits the payment of dividends by CW-Bahamas to available cash flow
(as defined in the governing loan agreement). All obligations under the credit
facility are repayable on demand.


43


Material
Commitments, Expenditures and Contingencies





OC-BVI
Contract Dispute





In
October 2006, our affiliate OC-BVI notified us that the Ministry of
Communications and Works of the Government of the British Virgin Islands (the
“Ministry”) had asserted a purported right of ownership of the Baughers Bay
plant pursuant to the terms of the Water Supply Agreement between the parties
dated May 1990 (the “1990 Agreement”) and had invited OC-BVI to submit a
proposal for its continued involvement in the production of water at the
Baughers Bay plant in light of the Ministry’s planned assumption of ownership.





Under the
terms of the 1990 Agreement, upon the expiration of the initial seven year term
in May 1999, the agreement would automatically be extended for another seven
year term unless the Ministry provided notice, at least eight months prior to
such expiration, of its decision to purchase the plant from OC-BVI for
approximately $1.42 million.





In
correspondence between the parties from late 1998 through early 2000, the
Ministry indicated that the BVI government intended to purchase the plant but
would be amenable to negotiating a new water supply agreement, and that it
considered the 1990 Agreement to be in force on a monthly basis until
negotiations between the BVI government and OC-BVI were concluded. Occasional
discussions were held between the parties since 2000 without resolution of the
matter. OC-BVI has continued to supply water to the Ministry and expended
approximately $4.7 million between 1995 and 2003 to significantly expand the
production capacity of the plant beyond that contemplated in the 1990
Agreement.





OC-BVI
submitted a proposal to the Ministry in late 2006 to continue to supply water
from the Baughers Bay plant.  The Ministry held discussions with
OC-BVI regarding a new contract but did not formally respond to OC-BVI’s
proposal.  Early in 2007, the Ministry unilaterally took the position
that until such time as a new agreement was reached on the ownership of the
plant and the price for the water produced by the plant, the Ministry would only
pay that amount of OC-BVI’s billings that the Ministry purported constituted
OC-BVI’s costs of producing the water. OC-BVI responded to the Ministry that the
amount the Ministry proposed to pay was significantly less than OC-BVI’s
production costs. Payments made by the Ministry to OC-BVI since the Ministry’s
assumption of this reduced price have been sporadic.  On November 15,
2007, OC-BVI issued a demand letter to the BVI government for approximately $6.2
million representing amounts that OC-BVI claimed were due by the BVI government
for water sold and delivered plus interest and legal fees. In response to
OC-BVI’s demand for payment, the BVI government issued a letter dated November
19, 2007 that reasserted its claim that ownership of the Baughers Bay plant has
passed to the BVI government and rejected OC-BVI’s claim for
payment.  On November 22, 2007, OC-BVI’s management was informed that
the BVI government had filed a lawsuit with the Eastern Caribbean Supreme Court
(the “Court”) seeking ownership of the Baughers Bay plant.  OC-BVI
counterclaimed that it was entitled to continued possession and operation of the
Baughers Bay plant until the BVI government paid OC-BVI approximately $4.7
million, which it believes represents the value of the Baughers Bay plant at its
present expanded production capacity. OC-BVI took the legal position that since
the BVI government never paid the $1.42 million to purchase the Baughers Bay
plant, the 1990 agreement terminated on May 31, 1999, which was eight months
after the date that the Ministry provided written notice of its intention to
purchase the plant.





On July
4, 2008, OC-BVI filed a claim with the Court seeking recovery of $7,806,629,
representing amounts owed to OC-BVI for water sold and delivered to the BVI
government through May 31, 2008, $842,188 for interest accrued on amounts owed
as of May 31, 2008, and future interest and costs.  This claim was
amended and increased on April 22, 2009 to $13,773,954 for amounts owed for
water delivered through March 31, 2009 plus accrued interest of $2,537,334 on
amounts owed as of March 31, 2009 plus future interest and costs.  The
$13,773,954 amount represented amounts billed at the contract prices in effect
before the BVI government asserted its purported right of ownership of the
plant.





The Court
held a three-day trial from July 22 through July 24, 2009 to address both the
Baughers Bay ownership issue and OC-BVI’s claim for payment of amounts owed for
water sold and delivered to the BVI government.  On September 17,
2009, the Court issued a preliminary ruling with respect to the litigation
between the BVI government and OC-BVI.  The Court determined that the
BVI government was entitled to immediate possession of the Baughers Bay plant
and dismissed OC-BVI’s claim for compensation of approximately $4.7 million for
of expenditures made to expand the production capacity of the
plant.  As a result of this determination by the Court, OC-BVI
recorded an impairment loss of approximately $2.1 million during the three
months ended September 30, 2009 for fixed assets associated with the Baughers
Bay plant.  However, the Court determined that OC-BVI was entitled to
full payment of water invoices issued up to December 20, 2007, which had been
calculated under the terms of the original 1990 Agreement, and ordered the BVI
government to make an immediate interim payment of $5.0 million to OC-BVI for
amounts owed to OC-BVI.  The Court deferred deciding the entire
dispute between the parties until it could conduct a hearing to determine the
reasonable rate for water produced by OC-BVI for the period from December 20,
2007 to the present.


44


After
conducting hearings on October 12 and 16, 2009, on October 28, 2009, the Court
ordered the BVI government to pay OC-BVI at the rate of $13.91 per thousand
imperial gallons for water produced by OC-BVI from December 20, 2007 to present,
which amounts to a total recovery for OC-BVI of $10.3 million as of September
30, 2009.  The BVI government made a payment of $2.0 million to OC-BVI
under the Court order during the fourth quarter of 2009.





On
October 28, 2009, OC-BVI filed an appeal with the Eastern Caribbean Court of
Appeals (the “Appellate Court”) asking the Appellate Court to review the
September 17, 2009 ruling by the Eastern Caribbean Supreme Court as it relates
to OC-BVI’s claim for compensation for expenditures made to expand the
production capacity of the Baughers Bay plant.





On
October 29, 2009, the BVI government filed an appeal with the Appellate Court
seeking the Appellate Court’s review of the September 17, 2009 ruling of the
Court that the BVI government pay OC-BVI the reasonable rate for water produced
by OC-BVI for the period from December 20, 2007 to the present.  The
BVI government is requesting a ruling from the Appellate Court that the BVI
government should only pay OC-BVI the actual cost of water produced at the
plant.





During
2007, OC-BVI completed, for a total cost of approximately $8.2 million, the
construction of a 700,000 U.S. gallons per day desalination plant located at Bar
Bay, Tortola (the “Bar Bay plant”). We provided OC-BVI with a $3.0 million loan
to fund part of this plant’s construction costs, of which $2.0 million remained
outstanding as of June 30, 2009.  Principal on this loan was payable
in quarterly installments of $125,000 with a final balloon payment of $2.0
million due on August 31, 2009 and interest on the loan was due quarterly at the
rate of LIBOR plus 3.5%. In August 2009, we amended the terms of this loan with
OC-BVI, increasing its balance to $2,800,000 by converting $800,000 in trade
receivables due to us from OC-BVI.   Under the terms of this
amendment, the interest rate on the loan was increased to the rate of LIBOR plus
5.5% and the maturity date for the final balloon payment extended to August 31,
2011. The terms for this loan were amended again in January 2010 to
increase the interest rate to LIBOR plus 7.5% as a result of OC-BVI’s inability
to comply with the loan covenant requiring OC-BVI to obtain a new contract for
Baughers Bay by December 31, 2009.  On December 19, 2008, OC-BVI and the
BVI government executed a binding term sheet for the purchase of water by the
BVI government from OC-BVI’s Bar Bay plant. The parties intended the binding
term sheet to govern the terms of sale of water by OC-BVI to the BVI government
until the parties executed a definitive contract. On March 4, 2010, OC-BVI and
the BVI government executed the definitive contract for the Bar Bay plant (the
“Bar Bay Agreement”).  Under the terms of the Bar Bay Agreement,
OC-BVI will deliver up to 600,000 U.S. gallons of water per day to the BVI
government from the Bar Bay plant and the BVI government will be obligated to
pay for this water at a specified price as adjusted by a monthly energy factor.
Prior to completion of the construction of the first phase of certain additional
facilities by OC-BVI in August 2009, the BVI government was not obligated to
purchase any minimum volumes of water from OC-BVI. However, since completion of
this first phase the BVI government has been obligated to purchase at least
600,000 gallons of water per day from the plant. The first phase of such
facilities construction involved the installation of water pipes from the plant
to a BVI government-owned reservoir site and from this site to the BVI
government’s piped water distribution system.  A second phase of
construction requires OC-BVI to complete a storage reservoir on the BVI
government site within twelve months of the signing of the Bar Bay agreement.
The Bar Bay Agreement includes a seven-year extension option exercisable by the
BVI government.


45


Under
U.S. generally accepted accounting principles revenue is generally realized or
realizable and earned when all of the following criteria are met:





•
            Persuasive
      evidence of an arrangement exists.





•
            Delivery
      has occurred or services have been
rendered.





•
            The
      seller’s price to the buyer is fixed and determinable;
  and





•
            Collectability
      is reasonably assured.





Effective
January 1, 2008, OC-BVI changed its policy for the recording of its revenues
from the Baughers Bay plant from the accrual to the equivalent of the cash
method due to an inability to meet all of the above revenue recognition
criteria.  As a result of this adjustment to OC-BVI’s revenues, we
recorded losses from our equity in OC-BVI’s results of operations for all fiscal
quarters of 2008 and for the first three quarters of
2009.    Any cash payments made by the BVI government on
Baughers Bay related invoices were applied by OC-BVI to the remaining balance of
outstanding accounts receivable that arose from billings for periods prior to
and including December 2007 and thus were not recognized as
revenues.  Sufficient payments were received from the BVI government
during the three months ended September 30, 2009 to repay the remaining accounts
receivable balances relating to period prior to December 31,
2007.  OC-BVI continues to apply the equivalent of the cash method
with respect to the recognition of revenues from Baughers
Bay.  Consequently, OC-BVI will not recognize as revenues any
amounts to be paid to OC-BVI as a result of the Court ruling until such
amounts are paid by the BVI government. The BVI government made a $2
million payment on the Court award during the fourth quarter of
2009.  OC-BVI also applied the equivalent of the cash basis of
accounting for revenue recognition for its Bar Bay plant until such time as the
Bar Bay Agreement was signed.





In
February 2010 the BVI government announced that it had signed a 16 year contract
with Biwater, PLC for the construction and operation of a water plant with a
production capacity of 2.75 million U.S. gallons per day.  This new
plant will provide potable water to the greater Tortola area and we believe will
replace the current production of the Baughers Bay plant.





We
account for our investment in OC-BVI in accordance with the equity method of
accounting for investments in common stock. This method requires recognition of
a loss on an equity investment that is other than temporary, and indicates that
a current fair value of an equity investment that is less than its carrying
amount may indicate a loss in the value of the investment. To test for possible
impairment of our investment in OC-BVI, we estimate its fair value as of the end
of each fiscal quarter. In making this estimate, we calculate the expected cash
flows from our investment in OC-BVI by (i) identifying various possible outcomes
of the Baughers Bay dispute and negotiations for a definitive contract on the
new Bar Bay plant; (ii) estimating the cash flows associated with each possible
outcome, and (iii) assigning a probability to each outcome based upon
discussions held to date by OC-BVI’s management with the BVI government and
OC-BVI’s legal counsel. The resulting probability-weighted sum represents the
expected cash flows, and our best estimate of future cash flows, to be derived
from our investment in OC-BVI. After considering the September and October 2009
rulings of the Court, we determined that the carrying value of our investment in
OC-BVI exceeded the estimated fair value for our investment in OC-BVI by
approximately $160,000 as of September 30, 2009 and therefore recognized an
impairment loss of this amount on this investment during the three months ended
September 30, 2009.   As a result of the decision by the BVI
government to enter into the agreement with Biwater, we now believe it unlikely
that OC-BVI will derive any significant future revenues from an operating
contract for the Baughers Bay plant.  Consequently, we determined that
an additional impairment loss of $(4,500,000) was required ( and was recorded)
during the fourth quarter of 2009 to reduce our investment in OC-BVI to its
estimated fair value.




The
Appellate Court could ultimately overturn the ruling of the Court requiring the
BVI government to pay OC-BVI at the rate of $13.91 per thousand imperial gallons
for water previously supplied.    If this occurs the actual
cash flows from OC-BVI will vary materially from the expected cash flows we used
in determining OC-BVI’s fair value as of December 31, 2009 and we would be
required to record an additional impairment loss to reduce the carrying value of
our investment in OC-BVI. Such impairment loss would reduce our earnings and
could have a material adverse impact on our results of operations and financial
condition.




The
impairment losses we recorded in 2009 for our investment in OC-BVI reduced our
earnings and adversely affected our financial condition, but have no impact on
our liquidity or cash flows. The BVI
government has announced their intention to seek an interim one year contract
with OC-BVI for the operation of the Baughers Bay plant, but OC-BVI may not be
willing to enter into such a contract and may at any time elect to cease
operating the Baughers Bay plant.   While OC-BVI has continued to
operate the Baughers Bay plant through the date of this filing, the BVI
government has paid OC-BVI only $2 million of the $10.3 million awarded by the
Court and has continued to pay OC-BVI for each thousand gallons supplied from
Baughers Bay at the rate of $6.88, rather than at the $13.91 rate deemed
equitable by the Court. OC-BVI continues to use the cash method for recognizing
any revenues from the Baughers Bay plant.
 
 While
OC-BVI expects the contract for the operation of its Bar Bay plant to be
profitable, it may continue to report net losses (of which we will recognize
43%) during 2010 to the extent that (1) it elects to continue to operate the
Baughers Bay plant and (2) payments received from BVI government are
insufficient to cover its operating costs. We do not anticipate that our
investment in OC-BVI will adversely impact our liquidity in 2010.


46





Material
Expenditures and Commitments





The
following table summarizes our contractual obligations as of December 31,
2009:





Total
                      
                      
                      2010
                      
                      
                      
                      2011-2013
                      
                      
                      
                      2014-2016
                      
                      
                      2017
      and
                        ThereafterSecured
      5.95% bonds (1)(2)
                      
                      $
                      14,202,269
                      
                      
                      $
                      2,104,040
                      
                      
                      $
                      6,312,120
                      
                      
                      $
                      5,786,110
                      
                      
                      $
                      -Series
      A bonds (1)
                      
                      
                      14,125,000
                      
                      
                      
                      750,000
                      
                      
                      
                      2,250,000
                      
                      
                      
                      11,125,000
                      
                      
                      
                      -Employment
      agreements
                      
                      
                      1,529,850
                      
                      
                      
                      1,141,650
                      
                      
                      
                      388,200
                      
                      
                      
                      -
                      
                      
                      
                      -Operating
      leases
                      
                      
                      386,589
                      
                      
                      
                      314,634
                      
                      
                      
                      71,955
                      
                      
                      
                      -
                      
                      
                      
                      -Other
                      
                      
                      306,810
                      
                      
                      
                      276,915
                      
                      
                      
                      60,000
                      
                      
                      
                      -
                      
                      
                      
                      50,000








(1)
            Includes
      interest costs to be incurred.





(2)
            Secured
      5.95% bonds are shown gross of
discount.





In
addition to the commitments in the table above, we estimate the costs as of
December 31, 2009 to complete the renovation of the Red Gate Road plant in Grand
Cayman to be approximately $1.3 million. We project these costs will all be
incurred in 2010.





CW-Bahamas
Liquidity





As of
December 31, 2009, CW-Bahamas was due approximately $5.4 million from the WSC.
We have been informed previously by representatives of the Bahamas government
that the delay in paying our accounts receivables is due to operating issues
within the WSC, that the delay does not reflect any type of dispute with us with
respect to the amounts owed, and that the amounts will ultimately be paid in
full. We have been informed by these representatives that monthly payments to
CW-Bahamas will continue from April 2010 through June 2010 in sufficient amounts
to meet current invoices and  reduce the amount of the delinquent
receivables.  Based upon these communications, we believe that the
accounts receivable from the WSC are fully collectible and therefore have not
provided any allowance for possible non-payment of these receivables as of
December 31, 2009.





Transfers
of  U.S. dollars from CW-Bahamas to our other subsidiaries requires
authorization in advance from the Central Bank of the Bahamas.





CW-Bahamas
Performance Bonds





We have
two contracts, one for our Windsor plant and one for our Blue Hills plant, to
supply water to the WSC. Each contract requires us to guarantee delivery of a
minimum quantity of water per week. If we do not meet this minimum, we are
required to pay the WSC for the difference between the minimum and actual
gallons delivered at a per gallon rate equal to the price per gallon that WSC is
currently paying us under the contract. The Windsor and Blue Hills contracts
expire in 2013 and 2026, respectively and require us to deliver 14.0 million
imperial gallons and 28.0 million imperial gallons, respectively, of water each
week. We are required to provide the WSC with performance and operating
guarantees, in the form of bank-issued letters of credit, to secure any payments
we may be required to make under the minimum delivery requirements of these
contracts On August 1, 2009, a performance bond with the Royal Bank of Canada in
Nassau, Bahamas in the amount of $1,910,775 for the Windsor plant expired and
was not subsequently replaced.  We expect to obtain performance bonds
for the Windsor and Blue Hills plants once CW-Bahamas has received payment of
its delinquent accounts receivable from the WSC.


47


Dividends





On
January 31, 2009, we paid a dividend of $0.065 to shareholders of record on
January 1, 2009.





On April
30, 2009, we paid a dividend of $0.065 to shareholders of record on April 1,
2009.





On July
31, 2009, we paid a dividend of $0.065 to shareholders of record on July 1,
2009.





On
October 31, 2009, we paid a dividend of $0.075 to shareholders of record on
October 1, 2009.





On
November 24, 2009, our Board declared a dividend of $0.075 payable on January
31, 2010 to shareholders of record on January 1, 2010.





We have
paid dividends to owners of our common shares and redeemable preference shares
since we began declaring dividends in 1985. Our payment of any future cash
dividends will depend upon our earnings, financial condition, cash flows,
capital requirements and other factors our Board deems relevant in determining
the amount and timing of such dividends.





Dividend Reinvestment and Common
Stock Purchase Plan.





This
program is available to our shareholders, who may reinvest all or a portion of
their common cash dividends into shares of common stock at prevailing market
prices and may also invest optional cash payments to purchase additional shares
at prevailing market prices as part of this program.





Impact
of Inflation





Under the
terms of our Cayman Islands license and our water sales agreements in Belize,
Bahamas and the British Virgin Islands, our water rates are automatically
adjusted for inflation on an annual basis, subject to temporary exceptions. We,
therefore, believe that the impact of inflation on our gross profit, measured in
consistent dollars, will not be material. However, significant increases in
items such as fuel and energy costs could create additional credit risks for us,
as our customers’ ability to pay our invoices could be adversely affected by
such increases.





ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK





Credit
Risk





We are
not exposed to significant credit risk on retail customer accounts in the Cayman
Islands, Bimini or the Bahamas, as our policy is to cease supply of water to
customers whose accounts are more than 45 days overdue. Our primary exposure to
credit risk is from accounts receivable arising from bulk water sales to the
governments of Belize, The Bahamas, The British Virgin Islands, and the Cayman
Islands.





As of
December 31, 2009, we had approximately $12.1 million in loans receivable due
from the Water Authority-Cayman and $2,675,000 in a loan receivable due from our
affiliate OC-BVI.  Both of these loans were current as to scheduled
principal and interest payments as of December 31, 2009.





Interest
Rate Risk





We are
not exposed to significant interest rate risk as the annual interest rates on
our Series A bonds and 5.95% bonds are fixed at 7.5% and 5.95%,
respectively.





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 operations could be adversely affected.


48


ITEM
8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA





PageCONSOLIDATED
      WATER CO. LTD.INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTSReport
      of Independent Registered Public Accounting Firm
              50Consolidated
      Balance Sheets as of December 31, 2009 and 2008
              51Consolidated
      Statements of Income for the Years Ended December 31, 2009, 2008 and
      2007
              52Consolidated
      Statements of Stockholders’ Equity for the Years Ended December 31, 2009,
      2008 and 2007
              53Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and
      2007
              54Notes
      to Consolidated Financial Statements
              55Schedule
      II, Valuation and Qualifying Accounts, is omitted because the information
      is included in the financial statements and notes.OCEAN
      CONVERSION (BVI) LTDINDEX
      TO CONSOLIDATED FINANCIAL STATEMENTSReport
      of Independent Registered Public Accounting Firm
              75Consolidated
      Balance Sheets as of December 31, 2009 and 2008
              76Consolidated
      Statements of Operations for the Years Ended December 31, 2009, 2008 and
      2007
              77Consolidated
      Statements of Stockholders’ Equity for the Years Ended December 31, 2009,
      2008 and 2007
              78Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and
      2007
              79Notes
      to Consolidated Financial Statements
              80


49


REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM





Board of
Directors and Stockholders


Consolidated
Water Co. Ltd.





We have
audited the accompanying consolidated balance sheets of Consolidated Water Co.
Ltd. as of December 31, 2009 and 2008, and the related consolidated statements
of income, stockholders’ equity and cash flows for each of the years in the
three-year period ended December 31, 2009. We also have audited Consolidated
Water Co. Ltd.’s internal control over financial reporting as of December 31,
2009, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Consolidated Water Co. Ltd.’s management is responsible for these
financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management’s Annual Report on
Internal Control Over Financial Reporting. Our responsibility is to express an
opinion on these financial statements and an opinion on the Company’s internal
control over financial reporting based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





As
discussed in Note 24 to the consolidated financial statements, the Company
adopted SFAS No. 160, Non-controlling Interests in
Consolidated Financial
Statements- an amendment of ARB No. 51, Consolidated Financial
Statements (incorporated into ASC Topic 810, Consolidation), effective January 2009.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Consolidated Water Co.
Ltd. as of December 31, 2009 and 2008, and the consolidated results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2009 in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, Consolidated
Water Co. Ltd. maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2009, based on criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).





/s/
MarcumRachlin, a division of Marcum LLP





Fort
Lauderdale, Florida


March 16,
2010


50


CONSOLIDATED
WATER CO. LTD.





CONSOLIDATED
BALANCE SHEETS





(Expressed
in United States dollars)





December 31,
                                
                                
                                December 31,2009
                                
                                
                                2008ASSETSCurrent
      assetsCash
      and cash equivalents
                                
                                $
                                44,429,190
                                
                                
                                $
                                36,261,345Accounts
      receivable, net
                                
                                
                                9,980,928
                                
                                
                                
                                13,911,312Inventory
                                
                                
                                1,832,564
                                
                                
                                
                                1,617,484Prepaid
      expenses and other current assets
                                
                                
                                1,689,874
                                
                                
                                
                                1,444,445Current
      portion of loans receivable
                                
                                
                                1,216,098
                                
                                
                                
                                768,803Total
      current assets
                                
                                
                                59,148,654
                                
                                
                                
                                54,003,389Property,
      plant and equipment, net
                                
                                
                                60,245,525
                                
                                
                                
                                58,937,980Construction
      in progress
                                
                                
                                1,000,882
                                
                                
                                
                                6,157,958Costs
      and estimated earnings in excess of billings - construction
      project
                                
                                
                                1,872,552
                                
                                
                                
                                7,377,554Inventory
      non-current
                                
                                
                                3,352,054
                                
                                
                                
                                2,971,949Loans
      receivable
                                
                                
                                10,875,848
                                
                                
                                
                                1,560,420Investment
      in affiliate
                                
                                
                                9,157,995
                                
                                
                                
                                14,371,312Intangible
      assets, net
                                
                                
                                1,919,656
                                
                                
                                
                                2,144,162Goodwill
                                
                                
                                3,587,754
                                
                                
                                
                                3,587,754Other
      assets
                                
                                
                                3,314,861
                                
                                
                                
                                3,544,096Total
      assets
                                
                                $
                                154,475,781
                                
                                
                                $
                                154,656,574LIABILITIES
      AND EQUITYCurrent
      liabilitiesAccounts
      payable and other current liabilities
                                
                                $
                                6,187,606
                                
                                
                                $
                                7,310,327Dividends
      payable
                                
                                
                                1,152,702
                                
                                
                                
                                1,006,414Current
      portion of long term debt
                                
                                
                                1,322,483
                                
                                
                                
                                1,229,071Total
      current liabilities
                                
                                
                                8,662,791
                                
                                
                                
                                9,545,812Long
      term debt
                                
                                
                                19,806,784
                                
                                
                                
                                21,129,269Other
      liabilities
                                
                                
                                465,408
                                
                                
                                
                                430,717Total
      liabilities
                                
                                
                                28,934,983
                                
                                
                                
                                31,105,798EquityConsolidated
      Water Co. Ltd. stockholders’ equityRedeemable
      preferred stock, $0.60 par value. Authorized 200,000
    shares;issued
      and outstanding 17,192 and 17,366 shares, respectively
                                
                                
                                10,315
                                
                                
                                
                                10,420Class
      A common stock, $0.60 par value. Authorized 24,655,000
    shares;issued
      and outstanding 14,541,878 and 14,529,360 shares,
    respectively
                                
                                
                                8,725,127
                                
                                
                                
                                8,717,616Class
      B common stock, $0.60 par value. Authorized 145,000
shares;none
      issued or outstanding
                                
                                
                                -
                                
                                
                                
                                -Additional
      paid-in capital
                                
                                
                                80,990,686
                                
                                
                                
                                80,461,942Retained
      earnings
                                
                                
                                34,365,640
                                
                                
                                
                                32,340,077Total
      Consolidated Water Co. Ltd. stockholders’ equity
                                
                                
                                124,091,768
                                
                                
                                
                                121,530,055Noncontrolling
      interests
                                
                                
                                1,449,030
                                
                                
                                
                                2,020,721Total
      equity
                                
                                
                                125,540,798
                                
                                
                                
                                123,550,776Total
      liabilities and equity
                                
                                $
                                154,475,781
                                
                                
                                $
                                154,656,574





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


51


CONSOLIDATED
WATER CO. LTD.





CONSOLIDATED
STATEMENTS OF INCOME





(Expressed
in United States dollars)


Year
      Ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Retail
      water revenues
                  
                  $
                  23,239,756
                  
                  
                  $
                  22,369,806
                  
                  
                  $
                  22,225,765Bulk
      water revenues
                  
                  
                  25,905,077
                  
                  
                  
                  30,121,536
                  
                  
                  
                  24,320,392Services
      revenues
                  
                  
                  8,874,684
                  
                  
                  
                  13,187,617
                  
                  
                  
                  7,530,708Total
      revenues
                  
                  
                  58,019,517
                  
                  
                  
                  65,678,959
                  
                  
                  
                  54,076,865Cost
      of retail revenues
                  
                  
                  9,812,434
                  
                  
                  
                  10,566,747
                  
                  
                  
                  9,930,936Cost
      of bulk revenues
                  
                  
                  20,149,969
                  
                  
                  
                  25,557,832
                  
                  
                  
                  20,078,758Cost
      of services revenues
                  
                  
                  5,058,037
                  
                  
                  
                  10,920,537
                  
                  
                  
                  5,382,945Total
      cost of revenues
                  
                  
                  35,020,440
                  
                  
                  
                  47,045,116
                  
                  
                  
                  35,392,639Gross
      profit
                  
                  
                  22,999,077
                  
                  
                  
                  18,633,843
                  
                  
                  
                  18,684,226General
      and administrative expenses
                  
                  
                  10,101,257
                  
                  
                  
                  8,789,185
                  
                  
                  
                  9,478,308Income
      from operations
                  
                  
                  12,897,820
                  
                  
                  
                  9,844,658
                  
                  
                  
                  9,205,918Other
      income (expense):Interest
      income
                  
                  
                  917,330
                  
                  
                  
                  1,393,691
                  
                  
                  
                  1,911,303Interest
      expense
                  
                  
                  (1,698,084
                  )
                  
                  
                  (1,755,969
                  )
                  
                  
                  (1,856,277
                  )Other
      income
                  
                  
                  168,584
                  
                  
                  
                  138,915
                  
                  
                  
                  263,912Equity
      in earnings (loss) of affiliate
                  
                  
                  (1,025,968
                  )
                  
                  
                  (2,345,612
                  )
                  
                  
                  2,314,594Impairment
      of investment in affiliate
                  
                  
                  (4,660,000
                  )
                  
                  
                  -
                  
                  
                  
                  -Other
      income (expense), net
                  
                  
                  (6,298,138
                  )
                  
                  
                  (2,568,975
                  )
                  
                  
                  2,633,532Net
      income
                  
                  
                  6,599,682
                  
                  
                  
                  7,275,683
                  
                  
                  
                  11,839,450Income
      attributable to non-controlling interests
                  
                  
                  501,111
                  
                  
                  
                  65,967
                  
                  
                  
                  451,799Net
      income attributable to Consolidated Water Co. Ltd.
      stockholders
                  
                  $
                  6,098,571
                  
                  
                  $
                  7,209,716
                  
                  
                  $
                  11,387,651Basic
      earnings per common share attributable to Consolidated Water Co.
      Ltd.common
      stockholders
                  
                  $
                  0.42
                  
                  
                  $
                  0.50
                  
                  
                  $
                  0.79Diluted
      earnings per common share attributable to Consolidated Water Co.
      Ltd.common
      stockholders
                  
                  $
                  0.42
                  
                  
                  $
                  0.50
                  
                  
                  $
                  0.79Dividends
      declared per common share
                  
                  $
                  0.28
                  
                  
                  $
                  0.325
                  
                  
                  $
                  0.195Weighted
      average number of common shares used in the determination
    of:Basic
      earnings per share
                  
                  
                  14,535,192
                  
                  
                  
                  14,519,847
                  
                  
                  
                  14,404,732Diluted
      earnings per share
                  
                  
                  14,588,144
                  
                  
                  
                  14,538,971
                  
                  
                  
                  14,495,364





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


52




CONSOLIDATED
WATER CO. LTD.





CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY





(Expressed
in United States dollars)





Redeemable
                        preferred
      stock
                      
                      
                      Common
      stock
                      
                      
                      Additional
                        paid-in
                      
                      
                      Retained
                      
                      
                      Non-controlling
                      
                      
                      Total
                        stockholders’Shares
                      
                      
                      Dollars
                      
                      
                      Shares
                      
                      
                      Dollars
                      
                      
                      capital
                      
                      
                      earnings
                      
                      
                      interest
                      
                      
                      equityBalance
      as of December 31, 2006
                      
                      
                      24,971
                      
                      
                      $
                      14,983
                      
                      
                      
                      14,132,860
                      
                      
                      $
                      8,479,716
                      
                      
                      $
                      76,071,710
                      
                      
                      $
                      21,278,246
                      
                      
                      $
                      1,495,755
                      
                      
                      $
                      107,340,410Conversion
      of preferred shares
                      
                      
                      (5,698
                      )
                      
                      
                      (3,418
                      )
                      
                      
                      5,698
                      
                      
                      
                      3,418
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Issue
      of share capital
                      
                      
                      1,809
                      
                      
                      
                      1,085
                      
                      
                      
                      368,928
                      
                      
                      
                      221,358
                      
                      
                      
                      3,666,117
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      3,888,560Net
      income
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      11,387,651
                      
                      
                      
                      451,799
                      
                      
                      
                      11,839,450Dividends
      declared
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (2,812,177
                      )
                      
                      
                      —
                      
                      
                      
                      (2,812,177
                      )Issue
      of options
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      33,266
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      33,266Capital
      contributions
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      7,200
                      
                      
                      
                      7,200Balance
      as of December 31, 2007
                      
                      
                      21,082
                      
                      
                      
                      12,650
                      
                      
                      
                      14,507,486
                      
                      
                      
                      8,704,492
                      
                      
                      
                      79,771,093
                      
                      
                      
                      29,853,720
                      
                      
                      
                      1,954,754
                      
                      
                      
                      120,296,709Issue
      of share capital
                      
                      
                      1,735
                      
                      
                      
                      1,041
                      
                      
                      
                      16,423
                      
                      
                      
                      9,853
                      
                      
                      
                      447,995
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      458,889Conversion
      of preferred shares
                      
                      
                      (5,451
                      )
                      
                      
                      (3,271
                      )
                      
                      
                      5,451
                      
                      
                      
                      3,271
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Net
      income
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      7,209,716
                      
                      
                      
                      65,967
                      
                      
                      
                      7,275,683Dividends
      declared
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (4,723,359
                      )
                      
                      
                      —
                      
                      
                      
                      (4,723,359
                      )Issue
      of options
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      242,854
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      242,854Balance
      as of December 31, 2008
                      
                      
                      17,366
                      
                      
                      
                      10,420
                      
                      
                      
                      14,529,360
                      
                      
                      
                      8,717,616
                      
                      
                      
                      80,461,942
                      
                      
                      
                      32,340,077
                      
                      
                      
                      2,020,721
                      
                      
                      
                      123,550,776Issue
      of share capital
                      
                      
                      5,651
                      
                      
                      
                      3,390
                      
                      
                      
                      6,734
                      
                      
                      
                      4,041
                      
                      
                      
                      86,704
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      94,135Conversion
      of preferred shares
                      
                      
                      (5,784
                      )
                      
                      
                      (3,470
                      )
                      
                      
                      5,784
                      
                      
                      
                      3,470
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Buyback
      of preferred shares
                      
                      
                      (41
                      )
                      
                      
                      (25
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (863
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (888
                      )Net
      income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      6,098,571
                      
                      
                      
                      501,111
                      
                      
                      
                      6,599,682Dividends
      declared
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (4,073,008
                      )
                      
                      
                      (1,072,802
                      )
                      
                      
                      (5,145,810
                      )Issue
      of options
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      442,903
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      442,903Balance
      as of December 31, 2009
                      
                      
                      17,192
                      
                      
                      $
                      10,315
                      
                      
                      
                      14,541,878
                      
                      
                      $
                      8,725,127
                      
                      
                      $
                      80,990,686
                      
                      
                      $
                      34,365,640
                      
                      
                      $
                      1,449,030
                      
                      
                      $
                      125,540,798




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


53




CONSOLIDATED
WATER CO. LTD.





CONSOLIDATED
STATEMENTS OF CASH FLOWS





(Expressed
in United States dollars)





Year
      Ended December 31,2009
                          
                          
                          2008
                          
                          
                          2007Cash
      flows from operating activitiesNet
      income
                          
                          $
                          6,599,682
                          
                          
                          $
                          7,275,683
                          
                          
                          $
                          11,839,450Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                          
                          
                          6,395,745
                          
                          
                          
                          6,582,499
                          
                          
                          
                          5,921,871Stock
      compensation on share and option grants
                          
                          
                          497,938
                          
                          
                          
                          445,285
                          
                          
                          
                          125,843Net
      (gain)/loss on disposal of fixed assets
                          
                          
                          68,778
                          
                          
                          
                          285,207
                          
                          
                          
                          (800,580
                          )Equity
      in loss/(earnings) in affiliate
                          
                          
                          978,317
                          
                          
                          
                          2,505,536
                          
                          
                          
                          (2,253,619
                          )Impairment
      of investment in affiliate
                          
                          
                          4,660,000
                          
                          
                          
                          —
                          
                          
                          
                          —Change
      in:Accounts
      receivable
                          
                          
                          (2,190,904
                          )
                          
                          
                          (11,460,337
                          )
                          
                          
                          (3,734,635
                          )Inventory
                          
                          
                          (595,185
                          )
                          
                          
                          (939,442
                          )
                          
                          
                          (855,099
                          )Prepaid
      expenses and other assets
                          
                          
                          116,000
                          
                          
                          
                          640,994
                          
                          
                          
                          (906,700
                          )Accounts
      payable and other liabilities
                          
                          
                          (1,059,279
                          )
                          
                          
                          2,524,638
                          
                          
                          
                          (123,921
                          )Net
      cash provided by operating activities
                          
                          
                          15,471,092
                          
                          
                          
                          7,860,063
                          
                          
                          
                          9,212,610Cash
      flows from investing activitiesAdditions
      to property, plant and equipment and construction in
    progress
                          
                          
                          (2,560,494
                          )
                          
                          
                          (6,640,135
                          )
                          
                          
                          (7,756,533
                          )Distribution
      of earnings from affiliate
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          222,475Collections
      of loans receivable
                          
                          
                          1,608,567
                          
                          
                          
                          1,572,893
                          
                          
                          
                          1,019,163Net
      cash (used in) investing activities
                          
                          
                          (951,927
                          )
                          
                          
                          (5,067,242
                          )
                          
                          
                          (6,514,895
                          )Cash
      flows from financing activitiesDividends
      paid
                          
                          
                          (4,999,514
                          )
                          
                          
                          (3,777,664
                          )
                          
                          
                          (3,721,538
                          )Proceeds
      from issuance of redeemable preference shares
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          9,564Proceeds
      from exercises of stock options
                          
                          
                          9,461
                          
                          
                          
                          —
                          
                          
                          
                          3,535,042Principal
      repayments of long term debt
                          
                          
                          (1,361,267
                          )
                          
                          
                          (1,283,195
                          )
                          
                          
                          (1,302,099
                          )Net
      cash (used in) financing activities
                          
                          
                          (6,351,320
                          )
                          
                          
                          (5,060,859
                          )
                          
                          
                          (1,479,031
                          )Net (decrease)/increase in cash
      and cash equivalents
                          
                          
                          8,167,845
                          
                          
                          
                          (2,268,038
                          )
                          
                          
                          1,218,684Cash and cash equivalents at
      beginning of year
                          
                          
                          36,261,345
                          
                          
                          
                          38,529,383
                          
                          
                          
                          37,310,699Cash and cash equivalents at
      end of year
                          
                          $
                          44,429,190
                          
                          
                          $
                          36,261,345
                          
                          
                          $
                          38,529,383





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


54






CONSOLIDATED
WATER CO. LTD.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





1.
Principal activity





Consolidated
Water Co. Ltd., and its subsidiaries (collectively, the “Company”) use reverse
osmosis technology to produce fresh water from seawater. The Company processes
and supplies water to its customers in the Cayman Islands, Belize and the
Bahamas. The Company sells water to a variety of customers, including public
utilities, commercial and tourist properties, residential properties and
government facilities. The base price of water supplied by the Company, and
adjustments thereto, are generally determined by the terms of the license and
contracts, which provide for adjustments based upon the movement in the
government price indices specified in the licenses and contracts, as well as
monthly adjustments for changes in the cost of energy. The Company also provides
engineering and design services and manages and operates plants owned by
others.





2.
Accounting policies





Basis of preparation:The
consolidated financial statements presented are prepared in accordance with
accounting principles generally accepted in the United States of
America.





Use of estimates:The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant items subject to
estimates and assumptions include the carrying value of property, plant and
equipment, intangible assets, goodwill, allowances for receivables and
inventory, and the fair value of the Company’s investment in and loan to
affiliate.  Actual results could differ significantly from those
estimates.





Basis of consolidation:The
Company consolidates the results of its majority owned subsidiaries and those
affiliates that possess the characteristics of a variable interest entity and
for which the Company is the primary financial beneficiary. The consolidated
financial statements include the accounts of the Company’s wholly-owned
subsidiaries Cayman Water Company Limited, Consolidated Water (Belize) Limited,
Ocean Conversion (Cayman) Limited, DesalCo Limited, DesalCo (Barbados) Ltd.,
Aquilex, Inc. and its majority owned subsidiary Consolidated Water (Bahamas)
Limited. The consolidated financial statements also include the accounts of the
Company’s 40% owned affiliate Consolidated Water (Bermuda) Limited. All
significant intercompany balances and transactions have been
eliminated.





Foreign currency:The
Company’s reporting currency is the United States dollar. The functional
currency of the Company and its foreign subsidiaries is the currency for each
respective country. The exchange rates between the Cayman Islands dollar, the
Belize dollar, the Bahamian dollar, the Bermuda dollar, and the Barbados dollar
have been fixed to the United States dollar during all periods
presented.




Cash and cash equivalents:Cash and cash equivalents consist of demand deposits at banks and highly
liquid deposits at banks with an original maturity of three months or
less.





Accounts receivable and allowance for
doubtful accounts:Accounts receivable are recorded at invoiced amounts
based on meter readings or minimum take-or-pay amounts per contractual
agreements. The allowance for doubtful accounts is the Company’s best estimate
of the amount of probable credit losses in the Company’s existing accounts
receivable balance. The Company determines the allowance for doubtful accounts
based on historical write-off experience and monthly review of delinquent
accounts. Past due balances are reviewed individually for collectability and
disconnection. Account balances are charged off against the allowance for
doubtful accounts after all means of collection have been exhausted and the
potential for recovery is considered by management to be remote.





Inventory:Inventory primarily
includes consumables stock and spare parts stock that are valued at the lower of
cost or net realizable value with cost determined on the first-in, first-out
basis. Inventory also includes potable water held in the Company’s reservoirs.
The carrying amount of the water inventory is the lower of the average cost of
producing water during the year or its net realizable value.


55





Loans receivable:Loans
receivable relate to amounts advanced to customers in connection with the
construction and sale of water desalination plants. The allowance for loan
losses, if any, is the Company’s best estimate of the amount of probable credit
losses in the Company’s existing loans and is determined on an individual loan
basis.





Property, plant and equipment:Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation is calculated using a straight line method with an
allowance for estimated residual values. Rates are determined based on the
estimated useful lives of the assets as follows:





Buildings
                5
      to 40 yearsPlant
      and equipment
                4
      to 40 yearsDistribution
      system
                3
      to 40 yearsOffice
      furniture, fixtures and equipment
                3
      to 10 yearsVehicles
                3
      to 10 yearsLeasehold
      improvements
                Shorter
      of 5 years or operating lease term outstandingLab
      equipment
                5
      to 10 years





Additions
to property, plant and equipment are comprised of the cost of the contracted
services, direct labor and materials. Assets under construction are recorded as
additions to property, plant and equipment upon completion of the projects.
Depreciation commences in the month the asset is placed in
service.


Long-Lived Assets:Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets might not be recoverable.
Conditions that would necessitate an impairment assessment include a significant
decline in the observable market value of an asset, a significant change in the
extent or manner in which an asset is used, or a significant adverse change that
would indicate that the carrying amount of an asset or group of assets is not
recoverable. For long-lived assets to be held and used, the Company recognizes
an impairment loss only if its carrying amount is not recoverable through its
undiscounted cash flows and measures the impairment loss based on the difference
between the carrying amount and fair value.


Construction in progress:Interest costs directly
attributable to the acquisition and construction of qualifying assets, which are
assets that necessarily take a substantial period of time to be ready for their
intended use, are added to the cost of those assets until such time as the
assets are substantially ready for use or sale.





Goodwill and intangible assets:Goodwill represents the excess costs over fair value of the assets of an
acquired business. Goodwill and intangible assets acquired in a business
combination and determined to have an indefinite useful life are not amortized,
but are tested for impairment at least annually.   Intangible
assets with estimable useful lives are amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for
impairment.  The Company annually 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.  The residual fair
value after this allocation is the implied fair value of the reporting unit
goodwill. If the implied fair value is less than its carrying amount, the
impairment loss is recorded. The Company has concluded based upon its annual
impairment valuation during 2009 that its goodwill was not
impaired.





Investments:Investments where
the Company does not exercise significant influence over the operating and
financial policies of the investee and holds less than 20% of the voting stock
are recorded at cost. The Company uses the equity method of accounting for
investments in common stock where the Company holds 20% to 50% of the voting
stock of the investee and has significant influence over its operating and
financial policies but does not meet the criteria for consolidation. The Company
recognizes an impairment loss on declines in the fair value of the stock of
investees that are other than temporary.





Other assets:Under the terms
of the contract with the Water and Sewerage Corporation of The Bahamas for the
purchase of water from the Company’s Blue Hills desalination plant, the Company
was required to reduce the amount of water lost by the public water distribution
system on New Providence Island, The Bahamas, over a one year period by 438
million U.S. gallons, a requirement the Company met during 2007. The Company was
solely responsible for the engineering, labor and materials costs incurred to
effect the reduction in lost water, which were capitalized and are being
amortized on a straight-line basis over the remaining life of the Blue Hills
contract. Such costs are included in other assets and aggregated approximately
$3.5 million as of December 31, 2009. Accumulated amortization for these costs
was approximately $564,000 and $385,000 as of December 31, 2009 and
2008.


56





Other liabilities:Other
liabilities consist of security deposits and advances in aid of construction.
Security deposits are received from large customers as security for trade
receivables. Advances in aid of construction are recognized as a liability when
advances are received from condominium developers in the licensed area to help
defray the capital expenditure costs of the Company. These advances do not
represent loans to the Company and are interest free. However, the Company
allows a discount of ten percent on future supplies of water to these
developments until the aggregate discounts allowed are equivalent to advances
received. Discounts are charged against advances received.





Income taxes:The
Company established Aquilex, Inc. its United States subsidiary in 2005. The
Company accounts for the income taxes arising from this subsidiary’s operations
under the asset and liability method. Deferred tax assets and liabilities, if
any, are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation allowance is
provided to the extent any deferred tax asset may not be realized.





Consolidated
Water (Belize) Limited (“CW-Belize”) is liable for business and corporate income
taxes. Under the terms of its water supply agreement with Belize Water Services
Ltd. (“BWSL”), its sole customer, CW-Belize is reimbursed by BWSL for all taxes
that it is required to pay and  records this reimbursement as an
offset to its tax expense.





The
Company is not subject to income taxes in the other countries in which it
operates.





Plant construction revenue and cost
of plant construction revenue:The Company recognizes revenue and related
costs as work progresses on fixed price contracts for the construction of
desalination plants to be sold to third parties using the
percentage-of-completion method, which relies on contract revenue and estimates
of total expected costs. The Company follows this method since it can make
reasonably dependable estimates of the revenue and costs applicable to various
stages of a contract. Under the percentage-of-completion method, the Company
records revenue and recognizes profit or loss as work on the contract
progresses. The Company estimates total project costs and profit to be earned on
each long term, fixed price contract prior to commencement of work on the
contract and updates these estimates as work on the contract progresses. The
cumulative amount of revenue recorded on a contract at a specified point in time
is that percentage of total estimated revenue that incurred costs to date
comprises of estimated total contract costs. If, as work progresses, the actual
contract costs exceed estimates, the profit recognized on revenue from that
contract decreases. The Company recognizes the full amount of any estimated loss
on a contract at the time the estimates indicate such a loss. Any costs and
estimated earnings in excess of billings are classified as current
assets.  Billings in excess of costs and estimated earnings on
uncompleted contracts, if any, are classified as current
liabilities.





Revenue from water sales:TheCompany
recognizes revenues from water sales at the time water is supplied to the
customer’s facility or storage tank.  The amount of water supplied is
determined based upon water meter readings performed at the end of each
month.  Under the terms of both its license agreement with the
government of the Cayman Islands and its bulk water supply contracts, the
Company is entitled to charge its customers the greater of a minimum monthly
charge or the price for water supplied during the month.





Comparative amounts:Certain
prior year amounts have been adjusted to conform to the current year’s
presentation.





3.
Cash and cash equivalents





Cash and
cash equivalents are not restricted as to withdrawal or use. As of December 31,
the equivalent United States dollars are denominated in the following
currencies:





December
      31,2009
                
                
                2008Demand
      deposits at banks:United
      States dollar
                
                $
                4,124,755
                
                
                $
                1,368,077Cayman
      Islands dollar
                
                
                3,535,734
                
                
                
                2,080,811Bahamas
      dollar
                
                
                2,445,044
                
                
                
                3,159,781Belize
      dollar
                
                
                956,030
                
                
                
                701,253Barbados
      dollar
                
                
                -
                
                
                
                217,826Bermuda
      dollar
                
                
                512,919
                
                
                
                768,89511,574,482
                
                
                
                8,296,643Short
      term deposits at banks
                
                
                32,854,708
                
                
                
                27,964,702Total
      cash and cash equivalents
                
                $
                44,429,190
                
                
                $
                36,261,345




57





4.
Accounts receivable





December 31,2009
                    
                    
                    2008Trade
      accounts receivable
                    
                    $
                    9,902,524
                    
                    
                    $
                    12,414,380Revenues
      earned in excess of amounts billed
                    
                    
                    -
                    
                    
                    
                    826,776Receivable
      from affiliate
                    
                    
                    86,477
                    
                    
                    
                    439,010Other
      accounts receivable
                    
                    
                    268,921
                    
                    
                    
                    346,57810,257,922
                    
                    
                    
                    14,026,744Allowance
      for doubtful accounts
                    
                    
                    (276,994
                    )
                    
                    
                    (115,432
                    )$
                    9,980,928
                    
                    
                    $
                    13,911,312





The
activity for the allowance for doubtful accounts consisted of:





December 31,2009
                    
                    
                    2008Opening
      allowance for doubtful accounts
                    
                    $
                    115,432
                    
                    
                    $
                    364,871Provision
      for doubtful accounts
                    
                    
                    161,562
                    
                    
                    
                    (249,439
                    )Accounts
      written off during the year
                    
                    
                    —
                    
                    
                    
                    —Ending
      allowance for doubtful accounts
                    
                    $
                    276,994
                    
                    
                    $
                    115,432





Significant
concentrations of credit risk are disclosed in Note 22.





5.
Inventory





December
      31,2009
                
                
                2008Water
      stock
                
                $
                19,498
                
                
                $
                38,627Consumables
      stock
                
                
                430,444
                
                
                
                716,428Spare
      parts stock
                
                
                4,734,676
                
                
                
                3,834,378Total
      inventory
                
                
                5,184,618
                
                
                
                4,589,433Less
      current portion
                
                
                1,832,564
                
                
                
                1,617,484Inventory
      (non-current)
                
                $
                3,352,054
                
                
                $
                2,971,949




58





6.
Loans receivable





December
      31,2009
                                
                                
                                2008Due
      from the Water Authority-Cayman:Due
      from the Water Authority-Cayman: Two loans originally aggregating
      $10,996,290, bearing interest at 6.5% per annum, receivable in combined
      monthly installments of principal and interest of $124,827 to May 2019,
      and secured by NSWW machinery and equipment
                                
                                $
                                10,531,569
                                
                                
                                $
                                —Due
      from the Water Authority-Cayman: Two loans originally aggregating
      $1,738,000, bearing interest at 5% per annum, receivable in combined
      monthly installments of principal and interest of $24,565 to March 2014,
      and secured by North Sound  plant, machinery and
      equipment
                                
                                
                                1,126,534
                                
                                
                                
                                1,358,651Due
      from the Water Authority-Cayman: Two non-interest bearing loans originally
      aggregating $3,129,000, receivable in monthly installments of $37,250 to
      November 2009, and secured by North Sound  plant, machinery and
      equipment
                                
                                
                                —
                                
                                
                                
                                409,710Due
      from the Water Authority-Cayman: Two loans originally aggregating
      $897,000, bearing interest at 5% per annum, receivable in combined monthly
      installments of principal and interest of $12,678 to January 2013, and
      secured by Lower Valley plant, machinery and equipment
                                
                                
                                433,843
                                
                                
                                
                                560,862Total
      loans receivable
                                
                                
                                12,091,946
                                
                                
                                
                                2,329,223Less
      current portion
                                
                                
                                1,216,098
                                
                                
                                
                                768,803Loans
      receivable, excluding current portion
                                
                                $
                                10,875,848
                                
                                
                                $
                                1,560,420




59




7. Property, plant and equipment and
construction in progress





December 31,2009
                    
                    
                    2008Land
                    
                    $
                    2,515,810
                    
                    
                    $
                    2,515,810Buildings
                    
                    
                    15,218,604
                    
                    
                    
                    13,164,488Plant
      and equipment
                    
                    
                    49,541,474
                    
                    
                    
                    47,109,425Distribution
      system
                    
                    
                    20,776,389
                    
                    
                    
                    20,335,700Office
      furniture, fixtures and equipment
                    
                    
                    2,364,510
                    
                    
                    
                    2,003,088Vehicles
                    
                    
                    1,275,733
                    
                    
                    
                    1,079,398Leasehold
      improvements
                    
                    
                    228,423
                    
                    
                    
                    202,592Lab
      equipment
                    
                    
                    34,874
                    
                    
                    
                    28,89091,955,817
                    
                    
                    
                    86,439,391Less
      accumulated depreciation
                    
                    
                    31,710,292
                    
                    
                    
                    27,501,411Property,
      plant and equipment, net
                    
                    $
                    60,245,525
                    
                    
                    $
                    58,937,980Construction
      in progress
                    
                    $
                    1,000,882
                    
                    
                    $
                    6,157,958





As of
December 31, 2009, the Company had outstanding capital commitments of
approximately $861,000.  It is the Company’s policy to maintain
adequate insurance for loss or damage to all fixed assets that may be
susceptible to loss. The Company does not insure its underground distribution
system, which cost approximately $11.6 million. During the years ended December
31, 2009 and 2008, $6,527,220 and $3,995,279 of construction in progress was
placed in service, respectively. Depreciation expense was $6,171,239, 5,844,761
and, $5,133,212 for the years ended December 31, 2009, 2008 and 2007,
respectively.





8.
Investment in and loan to OC-BVI





The
Company owns 50% of the outstanding voting common shares and a 43.5% equity
interest in the profits of Ocean Conversion (BVI) Ltd. (“OC-BVI”). The Company
also owns certain profit sharing rights in OC-BVI that raise its effective
interest in the profits of OC-BVI to approximately 45%. Pursuant to a management
services agreement, OC-BVI pays the Company monthly fees for certain engineering
and administrative services.





OC-BVI’s
sole customer is the Ministry of Communications and Works of the Government of
the British Virgin Islands (the “Ministry”) to which it sells bulk water under
the terms of the Water Supply Agreement between the parties dated May 1990 (the
“1990 Agreement”). Through December 31, 2008, substantially all of the water
sold to the Ministry was produced by OC-BVI’s desalination plant located at
Baughers Bay, Tortola (the “Baughers Bay plant”), which has a capacity of 1.7
million U.S. gallons per day.





During
2007 OC-BVI completed, for a total cost of approximately $8 million, the
construction of a 700,000 U.S. gallons per day desalination plant located at Bar
Bay, Tortola (the “Bar Bay plant”). The Company provided OC-BVI with a $3
million loan to fund part of this plant’s construction costs. Principal on this
loan was payable in quarterly installments of $125,000 with a final balloon
payment of $2 million due on August 31, 2009 and interest on the loan was due
quarterly at the rate of LIBOR plus 3.5%. In August 2009 the Company amended the
terms of this loan with OC-BVI, increasing its balance to $2,800,000 by
converting $800,000 in trade receivables due to the Company from
OC-BVI.  Under the terms of this amendment, the interest rate on the
loan was increased to LIBOR plus 5.5% and the maturity date for the final
balloon payment extended to August 31, 2011.  The Company further
amended this loan in January 2010 to increase the interest rate to LIBOR plus
7.5%.  On December 19, 2008 OC-BVI and the BVI government executed a
binding term sheet for the purchase of water by the BVI government from OC-BVI’s
seawater desalination plant located at Bar Bay. The parties intended this term
sheet to govern the terms of sale of water by OC-BVI to the BVI government until
the parties executed a definitive contract. On March 4, 2010, OC-BVI and the BVI
government executed the definitive seven year contract for the Bar Bay plant
(the “Bar Bay Agreement”).  Under the terms of the Bar Bay Agreement,
OC-BVI will deliver up to 600,000 U.S. gallons of water per day to the BVI
government from the Bar Bay plant and the BVI government will be obligated to
pay for this water at a specified price as adjusted by a monthly energy factor.
Prior to the completion of the construction of the first phase of certain
additional facilities by OC-BVI, the BVI government was not obligated to
purchase any minimum volumes of water from OC-BVI. The first phase of such
facilities construction involved the installation of water pipes from the plant
to a BVI government-owned reservoir site and from this site to the BVI
government’s piped water distribution system. A second phase of construction
requires OC-BVI to complete a storage reservoir on the BVI government site
within twelve months of the signing of the Bar Bay Agreement. The Bar Bay
Agreement includes a seven-year extension option exercisable by the BVI
government.


60





Summarized
financial information of OC-BVI is presented as follows:




December
      31,2009
                              
                              
                              2008Current
      assets
                              
                              $
                              3,433,427
                              
                              
                              $
                              2,179,072Non-current
      assets
                              
                              
                              9,454,460
                              
                              
                              
                              11,463,739Total
      assets
                              
                              $
                              12,887,887
                              
                              
                              $
                              13,642,811
  December
      31,2009
                          
                          
                          2008Current
      liabilities
                          
                          $
                          3,474,797
                          
                          
                          $
                          4,039,256Non-current
      liabilities
                          
                          
                          5,259,756
                          
                          
                          
                          3,209,756Total
      liabilities
                          
                          $
                          8,734,553
                          
                          
                          $
                          7,249,012





Year Ended December 31,2009
                  
                  
                  2008Water
      sales
                  
                  $
                  5,016,033
                  
                  
                  $
                  137,666Cost
      of water sales
                  
                  $
                  6,878,323
                  
                  
                  $
                  4,160,394Income
      (loss) from operations
                  
                  $
                  (2,765,220
                  )
                  
                  $
                  (5,069,040
                  )Net
      income (loss)
                  
                  $
                  (2,240,465
                  )
                  
                  $
                  (5,221,648
                  )





The
Company’s investment in and loan to OC-BVI are comprised of the
following:





December 31,2009
                    
                    
                    2008Equity
      investment (including profit sharing rights)
                    
                    $
                    6,482,995
                    
                    
                    $
                    12,121,312Loan
      receivable — Bar Bay plant construction
                    
                    
                    2,675,000
                    
                    
                    
                    2,250,000$
                    9,157,995
                    
                    
                    $
                    14,371,312





The
Company recognized a loss of ($1,025,968) and ($2,345,612) on its equity
investment in OC-BVI for the years ended December 31, 2009 and 2008
respectively. For the year ended December 31, 2007, the Company recognized
approximately $2.3 million in earnings from its equity investment in OC-BVI. For
the years ended December 31, 2009, 2008, and 2007, the Company recognized
approximately $324,000, $541,000 and $669,000, respectively, in revenues from
its management services agreement with OC-BVI. In addition to the Company’s
loans to, and equity investment in, OC-BVI of approximately $9.2 million in 2009
and $14.4 million in 2008, the Company’s recorded value of the OC-BVI management
services agreement, which is reflected as an intangible asset on the Company’s
consolidated balance sheet, was approximately $856,000 as of December 31, 2009
and 2008 (see Note 10).




Baughers Bay
dispute:





In
October 2006, OC-BVI notified the Company that the Ministry had asserted a
purported right of ownership of the Baughers Bay plant pursuant to the terms of
the 1990 Agreement and had invited OC-BVI to submit a proposal for its continued
involvement in the production of water at the Baughers Bay plant in light of the
Ministry’s planned assumption of ownership.





Under the
terms of the 1990 Agreement, upon the expiration of the initial seven year term
in May 1999, the agreement would automatically be extended for another seven
year term unless the Ministry provided notice, at least eight months prior to
such expiration, of its decision to purchase the plant from OC-BVI for
approximately $1.42 million.





In
correspondence between the parties from late 1998 through early 2000, the
Ministry indicated that the BVI government was prepared to exercise the option
to purchase the plant but would be amenable to negotiating a new water supply
agreement, and that it considered the 1990 Agreement to be in force on a monthly
basis until negotiations between the BVI government and OC-BVI were concluded.
Occasional discussions were held between the parties since 2000 without
resolution of the matter. OC-BVI has continued to supply water to the Ministry
and has expended approximately $4.7 million to significantly expand the
production capacity of the plant beyond that contemplated in the 1990
Agreement.


61





OC-BVI
submitted a proposal to the Ministry in late 2006 to continue to supply water
from the Baughers Bay plant. The Ministry held discussions with OC-BVI regarding
a new contract but did not formally respond to OC-BVI’s proposal. Early in 2007
the Ministry unilaterally took the position that until such time as a new
agreement is reached on the ownership of the plant and the price for the water
produced by the plant, the Ministry would only pay that amount of OC-BVI’s
billings that the Ministry purported constituted OC-BVI’s costs of producing the
water. At its proposed interim price, the Ministry would pay only approximately
30% of the amounts billed by OC-BVI pending a new agreement. OC-BVI responded to
the Ministry that the amount the Ministry proposed to pay was significantly less
than OC-BVI’s production costs. Payments made by the Ministry to OC-BVI since
the Ministry’s assumption of this reduced price have been sporadic and as of
December 31, 2007, OC-BVI had received payment for less than 22% of the amounts
it billed the Ministry for the year then ended. On November 15, 2007, OC-BVI
issued a demand letter to the BVI government for approximately $6.2 million
representing amounts that OC-BVI claimed were due by the BVI government for
water sold and delivered plus interest and legal fees. In response to OC-BVI’s
demand for payment, the BVI government issued a letter dated November 19, 2007,
that reasserted its claim that ownership of the Baughers Bay plant had passed to
the BVI government and rejected OC-BVI’s claim for payment. On November 22,
2007, OC-BVI’s management was informed that the BVI government had filed a
lawsuit with the Eastern Caribbean Supreme Court (the “Court’) seeking ownership
of the Baughers Bay plant.  OC-BVI counterclaimed that it was entitled
to continued possession and operation of the Baughers Bay plant until the BVI
government paid OC-BVI approximately $4.7 million, which it believed represented
the value of the Baughers Bay plant at its present expanded production capacity.
OC-BVI took the legal position that since the BVI government never paid the
$1.42 million to purchase the Baughers Bay plant, the 1990 agreement terminated
on May 31, 1999, which was eight months after the date that the Ministry
provided written notice of its intention to purchase the plant.





On July
4, 2008, OC-BVI filed a claim with the Court seeking recovery of $7,806,629,
representing amounts owed to OC-BVI for water sold and delivered to the BVI
government through May 31, 2008, $842,188 for interest accrued on amounts owed
as of May 31, 2008, and future interest and costs.  This claim was
amended and increased on April 22, 2009 to $13,773,954 for amounts owed for
water delivered through March 31, 2009 plus accrued interest of $2,537,334 on
amounts owed as of March 31, 2009 plus future interest and costs.  The
$13,773,954 amount represented amounts billed at the contract prices in effect
before the BVI government asserted its purported right of ownership of the
plant.





The Court
held a three-day trial from July 22 through July 24, 2009 to address both the
Baughers Bay ownership issue and OC-BVI’s claim for payment of amounts owed for
water sold and delivered to the BVI government.  On September 17,
2009, the Court issued a preliminary ruling with respect to the litigation
between the BVI government and OC-BVI.  The Court determined that the
BVI government was entitled to immediate possession of the Baughers Bay plant
and dismissed OC-BVI’s claim for compensation of approximately $4.7 million for
expenditures made to expand the production capacity of the plant.  As
a result of this determination by the Court, OC-BVI recorded an impairment loss
of approximately $2.1 million during the three months ended September 30, 2009
for fixed assets associated with the Baughers Bay plant.  However, the
Court determined that OC-BVI was entitled to full payment of water invoices
issued up to December 20, 2007, which had been calculated under the terms of the
original 1990 Agreement, and ordered the BVI government to make an immediate
interim payment of $5.0 million to OC-BVI for amounts owed to
OC-BVI.  The Court deferred deciding the entire dispute between the
parties until it could conduct a hearing to determine the reasonable rate for
water produced by OC-BVI for the period from December 20, 2007 to the
present.





After
conducting hearings on October 12 and 16, 2009, on October 28, 2009, the Court
ordered the BVI government to pay OC-BVI at the rate of $13.91 per thousand
imperial gallons for water produced by OC-BVI from December 20, 2007 to present,
which amounts to a total recovery for OC-BVI of $10.3 million as of September
30, 2009.  The BVI government made a payment of $2.0 million to OC-BVI
under the Court order during the fourth quarter of 2009.





On
October 28, 2009, OC-BVI filed an appeal with the Eastern Caribbean Court of
Appeals (the “Appellate Court”) asking the Appellate Court to review the
September 17, 2009 ruling by the Eastern Caribbean Supreme Court as it relates
to OC-BVI’s claim for compensation for expenditures made to expand the
production capacity of the Baughers Bay plant.





On
October 29, 2009, the BVI government filed an appeal with the Appellate Court
seeking the Appellate Court’s review of the September 17, 2009 ruling of the
Court that the BVI government pay OC-BVI the reasonable rate for water produced
by OC-BVI for the period from December 20, 2007 to the present.  The
BVI government is requesting a ruling from the Appellate Court that the BVI
government should only pay OC-BVI the actual cost of water produced at the
plant.





Effective
January 1, 2008, OC-BVI changed its policy for the recording of its revenues
from the Baughers Bay plant from the accrual to the equivalent of the cash
method due to an inability to meet all of the relevant revenue recognition
criteria.  As a result of this adjustment to its revenues, OC-BVI
incurred operating losses for all fiscal quarters of 2008 and
2009.    Any cash payments made by the BVI government on
Baughers Bay related invoices were applied by OC-BVI to the remaining balance of
outstanding accounts receivable that arose from billings for periods prior to
and including December 2007 and thus were not recognized as
revenues.  Sufficient payments were received from the BVI government
during the three months ended September 30, 2009 to repay the remaining accounts
receivable balances relating to periods prior to December 31,
2007.  OC-BVI continues to apply the equivalent of the cash method
with respect to the recognition of revenues from Baughers
Bay.  Consequently, OC-BVI will not recognize as revenues any
amounts to be paid to OC-BVI as a result of the Court ruling until such
amounts are paid by the BVI government. The BVI government made a $2
million payment on the Court award during the fourth quarter of
2009.  OC-BVI also applied the equivalent of the cash basis of
accounting for revenue recognition for its Bar Bay plant until such time as the
Bar Bay Agreement was signed.


62





In
February 2010 the BVI government announced that it had signed a 16 year contract
with Biwater, PLC for the construction and operation of a water plant with a
production capacity of 2.75 million U.S. gallons per day.  This new
plant will provide potable water to the greater Tortola area.





The
Company accounts for its investment in OC-BVI in accordance with the equity
method of accounting for investments in common stock. This method requires
recognition of a loss on an equity investment that is other than temporary, and
indicates that a current fair value of an equity investment that is less than
its carrying amount may indicate a loss in the value of the investment. To test
for possible impairment of its investment in OC-BVI, the Company estimates its
fair value as of the end of each fiscal quarter. In making this estimate, the
Company calculates the expected cash flows from its investment in OC-BVI by (i)
identifying various possible outcomes of the Baughers Bay dispute and
negotiations for a definitive contract on the new Bar Bay plant; (ii) estimating
the cash flows associated with each possible outcome, and (iii) assigning a
probability to each outcome based upon discussions held to date by OC-BVI’s
management with the BVI government and OC-BVI’s legal counsel. The resulting
probability-weighted sum represents the expected cash flows, and the Company’s
best estimate of future cash flows, to be derived from its investment in OC-BVI.
After considering the September and October 2009 rulings of the Court, the
Company determined that the carrying value of its investment in OC-BVI exceeded
the estimated fair value for our investment in OC-BVI by approximately $160,000
as of September 30, 2009 and therefore recognized an impairment loss of
this amount on this investment during the three months ended September 30,
2009.   As a result of the decision by the BVI government to
enter into the agreement with Biwater, the Company now believes it unlikely that
OC-BVI will derive any significant future cash flows from an operating contract
for the Baughers Bay plant.  Consequently, the Company determined that
an additional impairment loss of ($4,500,000) was required (and was recorded)
during the fourth quarter of 2009 to reduce its investment in OC-BVI to its
estimated fair value.





The
Appellate Court could ultimately overturn the ruling of the Court requiring the
BVI government to pay OC-BVI at the rate of $13.91 per thousand imperial gallons
for water previously supplied.    If this occurs the actual
cash flows from OC-BVI will vary materially from the expected cash flows the
Company used in determining OC-BVI’s fair value as of December 31, 2009 and the
Company would be required to record an additional impairment loss to reduce the
carrying value of its investment in OC-BVI. Such impairment loss would reduce
the Company’s earnings and could have a material adverse impact on its results
of operations and financial condition.


63





9.
Consolidated Water (Bermuda) Limited





In June
2006, the Company formed a Bermuda-based affiliate, Consolidated Water (Bermuda)
Limited (“CW-Bermuda”) with two other shareholders. The Company owns 40% of the
equity interest and voting rights of CW-Bermuda. In January 2007, CW-Bermuda
entered into a design, build, sale and operating agreement with the Government
of Bermuda for a desalination plant to be built in two phases at Tynes Bay along
the northern coast of Bermuda. Under the agreement, CW-Bermuda constructed the
plant and has been operating it since the second quarter of 2009.





The
Company has entered into a management services agreement with CW-Bermuda for the
design, construction and operation of the Tynes Bay plant, under which it
receives fees for direct services, purchasing activities and proprietary
technology.





Because
(i) the equity investment in CW-Bermuda is not sufficient to permit it to
finance its activities without the loan from the Company; (ii) the other
investors in CW-Bermuda have no obligation to absorb any significant amount of
its losses should losses arise; and (iii) the Company expects economic benefits
from CW-Bermuda that are significantly greater than the Company’s voting rights
of 40%, CW-Bermuda constitutes a variable interest entity (“VIE”). The Company
is the primary beneficiary of CW-Bermuda and accordingly, consolidates the
results of CW-Bermuda in its financial statements. The assets and liabilities of
CW-Bermuda included in the Company’s consolidated balance sheet amounted to
approximately $1,054,000 and $320,000 respectively, as of December 31, 2009. The
Company has not provided any guarantees related to CW-Bermuda and any creditors
of the VIE do not have recourse to the general credit of Consolidated Water Co.
Ltd. as a result of including CW-Bermuda in the consolidated financial
statements. The results of CW-Bermuda are reflected in the Company’s services
segment.





10.
Intangible assets





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





(a)
            The
      Company attributed $856,356 to an intangible asset which represents the
      fair value of a Management Services Agreement which has no expiration
      term. Originally, Management of the Company determined that this
      intangible asset has an indefinite life and therefore it was not
      amortized. Effective January 1, 2010, Management has assigned a life of 13
      years to this intangible asset and amortization commenced effective
      January 1, 2010.





(b)
            The
      Company attributed $337,149 to an intangible asset, the DWEERTM
      Distribution Agreement between DesalCo Limited and DWEER Technology
      Limited, which expires on October 31, 2009. Under this agreement, DesalCo
      Limited was granted an exclusive right, within certain geographical areas
      in the Caribbean, Central and South America, to distribute certain
      patented equipment which can increase the operational efficiency of
      reverse osmosis seawater desalination plants. The estimated fair value
      attributable to the intangible asset of the DWEERTM
      Distribution Agreement was amortized over the term of the underlying
      agreement.





(c)
            The
      Company attributed $4,385,496 to intangible assets, which represents the
      fair value of three Water Production and Supply Agreements between Ocean
      Conversion (Cayman) Limited and the Government of the Cayman Islands,
      dated April 25, 1994, June 18, 1997 and December 31, 2001. Under these
      agreements, Ocean Conversion (Cayman) Limited built reverse osmosis
      seawater desalination plants for the Government of the Cayman Islands.
      Ocean Conversion (Cayman) Limited operates the plants until the expiration
      of the agreement term, as extended, at which time the plant operations
      will be transferred to the Government of the Cayman Islands for no
      consideration. The carrying amounts attributable to the intangible assets
      of the Water Production and Supply Agreements were amortized over the term
      of the agreements, which were approximately 6, 3 and 7 years,
      respectively.





(d)
            On
      September 17, 2003, the Company signed an agreement with its Belize
      customer for the provision of water from a seawater desalination plant for
      an initial term of 23 years. The new agreement was effective on June 1,
      2004 after certain conditions precedent were met or waived. The carrying
      amount of the Belize Water Production and Supply Agreement is being
      amortized over the term of the agreement and has a weighted average
      remaining useful life of 16.1
years.


64





December
      31,2009
                    
                    
                    2008CostIntangible
      asset management service agreement
                    
                    $
                    856,356
                    
                    
                    $
                    856,356Amortizable
      intangible assets DWEERTM
      distribution agreement
                    
                    
                    337,149
                    
                    
                    
                    337,149Cayman
      water production and supply agreements
                    
                    
                    4,385,496
                    
                    
                    
                    4,385,496Belize
      water production and supply agreement
                    
                    
                    1,522,419
                    
                    
                    
                    1,522,4197,101,420
                    
                    
                    
                    7,101,420Accumulated
      amortizationDWEERTM
      distribution agreement
                    
                    
                    (337,149
                    )
                    
                    
                    (292,065
                    )Cayman
      water production and supply agreements
                    
                    
                    (4,385,496
                    )
                    
                    
                    (4,272,271
                    )Belize
      water production and supply agreement
                    
                    
                    (459,119
                    )
                    
                    
                    (392,922
                    )(5,181,764
                    )
                    
                    
                    (4,957,259
                    )Intangible
      assets, net
                    
                    $
                    1,919,656
                    
                    
                    $
                    2,144,162





Amortization
for each of the next five years is expected to be as follows:





2010
                
                $
                132,0662011
                
                
                132,0662012
                
                
                132,0662013
                
                
                132,0662014
                
                
                132,066Thereafter
                
                
                1,259,326





11.
Goodwill





The
Company does not amortize goodwill, but it is analyzed for impairment
annually.





The
reporting segments are tested by comparing the fair value of the reporting
segments to the carrying value. The fair value is determined using discounted
cash flow methodology based on management’s best estimates for each segment. As
of December 31, 2009, the Company’s impairment tests did not result in an
impairment loss. Goodwill
by segment was approximately $1.2 million, $2.3 million and $89,000 for the
retail, bulk and services segments, respectively, as of December 31, 2009 and
2008.





12.
Dividends





Interim
dividends declared on Class A common stock and redeemable preferred stock for
each quarter were as follows:





2009
                  
                  
                  2008
                  
                  
                  2007First
      Quarter
                  
                  $
                  0.065
                  
                  
                  $
                  0.130
                  
                  
                  $
                  0.065Second
      Quarter
                  
                  
                  0.065
                  
                  
                  
                  0.065
                  
                  
                  
                  0.065Third
      Quarter
                  
                  
                  0.075
                  
                  
                  
                  0.065
                  
                  
                  
                  0.065Fourth
      Quarter
                  
                  
                  0.075
                  
                  
                  
                  0.065
                  
                  
                  
                  —





13.
Long term debt





Long term
debt consists of the following:





December 31,2009
                      
                      
                      2008Fixed
      rate bonds bearing interest at a rate of 5.95%; repayable in quarterly
      installments of $526,010; secured by substantially all of the Company’s
      assets. Redeemable in full at any time after August 4, 2009 at a premium
      of 1.5% of the outstanding principal and accrued interest on the bonds on
      the date of redemption; maturing on August 4, 2016.
                      
                      $
                      11,626,534
                      
                      
                      $
                      12,987,799Series
      A bonds bearing interest at the annual fixed rate of 7.5%, payable
      quarterly; maturing onJune
      30, 2015.
                      
                      
                      10,000,000
                      
                      
                      
                      10,000,000Total
      long term debt
                      
                      
                      21,626,534
                      
                      
                      
                      22,987,799Less
      discount
                      
                      
                      497,267
                      
                      
                      
                      629,459Less
      current portion
                      
                      
                      1,322,483
                      
                      
                      
                      1,229,071Long
      term debt, excluding current portion
                      
                      $
                      19,806,784
                      
                      
                      $
                      21,129,269




65





As of
December 31, 2009, the Company has available but unused lines of credit with
Scotiabank for $2,000,000, bearing interest at the floating base rate as
established by Cayman Islands Class A licensed banks from time to
time.





The
Company has collateralized all borrowings under the 5.95% fixed rate bonds and
the $2,000,000 unused line of credit by providing a first debenture over fixed
and floating assets, a first legal charge over land and buildings, a security
interest in all insurance policies and claims, a reimbursement agreement for
standby letters of credit, a pledge of capital stock of each subsidiary and
guarantees and negative pledges from each company where a majority interest
exists.





On July
1, 2005, CW-Bahamas sold $10,000,000 Series A bonds solely to Bahamian citizens
and permanent resident investors in The Bahamas. The bonds mature on June 30,
2015, at which time the outstanding principal amount must be paid in full. The
bonds accrue interest at the annual fixed rate of 7.5% of the outstanding
principal amount and interest payments are payable to the bondholders each year
in March, June, September and December. CW-Bahamas has the option to redeem the
bonds in whole or in part without penalty commencing after June 30,
2008.  As of December 31, 2009, CW-Bahamas has not exercised this
option.





CW-Bahamas
has a credit facility with Scotiabank that consists of a B$500,000 revolving
working capital loan. The obligations under the credit facility are secured by
the assets CW-Bahamas. Borrowings under the working capital loan accrue interest
at the Nassau Prime rate plus 1.50% per annum. No amounts were outstanding under
this facility as of December 31, 2009.  This credit facility contains
certain covenants applicable to CW-Bahamas, including restrictions on additional
debt, guarantees and sale of assets. The credit facility limits the payment of
dividends by CW-Bahamas to available cash flow (as defined in the governing loan
agreement). All
obligations under the credit facility are repayable on demand.





As of
December 31, 2009, the aggregate debt repayment obligations over the next five
years and thereafter are as follows:





2010
                      
                      $
                      1,444,0862011
                      
                      
                      1,531,9452012
                      
                      
                      1,625,1502013
                      
                      
                      1,724,0252014
                      
                      
                      1,828,917Thereafter
                      
                      
                      13,472,411$
                      21,626,534





14.
Share capital and additional paid-in capital





Redeemable
preferred stock (“preferred shares”) is issued under the Company’s Employee
Share Incentive Plan as discussed in Note 20 and carries the same voting and
dividend rights as shares of common stock (“common share”). Preferred shares
vest over four years and convert to common stock on a share for share basis on
the fourth anniversary of each grant date. Preferred shares are only redeemable
with the Company’s agreement. Upon liquidation, preferred shares rank in
preference to the common shares to the extent of the par value of the preferred
shares and any related additional paid in capital.





The
Company has an Option Deed in place which is designed to deter coercive takeover
tactics. Pursuant to this plan, holders of common shares and preferred shares
were granted options which entitle them to purchase 1/100 of a share of Class
‘B’ stock at an exercise price of $50.00 if a person or group acquires or
commences a tender offer for 20% or more of the Company’s common shares. Option
holders (other than the acquiring person or group) will also be entitled to buy,
for the $37.50 exercise price, common shares with a then market value of $100.00
in the event a person or group actually acquires 20% or more of the Company’s
common shares. Options may be redeemed at $0.01 under certain circumstances.
145,000 of the Company’s authorized but unissued common shares have been
reserved for issue as Class ‘B’ stock. The Class ‘B’ stock has priority over
common shares with respect to dividend and voting rights. No Class ‘B’ stock
options have been exercised or redeemed up to December 31, 2009. In March 2007,
the Board of Directors extended the expiration date of the Option Deed through
July 2017.


66





15.
Cost of Revenues and General and Administrative Expenses





Year
      Ended December 31,2009
                        
                        
                        2008
                        
                        
                        2007Cost
      of revenues consist of:Electricity
                        
                        $
                        8,743,711
                        
                        
                        $
                        10,352,763
                        
                        
                        $
                        8,688,021Depreciation
                        
                        
                        5,882,387
                        
                        
                        
                        5,380,061
                        
                        
                        
                        4,581,375Fuel
      oil
                        
                        
                        4,953,120
                        
                        
                        
                        9,279,123
                        
                        
                        
                        6,404,945Employee
      costs
                        
                        
                        4,537,824
                        
                        
                        
                        4,230,387
                        
                        
                        
                        3,866,813Cost
      of plant sales
                        
                        
                        3,850,188
                        
                        
                        
                        9,949,693
                        
                        
                        
                        4,547,122Maintenance
                        
                        
                        2,437,164
                        
                        
                        
                        2,284,690
                        
                        
                        
                        2,339,341Other
                        
                        
                        1,564,739
                        
                        
                        
                        2,331,467
                        
                        
                        
                        1,473,840Royalties
                        
                        
                        1,505,080
                        
                        
                        
                        1,367,369
                        
                        
                        
                        1,407,367Insurance
                        
                        
                        1,321,727
                        
                        
                        
                        1,131,826
                        
                        
                        
                        1,243,136Amortization
      of intangible assets
                        
                        
                        224,500
                        
                        
                        
                        737,737
                        
                        
                        
                        788,659Water
      purchases
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        52,020$
                        35,020,440
                        
                        
                        $
                        47,045,116
                        
                        
                        $
                        35,392,639General
      and administrative expenses consist of:Employee
      costs
                        
                        $
                        4,526,140
                        
                        
                        $
                        3,941,357
                        
                        
                        $
                        4,316,922Other
                        
                        
                        2,701,105
                        
                        
                        
                        2,137,518
                        
                        
                        
                        2,156,367Insurance
                        
                        
                        952,742
                        
                        
                        
                        863,239
                        
                        
                        
                        696,953Professional
      fees
                        
                        
                        857,135
                        
                        
                        
                        774,095
                        
                        
                        
                        1,173,090Directors’
      fees and expenses
                        
                        
                        692,374
                        
                        
                        
                        715,591
                        
                        
                        
                        761,443Depreciation
                        
                        
                        310,529
                        
                        
                        
                        308,699
                        
                        
                        
                        316,574Maintenance
                        
                        
                        61,232
                        
                        
                        
                        48,686
                        
                        
                        
                        56,959$
                        10,101,257
                        
                        
                        $
                        8,789,185
                        
                        
                        $
                        9,478,308





16.
Earnings per share





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





The
following summarizes information related to the computation of basic and diluted
earnings per share for the respective years ended December 31:





2009
                
                
                2008
                
                
                2007Net
      income attributable to Consolidated Water Co. Ltd. common
      stockholders
                
                $
                6,098,571
                
                
                $
                7,209,716
                
                
                $
                11,387,651Less:
      Dividends paid and earnings attributable on preferred
    shares
                
                
                (
      5,236
                )
                
                
                (
      4,696
                )
                
                
                (
      5,509
                )Net
      income available to common shares in the determination of basic earnings
      per common share
                
                $
                6,093,335
                
                
                $
                7,205,020
                
                
                $
                11,382,142Weighted
      average number of common shares in the determination of basic earnings per
      common share attributable to Consolidated Water Co. Ltd. common
      stockholders
                
                
                14,535,192
                
                
                
                14,519,847
                
                
                
                14,404,732Plus:Weighted
      average number of preferred shares outstanding during the
    year
                
                
                17,657
                
                
                
                19,124
                
                
                
                22,488Potential
      dilutive effect of unexercised options
                
                
                35,295
                
                
                
                —
                
                
                
                68,144Weighted
      average number of shares used for determining diluted earnings per common
      share attributable to Consolidated Water Co. Ltd. common
      stockholders
                
                
                14,588,144
                
                
                
                14,538,971
                
                
                
                14,495,364




67


17.
Segment information


As
      of and for the year ended December 31, 2009Retail
                        
                        
                        Bulk
                        
                        
                        Services
                        
                        
                        TotalRevenues
                        
                        $
                        23,239,756
                        
                        
                        $
                        25,905,077
                        
                        
                        $
                        8,874,684
                        
                        
                        $
                        58,019,517Cost
      of revenues
                        
                        
                        9,812,434
                        
                        
                        
                        20,149,969
                        
                        
                        
                        5,058,037
                        
                        
                        
                        35,020,440Gross
      profit
                        
                        
                        13,427,322
                        
                        
                        
                        5,755,108
                        
                        
                        
                        3,816,647
                        
                        
                        
                        22,999,077General
      and administrative expenses
                        
                        
                        8,215,142
                        
                        
                        
                        1,676,327
                        
                        
                        
                        209,788
                        
                        
                        
                        10,101,257Income
      from operations
                        
                        
                        5,212,180
                        
                        
                        
                        4,078,781
                        
                        
                        
                        3,606,859
                        
                        
                        
                        12,897,820Other
      income (expense), net
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (6,298,138
                        )Consolidated
      net income
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        6,599,682Income
      attributable to noncontrolling interests
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        501,111Net
      income attributable to Consolidated Water Co. Ltd.
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        6,098,571As
      of December 31, 2009:Property
      plant and equipment, net
                        
                        $
                        26,918,699
                        
                        
                        $
                        31,935,956
                        
                        
                        $
                        1,390,870
                        
                        
                        $
                        60,245,525Construction
      in progress
                        
                        
                        1,000,882
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,000,882Goodwill
                        
                        
                        1,170,511
                        
                        
                        
                        2,328,526
                        
                        
                        
                        88,717
                        
                        
                        
                        3,587,754Total
      assets
                        
                        
                        78,291,323
                        
                        
                        
                        68,832,934
                        
                        
                        
                        7,351,524
                        
                        
                        
                        154,475,781
  As
      of and for the year ended December 31, 2008Retail
                        
                        
                        Bulk
                        
                        
                        Services
                        
                        
                        TotalRevenues
                        
                        $
                        22,369,806
                        
                        
                        $
                        30,121,536
                        
                        
                        $
                        13,187,617
                        
                        
                        $
                        65,678,959Cost
      of revenues
                        
                        
                        10,566,747
                        
                        
                        
                        25,557,832
                        
                        
                        
                        10,920,537
                        
                        
                        
                        47,045,116Gross
      profit
                        
                        
                        11,803,059
                        
                        
                        
                        4,563,704
                        
                        
                        
                        2,267,080
                        
                        
                        
                        18,633,843General
      and administrative expenses
                        
                        
                        7,150,449
                        
                        
                        
                        1,379,597
                        
                        
                        
                        259,139
                        
                        
                        
                        8,789,185Income
      from operations
                        
                        
                        4,652,610
                        
                        
                        
                        3,184,107
                        
                        
                        
                        2,007,941
                        
                        
                        
                        9,844,658Other
      income (expense), net
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (2,568,975
                        )Consolidated
      net income
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        7,275,683Income
      attributable to noncontrolling interests
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        65,967Net
      income attributable to Consolidated Water Co. Ltd.
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        7,209,716As
      of December 31, 2008:Property
      plant and equipment, net
                        
                        $
                        22,526,675
                        
                        
                        $
                        34,607,482
                        
                        
                        $
                        1,803,823
                        
                        
                        $
                        58,937,980Construction
      in progress
                        
                        
                        5,305,733
                        
                        
                        
                        852,225
                        
                        
                        
                        -
                        
                        
                        
                        6,157,958Goodwill
                        
                        
                        1,170,511
                        
                        
                        
                        2,328,526
                        
                        
                        
                        88,717
                        
                        
                        
                        3,587,754Total
      assets
                        
                        
                        80,567,404
                        
                        
                        
                        68,876,710
                        
                        
                        
                        5,212,460
                        
                        
                        
                        154,656,574
  As
      of and for the year ended December 31, 2007Retail
                  
                  
                  Bulk
                  
                  
                  Services
                  
                  
                  TotalRevenues
                  
                  $
                  22,225,765
                  
                  
                  $
                  24,320,392
                  
                  
                  $
                  7,530,708
                  
                  
                  $
                  54,076,865Cost
      of revenues
                  
                  
                  9,930,936
                  
                  
                  
                  20,078,758
                  
                  
                  
                  5,382,945
                  
                  
                  
                  35,392,639Gross
      profit
                  
                  
                  12,294,829
                  
                  
                  
                  4,241,634
                  
                  
                  
                  2,147,763
                  
                  
                  
                  18,684,226General
      and administrative expenses
                  
                  
                  7,822,592
                  
                  
                  
                  1,437,896
                  
                  
                  
                  217,820
                  
                  
                  
                  9,478,308Income
      from operations
                  
                  
                  4,472,237
                  
                  
                  
                  2,803,738
                  
                  
                  
                  1,929,943
                  
                  
                  
                  9,205,918Other
      income (expense), net
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,633,532Income
      before non-controlling interests
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  11,839,450Income
      attributable to non-controlling interests
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  451,799Net
      income attributable to Consolidated Water Co. Ltd.
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  11,387,651As
      of December 31, 2007:Property
      plant and equipment, net
                  
                  $
                  23,102,174
                  
                  
                  $
                  34,619,902
                  
                  
                  $
                  2,259,438
                  
                  
                  $
                  59,981,514Construction
      in progress
                  
                  
                  3,273,108
                  
                  
                  
                  1,716,671
                  
                  
                  
                  -
                  
                  
                  
                  4,989,779Goodwill
                  
                  
                  1,170,511
                  
                  
                  
                  2,328,526
                  
                  
                  
                  88,717
                  
                  
                  
                  3,587,754Total
      assets
                  
                  
                  86,646,896
                  
                  
                  
                  56,914,279
                  
                  
                  
                  5,769,709
                  
                  
                  
                  149,330,884




68


Revenues
from the Cayman Island operations were $31,739,512 in 2009 (2008: $31,299,635
and 2007: $29,436,608). Revenues from all other country operations were
$26,280,005 in 2009 (2008: $34,379,324 and 2007: $24,640,257). Included in the
revenues from other countries is $15,535,411 in 2009 (2008: $19,124,705 and
2007: $15,317,960) from the operations in the Bahamas, $1,869,912 in 2009 (2008:
$2,066,871 and 2007: $1,791,592) from our operations in Belize and $nil in 2009
(2008: $nil and 2007: $237,856) from our operations in Barbados.





For the
year ended December 31, 2009, revenues in the amount of $15,285,508 (2008:
$19,037,522 and 2007 $15,038,317:) were earned from the Water and Sewerage
Corporation of The Bahamas (“WSC”) and revenues in the amount of $8,499,755
(2008: $9,017,143 and 2007: $7,490,485) were earned from the Water
Authority-Cayman. Revenues from the WSC represented 26% (2008: 29% and 2007:
28%) of total revenues and revenues from the Water Authority-Cayman represented
15% (2008: 14% and 2007: 14%) of total revenues.





For the
year ended December 31, 2009, revenues which were earned in the Services segment
from OC-BVI through various management service agreements and an engineering
service agreement amounted to $324,148 (2008: $541,218  and 2007:
$668,888).





As of
December 31, 2009 and 2008, property, plant and equipment located in the Cayman
Islands was $28,146,619 and $23,954,235, respectively. Property, plant and
equipment in all other country operations was $32,098,906 and $34,983,745 as of
December 31, 2009 and 2008, respectively. Included in property, plant and
equipment from other country operations is $29,982,058 in 2009 and $32,456,941
in 2008, from the operations in the Bahamas and $1,472,227 in 2009 and
$1,499,859 in 2008 from our operations in Belize.





18.
Related party transactions





The
Company paid engineering consulting fees of approximately $93,000 in 2007 to
Wilmer F. Pergande, a Director of the Company.





On May
25, 2005, OC-BVI entered into a twenty-five year lease agreement with Bar Bay
Estate Holdings Limited (“Bar Bay”), a private company incorporated in the
Territory of the British Virgin Islands, pursuant to which OC-BVI agreed to
lease from Bar Bay approximately 50,000 square feet of land on Tortola, British
Virgin Islands on which the above mentioned seawater desalination plant and
wells were constructed. Under the terms of the lease agreement, a lease premium
payment of $750,000 was made on June 10, 2005, annual lease and easement
payments of $15,020 are due annually and royalty payments of 2.87% of annual
sales are payable quarterly. A Director of Sage Water Holdings (BVI) Limited, a
Company which currently owns 100% of the non-voting stock, 50% of the voting
common stock and 50% of the profit sharing rights of OC-BVI, is also a Director
of OC-BVI and holds 50% of the outstanding shares of Bar Bay.





19.
Commitments and contingencies





On April
1, 2005, the Company signed a lease for approximately 5,451 square feet of
office space at the Regatta Office Park, West Bay Road, Grand Cayman, Cayman
Islands. The term of the lease was three years at $196,240 per annum. The
Company exercised an option to extend the lease for a further three year period
in October 2007, effective May 1 2008, at an increased annual rental payment of
$215,864 per annum.





In July
2005, the Company entered into a lease agreement pursuant to which its
wholly-owned subsidiary Aquilex, Inc. has agreed to lease approximately 7,142
square feet of office and warehouse space in Deerfield Beach, Florida for a
period of five years.





Future
minimum lease payments under non-cancelable operating leases as of December 31,
2009 are as follows:





2010
                    
                    $
                    314,6342011
                    
                    
                    71,955Thereafter
                    
                    
                    —$
                    386,589





Total
rental expense for the years ended December 31, 2009, 2008 and 2007 was
$373,099,  $343,780 and $367,932 respectively.


69





The
Company is obligated to supply water, where feasible, to customers in the Cayman
Islands within its license area in accordance with the terms of the license.
Royalties are paid to the Government of the Cayman Islands at the rate of 7.5%
of gross water sales.





The
Company has seven water supply agreements under which it is required to provide
minimum water quantities.





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





As a
result of the Company’s acquisition of interests in CW-Bahamas, it guaranteed
the performance of CW-Bahamas to the Water and Sewerage Corporation of the
Bahamas (“WSC”) in relation to the water supply contract between CW-Bahamas and
the WSC. In the event that CW-Bahamas cannot provide the minimum water quantity
per the contract, it must reimburse the WSC for the cost of water it would have
to obtain from other sources, at the per U.S. gallon rate charged by CW-Bahamas
to the WSC.





The
Company has entered into employment agreements with certain executives, which
expire through December 31, 2011 and provide for, among other things, base
annual salary in an aggregate amount of $1.5 million, performance bonuses and
various employee benefits.





As of
December 31, 2009, the Company was subject to interest rate risk related to its
$2,675,000 loan to OC-BVI that bears interest at the three month LIBOR plus 7.5%
per annum.





20.
Stock Based Compensation





The
Company has the following stock compensation plans that form part of employees’
remuneration:





Employee
Share Incentive Plan (Preferred Shares)





The
Company awards preferred shares for $nil consideration under the Employee Share
Incentive Plan as part of compensation for certain eligible employees, excluding
Directors and certain Officers, that require future services as a condition to
the delivery of common shares. In addition, options are granted to purchase
preferred shares at a fixed price, determined annually, which will typically
represent a discount to the market value of the common stock. In consideration
for preferred shares, the Company issues shares of common stock on a share for
share basis. Under the plan, the conversion is conditional on the grantee’s
satisfying requirements outlined in the award agreements. Preferred shares are
only redeemable with the Company’s approval. Each employee’s option to purchase
preferred shares must be exercised within 30 days of the grant date, which is
the 90th day after the date of the auditor’s opinion on the financial statements
for the relevant year.





Employee
Share Option Plan (Common Stock Options)





In 2001,
the Company introduced an employee stock option plan for certain long-serving
employees of the Company. Under the plan, these employees are granted in each
calendar year, as long as the employee is a participant in the Employee Share
Incentive Plan, options to purchase common shares. The price at which the option
may be exercised will be the closing market price on the grant date, which is
the 40th day after the date of the Company’s Annual Shareholder Meeting. The
number of options each employee is granted is equal to five times the sum of (i)
the number of preferred shares which that employee receives for $nil
consideration and (ii) the number of preferred share options which that employee
exercises in that given year. Options may be exercised during the period
commencing on the fourth anniversary of the grant date and ending on the
thirtieth day after the fourth anniversary of the grant date.





Non-Executive Directors’ Share
Plan





In 1999,
the Company introduced a stock grant plan, which forms part of Directors’
remuneration. Under the plan, Directors receive a combination of cash and common
stock in consideration of remuneration for their participation in Board
meetings. All Directors are eligible except Executive Officers, who are covered
by individual employment contracts, and the Government elected board member. The
number of common stock granted is calculated based upon the market price of the
Company’s common stock on October 1 of the year preceding the grant. Stock
granted during the year ended December 31, 2009 totaled 3,928 shares (2008:
3,899 shares).


70





2008
Equity Incentive Plan





On May
14, 2008 the Company’s stockholders approved the 2008 Equity Incentive Plan (the
“2008 Plan”) and reserved 1,500,000 shares of the Company’s Class A common
shares for issuance under this plan. All Directors, executives and key employees
of the Company or its affiliates are eligible for participation in the 2008 Plan
which provides for the issuance of options, restricted stock and stock
equivalents at the discretion of the Board. A total of 101,697 (2008: 101,655)
options were granted under the 2008 Plan in 2009 at an exercise price of $7.90
(2008: exercise prices of $30.40 and $23.44).





The
Company measures and recognizes compensation cost at fair value for all
share-based payments, including stock options. As a result, stock compensation
expense of $497,938 and $445,285 was charged to earnings for the years ended
December 31, 2009 and 2008, respectively.





The fair
value of each option award is estimated on the date of grant using a
Black-Scholes option-pricing model that uses the assumptions noted in the table
below. Expected volatilities are based on historical volatilities of the
Company’s common stock. The Company uses historical data to estimate option
exercise and post-vesting termination behavior. The expected term of options
granted is based on historical data and represents the period of time that
options granted are expected to be outstanding,. The Company uses historical
data to estimate stock option exercises and forfeitures within its valuation
model. The risk-free interest rate for the expected term of the option is based
on the U.S. Treasury yield curve in effect at the time of the
grant.





The
significant weighted average assumptions for the years ended December 31, 2009,
2008 and 2007 were as follows:





2009
                
                
                2008
                
                
                2007Risk
      free interest rate
                
                
                1.10
                %
                
                
                2.87
                %
                
                
                4.82
                %Expected
      option life (years)
                
                
                2.4
                
                
                
                3.5
                
                
                
                2.0Expected
      volatility
                
                
                55.37
                %
                
                
                57.16
                %
                
                
                37.44
                %Expected
      dividend yield
                
                
                2.13
                %
                
                
                1.51
                %
                
                
                0.91
                %





A summary
of the Company’s stock option activity for the year ended December 31, 2009 is
as follows:





Options
                          
                          
                          Weighted
                              Average
                            Exercise Price
                          
                          Weighted Average
                                Remaining
                              Contractual Life
                            (Years)
                          
                          Aggregate Intrinsic
                            Value (1)Outstanding
      at beginning of year
                          
                          
                          118,115
                          
                          
                          $
                          28.30Granted
                          
                          
                          109,564
                          
                          
                          
                          8.20Exercised
                          
                          
                          (1,118
                          )
                          
                          
                          9.22Forfeited
                          
                          
                          (11,509
                          )
                          
                          
                          9.22Outstanding
      at end of year
                          
                          
                          215,052
                          
                          
                          $
                          18.76
                          
                          3.52
      years
                          
                          $
                          649,844Exercisable
      at end of year
                          
                          
                          33,885
                          
                          
                          $
                          29.27
                          
                          2.02
      years
                          
                          $
                          —


____________


(1)
              The
      intrinsic value of a stock option represents the amount by which the fair
      value of the underlying stock, measured by reference to the closing price
      of the common shares of $14.29 in the Nasdaq Global Select Market on
      December 31, 2009, exceeds the exercise price of the
    option.





As of
December 31, 2009, 181,167 non-vested options were outstanding with a weighted
average exercise price of $16.80 and an average remaining contractual life of
3.80 years. The total remaining unrecognized compensation costs related to
unvested stock-based arrangements was $283,335 at December 31, 2009 and is
expected to be recognized over a weighted average period of 3.80
years.


71





The
following table summarizes the weighted average fair value of options at date of
grant and the intrinsic value of options exercised during the years ended
December 31, 2009, 2008 and 2007:





2009
                
                
                2008
                
                
                2007Options
      granted with an exercise price below market price on the date of
      grant:Employees
      — preferred share options
                
                $
                8.31
                
                
                $
                —
                
                
                $
                6.65Overall
      weighted average
                
                $
                8.31
                
                
                $
                —
                
                
                $
                6.65Options
      granted with an exercise price at market price on the date of
      grant:Management
      employees
                
                $
                3.28
                
                
                $
                —
                
                
                $
                —Employees
      — common share options
                
                $
                8.05
                
                
                $
                6.82
                
                
                $
                10.49Overall
      weighted average
                
                $
                5.66
                
                
                $
                6.82
                
                
                $
                10.49Options
      granted with an exercise price above market price on the date of
      grant:Management
      employees
                
                $
                —
                
                
                $
                4.43
                
                
                $
                —Employees
      — preferred share options
                
                $
                —
                
                
                $
                0.02
                
                
                $
                —Overall
      weighted average
                
                $
                —
                
                
                $
                4.35
                
                
                $
                —Total
      intrinsic value of options exercised
                
                $
                34,963
                
                
                $
                12,012
                
                
                $
                5,082,472





21.
Pension benefits





Staff
pension plans are offered to all employees in the Cayman Islands. The plans are
administered by third party pension plan providers and are defined contribution
plans whereby the Company matches the contribution of the first 5% of each
participating employee’s salary up to $72,000. The total amount recognized as an
expense under the plan during the year ended December 31, 2009 was $181,143
(2008: $174,616 and 2007: $168,820).





22.
Financial instruments





Credit risk:





The
Company is not exposed to significant credit risk on its retail customer
accounts as its policy is to cease supply of water to customers’ accounts that
are more than 45 days overdue. The Company’s exposure to credit risk is
concentrated on receivables from its Bulk water customers. Management considers
these receivables fully collectible and therefore the Company has not recorded
an allowance for these receivables. All other accounts receivable are current or
an allowance has been made for collection as of December 31, 2009.





Interest
rate risk:





Substantially
all of the Company’s outstanding debt consists of fixed rate obligations and
therefore the Company is not subject to interest-rate risk arising from
fluctuations of LIBOR or prime lending rates. As of December 31, 2009, the
Company is subject to interest rate risk related to its $2,675,000 loan to
OC-BVI that bears interest at the three month LIBOR plus 7.5% per
annum.





Foreign exchange
risk:





All
relevant foreign currencies have fixed exchange rates to the United States
dollar as detailed under the foreign currency accounting policy note. If any of
these fixed exchange rates become floating exchange rates, the Company’s
consolidated results of operations could be adversely affected.





Fair values:





As of
December 31, 2009 and 2008, the carrying amounts of cash and cash equivalents,
accounts receivable, accounts payable and other liabilities and dividends
payable approximate their fair values due to the short term maturities of these
instruments. Management considers that the carrying amounts for loans receivable
and long term debt as of December 31, 2009 approximate their fair
value.




Fair
value is defined as the exit price, or the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants as of the measurement date. The guidance also establishes a
hierarchy for inputs used in measuring fair value that maximizes the use of
observable inputs and minimizes the use of unobservable inputs by requiring that
the most observable inputs be used when available. Observable inputs are inputs
market participants would use in valuing the asset or liability and are
developed based on market data obtained from sources independent of the Company.
Unobservable inputs are inputs that reflect the Company’s assumptions about the
factors market participants would use in valuing the asset or liability. The
guidance establishes three levels of inputs that may be used to measure fair
value:
  Level 1
— Quoted prices in active markets for identical assets or
liabilities.
  Level 2
— Inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or
can be corroborated by observable market data for substantially the full term of
the assets or liabilities.
  Level 3
— Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or
liabilities.
  Assets
and liabilities are classified in their entirety based on the lowest level of
input that is significant to the fair value measurements. The Company reviews
the fair value hierarchy classification on a quarterly basis. Changes in the
observability of valuation inputs may result in a reclassification of levels for
certain securities within the fair value hierarchy.
  The
following table presents the Company’s fair value hierarchy for assets and
liabilities measured at fair value as of December 31, 2009 (in
thousands):
  December 31,
      2009Level
      1
                        
                        
                        Level 2
                        
                        
                        Level
      3
                        
                        
                        TotalAssets:RecurringCash
      equivalents
                        
                        $
                        32,854,708
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        32,854,708NonrecurringInvestment
      in affiliate
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        9,157,995
                        
                        
                        $
                        9,157,995In
      2009 the Company recorded an impairment loss on investment in affiliate of
      $(4,660,000). (see Note 8)December 31,
      2008Level
      1
                        
                        
                        Level 2
                        
                        
                        Level
      3
                        
                        
                        TotalAssets:RecurringCash
      equivalents
                        
                        $
                        27,964,702
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        27,964,702NonrecurringInvestment
      in affiliate
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        14,371,312
                        
                        
                        $
                        14,371,312


72





23.
            Non cash
      transactions:




2009
                            
                            
                            2008
                            
                            
                            2007Supplemental
      disclosure of cash flow informationInterest
      paid in cash
                            
                            $
                            1,492,775
                            
                            
                            $
                            1,570,878
                            
                            
                            $
                            1,845,426The
      Company executed the following non-cash transactions:Note
      received for plant facility sold
                            
                            $
                            10,996,290
                            
                            
                            $
                            —
                            
                            
                            $
                            1,738,000Conversion of
      accounts receivable to investment in affiliate (see Note
      8)
                            
                            
                            800,000
                            
                            
                            
                            —
                            
                            
                            
                            —Issuance
      of 6,734, 11,450 and 11,346 respectively, of common shares
                              for
      services rendered
                            
                            
                            95,592
                            
                            
                            
                            286,462
                            
                            
                            
                            251,377Issuance
      of 4,533, 1,774, and 2,600 respectively, of redeemable
                              preferred
      shares for services rendered
                            
                            
                            78,703
                            
                            
                            
                            30,158
                            
                            
                            
                            47,856Conversion
      of 5,784, 5,451 and 5,698, respectively of redeemable
                              preferred
      shares to common shares
                            
                            
                            3,470
                            
                            
                            
                            3,271
                            
                            
                            
                            3,419Dividends
      declared but not paid
                            
                            
                            1,091,879
                            
                            
                            
                            945,695
                            
                            
                            
                            —





24.
Impact of recent accounting standards pronouncements





Adoption
of New Accounting Standards:





Business
Combinations


In
December 2007, the FASB issued new accounting guidance on business combinations
and non-controlling interests in consolidated financial statements. The
objective is to improve the relevance, representational faithfulness and
comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects. The guidance
applies to all transactions or other events in which an entity (the “acquirer”)
obtains control of one or more businesses (the “acquiree”), including those
sometimes referred to as “true mergers” or “mergers of equals” and combinations
achieved without the transfer of consideration. In April 2009, the FASB issued
additional guidance which addresses application issues arising from
contingencies in a business combination. The Company adopted this standard
effective for the year ended December 31, 2009.





Noncontrolling Interests in
Consolidated Financial Statements


In
December 2007, the FASB issued new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. The new guidance also changes the way the consolidated financial
statements are presented, establishes a single method of accounting for changes
in a parent’s ownership interest in a subsidiary that do not result in
deconsolidation, requires that a parent recognize a gain or loss in net income
when a subsidiary is deconsolidated and expands disclosures in the consolidated
financial statements that clearly identify and distinguish between the parent’s
ownership interest and the interest of the noncontrolling owners of a
subsidiary. The provisions are to be applied prospectively as of the beginning
of the fiscal year in which the guidance is adopted, except for the presentation
and disclosure requirements, which are to be applied retrospectively for all
periods presented.  The Company adopted this standard effective for
the year ended December 31, 2009.





Subsequent
Events


In May
2009, the FASB issued new accounting guidance on subsequent events effective for
interim or annual reporting periods ending after June 15, 2009.  The
new guidance establishes general standards of accounting and disclosures of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. The adoption requires the Company to
evaluate all subsequent events that occur after the balance sheet date through
the date and time the Company’s financial statements are issued.  The
Company evaluates the accounting and disclosure of events occurring after the
balance sheet date but before the consolidated financial statements are
issued.  Based upon the evaluation, the Company did not identify any
recognized or nonrecognized subsequent events that would have required
adjustment or disclosure in the consolidated financial
statements.


73





Effect of
Newly Issued But Not Yet Effective Accounting Standards:





Accounting for Transfers of
Financial Assets


In June
2009, the FASB issued new accounting guidance to improve the information
provided in financial statements concerning transfers of financial assets,
including the effects of transfers on financial position, financial performance
and cash flows, and any continuing involvement of the transferor with the
transferred financial assets. The provisions are effective for the Company’s
financial statements for the fiscal year beginning January 1,
2010.  The Company does not expect the adoption of this standard to
have a material impact on its financial statements.





Variable Interest
Entities


In June
2009, the FASB issued new accounting guidance requiring an enterprise to perform
an analysis to determine whether the enterprise’s variable interest or interests
give it a controlling financial interest in a variable interest entity. It also
requires enhanced disclosures that will provide users of financial statements
with more transparent information about an enterprise’s involvement in a
variable interest entity.  The provisions are effective for the
Company’s financial statements for the fiscal year beginning January 1,
2010.  The Company has concluded that the adoption of this standard in
2010 will not have a significant impact on its financial
statements.


74





REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM





The Board
of Directors


Ocean
Conversion (BVI) Ltd.





We have
audited the accompanying consolidated balance sheets of Ocean Conversion (BVI)
Ltd. and its subsidiary (the “Company”) as of December 31, 2009 and 2008, and
the related consolidated statements of operations, stockholders’ equity and cash
flows for each of the years in the three-year period ended December 31, 2009.
These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material aspects, the financial position of Ocean Conversion (BVI) Ltd.
and subsidiary as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2009, in conformity with accounting principles generally
accepted in the United States of America.





As more
fully discussed in Note 3 to the consolidated financial statements, the Company
is involved in a dispute with the BVI Government, which is the Company’s sole
customer. As a result of this dispute, the Company has modified its revenue
recognition policy with regard to water sales to this customer, which was the
principal factor in the Company’s incurring a significant net loss in 2009 and
2008. Other than this, the consolidated financial statements do not include any
adjustments that might result from the ultimate outcome of this
dispute.





/s/
MarcumRachlin, a division of Marcum LLP





Fort
Lauderdale, Florida


March 16,
2010


75





OCEAN
CONVERSION (BVI) LTD.





CONSOLIDATED
BALANCE SHEETS





DECEMBER
31, 2009 and 2008





(Expressed
in United States Dollars)




December
      31,2009
                                            
                                            
                                            2008ASSETSCurrent
      assetsCash
      and cash equivalents
                                            
                                            $
                                            2,910,531
                                            
                                            
                                            $
                                            748,566Accounts
      receivable
                                            
                                            
                                            42,349
                                            
                                            
                                            
                                            1,134,950Inventory
                                            
                                            
                                            374,810
                                            
                                            
                                            
                                            259,467Prepaid
      expenses and other assets
                                            
                                            
                                            105,737
                                            
                                            
                                            
                                            36,089Total current
      assets
                                            
                                            
                                            3,433,427
                                            
                                            
                                            
                                            2,179,072Property,
      plant and equipment, net
                                            
                                            
                                            8,179,176
                                            
                                            
                                            
                                            10,202,457Construction
      in progress
                                            
                                            
                                            224,744
                                            
                                            
                                            
                                            208,662Inventory
      non-current
                                            
                                            
                                            438,040
                                            
                                            
                                            
                                            410,120Other
      assets
                                            
                                            
                                            612,500
                                            
                                            
                                            
                                            642,500Total
    assets
                                            
                                            $
                                            12,887,887
                                            
                                            
                                            $
                                            13,642,811LIABILITIES
      AND EQUITYCurrent
      liabilitiesAccounts
      payable and other liabilities
                                            
                                            $
                                            2,849,797
                                            
                                            
                                            $
                                            1,789,256Current
      portion of long term debt
                                            
                                            
                                            625,000
                                            
                                            
                                            
                                            2,250,000Total current
      liabilities
                                            
                                            
                                            3,474,797
                                            
                                            
                                            
                                            4,039,256Long
      term debt
                                            
                                            
                                            2,050,000
                                            
                                            
                                            
                                            -Profit
      sharing obligation
                                            
                                            
                                            3,209,756
                                            
                                            
                                            
                                            3,209,756Total
      liabilities
                                            
                                            
                                            8,734,553
                                            
                                            
                                            
                                            7,249,012Commitments
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -EquityClass
      A, voting shares, $1 par value. Authorized 600,000 shares:
                                              issued
      and outstanding 555,000 shares
                                            
                                            
                                            555,000
                                            
                                            
                                            
                                            555,000Class
      B, voting shares, $1 par value. Authorized 600,000 shares:
                                              issued
      and outstanding 555,000  shares
                                            
                                            
                                            555,000
                                            
                                            
                                            
                                            555,000Class
      C, non-voting shares, $1 par value. Authorized 600,000
shares:
                                              issued
      and outstanding 165,000 shares
                                            
                                            
                                            165,000
                                            
                                            
                                            
                                            165,000Additional
      paid-in capital
                                            
                                            
                                            225,659
                                            
                                            
                                            
                                            225,659Retained
      earnings
                                            
                                            
                                            2,619,343
                                            
                                            
                                            
                                            4,878,512Total Ocean
      conversion (BVI) Ltd. stockholders’ equity
                                            
                                            
                                            4,120,002
                                            
                                            
                                            
                                            6,379,171Noncontrolling
      interests
                                            
                                            
                                            33,332
                                            
                                            
                                            
                                            14,628Total
      equity
                                            
                                            
                                            4,153,334
                                            
                                            
                                            
                                            6,393,799Total liabilities
      and equity
                                            
                                            $
                                            12,887,887
                                            
                                            
                                            $
                                            13,642,811





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


76


OCEAN
CONVERSION (BVI) LTD.





CONSOLIDATED
STATEMENTS OF OPERATIONS





YEARS
ENDED DECEMBER 31, 2009, 2008 and 2007





(Expressed
in United States Dollars)





2009
                  
                  
                  2008
                  
                  
                  2007Water
      sales
                  
                  $
                  5,016,033
                  
                  
                  $
                  137,666
                  
                  
                  $
                  9,326,435Cost
      of water sales
                  
                  
                  6,878,323
                  
                  
                  
                  4,160,394
                  
                  
                  
                  3,280,833Gross
      profit (loss)
                  
                  
                  (1,862,290
                  )
                  
                  
                  (4,022,728
                  )
                  
                  
                  6,045,602General
      and administrative expenses
                  
                  
                  902,930
                  
                  
                  
                  1,046,312
                  
                  
                  
                  2,486,278Income (loss) from
      operations
                  
                  
                  (2,765,220
                  )
                  
                  
                  (5,069,040
                  )
                  
                  
                  3,559,324Other
      income (expense):Interest
      income
                  
                  
                  654,976
                  
                  
                  
                  7,480
                  
                  
                  
                  579,373Interest
      expense
                  
                  
                  (130,236
                  )
                  
                  
                  (160,827
                  )
                  
                  
                  (259,038
                  )Other
      income
                  
                  
                  15
                  
                  
                  
                  739
                  
                  
                  
                  565Other
      income (expense), net
                  
                  
                  524,755
                  
                  
                  
                  (152,608
                  )
                  
                  
                  320,900Net income
      (loss)
                  
                  
                  (2,240,465
                  )
                  
                  
                  (5,221,648
                  )
                  
                  
                  3,880,224Income
      (loss) attributable to non-controlling interests
                  
                  
                  18,704
                  
                  
                  
                  14,628
                  
                  
                  
                  (33,776
                  )Net
      income (loss) attributable to Ocean Conversion (BVI) Ltd.
      stockholders
                  
                  $
                  (2,259,169
                  )
                  
                  $
                  (5,236,276
                  )
                  
                  $
                  3,914,000





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


77


OCEAN
CONVERSION (BVI) LTD.





CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY





YEARS
ENDED DECEMBER 31, 2009, 2008 and 2007





(Expressed
in United States Dollars)




Additional
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    TotalCommon stock
                                    
                                    
                                    paid-in
                                    
                                    
                                    Retained
                                    
                                    
                                    Non-controlling
                                    
                                    
                                    stockholders'Shares
                                    
                                    
                                    Dollars
                                    
                                    
                                    capital
                                    
                                    
                                    earnings
                                    
                                    
                                    interests
                                    
                                    
                                    equityBalance as of
      December 31, 2006
                                    
                                    
                                    1,275,000
                                    
                                    
                                    $
                                    1,275,000
                                    
                                    
                                    $
                                    225,659
                                    
                                    
                                    $
                                    6,647,038
                                    
                                    
                                    $
                                    33,776
                                    
                                    
                                    $
                                    8,181,473Net income (loss)
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    3,914,000
                                    
                                    
                                    
                                    (33,776
                                    )
                                    
                                    
                                    3,880,224Dividends declared
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (318,750
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (318,750
                                    )Balance as of
      December 31, 2007
                                    
                                    
                                    1,275,000
                                    
                                    
                                    
                                    1,275,000
                                    
                                    
                                    
                                    225,659
                                    
                                    
                                    
                                    10,242,288
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    11,742,947Net income
      (loss)
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (5,236,276
                                    )
                                    
                                    
                                    14,628
                                    
                                    
                                    
                                    (5,221,648
                                    )Dividends declared
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (127,500
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (127,500
                                    )Balance as of
      December 31, 2008
                                    
                                    
                                    1,275,000
                                    
                                    
                                    
                                    1,275,000
                                    
                                    
                                    
                                    225,659
                                    
                                    
                                    
                                    4,878,512
                                    
                                    
                                    
                                    14,628
                                    
                                    
                                    
                                    6,393,799Net income
      (loss)
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (2,259,169
                                    )
                                    
                                    
                                    18,704
                                    
                                    
                                    
                                    (2,240,465
                                    )Balance as of
      December 31, 2009
                                    
                                    
                                    1,275,000
                                    
                                    
                                    $
                                    1,275,000
                                    
                                    
                                    $
                                    225,659
                                    
                                    
                                    $
                                    2,619,343
                                    
                                    
                                    $
                                    33,332
                                    
                                    
                                    $
                                    4,153,334





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


78




OCEAN
CONVERSION (BVI) LTD.





CONSOLIDATED
STATEMENTS OF CASH FLOWS





YEARS
ENDED DECEMBER 31, 2009, 2008 and 2007





(Expressed
in United States Dollars)





2009
                                                            
                                                            
                                                            2008
                                                            
                                                            
                                                            2007Cash
      flows from operating activitiesNet
      income (loss)
                                                            
                                                            $
                                                            (2,240,465
                                                            )
                                                            
                                                            $
                                                            (5,221,648
                                                            )
                                                            
                                                            $
                                                            3,880,224Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Depreciation
                                                            
                                                            
                                                            820,030
                                                            
                                                            
                                                            
                                                            251,708
                                                            
                                                            
                                                            
                                                            399,442Impairment
      loss on operating contract
                                                            
                                                            
                                                            2,121,775
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            -Profit
      sharing
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            1,240,094Change
      in:Accounts
      receivable
                                                            
                                                            
                                                            1,092,601
                                                            
                                                            
                                                            
                                                            7,042,140
                                                            
                                                            
                                                            
                                                            (5,770,794
                                                            )Inventory
                                                            
                                                            
                                                            (143,263
                                                            )
                                                            
                                                            
                                                            (202,228
                                                            )
                                                            
                                                            
                                                            (42,137
                                                            )Other
      assets
                                                            
                                                            
                                                            (39,648
                                                            )
                                                            
                                                            
                                                            21,372
                                                            
                                                            
                                                            
                                                            (671,996
                                                            )Accounts
      payable and accrued liabilities
                                                            
                                                            
                                                            1,860,541
                                                            
                                                            
                                                            
                                                            (283,197
                                                            )
                                                            
                                                            
                                                            595,269Net
      cash provided by (used in) operating activities
                                                            
                                                            
                                                            3,471,571
                                                            
                                                            
                                                            
                                                            1,608,147
                                                            
                                                            
                                                            
                                                            (369,898
                                                            )Cash
      flows from investing activitiesPurchase
      of property, plant and equipment
                                                            
                                                            
                                                            (257,514
                                                            )
                                                            
                                                            
                                                            (156,195
                                                            )
                                                            
                                                            
                                                            (28,232
                                                            )Expenditures
      for construction in progress
                                                            
                                                            
                                                            (677,092
                                                            )
                                                            
                                                            
                                                            (12,549
                                                            )
                                                            
                                                            
                                                            (307,812
                                                            )Net
      cash (used in) investing activities
                                                            
                                                            
                                                            (934,606
                                                            )
                                                            
                                                            
                                                            (168,744
                                                            )
                                                            
                                                            
                                                            (336,044
                                                            )Cash
      flows from financing activitiesProfit
      sharing rights paid
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            (40,500
                                                            )
                                                            
                                                            
                                                            (101,250
                                                            )Principal
      repayments of long term debt
                                                            
                                                            
                                                            (375,000
                                                            )
                                                            
                                                            
                                                            (625,000
                                                            )
                                                            
                                                            
                                                            (125,000
                                                            )Dividends
      paid
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            (127,500
                                                            )
                                                            
                                                            
                                                            (318,750
                                                            )Net
      cash (used in) in financing activities
                                                            
                                                            
                                                            (375,000
                                                            )
                                                            
                                                            
                                                            (793,000
                                                            )
                                                            
                                                            
                                                            (545,000
                                                            )Net
      increase (decrease) in cash and cash equivalents
                                                            
                                                            
                                                            2,161,965
                                                            
                                                            
                                                            
                                                            646,403
                                                            
                                                            
                                                            
                                                            (1,250,942
                                                            )Cash
      and cash equivalents at the beginning of the year
                                                            
                                                            
                                                            748,566
                                                            
                                                            
                                                            
                                                            102,163
                                                            
                                                            
                                                            
                                                            1,353,105Cash
      and cash equivalents at the end of the year
                                                            
                                                            $
                                                            2,910,531
                                                            
                                                            
                                                            $
                                                            748,566
                                                            
                                                            
                                                            $
                                                            102,163Supplemental
      disclosure of cash flow informationInterest
      paid in cash
                                                            
                                                            $
                                                            82,578
                                                            
                                                            
                                                            $
                                                            245,000
                                                            
                                                            
                                                            $
                                                            154,314Conversion
      of accounts payable to long term debt (see Note 6).
                                                            
                                                            $
                                                            800,000
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            -





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


79


OCEAN
CONVERSION (BVI) LTD.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





1.
Principal activity





Ocean
Conversion (BVI) Ltd. (“OC-BVI”) was incorporated in the British Virgin Islands
under the Companies Act, Cap 285, on May 14, 1990 and is engaged in the
production and sale of potable water to the Government of the British Virgin
Islands (the “BVI government”). OC-BVI has an agreement with the BVI government,
its sole customer, to produce and supply a guaranteed quantity and quality of
potable water. This agreement provides for specific penalties should OC-BVI not
be able to provide the guaranteed quantity of water.





JVD Ocean
Desalination Ltd. (“JVD”), a majority owned subsidiary of OC-BVI, was
incorporated on January 2, 2003 and began producing potable water on the island
of Jost Van Dyke for the BVI government on July 10, 2003.





2.
Accounting policies





Basis of preparation:The
consolidated financial statements presented are prepared in accordance with
accounting principles generally accepted in the United States of
America.





Basis of consolidation:The
consolidated financial statements include the financial statements of Ocean
Conversion (BVI) Ltd. and its majority owned subsidiary, JVD Ocean Desalination
Ltd. (collectively, the “Company”). All significant intercompany balances and
transactions have been eliminated.





Use of estimates:The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management of the Company to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period.
Significant items subject to estimates and assumptions include the carrying
value of property, plant and equipment and inventory. Actual results could
differ from those estimates.





Cash and cash equivalents:Cash and cash equivalents are comprised of demand deposits at banks and
highly liquid deposits at banks with an original maturity of three months or
less. Cash and cash equivalents are not restricted as to withdrawal or
use.





Trade accounts receivable:Trade accounts receivable are recorded at the invoiced amounts based on
meter readings.





Interest income:The Company
earns interest income on trade accounts receivable based on the overdue invoices
from its customer.





Inventory:Inventory primarily
includes replacement spares and parts that are valued at the lower of cost or
net realizable value, with cost determined on the first-in, first-out
basis.





Impairment of long-lived assets:Assets such as property, plant and equipment, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount
exceeds the fair value of the asset.





Property, plant and equipment:Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation is calculated using a straight line method with an
allowance for estimated residual values. Rates are determined based on the
estimated useful lives of the assets as follows:





Plant
      and equipment
              4
      to 40 yearsOffice
      furniture, fixtures and equipment
              3
      to 10 yearsVehicles
              3
      to 10 yearsLab
      equipment
              3
      to 10 years


80


Additions
to property, plant and equipment consist of the cost of the contracted services,
direct labor and materials. Assets under construction are recorded as additions
to property, plant and equipment upon completion of the projects. Depreciation
commences in the month of addition.





Construction in progress:The
cost of borrowed funds directly attributable to the acquisition and construction
of qualifying assets, which are assets that necessarily take a substantial
period of time to be ready for their intended use, are added to the cost of
those assets until such time as the assets are substantially ready for use or
sale.





Revenue from water
sales:  Through December 31, 2007, OC-BVI recognized revenues
from water sales at the time water was supplied to the BVI government’s
distribution system. The amount of water supplied was determined based upon
water meter readings performed at the end of each month.  Under the
terms of its bulk water supply contracts, OC-BVI is entitled to charge its
customers the greater of a minimum monthly charge or the price for water
supplied during the month.  Due to the dispute relating to the
Baughers Bay plant (see Note 3) that resulted in on-going uncertainty as to the
amount and timing of payments by the BVI government for water supplied from this
plant, effective January 1, 2008, OC-BVI changed its policy for recognizing
revenues on its Baughers Bay plant from the accrual to the equivalent of the
cash method. OC-BVI has recognized revenues for amounts billed to the BVI
government for water supplied from the Baughers Bay and Bar Bay plants during
the years ended December 31, 2008 and 2009 only to extent such amounts have been
paid by the BVI government and such amounts exceed in the aggregate the accounts
receivable balances previously due from the BVI government as of December 31,
2007 for water supplied from the Baughers Bay plant. Payments received by OC-BVI
from the BVI government totaled approximately $4.7 million, $6.7 million and
$6.3 million in 2007, 2008 and 2009, respectively.




Reclassifications: The
deferred revenue amount previously presented in the 2008 consolidated balance
sheet has been reclassified in these financial statements as
follows:
 
 As ofDecember 31, 2008Accounts
      receivable, as previously reported
                      
                      $
                      14,029,143Reclassification
                      
                      
                      (12,894,193
                      )Accounts
      receivable, as adjusted
                      
                      $
                      1,134,950Deferred
      revenue, as previously reported
                      
                      $
                      12,894,193Reclassification
                      
                      
                      (12,894,193
                      )Deferred
      revenue, as adjusted
                      
                      $
                      -
 
 Certain
other prior year amounts have also been reclassified to conform to the current
year’s presentation.




3.
            Dispute with BVI
      government.





In
October 2006, the Ministry of Communications and Works of the Government of the
British Virgin Islands (the “Ministry”) notified OC-BVI that it was asserting a
purported right of ownership of the Baughers Bay plant pursuant to the terms of
the Water Supply Agreement between the parties dated May 1990 (the “1990
Agreement”) and was inviting OC-BVI to submit a proposal for its continued
involvement in the production of water at the Baughers Bay plant in light of the
Ministry’s planned assumption of ownership. The Ministry is OC-BVI’s sole
customer and substantially all of its revenues are generated from the Baughers
Bay plant.





Under the
terms of the 1990 Agreement, upon the expiration of the initial seven year term
in May 1999, the agreement would automatically be extended for another seven
year term unless the Ministry provided notice, at least eight months prior to
such expiration, of its decision to purchase the plant from OC-BVI for
approximately $1.42 million.





In
correspondence between the parties from late 1998 through early 2000, the
Ministry indicated that the BVI government was prepared to exercise the option
to purchase the plant but would be amenable to negotiating a new water supply
agreement, and that it considered the 1990 Agreement to be in force on a monthly
basis until negotiations between the BVI government and OC-BVI were concluded.
Occasional discussions were held between the parties since 2000 without
resolution of the matter. OC-BVI has continued to supply water to the Ministry
and has expended approximately $4.7 million to significantly expand the
production capacity of the plant beyond that contemplated in the 1990
Agreement.





OC-BVI
submitted a proposal to the Ministry in late 2006 to continue to supply water
from the Baughers Bay plant. The Ministry held discussions with OC-BVI regarding
a new contract but did not formally respond to OC-BVI’s proposal. Early in 2007
the Ministry unilaterally took the position that until such time as a new
agreement is reached on the ownership of the plant and the price for the water
produced by the plant, the Ministry would only pay that amount of OC-BVI’s
billings that the Ministry purported constituted OC-BVI’s costs of producing the
water. OC-BVI responded to the Ministry that the amount the Ministry proposed to
pay was significantly less than OC-BVI’s production costs. Payments made by the
Ministry to OC-BVI since the Ministry’s assumption of this reduced price have
been sporadic and as of December 31, 2007 OC-BVI had received payment for less
than 22% of the amounts it billed the Ministry for the year then ended. On
November 15, 2007, OC-BVI issued a demand letter to the BVI government for
approximately $6.2 million representing amounts that OC-BVI claimed were due by
the BVI government for water sold and delivered plus interest and legal fees. In
response to OC-BVI’s demand for payment, the BVI government issued a letter
dated November 19, 2007 that reasserted its claim that ownership of the Baughers
Bay plant has passed to the BVI government and rejected OC-BVI’s claim for
payment. On November 22, 2007, OC-BVI’s management was informed that the BVI
government had filed a lawsuit with the Eastern Caribbean Supreme Court (the
“Court”) seeking ownership of the Baughers Bay plant. OC-BVI counterclaimed that
it was entitled to continued possession and operation of the Baughers Bay plant
until the BVI government paid OC-BVI approximately $4.7 million, which it
believes represents the value of the Baughers Bay plant at its present expanded
production capacity. OC-BVI took the legal position that since the BVI
government never paid the $1.42 million to purchase the Baughers Bay plant, the
1990 agreement terminated on May 31, 1999, which was eight months after the date
that the Ministry provided written notice of its intention to purchase the
plant.


81





On July
4, 2008, OC-BVI filed a claim with the Court seeking recovery of $7,806,629,
representing amounts owed to OC-BVI for water sold and delivered to the BVI
government through May 31, 2008, $842,188 for interest accrued on amounts owed
as of May 31, 2008, and future interest and costs.  This claim was
amended and increased on April 22, 2009 to $13,773,954 for amounts owed for
water delivered through March 31, 2009 plus accrued interest of $2,537,334 on
amounts owed as of March 31, 2009 plus future interest and costs.  The
$13,773,954 amount represented amounts billed at the contract prices in effect
before the BVI government asserted its purported right of ownership of the
plant.





The Court
held a three-day trial from July 22 through July 24, 2009 to address both the
Baughers Bay ownership issue and OC-BVI’s claim for payment of amounts owed for
water sold and delivered to the BVI government.  On September 17,
2009, the Court issued a preliminary ruling with respect to the litigation
between the BVI government and OC-BVI.  The Court determined that the
BVI government was entitled to immediate possession of the Baughers Bay plant
and dismissed OC-BVI’s claim for compensation of approximately $4.7 million for
of expenditures made to expand the production capacity of the
plant.  As a result of this determination by the Court, OC-BVI
recorded an impairment loss of approximately $2.1 million during the three
months ended September 30, 2009 for fixed assets associated with the Baughers
Bay plant.  However, the Court determined that OC-BVI was entitled to
full payment of water invoices issued up to December 20, 2007, which had been
calculated under the terms of the original 1990 Agreement, and ordered the BVI
government to make an immediate interim payment of $5.0 million to OC-BVI for
amounts owed to OC-BVI.  The Court deferred deciding the entire
dispute between the parties until it could conduct a hearing to determine the
reasonable rate for water produced by OC-BVI for the period from December 20,
2007 to the present.





After
conducting hearings on October 12 and 16, 2009, on October 28, 2009, the Court
ordered the BVI government to pay OC-BVI at the rate of $13.91 per thousand
imperial gallons for water produced by OC-BVI from December 20, 2007 to present,
which amounts to a total recovery for OC-BVI of $10.3 million as of September
30, 2009.  The BVI government made a payment of $2.0 million to OC-BVI
under the Court order during the fourth quarter of 2009.





On
October 28, 2009, OC-BVI filed an appeal with the Eastern Caribbean Court of
Appeals (the “Appellate Court”) asking the Appellate Court to review the
September 17, 2009 ruling by the Eastern Caribbean Supreme Court as it relates
to OC-BVI’s claim for compensation for expenditures made to expand the
production capacity of the Baughers Bay plant.





On
October 29, 2009, the BVI government filed an appeal with the Appellate Court
seeking the Appellate Court’s review of the September 17, 2009 ruling of the
Court that the BVI government pay OC-BVI the reasonable rate for water produced
by OC-BVI for the period from December 20, 2007 to the present.  The
BVI government is requesting a ruling from the Appellate Court that the BVI
government should only pay OC-BVI the actual cost of water produced at the
plant.





The
Appellate Court could ultimately overturn the ruling of the Court requiring the
BVI government to pay OC-BVI at the rate of $13.91 per thousand imperial gallons
for water previously supplied.    If this occurs OC-BVI
could be required to repay some or all of the funds paid by the BVI government
pursuant to the award by the Court.  If this occurs OC-BVI would be
required to record an expense for the amounts repaid.  Such expense
could have a material adverse impact on OC-BVI’s  results of
operations and financial condition.





During
2007 OC-BVI completed, for a total cost of approximately $8 million, the
construction of a 700,000 U.S. gallons per day desalination plant located at Bar
Bay, Tortola (the “Bar Bay plant”). On December 19, 2008, OC-BVI and the BVI
government executed a binding term sheet for the purchase of water by the BVI
government from OC-BVI’s seawater desalination plant located at Bar Bay,
Tortola, BVI. The parties intended this term sheet to govern the terms of sale
of water by OC-BVI to the BVI government until the parties executed a definitive
contract. On March 4, 2010, OC-BVI and the BVI government executed the
definitive contract for the Bar Bay plant (the “Bar Bay Agreement”). Under the
terms of the Bar Bay Agreement, OC-BVI will deliver up to 600,000 U.S. gallons
of water per day to the BVI government from the Bar Bay plant. Prior to
completion of the construction of the first phase of certain additional
facilities by OC-BVI in August 2009, the BVI government was not obligated to
purchase any minimum volumes of water from OC-BVI. The first phase of such
facilities construction involved the installation of water pipes from the plant
to a BVI government-owned reservoir site and from this site to the BVI
government’s piped water distribution system. However, since completion of this
first phase, the BVI government has been obligated to purchase at least 600,000
U.S. gallons of water per day from the plant. A second phase of construction
requires OC-BVI to complete a storage reservoir on the BVI government site
within twelve months of the signing of the Bar Bay Agreement.  The Bar
Bay Agreement includes a seven-year extension option exercisable by the BVI
government.


82





4.
Inventory





Inventory
consists of:





December 31,2009
                      
                      
                      2008Consumables
      stock
                      
                      $
                      66,255
                      
                      
                      $
                      89,984Spare
      parts stock
                      
                      
                      746,595
                      
                      
                      
                      579,603Total
      inventory
                      
                      
                      812,850
                      
                      
                      
                      669,587Less
      current portion
                      
                      
                      374,810
                      
                      
                      
                      259,467Inventory
      (non-current)
                      
                      $
                      438,040
                      
                      
                      $
                      410,120





5. Property, plant and equipment and
construction in progress





Property,
plant and equipment consist of:




December
      31,2009
                          
                          
                          2008Buildings
                          
                          $
                          3,587,639
                          
                          
                          $
                          3,587,639Plant
      and equipment
                          
                          
                          5,488,196
                          
                          
                          
                          13,853,490Office
      furniture, fixtures and equipment
                          
                          
                          69,000
                          
                          
                          
                          61,363Vehicles
                          
                          
                          71,600
                          
                          
                          
                          71,600Tools
      & test equipment
                          
                          
                          21,259
                          
                          
                          
                          18,4319,237,694
                          
                          
                          
                          17,592,523Accumulated
      depreciation
                          
                          
                          (1,058,518
                          )
                          
                          
                          (7,390,066
                          )Property,
      plant and equipment, net
                          
                          $
                          8,179,176
                          
                          
                          $
                          10,202,457Construction
      in progress
                          
                          $
                          224,744
                          
                          
                          $
                          208,662




As a
result of the September 2009 determination by the Eastern Caribbean Supreme
Court that the BVI government was entitled to ownership and immediate possession
of the Baughers Bay plant (see Note 3). OC-BVI recorded an impairment loss on
operating contract of approximately $2.1 million during the year ended December
31, 2009 for fixed assets associated with the Baughers Bay plant, which is
included in cost of water sales.


83


6.
Long term debt





December 31,2009
                          
                          
                          2008CWCO
      loan bearing interest at three month LIBOR plus 5.5% (5.75% as of December
      31, 2009) per annum, with interest calculated daily and payable quarterly.
      The loan is payable in eight (8) quarterly principal payments, being four
      (4) equal installments of $125,000 commencing on November  30,
      2009, three (3) equal installments of $250,000, plus a final principal
      payment of $1,550,000 due on August 31, 2011, plus quarterly payments of
      accrued interest
                          
                          $
                          2,675,000
                          
                          
                          $
                          2,250,000Less
      current portion
                          
                          
                          (625,000
                          )
                          
                          
                          (2,250,000
                          )Long
      term debt, excluding current portion
                          
                          $
                          2,050,000
                          
                          
                          $
                          —





On May
25, 2005, the Company entered into a loan agreement with Consolidated Water Co.
Ltd. (“CWCO”), a Cayman Islands company which owns 50% of the Company’s voting
shares. Under this agreement CWCO loaned the Company $3.0 million for the design
and construction of the Bar Bay plant in Tortola. The loan principal was
originally due and payable on June 1, 2007 and interest accrues at the LIBOR
rate plus 3.5% and is payable quarterly on amounts drawn down commencing July
2005. The loan can be repaid at any time without penalty and is secured by a
debenture on all of the Company’s assets. On August 24, 2007, the loan agreement
was amended such that the loan is payable in eight quarterly principal payments
of $125,000 commending on August 31, 2007, plus a final principal payment of
$2,000,000 due on August 31, 2009, plus quarterly payments of accrued interest.
In August 2009, CWCO amended the terms of this loan with OC-BVI, increasing its
balance to $2,800,000 by converting $800,000 in trade payables due to CWCO
from OC-BVI.   Under the terms of this amendment, the interest
rate on the loan was increased to the rate of LIBOR plus 5.5% and the maturity
date for the final balloon payment extended to August 31, 2011. CWCO
further amended this loan in January 2010 to increase the interest rate to LIBOR
plus 7.5%.  OC-BVI failure to obtain new agreements with the BVI
government for its Baughers Bay and Bar Bay plants constituted an event of
default under the loan agreement as of December 31, 2009.  However,
the Company has obtained waivers of this default through January 1, 2011 from
CWCO.





7.
Commitments





The
Company leases property adjacent to the Baughers Bay plant upon which it has
installed wells and pipelines necessary for the production of water, with lease
payments totaling $18,055 annually through the year 2015.





In
addition, on May 25, 2005, the Company entered into a twenty-five year lease
agreement with Bar Bay Estate Holdings Limited (“Bar Bay”), a private company
incorporated in the Territory of the British Virgin Islands, pursuant to which
the Company agreed to lease from Bar Bay approximately 50,000 square feet of
land on Tortola, British Virgin Islands on which a seawater desalination plant
and wells was constructed. Under the terms of the lease agreement, a lease
premium payment of $750,000 was made on June 10, 2005, annual lease and easement
payments of $15,020 are due annually and royalty payments of 2.87% of annual
sales, as defined in the lease agreement, are payable quarterly. Sage Water
Holdings (BVI) Limited currently owns 100% of the non-voting stock, 50% of the
voting common stock and 50% of the profit sharing rights of OC-BVI. A Director
of Sage Water Holdings is also a Director of OC-BVI and holds 50% of the
outstanding shares of Bar Bay.





Future
minimum lease payments under non-cancelable operating leases as of December 31,
2009 are as follows:





2010
                
                $
                33,0752011
                
                
                33,0752012
                
                
                33,0752013
                
                
                33,0752014
                
                
                33,075Thereafter
                
                
                258,375





Total
rental expense for the years ended December 31, 2009, 2008 and 2007 was $63,655,
$63,655, and $83,655, respectively.


84


8.
Expenses





Year Ended December 31,2009
                        
                        
                        2008
                        
                        
                        2007Cost
      of water sales consist of the following:Fuel
      oil
                        
                        $
                        104,031
                        
                        
                        $
                        892,442
                        
                        
                        $
                        990,188Electricity
                        
                        
                        2,126,281
                        
                        
                        
                        1,653,487
                        
                        
                        
                        702,400Maintenance
                        
                        
                        358,516
                        
                        
                        
                        358,190
                        
                        
                        
                        278,673Depreciation
                        
                        
                        819,352
                        
                        
                        
                        250,603
                        
                        
                        
                        398,336Employee
      costs
                        
                        
                        609,364
                        
                        
                        
                        501,894
                        
                        
                        
                        469,759Insurance
                        
                        
                        136,025
                        
                        
                        
                        131,165
                        
                        
                        
                        80,529Loss
      from litigation
                        
                        
                        2,121,775
                        
                        
                        
                        —
                        
                        
                        
                        —Other
      direct costs
                        
                        
                        602,979
                        
                        
                        
                        372,613
                        
                        
                        
                        360,948$
                        6,878,323
                        
                        
                        $
                        4,160,394
                        
                        
                        $
                        3,280,833General
      and administrative expenses consist of the following:Profit
      sharing
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        1,240,094Management
      fees
                        
                        
                        389,978
                        
                        
                        
                        725,895
                        
                        
                        
                        713,119Directors
      fees and expenses
                        
                        
                        27,472
                        
                        
                        
                        27,789
                        
                        
                        
                        63,711Professional
      fees
                        
                        
                        219,103
                        
                        
                        
                        120,600
                        
                        
                        
                        266,366Employee
      costs
                        
                        
                        45,976
                        
                        
                        
                        52,718
                        
                        
                        
                        50,431Maintenance
      costs
                        
                        
                        2,598
                        
                        
                        
                        145
                        
                        
                        
                        1,265Depreciation
                        
                        
                        678
                        
                        
                        
                        1,105
                        
                        
                        
                        1,105Other
      indirect costs
                        
                        
                        217,125
                        
                        
                        
                        118,060
                        
                        
                        
                        150,187$
                        902,930
                        
                        
                        $
                        1,046,312
                        
                        
                        $
                        2,486,278





9.
Related party transactions





Pursuant
to an amended and restated Management Services Agreement dated December 1, 2003
between DesalCo Limited. (a wholly-owned subsidiary of CWCO) and the Company,
DesalCo Limited provides the Company with management, administration, finance,
operations, maintenance, engineering and purchasing services, and is entitled to
be reimbursed for all reasonable expenses incurred on behalf of the Company. The
Company incurred fees of $324,148, $541,218, and $528,119, related to this
management service agreement for the years ended December 31, 2009, 2008 and
2007, respectively, and as of December 31, 2009 had accounts payable of $137,066
(2008: $440,315) due to DesalCo Limited for fees and expenses paid by DesalCo
Ltd. on behalf of the Company.





Pursuant
to a Management Services Memorandum effected January 1, 2004 between the Class B
Directors who at any point in time represent Sage Water Holdings (BVI) Limited,
and the Company, the Class B directors provide the Company with delegated
operational matters, general management of local business matters, donation,
sponsorship and public relations activities, and are entitled to an annual fixed
fee of $60,000 and a profit sharing bonus equal to 2% of the Company’s income
before depreciation, interest (income and expense), and other expenses not
directly related to the operation of the Company. The Company incurred fees of
$65,830, $184,675, and $185,000, related to this management service memorandum
for the years ended December 31, 2009, 2008 and 2007, respectively and as of
December 31, 2009 had accounts payable of $nil (2008: $7,600) due to Sage Water
Holdings (BVI) Ltd.





As of
December 31, 2009, the Company had accounts payable of $158,723 (2008: $24,522)
related to the reimbursement of expenses paid by CWCO and DesalCo
Limited.





10.
Profit sharing obligation





December 31,2009
                  
                  
                  2008Opening
      balance
                  
                  $
                  3,209,756
                  
                  
                  $
                  3,250,256Additions
                  
                  
                  -
                  
                  
                  
                  -Distributions
                  
                  
                  -
                  
                  
                  
                  (40,500
                  )Ending
      balance
                  
                  $
                  3,209,756
                  
                  
                  $
                  3,209,756


85





In 1993,
the Company and its existing shareholders at that time, entered into two Share
Repurchase and Profit Sharing Agreements (the “Agreements”) to repurchase
225,000 shares each from those shareholders (the “Parties”), whose shares were
issued in exchange for guarantees of the Company’s long term debt. The
Agreements were subsequently approved by special resolution at an Extraordinary
Meeting of all the Company’s shareholders.





Under the
terms of the Agreements, the Company, in exchange for the above-mentioned
shares, granted the Parties, profit sharing rights in the Company’s profits for
as long as the Company remains in business as a going concern. The Agreement
states that where the Company has profits available for the payment of dividends
and pays a dividend from there, a distribution shall be made to each of the
Parties equal to 202,500 (2008: 202,500) times the dividend per share received
by the remaining shareholders and paid concurrently with such dividend. The
factor of 202,500 (2008: 202,500) shall be subject to amendment by the same
proportion and at the same time as changes take place or adjustments are made in
respect of the remaining shareholders.





The
current shareholders and an affiliate of a current shareholder have acquired
these profit sharing rights. The Company has recorded an obligation as of
December 31, 2009 for the maximum profit shares payable to the Parties if all
retained earnings were to be distributed as dividends and profit
shares.





11.
Taxation





Under the
terms of the water sale agreements with the Government, the Company is exempt
from all non-employee taxation in the British Virgin Islands.





12.
Pension plan





Effective
December 1, 2003, the Company established the MWM Global Retirement Plan (the
“Plan”). The Plan is a defined contribution plan whereby the Company will
contribute 5% of each participating employee’s salary to the Plan. The total
amount recognized as an expense under the plan during the year ended December
31, 2009 was $16,171 (2008: $14,335 and 2007: $13,876).





13.
Financial instruments





Credit risk:





Financial
assets that potentially subject the Company to concentrations of credit risk
consist principally of cash and cash equivalents, accounts receivable and
intercompany loans receivable. The Company’s cash is placed with high credit
quality financial institutions. The accounts receivable are due from the
Company’s sole customer, the BVI government. As a result, the Company is subject
to credit risk to the extent of any non-performance by the BVI
government.





Interest rate
risk:





The
interest rates and terms of the Company’s loans are presented in Note 6 of these
consolidated financial statements. The Company is subject to interest rate risk
to the extent that the LIBOR rate may fluctuate.





Fair values:





As of
December 31, 2009 and 2008, the carrying amounts of cash and cash equivalents,
accounts receivable, prepaid expenses and other assets, accounts payable and
accrued liabilities approximate fair values due to the short term maturities of
these assets and liabilities. Management considers that the carrying amount for
long term debt approximates fair value.




14. Subsequent
events






86





ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.





None.





ITEM
9A. CONTROLS AND PROCEDURES





Disclosure
Controls and Procedures





Disclosure
controls and procedures are the Company’s controls and other procedures that are
designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”) is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by us in the
reports that we file under the Exchange Act is accumulated and communicated to
our management, including our principal executive officer and principal
financial officer, as appropriate, to allow timely decisions regarding required
disclosure. Our management recognizes that any controls and procedures, no
matter how well designed and operated, can only provide reasonable assurance of
achieving their objectives and management necessarily applies its judgment in
evaluating the possible controls and procedures.





Our
management has evaluated, with the participation of our principal executive
officer and principal financial officer, the effectiveness of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) as of the end of the period covered by this
report. Based upon that evaluation, our management, including our principal
executive officer and principal financial officer, have concluded that, as of
the end of the period covered by this report, the company’s disclosure controls
and procedures were effective at the reasonable assurance level.





Internal
Control Over Financial Reporting





(a)
            Management’s
      Annual Report on Internal Control Over Financial
  Reporting





MANAGEMENT’S REPORT ON INTERNAL
CONTROL OVER FINANCIAL REPORTING





Company
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is a
process designed by, or under the supervision of, our principal executive and
principal financial officers and effected by the company’s Board of Directors,
management and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that:





•
            pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company;





•
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the Company
      are being made only in accordance with authorizations of management and
      directors of the Company; and





•
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the Company’s assets that
      could have a material effect on the financial
  statements.





Because
of inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.





Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2009. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control-Integrated
Framework.


87


Based on
our assessment, management has concluded that, as of December 31, 2009, the
Company’s internal control over financial reporting was effective at the
reasonable assurance level.





The
Company’s independent registered public accounting firm, MarcumRachlin, a
division of Marcum LLP, has issued a report on the effectiveness of the
Company’s internal control over financial reporting. Their report appears in
Item 8. Financial Statements and Supplementary Data.





(b)
Attestation Report of the Independent Registered Public Accounting
Firm





See Item
8. Financial Statements and Supplementary Data.





(c)
Changes in Internal Control Over Financial Reporting





There
were no changes in the Company’s internal control over financial reporting
identified in connection with the evaluation of such internal control that
occurred during the Company’s last fiscal quarter that have materially affected,
or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.





PART
III





ITEM
10.            DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE





Our Directors and Executive
Officers





This
table lists information concerning our executive officers and
directors:





Name
                    
                    Age
                    
                    PositionWilmer F. Pergande *
                    
                    70
                    
                    Director, Chairman of the Board of DirectorsFrederick W. McTaggart
                    
                    47
                    
                    Director, President, Chief Executive OfficerDavid W. Sasnett
                    
                    53
                    
                    Director, Executive Vice President & Chief Financial OfficerGregory S. McTaggart
                    
                    46
                    
                    Vice President of Cayman OperationsRobert B. Morrison
                    
                    56
                    
                    Vice President of Purchasing and Information TechnologyGerard J. Pereira
                    
                    39
                    
                    Vice President of Sales and MarketingRamjeet Jerrybandan
                    
                    42
                    
                    Vice President of Overseas OperationsWilliam T. Andrews
                    
                    61
                    
                    DirectorBrian E. Butler *
                    
                    60
                    
                    DirectorSteven A. Carr *
                    
                    59
                    
                    DirectorCarson K. Ebanks *
                    
                    54
                    
                    DirectorRichard L. Finlay *
                    
                    51
                    
                    DirectorClarence B. Flowers, Jr. *
                    
                    54
                    
                    DirectorLeonard J. Sokolow*
                    
                    53
                    
                    DirectorRaymond Whittaker *
                    
                    56
                    
                    Director







*
            The
      Board of Directors has determined that each of such persons is an
      “independent director” under the corporate governance rules of The NASDAQ
      Stock Market LLC (“NASDAQ”).





Wilmer F. Pergande has been a
director of our Company since 1978 and Chairman since November 2009. He has more
than 45 years of management and engineering experience in the desalinization
industry.  Mr. Pergande is the principal of WF Pergande Consulting LLC
currently providing consulting engineering services in the areas of desalination
and fluid dynamics technologies. He retired in 2006 as the Global Leader for
Desalination and Process Equipment for GE Infrastructure, Water and Process
Technologies, a water desalination and treatment division of GE, which position
he held since 2002. From 1995 to 2001, Mr. Pergande held the position of
Vice-President of Special Projects, and CEO of a subsidiary, of Osmonics, Inc.,
a publicly-traded water treatment and purification company, until its
acquisition by General Electric Co. Before joining Osmonics, Mr. Pergande was
the Chief Executive Officer of Licon International, Inc., a publicly traded
manufacturer of liquid separation and processing equipment from 1992 to 1995.
Previously, Mr. Pergande was the President of Mechanical Equipment Company, Inc.
from 1978 to 1992, and held managerial and executive positions from 1969 to 1977
with AquaChem Inc., both companies being manufacturers of seawater desalination
equipment. He has been a Director of the International Desalination Association
for three terms and also served as its Treasurer and Secretary.


88





Mr.
Pergande was selected to serve as a member of our Board of Directors because of
his management and engineering experience in the desalinization industry, and
his organizational, sales and marketing skills.





Frederick W. McTaggart has
been a director of our Company since 1998, President since October 2000 and
Chief Executive Officer since January 1, 2004. Mr. McTaggart served as Chief
Financial Officer of the Company from February 2001 to January 1,
2004.  From April 1994 to October 2000, Mr. McTaggart was the Managing
Director of the Water Authority-Cayman, the government-owned water utility
serving certain areas of the Cayman Islands. From March 1987 to April 1994 he
held the positions of Deputy Director and Operations Engineer with the Water
Authority-Cayman. He received his B.S. degree in Building Construction from the
Georgia Institute of Technology in 1985. Mr. McTaggart is the brother of Mr.
Gregory S. McTaggart, the Vice President of Cayman Operations.





Mr.
McTaggart was selected to serve as a member of our Board of Directors because of
his technical and managerial experience in the water industry, and his
experience as the principal executive officer of the Water
Authority-Cayman.





David W. Sasnett has served as
a director of our Company since December 2004 and in June 2006 became our
Executive Vice President and Chief Financial Officer. From October 2005 until
June 2006 Mr. Sasnett was the Chief Financial Officer of VoIP, Inc., a
publicly-traded provider of communication services utilizing voice over internet
protocol technology. During 2004, he was the Vice President of Finance and
Controller for MasTec, Inc., a publicly-traded specialty contractor and
infrastructure provider. Mr. Sasnett was employed from 1994 to 2002 by Catalina
Lighting, Inc. and from 1996 to 2002 served as the Chief Financial Officer of
Catalina Lighting, Inc., a publicly-traded manufacturer and distributor of
residential lighting and other consumer products. Mr. Sasnett is presently
serving on the Board of Directors of Web Safety, Inc. His experience also
includes more than 12 years with the accounting, auditing and consulting firm of
Deloitte & Touche, LLP.





Mr.
Sasnett was selected to serve as a member of our Board of Directors because of
his accounting, auditing and consulting background and his experience as
principal financial officer of several publicly-traded entities.





Gregory S. McTaggart is our
Vice President of Cayman Operations. Mr. McTaggart joined our Company in January
1991 as our resident engineer and has served in his current capacity since 1994.
For three years before joining us, Mr. McTaggart worked for the Caribbean
Utilities Company, the electrical utility on Grand Cayman, as a mechanical
engineer. Mr. McTaggart obtained his Bachelor of Mechanical Engineering from the
Georgia Institute of Technology in 1986. Mr. McTaggart is the brother of
Frederick W. McTaggart, who is the President, Chief Executive Officer and a
director of our Company.





Robert B. Morrison was
appointed Vice President of Purchasing & Information Technology in March
2003. Mr. Morrison holds the designation Certified Professional Purchaser and
has more than twenty- five years of experience in the purchasing and logistics
field. He joined DesalCo Limited as Purchasing Manager in June of 1996 in which
position he also employed his more than 20 years of information technology
experience as software and systems developer, network administrator and end user
support resource for PC and mainframe environments. Prior to this, Mr. Morrison
was principal Purchasing Officer for the Ministry of Works & Engineering of
the Bermuda government and Purchasing Manager for American-Standard in Toronto,
Canada.





Gerard J. Pereira was
appointed Vice President of Sales and Marketing in January 2008. Mr. Pereira
obtained his Bachelor of Science and Master of Science in Chemical Engineering
from the University of Waterloo, Ontario, Canada and joined Ocean Conversion
(Cayman) Limited as Operations Engineer in 1995. He was promoted to Operations
Manager of Ocean Conversion (Cayman) Limited in 1998, which post he held until
our acquisition of that company. In March 2003, Mr. Pereira was promoted to Vice
President of Engineering, retaining this post until his acceptance in 2008 of
current position.





Ramjeet Jerrybandan joined our
Company in 1998 as the Operations Engineer in Grand Cayman. He was promoted to
Operations Manager (Cayman) in 2005 and became our Vice President of Overseas
Operations in May 2006. He obtained his Bachelor of Science degree in Industrial
Engineering and his Master of Science degree in Engineering Management at the
University of the West Indies. Mr. Jerrybandan holds an Advanced Diploma in
Business Administration from the Association of Business Executives of London.
He also has extensive training in the Information Technology field including
industrial automation systems.


89


William T. Andrews became a
director of our Company upon completion of our acquisition of DesalCo Limited in
February 2003. Since 2002, he has been a director of DWEER Technology Ltd., and
since 2007 he has been a director of ROVEX Ltd. companies which license patented
high efficiency energy reduction pumping equipment for seawater reverse osmosis
desalination. Since 2003, he has been Vice-Chairman of the Board of Directors of
Calder AG. From 1991 to 2003, Dr. Andrews was Managing Director of DesalCo
Limited. He was formerly President of Reliable Water Inc., and Vice President of
Polymetrics Inc., focusing on seawater reverse osmosis desalination in both
cases. Dr. Andrews attended universities in England, receiving a bachelor’s
degree in Physics from the University of Newcastle-upon-Tyne, and a doctorate in
Atomic Physics at Oxford University, as a Rhodes Scholar. He is a registered
Mechanical Engineer in California and Bermuda. Since 1976, Dr. Andrews has
continuously been a member of the International Desalination Association (IDA).
He was a director of IDA from 1995 until 2005, and had served as President
during 2002/3. He is a member of the European Desalination Society.





Dr.
Andrews was selected to serve as a member of our Board of Directors because of
his global experience in the desalinization industry, and in particular his
experience as a pioneer of the Caribbean desalination market and his extensive
knowledge of seawater reverse osmosis system design.





Brian E. Butler has been a
director of our Company since 1983. Mr. Butler, a full time resident of the
Cayman Islands, has been the president since 1977 of Butler Property Development
Group, a consortium of property development companies specializing in luxury
resort projects in the Cayman Islands, Turks and Caicos Islands and British
Columbia, Canada.





Mr.
Butler was selected to serve as a member of our Board of Directors because of
his over 40 years as a property developer in the Caribbean and his knowledge of
and business connections on the Cayman Islands.





Steven A. Carr has served as a
director of the Company since 1998. Mr. Carr is the President of Carr &
Associates, a private investment firm located in Bryan, Texas. Mr. Carr received
his Bachelor of Science degree from Texas A&M University in 1973 and his
Master of Arts degree from the University of Texas in 1980. From 1972 to 1994,
Mr. Carr held executive positions and participated in the ownership and
management of a number of broadcast and telecommunications ventures throughout
the United States. From 1998 to 2000, Mr. Carr served as an alternate director
on our Board of Directors and was elected as a full director in May 2000. Mr.
Carr was a director and chairman of the Trust Committee of the First National
Bank of Bryan until its sale in 2007, and a director of Consolidated Water
(Bahamas) Limited. He is Senior Lecturer at Texas A&M University’s Mays
Business School, a councilor of the Texas A&M Research Foundation, director
of the 12th Man Foundation and serves on numerous other boards and councils of
private corporations and associations.





Mr. Carr
was selected to serve as a member of our Board of Directors because of his
knowledge of our Company and business experience.





Carson K. Ebanks became the
Cayman Islands government nominated director of our Company in May of 2001. Mr.
Ebanks was the Director of Planning for the Cayman Islands from 1991 — 1997.
Since 1997, he has served the Cayman Islands Government as a Chief Officer
currently for the Ministry of Finance, Tourism and Development. Mr. Ebanks is a
Justice of the Peace, a Fellow of the Royal Geographic Society and a member of
the American Planning Association and a member of the Most Excellent Order of
the British Empire. He holds a Bachelor of Environmental Studies (Hons. Urban
and Regional Planning — Peace and Conflict Studies Minor) from the University of
Waterloo and a Master of Arts — Planning in Community and Regional Planning from
the University of British Columbia. He is a trustee of the National Gallery of
the Cayman Islands. Mr. Ebanks has served on the Boards of the Trustees for the
Cayman Islands Museum, the Cayman Islands Civil Service Co-operative Credit
Union, the Housing Development Corporation, the Water Authority-Cayman, the
National Roads Authority, and is the Secretary General of the Cayman Islands
Olympic Committee.





Mr.
Ebanks, who was nominated to serve on our Board of Directors by the Cayman
Islands government, was selected to serve as a member of our Board of Directors
because of his knowledge of government affairs, connections within the Cayman
Islands government and his experience in the water industry.





Richard L. Finlay has served
as a director of our Company since 1995. Mr. Finlay is an attorney and notary
public and has practiced law in the Cayman Islands since 1992. Prior to that,
Mr. Finlay served as Director of Legal Studies of the Cayman Islands Government
from 1989 to 1992. From 1983 to 1989, Mr. Finlay was a partner with a Canadian
law firm located in Regina, Canada. Mr. Finlay has served as the Cayman Islands’
representative to the International Company and Commercial Law Review and is a
former editor of the Cayman Islands Law Bulletin.





Mr.
Finlay was selected to serve as a member of our Board of Directors because of
his knowledge of our Company and experience as a corporate lawyer, practicing in
the Cayman Islands and abroad.


90





Clarence B. Flowers, Jr. has
been a director of our Company since 1991. Mr. Flowers is, and has been since
1985, the principal of Orchid Development Company, a real estate developer in
the Cayman Islands. Mr. Flowers also serves as a director of C.L. Flowers &
Son, which is the largest manufacturer of wall systems in the Cayman Islands,
and Cayman National Bank, a retail bank.





Mr.
Flowers was selected to serve as a member of our Board of Directors because of
his over 40 years of experience in the construction industry as a real estate
developer in the Cayman Islands.





Leonard J. Sokolow became a
director of our Company on June 1, 2006. From November 1999 until January 2007,
Mr. Sokolow was CEO and President, and a member of the Board of Directors of
vFinance, Inc., a publicly-traded financial services company, which he
co-founded. From January 2007 until July 2008, Mr. Sokolow was the Chairman of
the Board of Directors and CEO of vFinance, Inc. until it merged into National
Holdings Corporation, a publicly traded financial services company. Since July
2008, Mr. Sokolow has been Vice-Chairman of the Board of Directors and President
of National Holdings Corporation. Mr. Sokolow was Founder, Chairman and Chief
Executive Officer of the Americas Growth Fund, Inc., a closed-end 1940 Act
management investment company, from 1994 to 1998. From 1988 until 1993, Mr.
Sokolow was EVP and General Counsel of Applica, Inc., a publicly-traded
appliance marketing and distribution company. From 1982 until 1988, Mr. Sokolow
practiced corporate, securities and tax law and was one of the founding
attorneys and a partner of an international boutique law firm. From 1980 until
1982, he worked as a CPA for Ernst & Young and KPMG Peat
Marwick.





Mr.
Sokolow was selected to serve as a member of our Board of Directors because of
his experience as a director, principal executive officer, his legal,
accounting, auditing and consulting background and his qualification as our
“audit committee financial expert.”





Raymond Whittaker has served
as a director of our Company since 1988. Mr. Whittaker was the Managing Director
of TransOcean Bank & Trust, Ltd., a bank and trust company located in the
Cayman Islands and a subsidiary of Johnson International, Inc., a bank holding
company located in Racine, Wisconsin from 1984 to December 2000. He is now the
principal of his own company and management firm, FCM Ltd.





Mr.
Whittaker was selected to serve as a member of our Board of Directors because of
his management, financial and banking experience.





Composition of the Board of
Directors





The Board
of Directors is organized into three groups. Each group holds office for a
three-year period and re-election of the Board members is staggered so that
two-thirds of the Board members are not subject to re-election in any given
year. The groups are organized alphabetically as follows:





Group
      1
                      
                      Group
      2
                      
                      Group
      3William T. Andrews
                      
                      Carson K. Ebanks
                      
                      Wilmer F. PergandeBrian E. Butler
                      
                      Richard L. Finlay
                      
                      Raymond WhittakerSteven A. Carr
                      
                      Clarence B. Flowers, Jr.
                      
                      David W. SasnettFrederick W. McTaggart
                      
                      Leonard J. Sokolow





The
directors of Group 3 were re-elected at our annual shareholders’ meeting in
2009. The directors in Group 1 will be eligible for re-election in 2010, Group 2
in 2011 and then Group 3 again in 2012.





Under our
exclusive retail license in the Cayman Islands, which was transferred to our
wholly-owned subsidiary, Cayman Water Company Limited in July 2003, the Cayman
Islands government may nominate three persons to serve on the Board of Directors
of the license holder. We must cause one of the persons nominated by the
government to be elected as a director. In May 2001, when the license was held
by our parent company, Carson K. Ebanks was elected as the government’s nominee
and was elected to our Board. The Government has not yet nominated their
director for Cayman Water Company Limited.





Board
Leadership Structure and Risk Oversight





Mr.
McTaggart currently serves as our principal executive officer and Mr. Pergande,
an independent director, currently serves as the Chairman of the Board of
Directors. The Board of Directors has determined that having an independent
director serve as Chairman of the Board of Directors is consistent with
corporate governance best practices and is in the best interest of shareholders
at this time.  The structure ensures a greater role for the
independent directors in the oversight of the Company and active participation
of the independent directors in setting agendas and establishing priorities and
procedures for the work of the Board of Directors.


91





The Board
of Directors is engaged in the oversight of risk through regular updates from
Mr. McTaggart, in his role as our Chief Executive Officer, and other members of
our management team, regarding those risks confronting us, the actions and
strategies necessary to mitigate those risks and the status and effectiveness of
those actions and strategies. The updates are provided at regularly scheduled
Board of Directors and Committee meetings as well as through more frequent
informal meetings that include the Chairman of the Board of Directors, our Board
of Directors, our Chief Executive Officer, our Chief Financial Officer and other
members of our management team. The Board of Directors provides insight into the
issues, based on the experience of its members, and provides constructive
challenges to management’s assumptions and assertions.





Governance
of the Company





Pursuant
to the Company’s Memorandum of Association, Articles of Association and Cayman
Islands law, the Company’s business, property and affairs are managed under the
direction of the Board of Directors. Members of the Board of Directors are kept
informed of the Company’s business through discussions with the Chief Executive
Officer and other senior officers, by reviewing materials provided to them and
by participating in meetings of the Board of Directors and its
committees.





The
Company schedules meetings of the Board of Directors quarterly, in conjunction
with its Annual General Meeting, and as necessary throughout the year. The
Company expects that all Directors will attend each meeting, absent a valid
reason, such as a scheduled conflict. The Board of Directors held six meetings
during 2009.





Each
director other than Carson K. Ebanksattended at
least 75% of the aggregate of: (i) the total number of meetings of the Board of
Directors held during 2009, and (ii) the total number of meetings held by all
committees of the Board of Directors on which he served during
2009.





If, in
the future, the Board of Directors amends the Code of Business Conduct and
Ethics or grants a waiver to our principal executive officer, principal
financial officer or principal accounting officer with respect to the Code of
Business Conduct and Ethics, the Company will post the amendment or a
description of the waiver on the “Investors - Governance” section of the
Company’s website.





Committees
of the Board of Directors





The Board
of Directors has the following four committees: (1) Executive, (2) Compensation,
(3) Audit and (4) Nominations. Except for the Executive Committee, the Board of
Directors has adopted a written charter for each of the other committees. Such
charters are posted on the “Investors - Governance” section of the Company’s
website: http://www.cwco.com.





Executive
Committee





The
Executive Committee is comprised of Messrs. Frederick McTaggart, Finlay,
Flowers, Pergande and Whittaker. The Executive Committee did not meet during
2009. The functions of the Executive Committee include meeting to ensure that
any matters which must be dealt with before the next Board of Directors meeting
are addressed in a timely matter.





Compensation
Committee





The
Compensation Committee is comprised of Messrs. Finlay, Carr and Flowers. Prior
to February 2009 the Committee was comprised of Messrs. Finlay, Pergande and
Sokolow.  The Compensation Committee met three times during
2009.





The
Compensation Committee is responsible for reviewing and approving the executive
compensation program for the Company and its subsidiaries, assessing executive
performance, making grants of salary and annual incentive compensation,
approving certain employment agreements and reviewing and consulting with the
Company’s management regarding the Compensation Discussion and Analysis that is
included in the Company’s proxy statement for each annual meeting. The Board of
Directors has adopted a written charter for the Compensation Committee. The
Board of Directors has determined that all members of the Compensation Committee
are “independent directors,” as such term is defined under the applicable rules
of NASDAQ.


92





Audit
Committee





The Board
of Directors has an Audit Committee which is comprised of Messrs. Sokolow,
Pergande and Whittaker. Mr. Whittaker was appointed to the Committee in November
2009.  The composition of our Audit Committee was changed in February
2009 and, from February 2009 until Mr. Parker’s resignation in October 2009,
this Committee consisted of Messrs. Sokolow, Pergande and
Parker.  Prior to February 2009 the Committee was comprised of Messrs.
Sokolow, Carr and Finlay.  The Audit Committee met five times during
2009.





The Audit
Committee assists the Board of Directors in monitoring the financial reporting
process, the internal control structure and the independence and performance of
the internal audit department and the independent public accountants. Its
primary duties are to serve as an independent and objective party to monitor the
Company’s financial process and internal control system, to review and appraise
the audit effort of the Company’s independent accountants and to provide an open
avenue of communications among the independent accountants, financial and senior
management and the Board of Directors. The Board of Directors has adopted a
written charter for the Audit Committee and the Audit Committee reviews and
reassesses the adequacy of its charter on an annual basis. During the year, the
Board of Directors examined the composition of the Audit Committee in light of
NASDAQ’s corporate governance rules and the regulations promulgated by the
Securities and Exchange Commission (“SEC”) applicable to audit committees. Based
upon this examination, the Board of Directors has determined that all members of
the Audit Committee are “independent directors” within the meaning of applicable
rules and regulations of NASDAQ and the SEC. The Board of Directors has also
determined that Mr. Sokolow qualifies as an “audit committee financial expert”
as defined under applicable rules and regulations of NASDAQ and the
SEC.





Nominations
Committee





The Board
of Directors has a Nominations Committee, which is comprised of Messrs. Sokolow,
Butler and Pergande. The composition of our Nominations Committee was
changed in February 2009 and again in October 2009. From February 2009 until
October 2009 was comprised of Messrs. Carr, Butler and Pergande. Prior to
February 2009 the Committee was comprised of Messrs. Carr, Pergande and
Sokolow.  The Nominations Committee met two times during
2009.





The
Nominations Committee makes recommendations to the Board of Directors regarding
the size and composition of the Board of Directors, establishes procedures for
the nomination process, recommends candidates for election to the Board of
Directors and nominates officers for election by the Board of Directors. The
Board of Directors has determined that all members of the Nominations Committee
are “independent directors”, as such term is defined under the applicable rules
of NASDAQ.





We do not
have a formal diversity policy or set of guidelines in selecting and appointing
directors that comprise the Board of Directors. However, when making
recommendations to the Board of Directors regarding the size and composition of
the Board of Directors, the Nominating Committee does consider each individual
director’s qualifications, skills, business experience and capacity to serve as
a director and the diversity of these attributes for the Board of Directors as a
whole.





To
recommend a prospective nominee for the Nominations Committee’s consideration, a
shareholder may submit the candidates name and qualifications in writing to the
Secretary of the Company, Consolidated Water Co. Ltd., Regatta Office Park,
Windward Three, 4th Floor, West Bay Road, P.O. Box 1114, Grand Cayman, KY1-1102,
Cayman Islands.


93


Section 16(a) Beneficial
Ownership Reporting Compliance





As a
foreign private issuer, we are not subject to the requirements of Section 16(a)
of the Securities Exchange Act of 1934, as amended.





ITEM
11.           EXECUTIVE
COMPENSATION





COMPENSATION DISCUSSION &
ANALYSIS





In this
section, we provide an overview and analysis of our compensation program and
policies, the material compensation decisions we have made under those programs
and policies, and the material factors that we considered in making compensation
decisions for our Named Executive Officers, as defined under the heading
“Additional Information Regarding Executive Compensation.” Specific information
regarding the compensation earned by or paid to our Named Executive Officers in
2009 is set forth in a series of tables under the heading “Additional
Information Regarding Executive Compensation.” The discussion below is intended
to help you understand the detailed information provided in those tables and put
that information into context within our overall compensation
program.





Overview
of Compensation Program





The
Compensation Committee (the “Committee”) of our Board of Directors has
responsibility for establishing, implementing and continually monitoring
adherence with our compensation philosophy, maintaining competitive compensation
and structuring compensation to achieve our compensation objectives. Generally,
the types of compensation and benefits we provide to our Named Executive
Officers are similar to those provided to our other executive
officers.





Compensation
Philosophy and Objectives





The
Committee believes that compensation paid to our Named Executive Officers should
be directly aligned with our performance, and that compensation should be
structured to ensure that a significant portion of our named executives
officers’ compensation opportunities are directly related to achievement of our
financial and operational goals, such as meeting profitability targets,
operating within the capital expenditures budget, securing new projects,
obtaining contract extensions with current customers and keeping current on the
industry’s engineering advances in seawater conversion technology, all of which
impact shareholder value. The Committee evaluates both performance and
compensation to ensure that we maintain our ability to attract and retain highly
skilled and motivated employees in key positions and that compensation provided
to key employees remains competitive relative to the compensation paid to
similarly situated executives of the following companies (our “Peer
Companies”):





Exponent Inc.
                  
                  PW Eagle Inc.Flow International Corp.
                  
                  Badger Meter Inc.Synagro Technologies Inc.
                  
                  Casella Waste Systems Inc.Ituran Location & Control Ltd.
                  
                  Lindsay CorporationEchelon Corporation
                  
                  Fuel Cell Energy Inc.Northwest Pipe Co.
                  
                  Plug Power Inc.North American Energy Partners Inc.
                  
                  Central Vermont Public Service Corp.Powell Industries Inc.
                  
                  Energysouth Inc.Southwest Water Co.
                  
                  Cascade Natural Gas Corp.Integrated Electrical Services Inc.





Executives
at our Peer Companies typically receive base salary, an annual bonus, and
equity-based compensation, with top executives (i.e., Chief Executive Officers
and Chief Financial Officers) also receiving severance payments and, at times,
payments upon a change of control.  Accordingly, the Committee has
determined that the compensation packages that we provide to our executives,
including our Named Executive Officers, should include a mix of base salary and
equity-based and incentive-based compensation, with our Chief Executive Officer
and Chief Financial Officer also receiving severance payments, and our Chief
Financial Officer also receiving severance payments upon a change of
control.


94


The
Committee set base salary and total cash compensation (i.e., base salary plus
cash bonus) 20-25% above the average base salary and average total cash
compensation of executives at our Peer Companies to account for the cost of
living in the Cayman Islands as compared to that of the United
States.  Actual payments fall within these parameters.  The
Committee did not target a certain percentage for equity-based
compensation.  The severance payments to be made to our Chief
Executive Officer and Chief Financial Officer and the change of control payments
to be made to our Chief Financial Officer were terms requested by such
officers.  The Committee agreed to the terms of the severance packages
and the change of control arrangement as such terms are similar to the severance
packages and change of control arrangements of Chief Executive Officers and
Chief Financial Officers of companies of our Peer Companies.





Setting
Executive Compensation





Based on
the foregoing philosophy and objectives, the Committee has structured our Named
Executive Officers’ base salary and equity-based and incentive-based
compensation to motivate executives to achieve our business goals and reward the
executives for achieving such goals. In determining the compensation of our
Named Executive Officers as set forth in their most recent employment
agreements, the Committee reviewed executive compensation data for 2005 and 2006
for our Peer Companies and the compensation paid to executive officers at
Caribbean Utilities Company, a publicly owned electrical utility in Grand
Cayman, Cayman Islands.





We
compete with many companies for top executive-level management and technical
talent and have been unsuccessful in the past when we attempted to recruit
executives to relocate to the Cayman Islands. As such, the Committee generally
sets total compensation targets for our Named Executive Officers who live in the
Cayman Islands at 20-25% above the compensation paid to similarly situated U.S.
executives of our Peer Companies in order to attract and to retain our Cayman
Islands based Named Executive Officers. However, the Committee may set
compensation for our Named Executive Officers above or below this standard as
dictated by the experience level of the individual and market
factors.





In
setting the base salaries in the employment agreements of our Chief Executive
Office and Chief Financial Officer, the Committee determined the approximate
total average annual cash compensation paid to executives performing similar
functions at our Peer Companies.  Such amount was then divided by the
respective companies’ annual revenue and income and expressed as a
percentage.  Generally, the chief executive officer’s total annual
cash compensation at our Peer Companies was approximately 1% of the Peer
Companies’ average annual revenue and 5% of the Peer Companies’ average annual
income and the chief financial officer’s total average annual cash compensation
at our Peer Companies was approximately 0.5% of the Peer Company’s average
annual revenue and 2.5% of the Peer Companies’ average
annual  income.  The Committee applied these percentages to
our annual revenue and income and then increased the resulting amounts by
between 20-25%.





In
setting the base salaries in the employment agreements of our Vice Presidents,
our Chief Executive Officer estimated the average annual salaries paid to
executives with similar levels of responsibility in the Cayman Islands, taking
into account the very limited availability of persons possessing the requisite
skills and experience in the local labor market, and gave his recommendation to
the Committee.  The Committee compared the suggested
annual  base salary for each of our Vice Presidents to the annual base
salaries paid to executives performing similar functions at Caribbean Utilities
Company, a publicly owned electrical utility in Grand Cayman, Cayman
Islands.  Because the suggested annual base salary for our Vice
Presidents was similar to that paid to executives performing similar functions
at Caribbean Utilities Company, the Committee approved the salaries recommended
by our Chief Executive Officer.





A
significant amount of the total compensation paid to our Named Executive
Officers is allocated to incentive-based compensation, as a result of the
philosophy and objectives mentioned above.





Role
of Chief Executive Officer in Compensation Decisions





Our Chief
Executive Officer recommends to the Compensation Committee a base salary within
a designated range for each of our Vice-Presidents and our Chief Financial
Officer. The Compensation Committee makes the final decision regarding base
salary, based upon the range suggested by our Chief Executive Officer, and sets
their other compensation components. Our Chief Executive Officer is not involved
with the setting of compensation for himself.





2009
Executive Compensation Components





For the
fiscal year ended December 31, 2007, 2008 and 2009, the principal components of
compensation for our Named Executive Officers were:





·
            base
      salary;


·
            equity-based
      compensation;


95


·
            incentive-based
      compensation;


·
            retirement
      and other benefits; and


·
            perquisites
      and other personal benefits.





Base
Salary





Base
salaries for our executives are established based on the scope of their
responsibilities and their prior relevant background, training, and experience,
taking into account competitive market compensation paid by the companies
represented in the compensation data the Committee reviewed for similar
positions and the overall market demand for such executives at the time of hire
or entry into employment agreements. As with total compensation, we believe that
executive base salaries should be competitive with the salaries paid to
executives at our Peer Companies. An executive’s base salary is also evaluated
together with other components of the executive’s other compensation to ensure
that the executive’s total compensation is in line with our overall compensation
philosophy and objectives.





Base
salaries are reviewed annually and increased based upon (i) a need to realign
base salaries with market levels for the same positions our Peer Companies; (ii)
an internal review of the executive’s compensation, both individually and
relative to other executive officers; (iii) the individual performance of the
executive and (iv) an assessment of whether significant corporate goals were
achieved. Additionally, we may adjust base salaries as warranted throughout the
year for promotions or other changes in the scope or breadth of an executive’s
role or responsibilities.





Equity-Based
Compensation





Under the
terms of the employment agreement for our Chief Financial Officer that was
effective through December 31, 2007, he was entitled to receive the equivalent
in value of $40,000 of our common shares annually. Such shares vest quarterly in
increments of 12.5% over a two-year period beginning at the start of each year.
For purposes of determining the number of common shares equivalent in value to
$40,000, we used the average of the closing bid and ask prices of the common
shares on the principal market on which our common shares are traded for the
five business days prior to the date that the amount of common shares to be
issued to our Chief Financial Officer is calculated.





We
believe that equity ownership resulting from equity-based compensation earned by
our Chief Financial Officer is an effective means of creating a long-term link
between the compensation provided to our Chief Financial Officer with gains
realized by our shareholders.





We
entered into a new employment agreement with our Chief Financial Officer in
January 2008 that supersedes his previous employment agreement effective January
1, 2008. The $40,000 of equity-based compensation discussed above is not a
component of compensation under this new agreement. However, any shares granted
under the previous agreement through December 31, 2007  continued to
vest since this executive continued his employment with us.




Incentive-Based
Compensation
 
 Annual Bonus. A significant
amount of total compensation for which our Named Executive Officers are entitled
is comprised of an annual bonus.  The current employment agreements
with our Named Executive Officers, other than our Chief Executive Officer, do
not provide quantitative limits on the annual bonus amounts
payable.  The current employment agreement with our Chief Executive
Officer provides that the annual bonus amount paid cannot exceed 100% of the
base salary payable under such employment agreement.
 
 For 2007,
our Chief Executive Officer was entitled to an annual performance bonus equal to
2% of net profit, subject to a cap measured as 50% of his base salary and was
also entitled to an annual incremental bonus equal to 5% of the increase (if
any) of net profit for a financial year over all prior years highest net profit.
The annual bonus paid to our Chief Executive Officer for 2007 was paid 75% in
cash and 25% in common shares.
 
 Our Chief
Executive Officer’s bonus for 2008 was determined (and his bonus for 2009 will
be determined) at the sole discretion of the Company’s Board of Directors. The
amount of the 2008 annual bonus was calculated (and the 2009  annual
bonus will be calculated) by the Board of Directors based upon their assessment
of the performance of Mr. McTaggart in the following areas, with the correlating
value assigned to each factor for each year noted:
 
 96
 Mr. Frederick McTaggart’s
2008 Goals
 
 1.
              The
      Company achieving its budgeted net income and earnings per share
      targets.  The net income and earnings per share targets used in
      determining Mr. McTaggart’s 2008 incentive-based compensation were based
      upon the 2008 budget approved by the Board of Directors.  The
      net income and earnings per share targets were $14,107,173 and $0.97,
      respectively.  The amounts budgeted were considered to be the
      minimum thresholds, but there was no maximum threshold established for
      these targets.  The Board of Directors determined that if the
      net income and earnings per share targets were achieved, Mr. McTaggart
      would be entitled to a bonus in an amount equal to 30% of his base
      salary.  The actual net income and earnings per share for 2008
      were $7,209,716 and $0.50, respectively.  Although the Company
      did not meet the target income and earnings targets, the Board of
      Directors determined that Mr. McTaggart had met 35% of the objectives
      associated with this goal.
  2.
              Mr.
      McTaggart facilitating the Company’s revenue growth through project
      extensions and new projects.  The Board of Directors determined
      that if Mr. McTaggart achieved this goal he would be entitled to a bonus
      in an amount equal to 25% of his base salary.  The Board of
      Directors determined that Mr. McTaggart had met 50% of the objectives
      associated with this goal.
  3.
              The
      Company staying within the approved capital expenditure budgets for
      operations.  The capital expenditure budget for operations used
      in determining Mr. McTaggart’s 2008 incentive-based compensation was based
      upon the 2008 budget approved by the Board of Directors. The 2008 capital
      expenditure budget for operations was $3,858,000. The amount budgeted was
      considered to be the maximum threshold, but there was no minimum threshold
      established for this target.  The Board of Directors determined
      that if the Company stayed within the approved capital expenditure budget
      for operations Mr. McTaggart would be entitled to a bonus in an amount
      equal to 25% of his base salary. The actual capital expenditures for
      operations for 2008 were $1,102,753.  The Board of Directors
      determined that Mr. McTaggart had met 30% of the objectives associated
      with this goal.
  4.
              Mr.
      McTaggart fostering excellent communications with the Board of Directors
      and being receptive to input from the Board of Directors.  The
      Board of Directors determined that if Mr. McTaggart achieved this goal he
      would be entitled to a bonus in an amount equal to 10% of his base
      salary.  Fostering excellent communications with the Board of
      Directors and being receptive to input from the Board of Directors was
      ultimately not used as a performance goal for Mr.
    McTaggart.
  5.
              Mr.
      McTaggart executing any special projects as assigned by the Board of
      Directors.  The Board of Directors determined that if Mr.
      McTaggart achieved this goal he would be entitled to a bonus in an amount
      equal to 5% of his base salary.  Executing any special projects
      as assigned by the Board of Directors was ultimately not used as a
      performance goal for Mr. McTaggart.
  6.
              The
      development and maintenance of excellent customer
      relations.  The Board of Directors determined that if Mr.
      McTaggart achieved this goal he would be entitled to a bonus in an amount
      equal to 5% of his base salary.  Development and maintenance of
      excellent customer relations was ultimately not used as a performance goal
      for Mr. McTaggart.
  Mr. Frederick McTaggart’s
2009 Goals
 
 1.
              The
      Company exceeding budgeted Net Income, excluding the earnings (loss) from
      OC-BVI.  The amount budgeted was considered to be the minimum
      threshold, but there was no maximum threshold established for this
      target.  The Board of Directors determined that if the net
      income and earnings per share targets were achieved, Mr. McTaggart would
      be entitled to a bonus in an amount equal to 25% of his base
      salary.  The Company exceeding ”Adjusted Revenue” defined as
      budgeted Income adjusted to exclude Energy Pass Through Costs and
      Additions.  The amount budgeted was considered to be the minimum
      threshold, but there was no maximum threshold established for this
      target.  The Board of Directors determined that if the “Adjusted
      Revenue” target was achieved, Mr. McTaggart would be entitled to a bonus
      in an amount equal to 25% of his base
salary.
  2.
              The
      Company improving Income from Operations Margin defined as Income from
      Operations divided by budgeted Income.  “Income from Operations”
      is defined as budgeted Gross Profit less budgeted General and
      Administrative Expenses.  The amount budgeted was considered to
      be the minimum threshold, but there was no maximum threshold established
      for this target.  The Board of Directors determined that if the
      Income from Operations Margin target was achieved, Mr. McTaggart would be
      entitled to a bonus in an amount equal to 25% of his base
      salary
  97
 3.
              The
      Company completing capital projects under budget and on schedule, as
      approved and/or adjusted by the Board from time to time.  The
      amount budgeted and time schedule were considered to be the minimum
      thresholds, but there was no maximum thresholds established for this
      target.  The Board of Directors determined that if the “Adjusted
      Revenue” target was achieved, Mr. McTaggart would be entitled to a bonus
      in an amount equal to 25% of his base
salary.
  As of the
date of this filing, the Board of Directors had not determined whether Mr.
McTaggart has met any of his goals for 2009 and therefore has not determined the
amount of Mr. McTaggart’s bonus for 2009.  For financial statement
preparation purposes, we have accrued 100% of Mr. McTaggart’s 2009 salary as his
accrued bonus for the year ended December 31, 2009.
 
 Our Chief
Financial Officer was entitled to an annual bonus for 2007, 2008 and 2009 in an
amount not less than 25% of his then current base salary based on meeting
certain performance goals agreed to with our Chief Executive Officer. The bonus
paid to our Chief Financial Officer is paid in cash. In 2008 and 2009, our Chief
Executive Officer set the performance goals listed below for the Chief Financial
Officer.  These performance goals are considered in their entirety and
we do not place values or weights on any specific goals.
 
 Mr. Sasnett’s 2008
Goals
 
 1.
              Ensure
      that monthly management accounts are provided to the Chief Executive
      Officer and other members of executive management within 21 days from the
      end of each calendar month for at least 11 calendar months out of the
      year.  Mr. Sasnett did not achieve this
  goal.
  2.
              The
      Company achieving its budgeted consolidated accounting and auditing
      costs.  The budgeted consolidated accounting and auditing costs
      used in determining Mr. Sasnett’s 2008 incentive-based compensation were
      based upon the 2008 budget approved by the Board of
      Directors.  The budgeted consolidated accounting and auditing
      costs for 2008 were $381,000.  The amount budgeted was
      considered to be the maximum threshold, but there was no minimum threshold
      established for this target.  The consolidated accounting and
      auditing costs for 2008 were $326,000.  The Company achieved
      this goal.
  3.
              Ensure
      that the Company and its subsidiaries are fully compliant with
      Sarbanes-Oxley.  The Company achieved this
  goal.
  4.
              Ensure
      that all statutory financial reporting filings are made accurately and on
      time.  The Company achieved this
goal.
  
 Mr. Sasnett’s 2009
Goals
 
 1.
              Successfully
      complete the Cayman Cost of Service Study within the agreed time
      frame.
  2.
              Provide
      Monthly Management Accounts to the CEO and other members of executive
      management within 30 days of the end of each month, except for the months
      of January and February in which case by April
  15
  3.
              Ensure
      that all statutory financial reporting filings are made accurately and
      within the required deadlines.
  4.
              Ensure
      that the Company’s consolidated accounting, auditing, administrative and
      finance costs do not exceed the aggregate amount budgeted for such
      costs.  The budgeted consolidated accounting and auditing costs
      used in determining Mr. Sasnett’s 2009 incentive-based compensation were
      based upon the 2009 budget approved by the Board of
      Directors.  The amount budgeted was considered to be the minimum
      threshold, but there was no maximum threshold established for this
      target.
  5.
              Examine
      and make recommendations to the CEO to restructure the financing structure
      of the Bahamas subsidiary in order to reduce financing costs and risk to
      the parent company
  6.
              Assist
      the CEO in maintain excellent investor relations and represent the Company
      at no less than two IR events during the
year.
  98
 
 As of the
date of this filing the Board of Directors and our CEO have not determined
whether Mr. Sasnett has met any of his goals for 2009 and therefore have not
determined the amount of Mr. Sasnett’s bonus for 2009.  For financial
statement preparation purposes, we have accrued 25% of Mr. Sasnett’s 2009 salary
as his accrued bonus for the year ended December 31, 2009.
 
 For 2007,
all Vice Presidents, except our Chief Financial Officer, were entitled to an
annual bonus equal to 2.5% of the increase (if any) of net profit for a
financial year over all prior years’ highest net profit, subject to a cap
measured as 40% of their respective, then current base salaries. For 2008 and
2009, our VP Overseas Operations and VP Cayman Operations were entitled to an
annual bonus in an amount not less than 25% of their then current base salary
based on meeting the performance goals set forth below that were agreed to with
our Chief Executive Officer. For 2008 and 2009 our VP of Sales and Marketing was
entitled to an annual bonus in an amount not less than 20% of his then current
base salary based on meeting the performance goals set forth below that were
agreed to with our Chief Executive Officer.  These performance goals
are considered in their entirety and we do not place values or weights on any
specific goals.  The annual bonuses, if any, paid to our
Vice-Presidents are paid in cash.
 
 
 Ramjeet
Jerrybandan, VP Overseas Operations
 
 In order
to maximize profitability, our reverse osmosis desalination systems are designed
to operate at high equipment utilization factors and at relatively constant
energy and chemical consumption rates.  We believe that careful
monitoring of these systems, a strong preventative maintenance plan, and the
ability to rapidly and effectively respond to unforeseen conditions will ensure
maximum profitability of these systems.  In setting Mr. Jerrybandan’s
financial targets for 2008 and 2009, specifically goals #1 and #2 of each
respective year, the Board of Directors considered the environmental and
logistical difficulties associated with operating and maintaining seawater
reverse osmosis desalination plants in remote tropical island
locations.  They also considered the optimum design parameters and the
expected profitability targets for each plant.  The Board of Directors
consequently set what it believed to be moderate to difficult financial targets
for Mr. Jerrybandan.
 
 Mr. Jerrybandan’s 2008
Goals
 
 1.
              Maintain
      or increase annual gross margin of Consolidated Water (Belize) Limited in
      2008.  The budgeted annual gross margin of Consolidated Water
      (Belize) Limited used in determining Mr. Jerrybandan’s 2008
      incentive-based compensation was based upon the 2008 budget approved by
      the Board of Directors.  The amount budgeted was considered to
      be the minimum threshold, but there was no maximum threshold established
      for this target.  Consolidated Water (Belize) Limited achieved
      this goal.
  2.
              Maintain
      or increase annual gross margin of Ocean Conversion (BVI)
      Ltd.  The budgeted annual gross margin of Ocean Conversion (BVI)
      Ltd. used in determining Mr. Jerrybandan’s 2008 incentive-based
      compensation were based upon the 2008 budget approved by the Board of
      Directors.  The amount budgeted was considered to be the minimum
      threshold, but there was no maximum threshold established for this
      target.  As result of the adoption by Ocean Conversion (BVI)
      Ltd. of the cash method for revenue recognition during 2008, the gross
      margin target for Ocean Conversion (BVI) Ltd. was ultimately not used as a
      performance goal for Mr.
Jerrybandan.
  3.
              Restore
      equipment operating efficiencies at Blue Hill Plant to original design
      efficiencies.  The target efficiencies for the Blue Hill Plant
      were taken from the contract with our customer in the
      Bahamas.  The Company achieved this
  goal.
  4.
              Increase
      the average monthly on-line factor at the Windsor plant to at least 90%
      for the original equipment.  The Company did not achieve this
      goal.
  5.
              Complete
      the implementation of the CMSS in all overseas operations and fully train
      all staff in its effective operation.  Mr. Jerrybandan achieved
      this goal.
  6.
              Develop
      and implement an effective operating plan for the Bermuda Plant and
      achieve budgeted profit targets.  The budgeted profit target for
      the Bermuda Plant used in determining Mr. Jerrybandan’s 2008
      incentive-based compensation was based upon the 2008 budget approved by
      the Board of Directors.  However the Bermuda Plant did not
      commence operations in 2008 as anticipated and consequently the budgeted
      profit target and the operating plan for the Bermuda Plant were ultimately
      not used as performance goals for Mr,
  Jerrybandan.
  99
 Mr. Jerrybandan’s 2009
Goals
 
 1.
              Contain
      costs (of supervised businesses) within approved budgeted amounts, subject
      to any adjustments for electricity and fuel cost changes.  The
      budgeted costs used in determining Mr. Jerrybandan’s 2009 incentive-based
      compensation were based upon the 2009 budget approved by the Board of
      Directors.  The amounts budgeted were considered to be the
      maximum threshold, but there were no minimum thresholds established for
      this target.
  2.
              Meet
      or exceed budgeted gross margin targets of all supervised
      businesses.  These amounts were considered to be the minimum
      thresholds, but there were no maximum thresholds
      established.  OC-BVI was excluded from this goal because of the
      uncertainty related to this
business
  3.
              Successfully
      implement an effective and cost-saving preventative maintenance plan for
      Consolidated Water (Bahamas) including utilization of the CMMS software
      package; this goal was measured by a reduction in the number of breakdowns
      and repair costs for the Windsor and Blue Hill desalination
      plants.  These amounts were considered to be the minimum
      thresholds, but there were no maximum thresholds
    established.
  4.
              Meet
      or better specific energy efficiencies in the 2009 budget of each
      desalination plant under supervision.  Plants in the BVI
      operation were excluded from this goal because of OC-BVI’s ongoing dispute
      with the BVI government and the resulting interference with maintenance of
      the BVI plants.  These amounts were considered to be the minimum
      thresholds, but there were no maximum thresholds
    established.
  5.
              Fully
      implement the Computerized Maintenance Management System (CMMS) and use
      the implemented Operations Data Portal; provide concise weekly reports to
      CEO from Operations Data Portal in a format to be
  agreed.
  6.
              By
      July 31, 2009, implement monthly performance evaluation tests at each
      supervised plant.  Ensure that the results of these tests are
      taken into consideration when evaluating plant staff
      performance.  The Board of Directors has not met to determine
      whether this goal has been
achieved.
  As of the
date of this filing, the Board of Directors and our CEO have not determined
whether Mr. Jerrybandan has met any of his goals for 2009 and therefore has not
determined the amount of Mr. Jerrybandan’s bonus for 2009.  For
financial statement preparation purposes we have accrued 25% of Mr.
Jerrybandan’s 2009 salary as his accrued bonus for the year ended December 31,
2009.
 
 
 Gregory
S. McTaggart, VP Cayman Operations
 
 In order
to maximize profitability, our reverse osmosis desalination systems are designed
to operate at high equipment utilization factors and at relatively constant
energy and chemical consumption rates.  We believe that careful
monitoring of these systems, a strong preventative maintenance plan, and the
ability to rapidly and effectively respond to unforeseen conditions will ensure
maximum profitability of these systems.
 
 We also
believe that minimizing non-revenue water (caused by leakage, theft and
under-metering) within our retail water distribution system is essential to the
profitable operation of our retail water utility on Grand
Cayman.  Over the past two years, the CEO has set consistently lower
non-revenue water targets for the Company.  In setting Mr. Gregory
McTaggart’s financial targets for 2008 and 2009, specifically goals #1, #2 and
#3 of each respective year, the Board of Directors considered the environmental
and logistical difficulties associated with operating and maintaining seawater
reverse osmosis desalination plants and water distribution systems in a remote
tropical island location.  They also considered the optimum design
parameters and the expected profitability targets for each plant, and historical
non-revenue water data for the Company over the past ten years.  The
Board of Directors consequently set what it believed to be moderate to difficult
financial targets for Mr. Gregory McTaggart.
 
 100
 Mr. Gregory McTaggart’s 2008
Goals
 
 1.
              Maintain
      or increase 2007 gross margins in 2008 for Cayman Water Company Limited
      and Ocean Conversion (Cayman) Limited.  The 2007 gross margins
      for Cayman Water Company Limited and Ocean Conversion (Cayman) Limited
      were considered to be the minimum thresholds, but there were no maximum
      thresholds established.  The Company did not achieve this goal
      with respect to Cayman Water Company Limited, and achieved this goal with
      respect to Ocean Conversion (Cayman)
Limited.
  2.
              Lower
      overall water loss percentage for Cayman Water Company Limited retail from
      the 2007 figure and implement a preventative/detective water loss program
      using pressure and flow monitoring equipment.  The 2007 overall
      water loss percentage for Cayman Water Company Limited retail was
      6.63%.  This percentage was considered to be the maximum
      threshold, but there was no minimum threshold established.  The
      2008 overall water loss percentage for Cayman Water Company Limited retail
      was 6.04%.  The Company achieved the water loss target
      percentage, but Mr. McTaggart did not implement a preventative/detective
      water loss program before the end of
2008.
  3.
              Contain
      Operations and Maintenance expenses, excluding Cost of Sales, Cost of
      Sales to 2008 budget or below for Cayman Water Company Limited and Ocean
      Conversion (Cayman) Limited.  The 2008 budgets for Operations
      and Maintenance expenses, excluding Cost of Sales, for Cayman Water
      Company Limited and Ocean Conversion (Cayman) Limited were considered to
      be the maximum thresholds, but there were no minimum thresholds
      established for these targets.  The Company achieved this
      goal.
  4.
              Maintain
      or improve the 2007 overall specific energy efficiency of Cayman Water
      Company Limited and Ocean Conversion (Cayman) Limited water production
      plants; return the North Sound plant to design efficiency; and implement a
      program to improve the plant control system.  The Company did
      not achieve this goal.
  5.
              Reduce
      total overtime wages paid to Cayman Water Company Limited and Ocean
      Conversion (Cayman) Limited staff to below total 2007
      figure.  The total overtime wages paid to the Cayman Water
      Company Limited and Ocean Conversion (Cayman) Limited staffs in 2007 were
      $26,500 and $44,200, respectively.  These amounts were
      considered to be minimum thresholds, but there was no maximum threshold
      established.  The total overtime wages paid to the Cayman Water
      Company Limited and Ocean Conversion (Cayman) Limited staffs in 2008 were
      $44,000 and $45,200, respectively.  The Company did not achieve
      this goal.
  
 Mr. Gregory McTaggart’s 2009
Goals
 
 1.
              Meet
      Cayman Water and Ocean Conversion gross profit to sales ratio
      targets.  The gross profit to sales ratio targets used in
      determining Mr. Gregory McTaggart’s 2009 incentive-based compensation were
      based upon the 2009 budget approved by the Board of
      Directors.  The amounts budgeted were considered to be the
      minimum threshold, but there were no maximum thresholds established for
      this target.
  2.
              Lower
      overall water loss percentage for Cayman Water to less than 2009 loss and
      implement real time detective water loss systems using pressure and flow
      monitoring equipment.  The 2008 overall water loss percentage
      for Cayman Water Company Limited retail was 6.04%.  This
      percentage was considered to be the maximum threshold, but there was no
      minimum threshold established.  The 2008 overall water loss
      percentage for Cayman Water Company Limited retail was
    5.72%%.
  3.
              Contain
      costs (for supervised businesses) within budgeted amounts, subject to any
      adjustments for electricity and fuel cost changes.  The budgeted
      costs used in determining Mr. Gregory McTaggart’s 2009 incentive-based
      compensation were based upon the 2009 budget approved by the Board of
      Directors.  The amounts budgeted were considered to be the
      maximum threshold, but there were no minimum thresholds established for
      this target.
  4.
              Maintain
      or improve specific energy efficiencies of each Cayman Water desalination
      plant relative to 2008 specific energy levels.  Improve the
      North Sound plant to at or better than contractual
      efficiency.  These amounts were considered to be the minimum
      thresholds, but there were no maximum thresholds
    established
  101
 5.
              Fully
      implement the Operations Data Portal and Computerized Maintenance
      Management System (CMMS); provide concise weekly reports to the CEO from
      the operations Data Portal in a format to be
  agreed.
  6.
              Provide
      all operational information to the cost of service study consultants in an
      accurate and timely manner.  The Board of Directors has not met
      to determine whether this goal has been
  achieved.
  7.
              Work
      with IT to implement all necessary meter reading and maintenance reports
      in Cogsdale by 1 June 2009. Re-establish the meter change-out and
      maintenance program. Install industry standard screens in front of all
      turbine type meters in the CW
system.
  
 As of the
date of this filing,  the Board of Directors and our CEO have not
determined whether Mr. Gregory  McTaggart has met any of his goals for
2009 and therefore has not had not determined the amount of Mr. McTaggart’s
bonus for 2009.  For financial statement preparation purposes we have
accrued 25% of Mr. McTaggart’s 2009 salary as his accrued bonus for the year
ended December 31, 2009.
 
 Gerard
J. Pereira, VP of Sales and Marketing
 
 Mr. Pereira’s 2008
Goals
 
 Mr.
Pereira’s 2008 performance goals were not directly tied to the financial
performance of the Company.  They included such things as successfully
preparing bids for new projects, establishing new partnerships in new markets,
developing a formalized sales and marketing plan for the Company, and expanding
the Company’s presence within regional and international water
organizations.  The Board of Directors determined that Mr. Pereira had
achieved 80% of the objectives associated with his 2008 performance
goals.
 
 Mr.
Pereira’s 2009 performance goals were not directly tied to the financial
performance of the Company.  They included such things as successfully
preparing bids for new projects, establishing new partnerships in new markets,
updating the Company’s sales and marketing plan, evaluating certain specific
long-term project opportunities, and expanding the Company’s presence within
regional and international water organizations.  The Board of
Directors has not met to determine whether Mr. Pereira’s 2009 performance goals
have been achieved.
 
 As of the
date of this filing the Board of Directors and our CEO have not determined
whether Mr. .Pereira has met any of his goals for 2009 and therefore have not
determined the amount of Mr. Pereira’s bonus for 2009.  For financial
statement preparation purposes we have accrued 20% of Mr. Pereira’s 2009 salary
as his accrued bonus for the year ended December 31, 2009.
 
 Unlike
the targets established for Frederick McTaggart, the performance goals for David
Sasnett, Ramjeet Jerrybandan, Gregory McTaggart and Gerard Pereira are
considered in their entirety and we do not place values or weights on any
specific goals.
 
 In its
discretion, the Committee may award bonus payments to our Vice-Presidents or our
Chief Financial Officer above or below the amounts specified in their respective
employment agreements. These bonus provisions are intended, in accord with our
compensation philosophies and objectives, to align executive interests with
shareholder interests.
 
 Unless
the provisions in our employment agreements relating to incentive compensation
are amended, our Named Executive Officers will continue to receive
incentive-based compensation as set forth above. As the employment agreements of
our other Named Executive Officers come up for renewal, the Committee plans to
review compensation paid to our Named Executive Officers to ensure that their
compensation levels are competitive and have the right mix of incentive-based
compensation.




Equity Incentives. We believe
that equity ownership is one of the more effective means of aligning the
interests of our Named Executive Officers with those of our
shareholders.




102


Through
December 31, 2007, our Vice-Presidents were eligible to participate in an
employee share incentive plan for our long-term employees who are not directors.
Under the employee share incentive plan, employees were issued redeemable
preference shares on an annual basis at no cost based on a formula which took
into consideration the employee’s salary and the total dividend paid to common
shareholders as a percentage of the total shareholder’s equity in each year. If
an employee remained employed by us for at least four years, we were obligated
to exchange the redeemable preference shares (whether or not the redeemable
preference shares have been held for four years) for the same number of common
shares. We were also obligated to exchange the redeemable preference shares for
an equal number of common shares if an employee’s employment with us or any of
our affiliates terminated by reason of the employee’s death, permanent
disability or the employee reached the age of 65 years. However, if an
employee’s employment with us or any of our affiliates terminated for any other
reason, we could at any time up to and including the first anniversary of such
termination, redeem the employee’s redeemable preference shares for cash equal
to 75% of the average of the closing market price for our common shares on each
of the first seven trading days in the month of October of the year in which the
redeemable preference shares were issued to the employee.





Additionally,
when an employee was issued redeemable preference shares, the employee was also
granted an option to purchase an equal number of redeemable preference shares at
approximately 75% of the average market price of the common shares. The exercise
price was determined using the average of the closing market price for our
common shares on each of the first seven trading days in the month of October of
the year in which the redeemable preference shares were issued to the employee.
The grant date was determined as 90 days after the date of the auditor’s
certificate on the financial statements for the relevant year. This option
expires, unless exercised by the employee, within thirty (30) days after the
date of grant.





Under the
new employment agreements consummated with our Chief Financial Officer and
Vice-Presidents that became effective January 1, 2008, such Named Executive
Officers no longer participate in the employee share incentive plan discussed
above. Under their new agreements, these individuals receive options to purchase
common shares under the 2008 Equity Incentive Plan, which was approved by our
shareholders in May 2008. Under the 2008 Equity Incentive Plan, we may grant
directors, executives and key employees, including our Chief Financial Officer
and Vice-Presidents, stock options, restricted stock, restricted stock units,
stock equivalents and awards of common shares. The Compensation Committee
selects participants to receive awards and determines the terms and conditions
of each award, including the number of common shares subject to awards, the
price, if any, a participant pays to receive or exercise an award, the time or
times when awards vest or may be exercised, settled or forfeited, any
performance goals, restrictions or other conditions to vest in, exercise, or
settle awards, and the effect on awards of the disability, death, or termination
of service of participants.





In
determining the number of options to be granted to our Chief Financial Officer
and Vice Presidents in 2008 and 2009, we took into account the individual’s
ability to affect profits and shareholder value, the individual’s historic and
recent performance and the value of stock options in relation to other elements
of total compensation.  We apportioned the greatest weight to an
executive’s ability to affect profits and shareholder value and the executive’s
recent performance, and less weight to the executive’s historic
performance.  As our Vice Presidents of Operations have the greatest
ability to affect profits and shareholder value, we set their equity incentive
compensation at approximately 20% of their respective base salary.  As
our Chief Financial Officer and VP of Marketing and Sales have less of an
ability to affect profits, we set their equity incentive compensation at
approximately 15% of their respective base salary.





All stock
options granted to our Named Executive Officers in 2008 and 2009 incorporate the
following features:





·
            the
      options vest one-third per year over three years beginning on the first
      anniversary of the date of grant;





·
            the
      options expire with regard to vested shares three years from the
      applicable vesting date; and





·
            under
      certain circumstances, the options are forfeited with regard to unvested
      shares upon separation from the
Company.





We
decided to use stock options as a long-term incentive vehicle for our Chief
Financial Officer and our Vice-Presidents because:





·
            stock
      options align the interests of executives with those of our shareholders,
      support a pay-for-performance culture, foster employee stock ownership,
      and focus our management team on increasing value for our
      shareholders;





·
            stock
      options are performance based (i.e., all of the value received by the
      recipient from a stock option is based on the growth of the stock price
      above the option price); and


103





·
            the
      vesting terms for stock options create incentive for increases in
      shareholder value over a longer term and encourages executive
      retention.





Pension
Plan





As with
every employer in the Cayman Islands, we are required by the National Pension
Law to provide a pension plan for our employees in the Cayman Islands. We belong
to the Cayman Islands Chamber Pension Plan, the Ocean Conversion Staff Pension
Plan and the Fidelity Pension Plan in the Cayman Islands. The Chamber Pension
Plan is a non-profit entity, which is administered by the Bank of Butterfield,
the Ocean Conversion Staff Pension Plan has as its trustee Colonial Private
Trustee Limited and is administered by the British Caymanian Insurance Company
Ltd, and the Fidelity Pension Plan is administered by Fidelity Pension Services
(Cayman) Limited who are also the trustees of the plan.





Under the
Cayman Islands National Pensions Law, all employees between the ages of 18 and
60 must contribute a specified minimum percentage of their earnings to a pension
plan. Until recently, the exact percentage of contributions varied according to
the age of each employee. Since June 1, 2002, however, all employees must
contribute 5% of their earnings to a pension plan. An employee also has the
option of contributing more than the prescribed minimum. We are required to
match the contribution of the first 5% of each participating employee’s salary
to a maximum of $72,000. Employees earning more than $72,000 are not required to
make contributions on amounts over $72,000. All contributions by our employees
are collected by us and paid into the various pension plans on a monthly
basis.





All three
plans are defined contribution plans, and as such the amount that an employee
receives upon retirement is directly related to the amount contributed to the
plan by the employee while working. Once an employee retires (employees become
eligible for retirement at age 60 in the Cayman Islands), an employee has the
following options for receiving benefits:





·
            Receive
      a cash payout if the employee’s retirement savings is less than
      $6,000;





·
            Transfer
      the retirement savings to a life annuity for investment by a life
      insurance company and payment of a regular income stream to the employee
      for the remainder of the employee’s life (and the employee’s spouse’s life
      if the employee is married at the time of retirement);
  or





·
            Transfer
      the retirement savings to a Retirement Savings Arrangement account with an
      approved provider or bank and receive regular income payments until the
      account is depleted.





Perquisites
and Other Personal Benefits





Pursuant
to our Chief Executive Officer’s employment agreement, we provided our Chief
Executive Officer with a suitable vehicle, the monthly expense of which was $250
in 2007, $563 in 2008 and $563 in 2009. Pursuant to our Chief Financial
Officer’s current and former employment agreements, we provided our Chief
Financial Officer with an automobile expense allowance which amounted to $750
per month in 2007, $850 per month in 2008 and $900 in 2009. Pursuant to the
employment agreements with our Vice Presidents of Overseas Operations and Sales
and Marketing, we provided each of them with an automobile expense allowance of
$850 per month in 2008 and $900 per month in 2009. We provided our Vice
President of Cayman Operations with an automobile allowance of $208 per month in
2007, $429 per month in 2008 and $429 per month in 2009 pursuant to his
employment agreement.





Termination-Based
Compensation





Termination





Our Named
Executive Officers’ employment agreements may be terminated upon the occurrence
of the following:





i.
            the
      death of the Named Executive
Officer;





ii.
            the
      Named Executive Officer being adjudicated
  bankrupt;





iii.
            the
      Named Executive Officer giving six month’s notice of termination;
      and


104





iv.
            the
      Named Executive Officer being unable to discharge his duties due to
      physical or mental illness for a period of more than 60
    days.





Additionally,
our Chief Financial Officer’s employment agreement may be terminated due to his
conviction of a felony or his commission of an act or omission that could result
in material harm to us or conduct justifying dismissal under Cayman Island law.
Our other Named Executive Officers’ employment agreements may be terminated due
to conduct by such Named Executive Officer justifying dismissal under Cayman
Island law.





Upon
termination due to the Named Executive Officer’s inability to discharge his
duties due to physical or mental illness for a period of more than 60 days, the
Named Executive Officer will be relieved of his duties. In the case of all Named
Executive Officers other than our Chief Financial Officer, we will pay such
Named Executive Officer $1,000 per year, provide medical insurance for him and
his family, and contribute to a pension fund for the Named Executive Officer for
a period of two years. In the case of our Chief Financial Officer, we will pay
him $1,000 per year and provide medical insurance for him and his family for a
period of one year.





If our
Chief Financial Officer’s employment agreement is terminated by our Chief
Financial Officer upon six month’s notice or due to his commission of an act or
omission that could result in material harm to us, he will forfeit all unvested
shares issued pursuant to his employment agreement. If his employment agreement
is otherwise terminated or upon a “Change in Control,” as defined below, all
unvested shares issued pursuant to his employment agreement will vest
immediately.





Severance





Upon
termination of employment, our Chief Executive Officer and Chief Financial
Officer are entitled to receive severance payments under their employment
agreements. In determining whether to approve and setting the terms of such
severance arrangements, the Committee recognizes that executives, especially
highly ranked executives, often face challenges securing new employment
following termination. Our Chief Executive Officer’s employment agreement
provides for a lump sum severance payment equal to 24 months and our Chief
Financial Officer’s employment agreement provides for a lump sum severance
payment of 12 months, of their then current respective base salary if their
employment is terminated without cause or if their employment agreements are not
renewed. The Committee negotiated our Chief Executive Officer’s severance
package to provide him an amount equal to his base salary for the length of his
non-competition arrangement with us. Based upon the data reviewed by the
Committee, we believe that our Chief Executive Officer’s and Chief Financial
Officer’s severance packages are generally in line with severance packages
offered to executive chief executive officers and chief financial officers of
our Peer Companies.





Change
in Control





Upon a
“Change in Control,” as defined below, our Chief Financial Officer may elect to
terminate his employment and receive a lump sum payment equal to three times his
then current base salary. In determining whether to approve and setting the
terms of such Change in Control arrangement, the Committee recognizes the
importance to the Company and our shareholders of avoiding the distraction and
loss of key management personnel that may occur in connection with rumored or
actual fundamental corporate changes. A properly arranged Change in Control
provision protects shareholder interests by enhancing employee focus during
rumored or actual Change in Control activity through:





•
            Incentives
      to remain with us despite uncertainties while a transaction is under
      consideration or pending; and





•
            Assurance
      of compensation for terminated employees after a Change in
      Control.





Our Chief
Financial Officer’s employment agreement provides that, at his election, he may
terminate his employment upon a Change in Control and receive a payment of 36
months of base his then current base salary. After reviewing the practices of
companies represented in the compensation data we obtained, the Committee
negotiated our Chief Financial Officer’s Change in Control arrangement to
provide him an amount equal to three times his base salary. We believe that our
Chief Financial Officer’s Change in Control arrangement is generally in line
with such arrangements offered to chief financial officers of our Peer
Companies.





For the
purposes of this discussion, a “Change of Control” means where: (i) any person,
including a “group” as defined in Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended, publicly announces that such person or group has become
the beneficial owner of more than 30% of the combined voting power (“Controlling
Voting Power”) of our then outstanding securities that may be cast for the
election of directors and (ii) the persons who were our directors before such
event shall cease to constitute a majority of our Board of Directors, or any
successor, as the direct or indirect result of any person or group acquiring
Controlling Voting Power.


105





Compensation
Committee Report





The
Committee, comprised of independent directors, reviewed and discussed the above
Compensation Discussion & Analysis (“CD&A”) with the Company’s
management. Based on the review and discussions, the Committee recommended to
the Company’s Board of Directors that the CD&A be included in this Annual
Report on Form 10-K.





Compensation
Committee





Richard
L. Finlay


Steven A.
Carr


Clarence
B. Flowers, Jr.


106


ADDITIONAL
INFORMATION REGARDING EXECUTIVE COMPENSATION





Summary Compensation
Table





The
following table summarizes the compensation of our (1) Chief Executive
Officer, (2) Chief Financial Officer and (3) our three other most
highly compensated executive officers based upon total compensation
(collectively, our “Named Executive Officers”) for the fiscal years ended
December 31, 2009, 2008 and 2007.





Name and Principal
                                                      Position
                                                    
                                                    Year
                                                    
                                                    Salary
                                                      ($)
                                                    
                                                    
                                                    Bonus($)
                                                      (1)
                                                    
                                                    
                                                    Stock
                                                      Awards
                                                      ($)(2)
                                                    
                                                    
                                                    Option
                                                      Awards
                                                      ($)(3)
                                                    
                                                    
                                                    Non-Equity
                                                      Incentive Plan
                                                      Compensation
                                                      ($)(4)
                                                    
                                                    
                                                    All Other
                                                      Compensation
                                                      ($)(5)
                                                    
                                                    
                                                    Total($)Frederick
      W. McTaggart
                                                    
                                                    2009
                                                    
                                                    
                                                    388,200
                                                    
                                                    
                                                    
                                                    291,150
                                                    
                                                    
                                                    
                                                    97,050
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    10,360
                                                    
                                                    
                                                    
                                                    786,760Chief
      Executive Officer
                                                    
                                                    2008
                                                    
                                                    
                                                    375,000
                                                    
                                                    
                                                    
                                                    86,250
                                                    
                                                    
                                                    
                                                    28,750
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    10,360
                                                    
                                                    
                                                    
                                                    500,3602007
                                                    
                                                    
                                                    230,000
                                                    
                                                    
                                                    
                                                    234,381
                                                    
                                                    
                                                    
                                                    72,562
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    6,600
                                                    
                                                    
                                                    
                                                    549,108David
      W. Sasnett
                                                    
                                                    2009
                                                    
                                                    
                                                    240,000
                                                    
                                                    
                                                    
                                                    60,000
                                                    
                                                    
                                                    
                                                    10,000
                                                    
                                                    
                                                    
                                                    75,562
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    10,800
                                                    
                                                    
                                                    
                                                    393,362Executive
      VP &
                                                    
                                                    2008
                                                    
                                                    
                                                    221,000
                                                    
                                                    
                                                    
                                                    50,000
                                                    
                                                    
                                                    
                                                    30,000
                                                    
                                                    
                                                    
                                                    93,941
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    10,200
                                                    
                                                    
                                                    
                                                    405,141Chief
      Financial Officer
                                                    
                                                    2007
                                                    
                                                    
                                                    202,500
                                                    
                                                    
                                                    
                                                    50,625
                                                    
                                                    
                                                    
                                                    40,000
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    9,000
                                                    
                                                    
                                                    
                                                    302,125Ramjeet
      Jerrybandan
                                                    
                                                    2009
                                                    
                                                    
                                                    137,500
                                                    
                                                    
                                                    
                                                    34,375
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    65,378
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    14,400
                                                    
                                                    
                                                    
                                                    251,653VP
      Overseas Operations
                                                    
                                                    2008
                                                    
                                                    
                                                    132,750
                                                    
                                                    
                                                    
                                                    45,000
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    74,899
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    13,800
                                                    
                                                    
                                                    
                                                    266,4492007
                                                    
                                                    
                                                    122,570
                                                    
                                                    
                                                    
                                                    49,028
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    3,600
                                                    
                                                    
                                                    
                                                    175,198Gregory
      S. McTaggart
                                                    
                                                    2009
                                                    
                                                    
                                                    137,500
                                                    
                                                    
                                                    
                                                    34,375
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    43,588
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    8,750
                                                    
                                                    
                                                    
                                                    224,213VP
      Cayman Operations
                                                    
                                                    2008
                                                    
                                                    
                                                    132,750
                                                    
                                                    
                                                    
                                                    30,000
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    74,899
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    8,750
                                                    
                                                    
                                                    
                                                    246,3992007
                                                    
                                                    
                                                    128,750
                                                    
                                                    
                                                    
                                                    51,500
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    6,100
                                                    
                                                    
                                                    
                                                    186,350Gerard
      J. Pereira
                                                    
                                                    2009
                                                    
                                                    
                                                    137,500
                                                    
                                                    
                                                    
                                                    27,500
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    38,576
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    14,400
                                                    
                                                    
                                                    
                                                    217,976VP
      Sales and Marketing
                                                    
                                                    2008
                                                    
                                                    
                                                    132,750
                                                    
                                                    
                                                    
                                                    26,550
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    56,174
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    13,800
                                                    
                                                    
                                                    
                                                    229,2742007
                                                    
                                                    
                                                    122,750
                                                    
                                                    
                                                    
                                                    49,028
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    3,600
                                                    
                                                    
                                                    
                                                    175,378







(1)
            Bonus
      amounts have been determined pursuant to the bonus terms outlined in our
      Named Executive Officers’ respective employment agreements. Bonus amounts
      for 2009 represent estimated bonuses accrued in the 2009 financial
      statements as the Board of Directors and CEO had not formally determined
      the amount of the 2009 bonuses as of the date of this
    filing.





(2)
            Under
      the terms of Mr. McTaggart’s employment agreement, his bonus was to be
      paid 75% in cash and 25% in common shares, valued at the market price at
      the close of trading on December 31, of the relevant fiscal
      year.  As a result, Mr. McTaggart received the following number
      of ordinary share in the years noted: 2008 – 2,300 shares, and 2007 –
      3,101 shares. Under the terms of Mr. Sasnett’s employment agreement
      effective for 2007, he was entitled to receive the equivalent in value of
      $40,000 of our common shares annually. Such shares vest quarterly in
      increments of 12.5% over a two-year period beginning on the date of
      grant.





(3)
            There
      were no option awards during 2007 to Named Executive
      Officers.  Options amounts for 2008 and 2009 have been
      determined pursuant to the option terms outlined in our Named Executive
      Officers' respective employment agreements. Stock
      options expense recognized for financial reporting purposes for options
      granted to these executives was $200,181 and $161,513 for the years ended
      December 31, 2009 and 2008,
respectively.





(4)
            There
      was no non-equity incentive plan compensation paid during 2007 to Named
      Executive Officers.





(5)
            Represents
      (i) pension plan contributions of $3,600 for each of Frederick W. and
      Gregory S. McTaggart, Ramjeet Jerrybandan and Gerard Pereira, (ii) car
      allowance of $10,800, $10,200, and $9,000 for Mr. Sasnett for 2009, 2008,
      and 2007, respectively; (iii) car allowance of $10,800 and $10,200 for Mr.
      Jerrybandan and Mr. Pereira for 2009 and 2008, respectively; (iv) the cost
      to us in the amount of $5,150, $5,150, and $2,500 for the automobile used
      by Gregory S. McTaggart for 2009, 2008, and 2007, respectively; and (v)
      the cost to us in the amount of $6,760, $6,760, and $3,000 for the
      automobile used by Frederick W. McTaggart for 2009, 2008, and 2007,
      respectively.





Employment
Agreements





Frederick
W. McTaggart-President and Chief Executive Officer





On
January 1, 2004, we entered into a three-year employment agreement with
Frederick W. McTaggart, our President and Chief Executive Officer, pursuant to
which he is paid $200,000 per annum. This agreement is subject to extension each
year upon mutual agreement such that the term will be for three years from
January 1st of the next following year. If we terminate Mr. Frederick McTaggart
without cause, he is entitled to twice the annual remuneration set out in this
agreement, adjusted for any annual increases received.


107





For each
completed financial year, Mr. Frederick McTaggart was paid a bonus calculated as
(a) 2% of the net profits for that financial year, before charging this bonus,
dividends, or crediting any amounts arising from the re-valuation of our assets
to a maximum of 50% of Mr. Frederick McTaggart’s annual remuneration and (b) 5%
of the amount by which our net profits for that financial year (calculated in
the same manner as in (a) above) exceed the highest annual net profits earned by
us in any prior financial year. This bonus was paid as to 75% in cash and 25% in
our common shares valued at the market price at the close of trading of the same
on December 31st of the relevant financial year.





On
September 14, 2007, we amended the employment agreement with Mr. McTaggart,
commencing January 1, 2008, Mr. McTaggart’s annual base salary increases from
approximately $230,000 to $375,000. In addition, Mr. McTaggart’s bonus for 2008
was calculated by the Board of Directors based upon their assessment of the
performance of Mr. McTaggart in the following areas: (a) the Company achieving
its budgeted net income and earnings per share targets, (b) Mr. McTaggart
facilitating the Company’s revenue growth through project extensions and new
projects, (c) the Company staying within the approved capital expenditure
budgets for operations, project extensions and new projects, (d) Mr. McTaggart
fostering excellent communications with the Board of Directors and being
receptive to input from the Board of Directors, (e) Mr. McTaggart executing any
special projects as assigned by the Board of Directors, and (f) the development
and maintenance of excellent customer relations.





On
September 9, 2009, we amended the employment agreement with Mr.
McTaggart.  Under the terms of the amended agreement, Mr. McTaggart’s
bonus in an amount not to exceed 100% of his then-current annual compensation,
will be calculated as follows:  (a) 25% of base salary if we achieve
our budgeted net income, excluding operations in the British Virgin Islands for
2009; (b) 25% of base salary if we exceed our budgeted “Adjusted Revenues,”
calculated as our budgeted revenue minus budgeted “Energy Pass Through Charges”;
(c) 25% of base salary if we improve our “Income from Operations Margin,”
calculated as our budgeted income from operations divided by our budgeted
revenue; and (d)  25% of base salary if we complete projects under our
capital budget and on schedule.





The
annual bonus, if any, will be paid 75% in cash and 25% in the Company’s common
shares valued at the market price at the close of trading on December 31, of the
relevant fiscal year (or if such day is not a trading day, at the close of
trading on the preceding trading day). Finally, Mr. McTaggart will be entitled
to a discretionary bonus in an amount and form as determined at the sole
discretion of the Board of Directors. Pursuant to NASDAQ rules, the payment of a
bonus in stock must be approved by the shareholders of the Company.





David
W. Sasnett-Executive Vice President & Chief Financial Officer





On May
22, 2006, we entered into a 19-month employment agreement with David W. Sasnett,
pursuant to which Mr. Sasnett began serving as our Executive Vice President and
Chief Financial Officer effective June 3, 2006. Under the terms of the
employment agreement, Mr. Sasnett was entitled to an annual base salary of
$155,000 and a performance bonus equal to 25% of Mr. Sasnett’s then current
salary if benchmarks to be agreed upon by our Chief Executive Officer and Mr.
Sasnett were met. We agreed to issue Mr. Sasnett a number of our common shares
having an aggregate value of $40,000. Such shares vest quarterly in increments
of 12.5% over a two-year period beginning on May 22, 2006. If Mr. Sasnett
terminates the Employment Agreement upon giving 90 day’s notice after a “Change
of Control,” we agreed to pay Mr. Sasnett an amount equal to twice his then
current salary.





Under
this previous agreement we issued Mr. Sasnett an additional number our common
shares having an aggregate value of $40,000 on each anniversary of the
Employment Agreement, which shares vested quarterly in increments of 12.5% over
a two-year period beginning on the date of each such grant. The number of common
shares equivalent in value to $40,000 were determined using
the  average of the closing bid and asked prices of the common shares
on the principal market on which such common shares were traded for the five
business days prior to the date that the amount of such common shares were
issued to Mr. Sasnett was calculated. Additionally, we provided Mr. Sasnett with
an initial monthly automobile allowance of $700 that increased by $50 per month
on the first of each new fiscal year.





On
January 15, 2008, we entered into a new two-year employment agreement with Mr.
Sasnett. Under the terms the employment agreement, Mr. Sasnett is entitled to an
annual base salary of $221,000 and a performance bonus equal to 25% of Mr.
Sasnett’s then current base salary if performance goals to be agreed upon by the
Company’s Chief Executive Officer and Mr. Sasnett are met. The Board of
Directors of the Company, may in its sole discretion, after taking into
consideration the recommendations of the Company’s Chief Executive Officer, pay
Mr. Sasnett a bonus in excess of 25% of Mr. Sasnett’s base salary. Mr. Sasnett
is also entitled to a monthly automobile expense allowance of $850 that
increases by $50 per month on the first of each new fiscal year. If the Chief
Executive Officer of the Company or the Company decide not to extend the term of
the Employment Agreement, the term of the Employment Agreement will expire on
December 31 of the year in which such decision is made and the Company will be
obligated to pay Mr. Sasnett, in cash, a severance payment equal to his base
salary on the expiration date.


108





The
Company granted Mr. Sasnett option to purchases 22,200 common shares at an
exercise price of $30.40 per share. These options vest in tranches of 7,400
shares each on January 1, 2009, 2010 and 2011 and expire three years from the
applicable vesting date. The Company granted Mr. Sasnett additional options in
March  2009 to purchase 22,149 ordinary shares at an exercise price of
$7.90.  These options will vest in tranches of 7,383 each on March 19,
2010, 2011 and 2012 and expire three years from the applicable vesting
date.





Gregory
S. McTaggart-Vice President of Cayman Operations





On
January 18, 2005, we entered into a two-year employment agreement with Gregory
S. McTaggart, our Vice President of Cayman Operations, pursuant to which he is
paid $105,000 per annum. This agreement is subject to extension each year if the
Chief Executive Officer so determines and shall be extended for a further term
not exceeding two years.





For each
completed financial year, Mr. Gregory McTaggart will be paid a bonus calculated
as 2.5% of the amount by which our net profits for that financial year (before
charging this bonus, dividends, or crediting any amounts arising from the
re-valuation of our assets) exceed the highest annual net profits earned by us
in any prior financial year to a maximum of 40% of Mr. Gregory McTaggart’s
annual remuneration. This bonus shall be paid as to in cash or in our common
shares valued at the market price at the close of trading on December 31st of
the relevant financial year (or if such day is not a trading day, at the close
of trading on the preceding trading day), or as a combination of both at the
Vice President election.





On
January 11, 2008, we entered into a new employment agreement with Mr. McTaggart.
Under the terms this employment agreement, Mr. McTaggart is entitled to an
annual base salary of $132,750 and a performance bonus of not less than 25% of
Mr. McTaggart’s base salary for the year pursuant to the completion of
Performance Goals agreed between Mr. McTaggart and the Chief Executive Officer
of the Company. The Board of Directors of the Company, may in its sole
discretion, after taking into consideration the recommendations of the Company’s
Chief Executive Officer, pay Mr. McTaggart a bonus in excess of 25% of Mr.
McTaggart’s base salary. The performance bonus must be paid entirely in
cash.





The
Company granted Mr. McTaggart options to purchase 17,700 common shares at an
exercise price of $30.40 per share. These options vest in tranches of 5,900
shares each on January 1, 2009, 2010 and 2011 and expire three years from the
applicable vesting date. The Company granted Mr. McTaggart additional options in
March  2009 to purchase 13,305 ordinary shares at an exercise price of
$7.90.  These options will vest in tranches of 4,435 each on March 19,
2010, 2011 and 2012 and expire three years from the applicable vesting
date.





Ramjeet
Jerrybandan-Vice President of Overseas Operations





On
November 24, 2006, we entered into a 26-month employment agreement with Ramjeet
Jerrybandan, our Vice President of Overseas Operations, pursuant to which he was
paid $119,000 per annum. This agreement was subject to extension each year if
the Chief Executive Officer so determined and could have been extended for a
further term not exceeding two years.





For each
completed financial year, Mr. Jerrybandan was to be paid a bonus calculated as
2.5% of the amount by which our net profits for that financial year (before
charging this bonus, dividends, or crediting any amounts arising from the
re-valuation of our assets) exceed the highest annual net profits earned by us
in any prior financial year to a maximum of 40% of Mr. Jerrybandan’s annual
remuneration. This bonus was to be paid in cash or in our common shares valued
at the market price at the close of trading on December 31st of the relevant
financial year (or if such day was not a trading day, at the close of trading on
the preceding trading day), or as a combination of both at the Vice President’s
election.





On
January 14, 2008, we entered into a new employment agreement with Mr.
Jerrybandan. Under the terms this employment agreement, Mr. Jerrybandan is
entitled to an annual base salary of $132,750 and a performance bonus of not
less than 25% of his base salary for the year pursuant to the completion of
performance goals agreed to between Mr. Jerrybandan and the Chief Executive
Officer of the Company. The Board of Directors of the Company, may in its sole
discretion, after taking into consideration the recommendations of the Company’s
Chief Executive Officer, pay Mr. Jerrybandan a bonus in excess of 25% of Mr.
Jerrybandan’s base salary. The performance bonus must be paid entirely in
cash.


109





The
Company granted Mr. Jerrybandan options to purchase 17,700 common shares at an
exercise price of $30.40 per share. These options vest in tranches of 5,900
shares each on January 1, 2009, 2010 and 2011and expire three years from the
applicable vesting date. The Company granted Mr. Jerrybandan additional options
in March  2009 to purchase 19,956 ordinary shares at an exercise price
of $7.90.  These options will vest in tranches of 4,435 each on March
19, 2010, 2011 and 2012 and expire three years from the applicable vesting
date.





Pursuant
to the terms of the employment agreement, the Company will provide Mr.
Jerrybandan with a monthly automobile expense allowance of $850. This will
increase on January 1 of each subsequent year by $50 per month during the term
of this agreement.





Gerard
J. Pereira-Vice President of Sales and Marketing





On
January 14, 2005, we entered into a two-year employment agreement with Gerard J.
Pereira, pursuant to which he served as our Vice President of Engineering and
was paid $100,000 per annum. This agreement was subject to extension each year
if the Chief Executive Officer so determined and could have been extended for a
further term not exceeding two years.





For each
completed financial year, Mr. Pereira was to be paid a bonus calculated as 2.5%
of the amount by which our net profits for that financial year (before charging
this bonus, dividends, or crediting any amounts arising from the re-valuation of
our assets) exceed the highest annual net profits earned by us in any prior
financial year to a maximum of 40% of Mr. Pereira’s annual remuneration. This
bonus was to be paid in cash or in our common shares valued at the market price
at the close of trading on December 31st of the relevant financial year (or if
such day is not a trading day, at the close of trading on the preceding trading
day), or as a combination of both at the Vice President’s election.





On
January 16, 2008, we entered into a new employment agreement with Mr. Pereira.
Under the terms this employment agreement, Mr. Pereira is entitled to an annual
base salary of $132,750 and a performance bonus of not less than 20% of Mr.
Pereira’s base salary for the year pursuant to the completion of performance
goals agreed between Mr. Pereira and the Chief Executive Officer of the Company.
The Board of Directors of the Company, may in its sole discretion, after taking
into consideration the recommendations of the Company’s Chief Executive Officer,
pay Mr. Pereira a bonus in excess of 20% of Mr. Pereira’s base salary. The
performance bonus must be paid entirely in cash.





The
Company granted Mr. Pereira options to purchase 13,275 common shares at an
exercise price of $30.40 per share. These options vest in tranches of 4,425
shares each on January 1, 2009, 2010 and 2011 and expire three years from the
applicable vesting date. The Company granted Mr. Pereira additional options in
March  2009 to purchase 19,956 ordinary shares at an exercise price of
$7.90.  These options will vest in tranches of 4,435 each on March 19,
2010, 2011 and 2012 and expire three years from the applicable vesting
date.





Pursuant
to the terms of the employment agreement, the Company will provide Mr. Pereira
with a monthly automobile expense allowance of $850. This will increase on
January 1 of each subsequent year by $50 per month during the term of this
agreement.





Grants of Plan-Based
Awards





The
following tables present information with respect to the stock options granted
in the fiscal year ended December 31, 2009 to the Named Executive Officers.
There can be no assurance that the Grant Date Fair Value of Option Award will
ever be realized by the individual. The amount of these awards that were
expensed is shown in the Summary Compensation Table.




Name
                    
                    Grant Date
                    
                    
                    Expiration Date
                    
                    
                    Number of
                      Securities
                      Underlying
                      Options
                      Granted
                    
                    
                    Exercise
                      Price
                    
                    
                    Grant Date
                      Fair Value
                      of Option
                      Award ($)
      (1)
                    
                    
                    Exercisable
                    
                    
                    UnexercisableFrederick
      W. McTaggart
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —David
      W. Sasnett
                    
                    3/19/2009
                    
                    
                    3/19/2015
                    (2)
                    
                    
                    22,149
                    
                    
                    $
                    7.90
                    
                    
                    
                    72,562
                    
                    
                    
                    -
                    
                    
                    
                    22,149.00Ramjeet
      Jerrybandan
                    
                    3/19/2009
                    
                    
                    3/19/2015
                    (2)
                    
                    
                    19,956
                    
                    
                    $
                    7.90
                    
                    
                    
                    65,378
                    
                    
                    
                    -
                    
                    
                    
                    19,956.00Gregory
      S. McTaggart
                    
                    3/19/2009
                    
                    
                    3/19/2015
                    (2)
                    
                    
                    13,305
                    
                    
                    $
                    7.90
                    
                    
                    
                    43,588
                    
                    
                    
                    -
                    
                    
                    
                    13,305.00Gerard
      J. Pereira
                    
                    3/19/2009
                    
                    
                    3/19/2015
                    (2)
                    
                    
                    11,775
                    
                    
                    $
                    7.90
                    
                    
                    
                    38,576
                    
                    
                    
                    -
                    
                    
                    
                    11,775.00


110


(1)
            Represents
      Black-Scholes value on the date of
grant.




(2)
            These
      options vest in equal tranches on each of March 19, 2010, 2011 and 2012
      and expire three years from the applicable vesting
  date.





Outstanding
Equity Awards at Fiscal Year-End





The
following table summarizes the outstanding option awards as of December 31,
2009 for each Named Executive Officer.




Number of SecuritiesUnderlying Unexercised
                
                
                Option
                
                
                Option
                
                
                OptionOptions at Fiscal Year End
                
                
                Exercise
                
                
                Grant
                
                
                ExpirationName
                
                Exercisable
                
                
                Unexercisable
                
                
                Price
      ($)
                
                
                Date
                
                
                DateFrederick
      W. McTaggart
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —David
      W. Sasnett
                
                
                7,400
                
                
                
                14,800
                
                
                
                30.48
                (1)
                
                5/14/2008
                
                
                01/01/2014
                (2)—
                
                
                
                22,149
                
                
                
                7.90
                (1)
                
                3/19/2009
                
                
                03/19/2015
                (2)Ramjeet
      Jerrybandan
                
                
                5,900
                
                
                
                11,800
                
                
                
                30.48
                (1)
                
                5/14/2008
                
                
                01/01/2014
                (2)—
                
                
                
                19,956
                
                
                
                7.90
                (1)
                
                3/19/2009
                
                
                03/19/2015
                (2)Gregory
      S. McTaggart
                
                
                5,900
                
                
                
                11,800
                
                
                
                30.48
                (1)
                
                5/14/2008
                
                
                01/01/2014
                (2)—
                
                
                
                13,305
                
                
                
                7.90
                (1)
                
                3/19/2009
                
                
                03/19/2015
                (2)Gerard
      J. Pereira
                
                
                4,425
                
                
                
                8,850
                
                
                
                30.48
                (1)
                
                5/14/2008
                
                
                01/01/2014
                (2)—
                
                
                
                11,775
                
                
                
                7.90
                (1)
                
                3/19/2009
                
                
                03/19/2015
                (2)





(1)
            These
      options vest annual in equal tranches beginning on the first anniversary
      of the date of grant.


(2)
            These
      options expire three years from the applicable vesting
    date.





Option Exercises and Stock
Vested





The
following table shows the number of our ordinary shares acquired during 2009
upon the exercise of options.





Option Awards
                        
                        
                        Stock AwardsName
                        
                        Number of
                          Shares
                          Acquired on
                          Exercise (#)
                        
                        
                        Value
                          Realized
                          on Exercise
                          ($)
                        
                        
                        Number of
                          Shares
                          Acquired
                          on Vesting (#)
                        
                        
                        Value Realized
                          on Vesting ($)Frederick
      W. McTaggart
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —David
      W. Sasnett
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        506
                        
                        
                        
                        5,983Ramjeet
      Jerrybandan
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Gregory
      S. McTaggart
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Gerard
      J. Pereira
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —





Pension
Benefits





We do not
have any defined benefit plans and only offer defined contribution
plans.


111





Non-Qualified
Deferred Compensation





We do not
have any non-qualified deferred contribution plans or other deferred
compensation plans.





Potential
Payments Upon Termination or Change of Control





The
section below describes the payments that may be made to Named Executive
Officers upon termination or Change in Control, as defined below, pursuant to
individual agreements. For payments made to a participant upon a retirement
other than in connection with termination or a Change in Control, see Pension
Benefits above.





Termination





Our Named
Executive Officers’ employment agreements may be terminated upon the occurrence
of the following:





·
            the
      death of the Named Executive
Officer;





·
            the
      Named Executive Officer being adjudicated
  bankrupt;





·
            the
      Named Executive Officer giving six month’s notice of termination;
      and





·
            the
      Named Executive Officer being unable to discharge his duties due to
      physical or mental illness for a period of more than 60
    days.





Additionally,
our Chief Financial Officer’s employment agreement may be terminated due to his
conviction of a felony or his commission of an act or omission that could result
in material harm to us or conduct justifying dismissal under Cayman Island law.
Our other Named Executive Officers’ employment agreements may be terminated due
to conduct by such Named Executive Officer justifying dismissal under Cayman
Island law.





Upon
termination due to the Named Executive Officer’s inability to discharge his
duties due to physical or mental illness for a period of more than 60 days, the
Named Executive Officer will be terminated. In the case of all Named Executive
Officers other than our Chief Financial Officer, we will pay such Named
Executive Officer $1,000 per year, provide medical insurance for him and his
family, and contribute to a pension fund for the Named Executive Officer for a
period of two years. In the case of our Chief Financial Officer, we will pay him
$1,000 per year and provide medical insurance for him and his family for a
period of one year.





Assuming
our Named Executive Officers’ employment were terminated on December 31, 2009
due to the Named Executive Officer’s inability to discharge his duties due to
physical or mental illness for a period of more than 60 days, the compensation
due to our Named Executive Officers would be as set forth in the following
table.





Salary
                      
                      
                      Medical
                        Insurance
                      
                      
                      Pension
                        Fund
                        Contribution
                      
                      
                      Total
                        CompensationName
                      
                      ($)
                      
                      
                      ($)
                      
                      
                      ($)
                      
                      
                      ($)Frederick
      W. McTaggart
                      
                      
                      2,000
                      
                      
                      
                      29,753
                      
                      
                      
                      7,200
                      
                      
                      
                      38,953David
      W. Sasnett
                      
                      
                      1,000
                      
                      
                      
                      25,776
                      
                      
                      
                      —
                      
                      
                      26,776Ramjeet
      Jerrybandan
                      
                      
                      2,000
                      
                      
                      
                      10,817
                      
                      
                      
                      7,200
                      
                      
                      
                      20,017Gregory
      S. McTaggart
                      
                      
                      2,000
                      
                      
                      
                      10,069
                      
                      
                      
                      7,200
                      
                      
                      
                      19,269Gerard
      J. Pereira
                      
                      
                      2,000
                      
                      
                      
                      29,753
                      
                      
                      
                      7,200
                      
                      
                      
                      38,953




If our
Chief Financial Officer terminates his employment agreement with six month’s
prior notice or if we terminate his employment agreement due to his commission
of an act or omission that could result in material harm to us or conduct
justifying dismissal under Cayman Island law, he will forfeit all unvested
shares issued pursuant to his employment agreement. If his employment agreement
is otherwise terminated or upon a “Change in Control,” as defined below, all
unvested shares issued pursuant to his employment agreement will vest
immediately.


112





Severance





Upon
termination of employment, our Chief Executive Officer and Chief Financial
Officer are entitled to receive severance payments under their employment
agreements. Our Chief Executive Officer’s and Chief Financial Officer’s
employment agreements provide for a lump sum severance payment equal to 24
months and 12 months, respectively, of their then current respective base salary
if their employment is terminated without cause or if their employment
agreements are not renewed. The Committee negotiated our Chief Executive
Officer’s severance packages to provide him an amount equal to their base salary
for the length of his non-competition arrangement with us.





Change
in Control





Upon a
“Change in Control,” as defined below, our Chief Financial Officer may elect to
terminate his employment and receive a lump sum payment equal to three times his
then current base salary. In determining whether to approve and setting the
terms of such Change in Control arrangement, the Committee recognizes the
importance to us and our shareholders of avoiding the distraction and loss of
key management personnel that may occur in connection with rumored or actual
fundamental corporate changes. A properly arranged Change in Control provision
protects shareholder interests by enhancing employee focus during rumored or
actual Change in Control activity through:





·
            Incentives
      to remain with us despite uncertainties while a transaction is under
      consideration or pending; and





·
            Assurance
      of compensation for terminated employees after a Change in
      Control.





Our Chief
Financial Officer’s employment agreement provides that, at his election, he may
terminate his employment upon a Change in Control and receive a payment of 36
months of his then current base salary. After reviewing the practices of
companies represented in the compensation data we obtained, the Committee
negotiated our Chief Financial Officer’s Change in Control arrangement to
provide him an amount equal to three times his base salary. We believe that our
Chief Financial Officer’s Change in Control arrangement is generally in line
with such arrangements offered to chief financial officers of our Peer
Companies.





For the
purposes of this discussion, a “Change of Control” means where: (i) any person,
including a “group” as defined in Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended, publicly announces that such person or group has become
the beneficial owner of more than 50% of the combined voting power (“Controlling
Voting Power”) of our then outstanding securities that may be cast for the
election of directors and (ii) the persons who were our directors before such
event shall cease to constitute a majority of our Board of Directors, or any
successor, as the direct or indirect result of any person or group acquiring
Controlling Voting Power.





The
following table sets forth the total amount of severance and change in control
payments that would be made to Messrs. McTaggart and Sasnett if their employment
agreements were terminated without cause or upon a “Change in Control” as of
December 31, 2009:





Severance
                        
                        
                        Change in ControlName
                        
                        ($)
                        
                        
                        ($)Frederick
      W. McTaggart
                        
                        
                        776,400
                        
                        
                        
                        —David
      W. Sasnett
                        
                        
                        240,000
                        
                        
                        
                        720,000


113


Director
Compensation





The
following table sets forth a summary of the compensation earned by our
non-employee directors and/or paid to certain of our non-employee directors in
2009.





Fees Earned or
                        Paid in Cash
                      
                      
                      Stock Awards
                      
                      
                      TotalName
                      
                      ($)
                      
                      
                      ($)(1)
                      
                      
                      ($)Jeffrey
      M. Parker
                      
                      
                      65,105
                      
                      
                      
                      2,590
                      
                      
                      
                      67,696Frederick
      W. McTaggart
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —David
      W. Sasnett
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —William
      T. Andrews
                      
                      
                      21,400
                      
                      
                      
                      3,809
                      
                      
                      
                      25,209Brian
      E. Butler *
                      
                      
                      21,800
                      
                      
                      
                      3,988
                      
                      
                      
                      25,788Steven
      A. Carr *
                      
                      
                      30,600
                      
                      
                      
                      8,109
                      
                      
                      
                      38,709Carson
      K. Ebanks *
                      
                      
                      20,400
                      
                      
                      
                      3,718
                      
                      
                      
                      24,118Richard
      L. Finlay *
                      
                      
                      30,150
                      
                      
                      
                      6,657
                      
                      
                      
                      36,807Clarence
      B. Flowers, Jr. *
                      
                      
                      25,100
                      
                      
                      
                      5,424
                      
                      
                      
                      30,524Wilmer
      F. Pergande *
                      
                      
                      33,789
                      
                      
                      
                      9,327
                      
                      
                      
                      43,116Leonard
      J. Sokolow *
                      
                      
                      39,100
                      
                      
                      
                      11,074
                      
                      
                      
                      50,174Raymond
      Whittaker *
                      
                      
                      25,200
                      
                      
                      
                      4,736
                      
                      
                      
                      29,936





*
            The
      Board of Directors has determined that each of such persons is an
      “independent director” under the corporate governance rules of
      NASDAQ.


(1)
            Represents fair
      value on the date of grant.





Director
Compensation Policy





Our
Chairman receives an annual retainer of $20,000 in addition to the meeting and
attendance fees paid to each non-executive director.





Each
director who is not an executive officer is entitled to an annual retainer of
$8,000 and an attendance fee of $3,800 for each quarterly Board of Directors’
meeting attended, and $1,000 for any additional Board of Directors’ meetings
attended.





Each
director who is a member of the Audit Committee is entitled to an attendance fee
of $900 for each Audit Committee meeting attended, except for the chairman of
the Audit Committee who is entitled to $1,650 for each Audit Committee meeting
attended.





Each
director who is a member of the Compensation Committee is entitled to an
attendance fee of $900 for each Compensation Committee meeting attended, except
for the chairman of the Compensation Committee who is entitled to $1,650 for
each Compensation Committee meeting attended.





Each
director who is a member of the Executive Committee is entitled to an attendance
fee of $400 for each Executive Committee meeting attended.





Each
director who is a member of the Nominations Committee is entitled to an
attendance fee of $400 for each Nominations Committee meeting attended, except
for the chairman of the Nominations Committee who is entitled to $900 for each
Nominations Committee meeting attended.





In
addition, under the non-executive directors share grant plan, a director
receives common shares worth the share equivalent of $1,200 for each quarterly
Board of Directors meeting and $600 for each Committee meeting attended. The
common shares are calculated by dividing the accumulated share attendance fees
by the prevailing market price on October 1st of the preceding
year.





Directors
who are executive officers on our Board of Directors are not entitled to an
annual retainer or any attendance fees.


114





Compensation Committee Interlocks and
Insider Participation in Compensation Decisions





The
Compensation Committee of the Board of Directors consists of Messrs. Finlay,
Pergande and Flowers. No member of the Compensation Committee is, or at any time
in the past has been, an officer or employee of the Company or any of its
subsidiaries.





ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDERS MATTERS





The table below sets forth the beneficial ownership of our common
shares, par value $0.60 per share, of which 14,541,878 are outstanding as of
March 10, 2010 and our redeemable preference shares, par value $0.60 per share,
of which 17,192 are outstanding as of March 10, 2010 by:





·
            each
      person or entity that we know beneficially owns more than 5% of our
      ordinary shares or redeemable preference
shares;





·
            each
      of our directors;





·
            our
      Chief Executive Officer and our Chief Financial Officer during the year
      ended December 31, 2009, and the three other most highly compensated
      executive officers who were serving as executive officers on December 31,
      2009; and





·
            all
      of our executive officers and directors as a
  group.





Title of Class
                                                        
                                                        Identity of
                                                          Person or Group
                                                        
                                                        Amount
                                                          Owned
                                                        
                                                        
                                                        Percentage
                                                          of ClassOrdinary
      Shares
                                                        
                                                        Invesco
      PowerShares Capital Management LLC (1)
                                                        
                                                        
                                                        1,568,071
                                                        
                                                        
                                                        
                                                        10.8
                                                        %Ordinary
      Shares
                                                        
                                                        Pictet
      Asset Management SA (2)
                                                        
                                                        
                                                        1,364,566
                                                        
                                                        
                                                        
                                                        9.38
                                                        %Ordinary
      Shares
                                                        
                                                        Wilmer
      F. Pergande,
                                                        
                                                        
                                                        15,619
                                                        
                                                        
                                                        
                                                        *Director,
      Chairman of theBoard
      of Directors (3)Ordinary
      Shares
                                                        
                                                        Frederick
      W. McTaggart,
                                                        
                                                        
                                                        99,257
                                                        
                                                        
                                                        
                                                        *Director,
      President andChief
      Executive OfficerOrdinary
      Shares
                                                        
                                                        David
      W. Sasnett,
                                                        
                                                        
                                                        18,763
                                                        
                                                        
                                                        
                                                        *Director,
      Executive Vice President andChief
      Financial Officer (4)Ordinary
      Shares
                                                        
                                                        Gregory
      S. McTaggart,
                                                        
                                                        
                                                        118,872
                                                        
                                                        
                                                        
                                                        *Vice
      President of CaymanOperations
      (5)Ordinary
      Shares
                                                        
                                                        Gerard
      J. Pereira
                                                        
                                                        
                                                        16,628
                                                        
                                                        
                                                        
                                                        *VP
      Sales and Marketing (6)Ordinary
      Shares
                                                        
                                                        Ramjeet
      Jerrybandan,
                                                        
                                                        
                                                        14,643
                                                        
                                                        
                                                        
                                                        *VP
      Overseas Operations (7)Ordinary
      Shares
                                                        
                                                        William
      T. Andrews,
                                                        
                                                        
                                                        2,681
                                                        
                                                        
                                                        
                                                        *DirectorOrdinary
      Shares
                                                        
                                                        Brian
      E. Butler,
                                                        
                                                        
                                                        9,879
                                                        
                                                        
                                                        
                                                        *Director




115




Title of Class
                                                      
                                                      Identity of
                                                        Person or Group
                                                      
                                                      Amount
                                                        Owned
                                                      
                                                      
                                                      Percentage
                                                        of ClassOrdinary
      Shares
                                                      
                                                      Steven
      A. Carr,
                                                      
                                                      
                                                      10,661
                                                      
                                                      
                                                      
                                                      *Director
      (8)Ordinary
      Shares
                                                      
                                                      Carson
      K. Ebanks,
                                                      
                                                      
                                                      749
                                                      
                                                      
                                                      
                                                      *DirectorOrdinary
      Shares
                                                      
                                                      Richard
      L. Finlay,
                                                      
                                                      
                                                      13,212
                                                      
                                                      
                                                      
                                                      *DirectorOrdinary
      Shares
                                                      
                                                      Clarence
      B. Flowers, Jr.,
                                                      
                                                      
                                                      14,860
                                                      
                                                      
                                                      
                                                      *DirectorOrdinary
      Shares
                                                      
                                                      Leonard
      J. Sokolow,
                                                      
                                                      
                                                      2,362
                                                      
                                                      
                                                      
                                                      *Director
      (9)Ordinary
      Shares
                                                      
                                                      Raymond
      Whittaker,
                                                      
                                                      
                                                      13,104
                                                      
                                                      
                                                      
                                                      *DirectorOrdinary
      Shares
                                                      
                                                      Directors
      and Executive
                                                      
                                                      
                                                      351,290
                                                      
                                                      
                                                      
                                                      2.41
                                                      %Officers
      as a Group (10)Redeemable
      Preference Shares
                                                      
                                                      Marinus
      Barendsen,
                                                      
                                                      
                                                      1,300
                                                      
                                                      
                                                      
                                                      7.56
                                                      %Redeemable
      Preference Shares
                                                      
                                                      Gerard
      J. Pereira
                                                      
                                                      
                                                      1,187
                                                      
                                                      
                                                      
                                                      6.90
                                                      %VP
      Sales and MarketingRedeemable
      Preference Shares
                                                      
                                                      Kenneth
      Crowley
                                                      
                                                      
                                                      869
                                                      
                                                      
                                                      
                                                      5.05
                                                      %Special
      Projects EngineerRedeemable
      Preference Shares
                                                      
                                                      Gregory
      S. McTaggart,
                                                      
                                                      
                                                      455
                                                      
                                                      
                                                      
                                                      2.65
                                                      %Vice
      President of CaymanOperationsRedeemable
      Preference Shares
                                                      
                                                      Ramjeet
      Jerrybandan,
                                                      
                                                      
                                                      370
                                                      
                                                      
                                                      
                                                      2.15
                                                      %VP
      Overseas Operations





*
            Indicates
      less than 1%





**
            Unless
      otherwise indicated, to our knowledge, the persons named in the table
      above have sole voting and investment power with respect to the shares
      listed. In computing the number of shares beneficially owned by a person
      and the percentage ownership of that person, shares issuable under stock
      options exercisable within 60 days after March 10, 2010 are deemed
      outstanding for that person but are not deemed outstanding for computing
      the percentage of ownership of any other
person.





(1)
            On
      February 9, 2010, Invesco Ltd., on its own behalf and on behalf of its
      subsidiary, Invesco PowerShares Capital Management LLC, filed an amended
      Schedule 13G (“Schedule 13G”) with the Securities and Exchange Commission.
      The Schedule 13G states that on its own behalf and on behalf of its
      subsidiary, Invesco PowerShares Capital Management LLC has sole voting
      power over 1,568,071 common shares and sole dispositive power over
      1,568,071 shares. The address of Invesco PowerShares Capital Management
      LLC is 301 West Roosevelt Road, Wheaton, IL
  60187.





(2)
            On
      January 13, 2010, Pictet Asset Management SA filed a Schedule 13G
      (“Schedule 13G”) with Securities and Exchange Commission. The Schedule 13G
      states that Pictet Asset Management SA disclaims beneficial ownership of
      the shares reported, which are owned of record and beneficially by three
      non-U.S. investment funds, both managed by Pictet Asset Management
      SA.  The Schedule 13G states that Pictet Asset Management SA has
      shared voting power over 1,364,566 common shares and shared dispositive
      power over 1,364,566  shares. The address of Pictet Asset
      Management SA is 60 Route des Acacias, Geneva 73, Switzerland,
      CH-1211.


116





(3)
            Of
      the 15,619 common shares beneficially owned by Mr. Pergande, all have
      shared investment power.





(4)
            Of
      the 18,763 common shares beneficially owned by Mr. Sasnett, 14,800 are
      issuable upon exercise of stock options within 60 days of March 10,
      2010.





(5)
            Of
      the 118,872 common shares beneficially owned by Mr. Gregory S. McTaggart,
      11,800 are issuable upon exercise of stock options within 60 days of March
      10, 2010.





(6)
            Of
      the 16,628 common shares beneficially owned by Mr. Pereira, 6,778 have
      shared investment power and 8,850 are issuable upon exercise of stock
      options within 60 days of March 10,
2010.





(7)
            Of
      the 14,643 common shares beneficially owned by Mr. Jerrybandan, 11,800 are
      issuable upon exercise of stock options within 60 days of March 10,
      2010.





(8)
            Of
      the 10,661 common shares beneficially owned by Mr. Carr, 10,000 are in a
      trust, for which Mr. Carr indirectly owns the shares as co-trustee. Of the
      shares owned by the trust, all have been
  pledged.





(9)
            Of
      the 2,362 common shares beneficially owned by Mr. Sokolow, all have shared
      investment power.





(10)
            Of
      the 351,290 common shares owned by the Directors and executive officers as
      a group, 24,759 have shared investment power, 10,000 are indirectly owned,
      47,250 are issuable upon exercise of stock options within 60 days of March
      10, 2010, and 10,000 are pledged.





Equity Compensation Plan
Information





The
following table sets forth certain information as of December 31, 2009,
with respect to compensation plans (including individual compensation
arrangements) under which our equity securities are authorized for issuance
under:





·
            all
      compensation plans previously approved by our security holders;
      and





·
            all
      compensation plans not previously approved by our security
      holders.





Plan category
                              
                              Number of
                                securities
                                to be issued upon
                                exercise of
                                outstanding options,
                                warrants and rights
                                (a)
                              
                              
                              Weighted-average
                                exercise price of
                                outstanding options,
                                warrants and rights
                                (b)
                              
                              
                              Number of securities
                                remaining available for
                                future issuance under
                                equity compensation
                                plans (excluding
                                securities reflected in
                                column (a))
                                (c)Equity
      compensation
      plansapproved
      by security holders
                              
                              
                              215,052
                              
                              
                              $
                              18.76
                              
                              
                              
                              1,284,948Equity
      compensation plans
      notapproved
      by security holders
                              
                              
                              —
                              
                              
                              $
                              —
                              
                              
                              
                              *Total
                              
                              
                              215,052
                              
                              
                              $
                              18.76
                              
                              
                              
                              *







*
            This
      equity compensation plan does not have any limits on the amount of shares
      reserved for issuance under the
plans.


117





ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE





Transactions
With Related Persons





In 2003,
DWEER Technology Ltd., the owner of the DWEERTM
technology, licensed the worldwide rights to the DWEERTM
technology to Calder AG, a Swiss company. On February 26, 2004, we entered into
a distributorship agreement with Calder AG, pursuant to which we have the
exclusive right to distribute and sell in the Caribbean the products
manufactured by Calder AG using the DWEERTM
technology.  This agreement was terminated in March 2009. Until April
2009 when all of the shares were sold, William T. Andrews, PhD, a director of
our Company, and his spouse indirectly owned 35% of the issued and outstanding
shares of Calder AG. Until April 2009 when he resigned as a director, Dr.
Andrews also was the Vice-Chairman of the Board of Directors of Calder AG. In
addition, Dr. Andrews and his spouse indirectly own 100% of the issued and
outstanding shares of DWEER Technology Ltd.  In April 2009, DWEER
Technology Ltd. sold its DWEERTM
technology and assigned the Calder AG license.  During 2009, we paid
$195,820 (2008: $1,033,108) to Calder AG for DWEERTM
equipment purchases.





The
Company has a written policy regarding the review, approval or ratification of
related person transactions. A related person transaction for the purposes of
the policy is a transaction between the company and one of the Company’s
directors or nominees for director, executive officers or 5% shareholders, or a
member of one of these person’s immediate family, in which such person has a
direct or indirect material interest and involves more than $120,000. Under this
policy, related person transactions are prohibited unless the Audit Committee
has determined in advance that the transaction is in the best interests of the
Company.





The Board
of Directors has determined that all of the current Directors, other than
Messrs. McTaggart, Sasnett, and Andrews, are “independent” as such term is
defined by the applicable listing standards of NASDAQ. The Board of Directors
based this determination primarily on a review of the responses of the Directors
to questions regarding their employment, affiliations and family and other
relationships.





ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES





The
following table shows the fees that the Company paid or accrued for the audit
and other services provided by MarcumRachlin, a division of Marcum LLP, formerly
known as Rachlin LLP through June 1, 2009, for the fiscal years ended December
31, 2009 and 2008.





2009
                    
                    
                    2008Audit
                    
                    $
                    346,500
                    
                    
                    $
                    325,800Audit-Related
                    
                    
                    -
                    
                    
                    
                    -Tax
                    
                    
                    3,000
                    
                    
                    
                    6,000All
      Other
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    349,500
                    
                    
                    $
                    331,800





Audit
Fees: This category includes the fees for the examination of the Company’s
consolidated financial statements and internal controls, review of the Company’s
Annual Report on Form 10-K and the quarterly reviews of the interim financial
statements included in the Company’s Quarterly Reports on Form
10-Q.





Audit-Related
Fees: This category consists of services that are closely related to the
financial audit process and primarily consists of review of reports filed and to
be filed with the U.S. Securities and Exchange Commission and accounting advice
relating thereto.





Tax Fees:
This category relates to professional services for tax compliance, tax advice,
and tax planning.





All audit
services performed by MarcumRachlin, a division of Marcum LLP, were approved by
the Audit Committee. The Audit Committee gives due consideration to the
potential effect of non-audit services on maintaining the auditors
independence.


118





PART
IV





ITEM
15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES





1.
Financial Statements





The
Consolidated Water Co. Ltd. Financial statements found in ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA are incorporated herein by
reference.





Pursuant
to Rule 3-09 of Regulation S-X, when either the first or third condition set
forth in Rule 1-02(w), substituting 20 percent for 10 percent, is met by a 50
percent-or-less-owned person accounted for by the equity method separate
financial statements shall be filed. The Ocean Conversion (BVI) Ltd. Financial
statements found in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA are
incorporated herein by reference.





2.
Financial Statement Schedules





None





3.
Exhibits





The
Exhibits listed in the Exhibit Index immediately preceding the Signatures are
filed as part of this Annual Report on Form 10-K.


119


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.





CONSOLIDATED WATER CO.
      LTD.By:
              /s/ Wilmer F. PergandeWilmer
      F. PergandeChairman
      of the Board of Directors





Dated:
March 16, 2010





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.





Signature
                    
                    Title
                    
                    DateBy:
                    /s/ Wilmer F. Pergande
                    
                    Chairman of the Board of Directors
                    
                    March
      16, 2010Wilmer
      F. PergandeBy:
                    /s/ Frederick W. McTaggart
                    
                    Director, Chief Executive Officer and President
                    
                    March
      16, 2010Frederick
      W. McTaggart
                    
                    (Principal Executive Officer)By:
                    /s/ David W. Sasnett
                    
                    Director, Executive Vice President & Chief Financial
                    
                    March
      16, 2010David
      W. Sasnett
                    
                    Officer (Principal Financial and Accounting Officer)By:
                    /s/ William T. Andrews
                    
                    Director
                    
                    March
      16, 2010William
      T. AndrewsBy:
                    /s/ Brian E. Butler
                    
                    Director
                    
                    March
      16, 2010Brian
      E. ButlerBy:
                    /s/ Steven A. Carr
                    
                    Director
                    
                    March
      16, 2010Steven
      A. CarrBy:
                    /s/ Carson K. Ebanks
                    
                    Director
                    
                    March
      16, 2010Carson
      K. EbanksBy:
                    /s/ Richard L. Finlay
                    
                    Director
                    
                    March
      16, 2010Richard
      L. FinlayBy:
                    /s/ Clarence B. Flowers,
Jr.
                    
                    Director
                    
                    March
      16, 2010Clarence
      B. Flowers, Jr.By:
                    /s/ Leonard J. Sokolow
                    
                    Director
                    
                    March
      16, 2010Leonard
      J. SokolowBy:
                    /s/ Raymond Whittaker
                    
                    Director
                    
                    March
      16, 2010Raymond
      Whittaker


120


CONSOLIDATED
WATER CO. LTD.





INDEX
TO EXHIBITS FILED WITH 10-K





Number
            
            Exhibit Description3.1
            
            Amended
      and Restated Memorandum of Association of Consolidated Water Co. Ltd.
      dated May 14, 2008 (incorporated by reference to Exhibit 3.1 filed as part
      of our Form 8-K filed October 12, 2006, Commission File No.
      0-25248)3.2
            
            Amended
      and Restated Articles of Association of Consolidated Water Co. Ltd. dated
      May 10, 2006 (incorporated by reference to Exhibit 4.2 filed as part of
      our Form F-3 filed October 12, 2006, Commission File No.
      333-137970)3.3
            
            Amendment
      to Articles of Association of Consolidated Water Co. Ltd. dated May 11,
      2007 (incorporated by reference to Exhibit 3.1 filed as part of our Form
      8-K filed May 14, 2007, Commission File No. 0-25248)3.4
            
            Amendment
      to Articles of Association of Consolidated Water Co. Ltd. dated May
      26, 2009 (incorporated by reference to Exhibit 3.1 filed as part of our
      Form 8-K filed May 27, 2009, Commission File No.
      0-25248)4.1
            
            Option
      Deed, dated August 6, 1997, between Cayman Water Company Limited and
      American Stock Transfer & Trust Company (incorporated herein by
      reference to the exhibit filed on our Form 6-K, dated August 7, 1997,
      Commission File No. 0-25248)4.2
            
            Deed
      of Amendment of Option Deed dated August 8, 2005 (incorporated herein by
      reference to Exhibit 4.2 filed as a part of our Form 8-K dated August 11,
      2005, Commission File No. 0-25248)4.3
            
            Second
      Deed of Amendment of Option Deed, dated September 27, 2005 (incorporated
      herein by reference to the exhibit filed as a part of our Form 8-K dated
      October 3, 2005, Commission File No. 0-25248)4.4
            
            Third
      Deed of Amendment to Option Deed, dated May 30, 2007 (incorporated herein
      by reference to Exhibit 4.3 filed as part of our Form 8-K filed June 1,
      2007, Commission File No. 0-25248)10.1.1
            
            License
      Agreement dated July 11, 1990 between Cayman Water Company Limited and the
      Government of the Cayman Islands (incorporated herein by reference to the
      exhibit filed as a part of our Form 20-F dated December 7, 1994,
      Commission File No. 0-25248)10.1.2
            
            First
      Amendment to License Agreement dated September 18, 1990 between Cayman
      Water Company Limited and the Government of the Cayman Islands.
      (incorporated herein by reference to the exhibit filed as a part of our
      Form 20-F dated December 7, 1994, Commission File No.
    0-25248)10.1.3
            
            Second
      Amendment to License Agreement dated February 14, 1991 between Cayman
      Water Company Limited and the Government of the Cayman Islands.
      (incorporated herein by reference to the exhibit filed as a part of our
      Form 20-F dated December 7, 1994, Commission File No.
    0-25248)10.1.4
            
            Third
      Amendment to a License to Produce Potable Water dated August 15, 2001
      between Consolidated Water Co. Ltd. by the Government of the Cayman
      Islands (incorporated herein by reference to Exhibit 10.4 filed as a part
      of our Form 10-K for the fiscal year ended December 31, 2001, Commission
      File No. 0-25248)10.1.5
            
            Fourth
      Amendment to a License to Produce Potable Water dated February 1, 2003
      between Consolidated Water Co. Ltd. by the Government of the Cayman
      Islands (incorporated herein by reference to Exhibit 10.5 filed as a part
      of our Form 10-K for the fiscal year ended December 31, 2002, Commission
      File No. 0-25248)10.3
            
            Water
      Supply Agreement dated December 18, 2000 between Consolidated Water Co.
      Ltd. and South Bimini International Ltd. (incorporated herein by reference
      to Exhibit 10.2 filed as a part of our Form 10-K for the fiscal year ended
      December 31, 2000, Commission File No. 0-25248)10.6.1*
            
            Employment
      contract dated December 5, 2003 between Frederick McTaggart and
      Consolidated Water Co. Ltd. (incorporated herein by reference to Exhibit
      10.18 filed as a part of our Form 10-K for the fiscal year ended December
      31, 2003, Commission File No. 0-25248)10.6.2*
            
            Amendment
      of Engagement Agreement dated September 14, 2007 between Frederick W.
      McTaggart and Consolidated Water Co. Ltd. (incorporated herein by
      reference to Exhibit 10.2 to our Form 8-K filed September 19, 2007,
      commission File No. 0-25248)10.6.3*
            
            Third
      Amendment of Engagement Agreement dated September 9, 2009 between
      Frederick W. McTaggart and Consolidated Water Co. Ltd. (incorporated
      herein by reference to Exhibit 10.1 to our Form 8-K filed September 9,
      2009, commission File No. 0-25248)10.7.1*
            
            Engagement
      Agreement dated May 22, 2006 between David Sasnett and Consolidated Water
      Co. Ltd. (incorporated herein by reference to Exhibit 10.1 filed as part
      of our Form 8-K filed May 26, 2006, Commission File No.
      0-25248)





121





10.7.2*
            
            Amended
      and restated Engagement Agreement dated March 29, 2007 between David
      Sasnett and Consolidated Water Co. Ltd. (incorporated herein by reference
      to Exhibit 10.1 filed as part of our Form 8-K filed April 14, 2007,
      Commission File No. 0-25248)10.7.3*
            
            Engagement
      Agreement dated January 15, 2008 between David Sasnett and Consolidated
      Water Co. Ltd. (incorporated herein by reference to Exhibit 10.1 filed as
      part of our Form 8-K filed January 22, 2008, Commission File No.
      0-25248)10.8*
            
            Employment
      contract dated January 11, 2008 between Gregory McTaggart and Consolidated
      Water Co. Ltd.10.10*
            
            Employment
      contract dated January 17, 2005 between Robert Morrison and Consolidated
      Water Co. Ltd. (incorporated herein by reference to Exhibit 10.56 filed as
      a part of our Form 8-K dated January 14, 2005, Commission File No.
      0-25248)10.11.1*
            
            Employment
      contract dated November 24, 2006 between Ramjeet Jerrybandan and
      Consolidated Water Co. Ltd.10.11.2*
            
            Employment
      contract dated January 14, 2008 between Ramjeet Jerrybandan and
      Consolidated Water Co. Ltd. (incorporated herein by reference to Exhibit
      10.11 filed as part of our Form 10-K for the fiscal year ended December
      31, 2008, Commission File No. 0-25248)10.12*
            
            Employment
      contract dated January 16, 2008 between Gerard Pereira and Consolidated
      Water Co. Ltd. (incorporated herein by reference to Exhibit 10.12 filed as
      a part of our Form 10-K for the fiscal year ended December 31, 2008,
      Commission File No. 0-25248)10.14
            
            Consulting
      Agreement dated November 17, 1998 between Cayman Water Company Limited and
      R.J. Falkner & Company, Inc. (incorporated herein by reference to
      Exhibit 10.30 filed as part of our Registration Statement on Form F-2
      dated May 17, 2000, Commission File No. 333-35356)10.15
            
            Specimen
      Service Agreement between Cayman Water Company Limited and consumers
      (incorporated herein by reference to the exhibit filed as part of our
      Registration Statement on Form F-1 dated March 26,
1996)10.16*
            
            Summary
      Share Grant Plan for Directors (incorporated herein by reference to
      Exhibit 10.24 filed as part of our Registration Statement on Form F-2
      dated May 17, 2000, Commission File No. 333-35356)10.17*
            
            Employee
      Share Option Plan (incorporated herein by reference to Exhibit 10.26 filed
      as a part of our Form 10-K for the fiscal year ended December 31, 2001,
      Commission File No. 0-25248)10.18*
            
            2008
      Equity Incentive Plan (incorporated by reference to Exhibit 10.1 filled as
      part of our Form 10-Q for the fiscal quarter ended September 30, 2008,
      Commission File No. 0-25248)10.19
            
            Purchase
      and Sale Agreement, dated December 10, 2001, among Consolidated Water Co.
      Ltd., Cayman Hotel and Golf Inc., Ellesmere Britannia Limited and Hyatt
      Britannia Corporation Ltd. (incorporated herein by reference to Exhibit
      10.30 filed as part of our Form 10-K for the fiscal year ended December
      31, 2001, Commission File No. 0-25248)10.20
            
            Agreement
      dated February 1, 2002 between Consolidated Water Co. Ltd. and Cayman
      Hotel and Golf Inc. (incorporated herein by reference to Exhibit 10.52
      filed as a part of our Form 10-K for the fiscal year ended December 31,
      2001, Commission File No. 0-25248)10.26
            
            Lease
      dated December 10, 2001 between Cayman Hotel and Golf Inc. and
      Consolidated Water Co. Ltd. (incorporated herein by reference to Exhibit
      10.52 filed as a part of our Form 10-K for the fiscal year ended December
      31, 2001, Commission File No. 0-25248)10.27.1
            
            Lease
      dated April 27, 1993 signed July 18, 2001 between Government of Belize and
      Belize Water Limited (incorporated herein by reference to Exhibit 10.53
      filed as a part of our Form 10-K for the fiscal year ended December 31,
      2001, Commission File No. 0-25248)10.27.2
            
            Amended
      lease dated April 27, 1993 signed January 2, 2004 between Government of
      Belize and Belize Water Limited (incorporated herein by reference to
      Exhibit 10.36 filed as a part of our Form 10-K for the fiscal year ended
      December 31, 2003, Commission File No. 0-25248)10.28
            
            Loan
      Agreement dated February 7, 2003 between Consolidated Water Co. Ltd. and
      Scotiabank (Cayman Islands) Ltd. (incorporated herein by reference to
      Exhibit 10.1 filed as a part of our Form 8-K dated February 13, 2003,
      Commission File No. 0-25248)




122





10.29.1
                
                Distributorship
      Agreement dated September 24, 2002 between DWEER Technology Ltd. and
      DesalCo Limited (incorporated herein by reference to Exhibit 10.58 filed
      as a part of our Form 10-K for the fiscal year ended December 31, 2002,
      Commission File No. 0-25248)10.29.2
                
                Amendment
      to the Distributorship Agreement dated September 24, 2002 between DWEER
      Technologies Ltd. and DesalCo Limited (incorporated herein by reference to
      Exhibit 10.43 filed as a part of our Form 10-K for the fiscal year ended
      December 31, 2003, Commission File No. 0-25248)10.30.1
                
                Distributorship
      Agreement dated February 26, 2004 between Calder AG and DesalCo Limited
      (incorporated herein by reference to Exhibit 10.44 filed as a part of our
      Form 10-K for the fiscal year ended December 31, 2003, Commission File No.
      0-25248)10.30.2
                
                First
      Amendment to the Distributorship Agreement dated August 30, 2005 among
      Calder AG, DesalCo Limited and DWEER Technologies Ltd. (incorporated
      herein by reference to Exhibit 10.27.2 filed as part of our Form 10-K for
      the fiscal year ended December 31, 2007, Commission File No.
      0-25248)10.30.3
                
                Amended
      and Restated Distributorship Agreement dated August 30, 2005 between
      Calder AG and DesalCo Limited (incorporated herein by reference to Exhibit
      10.27.3 filed as part of our Form 10-K for the fiscal year ended December
      31, 2007, Commission File No.
0-25248)




10.31.1
                          
                          Loan
      Agreement dated May 25, 2005 between Ocean Conversion (BVI), Ltd. and
      Consolidated Water Co. Ltd. (incorporated herein by reference to Exhibit
      99.1 filed as a part of our Form 8-K dated June 1, 2005, Commission File
      No. 0-25248)10.31.2
                          
                          Debenture
      Agreement dated August 24, 2007 between Ocean Conversion (BVI), Ltd. and
      Consolidated Water Co. Ltd.10.31.3
                          
                          Amending
      Debenture Agreement dated March 14, 2008 between Ocean Conversion (BVI),
      Ltd. and Consolidated Water Co. Ltd.10.31.4
                          
                          Second
      Amending Debenture Agreement dated February 18, 2009 between Ocean
      Conversion (BVI), Ltd. and Consolidated Water Co. Ltd.10.31.5
                          
                          Amending
      Loan Agreement dated August 20, 2009 between Ocean Conversion (BVI), Ltd.
      and Consolidated Water Co.10.31.6
                          
                          Amending
      Loan Agreement dated February 10, 2010 between Ocean Conversion (BVI),
      Ltd. and Consolidated Water
Co.







123








10.32
            
            Trust
      Deed dated August 4, 2006 between Consolidated Water Co. Ltd. and Dextra
      Bank & Trust Co. Ltd. (incorporated herein by reference to Exhibit
      10.1 filed as a part of our Form 8-K filed August 9, 2006, File No.
      0-25248)10.33
            
            Subscription
      Agreement dated August 4, 2006 between Consolidated Water Co. Ltd. and
      Scotiatrust and Merchant Bank Trinidad & Tobago Limited (incorporated
      herein by reference to Exhibit 10.2 filed as a part of our Form 8-K filed
      August 9, 2006, File No. 0-25248)10.34
            
            Deed
      of Second Debenture dated August 4, 2006 between Consolidated Water Co.
      Ltd. and Dextra Bank & Trust Co. Ltd. (incorporated herein by
      reference to Exhibit 10.5 filed as a part of our Form 8-K filed August 9,
      2006, File No. 0-25248)10.35
            
            Deed
      of Second Collateral Debenture dated August 4, 2006 between Cayman Water
      Company Limited and Dextra Bank & Trust Co. Ltd. (incorporated herein
      by reference to Exhibit 10.6 filed as a part of our Form 8-K filed August
      9, 2006, File No. 0-25248)10.36
            
            Equitable
      Charge of Shares dated August 4, 2006 between Consolidated Water Co. Ltd.
      and Dextra Bank & Trust Co. Ltd. (incorporated herein by reference to
      Exhibit 10.7 filed as a part of our Form 8-K filed August 9, 2006, File
      No. 0-25248)10.37
            
            Intercreditor
      Deed dated August 4, 2006 among Scotiabank & Trust (Cayman) Ltd.,
      Dextra Bank & Trust Co. Ltd., Consolidated Water Co. Ltd. and Cayman
      Water Company Limited (incorporated herein by reference to Exhibit 10.8
      filed as a part of our Form 8-K filed August 9, 2006, File No.
      0-25248)10.38
            
            Cayman
      Islands Collateral Charge, West Bay Beach South Property, Block 12D,
      Parcel 79REM1/2 (incorporated herein by reference to Exhibit 10.9 filed as
      a part of our Form 8-K filed August 9, 2006, File No.
    0-25248)10.39
            
            Cayman
      Islands Collateral Charge, West Bay Beach North, Block 11D, Parcel 40
      (incorporated herein by reference to Exhibit 10.10 filed as a part of our
      Form 8-K filed August 9, 2006, File No. 0-25248)10.40
            
            Cayman
      Islands Collateral Charge, West Bay Beach North, Block 11D, Parcel 8
      (incorporated herein by reference to Exhibit 10.11 filed as a part of our
      Form 8-K filed August 9, 2006, File No. 0-25248)10.41
            
            Cayman
      Islands Collateral Charge, West Bay North East, Block 9A, Parcel 8
      (incorporated herein by reference to Exhibit 10.12 filed as a part of our
      Form 8-K filed August 9, 2006, File No. 0-25248)10.42
            
            Cayman
      Islands Collateral Charge, West Bay North East, Block 9A, Parcel 469
      (incorporated herein by reference to Exhibit 10.13 filed as a part of our
      Form 8-K filed August 9, 2006, File No. 0-25248)10.43
            
            Loan
      Agreement dated as of October 4, 2006, by and between Royal Bank of Canada
      and Consolidated Water (Bahamas) Ltd. (incorporated herein by reference to
      Exhibit 10.1 filed as a part of our Form 8-K filed October 6, 2006, File
      No. 0-25248)18
            
            Letter
      regarding change in accounting principle21.1
            
            Subsidiaries
      of the Registrant23.1
            
            Consent
      of Marcum Rachlin, a division of Marcum LLP — Consolidated Water Co.
      Ltd.23.2
            
            Consent
      of Marcum Rachlin, a division of Marcum LLP — Ocean Conversion (BVI)
      Ltd.31.1
            
            Certification
      by the Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
            
            Certification
      by the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
            
            Certification
      by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, Section
      906 of the Sarbanes-Oxley Act of 200232.2
            
            Certification
      by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, Section
      906 of the Sarbanes-Oxley Act of
2002





*
              Indicates
      a management contract or compensatory
plan.


124