Financial Outlook
For the second quarter of 2008, the Company expects to achieve revenues
between $85-87 million. Excluding the non-cash charges related to the
redemption accretion on convertible notes, employee stock compensation and
depreciation and amortization related to the company's recent acquisitions,
the Company expects to achieve an adjusted net income of $15.9-16.5 million
and adjusted diluted earnings per share of $0.36-$0.38 in the second quarter
of 2008.
The Company estimates that in the second quarter, non-cash interest
expenses associated with the redemption accretion on convertible notes, the
employee stock compensation, and the depreciation and amortization, will be
approximately $4.4 million, $5.5 million and $2.5 million, respectively.
For the full year 2008, the Company is raising its previous guidance and
now expects to achieve revenues between $380-400 million. The Company expects
adjusted net income of $70-76 million and adjusted diluted earnings per share
of $1.59-1.76. The major contributors to results should continue to be system
integration and manufacturing of security products. The company expects
non-cash expense related to the redemption amount payable on convertible notes
will be approximately $17.6 million. Going forward, the company expects to
incur accrual non-cash employee compensation as well as higher depreciation
and amortization costs related to the intangible assets from an increasing
number of acquisitions.
Mr. Tu concluded, ''We continue to be optimistic about the future growth
of our business in China . We believe that we have put in place the strongest
possible operating structure and management team -- supported by the strongest
possible balance sheet -- to leverage the expanding opportunities for revenue
growth associated with increased demand for security and surveillance products
and services. This was recently evidenced by our notable contract win for a
second phase Safe City project with the government of Qingzhou City in
Shandong Province , following our implementation of phase one last year as well
as by our awarded Safe City bid in Jining City, which was our largest project
win to date. Our internal infrastructure, our reputation for premier service,
and our recent and pending acquisitions and sound partnerships provide us with
the optimal model to achieve our goal of becoming the market leader in
security and surveillance manufacturing and equipment. We plan to continue to
focus our efforts on developing all segments of our business. We continue to
see demand for our products, our services and our security expertise growing,
and it is our goal to be the logical choice for customers requiring security
products and services.''
Explanation of Redemption Accretion on convertible notes
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 March 31, 2008 the Company accrued a cumulative $18.1 million as a
redemption amount payable under the notes, $4.4 million of which was included
in interest expense in the first quarter of 2008. 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
$17.6 million annually.
