Consolidated Water Co. Ltd. - Quarter Report: 2005 March (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

                         For the quarterly period ended March 31, 2005

OR

                         For the transaction period from _______________ to _______________

Commission File Number: 0-25248

CONSOLIDATED WATER CO. LTD.

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    o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

      Yes   x   No    o

As at April 28, 2005, there were 5,861,062 of the registrant’s common shares of common stock, with US$ 1.20 par value, outstanding.

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 the U.S.$.

TABLE OF CONTENTS

Forward-Looking Statements

We discuss in this Form 10-Q for Consolidated Water Co. Ltd. (the “Company”) matters which are not historical facts, but which are “forward-looking statements.” We intend these forward-looking statements to qualify for safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, our future plans, objectives, expectations and events, assumptions and estimates about our company and our industry in general.

The forward-looking statements in this Form 10-Q reflect what we currently anticipate will happen. What actually happens could differ materially from what we currently anticipate will happen. We are not promising to make any public announcement when we think forward looking statements in this Form 10-Q are no longer accurate whether as a result of new information, what actually happens in the future or for any other reason.

Important matters that may affect what will actually happen include, but are not limited to: tourism and weather conditions in the areas we service; our ability to manage, integrate and realize the benefits from our acquisitions; scheduled new construction within our operating areas; the economies of the U.S. and the areas we service; regulatory matters; availability of capital to repay a substantial portion of our bank debt and for expansion of our operations, and other risks described in the Company’s other reports filed 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.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED WATER CO. LTD.

The accompanying information and notes are an
integral part of these condensed consolidated financial statements.

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CONSOLIDATED WATER CO. LTD.

The accompanying information and notes are an
integral part of these condensed consolidated financial statements.

2

CONSOLIDATED WATER CO. LTD.

The accompanying information and notes are an
integral part of these condensed consolidated financial statements.

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CONSOLIDATED WATER CO. LTD.

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, 2005 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, 2004.

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 issues stock under incentive plans that form part of employees and non-executive directors’ remuneration. The Company also grants options to purchase common shares as part of remuneration for certain long-serving employees and certain management employees.

During the year ended December 31, 2003, the option plan for certain management employees was amended as part of renegotiations of employee contracts. The amended contracts terminated the stock option plans for all years commencing from January 1, 2004. Options issued prior to January 1, 2004 are still in place.

The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25 “Accounting for Stock Issued to Employees”, and related interpretations to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. SFAS No. 123 “Accounting for Stock-Based Compensation” established accounting and disclosure requirements using a fair-valued-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company continues to apply the intrinsic-value method of accounting described above and has adopted the disclosure requirements of SFAS No. 123.

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CONSOLIDATED WATER CO. LTD.

3. Stock Based Compensation (continued)

The following table illustrates the effect on net income if the fair-value-based method had been applied to all outstanding and unvested awards in each period:

The intrinsic value of stock based compensation is recorded in stockholders’ equity and is expensed to the condensed consolidated statements of income based on the vesting period of the options. On exercise of options, proceeds up to the par value of the stock issued are credited to common share capital; any proceeds in excess of the par value of the stock issued are credited to additional paid in capital in the period in which the options are exercised. Options that expire without exercise are also credited to additional paid in capital in the period in which the option expired.

4. Segment Information

Under Statement of Financial Accounting Standards No. 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.

Included in the Bulk segment is the proportional share of results of operations and property, plant and equipment of Ocean Conversion (BVI) Ltd. An adjustment has been made in Reconciling Items to adjust the Company’s interest in its investment under the equity method of accounting.

Also included in Reconciling Items are corporate expenses that do not directly relate to any specific operating segment.

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CONSOLIDATED WATER CO. LTD.

4. Segment Information (continued)

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CONSOLIDATED WATER CO. LTD.

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, 2005 and 2004.

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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 (“RO”) technology to produce potable water is economically feasible.

In our Retail operations, sales decreased due to continued impact of reduced tourist arrivals resulting from the effects of Hurricane Ivan.

In our Bulk operations, sales increased primarily due to higher demand for water for domestic consumption by our Cayman customers. The Waterfields operation had increased demand but was negatively impacted by price adjustments relating to production shortfalls caused by continued fouling of the RO membrane elements. These price adjustments reduced our sales, and significantly higher energy costs increased our cost to desalinate water.

Earnings from our equity affiliate in the British Virgin Islands increased because of greater sales after our affiliate’s customer made significant repairs to its distribution system in mid 2004 which has since increased water deliveries.

In our Service operation, sales were reduced due to fewer construction projects.

We intend to expand revenues by developing new business opportunities both within our current service areas and in new areas. We also intend to maintain our operating efficiencies by executing our equipment maintenance and water loss mitigation programs. We believe that many Caribbean basin and adjacent countries, being water scarce, present opportunities for operation of our plants in limited regulatory environments, which are less restrictive than the highly regulated markets of North America.

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 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 may not be 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 these condensed 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 payments. Management continuously evaluates the collectibility of accounts receivable and records allowances based on estimates of the level of actual write-offs that 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.

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     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 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. Our annual tests resulted in no goodwill impairment.

Revenue

Revenue is comprised of retail water sales to individual customers, bulk water sales to large commercial and municipal customers and fees for management and engineering services.

Expenses

Expenses include cost of sales (“direct expenses’’) and general and administrative expense (“indirect expenses”). Direct expenses include royalty payments, electricity and chemicals expenses, production equipment and facility depreciation costs, equipment maintenance expenses, operational staff costs and the amortization of intangible assets. Indirect 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 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.

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Results of Operations

Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004

Revenue

Total revenue decreased by 4.4% from $6,337,697 to $6,057,485 for the three months ended March 31, 2005 when compared to the same period in 2004.

Revenue from our retail water (“Retail”) operations decreased by 12.4% from $3,575,076 to $3,131,728 for the three months ended March 31, 2005 when compared to the same period in 2004. This decrease was due to the continued impact of decreased demand for water due to reduced tourist arrivals resulting from the effects of Hurricane Ivan. Efforts to rebuild are continuing at a rapid pace but a number of hotels and condominiums within our Cayman market have not yet reopened and new construction projects are still experiencing problems due to labour shortages and delayed material deliveries. Until tourism returns to pre-hurricane levels in the Cayman market, we expect revenues from Retail to continue to be lower than revenues reported for prior year comparable periods.

Revenue from our bulk water (“Bulk”) operations increased by 7.5% from $2,508,179 to $2,695,301 for the three months ended March 31, 2005, when compared to the same period in 2004. This increase was primarily due to additional consumption by our customer (Water Authority-Cayman) in our Ocean Conversion (Cayman) Limited operations and was somewhat offset by lower net sales in our Waterfields operation. The latter continues to incur pricing adjustments related to reduced deliveries associated with the fouling of RO membrane elements. We are in the process of remediating this problem and in the second quarter ordered containerized desalination units to temporarily supplement production capacity until a permanent solution to the fouling to the RO membrane elements is effected.

Revenue from services (“Services”) operations decreased by 9.4% from $254,442 to $230,456 for the three months ended March 31, 2005 when compared to the same period in 2004. This decrease was due to fewer construction projects, which resulted in a reduction in engineering fees that are charged on labour and material costs associated with these projects. We expect this segment to improve after we commence work on two planned engineering and construction projects in the second quarter of 2005.

Cost of Sales

Total cost of sales increased by 6.7% from $3,430,474 to $3,659,625 for the three months ended March 31, 2005 when compared to the same period in 2004 for the reasons explained below.

Cost of sales of Retail decreased by 8.4% from $1,370,282 to $1,255,117 for the three months ended March 31, 2005 when compared to the same period in 2004 primarily due to a decrease in variable costs associated with the 12.4% reduction in revenue.

Cost of sales of Bulk increased by 17.9% from $1,916,058 to $2,259,324 for the three months ended March 31, 2005 when compared to the same period in 2004 primarily due to additional variable costs associated with increased deliveries and reduced production in our Waterfields operation due to RO membrane element fouling.

Cost of sales from Services increased by $1,050 (0.7%) for the three months ended March 31, 2005 when compared to the same period in 2004 despite a decrease of 9.4% in sales. This was the result of increased idle time and non-billable labour costs associated with a reduced level of projects.

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Gross Profit

The gross profit margin decreased from 45.9% to 39.6% for the three months ended March 31, 2005 when compared to the same period in 2004, for the reasons explained above.

General and Administrative Expense

Total general and administrative expense (“G&A”) increased by $343,644 (31.8%) from $1,080,159 to $1,423,803 for the three months ended March 31, 2005 when compared to the same period in 2004. G&A was 17.0% and 23.5% of total revenue for the three months ended March 31, 2004 and 2005, respectively.

G&A for Retail increased by $386,162 (42.9%) from $900,715 to $1,286,877 for the three months ended March 31, 2005 when compared to the same period in 2004 primarily due to additional unanticipated audit, accounting and legal fees related to the Sarbanes-Oxley internal control review and certification process. Our policy is and has been to allocate all corporate G&A to Retail.

G&A expense for Bulk decreased by $44,228 (25.9%) from $170,892 to $126,664 for the three months ended March 31, 2005 when compared to the same period in 2004 due to general non-specific administrative cost reductions in all of our operations.

The change in G&A expense for Services for the three months ended March 31, 2005 when compared to the same period in 2004 was negligible.

Other Income (Expense)

Total other income increased by 172.7% from $138,791 to $378,520 for the three months ended March 31, 2005 when compared to the same period in 2004. This increase was primarily the result of an increase in both profit sharing and equity income from the investment in Ocean Conversion (BVI) Ltd. (“OCBVI”). OCBVI has benefited since August 2004 from significant repairs made by the customer to their distribution system.

Net Income

As a result of factors described above, net income decreased by 28.6% from $1,923,922 to $1,374,051 for the three months ended March 31, 2005 when compared to the same period in 2004.

Liquidity and Capital Resources

Overview

For the three months ended March 31, 2005, we generated cash from the exercise of options by management, from all of our business segment operations, from the collection of loans receivable and from an insurance claim payment. We used cash for various capital expenditures related to our Cayman Island, Belize and Bahamas operations.

Cash flow is dependent upon the timely receipt of customer payments, 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 we operate such as weather conditions and the world economy. We use cash to fund our various business segments in the Cayman Islands, Belize, the

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Bahamas, and Barbados, to fund capital projects, to expand our infrastructure, to pay dividends, to repay borrowings, to repurchase our shares when appropriate and to take advantage of new investment opportunities which expand operations.

Operating Activities

Cash generated from operating activities for the three-months ended March 31, 2004 and 2005 was $1,684,292 and $989,300, respectively. We generate cash through the utilization of our existing plants, equipment and resources in all segments of the business.

In the three-months ended March 31, 2005, we also generated cash from the collection of a payment from our insurance claim. Additionally, after Hurricane Ivan struck in September 2004, some of our customers suffered damage to their commercial and residential premises, which caused metered water to be lost within these premises. We did not begin our normal monthly disconnection procedures until January 2005 and consequently, the Cayman Islands Retail receivables were unusually high at quarter end. We have been working with customers to settle outstanding accounts and an adequate provision has been made in our financial statements for amounts we believe to be uncollectible.

Investing Activities

Cash provided by investing activities during the three months ended March 31, 2004 was $114,798 while cash used in investing activities during the three months ended March 31, 2005 was $1,243,635. During the three-months ended March 31, 2005, our investing activities primarily consisted of expenditures for new property, plant and equipment to replace equipment destroyed by Hurricane Ivan, a new water storage tank in Belize, the Blue Hills plant in the Bahamas and a deposit on two containerized RO desalination plants to be used at our existing Bahamas plant.

Financing Activities

Cash used in financing activities during the three months ended March 31, 2004 and 2005 was $1,071,045 and $332,993, respectively. During the three months ended March 31, 2005 our primary financing activity was the receipt of an additional $1,143,468 from the issuance of shares though the exercise of stock options by certain members of management.

Material Commitments for Capital Expenditures and Contingencies

At March 31, 2005, we had committed approximately $1.2 million for capital expenditures related to various projects, in various stages of completion, in all of our operations. This includes $850,000 for the purchase of two containerized RO desalination plants to be utilized at the existing Bahamas plant.

On April 11, 2005, the Company through Waterfields Company Limited accepted the terms set forth in the letter of acceptance with the Water and Sewerage Corporation (“WSC”) of the Bahamas relating to the construction of the Blue Hills Plant and as part of its agreement with WSC, the Company is required to provide engineering services and equipment to reduce the amount of water that is lost throughout WSC’s pipeline distribution system on New Providence. The Company will commit approximately $22.0 million for these projects.

As of March 31, 2005, we have an outstanding balance of $14,285,714 on our Scotiabank loan facilities. We are required to make monthly payments of interest for all borrowings under the revolving line of credit and quarterly payments of interest for all amounts drawn down under the two term loans. We are obligated to make 28 equal quarterly payments of principal under the seven-year term loan.

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We have collateralized all borrowings under the three loan facilities by providing Scotiabank with a first lien on all of our assets, including the capital stock of subsidiaries and the investment in equity we acquired.

The loan agreement for the three facilities contains standard terms and conditions for similar bank loans made in the Cayman Islands, including acceleration of the repayment of all borrowings upon the demand of Scotiabank (Cayman Islands) Ltd. in the event of default.

We have guaranteed to Scotiabank 50% of the Ocean Conversion (BVI) Ltd. loan of $505,000. This 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 the two parties.

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.

Dividends

On January 31, 2005, we paid a dividend of $0.115 to shareholders of record on December 31, 2004, and on April 30, 2005, we paid a dividend of $0.115 to shareholders of record on March 31, 2005. We have consistently paid dividends to owners of our common 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 payout ratio in the range of 50% to 60% of net income. This policy is subject to modification by our Board of Directors. 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.

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

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Bahamas, the British Virgin Islands, Barbados and the Cayman Islands. In addition, the entire balance of our loan receivable is with one Bulk water customer, Water Authority-Cayman.

Interest Rate Risk

As of March 31, 2005, we had loans outstanding totaling $15,775,815, all of which bear interest at various lending rates such as LIBOR, Cayman Island’s Prime Rate or the Nassau Prime Lending Rate. We are subject to interest rate risk to the extent that any of these rates change.

Foreign Exchange Risk

All of our foreign currencies have fixed exchange rates to the U.S. dollar. If any of these fixed exchange rates become a floating exchange rate, however, our results of operation could be adversely affected.

Item 4. Controls and Procedures

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report, the Company’s management conducted an evaluation with the participation of the Company’s Chief Executive Officer and Chief Financial Officer (collectively, the “Certifying Officers”) regarding the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Exchange Act).

Based on this evaluation of these controls and procedures and the material weakness in the Company’s internal control over financial reporting described in the Company’s Form 10-K (the “Form 10-K”) for the fiscal year ended December 31, 2004, the Chief Executive Officer and Chief Financial Officer conclude that the Company’s disclosure controls and procedures were ineffective as of March 31, 2005.

The Certifying Officers also have indicated that there were no significant changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) and that the corrective actions described in the Company’s Form 10-K for the fiscal year ended December 31, 2004 have not yet remediated the material weakness in the Company’s internal control over financial reporting described in such Form 10-K.

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.

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PART II — OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds

On March 13, 2005, we issued 56,153 common shares to two of our executive officers, pursuant to the exercise of stock options. The aggregate exercise price of the options was $608,698. The issuance of the 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.

Also, on March 13, 2005, we issued 49,333 common shares to two other executive officers, pursuant to the exercise of stock options. The aggregate exercise price of the options was $534,770. The issuance of the shares was exempt from registration under Section 4(2) of the Securities Act of 1933 because the executive officers have knowledge of all material information relating to us. Proceeds of the transaction were used for general corporate purposes.

On March 8^th and 17^th, 2005 we converted a total of 2,091 shares of vested redeemable preferred stock for an equal number of common shares under our Employee Share Incentive Plan. The issuance of the common shares was exempt from registration under Regulation S promulgated under the Securities Act of 1933 (the “1933 Act”) because the common 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.

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Item 6. Exhibits

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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.

Dated: May 10, 2005

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