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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 1934For the quarterly period ended March 31, 2004OR[   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934For 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. 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 April 30, 2004,there were 5,746,467 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 = 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 March 31, 2004
and December 31, 2003
    
    
    1Condensed Consolidated Statements of Income for the
three months ended March 31, 2004 and 2003
    
    
    2Condensed Consolidated Statements of Cash Flows for each of the
three months ended March 31, 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
    
    
    13Item 4.
    
    

Controls
and Procedures
    
    
    14PART II
    
    
    OTHER INFORMATIONItem 2.
    
    
    Changes in Securities and Use of Proceeds
    
    
    15Item 6.
    
    
    Exhibits and Reports on Form 8-K
    
    
    16SIGNATURE
    
    
    
    
    
    17Sec 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,
the ability to successfully integrate the recently acquired companies into our
business, 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
 March 31,
    
    December 31,2004
    
    2003(unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    
    8,964,969
    
    
    
    8,236,924Accounts receivable
    
    
    4,441,501
    
    
    
    3,859,496Inventory
    
    
    1,665,550
    
    
    
    1,546,185Prepaid expenses and other assets
    
    
    586,379
    
    
    
    596,386Current portion of loans receivable
    
    
    1,098,732
    
    
    
    1,098,732Total current assets
    
    
    16,757,131
    
    
    
    15,337,723Loans receivable
    
    
    2,921,890
    
    
    
    3,194,346Property, plant and equipment, net
    
    
    29,421,011
    
    
    
    29,662,297Other assets
    
    
    483,538
    
    
    
    505,793Investments in affiliates
    
    
    10,079,058
    
    
    
    10,034,260Intangible assets
    
    
    6,095,438
    
    
    
    6,431,955Goodwill
    
    
    3,568,374
    
    
    
    3,395,752Total assets
    
    $
    69,326,440
    
    
    $
    68,562,126LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesDividends payable
    
    
    745,989
    
    
    
    686,118Accounts payable and other liabilities
    
    
    1,930,567
    
    
    
    2,072,245Current portion of long term debt
    
    
    3,683,144
    
    
    
    3,763,144Total current liabilities
    
    
    6,359,700
    
    
    
    6,521,507Long term debt
    
    
    15,822,780
    
    
    
    16,633,437Security deposits and other liabilities
    
    
    352,495
    
    
    
    352,495Minority interest in Waterfields Company Limited
    
    
    826,197
    
    
    
    806,160Total liabilities
    
    
    23,361,172
    
    
    
    24,313,599Stockholders equityRedeemable preferred stock, $1.20 par value. Authorized 100,000
shares; issued and outstanding 13,585 shares as at March 31,
2004 and 13,585 shares at as December 31, 2003
    
    
    16,302
    
    
    
    16,302Class A common stock, $1.20 par value. Authorized 9,840,000
shares; issued and outstanding 5,746,467 shares as at March 31,
2004 and 5,687,010 shares at as December 31, 2003
    
    
    6,895,760
    
    
    
    6,824,412Class B common stock, $1.20 par value. Authorized 60,000 shares;
issued and outstanding nil shares as at March 31, 2004 and nil
shares as at December 31, 2003
    
    
    
    
    
    
    Stock and options earned but not issued
    
    
    45,634
    
    
    
    21,494Additional paid-in capital
    
    
    27,133,076
    
    
    
    26,773,342Retained earnings
    
    
    11,874,496
    
    
    
    10,612,977Total stockholders equity
    
    
    45,965,268
    
    
    
    44,248,527Total liabilities and stockholders equity
    
    $
    69,326,440
    
    
    $
    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
    
    Three MonthsEnded March 31,
    
    Ended March 31,2004
    
    2003Retail water sales
    
    
    3,575,076
    
    
    
    2,818,953Bulk water sales
    
    
    2,508,179
    
    
    
    1,005,140Service revenue
    
    
    254,442
    
    
    
    194,632Total revenue
    
    
    6,337,697
    
    
    
    4,018,725Retail cost of sales
    
    
    (1,370,282
    )
    
    
    (1,219,878
    )Bulk cost of sales
    
    
    (1,916,058
    )
    
    
    (896,018
    )Service cost of sales
    
    
    (144,134
    )
    
    
    (117,692
    )Total cost of sales
    
    
    (3,430,474
    )
    
    
    (2,233,588
    )Gross profit
    
    
    2,907,223
    
    
    
    1,785,137General and administrative expenses
    
    
    (1,080,159
    )
    
    
    (767,086
    )Income from operations
    
    
    1,827,064
    
    
    
    1,018,051Other income (expenses):Interest income
    
    
    17,783
    
    
    
    5,522Interest expense
    
    
    (162,295
    )
    
    
    (293,383
    )Other income
    
    
    83,708
    
    
    
    101,372Equity in earnings of affiliates
    
    
    199,595
    
    
    
    192,429138,791
    
    
    
    5,940Net income before income taxes and minority interest
    
    
    1,965,855
    
    
    
    1,023,991Income taxes
    
    
    (13,006
    )
    
    
    (5,993
    )Minority interest
    
    
    (28,927
    )
    
    
    Net Income
    
    $
    1,923,922
    
    
    $
    1,017,998Basic earnings per share
    
    $
    0.34
    
    
    $
    0.25Diluted earnings per share
    
    $
    0.33
    
    
    $
    0.24Dividends declared per share
    
    $
    0.115
    
    
    $
    0.105Weighted average number of common stock used in the
determination of:Basic earnings per share
    
    
    5,699,609
    
    
    
    4,121,698Diluted earnings per share
    
    
    5,828,890
    
    
    
    4,251,195
 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)
 (Expressed in United States Dollars) Three Months
    
    Three MonthsEnded March 31,
    
    Ended March 31,2004
    
    2003Net cash flows provided by operating activities
    
    
    1,684,292
    
    
    
    1,166,841Cash flows provided by (used in) investing
activitiesPurchase of property, plant and equipment
    
    
    (384,908
    )
    
    
    (241,663
    )Business combinations, net of cash acquired
    
    
    
    
    
    
    (11,885,839
    )Investment in affiliate
    
    
    
    
    
    
    (12,069,998
    )Receipt of income from affiliate
    
    
    227,250
    
    
    
    Collections from loans receivable
    
    
    272,456
    
    
    
    178,759Net cash provided by (used in) investing activities
    
    
    114,798
    
    
    
    (24,018,741
    )Cash flows provided by (used in) financing
activitiesProceeds from credit facilities
    
    
    
    
    
    
    28,056,126Deferred expenditures
    
    
    
    
    
    
    (412,545
    )Dividends paid
    
    
    (602,532
    )
    
    
    (486,111
    )Proceeds from issuance of common stock
    
    
    422,145
    
    
    
    537,600Principal payments of long term debt
    
    
    (890,658
    )
    
    
    (1,687,500
    )Net cash (used in) provided by financing activities
    
    
    (1,071,045
    )
    
    
    26,007,570Net increase in cash and cash equivalents
    
    
    728,045
    
    
    
    3,155,670Cash and cash equivalents at beginning of period
    
    
    8,236,924
    
    
    
    568,304Cash and cash equivalents at end of period
    
    $
    8,964,969
    
    
    $
    3,723,974Interest paid in cash
    
    $
    132,209
    
    
    $
    230,321Interest received in cash
    
    $
    17,783
    
    
    $
    5,522
 The accompanying information and notes are an
integral part of these condensed consolidated financial statements. 3




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CONSOLIDATED WATER CO. LTD. 
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 1. Presentation of Financial Information The accompanying unaudited Condensed Consolidated Financial Statements were
prepared in accordance with the instructions for Form 10-Q and, therefore, do
not include all disclosures necessary for a complete presentation of financial
condition, results of operations, and cash flows in conformity with accounting
principles generally accepted in the United States of America. All adjustments
that are, in the opinion of management, of a normal recurring nature and are
necessary for a fair presentation of the interim financial statements have been
included. The results of operations for the period ended March 31, 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 and general and administrative
expenses, 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. 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 various stock option plans and an employee stock
purchase plan. 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
    
    Three MonthsEnded March 31,
    
    Ended March 31,2004
    
    2003Net income, as reported
    
    $
    1,923,922
    
    
    $
    1,017,998Add: Stock-based compensation
expense included in reported net
income
    
    
    33,078
    
    
    
    27,870Deduct: Total stock-based
compensation expense determined under
fair value based method for all
awards
    
    
    (45,559
    )
    
    
    (9,369
    )Pro forma net income
    
    $
    1,911,441
    
    
    $
    1,036,499Earnings per shareBasic  as reported
    
    $
    0.34
    
    
    $
    0.25Basic  pro forma
    
    $
    0.34
    
    
    $
    0.25Diluted  as reported
    
    $
    0.33
    
    
    $
    0.24Diluted  pro forma
    
    $
    0.33
    
    
    $
    0.24
 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 March 31 and for the three months then endedRetail
    
    Bulk
    
    Services2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Revenue
    
    
    3,575,076
    
    
    
    2,818,953
    
    
    
    3,123,886
    
    
    
    1,491,926
    
    
    
    254,442
    
    
    
    194,632Cost of sales
    
    
    1,370,282
    
    
    
    1,219,878
    
    
    
    2,181,734
    
    
    
    1,074,177
    
    
    
    144,134
    
    
    
    117,692Net income (loss)
    
    
    1,316,533
    
    
    
    1,010,119
    
    
    
    526,701
    
    
    
    84,667
    
    
    
    68,026
    
    
    
    (27,581
    )Property, plant and
equipment
    
    
    19,664,606
    
    
    
    18,663,008
    
    
    
    11,751,540
    
    
    
    4,402,610
    
    
    
    17,521
    
    
    
    32,917


[Continued from above table, first column(s) repeated] As at March 31 and for the three months then endedReconciling items
    
    Total2004
    
    2003
    
    2004
    
    2003Revenue
    
    
    (615,707
    )
    
    
    (486,786
    )
    
    
    6,337,697
    
    
    
    4,018,725Cost of sales
    
    
    (265,676
    )
    
    
    (178,159
    )
    
    
    3,430,474
    
    
    
    2,233,588Net income (loss)
    
    
    12,662
    
    
    
    (49,207
    )
    
    
    1,923,922
    
    
    
    1,017,998Property, plant and
equipment
    
    
    (2,012,656
    )
    
    
    (2,036,361
    )
    
    
    29,421,011
    
    
    
    21,062,174
 6




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CONSOLIDATED WATER CO. LTD. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 5. Earnings Per Share Basic earnings per common share (EPS) is calculated by dividing net income
available to common stockholders by the weighted average number of common
shares outstanding during the period. The computation of diluted EPS assumes
the issuance of common shares for all dilutive-potential common shares
outstanding during the reporting period. In addition, the dilutive effect of
stock options is considered in earnings per common share calculations, if
dilutive, using the treasury stock method. The following summarizes information related to the computation of basic and
diluted earnings per share for the three-month period ended March 31, 2004 and
2003. Three Months EndedMarch 31,2004
    
    2003Net income
    
    $
    1,923,922
    
    
    $
    1,017,998Less:Dividends paid and earnings attributable on preference shares
    
    
    (1,562
    )
    
    
    (2,362
    )Net income available to holders of ordinary shares in the
determination of basic earnings per ordinary share
    
    $
    1,922,360
    
    
    $
    1,015,636Weighted average number of ordinary shares in the
determination of basic earnings per ordinary share
    
    
    5,699,609
    
    
    
    4,121,698Plus:Weighted average number of preference shares outstanding
during the period
    
    
    13,585
    
    
    
    19,492Potential dilutive effect of unexercised options
    
    
    115,696
    
    
    
    110,005Weighted average number of shares used for determining
diluted earnings per ordinary share
    
    
    5,828,890
    
    
    
    4,251,195
 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
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 record 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 Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003 Revenue Total revenue increased by 57.7% from $4,018,725 to $6,337,697 for the three
months ended March 31, 2004 when compared to the same three-month period in
2003. Revenue from our retail water (Retail) operations increased by 26.8% from
$2,818,953 to $3,575,076 for the three months ended March 31, 2004 when
compared to the same three-month period in 2003. This increase was due to
higher sales in our primary market in the Cayman Islands due to increased
demand in both our tourist and residential markets. Revenue from our bulk water (Bulk) operations increased by 149.5% from
$1,005,140 to $2,508,179 for the three months ended March 31, 2004, when
compared to the same three-month period in 2003. This increase was due to an
additional month of revenue from our Ocean Conversion (Cayman) Limited
operations and three months of revenue from our Waterfields Company Limited
operations when compared to the same three-month period in 2003. Revenue from services (Service) increased by 30.7% from $194,632 to $254,442
for the three months ended March 31, 2004 when compared to the same three-month
period in 2003. This increase was due to 9




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an additional month of revenue from both our DesalCo Limited operations and the
operations of its wholly-owned subsidiary DesalCo (Barbados) Ltd. Other Income (Expenses) Total other income changed by 2,236.5% from $5,940 to $138,791 for the three
months ended March 31, 2004 when compared to the same three-month period in
2003. This increase was due primarily to the decreased interest expense due to
the repayment of our bridge loan facility with proceeds from our 2003 equity
offering and decreased amortization due to the fully amortized bridge financing
fees. Cost of Sales Total cost of sales increased by 53.6% from $2,233,588 to $3,430,474 for the
three months ended March 31, 2004 when compared to the same three-month period
in 2003 for the reasons explained below, while our total revenue increased by
57.7% for the same period. Cost of sales of our Retail operations increased by 12.3% from $1,219,878 to
$1,370,282 for the three months ended March 31, 2004 when compared to the same
three-month period in 2003, while our Retail revenue increased by 26.8% for the
same period. This increase in cost of sales resulted primarily from additional
costs related to the additional water produced and sold and additional employee
costs from new employees added as a result of the prior years acquisition. Cost of sales of our Bulk operations increased by 113.8% from $896,018 to
$1,916,058 for the three months ended March 31, 2004 when compared to the same
three-month period in 2003, while our Bulk revenue increased by 149.5% for the
same period. This increase in cost of sales was due to an additional month of
expenses from our Ocean Conversion (Cayman) Limited operations and three months
of expenses from our Waterfields Company Limited operations when compared to
the same three-month period in 2003. Cost of sales from our Service operations increased by 22.5% from $117,692 to
$144,134 for the three months ended March 31, 2004 when compared to the same
three-month period in 2003. This 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. Gross Profit Overall gross profit margin increased from 44.4% to 45.9% for the three months
ended March 31, 2004 when compared to the same three-month period in 2003, for
the reasons explained below. Gross profit margin for our Retail operations increased from 56.7% to 61.7% for
the three months ended March 31, 2004 when compared to the same three-month
period in 2003. The primary reason for this increase is that our Retail cost
of sales decreased as a result of the cancellation of the Governors Harbour
plant operating contract. Gross profit margin for our Bulk operations increased from 10.9% to 23.6% for
the three months ended March 31, 2004 when compared to the same three-month
period in 2003. The primary reason for this increase is due to 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 due to the amortization expense that we incur in our other Bulk
operations due to the various intangible assets in Ocean Conversion
(Cayman) Limited which were recognized when we acquired these operations.
Amortization expense of 10




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$181,146 and $231,970 was taken during each of the
three-month ended March 31, 2003 and 2004, respectively in our Bulk operations. Gross profit margin for our Service reporting segment increased from 39.5% to
43.4% for the three months ended March 31, 2004 when compared to the same
three-month period in 2003. The primary reason for this increase is due to a
temporary reduction of staff costs in the operations of DesalCo Limited because
we temporarily seconded two of our staff to our affiliate in the British Virgin
Islands. General and Administrative Expenses Total general and administrative expenses increased by 40.8% from $767,086 to
$1,080,159 for the three months ended March 31, 2004 when compared to the same
three-month period in 2003. General and administrative expenses were at 19.1%
and 17.0% of total revenue for the three months ended March 31, 2003 and 2004,
respectively. General and administrative expenses for our Retail operations increased by
58.8% from $567,077 to $900,715 for the three months ended March 31, 2004 when
compared to the same three-month period in 2003. This increase is comprised
primarily of the addition of a new purchasing department, additional
administration staff, general increases in salaries and higher insurance and
general legal costs. General and administrative expenses for our Bulk operations increased by 41.2%
from $120,987 to $170,892 for the three months ended March 31, 2004 when
compared to the same three-month period in 2003. This increase was due to an
additional three months of expenses from our Waterfields Company Limited
operations when compared to the same three-month period in 2003. General and administrative expenses for our Service reporting segment decreased
by 89.2% from $79,022 to $8,552 for the three months ended March 31, 2004 when
compared to the same three-month period in 2003. This decrease is the result
of our assimilation of the general and administrative functions of our
subsidiaries acquired in 2003. Net Income Net income increased by 89.0% from $1,017,998 to $1,923,922 for the three
months ended March 31, 2004 when compared to the same three-month period in
2003 as the result of factors explained above. Dividends On January 31, 2004, we paid a dividend of $0.105 to shareholders of record on
December 31, 2003, and on April 30, 2004, we paid a dividend of $0.115 to
shareholders of record on March 31, 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. 11




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Liquidity and Capital Resources Overview For the three months ended March 31, 2004, we generated cash primarily from our
operations in the Cayman Islands, the Bahamas, Belize and Barbados and from
dividends and profit sharing rights from our equity investment in 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 Cayman Islands, the
Bahamas, Belize, Barbados and the British Virgin Islands, such as weather
conditions and the economy. We use cash to fund our operations 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 three-months ended March 31,
2003 and 2004 was $1,166,841 and $1,684,292, 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. We also believe that our
centralized administrative staff is able to manage all our combined operations
so that our general and administrative costs do not increase in proportion to
water sales. Investing Activities Cash used in investing activities during the three months ended March 31, 2003
was $24,018,741 and cash provided by investing activities during the three
months ended March 31, 2004 was $114,798. During the three-months ended March
31, 2004, we received cash from 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 the Cayman Islands by constructing additional pipelines
to service new developments within our exclusive licensed area. Financing Activities Cash provided by financing activities during the three months ended March 31,
2003 was $26,007,570 and cash used in financing activities during the three
months ended March 31, 2004 was $1,071,045. During the three months ended
March 31, 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 options by management. During the three
months ended March 31, 2003, our primary financing activity was to draw down
$28,056,126 from our Scotiabank facilities from which we used $1,687,500 to
repay our Royal Bank of Canada credit facility. 12




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Material Commitments for Capital Expenditures and Contingencies At March 31, 2004, we had committed approximately $600,000 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 operations. We have guaranteed to Scotiabank 50% of the Ocean Conversion (BVI) Ltd. loan of
$755,000. 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. Interest Rate Risk As of March 31, 2004, we had loans outstanding totaling $19,505,924, all of
which bear interest at various lending rates such as LIBOR, Cayman Islands
Prime Rate or Nassau Prime Rate. We are subject to interest rate risk to the
extent that any of these lending rates change. Foreign Exchange Risk All of our foreign currencies have fixed exchanged rates to the U.S. dollar.
If any of these fixed exchange rates become a floating exchange rate, however,
our results of operation could be adversely affected. 13




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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. Over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of these inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and not be detected. 14




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PART II - OTHER INFORMATION 
 Item 2. Changes in Securities and Use of Proceeds On March 10, 2004, we issued 5,609 ordinary shares to one of our executive
officers, pursuant to the exercise of stock options. The aggregate exercise
price of the option was $39,824. The issuance of the shares was exempt from
registration under Section 4(2) of the Securities Act of 1933 because the
executive officer has knowledge of all material information relating to us, and
under Regulation S promulgated under the Securities Act of 1933 because the
shares were offered and sold outside of the United States to non-US persons (as
defined in Regulation S). Proceeds of the transaction were used for general
corporate purposes. On March 11, 2004, we issued 26,924 ordinary shares to one of our directors who
is also an executive officer, pursuant to the exercise of stock options. The
aggregate exercise price of the option was $191,160. The issuance of the
shares was exempt from registration under Section 4(2) of the Securities Act of
1933 because the executive officer has knowledge of all material information
relating to us, and under Regulation S promulgated under the Securities Act of
1933 because the shares were offered and sold outside of the United States to
non-US persons (as defined in Regulation S). Proceeds of the transaction were
used for general corporate purposes. On March 15, 2004, we issued 26,924 ordinary shares to a former employee,
pursuant to the exercise of stock options. The aggregate exercise price of the
option was $191,160. The issuance of these shares was exempt from registration
under Regulation S promulgated under the Securities Act of 1933 because the
shares were offered and sold outside of the United States to non-US persons (as
defined in Regulation S). Proceeds of the transaction were used for general
corporate purposes. 15




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Item 6. Exhibits and Reports on Form 8-K  (a)
    
    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
  (b)
    
    Reports on Form 8-K A Current Report on Form 8-K was filed with the Securities and Exchange
Commission (SEC) on January 20, 2004 by the Company disclosing
information under Item 2. Acquisition or Disposition of Assets. A Current Report on Form 8-K was filed with the SEC on February 20, 2004
by the Company disclosing information under Item 5. Other Events and
filing an exhibit under Item 7 thereof. A Current Report on Form 8-K/A was filed with the SEC on March 22, 2004
by the Company amending a Form 8-K filed with the SEC on January 20,
2004. Information was disclosed under Items 2 and 7 thereof. 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 OfficerDated: May 14, 2004
 17