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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-Q (Mark One) [X]
    
    QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2004
 OR [   ]
    
    TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transaction period from  to
 Commission File Number: 0-25248 CONSOLIDATED WATER CO. LTD.   CAYMAN ISLANDS
(State or other jurisdiction of incorporation or organization)
    
    N/A
(I.R.S. Employer Identification No.)Trafalgar Place, West Bay Road, P.O. Box 1114 GT,
Grand Cayman, B.W.I.
(Address of principal executive offices)
    
    N/A
(Zip Code)
 Registrants telephone number, including area code: (345) 945-4277 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
           Yes [X] No [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
           Yes [   ] No [X] As at November 5, 2004,there were 5,753,485 of the registrants ordinary
shares of common stock, with CI$ 1.00 par value, outstanding.




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




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TABLE OF CONTENTS Section
    
    Description
    
    PagePART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets as at September 30, 2004
and December 31, 2003
    
    
    1Condensed Consolidated Statements of Income for each of the
three and nine months ended September 30, 2004 and 2003
    
    
    2Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2004 and 2003
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2.
    
    Managements Discussions and Analysis of Financial Condition
and Results of Operations
    
    
    9Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    17Item 4.
    
    Controls and Procedures
    
    
    17PART II
    
    OTHER INFORMATIONItem 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    18Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    19Item 6.
    
    Exhibits
    
    
    20SIGNATURE
    
    
    
    
    21Section 302 Certification of CEOSection 302 Certification of CFOSection 906 Certification of CEOSection 906 Certification of CFO
  Forward-Looking Statements This Form 10-Q for Consolidated Water Co. Ltd. (the Company) includes
statements that may constitute forward-looking statements, usually containing
the words believe, estimate, project, intend, expect or similar
expressions. These statements are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements inherently involve risks and uncertainties that could cause actual
results to differ materially from the forward-looking statements. Factors that
would cause or contribute to such differences include, but are not limited to,
continued acceptance of the Companys products and services in the marketplace,
changes in its relationship with the governments of the jurisdictions in which
it operates, the ability to successfully secure contracts for water projects in
other countries, the ability to develop and operate such projects profitably,
and other risks detailed in the Companys other periodic report filings with
the Securities and Exchange Commission. By making these forward-looking
statements, the Company undertakes no obligation to update these statements for
revisions or changes after the date of this Form 10-Q.




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PART I  FINANCIAL INFORMATION 
 Item 1. Financial Statements CONSOLIDATED WATER CO. LTD. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
  September 30,
    
    December 31,2004
    
    2003(unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    
    9,119,384
    
    
    
    8,236,924Accounts receivable
    
    
    6,278,203
    
    
    
    3,859,496Inventory
    
    
    1,648,825
    
    
    
    1,546,185Prepaid expenses and other assets
    
    
    479,188
    
    
    
    596,386Current portion of loans receivable
    
    
    954,095
    
    
    
    1,098,732Total current assets
    
    
    18,479,695
    
    
    
    15,337,723Loans receivable
    
    
    2,517,179
    
    
    
    3,194,346Property, plant and equipment, net
    
    
    28,400,996
    
    
    
    29,662,297Other assets
    
    
    447,346
    
    
    
    505,793Investments in affiliates
    
    
    10,487,002
    
    
    
    10,034,260Intangible assets
    
    
    5,653,851
    
    
    
    6,431,955Goodwill
    
    
    3,568,374
    
    
    
    3,395,752Total assets
    
    $
    69,554,443
    
    
    $
    68,562,126LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesDividends payable
    
    
    797,126
    
    
    
    686,118Accounts payable and other liabilities
    
    
    2,996,722
    
    
    
    2,072,245Current portion of long term debt
    
    
    3,683,144
    
    
    
    3,763,144Total current liabilities
    
    
    7,476,992
    
    
    
    6,521,507Long term debt
    
    
    13,959,084
    
    
    
    16,633,437Security deposits and other liabilities
    
    
    352,495
    
    
    
    352,495Minority interest in Waterfields Company Limited
    
    
    859,076
    
    
    
    806,160Total liabilities
    
    
    22,647,647
    
    
    
    24,313,599Stockholders equityRedeemable preferred stock, $1.20 par value. Authorized 100,000
shares; issued and outstanding 13,921 shares as at September
30, 2004 and 13,585 shares at as December 31, 2003
    
    
    16,705
    
    
    
    16,302Class A common stock, $1.20 par value. Authorized 9,840,000
shares; issued and outstanding 5,748,855 shares as at September
30, 2004 and 5,687,010 shares at as December 31, 2003
    
    
    6,898,626
    
    
    
    6,824,412Class B common stock, $1.20 par value. Authorized 60,000 shares;
issued and outstanding nil shares as at September 30, 2004 and
nil shares as at December 31, 2003
    
    
    
    
    
    
    Stock and options earned but not issued
    
    
    95,568
    
    
    
    21,494Additional paid-in capital
    
    
    27,170,138
    
    
    
    26,773,342Retained earnings
    
    
    12,725,759
    
    
    
    10,612,977Total stockholders equity
    
    
    46,906,796
    
    
    
    44,248,527Total liabilities and stockholders equity
    
    $
    69,554,443
    
    
    $
    68,562,126
 The accompanying information and notes are an
integral part of these condensed consolidated financial statements. 1




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CONSOLIDATED WATER CO. LTD. 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (Unaudited)
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Retail water sales
    
    
    2,522,708
    
    
    
    2,572,152
    
    
    
    9,634,096
    
    
    
    8,253,530Bulk water sales
    
    
    2,552,605
    
    
    
    2,141,092
    
    
    
    7,716,477
    
    
    
    4,621,534Service revenue
    
    
    203,741
    
    
    
    290,857
    
    
    
    675,543
    
    
    
    867,730Total revenue
    
    
    5,279,054
    
    
    
    5,004,101
    
    
    
    18,026,116
    
    
    
    13,742,794Retail cost of sales
    
    
    (1,280,030
    )
    
    
    (1,208,113
    )
    
    
    (4,071,181
    )
    
    
    (3,642,109
    )Bulk cost of sales
    
    
    (1,913,867
    )
    
    
    (1,725,331
    )
    
    
    (5,808,369
    )
    
    
    (3,889,921
    )Service cost of sales
    
    
    (142,734
    )
    
    
    (94,236
    )
    
    
    (447,851
    )
    
    
    (354,944
    )Total cost of sales
    
    
    (3,336,631
    )
    
    
    (3,027,680
    )
    
    
    (10,327,401
    )
    
    
    (7,886,974
    )Gross profit
    
    
    1,942,423
    
    
    
    1,976,421
    
    
    
    7,698,715
    
    
    
    5,855,820General and administrative expenses
    
    
    (1,419,611
    )
    
    
    (1,048,257
    )
    
    
    (3,892,809
    )
    
    
    (2,748,131
    )Net loss due to Hurricane Ivan
    
    
    (387,472
    )
    
    
    
    
    
    
    (387,472
    )
    
    
    Income from operations
    
    
    135,340
    
    
    
    928,164
    
    
    
    3,418,434
    
    
    
    3,107,689Other income (expenses):Interest income
    
    
    21,600
    
    
    
    24,975
    
    
    
    54,237
    
    
    
    56,768Interest expense
    
    
    (183,622
    )
    
    
    (155,034
    )
    
    
    (503,040
    )
    
    
    (956,253
    )Other income
    
    
    127,981
    
    
    
    119,155
    
    
    
    378,696
    
    
    
    310,848Equity in earnings of affiliates
    
    
    340,367
    
    
    
    221,773
    
    
    
    846,480
    
    
    
    669,775306,326
    
    
    
    210,869
    
    
    
    776,373
    
    
    
    81,138Net income before income taxes
    
    
    441,666
    
    
    
    1,139,033
    
    
    
    4,194,807
    
    
    
    3,188,827Income taxes
    
    
    (6,836
    )
    
    
    (2,538
    )
    
    
    (21,011
    )
    
    
    (24,051
    )Minority Interest
    
    
    (10,798
    )
    
    
    (15,197
    )
    
    
    (61,806
    )
    
    
    (15,197
    )Net income
    
    $
    424,032
    
    
    $
    1,121,298
    
    
    $
    4,111,990
    
    
    $
    3,149,579Basic earnings per share
    
    $
    0.07
    
    
    $
    0.20
    
    
    $
    0.72
    
    
    $
    0.67Diluted earnings per common share
    
    $
    0.07
    
    
    $
    0.20
    
    
    $
    0.70
    
    
    $
    0.66Dividends declared per share
    
    $
    0.115
    
    
    $
    0.105
    
    
    $
    0.345
    
    
    $
    0.315Weighted average number of common
shares used in the determination
of:Basic earnings per share
    
    
    5,748,855
    
    
    
    5,570,570
    
    
    
    5,731,898
    
    
    
    4,660,588Diluted earnings per share
    
    
    5,886,791
    
    
    
    5,676,375
    
    
    
    5,861,790
    
    
    
    4,770,941
 The accompanying information and notes are an
integral part of these condensed consolidated financial statements. 2




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CONSOLIDATED WATER CO. LTD. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
  Nine Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003Net cash flows provided by operating activities
    
    
    5,297,563
    
    
    
    4,472,623Cash flows provided by (used in) investing activitiesDeferred expenditures
    
    
    
    
    
    
    401,971Purchases of property, plant and equipment
    
    
    (1,728,524
    )
    
    
    (1,841,816
    )Proceeds from sale of property, plant and equipment
    
    
    20,000
    
    
    
    Business combinations, net of cash acquired
    
    
    
    
    
    
    (19,892,894
    )Investment in affiliate
    
    
    
    
    
    
    (8,961,624
    )Receipt of income from affiliate
    
    
    681,750
    
    
    
    Collections from loans receivable
    
    
    821,804
    
    
    
    671,083Net cash used in investing activities
    
    
    (204,970
    )
    
    
    (29,623,280
    )Cash flows provided by (used in) financing activitiesProceeds from new credit facility
    
    
    
    
    
    
    28,056,126Deferred expenditures
    
    
    
    
    
    
    (383,207
    )Dividends paid
    
    
    (1,888,200
    )
    
    
    (1,347,307
    )Proceeds from issuance of stock
    
    
    432,421
    
    
    
    18,373,814Principal payments of long term debt
    
    
    (2,754,354
    )
    
    
    (12,411,606
    )Net cash (used in) provided by financing activities
    
    
    (4,210,133
    )
    
    
    32,287,820Net increase in cash and cash equivalents
    
    
    882,460
    
    
    
    7,137,163Cash and cash equivalents at beginning of period
    
    
    8,236,924
    
    
    
    568,304Cash and cash equivalents at end of period
    
    $
    9,119,384
    
    
    $
    7,705,467Interest paid in cash
    
    $
    430,861
    
    
    $
    600,335Interest received in cash
    
    $
    54,237
    
    
    $
    55,957
 The accompanying information and notes are an
integral part of these condensed consolidated financial statements. 3




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CONSOLIDATED WATER CO. LTD. 
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 1. Presentation of Financial Information The accompanying unaudited Condensed Consolidated Financial Statements were
prepared in accordance with the instructions for Form 10-Q and, therefore, do
not include all disclosures necessary for a complete presentation of financial
condition, results of operations, and cash flows in conformity with accounting
principles generally accepted in the United States of America. All adjustments
that are, in the opinion of management, of a normal recurring nature and are
necessary for a fair presentation of the interim financial statements have been
included. The results of operations for the period ended September 30, 2004
are not necessarily indicative of the results that may be expected for the
entire fiscal year or any other interim period. The accompanying consolidated financial statements of the Company should be
read in conjunction with the consolidated financial statements and notes
included in the Companys Annual Report on Form 10  K for the year ended
December 31, 2003. Certain of the prior periods figures have been reclassified to conform to the
current periods presentation. The Company has reallocated various expenses in
cost of sales, general and administrative expenses and interest expense, as
management has determined it more appropriate to reflect these amounts in its
current allocations. There is no impact to net income of the Company as a
result of these reclassifications. 2 Principles of Consolidation The accompanying unaudited Condensed Consolidated Financial Statements include
the accounts of the Companys wholly-owned subsidiaries, Cayman Water Company
Limited, Belize Water Limited, Ocean Conversion (Cayman) Limited, DesalCo
Limited, DesalCo (Barbados) Limited, and its majority owned subsidiary
Waterfields Company Limited. All intercompany balances and transactions have
been eliminated in consolidation. 3. Stock Based Compensation The Company currently has four stock compensation plans. The Company accounts
for stock  based compensation plans for employees and directors using the
intrinsic value method. Under this method, the Company records no compensation
expense for stock options granted when the exercise price of options granted is
equal to or greater than the fair market value of the Companys common stock on
the date of grant. 4




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CONSOLIDATED WATER CO. LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) 3. Stock Based Compensation (continued) The following table presents the effect on net income and earnings per share if
the Company had applied a fair value recognition method: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income, as reported
    
    $
    424,032
    
    
    $
    1,121,298
    
    
    $
    4,111,990
    
    
    $
    3,149,579Add: Stock-based
employee compensation
expense included in
reported net income
    
    
    45,750
    
    
    
    31,738
    
    
    
    113,067
    
    
    
    97,078Deduct: Total
stock-based
compensation expense
determined under fair
value based method for
all awards
    
    
    (77,773
    )
    
    
    (38,082
    )
    
    
    (170,051
    )
    
    
    (175,576
    )Pro forma net income
    
    $
    392,009
    
    
    $
    1,114,954
    
    
    $
    4,055,006
    
    
    $
    3,071,081Earnings per shareBasic  as reported
    
    $
    0.07
    
    
    $
    0.20
    
    
    $
    0.72
    
    
    $
    0.67Basic  pro forma
    
    $
    0.07
    
    
    $
    0.20
    
    
    $
    0.71
    
    
    $
    0.66Diluted  as reported
    
    $
    0.07
    
    
    $
    0.20
    
    
    $
    0.70
    
    
    $
    0.66Diluted  pro forma
    
    $
    0.07
    
    
    $
    0.20
    
    
    $
    0.69
    
    
    $
    0.64
 4. Segment Information Under the Statements of Financial Accounting Standards 131, Disclosure about
Segments of an Enterprise and Related Information, management considers; (i)
the operations to supply water to retail customers, (ii) the operations to
supply water to bulk customers, and (iii) the provision of engineering and
management services as separate business segments. For purposes of segment information, the accounts of Ocean Conversion (BVI)
Ltd. have been proportionally consolidated into the Bulk water segment. An
adjustment has been made in reconciling items to account for the investment
under the equity method. Also included in reconciling items are corporate
expenses including interest expense that do not relate to any specific
operating segment. 5




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CONSOLIDATED WATER CO. LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) 4. Segment Information (continued) As at September 30 and for the three months then ended Retail Water
    
    Bulk Water
    
    Services2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Revenue
    
    
    2,522,708
    
    
    
    2,572,152
    
    
    
    3,334,851
    
    
    
    2,660,242
    
    
    
    203,741
    
    
    
    290,857Cost of sales
    
    
    1,280,030
    
    
    
    1,208,113
    
    
    
    2,192,300
    
    
    
    1,888,104
    
    
    
    142,734
    
    
    
    94,236Net income (loss)
    
    
    (300,050
    )
    
    
    504,735
    
    
    
    634,739
    
    
    
    440,677
    
    
    
    16,846
    
    
    
    145,166Property, plant and
equipment
    
    
    18,402,083
    
    
    
    19,407,313
    
    
    
    11,882,772
    
    
    
    11,591,488
    
    
    
    31,103
    
    
    
    10,215
   [Additional columns below] [Continued from above table, first column(s) repeated] Reconciling items
    
    Total2004
    
    2003
    
    2004
    
    2003Revenue
    
    
    (782,246
    )
    
    
    (519,150
    )
    
    
    5,279,054
    
    
    
    5,004,101Cost of sales
    
    
    (278,433
    )
    
    
    (162,773
    )
    
    
    3,336,631
    
    
    
    3,027,680Net income (loss)
    
    
    72,497
    
    
    
    30,720
    
    
    
    424,032
    
    
    
    1,121,298Property, plant and
equipment
    
    
    (1,914,962
    )
    
    
    (1,915,158
    )
    
    
    28,400,996
    
    
    
    29,093,858
 As at September 30 and for the nine months then ended Retail Water
    
    Bulk Water
    
    Services2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Revenue
    
    
    9,634,096
    
    
    
    8,253,530
    
    
    
    9,815,319
    
    
    
    6,224,568
    
    
    
    675,543
    
    
    
    867,730Cost of sales
    
    
    4,071,181
    
    
    
    3,642,109
    
    
    
    6,618,580
    
    
    
    4,456,908
    
    
    
    447,851
    
    
    
    354,944Net income
    
    
    1,935,283
    
    
    
    2,499,787
    
    
    
    1,891,178
    
    
    
    645,098
    
    
    
    111,357
    
    
    
    195,034Property, plant and
equipment
    
    
    18,402,083
    
    
    
    19,407,313
    
    
    
    11,882,772
    
    
    
    11,591,488
    
    
    
    31,103
    
    
    
    10,215
   [Additional columns below] [Continued from above table, first column(s) repeated] Reconciling items
    
    Total2004
    
    2003
    
    2004
    
    2003Revenue
    
    
    (2,098,842
    )
    
    
    (1,603,034
    )
    
    
    18,026,116
    
    
    
    13,742,794Cost of sales
    
    
    (810,211
    )
    
    
    (566,987
    )
    
    
    10,327,401
    
    
    
    7,886,974Net income
    
    
    174,172
    
    
    
    (190,340
    )
    
    
    4,111,990
    
    
    
    3,149,579Property, plant and
equipment
    
    
    (1,914,962
    )
    
    
    (1,915,158
    )
    
    
    28,400,996
    
    
    
    29,093,858
 6




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CONSOLIDATED WATER CO. LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) 5. Earnings Per Share Basic earnings per common share (EPS) is calculated by dividing net income
available to common stockholders by the weighted average number of common
shares outstanding during the period. The computation of diluted EPS assumes
the issuance of common shares for all dilutive-potential common shares
outstanding during the reporting period. In addition, the dilutive effect of
stock options is considered in earnings per common share calculations, if
dilutive, using the treasury stock method. The following summarizes information related to the computation of basic and
diluted earnings per share for the three and nine month period ended September
30, 2004 and 2003. Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income, as reported
    
    $
    424,032
    
    
    $
    1,121,298
    
    
    $
    4,111,990
    
    
    $
    3,149,579Less:Dividends declared and earnings
attributable on preference shares
    
    
    (1,510
    )
    
    
    (3,233
    )
    
    
    (5,615
    )
    
    
    (9,353
    )Net income available to holders of
ordinary shares in the determination
of basic earnings per ordinary share
    
    $
    422,522
    
    
    $
    1,118,065
    
    
    $
    4,106,375
    
    
    $
    3,140,226Weighted average number of ordinary
shares in the determination of basic
earnings per ordinary share
    
    
    5,748,855
    
    
    
    5,570,570
    
    
    
    5,731,898
    
    
    
    4,660,588Plus:Weighted average number of
preference shares outstanding during
the period
    
    
    13,773
    
    
    
    22,751
    
    
    
    13,456
    
    
    
    20,777Potential dilutive effect of
unexercised options
    
    
    124,163
    
    
    
    83,054
    
    
    
    116,436
    
    
    
    89,576Weighted average number of shares
used for determining diluted earnings
per ordinary share
    
    
    5,886,791
    
    
    
    5,676,375
    
    
    
    5,861,790
    
    
    
    4,770,941
 7




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##### Table of Contents



CONSOLIDATED WATER CO. LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) 6. Unusual loss 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 the related insurance claim only when the
recovery is probable. The Company has preliminarily estimated the total loss
to its plant and equipment to be $1,342,274, its spare parts inventories to be
$111,839 and costs relating to rebuilding Cayman Islands operations to be
$133,359. These amounts have been recorded as an unusual loss on the income
statement as Net loss 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 is currently quantifying this loss of profits
with the intention of submitting a claim for such loss to its insurer under its
Loss of Profits insurance policy. The Company has recorded probable recoveries
from insurance of $1,200,000 partially offsetting the estimated loss of
$1,587,472. At the time of this filing, the Company is still in the process of
determining the exact extent of the damage to its plants and equipment and with
the assistance of advisors, is preparing an insurance claim in an effort to
recover losses sustained as a result of Hurricane Ivan. 7. Subsequent events On November 12, 2004, the Company accepted a proposal from the loss adjuster of
the insurance company for an advance payment of $1,200,000 towards claims for
loss and damage to property resulting in the passing of Hurricane Ivan, which
affected the Companys Cayman Islands operations on September 11 and 12, 2004.
This amount has been recorded as a receivable on the September 30, 2004 balance
sheet and has offset part of the unusual loss of $1,587,472. 8




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations Overview Our objective is to provide water services in areas where the supply of potable
water is scarce and where the use of reverse osmosis technology to produce
potable water is economically feasible. By focusing on this market, we believe
that we can provide a superior financial return to our investors. To increase
share value and maintain dividend payouts in accordance with current company
policy, we need to expand our revenues by developing new business opportunities
both within our current service areas, and in new areas. We need to maintain
our high operating efficiencies by adhering to our strict equipment maintenance
and water loss mitigation programs in order to achieve gross profit margins
that have historically been between 40% and 45%. We further believe that many
Caribbean basin and adjacent countries, while being water scarce, also present
opportunities for operation of our plants in limited regulatory settings which
are less restrictive than the highly regulated markets of North America, which
promotes cost effective operation of our equipment. Our business operations and activities are conducted in five countries: the
Cayman Islands, Belize, Barbados, the British Virgin Islands and the Bahamas. Critical Accounting Policies The preparation of our condensed 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 require managements more significant
judgments and estimates in the preparation of our companys consolidated
financial statements. Trade accounts receivable: We maintain an allowance for doubtful accounts for
estimated losses resulting from the inability of our customers to make required
payments. Management continuously evaluates the collectibility of accounts
receivable and records an allowance 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 9




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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. Retail water 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. Due to Hurricane Ivan, we
were unable to perform our normal September month end billing procedures and did not charge our minimum monthly amounts to our Retail customers for the month of September. This
resulted in an accrual being made based on an estimate of water delivered but
unbilled at quarter end, when the readings were not performed. The accrual is
matched with the direct costs of producing, purchasing and delivering water. Bulk water 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. September meter readings
were performed at month end and monthly minimums were invoiced as normal, but due to Hurricane Ivan, we had to estimate our
electricity usage for our Cayman Operations, as we did not receive any billing
data from our electrical supplier for the month of September. This resulted in
an accrual being made for the electricity adjustment portion for the September
Cayman Islands Bulk water bills. The accrual is matched with the direct costs
of producing, purchasing and delivering water. Recognition of net loss due to 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 preliminarily estimated the total loss to our plant and equipment to be $1,342,274,
our spare parts inventories to be $111,839 and costs relating to
rebuilding Cayman Islands operations to be $133,359. These amounts
have been recorded as an unusual loss on the income statement as
Net loss due to Hurricane Ivan. We also accepted a proposal from the loss adjuster of the insurance company for an advance
payment of $1,200,000 towards claims for loss and damage to property
resulting in the passing of Hurricane Ivan, which affected our Cayman
Islands operations on September 11 and 12, 2004. This amount has
been recorded as a receivable on the September 30, 2004 balance sheet and has offset part of the unusual loss of $1,587,472. At the time of this filing, we are preparing an
insurance claim with the assistance of advisors, and plan to submit the claims in an effort to recover all losses sustained as a result of Hurricane Ivan. Revenue Revenue is comprised of retail water sales via pipeline to individual
customers, bulk water sales to large commercial or municipal customers, and
fees for management and engineering services. Expenses Expenses include the cost of sales (direct expenses) and indirect, or
general and administrative, expenses. Direct expenses include royalty payments
to the Cayman Islands government, electricity and chemicals expenses,
production equipment and facility depreciation costs, equipment maintenance
expenses, operational staff costs and amortization of intangible assets.
Indirect, or general and administrative, expenses consist primarily of salaries
and employee benefits for administrative personnel, stock compensation
expenses, office lease payments, depreciation on fixed assets used for
administrative purposes 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. 10




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Results of Operations Three and Nine Months Ended September 30, 2004 Compared to Three and Nine
Months Ended September 30, 2003 Revenue Total revenue increased by 5.5% from $5,004,101 to $5,279,054 for the three
months ended September 30, 2004 and by 31.2% from $13,742,794 to $18,026,116
for the nine months ended September 30, 2004 when compared to the same three
and nine month period in 2003. Revenue from our retail water (Retail) operations decreased by 1.9% from
$2,572,152 to $2,522,708 for the three months ended September 30, 2003 and
2004, respectively, and increased by 16.7% from $8,253,530 to $9,634,096 for
the nine months ended September 30, 2003 and 2004, respectively. For the three
month period, this decrease was primarily due to the effects of Hurricane Ivan,
which reduced our Cayman Islands Retail sales for September by more than half
the budgeted amount. In the last half of September, our operations were only
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.
For the nine month period, this increase was due to higher water sales in our
primary market in the Cayman Islands, due to increased demand in both our
tourist and residential markets before Hurricane Ivan. Published tourist air
arrivals records are only available thru July 2004, however, they show a 25.0%
increase for the month of July 2004 and a 14.5% increase for the seven months
ended July 31, 2004 over the same periods in the prior year. Management feels
that this trend is similar for August and September up to the time Hurricane
Ivan hit the Island but since that time no visitors have been allowed on to the
Island. It is reported that tourist air arrivals will resume on November 20,
2004. Residential markets increased due to increased residential development
over the nine month period. Revenue from our bulk water (Bulk) operations increased by 19.2% from
$2,141,092 to $2,552,605 for the three months ended September 30, 2003 and
2004, respectively, and by 67.0% from $4,621,534 to $7,716,477 for the nine
months ended September 30, 2003 and 2004, respectively. For the three month
period this increase was due to the additional one month of revenue from our
acquisition of Waterfields Company Limited when compared to the same three
month period in 2003. For the nine month period this increase was 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 the same nine month
period in 2003. Our Bulk operations on the Cayman Islands were less affected
by Hurricane Ivan than our Cayman Islands Retail operations and therefore did
not experience the same drop in revenue. Revenues from our Belize operations
declined by 26.3% and 25.0%, respectively during the same three and nine month
periods due to the reduced water rates in the new long-term contract which was
signed in September 2003 and came into full effect on June 1, 2004 after all
conditions precedent had been met or waived. These reduced prices have been
partially offset by reduced amortization costs on an intangible asset
representing the Belize water sale contract, which is now being amortized over
23 years. The new contract also makes us the exclusive producer of potable
water for our customer on Ambergris Caye for the term of the agreement. Revenue from services (Service) decreased by 30.0% from $290,857 to $203,741
for the three months ended September 30, 2003 and 2004, respectively, and by
22.1% from $867,730 to $675,543 for the nine months ended September 30, 2003
and 2004, respectively. For the three and nine month periods these decreases
were 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. 11




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Other Income (Expenses) Total other income increased from $210,869 to $306,326 for the three months
ended September 30, 2003 and 2004, respectively, and from $81,138 to $776,373
for the nine months ended September 30, 2003 and 2004, respectively. For the
three months ended, this increase was due to increased profit sharing and
equity income from our investment in Ocean Conversion (BVI) Ltd. For the nine
month ended, this increase was due primarily to decreased interest expense
because we repaid our bridge loan facility on July 8, 2003 with proceeds from
our 2003 equity offering, and the associated reduction of amortization costs of
these bridge loan closing costs in the prior year. Increased profit sharing
and equity income from our investment in Ocean Conversion (BVI) Ltd. also
contributed to the increase in the nine month comparative period. Cost of Sales Total cost of sales increased by 10.2% from $3,027,680 to $3,336,631 for the
three months ended September 30, 2004 and by 30.9% from $7,886,974 to
$10,327,401 for the nine months ended September 30, 2004 when compared to the
same three and nine month periods in 2003. During these same periods in 2004,
our total revenue increased by 5.5% and 31.2%, respectively. Cost of sales of our Retail operations increased by 6.0% from $1,208,113 to
$1,280,030 for the three months ended September 30, 2003 and 2004,
respectively, and by 11.8% from $3,642,109 to $4,071,181 for the nine months
ended September 30, 2003 and 2004, respectively, while our Retail revenue
decreased by 1.9% and increased by 16.7% for the same periods. For the three
and nine month periods, these increases 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 September 30, 2004 we produced
significantly less water than last year but still incurred our fixed operating
costs. Cost of sales of our Bulk operations increased by 10.9% from $1,725,331 to
$1,913,867 for the three months ended September 30, 2003 and 2004,
respectively, and by 49.3% from $3,889,921 to $5,808,369 for the nine months
ended September 30, 2003 and 2004, respectively, while our Bulk revenue
increased by 19.2% and 67.0% for the same periods. For the three month period
this increase was due to the additional one month of cost of sales from our
acquisition of Waterfields Company Limited when compared to the same three
month period in 2003. For the nine months periods these increases in cost of
sales were 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 the same nine month
periods in 2003. This increase was also affected by 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 from our Service operations increased by 51.5% from $94,236 to
$142,734 for the three months ended September 30, 2003 and 2004, respectively,
and by 26.2% from $354,944 to $447,851 for the nine months ended September 30,
2003 and September 30, 2004, respectively, while our Service revenue decreased
by 30.0% and 22.1% for the same periods. For the three and nine month periods
these increases were due to additional labour expense because certain permanent
staff were not charged out to construction projects. In addition for the nine
month period 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. For the three and nine month periods our Barbados operation
also experienced increased maintenance when compared to the same periods is
2003. 12




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Gross Profit Overall gross profit margin decreased from 39.5% to 36.8% for the three months
ended September 30, 2004 and increased from 42.6% to 42.7% for the nine months
ended September 30, 2004 when compared to the same three and nine month periods
in 2003, for the reasons explained below. Gross profit margin for our Retail operations decreased from 53.0% to 49.3% for
the three months ended September 30, 2004 and increased from 55.9% to 57.7% for
the nine months ended September 30, 2004 when compared to the same three and
nine month periods in 2003. The primary reason for the three month decrease
was due to the effect of Hurricane Ivan, which limited our water sales for the
last half of September, during which period we still incurred our fixed
operational costs. For the nine months ended, 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. Gross profit margin for our Bulk operations increased from 19.4% to 25.0% for
the three months ended September 30, 2004 and from 15.8% to 24.7% for the nine
months ended September 30, 2004 when compared to the same three and nine month
periods in 2003. The primary reason for these increases is due to the addition
of the operations 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 higher gross profit margins than some of
our other Bulk operations is because Waterfields does not incur the
amortization expense that our other Bulk operations incur. 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 $529,676 and $581,591
was taken during each of the nine month ended September 30, 2003 and 2004,
respectively in our Bulk operations. Gross profit margin for our Service reporting segment decreased from 67.6% to
29.9% for the three months ended September 30, 2004 and from 59.1% to 33.7% for
the nine months ended September 30, 2004 when compared to the same three and
nine month periods in 2003. The primary reason for these decreases is because
we did not have any new construction projects in 2004 from which we earn
engineering revenues and to which we charge out certain labour costs. In
addition, we carried out certain intermittent maintenance work in Barbados,
which increased our costs. General and Administrative Expenses Total general and administrative expenses increased by 35.4% from $1,048,257 to
$1,419,611 for the three months ended September 30, 2004 and by 41.7% from
$2,748,131 to $3,892,809 for the nine months ended September 30, 2004 when
compared to the same three and nine month periods in 2003. General and
administrative expenses were at 20.9% and 26.9% of total revenue for the three
months ended September 30, 2003 and 2004, respectively and at 20.0% and 21.6%
of total revenue for the nine months ended September 30, 2003 and 2004,
respectively. General and administrative expenses for our Retail operations increased by
31.3% from $886,226 to $1,163,291 for the three months ended September 30, 2003
and 2004, respectively, and by 55.3% from $2,109,878 to $3,276,086 for the nine
months ended September 30, 2003 and 2004, respectively. These increases are
comprised of additional 2003 audit costs related to the work performed on the
2003 acquisitions, significantly higher 2004 audit fees, higher legal fees, new
consulting fees related to the new internal control review and testing
procedures, increases in salaries and bonuses, costs relating to 13




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our purchasing department, additional administration staff, increases in
director fees and higher insurance premiums. General and administrative expenses for our Bulk operations increased by 84.7%
from $130,544 to $241,110 for the three months ended September 30, 2003 and
2004, respectively, and by 40.0% from $415,900 to $582,088 for the nine months
ended September 30, 2003 and 2004, respectively. The three and nine month
increases were due to additional expenses incurred by our Waterfields Company
Limited operations for bank charges and government fees relating to the
exchange of Bahamian dollars to U.S. dollars, higher directors fees and
expenses, and increased legal fees relating to general legal advise. The nine
month increase was also affected by an additional seven months of expenses from
our Waterfields Company Limited operations when compared to the same nine month
period in 2003. General and administrative expenses for our Service reporting segment decreased
by 51.7% from $31,487 to $15,210 for the three months ended September 30, 2003
and 2004, respectively, and by 84.4% from $222,353 to $34,635 for the nine
months ended September 30, 2003 and 2004, respectively. In May 2003, we closed
our Bermuda office and relocated those operations to the Cayman Islands. These
decreases are the result of our assimilation of the general and administrative
functions of that office. Unusual loss 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, which are covered by property insurance. Five out of six of our
seawater conversion plants in the Cayman Islands suffered minor to moderate
damage and our Britannia plant suffered catastrophic damage. We believe based
on our assessment to date that the Britannia water production, post treatment
and distribution equipment is a total loss. We are in the process of claiming
such loss with our insurer. We are currently meeting all of our customers
water demands without this plant in operation and we expect to replace this
equipment before the end of March 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, in the period the loss occurs,
and record any gain from the related insurance claim only when the recovery is
probable. We have preliminarily estimated the total loss to our plant and
equipment to be $1,342,274, $111,839 to our spare parts inventories and
$133,359 relating to the rebuilding of the Cayman Islands operations. These
amounts have been recorded as part of income from operations as an unusual loss
in the income statement as Net loss from Hurricane Ivan. We also suffered
loss of profits during the period that we were unable to sell water to our
Cayman Islands customers. We are currently quantifying this loss of profits
with the intention of submitting a claim for such loss to our insurer under our
Loss of Profits insurance policy. We recorded probable recoveries of insurance
of $1,200,000 partially offsetting our estimated loss of $1,587,472. At the
time of this filing, management is preparing an insurance claim with the
assistance of advisors, and plans to submit the claims in an effort to recover
all losses sustained as a result of Hurricane Ivan. We expect that the
resulting unusual loss for this quarter will be offset in future periods when
we finalize our insurance claims and reach a final settlement. The probable recoveries of insurance of $1,200,000 were recorded as part of
accounts receivable and explain part of the accounts receivable increase.
Accounts receivable also increased, as we were unable to perform our normal
collection procedures for our Cayman Islands Retail operations during September
2004 due to Hurricane Ivan. 14




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Net Income Net income decreased by 62.2% from $1,121,298 to $424,032 for the three months
ended September 30, 2004 and increased by 30.6% from $3,149,579 to $4,111,990
for the nine months ended September 30, 2004 when compared to the same three
and nine month periods in 2003 as the result of factors explained above. Dividends On January 31, 2004, we paid a dividend of $0.105 per share to shareholders of
record on December 31, 2003, on April 30, 2004, we paid a dividend of $0.115
per share to shareholders of record on March 31, 2004, on July 31, 2004, we
paid a dividend of $0.115 per share to shareholders of record on June 30, 2004,
and on October 31, 2004, we paid a dividend of $0.115 per share 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 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 loan agreement 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 per
share to shareholders of record on September 9, 2004. Liquidity and Capital Resources Overview For the three and nine months ended September 30, 2004, we generated cash
primarily from our various business segments in the Cayman Islands, the
Bahamas, Belize and Barbados and from dividends and profit sharing rights from
our equity investment in the British Virgin Islands. Cash flow is affected by
the timely receipt of customer payments, by 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 in which we operate, such as weather conditions and the world
economy. We use cash to fund our various business segments in the Cayman
Islands, the Bahamas, Belize and Barbados, to fund capital projects, to expand
our infrastructure, to pay dividends, to repay principal on our loans, to
repurchase our shares when appropriate and to take advantage of new investment
opportunities which expand our operations. Operating Activities Cash generated from operating activities for the nine months ended September
30, 2003 and 2004 was $4,472,623 and $5,297,563, respectively. We generate
cash through the utilization of our existing plants, equipment and resources in
all segments of the business, minimization of water losses and operating
efficiencies created by our management team. 15




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Investing Activities Cash used in investing activities during the nine months ended September 30,
2003 and 2004 was $29,623,280 and $204,970, respectively. During the nine
months ended September 30, 2004, we used cash to make capital purchases and
improvements to our water production plant and equipment in our Bulk and Retail
segments and to our existing distribution system in our Retail segment. As at
September 30, 2004, we had only purchased a small amount of replacement
equipment due to Hurricane Ivan, but intend to replace most of the damaged
assets in the next quarter. This was offset by cash provided by an advance
payment received from our insurance claim, the collection of our loans
receivable and from our investment in affiliates through receipt of profit
sharing and dividends. During the same period in 2003, cash in the amount of
$31,966,916 was used for acquisitions. We also continued to make minor
expansions to our water distribution system in our Retail segment by
constructing additional pipelines to service new developments within our
exclusive licensed area. Financing Activities Cash provided by financing activities during the nine months ended September
30, 2003 was $32,287,820 and cash used in financing activities during the nine
months ended September 30, 2004 was $4,210,133. During the nine months ended
September 30, 2004 our primary financing activities were the payment of
dividends and the repayment of long-term debt. This was partially offset by
the issuance of shares though the exercise of stock options by management.
During the comparable nine months ended September 30, 2003, our primary
financing activity was to draw down $28,056,126 from our Scotiabank facilities.
Also during that period, $2,214,286 was repaid on our Scotiabank facilities
and $2,832,883 to repay another credit facility, which was closed. Material Commitments for Capital Expenditures and Contingencies At September 30, 2004, we had committed approximately $680,000 for capital
expenditures for the purchase, site preparation and construction of one water
storage tank at our Ambergris Caye, Belize plant which we intend to finance
using cash from our Belize Bulk operations. We also expect to replace all
plant and equipment, which was damaged by Hurricane Ivan during the fourth
quarter of 2004 and in early 2005. We intend to finance these replacements
using the proceeds of an insurance claim under our property insurance policy. We have guaranteed to Scotiabank 50% of the Ocean Conversion (BVI) Ltd. loan of
$630,000. 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. 16




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Impact of Inflation Under the terms of our Cayman Islands license, Belize, Bahamas, British Virgin
Islands and Barbados water sales agreements, there is an automatic price
adjustment for inflation on an annual basis, subject to temporary exceptions.
We, therefore, believe that the impact of inflation on our net income, measured
in consistent dollars, will not be material. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk Credit Risk We are not exposed to significant credit risk on retail customer accounts in
the Cayman Islands and Bimini, Bahamas, as our policy is to cease supply of
water to customers whose accounts are more than 45 days overdue. Our main
exposure to credit risk is from our bulk water sales customers in Belize, the
Bahamas, the British Virgin Islands, Barbados and the Cayman Islands. In
addition, the entire balance of our loans receivable is with one Bulk water
customer, Water Authority-Cayman. These loans receivable are secured by assets
which we hold until the receivable is paid in full. Interest Rate Risk As of September 30, 2004, we had loans outstanding totaling $17,642,228, all of
which are based on various lending rates including 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 exchange rates to the U.S. dollar. If
any of these fixed exchange rates become a floating exchange rate, however, our
results of operation could be adversely affected. 
 Item 4. Controls and Procedures Our Chief Executive Officer and Chief Financial Officer (collectively, the
Certifying Officers) are responsible for establishing and maintaining
disclosure controls and procedures for us. Such officers have concluded (based
upon their evaluation of these controls and procedures as of a date within 90
days of the filing of this report) that our disclosure controls and procedures
are effective to ensure that information required to be disclosed by us in this
report is accumulated and communicated to management, including our principal
executive officers as appropriate, to allow timely decisions regarding required
disclosure. The Certifying Officers also have indicated that there were no significant
changes in our internal controls or other factors that could significantly
affect such controls subsequent to the date of their evaluation, and there were
no corrective actions with regard to significant deficiencies and material
weaknesses. Our management, including each of the Certifying Officers, does not expect that
our disclosure controls or our internal controls will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. In addition, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within a company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can 17




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occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or
more people or by management override of the control. The design of any systems
of controls also is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Because of
these inherent limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected. 
 PART II  OTHER INFORMATION 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds As consideration for their services to the Company, on July 6, 2004, the
Company granted to 29 of its employees located in the Cayman Islands, Barbados
and British Virgin Islands an aggregate of 1,960 shares of redeemable preferred
stock (Preferred Stock) of which ten of these employees purchased an
additional 764 shares at $13.45 per share. In addition, the Company issued to
eight of its employees options to purchase an additional 4,240 ordinary shares
of common stock having an exercise price of $23.47 per share. The securities
issued to the employees were exempt from registration under Regulation S
promulgated under the Securities Act of 1933 because the shares were offered
and sold outside of the United States to non-US persons, as defined in
Regulation S. If an employee remains employed by the Company for at least four years, or a
person or affiliated group of persons acquires 30% or more of the Companys
ordinary shares of common stock (whether or not the Preferred Stock has been
held for four years), the Company is obligated to exchange the Preferred Stock
for the same number of ordinary shares of common stock. The Company is also
obligated to exchange the Preferred Stock for an equal number of ordinary
shares of common stock if an employees employment with the Company or any of
its 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 the Company or any of its affiliates terminates for
any other reason, the Company may at any time up to and including the first
anniversary of such termination, redeem the employees Preferred Stock for cash
equal to 75% of the average of the closing market price for the Companys
ordinary shares of common stock on each of the first seven trading days in the
month of October of the year in which such Preferred Stock was issued to the
employee. The options to purchase ordinary shares of common stock, which were issued to
the employees as, discussed above vest on August 4, 2008 and expire one month
thereafter. However, an option may be exercised by an employee at any time
during the period commencing on the earliest of the date of death of the
employee, the date on which the employment of the employee is terminated as a
result of permanent disability or the date on which the employee retires having
reached the age of 65 years. 18




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Item 4. Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of the Companys shareholders was held on August 11,
2004. Of the 5,746,467 ordinary shares outstanding and 13,585 Redeemable
Preferred Shares outstanding on the record date of May 31, 2004, a total of
4,804,126 ordinary shares and 956 Redeemable Preferred Shares were present in
person or by proxy. The ordinary shares and the Redeemable Preferred Shares
are hereafter collectively referred to as the Shares. (b)(i) The following directors were re-elected effective August 11, 2004: Votes CastFor
    Withheld AuthorityWilliam Andrews
    
    
    4,700,638
    
    
    
    103,488J. Bruce Bugg, Jr.
    
    
    4,701,341
    
    
    
    102,694Brian E. Butler
    
    
    4,697,896
    
    
    
    105,230Steven A. Carr
    
    
    4,699,875
    
    
    
    104,251
 (b)(ii) The following directors were not up for election at the Annual Meeting
and their terms of office as directors continued after the Annual Meeting:
Jeffrey M. Parker, Carson K. Ebanks, Richard L. Finlay, Clarence B. Flowers,
Jr., Frederick W. McTaggart, Wilmer Pergande and Raymond Whittaker. (c)(i) The shareholders approved the issuance of the Companys ordinary shares
to Jeffrey M. Parker and Frederick W. McTaggart as part of their annual
bonuses, if earned, in accordance with their respective employment agreements.
Of the votes cast on this matter, 2,218,628 Shares voted for the approval of
the issuance of shares to Messrs. Parker and McTaggart, 391,608 Shares voted
against the matter and 39,503 Shares abstained from voting on the matter. (c)(ii) The shareholders approved the elimination of Article 8.04 from the
Companys Articles of Association, which gives the Board of Directors the
absolute discretion to decline to register a transfer of the Companys ordinary
shares without any reason, the renumbering of the first of the two Articles
numbered 8.05 as 8.04 and the deletion from the first sentence of Article 9.02
of language referring to the right of the Board of Directors to decline to
register a transfer of the Companys ordinary shares. Of the votes cast on
this matter, 2,508,824 Shares voted for the matter, 99,443 Shares voted against
the matter and 41,472 Shares abstained from voting on the matter. (c)(iii) The shareholders approved the Deed of Indemnity Agreements for members
of the Companys Board of Directors. Of the votes cast on this matter,
4,639,013 Shares voted for the matter, 118,780 Shares voted against the matter
and 46,332 Shares abstained from voting on the matter. (c)(iv) The shareholders voted to approve KPMG as the Companys independent
accountants for the year ending December 31, 2004, at the remuneration to be
determined by the Board of Directors. Of the votes cast on this matter,
4,493,592 Shares voted for the matter, 282,171 Shares voted against the matter
and 28,363_Shares abstained from voting on the matter. 19




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Item 6. Exhibits  Exhibits ExhibitNumber
    
    Exhibit Description31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of the
Company31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of the
Company32.1
    
    Section 1350 Certification of Chief Executive Officer of the Company32.2
    
    Section 1350 Certification of Chief Financial Officer of the Company
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SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. CONSOLIDATED WATER CO. LTD.By: /s/ Frederick W. McTaggartFrederick W. McTaggart
Chief Executive Officer
 Dated: November 22, 2004 21