As
filed
with the Securities and Exchange Commission on October 23, 2006
Registration
No. 333-_
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
____________________________
FORM
S-1
REGISTRATION
STATEMENT UNDER
THE
SECURITIES ACT OF 1933
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
3699
|
98-0509431
|
||
|
(State
or other jurisdiction of incorporation or
organization)
|
(Primary
Standard Industrial Classification Code Number)
|
(I.R.S.
Employer
Identification
No.)
|
4/F,
East 3/B, Saige Science & Technology Park
Huaqiang,
Shenzhen, China 518028
(86)
755-83765666
(Address,
including zip code, and telephone number, including area code, of registrant’s
principal executive offices)
____________________________
|
Guoshen
Tu
4/F,
East 3/B
Saige
Science & Technology Park
Huaqiang,
Shenzhen, China 518028
(86)
755-83765666
|
Louis
A. Bevilacqua, Esq.
Thomas
M. Shoesmith, Esq.
Joseph
R. Tiano, Jr., Esq.
Thelen
Reid & Priest LLP
701
8th Street, N.W.
Washington,
D.C. 20001
(202)
508-4000
|
(Names,
addresses, including zip codes, and telephone numbers, including area codes,
of
agents for service)
____________________________
If
any of
the securities being registered on this form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933,
check the following box. [X]
If
this
form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. ྑ
If
this
form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ྑ
If
this
form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement the same
offering. ྑ
CALCULATION
OF REGISTRATION FEE
|
Title
of each class of securities to be registered
|
Amount
to be registered(1)(3)
|
Proposed
maximum offering price per share(2)
|
Proposed
maximum aggregate offering price(2)
|
Amount
of
registration
fee
|
|
Common
stock, $0.0001
par value
|
4,883,334
|
$7.19
|
$35,111,171
|
$3,757
|
(1) In
accordance with Rule 416(a), the Registrant is also registering hereunder
an indeterminate number of shares that may be issued and resold resulting from
stock splits, stock dividends or similar transactions.
(2) Estimated
pursuant to Rule 457(c) of the Securities Act of 1933 solely for the purpose
of
computing the amount of the registration fee based on the average of the bid
and
asked prices for the Registrant’s common stock reported on the OTC Bulletin
Board on October 20,
2006.
(3) Represents
shares of the Registrant’s common stock being registered for resale that have
been issued to the selling stockholders named in this registration
statement.
The
registrant hereby amends this registration statement on such date or dates
as
may be necessary to delay its effective date until the registrant shall file
a
further amendment which specifically states that this registration statement
shall hereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to such
Section 8(a), may determine.
The
information in this prospectus is not complete and may be changed. These
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer
to sell these securities and it is not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not
permitted.
PROSPECTUS
Subject
to completion,
dated
, 2006
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC.
4,883,334
Shares of Common Stock
This
prospectus relates to 4,883,334 shares of common stock of China Security
&
Surveillance Technology, Inc. or CSST Delaware, a Delaware corporation, that
may
be sold from time to time by the selling stockholders named in this prospectus.
We will not receive any proceeds from the sales by the selling
stockholders.
Common
stock of China Security & Surveillance Technology, Inc., or CSST BVI, a
British Virgin Islands corporation, is quoted on the OTC Bulletin Board
maintained by the National Association of Securities Dealers, Inc. under
the
symbol “CSSTF.OB”. The closing sales price for its common stock on October 20,
2006 was $7.10 per share, as reported on the OTC Bulletin Board. You are
urged
to obtain current market quotations of our common stock before purchasing
any of
the shares being offered for sale pursuant to this prospectus.
Any
selling stockholders who are affiliates of broker-dealers and any participating
broker-dealers are deemed to be “underwriters” within the meaning of the
Securities Act of 1933, and any commissions or discounts given to any such
selling stockholders who are affiliates of broker-dealers and any such
broker-dealer may be regarded as underwriting commissions or discounts under
the
Securities Act. The selling stockholders have informed us that they do not
have
any agreement or understanding, directly or indirectly, with any person to
distribute their common stock.
Investing
in the shares being offered pursuant to this prospectus involves a high degree
of risk. You should carefully read and consider the information set forth
in the
section of this prospectus titled “Risk Factors,” beginning on page 4, when
determining whether to purchase any of these shares.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or determined if this prospectus
is
truthful or complete. Any representation to the contrary is a criminal
offense.
The
date
of this Prospectus is October
,
2006.
TABLE
OF CONTENTS
|
INTRODUCTORY
STATEMENT
|
1
|
|
PROSPECTUS
SUMMARY
|
1
|
|
RISK
FACTORS
|
4
|
|
CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
|
12
|
|
USE
OF PROCEEDS
|
12
|
|
DETERMINATION
OF OFFERING PRICE
|
12
|
|
DIVIDEND
POLICY
|
12
|
|
MARKET
FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
|
12
|
|
DILUTION
|
13
|
|
SELECTED
CONSOLIDATED FINANCIAL DATA
|
13
|
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
|
15
|
|
DESCRIPTION
OF BUSINESS
|
28
|
|
MANAGEMENT
|
36
|
| EXECUTIVE COMPENSATION | 38 |
| CERTAIN RELATIONSHIPS AND RELATED TRANSACTION | 39 |
| SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT | 40 |
| SELLING STOCKHOLDER | 41 |
|
CHANGE
IN ACCOUNTANTS
|
42
|
|
DESCRIPTION
OF SECURITIES
|
43
|
|
SHARES
ELIGIBLE FOR FUTURE SALE
|
43
|
|
PLAN
OF DISTRIBUTION
|
44
|
|
LEGAL
MATTERS
|
46
|
|
EXPERTS
|
46
|
|
WHERE
YOU CAN FIND MORE INFORMATION
|
46
|
i
INTRODUCTORY
STATEMENT
On
September 30, 2006, China Security and Surveillance Technology Inc. or CSST
BVI,
a British Virgin Islands corporation, and its wholly owned subsidiary China
Security & Surveillance Technology, Inc. or CSST Delaware, a Delaware
corporation, entered into a merger agreement for the purpose of reincorporating
CSST BVI from a British Virgin Islands corporation to a Delaware corporation
(the “Merger Agreement”). The Merger Agreement contemplates that CSST BVI will
be merged with and into CSST Delaware, with CSST Delaware as the surviving
corporation (the “Reincorporation Merger”). On October 2, 2006, we filed a
registration statement on Form S-4, registering the shares of our common
stock
that we will issue to the shareholders of CSST BVI in connection with the
Reincorporation Merger (the “S-4 Registration Statement”). The Reincorporation
Merger will not be completed until, among other things, the S-4 Registration
Statement is declared effective by the Securities and Exchange
Commission.
As
this
registration statement on Form S-1 will only be effective after the
Reincorporation Merger is completed and since the prospectus contained in
this
registration statement will not be used until the Reincorporation Merger
is
consummated, the information set forth in this registration statement presents
all information as if the Reincorporation Merger was completed, with the
exception of the financial statements and Management’s Discussion and Analysis,
for which information is provided for CSST BVI only. We
have
not provided financial statements of CSST Delaware because, prior to the
Reincorporation Merger, it has no assets, liabilities or operations other
than
incident to its formation. In addition, we have not included complete pro
forma
financial statements that give effect to the Reincorporation Merger because
immediately after the completion of the Reincorporation Merger, the consolidated
financial statements of CSST Delaware will be identical to CSST BVI’s financial
statements immediately prior to the Reincorporation Merger, and the
Reincorporation Merger will result in the conversion of each share of CSST
BVI
common stock into the right to receive one share of CSST Delaware common
stock.
Following completion of the Reincorporation Merger, CSST Delaware will assume
all liabilities and obligations of CSST BVI.
PROSPECTUS
SUMMARY
This
summary highlights some information from this prospectus, and it may not
contain
all of the information that is important to you. You should read the following
summary together with the more detailed information regarding our company
and
the common stock being sold in this offering, including “Risk Factors” and our
financial statements and related notes, included elsewhere in, or incorporated
by reference into, this prospectus.
In
this
prospectus, all references to “we,” “us,” “our,” “our Company,” “the Company” or
“CSST” are to China Security & Surveillance Technology, Inc., a Delaware
corporation, and China Security and Surveillance Technology Inc., a British
Virgin Islands corporation, when the distinction between the two companies
is
not important to the discussion. When the distinction between the two companies
is important to the discussion, we use the term “CSST Delaware” to refer to
China Security & Surveillance Technology, Inc., a Delaware corporation, and
the term “CSST BVI” to refer to China Security and Surveillance Technology Inc.,
a British Virgin Islands corporation. The terms “we,” “us,” “our,” “our
Company,” “the Company” or “CSST” in each case do not include the selling
stockholders. Unless the context otherwise requires, all references to (i)
“Safetech” are to China Safetech Holdings Limited, a British Virgin Islands
corporation; (ii) “Golden” are to Golden Group Corporation (Shenzhen) Limited, a
corporation incorporated in the People’s Republic of China; (iii) “Chengfeng”
are to Shanghai Chengfeng Digital Technology Co. Ltd. ; (iv) “BVI” are to
British Virgin Islands; (v) “PRC” and “China” are to People’s Republic of China;
(vi) “U.S. dollar,” “$” and “US$” are to United States dollars; (vii) “RMB” are
to Yuan Renminbi of China; (viii) “Securities
Act” are to Securities Act of 1933, as amended; and (x) “Exchange Act” are to
the Securities Exchange Act of 1934, as amended.
The
Company
Overview
We
are a
holding company whose primary business operations are conducted through our
subsidiary China Safetech Holdings Limited, a BVI corporation and its subsidiary
Golden Group Corporation (Shenzhen) Limited, a corporation incorporated in
the
PRC. Golden’s business is focused on manufacturing, distributing, installing and
maintaining security and surveillance systems in China. Until our acquisition of
Safetech in September 2005, our business strategy and ownership changed over
the
years as a result of several acquisitions of our stock that are discussed
in the
section below entitled “Our Background and History.”
1
Our
Background and History
We
were
incorporated in the BVI on April 8, 2002 under the name “Apex Wealth Enterprises
Limited” as a corporation under the International Business Companies Ordinance
of 1984. In February 2006, we changed our name to China Security and
Surveillance Technology Inc. Prior to our reverse acquisition of Safetech,
discussed in more detail below which was consummated on September 12, 2005,
we
were
a development stage enterprise and had not yet generated any revenues. Prior
to
the reverse acquisition, we provided business
advisory and management consulting services in greater China, initially
concentrating on the Hong Kong market. The focus of these services was on
small
to medium size enterprises.
From
and
after the reverse acquisition, our business became the business of our indirect,
wholly-owned subsidiary, Golden. Golden is a corporation incorporated in
the PRC
which is engaged in the business of manufacturing, distributing, installing
and
maintaining security and surveillance systems. Golden was organized in the
PRC
in January 1995. We are headquartered in Shenzhen, China.
Reverse
Acquisition with Safetech
On
September 12, 2005, we acquired 50,000 shares of the issued and outstanding
capital stock of Safetech, constituting all of the issued and outstanding
capital stock of Safetech. The 50,000 shares of Safetech were acquired from
the
individual shareholders of Safetech in a share exchange transaction in return
for the issuance of 8,138,000 shares of our common stock. As a result of
this
transaction, Safetech became our wholly-owned subsidiary, and Golden became
our
indirect wholly-owned subsidiary. Completion of the transaction resulted
in a
change in control of our Company. After the transaction, we were no
longer a shell company. The contracts relating to this transaction have been
filed as exhibits to our current report on Form 6-K that was filed with the
SEC
on July 22, 2005 incorporated herein by reference.
Upon
the
closing of the reverse acquisition, our
sole director Szetang Li
submitted his resignation letter pursuant to which he resigned from all offices
of our Company that he then held, effective immediately, and from his position
as our director, effective as of September 27, 2005.
For
accounting purposes, the transaction was treated as a reverse acquisition,
with
Safetech as the acquirer and our Company as the acquired party. When we refer
in
this prospectus to business and financial information for periods prior to
the
consummation of the reverse acquisition, we are referring to the business
and
financial information of Golden on a consolidated basis unless otherwise
specified.
Recent
Acquisitions and Transactions
On
October 25, 2005, we entered into an agreement with the equity owners of
Shenzhen Yuan Da Wei Shi Technology Limited or Yuan Da, which was subsequently
amended in April and May 2006. Pursuant to the amended agreement, we acquired
all of the assets of Yuan Da. Yuan Da is a limited liability company established
in Shenzhen, China and was principally engaged in the sale and development
of
security and surveillance systems. Under the agreement with Yuan Da, as amended,
the purchase price consisted of (i) a cash payment of RMB 1,000,000
(approximately $125,000) and (ii) the issuance of 200,000 unregistered shares
of
our common stock valued at $500,000 (based upon the average closing market
price
during the twenty days before the date of the agreement).
On
July
6, 2006, we entered into a stock transfer agreement with the shareholders
of
Chengfeng pursuant to which our subsidiary Safetech will acquire 100% ownership
of Chengfeng, a leader in security surveillance software development and
manufacturing in China. Chengfeng owns advanced video technology which
integrates with other software and hardware applications. Proprietary software
owned by Chengfeng includes the Security Resource Integration Management
Platform and the Security Integration Platform, which are designed to integrate
all security installations, both hardware and software, onto a single operating
platform to greatly improve the management of the entire security system.
Chengfeng has an established brand name and 22 valuable distribution channels
across China. Under the agreement, we will pay consideration of RMB 120 million
(approximately $15 million), consisting of RMB 60 million (approximately
$7.5
million) in cash and RMB 60 million (approximately $7.5 million) in shares
of
our common stock. RMB 10 million (approximately $1.25 million) has been paid
as
of October 20, 2006. The balance of the cash portion of the purchase price,
RMB
50 million (approximately $6.3 million), is due upon receipt of acknowledgement
of the stock transfer by the Shanghai Industry & Commerce Bureau. The number
of shares issuable in satisfaction of the equity portion of the purchase
price
is 1,331,376 (based upon the average of the closing price of our common stock
on
the OTCBB for the 20 trading days prior to the date of the execution of the
agreement). The shares must be issued within 90 days following the receipt
of
the aforementioned approval from the Shanghai Industry & Commerce Bureau. We
expect that we will obtain the necessary approval from the Shanghai Industry
& Commerce Bureau before December 31, 2006.
2
On
September 5, 2006, we entered into agreements to purchase the security and
surveillance business of Jian Golden An Ke Technology Co. Ltd. or Jian An
Ke,
Shenzhen Golden Guangdian Technology Co. Ltd. or Shenzhen Guangdian, Shenyang
Golden Digital Technology Co. Ltd. or Shenyang Golden and Jiangxi Golden
Digital
Technology Co. Ltd. or Jiangxi Golden, of which our CEO and director Guoshen
Tu
owns 80%, 60%, 42% and 90%, respectively. We refer to these companies in
this
prospectus as the Four-Related Companies. We were required to acquire the
Four-Related Companies pursuant to a covenant contained in a securities purchase
agreement with certain accredited investors, dated April 4, 2006. The covenant
contained in the securities purchase agreement required us to acquire these
four
companies on or before October 4, 2006. Mr. Tu will not receive any
consideration for the acquisition of his interest in the Four-Related Companies.
However, his wife Zhiqun Li is a 20% shareholder of Jian An Ke and will receive
100,000 shares of our common stock as part of the transaction. The minority
shareholders of these four companies, including Mr. Tu’s wife, will receive in
aggregate 850,000 shares of our common stock. Shenzhen Guangdian is engaged
in
the business of manufacturing and distributing security and surveillance
products. The other three companies are engaged in the business of distributing
security and surveillance products.
Our
Business
Through
Golden, we are engaged in the business of manufacturing, distributing,
installing and maintaining security and surveillance systems. Our customers
are
located throughout China.
Golden’s
customers are mainly government entities, non-profit organizations and
commercial entities. Golden’s marketing network divides China into nine
geographic regions. Golden has 37 branch offices. Golden derives most of
its
revenues from the installation of security and surveillance systems as well
as
the sales of products including embedded digital video recorders, PC digital
video recorders, mobile digital video recorders, digital cameras and auxiliary
apparatus.
We
have
established a partnership with Beijing University to conduct our research
and
development on security and surveillance technology and the development of
new
products.
The
Offering
|
Common
stock offered by selling stockholders
|
4,883,334
shares
|
|
|
Common
stock outstanding before the offering
|
29,209,259
shares
(1)
|
|
|
Common
stock outstanding after the offering
|
29,209,259
shares
|
|
|
Proceeds
to us
|
We
will not receive any proceeds from the sale of common stock covered
by
this prospectus.
|
|
(1)
|
Represents
the number of shares outstanding on the effective date of the
Reincorporation Merger.
|
Selected
Historical Financial Information
The
following selected historical financial data of CSST BVI for the years ended
December 31, 2003, 2004 and 2005 have been derived from the audited consolidated
financials statements of CSST BVI. The selected historical financial data
of
CSST BVI for the years ended December 31, 2001 and 2002 and the six months
ended
June 30, 2005 and 2006 were unaudited. The selected historical financial
data
information is only a summary and should be read in conjunction with CSST
BVI’s
historical consolidated financials statements and related notes contained
elsewhere herein.
3
We
have
not included complete pro forma financial comparative per share information
that
gives effect to the Reincorporation Merger because, immediately after the
completion of the Reincorporation Merger, the consolidated financial statements
of CSST Delaware will be identical to CSST BVI’s financial statements
immediately prior to the Reincorporation Merger, and the Reincorporation
Merger
will result in the conversion of each share of CSST BVI common stock into
the
right to receive one share of CSST Delaware common stock. In addition, we
have
not provided financial statements of CSST Delaware because, prior to the
Reincorporation Merger, it has no assets, liabilities or operations other
than
incident to its formation. Following completion of the Reincorporation Merger,
CSST Delaware will assume all liabilities and obligations of CSST
BVI.
|
Statement
of Income Data
|
Years
Ended December
31,
|
Six
Months Ended
June
30,
|
||||||||||||||||||||
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2005
|
|
2006
|
||||||||||
|
Revenues
|
$
|
4,045,098
|
$
|
10,330,847
|
$
|
11,794,869
|
$
|
16,055,704
|
$
|
32,688,582
|
$
|
12,729,441
|
$
|
22,609,172
|
||||||||
|
Income
From Operations
|
302,445
|
2,234,128
|
3,262,057
|
6,130,779
|
7,478,842
|
2,441,937
|
6,279,225
|
|||||||||||||||
|
Net
Income
|
257,078
|
1,899,009
|
2,752,123
|
5,724,026
|
7,265,957
|
2,618,780
|
6,036,481
|
|||||||||||||||
|
Weighted
Average Shares (Basic & Diluted)
|
17,000,000
|
17,000,000
|
17,000,000
|
17,000,000
|
18,521,479
|
17,000,000
|
23,046,766
|
|||||||||||||||
|
Basic
& Diluted Net Income per Share
|
0.015
|
0.11
|
0.16
|
0.34
|
0.39
|
0.15
|
0.26
|
|||||||||||||||
|
Balance
Sheet Data
|
Years
Ended December
31,
|
Six
Months Ended June
30,
|
|||||||||||||||||
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|||||||||
|
Total
Assets
|
$
|
10,687,966
|
$
|
13,581,661
|
$
|
16,976,999
|
$
|
22,008,920
|
$
|
29,116,672
|
$
|
59,150,650
|
|||||||
|
Total
Current Liabilities
|
1,766,061
|
4,126,166
|
5,900,469
|
5,208,364
|
4,504,926
|
20,076,451
|
|||||||||||||
|
Net
Assets
|
8,921,905
|
9,455,495
|
11,076,530
|
16,800,556
|
24,611,746
|
39,074,198
|
|||||||||||||
|
Total
Shareholders’ Equity
|
8,592,637
|
8,849,715
|
11,076,530
|
16,800,556
|
24,611,746
|
39,074,198
|
|||||||||||||
Risk
Factors
Your
investment in our common stock offered by this prospectus involves a high
degree
of risk. See “RISK FACTORS” beginning on page 4.
Additional
Information
Our
corporate headquarters are located at 4/F, East 3/B, Saige Science &
Technology Park, Huaqiang, Shenzhen, China 518028.
Our
telephone number is (86) 755-83765666. We maintain a website at
www.goldengroup.cn that contains information about our subsidiary Golden,
but
that information is not a part of this prospectus.
RISK
FACTORS
The
shares of our common stock being offered for resale by the selling stockholders
are highly speculative in nature, involve a high degree of risk and should
be
purchased only by persons who can afford to lose the entire amount they invest
in the common stock. Before purchasing any of the shares of common stock,
you
should carefully consider the following factors relating to our business
and
prospects. If any of the following risks actually occurs, our business,
financial condition or operating results will suffer, the trading price of
our
common stock could decline, and you may lose all or part of your
investment.
4
RISKS
RELATED TO OUR BUSINESS
Due
to the nature of our business, we do not have significant amounts of recurring
revenues from our existing customers and we are highly dependent on new business
development.
Most
of
our revenues derive from the installation of security and surveillance systems
which are generally non-recurring. Our customers are mainly government entities,
non-profit organizations and commercial entities (including airports, customs
agencies, hotels, real estate developments, banks, mines, railways,
supermarkets, and entertainment enterprises). We manufacture and install
security systems for these customers and generate revenues from the sale
of
these systems to our customers and, to a lesser extent, from maintenance
of
these systems for our customers. After we have manufactured and installed
a
system at any particular customer site, we have generated the majority of
revenues from that particular client. We would not expect to generate
significant revenues from any existing client in future years unless that
client
has several possible installation sites. Therefore, in order to maintain
a level
of revenues each year that is at or in excess of the level of revenues we
generated in prior years, we must identify and be retained by new clients.
If
our business development, marketing and sales techniques do not result in
an
equal or greater number of projects of at least comparable size and value
for us
in a given year compared to the prior year, then
we may be unable to increase our revenues and earnings or even sustain current
levels in the future.
In
order to grow at the pace expected by management, we
will require additional capital to support our long-term business plan. If
we are unable to obtain additional capital in future years, we may be unable
to
proceed with our long-term business plan and we may be forced to curtail
or
cease our operations.
We
will
require additional working capital to support our long-term business plan,
which
includes identifying suitable targets for horizontal or vertical mergers
or
acquisitions, so as to enhance the overall productivity and benefit from
economies of scale. Our working capital requirements and the cash flow
provided by future operating activities, if any, will vary greatly from quarter
to quarter, depending on the volume of business during the period and payment
terms with our customers. We may not be able to obtain adequate levels of
additional financing, whether through equity financing, debt financing or
other
sources. Additional financings could result in significant dilution to our
earnings per share or the issuance of securities with rights superior to
our
current outstanding securities. In addition, we may grant registration
rights to investors purchasing our equity or debt securities in the future.
If we are unable to raise additional financing, we may be unable to
implement our long-term business plan, develop or enhance our products and
services, take advantage of future opportunities or respond to competitive
pressures on a timely basis, if at all. In addition, a lack of additional
financing could force us to substantially curtail or cease operations.
Our
future success depends in part on attracting and retaining key senior management
and qualified technical and sales personnel.
Our
future success depends in part on the contributions of our management team
and
key technical and sales personnel and our ability to attract and retain
qualified new personnel. In particular, our success depends on the continuing
employment of our Chief Executive Officer Mr. Guoshen Tu, our Chief Technical
Officer Dr. Yong Zhao, our Chief Operating Officer Shufang Yang, our Vice
President Jianguo Jiang and our Vice President Terence Yap. There is significant
competition in our industry for qualified managerial, technical and sales
personnel and we cannot assure you that we will be able to retain our key
senior
managerial, technical and sales personnel or that we will be able to attract,
integrate and retain other such personnel that we may require in the future.
We
also cannot assure you that our employees will not leave and subsequently
compete against us. If we are unable to attract and retain key personnel
in the
future, our business, financial condition and results of operations could
be
adversely affected.
5
Our
growth strategy includes making acquisitions in the future, which could subject
us to significant risks, any of which could harm our business.
Our
growth strategy includes identifying and acquiring or investing in suitable
candidates on acceptable terms. We recently completed the acquisition of
the
assets of Shenzhen Yuan Da Wei Shi Technology Limited and acquired the security
and surveillance business of the Four-Related Companies, and have entered
into
an agreement with the shareholders of Chengfeng to acquire 100% ownership
of
Chengfeng. In addition, over time, we may acquire or make investments in
other
providers of products that complement our business and other companies in
the
security industry.
Acquisitions
involve a number of risks and present financial, managerial and operational
challenges, including:
|
·
|
diversion
of management’s attention from running our existing
business;
|
|
·
|
increased
expenses, including travel, legal, administrative and compensation
expenses resulting from newly hired
employees;
|
|
·
|
increased
costs to integrate personnel, customer base and business practices
of the
acquired company with our own;
|
|
·
|
adverse
effects on our reported operating results due to possible write-down
of
goodwill associated with
acquisitions;
|
|
·
|
potential
disputes with sellers of acquired businesses, technologies, services,
products and potential liabilities;
and
|
|
·
|
dilution
to our earnings per share if we issue common stock in any
acquisition.
|
Moreover,
performance problems with an acquired business, technology, product or service
could also have a material adverse impact on our reputation as a whole. In
addition, any acquired business, technology, product or service could
significantly under-perform relative to our expectations, and we may not
achieve
the benefits we expect from our acquisitions. For all of these reasons, our
pursuit of an acquisition and investment strategy or any individual acquisition
or investment could have a material adverse effect on our business, financial
condition and results of operations.
Our
limited ability to protect our intellectual property may adversely affect
our
ability to compete.
We
rely
on a combination of patents, trademarks, copyrights, trade secret laws,
confidentiality procedures and licensing arrangements to protect our
intellectual property rights. A successful challenge to the ownership of
our
technology could materially damage our business prospects. Our technologies
may
infringe upon the proprietary rights of others. We may be required to
obtain from others licenses that may not be available on commercially reasonable
terms, if at all. Our competitors may assert that our technologies or products
infringe on their patents or proprietary rights. Problems with patents or
other rights could increase the cost of our products or delay or preclude
our
new product development and commercialization. If infringement claims
against us are deemed valid, we may not be able to obtain appropriate licenses
on acceptable terms or at all. Litigation could be costly and time-consuming
but
may be necessary to protect our technology license positions or to defend
against infringement claims.
We
sometimes extend credit to our customers. Failure to collect the trade
receivables or untimely collection could affect our liquidity.
We
extend
credit to a large number of our customers while generally requiring no
collateral. Generally, our customers pay in installments, with a portion
of the
payment upfront, a portion of the payment upon receipt of our products by
our
customers and before the installation, and a portion of the payment after
the
installation of our products and upon satisfaction by our customer. Sometimes,
a
small portion of the payment will not be paid until after a certain period
following the installation. We perform ongoing credit evaluations of those
customers’ financial condition and generally have no difficulties in collecting
our payments. However, if we encounter future problems collecting amounts
due
from our clients or if we experience delays in the collection of amounts
due
from our clients, our liquidity could be negatively affected.
6
If
our
subcontractors fail to perform their contractual obligations, our ability
to
provide services and products to our customers, as well as our ability to
obtain
future business, may be harmed.
Many
of
our contracts involve subcontracts with other companies upon which we rely
to
perform a portion of the services that we must provide to our customers.
There
is a risk that we may have disputes with our subcontractors, including disputes
regarding the quality and timeliness of work performed by the subcontractor.
A
failure by one or more of our subcontractors to satisfactorily perform the
agreed-upon services may materially and adversely impact our ability to perform
our obligations to our customers, and expose us to liability and could have
a
material adverse effect on our ability to compete for future contracts and
orders.
Safetech
is a BVI company, while Golden is a PRC company, and all of our officers
and
directors reside outside the United States. Therefore, certain judgments
obtained against our Company by our shareholders may not be enforceable in
the
BVI or China.
Safetech
is a BVI company and our operating subsidiary Golden is a PRC company. All
of
our officers and directors reside outside of the United States. All or
substantially all of our assets and the assets of these persons are located
outside of the United States. As a result, it may not be possible for investors
to effect service of process within the United States upon our Company or
such
persons or to enforce against it or these persons the United States federal
securities laws, or to enforce judgments obtained in United States courts
predicated upon the civil liability provisions of the federal securities
laws of
the United States, including the Securities Act and the Exchange Act.
RISKS
RELATED TO OUR INDUSTRY
Seasonality
affects our operating results.
Our
sales
are affected by seasonality. Our revenues are usually higher in the second
half
of the year than in the first half of the year because fewer projects are
undertaken during and around the Chinese spring festival.
Our
success relies on our management’s ability to understand the highly evolving
surveillance and security industry.
The
Chinese surveillance and security industry is an immature and highly evolving
industry. Therefore, it is critical that our management is able to understand
industry trends and make good strategic business decisions. If our management
is
unable to identify industry trends and act in response to such trends, our
business will suffer.
If
we
are unable to respond to the rapid technological changes in our industry
and
changes in our customers’ requirements and preferences, our business, financial
condition and results of operation could be adversely affected.
If
we are
unable, for technological, legal, financial or other reasons, to adapt in
a
timely manner to changing market conditions or customer requirements, we
could
lose customers and market share. The electronic security systems industry
is
characterized by rapid technological change. Sudden changes in customer
requirements and preferences, the frequent introduction of new products and
services embodying new technologies and the emergence of new industry standards
and practices could render our existing products, services and systems obsolete.
The emerging nature of products and services in the electronic security systems
industry and their rapid evolution will require that we continually improve
the
performance, features and reliability of our products and services. Our success
will depend, in part, on our ability to:
|
·
|
enhance
our existing products and services;
|
|
·
|
anticipate
changing customer requirements by designing, developing, and launching
new
products and services that address the increasingly sophisticated
and
varied needs of our current and prospective customers;
and
|
7
|
·
|
respond
to technological advances and emerging industry standards and practices
on
a cost-effective and timely basis.
|
The
development of additional products and services involves significant
technological and business risks and requires substantial expenditures and
lead
time. If we fail to introduce products with new technologies in a timely
manner,
or adapt our products to these new technologies, our business, financial
condition and results of operations could be adversely affected. We cannot
assure you that even if we are able to introduce new products or adapt our
products to new technologies that our products will gain acceptance among
our
customers. In addition, from time to time, we or our competitors may announce
new products, product enhancements or technological innovations that have
the
potential to replace or shorten the life cycles of our existing products
and
that may cause customers to defer purchasing our existing products, resulting
in
inventory obsolescence.
We
may
not be able to maintain or improve our competitive position because of strong
competition in the electronic security systems industry, and we expect this
competition to continue to intensify.
The
electronic security systems industry is highly competitive. There are about
9,000 companies in China that engage in the business of manufacturing, designing
and building surveillance and security products. In addition, since China
joined
the World Trade Organization (“WTO”), we also face competition from
international competitors. Some of our international competitors are larger
than
we and possess greater name recognition, assets, personnel, sales and financial
resources. These entities may be able to respond more quickly to changing
market
conditions by developing new products and services that meet customer
requirements or are otherwise superior to our products and services and may
be
able to more effectively market their products than we can because they have
significantly greater financial, technical and marketing resources than we
do.
They may also be able to devote greater resources than we can to the
development, promotion and sale of their products. Increased competition
could
require us to reduce our prices, result in our receiving fewer customer orders,
and result in our loss of market share. We cannot assure you that we will
be
able to distinguish ourselves in a competitive market. To the extent that
we are
unable to successfully compete against existing and future competitors, our
business, operating results and financial condition would be materially
adversely affected.
Our
business and reputation as a manufacturer of high quality surveillance and
security equipment may be adversely affected by product defects or substandard
performance.
We
believe that we offer high quality products that are reliable and competitively
priced. If our products do not perform to specifications, we might be required
to redesign or recall those products or pay substantial damages. Such an
event
could result in significant expenses, disrupt sales and affect our reputation
and that of our products. In addition, product defects could result in
substantial product liability. We do not have product liability insurance.
If we
face significant liability claims, our business, financial condition, and
results of operation would be adversely affected.
Our
product offerings involve a lengthy sales cycle and we may not anticipate
sales
levels appropriately, which could impair our profitability.
Some
of
our products and services are designed for medium to large commercial,
industrial and government facilities desiring to protect valuable assets
and/or
prevent intrusion into high security facilities in China. Given the nature
of
our products and the customers that purchase them, sales cycles can be lengthy
as customers conduct intensive investigations and deliberate between competing
technologies and providers. For these and other reasons, the sales cycle
associated with some of our products and services is typically lengthy and
subject to a number of significant risks over which we have little or no
control. If sales in any period fall significantly below anticipated levels,
our
financial condition and results of operations could suffer.
RISKS
RELATED TO DOING BUSINESS IN CHINA
Economic,
political, legal and social uncertainties in China could harm our future
interests in China.
All
of
our future business projects and plans are expected to be located in China.
As a
consequence, the economic, political, legal and social conditions in China
could
have
an
adverse effect on our business, results of operations and financial condition.
The legislative trend in China over the past decade has been to enhance the
protection afforded to foreign investment and to allow for more active control
by foreign parties of foreign invested enterprises. There can be no assurance,
however, that legislation directed towards promoting foreign investment will
continue. More restrictive rules on foreign investment could adversely affect
our ability to expand our operations into China or repatriate any profits
earned
there. Some of the changes that could adversely affect us include:
8
|
•
|
level
of government involvement in the
economy;
|
|
•
|
control
of foreign exchange;
|
|
•
|
methods
of allocating resources;
|
|
•
|
balance
of payments position;
|
|
•
|
international
trade restrictions; and
|
|
•
|
international
conflict.
|
The
Chinese economy differs from the economies of most countries belonging to
the
Organization for Economic Cooperation and Development (“OECD”), in many ways. As
a result of these differences, we may not develop in the same way or at the
same
rate as might be expected if the Chinese economy were similar to those of
the
OECD member countries.
The
legal environment in China is uncertain and your ability to legally protect
your
investment could be limited.
The
Chinese legal system is a civil law system based on written statutes. Unlike
common law systems, it is a system in which precedents set in earlier legal
cases are not generally used. The overall effect of legislation enacted over
the
past 20 years has been to enhance the protections afforded to foreign-owned
enterprises in China. However, these laws, regulations and legal requirements
are relatively recent and are evolving rapidly, and their interpretation
and
enforcement involve uncertainties. These uncertainties could limit the legal
protections available to foreign investors, such as the right of
foreign-invested enterprises to hold licenses and permits such as requisite
business licenses. In addition, all of our executive officers and our directors
are residents of China and not of the United States, and substantially all
the
assets of these persons are located outside the United States. As a result,
it
could be difficult for investors to effect service of process in the United
States, or to enforce a judgment obtained in the United States against us
or any
of these persons.
The
Chinese government exerts substantial influence over the manner in which
we must
conduct our business activities.
China
only recently has permitted provincial and local economic autonomy and private
economic activities. The Chinese government has exercised and continues to
exercise substantial control over virtually every sector of the Chinese economy
through regulation and state ownership. Our ability to operate in China may
be
harmed by changes in its laws and regulations, including those relating to
taxation, import and export tariffs, environmental regulations, land use
rights,
property and other matters. We believe that our operations in China are in
material compliance with all applicable legal and regulatory requirements.
However, the central or local governments of these jurisdictions may impose
new,
stricter regulations or interpretations of existing regulations that would
require additional expenditures and efforts on our part to ensure our compliance
with such regulations or interpretations.
Accordingly,
government actions in the future, including any decision not to continue
to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China
or
particular regions thereof, and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint ventures.
Future
inflation in China may inhibit our activity to conduct business in
China.
In
recent
years, the Chinese economy has experienced periods of rapid expansion and
high
fluctuating rates of inflation. During the past ten years, the rate of inflation
in China has been as high as 20.7% and as low as -2.2%. These factors have
led
to the adoption by the Chinese government, from time to time, of various
corrective measures designed to restrict the availability of credit or regulate
growth and contain inflation. High inflation may in the future cause the
Chinese
government to impose controls on credit and/or prices, or to take other action,
which could inhibit economic activity in China, and thereby harm the market
for
our products.
9
Public
health problems that may uniquely affect the Chinese population may disrupt
our
operations.
A
renewed
outbreak of severe acute respiratory syndrome or
another widespread public health problem in China, where our operations are
conducted, could have a negative effect on our operations.
Our
operations may be impacted by a number of other health-related factors,
including the following:
|
·
|
quarantines
or closures of some of our offices which would severely disrupt
our
operations;
|
|
·
|
the
sickness or death of our key officers and employees;
and
|
|
·
|
a
general slowdown in the Chinese
economy.
|
Any
of
the foregoing events or other unforeseen consequences of public health problems
could damage our operations.
Restrictions
on currency exchange may limit our ability to receive and use our revenues
effectively.
The
majority of our revenues will be settled in Renminbi, and any future
restrictions on currency exchanges may limit our ability to use revenue
generated in Renminbi to fund any future business activities outside China
or to
make dividend or other payments in U.S. dollars. Although the Chinese government
introduced regulations in 1996 to allow greater convertibility of the Renminbi
for current account transactions, significant restrictions still remain,
including the restriction that foreign-invested enterprises may only buy,
sell
or remit foreign currencies after providing valid commercial documents, and
only
at those banks in China authorized to conduct foreign exchange business.
In
addition, conversion of Renminbi for capital account items, including direct
investment and loans, is subject to governmental approval in China, and
companies are required to open and maintain separate foreign exchange accounts
for capital account items. We cannot be certain that the Chinese regulatory
authorities will not impose more stringent restrictions on the convertibility
of
the Renminbi.
The
value of our securities will be affected by the foreign exchange rate between
the U.S. Dollars and Renminbi.
The
value
of our common stock will be affected by the foreign exchange rate between
U.S.
dollars and Renminbi, and between those currencies and other currencies in
which
our sales may be denominated. For example, to the extent that we need to
convert
U.S. dollars into Renminbi for our operational needs, should the Renminbi
appreciate against the U.S. dollar at that time, our financial position,
the
business of our Company, and the price of our common stock may be harmed.
Conversely, if we decide to convert our Renminbi into U.S. dollars for the
purpose of declaring dividends on our common stock or for other business
purposes, should the U.S. dollar appreciate against the Renminbi, the U.S.
dollar equivalent of our earnings from our subsidiaries in China would be
reduced.
RISKS
RELATED TO THE MARKET FOR OUR STOCK
We
expect CSST Delaware common stock to be quoted only on the OTC Bulletin Board,
which may have an unfavorable impact on stock price and
liquidity.
CSST
BVI
common stock is quoted only on the OTCBB, and we expect CSST Delaware common
stock to be quoted only on the OTCBB as well. The OTCBB is a significantly
more
limited market than the New York Stock Exchange or NASDAQ system. The quotation
of our shares on the OTCBB may result in a less liquid market available for
existing and potential stockholders to trade shares of the common stock,
could
depress the trading price of the common stock and could have a long-term
adverse
impact on our ability to raise capital in the future.
We
are subject to penny stock regulations and restrictions.
The
SEC
has adopted regulations which generally define so-called “penny stock” to be an
equity security that has a market price less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to certain exemptions. As of
October
20, 2006, the closing bid and asked prices for our common stock were $7.10
and
$7.28 per share, respectively. Although our share price is currently above
the
penny stock level, there is no assurance, given the volatility of the OTC
market, that the CSST Delaware share price can be maintained above the penny
stock level all the time. Although since September 2005, we have met the
net
worth exemption from the “penny stock” definition, no assurance can be given
that CSST Delaware will maintain such exemption. As a “penny stock,” the common
stock may become subject to Rule 15g-9 under the Exchange Act, or the “Penny
Stock Rule.” This rule imposes additional sales practice requirements on
broker-dealers that sell such securities to persons other than established
customers and “accredited investors” (generally, individuals with a net worth in
excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together
with their spouses). For transactions covered by Rule 15g-9, a broker-dealer
must make a special suitability determination for the purchaser and receive
the
purchaser’s written consent to the transaction prior to sale. As a result, this
rule may affect the ability of broker-dealers to sell CSST Delaware securities
and may affect the ability of purchasers to sell CSST Delaware securities
in the
secondary market.
10
For
any
transaction involving a penny stock, unless exempt, the Exchange Act rules
require delivery, prior to any transaction in a penny stock, of a disclosure
schedule prepared by the SEC relating to the penny stock market. Disclosure
is
also required to be made about sales commissions payable to both the
broker-dealer and the registered representative and current quotations for
the
securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stock.
There
can
be no assurance that CSST Delaware common stock will qualify for exemption
from
the Penny Stock Rule. In any event, even if CSST Delaware common stock were
exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6)
of
the Exchange Act, which gives the SEC the authority to restrict any person
from
participating in a distribution of penny stock, if the SEC finds that such
a
restriction would be in the public interest.
The
number of shares being registered for sale is significant in relation to
our
trading volume.
All
of
the shares registered for sale on behalf of the selling stockholders are
currently subject to volume restrictions imposed upon those shares under
Rule
145 of the Securities Act. We have filed this registration statement to register
these shares for resale into the public market by the selling stockholders
and
thereby remove the otherwise applicable volume limitation restrictions under
Rule 145. These restricted securities, if sold in the market all at once
or at
about the same time, could depress the market price during the period the
registration statement remains effective and also could affect our ability
to
raise equity capital.
Provisions
in CSST Delaware’s certificate of incorporation and bylaws or Delaware law might
discourage, delay or prevent a change of control of CSST Delaware or changes
in
its management and, therefore depress the trading price of the common stock.
Delaware
corporate law and CSST Delaware’s certificate of incorporation and bylaws
contain provisions that could discourage, delay or prevent a change in control
of CSST Delaware or changes in its management that the stockholders of CSST
Delaware may deem advantageous. These provisions:
|
·
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deny
holders of CSST Delaware common stock cumulative voting rights
in the
election of directors, meaning that stockholders owning a majority
of CSST
Delaware outstanding shares of common stock will be able to elect
all of
CSST Delaware’s directors;
|
|
·
|
any
stockholder wishing to properly bring a matter before a meeting
of
stockholders must comply with specified procedural and advance
notice
requirements; and
|
|
·
|
any
vacancy on the board of directors, however the vacancy occurs,
may only be
filled by the directors.
|
In
addition, Section 203 of the Delaware General Corporation Law generally
limits our ability to engage in any business combination with certain persons
who own 15% or more of our outstanding voting stock or any of our associates
or
affiliates who at any time in the past three years have owned 15% or more
of our
outstanding voting stock. These provisions may have the effect of entrenching
our management team and may deprive you of the opportunity to sell your
shares
to potential acquirors at a premium over prevailing prices. This potential
inability to obtain a control premium could reduce the price of our common
stock.
11
CAUTIONARY
STATEMENT CONCERNING
FORWARD-LOOKING
STATEMENTS
This
prospectus and other documents incorporated by reference into this prospectus
contain or may contain “forward-looking statements.”
These
forward-looking statements include, without limitation, those statements
as
to:
|
·
|
the
anticipated closing date of the Reincorporation
Merger;
|
|
·
|
the
benefit expected to result from the Reincorporation
Merger;
|
|
·
|
our
future business activity, performance and financial condition
following
the Reincorporation Merger;
|
|
·
|
the
perceived advantages resulting from the Reincorporation Merger;
and
|
|
·
|
the
ability to retain key personnel before and after the Reincorporation
Merger.
|
Any
statements contained herein, including, without limitation, statements
to the
effect that we or our management “believes,” “expects,” “anticipates,” “plans,”
“may,” “will,” “projects,” “continues,” “estimates” or statements concerning
“potential” or “opportunity” or other variations thereof or comparable
terminology or the negative thereof, that are not statements of historical
fact
should be considered forward-looking statements. Actual results could differ
materially and adversely from those anticipated in the forward-looking
statements as a result of several factors, including those set forth in
“Risk
Factors” beginning on page 5, which you should review carefully.
You
are
cautioned not to place undue reliance on these forward-looking statements,
which
speak only as of the date of this prospectus. We do not undertake any obligation
to publicly update or release any revisions to these forward-looking statements
to reflect events or circumstances after the date of this prospectus or
to
reflect the occurrence of unanticipated events, except as required by
law.
USE
OF PROCEEDS
The
proceeds from the sale of the shares of our common stock being offered
by the
selling stockholders pursuant to this prospectus will belong to the selling
stockholders. We will not receive proceeds from the sales of our common
stock by
the selling stockholders.
DETERMINATION
OF OFFERING PRICE
The
selling stockholders will determine at what price they may sell the offered
shares, and such sales may be made at prevailing market prices or at privately
negotiated prices.
DIVIDEND
POLICY
We
have
never declared or paid cash dividends. Any future decisions regarding dividends
will be made by our board of directors. We currently intend to retain and
use
any future earnings for the development and expansion of our business and
do not
anticipate paying any cash dividends in the foreseeable future.
MARKET
FOR OUR COMMON STOCK
AND
RELATED STOCKHOLDER MATTERS
CSST
BVI’s common stock has been quoted on the OTCBB since June 2005 and currently
trades under the symbol “CSSTF.OB.” The CUSIP number is G21161 10 7. CSST
Delaware common stock is not publicly traded, and market price information
is
therefore not available.
We
expect that CSST Delaware common stock will trade on the OTCBB under the
symbol
“CSST.OB” immediately after the consummation of the Reincorporation Merger.
12
In
February 2006, CSST BVI submitted an application for listing on the American
Stock Exchange, which is pending. No assurances can be given as to whether
or
when the application will be approved.
The
following table sets forth the quarterly high and low bid prices of a share
of
CSST BVI common stock as reported by the OTCBB for the periods indicated.
The
quotations listed below reflect inter-dealer prices, without retail mark-ups,
mark-downs or commissions and may not necessarily represent actual transactions.
|
|
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Closing
Bid Price (US $) *
|
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||||
|
|
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High
|
Low
|
|
|||
|
Year
Ended December 31, 2006
|
|
|
|
|
|||
|
1st
quarter 2006
|
4.40
|
3.50
|
|
||||
|
2nd
quarter 2006
|
8.10
|
3.60
|
|
||||
|
3rd
quarter 2006
|
6.50
|
4.00
|
|
||||
|
4th
quarter 2006 (through October 20, 2006)
|
8.05
|
7.05
|
|
||||
|
|
|
|
|
||||
|
Year
Ended December 31, 2005
|
|
|
|
|
|||
|
1st
quarter 2005
|
N/A
|
N/A
|
|
||||
|
2nd
quarter 2005 (from June 23, 2005)
|
0.25
|
0.05
|
|
||||
|
3rd
quarter 2005
|
4.50
|
0.05
|
|
||||
|
4th
quarter 2005
|
3.00
|
1.85
|
|
||||
|
|
|
|
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||||
|
Year
Ended December 31, 2004
|
|
|
|
|
|||
|
1st
quarter 2004
|
N/A
|
N/A
|
|
||||
|
2nd
quarter 2004
|
N/A
|
N/A
|
|
||||
|
3rd
quarter 2004
|
N/A
|
N/A
|
|
||||
|
4th
quarter 2004
|
N/A
|
N/A
|
|
||||
Reports
to Stockholders
After
the
consummation of the Reincorporation Merger, we plan to furnish our stockholders
with an annual report for each fiscal year ending December 31 containing
financial statements audited by our independent certified public accountants.
Additionally, we may, in our sole discretion, issue unaudited quarterly
or other
interim reports to our stockholders when we deem appropriate. We intend
to
maintain compliance with the periodic reporting requirements of the Exchange
Act.
Approximate
Number of Holders of Our Common Stock
On
October 20, 2006, there were approximately 48 stockholders of record of
our
common stock. This number excludes the 4,714,000 shares of CSST BVI common
stock
owned by individual stockholders holding stock under nominee security position
listings.
DILUTION
Our
net
tangible book value as of June 30, 2006 was $1.57 per share of common stock.
Net
tangible book value is determined by dividing our tangible book value (total
assets less intangible assets including know-how, trademarks and patents
and less total
liabilities) by the number of outstanding shares of our common stock. Since
this
offering is being made solely by the selling stockholders and none of the
proceeds will be paid to us, our net tangible book value will be unaffected
by
this offering.
SELECTED
CONSOLIDATED FINANCIAL DATA
13
The
following selected consolidated financial data are the
financial data for CSST BVI. It should
be
read in conjunction with our consolidated financial statements and the
related
notes, and with “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” included elsewhere in this registration statement. The
statement of operations data for the years ended December 31, 2003, 2004
and 2005, and the balance sheet data as of December 31, 2003, 2004 and
2005, are derived from, and are qualified by reference to, our audited
consolidated financial statements that have been audited by GHP Horwath,
P.C.
and Child, Van Wagoner & Bradshaw, PLLC., independent auditors, and that are
included in this prospectus. The statement of operations data for the fiscal
years ended
December 31, 2001 and 2002 and the balance sheet data as of
December 31, 2001 and 2002 are derived from our unaudited consolidated
financial statements that are not included in this registration statement.
The
statement of operations data for the six months ended June 30, 2005 and
2006 and
the balance sheet data as of June 30, 2005 and 2006 are derived from our
unaudited consolidated financial statements included elsewhere in this
prospectus. The unaudited consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for the fair presentation of our financial position and results
of
operations for these periods. Operating results for the six months ended
June
30, 2006 are not necessarily indicative of the results that we will experience
for the entire year. Historical results are not necessarily indicative
of the
results to be expected in the future.
|
Year
Ended December 31,
|
|
Six
Months Ended
June
30,
|
|
|||||||||||||||||||
|
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2005
|
|
2006
|
|
|||||||
|
|
|
(in
thousands)
|
||||||||||||||||||||
|
Statement
of operations data:
|
|
|
|
|
|
|
|
|||||||||||||||
|
Sales
Revenues:
|
$
|
4,045
|
$
|
10,331
|
$
|
11,795
|
$
|
16,055
|
$
|
32,689
|
$
|
12,729
|
$
|
22,609
|
||||||||
|
Cost
of Sales
|
3,349
|
7,030
|
7,581
|
8,796
|
23,473
|
9,849
|
15,175
|
|||||||||||||||
|
Gross
profit
|
696
|
3,301
|
4,214
|
7,259
|
9,216
|
2,880
|
7,434
|
|||||||||||||||
|
Other
income
|
42
|
30
|
7
|
467
|
568
|
241
|
700
|
|||||||||||||||
|
Expenses:
|
||||||||||||||||||||||
|
Administrative
expenses
|
61
|
233
|
317
|
507
|
1,183
|
79
|
673
|
|||||||||||||||
|
Amortization
and depreciation
|
346
|
432
|
135
|
225
|
260
|
239
|
189
|
|||||||||||||||
|
Operating
expenses
|
-
|
424
|
507
|
391
|
288
|
120
|
293
|
|||||||||||||||
|
Other
operating expenses
|
29
|
8
|
-
|
6
|
7
|
-
|
-
|
|||||||||||||||
|
Provision
for doubtful debt
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Selling
expenses
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
|
||||||||||||||||||||||
|
|
436
|
1,097
|
959
|
1,129
|
1,738
|
438
|
1,155
|
|||||||||||||||
|
|
||||||||||||||||||||||
|
Income
from continuing operations before
taxes
|
302
|
2,234
|
3,262
|
6,597
|
8,046
|
2,683
|
6.979
|
|||||||||||||||
|
Income
taxes
|
45
|
334
|
517
|
873
|
780
|
64
|
943
|
|||||||||||||||
|
Net
income
|
257
|
1,899
|
2,752
|
5,724
|
7,266
|
2,619
|
6,036
|
|||||||||||||||
|
|
||||||||||||||||||||||
|
Earnings
per share - basic
|
$
|
0.015
|
$
|
0.11
|
$
|
0.16
|
$
|
0.34
|
$
|
0.39
|
$
|
0.15
|
$
|
0.26
|
||||||||
|
Earnings
per share - diluted
|
0.015
|
0.11
|
0.16
|
0.34
|
0.39
|
0.15
|
0.26
|
|||||||||||||||
|
|
||||||||||||||||||||||
|
Weighted
average number of shares outstanding — basic
|
17,000
|
17,000
|
17,000
|
17,000
|
17,000
|
17,000
|
23,047
|
|||||||||||||||
|
Weighted
average number of shares outstanding —diluted
|
17,000
|
17,000
|
17,000
|
17,000
|
17,000
|
17,000
|
23,140
|
|||||||||||||||
|
|
||||||||||||||||||||||
|
Cash
dividend declared per common share
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
|
||||||||||||||||||||||
|
Cash
flows data:
|
||||||||||||||||||||||
|
Net
cash flows provided by operating activities
|
$
|
(9
|
)
|
$
|
(13
|
)
|
$
|
1,019
|
$
|
684
|
$
|
799
|
$
|
1,442
|
$
|
(81
|
)
|
|||||
|
Net
cash flows used in investing activities
|
-
|
(2,673
|
)
|
(676
|
)
|
(111
|
)
|
(79
|
)
|
(139
|
)
|
(1
|
)
|
|||||||||
|
Net
cash flows used in financing activities
|
-
|
(1,629
|
)
|
72
|
(1,056
|
)
|
1,062
|
1,007
|
7,360
|
|||||||||||||
14
|
December
31,
|
|
June
30,
|
|||||||||||||||||||||||
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
2006
|
||||||||
|
|
|
(in
thousands)
|
|||||||||||||||||||||||
|
Balance
sheet data:
|
|||||||||||||||||||||||||
|
Cash
and cash equivalents
|
$
|
970
|
$
|
101
|
$
|
515
|
$
|
33
|
$
|
2,277
|
$
|
9,618
|
|||||||||||||
|
Working
capital
|
4,311
|
5,591
|
7,918
|
8,495
|
20,547
|
35,232
|
|||||||||||||||||||
|
Total assets
|
10,688
|
13,582
|
16,977
|
22,009
|
29,117
|
59,150
|
|||||||||||||||||||
|
Total
current liabilities
|
1,766
|
4,126
|
5,900
|
5,208
|
4,505
|
20,076
|
|||||||||||||||||||
|
Long
term liability
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||
|
Total
liabilities
|
1,766
|
4,126
|
5,900
|
5,208
|
4,505
|
20,076
|
|||||||||||||||||||
|
Total
stockholders’ equity
|
8,593
|
8,850
|
11,077
|
16,801
|
24,612
|
39,074
|
|||||||||||||||||||
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
Overview
We
manufacture, distribute, install and service security and surveillance
products
and systems. We generate revenues from the sale of products to, the installation
of our products for, and the delivery of after sales/installation services
to,
our customers. Our customers are mainly government entities (customs agencies,
courts, public security bureaus and prisons), non-profit organizations
(including schools, museums, sports arenas and libraries) and commercial
entities (including airports, hotels, real estate developments, banks,
mines,
railways, supermarkets, hospitals and entertainment venues), which account
for
approximately 40%, 10% and 50% of our sales revenues, respectively.
Our
revenues are not concentrated in any one customer or group of customers
because
a large portion of our sales revenue derives from the installation of projects.
After we have manufactured and installed a system at any particular customer
site, we have generated the majority of revenue from that particular client.
We
would not expect to generate significant revenues from any existing client
in
future years unless that client has several possible installation sites.
In
addition, we have 37 branch offices all over China and we do not rely on
customers located in particular geographic areas. As a result, in order
to
maintain a level of revenues each year that is at or in excess of the level
of
revenue we generated in prior years, we must identify and be retained by
new
clients. If our business development, marketing and sales techniques do
not
result in an equal or greater number of projects of at least comparable
size and
value for us in a given year compared to the prior year, then
we may be unable to increase our revenues and earnings or even sustain
current
levels in the future.
Our
Background and History
We
were
incorporated in the BVI on April 8, 2002 under the name “Apex Wealth Enterprises
Limited” as a corporation under the International Business Companies Ordinance
of 1984. In February 2006, we changed our name to China Security and
Surveillance Technology Inc. Prior to our reverse acquisition of Safetech,
discussed in more detail below which was consummated on September 12, 2005,
we
were
a development stage enterprise and had not yet generated any revenues.
Prior to
the reverse acquisition, we provided business
advisory and management consulting services in greater China, initially
concentrating on the Hong Kong market. The focus of these services was
on small
to medium size enterprises.
From
and
after the reverse acquisition, our business became the business of our
indirect,
wholly-owned subsidiary, Golden. Golden is a corporation incorporated in
the PRC
which is engaged in the business of manufacturing, distributing, installing
and
maintaining security and surveillance systems. Golden was organized in
the PRC
in January 1995. We are headquartered in Shenzhen, China.
Reverse
Acquisition with Safetech
On
September 12, 2005, we acquired 50,000 shares of the issued and outstanding
capital stock of Safetech, constituting all of the issued and outstanding
capital stock of Safetech. The 50,000 shares of Safetech were acquired
from the
individual shareholders of Safetech in a share exchange transaction in
return
for the issuance of 8,138,000 shares of our common stock. As a result of
this
transaction, Safetech became our wholly-owned subsidiary, and Golden became
our
indirect wholly-owned subsidiary. Completion of the transaction resulted
in a
change in control of our Company. After the transaction, we were no
longer a shell company. The contracts relating to this transaction have
been
filed as exhibits to our current report on Form 6-K that was filed with
the SEC
on July 22, 2005 incorporated herein by reference.
15
Upon
the
closing of the reverse acquisition, our
sole director Szetang Li
submitted his resignation letter pursuant to which he resigned from all
offices
of our Company that he then held, effective immediately, and from his position
as our director, effective as of September 27, 2005.
For
accounting purposes, the transaction was treated as a reverse acquisition,
with
Safetech as the acquirer and our Company as the acquired party. When we
refer in
this prospectus to business and financial information for periods prior
to the
consummation of the reverse acquisition, we are referring to the business
and
financial information of Golden on a consolidated basis unless otherwise
specified.
Recent
Acquisitions and Transactions
On
October 25, 2005, we entered into an agreement with the equity owners of
Yuan
Da, which were subsequently amended in April and May 2006. Pursuant to
the
amended agreement, we acquired all of the assets of Yuan Da. Yuan Da is
a
limited liability company established in Shenzhen, China and was principally
engaged in the sales and development of security and surveillance systems.
Under
the agreement with Yuan Da, as amended, the purchase price consisted of
(i) a
cash payment of RMB 1,000,000 (approximately $125,000) and (ii) the issuance
of
200,000 unregistered shares of our common stock valued at $500,000 (based
upon
the average closing market price during the twenty days before the date
of the
agreement).
On
July
6, 2006, we entered into a stock transfer agreement with the shareholders of
Chengfeng pursuant to which our subsidiary Safetech will acquire 100% ownership
of Chengfeng, a leader in security surveillance software development and
manufacturing in China. Chengfeng owns advanced video technology which
integrates with other software and hardware applications. Proprietary software
owned by Chengfeng includes the Security Resource Integration Management
Platform and the Security Integration Platform, which are designed to integrate
all security installations, both hardware and software, onto a single operating
platform to greatly improve the management of the entire security system.
Chengfeng has an established brand name and 22 valuable distribution channels
across China. Under the agreement, we will pay considerations of RMB 120
million
(approximately $15 million), consisting of RMB 60 million (approximately
$7.5
million) in cash and RMB 60 million (approximately $7.5 million) in shares
of
our common stock. RMB 10 million (approximately $1.25 million) has been
paid as
of October 20, 2006. The balance of the cash portion of the purchase price,
RMB
50 million (approximately $6.3 million), is due upon receipt of acknowledgement
of the stock transfer by the Shanghai Industry & Commerce Bureau. The number
of shares issuable in satisfaction of the equity portion of the purchase
price
is 1,331,376 (based upon the average of the closing price of our common
stock on
the OTCBB for the 20 trading days prior to the date of the execution of
the
agreement). The shares must be issued within 90 days following the receipt
of
the aforementioned approval from the Shanghai Industry & Commerce Bureau. We
expect that we will obtain the necessary approval from the Shanghai Industry
& Commerce Bureau before December 31, 2006. Please see our current report
on
Form 6-K filed on July 7, 2006 for more details.
On
September 5, 2006, we entered into agreements to purchase the security
and
surveillance business of the Four-Related Companies. We were required to
acquire
the Four-Related Companies pursuant to a covenant contained in a securities
purchase agreement with certain accredited investors, dated April 4, 2006.
The
covenant contained in the securities purchase agreement required us to
acquire
these four companies on or before October 4, 2006. Mr. Tu will not receive
any
consideration for the acquisition of his interest in the Four-Related Companies.
However, his wife Zhiqun Li is a 20% shareholder of Jian An Ke and will
receive
100,000 shares of our common stock as part of the transaction. The minority
shareholders of these four companies, including Mr. Tu’s wife, will receive in
aggregate 850,000 shares of our common stock. Shenzhen Guangdian is engaged
in
the business of manufacturing and distributing security and surveillance
products. The other three companies are engaged in the business of distributing
security and surveillance products.
Material
Opportunities and Challenges
Regulations
promulgated by governmental agencies in China relating to security and
surveillance often create opportunities for us. Currently, there are a
number of
formal and planned regulatory drivers which we believe offer significant
growth
opportunities. These include the estimated $6 billion to $12 billion that
the
Chinese government expects to spend for security infrastructure in preparation
for the 2008 Olympics, along with the planned investment by Shanghai for
the
2010 World’s Fair. In addition, several ordinances have been passed by the
Chinese government which require security surveillance systems to be installed
in: (1) 660 cities throughout China for street surveillance; (2) all
entertainment locations; (3) all Justice Departments and Courts; and (4)
all
coal mines in China by the end of 2008 (currently estimated to be 28,000).
16
We
are
actively pursuing near-term acquisition prospects and other strategic
opportunities, including the acquisition of Chengfeng that is pending government
approval from Shanghai Industry & Commerce Bureau.
We
have a
government policy monitoring group within the Company that regularly monitors
changes in governmental regulations affecting security and surveillance.
If we
determine that a new regulation or a change to an existing regulation presents
an opportunity for us, we actively pursue such opportunity. As a result,
we act
promptly on policy changes and are able to turn them into business
opportunities.
We
believe that in order to compete effectively in this market, we need to
constantly improve the quality of our products and deliver new products.
As
such, we face the challenge of expanding our research and development capacity.
We need to maintain a strong and sufficient research and development team
and
identify the right directions for our research and development.
We
also
face the long-term challenge of maintaining our rapid growth. In addition
to
maintaining the growth of our existing business, we will also employ an
acquisition strategy to ensure growth in future years.
Results
of Operation
Three
Months Ended June 30, 2006 and 2005
The
following table summarizes the results of our operations during the three
months
ended June 30, 2006 and 2005 and provides information regarding the dollar
and
percentage increase from the 2005 fiscal period to the 2006 fiscal
period:
All
amounts, other than percentages, in millions of U.S. dollars
|
Three
Months Ended June 30,
|
|||||||||||||
|
Item
|
2006
|
2005
|
Increase
|
%
Increase
|
|||||||||
|
Revenue
|
$
|
8.0
|
$
|
5.5
|
$
|
2.5
|
46.3
|
%
|
|||||
|
Cost
of Goods Sold
|
5.0
|
4.1
|
0.9
|
20.3
|
%
|
||||||||
|
Gross
Profit
|
3.0
|
1.3
|
1.7
|
126.9
|
%
|
||||||||
|
Operating
Expenses
|
0.6
|
0.5
|
0.1
|
29.5
|
%
|
||||||||
|
Other
Income (expense)
|
0.5
|
0.1
|
0.4
|
279
|
%
|
||||||||
|
Provision
for Taxes
|
0.3
|
(0.2
|
)
|
0.5
|
-
|
||||||||
|
Net
Income
|
2.5
|
1.2
|
1.3
|
109.6
|
%
|
||||||||
Revenue
Revenue
for the three months ended June 30, 2006 increased by 46.3% to $8.0 million
against $5.5 million for the same period in 2005. The increase was mainly
due to
several reasons. First, the entire security and surveillance market in
China has
been expanding rapidly since the end of 2005. As the population in China
in
general has become wealthier, the demand for security products has grown.
As a
result, the demand from various industries and organizations has been increasing
significantly. Second, the Chinese government began to require many public
places, including city-wide surveillance systems, traffic surveillance
systems,
critical government locations, cyber cafés, bars and discotheques, to install
security systems, which has also contributed to the increase of the demand
for
our products and services. Third, our strategic efforts to increase our
distribution channels during 2004 and 2005 turned out to be a highly successful
way to capture the wave of this growth in market demand. Finally, after
we
became a public reporting company in the U.S. through a reverse merger,
we were
able to raise sufficient working capital to facilitate our capturing more
business.
During
the second quarter of 2006, we signed 32 new contracts, 7 of which were
completed by June 30, 2006. During this quarter, we completed approximately
70-80% of the implementation of the remaining 25 contracts. Based on Staff
Accounting Bulletin No. 104, we deferred the entire contract revenue for
these
25 contracts at June 30, 2006 to the third fiscal quarter. The total value
of
the contracts signed and in progress in the second quarter was approximately
$23
million. $5.7 million of this $23 million was recognized as revenue in
the
second quarter of 2006. Management expects that the remaining $17.9 million
of
revenue will be recognized in the third quarter of 2006.
17
Components
of Revenues
The
following table shows the different components comprising our total revenues
over the three month periods ended June 30, 2006 and 2005.
All
amounts in millions of U.S. dollars
|
|
Three
months ended June 30,
|
||||||
|
|
2006
|
2005
|
|||||
|
|
|
|
|||||
|
Security
systems and installation
|
$
|
6.5
|
$
|
5.2
|
|||
|
Sales
of parts
|
1.5
|
0.3
|
|||||
|
|
|||||||
|
Total
|
$
|
8.0
|
$
|
5.5
|
|||
For
the
three months ended June 30, 2006, we realized $5.7 million revenue from
the
installation of projects pursuant to contracts signed in the second fiscal
quarter of 2006. We also realized approximately $0.8 million revenue from
installation projects pursuant to contracts signed in the first quarter
of 2006.
Income from installation projects contributed approximately 81% of the
total
revenue for the three months ended June 30, 2006 as compared to approximately
95% for the same period in 2005. Management believes that revenues from
the
installation projects will continue to be our major revenue source. However,
as
we put more resources into research and development of products and the
expected
addition of Shenzhen Guangdian and Chengfeng, management believes that
the
percentage of revenue from the outright sale of products will increase
in the
future.
Cost
of Goods Sold
Cost
of
goods sold for three months ended June 30, 2006 increased by 20.3% to $4.98
million from $4.14 million for the same period of 2005. Such increase was
mainly
attributable to the increase in sales revenue. However, the increase in
sales
revenue outpaced the increase in costs because we were able to purchase
raw
materials at lower prices due to higher sales volume.
Gross
profit margin increased from 24.4% for the three months ended June 30,
2005 to
37.9% for the three months ended June 30, 2006. This was mainly attributable
to
the higher gross purchase margins and the large increase in sales. Gross
margins improved significantly during the second quarter of 2006 because
of the
significant increase in our business volume and hence the size of orders
from
our vendors.
Selling
and Marketing Expenses
Selling
and marketing expenses were $0.17 million for the three months ended June
30,
2006, a $0.11 million increase as compared to $0.06 million for the same
period
of 2005. Such increase was mainly attributable to the hiring of new
staff.
General
and Administrative Expenses
General
and administrative expenses were $0.38 million for the three months ended
June
30, 2006 as compared to $0.31 million for the same period of 2005. We
believe such increase was due to the
hiring of additional staff, increased property tax expenses, research and
development costs, and traveling expenses.
General and administrative expenses consist mainly of salaries, office
utility
expenses and other daily office expenses.
Income
taxes
We
incurred income tax expenses of $0.3 million for the three months ended
June 30,
2006, an increase of $0.5 million against the tax benefits of $0.2 million
for
the three months ended June 30, 2005. The main reason was the increase
in net
income.
18
In
accordance with the relevant tax laws and regulations of the People’s Republic
of China for the Shenzhen Special Economic Zone, the corporate income tax
rate
was 15% for the first half of fiscal year of 2006 and fiscal year 2005.
We are
not aware of any tax rate change in the near future.
Net
income (profit after taxes)
We
earned
net income of $2.5 million for the three months ended June 30, 2006, an
increase
of 109.5% from $1.2 million for the same period of 2005. Such increase
was
mainly attributable to higher gross purchase margins and the large increase
in sales. Gross margins improved significantly during the second quarter
of 2006
because of the significant increase in our business volume and the resulting
increase in the size of orders from our vendors.
Amount
due from/(to) directors
We
have
received advances from a director. The advances are non-interest bearing
and are
repayable upon demand. The balance due to the director was $ 70,990 at
June 30,
2006. We expect to pay off such balances before December 31, 2006.
Six
Months Ended June 30, 2006 and 2005
The
following table summarizes the results of our operations during the six
months
ended June 30, 2006 and 2005 and provides information regarding the dollar
and
percentage increase from the 2005 fiscal period to the 2006 fiscal
period:
All
amounts, other than percentages, in millions of U.S. dollars
|
Six
Months Ended June 30,
|
|||||||||||||
|
Item
|
2006
|
2005
|
Increase
|
%
Increase
|
|||||||||
|
Revenue
|
$
|
22.6
|
$
|
12.7
|
$
|
9.9
|
77.6
|
%
|
|||||
|
Cost
of Goods Sold
|
15.2
|
9.8
|
5.4
|
54.1
|
%
|
||||||||
|
Gross
Profit
|
7.4
|
2.9
|
4.5
|
158.1
|
%
|
||||||||
|
Operating
Expenses
|
1.2
|
0.4
|
0.8
|
163.7
|
%
|
||||||||
|
Other
Income (expense)
|
0.7
|
0.2
|
0.5
|
190.7
|
%
|
||||||||
|
Provision
for Taxes
|
0.9
|
0.06
|
0.84
|
1375.5
|
%
|
||||||||
|
Net
Income
|
6.0
|
2.6
|
3.4
|
130.5
|
%
|
||||||||
Revenue
Revenue
for the six month period ended June 30, 2006 increased by 77.6% to $22.6
million
from $12.7 million for the same period of 2005. The increase was mainly
due to
the same reasons as discussed above relating to the three month
periods.
Components
of Revenues
The
following table shows the different components comprising our total revenues
over the six month periods ended June 30, 2006 and 2005.
All
amounts in millions of U.S. dollars
|
|
Six
months ended June 30,
|
||||||
|
|
2006
|
2005
|
|||||
|
Security
systems and installation
|
$
|
19.6
|
$
|
12.0
|
|||
|
Sales
of parts
|
3.0
|
0.7
|
|||||
|
Total
|
$
|
22.6
|
$
|
12.7
|
|||
19
For
the
six month period ended June 30, 2006, we realized $22.6 million in revenue.
Income from installation projects contributed approximately 86.7% of the
total
revenue for the six month period ended June 30, 2006 as compared to
approximately 95% for the same period in 2005. Management believes that
revenues
from the installation projects will continue to be our major revenue source.
However, as we put more resources into research and development of products
and
the expected addition of Shenzhen Guangdian and Chengfeng, management believes
that the percentage of revenue from the outright sale of products will
increase
in the future.
Cost
of Goods Sold
Cost
of
goods sold for the six month period ended June 30, 2006 increased by 54.1%
to
$15.2 million against $9.8 million for the same period of 2005. Such increase
was mainly attributable to the increase in sales volume.
Gross
profit margin increased from 22.6% for the six month period ended June
30, 2005
to 32.9% for the six month period ended June 30, 2006. This was mainly
attributable to an increase in sales volume and a decrease in raw material
prices.
Selling
and Marketing Expenses
Selling
and marketing expenses were $0.3 million for the six month period ended
June 30,
2006, a $0.18 million increase as compared to $0.12 million for the same
period
of 2005. Such increase was mainly attributable to the hiring of new
staff.
General
and Administrative Expenses
General
and administrative expenses were $0.67 million for the six month period
ended
June 30, 2006 as compared to $0.08 million for the same period last year.
We
believe such increase was due to the
hiring of additional staff, increased property tax, research and development
costs, and traveling expenses.
General and administrative expenses consist mainly of salaries, office
utility
expenses and other daily office expenses.
Income
taxes
We
incurred income tax expenses of $0.9 million for the six month period ended
June
30, 2006, an increase of 1375.5% against the $0.06 million for the three
month
period ended June 30, 2006. The main reason for such increase was the rapid
increase in net income.
In
accordance with the relevant tax laws and regulations of the People’s Republic
of China for the Shenzhen Special Economic Zone, the corporate income tax
rate
was 15% for the three month periods ended June 30, 2006 and 2005.
Net
income (profit after taxes)
We
earned
net income of $6.0 million for the three month period ended June 30, 2006,
an
increase of 130.5% from $2.6 million for the same period last year. Such
increase was mainly attributable to the significant increase in our business
volume and the resulting increase in the size of orders from our
vendors.
Fiscal
Years Ended December 31, 2005 and 2004
The
following table summarizes the results of our operations during the fiscal
years
ended December 31, 2005 and 2004 and provides information regarding the
dollar
and percentage increase from the 2004 fiscal period to the 2005 fiscal
period:
20
All
amounts, other than percentages, in millions of U.S. dollars
|
Year
Ended December 31,
|
|||||||||||||
|
Item
|
2005
|
2004
|
Increase
(decrease)
|
%
Increase (decrease)
|
|||||||||
|
Revenue
|
32.69
|
16.06
|
16.63
|
103.55
|
%
|
||||||||
|
Cost
of Goods Sold
|
23.47
|
8.80
|
14.67
|
166.70
|
%
|
||||||||
|
Gross
Profit
|
9.22
|
7.26
|
1.96
|
27.00
|
%
|
||||||||
|
Operating
Expenses
|
1.74
|
1.14
|
0.60
|
52.63
|
%
|
||||||||
|
Other
Income (expense)
|
0.57
|
0.47
|
0.10
|
21.28
|
%
|
||||||||
|
Provision
for Taxes
|
0.78
|
0.87
|
(0.09
|
)
|
(10.34
|
%)
|
|||||||
|
Net
Income
|
7.27
|
5.72
|
1.55
|
27.10
|
%
|
||||||||
Fiscal
Year Ended December 31, 2004 and 2003
The
following table summarizes the results of our operations during the fiscal
years
ended December 31, 2004 and 2003 and provides information regarding the
dollar
and percentage increase from the 2003 fiscal period to the 2004 fiscal
period:
All
amounts, other than percentages, in millions of U.S. dollars
|
Year
Ended December 31,
|
|||||||||||||
|
Item
|
2004
|
2003
|
Increase
|
%
Increase
|
|||||||||
|
Revenue
|
16.06
|
11.79
|
4.27
|
36.22
|
%
|
||||||||
|
Cost
of Goods Sold
|
8.80
|
7.58
|
1.22
|
16.09
|
%
|
||||||||
|
Gross
Profit
|
7.26
|
4.21
|
3.05
|
72.45
|
%
|
||||||||
|
Operating
Expenses
|
1.14
|
0.95
|
0.19
|
20.00
|
%
|
||||||||
|
Other
Income (expense)
|
0.47
|
0.007
|
0.463
|
6614.28
|
%
|
||||||||
|
Provision
for Taxes
|
0.87
|
0.52
|
0.35
|
67.31
|
%
|
||||||||
|
Net
Income
|
5.72
|
2.75
|
2.97
|
108.00
|
%
|
||||||||
Revenue
Revenue
for the year ended December 31, 2005 increased by 103.55% to $32.69 million
from
$16.06 million for the prior year. The substantial increase in revenue
was
mainly attributable to our increased marketing efforts, the increased brand
recognition of our services and products and the growth of the Chinese
security
and surveillance market.
Revenue
for the year ended December 31, 2004 increased by 36.22% to $16.06 million
against $11.79 million for 2003. Such increase was mainly due to the growth
of
the Chinese security and surveillance market and the public’s increased
awareness of the importance of having security and surveillance
systems.
Components
of Revenues
The
following table shows the different components comprising our total revenues
over each of the past three fiscal years.
All
amounts in millions of U.S. dollars
|
Revenue
|
2005
|
2004
|
2003
|
|||||||
|
Project
income from supply and installation of security and surveillance
equipment
|
30.56
|
15.53
|
10.06
|
|||||||
|
Outright
sale of security and surveillance equipment
|
2.13
|
0.53
|
1.73
|
|||||||
21
Income
from installation projects contributed approximately 90% of the total revenue
in
each of 2003, 2004 and 2005. Management believes that revenues from the
installation projects will continue to be our major revenue source. However,
as
we put more resources into research and development of products and the
expected
acquisition of Shenzhen Guangdian and Chengfeng, management believes that
the
percentage of revenue from the outright sale of products will increase
in the
future.
Cost
of Goods
Sold
Cost
of
goods sold for the year ended December 31, 2005 increased by 166.70% to
$23.47
million against $8.80 million for 2004. Such increase was mainly attributable
to
the increase of sales revenue.
Gross
profit margin decreased from 45.21% for the year ended December 31, 2004
to
28.19% for the year ended December 31, 2005. This was mainly attributable
to
increased competition and our strategic decision in taking some projects
that
had a lower profit margin, but were important for gaining market share.
Cost
of
goods sold for the year ended December 31, 2004 increased by 16.09% to
$8.80
million from $7.58 million for 2003. The increase was generally in line
with the
revenue increase.
Gross
profit margin increased from 35.73% for the year ended December 31, 2003
to
45.21% for the year ended December 31, 2004 which was mainly attributable
to the
increase in our brand recognition which allowed us to have higher profit
margins.
The
following table illustrates in detail the items constituting our cost of
goods
sold.
All
amounts, other than percentages, in millions of U.S. dollars
|
Cost
Item
|
2005FY
|
2004FY
|
2003FY
|
|||||||
|
Salary
|
1.09
|
1.01
|
0.25
|
|||||||
|
Percentage
|
4.64
|
%
|
11.48
|
%
|
3.30
|
%
|
||||
|
Purchase
|
22.38
|
7.79
|
7.33
|
|||||||
|
Percentage
|
95.36
|
%
|
88.52
|
%
|
96.70
|
%
|
||||
|
Total
|
23.47
|
8.80
|
7.58
|
|||||||
|
Percentage
|
100
|
%
|
100
|
%
|
100
|
%
|
||||
Selling
and Marketing Expenses
Selling
and marketing expenses were $0.29 million for the year ended December 31,
2005,
a $0.10 million decrease as compared to $0.39 million for the year ended
December 31, 2004. We started building branches in provincial cities in
China in
the fiscal year of 2003, and incurred large costs in connection with setting
up
these branches. All of our branch offices were set up by the end of 2004.
As a
result, selling and marketing expenses decreased in 2005.
Selling
and marketing expenses were $0.39 million for the year ended December 31,
2004
as compared to $0.50 million for the year ended December 31, 2003. The
$0.11
million decrease in the selling and marketing expenses was mainly attributable
to the larger costs incurred in connection with the initial setting up
of the
branches in 2003. Such expenses decreased in 2004.
22
General
and Administrative Expenses
General
and administrative expenses were $1.18 million for the year ended December
31,
2005 as compared to $0.51 million for the year ended December 31, 2004.
We
believe such increase was generally in line with the increase in revenue.
General and administrative expenses consist mainly of salaries, office
utility
expenses and other daily office expenses.
General
and administrative expenses were $0.51 million for the year ended December
31,
2004 as compared to $0.32 million for the year ended December 31, 2003.
Such
increase was mainly attributable to the increase in daily office expenses
that
resulted from the expansion of our business.
Finance
Costs
We
did
not incur finance costs in 2003, 2004 and 2005, as we had no bank loans
during
these periods.
Income
taxes
We
incurred income tax expenses of $0.78 million for the year ended December
31,
2005, a decrease of 10.34% from the $0.87 million for the year ended December
31, 2004. We incurred a tax expense of $1.37 million in fiscal year 2005
due to
higher revenue and profits in fiscal year 2005. However, $589,601 of the
taxes
paid was treated as net deferred tax assets. As a result, a $0.78 million
income
tax was recorded after deducting the $589,601 from the account of income
taxes
actually paid of $1.37 million.
We
incurred income tax expenses of $0.87 million for the year ended December
31,
2004, an increase of 67.31% from $0.52 million for the year ended December
31,
2003. Such increase was mainly attributable to the higher revenue and the
$0.48
million rental income we received from our related parties, namely Jiangxi
Golden, Jiangxi Golden Motuo Che Zhizhao Co. Ltd. and Jian Golden An Ke
Technology Co. Ltd. for renting our manufacturing plants in fiscal year
2004.
In
accordance with the relevant tax laws and regulations of the People’s Republic
of China for the Shenzhen Special Economic Zone, the corporate income tax
rate
was 15% for the fiscal years 2005, 2004 and 2003. We are not aware of any
tax
rate change in the near future.
Net
income (profit after taxes)
We
earned
net income of $7.27 million for the year ended December 31, 2005, an increase
of
27.10% from $5.72 million for the year ended December 31, 2004. Such increase
was mainly attributable to the increase in revenue.
We
earned
net income of $5.72 million in the year ended December 31, 2004, an increase
of
108.00% from $2.75 million for the year ended December 31, 2003. Such increase
was mainly attributable to the increase in revenue and the rental income
as
mentioned above.
Amount
due from/(to) directors
We
made
advances to our directors which were non-interest bearing and were repayable
upon demand. The balances due were $1,006,806 on December 31, 2004 and
were
repaid during 2005. These advances were made before the reverse acquisition
of
Safetech. Since the reverse acquisition, we have adopted a policy of not
making
any loans to our officers, directors or affiliates in order to comply with
the
requirements of the Sarbanes-Oxley Act of 2002.
We
also
received advances from one of our directors to facilitate our business
operations during the years ended December 31, 2005 and 2004. Such loans
were
non-interest bearing and were payable upon demand. The balances due at
December
31, 2005 and 2004 were $69,646 and $13,946, respectively. We expect to
pay off
such balances by the end of 2006.
Critical
Accounting Policies
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires our management to make
assumptions, estimates and judgments that affect the amounts reported in
the
financial statements, including the notes thereto, and related disclosures
of
commitments and contingencies, if any. We consider our critical accounting
policies to be those that require the more significant judgments and estimates
in the preparation of financial statements, including the
following:
23
|
·
|
Basis
of Consolidation
-
The consolidated financial statements of the Company and its
subsidiaries
are prepared in accordance with accounting principles generally
accepted
in the United States of America and include the accounts of the
Company
and its subsidiaries. All material intercompany accounts and
transactions
have been eliminated in the
consolidation.
|
|
·
|
Deferred
Income - Deferred
income represents amount billed for contracts for supply and
installation
of security and surveillance equipment which have not been fully
completed
at the balance sheet date.
|
|
·
|
Intangible
Assets - Intangible
assets represent a surveillance recording system acquired from
Yuan Da.
The value was established by an independent accounting firm.
The value of
the recording system is to be amortized using the straight-line
method
over its estimated useful life of five
years.
|
|
·
|
Inventories
-
Inventories are stated at the lower of cost, determined on a
weighted
average basis, and net realizable value. Net realizable value
is the
estimated selling price in the ordinary course of business less
the
estimated cost of completion and the estimated costs necessary
to make the
sale.
|
When
inventories are sold, their carrying amount is charged to expense in the
year in
which the revenue is recognized. Write-downs for declines in net realizable
value or for losses of inventories are recognized as an expense in the
year the
impairment or loss occurs.
|
·
|
Accounts
Receivable - Trade
receivables are recognized and carried at the original invoice
amount less
allowance for any uncollectible amounts. An estimate for doubtful
accounts
is made when collection of the full amount is no longer probable.
Bad
debts are written off as incurred.
|
|
·
|
Advances
to Suppliers -
Advances
to suppliers represent the cash paid in advance for purchasing
of
inventory items from suppliers.
|
|
·
|
Revenue
Recognition - The
Company derives the bulk of its revenue from the supply and installation
of security and surveillance equipment, and the two deliverables
do not
meet the separation criteria under EITF issue 00-21. The installation
is
not considered to be essential to the functionality of the equipment
having regard to the following criteria as set out in SAB
104:
|
(i) The
security and surveillance equipment is a standard product with minor
modifications according to customers’ specifications;
(ii) Installation
does not significantly alter the security and surveillance equipment’s
capabilities; and
(iii) Other
companies which possess the relevant licenses are available to perform
the
installation services.
Accordingly,
the portion of the contract price which is not payable until the installation
service is completed is deferred until the completion of the installation
service and the balance of the contract price is recognized as revenue
upon
delivery and acceptance of the security and surveillance equipment by the
customers.
Revenue
from the outright sale of security and surveillance equipment is recognized
when
delivery occurs and risk of ownership passes to the customers.
|
·
|
Foreign
Currency Translation - The
functional currency of the Company is Renminbi (RMB) and RMB
is not freely
convertible into foreign currencies. The Company maintains its
financial
statements in the functional currency. Monetary assets and liabilities
denominated in currencies other than the functional currency
are
translated into the functional currency at rates of exchange
prevailing at
the balance sheet date. Transactions denominated in currencies
other than
the functional currency are translated into the functional currency
at the
exchange rates prevailing at the dates of the transactions. Exchange
gains
or losses arising from foreign currency transactions are included
in the
determination of net income for the respective
periods.
|
24
For
financial reporting purposes, the financial statements of the Company which
are
prepared using the functional currency have been translated into United
States
dollars. Assets and liabilities are translated at exchange rates at the
balance
sheet dates and revenue and expenses are translated at the average exchange
rates and shareholders’ equity is translated at historical exchange rates. Any
translation adjustments resulting are not included in determining net income
but
are included in foreign exchange adjustment to other comprehensive income,
a
component of shareholders’ equity. The exchange rates adopted are as
follows:
|
2005
|
2004
|
2003
|
||||||||
|
Year
end RMB/US
$: exchange rate
|
8.07
|
8.28
|
8.28
|
|||||||
|
Average
yearly RMB/US
$: exchange rate
|
8.19
|
8.28
|
8.28
|
|||||||
No
representation is made that
the RMB
amounts could have been, or could be, converted into U.S. dollars at the
rates
used in translation
|
·
|
Use
of Estimates -
The preparation of the financial statements in conformity with
generally
accepted accounting principles in the United States of America
requires
management to make estimates and assumptions that affect the
reported
amounts of assets and liabilities and disclosure of contingent
assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods.
Management
makes these estimates using the best information available at
the time the
estimates are made; however actual results could differ materially
from
those estimates.
|
|
·
|
Income
Taxes -
Income tax expense is based on reported income before income
taxes.
Deferred income taxes reflect the effect of temporary differences
between
assets and liabilities that are recognized for financial reporting
purposes and the amounts that are recognized for income tax purposes.
In
accordance with Statement of Financial Accounting Standard (SFAS)
No. 109,
“Accounting for Income Taxes,” these deferred taxes are measured by
applying currently enacted tax
laws.
|
Inflation
We
believe our operations have not been and will not in the foreseeable future
be
materially adversely affected by inflation or changing prices.
Foreign
Currency Translation Gain
Our
operating subsidiary is located in China. The operating subsidiary
purchases all products and renders services in China and receives payment
from
customers in China using Chinese Renminbi as the functional currency. We
do not engage in currency hedging.
We
incurred a foreign currency translation gain of $545,233 for the year ended
December 31, 2005 as compared with no foreign currency translation gain
for the
period ended December 31, 2004. On July 21, 2005, China reformed its foreign
currency exchange policy, revalued the Renminbi by 2.1% and allowed the
Renminbi
to appreciate as much as 0.3% per day against the U.S. dollar. As a result,
we
implemented different exchange rates in translating Renminbi into U.S.
dollar in
our financial statements for fiscal year 2005, the exchange rates of 8.07,
8.19
and 8.28 were implemented in calculating the assets and liabilities, revenue
and
expenses, and shareholders’ equity, respectively, which results in a $545,233
foreign currency translation
gain in fiscal year 2005.
Liquidity
and Capital Resources
As
of
June 30, 2006 and December 31, 2005, we had cash and cash equivalents of
$9.6
million and $2.3 million, respectively. The
following table provides detailed information about our net cash flow for
all
financial statement periods presented in this prospectus.
25
Cash
Flow
|
Years
Ended December 31,
|
Six
Months Ended
June
30,
|
|||||||||||||||
|
2003
|
2004
|
2005
|
2005
|
2006
|
||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Net
cash provided by (used in) operating activities
|
$
|
1,019
|
$
|
684
|
$
|
799
|
$
|
1,443
|
$
|
(81
|
)
|
|||||
|
Net
cash provided by (used in) investing activities
|
$
|
(676
|
)
|
$
|
(110
|
)
|
$
|
(79
|
)
|
$
|
(139
|
)
|
$
|
(1
|
)
|
|
|
Net
cash provided by (used in) financing activities
|
$
|
72
|
$
|
(1,056
|
)
|
$
|
1,063
|
$
|
1,007
|
$
|
7,360
|
|||||
|
Cash
and cash equivalents at end of period
|
$
|
516
|
$
|
33
|
$
|
2,277
|
$
|
2,344
|
$
|
9,618
|
||||||
Operating
Activities:
Net
cash used for operating activities was $0.08
million for the six month period ended June 30, 2006 which is a decrease
of
$1.5
million from the $1.4
million net cash provided by operating activities for the same period in
2005.
The decrease was mainly due to substantial increases in accounts receivables,
inventories and advances to suppliers.
Net
cash provided by operating activities in 2005 totaled $0.8
million,
which is an increase of $0.1
million
from net cash provided by operating activities of $0.7
million
in 2004. The increase was mainly due to an increase
in current liabilities.
Net
cash provided by operating activities during 2004 totaled $0.7
million,
which is a decrease of $0.3 million
from net cash provided by operating activities of $1.0 million
during 2003. The increased was mainly due to an increase
in account receivables.
Investing
Activities:
Our
main uses of cash for investing activities are payments for the acquisition
of
property, plant and equipment.
Net
cash used for investing activities in the six month period ended June 30,
2006
was $ 0.01 million, which is a decrease of $0.13
million from net cash used for investing activities of $0.14
million
in the same period of 2005 due to the
decrease in purchases of fixed assets.
Net
cash
used for investing activities in the year 2005 was $0.08 million, which
is a
decrease of $0.1 million from net cash used for investing activities of
$0.1
million in 2004. The decrease for 2005 was primarily the result of the
decrease
in purchases of fixed assets.
Net
cash
used for investing activities in 2004 totaled $0.1 million as compared
to $0.7
million used for investing activities in 2003. The $0.6 million decrease
of net
cash used for investing activities in 2004 was mainly attributable to the
reversion of construction in progress.
Financing
Activities:
Net
cash provided by financing activities in the six month period ended June
30,
2006 totaled $7.3
million as compared to $1.0 million provided by financing activities in
the same
period of 2005. The increase in the cash provided by financing activities
was
mainly attributable to the
issuance of new shares to investors.
Net
cash provided by financing activities was $1.0
million in 2005 as compared to $1.0
million used for financing activities in 2004. Such increase was mainly
attributable to the
cash
advance made to the Company by one of the directors.
Net
cash used for financing activities was $1.0
million in 2004, a decrease of $1.0
million from net cash of $0.07
million
provided by financing activities in 2003. Such decrease was mainly attributable
to an advance
made to one of our directors.
26
We
are
substantially debt-free and no credit facility has been applied for by
our
Company. In April 2006, we completed a private placement of shares of our
common
stock to 3 accredited investors. As a result of this private placement,
we
raised $8,000,000 in gross proceeds, which left us with approximately $7.36
million in net proceeds after the deduction of approximately $0.64 million
of
offering expenses. In July 2006, we raised another $16.2 million in gross
proceeds from another private placement transaction, most of the $14.9
million
net proceeds will be used for the acquisition of Chengfeng.
Other
than the consideration to be paid to Chengfeng and the Four-Related Companies,
we have no material commitments for capital expenditures as of September
30,
2006. As part of our business strategy, we may acquire other businesses
engaged
in similar or complementary industries if the appropriate opportunity arises.
In
that event, we may need to raise more capital from the equity market to
finance
such acquisition. However, we believe that our currently available working
capital, after receiving the aggregate proceeds of the capital raising
activities referred to above, should be adequate to sustain our operations
at
our current levels through at least the next twelve months.
Off-Balance
Sheet Arrangements
Tabular
Disclosure of Contractual Obligations
Below
is
a brief summary of the payment obligations under materials contracts to
which we
are a party.
|
Contractual
Obligations
|
Payments
due by period
|
|||||||||||||||
|
Total
|
Less
than 1
year
|
1-3
years
|
3-5
years
|
More
than
5
years
|
||||||||||||
|
Long-Term
Debt Obligations
|
0
|
0
|
0
|
0
|
0
|
|||||||||||
|
Capital
(Finance) Lease Obligations
|
0
|
0
|
0
|
0
|
0
|
|||||||||||
|
Operating
Lease Obligations
|
$
|
93,286
|
$
|
34,982
|
$
|
58,304
|
0
|
0
|
||||||||
|
Purchase
Obligations
|
0
|
0
|
0
|
0
|
0
|
|||||||||||
|
Other
Long-Term Liabilities Reflected on the Company’s
Balance Sheet under GAAP of the primary financial
statements
|
0
|
0
|
0
|
0
|
0
|
|||||||||||
|
Total
|
$
|
93,286
|
$
|
34,982
|
$
|
58,304
|
0
|
0
|
||||||||
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest
Rate Risk
We
had no
bank loans or other interest bearing borrowings as of June 30, 2006, therefore,
we are not exposed to interest rate risk.
Foreign
Exchange Risk
While
our
reporting currency is the U.S. Dollar, all of our consolidated revenues
and
consolidated costs and expenses are denominated in Renminbi. All of our
assets
are denominated in RMB except for cash. As a result, we are exposed to
foreign
exchange risk as our revenues and results of operations may be affected
by
fluctuations in the exchange rate between U.S. Dollars and RMB. If the
RMB
depreciates against the U.S. Dollar, the value of our RMB revenues, earnings
and
assets as expressed in our U.S. Dollar financial statements will decline.
We
have not entered into any hedging transactions in an effort to reduce our
exposure to foreign exchange risk.
Inflation
Inflationary
factors such as increases in the cost of our product and overhead costs
may
adversely affect our operating results. Although we do not believe that
inflation has had a material impact on our financial position or results
of
operations to date, a high rate of inflation in the future may have an
adverse
effect on our ability to maintain current levels of gross margin and selling,
general and administrative expenses as a percentage of net revenues if
the
selling prices of our products do not increase with these increased
costs.
27
DESCRIPTION
OF BUSINESS
History
and Development of the Company
We
were
incorporated in the BVI on April 8, 2002 under the name “Apex Wealth Enterprises
Limited” as a corporation under the International Business Companies Ordinance
of 1984. In February 2006, we changed our name to China Security &
Surveillance Technology, Inc. Prior to our reverse acquisition of Safetech,
discussed in more detail below which was consummated on September 12, 2005,
we
were
a development stage enterprise and had not yet generated any revenues.
Prior to
the reverse acquisition, we provided business
advisory and management consulting services in greater China, initially
concentrating on the Hong Kong market. The focus of these services was
on small
to medium size enterprises.
From
and
after the reverse acquisition, our business became the business of our
indirect,
wholly-owned subsidiary, Golden. Golden is a corporation incorporated in
the PRC
which is engaged in the business of manufacturing, distributing, installing
and
maintaining security and surveillance systems. Golden was organized in
the PRC
in January 1995. We are headquartered in Shenzhen, China.
Reverse
Acquisition with Safetech
On
September 12, 2005, we acquired 50,000 shares of the issued and outstanding
capital stock of Safetech, constituting all of the issued and outstanding
capital stock of Safetech. The 50,000 shares of Safetech were acquired
from the
individual shareholders of Safetech in a share exchange transaction in
return
for the issuance of 8,138,000 shares of our common stock. As a result of
this
transaction, Safetech became our wholly-owned subsidiary, and Golden became
our
indirect wholly-owned subsidiary. Completion of the transaction resulted
in a
change in control of our Company. After the transaction, we were no longer
a
shell company. The contracts relating to this transaction have been filed
as
exhibits to our current report on Form 6-K that was filed with the SEC
on July
22, 2005 incorporated herein by reference.
Upon
the
closing of the reverse acquisition, our
sole director Szetang Li
submitted his resignation letter pursuant to which he resigned from all
offices
of our Company that he then held, effective immediately, and from his position
as our director, effective as of September 27, 2005.
For
accounting purposes, the transaction was treated as a reverse acquisition,
with
Safetech as the acquirer and our Company as the acquired party. When we
refer in
this prospectus to business and financial information for periods prior
to the
consummation of the reverse acquisition, we are referring to the business
and
financial information of Golden on a consolidated basis unless otherwise
specified.
Recent
Acquisitions and Transactions
On
October 25, 2005, we entered into an agreement with the equity owners of
Yuan
Da, which were subsequently amended in April and May 2006. Pursuant to
the
amended agreement, we acquired all of the assets of Yuan Da. Yuan Da is
a
limited liability company established in Shenzhen, China and was principally
engaged in the sales and development of security and surveillance systems.
Under
the agreement with Yuan Da, as amended, the purchase price consisted of
(i) a
cash payment of RMB 1,000,000 (approximately $125,000) and (ii) the issuance
of
200,000 unregistered shares of our common stock valued at $500,000 (based
upon
the average closing market price during the twenty days before the date
of the
agreement).
On
July
6, 2006, we entered into a stock transfer agreement with the shareholders
of
Chengfeng pursuant to which our subsidiary Safetech will acquire 100% ownership
of Chengfeng, a leader in security surveillance software development and
manufacturing in China. Chengfeng owns advanced video technology which
integrates with other software and hardware applications. Proprietary software
owned by Chengfeng includes the Security Resource Integration Management
Platform and the Security Integration Platform, which are designed to integrate
all security installations, both hardware and software, onto a single operating
platform to greatly improve the management of the entire security system.
Chengfeng has an established brand name and 22 valuable distribution channels
across China. Under the agreement, we will pay considerations of RMB 120
million
(approximately $15 million), consisting of RMB 60 million (approximately
$7.5
million) in cash and RMB 60 million (approximately $7.5 million) in shares
of
our common stock. RMB 10 million (approximately $1.25 million) has been
paid as
of October 20, 2006. The balance of the cash portion of the purchase price,
RMB
50 million (approximately $6.3 million), is due upon receipt of acknowledgement
of the stock transfer by the Shanghai Industry & Commerce Bureau. The number
of shares issuable in satisfaction of the equity portion of the purchase
price
is 1,331,376 (based upon the average of the closing price of our common
stock on
the OTCBB for the 20 trading days prior to the date of the execution of
the
agreement). The shares must be issued within 90 days following the receipt
of
the aforementioned approval from the Shanghai Industry & Commerce Bureau. We
expect that we will obtain the necessary approval from the Shanghai Industry
& Commerce Bureau before December 31, 2006. Please see our current report
on
Form 6-K filed on July 7, 2006 for more details.
28
On
September 5, 2006, we entered into agreements to purchase the security
and
surveillance business of the Four-Related Companies. We were required to
acquire
the Four-Related Companies pursuant to a covenant contained in a securities
purchase agreement with certain accredited investors, dated April 4, 2006.
The
covenant contained in the securities purchase agreement required us to
acquire
these four companies on or before October 4, 2006. Mr. Tu will not receive
any
consideration for the acquisition of his interest in the Four-Related Companies.
However, his wife Zhiqun Li is a 20% shareholder of Jian An Ke and will
receive
100,000 shares of our common stock as part of the transaction. The minority
shareholders of these four companies, including Mr. Tu’s wife, will receive in
aggregate 850,000 shares of our common stock. Shenzhen Guangdian is engaged
in
the business of manufacturing and distributing security and surveillance
products. The other three companies are engaged in the business of distributing
security and surveillance products.
Organizational
Structure
CSST
BVI
owns all of the issued and outstanding shares of Safetech. Safetech owns
all of
the issued and outstanding shares of Golden and China Security &
Surveillance Technology (HK) Ltd., a Hong Kong corporation. Currently,
Golden is
the sole operating subsidiary of our Company. Upon the consummation of
the
acquisition of Chengfeng, Chengfeng will become another operating subsidiary
of
our Company. China Security & Surveillance Technology (HK) Ltd. was
established in September 2006 for the sole purpose of being the holding
company
of Chengfeng. We expect to transfer all the equities of Cheng Feng to China
Security & Surveillance Technology (HK) Ltd. after the closing of the
acquisition.
Business
Overview
Through
Golden, we are engaged in the business of manufacturing, distributing,
installing and maintaining security and surveillance systems. Our customers
are
located throughout China.
Golden’s
customers are mainly government entities, non-profit organizations and
commercial entities. Golden’s marketing network divides China into nine
geographic regions. Golden has 37 branch offices. Golden derives most of
its
revenues from the installation of security and surveillance systems as
well as
the sales of products including embedded digital video recorders, PC digital
video recorders, mobile digital video recorders, digital cameras and auxiliary
apparatus.
We
have
established a partnership with Beijing University to conduct our research
and
development on security and surveillance technology and the development
of new
products.
Opportunities
for Growth
Currently,
there are a number of formal and planned regulatory drivers which we believe
offer significant growth opportunities. These include the estimated $6
billion
to $12 billion that the Chinese government expects to spend for security
infrastructure in preparation for the 2008 Olympics, along with the planned
investment by Shanghai for the 2010 World’s Fair. In addition, several
ordinances have been passed by the Chinese government which require security
surveillance systems to be installed in: (1) 660 cities throughout China
for
street surveillance; (2) all entertainment locations; (3) all Justice
Departments and Courts; and (4) all coal mines in China by the end of 2008
(currently estimated to be 28,000 coal mines).
We
recently acquired the security and surveillance business of the Four-Related
Companies and entered into an agreement with the shareholders of Chengfeng
to
acquire 100% ownership of Chengfeng. We are actively pursuing near-term
acquisition prospects and other strategic opportunities,
29
Our
Industry
The
Chinese surveillance and security industry was established at the beginning
of
the 1980’s, and the surveillance and security products were used primarily by
government agencies, financials institutions, transportation companies
and
mega-size companies. Since then, the industry has experienced significant
growth
and is growing at an annual rate of approximately 40%, according to the
China
Public Security Guide published by the Chinese Security and Protection
Association,
which
also predicts that the industry will grow by 20-30% annually in the near
future
and that the Chinese market for security and surveillance products and
services
will reach RMB 1 trillion by 2020.
In
2006,
the Chinese government promulgated Ordinance 458 which requires all
entertainment locations to install surveillance systems. In addition, the
booming Chinese real estate market and the increasing focus on the security
of
the Chinese mining industry provide great opportunities for the surveillance
and
security industry.
At
present, video surveillance is estimated to have a market of about RMB
60
billion and accounts for about 40% of the surveillance and security market.
It
is expected that the video surveillance market share will increase to
approximately 60% of the whole industry, according to the China Public
Security
Guide published by the China Security and Protection Association.
Our
Strategy
Our
primary business strategy is to achieve annual growth in revenue by building
our
brand and reputation. We intend to focus significant efforts on promoting
our
brand and improving our brand recognition.
Our
research and development efforts are aimed at finding new varieties of
products,
improving existing products, improving overall product quality and reducing
production costs. We cooperate with Beijing University and have established
a
joint lab for the research of video surveillance technology. Our research
and
development efforts are led by Dr. Yong Zhao, who worked for the research
and
development department of a large international surveillance and security
company and has extensive research experience.
In
addition, Shenzhen is one of the biggest and most concentrated bases for
electronic products in China. We are headquartered in Shenzhen, which allows
us
to take advantage of the resources of Shenzhen’s numerous electronic product
manufacturers and benefit from economies of scale.
Over
the
last several years, we have established one of the largest surveillance
and
security product distribution networks in China. Our distribution network
covers
nine regions and includes 37 branches, which allows us to provide timely
services and specially tailored solutions to our customers throughout China.
Our
growth strategy also includes identifying and acquiring businesses engaged
in
similar or complementary industries. However, we may not be able to consummate
any additional acquisitions, and any businesses that we do acquire may
not be
successful. In addition, the acquisition of a business through the issuance
of
our securities, which is the most likely consideration for any acquisition
that
we pursue, will result in dilution of our earnings per share affecting
our
existing stockholders.
Products
and Services
We
engage
in the business of manufacturing, distributing, installing and maintaining
surveillance and security products.
1.
Installation Services
In
the
past three years, we derived approximately 90% of our revenues from the
supply
and installation of security and surveillance systems for various projects
involving railways, schools, banks, highways, commercial buildings, and
public
security and government entities, among others. Generally, our installation
projects involve the following steps:
Bidding
We
receive most of our installation projects through a bidding process. In
a
typical bidding process, our potential client will send us and our competitors
a
request for proposal that outlines the work to be performed and the
specifications of the equipment to be installed. We then prepare and submit
our
bid and the potential client chooses the winning contractor from among
all the
bids submitted. On some projects, we also act as a subcontractor where
a third
party has submitted a winning bid.
30
System
Design
Upon
winning a project, we provide the final project design for approval. System
design is generally conducted through the joint efforts of our research
and
development personnel, sales department, project service department and
quality
control department.
Purchase
of Security and Surveillance Products
The
major
products used in our installation projects include computer accessories,
decoders, video capture cards, recorders and computer cases. We use equipment
manufactured by us in most of the installation projects, but also use products
from other manufacturers. Generally, approximately 60% of the equipment
used in
any given project is equipment we have manufactured.
Installation
We
have a
project service department which performs installations. We use subcontractors
for non-technical labor intensive work. We usually assign a project group
with
5-10 members who are in charge of the technical components of the project
and
manage the progress of each project.
System
Software Design and Integration
System
software design and integration services are usually conducted by our technical
department. We design software for our customers’ security and surveillance
systems in accordance with our customers’ specifications. We generally test the
software on our own computer system before integrating it into our customer’s
computer system. We then assign our technicians to the site of each project
to
assist in the integration of the security and surveillance system with
our
customers’ computer system.
Testing
Upon
integration, our technical department will test and examine the system to ensure
the proper functioning of the installed security and surveillance
system.
2.
Our Products
In
the
past three years, we have derived approximately 10% of our revenues from
sales
of our products, excluding products sold in connection with the installation
projects described above. We manufacture the key components of the security
and
surveillance products and rely on third party electronic assembling companies
to
assemble the final products utilizing our technology. The final products
are
sold under our brand names. Our main products include embedded digital
video
recorders, PC digital video recorders, mobile digital video recorders,
digital
cameras and auxiliary apparatus.
Embedded
digital video recorders (Embedded DVR)
The
Embedded DVR stores digital images captured via the security cameras. It
also
controls the recording functions of the cameras and manages the storage
of the
data. This
product has a pre-installed Golden surveillance software system which will
enable it to perform access control and recording functions. It also has
an
upgradable hard drive which will allow clients to customize the digital
storage
capacity, network server functions which
will allow the clients to access the digital images via Internet, MPEG-4
video
compression which will allow a more efficient compression of the images
and
higher image quality and 4-16 signal input channels which will allow 4
to 16
cameras to be connected to the Embedded DVR. This product has the competitive
features of small size, low cost and high reliability. The targeted markets
for
this product are small to medium size businesses, non-profit organizations
and
home use. It is suitable for small sized security and surveillance
needs.
31
PC
digital video recorders (PC DVR)
Similar
to the Embedded DVR, the PC DVR provides recording and compression functions.
It
has pre-installed Golden surveillance software system, upgradable hard
drive,
network server function, MPEG-4 Video compression method and 4-36 signal
input
channels and uses Windows operating system. The main difference is that
the PC
DVR has expanded capacity to accommodate recording functions for a greater
number of cameras compared to the Embedded DVR. In addition, it is operated
via
Microsoft’s Windows Operating System. The
targeted markets for these products are large projects and community security
projects.
Mobile
digital video recorders (Mobile DVR)
Similar
to the Embedded DVR, the Mobile DVR is smaller in size and has a maximum
of 4
ports. The Mobile DVR, which can be installed in a vehicle, enables recording
of
digital video images within the cabin. This product is easily installed,
supports GPS/GPRS and has 1 to 4 signal input channels and MPEG-4 video
compression. The targeted markets for this product are the transportation
industry and governmental agencies.
Digital
Camera
Digital
cameras can be easily installed within the customer’s site. The range of cameras
that we produce and sell includes color Charge Coupled Device (“CCD”) cameras,
indoor color CCD dome cameras, color/black and white CCD flying saucer
cameras,
Infra Red CCD multi-function cameras, mini Digital Signal Processing (“DSP”)
cameras, indoor stand alone sphere CCD cameras and network high speed sphere
CCD
cameras.
Auxiliary
apparatus
Auxiliary
apparatus includes DVR compression cards, decoders, alarm notification
switches,
digital video fiber optics systems and matrix switch/control
systems.
As
discussed above, we plan to acquire Shenzhen Guangdian, a manufacturer
and
distributor of security and surveillance system products in October 2006.
In
addition, our acquisition of Chengfeng is expected to close before December
31,
2006. The expected addition of Shenzhen Guangdian and Chengfeng will
significantly improve the manufacturing capacity and sales of the above
products.
Distribution
and Marketing
We
have
developed a multi-tiered marketing plan, allowing us to effectively market
products and services to our clients. We sell most of our products and
services
through our own distribution network. Our distribution network covers all
of
China.
We
have
approximately 160 engineers and sales personnel. We divide our market into
9
geographic regions and have 37 branch offices in provincial capital cities
throughout China. Each region is managed by a regional manager who is
responsible for technical support and management within the region as well
as
client relations. 22 more distribution points will be added into our
distribution network upon the consummation of the acquisition of Chengfeng.
In
addition to our own branch offices and employees, we cooperate with independent
sales agents and have established close relationships with these sales
agents in
order to take advantage of their regional resources and provide products
and
services that are tailored to the needs of our customers in those regions.
Through
this distribution and marketing network, we believe we can continue to
promote
our brand recognition, strengthen the management of our distribution network
and
improve our sales revenue and market share.
We
have
also been marketing and promoting our products through the following
means:
|
·
|
participating
in various industrial shows to display our
products;
|
|
·
|
advertising
in industrial magazines and periodicals to introduce and promote
our
products;
|
|
·
|
publishing
our own magazine which is distributed to our suppliers and sales
agents so
that they can better understand our company and strengthen their
confidence in us; and
|
32
|
·
|
utilizing
the Internet to promote our products, such as the public safety
network,
Chinese Security Association network and HuiChong
Network.
|
Research
and Development
Currently,
we have approximately 70 employees devoted to our research and development
efforts, which are
aimed
at finding new varieties of products, improving existing products, improving
overall product quality and reducing production costs. We have established
a
strategic partnership with Beijing University under which we will provide
funds
to Beijing University for the research and development of video surveillance
and
security products. Our research and development efforts are led by Dr.
Yong
Zhao, who worked for the research and development department of a large
international surveillance and security company and has extensive research
experience Under the agreement, we have agreed to provide Beijing University
a
maximum amount of RMB 2,000,000 (approximately $250,000). Management anticipates
that the RMB 2,000,000 (approximately $250,000) will be provided during
2006 and
2007. We
did not have any research and development expenditure in fiscal years 2005,
2004
and 2003.
Employees
We
have approximately 299 full-time employees, 69 of them are administrative
and
accounting staff, 70 of them are research and development staff and 160
of them
are engineers and sales staff.
Approximately
142 employees are located in Shenzhen, and the rest of the employees are
located
in various branches throughout China.
Approximately
80% of our employees have bachelor degrees and most of those majored in
computer
sciences.
Our
employees have trade unions which protect employees’ rights, aim to assist in
the fulfillment of our economic objectives, encourage employee participation
in
management decisions and assist in mediating disputes between us and union
members. We believe that we maintain a satisfactory working
relationship with our employees and we have not experienced any significant
labor disputes or any difficulty in recruiting staff for our operations.
As
required by applicable Chinese law, we have entered into employment
contracts with all of our officers, managers and employees. Our
employees in China participate in a state pension plan organized by Chinese
municipal and provincial governments. We are required to contribute
monthly to the plan at the rate of 23% of the average monthly
salary. As of the date of this report, we have complied with the
regulation and have paid the state pension plan as required by the
law.
In
addition, we are required by Chinese law to cover employees in China with
various types of social insurance. We have purchased social insurance for
part
of our employees. For those whom we have not purchased social insurance,
the
premium has been added into their salary so that they can purchase social
insurance in their individual capacity at the location of their recorded
residences.
With
the
expansion of our business operations and the acquisition of Chengfeng,
we expect
that the number of our employees will increase in the next 12
months.
Seasonality
Our
sales
are affected by seasonality. Our revenue is usually higher in the second
half of
the year than in the first half of the year because fewer projects are
undertaken during and around the Chinese spring festival.
Customers
Our
customers are mainly government entities (customs agencies, courts, public
security bureaus and prisons), non-profit organizations (including schools,
museums, sports arenas and libraries) and commercial entities (including
airports, hotels, real estate developments, banks, mines, railways,
supermarkets, hospitals and entertainment venues), which account for
approximately 40%, 10% and 50% of our sales revenues, respectively.
33
Our
revenues are not concentrated in any one customer or group of customers
because
a large portion of our sales revenue derives from the installation of projects.
After we have manufactured and installed a system at any particular customer
site, we have generated the majority of revenues from that particular client.
We
would not expect to generate significant revenues from any existing client
in
future years unless that client has several possible installation sites.
In
addition, we have 37 branch offices all over China and we do not rely on
customers located in one particular geographic area. As a result, in order
to
maintain a level of revenues each year that is at or in excess of the level
of
revenues we generated in prior years, we must identify and be retained
by new
clients. If our business development, marketing and sales techniques do
not
result in an equal or greater number of projects of at least comparable
size and
value for us in a given year compared to the prior year, then
we may be unable to increase our revenues and earnings or even sustain
current
levels in the future.
Raw
Materials
We
use
manufactured electronic components in our products. The main components
of our
products include camcorders, monitors, frames, decoders, lenses, outdoor
hoods
and digital video recorders (“DVR”).
Shenzhen
is one of the biggest and most concentrated bases for electronic products
in
China. As a result, there are numerous suppliers and vendors of the components
needed for our products. Because of the fierce competition among the suppliers,
the prices of our principal components are not volatile and we are able
to
purchase these raw materials at reasonable prices. We have entered into
written
contracts with several suppliers and vendors. Our main suppliers are Shenzhen
Ronghen Co. Ltd., Shenzhen Dongxun Shidai Technology Co. Ltd., Shenzhen
Kerui
Electronic Co. Ltd., Shenzhen Huichuang Computer Technology Co. Ltd. and
Shenzhen Jingfeiya Electronic Co. Ltd. We believe we are not dependent
on any of
these suppliers and will be able to replace them, if necessary, without
material
difficulties.
Our
Competition
There
are
many companies in China engaged in the business of manufacturing surveillance
and security products and designing and installing security and surveillance
systems. The surveillance and security industry in China is still an immature
industry and no company has monopolized the industry. In the surveillance
and
security industry, it is difficult for very large companies to reap benefits
from their size, because most of the projects require the product to be
specially tailored to meet customers’ individual requirements.
In
the
security and surveillance industry, we compete based upon price, product
quality, ability to distribute products, and ability to provide after sales
service.
Our
major
competitor in China is Hangzhou Haikang Weishi Digital Technology Co. Ltd.
Hangzhou Haikang Weishi Digital Technology Co. Ltd. focuses on the development
of video and audio decoding technology and the development and manufacture
of
digital video compression cards. Its most successful product is a digital
video
compression card which accounts for approximately 50% of the market.
Another
group of competitors is international companies. Some of our international
competitors are larger than we are and possess greater name recognition,
assets,
personnel, sales and financial resources. However, these competitors generally
have higher prices for their products, and most of them do not have strong
distribution networks in China.
We
believe that the range of our product and service offerings, our brand
recognition by the market, our relatively low labor cost and our extensive
distribution channels enable us to compete favorably in the market for
the
security and surveillance products and services that we offer in China.
Regulation
All
security and surveillance products produced in China must satisfy testing
by the
China Public Security Bureau, and manufacturers of such products must receive
the Security Technology Protection Product Manufacturing Permit from the
provincial agency. We satisfactorily completed this testing in 2002 and
also
received a permit from Guangdong province in May 2003. In addition, we
have a
license from the Guangdong province for the design, installation and repair
of
security protection systems.
We
believe that we are in material compliance with all registrations and
requirements for the issuance and maintenance of all licenses required
by the
governing bodies, and that all license fees and filings are current.
34
Intellectual
Property
We
have
registered with the Trademark office of the State Administration for Industry
and Commerce of China the following trademarks:
|
|
Name
|
Trademark
No.
|
Type
|
Expiration
Date
|
Status
|
|
1
|
Golden
Group
|
4108508
|
Word
(Chinese)
|
July
2014
|
Approved
|
|
2
|
DVR
|
4108509
|
Word
|
July
2014
|
Approved
|
|
3
|
 |
4108511
|
Word
and Logo
|
July
2014
|
Approved
|
|
4
|
 |
4108510
|
Logo
|
July
2014
|
Approved
|
|
5
|
 |
3814725
|
Word
and logo
|
December
2013
|
Approved
|
|
6
|
JDR
|
N/A
|
Word
|
N/A
|
Pending
|
In
addition, our subsidiary Golden has registered the domain name www.goldengroup.cn.
We
hold
no patents under our own name. We protect our trade secrets through
confidentiality provisions of the employment contracts we enter into with
our
employees. In addition, our engineers are generally divided into different
project groups, each of which generally handles only a portion of the project.
As a result, any one engineer generally has no access to the entire design
process and documentation.
Property,
Plant, and Equipment
All
land in China is owned by the State. Individuals and companies are permitted
to
acquire rights to use land or land use rights for specific purposes. In
the case
of land used for industrial purposes, the land use rights are granted for
a
period of 50 years. This period may be renewed at the expiration of the
initial
and any subsequent terms. Granted land use rights are transferable and
may be
used as security for borrowings and other obligations.
We
currently have land use rights to approximately 119,245 square meters consisting
of manufacturing facilities and office buildings in various parts of China,
including Shenzhen and Jiangxi province. We have fully paid the land use
fees.
The chart below lists all facilities owned by us.
|
Location
|
Type
of Facility
|
Size
of the Land
(Square
Meters)
|
Size
of the Building
(Square
Meters)
|
|||||||
|
Shangtian,
Taihe County, Jiangxi Province
|
Manufacturing
|
64,533
|
45,877.5
|
|||||||
|
No.
45 Jifu Road, Jiangxi Province
|
Manufacturing
|
28,592.66
|
5,224.34
|
|||||||
|
Jishui
County, Jiangxi Province
|
Manufacturing
|
24,866.52
|
10,404.67
|
|||||||
|
4th
Floor, Building 3, Shaige Technology Park, Futian District,
Shenzhen
|
Office
and Manufacturing
|
1,252.47
|
1,252.47
|
|||||||
|
Total
|
119,244.65
|
62,758.98
|
||||||||
In
addition, in April 2006, we entered into a lease agreement with Shenzhen
Huiye
Technology Co. Ltd. or Huiye pursuant to which we lease 3,288 square meters
of
office space and manufacturing facilities from Huiye. The lease has a two-year
term which runs from April 16, 2006 to April 15, 2008. The rent was free
from
April 16, 2006 to June 15, 2006. The monthly rent is now approximately
$1.38
(RMB 11) per square meter.
35
We
believe our property is sufficient to meet our current needs. As our business
expands, we will consider acquiring additional property rights.
Legal
Proceedings
From
time
to time, we have disputes that arise in the ordinary course of its business.
Currently, there are no material legal proceedings to which we are a party,
or
to which any of our property is subject, that we expect to have a material
adverse effect on our financial condition.
MANAGEMENT
Directors
and Executive Officers
The
following sets forth the name and position of each of our current executive
officers and directors.
|
NAME
|
AGE
|
POSITION
|
|
Guoshen
Tu
|
41
|
CEO
and Chairman of the Board
|
|
Shufang
Yang
|
36
|
COO
and Director
|
|
Jianguo
Jiang
|
40
|
Vice
President and Director
|
|
Jinxu
Wu
|
35
|
Chief
Financial Officer
|
|
Lingfeng
Xiong
|
54
|
Vice
President and Director
|
|
Yong
Zhao
|
43
|
Chief
Technology Officer
|
|
Terence
Yap
|
35
|
Vice
Chairman of the Board and Vice
President
|
Guoshen
Tu.
Mr. Tu has been our Chief Executive Officer and a director since September
2005. He has extensive experience in surveillance and technology.
From 1999 to 2001, he served as Chief Executive Officer of Zhongshan
Golden Grains Industry Limited and as President of Jiangxi Golden Group
Limited.
From 2001 to 2005, Mr. Tu was the Chief Executive Officer and Secretary
of
Golden Group Corporation (Shenzhen) Limited. Mr. Tu currently serves as
the
Chairman of Shenzhen Guangdian, Shenyang Golden, Jiangxi Golden, Jian Golden
An
Ke and Jiangxi Golden Motuo Che Zhizhao Co. Ltd., but is not involved in
the
daily management of these companies. Mr. Tu holds his position as the Chairman
of Jiangxi Golden through his brother.
Shufang
Yang. Mr.
Yang
has served as our Chief Operating Officer and director since August 17,
2006.
Mr. Yang worked for Zhejiang Yin Cheng Electronic Ltd. as the general manager
from July 1998 to April 2001 and has served as the President and CEO of
Chengfeng since April 2001. Mr. Yang has extensive experience in the security
and surveillance industry and received an EMBA from China Europe International
Business School.
Jianguo
Jiang. Mr.
Jiang
has served as our Vice President since August 2006 and
our
director since January 2006. From 1999 to 2003, Mr. Jiang worked for Shenzhen
Shi Xun Tong Electronics Ltd as a general manager. He was responsible for
supervising daily operations and marketing activities. From 2003 to 2005,
Mr. Jiang served as the president in Yuan Da Wei Shi Technology Limited.
He is
responsible for strategic decision-making and market expansion of our Company.
Jinxu
Wu.
Mr. Wu has been our Chief Financial Officer since January 2005. He
has experience in financial activities of corporations. From 2000 to 2004,
he worked as a financial manager for Shenzhen Shi Roydatas Technical Limited
where he supervised preparation of financial statements, financing activities,
capital allocation and internal controls. From 2004 to 2005, Mr. Wu was
the Chief Financial Officer of Golden Group Corporation (Shenzhen) Ltd.
At
our Company, he supervises financial statements analysis, budgeting, internal
control and auditing. Mr. Wu has a master degree in Economics from Jinan
University and is a certified CPA.
Lingfeng
Xiong.
Mr. Xiong has been our Vice President and our director since September
2005. He has served as the Vice President of Golden since 2001. He
supervises many aspects of our Company and our products.
36
Yong
Zhao.
Dr.
Zhao has been our Chief Technology Officer since February 2006. From 2000
to 2004, Dr. Zhao worked as a technology consultant for Honeywell Corporation,
Ottawa, Canada, which is one of the 30 biggest companies listed on the
Dow Jones
index. During his service, Dr. Zhao was responsible for the development
of core
technology and for supervising research and development activities. From
2004 to present, Dr. Zhao has been a director of Mobile Video Networking
Lab and
an associate professor of Shenzhen Graduate School of Peking University.
His
major responsibilities include supervising the research and development
activities in the lab and providing valuable advice and instructions in
key
projects. Dr. Zhao spends about 60% of his business time on our affairs
and
approximately 40% of his business time on the affairs of Mobile Video Networking
Lab and Shenzhen Graduate School of Peking University.
Terence
Yap.
Mr. Yap
has served as our Vice President since May 2006 and our director since
March
2006. Mr. Yap is the President, CEO and a director of Digital Network Alliance
International, Inc., a Delaware company which is engaged in the business
of
providing satellite Internet connections to customers in the Asia Pacific
region, including Hong Kong, Singapore, Indonesia, Bangladesh, Pakistan
and
Mongolia, and the business of providing managed broadband services to commercial
office buildings and apartment buildings in Singapore and Hong Kong. Digital
Network Alliance International, Inc., is a reporting company with the U.S.
Securities and Exchange Commission. Mr. Yap has been affiliated with
Digital Network Alliance International, Inc. and its affiliated entities
since
January 2002. From April 2000 to December 2002, he was the Director of
Business Development for Skyhub Asia Co., Ltd., where he was responsible
for the
development of partnerships and alliances with various partners in Hong
Kong and
within the region. Skyhub Asia’s main line of business was the provision
of satellite services within the Asia Pacific region. From June, 1999 to
April, 2000, he served as the Business Development Manager of MCI WorldCom
Asia
Pacific, Ltd., where he was part of the business development team in the
Asia
Pacific region and was involved in mergers and acquisitions of licensed
telecommunications companies, building of physical points of presence and
negotiations with incumbent telecommunications operators. MCI WorldCom’s
main line of business was the provision of global data communication services.
From June 1998 to June 1999, he served as the distribution manager for
Tele Media International H.K. Ltd (“TMI”), where he was responsible for
distribution and sale of the company’s products and services within various
countries in the Asia Pacific region. TMI’s main line of business was the
provision of data communication services within Europe and the Asia Pacific
region. From January 1996 to June 1998, he was employed by Hutchison
Corporate Access (HK) Ltd. and Hutchison Corporate Access Pte. Ltd (HCA),
first
as a senior market development executive and later as a business development
manager. HCA’s main line of business is the provision of satellite data
network services within the Asia Pacific region. From June 1995 to January
1996, he was employed by Pacific Century Corporate Access Pte. Ltd. (“PCCA”) as
a project engineer. PCCA’s main line of business was the provision of
satellite data networking services in the Asia Pacific region. Mr. Yap
spends
approximately 60% of his time on our affairs and approximately 40% of the
time
on his other business obligations.
Board
Composition and Committees
Our
board
of the directors is currently composed of five members. All board action
requires the approval of a majority of the directors in attendance at a
meeting
at which a quorum is present.
We
do not
currently have a standing audit, nominating or compensation committee.
Currently, our entire board of directors is responsible for the functions
that
would otherwise be handled by these committees. We intend to establish
an audit
committee, governance and nominating committee and a compensation committee
of
the board of directors as soon as is practicable. We envision that the
audit
committee will be primarily responsible for reviewing the services performed
by
our independent auditors, evaluating our accounting policies and our system
of
internal controls. The governance and nominating committee will be responsible
for nominating directors to our board and will also be generally responsible
for
overseeing our corporate governance policies and practices. The compensation
committee will be primarily responsible for reviewing and approving our
salary
and benefits policies (including stock options) and other compensation
of our
executive officers.
Our
board
of directors has not made a determination as to whether any member of our
board
is an audit committee financial expert. Upon the establishment of an audit
committee, the board will determine whether any of the directors qualify
as an
audit committee financial expert.
Director
Compensation
We
have
not paid our directors fees in the past for attending scheduled and special
meetings of our board of directors. In the future, we may adopt a policy
of
paying independent directors a fee for their attendance at board and committee
meetings. We do reimburse each director for reasonable expenses related
to such
director’s attendance at board of directors and committee meetings.
37
Family
Relationships
There
are
no family relationships among our directors or officers.
Understandings
with Respect to Directors and Senior Management
There
is
no arrangement or understanding between any of our directors or officers
and any
other person pursuant to which any director or officer was or is to be
selected
as a director or officer, and there is no arrangement, plan or understanding
as
to whether non-management shareholders will exercise their voting rights
to
continue to elect the current directors to our board. There are also no
arrangements, agreements, or understandings between non-management shareholders
and management under which non-management shareholders may directly or
indirectly participate in or influence the management of our
affairs.
Code
of Ethics
On
June
9, 2006, our board of the directors adopted a Code of Ethics that applies
to all
of our directors, officers and employees, including our principal executive
officer, principal financial officer and principal accounting officer. The
Code of Ethics addresses, among other things, honesty and ethical conduct,
conflicts of interest, compliance with laws, regulations and policies,
including
disclosure requirements under the federal securities laws, confidentiality,
trading on inside information, and reporting of violations of the code.
EXECUTIVE
COMPENSATION
The
following table sets forth information concerning all cash and non-cash
compensation awarded to, earned by or paid to Sze Tang Li, our former director
and CEO, and Guoshen Tu, our Chief Executive Officer and director for services
rendered in all capacities during the noted periods. No other executive
officers
received total annual salary and bonus compensation in excess of $100,000.
|
|
|
Annual
Compensation
|
|
Long-Term
Compensation
|
||||||
|
|
|
|
|
|
|
Awards
|
|
Payouts
|
||
|
Name
And Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Other
Annual Compensation ($)
|
Restricted
Stock Awards($)
|
Securities
Underlying Options/ SARs(#)
|
|
LTIP
Payouts ($)
|
All
Other Compensation ($)
|
|
|
Sze
Tang Li, Chairman and CEO (2)
|
2005
|
-
|
-
|
-
|
-
|
-
|
|
-
|
-
|
|
|
2004
|
-
|
-
|
-
|
|
-
|
-
|
|
-
|
-
|
|
|
2003
|
-
|
-
|
-
|
|
-
|
-
|
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guoshen
TuChairman and CEO (1)
|
2005
|
15,000
|
-
|
-
|
|
-
|
-
|
|
-
|
-
|
|
2004
|
15,000
|
-
|
-
|
|
-
|
-
|
|
-
|
-
|
|
|
2003
|
15,000
|
-
|
-
|
|
-
|
-
|
|
-
|
-
|
|
_____________________________
| (1) |
On
September 12, 2005, we acquired Safetech through a reverse acquisition
transaction and in connection with that transaction, Mr. Tu became
our Chief Executive Officer and Chairman. Prior to the effective
date of
the reverse acquisition, Mr. Tu served at Golden as the Chairman.
The
annual, long term and other compensation shown in this table
include the
amount Mr. Tu received from Golden prior to the consummation
of the
reverse acquisition.
|
| (2) |
Mr.
Li resigned
from all offices he held with our Company in September 2005.
|
38
Bonuses
and Deferred Compensation
We
do not
have any bonus, deferred compensation or retirement plan. We do not have
a
compensation committee; all decisions regarding compensation are determined
by
our entire board of directors.
Stock
Option and Stock Appreciation Rights
We
do not
currently have a Stock Option Plan or Stock Appreciation Rights Plan. No
stock
options or stock appreciation rights were awarded during the fiscal year
ended
December 31, 2005.
Executive
Compensation
We
do not
have written employment agreements with our executive officers. Under our
verbal
agreements with our executive officers, each of them receives a monthly
salary
of RMB 10,000 (approximately $1,250). All of our executive officers are
entitled
to another RMB 120,000 (approximately $15,000) per year upon reaching certain
performance thresholds.
Indemnification
of Directors and Executive Officers and Limitation of
Liability
Our
bylaws provide for the indemnification of our present and prior directors
and
officers or any person who may have served at our request as a director
or
officer of another corporation in which we own shares of capital stock
or of
which we are a creditor, against expenses actually and necessarily incurred
by
them in connection with the defense of any actions, suits or proceedings
in
which they, or any of them, are made parties, or a party, by reason of
being or
having been director(s) or officer(s) of us or of such other corporation,
in the
absence of negligence or misconduct in the performance of their duties.
This
indemnification policy could result in substantial expenditure by us, which
we
may be unable to recoup.
Insofar
as indemnification by us for liabilities arising under the Securities Act
may be
permitted to our directors, officers and controlling persons pursuant to
provisions of the Articles of Incorporation and Bylaws, or otherwise, we
have
been advised that in the opinion of the SEC, such indemnification is against
public policy and is, therefore, unenforceable. In the event that a claim
for
indemnification by such director, officer or controlling person of us in
the
successful defense of any action, suit or proceeding is asserted by such
director, officer or controlling person in connection with the securities
being
offered, we will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by us is against public policy
as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
At
the
present time, there is no pending litigation or proceeding involving a
director,
officer, employee or other agent of ours in which indemnification would
be
required or permitted. We are not aware of any threatened litigation or
proceeding which may result in a claim for such indemnification.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
During
the last three fiscal years, we entered into the following transactions
with
certain related parties, in addition to the share transactions noted
above.
On
September 5, 2006, we entered into agreements to purchase the security
and
surveillance business of Jian An Ke, Shenzhen Guangdian, Shenyang Golden
and
Jiangxi Golden, of which our CEO and director Guoshen Tu is the Chairman
and a
shareholder. Mr. Tu will not receive any consideration for the acquisition
of
his interest in these companies, however his wife Zhiqun Li who owns 20%
of Jian
An Ke will receive 100,000 shares of our common stock as part of the
transaction. Our director and Vice President Lingfeng Xiong, as the 10%
shareholder of Jiangxi Golden, will receive 50,000 shares of our common
stock.
Our director and Vice President Jianguo Jiang, as the 40% shareholder of
Shenzhen Guangdian, will receive 550,000 shares of our common stock.
In
July
6, 2006, we entered into a stock purchase agreement with the shareholders
of
Chengfeng pursuant to which we will pay the shareholders of Chengfeng
consideration of RMB 120 million (approximately $15 million) in exchange
for
100% ownership of Chengfeng. Our newly appointed Chief Operating Officer
and
director Shufang Yang owns 46.26% of Chengfeng.
39
We
have
receivables from Jian Golden An Ke, Shenzhen Guangdian, Shenyang Golden
and
Jiangxi Golden. We also have receivables from Jiangxi Golden Motuo Che
Zhizhao
Co. Ltd., a motor and elevator manufacturer controlled by our CEO and director
Mr. Tu, arising from certain lease arrangements as discussed below. Our
net
receivables from related parties were $3,783,198 and $4,152,024 in fiscal
years
2005 and 2004, respectively, however, all of those have been paid
off.
We
have
leased property to Jiangxi Golden, Jian An Ke and Jiangxi Golden Motuo
Che
Zhizhao Co. Ltd. of which Guoshen Tu, our CEO and director, is the Chairman
and
a shareholder. The aggregated annual rental was $438,516 and $478,261 in
2005
and 2004, respectively. The leases expire on December 31, 2007.
We
entered into a consulting service agreement with Terence Yap, our Vice
President
and director, on February 8, 2006, which was later amended on June 27,
2006.
Pursuant to the agreement, as amended, we issued 100,000 shares of our
common
stock to Terence Yap on March 1, 2006 in exchange for his consulting services
valued at $350,000, which are to be provided to our Company from February
8,
2006 to February 7, 2009.
In
October 2005, we entered into an agreement with Yuan Da and its stockholder
Jianguo Jiang, our Vice President and director, which was subsequently
amended
in April and May 2006. Pursuant to the agreement, as amended, Mr. Jiang
sold all
the assets of Yuan Da in exchange for 200,000 shares of our common stock
and
approximately $125,000 (RMB 1,000,000).
On
September 12, 2005, we consummated the transactions contemplated by a share
exchange agreement among our Company and the owners of the issued and
outstanding capital stock of China Safetech Holdings Limited, including
Guoshen
Tu, our CEO and director, and certain of our other officers and directors.
Pursuant to the share exchange agreement, we acquired 100% of the outstanding
capital stock of China Safetech Holdings Limited in exchange for 8,138,000
shares of our common stock.
We
made
advances to Mr. Xiong during the 2004 fiscal year, which were non-interest
bearing and repayable upon demand. The balances due to the Company as of
December 31, 2004 were $1,006,806. Such balance has been paid in full.
We
also
received advances from Mr. Tu during the 2005 and 2004 fiscal year which
were
non-interest bearing and repayable upon demand. The balance due to Mr.
Tu as of
December 31, 2005 and 2004 was $69,646 and $13,946, respectively. We expect
to
pay off such balances by the end of 2006.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth information regarding beneficial ownership of
our
common stock as of as of October 20, 2006 (i) by each person who is known
by us
to beneficially own more than 5% of our common stock; (ii) by each of our
officers and directors; and (iii) by all of our officers and directors
as a
group.
Unless
otherwise specified, the address of each of the persons set forth below
is in
care of China Security & Surveillance Technology, Inc., 4/F, East 3/B, Saige
Science & Technology Park, Huaqiang, Shenzhen, China 518028.
|
Name
and Address
|
Number
of Shares Beneficially
Owned
|
|
Percent
of Class (5)
|
||||
|
Guoshen
Tu(1)
|
13,627,500(2
|
)
|
46.7
|
%
|
|||
|
Lingfeng
Xiong
(1)
|
60,000
|
*
|
|||||
|
Jinxu
Wu(1)
|
0
|
*
|
|||||
|
Yong
Zhao(1)
|
0
|
*
|
|||||
|
Terence
Yap(1)
|
100,000
|
*
|
|||||
|
Shufang
Yang (1)
(3)
|
0
|
*
|
|||||
|
Jianguo
Jiang(1)
|
200,000
|
*
|
|||||
|
All
Current Officers and Directors as a Group
(7
in number)
|
13,987,500
|
47.9
|
%
|
||||
|
Whitehorse
Technology Ltd.
(4)
|
13,627,500
|
46.7
|
%
|
||||
|
Li
Zhi Qun (6)
|
13,627,500
|
46.7
|
%
|
||||
|
Jayhawk
China Fund (Cayman) Ltd. (7)
c/o
Jayhawk Capital Management, LLC
8201
Mission Road, Suite 110
Prairie
Village, Kansas 66208
|
2,139,333
|
7.3
|
%
|
||||
|
The
Pinnacle Fund, L.P. (8)
4965
Preston Park Blvd., Suite 240
Plano,
Texas 75093
|
2,441,667
|
8.4
|
%
|
||||
|
The
Pinnacle China Fund, L.P. (8)
4965
Preston Park Blvd., Suite 240
Plano,
Texas 75093
|
2,441,667
|
8.4
|
%
|
||||
|
Total
shares owned by persons named above
|
21,010,167
|
71.9
|
%
|
||||
40
*
Less than 1%.
(1)
The
person is an officer, a director or both.
(2)
Includes
11,000,000 shares owned by Whitehorse Technology Limited. Mr. Tu is the
sole
owner of Whitehorse and may be deemed the beneficial owner of these shares.
The
total also includes the 2,627,500 shares owned by Li Zhi Qun, who is Mr.
Tu’s
wife. Mr. Tu may be deemed the beneficial owner of these shares as
well.
(3)
Under
the
stock transfer agreement, dated July 6, 2006, among CSST BVI and the
shareholders of Chengfeng, we will issue 1,331,376 shares of our common
stock to
the shareholders of Chengfeng. Mr. Yang, as a 46.26% shareholder of Chengfeng,
will be entitled to receive approximately 615,895 shares of our common
stock.
Such shares have not been issued as of the date of this prospectus.
(4)
Includes
2,627,500 shares owned by Li Zhi Qun, who is Mr. Tu’s wife.
(5)
A total
of 29,209,259 shares of our common stock are considered to be outstanding
pursuant to SEC Rule 13d-3(d)(1). For each beneficial owner above, any
options
exercisable within 60 days have been included in the denominator.
(6)
Includes
11,000,000 shares owned by Whitehorse Technology Limited of which Li Zhi
Qun’s
husband Guoshen Tu is the sole owner.
(7)
Includes
228,000 shares underlying the warrant to purchase shares of our common
stock.
(8)
Barry M.
Kitt exercises investment discretion and control over the shares of our
common
stock held by The Pinnacle Fund, L.P., a Texas limited partnership and
Pinnacle
China Fund, L.P., a Texas limited partnership. Mr. Kitt may be deemed to
be the
beneficial owner of the shares of common stock beneficially owned by both
funds.
Mr. Kitt disclaims beneficial ownership of these shares to the extent of
his
direct or indirect pecuniary interest.
SELLING
STOCKHOLDERS
This
prospectus relates to the resale by the selling stockholders named below
from
time to time of up to a total of 4,883,334 shares of our common stock,
2,333,334
of which shares were issued to the selling stockholders in connection with
a
private placement transaction in April 2006 while the remaining 2,550,000
shares
were purchased by the selling stockholders from other shareholders of CSST
BVI
pursuant to transactions exempt from registration under the Securities
Act.
The
following table sets forth certain information regarding the selling
stockholders and the shares offered by them in this prospectus. Beneficial
ownership is determined in accordance with the rules of the Securities
and
Exchange Commission, or SEC. In computing the number of shares beneficially
owned by a selling stockholder and the percentage of ownership of that
selling
stockholder, shares of common stock underlying shares of options or warrants
held by that selling stockholder that are convertible or exercisable, as
the
case may be, within 60 days of October 20, 2006 are included. Those shares,
however, are not deemed outstanding for the purpose of computing the percentage
ownership of any other selling stockholder. Each selling stockholder’s
percentage of ownership in the following table is based upon 29,209,259
shares
of common stock outstanding as of October 20, 2006.
41
Except
as
specifically set forth in the footnotes to the table, none of the selling
stockholders has held a position as an officer or director of our, nor
has any
selling stockholder had any material relationship of any kind with us or
any of
our affiliates. All information with respect to share ownership has been
furnished by the selling stockholders. The shares being offered are being
registered to permit public secondary trading of the shares and each selling
stockholder may offer all or part of the shares owned for resale from time
to
time. In addition, none of the selling stockholders has any family relationships
with our officers, directors or controlling stockholders. Furthermore,
except as
specifically set forth in the footnote to the table below, no selling
stockholder is a registered broker-dealer or an affiliate of a registered
broker-dealer.
For
additional information, refer to “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT” above.
The
term
“selling stockholders” also includes any transferees, pledges, donees, or other
successors in interest to the selling stockholders named in the table below.
To
our knowledge, subject to applicable community property laws, each person
named
in the table has sole voting and investment power with respect to the shares
of
common stock set forth opposite such person’s name. We will file a supplement to
this prospectus (or ,if required by applicable law, a post-effective amendment)
to name successors to any named selling stockholders who are able to use
this
prospectus to resell the securities registered hereby.
|
Name
and Address
|
Beneficial
Before the Offering
|
Shares
of Common Stock Included in Prospectus
|
Beneficial
Ownership After the Offering (1)
|
Percentage
of Common Stock Owned After Offering(1)
|
|
The
Pinnacle China Fund, L.P.
4965
Preston Park Blvd., Suite 240
Plano,
TX 75093 (1)
|
2,441,667
|
2,441,667
|
0
|
*
|
|
The
Pinnacle Fund, L.P.
4965
Preston Park Blvd., Suite 240
Plano,
TX 75093 (1)
|
2,441,667
|
2,441,667
|
0
|
*
|
(1)
Barry
M. Kitt is the General Partner of The Pinnacle China Fund, L.P. and The
Pinnacle
Fund, L.P. and has voting control and investment discretion over securities
held
by both funds. Mr. Kitt disclaims beneficial ownership of the shares.
We
will
not receive any of the proceeds from the sale of any shares by the selling
stockholders. We have agreed to bear expenses incurred by the selling
stockholders that relate to the registration of the shares being offered
and
sold by the selling stockholders, including the SEC registration fee and
legal,
accounting, printing and other expenses of this offering.
CHANGE
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Prior
to
our reverse acquisition of Safetech, our independent registered public
accounting firm was PKF Certified Public Accountants (“PKF”) while Golden’s
independent registered public accounting firm was Child, Van Wagoner &
Bradshaw, PLLC, formerly known as Child, Sullivan & Company, (“Child Van
Wagoner”). On February 2, 2006, in connection with the change of
control resulted from the reverse acquisition, our board of directors elected
to
appoint GHP Horwath, P.C. as our independent auditor and approved the dismissal
of PKF and Child, Van Wagoner.
No
accountant’s report issued by Child, Van Wagoner & Bradshaw, PLLC. or PKF on
the financial statements for either of the past two (2) years contained
an
adverse opinion or a disclaimer of opinion or was qualified or modified
as to
uncertainty, audit scope or accounting principles.
During
our two most recent fiscal years (ended December 31, 2005 and 2004) and
from
January 1, 2006 to the date of this prospectus, there were no disagreements
with
Child, Van Wagoner or PKF on any matter of accounting principles or practices,
financial disclosure, or auditing scope or procedure. There were no reportable
events, as described in Item 304(a)(1)(iv)(B) of Regulation S-K, during
our two
most recent fiscal years (ended December 31, 2005 and 2004) and from January
1,
2006 to the date of this prospectus.
42
We
furnished a copy of this disclosure to Child, Van Wagoner and PKF and requested
Child, Van Wagoner and PKF to furnish us with a letter addressed to the
SEC
stating whether they agree with the statements made by us herein in response
to
Item 304(a) of Regulation S-K and, if not, stating the respect in which
it does
not agree. A copy of the letter was filed by us as Exhibits 16.1 and 16.2
to our
current report on Form 6-K, filed March 37, 2006.
DESCRIPTION
OF SECURITIES
General
CSST
Delaware’s authorized capital stock consists of 100,000,000 shares of common
stock, par value $0.0001 per share. As of the effective date of the
Reincorporation Merger, CSST Delaware will have 29,209,259 shares of common
stock issued and outstanding.
Common
Stock
Each
outstanding share of CSST Delaware’s common stock entitles the holder thereof to
one vote per share on all matters. CSST Delaware’s bylaws provide that the
persons receiving the greatest number of votes shall be the directors.
Stockholders do not have preemptive rights to purchase shares in any future
issuance of CSST Delaware’s common stock. Upon CSST Delaware’s liquidation,
dissolution or winding up, and after payment of creditors, CSST Delaware’s
assets will be divided pro rata on a share-for-share basis among the holders
of
the shares of common stock.
The
holders of shares of CSST Delaware’s common stock are entitled to dividends out
of funds legally available when and as declared by CSST Delaware’s board of
directors. CSST Delaware’s board of directors has never declared a dividend and
does not anticipate declaring a dividend in the foreseeable future. Should
CSST
Delaware decide in the future to pay dividends, as a holding company, its
ability to do so and meet other obligations depends upon the receipt of
dividends or other payments from its operating subsidiaries and other holdings
and investments. In addition, CSST Delaware’s operating subsidiaries, from time
to time, may be subject to restrictions on their ability to make distributions
to CSST Delaware, including as a result of restrictive covenants in loan
agreements, restrictions on the conversion of local currency into U.S.
dollars
or other hard currency and other regulatory restrictions.
All
of
the issued and outstanding shares of CSST Delaware’s common stock are duly
authorized, validly issued, fully paid and non-assessable. To the extent
that
additional shares of CSST Delaware’s common stock are issued, the relative
interests of its existing stockholders will be diluted.
Transfer
Agent and Registrar
Our
independent stock transfer agent is Manhattan Transfer Registrar Company.
Their
mailing address is 57 Eastwood Road, Miller Place, NY 11764. Their phone
number
is (631) 928-7655.
SHARES
ELIGIBLE FOR FUTURE SALE
As
of the
effective date of the Reincorporation Merger, we had outstanding 29,209,259
shares of common stock.
Shares
Covered by this Prospectus
All
of
the 4,883,334 shares being registered in this offering may be sold
without restriction under the Securities Act.
Rule 144
The
resale of shares that are held by our affiliates and the resale of shares
that
are held by non-affiliates for a period of less than two years are governed
by
the following requirements of Rule 144 of the Securities Act.
43
In
general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated) who has beneficially owned shares of our common
stock for
at least one year, including any person who may be deemed to be an “affiliate”
(as the term “affiliate” is defined under the Securities Act of 1933), would be
entitled to sell, within any three-month period, a number of shares that
does
not exceed the greater of:
|
•
|
1%
of the number of shares of common stock then outstanding, which
as of the effective date of the Reincorporation Merger would
equal
approximately 292,093; or
|
|
•
|
the
average weekly trading volume of our common stock during the
four calendar
weeks preceding the filing of a notice on Form 144 with respect to
such sale.
|
Sales
under Rule 144 are also governed by other requirements regarding the manner
of sale, notice filing and the availability of current public information
about
us. Under Rule 144, however, a person who is not, and for the three months
prior to the sale of such shares has not been, an affiliate of the issuer
is
free to sell shares that are “restricted securities” which have been held for at
least two years without regard to the limitations contained in Rule 144.
The selling shareholders will not be governed by the foregoing restrictions
when
selling their shares pursuant to this prospectus.
We
believe that none of our outstanding shares may currently be sold in
reliance on
Rule 144. However, shares held by our officers and directors that were
registered under a separate registration statement on Form S-4 relating
to our
Reincorporation Merger are considered Rule 145 shares under the Securities
Act.
There shares are subject to the same limitations on the volume of shares
that
can be re-sold by such affiliates as would be applicable under Rule 144
as
discussed above. There are a total of 13,987,500 Rule 145 shares held
by our
affiliates, not including the Rule 145 shares being registered for the
account
of the selling stockholders named in this prospectus.
Rule 144(k)
Under
Rule 144(k), a person who is not deemed to have been one of our affiliates
at any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, including
the
holding period of any prior owner other than an affiliate, is entitled
to sell
such shares without complying with the manner of sale, notice filing,
volume
limitation or notice provisions of Rule 144.
We
believe that none of our outstanding shares may currently be sold in
reliance on
Rule 144(k).
PLAN
OF DISTRIBUTION
The
selling stockholders, may, from time to time, sell, transfer or otherwise
dispose of any or all of their shares of our common stock or interests
in shares
of our common stock on any stock exchange, market or trading facility
on which
the shares are traded or in private transactions. These dispositions
may be at
fixed prices, at prevailing market prices at the time of sale, at prices
related
to the prevailing market price, at varying prices determined at the time
of
sale, or at negotiated prices.
The
selling stockholders may use any one or more of the following methods
when
disposing of shares or interests therein:
-
ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
-
block
trades in which the broker-dealer will attempt to sell the shares as
agent, but
may position and resell a portion of the block as principal to facilitate
the
transaction;
-
purchases by a broker-dealer as principal and resale by the broker-dealer
for
its account;
-
an
exchange distribution in accordance with the rules of the applicable
exchange;
-
privately negotiated transactions;
44
-
short
sales effected after the date the registration statement of which this
prospectus is a part is declared effective by the SEC;
-
through
the writing or settlement of options or other hedging transactions, whether
through an options exchange or otherwise;
-
broker-dealers may agree with the selling stockholders to sell a specified
number of such shares at a stipulated price per share; and
-
a
combination of any such methods of sale.
The
selling stockholders may, from time to time, pledge or grant a security
interest
in some or all of the shares of our common stock owned by them and, if
they
default in the performance of their secured obligations, the pledgees
or secured
parties may offer and sell the shares of our common stock, from time
to time,
under this prospectus, or under an amendment to this prospectus under
Rule
424(b)(3) or other applicable provision of the Securities Act amending
the list
of selling stockholders to include the pledgee, transferee or other successors
in interest as selling stockholders under this prospectus. The selling
stockholders also may transfer the shares of our common stock in other
circumstances, in which case the transferees, pledgees or other successors
in
interest will be the selling beneficial owners for purposes of this
prospectus.
In
connection with the sale of our common stock or interests therein, the
selling
stockholders may enter into hedging transactions with broker-dealers
or other
financial institutions, which may in turn engage in short sales of our
common
stock in the course of hedging the positions they assume. The selling
stockholders may also sell shares of our common stock short and deliver
these
securities to close out their short positions, or loan or pledge the
shares of
our common stock to broker-dealers that in turn may sell these securities.
The
selling stockholders may also enter into option or other transactions
with
broker-dealers or other financial institutions or the creation of one
or more
derivative securities which require the delivery to such broker-dealer
or other
financial institution of shares offered by this prospectus, which shares
such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
aggregate proceeds to the selling stockholders from the sale of shares
of our
common stock offered by them will be the purchase price of the common
stock less
discounts or commissions, if any. Each of the selling stockholders reserves
the
right to accept and, together with their agents from time to time, to
reject, in
whole or in part, any proposed purchase of our common stock to be made
directly
or through agents. We will not receive any of the proceeds from this
offering.
Broker-dealers
engaged by the selling stockholders may arrange for other broker-dealers
to
participate in sales. Broker-dealers may receive commissions or discounts
from
the selling stockholders (or, if any broker-dealer acts as agent for
the
purchase of shares, from the purchaser) in amounts to be negotiated.
The selling
stockholders do not expect these commissions and discounts to exceed
what is
customary in the types of transactions involved.
The
selling stockholders also may resell all or a portion of the shares in
open
market transactions in reliance upon Rule 144 under the Securities Act,
provided
that they meet the criteria and conform to the requirements of that
rule.
The
selling stockholders and any underwriters, broker-dealers or agents that
participate in the sale of our common stock or interests therein are
“underwriters” within the meaning of Section 2(11) of the Securities Act. Any
discounts, commissions, concessions or profit they earn on any resale
of the
shares may be underwriting discounts and commissions under the Securities
Act.
Selling stockholders who are “underwriters” within the meaning of Section 2(11)
of the Securities Act will be subject to the prospectus delivery requirements
of
the Securities Act. We know of no existing arrangements between any of
the
selling stockholders and any other stockholder, broker, dealer, underwriter,
or
agent relating to the sale or distribution of the shares, nor can we
presently
estimate the amount, if any, of such compensation. See “Selling Stockholders”
for description of any material relationship that a stockholder has with
us and
the description of such relationship.
To
the
extent required, the shares of our common stock to be sold, the names
of the
selling stockholders, the respective purchase prices and public offering
prices,
the names of any agents, dealers or underwriters, any applicable commissions
or
discounts with respect to a particular offer will be set forth in an
accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement that includes this
prospectus.
45
In
order
to comply with the securities laws of some states, if applicable, the
shares of
our common stock may be sold in these jurisdictions only through registered
or
licensed brokers or dealers. In addition, in some states the common stock
may
not be sold unless it has been registered or qualified for sale or an
exemption
from registration or qualification requirements is available and is complied
with.
We
have
advised the selling stockholders that the anti-manipulation rules of Regulation
M under the Exchange Act may apply to sales of shares in the market and
to the
activities of the selling stockholders and their affiliates. In addition,
we
will make copies of this prospectus (as it may be supplemented or amended
from
time to time) available to the selling stockholders for the purpose of
satisfying the prospectus delivery requirements of the Securities Act.
The
selling stockholders may indemnify any broker-dealer that participates
in
transactions involving the sale of the shares against certain liabilities,
including liabilities arising under the Securities Act.
We
have
agreed to pay certain fees and expenses incurred by us incident to the
registration of the shares. Such fees and expenses are estimated to be
$65,757.
We have agreed to indemnify the selling stockholders against liabilities,
including liabilities under the Securities Act and state securities laws,
relating to the registration of the shares offered by this
prospectus.
We
have
agreed with the selling stockholders to keep the registration statement
of which
this prospectus constitutes a part effective until the earlier of (1)
such time
as all of the shares covered by this prospectus have been disposed of
pursuant
to and in accordance with the registration statement or (2) the date
on which
the shares may be sold pursuant to Rule 144(k) of the Securities
Act.
LEGAL
MATTERS
The
validity of the common stock offered by this prospectus will be passed
upon for
us by Thelen Reid & Priest, LLP, Washington, D.C.
EXPERTS
The
consolidated financial statements of CSST BVI for the years ended December
31,
2003 and 2004 included in this prospectus and in the registration statement
have
been audited by the accounting firm of Child, Van Wagoner & Bradshaw, PLLC,
independent registered public accounting firm, and are included in reliance
upon
their report dated September 1, 2005, given upon such firm’s authority as
experts in auditing and accounting.
The
consolidated financial statements of CSST BVI for the year ended December
31,
2005 included in this prospectus have been audited by the accounting
firm of GHP
Horwath, P.C., independent registered public accounting firm, and are
included
in reliance upon their report dated May 25, 2006, given upon such firm’s
authority as experts in auditing and accounting.
WHERE
YOU CAN FIND MORE INFORMATION
We
have
filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock offered in this offering.
This
prospectus does not contain all of the information set forth in the registration
statement. For further information with respect to us and the common
stock
offered in this offering, we refer you to the registration statement
and to the
attached exhibits. With respect to each such document filed as an exhibit
to the
registration statement, we refer you to the exhibit for a more complete
description of the matters involved.
You
may
inspect our registration statement and the attached exhibits and schedules
without charge at the public reference facilities maintained by the SEC
at 100 F
Street, N.E., Washington, D.C. 20549. You may obtain copies of all or
any part
of our registration statement from the SEC upon payment of prescribed
fees. You
may obtain information on the operation of the public reference room
by calling
the SEC at 1-800-SEC-0330.
Our
SEC
filings, including the registration statement and the exhibits filed
with the
registration statement, are also available from the SEC’s website at
www.sec.gov, which contains reports, proxy and information statements
and other
information regarding issuers that file electronically with the
SEC.
46
FINANCIAL
STATEMENTS
The
following financial statements listed below are included with this prospectus.
These financial statements have been prepared on the basis of accounting
principles generally accepted in the United States and are expressed
in U.S.
dollars.
|
Page
|
|
|
UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED JUNE
30, 2006 AND 2005
|
|
|
Condensed
Consolidated Balance Sheets
|
F-2
|
|
Condensed
Consolidated Statements of Operations
|
F-3
|
|
Condensed
Consolidated Statements of Stockholders’ Equity
|
F-4
|
|
Condensed
Consolidated Statements of Cash Flows
|
F-5
|
|
Notes
to Condensed Consolidated Financial Statements
|
F-6-12
|
|
AUDITED
CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS
IN THE
PERIOD ENDED DECEMBER 31, 2005
|
|
|
Reports
of Independent Registered Public Accounting Firm
|
F-14-15
|
|
Consolidated
Balance Sheets
|
F-16
|
|
Consolidated
Statements of Operations
|
F-17
|
|
Consolidated
Statements of Stockholders’ Equity
|
F-18
|
|
Consolidated
Statements of Cash Flows
|
F-19-20
|
|
Notes
to Audited Consolidated Financial Statements
|
F-21-37
|
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
|
|
UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX
MONTHS ENDED JUNE
30, 2006 AND 2005
|
|
|
Condensed
Consolidated Balance Sheets
|
F-2
|
|
Condensed
Consolidated Statements of Operations
|
F-3
|
|
Condensed
Consolidated Statements of Stockholders’ Equity
|
F-4
|
|
Condensed
Consolidated Statements of Cash Flows
|
F-5
|
|
Notes
to Condensed Consolidated Financial Statements
|
F-6-12
|
|
AUDITED
CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE
YEARS IN THE
PERIOD ENDED DECEMBER 31, 2005
|
|
|
Reports
of Independent Registered Public Accounting Firm
|
F-14-15
|
|
Consolidated
Balance Sheets
|
F-16
|
|
Consolidated
Statements of Operations
|
F-17
|
|
Consolidated
Statements of Stockholders’ Equity
|
F-18
|
|
Consolidated
Statements of Cash Flows
|
F-19-20
|
|
Notes
to Audited Consolidated Financial Statements
|
F-21-37
|
F-1
|
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
SUBSIDIARIES
|
|||||||
|
CONSOLIDATED
BALANCE SHEETS AS OF JUNE 30, 2006 AND DECEMBER 31,
2005
|
|||||||
|
Expressed
in US Dollars
|
|||||||
|
ASSETS
|
|||||||
|
June
30,
|
December
31,
|
||||||
|
2006
|
2005
|
||||||
|
(Unaudited)
|
|||||||
|
CURRENT
ASSETS
|
|||||||
|
Cash
and cash equivalents
|
$
|
9,618,069
|
$
|
2,276,915
|
|||
|
Accounts
receivable, net
|
15,290,877
|
11,642,823
|
|||||
|
Related
party receivables
|
922,214
|
3,783,198
|
|||||
|
Inventories,
net
|
8,879,780
|
5,311,293
|
|||||
|
Prepayment
for consulting services
|
302,789
|
—
|
|||||
|
Deferred
cost of goods sold
|
12,149,710
|
—
|
|||||
|
Advances
to suppliers
|
5,166,844
|
1,492,512
|
|||||
|
Other
receivables
|
2,155,001
|
415,455
|
|||||
|
Deferred
tax assets - current portion
|
823,513
|
129,712
|
|||||
|
Total
current assets
|
55,308,796
|
25,051,908
|
|||||
|
|
|||||||
|
Plant
and equipment, net
|
1,844,413
|
1,951,566
|
|||||
|
Land
use rights, net
|
1,137,273
|
1,142,182
|
|||||
|
Intangible
assets, net
|
463,662
|
511,127
|
|||||
|
Deferred
tax assets - non-current portion
|
396,505
|
459,889
|
|||||
|
|
|||||||
|
Total
Assets
|
$
|
59,150,650
|
$
|
29,116,672
|
|||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||
|
CURRENT
LIABILITIES
|
|||||||
|
Accounts
payable and accruals
|
$
|
1,133,729
|
$
|
1,839,609
|
|||
|
Amount
due to a director
|
70,990
|
69,646
|
|||||
|
Taxes
payable
|
913,708
|
1,115,356
|
|||||
|
Payable
for acquisition of business
|
87,429
|
592,846
|
|||||
|
Deferred
income
|
17,853,121
|
887,469
|
|||||
|
Deferred
tax liabilities
|
17,474
|
||||||
|
Total
liabilities (all current)
|
20,076,451
|
4,504,926
|
|||||
|
SHAREHOLDERS'
EQUITY
|
|||||||
|
Common
stock, $0.01 par value; 100,000,000 shares
|
|||||||
|
authorised
24,524,667 (June 30, 2006) and 21,558,000
|
|||||||
|
(December
31, 2005) shares issued and outstanding
|
245,247
|
215,580
|
|||||
|
Additional
paid-in capital
|
12,674,128
|
4,494,565
|
|||||
|
Retained
earnings
|
23,711,713
|
18,552,610
|
|||||
|
Surplus
reserve fund
|
1,681,136
|
803,758
|
|||||
|
Accumulated
other comprehensive income
|
761,974
|
545,233
|
|||||
|
Total
shareholders' equity
|
39,074,198
|
24,611,746
|
|||||
|
Total
liabilities and shareholders' equity
|
$
|
59,150,650
|
$
|
29,116,672
|
|||
|
See
accompanying notes to consolidated financial statements
|
|||||||
F-2
|
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
SUBSIDIARIES
|
|||||||||||||
|
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
|
|||||||||||||
|
Expressed
in US Dollars
|
|||||||||||||
|
Three
Months Ended June 30
|
Six
Months Ended June 30
|
||||||||||||
|
2006
|
2005
|
2006
|
2005
|
||||||||||
|
Revenues
|
$
|
8,014,810
|
$
|
5,477,208
|
$
|
22,609,172
|
$
|
12,729,441
|
|||||
|
Cost
of goods sold
|
4,978,063
|
4,139,282
|
15,174,982
|
9,849,515
|
|||||||||
|
Gross
profit
|
3,036,747
|
1,337,926
|
7,434,190
|
2,879,926
|
|||||||||
|
Selling
and marketing
|
170,896
|
59,905
|
293,110
|
120,440
|
|||||||||
|
General
and administrative
|
378,375
|
306,201
|
673,062
|
79,036
|
|||||||||
|
Depreciation
and amortisation
|
86,947
|
125,310
|
188,793
|
238,513
|
|||||||||
|
Income
from operations
|
2,400,529
|
846,510
|
6,279,225
|
2,441,937
|
|||||||||
|
Other
income,net
|
457,743
|
120,485
|
699,780
|
240,721
|
|||||||||
|
Income
before income taxes
|
2,858,272
|
966,995
|
6,979,005
|
2,682,658
|
|||||||||
|
Income
taxes expense (benefit)
|
321,836
|
(243,268
|
)
|
942,524
|
63,878
|
||||||||
|
Net
income
|
2,536,436
|
1,210,263
|
6,036,481
|
2,618,780
|
|||||||||
|
Foreign
currency translation gain
|
597,067
|
—
|
216,741
|
—
|
|||||||||
|
Comprehensive
income
|
$
|
3,133,503
|
$
|
1,210,263
|
$
|
6,253,222
|
$
|
2,618,780
|
|||||
|
Net
Income Per Share
|
|||||||||||||
|
Basisc
|
0.10
|
0.07
|
0.26
|
0.15
|
|||||||||
|
Diluted
|
0.10
|
0.07
|
0.26
|
0.15
|
|||||||||
|
Weighted
Average Number of Shares
|
|||||||||||||
|
Outstanding
|
|||||||||||||
|
Basic
|
24,436,755
|
17,000,000
|
23,046,766
|
17,000,000
|
|||||||||
|
Diluted
|
24,621,287
|
17,000,000
|
23,139,542
|
17,000,000
|
|||||||||
|
See
accompanying notes to consolidated financial
statements
|
|||||||||||||
F-3
|
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND SUBSIDIARIES
|
||||||||||||||||||||||
|
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
|
||||||||||||||||||||||
|
Expressed
in US dollars
|
||||||||||||||||||||||
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
||||||||||||
|
|
|
Shares
|
|
Par
Value
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Income
|
|
Statutory
Surplus
Reserve
Fund
|
|
Total
|
||||||||
|
BALANCE
AT DECEMBER 31, 2005
|
|
21,558,000
|
$
|
215,580
|
$
|
4,494,565
|
$
|
18,552,610
|
$
|
545,233
|
$
|
803,758
|
$
|
24,611,746
|
||||||||
|
Common
stock issued for consulting services
|
100,000
|
1,000
|
349,000
|
—
|
—
|
—
|
350,000
|
|||||||||||||||
|
Common
stock issued for acquisition of Yuan Da
|
200,000
|
2,000
|
498,000
|
—
|
—
|
—
|
500,000
|
|||||||||||||||
|
Common
shares issued under securities purchase agreement
|
2,666,667
|
26,667
|
7,332,563
|
—
|
—
|
—
|
7,359,230
|
|||||||||||||||
|
Foreign
currency translation
|
—
|
—
|
—
|
—
|
216,741
|
—
|
216,741
|
|||||||||||||||
|
Net
income for six months ended June 20,2006
|
—
|
—
|
—
|
6,036,481
|
—
|
—
|
6,036,481
|
|||||||||||||||
|
Transfer
|
—
|
—
|
—
|
(877,378
|
)
|
877,378
|
||||||||||||||||
|
BALANCE
AT JUNE 30, 2006
|
|
24,524,667
|
$
|
245,247
|
$
|
12,674,128
|
$
|
23,711,713
|
$
|
761,974
|
$
|
1,681,136
|
$
|
39,074,198
|
||||||||
|
See
accompanying notes to consolidated financial statements
|
||||||||||||||||||||||
F-4
|
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC. (UNAUDITED) AND
SUBSIDIARIES
|
|||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|||||||
|
Expressed
in US dollars
|
|||||||
|
Six
Months Ended
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
June
30, 2006
|
June
30, 2005
|
|||||
|
Net
income
|
$
|
6,036,481
|
$
|
2,618,780
|
|||
|
Adjustments
to reconcile net income to net cash (used in) provided
|
|||||||
|
by
operating activities:
|
|||||||
|
Depreciation
and amortization
|
188,793
|
238,513
|
|||||
|
Deferred
taxes
|
(625,741
|
)
|
(666,012
|
)
|
|||
|
Changes
in operating assets and liabilities:
|
|||||||
|
(Increase)
decrease in:
|
|||||||
|
Accounts
receivable
|
(3,555,714
|
)
|
919,597
|
||||
|
Related
party receivables
|
2,890,989
|
(2,754,866
|
)
|
||||
|
Other
receivable
|
(1,736,251
|
)
|
(969,280
|
)
|
|||
|
Prepayment
for consulting services
|
48,837
|
||||||
|
Inventories
|
(3,526,363
|
)
|
(645,227
|
)
|
|||
|
Advances
to suppliers
|
(3,662,495
|
)
|
3,064,203
|
||||
|
Deferred
cost of goods sold
|
(12,149,710
|
)
|
|||||
|
(Decrease)
increase in:
|
|||||||
|
Accounts
payable and accruals
|
(720,470
|
)
|
(1,450,143
|
)
|
|||
|
Deferred
income
|
16,958,613
|
939,453
|
|||||
|
Tax
payable
|
(210,494
|
)
|
147,885
|
||||
|
Deferred
tax liabilities
|
(17,474
|
)
|
|||||
|
Net
cash (used in) provided by operating activities
|
(80,999
|
)
|
1,442,903
|
||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||
|
Additions
to fixed assets
|
(1,449
|
)
|
(139,116
|
)
|
|||
|
Net
cash used in investing activities
|
(1,449
|
)
|
(139,116
|
)
|
|||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||
|
Proceeds
from Issuance of common stock
|
7,359,230
|
-
|
|||||
|
Cash
received from directors
|
792
|
1,006,806
|
|||||
|
Net
cash provided by financing activities
|
7,360,022
|
1,006,806
|
|||||
|
Effect
of exchange rate changes on cash
|
63,580
|
||||||
|
Cash
and cash equivalents, beginning
|
2,276,915
|
33,298
|
|||||
|
CASH
AND CASH EQUIVALENTS, ENDING
|
$
|
9,618,069
|
$
|
2,343,891
|
|||
|
SUPPLEMENTARY
CASH FLOW INFORMATION
|
|||||||
|
Income
taxes paid
|
$
|
940,353
|
$
|
651,439
|
|||
|
SUPPLEMENTAL
SCHEDULE OF NON-CASH INVESTING
|
|||||||
|
AND
FINANCING ACTIVITIES
|
|||||||
|
Common
stock issued for consulting services
|
$
|
350,000
|
|||||
|
Common
stock issued for acquisition of Yuan Da
|
$
|
500,000
|
|||||
|
See
accompanying notes to consolidated financial
statements.
|
|||||||
F-5
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
PART
1
1. BASIS
OF
PRESENTATION
The
accompanying financial statements, as of June 30, 2006 and for
the three months
and
six
months ended
June 30, 2006 and 2005, have been prepared by the Company without
audit.
Pursuant to the rules and regulations of the Securities and Exchange
Commission,
certain information and footnote disclosures normally included
in the financial
statements prepared in accordance with accounting principles generally
accepted
in the United States of America (“USGAAP”) have
been
condensed or omitted pursuant to such rules and regulations. However,
the
Company believes that the disclosures are adequate to make the
information
presented not misleading. These financial statements should be
read in
conjunction with the financial statements and the notes thereto
included in the
Company's audited annual financial statements for the year ended
December 31,
2005.
The
preparation of financial statements in conformity with USGAAP requires
management to make estimates and assumptions that affect the reported
amounts of
assets, liabilities, revenues and expenses and the disclosure of
contingent
assets and liabilities. Actual results could differ from these
estimates.
In
the
opinion of the management, all adjustments (which include only
normal recurring
adjustments) necessary to present fairly the financial position
as of June 30,
2006, results of operations for
the
three months and six months ended June 30, 2006 and 2005, and cash
flows for the
six months ended June 30, 2006 and 2005, have been made.
The
results of operations for the three months and
six
months ended June 30, 2006
are not
necessarily indicative of the operating results for the full year.
2. SUMMARY
OF SELECTED SIGNIFICANT ACCOUNTING POLICIES
| (a) |
Accounts
Receivable
|
Trade
receivables are recognized and carried at the original invoice
amount less
allowance for any uncollectible amounts. An estimate for doubtful
accounts is
made when collection of the full amount is no longer probable.
Bad debts are
written off as incurred.
| (b) |
Revenue
Recognition and deferred income and
cost
|
The
Company derives the bulk of its revenue from the supply and installation
of
security and surveillance equipment and the two deliverables do
not meet the
separation criteria under EITF issue 00-21 because the company
has not
established vendor specific objective evidence of fair value of
installation.
The installation is not considered to be essential to the functionality
of the
equipment having regard to the following criteria as set out in
SAB
104:
F-6
| (i) |
The
security and surveillance equipment is a standard product
with minor
modifications according to customers’
specifications;
|
| (ii) |
Installation
does not significantly alter the security and surveillance
equipment’s
capabilities; and
|
| (iii) |
Other
companies which possess the relevant licenses are available
to perform the
installation services.
|
Accordingly,
the portion of the contract price which is not payable until the
installation
service is completed is deferred until the completion of the installation
service and the balance of the contract piece is recognized as
revenue upon
delivery and acceptance of the security and surveillance equipment
by the
customers.
Revenue
from the outright sale of security and surveillance equipment is
recognized when
delivery occurs and risk of ownership passes to the customers.
During
the three months ended June 30, 2006, the Company signed 32 contracts
with
customers with a total contract price of approximately $23 million.
The Company
completed 7 of these contracts before June 30, 2006, thus approximately
$17.9
million of the revenue and $12 million of the cost of sales were
deferred at
June 30, 2006 to the 3rd
quarter.
| (c) |
Use
of Estimates
|
The
preparation of the financial statements in conformity with generally
accepted
accounting principles in the United States of America requires
management to
make estimates and assumptions that affect the reported amounts
of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of
the financial statements and the reported amounts of revenues and
expenses
during the reporting periods. Management makes these estimates
using the best
information available at the time the estimates are made; however
actual results
could differ materially from those estimates.
| (d) |
Earnings
Per Share
|
Basic
earnings per share is calculated based on the weighted average
number of common
shares outstanding for the three and six month periods ended June
30, 2006 and
2005. Diluted earnings per share reflects additional common shares
that would
have been outstanding if dilutive potential common shares had been
issued, as
well as any adjustment to income that would result from the assumed
issuance.
Potential common shares that may be issued by the Company relate
to outstanding
stock warrants, and are determined using the treasury stock method.
F-7
| 3. |
INVENTORIES
|
Inventories
consist of the following as of June 30, 2006 and December 31, 2005:
|
June
30, 2006
|
December
31, 2005
|
||||||
|
Security
and surveillance equipment
|
$
|
8,923,199
|
$
|
5,354,370
|
|||
|
Less:
Allowance for obsolete inventories
|
(43,419
|
)
|
(43,077
|
)
|
|||
|
Inventories,
net
|
$
|
8,879,780
|
$
|
5,311,293
|
|||
| 4. |
LAND
USE RIGHTS
|
Land
use
rights consist of the following as of June 30, 2006 and December
31,
2005:
|
June
30, 2006
|
December
31, 2005
|
||||||
|
Cost
of land use rights
|
$
|
1,407,975
|
$
|
1,396,896
|
|||
|
Less:
Accumulated amortization
|
(270,702
|
)
|
(254,714
|
)
|
|||
|
Land
use rights, net
|
$
|
1,137,273
|
$
|
1,142,182
|
|||
Amortization
expense for the three and six months ended June 30, 2006 and 2005
were
approximately $7,000, $7,000, $14,000 and $14,000, respectively.
Amortization
expense for the next five years and thereafter is as follows:
|
2006
(remaining 6 months)
|
$ |
13,934
|
||
|
2007
|
27,887
|
|||
|
2008
|
27,887
|
|||
|
2009
|
27,887
|
|||
|
2010
|
27,887
|
|||
|
2011
|
27,887
|
|||
|
Thereafter
|
983,904
|
|||
|
Total
|
$
|
1,137,273
|
F-8
| 5. |
INTANGIBLE
ASSETS
|
|
June
30, 2006
|
December
31, 2005
|
||||||
|
Intangible
asset, net
|
$
|
463,662
|
$
|
511,127
|
|||
The
Company’s intangible asset represents the value determined by an independent
accounting firm attributable to intellectual
property pertaining to a surveillance recording system developed
by Shenzhen
Yuan Da Wei Shi Technology Limited. This intangible asset is being
amortized
over its useful life of 5 years. Amortization expense for the six
months and
three months ended June 30, 2006 was $51,300 and $25,700
respectively.
| 6. |
RELATED
PARTY RECEIVABLES
|
The
Company has receivables from several companies whose directors
and shareholders
are common with the Company. All receivables recorded on December
31, 2005 arose
from advances made prior to the date of the reverse merger of September
22, 2005
as detailed in note 1 and from the rental of real estate. The receivables
were
classified as related party receivables on the balance sheets.
Since these
receivables had no fixed repayment terms, they were classified
as non-current
assets. However, a significant portion of the balance at December
31, 2005 was
repaid. New balances as a result of advances made and the remaining
portion of
the balance owed at December 31, 2005 have to be repaid in one
year and
therefore, related party receivables are classified as a current
asset on the
balance sheet at June 30, 2006. The reconciliation of the related
party
receivable from the December 31, 2005 balance to the June 30, 2006
balance is as
follows:
|
Related
party receivables at December 31, 2005
|
$
|
4,018,632
|
||
|
Allowance
for doubtful accounts
|
(235,434
|
)
|
||
|
Related
party receivables, net, at December 31, 2005
|
3,783,198
|
|||
|
Repayment
|
(3,373,918
|
)
|
||
|
Addition
(primarily rental income)
|
247,314
|
|||
|
Reversal
of allowance for doubtful accounts upon collection of
amounts
owed
|
235,434
|
|||
|
Foreign
currency translation gain
|
30,186
|
|||
|
Ending
balance at June 30, 2006
|
$
|
922,214
|
The
Company earned rental income from related parties amounting to
$123,364,
$119,471, $246,292 and $238,943 for the three and six months ended
June 30, 2006
and 2005 respectively.
F-9
| 7. |
DUE
TO DIRECTOR
|
The
Company has received advances from a director. The advances are
non-interest
bearing and are repayable upon demand. The balances due to the
director were $
70,990 at June 30, 2006.
| 8. |
ADVANCE
PAYMENTS
|
The
Company has made payments to unrelated suppliers in advance of
receiving
merchandise. The advance payments are meant to ensure preferential
pricing and
delivery. The amounts advanced under such arrangements totaled
$5,166,844 as of
June 30, 2006.
| 9. |
ISSUANCE
OF COMMON STOCK
|
On
April
4, 2006, the Company entered into a Securities Purchase Agreement
(the
“Agreement”) with certain investors (the “Investors”) for the sale of 2,666,667
shares (the “Shares”) of the Company’s common stock at a price of $3.00 per
share, or an aggregate total of $7,359,230 (net of issuance costs).
Closing
under the Agreement also occurred on April 4, 2006.
Pursuant
to this Agreement, the Company also issued warrants (the “Warrants”) to these
investors to purchase 416,667 shares of its common stock. A total
of 150,000 of
the warrants are exercisable at a price of $3.80 per share, which
is the closing
bid price for the Company’s stock as of the date of closing under the Agreement,
and a total of 266,667 of the warrants are exercisable at a price
of $3.00 per
share. All of the warrants have a term of 5 years.
In
conjunction with execution of the Agreement, the Company also executed
a
Registration Rights Agreement under which it is obligated, within
45 days after
the closing date, to file a registration statement on Form F-1,
or other
available form, to register the shares and the shares underlying
the Warrants
for resale. The Company is obligated to use its best efforts to
cause the
registration statement to be declared effective within 180 days
of the Closing
Date, and may be liable for payment of penalties to the Investors
in the event
the registration statement is not declared effective within the
180-day period.
This agreement established a cap on the payment of liquidated damages
equal to a
maximum of 10% of the aggregate purchase price of each purchaser’s securities.
The Company believes that the maximum 10% payment for liquidated
damages
reflects a reasonable estimate of the difference in fair values
between
registered and unregistered shares. As a result, both the common
stock and
warrants are classified as a permanent equity.
F-10
| 10. |
SUBSEQUENT
EVENTS
|
(a)
Execution and closing of a stock purchase agreement
On
July
6, 2006, the Company entered into a definitive Securities Purchase
Agreement
(the “Security Purchase Agreement”) with certain accredited investors relating
to the private placement of 2,675,794 units for an aggregate gross
cash purchase
price of $12,041,094.
Each
unit
consists of one share of The Company’s common stock and a warrant to purchase
one-fifth of one share of common stock. The exercise price for
each whole
warrant was originally $5.40. The warrants have a term of five
years and include
a cashless exercise feature. The units were to be sold under the
Securities
Purchase Agreement at a price of $4.50 per unit. Under the terms
of the
Securities Purchase Agreement, all of such funds were required
to be placed into
escrow by the investors by Friday, July 7, 2006.
The
Securities Purchase Agreement was amended on July 30, 2006 and
July 31, 2006 and
closing under the amended agreement occurred July 31, 2006. The
major amendments
to the Securities Purchase Agreement include the waiver of a closing
condition
which permitted the Company to break escrow notwithstanding the
fact that the
acquisition of a China based surveillance software company ( the
“Acquisition”)
will not be fully consummated until certain governmental approvals
are obtained,
the reduction of the purchase price of each unit from $4.50 to
$3.50 and the
exercise price for each whole warrant from $5.40 to $4.80, and
the grant of a
put right by the Company to all of the investors which allows the
investors to
require the Company to repurchase all, but not less than all, of
the securities
issued under the Securities Purchase Agreement if the Company fails
to obtain
the necessary governmental approval to consummate the Acquisition
on or before
December 31, 2006.
Pursuant
to the amended Securities Purchase Agreement, the Company sold
4,634,592 units
to certain accredited investors for $16.2 million. Each unit consists
of one
share of common stock and a warrant to purchase one-fifth of one
share of common
stock. The exercise price for each whole warrant is $4.80. The
warrants have a
term of five years and include a cashless exercise feature. The
units were sold
under the Securities Purchase Agreement at a price of $3.50 per
unit. Net
proceeds to the Company from the sale of all of the units are approximately
$14.9 million.
Proceeds
from the private placement transaction were to be used for the
Acquisition with
excess funds being used for general working capital purposes.
Following
closing, the Company has a total of 29,159,259 shares issued and
outstanding.
The number of warrants outstanding after the transaction is 1,343,585.
A total
of 150,000 of the warrants are exercisable at a price of $3.80
per share, a
total of 266,667 of the warrants are exercisable at a price of
$3.00 per share,
and a total of 926,918 of the warrants are exercisable at a price
of $4.80 per
share. All of the warrants have a term of 5 years.
F-11
In
conjunction with execution of the Securities Purchase Agreement,
as amended, the
Company also executed a Registration Rights Agreement under which
it is
obligated, within 45 days after the closing date, to file a registration
statement on Form S-4, or other available form, to register the
Shares and the
shares underlying the Warrants for resale. The Company is obligated
to use its
best efforts to cause the registration statement to be declared
effective within
180 of the Closing Date, and may be liable for payment of penalties
to the
Investors in the event the registration statement is not declared
effective
within the 180-day period. This agreement established a cap on
the payment of
liquidated damages equal to a maximum of 10% of the aggregate purchase
price of
each purchaser’s securities. The Company believes that the maximum 10% payment
for liquidated damages reflects a reasonable estimate of the difference
in fair
values between registered and unregistered shares. As a result,
both the common
stock and warrants are classified as a permanent equity.
(b)
Issuance of Warrants to Rubenstein
Investor Relations, Inc
On
July
26, 2006, the Company issued to Rubenstein Investor Relations,
Inc, (the
Company’s IR firm), a warrant to purchase 100,000 shares of the Company’s common
stock at $1.85 per share. The warrants are exercisable, in whole
or in part
through September 13, 2010.
(c)
Acquisition of Cheng Feng
On
July
7, 2006 the Company entered into a Stock Transfer Agreement relating
to the
acquisition of 100 percent of the equity of Shanghai Cheng Feng
Digital
Technology Co., Ltd. (“Cheng Feng”). The acquisition was financed with proceeds
from the Company’s private placement of common stock and was closed upon the
completion of such capital raise.
The
Company agreed to pay consideration of RMB 120 million (approximately
$15
million) in exchange for 100% ownership of Cheng Feng, consisting
of RMB 60
million (approximately $7.5 million) in cash and RMB 60 million
(approximately
$7.5 million) in restricted stock of the Company. RMB 2 million
(approximately
$0.25 million) of the purchase price was paid as a deposit on May
18, 2006. An
additional amount of RMB 18 million (approximately $2.25 million)
was paid
during the month of August, 2006. The balance of the cash portion
of the
purchase price, RMB 40 million (approximately $5 million), is due
upon receipt
of the approval of the stock transfer by the Shanghai Industry
& Commerce
Bureau. The number of shares issuable in satisfaction of the equity
portion of
the purchase price is 1,331,376. The shares must be issued within
90 days
following the receipt of the acquisition approval from the Shanghai
Industry
& Commerce Bureau.
F-12
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE YEARS ENDED
DECEMBER
31, 2005, 2004 AND 2003
F-13
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Shareholders
China
Security & Surveillance Technology, Inc.
We
have
audited the accompanying consolidated balance sheet of China Security
&
Surveillance Technology, Inc. and subsidiaries as of December 31,
2005 and the
related consolidated statements of income and comprehensive income,
changes in
shareholders' equity and cash flows for the year then ended. These
financial
statements are the responsibility of the Company's management.
Our
responsibility is to express an opinion on these financial statements
based on
our audit.
We
conducted our audit in accordance with the standards of the Public
Company
Accounting Oversight Board (United States). Those standards require
that we plan
and perform the audit to obtain reasonable assurance about whether
the financial
statements are free of material misstatement. An audit includes
examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial
statements. An audit also includes assessing the accounting principles
used and
significant estimates made by management, as well as evaluating
the overall
financial statement presentation. We believe that our audit provides
a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above
present fairly,
in all material respects, the financial position of China Security
&
Surveillance Technology, Inc. and subsidiaries as of December 31,
2005, and the
results of their operations and their cash flows for the year then
ended in
conformity with accounting principles generally accepted in the
United States of
America.
GHP
Horwath, P.C.
Denver,
Colorado
May
25,
2006
F-14
Child,
Van Wagoner & Bradshaw, PLLC
A
Professional Limited Liability Company of CERTIFIED PUBLIC
ACCOUNTANTS
| 5296 S. Commerce Dr., Suite 300, Salt Lake City, UT 84107 |
|
PHONE:
(801) 281-4700 FAX: (801)
281-4701
|
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
The
Board of Directors and Stockholders
China
Security & Surveillance Technology, Inc.
We
have
audited the accompanying consolidated balance sheet of Golden Group
Corporation
(Shenzhen) Ltd. (predecessor to China Security & Surveillance Technology,
Inc.) as of December 31, 2004, and the related statements of income
and
comprehensive income, changes in shareholders’ equity and cash flows for the
years ended December 31, 2004 and 2003. These financial statements
are the
responsibility of the Company's management. Our responsibility
is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public
Company
Accounting Oversight Board (United States of America). Those standards
require
that we plan and perform the audits to obtain reasonable assurance
about whether
the financial statements are free of material misstatement. The
Company was not
required to have, nor were we engaged to perform, an audit of its
internal
control over financial reporting. Our audits included consideration
of internal
control over financial reporting, as a basis for designing audit
procedures that
are appropriate in the circumstances, but not for the purpose of
expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes
examining,
on a test basis, evidence supporting the amounts and disclosures
in the
financial statements. An audit also includes assessing the accounting
principles
used and significant estimates made by management, as well as evaluating
the
overall financial statement presentation. We believe that our audits
provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly,
in all
material respects, the financial position of Golden Group Corporation
(Shenzhen)
Ltd. (predecessor to China Security & Surveillance Technology, Inc.) as of
December 31, 2004, and the results of its operations and its cash
flows for the
years ended December 31, 2004 and 2003, in conformity with accounting
principles
generally accepted in the United States of America.
Child,
Van Wagoner & Bradshaw, PLLC
Salt
Lake
City, Utah
September
1, 2005
F-15
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS AS OF DECEMBER 31, 2005 AND 2004
Expressed
in US dollars
|
ASSETS
|
|||||||
|
December
31,
2005
|
December
31,
2004
|
||||||
|
CURRENT
ASSETS
|
|||||||
|
Cash
and cash equivalents
|
$
|
2,276,915
|
$
|
33,298
|
|||
|
Accounts
receivable, net
|
11,642,823
|
4,306,774
|
|||||
|
Related
party receivables
|
3,783,198
|
—
|
|||||
|
Inventories,
net
|
5,311,293
|
6,012,019
|
|||||
|
Advances
to suppliers
|
1,492,512
|
3,272,371
|
|||||
|
Other
receivables
|
415,455
|
78,513
|
|||||
|
Deferred
tax assets - current portion
|
129,712
|
—
|
|||||
|
Total
current assets
|
25,051,908
|
13,702,975
|
|||||
|
Plant
and equipment, net
|
1,951,566
|
2,006,318
|
|||||
|
Land
use rights, net
|
1,142,182
|
1,140,797
|
|||||
|
Intangible
assets
|
511,127
|
—
|
|||||
|
Related
parties receivables
|
—
|
4,152,024
|
|||||
|
Due
from directors
|
—
|
1,006,806
|
|||||
|
Deferred
tax assets - non-current portion
|
459,889
|
||||||
|
TOTAL
ASSETS
|
$
|
29,116,672
|
$
|
22,008,920
|
|||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|||||||
|
CURRENT
LIABILITIES
|
|||||||
|
Accounts
payable and accruals
|
$
|
1,839,609
|
$
|
4,779,187
|
|||
|
Taxes
payable
|
1,115,356
|
415,231
|
|||||
|
Payable
for acquisition of business
|
592,846
|
—
|
|||||
|
Deferred
income
|
887,469
|
—
|
|||||
|
Due
to director
|
69,646
|
13,946
|
|||||
|
Total
liabilities (all current)
|
4,504,926
|
5,208,364
|
|||||
|
SHAREHOLDERS’
EQUITY
|
|||||||
|
Common
stock, $0.01 par value; 100,000,000 shares authorized
21,558,000 (2005)
and 17,000,000 (2004) shares issued and outstanding
|
215,580
|
170,000
|
|||||
|
Additional
paid-in capital
|
4,494,565
|
4,540,145
|
|||||
|
Retained
earnings
|
18,552,610
|
12,090,411
|
|||||
|
Reserve
|
803,758
|
—
|
|||||
|
Accumulated
other comprehensive income
|
545,233
|
—
|
|||||
|
Total
shareholders’ equity
|
24,611,746
|
16,800,556
|
|||||
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$
|
29,116,672
|
$
|
22,008,920
|
|||
See
accompanying notes to the consolidated financial statements.
F-16
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR
THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
Expressed
in US dollars
|
2005
|
2004
|
2003
|
||||||||
|
Revenues
|
$
|
32,688,582
|
$
|
16,055,704
|
$
|
11,794,869
|
||||
|
Cost
of goods sold
|
23,473,009
|
8,796,374
|
7,580,845
|
|||||||
|
Gross
profit
|
9,215,573
|
7,259,330
|
4,214,024
|
|||||||
|
Selling
and marketing
|
287,980
|
391,238
|
499,578
|
|||||||
|
Advertising
|
6,553
|
5,871
|
-
|
|||||||
|
General
and administrative
|
1,182,531
|
506,813
|
317,504
|
|||||||
|
Depreciation
and amortization
|
259,667
|
224,629
|
134,885
|
|||||||
|
Income
from operations
|
7,478,842
|
6,130,779
|
3,262,057
|
|||||||
|
Rental
income from related parties
|
438,516
|
478,261
|
||||||||
|
Other
income (expense), net
|
129,090
|
(11,610
|
)
|
6,818
|
||||||
|
Income
before income taxes
|
8,046,448
|
6,597,430
|
3,268,875
|
|||||||
|
Income
taxes
|
780,491
|
873,404
|
516,752
|
|||||||
|
Net
income
|
7,265,957
|
5,724,026
|
2,752,123
|
|||||||
|
Foreign
currency translation gain
|
545,233
|
—
|
—
|
|||||||
|
COMPREHENSIVE
INCOME
|
$
|
7,811,190
|
$
|
5,724,026
|
$
|
2,752,123
|
||||
|
NET
INCOME PER SHARE
|
||||||||||
|
BASIC
AND DILUTED
|
$
|
0.39
|
$
|
0.34
|
$
|
0.16
|
||||
|
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING
|
||||||||||
|
BASIC
AND DILUTED
|
18,521,479
|
17,000,000
|
17,000,000
|
|||||||
See
accompanying notes to the consolidated financial
statements.
F-17
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
Expressed
in US dollars
|
Common
Stock
|
||||||||||||||||||||||
|
Shares
|
Par
Value
|
Additional
Paid-in Capital
|
Retained
Earnings
|
Accumulated
Other
Comprehensive Income
|
Statutory
surplus
reserve fund
|
Total
|
||||||||||||||||
|
BALANCE
AT JANUARY 1, 2003
|
17,000,000
|
$
|
170,000
|
$
|
4,540,145
|
3,614,262
|
$
|
—
|
—
|
$
|
8,324,407
|
|||||||||||
|
Net
income for the year
|
—
|
—
|
—
|
2,752,123
|
—
|
—
|
2,752,123
|
|||||||||||||||
|
BALANCE
AT DECEMBER 31, 2003
|
17,000,000
|
170,000
|
4,540,145
|
6,366,385
|
—
|
—
|
11,076,530
|
|||||||||||||||
|
Net
income for the year
|
—
|
—
|
—
|
5,724,026
|
—
|
—
|
5,724,026
|
|||||||||||||||
|
BALANCE
AT DECEMBER 31, 2004
|
17,000,000
|
170,000
|
4,540,145
|
12,090,411
|
—
|
—
|
16,800,556
|
|||||||||||||||
|
Common
stock issued for consulting services
|
1,420,000
|
14,200
|
(14,200
|
)
|
—
|
—
|
—
|
—
|
||||||||||||||
|
Common
shares issued to previous
|
||||||||||||||||||||||
|
Apex
shareholders (Note 1)
|
3,138,000
|
31,380
|
(31,380
|
)
|
—
|
—
|
—
|
—
|
||||||||||||||
|
Foreign
currency translation
|
—
|
—
|
—
|
—
|
545,233
|
545,233
|
||||||||||||||||
|
Net
income for the year
|
—
|
—
|
—
|
7,265,957
|
—
|
—
|
7,265,957
|
|||||||||||||||
|
Transfer
|
—
|
—
|
—
|
(803,758
|
)
|
—
|
803,758
|
—
|
||||||||||||||
|
BALANCE
AT DECEMBER 31, 2005
|
21,558,000
|
$
|
215,580
|
$
|
4,494,565
|
$
|
18,552,610
|
$
|
545,233
|
803,758
|
$
|
24,611,746
|
||||||||||
See
accompanying notes to the consolidated financial
statements.
F-18
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR
THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
Expressed
in US dollars
|
2005
|
2004
|
2003
|
||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||
|
Net
income
|
$
|
7,265,957
|
$
|
5,724,026
|
$
|
2,752,123
|
||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||
|
Depreciation
and amortization
|
259,667
|
224,629
|
134,885
|
|||||||
|
Allowance
for doubtful accounts
|
—
|
239,448
|
—
|
|||||||
|
Deferred
taxes
|
(589,601
|
)
|
—
|
—
|
||||||
|
Changes
in operating assets and liabilities:
|
||||||||||
|
(Increase)
decrease in:
|
||||||||||
|
Accounts
receivable
|
(7,269,715
|
)
|
526,337
|
(1,628,701
|
)
|
|||||
|
Related
party receivables
|
368,826
|
(887,926
|
)
|
(703,030
|
)
|
|||||
|
Other
receivable
|
(336,942
|
)
|
(78,513
|
)
|
-
|
|||||
|
Inventories
|
770,871
|
(4,537,036
|
)
|
(115,912
|
)
|
|||||
|
Advances
to suppliers
|
1,779,859
|
114,356
|
(1,134,890
|
)
|
||||||
|
(Decrease)
increase in:
|
||||||||||
|
Accounts
payable and accruals
|
(3,630,214
|
)
|
(392,743
|
)
|
1,138,809
|
|||||
|
Payable
for acquisition of business
|
592,846
|
—
|
—
|
|||||||
|
Deferred
income
|
887,469
|
—
|
—
|
|||||||
|
Customer
deposits
|
—
|
(540,749
|
)
|
540,749
|
||||||
|
Tax
payable
|
700,125
|
292,032
|
35,137
|
|||||||
|
Net
cash provided by operating activities
|
799,148
|
683,861
|
1,019,170
|
|||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||
|
Construction
in progress
|
-
|
-
|
(676,387
|
)
|
||||||
|
Additions
to fixed assets
|
(48,898
|
)
|
(110,527
|
)
|
—
|
|||||
|
Net
cash outflow on acquisition of net assets of Yuan Da
Wei Shi Technology
Limited (net of cash acquired)
|
(30,231
|
)
|
—
|
—
|
||||||
|
Net
cash used in investing activities
|
(79,129
|
)
|
(110,527
|
)
|
(676,387
|
)
|
||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||
|
Cash
received from (advanced to) directors
|
1,062,506
|
(1,055,891
|
)
|
72,149
|
||||||
|
Net
cash provided by (used in) financing activities
|
1,062,506
|
(1,055,891
|
)
|
72,149
|
||||||
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
1,782,525
|
(482,557
|
)
|
414,932
|
||||||
|
Effect
of exchange rate changes on cash
|
461,092
|
—
|
—
|
|||||||
|
Cash
and cash equivalents, at beginning of year
|
33,298
|
515,855
|
100,923
|
|||||||
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
$
|
2,276,915
|
$
|
33,298
|
$
|
515,855
|
||||
|
SUPPLEMENTARY
CASH FLOW INFORMATION
|
||||||||||
|
Income
taxes paid
|
$
|
1,403,551
|
$
|
620,849
|
$
|
438,151
|
||||
See
accompanying notes to the consolidated financial
statements.
F-19
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR
THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
Expressed
in US dollars
Supplemental
Schedule of Non cash Investing and Financing Activities
| (a) |
The
Company purchased net assets of Yuan Da Wei Shi Technology
Limited for
$630,021 as detailed in note 3. In conjunction with the
acquisition,
liabilities were assumed as follows:-
|
|
Fair
value of net assets acquired
|
$
|
630,021
|
||
|
Cash
paid
|
37,175
|
|||
|
Amount
owed at December 31, 2005
|
$
|
592,846
|
||
| (b) |
1,420,000
shares of common stock were issued to consultants for services
provided to
the Company during 2005 in connection with the acquisition
of Safetech by
Apex (Note 1).
|
See
accompanying notes to the consolidated financial
statements.
F-20
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2005, 2004 AND 2003
Expressed
in US dollars
1. ORGANIZATION
AND PRINCIPAL ACTIVITIES
Apex
Wealth Enterprises Limited (“Apex” or the “Company”) was incorporated in the
British Virgin Islands in April 2002 with an authorized capital of
$50,000
divided into 50,000 shares of common stock at $1 par value and operated
as a
corporation under the International Business Companies Ordinance
of 1984. On
August 1, 2002, the authorized capital was subdivided into 500,000
shares of
common stock at $0.01 par value. On May 12, 2003, the authorized
capital was
increased to $1,000,000, which was divided into 100,000,000 shares
of common
stock at $0.01 par value. Apex was a development stage company whose
significant
activities consist of organization, the registering and offering
of shares, and
forming a subsidiary company in the People’s Republic of China (“PRC” or
“China”) to apply for a consultancy license, and business development.
On
July
23, 2005, Apex executed a Stock Purchase Agreement and an Agreement
for Share
Exchange. Both agreements closed on September 12, 2005. Under the
Stock Purchase
Agreement, Whitehorse Technology Ltd. (“Whitehorse”), purchased a total of
8,862,000 shares, or approximately 66.04% of the issued and outstanding
common
stock of Apex, from First Asia International Holdings Ltd. Whitehorse
is the
largest shareholder of China Safetech Holdings Limited (“Safetech”), a British
Virgin Islands corporation. Safetech is the investment holding vehicle
of the
entire equity interest of Golden Group Corporation (Shenzhen) Ltd.
(“Golden”).
Golden is a corporation in the PRC engaged in the business of the
manufacturing
and distribution of security and surveillance systems, which integrates
development, manufacturing, marketing, and maintenance of digital
video
surveillance and network communication together.
Simultaneously
with the closing under the Stock Purchase Agreement, Apex issued
a total of
8,138,000 shares of its common stock to the shareholders of Safetech
under the
Agreement for Share Exchange. Through the share exchange, Apex acquired
50,000
shares of the issued and outstanding stock of Safetech, which constituted
100%
of its issued and outstanding stock from the individual shareholders
of
Safetech. As a result of the transaction, Safetech and Golden became
wholly-owned subsidiaries of Apex.
The
acquisition of Safetech by Apex has been recorded as a reverse acquisition
based
on factors demonstrating that Safetech represents the accounting
acquirer. The
shareholders of Safetech received 17,000,000 shares (or approximately
78.86%) of
the post-acquisition common stock of Apex. In addition, post-acquisition
management personnel and the board members of the Company now consist
of
individuals previously holding position with Safetech. The historical
shareholders’ equity of Safetech prior to the exchange has been retroactively
restated (a recapitalization) for the equivalent number of shares
received in
the exchange after giving effect to any differences in the par value
of the Apex
and Safetech common stock, with an offset to additional paid-in capital.
The
restated consolidated retained earnings of the accounting acquirer
(Safetech)
have been carried forward after the exchange.
On
February 8, 2006, Apex changed its name to China Security and Surveillance
Technology Inc. (“CSST” or the “Company”). The Company’s board of directors
authorized changing its fiscal year from that used in its most recent
filing.
The new fiscal year will be December 31, and the Company is filing
an annual
report on Form 20-F for the year ended December 31, 2005.
F-21
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2005, 2004 AND 2003
Expressed
in US dollars
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
| (a) |
Basis
of Consolidation
|
The
consolidated financial statements of the Company and its subsidiaries
are
prepared in accordance with accounting principles generally accepted
in the
United States of America and include the accounts of the Company
and its
subsidiaries. All material inter-company accounts and transactions
have been
eliminated in consolidation.
| (b) |
Economic
and Political Risks
|
The
Company’s operations are conducted in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced
by the
political, economic and legal environment in the PRC, and by the
general state
of the PRC economy.
The
Company’s operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North
America and
Western Europe. These include risks associated with, among others,
the
political, economic and legal environment and foreign currency exchange.
The
Company’s results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies
with
respect to laws and regulations, anti-inflationary measures, currency
conversion, remittances abroad, and rates and methods of taxation.
| (c) |
Plant
and Equipment
|
Plant
and
equipment are carried at cost less accumulated depreciation. Depreciation
is
provided over the assets’ estimated useful lives, using the straight-line
method. Estimated useful lives of the plant and equipment are as
follows:
|
Building
|
20
years
|
|
Leasehold
improvement
|
10
years
|
|
Plant
and equipment
|
5
years
|
|
Electronics
equipment
|
5
years
|
|
Motor
Vehicle
|
5
years
|
The
cost
and related accumulated depreciation of assets sold or otherwise
retired are
eliminated from the accounts and any gain or loss is included in
the statement
of income. The cost of maintenance and repairs is charged to the
statement of
income as incurred, whereas significant renewals and betterments
are
capitalized.
F-22
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2005, 2004 AND 2003
Expressed
in US dollars
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
| (d) |
Intangible
Assets
|
Intangible
assets represent a surveillance recording system acquired from Yuan
Da Wei Shi
Technology Limited (see note 3). The value was established by an
independent
accounting firm. The value of the recording system is to be amortized
using the
straight-line method over its estimated useful life of five years.
| (e) |
Accounting
for the Impairment of Long-Lived
Assets
|
The
long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of
assets may not be recoverable. It is reasonably possible that these
assets could
become impaired as a result of technology or other industry changes.
Determination of recoverability of assets to be held and used is
by comparing
the carrying amount of an asset to future net undiscounted cash flows
to be
generated by the assets. If such assets are considered to be impaired,
the
impairment to be recognized is measured by the amount by which the
carrying
amount of the assets exceeds the fair value of the assets. Assets
to be disposed
of are reported at the lower of the carrying amount or fair value
less costs to
sell.
There
were no impairments of long-lived assets as of December 31, 2005
and
2004.
| (f) |
Deferred
Income
|
Deferred
income represents amount billed for contracts for supply and installation
of
security and surveillance equipment which have not been fully completed
at the
balance sheet date in accordance with accounting policy note 2(m).
| (g) |
Inventories
|
Inventories
are stated at the lower of cost, determined on a weighted average
basis, and net
realizable value. Net realizable value is the estimated selling price
in the
ordinary course of business less the estimated cost of completion
and the
estimated costs necessary to make the sale.
When
inventories are sold, their carrying amount is charged to expense
in the year in
which the revenue is recognized. Write-downs for declines in net
realizable
value or for losses of inventories are recognized as an expense in
the year the
impairment or loss occurs. Declines in net realizable value of inventory
for the
years ended December 31, 2005, 2004 and 2003 amounted to $0, $41,984
and
$0.
In
2005,
approximately 50% of total inventory purchases were from 3
suppliers.
F-23
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2005, 2004 AND 2003
Expressed
in US dollars
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
| (h) |
Accounts
Receivable
|
Trade
receivables are recognized and carried at the original invoice amount
less
allowance for any uncollectible amounts. An estimate for doubtful
accounts is
made when collection of the full amount is no longer probable. Bad
debts are
written off as incurred.
| (i) |
Cash
and Cash Equivalents
|
The
Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
| (j) |
Advances
to Suppliers
|
Advances
to suppliers represent the cash paid in advance for purchasing of
inventory
items from suppliers.
| (k) |
Land
Use Rights
|
According
to the laws of China, the government owns all the land in China.
Companies or
individuals are authorized to possess and use the land only through
land use
rights granted by the Chinese government. Land use rights are being
amortized
using the straight-line method over the lease term of the rights.
The
Company paid in advance for the lease of three parcels of land for
48 to 50 year
time periods, consisting of approximately $1,361,467. The lease periods
began in
1997 and expire during 2045 and 2047. The amount is being amortized
and recorded
as expense over the 48-50 year terms of the leases. The Company adopted
the
provisions of SFAS No. 142, Goodwill and Other Intangible Assets
(SFAS 142),
effective January 1, 2002. Under SFAS 142, finite lived intangible
assets are
amortized over their lives, and are reviewed annually for impairment,
or more
frequently, if indications of possible impairment exist. The Company
has
performed the requisite annual transitional impairment tests on intangible
assets and determined that no impairment adjustments were
necessary.
| (l) |
Fair
Value of Financial Instruments
|
The
Company’s financial instruments include cash and cash equivalents, accounts
receivable, related party receivables and payables, advances to suppliers,
other
receivables, taxes payable and accounts payable. Management has estimated
that
the carrying amount approximates their fair value due to their short-term
nature. The fair value of the related party receivables and amounts
due to
(from) directors is not practicable to estimate due to the related
party nature
of the underlining transactions.
F-24
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2005, 2004 AND 2003
Expressed
in US dollars
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
| (m) |
Revenue
Recognition
|
The
Company derives the bulk of its revenue from the supply and installation
of
security and surveillance equipment and the two deliverables do not
meet the
separation criteria under EITF issue 00-21. The installation is not
considered
to be essential to the functionality of the equipment having regard
to the
following criteria as set out in SAB 104:
| (i) |
The
security and surveillance equipment is a standard product
with minor
modifications according to customers’
specifications;
|
| (ii) |
Installation
does not significantly alter the security and surveillance
equipment’s
capabilities; and
|
| (iii) |
Other
companies which possess the relevant licenses are available
to perform the
installation services.
|
Accordingly,
the portion of the contract price which is not payable until the
installation
service is completed is deferred until the completion of the installation
service and the balance of the contract piece is recognized as revenue
upon
delivery and acceptance of the security and surveillance equipment
by the
customers.
Revenue
from the outright sale of security and surveillance equipment is
recognized when
delivery occurs and risk of ownership passes to the customers.
| (n) |
Advertising
Costs
|
The
Company expenses advertising costs as incurred or the first time
advertising
takes place.
| (o) |
Foreign
Currency Translation
|
The
functional currency of the Company is Renminbi (RMB) and the RMB
is not freely
convertible into foreign currencies. The Company maintains its financial
statements in the functional currency. Monetary assets and liabilities
denominated in currencies other than the functional currency are
translated into
the functional currency at rates of exchange prevailing at the balance
sheet
date. Transactions denominated in currencies other than the functional
currency
are translated into the functional currency at the exchange rates
prevailing at
the dates of the transactions. Exchange gains or losses arising from
foreign
currency transactions are included in the determination of net income
for the
respective periods.
F-25
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2005, 2004 AND 2003
Expressed
in US dollars
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
| (o) |
Foreign
Currency Translation (continued)
|
For
financial reporting purposes, the financial statements of the Company
which are
prepared using the functional currency have been translated into
United States
dollars. Assets and liabilities are translated at exchange rates
at the balance
sheet dates and revenue and expenses are translated at the average
exchange
rates and shareholders’ equity is translated at historical exchange rates. Any
translation adjustments resulting are not included in determining
net income but
are included in foreign exchange adjustment to other comprehensive
income, a
component of shareholders’ equity. The exchange rates adopted are as
follows:-
|
2005
|
2004
|
2003
|
||||||||
|
Year
end RMB
: exchange rate
|
8.07
|
8.28
|
8.28
|
|||||||
|
Average
yearly RMB
: exchange rate
|
8.19
|
8.28
|
8.28
|
|||||||
No
representation is made that
the RMB
amounts could have been, or could be, converted into U.S. dollars
at the rates
used in translation
| (p) |
Retirement
Benefits
|
Retirement
benefits in the form of contributions under defined contribution
retirement
plans to the relevant authorities are charged to the consolidated
statements of
income as incurred. The retirement benefit expenses for 2005, 2004
and 2003 were
$34,560, $30,651 and $36,923, respectively and are included in general
and
administrative expenses.
| (q) |
Use
of Estimates
|
The
preparation of the financial statements in conformity with generally
accepted
accounting principles in the United States of America requires management
to
make estimates and assumptions that affect the reported amounts of
assets and
liabilities and disclosure of contingent assets and liabilities at
the date of
the financial statements and the reported amounts of revenues and
expenses
during the reporting periods. Management makes these estimates using
the best
information available at the time the estimates are made; however
actual results
could differ materially from those estimates.
| (r) |
Income
Taxes
|
Income
tax expense is based on reported income before income taxes. Deferred
income
taxes reflect the effect of temporary differences between assets
and liabilities
that are recognized for financial reporting purposes and the amounts
that are
recognized for income tax purposes. In accordance with Statement
of Financial
Accounting Standard (SFAS) No. 109, "Accounting for Income Taxes,"
these
deferred taxes are measured by applying currently enacted tax
laws.
F-26
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2005, 2004 AND 2003
Expressed
in US dollars
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
| (s) |
Earnings
Per Share
|
Basic
earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding
during
the period. There were no outstanding dilutive securities during
2005, 2004 and
2003.
| (t) |
Reclassifications
|
Certain
amounts reported in the 2004 and 2003 financial statements have been
reclassified to conform to the 2005 presentation.
| (u) |
Recent
Accounting Pronouncements
|
In
December 2004, the FASB issued FAS No. 123(R), “Share-Based Payment,” (FAS 123
(R)). FAS 123(R) requires employee stock options and rights to purchase
shares
under stock participation plans to be accounted for under the fair-value
method,
and eliminates the ability to account for these instruments under
the
intrinsic-value method prescribed by APB Opinion No. 25, which was
allowed under
the original provisions of FAS 123. FAS 123(R) requires the use of
an
option-pricing model for estimating fair value, which is amortized
to expenses
over the requisite periods. The requirements of FAS 123(R) were effective
for
interim periods beginning after June 15, 2005. The Securities and
Exchange
Commission (SEC) has postponed the effective date of FAS 123(R),
giving
companies more time to develop their implementation strategies. Under
the SEC’s
rule, FAS 123(R) is now effective for public companies for annual,
rather than
interim, periods that begin after June 15, 2005. We adopted this
new standard on
January 1, 2006, using the modified prospective method and the Black-Scholes
valuation model. Because the Company had not recorded any compensation
cost in
its Statement of income and comprehensive income prior to the adoption
of FAS
123(R), no cumulative effect adjustment was recorded upon adoption.
Our adoption
of FAS 123(R) may have a material impact on future net income and
net income per
share.
In
May
2005, the FASB issued FAS No. 154, "Accounting Changes and Error
Corrections"
(FAS 154), a replacement of Accounting Principles Board ("APB") Opinion
No. 20
and FAS No. 3. FAS 154 changes the requirement for the accounting
for and
reporting of a change in accounting principles. FAS 154 apply to
all voluntary
changes in accounting principles. It also applies to changes required
by an
accounting pronouncement if the pronouncement does not include specific
transition provisions. When a pronouncement includes specific transition
provisions, those provisions should be followed. The provisions of
FAS 154 will
be effective for accounting changes made in fiscal years beginning
after
December 15, 2005. It is not expected that FAS 154 will have a material
effect
on our financial position or results of operations.
F-27
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2005, 2004 AND 2003
Expressed
in US dollars
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
| (u) |
Recent
Accounting Pronouncements
(continued)
|
In
March
2005, the FASB issued Interpretation No. 47 (FIN 47), “Accounting for
Conditional Asset Retirement Obligations, an Interpretation of FASB
Statement
No. 143, “Accounting for Asset Retirement Obligations.” FIN 47 generally applies
to long-lived assets and requires a liability to be recognized for
a conditional
asset retirement obligation if the fair value of that liability can
be
reasonably estimated. A conditional asset retirement obligation is
defined as a
legal obligation to perform an activity associated with an asset
retirement in
which the timing and/or method of settlement are conditional on a
future event
that may or may not occur or be within the control of the company.
A liability
should be recognized when incurred (based on its fair value at that
date), which
generally would be upon the acquisition or construction of the related
asset.
Upon recognition, the offset to the liability would be capitalized
as part of
the cost of the asset and depreciated over the estimated useful life
of that
asset. FIN 47 is effective no later than December 31, 2005. We adopted
FIN 47 in
the fourth quarter of 2005 without material effect on our financial
position or
results of operations.
In
September 2005, the Emerging Issues Task Force (EITF) ratified EITF
04-13 (EITF
04-13), "Accounting for Purchases and Sales of Inventory with the
Same
Counterparty." This issue addresses the circumstances under which
two or more
inventory purchase and sales transactions with the same counterparty
should be
viewed as a single exchange transaction and whether there are circumstances
under which such non-monetary exchanges should be accounted for at
fair
value. The adoption of EITF 04-13 is effective for new or modified
agreements for fiscal periods beginning after March 15, 2006. It
is not expected
that the adoption of EITF 04-13 will have a material effect on our
financial
position or results of operations.
In
November 2005, FASB Staff Position (FSP) 115-1 “The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments” was
issued. The FSP addresses the determination as to when an investment
is
considered impaired, whether that impairment is other-than-temporary,
and the
measurement of an impairment loss. This FSP also includes accounting
considerations subsequent to the recognition of an other-than-temporary
impairment and requires certain disclosures about unrealized losses
that have
not been recognized as other-than-temporary impairments. The guidance
in this
FSP amends FASB Statement No. 115, “Accounting for Certain Investments in Debt
and Equity Securities” and APB Opinion No. 18, “The Equity Method of Accounting
for Investments in Common Stock.” The FSP applies to investments in debt and
equity securities and cost-method investments. The application guidance
within
the FSP includes items to consider in determining whether an investment
is
impaired, in evaluating if an impairment is other-than-temporary
and recognizing
impairment losses equal to the difference between the investment’s cost and its
fair value when an impairment is determined. The FSP is required
for all
reporting periods beginning after December 15, 2005. Earlier application
is
permitted. We do not anticipate the amendment will have a material
effect on our
financial position or results of operations.
F-28
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2005, 2004 AND 2003
Expressed
in US dollars
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
| (u) |
Recent
Accounting Pronouncements
(continued)
|
In
February 2006, the FASB issued FAS No. 155, "Accounting for Certain Hybrid
Financial Instruments." FAS No. 155 amends Financial Accounting Standards
Board
Statements No. 133 and 140. The statement applies to certain hybrid
financial
instruments, which are instruments that contain embedded derivatives.
The new
standard establishes a requirement to evaluate beneficial interests
in
securitized financial assets to determine if the interests represent
freestanding derivatives or are hybrid financial instruments containing
embedded
derivatives requiring bifurcation. This new standard also permits
an election
for fair value re-measurement of any hybrid financial instrument
containing an
embedded derivative that otherwise would require bifurcation under
FASB
Statement No. 133. The fair value election can be applied on an
instrument-by-instrument basis to existing instruments at the date
of adoption
and can be applied to new instruments on a prospective basis. It
is not expected
that FAS 155 will have a material effect on our financial position
or results of
operations.
3. ACQUISITION
OF ASSETS AND ASSUMPTION OF LIABILITIES OF YUAN DA WEI SHI TECHNOLOGY
LIMITED
(“YUAN DA”)
On
October 25, 2005, Golden entered into an agreement (“Acquisition Agreement”)
with the equity owners of Yuan Da to acquire the business effective
December 31,
2005. Yuan Da is a limited liability company established in Shenzhen
and was
principally engaged in the sales and development of security and
surveillance
systems. The purchase price consisted of (i) a cash payment of RMB
1,000,000 and
(ii) the issuance of 200,000 unregistered shares of common stock
of the Company
valued at $500,000 (based upon the average closing market price during
the
twenty days before the date of the agreement.)
The
purchase price is being settled in the following manner:-
| (i) |
A
cash payment of RMB300,000 was paid on December 31,
2005.
|
| (ii) |
The
issuance of 200,000 unregistered shares of common stock
of the Company on
March 10, 2006.
|
| (iii) |
A
payable of RMB700,000 was accrued at December 31, 2005
and is to be paid
in 2006.
|
F-29
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2005, 2004 AND 2003
Expressed
in US dollars
3.
ACQUISITION
OF ASSETS AND ASSUMPTION OF LIABILITIES OF YUAN DA WEI SHI TECHNOLOGY
LIMITED
(“YUAN DA”) (CONTINUED)
On
December 31, 2005, all the assets of Yuan Da were transferred to
Golden. The
total consideration of US$630,021 was allocated as follows:-
|
Total
assets transferred to the Company:
|
||||
|
Cash
on hand and bank balance
|
$
|
6,944
|
||
|
Accounts
receivable
|
43,185
|
|||
|
Other
receivable
|
23,148
|
|||
|
Inventories
|
70,146
|
|||
|
Fixed
assets
|
79,367
|
|||
|
Intangible
assets
|
511,127
|
|||
|
Other
payables
|
(103,896
|
)
|
||
|
$
|
630,021
|
|||
|
Total
cash consideration paid
|
$
|
37,175
|
||
|
Total
payable to Yuan Da:
|
||||
|
To
be paid in cash
|
92,846
|
|||
|
Common
stock issued March 10, 2006
|
500,000
|
|||
|
$
|
630,021
|
|||
4. ACCOUNTS
RECEIVABLE
The
Company provides an allowance for doubtful accounts related to its
receivables.
The receivables and allowance balances at December 31, 2005 and 2004
are as
follows:
|
2005
|
2004
|
||||||
|
Accounts
receivable
|
$
|
11,653,068
|
$
|
4,310,593
|
|||
|
Employee
advances
|
—
|
6,166
|
|||||
|
11,653,068
|
4,316,759
|
||||||
|
Less:
Allowance for doubtful accounts
|
(10,245
|
)
|
(9,985
|
)
|
|||
|
Accounts
receivable, net
|
$
|
11,642,823
|
$
|
4,306,774
|
|||
F-30
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2005, 2004 AND 2003
Expressed
in US dollars
5. INVENTORIES
Inventories
consist of the following as of December 31, 2005 and 2004:
|
2005
|
2004
|
||||||
|
Security
and surveillance equipment
|
$
|
5,354,370
|
$
|
6,054,003
|
|||
|
Less:
Allowance for obsolete inventories
|
(43,077
|
)
|
(41,984
|
)
|
|||
|
Inventories,
net
|
$
|
5,311,293
|
$
|
6,012,019
|
|||
6. DUE
FROM
DIRECTORS
The
Company has made advances to directors, which advances are classified
as due
from directors on the balance sheets. The advances are non-interest
bearing and
are repayable upon demand. Since the advances have no fixed repayment
terms,
they have been classified as non-current assets. The balances due
was $1,006,806
at December 31, 2004, which was repaid during 2005.
7. PLANT
AND
EQUIPMENT
At
December 31, 2005, 2004 and 2003, plant and equipment, at cost, consist
of
|
2005
|
2004
|
||||||
|
Buildings
|
$
|
2,201,867
|
$
|
2,146,023
|
|||
|
Leasehold
improvements
|
693,988
|
676,387
|
|||||
|
Plant
and equipment
|
55,485
|
243,870
|
|||||
|
Electronic
equipment
|
137,285
|
143,820
|
|||||
|
Motor
Vehicle
|
48,899
|
—
|
|||||
|
3,137,524
|
3,210,100
|
||||||
|
Less:
Accumulated depreciation
|
(1,185,958
|
)
|
(1,203,782
|
)
|
|||
|
Plant
and equipment, net
|
$
|
1,951,566
|
$
|
2,006,318
|
|||
Depreciation
expense for the years ended December 31, 2005, 2004 and 2003 were
$231,780 and
$197,045 and $107,302 respectively.
F-31
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2005, 2004 AND 2003
Expressed
in US dollars
8. LAND
USE
RIGHTS
Land
use
rights consisted of the following as of December 31, 2005 and 2004
|
2005
|
2004
|
||||||
|
Cost
of land use rights
|
$
|
1,396,896
|
$
|
1,361,467
|
|||
|
Less:
Accumulated amortization
|
(254,714
|
)
|
(220,670
|
)
|
|||
|
Land
use rights, net
|
$
|
1,142,182
|
$
|
1,140,797
|
|||
Amortization
expense for the years ended December 31, 2005, 2004 and 2003 were
$27,887 and
$27,584 and $27,583 respectively.
Amortization
expense for the next five years and thereafter is as follows:
|
2006
|
27,887
|
|||
|
2007
|
27,887
|
|||
|
2008
|
27,887
|
|||
|
2009
|
27,887
|
|||
|
2010
|
27,887
|
|||
|
Thereafter
|
1,002,747
|
|||
|
Total
|
$
|
1,142,182
|
9. INTANGIBLE
ASSETS
|
2005
|
2004
|
||||||
|
Intangible
assets
|
$
|
511,127
|
$
|
—
|
|||
The
Company’s intangible assets represent the value determined by an independent
accounting firm for the intellectual property pertaining to a surveillance
recording system developed by Yuan Da which was acquired by the Company
on
December 31, 2005, thus there was no amortization for the year ended
December
31, 2005.
F-32
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2005, 2004 AND 2003
Expressed
in US dollars
10. RELATED
PARTY RECEIVABLES
The
Company has receivables from several companies whose directors and
shareholders
are common with the Company. All receivables arise from advances
made prior to
the date of the reverse merger of September 22, 2005 as detailed
in note1 and
from the rental of landed properties. The receivables are classified
as related
party receivables on the balance sheets. Since these receivables
have no fixed
repayment terms as of December 31, 2004, they have been classified
as
non-current assets as at this date. These receivables as at December
31, 2005
are to be repaid by June 30, 2006 pursuant to the agreements between
the Company
and these related parties. Accordingly, they have been classified
as current
assets as at that date. The balances as of December 31, 2005 and
2004 are as
follows:
|
2005
|
2004
|
||||||
|
Related
party receivables
|
$
|
4,018,632
|
$
|
4,381,487
|
|||
|
Allowance
for doubtful debts
|
(235,434
|
)
|
(229,463
|
)
|
|||
|
Related
party receivables, net
|
$
|
3,783,198
|
$
|
4,152,024
|
|||
On
January of 2006, the Company entered into Agreements of Repayment
with the
related parties. Pursuant to the agreements, the related parties
are to repay
the outstanding amounts to the Company by June 30, 2006.
The
Company has leased offices to three related parties since January
1, 2004. The
leases expire on December 31, 2007 and annual rental income for all
periods is
RMB3,960,000. Rental income was US$438,516 and US$478,261 in 2005
and 2004,
respectively. The rental income from the related parties was included
in other
income.
11. DUE
TO DIRECTOR
The
Company has received advances from a director. The advances are non-interest
bearing and are repayable upon demand. The balances due to the director
were
$69,646 and $13,946 at December 31, 2005 and 2004 respectively.
12. INCOME
TAXES
| (a) |
Corporation
Income Tax (“CIT”)
|
In
accordance with the relevant tax laws and regulations of the PRC
for the
Shenzhen Special Economic Zone, the corporate income tax rate is
15% for the
Company for the years ended December 31, 2005, 2004 and 2003 and
future
years.
The
Company’s tax expense differs from the “expected” tax expense for the years
ended December 31, 2005, 2004 and 2003 (computed by applying the
CIT rate of 15%
to income before income tax of the Company):
F-33
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2005, 2004 AND 2003
Expressed
in US dollars
12. INCOME TAXES (CONTINUED)
| (a) |
Corporation
Income Tax (“CIT”) (Continued)
|
|
2005
|
2004
|
2003
|
||||||||
|
Computed
“expected” expense
|
$
|
1,206,967
|
$
|
989,614
|
$
|
490,331
|
||||
|
Temporary
differences
|
(589,601
|
)
|
—
|
—
|
||||||
|
Others
|
163,125
|
(116,210
|
)
|
26,421
|
||||||
|
Income
tax expense
|
$
|
780,491
|
$
|
873,404
|
$
|
516,752
|
||||
The
provisions for income taxes for each of the three years ended December
31, 2005,
2004, and 2003 are summarized as follows:
|
2005
|
2004
|
2003
|
||||||||
|
Current
|
$
|
1,370,092
|
$
|
873,404
|
$
|
516,752
|
||||
|
Deferred
|
(589,601
|
)
|
—
|
—
|
||||||
|
$
|
780,491
|
$
|
873,404
|
$
|
516,752
|
|||||
The
tax
effects of temporary differences that give rise to the Company's
net deferred
tax assets as of December 31, 2005 are as follows:
|
2005
|
||||
|
Deferred
income tax assets:
|
||||
|
Deferred
income
|
$
|
133,120
|
||
|
Depreciation
|
473,760
|
|||
|
Deferred
income tax liability:
|
||||
|
Allowance
for doubtful accounts
|
(17,279
|
)
|
||
|
Net
deferred tax assets
|
$
|
589,601
|
||
|
Current
portion
|
129,712
|
|||
|
Non-current
portion
|
459,889
|
|||
|
$
|
589,601
|
|||
| (b) |
Value
Added Tax (“VAT”)
|
In
accordance with the relevant taxation laws in the PRC, the VAT rate
for domestic
sales is 4%, which is levied on the invoiced value of sales and is
payable by
the purchaser. The Company is required to remit the VAT it collects
to the tax
authority. The VAT payable balance was $63,382 and $0 at December
31, 2005 and
2004.
F-34
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2005, 2004 AND 2003
Expressed
in US dollars
13. ADVANCE
PAYMENTS
The
Company has made payments to unrelated suppliers in advance of receiving
merchandise. The advance payments are meant to ensure preferential
pricing and
delivery. The amounts advanced under such arrangements totaled $1,492,512
and
$3,272,371 as of December 31, 2005 and 2004, respectively.
14. DEFERRED
INCOME
Deferred
income balances as of December 31, 2005 and 2004 were $887,469 and
nil,
respectively, and represented amount invoiced but deferred as revenue
in
accordance with the accounting policy in note 2(m).
15. COMMITMENTS
AND CONTINGENCIES
(a) Leases
During
2005 and 2004, the Company’s branches leased offices in various cities in the
PRC. The lease agreements expire on various dates through October
15, 2007. Rent
expense for the years ended December 31, 2005 and 2004 was approximately
$53,000
and $22,000, respectively.
Future
minimum lease payments for these office leases for the years ending
December 31,
2006 and 2007 amount to $37,000 and $13,000, respectively.
(b) Warranty commitments
The
Company issues a one to three year warranty with the sales of its
surveillance
and security systems. The warranty covers labor costs only. Management
believes
that the amount of future costs to service items covered by warranty
is not
material, so no liability has been recognized for such future costs
at December
31, 2005 and 2004.
(c) Retirement benefit
Retirement
benefits in the form of contributions under defined contribution
retirement
plans to the relevant authorities are charged to the consolidated
statements of
income and comprehensive income as incurred. The retirement benefit
expenses for
2005, 2004 and 2003 were $34,560, $30,651 and $36,923, respectively
and are
included in general and administrative expenses.
(d) Research and Development Commitment
The
Company has established a strategic partnership with Beijing University
under
which the Company will provide funds to Beijing University for the
research and
development of video surveillance and security products. Under the
agreement,
the Company has agreed to provide Beijing University a maximum amount
of RMB
2,000,000. Management anticipates that the RMB 2,000,000 will be
provided during
2006 and 2007.
F-35
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2005, 2004 AND 2003
Expressed
in US dollars
16. SUBSEQUENT
EVENTS
(a) Execution and closing of a stock purchase
agreement
On
April
4, 2006, the Company entered into a Securities Purchase Agreement
(the
“Agreement”) with certain investors (the “Investors”) for the sale of 2,666,667
shares (the “Shares”) of the Company’s common stock at a price of $3.00 per
share, or an aggregate total of $8,000,000. Closing under the Agreement
also
occurred on April 4, 2006.
Following
the closing, the Company has a total of 24,524,667 shares issued
and
outstanding. In conjunction with the closing of the transaction,
the Company
also issued a total of 416,667 warrants (the “Warrants”) to purchase shares of
common stock. A total of 150,000 of the warrants are exercisable
at a price of
$3.80 per share, which was the closing bid price for the Company’s stock as of
the date of closing under the Agreement, and a total of 266,667 warrants
which
are exercisable at a price of $3.00 per share. All of the warrants
have a term
of 5 years.
In
conjunction with execution of the Agreement, the Company also executed
a
Registration Rights Agreement under which it is obligated, within
45 days after
the closing date, to file a registration statement on Form F-1, or
other
available form, to register the Shares and the shares underlying
the Warrants
for resale. The Company is obligated to use its best efforts to cause
the
registration statement to be declared effective within 180 of the
Closing Date,
and may be liable for payment of penalties to the Investors in the
event the
registration statement is not declared effective within the 180-day
period.
(b) Common stock issued for consulting services
The
Company entered into a consulting service agreement on February 8,
2006.
Pursuant to the agreement, the Company issued 100,000 shares of its
common stock
to the consultant on March 1, 2006 in exchange for consulting services
valued at
$350,000, which are to be provided by the Company from February 8,
2006 to
October 31, 2006.
(c) Statutory surplus reserve fund
As
stipulated by the relevant laws and regulations for foreign investment
enterprises in the PRC, the PRC subsidiary of the Company is required
to
maintain three statutory reserves, being a statutory surplus reserve
fund, an
enterprise expansion fund and a staff welfare and incentive bonus
fund which are
non-distributable. Appropriations to such reserves are made out of
net profit
after taxation of the statutory financial statements of the PRC subsidiary
while
the amount and allocation basis are decided by its board of directors
annually.
The statutory surplus reserve fund can be used to make up its prior
year losses,
if any, and can be applied in conversion into capital by means of
capitalization
issue.
F-36
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2005, 2004 AND 2003
Expressed
in US dollars
16. SUBSEQUENT EVENTS (CONTINUED)
(c) Statutory surplus reserve fund
(continued)
The
enterprise expansion fund is used for expanding the capital base
of the Company
by means of capitalization issue. On May 25, 2006, the board of directors
approved to provide 10% of 2005 net profit after taxation as disclosed
in the
statutory audited financial statements of the PRC subsidiary to the
enterprise
expansion fund.
F-37
CHINA
SECURITY & SURVEILLANCE TECHNOLOGY, INC.
4,883,334
shares of common stock
PROSPECTUS
_______
, 2006
Dealer
Prospectus delivery obligation
----------------------------------------------
Until
90
days from the date of this prospectus, all dealers that effect transactions
in
these securities, whether or not participating in this offering,
may be required
to deliver a prospectus. This is in addition to the dealers’ obligation to
deliver a prospectus when acting as underwriters and with respect
to their
unsold allotments or subscriptions.
PART II
INFORMATION
NOT REQUIRED IN THE PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution
The
following table sets forth the costs and expenses, other than underwriting
discounts and commissions, payable by us in connection with the sale
of common
stock being registered. All amounts, other than the SEC registration
fee, are
estimates. We will pay all these expenses.
|
Amount to be
Paid
|
||||
|
SEC
Registration Fee
|
$
|
3,757
|
||
|
Printing
Fees and Expenses
|
12,500
|
|||
|
Legal
Fees and Expenses
|
30,000
|
|||
|
Accounting
Fees and Expenses
|
6,000
|
|||
|
Blue
Sky Fees and Expenses
|
2,000
|
|||
|
Transfer
Agent and Registrar Fees
|
1,500
|
|||
|
Miscellaneous
|
10,000
|
|||
|
Total
|
$
|
65,757
|
||
Item
14. Indemnification of Directors and Officers
Our
bylaws provide for the indemnification of our present and prior directors
and
officers or any person who may have served at our request as a director
or
officer of another corporation in which we own shares of capital
stock or of
which we are a creditor, against expenses actually and necessarily
incurred by
them in connection with the defense of any actions, suits or proceedings
in
which they, or any of them, are made parties, or a party, by reason
of being or
having been director(s) or officer(s) of us or of such other corporation,
in the
absence of negligence or misconduct in the performance of their duties.
This
indemnification policy could result in substantial expenditure by
us, which we
may be unable to recoup.
Insofar
as indemnification by us for liabilities arising under the Securities
Act may be
permitted to our directors, officers and controlling persons pursuant
to
provisions of the Articles of Incorporation and Bylaws, or otherwise,
we have
been advised that in the opinion of the SEC, such indemnification
is against
public policy and is, therefore, unenforceable. In the event that
a claim for
indemnification by such director, officer or controlling person of
us in the
successful defense of any action, suit or proceeding is asserted
by such
director, officer or controlling person in connection with the securities
being
offered, we will, unless in the opinion of our counsel the matter
has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction
the question whether such indemnification by us is against public
policy as
expressed in the Securities Act and will be governed by the final
adjudication
of such issue.
At
the
present time, there is no pending litigation or proceeding involving
a director,
officer, employee or other agent of ours in which indemnification
would be
required or permitted. We are not aware of any threatened litigation
or
proceeding which may result in a claim for such indemnification.
In
October 2006, we issued 50,000 shares of our common stock to Hayden
Communications, Inc. as payment for their investor relationship
services
rendered pursuant to a consulting agreement dated April 6, 2006.
These stock
issuances were exempt from registration pursuant to Section 4(2)
of the
Securities Act.
II-1
On
April
4, 2006, we completed a private placement in which we sold 2,666,667
shares of
our common stock at a price of $3.00 per share for aggregate gross
proceeds of
$800,000 to certain accredited investors. We
also
issued warrants to purchase 416,667 shares of our common stock to
certain
entities as compensation for their services in connection with the
private
placement, 150,000 of which have an exercise price of $3.80 per share,
while the
remaining 266,667 are exercisable at a price of $3.00 per share.
The
issuance of our shares to these individuals was made in reliance
on the
exemption provided by Section 4(2) of the Securities Act for the offer and
sale of securities not involving a public offering and Regulation D
promulgated thereunder.
In
March
2006, we issued 100,000 shares of common stock to Terence Yap as
payment for his
services rendered. The value attributed to these shares was $350,000
($3.50 per
share). These stock issuances were exempt from registration pursuant
to Section
4(2) of the Securities Act.
In
October 2005, we issued 200,000 shares of common stock to shareholders
of Yuanda
in connection with our acquisition of Yuanda. The value attributed
to these
shares was $500,000 ($2.50 per share). These stock issuances were
exempt from
registration pursuant to Section 4(2) of the Securities Act.
In
September 2005, we issued 8,138,000 shares of our common stock to
stockholders
of Safetech. The total consideration for the 8,138,000 shares of
our common
stock is 50,000 shares of capital stock of Safetech, which is all
the issued and
outstanding capital stock of Safetech. We did not receive any cash
consideration
in connection with the share exchange. The number of our shares issued
to the
stockholders of Safetech was determined based on an arms-length negotiation.
The
issuance of our shares to these individuals was made in reliance
on the
exemption provided by Section 4(2) of the Securities Act for the offer and
sale of securities not involving a public offering.
In
instances described above where we issued securities in reliance
upon Regulation
D, we relied upon Rule 506 of Regulation D under the Securities Act.
These
stockholders who received the securities in such instances made representations
that (a) the stockholder is acquiring the securities for his, her
or its own
account for investment and not for the account of any other person
and not with
a view to or for distribution, assignment or resale in connection
with any
distribution within the meaning of the Securities Act, (b) the stockholder
agrees not to sell or otherwise transfer the purchased shares unless
they are
registered under the Securities Act and any applicable state securities
laws, or
an exemption or exemptions from such registration are available,
(c) the
stockholder has knowledge and experience in financial and business
matters such
that he, she or it is capable of evaluating the merits and risks
of an
investment in us, (d) the stockholder had access to all of our documents,
records, and books pertaining to the investment and was provided
the opportunity
ask questions and receive answers regarding the terms and conditions
of the
offering and to obtain any additional information which we possessed
or were
able to acquire without unreasonable effort and expense, and (e)
the stockholder
has no need for the liquidity in its investment in us and could afford
the
complete loss of such investment. Management made the determination
that the
investors in instances where we relied on Regulation D are Accredited
Investors
(as defined in Regulation D) based upon management’s inquiry into their
sophistication and net worth. In addition, there was no general solicitation
or
advertising for securities issued in reliance upon Regulation D.
In
instances described above where we indicate that we relied upon Section
4(2) of
the Securities Act in issuing securities, our reliance was based
upon the
following factors: (a) the issuance of the securities was an isolated
private
transaction by us which did not involve a public offering; (b) there
were only a
limited number of offerees; (c) there were no subsequent or contemporaneous
public offerings of the securities by us; (d) the securities were
not broken
down into smaller denominations; and (e) the negotiations for the
sale of the
stock took place directly between the offeree and us.
Item
16. Exhibits and Financial Statement Schedules
The
following exhibits are included as part of this Form S-1.
II-2
|
Exhibit
Number
|
Description
|
|
|
2.1
|
Plan
of Merger by and between China Security & Surveillance Technology,
Inc., a BVI corporation, and China Security & Surveillance Technology,
Inc., a Delaware corporation, dated September 30, 2006
(herein
incorporated by reference from the registrant’s registration statement on
Form S-4 filed with the Securities and Exchange Commission
on October 4,
2006).
|
|
|
2.2
|
Share
Exchange Agreement, dated as of July 22, 2005, between
CSST BVI and China
Safetech Holdings Limited (herein incorporated by reference
from the
registrant’s current report on Form 6-K filed with the Securities
and
Exchange Commission on July 22, 2005).
|
|
|
3.1
|
Certificate
of Incorporation of the registrant (herein incorporated
by reference from
the registrant’s registration statement on Form S-4 filed with the
Securities and Exchange Commission on October 4, 2006).
|
|
|
3.2
|
By-laws
of the registrant (herein incorporated by reference from
the registrant’s
registration statement on Form S-4 filed with the Securities
and Exchange
Commission on October 4, 2006).
|
|
|
5
|
Opinion
of Thelen Reid & Priest LLP.
|
|
|
10.1
|
Share
Purchase Agreement, dated as of July 22, 2005, by and among
CSST BVI,
Whitehorse Technology Limited and First Asia International
Holdings
Limited (herein incorporated by reference from the registrant’s report on
Form 6-K filed with the Securities and Exchange Commission
on July 22,
2005).
|
|
|
10.2
|
Stock
Transfer Agreement, dated as of October 25, 2005, by and
among CSST BVI,
Golden Group Corporation (Shenzhen) Limited, Shenzhen Yuan
Da Wei Shi
Technology Limited and its stockholders Jianguo Jiang and
Jing Li (herein
incorporated by reference from the registrant’s report on Form 20-F filed
with the Securities and Exchange Commission on June 14,
2006).
(English
Summary)
|
|
|
10.3
|
Amendment
No. 1 to the Equity Transfer Agreement, dated as of April
28, 2006, by and
among CSST BVI, Golden Group Corporation (Shenzhen) Limited,
Shenzhen Yuan
Da Wei Shi Technology Limited and its stockholders Jianguo
Jiang and Jing
Li (herein incorporated by reference from the registrant’s report on Form
20-F filed with the Securities and Exchange Commission
on June 14, 2006).
(English
Summary)
|
|
|
10.4
|
Amendment
No. 2 to the Equity Transfer Agreement, dated as of May
25, 2006, by and
among CSST BVI, Golden Group Corporation (Shenzhen) Limited,
Shenzhen Yuan
Da Wei Shi Technology Limited and its stockholders Jianguo
Jiang and Jing
Li. (herein incorporated by reference from the registrant’s report on Form
20-F filed with the Securities and Exchange Commission
on June 14, 2006).
(English
Summary)
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|
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10.5
|
Securities
Purchase Agreement, dated as of April 4, 2006, with certain
investors for
the sale of 2,666,667 shares of our common stock (herein
incorporated by
reference from the registrant’s current report on Form 6-K filed with the
Securities and Exchange Commission on April 5, 2006).
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|
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10.6
|
Registration
Rights Agreement, dated as of April 4, 2006, with certain
investors with
respect to resale registration of 2,666,667 shares of our
common stock
(herein incorporated by reference from the registrant’s current report on
Form 6-K filed with the Securities and Exchange Commission
on April 5,
2006).
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|
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10.7
|
Lease
Agreement, dated as of April 18, 2006, by and between the
Company and
Shenzhen Huiye Technology Co. Ltd. (herein incorporated
by reference from
the registrant’s report on Form 20-F filed with the Securities and
Exchange Commission on June 14, 2006). (English
Summary)
|
|
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10.8
|
Cooperation
Agreement, dated as of February 17, 2006, by and between
Golden Group
Corporation (Shenzhen) Limited and Graduate School (Shenzhen)
of Beijing
University (herein incorporated by reference from the registrant’s report
on Form 20-F filed with the Securities and Exchange Commission
on June 14,
2006). (English
Summary)
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|
II-3
|
Exhibit
Number
|
Description
|
|
10.9
|
Consulting
Agreement, dated as of February 8, 2006, by and between
the Company and
Terence Yap (herein incorporated by reference from the
registrant’s report
on Form 20-F filed with the Securities and Exchange Commission
on June 14,
2006).
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|
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10.10
|
Amendment
No. 1 to Consulting Agreement, dated as of June 27, 2006,
by and between
the Company and Terence Yap (herein incorporated by reference
from the
registrant’s annual report on Form 20-F filed with the Securities
and
Exchange Commission on June 28, 2006).
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|
|
10.11
|
Form
of Securities Purchase Agreement, dated as July 6, 2006,
by and among CSST
BVI and certain investors (herein incorporated by reference
from the
registrant’s current report on Form 6-K filed with the Securities
and
Exchange Commission on July 6, 2006).
|
|
|
10.12
|
Form
of Registration Rights Agreement, dated as July 6, 2006,
by and among CSST
BVI and certain investors (herein incorporated by reference
from the
registrant’s current report on Form 6-K filed with the Securities
and
Exchange Commission on July 6, 2006).
|
|
|
10.13
|
Form
of Warrant (herein incorporated by reference from the registrant’s current
report on Form 6-K filed with the Securities and Exchange
Commission on
July 6, 2006).
|
|
|
10.14
|
Form
of Escrow Agreement, dated July 6, 2006, by and among CSST
BVI, certain
investors and Thelen Reid & Priest LLP (herein incorporated by
reference from the registrant’s current report on Form 6-K filed with the
Securities and Exchange Commission on July 6, 2006).
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|
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10.15
|
Framework
Agreement, dated July 6, 2006, by and among CSST BVI, China
Safetech
Holdings Limited and shareholders of Shanghai Cheng Feng
Digital
Technology Co., Ltd (herein incorporated by reference from
the
registrant’s current report on Form 6-K filed with the Securities
and
Exchange Commission on July 7, 2006). (English
Summary)
|
|
|
10.16
|
Form
of Waiver and Amendment to Securities Purchase Agreement,
dated July 26,
2006, by and among CSST BVI and certain investors (herein
incorporated by
reference from the registrant’s current report on Form 6-K filed with the
Securities and Exchange Commission on July 31, 2006).
|
|
|
10.17
|
Form
of Second Waiver and Amendment, dated July 27, 2006, by
and among CSST BVI
and certain investors (herein incorporated by reference
from the
registrant’s current report on Form 6-K filed with the Securities
and
Exchange Commission on July 31, 2006).
|
|
|
10.18
|
Form
of Second Waiver and Amendment, dated July 27, 2006, by
and among CSST BVI
and certain investors (herein incorporated by reference
from the
registrant’s current report on Form 6-K filed with the Securities
and
Exchange Commission on July 31, 2006).
|
|
|
10.19
|
Form
of Second Waiver and Amendment, dated July 27, 2006, by
and among CSST BVI
and certain investors (herein incorporated by reference
from the
registrant’s current report on Form 6-K filed with the Securities
and
Exchange Commission on July 31, 2006).
|
|
|
10.20
|
Asset
Purchase Agreement, dated September 5, 2006, by and among
CSST BVI, Golden
Group Corporation (Shenzhen) Limited and Jian
Golden An Ke Technology Co. Ltd. (English Summary)
|
|
|
10.21
|
Asset
Purchase Agreement, dated September 5, 2006, by and among
CSST BVI, Golden
Group Corporation (Shenzhen) Limited and Shenzhen Golden
Guangdian
Technology Co. Ltd.
(English Summary)
|
|
|
10.22
|
Asset
Purchase Agreement, dated September 5, 2006, by and among
CSST BVI, Golden
Group Corporation (Shenzhen) Limited and Shenyang
Golden Digital Technology Co. Ltd. (English Summary)
|
|
|
10.23
|
Asset
Purchase Agreement, dated September 5, 2006, by and among
CSST BVI, Golden
Group Corporation (Shenzhen) Limited and Jiangxi
Golden Digital Technology Co. Ltd. (English Summary)
|
|
II-4
|
Exhibit
Number
|
Description
|
|
23.1
|
Consent
of GHP Horwath, P.C.
|
|
|
23.2
|
Consent
of Child, Van Wagoner & Bradshaw, PLLC.
|
|
|
23.3
|
Consent
of Thelen Reid & Priest LLP (included in Exhibit 5).
|
|
|
24
|
Power
of Attorney (included on the signature page to this registration
statement).
|
Item
17. Undertakings
The
undersigned registrant hereby undertakes to:
File,
during any period in which offers or sales are being made, a post-effective
amendment to this registration statement to:
(a) Include
any prospectus required by Section 10(a)(3) of the Securities Act,
and
(b) Reflect
in the prospectus any facts or events arising after the effective
date of the
registration statement (or the most recent post-effective amendment
thereof)
which, individually or in the aggregate, represent a fundamental
change in the
information in the registration statement. Notwithstanding the foregoing,
any
increase or decrease in volume of securities offered (if the total
dollar value
of securities offered would not exceed that which was registered)
and any
deviation from the low or high end of the estimated maximum offering
range may
be reflected in the form of prospectus filed with the Commission
pursuant to
Rule
424(b)
under the Securities Act if, in the aggregate, the changes in volume
and price
represent no more than a 20% change in the maximum aggregate offering
price set
forth in the “Calculation of Registration Fee” table in the effective
registration statement, and
(c) Include
any additional or changed material information on the plan of
distribution.
For
determining liability under the Securities Act, treat each post-effective
amendment as a new registration statement of the securities offered,
and the
offering of the securities at that time to be the initial bona fide
offering.
File
a post-effective amendment to remove from registration any of the
securities
that remain unsold at the end of the offering.
For
determining any liability under the Securities Act, treat each post-effective
amendment that contains a form of prospectus as a new registration
statement for
the securities offered in the registration statement, and that offering
of the
securities at that time as the initial bona fide offering of those
securities.
II-5
Pursuant
to the requirements of the Securities Act of 1933, the registrant
has duly
caused this registration statement to be signed on its behalf by
the
undersigned, thereunto duly authorized, in
the City of Shenzhen, China, on the 23rd day
of October,
2006.
By:
/s/
Guoshen Tu
Guoshen
Tu
Chief
Executive Officer and President
Pursuant
to the requirements of the Securities Act of 1933, this registration
statement
has been signed by the following persons in the capacities indicated
below on
October 23, 2006. Each person whose signature appears below constitutes
and
appoints Guoshen Tu and Jinxu Wu, and each of them individually,
his or her true
and lawful attorneys-in-fact and agents, with full power of substitution
and
resubstitution, for him or her and in his or her name, place and
stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this registration statement, and to file the same,
with all
exhibits thereto, and other documents in connection therewith, with
the
Securities and Exchange Commission, granting unto said attorneys-in-fact
and
agents, and each of them, full power and authority to do and perform
each and
every act and thing requisite and necessary to be done in connection
therewith,
as fully to all intents and purposes as he or she might or could
do in person,
hereby ratifying and confirming all that said attorneys-in-fact and
agents, or
any of them, or their or his or her substitute or substitutes, may
lawfully do
or cause to be done by virtue hereof.
|
Signature
|
|
Title
|
|
/s/
Guoshen Tu
Guoshen
Tu
|
Chief
Executive Officer, President and Director
(Principal
Executive Officer)
|
|
|
/s/
Jinxu Wu
Jinxu
Wu
|
Chief
Financial Officer (Principal
Financial and Accounting Officer)
|
|
|
/s/
Shufang Yang
Shufang
Yang
|
Chief
Operating Officer and Director
|
|
|
/s/
Lingfeng Xiong
Lingfeng
Xiong
|
Vice
President, Director and Secretary
|
|
|
/s/
Jianguo Jiang
Jianguo
Jiang
|
Vice
President and Director
|
|
|
/s/
Terence Yap
Terence
Yap
|
Vice
President and Director
|
EXHIBIT
INDEX
|
Exhibit
No.
|
Description
|
|
|
5
|
Opinion
of Thelen Reid & Priest LLP.
|
|
|
10.20
|
Asset
Purchase Agreement, dated September 5, 2006, by and among
CSST BVI, Golden
Group Corporation (Shenzhen) Limited and Jian Golden An
Ke Technology Co.
Ltd. (English Summary)
|
|
|
10.21
|
Asset
Purchase Agreement, dated September 5, 2006, by and among
CSST BVI, Golden
Group Corporation (Shenzhen) Limited and Shenzhen Golden
Guangdian
Technology Co. Ltd. (English Summary)
|
|
|
10.22
|
Asset
Purchase Agreement, dated September 5, 2006, by and among
CSST BVI, Golden
Group Corporation (Shenzhen) Limited and Shenyang Golden
Digital
Technology Co. Ltd. (English Summary)
|
|
|
10.23
|
Asset
Purchase Agreement, dated September 5, 2006, by and among
CSST BVI, Golden
Group Corporation (Shenzhen) Limited and Jiangxi Golden
Digital Technology
Co. Ltd. (English Summary)
|
|
|
23.1
|
Consent
of GHP Horwath, P.C.
|
|
|
23.2
|
Consent
of Child, Van Wagoner & Bradshaw, PLLC.
|
|
|
24
|
Power
of Attorney (included on the signature page of this registration
statement).
|