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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 1934
 For the fiscal year ended December 31, 2004
 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transaction period from _____________ to _____________ Commission File Number: 0-25248 CONSOLIDATED WATER CO. LTD. 
  CAYMAN ISLANDS
    
    N/A(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 Trafalgar Place, West Bay Road, P.O.
Box 1114GT, Grand Cayman, B.W.I.
    
    N/A(Address of principal executive offices)
    
    (Zip Code)
 Registrants Telephone number, including area code: (345) 945-4277 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: ORDINARY SHARES, PAR VALUE CI$1.00(Title of Class)
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this 10-K or
any amendments to this Form 10-K. [Not Applicable] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act. Yes þ No o The aggregate market value of common stock held by non-affiliates of the registrant, based on the
closing sales price for the registrants ordinary shares, as reported on the Nasdaq National Market
on June 30, 2004,was $149,585,207. As at June 30, 2004,there were 5,748,855 shares of the registrants ordinary shares outstanding. DOCUMENTS INCORPORATED BY REFERENCE None EXCHANGE RATES Unless otherwise indicated, all dollar amounts are in United States Dollars and references to $,
U.S., or U.S.$ are to United States Dollars. The official fixed exchange rate for conversion of CI$ into U.S.$, as determined by the Cayman
Islands Monetary Authority, has been fixed since April 1974 at U.S. $1.20 per CI$1.00. The official fixed exchange rate for conversion of BZE$ into U.S.$, as determined by the Central
Bank of Belize, has been fixed since 1976 at U.S.$ 0.50 per BZE$ 1.00. The official fixed exchange rate for conversion of BAH$ into U.S.$, as determined by the Central
Bank of The Bahamas, has been fixed since 1973 at U.S.$ 1.00 per BAH$ 1.00. The official fixed exchange rate for conversation of BDS$ into U.S.$ as determined by the Central
Bank of Barbados has been fixed since 1975 at U.S.$ 0.50 = BDS$ 1.00. The British Virgin Islands currency is U.S.$.




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TABLE OF CONTENTS Section
    
    Description
    
    PagePART IItem 1.
    
    Business
    
    
    1Item 2.
    
    Properties
    
    
    23Item 3.
    
    Legal Proceedings
    
    
    26Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    26PART IIItem 5.
    
    Market for Registrants Common Equity and Related Stockholder Matters
    
    
    27Item 6.
    
    Selected Financial Data
    
    
    29Item 7.
    
    Managements Discussions and Analysis of Financial Condition and Results of Operations
    
    
    30Item 7A.
    
    Quantitative and Qualitative Disclosure about Market Risk
    
    
    50Item 8.
    
    Financial Statements and Supplementary Data
    
    
    51Item 9A.
    
    Controls and Procedures
    
    
    93PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    99Item 11.
    
    Executive Compensation
    
    
    105Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    114Item 13.
    
    Certain Relationships and Related Transactions
    
    
    117Item 14
    
    Principal Accounting Fees and Services
    
    
    117PART IVItem 15
    
    Exhibits and Financial Statement Schedules
    
    
    118SIGNATURES
    
    
    
    
    126Amended and Restated Articles of AssociationEngagement AgreementEmployee share option notice letter/Billy BankerEmployee share option notice letter/Chet RitchEmployee share option notice letter/David HookerEmployee share option notice letter/Elizabeth TrianaEmployee share option notice letter/Helverth RodriguezEmployee share option notice letter/Ivan TaboraEmployee share option notice letter/Luis WoodEmployee share option notice letter/Maggie JulierSubsidiariesConsent of KPMG - Consolidated Water Co. Ltd.Consent of KPMG - Ocean Conversion (BVI) Ltd.Section 302 Certification of CEOSection 302 Certification of CFOSection 906 Certification of CEOSection 906 Certification of CFO




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Forward-Looking Statements We discuss in this Annual Report matters which are not historical facts, but which are
forward-looking statements. We intend these forward looking statements to qualify for safe harbor
from liability established by the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include, but are not limited to, our future plans, objectives,
expectations and events, assumptions and estimates about our company and our industry in general. The forward-looking statements in this Annual Report reflect what we currently anticipate will
happen. What actually happens could differ materially from what we currently anticipate will
happen. We are not promising to make any public announcement when we think forward looking
statements in this Annual Report are no longer accurate whether as a result of new information,
what actually happens in the future or for any other reason. Important matters that may affect what will actually happen include, but are not limited to:
tourism and weather conditions in the areas we service; our ability to manage, integrate and
realize the benefits from our recent acquisitions; scheduled new construction within our operating
areas; the economies of the U.S. and the areas we service; regulatory matters; availability of
capital to repay a substantial portion of our bank debt and for expansion of our operations, and
other factors described in the Risk Factors section below as well as elsewhere in this Annual
Report. Prior to commencing construction on the Blue Hills and Windsor plants, the Company must
negotiate a definitive agreement with the Water and Sewerage Corporation of the Bahamas and obtain
financing for the projects, which we anticipate will consist of $12.0 million of debt and $10.0
million of equity. No assurances can be made that the Company will be able to obtain financing at
all or that the available financing opportunities will be on terms acceptable to the Company.




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PART I 
 ITEM 1. BUSINESS Introduction Our company, Consolidated Water Co. Ltd., was incorporated in 1973 and uses reverse osmosis
technology to produce freshwater from seawater. We process and supply water to our customers in
the Cayman Islands, Belize, Barbados, the British Virgin Islands and the Commonwealth of the
Bahamas. We sell water to a variety of customers, including public utilities, commercial and
tourist properties, residential properties and government facilities. Effective February 1, 2003, we acquired interests in five companies, which operate a total of
seven desalination plant facilities. With one of these acquisitions, we obtained the exclusive
right through October 2009 to distribute the DWEER Energy Recovery System for use in reverse
osmosis seawater desalination plants in the Caribbean basin. We believe the DWEER System makes us
more competitive when bidding for new plant construction projects. On July 30, 2003, we acquired a further 13.5% of Waterfields Company Limited (Waterfields)
and effective August 1, 2003, acquired an additional 64.7% interest resulting in total controlling
interest of 90.9% of Waterfields. These acquisitions increased our daily water production capacity
in the Cayman Islands and the Commonwealth of the Bahamas and expanded our geographic presence to
include Barbados and the British Virgin Islands. As a result of these acquisitions, our daily
capacity has more than tripled from approximately 2.9 to 10.9 million U.S. gallons per day. Our strategy is to provide water services in areas where the supply of potable water is
scarce. We have focused on the Caribbean basin and adjacent areas as our principal market because
these areas have: little or no naturally occurring fresh water; limited local regulations and taxes
allowing for higher returns than most highly regulated countries and a large proportion of tourist
properties, which historically have generated higher volume sales than residential properties. To execute this strategy, we plan to grow our business by:  
    continuing to develop our production and distribution infrastructure and providing
high quality potable water to our licensed area in the Cayman Islands;
    expanding our existing operations in Belize, Barbados, the British Virgin Islands
and the Commonwealth of the Bahamas;
    extending our operations to other markets outside our current areas of operation
where there is a need for potable water; and
    broadening our existing and future operations into complimentary services, such as
wastewater management. Our business group structure is defined based on areas of management responsibility, which are
(i) the operations to supply water to retail customers, (ii) the operations to supply water to bulk
customers, and (iii) the provision of engineering and management services. In 2003, we changed the
composition of our reportable segments. The operations in the Cayman Islands and the Bahamas that
had previously been reported as separate geographical segments are included in our Retail Water
segment and the operation in Belize is included in our Bulk Water segment. Our Services segment is
a new business segment created as a result of our acquisitions in February 2003. In 2004, our
Retail Water, Bulk Water 1




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and Services segments accounted for 52%, 44% and 4%, respectively of our total revenue. In
2003, these percentages were 57%, 37% and 6%, respectively and in 2002, these percentages were 88%,
12% and nil%, respectively. Financial Information about Business Segments Financial information about business segments is included in Note 18 in our consolidated
statements set forth in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA herein. Business Combinations Our consolidated financial statements include the accounts of our wholly-owned subsidiaries
Cayman Water Company Limited, Belize Water Limited, Ocean Conversion (Cayman) Limited, DesalCo
Limited, DesalCo (Barbados) Ltd, and our majority owned subsidiary Waterfields Company Limited.
The operating results of Ocean Conversion (Cayman) Limited, DesalCo Limited and DesalCo (Barbados)
Ltd. have been included in the consolidated financial statements effective February 1, 2003. The
operating results of Waterfields Company Limited have been included in the financial statements
effective August 1, 2003. All inter-company balances and transactions have been eliminated. Our
investment in Ocean Conversion (BVI) Ltd. has been accounted for under the equity method of
accounting. RETAIL WATER OPERATIONS Our Retail water segment accounted for 52% of our revenues in 2004 (2003: 57%; 2002: 88%) and
is comprised of businesses in the Cayman Islands and the Commonwealth of the Bahamas. These
businesses produce potable water from seawater and distribute this water to end-users, including
residential, commercial and government customers. Retail Water Operations in the Cayman Islands In the Cayman Islands, we sell retail water to a variety of customers through our wholly-owned
subsidiary Cayman Water Company Limited. Our retail operations in the Cayman Islands currently produce potable water at three reverse
osmosis seawater conversion plants in Grand Cayman, namely our Governors Harbour plant, West Bay
plant and Britannia plant. The Britannia plant was destroyed by Hurricane Ivan in September 2004
and is not expected to be fully functional again until May 2005. We own the land where two of our
three water plants are located and have entered into a 25-year lease on the site where the third
plant is located. The current production capacities of our Governors Harbour plant and West Bay
plant are 1.2 million and 710,000 U.S. gallons per day, respectively. The production capacity of
the Britannia plant will be 750,000 U.S. gallons per day when it is restored to operating condition
in May 2005. Since the Governors Harbour and West Bay plants began production of water, they have
consistently been capable of operating at or near their rated capacity. Feed water for the reverse osmosis units is drawn from deep wells with associated pumps on the
properties. Reject water is discharged into brine wells on the properties at a deeper level than
the feed water intakes. Electricity to our plants is supplied by Caribbean Utilities Co. Ltd., a publicly-traded
utility company. At all three plant sites from which we supply water to our distribution pipeline,
we maintain 2




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diesel driven, standby generators with sufficient capacity to operate our distribution pumps and
other essential equipment during any temporary interruptions in the electricity supply. In the event of an emergency, our distribution system is connected to the George Town, Grand
Cayman distribution system of Water Authority-Cayman. In prior years in order to efficiently
maintain our equipment, we have purchased water from Water Authority-Cayman for brief periods of
time. We have also sold potable water to the Water Authority-Cayman from time to time. After
Hurricane Ivan struck the island in September 2004, we purchased approximately 1.6 million U.S.
gallons of water from the Water Authority-Cayman while we were making repairs to our own water
production and distribution systems. Our pipeline system in the Cayman Islands covers the Seven Mile Beach and West Bay areas of
Grand Cayman and consists of approximately 68 miles of PVC pipeline. We extend our distribution
system periodically as property developments are completed. We have a main pipe loop covering a
major part of the Seven Mile Beach area. We place extensions of smaller diameter pipe off our main
pipe to service new developments in our service area. This system of building branches from the
main pipe keeps our construction costs low and allows us to provide service to new areas in a
timely manner. During 2004, 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, which is maintained in a computer aided
design (CAD) system. This system is integrated with digital aerial photographs and a computer
generated hydraulic model, which allows us to accurately locate pipes and equipment in need of
repair and maintenance. It also helps us to plan extensions of and upgrades to our existing
pipeline system. Residential and Commercial Operations in the Cayman Islands We enter into standard contracts with hotels, condominiums and other properties located in our
existing licensed area to provide potable water to such properties. We currently have agreements on
differing terms and rates to supply potable water to the 309-room Marriott Hotel, the 343-room
Westin Hotel, the 357-room Hyatt Hotel and Britannia Golf Course, and to supply non-potable water
to the SafeHaven Golf Course. In the Seven Mile Beach area, our primary customers are the hotels and condominium complexes
which serve the tourist industry. On September 11 and 12, 2004, Hurricane Ivan significantly
damaged many of the hotel and condominium properties within our Cayman Islands license area. On
March 1, 2005, the Government of the Cayman Islands reported that approximately 35% of Grand
Caymans hotels rooms were fit for occupancy. The Government also reported that room availability
is not expected to be fully restored to pre-Ivan levels until well into 2006. In the West Bay
area, our primary customers are residential homes. Occasionally, we also supply to, or buy from, on
an as-needed basis, the Water Authority-Cayman, which serves the business district of George Town
and other parts of Grand Cayman. Although adversely impacted by Hurricane Ivan, development is taking place on Grand Cayman,
and particularly in our licensed area to accommodate both the growing local population and the
tourism market. Because our license requires us to supply water to developments in our licensed
area, the planning department of the Cayman Islands government routinely advises us of proposed
developments in our licensed area. This advance notice allows us to manage our production capacity
to meet anticipated 3




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demand. We believe that we have, or have contracted for, a sufficient supply of water to meet the
foreseeable future demand. We bill on a monthly basis based on metered consumption. Receivables are typically collected
within 30 to 35 days after the billing date and receivables not collected within 45 days subject
the customer to disconnection from our water service. In 2004, bad debts represented less than 1%
of our total sales for the year. Customers who have had their service disconnected must pay
re-connection charges. The following table shows, for each of the five years ended December 31, 2004, our total
number of customer connections at the end of each year and metered sales of water for that year: 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Number of Customers
    
    
    3,600
    
    
    
    3,300
    
    
    
    3,100
    
    
    
    2,999
    
    
    
    2,836Miles of Pipeline
    
    
    68
    
    
    
    67
    
    
    
    66
    
    
    
    65
    
    
    
    64Metered Sales (in
thousands of
U.S. gallons):Commercial
    
    
    451,609
    
    
    
    429,013
    
    
    
    405,545
    
    
    
    358,711
    
    
    
    345,940Residential
    
    
    122,699
    
    
    
    107,528
    
    
    
    103,661
    
    
    
    104,002
    
    
    
    97,759Government
    
    
    7,584
    
    
    
    6,164
    
    
    
    13,789
    
    
    
    11,425
    
    
    
    7,599Total Metered Sales
    
    
    581,892
    
    
    
    542,705
    
    
    
    522,995
    
    
    
    474,138
    
    
    
    451,298
 The table above does not precisely represent the actual number of facilities we service. For
example, in hotels and condominiums, we may only have a single customer, which is the operator of
the hotel or the condominium, but we actually supply water to all of the units within that hotel or
condominium development. Of the customers indicated in the table above, as of 2004, 56.0% were
residential, 42.8% were hotels, condominiums and other commercial customers and 1.2% were
government facilities. In the past, demand on our pipeline distribution has varied throughout the year. Demand
depends upon the number of tourists visiting and the amount of rainfall during any particular time
of the year. In general, the majority of tourists come from the United States during the winter
months. We have an agreement with Safehaven Ltd. to supply non-potable water on demand to irrigate an
18-hole golf course. Since December 31, 2004, the agreement may be terminated by either party upon
four months notice. We had been in discussions with Safehaven Ltd. prior to the passing of
Hurricane Ivan to replace this agreement with a new long term supply contract. However, no further
discussions have been held since August 2004 and we may not be able to renew this agreement. Before 1991, any owner of property within our licensed area could install water-making
equipment for its own use. Since 1991, that option is only available to private residences,
although water plants in existence prior to 1991 can be maintained but not replaced or expanded.
When the Marriott Hotel was built in 1990 in our licensed area, the developer installed its own
reverse osmosis seawater desalination equipment. The equipment proved unreliable, and on February
4, 1994, we entered into an agreement with the owner of the Marriott Hotel to supply between 60,000
and 180,000 U.S. gallons of water per month at our standard tariff rates. If we are required to
supply more than 180,000 U.S. gallons in a month, we will provide the water at our standard tariff
rates on a best efforts basis. The owner of the hotel has indicated that it may refurbish the
reverse osmosis equipment, however, we do not believe the hotel has the right to refurbishment or
replace the plant under Cayman Islands law. In 1995, we entered into a 10-year agreement with the owner of the Westin Hotel. This
agreement requires us to supply up to 1.86 million U.S. gallons per month at a discount to our
standard tariff rates, and to supply any additional demand on a best efforts basis. The Westin
Hotel maintains storage capacity 4




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on-site, assists pressurization with on-site re-pumping facilities, and has provided us with a
letter of credit that covers the cost of water supply for 45 days. Upon expiration of the
agreement in October 2005, we expect to supply the Westin Hotel under the terms and conditions of
our Seven Mile beach license agreement with the Cayman Islands Government. On February 1, 2002, we entered into a 25-five year agreement to acquire the Britannia plant
and to supply a minimum of 62.0 million U.S. gallons of potable water per year on a take or pay
basis to Cayman Hotel and Golf, Inc., the owner of the Hyatt Grand Cayman Resort and Britannia golf
course. We are required by our government license to meet any water demand from our customer above
the 62.0 million U.S. gallons of water supplied per year. A portion of the Hyatt Hotel has been
closed since it was damaged by Hurricane Ivan in September 2004 and water demand under this
contract has been reduced. Cayman Hotel and Golf, Inc. is invoiced for the monthly minimum balance
but we only record the revenue associated with the water used by them and accrue a credit equal to
the cost of the difference between their monthly minimum volume charged and their actual
consumption for that month. This credit resets every twenty-four months and as of February 1, 2005
Cayman Hotel and Golf had a credit of 14,745,370 U.S. gallons, which they must use or lose before
June 1, 2006. Retail Water Operations in the Bahamas In 2000, we entered into a water supply agreement with South Bimini International Ltd., a
company incorporated in the Commonwealth of Bahamas, and on July 11, 2001 we began to provide
potable water from one reverse osmosis seawater conversion plant in South Bimini, Bahamas capable
of producing 115,000 U.S. gallons per day. Potable water is supplied to Bimini Sands Resort, a
marina and condominium development and Bimini Beach Hotel, a 40 room hotel. The developer of the
Bimini Sands Resort continues to develop the property, but we are not currently aware of any time
schedule by the developer for the completion of the additional condominium units. Under our
agreement, South Bimini International Ltd. is committed to pay for a minimum of 3,000 U.S. gallons
of water per customer per month (36,000 U.S. gallons per customer per year) on a take or pay basis
in relation to the Bimini Sands Resort. The price of water supplied is adjusted for inflation
annually based on Bahamian and U.S. government indices, and adjusted monthly for changes in the
cost of electricity. During 2004, we supplied South Bimini International Ltd. with 4.5 million
U.S. gallons of water. We believe that water sales in Bimini will continue to be cyclical. We expect that our sales
will be higher during the summer months when tourists and fisherman arrive from the United States
by boat, and when several large angling tournaments are traditionally held in Bimini. We expect
that our sales will be lower during winter months when the weather is not conducive to pleasure
boat travel from the United States. Feed water for the reverse osmosis unit is drawn from deep wells with associated pumps on the
property. Reject water is discharged into brine wells on the property at a deeper level than the
feed water intakes. Electricity to our plants is supplied by Bahamas Electricity Corporation. We maintain a
diesel driven, standby generator with sufficient capacity to operate our distribution pumps and
other essential equipment during any temporary interruption in the electricity supply. 5




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Retail Water Demand and Average Sales Price The table below lists the total volume of water we supplied on a quarterly basis for the five
years ended December 31, 2004 to all of our Retail Water customers: 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(in thousands of U.S. gallons)First Quarter
    
    
    176,346
    
    
    
    141,575
    
    
    
    141,559
    
    
    
    119,115
    
    
    
    125,869Second Quarter
    
    
    175,813
    
    
    
    144,134
    
    
    
    146,488
    
    
    
    129,305
    
    
    
    117,766Third Quarter
    
    
    123,512
    
    
    
    125,510
    
    
    
    120,201
    
    
    
    119,182
    
    
    
    100,259Fourth Quarter
    
    
    110,754
    
    
    
    134,957
    
    
    
    119,231
    
    
    
    107,536
    
    
    
    107,404Total
    
    
    586,425
    
    
    
    546,176
    
    
    
    527,479
    
    
    
    475,138
    
    
    
    451,298
 Our average sales price of potable water sold to our Retail water customers for the three
years ended December 31, 2004, 2003 and 2002 are as follows: 2004
    
    
    2003
    
    
    2002(per 1,000 U.S. gallons)Average Sales Price
    
    $
    20.62
    
    
    $
    19.69
    
    
    $
    19.79
 BULK WATER OPERATIONS Our Bulk water segment accounted for 44% of our revenues in 2004 (2003: 37%; 2002: 12%) and is
comprised of businesses in the Cayman Islands, Belize, British Virgin Islands, and the Commonwealth
of the Bahamas. These businesses produce potable water from seawater and sell this water to
governments and private customers. Bulk Water Operations in the Cayman Islands In the Cayman Islands, we sell bulk water, through our wholly-owned subsidiary Ocean
Conversion (Cayman) Limited. Ocean Conversion (Cayman) Limited provides water on a take or pay
basis to the Water Authority-Cayman, a government owned utility and regulatory agency, under
various licenses and agreements. 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 2004,
we supplied the Water Authority-Cayman with 805.0 million US gallons of water. As a result of our acquisition of Ocean Conversion (Cayman) Limited, we operate, but do not
own, three additional reverse osmosis seawater conversion plants in Grand Cayman with a total
installed capacity of 2.9 million U.S. gallons per day: the Red Gate Road plant with a production
capacity of 1.3 million U.S. gallons per day, the Lower Valley plant with a production capacity of
792,000 U.S. gallons per day and the North Sound plant with a production capacity of 792,000 U.S.
gallons per day. Each of these plants was damaged to varying degrees from Hurricane Ivan in
September 2004, and were restored to fully operational status and production capacity in the fourth
quarter of 2004. The plants that we operate for Water Authority-Cayman are located on land owned
by the Cayman Islands government. 6




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In April 1994, our wholly-owned subsidiary, Ocean Conversion (Cayman) Limited, was granted a
seven-year water supply license by the government of the Cayman Islands and the Water
Authority-Cayman to supply desalinated water from the Red Gate Road plant. In January 2001, this
agreement was extended for seven years with effect from December 2001. Under the terms of this
license, Ocean Conversion (Cayman) Limited is obligated to deliver to the Water Authority-Cayman
the amount of water it demands or 1.2 million U.S. gallons of water per day on average each month,
whichever is less. In June 1997, our wholly-owned subsidiary, Ocean Conversion (Cayman) Limited, was granted a
seven-year water supply license by the government of the Cayman Islands and the Water
Authority-Cayman to supply desalinated water from the Lower Valley plant. In August 1999, this
agreement was extended with effect from March 1999 until March 2006. Under the terms of this
license, Ocean Conversion (Cayman) Limited is obligated to deliver to the Water Authority-Cayman
the amount of water it demands or 713,000 U.S. gallons of water per day on average each month,
whichever is less. We recently submitted a proposal to the Water Authority-Cayman to increase the
capacity of the Lower Valley plant to 1.06 million US gallons per day in exchange for certain
pricing changes and a seven-year extension of the license. We have been advised that the offer has
been accepted by the Water Authority Board of Directors and we are awaiting confirmation of
approval by the Cabinet of the Cayman Islands Government to proceed with the expansion. In December 2001, our wholly-owned subsidiary, Ocean Conversion (Cayman) Limited, was granted
a seven-year water supply license, with effect from November 2002, by the government of the Cayman
Islands and the Water Authority-Cayman to supply desalinated water from the North Sound plant.
Under the terms of this license Ocean Conversion (Cayman) Limited is obligated to deliver to the
Water Authority-Cayman the amount of water it demands or 713,000 U.S. gallons of water per day on
average each month, whichever is less. Bulk Water Operations in Belize In Belize, we sell bulk water through our wholly-owned subsidiary Belize Water Limited which
we acquired on July 21, 2000, as Seatec Belize Ltd. and subsequently changed its name to Belize
Water Limited. Belize Water Limited provides water under a 23 year agreement to Belize Water
Services Ltd. (BWSL), which distributes the water through its own pipe line system to
residential, commercial and tourist properties in Ambergris Caye, Belize. During 2004, we supplied
BWSL with 110 million U.S. gallons of water. When we originally acquired Belize Water Limited in July 2000, we were contractually
obligated to supply water to Belize Water and Sewerage Authority, a Belize government
organization. In early 2001, BWSL, a private company, purchased Belize Water and Sewerage
Authority and assumed our contract with the Belize Water and Sewerage Authority. Belize Water Limited provides potable water from one reverse osmosis seawater conversion plant
in Ambergris Caye, Belize, Central America, capable of producing 420,000 U.S. gallons per day, to
BWSL, which acquired the operations of the Belize Water and Sewerage Authority in February 2001. On September 17, 2003 we entered into a 23-year contract with BWSL to supply a minimum of
1.75 million US gallons of water per week, or upon BWSLs demand up to 2.1 million US gallons
per week, on a take or pay basis. This contract supercedes our June 26, 1992 contract with BWSL
to supply a minimum of 135,000 U.S. gallons of water per day to BWSL. Additionally we are
BWSLs exclusive supplier of desalinated water on Ambergris Caye, Belize throughout the term of
the contract. The new contract came into effect on June 1, 2004 when all conditions precedent
were met or waived. On November 12, 2003, we offered and BWSL accepted a reduced concessionary
water rate, effective 7




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November 1, 2003, which is equal to the water rate that we will charge BWSL under the new
agreement. This reduced concessionary rate was charged until the new contract became effective. This contract terminates on March 23, 2026. However BWSL has the option to advise us no
later than six months before the termination date that it wishes to renew the contract for a
further 25-year period on the same terms and conditions. While we own our production plant in Belize, we lease the parcel of land on which our plant
is located from the Government of Belize at an annual rent of BZE$1.00. The lease commenced on
April 27, 1993 and was extended on January 2, 2004 to a period of 33 years. The base price of water supplied, and adjustments thereto, are determined by the terms of
the contracts, which provide for annual adjustments based upon the movement in the government
price indices specified in the contract, as well as monthly adjustments for changes in the cost
of diesel fuel and electricity. We bill on a monthly basis based on metered consumption. Receivables are due within 21 days
after the billing date. Interest of 1% per month is charged on any delayed payments. BWSL distributes our water primarily to residential properties, small hotels, and
businesses that serve the tourist market. We have operated our plant in Belize since July 2000. We believe that water sales in
Belize are less cyclical, but on a similar cycle to sales in the Cayman Islands. Although both
operations cater to similar tourist markets, Belize has a greater proportion of residents to
tourists. Feed water for the reverse osmosis units is drawn from deep wells with associated pumps on the
property. Reject water is discharged into brine wells on the property at a level below that of the
feed water intakes. Electricity to our plant is supplied by Belize Electricity Limited. At the plant site, we
maintain a diesel driven, standby generator with sufficient capacity to operate our essential
equipment during any temporary interruption in the electricity supply. Bulk Water Operations in the British Virgin Islands In the British Virgin Islands, we sell bulk water through our affiliate, Ocean Conversion
(BVI) Ltd., to the Government of the British Virgin Islands Water and Sewerage Department
(BVIW&S), which distributes the water through its own pipeline system to residential, commercial
and tourist properties on the islands of Tortola and Jost Van Dyke. During 2004, Ocean Conversion
(BVI) Ltd. supplied BVIW&S with 471.0 million U.S. gallons of water. Ocean Conversion (BVI) Ltd. supplies desalinated water produced from its Baughers Bay
desalination plant in Tortola, British Virgin Islands to BVIW&S on a month-to-month basis. On May
31, 1999, the British Virgin Islands Government did not extend the water supply agreement for a
seven-year period, and did not make a terminal payment of $1.42 million to Ocean Conversion (BVI)
Ltd., which would have entitled them to take possession of the Baughers Bay plant. On January 28,
2000, the government advised Ocean Conversion (BVI) Ltd. that it considered a water sales
arrangement to be in force on a monthly basis until negotiations for a new agreement could be
concluded. Negotiations on the terms of a new agreement have not proceeded since our acquisition
of interests in Ocean Conversion 8




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(BVI) Ltd. We are presently awaiting an indication from government that they wish to meet to
discuss the terms of a new agreement. Ocean Conversion (BVI) Ltd.s Baughers Bay plant was expanded in December 2003 to a capacity
of 1.7 million U.S. Gallons per day. The plant is a seawater reverse osmosis plant with an advanced
energy recovery system. Ocean Conversion (BVI) Ltd. generates its own electrical power on site
using two large Caterpillar diesel driven generator units. Ocean Conversion (BVI) Ltd. also
purchases electricity from the BVI Electric Co. to power ancillary equipment and provide building
lighting. Our wholly-owned subsidiary, DesalCo Limited, provides certain senior management as well as
other management and engineering services to Ocean Conversion (BVI) Ltd. in the form of accounting
services, personnel management and plant management for a monthly fee of $20,500. DesalCo Limited
also receives a bonus of 4% of the annual net operating income of Ocean Conversion (BVI) Ltd. Under the Articles of Association of Ocean Conversion (BVI) Ltd., we appoint three of the six
directors of the company. Sage Water Holdings (BVI) Limited, which owns the remaining 50% of the
issued and outstanding voting shares, is entitled to appoint the remaining three directors. If
there is a tied vote on any matter, the President of the Caribbean Water and Wastewater Association
will be entitled to appoint a junior director to break the tie. On February 7, 2003, we completed our purchase of 50% of the issued and outstanding voting
stock, certain profit sharing rights and all of the non-voting shares of Ocean Conversion (BVI)
Ltd. Also on that date we surrendered 18.2% of our profit sharing rights for 45,000 non-voting
shares of Ocean Conversion (BVI) Ltd. On May 9, 2003 we sold all of our non-voting shares of Ocean
Conversion (BVI) Ltd. to Sage Water Holdings (BVI) Limited. We now own 50% of the voting shares
and 50% of the profit sharing rights of Ocean Conversion (BVI) Ltd. We account for our interests in Ocean Conversion (BVI) Ltd. using the equity investment
method, and therefore the operating results of Ocean Conversion (BVI) Ltd. are not consolidated in
our financial statements. Income from this equity investment has been included in our bulk water
operations segment, since the business of Ocean Conversion (BVI) Ltd. is similar to the business of
our bulk water operations segment. Bulk Water Operations in the Bahamas In the Commonwealth of the Bahamas, we sell bulk water through our majority-owned subsidiary,
Waterfields Company Limited, to the Water and Sewerage Corporation of the Bahamas (WSC), which
distributes the water through its own pipeline system to residential, commercial and tourist
properties on the island of New Providence. During 2004, Waterfields Company Limited supplied WSC
with 831 million U.S. gallons of water. As a result of our acquisition of DesalCo Limited on February 7, 2003, we acquired a 12.7%
interest in Waterfields Company Limited. On July 30, 2003, we acquired a further 13.5% of
Waterfields and effective August 1, 2003, acquired an additional 64.7% interest resulting in total
controlling interest of 90.9% of Waterfields. We supply bulk water to WSC from our Windsor Plant under the terms of a 15-year water supply
agreement dated May 7, 1996. We are required under this agreement to provide WSC with at least
16.8 million US gallons per week of potable water, and WSC has contracted to purchase at least that
amount from us on a take-or-pay basis. The water supply agreement expires on the later of March 1,
2013 or after 9




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the plant has produced approximately 13.1 billion U.S. gallons of water. At the conclusion of
the initial term of the water supply agreement, WSC has the following options:  
    extend the term of the agreement for an additional five years at a reduced rate
specified in the agreement;
    exercise a right of first refusal to purchase any materials, equipment and facilities
that Waterfields intends to remove from the site, and negotiate a purchase price with
Waterfields; or
    require Waterfields to remove all materials, equipment and facilities from the site. During 2004, we experienced various equipment failures and operational problems, which caused
us to incur penalties for not supplying minimum water volumes to WSC. We also incurred penalties
for not meeting the diesel fuel and electricity efficiencies specified in our water sale agreement
with WSC. These penalties totaled $313,408 in 2004. We have undertaken a program to replace
certain equipment prone to repetitive failure and reduce the fouling tendency of the feed water to
the plant. Feed water for the reverse osmosis unit is drawn from deep wells with associated pumps on the
property. Reject water is discharged into brine wells on the property at a deeper level than the
feed water intakes. Electricity to our plants is supplied by Bahamas Electricity Corporation. We maintain a
standby generator with sufficient capacity to operate essential equipment at our Windsor Plant and
are able to produce water with this plant during any temporary interruptions in the electricity
supply. On February 16, 2005, the Honorable Bradley Roberts, Minister of Works and Utilities of the
government of the Commonwealth of the Bahamas, announced at a press conference in the Bahamas that
the Bahamas government accepted the bid of Consolidated Water Co. Ltd. (the Company) to build a
new seawater desalination plant (the Blue Hills Plant) on the island of New Providence in the
Bahamas. Although not part of the Blue Hills Plant bid, the Company will also expand the Companys
existing seawater desalination plant (the Windsor Plant) on the island of New Providence. On
March 11, 2005, the Water and Sewerage Corporation (the WSC) of the Bahamas delivered a formal
letter of acceptance (the Letter) of the Companys bid to the Company and Waterfields Company
Limited, a subsidiary of the Company incorporated in the Bahamas (Waterfields). On April 11,
2005, the Company and Waterfields accepted the terms set forth in the Letter relating to the
construction of the Blue Hills Plant and delivered the Letter to WSC. When completed, the Company expects that the Blue Hills Plant will produce 7.2 million U.S.
gallons potable water per day and will be the Companys largest seawater conversion facility. The
Companys expansion of the Windsor Plant will increase the capacity of the Windsor Plant by
approximately 40%, to approximately 3.6 million U.S. gallons of potable water per day. As part of
its agreement with WSC, the Company is required to provide engineering services and equipment to
reduce the amount of water that is lost throughout WSCs pipeline distribution system on New
Providence. On March 10, 2005, Biwater International Limited, a corporation which was unsuccessful in its
bid for the construction of the Blue Hills Plant, and Biwater Bahamas Limited (BBL) filed an
application with the Supreme Court of the Commonwealth of Bahamas for judicial review of WSCs
award for the construction of the Blue Hills Plant to the Company. The unsuccessful bidder and BBL
are seeking an order from the court rescinding the award to the Company of the Blue Hills Plant
construction project and an order awarding the project to the unsuccessful bidder. In the
alternative, the unsuccessful bidder and BBL are seeking an order from the court awarding
compensatory and exemplary damages to them. The Company is not a party to this action. 10




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The Company and Waterfields have taken preliminary steps to perform under their agreement with
WSC. WSC has entered into an agreement to indemnify the Company and Waterfields against all
expenses and losses incurred by the Company and Waterfields, including loss of profits, which the
Company and Waterfields may incur if the court were to award the Blue Hills Plant construction
project to Biwater International Limited. In order to finance the construction of the Blue Hills Plant and the expansion of the Windsor
Plant, the Company has retained Nassau-based Fidelity Merchant Bank & Trust Limited (Fidelity)
and its affiliated companies to serve as the Companys financial advisor and placement agent to
explore a public offering outside of the United States of approximately $10 million in Bahamas
Depository Receipts (BDRs) and to arrange for approximately $12 million in bank debt and bond
financing for the Blue Hills Plant. In addition to the debt financing for the Blue Hills Plant,
the Company and Fidelity are also exploring the feasibility of refinancing some or all of the
Companys existing bank debt. The Company has agreed to pay Fidelity a placement fee in cash equal
to 3% of the aggregate amount of the BDRs which are sold in the Bahamas and 0.5% of the aggregate
amount of the bank debt financing obtained. Terms and fees for the bond financing are currently
being negotiated. There can be no assurances that the BDR financing will be completed or that the
debt financing will be obtained. The successful completion of the contemplated BDR financing is
dependent upon several factors, including the outcome of the unsuccessful bidders attempt to
obtain an injunction from the Bahamian court, the absence of adverse changes to the Companys
business or financial condition and the prevailing securities market conditions at the time the
BDRs are marketed in the Bahamas. Bulk Water Demand and Average Sales Price The table below lists the total volume of water we supplied on a quarterly basis for the four
years ended December 31, 2004 to all of our Bulk water customers: 2004
    
    
    2003
    
    
    2002
    
    
    2001(in thousands of U.S. gallons)First Quarter
    
    
    438,851
    
    
    
    133,682
    
    
    
    24,751
    
    
    
    24,589Second Quarter
    
    
    458,455
    
    
    
    208,107
    
    
    
    30,206
    
    
    
    26,519Third Quarter
    
    
    424,665
    
    
    
    345,307
    
    
    
    30,028
    
    
    
    21,404Fourth Quarter
    
    
    424,434
    
    
    
    414,404
    
    
    
    27,552
    
    
    
    21,266Total
    
    
    1,746,405
    
    
    
    1,101,500
    
    
    
    112,537
    
    
    
    93,778
 Our average sales of potable water sold to our Bulk water customers for the three years
ended December 31, 2004, 2003 and 2002 are as follows: 2004
    
    
    2003
    
    
    2002(per 1,000 U.S. gallons)Average Sales Price
    
    $
    5.90
    
    
    $
    6.97
    
    
    $
    13.07
 11




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SERVICES OPERATIONS Engineering and Management Services Operations acquired through DesalCo Limited As a result of our acquisition of DesalCo Limited effective February 1, 2003, we provide
management, engineering and construction services for desalination projects and are the exclusive
agents for sales of DWEER energy recovery systems for desalination plants in the Caribbean basin
until October 2009. DesalCo Limited, which is recognized by suppliers as an original equipment
manufacturer of reverse osmosis seawater desalination plants, also acts as the purchasing agent for
all companies affiliated with our company. In 2003, DWEER Technology Ltd. (DWEER Tech), the owner of the DWEER technology, licensed
the world-wide rights to the DWEER technology to Calder AG, a Swiss company. On February 26, 2004
we entered into a new exclusive Caribbean distributorship agreement with Calder AG for the DWEER
technology, and amended the terms of our distributorship agreement with DWEER Tech. The Calder
agreement supercedes our agreement with DWEER Tech, and contains terms comparable to the DWEER Tech
agreement. Service Operations in Barbados Effective February 1, 2003, we acquired all of the issued and outstanding stock of DesalCo
Limited. DesalCo Limited owns all of the issued and outstanding stock of DesalCo (Barbados) Ltd.,
a Barbados company, which operates a desalination plant for Sandy Lane Properties Ltd. in St.
James, Barbados. As a result of our acquisition of DesalCo Limited, we acquired control of its
wholly-owned subsidiary, DesalCo (Barbados) Ltd. Under the terms of a supply and operating agreement with Sandy Lane Properties Ltd., DesalCo
Limited constructed and operates a seawater desalination plant, which provides irrigation water for
several golf courses on the Sandy Lane Resort in St. James, Barbados. The plant and property are
owned by Sandy Lane Properties Ltd. and DesalCo Limited operates the plant under the terms of a
five-year operating agreement, which expires in January 2006. We are not currently in discussions
with Sandy Lane to extend the term of this operating agreement, but intend to hold such discussions
at some point in the future. In 2004 and 2003, the Sandy Lane Operating agreement generated
revenues of $402,631 and $397,929, respectively. Sandy Lane Properties Ltd. has the option to
cancel the operating agreement with three months prior notice to DesalCo Limited, subject to
certain penalties for early termination of the operating agreement. The operating agreement was
assigned to DesalCo Limiteds wholly-owned subsidiary, DesalCo (Barbados) Ltd., in January 2001 and
DesalCo (Barbados) Ltd. pays a monthly assignment fee to DesalCo Limited equal to 8% of the gross
revenue received under the operating agreement. DesalCo Limited also provides certain engineering
services and pays a portion of the plant managers salary in exchange for a management fee of
$12,437 per month and reimbursement of expenses. This management fee was reduced in May 2003 from
approximately $14,700 per month. OTHER INFORMATION REGARDING THE COMPANYS BUSINESS Wastewater Services in the Cayman Islands We began providing sewerage services on Grand Cayman in 1973. In 1987, the Cayman Islands
government, through Water Authority-Cayman, constructed a public sewerage system in part of the
Seven Mile Beach area where Governors Harbour is located. In 1988, Water Authority-Cayman began 12




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processing sewage delivered by the pipelines and lift stations in that area and we stopped our
processing of sewage. Water Authority-Cayman currently directly bills our former sewerage customers
for its services. In October 2001, we reached an agreement with the Water Authority-Cayman pursuant
to which Water Authority-Cayman assumed, in November 2002, the operation of two remaining sewage
lift stations, which we had operated. No revenue was earned for wastewater services during the
three years ended December 31, 2004. The Government in the Cayman Islands, Customs Duties and Taxes The Cayman Islands are a British Overseas Territory of the United Kingdom and have had a
stable political climate since 1670, when the Cayman Islands were ceded to England by the Treaty of
Madrid. The Queen of England appoints the Governor of the Cayman Islands to make laws with the
advice and consent of the legislative assembly. There are 15 elected members of the legislative
assembly and three members appointed by the Governor from the Civil Service. The 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 Governor has reserved powers and the United Kingdom retains full control over
foreign affairs and defense. The Cayman Islands are a common law jurisdiction and have adopted a
legal system similar to that of the United Kingdom. We have exemptions from, or receive concessionary rates of, customs duties on capital
expenditures on plant and major consumable spares and supplies imported into the Cayman Islands as
follows:  
    there are no local taxes on profit, income, distributions, capital gains or
appreciations of our company in the Cayman Islands;
    we do not pay any import duty or taxes on reverse osmosis (RO) membranes, electric
pumps and motors and chemicals, and we pay duty at the rate of 10% of the cost, including
insurance and transportation to the Cayman Islands, of other plant and associated materials
and equipment to manufacture or supply water in Seven Mile Beach or West Bay areas; and
    Ocean Conversion (Cayman) Limited pays all customs duties up to 10% in respect of
materials and supplies imported for the Red Gate plant and is reimbursed amounts in excess
of this by Water Authority-Cayman. A major source of revenue to the Cayman Islands government is a 7.5% or 9% stamp tax,
depending on location, on the transfer of ownership of land in the Cayman Islands. During the
period of November 14, 2001 to date the stamp tax rate is temporarily set at 5%. To prevent stamp
tax avoidance by transfer of ownership of the shares of a company, which owns land in the Cayman
Islands (as opposed to transfer of the land itself), The Land Holding Companies (Share Transfer
Tax) Law was passed in 1976. The effect of this law is to charge a company, which owns land or an
interest in land in the Cayman Islands, a tax based on the value of its land or interest in land
attributable to each share transferred. The stamp tax calculation does not take into account the
proportion which the value of a companys Cayman land or interest bears to its total assets and
whether the intention of the transfer is to transfer ownership or part of a companys entire
business or a part of its Cayman land or interest. Prior to our ordinary shares becoming quoted in the United States, we paid this tax on private
share transfers. We have never paid the tax on transfers of our publicly traded shares. Since 1994,
we requested that the Cayman Islands government exempt us from the share transfer tax. On April 10,
2003, we received notice that the Cayman Islands government had granted an exemption from taxation
for all transfers of our shares. We believe it is unlikely that government will seek to collect
this tax on transfers of our publicly traded shares during 1994 through April 10, 2003. 13




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The Government in the Bahamas, Customs Duty, and Taxes The Commonwealth of the Bahamas is a constitutional parliamentary democracy with the Queen of
England as the constitutional head of state. The basis of Bahamian law and legal system is the
English common law tradition with a Supreme Court, Court of Appeals, and a Magistrate court. We have not been granted any tax exemptions for our Bahamian operations. Bahamian companies
are subject to an annual business license fee ranging from 1% to 2% of their gross revenues. We
did not pay any business license fees to the Bahamian government in respect of our Bimini retail
water operations since commencement of operations on July 11, 2001, other than National Insurance
Board tax on our employees. We estimate our potential tax liability based on our gross revenues
earned from commencement of operations to be less than $7,500. The Government in Belize, Customs Duty, and Taxes Belize (formerly British Honduras) achieved full independence from the United Kingdom in 1981.
Today, Belize is a constitutional monarchy with the adoption of a constitution in 1991. Based on
the British model with three independent branches, the Queen of England is the constitutional head
of state, represented by a Governor General in the government. A prime minister and cabinet make
up the executive branch, while a 29 member elected House of Representatives and a nine member
appointed Senate form a bicameral legislature. The cabinet consists of a prime minister, other
ministers and ministers of state who are appointed by the Governor-General on the advice of the
Prime Minister, who has the support of the majority party in the House of Representatives. Belize
is an English common law jurisdiction with a Supreme Court, Court of Appeals and local Magistrate
Courts. The Government of Belize has exempted Belize Water Limited from certain customs duties and all
revenue replacement duties until April 18, 2026, and company taxes until January 28, 2006. Belize
levies a gross receipts tax on corporations at a rate varying between 0.75% and 25%, depending on
the type of business, and a corporate income tax at a rate of 25% of chargeable income. Gross
receipts tax payable amounts are credited towards corporate income tax. The Government of Belize
recently increased certain business and personal taxes and created new taxes effective March 1,
2005. We are presently assessing whether these increases will have any impact on our business.
Under the old tax structure we believe our business would be subject to a 1.25% gross receipts tax
and income tax without our exemption. Belize levies import duty on most imported items at rates
varying between 0% and 45%, with most items attracting a rate of 20%. While the Government of
Belize confirmed its commitment in a letter dated June 29, 1992 from the Financial Secretary of
Belize to support all future applications for extensions or additional tax exemptions for the life
of our water supply contract, future exemptions must be approved by the Belizean legislature and we
cannot give any assurance that we will be granted any further tax exemptions after January 28,
2006. The Government in the British Virgin Islands and Customs, Duties and Taxes The British Virgin Islands is an Overseas Territory of the United Kingdom that was first
settled by the Dutch in 1648 and annexed by the British in 1672. It adopted a constitution in 1977
and is now a constitutional democracy with three branches of government: the Executive Council, the
Judiciary and the Legislative Council. Executive authority is vested in the Queen of England,
exercised through her representative, the Governor. The Governor has responsibility for the
courts, public service, police, and foreign affairs and full policy-making authority. The Governor
is not a member of the Executive Council but receives assistance with the day-to-day operations of
the government. The Executive Council is made up of various members of the legislature. The
Parliament or Legislative Council is made up of thirteen 14




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(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. The British Virgin Islands imposes a corporate income tax at a rate of 15% of net income.
However, Ocean Conversion (BVI) Ltd. received an exemption, under the water supply agreement with
the British Virgin Islands government, from all taxes, duties, levies and impositions on items,
which it imports for the Baughers Bay plant. As of January 1, 2005, the British Virgin Islands
government instituted a payroll tax of which we are currently responsible for a 6% employer
contribution. The Government in Barbados and Customs, Duties and Taxes Barbados is an independent island nation that was initially occupied by the British in 1627.
It remained a British colony until 1961 when it was granted internal autonomy. Barbados gained
full independence in 1966 but remains a member of the British Commonwealth that appoints the
Governor General. The Governor General approves members of the Cabinet on the advice of the prime
minister. The parliament consists of the senate whose 21 members are appointed by the Governor
General and the assembly whose 30 members are popularly elected to five-year terms. Barbados is an
English common law jurisdiction with a Supreme Court. The net income of DesalCo (Barbados) Ltd. is subject to a 33% Barbados corporate tax, and all
dividend payments and supplier payments are subject to a Barbados withholding tax of 15%. DesalCo
(Barbados) Ltd. pays for all customs duties due on parts and equipment for the plant since a
concession on such duties held by Sandy Lane Properties Ltd. expired in March 2004. Value added
taxes are paid by Sandy Lane Properties Ltd. DesalCo (Barbados) Ltd. has made all necessary tax
filing and payments. Government Regulation In the Cayman Islands, we are regulated by the Water Authority-Cayman on behalf of the Cayman
Islands Government and believe that our operations comply with all local laws and regulations. We have received confirmation from the Public Utilities Commission of Belize that they approve
of the terms and conditions of our new contract with Belize Water Services Limited. We believe
that our operations in Belize comply with all other local laws and regulations. We believe that our operations in the Bahamas, the British Virgin Islands and Barbados comply
with all local laws and regulations, and we are currently reviewing our Bahamian tax status as it
relates to our Bimini operation, as discussed above. Market and Service Area Although we currently operate in the Cayman Islands, Belize, Barbados, the British Virgin
Islands and the Bahamas, we believe that our potential market consists of any location where there
is a need for potable water. The desalination of seawater, either through distillation or reverse
osmosis, is the most widely used process for producing fresh water in areas with an insufficient
natural supply. We believe our experience in the development and operation of distillation and
reverse osmosis desalination plants as well as our exclusive rights in the Caribbean to the DWEER
energy recovery system provides us with a significant opportunity to successfully expand our
operations beyond the markets in which we currently operate. 15




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Prior to our acquisition of Ocean Conversion (Cayman) Limited in February 2003, the market
that we serviced under our exclusive license in the Cayman Islands consisted of Seven Mile Beach
and West Bay, Grand Cayman, two of the three most populated areas in the Cayman Islands. The Cayman
Islands Government, through Water Authority-Cayman, supplies water to parts of Grand Cayman, which
are not within our licensed area, as well as to Little Cayman and Cayman Brac. As a result of our
acquisition of Ocean Conversion (Cayman) Limited, we operate all the reverse osmosis desalination
plants of Water Authority-Cayman on Grand Cayman and supply water under licenses and supply
agreements held by Ocean Conversion (Cayman) Limited with Water-Authority Cayman. According to the most recent figures published by the Economics and Statistics Office of the
Cayman Islands Government, the population of the Cayman Islands was estimated in July 2004 to be
approximately 43,000. The figures normally published by the Cayman Islands Government Department
of Tourism are not available after August 2004 because of the disruption caused by Hurricane Ivan
in September 2004. During the eight months ended August 31, 2004 tourist air arrivals increased by
13.5% and tourists cruise ship arrivals increased 11.5% over the same eight-month period in 2003.
Total visitors for the eight-month period increased to 1.5 million persons for the eight-months
ended August 31, 2004 from 1.4 million during the eight-months ended August 31, 2003. We believe
that our water sales in the Cayman Islands are more positively impacted by tourists that arrive by
air than by those arriving by cruise ship, since cruise ship tourists generally only remain on
island for one day or less. During 2004, construction progressed within our license area on the 360-room Ritz Carlton
Hotel, condominiums and golf course development. The developer of this project has revised an
anticipated completion date to May 2006 because of the disruption caused by Hurricane Ivan in
September 2004. Until July 2004, we were in discussions with the developer to provide non-potable,
irrigation water to the proposed Ritz Carlton 9-hole golf course. We believe that the developer
has now received permission from the Cayman Islands Government to install its own equipment to
produce non-potable, irrigation water for the golf course and discussions with us have stopped.
However the developer will be required to purchase potable water from us for the hotel and
condominiums under the terms of our exclusive license agreement. We are not currently aware of any
similar large developments in the final planning stages or under construction within our service
area in the Cayman Islands. During 2002, the government of the Cayman Islands amended the Development and Planning Law to
permit construction of buildings up to seven stories in certain zones within our license area,
including commercial and hotel zones. Previously, buildings in these zones were only permitted to
be built to five stories. We believe that this change in the law will facilitate the development
of certain properties within our license area that may have otherwise not developed under the old
height restriction, and it has already facilitated the re-development of three existing properties,
which have been demolished and being re-built as multi-story structures. Our current operations in Belize are located on Ambergris Caye, which consists of residential,
commercial and tourist properties in the town of San Pedro. This town is located on the southern
end of Ambergris Caye. Ambergris Caye is one of many islands located east of the Belize mainland
and off the southeastern tip of the Yucatan Peninsula. Ambergris Caye is approximately 25 miles
long and, according to the Belize National Population Census 2000, has a population of about 4,500
residents, which has increased approximately 144% over the past ten years. We provide bulk potable
water to Belize Water Services Limited, which distributes this water to this market. Belize Water
Services Limited (BWSL) currently has no other source of potable water on Ambergris Caye. Our
new contract with BWSL makes us 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 16




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scuba divers and tourists. According to information published by the Belize Trade and Investment
Development Service, tourism is Belizes second largest source of foreign income, next to
agriculture. Our current operations in the Bahamas are located on South Bimini Island and in New
Providence. The Bimini Islands consist of North Bimini and South Bimini, and are two of 700
islands which comprise the Bahamas. The Bimini Islands are located approximately 50 miles east of
Ft. Lauderdale, Florida and are a premier destination for sport fishing enthusiasts. The population
of the Bimini Islands is approximately 1,600 persons and the islands have about 200 hotel and guest
rooms available for tourists. The total land area of the Bimini Islands is approximately 9 square
miles. New Providence, Lyford Caye and Paradise Island, connected by several bridges, are located
approximately 150 miles east southeast of the Bimini Islands. With an area of 151 square miles and
a population of approximately 211,000, Nassau is the political capital and the commercial hub of
the Bahamas. As the largest city with its famed Cable Beach, it accounts for more than two-thirds
of the 4.0 million tourists who visit the Bahamas annually. New Providence is presently
experiencing intermittent to severe water shortages and imports about one-half of its water from
Andros Island, which lies about 35 miles west of New Providence. On February 16, 2005, the Hon. Bradley Roberts, Minister of Works and Utilities of the
Government of the Bahamas, announced that the Bahamas government accepted our bid to build a new
seawater desalination plant (the Blue Hills plant), and to expand its existing seawater
desalination plant (the Windsor plant) on the island of New Providence in the Commonwealth of the
Bahamas. When completed, the Blue Hills plant will be capable of producing 7.2 million US gallons
of potable water per day (USgpd) and will be our largest seawater conversion facility. We will
also expand the capacity of our existing Windsor plant by almost 40%, to approximately 3.6 million
USgpd, under the terms of our contract with WSC. The Blue Hills contract will also require that we
provide engineering services and equipment to reduce the amount of water that is lost (due to
leakage, theft, etc.) throughout the WSCs pipeline distribution system on New Providence. We are
currently negotiating with WSC on the final terms and conditions of the Blue Hills water supply and
water loss reduction agreements. The British Virgin Islands, like the Cayman Islands, are an Overseas Territory of the United
Kingdom and are situated east of Puerto Rico. They consist of 16 inhabited and more than 20
uninhabited islands, of which Tortola is the largest and most populated island. The islands are
the center for many large yacht-chartering businesses. Barbados, located northeast of Venezuela between the Caribbean Sea and the North Atlantic
Ocean, is an independent sovereign nation member of the British Commonwealth. It has a population
of approximately 277,000 and was traditionally known for its cultivation of sugar cane. More
recently, the economy has diversified to include tourism and light manufacturing. 17




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Growth Strategy Our strategy is to provide water services in areas where the supply of potable water is
scarce. We have focused on the Caribbean basin and adjacent areas as our principal market because
these areas have: little or no naturally occurring fresh water; limited local regulations and taxes
allow for higher returns than most highly regulated countries; and a large proportion of tourist
properties, which historically have generated higher volume sales than residential properties. Our growth strategy is as follows:  
    We intend to continue to develop our production and distribution infrastructure and
provide high quality potable water to our licensed area in the Cayman Islands. We have
increased our share of the potable water market in the Cayman Islands as a result of
our purchase of the Britannia plant and recent acquisition of Ocean Conversion
(Cayman). We also intend to explore the feasibility of either acquiring or obtaining
the license from the Cayman Islands government to operate Water Authority-Cayman, which
supplies water to parts of Grand Cayman, and Cayman Brac and has the right to supply
water in Little Cayman.
    We intend to expand our existing operations in the Cayman Islands, Belize, Barbados,
the British Virgin Islands and the Commonwealth of the Bahamas. For example, through
negotiations with Belize Water Services Limited, we have extended the term of our
agreement to 23 years and increased the guaranteed minimum quantities supplied. We
intend to seek new water supply agreements for other areas in Belize. Similarly, as the
development of resort properties in Bimini continues, we expect to sell more water to
additional customers further utilizing our current plant until the installation of a
larger plant becomes necessary. In the British Virgin Islands, we expanded the capacity
of our existing plant on the island of Tortola from 1.2 million to 1.7 million U.S.
gallons per day in December 2003, and we are constructing a second plant on the island
of Tortola.
    We intend to expand our operations to other markets outside of our current areas of
operation where there is need for potable water. In addition to our recent
acquisitions, we are currently involved in preliminary discussions to operate
water-making plants and to supply water in other new markets and may pursue these
opportunities either on our own or through joint ventures. So far, we have focused on
various locations throughout the Caribbean basin and Central America.
    We intend to broaden our existing and future operations into complementary services.
Prior to the installation of a central wastewater system by the Cayman Islands
government, we provided wastewater services on Grand Cayman. We may reenter this field
in the Cayman Islands and intend to use our expertise to provide such services outside
of the Cayman Islands. Reverse Osmosis Technology The conversion of saltwater to potable water is called desalination. There are two primary
forms of desalination: distillation and reverse osmosis. Both methods are used throughout the world
and technologies are improving to lower the costs of production. Reverse osmosis is a separation
process in which the water from a pressurized saline solution is separated from the dissolved
material by passing it over a semi-permeable membrane. An energy source is needed to pressurize the
saline (or feed) water for pretreatment, which consists of fine filtration and the addition of
precipitation inhibitors. Pre-treatment removes suspended solids, prevents salt precipitation and
keeps the membranes free of microorganisms. 18




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Next, a high-pressure pump enables the water to actually pass through the membrane, while salts are
rejected. The feed water is pumped into a closed vessel where it is pressurized against the
membrane. As a portion of the feed water passes through the membrane, the remaining feed water
increases in salt content. This remaining feed water is discharged without passing through the
membrane. As the discharged feed water leaves the pressure vessel, its energy is captured by an
energy recovery device which is used to pressurize incoming feed water. The final step is
post-treatment, which consists of stabilizing the water, removing undesirable dissolved gases and
adjusting the pH and chlorination to prepare it for distribution. We use reverse osmosis technology to convert seawater to potable water. We believe that this
technology is the most effective and efficient conversion process for our market. However, we are
always seeking ways to maximize efficiencies in our current processes and to investigate new more
efficient processes to convert seawater to potable water. The equipment at our plants is among the
most energy efficient available and we monitor and maintain our equipment in an efficient manner.
As a result of our years of experience in seawater desalination, we believe that we have an
expertise in the development and operation of desalination plants which is easily transferable to
locations outside of our current operating areas. In addition, DesalCo Limited, our wholly-owned subsidiary, is the exclusive distributor in the
Caribbean basin for the DWEER system produced by DWEER Technology Limited for use in reverse
osmosis seawater desalination plants. An advanced energy recovery system, the DWEER system is
utilized to efficiently recover energy from the high-pressure brine that is the by-product of the
reverse osmosis desalination process. Unlike pump/turbine systems used in many desalination plants
around the world, the DWEER system recovers nearly 100% of the energy contained in the reject
water (or brine) from the reverse osmosis process. As a result, the DWEER energy recovery system
for reverse osmosis seawater desalination plants is one of the most energy efficient systems of its
kind. The DWEER system is used on all desalination plants that DesalCo Limited has designed since
1990. As a result of the completion of the DesalCo Limited acquisition in February 2003, our
company has the exclusive distribution rights for the DWEER system in the Caribbean basin through
October 2009. Raw Materials and Sources of Supply All materials, parts and supplies essential to our business operations can normally be
obtained from multiple sources, except for the DWEER energy recovery devices which are exclusively
manufactured by Calder AG, a Swiss company, and which we use at all of our plants with the
exception of the Belize and Britannia plants. We have obtained, through our subsidiary DesalCo
Limited, a seven-year exclusive distributorship agreement with Calder AG for the DWEER system. We
do not manufacture any parts or components for equipment essential to our business. Our access to
seawater for processing into potable water is granted through our licenses and contracts with
governments of the various jurisdictions in which we have our operations. Licenses, Franchises and Concessions Our exclusive operational license was issued to us by the Cayman Islands government under The
Water (Production and Supply) Law of 1979. Unless renewed, the license terminates on July 11, 2010. Two years prior to the expiration of the license, we have the right to negotiate with the
government to extend the license for an additional term. Unless we are in default under the
license, the government may not grant a license to any other party without first offering the
license to us on terms that are no less favorable than those which the government offers to a third
party. 19




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We must provide, within our licensed area, any requested piped water service that, in the
opinion of the Cabinet of the Cayman Islands government, is commercially feasible. Where supply is
not considered commercially feasible, we may require the potential customer to contribute toward
the capital costs of pipe-laying. We then repay these contributions to the customer, without
interest, by way of a 10% discount on future billings for water sales until this advance in aid of
construction has been repaid. We have been installing additional pipeline when we consider it to be
commercially feasible, and the Cayman Islands government has never objected to our determination
regarding commercial feasibility. Under our exclusive license, we pay a royalty to the government of 7.5% of our gross water
sales revenue. Other than the selling prices provided in our agreements with the Westin Hotel, the
Hyatt Hotel and Britannia Golf Course and SafeHaven Golf Course, the selling price of water under
the license varies depending upon the type and location of the customer and the monthly volume of
water purchased. The license provides for an automatic adjustment for inflation or deflation on an
annual basis, subject to temporary limited exceptions, and an automatic adjustment for the cost of
electricity on a monthly basis. The Water Authority-Cayman, on behalf of the government, reviews
and approves the calculations of the price adjustments for inflation and electricity costs. If we want to adjust our prices for any reason other than inflation or electricity costs, we
have to request prior approval of the Cabinet of the Cayman Islands government. If the parties fail
to agree, the matter is referred to arbitration. The last such price increase that we requested was
granted in full in June 1985. Seasonal Variations in Our Business Although, our water sales in the Cayman Islands, Belize and Bimini are seasonal, the
variations between the periods are not significant. We normally sell more water during the first
and second quarters when greater numbers of tourists are present. Our sales are also affected to
some extent by the weather. We sell less water during the third and fourth quarters, which normally
experience higher rainfall amounts than other times of the year. We do not believe that our
operations in Nassau and Tortola will be subject to significant seasonal variations in demand. Our
operation in Barbados has been subject to significant demand variations since Sandy Lane finished
the grow-in of the grass on their three golf courses in early 2003. Competition We do not compete with utilities within our licensed area in the Cayman Islands. Although we
have been granted an exclusive license for our present service area, our ability to expand our
service area is limited at the discretion of the government. At the present time, we are the only
non-municipal public water utility on Grand Cayman. The Cayman Islands government, through Water
Authority-Cayman, supplies water to parts of Grand Cayman, which are not within our licensed area. On Ambergris Caye in Belize, our new water supply contract with Belize Water Services Limited
is exclusive, and Belize Water Services Limited can no longer seek contracts with other water
suppliers, or produce water themselves, to meet their future needs in San Pedro, Ambergris Caye,
Belize. On South Bimini Island in the Bahamas, we supply water to a private developer and do not have
competitors. AquaDesign, an Ionics Inc. company, operates a seawater desalination plant on North
Bimini Island. We competed with companies such as AquaDesign/Ionics, Enerserve/Vivendi, IDE,
Pridesa, 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 in the future for similar projects. 20




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In the British Virgin Islands, AquaDesign operates seawater desalination plants in West End
and Sea Cows Bay, Tortola, and on Virgin Gorda and generally bids against Ocean Conversion (BVI)
Ltd. for projects. There are currently water shortages in certain areas of Tortola, particularly
on the eastern end of the island, and we believe that additional desalination plants will be
required to alleviate these shortages. Ocean Conversion (BVI) Ltd. is currently designing and
building a seawater desalination plant to be constructed on a site already identified in East End,
Tortola. DesalCo (Barbados) Ltd., the wholly-owned subsidiary of DesalCo Limited, operates a seawater
desalination plant which provides irrigation water for several golf courses on the Sandy Lane
Resort in St. James, Barbados. Ionics Inc. competed with us for this operating agreement. We
expect that Ionics and other companies of comparable size and financial resources will compete with
us for future agreements with the Sandy Lane Resort as well as any other agreements which we may
seek in Barbados. To implement our growth strategy outside our existing operating areas, we will have to compete
with the same companies we competed with for the Blue Hills project in Nassau, Bahamas such as
AquaDesign/Ionics, Enerserve/Vivendi, IDE, Pridesa, Inima and Biwater. These companies currently
operate in areas in which we would like to expand our operations. These companies already maintain
worldwide operations and have greater financial, managerial and other resources than our company.
We believe that our low overhead costs, knowledge of local markets and conditions, exclusive rights
in the Caribbean to the DWEER energy recovery system and our efficient manner of operating
desalinated water production and distribution equipment will provide us competitive advantage on
projects, ranging in size up to 8.0 million U.S. gallons per day, in the Caribbean basin and
surrounding areas. Environmental Matters With respect to our Cayman Islands operations, although not required by local government
regulations, we operate our water plants in accordance with guidelines of the Cayman Islands
Department of Environment. Under these guidelines, our plants may not have emissions of hydrogen
sulfide at levels greater than 20 milligrams per liter at the exit of the air scrubbers. Due to
damage sustained from Hurricane Ivan to our air scrubber equipment at our Governors Harbour plant,
we are not currently meeting this guideline at that plant. We are replacing damaged equipment and
have discussed our remediation plan with our regulator. We do not expect to incur any penalties or
fines in connection with our failure to meet this guideline. 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. On February 1, 2003, we entered into a license amendment with the government
under which we were required by October 1, 2003 to improve the aesthetic quality of our potable
water supply in our licensed area to the same quality as that supplied by Ocean Conversion (Cayman)
Limited to Water Authority-Cayman. We completed upgrades to our Governors Harbour, West Bay and
Britannia plants before 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. With respect to our Belize, Bahamas and British Virgin Islands operations, we are required by
our water supply contracts to take all reasonable measures to prevent pollution of the environment.
We are licensed by the Belize and Bahamian governments to discharge concentrated seawater, which is
a byproduct of our desalination process, into deep disposal wells, and by British Virgin Islands
government to discharge concentrated seawater into the coastal marine environment. We operate our
plants in a 21




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manner so as to minimize the emission of hydrogen sulfide gas into the environment. We are not
aware of any existing or pending environmental legislation, which may affect our operations in
Belize, the Bahamas and the British Virgin Islands. To date we have not received any complaints
from any regulatory authorities regarding hydrogen sulfide gas emission, nor any other matter
relating to operations. In Barbados, we operate a seawater desalination plant for Sandy Lane Properties Ltd., who
holds all of the government and environmental permits relating to the construction and operation of
the plant. We are not aware of any existing or pending environmental legislation which may affect
our operations in Barbados. Employees We employ 56 persons in the Cayman Islands, seven of whom are executive and management
personnel who have an average of 15 years experience with our company or in a directly related
position. Eleven employees are engaged in administrative and clerical positions. The remaining
staff is 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. Our staff has significant experience and on average has worked with us for eight years,
with 4 of the employees having worked over 20 years with us. We presently employ 4 persons in
Belize to manage and operate our plant. Waterfields Company Limited presently employs 8 persons to
operate the plant in New Providence, Bahamas. We directly employ 1 person to manage and operate our
water plant and distribution system in South Bimini, Bahamas. We presently employ 5 persons in
Barbados to operate the water plant for Sandy Lane Properties. Currently, we manage the 6 employees
of Ocean Conversion (BVI) Ltd. in the British Virgin Islands. None of our employees is party to a
collective bargaining agreement. We consider our relationship with our employees to be good. 22




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ITEM 2. PROPERTIES Cayman Island Properties Governors Harbour Plant We own our Governors Harbour plant and the 8,745 square feet of buildings, which contain the
water treatment facility, and operate and maintain the plant through our wholly-owned subsidiary
Ocean Conversion (Cayman) Limited. The plant is located on 3.2 acres, including 485 feet of
waterfront. The current water production capacity of our Governors Harbour plant is 1.2 million
U.S. gallons per day. On this site we also have three 1.0 million U.S. gallon potable water storage
tanks, which were constructed in 2003 to replace our previous 2.0 million U.S. gallon fabric-lined
storage tanks. The property surrounding the facility has yet to be fully developed, although these
areas are being developed for residential and tourist accommodations. West Bay Plant We own, operate and maintain our West Bay plant in Grand Cayman, which is located on 6.1 acres
in West Bay. The plant began operating on June 1, 1995 and was expanded in February 1998 and again
in February 2000. On this site, we have a 2,600 square foot building which houses our water
production facilities, a 2,400 square foot building which houses the potable water distribution
pumps, a water quality testing laboratory, office space and water storage capacity consisting of
three 1.0 million U.S. gallon potable water tanks. The current capacity of our West Bay plant is
710,000 U.S. gallons per day. Britannia Plant On February 1, 2002, we purchased the Britannia seawater desalination plant in Grand Cayman,
which consists of four seawater reverse osmosis production units with a combined nominal production
capacity of 440,000 U.S. gallons of water per day, an 840,000 U.S. gallon bolted steel water tank,
potable water high service pumps, and various ancillary equipment to support the operation. We have
entered into a lease of the 0.73 acre site and steel frame building, which houses the plant, from
Cayman Hotel and Golf Inc., for a term of 25 years at an annual rent of $1.00. On September 11 and
12, 2004 the seawater reverse osmosis production units and potable water high service pumps were
destroyed by Hurricane Ivan. The depreciated value of this equipment was written off of our books
in September 2004, when the damage occurred. We are currently replacing the damaged equipment and
the plant will, when completed in May 2005, have a new production capacity of 750,000 U.S. gallons
per day. The full cost of this replacement equipment is being funded from the proceeds of our
insurance claim relating to the hurricane damage, which was fully settled in February 2005. Distribution System We own our Seven Mile Beach and West Bay potable water distribution systems in Grand Cayman.
The combined systems consist of approximately 68 miles of polyvinyl chloride and polyethylene water
pipes, valves, curb stops, meter boxes, and water meters installed in accordance to accepted
engineering standards in the United States of America. Leased Properties In addition to the properties where our water plants are located, we rent approximately 4,350 23




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square feet of space for our executive offices at Trafalgar Place, West Bay Road, Grand Cayman
under a lease which expires on January 31, 2008, with an extension provision until January 31,
2010. At any time during the term of this lease if the leased area is destroyed or damaged by
fire, storm or act of God so as to become totally unfit for occupation and use within 180 days of
its occurrence, either party has the right to terminate the lease by giving to the other party 14
days written notice. On March 4, 2005, the Company exercised this right and gave notice to the
landlord that the lease would be terminated on March 26, 2005. We are temporarily occupying another
unit within the same Trafalgar Place property on a month-to-month tenancy basis. We have given our
landlord notice that we intend to vacate this temporary space on April 30, 2005. On March 23, 2005, we signed a lease with Corporate Center Limited for 5,451 square feet of
office space at the Regatta Business Park, West Bay Road, Grand Cayman, Cayman Islands, which is
effective April 1, 2005. The term of the lease is three years and upon expiration may be renewed
at our option for a further three year period. We intend to relocate our corporate offices to the
Regatta Business Park space on or before April 30, 2005. Ocean Conversion (Cayman) Limited Properties Following completion of our acquisition of all of the outstanding stock of each of DesalCo
Limited and Ocean Conversion (Cayman) Limited, we assumed operational control over four water
production plants in the Cayman Islands, one of which we already owned, but had contracted with
Ocean Conversion (Cayman) Limited to operate until December 2004. Red Gate Road Plant Under the terms of the water production and supply license between Ocean Conversion (Cayman)
Limited and the government of the Cayman Islands, Ocean Conversion (Cayman) Limited is allowed to
use the property on which the plant is located to produce approximately 1.3 million U.S. gallons of
desalinated water per day for sale to the Water Authority-Cayman. Ocean Conversion (Cayman)
Limited owns all of the buildings, equipment feed water wells and brine disposal wells with the
exception of the piping from the wells to the plant (including feed water and brine disposal) and
the main electrical service disconnect, both of which are owned by Water Authority-Cayman. The
property on which the plant is located is also owned by Water Authority-Cayman. The plant was
originally powered only by electricity, but was upgraded in 1994 to include diesel driven
high-pressure pumps. Upon expiration of the water production and supply license on November 30,
2008, Water Authority-Cayman will take possession of the plant for no consideration. This license
was extended in November 2001 for a period of seven years and no further extension options are
included in the present license. Lower Valley Plant Ocean Conversion (Cayman) Limited provided the plant and equipment to Water Authority-Cayman
under a seven-year vendor-financed sale and operating agreement. Ocean Conversion (Cayman) Limited
operates the electrically-powered 850,000 U.S. gallons per day rated plant and supplies
approximately 792,000 U.S. gallons of desalinated water per day to Water Authority-Cayman. Ocean
Conversion (Cayman) Limited leases the property on which the plant is located from Water
Authority-Cayman for a minimal annual rent for the duration for the sale and operating agreement,
which expires on March 9, 2006, but which contains a provision to extend the operating portion of
the agreement for an additional period. Responsibility for operation of the plant passes to Water
Authority-Cayman upon expiration of the lease-purchase and operating agreement. We recently
submitted a proposal to the Water Authority-Cayman to increase the capacity of the Lower Valley
plant to 1.06 million US gallons per day in exchange for a seven-year extension of the license. We
have been advised that the Water Authority 24




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Board of Directors has accepted the offer and we are awaiting confirmation of approval by the
Cabinet of the Cayman Islands Government to proceed. North Sound Plant Construction of this plant was completed in November 2002. Ocean Conversion (Cayman) Limited
provided the plant and equipment to Water Authority-Cayman under a seven-year vendor-financed sale
and operating agreement. Ocean Conversion (Cayman) Limited operates the electrically powered plant
and supplies approximately 792,000 U.S. gallons of desalinated water per day to Water
Authority-Cayman. Ocean Conversion (Cayman) Limited leases the property on which the plant is
located from Water AuthorityCayman for a minimal annual rent, for the duration of the sale and
operating agreement. Responsibility for operation of the plant passes to Water Authority-Cayman
upon expiration of the sale and operating agreement on November 28, 2009. Belize Properties We own our San Pedro water production facility in Ambergris Caye, Belize. The plant consists
of a one story concrete block building, which contains a seawater RO water production plant with a
production capacity of 420,000 US gallons per day. We lease from the Government of Belize at an
annual rent of BZ$1.00, the parcel of land on which our plant is located. The lease commenced on
April 27, 1993 and expires in 2026. We are also in the process of constructing a 1.0 million U.S.
gallon potable water storage tank. Bahamas Properties We own our Bahamas water production facility in South Bimini, Bahamas. The plant consists of
two 40 foot long standard refrigerated shipping containers, which contain a seawater RO water
production plant with a rated capacity of 115,000 US gallons per day, a 250,000 US gallon bolted
steel potable water tank, a high service pump skid and an office trailer. The facility is located
on a parcel of land owned by South Bimini International Ltd., and we are allowed, under the terms
of our water supply agreement, to utilize the land for the term of the agreement, without charge. We own our Bahamas water production facility in Nassau, New Providence, Bahamas. The plant
consists of four independent seawater reverse osmosis units, each with a production capacity of
700,000 U.S. gallons of water per day, a brackish water reverse osmosis plant with a production
capacity of 2.6 million U.S. gallons per day, feed water deep wells, brine injection wells, fuel
storage tanks, and other ancillary equipment. All of the seawater units feed their product into
the brackish water unit, which produces water for the Water and Sewerage Corporation of the Bahamas
containing less than 50 mg/l of total dissolved solids. The plant is powered by a combination of
diesel engine-driven high pressure pumps, and electrical power purchased from the Bahamas
Electricity Corporation to power all other loads in the plant. The plant is contained within a
13,000 sq. ft. concrete and steel building, which also contains a warehouse, workshop and offices.
The plant is located on land owned by the Water and Sewerage Corporation of the Bahamas and our
fifteen-year water sales agreement gives us a license to use the land throughout the term of that
agreement. 25




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ITEM 3. LEGAL PROCEEDINGS We are not currently a party to any ongoing or pending legal proceeding which, in the opinion
of management, is likely to have a material adverse effect on the financial conditions, results of
operations or liquidity of the Company. 
 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. 26




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PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information Our ordinary shares of common stock (ordinary shares) are listed on the Nasdaq National
Market and trade under the symbol CWCO. Our ordinary shares are not traded on any market other
than the Nasdaq National Market. Listed below, for each quarter of the last two fiscal years, are
the high and low closing bid prices for the ordinary shares on the Nasdaq National Market. HIGH
    
    
    LOWFirst Quarter 2003
    
    
    15.47
    
    
    
    13.77Second Quarter 2003
    
    
    15.91
    
    
    
    13.50Third Quarter 2003
    
    
    17.75
    
    
    
    14.02Fourth Quarter 2003
    
    
    20.98
    
    
    
    17.37First Quarter 2004
    
    
    20.92
    
    
    
    17.50Second Quarter 2004
    
    
    29.75
    
    
    
    18.96Third Quarter 2004
    
    
    26.46
    
    
    
    20.28Fourth Quarter 2004
    
    
    30.98
    
    
    
    21.51
 The high and low closing bid prices in the table reflect interdealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual transactions. There is no trading market for our redeemable preferred shares, which are only issued to, or
purchased by, long-term employees of our company and must be held by these employees for a period
of four years before they vest. On October 27, 2004, we issued 4,630 ordinary shares of common stock to our directors under
the Non-Executive Directors Share Plan. Holders On April 20, 2005, we had 723 holders of record of our ordinary shares. Dividends We have paid cash dividends on our ordinary shares since 1985. The board of directors policy
is to pay cash dividends out of accumulated profits on a quarterly basis, if funds are available.
Our board of directors have established a policy, although not a binding obligation, that, subject
to annual review by the board of directors, our company will maintain a dividend payout ratio in
the range of 50% to 60% of net income. Our payment of any future cash dividends, however, will
still depend upon our earnings, financial condition, capital demand and other factors, including
the condition in our loan agreement with Scotiabank (Cayman Islands) Ltd. that dividends be paid
from cash flow. The board of directors declares and approves all interim dividends. It is a
requirement of our Articles of Association for the board of 27




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directors to seek shareholder approval of the final dividend, if any, at the annual meeting of
our shareholders. Listed below, for each quarter of the last two fiscal years, is the amount of interim
dividends, in U.S. dollars, declared on our issued and outstanding ordinary shares and redeemable
preferred shares. No final dividend was declared during the last two fiscal years. First Quarter 2003
    
    
    0.105
    
    
    Per ShareSecond Quarter 2003
    
    
    0.105
    
    
    Per ShareThird Quarter 2003
    
    
    0.105
    
    
    Per ShareFourth Quarter 2003
    
    
    0.105
    
    
    Per ShareFirst Quarter 2004
    
    
    0.115
    
    
    Per ShareSecond Quarter 2004
    
    
    0.115
    
    
    Per ShareThird Quarter 2004
    
    
    0.115
    
    
    Per ShareFourth Quarter 2004
    
    
    0.115
    
    
    Per Share
 On February 17, 2005 our board of directors declared an interim cash dividend of $0.115 per
share, payable on April 30, 2005 to shareholders of record on March 31, 2005. Exchange Controls and Other Limitations Affecting Security Holders Our company is not subject to any governmental laws, decrees or regulations in the Cayman
Islands which restrict the export or import of capital, or that affect the remittance of dividends,
interest or other payments to non-resident holders of our securities. The Cayman Islands does not
impose any limitations on the right of non-resident owners to hold or vote our ordinary shares
other than stated below. There are no exchange control restrictions in the Cayman Islands. Taxation The Cayman Islands presently impose no taxes on profit, income, distribution, capital gains,
or appreciations of our company and no taxes are currently imposed in the Cayman Islands on profit,
income, capital gains, or appreciations of the holders of our securities or in the nature of estate
duty, inheritance, or capital transfer tax. There is no income tax treaty between the United States
and the Cayman Islands. As discussed in Part I, Item 1, we were subject in the Cayman Islands to a stamp tax when our
shares are transferred. Prior to our ordinary shares becoming quoted in the United States, we paid
this tax on private share transfers. We have never paid the tax on transfers of our publicly traded
shares. Since 1994, we requested that the Cayman Islands government exempt us from the share
transfer tax. On April 10, 2003, we received notice that the Cayman Islands government had granted
an exemption from taxation for all transfers of our shares. We believe it is unlikely that
government will seek to collect this tax on transfers of our publicly traded shares during the
period 1994 through April 10, 2003. 28




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ITEM 6. SELECTED FINANCIAL DATA The consolidated financial statements are prepared in accordance with the accounting
principles generally accepted in the United States of American (US-GAAP). As a result all
financial information presented in the selected financial data have been prepared in accordance
with US-GAAP. The consolidated financial statements include the accounts of the Companys wholly-owned
subsidiaries Cayman Water Company Limited, Belize Water Limited, Ocean Conversion (Cayman) Limited,
DesalCo Limited, DesalCo (Barbados) Ltd, and its majority owned subsidiary Waterfields Company
Limited. The operating results of Ocean Conversion (Cayman) Limited, DesalCo Limited, DesalCo
(Barbados) Ltd. have been included in the consolidated financial statements effective February 1,
2003. The operating results of Waterfields Company Limited have been included in the financial
statements effective August 1, 2003. All inter-company balances and transactions have been
eliminated. Set forth below is selected financial data based upon our consolidated financial statements.
The table contains information, expressed in US dollars, derived from our audited consolidated
financial statements for the five-year period ended December 31, 2004. This selected financial
data should be read in conjunction with the more detailed financial statements and related notes
thereto contained elsewhere in this Annual Report. The audited consolidated financial statements
for the years ended December 31, 2001 and 2000 and accountants reports thereon are not included in
this Annual Report. YEAR ENDED DECEMBER 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Statement of Income Data:Revenue
    
    $
    23,281,413
    
    
    $
    19,054,205
    (1)
    
    $
    12,154,689
    
    
    $
    11,248,105
    
    
    $
    9,795,751Net Income
    
    
    6,197,383
    
    
    
    4,177,081
    (1)(2)
    
    
    2,576,310
    
    
    
    2,764,573
    
    
    
    2,404,820Balance Sheet Data:Total Assets
    
    
    70,825,049
    
    
    
    68,562,126
    (1)
    
    

    25,507,637
    
    
    
    22,721,178
    
    
    
    21,845,672Long Term Debt Obligation
    
    
    12,856,226
    
    
    
    16,633,437
    (1)
    
    
    2,074,609
    
    
    
    1,213,804
    
    
    
    1,131,986Redeemable preferred stock
    
    
    16,705
    
    
    
    16,302
    
    
    
    23,688
    
    
    
    30,234
    
    
    
    40,361Dividends Declared Per Share
    
    
    0.46
    
    
    
    0.42
    
    
    
    0.42
    
    
    
    0.40
    
    
    
    0.34Basic Earnings Per Share
    
    
    1.08
    
    
    
    0.85
    
    
    
    0.65
    
    
    
    0.71
    
    
    
    0.68Based on Number of Shares
    
    
    5,737,132
    
    
    
    4,917,183
    (1)
    
    
    3,969,861
    
    
    
    3,897,969
    
    
    
    3,532,501Diluted Earnings Per Share
    
    
    1.05
    
    
    
    0.83
    
    
    
    0.63
    
    
    
    0.69
    
    
    
    0.67Based on Weighted Number of
Shares
    
    
    5,879,505
    
    
    
    5,037,530
    (1)
    
    
    4,087,532
    
    
    
    3,999,691
    
    
    
    3,616,271
  (1)
    The operating results of Ocean Conversion (Cayman) Limited, DesalCo Limited, DesalCo
(Barbados) Ltd. have been included in the consolidated financial statements effective
February 1, 2003. The operating results of Waterfields Company Limited have been included
in the financial statements effective August 1, 2003. These acquisitions were funded by
both debt and equity financing which were completed in 2003.(2)
    Included in net income is other income relating to a profit sharing agreement and the
equity in earning of Ocean Conversion (BVI) Ltd., which was effectively acquired on
February 7, 2003. 29




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Our objective is to provide water services in areas where the supply of potable water is
scarce and where the use of RO technology to produce potable water is economically feasible. In
2004, we did this by continuing to integrate the expanded operations resulting from our
acquisitions in 2003. In
our Retail operations, sales increased due to increased demand but
were somewhat curtailed
by Hurricane Ivan, which struck the Cayman Islands on September 11 and 12, 2004. Administrative
expense of Retail operations increased due to additional accounting controls now being enforced in
our operations. In our Bulk operations, sales increased due to the current full year impact of the 2003
acquisitions. Our Belize operations had increased demand but we experienced a significant increase
in unscheduled maintenance and repair costs. Due to a change in operational management, we expect
to reduce these costs in 2005. We also experienced some fouling of membrane elements in Waterfields, which has limited the
production of water and exposed us to penalties. Earnings from our equity affiliate increased, because of an increase in sales after our
customer made significant repairs to its distribution system in the British Virgin Islands. In our Service operations, sales were reduced due to delays in obtaining construction projects
and this resulted in an increase in non-billable labour costs due to increased idle time. We also experienced an increase in our maintenance costs related to our Barbados operations. By focusing on operations we have increased our share value and maintained dividend payouts.
To maintain this, we need to expand our revenues by developing new business opportunities both
within our current service areas, and in new areas. We also need to maintain our high operating
efficiencies by executing our equipment maintenance and water loss mitigation programs. We believe
that many Caribbean basin and adjacent countries, being water scarce, present opportunities for
operation of our plants in regulatory environments which are less restrictive than the highly
regulated markets of North America. Our business operations and activities after our acquisitions in 2003 are conducted in five
countries: the Cayman Islands, Belize, Barbados, the British Virgin Islands and the Bahamas. The
acquisitions increased our daily water production capacity in the Cayman Islands and the Bahamas
and expanded our geographic presence to include Barbados and the British Virgin Islands. 30




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Operations Before and After Acquisitions Operations Before Recent Acquisitions
    
    
    Operations After AcquisitionsLocation
    
    Plants
    
    Capacity*
    
    Location
    
    Plants
    
    Capacity*Cayman Islands
    
    3
    
    2.4
    
    Cayman Islands
    
    6
    
    5.3Bahamas
    
    1
    
    0.1
    
    Bahamas
    
    2
    
    2.7Belize
    
    1
    
    0.4
    
    Belize
    
    1
    
    0.4Barbados
    
    1
    
    1.3British Virgin Islands
    
    1
    
    1.2Total
    
    5
    
    2.9
    
    Total
    
    11
    
    10.9
    Cayman Islands We have been operating our business on Grand Cayman Island since 1973 and have been using RO
technology to convert seawater to potable water since 1989. There is a limited natural supply of
fresh water on the Cayman Islands. We currently have an exclusive license from the Cayman Islands
government to process potable water from seawater and then sell and distribute that water by
pipeline to Seven Mile Beach and West Bay, Grand Cayman. Prior to our acquisition of Ocean
Conversion (Cayman) Limited, our Cayman Islands operations consisted of three reverse osmosis
seawater conversion plants in Grand Cayman: the Governors Harbour plant, the West Bay plant and
the Britannia plant. The combined capacity of these plants is 2.4 million U.S. gallons per day.
Our pipeline system in the Cayman Islands covers the Seven Mile Beach and West Bay areas of Grand
Cayman and consists of approximately 68 miles of polyvinyl chloride pipe. Retail water sales in
Grand Cayman are made within our licensed area to approximately 3,600 customers. During 2004, we
supplied approximately 582 million U.S. gallons (2003: 543 million U.S. gallons) of water to our
Retail water customers in Grand Cayman. As a result of our acquisition of Ocean Conversion (Cayman) Limited in February 2003, we now
operate an additional three reverse osmosis seawater conversion plants in Grand Cayman with a total
installed capacity of 2.9 million U.S. gallons per day. Ocean Conversion (Cayman) Limited provides
water on a take or pay basis to the Water Authority-Cayman, a government regulatory agency, under
various licenses and agreements. During 2004, we supplied approximately 805 million U.S. gallons
(2003: 646 million U.S. gallons) of water to our Bulk water customer in Grand Cayman. DesalCo Limited provides management, engineering and construction services for desalination
projects and is the exclusive agent for sales of the DWEER energy recovery system for desalination
plants in the Caribbean basin for the next five years. DesalCo Limited, which is recognized by
suppliers as an original equipment manufacturer, also acts as the purchasing agent for all of our
companies. 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 420,000
U.S. gallons per day. We sell water to one customer, Belize Water Services Limited, which then
distributes the water through its own distribution system to residential, commercial and tourist
properties 31




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on Ambergris Caye. During 2004, we supplied approximately 110 million U.S. gallons (2003: 100
million U.S. gallons) of water to our Bulk water customer in Belize. Bahamas Prior to our acquisition of operational control of Waterfields Company Limited, our Bahamas
operations consisted of one reverse osmosis seawater conversion plant in Bimini, Bahamas. Our
Bimini plant is capable of producing 115,000 U.S. gallons per day and provides potable water to
Bimini Sands Resort and to the Bimini Beach Hotel. During 2004, we supplied approximately 5
million U.S. gallons (2003: 3 million U.S. gallons) of water to our retail water customer in
Bimini, Bahamas. We expect the demand for water from our plant in Bimini to increase as additional
condominium units are completed at the Bimini Sands development. As a result of our acquisition of Waterfields Company Limited in August 2003, we acquired an
additional reverse osmosis seawater conversion plant in the Bahamas. Waterfields produces potable
water from one reverse osmosis seawater conversion plant in New Providence and has a total
installed capacity of 2.6 million U.S. gallons per day. Waterfields Company Limited provides water
on a take or pay basis to the Water and Sewerage Corporation of the Bahamas under a long-term
build, own and operate supply agreement. During 2004, we supplied approximately 831 million U.S.
gallons (2003: 356 million U.S. gallons) of water to our Bulk water customer in the Bahamas. Barbados The acquired Barbados operation consists of a service agreement to operate one reverse osmosis
seawater conversion plant with a capacity of 1.3 million U.S. gallons per day, which is owned by
Sandy Lane Resort. This plant is operated by DesalCo (Barbados) Ltd., the wholly owned subsidiary
of DesalCo Limited. The plant provides water to the Sandy Lane Resort, and during 2004, we
produced approximately 140 million U.S. gallons (2003: 261 million U.S. gallons). British Virgin Islands We recently entered the market in the British Virgin Islands when our wholly-owned subsidiary,
DesalCo Limited acquired an equity position and shared management control of Ocean Conversion (BVI)
Ltd., which produces potable water from one reverse osmosis seawater conversion plant in Tortola,
British Virgin Islands. The plant has a total installed capacity of 1.7 million U.S. gallons per
day. Ocean Conversion (BVI) Ltd. provides water to the Department of Water and Sewerage of the
Ministry of Communications and Works of the Government of the British Virgin Islands. During 2004,
we supplied approximately 471 million U.S. gallons (2003: 357 million U.S. gallons) of water to our
bulk water customer in the British Virgin Islands. Critical Accounting Policies The preparation of our consolidated financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and
related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to trade accounts receivable, goodwill and other intangible
assets. Our company bases its estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under different assumptions or
conditions. We believe the following critical accounting policies are the most important to the
portrayal of our financial condition and results and 32




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require managements more significant judgments and estimates in the preparation of our companys
consolidated financial statements. Trade accounts receivable: We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make payments. Management continuously evaluates
the collectibility of accounts receivable and record allowances for doubtful accounts based on
estimates of the level of actual write-offs which might be experienced. These estimates are based
on, among other things, comparisons of the relative age of accounts and consideration of actual
write-off history. Goodwill and other intangible assets: Goodwill represents the excess costs over fair value of
the assets of an acquired business. Goodwill and intangible assets acquired in a business
combination accounted for as a purchase and determined to have an indefinite useful life are not
amortized, but are tested for impairment at least annually in accordance with the provisions of
SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimatable useful lives be
amortized over their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of
Long-Lived Assets. The Company periodically evaluates the possible impairment of goodwill.
Management identifies its reporting units and determines the carrying value of each reporting unit
by assigning the assets and liabilities, including the existing goodwill and intangible assets, to
those reporting units. The Company determines the fair value of each reporting unit and compares
it to the carrying amount of the reporting unit. To the extent the carrying amount of the
reporting unit exceeds the fair value of the reporting unit, the Company is required to perform the
second step of the impairment test, as this is an indication that the reporting unit goodwill may
be impaired. In this step, the Company compares the implied fair value of the reporting unit
goodwill with the carrying amount of the reporting unit goodwill. The implied fair value of
goodwill is determined by allocating the fair value of the reporting unit to all the assets
(recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a
purchase price allocation, in accordance with SFAS No. 141, Business Combinations. The residual
fair value after this allocation is the implied fair value of the reporting unit goodwill. If the
implied fair value is less than its carrying amount, the impairment loss is recorded. Our annual
tests resulted in no goodwill impairment. Net insurance recovery from Hurricane Ivan: Under generally accepted accounting principles,
we are required to record the loss of any property, which must be replaced, in the period the loss
occurs, and record any gain from the related insurance claim only when the recovery is probable.
We have estimated a loss of $2,541,501, consisting of plant and equipment of $1,351,563, spare
parts inventories of $111,839 and costs relating to rebuilding the Cayman Islands operations of
$1,078,099. These amounts have been recorded against the insurance recoveries and the result
appears as an unusual gain on the income statement as Net insurance recovery due to Hurricane
Ivan. The Company also suffered loss of profits during the period that it was unable to sell
water to its Cayman Islands customers. The Company has quantified this loss of profits at
$818,700. This has been fully covered in the Companys claim for such loss to its insurer under
its Loss of Profits insurance policy. We have accepted a final settlement from the insurance company of $3,132,905 towards claims
for loss and damage to property and loss of profits resulting from Hurricane Ivan. This amount has
offset the loss of $2,541,501. At December 31, 2004, $1,932,905 has been recorded as a receivable. At the time of this filing, we have received, in cash, the entire amount recorded as insurance
recovery receivable at December 31, 2004. 33




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Quarterly Results of Operations The following table presents unaudited quarterly results of operations for the eight quarters
ended December 31, 2004. 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. For the year ended December 31, 2004First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterTotal revenue
    
    $
    6,337,697
    
    
    $
    6,409,364
    
    
    $
    5,279,054
    
    
    $
    5,255,298Gross profit
    
    
    2,907,223
    
    
    
    2,849,545
    
    
    
    1,942,423
    
    
    
    1,910,509Net income
    
    
    1,923,922
    
    
    
    1,764,040
    
    
    
    424,032
    
    
    
    2,085,389Diluted earnings per share
    
    
    0.33
    
    
    
    0.30
    
    
    
    0.07
    
    
    
    0.35
 For the year ended December 31, 2003First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterTotal revenue
    
    $
    4,018,725
    
    
    $
    4,750,381
    
    
    $
    5,004,101
    
    
    $
    5,280,998Gross profit
    
    
    1,785,137
    
    
    
    2,108,981
    
    
    
    1,976,421
    
    
    
    1,943,218Net income
    
    
    1,017,998
    
    

    
    1,013,041
    
    
    
    1,121,298
    
    
    
    1,024,744Diluted earnings per share
    
    
    0.24
    
    
    
    0.23
    
    
    
    0.20
    
    
    
    0.18
 Revenue Revenue is comprised of retail water sales to individual customers, bulk water sales to large
commercial or municipal customers, and fees for management and engineering services. Expenses Expenses include the cost of sales (direct expenses) and general and administrative expense
(indirect expenses). Direct expenses include royalty payments, electricity and chemicals
expenses, production equipment and facility depreciation costs, equipment maintenance expenses,
operational staff costs and amortization of intangible assets. Indirect expenses consist primarily
of salaries and employee benefits for administrative personnel, stock compensation expenses, office
lease payments, depreciation on fixed assets used for administrative purposes, amortization of bank
fees and legal and professional fees. There are no income taxes in the Cayman Islands, and we are currently exempt from taxes in the
British Virgin Islands and Belize. We pay an annual business license fee in the Bahamas. We pay
income tax in Barbados. Results of OperationsYear Ended December 31, 2004 Compared to Year Ended December 31, 2003 Revenue Revenue increased by 22.2% from $19,054,205 to $23,281,413 for the year ended December 31,
2004 when compared to the same period in 2003. 34




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Revenue from our retail water (Retail) operations increased by 10.7% from $10,918,151 to
$12,089,151 for the year ended December 31, 2003 and 2004, respectively. This increase is due to
higher water sales in our primary market in the Cayman Islands, as a result of an increased demand
in both our tourist volume and residential developments before Hurricane Ivan affected the Cayman
Islands. Published tourist air arrival records are only available thru August 2004.These indicate
a 13.5% increase for the eight months ended August 31, 2004 over the same period in the prior year.
After Hurricane Ivan no overnight visitors were allowed on to the Island until the end of November
2004. Hurricane Ivan reduced our budgeted Cayman Islands Retail sales for September by more than
half. In the last half of September, our operations were operating at limited capacity, due to the
damage to our plants and many of our retail customers were unable to take any water due to damage
to their premises. Since Hurricane Ivan we have repaired our plants and are able to meet the

demand with our current facilities. The sales trends since the Hurricane indicate that subsequent
to Hurricane Ivan water sales were higher than anticipated due to the clean up efforts but December
water sales in our tourist market were down 18.2% and residential sales were down 31.6% compared to
December 2003. January 2005 sales trends indicate that water sales are reduced from January 2004
levels but more in line with 2003 results. Revenue from our bulk water (Bulk) operations increased by 46.2% from $7,045,761 to
$10,303,074 for the year ended December 31, 2003 and 2004, respectively. This increase was
primarily due to an additional month of revenue from our acquisition of Ocean Conversion (Cayman)
Limited operations and seven months of revenue from our acquisition of Waterfields Company Limited
operations when compared to 2003. Our Bulk operations on the Cayman Islands were less affected by
Hurricane Ivan than our Cayman Islands Retail operations. The sales volume is 9.3% higher for the
fourth quarter 2004 compared to the same period in 2003. Revenues from our Belize operations declined by 16.4% during 2004 due to the reduced water
rates in the new long-term contract which was signed in 2003 and came into full effect on June 1,
2004 after all conditions precedent had been met or waived. These reduced rates have been
partially offset by reduced annual amortization costs on an intangible asset representing the
Belize water sale contract, which is now being amortized over 23 years. The new contract, however,
made us the exclusive producer of potable water for our customer on Ambergris Caye for the term of
the agreement. Revenue from services (Services) decreased by 18.5% from $1,090,293 to $888,848 for the year
ended December 31, 2003 and 2004, respectively. All Services revenues pertain to DesalCo Limited
and its wholly-owned subsidiary DesalCo (Barbados) Ltd. The decrease was due to fewer construction
projects and the related decrease in engineering fees that are charged on labour and material costs
associated with these projects. During 2003, we substantially completed our existing construction
projects and have not commenced any new construction projects. Other Income (Expenses) Total other income (expenses) increased by 565.9% from income of $182,748 to $1,216,870 for
the years ended December 31, 2003 and 2004, respectively. This increase was due to both decreased
interest expense resulting from the repayment of our bridge loan facility on July 8, 2003 with
proceeds from our 2003 equity offering and the associated reduction of amortization of financing
costs from the prior year and increased profit sharing and equity income from our investment in
Ocean Conversion (BVI) Ltd. The increase in our equity income from our investment in Ocean Conversion (BVI) Ltd. was due
to increased sales. In 2003, we completed the expansion of this plant but were unable to increase
sales 35




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due to damaged distribution equipment of our customer. In 2004, our customer has made significant
repairs to its distribution system and continues to do so. Cost of Sales Total cost of sales increased by 21.6% from $11,240,448 to $ 13,671,713 for the year ended
December 31, 2004 when compared to the same period in 2003. During this same period, our total
revenue increased by 22.2%. Cost of sales of our Retail operations increased by 5.6% from $4,972,300 to $5,250,372 for the
years ended December 31, 2003 and 2004, respectively, while our Retail revenue increased by 10.7%
for the year ended December 31, 2004. This increase in cost of sales resulted primarily from
additional variable costs related to the production of the additional water sold up to September
12, 2004 when Hurricane Ivan damaged our Cayman Island operations. From that point until
December 31, 2004 we produced significantly less water than last year but still incurred fixed
operating costs. Cost of sales of our Bulk operations increased by 35.0% from $5,776,555 to $7,798,225 for the
years ended December 31, 2003 and 2004, respectively, while our Bulk revenue increased by 46.2% for
the same period. This increase in cost of sales was due to an additional month of expenses from
our Ocean Conversion (Cayman) Limited operations and an additional seven months of expenses from
our Waterfields Company Limited operations when compared to 2003. This increase also resulted from
increased maintenance costs in our Belize operations. We have changed management and a number of
other staff in our Belize operations and are working successfully to reduce these unscheduled
repair costs by improving the capabilities of our staff and preventative maintenance program. Cost of sales of our Services reporting segment increased by 26.8% from $491,593 to $623,116
for the years ended December 31, 2003 and 2004, respectively. This increase was due to additional
labour expense because of an increase in idle time resulting from reduced construction projects.
In addition, the increase in cost of sales is due to an additional month of operations from both
DesalCo Limited and its wholly-owned subsidiary DesalCo (Barbados) Ltd. Our Barbados operation
also experienced increased maintenance when compared to 2003, however, the necessary repairs have
been made and we do not expect these problems to continue. Gross Profit The gross profit margin increased from 41.0% to 41.3% for the year ended December 31, 2004
when compared to the same period in 2003, for the reasons explained below. Gross profit margin for our Retail operations increased from 54.5% to 56.6% for the year ended
December 31, 2004 when compared to the same period in 2003. This increase is due to a decrease in
our Retail cost of sales resulting from (i) the cancellation of the Governors Harbour plant
operating contract in February 2003, and (ii) higher production volumes from our Cayman water
production equipment to meet increased customer demand with no additional fixed overhead costs.
This increased was partially offset due to the effect of Hurricane Ivan, which limited our water
sales for the last quarter, during which period we still incurred our fixed operational costs. Gross profit margin for our Bulk operations increased from 18.0% to 24.3% for the year ended
December 31, 2004 when compared to the same period in 2003. This increase is due to the addition
of Waterfields Company Limited, which is producing water at a higher gross margin than our other
bulk operations. The reason Waterfields Company Limited is able to operate at a higher gross
profit margin than some of our other Bulk operations is because Waterfields does not incur the
amortization expense 36




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which our other Bulk operations incur. By comparison, various intangible assets were
recognized in Ocean Conversion (Cayman) Limited when we acquired that company in February 2003 and
in Belize Water Limited when we acquired that company in September 2000. Amortization expense of
$877,761 and $842,693 was taken during each year ended December 31, 2003 and 2004, respectively in
our Bulk operations. We generally sell water to our Bulk customers at a lower profit margin than to our Retail
customers. Gross profit margin for our Services reporting segment decreased from 54.9% to 29.9% for the
year ended December 31, 2004, when compared to the same period in 2003 primarily due to a relative
decrease in revenue supporting the same level of fixed labour costs In addition, we carried out
certain intermittent maintenance work in Barbados. General and Administrative Expenses Total general and administrative expenses increased by 36.1% from $3,775,357 to $5,138,182 for
the year ended December 31, 2004 when compared to the same period in 2003. General and
administrative expenses were at 19.8% and 22.1% of total revenue for the years ended December 31,
2003 and 2004, respectively. General and administrative expenses related or allocated to our Retail operations increased by
60.2% from $2,684,216 to $4,300,916 for the years ended December 31, 2003 and 2004, respectively.
This increase is comprised of additional audit costs expensed in 2004 related to the work performed
on the 2003 acquisitions, higher 2004 audit fees, legal and consulting fees related to
Sarbanes-Oxley internal control review process, increases in salaries and bonuses, , additional
administrative staff costs, increases in director fees and higher insurance premiums. General and administrative expenses related or allocated to our Bulk operations decreased by
12.3% from $896,716 to $786,337 for the years ended December 31, 2003 and 2004, respectively. This
decrease is due to the reduction of our general and administrative expenses in Ocean Conversion
(Cayman) Limited resulting from the assimilation of administrative functions of our Cayman Islands
acquisition. This was offset by additional expenses incurred by our Waterfields Company Limited
operations for bank and government fees relating to the exchange of Bahamian dollars to U.S.
dollars, higher directors fees and expenses, and increased legal fees. The increase was also the
result of an additional seven months of expense from our Waterfields Company Limited operations
when compared to 2003. General and administrative expenses related or allocated to our Services reporting segment
decreased by 73.8% from $194,425 to $50,929 for the years ended December 31, 2003 and 2004,
respectively. In May 2003, we closed our Bermuda office and relocated operations to the Cayman
Islands. These decreases are the result of assimilation of the administrative functions of that
office. Net insurance recovery from Hurricane Ivan On September 11 and 12, 2004 Hurricane Ivan significantly affected our Cayman Islands
operations. As a result, we suffered damage to our seawater conversion plants. Five out of six of
our seawater conversion plants suffered minor to moderate damage and our Britannia plant suffered
catastrophic damage. Based on our assessment, the Britannia water production, post treatment and
distribution equipment was a total loss and has been included in our insurance claim. We are
currently meeting all of our customers water demands without this plant in operation and expect to
replace this 37




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equipment before the end of May 2005. We believe that our remaining production capacity will
be sufficient to meet the needs of our customers until the production capacity of our Britannia
plant can be replaced. Under generally accepted accounting principles, we are required to record the loss of any
property, which must be replaced or now has a revised useful life, in the period the loss occurs,
and record any gain from the related insurance claim only when the recovery is probable. We have
estimated a loss of $2,541,501 consisting of plant and equipment of $1,351,563, spare parts
inventories of $111,839 and $1,078,099 relating to the rebuilding of the Cayman Islands operations
as of December 31, 2004. These amounts have been recorded as part of income from operations as an
unusual gain in the income statement as Net insurance recovery due to Hurricane Ivan. The
Company also suffered loss of profits during the period that we were unable to sell water to our
Cayman Islands customers and we have quantified this loss of profits
at $818,700. This has been
fully covered as part of claim for such loss to our insurer under our Loss of Profits insurance. We have accepted a final settlement from the insurance company of $3,132,905, offsetting our
estimated loss of $2,541,501. Net Income Net income increased by 48.4% from $4,177,081 to $6,197,383 for the year ended December 31,
2004 when compared to the same period in 2003. Dividends On January 31, 2004, we paid a dividend of $0.105 to shareholders of record on December 31,
2003; on April 30, 2004, we paid a dividend of $0.115 to shareholders of record on March 31, 2004;
on July 31, 2004, we paid a dividend of $0.115 to shareholders of record on June 30, 2004 and on
October 31, 2003, we paid a dividend of $0.115 to shareholders of record on September 30, 2004. We
have consistently paid dividends to owners of our ordinary and redeemable preferred shares since we
began declaring dividends in 1985. Our board of directors has established a policy, but not a
binding obligation, that we will seek to maintain a dividend pay out ratio in the range of 50% to
60% of net income. While this policy is subject to modification by our board of directors, we
expect to continue increasing our dividends if earnings grow. Our payment of any future cash
dividends, however, will depend upon our earnings, financial condition, capital demand and other
factors, including the condition in our loan agreement effective February 7, 2003, with Scotiabank
(Cayman Islands) Ltd. that dividends be paid only from current cash flows. In October 2004, Waterfields Company Limited paid a dividend of BAH $10.00 per share to
shareholders of record on September 9, 2004. On February 17, 2005, our board of directors declared an interim cash dividend of $0.115 per
share payable on April 30, 2005 to shareholders of record on March 31, 2005. Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 Revenue Total revenue increased by 56.8% from $12,154,689 to $19,054,205 for the year ended December
31, 2003 when compared to the same period in 2002. 38




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Revenue from our retail water (Retail) operations increased by 2.2% from $10,683,592 to
$10,918,151 for the year ended December 31, 2002 and 2003, respectively. Sales in our primary
market in the Cayman Islands were generally flat during the year, although we did experience an
increase in sales of 13.2% during the fourth quarter of 2003 over the same period in the prior
year. Revenue from our bulk water (Bulk) operations increased by 378.9% from $1,471,097 to
$7,045,761 for the year ended December 31, 2002 and 2003, respectively. This increase was due to
our recent acquisitions of Ocean Conversion (Cayman) Limited and Waterfields Company Limited and
was slightly offset by a 15.3% decrease in our bulk water sales in Belize for the year ended
December 31, 2003. Revenue from services (Services) was $1,090,293 for the year ended December 31, 2003. All
Services revenues pertain to our recent acquisition of DesalCo Limited and its wholly-owned
subsidiary DesalCo (Barbados) Ltd. Other Income (Expenses) Total other income (expenses) changed from an expense of $52,198 to income of $182,748 for the
year ended December 31, 2003 when compared to the same period in 2002. This increase was comprised
of income and profit sharing from our equity investment in Ocean Conversion (BVI) Ltd. and was
offset by interest expense related to the loan used to finance our recent acquisitions,
amortization of bank fees and the early repayment fees paid on our loan from the European
Investment Bank that was extinguished on June 20, 2003. We expect loan interest costs to decrease because a portion of the proceeds received from our
completed equity offering was used to repay our Scotiabank six-month term loan on July 9, 2003 and
we expect amortization of bank fees to decrease because we have fully amortized all fees relating
to our bridge financing that was used to complete our recent acquisition. Cost of Sales Total cost of sales increased by 63.3% from $6,882,177 to $11,240,448 for the year ended
December 31, 2003 when compared to the same period in 2002. During this same period, our total
revenue increased by 56.8%. Cost of sales of our Retail operations decreased by 14.6% from $5,824,815 to $4,972,300 for
the year ended December 31, 2002 and 2003, respectively, while our Retail revenue increased by 2.2%
for the year ended December 31, 2003. This decrease in cost of sales resulted primarily from the
cancellation of the Governors Harbour plant operating contract on February 7, 2003, which
decreased our water purchase expense. We expect our Retail cost of sales going forward to remain
at this lower percentage of Retail revenues. Cost of sales of our Bulk operations increased by 446.3% from $1,057,362 to $5,776,555 for the
year ended December 31, 2002 and 2003, respectively, while our Bulk revenue increased by 378.9% for
the same period. This increase in cost of sales resulted almost entirely from the operating costs
of Ocean Conversion (Cayman) Limited and Waterfields Company Limited, which were consolidated in
our accounts from February 1, 2003 and August 1, 2003 respectively. It also includes the
amortization costs of the intangible assets that were recognized in conjunction with our recent
acquisition of Ocean Conversion (Cayman) Limited. 39




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Cost of sales of our Services reporting segment were $491,593 for the year ended December 31,
2003. These relate to our recent acquisition of DesalCo Limited and its wholly-owned subsidiary
DesalCo (Barbados) Ltd. and include the amortization cost of the intangible assets that was
recognized in conjunction with our recent acquisition of DesalCo Limited and DesalCo (Barbados)
Ltd. Gross Profit Overall gross profit margin decreased from 43.4% to 41.0% for the year ended December 31, 2003
when compared to the same period in 2002, for the reasons explained below. Gross profit margin for our Retail operations increased from 45.5% to 54.5% for the year ended
December 31, 2003 when compared to the same period in 2002. The primary reason for this increase
is that our Retail cost of sales decreased as a result of the cancellation of the Governors
Harbour plant operating contract. Gross profit margin for our Bulk operations decreased from 28.1% to 18.0% for the year ended
December 31, 2003 when compared to the same period in 2002. In 2003, we incurred additional direct
costs in our Belize Bulk operations for leasing a temporary potable Reverse Osmosis unit, which we
operated to meet our customers water demand while we carried out maintenance on our permanent
Reverse Osmosis units. We ceased using the plant on September 30, 2003 and we do not expect to
incur costs for this plant beyond April 2004. We generally sell water to our Bulk customers at a
lower profit margin than to our Retail customers. Gross profit margin for our Services reporting segment was 54.9% for the year ended December
31, 2003. General and Administrative Expenses Total general and administrative expenses increased by 42.8% from $2,644,004 to $3,775,357 for
the year ended December 31, 2003 when compared to the same period in 2002. General and
administrative expenses were at 21.8% and 19.8% of total revenue for the year ended December 31,
2002 and 2003, respectively. General and administrative expenses related or allocated to our Retail operations increased by
11.0% from $2,418,378 to $2,684,216 for the year ended December 31, 2002 and 2003, respectively.
This increase is comprised primarily of higher insurance premiums, office rent and staff costs. General and administrative expenses related or allocated to our Bulk operations increased by
297.4% from $225,626 to $896,716 for the year ended December 31, 2002 and 2003, respectively. This
increase is almost entirely the result of the inclusion of the general and administrative expenses
of Ocean Conversion (Cayman) Limited and Waterfields Company Limited. We expect to reduce general
and administrative expenses as we continue to assimilate the administrative functions of our recent
acquisitions. General and administrative expenses related or allocated to our Services reporting segment
were $194,425 for the year ended December 31, 2003. This is entirely the result of our recent
acquisitions of DesalCo Limited and its wholly-owned subsidiary DesalCo (Barbados) Ltd. We expect
to reduce general and administrative expenses as we continue to assimilate the administrative
functions of our recent acquisitions. 40




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Net Income Net income increased by 62.1% from $2,576,310 to $4,177,081 for the year ended December 31,
2003 when compared to the same period in 2002. We expect future net income to be positively
affected because; interest expense decreased after we repaid the bridge financing using the
proceeds from our recent equity offering and we fully amortized the bank fees related to this
bridge financing on July 9, 2003. We also anticipate that general and administrative expenses
will decrease as we continue to assimilate our recent acquisitions. Dividends On January 31, 2003, we paid a dividend of $0.105 to shareholders of record on December 31,
2002; on April 30, 2003, we paid a dividend of $0.105 to shareholders of record on March 31, 2003;
on July 31, 2003, we paid a dividend of $0.105 to shareholders of record on June 30, 2003 and on
October 31, 2003, we paid a dividend of $0.105 to shareholders of record on September 30, 2003. We
have consistently paid dividends to owners of our ordinary and redeemable preferred shares since we
began declaring dividends in 1985. Our board of directors has established a policy, but not a
binding obligation, that we will seek to maintain a dividend pay out ratio in the range of 50% to
60% of net income. While this policy is subject to modification by our board of directors, we
expect to continue increasing our dividends, if our earnings grow. Our payment of any future cash
dividends, however, will depend upon our earnings, financial condition, capital demand and other
factors, including the condition in our new loan agreement effective February 7, 2003, with
Scotiabank (Cayman Islands) Ltd. that dividends be paid only from current cash flows. On February 10, 2004, our board of directors declared an interim cash dividend of $0.115 per
share, an increase of approximately 10%, payable on April 30, 2004 to shareholders of record on
March 31, 2004. Liquidity and Capital Resources Overview For the year ended December 31, 2004, we generated cash from our business segments in the
Cayman Islands, the Bahamas, Belize and Barbados, from dividends and profit sharing rights from our
equity investment in the British Virgin Islands and, to a lesser extent, from the sale of our
shares, collection of loans receivable and the collection of a partial payment from our insurance
claim. Cash flow is dependent upon the timely receipt of customer payments, operating expenses, the
timeliness and adequacy of rate increases (excluding automatic adjustments to our rates for
inflation and electricity costs), and various factors affecting tourism in the areas we operate
such as weather conditions and the world economy. We use cash to fund our various business segments
in the Cayman Islands, Belize, Barbados and the Bahamas, to fund capital projects, to expand our
infrastructure, to pay dividends, to repay borrowings, to repurchase our shares when appropriate
and to take advantage of new investment opportunities which expand operations. Operating Activities Cash generated from operating activities for the years ended December 31, 2003 and 2004 was
$6,506,826 and $7,834,268, respectively. We generate cash through the utilization of our existing
plants, equipment and resources in all segments of the business, minimization of water losses and
operating 41




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efficiencies created by our management team. In 2004, we also generated cash from the collection of a partial payment from our insurance
claim but this was partially offset by payments to make the necessary repairs to damaged assets.
After Hurricane Ivan struck the island in September 2004 we did not bill our retail customers in
Grand Cayman at the end of September, and issued bills in early November 2004 for the period of
September and October 2004. Additionally some of our customers suffered damage to their commercial
and residential premises, which caused metered water to be lost within these premises. We also did
not carry out our normal disconnection procedures until January 2005. Consequently, the
receivables for our Cayman Islands retail operations were unusually high at year end. We have been
working with customers to settle any outstanding accounts and believe that an adequate provision
has been made in our financial statements for amounts we believe to be uncollectible. Investing Activities Cash used in investing activities during the years ended December 31, 2003 and 2004 was
$29,645,995 and $915,405, respectively. In 2004, our investing activities consisted of
expenditures for new property, plant and equipment, including $800,000 used to expand a plant in
our Retail segment in the Cayman Islands and $540,000 towards the construction of a new 1.0 million
U.S. gallon potable water storage tank in our Bulk segment in Belize. We also used cash to make
improvements to our existing distribution system in our Retail segment. By December 31, 2004, we
had purchased some of the replacement equipment resulting from the impact of Hurricane Ivan, but
will continue to replace assets during 2005. This was partially offset by the collection of our
loans receivable. In 2003, cash in the amount of $28,917,513 was used for our acquisitions of DesalCo Limited,
its wholly owned subsidiary DesalCo (Barbados) Limited, Ocean Conversion (Cayman) Limited,
Waterfields Company Limited and our equity investment in Ocean Conversion (BVI) Ltd. Also cash of
$1,874,286 was used in the construction of three 1.0 million U.S. gallon potable water storage
tanks at our Governors Harbour plant to replace our previous 2.0 million U.S. gallon fabric-lined
storage tanks. During 2002, our investing activities consisted of expenditures for new property, plant and
equipment, including $1,500,000 used to purchase the Britannia reverse osmosis plant in the Cayman
Islands. Financing Activities Cash provided by financing activities for the year ended December 31, 2003 was $30,807,789 and
cash used in financing activities for the year ended December 31, 2004 was $5,938,879,
respectively. In 2004, our financing activities primary consisted of the payment of dividends and
repayment of our long term debt. This was partially offset by the issuance of shares though the
exercise of stock options by management. In 2003, we utilized a credit facility with Scotiabank (Cayman Islands) Ltd. to complete our
acquisitions and repay facilities with the Royal Bank of Canada and the European Investment Bank.
In the year ended December 31, 2003, our primary financing activities were to borrow $28,056,126
from our Scotiabank facilities and the receipt of $18,373,814 of equity through a secondary share
offering. From these amounts $1,687,500 was used to repay our Royal Bank of Canada credit
facility, $905,384 was used to fully repay our European Investment Bank loan, $869,091 represented
financing fees and $12,411,606 was repaid on our Scotiabank bridge financing. 42




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Material Commitments for Capital Expenditures and Contingencies The following table summaries our contractual obligations as at December 31, 2004: Less Than
    
    
    1  3
    
    
    3  5
    
    
    After 5Total
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    YearsLong term debt
    
    $
    16,589,370
    
    
    $
    3,733,144
    
    
    
    9,284,802
    
    
    
    3,571,424
    
    
    
    Operating leases
    
    
    367,811
    
    
    
    119,094
    
    
    
    248,717
    
    
    
    
    
    
    
    Other
    
    
    357,957
    
    
    
    96,809
    
    
    
    211,148
    
    
    
    
    
    
    
    50,000
 At December 31, 2004, we had committed approximately $780,000 for capital expenditures related
to various projects, in various stages of completion, in all of our operations. We intend to
finance these projects using cash from operations. On April 11, 2005, the Company through Waterfields Company Limited accepted the terms set
forth in the letter of acceptance with the Water and Sewerage Corporation (WSC) of the Bahamas
relating to the construction of the Blue Hills Plant and as part of its agreement with WSC, the
Company is required to provide engineering services and equipment to reduce the amount of water
that is lost throughout WSCs pipeline distribution system on
New Providence. The Company has
committed approximately $22.0 million for these projects. In
addition, the Company has committed approximately $850,000 for the purchase of 2
containerized reverse osmosis units to be utilized at the existing Waterfields Company Limited
plant. On February 7, 2003, we entered into a loan agreement with Scotiabank (Cayman Islands) Ltd. to
finance certain acquisitions and refinance existing debt. The facilities are comprised of the
following:  
    $2.0 million revolving line of credit bearing interest at the floating base rate as
established by Cayman Island Class A licensed banks from time to time. The present
interest rate is 6.5%
    $20.0 million seven-year term loan bearing interest at an annually adjusted floating
rate of LIBOR plus 1.5% to 3%, depending on the ratio of our consolidated debt to our
consolidated earnings before interest, taxes and depreciation. The present interest rate
is 4.08%.
    $17.1 million six-month term loan bearing interest on the same basis as the seven-year
term loan. This facility was fully repaid by the proceeds from our equity offering on July
9, 2003 We have used the proceeds from these facilities to refinance existing debt, for working
capital and to finance acquisitions. As of December 31, 2004, we have an outstanding balance of $15,000,000 on our Scotiabank loan
facilities. We are required to make monthly payments of interest for all borrowings under the
revolving line of credit and quarterly payments of interest for all amounts drawn down under the
two term loans. We are obligated to make 28 equal quarterly payments of principal under the
seven-year term loan. 43




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We have collateralized all borrowings under the three facilities by providing Scotiabank with
a first lien on all of our assets, including the capital stock of subsidiaries and the investment
in equity we acquired in our recent acquisitions. The loan agreement for the three facilities contains standard terms and conditions for similar
bank loans made in the Cayman Islands, including acceleration of the repayment of all borrowings
either upon the demand of Scotiabank (Cayman Islands) Ltd. or in the event of default under the
loan agreement. We have guaranteed to Scotiabank 50% of the Ocean Conversion (BVI) Ltd. loan of $505,000. The
Scotiabank loan is repayable in 6 equal semi-annual installments of $125,000 with the balance of
principal due May 31, 2006, bearing interest at 3-month LIBOR plus 1.5%. As a result of our acquisition of interests in Waterfields Company Limited, we guaranteed the
performance of Waterfields Company Limited to the Water & Sewerage Corporation of the Bahamas in
relation to the water supply contract between Waterfields Company Limited and the Water & Sewerage
Corporation. Through a performance and operation bond, the Royal Bank of Canada, Nassau, has made a
guarantee in the amount of $1,910,775 to the Water & Sewerage Corporation of The Bahamas that we
shall duly perform and observe all terms and provisions pursuant to the contract between the Water
& Sewerage Corporation of The Bahamas and us. In the event of our default on our obligations, the
Royal Bank of Canada, Nassau, shall satisfy and discharge any damages sustained by the Water &
Sewerage Corporation of The Bahamas up to the guaranteed amount. Impact of Inflation Under the terms of our Cayman Islands license and our water sales agreements in Belize,
Bahamas, British Virgin Islands and Barbados, our water rates are automatically adjusted for
inflation on an annual basis, subject to temporary exceptions. We, therefore, believe that the
impact of inflation on our net income, measured in consistent dollars, will not be material. Exchange Rates The official exchange rate for conversion of United States dollars into Cayman Islands
dollars, as determined by the Cayman Islands Monetary Authority, has been fixed since 1974 at U.S.
$ 1.00 = CI$ 0.83. The official exchange rate for conversion of United States dollars into Belizean dollars, as
determined by the Central Bank of Belize, has been fixed since 1976 at U.S.$ 1.00 = BZE$ 2.00. The official fixed exchange rate for conversion of United States dollars into Bahamian dollars
as determined by the Central Bank of The Bahamas, has been fixed since 1973 at U.S.$ 1.00 = BAH$
1.00. The official fixed exchange rate for conversation of United States dollars into Barbadian
dollars as determined by the Central Bank of Barbados has been fixed since 1975 at U.S.$ 1.00 =
BDS$ 2.00. The British Virgin Islands currency is United States dollars. 44




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Forward-Looking Statements We discuss in this Annual Report matters which are not historical facts, but which are
forward-looking statements. We intend these forward looking statements to qualify for safe harbor
from liability established by the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include, but are not limited to, our future plans, objectives,
expectations and events, assumptions and estimates about our company and our industry in general. The forward-looking statements in this Annual Report reflect what we currently anticipate will
happen. What actually happens could differ materially from what we currently anticipate will
happen. We are not promising to make any public announcement when we think forward looking
statements in this Annual Report are no longer accurate whether as a result of new information,
what actually happens in the future or for any other reason. Important matters that may affect what will actually happen include, but are not limited to:
tourism and weather conditions in the areas we service; our ability to manage, integrate and
realize the benefits from recent acquisitions; scheduled new construction within our operating
areas; the economies of the U.S. and the areas we service; regulatory matters; availability of
capital to repay a substantial portion of our bank debt and for expansion of our operations; and
other factors described in the Risk Factors section below as well as elsewhere in this Annual
Report. Prior to commencing construction on the Blue Hills and Windsor plants, the Company must
negotiate a definitive agreement with the Water and Sewerage Corporation of the Bahamas and obtain
financing for the projects, which we anticipate will consist of $12.0 million of debt and $10.0
million of equity. No assurances can be made that the Company will be able to obtain financing at
all or that the available financing opportunities will be on terms acceptable to the Company. Risk Factors We have described for you below some risks which may materially and adversely affect our
business, financial condition or results of operations. Our exclusive license for our service area in the Cayman Islands may not be renewed in the
future and requires that we obtain prior approval for any rate increase for reasons other than
inflation.In the Cayman Islands, we presently operate as a public water utility under an
exclusive license originally issued to us in December 1979 by the government of the Cayman Islands.
Our existing license expires on July 11, 2010. If we are not in default of any terms of the
license, we have a right of first refusal to renew the license on terms that are no less favorable
than those which the government offers to a third party. Nevertheless, we cannot assure you that
the government will renew our license or that we will be able to negotiate a new license on
satisfactory terms. We would retain ownership of our production infrastructure and substantially
all of our distribution infrastructure if our license were not renewed. Under our existing license, we must obtain prior approval from the Cayman Islands government
to increase our rates for any reason other than inflation. Our ability to raise our rates is
limited by this requirement, including potential delays and costs involved in obtaining government
approval for a rate increase. Failure to obtain adequate rate increases could have an adverse
effect on our results of operations. 45




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We rely on water supply and/or service agreements with our customers in the Cayman Islands,
Belize, the Bahamas and Barbados which, upon their expiration, may not be renewed or may be
renegotiated on less favorable terms to us.We presently operate as bulk water suppliers under
water sales agreements in the Cayman Islands with our customer the Water Authority-Cayman, in
Belize with our customer, the Belize Water Services Limited, in the Bahamas with our customers, the
Water & Sewerage Corporation and South Bimini International Ltd. We presently operate a plant in
Barbados under a service agreement for our customer Sandy Lane Properties Ltd. Upon expiration,
these agreements may not be renewed or may be renewed on less favorable terms. We are currently negotiating with our customer Water Authority-Cayman for an extension of one
of our operating agreements for the Lower Valley Seawater Reverse Osmosis Plant (the Lower Valley
Agreement), which expires in March 2006. For the year ended December 31, 2004, revenue from the
Lower Valley Agreement was $1,382,845. Ocean Conversion (BVI) Ltd.s water supply agreement with
BVIW&S, which had an original term of seven years, has been in force on a monthly basis since
January 28, 2000. Our Service Agreement with Sandy Lane Properties Ltd. expires in January 2006
and we are currently not in negotiations to extend this agreement, although we intend to make a
proposal to our customer to renew the agreement at some later date. For the year ended December
31, 2004, revenue from Sandy Lane Properties Ltd. was $402,631. Our other water supply agreements
expire between November 2008 and March 2026. The British Virgin Islands Water and Sewerage Department has taken the position that our water
supply agreement is operating on a month-to-month basis.We have accepted the position of the
British Virgin Islands Water and Sewerage department that Ocean Conversion (BVI) Ltd.s existing
water supply arrangement the British Virgin Islands is in force on a month-to-month basis until
negotiations for a definitive agreement are finalized. In May 1999, the British Virgin Islands
government did not make a required buyout payment of $1.42 million for the Baughers Bay plant and
has taken the position that the water supply agreement continues on a month-to-month basis. Thus,
it is possible, but in our opinion unlikely, that the government could cease purchasing water at
any time. While Ocean Conversion (BVI) Ltd. has made attempts in the past to negotiate a new water
supply agreement, there is no guarantee such agreement will be obtained, or if obtained, would be
on terms favorable to Ocean Conversion (BVI) Ltd. Cessation of the government water purchases, or
failure to negotiate a new agreement on terms favorable to us, could have an adverse effect on our
results of operations. For the year ended December 31, 2004, net income of our affiliate Ocean
Conversion (BVI) Ltd. was $2,771,198 of which $1,284,080 was recorded as equity in earning of
affiliate on our consolidated statements of income. Our equity investment in Ocean Conversion
(BVI) Ltd., as at December 31, 2004, was $11,058,398. In the event that the government ceased
purchasing water from the Baughers Bay plant, or we negotiated a new contract with the government
on less favorable terms than the existing supply arrangement, we would be required to examine this
investment for impairment. In the event that we determined that this investment was impaired, we
could incur significant expense to write off part or all of this investment, which would reduce our
earnings during the period in which the investment was determined to be impaired. Termination of our exclusive distributorship agreement with DWEER Technology Ltd. would
eliminate one competitive advantage that we presently have over our competition in obtaining new
plants in the Caribbean basin.Our wholly-owned subsidiary, DesalCo Limited, is currently the
exclusive distributor in the Caribbean basin for the DWEER system produced by DWEER Technology
Ltd. for use in reverse osmosis seawater desalination plants. As a result, none of our competitors
are able to offer this technology when bidding for new reverse osmosis seawater desalination plants
in the Caribbean basin. As the DWEER system is one of the most energy efficient recovery systems
of its kind, the distributorship agreement with DWEER Technology Ltd. gives us a unique 46




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competitive advantage. If the distributorship agreement were terminated or not renewed on equally
favorable terms, we would lose this competitive advantage, and it may be more difficult for us to
obtain new contracts for plants in the Caribbean basin. The costs of integrating future assets may affect our ability to pay dividends.We have
historically sought to pay cash dividends to our shareholders out of our net income on a quarterly
basis if funds are available. The costs associated with integrating future assets into our
company, however, may reduce our net income. If our net income is reduced, we will have fewer
funds available to pay dividends. In addition, our bank loan agreement with Scotiabank (Cayman
Islands) Ltd. requires that we pay dividends from current cash flows. Our business is affected by tourism, weather, the economies of the locations where we provide
service and the U.S. and European economies.Tourist arrivals and weather within our operating
areas affect the demand for our water to a greater extent in the Cayman Islands and in Belize than
in the Bahamas, the British Virgin Islands and Barbados. In the Cayman Islands and Belize, the
highest demand is normally in the first two quarters of each calendar year. The lowest demand for
water occurs in the third quarter of each calendar year. A significant percentage of tourists
visiting the Cayman Islands and Belize come from the U.S. or certain European countries. In
addition, development activity in our service areas in the Cayman Islands is significantly impacted
by the U.S. economy. Accordingly, a significant downturn in tourist arrivals to the Cayman Islands
or in the U.S. or European economies for any reason would be detrimental to our revenues and
operating results. Additional terrorist activities in the United States, Europe or in areas served
by us or extended hostilities in the Persian Gulf would likely have a material adverse effect on
our business and results of operations. The Blue Hills Plant is larger than any other single desalination plant that we have
built previously and revenue from this plant is substantially derived from fixed unit prices.
Because of the size of the Blue Hills project, there are inherent uncertainties in our cost
estimates to construct this project. Construction and/or operating cost overruns could materially
affect the return on our investment in this project. Additionally, the terms of the Blue Hills
contract require us to guarantee the price of desalinated water on a per unit basis, subject to
certain annual inflation adjustments, and assume the risk that the costs associated with producing
this water may be greater than anticipated. The profitability of this project is therefore
dependent on our ability to estimate accurately the costs of constructing and operating the Blue
Hills Plant. These costs may be affected by a variety of factors, such as changes in the costs of
materials and services since we submitted our bid in March 2004, lower than anticipated production
efficiencies and/or hydrogeological conditions at the plant site differing materially from what was
evaluated at the time we bid on the contract. If we did not estimate accurately the costs of the
Blue Hills contract, this project could have lower margin than expected, which could adversely
affect our results of operations or financial condition. We may have difficulty accomplishing our growth strategy within and outside of our current
operating areas.Even though we have an exclusive license for our present operating area in the
Cayman Islands and supply agreements in the Cayman Islands, the Bahamas, the British Virgin
Islands, Barbados and Belize, our ability to expand our operating areas is often subject to the
approval of the respective governments in each location. Further, part of our long-term growth strategy is to expand our water supply and distribution
operations to other locations outside of the Cayman Islands, the Bahamas, Barbados, the British
Virgin Islands and Belize. Our expansion into new locations depends on our ability to obtain
necessary permits, licenses and approvals to operate in new territories. We may not obtain these
necessary permits, licenses and approvals in a timely and cost efficient manner, or at all. Our expansion to territories outside of our current operating areas includes significant
risks, including, but not limited to, the following:  
    regulatory risks, including government relations difficulties, local regulations and
currency controls;
    risks related to operating in foreign countries, including political instability,
reliance on local economies, environmental or geographical problems, shortages of
materials, immigration restrictions and limited skilled labor;
    risks related to development of new operations, including assessing the demand for
water, engineering difficulties and inability to begin operations as scheduled; and
    risks relating to greater competition in these new territories, including the ability of
our competitors to gain or retain market share by reducing prices. 47




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Even if our expansion plans are successful, we may have difficulty managing our growth. We
cannot assure you that any new operations outside of our current operating areas will attain or
maintain profitability or that the results from these new operations will not negatively affect our
overall profitability. We do not own a majority interest in Ocean Conversion (BVI) Ltd.We own 50% of the voting
shares of Ocean Conversion (BVI) Ltd., which allows us to appoint three of the six directors of
that company. Sage Water Holdings (BVI) Limited, which owns the remaining 50% of the voting
shares, is entitled to appoint the remaining three directors. If there is a tied vote of the
directors on any matter, the president of the Caribbean Water and Wastewater Association is
entitled to appoint a temporary director to break the tie. As a result, we have to share the
management of Ocean Conversion (BVI) Ltd. with Sage Water Holdings (BVI) Limited. Although we
provide management and engineering services to Ocean Conversion (BVI) Ltd. we do not fully control
the operations of the company. Our operations in the Caribbean could be harmed by hurricanes.Another significant hurricane
such as Hurricane Ivan, which affected our Cayman Islands operations in September 2004, could cause
major damage to our equipment and properties and the properties of our customers, including the
large tourist properties in these areas. This would result in decreased revenues and profits from
water sales until our damaged equipment and properties are repaired and our customers and the
tourism industry returned to the status quo before the hurricane. We insure all of our assets
except for our feed wells and, in the Cayman Islands our underground water distribution system. Contamination to our processed water may cause disruption in our services and adversely affect
our revenues.Our processed water may become contaminated by naturally-occurring or man-made
compounds and events. In the event that a portion of our processed water is contaminated, we may
have to interrupt the supply of that water until we are able to install treatment equipment or
substitute the flow of water from an uncontaminated water production source. In addition, we may
incur significant costs in order to treat a contaminated source of plant feed water through
expansion of our current treatment facilities, or development of new treatment methods. Our
inability to substitute processed water from an uncontaminated water source, or to adequately treat
the contaminated plant feed water in a cost-effective manner may have an adverse effect on our
revenues. In addition, in the wake of the September 11, 2001 terrorist attacks in New York, Washington,
D.C. and Pennsylvania, we have taken steps to heighten employee awareness of threats to our water
supply. While we are not aware of any specific threats to our facilities, operations or supplies,
we have and will continue to take security precautions to protect our facilities, operations and
supplies. It is possible, however, that we would not be in a position to control the outcome or
the costs of such events should they occur, which could have an adverse effect on the results of
our operations. We could be negatively affected by potential government actions and regulations.Any
government that regulates our operations may issue legislation or adopt new regulations, including
but not limited to:  
    restricting foreign ownership of our company;
    providing for the expropriation of our assets by the government;
    providing for nationalization of public utilities by the government;
    providing for different water quality standards; 48




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
    resulting in unilateral changes to or renegotiation of our exclusive licenses; or
    causing currency exchange fluctuations or devaluations or changes in tax laws. We rely on the efforts of several key employees.Our success depends upon the abilities of
our executive officers. In particular, the loss of the services of Jeffrey Parker, our Chairman of
the Board, or Fredrick McTaggart, our President and Chief Executive Officer, could be detrimental
to our operations and our continued success. Although Messrs. Parker and McTaggart have entered
into three-year employment agreements, which may be extended every year for an additional one-year
term, we cannot guarantee that Mr. Parker or Mr. McTaggart will continue to work for us during the
term of their agreements. In addition to Messrs. Parker and F. McTaggart, all of our Vice
Presidents have entered into non-compete agreements with us. Provisions in our articles of association and an option deed adopted by our board of directors
may discourage a change in control of our company and may make it more difficult for you to sell
your ordinary shares.Our articles of association include provisions, which may discourage or
prevent a change in control of our company. For instance, our board of directors consists of three
groups. Each group serves a staggered term of three years before the directors in the group are up
for re-election. Also, our board of directors may refuse to register any transfer of shares on our
books for any reason. We have also adopted an option deed, which is similar to a poison pill. The option deed will
discourage a change in control of our company by causing substantial dilution to a person or group
who attempts to acquire our company on terms not approved by the board of directors. The option
deed will expire on July 31, 2007. As a result of these provisions, which discourage or prevent an unfriendly or unapproved
change in control of our company, our shareholders may not have an opportunity to sell their
ordinary shares at a higher market price, which, at least temporarily, typically accompanies
attempts to acquire control of a company through a tender offer, open market purchase or otherwise. There may be a risk of variation in currency exchange rates.Although we report our results
in United States dollars, the majority of our revenue is earned in Cayman Islands dollars, Belizean
dollars, Bahamian dollars and Barbados dollars. All of the currencies in our operating areas have
been fixed to the United States dollar for over 20 years. As a result, we do not intend to hedge
against any exchange rate risk associated with our reporting in United States dollars. If any of
these fixed exchange rates becomes a floating exchange rate, however, our results of operations
could be adversely affected. Service of process and enforcement of legal proceedings commenced against us in the United
States may be difficult to obtain.Service of process on our company and our directors and
officers, twelve out of sixteen of whom reside outside the United States, may be difficult to
obtain within the United States. Also, since substantially all of our assets are currently located
outside the United States, any judgment obtained in the United States against us may not be
collectible. There is no reciprocal statutory enforcement of foreign judgments between the United States
and the Cayman Islands, so foreign judgments originating from the United States are not directly
enforceable in the Cayman Islands. A prevailing party in a United States proceeding against us or
our officers or directors would have to initiate a new proceeding in the Cayman Islands using the
United States judgment as evidence of the partys claim. A prevailing party could rely on the
summary judgment procedures available in the Cayman Islands, subject to available defenses in the
Cayman Islands courts, including, 49




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but not limited to, the lack of competent jurisdiction in the United States courts, lack of due
service of process in the United States proceeding and the possibility that enforcement or
recognition of the United States judgment would be contrary to the public policy of the Cayman
Islands. Depending on the nature of damages awarded, civil liabilities under the Securities Act of 1933
or the Securities Exchange Act of 1934 for original actions instituted outside the Cayman Islands
may or may not be enforceable. For example, a United States judgment awarding remedies unobtainable
in any legal action in the courts of the Cayman Islands (for example, treble damages, which would
probably be regarded as penalties), would not likely be enforceable under any circumstances. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Credit Risk We are not exposed to significant credit risk on retail customer accounts in the Cayman
Islands, and Bimini, Bahamas, as our policy is to cease supply of water to customers whose accounts
are more than 45 days overdue. Our primary exposure to credit risk is from bulk water sales
customers in Belize, the Bahamas, the British Virgin Islands, Barbados and the Cayman Islands. In
addition, the entire balance of our loan receivable is due from the Water Authority-Cayman. Interest Rate Risk As of December 31, 2004, we had loans outstanding totaling $16,589,370, all of which bear
interest at various lending rates such as LIBOR, Cayman Islands Prime Rate or Nassau Prime Rate.
We are subject to interest rate risk to the extent that any of these lending rates change. Foreign Exchange Risk All of our foreign currencies have fixed exchanged rates to the U.S. dollar. If any of these
fixed exchange rates become a floating exchange rate, however, our results of operation could be
adversely affected. 50




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED WATER CO. LTD.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    PageIndependent Auditors Report
    
    
    52Consolidated Balance Sheets as at December 31, 2004 and
2003
    
    
    53Consolidated Statements of Income for each of the years
ended December 31, 2004, 2003, and 2002
    
    
    54Consolidated Statements of Stockholders Equity for each
of the years ended December 31, 2004, 2003, and
2002
    
    
    55Consolidated Statements of Cash Flows for each of the
years ended December 31, 2004, 2003, and
2002
    
    
    56Notes to Consolidated Financial Statements
    
    
    57OCEAN CONVERSION (BVI) LTD.INDEX TO CONSOLIDATED FINANCIAL STATEMENTSIndependent Auditors Report
    
    
    82Consolidated Balance Sheet as at December 31, 2004 and
2003
    
    
    83Consolidated Statement of Income for the years ended
December 31, 2004 and 2003
    
    
    84Consolidated Statement of Stockholders Equity for the
years ended December 31, 2004 and 2003
    
    
    85Consolidated Statement of Cash Flows for the years ended
December 31, 2004 and 2003
    
    
    86Notes to Consolidated Financial Statements
    
    
    87
 51




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Independent Auditors Report The Board of Directors and Stockholders
Consolidated Water Co. Ltd We have audited the accompanying consolidated balance sheets of Consolidated Water Co. Ltd. and
subsidiaries as of December 31, 2004 and 2003, 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, 2004. 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. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Consolidated Water Co. Ltd. and subsidiaries as of
December 31, 2004 and 2003, and the results of their operations and cash flows for each of the
years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted
accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Consolidated Water Co.
Ltd.s internal control over financial reporting as of
December 31, 2004 based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated April 15, 2005 expressed an unqualified opinion on
managements assessment of, and an adverse opinion on the effective operation of, internal control
over financial reporting. /s/ KPMG George Town, Cayman Islands
April 15, 2005 52




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CONSOLIDATED WATER CO. LTD. 
 CONSOLIDATED BALANCE SHEETS (Expressed in United States dollars) December 31,2004
    
    
    2003ASSETSCurrent assetsCash and cash equivalents (Note 4)
    
    $
    9,216,908
    
    
    $
    8,236,924Accounts receivable (Note 5)
    
    
    4,879,410
    
    
    
    3,859,496Insurance claim receivable (Note 6)
    
    
    1,932,905
    
    
    
    Inventory (Note 7)
    
    
    1,629,348
    
    
    
    1,546,185Prepaid expenses and other assets
    
    
    625,563
    
    
    
    596,386Current portion of loans receivable (Note 8)
    
    
    924,020
    
    
    
    1,098,732Total current assets
    
    
    19,208,154
    
    
    
    15,337,723Loans receivable (Note 8)
    
    
    2,270,326
    
    
    
    3,194,346Property, plant and equipment, net (Note 9)
    
    
    28,861,402
    
    
    
    29,662,297Other assets
    
    
    424,564
    
    
    
    505,793Investment in affiliates (Note 10)
    
    
    11,070,848
    
    
    
    10,034,260Intangible assets (Note 11)
    
    
    5,421,381
    
    
    
    6,431,955Goodwill (Note 12)
    
    
    3,568,374
    
    
    
    3,395,752Total assets
    
    $
    70,825,049
    
    
    $
    68,562,126LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesDividends payable (Note 13)
    
    $
    783,854
    
    
    $
    686,118Accounts payable and other liabilities
    
    
    3,860,511
    
    
    
    2,072,245Current portion of long term debt (Note 14)
    
    
    3,733,144
    
    
    
    3,763,144Total current liabilities
    
    
    8,377,509
    
    
    
    6,521,507Long term debt (Note 14)
    
    
    12,856,226
    
    
    
    16,633,437Other liabilities
    
    
    357,957
    
    
    
    352,495Minority Interest in Waterfields Company Limited
    
    
    861,463
    
    
    
    806,160Total liabilities
    
    
    22,453,155
    
    
    
    24,313,599Stockholders equityRedeemable preferred stock, $1.20 par value. Authorized 100,000 shares;
issued and outstanding 13,921 shares in 2004
and 13,585 shares in 2003 (Note 15)
    
    
    16,705
    
    
    
    16,302Class A common stock, $1.20 par value. Authorized 9,840,000 shares;
issued and outstanding 5,753,485 shares in 2004 and
5,687,010 shares in 2003
    
    
    6,904,183
    
    
    
    6,824,412Class B common stock, $1.20 par value. Authorized 60,000 shares;
issued and outstanding nil shares for 2004
and nil shares for 2003 (Note 15)
    
    
    
    
    
    
    Stock and options earned but not issued
    
    
    20,746
    
    
    
    21,494Additional paid-in capital
    
    
    27,281,728
    
    
    
    26,773,342Retained earnings
    
    
    14,148,532
    
    
    
    10,612,977Total stockholders equity
    
    
    48,371,894
    
    
    
    44,248,527Commitments (Note 20)Total liabilities and stockholders equity
    
    $
    70,825,049
    
    
    $
    68,562,126
 The accompanying notes are an integral part of these consolidated financial statements. 53




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CONSOLIDATED WATER CO. LTD. 
 CONSOLIDATED STATEMENTS OF INCOME (Expressed in United States dollars) For the year ended December 31,2004
    
    
    2003
    
    
    2002Retail water sales
    
    $
    12,089,491
    
    
    $
    10,918,151
    
    
    $
    10,683,592Bulk water sales
    
    
    10,303,074
    
    
    
    7,045,761
    
    
    
    1,471,097Services revenues
    
    
    888,848
    
    
    
    1,090,293
    
    
    
    Total revenues
    
    
    23,281,413
    
    
    
    19,054,205
    
    
    
    12,154,689Retail cost of sales
    
    
    (5,250,372
    )
    
    
    (4,972,300
    )
    
    
    (5,824,815
    )Bulk cost of sales
    
    
    (7,798,225
    )
    
    
    (5,776,555
    )
    
    
    (1,057,362
    )Services cost of sales
    
    
    (623,116
    )
    
    
    (491,593
    )
    
    
    Total cost of sales(Note 16)
    
    
    (13,671,713
    )
    
    
    (11,240,448
    )
    
    
    (6,882,177
    )Gross profit
    
    
    9,609,700
    
    
    
    7,813,757
    
    
    
    5,272,512General and administrative expenses (Note 16)
    
    
    (5,138,182
    )
    
    
    (3,775,357
    )
    
    
    (2,644,004
    )Net insurance recovery from Hurricane Ivan (Note 6)
    
    
    591,404
    
    
    
    
    
    
    
    Income from operations
    
    
    5,062,922
    
    
    
    4,038,400
    
    
    
    2,628,508Other income (expenses)Interest income
    
    
    81,560
    
    
    
    82,334
    
    
    
    14,711Interest expense
    
    
    (682,744
    )
    
    
    (1,163,637
    )
    
    
    (103,986
    )Other income
    
    
    533,974
    
    
    
    438,022
    
    
    
    37,077Equity in earnings of affiliate
    
    
    1,284,080
    
    
    
    826,029
    
    
    
    1,216,870
    
    
    
    182,748
    
    
    
    (52,198
    )Net income before income taxes and minority interest
    
    
    6,279,792
    
    
    
    4,221,148
    
    
    
    2,576,310Provision for income taxes
    
    
    (30,150
    )
    
    
    (23,743
    )
    
    
    Minority interest
    
    
    (52,259
    )
    
    
    (20,324
    )
    
    
    Net income
    
    $
    6,197,383
    
    
    $
    4,177,081
    
    
    $
    2,576,310Basic earning per share(Note 17)
    
    $
    1.08
    
    
    $
    0.85
    
    
    $
    0.65Diluted earning per share(Note 17)
    
    $
    1.05
    
    
    $
    0.83
    
    
    $
    0.63Weighted average number of common shares
used in the determination of:Basic earnings per share (Note 17)
    
    
    5,737,132
    
    
    
    4,917,183
    
    
    
    3,969,861Diluted earnings per share (Note 17)
    
    
    5,879,505
    
    
    
    5,037,530
    
    
    
    4,087,532
 The accompanying notes are an integral part of these consolidated financial statements. 54




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CONSOLIDATED WATER CO. LTD. 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2004 (Expressed in United States dollars) Stock andRedeemable preferred
    
    
    
    
    
    
    
    
    
    
    options
    
    
    Additional
    
    
    
    
    
    
    Totalstock
    
    
    Common stock
    
    
    earned but
    
    
    paid-in
    
    
    Retained
    
    
    stockholdersShares
    
    
    Dollars
    
    
    Shares
    
    
    Dollars
    
    
    not issued
    
    
    capital
    
    
    earnings
    
    
    equityBalance at December 31, 2001
    
    
    25,195
    
    
    $
    30,234
    
    
    
    3,920,064
    
    
    $
    4,704,077
    
    
    $
    210,324
    
    
    $
    6,896,753
    
    
    $
    7,633,036
    
    
    $
    19,474,424Issue of share capital
    
    
    3,330
    
    
    
    3,996
    
    
    
    67,456
    
    
    
    80,947
    
    
    
    (227,980
    )
    
    
    490,889
    
    
    
    

    
    
    
    347,852Conversion of preferred shares
    
    
    (8,083
    )
    
    
    (9,700
    )
    
    
    8,083
    
    
    
    9,700
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Redemption of preferred shares
    
    
    (702
    )
    
    
    (842
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,999
    )
    
    
    
    
    
    
    (3,841
    )Repurchase and cancellation of
ordinary shares
    
    
    
    
    
    
    
    
    
    
    (2,184
    )
    
    
    (2,621
    )
    
    
    
    
    
    
    (30,248
    )
    
    
    
    
    
    
    (32,869
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,576,310
    
    
    
    2,576,310Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,678,149
    )
    
    
    (1,678,149
    )Issue of options and share grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    442,497
    
    
    
    
    
    
    
    
    
    
    
    442,497Balance at December 31, 2002
    
    
    19,740
    
    
    $
    23,688
    
    
    
    3,993,419
    
    
    $
    4,792,103
    
    
    $
    424,841
    
    
    $
    7,354,395
    
    
    $
    8,531,197
    
    
    $
    21,126,224Public offering of ordinary shares,
net of issuance costs
    
    
    
    
    
    
    
    
    
    
    1,392,150
    
    
    
    1,670,580
    
    
    
    
    
    
    
    16,118,254
    
    
    
    
    
    
    
    17,788,834Issue of share capital
    
    
    3,837
    
    
    
    4,604
    
    
    
    291,463
    
    
    
    349,756
    
    
    
    (544,756
    )
    
    
    3,300,838
    
    
    
    
    
    
    
    3,110,442Conversion of preferred shares
    
    
    (9,978
    )
    
    
    (11,973
    )
    
    
    9,978
    
    
    
    11,973
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Redemption of preferred shares
    
    
    (14
    )
    
    
    (17
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (145
    )
    
    
    
    
    
    
    (162
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,177,081
    
    
    
    4,177,081Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,095,301
    )
    
    
    (2,095,301
    )Issue of options and share grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    141,409
    
    
    
    
    
    
    
    
    
    
    
    141,409Balance at December 31, 2003
    
    
    13,585
    
    
    $
    16,302
    
    
    
    5,687,010
    
    
    $
    6,824,412
    
    
    $
    21,494
    
    
    $
    26,773,342
    
    
    $
    10,612,977
    
    
    $
    44,248,527Issue of share capital
    
    
    2,724
    
    
    
    3,269
    
    
    
    64,087
    
    
    
    76,905
    
    
    
    (95,568
    )
    
    
    508,386
    
    
    
    
    
    
    
    492,992Conversion of preferred shares
    
    
    (2,388
    )
    
    
    (2,866
    )
    
    
    2,388
    
    
    
    2,866
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,197,383
    
    
    
    6,197,383Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,661,828
    )
    
    
    (2,661,828
    )Issue of options and share grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94,820
    
    
    
    
    
    
    
    
    
    
    
    94,820Balance at December 31, 2004
    
    
    13,921
    
    
    $
    16,705
    
    
    
    5,753,485
    
    
    $
    6,904,183
    
    
    $
    20,746
    
    
    $
    27,281,728
    
    
    $
    14,148,532
    
    
    $
    48,371,894
 The accompanying notes are an integral part of these consolidated financial statements. 55




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CONSOLIDATED WATER CO. LTD. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Expressed in United States dollars) For the year ended December 31,2004
    
    
    2003
    
    
    2002Net income
    
    $
    6,197,383
    
    
    $
    4,177,081
    
    
    $
    2,576,310Adjustments to reconcile net income to net cash from
operating activitiesDepreciation
    
    
    2,079,475
    
    
    
    1,699,140
    
    
    
    1,269,126Amortization of intangible assets and bank fees
    
    
    1,017,207
    
    
    
    1,318,102
    
    
    
    194,906Stock compensation on share grants
    
    
    155,388
    
    
    
    138,750
    
    
    
    175,330Net loss on disposal of fixed assets due to Hurricane Ivan
    
    
    1,331,563
    
    
    
    
    
    
    
    Undistributed income from affiliates
    
    
    (1,718,338
    )
    
    
    (1,060,188
    )
    
    
    Minority interest
    
    
    52,259
    
    
    
    20,324
    
    
    
    (Increase) decrease in accounts receivable
    
    
    (1,019,914
    )
    
    
    (82,939
    )
    
    
    (83,791
    )Increase in insurance claim receivable
    
    
    (1,932,905
    )
    
    
    
    
    
    
    Increase in inventory
    
    
    (83,163
    )
    
    
    (10,088
    )
    
    
    (68,620
    )(Increase) decrease in prepaid expenses and other assets
    
    
    (29,177
    )
    
    
    60,041
    
    
    
    (50,529
    )Increase in other assets
    
    
    (9,239
    )
    
    
    
    
    
    
    Increase in accounts payable and other liabilities
    
    
    1,788,267
    
    
    
    230,725
    
    
    
    56,380Increase in other liabilities
    
    
    5,462
    
    
    
    15,878
    
    
    
    45,978Net cash provided by operating activities
    
    
    7,834,268
    
    
    
    6,506,826
    
    
    
    4,115,090Cash flows from investing activitiesDeferred expenditures
    
    
    
    
    
    
    
    
    
    
    (460,886
    )Purchase of property, plant and equipment
    
    
    (2,715,887
    )
    
    
    (2,159,860
    )
    
    
    (3,107,837
    )Business combinations, net of cash acquired
    
    
    
    
    
    
    (19,495,005
    )
    
    
    Investment in affiliate
    
    
    681,750
    
    
    
    (8,961,622
    )
    
    
    Collection from loans receivable
    
    
    1,098,732
    
    
    
    970,492
    
    
    
    Proceeds from sale of property, plant and equipment
    
    
    20,000
    
    
    
    
    
    
    
    Cash used in investing activities
    
    
    (915,405
    )
    
    
    (29,645,995
    )
    
    
    (3,568,723
    )Cash flows from financing activitiesNet proceeds from credit facility
    
    
    
    
    
    
    27,187,035
    
    
    
    1,500,000Deferred expenditures
    
    
    
    
    
    
    
    
    
    
    (426,970
    )Dividends declared and paid
    
    
    (2,564,092
    )
    
    
    (1,924,067
    )
    
    
    (1,669,088
    )Net proceeds from issuance of stock
    
    
    432,424
    
    
    
    19,037,034
    
    
    
    615,019Principal repayments of long term debt
    
    
    (3,807,211
    )
    
    
    (13,492,213
    )
    
    
    (476,760
    )Payment to acquire common stock
    
    
    
    
    
    
    
    
    
    
    (32,869
    )Payment to acquire redeemable preferred shares
    
    
    
    
    
    
    
    
    
    
    (3,841
    )Net cash provided by (used in) financing activities
    
    
    (5,938,879
    )
    
    
    30,807,789
    
    
    
    (494,509
    )Net increase in cash and cash equivalents
    
    
    979,984
    
    
    
    7,668,620
    
    
    
    51,858Cash and cash equivalents at beginning of year
    
    
    8,236,924
    
    
    
    568,304
    
    
    
    516,446Cash and cash equivalents at end of year
    
    $
    9,216,908
    
    
    $
    8,236,924
    
    
    $
    568,304Interest paid in cash
    
    $
    591,795
    
    
    $
    770,438
    
    
    $
    101,764Interest received in cash
    
    $
    81,560
    
    
    $
    81,836
    
    
    $
    11,380Income taxes paid
    
    $
    14,281
    
    
    $
    40,090
    
    
    $
    
 The accompanying notes are an integral part of these consolidated financial statements. 56




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CONSOLIDATED WATER CO. LTD. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Principal activity Consolidated Water Co. Ltd., its wholly-owned subsidiaries, majority-owned subsidiary and affiliate
(together the Company) use reverse osmosis technology to produce fresh water from seawater. The
Company processes and supplies water to its customers in the Cayman Islands, Belize, Bahamas,
Barbados and British Virgin Islands. The Company sells water to a variety of customers, including
public utilities, commercial and tourist properties, residential properties and government
facilities. The base price of water supplied by the Company, and adjustments thereto, are
generally determined by the terms of the license and contracts, which provide for adjustments based
upon the movement in the government price indices specified in the license and contracts, as well
as monthly adjustments for changes in the cost of energy. The Company also provides consulting
services under long-term agreements under which the Company designs and constructs desalination
plants, and manages and operates plants owned by other companies. 2. Accounting policies Basis of preparation:The consolidated financial statements presented are prepared in accordance
with accounting principles generally accepted in the United States of America. Use of estimates:The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the reporting period.
Significant items subject to estimates and assumptions include the carrying value of property,
plant and equipment, intangible assets, goodwill, allowances for receivables and inventory. Actual
results could differ from those estimates. Basis of consolidation:The consolidated financial statements include the accounts of the
Companys wholly-owned subsidiaries Cayman Water Company Limited, Belize Water Limited, Ocean
Conversion (Cayman) Limited, DesalCo Limited, DesalCo (Barbados) Ltd, and its majority owned
subsidiary Waterfields Company Limited. The operating results of Ocean Conversion (Cayman)
Limited, DesalCo Limited, DesalCo (Barbados) Ltd. have been included in the consolidated financial
statements effective February 1, 2003. The operating results of Waterfields Company Limited have
been included in the financial statements effective August 1, 2003. All inter-company balances and
transactions have been eliminated. Foreign currency:The Companys reporting currency is the United States dollar. The functional
currency of the Company and its foreign subsidiaries is the currency for each respective country.
The exchange rates between the Cayman Islands dollar, the Belize dollar, the Bahamian dollar and
the Barbados dollar have been fixed to the United States dollar during all periods presented. Monetary assets and liabilities denominated in foreign currencies are translated at the rates of
exchange ruling at the balance sheet date. Foreign currency transactions are translated at the
rate ruling on the date of the transaction. Net exchange gains and losses are included in other
income in the consolidated statements of income. Cash and cash equivalents:Cash and cash equivalents comprise cash at banks on call and highly
liquid deposits with an original maturity of three months or less. 57




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Accounting policies (continued) Trade accounts receivable:Trade accounts receivable are recorded at invoiced amounts based on
meter readings. The allowance for doubtful accounts is the Companys best estimate of the amount
of probable credit losses in the Companys existing accounts receivable balance. The Company
determines the allowance for doubtful accounts based on historical write-off experience and monthly
review of delinquent accounts. Past due balances are reviewed individually for collectibility and
disconnection. Account balances are charged off against the allowance for doubtful accounts after
all means of collection have been exhausted and the potential for recovery is considered by
management to be remote. Inventory:Inventory primarily includes replacement spares and parts that are valued at the lower
of cost and net realizable value on a first-in, first-out basis. Inventory also includes potable
water held in the Companys reservoirs. The carrying amount of the water inventory is the lower of
the average cost of producing or purchasing water during the year and its net realizable value. Loans receivable:Loans receivable relate to amounts advanced to customers to facilitate the
construction of water desalination plants. The allowance for loan losses, if any, is the Companys
best estimate of the amount of potable credit losses in the Companys existing loans and is
determined on an individual loan basis. Management believes the loans receivable are collectible
and, therefore, no loan allowance has been established as of December 31, 2004. Property, plant and equipment:Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is calculated using a straight line method with an allowance for
estimated residual values. Rates are determined based on the estimated useful lives of the assets
as follows: Buildings
    
    5 to 40 yearsPlant and equipment
    
    4 to 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 labour and materials. Assets under construction are recorded as additions to property,
plant and equipment upon completion of the projects. Depreciation commences in the month of
addition. Interest costs directly attributable to the acquisition and construction of qualifying assets,
which are assets that necessarily take a substantial period of time to ready for their intended
use, are added to the cost of those assets until such time as the assets are substantially ready
for use or sale. 58




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Accounting policies (continued) Goodwill and intangible assets:Goodwill represents the excess costs over fair value of the assets
of an acquired business. Goodwill and intangible assets acquired in a business combination
accounted for as a purchase and determined to have an indefinite useful life are not amortized, but
are tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS
No. 142 also requires that intangible assets with estimatable useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and reviewed for impairment
in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. The
Company periodically evaluates the possible impairment of goodwill. Management identifies its
reporting units and determines the carrying value of each reporting unit by assigning the assets
and liabilities, including the existing goodwill and intangible assets, to those reporting units.
The Company determines the fair value of each reporting unit and compares it to the carrying amount
of the reporting unit. To the extent the carrying amount of the reporting unit exceeds the fair
value of the reporting unit, the Company is required to perform the second step of the impairment
test, as this is an indication that the reporting unit goodwill may be impaired. In this step, the
Company compares the implied fair value of the reporting unit goodwill with the carrying amount of
the reporting unit goodwill. The implied fair value of goodwill is determined by allocating the
fair value of the reporting unit to all the assets (recognized and unrecognized) and liabilities of
the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No.
141, Business Combinations. The residual fair value after this allocation is the implied fair
value of the reporting unit goodwill. If the implied fair value is less than its carrying amount,
the impairment loss is recorded. The Companys annual impairment valuation resulted in no goodwill
impairment. 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. Investments where the Company has significant influence over the operating and
financial policies of the investee and holds 20% to 50% of the voting stock are recorded using the
equity method of accounting for investments in common stock. The Company recognizes an impairment
loss on declines in value that are other than temporary. Other assets:Other assets consist of the bank financing fees paid on the drawdown of the Companys
long term debt and are being amortized on a straight line basis over the term of the loans. Other liabilities:Other liabilities consist of security deposits and advances in aid of
construction. Security deposits are received from large customers as security for trade
receivables. Advances in aid of construction are recognized as a liability when advances are
received from condominium developers in the licensed area to help defray the capital expenditure
costs of the Company. These advances do not represent loans to the Company and are interest free.
However, the Company allows a discount of ten percent on future supplies of water to these
developments until the aggregate discounts allowed are equivalent to advances received. Discounts
are charged against advances received. Shares repurchased:Under Cayman Islands law, shares repurchased out of capital by the Company are
treated as cancelled upon redemption, and the Companys issued share capital is reduced by the par
value of those shares, with the difference being adjusted to additional paid up capital. 59




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Accounting policies (continued) Stock and stock option incentive plans:The Company issues stock under incentive plans that form
part of employees and non-executive Directors remuneration. The Company also grants options to
purchase ordinary shares as part of remuneration for certain long-serving employees and certain
management employees. During the year ended December 31, 2003, the option plan for certain management employees was
amended as part of renegotiations of employee contracts. The amended contracts terminated the
stock option plans for all years commencing from January 1, 2004. The Company applies the intrinsic-value-based method of accounting prescribed by Accounting
Principles Board (APB) Opinion No. 25 Accounting for Stock Issued to Employees, and related
interpretations to account for its fixed-plan stock options. Under this method, compensation
expense is recorded on the date of grant only if the current market price of the underlying stock
exceeds the exercise price. SFAS No. 123 Accounting for Stock-Based Compensation established
accounting and disclosure requirements using a fair-valued-based method of accounting for
stock-based employee compensation plans. As allowed by SFAS No. 123, the Company continues to
apply the intrinsic-value method of accounting described above and has adopted the disclosure
requirements of SFAS No. 123. The following table illustrates the effect on net income if the
fair-value-based method has been applied to all outstanding and unvested awards in each period. 2004
    
    
    2003
    
    
    2002Net income, as reported
    
    $
    6,197,383
    
    
    $
    4,177,081
    
    
    $
    2,576,310Add stock-based employee compensation expense included
in reporting net income
    
    
    155,388
    
    
    
    138,750
    
    
    
    442,497Deduct total stock-based employee compensation expense
determined under fair-value-based method for all rewards
    
    
    (216,346
    )
    
    
    (950,147
    )
    
    
    (622,702
    )Pro forma net income
    
    $
    6,136,425
    
    
    $
    3,365,684
    
    
    $
    2,396,105Earnings per share:Basic  as reported
    
    $
    1.08
    
    
    $
    0.85
    
    
    $
    0.65Basic  pro forma
    
    $
    1.07
    
    
    $
    0.68
    
    
    $
    0.60Diluted  as reported
    
    $
    1.05
    
    
    $
    0.83
    
    
    $
    0.63Diluted  pro forma
    
    $
    1.04
    
    
    $
    0.67
    
    
    $
    0.58
 The intrinsic value of stock based compensation is recorded in stockholders equity and is expensed
to the consolidated statements of income based on the vesting period of the options. On exercise
of options, proceeds up to the par value of the stock issued are credited to ordinary share
capital; any proceeds in excess of the par value of the stock issued are credited to additional
paid in capital in the period in which the options are exercised. Options that expire without
exercise are also credited to additional paid in capital in the period in which the option expired. Revenue and cost of sales:Customers are billed monthly based on meter readings performed at or
near each month end and in accordance with agreements, which stipulate minimum monthly charges for
water service. An accrual, where necessary, is made for water delivered but unbilled at year end
when readings are not performed at the year end date. The accrual is matched with the direct costs
of producing, purchasing and delivering water. Consulting revenue is recognized on the accrual basis based upon time spent at agreed upon rates
and is included under service revenue. Plant construction revenue is recognized using the percentage-of-completion method. The recognized
income is that percentage of estimated total income that incurred costs to date bear to estimated
total costs after giving effect to estimates of costs to complete based upon most recent
information. This revenue is included under services revenue. Interest income is recognized by the Company over the term of a loan based on the interest rate
stated in the loan and is included in interest income. 60




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Accounting policies (continued) Repairs and maintenance:All repair and maintenance costs are expensed as incurred. Comparative figures:Certain prior year amounts have been adjusted to conform to the current
years presentation. The Company has reallocated various maintenance expenses to cost of sales
from general and administrative expenses. In addition, the Company has adjusted the cost and
amortization of the Belize water production and supply agreement intangible asset to reflect a 2003
revaluation. These adjustments have no impact on the net income of the Company. 3. Acquisitions Effective February 1, 2003, the Company acquired 100% of the outstanding voting common shares of
DesalCo Limited, its wholly owned subsidiary DesalCo (Barbados) Limited and Ocean Conversion
(Cayman) Limited. The consideration paid was $26,976,648, comprised of $24,202,651 in cash and
185,714 ordinary shares of the Company and $482,286 in costs related to the acquisitions. Effective February 1, 2003, the Company also acquired as part of this acquisition of DesalCo
Limited, 12.7% of the outstanding voting common shares of Waterfields Company Limited
(Waterfields). On July 30, 2003, the Company acquired a further 13.5% of Waterfields and
effective August 1, 2003, acquired an additional 64.7% interest, resulting in total controlling
interest of 90.9% of Waterfields. The total consideration paid was $9,652,491, comprised of
$9,431,610 in cash and $220,881 in costs related to the acquisition. These acquisitions provided the Company with a reverse osmosis plant design, a construction and
facilities management and engineering services firm, as well as facilities and contracts to supply
additional bulk potable water services in the Cayman Islands, Bahamas and Barbados. The following table summarizes the estimated fair values of assets acquired and liabilities assumed
at the date of the acquisitions. Current assets
    
    $
    7,187,798Property, plant and equipment
    
    
    8,947,932Investments in affiliates
    
    
    12,069,998Intangible assets
    
    
    5,766,886Goodwill
    
    
    3,395,752Other assets
    
    
    4,190,883Total assets acquired
    
    
    41,559,249Current liabilities
    
    
    1,877,490Long term debt and liabilities
    
    
    2,266,784Total liabilities assumed
    
    
    4,144,274Less: Minority interest in Waterfields Company Limited
    
    
    785,836Net assets acquired
    
    $
    36,629,139
 61




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. Acquisitions (continued) The results of operations of DesalCo Limited, DesalCo (Barbados) Limited and Ocean Conversion
(Cayman) Limited are included in the consolidated statements of income from February 1, 2003 and
the results of operations of Waterfields Company Limited are included in the consolidated
statements of income from August 1, 2003. The unaudited pro forma consolidated results of
operations of Consolidated Water Co. Ltd., DesalCo Limited, DesalCo (Barbados) Limited, Ocean
Conversion (Cayman) Limited, Waterfields Company Limited and an equity interest in Ocean Conversion
(BVI) Ltd., had the companies been acquired at January 1, 2003 or 2002 would be as follows: December 31,2003
    
    
    2002Pro forma revenue
    
    $
    21,841,916
    
    
    $
    21,923,798Pro forma net income
    
    $
    4,704,114
    
    
    $
    4,145,465Pro forma earnings per share:Basic
    
    $
    0.83
    
    
    $
    0.75Diluted
    
    $
    0.82
    
    
    $
    0.73
 4. Cash and cash equivalents Cash and cash equivalents are not restricted as to withdrawal or use. At December 31, 2004, the
equivalent United States dollars are denominated in the following currencies: December 31,2004
    
    
    2003Bank accountsUnited States dollar
    
    $
    1,980,944
    
    
    $
    3,459,939Cayman Islands dollar
    
    
    4,413,496
    
    
    
    1,650,342Bahamian dollar
    
    
    466,193
    
    
    
    492,076Belize dollar
    
    
    83,157
    
    
    
    320,300Barbadian dollar
    
    
    95,065
    
    
    
    15,1757,038,855
    
    
    
    5,937,832Short Term depositsUnited States dollars
    
    
    1,521,188
    
    
    
    1,505,192Bahamian dollar
    
    
    493,699
    
    
    
    474,901Belize dollar
    
    
    163,166
    
    
    
    318,9992,178,053
    
    
    
    2,299,092Total cash and cash equivalents
    
    $
    9,216,908
    
    
    $
    8,236,924
 62




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. Accounts receivable December 31,2004
    
    
    2003Trade accounts receivable
    
    $
    4,939,985
    
    
    $
    3,781,297Other accounts receivable
    
    
    104,767
    
    
    
    153,0665,044,752
    
    
    
    3,934,363Allowance for doubtful accounts
    
    
    (165,342
    )
    
    
    (74,867
    )$
    4,879,410
    
    
    $
    3,859,496
 The activity of the allowance for doubtful accounts consisted of the following: December 31,2004
    
    
    2003Opening allowance for doubtful accounts
    
    $
    74,867
    
    
    $
    12,000Provision for doubtful accounts
    
    
    90,475
    
    
    
    62,867Accounts written off during the year
    
    
    
    
    
    
    Ending allowance for doubtful accounts
    
    $
    165,342
    
    
    $
    74,867
 Significant concentrations of credit risk are disclosed in Note 24. 6. Insurance claim receivable On September 11 and 12, 2004, Hurricane Ivan significantly affected the Companys Cayman Islands
operations. As a result, the Company suffered damage to its seawater conversion plants, which are
covered by property insurance. Under generally accepted accounting principles, the Company is
required to record the loss of any property which must be replaced in the period the loss occurs,
and record any gain from related insurance claims only when the recovery is probable. As at December 31, 2004, the Company has estimated the total loss to be $2,541,501 consisting of
plant and equipment of $1,351,563, spare parts inventories of $111,839 and $1,078,099 relating to
the rebuilding of the Cayman Islands operations as at December 31, 2004. These amounts have been
recorded against the insurance recovery and appear as a gain on the income statement as Net
insurance recovery due to Hurricane Ivan. The Company also suffered loss of profits during the period that it was unable to sell water to its
Cayman Islands customers. The Company has quantified this loss of profits at $818,700 and has been
fully covered in the Companys claim for such loss to its insurer under its Loss of Profits
insurance. The Company has recorded total recoveries from insurance of $3,132,905 offsetting the
total estimated loss of $2,541,501. On February 8, 2005, the Company accepted a proposal from the insurance company for a final
settlement sum of $1,932,905 towards claims for loss and damage to property and loss of profits.
This amount has been recorded as a Insurance claim receivable on the December 31, 2004 balance
sheet and is part of the gain of $591,404. 63




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. Inventory December 31,2004
    
    
    2003Water stock
    
    
    33,659
    
    
    
    42,440Consumables stock
    
    
    194,307
    
    
    
    190,280Spare parts stock
    
    
    1,401,382
    
    
    
    1,313,465$
    1,629,348
    
    
    $
    1,546,185
 8. Loans receivable As part of the acquisition of Ocean Conversion (Cayman) Limited, the following loans receivable
were acquired. Management estimates these loans to be fully collectible and as such no impairment
allowance has been provided at December 31, 2004. December 31,2004
    
    
    2003Due from Water Authority Cayman: Original loan of $1,216,000,
non-interest bearing, in monthly installments of $14,476
to November 30, 2008. Loan secured by Red Gate plant, machinery
and equipment.
    
    $
    680,381
    
    
    $
    854,095Due from Water Authority Cayman: Two loans originally aggregating
$1,819,920, bearing interest at 5% per annum, receivable in combined
monthly installments of principal and interest of $25,721 to March 2005, and
secured by Lower Valley plant, machinery and equipment.
    
    
    76,529
    
    
    
    373,275Due from Water Authority Cayman: Two loans originally aggregating
$1,168,600, bearing interest at 5% per annum, receivable in combined
monthly installments of principal and interest of $16,516 to March 2006, and
secured by Lower Valley plant, machinery and equipment.
    
    
    239,686
    
    
    
    420,958Due from 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 Road plant, machinery
and equipment.
    
    
    2,197,750
    
    
    
    2,644,750Total loans receivable
    
    
    3,194,346
    
    
    
    4,293,078Less current portion
    
    
    (924,020
    )
    
    
    (1,098,732
    )Loans receivable, excluding current portion
    
    $
    2,270,326
    
    
    $
    3,194,346
 Principal amounts due in each of the next five years are as follows: 2005
    
    
    924,0202006
    
    
    633,6242007
    
    
    620,7142008
    
    
    606,2382009
    
    
    409,750
 64




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. Property, plant and equipment December 31,2004
    
    
    2003CostLand
    
    
    475,679
    
    
    
    475,679Buildings
    
    
    4,373,382
    
    
    
    4,149,669Plant and equipment
    
    
    14,209,510
    
    
    
    15,923,840Distribution system
    
    
    18,278,146
    
    
    
    17,781,207Office furniture, fixtures and equipment
    
    
    551,911
    
    
    
    864,426Vehicles
    
    
    556,825
    
    
    
    700,750Leasehold improvements
    
    
    
    
    
    
    246,777Lab equipment
    
    
    20,877
    
    
    
    41,305Assets under construction
    
    
    1,642,813
    
    
    
    628,50440,109,143
    
    
    
    40,812,157Accumulated depreciation
    
    
    (11,247,741
    )
    
    
    (11,149,860
    )Net book value
    
    $
    28,861,402
    
    
    $
    29,662,297
 At December 31, 2004, the Company had outstanding capital commitments of approximately $780,000
(2003: $600,000). It is the Companys policy to maintain adequate insurance for loss or damage to
all fixed assets that in managements assessment may be susceptible to loss. The Company does not
insure its underground distribution system, which originally cost $9,873,746 (2003: $9,751,456). 10. Investments in affiliates As part of the acquisition described in Note 3, the Company acquired 50% and 100% of the
outstanding voting common shares and non-voting common shares, respectively, of Ocean Conversion
(BVI) Ltd. On May 9, 2003, the Company sold 100% of its non-voting shares in Ocean Conversion
(BVI) Ltd. to Sage Water Holdings (BVI) Limited for $2,120,250. The Company now owns 50% of the
voting common shares of Ocean Conversion (BVI) Ltd., representing a 43.5% interest in the company. The Companys investment in Ocean Conversion (BVI) Ltd. is accounted for using the equity method of
accounting. The excess cost over the Companys share of fair value net assets acquired of Ocean Conversion
(BVI) Ltd. is $6,654,362, which is considered equity-method goodwill. In accordance with SFAS No.
142 this equity-method goodwill is not being amortized, but is analyzed for impairment. At
December 31, 2004, management believes there is no impairment of this equity-method goodwill. 65




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. Investments in affiliates (continued) Summarized financial information of Ocean Conversion (BVI) Ltd. is presented as follows: December 31,2004
    
    
    2003Current assets
    
    $
    4,552,059
    
    
    $
    2,154,380Non-current assets
    
    
    4,189,764
    
    
    
    4,612,348Total assets
    
    $
    8,741,823
    
    
    $
    6,766,728Current liabilities
    
    $
    1,085,589
    
    
    $
    1,006,733Non-current liabilities
    
    
    1,682,604
    
    
    
    1,410,063Total liabilities
    
    $
    2,768,193
    
    
    $
    2,416,796
 For the year ended December 31,2004
    
    
    2003Water sales
    
    $
    6,872,366
    
    
    $
    4,819,605Cost of water sales
    
    $
    2,475,304
    
    
    $
    2,110,066Income from operations
    
    $
    2,746,636
    
    
    $
    1,663,353Net income
    
    $
    2,771,198
    
    
    $
    1,738,200
 11. Intangible assets Effective February 1, 2003, the Company acquired 100% of the outstanding voting common shares of
DesalCo Limited, its wholly-owned subsidiary DesalCo (Barbados) Ltd., and Ocean Conversion (Cayman)
Limited. A portion of the purchase price was allocated to the following identifiable intangible
assets. (a) As part of the acquisition of DesalCo Limited the Company originally attributed $726,902 to an
intangible asset which was adjusted in 2004 by $129,454 for a total balance of $856,356. This
represents the fair value of a Management Services Agreement originally dated December 4, 2000,
under which DesalCo Limited provides management and engineering services to Ocean Conversion (BVI)
Ltd. an affiliated company. Original agreement was amended on February 7, 2003 such that there is
no expiration term. Management of the Company has determined that this intangible asset has an
indefinite life, and therefore it is not being amortized. 66




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. Intangible assets (continued) (b) As part of the acquisition of DesalCo Limited, the Company attributed $337,149 to another
intangible asset, the DWEER Distribution Agreement between DesalCo Limited and DWEER Technology
Limited, which expires on October 31, 2009. Under this agreement DesalCo Limited was granted an
exclusive right, within certain geographical areas in the Caribbean, Central and South America, to
distribute certain patented equipment which can increase the operational efficiency of reverse
osmosis seawater desalination plants. The estimated fair value attributable to the intangible
asset of the DWEER Distribution Agreement is being amortized over the remaining term of the
seven-year agreement and has a weighted average useful life of 6.83 years. (c) As part of the acquisition of DesalCo Limited, the Company attributed $104,050 to an intangible
asset which represents the fair value of an operations agreement between Sandy Lane Properties Ltd.
and DesalCo (Barbados) Limited, a wholly owned subsidiary of DesalCo Limited. Under the terms of
the agreement, DesalCo (Barbados) Limited provides operations and maintenance services for a
seawater reverse osmosis desalination plant. The carrying amount attributable to the intangible
asset of the operations agreement is being amortized over the remaining term of the five-year
agreement and has a weighted average useful life of 3.0 years (d) As part of the acquisition of Ocean Conversion (Cayman) Limited, the Company originally
attributed $4,598,785 to intangible assets which was adjusted in 2004 by $213,289 for a total
balance of $4,385,496. This represent the fair value of three Water Production and Supply
Agreements between Ocean Conversion (Cayman) Limited and the Government of the Cayman Islands,
dated April 25, 1994, June 18, 1997 and December 31, 2001. Under these agreements, Ocean
Conversion (Cayman) Limited built reverse osmosis seawater desalination plants for the Government
of the Cayman Islands. Ocean Conversion (Cayman) Limited operates the plants until the expiration
of the agreement term, as extended, at which time the plant operations will be transferred to the
Government of the Cayman Islands for no consideration. The carrying amounts attributable to the
intangible assets of the Water Production and Supply Agreements are being amortized over the
remaining term of the agreements, which are approximately 6, 3 and 7 years, respectively, and have
a weighted average useful life of 5.8 years. (e) On September 17, 2003, the Company signed a new agreement with its Belize customer for the
provision of water from a seawater desalination plant for an initial term of 23 years. The new
agreement 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 was revalued in 2003 to its
fair market value upon signing of the new agreement. The revised carrying amount which was
previously being amortized over its weighed average useful life of 10.75 years is now being
amortized over the term of the new 23-year agreement and now has a weighted average useful life of
23.0 years. 67




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. Intangible assets (continued) December 31,2004
    
    
    2003CostNon-amortizable intangible assetManagement service agreement
    
    $
    856,356
    
    
    $
    726,902Amortizable intangible assetsDWEERTM distribution agreement
    
    
    337,149
    
    
    
    337,149Operations agreement with Sandy Lane
    
    
    104,050
    
    
    
    104,050Cayman water production and supply agreements
    
    
    4,385,496
    
    
    
    4,598,785Belize water production and supply agreement
    
    
    1,522,419
    
    
    
    1,522,419$
    7,205,470
    
    
    $
    7,289,305Accumulated amortizationNon-amortizable intangible assetManagement service agreement
    
    $
    
    
    
    $
    Amortizable intangible assetsDWEERTM distribution agreement
    
    
    (94,613
    )
    
    
    (45,250
    )Operations agreement with Sandy Lane
    
    
    (66,476
    )
    
    
    (31,793
    )Cayman water production and supply agreements
    
    
    (1,494,847
    )
    
    
    (718,346
    )Belize water production and supply agreement
    
    
    (128,153
    )
    
    
    (61,961
    )(1,784,089
    )
    
    
    (857,350
    )Net book value
    
    $
    5,421,381
    
    
    $
    6,431,955
 Amortization for each of the next five years are as follows: 2005
    
    $
    929,8792006
    
    
    820,9432007
    
    
    788,6592008
    
    
    639,2492009
    
    
    234,855Thereafter
    
    
    1,151,440
 68




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. Goodwill As of January 1, 2002, the Company adopted SFAS No. 142 Goodwill and Other Intangible Assets, and
in accordance with this statement goodwill is not amortized, but is analyzed for impairment
annually. The carrying amount of goodwill allocated to the reporting units for the year ended December 31,
2004 are as follows: Retail
    
    
    Bulk
    
    
    ServicesSegment
    
    
    Segment
    
    
    Segment
    
    
    TotalBalance as of December 31, 2003
    
    $
    1,170,511
    
    
    $
    2,136,524
    
    
    $
    88,717
    
    
    $
    3,395,752Goodwill acquired during the year
    
    
    
    
    
    
    172,622
    
    
    
    
    
    
    
    Balance as of December 31, 2004
    
    $
    1,170,511
    
    
    $
    2,309,146
    
    
    $
    88,717
    
    
    $
    3,568,374
 In 2004, goodwill and intangible assets were adjusted by $172,622 due to a revaluation of the fair
market value of those assets. The reporting segments are tested for impairment in the fourth quarter by comparing the fair value
of the reporting segments to the carrying value. The fair value is determined using discounted
cash flow methodology based on managements best estimates for each segment. At December 31, 2004,
the Companys impairment tests resulted in no impairment loss. 13. Dividends Quarterly interim dividends were declared in respect of class A common stock and redeemable
preferred stock as follows: 2004
    
    
    2003
    
    
    2002March 31
    
    $
    0.115
    
    
    $
    0.105
    
    
    $
    0.105June 30
    
    $
    0.115
    
    
    $
    0.105
    
    
    $
    0.105September 30
    
    $
    0.115
    
    
    $
    0.105
    
    
    $
    0.105December 31
    
    $
    0.115
    
    
    $
    0.105
    
    
    $
    0.105
 Interim dividends for the first three quarters were paid during each respective year. The Board of
Directors declares the interim dividend for the fourth quarter in October of each year. These
quarterly interim dividends are subject to no further ratification and consequently the fourth
quarter interim dividends have been recorded as a liability in each respective year. Included in
dividends payable at December 31, 2004 are unclaimed dividends of $120,574 (2003: $79,311). 14. Long term debt December 31,2004
    
    
    2003Scotiabank $20,000,000 term loan bearing interest at an annually adjusted
floating rate of LIBOR plus 1.5% to 3.0%, depending on the ratio of the
Companys consolidated debt to its consolidated earnings before interest,
taxes and depreciation, repayable in quarterly payments of $714,286
plus interest, due February 6, 2010. (3.68% at December 31, 2004; 2.68%
at December 31, 2003)
    
    $
    15,000,000
    
    
    $
    17,857,143
 69




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. Long term debt (continued) December 31,2004
    
    
    2003Scotiabank $1,428,000 term loan bearing interest at 3-month LIBOR
plus 1.5%, repayable in semi-annual installments of $240,000 plus interest,
due December 31, 2007. (3.61% at December 31, 2004; 2.60% at December 31,
2003)
    
    
    708,000
    
    
    
    1,188,000Royal Bank of Canada loan bearing interest at LIBOR plus 1.75%,
Repayable in quarterly installments of principal and interest, due in 2007.
(3.11% at December 31, 2004; 2.92% at December 31, 2003)
    
    
    527,215
    
    
    
    801,414Royal Bank of Canada loan bearing interest at Nassau Prime Lending Rate
plus 1.5%, repayable in quarterly installments of principal and interest,
due in 2007. (7.50% at December 31, 2004; 7.50% at December 31, 2003)
    
    
    354,155
    
    
    
    470,024Inter-American Investment Corporation loan bearing interest at LIBOR
plus 2.75%, repayable in quarterly installments of $40,000 plus interest.
Repaid in full during the year ended December 31, 2004.
    
    
    
    
    
    
    80,000Total long term debt
    
    
    16,589,370
    
    
    
    20,396,581Less current portion
    
    
    (3,733,144
    )
    
    
    (3,763,144
    )Long term debt, excluding current portion
    
    $
    12,856,226
    
    
    $
    16,633,437
 In addition to these facilities, as at December 31, 2004, 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 and with Royal Bank of
Canada for $500,000 bearing interest at the Nassau Prime Lending Rate plus 1.0%. The Company has collateralized all borrowings under the $20,000,000 seven-year term loan and the
$2,000,000 unused line of credit by providing Scotiabank with 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. The assets of Waterfields Company Limited have collateralized the two Royal Bank of Canada loans
and the loan from Inter-American Investment Corporation. The Company is in compliance with restrictive covenants associated with all its long term debt. The aggregate capital repayment obligations over the next five years are as follows: 2005
    
    $
    3,733,1442006
    
    
    3,468,3582007
    
    
    2,959,3002008
    
    
    2,857,1442009
    
    
    2,857,144Thereafter
    
    
    714,280
 70




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. 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 21 and carries the same voting and dividend rights as ordinary
shares of common stock (ordinary 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 preferred to the ordinary shares to the extent of the par value of the preferred shares and any
related additional paid in capital. The Company has a Class B stock option plan designed to deter coercive takeover tactics.
Pursuant to this plan, holders of ordinary shares and preferred shares were granted options which
entitle them to purchase 1/100 of a share of Class B stock at an exercise price of $37.50 if a
person or group acquires or commences a tender offer for 20% or more of the Companys ordinary
shares. Option holders (other than the acquiring person or group) will also be entitled to buy, for
the $37.50 exercise price, ordinary shares with a then market value of $75.00 in the event a person
or group actually acquires 20% or more of the Companys ordinary shares. Options may be redeemed
at $0.01 under certain circumstances. December 31, 2004, 60,000 of the Companys authorized but
unissued ordinary shares have been reserved for issue as Class B stock. The Class B stock
has priority over ordinary shares with respect to dividend and voting rights. No Class B stock options
have been exercised or redeemed up to December 31, 2004. 16. Expenses For the year ended December 31,2004
    
    
    2003
    
    
    2002Cost of water sales comprise the following:Water purchases
    
    
    76,399
    
    
    
    263,586
    
    
    
    1,952,331Depreciation
    
    
    1,945,476
    
    
    
    1,586,217
    
    
    
    1,175,349Amortization of intangible asset (Note 11)
    
    
    926,739
    
    
    
    954,804
    
    
    
    194,906Employee costs
    
    
    2,906,249
    
    
    
    2,351,727
    
    
    
    1,042,192Fuel oil
    
    
    1,536,780
    
    
    
    639,434
    
    
    
    179,275Royalties (Note 20)
    
    
    868,324
    
    
    
    781,632
    
    
    
    737,064Electricity
    
    
    2,586,723
    
    
    
    2,499,695
    
    
    
    710,168Insurance
    
    
    516,133
    
    
    
    403,944
    
    
    
    124,404Maintenance
    
    
    1,712,673
    
    
    
    1,209,391
    
    
    
    441,396Other direct costs
    
    
    596,217
    
    
    
    550,018
    
    
    
    325,092$
    13,671,713
    
    
    $
    11,240,448
    
    
    $
    6,882,177General and administrative expenses
comprise the following:Employee costs
    
    
    2,475,511
    
    
    
    1,904,454
    
    
    
    1,427,182Depreciation
    
    
    122,932
    
    
    
    112,923
    
    
    
    93,777Professional fees
    
    
    961,851
    
    
    
    341,246
    
    
    
    278,433Insurance
    
    
    287,068
    
    
    
    234,968
    
    
    
    141,650Directors fees and expenses
    
    
    348,439
    
    
    
    164,794
    
    
    
    157,877Maintenance
    
    
    28,086
    
    
    
    165,864
    
    
    
    21,339Other indirect costs
    
    
    914,295
    
    
    
    851,108
    
    
    
    523,746$
    5,138,182
    
    
    $
    3,775,357
    
    
    $
    2,644,004
 71




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. Earnings per share Basic earnings per common share (EPS) is calculated by dividing net income available to common
stockholders by the weighted average number of common shares outstanding during the period. The
computation of diluted EPS assumes the issuance of common shares for all potential common shares
outstanding during the reporting period. In addition, the dilutive effect of stock options is
considered in earnings per common share calculations, if dilutive, using the treasury stock method. The following summarizes information related to the computation of basic and diluted earnings per
share for the three years ended December 31, 2004. 2004
    
    
    2003
    
    
    2002Net income
    
    $
    6,197,383
    
    
    $
    4,177,081
    
    
    $
    2,576,310Less:Dividends paid and earnings attributable on
preferred shares
    
    
    (7,751
    )
    
    
    (5,706
    )
    
    
    (8,913
    )Net income available to holders of ordinary shares
in the determination of basic earnings per ordinary share
    
    $
    6,189,632
    
    
    $
    4,171,375
    
    
    $
    2,567,397Weighted average number of ordinary shares
in the determination of basic earnings per ordinary share
    
    
    5,737,132
    
    
    
    4,917,183
    
    
    
    3,969,861Plus:Weighted average number of preferred
shares outstanding during the year
    
    
    13,574
    
    
    
    19,604
    
    
    
    23,801Potential dilutive effect of unexercised options
    
    
    128,799
    
    
    
    100,743
    
    
    
    93,870Weighted average number of shares used for determining
diluted earnings per ordinary share
    
    
    5,879,505
    
    
    
    5,037,530
    
    
    
    4,087,532
 18. Segment information Due to acquisitions, management changed the Companys internal organizational structure to
effectively assimilate the business activities of the acquired companies. Consequently, management
no longer considers it appropriate to report separate business segments based on geographical
location. Under Statements of Financial Accounting Standards 131, Disclosure about Segments of an
Enterprise and Related Information, management now considers; (i) the operations to supply water
to retail customers, (ii) the operations to supply water to bulk customers, and (iii) the provision
of engineering and management services, as separate business segments. The segmented information
that was previously reported in 2002 for the Cayman Islands and the Bahamas is now reported as part
of the Retail Water segment and segmented information for Belize is now reported as part of the
Bulk Water segment. Included in our Bulk segment is our proportional share of results of operations, property, plant
and equipment and total assets of Ocean Conversion (BVI) Ltd. An adjustment has been made in
Reconciliation to adjust the Companys interest in its investment under the equity method of
accounting. Also included in Reconciliation are corporate expenses that do not directly relate to any specific
operating segment. 72




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18. Segment information (continued) As at December 31 and for the year then endedRetail
    
    
    Bulk
    
    
    Services
    
    
    Reconciliation
    
    
    Total2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2003
    
    
    2002
    
    
    2001Water sales
    
    
    12,089,491
    
    
    
    10,918,151
    
    
    
    10,683,592
    
    
    
    13,294,615
    
    
    
    9,130,741
    
    
    
    1,471,097
    
    
    
    888,848
    
    
    
    1,090,293
    
    
    
    
    
    
    
    (2,991,541
    )
    
    
    (2,084,980
    )
    
    
    
    
    
    
    23,281,413
    
    
    
    19,054,205
    
    
    
    12,154,689Other income
(expense)
    
    
    217,140
    
    
    
    (297,793
    )
    
    
    (60,487
    )
    
    
    (590,985
    )
    
    
    (420,445
    )
    
    
    8,289
    
    
    
    (90,075
    )
    
    
    (51,694
    )
    
    
    
    
    
    
    1,680,790
    
    
    
    952,680
    
    
    
    
    
    
    
    1,216,870
    
    
    
    182,748
    
    
    
    (52,198
    )Other income includes:Interest revenue
    
    
    15,796
    
    
    
    11,597
    
    
    
    
    
    
    
    90,596
    
    
    
    89,679
    
    
    
    14,711
    
    
    
    
    
    
    
    197
    
    
    
    
    
    
    
    (24,832
    )
    
    
    (19,139
    )
    
    
    
    
    
    
    81,560
    
    
    
    82,334
    
    
    
    14,711Interest expense
    
    
    
    
    
    
    422,510
    
    
    
    103,427
    
    
    
    349,693
    
    
    
    368,462
    
    
    
    559
    
    
    
    88,532
    
    
    
    99,281
    
    
    
    
    
    
    
    244,519
    
    
    
    273,384
    
    
    
    
    
    
    
    682,744
    
    
    
    1,163,637
    
    
    
    103,986Cost of water sales
    
    
    5,250,372
    
    
    
    4,972,300
    
    
    
    5,824,815
    
    
    
    8,878,939
    
    
    
    6,484,560
    
    
    
    1,057,362
    
    
    
    623,116
    
    
    
    491,593
    
    
    
    
    
    
    
    (1,080,714
    )
    
    
    (708,005
    )
    
    
    
    
    
    
    13,671,713
    
    
    
    11,240,448
    
    
    
    6,882,177General and
Administrative
    
    
    4,300,916
    

    
    
    2,684,216
    
    
    
    2,418,378
    
    
    
    1,123,086
    
    
    
    1,166,640
    
    
    
    225,626
    
    
    
    50,929
    
    
    
    194,425
    
    
    
    
    
    
    
    (336,749
    )
    
    
    (269,924
    )
    
    
    
    
    
    
    5,138,182
    
    
    
    3,775,357
    
    
    
    2,644,004Net insurance
recovery
    
    
    591,404
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    591,404
    
    
    
    
    
    
    
    Cost of water sales and general and administrative expenses include:Depreciation
    
    
    841,562
    
    
    
    1,077,609
    
    
    
    1,089,021
    
    
    
    1,542,093
    
    
    
    835,315
    
    
    
    180,105
    
    
    
    8,439
    
    
    
    5,105
    
    
    
    
    
    
    
    (312,619
    )
    
    
    (218,889
    )
    
    
    
    
    
    
    2,079,475
    
    
    
    1,699,140
    
    
    
    1,269,126Amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    842,693
    
    
    
    877,761
    
    
    
    194,907
    
    
    
    84,046
    
    
    
    77,043
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    926,739
    
    
    
    954,804
    
    
    
    194,907Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,150
    
    
    
    23,743
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,150
    
    
    
    23,743
    
    
    
    Net income
    
    
    3,346,747
    
    
    
    2,963,842
    
    
    
    2,379,912
    
    
    
    2,645,635
    
    
    
    1,038,771
    
    
    
    196,398
    
    
    
    94,578
    
    
    
    328,839
    
    
    
    
    
    
    
    110,423
    
    
    
    (154,371
    )
    
    
    
    
    
    
    6,197,383
    
    
    
    4,177,081
    
    
    
    2,576,310Property, plant and
equipment
    
    
    18,981,551
    
    
    
    19,701,187
    
    
    
    18,812,973
    
    
    
    11,685,778
    
    
    
    11,954,770
    
    
    
    1,440,673
    
    
    
    17,877
    
    
    
    14,095
    
    
    
    
    
    
    
    (1,823,804
    )
    
    
    (2,007,755
    )
    
    
    
    
    
    
    28,861,402
    
    
    
    29,662,297
    
    
    
    20,253,646Total assets
    
    
    48,205,461
    
    
    
    45,028,169
    
    
    
    23,347,530
    
    
    
    22,734,565
    
    
    
    22,224,004
    
    
    
    2,160,107
    
    
    
    3,696,868
    
    
    
    4,255,510
    
    
    
    
    
    
    
    (3,811,845
    )
    
    
    (2,945,557
    )
    
    
    
    
    
    
    70,825,049
    
    
    
    68,562,126
    
    
    
    25,507,637
 73




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18. Segment information (continued) For the year ended December 31, 2004, revenues from the Cayman Island operations were $17,514,609
(2003: $15,541,455; 2002: $10,565,568). Revenues from all foreign country operations were
$5,766,804 (2003: $3,512,750; 2002: $1,589,121). Included in the revenues from foreign countries
is $4,374,135 (2003: $1,869,077; 2002: $118,024) from the operations in Bahamas, $990,039 (2003:
$1,245,744; 2002: $1,471,097) from our operations in Belize and $402,631 (2003: $397,929; 2002:
$nil) from our operations in Barbados. For the year ended December 31, 2004, property, plant and equipment located in the Cayman Islands
was $18,588,073 (2003: 19,375,384; 2002: 17,698,944). Property, plant and equipment in all the
foreign country operations were $10,273,329 (2003: 10,286,913; 2002: $2,554,702). Included in
property, plant and equipment from foreign operations is $8,509,679 (2003: $8,904,739; 2002:
$1,114,029) from the operations in Bahamas and $1,756,381 (2003: $1,373,357; 2002: $1,440,673) from
our operations in Belize. For the year ended December 31, 2004, revenues in the amount of $5,066,004 (2003: $4,022,544; 2002:
$nil) were earned from one customer and revenues in the amount of $4,247,031 (2003: $1,777,698;
2002: $nil) were earned from another customer. These revenues are located in the Bulk segment. During the year end December 31, 2004, revenues which were earned in the Service segment from the
Bulk segment through various management service agreements and an engineering service agreement
amounted to $867,995 (2003: $1,038,435; 2002: $nil). Any intercompany amounts included in this
amount have been eliminated in accordance with the basis of consolidation. 19. Related party transactions A professional service firm, of which a director is an ex-partner, provided professional services
during the year ended December 31, 2004 for which it charged $29,730 (2003: $200,685; 2002:
$225,400). As at December 31, 2004, the amounts receivable from Ocean Conversion (BVI) Ltd. relating to
revenue earned was $232,971 (2003: $227,432), from revenues of $486,217 (2003: $579,950). 20. Commitments The Company has committed to lease premises in the Cayman Islands for a period of three years from
February 1, 2005 to January 31, 2008 at approximately $119,000 per annum. At any time during the
term of this lease shall the leased area be destroyed or damaged by fire, storm or tempest of other
act of God so as to become totally unfit for occupation and use within 180 days of its occurrence,
then in such case either party shall have the right to terminate this lease by giving to the other
fourteen days written notice. On March 4, 2005, the Company exercised this right and gave notice
to the landlord that the lease would be terminated on March 26, 2005. On March 23, 2005, the Company signed a lease with Corporate Center Limited for 5,451 square feet
of office space at the Regatta Business Park, West Bay Road, Grand Cayman, Cayman Islands, which is
effective April 1, 2005. The term of the lease is three years at $196,240 per annum and upon
expiration may be renewed at the Companys option for a further
three year period. The Company intends to relocate our
corporate offices to the Regatta Business Park space on or before April 30, 2005. 74




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 20. Commitments (continued) The Company is obligated to supply water, where feasible, to customers in the Cayman Islands within
its licence area in accordance with the terms of the licence. Royalties are paid to the Government
of the Cayman Islands at the rate of 7.5% of gross water sales. The Company has six water supply agreements under which it is required to provide minimum water
quantities. As part of the acquisition of the Companys interests in Ocean Conversion (Cayman) Limited, with
the approval of Scotiabank (Cayman Islands) Ltd., the Company has guaranteed the performance of
Ocean Conversion (Cayman) Limited to the Cayman Islands government, pursuant to the water supply
contract with the Water Authority-Cayman dated April 25, 1994, as amended. The Company has guaranteed to Scotiabank 50% of the Ocean Conversion (BVI) Ltd. loan of $880,056.
The Scotiabank loan is repayable in 6 equal semi-annual installments of $125,000 bearing interest
at 3-month LIBOR plus 1.5%, with the balance of principal due May 31, 2006. At December 31, 2004
the outstanding balance of this loan was $255,000 and is collateralized by other assets of Ocean
Conversion (BVI) Ltd. As a result of the Companys acquisition of interests in Waterfields Company Limited, it guaranteed
the performance of Waterfields Company Limited to the Water & Sewerage Corporation of the Bahamas
in relation to the water supply contract between Waterfields Company Limited and the Water &
Sewerage Corporation. In addition to the above guarantee provided by the Company to Water & Sewerage Company of the
Bahamas, the Company also provides a bank guarantee, with the Royal Bank of Canada, Nassau, in the
amount of $1,910,775 to the Water & Sewerage Corporation of The Bahamas in that the Company shall
duly perform and observe all terms and provisions pursuant to the contract between the Water &
Sewerage Corporation of The Bahamas and the Company. In the event of the Companys default on its
obligations, the Royal Bank of Canada, Nassau, shall satisfy and discharge any damages sustained by
the Water & Sewerage Corporation of The Bahamas up to the guaranteed amount. 21. Stock compensation The Company operates various stock compensation plans that form part of employees remuneration.
Stock compensation expense of $155,388 (2003: $138,750; 2002: $442,497) is recorded in accordance
with APB Opinion No. 25 and included within employee costs. Had compensation cost for the
Companys stock based compensation plans been determined on the fair value at the grant dates for
award under those plans consistent with the method of SFAS 123, the Companys net income and
earnings per shares would have been reduced to the pro forma amounts below: 75




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21. Stock compensation (continued) For the Year ended December 31,2004
    
    
    2003
    
    
    2002Net income  as reported
    
    $
    6,197,383
    
    
    $
    4,177,081
    
    
    $
    2,576,310Net income  pro forma
    
    $
    6,136,425
    
    
    $
    3,365,684
    
    
    $
    2,396,105Earnings per share:Basic  as reported
    
    $
    1.08
    
    
    $
    0.85
    
    
    $
    0.65Basic  pro forma
    
    $
    1.07
    
    
    $
    0.68
    
    
    $
    0.60Diluted  as reported
    
    $
    1.05
    
    
    $
    0.83
    
    
    $
    0.63Diluted  pro forma
    
    $
    1.04
    
    
    $
    0.67
    
    
    $
    0.58
 In calculating the fair value for these options under SFAS 123 the Black-Scholes model was used
with the following weighted average assumptions: 2004
    
    
    2003
    
    
    2002Exercise price
    
    $
    24.27
    
    
    $
    19.59
    
    
    $
    12.17Grant date market value
    
    $
    20.30
    
    
    $
    19.50
    
    
    $
    14.71Risk free interest rate
    
    
    2.65%
    
    
    
    2.37%
    
    
    
    2.24%Expected life
    
    2.82 years
    
    3.22 years
    
    3.23 yearsExpected volatility
    
    
    36.28%
    
    
    
    35.55%
    
    
    
    42.91%Expected dividend yield
    
    
    1.90%
    
    
    
    2.16%
    
    
    
    2.85%
 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 employee, excluding Directors and Officers, that
require future services as a condition to the delivery of ordinary 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 ordinary shares. In consideration for preferred
shares, the Company issues ordinary shares on a share for share basis. Under the plan the
conversion is conditional on the grantees satisfying requirements outlined in the award
agreements. Preferred shares are only redeemable with the Companys approval. The details of preferred shares and preferred share options granted and exercised under the
Employee Share Incentive Plan are as follows: Year of
    
    
    
    
    
    
    Strike
    
    
    Options
    
    
    OptionsGrant
    
    
    Granted
    
    
    Price
    
    
    Exercised
    
    
    ExpiredPreferred shares
    
    
    2002
    
    
    
    2,713
    
    
    $
    nil
    
    
    
    N/A
    
    
    
    N/A2003
    
    
    
    2,993
    
    
    $
    nil
    
    
    
    N/A
    
    
    
    N/A2004
    
    
    
    1,960
    
    
    $
    nil
    
    
    
    N/A
    
    
    
    N/APreferred share options
    
    
    2002
    
    
    
    2,713
    
    
    $
    8.13
    
    
    
    617
    
    
    
    2,0962003
    
    
    
    2,993
    
    
    $
    8.95
    
    
    
    844
    
    
    
    2,1492004
    
    
    
    1,960
    
    
    $
    13.45
    
    
    
    764
    
    
    
    1,196
 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. 76




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21. Stock compensation (continued) Employee Share Option Plan (Ordinary Stock Options) In 2001, the Company introduced an employee stock option plan for certain long-serving employees of
the Company. Under the plan these employees are granted in each calendar year, as long as the
employee is a participant in the Employee Share Incentive Plan, options to purchase ordinary
shares. The price at which the option may be exercised will be the closing market price on the
grant date, which is the 90th day after the date of the auditors opinion on the
financial statements for the relevant year. The number of options each employee is granted is
equal to five times the sum of (i) the number of 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 ordinary shares in consideration of
remuneration for their participation in Board meetings. All Directors are eligible except Executive
Officers, who are covered by individual employment contracts and the Government elected board
member. The number of ordinary shares granted is calculated with reference to a strike price that
is set on October 1 of the year preceding the grant. Stock granted during the year ended December
31, 2004 totaled shares of 4,630 (2003: 7,735) at a strike price of $17.75 (2003: $11.79). Directors and senior management stock compensation Effective January 1, 2004, the option plan for senior management was amended as part of
renegotiations of employee contracts. The amended contracts terminated the stock option plans for
all years commencing from January 1, 2004. The 2003 stock option exercise price was set at the
market price on December 31, 2003. The following table summarizes information about the Companys stock option plans as of December
31, 2004, 2003 and 2002, and changes during the years ended on those dates. 2004
    
    
    2003
    
    
    2002Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Exercise price
    
    
    Shares
    
    
    price
    
    
    Shares
    
    
    priceOutstanding at beginning
of year
    
    
    479,418
    
    
    $
    13.96
    
    
    
    394,530
    
    
    $
    10.02
    
    
    
    341,136
    
    
    $
    8.59Granted
    
    
    6,200
    
    
    $
    20.30
    
    
    
    183,490
    
    
    $
    19.50
    
    
    
    114,086
    
    
    $
    12.17Exercised
    
    
    (60,221
    )
    
    $
    7.18
    
    
    
    (96,453
    )
    
    $
    8.51
    
    
    
    (58,596
    )
    
    $
    5.94Forfeited
    
    
    (1,196
    )
    
    $
    13.45
    
    
    
    (2,149
    )
    
    $
    8.95
    
    
    
    (2,096
    )
    
    $
    8.14Outstanding at end of year
    
    
    424,201
    
    
    $
    15.01
    
    
    
    479,418
    
    
    $
    13.96
    
    
    
    394,530
    
    
    $
    10.02Exercisable at end of year
    
    
    368,916
    
    
    $
    15.27
    
    
    
    428,373
    
    
    $
    14.13
    
    
    
    358,230
    
    
    $
    9.90
 77




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21. Stock compensation (continued) The following table summarizes the weighted average grant date fair value of options during the
year: For the year ended December 31,2004
    
    
    2003
    
    
    2002Options granted with an exercise price below market price on the date of grant:Management employees
    
    $
    
    
    
    $
    
    
    
    $
    4.93Non executive Directors
    
    $
    
    
    
    $
    
    
    
    $
    Employees  preferred shares
    
    $
    12.51
    
    
    $
    5.47
    
    
    $
    5.72Overall weighted average
    
    $
    12.51
    
    
    $
    5.47
    
    
    $
    4.95Options granted with an exercise price at market price on the date of grant:Management employees
    
    $
    
    
    
    $
    4.70
    
    
    $
    Employees  ordinary share options
    
    $
    6.65
    
    
    $
    4.12
    
    
    $
    4.41Overall weighted average
    
    $
    6.65
    
    
    $
    4.65
    
    
    $
    4.41
 Summary of options outstanding at December 31, 2004 At December 31, 2004, the range of exercise prices on outstanding options was $7.10  $20.05.
Accordingly the following information is presented on options outstanding, which are all
exercisable, at December 31, 2004: Exercise prices
    
    
    Exercise pricesfrom
    
    
    from$7.10  $10.84
    
    
    $11.17  $20.05Number of options outstanding at December 31, 2004
    
    
    105,486
    
    
    
    263,430Weighted average exercise price
    
    $
    10.84
    
    
    $
    17.04Weighted average remaining contractual life
    
    0.19 years
    
    1.75 years
 The weighted average fair value per share under SFAS 123 for shares granted during the year below
market price on the date of grant follows: 2004
    
    
    2003
    
    
    2002Exercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseNumber
    
    
    price
    
    
    Number
    
    
    price
    
    
    Number
    
    
    priceOverall weighted average
    
    
    6,286
    
    
    $
    23.11
    
    
    
    11,467
    
    
    $
    14.51
    
    
    
    14,857
    
    
    $
    12.67
 22. Taxation Under current laws of the Cayman Islands, there are no income, estate, corporation, capital gains
or other taxes payable by the Company on its Cayman Islands operations. Under the current laws of Belize, the Company has received a tax exemption with respect to its
Belize operations. The exemption expires in January 2006 and there is no certainty it will be
renewed. However, if not renewed there would be no impact to the Company as any taxes paid will be
passed through to the customer through a rate change. Under current laws of The Commonwealth of The Bahamas, there are no income, corporation, capital
gains or other taxes payable by the Company. The Company is required to pay an annual business
license fee, the calculation of which is based on the preceding years financial statements, and
such fees are payable between January and April of the subsequent year. 78




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 22. Taxation (continued) Under the current laws of Barbados, the Companys Barbados operations are subject to a 40% Barbados
corporate tax and all dividend payments and non-tax treaty supplier payments are subject to a
Barbados withholding tax of 15%. As at December 31, 2004, the Company had $nil income tax
receivable or payable and as at December 31, 2003, the Company had income tax receivable in the
amount of $3,335. The Company has not recorded any deferred tax asset or liability as management
believes that such items would be, if any, immaterial to the financial statements. A substantial majority of the net income of the Company is currently not subject to taxation. The
overall net tax expense is less than 1%, which is attributable to continuing operations in
Barbados. There are no significant permanent reconciling items. For the year ended December 31, 2004, total net income before income taxes and minority
interest was $6,279,792. Net income before income taxes for domestic operations was $4,245,866 (2003: $3,018,542; 2002:
$2,419,425) and net income before taxes for all the foreign country operations was $1,981,667
(2003: $1,182,282; 2002: $156,885). 23. 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, 2004
was $145,234 (2003: $119,800; 2002: $70,210). 24. Financial instruments Credit risk: The Company is not exposed to significant credit risk on the vast majority of customer accounts as
the policy is to cease supply of water to customers accounts that are more than 45 days overdue.
The Companys exposure to credit risk is concentrated on receivables from its Bulk water customers.
The balances from these customers are current or an allowance has been made for collection as at
December 31, 2004. Management does not anticipate any losses on these concentrations. Interest rate risk: The interest rates and terms of the Companys loans are presented in Note 14 of these financial
statements. The Company is subject to interest rate risk to the extent that the LIBOR or Nassau
Prime Lending rates change. Foreign exchange
risk:

All relevant foreign currencies have fixed exchange rates to the United States dollar as detailed
under the foreign currency accounting policy note. If any of these fixed exchange rates become
floating exchange rates, the Companys results of operations could be adversely affected. Fair values: At December 31, 2004 and 2003, the carrying amounts of cash and cash equivalents, accounts
receivable, accounts payable and other liabilities and dividends payable approximate fair values
due to the short term maturities of these assets and liabilities. Management considers that the
carrying amounts for loans receivable and long term debt due to Scotiabank and the Royal Bank of
Canada approximate their fair value. 79




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25. Non-cash transactions The Company executed the following non-cash transactions: 2004
    
    
    2003
    
    
    2002Redemption of preferred shares and issue of
replacement ordinary shares at $nil consideration
    
    $
    2,866
    
    
    $
    11,974
    
    
    $
    9,700Preferred shares issued to employees at $nil
consideration (Note 21)
    
    $
    2,352
    
    
    $
    3,592
    
    
    $
    3,256Redemption of preferred shares at $nil
consideration
    
    
    
    
    
    
    (162
    )
    
    
    Ordinary shares issued under the Non-executive
Directors Share Plan at $nil consideration 
(Note 21)
    
    
    95,568
    
    
    
    102,602
    
    
    
    66,600Ordinary shares issued under senior management
employment agreements at $nil consideration (Note 21)
    
    
    
    
    
    
    28,715
    
    
    
    30,303Additional paid in capital from exercise of stock options
    
    
    
    
    
    
    37,500
    
    
    
    75,171$
    97,920
    
    
    $
    172,247
    
    
    $
    175,330Reduction in ordinary shares and additional paid-in capital
from cancellation of shares repurchased
    
    $
    
    
    
    $
    
    
    
    $
    36,710Addition of ordinary shares and additional paid-in capital
from issuance of shares in the acquisition
    
    $
    
    
    
    $
    2,291,711
    
    
    $
    Dividends declared but not paid (Note 13)
    
    $
    783,854
    
    
    $
    686,118
    
    
    $
    508,444
 26. Impact of recent accounting standards pronouncements The Financial Accounting Standards Board issued one interpretation and three standards that
affect the Company. A summary of this interpretation and these standards are given below: In December 2004, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46R,
Consolidation of Variable Interest Entities which replaces FASB Interpretation No. 46. This
interpretation addresses the consolidation by business enterprises of variable interest entities,
which have one or more of the characteristics defined in the Interpretation. Application of this
Interpretation is required in financial statements of public entities that have interests in
variable interest entities for periods ending after December 15, 2003. Application by public
entities is required in financial statements for periods ending after March 15, 2004. The
interpretation is intended to achieve more consistent application of consolidated policies to
variable interest entities or disclose information about variable interest entities in which
consolidation does not occur to help users assess the enterprises risks. The application of this
Interpretation is not expected to have a material effect on the Companys financial statements. 80




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CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 26. Impact of recent accounting standards pronouncements (continued) In December 2004, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 151,
Inventory Costs. SFAS No. 151 amends the guidance in ABR No. 43, Chapter 4, Inventory Pricing,
to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs,
and waste material. This statement requires a company to record those items as current period
charges regardless of whether they meet the criteria of so abnormal. In addition, this statement
also requires a company to allocate fixed production overheads to the costs of conversion based on
the normal capacity of production facilities. The Company is required to adopt SFAS No. 151 on or
before June 15, 2005. The application of this Interpretation is not expected to have a material
effect on the Companys financial statements. In December 2004, the FASB issued SFAS No. 153, Exchange of Nonmonetary Assets. SFAS No. 153
amends APB Opinion No. 29, Accounting for Nonmonetary Transactions to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. The Company is required to
adopt SFAS No. 153 on or before June 15, 2005. The application of this Interpretation is not
expected to have a material effect on the Companys financial statements. In December 2004, the FASB revised SFAS No. 123, Share-Based Payments. SFAS No. 123 eliminates
the alternative to use Opinion 25s intrinsic value method of accounting and requires the Company
to measure the cost of employee services received in exchange for an award of equity instruments
based on the grant-date fair value of the reward. That cost will be recognized over the period
during which an employee is required to provided service in exchange for the award. The Company is
required to adopt SFAS No. 123 at the beginning of the first annual period after June 15, 2005.
The Company is in the process of reviewing SFAS No. 123 and as at December 31, 2004 is unable to
make a determination if adoption will have a material effect on the Companys financial statements. 81




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Independent Auditors Report The Board of Directors
Ocean Conversion (BVI) Ltd We have audited the accompanying consolidated balance sheet of Ocean Conversion (BVI) Ltd. and its
subsidiary (the Company) as of December 31, 2004 and 2003 and the related consolidated statements
of income, stockholders equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards as established by
the Auditing Standards Board (United States) and in accordance with the auditing 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 controls 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 includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material aspects, the financial position of Ocean Conversion (BVI) Ltd. and its subsidiary as of
December 31, 2004 and 2003, and the results of their operations and cash flows for the years then
ended in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG Chartered Accountants
April 15, 2005 82




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OCEAN CONVERSION (BVI) LTD. 
 CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2004 and 2003 (Expressed in United States dollars) 2004
    
    
    2003ASSETSCurrent assetsCash and cash equivalents (Note 3)
    
    $
    1,291,121
    
    
    $
    1,196,267Accounts receivable (Note 4)
    
    
    2,874,989
    
    
    
    696,818Deferred fees
    
    
    11,401
    
    
    
    18,968Inventory (Note 5)
    
    
    349,826
    
    
    
    217,605Prepaid expenses and other assets
    
    
    24,722
    
    
    
    24,722Total current assets
    
    
    4,552,059
    
    
    
    2,154,380Property, plant and equipment, net (Note 6)
    
    
    4,189,764
    
    
    
    4,612,348Total assets
    
    $
    8,741,823
    
    
    $
    6,766,728LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable and other liabilities
    
    $
    835,589
    
    
    $
    756,733Current portion of long term debt (Note 7)
    
    
    250,000
    
    
    
    250,000Total current liabilities
    
    
    1,085,589
    
    
    
    1,006,733Profit sharing provision (Note 11)
    
    
    1,409,078
    
    
    
    905,063Long term debt (Note 7)
    
    
    255,000
    
    
    
    505,000Minority interest in JVD Ocean Desalination Ltd.
    
    
    18,526
    
    
    
    Total liabilities
    
    
    2,768,193
    
    
    
    2,416,796Stockholders equityClass A, voting shares, $1 par value. Authorized 600,000 shares:Issued and outstanding 555,000 shares in 2004 and 555,000 shares in 2003
    
    
    555,000
    
    
    
    555,000Class B, voting shares, $1 par value. Authorized 600,000 shares:Issued and outstanding 555,000 shares in 2004 and 555,000 shares in 2003
    
    
    555,000
    
    
    
    555,000Class C, non-voting shares. $1 par value. Authorized 600,000 shares:Issued and outstanding 165,000 in 2004 and 165,000 in 2003
    
    
    165,000
    
    
    
    165,000Additional paid-in capital
    
    
    225,659
    
    
    
    225,659Retained earnings
    
    
    4,472,971
    
    
    
    2,849,273Total stockholders equity
    
    
    5,973,630
    
    
    
    4,349,932Commitments (Note 8)Total liabilities and stockholders equity
    
    $
    8,741,823
    
    
    $
    6,766,728
 The accompanying notes are an integral part of these consolidated financial statements. 83




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OCEAN CONVERSION (BVI) LTD. 
 CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2004 and 2003 (Expressed in United States dollars) 2004
    
    
    2003Water sales
    
    
    6,872,366
    
    
    
    4,819,605Cost of water sales (Note 9)
    
    
    (2,475,304
    )
    
    
    (2,110,066
    )Gross profit
    
    
    4,397,062
    
    
    
    2,709,539General and administrative expenses (Note 9)
    
    
    (1,650,426
    )
    
    
    (1,046,186
    )Income from operations
    
    
    2,746,636
    
    
    
    1,663,353Other income (expense)Interest income
    
    
    57,081
    
    
    
    103,225Interest expense
    
    
    (23,993
    )
    
    
    (28,378
    )33,088
    
    
    
    74,847Net income before minority interest
    
    
    2,779,724
    
    
    
    1,738,200Minority interest
    
    
    (8,526
    )
    
    
    Net income
    
    $
    2,771,198
    
    
    $
    1,738,200
 The accompanying notes are an integral part of these consolidated financial statements. 84




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OCEAN CONVERSION (BVI) LTD. 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY YEARS ENDED DECEMBER 31, 2004 and 2003 (Expressed in United States dollars) Additional
    
    
    
    
    
    
    TotalCommon stock
    
    
    
    paid-in
    
    
    
    Retained
    
    
    
    stockholdersShares
    
    
    Dollars
    
    
    capital
    
    
    earnings
    
    
    equityBalance at December 31, 2002
    
    
    1,230,000
    
    
    $
    1,230,000
    
    
    $
    165,200
    
    
    $
    2,704,823
    
    
    $
    4,100,023Issuance of Class C stock
    
    
    45,000
    
    
    
    45,000
    
    
    
    60,459
    
    
    
    
    
    
    
    105,459Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,738,200
    
    
    
    1,738,200Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,593,750
    )
    
    
    (1,593,750
    )Balance at December 31, 2003
    
    
    1,275,000
    
    
    $
    1,275,000
    
    
    $
    225,659
    
    
    $
    2,849,273
    
    
    $
    4,349,932Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,771,198
    
    
    
    2,771,198Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,147,500
    )
    
    
    (1,147,500
    )Balance at December 31, 2004
    
    
    1,275,000
    
    
    $
    1,275,000
    
    
    $
    225,659
    
    
    $
    4,472,971
    
    
    $
    5,973,630
 The accompanying notes are an integral part of these consolidated financial statements. 85




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OCEAN CONVERSION (BVI) LTD. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2004 and 2003 (Expressed in United States dollars) 2004
    
    
    2003Net income
    
    $
    2,771,198
    
    
    $
    1,738,200Adjustments to reconcile net income to net cashDepreciation
    
    
    719,163
    
    
    
    502,666Amortization of bank fees
    
    
    7,567
    
    
    
    Profit sharing
    
    
    868,515
    
    
    
    527,393Minority interest
    
    
    8,526
    
    
    
    (Increase) decrease in accounts receivable
    
    
    (2,178,171
    )
    
    
    1,606,496Increase in inventory
    
    
    (132,221
    )
    
    
    (38,779
    )(Increase) in prepaid expenses and other assets
    
    
    
    
    
    
    (18,974
    )Increase (decrease) in accounts payable and other
liabilities
    
    
    78,856
    
    
    
    466,116Net cash provided by operating activities
    
    
    2,143,433
    
    
    
    4,783,118Cash flows from investing activitiesPurchase of property, plant and equipment
    
    
    (296,579
    )
    
    
    (1,506,839
    )Cash used in investing activities
    
    
    (296,579
    )
    
    
    (1,506,839
    )Cash flows from financing activitiesProfit sharing rights paid
    
    
    (364,500
    )
    
    
    (506,250
    )Minority interest from affiliate
    
    
    10,000
    
    
    
    Proceeds from long-term debt
    
    
    
    
    
    
    880,000Principal repayment of long term debt
    
    
    (250,000
    )
    
    
    (1,125,000
    )Dividends paid
    
    
    (1,147,500
    )
    
    
    (1,593,750
    )Cash used in financing activities
    
    
    (1,752,000
    )
    
    
    (2,345,000
    )Net increase (decrease) in cash and cash equivalents
    
    
    94,854
    
    
    
    931,279Cash and cash equivalents at beginning of year
    
    
    1,196,267
    
    
    
    264,988Cash and cash equivalents at end of year
    
    $
    1,291,121
    
    
    $
    1,196,267Interest paid in cash
    
    $
    20,659
    
    
    $
    28,378Interest received in cash
    
    $
    11,013
    
    
    $
    103,225
 The accompanying notes are an integral part of these consolidated financial statements. 86




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OCEAN CONVERSION (BVI) LTD. 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Principal activity These financial statements include the accounts of Ocean Conversion (BVI) Ltd. and its
majority-owned subsidiary, JVD Ocean Desalination Ltd. together, the Company. Ocean Conversion (BVI) Ltd. was incorporated in the British Virgin Islands under the Companies Act,
Cap 285, on May 14, 1990 and is engaged in the production and sale of potable water to the
Government of the British Virgin Islands (the Government). The Company has an agreement with the
Government, its sole customer, to produce and supply a guaranteed quantity and quality of potable
water. This agreement provides for specific penalties should the Company not be able to provide
the guaranteed quantity of water. On January 24, 1992, Ocean Conversion (BVI) Ltd. amended the original agreement with the Government
to allow for the expansion of its plant in order to increase its production capacity from 360,000
imperial gallons of water to 510,000 imperial gallons per day. Under this agreement, the
Government had the option to purchase the facility in May 1999, at a cost of $1,420,000 or renew
the agreement for a period of seven years. The Government did not exercise its option to purchase
the plant but advised Ocean Conversion (BVI) Ltd. of its desire to continue the agreement on a
month-to-month basis until a new agreement is negotiated. JVD Ocean Desalination Ltd. (JVD) was incorporated on January 2, 2003 and began producing potable
water for the Government on July 10, 2003. On February 5, 2005 JVD executed a contract with the
Government of the British Virgin Islands with the agreement that all water delivered before the
contract was signed would be invoiced upon signing of the contract. During 2003, the amount of
water delivered or the expenses occurred were not material to the financial statements of the
majority owned parent Company, Ocean Conversion (BVI) Ltd. These amounts have been recorded in the
consolidated financial statements of Ocean Conversion (BVI) Ltd. along with the portion relating to
the minority interests. 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. All
significant intercompany balances and transactions have been eliminated. Use of estimates:The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America requires management of the
Company to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period.
Significant items subject to estimates and assumptions include the carrying value of property,
plant and equipment and inventory. Actual results could differ from those estimates. Cash and cash equivalents:Cash and cash equivalents comprise cash at bank on call and highly
liquid deposits with an original maturity of three months or less. Trade accounts receivable:Trade accounts receivable are recorded at invoiced amounts based on
meter readings reduced by appropriate allowances for estimated uncollectible amounts. The allowance
for doubtful accounts is the Companys best estimate of the amount of probable credit losses in the
Companys existing accounts receivable balance. The Company determines the allowance based on
historical write-off experience. Interest income:The Company earns interest income on trade accounts receivable based on the
overdue invoices from its customer. The interest is earned on an accrual basis. 87




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OCEAN CONVERSION (BVI) LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. Accounting policies (continued) Deferred fees:Deferred fees consist of the bank financing fees paid on the drawdown of the
Companys long term debt and are being amortized on a straight line basis over the term of the
loan. Inventory:Inventory primarily includes replacement spares and parts that are valued at the lower
of cost and net realizable value on a first-in, first-out basis. Impairment of long-lived assets:In accordance with SFAS No. 144, long-lived assets, such as
property, plant and equipment, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by
the amount by which the carrying amount 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 25 yearsOffice furniture, fixtures and equipment
    
    
    3 to 10 yearsVehicles
    
    
    3 to 10 yearsLab Equipment
    
    
    3 to 10 years
 Additions to property, plant and equipment are comprised of the cost of the contracted services,
direct labour and materials. Assets under construction are recorded as additions to property,
plant and equipment upon completion of the projects. Depreciation commences in the month of
addition. Interest costs directly attributable to the construction of qualifying assets, which are assets
that necessarily take a substantial period of time to ready for their intended use, are added to
the cost of those assets until such time as the assets are substantially ready for use or sale. Water sales and cost of water sales:The Government is billed monthly based on meter readings
performed at or near each month end and in accordance with the water sales agreement, which
stipulates minimum monthly charges for water service. Repairs and maintenance:All repair and maintenance costs are expensed as incurred. 3. Cash and cash equivalents Cash and cash equivalents are not restricted as to withdrawal or use. 4. Accounts receivable Accounts receivable comprise receivables from our sole customer, the Government of the British
Virgin Islands. Significant concentrations of credit risk are disclosed in Note 15. 88




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OCEAN CONVERSION (BVI) LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. Inventory December 31,2004
    
    
    2003Consumables stock
    
    $
    51,239
    
    
    $
    47,938Spare parts stock
    
    
    298,587
    
    
    
    200,062Less allowance for obsolescence
    
    
    
    
    
    
    (30,395
    )Total
    
    $
    349,826
    
    
    $
    217,605
 6. Property, plant and equipment December 31,2004
    
    
    2003CostPlant and equipment
    
    $
    9,475,811
    
    
    $
    8,973,271Office furniture, fixtures and equipment
    
    
    33,182
    
    
    
    27,658Vehicles
    
    
    71,600
    
    
    
    71,600Lab equipment
    
    
    11,637
    
    
    
    11,637Assets under construction
    
    
    240,181
    
    
    
    451,6669,832,411
    
    
    
    9,535,832Accumulated depreciation
    
    
    (5,642,647
    )
    
    
    (4,923,484
    )Net book value
    
    $
    4,189,764
    
    
    $
    4,612,348
 At December 31, 2004, the Company had no outstanding capital commitments. It is the Companys
policy to maintain adequate insurance for loss or damage to all fixed assets that in managements
assessment may be susceptible to loss. 7. Long term debt December 31,2004
    
    
    2003Scotiabank (Cayman Islands), loan bearing
interest at three month LIBOR plus 1.5% per
annum, with interest calculated daily and payable
quarterly, repayable in 6 equal semi-annual
installments of $125,000 commencing June 30,
2003, the balance of principal and interest then
outstanding due May 31, 2006
    
    $
    505,000
    
    
    $
    755,000Total long term debt
    
    
    505,000
    
    
    
    755,000Less current portion
    
    
    (250,000
    )
    
    
    (250,000
    )Long term debt, excluding current portion
    
    $
    255,000
    
    
    $
    505,000The aggregate capital repayment obligations over the next five years are as follows:2005
    
    
    
    
    
    
    250,0002006
    
    
    
    
    
    
    255,000
 89




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OCEAN CONVERSION (BVI) LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 7. Long term debt (continued) Any amounts drawn under the Scotiabank facility are collateralized by a fixed and floating charge
of $1,250,000. The fixed and the floating charge covers all other assets of the Company. The loan balance has been guaranteed equally by Consolidated Water Co. Ltd. and Sage Water Holdings
(BVI) Ltd. At year end the Company is in compliance with all restrictive covenants. 8. Commitments The Company rents property upon which it has installed walls and boreholes necessary for the
production of water. Future minimum lease payments under this non-cancelable operating lease at
December 31, 2004 are as follows: Operating Lease2005
    
    $
    18,0552006
    
    
    18,0552007
    
    
    18,0552008
    
    
    18,055Thereafter
    
    
    126,385
 Total rental expense for the
years ended December 31, 2004, 2003 and 2002 was $18,055, $3,600 and
$3,600, respectively. 9. Expenses For the year ended December 31,2004
    
    
    2003Cost of water sales comprise the following:Fuel oil
    
    $
    532,933
    
    
    $
    356,427Electricity
    
    
    151,726
    
    
    
    324,162Maintenance
    
    
    296,361
    
    
    
    288,697Depreciation
    
    
    718,611
    
    
    
    502,573Employee costs
    
    
    468,506
    
    
    
    417,861Insurance
    
    
    78,008
    
    
    
    77,790Other direct cost
    
    
    229,159
    
    
    
    142,556$
    2,475,304
    
    
    $
    2,110,066General and administrative expenses
comprise the following:Profit sharing
    
    $
    868,515
    
    
    $
    527,393Management fees
    
    
    567,802
    
    
    
    333,904Directors fees and expenses
    
    
    79,589
    
    
    
    60,647Professional fees
    
    
    24,399
    
    
    
    13,150Employee costs
    
    
    25,689
    
    
    
    Maintenance costs
    
    
    474
    
    
    
    709Depreciation
    
    
    552
    
    
    
    92Amortization of bank fees
    
    
    7,565
    
    
    
    Other indirect costs
    
    
    75,841
    
    
    
    110,291$
    1,650,426
    
    
    $
    1,046,186
 90




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OCEAN CONVERSION (BVI) LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 10. Related party transactions A professional service firm, of which a director is a principal, provided pension services during
the year ended
December 31, 2004 for which it charged $705 (2003: $345). Pursuant to an amended and restated Management Services Agreement dated December 1, 2003 between
DesalCo Ltd. (a wholly-owned subsidiary of Consolidated Water Co. Ltd.) and the Company, DesalCo
Ltd. 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 $442,444, $333,904 and $393,226
related to this management service agreement for the years ended December 31, 2004, 2003 and 2002,
respectively and as at December 31, 2004 had accounts payable of $497,846 due to DesalCo Ltd. 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 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 1% 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 $125,358, $nil and $nil related to this
management service memorandum for the years ended December 31, 2004, 2003 and 2002, respectively
and as at December 31, 2004 had accounts payable of $9,878 due to Sage Water Holdings Ltd. As at December 31, 2004, the Company had accounts payable of $53,225 related to the reimbursement
of expenses from Consolidated Water Co. Ltd., Ocean Conversion (Cayman) Limited and DesalCo
(Barbados) limited. 11. Profit sharing provision December 31,2004
    
    
    2003Opening balance
    
    
    905,063
    
    
    
    989,739Additions
    
    
    868,515
    
    
    
    421,574Distributions
    
    
    (364,500
    )
    
    
    (506,250
    )$
    1,409,078
    
    
    $
    905,063
 In 1993, the Company and its existing shareholders at that time, entered into two Share Repurchase
and Profit Sharing Agreements (the Agreements) to repurchase 225,000 shares each from those
shareholders (the Parties), whose shares were issued in exchange for guarantees of the Companys
long term debt. The Agreements were subsequently approved by special 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, grants
the Parties, profit sharing rights in the Companys profits for as long as the Company remains in
business as a going concern. The Agreement states that where the Company has profits available for
the payment of dividends and pays a dividend there from, a distribution shall be made to each of
the Parties equal to 202,500 (2003: 202,500) times the dividend per share received by the remaining
shareholders and paid concurrently with such dividend. The factor of 202,500 (2003: 202,500) shall
be subject to amendment by the same proportion and at the same time as changes take place or
adjustments are made in respect of the remaining shareholders. The current shareholders and an affiliate of a current shareholder have acquired these profit
sharing rights. The Company has made an allowance at December 31, 2004 for the maximum profit
shares payable to the Parties if all retained earnings were to be distributed as dividends and
profit shares. 91




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OCEAN CONVERSION (BVI) LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 12. Taxation Under the terms of the water sale agreements with the Government, the Company is exempt from all
taxation in the British Virgin Islands. 13. Non-cash transaction December 31,2004
    
    
    2003Issuance of Class C shares
    
    $
    
    
    
    $
    45,000
 During the year ended December 31, 2003, 45,000 Class C non-voting shares were issued in exchange
for cancellation of an equal portion of profit sharing rights. 14. Pension plan Effective December 1, 2003, the Company established the MWM Global Retirement Plan (the Plan).
The Plan is a defined contribution plan whereby the Company will contribute 5% of each
participating employees salary to the Plan. The total amount recognized as an expense under the
plan during the year ended December 31, 2004 was $6,776 (2003: nil). 15. 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 Government (Note 1). As a result, the
Company is subject to credit risk to the extent of any non-performance by the Government. The
Company has a loan receivable with its majority owned subsidiary, JVD Ocean Desalination Ltd. in
the event of non-payment the Company is subject to credit risk for to the extent of our investment
in JVD Ocean Desalination Ltd. Interest rate risk: The interest rates and terms of the Companys loans are presented in Note 7 of these consolidated
financial statements. The Company is subject to interest rate risk to the extent that the LIBOR
rate may fluctuate. Fair values: At December 31, 2004 and 2003 the carrying amounts of cash and cash equivalents, accounts
receivable, prepaid expenses and other assets, accounts payable and other liabilities approximate
fair values due to the short term maturities of these assets and liabilities. Management considers
that the carrying amount for long-term debt approximates fair value. 92




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ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the
Exchange Act), as of the end of the period covered by this Annual Report, the Companys
management conducted an evaluation with the participation of the Companys Chief Executive Officer
and Chief Financial Officer (collectively, the Certifying Officers) regarding the effectiveness
of the design and operation of the Companys disclosure controls and procedures (as defined in
Rules13a-15(e) and 15d-15(e) under the Exchange Act). The Companys management with the
participation of the Certifying Officers also conducted an evaluation of the Companys internal
control over financial reporting and identified five control deficiencies, which in combination
resulted in a material weakness. A significant deficiency is a control deficiency, or combination of control deficiencies, that
adversely affects the companys ability to initiate, authorize, record, process or report external
financial data reliably in accordance with generally accepted accounting principles such that there
is more than a remote likelihood that a misstatement of the companys annual or interim financial
statements that is more than inconsequential will not be prevented or detected. A material weakness
is a significant deficiency, or combination of significant deficiencies, that results in more than
a remote likelihood that a material misstatement of a companys annual or interim financial
statements will not be prevented or detected. The control deficiencies identified by the Companys
management and the Certifying Officers which in combination resulted in a material weakness were:
(a) improper tracking of fixed assets and accumulated depreciation, including work-in-progress
accounts, (b) insufficient personnel resources with appropriate accounting expertise, (c) improper
tracking and review of inventory, (d) improper review of intercompany eliminations, and (e)
insufficient documentation of system access controls around the financial management information
system. Based on this evaluation and in accordance with the requirements of Auditing Standard No. 2 of
the Public Company Accounting Oversight Board, the Chief Executive Officer and Chief Financial
Officer conclude that the Companys disclosure controls and procedures were ineffective as of
December 31, 2004. The Companys management, including the Certifying Officers, does not expect that the
Companys disclosure controls and procedures will prevent all error and all improper conduct. A
control system, no matter how well conceived and operated, can provide only reasonable, not
absolute assurance that the objectives of the control system are met. Further, a design of a
control system must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of improper conduct, if any, have been detected. These inherent limitations include
the realities that judgments and decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more persons, or by management override of the
control. Further, the design of any system of controls is also based in part upon assumptions
about the likelihood of future events, and there can be no assurance that any design will succeed
in achieving its stated goals under all potential future conditions. Over time, controls may
become inadequate because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations and a cost-effective control
system, misstatements due to error or fraud may occur and may not be detected. 93




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Managements Annual Report on Internal Control Over Financial Reporting The Companys management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act.
The 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, 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 authorization 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. The Companys management, including the Certifying Officers, assessed as of December 31, 2004,
the effectiveness of the Companys internal control over financial reporting. In making this
assessment, management used the criteria set forth in the framework in Internal Control 
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). As of December 31, 2004, the Companys management, including the Certifying Officers, has
concluded that the Company had the following control deficiencies that when combined resulted in a
material weakness: (a) The Company failed to properly track fixed assets and accumulated depreciation, including
work-in-progress accounts. This deficiency existed as of December 31, 2004 because: (1) management
improperly capitalized and depreciated a fixed asset in a sub ledger resulting in an overstatement
of accumulated depreciation, (2) in some cases work-in-progress accounts were not placed in service
in a timely manner, and (3) in some cases fixed assets that were fully depreciated or had been
disposed of were not removed from the fixed assets sub ledger in a timely manner. Management has
determined that the potential magnitude of a misstatement arising from this deficiency is more than
inconsequential to the annual and/or interim financial statements. Management further determined
that redundant controls do not exist to achieve the same control objective of a properly
functioning fixed asset tracking system. The Company relies heavily on review of interim and
annual financial reports by management to detect material misstatements to the Companys financial
reporting. Management believes that such review qualifies as a compensating control, which
management, including the Certifying Officers, has tested and determined to be effective, and that
such review mitigates the possibility that a material misstatement would be made in the Companys
interim and annual financial reports because of this control deficiency. (b) The Company does not have sufficient personnel resources with appropriate accounting
expertise. This deficiency arises because the Company has: (1) insufficient personnel with
expertise in United States Generally Accepted Accounting Principles on complex issues and
implementation of new standards, and (2) the Company has insufficient personnel with expertise in
purchase accounting and performing intangible asset and goodwill impairment analysis. The
Companys management with the participation of the Certifying Officers determined that the
potential magnitude of a misstatement arising 94




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from this deficiency is more than inconsequential to
the annual and/or interim financial statements.
Although, in some cases, the Company hired expert outside resources to carry out certain complex
accounting functions, the Company relied on managements expertise to identify and anticipate
accounting issues that may arise due to changes in the Companys business and/or changes in
accounting standards. Accordingly, the Companys management, including the Certifying Officers,
has concluded that this is a deficiency. The Company relies heavily on review of its interim and
annual financial reports by management to detect material misstatements to the Companys financial
reporting. The Companys management, including the Certifying Officers, believes that such review
qualifies as a compensating control, which the Companys management has tested and determined to be
effective, and that such review mitigates the possibility that a material misstatement would be
made in the Companys interim and annual financial reports because of this control deficiency. (c) The Company did not properly track inventory and management did not sufficiently review
the physical count worksheets to the final inventory lists This deficiency exists because: (1)
management does not consistently follow the Companys inventory policy as it does not have a system
in place to track the inventory as per the policy, and (2) there was insufficient review of the
final inventory count sheets to the final inventory listing which resulted in an adjustment to
inventory. The Companys management with the participation of the Certifying Officers determined
that the potential magnitude of a misstatement arising from this deficiency is more than
inconsequential to the annual and/or interim financial statements. Management further determined
that redundant controls do not exist to achieve the same control objective of a properly
functioning inventory tracking system. The Company relies heavily on review of interim and annual
financial reports by management to detect material misstatements to the Companys financial
reporting. The Companys management, including the Certifying Officers, believes that such review
qualifies as a compensating control, which we have tested and determined to be effective, and that
such review mitigates the possibility that a material misstatement would be made in the Companys
interim and the annual financial statements because of this control deficiency. (d) The Company did not sufficiently review the intercompany eliminations. This deficiency
exists because the Company did not properly identify and eliminate an intercompany receivable and
payable in the consolidated accounts. The Companys management with the participation of the
Certifying Officers determined that the potential magnitude of a misstatement arising from this
deficiency could be more than inconsequential to the annual and/or interim financial statements.
Management further determined that redundant controls are not present that would identify any
missed intercompany eliminations. The Company relies heavily on review of interim and annual
financial reports by management to detect material misstatements to the Companys financial
reporting. The Companys management, including the Certifying Officers, believes that such review
qualifies as a compensating control, which we have tested and determined to be effective, and that
such review mitigates the possibility that a material misstatement would be made in the Companys
interim and the annual financial statements because of this deficiency. (e) The Company did not sufficiently document the system access controls around its financial
management information system. This deficiency exists because those access controls which relate to
the Companys accounting system were not adequately documented and the access controls to the
Companys billing system were not adequately implemented. The Companys management with the
participation of the Certifying Officers determined that the potential magnitude of a misstatement
arising from this deficiency could be more than inconsequential to the annual and/or interim
financial statements. Management further determined that redundant controls are not present that
would identify insufficient access controls. The Company does not rely on the access controls to
its information technology systems for financial reporting and has implemented manual controls and
reconciliations to achieve this. The Company relies heavily on review of interim and annual
financial reports by management to detect material misstatements to the Companys financial
reporting. The Companys management, including the Certifying Officers, believes that such review
qualifies as a compensating control, which we have tested 95




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and determined to be effective, and that
such review mitigates the possibility that a material misstatement would be made in the Companys
interim and the annual financial statements because of this deficiency. Management has concluded that the above deficiencies when combined together have resulted in a
material weakness in its internal control of financial reporting because the quantitative effect of
any errors resulting from these deficiencies when taken together could result in a material
misstatement of the Companys interim and annual financial reports. Based on this evaluation and
in accordance with the requirements of Auditing Standard No. 2 of the Public Company Accounting
Oversight Board, the Chief Executive Officer and Chief Financial Officer concluded that the Company
did not maintain effective internal control over financial reporting as of December 31, 2004 based
on the criteria in the Internal Control  Integrated Framework. Managements assessment of the effectiveness of the Companys internal control over financial
reporting as of December 31, 2004 has been audited by KPMG Chartered Accountants, an independent
registered public accounting firm, as stated in their report which is included on page 97 of this
Annual Report. Remediation Steps to Address Control Deficiencies The Company is in the process of remediating the identified material weakness by remediating
the control deficiencies in the Companys internal control over financial reporting which comprise
this material weakness. The Company is implementing changes to the Companys financial management
information system that will remediate the deficiency relating to improper tracking of fixed assets
and accumulated depreciation, including work-in-progress accounts. The Company expects to complete
the installation and staff training for a new fixed asset management system within the second
quarter of 2005. With regard to the second control deficiency the Company has had difficulty attracting
suitable qualified persons with accounting expertise to work for the Company because of disruptions
caused by Hurricane Ivan to housing and general living conditions in the Cayman Islands. The
Company is in the process of establishing an office in South Florida and relocating corporate
accounting functions to that new office. In addition, the Company has identified and successfully
negotiated with a qualified and experienced person to assume the duties of Chief Financial Officer
of the Company after the Companys Form 10-Q for the quarter ended March 31, 2005 is filed with the
Securities and Exchange Commission. The Company expects to open the South Florida office by the
third quarter 2005 and to recruit additional qualified accounting personnel to work from this
office. With regard to the third control deficiency, management is currently implementing changes to
the Companys inventory system and inventory review procedures and is looking at adjusting the
Companys inventory policy, which will remediate the deficiency. We expect to adjust the policy
and complete the installation and staff training for an inventory tracking system within the second
quarter of 2005. With regard to the fourth control deficiency, management intends to implement changes to the
procedures with regard to how intercompany accounts are tracked and reviewed in the second quarter
2005. Regarding the fifth control deficiency, management intends to improve the documentation of its
access controls over its financial management information system and implement adequate access
controls over its billing system within the second quarter of 2005. 96




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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. Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders
Consolidated Water Co. Ltd.: We have audited managements assessment, included in the accompanying Managements Annual Report on
Internal Control Over Financial Reporting, that Consolidated Water Co. Ltd. did not maintain
effective internal control over financial reporting as of December 31, 2004, because of the effect
of material weakness resulting from aggregated deficiencies relating to the improper tracking of
fixed assets and accumulated depreciation, including work-in-progress accounts, insufficient
personnel resources with appropriate accounting expertise, improper tracking of inventory and
insufficient management review of physical count worksheets to final inventory lists, and
insufficient documentation of system access controls around its financial management information
system, 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 maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on managements assessment and an opinion on the
effectiveness of the Companys internal control over financial reporting based on our audit. We conducted our audit 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 effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion. 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. 97




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A material weakness is a control deficiency, or combination of control deficiencies, that results
in more than a remote likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. The following material weakness has been identified and included in managements assessment: As of
December 31, 2004, the Companys management, including the Certifying Officers, has concluded that
the Company had the following control deficiencies that when combined resulted in a material
weakness:  a)
    The Company failed to properly track fixed assets and accumulated depreciation,
including work-in-progress accounts.b)
    The Company does not have sufficient personnel resources with appropriate accounting
expertise.c)
    The Company did not properly track inventory and management did not sufficiently review
the physical count worksheets to the final inventory lists.d)
    The Company did not sufficiently review the inter-company eliminations.e)
    The Company did not sufficiently document the system access controls around its
financial management information system. We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the December 31, 2004 consolidated financial statements of Consolidated
Water Co. Ltd. This material weakness was considered in determining the nature, timing, and extent
of audit tests applied in our audit of the 2004 consolidated financial statements, and this report
does not affect our report dated April 15, 2005, which expressed an unqualified opinion on those
consolidated financial statements. In our opinion, managements assessment that Consolidated Water Co. Ltd. did not maintain effective
internal control over financial reporting as of December 31, 2004, is fairly stated, in all
material respects, based on criteria established in Internal ControlIntegrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion,
because of the effect of the material weakness described above on the achievement of the objectives
of the control criteria, Consolidated Water Co. Ltd. has not maintained effective internal control
over financial reporting as of December 31, 2004, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). We do not express an opinion or any other form of assurance on managements statements referring to
remediation steps taken after December 31, 2004, relative to the aforementioned material weakness
in internal control over financial reporting. /s/ KPMG Georgetown, Cayman Islands
April 15, 2005 98




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PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Our Directors and Executive Officers This table lists information concerning our executive officers and directors: Name
    
    Age
    
    PositionJeffrey M. Parker
    
    
    60
    
    
    Director, Chairman of the Board of DirectorsFrederick W. McTaggart
    
    
    42
    
    
    Director, President, Chief Executive OfficerKenneth R. Crowley
    
    
    40
    
    
    Vice President of Overseas OperationsGregory S. McTaggart
    
    
    41
    
    
    Vice President of Cayman OperationsRobert B. Morrison
    
    
    51
    
    
    Vice President of Purchasing and
Information TechnologyGerard J. Pereira
    
    
    34
    
    
    Vice President of EngineeringJoseph Pivinski
    
    
    57
    
    
    Senior Vice PresidentPeter D. Ribbins
    
    
    56
    
    
    Director of Public RelationsBrent J. Santha
    
    
    34
    
    
    Vice President of Finance, Interim Chief
Financial Officer and Company SecretaryWilliam T. Andrews *
    
    
    56
    
    
    DirectorJ. Bruce Bugg, Jr. *
    
    
    50
    
    
    DirectorBrian E. Butler *
    
    
    55
    
    
    DirectorSteven A. Carr *
    
    
    54
    
    
    DirectorCarson J. Ebanks *
    
    
    47
    
    
    DirectorRichard L. Finlay
    
    
    46
    
    
    DirectorClarence B. Flowers, Jr. *
    
    
    49
    
    
    DirectorWilmer Pergande *
    
    
    64
    
    
    DirectorDavid W. Sasnett *
    
    
    48
    
    
    DirectorRaymond Whittaker *
    
    
    50
    
    
    Director
   *
    
    The Board of Directors has determined that each of such persons is an independent
director under the corporate governance rules of The Nasdaq Stock Market, Inc. (Nasdaq) Jeffrey M. Parkerhas been a director of our company since 1980 and the Chairman of the Board
since 1982. On January 1, 2004, Mr. Parker resigned as Chief Executive Officer, a position he held
since 1994 but remained employed by the Company as Director responsible for investor relations and
business expansion and Chairman of the Board. In addition to serving as our Chairman of the Board,
Mr. Parker is a Chartered Accountant and practices as Moore Stephens (Cayman Islands) Ltd., a
member of Moore Stephens International Ltd. From 1993 to 1995, Mr. Parker served as a director of
The International Desalination Association representing the Caribbean & Latin America. Mr. Parker
received his ACA designation as a chartered accountant in England and Wales in 1967, and his FCA
designation in 1977. Frederick W. McTaggarthas been a director of our company since 1998, President since October
2000 and Chief Executive Officer since January 1, 2004. Also on January 1, 2004, Mr. McTaggart
resigned as Chief Financial Officer, a position he held since February 2001. From April 1994 to
October 2000, Mr. McTaggart was the Managing Director of the Water Authority-Cayman, the
government-owned water utility serving certain areas of the Cayman Islands. He received his B.S.

degree 99




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in Building Construction from the Georgia Institute of Technology in 1985. Mr. McTaggart is
the brother of Mr. Gregory S. McTaggart, the Vice President  Operations (Cayman Islands). Kenneth R. Crowleywas appointed our Vice President of Overseas Operations in March 2003 and
holds a Bachelor of Science degree in Mechanical Engineering from the University of Maryland. In
1989, he joined Reliable Water Co. Ltd, the predecessor of Ocean Conversion (Cayman) Limited, as
Operations Engineer in the Canary Islands and the Cayman Islands. He was promoted to Operations
Manager of Ocean Conversion (Cayman) Limited in 1991. In 1998, Mr. Crowley transferred to DesalCo
Limited to work on the design, construction and operation of reverse osmosis water plants including
high efficiency work exchanger energy recovery systems in the Cayman Islands, the Bahamas, Barbados
and the British Virgin Islands with a combined capacity in excess of 9.0 million U.S. gallons per
day. Gregory S. McTaggartis 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, the President, Chief Executive Officer and a director of our
company. Robert B. Morrisonwas appointed Vice President of Purchasing & Information Technology in
March 2003. Mr. Morrison holds the designation Certified Professional Purchaser and has over
twenty- five years experience in the purchasing and logistics field. He joined DesalCo Limited as
Purchasing Manager in June of 1996 in which position he also employed his more than 20 years of
information technology experience as software and systems developer, network administrator and end
user support resource for PC and mainframe environments. Prior to joining DesalCo Limited, Mr.
Morrison was Principal Purchasing Officer for the Ministry of Works & Engineering of the Bermuda
government and Purchasing Manager for American-Standard in Toronto, Canada. Gerard J. Pereirawas appointed Vice President of Engineering in March 2003. Mr. Pereira
obtained his BS and MS in Chemical Engineering from the University of Waterloo, Ontario, Canada and
joined Ocean Conversion (Cayman) Limited as Operations Engineer in 1995. He was promoted to
Operations Manager of Ocean Conversion (Cayman) Limited in 1998, which post he held until our
acquisition of the company. Joseph Pivinskiwas appointed Senior Vice President in April 2005. From December 2003 to
March 2005, Mr. Pivinski was Managing Director of P&B Associates, CPAs, a financial and business
consulting firm. From October 1997 to December 2003, Mr. Pivinski served as Vice President and
Chief Financial Officer of Oriole Homes Corp., a publicly traded residential real estate developer.
Mr. Pivinski received his MBA in Finance from Fordham University in 1980 and is a Certified Public
Accountant. Peter D. Ribbinsis our Director of Public Relations. In September 2003, Mr. Ribbins resigned
as Company Secretary and as a director, a position he held since 1989. Mr. Ribbins joined our
company in 1983 as its General Manager, a position he held until 1989, when he was appointed
Managing Director. He was appointed President and Chief Operating Officer in 1994 and resigned from
that position in October 2000. Mr. Ribbins obtained his B.S. degree in Kinanthropology from the
University of Ottawa, Canada in 1971. Brent J. Santhajoined our Company as Management Accountant in January 2001 and was appointed
Vice President of Finance and Assistant Company Secretary in March 2003. In December 2003, Mr.
Santha resigned as Assistant Company Secretary and was appointed Company Secretary. On January 1,
2004, Mr. Santha was appointed as interim Chief Financial Officer until a suitable replacement is
found. Mr. Santha is a member of the Canadian Institute of Chartered Accountants having received
his 100




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Chartered Accountant designation in 1997. Previously he was employed for six years by Johnsen
Archer Chartered Accountants leaving as Manager of Audit & Business Services. William T. Andrewsbecame a director of our company upon completion of our acquisition of
DesalCo Limited in February 2003. Since 2002, he has been Managing Director of DWEER Technology
Ltd., which designs and manufactures patented high efficiency energy reduction pumping equipment
for seawater reverse osmosis desalination. From 1991 to 2003, Dr. Andrews has been Managing
Director of DesalCo Limited. He was formerly President of Reliable Water Inc., and Vice President
of Polymetrics Inc., focusing on seawater reverse osmosis desalination in both cases. Dr. Andrews
attended universities in England, receiving a bachelors degree in Physics from the University of
Newcastle-upon-Tyne, and a doctorate in Atomic Physics at Oxford University, as a Rhodes Scholar.
He is a registered Mechanical Engineer in California and Bermuda. Since 1976, Dr. Andrews has
continuously been a member of the International Desalination Association (IDA). He has been a
director of IDA since 1995, and had served as President until October 2003. He is a member of the
European Desalination Society. J. Bruce Bugg, Jr.has been a director of our company since 1998 and in 2003 Mr. Bugg resigned
as Vice-Chairman of the Board and member of the Executive Committee, positions he has also held
since 1998. Mr. Bugg is also, and has been since 1997, the Chairman of the board of directors and
Chief Executive Officer of Argyle Investment Co., the general partner of Argyle Partners Ltd., the
sole general partner of Argyle/Cay-Water, Ltd. From 1996 to 1997, Mr. Bugg served as Vice Chairman
of First Southwest Company and Chairman of its Investment Banking Group. Brian E. Butlerhas been a director of our company since 1983. 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. Steven A. Carrhas 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 is a director and chairman of
the Trust Committee of the First National Bank of Bryan, and a director of Waterfields Company
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. Carson K. Ebanksbecame the Cayman Islands government nominated director of our company in May
of 2001. Mr. Ebanks was the Director of Planning for the Cayman
Islands from 1991 - 1997. Since
1997, he has served the Cayman Islands Government as a Permanent Secretary currently for the
Ministry of Community Services, Youth, Sports and Gender Affairs. 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 Director of The National Housing and Community
Development Trust and a trustee of the National Gallery of the Cayman Islands. Mr. Ebanks has
served on the Boards of the Trustees for the Cayman Islands Museum, the Cayman Islands Civil
Service Co-operative Credit Union, the Housing Development Corporation, the Water Authority-Cayman
and is the Vice President of the Cayman Islands Olympic Committee. 101




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Richard L. Finlayhas served as a director of our company since 1995. Mr. Finlay is an
attorney and partner with the Cayman Islands law firm of Conyers, Dill and Pearman. Before joining
this firm in 2003, he was a partner with Charles Adams, Ritchie and Duckworth since 1993. Prior to
that, Mr. Finlay served as Director of Legal Studies of the Cayman Islands Government from 1989 to
1992. From 1983 to


1989, Mr. Finlay was a partner with the Canadian law firm of Olive, Waller, Zinkhan and Waller. Mr.
Finlay has served as the Cayman Islands representative to the International Company and Commercial
Law Review and is a former editor of the Cayman Islands Law Bulletin. Clarence B. Flowers, Jr.has been a director of our company since 1991. Mr. Flowers is, and
has been since 1985, the principal of Orchid Development Company, a real estate developer in the
Cayman Islands. Mr. Flowers also serves as a director of C.L. Flowers & Son, which is the largest
manufacturer of wall systems in the Cayman Islands, and Cayman National Bank, a retail bank. Wilmer Pergandehas been a director of our company since 1978. Mr. Pergande is the Global
Leader for Desalination and Process Equipment, GE Infrastructure, Water and Process Technologies.
Mr. Pergande previously held the position of Vice-President of Special Projects of Osmonics, Inc.
acquired by GE of Minnetonka, Minnesota. Before joining Osmonics, Mr. Pergande was the Chief
Executive Officer of Licon International, Inc., a publicly traded manufacturer of liquid processing
equipment. Previously, Mr. Pergande held several executive positions with Mechanical Equipment
Company, Inc., a manufacturer of seawater conversion equipment. David W. Sasnettbecame a director of our Company in December 2004. Since May 2003, Mr.
Sasnett has been the President of Secure Enterprises, LLC, a marketer and distributor of consumer
products. From February 2004 to August 2004, Mr. Sasnett was the Vice President of Finance and
Controller for MasTec, Inc., a publicly-traded specialty contractor and infrastructure provider.
Mr. Sasnett was employed from August 1994 to July 2002 by Catalina Lighting, Inc. and from November
1996 to February 2002 served as the Chief Financial Officer of Catalina Lighting, Inc., a
publicly-traded manufacture and distributor of residential lighting and other consumer products.
After leaving Catalina Lighting, Mr. Sasnett was employed through October 2002 in an executive and
consulting capacity by Platinum Products, Inc., a privately-held consumer products importer and
distributor. Mr. Sasnetts experience also included more than 12 years with the accounting,
auditing and consulting firm of Deloitte & Touche, LLP. Raymond Whittakerhas served as a director of our company since 1988. Mr. Whittaker was the
Managing Director of TransOcean Bank & Trust, Ltd., a bank and trust company located in the Cayman
Islands and a subsidiary of Johnson International, Inc., a bank holding company located in Racine,
Wisconsin from 1984 to December 2000. He is now the principal of his own company and management
firm, FCM Ltd. Composition of the Board of Directors The board of directors is organized into three groups. Each group holds office for a
three-year period and re-election of the board members is staggered so that two-thirds of the board
members are not subject to re-election in any given year. The groups are organized alphabetically
as follows: Group 1
    
    Group 2
    
    Group 3William T. Andrews
    
    Carson K. Ebanks, JP
    
    Wilmer PergandeJ. Bruce Bugg Jr.
    
    Richard Finlay
    
    Raymond WhittakerBrian Butler
    
    Clarence Flowers, Jr.
    
    David W. SasnettSteven A. Carr
    
    Frederick McTaggartJeffrey M. Parker
 102




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The directors of Group 1 were re-elected at our annual shareholders meeting in August 2004.
The directors in Group 2 will be proposed for re-election in 2005, Group 3 in 2006 and then Group 1
again in 2007. Under our Cayman Islands license, which was transferred to our wholly-owned subsidiary, Cayman
Water Company Limited in July 2003, the Cayman Islands government may nominate three persons to
serve on the board of directors of Cayman Water Company Limited. We must cause one of the persons
nominated by the government to be elected as a director. In May 2001, Carson K. Ebanks, JP was
elected as the governments nominee but remains on the board of Consolidated Water Co. Ltd.
Government has not yet nominated their director for Cayman Water Company Limited. At a Board meeting on December 17, 2004 we appointed David W. Sasnett to our board of
directors as a director in Group 3. He was also appointed as a member of the audit committee and
as chairman of the audit committee with immediate effect. Committees of the Board of Directors The board of directors has established the following committees: Executive Committee The Board of Directors has an Executive Committee, which is comprised of Messrs. Frederick
McTaggart, Finlay, Flowers, Parker and Whittaker. The functions of the Executive Committee include
meeting on a regular basis to review the operations of the Company, ensuring that any matters,
which must be dealt with before the next Board of Directors meeting, are addressed in a timely
matter. Compensation Committee The Board of Directors has a Compensation Committee, which is comprised of Messrs. Finlay,
Flowers, and Pergande. The Compensation Committee is responsible for reviewing and approving the
executive compensation program for the Company and its subsidiaries, assessing executive
performance, making grants of salary and annual incentive compensation, and approving certain
employment agreements. The Board of Directors has adopted a written charter for the Compensation
Committee. The Compensation Committee Charter is filed as Exhibit 99.1 to our Annual Report for
the fiscal year ended December 31, 2003 (the 2003 Annual Report), which Exhibit is incorporated
herein by reference. The Board of Directors has determined that all members of the Compensation
Committee, except Mr. Finlay, are independent directors, as such term is defined under the
corporate governance rules of Nasdaq. Mr. Finlay is not an independent director as defined in
Nasdaq Rule 4200 because the Company paid a law firm in which he was a partner for part of 2003 in
excess of $200,000 for legal services provided to the Company during 2003. Notwithstanding Mr.
Finlays previous relationship with that law firm, the Board of Directors believes it is required
in the best interest of the Company and its shareholders for Mr. Finlay to serve as a member of the
Compensation Committee and the Audit Committee because of his experience as a director or the
Company since 1995 and his knowledge of corporate governance matters relating to Cayman Islands
corporations. Audit Committee The Board of Directors has an Audit Committee, which is comprised of Messrs. Butler, Carr,
Finlay, Sasnett and Whittaker. 103




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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. The Audit Committee Charter
is filed as Exhibit 99.2 to our 2003 Annual Report, which Exhibit is incorporated herein by
reference. During the year, the Board of Directors examined the composition of the Audit Committee
in light of Nasdaqs corporate governance rules and the regulations under the Securities Exchange
Act of 1934 (Exchange Act) applicable to audit committees. Based upon this examination, the
Board of Directors has determined that all members of the Audit Committee, except Mr. Finlay, are
independent directors within the meaning of Nasdaqs rules and the Exchange Act and the rules and
regulations there under. The Board of Directors has also determined that David W. Sasnett qualifies
as an audit committee financial expert under the regulations of the Exchange Act. Nominations Committee The Board of Directors has a Nominations Committee, which is comprised of Messrs. Pergande,
Carr and Parker. The Nominations Committee makes recommendations to the Board of Directors
regarding the size and composition of the Board of Directors, establishes procedures for the
nomination process, recommends candidates for election to the Board of Directors and nominates
officers for election by the Board of Directors. The Board of Directors has determined that all
members of the Nominations Committee, except Mr. Parker, are independent directors, as such term
is defined under the corporate governance rules of Nasdaq. Mr. Parker is not an independent
director under the Nasdaqs rules because he was Chief Executive Officer of the Company from 1994
until January 1, 2004 and he received compensation for his services to the Company in excess of
$60,000. See Item 11 of this Annual Report. Notwithstanding Mr. Parkers employment relationship
with the Company, the Board of Directors believes that it is required in the best interest of the
Company and its shareholders for Mr. Parker to serve as a member of the Nominations Committee
because of his involvement with the Company since 1980 and his knowledge if corporate governance
matters relating to Cayman Islands corporations. The Nominations Committee Charter is filed as
Exhibit 99.3 to our 2003 Annual Report, which Exhibit is incorporated herein by reference. . To recommend a prospective nominee for the Nominations Committees consideration, a
shareholder may submit the candidates name and qualifications in writing to the Secretary of the
Company, Trafalgar Place, West Bay Road, Grand Cayman, Cayman Islands, B.W.I. Code of Ethics Our Code of Ethics for the Chief Executive Officer and Chief Financial Officer is filed as
Exhibit 14 to our 2003 Annual Report, which is incorporated herein by reference to such Exhibit. 104




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ITEM 11. EXECUTIVE COMPENSATION The following table provides summary information concerning the annual and long-term
compensation earned by the companys chief executive officer and each of the five other most highly
compensated executive officers of the company during the fiscal years ended December 31, 2004, 2003
and 2002: Summary Compensation Table Annual Compensation
    
    
    Long-Term CompensationOther Annual
    
    
    Securities
    
    
    All OtherSalary
    
    
    Bonus
    
    
    Compensation
    
    
    Underlying Options (2)
    
    
    CompensationName and Principal Position
    
    Year
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    (#)
    
    
    ($)Frederick W. McTaggart (1)
    
    2002
    
    
    118,006
    
    
    
    66,066
    
    
    
    
    
    
    
    26,427
    
    
    
    Director, President and Chief
    
    2003
    
    
    118,006
    
    
    
    185,757
    
    
    
    
    
    
    
    43,790
    
    
    
    Executive Officer
    
    2004
    
    
    200,000
    
    
    
    200,482
    
    
    
    
    
    
    
    
    
    
    
    Gregory S. McTaggart
    
    2002
    
    
    85,932
    
    
    
    
    
    
    
    
    
    
    
    19,325
    
    
    
    Vice President of Cayman
    
    2003
    
    
    85,932
    
    
    
    36,408
    
    
    
    
    
    
    
    31,722
    
    
    
    Operations
    
    2004
    
    
    105,000
    
    
    
    42,000
    
    
    
    
    
    
    
    
    
    
    
    Robert B. Morrison (3)
    
    2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vice President of Purchasing and
    
    2003
    
    
    115,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Information Technologies
    
    2004
    
    
    100,000
    
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    Jeffrey M. Parker (1)
    
    2002
    
    
    95,895
    
    
    
    39,243
    
    
    
    
    
    
    
    26,159
    
    
    
    Chairman of the Board of
    
    2003
    
    
    95,895
    
    
    
    316,493
    
    
    
    
    
    
    
    45,097
    
    
    
    Directors
    
    2004
    
    
    165,000
    
    
    
    373,840
    
    
    
    
    
    
    
    
    
    
    
    Gerard J. Pereira (3)
    
    2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vice President of Engineering
    
    2003
    
    
    96,600
    
    
    
    7,807
    
    
    
    
    
    
    
    
    
    
    
    2004
    
    
    100,000
    
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    Brent J. Santha
    
    2002
    
    
    80,899
    
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    Vice President of Finance,
    
    2003
    
    
    90,000
    
    
    
    20,000
    
    
    
    
    
    
    
    10,483
    
    
    
    Interim Chief Financial
Officer and Company Secretary
    
    2004
    
    
    115,000
    
    
    
    46,000
    
    
    
    
    
    
    
    
    
    
    
    
   (1) 
Mr. Parker and Mr. McTaggart served as the Chief Executive Officer and Chief Financial
Officer, respectively, until January 2004.(2)
 All options granted to Messrs. Frederick McTaggart, Gregory McTaggart, Parker, Ribbins and
Santha in 2002 and 2003 have an exercise price of $11.93 and $20.05 per share, respectively. 105




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(3)  
The 2003 salaries for Messrs. Morrison and Pereira, who joined the company in February 2003,
due to the acquisition, have been annualized based upon a full year of employment for comparative
purposes. Stock Option Grants There were no stock options granted on ordinary shares in fiscal year 2004, with respect to
the Chief Executive Officer and the other named executive officers listed in the Summary
Compensation Table. Stock Option Holdings The following table provides information, with respect to the Chief Executive Officer and the
other named executive officers listed in the Summary Compensation Table, concerning the holding of
unexercised options at the end of fiscal year 2004: Number of Securities
    
    
    Value of UnexercisedShares
    
    
    
    
    
    
    Underlying Unexercised
    
    
    In-The-MoneyAcquired on
    
    
    Value
    
    
    Options at Fiscal Year End
    
    
    Options at Fiscal Year EndExercise
    
    
    Realized
    
    
    Exercisable
    
    
    Unexercisable
    
    
    Exercisable
    
    
    UnexercisableName
    
    (#)
    
    
    ($)
    
    
    (#)
    
    
    (#)
    
    
    ($)
    
    
    ($)Frederick W. McTaggart
    
    
    
    
    
    
    
    
    
    
    98,750
    
    
    
    
    
    
    
    1,556,714
    
    
    
    Gregory S. McTaggart
    
    
    
    
    
    
    
    
    
    
    71,847
    
    
    
    
    
    
    
    1,133,775
    
    
    
    Robert B. Morrison
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Jeffrey M. Parker
    
    
    26,924
    
    
    
    336,012
    
    
    
    99,763
    
    
    
    
    
    
    
    1,565,370
    
    
    
    Gerard J. Pereira
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Brent J. Santha
    
    
    
    
    
    
    
    
    
    
    10,483
    
    
    
    
    
    
    
    114,579
    
    
    
    
 Incentive Compensation Employee Share Incentive Plan Since April 8, 1987, we have maintained an employee share incentive plan for our long-term
employees who are not directors. To become eligible for the employee share incentive plan, an
employee must complete four years of service with us and then retain the shares for an additional
four years before he can transfer or sell the shares. We may, at our option, offer to exchange the
redeemable preferred shares issued to the employee for an equal number of freely tradable ordinary
shares at any time during the four year holding period. Within the four year holding period, if an
employee ceases to be employed by our company, our company, at the sole discretion of the board of
directors, may redeem the redeemable shares held by that employee for less than four years at the
price which the employee originally paid for the shares. Under the plan, employees are issued redeemable preferred shares on an annual basis at no cost
based on a formula which takes into consideration the employees salary and the total dividend paid
to ordinary shareholders as a percentage of the total shareholders equity in each year. If an
employee remains employed by us for at least four years, or a person or affiliated group of persons
acquires 30% or more of our ordinary shares, we are obligated to exchange the redeemable preferred
shares (whether or not the redeemable preferred shares have been held for four years) for the same
number of ordinary 106




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shares. We are also obligated to exchange the redeemable preferred shares for an
equal number of ordinary shares if an employees employment with us or any of our affiliates
terminates by reason of the employees death, permanent disability or the employee reaches the age
of 65 years. However, if an
employees employment with us or any of our affiliates terminates for any other reason, we may at
any time up to and including the first anniversary of such termination, redeem the employees
redeemable preferred shares for cash equal to 75% of the average of the closing market price for
our ordinary shares on each of the first seven trading days in the month of October of the year in
which the redeemable preferred shares were issued to the employee. Under the plan, when an employee is issued redeemable preferred shares, the employee is also
granted an option to purchase an equal number of redeemable preferred shares at approximately 75%
of the average market price of the ordinary shares. The exercise price is determined using the
average of the closing market price for our ordinary shares on each of the first seven trading days
in the month of October of the year in which the redeemable preferred shares were issued to the
employee. The grant date is determined as 90 days after the date of the auditors certificate on
the financial statements for the relevant year. This option expires, unless exercised by the
employee, within thirty (30) days after the date of grant. Since we adopted the employee share
incentive plan, our employees have acquired 130,907 redeemable preferred shares, of which 116,986
have been redeemed for an equal number of ordinary shares. Employee Share Option Plan In 2001, we established an employee share option plan for certain long-term employees who
participate in the share incentive plan. This plan was introduced in order to compensate these
employees for adjustments in the employee share incentive plan. Under the share option plan, these
employees are granted in each calendar year, as long as the employee is a participant in the
employee share incentive plan, options to purchase ordinary shares of common stock. The price at
which the option may be exercised will be the closing market price on the grant date, which is 90
days after the date of the auditors certificate on the financial statements for the relevant year.
The number of options each employee is granted is equal to five times the sum of (i) the number of
redeemable preferred shares which that employee receives for $nil consideration and (ii) the number
of redeemable preferred shares options which that employee exercises in that given year. The
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. Since we adopted the employee share option plan, we have granted 22,605 options to purchase
ordinary shares at an exercise price of $9.20 with an expiration date of August 4, 2005, 13,695
options to purchase ordinary shares at an exercise price of $14.69 with an expiration date of July
30, 2006, 14,745 options to purchase ordinary shares at an exercise price of $15.42 with an
expiration of July 29, 2007 and 4,240 options to purchase ordinary shares at an exercise price of
$23.47 with an expiration of September 3, 2008. 107




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Non-Executive Directors Share Plan In 1999, we implemented a share grant plan for our directors who are not executive officers or
serving as the Cayman Islands government representative on our board. Under this plan, a director
receives ordinary shares based upon the number of board and committee meetings that the director
attends during the year. On January 1, 2004, directors fees have been increased to take into
account the increasing responsibilities and duties of our directors, however the share equivalent
portion of these fees remains unchanged. Each board meeting is worth the share equivalent of a
$1,200 fee and each committee meeting is worth the share equivalent of a $600 fee. Attendance fees
are accumulated throughout the year and then divided by the prevailing market price on October
1st, or the next trading day if October 1st falls on a non-trading day, of
the preceding year to determine the number of shares to be granted for the current year. As a result of the non-executive directors share plan, the directors, as a group, as of
December 31, 2004, are entitled to receive 777 ordinary shares, based upon the prevailing market
price for the ordinary shares on October 1, 2004 of $23.95. Pension Plan As with every employer in the Cayman Islands, we are required by the National Pension Law to
provide a pension plan for our employees in the Cayman Islands. We belong to both the Cayman
Islands Chamber Pension Plan and the Ocean Conversion Staff Pension Plan in the Cayman Islands.
The Chamber Pension Plan is a non-profit entity, which is administered by the Bank of Butterfield,
and the Ocean Conversion Staff Pension Plan has as its trustee, Colonial Private Trustee Limited
and is administered by the British Caymanian Insurance Company Ltd. Under the Cayman Islands National Pensions Law, all employees between the ages of 18 and 60
must contribute a specified minimum percentage of their earnings to a pension plan. Until
recently, the exact percentage of contributions varied according to the age of each employee.
Since June 1, 2002, however, all employees must contribute 5% of their earnings to a pension plan.
An employee also has the option of contributing more than the prescribed minimum. Our company is
required to match the contribution of the first 5% of each participating employees salary to a
maximum of $72,000. Employees earning more than $72,000 are not required to make contributions on
amounts over $72,000. All contributions by our employees are collected by us and paid into the
various pension plans on a monthly basis. Both plans are defined benefit plans, and as such the amount that an employee receives upon
retirement is directly related to the amount contributed to the plan by the employee while working.
Once an employee retires (employees become eligible for retirement at age 60 in the Cayman
Islands), an employee has the following options for receiving benefits:  
    Receive a cash payout if the employees retirement savings is less than $6,000;
    Transfer the retirement savings to a life annuity for investment by a life insurance
company and payment of a regular income stream to the employee for the remainder of the
employees life (and 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. 108




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Employment Agreements Jeffrey ParkerChairman of the Board of Directors On January 1, 2004, we entered into a three-year employment agreement with Jeffrey M. Parker,
our Chairman of the Board of Directors, with remuneration of $165,000 per annum. This agreement
supersedes all prior contracts and understandings between the parties save that benefits earned or
accrued under prior contracts shall not be extinguished or affected. This agreement is subject to
extension each year if the Board so determines and shall be extended such that the term shall be
for three years from January 1st of the next following year. If we terminate Mr. Parker
without cause, he is entitled to twice the annual remuneration set out in this agreement, adjusted
for any annual increases received. Under a previous employment agreement for the year ended December 31, 2003, which was amended
to adjust the exercise price of his options from the first seven trading days in the month of
October of that year to December 31st of that year, Mr. Parker was granted an option to
purchase 45,097 ordinary shares at an exercise price of $20.05. For the year ended December 31,
2002, Mr. Parker was granted an option to purchase 26,159 ordinary shares at an exercise price of
$11.93 per share. All options granted to Mr. Parker after March 1999 expire on the third
anniversary of the date of the auditors report on the financial statements for the year of the
grant. Under the terms of his new employment agreement Mr. Parker will no longer be granted
options. For the year ended December 31, 2003, under the terms of his previous employment agreement,
Mr. Parker was entitled to receive an annual bonus for each completed financial year during which
he served in the capacities of Chairman and Chief Executive Officer. The amount of the bonus
consisted of the following two amounts: (a) 1.5% of our net profits for that financial year, before
charging this bonus, dividends, or crediting any amounts arising from the re-valuation of our
assets and (b) 15% of the amount by which our net profits for that financial year (calculated in
the same manner as in (a) above) exceed the highest annual net profits earned by us in any prior
financial year. For each completed financial year beginning with the financial year 2004, Mr. Parker will be
paid a bonus calculated as (a) 1.5% of the net profits for that financial year, before charging
this bonus, dividends, or crediting any amounts arising from the re-valuation of our assets to a
maximum of 40% of Mr. Parkers annual remuneration and (b) 15% of the amount by which our net
profits for that financial year (calculated in the same manner as in (a) above) exceed the highest
annual net profits earned by us in any prior financial year. This bonus shall be paid as to 75% in
cash and 25% in ordinary shares of the Company valued at the market price at the close of trading
of the same on December 31st of the relevant financial year. Approval for the issuance
of shares was obtained from the members of the Company at the Companys August 11, 2004 annual
general meeting. 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, with remuneration of $200,000 per annum.
This agreement supersedes all prior contracts and understandings between the parties save that
benefits earned or accrued under prior contracts shall not be extinguished or affected. This
agreement is subject to extension each year if the Board so determines and shall be extended such
that the term shall be for three years from January 1st of the next following year. If
we terminate Mr. Frederick McTaggart without cause, he is entitled to twice the annual remuneration
set out in this agreement, adjusted for any annual increases received. 109




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Under a previous employment agreement for the year ended December 31, 2003, which was amended
to adjust the exercise price of his options from the first seven trading days in the month of
October of that year to December 31st of that year, Mr. Frederick McTaggart was granted
an option to purchase 43,790 ordinary shares at an exercise price of $20.05. For the year ended
December 31, 2002, Mr. Frederick McTaggart was granted an option to purchase 26,427 ordinary shares
at an exercise price of $11.93 per share. All options granted to Mr. Frederick McTaggart expire on
the third anniversary of the date of the auditors report on the financial statements for the year
of the grant. Under the terms of his new employment agreement Mr. Frederick McTaggart will no
longer be granted options. For the year ended December 31, 2003, under the terms of his employment agreement, Mr.
Frederick McTaggart was entitled to receive an annual bonus for each completed financial year
during which he served in the capacities of President and Chief Operating Officer. The bonus
consists of the following two amounts: (a) 2.5% of our net profits for that financial year, before
charging this bonus, dividends or crediting any amounts arising from the re-valuation of our assets
and (b) 5% of the amount by which our net profits for that financial year (calculated in the same
manner as in (a) above) exceed the highest annual net profits earned by us in any prior financial
year. For each completed financial year beginning with the financial year 2004, Mr. Frederick
McTaggart will be paid a bonus calculated as (a) 2% of the net profits for that financial year,
before charging this bonus, dividends, or crediting any amounts arising from the re-valuation of
our assets to a maximum of 50% of Mr. Frederick McTaggarts annual remuneration and (b) 5% of the
amount by which our net profits for that financial year (calculated in the same manner as in (a)
above) exceed the highest annual net profits earned by us in any prior financial year. This bonus
shall be paid as to 75% in cash and 25% in ordinary shares of the Company valued at the market
price at the close of trading of the same on December 31st of the relevant financial
year. Approval for the issuance of shares was obtained from the members of the Company at the
Companys August 11, 2004 annual general meeting. Brent J. SanthaVice President of Finance, Interim Chief Financial Officer and Company
Secretary On January 1, 2004, we entered into a two-year employment agreement with Brent J. Santha, our
Vice President of Finance, Interim Chief Financial Officer and Company Secretary, with remuneration
of $115,000 per annum while he serves as Chief Financial Officer and $100,000 thereafter while he
serves as Vice President of Finance. This agreement supersedes all prior contracts and
understandings between the parties save that benefits earned or accrued under prior contracts shall
not be extinguished or affected. This agreement is subject to extension each year if the Chief
Executive Officer so determines and shall be extended for a further term not exceeding two years. Under a previous employment agreement for the year ended December 31, 2003, Mr. Santha was
granted an option to purchase that number of ordinary shares which equals 0.25% of our net profit
for that year. In 2003, Mr. Santha was granted an option to purchase 10,483 ordinary shares at an
exercise price of $20.05. The exercise price of the options granted to Mr. Santha is equal to the
average of the closing market price of our ordinary shares on the last trading day of that year.
All options granted to Mr. Santha expire on the day before the third anniversary of the date of the
auditors report on the financial statement for the year of the grant. Under the terms of his new
employment agreement Mr. Santha will no longer be granted options. For the year ended December 31, 2003, under the terms of his previous employment agreement,
Mr. Santha was entitled to receive an annual bonus as determined at the discretion of the President
of our company. For each completed financial year beginning with the financial year 2004, Mr. Santha will be
paid a bonus calculated as 2.5% of the amount by which our net profits for that financial year
(before charging 110




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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. Santhas annual remuneration. This bonus shall be paid as to in cash or,
subject to approval of the members of the
Company at the Companys next annual general meeting, in ordinary shares of the Company 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. If such approval required for issuance of
ordinary shares is not obtained, the Performance Bonus will be paid entirely in cash. Gregory S. McTaggartVice President of Cayman Operations On January 1, 2004, we entered into a two-year employment agreement with Gregory S. McTaggart,
our Vice President of Cayman Operations, with remuneration of $105,000 per annum. This agreement
supersedes all prior contracts and understandings between the parties save that benefits earned or
accrued under prior contracts shall not be extinguished or affected. This agreement is subject to
extension each year if the Chief Executive Officer so determines and shall be extended for a
further term not exceeding two years. Under a previous employment agreement for the year ended December 31, 2003, Mr. Gregory
McTaggart was granted an option to purchase that number of ordinary shares which equals 0.75% of
our net profit for that year. The exercise price of the options to be granted to Mr. Gregory
McTaggart was amended on December 5, 2003 to be equal to the closing price of the Companys
ordinary shares on December 31st of the relevant financial year. For the year ended
December 31, 2003, Mr. Gregory McTaggart was granted an option to purchase 31,722 ordinary shares
at an exercise price of $20.05 per share. For the year ended December 31, 2002, Mr. Gregory
McTaggart was granted an option to purchase 19,325 ordinary shares at an exercise price of $11.93
per share. All options granted to Mr. Gregory McTaggart expire on the third anniversary of the
date of the auditors report on the financial statements for the year of grant. Under the terms of
his new employment agreement Mr. Gregory McTaggart will no longer be granted options. For the year ended December 31, 2003, under the terms of his previous employment agreement,
Mr. Gregory McTaggart was entitled to receive an annual bonus for each completed financial year
during which he serves in the capacity of Vice President of Operations. The bonus consists of 2.5%
of the amount by which our net profits for that financial year (before charging this bonus,
dividends or crediting any amounts arising from the re-valuation of our assets) exceed the highest
annual net profits earned by us in any prior financial year. For each completed financial year beginning with the financial year 2004, 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, subject to approval of the members of the Company at the Companys
next annual general meeting, in ordinary shares of the Company 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. If such approval required for issuance of ordinary shares is not obtained, the
Performance Bonus will be paid entirely in cash. 111




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Robert B. MorrisonVice President of Purchasing and Information Technology On January 1, 2004, we entered into a two-year employment agreement with Robert B. Morrison,
our Vice President of Purchasing and Information Technology, with remuneration of $100,000 per
annum. This agreement supersedes all prior contracts and understandings between the parties save
that benefits earned or accrued under prior contracts shall not be extinguished or affected. This
agreement is subject to extension each year if the Chief Executive Officer so determines and shall
be extended for a further term not exceeding two years. For each completed financial year beginning with the financial year 2004, Mr. Morrison 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. Morrisons annual remuneration. This bonus shall be paid as to in cash or,
subject to approval of the members of the Company at the Companys next annual general meeting, in
ordinary shares of the Company 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. If such
approval required for issuance of ordinary shares is not obtained, the Performance Bonus will be
paid entirely in cash. Gerard J. PereiraVice President of Engineering On January 1, 2004, we entered into a two-year employment agreement with Gerard J. Pereira,
our Vice President of Engineering, with remuneration of $100,000 per annum. This agreement
supersedes all prior contracts and understandings between the parties save that benefits earned or
accrued under prior contracts shall not be extinguished or affected. This agreement is subject to
extension each year if the Chief Executive Officer so determines and shall be extended for a
further term not exceeding two years. For the year ended December 31, 2003, under the terms of his previous employment agreement,
Mr. Pereira was entitled to receive an annual bonus equal to 0.6% of the sum of the net profits as
at the end of each fiscal year of Ocean Conversion (BVI) Ltd. and DesalCo (Barbados) Ltd. (before
charging this bonus, dividends or crediting any amounts arising from the re-valuation of our
assets). For each completed financial year beginning with the financial year 2004, Mr. Pereira 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. Pereiras annual remuneration. This bonus shall be paid as to in cash or,
subject to approval of the members of the Company at the Companys next annual general meeting, in
ordinary shares of the Company 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. If such
approval required for issuance of ordinary shares is not obtained, the Performance Bonus will be
paid entirely in cash. Joseph PivinskiSenior Vice President On April 1, 2005, we entered into a two-year employment agreement with Joseph Pivinski as
Senior Vice President, with annual remuneration of $145,000 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. If we terminate Mr. Pivinski without cause, he is entitled to
the annual remuneration set out in this agreement, adjusted for any annual increases received. For the year ending December 31, 2005 and for each completed financial year thereafter,
Mr. Pivinski is entitled to receive a maximum cash bonus of up to 25.0% of his annual remuneration
for the completion of certain agreed to performance goals, such bonus to be determined at the sole
discretion of the Chief Executive Officer and to be pro rated for the initial year 2005. Compensation Committee Interlocks and Insider Participation in Compensation Decisions The Compensation Committee of the Board of Directors consists of Richard Finlay, Clarence
Flowers, Jr., and Wilmer Pergande. No member of the Compensation Committee is, or at any time
in the past has been, an officer or employee of the Company or any of its subsidiaries. 112




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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDERS MATTERS The table below sets forth the beneficial ownership of our ordinary shares, par value CI$1.00
per share, of which 5,861,062 are outstanding as of April 19, 2005, and our redeemable preferred
shares, par value CI$1.00 per share, of which 11,830 are outstanding as of April 19, 2005 by:  
    each person or entity that we know beneficially owns more than 5% of our ordinary
 shares or redeemable preferred shares;
    each of our executive officers and directors; and
    all of our officers and directors as a group. Title of
    
    Identity of
    
    Amount
    
    
    PercentageClass
    
    Person or Group (1) (2)
    
    Owned
    
    
    of ClassOrdinary Shares
    
    Thomas C. Barrow (1)
    
    
    370,194
    
    
    
    6.3
    %Ordinary Shares
    
    Jeffrey M. Parker,
    
    
    281,688
    
    
    
    4.8
    %Chairman of the Board,Ordinary Shares
    
    Frederick W. McTaggart,
    
    
    104,459
    
    
    
    1.8
    %Director, President and ChiefExecutive OfficerOrdinary Shares
    
    Gregory S McTaggart,
    
    
    103,163
    
    
    
    1.8
    %Vice President of CaymanOperationsOrdinary Shares
    
    Kenneth R. Crowley,
    
    
    
    
    
    
    *Vice President of OverseasOperationsOrdinary Shares
    
    Robert B. Morrison,
    
    
    100
    
    
    
    *Vice President of Purchasingand Information TechnologyOrdinary Shares
    
    Joseph Pivinski,
    
    
    
    
    
    
    *Senior Vice PresidentOrdinary Shares
    
    Gerard J. Pereira,
    
    
    
    
    
    
    *Vice President of EngineeringOrdinary Shares
    
    Brent J Santha,
    
    
    11,683
    
    
    
    *Vice President of Finance,Interim Chief FinancialOfficer and Company SecretaryOrdinary Shares
    
    J. Bruce Bugg, Jr.,
    
    
    4,068
    
    
    
    *DirectorOrdinary Shares
    
    William T Andrews,
    
    
    524
    
    
    
    *DirectorOrdinary Shares
    
    Brian E. Butler,
    
    
    21,872
    
    
    
    *DirectorOrdinary Shares
    
    Steven A. Carr,
    
    
    46,860
    
    
    
    *DirectorOrdinary Shares
    
    Carson K. Ebanks,
    
    
    
    
    
    
    *DirectorOrdinary Shares
    
    Richard L. Finlay,
    
    
    3,918
    
    
    
    *Director
 113




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##### Table of Contents



Title of
    
    Identity of
    
    Amount
    
    
    PercentageClass
    
    Person or Group (1) (2)
    
    Owned
    
    
    of ClassOrdinary Shares
    
    Clarence B. Flowers, Jr.,
    
    
    6,015
    
    
    
    *DirectorOrdinary Shares
    
    Wilmer Pergande,
    
    
    6,545
    
    
    
    *DirectorOrdinary Shares
    
    David Sasnett,
    
    
    
    
    
    
    *DirectorOrdinary Shares
    
    Raymond Whittaker,
    
    
    12,953
    
    
    
    *DirectorOrdinary Shares
    
    Directors and Executive Officers as
a Group 
(18 persons)
    
    
    603,848
    
    
    
    10.3
    %Redeemable
    
    Margaret Julier,
    
    
    2,056
    
    
    
    17.8
    %Preferred Shares
    
    Office ManagerRedeemable
    
    William Banker
    
    
    2,318
    
    
    
    20.1
    %Preferred Shares
    
    Operations ManagerRedeemable
    
    Chet Ritch
    
    
    689
    
    
    
    6.9
    %Preferred Shares
    
    OperationsRedeemable
    
    Helbert Rodriquez
    
    
    806
    
    
    
    6.9
    %Preferred Shares
    
    OperationsRedeemable
    
    Ivan Tabora
    
    
    664
    
    
    
    5.7
    %Preferred Shares
    
    OperationsRedeemable
    
    Elizabeth Triana
    
    
    693
    
    
    
    5.9
    %Preferred Shares
    
    Customer Service
   An asterisk (*) in the above table indicates less than one percent(1)
    
    On January 20, 2005, Javelin Opportunities LP, Javelin Opportunities Offshore,
Ltd. and Javelin Partners LP (the Javelin Entities) jointly filed a Schedule 13G
(Schedule 13G) with the Securities and Exchange Commission. The Schedule 13G states
that Javelin Opportunities LP has sole voting and investment power over 181,200
ordinary shares, Javelin Opportunities Offshore, Ltd. has sole voting and investment
power over 175,800 shares and Javelin Partners LP has sole voting and investment power
over 13,194 shares. Thomas C. Barrow is the managing member of the general partner of
each of the Javelin Entities. The address of the Javelin Entities and Thomas C. Barrow
is 7674 W. Lake Mead Boulevard, Suite 230, Las Vegas, NV 89128.(2)
    
    The address for Jeffrey Parker, Frederick McTaggart, Gregory McTaggart, Kenneth
Crowley, Robert Morrison, Gerard Pereira, Brent Santha Margaret Julier, William Banker,
Chet Ritch, Helbert Rodriquez, Ivan Tabora and Elizabeth Triana is as follows: c/o
Consolidated Water Co. Ltd., Trafalgar Place, West Bay Road, P.O. Box 1114GT, Grand
Cayman, B.W.I. The address for Joseph M. Pivinski is 6300 NW 2nd Avenue,
Boca Raton, FL 33487. The address for each of J. Bruce Bugg Jr. and Argyle/Cay-Water,
Ltd. is c/o Argyle Investment Corp., 1500 Nations Bank Plaza, 300 Convent Street, San
Antonio, Texas 78205. The address for William Andrews is De Salt House, 7 Salt
Kettle Lane, Paget PG 01, Bermuda. The address for Brian Butler is P.O. Box 30864 SMB,
Grand Cayman, B.W.I. The address for Steven A. Carr c/o Carr & Associates, P.O. Box
4689, Bryan, Texas 77805. The address for Caron Ebanks is Government Administration
Building, Georgetown, Grand Cayman, B.W.I. The address for Richard Finlay is P.O. Box
31442 SMB, Grand Cayman, B.W.I. 114




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##### Table of Contents



The address
for Clarence Flowers, Jr. is P.O. Box 2581GT, Grand Cayman, B.W.I. The address for
Wilmer Pergande is 3724 Bengal Road, Gulf Breeze, Florida 32561. The address for David
Sasnett is 16254 SW 67 Court, Fort Lauderdale, Florida 33331. The address for Raymond
Whittaker is P.O. Box 1982GT, Grand Cayman, B.W.I. Unless otherwise indicated, to our knowledge, the persons named in the table above have sole
voting and investment power with respect to the shares listed. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person, shares issuable under
stock options exercisable within 60 days after April 15, 2005 are deemed outstanding for that
person but are not deemed outstanding for computing the percentage of ownership of any other
person. Of the 281,688 ordinary shares owned by Mr. Parker, 5,100 have shared investment power and
71,256 are ordinary shares underlying options granted to Mr. Parker, which may be exercised within
60 days after April 15, 2005. Of the 104,459 ordinary shares owned by Mr. Frederick McTaggart,
70,217 are ordinary shares underlying options granted to Mr. Frederick McTaggart, which may be
exercised within 60 days after April 15, 2005. Of the 103,163 ordinary shares owned by Mr. Gregory
McTaggart, 51,047 are ordinary shares underlying options granted to Mr. Gregory McTaggart, which
may be exercised within 60 days after April 15, 2005. Of the 11,683 ordinary shares owned by Mr.
Santha, 1,200 have shared investment power and 10,483 are ordinary shares underlying options
granted to Mr. Santha, which may be exercised within 60 days after April 15, 2005. Equity Compensation Plan Information The following table sets forth certain information as of December 31, 2004, with respect to
compensation plans (including individual compensation arrangements) under which our equity
securities are authorized for issuance under:  
    all compensation plans previously approved by our security holders; and
    all compensation plans not previously approved by our security holders. Number of securitiesremaining available forfuture issuance underNumber of securities to
    
    
    Weighted-average
    
    
    equity compensationbe issued upon exercise
    
    
    exercise price of
    
    
    plans (excludingof outstanding options,
    
    
    outstanding options,
    
    
    securities reflected inwarrants and rights
    
    
    warrants and rights
    
    
    column (a))Plan category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security holders
    
    
    368,916
    
    
    $
    15.27
    
    
    *Equity compensation
plans not approved
by security holders
    
    
    55,285
    **
    
    $
    13.31
    
    
    *Total
    
    
    424,201
    
    
    $
    15.01
    
    
    *
   * 

Our equity compensation plans do not have any limits on the amount of shares reserved for
issuance under the plans.** 
All of the 55,285 shares are issuable pursuant to our employee stock option plan. See Note 21
to the Notes to Consolidated Financial Statements. 115




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##### Table of Contents



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS For a discussion of the employment agreements we have with our executive officers, see Part
III, Item 11 of this Annual Report. 
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The following table shows the fees that the Company paid or accrued for the audit and other
services provided by KPMG for the fiscal years ended December 31, 2004 and 2003. Services
    
    Dollar Amount (2004)
    
    
    Dollar Amount (2003)Audit Fees
    
    $
    537,819
    
    
    $
    244,719Audit-Related Fees
    
    
    
    
    
    
    Tax Fees
    
    
    
    
    
    
    All Other Fees
    
    
    
    
    
    
    288,372Total
    
    $
    537,819
    
    
    $
    533,091
 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. No such services were provided to the Company during the years ended December 31,
2004 and 2003. All Other Fees: During the year ended December 31, 2003, KPMG provided non-audit services
related to our acquisitions and subsequent share offering. All audit and non-audit services performed by KPMG were approved by the Audit Committee. The Audit
Committee gives due consideration to the potential effect of non-audit services on maintaining
KPMGs audit in dependence. 116




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PART IV 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES (a)1. Financial Statements The Consolidated Water Co. Ltd. financial statements found in ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA for the year ended December 31, 2004 are incorporated herein by
reference. Pursuant to Rule 3-09 of Regulation S-X, when either the first or third condition set forth
in Rule 1-02(w), substituting 20 percent for 10 percent, is met by a 50
percent-or-less-owned person accounted for by the equity method separate financial
statements shall be filed. The Ocean Conversion (BVI) Ltd. financial statements found in
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA for the year ended December 31, 2004 are
incorporated herein by reference. 2.
 Financial Statement Schedules None 3. Exhibits ExhibitNumber
    

Exhibit
Description2.1
    
    Share Sale Agreement dated October 4, 2002, among Consolidated Water Co. Ltd. and William T. Andrews and
Margaret D. Andrews (incorporated herein by reference to the exhibit filed as a part of our Form 8-K dated
February 13, 2003, Commission File No. 0-25248)2.2
    
    Agreement to Amend Share Sale Agreement dated November 29, 2002 between the Company and William T. Andrews
and Margaret D. Andrews (incorporated herein by reference to the exhibit filed as a part of our Form 8-K
dated February 13, 2003, Commission File No. 0-25248)2.3
    
    Agreement to Amend Share Sale Agreement dated December 30, 2002 between the Company and William T. Andrews
and Margaret D. Andrews (incorporated herein by reference to the exhibit filed as a part of our Form 8-K
dated February 13, 2003, Commission File No. 0-25248)2.4
    
    Agreement to Amend Share Sale Agreement dated January 31, 2003 between the Company and William T. Andrews
and Margaret D. Andrews (incorporated herein by reference to the exhibit filed as a part of our Form 8-K
dated February 13, 2003, Commission File No. 0-25248)2.5
    
    Share Sale Agreement dated October 4, 2002, among Consolidated Water Co. Ltd., North American Mortgage &
Finance Corporation and Transcontinental Finance Corporation Ltd. (incorporated herein by reference to the
exhibit filed as a part of our Form 8-K dated February 13, 2003, Commission File No. 0-25248)
 117




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##### Table of Contents



2.6
    
    Agreement to Amend Share Sale Agreement dated November 29, 2002 among the Company North-American Mortgage &
Finance Corporation and Transcontinental Finance Corporation Limited (incorporated herein by reference to
the exhibit filed as a part of our Form 8-K dated February 13, 2003, Commission File No. 0-25248)2.7
    
    Agreement to Amend Share Sale Agreement dated December 30, 2002 among the Company North-American Mortgage &
Finance Corporation and Transcontinental Finance Corporation Limited (incorporated herein by reference to
the exhibit filed as a part of our Form 8-K dated February 13, 2003, Commission File No. 0-25248)2.8
    
    Agreement to Amend Share Sale Agreement dated January 31, 2003 among the Company North-American Mortgage &
Finance Corporation and Transcontinental Finance Corporation Limited (incorporated herein by reference to
the exhibit filed as a part of our Form 8-K dated February 13, 2003, Commission File No. 0-25248)2.9
    
    Agreement dated October 8, 2002 between Consolidated Water Co. Ltd. and Sage Water Holdings (BVI) Limited
(incorporated herein by reference to the exhibit filed as a part of our Form 8-K dated February 13, 2003,
Commission File No. 0-25248)2.10
    
    Amending Agreement dated November 15, 2002 between the Company and Sage Water Holdings (BVI) Limited
(incorporated herein by reference to the exhibit filed as a part of our Form 8-K dated February 13, 2003,
Commission File No. 0-25248)2.11
    
    Amending Agreement dated December 18, 2002 between the Company and Sage Water Holdings (BVI) Limited
(incorporated herein by reference to the exhibit filed as a part of our Form 8-K dated February 13, 2003,
Commission File No. 0-25248)2.12
    
    Amending Agreement dated January 28, 2003 between the Company and Sage Water Holdings (BVI) Limited
(incorporated herein by reference to the exhibit filed as a part of our Form 8-K dated February 13, 2003,
Commission File No. 0-25248)2.13
    
    Share Sale Agreement dated December 16, 2002 between Consolidated Water Co. Ltd. and Bacardi & Co. Ltd.
(incorporated herein by reference to the exhibit filed as a part of our Form 8-K dated February 13, 2003,
Commission File No. 0-25248)2.14
    
    Registration Rights Agreement dated February 7, 2003 between Consolidated Water Co. Ltd. and North American
Mortgage & Finance Corporation (incorporated herein by reference to the exhibit filed as a part of our Form
8-K dated February 13, 2003, Commission File No. 0-25248)4.1
    
    Amended and Restated Memorandum of Association of Consolidated Water Co. Ltd., dated December 4, 1998
(incorporated by reference to the exhibit filed as
 118




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part of our Form 20-F for the fiscal year ended December
31, 1998, Commission File No. 0-25248)4.2
    
    Amended and Restated Articles of Association of Consolidated Water Co. Ltd., dated August 11, 2004.10.1
    
    License Agreement, dated July 11, 1990, between Cayman Water Company Limited and the Government of the
Cayman Islands (incorporated herein by reference to the exhibit filed as a part of our Form 20-F dated
December 7, 1994, Commission File No. 0-25248)10.2
    
    First Amendment to License Agreement, dated September 18, 1990, between Cayman Water Company Limited and
the Government of the Cayman Islands. (incorporated herein by reference to the exhibit filed as a part of
our Form 20-F dated December 7, 1994, Commission File No. 0-25248)10.3
    
    Second Amendment to License Agreement, dated February 14, 1991 between Cayman Water Company Limited and the
Government of the Cayman Islands. (incorporated herein by reference to the exhibit filed as a part of our
Form 20-F dated December 7, 1994, Commission File No. 0-25248)10.4
    
    An Amendment to a License to Produce Potable Water, dated August 15, 2001, between Consolidated Water Co. Ltd. by the
Government of the Cayman Islands (incorporated herein by reference to the exhibit filed as a part of our Form 10-K
for the fiscal year ended December 31, 2001, Commission File No. 0-25248)10.5
    
    Fourth Amendment to a License to Produce Potable Water, dated February 1, 2003 between Consolidated Water Co. Ltd. by the
Government of the Cayman Islands (incorporated herein by reference to the exhibit filed as a part of our Form 10-K
for the fiscal year ended December 31, 2002, Commission File No. 0-25248)10.6
    
    Agreement, dated December 19, 2002, between Consolidated Water Co. Ltd. (formerly Cayman Water Company Limited) and Safe
Haven Ltd. (incorporated herein by reference to the exhibit filed as a part of our Form 10-K for the fiscal year
ended December 31, 2002, Commission File No. 0-25248)10.9
    
    Water Supply Agreement, dated December 18, 2000, between Consolidated Water Co. Ltd. and South Bimini International Ltd.
(incorporated herein by reference to the exhibit filed as a part of our Form 10-K dated March 30, 2001, Commission File
No. 0-25248)10.10
    
    Employment contract dated September 30, 2003 between Peter Ribbins and Consolidated Water Co. Ltd. (incorporated herein by
reference to the exhibit filed as a part of our Form 10-K for the fiscal year ended December 31, 2003, Commission File
No. 0-25248)10.11
    
    Employment contract dated December 5, 2003 between Jeffrey Parker and Consolidated Water Co. Ltd. (incorporated herein by
reference to the exhibit filed as a part of our Form 10-K for the fiscal year ended December 31, 2003, Commission File
No. 0-25248)
 119




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##### Table of Contents



10.12
    
    Employment contract dated December 5, 2003 between Frederick McTaggart and Consolidated Water Co. Ltd. (incorporated herein
by reference to the exhibit filed as a part of our Form 10-K for the fiscal year ended December 31, 2003, Commission
File No. 0-25248)10.13
    
    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)10.14
    
    Summary Share Grant Plan for Directors (incorporated herein by reference to the exhibit filed as part of our Registration
Statement on Form F-2 dated May 17, 2000, Commission File No. 333-35356)10.15
    
    Employee Share Option Plan (incorporated herein by reference to the exhibit filed as a part of our Form 10-K for the fiscal
year ended December 31, 2001, Commission File No. 0-25248)10.16
    
    Option Deed, dated August 6, 1997, between Cayman Water Company Limited and American Stock Transfer & Trust Company
(incorporated herein by reference to the exhibit filed on our Form 6-K, dated August 7, 1997, Commission File No.
0-25248)10.17
    
    Purchase and Sale Agreement, dated December 10, 2001, between Consolidated Water Co. Ltd., Cayman Hotel and Golf Inc.,
Ellesmere Britannia Limited and Hyatt Britannia Corporation Ltd. (incorporated herein by reference to the exhibit filed
as a part of our Form 10-K for the fiscal year ended December 31, 2001, Commission File No. 0-25248)10.18
    
    Agreement, dated February 1, 2002, between Consolidated Water Co. Ltd. and Cayman Hotel and Golf Inc. (incorporated herein
by reference to the exhibit filed as a part of our Form 10-K for the fiscal year ended December 31, 2001, Commission
File No. 0-25248)10.19
    
    Consulting Agreement, dated November 17, 1998, between Cayman Water Company Limited and R.J. Falkner & Company, Inc.
(incorporated herein by reference to the exhibit filed as part of our Registration Statement on Form F-2 dated May 17,
2000, Commission File No. 333-35356)10.20
    
    Agreement, dated July 24, 1995, between Cayman Water Company Limited and Galleon Beach Resort Limited (incorporated herein
by reference to the exhibit filed as part of our Registration Statement on Form F-2 dated May 17, 2000, Commission File
No. 333-35356)10.21
    
    Agreement, dated February 9, 1994, between Cayman Water Company Limited and Widar Ltd. (incorporated herein by reference to
the exhibit filed as part of our Registration Statement on Form F-2 dated May 17, 2000, Commission File No. 333-35356)
 120




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##### Table of Contents



10.22
    
    Lease of Part, dated October 13, 2000, between Consolidated Water Co. Ltd. and Colmar Ltd. (incorporated herein by reference
to the exhibit filed as a part of our Form 10-K dated March 30, 2001, Commission File No. 0-25248)10.23
    
    Lease of Part, dated March 1, 2003, between Consolidated Water Co. Ltd. and Colmar Ltd. (incorporated herein by reference
to the exhibit filed as a part of our Form 10-K for the fiscal year ended December 31, 2003, Commission File No. 0-25248)10.24
    
    Lease of Part, dated July 1, 2003, between Consolidated Water Co. Ltd. and Colmar Ltd. (incorporated herein by reference to
the exhibit filed as a part of our Form 10-K for the fiscal year ended December 31, 2003, Commission File No. 0-25248)10.25
    
    Lease, dated December 10, 2001, between Cayman Hotel and Golf Inc. and Consolidated Water Co. Ltd. (incorporated herein by
reference to the exhibit filed as a part of our Form 10-K for the fiscal year ended December 31, 2001, Commission File
No. 0-25248)10.26
    
    Lease, dated April 27, 1993, signed July 18, 2001 between Government of Belize and Belize Water Limited (incorporated herein
by reference to the exhibit filed as a part of our Form 10-K for the fiscal year ended December 31, 2001, Commission
File No. 0-25248)10.27
    
    Amended lease, dated April 27, 1993, signed January 2, 2004 between Government of Belize and Belize Water Limited
(incorporated herein by reference to the exhibit filed as a part of our Form 10-K for the fiscal year ended December 31,
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 the exhibit filed as a part of our Form 8-K dated February 13, 2003, Commission File No. 0-25248)10.29
    
    Employment contract dated January 19, 2005 between Kenneth Crowley and Consolidated Water Co. Ltd. (incorporated herein by
reference to the exhibit filed as a part of our Form 8-K dated January 14, 2005, Commission File No. 0-25248)10.30
    
    Employment contract dated January 18, 2005 between Gregory McTaggart and Consolidated Water Co. Ltd. (incorporated herein
by reference to the exhibit filed as a part of our Form 8-K dated January 14, 2005, Commission File No. 0-25248)10.31
    
    Employment contract dated January 17, 2005 between Robert Morrison and Consolidated Water Co. Ltd. (incorporated herein by
reference to the exhibit filed as a part of our Form 8-K dated January 14, 2005, Commission File No. 0-25248)10.32
    
    Employment contract dated January 14, 2005 between Gerard Pereira and Consolidated Water Co. Ltd. (incorporated herein by
reference to the exhibit
 121




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filed as a part of our Form 8-K dated January 14, 2005, Commission File No. 0-25248)10.33
    
    Employment contract dated February 1, 2005 between Brent Santha and Consolidated Water Co. Ltd. (incorporated herein by
reference to the exhibit filed as a part of our Form 8-K dated January 14, 2005, Commission File No. 0-25248)10.34
    
    Employment contract dated April 1, 2005 between Joseph Pivinski and Consolidated Water Co. Ltd.10.35
    
    Distributorship Agreement dated September 24, 2002 between DWEER Technology Ltd. and DesalCo Limited (incorporated herein by
reference to the exhibit filed as a part of our Form 10-K for the fiscal year ended December 31, 2002, Commission File
No. 0-25248)10.36
    
    Amendment to the Distributorship Agreement dated September 24, 2002 between DWEER Technologies Ltd. and DesalCo Limited
(incorporated herein by reference to the exhibit filed as a part of our Form 10-K for the fiscal year ended December 31,
2003, Commission File No. 0-25248)10.37
    
    Distributorship Agreement dated February 26, 2004 between Calder AG and DesalCo Limited (incorporated herein by reference
to the exhibit filed as a part of our Form 10-K for the fiscal year ended December 31, 2003, Commission File No. 0-25248)10.38
    
    Employee share option notice letter dated May 26, 2003 between Abel Castillo and Consolidated Water Co. Ltd. (incorporated
herein by reference to the exhibit filed as a part of our Form 10-K for the fiscal year ended December 31, 2003,
Commission File No. 0-25248)10.39
    
    Employee share option notice letter dated May 26, 2003 between Billy Banker and Consolidated Water Co. Ltd. (incorporated
herein by reference to the exhibit filed as a part of our Form 10-K for the fiscal year ended December 31, 2003,
Commission File No. 0-25248)10.40
    
    Employee share option notice letter dated May 26, 2003 between Chet Ritch Consolidated Water Co. Ltd. (incorporated herein
by reference to the exhibit filed as a part of our Form 10-K for the fiscal year ended December 31, 2003, Commission
File No. 0-25248)10.41
    
    Employee share option notice letter dated May 26, 2003 between David Hooker and Consolidated Water Co. Ltd. (incorporated
herein by reference to the exhibit filed as a part of our Form 10-K for the fiscal year ended December 31, 2003,
Commission File No. 0-25248)10.42
    
    Employee share option notice letter dated May 26, 2003 between Elizabeth Triana and Consolidated Water Co. Ltd.
(incorporated herein by reference to the exhibit filed as a part of our Form 10-K for the fiscal year ended December 31,
2003, Commission File No. 0-25248)
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10.43
    
    Employee share option notice letter dated May 26, 2003 between Helverth Rodriguez and Consolidated Water Co. Ltd.
(incorporated herein by reference to the exhibit filed as a part of our Form 10-K for the fiscal year ended December 31,
2003, Commission File No. 0-25248)10.44
    
    Employee share option notice letter dated May 26, 2003 between Ivan Tabora and Consolidated Water Co. Ltd. (incorporated
herein by reference to the exhibit filed as a part of our Form 10-K for the fiscal year ended December 31, 2003,
Commission File No. 0-25248)10.45
    
    Employee share option notice letter dated May 26, 2003 between Luis Wood and Consolidated Water Co. Ltd. (incorporated
herein by reference to the exhibit filed as a part of our Form 10-K for the fiscal year ended December 31, 2003,
Commission File No. 0-25248)10.46
    
    Employee share option notice letter dated May 26, 2003 between Maggie Julier and Consolidated Water Co. Ltd. (incorporated
herein by reference to the exhibit filed as a part of our Form 10-K for the fiscal year ended December 31, 2003,
Commission File No. 0-25248)10.47
    
    Employee share option notice letter dated July 8, 2004 between Billy Banker and Consolidated Water Co. Ltd.10.48
    
    Employee share option notice letter dated July 8, 2004 between Chet Ritch Consolidated Water Co. Ltd.10.49
    
    Employee share option notice letter dated July 8, 2004 between David Hooker and Consolidated Water Co. Ltd.10.50
    
    Employee share option notice letter dated July 8, 2004 between Elizabeth Triana and Consolidated Water Co.
Ltd.10.51
    
    Employee share option notice letter dated July 8, 2004 between Helverth Rodriguez and Consolidated Water
Co. Ltd.10.52
    
    Employee share option notice letter dated July 8, 2004 between Ivan Tabora and Consolidated Water Co. Ltd.10.53
    
    Employee share option notice letter dated July 8, 2004 between Luis Wood and Consolidated Water Co. Ltd.10.54
    
    Employee share option notice letter dated July 8, 2004 between Maggie Julier and Consolidated Water Co. Ltd.14
    
    Code of Business Conduct and Ethics (incorporated herein by reference to the exhibit filed as a part of
our Form 10-K for the fiscal year ended December 31, 2003, Commission File No. 0-25248)21
    
    Subsidiaries of the Registrant23.1
    
    Consent of KPMG  Consolidated Water
Co. Ltd.
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23.2
    
    Consent of
KPMG  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 200299.1
    
    Compensation Committee Charter (incorporated herein by reference to the exhibit filed as a part of our Form
10-K for the fiscal year ended December 31, 2003, Commission File No. 0-25248)99.2
    
    Audit Committee Charter (incorporated herein by reference to the exhibit filed as a part of our Form 10-K
for the fiscal year ended December 31, 2003, Commission File No. 0-25248)99.3
    
    Nominations Committee Charter (incorporated herein by reference to the exhibit filed as a part of our Form
10-K for the fiscal year ended December 31, 2003, Commission File No. 0-25248)
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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. CONSOLIDATED WATER CO. LTD.`
    
    By: /s/ Jeffrey M. Parker

Jeffrey M. Parker
Chairman of the Board of Directors
 Dated: April 26, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated. Signature
    
    Title
    
    DateBy:
    
    /s/ Jeffrey M. Parker
    
    Chairman of theJeffrey M. Parker
    
    Board of Directors
    
    April 26, 2005By:
    
    /s/ Frederick W. McTaggart
    
    Director, Chief ExecutiveFrederick W. McTaggart
    
    Officer and President(PrincipalExecutive Officer)
    
    April 26, 2005By:
    
    /s/ Brent J. Santha
    
    Chief Financial Officer (PrincipalBrent J. Santha
    
    Financial and Accounting Officer)
    
    April 26, 2005By:
    
    /s/ J. Bruce Bugg, Jr.J. Bruce Bugg, Jr.
    
    Director
    
    April 26, 2005By:
    
    /s/ William T. AndrewsWilliam T. Andrews
    
    Director
    
    April 26, 2005
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##### Table of Contents



By:
    
    /s/ Brian E. ButlerBrian E. Butler
    
    Director
    
    April 26, 2005By:
    
    /s/ Steven A. CarrSteven A. Carr
    
    Director
    
    April 26, 2005By:
    
    /s/ Richard L. FinlayRichard L. Finlay
    
    Director
    
    April 26, 2005By:
    
    /s/ Clarence B. Flowers, Jr.Clarence B. Flowers, Jr.
    
    Director
    
    April 26, 2005By:
    
    /s/ Wilmer PergandeWilmer Pergande
    
    Director
    
    April 26, 2005By:
    
    /s/ David SasnettDavid Sasnett
    
    Director
    
    April 26, 2005By:
    
    /s/ Raymond WhittakerRaymond Whittaker
    
    Director
    
    April 26, 2005By:
    
    /s/ Carson K. EbanksCarson K. Ebanks
    
    Director
    
    April 26, 2005
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##### Table of Contents



CONSOLIDATED WATER CO. LTD. INDEX TO EXHIBITS FILED WITH 10-K 4.2
    
    Amended and Restated Articles of Association of Consolidated Water Co. Ltd., dated August 11, 2004.10.34
    
    Employment contract dated April 1, 2005 between Joseph Pivinski and Consolidated Water Co. Ltd10.47
    
    Employee share option notice letter dated July 8, 2004 between Billy Banker and Consolidated Water Co. Ltd.10.48
    
    Employee share option notice letter dated July 8, 2004 between Chet Ritch Consolidated Water Co. Ltd.10.49
    
    Employee share option notice letter dated July 8, 2004 between David Hooker and Consolidated Water Co. Ltd.10.50
    
    Employee share option notice letter dated July 8, 2004 between Elizabeth Triana and Consolidated Water Co.
Ltd.10.51
    
    Employee share option notice letter dated July 8, 2004 between Helverth Rodriguez and Consolidated Water
Co. Ltd.10.52
    
    Employee share option notice letter dated July 8, 2004 between Ivan Tabora and Consolidated Water Co. Ltd.10.53
    
    Employee share option notice letter dated July 8, 2004 between Luis Wood and Consolidated Water Co. Ltd.10.54
    
    Employee share option notice letter dated July 8, 2004 between Maggie Julier and Consolidated Water Co. Ltd.21
    
    Subsidiaries of the Registrant.23.1
    
    Consent of
KPMG  Consolidated Water Co. Ltd.23.2
    
    Consent of
KPMG  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