Earnings Recap: China Security & Surveillance Technology Reports Fourth Quarter and Full Year 2008 Financial Results

 SHENZHEN, China, March 5 /PRNewswire-Asia/ --

    -- 4Q08 Revenue Increases 70.5% to $143.5 Million
    -- 4Q08 Adjusted Net Income Increases 47.1% to $23.7 Million
    -- 4Q08 Adjusted EPS Increases 28.9% to $0.49
    -- Full Year 2008 Revenue Increases 77.9% to $427.4 Million
    -- Full Year Adjusted Net Income Increases 62.1% to $75.6 Million
    -- Full Year Adjusted EPS Increases 39.2% to $1.67

GeoManaged Guidance Table

China Security & Surveillance Technology, Inc. ('China Security' or 'CSST' or the 'Company') (NYSE: CSR) (Nasdaq Dubai: CSR), a leading provider of digital surveillance technology in the PRC, today reported its financial results for the fourth quarter and full year ending December 31, 2008.

Fourth Quarter 2008

Fourth quarter 2008 revenue increased 70.5% to $143.5 million, from $84.2 million in the fourth quarter of 2007, as demand for security solutions remains strong in both the government and private sectors. Organic revenue was approximately $124.3 million, or 86.6% of total revenue, while revenue from acquisitions was approximately $19 million or 13.4% of total revenue. As a result, organic revenues grew by $55.0 million, or 79.4% from $69.3 million in the same period of 2007.

In the fourth quarter, gross profits increased $11.0 million, or 44.5%, to $35.8 million, versus $24.8 million in the prior year's fourth quarter. However, in this challenging environment, more corporate customers insisted on price discounts, and therefore, gross margin decreased to 25.0%, from 29.5% for the same period of 2007. Correspondingly, operating margin decreased to 11.7%, from 16.1% a year ago, while net income decreased to $11.2 million from $14.8 million in the same quarter last year.

GAAP earnings per diluted share for the fourth quarter of 2008 was $0.23, as compared to $0.35 for the fourth quarter of 2007. GAAP results include: (1) approximately $5.6 million, or $0.12 per diluted share, of non-cash expense related to the redemption accretion on convertible notes; (2) approximately $2.7 million, or $0.06 per diluted share, of non-cash expense related to depreciation and amortization of long-lived assets due to our acquisition of subsidiaries, and (3) approximately $4.2 million, or $0.09 per diluted share, of non-cash expense related to employee stock compensation recognized pursuant to SFAS 123 (R).

Excluding these non-cash expenses, adjusted net income grew 47.1% to $23.7 million, versus $16.1 million in the fourth quarter of 2007. Adjusted earnings per diluted share was $0.49, a 28.9% increase from $0.38 per diluted share in the fourth quarter of 2007 (see ''About Non-GAAP Financial Measures' toward the end of this release). Diluted share count increased 14% to $48.2 million from $42.2 million in the fourth quarter of 2007.

The Company's cash position at the end of 2008 was $47.8 million as compared to $65.9 million at the end of the third quarter. Working capital increased to $231.0 million, versus $207.1 million at the end of the previous quarter, and total debt was $163.1 million, up from $157.6 million at the end of the third quarter of 2008.

Mr. Guo Shen Tu, Chief Executive Officer of China Security, commented, ''In the fourth quarter, we continued to see significant demand from government Safe-City contracts, and we continue to have excellent success in winning ever larger contracts, due to our strong brand and comprehensive product and services offerings. While our pricing and profitability remain firm in the government sector, we nevertheless experienced price erosions in our corporate segment, due to higher emphasis on cost controls by many of our corporate customers. As such, while we continue to project healthy demand and revenue growth over the next 12 months, we are focused on further integrating our operations and generating greater synergies across our portfolio of technologies, products, and subsidiaries. We are also focused on increasing our manufacturing and administrative efficiencies through targeted cost savings initiatives.''

Full Year 2008

Revenue increased 77.9% to $427.4 million, from $240 million in 2007. The strong revenue growth was driven by continued demand for surveillance and safety products in China, and increased government deployment of surveillance and safety systems in public places. During 2008, government customers account for 49.0% of total revenue, while corporate customers account for 51.0%. Organic revenue for 2008 was approximately $361.5 million, or 84.6% or total revenue. Non-organic revenue, or revenue of acquired companies, was approximately $65.9 million or 15.4% of total revenue. As a result, organic revenues grew during the year by $170.8 million, or 89.6%, from $190.7 million in 2007.

Full year 2008 gross profits increased 73.3% to $120.5 million, from $69.5 million for 2007. Gross margin for the year was 28.2%, a slight decrease from 28.9% for 2007. Income from operations in 2008 increased 34.7% to $57.5 million, from $42.7 million in the prior year; however, operating margin decreased to 13.4% from 17.8%, primarily due to higher selling, general and administrative (SG&A) expenses and non-cash expenses.

Accordingly, GAAP net income in 2008 decreased 7.7% to $32.6 million, from $35.3 million in 2007; and, GAAP earnings per diluted share decreased to $0.72 from $0.91 in 2007. GAAP results for the full year of 2008 include: (1) approximately $19.6 million, or $0.43 per diluted share, of non-cash expense related to the redemption accretion on convertible notes (as described below under the caption ''Explanation of Redemption Accretion''); (2) approximately $9.5 million, or $0.21 per diluted share, of non-cash expense related to depreciation and amortization of long-lived assets due to our acquisition of subsidiaries, and (3) approximately $13.8 million, or $0.31 per diluted share, of non-cash expense related to employee stock compensation recognized pursuant to SFAS 123 (R).

Excluding these non-cash expenses, adjusted net income increased 62.1% to $75.6 million, versus $46.6 million in 2007. Adjusted earnings per diluted share grew 39.2% to $1.67, from $1.20 per diluted share in 2007 (see the ''Reconciliation of GAAP to non-GAAP Measures' toward the end of this release).

Financial Outlook

For the full year 2009, the Company reaffirms its revenue projection of $600 to $630 million. The Company also reaffirms adjusted net income of $108-$113 million and adjusted diluted earnings per share of $2.16-$2.26. The company estimates that non-cash interest expense on redemption accrual, employee stock compensation expense, and depreciation and amortization will be approximately $22.7 million, $18.5 million, and $12 million, respectively.

Mr. Tu concluded, ''We remain confident about the business and the growth of the security industry. Our strategy has always been to be the market leader, and we have executed on our strategy successfully. We have built our industry's leading brand, distribution, product and services breadth, and manufacturing capabilities, and we have begun to realize the benefits of our self-reinforcing foundation, as we continue to see higher revenues, and a greater number of larger Safe City contracts.

In the coming year, we aim to expand our market leadership in China through greater integration of our corporate strengths and assets. We believe that our strategic consolidation efforts during the previous two years provide us with the strongest and most complete capabilities in offering turnkey security solutions demanded by our large corporate and government customers. We also aim to expand our international business through strategic partnerships and targeted market developments. Even taking into account the current global economic situation, we believe this is a great time to leverage our expertise and increase our brand awareness on a more global scale. As such, we continue to evaluate additional strategic partnerships with leading vendors of security technology and services that seek to leverage our leading brand, distribution, and manufacturing capabilities in the Chinese market.''

Explanation of Redemption Accretion

The Company raised $60 million and $50 million through two guaranteed senior unsecured convertible note financings with Citadel Equity Fund Ltd. 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 December 31, the Company accrued $19.6 million as a redemption amount payable under the notes, which was included in interest expense. Unlike the annual interest rate of 1% that the Company is actually paying out to the note holders under the notes 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 maturity dates and are redeemed in accordance with their terms. Nevertheless, the Company believes that it must accrue the entire redemption amount under U.S. generally accepted accounting principles.

Conference Call

The Company will hold a conference call to discuss the financial results at 8:00 a.m. ET on March 05, 2009. The Company invites you to join the call by dialing 1-913-312-9325. A live webcast of the conference call will be available at http://www.csst.com . A replay of the call will be available from March 05, 2009 to March 12, 2009. Listeners may access the replay by dialing 1-719-457-0820, passcode: 1429713.

About China Security & Surveillance Technology, Inc.

Based in Shenzhen, China, China Security manufactures, distributes, installs and services surveillance and safety products and systems as well as develops surveillance and safety 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.

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

                                   Twelve Months Ended   Three Months Ended
                                 12/31/2008 12/31/2007  12/31/2008  12/31/2007

    GAAP Net Income                $32,603   $35,319     $11,223     $14,825
    Less:

    Gain on disposal of
     long lived assets                  --   (11,587)         --      (6,898)
    Addition:

    Depreciation and amortization    9,491     5,040       2,745       1,714

    Non cash employee compensation  13,837     4,157       4,175       2,102
    Redemption accretion on
     convertible notes              19,641    13,701       5,551       4,363

    Non-GAAP Net Income            $75,572   $46,630     $23,694     $16,106



                             Adjusted EPS (Unaudited)
                                   Twelve Months Ended    Three Months Ended
                                 12/31/2008 12/31/2007  12/31/2008  12/31/2007

    GAAP DILUTED EPS                 $0.72      $0.91       $0.23       $0.35
     Less:

    Gain on disposal of
     long lived assets                  --      (0.30)         --       (0.16)
    Addition:

    Depreciation and amortization     0.21       0.13        0.06        0.04

    Non-cash employee compensation    0.31       0.11        0.09        0.05
    Redemption accretion on
     convertible notes                0.43       0.35        0.12        0.10

    Adjusted EPS                     $1.67      $1.20       $0.49       $0.38
    Share used in computing net
     income per
     share (diluted) 'million        45.28      38.80       48.16       42.23

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 surveillance and safety products, our expectations regarding the continued growth of the surveillance and safety 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, 2008, 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.

    For more information, please contact:

    Company Contact:
     Terence Yap
     Tel:   +86-755-8351-6102
     Email: terence.yap@csst.com

     Kewa Luo
     Tel:   +1-212-984-0688
     Email: ir@csst.com

    Investor Contact:
     ICR:
     Michael Tieu
     Tel:   +86-10-6599-7960
     Email: michael.tieu@icrinc.com

     Bill Zima
     Tel:   +1-203-682-8200
     Email: bill.zima@icrinc.com

    Media Contact:
     Patrick Yu
     Fleishman-Hillard Hong Kong
     Tel:   +852-2530-2577
     Email: patrick.yu@fleishman.com



       CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
              FOR THE QUARTERS ENDED DECEMBER 31, 2008 AND 2007
                    Expressed in thousands of U.S. dollars
                   (Except for share and per share amounts)

                                                       Three Months Ended
                                                           December 31
                                                     2008              2007

    Revenues                                      $143,548            $84,174

    Cost of goods sold                             107,728             59,384

    Gross profit                                    35,820             24,790

    Selling and marketing                            3,547              2,709

    General and administrative                      13,026              7,047

    Depreciation and amortization                    2,499              1,498

    Income from operations                          16,748             13,536

    Rental income received from
     related party                                      --                103

    Interest income                                     47                 60

    Interest expense                                (6,167)            (4,819)

    Gain on disposal of fixed assets                    --              8,115

    Equity in net loss of affiliated
     companies                                          --                 --

    Other income, net                                1,069              1,483

    Income before income taxes and
     minority interest                              11,697             18,478

    Minority interest in income of
     consolidated subsidiaries                           2                (32)

    Income taxes                                      (476)            (3,621)

    Net income                                      11,223             14,825

    NET INCOME PER SHARE
    BASIC                                           0.2362             0.3536
    DILUTED                                         0.2331             0.3517

    WEIGHTED AVERAGE NUMBER OF SHARES
     OUTSTANDING
    BASIC                                       47,514,443         41,922,449
    DILUTED                                     48,156,574         42,149,873



       CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
             FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 and 2006
                    Expressed in thousands of U.S. dollars
                   (Except for share and per share amounts)

                                             2008         2007         2006

    Revenues                               $427,354     $240,188     $106,989
    Cost of goods sold
    (including depreciation and
     amortization for the years ended
     December 31, 2008, 2007 and 2006
     of $762, $216 and $0,
     respectively)                          306,813      170,649       75,976
    Gross profit                            120,541       69,539       31,013
    Selling and marketing                    12,056        5,622        1,511
    General and administrative               42,295       16,442        3,036
    (including non-cash employee
     compensation for the years ended
     December 31, 2008, 2007 and 2006
     of $13,837, $4,157 and $0,
     respectively)
    Depreciation and amortization             8,729        4,824        1,124
    Income from operations                   57,461       42,651       25,342
    Rental income from related parties           --          483          496
    Interest income                             218          374           63
    Interest expense                        (21,765)     (15,011)        (108)
    Gain on sale of affiliated company           --           --          307
    Gain on disposal of land use rights
     and properties                              --       13,632           --
    Other income, net                         2,236        2,530          711
    Income before income taxes and
     minority interest                       38,150       44,659       26,811
    Minority interest in (income) loss
     of consolidated subsidiaries                33          (49)           9
    Income taxes                             (5,580)      (9,291)      (3,889)
    Net income                               32,603       35,319       22,931
    Foreign currency translation gain        17,294        9,664        1,664
    COMPREHENSIVE INCOME                    $49,897      $44,983      $24,595

    NET INCOME PER SHARE
    BASIC                                     $0.73        $0.95        $0.88
    DILUTED                                   $0.72        $0.91        $0.85
    WEIGHTED AVERAGE NUMBER OF SHARES
     OUTSTANDING
    BASIC                                44,721,421   37,368,549   26,052,519
    DILUTED                              45,284,070   38,795,241   26,940,215



          CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND SUBSIDIARIES
           CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2008 AND 2007
                      Expressed in thousands of U.S. dollars
                     (Except for share and per share amounts)

                                    ASSETS

                                                     2008              2007
    Cash and cash equivalents                      $47,779           $89,071
    Accounts receivable, net                       148,205            63,206
    Related party receivables                           --               549
    Inventories, net                               117,042            40,606
    Prepayment and deposits                          7,280             3,225
    Advances to suppliers                           17,120             2,877
    Other receivables                               14,065            13,171
    Tax refundable                                      --                92
    Deferred tax assets - current portion               32               137
     Total current assets                          351,523           212,934

    Deposits paid for acquisition of
     subsidiaries, properties and
     intangible assets                               7,855            46,443
    Plant and equipment, net                        74,523            24,066
    Land use rights, net                             7,675             1,379
    Intangible assets                               56,913            39,800
    Contingently returnable acquisition
     consideration                                   1,176                --
    Goodwill                                        73,216            52,369
    Deferred financing cost                          1,082               150
    Deferred tax assets -                        -
     non-current portion                               253               262
         TOTAL ASSETS                             $574,216          $377,403

                     LIABILITIES AND SHAREHOLDERS' EQUITY

    CURRENT LIABILITIES
    Notes payable - short term                     $10,242           $12,814
    Obligation under product financing
     arrangements - short term                       2,469                --
    Accounts payable                                50,756            21,864
    Accrued expenses                                10,263             5,108
    Advances from customers                         28,621             8,352
    Taxes payable                                    4,115             4,153
    Payable for acquisition of
     businesses, properties and land use
     rights                                         11,915                --
    Deferred income                                  1,207               915
      Total current liabilities                    119,588            53,206

    LONG TERM LIABILITIES
    Notes payable - long term                        2,853               698
    Obligation under product financing
     arrangements - long term                        4,214                --
    Convertible notes payable                      143,342           123,701
      Total liabilities                            269,997           177,605

    MINORITY INTEREST IN CONSOLIDATED
     SUBSIDIARIES                                       32                61

    SHAREHOLDERS' EQUITY
    Preferred stock, $0.0001 par value;
     10,000,000 shares authorized,
     0 shares issued and outstanding
     Common stock, $0.0001 par value;
     290,000,000 shares authorized
     49,142,592 (2008) and 42,506,150
     (2007) shares issued and outstanding                5                 4
    Additional paid-in capital                     164,806           110,254
    Retained earnings                              109,405            76,802
    Statutory surplus reserve fund                     804               804
    Accumulated other comprehensive
     income                                         29,167            11,873
      Total shareholders' equity                   304,187           199,737
       TOTAL LIABILITIES AND
        SHAREHOLDERS' EQUITY                      $574,216          $377,403



           CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 and 2006
                       Expressed in thousands of U.S. dollars
                      (Except for share and per share amounts)

                                               2008        2007        2006
    CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income                               $32,603     $35,319      $22,931
    Adjustments to reconcile net income
     to net cash (used in) provided by
     operating activities:
    Depreciation and amortization              9,491       5,040        1,124
    Allowance for doubtful accounts              401          74          113
    Provision for obsolete inventories            14           8          230
    Amortization of loan origination fees         --          --           37
    Common stock issued for services              --          --          250
    Issue of warrants for investor
     relation services                            --          --          185
    Amortization of consultancy services         135         122           --
    Non-cash compensation expense             13,837       4,157           --
    Amortization of deferred
     financing cost                              206          26           --
    Redemption accretion on
     convertible notes                        19,641      13,701           --
    Gain on disposal of land use rights,
     properties, plant and equipment              --     (13,632)         (15)
    Gain on sale of affiliated company            --          --         (307)
    Deferred taxes                               142           7          107
    Minority interest                            (33)         49           (9)

    Changes in operating assets and
     liabilities:
    (Increase) decrease in:
    Accounts receivable                      (73,827)    (28,539)     (13,992)
    Related party receivables                    587         (80)       3,768
    Other receivables                         (2,060)     (6,932)        (401)
    Inventories                              (63,306)     (7,851)     (13,328)
    Prepayment and deposits                   (2,381)        453       (3,233)
    Advances to suppliers                    (12,850)      1,178       (1,323)
    Increase (decrease) in:
    Accounts payable and accrued expenses     21,312      10,094        6,300
    Advances from customers                   17,077       1,376           --
    Taxes payable                               (318)      2,271          582
    Related party payable                         --          --           (9)
    Deferred income                              229         141          (26)
    Net cash (used in) provided by
     operating activities                    (39,100)     16,982        2,984


                                                2008        2007         2006
    CASH FLOWS FROM INVESTING ACTIVITIES:
    Additions to plant and equipment          (6,129)    (11,382)      (5,114)
    Additions to intangible assets, other
     than through business acquisitions       (2,320)     (1,016)        (107)
    Additions to land use rights, other
     than through business acquisitions       (5,101)       (591)          --
    Deposits paid for acquisition of
     subsidiaries                             (3,790)    (22,545)          --
    Deposits refunded for acquisition of
     subsidiaries                              1,943          --           --
    Deposits paid for acquisition of
     properties and intangible assets           (357)    (23,898)          --
    Net cash outflow on acquisition of
     net assets of businesses acquired
     (net of cash acquired)                  (10,997)    (36,378)      (6,539)
    Proceeds from dispositions of
     non-current assets                           --          --          592
    Proceeds from disposal of land use
     rights and properties                     3,379      12,844           --
    Net cash used in investing activities    (23,372)    (82,966)     (11,168)

    CASH FLOWS FROM FINANCING ACTIVITIES:
    Cash received from (advanced to)
     directors                                    --         (71)           9
    New borrowings, net of issuing cost       17,401     124,883        3,495
    Repayment of borrowings                  (19,386)     (8,045)          --
    New borrowings from obligation under
     product financing arrangements            6,687          --           --
    Repayment of obligation under product
      financing arrangements                  (1,143)         --           --
    Issue of common stock upon
     exercise of warrants                        277       3,905          123
    Issue of common stock, net of
     issuing expenses                          9,700          --       32,285
    Net cash provided by financing
     activities                               13,536     120,672       35,912
    NET (DECREASE) INCREASE IN CASH AND
     CASH EQUIVALENTS                        (48,936)     54,688       27,728
    Effect of exchange rate changes
     on cash                                   7,644       3,403          975
    Cash and cash equivalents, beginning
     of year                                  89,071      30,980        2,277
    CASH AND CASH EQUIVALENTS,
     END OF YEAR                             $47,779     $89,071      $30,980

SOURCE China Security & Surveillance Technology, Inc.