China Security & Surveillance Technology Reports Third Quarter 2008 Financial Results

SHENZHEN, China , Oct. 28 /Xinhua-PRNewswire/ -- China Security & Surveillance Technology, Inc. ("China Security" or the "Company") (NYSE: CSR), a leading provider of digital surveillance technology in China , today reported its financial results for the third quarter ending September 30, 2008 .

Third Quarter 2008

For the third quarter 2008, the Company reported GAAP earnings per diluted share of $0.20 compared to $0.29 in the third quarter 2007. GAAP results for the third quarter of 2008 include: (1) approximately $5.36 million, or $0.12 per diluted share, of non-cash expense related to the accrual of amounts payable under outstanding convertible notes in the event that such notes are redeemed (as described below under the caption "Explanation of Redemption Accrual"); (2) approximately $2.51 million, or $0.05 per diluted share, of non-cash expense related to the depreciation and amortization of long lived assets and (3) approximately $3.60 million, or $0.08 per diluted share, of non-cash expense related to the accrual of performance-based employee compensation. The company also recorded a one-time gain of $5.52 million, or $0.14 per diluted share, in last year's third quarter which did not recur in the third quarter of 2008. Excluding these non-cash expenses and the one-time gain in 3Q07, diluted earnings per share was $0.45, compared to $0.32 per diluted share in the third quarter 2007 (see "About Non-GAAP Financial Measures" toward the end of this release). Diluted share count increased 19% in the third quarter 2008 to 46.15 million from 40.51 million in the third quarter of 2007.

Third quarter revenue increased 82.3% to $119.3 million compared to $65.4 million in the third quarter 2007. Organic revenue during the third quarter 2008 was approximately $106.21 million, or 89.0% of total revenue. As a result, organic revenue grew during the quarter by $56.75 million, or 114.7% from $49.46 million in the third quarter 2007. Non-organic revenue, or revenue of acquired companies was approximately $13.08 million or 11.0% of total revenue in the third quarter 2008.

In the third quarter gross profits increased $12.27 million, or 62.2%, to $32.01 million from $19.74 million for the same period last year. Gross margin for the third quarter was 26.8%, compared to 30.2% in the same period last year. Overall gross margin was impacted by the need for accelerated installations of security projects before and during the Olympics, which required the company to pay overtime and premium for outsourced labor.

Income from operations in the third quarter increased 17.8% to $15.33 million from $13.01 million in the prior year's third quarter. Operating margin decreased to 12.8% from 19.9% in the third quarter last year, primarily due to lower gross margins, increased non-cash expenses as well as higher selling, general and administrative expenses. Net income in the third quarter of 2008 decreased 21.8% year over year to $9.15 million from $11.70 million in the prior year's third quarter. It is important to note that the third quarter 2007 also included a gain from land disposal of $5.52 million, or $0.14 per share, which did not recur in the third quarter of this year. Net income per diluted share was $0.20, versus $0.29 in the third quarter 2007.

The company's cash position at the end of the quarter was $65.93 million, down from $88.60 million at the end of the second quarter 2008. Total debt at the end of the first quarter was $157.61, up from $137.81 million at the end of the second quarter 2008.

Mr. Guo Shen Tu , Chief Executive Officer of China Security, commented, "We are excited by the revenue growth we have generated in the quarter. Even in today's challenging global economic environment, we continue to see sustained demand for our security and surveillance products and services. We believe we have the right foundation and the financial strength to continue to grow our revenues and to weather short term cost increases, which have returned to normal following the end of the Olympics. Our corporate and Safe City products and services continue to show strong demand, and we are beginning to realize benefits from our global outreach. We are excited about our stock listing on the Dubai International Financial Exchange, and the increased visibility we believe it will bring us. We anticipate continued growth in our existing markets within China , and believe that international exposure will soon realize benefits."

Financial Outlook

For the full year 2008, the company is reiterating its financial forecast and expects to achieve revenues between $410-420 million. Excluding the non- cash charges related to the redemption amount payable on convertible notes, the accrual of performance based employee compensation and the amortization of intangible assets related to the company's recent acquisitions, the company expects to achieve an adjusted net income of $74-82 million and adjusted diluted earnings per share of $1.63-1.79 for the full year 2008.

The company estimates that for the fourth quarter, 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 assets related to the company's recent acquisitions, will be approximately $5.55 million, $3.70 million and $2.80 million in the quarter respectively.

For the full year 2009, the Company expects to achieve revenues between $600-$630 million. The Company expects adjusted net income of $108-$113.4 million and adjusted diluted earnings per share of $2.16-$2.26. The major contributors to results should continue to be manufacturing and parts and systems integration. The company expects non-cash expense related to the redemption amount payable on convertible notes will be approximately $24.0 million in 2009. 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 remain focused on our goal of becoming the premiere security product and service provider in China , and believe that with our strong balance sheet and access to capital through our bank lines, we are well positioned to continue our growth trajectory, not only here in China but also globally. Despite the current global economic environment, we continue to believe that this is an ideal time to begin to increase our visibility and brand awareness overseas. Our management expertise, our solid strategic plan, and our strong capital structure give us the infrastructure to continue to leverage the growing opportunities and demand for security and surveillance products and services on a global scale."

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 September 30, 2008 the Company accrued a cumulative $27.8 million as a redemption amount payable under the notes, $5.36 million of which was included in interest expense in the third 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 $20.0 million annually.

Conference Call

The Company will hold a conference call to discuss the financial results at 8:00 a.m. ET today. The Company invites you to join the call by dialing 1-913-312-1468. A live webcast of the conference call will be available at http://www.csst.com . A replay of the call will be available from October 28, 2008 to November 4, 2008 . Listeners may access the replay by dialing 1-719-457-0820, passcode: 4870794.

About China Security & Surveillance Technology, Inc.

Based in Shenzhen, China , China Security manufactures, distributes, installs and services security and surveillance products and systems as well as develops security and surveillance related software in China . Its customers are mainly comprised of commercial and government entities and non-profit organizations. China Security has built a diversified customer base through its extensive sales and service network that includes over 150 branch offices and distribution points throughout China . To learn more about the Company visit http://www.csst.com.

About Non-GAAP Financial Measures

This press release contains non-GAAP financial measures for earnings that exclude the accrual for the redemption amount payable under certain outstanding convertible notes issued by the Company and certain other non-cash charges. China Security believes that these non-GAAP financial measures are useful to investors because they exclude non-cash charges that China Security's management excludes when it internally evaluates the performance of China Security's business and makes operating decisions, including internal budgeting, and performance measurement, because these measures provide a consistent method of comparison to historical periods. Moreover, management believes these non-GAAP measures reflect the essential operating activities of China Security. Accordingly, management excludes the expense arising from the accrual of redemption amounts payable under its outstanding convertible notes and certain other non-cash charges when making operational decisions. China Security believes that providing the non-GAAP measures that management uses to its investors is useful to investors for a number of reasons. The non-GAAP measures provide a consistent basis for investors to understand China Security's financial performance in comparison to historical periods. In addition, it allows investors to evaluate China Security's performance using the same methodology and information as that used by China Security's management. Non-GAAP measures are subject to inherent limitations because they do not include all of the expenses included under GAAP and because they involve the exercise of judgment of which charges are excluded from the non- GAAP financial measure. However, China Security's management compensates for these limitations by providing the relevant disclosure of the items excluded. In addition, please note that in Q3, 2007, the company recorded a one-time gain of $5.52 million or $0.14 per diluted share. The company did not have any one-time gains recorded during the 2008 third quarter.

The following table provides the non-GAAP financial measure and the related GAAP measure and provides a reconciliation of the non-GAAP measure to the equivalent GAAP measure.

Safe Harbor Statement

This press release includes certain statements that are not descriptions of historical facts, but are forward-looking statements. Such statements include, among others, those concerning our expected financial performance and strategic and operational plans, our future operating results, our expectations regarding the market for security and surveillance products, our expectations regarding the continued growth of the security and surveillance market, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and that a number of risks and uncertainties could cause our actual results to differ materially from those anticipated, expressed or implied in the forward-looking statements. These risks and uncertainties include, but not limited to, the factors mentioned in the "Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2007 , and other risks mentioned in our other reports filed with the Securities Exchange Commission, or SEC. Copies of filings made with the SEC are available through the SEC's electronic data gathering analysis retrieval system (EDGAR) at www.sec.gov. The words "believe," "expect," "anticipate," "project," "targets," "optimistic," "intend," "aim," "will" or similar expressions are intended to identify forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. The Company assumes no obligation and does not intend to update any forward- looking statements, except as required by law.

(Financial Tables to Follow)

SOURCE China Security & Surveillance Technology, Inc.



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