Net income in the second quarter of 2007 increased 72% to $4.3 million or
$0.11 per diluted share compared to $2.5 million or $0.10 per diluted share in
the second quarter of 2006. As stated above, the net income performance
includes approximately $5.7 million of non-cash expense, or $0.15 on a diluted
share basis.
The Company's cash position in the second quarter of 2007 increased to
$91.8 million compared to $71.9 million at the end of the first quarter of
2007. This increase was largely a result of the receipt of the net proceeds
from the $50 million convertible note financing with Citadel that closed in
April 2007 , offset by the use of $30.3 million in connection with three
acquisitions that closed during the quarter.
Total debt at the end of the second quarter of 2007 was $126.1, up from
$67.1 million at the end of the first quarter of 2007. Working capital at the
end of the second quarter of 2007 increased to $132.8 million compared to
$117.2 at the end of the first quarter of 2007.
Financial Outlook
For the third quarter of 2007, the Company expects to achieve revenues
between $65 million and $70 million, including revenues from completed
acquisitions. The acquisitions completed by the Company since the beginning of
fiscal 2007 are Shenzhen Hongtianzhi Electronics Co., Ltd., HiEasy Electronic
Technology Development Co., Ltd., Changzhou Mingking Electronics Co., Ltd. and
Hangzhou Tsingvision Intelligence System Co., Ltd.. Excluding the non-cash
charges related to the redemption amount payable on convertible notes and the
accrual of performance-based employee compensation, the Company expects to
achieve an adjusted net income of at least $12.0 million in the third quarter
of 2007.
The Company estimates that the non-cash interest expenses associated with
the redemption amount payable on convertible notes, the accrual of
performance-based employee compensation and the amortization of intangible
expense related to the company's recent acquisitions for the remaining two
quarters will be approximately $4.1 million, $1.0 million and $1.5 million per
quarter, respectively.
Mr. Tu concluded, "We have put in place the foundation to grow our
security and surveillance company and expect to continue to be a market leader
in the manufacturing, systems integration and operating services markets. The
overall market for security and surveillance projects continues to expand in
China and our market share is growing. Our acquisition strategy -- combined
with our strong organic growth -- serves to strengthen our overall competitive
position, so that our brand will become synonymous with premiere security
solutions and our customers will receive one solid solution for all their
security needs. This model has worked well for our organization and we expect
benefits will become even more apparent over time. Our highly incentivized
management team remains focused on shareholder value and we plan to proceed
with our strategic plan with our shareholders foremost in mind."
Explanation of Redemption Accrual
The Company raised $60 million and $50 million through two guaranteed
senior unsecured convertible note financings with Citadel in February 2007 and
April 2007 , respectively. These notes bear interest at a rate of 1% per annum
and are due in 2012. Under the indentures, if the notes are not converted
before their respectively maturities, the notes are to be redeemed by the
Company on the maturity date at a redemption price equal to 100% of the
principal amount of the notes then outstanding plus an additional amount of
15% per annum, calculated on a quarterly compounded basis, plus any accrued
and unpaid interest.
As of June 30th , the Company accrued $3.8 million as a redemption amount
payable under the notes, which was included in interest expense in the second
quarter of 2007. Unlike the annual interest rate of 1% that the Company is
actually paying out to the note holders under the note on a semi-annual basis,
the Company would only pay the accrued redemption amount under the notes if
the notes are not converted into the Company's common stock before their
respective maturities and are redeemed in accordance with its terms.
Nevertheless, the Company believes that it must accrue the entire redemption
amount under U.S. generally accepted accounting principles. This accrual will
result in non-cash expense of approximately $17.1 million annually beginning
in 2008.
