China Security & Surveillance Technology Reports Second Quarter 2007 Financial Results

SHENZHEN, China , Aug. 13 /Xinhua-PRNewswire/ -- China Security & Surveillance Technology, Inc. (" China Security" or the "Company") (OTC: CSCT), a leading provider of digital surveillance technology in China , today reported its financial...


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.