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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 THESECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2004 OR [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES 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
1114 GT, Grand Cayman, B.W.I.
    
    N/A(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (345) 945-4277 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X
 Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). X
 As at July 31, 2004,there were 5,748,855 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 June 30, 2004 and December 31, 2003
    
    
    1Condensed Consolidated Statements of Income for each of the three and six months ended June 30, 2004 and 2003
    
    
    2Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2.
    
    Managements Discussions and Analysis of Financial Condition and Results of Operations
    
    
    8Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    14Item 4.
    
    Controls and Procedures
    
    
    15PART II
    
    OTHER INFORMATIONItem 2.
    
    Changes in Securities and Use of Proceeds
    
    
    15Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    16SIGNATURE
    
    
    
    
    17Amendment to the Company's Articles of AssociationDeed of Indemnity AgreementSec 302 Chief Executive Officer CertificationSec 302 Chief Financial Officer CertificationSec 906 Chief Executive Officer CertificationSec 906 Chief Financial Officer Certification
  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
 June 30,
    
    December 31,2004
    
    2003(unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    
    8,609,799
    
    
    
    8,236,924Accounts receivable
    
    
    4,848,519
    
    
    
    3,859,496Inventory
    
    
    1,636,798
    
    
    
    1,546,185Prepaid expenses and other assets
    
    
    624,053
    
    
    
    596,386Current portion of loans receivable
    
    
    1,028,739
    
    
    
    1,098,732Total current assets
    
    
    16,747,908
    
    
    
    15,337,723Loans receivable
    
    
    2,717,954
    
    
    
    3,194,346Property, plant and equipment, net
    
    
    29,725,262
    
    
    
    29,662,297Other assets
    
    
    460,889
    
    
    
    505,793Investments in affiliates
    
    
    10,483,860
    
    
    
    10,034,260Intangible assets
    
    
    5,886,321
    
    
    
    6,431,955Goodwill
    
    
    3,568,374
    
    
    
    3,395,752Total assets
    
    $
    69,590,568
    
    
    $
    68,562,126LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesDividends payable
    
    
    784,790
    
    
    
    686,118Accounts payable and other liabilities
    
    
    2,049,041
    
    
    
    2,072,245Current portion of long term debt
    
    
    3,683,144
    
    
    
    3,763,144Total current liabilities
    
    
    6,516,975
    
    
    
    6,521,507Long term debt
    
    
    14,771,685
    
    
    
    16,633,437Security deposits and other liabilities
    
    
    352,495
    
    
    
    352,495Minority interest in Waterfields Company Limited
    
    
    848,278
    
    
    
    806,160Total liabilities
    
    
    22,489,433
    
    
    
    24,313,599Stockholders equityRedeemable preferred stock, $1.20 par value. Authorized 100,000
shares; issued and outstanding 11,197 shares as at June 30,
2004 and 13,585 shares at as December 31, 2003
    
    
    13,436
    
    
    
    16,302Class A common stock, $1.20 par value. Authorized 9,840,000
shares; issued and outstanding 5,748,855 shares as at June 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 June 30, 2004 and nil
shares as at December 31, 2003
    
    
    
    
    
    
    Stock and options earned but not issued
    
    
    70,935
    
    
    
    21,494Additional paid-in capital
    
    
    27,142,013
    
    
    
    26,773,342Retained earnings
    
    
    12,976,125
    
    
    
    10,612,977Total stockholders equity
    
    
    47,101,135
    
    
    
    44,248,527Total liabilities and stockholders equity
    
    $
    69,590,568
    
    
    $
    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
    
    Six Months EndedJune 30,
    
    
    
    
    
    June 30,2004
    
    2003
    
    2004
    
    2003Retail water sales
    
    
    3,536,311
    
    
    
    2,862,424
    
    
    
    7,111,387
    
    
    
    5,681,376Bulk water sales
    
    
    2,655,693
    
    
    
    1,505,716
    
    
    
    5,163,872
    
    
    
    2,510,857Service revenue
    
    
    217,360
    
    
    
    382,241
    
    
    
    471,802
    
    
    
    576,873Total revenue
    
    
    6,409,364
    
    
    
    4,750,381
    
    
    
    12,747,061
    
    
    
    8,769,106Retail cost of sales
    
    
    (1,420,869
    )
    
    
    (1,214,120
    )
    
    
    (2,791,151
    )
    
    
    (2,433,996
    )Bulk cost of sales
    
    
    (1,978,442
    )
    
    
    (1,284,141
    )
    
    
    (3,894,501
    )
    
    
    (2,180,160
    )Service cost of sales
    
    
    (160,508
    )
    
    
    (143,139
    )
    
    
    (305,117
    )
    
    
    (260,707
    )Total cost of sales
    
    
    (3,559,819
    )
    
    
    (2,641,400
    )
    
    
    (6,990,769
    )
    
    
    (4,874,863
    )Gross profit
    
    
    2,849,545
    
    
    
    2,108,981
    
    
    
    5,756,292
    
    
    
    3,894,243General and administrative expenses
    
    
    (1,376,510
    )
    
    
    (939,959
    )
    
    
    (2,473,198
    )
    
    
    (1,711,950
    )Income from operations
    
    
    1,473,035
    
    
    
    1,169,022
    
    
    
    3,283,094
    
    
    
    2,182,293Other income (expenses):Interest income
    
    
    22,646
    
    
    
    16,740
    
    
    
    40,429
    
    
    
    32,371Interest expense
    
    
    (157,123
    )
    
    
    (513,118
    )
    
    
    (319,418
    )
    
    
    (801,596
    )Other income
    
    
    142,214
    
    
    
    100,345
    
    
    
    242,922
    
    
    
    191,608Equity in earnings of affiliates
    
    
    306,518
    
    
    
    255,572
    
    
    
    506,113
    
    
    
    448,002314,255
    
    
    
    (140,461
    )
    
    
    470,046
    
    
    
    (129,615
    )Net income before income taxes
    
    
    1,787,290
    
    
    
    1,028,561
    
    
    
    3,753,140
    
    
    
    2,052,678Income taxes
    
    
    (1,169
    )
    
    
    (15,520
    )
    
    
    (14,174
    )
    
    
    (21,513
    )Minority Interest
    
    
    (22,081
    )
    
    
    
    
    
    
    (51,008
    )
    
    
    Net income
    
    $
    1,764,040
    
    
    $
    1,013,041
    
    
    $
    3,687,958
    
    
    $
    2,031,165Basic earnings per share
    
    $
    0.31
    
    
    $
    0.24
    
    
    $
    0.64
    
    
    $
    0.48Diluted earnings per common share
    
    $
    0.30
    
    
    $
    0.23
    
    
    $
    0.63
    
    
    $
    0.47Dividends declared per share
    
    $
    0.115
    
    
    $
    0.105
    
    
    $
    0.23
    
    
    $
    0.21Weighted average number of common
shares used in the determination of:Basic earnings per share
    
    
    5,747,044
    
    
    
    4,273,574
    
    
    
    5,723,327
    
    
    
    4,198,056Diluted earnings per share
    
    
    5,870,984
    
    
    
    4,369,010
    
    
    
    5,847,552
    
    
    
    4,310,270
 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)
 Six Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003Net cash flows provided by operating activities
    
    
    3,509,382
    
    
    
    3,330,998Cash flows provided by (used in) investing
activitiesDeferred expenditures
    
    
    
    
    
    
    301,714Purchase of property, plant and equipment
    
    
    (1,164,396
    )
    
    
    (1,225,482
    )Business combinations, net of cash acquired
    
    
    
    
    
    
    (11,885,839
    )Investment in affiliate
    
    
    
    
    
    
    (8,961,624
    )Receipt of income from affiliate
    
    
    227,250Collections from loans receivable
    
    
    546,385
    
    
    
    448,070Net cash used in investing activities
    
    
    (390,761
    )
    
    
    (21,323,161
    )Cash flows provided by (used in) financing
activitiesProceeds from new credit facility
    
    
    
    
    
    
    28,056,126Deferred expenditures
    
    
    
    
    
    
    (1,230,427
    )Dividends paid
    
    
    (1,226,139
    )
    
    
    (901,218
    )Proceeds from issuance of stock
    
    
    422,145
    
    
    
    584,980Principal payments of long term debt
    
    
    (1,941,752
    )
    
    
    (5,047,169
    )Net cash (used in) provided by financing activities
    
    
    (2,745,746
    )
    
    
    21,462,292Net increase in cash and cash equivalents
    
    
    372,875
    
    
    
    3,470,129Cash and cash equivalents at beginning of period
    
    
    8,236,924
    
    
    
    568,304Cash and cash equivalents at end of period
    
    $
    8,609,799
    
    
    $
    4,038,433Interest paid in cash
    
    $
    273,469
    
    
    $
    480,826Interest received in cash
    
    $
    40,429
    
    
    $
    7,399
 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 June 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
    
    Six Months EndedJune 30,
    
    
    
    
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income, as reported
    
    $
    1,764,040
    
    
    $
    1,013,041
    
    
    $
    3,687,958
    
    
    $
    2,031,165Add: Stock-based
employee compensation
expense included in
reported net income
    
    
    34,239
    
    
    
    37,470
    
    
    
    67,313
    
    
    
    65,340Deduct: Total
stock-based
compensation expense
determined under fair
value based method for
all awards
    
    
    (46,720
    )
    
    
    (128,125
    )
    
    
    (92,279
    )
    
    
    (137,494
    )Pro forma net income
    
    $
    1,751,559
    
    
    $
    922,386
    
    
    $
    3,662,992
    
    
    $
    1,959,011Earnings per shareBasic  as reported
    
    $
    0.31
    
    
    $
    0.24
    
    
    $
    0.64
    
    
    $
    0.48Basic  pro forma
    
    $
    0.30
    
    
    $
    0.21
    
    
    $
    0.64
    
    
    $
    0.46Diluted  as reported
    
    $
    0.30
    
    
    $
    0.23
    
    
    $
    0.63
    
    
    $
    0.47Diluted  pro forma
    
    $
    0.30
    
    
    $
    0.21
    
    
    $
    0.63
    
    
    $
    0.45
 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 June 30 and for the three months then ended Retail Water
    
    Bulk Water
    
    Services
    
    Reconciling items
    
    Total2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Revenue
    
    
    3,536,311
    
    
    
    2,862,424
    
    
    
    3,356,582
    
    
    
    2,102,815
    
    
    
    217,360
    
    
    
    382,241
    
    
    
    (700,889
    )
    
    
    (597,099
    )
    
    
    6,409,364
    
    
    
    4,750,381Cost of sales
    
    
    1,420,869
    
    
    
    1,214,120
    
    
    
    2,244,543
    
    
    
    1,510,196
    
    
    
    160,508
    
    
    
    143,139
    
    
    
    (266,101
    )
    
    
    (226,055
    )
    
    
    3,559,819
    
    
    
    2,641,400Net income
    
    
    930,616
    
    
    
    981,549
    
    
    
    724,766
    
    
    
    124,076
    
    
    
    24,753
    
    
    
    77,827
    
    
    
    83,905
    
    
    
    (170,411
    )
    
    
    1,764,040
    
    
    
    1,013,041Property, plant and
equipment
    
    
    19,543,376
    
    
    
    19,050,174
    
    
    
    12,138,258
    
    
    
    4,412,828
    
    
    
    19,832
    
    
    
    11,607
    
    
    
    (1,976,204
    )
    
    
    (1,763,171
    )
    
    
    29,725,262
    
    
    
    21,711,438
 As at June 30 and for the six months then ended Retail Water
    
    Bulk Water
    
    Services
    
    Reconciling items
    
    Total2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Revenue
    
    
    7,111,387
    
    
    
    5,681,376
    
    
    
    6,480,468
    
    
    
    3,594,741
    
    
    
    471,802
    
    
    
    576,873
    
    
    
    (1,316,596
    )
    
    
    (1,083,884
    )
    
    
    12,747,061
    
    
    
    8,769,106Cost of sales
    
    
    2,791,151
    
    
    
    2,433,996
    
    
    
    4,426,279
    
    
    
    2,584,374
    
    
    
    305,117
    
    
    
    260,707
    
    
    
    (531,778
    )
    
    
    (404,214
    )
    
    
    6,990,769
    
    
    
    4,874,863Net income
    
    
    2,235,337
    
    
    
    1,995,053
    
    
    
    1,256,436
    
    
    
    207,305
    
    
    
    94,512
    
    
    
    49,868
    
    
    
    101,673
    
    
    
    (221,061
    )
    
    
    3,687,958
    
    
    
    2,031,165Property, plant and
equipment
    
    
    19,543,376
    
    
    
    19,050,174
    
    
    
    12,138,258
    
    
    
    4,412,828
    
    
    
    19,832
    
    
    
    11,607
    
    
    
    (1,976,204
    )
    
    
    (1,763,171
    )
    
    
    29,725,262
    
    
    
    21,711,438
 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 six month period ended June 30,
2004 and 2003. Three Months Ended
    
    Six Months EndedJune 30,
    
    
    
    
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income, as reported
    
    $
    1,764,040
    
    
    $
    1,013,041
    
    
    $
    3,687,958
    
    
    $
    2,031,165Less:Dividends declared and earnings
attributable on preference shares
    
    
    (1,288
    )
    
    
    (3,589
    )
    
    
    (2,575
    )
    
    
    (7,188
    )Net income available to holders of
ordinary shares in the determination
of basic earnings per ordinary share
    
    $
    1,762,752
    
    
    $
    1,009,452
    
    
    $
    3,685,383
    
    
    $
    2,023,977Weighted average number of ordinary
shares in the determination of basic
earnings per ordinary share
    
    
    5,747,044
    
    
    
    4,273,574
    
    
    
    5,723,327
    
    
    
    4,198,056Plus:Weighted average number of
preference shares outstanding during
the period
    
    
    13,008
    
    
    
    20,052
    
    
    
    13,296
    
    
    
    19,774Potential dilutive effect of
unexercised options
    
    
    110,932
    
    
    
    75,384
    
    
    
    110,929
    
    
    
    92,440Weighted average number of shares
used for determining diluted earnings
per ordinary share
    
    
    5,870,984
    
    
    
    4,369,010
    
    
    
    5,847,552
    
    
    
    4,310,270
 7




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Overview Our objective is to provide water services in areas where the supply of potable
water is scarce and where the use of reverse osmosis 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 8




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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. 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. Results of Operations Three and Six Months Ended June 30, 2004 Compared to Three and Six Months Ended
June 30, 2003 Revenue Total revenue increased by 34.9% from $4,750,381 to $6,409,364 for the three
months ended June 30, 2004 and by 45.4% from $8,769,106 to $12,747,061 for the
six months ended June 30, 2004 when compared to the same three and six month
period in 2003. Revenue from our retail water (Retail) operations increased by 23.5% from
$2,862,424 to $3,536,311 for the three months ended June 30, 2003 and 2004,
respectively, and by 25.2% from $5,681,376 to $7,111,387 for the six months
ended June 30, 2003 and 2004, respectively. For the three and six months ended
these increases were due to higher water sales in our primary market in the
Cayman Islands due to increased demand in both our tourist and residential
markets. Published tourist air arrivals records show a 17.6% increase for the
three months ended June 30, 2004 and a 12.7% increase for the six months ended
June 30, 2004 over the same periods in the prior year. Residential markets
increased due to increased residential development. Revenue from our bulk water (Bulk) operations increased by 76.4% from
$1,505,716 to $2,655,693 for the three months ended June 30, 2003 and 2004,
respectively, and by 105.7% from $2,510,857 to 9




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$5,163,872 for the six months ended June 30, 2003 and 2004, respectively. For
the three month period this increase was due to the additional three months of
revenue from our acquisition of Waterfields Company Limited when compared to
the same three month period in 2003. For the six months periods these
increases were due to an additional month of revenue from our acquisition of
Ocean Conversion (Cayman) Limited operations and six months of revenue from our
acquisition of Waterfields Company Limited operations when compared to the same
six month period in 2003. Revenues from our Belize operations declined by 26%
and 32%, respectively during the same three and six month periods due to the
reduced water rates in the new long term contract which was signed in September
2003 and has come into full effect on June 1, 2004 now that all conditions
precedent have been met or waived. These reduced prices will be offset by the
reduced amortization costs on the intangible asset which is 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 43.1% from $382,241 to $217,360
for the three months ended June 30, 2003 and 2004, respectively, and by 18.2%
from $576,873 to $471,802 for the six months ended June 30, 2003 and 2004,
respectively. For the three and six 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 the three and six month periods, we substantially completed our existing
construction projects and have not commenced any new construction projects. We
are in the process of bidding for one plant in BVI and are awaiting the results
of three other bids which we submitted earlier this year on projects in the
Bahamas, Barbados and Mexico. Other Income (Expenses) Total other income increased from a net expense of $140,461 to a net income of
$314,255 for the three months ended June 30, 2003 and 2004, respectively, and
from a net expense of $129,615 to a net income of $470,046 for the six months
ended June 30, 2003 and 2004, respectively. These increases were due primarily
to decreased interest expense because we repaid our bridge loan facility with
proceeds from our 2003 equity offering on July 8, 2003 and due to the full
amortization of our bridge financing fees in the prior year. Our profit
sharing and equity income from our investment in Ocean Conversion (BVI) Ltd.
also contributed to the increase. Cost of Sales Total cost of sales increased by 34.8% from $2,641,400 to $3,559,819 for the
three months ended June 30, 2004 and by 43.4% from $4,874,863 to $6,990,769 for
the six months ended June 30, 2004 when compared to the same three and six
month periods in 2003. During these same periods in 2004, our total revenue
increased by 34.9% and 45.4%, respectively. Cost of sales of our Retail operations increased by 17.0% from $1,214,120 to
$1,420,869 for the three months ended June 30, 2003 and 2004, respectively, and
by 14.7% from $2,433,996 to $2,791,151 for the six months ended June 30, 2003
and 2004, respectively, while our Retail revenue increased by 23.5% and 25.2%
for the same period. For the three and six month periods, these increases in
cost of sales resulted primarily from additional variable costs related to the
production of the additional water sold. Cost of sales of our Bulk operations increased by 54.1% from $1,284,141 to
$1,978,442 for the three months ended June 30, 2003 and 2004, respectively, and
by 78.6% from $2,180,160 to $3,894,501 for the six months ended June 30, 2003
and 2004, respectively, while our Bulk revenue increased by 76.4% and 105.7%
for the same periods. For the three month period this increase was due to the
additional three months of cost of sales from our acquisition of Waterfields
Company Limited when compared to the same three month period in 2003. For the
six months periods these increases in cost of sales were due to 10




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an additional month of expenses from our Ocean Conversion (Cayman) Limited
operations and six months of expenses from our Waterfields Company Limited
operations when compared to the same six month periods in 2003. This increase
was also affected by increased maintenance costs in our Belize operations due
to the unscheduled rebuild of our diesel engines. We have changed management
of our Belize operations and are working on reducing these unscheduled repair
costs by improving the capabilities of our staff and preventative maintenance. Cost of sales from our Service operations increased by 12.1% from $143,139 to
$160,508 for the three months ended June 30, 2003 and 2004, respectively, and
by 17.0% from $260,707 to $305,117 for the six months ended June 30, 2003 and
June 30, 2004, respectively, while our Service revenue decreased by 43.1% and
18.2% for the same periods. For the three and six 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 six 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 six month periods our Barbados operation
also experienced increased maintenance when compared to the same periods is
2003. Gross Profit Overall gross profit margin increased from 44.4% to 44.5% for the three months
ended June 30, 2004 and from 44.4% to 45.1% for the six months ended June 30,
2004 when compared to the same three and six month periods in 2003, for the
reasons explained below. Gross profit margin for our Retail operations increased from 57.6% to 59.8% for
the three months ended June 30, 2004 and from 57.2% to 60.8% for the six months
ended June 30, 2004 when compared to the same three and six month periods in
2003. The primary reasons for these increases are that our Retail cost of
sales decreased as a result of the cancellation of the Governors Harbour plant
operating contract in February 2003, and our Cayman water production equipment
produced more water to meet increased customer demand and we incurred no
additional fixed overhead costs. Gross profit margin for our Bulk operations increased from 14.7% to 25.5% for
the three months ended June 30, 2004 and from 13.2% to 24.6% for the six months
ended June 30, 2004 when compared to the same three and six 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
June 2000. Amortization expense of $428,502 and $420,961 was taken during each
of the six month ended June 30, 2003 and 2004, respectively in our Bulk
operations. Gross profit margin for our Service reporting segment decreased from 62.6% to
26.2% for the three months ended June 30, 2004 and from 54.8% to 35.3% for the
six months ended June 30, 2004 when compared to the same three and six 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. 11




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General and Administrative Expenses Total general and administrative expenses increased by 46.4% from $939,959 to
$1,376,510 for the three months ended June 30, 2004 and by 44.5% from
$1,711,950 to $2,473,198 for the six months ended June 30, 2004 when compared
to the same three and six month periods in 2003. General and administrative
expenses were at 19.8% and 21.5% of total revenue for the three months ended
June 30, 2003 and 2004, respectively and at 19.5% and 19.4% of total revenue
for the six months ended June 30, 2003 and 2004, respectively. General and administrative expenses for our Retail operations increased by
83.4% from $651,672 to $1,195,080 for the three months ended June 30, 2003 and
2004, respectively, and by 72.7% from $1,223,652 to $2,112,795 for the six
months ended June 30, 2003 and 2004, respectively. These increases are
comprised of additional 2003 audit costs related to the work performed on the
2003 acquisitions, increased 2004 audit and legal fees, consulting fees related
to the new internal control review and testing processes, increases in
salaries and bonuses, costs relating to a new purchasing department, additional
administration staff, increases in director fees and higher insurance premiums. General and administrative expenses for our Bulk operations decreased by 3.6%
from $176,444 to $170,086 for the three months ended June 30, 2003 and 2004,
respectively, and increased by 14.6% from $297,432 to $340,979 for the six
months ended June 30, 2003 and 2004, respectively. The three month decrease
was due to the assimilation of the general and administrative functions of
Ocean Conversion (Cayman) Limited. This decrease was offset by an additional
six months of expenses from our Waterfields Company Limited operations when
compared to the same six month period in 2003. General and administrative expenses for our Service reporting segment decreased
by 89.9% from $111,843 to $11,344 for the three months ended June 30, 2003 and
2004, respectively, and by 89.8% from $190,866 to $19,424 for the six months
ended June 30, 2003 and 2004, respectively. In June 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. Net Income Net income increased by 74.1% from $1,013,041 to $1,764,040 for the three
months ended June 30, 2004 and by 81.6% from $2,031,165 to $3,687,958 for the
six months ended June 30, 2004 when compared to the same three and six 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, and on April 30, 2004, we paid a dividend of
$0.115 per share to shareholders of record on March 31, 2004 and on July 31,
2004, we paid a dividend of $0.115 per share to shareholders of record on June
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. 12




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Liquidity and Capital Resources Overview For the three and six months ended June 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 six months ended June 30, 2003
and 2004 was $3,330,998 and $3,509,382, 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. Investing Activities Cash used in investing activities during the six months ended June 30, 2003 and
2004 was $21,323,161 and $390,761, respectively. During the six months ended
June 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. This was offset by cash
provided by 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 $23,955,837 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. In 2004, we intend to complete the upgrade
of our Britannia reverse osmosis plant in our Retail segment. This upgrade
will allow us to produce more water to meet expected demand increases in 2005. Financing Activities Cash provided by financing activities during the six months ended June 30, 2003
was $21,462,292 and cash used in financing activities during the six months
ended June 30, 2004 was $2,745,746. During the six months ended June 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 six months ended June 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 our other credit facility. 13




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Material Commitments for Capital Expenditures and Contingencies At June 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. We intend to finance this
project using cash from our Belize Bulk operations. We have guaranteed to Scotiabank 50% of the Ocean Conversion (BVI) Ltd. loan of
$880,000. 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, 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 are 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 June 30, 2004, we had loans outstanding totaling $18,454,829, 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. 14




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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 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. Changes in Securities and Use of Proceeds On June 9, 2003, we converted 2,388 shares of non-vested redeemable preferred
stock for an equal number of ordinary shares under our Employee Share Incentive
Plan. The issuance of the ordinary shares was exempt from registration under
Regulation S promulgated under the Securities Act of 1933 (the 1933 Act)
because the ordinary shares were issued outside of the United States to
non-U.S. persons (as defined in Regulation S) upon conversion of the redeemable
preferred stock. 15




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Item 6. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits ExhibitNumber
    
    Exhibit Description3.2
    
    Amendment to the Companys Articles of Association10.0
    
    Deed of Indemnity Agreement31.1
    
    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
  (b)
    
    Reports on Form 8-KA Current Report on Form 8-K was filed with the Securities and Exchange
Commission (SEC) on April 14, 2004 by the Company disclosing
information under Item 12. Results of Operations and Financial
Conditions.A Current Report on Form 8-K was filed with the Securities and Exchange
Commission (SEC) on May 18, 2004 by the Company disclosing information
under Item 12. Results of Operations and Financial Conditions. 16




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SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. CONSOLIDATED WATER CO. LTD.By: /s/ Frederick W. McTaggartFrederick W. McTaggartChief Executive Officer
 Dated: August 13, 2004 17