Unassociated Document
PROSPECTUS
Filed
Pursuant to Rule 424(b)(3)
Registration
No. 333-138166
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 and 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 November 3, 2006 was
$8.24 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 November 15, 2006
TABLE
OF CONTENTS
PROSPECTUS
SUMMARY
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1
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RISK
FACTORS
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4
|
CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
|
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11
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USE
OF PROCEEDS
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12
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DETERMINATION
OF OFFERING PRICE
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12
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DIVIDEND
POLICY
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12
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MARKET
FOR OUR COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
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12
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DILUTION
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13
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SELECTED
CONSOLIDATED FINANCIAL DATA
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13
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MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
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15
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DESCRIPTION
OF BUSINESS
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27
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MANAGEMENT
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35
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CHANGE
IN ACCOUNTANTS
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42
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DESCRIPTION
OF SECURITIES
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42
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SHARES
ELIGIBLE FOR FUTURE SALE
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43
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PLAN
OF DISTRIBUTION
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44
|
LEGAL
MATTERS
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46
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EXPERTS
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46
|
WHERE
YOU CAN FIND MORE INFORMATION
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46
|
FINANCIAL
STATEMENTS
|
|
47
|
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.”
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.
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 merger
where
CSST BVI will be merged with and into CSST Delaware, with CSST
Delaware
being the surviving company. The purpose of such merger is to
reincorporate CSST BVI from a BVI company to a Delaware company.
The
merger is hereinafter referred as 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.
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.
(In
US Dollar)
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.
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.
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.
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
|
|
· |
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:
·
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.
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
November 3, 2006, the closing sales price for our common stock was $8.24 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.
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 may be
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 possible 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:
|
· |
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.
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
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.
|
|
Closing
Bid Price (US $) *
|
|
|
|
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 November 3, 2006)
|
|
|
8.24
|
|
|
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
|
|
|
|
|
|
|
|
|
|
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
November 3, 2006, there were approximately 48 stockholders of record of our
common stock. This number excludes the 4,889,000 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
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
|
|
|
|
December
31,
|
|
June
30,
|
|
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
Balance
sheet data:
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Febuary 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 and are 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 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 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).
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. Based on Staff Accounting Bulletin (SAB) 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.
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.
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
|
|
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:
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
|
|
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.
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:
|
· |
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.
Certain
contracts provide for the delivery and installation of equipment which
may
require extensive wiring and cofiguration. All revenue on these contracts
is
deferred until installation is complete and the Company has received customer
acceptance.
Revenue
from the outright sale of security and surveillance equipment is recognized
when
delivery occurs and risk of ownership passes to the customers. No
right
of return exists on the sale of security and surveillance
equipment.
|
· |
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.
|
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.
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.
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.
|
|
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.
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 and are 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 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 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.
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.
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.
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.
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 recently acquired the security and surveillance business
of
Shenzhen Guangdian, a manufacturer and distributor of security and surveillance
system products. In addition, our acquisition of Chengfeng is expected to close
before December 31, 2006. The 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
|
|
· |
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 480 full-time employees, 75 of them are administrative and
accounting staff, 70 of them are research and development staff and 170 of
them
are engineers and sales staff.
Approximately
152 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 prospectus, 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.
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.
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
|
|
威勒
|
|
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.
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.
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.
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,
|
|
|
2005
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Chairman
and
|
|
|
2004
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
CEO
(2)
|
|
|
2003
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guoshen
Tu
|
|
|
2005
|
|
|
15,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Chairman
and
|
|
|
2004
|
|
|
15,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
CEO
(1)
|
|
|
2003
|
|
|
15,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
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.
|
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.
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 November 3, 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
|
%
|
*
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 November 3, 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.
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.