##### 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
 March 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
  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 Park
Windward Three, 4th Floor,
West Bay Road
P.O. Box 1114 GT
Grand Cayman, Cayman Islands
    
    N/A(Address of principal executive offices)
    
    (Zip Code)
 (345) 945-4277
  x o
  Large accelerated filer o
    
    Accelerated filer x
    
    Non-accelerated filer 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 March 31, 2006 (unaudited) and December 31, 2005
    
    
    1Condensed Consolidated Statements of Income for the three months ended March 31, 2006 and 2005 (unaudited)
    
    
    2Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 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
    
    
    10Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    16Item 4.
    
    Controls and Procedures
    
    
    17PART II
    
    
    
    OTHER INFORMATIONItem 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    18Item 6.
    
    Exhibits
    
    
    18SIGNATURE
    
    
    
    
    
    
    19Section 302 CEO CertificationSection 302 CFO CertificationSection 906 CEO CertificationSection 906 CFO Certification




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Forward-Looking Statements




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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)
 March 31,
    
    
    December 31,2006
    
    
    2005(unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    4,819,995
    
    
    $
    11,955,589Accounts receivable, net
    
    
    7,903,924
    
    
    
    5,659,975Inventory
    
    
    2,565,097
    
    
    
    2,032,209Prepaid expenses and other current assets
    
    
    611,721
    
    
    
    858,870Current portion of loans receivable
    
    
    730,495
    
    
    
    669,855Total current assets
    
    
    16,631,232
    
    
    
    21,176,498Loans
receivable, including $1,600,000 and $800,000 due from affiliate
    
    
    3,850,750
    
    
    
    2,436,702Property, plant and equipment, net
    
    
    32,240,180
    
    
    
    32,667,615Construction in progress, including interest of $562,500 and $375,000
    
    
    19,150,771
    
    
    
    12,172,402Other assets
    
    
    506,299
    
    
    
    534,368Investments in affiliates
    
    
    11,109,005
    
    
    
    11,317,731Intangible assets
    
    
    4,264,812
    
    
    
    4,491,501Goodwill
    
    
    3,568,374
    
    
    
    3,568,374Total assets
    
    $
    91,321,423
    
    
    $
    88,365,191LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesDividends payable
    
    $
    865,131
    
    
    $
    828,709Accounts payable and other current liabilities
    
    
    3,919,532
    
    
    
    3,939,538Current portion of long term debt
    
    
    3,472,330
    
    
    
    3,472,330Total current liabilities
    
    
    8,256,993
    
    
    
    8,240,577Long term debt, including Series A bond issue of $10,000,000
    
    
    18,562,063
    
    
    
    19,378,212Security deposits and other liabilities
    
    
    483,617
    
    
    
    349,628Minority interest in Waterfields Company Limited
    
    
    825,910
    
    
    
    833,695Total liabilities
    
    
    28,128,583
    
    
    
    28,802,112Stockholders equityRedeemable preferred stock, $0.60 par value. Authorized 200,000
shares; issued and outstanding 32,304 shares at March 31, 2006
and December 31, 2005
    
    
    19,382
    
    
    
    19,382Class A common stock, $0.60 par value. Authorized 19,680,000
shares; issued and outstanding 12,379,269 shares at March 31,
2006 and 12,181,778 shares at December 31, 2005
    
    
    7,427,562
    
    
    
    7,309,066Class B common stock, $0.60 par value. Authorized 120,000 shares
    
    
    
    
    
    
    Stock and options earned but not issued
    
    
    66,377
    
    
    
    28,802Additional paid-in capital
    
    
    36,478,128
    
    
    
    35,338,235Retained earnings
    
    
    19,201,391
    
    
    
    16,867,594Total stockholders equity
    
    
    63,192,840
    
    
    
    59,563,079Total liabilities and stockholders equity
    
    $
    91,321,423
    
    
    $
    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 March 31,2006
    
    
    2005Retail water sales
    
    $
    5,054,149
    
    
    $
    3,131,728Bulk water sales
    
    
    3,748,855
    
    
    
    2,695,301Service revenue
    
    
    440,560
    
    
    
    230,456Total revenue
    
    
    9,243,564
    
    
    
    6,057,485Retail cost of sales
    
    
    (1,449,393
    )
    
    
    (1,255,117
    )Bulk cost of sales
    
    
    (2,917,097
    )
    
    
    (2,259,324
    )Service cost of sales
    
    
    (103,726
    )
    
    
    (145,184
    )Total cost of sales
    
    
    (4,470,216
    )
    
    
    (3,659,625
    )Gross profit
    
    
    4,773,348
    
    
    
    2,397,860General and administrative expenses
    
    
    (2,123,795
    )
    
    
    (1,423,803
    )Income from operations
    
    
    2,649,553
    
    
    
    974,057Other income (expense):Interest income
    
    
    28,705
    
    
    
    14,317Interest expense
    
    
    (214,972
    )
    
    
    (186,674
    )Other income
    
    
    198,281
    
    
    
    196,469Equity in earnings of affiliate
    
    
    415,989
    
    
    
    354,408Other income, net
    
    
    428,003
    
    
    
    378,520Income before income taxes and minority interest
    
    
    3,077,556
    
    
    
    1,352,577Income tax benefit (expense)
    
    
    (7,330
    )
    
    
    23,399Minority interest recovery (expense)
    
    
    7,785
    
    
    
    (1,925
    )Net income
    
    $
    3,078,011
    
    
    $
    1,374,051Basic earnings per common share
    
    $
    0.25
    
    
    $
    0.12Diluted earnings per common share
    
    $
    0.24
    
    
    $
    0.115Dividends declared per common share
    
    $
    0.06
    
    
    $
    0.0575Weighted average number of common shares used
in the determination of:Basic earnings per share
    
    
    12,216,870
    
    
    
    11,552,116Diluted earnings per share
    
    
    12,599,001
    
    
    
    11,919,516
  2




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CONSOLIDATED WATER CO. LTD.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 (Expressed in United States Dollars)
 Three Months Ended March 31,2006
    
    
    2005Net cash flows provided by operating activities
    
    $
    1,073,669
    
    
    $
    989,300Cash flows provided by (used in) investing activitiesPurchase of property, plant and equipment
    
    
    (406,452
    )
    
    
    (571,047
    )Construction in progress
    
    
    (7,623,980
    )
    
    
    (951,044
    )Distribution of income from affiliate
    
    
    757,500
    
    
    
    Loan to affiliate
    
    
    (800,000
    )
    
    
    Collections of loans receivable
    
    
    222,312
    
    
    
    278,456Net cash used in investing activities
    
    
    (7,850,620
    )
    
    
    (1,243,635
    )Cash flows provided by (used in) financing activitiesDividends paid
    
    
    (707,792
    )
    
    
    (662,905
    )Proceeds from issuance of preferred stock
    
    
    
    
    
    
    1,143,468Proceeds from exercises of stock options
    
    
    1,165,298
    
    
    
    Principal repayments of long term debt
    
    
    (816,149
    )
    
    
    (813,556
    )Net cash used in financing activities
    
    
    (358,643
    )
    
    
    (332,993
    )Net decrease in cash and cash equivalents
    
    
    (7,135,594
    )
    
    
    (587,328
    )Cash and cash equivalents at beginning of period
    
    
    11,955,589
    
    
    
    9,216,908Cash and cash equivalents at end of period
    
    $
    4,819,995
    
    
    $
    8,629,580Interest paid in cash
    
    $
    196,881
    
    
    $
    161,037Interest received in cash
    
    $
    19,660
    
    
    $
    15,804
  3




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CONSOLIDATED WATER CO. LTD.
 
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 1. Presentation of Financial Information
   Segment Information,
 2. Basis of Presentation
  Share-Based Compensation
 Accounting for Stock Issued to
Employees
 Share-Based Payment,
 3. Stock Based Compensation
 Share-Based Payment, Stock-Based Compensation,
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CONSOLIDATED WATER CO. LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 3. Stock Based Compensation (continued)
  Accounting for
Stock-Based Compensation
 Net income, as reported
    
    $
    1,374,051Add: Stock based compensation expense included in reported net
income
    
    
    67,765Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects
    
    
    (77,578
    )Pro forma net income
    
    $
    1,364,238Earnings per shareBasic  as reported
    
    $
    0.12Basic  pro forma
    
    $
    0.12Diluted  as reported
    
    $
    0.115Diluted  pro forma
    
    $
    0.11
  Employee Share Incentive Plan (Preferred Shares) 
 Employee Share Option Plan (Common Stock Options)  th
 Non-Executive Directors Share Plan 
 5




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CONSOLIDATED WATER CO. LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 3. Stock Based Compensation (continued)
  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
    
    
    
    
    
    
    Exercised
    
    
    (195,356
    )
    
    
    5.97Forfeited
    
    
    
    
    
    
    Outstanding at March 31, 2006
    
    
    405,294
    
    
    $
    9.91
    
    
    1.37 years
    
    $
    5,909,187Exercisable at March 31, 2006
    
    
    331,504
    
    
    $
    10.03
    
    
    .95 years
    
    $
    4,793,548
 
 (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)
 4. Segment Information
   Retail
    
    
    Bulk
    
    
    Services
    
    
    TotalMarch 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,Three Months Ended
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue
    
    $
    5,054,149
    
    
    $
    3,131,728
    
    
    $
    3,748,855
    
    
    $
    2,695,301
    
    
    $
    440,560
    
    
    $
    230,456
    
    
    $
    9,243,564
    
    
    $
    6,057,485Cost of sales
    
    
    1,449,393
    
    
    
    1,255,117
    
    
    
    2,917,097
    
    
    
    2,259,324
    
    
    
    103,726
    
    
    
    145,184
    
    
    
    4,470,216
    
    
    
    3,659,625Net income (loss)
    
    
    1,875,511
    
    
    
    605,979
    
    
    
    831,895
    
    
    
    694,524
    
    
    
    370,605
    
    
    
    73,548
    
    
    
    3,078,011
    
    
    
    1,374,051Property, plant and
equipment
    
    
    21,882,008
    
    
    
    18,110,811
    
    
    
    7,621,818
    
    
    
    9,062,225
    
    
    
    2,736,354
    
    
    
    266,551
    
    
    
    32,240,180
    
    
    
    27,439,587Construction in
progress
    
    
    296,428
    
    
    
    1,401,589
    
    
    
    18,838,561
    
    
    
    1,038,279
    
    
    
    15,782
    
    
    
    6,884
    
    
    
    19,150,771
    
    
    
    2,446,752Total assets
    
    
    57,989,833
    
    
    
    47,964,417
    
    
    
    29,384,689
    
    
    
    18,690,760
    
    
    
    3,946,901
    
    
    
    4,072,929
    
    
    
    91,321,423
    
    
    
    70,728,106
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CONSOLIDATED WATER CO. LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 5. Earnings Per Share
   Three
Months Ended March 31,2006
    
    

2005Net income
    
    $
    3,078,011
    
    
    $
    1,374,051Less:Dividends declared and earnings attributable to preferred shares
    
    
    (3,161
    )
    
    
    (1,372
    )Net income available to holders of common shares in thedetermination of basic and diluted earnings per share
    
    $
    3,074,850
    
    
    $
    1,372,679Weighted average number of common shares used in the
determination of basic earningsper common share
    
    
    12,216,870
    
    
    
    11,552,116Plus:Weighted average number of preferred shares outstanding during
the period
    
    
    31,949
    
    
    
    26,746Potential dilutive effect of unexercised options
    
    
    350,182
    
    
    
    340,654Weighted average number of common shares used in the
determination of diluted earningsper common share
    
    
    12,599,001
    
    
    
    11,919,516
 6. Related Party Transactions
  8




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CONSOLIDATED WATER CO. LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 7. Non-cash Transaction
   8. Impact of Recent Accounting Pronouncements
 Accounting for Servicing of Financial Assets  an
amendment of FASB Statement No. 140.
 Accounting for Certain Hybrid Financial
Instruments  an amendment of FASB Statements No. 133 and 140.
 The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments Accounting for Certain Investments in Debt and Equity Securities The Equity Method of Accounting for Investments in Common Stock.
 Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees Statement
of Cash Flows
 9




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Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
    Critical Accounting Policies
  Goodwill and other intangible assets
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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
 Recent Developments, Off Balance Sheet Transactions and Commitments
 Lower Valley Plant
   Barbados Operations
  11




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Results of Operations
 Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005
 Revenue
     Cost of Sales
     Gross Profit
  12




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General and Administrative Expense
     Other Income (Expense)
   Net Income
  Liquidity and Capital Resources
 Overview
    Operating Activities
  13




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Investing Activities
  Financing Activities
    Material Commitments, Expenditures and Contingencies
  2013 andTotal
    
    
    2006
    
    
    2007- 2009
    
    
    2010 -2012
    
    
    ThereafterLong term debt
    
    $
    12,034,393
    
    
    $
    2,656,182
    
    
    $
    8,663,929
    
    
    $
    714,282
    
    
    $
    Series A bond
    
    
    10,000,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000,000Employment agreements
    
    
    2,594,215
    
    
    
    931,542
    
    
    
    1,662,673
    
    
    
    
    
    
    
    Operating leases
    
    
    948,119
    
    
    
    237,892
    
    
    
    583,878
    
    
    
    126,349
    
    
    
    Other
    
    
    325,426
    
    
    
    72,607
    
    
    
    202,819
    
    
    
    
    
    
    
    50,000
    14




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Dividends
    Dividend Reinvestment and Common Stock Purchase Plan
  Impact of Inflation
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Credit Risk
  Interest Rate Risk
  Foreign Exchange Risk
  16




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Item 4. Controls and Procedures
      17




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PART II  OTHER INFORMATION
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   
 Item 6. Exhibits
 Exhibit
Number
    
    Exhibit Description31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of the Company31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of the Company32.1
    
    Section 1350 Certification of Chief Executive Officer of the Company32.2
    
    Section 1350 Certification of Chief Financial Officer of the Company
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SIGNATURE
  CONSOLIDATED WATER CO. LTD.By:

/s/ Frederick W. McTaggartFrederick W. McTaggartChief Executive Officer  19