##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transaction period from _______________ to _______________
 0-25248
 CONSOLIDATED WATER CO. LTD.
  CAYMAN ISLANDS
    
    N/A(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 Regatta Office ParkWindward Three, 4th Floor, West Bay RoadP.O. Box 1114 GTGrand Cayman, Cayman Islands
    
    N/A(Address of principal executive offices)
    
    (Zip Code)
 (345) 945-4277
  x o
  o x o
  o x
 ,




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EXCHANGE RATES




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TABLE OF CONTENTS
 Section
    
    Description
    
    PagePART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets as of June 30, 2006 (unaudited) and December 31, 2005
    
    
    1Condensed Consolidated Statements of Income for the three months and six months ended June 30, 2006 and 2005 (unaudited)
    
    
    2Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005 (unaudited)
    
    
    3Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    20Item 4.
    
    Controls and Procedures
    
    
    21PART II
    
    OTHER INFORMATIONItem 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    22Item 6.
    
    Exhibits
    
    
    23SIGNATURES
    
    
    
    
    24EX-31.1 Section 302 Certification of CEOEX-31.2 Section 302 Certification of CFOEX-32.1 Section 906 Certification of CEOEX-32.2 Section 906 Certification of CFO




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PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 
 CONSOLIDATED WATER CO. LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Expressed in United States Dollars)
 June 30,2006
    
    
    December 31,(unaudited)
    
    
    2005ASSETSCurrent assetsCash and cash equivalents
    
    $
    2,210,107
    
    
    $
    11,955,589Accounts receivable, net
    
    
    7,823,571
    
    
    
    5,659,975Inventory
    
    
    2,901,057
    
    
    
    2,032,209Prepaid expenses and other current assets
    
    
    1,944,160
    
    
    
    858,870Current portion of loans receivable
    
    
    730,495
    
    
    
    669,855Total current assets
    
    
    15,609,390
    
    
    
    21,176,498Loans receivable
    
    
    3,668,300
    
    
    
    2,436,702Property, plant and equipment, net
    
    
    32,209,648
    
    
    
    32,667,615Construction in progress, including interest of $771,151 and $375,000
    
    
    29,490,173
    
    
    
    12,172,402Other assets
    
    
    478,228
    
    
    
    534,368Investments in affiliates
    
    
    11,538,666
    
    
    
    11,317,731Intangible assets
    
    
    4,064,888
    
    
    
    4,491,501Goodwill
    
    
    3,568,374
    
    
    
    3,568,374Total assets
    
    $
    100,627,667
    
    
    $
    88,365,191LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesLine of credit
    
    $
    5,659,608
    
    
    $
    Dividends payable
    
    
    865,592
    
    
    
    828,709Accounts payable and other current liabilities
    
    
    6,105,468
    
    
    
    3,939,538Current portion of long term debt
    
    
    3,132,356
    
    
    
    3,472,330Total current liabilities
    
    
    15,763,024
    
    
    
    8,240,577Long term debt
    
    
    17,857,142
    
    
    
    19,378,212Security deposits and other liabilities
    
    
    483,618
    
    
    
    349,628Minority interest in Waterfields Company Limited
    
    
    1,521,053
    
    
    
    833,695Total liabilities
    
    
    35,624,837
    
    
    
    28,802,112Stockholders equityRedeemable preferred stock, $0.60 par value. Authorized 200,000
shares; issued and outstanding 27,516 shares at June
30, 2006 and 32,304 shares at December 31, 2005
    
    
    16,510
    
    
    
    19,382Class A common stock, $0.60 par value. Authorized 19,680,000
shares; issued and outstanding 12,388,433 shares at June 30,
2006 and 12,181,778 shares at December 31, 2005
    
    
    7,433,060
    
    
    
    7,309,066Class B common stock, $0.60 par value. Authorized 120,000 shares
    
    
    
    
    
    
    Additional paid-in capital
    
    
    36,598,603
    
    
    
    35,367,037Retained earnings
    
    
    20,954,657
    
    
    
    16,867,594Total stockholders equity
    
    
    65,002,830
    
    
    
    59,563,079Total liabilities and stockholders equity
    
    $
    100,627,667
    
    
    $
    88,365,191
  1




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CONSOLIDATED WATER CO. LTD.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Expressed in United States Dollars)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Retail water sales
    
    $
    4,863,830
    
    
    $
    3,411,605
    
    
    $
    9,917,977
    
    
    $
    6,543,334Bulk water sales
    
    
    4,315,928
    
    
    
    2,870,593
    
    
    
    8,064,783
    
    
    
    5,565,894Services revenue
    
    
    447,221
    
    
    
    270,670
    
    
    
    887,779
    
    
    
    501,126Total revenues
    
    
    9,626,979
    
    
    
    6,552,868
    
    
    
    18,870,539
    
    
    
    12,610,354Retail cost of sales
    
    
    1,952,660
    
    
    
    1,297,694
    
    
    
    3,485,301
    
    
    
    2,552,811Bulk cost of sales
    
    
    3,106,910
    
    
    
    2,316,463
    
    
    
    5,940,756
    
    
    
    4,575,787Services cost of sales
    
    
    157,924
    
    
    
    156,482
    
    
    
    261,648
    
    
    
    301,666Total cost of sales
    
    
    5,217,494
    
    
    
    3,770,639
    
    
    
    9,687,705
    
    
    
    7,430,264Gross profit
    
    
    4,409,485
    
    
    
    2,782,229
    
    
    
    9,182,834
    
    
    
    5,180,090General and administrative expenses
    
    
    2,098,733
    
    
    
    1,530,892
    
    
    
    4,222,074
    
    
    
    2,933,222Income from operations
    
    
    2,310,752
    
    
    
    1,251,337
    
    
    
    4,960,760
    
    
    
    2,246,868Other income (expense):Interest income
    
    
    67,858
    
    
    
    18,478
    
    
    
    96,564
    
    
    
    36,235Interest expense
    
    
    (304,694
    )
    
    
    (268,151
    )
    
    
    (519,667
    )
    
    
    (446,480
    )Other income
    
    
    132,549
    
    
    
    116,165
    
    
    
    330,829
    
    
    
    300,849Equity in earnings of affiliate
    
    
    315,564
    
    
    
    363,530
    
    
    
    731,553
    
    
    
    717,938Other income, net
    
    
    211,277
    
    
    
    230,022
    
    
    
    639,279
    
    
    
    608,542Net income
    
    $
    2,522,029
    
    
    $
    1,481,359
    
    
    $
    5,600,039
    
    
    $
    2,855,410Basic earnings per common share
    
    $
    0.20
    
    
    $
    0.13
    
    
    $
    0.46
    
    
    $
    0.25Diluted earnings per common share
    
    $
    0.20
    
    
    $
    0.12
    
    
    $
    0.44
    
    
    $
    0.24Dividends declared per common share
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    0.12
    
    
    $
    0.12Weighted average number of common
shares used in the determination of:Basic earnings per share
    
    
    12,381,686
    
    
    
    11,725,828
    
    
    
    12,299,727
    
    
    
    11,639,702Diluted earnings per share
    
    
    12,670,129
    
    
    
    12,023,284
    
    
    
    12,638,142
    
    
    
    11,973,856
  2




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CONSOLIDATED WATER CO. LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Expressed in United States Dollars)
 Six Months Ended June 30,2006
    
    
    2005Net cash flows provided by operating activities
    
    $
    4,786,822
    
    
    $
    3,966,580Cash flows provided by (used in) investing activitiesPurchase of property, plant and equipment
    
    
    (1,189,389
    )
    
    
    (1,309,786
    )Construction in progress
    
    
    (17,839,040
    )
    
    
    (2,576,407
    )Distribution of income from affiliate
    
    
    757,500
    
    
    
    1,136,250Proceeds from sale of minority interest in subsidiary
    
    
    672,136
    
    
    
    Loan to affiliate
    
    
    (800,000
    )
    
    
    (800,000
    )Collections of loans receivable
    
    
    404,762
    
    
    
    480,971Net cash used in investing activities
    
    
    (17,994,031
    )
    
    
    (3,068,972
    )Cash flows provided by (used in) financing activitiesDividends paid
    
    
    (1,512,976
    )
    
    
    (1,337,879
    )Proceeds from issuance of preferred stock
    
    
    10,841
    
    
    
    Proceeds from exercises of stock options
    
    
    1,165,298
    
    
    
    1,143,468Line of credit
    
    
    5,659,608
    
    
    
    Principal repayments of long term debt
    
    
    (1,861,044
    )
    
    
    (1,867,586
    )Net cash provided by (used in) financing activities
    
    
    3,461,727
    
    
    
    (2,061,997
    )Net decrease in cash and cash equivalents
    
    
    (9,745,482
    )
    
    
    (1,164,389
    )Cash and cash equivalents at beginning of period
    
    
    11,955,589
    
    
    
    9,216,908Cash and cash equivalents at end of period
    
    $
    2,210,107
    
    
    $
    8,052,519Interest paid in cash
    
    $
    850,066
    
    
    $
    339,518Interest received in cash
    
    $
    69,517
    
    
    $
    34,034Non-cash investing and financing activitiesNote received for plant facility sold
    
    $
    897,000
    
    
    $
    Issuance of 2,135 and 4,682, respectively, common
shares for services rendered
    
    
    43,326
    
    
    
    145,040Issuance of 3,587 preferred shares for services rendered
    
    
    108,397
    
    
    
    Conversion of 9,164 shares of preferred
stock to common stock
    
    
    5,498
    
    
    
    
  3




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CONSOLIDATED WATER CO. LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 1. Basis of Presentation










2. Stock Based Compensation




,


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CONSOLIDATED WATER CO. LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 2. Stock Based Compensation (continued)
   Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30, 2005
    
    
    June 30,2005Net income, as reported
    
    $
    1,481,359
    
    
    $
    2,855,410Add: Stock based compensation expense
included in reported net income
    
    
    69,029
    
    
    
    136,794Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects
    
    
    (78,842
    )
    
    
    (156,420
    )Pro forma net income
    
    $
    1,471,546
    
    
    $
    2,835,784Earnings per shareBasic  as reported
    
    $
    0.13
    
    
    $
    0.25Basic  pro forma
    
    $
    0.13
    
    
    $
    0.24Diluted  as reported
    
    $
    0.12
    
    
    $
    0.24Diluted  pro forma
    
    $
    0.12
    
    
    $
    0.24
  Employee Share Incentive Plan (Preferred Shares) 
 Employee Share Option Plan (Common Stock Options)  th
 5




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CONSOLIDATED WATER CO. LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 2. Stock Based Compensation (continued)
 Non-Executive Directors Share Plan 
 Directors and Senior Management Stock Compensation 
     WeightedAverageWeighted
    
    
    RemainingAverage
    
    
    Contractual
    
    
    AggregateOptions
    
    
    Exercise Price
    
    
    Life (Years)
    
    
    Intrinsic Value(1)Outstanding at beginning of year
    
    
    600,650
    
    
    $
    8.63Granted
    
    
    6,742
    
    
    
    19.20Exercised
    
    
    (196,680
    )
    
    
    6.02Forfeited
    
    
    (2,263
    )
    
    
    13.74Outstanding at June 30, 2006
    
    
    408,449
    
    
    $
    10.03
    
    
    1.42 years
    
    $
    5,947,556Exercisable at June 30, 2006
    
    
    331,504
    
    
    $
    10.03
    
    
    .70 years
    
    $
    4,828,356
 
 (1)
    
    The intrinsic value of a stock option represents the amount by which the fair value
of the underlying stock exceeds the exercise price of the option.   6




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CONSOLIDATED WATER CO. LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 3. Segment Information
   RETAIL
    
    
    BULK
    
    

SERVICES
    
    
    TOTAL2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005For the Three
Months Ended June 30,Revenue
    
    $
    4,863,830
    
    
    $
    3,411,605
    
    
    $
    4,315,928
    
    
    $
    2,870,593
    
    
    $
    447,221
    
    
    $
    270,670
    
    
    $
    9,626,979
    
    
    $
    6,552,868Cost of Sales
    
    
    1,952,660
    
    
    
    1,297,694
    
    
    
    3,106,910
    
    
    
    2,316,463
    
    
    
    157,924
    
    
    
    156,482
    
    
    
    5,217,494
    
    
    
    3,770,639Net Income
    
    
    1,077,460
    
    
    
    822,749
    
    
    
    1,211,329
    
    
    
    601,912
    
    
    
    233,240
    
    
    
    56,698
    
    
    
    2,522,029
    
    
    
    1,481,359For the Six Months
Ended June 30,Revenue
    
    
    9,917,977
    
    
    
    6,543,334
    
    
    
    8,064,783
    
    
    
    5,565,894
    
    
    
    887,779
    
    
    
    501,126
    
    
    
    18,870,539
    
    
    
    12,610,354Cost of Sales
    
    
    3,485,301
    
    
    
    2,552,811
    
    
    
    5,940,756
    
    
    
    4,575,787
    
    
    
    261,648
    
    
    
    301,666
    
    
    
    9,687,705
    
    
    
    7,430,264Net Income
    
    
    2,877,506
    
    
    
    1,428,731
    
    
    
    2,311,630
    
    
    
    1,296,436
    
    
    
    410,903
    
    
    
    130,243
    
    
    
    5,600,039
    
    
    
    2,855,410As of June 30,Property, plant and
equipment, net
    
    
    20,712,242
    
    
    
    21,938,568
    
    
    
    8,790,822
    
    
    
    7,919,173
    
    
    
    2,706,584
    
    
    
    2,809,874
    
    
    
    32,209,648
    
    
    
    32,667,615Construction in
progress
    
    
    405,129
    
    
    
    166,924
    
    
    
    28,889,206
    
    
    
    12,005,478
    
    
    
    195,838
    
    
    
    
    
    
    
    29,490,173
    
    
    
    12,172,402
 4. Earnings Per Share
   7




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CONSOLIDATED WATER CO. LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 4. Earnings Per Share (continued)
 Three Months Ended June 30,2006
    
    
    2005Net income
    
    $
    2,522,029
    
    
    $
    1,481,359Less:Dividends declared and earnings attributable to preferred shares
    
    
    (2,315
    )
    
    
    (2,864
    )Net income available to holders of common shares in thedetermination of basic and diluted earnings per share
    
    $
    2,519,714
    
    
    $
    1,478,495Weighted average number of common shares used in the
determinationof basic earnings per common share
    
    
    12,381,686
    
    
    
    11,725,828Plus:Weighted average number of preferred shares outstanding during
the period
    
    
    31,089
    
    
    
    23,660Potential dilutive effect of unexercised options
    
    
    257,354
    
    
    
    273,796Weighted average number of common shares used in the
determinationof diluted earnings per common share
    
    
    12,670,129
    
    
    
    12,023,284
 Six Months Ended June 30,2006
    
    
    2005Net income
    
    $
    5,600,039
    
    
    $
    2,855,410Less:Dividends declared and earnings attributable to preferred shares
    
    
    (4,839
    )
    
    
    (5,608
    )Net income available to holders of common shares in the
determinationof basic and diluted earnings per share
    
    $
    5,595,200
    
    
    $
    2,849,802Weighted average number of common shares used in the
determinationof basic earnings per common share
    
    
    12,299,727
    
    
    
    11,639,702Plus:Weighted average number of preferred shares outstanding during
the period
    
    
    31,693
    
    
    
    25,188Potential dilutive effect of unexercised options
    
    
    306,722
    
    
    
    308,966Weighted average number of common shares used in the
determinationof diluted earnings per common share
    
    
    12,638,142
    
    
    
    11,973,856
 8




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CONSOLIDATED WATER CO. LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 5. Related Party Transaction
  6. Impact of Recent Accounting Pronouncements
  .
  .
  9




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CONSOLIDATED WATER CO. LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 6.
Impact of Recent Accounting Pronouncements (continued)
  7. Subsequent Event
 
 10




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Forward-Looking Statements
    Business Overview
    Critical Accounting Policies
  11




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Goodwill and other intangible assets
 Property, plant and equipment
 Buildings
    
    5 to 40 yearsPlant and equipment
    
    4 to 40 yearsDistribution system
    
    3 to 40 yearsOffice furniture, fixtures and equipment
    
    3 to 10 yearsVehicles
    
    3 to 10 yearsLeasehold improvements
    
    Lesser of 5 years or operating lease termLab equipment
    
    5 to 10 years
  Construction in progress:
 Trade accounts receivable
 12




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Recent Developments
   RESULTS OF OPERATIONS
  Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005
 Consolidated Results
    13




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Results by Segment
 Retail Segment:
    Bulk Segment:
   14




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Services Segment:
   Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005
 Consolidated Results
    Results by Segment
 Retail Segment:
  15




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Bulk Segment:
  .
  Services Segment:
   LIQUIDITY AND CAPITAL RESOURCES
 Overview
   16




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Cash Flows for the Six Months Ended June 30, 2006
     Borrowings Outstanding
   17




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Material Commitments, Expenditures and Contingencies
      18




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Dividends
     Impact of Inflation
  Off Balance Sheet Arrangements
  19




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ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Credit Risk
  Interest Rate Risk
  Foreign Exchange Risk
  20




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ITEM 4.
    
    CONTROLS AND PROCEDURES
      21




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PART II  OTHER INFORMATION
 
 Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
   
 Item 4.
    
    Submission of Matters to a Vote of Security Holders
  Votes For
    
    Votes WithheldWilmer Pergande
    
    
    8,604,238
    
    
    
    117,766David W. Sasnett
    
    
    8,546,109
    
    
    
    175,895Raymond Whittaker
    
    
    8,556,637
    
    
    
    165,367
   22




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Item 6.
    
    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
 23




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SIGNATURES
  CONSOLIDATED WATER CO. LTD.By:
    /s/ Frederick W. McTaggartFrederick W. McTaggartChief Executive Officer  24