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.

Adjusted Net Income (Unaudited) All amounts, other than for share and per share amounts, in thousands of U.S. dollars For the Three Months Ended September 30, 2008 2007 GAAP Net Income $ 9,148 $ 11,696 Less: Gain on disposal of long lived assets -- (5,517) Addition: Depreciation and amortization 2,513 1,436 Non cash employee compensation 3,596 989 Redemption accretion on convertible notes 5,364 4,363 Non-GAAP Net Income $ 20,621 $ 12,967 Adjusted EPS (Unaudited) All amounts, other than for share and per share amounts, in thousands of U.S. dollars For the Three Months Ended September 30, 2008 2007 GAAP DILUTED EPS $ 0.20 $ 0.29 Less: Gain on disposal of long lived assets -- (0.14) Addition: Depreciation and amortization 0.05 0.04 Non cash employee compensation 0.08 0.02 Redemption accretion on convertible notes 0.12 0.11 Adjusted EPS $ 0.45 $ 0.32 Share used in computing net income per share (diluted) million 46.15 40.51

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)

CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS Expressed in thousands of U.S. dollars (Except for share and per share amounts) September 30, December 31, 2008 2007 (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 65,926 $ 89,071 Accounts receivable, net 131,928 63,206 Related party receivables 215 549 Inventories, net 85,719 40,606 Prepayments and deposits 7,175 3,225 Advances to suppliers 22,989 2,877 Other receivables 13,739 13,171 Tax refundable -- 92 Deferred tax assets - current portion 72 137 Total current assets 327,763 212,934 Deposits for acquisition of subsidiaries, properties and intangible assets 24,909 46,443 Property, plant and equipment, net 55,586 24,066 Land use rights, net 7,728 1,379 Intangible assets, net 56,923 39,800 Goodwill 86,435 52,369 Deferred financing cost 1,188 150 Deferred tax assets - non-current portion 252 262 TOTAL ASSETS $ 560,784 $ 377,403 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable - short term $ 8,213 $ 12,814 Obligation under product financing arrangements - short term 2,413 -- Accounts payable 51,469 21,864 Accrued expenses 6,411 5,108 Advances from customers 23,992 8,352 Taxes payable 2,801 4,153 Payable for acquisition of businesses, properties and land use rights 24,312 -- Deferred income 1,062 915 Total current liabilities 120,673 53,206 LONG-TERM LIABILITIES Notes payable - long term 4,327 698 Obligation under product financing arrangements - long term 4,867 -- Convertible notes payable 137,791 123,701 Total liabilities 267,658 177,605 MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 34 61 SHAREHOLDERS' EQUITY Preferred stock, $0.0001 par value; 10,000,000 shares authorized, 0 share issued and outstanding Common stock, $0.0001 par value; 290,000,000 shares authorized 45,843,285 (September 30, 2008) and 42,506,150 (December 31, 2007) shares issued and outstanding 5 4 Additional paid-in capital 162,396 110,254 Retained earnings 98,182 76,802 Statutory reserves 804 804 Accumulated other comprehensive income 31,705 11,873 Total shareholders' equity 293,092 199,737 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 560,784 $ 377,403 CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Expressed in thousands of U.S. dollars (Except for share and per share amounts) Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenues $119,289 $65,438 $283,806 $156,014 Cost of goods sold 87,280 45,700 199,085 111,265 (including depreciation and amortization for the three and nine months ended September 30, 2008 and 2007 of $230, $516, $0 and $0, respectively) Gross profit 32,009 19,738 84,721 44,749 Selling and marketing 3,376 1,455 8,509 2,913 General and administrative 11,023 3,836 29,269 9,395 (including non-cash employee compensation for the three and nine months ended September 30, 2008 and 2007 of $3,596, $9,662,989 and $2,055, respectively) Depreciation and amortization 2,283 1,436 6,230 3,326 Income from operations 15,327 13,011 40,713 29,115 Rental income received from related party -- 124 -- 380 Interest income 65 89 171 314 Interest expense (5,949) (4,768) (15,598) (10,192) Gain on disposal of land use right and property -- 5,517 -- 5,517 Other income, net 480 329 1,167 1,047 Income before income taxes and minority interest 9,923 14,302 26,453 26,181 Minority interest in (income) loss of consolidated subsidiaries -- (19) 31 (17) Income taxes (775) (2,587) (5,104) (5,670) Net income 9,148 11,696 21,380 20,494 Foreign currency translation gain 4,402 2,185 19,832 4,747 Comprehensive income $13,550 $13,881 $41,212 $25,241 Net income per share Basic $0.20 $0.30 $0.49 $0.57 Diluted $0.20 $0.29 $0.48 $0.54 Weighted average number of shares outstanding Basic 45,655,617 38,547,263 44,003,994 35,807,815 Diluted 46,151,827 40,512,247 44,615,552 37,772,753 CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Expressed in thousands of U.S. dollars (Except for share and per share amounts) Nine Months Ended September 30, 2008 2007 (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 21,380 $ 20,494 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 6,746 3,326 Provision for bad debt 345 -- Amortization of consultancy services 101 91 Amortization of deferred financing cost 102 18 Non cash employee compensation 9,662 2,055 Gain on disposal of land use right and property -- (5,517) Redemption accretion on convertible notes 14,090 9,338 Deferred taxes 104 7 Minority interest (31) 17 Changes in operating assets and liabilities: (Increase) decrease in: Accounts receivable (60,155) (16,669) Related party receivables 373 23 Inventories (31,933) (10,299) Prepayments and deposits (2,233) 1,074 Advances to suppliers (18,779) 183 Other receivables (2,723) (3,369) Increase (decrease) in: Accounts payable and accrued expenses 21,153 2,640 Advances from customers 12,543 6,664 Tax payable (1,375) 1,236 Deferred income 82 61 Net cash (used in) provided by operating activities (30,548) 11,373 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (13,877) (9,273) Additions to intangible assets (1,651) (854) Additions to land use rights (5,101) (587) Deposits paid for acquisition of subsidiaries (4,761) (18,148) Deposits refunded for acquisition of subsidiaries 11,898 -- Deposits paid for acquisition of properties and intangible assets -- (22,040) Net cash outflow for acquisition of subsidiaries (net of cash acquired from subsidiaries) (6,013) (36,378) Proceeds from disposal of land use right and property 3,379 6,125 Net cash used in investing activities (16,126) (81,155) CASH FLOWS FROM FINANCING ACTIVITIES: Due to a director -- (73) Issue of common stock by cash warrants 277 -- Issuance of common stock, net of issuing expenses 9,700 2,654 New borrowings, net of issuing cost 11,534 117,812 Repayment of borrowings (13,987) (3,481) New borrowings from obligation under product financing arrangements 6,705 -- Repayment of obligation under product financing arrangements (566) -- Net cash provided by financing activities 13,663 116,912 EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 9,866 1,677 NET (DECREASE) INCREASE IN CASH AND CASH (23,145) 48,807 EQUIVALENTS Cash and cash equivalents, beginning of period 89,071 30,980 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 65,926 $ 79,787

SOURCE China Security & Surveillance Technology, Inc.

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